Kirby Corp (KEX) 2011 Q4 法說會逐字稿

Welcome to the Kirby Corporation 2011 fourth quarter and year earnings conference call. My name is Sandra 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 is Joe Pyne, Kirby's Chairman and Chief Executive Officer, Greg Binion, Kirby's President and Chief Operating Officer, and David Grzebinsk, Kirby's 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 Kirby's 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, and quarterly report on form 10-Q for the period ended September 30, 2011, both filed with the Securities and Exchange Commission. I will now turn the call over to Joe Pyne.

Thank you, Steve. Late yesterday, we announced record-setting net earnings for the 2011 fourth quarter of $1.00 per share, reflecting a 69% improvement over the $0.59 per share reported for the 2010 fourth quarter. For the year, we announced record earnings of $3.33 per share, a 55% increase compared to $2.15 per share for 2010.

Our record fourth quarter and year earnings were the result of strong demand for our inland tank barge service. Modest earnings contribution from our coastal marine tank barge business, strong earnings from our land based diesel engine service business, and improved earnings from our Heritage Marine diesel engine service business.

I will speak briefly about K-Sea's results, our coastal tank barge operation. Then I'm going to turn the call over to Greg Binion, who will update you on our inland Marine transportation and diesel engine service markets. With respect to K-Sea, K-Sea's operating results were as expected for both the fourth quarter and the year.

Fourth quarter is generally a more difficult quarter for our coastal business due to some seasonality in the cargoes we carry, principally refined products. And, either the closure or reduction in demand in Alaska and on the Great Lakes as poor weather conditions affect those operations. In addition the fourth quarter included a $1.25 million severance charge associated with integrating K-Sea's back office into Kirby's.

For the fourth quarter, K-Sea's equipment utilization was approximately 75% to 80% with respect to pricing contracts in this market that renewed during the first quarter -- excuse me, the fourth quarter were basically flat. And, spot contract improved in the low to mid-single digit range year-over-year. During the fourth quarter, approximately 60% of K-Sea's revenues were under term contract, and 40% were in the spot market.

Time charters in this coastal business represents approximately 90% of the revenues under term contracts for the quarter. With refined product demand tying K-Sea more to the US economy than our inland operation, K-Sea's equipment utilization levels and pricing environment remains below our inland transportation business.

As we continue to fine tune K-Sea's cost structure, US economy improves, and industry capacity is removed from service, coastwise utilization rates should improve as well as K-Sea's profitability. I'll come back at the end of this call and talk about the full year and first-quarter outlook for 2012. Let me turn the call now over to Greg.

Thank you, Joe, and good morning to all. During the fourth quarter, our inland Marine transportation sector continued its strong performance with high utilization rates and favorable pricing trends. Low priced natural gas continued to positively impact the global competitiveness of the US petrochemical industry. The feedstock advantage provided continued strong volumes of domestically produced petrochemicals for domestic consumption and exportation.

Kirby's black oil fleet continued to see strong demand driven by stable refinery output and the movement of crude from the Midwest to the Gulf coast and also out of South Texas. Our refined products demand remain positive, benefiting from the Midwest to Gulf Coast movements of ethanol. And, our agricultural demand was also brisk, benefiting both from domestically produced and imported ag products.

Consequently, during the 2011 fourth quarter, Kirby's petrochemical and black oil inland fleets achieved utilization rates in the low to mid 90% range. Revenue from our long-term contracts, that is one year in duration or longer, remained at 75%. And, the mix of time charter and affreightment business continued at about 55% and 45% respectively.

Turning now to inland marine transportation pricing. Term contracts, which renewed during the fourth quarter, achieved rate increases in the mid-single digit range when compared with the 2010 fourth quarter. Spot contract pricing, which includes the price of fuel, saw rate increases in the mid to high single digit range when compared with the 2011 third quarter.

Our multi-year contracts have annual escalations based on labor and Producer Price Index. Some of these are adjusted each January, and the adjustment effective on January 1, 2012 provided rate increases in the 2% range. During 2011, we continued to invest in our inland fleet, both in terms of new construction and upgrading existing barges.

This reduces maintenance costs and out of service days, and improves the reliability of our fleet and our service to our customers. If we roll forward to the end of 2012, and exclude our non-certificated fleet, which moves primarily fertilizer solutions, our average inland tank barge fleet age will be about 16.5 years old.

During 2011, we took place of -- excuse me, we took delivery of 38 new 30,000 barrel tank barges and two new pressure barges totaling approximately 1.1 million barrels of capacity. During 2011, we retired 66 tank barges totaling 1.25 million barrels of capacity. We also added 20 tank barges with the purchase of the ship bunkering operation of Enterprise in February of 2011.

Adding approximately 400,000 barrels and capacity. So, net, net, during 2011, our active inland tank barge fleet capacity increased by about 250,000 barrels. As of December 31, 2011, we operated 819 tank barges with a capacity of 16.2 million barrels.

We also took delivery of one 2000 horsepower inland towboat in the 2011 fourth quarter. For 2012, our construction program will consist of 25 30,000 barrel inland tank barges and 30 new 10,000 barrel inland tank barges with a total capacity of approximately 1 million barrels. We're also building five Canal towboats for 2012 delivery.

The cost of the new inland tank barges and towboats is approximately $100 million, the majority of which will be expended in 2012. We will also continue to retire our older inland tank barges during 2012. In the 2012 fourth quarter, we also expect to take delivery of two new offshore articulated dry cargo barge and tug units for use under long-term contracts.

The cost of these units is approximately $100 million. During 2011 we did make progress payments on these two units totaling $33 million and the balance will be paid in 2012. For 2011, we estimate the industry placed into service approximately 160 inland tank barges, 40 of which were Kirby's.

We estimate that 100 to 125 were retired from service, the majority of which were 35 years or older. Due to improved demand for inland petrochemical and black oil products barges and federal tax incentives on new equipment, we estimate that approximately 235 inland tank barges were on order industrywide for delivery throughout 2012.

55 of these are Kirby's. Short to medium term we don't see this as a problem for the industry as we believe that increased market volumes and fleet retirements will keep supply and demand in relative balance. Turning now to our diesel engine services segment, our April 15 acquisition of United had a positive impact on Kirby's fourth quarter and the full year financial results.

United contributed approximately 75% of the diesel engine services segment's revenue for the fourth quarter. United's operating margin was in the low double-digit range. We've continued exploration and development of the nations shale formations. United's revenue and operating margins were better than expected. Manufacturing and servicing of hydraulic fracturing equipment and the sale of land-based transmissions and diesel engines remains robust.

Finally, our legacy diesel engine services segment, which involves the marine market also improved, as well as our power generation market, with engine generator set upgrades, so parts and services all being stable. The Gulf coast oil service market was similar to the third quarter, with lower than historical levels of drilling rigs working in the Gulf and the resulting competitive environment for service work. I will now turn the call over to David.

Thank you, Greg. Good morning. I will talk about margins, and then provide a few more other financial details. Continued strong performance in our inland transportation sector and the purchase of K-Sea effective July 1 resulted in Kirby's marine transportation revenues being 44% above and operating income 48% above the 2010 fourth quarter.

The Marine segments operating margin was 21.8% compared with 21.2% for the 2010 fourth quarter. Without the severance charge at K-Sea, operating margins would've been 22.2% for the fourth quarter. As Greg noted, during the fourth quarter, our inland marine transportation sector had continued high equipment utilization in the 90% to 95% range with some softness in November, but a fairly strong rebound in December.

So, our legacy marine transportation sector maintained its strong operating margins in the mid-20% range during the fourth quarter. K-Sea, which contributed approximately 20% of the fourth quarter's marine transportation segment revenues, they contributed to our fourth quarter operating income with margins in the in the low single digit range.

With the acquisition of United, our diesel engine services revenues increased to $215 million in the quarter from$ 54 million a year ago, and operating income was $23 million compared with $7 million for last year's fourth quarter. The segment operating margins were 10.6% compared with 12.8% for the 2010 fourth quarter.

However, without the earnout adjustment, which I'll discuss in more detail in a minute, operating margins would've been approximately 12%. United's strong performance continued in both the service and manufacturing sectors. And, they're operating margins were in the low double digits, which is higher than historical United operating margins and this is driven by higher volume leverage, which basically flowed through to the bottom line.

On the cash flow side, we continued to generate significant cash during 2011. Our EBITDA was $436 million for the year. Our capital spending for 2011 was $226 million. And, consisted of $115 million for new inland tank barges and towboats, $33 million in progress payments for the two new offshore dry bulk barge and tug units that Greg mentioned.

And then, $78 million primarily for capital upgrades to existing inland and coastwise equipment. Capital expenditures for K-Sea and United were minimal. Our capital spending guidance for 2012 is currently in the range of $255 million to $265 million.

And, that includes approximately $100 million for the construction of new equipment and approximately $70 million in progress payments for the two dry bulk units that Greg noted. The balance is for upgrades to existing marine equipment, and some small spending in the diesel engine services facilities area.

As of December 31, we had $95 million outstanding under our $250 million revolving credit facility, which included the $42.7 million acquisition of the Sea Boats fleet that we completed in the late fourth quarter. This morning, our revolvers outstanding balance was $73 million. Now, I would like to talk about the earnout.

As you know, we have this earnout in place as part of our acquisition of United Holdings. The former owners received $270 million on closing but can receive an additional $50 million payable in 2014, if certain financial targets are met during 2011, 2012, and 2013.

The fair value estimate of the amount we think we will have to pay under this arrangement is determined each quarter and held as a contingent liability on our balance sheet. Any changes to the estimated we believe we will pay runs through the income statement. If we increase our estimate of the payout, we would increase the contingent liability, and it would lower our earnings.

Conversely, if we lower the estimate, we would reduce the liability, thereby increasing our earnings. During the fourth quarter, we booked $3.7 million, or $0.04 per share, in expense as our estimate of the amount we would have to pay increased. For the year 2011, we booked a total of $6.3 million, or $0.07 per share, in expense.

As there are two full years remaining for the earnout period, you can understand that we may be required to make further adjustments either up or down to this contingent liability. We have consequently excluded any potential changes to the earnout contingent liability from our guidance. Joe will share our outlook and guidance shortly. I will now turn the call back to Joe.

Thank you, David. There is certainly still some uncertainty in the US and world economies, and this uncertainty is reflected somewhat in our 2012 guidance. Our 2012 year guidance range is $3.85 to $4.05 per share. This compares with the $3.33 per share, which we just reported for the 2011 year.

Our 2012 low end guidance of $3.85 assumes that our inland and coastal marine transportation equipment utilization and pricing will be consistent with the 2011 second half. And, that our diesel engine service land-based market will not be as strong as it was in 2011, with some second-half softness in the manufacturing of principally hydraulic fracking units.

The high end guidance of $4.05 per share assumes both marine transportation units will improve modestly with corresponding higher term and spot contract pricing. On the diesel engine service side, our high end guidance assumes that our land-based market will be similar to what it was in 2011, with continued strong manufacturing and re-manufacturing of hydraulic fracking equipment, as well as some modest improvements in our marine and power generation and Gulf Coast oil service markets.

There has been much market discussion about the rapid expansion of fracking units in the oil and gas business, and the effect of low natural gas prices on the need for drilling and fracturing equipment. We have had no customer cancellations, and our 2012 backlog is about the same as it was this time last year.

Moving to the first quarter guidance of $0.86 to $0.93 per share, in our marine transportation segment we're forecasting that both our inland and coastwise overall equipment utilization levels and pricing will remain relatively consistent with the fourth quarter. Weather issues and lock delays will impact the first quarter. During January, we experienced, of course, some of these delays.

The first quarter will also be negatively affected by a major maintenance issue with one of the key locks on the Gulf Intracoastal Waterway. Which causes the lock to be deactivated for short periods of time. In summary, 2011 was a terrific year for Kirby, with record revenues, earnings, and cash flow. And, of course, we reported record results.

Significant acquisitions completed in 2011 were positive in the marine transportation and diesel engine areas. And, the markets are complementary to our legacy market, and we believe position us well for continued growth. Our balance sheet is strong and our cash flow is excellent.

Our two businesses, which are in more challenging markets, our coastal business and our legacy diesel engine business, should improve as capacity tightens and volumes expand with respect to the coastal trade. And, drilling activity increases in the Gulf of Mexico with respect to our legacy diesel engine business. Operator, that's all of our prepared remarks. We're now ready to take questions.

Thank you.

(Operator Instructions)

Jon Chappell, Evercore Partners.

Thank you, good morning, guys.

Good morning.

Joe, my first question is on the diesel engine services business. When you were talking about the guidance at the very end of your prepared remarks, you said the 2012 backlog for fracking equipment is the same as 2011. And then, when you read through your commentary about the assumptions and the high and the low end of your range, that would seem to match up with the higher end of the range.

So, my question is, the ordering for the fracking equipment, how did that progress through the fourth quarter from beginning to end? And, so far early this year? And, do you feel that maybe your customers are a little bit more reluctant to order than six months ago as pressure pumping margins may have decreased?

John, this is David. Let me answer that a little bit as it relates to the backlog. The order pattern tends to be backend loaded in the year. So, we've -- you work down your backlog through the first two quarters, and then you build it back up in the last two quarters. So far, as Joe indicated, the backlogs approximately where it was at the beginning of last year.

What we don't know is what the strength of the year will be going forward. Obviously, the low natural gas price is impacting gas-directed fracturing. But, a lot of our customers are moving their equipment to more oil directed, as you would expect. We're just a little cautious on how that might play out through the remainder of the year.

And, Jon, just to give you a little more color, and I'm going to ask Greg to talk about some of other things that we're doing at United, but clearly, the change in natural gas prices is something that we're watching very, very carefully at this point. We're not hearing anything that worries us, but I think we all know that can change. But, let's talk a little bit about some success in diversifying that business and also the service side of the business.

Sure. We talked a lot about United and pressure pumping, but really one of the big thrusts that United has had over the last year or so is to be able to diversify its product offering. And, we're now to the point where really we've expand that product offering so we can provide all the equipment needed by a frac operation.

So, of course, pressure pumps, but we also offer blenders, cementers, hydration units, and transfer pumps. And, recently added the capability to provide our customers with the data band. So, one of the things that we've seen is interest, in addition to what David's talking about, an interest in the pressure pumping.

We've also seen some expanded interest in these other non-pressure pumping products. So, we're excited about the diversification and the capability to provide our customers with a complete suite of frac equipment. The other thing that we've been working on is the thing that really brought us to United in the first place.

And, that is centered around the service component of the business as it relates to the re-manufacturing ability. You think about the frac market, there's somewhere in the 7000 frac pumps that are out there operating in very harsh conditions every day. And so, we've been trying to position ourselves as one of the premier re-manufacturers of this equipment.

As you can re-manufacture and make like new a frac pump for roughly 60% to 70% of the cost of new. As we go into 2012, this interest in re-manufacturing is really strengthening as our customers, the operators of these fleets, have been able to grow their fleet size to the point where they can take some capacity out and afford to have it off-line and do this process, which takes several weeks.

And also, they've had to establish their capital budgets to accommodate this re-manufacturing of the frac fleets. We did a small number of test units last year, which were successful. And, we've got a more robust program as we go into 2012. And, we have in place the marketing effort, the process for accomplishing this efficiently, the supply chain in place, and then the people with the skill sets required to deliver to our customers.

And, to that, finally, I'd say that the facility that we have where we really focus our manufacturing is flexible. And, allows us to do a mix of both new and re-manufactured pressure pumping units. And, also to build these non-pressure pumping oil field related products.

In fact, that facility was built for re-manufacturing units. And, it's our objective over time to reduce the exposure to manufacturing and increase the service aspects of that business.

Right. That's incredibly helpful. I almost feel like I'm cheating by asking my follow-up question, but I'm going to do it anyway.

On the marine side, Greg, you mentioned of the black oil fleet seeing some strong demand, Midwest to Gulf and Texas. As those fields are developing and as we tie in the fracking business and what you're seeing with some of your customers going to drilling more oil, have you look at the growth potential for your black oil business?

Well, we see that in the short-term, that's probably going to continue to grow as more oil find its way to water and delivers to refineries across the Gulf Coast. Long-term, we think that most of the ratable production is going to find its way to pipeline. And, that's been the way it's been. History's taught us that that's how it works.

However, we think there is still -- there's still will be some continued movement of crude oil by barge as barges are much more flexible. And, as these fields are developed, they do have different types of crude oil that are produced that need -- and so, as a result of that, you need flex ability to move those different types of crudes to the refineries that can run the most efficiently. So, we think there'll be a component that stays on the water.

Jonathan, a shorter answer would be flat to maybe some modest increase in black oil. But, we don't think this is going to drive a significant increase in black oil demand long-term and medium term.

Okay. Thanks, Joe, Greg, and David.

Alex Brand, SunTrust Robinson Humphrey.

Hi, guys. Shifting gears to your core business. It sounds like your new build plans for this year are still mostly replacement. And, I know you guys like to make sure that you're disciplined and maintaining price in the market, but isn't there an opportunity for you to maybe get some volume growth here and take advantage of a balance of some growth and some price?

That's a good question, Alex. And, with respect to the 2012 order book, there are 10 to 13 barges that we can make new capacity by delaying retirements. And, we'll call that during the year based on how the markets doing. So, there are -- there is plans for potential new capacity in the current order book.

And, let me just also comment on the 2012 projected capital expenditures going forward, 2013 and '14. We're getting to the end of our significant rebuild program. So, we should see CapEx, for at least replacement equipment, taper off at the end of 2012, and we should see lower numbers going forward.

That's -- we like cash flow.

So do we.

Free cash. And then, for my second question, David, on the -- can you just remind us when you bought K-Sea, what was your expectation for what that business would contribute to the bottom line in 2012? And, where are you in the process of integrating and getting that accretion?

Sure, yes. We -- when we announced the acquisition, we said that we would save in 2011, on an annualized basis, about $7 million. And, that would add to the earnings of K-Sea. As we've moved through it and you heard some of the severance charges that we outlined this quarter, we think the annualized savings going forward is about on the order of $10 million.

Which is probably a little better than we expected in terms of earnings contribution from K-Sea. I think what we need to watch here is how the market develops. The US economy is still fairly weak and refined products demand is still weak. And, we've got see that come back before we get significant accretion. But, it will be a positive contributor to our earnings in 2012, to be sure.

So, all that you're saying, you only baked in the cost savings for this year, until you see the cycle on the coastwise start to play out?

Yes, pretty much.

Okay, thank you.

And, Alex, it might -- as K-Sea was a public company, you can go back and look at historic peak margins and you can look at their earnings during that period. And, make some assumptions. They should, in our system, our business model, operate at higher margins, and greater profitability. Because of the costs that we can take out.

I got you. Thanks for the time, guys.

Jack Atkins, Stephens.

Good morning, guys, thanks for taking my questions.

Sure.

So, just to start off here, I guess my first question is with regard to future petrochemical investment domestically. I think it's interesting that over the last couple of weeks, we've seen domestic natural gas producers pump the brakes a little bit with regard to their expectations for production in 2012, hoping to get natural gas prices back up to that $4.00 an Mcf level over time.

So, I guess the main part of my question here is when you think about the directionality of natural gas prices over the next 12 to 18 months, and maybe moving back higher if we see production coming in, at what point do you think domestically our petrochemical producers begin to lose their feedstock advantage, and you see some pull back in capacity expansion?

Yes. Jack, another component to that, that is probably even more important than the actual price of natural gas, is the differential between crude oil and natural gas. Now, historically, it was between six and seven times. So, you can multiply 250x7, and you can see that crude oil would be very, very low.

For petrochemical manufacturing complexes around the world, a large number of them are based on liquid feedstock slates. Where the US manufacturing capacity was really based on cheap natural gas. And, people worried about that, when gas back in the early 2000 spiked up to high single digits, low double-digit numbers. And, it's really apparent that -- that we've got plenty of gas, and that that's not going to happen for a while.

And, it also doesn't look like crude oil is going to come down in value to the point where they go back to their -- it goes back to its historical relationship. So, we're not really worried about that. And, I think that based on that, you're beginning to see chemical companies talk about investments in North America. And, there've been -- there's been lots of noise, and there have been, already, decisions to add additional capacity.

Okay, great. Thank you for that color, Joe. And then, when you think about the M&A environment as it stands today, you have three different areas of your business, where you could look to make acquisitions. And then, there's always a potential for bolt-ons beyond that or new verticals. I guess I was wondering if you could comment on how you would prioritize your strategy for M&A going forward between your inland marine business, your coastwise business, and then also your diesel engine services business?

Yes. I might add to your point that we've kind of expanded our investment horizons, which is exciting for a company that is going to produce enormous pre-cash flow for 2013 and forward. We're a disciplined buyer of assets, we've learned over time that when you make capital mistakes, they're very painful and there with you forever.

So, within that discipline, we look at the opportunities. And, I would say that all those businesses have opportunities in either bolt-ons or acquiring businesses. And, we're looking at all areas, evaluating those areas based on the capital decision and the objective of getting a 12% return over the cycle.

I would also tell you that I think that the acquisition environment is actually pretty good. 2011 was great. 2012 I think will also be good.

Okay, great. And, one last follow-up and I'll jump back in queue. Greg, you talked about the number of new build barges you expected for the industry in 2012. Could you maybe comment on how many barges you expect to be retired by the industry in 2012 as well?

Yes. Jack, that's difficult to predict. But, at this point in time, we think that it's somewhere about -- a little over half will probably be replacement capacity, and the balance will be expansion.

I'd also point out that in addition to just the raw a number of barges in the mid-230 range, there's a high number of 10,000 barrel barges that are being built this year, and somewhere in the 80% to 90% range. And, that's more than normal. So, while the number of barges is high, you also need to temper that with the fact that there's quite a few of them that are 10s versus 30s.

And, those 10s will be replacement for the most part.

Right.

Great. Thank you, guys.

Ken Hoexter, BofA Merrill Lynch.

It's Scott Weber in for Ken. Hi, Joe. I'm just trying to get a better sense for the margins at engine services. United was mid to high single-digit margin business, and I understand that Dave said that you're getting volume leverage there now from manufacturing.

But, the margin must have really expanded for the overall segment to come out at about 12%. Can you just talk a little bit more about the volume leverage you've experienced? And, if you been able to take out any costs there, or if you'd expect the manufacturing margins at least to normalize back to the single digits, once equipment sales ease?

Yes. No, Yes, without the earnout adjustments, margins in the segment, as you've correctly point out, were about 12%. Clearly, we are getting volume leverage. We haven't taken costs out of United.

And, in fact, they've been expanding because they've been ramping up their capacity. So, what we've really seen is just that fixed cost spread, as the volume of both manufactured equipment and service related items and parts goes through their organization. And, more of it is falling through the bottom line because the G&A costs aren't going up in line with that, as they exercise the leverage.

I don't know if that helps you --

I guess your second part of the question was will margins drop -- go back to a more normal range? And, I would just say it's dependent on the volume. It will scale up and down with volume. Clearly, as -- if volume comes down, we will address the cost structure. But, right now, things are pretty much right sized for where we're at.

I might add that as we transition, to more service, you should see higher margins in that part of the business.

Got it. Okay. That is helpful. Thanks. And then, just as a follow-up on K-Sea, can you talk about the trade patterns for the coastwise fleet right now? And, how Northeast refinery shutdowns might impact that business, if at all?

Yes. We don't think it's negative. We think it's positive, because you're going to see distribution to that area likely accumulating more ton miles.

I think it's too early to talk about that in any detail. I can tell you that the refined products trade in the Northeast is actually pretty strong right now. Where we have utilization problems, it's more in the black oil side.

Got it. Okay. Terrific. Thanks for your time.

John Barnes, RBC Capital Markets.

Hi, thanks, guys. Can you talk a little bit about the first quarter? I'm interested in just -- obviously you're dealing with easier weather conditions and that type of thing and I'm trying to understand the range that you gave on guidance, is the low end building in?

The potential for the weather to revert to a more normal pattern, and is the top end a continuation of what we're seeing now? Or if this weather continues to play out, is there -- I guess what I'm asking, is there upside to that? I'm trying to figure out how you modeled in weather, I'm sorry.

Yes, right. Gosh, who knows what it's going to be. Remember that -- and I'm -- this sounds a little facetious, but remember that weather on the East Coast is not necessarily weather on the Gulf coast. And, that what we have seen this year, I think more than we had seen in the last couple years, is more fog.

And, more frontal system delays. You get a frontal system through Houston, and you can't go across Galveston Bay. And, what we haven't seen is what we saw last year, which was heavy icing conditions in the early part of the year. And then, in the first quarter of '11 the ice all melted and went away. So, I think it's too early.

What we put in the assumptions, John, is just kind of normal weather. And, if it's worse, then it affect earnings negatively. If it is positive, it's a little better. But, based on what we know today, I wouldn't say that January was a great weather month. It wasn't the worst either.

All right. And then, I know the focus on diesel engine now is very, very heavy on United and that business. But, just curious as to the old core diesel engine business. The off-shore stuff, that type of thing. Can you just talk about what type of trends you're seeing on that? Are you still seeing some recovery on that business?

I'll let Greg respond to that.

John, as you suggested, we have seen some improved service levels in the Gulf during the fourth quarter. And, we're hopeful that will continue in the first quarter. And, we are encouraged by the fact that improved rig counts permits are being issued.

There is some deepwater rigs that are moving back to the Gulf of Mexico with some chatter in the market about maybe some more of that happening later in the year. And, our customers just appear to be more upbeat to us this year than they were last year. So, it seems to be an improving area of the market for us.

And then, one last question. With the discussion around a shift between manufacturing and parts and service on the United business, can you just remind us what the differential there today, in terms of what percent is OEM and what percent of the parts and service? And, where do you think, ultimately, that mix shifts to?

It's about 55% manufacturing, John, 45% parts, service, distribution. And, we think that it should look more like 70% parts service distribution, and 30% manufacturing. That will move around, of course, based on demand in any given year.

But, we're willing to give up some manufacturing to do more service. We don't want to exclude manufacturing, because those are the relationships and the units that at some point you have the best opportunity to bring back in and maintain.

And timeframe for that shift?

We're working hard on it. It -- the transition is going to be -- it started this year. We still have a large backlog. So, you physically can't get 70%. 30% at this point. But, I think over the next couple of years, we should be getting there.

Good. Thanks for your time, guys.

Kevin Sterling, BB&T Capital Markets.

Thank you, hi. Good morning, gentleman.

Good morning, Kevin.

Joe, let me ask you about your contract to book of business on the margin side. How much is rolling off this year? And, when do most of those contracts reprice?

Yes. I'll let Greg address the how much is rolling off. They reprice through the year. So, there's no one quarter that is particularly loaded with renewals. Do you want to that?

Yes. And, with respect to the volume of our business that reprices every year. Some years are heavier than others. But, when you include the spot component of our business, that makes up 25% of our revenue stream, about 60% to 70% of our business reprices every year.

Okay. And then, just to follow-up with that. Those contracts are staggered anywhere from 1 to 3 years that are repricing. Is that the right way to think about it?

Actually, some are longer than that. But yes, there's a blend of those that are renewing all the time, as Joe pointed out.

So, you'll be repricing some of the older contracts than from a couple years ago?

Yes. There's some of that that occurs.

There's a few. There's a few. But, remember that -- I think we've said this, 35% of the contract revenue is in long-term agreements.

And, a lot of that is with two customers. So, your exposure to them, depending on the year, is going to be relatively minimal with respect to renewing contracts at higher rates. The others, if they were put together in 2009, would come up. If they were put together in 2008, they wouldn't.

Right. Okay. Thank you. And then, one last question. A lot of talk about the mix from oil and gas and the shales.

Are you seeing a benefit to your utilization in the Eagle Ford shale from gas to oil and the Eagle Ford being liquid rich? Do you think you'll see incremental demand or is it relatively net neutral to your overall demand levels? As we see the shift from maybe more oil -- from gas to oil?

Yes. It can't hurt. It's certainly going to be beneficial, as you get -- but, in the Eagle Ford what you have to remember is that there's really been a pretty strong focus in the liquid plays down there, since they started developing that. There's relatively few gas wells.

I'm not sure you're going to see a big shift. But, there is quite a large amount of barges that are being used in that area to move this way. We estimate it to be in around the 100 range. 100 barges on industry basis. That's not our participation.

We're a minor player down there, Kevin. And, that's just in the Eagle Ford. What you are seeing is drilling equipment and fracking equipment moving out of gas-rich formations into formations that have higher concentrations of liquids.

Right, okay.

You are seeing that.

Okay, that's what I thought. Are you seeing any barges being used to tie -- actually be used to storage capacity of oil?

No.

It's, temporational -- okay.

No, we really aren't.

That's all I had. Thanks, so much, for your time today.

Jimmy Gibert, Iberia Capital Partners.

Hey, Joe, thanks for taking my questions. Regarding the Gulf of Mexico, I think most people assume you guys work on the boat engines. But, don't you also work on the compressors that power all these drilling rigs?

Well, we work on drilling rig engines. And, we work on some other things, cementers and that kind of thing. But, most of it is the engines on both the drilling rigs and the boats.

Okay. So, we're not counting boats, were also counting rigs. And, also, I wanted to see if I could get your comments on capacity adds at the Gulf region refineries. I heard about a refinery in Pascagoula hiring 300 new guys to work on an expansion that they have up and running. Could you just talk about expansions in the Gulf region refineries in general?

Yes. I'll let Greg address that. There's talk every month -- each month about somebody considering expansion. And, there are some that in fact are happening now.

Yes. There's, as Joe points out, there's been a number of announcements. Some of these announcements are large wool scale ethylene crackers that may or may not happen in the latter part of the decade. But, there's some that are pretty close that are smaller bolt-ons that are very likely to occur.

Also, there's been some interesting news recently where a methanol producer has decided to move some assets that are down in Chile to the Guysmere area for activation in the US market and participation in the low-cost natural gas. And then, there's been some restarts of some places that have been idle and thought might never come back online. But, they have around methanol and the production also of ammonia.

So, there's -- I guess I'd end up with there's also been some interest in gas to liquids projects. There is two that are currently being studied for the Gulf coast at this point in time as well. And then, on the refining side, there's also been some in the fence line additional capacity adds along the Gulf coast.

Take advantage of all the infrastructure that's available here, and the refinery interplay that occurs as people trade and move intermediates between refineries to optimize the refinery runs. So, there is a lot of activity on the Gulf Coast, and we think it's all beneficial for us long term.

Okay. Thank you, very much for taking my questions, guys.

Chaz Jones, Morgan Keegan & Co., Inc.

Hi, good morning, guys, thanks for taking my question. Just wanted to ask about K-Sea with the utilization, where it is. Obviously, I know there's pockets of weakness in the refining products and probably a little bit of that single skin capacity overhang. But, I guess the nature of my question was, are there any potential other products that those barges could actually move that might help improve K-Sea's utilization before the broader market comes back?

Chaz, Yes. We think that we're in good position to help them do that. You are right, that this fleet has a greater percentage of single skin barges than the inland fleet. It's around 8% of the fleet is single skin. And, that capacity must leave the US trade by the end of 2014.

And, as the economy improves, we think their traditional markets will come back. But, there's other things that we can help K-Sea do. Kirby is the largest mover of chemicals on the inland waterway system. There are chemicals that move offshore. And, we think that through our relationships with these major chemical manufacturers, that we could put them in position to move chemicals, which is going to help them.

But, also believe that the combined Kirby with K-Sea sees an even bigger piece of the market. And, the relationships that we have with our existing customers can be levered to position K-Sea for potentially more cargoes than they could by themselves. I think all of that is going to be positive, it is going to take a little while to work its way through.

Sure. And then, the second question I had was just on a contract rate. If memory serves me right, I think you commented in the third quarter that contract rates were up mid to high single digits. And, if I heard you right, you said that contract rates were up mid-single digits this quarter.

I guess the nature of the question is first of all, are contract rates decelerating at all? Are we reading into that wrong. Or was there something more in line with comps are getting more difficult, or is it that the market was maybe a little frothier in the third quarter given all the catch up volume related to flooding?

You're talking about the inland?

Inland, yes.

Right. We actually said, I think it was at the end of third quarter, that we expected some of the froth would come out of the market. That you went through a very disruptive flooding situation in the second quarter.

And, that rates would -- at least the velocity rates would come down a little bit. And, we were saying in the low to mid-single digit area. If you look at the year, on average, rates were up 4%, 5% in the year for contracts that were renewed in 2011. Does that answer your question?

It did. Again, I just didn't want to misinterpret, like I said, that contract pricing was actually -- the improvement was decelerating. That's why I wanted to clarify. I know you guys had said that on the last call, and it sounds consistent with what you previously said.

Yes. I hope it's consistent.

All right. Thanks, guys.

Greg Lewis, Credit Suisse.

It's actually Anthony Sebago for Greg this morning. I just had a quick question on the legacy marine business. If you look at earnings, this past quarter, they revealed some weak performance in production levels across the major chemical producers, even when you consider seasonality this quarter.

And, the tone for the next few quarters seems pretty cautious as end users face pretty uncertain demand and are hesitant to restart their inventories. Can you just talk a little bit about how you guys expect this to translate into ton miles and revenue per ton miles over the next year?

Yes. That's -- I wouldn't say it's pessimistic. I think what the chemical companies are saying is it's going to be modest growth, and listening to the class I railroads, I think they're also saying that. And, that's what we're saying.

That the chemical capacity is going to be growing modestly until more facilities come online. And, that's because you still have a very weak economy. And, you still have unemployment that is -- I guess this morning it was 8.3% after adding 250,000 jobs and after 1.2 million people dropped out of the workforce. That's pretty negative. GDP was a little better in the fourth quarter, but it's expected to moderate.

That's the kind of thing that we're talking about, when I talked about the outlook, there is still a lot of uncertainty out there. But, even with all of that, I don't think that we're concerned in that legacy marine business that it's in trouble at all. I think that we stayed pretty busy throughout the quarter. Some slight weakness maybe in November, but it came back strong in December.

Low inventory levels, not restocking is positive for us in that it actually creates more consistent demand. When you stock up, it creates some short-term demand, which then collapses. So, we're not sure that the environment that you just described is negative at all. As we understand our business and how it services those customers.

I guess would it be fair to say that looking more to the latter half of 2012 is when we could see some increasing volumes as these end users begin to actually start restocking?

I think that's right. Again, we talked about that in outlook.

Yes. Okay great. Thank you, so much, guys, for the time.

David Beard, Iberia.

Just wanted a clarification on your outlook, I believe, for the industry. Did you say you expect deliveries of 350 tank barges and scrappings of 175?

No. We said 230, and scrappage of somewhere in the 100 to 120 range, we anticipate.

Okay.

Did you get that? 230 --.

Yes. And, with the fleet growing with those numbers, what's your outlook relative to demand to meet that growth?

I think, David, that you're going to need that capacity to service requirements. That actually some growth in tank barge capacity is necessary. Now, if you look at the 2011-2012 order book, remember that that is either 100% or 50% deduction, accelerated tax depreciation. We'll see what they do in 2013.

I hope they end that. Because as we look at the 2013 order book, at least at this point, it's a very modest, and you typically see more robust orders about this time. And, our thought with respect to it is that there are a number of operators that looked at their requirements the next couple of years, and then used the opportunity of 2012 to build those requirements, because from a cash flow perspective, you have a real advantage.

Okay. That's very helpful. And then, just as a follow-up to switch to your capital spending needs, I noticed you had said about $90 million in maintenance. Are there a couple of big projects in there? Or is this an ongoing number that we should consider?

No. It's going to be in the range -- maintenance CapEx with K-Sea and the legacy marine business is going to be $70 million to $90 million. But, we also have some facilities expenditures in there that are increasing that number a little bit for 2012.

Great. Thank you. Appreciate the time.

Operator, let's take one more call please.

John Larkin, Stifel Nicolaus.

Most of my questions have been asked already, but your cash flow outlook here, David, is very strong. It looks to me like you might be in a position to pay down all of your debt here during the course of the year. Aside from maybe opportunistic share repurchases, would the company consider, perhaps, instituting a dividend at this point, given how strong your cash flows have been and should continue to be?

Yes. I don't think we can pay down all our debt this year. We have roughly $800 million in debt. EBITDA this year, I think we said, is going to be in the range of between $500 million and $540 million. But, as you heard our capital spending's in the range of $250 million, $255 million. So, the free cash flow isn't enough to pay down all our debt.

Right.

Now, going forward, without acquisitions, clearly we could delever our balance sheet and probably be debt-free by 2014. Clearly, we hope there will be acquisitions. But, to direct it -- to answer your question directly about considering a dividend, we're getting to the size that we're talking regularly to the Board about that.

We think a modest dividend and continued growth may be possible. But, right now, given our -- the platform we have for growth, it's may be a little soon for that. But, we're at least talking about it now, and thinking through it.

Okay, thank you very much.

We appreciate your interest in Kirby Corporation and for participating in our 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 conference. Thank you for participating. You may now disconnect.