Kirby Corp (KEX) 2011 Q1 法說會逐字稿

Welcome to the Kirby Corporation First Quarter Earnings Conference Call. My name is Monica and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Steve Holcomb. Mr. Holcomb, you may begin.

Good morning. Thank you for joining us. With me today are Joe Pyne, Kirby's Chairman and Chief Executive Officer; Greg Binion, Kirby's President and Chief Operating Officer; and David Grzebinski, 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 GAAP [sic] 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, 2010, filed with the Securities and Exchange Commission. I will now turn the call over to Joe.

Thank you, Steve, and good morning. Yesterday evening we announced several important management changes at Kirby, which we believe will enhance our ability to manage our growing business. Greg Binion, who will be on this call, was elected President and Chief Operating Officer of Kirby, having served as the President of Kirby Inland Marine, our principal marine transportation subsidiary, since 2008. Kirby has grown significantly this year through acquisitions and I know that through Greg's leadership these newly acquired companies will be effectively and efficiently integrated into Kirby.

Phil Ivey replaces Greg as President of Kirby Inland Marine. Phil has served as the Executive Vice President of Marketing of Kirby Inland Marine since 1999.

Yesterday we also reported net earnings for the 2011 first quarter of $0.60 per share, compared to the first quarter of 2010 net earnings of $0.46 per share. The 2010 first quarter included a $0.05 per share charge for early retirements and shore staff reductions.

2011 has been an active year for Kirby on the acquisition front, and I want to briefly bring you up to date on where we are with respect to these acquisitions. The purchase in February of a 51% interest from Kinder Morgan of a barge shifting and fleeting operation in the Houston Ship Channel has now been fully integrated into our canal operations. It is performing well. It was slightly accretive to our first quarter earnings.

In February, our purchase of a ship bunkering operation from Enterprise Marine Services, with operations principally in Florida but also in Mobile and Houston, has been totally integrated into our black oil and bunkering segment and also is performing well and accretive to our first quarter earnings.

We've completed the acquisition of United Holding, a land-based diesel engine and service provider and well service equipment manufacturer, on April 15 this year and have begun the process of integrating this operation into Kirby as well. United will be accretive to our second quarter and year earnings.

And finally, the acquisition of K-Sea Transportation is proceeding about as planned and we've received early termination of our Hart-Scott-Rodino filing. The financing of the acquisition will be in place by closing. The financing will be a five-year, $540 million senior unsecured term loan with a syndicate of banks. The Form S-4 registration statement will be filed with the Securities and Exchange Commission in the near future. After the SEC approves the S-4, a proxy statement and prospectus will be mailed to the K-Sea unit holders for voting on the merger of K-Sea into Kirby. We anticipate that this acquisition, or transaction, will close some time in the third quarter.

I'm now going to turn the call over to Greg to recap our marine transportation operation for the first quarter.

Thank you, Joe, and good morning to all. During the 2011 first quarter, Kirby's petrochemical and black oil fleets achieved utilization rates in the low 90% range. These are the highest utilization rates since the third quarter of 2008. Utilization was driven both by difficult operating conditions and also by improved customer demand.

During the quarter, about 65% of our marine transportation revenue was produced serving our petrochemical customer base. Low-price natural gas continues to provide domestic petrochemical production with a competitive advantage to global markets. This feedstock advantage has resulted in improved volumes of domestically produced petrochemicals and increased consumption of feedstocks.

Our black oil fleet, which produces 20% of revenue, experienced improved demand at the margin by refinery maintenance activities and the continued (inaudible) of heavy fuel oil.

Our first quarter revenues from our long-term contracts -- that is, over one year in duration -- totaled 75%. And our mix of time charter and a freightment business was at 50% for each.

With respect to pricing during the first quarter, we were successful in securing modest price increases when term contracts were renewed. Additionally, our multiyear contracts have annual escalations based on labor and the producer price index. Some of these adjust each January, and this year's adjustment provided a rate increase in the 1% to 2% range.

Spot pricing for the first quarter was higher due to the 15.7% increase in fuel prices quarter over quarter, and also improved from market conditions. When you compare our current spot pricing against contract rates, spot pricing is currently in the mid- to high single digits above contract.

We continue to invest in our fleet, both in terms of new construction and upgrading our existing barges. The program continues to improve the reliability of the fleet, improves customer service, and reduces the amount of shipyard cost and out-of-service days.

David will provide you with some additional detail on fleet additions and retirements in a moment, after Joe's comments on the diesel engine services segment. I will now turn the call back over to Joe.

My comments on the diesel engine segment are going to be restricted to our existing business. The United transaction, of course, closed at the beginning of the second quarter. During the first quarter, this segment benefited from continued strong power generation markets, with several engine generator set upgrade projects and also strong parts and engine sales in this part of the business.

Additionally, the segment benefited from high levels of maintenance in the Midwest, which typically occur during the first quarter, and better business levels on the West Coast. We continue to see weak service and part sales across the majority of our Gulf Coast oil service market as our customers continue to defer major maintenance projects. We do expect that -- this part of the business, the Gulf Coast oil service market, to improve later in the year.

The Gulf Coast high-speed business also remains very competitive due to the reduced levels of service work and part sales. We anticipate, as I said, this market to do better at the latter half of the year.

I'm going to come back later and talk about the outlook for the second quarter as well as the full year outlook. And I'll also comment on United's anticipated performance and contribution to Kirby's earnings for the full year.

I'm now going to turn the call over to David.

Thank you, Joe. Good morning, everyone. Let me provide a few details. Kirby's marine transportation revenue was 10% above, and operating income 24% above, the 2010 first quarter.

The segment's operating margin was 21.8%, compared with 19.3% for the first quarter of 2010. If you correct the first quarter of 2010 -- or, you back out the retirement and staff reduction charge taken, the margin was 20.5 %.

The higher margin reflected the improved petrochemical and black oil products demand and equipment utilization as well as modestly higher term and spot contract pricing during the first quarter and our ongoing cost reduction and efficiency initiatives.

These positive factors were partially offset by the 24% increase in diesel fuel prices seen year over year and the impact of increased delay days from difficult weather and high water issues.

Diesel engine services revenue was 18% above, and operating income 31% above, last year's first quarter. The operating margin was 11.5%, compared with 10.4% recorded in the 2010 first quarter. The margins were better primarily due to project timing, and you should continue to expect full-year margins, ex-United, in the engine business to be in the 10% range.

We expect margins in both of our segments to come down slightly and modestly in the next few quarters as we bring in the acquisitions of K-Sea and United.

We continued to generate significant cash during the 2011 first quarter, with EBITDA of $80.4 million. At March 31, we had $172 million of cash and cash equivalents, and this was after paying $58.5 million for two of the acquisitions made in February.

Our capital spending for 2011 first quarter totaled $31.1 million, which included $12.7 million for new tank barges and towboats and $18.4 million for capital upgrades to the existing fleet.

During the 2011 first quarter, we took delivery of five new 30,000-barrel tank barges and three 10,000-barrel charter barges, adding approximately 175,000 barrels of capacity.

However, during the first quarter, we moved 23 barges to inactive status and returned one chartered tank barge, thereby reducing our overall active capacity by approximately 400,000 barrels. We did add 21 tank barges with the purchase of the ship bunkering enterprise in February, which added approximately 400,000 barrels of capacity. So net-net, our active tank barge fleet increased approximately 175,000 barrels during the 2011 first quarter. As of March 31, we operated 829 tank barges with a total capacity of 16.1 million barrels.

For the remainder of 2011, we plan on taking delivery of 35 new tank barges, with a capacity of approximately 950,000 barrels. We also plan to continue retiring older barges. Net-net, by the end of 2011 we plan on bringing our total capacity to approximately 16.5 million barrels.

In addition to tank barges, we are building three 1800 horsepower towboats for delivery in 2011 and '12.

We have also signed a contract for the construction of an offshore integrated dry bulk barge and tugboat unit for use under a long-term contract with a Florida utility and a cement manufacturer moving coal from the Mississippi River to Tampa, Florida, and a back-haul with limestone rock to Mobile, Alabama. The cost of this new unit is approximately $50 million and is scheduled to be completed in the 2012 second quarter. We anticipate signing a contract in the near future for another offshore unit for approximately the same price. These new units are replacing existing older units.

Our capital spending guidance for 2011 is currently $220 million to $230 million, including $100 million for the construction of the 40 tank barges and three inland towboats, and approximately $36 million in progress payments on the construction of the integrated offshore dry bulk barge and tug unit. The construction prices are based on current steel prices and projected delivery schedules. If we sign the contract for the second offshore unit, we anticipate spending an additional $15 million on progress payments this year.

I'll now turn the call back to Joe.

Thank you, David. Our 2011 second quarter guidance range is $0.67 to $0.77 per share. This compares with $0.54 per share recorded in the 2010 second quarter. This guidance range is larger than we typically give. The reason for this is we know that our results will be negatively impacted by current high water and lock issues on the Mississippi River system due to heavy rain in the Midwest. Our guidance is based on what we know today. The Ohio River north of Paducah, Kentucky, is closed due to high water and a lock closure and could remain closed for up to 10 days. There is also high water and flooding on the upper Mississippi River above St. Louis.

We know that this high water level on the Ohio River and the upper Mississippi River will make its way into the lower Mississippi River, further exacerbating the situation. We already have daylight travel-only restrictions and assist boat requirements on sections of the lower Mississippi River and we expect these regulations to increase as conditions worsen.

It could very well be the latter part of the second quarter before we see conditions return to normal. Again, based on what we know today, we are currently estimating that the high water conditions could impact our second quarter results by as much as $0.02 to $0.07 per share, depending on the severity and the length of the high water event.

For the second quarter, we are forecasting that our utilization of our petrochemical and black oil fleets will range from the low to mid-90% level and pricing will continue to modestly improve. Our guidance assumes that the US petrochemical production for both domestic use and exports will remain strong based on continued low US natural gas prices.

In addition, our guidance assumes that the Gulf Coast refinery utilization will remain stable and will continue to export diesel oil and heavy fuel oil.

Both our low-end and high-end quarter guidance assumes our historical diesel engine service operation will continue to see favorable power generation markets, stable marine markets, but will still face some stress and challenge in the Gulf Coast oil service market.

We expect United Holdings to be busy and make a contribution to our 2011 earnings. The demand for hydraulic fracking equipment remains very strong.

Our 2011 year guidance was raised and narrowed to $2.70 to $2.90 from our previous guidance of $2.55 to $2.80 per share, an improvement when compared to the $2.15 reported for the 2010 year. Our high-end guidance assumes continued strong petrochemical and black oil demand with equipment utilizations remaining about where they are today, in the low to mid-90% range, and with continued modest improvements in term and spot contract pricing. Our low-end guidance assumes some deterioration in demand utilization backing up to the mid- to high 80% level and spot and term pricing not improving until the latter part of the year.

Both our low-end and high-end guidance factors in an estimated impact of current high water and lock issues on our inland tank barge business, -- our low and high-end range assumes our diesel engine service segment will continue to face the challenges in the Gulf Coast oil service market, and as I indicated earlier, some gradual improvement towards the year, and assumes stable marine and power generation markets.

In addition, both our low and high-end guidance assumes accretive earnings from United Holdings in the 20% to 25% range for the year. It also assumes that the K-Sea acquisition will close some time in the third quarter and K-Sea's earnings contribution will be offset by one-time merger transaction fees of approximately $0.05 a share.

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

Thank you. (Operator Instructions) So that we may answer as many questions as possible, we ask that you please limit yourself to one question and a follow-up. (Operator Instruction) Alex Brand, Suntrust Robinson.

Hi; good morning, guys.

Good morning, Alex.

Joe, I'm trying to understand a couple of things. First of all, your utilization is basically as high as it could realistically get. And yet, it seems like you're not quite sure if pricing's really clicking in yet, and I'm not sure I understand exactly what modest means. So maybe I just don't understand how much modest is and why it isn't improving a little bit faster with utilization being this high.

Alex, human nature has a lot to do with it. Typically as you come out of a pretty severe down cycle -- and we saw this in the 2000 to 2003 cycle -- the pricing begins slowly and modestly. Modestly is 2% to 4%. And as the market gets comfortable that the pricing is being accepted -- in that last cycle, and you remember this, it was kind of an anguishing improvement in pricing on a year-to-year basis -- 2 to 4, 4 to 6, 6 to 8. And at the end, it was 8% to 10%.

I actually think that that's going to be compressed this time around and I would expect, if these utilization rates hold, that it'll be a little quicker recovering some of that lost pricing in this cycle. Part of that is that the cycle was, frankly, a lot shorter than the last one, and the duration of it was, I think, was a surprise for everybody. I think most people expected kind of a U-shaped recovery and what we got was a pretty sharp V-shaped recovery.

So many questions I'd like to ask, but I'll use my follow-up with Dave. Can you quantify how much of the revenue, either in percentage terms or dollar terms, maybe both, was fuel? Just even a year-over-year change in the revenue, how much was fuel.

Let me come back-- we're going to have to -- year over year, fuel was up 24%. From the fourth quarter, it was up 15.7%. In terms of revenue, we haven't really disclosed how much is fuel in the past. Let me come back to that question a little later in the call.

All right, thank you. Thanks for the time, guys.

It's also a reasonably complicated calculation because it works a little differently in different contracts.

Ken Hoexter, Merrill Lynch.

Hey, good morning; it's Ken Hoexter.

Good morning.

Joe, can you talk about with the acquisitions of United and K-Sea, what kind of market assumptions have you made in terms of -- I want to understand what kind of markets that we should anticipate that would fit into your guidance range versus what would we need to see to see some incremental up side from the acquisitions? And then, maybe what kind of synergies you've built in versus what possibly we could see on the up side there?

Yes. Well, with respect to United, they're servicing a very strong market which, of course, the hydraulic fracturing of the shale deposits. What we expect there is really full utilization of their capacity with respect to building these units and full utilization, also, of their service capacity.

On K-Sea, I'm reluctant to say much more than we said in the last phone call, Ken, because we don't own it yet. But K-Sea is in a challenging market. We think that that market is going to improve over time, partly driven by capacity leaving and partly driven just by some changes in the refined products distribution on the East Coast. Some of it has to do with opening multiple refineries, some of it has to do with the pipeline capacity expansion. But other than that, I just don't want to be more specific. Once we own them, we'll be more specific with respect to where we think that market's going.

Thanks, Joe. And then -- by the way, congratulations to the team for naming your next generation of leaders there. That's helpful to give visibility.

But if we step back and look at the fleet from an industry perspective, have we seen -- if your utilization is so tight, have you seen bonus depreciation, increased expenditures, and are we seeing the order book build so while pricing doesn't get a chance to peak out here with that tightness, do we see a rush of build because of tax incentives to the fleet?

And I guess on that same note, does kind of the flooding and things, does that run up pricing in that environment? I guess I'm looking more for the fleet perspective on this.

Right. Unfortunately, taxes matter. And the 100% bonus depreciation drove 2011 orders -- you couldn't build another barge in 2011. I think if you ordered one today, you're really talking about 2012 deliveries. At least at this point, I don't think we're seeing a rush to 2012 orders, but we are hearing that people are beginning to consider them for 2012.

One of the nice things about this business is the age of the fleet. About a third of it is, I would call mature, and we think that there's going to be some significant rebuilding that occurs in the next several years and that that rebuilding program is going to limit the amount of additional capacity that you can put into the market.

As for river conditions driving pricing, certainly when you get utilization rates where they are today, pricing is going to increase -- at first modestly; and if they stay at these levels, more significantly -- because there are going to be requirements that are uncovered.

But the operating conditions that we're seeing today are going to be normalized by the summer. So we'll just have to see where industry utilization actually settles out. Intuitively, we think it's going to be less than current levels because we've been experiencing, really from the beginning of the year, operating conditions that made the system less efficient and drove utilization up.

Wonderful. Thanks for the time, Jim.

George Pickral, Stephens.

Hey, good morning, guys. To follow up on Ken's question, maybe focusing on the Gulf market in the near term, is there any concern -- or, what's your concern level that the flooding in the inland river system will drive capacity into the Gulf market and hurt your petrochem utilization there?

Right now, none because it's not moving. I think once the river opens up, there's going to be a lot of demand for volumes on the river. So I'm not-- George, if the river was closed for more than we anticipate it, then capacity will seek, where it can, a home somewhere else. But if it's five to 10 days, which we anticipate, we don't think there's much risk.

Okay. So no impact to kind of your core markets as of today.

Yes, that's kind of where we are today.

And then, to completely shift gears on you, Joe, can you maybe talk about the acquisition market today? You've made four deals this year. Has it turned from you-all making the call to a potential acquisition candidate to maybe you're getting more calls now? I'm just curious -- has the acquisition market in general changed over the past couple of months?

No, I wouldn't say so. We've talked about this on other calls, but there are different times in the business cycle that are going to be conducive to making acquisitions or buying back your stock or adding capacity. And I think that what Kirby has done, hopefully well -- and these acquisitions, of course, will be a test of this -- is that we've had a discipline that has kept us out of the acquisition markets when we thought that prices were too high and had us maintain the flexibility, at least from a balance sheet perspective, to take advantage of markets that bring prices down to where you think you can get your returns over the business cycle.

Typically -- again, we've talked about this -- at the bottom of the market, nobody wants to sell. They don't want to sell because they can't get adequate value for their business. As you come out of the cycle, the environment improves because people get more comfortable that they can get reasonable value. And I think we're seeing that. I think there are other opportunities out there. And the issue for Kirby is not so much that there aren't always opportunities -- there were plenty of opportunities in 2006, '7, and '8 that we passed on.

The issue is, are price levels at levels that we think justify the investment, getting -- what we're trying to get is a 12% return on our money over a reasonable period of time. And I would say that the environment is better today for that than it has been over the last probably four or five years. Does that answer your question?

Yes, it does. Thank you so much.

Long answer; sorry, George.

I appreciate it.

(Operator Instruction) John Barnes, RBC Capital Markets.

Hey, good morning, guys. Joe, could you talk a little bit about -- there's been a lot made of the oil glut in Cushing and some things like that. Is there anything artificially driving either demand or utilization in your view at this point?

We're not really moving anything from Cushing. John, there are -- although I do want to report that we're actually hearing more than just from investors on moving oil out of Cushing. There are some customers that are trying to figure that out. There is some -- and Greg, you might talk about this. There is some liquids coming out of the Eagle Ford Shale play in South Texas that we think is assuming some capacity. Do you want to talk a little bit about that?

Sure. There's actually some Eagle Ford Shale crude oil and condensates that have made their way to the Texas Gulf Coast in the Corpus Christi area and we're hearing reports and we're talking to customers who are interested in shipping those cargoes and, in fact, are shipping some of those cargos today from Corpus Christi to destinations in Huston; but more predominately, in the New Orleans-Baton Rouge area. So that's beginning at this point in time. There's some additional project that will install some infrastructure which appear to have additional volumes coming to the Gulf Coast as we get into 2012. But we are seeing some volumes flowing today.

And the reason I mentioned that in the context of your question is that certainly as they get the pipeline infrastructure in place, some of those volumes that really can only be moved by marine assets will go into the pipeline. But you're looking mid- to late 2012 before that happens.

Yes, these couple of recent announcements on the pipeline coming into Houston -- is that any concern to your business at this point?

Not really, unless it drove artificial building. If you got really excited about it because it marginally tightens the market up. Because it's going to go away. Those are volumes that we traditionally haven't moved; and from a Kirby perspective, we're glad to have them but we typically factor them out as we look at long-term fleet requirements.

Okay. And then in terms of pricing, can you just talk a little bit about your mix of pricing at this point? I'm really interested in where you stand on that spot versus contractual. I know there was an effort to kind of move back to more of a 75% contractual 25% spot mix.

And then also, just elaborate a little bit -- have you seen the customer -- with utilization where it is now, have any of your customers begun to approach you again about signing up this capacity under longer-term deals or day rates or something like that, beyond just a typical negotiated tariff?

Hey John, this is Greg. I'll try to answer that question for you. What our strategy is with respect to term versus spot -- well, let me tell you where we are today, which is we're 75% term and 25% spot. And what we're doing with our existing term customers is as those contracts come up we renew those on terms that are equivalent with what they're rolling off from.

In terms of our customers' behavior, we're noticing that there is some concern by some customers around coverage. And as a result, some of those customers who have been booking trips on a trip-to-trip basis, we've engaged with them on a 30- to 90-day charter period. But at this point in time, we're really resisting signing up any additional long-term contracts with new customers or existing customers that have new requirements.

Okay. All right; thanks for your time, guys. Nice quarter.

Kevin Sterling, BB&T Capital Markets.

Thank you, Operator. Good morning, everyone.

Morning, Kevin.

And Greg, congratulations on your promotion.

Thank you.

Let me get -- going back to the contract business, what percentage of your contract business do you still have to reprice this year?

Just the contract business as a percent of revenue, it's in the 10% to 15% range when you exclude the spot component.

10 to 15% of total--

Total revenue.

Right; excluding the spot component. Okay. And Joe, in the diesel engine services business -- kind of switching gears here -- are you starting to see an increase in customer maintenance schedules, and do you anticipate more, I guess, maintenance of the diesel engine services to continue, at least for the foreseeable future?

In the Gulf Coast, as it relates to the oil service business, there's a lot more talk because you have more drilling permits being issued. But issuing the permits is the first part of it and getting the equipment in place is the second. We're seeing a little of that, which is why we say that towards the latter part of the year we think that that business is going to get a little better.

Okay. All right, well, thanks so much for your time today.

Thanks, Kevin.

Chaz Jones, Morgan Keegan.

Hey, good morning, guys. Nice quarter.

Thank you.

I know last year you spent a lot of time talking about excess capacity in the market and that the industry fleet utilization levels were below what Kirby's were. Obviously, I'm sure weather's had an impact on that this year, but I guess, Joe or -- could you answer -- and I know this maybe is a hard question to answer -- is there any excess capacity still in the market? And is the rest of the industry at that low 90s utilization level?

Well, today they certainly are. I guess your question is, if you peel out the weather, is there excess capacity?

Right.

Well, currently everybody's at full utilization because there's actually some requirements that just aren't getting covered. And that's even more exacerbated by the upriver issues. Once that is relieved and you get into more normal operating conditions, I do expect that utilization rates will decline a little bit, which would be natural. But at the high 80%, low 90% level, you still are at levels that support pricing.

Right.

But I'd be surprised that -- if all of this backed away, that you'd still be at 95% utilization.

Yes, I was just kind of trying to get at, has the rest of the industry caught up to your utilization levels? Because I know that was an issue last year as you wanted to maybe drive for pricing improvement but the rest of the fleet was kind of holding you back.

Yes, we sense that a lot of that's gone. That there's a motivation to move prices a little bit. But who knows?

Right. Then my follow-up question was, you talked a little bit about adding some capacity to your fleet before the end of the year. I know that's the first time since, I think, 2008. How should we think about market share in this cycle? I mean, ex-acquisitions, do you kind of plan to maybe grab some market share? I know on the down cycle you said you were going to kind of take it out in line with what your competitors did. But I'm just trying to think about how to help get through the next up cycle.

Chaz, I wouldn't look at this as adding capacity. I would look at it just as the timing of barges coming out to when we get replacement tonnage back. It's just not perfect a time, so we're going down a little bit now and then we're going to go back at about 16.4, 16.5 ,which is about where we said we'd be last year. We're actually a little lower, I think, than we thought we'd be just by the way we've taken some barges out.

With respect to adding capacity, you do that carefully. And it'll be driven by our thoughts on utilization rates going forward and careful conversations that we have with our customers. But we don't just add capacity for capacity's sake; it's a thoughtful decision. Because as you know, that's what gets you into trouble.

Jimmy Gibert, Iberia Capital.

Hi, Joe; thank you for taking my questions. Someone mentioned earlier the movement of crude out of Galveston from the Eagle Ford region. We talk a lot here about the [Acron] acquisition of Cross Timbers and the Chevron acquisition of Atlas Energy. And both of those companies have very substantial assets in the Marcellus Shale region of Pennsylvania.

And I noticed that last week Dow Chemical signed a deal to buy natural gas liquids and ethane from Range Resources out of the Marcellus Shale region. And I was wondering if you guys had any thoughts about how these natural gas liquids and ethane might be moved to the Dow refineries in the Gulf.

That's a great question. That was a question we were asking last week, also. (Laughs) My guess is that ultimately it will be pipelines, but short term, probably principally unit trains. That's a question that's best addressed to them because we're speculating. We're going to ask them but we haven't gotten to it yet.

Okay. And Joe, maybe as a follow-up, could you sort of update us as best you can on your view of the US inland fleet dynamics and where you think we'll wind up at the end of the year.

In terms of total number of barges?

Yes.

I think it'll be about flat. How many barges are being built? Okay, 150 in -- probably about 150 out. That would be our guess today.

Okay, and that's with 95% utilization rates, at least for Kirby right now. Okay, thank you very much, Joe. I appreciate your time, as always.

All right; thank you.

(Operator Instructions) Steve O'Hara, Sidoti and Company.

Hi, good afternoon. Could you just talk quickly about your -- what balance sheet leverage you're willing to kind of move to in terms of a range? I mean, I know you guys have been close to 50% in the past. I'm just wondering if you'd be willing to go back there with acquisitions.

This is David. At the end of this year, we'll probably be in the 35% debt-to-total cap range. We would be willing to go up to the 50% range for the right acquisition. We do want to keep some balance sheet powder dry, but we would lever up for the right acquisition.

If we went beyond 50%, we'd risk investment-grade rating, which we don't want to do because we like to invest counter-cyclically. But we would go into junk for -- if it was kind of the perfect acquisition. But we'd probably want to cap it at 50%.

It would take a lot of thought before we'd do that.

Yes.

Okay. And then, has there been any change in the relationship with EMD now that Cat's the owner?

Well, yes and no. They were owned by a private equity group prior to Progress Rail, which is a subsidiary of Caterpillar, buying them. They're a -- this is kind of an interesting comment because private equity is entrepreneurial. But Progress Rail is very entrepreneurial and aggressive and we'll just see where they take the business. They're a pretty scrappy group, but we think that we have a good relationship with them. So I guess at this point that we don't anticipate much, if any, change.

Okay. All right, thank you very much.

I want to come back to Alex's question earlier on fuel as a percent of revenue. It runs about 10%. Okay, Operator, you can get the next question.

I'm showing no further questions at this time and I'll turn it over to the speakers for any closing remarks.

Thank you for joining us this morning. If you have any additional questions, 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 now disconnect.