Kirby Corp (KEX) 2010 Q1 法說會逐字稿

Welcome to the Kirby Corporation first quarter earnings results conference call. My name is Anthony, and I will be your operator for today's 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 would now like to turn the call over to your host, Steve Holcomb. Mr. Holcomb, you may begin.

Thank you for joining us this morning. With me is Joe Pyne, Kirby's Chief Executive Officer, and David Grzebinski, our Chief Financial Officer.

During this conference call, you may refer -- 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, 2009 filed with the Securities and Exchange Commission.

I will now turn the call over to Joe.

Thank you, Steve. Late yesterday, we reported net earnings for the 2010 first quarter of $0.46 per share, compared with $0.52 per share reported for the 2009 first quarter. Included in our first quarter results was a previously announced $0.05 per share charge for retirements and shore staff reductions. Our 2009 first quarter results also included a $0.05 per charge for early retirements and shore staff reductions.

Our announced earnings guidance for the first quarter was $0.42 to $0.47 per share, and included an estimated $0.04 per share cost for shore staff redundancies. The actual charge that we incurred in the first quarter was slightly higher, a $0.05 charge.

During the 2010 first quarter, our marine transportation volumes improved compared to both the 2009 first and fourth quarters. Our barge utilization for the first quarter, which is always impacted by weather, averaged in the mid-80s to high 80 range, above all four 2009 quarter levels, and frankly, better than forecasted.

In addition to increased petrochemical production, improvement in our barge utilization level was also helped by some supply chain disruptions caused by petrochemical and refining plant turnarounds, as well as some unscheduled plant maintenance. Higher volumes were also driven by improved demand for exported petrochemicals. US petrochemical complex is enjoying a feedstock advantage today due to a relatively low natural gas cost in the US compared to current crude oil prices.

During the first quarter, the term contract portion of our revenue mix remained at about 75% contract, 25% spot. Time charters represented a little less than 50% of total term contracts compared to the 52% time charter mix we reported in the fourth quarter. While some customers have switched to spot [of freight] in the contracts when their time charters have expired, others have just taken the shorter charters of equipment, as they're not ready to commit to longer term positions at this point.

With improved volumes and resulting higher barge utilization rates during the first quarter, we did see pricing stabilize. Some contracts were renewed during the first quarter -- that renewed during the first quarter, generally decreased, on average, approximately 10% when compared with the term contracts that renewed first quarter of 2009, with some firming in the contract areas as the quarter progressed.

Spot contracts were -- contract rates for the first quarter, which, of course, include fuel, and fuel was higher, were down 15 to 25%, compared with the first quarter spot pricing. But when compared to the fourth quarter, we're up 3 to 6%. Again, this represents, I think, the stabilization of pricing in our business.

With respect to the multi-year contracts that are typically renewed first of the year and escalated first of the year, these are contracts that don't expire in any given year, they're escalated for labor and either the producer price index or the consumer price index, these -- the pricing was neutral for 2010. Typically, in previous years, we've gotten anywhere from a 3 to 5% increase.

The tank barge industry still has some excess capacity. Certainly the demand that was experienced 2007, 2008, encouraged the industry to build new equipment. But also it encouraged the industry to keep older equipment in service, which typically would have been retired, to meet the higher demand levels. In 2009, 192 tank barges were delivered. We estimate about 140 barges were retired in 2009, for a net addition to the industry of about 50 barges.

As of the beginning of 2010, we estimate there are approximately 3,150 tank barges in the industry, of which 500 are 35 years old and approximately 250 are 40 years old. For 2010, we believe that less than 100 barges will be constructed. Of those less than 100 barges, 58 are going to be ordered by Kirby.

With respect to the barges that Kirby isn't building, a number of the barges being built in 2010 were, in fact, ordered for delivery in 2009, but deferred into 2010. And a shipper is also building nine barges for his proprietary fleet, serving his internal needs.

Given the age profile of the industry fleet, we continue to expect older barges to be removed from service and the industry supply versus demand will continue to move closer to balance.

We're certainly encouraged by our improved utilization and the pricing stabilization that we're seeing. Demand is better, as measured by the volumes that we're moving. Certainly, demand is better than it was in 2009, and a little better than we thought it would be. However, we do expect our utilization to decline somewhat, as weather improves and the supply chain becomes more efficient.

This is not un-typical. In usual years, in late spring and in the summer, you typically see the industry utilization decline a little bit. The difference in 2007, 2008, was that the -- there was so much demand that the industry was just fully utilized the entire year.

During the 2010 first quarter, this is talking about the diesel engine business, that segment and demand levels for service and direct parts sales, generally remained weak across the majority of its markets, particularly the high-speed oil service market. We did benefit from some first quarter seasonal work that we generally see in the Midwest and Great Lakes area for medium speed marine customers.

Our service customers continue to defer major maintenance, and this is in the oil service area. The medium speed power generation market remained healthy, and our medium speed railroad market benefited from improved direct parts sales, as the utilization level for our rail customers' equipment slowly improved, really reflecting improvements in demand for what they're producing.

We do believe demand has bottomed out. But we still haven't seen any consistent signs of improvement in this business segment yet. I'll come back and talk more about this, as well as the outlook for the inland tank barge business later in this call. But first, let me turn the call over to David.

Yes. Good morning, everyone. Thank you, Joe. As we disclosed in our press release, we continue to focus our attention on operating as prudently and as efficiently as possible. We did this by further reducing our costs in order to remain competitive, as we try and emerge from this economic downturn.

In January 2010, we further reduced our marine transportation and corporate staff through retirements and reductions, and we took a $4.1 million before tax charge, or $0.05 per share charge, in the quarter. We took a similar early retirement and reduction charge in 2009 first quarter. Since our peak headcount in October of 2008, we've reduced our shore staff headcount by 22% through early retirements, staff reductions, and attrition.

Kirby's marine transportation operating income was 8% below the 2009 first quarter, and the operating margin of 19.3% was below the 2009 first quarter margin of 21%. Adjusting for the staff reduction charges in both quarters, the first quarter margin was, for this quarter, would have been 20.5%, compared with 22.3% for the first quarter in 2009.

The lower margin reflected the impact of lower term and spot contract pricing throughout the last three quarters of 2009, some higher fuel prices and some more difficult operating conditions with weather and whatnot. Partially offset by the benefit of the cost reductions from the headcount reductions that we initiated.

The diesel engine services operating income was inline with last year's first quarter. The operating margin was 10.4%. This compared with 8.7% reported for the 2009 first quarter, or 11.1% adjusted for early retirements and staff reductions taken in the first quarter of 2009. Customers continue to defer their diesel engine maintenance projects resulting in continued low labor utilization for the business.

We had a strong cash flow generation quarter. EBITDA was $66 million in the quarter. And as of quarter end, at March 31st, we had $121 million in cash or in cash equivalents.

Our capital spending for the first quarter totaled $34 million, which included $21 million for new tank barges and towboats and $13 million primarily for capital upgrades to the existing fleet. Our capital spending guidance for 2010, remains in the range of $125 to $135 million, which includes approximately $60 million for new tank barges and towboat construction.

During the 2010 first quarter, we took delivery of 16 new 10,000 barrel and two 30,000 barrel tank barges, which added about 226,000 barrels of capacity. However, we also retired tank barges in the quarter, 20, and that reduced our overall capacity by 365,000 barrels. So net net, our capacity declined about 139,000 barrels during the quarter.

As of March 31st, we operated 861 tank barges with a total capacity of 16.6 million barrels. This compares with our peak tank barge count of 918 back in June, June 30th of 2008, and a peak capacity of about 17.5 million barrels. So this represents a 6% reduction from the peak number of tank barges we operated, and about a 5% reduction from our peak tank barge capacity.

For the remainder of 2010, as we've stated before, to take advantage of attractive barge construction prices and to continue to upgrade our fleet and provide our customers with newer equipment, we will take delivery of 37 new 10,000 barrel barges, three 30,000 barrel barges, and five new 10,000 barrel charter barges, which will add about 530,000 barrels of capacity. However, we will continue to retire older tank barges from the fleet.

So with that, now I'll turn it back to Joe.

Okay. Thank you, David. I'll turn to the outlook for the second quarter and the year. Yesterday afternoon we announced our second quarter guidance of $0.52 to $0.57 per share, which compares to $0.63 per share earned in the second quarter of last year. You take the $0.46 per share first quarter earnings, which reflected some modest improvement in volumes, add back the $0.05 per share staff reduction charge, and look for some improvement in weather and operating conditions, you're basically at the low end of our range, the $0.52 level.

The $0.57 high end of the range assumes that we continue to see transportation volumes improve somewhat. We're forecasting for the diesel engine business kind of flat operating results, similar to their results in the first quarter.

As for the full year, based on a more positive outlook for the balance of the year, we're raising our low-end guidance to $2, up from the $1.85 that we put out at the beginning of the year, and we're maintaining our high-end guidance of $2.20 per share. Our previous $1.85 low-end guidance assumed 2010 volumes would be consistent with volumes in 2009, and continued downward pressure on term contract renewals and spot contract pricing, at least through the first half of the year.

Fortunately, during the first quarter, volumes improved and contract and spot market pricing stabilized, and with respect to spot prices were in fact up a little. Therefore, the new $2 low-end guidance assumes volumes are going to be stable for the remainder of 2010, and pricing is going to remain about where it is. Our $2.20 high-end guidance assumes continued modest improvement in volumes as the year progresses, and a continued reduction in the current number of tank barges or reduction in capacity, this all combining to lead to some modest improvement in term and spot pricing in the second half of the year.

As we stated in last quarter's call, to achieve pricing power, barge capacity will need to be removed from the industry fleet or volumes will need to improve to absorb existing capacity or a combination of both will need to happen. We did see some improvement in volumes during the quarter. And time will tell whether, Frankly, these volumes are sustainable. If they are sustainable, we suspect that we will see some modest pricing power in the second half of 2010.

Now, Kirby's in great financial shape. We've taken a significant amount of cost out of our business last year, early this year. We have a very strong balance sheet, low level of debt, favorable interest rates, and cash on our balance sheet that should continue to build.

In March of this year, S&P increased our credit rating from a BBB+ to a investment graded rated A-. So we remain in excellent position to execute our objective of making strategic acquisitions as they become available.

Also I want to comment, before we open the call up for questions, on the retirement of Berdon Lawrence, Kirby's Chairman of the Board since 1999. Yesterday Berdon retired. He had announced that he was going to retire in October of last year. I would like to thank Berdon publicly for his service, not only to Kirby, but to the inland tank barge industry. He has truly been a leader of this industry and has helped guide Kirby to its success, while serving as Kirby's Chairman.

I've enjoyed working with Berdon over the past 10 years, beginning with the integration of Hollywood into Kirby, and continuing over those years with Kirby's strategy of enhancing and growing our core businesses through synergistic acquisitions and also creating enhanced earnings and value for our shareholders.

Fortunately, Berdon's not going to go far. He's going to sit on Kirby's Board. He's going to be Kirby's Chairman Emeritus, and we will still have access to his wisdom.

Operator, I think we're now ready to open the call up for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Alex of Stephens.

Hey, Joe, I think that's me, Alex with Stephens.

Bet it is.

Good morning.

Good morning. Let's see. My first question is, help us understand, since I guess the beginning of '09, but when pricing turned down, what percentage of the contracts have been renewed, and so that pricing down is behind us and what's still to come?

Yes. As of today, probably about a third are behind us. But I think you have to -- I think a better way to look at this is that most of the pricing deterioration occurred in the first and second quarter, and then it stabilized somewhere between I think we said 7 to 15%. So as you get through the second quarter where the pricing stabilized, we really shouldn't see any further deterioration. And if these volumes remain and improve a little bit, we may see some pricing power. Is that answering your question, Alex?

That's fair enough. I'll use my follow-up to sort of clarify, too. In a cycle, and I don't know if I should even use the word normal cycle. But if you go back to your experience in the business as we proceed, and let's assume utilization stays pretty good here and pricing is going to improve later in the year, what do you have to see in terms of spot pricing being up before the contract pricing turns up? And then, in the first year of recovery in pricing, contract pricing I'm talking about, assuming that's next year, how much pricing power do you get? I'm trying to get a feel for how long does it take and how should we think about recovery for your business?

That's an excellent question. This is a -- the Great Recession is a strange recession because I think at least in the chemical refining business, the recovery was projected to be a lot slower than it, in fact, was. If you go back to the last recession which began in 2000, through 2003, we really didn't see any recovery until the end of 2003, where today we're seeing a pretty sharp recovery.

Now, I think the dilemma is, is do you believe it's sustainable? If it's sustainable, then I would expect pricing actually to recover going forward a little quicker than it did in the last recession, the 2000 to 2003 recession.

Spot prices are a leading indicator of contract pricing. And today, spot pricing is actually slightly better than contracts as they're renewed. Now, of course, contracts are renewed at lower rates. We said, on average, about 10% lower this quarter than last year's first quarter. But I think if you get spot pricing somewhere in the 5 to 10% range above contracts, then you -- they'll pull the contract pricing up. We're not there yet. I would say that the -- when I say modest, modestly above contract pricing, you're talking 3, 4%. And you're also talking in an environment where they jump around a lot. I mean, there may be days where positioning drives spot pricing a little higher and other days where it depresses it.

That's good color. Thank you for your time.

Thank you.

Our next question comes from John Chappell of JP Morgan. Please go ahead.

Thank you. Good morning, guys.

Morning, John.

Joe, I'm trying to think about the balance of the two issues that you talked about both in this call and in calls previously to get the pricing environment stronger. Obviously, volumes was part of it. But then another big part of it was the removal of excess capacity in the market. As the volumes have recovered, and I would probably guess it's the sentiment across the industry, just as it has across the broader economy has improved over the last several months, do you think that people may hold on to their older barges a bit longer in the hopes to get one more strong pricing environment and that might put a ceiling on any pricing recovery if the barge -- if the excess barge capacity isn't eliminated?

I don't think that's going to happen. But, of course, you just don't know. I think it's going to be driven by how quickly it firms up. There are all kinds of views of where this is all going. But it -- from our perspective, we continue to see over the year a pretty low GDP growth kind of environment. And that is going to put a damper on a lot more volume.

The only thing that I think that might change that is that we are experiencing in the petrochemical area a pretty significant feedstock advantage with natural gas at around $4 and crude oil around $85. And that disadvantages petrochemicals in a lot of other areas in the world. So we're kind of becoming -- well, we are globally competitive. So the export business is pretty firm.

But, and that's a business that's very important to Kirby. It's less important to some of the other operators. And it's hard to see how some of the other trades really enjoy significant volume, volume improvements. So I'm giving you kind of our view of how the economy drives volumes. And I think consistent with that view, I think that you'll see retirements, the older equipment's just expensive to operate. Frankly, if the -- there are a number of customers, if they have a choice between a barge that's less than 20 years old versus a barge that's 35 years or older, they're going to prefer the younger barges. So there's kind of a natural selection process going on also. And the fact that this older equipment hung on was more driven by a pricing environment that I think we're a ways away from getting to.

And then for my follow-up, I want to stick with this whole improving sentiment theme. You had mentioned earlier this year, and I can't remember if it was on the fourth quarter call or at our conference in March, that asset prices were still probably a little bit too high, hadn't come off enough from the '07 peak, and you thought that Kirby's next phase of growth would probably be a second half 2010, 2011 story. You're sitting with record levels of cash, at least as far back as my model goes, which is like 12 years.

And has the sentiment improvement in the group kind of changed asset values or your thoughts about asset values? Do you think that maybe the bottom won't get as deep as you had originally thought three to six months ago? And when do you start to pull the trigger on that?

Yes. Well, it's, unfortunately, it's not something that you have control over. You pull the trigger when the asset values are right. I think that the depth of the recession, that we were thinking of clearly, if -- when we got there, we weren't there long. So recovery has helped. But I also think that in a low-growth environment, some of the enthusiasm for companies that have significant capital decisions in front of them or a lot of debt gets diminished, and that there are going to be opportunities. I think that the patience is in order.

Back in the '90s, where Kirby was pretty active from an acquisition perspective, that was the environment. It was a low-growth environment. So we're not less optimistic that there are going to be opportunities. We think that this is a business that is going to consolidate and we think we're going to play a role in that consolidation. It's just hard to predict when it begins.

Okay. I appreciate the insight, Joe. Thanks a lot.

Yes. Thank you.

Our next question comes from John of RBC Capital Markets. Please go ahead.

Hey. Good morning, guys.

Morning, John.

First, on the capacity side, kind of a two-prong question there. Number one, we saw Trinity announce an increase in its backlog, and it seems like there's more quote activity going on right now. So I guess the question I have is, are you concerned at all that this quick reversal -- maybe it doesn't take capacity our or maybe it does, the older equipment still goes away. But are you concerned at all that this quick recovery might lead to some increase in the order book and all of the sudden a flood of capacity back into the market?

Yes, I think it depends on how quickly pricing comes back. The Trinity backlog is principally driven by us. So I'm --

Sure.

I'm not terribly, terribly concerned about it. This is just a good time to build tank barges. Prices are down. We have some replacement issues in front of us. We're just using this as an opportunity to upgrade our fleet when we think that new construction is priced attractively.

So I guess, where we sit today, not really concerned about it. If pricing took off, as I said before, capitalism works.

Sure.

And you'll have some more additions. Now, I'll also add that I think for companies that have significant amount of leverage, I think it's going to be very difficult to add, add more debt, and I think that this last cycle was a warning to all of us that these things happen and that the companies that do the best are the ones that are prudent with respect to how they capitalize their business.

Okay. And then secondly, I guess this is an extension of John's prior question on acquisitions. The single A-rated balance sheet's great, it's a bonus. I think we could argue whether or not it's necessary. And same thing, record levels of cash, funding CapEx from internally generated cash. I'm just kind of curious. The longer that the acquisition scenario takes to play out, are you starting to give any thought to other uses of the cash? And, more importantly, given where you stand today, do you think that you can maybe tackle more than one use of the cash? Say, can still go down the acquisition scenario, but maybe set aside part of the balance sheet or cash for either share repurchase, dividend, something along those lines?

That's a very fair question. The answer is, you probably can. Our reluctance has really been driven by the -- what we thought or what we think is a unique environment for potential acquisitions. But certainly, we have a lot of capacity on the balance sheet to -- and, David, you want to comment on that?

Yes. You saw our debt to total cap ratio is 15.6%. And, clearly, we wouldn't mind being up in the 40% range. So we have a lot of capacity. As you saw our debt's now 121 -- I mean our cash on the balance sheet's 121. So on a net-debt basis, we're 6.8% net debt to total cap. Lots of room. Clearly, as Joe indicated, our preference would be an acquisition. But given our debt capacity and the cash, we certainly could see the possibility of doing more than just acquisitions.

All right. Very good. Thanks for your time, and great quarter, guys. Thanks.

Thanks, John.

Our next question comes from Jimmy of Rice Voelker. Please go ahead.

Joe, thanks for taking my questions.

Hi, Jim.

And congratulations being elected Chairman of the Board.

Thank you.

It's great that business has gotten better and you guys were able to benefit. But can you give us any commentary on how much of the increase in volume you're seeing is due to the overall economy getting better and, perhaps, how much is due to the natural gas price advantage for these domestic refiners?

And the other part of that is, of course, supply chain disruptions that cause shippers to absorb more ton miles because you've got to go to less -- well, you have to go longer distances to get the product that they need.

Okay.

I mean, truthfully, I don't think we know. The export business has traditionally been 10 to 12% of the US petrochemical volume. It got as low as 4 to 6%. We sense it's probably over the high end of the range as we speak, and that's partly because of feed -- low feedstock cost. It's also partly because the dollar is okay, strengthening a little bit, but still not to the point where it's disadvantaging exports.

Right.

Now, exports drive our business a lot less than domestic consumption. So even with the higher exports, the domestic consumption is going to be kind of our key driver. But I just -- Jimmy, that's probably a good question to ask towards the middle of the year, because we'll see how volumes do over the quarter, and I think that we'll have a better chance for how much of it is truly improved demand.

Now, we couldn't tell you, if you asked this question in January, that there was true demand. But today, we clearly think that there is real demand growth, but it's hard to figure how much.

Okay. And also, you guys had been giving a number of power vessels operated in the quarter verse the number of power vessels operated in the prior year's quarter. And maybe I missed that. But could you give that number and have you been finding yourself re-leasing or putting idle towboats back into service? And, if so, how many?

Yes. We didn't give you that? The towboats operated averaged, in the first quarter, 224, and that compares to 232 a year ago.

It's all right on the last page of the release.

And so, are those -- I'm sorry, I know I'm asking a third. But so are you -- you're re-leasing or this is a re-leasing of towboats or are you putting idle boats that you own back into service?

It's a little of both, Jimmy. Our -- I would say about 30% of that number is charter boats and the rest is owned.

Okay. Thank you very much, guys.

You're welcome.

Our next question comes from Kevin of BB&T Capital Markets. Please go ahead.

Good morning, gentlemen.

Morning, Kevin.

Morning.

Joe, are you done with your staff reductions? And will there be any more charges in the second quarter or going forward?

Yes, we hope so.

Right.

We size Kirby to run or reduce the fleet. We reduced our fleet by about 50 barges in 2009. We said we wanted to get to kind of 2009 levels with the ability to stretch up and handle the volume that our fleet could potentially handle.

Now, as utilization improves, you do -- you do add boats. So I'm talking about really shore staff here. Now, that doesn't suggest that if we had a deterioration in our business levels, you wouldn't go back and look at t. But we do think that we're staffed about where we need to be, looking at current business levels and even improved -- some improvement in utilization.

Okay. So you can handle some more business without materially, I guess increasing your staff or costs?

We can, and we certainly can handle more price increases.

Right. Following up on Jimmy's question about your tug boats. With the increase in demand, are you having to outsource more power or do you think you have ample tow capacity now?

Well, the nice thing about our power model is that you do have some flexibility around the charter fleet. You can add boats when you need them. But even this year, I think that we're taking delivery of three new boats, and we have, I think 10 boats that are Kirby-owned boats that are still tied up. So we can reach in and get those.

The other thing that we've done during this period is that we haven't stopped training pilots. We're continue to train pilots in -- one, to accommodate retirements, but also give us the ability to continue to crew our fleet at higher levels.

Okay. Joe, you talked a little bit about demand continuing to improve through the month of April. Could you talk about your barge utilization through April?

Yes. Our barge utilization in March, April, was anywhere from the kind of the mid-80s to the high 80s. As weather improved, it ticked down a little bit. That doesn't suggest that the volume's not there. What that says is that we're just doing it more efficiently with less delays, less weather delays. But it's currently in the 80, I'd say 87% range. I don't mind giving that number because we're doing it on a conference call. So it's down a little bit, but nothing that we're particularly worried about. And anything over 85%, if you believe it's sustainable, is good for pricing.

Okay. Thank you. How would you describe or characterize industry capacity? It sounds like there's been a lot of talk, we're going to see capacity come out if pricing ticks up. It sounds like we're not at an equilibrium of demand and supply. How much excess supply do you think there is right now in the industry?

We said in January that we thought that there were, I think 300 to 400 too many barges. And that included an estimate for barges that were being built. That to get a balance and sustain the pricing power that you really needed to either have those barges removed or volumes need to be improved, we've seen some volume improvement based on the volumes that we're seeing. And, again, I'm not suggesting that they're sustainable. We don't know. We hope they are. That number's going to be less, probably closer to a little less than 300 today.

And what makes us, I think optimistic that we can real balance is that less barges are being built and the older barges are just very expensive to operate, and we think they're going to retire. So even if we didn't see any volume growth over the next year or 18 months, I think you'll continue to move to balance.

Thank you. One last question, Joe. I believe you said you're adding 58 barges this year in 2010. Could you comment or did you say how many barges you would be retiring?

What we've said is that -- and this was our January call, that we thought that we'd end the year with less barges, that the barges that we're building are replacement barges. But that we were going to continue to look at that over the year, and we'd make judgments kind of around where we thought business was going, that that judgment would affect the total number of barges that we end up with.

Okay. Well, thank you so much for your time today. I really appreciate it. Really appreciate it.

Thanks, Kevin.

Our next question comes from Chaz of Morgan Keegan. Please go a head.

David, Joe, good morning.

Good morning.

Morning, Chaz.

Joe, I wanted to echo the congratulations on your new position.

Thank you.

I think every pricing and capacity question that anyone could come up with have been asked. But I guess my question would center around margin and inland marine. Obviously, it sounds like fundamentals are in the process of bottoming, volumes are getting a little bit better, pricing's close to bottoming out here. Have margins bottomed, I guess is my question, because typically as we look at the first quarter, that's the seasonally low point for operating margins as well. So I'm just trying to think through, if we get a faster acceleration in pricing this cycle and we're starting at a 20% operating margin, where does this thing go in the next cycle?

Good question. I'll start and we'll let David -- I think that the -- your capability of extending your margin growth in the next cycle is greater than the last cycle, just because of the cost that you've taken out of the business. And also remember that the fuel, and I think you know this Chaz, fuel has the ability to affect your margins just by the way that we account it -- account for it or charge for it through revenue. David, you want to comment?

Yes. Chaz, I guess one way to think about this is back in 2000, we averaged, and I'm going way back here, but to demonstrate kind of the highs and lows. In 2000, we ran, in the marine at business, 18.9% margin. And then through the recession it kind of dipped down in 2003, to 14.6%. And then it slowly climbed back up, and in 2009, you saw it at 23.6%. So we're getting higher highs now, and we'll have higher lows going forward, I think, because of the right sizing of the organization. So you could expect an upward trend on margins if things stabilize and pricing improves. But to add to what Joe said, fuel does impact it. It's -- we don't make margin on it. It's kind of a pass through. So it deletes the margins a little bit. So you got to watch the fuel.

Well, I've been on this conference call long enough to kind of remember when things started getting better in the last cycle, that Joe used to say, in the '70s, that Kirby ran at a mid-20s margin. And that just almost seems very conservative, if we do kind of get a strong V-shaped recovery in the economy the next couple of years.

Yes, if you get a V-shaped, sure. I don't know if you're going to get a V-shape. But you got to layer your forecast of where you think this is all going on that. But in that scenario, V-shape, sharp recovery, you could see margins certainly in that area.

I guess my follow-up on that, does your guidance assume that margins get better in the back half of the year?

Marginally.

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

Thanks, Chaz.

Our next question comes from Mike of Stifel Nicolaus. Please go ahead.

Thank you. I had a question on the shore staff. You're down 22% from the peak in 2008. If volumes were to recover back to where you were running peak volume, I wonder if you had an estimate of how many of those shore staff reductions would be sustainable.

Well, based on the size of our fleet, we don't believe that we'll need to add shore staff. If the fleet grows, then you would. The exception to that is that in that 22% there's also -- we include also some Kirby Engine Systems employees that you could argue are revenue producing in good times. Last year they were not. That if that business grew in any kind of significant way, that you'd need to add employees there. But even so, we sized that organization so that it could accommodate business levels that were 10, 15% higher than they currently are.

Good. That's encouraging. And then on the equipment side, it was my understanding that you guys have been more aggressive in your competitors, taking delivery of barges because the cost to take delivery of those barges is low at the moment. I'm wondering if you've seen any increase in those costs here recently, as volumes have picked up.

In shipyard construction?

Right.

Well, there's still a lot of capacity, shipyard capacity out there. And you could -- you can build more barges than are currently being built. And the order book for 2011 is minimal. We only know of, I don't know, maybe 10, 15 barges that are on the -- potentially on the books. I mean, they haven't even been declared yet.

So I -- what affects construction is going to be how tight the manufacturing capacity is and a cost the -- of course, the cost of the material to build the barge. Steel prices have risen, so there is those costs that are reflected in barges that you would build in the future. So they're going to be up a little bit, but not substantially.

Okay. Those are my two. Thanks for the time.

And I'll just add that our appetite to build barges in this environment is driven by price. And if the price goes up to any significant degree, our appetite will quickly be diminished.

Our next question comes from Steve of Sidoti Company. Please go ahead.

Hi. Good morning.

Morning, Steve.

I was wondering, in terms of your size in the industry, do you see an upper limit in terms of acquisition that you might be able to do? Or do you think about it more from a liquid and a dry barge operator as opposed to maybe just liquid?

We're a total transportation market. You can move these volumes by different modes of transportation. But we think that we can get bigger. And where that exact number is we don't know. We say that it's closer to 50%, than where we are today. But, yes, we think we can continue to grow.

Okay. And then going back to the, kind of the replacement cycle for the aging of the fleet. I mean, is there a point where you see that kind of cascading forward a little bit in terms of these -- the age in barges becoming a problem and then maybe the manufacturing capacity not being able to keep up with that?

I wish our industry was that logic would control replacement cycles, but it doesn't. It's really driven by pricing. When pricing gets to the point where it's attractive to build, everybody go out -- goes out and builds and you -- and existing capacity remains. And then when pricing deteriorates, you see that older capacity disappear. So it's more a stair-step approach to building capacity and getting rid of it versus a linear approach that's based on the age and condition of the fleet.

Okay. All right. Thank you very much.

Yes.

Our next question comes from Ken of Merrill Lynch. Please go ahead.

Hey, great -- good morning.

Morning.

Just want to -- Joe, if you can just talk about on the volume side, can you talk about the contract business? How visible do you have? You talked a bit about that double-digit growth. What is still locked in? What of it is still that take or pay versus just normal contract level?

What do you mean by double-digit growth, Ken?

I thought you mentioned earlier that you expected the volumes to remain up about 10%. Didn't you say that earlier?

Well, volumes are consistent kind of where they are. And if you go back to the 2009 first quarter, the US petrochemical business was shutting itself down. So volumes are certainly, certainly recovering from that point.

Our utilization is up from kind of a low to mid-80s to now the mid-80s to the high 80s. So I would say utilization's up 5, 6%. It's more, I think more single digit growth, growth levels as it's measured by our utilization.

And how much of it is that contract? I'm just trying to get the visibility you have on the volumes.

Yes. No, our contract to spot mix is 75% contract, 25% spot. And that's where it was last quarter. And I would have said last quarter, I would expect it to continue to decline to its more traditional level, which is 70-30. But I'm not as confident of that. I think it will decline, but whether it'll get to 70%, I'm just not sure.

Now, with respect to time charters, those are the daily rate charters that we had so many of. I think at its high we had over 50, 55% of our contract business was under time charters. That continues to decline. The number that we gave out was I think 49% in the first quarter. And I actually expect that to continue to decline. I'm not even sure that we don't want it to decline a little bit, because with our large fleet and its capabilities, we do pretty well in the affreightment business, because we just have -- we have more flexibility. We can use a barge that's positioned to load a cargo. We can use a bottom that's compatible with another cargo. We really can leverage our fleet a little better.

Great stuff. Thanks for that. And then my follow-up would be on the cost side. You talked a bit about the shore staff, the reductions that you've made. When do you, looking forward, think you start to bring some of that in?

Well, I think that in the inland barge side of the business, we can manage our current barge fleet with essentially the people that we have. Now, as utilization kicks up, you do have to add more vessels. And the exception might be that you'll need to add a few more maintenance people or port captains or in the crewing area. But it's a relative deminimis amount compared to the total shore staff.

With respect to the diesel engine business, we have geared that labor force to be able to handle maybe 10, 15% more work. If you get more than that, then you'll have to have production people.

Great stuff.

Does that give you what you need?

Yes. No, that's perfect. Thanks, Joe.

Thank you, Ken. Operator, let's limit the conference to one more call, please.

Thank you. (Operator Instructions) At this time I show no further questions.

Well, we certainly appreciate your interest in Kirby and for participating in our call. If you 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 teleconference. Thank you for participating. You may all disconnects.