Kirby Corp (KEX) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Kirby Corporation First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Steve Holcomb. Mr. Holcomb, 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 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, 2008, filed with the Securities and Exchange Commission.

I will now turn the call over to Joe.

Thank you. Thank you, Steve. Over the past five years, Kirby's earnings for 20 consecutive quarters exceeded the same quarter of the prior year, a five-year trend. Unfortunately, 2009 will not continue this trend. The current US and global recession and its impact on our two businesses, marine transportation and diesel engine services, has ended our string of increasing earnings.

Yesterday, we reported net earnings for the first quarter of $0.52 per share, compared to $0.68 per share reported first quarter of 2008. Our results include a $0.05 per share charge for early retirements and staff reductions that was included in the guidance that we gave in January of $0.45 to $0.55 per share.

During the 2009 first quarter, in our marine transportation segment, we saw lower volumes in all four of our transportation markets, which are petrochemicals, black oil, refined products and agricultural chemicals as our customers continue to respond to weak -- a weakened economic environment. We did see some small improvement in up-river movements of finished petrochemical products going into the Midwest at the end of the quarter as compared to the fourth quarter of last year where significant destocking of inventories occurred and this destocking actually continued into the early part of the first quarter this year.

Also as anticipated, the fourth quarter destocking that we saw in the up-river part of our business made its way to the Gulf -- intercoastal waterway markets during the quarter, resulting in lower demand for petrochemical movements and some pressure in the spot market.

Refined products and black oil movements were also weaker, consistent with prevailing conditions that we're seeing in the economy. With respect to agricultural chemicals, there was softness in this area, principally driven by crop prices, some credit issues with respect to farmers and current high inventory levels of the product in the Midwest. Our overall utilization for the first quarter was in the low 80% range. This would be compared to mid-90% utilization first quarter of last year.

With respect to weather, we saw more favorable weather conditions and operating conditions from the quarter. Almost 50% less reduction -- or 50% less delay days compared to the same period last year. That helped reduce operating expenses and offset some of the financial impact of lower demand, but it also has an effect on utilization because it serves to put more equipment into the market.

During the first quarter, we maintained our current revenue mix of 80% term, 20% spot and it was consistent with the mix of last year. Time charter or day rate contracts, which serve to reduce revenue volatility caused by weather and navigating delays and also help with temporary market declines, remain at about 55% of our total contracts. We do expect time charters will decline as customers release some time chartered equipment back into the market as they react to lower volumes.

We expect volumes, however, and I think this is an important point, to be stable to slightly improving this quarter as customers begin to rebuild their inventories. Now, all the volumes have stabilized in recent weeks. The economy will have to start expanding again before we see any significant strengthening in demand. We should see some short improvement, as I just noted, as some of our customers rebuild their inventories. But we don't see any significant demand return, certainly to the mid-2008 levels of demand this year.

During the first quarter, we were generally able to renew our contracts at expiring rates, in some cases, we did create some rate for increased contract terms. Spot rates did decline during the quarter and we believe they may continue to come under pressure as we see more equipment enter the spot market, principally from the release of charters.

Now fortunately, our 80% contract-to-spot mix, 20% spot, will give us some shelter from this. With respect to our long-term agreements, these are the multi-year agreements that don't expire in the -- during the year. The escalators that we have in those contracts for labor and the producer price index that saw these contracts escalate in the 4% to 5% range in January.

During, again, the first quarter, our diesel engine service segment, saw demand levels for their service and direct part sales decline in the Gulf Coast service area, where we're servicing oil service companies. And to a lesser extent, in the marine transportation area, as customers deferred some maintenance to their equipment, as their business levels declined. This also was true in the short line industrial rail market and again, they tend to defer maintenance as their markets slow down.

We did see some strength in the medium speed power generation area, which benefited from favorable engine modification products and -- projects and direct part sales and a stable East Coast marine market, which benefited from that market continuing their overhaul programs.

Now, when adjusted for one-time costs associated with the cost reduction initiatives that we undertook in the diesel engine segment, if you add those back, our operating margins would be over 11%. Later in this call, I'll come back and talk more about the diesel engine business and its margins.

During the first quarter, in response to lower demand in both our business segments, we did take specific steps to reduce overhead and costs. We reduced our shore staff by approximately 6% through early retirements and staff redundancies. We charged our P&L approximately $4 million before tax for these expenses, which translates to about $0.05 per share.

In addition, we implemented a shore staff hiring freeze for all officers and management salaries for 2008. We estimate that the early retirements and staff reductions will result in an approximate $0.02 per share savings in 2009 and then for the full year of 2010, about an $0.08 per share savings.

One important element, which we've talked about, in other calls and the conferences, that is part of Kirby's business model, is our utilization of charter power for a portion of our business. These charter tow boats allow us to grow during strong markets and to contract when the market is weaker. During the quarter, we were able to take out a number of tow boats.

During the first quarter of 2008, just to give you a reference mark, we operated an average of 260 boats, compared to the first quarter of 2009, where the average was 232. And today, we're currently operating 221 boats. Additionally, barge retirements outpaced our building program and our tank barge fleet was reduced by 17 barges to a total number currently of 897 barges. And Berdon will give you a little more color on that in a minute.

These and other cost savings are the reason that Kirby was able to maintain its operating margins in the transportation segment, despite declining volumes. As we move through this period of economic challenge, we'll continue to evaluate for shore staffing requirements. We'll seek additional cost saving opportunities as we see them. And we'll continue to balance our horsepower with current volume requirements. And where appropriate, we'll defer capital and that will reduce maintenance, certainly, on inactive equipment.

We'll come back at the end of our prepared remarks and talk about the second quarter and also our full year outlook, but first I want to talk -- I want to turn the call over to Norman.

Good morning. First quarter, Marine Transportation revenues declined 16% compared with the first quarter of 2008, reflecting lower demand and lower diesel fuel prices that are passed through to our customers through fuel escalation clauses in our term contracts. Approximately $16 million of the $42 million decline in revenue was due to lower fuel prices. Ton miles were 47% below the first quarter of 2008, but the impact of revenue was limited by time charter contracts.

Our marine transportation segment first quarter operating margin was 21.1% compared to 23.4% in the fourth quarter of 2008 and 21.3% in the 2008 first quarter. As Joe said, the operating margin held up well due to several factors, including lower barge maintenance, improved operating efficiency, term contract escalations, better weather, lower depreciation and the impact of lower fuel costs. Excluding the charge for Marine Transportation, early retirements of staff reductions, the first quarter operating margin would be 22.3%.

The operating margin in our Diesel Engine Services segment decreased to 8.7% in the first quarter compared to 12.3% in the fourth quarter of 2008 and 16% in the 2008 first quarter. And again, as Joe pointed out, excluding the charge for Diesel Engine Services early retirements and staff reductions, the first quarter operating margins would be 11.1%.

The lower margin reflected the decline in service and direct parts sales to the Gulf Coast oil services and marine transportation markets resulting in lower labor utilization. Cash flow in the quarter, aided by a decline of accounts receivable, is sufficient to cover $65 million of capital spending and still pay down $21 million of debt. Our debt-to-capitalization ratio declined to 19.7% at the end of the quarter compared to 21.7% at December 31st, 2008 and 25.9% a year ago. Our average cost of debt for the 2009 first quarter was 4.7%.

The $64.8 million of capital spending in the first quarter included $48.5 million for new barge and tow boat construction and $16.3 million for upgrades to our existing fleet. We slightly lowered our 2009 capital spending guidance range to $180 million to $190 million. This includes approximately $135 million for new barges and tow boats. For the remainder of 2009, we anticipate continued positive cash flow, not as strong as the first quarter, though, and a continued reduction in our debt-to-capitalization ratio.

I'll now turn the call over to Berdon.

Thank you, Norman and good morning. During the first quarter, we took delivery of ten new barges and three new chartered barges with a total capacity of 291,000 barrels. As of March 31, we owned or operated 897 active tank barges with a capacity of 17.2 million barrels. We also took delivery of one 1,800 horsepower tow boat. During the balance of 2009, we expect delivery of an additional 36 owned and four chartered barges, with a combined capacity of 874,000 barrels and four 1,800 horsepower tow boats.

The cost of the new equipment is approximately $135 million for 2009. Our current plan is to net retirements with new capacity, maintaining our current capacity levels. We will continue to review this over the year and make adjustments as necessary. Two 10,000 barrel barges, one 30,000 barrel barge and two 1,800 horsepower tow boats have been pushed into early 2010 for delivery.

I'll now turn the call back to Joe.

Thank you, Berdon. Yes, as we noted in January, we anticipate that overall demand will stabilize, but at levels below 2008 levels. Once our customers have completed their inventory adjustments and begin to gain confidence with respect to what sustainable demand is, that assessment that we made in January, we think, is correct based on what we're currently seeing.

Berdon gave you an update on our tank barge and tow boat construction program for 2009 and 2010. Remember that we committed to build this equipment in early 2008, when the market was very strong and shipyard space was very tight. Based on current market conditions and fleet utilization, we have somewhat accelerated our retirement schedule for some of our older tank barge equipment.

Now, although we don't know when the economy will begin to pull out of this recession, Kirby's earnings and cash flow do remain healthy and we have a very strong balance sheet, which will give us the ability to take advantage of opportunities as they may appear, going forward.

Lower utilization levels caused by excess capacity in the tank barge industry will likely be with us awhile. We're going to continue to focus on the things that we can control, which is being safe, taking costs out of our business and making sure that we continue to provide our customer high service levels. We think that this coupled with right-sizing our operations will help us control margin erosion.

With respect to the diesel engine side of our business, during April, we have seen some slight improvement in our Gulf Coast oil service business and in the marine transportation market. And we do anticipate that this trend's going to continue for the balance of the quarter. We also expect our power generation market to remain strong with some engine modification projects and direct part sales.

Now, we have been able to bring operating margins up in the diesel engine business over the last several years. Last year, we were in the mid-teen area. We do believe that there's going to be some margin erosion in this business, but we're still forecasting double-digit operating margins in the sector.

With all this in mind, yesterday afternoon, we announced our guidance for the second quarter with a range of $0.52 to $0.62 per share, which compares with the $0.74 per share that we earned the same period the year before. We're giving a wider range than normal, but we feel that it's prudent to do that given our lack of visibility, frankly, with respect to the year.

With respect to the full year, we did lower our top-end guidance $0.10 to $2.55, but we're maintaining our $2.40 low-end. We'll -- we'll continue to review this during the year. I think that we noted that when we provided guidance for the year, we were one of the few companies that did that. We thought it was appropriate to provide it so that you would have some insight with respect to how we were thinking. And as we make judgments about the year, we'll continue to adjust the guidance, but at least for now, we think that the $2.40 to $2.55 a share is the appropriate place to be.

Operator, we'll go ahead and open it up for questions now.

Thank you. We will now begin the question-and-answer session. (Operator Instructions).

Our first question comes from Jon Chappell from JP Morgan. Please go ahead.

Thank you. Good morning, guys.

Good morning.

Joe, I wanted to ask a question about the industry capacity and you've highlighted that you're doing some early retirements and whatnot. Are others being as proactive in removing capacity from the market? And at the same time, have you seen any new build cancellations or anything like that, given the tough banking markets right now?

Yes, Jon, I mean we frankly don't know. I think Jet Boat, in their -- in ACL's earnings announcement yesterday said that they were continuing to build tank barges. I mean, truthfully, any barge added to capacity right now is a barge that is just going to get tied up. Because it's not going to be absorbed based on these volume levels.

I would expect capacity to go out. We have a lot of mature capacity that people -- operators will have to make maintenance decisions around. About a third of the fleet is 30 years or older. But this is not the time to be adding capacity to your fleet. This is the time, as you correctly noted, to be taking capacity out.

Right. And then, my follow-up question, I think I might have asked this last quarter, or maybe two quarters ago too, but Kirby's clearly in a good financial position to weather a weaker volume environment and a weaker credit environment as well. Have you seen any distressed sellers? Any assets coming across your desk that may be attractive right now? And then, I know you just said it's not the time to be adding barges, but at the right price, to have this financial strength, to be buying at the trough of the market may be good for the long term?

Well, yes, that's a consolidation play, not an incremental capacity play and that -- this is the correct time to see consolidation. I think the truth is that we haven't gotten into the real pain yet. And that's going to happen over the year.

Yes.

So, as we see more pain, hopefully there'll be some opportunities.

All right. Great. Thanks a lot, Joe.

Our next question comes from Natasha Boyden from Cantor Fitzgerald. Please go ahead.

Thank you, Operator. Good morning, gentlemen.

Good morning.

Given what's going on with the economy and everything with -- there's been some pretty bad news out there and the long-term contract situation that you have. Are you comfortable with your counterparty exposure, given your time charter contracts right now?

Well, yes. Yes.

Okay.

There are some of our customers that are financially stronger than others. But we think that we have appropriately reserved what we think our exposure is. So, I would say yes.

Okay. So, this -- I guess my point is, do you think that this could become more of an issue in 2009? And if so, the Company is, obviously, I presume, has positioned itself in response to such an event?

Yes. I think we're positioned well for the exposure that we see. And frankly, I think that we're a little less concerned about it today than we were, let's say, three months ago.

And what would be a reason for that? I mean, are you a little more confident, in general, in the economy in general? Or --?

Yes, I think that the major destocking has occurred and that you're going to see utilization improve. And I also think that those companies that were exposed are reacting appropriately and protecting their business entity. So yes, there's always the exposure out there, Natasha, but actually I feel a little better about it and we took a deep breath and reserved money on our balance sheet for the exposure end of last year.

Okay. Great. I don't know if I asked too many questions there. I have just one quick one. Yes. I mean, I do notice that you do have some more shares remaining under your repurchase program. Do you have any plans to purchase any additional stock in 2009?

No, we didn't. We didn't buy any stock. And we were pretty clear that that wasn't going to be our intention in our January call.

Yes, you did. Yes.

Yes. This is a time when you want to preserve cash .

Yes.

Preserve your balance sheet. Now, we're not saying that you wouldn't consider it at some point. But at least from now, we're just preserving the balance sheet.

There are better options on the table on alloyed?

Yes.

Okay. Great. Thank you very much.

Our next question comes from Alex Brand from Stephens Inc. Please go ahead.

Hey. Good morning, guys.

Good morning.

Joe, did you say how much spot pricing was down in the quarter and if it was down more than that in April so far?

Yes. I didn't. But let me say what it is. For the quarter, it was 6% to 8% down. That's fourth quarter to first quarter. And I -- that's about where it is.

And year-over-year, that would be down how much?

About 4%, Alex.

Okay.

Yes.

And can you just help me --

And remember, just to caveat, remember that fuel is lower, too.

Okay. So, you think fuel neutral, it would be about flat then?

It's still down a little bit.

Okay.

Yes.

All right. Help me, Joe, understand -- sort of put the pieces here together. Because I -- on the one hand, you're saying business stabilized, the destocking is over, so we feel like volume might even get a touch better in Q2, but yet there's a lot more pain ahead and that pain will allow us to potentially make acquisitions?

Yes.

Help me --?

Yes. That's a good question and it -- we kind of subtly addressed it in the remarks. It looks like that chemical business is kind of rocking along the bottom and that there is some inventory building that's going to occur, which short term will help utilization. But we don't know where the sustainable kind of level is right now. So, we don't know where we're going. So, that's positive. On the bottom, slightly improving.

What's negative is that you had an inefficient business in 2008 where customers worried that they couldn't get coverage, took under contract a lot of time charters. And what you're going to see is some of those time charters released. They will go in the spot market. And what the time charters do until they are released is artificially inflate utilization. Are you following me?

Yes.

And what we're -- what we think will happen is that you're just going to have more equipment in the spot market, which is going to put more pressure on rates at the same time that volumes are actually increasing. Now, what we don't know is will volumes increase enough to the amount of equipment in the market? That's something that time will tell. But in trying to kind of explain our exposure, that -- well that's kind of where we are.

Right. So, the volume is stable, the pricing is the real risk that you think could affect your competitors?

Yes, I think that's right.

Okay. Thank you. I appreciate the time.

Yes.

Our next question comes from Ken Hoexter from Banc of America-Merrill Lynch. Please go ahead.

Great. Good morning.

Good morning.

Joe, can you talk a bit about the order book just a bit more? You gave great detail before, but is there any ability to -- are these firm contracts that you have for these barges? I think you noted that you pushed out a couple of them.

Yes.

To 2010. Can you -- are you negotiating to perhaps do some more of that? Could you give some background on that?

No, Ken, we're going to build the equipment that Berdon talked about at the -- we had some discussions about pushing some more equipment into 2010, but frankly from a cash flow perspective, because of the depreciation rules in 2009, we're better off going ahead and building that equipment and taking delivery of it 2009. So, from a cash perspective, it's better to go forward. Now 2010, other than the equipment that Berdon noted, we -- we're -- we have no commitments currently to build 2010 equipment.

Okay. And then, how about on the other side, on retiring some of your existing fleet. It sounds like you might move to break even. What would -- in the previous question, you just kind of highlighted how much you're seeing volumes stabilize a bit at these down, I guess, mid-teen levels. What gets you to maybe move forward and pull some more equipment out and what is the age of the fleet? Are you looking at pulling stuff that's closer to 30, 25 years?

Well, no, it'll be the older equipment that we'll pull. But at the same time, Ken, we're -- we're not going to -- we're happy to take equipment out of the market. But not at the expense of market share. The whole industry needs to shed some equipment and we're going to be prudent about it. We're going to watch utilization levels. And we'll reduce our fleet as it's appropriate to reduce it. But not at the expense of servicing our customers.

Okay. And then, your contracts, what percent now is under contract? And what percent now is take-or-pay? Is it still 50% of it?

Yes, 80%'s under contract. And well, we have some consecutive orig contracts that are take-or-pay. So, probably north of 60%.

60% of the 80%?

Yes. Well -- yes. Right. No question.

Okay. The last question, just on the diesel engine services side. You mentioned that you thought you could keep the double-digit margins. Is that more on moving to additional cost cutting? Or is it kind of status quo that what you'll do? Or does it depend on the revenue flows over the next few months and quarters?

Yes. All of that.

So, are there additional costs then you'd look to pull out if we're staying at these levels?

Oh, yes, we're looking at additional cost opportunities throughout the year. We'll continue to look at how we manage the business better. And with respect to taking additional people out, we're not contemplating that now. But certainly if business levels fell, we'd look at that too.

Great. Helpful. Thanks for the time.

Okay.

Our next question comes from [Jimmy Gilbert] from Rice Voelker. Please go ahead.

Hey, Joe. Thanks for taking my questions.

Good morning, Jimmy.

Did the -- I wanted to ask, did the Lyondell bankruptcy create any opportunities for you guys to pick up new business? And if you did, how important would that be in your overall revenue mix?

Well, we -- yes, I think it would be inappropriate to comment on Lyondell. It -- disruptions create opportunities. Some good, some bad. But we think that Lyondell actually is going to work their way through bankruptcy and they're going to emerge as an important player, an important customer of our Company.

Okay. Well, that's good. And then also, you said you thought that there's more pain to come in your industry, but it also sounds like you see some signs that maybe things have bottomed in the overall economy. What sort of clues do you look at or do you see in your business that maybe tell you things may have bottomed out in the overall economy? Or is that your opinion?

Yes. No, it -- we look at volumes.

Yes.

And the volumes seem to have stabilized and what we're suggesting is that we're going to see some slight improvement as customers continue to build their inventories. But your -- when the industry fleet is in the high 70%, low 80% utilization, you're going to -- there's going to be a lot of pressure and the way that that's going to ultimately correct itself is either volumes have got to come up or equipment's got to go out.

Right.

And also, if this continues, if this is more than just a 2009 event, you're going to see continued pressure on the whole business, the whole industry.

I was listening to the ACLI call yesterday and they seem to think that the -- some of the manufacturers in the Midwest and up north are starting to, I guess, restock inventories and they're seeing some pick up, at least, in the sort of Upper Mississippi, or I guess the north of Baton Rouge corridor. Are you guys seeing that in your business to?

Yes. No, that's what we're saying. We're saying that the deliveries into the Midwest appear to be improving. Now, everything is relevant. We saw probably the most significant destocking occur in the fourth quarter and the beginning of the first quarter that we've ever seen. And utilization rates were, in that particular market, were 30%, 40%, 50% down. I'm not sure where ACL's were, but ours were probably about 40% down.

Yes. Right.

So, improvement from being down 40% is -- it's nothing to get terribly excited about. But we do think that the trend's going to be up. And that -- that's encouraging. But I don't want to make a bigger deal out of it than just that.

Okay. Well, thank you very much, Joe, and I'm glad to hear that.

Our next question comes from Sunil Jagwani from Catapult. Please go ahead.

Yes. Hi. Good morning. I just had a quick question, so I can understand the difference between what's going on in the spot market and the charter coverage. Can you break out the average for the quarter as well as the current spot market day rates and compare that with what you realized through your charters? Please? Thank you.

No, we won't do that. That's information we consider proprietary and not to our advantage to release.

Okay. Well, can you talk about how much, I guess, the magnitude of weakness in the spot market compared to your charter -- I'm just trying to understand or get some sort of ball park in -- about, I guess, projecting 2010. So, I wanted to try and understand how much weakness there is in the spot market relative to what's being realized in 2009?

Well, I'd just reiterate what we said earlier and that is that we rolled over, for the most part, contracts that were expiring in the first quarter at -- where they were. And where we gave up rate, we traded it for some term. And at spot rates, fourth quarter to first quarter, were down about 7%. And I don't think I want to say anything more than that.

Okay. I appreciate it. Thank you.

Our next question comes from Chaz Jones from Morgan Keegan. Please go ahead.

Yes. Hey. Good morning, guys. Nice quarter.

Sure.

Maybe if I could ask the pricing question a different way. Joe, you had commented that right now it's kind of a race between volume improvement versus pricing deceleration. And clearly, it sounds like, from the commentary in the release, that the biggest concern is continued deterioration and spot pricing as more excess capacity comes into the market. I guess my question would be, generally speaking, based on your past experience, how many quarters does it generally take with negative spot pricing for that to translate into negative contract pricing?

Yes, Chaz, in the last recession, which was what? 2000 to 2000 -- kind of end of 2003, it really didn't happen. The spot pricing was at times 25% below the contract pricing. Now, if this is a -- I think this is a different kind of recession. So I mean, the truthful answer is we don't know.

Sure.

And I'd hate to speculate because it would set an expectation that may not be appropriate to set.

Well, I think everyone's trying to figure out whether '09's a trough year or not and obviously that's the $64,000 question. To some degree, it's what happened with contract pricing probably.

Yes. Add us to that list.

Fair enough. And maybe just to circle back around on the capital structure. With the CapEx expectations over the next two years, if you guys don't do acquisitions, I mean, it's fairly conceivable that if you're not debt free, you're going to be awfully close. Any updated thoughts on capital structure, aside from acquisitions, Joe?

Well, I'm going to -- I'll let Norman talk about the prospects of being debt free. But let me comment that right now, our focus is preserving a very healthy balance sheet, given the prospects of being able to take advantage of situations in this market.

Having said that, if those situations didn't occur, then we would have to do something else with the cash. And we would consider at that point stock repurchases and even beginning to pay a dividend. So, those are kind of the easy things to do. Let me just let Norman comment on that debt repayment. Once we get kind of through the revolver debt.

Yes. Chaz, your observation's absolutely right. Right now, we have -- we will probably, especially in 2010, we'd pay off our revolver pretty quickly. In fact, we could easily pay that off by the end of this year. We are actually -- we have a private placement, $200 million private placement, that matures in 2013, which currently we're -- we have hedged into a fixed rate position.

So that will give us a little, I guess, perhaps put us under pressure to use the cash rather than paying down the private placement, which is a really attractive piece of debt, it would put us under pressure to do something like buy back stock or do a dividend. It's just at this point, we've mentioned -- we do anticipate maybe there's acquisition opportunities, but clearly we're going to be in a favorable cash position before long.

Okay. Great. No, that's helpful. I appreciate all the commentary, guys.

Our next question comes from John Larkin from Stifel Nicolaus. Please go ahead.

Yes. Good morning, gentlemen.

Good morning.

Not to beat a dead horse over the headgear, but just to make sure there's no confusion amongst the listeners, I think we pretty clearly got the numbers from you a couple of times on the spot pricing decline. Also the contracts that were negotiated in the first quarter were more or less extended at the existing rates.

But then I also heard you say, midway through the call, that there were some inflation cost escalators included in many of those contracts that might give you as much as a 4% or 5% increase in reality when you in fact are in the labor, inflation and some other elements of the inflation story. Did I hear that correctly? And if so, what percentage of the contracts have those inflation adjusted mechanisms in them?

Yes. John, those are the multi-year contracts, contracts that in some cases don't expire until 2013 and later. And in those contracts, we have the ability to adjust the contract rate for labor and for some kind of PPI index. It varies contract to contract. And in -- with respect to those contracts, we saw, as you work those escalation formulas, increases in the 4%, maybe 5% range. That represents about 25% of our contracts.

I think that's extremely helpful. The other question I had regarding pricing related to your comment early on in the call that suggested that some customers may choose to essentially put some equipment back to you rather than to renew the time charter.

Right.

Which effectively puts more equipment out on the spot market, which could put more pressure to the spot market. Could you give us any kind of a sense of order of magnitude as to how big that impact might be if 80% of your fleet is on contract now, is it possible that 75% would be on contract by the end of the year? Or is it more dramatic than that?

I don't -- I think it's probably plus or minus 5%, in that area. Somewhere between 80% and 70%. I -- we -- I think it's going to come down. I don't think it's going to be appreciable. But it's going to come down for the whole industry. That's the point I'm trying to make.

I've got it. That's extremely helpful.

Yes.

I'll let somebody else have the microphone. But thank you very much.

Our next question comes from Daniel Burke from Johnson Rice. Please go ahead.

Good morning, guys. Just two quick ones left, I suppose. One, I think last quarter you had noted you have about 50% of the contract is set to renew this year. I'm sure that's sort of standard at the beginning of each year. I guess my question was, is that -- is the proportion of business renewing, is that ratable throughout the year? Or can you accelerate that and do more of that before ostensibly the spot market begins to lean a little bit more heavily on the spread between term and spot rates?

Well, we're always working with our customers to renew on terms that are favorable to both of us and are able to handle their requirements. So, I would say those discussions are going on in good times and in bad times. We like to get in front of our customers, talk about what their business needs are and make sure that we've done the appropriate planning to respond to those needs. So, that -- if I said we're doing that now, we do that all the time.

Okay. Clear enough. And then the only other question I had, you refer to Kirby's utilization being in the low 80% and I think you made passing reference to the idea that maybe the industry was at or just below that threshold. Given your amount of term coverage, I'm a little surprised to see that the rest of the industry is that close. Could you maybe, Joe, address what you think maybe industry-wide utilization is and thoughts on whether that could go below 75% or whether that's really the bottom four companies, including Kirby?

Yes, I don't think we'd know what -- where it's going to go. The volumes are, as I said, we think the volumes are stabilizing. We can only really speak to our utilization rates and I don't know if ACL spoke to theirs yesterday. And yes, utilizations have funny numbers, we have talked about before, because it gets pulled around by weather events and navigating events.

But it -- where we think that utilization is meaningful is that when you get into the mid-80s, high 80s, you get some pricing stability, even some pricing power. But when it falls below that number, you lose it pretty quickly. So, we -- we're really talking about utilization as an indicator of pricing direction.

Thanks for taking my questions.

Sure.

Our next question comes from David Yuschak from SMH Capital. Please go ahead.

Yes. Good morning, guys. As far as your assumptions, Joe, in this second quarter, $0.52 to $0.62, you said -- you're saying that things look like they could be bottoming, stabilizing, yet you had said earlier, two years from -- or you had some concerns about visibility going into the second quarter.

But I'm a little puzzled at the $0.52. Because it would say that things aren't going to get any better and with the performance you've had in your EBIT margin here, even in the first quarter, which is very impressive, given what's happened. What has to happen at that $0.52 versus being maybe being at the upper end of the range, as far as the ability to go from one to the other? I'm -- given that things might look a little bit better?

Yes. Yes. Yes. And we certainly -- we're suggesting that. But, yes, we're giving a greater range. We think that that's consistent with the uncertainty out there.

Is that uncertainty more pricing than it is volumes, maybe, at this point?

Yes. I think it's probably pricing. More pricing than volumes. But volumes could fall off too. I guess what I'd say about the range is that that's something that you're going to have to make a judgment about.

Okay. When you take a look at your full year range, it's minus -- it's in the $0.15 range. And kind of that $0.15, basically kind of looks like it's in the first quarter.

Yes. And what we've said about the year range though, David, yes. I think that the -- there are a lot of companies that aren't forecasting that at all.

Oh, yes. For sure.

And we're trying to kind of feel our way through an environment that is full of uncertainties. And we've put numbers out there and we've just said, look, if this is how we see it, and as we see it differently, we'll adjust the numbers. And I think that's all we can say about that. And we're giving you our best guess right now.

And I guess that would be the same for the second half of the year then, too? This kind of --?

Oh, yes, absolutely. Admittedly it is. Yes.

Okay. Okay. Yes. Because when we look at the thing, it kind of says you have to have a good pick up in the second half as well.

No, that's right.

Yes.

That's right.

And certainly, too, that's a possibility given where -- how PEP is cut. At least sort of snap it. As far as your EBIT margins going forward, you really did a good job in this first quarter on managing through the portfolio -- through the difficult time in the -- and sustained those things. How do you see -- what kind of vulnerability would you have to do -- EBIT margins if pricing would get weaker versus some of the cost initiatives that you're taking underway due to the lower costs in this kind of environment? And can they go higher next year? Or from these levels?

Well, they can go higher or they can go lower.

I'm just wondering, with some of the economics of maybe getting them -- I mean, can pricing really hurt the EBIT margins over the balance of the year?

Oh sure. Oh, yes. Because pricing has an effect on revenue. Yes, yes, sure it can. But we're trying to maintain margins by taking costs out right now. And if you continue to see revenue go down and the margin gets more challenged. If revenue goes up, then margins should expand if you can continue to control your costs.

So, I think if I was to summarize from the probes I've been putting in here is pricing is going to be a really critical path to where the earnings come out this year and what potentially could be the direction of EBIT margin. Because if right here, right now, at these levels you have to assume margins -- volumes have to go up, but the key factor from your uncertainty point of view would certainly be more pricing than it would be volume maybe?

Yes, I think that's what we're saying.

Okay.

I think you've got that right.

Thank you.

Yes.

Our next question comes from Charles Rupinski from Maxim Group. Please go ahead.

Hello everybody.

Good morning.

Good morning. I just had a question on, when you talked about both for Kirby and for the industry, sticking out of capacity, sidelining capacity, given the weak environment and lower utilization, just trying to get an idea of how much of that would you think about both from Kirby and the industry would be permanent capacity being taken out, meaning vessels are scrapped or reutilized in another form, and how much of it would be just taken temporarily or moth balling or laying off? Is there a way to think about that?

Well, I think it's -- it -- you get into kind of your view of the recovery and what GDP growth is going to be over the next several years. I think that -- I hate to give a view on that, but I think that capacity is going to have to come out to get utilization to levels that support price stabilization and some pricing on the upside.

Okay. And I guess one quick follow-up. Most of my questions have been answered, but I'm just curious. On an order of magnitude, if any, as far as your end-markets are concerned, there's talk about General Motors, for example, having a sort of taking the summer off on manufacturing. I mean how much, if any, impact would that have on your end-users?

Well, it'll have some impact, but the current housing business has been down for awhile. So, yes, I would say the impact isn't going to be that significant. I think that most of that is already in the volumes that we're carrying.

Okay. Well, thank you very much.

Sure.

Our next question comes from Gregory Macosko from Lord Abbett. Please go ahead.

Yes. Thank you. Yes. Could you talk a little bit, go back to the fleet and the purchases and the expectations for this year and next year in terms of your adding to the equipment? I guess I wasn't clear on the discussion of depreciation with regard to cash, et cetera. It would seem that if you held onto the existing boats at -- or barges at this point, that the return on capital might be better relative to other things and perhaps it would make sense to push that out. Discuss that with me. Give me a feeling for why kind of continue to add to the new fleet.

Let me just -- Greg, let's just make sure we understand your question. You're asking why would you retire equipment?

Yes. Exactly. That's the point. Yes.

Yes. It -- we think that the industry needs less equipment that the roughly 3,050 barges that are out there, if you're at 80% utilization, you're over, probably, let's see here, 10, probably 450 barges long right now. No, we don't think that that's going to continue. We think that volumes will improve and absorb some of that capacity.

But right now, any incremental capacity that is added is a barge that is not going to be absorbed. And that the capacity's going to have to leave the system for us to get back in balance and that's something that the industry is just going to have to reckon with.

With respect to our fleet, we're just going to kind of maintain the status quo for right now. And we'll have slightly over, at least current planning, slightly over 900 barges. At the end of the year, which is about the number that we started at the beginning of the year. If we're going to take any additional capacity out, those decisions are going to be made based on where we're seeing the market going.

But you did say that you had considered pushing some out? I mean I'm not suggesting that you add capacity. I'm just suggesting that why not just keep the same boats, which I would assume would have a lower depreciated value just --

Right.

The return on capital would be higher. But is there -- are you forced? Are there penalties or things?

Yes. No, you're going to have to maintain them. And you're going to have to spend, in some cases, some significant amounts of money to maintain them. Remember, these are inspected barges. Your older fleet, you just tend to spend more money per barge. The younger fleet, yes, you have more depreciation, but you're spending less maintenance money.

Is there any other -- any single skims left at all? Or --?

No. We have five -- they're all gone, aren't they? The end of this year? They're not -- they're --

Within the next two.

Within the next two years of being --

Okay. So, it's basically a cash flow issue. In other words, you'd spend more on maintenance as opposed to spend it now and trade out the old one and your -- the argument then is the return on capital would be about the same?

Well, the -- I'm not sure we've done the calculation, but it -- from a cash perspective, you're going to be better off taking the new equipment and not spending money on the older equipment.

Yes.

You're spending money on barges that are about to be retired, one way or the other.

I see. Okay. And then, just the -- just talk if you would, please, a little bit about the diesel transport area, where you talked about engine modification. You remain strong. Just give me some color on that market, I'm just curious about that.

Well, in the marine business, you're overhauling engines. And in the power generation business, where we're actually building some new units, we would describe that a little bit different. So, it depends on kind of where you are in that business. We do both.

And so, there's more of that perhaps? Because people are a little bit idle, so they figure they'll fix some equipment now that it's not as busy? Or --?

Well, no, no. They're going to defer it, Greg. What we've said is that we expect, certainly in the oil service business, that the customers are going to defer more maintenance than they're going to do. But having said that, I mean, there is some sustainable maintenance that you've got to do. And we hope we've forecasted that into --

So, basically maintenance business that you figure will pick up to some extent after having fallen off pretty sharply in the fourth and first quarters?

Well, what -- they'll defer maintenance and then as business comes back, then you're really busy because you've got all this equipment sitting there that is -- has been deferred. So, you've got to do it to put the equipment, yes, back in that -- in the business.

Good. Good. Thank you, gentlemen. I appreciate hearing all the color to what's going on out there.

Okay. Thank you. Thank you.

John, we'll take one more call, please.

If there is one.

Yes.

We have no further questions at this time.

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

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may all disconnect.