Kirby Corp (KEX) 2006 Q2 法說會逐字稿

Good morning. My name is Brian and I will be your conference operator today. At this time, I would like to welcome everyone to the Kirby Corporation 2006 Second Quarter Earnings Conference College. (Operator Instructions.) At this time, I would like to turn today's conference over to Mr. Steve Holcomb, Vice President of Investor Relations. Please go ahead, Mr. Holcomb.

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 risks and uncertainties. Our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby's Annual Report on Form 10-K for the year-ended December 31, 2005, filed with the Securities and Exchange Commission.

I will now turn the call over to Joe Pyne.

Thank you, Steve, and good morning. On May 31 of this year, Kirby completed its two-for-one stock split declared by the Board in our first quarter meeting on April 25. So all references to the number of shares and per share information in this press release and referenced in this conference call have been adjusted to reflect the stock split.

Turning to the business fundamentals, the fundamentals that exist in our marine transportation and diesel engine service businesses remain the best we've seen in many years. We've said this before. Late yesterday, we reported record results for 2006 second quarter and for the first six months. We continue to experience strong utilization in the petrochemical black oil pressure and refined products fleets. Delay days are down. This is typical for this time of year.

Pricing continued to improve during the quarter. Contracts were renewed at rates in the 5 to 7% range. The velocity of price increases are up a little bit. We're going to come back and talk about this at the end of the call. Spot market rates for the second quarter, again, were up approximately 25% above where they were same time last year. Of course, fuel costs, labor, charter boat expense, and other expenses were higher as well. The average price per gallon of fuel consumed during the quarter was $1.99 compared to $1.55 second quarter '05.

The 2006 second quarter was also negatively impacted by an estimated $0.03 to $0.04 per share from a diesel fuel recovery clause, principally in one marine transportation long-term contract, basically offsetting the favorable impact of fuel in the first quarter, which was $0.43 a share.

Now looking at the six months, earnings per share are $0.86 and that number is essentially fuel-neutral. As an aside, we're working with our customer with respect to the principal contract that has caused the fuel anomaly to try to take some of the volatility out of fuel escalation. Although a bit unusual, even for this large contract, the volatility of fuel made the first quarter appear higher and the second quarter appear lower. We pointed this out in the first quarter, but I'm sure that some missed it.

Talking about the diesel engine service segment, the second quarter results saw continued strong service activity and direct parts sales in the markets that they service. The higher results and operating margins also benefited from increases in pricing begun in 2005 and continuing really through the first half of 2006, as well as the completion of a number of emission compliance projects for Gulf Coast and West Coast customers, and better labor utilization. In addition, Global, our high-speed Gulf Coast service provider acquired by Kirby June 7 of this year, was accretive for that period that they were with us.

I'll now turn the call over to Norman to talk about some of the financial details and I'll come back and talk about the quarter and the end of the year towards the end of the call.

Thanks, Joe. As Joe said, our second quarter earnings reflected continued strong marine transportation and diesel engine services markets, and favorable weather conditions. Ton miles were relatively flat for the second quarter and for the six months, due to a continued strong demand in the Intercoastal Waterway, which is associated with shorter and more frequent trips. In addition, our agricultural chemical volumes were lower than last year, due to the high Midwest inventory levels. Ag chemical movements typically involve longer trips up the Mississippi River.

Since we now own all of Dixie Fuels since the first of March and a controlling interest in Osprey since the first of January, we began consolidating the results of both entities in the marine transportation segment of our business in the first quarter. These two entities contributed $10.2 million of revenues to the marine transportation segment for the second quarter, and 15.3 million for the first half.

In 2006, we adopted the fair value method of accounting for stock-based compensation, which had a $0.01 per share negative earnings impact for the second quarter, and $0.02 for the first half. General corporate expenses for both 2006 periods were higher than the 2005 corresponding periods. And the increases primarily reflected the expensing of stock-based compensation, increases in salaries and wages effective January 1, higher incentive compensation accruals, and expenses associated with the two-for-one stock split.

We generated second quarter EBITDA of $56.5 million, a 21% increase over the second quarter of 2005, and first half EBITDA of 110.8 million, a 28% increase over the first half of 2005.

In June, we increased our bank revolving credit facility from 150 million to 250 million. The facility allows for an increase in the facility to 325 million, subject to the consent of the lending banks. The facility has a variable interest rate based on LIBOR and varies with our senior debt rating and the level of debt outstanding. Currently, the variable interest rate spread is 40 basis points over LIBOR.

Capital spending for the first half was 64.4 million, which included 19.3 million for new tank barges and towboats and 45.1 million, primarily for upgrading our existing fleet. We also spent 116.8 million in acquisitions, most of which was with Global and Dixie Fuels. We are increasing our 2006 capital spending guidance by $5 million to $125 to $135 million, due to additional new barge construction and several revenue-generating barge modification projects.

Our debt-to-capitalization ratio increased from 25.9 to 32% after the acquisition of Global in June. And our average cost of debt for the second quarter and first six months was 6%. We now have approximately 53% of our outstanding debt hedged against interest rate fluctuations with interest rate swaps.

I'll now turn the call over to Berdon.

Thank you, Norman. I want to speak to you about some very recent acquisitions and our new tank barge and towboat construction programs. On July 21, we purchased the assets of Marine Engine Specialists for approximately 3.6 million. Marine Engine Specialists is a Gulf Coast factory-authorized full service distributor for John Deere and a service provider for Detroit Diesel. It is a great bolt-on acquisition to our recently acquired Global, further expanding our high-speed diesel and parts capabilities along the Gulf Coast.

On July 24, we signed an agreement to purchase the assets of Capital Towing, Limited, for approximately 15 million. Capital owns 11 inland towboats, six of which we currently charter. One boat is currently chartered to another carrier and that charter will expire within the next 30 days. The remaining four are under charter to other carriers with terms expiring within the next 10 months. The six we charter will be purchased at closing and the remaining five with the expiring of their present charters. We anticipate that towboat availability will remain tight and we are addressing this issue with this purchase, as well as aggressively recruiting qualified charter boat operators.

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 approximately 45 million, and two 10,000-barrel capacity tank barges for use in the petrochemical market at a cost of approximately 2.3 million. 15 of the 30,000-barrel capacity barges will be new capacity, adding 450,000 barrels to Kirby's overall capacity, and eight are replacement barges. Both of the 10,000-barrel barges are new capacity. Deliveries of the 23 new 30,000-barrel barges are scheduled throughout 2006, with the final three scheduled for delivery in the 2007 first quarter. One of the 10,000-barrel barges is scheduled for delivery this December and one 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 2006 second half, and two in the 2007 first quarter.

Looking ahead to 2007, in March of this year, 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. We have also signed a Letter of Intent to build two 1800-horsepower vessels for delivery in the fourth quarter of 2007. The construction price for the barges and boats is approximately $50 million, subject to steel price adjustments.

I will now turn the call back over the Joe.

Thank you, Berdon. As we said in the first quarter and earlier in this call, Kirby's business fundamentals, which allow for sustained earnings, haven't been better in years. These excellent conditions continue and our fleet remains fully utilized. We see no reason why this should not continue. There is 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. About one-third of the industry is also 30 years or older. Labor shortages will also constrain the industry's ability to add power, which is essential for an industry fleet expansion. You have to have power to move barges.

Now there are some challenges, of course, associated with the shortage of vessel personnel. High U.S. employment, coupled with Hurricanes Katrina and Rita, which created construction job opportunities in the oil service and construction industries along the Gulf Coast, and also displaced some labor, have created a very tight labor market.

We're managing through these challenges by aggressively recruiting and training our vessel personnel and addressing vessel personnel pay scales. Effective April 1, 2006, we gave an overall 6.7 increase to our vessel personnel. In August, we intend to make some structural changes in our pay system for vessel personnel, which will increase our costs this year by about $0.01 a share, but should in turn help us retain crews.

With current--with our current full utilization in our tank barge fleet, coupled with the demand for towboats in various hurricane reconstruction projects, there also has been a shortage of towboats. This has limited our flexibility to some extent in servicing our customers' requirements. Our purchase of Capital Towing, which Berdon just talked about, and adding some new charter boat operators to Kirby's fleet, will certainly help this situation.

Our new boat construction program, which will add two new boats this year and four next year, will also help. Additionally, we have purchased some used power--that's used towboats. And we'll continue to buy power when we have an opportunity to do so. As we add power to Kirby's fleet, we will create some additional barge capacity, which we then can make available to meet our customers' demands.

Yesterday we announced our 2006 third quarter guidance, which we set at $0.42 per share to $0.47 per share. Our third quarter guidance anticipates our business remaining strong. We do anticipate a traditional summer slowdown in our diesel engine segment. However, we anticipate accretive earnings from both Global and Marine Engine Specialists. For the 2006 year, our earnings guidance is 1.69 to 1.79 a share, which compares to 1.33 a share in 2005.

Barge business and tank barge utilization gears off of our customers' volumes. At the present time, we're not seeing any weakness in the volumes we transport. If the U.S. economy remains strong, we see no reason to believe that the good fundamentals in this business, which produce strong barge utilization rates, won't continue through 2006 as well as 2007.

Now, labor, horsepower and shipyard constraints do represent some headwinds to our business in terms of increased costs, delays, and reduced flexibility. But they also impose some constraints on internal growth. Even if we could build more tank barges, the current environment will limit our ability to move them. These constraints put pressure on pricing. Spot prices are continuing to rise, which in turn impose some increase in the velocity of contract price increases.

The U.S. barge business for many years suffered from overcapacity and depressed pricing. Overcapacity in turn forced inadequate investment. This has now changed. Reinvestment in the industry is occurring. The industry is realizing as reinvestment occurs, pricing must follow to justify that investment. Frankly, we still have a ways to go before we fully price into our rate system on an industry level new boat and new barge capital. The industry fleet is mature and replacement is essential to maintain our service levels to our customer base.

Human capital investments in recruiting, training, and retention must also occur. Given that we're a very competitive mode of transportation, I see no reason why we should not be able to get appropriately compensated for our cost of capital and other expenses.

Bottom line, this remains a healthy business, both the barge business and the diesel engine business. I do want to confirm, again, that we do not see a contraction in volumes now, nor have we seen them in the past several months, and based on discussions with our customers, are they predicting a decline in volumes in 2006 or 2007.

I think we'll end the prepared remarks now. And Operator, if we could open it up for questions, we'd appreciate that.

Thank you, sir. (Operator Instructions.) Our first question comes from the line of Alex Brand with Stephens. Please go ahead, Alex.

Thank you. This is Kevin Sterling calling for Alex. Good morning, gentlemen.

Good morning, Kevin.

Real quick, maybe you could touch on some of--were there any integration costs relating to the Global acquisition this quarter?

No, very little, Kevin. We closed that transaction June 7. Most of those costs will be occurred in the latter half.

What kind of impact do you think that may have on the gross margin in the latter half?

Well, we still think that that's going to be a mid-teen margin business. It'll have a slight impact, but it's not going to be that significant.

Okay. Did the towboat acquisition you did recently--do you see any more additional acquisitions, particularly on the towboat side? If something comes available as a way to continue to increase your horsepower?

Well, we're actively looking for horsepower to buy it directly or charter it. We've made some headway in that area, so we're pleased with our progress . Whether it's going to be in the form of a purchase or a charter, I'm just not in a position to say at this point.

Okay. And ACLI mentioned on their call yesterday that they were seeing--they were getting additional calls for dedicated business. Are you guys seeing the same type of activity?

Did they say what product?

Mainly relating to ethanol.

Yes. Well, yes, we're seeing some of that. Now we would prefer, frankly, not to dedicate equipment. Dedicating equipment limits flexibility. The Kirby system works best where we dedicate capacity and use barges of opportunity to load cargos. Where we'll dedicate a barge is where the cargo just isn't compatible with other cargos and we--the expense of cleaning kind of overwhelms the opportunity of loading multiple cargos on the barge.

Having said that, we are seeing ethanol requirements increase. And they're certainly going to be a net positive for the business. I don't think you're going to see the kinds of volumes that everybody would hope to see until more of that capacity is located on the river. And that is occurring now. I mean, they are building plants located on the river that are targeted really for Gulf Coast markets.

Do we have any dedicated equipment currently in Ethanol? I think we have a barge in the Houston Harbor that shuttles ethanol back and forth between some terminals. But generally, we prefer not to dedicate it, frankly.

Okay. Thank you for that color and thanks for your time today.

Yes. Thank you, Kevin.

Our next question comes from the line of Jeff Fidacaro with Merrill Lynch. Please go ahead.

Good morning, Jeff.

Hi. Good morning. I was wondering if you could just help us understand a little bit on the fuel impact. I know you pointed to the $0.03 to $0.04 in this quarter relating mostly to one customer. Is that fuel surcharge recovery a one quarter lag or is this going to be made up in the third quarter? Can you just kind of touch on that briefly?

Well, it actually was taken out of the first quarter. One of the--Jeff, one of the challenges we're going to have is explaining the first quarter next year, which was positively impacted, not only by good weather, but by fuel. And essentially, you--the way the contract worked--and I indicated in my remarks that we're working to change that because we think that it just is confusing. We'd rather try to get fuel where we can in the quarter that it belongs.

But the net effect was that it raised the first quarter $0.03 to $0.04 and lowered the second quarter $0.03 to $0.04. In fact, I think you might go through the exercise of putting that back into your model. And I think that when you do that, you'll see that earnings and margins are really more where you thought they'd be. I--we'd rather not have that, but that's the way the contract works. And until we--we're able to change it, we're going to have some volatility when you have volatility in fuel pricing.

I mean, frankly, when we put this contract together, you didn't have that kind of volatility. And we're seeing fuel move $0.50 to $0.75 sometimes in a particular quarter, based on the vagaries of the energy business.

Do you mind--you are 100% covered on your contracts. And what's a typical lag? Is it 30 days?

Well, it is, but in this particular contract, it--the fuel is set the quarter before based on where it is on the first day of the quarter. So you can get some real anomalies. Most of our contracts are either--either used the average price for the quarter before or used the price at the beginning of the month and escalate on a monthly basis. This is a unique fuel escalator that we have in this particular contract.

And if I could just jump over to talk about the labor shortage a little bit. You had a pay increase back in April about--I think you mentioned about 6.7%.

Right.

Could you expand a little bit on the structural change you mentioned in August? Is that another pay increase or is--in that cost of [indiscernible]?

Yes. It--about half of it is just--we pay people according to the class of horsepower they're on. This is our wheelhouse personnel. And what we're doing is eliminating one class and moving--it's the lowest class of horsepower that we have--and moving those wheelhouse positions up to the higher class. If we do that, then we get to where we think we need to be from a market perspective. The balance is going to be adjustments that we're going to make in senior tanker men and deckhands.

And I know you do some training internally. Do you--how do you see this labor shortage sort of playing out for the rest of the year? Do you have enough personnel in training to kind of ease this shortage?

Yes. We do a lot of training internally. Our objective is to make our people because we think that (1) statistically, they are people that stay with us; and (2) they understand the culture that we're trying to put them into. We have targeted a number of trainees, both from a wheelhouse and tanker men perspective, to fully crew our vessels, including vessel expansions to be crewed early next year, based on current turnover rates. Now, what we hope to do is through these structural changes actually improve turnover. But our objective is to be fully crewed, based on the expansion forecast and the horsepower requirements we have that are based on current business levels and new equipment that we're building to come into service at that time.

Great. Thank you for your time.

Thank you.

Our next question comes from the line of [Alan Matraney] with [Belvin Lake Asset Management]. Please go ahead with your question.

Hi. Thank you. Appreciate it. Can you just--I just want to understand. I understand pricing is very strong. But your ton miles year-to-date are flat, and yet you're using--you have more boats that are active. Can you just talk about why you're not having any more ton miles?

Unfortunately, Alan, ton miles are not a perfect measure. I guess we knew that when we started publishing them. They're a good indicator, but you need to--you really need to know more to understand what's happening. Ton miles, if you have a strong river business, are going to be longer because the trips are longer. So if you've got a lot of equipment working out on the river in the refined products trade or in the fertilizer trade, you produce a lot of ton miles.

What's happened over the last year is that we have moved more equipment into the canal to take advantage of a very brisk petrochemical business. That not only reduces the ton miles, but it also increases the number of boats that you have in your service. Because in river movements, you have more boats--excuse me--more barges per boat than a canal movement, where you have less barges per boat. So it's distorting. We need to continue to look at ways to help you understand this.

Now, the other thing, of course, that's happening in the business as a whole, and I touched on this last quarter, is that we're seeing a lot of dock inefficiency, dock congestion, with the refining and chemical business operating at the high utilization rates. Their infrastructure, frankly, isn't designed for the amount of equipment that is going in and out of there. So our demurrage actually is up year-over-year, and that's time we're getting paid for, but that's also time that we're not producing ton miles.

I don't think that--I don't see that dock congestion, incidentally, reducing the--there's going to have to be an enormous amount of investment in infrastructure to see that reducing the given--even given the cost of barges it's still very efficient to just use barges as your elasticity and not make a fixed investment in your shore-based assets.

Okay. And also, I realized your commentary regarding pricing was helpful and obviously indicates the pricing as you expected earlier this year and as you've--I guess as it strengthens throughout the year is going to go up in terms of spot pricing, but also--which, obviously, will impact some of your contract negotiations at the end of the year. But I think I missed--was there a rate that you expect pricing? You sometimes give us--.

--Right--.

--Sort of a range. Did I miss that? Did you mention what you--?

--Yes. I said that they were renewing at 5 to 7% as they come up on an annual basis. That's on average. That the contract--excuse me--spot pricing, which is the leading indicator--.

--Right--.

--Is over 25% above where it was this period last year. Now, what we've also said--we--at the beginning of the year, we kind of looked--looked out at the business and we said, gosh, we don't think that spot prices year-over-year are going to be another 20 to 25% higher. And the reason we said that is that at the end of the year, over a--if that continues over a three-year period, that's having spot pricing rise well over 60%. And that's significant.

Having said that, frankly, the environment for continued pressure on spot prices is pretty good. And if that occurs, and again, we talked about this in the first quarter. The velocity of contract pricing should increase. And I think we're seeing that. We said in the first quarter we were renewing in the 4 to 6% range. We're saying the second quarter it's 5 to 7%. When you couple that with the other things that are happening - the constraints on the business, the new capital that is not getting an adequate return, particularly as we price boats. We build boats and price them into the market. We're going to need to see, frankly, spot prices continue to rise and contract prices should fall.

I mean, just to--by the way, I appreciate all of that. And far be it for me from sitting in New York in front of a desk to think about this. But your clients' products prices have gone up meaningfully as well. That's oil and chemical--.

--Right--.

--And some others, as well as your cost. So while it appears that 60% over a few year period does seem like a lot, given the fact that there really aren't that many more boats and the capacity is running--and you're running at capacity, and your clients have the ability to pay for it and don't seem to be able to contract other--at least other boat companies with the consistency that Kirby provides, it seems to me as if that makes a lot of sense what you're doing in terms of pricing.

No, I think that's well said. That's what should happen.

Our next question comes from the line of [Kevin Maska] with BB&T Capital Markets. Please go ahead.

Good morning, gentlemen.

Good morning, Kevin.

Just a question on the diesel engine services business. Can you just remind us again of any seasonality in that business? And with all of the acquisitions you've done there, do you expect that second half revenues from the third and fourth quarter should be greater than what you just delivered in the second quarter?

Well, revenues certainly will be greater. There is some seasonality in the mid-speed business that--typically you see the summer a little slower than the earlier part of the year. On the high-speed--in the high-speed engine area, we're learning about the seasonality in that business. But it should be pretty strong through the summer and fall. So revenue's going to be up. Seasonality we understand with respect to the mid-speed business is going to be down in the summer. High-speed business, we're just going to have to watch it and see.

Okay. And just switching gears over to acquisitions. With all of the constraints you've been talking about in terms of labor and power and your fleet, can you just give an update on your view of the acquisition market?

Well, I think there are opportunities out there. The challenge is going to be can we agree on a price.

And has it been just as simple as that? Have you been priced out of the market essentially in the last few quarters?

Well, we've made acquisitions, so not necessarily so. But the history of Kirby is that we--the inland side of the business is the aggregation of now I think 25 acquisitions in that area, the diesel engine business the aggregation of probably 8 or 10. We built this Company through acquisition. We're mindful that you live forever with capital decisions that you make, so we want to be prudent about it. I don't--I really don't think that the pipeline is any slower today than it was a year or two ago. We'll just have to see.

Okay, guys. That's helpful. Thank you.

Our next question comes from the line of James Lee with Cantor Fitzgerald. Please go ahead.

Good morning, gentlemen. This is--hello?

Yes, yes, good morning.

Yes, sorry. Good morning. This is James Lee calling for Natasha Boyden.

Yes. Good morning.

First of all, I just had a question about the labor shortage. Obviously, it's still a continuing constraint for you guys. But one of your peers recently received state incentives for future expansion and job creation. Have you guys considered doing the same sort of thing?

Well, that was--you're talking about ACLI?

Yes.

Yes. That--we're not in the barge construction business. And that incentive's for--state incentives for land-based jobs trying to encourage employment in a specific area, where they're really not available for our float jobs because that--they're not dedicated to a particular area. Those are mobile assets.

Okay. And I guess my second and last question would be it looks like you're really focusing on growing your high-speed engine services division, obviously with, first, Global and now with Marine Engine Specialists. But what do you see in terms of consolidation opportunities in the segment? Are you still focusing on the segment or do you think you're pretty much done?

No. I think there's the ability to continue to grow this business. And we're going to pursue opportunities to do that.

Okay, great. Thank you.

Our next question comes from the line of Daniel Burke with Johnson Rice. Please go ahead.

Good morning, all.

Good morning.

Just two pretty specific questions left. First of all, I was hoping to get a little more detail on the Capital Towing acquisition. What's the average horsepower of those and average age?

Okay, let's see. The horsepower ranges are about 1800--okay. The average--.

--These are river? These are river, not--?

--No, they're canal and river.

Okay.

It's a mixture of both. And the age of fleet - 20. Yes.

Can I get the--?

--I just don't have that in front me. But we're saying--kind of looking around this table--approximately 1800, 20 to 25 years old--.

--Towboats--.

--That will last, if well maintained, probably 50 years.

I'm just trying to get a read for how much you're willing to pay for horsepower. And then, one other question. I was curious if the Lake Charles channel closure that I guess spanned both Q2 and Q3 had any impact on your operations?

Yes, it did. But most of it--most of our equipment was--we're able to bill. So from a revenue point of view, I think the effect was de minimis.

Okay, thanks.

Yes. And again, that--my--our team here is confirming it was de minimis.

Our next question comes from the line of David Yuschak with Sanders Morris Harris. Please go ahead.

Congratulations, guys, on a good quarter. Help me out on this, Joe. The--you mentioned in the press release about being kind of capacity constrained right now, and that the delay days were quite low compared to a year ago. Help us in understanding. Was that just if you had more capacity you could have shipped more?

Yes. Oh, sure. We sure could. We're turning down requirements every day.

Is--does that suggest how much this horsepower issue is a problem then?

Well, it is a problem because you have delays moving equipment kind of in and out of docks. You have delays moving equipment on the canal. We're on every--on any given day in a fleet of roughly 250 boats, we're 10 boats short.

And short of barges, too.

Yes, right. If we had more barges, we certainly could book them.

And so, the delay days certainly would give you--gave you a lot more potential capacity in the quarter--.

--No--.

--But the potential because of the horsepower and barges. You're really [indiscernible] take care of that--take advantage of that capacity. Because you're saying the customer needs are there, but just the capacity wasn't there for whatever those constraints are.

No, that's correct. In terms of barges, if we had more barges, we could sell them. With respect to horsepower, I think that we do have a strategy that will get us the boats we need. And at least a lot of thinking has gone into it. And we're trying to implement that plan. And certainly, Capital is part of it, building boats are part of it, and then, buying power, when we get the opportunity to buy good used power, is also part of it.

And would most--because of the nature of the issues, would most of that demand - if you could fulfill it - be along the Gulf Coast then at this point?

Yes, it is. It's mostly Gulf Coast demand.

Okay. So that part of the business could be in higher margins. It's just a lot of missed opportunity at this point in time because of these constraints.

There is--there is missed opportunity, yes.

Now, as far as your outlook for spending for beyond, are you giving any thought as to--because of some of these constraints--what you might need in the way of additional barges to even--at the margin--because you've got a quicker turnaround along the channel? Would you need that many? Would you need--?

--How many--how much capacity would we free up?

Yes. How much--I'm just wondering how much more barging--barges may you need to help facilitate that missed opportunity.

Well--.

--Because you're getting quicker turnaround because you don't to go as far as upriver and I'm just kind of thinking--.

--Yes. If we had--.

--You may not need as many barges or horsepower to accommodate that. I don't know. I'm asking you.

Yes. Well, that's--a hard question. I mean, truthfully, if you needed more barges, you couldn't fill them anyway.

--Right.

Because there is a capacity [inaudible]. Additional power will free up some capacity. It just makes us--the system more efficient.

Right.

But in terms of estimating the number of barges that it would free up, I'm not prepared to do that at this point. But we'll think about it. But if we give you a number, we want to make sure it's a good number.

So horsepower is the first constraint that you really think you can--will help free up the capacity. And then, maybe barges may be second after that.

Well, I mean, truthfully, you can have more barges. But unless you have the boats to push them--.

--That's right--.

--It doesn't help. So horsepower is probably the most significant constraint that we face. Now, also constraining horsepower is labor. You have to have the people who drive the boat, and you have to have the boat to push the barge. So it's labor and horsepower that we need to solve first. And then, we can figure out how many more barges - if we could build them - we're going to build. But the biggest challenge in the industry currently is labor and horsepower.

As far as the opportunities that are missed, where--along the Gulf Coast--is it still primarily chemicals or is it refinery, oil, the oil industry? I mean, could you give us a sense as to where those missed opportunities may be, too? Just an idea where that activity along the Gulf coast is.

Well, I think it's probably all markets with the exception of fertilizer, which is essentially our entire fleet. It's black oil, it's chemicals, it's refined products, it's pressure products, very strong throughout the system.

So the incremental business could be across all product categories because like you said, the few isolated ones would be more upriver and all that. As far as a sense of what you may need to do for--when do you start have to start making decisions because of this capacity issue with making forward commitments for 2008 spending for barges? When--what kind of deadline do you need for that do you suppose?

Well, we're doing that now. We're doing that now.

Okay. So you might expect to have some idea what you're going--with--doing some capital spending for 2008 right now?

Well, I--Berdon, you--.

--We talked to that.

Yes. We talked about that a little earlier. And I think 2008 currently we're looking at about--.

The thing I did was 2007.

Did we talk about 2008? Oh, we didn't. Okay. Well, we haven't talked about 2008. Well, I guess we can. I mean this is a public call. So let me say that we're talking about thus far committing to roughly $36 million of capital, which would consist of six 30,000-barrel barges and 20 10,000-barrel barges.

And that's new construction, not--.

--That's new construction. And that really is putting the marker down for space and we'll fine tune that over the year and we'll likely add some additional capacity. But that's the capacity that we want to reserve and we're doing that now with respect to the shipyards that we use.

I suppose this means you had to make commitments sooner than you normally would given the [indiscernible]?

Well, no, that's exactly right. And I'll also tell you that we're--we haven't decided the number of boats we're going to add, but we certainly will add some boats, either purchase boats or build boats.

Okay. I appreciate your comments, guys.

You're welcome.

Our next question comes from the line of Bill Stuart with Citibank Investments.

Good morning, Joe. Congratulations on a great quarter once again.

Thank you.

You seem to be perpetually confounding the experts who keep downgrading your stock. Question - a couple of quarters ago you mentioned you were interested in getting in and taking some of the trucking business off the road and transporting that by barge. Has that long-term effort been put on the back burner due to your capacity and crew constraints?

Well, that's more in the context of Osprey or Container on Barge operation. That is an objective. We're continuing to pursue it. It's still a relatively small part of what we do, so we don't--we just don't talk about it much because the real value--the current value in Kirby is going to be the tank barge side of the business and the diesel engine side. But we still believe that's a market that's going to grow. But the surface transportation system is seriously constrained and water is going to be an option. And we just want to be in a position to take advantage of that.

Thank you very much, Joe. And once again, congratulations. Keep going.

Thank you, Bill.

Our next question comes from the line of [Zandor Tof] with [Chrizen, Inc.].

Good morning, Zandor.

Good morning. And how are you today?

Fine, thank you.

Just a real quick question on the numbers in the presentation. I understand that the Dixie and Osprey numbers are now included in the marine transportation revenues.

Yes. We--of course, we own 100% of Dixie, so then we own two-thirds of Osprey, which causes us to consolidate both of them.

Okay. Were they also--are their figures also included in the ton mile figures and the revenue per ton mile figure that you've been publishing your [inaudible]--?

--They're not.

Okay.

They're not.

Very good. Joe, that was all the questions I had.

Okay. Good question.

Thank you.

At this time, sir, there are no further questions.

Thank you for participating in our call. If you have any additional questions, you can give me a call. My direct dial number is 713-435-1135. We wish you a good day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.