Kirby Corp (KEX) 2011 Q2 法說會逐字稿

Welcome to the Kirby Corporation Second Quarter Earnings Conference Call. My name is Lorraine and I will be your operator for today's call. (Operator instructions) Please note that this conference is being recorded. I would now like to turn the call over to Mr. 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 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, 2010 filed with the Securities and Exchange Commission. I will now turn the call over to Joe.

Thank you, Steve. Late yesterday evening we announced net earnings for the 2011 second quarter of $0.77 per share, tying Kirby's previous record earnings of $0.77 per share reported third quarter of 2008, and reflecting a 43% improvement over the $0.54 per share reported second quarter last year. Our 2011 second quarter results included an estimated $0.07 per share negative impact from the record-setting high water experienced throughout the Mississippi River system during the quarter. I'm pleased to report that the River System is now back to normal water levels and this occurred kind of mid July.

The 2011 second quarter was a very active time for Kirby on the acquisition front and I want to briefly bring you up to date with respect to where we are on these acquisitions. On April the 15th we completed the acquisition of United Holding; a land based diesel engine and transmission service provider, as well as an oil service equipment manufacturer. United is doing well, capitalizing on strong demand in the land based oil service business and they are accretive, were immediately accretive to our second quarter earnings and frankly ahead of our plan.

To help us manage our expanded diesel engine service business, I'm pleased to announce that David Whisenhunt has joined the Kirby organization as the Executive Vice President of Engine Services. David will bolster our diesel engine service management team and will work with both Kirby Engine Systems, which is our heritage business and United, which is our new business. David brings over 30 years of diesel engine sales, operations and management experience to this segment of our business. He previously held positions with the Wood Group, GE Power and Stewart & Stevenson.

The acquisition of K-Sea Transportation was completed on July 1st. K-Sea is a large US coastwise tank barge operator. K-Sea has a diverse geographic footprint and operates on the East, West and Gulf Coast, as well as on the Great Lakes and in Alaska and Hawaii and owns one of the youngest fleets in the US Coastal tank barge business. We believe our purchase of K-Sea and our entrance into the US coastwise tank barge market was well timed. This business supply and demand is coming into balance and it's improving as demand improves and as single hull barges are phased out of service and also terms it's got in spot rate contracts are currently stabilizing.

Our relatively quick earnings recovery would have been very difficult to forecast a year ago. For a business that traditionally reflects the domestic economy, our success is surprising but also understandable. Low natural gas prices from shale formations have not only changed the competitiveness of the US petrochemical business, but has provided new crude oil volumes to be transported by tank barge; we think both inland and offshore tank barges and it has also helped drive the success that we're seeing in our land based diesel engine service business.

I'm going to come back at the end of our prepared remarks and talk about our 2011 third quarter and our full year outlook, including United's and K-Sea's anticipated contributions. I'm now going to turn the call over to Greg to recap our marine transportation operation and diesel engine service second quarter operations.

Thank you Joe, and good morning to all. During the 2011 second quarter, Kirby's petrochemical and black oil fleets achieved utilization rates in the low to mid 90% range, the highest equipment utilization rates since the third quarter of 2008. This high equipment utilization was driven both by continued strong customer volumes as well as the high water and flooding conditions on the Mississippi River system experienced during the second quarter that created delays and increased transit times.

During the quarter, 66% of our marine transportation revenue was produced serving our petrochemical customer base. The domestic petrochemical industry continues to benefit from low priced natural gas, providing it with a competitive advantage to global markets. This feedstock advantage continues to result in improved volumes of domestically produced petrochemicals for both domestic consumption and exportation.

The black oil fleet, which produced 21% of our marine transportation revenues, continued to see heavy demand driven from higher refinery output and the continued exportation of heavy fuel oil. We are also beginning to move crude oil produced from South Texas Eagle Ford shale formations loaded in the Corpus Christi area and delivered to the Houston and Louisiana area, as well as the transportation of crude oil from the Midwest to the Gulf Coast. The second quarter also benefited from all four of our oceangoing drybulk barge and tug units working in the coals and rock trade.

Revenues from our long-term contracts, that is contracts with over one year in duration, remained at 75% and the mix of time charter and affreightment business continued at approximately 56% and 44% respectively.

With respect to pricing during the second quarter, when term contracts were renewed, we achieved price increases in the 3% to 5% average range, when compared with the 2010 second quarter. This is an improvement over the 2% to 4% increase in the term contract prices achieved during the 2011 first quarter when compared to the 2010 first quarter. Additionally, our multiyear contracts have annual escalations based on labor and producer price index. Some of these are adjusted each January, and this year's adjustment provided rate increases in the 1% to 2% range.

Spot pricing during the second quarter increased in the mid to high single-digit range compared with the 2011 first quarter and in the high single to low double-digit range when compared to the 2010 second quarter. Contributing factors to higher spot contract pricing were higher equipment utilization levels both from improved volumes and the high water and flooding conditions, as well as from a 23% increase in fuel prices 2011 second quarter over first quarter, which are included in spot market pricing. When you exclude the fuel price impact, the second quarter spot market pricing increased in the mid single-digit range compared to the 2011 first quarter.

We anticipate our petrochemical customers' volumes will remain strong as they benefit from low natural gas prices, a major feedstock in the production of petrochemicals. We also continue to hear of planned plant expansions of petrochemical and refining facilities on the Gulf Coast that will benefit both our inland and offshore tank barge operations going forward. We also anticipate that the movement of crude oil will increase over today's levels, with the continued development of the South Texas Eagle Ford shale formations, as well as possible other increases in crude oil movements from the Midwest to the Gulf Coast.

We continue to invest in our inland fleets, both in terms of new construction and upgrading existing equipment. This program continues to improve the reliability of the fleet, improves our customer service and reduces our shipyard costs and the number of days out of service.

During the 2011 first half, we took delivery of 21 new 30,000-barrel tank barges and 5 10,000-barrel charter barges, adding approximately 650,000 barrels of capacity. However, during the first half, we retired 32 tank barges and returned 2 chartered barges, thereby reducing our overall active capacity by approximately 600,000 barrels. We did add 20 tank barges with the purchase of the ship bunkering operation of Enterprise in February, which added approximately 400,000 barrels of capacity. So, net-net our active tank barge fleet increased by about 450,000 barrels during the first half of 2011. As of June 30th we operate 837 tank barges with a capacity of 16.4 million barrels.

For the 2011 second half, we plan on taking delivery of 19 new tank barges, with a capacity of approximately 500,000 barrels. We also plan on continuing to retire older barges. Net-net, at the end of 2011 our total inland tank barge capacity should remain at 16.4 million barrels.

In addition to inland tank barges, we're building 3 2,000-horsepower tow boats for delivery in 2011 and early 2012. We're also building 2 offshore integrated drybulk barge and tugboat units for use under long-term contracts. The cost of the 2 units is approximately $100 million and they're scheduled to be completed in 2012. We will make progress payments on these 2 units totaling approximately $35 million during 2011.

K-Sea's fleet consists of 58 tank barges; 54 of which are double hull with an average age of nine years and 63 towboats. K-Sea's total tank barge capacity is 3.8 million barrels. Of K-Sea's 4 single hull vessels, 3 are scheduled to be operated through 2014 then will be scrapped or sold. As Joe says, K-Sea's fleet is one of the youngest in the coastwise trade.

Turning to the diesel engine services segment, during the 2011 second quarter, our April 15th acquisition of United had a significant positive impact on the segment's revenues and operating results. United contributed approximately 70% of the segment's revenue during the second quarter and achieved an operating margin in the high single digits.

Both United's revenue and operating margins were better than we originally expected and were achieved despite some supply chain disruptions from trailer manufacturers who were hit by recent tornadoes in the Midwest and also the Midwest flooding. United's manufacturing and servicing of hydraulic fracturing equipment, sale of transmissions and diesel engines and the compression business were all above our expectations.

The heritage diesel engine services segment also benefited from a continued strong power generation market, with several engine generator set upgrade projects and strong part and engine sales in the power generation sector. However, we continue to see a weak service and direct parts sales across the majority of our Gulf Coast oil services markets as our customers continue to defer major service projects. We also continue to see some pricing pressure in the Gulf Coast high speed markets as competitors bid for the reduced level of service work and part sales. We do anticipate this market to slowly improve during the second half of 2011 and into 2012 as the industry adjusts to the new safety regulations and drilling permits are issued.

I'll now turn the call over to David.

Thank you Greg. Good morning everyone. Let me provide a few more financial details. Kirby's marine transportation revenue was 16% above, and operating income 18% above the 2010 second quarter. The segment's operating margin was 21.9% compared with 21.6% from last year's second quarter. The high water and flooding issues throughout the quarter negatively impacted the quarter's results and operating margins. Our estimated operating margin without the negative impact of the high water and flooding was 23.8%.

The continued positive operating margins reflected the improved petrochemical and black oil products demand and equipment utilization and higher term and spot contract pricing during the second quarter that Greg mentioned. These positive factors were partially offset by a 23% increase in diesel fuel prices. With the purchase of United on April 15th, our diesel engine services revenues increased 293% and operating income 328% above last year's second quarter. The segment's operating margin was 10.3% compared with 11.3% reported in the first quarter of this year.

As Greg reported, United's revenues were better than we expected from both the service and manufacturing sectors and their operating margin was slightly higher than historical United operating margins, as some volume leverage flowed through to the bottom line.

However, and we've made this comment before, United's operating margins are lower than Kirby's legacy heritage diesel engine segment margins by at least a couple of percentage points due to the manufacturing sector carrying lower margins. This quarter, Kirby's legacy diesel engine services operating margins were strong due to the timing of several power generation projects which helped this segment's overall margins.

We continued to generate significant cash during the 2011 first half, with EBITDA of $180 million. At March 31st we had $172 million of cash and cash equivalents on the balance sheet. We used this cash and borrowings under our revolver facility to fund the $270 million purchase of United. Our capital spending for the first half was $98 million and consisted of approximately $60 million for new tank barges and towboats and approximately $38 million for capital upgrades to the existing fleet.

Our capital spending guidance for 2011 is $225 to $235 million and includes approximately $120 million for construction of the 40 inland tank barges and 2 inland towboats and progress payments on 2012 inland tank barge and towboat construction. The guidance also includes approximately $35 million in progress payments for the construction of 2 offshore drybulk barge and tug units. Anticipated capital expenditures for K-Sea for the 2011 second half are minimal.

We currently have agreements for the construction of 52 new tank barges with a capacity of approximately 935,000 barrels for delivery in 2012. The cost is approximately $95 million, the majority of which will be expensed in 2012.

We financed the K-Sea acquisition with a new $540 million unsecured term loan and approximately 1.9 million shares of Kirby common stock. The term loan was funded on July 1st, which was the closing date of the K-Sea acquisition, is with a group of commercial banks and has a five-year maturity. The term loan has a variable interest rate based on LIBOR. Interest rate spread varies with the company's senior debt rating and is currently 150 basis points over LIBOR. The term loan is subject to quarterly amortization and is prepayable in whole or in part without penalty.

As of June 30th our debt to total cap ratio was 20.5%, reflecting the borrowings under our revolver to fund the United acquisition. On a pro forma basis, assuming that K-Sea acquisition had closed on June 30th, thereby adding the $540 million term loan to Kirby's outstanding debt and reflecting the issuance of 1.9 million shares of Kirby common stock, Kirby's debt to total cap ratio would have been approximately 38.8%.

I'll now turn the call back to Joe.

Thank you David. I'm going to talk about our guidance through the third quarter and for the year. We announced our 2011 third quarter guidance range of $0.82 to $0.87 per share yesterday afternoon. This compares with the $0.57 per share recorded for the same quarter last year. For the third quarter, we're forecasting that utilization of our inland petrochemical and black oil products fleets will continue to range in the low to mid 90% level and based on these utilization rates, pricing should improve modestly.

Our guidance assumes that the US petrochemical production of both domestic and exported chemicals will remain strong, based on continued low natural gas prices. In addition, our guidance assumes that the US Gulf Coast refinery utilization will be stable with continued exports of crude oil and heavy fuel oil. All of this should result in continued favorable term contract renewals as well as favorable spot rates.

For the third quarter, we do anticipate lower results from our existing offshore operation which consists of 4 drybulk units, as 1 of those units enters the shipyard for some major maintenance during the quarter. Our third quarter guidance assumes positive operating income from K-Sea, however, acquisition transaction fees, interest expense on the new term loan and the negative impact on earnings per share from issuing the additional shares as part of the acquisition will offset K-Sea's operating income from an EPS standpoint for the quarter.

With respect to the diesel engine service sector, our guidance assumes continued strong manufacturing and service levels out of United and generally in line with their performance during the second quarter. We also anticipate that in the marine engine part of our business it will improve based on some customers' overhaul projects which were deferred out of the second quarter into the third quarter. And also some modest improvement in the oil service business in the Gulf Coast.

Our previous guidance for the United contribution to the 2011 year earnings was in the $0.20 to $0.25 per share range. We're pleased to say that based on current projections, United contribution to our third quarter earnings as well as our year-end guidance exceeds those levels.

For the 2011 year guidance range, we have raised and tightened our earnings estimate to a historic record level of $3.00 to $3.10 per share from the guidance that we issued earlier which was $2.70 to $2.90 per share, a significant improvement when you compare it to the $2.15 per share we earned for 2010. Our record previous earnings were the 2008 earnings of $2.91 per share.

Before I open the call up for questions, I want to comment further on Kirby's growth opportunities going forward. We're very pleased with this year's acquisitions and the strong management teams which they bring with them. These are businesses that were already in the diesel engine service and liquid barge transportation. They all either extend our geographic footprint or position Kirby to service a new market. They also extend our future investment opportunities.

Kirby's in great financial shape. Our debt to total cap, as David reported, is in the 38% range. If we were to apply our excess capital to paying down debt, including factoring in our anticipated capital expenditure program, we will be debt free sometime in 2014.

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

(Operator instructions) Alex Brand, SunTrust Robinson Humphrey.

I hate to do this, Joe because you just went through so much detail on your guidance, but I just want to understand that it sounds like everything's kind of tracking. In terms of recovery of pricing, United's doing a little better than you thought. And so if I take Q2 and I add back the $0.07 I would just normally expect your business to be a little stronger in the third quarter and I'm just wondering if there's some puts and takes there that maybe I need to be reminded about?

A couple of things; the existing offshore business has a unit in the shipyard so that's going to reduce the contribution from that segment.

I didn't think that was that big; that's part of the reason I asked.

Then the existing heritage diesel engine business whose earnings are driven by the projects that they're in the middle of, that part of the business, the power generation part of that business is also down a little bit.

With respect to K-Sea, last time we had a call you didn't' own it yet. You were reluctant to talk about kind of synergies and things you thought you could maybe affect by putting the businesses together. Is there any color you can now give us on what that might look like, if there's anything that you can bring to bear on their cost structure?

Alex, it's still too early to quantify it, but we estimated that we would capture $7 million of synergies pretty quickly and we will have captured that by the end of the third quarter. What we're doing with respect to the integration of K-Sea is we're working with their management team with a defined process of identifying additional synergies. That's going to occur in the third quarter - early fourth quarter, we'll make some decisions this year and really look probably early in 2012 for that to be implemented. And I think until that process is over, it would be premature to suggest anything more than we've put out. We think there's more there, but just not willing to quantify yet.

Ken Hoexter, Merrill Lynch.

As I look at the business really starting to ramp-up and now you've got full focus on getting the synergies on the mergers, you did a great job during the downturn in taking cost out, I think a lot better than we had anticipated, but as you see this start to ramp-up and you even highlighted how pricing is finally starting to kick into gear as well, what do you expect in terms of cost ramping up in both sides of the business as you begin to take on more volumes?

Ken, with respect to the inland marine business, we don't think that based on current capacity levels that we need to add people, at least G&A people. And we won't have to add power either, because we're essentially fully utilized so all the power is in there. If we add capacity then you'll have to add power and there'll be some G&A cost that would be associated with that capacity depending on how much you add.

On the diesel engine side, we size that business so that they can see improvements in the 10% to 15% range and not have to add people. So I think the message here is that those costs that we took out should pretty much stay out as margins and rates improve.

K-Sea, to Alex's question, you were getting more into a synergy discussion on kind of what you anticipate, but maybe taking a step back and just talking about the business itself and can you comment on how the business is in that market? Obviously you made the acquisition, but didn't go into real great detail because you wanted to close it before commenting on it, but maybe you can talk about how the fundamentals are trending in that segment relative to the inland segment and how you gain those synergies over time?

That's a great question. That business went through a lot of pain in 2009 and 2010 and I'm talking about not specific K-Sea. K-Sea was just part of the industry pain. What we see is the excess capacity shrinking. We think that as the single skin barges come out - and they all have to be out by the end of 2014 - it's going to continue to move to balance.

But what is also encouraging is that the recent reopening of a couple of Delaware Bay refineries; one is just opening; the other one I think is scheduled to open later this year, should improve volumes and there are also opportunities for the movement of crude oil from South Texas, this Eagle Ford play we think along the Gulf Coast. So we're encouraged with respect to what we see. We think the recovery is going to be over the next several years. We don't think that it's going to happen this year. We think that you're just going to see a gradual strengthening of this business and it should get back to frankly where it was in the kind of 2007 early 2008 years. But it's going to take a couple of years to do that.

Kevin Sterling, BB&T Capital Markets.

Joe, I'd like to touch on utilization. You've got really good utilization. Do you think you could continue to push your barge utilization or do you think we're near peak?

Kevin, it's a little bit like unemployment, there's some time period between our voyages on large contracts of affreightment that you just can't get to and we are in the mid 90% level range; you're pretty close to getting there. Now having said that, we serve several markets and there's always an opportunity to improve the way that we assign vessels to voyages and try to compress that and we'll work on that every day, as evidenced by our improvement in our horsepower utilization rates over the last couple of years. But in general, when you get to the mid 90s it gets pretty difficult to push beyond that.

I'd like to follow-up on that. Because I think Joe, a year or maybe 1.5 years ago you were talking about your utilization being higher than the industry's and I'm wondering where you think we are today? Of course your utilization continues to be very strong. Do you think the industry is caught up and particularly given the growth we're seeing in crude oil by barge?

Kevin, we do believe that the industry utilization rates are about on par with where we are today and that's part of the reason why pricing has begun to move. Quite frankly, maybe a little sooner than we thought. Some of that's driven by base demand and some of that has been because of this really historic high water event that we had during the second quarter.

Thank you, that's a good explanation.

George Pickral, Stephens.

Kind of following up on the last line of questioning; as it stands now I think Greg said you have 52 barges on order for next year; do you have any thoughts on whether those will be used to grow the fleet or if you're simply just going to use them for replacement again next year, kind of like you've been doing over the last couple of years?

George, primarily they'll be used for replacement.

My follow-up then, barge margins if you exclude the weather around 24% like you said, which is essentially near the peak margins in 2008. It looks like K-Sea is going to bring that number back down to the low 20s. Joe, I think in the past you talked about getting up to the high 20s barge operating margin. Do you need to revise that or do you still kind of stand by that or is that kind of the right way to think about peak margin potential?

When we talked about that we were talking about inland margins.

I think in the legacy business or the inland margins we could be in the mid 20% range and maybe a little above that as pricing rolls through here. We've taken a lot of cost out of the business and we've streamlined the operation to better serve the customer and it's paying dividends. So we should hit higher highs in the legacy business, if you will.

But as you pointed out George, K-Sea will bring down the average of the segment margins a couple percent at least. And over time it will get back up, you know, we'll get everybody kind of at the same level. But K-Sea's markets, as Joe mentioned, are just now in the process of recovering.

John Barnes, RBC Capital Markets.

A couple of questions. One, I want to follow back on George's question about the barge orders. You said primarily for replacement, so primarily leaves a little bit of a range there, so what are you thinking in terms of fleet growth next year with those barges?

John, we haven't fully declared but it does appear to us that the volume levels are going to be pretty strong and that may warrant some additional capacity, but we're not ready to say that that's going to happen yet.

That makes sense. Can you give us an idea, once those barges are delivered and you finish the program this year, what's going to be the age of your inland barge fleet at that point? Do you have a rough guess?

It will be in the 19-year range.

But it continues to move down. Our barge age will move down in 2011; it will move down again in 2012. We're looking at in 2012 potentially 18, maybe even a little less on average.

Joe, going back to K-Sea and the coastwise business again, I'm just curious, as you look at that business and new growth opportunities, obviously they've got a customer base; do you see more opportunity to sell into new customers or do you see more opportunity to sell into the existing customer base?

Actually both. Greg's inland tank barge business has been working very closely with the K-Sea sales team and I'm going to let him comment on some of the things that you're talking about.

John, we've been comparing notes and talking about opportunities where there may be to cross sell between the two fleets and one of the areas of strength of course that we have on the inland side is with the petrochemical customer base and K-Sea has several units that are capable of moving those, but just don't have the relationships that we do, so we're in the process of trying to introduce them to those customers.

Additionally, we're just making sure that they're seeing all the opportunities that we see on the Kirby Inland Marine side from the Eagle Ford shale play. Additionally, there are times when our business peak loads and we may have some spot requirements that we're unable to apply inland equipment against and so we, again want to make sure that K-Sea sees that. So, those are the kinds of things that we're doing on a day to day basis, as well as just exchanging information about our customer base and relationships that we enjoy.

Just further commenting on K-Sea, I think that the customer base sees K-Sea is a great company, strong management team, but was concerned with respect to how they were structured and their - not necessarily their viability, but the limits that the MLP structure and debt has on their fleet. And I think [almost] to the customer that we've talked to, welcomes K-Sea under an umbrella that is financially a lot stronger than where they were on a standalone basis.

Last question for you guys. I appreciate the commentary around pricing and obviously I agree with the sentiment about a little more than expected, a little sooner than expected. I'm curious, the last time we saw utilization pop to these levels and you had as good an outlook, you guys were willing to take on a little more contractual business than spot. I think you had always maintained a goal to get back down to that kind of 75/25 split.

But I'm just curious, with utilization improving as quickly as it has, with weight having popped back up and with what I think is going to be a fairly I guess balanced supply/demand equation, are you starting to see an uptick in requests for more contractual quotes or do you think we still need a couple of more quarters of this kind of strength before you start to see that uptick?

No, you're beginning to see it, but remember that we moved our spot contract exposure from 70% to 80% because we were frankly concerned that the business just couldn't carry the capacity that was being introduced much longer. So we did it as a conservative measure. I think that at least where we sit now, based on equipment that's being projected to be built in 2012, that we're going to have a pretty strong market, assuming the economy hangs together, assuming that natural gas prices remain at these approximate levels for a while. So I'd be comfortable or we would be comfortable frankly with probably a little more spot exposure.

Now what happens is that you go to the market and you test it and you say gee, I'm willing to let this business go because the customer's not going to agree to the rate increase and what I think probably surprised us a little bit is that the customer did agree to it, which is indicative of kind of where we are in the market. All of that has to be qualified by the fact that it was a very difficult operating environment out there and that there may be some anomalies that were occurring this current quarter that over time will work through the system and utilization may come down a little bit.

But we are pleased with what we see. We're pleased with the talk of new capacity. We're seeing some of that. When I say new capacity, new petrochemical capacity. We're encouraged by the liquids that are coming out of South Texas that need to be transported by barge, because the infrastructure just isn't there to move it by pipeline. So there are a lot of positive things that are encouraging. We just need to kind of let the year play out, see where utilization ends up and hopefully the industry is going to be disciplined with respect to the capacity it's added. So far they have been. So things are looking pretty good.

Nice quarter guys. I really appreciate your time.

Chaz Jones, Morgan Keegan.

Just kind of wanted to ask a big picture question here, maybe kind of thinking about the inland marine industry over the next five years, going back historically, if my recollection is right, tonnage or volume growth kind of track GDP in the industry maybe over the last 20-30 years 2% or 3%, but with these secular trends going on with the export story, with the plant production increases, more product moving into Houston and Corpus, those sorts of things; has that changed that historical sort of baseline tonnage trend maybe up to the 5%-6% range over the next five years or do we have to see housing and auto come back stronger maybe for that to play out?

Well, it would be interesting if housing and autos did come back strong; that would be another significant boost to volumes that need to be moved. Our utilization rates are at these levels without that, which is encouraging indeed. Chaz, I'd hesitate to try to quantify that. I do think that the traditional GDP growth rate for our business is probably too low, based on what you just said, but I think it's too early to say it's double. You know, some of it depends on what is GDP; pretty anemic right now.

But it sounds like Joe, that if that played out that way that the current capacity situation in the industry isn't high enough to even handle the volume.

If everything came back right now, that's correct.

Then I had one quick follow-up. Just on the corporate expense line, I know this is an itty-bitty thing but that was up in the quarter. I'm going to guess that was related to maybe acquisition activity expenses, those sorts of things. If it wasn't, let me know. And then should that come back down below $4 million or is that a new range with the acquisitions?

It's related to the acquisitions. We will have some more acquisition expenses in the third quarter but then the fourth quarter you should see it come down a bit.

Steve O'Hara, Sidoti.

I don't know if you said it or not, but are you guys still looking for acquisitions actively and then going back to the debt to cap, what could you theoretically bring that up to or what's your comfort level there, if you were still looking?

I'm going to answer the first part and then I'm going to let David answer the second. We're always looking for acquisitions. The issue is what's out there and what is the relative value.

On the debt to cap, it comes down to debt to cap, as Joe mentioned, we're about 38% debt to total cap right now. We believe we could get up to about 50% and still maintain an investment grade rating, so that gives us some capacity. But as we mentioned, the cash flow generation of the company is pretty strong, so we should be able to de-lever pretty quickly. And so if an acquisition came tomorrow, we'd have the room to get up towards the 50% range, but if it's six months to a year, the cash flow generation will add to our capability, if you follow me.

Then going back to the scheduled refinery openings or assumed refinery openings, how much of that is in your guidance and how does that change it if it's not?

I'll let Greg comment on the inland marine and how it might affect inland marine, but as it relates to K-Sea, refinery utilization coming up is certainly helpful. The volumes are still fairly low and they've got a ways to go, so it's going to take some time. We haven't factored a lot of that into the guidance as it relates to K-Sea.

On the Gulf Coast petrochemical expansions there's some of those that were and are really pretty short-term that have happened or will happen pretty quickly. Typically it's reopening existing plants that have been mothballed. Those are in our numbers. There's some longer-term additional capacity that's in the three to five-year timeframe that of course is excluded.

The message though is that our customers are really encouraged by the current environment around feedstock pricing and also taking advantage of the tremendous infrastructure that the US has to offer them along the Gulf Coast and are making decisions today that are long-term capital investments in the Gulf Coast that will position them to produce more products in the long-term in this area. So we're just very encouraged by that.

I am showing no further questions at this time.

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

Thank you ladies and gentlemen. This concludes today's teleconference. Thank you for participating. You may now disconnect.