Kirby Corp (KEX) 2011 Q3 法說會逐字稿

Welcome to the Kirby Corporation third quarter earnings conference call. My name is John and I will be your operator for today's call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I 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 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 Web site 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, and quarterly report on Form 10-Q for the period ended June 30, 2011 filed with the Securities and Exchange Commission. I will now turn the call over to Joe.

Thank you, Steve and good morning. Late yesterday we announced record-setting net earnings for the 2011 third quarter of $0.94 per share. Which reflects a 65% improvement over the $0.57 per share reported for the 2010 third quarter. This quarter we also closed the acquisition of K-Sea Transportation on July 1. K-Sea is a coastwise and local tank barge operator with a diverse geographic footprint, operating on the East, West and Gulf coasts as well as the Great Lakes and in Alaska and Hawaii, and owns one of the younger fleets in the US coastwise tank barge business. The K-Sea fleet consists of 57 tank barges, 54 or which are double haul with an average age of about 9 years and 63 tugboats. K-Sea's total tank barge capacity is 3.8 million barrels.

Our record third-quarter results reflect a strong inland tank barge transportation market, accretive operated earnings from K-Sea, a robust land based diesel engine service business, and an improved marine and stable power generation service business. Our original earnings guidance range for the third quarter was $0.82 to $0.87 per share. On September 19, we announced that we expected our third quarter results to exceed $0.90 per share. Yesterday, we announced $0.94 per share. Stronger-than-expected petrochemical volumes, stable domestic refinery production held by some export volumes, favorable weather, higher term and contract rates, all impacted our results for the third quarter. Development of US shale formations for oil and gas, not only drove our land based diesel engine service business, but also low priced natural gas is driving US petrochemical volumes. And the liquids coming out of these formations are providing black oil volumes to move. All very positive.

As we expected, and as we have commented on before, K-Sea's accretive operating results were generally offset by investment banking and legal fees, higher interest expense, and the dilutive effect of the issuance of 1.9 million shares of Kirby stock associated with this acquisition. For the third quarter, K-Sea's equipment utilization rate was in the mid to high 70% range. The Atlantic Pacific and Hawaii fleets experienced good equipment utilization rates. The New York Harbor based fleet reflected lower utilization rates due to some over capacity, principally in the bunkering market. With respect to pricing, contracts in this market renewed to basically as expiring. But spot contract rates improved in the low to single digit percentage range. During the 2011 third quarter, approximately 60% of K-Sea's coast wise and local revenue was under contract and 40% was in the spot market. Time charters represented about 90% of the revenues under term contracts in the third quarter.

With respect to K-Sea, we are working with Tim Casey and his management team, integrating K-Sea where appropriate into Kirby. We expect this integration process will be completed early next year. K-Sea's market is certainly more difficult than our inland transportation business. We are pleased with the progress and believe that this business should continue to improve over the next couple of years as single haul vessels leave the market and volumes improve.

I will come back at the end of our prepared remarks and talk about our fourth-quarter forecast, as well as the full year outlook. Now I'm going to turn the call over to Greg for a recap of our inland marine transportation business and our diesel engine service business also.

Thank you Joe and good morning to all. The domestic petrochemical industry continued to benefit from low priced natural gas, providing it with a competitive advantage to global markets. This feedstock advantage continued to provide us with improved volumes of domestically produced petrochemicals for domestic consumption and also for exportation. Kirby's black oil fleet continued to see strong demand, driven by a stable refinery output and the expansion -- and the exportation of heavy fuel oil. In addition, we are benefiting from some new incremental demand driven by the movements of crude oil produced from South Texas Eagle Ford shale formations from the Corpus Christi area to Houston and South Louisiana requiring case. And also, Canadian crude oil movements from the St Louis area to refineries in the lower Mississippi River as well. We expect a movement accrued by barge will continue as shale formations are further developed.

The agricultural chemical market was also very strong during the latter half of the third quarter with a traditional midwest fall fill. During 2011 third quarter, Kirby inland marines petrochemical and black oil fleets achieved utilization's in the low to mid 90% range. Our inland markets -- excuse me, in our inland markets, revenues from long-term contracts, that is 1 year or longer in duration, remained at 75%. And the mix of time charter in the freightment business continued at approximately 54% and 46% respectively.

Moving to inland marine transportation pricing, contracts that were renewed during the third quarter achieved price increases in the mid to high single-digit range when compared with the 2010 third quarter. This compares with the low to mid-single digit range achieved in the 2011 first and second quarters, compared to the -- for contracts renewed during the period of the 2010 corresponding quarters. During the third quarter, spot pricing, which includes the price of fuel, increased in the high-single to low double-digit range compared with the 2011 second quarter. We continue to invest in our inland fleets, both in terms of new construction and upgrading our existing barges. This program continues to improve the flexibility of the fleet, improves customer service, and reduces shipyard days and out of service days.

During the 2011 first 9 months, we took delivery of 32 new 30,000 barrel tank barges and 5, 10,000 barrel charter barges, adding about 955,000 barrels of capacity. Offsetting this during the first 9 months, we retired 51 tank barges and returned 4 chartered tank barges, thereby reducing our overall active fleet by about 980,000 barrels. We added 20 tank barges with the purchase of the ship bunkering operation of Enterprise in February, adding approximately 400,000 barrels of capacity. So, net-net, our active tank barge fleet increased by approximately 375,000 barrels during the 2011 first 9 months. As of September 30, we operated 827 tank barges with a capacity of 16.3 million barrels.

For the 2011 fourth quarter, we plan on taking delivery of 8 new tank barges with a capacity of about 200,000 barrels. We also plan on continuing to retire older barges. So, net-net, at the end of 2011, our total inland tank barge capacity should remain at 16.3 million barrels. In addition to inland tank barges, we are building 6, 2,000 horsepower inland towboats with 2 scheduled for delivery in the fourth quarter of 2011, and 4 scheduled for 2012 delivery. We're also building 2 offshore articulated dry bulk tug barge units for use under long-term contracts. The cost of these units is approximately $100 million, and they are scheduled to be completed in the second half of 2012. We will make progress payments on these 2 units, totaling about $35 million during 2011, with the balance in 2012. In addition to the 2 offshore units I just noted, Kirby's 2012 new construction will consist of 52 inland tank barges with a total capacity of about 930,000 barrels. The cost is about $95 million, the majority of which will be expended in 2012.

For 2011, we anticipated that industry wide, about 150 tank barges will be delivered into service, 40 of which are for Kirby. And we have been estimating that about 150 older tank barges would be retired from service. Due to the improved demand for inland petrochemical and black oil barges and federal tax incentives on new equipment, during 2011, we estimate that approximately 200 tank barges are currently on order industry wide for delivery throughout 2012. And offset -- it will be offset to be some degree depending on market conditions by retirements. Short to medium term, we did not see this as a problem for Kirby as current 2011 and projected 2012 petrochemical and refinery production levels increase crude oil movements and the current tank barge utilization levels support these new additions.

Turning to the diesel engine services segment, our April 15 acquisition in United, continue to have a significant impact on Kirby's third quarter revenues and operating results. United contributed approximately 75% of the diesel engine services segment revenue during the third quarter, achieving an operating margin in the high single digits. United's revenue and operating margin continued to be better than we had originally expected. United's manufacturing of hydraulic fracturing equipment and sailing service of transmission and diesel engines were above our expectations, as exploration and development of the United States shale formations continues at a rapid pace.

Our legacy diesel engine services segment also benefited from continued strong power generation market, with engine generator set up grade projects and strong parts and engine sales. Our service to the inland marine operators improved during the third quarter, a reflection of the improved inland liquid marine transportation market and maintenance on river vessels prior to the Midwest fall harvest. I will now turn the call over to David.

Thank you, Greg. Good morning everyone. Let me provide a few financial details. Kirby's marine transportation revenues were 51% above and operating income 52% above the 2010 third quarter. The marine segments operating margin was 22.2%, compared with 22.1% for the third quarter of 2010. The significant increase in both revenues and operating income included continued strong performance from our inland marine transportation sector with high equipment utilization levels and favorable pricing, as Greg mentioned. Our legacy marine transportation sector achieved an operating margin in the mid-20% range during the third quarter. The segment revenue increase included K-Sea, which contributed approximately 20% of the third quarter's marine transportation revenues. As expected, K-Sea was accretive to our third quarter operating income. For the third quarter, K-Sea's operating margin was in the low double-digit range.

Our diesel engine services revenues increased 338% and operating income 371% above last year's third quarter, with the increase predominately due to the acquisition of United on April 15. The segment operating margin was 10% compared with 9.3% reported for the 2010 third quarter. As Greg reported, United's revenues and operating results were better than we expected, both from the service and manufacturing sectors. And their operating margin, in the high single digit range, was higher than historical United operating margins as the higher volume leverage flowed through to the bottom line. Kirby's legacy third quarter diesel engine services operating margins were strong, due to the timing of several power generation projects and the improved inland marine market, which helped the segments overall margins.

We continue to generate significant cash during the first 9 months of the year, with EBITDA of $308 million. Our capital spending for the first 9 months was $163.2 million and consisted of $110.1 million for new tank barges and towboats, as well as progress payments on the 2 new offshore bulk dry barges that Greg mentioned. And then another $53 million for capital upgrades to the existing fleet. Capital expenditures for K-Sea and United during the third quarter were minimal. Our capital spending guidance for 2011 remains in the range of $225 million to $235 million, which includes approximately $120 million for construction of new equipment.

As you know, we financed the K-Sea acquisition with a new $540 million unsecured term loan. And approximately $1.9 million of Kirby common stock. The term loan was funded on July 1, the closing date of the K-Sea acquisition. As of September 30, the term loan balance was $513.5 million. Also as of September 30, we had $83 million outstanding under our $250 million revolving credit facility. This morning, our revolvers outstanding balance was $33 million. Since the acquisition of K-Sea, our peak debt hit $860 million. But as of yesterday, it was $747 million, a reduction from the peak of $113 million.

Based on our current cash flow projections, with no further acquisitions, and tank barge and towboat construction at levels equal to scheduled retirements, we would anticipate being debt-free sometime during the year of 2014. But let me be clear, we do not anticipate this happening. As historically, Kirby has been the major consolidator in the inland tank barge sector. And now being the largest operator in the 180,000 barrel coastwise trade, we believe we will be able to entertain consolidation opportunities in that area as well.

As of September 30, our debt to total capitalization ratio was 36%, compared with 20.5% at June 30. This reflects the new term loan associated with the K-Sea acquisition, less some debt repayments during the quarter.

I will now turn the call back to Joe.

Okay thank you, David. Let me give you some insight with respect to the fourth quarter. Yesterday afternoon we announced our 2011 reported guidance range of $0.97 per share to $1.02 per share. This compares with $0.59 per share reported for 2010 fourth quarter. Our fourth-quarter guidance assumes that the US petrochemical production for both domestic use and export will remain relatively strong, based on continued low US natural gas prices. And we will continue to export some diesel fuel as well as the heavy oil.

We are forecasting for the fourth quarter, inland marine transportation utilization levels to be in the low 90% range. This is 1 or 2 percentage points off of the full utilization levels. Our practical full utilization is about 95%. The third quarter was a very frothy, driven by low inventory levels, which were the result of infrastructure issues caused by the flood in the second quarter. The market is returning to more normal levels. Still high utilization and with rate momentum, but not quite the frothy environment we saw at the beginning of the third quarter.

For the fourth quarter, we do anticipate higher results from our 4 offshore dry bulk units, as all 4 of those units are fully employed for the quarter. Our fourth-quarter guidance assumes positive operating results from K-Sea. However, anticipated winter weather conditions, the seasonality in their Alaskan and Great Lakes business, and interest expense coupled with the impact on EPS on issuing the 1.9 million shares associated with this acquisition, will offset most of K-Sea's contribution to operating income for the quarter.

For diesel engine service sector, our guidance assumes continued strong land based manufacturing and service levels from United, generally in line with how United performed during the third quarter. We anticipate our legacy diesel engine market will be in line with the third quarter. And our power generation market will have fewer engine generator upgrade projects and some lower parts in engine sales. We also anticipate our Gulf coast oil service market to reflect continued modest improvement during the fourth quarter.

Our 2011 guidance range was raised and tightened to a new level of $3.30 per share to $3.35 per share. Our previous guidance levels had been $3 to $3.10 per share. And of course, much improved from the $2.15 reported last year. Our previous record year, and this is a historical record for Kirby, was in 2008, when we reported $2.91 per share.

Now, obviously, we are very pleased with our operating results thus far this year. The acquisitions we have made position Kirby in markets which we believe will perform well and have growth opportunity. We are rapidly paying down our debt, as David mentioned. $113 million already from peak debt levels, at least as of yesterday. Our 2 businesses which are in more challenging markets, K-Sea and our legacy diesel engine business, will continue to improve as capacity tightens and volumes expand for K-Sea and drilling activity increases in the Gulf of Mexico for our legacy diesel engine business.

Operator I think we will now open the call for questions.

Thank you. (Operator Instructions) Our first question comes from Ken Hoexter from Merrill Lynch. Please go ahead.

Hi, good morning, Joe and Dave. If I can jump in on the chemical car loading. If I look at the rails, we have seen a move to kind of a negative volume growth the last few weeks. Yet, you talked about low natural gas, I guess Greg talked about low natural gas prices remaining positive for out looking. I just want to understand, we have not seen it separate from the rail volumes to often. Why would you see that strength continue?

You actually do see it historically separate from time to time, Ken. Having watched this for 27 years. And in your railcar carload, you have other things. It is not purely a liquid measure. There is some plastic pellets for example in those numbers also.

We are not hearing any concern from our customers with respect to the volumes that we carry. We are also probably a little closer to kind of base inventories than the rails are. Now, we do think that some of the demand in the third quarter was pent-up demand, not satisfied in the second quarter. And we are bringing down kind of our utilization estimates a couple of percentage points. But, overall we are not concerned about volumes in the third quarter, excuse me the fourth quarter.

Wonderful. And Joe, can you talk about -- are you seeing an increased move towards moving crude as opposed to kind of a refined product as we see more of the Bakken and other flows?

Yes, that is a good question. And certainly, crude oil movements are significantly up. Four or five years ago, you could count the number of barges actually moving crude oil on one or two hands. Today, there are close to, we think, 140, 150 barges, inland barges that are directly involved in moving crude oil. And some offshore equipment also moving crude oil. The movements are mostly down river movements of Canadian crude oil through Baton Rouge refineries. And then, Eagle Ford liquids move to the Houston Port Arthur and New Orleans markets.

We think that, that is going to continue to grow. That production levels are estimated to be four to five times what they are currently. That is both in Eagle Ford and Bakken. We also think that Canadian crude oil movements are going to grow. Some of the Eagle Ford movements will be, ultimately, kind of medium term move by pipeline. But, we think that the way of these volumes are growing and where the pipelines are placed, there is still going to be some significant amount that will be moved by water. And don't really -- frankly, the number of barges involved, we think going forward, you'll have at least that many in the short-term, even more in the long-term. There's enough flexibility that barging gives and enough limitation in the pipeline to keep that demand pretty strong.

As it -- will it replace, in terms of volume, refined products being moved? Well for Kirby, we already move more black oil. But, specifically to crude oil, it is possible. I think it is possible that you will see the movement of crude oil equal to maybe the number of barrels that are currently moved for the prime products. Probably a little too early to tell, but you feel pretty good about it.

Sounds like a great opportunity. Can I jump over to United? It seems like each quarter, this acquisition has done better than expected and significantly so. Can you talk about maybe what the top line growth is kind of longer-term? Is it a 5% grow or double-digit growth? Or just give us some perspective. And maybe talk about what drove it beyond the expectations.

Yes, hi, Ken. It is David. Well what is driving it beyond expectations is that they have ramped up their manufacturing capability a lot faster and a lot better than we had anticipated when we bought them. The management team there has been very focused and done an excellent job getting the throughput through the facility. And, obviously, we talked a little bit about the margins that were better than we expected. And you can see it in the volumes also. So, that is what has driven the out performance versus expectations.

In terms of revenue growth, it is in the oil service patch. Right? And they do tend to have boom bust cycles. Any you do see that in equipment. And we do expect, at some point, that this will turn down. And that is why we are really trying to focus on the service side of the business and grow that out before the eventual downturn comes. But that said, it feels to us that this frac opportunity in the natural gas and cheap liquids are on a path to energy independence for the US. And given that, we think this trend is going to stay here for a while.

Now, how does that translate into revenue growth going forward? It is really hard for us to put a number on it right now. I would say for just in the near term, 2012 looks on par to 2011 on a full-year basis. And maybe up some. We are still taking orders now for 2012 and it is still fairly strong.

Wonderful. I just want to understand the offshore articulated dry barges that you are buying, the two. That is in addition to the four that you currently have. Right? So, are they -- I think you said they're coming in on contract. How long are those contracts? And what was the rationale for expanding that market?

Yes, they're actually not expanding it. These are assumed to replace the capacity that we currently have in that business. This is a contract, Ken, that goes back to 1977. So, it is a very long-term relationship. And what we are doing is replacing some older equipment. Whether all that older equipment goes away or not is still to be determined. It looks like there is some additional opportunities to continue to employ it. But at least for the coal trade, we're going to put these two new units and the coal trade.

Wonderful, that makes a lot of sense. Just my last one is just on K-Sea. I thought you had said they were going to break out and keep separate K-Sea in results. Is this a one quarter post acquisition where you are blending it in? Or, I just want to understand going forward how should look for K-Sea. Are you fully integrating this so it is not going to be a completely separate line item?

Yes, closer to the latter there. We are fully integrating it into the marine segment. We will try, as we did this time, give you the percent of revenue and give you an indication of where the margins were. As we said on the call, the margins were in the legacy marine business were in the mid 20% range. And on K-Sea they were in the low single -- excuse me, low double digits and the revenue was about 20% of the marine total for the quarter. Hopefully that gives you enough to model it. We don't plan on giving more disclosure on that side. But as we integrate we will enter more.

Yes, and let me also add that our strategy is to pace the market as a tank barge operator that has both the inland and coastal capacity. And that there will be places where it doesn't matter if it moves inland or coastal. Just bring your requirement to us and we will fulfill it. That is kind of the strategy which would tend to report, that based on that strategy kind of one single marine transportation unit.

Great. Greg, Joe, Dave, thanks. Appreciate the time.

Thank you, Ken.

Our next question comes from Alex Brand from SunTrust Robinson. Please go ahead.

Thanks guys. I just wanted to verify, you guys just want one question and a follow-up right?

Yes, thank you Alex.

Okay so, I just want to try to get a little color if I can on the guidance. I want to make sure I understand what -- I heard -- I think I heard a lot of things, weather will be a negative, they will be flat. United you think will be sort of sequentially similar, utilization will be a little bit lower. And so all of those things are why I typically think of the fourth quarter being more flat to down than flat to up as you have guided. Is it just barge pricing being up sequentially that is the driver? I'm just had to get a handle on what it is and how sustainable it is.

That's right. It is the rate momentum as it cascades forward. Kind of the good side of what it was doing a couple of years ago, which was going in the other direction.

Okay.

And there is also transaction fees. We had some transaction fees in the corporate and general expense that won't recur in the fourth quarter.

All right good. And when I think about where pricing is, can you help us, if not quantitatively at least qualitatively, understand how far are your prices now from prior peak levels and when do you think you would get there? Is there anything that would keep you from getting there and exceeding those levels?

Yes, Alex, I would say that we are approaching the peak levels that we were at previously. As it always is, really just kind of a supply and demand function in terms of can we get there. I think I would add that, I think, it is easier to return than to get there the first time. So, hopefully that observation is accurate.

All right thanks for the time guys.

Take care, Alex.

Our next question comes from Mike Baudendistel from Stifel Nicholas.

I wanted to ask a question on the contract rate increases. I think you said they are increasing mid to high single digits on the traditional inland barge area. Are those replacing rates that were negotiated last year at this time or earlier than that? Kind of early 2010, were there any that were negotiated in 2009?

Yes. Most of those were negotiated a year prior. But there were some that were older than that as well. The vast majority are about a year old.

Okay. And I also wanted to ask with amount of book to business up at 40% on spot, in the same market, are rates now at a level that you would like to lock in rates under contract at a little bit larger portion of that business? Are you maybe going to wait to see if rates on the contract business increase a little bit more?

Mike, that is the K-Sea business is the 40% spot. Of course, the inland business is about 25% spot. I think it frankly depends on the piece of business that you are looking at and the customer. But, we do think that rates in that business are going to continue to trend up as capacity comes out and as some of the volume comes back. So, we are optimistic about the rate environment there. If you go into -- if you do term some of your spot business up, you will -- as a strategy, you are going to try to limit the term on that. So, that as rates rise, you can take advantage of higher rates on renewals. And that is typically what we do on the inland side and what Tim Casey and his team tries to do on the offshore side too.

Great details. Thank you.

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

Joe, is there a pricing differential between moving crude oil versus your core black oil petrochemical business? And is most of that crude business mostly spot our is it contract?

Well, now, we are moving it under contract for the most part. I'm sure that there is some being moved on a spot basis, but we are not doing much of it. And I would say it is about at the black oil rate levels. We don't have that much equipment engaged in it yet, because our traditional black oil market was so strong. But we see that as a growing market and we have some customers that are continuing to put some pressure on us to put more equipment there.

Okay. If I can follow up along that, so it sounds like you are probably getting more calls now than say six months ago to move oil out of the shales. And if you can get your hands on capacity, is that where you would place it?

Not necessarily. We -- it depends on, frankly, how we see the longevity of that particular movement. Our strategy has always been to work with our existing customer base on movements that we think are long-term movements. In other words, the volumes are going to be there going forward. We would rather do that than to take a short-term opportunity that we don't think is sustainable.

Now, having said that, I do think that the volume that we are seeing today, particularly coming out of the Eagle Ford and Canadian crude that is being exported into the Baton Rouge area, that volume is sustainable. The issue is how much more volume is going to be sustainable over the long run as the gathering systems are put in. With respect to the Baton Rouge movement, there isn't really a lot of talk about a pipeline there. But in the Eagle Ford, there are gathering systems that are going to go in that is going to take some of that volume.

Okay, thank you. And one follow-up. Greg, I think you had mentioned, you said there were 200, I think, tank barges on order for 2012? How does that rank with years past?

It is up from 2011 by about 50 barges. But the mix has changed also. If you look back on the barges that will be delivered in 2011, only about 50 of those barges were 10,000 barrel barges. And if you look at the mix as you go into 2012, about 85 of those barges will be 10,000 barrel barges. The 10's really have not seen much of a replacement cycle so far. Most of the building has been focused in the 30,000 barrel market. And as a result, I'm talking industry wide here, the age of the 10's is really creeping up there and it needs some replacement. So, you're starting to see that. So, on a capacity basis, it is not quite as aggressive as it sounds.

Okay. I appreciate the time and the color. Thank you and congratulations on a really solid quarter.

Thank you.

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

Yes, thank you and thanks for taking my question. Nice quarter guys. I wanted to -- you gave a lot of great detail on K-Sea, just data point wise. One question I had there was you talked about the utilization of the fleet being 75% to 80%. Could you give us a sense for maybe where that was either last year or in the second quarter, just to get us a sense, maybe a better sense for where they are in the cycle?

Yes, it was lower last year and lower even more the year before. So, you are beginning to see the recovery.

Okay.

And down -- significantly down from the 2008 levels.

Right, right. And then the follow-up question I had, I think, Greg, you mentioned that spot rates were up 8% to 12% sequentially. Could you comment on what spot rates were up year over year?

No, what I said about spot rates was kind of high, high single-digit to low double-digit range. And we did not comment year over year. Fuel is included in that number and it gets pulled around quite a bit by fuel.

Okay. I guess that is the end of my questions. Thanks guys.

Our next question comes from David Beard from Iberia.

Good morning gentlemen. For the industry capacity of -- the capacity addition of 200 barges, are the shipyards full at 200 or could there be some additional movement sometime during the year?

I can't speak for Jeffboat, but certainly, the yards that we use that Trinity, West Gulf, and some other smaller ones are at capacity. So, with the exception of Jeffboat, which I just don't have a good feel for it, I think they are about there.

Okay. So, it seems it is going to be hard for that order book to build beyond the 200 for next year?

Yes, not without opening additional capacity.

Okay. And do you think the retirements would approach 200 or is it just too early to tell?

It is too early to tell. But to Greg's point, there is a good percentage of those barges that are 10,000 barrel barges. And the age profile of that fleet is old to older. So, we think that there is going to be quite a lot of capacity in the next couple of years. It is going to have to come out of the 10,000 barrel fleet.

Okay. And lastly, just to switch a little bit to the cash flow. Because you have done a great job paying down debt. Would I just take the net income plus the DDA, plus the CapEx, it seems that the free cash flow number there would be $25 million or $30 million a quarter. But you seem to have paid down debt faster than that. Am I missing something? Or have you been more efficient on working capital?

No, I wish you were more efficient on working capital always. But no, it's timing of deferred -- we get deferred taxes and timing of tax payments helps, or lack thereof having to make a tax payment. Bonus depreciation is clearly a big benefit for us this year. It is 100% bonus depreciation this year. Next year it drops down to 50%. And, obviously, that is a big help from your tax cash -- excuse me, cash paid for taxes.

And we also typically generate more cash in the latter part of the year than at the beginning of the year. Timing of capital expenditures, that kind of thing.

Okay great. Thank you for your time.

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

Hi, good morning. Could you just talk about your operating margin goals for K-Sea and maybe where they peaked in the past?

Yes, they peaked in the kind of high teens historically. This goes back to 2007, 2008. We think that integrated with Kirby, that K-Sea's costs are going to be lower. So, we don't see any reason to think that if they get back to where they were in 2008, rate levels get back there, that the margins are not going to be higher. Are they going to be in the mid-20% range as we see in the inland business? I think it is too early to tell. I think that they should be pretty close to the other side of the business when their market gets to where we think it is moving towards.

Okay. Thank you. And then, you guys have said that size matters in the inland business. Is it as important for the coastwise business as well or is it may be a combination of the two that is more important?

I think it is both. I think that as we expand the offshore business, that their ability to service their customer base, be flexible, leverage their G&A costs all help. And I think that as we integrate them into Kirby, that helps to.

Okay. Thank you very much.

Our next question comes from Jimmy Giber from Iberia Capital. Please go ahead.

Hi, guys thanks for taking my question. When I talked to people about export chemicals, I always get the question, so these guys have tankers that move chemicals overseas, but I know that's not true. But if I'm right, you guys benefit from higher export chemical volumes because you're feeding more raw materials into the refinery and more finished product out of the refinery to terminals that then load the finished product onto tankers to go overseas. Is that pretty much the way works?

Jimmy, that is pretty much the way works. What we participate in is everything from that crude oil going into the refineries, to the intermediates going from refineries to petrochemicals, and then sometimes there is several intermediate steps. And ultimately, to either a domestic user or to a terminal where it is loaded on the ships you talk about for export markets.

And like if I see, Dave, I have seen in natural gas prices -- everything on the screen for the most part is green except for natural gas. And that seems to be a pretty stable price down here, if not lower. So, that would just mean that volumes would continue to increase at the refineries? Is that right?

Yes, it bodes well for the US petrochemical complex and for use through the existing infrastructure, and also for additional projects that have been talked about in a variety of locations in the United States. 80% of the US petrochemical production occurs in Texas and Louisiana. And both of those venues have been talked about recently by a number of players for additional investment, particularly over the next five years or so. So, that is encouraging as well.

All right. And just one more real quick? If I want to order a 30,000 barrel tank barge today, I know you said the yards are at capacity for '12, when can I take delivery for a 30,000 barrel tank barge if I ordered it today?

It would be in the first part of 2013 more than likely.

Okay. So, thank you guys very much.

Thank you Jim.

Our next question comes from [Sander Tonts from Crichton]. Please go ahead.

Hello, Joe how are you? Just a quick clarification, I had one question that was answered and this one I think was answered, but I want to make sure. On the contract pricing for this most recent quarter, I heard two things. One, that they were basically rolling over. And one that they were up in the low to mid single digits from a year ago. I'm assuming that they are rolling over from the escalated base price, which is low single digits, higher than the unescalated base price of the original contract that they are replacing. Am I interpreting that correctly?

Sander, what Greg said was for the third quarter, as contracts rolled over, they rolled over at rates that were in the -- into the mid to high single-digit rate increases. Okay? And then, what I said, was that the third quarter was a frothy quarter with lots of pent up demand. And they're really just wasn't enough equipment to move the cargo that needed to be moved. That -- we anticipate that we are going to come back to more normal levels, still very high utilization for the quarter. We are moving the utilization rate down a couple of percentage points, not much, to slightly off of full utilization. We still have rate momentum, but I think it is really too early to tell if rate momentum isn't going to be in the kind of mid single digit or is it going to still be in the kind of high single digit. So, for the quarter, the way that we are forecasting our earnings, we are actually moving the earnings momentum down a little bit. But certainly not ending it.

Okay.

Now where we said that contracts were rolling over as expiring was in the K-Sea example. Contracts rolling over and expiring. Some were up, some were down. But on average, they were at the same levels. Spot rates are actually up a little bit though. That makes sense to you?

It does. One other question with respect to the refined product and petrochemical exports. The industry has been set up for years to handle movements in the opposite direction. And now we are moving and exporting this material in great volume. Are there any bottlenecks in the terminaling space that are preventing growth, or are we targeting growth to some degree?

No, not that I know of. Not that can't be corrected. There is a lot of incentive to correct any bottleneck. But an import terminal can be an export terminal just as easily.

Sure, sure. Okay that's all I had. Thank you.

We have no further questions at this time.

Well we certainly appreciate your interest in Kirby Corporation and participating in our call. If you have any additional questions, 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 conference. Thank you for your participation. You may now disconnect.