Kirby Corp (KEX) 2008 Q2 法說會逐字稿

Good morning. My name is Casey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kirby Corporation Second Quarter Earnings Conference Call. (Operator Instructions). Thank you. I will now turn the conference over to Mr. Steve Holcomb. Sir, you may begin.

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 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 factors can be found in Kirby's annual report on Form 10-K for the year-end of December 31, 2007 filed with the Securities and Exchange Commission. I will now turn the call over to Joe Pyne.

Thank you, Steve, and thank all those that are participating today for joining us. The second quarter this year was the 18th consecutive quarter that our earnings exceeded the same quarter the previous year.

Late yesterday we reported second quarter earnings of $0.74 per share, a 32% increase compared to the $0.56 per share reported for the same period last year.

The volumes for most of our contract petrochemical customers continue to hold up during the second quarter. Approximately 80% of our marine transportation revenues are in term contracts and 20% is in the spot market.

This compares with a contract to spot mix of 75/25 during the same period last year. We did see demand for refined products and some black oil volumes going to the Midwest decline during the quarter, but we were able to divert the equipment into the canal or it remained on time charter to the customer.

While there has historically been seasonality in the refined products market, this year the high price of gasoline has certainly affected US driving habits, leading to less gasoline consumed and consequently less gasoline transported. Recently, we have seen some improvement in gasoline volumes and expect that this trend will continue through the summer.

We operated an average of 259 boats during the second quarter, seven more than we averaged operating in the 2007 second quarter and nine more than we averaged during the first half of last year.

The availability of charter horsepower and crewing continues to improve. During 2008's second quarter, we did experience a 6% increase in delay days that we recorded compared to the same period year before, as high water prevailed on the lower Mississippi River and its tributaries during the quarter.

Reported delay days only reflect the time lost by a tow during transit when the tow is actually stopped, but the delays do not affect or the slower trip times caused by high water conditions. Certain cases we also added additional river horsepower in order to make customer delivery schedules.

Contracts renewed during the second quarter increased year- over-year in the high single to low double-digit percentage. Stop market rates, which include the price of fuel, increased 3% to 4% compared to where they were in the first quarter of this year.

When we discussed the 2008 forecast in our January earnings release conference call earlier this year, we said our assumptions were that contracts would renew at rates in the mid-single digits. Contracts renewed this year have actually renewed on a year-over-year basis at higher rates, at least higher than the forecast given in January.

Our marine transportation segment-operating margin was 22% for the second quarter up from 21% same period last year. Continued strong demand, favorable rate increases, increased efficiencies from improvements in crewing and horsepower all contributed to the higher margin offset the course by additional costs associated with very high water conditions on the Mississippi River system.

With respect to our diesel engine service segment, the second quarter results were driven by continued strong demand for services and parts in our medium speed marine and power generation markets offset by some softness in our high speed engine business as it services the Gulf Coast oil service market.

The second quarter results also reflect the acquisition of Saunders Engine and Equipment Company, which was acquired in July of 2007. With respect to margins in this business, operating margins were 15.6% compared to 16% for the 2007- second quarter.

The margin reflects continued favorable markets, high labor utilization in the medium speed side of the business and service rate and part pricing increases implemented earlier this year.

I'll come back at the end of the prepared remarks and talk about the 2008 third quarter and our full-year outlook and also speak to some of the expected capacity additions in the tank barge business that are reported to occur this year, next year and in 2010. I'm now going to turn the call over the Norman.

Good morning. As Joe said, we continue to benefit from overall favorable marine transportation and diesel engine services markets in the second quarter.

Marine transportation revenues increased 23% over the second quarter of 2007 and were impacted by higher term and spot rates and the recovery of higher fuel and other operating costs through contract rate escalations.

During the 2008-second quarter, ton-miles decreased 15% from the second quarter of 2007 primarily to changes in our trip mix between the river system and the Gulf Intracoastal Waterways.

With weaker Midwest demand for refined products we transferred tank barges from the River to the Gulf Intracoastal Waterway where trips are shorter. In addition the Upper Mississippi River flooding in June negatively impacted our river ton-miles.

Our barge fleets barrel capacity increased slightly to 17.5 million barrels over last year and we operated seven more boats than in the second quarter of '07, which helped our overall efficiency.

Operating income for the marine transportation business increased 29% and we reported that 22% operating margin in that segment.

Our diesel engine services segment revenues for the second quarter increased 14% and operating income increased 11% over last year and we reported a 15.6% operating margin. Our medium speed marine and power generation markets are very strong in the second quarter, and our high-speed market as we anticipated was soft due to weakness in the Gold Coast offshore oil service market.

Kirby generated $91.3 million of EBITDA in the second quarter, which is a 22% increase over last year and the EBITDA margin was 26.2% compared to 25.9% last year.

Capital spending for the second quarter '08 was $57.8 million and includes $36 million for new barge and towboat construction and $21.8 million for upgrades to our existing fleet.

For the first half of the year, capital spending totaled $106.5 million including $63.5 million for new barge and towboat construction and $43.1 million primarily for upgrades to the existing fleet.

We had increased our 2008 capital spending guidance from a range of $150 million to $160 million to a range of $165 million to $175 million because of shipyard schedule changes and progress payments on new barge contracts for 2009.

Capital spending for new barges and boats in 2008 should total approximately $90 million by year-end. Our debt-to- capitalization ratio dropped from 27.9% at year-end 2007to 25.7% at June 30, 2008, and our average cost of debt for the second quarter was 4.9%.

Interest rate swaps and interest rate collars hedged $200 million of our roughly $300 million of outstanding debt as of June 30.

I'll now turn the call over the Berdon.

Thank you, Norman. During the 2008 first half, we took delivery of 20 barges with a total capacity of 480,000 barrels and two 1,800 horsepower towboats and retired 15 barges with a total capacity of 330,000 barrels.

As of June 30, 2008, we owned or operated 918 tank barges with a fleet capacity of 17.5 million barrels. For the remainder of 2008, we anticipate the delivery of six barges with a capacity of 98,000 barrels and two 1,800 horsepower towboats.

The cost of the new equipment for 2008 will be approximately $90 million and includes anticipated progress payments on certain equipment to be delivered in 2009. Recently, we signed an agreement to charter 12 new tank barges with a total capacity of approximately 180,000 barrels.

The barges will be placed in service upon completion of their construction and the lease term will be seven years. This will add approximately 130,000 barrels in 2008 and 50,000 barrels in 2009. We will also be assuming 15 additional new barge construction slots with a total capacity of approximately 420,000 barrels for delivery in 2009.

I will now turn the call back over to Joe.

Thank you, Berdon. Yesterday afternoon, we forecasted our 2008 third quarter guidance of $0.75 to $0.80 per share, which is a 17% to 25% improvement when compared to the $0.64 earned third quarter of 2007.

For the year, we raised our guidance to $2.90 to $3.00 per share up from pervious guidance in the range of $2.74 to $2.89, a 27% to 31% improvement when you compare the guidance to what was earned in 2007.

There has been much negative news about the [inland] tank barge business lately, principally in some industry press, high water, US economic problems and new capacity. We appear to have made it through the flooding and any economic problems in front of us thus far.

As for capacity, we have consistently noted that too much capacity isn't a good thing for barge business, but that it was a medium term concern, not a short-term concern. We've also noted that the age profile of the [inland] tank barge fleet would mitigate the length of any industry over- building.

With respect to current tank barge deliveries, the market thus far has absorbed those deliveries. We also believe that future barge delivery estimates overstate the ability of some shipyards to produce barges on schedule and are further exacerbated by steel shortages, which again delay barge deliveries.

Steel prices have also risen to levels, which make estimated barge prices in 2010 appear unattractive, which should have a dampening effect on barge-building enthusiasm in 2010.

And finally, one new shipyard, which announced that they intended to build barges has already closed. Berdon noted in his comments that we recently chartered 12 barges and assumed 15 spots in the 2009 building schedule from somebody that had those slots, but decided not to build.

These additions are Kirby's fleet, tonnage, which we will control and will be used as replacement tonnage and for current volume requirements. The bottom line, we believe it's too early to predict what's going to happen with respect to capacity.

Certainly if the industry continues to build at 2008 rates, we will overbuild; however, we believe a more likely scenario is that the building cycle will slow due to a number of things including high construction costs and that the overhang of older barges will allow the market to absorb the barges currently on order.

As for Kirby, we continue to be in great shape. We have a very strong contract position with over 80% of our total business currently under contract and our barge utilization rates remain high as evidenced by our financial performance.

For the third quarter, we're forecasting $0.75 to $0.80 per share, a 17% to 25% increase over the same period the year before and we're raising our annual guidance to $2.90 to $3.00 a share, again a 27% to 31% increase over where we were in 2007.

Operator, we'll now open the call up to questions.

Thank you. (Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Alex Brand with Stephens.

Hey, this is actually George Pickle for Alex. Joe, my first question goes back to your statements about the barge building. I guess a question is at these elevated prices because of steel, are you still able to get your anticipated return on capital on the new barges?

Yes, prices that we're paying, yes.

Okay. I guess, let me switch gears on my follow-up question, then. Why the confidence to raise guidance now? Is it a function of having so many day charters as compared to last year, because I think in the past you kind of waited to see how the weather plays out in the quarter?

No, I don't think we've done that, George. We'll predict some weather when we know about it, but we don't put hurricanes into forecasts because only God knows when they occur and where they'll land in the US, if they occur at all.

We've tried in forecasting our business to tell the market what we think we know. It is a forecast; it's our estimate of where we think we're going to be. Sometimes we get it right; sometimes we get it wrong, but when we think we know where we're going, we talk about it.

Okay, great. Thank you for your time.

Your next question comes from the line of Ken Hoexter with Merrill Lynch.

Great, good morning, I guess still. Sorry about that. When you look at the 15% ton mile decrease, you mentioned in the opening comments, Joe, this shift from the river down to the Gulf, can you talk about how much of that 15% is because of the floods?

Yes, that's hard to do. It's a combination, of course of slower transit times on the river, less tonnage on the river, very little movement of refined products up river, as well as black oil.

But we were able, for the most part, to re-deploy that equipment sometimes for the same customer on business that that customer had on the Gulf Intracoastal Canal. And when you're moving on the canal, you've got shorter voyages, of course.

I guess in light of Dow's announcement of cutting back capacity and obviously other chemical companies shrinking demand, I'm just trying to understand what of that is due to the weather?

No it's not much in chemicals; it's more in the refined products, black oil and agricultural chemical area. And remember that the agricultural chemicals kind of came to a screeching halt because fields were flooded and docks were under water and some of those ton miles get driven by ag chemicals, but a lot of them also get driven by the up river movement of gasoline. That just didn't occur.

I wouldn't read too much into the ton-mile reduction. The revenue was there; it's just being earned in different places.

Okay. Then if I can have my follow up on the capacity side. It sounded like if I do some quick math between what Berdon was saying about the chartered in, the new slots, it looks like you're adding about 4% of capacity.

I think you mentioned before that the industry's adding maybe 200 to 225 barges which, I guess if you strip out maybe, I don't know, 75 to 100 of those for retirement, it looks like the industry is now adding 5% to 6% of capacity. You said it's more medium term, but I guess does that level of build start to concern you on pricing in the near term?

Well, it hasn't affected it yet. The point I was making is that the best capacity that we're going to control that really before, we didn't control. I think that the capacity is always something that you've got to worry about. I've made no secret of that. We've made no secret of that here at Kirby.

Anybody that lived through the 1980s knows that capacity can be a problem, but there's a big difference today than what we faced back then. Back then we had a new fleet; it wasn't an overhang of old tonnage.

And 2008-2009, we're going to build a number of barges, but yeah, I'd be surprised at least given the current shipyard prices that that same building rate is going to continue. And if we're right, then I think that that equipment should be able to be absorbed by the industry.

Now, of course the other side of that is what's going to happen with volumes, and I don't know. Again, thus far our volumes with the exception of refined products would move up river and to a lesser extent, black oil, have remained pretty stable.

Why did that yard close that you mentioned?

The availability of steel and the fact that they wouldn't be up and running to build barges during what appears to be kind of the peak of the barge-building cycle.

Okay. Just to clarify one number if I can before pressing on. The 80% of contract last quarter, I think you said about 60% of that was under tanker pay. Did that hold firm even through the weather and everything else that occurred during the quarter?

Yes, I think the actual number was 56% and it's about at the same level, I think it's 53% or 54% today.

Thanks for the time, gentlemen.

Yes.

Your next question from the line of Noah Parkett with Cantor Fitzgerald.

Good morning, gentlemen. The 80% charter coverage, is that a level you're comfortable at now or you going to look to increase it some more?

Oh, I don't think we probably can increase it too much more and not have the flexibility of servicing customers that have increased demand when refineries are in turnaround or are responding to other market opportunities. We're pretty comfortable with the 80/20.

Okay, and your leverage is pretty low and the stock has pulled back a little bit, do share repurchases look attractive to you?

We don't comment on that, but we have bought shares this year at really over, well, since I've been the CEO, we've bought over $20 million shares back, so we think that that's a good use of capital, but we don't comment on when we buy or when we don't buy.

Okay, great. Thank you.

Your next question comes from the line of John Chappell with JP Morgan.

Thank you. Morning, guys.

Morning.

Joe, you mentioned the pricing on the spot side of your business. I know it's only 20%, but up 3% to 4% and that includes fuel. I would have to think average fuel is up at least 3% to 4%, second quarter over first quarter, so is there a way to kind of strip out kind of the pure pricing momentum on the spot business and does it look like it's maybe slowing a bit?

Yes, John, that's a good question. I think when you strip out fuel, then spot pricing was probably about flat, but I think this is what you need to remember about that. We had unprecedented increases in fuel prices during the second quarter. And I think the key thing to watch is what do spot prices do now that fuel is in decline?

Thus far, we've been able to hold those numbers up. When you have that kind of pressure on fuel that it's difficult to press rates in an environment that is a little uncertain to levels that would have real substantial spot price increases.

So we're going to watch it, but what we anticipate is that the difference between spot and contract that is around 10%, will when fuel settles down, will continue. And we're not contemplating a narrowing.

You're always trying to price to the spot market, and what happened in the second quarter was that that gap narrowed a little bit. We're not expecting that narrowing to continue. We think it will widen out a little bit.

Okay, and then my follow-up question is on your power situation, do you have enough [home] capacity at this point or at least already chartered in capacity at this point to meet your power requirements or may there be some impact on the cost side from the need to go out and charter more tugs?

Well, as we add barges, you need more power, so we'll be in the market for more power.

Chartering versus owned?

It'll be a little of both.

Okay. All right. Thanks, Joe.

Your next question comes from the line of Jimmy Gilbert with Rice-Voelker.

Oh, hey Joe, Jimmy Gilbert, how are you?

Good. Good morning.

You know this may be a little bit off topic, but on the last call you mentioned that you thought the fundamentals for dry cargo were favorable.

And, of course, you guys aren't in the dry cargo business, but does this mean you see that the dry cargo fleet is shrinking or is it more just the upside in moving construction materials, fertilizer, grain, things that have been sort of very, very slow for the dry cargo business in the last year or so?

Well, no it's more the dynamics of the fleet. The fleet is shrinking. Operators are scrapping more barges than they are replacing. There is enormous demand for US grain products; and as the economy improves, you will see more of those base materials that you just talked about move.

Right. I know people have talked a lot on this call already about liquid fleet demographics, but do you guys sort of have in your mind a number for -- an equilibrium number for that new ad or now it's new ads that leave prices at equilibrium?

Well, that's difficult to forecast because you have volumes of assumptions kind of that you have to apply to it, but I think we're still seeing utilization rates in the kind of mid 90% range and you typically see pricing leverage on the upside when you get into the high 80%. You know mid 90% utilization is essentially fully utilized.

So you could add some capacity and actually see a little utilization decline but still have pricing in the business.

Right. My perception is there were 75 tank barges scrapped last year. Do you think that that's probably a decent number for this year or are you guys able to sort of track that and project how many you think will be scrapped in '08?

Yes, I mean you really can't. The only thing that you can do is project what you're going to do. But there are a lot of barges out there that are premature. Over the next couple of years we think that scrapping will continue; and if, in fact, supply and demand gets out of balance, I think it will accelerate.

Okay. And then I had one more question. This is sort of going into the future a little bit, but I've heard about some pretty large coal to liquid plants that are in the works, and at least three of which that I know of are planned for construction on the Inland Waterway System and the first one should be coming on line in early 2011. Does this present an opportunity for you guys and if so how big an opportunity is it?

Yes, you're talking about the Eastman plant?

Right.

Yes, there are actually more than three. I think there are six or seven that are talked about. We'll see how many actually get built, but sure, sure it presents an opportunity. They're going to produce things that we move.

Okay, I haven't been able to get to a capacity number for those plants in terms of barrels a day.

I'm not sure we know barrels per day. We know that that plant that I just alluded to is a petco plan and you're talking about an input of over a couple million tons. I don't know what the output is.

Right. Okay, well, Joe, thanks a lot.

You're welcome.

Your next question comes from the line of Charles Rupinski with Maxim Group.

Good morning. Congratulations on the quarter.

Thank you.

I just had a quick question on just your end markets. You know just give me a little color on what you're seeing, if you have any views on you know how much of the deposited volumes may be related to either direct or indirect export markets.

I think that exports do play a role in keeping the petrochemical volumes up. There is a worldwide global shortage of chemicals and the US is filling the void in some respects. Typically, you see 10% to 12% of the chemical capacity exported. That number shrank to probably half that number and what we've seen is the number is really getting back to about where it was.

Okay. Great. And this other question just on single versus double hull. On the regulatory front there, is that something that I guess as of 2010 becomes more of an issue and is that something that you're seeing that maybe with the capacity coming on in the next year -- 12 to 24 months that there might be a sort of a bump off in maybe the 2010 period?

Let me answer it this way. The regulatory date is 2015.

2015. Okay.

And what we've been saying is that we think that the market is going to push those barges out quicker than the 2015 date. They are approximately I guess 140-odd barges that are single skin that are left in the business.

With respect to Kirby, for the most part, that's behind us. I think that we only have nine single skin barges left. They're used in very specialized services, and we plan to replace them long before 2015.

Great, well thank you for that.

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

Good morning, all.

Good morning.

Question for you, Joe. You mentioned you're seeing some improvement in I guess the Midwest refined products market. Is that really just now the normal seasonal uptick you'd expect to see there or do you think that structurally now things are improving from where they were earlier in the year?

No, I think it's more seasonal. Gasoline demand is estimated to be down about 2.5% compared to where it was last year. And I don't think -- I think there's been some real demand destruction, but people are still driving and there is a component of gasoline used in the Midwest that has to be imported.

Typically about a million barrels a day is imported to the Midwest on the Gulf Coast. I think we're just getting a share of it.

Okay, just one other quick question, as well. You mentioned the higher steel prices, what do you realize in terms of scrap value per barge as you retire equipment? Is that a notable number or a mentionable number?

Yes, it's not unnotable, but we typically see higher prices for barges used in alternative services. If we've got a scrapping barge, we'll sell it to somebody that uses it for a deck barge. Most of the floating casinos that are floating around this country are built on the decks of old tank barges.

So at least for us, selling them into some other service has more value. In the dry cargo business, I think it's more of a factor.

I see. That's it for me. Thanks.

Sure.

Your next question comes from the line of Reishee Chernak with Children Investment Fund.

Good morning.

Morning.

I have a quick question just to follow up on the capacity point. If the industry press were reading this right that you've got around 250 new barges this year and also they seem to be larger barges than the ones developed lately, so that the barrel capacity increases a little bit more, that seems to be something like a kind of mid to high single-digit increase.

With the current demand outlet that you guys see, is there any risk that that puts a bit of a dampener on pricing from where you are today or are you comfortable that you kind of maintain strong pricing with that supply and demand outlook?

Well, I'm not sure that we would agree that 250 barges are going to be built in 2008. That's pretty aggressive based on what some shipyards have historically done. Additionally, there are some cases of some delays in getting steel. I think the number is going to be closer to 200 frankly than 250.

With respect to replacing barges with larger capacity, I'm not sure I agree with that either. A single skin barge actually for its size is going to have more capacity than a double skin barge. Yes, we tend to build 10s and 30s, but I'm not sure that there's that much capacity creep.

Now, I did say earlier, and I'm not sure what else I could say about the capacity issue, I did say earlier in the prepared remarks that if we continue with 2008 building levels, we will overbuild and yes that will affect pricing. It is a supply and demand business.

But I also said that we don't expect that to continue. We don't expect it to continue for a host of reasons, but one of which is that steel prices in 2010 have gotten to levels where it really is not all that attractive to build and you're getting a lot of pushback.

Having said all that, from a Kirby perspective, 80% of our business is under contract, a year or longer. So from a pricing perspective, we're really in pretty good shape, in at least the next 12 months or so.

That's great. Thanks, and just one quick follow-up. I just want to understand the movement in the revenue for ton-mile increase and the cost of ton-mile increase. How much of the volume decline was covered by take-or-pay contracts because you report a very large increase in the revenue for ton-mile. I was just wondering about the take-or-pay, just wondering how big that impact is.

Yes, it wasn't that significant. I mean certainly some of it was, but on an everyday basis, we have several tows that were between trips, on-time charters that were being paid for, but that's not that unusual.

Customers time charter equipment so they control capacity and based on requirements within their own system, you'll have periods where the equipment will be positioned, not loaded, waiting for some of that (inaudible) loading.

Okay, great. Thank you.

Your next question comes from the line of Lew Salts with Water Street Capital.

Yes, hi, thanks for taking my question. Would love to know what you guys are seeing in terms of contracting when you are bringing in your new barges and your sign-in or rolling over existing contracts. What's kind of a length of time that you're seeing on those contracts and is that time lengthening out at all?

Maybe lengthening a little, but we have a fleet of almost 920 barges, and this is a dynamic fleet, so equipment that we're bringing in can go on the spot business. It can replace equipment that we're phasing out or it could supplement contracts.

So it's really all over the board. I think I'd be more comfortable just talking about our contract mix and the terms of those contracts. I mean 25% of our marine transportation revenue is under contracts that won't expire this decade, some of which won't expire until 2016.

Probably a little more than 50% of our contracts are renewed on an annual basis and then the rest are anywhere from two to five years.

Got it, and if we just look at the fleet and understand that everything is a dynamic, is your bias or is the customer's bias more towards securing capacity on a spot basis or securing capacity on a contract basis.

It's the latter. Our customer base is, but again, we typically -- last year our contract spot mix was 75%/25%. I think in the last six or seven years, the lowest it's gotten is about 70%.

So we tend to focus on customers that want contractual relationships. We do that as a strategy, principally because we think that that allows us to forecast and manage our business better than just having all your equipment out on the spot market.

You'll probably lose, in a very brisk market, you'll lose some profit potential with that high a contract mix, but you also mitigate the downside significantly; and we'd rather be more conservative than aggressive as we approach our business.

And so what I hear you saying really is that your customers are more on the margin. They're biased towards securing contracts and the contract terms that you're signing are increasing, the length of the contract is increasing. Is that --

Yes, marginally increasing.

Got it. Thank you.

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

Good morning, gentlemen.

Hey, Bill.

Could you take a minute, Joe, and explain why the demand for black oil would be doing what it's doing in here? I mean is that related to overall refinery runs or is that something on the demand side that's causing those volumes to be ---

Yes, it's refinery runs, we think. There is a kind of -- an interesting thing's happening in the refining business. It just shows you how dynamic and flexible the market is.

Gasoline is down, but the demand for tool oil or diesel is up; and you're seeing in Europe, which uses as its transportation fuel principally tool oil or diesel, makes as a by-product to diesel, a lot of gasoline, which is then imported on the East Coast.

And what we're seeing is that the demand for diesel is so significant on a global basis is that we're actually making more diesel at record levels on the Gulf Coast and exporting them.

When you do that, the mix changes and the need to produce or to squeeze more gasoline out of the bottom into the barrel diminishes. And so we're seeing less vacuum gas oil, for example, transported.

The other thing that we're not seeing a lot of, which you typically see in the summer, is asphalt. There just isn't asphalt available and that's probably a question that you should ask a refiner, but my guess is that the demand for tool oil in the margins that refiners are getting for tool oil just make it a lot more profitable trying to produce as much of that than some of the other things that they produce.

So they're taking a larger portion of the barrel and devoting it to tool oil, I guess is basically what you're saying, and as you do that, there's just less —

We don't want to make a bigger thing than it is of because demand is not that significantly down. The real differences are just where you're moving it. We're moving more in the canal than we are in the river.

I see.

In the summer you typically see more ton-miles in the river because you're moving gasoline up river; you're moving asphalt up river; you're moving agricultural chemicals up river.

Part of that is demand destruction of the gasoline market; part of it was just very poor operating conditions on the river, flooded fields, flooded docks, at least in the agricultural chemical area.

Okay, do you think this will be with us for a while, as long as this demand for tool oil remains so strong?

Well, refiners are going to make products that they can make money on; and certainly at these high oil prices that drive gasoline prices, there is some demand destruction. Now 2% to 2.5% down, and frankly, I'm surprised it's not more than that, but that's what the national statistics are showing.

And I think we just need to adjust our business accordingly. Remember only about 10% of what we do is in the gasoline area.

But I was focusing more on the black oil than I was the gasoline.

I think black oil is going to be okay.

You think it will be okay?

Uh-huh.

Okay. Thank you.

Your next question comes from the line of David Yuschak with SMH Capital.

Good morning, guys. Earlier, Joe, you said in your guidance you were looking for mid-single digits on your long-term contract renewals, and they're up from there.

Is that just a function of the spot market right now, or is it, you maybe said earlier, some of your customers want to begin to lock in some capacity and control from that capacity and are willing to take even the risk of a take in pay to have that capacity controlled?

Well, there's certainly some of that going on, hence, the greater percentage of our contracted business in time charters than you typically see.

Yes, we still think that a more reasonable forecast of our business is in the mid-single digit rate increase area. We've seen more than that as we've renewed contracts from last year, but as you model the business, I think I'd use a lower rate percentage increase, which from a Kirby perspective, is double-digit earnings growth.

We're very happy with lower rate increases. We think it also takes some of the froth out of building tank barges, so I think that we don't have a problem with the mid-single digit forecast.

Is there any particular customer that you're dealing with who wants to maybe do more controlling some of that capacity for the (inaudible). Is there any particular (inaudible) or anything?

There are lots of them.

So it's just a broad range; it's pretty diversified.

Yes.

And one other question. As far as your business in the upstream or up river, what generally would be normalized on a quarter-to-quarter basis versus maybe what you may have experienced here in this quarter?

I'm not sure I understand your question, David.

Say, for instance, normally 25% of your revenue comes from moving stuff up river versus 75% in the channel. I'm just kind of curious if there was anything that was abnormally as a percentage of revenue that you didn't do in the Midwest that you were able to funnel back into your coastal waters. I kind of wondered what was maybe normalized business going up river versus the coastal waterways.

Yes, it's going to vary quarter-to-quarter, but about a third of our business is on the river and about two thirds of it canal. We haven't bifurcated the revenue to give you an answer, just haven't thought of it that way. The point that we're making is whether it works on the river or on the canal, it's still there -- the revenue is still there, so the business is still there.

Yes. I was just kind of curious if you were, if it was abnormally affected in the quarter, as a percentage of revenue just to get a sense as to --

Well, more revenue is earned on the canal, clearly.

Yes.

I think ton-miles is a pretty good indicator of revenue. As you look at the second quarter '08 to the second quarter of '07, you could probably extrapolate and answer your question.

Because normally speaking, you are more profitable on the coastal waterways anyway than up river.

Our infrastructure is very competitive on the Gulf Coast.

All right, thanks.

Sure.

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

Yes, hey, guys, nice quarter. Just wanted to ask you quickly here on the engine services side of the business, I guess everyone has forgot about it today, but in any event, it's certainly been a model of consistency from an operating margin standpoint the last four or five quarters.

But I kind of go back to maybe 12 months ago when I think you guys first said you thought that if fundamentals stayed positive that you potentially could get the operating margin there in the upper teens and I guess my question is is that still the case and maybe what has to happen for you to get there?

Well, I think the oil service in the Gulf Coast needs to improve. We're about there in the medium [speak] side, so it's more an oil service story and we think that is actually getting better. So I'm not sure that we'd change what we said over time. Mid to high teens is a reasonable target.

Okay, great. That's all I had. Thanks, guys.

We do have a follow-up question from the line of Jimmy Gilbert with Rice-Voelker.

I'm sorry, guys. My question's all been answered. Thank you.

There are no further questions at this time.

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

This does conclude today's conference. Thank you for your participation. You may now disconnect.