Kirby Corp (KEX) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Kirby Corporation Third 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 participating in our third quarter call. Joining 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 risk 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.

Okay, thank you, Steve.

Late yesterday, we reported net earnings for the 2009 third quarter of $0.65 per share with -- compared to $0.77 per share reported the same period last year. Our announced earnings guidance for the third quarter was $0.62 to $0.67 per share.

For the first nine months of this year, we earned $1.79 per share compared with $2.19 for the same period a year ago.

During the third quarter, our Marine Transportation petrochemical demand for more finished products, which is typically what we move up into the Midwest, continued to improve modestly, driven, we think, by inventory rebuilding, while the rest of our business -- that's the canal, petrochemical, black oil, and refined products markets -- stabilized but stabilized well below prior-year levels.

Weekly overall barge utilization during the quarter ranged up and down in a range of 80% to 85% but well below where it was last year. Last year, it was in the 95 -- excuse me, 90% to 95% range. Our average for the quarter was more on the lower end of the range in the low 80% level.

During the third quarter, we maintained our revenue to spot mix at 80% term, 20% spot, really consistent with the first half of this year and last year.

Pricing for our services has continued to deteriorate as the year has progressed, driven by low barge utilization, which was caused by excess industry capacity.

During the first quarter of this year, we generally were able to renew our contracts at the same rates, and in some cases, as we reported earlier, we traded rate for more term, more contract term.

During the second quarter, term contracts were generally renewed at flat to about 8% lower, and spot market rate declines were down 10% to 15%, which includes fuel, when you look at it on a year-over-year basis.

During the third quarter, contracts which renewed -- were renewed at rates between 7% and 15% lower, and spot rates declined in a range of 10% to 20% lower, which again includes fuel, and again, these are year-over-year comparisons.

Time charter or day rate contracts, which reduce revenue volatility, caused by a number of factors, including weather and navigation delays, as well as the volume declines, were about at the same level as they had been all year. 54% of our contract revenue remains under time charter.

Now, we do expect time charter contracts to decline as we go forward as customers size their time charter demands with what their volumes require and as they gain comfort that they can get coverage in the spot market.

While our marine transportation revenues declined $59 million during the third quarter and for the first nine months by $166 million when compared to the same periods a year ago, approximately $25 million, or 41%, of the third quarter revenue decline, and $63 million, or 38%, of the first nine-month revenue decline can be tied to the price of diesel fuel, which is passed through our contracts using escalation and de-escalation clauses that are embedded in the contracts.

We did experience favorable weather conditions during most of the third quarter and for the first nine months of this year, evidenced by a 52% reduction in third quarter delays for the first nine months, a 46% reduction when compared to 2008 numbers. Now, this is unusually good weather. However, remember that in the 2008 third quarter and for the first nine months of last year, embedded in our delay days were the effects of the two hurricanes, Hurricane Gustav and Ike.

The lower delay days in 2009 did help reduce our operating expenses, helped us operate more efficiently, and offset some of the financial impact of lower rates, but it also creates more barge days, which drives down utilization and has a negative effect, in fact, on rates.

We also continue to reduce the number of towboats we have in our system. Historically, about 70% of our power is owned power, and about 30% is chartered. Charter power gives us a lot of flexibility to grow our business when business is strong and contract when it's weaker.

During the first, second, and third quarters, we're able to take out a significant number of charter boats and to eliminate the cost associated with these boats. Now, we've also idled 15 owned towboats since the beginning of the year, and we were able to reassign the crews to other owned Kirby towboats.

This may be more information than some of you want, but for those that do follow our towboat count, in the third quarter, we operated on average at 215 towboats; in the second quarter, 219; and in the third quarter -- excuse me, in the first quarter, 232 towboats. This compares with an average of 255 operated third quarter of last year and 258 for the first nine months of last year.

This year, we've taken delivery of 44 new tank barges, but as we've done that, we've also retired 85 tank barges. We continue to retire more tank barges than we're building as we have -- or now at a barge count of 874 barges as of the end of the third quarter. This compares with 894 end of the second quarter this year, and if you go back a year ago to the end of the third quarter a year ago, we operated 915 barges.

At the present time, the industry does have too much capacity. This year, we estimate that about 180 barges will be delivered. There were somewhere between 180 and 200 barges actually on order this year. All of these orders were made when business was a lot better and the barge fleet was fully utilized and you had to wait in line to order a tank barge.

We think that as these new barges are being delivered that the industry's going to begin to take out older capacity, and we believe that just given the expense of operating older barges, that this will happen more rapidly next year.

Moving to the Diesel Engine segment of our business, during the third quarter, demand levels for service and direct parts remained under pressure as both our medium-speed and high-speed offshore oil service customers, as well as our Marine Transportation customers -- and when we say Marine Transportation, in this context, it's the tug and barge industry, both inland and offshore -- and some of our rail customers continued to defer maintenance as they idled equipment in response to the lower utilization levels.

Our power generation business remained stable. This is the bright spot in this business. And we do feel that with respect to the Diesel Engine side of our business, that we are getting to the bottom of -- at least in this business cycle, there's only so much equipment that you can defer and that we anticipate that in 2010, we'll see some improvement in this business.

I'm going to come back and talk about the fourth quarter outlook and the full-year outlook, but before I do that, let me turn the call over to Norman and then to Berdon.

Good morning.

Although Kirby's Marine Transportation operating income was 11% before the third quarter last year, the operating margin of 25.3% was higher than the third quarter of last year of 22.7%. The higher margin benefited from the impact of lower fuel prices, the first quarter staff reductions, fewer charter boats, better weather, and greater efficiency at the lower operating levels.

The Diesel Engine Services business operating income and operating margin were lower than last year and the previous quarter. Deferred Diesel Engine maintenance projects, which Joe talked about, resulted in lower labor utilization in most areas but especially in the domestic offshore oil service market.

Our fourth quarter earnings guidance anticipates that Marine Transportation margins will be similar to the margins in quarter four last year and that Diesel Engine Services margin will be below those of the fourth quarter last year.

We had another strong cash flow quarter, and we repaid the remaining balance on our bank revolving credit facility. We also had $40 million of cash at the end of the quarter.

Our capital spending totaled $163 million for the first nine months, and our guidance for the full year 2009 is now $185 million to $195 million. Even with the new 2010 barge construction plans, which Berdon will discuss, we anticipate significantly less total capital spending in 2010 than in 2009.

I'll now turn the call over to Berdon.

Good morning.

During the first nine months, we took delivery of 37 new barges and 7 new chartered barges with a total capacity of 974,000 barrels.

As of September 30, we owned or operated 874 active tank barges with a capacity of 16.8 million barrels. We also took delivery of three 1,800-horsepower towboats.

During the 2009 fourth quarter, we expect delivery of an additional nine owned barges with a capacity of 217,000 barrels and one 1,800-horsepower towboat.

Two 10,000-barrel barges, one 30,000-barrel barge, and three 1,800-horsepower towboats have been pushed into early 2010 for delivery.

Based on current market conditions and fleet utilizations, as Joe stated earlier, we have accelerated the retirement schedule of some of our older tank barges. We anticipate our total barge count and capacity at the end of 2009 will be where it is today or lower.

For 2010 to take advantage of attractive barge construction prices and to continue to upgrade our fleet, we will build 50 10,000-barrel and five 30,000-barrel tank barges.

Based on current economic conditions, we are forecasting that at the end of 2010, our barge count and capacity will decline slightly as we continue to remove older barges from the fleet.

I'll now turn the call back to Joe.

Okay, thank you, Berdon.

Yesterday afternoon, we announced our fourth quarter guidance of $0.57 to $0.62 per share, which compares to $0.72 per share earned in the fourth quarter of 2008.

We're encouraged that our demand for more finished petrochemicals into the Midwest continues to trend up modestly and that transportation markets have generally stabilized.

We do not expect or we're not planning on a rapid economic recovery. We're encouraged that our customers are generally being more optimistic with respect to their 2010 volumes.

Barging rates have been under pressure all year and will remain under pressure until the demand for barges improves or barge capacity is removed from the industry. We believe this will slowly occur as the economy improves and/or older barges are retired.

During 2007 and 2008, strong market demands encouraged keeping older barges to meet that demand. Today, over 500 barges in the industry are 35 years or older. Older barges cost more to maintain. Improved volumes and tank barge fleet reductions will result in higher utilization rates, which should lead to stable contract and spot pricing. Till this happens, and it will happen, barging rates will remain under pressure, but this will indeed change.

In regards to our fourth quarter guidance, our low-end guidance is -- of $0.57 assumes volumes will be consistent with the third quarter of this year and will be impacted by poor operating conditions typically experienced in the fourth quarter. The high end of our guidance, the $0.62, assumes volumes will continue to improve modestly and that the winter is relatively mild.

For the 2009 year, based on our fourth quarter guidance, we're lowering our year-end guidance slightly to $2.37 to $2.42.

Kirby has a strong balance sheet, low debt levels at favorable interest rates, a very low debt-to-total cap ratio, and strong cash flow.

We will announce our 2010 earnings and capital expenditure guidance when we announce our fourth quarter results in late January 2010. However, we're currently estimating our capital spending for 2010 will be much lower than 2009.

Because of the age of the industry fleet, the high cost of maintaining older barges, we believe the capacity will come out and supply and demand will balance sometime next year. The economy improves and volumes become stronger, supply and demand balance will occur sooner.

Kirby's in great shape, very strong cash flow, a strong and loyal customer base, and a great balance sheet. Industry stress is not necessarily bad for Kirby. Stress creates opportunities to grow either through acquisition or organic growth. It allows us to take advantage of favorable shipyard pricing, and it positions us for a strong performance as we return to more normal market conditions.

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

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

The first question is from Jon Chappell from JPMorgan. Please go ahead.

Thank you. Good morning, guys.

Morning.

Joe, my first question's about the pricing and the impact that the fuel surcharges are having on that. Is there any way to quantify how much of the pricing declines that you mentioned earlier in the call were related to fuel?

And as we think about your 4Q guidance and where fuel prices are today, I would think that the comparisons are much easier year over year.

Jon, with respect to contracts, fuel is essentially neutral. There's some delays depending on the direction of fuel prices that you'll see from a quarter-to-quarter basis, but fuel is generally over time neutral with respect to contracts.

Now, in the spot market, it's about half fuel. If you look at the rate declined year over year -- on a year-over-year basis, you were looking at fuel, I think, close to $4 a gallon at this time last year, and today, it's a little over $2 a gallon.

And if you'd look at fuel as it applies to contract revenue, we said that 41% of the revenue decline was fuel related in the third quarter, and for the first nine months, it was 38%.

Okay, that's helpful.

And my second question just has to do with some of the opportunities you mentioned, both in your comments and the press release. If you can just give us a little bit more information on how you came about to these 50 10,000-barrel barges and the other five 30,000-barrel, was that a situation where a yard came to you directly because they knew that you were in the best financial position to make these and, therefore, gave you more attractive pricing than you may have been able to achieve in the last couple years?

Well, let me put it this way. I think that the equipment that we're building is attractive really both for us and the yard that -- the yards that are building it. There's more than one yard. Steel prices are down. Utilization in shipyards are down, and what we were trying to do was really negotiate a win-win kind of situation where the shipyard could continue to build barges and maintain their labor force and we could get barges or build barges at attractive prices that really allowed us as we ran repair/replace kind of analyses to replace and not repair particularly older barges.

So this is a good time for us to do this. We have the cash, we have the need, and I think it works for the shipyards involved, also.

Okay. Thanks a lot, Joe.

Thank you. The next question is from Alex Brand from Stephens. Please go ahead.

Thanks. Good morning, guys.

Good morning.

Morning.

Joe, I guess I was a little surprised to hear that contract renewals were down quite as much as they were in the quarter, and I'm wondering, is there a perspective on that that maybe you were renewing some contracts that had really attractive prices so this is unusual?

So can you comment on that trend? I mean do you really think it would be any worse, or are we probably stabilizing here, and was there anything unusual?

Yes, we like to think that all our contracts are attractively priced, but I think you're coming off of really 2008 highs, Alex, and there is a lot of pressure.

Now, I sense -- and I'm really speaking. I think -- let me say we sense, because I'm speaking for Kirby, that contracts are getting near the bottom; maybe in some case, in fact, are at the bottom.

You've had a -- we've just gone through a period of significant declines in utilization, and the industry is adjusting to that. I think individual operators are making decisions with respect to how aggressive they want to pursue volumes.

Having lived through this before, I've seen this before. Next year, with the basic assumption that the economy is stabilized and it's going to get gradually better, I think that there will be a more rational kind of approach to how you -- how aggressively you go after business and how aggressively you protect your business, so if there's anything positive that's coming out of this is that these pricing levels are going to drive out the barges, particularly older barges, and as you get more balance between the actual demand and the number of barges out there, you'll stabilize, and I think then turn to a slightly positive, frankly, pricing environment.

But there's a period -- and, I mean, you know this -- there's going to be a period that we're going to have to get through before that's going to happen.

Right. And so, clearly, it's tied to utilization, and I guess if I recall at last quarter's conference call, I think you felt like utilization was maybe more towards the 85%, and you felt like maybe it was getting a little bit better. But it sounds like there was no trend there and it went back and forth and maybe weakened a little bit in the quarter. Can you comment? Was there a trend there, or is it just really stable and waiting for improvement?

To be honest, I don't remember what we said last quarter. I think we said it was in the 80% to 85% range. I don't think utilization has gotten any worse. In fact, I think with respect to upward movements, we're seeing it get a little better.

I think what distorts some of the utilization is the number of time charters that customers took on when they couldn't get coverage, and that will distort industry utilization because it's equipment that's under contract but it isn't necessarily being used. So as that equipment, or at least some of it, gets turned back, you do get pressure on industry utilization.

All right. I appreciate the time, Joe. Thanks.

Yes, thank you.

The next question is from John Barnes from RBC Capital Markets. Please go ahead.

Hey, good morning. A couple of questions real quick.

Could you talk a little bit about -- you know, just along those same comments on pricing, do you have a feel for -- maybe what -- taking out the shift away from the time charter business and kind of the mix shift in your contracts, do you have a feel for just kind of what core pricing might look like, what kind of a decline in industry or overall kind of core pricing might be, or is that just too difficult a number to get to?

Well, year over year, Joe?

Yes, just year over year.

Yes. You know, it's difficult to get to because as you renewed during the quarters this year, you renewed at probably slightly stronger rates in the first quarter versus where we are today, but I'd say rates are down -- well, we have a certain amount of our business that just doesn't come up for rate renewal until some of it, 2013, 2016, so you have to take that out.

I know what -- you're trying to get a number, I assume, that you can apply to a model, and --

Well, I'm just trying to understand if you didn't have -- you guys had a surge in the amount of business that you did under time charter which was abnormally high, and now you're getting a reversion to maybe more of the mean there. You had pricing kind of in 2008 that was much better than it ever had been in the industry.

I'm just trying to get an understanding for if you had to look at it and say, hey, taking all these other factors aside, just our core price is either what we could go out and charge in a normalized environment is kind of X, and all this other stuff is the extra. That's all I'm trying to get to. I'm not even trying for a model reason. I'm just trying to --

Yes, I understand. I think I'm going to go back to your initial qualifier. That's a hard number to get.

Okay. All right. I'll let you off the hook on that one.

Okay, thank you.

Can you talk a little bit about -- I think Alex asked the question last quarter about if volumes began to rebound, with the amount of costs you've taken out, could you realize some kind of outsized margins for a couple quarters before the volume-related costs began to tick back in? I'm just kind of curious. Could you talk a little bit about how much more business, how much more revenue you could do in the transportation side given the current staffing levels, given the current towboat levels and that type of thing before you'd have to begin to add those things back in?

You'd have to add towboats almost immediately.

Okay.

The increased utilization is going to mean more barges working, and you have to have the power to move the barges.

But in terms of G&A, I think that you could see revenue up probably 10%, maybe even 15% without adding a lot of incremental G&A.

From current levels?

Yes. So I do think that you'd get a margins bump there. But I would caution you that during this period that we're talking about, it's remarkable that Kirby has held on to its margins, and it has a lot to do with partly driven by fuel but also by the management team here working very hard to take costs out of the business and making the fleet as efficient as you can make it.

Having said that, with these kinds of pricing declines, you are going to get pressure on margins. So I don't -- I do not expect that, at least for the first part of 2010, that we're going to enjoy operating margins as high as they are now.

Okay. All right. Very good. All right, guys. Thanks for your time. I appreciate it.

Thank you. The next question is from Natasha Boyden from Cantor Fitzgerald. Please go ahead.

Thank you, Operator. Good morning, gentlemen.

Good morning, Natasha.

Want to just get a little bit more clarity. In the release, you said that your Diesel Engine Service segment had been impacted as customers defer maintenance as a result of this recession. I'm curious as to how long such maintenance can typically be deferred, and could we potentially expect to rebound in 2010?

Yes, I think there's -- you're getting to the bottom of that. You're going to have to start doing the maintenance, and we do expect some improvement in 2010.

What will drive that business probably more than anything is a resurgence in the oil service business. Now, we are not forecasting that to occur early in 2010, and it's going to be more driven by, frankly, the price of natural gas, but there is a building consensus that that business is going to improve towards the latter part of next year.

Okay. So I mean would these customers be able to hold off their maintenance through to the end of 2010, or is that just not possible with [inaudible - multiple speakers]?

No, they're going to have to start maintaining some of that equipment.

Yes?

Yes.

Okay, that's helpful. Just given your level of understated capex in 2010 [inaudible] about 60 million, and obviously [you want it] to be low leverage levels, how do you look at the use of cash flow going forward? I know [inaudible] to look at asset values, looking at share repurchases, [inaudible] dividend, any of those things, have you kind of thought about maybe priority?

Well, yes, certainly acquisitions are top on the list. Where we can opportunistically buy back our stock, we'll do that. Dividends -- you know, I think the cash flow characteristics of Kirby certainly long-term support a dividend, but these are unusual times, and the opportunities that could come forward, I think, suggest to be that we keep our cash, we keep the balance sheet strong, and that we're able to react to opportunities if we see them.

And when you say opportunities and acquisitions, I'm presuming -- correct me if I'm wrong -- that you mean in both the Diesel Engine Services and Marine Transportation?

Yes.

Okay. And what are asset values or acquisition prices? How have they been trending? I'm presuming lower, but --

Yes, you know, I'm not -- we've said in previous calls we think that -- we think it's too early, that this business is under pressure, and it really started to go under pressure late last year and in the first quarter. So we're not predicting that anything necessarily is going to happen in the next quarter or even next six months, but certainly, the environment is more favorable.

With respect to acquisition pricing, I think it has to do with your long-term view of the market. Typically, assets have sold in the kind of 5 to 7 times EBITDA, the multiple range based on kind of the long-term view of the business, which is certainly better than it is today.

Where those prices have gotten distorted a little bit, I think, were some of the acquisitions that were made in the last 24 months. And are those new price levels? I don't think so. I think that you -- that those are, in fact, anomalies and that you'll go back to kind of more traditional historical multiples.

Okay, great. Well, thank you very much for that.

The next question is from Kevin Sterling from BB&T Capital Markets. Please go ahead.

Hey, guys. This is [Brad Travlion] for Kevin Sterling. How're you doing this morning?

Fine, thanks.

I know you guys made some comments about you're seeing continuing decline in your fleet, and I just wondered if you could add some color of what trends you're starting to see in the industry as a whole as decline in fleet goes.

There is no real visibility yet on that. There will be, I think, when the survey is done early next year. When we say we think that the industry capacity is going to decline, it's based on really the historical observations that we've made during periods like this.

Okay, great, and thank you. And just one quick follow-up [inaudible]. What's your current spot to fix contract ratio right now?

The ratio is -- you're talking about term versus spot?

Yes.

Yes, it's 20% spot, 80% term.

Okay, great. That's all I have for you guys. All my other question answered. Thanks.

Okay, thank you.

The next question is from [Jimmy Jiper] from Rice Voelker. Please go ahead.

Hi, Joe. How are you?

Hi, Jimmy.

You said that in the press release that you thought your refinery and petrochemical customers appear to be more optimistic for 2010, and can you tell me how much of the refinery capacity that was shut down after Hurricane Ike last year, how much of that has come back into service, do you think?

I think most of it's back.

Okay.

Yes.

And the third quarter --

I can't think of anything, in fact, that's not back right now. I think it's back. Now, there have been, Jimmy, some chemical plants that have been closed, but they're well publicized, and those have happened really in the last six months.

Okay.

Yes, since Ike and Gustav.

Now, as I recall, the third quarter guidance that you gave didn't -- I think you said it did not include any allowances for bad weather, which, I guess, in the third quarter would have been hurricanes, which we didn't have any.

Yes.

So now as we go forward to guidance, is that going to include -- I remember you used to build in some allowances for high water, low water, and high wind conditions and things like that. Are you all building weather conditions into your guidance now? Are you still doing that or not?

Well, it depends on the quarter, but in the fourth and first quarter, we'll build that weather -- some weather into our earnings guidance. In the range that we gave, the $0.57 to $0.62 range, in the $0.57 range, it really looked at typical kind of poor operating conditions associated with the fourth quarter. If you didn't get those, what we said was certainly part of the rationale for the higher end of the range would be better weather.

Okay. Thanks a lot, Joe.

Welcome.

The next question is from Chaz Jones from Morgan Keegan. Please go ahead.

Hey, good morning, guys.

Morning.

Morning.

Hey, Berdon, congratulations on your retirement announcement.

Well, thank you. Thank you. I'm still going to be involved, but I'm looking forward to having a little more time.

Well, great.

First question I had, Joe, just given where pricing is, have you seen more customers come to you about locking into multi-year contracts?

Well, there's some discussions about that. Of course, in this kind of market, you'd prefer not to do that.

But there is some discussion out there?

Oh, sure, yes.

Yes. Okay, and then the second question I had, if you could answer this, certainly I know steel prices are in play, but could you give us a sense for how much new construction costs are down just in terms of a barge build?

Well, I want to be careful how I answer this, Chaz, just in full disclosure because the individual prices that we pay for barges are between us and the shipyard.

Sure.

We don't talk about them publicly. But prices are -- you were building barges last couple of years probably at prices that were 40%, maybe more, higher, in some cases.

Okay. And then one quick follow-up. The D&A looked like it inched up here a little bit in the quarter. Anything to that?

I'm looking at Norman.

Depreciation jumped up a little bit, Chaz. We reduced or lessened the expected lives on some of our older equipment, which we will retire sooner than we would have when we had a really hot market. So depreciation was, oh, between 2 and $3 million higher in the quarter than it was the previous quarter.

So could we expect that for maybe a couple more quarters until some of that new equipment comes in in 2010?

Yes, it will probably taper off a little bit. The new equipment will come in.

Okay, great. I appreciate it, guys.

The next question is from [Mike Boddenstill] from Stifel Nicolaus. Please go ahead.

Hi. Good morning, gentlemen. I had a question on when you talked about the contracts being lower, the renewals down 7% to 15%. I was just wondering what -- explain that large of a range. Is it simply volume and duration? Is there more to it than that? And kind of where were the Dows and the Exxons of the world in that range?

Well, no, Dow and Exxon are not in that range because we have long-term agreements.

They're all on the long-term agreements?

Yes.

Okay.

And when we talk about it, it's principally price. There are some terms that, of course, get renegotiated, but the main driver is price.

Are the larger customers down towards the lower end of that range, near the 7%? Is that a good way to think about that?

I'd rather not comment with respect to any group or any specific customer.

Okay. And then a question on the DES segment. Is there something you can do kind of, say, over the next business cycle to lessen the economic sensitivity of that segment? Is there something strategic you could do?

This is the Diesel Service --

Yes.

-- Diesel Engine Service segment?

Well, that segment is going to be driven more by utilization than rates, and what we have been doing over the past several years is trying to have -- to codify some long-term relationships with service agreements.

But I mean, frankly, we're not unhappy given this environment with margins in the 10% to 11% range. Think that that is pretty good execution on their part.

We continue to fine-tune the cost of that business, and we're always looking for opportunities to reduce cost but cognizant, also, that you want to be able to respond to where you think your business levels are going to be in the future.

I don't know if that answers your question but --

Yes, it does.

Okay.

Okay, those are the questions I had. Thank you.

Yes, thank you.

The next question is from David Yuschak from SMH Capital. Please go ahead.

Good morning, guys.

Morning.

Hey, just, Joe, on your comments about some of your expected expenditures in 2010 to replace some of your aged fleet, would you -- would it kind of suggest that for the most part after you get this particular spending done in the first half of 2010 that for all intents and purposes except for at the margin, most of your fleet is on an average age where you want it to be then?

David, I think that we're going to use this opportunity of attractive shipyard barge-building prices to continue to selectively replace certain parts of our fleet.

Our age profile -- if you take out the specialty equipment, these are pressure barges where the tanks which almost have an indefinite life are really at the age that we present as the age of the barge have had really new hulls built around them. So we don't say they're new barges; we continue to report them as older barges. But if you take that out, our age profile is around 20 years, and it's trending down, and we want it to continue to trend down.

But, having said that, we're going to be prudent in the way we deploy the capital, also. We don't want a brand new fleet, but we don't want an old fleet either.

So 20 years, that would probably be -- you'd have to feel very comfortable, though, that that's a good place to be right now.

Oh, it is.

Okay.

And it -- newer barges for a period of time cost less to operate, and we just -- there is a unique opportunity to replace some equipment at very attractive prices that won't be forever, and Kirby is really one of the few companies in the industry that can take advantage of this opportunity, and we're doing so.

Now, would that kind of suggest then that your capital spending will be more front-end loaded next year then and back-end loaded as you take on this initiative?

No, because the barges are going to be delivered over the year.

Okay. And then just one last question on the diesel services, the kind of drop in revenue. Did it kind of catch you by surprise that that could've dropped that much and that's what kind of maybe you're beginning to take a more serious look at what we need to do to maybe take out some incremental costs?

Well, no, we've been looking at what we need to do for a while. I wouldn't say it necessarily surprised us. That business is under pressure. There's been a lot of equipment that would normally be maintained that hasn't been maintained.

I think on the positive side, though, is that when you defer maintenance, you build backlog. You just don't know when you're going to get it, get backlog.

Okay. That's it for now then. Thanks.

Thank you.

The next question is from Justin Maurer from Lord Abbett. Please go ahead.

Morning, guys.

Morning.

Morning.

Joe, just to follow up on Dave's question about industry utilization or industry capacity, you know, as you said, you guys will maybe down a little bit next year and you hope the industry maybe follows to a certain respect, but if the economy's improving, what have you found kind of historically? As we go into an up cycle, I would think if folks have stuff there kind of idle or just sitting, and even though it's in the latter days of its life and sorry shape, they may try to push that into service a little bit just to kind of squeeze a little bit out of an improving environment and particularly if it's fully depreciated.

So do you think there's kind of a little bit of a lag in some of the improvement to you guys or the industry because you got some stuff sitting that would be pushed back into service pretty quickly or--?

Well, I think what's different here is that the fleet's really older than I think it probably has ever been in the history of the barge business. You have 500 barges that are over 35 years old, and that equipment is expensive to operate, and unless utilization rates go back to the high levels that they were at, let's say, 15 to 18 months ago, I think equipment's going to continue to come out.

As we look at the business, we're not forecasting a rapid return with respect to our volumes. We think that the volume's increases are going to be, frankly, pretty modest and that the fleet is going to be balanced based on capacity coming out and some modest increase in volumes.

Where we have alluded to that happening quicker is if IMs actually recovered quicker. But, intuitively, I don't think that that's going to happen.

And for the laypeople on the call here, what is it about barges of that age that make it more expensive, like you said earlier?

Yes.

It's kind of a maintenance issue, but is it engineering, too, in terms of the accessibility of it to goods being put on board, or what--?

Well, these are certificated barges that have to have a valid certificate to load the cargoes that are loaded in them. And the certificate is issued by the Coast Guard, and the Coast Guard inspects the equipment to a standard.

An older barge is going to have more worn-out parts to it. It could be a bottom or a knuckle, which is the transition from the bottom to the side or the side to the deck, could be worn, doesn't meet the plate thickness specification that's in the standard, causes it -- the Coast Guard says you've got to replace that. That's expensive to do, and where you're talking about investing major money in a barge that's 35 years or older, you typically just don't do it because the rates don't support getting the investment back over a reasonable period of time.

Okay, okay.

That's kind of how it works.

I got you. And sorry if I missed it, but you talked last quarter about utilization last quarter first half, maybe it was running in the 80s on the low and mid-80s in the high. Did you give that for this quarter and kind of thoughts for the rest of the year?

Yes, we said the range was 80 to 85%, but for the quarter, it was in the low 80s.

Okay.

Yes, there are weeks where it's going to be higher or weeks where it's going to be lower, but the mean is low 80s.

Okay. And same expectation for the fourth quarter?

Yes, we think that volumes have stabilized and that utilization, because that's what drives utilization are the volumes, that utilization for the most part's stabilized.

Yes. And then last one on pricing. Sorry if I missed this one, too, but you talked about contract being down 7 to 15 after being down -- flat to down 8. Did you mention spot at all because I think last quarter --

Yes, we said 10 to 20%.

All right, so a little bit worse.

Right.

Is that largely fuel? I think last quarter you said half of that's fuel. Is that --

Yes, I would say about half of it's fuel again because fuel was almost $4 or about $4 this time last year. Today, it's slightly over 2 bucks.

Okay, great. Thanks a lot.

Welcome.

We have no further questions at this time.

Well, we certainly appreciate your interest in Kirby and for participating in our call. If you do have any additional questions or comments, you can 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.