Kirby Corp (KEX) 2012 Q2 法說會逐字稿

Welcome to the Kirby Corporation 2012 conference call. (Operator Instructions). My name is Trish, and I will be your operator for today's call. All participants are in a listen only mode. Please note that this conference is being recorder. I would now like to turn the call over to your host, Stephen Holcomb. Stephen, you may begin.

Good morning. Thank you for joining us.

With me today are Joe Pyne, Kirby's Chairman and Chief Executive Officer, Greg Binion, Kirby's President and Chief Operating Officer, and David Grzebinski, our Executive vice President and Chief Financial Officer.

During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at kirbycorp.com in the Investor Relations section under non-GAAP financial data.

Statements contained in the conference call with respect to the future are forward-looking statements. These statements reflect managements 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, 2011, filed with the Securities and Exchange Commission. I will now turn the call over to Joe.

Thank you, Steven, andgood morning.

Our second quarter earnings of $0.85 per share came in at the high-end of a revised $080 to $0.85 per share guidance range.

With respect to our inland tank business it continued to perform well and operating results were above the 2011 second quarter results, despite some temporarily lower petrochemical volumes from one major customer, but principally due to plant maintenance outages, as well as low water levels on the Mississippi River, which led to light-loading tank barges since mid-May and throughout June.

Our legacy diesel engine service marine business operating results were also above the 2011 second quarter results, principally due to improvements in the Gulf of Mexico oil service market. Demand for our coastal tank barge equipment was about as expected, except for the New York Harbor market which was a little softer.

Higher maintenance and repair related issues, and lower revenues caused by delays spent in shipyards addressing this maintenance, negatively impacted the second quarter. For our land based diesel engine service market, with the current low price of natural gas, the incentive to drill for natural gas has been sharply curtailed, but the incentive to find crude oil remains positive.

As a result, orders from manufacturing frack spreads have been curtailed, but the demand for remanufacturing existing equipment has improved. I'll come back at the end of our prepared remarks and talk about the third quarter and the full year outlook.

I'm now going to turn the call over to Greg Binion, who will discuss our inland tank barge and diesel engine service markets, and then to David, who will discuss the coastal tank barge market, and give you our financial update.

Thank you, Joe. Good morning to all.

For the second quarter, our inland Marine Transportation sector continued its overall strong performance with high equipment utilization in the 90% to 95% range, and higher term and spot contract pricing. In mid-May, we started to experience low water conditions on the Mississippi River system, and reduced operating drafts. Those conditions persist today.

During the second quarter, we also were affected by scheduled and unscheduled maintenance at a major petrochemical facility. These facilities are now back in service.

(inaudible) remains strong, driven by driven by continued, stable refinery output, and the continued exploitation of heavy fuel oil. Also the movement of crude oil, along both the river and the Gulf Intracoastal Waterway, continue to be brisk. I'd also note that we loaded our first Vulcan crude cargo out of St. Louis over the weekend.

And fine product demand remained positive, benefiting from additional volumes from major customers, and our agricultural chemical demand, driven by low inventory levels and high condition prices, remained strong in April and May, but declined sharply in June, as expected.

Revenues, from our long-term contracts, that is one year or longer in duration, remained at 75% and the mix of time charter and affreightment business continued to be about 55% and 45% respectively. Turning to inland Marine Transportation pricing term contracts during the second quarter continued to be renewed in the mid-single-digit level with some cases slightly higher pricing when compared to the 2011 second quarter.

Spot contract pricing, which includes the price of fuel, sell rates increase modestly when compared to the 2012 first quarter. We continue to invest in our Inland fleet, both in terms of new construction and upgrading existing barges.

This reduces maintenance cost and out of service days, and improves the reliability of fleet and our customer service. During 2012 first six months, we took delivery of 20 new 30,000 barrel tank barges, and eight new 10,000 barrel tank barges, totalling approximately 650,000 barrels of capacity.

We retired 27 tank barges and returned three chartered tank barges, reducing capacity by about 470,000 barrels. So net/net during the 2012 first six month, our inland tank barge increased by one, but our capacity increased by approximately 180,000 barrels.

As of June 30, we operated 818 tank barges with a capacity of 16.4 million barrels. We also took delivery of two, 2,000-horsepower inland tow boats in the 2012 second half. In May of 2012, we signed contracts for the construction of 36 new 36,000-barrel inland tank barges, and 20 new 10,000-barrel tank barges all totally 1.2 million barrels of capacity.

Three of the 30,000-barrel barges are currently planned for delivery in late 2012, and the balance of these barges will be delivered throughout 2013. At the present time, many of these new tank barges are anticipated to be replacements for older barge removed from service.

For the second half of 2012, our construction program will consist ofeight new 30,000 barrel inland tank barges, and 22 ten thousand barrel inland tank barges, with a total capacity of approximately 450,000 barrels. We will also take delivery of three additional canal tow boats.

The cost of the new inland tank barges and tow boats during 2012 and progress payments made by barges and tow boats delivered in 2013 will be about $130 million. We also continue to retire older barges during the 2012 second half.

At the present time, we anticipate that our 2012 year end capacity will be approximately 16.5 million barrels or 350,000 barrels above the 16.2 million that we had at the beginning of the year.

In the 2012 fourth quarter, we will take delivery of two new offshore dry-bulk barge type units for the use of -- under long-term contracts. The cost is about $52 million for each of these units.

During 2011, in the first half of 2012, we made progress payments on these two units totalling approximately $65 million, and the balance will be paid during the 2012 second half.

Turning to our diesel engine service segment, United, a land-based service provider, as anticipated, saw revenues and operating income decline, the result of order cancellation and postponement for the manufacturing the fracturing units, as well as modest declines in the service land-based diesel engines, and the sale of engines, transmissions, and parts, all associated with the low price of natural gas and resulting decline in drilling for natural gas in the north American shale formations.

Partially offsetting the decline in manufacturing of fracturing units was the demand for remanufacturing of such units. However, it will take us several quarters for United to obtain this optimal efficiency level for the process of remanufacturing these units.

Currently, United has 29 units in its facilities in the process of being remanufactured or in the queue to start the process, with commitments from our customers to send more units to be remanufactured as capacity comes available in the remanned facilities.

We said since we announced the acquisition of United that our vision was to move the majority of United's business to service, including the re-man of oil service equipment, along with parts and distribution, as a means to establish a more stable revenue and earnings stream, while preserving the ability to layer in manufacturing as the market presents the opportunity to do so.

We are on the path towards achieving this business model. Our legacy diesel engine service marine business reported higher operating results, benefit ting from improved oil service activity levels in the Gulf of Mexico, as well as from international customers.

Business was also brisk for major overhauls and gear work for inland tank barge and dry cargo operators, and as well as coastal operators. The power gen market benefited from strong part sales and continue engine generator set up grades, during the second quarter.

I'll now turn the call over to David.

Thank you, Greg. Good morning. Let me start with Kirby Offshore Marine.

Overall equipment utilization was in the 75% range for Kirby Offshore Marine. The Pacific, Alaska, Hawaiian reported higher utilization levels. However, the New York market, the New York harbor market, in particular, saw lower equipment utilization levels and corresponding competitive bidding for available movements. During the second quarter, we had an additional $0.5 million in severance charges, associated with the integration of Kirby Offshore Marine into Kirby.

We had the negative impact of maintenance and repair related equipment to unavailability issues that negatively impacted results, as well. We continued -- with continued low equipment utilization and excess capacity in the New York harbor market during the second quarter, we did reposition for tank barges and two tug boats to the Gulf Coast market.

The repositioning costs for these moves were included in the second quarter results. With respect to pricing, contracts that renewed for Kirby Offshore Marine during the quarter, and spot contract rates were basically flat.

Approximately 60% of Kirby Offshore Marine were under term contracts, with 40% being spot contracts. Time charters represented approximately 90% of the revenues under term contracts during the second quarter.

Moving to Kirby general financial data, late yesterday, as you know, we announced net earnings for the second quarter of $0.85 per share compared with $0.70 -- $0.77 per share from the second quarter last year.

For comparison purposes, the 2011 second quarter results included about $0.07 negative share impact -- negative impact from the record setting high water and flooding conditions we had last year.

A continued strong performance in our inland transportation sector, and the acquisition of Kirby Offshore Marine, which was effective in July 1 of last year, resulted with our marine transportation segment revenues being28% above, and operating income 23% above the 2011 second quarter.

The Marine Transportation segment's second quarter operating margin was 21% compared to 21.9% from last year. As Greg noted during the second quarter, our legacy inland Marine Transportation fleets, 90% to 95% equipment utilization continued, along with favorable pricing.

The inland sector contributed about 80% of the second quarter's marine transportation segment revenue. We estimate that the low water levels on the Mississippi River, and the maintenance issues at a major petrochemical customers facilities negatively impacted the second quarter by about $0.03 to $0.04 per share.

Despite these temporary issues, our inland Marine operations maintained an operating margin in the mid-20% range for the second quarter.

Kirby Offshore Marine contributed about 20% of the second quarter's Marine Transportation revenues, with the maintenance and repair-related issues negatively impacting earnings, and an additional $0.5 million severance charge, coupled with the weak New York harbor market, and the repositioning cost, the operating margin at Kirby Offshore Marine was in the low single-digit range.

Our Diesel Engine Services revenue for the 2012 second quarter was in line with the 2011 second quarter, which both periods included United. However, last year United acquisition was completed on April 15. Diesel Engine Services operating margin -- operating income was 14% lower than the 2011 second quarter and the segments operating margin was 8.9% compared with 10.3% for the second quarter last year.

The decline in operating margin and operating income was due to the lower results from United that Greg noted. United contributed approximately 70% of the diesel engine services segment revenue during the second quarter, with the decline in manufacturing revenue, specifically fracturing units, and replaced to some degree with remanufacturing of fracturing units, United earned an operating margin in the mid to high single-digit range for the second quarter.

Legacy Marine and power generation operations contributed approximately 30% of diesel services revenue during the second quarter, and they benefited from improved Gulf Coast offshore service market, and some large overall projects for the inland and Marine customers that they have.

We continue to generate significant cash during the first half of 2012 with EBITDA of $243 million. Our capital spending for the first half was $154 million, and consisted of $70 million for new Inland tank barges and tow boats.

$32 million progress payments on the two new offshore dry-bulk barge and tug units, and $52 million primarily for capital upgrades to the existing inland and coastal fleet, as well as some spending diesel engine services facilities. We have raised our capital spending guidance for 2012 to $290 million to $300 million range.

Including $130 million for construction of new inland equipment, approximately $70 million in progress payments for the two offshore dry-bulk units, with the balance attributable to upgrades for the inland and coastal fleets, as well as some progress payments for the inland tank barges ordered in 2012 for late 2012 and 2013 deliveries.

As of June 30, we had $106 million outstanding on our $250 million resolving credit facility, and as of this morning, the revolver's outstanding balance was $91 million. With the respect to the United earn-out, during the first quarter of 2012 based on United's earnings, we booked $4.2 million or $0.05 per share in expense as our estimate of the earn-out increased.

During the second quarter, this second quarter, with the decline in natural gas price and the subsequent weaker market for manufacturing of fracturing units. We held the contingent liability flat, making only a slight adjustment to reflect the time value of money.

As of June 30 we recorded a earn-out liability of $26.9 million. As there are 18 month remaining for the earn-out 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 future changes to the earn-out contingent liability from our guidance. With that I'll turn the call back to Joe.

Okay. Thank you. Thank you, David.

I'm going to talk about the outlook going forward. Yesterday afternoon we announced our guidance for the third quarter of $0.87 to $0.97 per share.

This compares with $0.94 per share earned in the 2011 third quarter. The 2012 and 2011 third quarters are a direct comparison, as the third quarter last year results included United purchased on April 15, 2011, as well as Kirby Offshore Marine which was purchased July 1, 2011.

For the year our guidance is $3.50 to $3.70 per share compared to the 2011 results of $3.33 per share. As we stated earlier, our Inland Marine Transportation sector is doing well.

Favorable pricing trends, and we anticipate this is going to continue throughout the rest of this year and into next year. As I'm sure you're aware, drought conditions in the Midwest have created low water conditions on the Illinois, Ohio, and Mississippi rivers.

These low water conditions negatively impacted our South second quarter, as well as reducing drafts on our barges with destinations to upriver locations,since about mid-May. That continues as we speak, today.

And our third quarter guidance assumes that the water levels on this system will remain similar to where they are today. We cannot predict rainfall in the Midwest any better than we can predict potential hurricanes. Therefore, we based our guidance on current weather conditions and water levels going forward.

Although, we are beginning to see some rain in the Midwest, which is encouraging. Our third quarter guidance assumes our coastal Marine Transportation business results should improve due to the seasonality of the refined products market, as well as favorable operating conditions during the quarter.

Since we purchased our coastal fleet in July of 2011, we've said the coastal market is not a next quarter or 2012 story, but operating results should improve over the next couple of years as supply and demand becomes more balanced, leading to higher equipment utilization.

And maintenance and repair expenditures should decline as we bring this fleet up to what we think are appropriate equipment standards. Our maintenance strategy will improve this fleet's performance, as well as it's profitability. Our long term strategy for this business remains intact.

Our guidance assumes our legacy diesel engine service business will be similar so the second quarter results, reflecting continued good marine and power generation markets.

A more significant variable in the third quarter and the year guidance is United, with the decline of natural gas prices and it's impact on manufacturing and remanufacturing pressure pumping equipment, and service to the land based oil and gas market. Even with this volatility however, United remains profitable.

It's performance is consistent with our original acquisition pro forma, and our imitative of focusing this business on the service side of the business, will take out some of the future volatility.

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

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question comes from Jon Chappelle with Evercore Partners. Please, go ahead.

Thank you. Good morning, guys.

Good morning.

Greg or Joe, you mentioned at the very beginning the movement of the crude oil on the Intracoastal Highway and along the river. I've been talking to a lot of oil traders and ship workers about the potential market. I'm trying to get a better understanding of what Kirby's potential is to move excess crude from the Eagle Ford to the Texas region, along the Intracoastal highway, and even your potential to potentially move it to the East Coast refineries where there may be a shortage.

I'll start answering it, and Greg, and David, you can fill in the blanks. There's a lot of crude oil coming out of Eagle Ford, which is south Texas.

That's being moved by inland barge and in some instances coastal barge. There's also a gathering pipeline systems that they're -- being installed in that market.

What we have said in the past is that we think that barge demand at some point is going to be capped. We don't think it's going to go away, but we don't think there's going to be a lot of future growth coming out of south Texas.

Now, having said that, the need to supply crude oil to East Coast refineries is, you know, is significant. That -- that's going to be moved in larger vessels. These are the -- typically ships in the 340,000-barrel range.

KC's biggest barge is 185,000 barrels. That lends itself more to the refined products trade than actually moving crude oil.

Now where we do think there's some -- some offshore opportunity, is the movement of some crude oil, but also a lot of the condensate that's coming out of Eagle Ford. Two refineries that can use it by offshore equipment, And that movement really is much better suited for barges that are in the KC range.

Now how the East Coast gets their crude oil is still somewhat of a mystery. There's talk of bulk and crude coming into Albany by train. Some of that is happening today.

We should have an opportunity to move some of that. I think we've already moved some of it. You, of course, have the imported crude which is expensive relative to U.S. crude based pricing.

But I'm -- I'm not sure that that's all been worked out yet. You guys have anything to add to that?

No, not really.

No.

Okay.

Our next question from Jack Atkins from Stevens. Please, go ahead.

Good morning, guys. Thanks for taking my questions. First, Joe, I wondered if you could maybe just expand a little bit on your comments about the low water issues on the Mississippi. Could you maybe talk about Kirby's exposure to it. Specifically, whether this is more of the upper Mississippi River area or, are you guys seeing an impact of it, as well, down on the Gulf Coast Intracoastal Waterway?

No impact on the Gulf Coast Intracoastal, because it's open to the sea. If you lose fresh water you'll gain salt water. With respect to the lower Mississippi, those drafts have been decreased to 9 feet but, frankly, since mid-May, we've been loading barges that we take up river to that draft because the Illinois and the Ohio rivers are already there. I think that -- and in our contracts, we do have low-water protection, and we have minimum-volume protection in most of the contracts. Where you may -- yet to be affected is, you know, if it continues to shoal, you're going to see delays caused by dredging, and you're going to see some high-velocity currents as the river narrows. You can anticipate that if we don't get water, but as I've said in my remarks, you actually are getting a little water now. Let's hope that the worst is behind us.

Our next question from Alex Brand from SunTrust. Please, go ahead.

Good morning, guys.

Good morning.

Greg, when you had mentioned the spot pricing, I think you gave it sequentially. Can you give it year-over-year as well?

Well, I think you gave it year-over-year. the term was year-over-year.

Yes, the term was year-over-year, the spot pricing, you said it was modestly better.

The testimony was year over year, the spot pricing as modestly better. So I -- Alex, I think the way to probably to think about that is that spot pricing has been about 5 to kind of mid-to high single-digits above term pricing. Term pricing has moved up. The mid-single digit range year-over-year. To think about it is spot pricing has really moved in concert with term pricing over the last year.

And, Alex, just to add, as you know, fuel prices impacts spot pricing in there. Year-over-year, this quarter, the average fuel price was about $3.35 andlast year it was $3.25. So that adds a little bit to the spot pricing.

Yeah, I think what you're really looking for is our spot prices continuing to rise and they are, yes. And they're ahead of contract.

Thank you, our next question comes from Gregory Lewis from Credit Suisse. Please, go ahead.

It's actually Anthony (inaudible) for Greg this morning. Good morning, everyone. I had a quick follow up on the low water levels. In this situation, did you guys add barge capacity to kind of offset the like light loadings in this case?

Yeah, that's a good question. And -- it would be around the margins, because you're really talking about in the summer probably 6 to 10 inches of cargo that you're missing.

Yes.

So it, but, yes, to service -- to service the demand, there will be a little capacity added, and they'll also incur some delays too that will add a little capacity.

Okay.

It's more marginal than anything.

And I guess a quick question on United or the diesel business. With, since kind of the manufacturing is a little bit -- has been light, or expects to be light for the rest of the year, would you say that we should see some margin improvement, because of kind of the switch more to the remanufacturing? Is that kind of fair to say?

Well, any long-term, I think the answer is yes. Yes, where we are in the process is we are in the startup phase of this. It's still work through the process of improving the efficiency of the flow of remanufacturing units through our facilities, so we're not quite where we want to be in terms of margins in the reman area, but I think your assessment long-term is a good one.

Our next question comes from John Barnes with RBC Capital. Please go ahead.

Hi, guys, good morning. Could you talk a little bit about -- I hate to keep beating this to death on the drought side, but just with the light loadings, and that type of thing, Joe, I know you said it on the margin, but how much impact was there to utilization of the fleet as a result of that? I mean was it a couple of points, or was it less than that?

Oh, I, I would say it was less than that. But I think that maybe -- maybe what you're looking for is what is it really cost us, and it costs us roughly about a $0.5 million a month. That's the cost of the cargoes that you're -- the reduced cargo capacity and a little delay.

All right. Yes, I was just trying to see, you know, if it -- if the low water conditions result in you having to use more barges to handle the same amount of freight, does that have an abnormal impact on utilization, and therefore does it kind of push spot prices up maybe a little more than in a normal environment?

Yeah. On the river, most of that business is contract and it services a couple of customers. Now there are -- the majority of it services a couple of customers. Where the market is very tight is more on the canal, frankly, than on the river. We -- because of that major customer that had the plant maintenance outages, we actually had capacity we probably could have sold. So I don't think that -- I don't think that made a real difference in your ability to price up the spot market. At least, in our fleet because we just didn't have much spot business there. Did that answer your question, John?

(technical difficulty) issue. Are those commerce fully back to -- I mean are they back to full volumes at this point?

Yes, they are.

All right. Very good. Thank you for your time, guys.

Yes.

Our next question comes from Ken Hoexter from Merrill Lynch. Please, go ahead.

Great. Good morning. Can you talk about how you're seeing petrochemical demand now, and you mentioned a little bit of before, I guess because of the customer. but you're also targeting -- Greg mentioned capacity up 4%, I guess year-over-year by the end of the year. So, again I just want to throw that into your thoughts on the demand growth.

Yes. We're still seeing a good demand for petrochemical equipment. There was some destocking in the second quarter, but even with the destocking, we still had utilization rates in the 90% to 95% range.

And we're not hearing anything from our customers that suggests declines in our volumes. Now there is some noise out there in -- with your major chemical companies that are talking about kind of global economic conditions that affect their chemicals, but we don't -- we don't think that's going to translate into our volumes. And with respect to the 4%, I don't know if that's the right math. It's 350,000 barrels over, what, 16?

16.4%

Is that, 2%?You can do the math, Ken.

Okay. 2%. Okay, maybe you can kind of keep -- if you can keep going on that CapEx, your thoughts on where capacity goes, you know, going forward into next year. It sounds like you're already starting to plan your order book into next year.

We are. And, but, let's just kind of talk generally about industry capacity, because I know that's on some people's minds. The industry is building a number of barge this year. We think that it's driven by the tax benefits you get this year that you're not going to get next year. Capacity additions are something that you watch closely, but as we look at the capacity that's coming in, the current fleet utilization, and the growth in our markets, we're really not that concerned about it for a couple of years. Where you get concerned about it is if this building continued and you had a, you know, you had a market issue where your volumes dropped.

Then you could go into an overcapacity situation pretty quickly. I think that the way that the industry is building, you're not going to see sharp drops in utilization without an effect on volume. And if utilization stays, you know, in the 90% range, you should continue to have some pricing power. If it begins to drop, then you know you would worry about it. In 2013, specific to your question about Kirby's fleet, we could -- we could add about 300,000 barrels. Is that right? 300,000 barrels of additional capacity. And I would tell you that in our building plans, that's kind of our intent, but if we got worried about utilization, then we would pre-empt some replacement and just keep the fleet flat.

Great. Appreciate the insight. Thanks, Joe.

Yeah.

Our next question comes from Kevin Sterling, from BB&T Capital Markets.

Thank you. Good morning, gentlemen.

Good morning.

Joe, do you think we're near an [inflection] point regarding the slowdown in the manufacturing of fracking equipment and maybe an improvement in servicing of this equipment? What I mean by this, maybe has the rate of decline slowed enough regarding manufacturing, and the service and refurbishing has begun to catch up with maybe a slower rate of decline.

Yes, is it -- is the question that we're kind of at the bottom of the decline of making things? Is that what you're trying to ask?

Yes, if you've seen, maybe -- I'm not saying its bottom is going back up, but have you seen that -- we saw such a rapid rate of decline, but have you seen that rate of decline slow?

Well, yes, because there's not much left to go. But, what's encouraging, and Greg, you should chime in here, but what's encouraging is that the pace of re-manage is picking up, and everything that we're seeing and hearing suggests that demand is there. Natural gas has moved from -- at one point below $2 to $3.10. At some point between $3 and $4 you're going to get demand for finding gas again. So, you know, you sense that you're getting close to the bottom. You want to --

The other thing I would add, Kevin, is that the -- we watch kind of the inquiry level also around new equipment, as well, and it's improved a little bit since -- over what we saw a couple of months ago. The general trend is that it's starting to improve a little bit. As Jim pointed out, most importantly to us, and we're trying to build out the service aspect of this business is that interest in reman continues to be robust, and we continue to work on that business model to make it as (inaudible) as we possibly can.

The other point I'll make is, our folks in Oklahoma will want me to make it, is that the -- typically the order book that begins to look at the next year in the third and fourth quarter. You don't typically see the order book before about now. So about (inaudible) I would say by next quarter we'll have a better sense for what that order book might look like for new equipment. Remember, our objective is yes, to build new equipment, but not at the expense of developing this service model.

Right, right. So you're encouraged on what you're seeing on the servicing side, and that's -- I guess that's the reason you like that is that's more of a recurring revenue stream, is that the right way to think about it?

That's right exactly right. More consistent. The margins actually should be better. The barriers of entry should be higher. You should be able to develop long-term relationships with major users of the equipment based on how you service it and availability and that kind of thing. It's more the kind of business that we do here. It's consistent with the Marine diesel service mode. It's even consistent with the Marine Transportation model. Long-term relationships that, you know, go for rateable kind of steady business.

Kevin, one other point, that is that akin to what we do at Kirby Engine Systems servicing our Marine customers, we, in the reman business, have been servicing some projects that are destined for international applications even though we're doing the work here. And, specifically, what I'm talking about is the remanufacturing of some hydraulic fracturing units that will be shipped offshore to foreign destinations for use in those -- for use in foreign venues. So, that's -- that, again, is similar to the business model that we have at KES

Okay. And then I'll just follow up kind of shifting gears here, this is my last question. When you look at the (inaudible) trade, what has been the real issue there, is it one that's been -- an industry that's oversupplied? Is there too much capacity, and how much capacity is going to come out in the next couple of years as you think of single skin barges.

Hi, Kevin, this is David. The real issue is the economy and particularly in the New York area and the west coast. Miles driven and gasoline consumption, diesel consumption, it's been low. There is excess equipment. In the New York harbor we have had entrance of a competitor that got pretty aggressive too.

But the positive is that we are seeing things improve a little bit on the west coast and as Joe mentioned, there's some possibility for condensate moves, in across Gulf condensate moves that could use some of the industry capacity in the 80,000 to 100,000-barrel range which should tighten it up. Clearly, it's a supply and demand situation. A lot of refined products are moved coastwise. That demand is down because of the general economic weakness and so the market is a little over-supplied. As Joe mentioned in his prepared remarks, we knew it was not a one quarter story. This is going to take some time to tighten up. There are approximately 40 to 45 coastal barges that are 185,000 barrels or less, that are over 25 years old. So soon or later that equipment is going to come out, and the pricing, the market doesn't justify building any new equipment right now. It will gradually tighten up.

Great. Okay, great. Thanks so much for your time today, gentleman.

Thank you, Kevin

Our next question from Jimmy Gilbert from IBERIA Capital. Please, go ahead.

Hi, guys. Thanks for taking my questions. I was looking a little bit at the Dow Chemical results today, and picking up out of the stock, but they seem to be pretty cautious, worried about Europe (inaudible). But they say they they plan to spend $4 billion to expand their Texas refineries, which, obviously, is right in the heart of where you guys operate. Can you talk a little bit about how you view the refiners, and even if the world possibly slows a little bit they obviously see enough to want to expand these refineries there quite a bit, $4 billion.

Yeah. We can talk a little bit about what -- what's being expanded. But Jimmy, that's all about feedstock costs. Low natural gas prices that put the U.S. at a competitive advantage, really almost everywhere in the world. And their perspective, their time horizon is going to be beyond, you know, the quarter or even the next several years. Their time horizon is out there with the clear assumption that we're going to get through these economic problems, and that there's going to be strong demand going forward. I mean, frankly, there's strong demand right now. With respect to the actual announced capacity, I think principally in the ethylene business, once you go through that, Greg, because I think it's significant.

Yes they're -- Jimmy, they're going to expand -- that will the expand there -- their current St. Charles facility by about 400,000 tons. And then longer term they're planning on adding a world scale cracker to the U.S. Gulf Coast. Hopefully, down here in the Freeport complexes is what's going to happen. As Joe talked about, the timeline to make that world scale addition happen is in the future pretty far, four to five years from here. But the good news is the U.S. Gulf Coast, and North America in general, is becoming a place of preferred venue for investment for the petrochemical players as it has been for some time for the refiners. You've seen quite a bit of investment in the refining complexes down the Gulf Coast , making it most efficient and flexible ones in the world.

With respect to Dow Chemical, they are also restarting a cracker. That happens at the end of this year.

That's a pretty new term. And then I wanted to ask a question about the margins on the legacy diesel engine maintenance business. From what you guys tell us, I can kind of back into an operating margin right now, a little bit north of 16%, but I was trying -- I mean that seems higher than what I remember of the operating margin being prior to the acquisition of United, so it would appear to me -- and from what we see here in offshore service vessels, and shallow water, mid-water, and deep water rig utilizations in the Gulf of Mexico, that business is doing pretty good. Am I thinking about the margins correctly, 16%, a little higher than that?

Yeah, Jimmy, this is David. You're a little high. We said United was in the high single-digits, and maybe if you round that off that would imply the 16, but really we're approaching the mid-teens margins. It's better but it's not above mid-teens yet. So maybe you have a rounding error there or depending on your assumption on what you backed into for United. But we had a lot of carryover in the Midwest Marine market in the legacy business, which really helped margins this quarter. And as you mentioned, the Gulf Coast oil service market has picked up. The legacy diesel business utilization, labor utilization, is up and clearly that helps drive their margins higher, but it's not quite above the mid-teens range but it's approaching it.

I would say the mid-teen -- that's kind of the sweet spot. That's where that business should be on a consistent basis, you know, in a normal market. And they've been there before, 2007, 2008, I think, they were in that range. Maybe a little higher, actually.

Thank you, our next question comes from Chaz Jones from Wunderlich. Please, go ahead.

Hey, guys. Good Morning. Just one more question maybe on the operating margins that DES. I know there'sbeen a lot of questions around that, but really the question was, is we kind of maybe go through this transition with United for a couple more quarters. Is it right to assume that maybe DES operating margins kind of stay in the high singles digit sort of range for a couple more quarters?

This is the diesel engine margins?

Yeah, the consolidated.

The high single digits.

Yeah, I think that's right. We might get back to the double-digits. It depends, as Greg mentioned, the ramp up of United reman. As Greg mentioned, reman once it's up and running and lined out should be higher margins, but that's going to take some time to sort itself out as we ramp up. But maybe high single-digits on a combined basis for quarter or two more, but as it improves it could get back into the double-digits.

Got it. And then just one follow up. I was wondering you if you could maybe comment on labor markets, as it just kind of relates to the crewing of vessels. Any issues or pressures there that you are encountering?

In our transportation businesses, not yet. We watch that. Now we do think that a float labor rates are going to be above the cost of inflation going forward into the foreseeable future. But we're certainly not seeing the kind of shortages that we saw in the 2006 and 2007 years.

Our next question comes from David Beard from IBERIA. Please, go ahead.

Good morning.

Good morning.

I want to say good morning, David.

Maybe we could just talk about the industry fleet growth, just to get at this capacity issue. Do you guys have your thoughts of how much the fleet may grow here for 2012, and are there any indications for 2013?

Well, yes. We think that -- there's a number of barges being built, but there's a lot of replacement too. So I think I'd look at fleet growth somewhere in the 3% to 4% this year, and a little less next year. So, and at those levels, just given, you know, given to what we're seeing with respect to volumes I think we're okay. You know, in that period, what you'd worry about is something happens to volumes, but I think if the volumes are there, that capacity should get absorbed. Certainly, we're already halfway through the year and certainly, the capacity, thus far, has been absorbed and there's still a need for some additional equipment.

Okay. And just as a follow on, when the industry is looking at scrapping. Our current rates either not adequate to overcome the big maintenance costs of an older barge, or would we need rates to come in a little bit to push scrapping higher?

Yeah. I think we're still seeing scraping. You know I think that what the industry learned, and we certainly learned, was that older barges are just less efficient and they're more expensive. And the market, when it slows, immediately has a bias against the older equipment. So we're certainly pushing a lot more equipment out than we did in 2006, 2007 and 2008. You know, I think the industry is generally doing the same.

That's helpful. Thank you.

Sure.

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

Hi. Good morning.

Good morning.

Just real quick, in terms of appreciation for the diesel engine service business, it dropped pretty significantly, I'm just kind of curious what drove that, and if that's kind of a good rate to assume going forward.

Yes. Now, that's the intangibles. As you do your purchase price allocation with the acquisition, there were some intangibles that were short-lived, and that rolls off fairly quickly. It's as simple as that.

Okay. Thank you.

Operator, let's ask one more question, please.

Sure, Our last question comes from Jon Chappell from Evercore Partners. Please, go ahead.

Start and finish, thanks for letting me get on one more time, guys. Really important thing, here that I think has not been addressed and that's the cash flow. I notice you put separate section in your release on cash generation. I'm assuming aftera year of pretty hefty CapEx, the CapEx spend is going to be down next year. I'm just wondering as think of cash allocation for next year, if you could talk about buybacks, potentially initiating a dividend in 2013, and also just what the acquisition landscape looks like.

Yeah. Well, we still think that the acquisition environment is strong. And we're going to pursue acquisitions, principally in the transportation space. With respect to share repurchases, that's a function of where your stock is trading. We like to be opportunistic acquirers of our stock. Dividends is something that we have talked a lot about. We're beginning to get into a cash flow generation situation where we can actually do acquisitions and dividends. I think what we want to do is get through these heavy CapEx years, and then at the board level, address the possibility of a dividend. So I don't want to project when that might happen, but certainly this year we have a heavy CapEx year. Depending on if we make acquisitions, that's going to affect cash flow, so we'll -- we'll put all that together and make a decision whether we're going to pay a dividend or whether we'll buy back stock based on the stock price.

All right. Sounds great, Joe, thank you.

Yeah.

We appreciate your interest in Kirby corporation and participating in our call. If you have any additional questions, please give me a call (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.