Kirby Corp (KEX) 2012 Q3 法說會逐字稿

Welcome to the Kirby Corporation's 2012 third quarter conference call. My name is Trish, 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 would now like to turn the call over to Steve Holcomb. Please go ahead.

Good morning. Thank you for joining us. With me today are Joe Pyne, Kirby's Chairman and Chief Executive Officer, Greg Binion, Kirby's President and Chief Operating Officer, and David Grzebinski, our Executive Vice President and Chief Financial Officer. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at kirbycorp.com, in the investor relations section, under non-GAAP financial data. Statements contained in this conference call, with respect to the future or 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 Form 10K for the year ended December 31, 2011, filed with Securities and Exchange Commission. I will now turn the call over to Joe.

Thank you, Steve. We announced last night that our third quarter earnings of $0.95 per share came at the upper end of our $0.87 to $0.97 per share guidance range. Inland tank barge business continues to perform well, with results that were above 2011 third quarter levels, despite low water conditions throughout the Mississippi River system that created a number of operating challenges this quarter. In addition to the delays caused by Hurricane Isaac, which was also in the quarter. Demand for our coastal tank barge equipment was roughly in line with the 2012 second quarter levels, although we are beginning to see some modest improvement, particularly towards the latter half of the quarter. Our marine diesel engine service--that's our heritage diesel engine service--operating results were below their 2011 third quarter results.

This was principally due to the hurricane. The hurricane closed our Louisiana facilities for several days. And low water conditions, which had some of our customers defer maintenance projects. And to a lesser extent, the timing of projects. In our land-based diesel engine service business, the market for new pressure pumping units continues to be very weak, and is the primary factor in the decline in overall diesel engine service revenues, compared to last year. I'm going to come back at the end of our prepared remarks and talk about the fourth quarter, end-of-the-year outlook. I will now turn the call over to Greg Binion, who will discuss our inland tank barge and service markets, and then to David, who will discuss the coastal tank barge market, as well as the financial update.

Thank you, Joe. Good morning to all. For the third quarter, our inland transportation sector continues overall strong performance, with high equipment utilization in the 90% to 95% range, with both higher term and spot contract pricing. The low water conditions on the Mississippi River, which began in mid-May, caused -- persisted through the third quarter, causing delays, white loadings, and smaller tow sizes, all of which cause a reduction in our ton-miles. These conditions have continued into October, and could extend into the fourth quarter, as we continue to experience drought conditions in the Midwest, which impacts our river loadings and efficiency. To date, we have not seen sufficient rainfall to relieve the situation, and there is the possibility for the situation to get worse in sections of the Upper Mississippi River, near St. Louis.

As they did last year in the high water, the Army Corps of Engineers has done a very good job in keeping the river open, and continues to work with industry to minimize commercial disruptions. We will continue to update you on the situation as it develops further. During the third quarter, Hurricane Isaac also drove increased delay days, forcing us to limit or suspend operations for as many as nine days for vessels in Southeast Louisiana. While operating conditions were and remain challenging, demand across our inland markets remain strong. Revenues from our long-term contracts -- that is, one year or longer in duration -- remained at 75%. In the mix of time charter and the affreightment business for the third quarter was 58 and 42, respectively.

Turning to the inland marine transportation pricing. Term contracts during the third quarter continued to be renewed in the mid-single digit level, and in some cases, higher when compared to the 2011 third quarter. Spot contract pricing, which includes the price of fuel, saw rate increases modestly when compared to the 2012 second quarter. During the 2012 first nine months, we took delivery of 53 new tank barges, totaling 972,000 barrels of capacity, and retired 40 tank barges, with 635,000 barrels of capacity. In addition, we completed the transfer of four coastal tank barges to the inland fleet, adding 91,000 barrels of capacity, for a net capacity add of 428,000 barrels. We also added the Lyondell fleet of 17 tank barges, with 243,000 barrels of capacity.

I'd point out that as we previously operated this fleet for Lyondell, this addition does not affect our revenue or cost structure. So, net-net during the first nine months, we added 34 tank barges to our fleet, and increased our capacity by 671,000 barrels. As of September 30th, we operated 853 tank barges, with a capacity of 16.9 million barrels. We also took delivery of three 2000 horsepower inland towboats in the 2012 first nine months. Our fourth quarter construction program will consist of two 30,000 barrel inland tank barges and two towboats. The new--the cost of the new inland tank barges and towboats delivering during 2012, and progress payments on barges and towboats delivered in 2013 will be approximately $130 million. We will also continue to retire older barges during the 2012 fourth quarter.

At present time, we anticipate our 2012 year-end capacity to be approximately 16.8 million barrels, or 600,000 barrels above the 16.2 million barrels at the beginning of the year, which -- note this number includes the Lyondell addition. Our 2013 construction program consists of 56 tank barges, totaling 1.2 million barrels of capacity, and three towboats, with all vessels scheduled for delivery throughout 2013. At the present time, the majority of these new barges are planned to be replacements for older barges.

Turning to our Diesel Engine Services segment. United, our land-based service provider, saw revenues and operating incomes decline year-over-year 25% and 43%, respectively. Sequentially, revenues and operating income was close to flat. The year-over-year revenue decline was a result of a significant reduction in orders for the manufacturing of pressure pumping units. We also experienced a decline in the sale of engines, transmissions, and other parts. Partially offsetting the decline in the manufacturing of pressure pumping units was an increase in the remanufacturing of pressure pumping units.

Our legacy Diesel Engine Services business reported lower operating results, primarily due to the timing of customer deferrals of several large projects in the Midwest, due to the low water conditions, and due to the facts of Hurricane Isaac, which closed most of our Gulf Coast operations for several days. The Diesel Engine Services segment also incurred additional operating expenses related to startup costs, associated with the new marine product distribution agreement and a new engine certification for the power generation market. The power generation market benefited from strong parts and a continued favorable engine generator set-up grades during the third quarter. I will now turn the call over to David.

Thank you, Greg. Let me start with Kirby Offshore Marine. Kirby Offshore Marine's overall equipment utilization rate was just under 80%, with the Atlantic, Pacific, Alaska and Hawaii markets showing some signs of improvement. Although New York Harbor remained relatively weak -- weaker, the equipment we repositioned from New York Harbor market to the Inland Gulf Coast market during the second quarter has had a positive impact, and we did see some modest improvement in market conditions in the month of September. With respect to pricing at Kirby Offshore Marine, spot contract rates were up in the mid-single digits. No term contracts were renewed during the quarter. Before I turn to the financials, let me update you on our Allied acquisition. We received early termination for our Hart-Scott-Rodino review, and we are on track to close early in this fourth quarter. We are moving forward with our integration plans at Allied, and are looking forward to the business that this will bring Kirby.

Moving to the financial data, yesterday as we announced, net earnings for 2012 third quarter of $0.95 per share, which included an estimated $0.03 to $0.04 negative impact from the low water conditions on the Mississippi River, and the delays caused by the hurricane, and this compares to $0.94 per share reported in the 2011 third quarter. Due primarily to the impact of challenging weather in the quarter, Marine Transportation revenues were relatively flat, while operating income was 5% above 2011 third quarter. The inland sector contributed approximately 80% of the third quarter's Marine Transportation segment revenue. Kirby Offshore Marine contributed approximately 20 cent -- 20% of the third quarter's revenues in Marine Transportation. Despite unfavorable weather impacts, our inland operations maintained an operating margin in the mid-20% range for the third quarter. Kirby Offshore Marine's operating margin was in the high single-digit range. The overall Marine Transportation segment's third quarter operating margin was 23.4%, compared with 22% for the third quarter of 2011.

Our Diesel Engine Services revenue for the 2012 third quarter was 19% below the 2011 third quarter. Diesel Engine Services operating income was 31% lower than the third quarter a year ago, and the segment's operating margins were at 8.5%, compared with 10% for the third quarter of 2011. The decline in operating income and operating margin was due to the lower results at United. United contributed approximately 70% of the Diesel Engine Services segment's revenue during the third quarter, and United earned an operating margin in the mid to high single-digit range for the 2012 third quarter. The legacy diesel engine operations contributed about 30% of Diesel Engine Services revenue during the third quarter, and their operating margin was in the low double-digit range. At the end of August, we raised our unsecured revolving credit facility from $250 million to $325 million, in part to facilitate the closing of our acquisition of Allied Transportation. As of September 30th, we had $101 million outstanding under our revolving credit agreements. This morning, our revolver's outstanding balance was $74 million. We ended the third quarter with $782 million in debt, and as of this morning, it was $754 million. That's all I have, and I'll turn the call back to Joe.

Thank you, David. Our 2012 fourth quarter guidance is $0.83 to $0.93 per share. This compares with $1 per share earned in the 2011 fourth quarter. For the year, our guidance is $3.53 to $3.63 per share, compared to $3.33 for the 2011 year.

Our Inland Marine Transportation sector is performing well, with favorable pricing trends, and we anticipate this performance to continue. Liquid movements from shale formations and Canadian crude oil movements from the Upper River system have kept positive pressure on barge utilization, and has absorbed new barge capacity. This should continue into next year. While water conditions throughout the Mississippi River System negatively impacted our third-quarter results, our fourth quarter guidance assumes that operating restrictions and resultant delays at lower ton-miles, created by low water levels, will continue into the fourth quarter. We're also assuming normal seasonality associated with typical winter weather conditions.

Our fourth quarter guidance assumes our Coastal Marine Transportation business will experience a normal seasonal decline in the fourth quarter, partially offset by some very modest year-over-year improvement in rights and utilization. This business continues to improve as capacity is removed. It's also benefiting from crude oil movements, which is absorbing capacity. We see nothing that suggests that this won't continue. This sector would also benefit from a stronger economy.

With respect to our legacy diesel engine business, our fourth quarter guidance assumes that results will reflect fewer power generation engine generator set projects, resulting in a sequential decline in the fourth quarter. The core service business, with respect to our heritage business, continues to strengthen. What pulls earnings around are delivery schedules of large projects and the timing of overhauls. The largest variable in the fourth quarter and full-year guidance is United, and frankly, this will, I think, also be true in 2013.

Although we expect continued improvement in United's revenues from the service side of this business -- these are the service revenues -- the current volatility in natural gas prices and the subsequent decline in demand for pressure pumping equipment to service North American shale regions creates uncertainty at lower revenue and earnings in the near term, and we believe into 2013. New orders for pressure pumping equipment have essentially stopped, and the supply and distribution part of this business has slowed. Price spot in the business is the service of remanufacturing of oil field equipment, particularly pressure pumping equipment. Unfortunately, this side of the business will not replace the earnings dollar-for-dollar, compared to the business operating in what is typically a more healthy environment, where you have both remanufacturing and some new manufacturing.

We certainly expect this business to be profitable in the fourth quarter. And we also expect it to be profitable in 2013, so we're not saying that it's going to lose money. But it's not going to be as profitable as it has been in 2011 and 2012. Except for the United business, the fundamentals of our other businesses is actually pretty strong. United business will get stronger, as pressure pumping business gets better, which most are projecting will occur in late 2013 or early 2014. In January, when we announce our full year earnings, we'll be more specific with respect to our business -- our businesses, and will provide some actual earnings guidance at that time. 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)

Jon Chappell, Evercore Partners.

Thank you. Good morning, guys.

Good morning John.

Joe or Greg, trying to figure out the sustainability of the pricing strength in the inland barge business. And the way I'm thinking about it is, I don't know if you can put a number around it, but how many of your contracts--the term contracts, may still be operating on what we call tentative pre-strengthening in the market type levels? So what's the ability to still kind of re-up contract renewals at prices that are significantly higher than what you may have signed a 1.5 years, 2 years, maybe even 3 years ago?

Jon, I think that the majority of it have been repriced. There are still a sliver that were priced in the 2009 and '10 period, but it's not a material amount. About 50% of the contracts that we currently have will be renewed in 2013, but I think that most of this has been renewed in the 2011 and '12 time period. So I don't think that you're talking about a lot of business that's going to get significant rate increases to adjust to current market.

Understood. And my follow-up, maybe for David, on the Kirby Offshore Marine. It sounds like there's some positive developments, end of 3Q, going into 4Q. Can you talk about some of the new, I guess trading routes that you're seeing that's absorbing some of the tonnage, and how that's matching up with the timing of removal of capacity, and where you see the market 2013, versus 2012 and '11?

Sure. Our utilization, as you heard in our prepared comments, was approaching 80%, which is up. The market has tightened up a little bit. Some older capacity has come out. We've actually retired some, and we've moved some capacity out of New York Harbor, into the inland market, so that has helped tighten it up. But the other thing that's happening is that we're getting some crude moves, that are essentially cross-goal, coming out of the Corpus Christi area from the Eagle Ford play. That the crude's making it to Corpus Christi, and then making it to water, and then there are some cross-Gulf moves over to the New Orleans area. That is also helped in tightening up the market. You also heard that we -- some spot price increases this quarter, so things are improving and looking up. That there's no reason that shouldn't carry into 2013.

Jon, just a little more color on that, because David talked about the Gulf Coast opportunities. But they're actually East Coast and West Coast opportunities that are beginning to pop up, which is all encouraging, as you look at a model that isn't fully utilized. So all of this should be positive, pushing this fleet to higher utilization levels. The other thing that will help, as I mentioned in my remarks, is a stronger economy. The economy improves, you'll move more gasoline too.

All right. Thanks, Joe. Thanks, David.

Thanks John.

Gregory Lewis, Credit Suisse

Yes. Thank you and good morning. Joe, your point on East Coast and West Coast moves. Are those moves from the US Gulf, or are those just East Coast moves?

Well, some will be from the US Gulf, but that's going to be principally in larger vessels. The kind of movements that we're seeing on the East Coast that fit naturally in our size vessels are moves such as Albany to New York Harbor, where crude oil is railed to Albany, and then loaded on barges to be distributed. So that's pretty positive. We think that that's going to continue. And we think that there are going to be additional, kind of innovative moves that will seek the lower price, shale crude oil for those East Coast refineries. Traditionally, they've been supplied by imported barrels. And imported barrels are at a significant disadvantage with domestic barrels, if you can overcome the transportation differential, which it looks like the market is finding ways to do.

And on the West Coast, Greg, I'd add that there's mock in crude that's trying to make its way to Anacortes, which will end up on the water, and perhaps get distributed along the West Coast.

So it sounds like the market's pretty strong. At this point, is Kirby looking at opportunities to maybe build-out its capacity in the coastal trade, or are you seeing any opportunities to do that?

Well, of course as you know, we're always looking for acquisitions. But in terms of new capacity and building new capacity, prices still don't justify new capacity, and of course, Kirby would rather buy capacity than build new capacity. You want to be very careful in adding capacity, but pricing is not near where it needs to be to justify new builds.

Okay. Thank you.

Jack Atkins, from Stephens.

Good morning, guys. Thanks for the time.

Morning, Jack.

First off here, if we could maybe talk about the Marine Transportation segment. I was really impressed with the sequential improvement in operating margins there, despite the fact that you guys had some headaches from low water and the hurricane. So maybe, first of all, if we could just talk about what was going on in the third quarter to help drive the sequential margin improvement, and do you think that this level of operating margin is sustainable, going forward?

Yes. Let me just, Jack, caution you about some of the margin growth. In our river contracts, we had minimals, so you can actually -- let me just think that through--you can actually -- I guess it wouldn't. I guess the revenue would be the same, so the margin should be about right. Greg, you want to answer the rest of the question?

Sure. So I think, Jack, one of the things you've heard us talk about for a couple years now is the fact that we've been reinvesting in our fleet. And I think what you're seeing to a large degree is improvements in reliability and flexibility that we're really beginning to enjoy. But they--with an improved tank barge fleet, you're starting to see the fruits of that effort.

I would add on the Com side, you saw margins come up, in my comments, from in the second quarter, from the low single-digits to the high single-digits, and part of that is cost savings that we have been talking about. It's starting to flow through. And that helps. But third quarter is also a busy time for Com. It's our busiest quarter. And as you know, when you go into the fourth quarter, the Alaska business on offshore starts to slow down, just because of the weather and whatnot, but the improvements -- some improvements in Com are starting to flow through as well.

Okay, that's all very helpful. And then, looking at the Diesel Engine Services side. To me, your guidance supplies a pretty sharp step down there, sequentially on the revenue side. Just sort of curious if maybe you could talk about your expectations in the fourth quarter for Diesel Engine Services, as it relates to the third quarter. And then also maybe just any sort of trends you saw in your Diesel Engine Services business on the land-based side as you move through the quarter, and if that could help, sort of enlighten us, as to how you're thinking about the fourth quarter. I think all that would be very helpful.

Well, Jack, this is Greg. In the legacy business, what we saw is as we talked about, deferrals from our marine transportation customers. And also the -- typically, what we have -- we have some large projects in the power generation business, and while there was one on the books, it's actually been deferred a little bit. It's a European project, and as you can imagine, with the issues in Europe, that's been put on the shelf for the time being. As it relates to the United business, as Joe -- as we mentioned, the sequential downturn is really around the new product, and while the typical contracting happens in a normal year during the third quarter, that's actually been pretty quiet. We haven't received a lot of inquiries from our customers about pressure pumping equipment, and in the market for other types of equipment, some other pumping and well service equipment, it's been a little stronger than that, but it's still really pretty subdued.

We -- as we said, the ancillary sales that go along with servicing the equipment, that's really based on the intensity in the area in which we serve, which is really that Oklahoma, and Northwest Arkansas, and Northern Louisiana area, which is really a pretty gas-intensive area, has also come off, which has affected our parts distribution and service sales a little bit adversely as well. And then, the ReMan business. We continued to work diligently to improve the throughput through our ReMan shop. We've engaged with a consultant that is helping us look at our organization and really kind of re-engineer the Company, so that we maximize our efficiency. That's a work in process. We are making progress, but it's going to be slow, steady progress. As we said, that business is much more difficult to do than building new units, which is good and bad. It takes a while for us to get it right, but it also is more difficult. And once we do get it right, should give us sustainable competitive advantage in that space.

Okay. Thanks for the time.

Thanks, Jack.

Ken Hoexter, from Merrill Lynch.

Great. Good morning. Now that you've been operating in the offshore market for a while, and you've made a follow-up acquisition, a couple of things. Can you just talk about -- you know, you talked a bit before about what -- needing the economy and demand to come back, but looking at the vessels you now have, are you done inspecting them? Are you making all the necessary investments? I just want to know if there's any other surprises that may pop up from the operating side of functional marine.

Hopefully, there's no surprises. We have -- we've made steady progress in our repair -- maintenance and repair program. As we've said, that's going to take a good part of this year, and there will be increased spending, next year. But it's -- we're making great progress on it. The reliability of the fleet has gone up. And we're not seeing the surprises that we had seen, and things have improved quite a bit.

We're being vetted by customers who are -- working with the customers now that we want to work for. Just a lot of positive things that have occurred. But to get that moving in the right direction, you have to have a service that meets their vetting requirements, and their reliability requirements. And the money that Kirby Offshore Marine is investing, is going to do that. We're confident of that.

Just to stick on that, did you mention that you're taking vessels from the offshore marine into the inland marine side?

Yes, we did. We took -- we talked a little bit about it in the fourth quarter, that we took some of these smaller vessels that were in the New York Harbor that weren't being utilized, and we moved them down to the Gulf Coast. And quite frankly, they've been put to work in the inland space, so it's been a win for both businesses, the inland and the offshore markets.

It's not scaling the capacity too much on the inland side?

Oh goodness, no. They--we -- we're as busy as we can be on the inland side, really.

There was only four barges. Four out of 850-something. (inaudible)

Yes, Ken. These weren't the big 80,000, 100,000 barrel units. These were four 28,000 barrel units. Roughly the equivalent of a 30,000 barrel minimum barge.

And the physical dimensions of these barges, Ken, are really identical to what an inland 30 looks like.

Well, they're inland barges that's been modified for offshore use, so it's not a big reach.

That's helpful. And just a follow-up on United. Is there a certain price that you need to see, in terms of getting the rigs back to being put back into commission?

Yes. At $4.01. No. Ken, I think the consensus is around $4.00. You'll begin to see more equipment go into gas formations, looking for gas, at the $4.00 level. I just -- that's the best consensus view I can give you.

I appreciate it. Thanks for the insights, guys.

John Barnes, from RBC Capital Markets.

Hey, Joe. Just a quick question on the coastal side. You've elaborated a couple times about the changes in the New York Harbor market, and specifically, relocating some equipment out of there. I go back and think about during the downturn, Kirby took this leadership position on the inland barge side. Kind of kept the industry rational as a whole, by doing some things with your fleet, maybe taking some retirements early, and that kind of thing. I'm just kind of curious, as to how you feel about the current size of your coastal business, and how close you think you are, from a size perspective, to being able to kind of influence that same behavior on the coast-wise business, as you were able to on the inland side?

Yes, I'm not sure that you ever truly influence it. But what we are able to do, that Kirby uniquely can do, is take barges that will fit in inland service, and move them into that service. I think, with respect to the coastal trade, in doing much more of that would be giving up opportunities going forward, because we see that business moving to balance. It's slow, but it's steady. You see the equipment being, in some cases, shifted to really a new product movement of crude oil. With any reasonable increase in the economy, you're going to stimulate more gasoline movements. So I don't think the industry is that far from balance.

On the inland business, we had in 2008, going into the recession, a fleet that was older than our coastal fleet. And we used the opportunity of reduced demand as an opportunity to take barges kind of out of service that frankly should've been taken out, probably a couple years before, but demand was such that we needed them. And embark on a replacement program at very attractive prices that drove down the age of the fleet, and as Greg explained, it significantly increased our reliability with the newer equipment. So it was a little different, I think, scenario on the inland side than on the coastal side, right now.

Okay. All right. That makes sense. In terms of the low water conditions that impacted the inland side. I mean, this is the first time I can recall where you had this severe of a situation for an entire quarter, where it kind of impacted you for the entirety of the quarter, I'm kind of curious. As you look back at the third quarter, that low river condition, light loading, that type of thing. If you hadn't had those conditions exist, would your utilization levels have been as strong, and do you think your pricing would have been as strong, versus if you had kind of a normal river condition situation?

Yes, that's a good question. Most of the additional capacity needed to service upriver customers is 10,000 barrel capacity. Most of that, frankly, is contracted, so you don't see it in spot rates. It just takes more equipment to service the contracted business that you have. The 30,000 barrel fleet, for the most part, is a lower river, Gulf of Mexico fleet. There are some exceptions. There is some crude oil now being moved out of St. Louis, which is new. And there's some unit tows that operate, but the bulk of the 30,000 barrel fleet is a lower river, canal-based fleet. And that would've been unaffected really by low water conditions. I think that the utilization, which drove I think the pricing increases that we and others saw, was just real demand that was being handled by that fleet.

Okay. All right. And then, can I ask one question on CapEx? Well, kind of two. First, the CapEx numbers that you gave in the press release. There was no real mention about the CapEx dollars spent into the diesel engine business. Can you give us some color there? And then secondly, on CapEx. Do you have any preliminary guidance you can give us around 2013 CapEx?

Yes. We did spend a little bit in the diesel business to buy off the lease -- one of properties in Oklahoma City. But the capital spending in the diesel business is pretty minimal. Most of our spending is in the marine side, as you might imagine. And gets to the fleet replacement that we've had going on for several years, and it continues. This is probably -- this will probably be our big year. Next year, we haven't given official guidance, but it could be in the order of $150 million to $200 million, depending on what we do in the inland space. But that will be down obviously from this year, for around $300 million or little above $300 million. But it's -- as you would expect, John, it's marine-driven.

Okay, and I'm assuming that $150 million to $200 million is based on a continuation of current conditions, and not some material move-up in the economy?

Correct.

Okay. Very good. Guys, nice quarter. Thanks for your time.

Chaz Jones, from Wunderlich.

Hey, good morning, guys. First off, does the Dow Chemical announcement earlier this week have any impact whatsoever on your business?

Hey Chaz, Greg. It really does not. What Dow was talking about there was really European and Asian production areas, so it really doesn't impact our area at all. In fact, we've seen some of the players in the chemicals space that have pending capital projects, that have reiterated their plans to go forward with those as late as this morning. So we're, we continue to be encouraged by the interest in investments in the petrochemical complex in the US Gulf.

And then, to follow-up on United. The 8.5% margin. I mean, just from your comments, it sounds like that's probably bottoming out. And as we think about 2013, are you saying that, just from a modeling standpoint, engine services revenues are probably down year-over-year, but margins are up, because of that mix shift at United. But potentially, overall, operating profits are down? Is that --

Yes. I think, directionally, that's right. I don't want to comment prematurely on what 2013's going to look like, but I think directionally, that that's about right.

Okay, great. Thanks, guys. Nice quarter.

Thanks, Chaz.

Kevin Sterling, BB&T Capital Markets.

Thank you. Good morning, gentlemen.

Good morning.

You guys have talked about how Kirby Offshore Marine, your utilization just under 80%. But realistically, where do you think this utilization can go? In light of, maybe a little bit of tick up, we've seen an improvement with some crude oil movement in improvement, East to West. I imagine it can't be as high as your core business, low to mid-90s, but how should we think about utilization as it continues to improve in offshore?

I think you should think of it actually fairly similar to the inland business. You could get into the 90% to 95%. You'll never get above 95%. There's inefficiencies that happen. The question is how long does it take to get that utilization up? We continue, as I mentioned earlier, we continue to see older equipment retired. We moved some equipment out of the market, so that's helping, but clearly the crude demand is absorbing some capacity and driving up industry utilization. We are seeing regional periods of high utilization, but then it'll turn back down a little bit, so that -- the economy could help a lot, as Joe indicated, but a little bit of economic strength in this continued crude movement situation could start to push utilization up fairly healthy next year. Maybe we get into the mid-maybe even high 80s. We'll have to see how it develops.

Wow. Okay. That's great. So Dave, when does the line for utilization for you guys to really push pricing? Is it 80%? 85%?

Yes, it's 85%. As I said, we've got a little bit of pricing this quarter, but it was in a regional kind of context. You need -- very similar to inland -- you need that sustained above 85%. And you can get it earlier than that, if the market really thinks that it's going to get a lot tighter. Right. It's not only the absolute level of utilization. It's about what the customer thinks is going to happen, right. And if they looked forward, and they say, oh my goodness, it's going to be harder to get a barge. Then we can push pricing a little earlier. But 85% really is kind of that magic line.

Okay. You know on this launch too, you know, talking about customer behavior in the offshore market, but remind me, there's still some single-haul capacity in offshore markets that's got to come out. Could you remind me how much single-haul capacity there is, and when that has to come out by? And I imagine that if the economy picks up, starts moving more gas and what have you, and the customer sees some single-haul capacity, can you access the market? That's got be favorable for your business.

Yes. We believe the single skin was about 8%. I think that's been coming down. We haven't done -- there is no industry survey, so we've kind of got to go through Coast Guard databases to get it. But it's probably still in that order of magnitude, maybe 5% to 8%, but it will be coming down. It has to be out by the end of 2014.

Okay, great. Well, that sounds like a project for Sterling, so put him to work.

(laughter)

Thanks for your time today.

Thanks, Kevin.

Alex Brand, SunTrust.

Hey. Thanks, guys. I don't remember in the time I've covered you that you ever had water conditions be this kind of persistent impact, and I think you said they might actually get worse. So when we look at Q3, and you say $0.03 to $0.04 was water conditions and weather, how much of that's really water conditions? I mean, is it $0.03, or $0.04, or $0.05 impact to the fourth quarter that you're thinking about, or what?

It was about $0.03 to $0.04, water and hurricane --

Isaac, right?

Yes. It's about $0.01 to $0.02, or $0.01 --

About $0.015 on hurricane.

Okay. $0.015 to $0.02 on hurricane, and that would be $0.02 to $0.03 on water, I guess.

Okay. And then, at some point here in the fourth quarter, you expect the upper part of the river to kind of close anyways, right? So it really doesn't impact at some point late in the fourth quarter, and into the first quarter. Is that the right way to think about that?

Well, no. Because it--unfortunately, you have to get on the section that is going to be most affected to get into the Illinois River, which typically does remain open. The Upper Mississippi River, north of St. Louis, you want to be off that river by around Thanksgiving, because it does freeze. But the Illinois typically either doesn't freeze, or it freezes so that you can actually break the ice and get to port, south of Chicago. So that's an active, active river.

We're not saying that it's going to close. We're just putting a marker down that we're watching it carefully. That stretch of the river is dependent on flows coming out of the Missouri River. The Corp that typically reduces those flows, beginning in November, and that is a potential problem. Now, there are a number of things that can be done, and I think that the industry and the Corp are looking at all of them. But it would all go away, if it would just rain. This is typically the time of the year, frankly, that it begins to rain, so we'll just have to monitor it.

With respect to United, I sense maybe a little less optimism about the speed of the ramp up and ReMan than I think I was hearing in the past. And I'm wondering if that's just a function of -- it's been harder to get it going than you thought, and really what I am thinking about is when we look at next year, I thought the idea was ReMan as lower revenue, but higher margin, and so you don't lose too much profitability. But I'm wondering if that's changed, and when do we really lack those manufacturing comps that that could -- that ReMan could make up the slack?

That's the question. ReMan is making progress. There's just a lot of moving parts to that, to make it an efficient process. As Greg mentioned, we're working with a consultant to help us there. I think that that's going to be very positive.

The other issue is how much -- we're not ready to talk about this yet, but it's something that you should ask us about, certainly in January -- is how much can you push through the current facility, without investing new capital? That really is our focus, making it efficient, and then pushing as much as you can through current facilities, without investing capital. We can invest the capital. We have positioned ourselves to add to the facility that we have by buying the adjacent property, and actually taking that property that was leased and buying it. But our first effort is to maximize the capacity that we have. And then to add capacity, once we've done that. And I think we'll have a much better feeling for all that by the first of next year.

Thanks for the time, guys. I appreciate it.

Okay.

David Beard, Iberia

Good morning, gentlemen.

Good morning David.

Could you elaborate a little bit about the outlook for the overall inland barge fleet growth for this year, and any thoughts on next year?

Yes. We think that there's going to be another approximately 200 barges built, a combination of 30,000 barrel and 10,000 barrel barges. Again, we think some of that's going to be replacement. Most of our building program is replacement. The industry continues to need capacity to service new requirements, particularly the black oil requirements, crude oil requirements. Is that what you wanted?

Yes, and then, would you say the 200, is that for this year, or are you speculating out in '13?

No, that's a 2013 number. This year's actually a little more. Remember, you get the tax benefits this year.

Yes.

And then, as it relates to the coastal market in general, with utilization picking up, has that changed the outlook for acquisitions in that area, or prices for fleets, or has it changed the big picture?

The acquisition environment's still okay in the coastwise, but it could start impacting the price expectations of potential sellers. I think there's a couple things going on -- still going on -- people are still recovering from what was a pretty rough time in the coastwise business, and they're making a little money. They're looking at their succession plans, and saying, well, still, let's get out. But you're right. If the outlooks continues to brighten, it may close the window for further consolidation for a while in the coastwise, but it still looks pretty good, right now. I don't want to be too dour or too negative about that.

Okay. Good. That's helpful. Thanks, guys.

John [Dimopoulos] from Argus.

Good morning, gents. Wondering, first of all, about the ATB space. Do you see any kind of opportunity for Kirby there, in terms of acquisitions and kind of synergies with your existing fleet? I guess I'm kind of thinking here, maybe about the OSG fleets. I know those guys have been in difficulties lately. Is the ATB something you're interested in?

We already operate ATB. So the bulk of the comp fleet is ATB. ATB is an articulated tug barge unit, where the tug locks into the notch of the barge, but stays independently buoyant. And a lot of our equipment is there. The OSG fleet -- yes, we're certainly watching it. It's a complicated situation. They have equipment that -- they control equipment. You know, certainly is very attractive, but some of it they don't own. Some of it is ineligible for the coast guard -- coastwise Jones Act trade, and some of it is pretty old. As with anything, it depends on the deal. Whether you get excited or not. And I think that time just needs to sort out what OSG is going to do. My understanding, just reading the press clips, is that they've hired somebody to help them do that.

Thank you. Okay. Just going back to the -- that kind of relates from my kind of view of things is that crude movements. Some of the bigger barges are invested to moving crude up from the Gulf Coast to the Northeast. Do you see demand for crude exports from any other Gulf Coast terminals? You mentioned Corpus Christi earlier. Do see that demand kind of growing into 2013?

Yes. There's really two kinds of demand. There's demand that goes into -- that is best suited for barges that are similar to what Com operates, which is kind of 150,000 barrels and below. Sweet spot probably 80,000 to 120,000 barrels. And then there's demand that is -- has a longer supply chain, which an OSG ship or a larger barge would be better suited for. And that would be South Texas to the East Coast. The sweet spot for us is the shorter trip kind of demand. With respect to OSG, a couple of those barges, their large barges are not eligible for that trade. They were built with construction subsidized funds, and they're not Jones Act eligible.

Okay. So one final thing. The crude that -- the barges you are using to shuffle crude around the US Gulf. Is most of that being done on a ton basis or is there spot deals going on?

Yes. We would say it's more spot, but clearly some of the operators are now looking for longer-term deals. So it's an evolving market. This is really starting to -- just really starting to take off.

That's good. Thanks very much.

Thank you.

Jimmy Gibert, Iberia Capital

Hey, guys. Thanks for taking my question. I think maybe some people -- when you talk about low water conditions persisting into part of Q4, isn't October typically the lowest water levels? Isn't that the month that you find the lowest water levels typically on the Mississippi?

It can be anywhere, from about August to October. It will vary, year for year -- year-to-year. But yes, in this area.

And then, I wanted to follow-up on David's question, about the new builds and retirements. If I were to call Jeffboat or Trinity Marine, and wanted to order a tank barge, either a 10,000 or a 30,000, what would be the first delivery date that could get one to me?

Jimmy, this is Greg --

Assuming I had the financing, which I don't.

Assuming you have the money. The major yards are really pretty booked up through 2013. So it would be the tail end of 2013, maybe first part of 2014 before you be able to get anything from the major yards. There's some specialty yards that aren't as efficient as those major yards that may be priced slightly higher. They may have some availability for very limited run production.

I'm not sure we have the traditional visibility of Jeffboat that we had -- have always had. They may have some capacity, but they seem to be very disappointed with respect to how they're using their capacity.

Right. And just real quick, one more. You guys talked about some West Coast movements of crude, and I don't really understand the West Coast inland barge movement. Would those be coastwise movements, and how would that work?

Yes. That would be coastwise. Out of Anacortes, up in Washington state, and they've come down into, maybe the California refineries. And it would just be coastwise, larger barge type movements. 80,000 to 150,000 barrels, and maybe if the volumes are enough, the larger units, the 330,000 barrel units, which is a space we don't play in. But clearly, initial volumes would probably be in smaller units, I would imagine. But that again is just starting to be discussed, and it hasn't really developed yet.

In larger movements, like 300,000 barrels, that would be almost -- that would be a product tanker almost, wouldn't it?

Similar. There's some large ATB's that are of that size. Like Crowley and some others operate.

Well, thank you, guys. I appreciate you taking my call

Operator, let's go to one more call, please.

Okay. Bill Baldwin, Baldwin Anthony's.

Good timing, Steve.

Yes, sir, Bill.

Just made it. (laughter)

David, just a quick one here. Are you having any progress on extending out contracts on KLM? I know you wanted to get a little more contract in there, a little less spot. Is that process begun?

It has, and it's a slow process. We just -- I don't want to give the customer name, but we just signed a longer-term deal on the West Coast that's out six years. So, pretty good piece of business for us that we are very excited to do. But as Joe mentioned, we're also working with some of our inland customers in a looking at some of the major carriers that are going to have the volumes year-in and year-out, which is what we like. And that, as we have improved the equipment, we're working on vetting with some of these potential major customers. And it's a process, but we are clearly focused on getting some of this equipment termed out a little longer, with some more ratable volumes that will be there year-in and year-out.

Very good. Is your target there around 75%, 80% on contract, David, or --

Quite frankly, I'd like to be above 80% on contract. But it's going to take a time for us to get there.

Okay. So this will be more kind of a contract, longer-term contract type business in really than the inland business?

We'd like it to be, yes.

Thank you.

Thank you.

We certainly appreciate your interest in Kirby Corporation, and participating in our call. If you have 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.