Kirby Corp (KEX) 2010 Q3 法說會逐字稿

Welcome to the Kirby Corporation 2010 third quarter earnings results conference call. My name is John, and I'll 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 will now turn the call over to Mr. Steve Holcomb. Mr. Holcomb, you may begin.

Good morning. Thank you for joining us. With me today is Joe Pyne, Kirby's Chief Executive Officer, David Grzebinski, our Chief Financial Officer, and Greg Binion, President of Kirby Inland Marine, our marine transportation subsidiary.

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, 2009 filed with the Securities and Exchange Commission.

I will now turn the call over to Joe.

Thank you, Steve, and good morning to those who have joined us. We've asked Greg Binion to join us today as a call participant. As Steve noted, Greg is the President of Kirby Inland Marine, our tank barge company. Greg will give you some additional color on the transportation sector.

Yesterday, yesterday evening, we reported our third quarter results, earning $0.57 per share compared to the third quarter of 2009 net earnings of $0.65 per share. For the first nine months of this year, we earned $1.56 per share compared with $1.79 per share for the first nine months of last year. The $0.57 per share third quarter results were or was at the high end of our guidance range, which we published at the beginning of the quarter, $0.52 to $0.57.

Beginning -- since the beginning of 2010, the US petrochemical industry has seen a steady improvement in production. This improvement, the US refinery -- and US refinery anomalies - we'll come back and talk about those a little later - have allowed Kirby to maintain equipment utilization levels in the high 80% range in our petrochemical or black oil markets during the second and third quarters of this year. These two markets comprise approximately 87% of what we do, and it's good to have them strong.

As anticipated in our third quarter guidance, our diesel engine service segment results continued to struggle a little bit with weak service and direct part sales in the majority of our marine markets, particularly in the Gulf Coast oil service market. This was partially offset by a good third quarter in the power generation business.

I'm going to now turn the call over to Greg to recap the marine sector for the third quarter.

Thank you, Joe, and good morning. During the 2010 third quarter, our overall marine transportation demand was stable and barge utilization levels remained in the 85% to 90% range above all four 2009 quarters and above what we anticipated at the beginning of 2010.

We continue to believe that on the average our utilization is slightly better than the industry's average. Low domestic natural gas prices have improved the global competitiveness for US petrochem producers. This has increased transportation volumes for basic petrochemicals to both domestic consumers and export terminals. These volumes help to maintain our petrochemical fleet at high 80% utilization levels.

Additionally, a heavy refinery maintenance (inaudible - background noise) which required additional black oil shipments between refineries was coupled with exportation of heavy fuel oil to South America and the Pacific Rim, which helped to maintain our black oil fleet also at 80% utilization levels.

Revenue from term contracts delivered approximately 75% of third quarter revenue consistent with the second quarter. And as previously noted, during 2009, some customers switched from time charters to affreightment contracts as their time charters expired. This shift stabilized during the first quarter of 2010, and during the third quarter revenue from time charter was consistent with the first two quarters of the year at approximately 50%.

With respect to pricing, Kirby's term contract renewals bottomed out in the third quarter of 2009, and have remained flat since. Accordingly, renewals in the 2010 third quarter was consistent with our second quarter renewals. Spot contract rates for the third quarter, which include the price of fuel were flat to slightly positive when compared with the 2010 second quarter.

And as previously stated, our annual escalators effective January 1 of 2010 for labor and PPI, producer price index, on multiyear contracts were neutral.

I'll now turn the call back to Joe to discuss the diesel engine services operation.

Thank you, Greg. With respect to the diesel engine side of our business, this segment saw soft service and direct part sales across the majority of our marine transportation markets. As customers continued to defer major maintenance projects -- the thing about deferred maintenance is that ultimately it represents a pretty good backlog. So it's going to need to be done at some point.

Our Gulf Coast high-speed market continued to see lower utilization and some pricing pressure as a result of a number of things that were occurring along the Gulf Coast, but principally the moratorium. As in the second quarter, the high-speed market did benefit modestly from required repair work to customers equipment involved in the cleanup effort. But the more extensive overhauls were deferred. Moratorium on deep water drilling negatively impacted the company's business in this area, both for the high-speed side of the business and the medium-speed side of the business.

Historically, 20% to 25% of the business that this engine group performs is associated with the Gulf Coast oil service business. And that includes both the shallow water side and the deep water side.

Even though the moratorium was lifted in mid-October, new safety regulations that affect drilling operations are being issued or in some cases not issued yet and it's going to take some time to digest them and to understand how it affects the business. Having said that, the business we believe should begin a slow process of returning to normal levels once these new rules are understood.

During the third quarter, the medium speed power generation market benefited from generator [set] upgrade projects and higher engine and part sales.

I'm going to come back at the end of our prepared remarks and talk about our outlook for the fourth quarter and for the full year. But first I want to turn the call over to David to go over the financial results.

Thank you, Joe. Good morning, everyone. Let me provide a few details on margins and CapEx and a number of other items. Kirby's marine transportation revenue was 2% above and operating income 11% below the 2009 third quarter. The segment's operating margin was 22.1% compared with 25.3% for the 2009 third quarter. The lower margin reflected the continued impact of lower term and spot contract pricing that has rolled through. The lower margin also reflects the effect of higher fuel prices and increased delay days which we saw in the quarter. These were partially offset with the ongoing cost reduction efforts and efficiency efforts that we started throughout 2009 and part of 2010.

So year-over-year margins are down. But both term and spot contract pricing have stabilized. And the 2010 margins have continued to improve. They were 19.3% in the first quarter, 21.6% in the second quarter, and then 22.1% in this quarter. However, the margin in the fourth quarter will likely be down slightly from this quarter due to the normal seasonal impact related to weather and some scheduled lock repairs.

On the diesel engine service side, revenue was 9% above and operating income was 3% below last year's third quarter. The operating margin was 9.3% compared with 10.4% reported in the 2009 third quarter. The higher revenue reflected stronger power generation market, partially offset by the weakness in the Gulf Coast oil services market that Joe mentioned. The 3% decrease in operating income was a result of lower service and direct part sales in the marine markets, some lower pricing in the high-speed marine market related to the oil service environment, and lower overall labor utilization.

On the corporate side, we continued to generate significant cash during the 2010 third quarter in the first nine months with EBITDA at $77 million for the quarter and $216 million for the first nine months. At September 30, we had $149 million in cash on the balance sheet. Our capital spending for the first nine months totaled $108 million which included $60 million for new tank barges and towboats and $48 million for capital upgrades to the existing fleet.

During the 2010 first nine months we took delivery of 45 new 10,000 barrel tank barges, three 30,000 tank barges -- 30,000 barrel tank barges, and five new 10,000 barrel charter barges, adding about 637,000 barrels of new capacity. However, also during this same time period we retired 64 tank barges and returned a couple charter barges, which reduced our overall capacity about 1.014 million. So net net our capacity declined 377,000 barrels during the first nine months of this year.

As of September 30th, we now operate 850 tank barges with a capacity of 16.4 million barrels. And this compares to the peak back in 2008 of 918 barges and 17.5 million barrels of capacity.

During the fourth quarter we plan to take delivery of eight new 10,000 barrel barges and two 30,000 barrel barges, adding 140,000 barrels of new capacity. But we'll continue to retire older tank barges from the fleet.

Our capital spending guidance for 2010 remains unchanged at $135 to $145 million. It includes approximately $70 million for construction of 58 tank barges, three two boats, and some prepayments on 2011 barge construction. New construction capital expenditures for 2011 are currently projected in the $50 to $60 million range, and that's on top of our normal $70 million maintenance CapEx. The $50 to $60 million amount for 2011 is based on our current commitments for 31 new tank barges that should be delivered throughout 2011.

Our current plans are to expand -- are not to expand the fleet and to use these new barges to replace older equipment that we plan to remove from service. So going forward we expect our barrel capacity to remain flat with additions equaling retirements. However, this replacement program has had a good impact on our fleet age. And since the end of 2007 through today, our average fleet age has fallen around 3.5 years. The fleet should continue -- the fleet age should continue to improve as we continue our replacement program.

Moving to share repurchases. Through June of -- from June to October 26th, we've repurchased 615,000 shares of Kirby stock at an average price of $38.47. The shares were purchased through a combination of open market purchases and a stock trading plan that we entered into with a brokerage firm pursuant to Rule 10(b)(5)(1). The 10(b)(5)(1) program is applicable for our 2010 second, third, and year end Kirby-imposed blackout periods that usually precede our earnings press releases.

Effective November 1st, the end of our third quarter blackout period, we will have 2.086 million shares remaining under our share authorization.

That concludes my comments. I'll turn the call back to Joe.

Yes. Thank you, David. Yesterday afternoon we announced our 2010 fourth quarter guidance range of $0.52 to $0.57 per share. This compares with $0.54 per share we reported same period last year. But those results included a $0.05 per share charge for a combination of things, shore staff reductions, an impairment charge, and adding back a previously booked reserve for a doubtful account. For the year, for this year, we updated our guidance to $2.08 to $2.13 a share.

For the fourth quarter, we're forecasting that overall equipment utilization levels will remain consistent with the third quarter in the mid- to high 80% range and pricing will also remain inline with the third quarter. Our guidance assumes that the petrochemical market will continue to remain strong based on low natural gas prices as they compare with other feed stock prices.

In addition, our guidance assumes that the Gulf Cost refinery utilization will also be stable during the quarter. That being said, the difference between the low end of the guidance and the high end is principally weather and other navigating delays.

As those who have listened to our calls for a number of years know, that the fourth quarter is the most weather-impacted quarter. The upper river system is impacted typically by ice and sometimes low water conditions. On the lower end of the system and in the canal it's impacted by frontal systems that cause high winds and fog. There are also several scheduled lock repairs during the quarter which will have some impact on efficiency.

Both the high end and low end guidance assumes that the additional [engine] business is going to be about the same as it was in the third quarter.

Briefly looking into next year, I think that Kirby and, frankly, the industry challenges to be able to move pricing forward, based on the current strength of the petrochemical industry, what we believe are higher industry utilization levels and continued industry discipline with respect to tank barge capacity, we do believe that the environment for better pricing is better today than certainly it was in the last six months.

We think there is some modest improvement in the industry's view of 2011. There, I think was a general kind of umbrella concern for maybe negative GDP growth in 2011. I think that this is diminishing. And as it diminishes, I think it improves confidence levels. This combined with what we typically see in the fourth quarter, the higher utilization driven by weather principally, should all help the pricing environment.

Kirby -- I want to make I guess a general comment on just Kirby. Kirby's in excellent financial shape. We've taken some significant cost out of our business model. Our transportation margins remain above 20%, which in itself is quite an accomplishment. The diesel business is under some pressure, but operating margins even there are in the 10% range. And we think that as we get a little more clarity in the Gulf Coast oil service business that that business will continue to improve.

We have strong consistent cash flow. We have a great balance sheet, a very low level of debt, good interest rates. Currently today we have $160 million in cash on our balance sheet. We think we're in a great position to acquire companies in both our core businesses, build equipment, and continue to repurchase our stock when appropriate. All of this I think puts us in a great position as we go into 2011.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from John Chappell from JP Morgan. Please go ahead.

Thank you. Good morning.

Morning.

Joe and/or Greg, my first question has to do with the marine business and the export-related business. Is there anyway to quantify how much of your business is tied to the export market? And is the strength in that business strictly a natural gas phenomenon or is there something else that's driving the strength in the export business?

John, I think it's both the low natural gas feed stock which helps the business be globally competitive. I think the dollar also helps, the weaker dollar helps. It's difficult to quantify the effect of exports, we -- because we touch the chemicals as they move from process to process. And when we deliver them to a terminal you don't really know where they're ultimately going to end up.

I think maybe another way to answer this question is if you look at what typically drives the chemical business, 70% of it is consumer nondurables.

Yes.

When you look at the durables which are driven by housing and by automobiles and other things, the durables are down. And typically when you're in that kind of environment, you would expect the volumes to be down. But because of our price advantage, on a global basis I think that what we would typically be losing in weaknesses and the durable area we're picking up in exports.

And that's really driving, frankly, better utilization than I think anybody expected in our business and also in the chemical business. And as you listen to our customers' public statements on the global chemical environment, all of them are saying that it's exports that really are driving the business incrementally.

Okay. That's helpful. And then my second question's on the buyback. I know you've had an authorization in place for a while, but clearly you stepped it up this past quarter. Just curious with the two million left on the authorization, as you sit here today and you weight acquisitions and buybacks and also as you see your share price moving up, it's now over 10% over the average price that you were buying it back, just curious about your sensitivity to price, sensitivity to share price and your thoughts around the timing of potentially completing the two million shares remaining on the authorization.

Yes. I mean, we're -- we clearly are sensitive to price. And we say that we like to buy our stock back opportunistically. I'm not going to comment what that means in terms of price. And it's just very hard to predict when that two million shares is going to be repurchased. We're on a run rate of buying back about a half a million shares a quarter. But we're certainly reevaluating or evaluating our appetite to repurchase shares based on kind of the relative value of the price on an everyday basis.

Thanks a lot, Joe. I appreciate the help.

Yes.

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

Hey, guys. Joe, as you continue to think about you've got this great utilization and no pricing power, what do you think the excess capacity in the market looks like and how much does that need to shift to give you the kind of pricing power you would expect?

I think it's getting better, Alex. I think that, as you know, the challenge in our business because most of the companies are private and don't report is to know with any kind of exactness how many barges are leaving. But our sense says that capacity's being taken out, that capacity is not being added. What is being added, and it's principally Kirby, is replacement capacity. And even our fleet continues to shrink a little bit.

We think that, as I mentioned a little earlier, that the environment is getting better, that industry utilization levels we sense are moving up, that confidence in 2011 is building. There's a little less uncertainty out there today. All of that should help begin the process of moving pricing up a little bit. Yet, you like to be able to say, well, pricing's going to be up 3% to 5% or whatever next year, but I think it's too early to say that. What we are saying is that we think or feel that the environment is better and we certainly weren't saying that earlier in the year.

And, Joe, help us think about when you have such an open strategy to acquire some of your competitors, if the market does feel better and pricing is more likely to go up next year, does that help your acquisition strategy or hurt it?

I actually think it helps it. I think I've said this before, that nobody likes to sell at the bottom. So anything that is for sale now is distressed or somebody's made the strategic decision to exit a business. There's some of that too.

As business improves, I mean particular in a slow growth environment, I think that sellers who, for a host of reasons, whether it's recapitalization, whether it's succession, whether it's health, are more comfortable believing that they're going to get a fair value for their assets. So as you go back in history and look at where Kirby made a number of acquisitions it was in the early '90s where we had just that kind of environment. So I think it helps. Time will tell. But I actually think it's positive.

That's good color, Joe. Thanks for the time.

Yes.

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

Hey, Joe. Good morning, guys. Can I just follow up on that a little bit and just -- what would it take to kind of change your mind in terms of the CapEx and the vessel build that you're looking at in '11 and '12? I mean, does a high 80% utilization but no pricing power in the near term kind of support that level of build for kind of a replenishment only? Or do you think you need to -- do you think you need to see that pricing for that level of CapEx to be sustainable longer term?

What's driving CapEx currently is fleet replacement in a attractive barge price -- barge new construction price environment. We're replacing the fleet and taking advantage of attractive shipyard pricing. And that's what's driving it today. It's -- we have already shrunk the fleet from I think a high of 917 barges to the current level of 850. And that may come down a little more. We're looking at it all the time. But it's replacement and the price of that replacement tonnage that is driving the CapEx.

Okay. Very good. And then if I look at towboat utilization in the quarter, looked to be down a couple of percent. I know it's up against a little bit of a [tougher comp]. Can you just walk through what the issue behind towboat utilization is and is there further right-sizing needed among your towboat fleet at this point?

I'm not sure what you're looking at, John. But I'm going to ask Greg Binion to address towboat utilization.

Our towboat utilization has actually improved year over year by about a percentage point. This is -- and this is due to some structural enhancements that we had in terms of our organization in our sales and traffic area. So our -- the utilization's actually improved by one percentage point.

Okay. I was just seeing [10 miles] per towboat per available day I thought was down about a point.

I tell you what drives that, John, is if you -- if the line haul business which is more tons per horsepower is stronger that'll look better. But the business mix was more in the canal than on the river. It's a -- I'm glad you asked the question because I can see how you could get the conclusion.

Okay. So it was just more of a mix issue versus some deterioration in actual towboat usage?

That's correct, John.

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

Yes.

Thank you.

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

Hi. Good morning. Joe, if I look at the kind of history here of the transport side, kind of bottomed margins down at the 12% or so level back in the early 2000s. Now when you kind of talked about margins may be bottoming out in the 20s, can we see, I guess, higher highs or would that invite more competition quickly coming back? I guess what keeps the margins at this level? Is it -- and what's brought it back up to this new bottom level? Is it just pricing? Is it capacity over the last couple years getting tighter? What are your thoughts on that?

Yes. No, I think that's a great question. I think that we've been able to maintain margins above 20% principally driven by very aggressive cost reductions and some structural changes in how we manage the business that have reduced the number of people that we need to run the business. So, and the -- I think the low in the last recession was actually about 14, a little under 15%, 14.9%. That was distorted a little bit by how we accounted for a joint venture that we had. It drove the margins down about 1%. So the real low was in the 15.8%, 15.9% something like that.

Now, in this downturn, margins were -- are above 20%, in fact, this quarter above 22%. And we think that that is sustainable. And I think that -- and, frankly, I think that our cost structure is just lower. We're enjoying margins we think that are higher than most, if not all, other companies in the business. And where there are companies that are struggling, we're actually doing pretty well. And that we can support in the next cycle higher margins without the concern you raised, which is a good concern, which is the attraction of additional capacity.

Now, having said that, at some point we all know that you can get rates and returns to the point where you do attract additional capital. But I think that we're a ways away from that.

That's helpful. Thank you for that. The capacity side, I think you kind of touched this before. But you talked about utilization when I saw you a couple weeks ago, about how it had increased to a point that you thought that would have led to pricing already. I think on the call earlier you just mentioned that you were seeing the industry utilization start to creep up.

So at what point do you need, do you think, the industry utilization gets to that point where you can drive the pricing to where you want to get that increase?

I don't know -- I don't want to put kind of a date certain out there, obviously. But we do think that the environment is better. Along with utilization there's another intangible factor which is business confidence. You -- to move rates you have to have the confidence that business levels are going to be sustainable. And I think that -- I think what's happening is that that confidence level is building and it's building not only with us, but I think it's building with others in the business.

Now, I think that part of the issue with us not being able to drive rates really had to do with our utilization being generally higher than others in the business. I'm not saying higher than all, but on average probably a little higher. And also that our customers, for a host of reasons, continue to work with us and maybe in some cases pay us a little more, and that when you go to a -- when you go to the customers and say, hey, I'd like a rate increase, and he reminds you that he's already paying you a little more.

And the other anomaly that's kind of interesting that I hadn't -- I haven't seen, typically in a stable environment, [spot] prices are higher than your contract prices. That's any kind of a normal, stable market. In this case, our spot prices and our contract prices were about the same.

Now, another thing that's encouraging is -- and Greg talked about this in his section of the call -- that spot prices very modestly are a little better in the third quarter than they were in the second quarter. And that's in an environment where actually fuel fell. So that makes you feel maybe a little better too. That give you the color you need?

Yes. No, that was good. If I can just wrap up one last thing on a different subject. On the diesel engine services side, your margins kind of I guess reached a bit of a bottom here. But I guess in four of the five past years we've seen the fourth quarter weaker than the third. So I guess looking at that and based on what you said earlier in the -- in your introductory comments, do you think we continue to see kind of normal seasonal weakness on the diesel engine services side? Or it sounds like you might start getting some business that picks up there? Just wondering what your thoughts are on -- or what's in your target estimates that you put out?

Yes. We're not forecasting a decline. We're forecasting more of the -- kind of that 10% range margin in the fourth quarter. Yes, part of it is that we do have some projects that we're working on that I think will help the quarter. But it should be comparable, could potentially be slightly a little better in the fourth quarter.

Appreciate the time. Thank you.

Our next question comes from Jimmy Gilbert from Rice Voelker, LLC. Please go ahead.

Hi, Joe. How you doing?

Good. Thanks, Jimmy.

I had a question about, you know, you guys are building new power vessels. Could you -- my understanding is there's a lot of power vessels that are idle still. And could you talk a little bit about the economics of building power vessels verse just going out and leasing them? I know you guys lease a lot of power vessels also.

Yes. We're actually not building any as we speak. I think we've taken delivery, haven't we, Greg?

We have.

-- of all the vessels that we have on order. Having said that, you can expect some modest towboat construction program from Kirby going forward just because the age of our fleet's getting older. But it's going to be modest.

With respect to tied up power, there may be some tied up power, but with -- in our operation, the quality of power has to matter just because of what we do. So we're going to be much more attentive to the -- if we charter a vessel, the quality of the management team. We vet them very carefully. They're inspected. We have people aboard those vessels on a consistent basis. We know who's aboard them on a daily basis. It's a -- we -- any time we charter a vessel we accept the fact that that vessel as ours and that it needs to meet the same standards that we have internally. That's just something that we take responsibility for.

So you can have power that's available, but it just doesn't meet our standards and, therefore, we can't use it.

Right. So better to have your own if you can.

No, I think, Jimmy, I think there's a balance. We like chartering some of our power, we're just very selective how we do it. And the reason that we like it is that when business turns up, you can flex up with the business. When it turns down, you can take that out, which we did in 2009.

Right. Right. And you mentioned that you retired some barges. Could you talk a little bit about what do you realize when you retire a barge and when you sell it to a market outside the United States, I assume? And what kind of prices can you get for a retired barge?

Jimmy, this is Greg. It really --

Hi, Greg.

-- depends on the type of service that it's going to go into. A very, very small percentage of the barges we retire go to international sales. We've -- we look at that market. It's one of the premium price market -- markets for us. There's been some barges that go to work for -- as platforms for other work. But typically the -- some of the older single skin barges were more attractive to that, so double skin barges really don't fit that as well. And today most of the barges that are being retired are being sold into the scrap market.

And -- really? Okay. Well, what do you get -- when you scrap a barge, what do you -- what kind of prices are you realizing now, say for a 10 and a 30?

It's -- the scrap steel price is around $250 a ton. And 10s are -- 10s weigh -- and it depends on the barge. But they're somewhere in the 300 ton, 300-350 ton range for a 10 and then the 750 to 800 ton range for a 30.

Okay. Thanks very much, Greg.

The reason that we're scrapping more is that we're pushing a lot of barges out of service and you just flood the market if you didn't scrap them.

Oh, I see. Well, nice --

And, Jimmy, just one other qualifier is that --

Okay.

-- sometimes there's some offsetting costs to taking barges out of service. Again, it's driven by the specific piece of equipment. But black oil barges, as an example, need to be cleaned of all the residues before they can be scrapped and there's a cost associated with that that offsets the case of black oil barges, quite a bit of the revenue that you'd receive.

Okay. That's very helpful, guys. Thank you for taking my questions. And that's a great job this quarter.

Thank you.

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

Good morning, gentlemen.

Morning, Kevin.

Joe, can you remind us, and you may have said this already, so I apologize. I jumped on a little late. But can you remind us what your spot to contract mix is today?

Spot to contract mix is 75% contract and 25% spot.

Okay. Thanks, Greg. And you talked about your spot and contract pricing being about the same. Would you consider altering that mix depending upon where you think the direction of rates is going? Or do you want to kind of hold steady at that ratio?

As spot prices increase you -- you're confident that the volume is going to be there. You're -- having more business in the spot market is a good thing. But having said that, our traditional spot to contract mix is 30% spot, 70% contract. We're a little higher, 75% contract and 25% spot. That's a good position to be in where we are today. But I don't see it getting much lower than 70/30. I don't think it would get much higher than where we had it last year, which was 80/20.

Okay. Thank you, Joe. And then maybe directionally could you talk about now we're at the end of October, kind of where rate -- what rates have done in the month of October versus September? I know you've been talking relatively flat for a while. Is it still the case where they're flat through October?

Yes. Yes. Yes, as we speak today we're still flat. We're just saying that we think that going forward into 2011 the environment looks better for some ability to raise rates.

Okay. And then, Joe, one last follow-up. Are your customers today asking for more -- longer -- for contract terms or are they looking to continue to operate in the spot market? I guess could you share with us a little bit of kind of what your customer is thinking as a regards to contract and spot pricing?

Well, no, I think it -- several quarters ago they kind of settled into where they wanted their contract to spot mix. I think -- and we're not seeing really any trend to lock up additional term. I think that both we and them are comfortable with shorter duration. And that's not unusual, having gone through this before. That's what I would expect to see at this point in the market.

Okay. Thanks so much for your time today.

Yes. Thank you.

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

Yes. Thank you. Good morning, guys.

Morning.

I had a point of clarification. Greg, when you were talking about spot and contract, I kind of followed. I think you said spot being flat to slightly positive sequentially and contract being flat sequentially. Did you comment on what those two did on a year-over-year basis?

No, I did not.

Is that something you can share with us?

Well, on a year-over-year basis they're -- spot's up a little bit and contracts are about where they were, they're flat.

Okay. So, because I think earlier this year you had been commenting that year-over-year contract was still down 10%, 15% year-over-year. But here in the second quarter -- or excuse me -- the third quarter, we've gone flat year-over-year finally?

Yes. We said that in the third quarter of 2009, that it kind of bottomed out and it's been flat since.

Okay. And then really my next question or last question, Joe, you touched on this quite a bit earlier in the call. But I was fairly, I guess I would say surprised yesterday when Trinity released that they had a huge spike in their barge backlog up 50% year-over-year, up 50% sequentially. First time their backlog's been up since I think the first quarter of '08. Obviously I know you don't have great visibility on Trinity's backlog.

But I guess just tying into what you said earlier in the call, you're still -- you still have a lot of conviction that even with the order books starting to move back up here that that's reflective of where pricing is in the market on constructing new barges as well as replacement needs for kind of that tail that we have on the aging fleet?

Yes, I -- we are. And I think the Trinity order book is principally dry cargo barges, Chaz.

Okay.

Yes, it's not tank barges. We have a pretty good feel for what's being -- what's on order with respect to tank barges. And it -- it certainly isn't at levels that are going to have capacity.

Okay.

We have one other point of clarification. I just want to make clear the utilization levels in the black oil fleet were at high 80% utilization levels. I may have left the high off of my descriptor earlier. I want to make that -- sure that everybody understands that.

For anybody that was listening carefully to pick that up.

Our next question comes from Steve O'Hara from Sidoti and Company. Please go ahead.

Yes. In terms of the diesel engine business, you guys have talked about people deferring maintenance. And I'm just wondering, does that at some point possibly create kind of a bottleneck on these activities or is that going to be offset by replacement? And does that maybe create a pricing benefit for you as well down the road?

Yes, it creates a backlog which when they start doing it will drive utilization. So it's [positive].

Okay. And then in terms of the -- I think you've said previously that volumes could kind of ease the or overtake the over capacity issue or -- and -- what's your, in terms of where utilization is right now and volumes, I mean, how long does something like that take if there's not a capacity reduction?

Well --

Generally. I mean, I know it's not exact.

Yes. Yes. Well, let's assume that there isn't any volume increase, which is, as you know, is an incorrect assumption because we have had volume increases, particularly in the petrochemical business and in the black oil business.

But one of the, I think the unique things about this business is the age profile of the fleet is mature. I like that word better than old. And it -- over a third of it is over 30 years old. And that is expensive tonnage to operate. It -- the market, particularly when there's excess capacity, is biased against that older tonnage. And it -- there's a natural attrition as you make maintenance decisions with respect to it. So you will get a clearing in a no-volume growth environment of capacity. And we think that that, in fact, is happening.

Now, what has also happened is that volumes have increased. So when we were talking about industry excess barges a year ago, we were saying that there were somewhere between I think 4 to 500 excess barges that had to come out to get balanced. That number's lower today because volumes are up. And if you look at our fleet, our fleet is in the high 80% utilization levels, has been for the last few quarters, is currently, and there are just less barges now that have to come out to get it to balance, which is, I think, one of the factors that suggests that the environment for pricing should get better.

Okay. And just quickly, can you just give me an idea of the differential in cost between, let's say a brand new barge and one that's 30 years old to operate, maintain?

Greg, you want to talk about that just generally and what's -- what you see in terms of maintenance and -- not necessarily --

Right.

-- quantifying specifically?

Well, as you might imagine, a newer barge is -- has less maintenance days associated with its operation which gives you more available days to sell and has a lower -- has a lower maintenance requirement as well and is a -- has higher reliability. So even though we do -- we maintain our barges very well, that's, unfortunately, the case.

So on a -- in terms of cost of operation, it's really pretty flat across, but there's -- there is offset by less days in the older barges is available.

Yes. I mean, for example, older barges are a little more tender. They tend to fracture sometimes. When that occurs there's a lot of disruption to the movement and you're incurring costs that go way beyond the cost of repairing it. You're incurring costs, some cases [laddering] the equipment or positioning the equipment back to the shipyard. Just a lot of inefficiency that is associated with an older barge that you typically don't have with a younger barge.

So it actually -- it might be a lost revenue as well?

Right, that's true.

Okay. All right. Thanks a lot.

We have no further questions at this time.

Thank you for participating in our call. If you have any other questions, you can give me a call. My name -- my telephone 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 now disconnect.