Kirby Corp (KEX) 2003 Q3 法說會逐字稿

Good morning. And welcome to the Kirby Corporation's third quarter earnings release conference call. All participants will be on listen only until the question-and-answer session. This conference is being recorded. At this time, I'd like to introduce your host for today's call, Mr. Steve Holcomb, Vice President of Investor Relations. Sir, you may begin.

Thank you for joining us this morning. With me today is Berdon Lawrence, Kirby's Chairman, Joe Pyne, the President and Chief Executive Officer of Kirby, and Norman Nolen, our Executive Vice President and Chief Financial Officer. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at www.Kirbycorp.com in the investor relations under nonfinancial-GAAP financial data.

The statements contained in this conference call with respect to future or forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risk and uncertainties, and our actual results may differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby's annual report on Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission. I will now turn the call over to Joe.

Thank you, Steve. In our release this morning, we reported our 2003 third quarter results of 46 cents per share, earning $11.2 million dollars on revenues of $154.5 million. The results were at the top end of our earnings guidance range of 42 cents to 46 cents a share given the end of the second quarter. This compares with our 2002 third quarter results of 49 cents per share, which included a 6-cent-per-share positive adjustment to accrued insurance liabilities for casualty losses.

Our third quarter 2003 petro-chemical lines were above third-quarter 2002 volumes, principally due to the new Exxon Mobile volumes added when we purchased their sheet river inland tank river barge fleet early this year, along with some improved volumes from several other large customers and continued strong demand for chemicals used principally in the gasoline blending pool. Blackwell volumes remain consistent with their second quarter 2003 volumes. Upriver refined products volumes were strong for most of the quarter as midwest refinery outages, principally for maintenance, low gasoline inventory levels and the Gulf Coast versus Chicago gasoline price differential, which really drives that market, encouraged the movement of Gulf coast -- Gulf coast shores refined products in the midwest. Our fertilizer volumes, on the other hand, were weak throughout the quarter.

During this year, 2003, we have successfully increased revenue principally through acquisition. The margins have continued to decline. Profits have improved, but only because increases in revenue have offset the decrease in operating margins. Since the spring of 2000, the U.S. petro-chemical business has been depressed, although we have seen gradual improvements in our volumes since the second quarter of 2002, principally in the petro-chemical area. We have not been able to pass our cost increases through in our rates. Although contract rights haven't declined, they haven't increased either and margins have been squeezed. All of this is very frustrating to us.

Frankly, we need some help in the pricing area to recover our cost increases and to get our margins moving in the right direction. As I said in our press release this morning, our customers remain optimistic about improvements to their business. This is very encouraging. What we haven't seen yet is this translate into anything but slight, gradual increases in volumes quarter-over-quarter. If the economy continues to strengthen, inventory adjustments and better business conditions should translate into improved chemical volumes for Kirby.

Now, with regards to rates this quarter, contract rates continue to remain essentially flat. Spot rates declined modestly, reflecting lower fuel costs compared certainly to the first quarter and good navigating conditions, which allowed the industry to be more efficient and effectively that creates some additional capacity. With respect to our diesel engine service business, that business continues to be negatively affected by a very poor midwest dry cargo barge market.

Couple this quarter by the timing of engine overhauls on both coasts -- both the east coast and the west coast. Our Gulf Coast oil service market showed some improvement as the business benefited from part sales to some international offshore oilfield service customers. We'll come back later in the call and talk about the fourth quarter and year outlook, and Berdon will bring you up to date on our barge construction projects. First, I want to turn the call over to Norman to discuss the financial highlights of the quarter.

Thanks, Joe. Capital spending before acquisitions for the first nine months of 2003 was $52.2 million dollars, which included $12.1 million dollars of new barge construction. In addition, Kirby spent $35.6 million dollars for the acquisition of 48 tank barges and seven tow boats from Exxon Sea River in January, and $1.3 million for two small tankering service companies. We've raised our guidance for 2003 capital expenditures, excluding acquisitions, to $74 to $77 million dollars, up from $68 to $73 million that we gave at our second quarter conference call. The increase is due to an additional black oil barge which we'd scheduled for 2004.

Looks like it will be delivered in 2003, and slightly higher than anticipated maintenance capital expenditures in the third and fourth quarters. Total debt in the quarter decreased $25 million to $270 million. For the first nine months of 2003, debt increased $4 million dollars, which reflects the $35 million dollar Sea River equipment acquisition in the first quarter. Our debt-to-capitalization ratio was 43.1% at September 30th, compared with 45.1% at year-end 2002. And our all-in average cost of debt was 5.3% for the third quarter and 5.1% for the first nine months of 2003.

Last month, we took advantage of favorable long-term interest rates and extended our interest rate hedge on $100 million dollars of our total long-term debt. We executed interest rate swap contracts, which effectively lock in the rates on $100 million dollars of debt out to 2013, which is the maturity date of our private-placement debt. The current hedged rate on this portion of our debt will be 6.84% until 2006, and then we'll reduce to 6.65% thereafter until 2013. I'll now turn the call over to Berdon.

Thank you, Norman. And good morning. I'd like to update you on our ongoing tank barge construction program, a program designed to replace existing tank barges as they are retired from service. First, for the petro-chemical and refined products market, or what we refer to as the "clean market," during the 2003 year-to-date, we have placed into service three 30,000-barrel capacity tank barges with three additional tank barges scheduled for delivery in the fourth quarter. The purchase price for these six tank barges is approximately $8.9 million.

We also plan to build six more 30,000-barrel tank barges for the clean market in 2004. Delivery of the six barges is scheduled over a six-month period starting in March of 2004. Now, for the black oil market, we placed two 30,000-barrel capacity tank barges into service during the 2003 first quarter at a cost of approximately $3.6 million. In May 2003, we announced a plan to construct 16 30,000-barrel black oil tank barges.

We placed one of those barges into service in September, one in October, and expect to place six more into service before year-end. The remaining eight to be placed into service during the first half of 2004. The total purchase price of those black oil barges is approximately $29 million. We also plan to build at least nine black oil barges in the second half of 2004. I want to emphasize that Kirby's current barge construction program, the building of these tank barges for both the clean market and the black oil market, is designed to replace older tank barges that will be removed from service. I'll now turn the call back over to Joe, who'll talk about Kirby's 2003 fourth quarter, and our full-year outlook.

Thank you, Berdon. This morning, we announced our fourth quarter earnings guidance in a range of 44 cents to 48 cents per share. This compares with the 2002 fourth quarter loss of nine cents a share, which included a 52 cents per share impairment charge. If you add that impairment charge back, the non-GAAP earnings would be 43 cents per share for the comparable period.

For the 2003 year, we're adjusting our earnings guidance to a range of $1.66 to $1.70 per share, compared with the 2002, again, GAAP earnings, of $1.13 a share, which, again, included the impairment charge. You add the impairment charge back, the comparative non-GAAP earnings with the impairment charge added back would be $1.64 a share. Our earnings range for the quarter, for the fourth quarter is based on a much stronger fertilizer market. Firm black oil volumes and some marginal improvement in chemical volumes during the quarter and, of course, normal weather conditions. Now, operator, we're now ready to open the call to questions.

Thank you. At this time, we're ready to begin the question-and-answer session. If you would like to ask a question, please press Star 1. You will be announced prior to asking your question. To withdraw your question, press Star 2. Once again, to ask a question, please press Star 1. One moment, please. Our first question comes from Chaz Jones from Stephens, Inc.

Good morning guys.

Good morning, Chaz.

Well, congratulations on a solid quarter and what still appears to be a pretty difficult operating environment.

Thank you.

Just a couple of quick questions here. Is there any way you can quantify the impact on the quarter from hurricane Claudette and also diesel prices being higher?

Yeah, the diesel prices were slightly higher. I think about 4 cents higher than the second quarter. Is that right? So that would have a marginal impact, but, you know, it's not enough to quantify in cents.

Sure. Sure.

With respect to Claudette, you know, it's a penny or two. What happens with Gulf coast hurricanes is you just come to a screeching halt. Nothing moves until you understanding the path of the hurricane, and certainly nothing within the range of the hurricane will move. So Gulf Coast operations, which is about two-thirds of our revenue, just ceases until more is known.

Okay, okay.

Chaz, we didn't have any severe damage to anything. It was just those delays.

Right. Right. I was just curious on maybe from an EPS standpoint what type of impact that may have had.

Right.

That's fair. My next question was, the equity in earnings of the Marine affiliates was about a million dollars in the quarter.

Right.

That's up significantly from last year, and you mentioned in your press release that your four dry cargo barges were fully utilized. And I guess my question was, are they still fully utilized? And maybe, what should we expect of that line item moving forward?

Yeah. That -- that partnership, it's affected significantly by shipyard maintenance, both from a revenue point of view and a cross point of view. This year, we have essentially not had any -- any of that equipment in the shipyard except for some minor repairs. Last year, several of the barges were in the shipyard. And next year, several more will be in the shipyard. So on a three-year basis, the best year is going to be this year, and, you know, next year is going to be the -- be lower, driven by the fact that the equipment will operate less and we're going to incur some shipyard costs.

Okay. But in the fourth quarter, we should probably still see that being a little stronger?

Yeah.

Okay.

The only thing that will affect it in the fourth quarter -- other than the unplanned stuff -- is weather in the Gulf, which will deteriorate pretty sharply in December.

Okay. One other quick question, and I'll let somebody else have it, was, you know, Joe, maybe if you could just comment on the acquisition environment, and any opportunities that maybe you're seeing out there?

Yeah. Of course, we don't comment specifically on any individual acquisition, but we still maintain that the environment is positive for acquisitions. We think that this business will continue to consolidate, and we think that we're well positioned both from a balance sheet and from a market perspective to be a major influence in that area.

Okay. Thanks again, guys.

Sure.

Our next question comes from David Yuschak from Sanders, Morris, Harris. Sir, your line is open.

Thank you. Good quarter, Guys. A couple of questions here. You started giving us this ton miles and stuff like that, to try to get us familiar with and a better feel for doing better forecasting, and I'm just kind of curious, when I look at the quarter's ton miles, and certainly some of it has to do with, as you mentioned earlier extra capacity, but ton miles was up because of good weather.

Revenue was about 3 million less than the second quarter, and then you come in about some pricing and transportation may have been a problem in the quarter. I'm kind of curious how much might have been associated with mixed versus potential rates or, you know, maybe even the disappointment on of fertilizer, how much of a variance that might have been?

No, I think that's a good question, David. I think the -- I think you and other people that look at the ton miles versus revenue are going to see these anomalies, because it's not -- it's not as perfect a correlation as you'd like it to be. It's not completely linear. But at the same time, it does give you a very good trend, and I think as you look over -- look at the relationship between ton miles and revenue over a number of quarters, you'll get more comfortable with it.

It's going to move around for a number of reasons. You identified several of them. Spot rates down a little bit. That's going to affect revenue. The more equipment you have on the river, the greater the ton miles, because it's moving, where the canal, you know, it's moving, also, but the port -- the port time sometimes equals the time that it's under way, where on the river it's mostly under way.

The other thing that affected revenue -- third quarter versus second quarter -- is remember that the first quarter saw rapid escalation of fuel prices. And we didn't get a lot of that back until the second quarter. Of course, by the third quarter it washed down. So all of that is going to kind of play in the relationship between what you see with respect to ton miles and what we report for revenue.

So, it's probably more mixed, then, in the quarter?

I would say mixed fuel. I would say the principal drivers for the different --

okay. Because I just generally found that pricing can be an anomaly in the short period, but it doesn't last long. It's never been sustained as far as that goes.

Yeah.

You're not seeing that at this point in time, any kind of sustained transportation problems?

Oh --

It's just a matter of whether it's weather or something else could create -- like we saw a few years ago with refined products just stopped and you had an anomaly of prices. It's nothing other than transitory.

Oh, no, no, nothing to worry about that. Part of the decline in spot pricing was also driven by fuel, too. And it -- you know, you try to hang onto it as long as you can.

Okay.

So in the second quarter, we probably hung onto the fuel effect that fuel has, higher fuel has on spot pricing. And, again, by the third quarter, it washed out. And the better weather, you know, we've talked about this on calls in the past. Better weather creates some additional capacity which does put some pressure in a market that's not firm on spot rates, and I don't know if you remember back in 2000, we were talking about the very positive trend in the summer, rates didn't go down.

Right.

And we said that's a very good indicator that the market's tight, and there's a lot of substance to that. Well, we're kind of back to -- to a little sloppy market, which, you know, hopefully if the economy is really doing what -- what people say it's doing, it's going to be reflected in more volumes to us, and better utilization and maybe some pricing power.

If I could talk a little bit about the chemicals, because it looks like chemicals balanced in the quarter was about what we saw in the second quarter, primarily from the rail car shipments, but it looked like things were firming up nicely in September. Are you seeing that kind of recovery yourself as far as comparable to the rail cars that -- comparable by September being pretty good?

Yeah. If you remember last quarter, we said that we had noticed that rail car loadings were down and that our volumes were pretty flat and that there seemed to be a disconnect there. We, with several customers, saw stronger volumes through the quarter, but we're not saying that one particular month was better than the other.

Okay. One last question, I'll get back in queue. Looking like, Norm, you paid down $25 million in debt, looking at some of the numbers, like you had $20 million dollars in free cash after Cap Ex, was there an extra $5 million you were able to squeeze out of the working capital that gave you the extra five million?

Yeah, that's right, David. That's just timing issues from quarter to quarter. We had positive cash flow from working capital and we had obviously good cash flow from operations.

Okay. So the extra five really was more -- more seasonal than it was something you're doing to squeeze more working capital out of --

yeah, that's right.

All right.

And just the timing of payments.

Yep. All right. I'll get back into queue. Thanks.

Our next question comes from Alex Brand of BBT Capital Market. Your line is open.

Thank you. Good morning, Gentlemen. I wanted to inquire about the barges in terms of the active barge numbers. The number dropped more than we thought, and wondering maybe you can explain a little bit about maybe it's a fleet management decision, or is there something that would help me understand what draws the decision to have fewer active barges other than a retirement, because I would guess the number of barges you have out there is obviously a key component of the revenue that you can drive.

No, that's right, Alex. And it's -- it's principally retirement. You're going to see the number flatten out as we go forward with our building program. The only thing, it's going to be a little confuse is that what we worry about is capacity and not the number of barges. And the barges that we're going to build in some cases will be slightly higher capacity barges, so we'll be able to maintain the same capacity with slightly less barges. But you're not going to see going forward the drops that you've seen, let's say, in the last 24 months.

Okay. So that's not inconsistent, then, with your statements that volumes are getting better in the chemicals business?

No, no, because we measure volumes, yeah. No, it's not.

Okay. And so, are you seeing that there -- I mean, you've said you had trouble raising prices, and we've heard that in the marketplace that nobody's getting price increases. Is part of that driven by the fact that there are enough others out there that have capacity that are willing to offer it at a better price? Is that what's hampering you as much as anything else?

Yeah. Yeah, it's a supply-and-demand game. And when there's more capacity than is needed, there's pressure on pricing. Now, what we have been able to do is hold our contract pricing essentially flat through this period.

Normally, you'd see pressure in contract pricing. Most of the pressure has been on spot pricing, so we've been able to at least not see declines in contracts. Having said that as I indicated earlier, that still squeezes margins. I mean, you're holding your prices flat, but your costs continue to go up.

Can you just talk a little bit about the costs that are going up and --

sure.

-- sort of, if I'm looking at a trucking company. They've had a lot of success going to their customers and saying, our insurance rates are up 30%, and we have to pass some of that along.

Right.

And what's happening to you, your situation?

Well, we haven't had as large a success as they have. But, you know, having said that, I don't look at the trucking companies on a month-to-month basis. My guess is our earnings have been more stable than theirs. Our earnings were down about 13% over 2001, and we're projecting earnings higher in 2003. So we've done a pretty good job of, I think, controlling costs, but the costs we see escalating will be labor, a little bit of insurance -- although we -- the way we structure our insurance program, a lot of the costs of that is absorbed by us principally because of our emphasis on safety and training and the condition of our fleet.

We think that we can control a major layer of the risk. So when you -- you can double our insurance premiums, and you really aren't talking about a lot of money. But insurance did go up. To a lesser extent, maintenance is marginally up, but those are the principal components. Of course, fuel goes up and down, and for the most part, the spot market reflects the price of fuel, and we're able to recover most of the fuel through contract escalations where we have contracts.

One final question -- Last quarter, you also talked about, as you are this quarter, that your customers seem more optimistic, and you're encouraged by that. But it seems like in the third quarter, there really wasn't much to be excited about. Are you staying a little cautious because of that, because you've had too many false starts already?

Well, I think I was cautious in the second quarter. I hope I didn't mislead anybody.

You were.

And, as we are now, we're kind of -- we have -- we have seen our customers' optimism slide year to year, in six-month increments. What's encouraging is that they're now saying that they think, you know, the business is going to get better, and they're saying it publicly. I think Dow -- Dow Chemical announced their earnings this morning.

They indicated that they thought -- well, they said that their volumes were up, and we saw that, frankly, with the work that we did with them. But they said they thought volumes would continue to improve. And we're -- we hope they're right. Unfortunately, we have no control over that. They're the ones that control the volumes. I think that -- you know, caution is just prudent. We don't want to mislead anybody.

We're kind of reporting what we hear, but until we see it, we're just going to report what we hear.

And to kind of put it in perspective, some of our customers feel that this -- that this downturn in the chemical business since March of 2000 has been one -- one of the longest and certainly one of the deepest that they've ever encountered. And so, for the first time now, we're starting to hear optimism after a long dry spell.

Right. Great, thank you, Gentlemen.

Our next question comes from Natasha Boyden of Sidoti & Company. Your line is open.

Hi, how are you? Hi, I want to follow on from Alex's question regarding the margins. I think you said that some of the pressure was coming from perhaps an imbalance in supply and demand. Do you have any sense of how long you think that will go on for? You know, can we expect to see some more pressure in the fourth quarter? Or are things going to stay fairly stable?

We're saying that they're going to be stable and maybe slightly improved, Natasha.

And this is the fourth quarter --

yes.

-- or in '04?

No, fourth quarter.

Okay.

And, I mean, frankly, we've been talking about -- about -- about overcapacity, reduced volumes, and the inability to increase rates, since, you know, 2001.

Right. I just want to go back to the -- I know the Coast Guard had implemented tank barge levels.

Oh, that's -- that was the reason for the impairment last year.

Right. Are you seeing anybody or anybody really taking vessels out of the market now, because they don't want to take that charge? And is that going to help you? I guess I wanted it see what kind of impact it had.

Yeah, we think that the general trend over the next couple of years is going to be reduction in capacity. That last year, about 100 barges went -- actually left the system. And that included barges that were added to the system, but the number of barges decreased from about 2,800 to 2,700. We think that trend is probably going to continue, and we think that that is positive. If you look at our numbers, you can see that we ourselves are taking capacity out. And what we said is we're going to stop doing that, that we think that the market is going to get better. We're not predicting when, but it's certainly not long term, and that we want to be in a position so that we don't lose market share. As we speak, there are about 70 barges being built in the country, and of those 70, we're building, I think, 23 or 24 of them.

Okay. And I also just sort of a completely different subject. Can you give us some kind of idea of Cap Ex for '04, or is that not a number you put out?

Go ahead.

That is a number -- we have increased our guidance, Natasha --

this is '04.

Oh, '04 -- I thought you said Q4.

Sorry, no, '04.

Yeah, we will be talking about that as well as what we think our earnings range is going to be in January when we release our year-end results.

Okay, no problem. Thank you very much. I'll turn it back to somebody else.

Our next question comes from David Bolbay from Paradigm Capital Management. Your line is open, sir.

Good morning. I was wondering if you could give us an update on pipeline activity?

There has been some additional capacity added through Explorer, but we're really not seeing any significant effect on us because of it. And again, I think it's capacity that balances -- balances out that market with capacity that's going out of service and just normal growth in that market. So -- and as far as we know, at least Gulf Coast to the midwest, the Explorer, is the last pipeline that we're aware of that anybody was adding capacity to.

Okay. And the other question was, are you seeing any particular petro-chemicals indicating strength? Particular segments or --

yeah. The -- yeah, I think that most petro-chemicals are getting -- are getting stronger with the possible exception of chemicals that are going into ABS Plastics, which is -- a lot of that is used in the automobile manufacturing business, and I think that -- that business is being affected by just less -- less fewer automobiles being built. But overall, plastics used in consumer durable/nondurable goods are gradually increasing.

Great, thank you.

Our next question comes from David Yuschak of Sanders, Morris, Harris. Your line is open.

Yeah, looking at your debt-to-cap ratio guys, about 43.1 as you calculated it, Norman, in your press release. And that's the lowest -- second-lowest, the lowest was last year at this time in the third quarter. But it's the second-lowest in the last four years. And as I look at your capacity to borrow you've got at least probably $150 million dollars or so that you can add to your debt structure without any real problems at all.

I guess the question is, you know, you're over year -- year-over-year, the fleet you own, just year-over-year, it just drops off without acquisitions beginning in January. With the capacity you've got and the debt ratios you've got, a couple of things. Would it suggest that we are becoming more programmed to timing some acquisitions here that we can probably count on sometime in the not-too-distant future, because the debt level where it is makes you guys a little uncomfortable, because you use the the debt rate to raise your credit rating instead of keeping it where it's at.

Also what it suggests is with the free cash drawn off, in combination of what you may need in the way of acquisition capacity for that, there is room for getting dividends getting put in there at some point in time?

Yeah, David, we certainly are positioning ourselves to continue to grow, and we think the opportunity for growth is excellent. No comment with respect to timing of it. But we think the environment is good. With respect to dividends, we still believe that we can -- we can use our cash to grow, and we think we've -- we've demonstrated that, frankly, over the last year, and we think that we can continue to demonstrate that. So, you know, until -- until we think that -- that the cash can't be used for acquisitions, we're probably not going to consider any dividend. And let me get Berdon to also weigh in on that.

Yeah, David, I think what I would say is we're getting our powder dry. How's that?

Okay.

And I think there's lots of opportunities out there. And until we exhaust those opportunities, I don't think we're going to be doing dividends.

Well, you might want to look at the debt-to-cap ratio where it is now, and every time it gets down to these levels, you reload the gun back up again and go at it. So the ability to free up the cash, like you have, it certainly gives you a lot of borrowing capacity as well as the free cash thrown off to reinvest back in again.

That's why you begin to wonder if there's magical balance between acquisitions and being able to throw something back to the shareholders. Another question I got, too, talking about this -- in the contract prices staying flat, is it because your customers are taking a look at this same supply/demand relationship on the longer-term basis, that we really can't afford to squeeze too much out of you guys from what's happening in the spot market because we're looking at the longer-term supply/demand thing here? And if we really believe that this relationship is going to be in existence, and we don't know how tight it can get, that's more of a motivator too, to keep contract prices where they're at?

Well, I mean that's -- the customers also want good service. We're a key part of the supply chain, and so, they don't want to see the quality of their service fall off. They don't want those products contaminated. They don't want them late. They want them on time. They don't want them spilled. And so, there's also a concern for quality there, too, David.

Okay. I think that's about all I got right now, thanks.

Thank you.

Our next question comes from Bill Baldwin of Baldwin, Anthony Securities. Sir, your line is open.

Okay, thank you. Good morning.

Good morning, Bill.

Do you all have the number of active, inactive barges at the end of the quarter and what your capacity was at the end of the quarter?

Yeah. The number of active barges are 882. The number of inactive barges are 70.

At the end of the third quarter?

Yes.

Okay. The capacity in the system --

Yeah, the active capacity is 16,028,796.

Okay. And would the 70 inactive be primarily single-hold barges?

Yes.

And are those generally 30,000 barrels, also?

Generally.

Generally?

There's some smaller barges in there, too.

Okay. What I was trying to get at, if you had a total capacity number that included the inactive barges?

We don't publish that.

Okay. Second question, Joe, on the -- the pickup you're seeing in the petro-chemical, are you seeing the balance between the Gulf Coast and the river now, are they increasing activity in the Gulf Coast?

No, the Gulf Coast peaks are generally driven by chemicals used in the gasoline-blending pool. The increases have been more in the river, some in the canal, but I would say more in the river. More easy -- maybe it's just easy to identify it.

Mm-hmm.

The blending kpons can get very confusing.

Now, when you do begin to see a real pickup from your customer base in that petro-chemical area, you would expect that to reflect in the canal, would you not?

You -- you would.

Yeah, okay. Okay. Thank you much.

Our next question comes from Tom Spiro of Spiro [INAUDIBLE].

Tom Spiro, Spiro Capital. Good morning.

Good morning.

A question about the black oil business. In round numbers, what percentage of the black oil business that goes into the asphalt end market?

Well, it varies year to year. Recently, in the last couple of years less, because there appears to be less road construction occurring in the country. We think that that's driven by just state budgeting problems, but it's principally a summer -- spring/summer --

It usually -- the asphalt season usually starts about April. And we take asphalt up the river during the summer months, which is when it's easier to lay asphalt, and it usually ends about October.

Yeah. And the percent -- do you have a sense for that?

Yeah, I think when asphalt season is going, it's about a third.

How about on a full-year basis?

Well, it will be less.

Less.

Yeah, sure. But over a full year, is it the largest end market over a full year or --

No, I wouldn't say -- I wouldn't say it is. I would think probably, you know, heavy feed stock, the larger market.

Calf feed, things like that.

Thanks much. Good luck.

Next question from David Yuschak. Your line is open.

One quick question on -- you discussed it in the past, just kind of like get an update. Horse-power management. You guys have done a lot in improving that. How much more can you squeeze out of that factor as you -- particularly as you see maybe a recovery developing in the Conway. Does it become less of an issue?

No, actually it, will help. Because the more barges you have out there, the greater chance you have to match the capacity of the horsepower to the size of the tow. So more business helps you there. We continue to work on it. We think that there's a little more that we can squeeze out just by being smarter.

Now, in the current quarter, is it more difficult to manage horsepower in a quarter like you just finished compared to the second quarter?

Well, I would say that they're -- that they're both challenging. I don't know if the third quarter was any better or worse than the second quarter. I think the metrics we keep probably have -- I think, as I remember them, they're about the same.

Okay. All I got. Thanks.

Our next question comes from Chaz Jones of Stephens, Inc. Your line is open.

Yeah, just two quick follow-ups. One, on the diesel engine services side, clearly that division had a pretty tough quarter from a margin standpoint. Could you maybe just talk to us about maybe what we should expect moving forward and what the trends are going to look like there?

Yeah, we think that the -- that probably the worst is over, that we should see that trend up. Several reasons for that. The markets that are struggling the most are the midwest market and the Gulf coast market. With respect to the midwest market, we're -- we've taken some action to reduce costs, but also the market's getting better.

The inland/dry boat market is improving, and with it the demand for their services will improve. The Gulf Coast market is really driven by the oil service business, and that's been a difficult business. But we're trying to position our service there to address the needs of that market, which are going to be less Gulf of Mexico and more position -- more trending towards foreign service.

Mm-hmm.

But, you know, our feeling is that that business is going to improve.

Okay. And then, lastly -- the last couple of conference calls, you had mentioned the pension costs. And I know that comes up here in November. Are you able to give us any kind of update there yet?

We -- you know, we're -- we think there is going to be a pension contribution. Part of it's going to be certainly driven by where the market ends at the end of November, which is where we will value our portfolio . At the beginning of the year, we predicted the contribution would be around $6 million dollars. We think that it's, you know, probably going to be in that range. Maybe -- I think I said in the last conference call zero to ten. Maybe we can narrow it four to eight.

Okay.

But some of it's going to depend on where the market ends the end of this month.

Sure.

Actually end of November.

Sure. Okay. Thanks. That's all I had, guys. Best of luck in the fourth quarter.

Thank, Chaz.

Once again, to ask a question, please press star 1. One moment. Our next question comes from David Yuschak of Sanders, Morris, Harris. Sir, your line is open.

Back again, guys. On the guidance for the fourth quarter, you did indicate -- I want to confirm it -- a relatively cautious outlook for the chemical business then. Does that relate to what you saw in the quarter or just the same kind of attitude you've had consistently here throughout the year?

Yeah, I would say the latter, David. We did say some marginal improvement.

Okay. That's all I got. Thanks.

Sure.

At this time, there are no further questions.

Okay. Thank you for participating in our call. If you do have any additional questions or comments, would you please give me a call? My number is 713-435-1135. Have a good day.