Kirby Corp (KEX) 2006 Q3 法說會逐字稿

Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Kirby Corporation 2006 Q3 Earnings conference call. [Operator Instructions] Thank you. I would now like to turn conference over to Mr. Steve 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 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 SEC.

I will now turn the call over to Joe Pyne.

Yes. Thank you, Steve, and let me add my welcome to all that are on the call today. The business fundamentals that produced record results for the first half of 2006 continued during the 2006 third quarter.

Late yesterday we reported EPS of $0.48 for the third quarter and $1.34 per share for the first nine months, both 41% over their comparable 2005 period. This is the 12th consecutive quarter of record earnings for Kirby, when compared with the prior year quarter.

During the quarter we saw continued strong utilization in our principle markets, pricing continued to increase, delay days were down, as we were blessed with no hurricanes during the quarter. Pricing continues to improve. Contracts were renewed at higher rates, in the 6.0 to 8.0% range, when you compare rates the third quarter of 2005. Spot rates for the third quarter were over 25% higher than the third quarter of 2005.

During the 2006 third quarter and the first nine months of this year, our results have been effected by a continued shortage of vessel personnel and a shortage of Gulf Coast horsepower (HP). The two hurricanes of 2005 helped to create this shortage and the fact that we did not have hurricanes this year will help reduce crewing and power shortages going forward.

We expect that we will incur most of the additional labor and charter boat shortage expenses this year. That's the unusual expenses. We do anticipate, however, that the cost of crewing our vessels and charter power will continue to increase above the cost of inflation in 2007, but, again, not at 2006 levels.

We have been saying this for, I think, a number of years, that crew expense is going to typically run above the cost of inflation. Labor escalators in our term contracts will allow us to recover most, if not all, of our additional labor expenses.

The point I want to make here is that, yes, we have some additional wage costs. But we think that these increases will moderate in 2007 and that the term contract or on-term contract renewals, or with respect to multiyear contracts, the labor escalators in those contracts will help us recover our increased labor costs. And of course, if we didn't have these unusual labor and power constraints in the business our earnings would have been higher this quarter.

Going onto the diesel engine segment, they also reported record third quarter results, which reflected the addition of Global Power Holding Company acquired in June and Marine Engine Specialists acquired in July. Both of these are Gulf Coast-based, high-speed diesel engine service providers.

Global and Marine Engine Specialists posted accretive earnings to Kirby's earnings for the quarter. Record results also reflected continued strong service activity, a good utilization, better part sales in the majority of the markets that we serve, as well as pricing in the service area and for parts.

I'll now turn the call over to Norman to get into the details of the financials.

Good morning.

As Joe said, during the third quarter both our marine transportation and diesel services businesses remained strong and pricing continued to increase. Ton miles for both the third quarter and the first nine months were relatively flat, due to a continued strong demand in the Intercoastal Waterway, which is associated with shorter and more frequent trips.

We did ship some tank barges to the longer route Midwest refined products trade, but the additional ton miles were offset by lower river black oil and agricultural chemical volumes and the chemical plant turnaround in the Midwest.

Since we now own all of Dixie Fuels since March 1st and the controlling interest in Osprey since January 1st, we began consolidating the results of both entities in our marine transportation segment in the first quarter. These two entities contributed $10.6 million of revenues to that segment for the third quarter and $25.9 million for the first nine months.

In June 2006 we acquired Global Power Holdings for $102 million and in July we acquired Marine Engine Specialists for approximately $6.9 million, both high-speed diesel engine service providers. For the third quarter, these two entities contributed $20.9 million of revenues and $25.4 million for the YTD.

We adopted the fair value method of accounting for stock-based compensation at the start of 2006, which had a $0.01 per share negative earnings impact in the third quarter and $0.04 for the first nine months.

SG&A for the third quarter of 2006 was 36% higher than 2005, due mainly to the addition of SG&A from the diesel engine services acquisitions, Global and Marine Engine Specialties, the consolidation of Dixie Fuels and Osprey. In addition, we're expensing stock options this year and SG&A was also impacted by wage and incentive compensation increases.

We generated third quarter EBITDA of $62.5 million in the quarter, a 40% increase over the second quarter of 2005, and first nine months EBITDA of $173.3 million, a 32% increase over 2005.

Our EBITDA margin for the third quarter increased to 23.6% and that was compared to 22.4% for 2005 and for the YTD the EBITDA margin was 23.7% versus 22.5% for the first nine months of '05.

Capital spending for the 2006 first nine months was $110 million, which included $44 million for new tank barges and towboats and almost $68 million primarily for upgrading our existing fleet. We spent $139 million in the acquisition of Global, Marine Engine Specialists, the remaining 65% interest in Dixie Fuels, and the purchase of 16 towboats, 8 of which were from Capital Towing.

We are increasing our 2006 capital spending guidance to $138 to $143 million due to additional new barge and towboat construction and a number of revenue-generating barge modification projects.

Our debt-to-capitalization ratio increased from 27.1% at year-end to 34.3% at the end of the third quarter, primarily from the acquisitions that I talked about earlier.

Our average cost of debt for the third quarter and first nine months was right at 6.0% and about 46% of our outstanding debt remains hedged against the interest rate fluctuations with interfreight swaps.

During the quarter we purchased 163,000 shares of Kirby's common stock at an average price of $29.40 a share.

I'll now turn the call over to Berdon.

Thanks, Norman. I want to update you on our new tank barge and towboat construction programs.

Our 2006 construction program consists of twenty-three 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. Fifteen 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. We have taken delivery of fifteen of the twenty-three new 30,000-barrel barges, with four scheduled for delivery in the fourth quarter and the final four scheduled for delivery in the 2007 first half. One of the 10,000-barrel barges is scheduled for delivery in December and one in the 2007 first quarter.

Kirby is also building four 2100-HP towboats, primarily for use on the Mississippi River, at a cost of approximately $13 million. One of the towboats is scheduled to be placed in service in the 2006 fourth quarter and three in the 2007 first half.

Currently, our 2007 construction program includes eighteen 30,000-barrel capacity tank barges for use in the petrochemical and refined products markets and two for the black oil products market. Eighteen are scheduled for delivery throughout 2007 and two in early 2008.

We also signed a contract in August for the construction of four 1800-HP towboats, primarily for use on the Gulf Intercoastal Waterway, at a cost of approximately $13 million. Delivery is scheduled for the 2007 second half.

I will now turn the call back to Joe.

Thank you, Berdon.

I want to note, just to get closure on this issue, that the contract that has the unusual fuel escalation in it, that tended to move earnings around between quarters, has been modified to have more traditional fuel escalation component. So hopefully it'll be a little easier to predict Kirby's earnings going forward.

I also want to confirm that we remain in great shape going into the fourth quarter and we think into 2007. Business levels remain strong, as I reported earlier, really no spare capacity in our certified tank barge fleet.

Shipyard constraints, with respect to adding capacity, remain limited to approximately 100 tank barges a year and there are going to be a number of barges that will continue to be phased out on a yearly basis.

Pricing also remains strong year-over-year. As I said earlier, contract rates continue to increase at an annual pace of in excess of 25% a year and the velocity of contract pricing increases is also improving.

Our customer base remains optimistic, in regards to their business outlook, and they anticipate that their volumes, in many cases, are going to continue to accrue.

We understand that there are some who are concerned about the economy, that the economy is going to weaken and that this weakening is going to have negative effect on our business. We have not seen any weakness, nor do we anticipate it based on what we're currently seeing in our market.

I mean, frankly, some modest weakening would probably help, because it would take some of the pressure off the labor pool. But even if it doesn't occur, the labor pool is, we think, going to get a little better. We don't believe that a modest weakening in the economy is going to have an effect on our utilization or pricing.

As I said in the call last quarter, and I think it's worthy to probably repeat again, that the U.S. barge business for many years has been a difficult business. It suffered from over-capacity and depressed pricing. Of course over-capacity forces inadequate investment, you can't get the returns you don't invest.

This has now changed. Reinvestment in our business is occurring and the industry - I think this is important- is recognizing as reinvestment occurs, pricing must follow to justify the investments, particularly given the fact that the cost of building equipment is up significantly, over the last four years.

Frankly, we have a ways to go before we fully price into our rate system all the new capital that's necessary when you're building both new boats and new barges and when the cost of building that equipment continues to increase.

The other thing that's out there, of course, is the industry fleet is mature and replacement is essential to maintain our service levels and human capital investments, investments in recruiting and training and retention, must also occur.

Given that the barge business is really a very competitive mode of transportation, we see no reason why we shouldn't be able to, over time, get appropriately compensated for our cost of capital and the other expenses that were occurring.

Operator, let's go ahead and open the call for questions now.

[Operator Instructions] First question, Jon Chappell with JP Morgan.

Good morning, guys.

Good morning, Jon.

Berdon always gives the straight detail on the new builds and you laid out all the reasons, Joe and like a [pass] that needs to be added. If you look at your capital expenditure budget over the last three years, it's definitely accelerated through the early part of this decade. Can you give us any sense to where you are in your mind, in your fleet modernization or expansion program as we start to look at CapEx in the out years 2007 and 2008? How much you think you'll be adding for new capacity as well as for replacement capacity, given the term structure of your fleet.

Yes. John, I think it's going to be about at these levels. You got to remember that Kirby, up to 2003, let its capacity actually decline. I mean, we've been an aggregator of this business and we have not replaced capacity barge-for-barge. It wasn't until 2003 that we said, "We see the business turning and not to replace the capacity we have is going to effect our market share". Then, in 2005 was the first year we actually added capacity.

Our capacity additions, I would say, are modest and limited, frankly, because you can only build about 100 tank barges a year. But I see about the same run of capital expenditures kind of continuing. I think we're -- what did we use this year? This year has got some kind of extraordinary capital limit because we're spending capital on revenue-enhancing projects with existing equipment.

Yes. I have Dixie Fuels in this year, which is --.

Yes and the Dixie Fuels offshore equipment, because it's consolidated now, now is fully seen in Kirby's capital. But I think the $110 to $120 million, we'll have something to say about it, of course, when we release our fourth quarter earnings, because that generally when we talk about it. But when you look at the equipment, it's going to be $50 million and $70 million, probably, of actual equipment that we're building, somewhere in that range.

All right and then assuming you get the pricing improvements that you've been receiving the last few quarters, it appears that your operating cash flows are more then enough to cover this type of CapEx program. I notice you bought back a fair amount of stock for the first time in almost four years. How are you looking at the remainder of capital deployment, whether it be a new dividend, more share buybacks? You're already pretty de-levered. So how do you feel about capital deployment?

Right, right. We look at, of course, debt levels and then around debt levels we'll make decisions. But our first choice is accretive acquisitions and we've made several this year and we're going to continue to look for opportunities to make more and we think there are opportunities out there.

Our stock repurchase program is based on opportunity. We're not going to necessarily buy stock at any price, but when there's an opportunity to buy it we'll do that. We have bought a lot of it over the last 10 years, about 20 million shares on a post-split basis, so we like to do that when we think there's an opportunity do it.

Dividends are something we talk about, but frankly, we continue to believe there are opportunities to grow the business and to keep an appropriate amount of leverage on the balance sheet. So, at least at this point, we don't contemplate a dividend.

All right. Thanks a lot, Joe, I'll turn it over.

Alex Brand with Stephens, Inc.

Thanks. Good morning, guys. Norman, I just want to clarify your comments on the diesel acquisitions in terms of accretion or dilution for Q3. I think I got the revenue number. Did you say what it was to earnings?

No. All we said, Alex, was that it was accretive. It is accreted in the very first quarter that we bought them.

We did give some guidance, Alex, on that when we bought them. I think we said $0.02 to $0.04 in 2006.

For the entire year.

Right.

Okay and Joe, in your comments you said contracts renewed at 6.0 to 8.0%. The last thing I recall you saying was 5.0 to 7.0% and you have been saying that it's accelerating. Is that kind of what we should be thinking about going forward?

Yes. Alex, what we've said is that if spot prices continue to escalate, then the contract prices are going to follow. And right now, contract prices are about 10 to 15% below the spot market. Some of that is, as we renew them, you've got this period of time where they've been stagnant while the spot market has been escalating. But we think that that 10 to 15% difference, that delta is kind of going to remain about the same. So as you continue to see escalation, spot prices, contracts are going to follow.

Okay. So that implies, then, that the spot being up 25%, not very much of that is fuel-related, because I was thinking some of that would be.

Well, yes it is. Yes, some of it is clearly fuel-related. I don't know if we have a spot rate without fuel. I can tell you that fuel in the third quarter of 2005 was $1.75 and fuel in the third quarter of this year is $2.08. That's an average fuel price. So there is a component of fuel in there.

Okay and as we -- you haven't done acquisitions in a while. You just said that's still your primary desire, in terms of use of cash. Are we getting to a point where some of the smaller players see that the cycle won't be this good forever and you can start to talk to them about some more realistic pricing that might allow you to get some deals done in, I don't know, some time in the not too distant future?

Yes.

What does that pipeline look like?

Yes. The truth is I don't know the answer to that question. We have made acquisitions. I mean, we've this year made $125, $130 million of acquisitions.

I know, but I don't understand the diesel business, so I just focus on the boat business.

It's a good business. As we've said, that there are opportunities out there. The issue is can you agree on price and we just need to work through that. I don't think anybody in this business is ready to accept that business levels are going to tame down. I think just based on what we're seeing, frankly, we've got a ways to go yet. Yes, when business isn't so good, the environment for acquisitions may be a little better, but there are still some out there.

Okay. Thanks a lot, guys.

Jeff Fidacaro with Merrill Lynch.

Hey, good morning. Joe, I was wondering if you could give us an update of where you see spot prices now tracking into this fourth quarter. Is it holding that 25% level and what is sort of baked into that fourth quarter guidance?

Yes, we're not forecasting decreases in spot pricing. We're forecasting kind of continued spot pricing at these levels. Of course you've got a little lower fuel component, because fuel today we're paying currently about $1.80 a gallon. Of course you have to average fuel for the quarter, but the current price is $1.80, down from the average price of $2.08. So that's going to help a little bit.

In the fourth quarter, you do have a weather factor that unfortunately isn't predictable and we have factored in a deterioration of weather into our forecast. If that doesn't happen, then earnings may well be a little stronger, but it typically happens and in our forecast we think it's appropriate to put it in.

Okay and then, if we look at the margins, just help us understand on the diesel side. Do the high-speed acquisitions generate about the same margins as the medium-speed? And I noticed you've sort of broken through that 15% sort of target on the operating margin side. Is there more upside to this?

Yes, there should be a little more upside. We're delighted to be at 15%. We've been saying for several years that we think that this is a mid-teen or should be a mid-teen margin business and it is.

The high-speed engine business, we still have some costs that we're working on taking out that should help margins. Whether the margins are high teens or high mid-teens I'm not sure we're ready to declare yet. But we're delighted they are where they are and both businesses, currently, are about at the same margin levels.

Okay, great. Thank you for your time.

Sure.

David Yuschak with Sanders Morris Harris.

Hey, good morning, gentlemen, and great quarter.

Thank you.

You guys keep cruising along in a slow speed, but the question I've got for you on the spot prices, with prices at say 25% of the spot market side of it. As you look at your customer base and the demands that are out there for transportation services, as far as your vertical markets, your products you would have had [not want to] classified, who would have the elasticity of need to want to pay the 25% spot prices? Can you define it? Can it be defined at all?

Well, of course, nobody wants to pay it, David.

No, no, but that's not that want -- but who is paying it?

Well, all our spot customers are. And you don't want to pay $2.11 for gasoline, but that's the market.

No, I'm just trying -- is there --?

[Inaudible - multiple speakers]

Is there a particular product category that feels that they need to pay that too, versus somebody else who may say, well, we'll just delay a shipment or we'll get the capacity or get this stuff moving when the spot price is maybe not as much. I'm just kind of curious, because --.

David, this is Berdon. Some people don't have but maybe one trip a month or two trips a month, so they can't get into the contract business. So they may call up for one trip in February and two trips in April, that type of thing.

So was it fair to say, then, that because of strength in the spot market it's more a function of just a lot more of these smaller businesses who have demands for your services to have to pay for it? Is that kind of --?

Not necessarily smaller businesses. It's just certain people have just -- some real big companies have, on certain products, just spot moves.

Yes, yes. So what it would kind of tell you, though, is it's pretty active amongst those even with those who have modest needs, so to speak, then?

Well, no. We have some large customers and large volumes that move on a spot basis. It typically is volumes that aren't predictable, going to different places. It may be additional volumes above contract volumes. We do a lot of spot business with some large contract customers.

I'm just trying to get a sense as to the -- because of the sustainability. The spot market's been there for so long. I'm just trying to get an understanding of it. That's kind of what I'm pointing towards.

David, it's driven by supply and demand and if our customers could pay less, they'd pay less. But having said that, I want to -- let's go back and look at the kinds of returns that you need to get in this business to, long-term, make investments and to in fact, grow capacity, which the market needs.

We have been under-pricing our business or a long time. This has not been a good business. I mean, you've been following this for a very long time.

Right.

We're now beginning to get the business - and I say beginning to get the business - where it needs to be to be a healthy business. It just -- it has not been a healthy for a very long period of time.

I agree with you on that.

And as I said kind of at the end of my prepared remarks that I think we've got a ways to go and yes, on a relative basis, it looks like spot pricing is way up. Well, I mean, the truth of it is that it needs to be. Costs are up, capital is up, and the base was very, very low from where we started.

One thing on your capital budgets. You'd indicated on the last call that, what was it, up $38 million or so that you potentially have allocated now for -- $36 million you had allocated for 2008. Some of the spending you're doing here, it's boosting it up for 2006. Is that maybe borrowing something from 2008 because you want to get it sooner than later?

We haven't given you anything on 2008 yet.

But on last conference call you said that you --.

I don't believe so.

Yes, I was looking at your transcript here.

Well, then we misspoke, because we haven't given any 2008 capital numbers.

Okay. Would the amount of accelerated spending in the rest of this year hopefully accommodate less spending further out or can you give us a sense as to boosting it now means less later?

No. We're adding capacity. We think we're doing it prudently. We will continue to add capacity, providing the market exceptions. Also remember, David, that there's going to be an enormous amount of replacement building. So we're very comfortable with our capital plan.

I think there was a question earlier where we talked about kind of ongoing capital, kind of projected forward, and we gave a number somewhere in the equipment area of $50 to $70 million. And that was an off the top of the head number. We'll refine that when we talk about 2007 capital spending. We haven't even talked about what we think our total capital spending is going to be in 2007.

What we have done is talked about equipment where we have signed contracts to build it and I don't think we've -- do we have any 2008?

We have some equipment that we've signed contracts for that will be delivered in 2008.

That's probably what you're thinking about. But don't take that as our 2008 capital number.

And one other question and then I'll get back in the queue is you mentioned about barge modification and I noticed in your press release you took some stuff out of inactive and made it active. Is that all part of that barge modification or can you maybe help us out as far as when you're doing barge modification where is that happening and what the purpose is for?

No, it's things like converting a couple of anhydrous ammonia barges to pressure barges. There was some very limited equipment that we bought from a competitor that initially we didn't think that the rates justified the money you had to put back into it to put it back into service. And as rates continued to climb and frankly, as barges got more expensive, we made the decision to take several of those barges and put them back into service.

But when we say "revenue-enhancing" , it's where either through rate increases or through new barges in the system that you're going to get revenue and earnings that justify the capital expenditure.

Okay. Thanks a lot, Joe, and I'll get back in the queue.

Natasha Boyden with Cantor Fitzgerald.

Hi, good morning, gentlemen.

Good morning.

I just wanted, Norman, if perhaps you could just let us know, the increase in the SG&A costs in the third quarter. Was that -- I think you said a lot of that was integration costs?

No. Most of it, Natasha, was simply adding the SG&A of the companies we bought. Global MES, the remaining part of Dixie Fuels that we bought, we're not consolidating them, so we have to consolidate that SG&A and then also we're consolidating Osprey this year.

Okay, so that should be a fair level for you going forward, could one assume?

Yes. That's right.

Okay.

We also are expensing stock options this year, which contributed increases pretty significantly.

Okay and I think you said that the integration cost setting on the last conference call would come in the second half of the year?

Yes. That's really ongoing. We've had obviously some, at this point, and probably over the next three to six months they'll all be out.

Okay, great. And then Joe, if I could just shift over to you? Are you concerned about any delays in the delivery of the new equipment that you've ordered, given that these shipyards are pretty perhaps full to capacity and there's a pretty good backlog in some of the shipbuilders?

No we haven't seen it, Natasha or effected. I think that we're actually ahead of schedule in deliveries.

Okay, great and if I could just sneak in one last question about clearly last quarter and the quarter before ethanol was kind of the buzzword. Maybe just give us an update on what you're seeing there in terms of trades and volumes?

Well, it's about the same. We think that ethanol transported by barge will increase, but you have to build the facilities that are near the river and the infrastructure to do it. We're moving some now, about the same levels as the second quarter.

Okay, good. Thank you very much, gentlemen.

Kevin Maczka with BB&T Capital Markets.

Good morning, guys.

Good morning, Kevin.

Just a question on the fourth quarter guidance and as we look out to the first quarter as it relates to the weather. It seems to me, even if we could predict the weather, we still might have a hard time handicapping how that might impact. Because, if I understand right, I think delay days don't necessarily mean lost revenue days. So can you just help us understand that a little bit better, maybe talk about the percentage of your business that would be effected by a delay day?

Yes. Well, where the delay days that are associated with block problems, high water/low water.

[Inaudible]

Well, but the high water/low water and lock delays do have some contract protection, but fog and storms and things like that, you're exposed to, Kirby's exposed to. The first quarter of 2005 was just an incredible quarter, from a weather delay point of view, and as you go into the first quarter you're certainly going to worry about the comparison of 2006 to 2007. We'll start anguishing about that pretty soon. But as you suggest, you can't predict it, but we really enjoyed some great, great weather in 2006, early part of 2006. It's certainly unusual.

Okay and just another question on the demand side in general. We hear a lot of concern about a moderating economy and what that will mean for demand for your service. So my question is, Joe, if you said that a moderating economy will not impact your pricing or your utilization, I guess what would it take to impact that? What would it take to really turn off that demand? Do we need a full-blown recession for that to happen?

Yes, I think you probably do, yes, given the supply/demand balance in the business. Volumes will drive utilization, which drives pricing and as long as you have growth the volumes are going to be there.

Now there may be periods of inventory adjustments that could effect us. I mean, surprisingly, where that's happened in the last 18 months we haven't seen it, because there have been some adjustments in the economy. So I guess -- it's hard to predict, but as long as there are some constraints with respect to the equipment that you're adding and that the economy is continuing to grow, we really should be in good shape.

Okay and just one last quick one, if I could, Joe? The fuel contract that was modified in the quarter, was there any benefit plus or minus, I guess, in the quarter from that? Was it modified during the quarter or after the quarter ended?

It was modified effective the fourth quarter? Okay, effective October 1, so really no effect and fuel was pretty much neutral for the quarter.

Okay, guys, thanks for the time.

Welcome.

[Daniel Cohen] with Columbia Management.

Hi Joe and Norman.

Good morning

Gentlemen, can you give me a little insight on what your thoughts are with respect to consolidation of some of the captive fleet, for example, American River or Cargill? I've heard that, for example, one of those has an aging fleet of vessels. They haven't really contracted to purchase or upgrade the fleet and my thoughts are that I'm wondering what happens with those big captives.

Yes, of course those are cargo fleets, principally. ADM, which is the American River Fleet, does have some tank barges that are principally in ethanol and edible oils and that kind of thing. They're really not in our chemical business. And we're just not close enough to those fleets to speculate. We are much closer to the chemical companies. That outsourcing is occurring.

We, ourselves, have bought Dow Chemical's fleet, Union Carbide, Exxon's inland fleet and some smaller ones. So just I think they've got to make the individual decision themselves. But they look at the investment, the exposure of being in the marine business, from a human resources point of view and also just from a bad publicity point of view, if they have a problem and make the decision, depending on the company, to outsource or if they're comfortable with all of that stay in.

We think the trend is going to be more outsourcing, but I don't want to comment on the cargo fleets. It's just we just don't know.

Got it. Thank you, men.

Gregory Macosko with Lord Abbett.

Yes, thank you. With regard to back to the discussion of capacity additions and the like, maybe you could simply it for me a little bit by just saying as of -- clearly '06 you've made your commitments. You know what you're going to add. You know what you're going to take out. You know how, what you're going to do there. Just with regard to you're capacity that's out there, what is the increase as a result of the net, on a net basis?

Yes, that's a good question. In 2005 it was 230,000 barrels. On a fleet it was about 16.4 million barrels, Greg, and then 2006 it's 450,000 barrels. These are approximate numbers on a fleet that grew to 16.6 to 16.7.

How did that get up to 16.6 if you add 230 to 16.1?

Sixteen-four.

Oh, 16.4 in '05?

Yes. And then in 2006, it was --.

It was 16.6 then?

It was 16.7 and --.

Sixteen-six, seven, okay.

Okay. I'm being corrected here - 16.7 in 2005 and 230,000 barrels.

Okay.

Now into '06, we're adding about 450,000 barrels.

On top of --?

Of the 230,000, we added in the --.

No, no, but how much is in '06? I mean, you were 16.7 in '05 and now you're at --?

We're adding. We're going to add 450,000 barrels in 2006.

Okay, but that would be on two, I believe, almost seven, 16.7 plus 0.2, so 16.9 or 17?

Yes, 17 now.

Okay. All right. Just so we understand what. And I also assume, to some extent, the quality of those barrels will be slightly improved from this remodeling and the like that you've done?

Well, the remodeling or the revenue enhancement is --.

Enhancement, right.

Yes. You're going to -- the money that we're spending in making those enhancements meets our return objectives.

Okay, but that should imply, perhaps a little bit better revenue profitability on some of those enhancements, right?

Yes, perhaps. It's not a lot of barges, but yes.

Okay. All right and then finally, you have options on --.

No, we have contracts in '07 and I think it's about another 450,000 barrels.

Okay, I'm sorry, that's 400 -- so the same amount again, so that's on top of that 450,000. And do you have options into '08?

We do.

Can you talk about that?

We will talk about that next quarter, because we're in the process of talking to shipyards about contracts, so I don't want to go any further than that. Our policy is that we'll talk about it when we have a contract.

Okay and when you talk about adding 450,000 barrels in '06, that's kind of at the beginning point, so those perhaps are not usable immediately. They take a little time to roll out?

Yes. That's the capacity added throughout the year.

Added. So the net add would be something less than that 450,000?

Well, depending on what part of the year you're in.

Right, exactly. I mean, you --.

The average is going to be less.

Okay, but you add 450,000 one year and 450,000 the next year, so it should be pretty even over those two years, then, or at least one of those years, right, just in terms of the addition and in terms of --?

No. Yes, you mean if you're asking -- if you're picking a point in the year in 2005 did we build about the same amount of barges as we did in 2006. If we had built the same amount, yes, that's about right. I mean, they come in throughout the year.

Right. Okay, very good.

Chaz Jones with Morgan Keegan.

Good morning, Chaz.

Hey, good morning, Joe, Berdon and Norman. How are you guys doing?

Fine.

I wanted to ask you just quickly here about Osprey. I know it's just a small piece of your business, but maybe if you could just kind of give us an update on sort of customer acceptance, how the growth is progressing there, profitability? I know you're not going to be specific about numbers, but maybe just kind of give us, directionally, a sense of what's going on?

Yes. Berdon, do you want to do that?

Yes, Chaz. As you know, we've restructured the Company and Christian O'Neil is heading it up and doing a very, very good job and we are developing some trade lanes that are proving to be working out for us. And as we've said on several of the calls, this is gradual process. We're prodding along, but we're encouraged by it and continue to work hard on it.

Yes, the other thing I'd just add, Chaz, is there's been a lot of news about the railroads de-marketing certain freight lines and I think we will benefit from that. Yes, they either -- if the railroad's not going to move it, they've got to move it by truck or by barge and you'll see cargoes that can move by barge and of course we're talking about containers here. You'll see them try to do it. So I think that that'll be a net benefit.

Maybe just a follow-on to that? I guess if there are benefits and the business continues to grow like you think it should, longer-term, you've had a lot of discussions, I guess, over the last 12 months talking about moving up the dock with services. Do you ever get to a point that maybe, perhaps, owning a port operation in one of your major areas makes sense at all?

With respect to Osprey, it may well make sense or at least having some sort of joint venture arrangement with a port that exists or even a new port. There are some opportunities there.

Concerning owning terminals, well, we are in the terminal business. We already own at least one, have owned more than one. We sold one, I think, several years ago. But that's a business that, depending on it's strategic fit, we'd certainly look at.

The walking up the dock part of our business, which is helping our customers manage their facilities and really further integrating with them, is frankly doing very well. We have grown that business almost ten-fold since 2000 and we think that there's continued growth opportunities. The challenge there is just making sure that you have the qualified people.

I've got to think that's a pretty high return on capital service?

Yes. There's not a lot of capital.

Well, I appreciate the feedback, guys. Great quarter.

Okay. Have a good day.

Daniel Burke with Johnson Rice & Co.

Good morning, all. Actually, most of my questions have been asked and answered. Just one refresher perhaps? Can you remind me the Dow and C-River contracts, are the escalation clauses there different in any ways from the clauses on the remainder of the term contracts?

Yes. They're minor differences. I wouldn't -- I don't want to get into specifics of those contracts, but there are some minor differences, but I would say they're not material now.

Okay. Do those contracts escalate a specific point in time or do they roll? In other words, one big block coming?

Well, they escalate and they escalate annually and they escalate for a number of things. They escalate quarterly for fuel, but for other costs annually.

Okay. Okay, that's useful. Thank you.

Yes.

Alan Mitrani with Sylvan Lake Asset Management.

Hi, thank you. A question regarding the diesel services business. A number of years ago you highlighted it in your annual report, the electromotive division of General Motors, which was a long customer. I see GM obviously has been shutting a lot of plants, laying off workers. Can you just talk about that relationship, whether it's expanded or contracted, from what you see regarding the business in light of GM's layoffs?

Sure. GM sold it. It's now owned by somebody else and we think that's positive. The new owner is very focused on the engine and making money with it and I would say that our relationship is very good.

How long ago did that happen?

That happened about - let me think here - yes, I want to say about 18 months ago.

Okay, thank you, and also, when do you plan on giving us a sense of where '07 for the full year can be? Is that when you're going to report your fourth quarter numbers?

Yes. We typically have done that in the fourth quarter. Well, excuse me, yes, when were report at fourth quarter, in January.

Excellent. Thank you.

David Yuschak with Sanders Morris Harris.

Okay. David, we'll give you one more question and then I think we probably need to take or allow for one more and then wrap up.

Yes, this is real quick. Just going back to the Osprey, guys. The potential there certainly is great, but is there kind of constraints about the ability to get barging into production inhibiting your ability to move forward on that? Because you've got other things that you're doing with the fleet, as far as other support services for existing customers and so forth, I'm just kind of wondering.

No. No, we can get the barges, they're our cargo barges and we're converting, frankly, some out of service tank barges to hopper barges and that's been very effective and we think it's a good way to add capacity. But they're not capacity constraints that we see at this point.

Okay. With what's going on in dry cargo, too, I just wasn't sure if you'd seen that kind of constraints. But that certainly suggests that it's just a matter of growing into -- having the market accommodate what you're trying to do there, then, is more the constraint than anything else.

Yes, no, that's right and I think Berdon would agree with this, that Osprey is on track. Now we're going to build this block by block and at the end of the day we hope to have really a great business model. So, as cargo flows to the river, we'll be there.

Okay, thanks.

We'll take one more question, operator. That's providing there is one.

Yes sir. Your final question comes from William Stewart with Kittiwake.

Good morning, Joe. Congratulations on a great quarter.

Thank you.

You alluded to labor being an inhibiting factor in your growth, but also the labor market was going to improve for you. What's driving that view of improvement?

Well, I'm not sure we're saying that it's going to inhibit our growth. It's just that we have some additional costs that are associated with labor. But Kirby has had a training school for 15-20 years, with the objective of kind of growing our own people. We've been very successful at that.

What happened in labor is that I think everybody knew that crewing was going to be a challenge, but nobody predicted the hurricanes of 2005, Katrina and Rita, which just tightened the labor market. So we knew it was coming. We were surprised that it came so quickly.

What we've done at Kirby is we have increased our training in our school. Our school is a U.S. Coast Guard approved all the licenses that we need in our fleet. As far as I know, we're the only independent company that has the ability to do this.

Our shortages are in the tanker men and pilot area. We currently now have 80 people in the approved steersman program and we think that as we work them through the program, that we'll license over 30 this year and we'll license over 40 next year and that's going to fulfill our wheel house needs tanker men area. Now we're going to license over 150 people this year.

So we think that we have good control over it. We think that we can produce the people that meet our needs and allow us to continue to grow. Is it a challenge? Sure it is. But we think that we've got our arms around it.

Okay, great, Joe. Thank you very much. A fantastic quarter and I'm standing by for the next buying opportunity when they downgrade you again.

Thank you. I think thank you, I don't know. I'll think about that.

This is Steve Holcomb again. We appreciate your interest in Kirby and for joining in our call. If you have any additional question or comments, please give me a call. My direct dial number is 713-435-1135 and we wish you a good day.

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