Kirby Corp (KEX) 2012 Q1 法說會逐字稿

Welcome to the Kirby Corporation 2012 First Quarter Conference Call. My name is Christine and I will be your operator for today's conference. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Please note that today's conference is being recorded.

l will now turn the call over to the Steve Holcomb, Vice President Investor Relations. You may begin.

Good Morning and 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. Our 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 judgement with respect to future events. Forward-looking statements involve risk and uncertainty. 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, 2011, filed with the Securities and Exchange Commission.

I'll now turn the call over to Joe.

Thank you, Steve, and good morning to everybody. Late yesterday afternoon we announced net earnings for the 2012 first quarter of $0.91 per share, reflecting a 52% improvement over the $0.60 per share reported for the same period last year. The first quarter earnings guidance was $0.86 to $0.93 per share.

In our fist quarter results, there were two charges that were not included in our guidance range, a $4.2 million before tax charge, or $0.05 a share, which was the earn-out charge pertaining to the United acquisition, and a $2.4 million before tax, or $0.03 per share, severance charge associated with the integration of K-Sea and to Kirby. David is going to talk about both of these charges in more detail later in the call.

Our record first quarter earnings were the result of the continued strong demand for our Inland tank barge business, a strong performance from the land-based diesel engine service business and the improved earnings from our legacy marine diesel engine service business. The demand for the coastal tank barge equipment was about as expected, given the seasonality of this business, and some continued over capacity in the coastal tank barge fleet.

In April, we changed the name of K-Sea Transportation to Kirby Offshore Marine, more fully integrating our coastal operation into the Kirby family of marine transportation companies. With this renaming, we have begun of process rebranding equipment, the organization and the service. Jim Farley was named President of Kirby Offshore Marine, having previously served as the Executive Vice President of Operations for Kirby Inland Marine. David Grzebinski will serve as Kirby's Offshore Marine's Chairman, as well as Kirby Corporation CFO. I look forward to working with both Jim and David as we more fully integrate Kirby Offshore Marine into our marine transportation business. Our focus is to continue to enhance this service model with the objective of providing our customers the best and safest service in the industry.

Our legacy inland tank barge business is performing well, with favorable pricing trends. We anticipate this sector to remain positive based on the favorable outlook of the US petrochemical and refining industry.

For the diesel engine segment, our legacy business is improving due to the overall health of its inland marine transportation customers and improved Gulf of Mexico oil service market. For our land based diesel engine service business, with the current low price of natural gas, incentive to drill for natural gas has declined, but the incentive to find crude oil remains very positive due to the current high price of crude oil. This business is seeing a natural rotation away from the natural gas to oil exploration. As this rotation occurs, there has been a pause in the new orders for the oil service equipment as the market assesses its requirements. We're using this pause to further develop the service opportunities in this business.

When we purchased United, it was our objective to apply a very good, well-tested marine diesel engine service model to the land-based diesel engines. It is our intention to continue to build oil service equipment but to more heavily focus on servicing this equipment rather than manufacturing it. Later in the call, Greg will share with you some encouraging comments regarding remanufacturing service opportunities.

Now, I'll come back at the end of the call and talk about the second quarter, as well as the full year outlook. Now I'm going to turn the call over to the David, who will speak briefly about Kirby Offshore Marine markets, and then Greg will update you on the inland tank barge business and the diesel engine service markets.

Thank you, Joe. Kirby Offshore Marine operating results, including the severance charge -- we're a bit above breakeven for the first quarter. As we mentioned before, the fourth and first quarter are more difficult for the coastal operations due to seasonality, the closure or a significant reduction in demand in Alaska and on the Great Lakes, as well as poor operating efficiency caused by winter weather conditions. Also during the first quarter, unseasonably mild weather in the New York and the Northeast market negatively impacted the demand for distalid products, particularly , heating oil, which resulted in the lower equipment utilization and rates in the New York City and Northeast markets.

As Joe mentioned, in the 2012 first quarter, we took a $ 2.4 million or $0.03 per share charge related to severance, which was for the integration of Kirby Offshore Marine's administrative functions into Kirby. We have made the decisions and taken the steps, some of them painful, from a personnel standpoint, to fully integrate Kirby Offshore Marine into the Kirby Marine family. As part of this integration, we will be closing our East Brunswick, New Jersey office and consolidating our East Coast operations into our existing Staten Island, New York operations facility.

For the first quarter, Kirby Offshore Marine's equipment utilization rate was in the 75% to 80% range. With respect to pricing contracts that renewed during the first quarter and spot contracts, were basically flat. Approximately 60% of Kirby Offshore Marine's revenues were under term contract and 40% were spot. Time charters represented approximately 90% of the revenues under term contracts during quarter.

As we have stated before, our coastal operations primarily transport refined products, tying more to the US economy, which is a contrast to our inland fleet which is seeing strong leverage from the chemical market. Offshore marine equipment utilization levels and pricing are weaker than in our Inland transportation business. As we continue to fine-tune our coastal authorizations, reduce costs, and seek additional coastal transportation opportunities with our existing inland marine customers, our profitability will improve. Furthermore, as the US economy improves and the industry's single whole tank barges, which currently comprise approximately 8% of the coast-wise capacity -- when those are removed from the service from the now and the end of 2014, we fully expect coastal utilization and rates to improve.

I'll now turn the call over to

Thank you, David, and good morning to all. During the first quarter, our inland marine transportation sector continued the strong performance with high utilization rates and favorable pricing trends. US-produced petrochemicals for both domestic consumption and exportation remain strong, as US-produced, low priced natural gas continues to provide a feedstock advantage, thereby continuing the global competitiveness of the US petrochemical industry.

Kirby's black oil fleet continued to see strong demand, driven by stable refinery output and the movement of crude oil from the Midwest to the Gulf Coast and from South Texas. Our refined products demand remain positive, benefiting from the Midwest to Gulf Coast movements of ethanol.

In the agricultural chemical market, the traditional spring fill started early, transporting both domestically produced and imported product. This has been driven by warmer than normal weather and low fertilizer inventories, coupled with high corn prices. Our petrochemical and black oil inland fleets operated at utilization levels in the low to mid 90% range during the first quarter. Revenues from our long-term contracts, that is one year or longer in duration, remained at 75%. And the mix of time charter and afreightment business continued at about 55% and 45%, respectively.

Turning to the inland marine transportation pricing, term contracts that renewed during the first quarter continued to be renewed in the range of mid single-digit levels. In some cases, were slightly higher when compared with the same period during 2001. Spot contract pricing, which includes the price of fuel, saw rates increase modestly when compared, sequentially, to the 2011 fourth quarter. Our multi-year contracts have annual increases based on labor and the producer price index. And some of these are adjusted each January and the adjustment for this year, which were effective January 1, provided rate increases in the 2% range.

During the 2012 first quarter, we continued in our inland fleet, both in terms of new construction and up upgrading our existing barges, thereby reducing maintenance costs and out of service days, and improving the reliability of the fleet and our customer service. We took delivery of five new 30,000 barrel tank barges totaling approximately 140,000 barrels in capacity, and retired 16 tank barges and returned charter barges, thereby reducing capacity by approximately 300,000 barrels. So, net-net, during the 2012 first quarter, our inland tank barge fleets declined by a 13 tank barges and our capacity decreased by approximately 160,000 barrels. As of May 31, we operated 806 tank barges with the capacity of 16 million barrels.

During the quarter, we also took delivery of one 2,000 horsepower inland towboat. For the remaining nine months of 2012, our construction program will consist of 20 new 30,000 barrel inland tank barges and 30 new 10,000 barrels tank barges with a total capacity of approximately 875,000 barrels. We will also take delivery of four new additional canal towboats. The cost of the new inland tank barges and towboats remaining in the construction program is approximately $90 million, the majority of which will be expended during 2012.

We'll also continue to retire older barges during 2012. At the present time we anticipate this our 2012 year-end capacity to be approximately 16.5 million barrels or about 300,000 barrels above the 16.2 million that we had at the beginning of year.

In the 2012 fourth quarter, we'll take delivery of two new offshore articulated dry bulk tug barge units for use under long-term contracts. The cost of these units is approximately $100 million. During 2011 and in the first quarter of 2012, we made progress payments on these two units totaling approximately $52 million, and the balance will be paid through the remaining nine months of 2012.

Turning to our diesel engine service segment; United, our land-based drilling service provider contributed about 75% of the diesel engine services segment revenue during the first quarter. Their operating margin was in the high single digits. The quarter benefited from the start-up of remanufacturing hydraulic fracturing equipment.

We're making good progress towards our stated objective to moving United to a business which is focused on the more stable service business. This will be accomplished by increasing our business levels and remanufacturing, and to a lesser extent, the parts and service and distribution business, so that reman and service is the majority of what we do.

Let me express this in terms of revenue. In 2011, approximately 55% of United's revenue was from manufacturing, primarily, the assembly of oil field service equipment. For 2012, we're forecasting that this will reverse, and about 55% to 60% of United's revenue will be from remanufacturing parts and service, as we anticipate that the demand for the reman will continue to increase as manufacturing slows later in the year. Currently, we have 27 units either in the process of being remanufactured or in the queue to start, with the commitments from our customers to send more unit as capacity becomes available at our reman facility.

Our vision for United is that the reman and service business forms a stable base on top of which we can layer in manufacturing business activity as the market presents the opportunity to do so.

Our legacy diesel engine services segment marine market reported higher results, benefiting from large overhaul projects for both domestic and international marine customers, as well as the return of drilling rigs to the Gulf of Mexico during the first quarter.

The legacy power generation business benefited from engine generator set upgrades, service, and part sales.

I will now turn the call back over to David.

Thank you, Greg. Let me provide a few financial details for the quarter. Our continued strong performance in inland transportation sector and the addition of K-Sea Transportation, now Kirby Offshore Marine, in July 1 of last year, resulted in our marine transportation revenues being 39% above and operating income 30% above the 2011 first quarter.

The marine segment's first quarter operating margin was 20.4%, compared with 21.8% for the first quarter of 2011. As Greg noted, during the first quarter our inland marine transportation sector's 90% to 95% equipment utilization continued, along with favorable pricing. Our legacy marine transportation sector maintained its strong operating margin in the mid 20% range during the first quarter.

Kirby Offshore Marine contributed approximately 20% of the first quarter's marine transportation revenues. But with the $2.4 million severance charge, its contribution to our first quarter operating income was only slightly positive.

With the acquisition of United in the second quarter of 2011, our diesel engine services revenues increased $231 million in the first quarter from $58 million a year ago. And operating income was $23.6 million, compared with $6.6 million in the first quarter of last year. The segment's operating margin was 10.2% compared with 11.5% for the 2011 first quarter. United's performance continued to be strong, as they worked through their manufacturing backlog and ramped up service and remanufacturing. United's operating margin was in the high single digit range for the quarter.

We continued to generate significant cash during the first quarter, with EBITDA of $125 million. Our capital spending for the first quarter was $62 million and consisted of $21 million for the new inland tank barges and towboats, $19 million in progress payments on the two new offshore dry bulk barge and tug units Greg mentioned, and $22 million primarily for capital upgrades to the existing inland and coastwise fleet.

Our capital spending guidance for 2012 is $265 million to$ 275 million, and it includes $110 million for the construction and new equipment and approximately $70 million in progress payments for the two offshore dry bulk units. The balance would be for upgrades to existing marine equipment and some to diesel engine facilities. As of March 31st, we had $72.5 million outstanding on our $250 million revolving credit facility.

Now I want to, once again, talk about the earn-out that we have in place for our acquisition of United Holdings. The former owners received $271 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 that we would have to pay under this agreement is determined each quarter and held as a contingent liability on our balance sheet.

Any changes to the estimate we believe we will pay runs through the income statement. If we increase our estimate of the pay-out, we would increase the contingent liability and it would lower our earnings. Conversely, if we lower the estimate, we would reduce the liability and thereby increase our earnings. During the first quarter, we booked $4.2 million or $0.05 per share in expense as our estimate of the amount we would have to pay in this earn-out increase.

As there are about two full years remaining for the earn-out period, you can understand that we may be required to make further adjustments, either up or down, to the contingent liability, if consequently excluded any past or potential changes to the earn-out liability from our 2012 earning guidance.

I'll now turn the call back to Joe.

Thank you David. Our 2012 second quarter guidance is in a range of $0.97 to $1.02 per share. This compares with $0.77 per share earned in the 2011 second quarter. Our 2011 second quarter results included United, purchased on April 15, 2011, but did not include Kirby Offshore Marine, purchased on July 1, 2011. As David explained, our 2012 second quarter guidance is before any positive or negative change to United's multi-year contingent earn-out liability. For the year, our guidance remains at the $3.85 to $4.05 per share, compared to actual earnings of 2011 of $3.33 per share.

As I stated at the beginning of the call, our inland marine transportation business is performing at a very high level, with favorable pricing trends and we anticipate this performance to continue. We have 50 new barges scheduled to be delivered throughout the balance of 2012 that will further enhance our inland performance, as well as profitability.

As we have stated since the purchase of our coastal fleet in July of 2011, the coastal market is not a next quarter story, but will improve over the next couple of years. We do expect the coastal fleet will be profitable with operating margins in the high single-digit area.

Our legacy diesel service business should improve going forward, with increased drilling activity in the Gulf of Mexico. Perhaps the largest variable in our guidance is United and the impact of the recent transition away from drilling for natural gas to the exploration of crude oil, and the impact of this transition will have on new orders for equipment. We do anticipate a decrease in the demand for the new equipment. However, we believe this pause is providing an opportunity to free up some capacity for pressure pumping remanufacturing, and will allow us to further develop and enhance that service model that really is our vision for the business when we bought it.

Operator, we are now ready to open the call up for questions.

(Operator Instructions). The first question comes Alex Brand from SunTrust Robinson Humphrey. Please go ahead.

Thank you, good morning, guys.

Good morning.

David, I know you are not including the earn-out in you guidance, but I was just -- I'm wondering if when we think about the run rate for the first quarter and for your guidance, what is the right way to think about it? What I mean by that is, let's say in the second quarter, United has a really good quarter, will it do better and therefore you take an earn-out charge, so they wash each other out and we don't really have a risk from that? And by extension, is the right underlying run rate for the Q1 the add back of the severance and the earn-out adjustment? Or just adding back the severance?

Let me talk about the earn-out first. This is a fair value calculation. So what we do is we have multiple scenarios that we run and put probabilities on it and we estimate, going forward through 2013, what we think the financial measures would be that drive the earn-out. And it is probability-weighted model. So right now, what we have accrued for the earn-out is what we actually think will occur. But as you know, as time goes on, you get new data points, stronger or weaker, and you factor that into your profitability models. So it is hard way -- it is hard to predict what will happen with the earn-out. But right now, we think we are appropriately accrued for the earn-out with our forward look for the next year and a half, two years.

The second part of your question, could you ask again, please, Alex?

And this is coming from the fact that clients are calling and I think we all have the same questions. You report $0.91, there is a $0.03 severance, so that clearly is not recurring. This $0.05 that is the earn-out and we have deal with this for a couple of years, is the underlying run rate really as strong as $0.99 for the quarter? Or should we not think of it that way it is really the $0.94? And going forward, we should not worry about the earn-out as it reflects on the tone of the underlying business, particularly at United, in that case?

I think, yes, it is close to the underlying run rate. Certainly with the severance that should not recur. We do believe that the severance -- that we have essentially done the activities that we have to do. So you shouldn't expect -- we don't expect to see any more severance charges. So clearly, that you should think in terms of your run rate. I think the earn-out is a little more delicate. If United does extremely well, above what we have expected, we will have to accrue more earn-out. So it not a simple answer and it -- adding that back to the run rate is a little more tenuous.

Let me -- Alex, let me give you a little more color on the first quarter for United. The first quarter of United was a very strong quarter. And we're not forecasting that to continue at those levels, going forward. The diesel engine sector had a very good quarter. And to David's point, what you are supposed to do is, you are supposed to project what you think the earn-out is going to be. And the current amount that you have reserved is supposed to reflect what that value is. So we're -- we will adjust it up and down based on how that business performs.

Thank you for that. Both of you. Just to segue there, then, as we think about United for the rest of the year, it sounds like there is no change in terms of -- you guys always thought it would switch over to more service and that is happening. So how should we think about that business looking this year? In other words, it sounds like revenue is flattening out and maybe you are even implying that it will come down a little bit from the run rate, but the margin should go up. Could you talk about what that progression might, at least in general terms, look like the rest of the year?

I think that the revenue will certainly flatten, probably decline a little bit. But the service margin should be higher.

Okay, that is all I have guys. Thanks for your time.

Next question comes from Gregory Lewis from Credit Suisse. Please go ahead.

Thank you and good morning.

Morning.

I would like to delve a little more on the diesel engine service side of the business. Joe, in your prepared remarks, you mentioned that there was sort of a pause in new equipment. In thinking about that, and on the last call you talked about the backlog being pretty strong, could you give us a sense on where the backlog is today for new manufactured equipment?

Yes. The backlog is down from its kind of high levels, which were mid to the end of last year down maybe about one-third. But we still have a pretty healthy backlog that we're running with. When I say pause, I think that the market is just kind of stepping back and assessing what the transition from principally looking for gas to principally looking for oil really means for equipment demand. And you also have some logistic challenges, as you move equipment that's working in a particular area to another area. You have to get to it there, you have to get the fracking material and some fluid there, you have to arrange for water. It's a process, it is going to take a while to settle down.

What I think is different about this point in the oil service cycle, is that typically, when this happens, the whole sector is collapsed. Energy prices have collapsed because, traditionally, natural gas and crude oil traded at a ratio that was driven more by the BTUs that each produced. Here you have a decoupling of natural gas and crude oil. You don't have a collapse, you just have a shift from -- based on price, the thing we like to say here is that capitalism works, where you think that you could make money, that is where you go. You are struggling to make money in the gas exploration area. The crude oil is priced so that you could make a lot of money in that area. And the world is trying to figure out, how do you get the equipment there and what it means when it gets there?

There is a lot of talk about margins collapsing in that business. I think most businesses would like to have that kind of margin collapse. You are going from extremely high operating margins to more traditional margins. Not particularly concerned that there is not going to be enthusiasm for doing this, you are still making plenty of money. Just trying to reassess what it all means.

Great. Following up, you mentioned that there is 27 units that are going to be remanufactured. Is there any sense on the margins on those type of units? And the time it takes on an unit basis for those? And what I'm trying to get at is, there are 27 units -- what does that translate into time? And what is the opportunity for additional units to come on for the year?

This is Greg. In terms of the margins we see as we transition from manufacturing to more service, that the margins will move from the high single-digit range that we have seen in the United piece, to more of the low double-digit range that we see in the service business, in our marine transportation business. In general, that's where we think that is going to move.

In terms of the 27 that we mentioned, are -- some of those are work-in-progress and some are in the queue to come into our shop. We're currently, really in the start-up phrase of this. I think last call you may recall that we talked about getting the customers and supply chain and everything lined up and now we're in process of executing. And where we find ourselves is really in the start-up phase. We are not as efficient today as we believe we are going to be in the future. So for -- I think is premature for us to give you an idea of exactly what the capacity through that shop looks like, because we are getting everything lined out and getting it efficient -- working toward getting it more efficient.

We do believe, though, that there is plenty of demand out there. As we free up capacity, there is plenty of frac equipment that needs to be worked on.

And we've -- in our discussions with our customers is very encouraging around that area. At this point, we have commitments from our customers to continue to supply us with the frac equipment that we believe is going to keep us busy with the capacity that we have available to do that work currently, through the tail end of the year.

Okay, perfect. Thanks for the time, gentleman, and congratulations on a good quarter.

The next question comes from Jack Atkins from Stephens Inc. Please go ahead.

Thanks for taking my questions. Just to focus back here on the inland marine side of the business. You showed very strong pricing power again this quarter. Just curious to get your thoughts on where you think we are in the pricing cycle on the inland marine side? And do you think that we are back to peak pricing levels there?

Jack, yes, we are back to levels that we were at 2008, which was really the last peak pricing period. And just based on demand, we think that the pricing environment continues to be favorable.

And when you think about the fact that we really haven't seen a recovery in residential construction ye and that's typically a driver for domestic petrochemical production and consumption and we are seeing some petrochemical capacity coming online late this year and next year, it seems like this pricing story for you guys on the inland marine side is a multi-year story with a number of legs to it. I would be curious to hear how you guys are thinking about the pricing power that you have in your business over the next several years. And do you think that over time, if we do see prices creep higher, that your customers could push back at some point?

Customers push back on a daily basis. But I think that for the reasons you just gave -- go back to my original comment. That is that the pricing environment continues to be favorable. And we think that over the next year or two, that is likely to be sustainable.

Okay, great. Last thing for me and I'll jump back in the Q. I was just curious, on the diesel engine side, could you give us some color on what percentage of United's business in the quarter was new build versus remanufactured? I would be curious to see how that mix has change so far this year.

Jack, as I mentioned, we are in the start-up phrase. The reman business is picking up steam. But during the first quarter, it didn't have -- it wasn't a large percentage of it driven by that business. It will grow as we go further into the year.

Okay, great. Thank you, guys.

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

Thank you, good morning, gentlemen.

Good morning, Kevin.

Joe, the pulldown you talked about in your active barge fleet, is this more inland, coastwise or both?

It is inland. When we talk about barge capacity -- when I talked about 50 additional barges, I'm talking about inland barges. We are building two offshore dry cargo barges, but we are not building any offshore liquid barges.

Great. And you also talked about leverage in your existing inland customers with the costalwise trade. How quickly do you see this opportunity ramping up? And are you seeing any customers wins now?

The point we make there is that our customers have inland and coastal requirements. And what we want to be able to do is offer barging services for those requirements. When we talk to an inland customer about their overall requirements, we are talking both about their coastal moves, as well as their inland moves. I think that we are having a degree of success in offering Kirby as the one stop shop for those requirements.

Has there been some wins? Sure there has. But I don't know if I want to -- I don't think we have put them in the column yet. that this is a win. But we are certainly getting a lot of enthusiasm, which is gratifying, from the customers that we work for, that we were able to provide barging services regardless of whether it is an inland requirement or its a coastal requirements.

Great, Joe. And then along those lines, that is where you can really drive margins, as you consolidate from the back office, since there is some overlap of customers. Is that the right way to think about it?

I think that as we integrate the companies, which we're doing, we'll take costs out. And we have talked about some of those costs in previous calls. But K-Sea, now Kirby Inland Marine -- Kirby Offshore Marine, now Kirby Offshore Marine, they are going to punish me when we get off this call for that -- is operating more efficiently in the Kirby operating model than it certainly was as a standalone MLP. And those cause should be eliminated going forward and that should enhance margins when you get to similar places and in the pricing cycle, based on the history of the pricing in that business.

Okay, great. That is all I had. Thanks so much for your time today.

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

Good morning, guys, thanks for your time. Joe, there has been a lot made about potential refinery shut downs in the Pennsylvania. I'm curious if you have been approached by any of your customers, as to potentially filling that void, either through your inland barge business or more importantly, your coastal business, maybe refine product into the Northeast and Atlantic via -- from off the Gulf Coast?

There is -- John, there is general conversations that occur about that. But I think that most of the attention has been focused on -- if they do close those East Coast refineries, where is the product going to come from? And the thought is that some of it is going to come up the pipeline and some of it will come up from the Gulf Coast by US flagged marine vessels. That is going to be moved principally in larger vessels than we operate. There are going to be some blending components that we could move and it will continue to narrow the diesel spec, there may be some diesel movements which will logically fall into smaller lots, it would fit our vessels.

But that -- those kinds of discussions, except on a very general basis, really aren't occurring yet. There is more speculation about refineries closing and how that pipe is going to get up there, than actual contractual discussions on moving it.

Very good. One of the railroads talked earlier this week, when they announced their news, that they were having difficulty signing longer term contracts for crude by rail movements to justify building additional storage facilities and the like in the south Texas. Are you seeing that maybe Kirby is moving into more opportunities to move crude either down the Mississippi or out of the Eagle Ford at the expense of the rails? Because your model may be a little bit more flexible, a little bit more able to handle things on a spot basis, where maybe the rails aren't as set up for that?

We are not really going head-to-head with rail for down river movements of Canadian crude, or for that matter for Eagle Ford. Where the rail play is out of Cushing and out of the Bakken. There is some talk about moving Bakken crude to St. Louis, where it would be put on barge. I think with the respect to the Eagle Ford -- what we have said about barging volumes out of the Eagle Ford is that right now you don't have a good pipeline gathering system. They are putting in the pipelines and we think that there is always going to be barging, but at some point, the amount of new equipment that you are going to put in there is going to be capped. That the excess crude oil is going to be moved by the pipeline.

My guess is what you are hearing with respect to the rail -- the railroads is more what is happening with the Cushing, because there is pipelines that are planned and talked about at Cushing. And also pipelines that are being put in at the Bakken. And there is resistance to long-term agreement with railroads until you really understand what those pipelines do. I'm guessing there. But my guess is that is more the discussion than kind of an Eagle Ford or Canadian crude out of the St. Louis area.

That makes sense. Going back to your comments around the order book at United. You had Gardner Denver report earlier -- they basically took their outlook on the frac market to zero. I'm curious as to -- where do you think that you end this year, in terms of the order book as a percentage of maybe the peak? Is it down 50 from the peak? Is it down 80 and it is just about wiped out? I'm trying to get a sense for it, as we go into 2013. Is there going to be an older book left, as you go into the next year?

It is really hard to say, John. I think that right now nobody is aggressively ordering, certainly frac equipment. And it is for the reasons I gave earlier. I think that the market is really trying to assess, is there enough equipment out there? They are trying to position equipment that they already own to new areas. Just a lot of turmoil in that business. How quickly that works its way out is going to drive how much equipment is going to be worth. I think it is too early to tell.

All right, nice quarter, thanks for you time.

The next question comes from Jon Chappell from Evercore Partners. Please go ahead.

Thanks, good morning, guys. You laid in the press release and then also in David's comments earlier, that the United business is about 75% of the diesel engine services revenue. I assume that is still lower margin than the legacy services business. So what's the contribution to total diesel engine services operating income from United?

The way to think about that is United, as a whole, runs mid to high single digits operating margins. And the legacy diesel business is running low double digits margins right now. You could kind of back into it that way.

And then, unfortunately, the market dictates when you get spend a lot of time on the diesel refine services, or at least United business, despite the record results at the inland barge business.

One of the other topics that we have talked about in previous calls and haven't been updated is the acquisition climate. Primarily -- obviously the barge business has bounced back a lot faster and harder than we would have expected12 to 18 months ago, so maybe some missed opportunities there. But as you have had some time to digest K-Sea, now the Kirby Offshore Marine and kind of assess the landscape to potential acquisition candidates there, in the coastwise business, how does that acquisition climate look? And what is the timing you would think? And where can you get, from a market perspective, with the coastwise business?

John, as you know, the utilization in the coastwise business is a little lower, right at 75% to 80%. The environment is a little better than it is in the inland. With the inland market, it is 90% to 95% utilization. Owners of barges are doing okay. The acquisition environment in the coastwise business is pretty good right now. And we're hopeful and always looking. But I would characterize it as a pretty favorable market.

You think it is a 2012 event?

It it is hard to predict. I don't want to give a date. It is certainly a good environment.

All right, thanks, David.

Your next question comes from Ken Hoexter from Bank of America Merrill Lynch. Please go ahead.

Good morning. So you mentioned the 90%, 95% utilization rate at the inland barge. Did you update on the utilization at the offshore marine?

We can -- David.

It is 75% to 80% utilization right. But we see signs of firming. Things are getting a little better.

That is similar to where it was last quarter, if I recall correctly?

Yes.

What needs to happen, to get that -- where should that be? Should that be up at the 90%, 95% as your inland barge?Or is 80% a good target there? Where should that business be at?

Ideally, we would like to see it above 85% because that is where you can really start moving pricing. What has to happen? Two things really, both -- one of them on the supply side and one on the demand side. The supply side is working itself out and that's the retirement of about 8% of the capacity, which is single skin. As you know, that has to come out by the end of 2014. And we are not seeing any knew builds right now. From a supply side, that has got to play itself out. We are seeing some single skins being retired. On the supply side of the market, it will gradually tighten up between now and the end of 2014.

On the demand side, the economy is weak. The coastwise business is largely refined products -- which it is miles driven -- vehicle miles driven, passenger miles flown, diesel truck miles driven. With the economy being weak -- or on the weaker side of the last five years or so. That's got to come back before you could see the demand side to come. But if you take 8% of the capacity out of market -- if we're 75% to 80%, add 8% to that. It should start to get better.

Wonderful. Just a follow-up, again, on the United side. Obviously, you bought the business that was manufacturing, noted you are now moving away towards the remanufacturing services side. How did -- you talked about how the discussions have started. How long do you anticipate the lead time for that process? And when should we start to see that ramp up?

I think we are seeing it ramp up right now. Where we are is that we are -- the facilities that we have are really fully utilized. And the first quarter was the ramp process. As we go forward, we should be able to improve the process and enhance our throughput and get better at doing this. And as we get our employees trained, and we get our customers accustomed to the process, I think you will see improvements going forward.

Maybe I need to be more specific. I thought you said the revenues were nearly diminimus in the first quarter. So I meant ramp up in terms of revenues as a percent of the base.

Right.

Towards the end of the year.

As we -- I was trying to imply that the revenues would also increase as our throughput gets firm through the end of the year.

And Ken, the other piece to this is that we are out assessing demand. Demand is, we think, is going to be significant to remanufacture oil field equipment. To the point where we'll actually consider adding some capacity to meet it. So we think that the market is there and it is a market that we're very well-positioned for. We're the distributor for the MTU Allison transmission, we have the capability of handling a wide range of engines and transmissions. We think that we're located well for that market. And with 6,000 to 7,000 units out there that has been worked hard over the last several years, that there is going to be plenty of demand to service that equipment.

Appreciate the time. Thank you.

Thank you, Ken.

The last question comes from David Beard from Iberia. Please go ahead.

Good morning, gentlemen. Nice job on the quarter, I know you have a lot of moving parts going on in the Company. My question is a little bit bigger picture. Maybe you could talk a little bit about industry deliveries and scrapings for this year and any outlook on next year? I know we had been thinking about 230 barges, 120 scrapped. Any update there, for this year, and thoughts for the next year?

The new deliveries may have ticked up by a few barges. The scrap number is still pretty much the same, somewhere in the -- it is somewhere in the 100 or 150 range. Just depend on what other operators are going to do in that period. I think you got it just about right.

Given the shipyards are pretty full, what do we think that next year is going to look like? Any thoughts?

We think that current order book, which includes our program, is somewhere in the -- just above the 100 barge range. And it is early in the year. So it is still unclear as to how the order book is going to fill up. I would remind you that in the 2012, one of the incentives that was in place for orders to build was the accelerated -- the bonus depreciation of 50%. If you were planning on building in either 2012 or 2013, it might have incent you to bring your forward to some degree. We think that 2012 was robust from a demand standpoint, in general, but also driven by the bonus depreciation thing. Which, at this point in time, does not appear that it is going to renew for 2013.

Right, that has definitely been a factor of moving these numbers year-to-year. And then specifically with Kirby, what are your thoughts relative to CapEx next year? How should we bracket it? It seems to me, it is a $90 million or $100 million bare bones maintenance, $270 million this year. So we should be thinking somewhere in between? What are you thoughts?

You said it, $270 million this year, $265 million to $275 million. And as we look at this chemical cycle that is coming in front of us, we may bump up our CapEx next year. It's still too early too tell. But we're seeing pretty robust market here. And it all depends on the how the year shapes out. We may take the opportunity to expand the fleet a little bit.

Okay, last question; how should we think about expansions at some of the refineries like Motiva? Is that going to be new demand coming online? Or have they already contracted barge needs? Or are they really moving everything by pipeline? Just in general, how should we think of Gulf Coast refinery expansions?

I think this is all of the above, what you just said. When you couple that with the pipeline changes that Joe talked about earlier, having a larger supply of crude that is going to reduce the difference between Cushing and the prices that our refinery customers are paying in the Gulf Coast, I think all that adds up to more volumes for us in the future than we've had in the past. I see that as very positive.

Great, appreciate the time and sneaking me in at the end for questions. And nice quarter.

Thank you.

At this time, there are no additional questions. Please go ahead with any final remarks.

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 for participating in the Kirby Corporation First Quarter 2012 Conference Call. That concludes our conference for today. You may all disconnect at this time.