Kirby Corp (KEX) 2004 Q4 法說會逐字稿

My name is Rodney and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Kirby Corporation 2004 Fourth Quarter and Year-End Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press *1 on your telephone key pad. If you would like to withdraw your question, press the # key. At this time I would like to turn the conference over to the VP of Investor Relations, Mr. Steve Holcomb. Mr. Holcomb, you may begin your conference.

Thank you for joining us this morning. With me today is Berdon Lawrence, Kirby’s Chairman, Joe Pyne, President and CEO of Kirby, and Norman Nolen, our EVP and CFO.

During this conference call we may refer to certain non-GAAP or adjusted financial measures. Reconciliation to non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at Kirbycorp.com in the Investor Relation’s section under Non-GAAP Financial Data. 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. 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 annual report on Form 10K for the year ended December 31, 2003, filed with the Securities and Exchange Commission. I will now turn the call over to Joe. Joe Pyne;Kirby Corp;President,CFO: Thank you, Steve. In our press release yesterday afternoon we reported record 2004 fourth quarter results at 53 cents per share, earning $13.5 million on revenues of $173.7 million. The results were at the upper end of our published earnings guidance range of 50 to 54 cents per share. 53 cents per share compares with net earnings of 45 cents per share for the same period last year in the fourth quarter of 2003. Our 2004 total year results were $1.97 per share, which was a record for Kirby. During the fourth quarter of 2004, Petrochemical lines of black oil volumes remained strong. Refined product volumes were at traditional levels for the fourth quarter. Our agricultural chemical volumes, which were weak for the first nine months of 2004, improved during the fourth quarter, as we expected them to do, as we transported more imported fertilizer products. Our pricing continued to improve in the fourth quarter. Contracts were renewed during the fourth quarter and increased in the 2 to 3 percent range and spot market rates were up 3 to 4 percent. Spot prices for the year were up between 15 and 20 percent. The Diesel Engine Service segment fourth quarter results benefited from our April, 2004, asset acquisition of Walker Paducah, the diesel engine service operation purchased from Ingram Barge Company located up in the Midwest. The segment’s power generation market benefited from direct part sales to the nuclear power generation customers and the rail market benefited from overall strong direct part sales. During the fourth quarter, our East Coast, Midwest and West Coast markets also saw some improvement. However, our Gulf Coast market, which services, principally, the oil service business, remained weak. The slight drop in the fourth quarter operating margin was primarily due to the increase in direct part sales to the nuclear power generation and rail markets as we generally earn a lower margin on parts than service. With respect to Osprey Lines, our container-on-barge feeder service operation which we purchased a one-third interest in April of last year, Osprey reported 2004 revenues of a little less than $14 million, an 18 percent increase, compared to the little less than $12 million in revenue in 2003. Revenue growth slowed during the fourth quarter as Osprey consolidated the new services that they established in 2004. All in all, this was a great year for Kirby. Record Earnings, continued success in improving safety, reducing costs and improving service levels to our customers. I’ll comment later on the outlook for 2005 on both the first quarter and the full-year. Berdon will brief you on our capital expenditure program in 2005, but first, I’m going to turn the call over to Norman to discuss the financial highlights for the quarter and for the 2004 full year. Norman Nolen;Kirby Corp;CFO,EVP: Thanks, Joe. Kirby continued to generate strong cash flow during the fourth quarter of 2004 with a record EBITDA of $38.7 million, 7 percent over the fourth quarter of 2003. EBITDA for the full year was also a record, $148.3 million, 11 percent over 2003. Capital spending totaled $93.6 million in 2004 and included $42.7 million for new tank barges and $50.9 million for upgrading of our existing fleet. During 2004 we also spent $11.5 million on acquisitions. That included $4.2 million for our one-third interest in Osprey and $5.8 million for the Walker Diesel Repair business. In 2004 operating cash flow continued to be in excess of the capital required to maintain and replace Kirby’s barge fleet. We reduced debt by $36 million and ended the year with $218.7 million in total debt. Our debt to capitalization ratio declined from 40.7 percent at the start of 2004 to 33.4 percent at year-end. At the end of November, we prepaid $50 million on our $250 million private placement loan. $150 million of the remaining $200 million is hedged against interest rate exposure with interest rate swaps. Our average cost of debt was 5.6 percent in the fourth quarter and 5.3 percent for the year as a whole. Kirby’s projected capital spending will increase from $94 million in 2004 to a range of $110 to $120 million in 2005. The increased capital spending includes $28 million for additional tank barge capacity and $37 million for replacement barges, which Berdon will discuss. Because of the additional capital requirements for replacement barges in 2005, our projected debt levels at December 31, 2005 should be about the same as at year-end 2004. Spending for barge replacements, which fluctuates from year-to-year to the age and condition of barges, should peak at $37 million in 2005 and decline to around $20 to $25 million for several years after 2005. I’ll now turn the call over to Berdon. Berdon Lawrence;Kirby Corp;Chairman: Thank you, Norman. The new construction projects were designed to replace older petrochemical and refined product tank barges as well as black oil tank barges that were retired or scheduled to be retired. Our total number of tank barges, basically, stayed the same. Our 2005 construction program consists of 10 double-hulled 30,000-barrel capacity tank barges for use in the petrochemical and refined products markets and 7 black-walled tank barges for use in the black-wall market. These 17 tank barges are replacement barges for barges scheduled to be removed from service. The total construction price is approximately $37 million, subject to the fluctuation of steel prices. Delivery of the 17 barges will be throughout 2005. In the change to our historical trend of only building tank barges to replace barges to be taken out of service, our 2005 construction program will include 20 double-hulled 10,000-barrel tank barges and one 30,000-barrel specialty barge, adding an additional 230,000 barrels to our overall fleet capacity. The total construction price is approximately $28 million, subject to adjustment based on steel prices. Delivery of the 21 barges is scheduled for June through October of 2005. We believe that this limited additional capacity will position us to obtain some business we cannot currently handle. As Norman discussed, our capital expenditures are unusually high this year because we are going to replace a larger number of barges in 2005 and we expect to replace in future years. Our CapEx for replacement equipment will vary year-to-year, but the run rate will be lower than our 2005 CapEx. I’ll now turn the call back to Joe. Joe Pyne;Kirby Corp;President,CFO: Thank you, Berdon. Yesterday afternoon we announced our 2005 first quarter guidance of 42 to 48 cents per share. For those of you who have followed Kirby over the years, you know that weather plays a significant role in the make-up of our first quarter results. Therefore, our earnings guidance has been expanded to 6 cents a share, a little larger than the normal 4 cents per share we gave in the second, third and fourth quarters. Our 2004 first quarter earnings were 36 cents per share. Our guidance anticipates a continued strong petrochemical and black-wall market, a slower first quarter refined products market and a little stronger than usual ag chem. Market. The wild card, of course, is our estimate for weather. In January, we have encountered significant weather delays in the Midwest due to high water conditions on the Ohio and the Illinois Rivers. The Upper Ohio, today, remains closed while the Corp of Engineers clears barges from the Bellville Vamp. The run-off from these rivers is currently causing high water conditions on the Lower Mississippi River, creating some significant delays and requiring some additional horsepower. The Mississippi River at Baton Rouge is anticipated to crest on February 1st at 39 feet. This is the highest flood stage since 1997, the last time we saw the Mississippi River at Baton Rouge at these levels. Looking at the year, our earnings are 220 to 230, which is a 12 to 17 percent improvement when compared to the 197 we earned last year. The 2005 year guidance also includes an estimated 4 cents per share expense from the adoption effective July 1, 2005, of the fair value method of expensing stock-based compensation for stock options awarded to employees. I also want to comment on the strength of the refining and chemical industries. Despite high energy costs, the customers which we service are doing very well. Their volumes remain strong. They’re optimistic. This is an excellent environment for barging liquid products. Our operator will now go ahead and open the conference call to questions.

At this time, I would like to remind everyone that in order to ask a question, please press *1 on your telephone key pad. Your first question comes from Alex Brand with BB&T Capital Markets.

Good morning, gentlemen. Forgive me if I ask anything you covered right at the beginning because I did miss the very beginning. I guess the thing that I was, number one, impressed with your ability to manage so many delay days in Q4, but then confused by the guidance, which seems to be pretty strong guidance for Q1 but, then, more tepid after that. Can you give some more color on what’s in your guidance? Where are you being conservative that, maybe, I wouldn’t have thought of when you’re also telling me that volumes and pricing do remain strong? Joe Pyne;Kirby Corp;President,CFO: With respect to 2005, the assumptions in the forecast do assume that weather gets better when we get the first quarter behind us. Where we’ll be in the range, the 42 to 48 cent range, I guess would play kind into how aggressive or non-aggressive we are for the rest of the year. In terms of our rate increase, we are assuming, again, kind of the 3 to 4 percent real rate increases on contracts that are renewed, modest volume increases and modest spot rate increases. There are also some costs that are higher this year than last year, Alex. The M&R is up a little bit, driven, principally, by higher steel prices. Interest is also up. In kind of thinking through where you were for 2005 this morning, we wondered if you had included the - - you wouldn’t have known the higher CapEx expense. The interest assumptions probably were more modest than what we’re going to experience this year. Furthermore, we have the stock option expense. I’m not sure that we’re that far off from kind of where you were or where you thought we would be when you projected Kirby’s earnings late last year.

Right. That’s fine. I’m just guessing the best I can. I feel like I keep waiting for pricing improvement to have more of a straight drop through effect, leverage effect, to the bottom line. In Q4 I couldn’t tell and perhaps you can give me some help on this, you had a lot of, I guess, unexpected costs so your Marine margin didn’t go up, maybe, as much as I would have hoped and maybe you’re kind of extrapolating the same type of assumptions into 2005. Maybe if you quantified for me how much was fuel as a percentage of cost the prior year versus Q4 of 2004, how much did delay days increase in cost year-over-year, maybe that would help me understand a little bit. Joe Pyne;Kirby Corp;President,CFO: Okay. Let us work on that and we’ll come back to you later in the call and give you that information.

Fair enough. Thanks, guys.

Your next question will come from David Yuschak with Sanders Morris Harris.

I’d just like to follow up a little bit more on that myself. When you take a look at your revenue for ton mile was up versus the third quarter and your operating profit per ton mile is actually up modestly as well. Doesn’t that suggest that pricing did have a pretty good impact on the results in the quarter? Joe Pyne;Kirby Corp;President,CFO: Certainly. It certainly had an impact.

As you look at annualizing that - - when you take a look at the amount of delay days that you had in that quarter and you, in fact, when you take a look at delay days in your typically slow first quarter, you had delay days even greater than you had in the first quarter of 2004. As you look at 2005 shouldn’t you be - - those annualized price increases, shouldn’t they begin to have more of an effect if, in fact, you’ve had a lot of cost increases this year that may have mitigated some of the margin expansion? Shouldn’t some of this begin to moderate somewhat in 2005 as far as expenses? Joe Pyne;Kirby Corp;President,CFO: You’re talking about costs?

Yes. Joe Pyne;Kirby Corp;President,CFO: Yes.

What would be - - I think, as we may not think about that we may see as bigger costs than 2004. Joe Pyne;Kirby Corp;President,CFO: Let’s just kind of think through the costs that are going to be higher in 2005 than 2004. Interest expense is going to be higher. We’re not going to reduce debt. Accrues is slightly higher. Fuel, on average, is going to be higher because fuel really took off middle of the year. Of course, we had the expense for stock options and slightly higher maintenance expense, principally driven by steel. Also, maintenance is going to fluctuate. It’s not going to be a perfect number year-to-year based on what you have in the ship yard and what you have to do with it.

Looking at your capital spending then, too. I think your capacity this year was up modestly, whatever the number was, up about 1 or 2 percent, whatever that number might be. The amount of capital spending you’re going to be doing this year, how much more is it? What’s the percent of increase there? Joe Pyne;Kirby Corp;President,CFO: Of CapEx over last year?

No, the capacity? How much capacity additions will you have this year on average that you’re assuming on average that you’ll have this year? Joe Pyne;Kirby Corp;President,CFO: It’s a little over 200,000 barrels and it represents the 20 10,000-barrel barges and one 30,000-barrel barge.

So the average capacity additions this year will be comparable to what you did in 2004 with this capital spending? Joe Pyne;Kirby Corp;President,CFO: Yes.

As far as the capital spending is concerned - - because you have had an extraordinary amount of spend here in the course of the last couple of years compared to what you throw off in the amount of depreciation. You mentioned about how much you’ve had to spend in the way of - - $37 million, I think you said, this year for just improving the existing fleet, I guess, is that what that $37 million is? Help me out with that. Is that just, basically, upgrading the existing fleet? Joe Pyne;Kirby Corp;President,CFO: That’s new construction.

New construction, taking out old stuff and putting in new. Joe Pyne;Kirby Corp;President,CFO: That’s correct. Barges that you just don’t want to spend any more money on but you don’t want to reduce your capacity either.

Right. Then 20 is the new? Berdon Lawrence;Kirby Corp;Chairman: David, that $37 million is 10 double-hulled 30,000-barrel barges and 7 30,000-barrel black-wall barges.

The level of capital spending, because of the replacement here and steel prices increasing, is that an indication of just how much it is costing for replacement cost of a fleet versus the imbedded costs of an older fleet to demonstrate to us just what kind of replacement value there is to need and support a fleet from a capital point of view? Joe Pyne;Kirby Corp;President,CFO: I’m not sure where you’re going. Let me just kind of back up and talk about the fleet replacement program and just give you some general guidance on what it’s going to cost on a normalized basis. Both Norman and Berdon talked about the fact that it’s going to go up and down on a year-to-year basis. I think what you’re looking for is what is the normalized CapEx for Kirby kind of going forward and I’m going to give that to you. I’m also going to warn you that in any given year, it’s going to be higher or lower than this, of course. The cost of replacing our fleet is going to be somewhere between $20 and $25 million a year as we project it going forward. That’s going to be on top of capitalized maintenance, which is money that we put back in the fleet to maintain the equipment for the kind of service that we’re offering our customers, which is a very high-level of service. So when you look at kind of total CapEx on a normalized basis, we’re projecting it to be kind of $60 to $70 million a year, David. I don’t know if that helps you. That, of course, gets stressed as steel prices go up. I think that that 20 to 25 was based on about $600 a ton. We’re currently paying about $800 a ton. Where it ultimately settles, we just don’t know. It’s going to be a little higher with steel prices higher. If it goes back to $600, it’s going to be at that number, but if it falls a little lower, it will be, hopefully, less than that.

Okay. So, looking at 2006, then, your capital spending should equate to, basically, around depreciation after a few years here of being substantially above depreciation? That’s kind of a ballpark point of view. Joe Pyne;Kirby Corp;President,CFO: No, that’s right. The run rate is going to be substantially lower than 2005. 2005 is going to be a record year for CapEx. Remember that there’s some additional capacity in that number, too. Of course, if the market continues to trend the way we believe it’s going to trend, let’s hope that there’s going to be additional capacity in future years. I think that that’s a very positive sign for the general health of the business.

But capacity, generally, should not expand more than 2, 3 or 4 percent at most in any given year. Joe Pyne;Kirby Corp;President,CFO: Right. That’s exactly right.

As far as tracking some kind of longer term thing. So, 2006, you should begin to produce a lot more excess free cash then on top of a balance sheet now that’s probably the lowest debt to cap ratio that you’ve had in - - I can’t remember when? Joe Pyne;Kirby Corp;President,CFO: Certainly before Hollywood. It’s as low as it’s been in recent history.

So the credit services have even upgraded your credit, I guess? Joe Pyne;Kirby Corp;President,CFO: We have a lot to think through if we want that on it.

That’s right. That’s why, with the kind of balance sheet you have right now, it does suggest that you have a lot of capacity to do some other things, which gets me to one last question. On Osprey you said the company - - was it revenue slowed a bit in the fourth quarter because of their - - help us out, what did you mean by the consolidation of operations there? Joe Pyne;Kirby Corp;President,CFO: This is what happens. This year Osprey initiated a service to Memphis, initiated a service to Chicago, initiated an off-shore service with a small shop. When you do that, you’re going to incur some operating costs that aren’t going to be satisfied by revenue until you have proved to the shipper that you have a reliable service that is there to stay and that he can make a big decision which is to change modes of transportation. We kind of didn’t expand the business while we consolidated those new services. We wanted the revenue to catch up with the operating expenses.

Okay. I would think with Home Depot and Wal-Mart opening up distribution facilities down in Houston’s ship channel that activity there from a cargo container point of view should really begin to accelerate. Joe Pyne;Kirby Corp;President,CFO: We think there’s a great opportunity in the Houston area, particularly as Bay Port comes on-line and as those major shippers, frankly, look for alternatives for imported cargo other than the West Coast. That’s really what that warehouse space is trying to do.

Okay. That’s all I have for now. Thanks.

Your next question comes from Chaz Jones with Morgan Keegan.

Good morning. A lot of my questions have been asked and I got on the call late, so I apologize if I’m being redundant here with some of the questions. Did you comment, Joe - - I know that Kirby’s going to be adding a few barges next year, did you say any comments on, maybe, some of your competitors and what they’re doing next year or do you have a feel for that? Joe Pyne;Kirby Corp;President,CFO: No, we didn’t comment on them. I can generally comment on them. ACL is, I think as most of the listeners know, has emerged from bankruptcy as of, I think, January 10th. They’re going to be a smaller company. They still have quite a bit of debt but, hopefully, they’re got kind of the worst behind themselves and they can now focus on running their business. We think that that’s a positive thing for the industry in general. With respect to the rest of the competition, this is a competitive business. There have been, I think, higher levels of building the last couple of years than we have seen in years before. We’re not particularly concerned about the market’s ability to absorb this equipment. For one thing, there’s still a lot of equipment that is going out of service. We think that this building will slow down in 2005 for 2006 deliveries partly because there’s no longer a tax benefit for building equipment. We do believe that some of this building was the direct result of some tax benefits that could be achieved in 2004 and 2005 that can’t be achieved in 2006.

You’re pretty comfortable, still, from the standpoint that most of the new build activity that’s going on out there can be absorbed with the current industry fundamentals? Joe Pyne;Kirby Corp;President,CFO: Yes. Yes, we are.

Okay. Then, kind of weird one here, do you happen to know how many single hulls you have left? I know that’s something you guys put out at the end of the year. With all the questions going on with CapEx and the fleet, I believe it was around 43 at the end of last year. Joe Pyne;Kirby Corp;President,CFO: The consensus around the table is that we’re operating 24.

24. Okay. Then, shifting gears here, two weeks ago, I guess, GM sold its Electro Motive Division to, I believe it was Greenbriar and Berkshire. I’m just trying to, maybe, get your comments to see if there’s any type of impact on DES in terms of that sale with the ownership change and can we expect any changes in that relationship going forward? Joe Pyne;Kirby Corp;President,CFO: The truth is that we don’t know yet, but as we talk to EMD, which was the Electro Motive Diesel Division that was sold, they see it as positive. They think that they’re going to be able to be more competitive with the new owner, more aggressive. Time will tell. I don’t see it as negative. Whether it’s a truly positive event we’ll just see.

Okay. Then, one last question on DES, I know this gets asked from time to time, but we’ve kind of been on a run rate here of 10 percent operating margins in that division and I know you guys have said in the past that you kind of thought that low to mid-teens operating margins were certainly achievable. What, at this point, is that going to be a function of? Is it meaning more aggressive in terms of pricing or service? Is it waiting in-markets to improve which, maybe, have kind of been in a lull here the last couple of years or is there something else there that’s going to have to happen? Joe Pyne;Kirby Corp;President,CFO: I think that, certainly, initial improvements are going to be, principally, pricing. We’re going to test that this year.

Okay. That’s all I have.

Your next question comes from Magnus Fyhr with Jefferies and Company.

Just a few questions left. First, with spot rates improving a couple percent in the fourth quarter and up 15 percent for the year, can you give us some guidance on where you see current utilization for your barges? Joe Pyne;Kirby Corp;President,CFO: Utilization, Magnus, is very high at this moment, but we’re not being very efficient because the overall system is constrained by high water, fog, ice storms, typical winter weather. As we move into the second quarter, we have some incremental additional capacity that we can sell. It’s not a lot. We are adding some capacity which we can sell towards the end of the year. We think that the industry utilization rates are probably about the same as ours. What will happen to spot rates? In our forecast we are assuming that they are going to rise modestly. If volumes improve more than we’re assuming they’re going to improve, I think that we could see a more aggressive spot rate environment, but we haven’t forecast that.

Right. When you say “modest”, I mean, your contract pricing improving 3 to 4 percent, is that more or less than the contract pricing? Joe Pyne;Kirby Corp;President,CFO: Right now spot pricing is higher than contract pricing.

But in your expectation - - Joe Pyne;Kirby Corp;President,CFO: Yes, it would be about the same, 3 to 5 percent.

Final question. Your G&A expenses were a little higher in the fourth quarter, what’s the guidance going forward. Norman Nolen;Kirby Corp;CFO,EVP: Magnus, the G&A cost this year, we’ve had a lot of, hopefully, non-recurring costs, Sarbanes-Oxley costs, legal costs. We had higher incentive compensation, which is a formula-driven number. The percentage of revenues, it will probably be a little bit less in 2005 than 2004.

Okay. Very good. Thank you. Joe Pyne;Kirby Corp;President,CFO: Operator, we want to go back to Alex Brand and answer the questions that he asked. Norman, you want to address those? Norman Nolen;Kirby Corp;CFO,EVP: Alex, our fuel cost, quarter three to quarter four this year, increased from 10.6 percent of our Marine Transportation revenues to 13 percent. The number next year will certainly be higher, we expect, than the average for 2004. We don’t yet know what our recovery was in 2004. As you know, 70 percent of contracts have fuel escalation clauses in them, they’re term contracts, and we usually recover the price of fuel increases over a period of anywhere from a month to three months and we don’t, right now, have the number to give you the earnings per share impact of the fourth quarter, but a substantial spike in prices toward the last half of the year.

Thank you.

Your next question comes from Bob Vitch from Lord Abbett.

Good morning. A number of issues, as far as the new builds that you have planned, number one, are they contracted for or are you building in advance of expected contracts? Joe Pyne;Kirby Corp;President,CFO: Are they contracted for, with respect to customers?

Customers. Joe Pyne;Kirby Corp;President,CFO: The 30,000-barrel barge is contracted for. The 20 10,000-barrel barges are additional capacity that we’re talking to customers currently about. Frankly, without those barges we wouldn’t be in a position to bid on a lot of the business that’s out there.

Okay. You commented also on the new builds that might be tax affected within the industry in general, but some of that is likely replacing some of the existing equipment. Do you have any sense of what the total capacity increase may be from an industry perspective? Joe Pyne;Kirby Corp;President,CFO: The industry does a survey that comes out late February, early March that will give us a better sense for that. We know what’s being built in shipyards. That’s easy information to get. What we don’t know is what individual operators are doing with respect to older tonnage. We’ll have a better feel for that in about a month. Having said that, capacity, since 2000, has declined. We had approximately 2900 tank barges in 2000 and last year the number was around 2700. We’re in a market that, in many respects, is stronger than it was late 1999 and 2000. The industry can support some additional capacity, which is why we’re reasonably comfortable that the new capacity isn’t going to cause us problems. Would we prefer not seeing it? Sure, we would, but we think there is volume growth and volume growth needs to be serviced, not by what’s in the fleet, but by some additional capacity.

Where is pricing relative to 2000, generally? Joe Pyne;Kirby Corp;President,CFO: Pricing is better.

Pricing is currently better than in 2000? Joe Pyne;Kirby Corp;President,CFO: It is, yes.

As far as the new boats are concerned, when were those orders placed? Joe Pyne;Kirby Corp;President,CFO: They were placed throughout the year. What we typically do, Bob, is with each order get options for future orders. We do that to really hold space in the shipyard. With all the replacement capacity is the exercising of options. The 20,000-barrel barges is actually a new order that was placed, I want to say, the fourth quarter or maybe late in the third quarter of 2004. It was late in the third quarter, wasn’t it? Norman Nolen;Kirby Corp;CFO,EVP: It was reported in our third quarter 10Q.

Are they being ordered from traditional suppliers or who might they be? Joe Pyne;Kirby Corp;President,CFO: We use, essentially, three shipyards to build our barges. Jeb Boat, which is a subsidiary of American Commercial Lines, they’re the second largest inland barge builder. Trinity, which is the Rail Corp builder, and then a small yard down in Galveston called the West Gulf Marine, which builds six to eight 30,000-barrel barges for us.

You commented on the impact of steel earlier. My guess is you probably had some equipment that was ordered and build for replacement over the prior year, too, that might not have had escalators for steel, my guess is that the new orders do? Joe Pyne;Kirby Corp;President,CFO: Yes. That’s exactly right.

I know some of the parts companies have been feeling that pain. Joe Pyne;Kirby Corp;President,CFO: Our 2004-built barges were built at old steel prices. Of course, shipyards have gotten a lot smarter and more aggressive. The barges going forward have steel escalators, de-escalators in them which will raise the price if steel goes up, but if it goes down, we get credit for it.

The 30,000 10 tank barges that are for replacement requirements, did you build some similar boats in the year previous? Joe Pyne;Kirby Corp;President,CFO: We have.

And to the extent that they were of like kind or design and can you give us a sense of how much that ASP has moved for those new barges? Joe Pyne;Kirby Corp;President,CFO: The difference in price?

Yes. Joe Pyne;Kirby Corp;President,CFO: Its $300,000 to $400,000 per barge. It’s not insignificant. It’s 25 to 30 percent of the total cost of the barge.

And that’s at a current run rate or base of what? Joe Pyne;Kirby Corp;President,CFO: We were building barges in the $1.5, $1.6 million range. We’re now in the $1.9 to $2 million range for the same barge.

Thanks. In regards to the new capacity you’re adding, are you finding any issues from attracting labor? Joe Pyne;Kirby Corp;President,CFO: No. Part of that might be the fact that nobody is building hopper barges. The shipyards have the ability, particularly in the Trinity and Jeb Boat yards, to take labor that might have been used on a dry cargo line and put them on a tank barge line.

How about your own labor needs in terms of operating the new barges? Joe Pyne;Kirby Corp;President,CFO: No. We’re always concerned about that and we always say that that’s one of the biggest challenges that we face. Having said that, we have a very extensive recruiting and retaining program here at Kirby, we have our own training facility. We forecast our needs forward and we try to keep enough people in the training pipeline to fill positions. We’ve been, I think, very successful in doing that and have avoided the problems, let’s say, that the trucking companies have had recently. Having said that, labor is something that we’re going to continue to watch very careful because you can’t run this place without people, they really are what make us successful. We don’t contemplate any problems, but we’re going to pay a lot of attention to it.

In order to retain those people are you finding any relative increases in wages and compensation? Joe Pyne;Kirby Corp;President,CFO: We are going to increase a float compensation this year. We’re going to do it in April. We think that, generally, you can forecast a float compensation increase above the rate of inflation just because it’s hard to get those guys - - let me put it this way, it’s a challenge to continue to recruit and retain the people that are necessary to run our fleet given the lifestyle issues of working on a boat. We’re very attentive to that. We think that the budgeted rate increases are appropriate, but we’re going to watch it during the year.

So it sounds, though, on a relative basis in terms of absolute increases in wages that there is some up tick? Joe Pyne;Kirby Corp;President,CFO: I think you can expect that our float organization is going to continue to be paid very well. There’s going to be pressures from other occupations for people and that we’re just going to have to be attentive to those.

Can you just comment on your Workman’s Comp expense or any losses in time or expenses related this year versus some of the prior years? Joe Pyne;Kirby Corp;President,CFO: Our safety record has continued to improve. It’s improved on almost every measure from accidents to injuries to spills. I’m very proud of that. Our loss record in total dollars also continues to improve. You always want to knock on wood because we have a lot of moving parts to Kirby, at any given day, 240 boats, 900 barges, 1700 people in the float organization, so we’re very attentive to that. Workman’s Compensation really isn’t a significant issue for us because all of our employees, at least in the float organization, the vessel employees, come under the Jones Act which doesn’t have a defined compensation plan. Each injury is looked at individually. The company is required to provided maintenance and cure, which means a salary continuation and medical care. If the injury is significant, the employee has the right to sue the Company under Tort Law, or for damages. Our lost time injury rate is like .07, I think, per 200,000 hours of work, so we don’t hurt that many people. That’s a very low lost time injury rate in our business and we’re very proud of it. Frankly, we think its good business. People are what makes this company go, we don’t want to hurt anybody.

Last two questions, you had a nice increase in Diesel Engine business. Going forward, is that going to be highly correlated with the growth in the overall industry fleet as well as your own? Joe Pyne;Kirby Corp;President,CFO: Most of that was driven by part sales to a nuclear facility where one of the subcontractors installing an auxiliary engine. That project is going to be ongoing for the next couple of years. That does have some significant revenue attached to it. The other part of revenue growth was the addition of that Midwest operation that we bought in April, Walker Paducah. There have been some things that Walker Paducah is going to continue. The work that we’re doing in that nuclear facility, I’m sure there’s going to be others that come along, but I don’t think that we can reasonably say that that’s going to continue on a ratable basis going forward.

Okay. Thank you very much.

Your next question comes from Greg Macosko with Lord Abbett.

Bob covered most of my questions, but just one, please. You talked about the 10,000-barrel barges, could you give us a little color on kind of what the bidding environment out there - - you were talking about those, you brought those on for that area - - talk about the market a little bit there? Joe Pyne;Kirby Corp;President,CFO: The 10,000-barrel barge order is principally for what we call our “river align haul business”. That’s a business that transports 10,000 barrels, principally, of chemicals from the Gulf Coast up into the Midwest. It is the market that ACL has principally been in. There are some other smaller players. The largest player is ACL. That market is growing as volumes improve. We’ve found ourselves in the last year or two unable to participate in some of the bidding that we could participate if we had some additional capacity.

And would you talk about the - - you mentioned ag and chemical, are these barges aimed at that market and you’re suggesting that is starting to pick up? Joe Pyne;Kirby Corp;President,CFO: Not ag chem.. Ag chem is a business that we wouldn’t build for. With respect to the chemical business, that’s a business that has seen volume increases in 2004 and we think there will be continued volume increases in 2005. Business is doing surprisingly well given the high cost of energy and it looks like, Greg, that it’s going to continue to do well for, at least, the near future, the near future being a couple of years out. It’s hard to predict when you get to 2007, 2008, but for the first time in many years, our customer base in the chemical business is very optimistic about their core business.

Okay. Finally, the D&A dropped about $1 million, just what was behind that? Norman Nolen;Kirby Corp;CFO,EVP: On the depreciation?

Yes. Norman Nolen;Kirby Corp;CFO,EVP: We had an unusually high core quarter in quarter three. What we do each year, we continue to look at older barges to ensure that we have the ages on our books equal to their expected life. We often will reduce the book life on various barges during the year. We did it in third quarter this year, did it in fourth quarter last year. That did increase the depreciation third quarter and that does not suggest that depreciation is going down because it won’t, it will continue to increase because of our capital spending program.

Okay. Thank you.

Your next question comes from Jon Chappell with J P Morgan.

Good morning. Just two, hopefully, really quick questions, you mentioned the impact of ACL returning to the market as being a positive. Have you seen anything on the pricing side so far? Do you expect to see, maybe, some competitive pricing? Joe Pyne;Kirby Corp;President,CFO: What we hope is that pricing is going to kind of reflect the true cost of that business and the risk that is in that business. We don’t expect to see pricing deterioration, but I don’t think that we’ve seen anything quite yet. They’re just newly out of bankruptcy, not two weeks yet.

Okay and the other thing, with the CapEx budget so high for this year, you’re kind of limited on what you can do on the acquisition front. How high would you lever up your balance sheet if the right acquisition came along? Joe Pyne;Kirby Corp;President,CFO: We’re in great shape for acquisitions. We, essentially, have an unused credit facility, $150 million expandable to $225 million. Our debt to total cap is as low as it has been in years. We’re very comfortable levering up at least 50 percent. When we merged with Hollywood, we presented pro formas to the rating agencies that had Kirby’s leverage at almost 62 percent. They were still comfortable maintaining our investment grade rating. I think we have plenty of capacity, Jon. The truth is, if we want to pay down debt, we can do that very, very quickly by just reducing capital expenditures.

Then, as you look at acquisitions, and I know its going to be buy if the opportunities present themselves, but could you kind of prioritize between your two core business units, the Inland Transportation versus Diesel Engine, and also, maybe, throw Osprey in there now that you have some sense for what that business is? Joe Pyne;Kirby Corp;President,CFO: Osprey is probably not going to be driven by acquisitions because it’s a new business, so the growth is going to be internally-generated growth. The barge business is our larger business, best margins, best opportunity to improve cash, which is really what the business is cash and, having said that, there are opportunities in the Diesel Engine business that we continue to explore and we thing that we can, indeed, grow that business. If you had two acquisitions of similar returns and you could only do one, we’d probably lean towards the barge business.

Okay. Thanks, Joe.

Your next question comes from Joe Aguilera with Johnson Wright.

A lot of ground has already been covered so I’ll make it quick. Did Joe mention earlier any quantification of what the extraordinarily high amount of delay days was in the quarter? Joe Pyne;Kirby Corp;President,CFO: It was a combination of things.

I guess what I’m asking, Joe, is in terms of its impact on earnings? Joe Pyne;Kirby Corp;President,CFO: No, we didn’t quantify it with respect to its impact on earnings. We didn’t try to do that.

Okay. Is there a simple formula for translating delay days into ton miles? Joe Pyne;Kirby Corp;President,CFO: Probably not, but we’ll think about that. The challenge is, of course, that you’ve got different segments of the system. You have more ton miles on the river than you do the canal because the trips are longer. On the canal, it’s probably the average time that a cargo spends in a barge is around 48 hours and there’s lots of time waiting at dock. The dock side of the trip is a far greater percentage of the total length of the trip than on a river. It’s not an easy thing to do.

Thank you.

Your next question will be a follow-up from David Yuschak with Sanders Morris Harris.

Help me out, guys, on the interest expense. You said that you think it will be up this year, but this year we had about $95 million of CapEx and you ended up paying down about $30 million so far versus the end of the year last year and you may be adding, say, on average, another $15 million or so of CapEx this year. Then, I think you also commented that you thought that by the end of the year, 2005 that your debt level would be equal to where it was at the end of this year. Obviously, there’s going to be some seasonal borrowing for the CapEx is what I’m assuming. Net net, your outstanding debt should still be lower in 2005 than 2004. I’m just wondering what magnitude of interest expense you’re expecting to be up at versus what you actually produced in 2004, given the fact that your average debt should be down versus 2004? Norman Nolen;Kirby Corp;CFO,EVP: David, our interest expense in 2005 is expected to be in the low $14 million range versus, say, $13.3 million in 2004. Joe Pyne;Kirby Corp;President,CFO: As you looked at the year, David, my guess is that you forecasted that the debt moved down over the year, which lowered the cost of interest, the total cost of interest, in your forecast that you put out, I think, at the end of the third quarter. What will actually happen is this year debt, during the year, - - it’s based on timing of barges coming out of the shipyards, our debt will increase, probably, to mid-year and then it’ll start coming down.

That’s just higher cost of bank debt versus what you just retired? Joe Pyne;Kirby Corp;President,CFO: Our debt that we will be putting on the incremental debt this year will be bank debt.

That should be a bit higher than what you just retired, right? Joe Pyne;Kirby Corp;President,CFO: No, it’s a little bit lower actually.

Is it? Joe Pyne;Kirby Corp;President,CFO: About 20 basis points.

So you’re kind of telling me that your debt, then, should be - - average debt for the year should be higher than it was in 2004? To get interest expense up $800,000 versus what you did this year? Joe Pyne;Kirby Corp;President,CFO: Our debt during 2004 was coming down, say, pretty continuously over the year. In 2005, it’s going to go up, then come down. I don’t know off the top of my head if the average is going to be higher or lower.

I just wanted to see about the timing of the cash flows for your capital spending is basically what you could end up having higher debt on average versus - - Joe Pyne;Kirby Corp;President,CFO: Capital spending will be weighted towards the first part of the year and then will go up, probably peaking in the middle part of the year and start coming down.

As far as delay dates are concerned, everybody kind of talks about how aging the infrastructure is on the inland waterways, do you guys have to keep an idea of how much of those delay days last years were accounted for by infrastructure issues versus weather issues? Berdon Lawrence;Kirby Corp;Chairman: Most of it was weather, David, by a large margin.

The issues that we hear about, the aging infrastructure, it’s there but its money being spent so it’s not an issue with you guys operating even with an infrastructure that’s - - Berdon Lawrence;Kirby Corp;Chairman: We know the infrastructure is getting older, but we’ve been successful. The waterway’s council has been successful in getting back to full funding on the inland waterway projects recommended by the user’s board. The Corp has more money to spend now than they did two or three years ago and we’re kind of catching up on that.

So, the potential is, as that money gets spent on the inland waterways it could also improve the capacity that could be delivered on the waterways, right? Berdon Lawrence;Kirby Corp;Chairman: No, it doesn’t really improve the capacity.

But it gets faster through put on some of these areas. Berdon Lawrence;Kirby Corp;Chairman: Some of the locks will be improved but, overall, it’s going to maintain the waterway. Joe Pyne;Kirby Corp;President,CFO: On the waterways we use, I guess that you could argue that on the Upper Mississippi River they expanded the locks. That’s not a waterway that we’re on a lot, but it would help traffic.

One last question on your guidance for the first quarter, Joe, a 42 to 48, you, obviously, know in this first month how many delay days you’ve already had and what things look like, what would need to happen to get you to the upper end of that 42 to 48 range, knowing that we’re already off to a slow start because of delays? Joe Pyne;Kirby Corp;President,CFO: Well, January is pretty ugly.

I figure if you’re doing 42 in January, what do I need to do (inaudible) back pretty quickly? Joe Pyne;Kirby Corp;President,CFO: We need to improve weather.

So weather would be the overriding condition as far as you’re concerned to get to 48 cents because business is there right now, it’s just a matter of can it get shipped? Joe Pyne;Kirby Corp;President,CFO: I think that’s right.

Thanks a lot.

Your next question is from Anthony Arnold with Ingram Barge.

Good morning. I have one quick question. In yesterday’s press release, the mention about capital expenses and building the 38 barges, the number listed there was $65 million and I thought I heard $28 million mentioned this morning. Is there something I’m missing or is there a mistake? Joe Pyne;Kirby Corp;President,CFO: No, the $28 million is for the 20 10,000-barrel barges and the one specialty 30,000-barrel barge.

Okay. Thank you very much.

Your next question will come from Kevin Stock with Imperial Capital.

Good afternoon. I actually cover ACL so I’m a little surprised to hear this fallacy repeated over and over that they’ve been out of business for the past two years. I’m just wondering, are you expecting their near immergence from bankruptcy to in any way affect the industry? Joe Pyne;Kirby Corp;President,CFO: I certainly didn’t know they were out of business and certainly have seen them in the market.

That’s what I’m saying. Joe Pyne;Kirby Corp;President,CFO: I’m not sure what you’re suggesting.

I’m really talking about the other callers, not you. Joe Pyne;Kirby Corp;President,CFO: Okay. ACL is a great company. It’s one of the great company that has been around a long time. They, unfortunately, over-levered the company and, then, they had a host of operating and market problems that eventually drove them into bankruptcy. When you’re in bankruptcy or as you’re going into bankruptcy, you focus on things like trying to pay debt and dealing with creditors. I’m not suggesting that they didn’t focus on their business also, but I think an ACL re-emerging from bankruptcy really focused on the market, focused on their business, is a positive thing for the business. That’s really the point we were trying to make.

Okay. Thank you.

Your next question comes from Forrest Temple with Fly Line.

I like the fact that the Ingram guys are on here, too, so we all know exactly where everybody stands. You look at ACL and you’re were just kind of expounding on that of them coming back, better balance sheet, maybe better capitalized a little bit, and as you were saying, they’ve been steady in the market. Have they been more irrational and you believe that they will be a more rational player right now or why do you think that that’s good for you that they come back out of bankruptcy? Joe Pyne;Kirby Corp;President,CFO: I don’t want to say they’re irrational, I just that - - Berdon Lawrence;Kirby Corp;Chairman: They’re distracted. Joe Pyne;Kirby Corp;President,CFO: Yes. You just get distracted because you’ve got kind of other influences other than the marketing and operating influences, particularly on the senior management team, when you go through what they just went through.

So that will just sharpen up the market, maybe. Joe Pyne;Kirby Corp;President,CFO: Well, we hope. We think that it’s going to be positive. It’s kind of good to have them back, frankly.

Joe, are you seeing any new entrants with the spot rates up? Joe Pyne;Kirby Corp;President,CFO: No, not really. We see some guys that got out for one reason or another, sometimes because they sold to us, that are building a couple of barges here or there, kind of boutique barge lines.

Is that more like Charles or do you mean other guys? Joe Pyne;Kirby Corp;President,CFO: No. This would be an operator that exited for a couple of years and just missed the business and wants to build a little equipment. The market absorbs that very well. The Sea Corp entry, I think, is just looking at the market, they’re not an operator, at least with respect to tank barges, and seeing an opportunity, principally in the river line haul business to build some equipment because of their belief that the amount of equipment for that business is decreasing. In many respects, they’re right, it is decreasing.

But not a business you’re interested in? Joe Pyne;Kirby Corp;President,CFO: We’re in that business. That’s what we’re building our 20 10,000-barrel barges for.

I’m sorry, I thought you were talking about harbor barges. Joe Pyne;Kirby Corp;President,CFO: No. They’ve built some tank barges also.

If you were to go out, or I was to call Jeb Boat or Trinity right now, when is the first time I could get a slot to build a tank barge? Joe Pyne;Kirby Corp;President,CFO: The consensus, again, around the table is that it would be a 2006 delivery.

And how long does it take these guys to build one of these things? Joe Pyne;Kirby Corp;President,CFO: Once they start, not that long, a 10,000-barrel barge takes two to three months. It’s a pretty quick process. Again, I think that a lot of the building occurred in 2004 and 2005 was tax incentive-based and that doesn’t exist anymore.

Will it accelerate depreciation? Joe Pyne;Kirby Corp;President,CFO: Yes.

I guess the one thing that I do get confused about, if you saw spot rates - - and I know other guys have tried to kind of pin this down and maybe I’m just missing it - - spot rates were up 2, 3 percent, it seems like, kind of a quarter, overall year-over-year fourth quarter 2004 versus fourth quarter 2003 they were up 15 to 20 percent. Joe Pyne;Kirby Corp;President,CFO: Yes.

Your normal contract is for a year? Joe Pyne;Kirby Corp;President,CFO: Yes, most of them are a year.

If they’re for longer, they’re annual resets? Joe Pyne;Kirby Corp;President,CFO: Annual adjustments, typically, for PPI and labor and, of course, they are adjusted monthly or quarterly for fuel.

Within 12 to 15 months, maybe, 18 months, should you be cycling up to the whole fleet as, roughly, at where Q4 spot prices are? What’s the lag, that’s what I’m trying to figure out is how long until you realize that? Joe Pyne;Kirby Corp;President,CFO: You have to be careful about spot prices because at the beginning of the year, they were below contract prices. We lost a lot of spot pricing power at the end of 2001 really through the beginning of 2003, then, we began to get it back. Contract prices at the beginning of this year were generally below spot prices, but generally below contract prices. Over the year, they were higher.

That’s great. Thank you, guys. Joe Pyne;Kirby Corp;President,CFO: I think, operator, maybe one more question.

Your next question comes from Greg Macosko with Lord Abbett.

With regard to - - you mentioned ACL coming back into the market a smaller company, does that mean, and I’m sure you must know, specifically, were any barges taken off by ACL, say, over the last three to six months? Joe Pyne;Kirby Corp;President,CFO: Really, over the last, probably, year, year and a half, they reduced their tank barge fleet from about 450 barges to where we think they are - - I know they’re listening - - 385 barges, roughly. That’s where we think they are. They reduced their hopper fleet substantially. They scraped 800 barges, turned back other barges that were under lease, so they’re a much smaller, not a much smaller company, but a smaller company today than they were two years ago.

But in the last couple of quarters it’s been at 385? Joe Pyne;Kirby Corp;President,CFO: Yes, that sounds about right.

Okay. Thanks very much.

We appreciate your interest in Kirby and for anticipating in our call. If you have any additional questions or comments, please give me a call. My direct call number is 713-435-1135 and we wish you a good day.

Thank you for participating in today’s Kirby Corporation 2004 Fourth Quarter Year-End Results Conference Call. You may now disconnect.