Kirby Corp (KEX) 2006 Q1 法說會逐字稿

Good morning. My name is Courtney and I will be your conference operator today. At this time, I would like to welcome everyone to the Kirby Corporation 2006 First Quarter Earnings 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 session. (Operator Instructions)

I would now like to turn the call over to Mr. Stephen Holcomb, Vice President of Investor Relations. Sir, you may begin your conference.

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 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 risk and uncertainties. Our actually 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, 2005, filed with the Securities and Exchange Commission.

I will now turn the call over to Joe.

Thank you, Steve. Welcome to our first quarter conference call. We have a lot of good news to discuss this morning. Record earnings, record revenues, the election of two very fine new directors, and a two-to-one stock split.

The business fundamentals that produced our record results last year continued into the first quarter of 2006. Late yesterday, we reported record first quarter earnings of $0.85 per share. We were assisted by some unusually favorable weather conditions during the first quarter. Favorable fuel recovery also helped during the quarter. We estimate that the impact of fuel recovery during the quarter was in the range of $0.05 to $0.05 cents per share. This is still profit, it’s just the timing of when it’s recorded on a quarterly basis.

We experienced very strong utilization during the first quarter. We essentially had no spare capacity in our clean pressure of black oil fleets. The only weakness was in the agricultural chemical market. Because of favorable weather conditions, the delay days in 2006 compared to the same period the year before were 25% less.

With respect to pricing, pricing continued to improve during the quarter. Contracts were renewed at rates in the 4% to 6% range. Effective 1 January 2006, first of the year, escalators for labor and producer price indexes on a number of the multi-year contracts increased rates for those contracts in the 2.5% to 3% level. This is something that happens at this time every year.

The spot market continued to rise. We estimate that first quarter saw spot prices up in the range of 5% to 10% compared to the fourth quarter of ’05. Spot prices remain above contract prices.

Of course, fuel costs were also higher. The average price per gallon of fuel consumed in the first quarter was $1.84 compared to $1.32 same period of last year. We’re currently paying between $2.10 and $2.16 or $2.17, depending on where we’re buying it for fuel.

The Diesel Engine segment’s first quarter results saw continued strong service activity and direct part sales. The higher results and operating margins reflected the firming of pricing throughout 2005 and into 2006 for service and parts, and also for very strong labor utilization. Labor utilization was a little stronger this year than last year.

Historically, the first quarter is this segment’s best quarter. What happens is during the winter months, customers that are on the upper Mississippi River and on the Great Lakes see their business levels typically slowing, do the majority of maintenance, or at least try to do the majority of maintenance during this period.

We’re very pleased with the progress of increasing our operating in both segments, Marine Transportation and Diesel Engine. The Marine margins for the quarter were 18.4%, and the Diesel Engine margins were 16.2%.

In January of this year, Kirby increased its ownership in Osprey lines from 33% to 67% when we exercised our option to purchase one of the three owners’ interests. Cooper T. Smith, the other owner other than Kirby, retained their 33% ownership interest. We continue to be optimistic with respect of the long-term prospects of this business. As we said before, this is a long-term play which we think will provide a great alternative to rail and truck transportation.

In March of this year, we also purchased the 65% interest in Dixie fuels that we did not own, for $15.6 million. The 65% interest was owned by Progress Fuel Corporation. Kirby owned a 35% interest. Dixie Fuels owns and operates a fleet of four ocean-going dry bulk barges and tugboat units. They operate under a long-term contract for a subsidiary of Progress Fuels, transporting coal from the lower Mississippi River to the west coast of Florida, and then they pick up limestone rock and carry that to a cement manufacture in Alabama.

We expect that the DFL purchase will only be slightly accretive this year due to large scheduled maintenance projects which will occur this year.

I’m also pleased to report that at our board meeting this week, the board declared a 2-for-1 split of Kirby common stock. Stockholders on record on May 10th will receive one additional share of common stock for each share of common stock held on that day. The distribution date for the additional shares is targeted at May 31. As of yesterday, Kirby had 26.4 million shares outstanding.

I’ll now turn the call over to Norman who will go through some of the financial highlights.

Thanks, Joe. As Joe said, first quarter earnings reflected continued strong Marine Transportation and Diesel Engine services markets, and unusually favorable winter weather conditions.

Ton miles for first quarter are up slightly over the 2005 first quarter. The relatively flat ton mile volume is due to a continued strong demand of the inter-coastal waterway, which is associated with shorter and more frequent trips.

In addition, our agricultural chemical volumes were lower than last year due to high Midwest inventory levels. Agricultural chemical movements typically involve longer trips up the Mississippi River to serve customers in the Midwest farm belt.

Since we now own all of Dixie Fuels since March 1st, and a controlling interest in Osprey since January 1st, we began consolidating the results of both entities in the Marine Transportation segment of our business in the first quarter. These two entities contributed $5.1 million or revenue for the quarter.

Also in the first quarter we adopted the fair value method of accounting for stock-based compensation, which had a $0.02 per share negative earnings impact. We generated first quarter EBITDA of $54.3 million, a 37% increase over the first quarter last year. The EBITDA margin increased from 21.4% to 24.1% this year.

Capital spending for the 2006 first quarter was $21.6 million, which included $5 million for new tank barges and towboats, and $16.6 million, primarily for upgrading our existing fleet.

We also spent $15.6 million for the remaining interest in Dixie Fuels, which we reported in March, and are increasing our 2006 capital spending guidance by $10 million, from $120 million to $130 million, to recognize the consolidate capital expenditures of Dixie Fuels.

Our debt to capitalization ratio dropped from 27.1% to 25.9% during the quarter, and our average cost of debt was 6%. Approximately 75% of our outstanding debt remains hedged against interest rate fluctuations with interest rate swaps, and lastly, as of March 31st, we had $23 million in cash on our balance sheet.

I’ll now turn it over the call to Berdon.

Thank you, Norman. I want to speak to you about our new barge and towboat construction programs, and the changes we have made to our board of directors.

Our 2006 construction program consists of 23 30,000 barrel capacity tank barges for use in the petrochemical and refined products markets at a cost of $45 million. 15 will be new capacity, adding 450,000 barrels to Kirby’s overall capacity, and 8 are replacement barges. Deliveries of the 23 barges are scheduled throughout 2006, with the final three scheduled for delivery in the 2007 first quarter.

Kirby is also building four 2100 horsepower towboats, primarily for use on the Mississippi River, at a cost of approximately $13 million. Two of the towboats are scheduled to be placed in service in the 2006 second half, and two in the 2007 first quarter.

Looking ahead to 2007, in March and April, we signed contracts for the construction of 20 30,000 barrel capacity tank barges for use in the petrochemical and refined products markets. These barges are scheduled for delivery throughout 2007. The construction price is approximately $43 million, subject to steel price adjustment. 14 will be new capacity, and six replacement barges, adding approximately 450,000 barrels of additional capacity.

Recently Kirby lost one of its long-serving directors with the death on April 18th of Robert G. Stone, Jr. Bob served as Kirby’s Chairman from 1983 until 1995, and Chairman Emeritus from 1995. Our warmest condolences go to Bob’s family.

At Kirby’s board of director meeting held on April 25th, David L. Lemmon was elected to serve on the Kirby board, replacing Bob Stone. Mr. Lemmon served as President and Chief Executive Officer of Colonial Pipeline Company from 1997 through his retirement from Colonial in January 2006.

At Kirby’s annual meeting held on April 25th, the Kirby shareholders elected Monnie Miller as a director. Mr. Miller served as executive Vice President, Chemicals, of Flint Hills Resources, a company engaged in crude oil refining and petrochemical production from 2003 until his retirement in January, 2006. From 1999 to 2003, Mr. Miller served as Senior Vice President of Coke Chemical Company, a predecessor company of Flint Hills.

Both Mr. Lemmon and Mr. Miller bring current knowledge and expertise in the petrochemical and refining industries, Kirby’s principal customer base, to the Kirby board.

Rick Webb, a Kirby director since October, 2000, did not stand for reelection as a director, having reached our board retirement age. I want to thank Rick for his dedicated service to Kirby.

I will now turn the call back to Joe.

Thank you, Berdon. Before I get into the second quarter and the year outlook, I want to talk about the ethanol market. Bear with me, and I’ll try to go this quickly. There’s a lot of interest in ethanol, and how it’s going to affect the barging market, and I just wanted to give you our view on it.

It’s a complicated topic, but this is kind of what we know. The Energy Policy Act of 2005 removed the oxygen mandate for reformulated gasoline. The change becomes effective May 1, 2006. Many are forecasting that MTBE will no longer be used as a blending component in reformulated gasoline because of the perceived legal liability of using MTBE as a gasoline blending component without the protection of the federal oxygen mandate. That’s kind of the issue.

MTBE is not only useful as an oxygenator, but it’s also a great octane enhancer because natural gasoline by itself doesn’t meet automobile manufacturers’ octane requirements. The gasoline has to be blended with something that increases octane to meet the retail octane standards.

There doesn’t appear to be any other blending component that matches up with MTBE’s qualities as a blending component. However, ethanol is likely to be the most practical replacement, particularly given the fact that the Energy Policy Act contained a renewable fuel standard, which will force a near doubling of ethanol use in the gasoline pool between now and 2012.

Ethanol does have several undesirable physical properties which frankly, MTBE doesn’t, including the tendency to separate from gasoline in the presence of water that will limit the transportation and mixing options. Bottom line, ethanol probably can’t be moved by pipeline and it must be transported and stored separately from gasoline, and it’s going to be mixed relatively close to where the gasoline is sold to retail outlets.

Ethanol currently moves to the west coast by unit trains. The east coast will be supplied probably principally by trains, but there is some talk of moving it by ship using barges to transport it down the Mississippi River where it will be loaded on ships. Certainly inland barging will play in the Midwest and Gulf Coast areas. Transportation patterns are still being worked out and will continue to evolve as the use of ethanol as a blending component is better defined.

With respect to Kirby, how this would affect Kirby, most of Kirby’s river line haul barges currently return empty from the Midwest, so an ethanol backhaul is an attractive opportunity. We’ve recently transported some ethanol, but frankly, we’re so fully utilized with requirements from our existing customer base, we don’t have a lot of capacity to take advantage of the ethanol that’s moving on a backhaul basis.

Enough about ethanol. I just wanted to kind of give you our take on that.

I want to talk about the second quarter and the year. Today, the business fundamentals that allow for sustained earnings frankly haven’t been better in a number of years. Our fleet is fully utilized. We really do not have any spare capacity. We see no reason why this shouldn’t continue for a while. There’s only limited current capacity to build tank barges in the United States. Current capacity allows for approximately 100 tank barges to be built per year, given the current mix of building dry cargo and tank barges.

These 100 tank barges are being built into a fleet where a third of it is 30 years or older, so there’s going to be a lot of replacement that needs to happen.

I think our short-term risks in the business are economic. How is the economy going to affect the lines that we move? We’re really not at the risk of over-capacity.

Now all of this is positive, but there are also some challenges that are associated with a tight market, and I want to note those. We’re short of people to man our vessels, and short of horsepower. The effects of the hurricanes Katrina and Rita, as well as an already tight labor market, are being felt by our industry. We’re managing through these challenges at Kirby by aggressively recruiting and training vessel personnel and addressing the vessel personnel pay scales. Effective first of the quarter, April 1, we gave an average overall increase to our vessel personnel of 6.7%.

We’re also addressing the shortage of horsepower by purchasing or chartering additional power where we prudently can, as well as adjusting some of the rates we pay our current charter boat operators. I think the shortage of towboats will get better this summer as some of the urgency to rebuild the defensive levies around New Orleans is relieved.

Yesterday we announced our second quarter guidance, and we’re putting that guidance in the range of $0.85 to $0.90 per share, which is an 18% to 25% improvement over our actual second quarter 2005, which was $0.72 per share. Our second quarter guidance of course anticipates our markets will continue to remain strong.

For the year, we’ve increased our earning guidance to $2.35 to $2.50 per share, and that’s a 25% to 31% improvement over the 2005 number, which was $2.67. The hike in our year guidance is based obviously on a great first quarter but also on a continued strong outlook for the remainder of the year.

Despite the high oil prices, we continue to see a strong demand for our equipment. Our customers frankly are optimistic with respect to their volumes. At the present time, we really don’t see any weakness in demand for the products that we transport, except for agricultural chemicals to some extent, and that’s more seasonal.

If the U.S. economy remains strong and we don’t see that it won’t, at least at this point, we see no reason to believe that these fundamentals, these strong barge utilization rates won’t continue through this year and frankly through 2007.

I guess bottom line, this remains to be a great time to be in both our businesses. We continue to think that the future is good. It looks good. I’m excited about the long-term prospects of both our business.

Operator, we’re going to go ahead and turn the call over to questions, but we’d like to ask you to help us, because there are a number of people that want to ask questions. If you could limit your questions to one question and then a follow-up, and then if you have more questions, please just get back in the queue. That will allow those that want to get in and ask a principal question to do that.

Operator, go ahead and open it up.

Absolutely. (Operator Instructions) Your first question comes from the line of Jon Chappell with JP Morgan.

Joe, you talked about another key topic in my mind, something we’ve been hearing about a lot which is ethanol. I just wanted to clarify one thing with that. You had mentioned that you don’t really have the excess capacity to take a lot of the ethanol, but the way that I understood it, it would’ve been a backhaul cargo on barges that are coming back to the Gulf relatively empty. Could you just explain that a little bit how you’re thinking about that?

Sure. You still have to position the equipment to load, so there’s some positioning time. The cargo bottoms need to be clean and dry. You can’t load over gasoline and many of the chemicals that we move, but we’re so busy trying to keep up with our customer demands and servicing their business, which is our obligation to do, that in many cases, we just can’t take the time to position the barge to load.

Frankly, John, I’m not sure how much of it is moving. There’s certainly some moving. We’re moving some of it. I think other barge lines are moving it, but how much is going to be moved is still being worked out.

Then my follow-up would be on the first thing you talked about, which is the fuel recovery, the $0.05 to $0.07 addition to the first quarter. Is this fuel surcharges? Do you get it basically the majority of your fuel surcharges one quarter per year? Is the first quarter typically lumpy here? How should we think about this going forward?

We ultimately should get all the fuel back, all our costs back. What happened in the first quarter is if we had a contract that escalates the first day of the quarter preceding the quarter, the escalation takes place. In other words, they pegged the fuel price 90 days before based on one day’s price. It is then put in the contract. It just so happens that it was at the top of the last peak in fuel prices, so we had in this particular contract an artificially high fuel rate, and we benefited from that.

You know, sometimes we benefit and sometimes we don’t, but we think that on average, we get it all back. It’s still profit. It’s more the timing of where that profit is recognized on a quarter basis.

We only have one contract that does that, and in the number of years that we’ve had that contract, this is the first time that it’s kind of happened that way.

Thanks a lot, Joe, very helpful.

Your next question comes from the line of Doug Jones with Jones Jefferies and Company.

Thank you, fantastic quarter, guys. Just a quick question on your operating margins. I’m basically trying to get to the point of how much better can it get, you know? I mean, you guys put up 18.4% operating margin this quarter -- outlook is still fantastic. What have you seen in terms of historically high types of operating margins, and do you think that given the outlook, in your own mind, that that is at least achievable this go-round?

I think indeed it is. In recent history, our last record margins were in 2000, they were 18.9% for the year on the transportation side. I don’t see any reason that we’re not going to go through that. We’ve been saying for a while that we think this is a high-teen, low-20 margin business. It should be. On the Diesel Engine side, we think that that’s a mid-teen margin business. Again, we’ve been saying that for a while. This quarter, it was 16.4%, I think, and we think that you’re going to see those margins get into that area.

Thank you. My one follow-up, back on the ethanol issue, just to make sure that I’m clear on that. Being more of the backhaul type of trade that it is, am I interpreting correctly that you guys don’t believe that there’s much in the way of an expected impact on the pricing as it relates specifically, as a result of the impact of the ethanol switch for the overall barge spot-market?

I think it continues to put pressure on barge pricing. It’s additional cargo that drives utilization rates up and it does help pricing. I guess what we’re saying is we don’t really know how much it’s going to be moved but we do know that there’s a federal mandate to double the amount that’s being -- at least I think it’s double -- double the amount that is going to be used in the gasoline pool. MTBE is being phased out. You need an octane enhancer. Ethanol is a good octane enhancer. It just has some transportation challenges. It also has a very high re-vapor pressure, which creates problems in the summer. I think there are a lot of smart people that are working on it. Ultimately they’re going to figure out how to transport it in the most economic way. We think that we’re going to certainly be a part of that. How much of it we’ll leave to the people that spend a lot more time studying those things. We’re just saying that with respect to Kirby, we’re moving a little bit and we really don’t know how much we’re going to move in the future.

Thank you.

Your next question comes from the line of Jeff Fidacaro with Merrill Lynch.

Good morning. Joe, I was wondering, if you could just expand a little bit on the constraints we’re seeing here on the people and supply, really. Where are you seeing the greatest impact? How is that affecting your gross outlook? I think you said your wage increases were up about 6.7%. Do you anticipate any more hikes this year?

No, we don’t anticipate additional hikes this year. It’s a tight labor market. We compete for people in a pool that is also drawn by the oil service business and the construction business, and our business, which is frankly booming. Kirby has recognized that people in a tight market is the main constraint for years, and has had training program systems and facilities in place that allow us to produce the people that we need. We are fine-tuning that all the time and aggressively recruiting what we hope are the right people, the people that will stay, and training them for the key posts that we need them in.

Having said that, the labor pool’s constrained, the work conditions that we ask our employees to work under, they’re gone from home for long periods of time, they’re working on towboats, you’re going to have to pay them.

Again, we’ve said that we think that the personnel are going to see pay increases that are going to be beyond the cost of inflation. Will they be 6.7% on an annual basis? I think it’s too early to say that, but I certainly think that we’re going to be paying them more than the rate of inflation going forward for a while.

Just touching on the towboat side, I believe you said that you saw the power really improving coming into this summer. I wonder if you could expand on that. Is that really built into your 2006 estimates? Is this going to affect you reaching a high-teens, low-20’s operating margin this year on the transportation side?

I’m not ready to predict that we’re going to be at low-20’s operating margins this year, but I think the power is going to improve. That’s kind of a consensus opinion. Now, some of it will be affected by any additional storms, maybe in the Gulf of Mexico. We certainly hope that there aren’t any, but there’s just a lot of activity as this country repairs the infrastructure, and there’s some urgency in doing it prior to the next storm season. I think some of the pressure on charter power is going to be relieved. We’re already seeing I think some relief. The charter boat situation appears to be getting better even as we speak, and we hope that it continues to improve.

Not enough power just makes you a little less efficient. There’s some delays in moving barges that you wouldn’t have. You can squeeze a little additional barge capacity with a few more boats.

Your next question comes from the line of John Barnes with BB&T Capital Markets.

A couple of questions on the fleet. You talked about some capacity constraints on towboats, these four that you’ve announced that you’re building, if I’m not mistaken, are the first four towboats you’ve bought or built in the better part of 10 years or something. Would you consider bumping that up along with your barge cycle? Is this tight capacity situation, both on horsepower and on barges, is it impacting your ability to get vessels in for refurbishment and that type of thing?

John, the answer is that we’ll probably build some more towboats. We’re talking to shipyards as we speak about that. We also purchased -- we didn’t have this in our remarks, but we purchased two used towboats during the quarter, so we’re adding both new and used power.

Okay. Given this ethanol is a big deal, and I understand about the repositioning and that type of thing, would you ever consider -- I mean, at what point would the business be big enough that you would actually consider potentially an ethanol only fleet just to take care of this stuff?

Well, I think if it would sustain dedicated equipment, we would build for it. On a practical matter, given that we can only build a hundred or so barges a year, I think it would be difficult to gear up for it. I think at least short-term it’s going to be handled on a backhaul basis. When we have the opportunity to take it, we’ll certainly do that, but we also feel very committed to our existing customer base. They’ve got real demand, and based on very, very long-term relationships and the importance of reliability in that relationship, we’re going to service them first.

Okay. Nice quarter, thanks for your time.

Your next question comes from the line of Alex Brand with Stephens.

Good morning, this is Kevin Stirling calling for Alex. Real quick, you talked about your demand during the quarter being fairly strong. Did you see more demand on a specific product, or was it fairly even across the board?

I would say that the U.S. chemical business is very strong right now. The majority of the cargoes that we move are chemical based. Black oil too. I don’t want to discount that, because the black oil fleet is also fully utilized.

Essentially we don’t have, on a daily basis, really any spare capacity in the clean fleet -- the clean fleet can move chemicals and refined products -- the pressure fleet, which is principally chemicals, and the black oil fleet. The only spare capacity is in our fertilizer fleet, and there are 38 barges in that fleet. Occasionally you’ll see a little spare capacity in something like caustic, where you’ve dedicated some barges to caustic, but even that was pretty strong through the quarter.

Just a real quick follow-up question. Are any of the refineries still shut down after the hurricanes, or is everybody pretty much back up and running?

I think everybody’s pretty much back. Maybe Alliance has… Murphy Morrow? Okay, I’m hearing Murphy Morrow, but that’s a relatively small refinery located lower river in Belle Chasse.

Thank you for your time this morning. Great quarter.

Your next question comes from the line of Chaz Jones with Morgan Keegan.

I was wondering if you could help me understand just the margins in DES here a little bit better. We’ve seen five quarters here, and I certainly know a lot of that has come from a strategy of appropriately pricing a service, but have there been any other factors there that have helped, whether it’s customer consolidation or the sale of General Motors electromotive division about a year ago?

This is on the Diesel side?

Exactly.

I think it’s a number of things, Chaz. I think that the customers are very concerned about availability and reliability. That concern heightens as they consolidate and get a little more sophisticated in how they buy that service. Kirby Engine Systems has a national presence, and the ability to shift its workforce to areas that need the labor. That’s value, because when somebody has a unit go down, we can throw the bodies at it to get it back up.

So what you’re seeing is not only a trend towards using Kirby Engine Systems, but you’re also seeing a trend towards signing service agreements with us, which establish pricing so that you don’t have to go and re-bid each job.

The other thing that is happening is that labor utilization is up and we have some pricing power. I don’t see that diminishing. I think that’s probably going to continue. There’s a big demand for service mechanics. We think that that’s going to support the high utilization, some pricing and better margins going forward, and that those margins should certainly be sustainable with these kinds of business levels.

The follow-up would be we’ve seen that division grow over the years through acquisitions. Is there opportunity to grow it organically in terms of, you know, other in-markets that you could get into, or additional parts, manufacturers or services that might be able to come in that division?

There is. For example, Kirby Engine Systems is principally focused on medium speed engines, which are propulsion engines used by river towboats, offshore supply vessels, that kind of thing. They’re also used for locomotive engines and in the power generation business.

On a towboat that we maintain the propulsion engine, there’s also some auxiliary power, typically a high-speed engine. We’re looking for opportunities to be able to offer a service that provides the customer a single source for his engine maintenance. High-speed engines are also used on tank barges as the pump engine. We think that’s an opportunity. We think there’s some organic growth opportunities in that area. We also think that there’s some attractive acquisition opportunities also.

That business, we’ve really spent some energy in the last several years of kind of bolstering the management team and kind of thinking through where we want to take the business, and we think it’s in an excellent position to grow.

I appreciate the commentary, guys, look forward to the rest of the year.

Your next question comes from the line of David Yuschak with Sanders Morris Harris.

A question for you, when you think about the quarter that’s just ending, $5 million came basically from the Dixie Fuels and the Osprey consolidated. I was wondering how much of an affect over the balance of this year those revenues may have in the way of incremental growth maybe we should be factoring into our assumptions compared to what we may have had without them being in there? I was wondering if maybe since those were very early in the year, may they have affected your margins initially too just because of the early consolidation?

David, I’m going to ask Norman to answer that.

The revenues which we have in our 10K for Osprey last year were a little over $28 million, and for Dixie Fuels, it was $26 million. The operating income in the first quarter, Osprey had a very small loss. Osprey’s been bucking around. It’s a matter really of utilization as we build up this business, getting the utilization up so it’s consistently profitable. It will be slightly profitable one quarter, slight negative the next quarter.

Dixie Fuels was positive. It will not have meaningful impact on our margins this year, or operating income, because I think we said in our last conference call, this is a particularly heavy year on maintenance. With four unities, when you have one unit in the shipyard, that impacts your ability to generate revenues.

So the potential revenues could be in the $40 million to $50 million, but the operating income, operating margins are pretty immaterial.

So it would have the net effect of squeezing margins a little bit.

So your basic core business could be well approaching 20% if you exclude some of that. We could sometime in this quarter get over 20% on the base business end, operating margins?

I don’t want to predict margins other than the trend. I think the trend is going to continue to be up. I really see no reason why we can’t see margins at those levels. Whether that happens in the second quarter, I’m not prepared to comment on that.

I mentioned this and I’ve asked you guys this on several occasions about taking market share, but as you guys talk to your chemical customers, are you hearing from them at all that, because we kind of debated back and forth whether rails would better some of your product categories and that’s why you’re doing better on chemicals when you compare yourself to rail car shipments versus what you guys are doing. Are you hearing anything back from your customer at all that may suggest that because of the problems in rails, you are becoming more of a preferred vehicle for us?

Yes.

I think at some point in time you’ve got to get that kind of feedback.

The chemical companies don’t have a great relationship with many of the railroads. I don’t want to be more specific than that. Frankly, some of them are captive to railroads.

We are seeing some market opportunities, certainly at Osprey, where a railroad has decided that they really don’t want to take a particular cargo. We’re seeing opportunities to pick those cargoes up.

I think the transportation system really is pretty efficient. Where cargo could go by barge made sense geographically and from a volume perspective, you know, they’re trying to put it in a barge. So you’re not going to see short-term market shifts. You may see some long-term market shifts as railroads continue to raise prices and it gets to the point where barging even minimal volumes makes more sense.

On the debt side of it, right now with your cash plus what you’re going to produce, isn’t it possible you’ll be paying down maybe $40 million or $50 million in debt this year, if you do nothing else?

We could. We hope to not do nothing else.

Thank you.

Your next question comes from the line of Natasha Boyden with Cantor Fitzgerald.

Good morning, gentlemen. Just curious, given the push to Dixie, would you also consider entering into other inland dry-dock transportation sectors at the moment, or is that something that you don’t think is right for you?

I don’t think we’re eager to do that. There may be some special opportunities that make sense, but our focus is growing our inland tank business, and growing our diesel engine business. We think there’s some very good opportunities to do that, so we’re going to spend our time there.

We’ve talked a lot in the past about the acquisition environment and what opportunities are out there. I’m guessing now given the success of the industry as it were that valuations of total rate’s inflated dramatically. Has that really sort of narrowed down any kind of opportunity that you see?

Well, it may be more difficult to agree on a price, but there’s still opportunities, Natasha, both on the barge line and particularly in the diesel engine business. We’ll be running those down this year. We’re still very cognizant of the fact that we don’t want to make capital mistakes, but we also want to balance that, not making a capital mistake with a opportunity to add to a fleet in a very, very good market.

The other thing I’ll tell you is that, and I think this is important to know, you know, we’ve been around this business a long time, Berdon and I, and in a market that we’re seeing today, there are opportunities to grow organically, and we really haven’t focused as much as we probably should on the organic growth opportunities. We’re seeing opportunities to build equipment against customer commitments that we haven’t seen in a long time.

This is very, very positive. As important I think in today’s environment to acquisition opportunities is also some internal growth opportunities that are organic.

Absolutely. I couldn’t agree more on that one. Thank you very much.

Your next question comes from the line of Daniel Burke with Johnson Rice.

Given the heavy refinery turnarounds we’ve witnessed this year, and combining that with crude and gasoline markets that are in Contango, are you seeing any uptake in demand for barges for temporary storage up on the river? Has that been at all a driver this year?

Well, that’s really happening all the time when you have refinery turnarounds. I don’t think that this year is seeing demand for storage barges to any greater extent than most years. We had an anomaly, I think it was first quarter last year, it may have been second quarter, where we had a number of barges in storage for refinery turnaround. That may have been a greater number than usual last year, but you know, you see requirements all the time.

Frankly, what’s happened is that the petrochemical refining infrastructure was designed for operating rates that are probably a little less than we’re seeing now, so you’ve got some dock congestion and tankage restrictions that we haven’t seen in a while. They’re solving that with barge capacity.

Okay, I understand. If I could just lob in one last question on ethanol. I appreciate certainly the opportunity that the ethanol backhaul trade presents, but in the near-term, as you pointed out, the bigger demand for ethanol is going to be in RFG areas that previously blended MTBE. To that end, I was wondering if you could share any insights into what markets you are shipping Ethanol. Is it all the way down to the Gulf Coast, or is it shorter hauls? Any details like that would be interesting.

Most of it I think is coming to the Houston area. The non-attainment areas in Texas are Houston and Dallas, and there’s a requirement in those areas, so I think most of what we’re moving is coming to the Houston area.

All right. Thank you.

Your next question comes from the line of Wayne Argyle with Black Rock.

At this time, there’s no questions. They’ve all been answered. Thank you.

Your next question comes from the line of Bill Baldwin, with Baldwin Anthony Securities.

Most of my questions have been answered too, but I ask on the barge fleet, how many barges are now dedicated to the black oil markets?

On an industry-wide basis?

No, on Kirby’s fleet.

It’s 117.

Very good. Secondly, you mention most of all the refineries are back up and running. Would that also apply to the petrochemical plants that were affected by the hurricanes last year?

Yes, it does.

Thank you.

Gentlemen, at this time, we have no further questions.

Thank you. I’m going to turn the call back to Steve, but I want to thank you for staying with the one question, one follow-up -- appreciate you’re working with us on that.

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

This concludes today’s Kirby Corporation 2006 First Quarter Earnings Conference call. You may now disconnect.