Kirby Corp (KEX) 2007 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Kirby Corporation 2007 First Quarter Earnings Call.

[OPERATOR INSTRUCTIONS]

Thank you. Mr. Holcomb, you may begin your conference.

Thank you for joining us this morning. With me today is Berdon Lawrence, Kirby's Chairman; Joe Pyne, 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 in 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 involved 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, 2006, filed with the Securities and Exchange Commission.

I will now turn the call over to Joe Pyne.

Thank you, Steve. The strong fundamentals that existed in 2006 in both our core businesses continued into the first quarter of 2007. Yesterday, we reported record first quarter earnings of $0.46 a share, marking the 13th consecutive quarter that our earnings have exceeded the same quarter of the previous year.

During the 2007 first quarter, marine transportation demand remained strong. The barge capacity was tight, continuing a very favorable environment for pricing in that sector. With respect to the diesel engine segment, we also continued to experience strong demand for both the services the we offer in that business as well as part sales.

During the first quarter, we remained active on the acquisition front. We purchased 65 tank barges that we had been operating through either lease or management agreements for a total of $41.6 million in cash. And we also made a couple of diesel engine acquisitions.

We bought P&S Diesel, a Gulf Coast, high-speed diesel engine service company for $1.5 million, again cash. And we bought the assets and technology to support [Norborg] medium-speed, diesel engines, which are used principally in the nuclear application for $3.5 million. Again, all of this is cash.

During the first quarter, we saw continued strong utilization in our fleet. Agriculture chemicals, which are typically weak at the beginning of the quarter, did strengthen in March. Weather was an issue this quarter compared with the unusually favorable weather we saw first quarter 2006. We saw a number of fog days and story systems along the Gulf Coast. And of course, it was ice in the Midwest. And the Illinois River was closed for part of the quarter.

Our first quarter delay days increased about 5% when you compare them to the quarter the year before. Of course, weather, high water, low water are factors in this business. We live with them, and we try to take this all into account as we forecast our earnings. Sometimes we get it right. Sometimes we don't. I think we got it about right this quarter.

With respect to our offshore business, we have four ocean-going, dry-bulk, tug-barge units in this business. They were operated -- operating as expected at lower revenue levels, because one of those units was in the shipyard for major maintenance the entire quarter. With respect to pricing, pricing continued to improve during the quarter.

Contracts during the quarter were renewed at the anticipated higher rates in the 6% to 8% range. Spot pricing was up about 3% fourth quarter to first quarter. Of course, fuel was down a little bit. And over the last year, spot prices are up a little over 20%. We escalate our multi-year contracts, at least the large ones, on January 1, 2007. If you look at the increase of escalation for labor in the presumer price index, which these are indexed against, those increases were in the 4% to 5% range this year.

Personnel to crew our towboats and a shortage of towboats remain a challenge. We continue to make slow progress in both these areas. We continue to ramp up our training process. However -- it's going to take three to five years for a deckhand to advance to the wheelhouse in the best case. Part of our current challenge is that we're adding some company-owned boats, both newly constructed boats and purchased boats. We anticipate that crewing is going to remain a challenge through 2007.

The shortage of charter boats is easing slightly. But frankly, this industry's ability to add capacity is limited to our ability to move the barges that we build. We can't add capacity without adding towboats. This is why we're building seven new towboats in 2007 and an additional six new towboats in 2008.

It's also why we have expanded the number of pilot trainees in our system. And at the present time, we have approximately 65 pilots training for wheelhouse positions in our system. All of this is expensive, but it's a cost that we must bear if we're going to be successful in continuing to grow our business organically.

I do not see these additional costs abating any time soon. Effective the first of April, we raised our crew wages an average of 6%. I'd also add that the cost of training pilots and tankermen and deckhands for the Kirby system is running at a run rate of about $12 million a year. Turning to the diesel engine service segment, the first quarter reflected, of course, the accretive acquisitions of Global, which was made last June and Marine Engine Specialists in July of last year.

The medium speed market, which is our traditional business, service activity and part sales remained strong during the quarter. This is typical for this part of our business, because the upper Mississippi River closes and The Great Lakes close, and the customers that are principally on those bodies of water use that time to do their maintenance.

Our high-speed market in the first quarter was slightly better than anticipated. The first quarter typically is a little slower in the high-speed in the winter months. The equipment that it services in the Gulf of Mexico is active, and it's just hard to get to it during the winter months. The higher service rates and parts pricing that we implemented in 2006 and again in 2007, we adjusted prices in 2007 in this business coupled with the -- with good labor utilization had a positive impact on this segment of our business.

I'll now turn the call over to Norman, to talk more about the details of the financials.

Thank you, Joe. As Joe said, first quarter earnings reflected continued strong marine transportation and diesel engine services markets along with more typical first quarter weather conditions.

Marine transportation revenues increased 10% over the first quarter of 2006 on volume, which was essentially unchanged from last year. Although Kirby's fleet was fully utilized and the fleet barrel capacity increased 4%, volume was impacted by increased navigation delays, barges chartered for storage purposes, the mix between river and canal volume and manpower shortages.

The high-speed diesel repair business resulting from the acquisitions of Global, Marine Engine Specialists and P&S Diesel Service generated $25 million out of the total diesel engine services revenue of $65 million in the first quarter. SG&A for the first quarter was higher than the previous year, primarily due to the diesel engine services acquisitions in 2006.

Kirby generated $64 million of EBITDA in the first quarter, a 19% increase over the first quarter last year. The EBITDA margin of 23.5% for the first quarter was down from 24.1% in the 2006 first quarter because of the higher component of diesel engine services business this year. Marine transportation EBITDA margins were 26.9%, up slightly from 26.2% a year ago. Diesel engine services EBITDA margins were 16.6% and down from 17.2% in 2006 and were impacted by timing differences between wage and pricing increases in the first quarter.

Capital spending for the first quarter totaled $54 million and included $31 million for new barge and towboat construction and $22 million, primarily for upgrades to our existing fleet. During the first quarter, we also spent $47 million on acquisitions for a combined total of $101 million of capital spending in acquisitions.

Our debt to capitalization ratio impacted by the capital spending and acquisitions increased from 32.9% at the end of the year to 35.3% at March 31st. Our average cost of debt in the first quarter was 5.9% and about 55% of the outstanding debt, which was $361 million at the end of the quarter, was hedged against interest rate fluctuations with an interest rate collar and interest rate swaps.

Our earnings guidance for the second quarter includes a negative impact of $0.03 a share due to anticipated fuel price fluctuations. We expect our actual fuel costs to increase during the next quarter and our term contract cost recovery, which lags the price movement by a quarter to decrease. However, since we had a negative fuel impact in the second quarter of 2007, the two quarters should be comparable from a fuel cost standpoint.

I'll now turn the call over to Berdon.

Thank you, Norman. I want to briefly update you on our new tank barge and towboat construction programs. Our 2007 schedule of 26 new tank barges consist of 14 new capacity, 30,000-barrel barges; six replacement, 30,000-barrel barges; and six new capacity, 10,000-barrel barges. We also will build seven new towboats.

During the 2007 first quarter, we took delivery of nine of the 30,000-barrel barges and two of the 10,000-barrel barges, a combination of new capacity and replacement barges. We also took delivery of two of the 2,100 horsepower towboats, one in February and one in April. In March 2007, we signed contracts for the construction of four towboats for 2008 delivery at a cost of $13.6 million. Also this week, the Kirby Board approved two more 1,800 horsepower towboats to be delivered in 2008.

I will now turn the call back over to Joe.

Okay, thank you Berdon. Our second quarter guidance for this year is $0.48 to $0.53 a share, which is 9% to 20% over the $0.44 per share earned in the second quarter of last year. For 2007, our earnings per share guidance remains at $1.95 to $2.10 a share, which is a 9% to 17% improvement when you look at the $1.79 per share in 2006.

Our marine transportation levels are very strong. The business levels are very strong. Essentially, we're sold out on a everyday basis. With respect to net barrels added, let me give you these numbers.

In 2006, we added net barrels. That's additions to the fleet after you take out barges that you're retiring, of 3,000 -- excuse me, 341,000 barrels in 2006, we anticipate 2007 -- the number will be lower. It's going to be 272,000 barrels this year, and the anticipated additions in 2008 are 279,000 barrels.

Our diesel engine service business levels also were strong, as I indicated earlier with the Global and the Marine Engine Specialty and P&S acquisitions adding to our customer base and offering -- we're continuing to offer the opportunity to allow those customers to single-source all their diesel engine requirements.

In conclusion, the outlook for supply and demand drivers for our industry remains very favorable. Our strategy has been consistent, and we think continues to serve us well. We have a very focused management team focused on the things that we think we do best and know best. And our goal is to continue to provide the best-maintained fleet, operated by the best-trained and safest personnel in the industry. And finally, we intend to grow Kirby through acquisitions in our core business and internally as appropriate by adding capacity.

Operator, I think we're now ready to open this call up to questions. Operator, are you there?

[OPERATOR INSTRUCTIONS]

Your first question comes from Natasha Boyden.

Good morning, gentlemen.

Good morning.

Yesterday, one of your peers actually mentioned that they have plans to grow fairly significantly into the liquid barge business, play that space where you're very large in. Do you have any thoughts on that?

Do I have any thoughts on that? Well, we obviously think that it's a strong and consistent part of the inland barge business. You always have concerns about people adding capacity when it's not in your fleet. I -- I'm not sure that I want to comment --.

Sure.

On that --

I'll try to make it a little easier then. Do you think there's enough business for, I guess, more than one player to grow [moving into] the space? Or, are you concerned that they may be taking some business away from you if they do, do what they say they're going to do?

Well, I'm not sure what they're actually saying. Did they indicate a market that they were targeting? Or, are they just --?

[Inaudible], which is obviously a big one for you, oil, so really, we're just again interested in --.

Sure.

your view on that.

Right. Well --.

If you can [offer it] there?

Yes. In -- additional capacity is something that, of course, you always want to watch. I think --

Yes.

--that there are a number of people that are adding capacity. The fleet is, indeed, mature, and replacement capacity is going to have to be built. There are more problems than just adding capacity. There are other constraints in this business. I've alluded to them in remarks. That there are -- there is a shortage of towboats and a shortage of crews.

You can build the barges, but you also have to be able to move them and move them efficiently with crews that are appropriately trained to handle the movements and to tanker them. So yes, I don't know if I -- it's appropriate to get --.

Sure. No, I appreciate that -- that feedback.

Anything further into that.

Sure. And in terms of the shipyards, can you just give us an update on what you are seeing there? Are they still pretty much building at capacity?

Yes. That's -- that's what they're saying.

Okay.

They're saying that they're building at capacity.

Okay. And then if you could just perhaps give us an update on the ethanol, and I know it's a very small side. But, are you seeing any higher volumes there? Or, is it becoming a larger part of business?

Ethanol will continue to grow. Of course, we only handle the liquid side. We -- we're certainly seeing inquiries increase. We are seeing more capacity put on river -- on the river. Most of it has been previously built away from the river. It's hard to put in pipelines, so it's not easy to get to the river unless you actually put it -- put the capacity there. We frankly can't handle a lot of it, because we just don't -- we just don't have the capacity.

Right.

Okay Natasha, we want to try to open up the space for others. So please --.

Oh, absolutely.

One more question and then --.

No, that's it.

And we'll ask everybody just to have one --

I appreciate it.

-- question and a follow-up, yes.

No, that's fine. Thank you very much, gentlemen.

Thank you.

The next question comes from Crista Lewis.

Hi, good morning guys. I had a few questions for you on a couple of different things. I noticed that the CapEx that was spent in the first quarter was up quite a bit higher than what your guidance implied for the year. I think it was $54 million, and you guys were looking to spend $130 million to a $140 million for the year. I was just wondering why it seemed to be so front-end loaded.

We'll let Norman weigh in on that. I think it's timing.

Yes, it just happened to be the way that -- the timing of payments does not necessarily, and very rarely follows the delivery of barges. And that's just the way the -- it was really front-end loaded this year.

Okay. Is there any expectation as to how it'll play out for the rest of quarters?

We don't -- what we do is just give a guidance for the full year. And --.

Okay.

But obviously, the other quarters would be -- you wouldn't spend at the rate for the whole year. You wouldn't -- you'd be over our guidance.

Okay.

Changing the guidance.

Right.

Right.

And then, the other question I had was on the diesel engine services business, just wanted to see kind of what your -- it seems like the intent of acquiring Global was to kind of allow for more cross-selling opportunities between a lot of the customers that you have in that segment. And I was just wondering A) how it's playing out to date? And B) what -- I guess if there is any likely benefit to the operating margins long term in that business, and what it could to as your customers buy more of your services?

Yes. Well yes, I think it is playing out where we're cross selling. Of course, the intent to buy Global was also to get into that high-speed business line alignment re -- we're in only marginally until the acquisition of Global. Margins, they -- we've been saying that this is a mid-teen margin business, and we're just not -- we're not ready to say where they're going.

And we're mindful that we need to say something about that. But, we've had Global now for about a year. Well actually, a little less than a year, nine months, so we want to get a full year under our belt before we put an expectation out there.

Yes.

Give us another quarter or two.

Yes, because it seems like with the 15%, it might have been just because of the seasonality of that business that it was higher than it was in the fourth quarter. But, I guess mid teens is kind of what you feel safe with for now.

Yes. And I don't get too terribly concerned about 100 basis point kind of moves. You're going to see that just based on the timing of projects. For example, in the first quarter of 2006, the margins were higher, but, they were driven by a significant project that we were finishing up.

They were driven by the medium-speed diesel engine business, which was the business back then that that is their best quarter because of the Midwest and Great Lakes issue. Those waterways essentially close down, so the operators do most of their maintenance in the first quarter.

The high-speed business is going to be a little slower in the first quarter. That's traditional. At least, we're told it's traditional. And we certainly saw that in the quarter. So, I'm -- and I don't think there's anything to be concerned about. And just give us a little time to kind of really fully understand the potential of the business. And then, we'll give you a clearer view of where we think margins may go.

Okay. I appreciate it, thanks guys.

Yes.

Your next question comes from [Adam Thalhimer].

Good morning, thanks guys.

Good morning.

Is there any change to the acquisition pipeline? And do you -- how do evaluations look to you today?

Well, that's a -- it's a dynamic situation, so there's changes occurring all the time. What we have said, and this hasn't changed, is that business levels are pretty brisk, so the challenge is just getting a value that both parties can agree to.

Now, having said that, in the last 12 months, I think we've made $180 million worth of acquisitions. So, we're making them. We are very mindful that the capital we spend needs to have a return attached to it and that the higher the capital, the greater the return. So, we're just going to be patient. And where we see an opportunity that we're comfortable with the price, we'll pursue it. If we don't see that, we'll be -- we'll just be patient.

Are there any good opportunities out there as you see it right now?

Well, there's always good opportunities. But, we don't -- well, I'm not going to comment on any particular acquisition. We will say that the environment appears to be favorable.

Okay. Great, thanks. And then, obviously ton miles declined a little bit in Q1, which I guess is mostly due to weather. In our model, should we be expecting due to more favorable weather, ton miles might be up year-over-year in Q2?

Yes. It's weather. It's barges at storage. We had some barges that were storing product because of major plant turnarounds. And in business mix, you're going to have more business on the river than the canal. You should see -- you should see ton miles improve though in the second quarter.

Great, thanks for the time.

Yes.

Your next question comes from David Yuschak.

Good morning, guys.

Hi.

Hey, just on the -- Joe, on the comments you made about barrel capacity in 2008 of 279,000 barrels, does that suggest that maybe your capital spending thoughts initially here may begin to back off? And at what point in time on the inactive side of it, does that stuff that you're going to retire really slows down materially so that as this new capacity comes on, you're growing maybe your active stuff, maybe more than like a 4% rate?

Yes David, I think that that -- that those projections are on our website. Are they still up there?

Yes.

Yes, if you go to our website, we give you projected capital expenditures through what, 2010?

Yes, I believe that's correct.

Yes, if you go there, it's there. But it --.

Would it give you retirements also, so I can come up with kind of net?

Yes, it does. And so, you'll see it does -- it does slow down.

Okay.

Yes.

Okay. So, the net slows -- the increments still slow down though, right? Or, are you talking about capital spending slowing down?

Yes, the capital spending slows down.

Okay.

Because the replacement is less.

Right, right. And then, one other question on a follow-up is, from an operating margin point of view with a more positive pricing environment, does that still give you the chance to keep recouping the incremental cost of labor that you're gong to anticipate? [Inaudible] on the -- it goes to back to what was talked about before, operating margins having the ability to continue to increase. Is there kind of a point where that's -- gets more difficult? Or, because of the inflation in the industry right now that that's not as much a problem in capturing margin?

Well, I don't think that I've every implied that margins weren't going to continue to improve or that we were going to not be able to recapture labor costs. Labor in multi-year contracts has escalated. And if you look at what -- we've been saying fairly consistently for the last several years, we have said the contracts are going to be 4% to 6% -- 6% to 8%, which very easily recaptures labor.

I think that as long as the supply and demand situation remains as it is, and we're not suggesting it's not going to, but principally because of the enormous replacement component that's going to have to occur in this business that we're not going to be able to stay ahead of costs.

Yes.

What I have said, and I've said it again today is that, yes, there are pressures. There are pressures on boats. There are pressures on crew that do provide some resistance. But, the resistance isn't so strong that you're not going to be able to overcome it with rate increases.

Right. Well, that's why I -- the logic would suggest that that's -- that positive --.

Well, in fact --.

[That's] still there.

The facts -- the fact that this is the thirteenth consecutive quarter that Kirby has had improved earnings, I think tells you that we're able to keep ahead of costs.

Right. Okay, thanks. That's all I've got right now.

Right.

[OPERATOR INSTRUCTIONS]

Your next question comes from Alex Brand.

Thanks, good morning guys.

Good morning.

Joe, I guess -- there's a lot of demand. There's tight capacity. And I'm going to ask you a question that I kind of know the answer to, but I just think it would be helpful to get your color on it anyway.

The demand picture, which would seem like it would be impacted in this economy, remains robust. And other than sort of adding the potential for ethanol, which might make people want to sort of lock up capacity and pay a higher rate, can you just talk about other demand drivers that you think are helping to offset what would seem a weaker economic environment?

Yes. Yes, we're mindful of what the press is saying about the economy. But, you're right. We're not seeing that, at least at this point, in the volumes that we carry. Now, part of that is that we're clearly in a position where we're turning down business, meaning that there's not enough capacity to service the business out there. Now, it does get moved, but it doesn't get moved when the customer necessarily wants it.

I think that the chemical business, we have said, grows at about GDP. And the economy is still growing, so that part is growing. The other thing that we've talked about before is, frankly, the infrastructure that we use to service our business, the infrastructure of docks and terminals, is also constrained. And the business is not as efficient as it could be if significant investment was invested to reduce those constraints.

So, there's some limits to kind of how much you can press through the system without the system without kind of backing up. And I think some of that's happening. But, I think the basic drivers -- the basic drivers in our -- it's a pretty simple business. It -- it's capacity and then volumes. And we have more volumes than the capacity can handle, so we have a good pricing environment. We have really an excellent utilization environment.

Is it mostly -- is the demand mostly a push dynamic? In other words, the shippers contact you? Or, do you guys actively sell your product into and pitch for business that might traditionally be on the rails as an opportunity? Do you actively sell into them? Or, is demand strong enough that you don't really have to?

Well, I've -- we've talked about rail. Rail is not our logical or historical competitor. If you will remember when the UP imploded on the Gulf Coast several years ago, and you just couldn't get rail cars out of Houston, if there was ever a time when you would see more liquid cargoes moved by barge, it was that time.

I think that what -- pretty much what can be moved by barge is being moved there. Now -- and the reason is that barging is both volume and geographically constrained. The smallest barge that we operate is equal to 15 rail cars. We can only go where the rivers let us go. As volumes grow, then indeed, barging is a better alternative, because we're just naturally a less expensive way of moving products.

As shippers make infrastructure investments to move cargo to the water, and that doesn't happen a lot, then we get some of that. But, I think that we've been -- I think Kirby's been pretty consistent in saying that if we're looking at a competitor, we look at pipelines as the competitor and not so much rail, in the liquid business. Direct cargo business may be a little different.

Right. That's good color, I appreciate it guys.

Your next question comes from Jeff Fidacaro.

Hey, it's Jeff Fidacaro, Merrill Lynch. How are you doing, guys?

Yes, how are you doing Jeff?

A quick color on the diesel engine, if you could talk about the difference between the medium-speed and the high-speed seasonality, in other words, by quarter, which is the stronger quarters for each business?

Well, the high-speed business is stronger in the summer. Okay? So, you've got part of the second, part of the third, which would be pulled up, should be by then. The medium-speed business is typically strongest in the first quarter.

And when you look at just backing out the Global and MES acquisitions from last year, it looks like you're -- on a same store sales basis, you're growing about 13%. How should we think about this going forward? Have you seen a lot of the high-speed business sort of opportunity into the inland waterways sort of increasing the number? Or -- and give us an idea of the growth rates there.

Yes. You're saying same store sales on the medium-speed business at 13?

Yes, if I just back out the -- I think --.

Yes. You're looking at revenue?

Yes. Let me just back out the $25 million contribution.

Okay, the revenue that we gave you. And the question is, are you -- are we seeing what we suggest we should see, the high-speed business allowing us to service more medium-speed business? And the answer is, yes. Does that account for the 13%? I don't think so. Well, it certainly doesn't account for all of it, because we have price increases in that number and really brisk service utilization.

But, I'm not sure I'm in a position to break that down. But, yes we are seeing what we thought we'd see. We're seeing some of that. But, we're also seeing a good pricing and utilization environment.

Great. And just a quick update on the Dixie Fuels and Osprey Lines, I think that business was about $9 million in revenues this quarter, about what we expected, because one of the boats was down. How should we think about that on run rate basis, just an update on those two?

Yes. I don't know if we're breaking that out from a forecast perspective, but it will be better in the second quarter, because both of those businesses should be a little stronger. And we don't have the equipment in the shipyard. Now, one of the -- one of the issues in a business that has so few units is that when you take a unit out, that's 25% of your revenue. So, it has a much bigger impact.

And one last question, just Joe on pricing, when you look at this going forward, your best stab at what the spot prices look like in the sort of the remainder of the year?

Oh Jeff, what we're -- we're going to stick with what we said at the beginning of the year, which is we think that contract pricing was -- is going to be in the high single-digit area. And spot pricing, and this is going to be pulled around a little bit by fuel, is going to be low double-digits. That's still our best guess.

Okay, great. And one last question for Berdon, on those two new towboats, I guess were just agreed to order, do you have a price on -- those that are going to be delivered in 2008? Do you know the cost?

About $3 million for each boat.

Great, thank you for your time gentlemen.

Thanks, Jeff.

Your next question comes from Chaz Jones.

Yes. Hey guys, how are you doing today?

Fine, thank you.

I'm going to focus one question on DES and that was, given that acquisitions that we've done here over the last 12 months, has there been any type of material shift in kind of the percentage of revenue between parts and service over -- today versus where it was 12 months ago?

Yes. Given the high-speed engine business --.

[inaudible-microphone inaccessible]

Yes. Chaz, we don't have that number in front of us. We don't think so. But, that's an excellent question, and we will find the answer out.

Okay. And then, do you have any more -- I guess just to follow on that pricing power, either on the service side or parts side at this standpoint?

Well, we said we adjusted prices in 2007 during the quarter. And we'll -- I don't think that -- it certainly depends on what period you're talking about.

Sure.

But certainly in the future, you do. But, I'm not sure we're prepared to say if there's anything more this year.

Okay, great. That's all I had guys, nice quarter.

Thank you.

Thanks.

[OPERATOR INSTRUCTIONS]

Your next question comes from [Corey Amon].

Hey, good morning. With respect to power vessels, how much is power constrained until to reach a maximum utilization of your barges. And is the cost of third-party power growing slower or faster than you're comfortable with, given the tight market?

It's always growing faster than we're comfortable with. But, we'd be comfortable if it wasn't growing at all. It is growing. Charter power is tight, but it is getting -- it's getting a little better.

Just speaking for the Kirby fleet, we continue to be short canal towboats. On any given day, we're probably eight to 12 short. We think that if we had access to that power, we could squeeze a little more capacity out of the system. What we've talked about is that's in the 2% range, 1% to 2% range, just to give you a feel for what the additional towboats would do for us.

Thanks. And just one quick follow-up, do you foresee a time when your power will be sourced 100% internally? And how long do you think it may take you to get there, if you do think you can get there?

No. I don't think we want to get there. I think there's some real advantages to having charter boat power. It -- including, but not limited to the fact that that's somebody else's capital. It's not yours. That charter -- the charter power that we bring into our system is very carefully bedded. The employees of that company often go through our training school. We keep very careful safety and performance statistics with respect to the power.

And we have 25-year relationships with a lot of these people.

Right.

They're really a part of our team.

The other advantage is that it gives you some flexibility if business turns down. You can turn that off, where you really cant' turn off power that you own 100%.

Right, thank you very much.

Yes.

Your next question comes from [Peter Bark].

Hi, I just wanted to get a sense of how different the spot price is versus the contract price now, and whether that gap has changed over the last quarter, and where you might expect it to be over the course of the year? Thank you.

Yes, we expect it to narrow a little bit. We think that spot pricing will continue to be above contract pricing, typically would be in a market like this. We don't expect the difference to increase. And it's currently 10% to 15% above contract pricing. We think that that's likely -- it's more likely to narrow, we think, than expand.

And not to make you paint it too narrow, but do you think it might be what, 5% to 10% gap by the end of the year? Or zero to 5%? I'm just trying to get a feel for --.

I don't think it'll be zero to 5%. It -- 5% to 10% is -- if you were to guess, would be a better guess I think than a lower number.

Great, thank you.

[OPERATOR INSTRUCTIONS]

At this time, there are no further questions.

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

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