Kirby Corp (KEX) 2012 Q4 法說會逐字稿

Welcome to the Kirby Corporation 2012 fourth quarter conference call. My name is Ellen, and I will be your operator for today's call.

(Operator Instructions)

Later, we will conduct a question-and-answer session.

(Operator Instructions)

I will now turn the call over to Steve Holcomb. Mr. Holcomb, you may begin.

Good morning thank you for joining us.

With me today are Joe Pyne, Kirby's Chairman and Chief Executive Officer; Greg Binion, our 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 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 are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risk 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 the Securities and Exchange Commission.

I will now turn the call over to Joe.

Thank you, Steve. Good morning.

Yesterday afternoon we announced fourth quarter earnings of $1.03 per share, including a $0.09 per share credit, decreasing the fair market value of the earnout liability associated with our acquisition of United Holdings in April 2011. Despite this credit, we exceeded our guidance range, if you take the credit out, of $0.83 to $0.93 per share. For the year, even with the collapse of the Land-based Pressure Pumping business, we still achieved record earnings of $3.73 per share or a 12% increase, when you compare our $3.33 per share for last year, which again, were record earnings for the Company.

In the 2012 fourth quarter, our Inland Tank Barge business maintained high utilization rates with consistent and healthy levels of demand across all of our markets. Low water conditions on the Mississippi River did continue to effect our operations during the quarter, forcing us to light-load cargo for cargo destined to northern parts of the river system, and making us a little less efficient because of the longer transit times, and the reduced cargo levels. Among other achievements for inland operations during the quarter, we executed the renewal of a multi-year contract, with options, with one of our largest customers, Exxon Mobil.

In our coastal fleet, we experienced improvements in demand in all markets during the quarter. The fourth quarter, historically, is a little slower given the seasonality of this business. We attribute this to a combination of tighter capacity from new demand for coastal transportation of crude oil and natural gas condensate, but also to prior heating oil demand associated with cooler weather in the Northeast during December. We are also working more for inland customer base. This is encouraging. These are inland customers that have coastal requirements.

As many of you are aware, we made the decision last year to invest more capital in our coastal fleet in 2012, and frankly, in the last next couple of years, to bring our coastal equipment up to our internal maintenance standards. We think this investment will pay long-term dividends, principally, because it allows the fleet to meet the vetting requirements of our major inland customers, but it also makes it more reliable.

In our Land-based Diesel Engine 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 revenue from last year. The year-over-year revenue decline was the result of a significant reduction in orders for manufacturing in our land-based business. We are also experiencing a decline in the sale of engines, transmissions, and parts.

Partially offsetting this decline in manufacturing is an increase in remanufacturing and maintenance of existing treasure pumping units. The reman businesses is significantly more specialized and labor-intensive than our manufacturing business. We continue to make progress reducing the number of man-hours required to service this equipment. We are not satisfied yet with our performance, but we think we are making good progress.

While 2013 starts out to be a year of uncertainty over drilling activity with over capacity in the US pressure pumping market, we are confident in the long-term strategy of growing the service side of this business, and making this business more stable and predictable. The overall demand for new and remanufactured oil service equipment may yet improve later this year, we will see.

We spent a lot of time, last year, explaining this business. I thought it might be helpful to just summarize here where we are currently with United. This is our Land-based Diesel Engine Service business. We are moving United to a service platform, which will principally maintain pressure pumping equipment. And as demand returns, manufacture this equipment to meet new and replacement requirements. We will also focused on continuing to expand this business' existing Supply and Distribution business, and also our Compression Service business, which manufactures compression equipment for natural gas transmission and electric utilities. Perhaps a good way to get your arms around this business, as it is currently situated, is United, which is this land-based diesel engine business, for 2013, is going to be around 5% of our total forecasted EBITDA.

Our legacy Diesel Engine Service business reported slightly lower operating results during the quarter. While overall market conditions were generally stable across the majority of Marine markets, the low water conditions on the Mississippi River did lead several of our Midwest customers to defer several maintenance projects into 2013. The power generation market benefited from strong part sales and engine generator setup rate projects during the fourth quarter.

I am now going to turn the call over to Greg, who will discuss our inland tank barge market; and then to Dave, who will discuss the coastal tank barge market and also give you a financial update. At the end of the call, I am going to come back and make some comments about the first quarter outlook and the 2013 year outlook.

Thank you, Joe.

Good morning to all. For the fourth quarter, our Inland Marine Transportation sector continue to perform well with equipment utilization in the 90% to 95% range, with continued favorable term and spot contract pricing. The water conditions on the Mississippi River, which began in May of last year, persisted through the fourth quarter and into the 2013 first quarter, reducing our volumes and increasing costs. However, the situation is currently improving.

The first phase of rock removal by the core engineers in the effected areas between St. Louis, Missouri, and Cairo, Illinois, will be completed soon. And the Corps of Engineers advises that the second and final phase should be completed in early February. The rock removal will allow us to transit this area with deeper drafts at a given river stage. Additionally, December and January rainfall in the Ohio and lower Mississippi River basins have improved water levels in both areas.

Having said that, the Midwest is still in the drought and future drafts will be contingent upon precipitation in the Midwest and the form of both rain and snow. Looking forward to the beginning of the second quarter, springtime does typically bring increased precipitation in the Midwest. Additionally, the Corps of Engineers increases flows on the Missouri River in the spring to support the navigation season on the Missouri River. These seasonal events should improve the operating conditions in the St. Louis and Cairo areas around the beginning of the second quarter. Inland marine transportation revenues from our long-term contracts, that is one year or longer in duration, were 75% of total revenue with time charters comprising 59% of revenue.

Turning to the inland marine transportation pricing, during the second quarter, term contracts continued to renew at the mid single-digit level, when compared to the 2011 fourth quarter. Spot contract prices, which included the price of fuel, were stable to slightly higher when compared with the 2012 third quarter spot rates. Moving to capacity, during 2012, we took delivery of 56 new tank barges totaling 1.058 million barrels of capacity, and retired 55 tank barges with 910,000 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 addition of 239,000 barrels. We also added the Lyondell fleet of 17 tank barges with 243,000 barrels of capacity. I remind you this is a fleet that we provided the towing services for, prior to the acquisition of these assets. So, net-net during 2012, we added 22 tank barges to our fleet, and increased our capacity by 483,000 barrels.

As of December 31, we operate 841 tank barges with the capacity of 16.7 million barrels of capacity. We also took delivery of five 2,000-horsepower inland towboats in 2012. Our 2013 inland transportation construction program will consist of 55 inland tank barges with a total capacity of 1.2 million barrels and three towboats. Payments for the new inland tank barges and towboats delivered during 2013 will be approximately $115 million.

At the present time, we expect to finish 2013 with approximately 17.2 million barrels. As was the case in 2012, we don't think the added capacity will negatively impact the supply and demand balance of 2013, given the increasing overall demand in the petrochemical, crude oil, black oil, and refined products markets in the expectation that the industry will continue to retire some older barges.

I will now turn the call over to David.

Thank you, Greg.

Kirby Offshore Marine's overall equipment utilization improved to the mid- to high-80% range during the quarter, and some days, even higher than that. As Joe mentioned, all of the coastal markets reflected signs of improvement, driven in part by increased demand for crude and condensate moves, and also by cooler weather in the Northeast. The improvement in the Coastal business is very encouraging. Although, we continue to watch the markets closely and look for opportunities to enhance our results in each region. We are making progress with expanding our coastal customer base to our inland customers, and on the improvement in the overall condition of our coastal vessels.

The acquisitions of Allied and Penn during the fourth quarter also contributed to high results during the quarter. Allied and Penn contributed approximately 5% of the marine transportation revenues -- excuse me, marine transportation segment revenues during the quarter, and added $0.03 per share to our fourth quarter results. That more than offset the additional interest expense and transaction fees incurred.

Our 2012 fourth quarter results were negatively impacted by Hurricane Sandy that made landfall near Atlantic City, New Jersey. It did impact our operations along the Atlantic seaboard and in the New York Harbor. We did incur some damage to our Staten Island facility, and a number of our employees' automobiles that we're parked at our facility were damaged. We also incurred some delay days related to the Hurricane itself. The financial impact for Sandy for the fourth quarter was about $0.01 per share, maybe a little more than $0.01 per share for the quarter.

As of December 31, approximately 70% of our coastal operations revenue was under term contract and that compares with 60% for the 2012 third quarter. The balance, of course, is with spot contract. The improvement represented the addition of Allied and Penn, as well as some new contracts signed during the fourth quarter. With respect to the coastal marine transportation pricing, terms contracts that renewed during the fourth quarter, increased in the high single-digit range, and in some cases, higher. Spot contract rates were up in the mid- to high-single-digit range, as well.

Moving to the financial data, as Joe noted, our 2012 fourth quarter earnings per share of $1.03 included $0.09 for a credit decreasing the fair value of the contingent earnout liability associated with United. This was partially offset by an estimated $0.02 to $0.03 negative impact from the low water conditions Greg mentioned and Hurricane Sandy.

Marine transportation revenues grew 14% and operating income grew 23% over the 2011 quarter, fourth quarter. The inland sector contributed approximately 75% of fourth quarter marine transportation revenue and the coastal sector was approximately 25%. Despite the low water issues, our inland operations maintained an operating margin in the mid-20% range for the fourth quarter. The coastal operations operating margin was in the low double-digit range. The overall marine transportation segment's fourth quarter operating margin was 23.6%, which compares with 21.8% for the 2011 fourth quarter.

Our diesel engine services revenue for the 2012 fourth quarter was 39% below the 2011 fourth quarter, and diesel engine services operating income was 42% lower than the 2011 fourth quarter. The segments operating margin was 10%, compared with 10.6% in the year-ago quarter. However, if you back out the earnout adjustment, the fourth quarter operating margin for diesel engine services segment was approximately 4%. The decline in revenue, operating income, and operating margin was due primarily to the lower results from United.

In the fourth quarter, United contributed approximately 65% of the diesel engine services segments revenue, and earned the low single-digit operating margin, if you exclude the $8.2 million credit that was reduced the fair value of the contingent burnout liability. Legacy diesel engine operation contributed approximately 35% of the segment's revenue during the fourth quarter, and had an operating margin in the high single-digit range.

Total debt as of December 31 was $1.14 billion, and our debt-to-total capitalization radio was 39.9%. Last month we drew $275 million down from our new $500 million private placement senior notes facility to facilitate the closing of the Penn Maritime acquisition. We intend to draw down the remaining amount in conjunction with the February 2013 maturity of our $200 million private placement. As of December 31, we had $192 million outstanding under our revolving credit agreement. As of this morning, our revolver's outstanding balance was about $165 million.

I will now turn the call back to Joe.

Thank you, David.

Our 2013 first quarter guidance is $0.82 to $0.92 per share. This compares with the $0.91 per share earned in the 2011 fourth quarter. For the year, our guidance is $4.00 to $4.20 per share compared to $3.73 for 2012. In the first quarter of 2013, we face a relatively tough comparison. During the 2012 first quarter, the level of activity at United's manufacturing operation was at a very high level, as we worked through our backlog.

The decline in this business really did not begin to occur until the second quarter of last year. I noted earlier, this business segment represents now a relatively small part of our overall business, less than 5% of our forecasted EBITDA. It may see some improvement in the latter half of this year, but we are not going to forecast that in our guidance.

For the marine transportation segment, we are very encouraged by the improvement in our coastal markets. During the fourth quarter of last year and continuing into 2013, our coastal business has seen some meaningful improvement in demand, which we anticipate will contribute to not only higher equipment utilization, but also improved pricing over the course of this year. In our 2013 first quarter guidance, we include a negative impact from winter weather conditions for our marine operations, and some continuation of the low water issues on the Mississippi River, which have kind of bled over into the first quarter, although the river is improving. However, we anticipate strong equipment utilization and favorable pricing in our marine markets.

Moving to our guidance, the low end of our guidance, the $4.00 per share, and assumes our inland transportation equipment utilization and pricing will be consistent with 2012, and our coastal markets will reflect more modest improvement in both pricing and utilization. It assumes our diesel engine land-based market will continue to experience softness throughout the year and our legacy diesel engine business, that's the marine business, will remain consistent with 2012 levels.

The primary driver in our high end of guidance, that's the $4.20 per share number, is tied to the performance of our coastal marine business. The higher guidance assumes that much improved utilization and corresponding higher term and spot contract pricing, along with a modest improvement in utilization and pricing for the inland marine transportation business. Now, remember, with respect to the inland business, we are currently operating close to full utilization, and we are back to the peak pricing levels in this business.

For our diesel engine services segment, our high-end guidance assumes that the land-based market will continue to experience ongoing softness throughout the year. And the Marine Engine business, which includes servicing equipment that is in the Gulf coast and Gulf of Mexico oil service market and the power generation market, will modestly improve.

In summary, 2012 was a strong year for growth and Kirby with record revenue and earnings. We are very encouraged by our recent Allied and Penn acquisitions in the coastal sector, completed late last year. We believe that they will both complement our current coastal operations, as we integrate these companies into our business. We think that there is some synergies in costs that we can continue to squeeze out, as well as selling opportunities, as we service inland customers coastal requirements. Currently, the integration of Allied and Penn are on track, and they are proceeding as we expected.

With respect to our balance sheet, the balance sheet is strong, our cash flow is excellent. 2012 was a year of heavy capital investment, which is typical for us, as we see an economic and industry recovery. Having refreshed a significant portion of our inland fleet, and with an eye of continued cash flow, 2013 should be a year where we pay down debt, but still keep position for opportunistic potential acquisitions, as they present themselves over the course of the year.

Operator, this will end our prepared remarks. We are ready now to enter the question-and-answer period.

(Operator Instructions)

Gregory Lewis, Credit Suisse

Yes, thank you and good morning. David, you touched on the coastal fleet a bit.

Clearly there's been an increase in the amount of contracts -- term contracts you have for that fleet. I think you mentioned it went from 60% to 70%. As we think about this fleet over the next 12 months, should we think about that term contract exposure rising, or are you comfortable with that 30%-type level of spot pricing contracts?

Yes. I think you will see it move up a little bit throughout the year. We ultimately would like to get that fleet about 80% maybe 85% termed up. The markets rising a little bit.

We are going to go slow and prudently through that, but the other thing I would add to that is both the Allied fleets and the Penn fleets were pretty heavily termed up. They were in the 90% plus range. That actually helped the average, but it is slowly moving up and we target in the 80% range, mid-80% range, ultimately, is where we would like to be.

Okay. Switching gears over to the inland side of the business.

I guess, Greg, you mentioned you are taking delivery of about 55 inland barges. Now clearly the market is tight, utilization in the high-, low-, mid-90s pricing, and sort of mid-, high-single digits.

Thinking about that, should we think about retirements of any barges this year in terms of, I think you mentioned, net last year you added about 20 to 25. Should we think about a similar amount of retirements this year? Could these really all be incremental?

We will have some retirement as well during 2013. We will have some incremental volume that, when you net out some timing differences that we had anticipated, some barges that would continue in service though 2013, that just from operational considerations, we took out of service in 2012, that our capacity growth should be about the same in 2013 as what we had in 2012.

Greg, most of it is retirement. We're still replacing the fleet. We are adding some incremental capacity but we are always careful about that.

Okay. Perfect, guys. Thank you very much for your time and congratulations on a really nice quarter.

Jon Chappell, Evercore Partners.

Thank you. Good morning. David, follow up question on the coastal as well.

Obviously the pickup in demand has driven the acceleration in the fleet utilization. To try to think about the actual broader fleet, not just your coastal fleet, but how do you see the trend of capacity based on the current order book for coastal-type assets? And then the phaseouts, whether they are single haul or OPA 90 related phaseouts over the next, we'll call it 12 to 24 months?

Good question. We haven't heard of any real new construction being announced in terms of capacity additions in the coastwise business. There are still a number of single skins out there. I think we estimate it is still around 8%. That has to come out by 2014.

Pricing is just not where it needs to be justify new construction yet. So far, it looks like it will stay pretty tight, as the crude and condensate help drive demand. I don't know that answered your question.

Yes, it does, very well. My follow up is probably also for you, David.

One, can you give us the year-end cash balance to try to figure out the cash flow statement? Also, as part of that, what are your assumptions for your use of your free cash in the 2013 guidance range? Even if you're $175 million to $200 million of capital expenditures you should be generating close to $200 million of free cash. Are you just assuming that's going to be used for debt reduction, sitting on the balance sheet, or for any acquisitions?

Yes. No. It is hard to predict acquisitions, as you know. We ended with about $11 million in cash at year-end.

Of course, you know our debt position of $1.14 billion in debt at year-end. We expect we will generate maybe in the order of $250 million in free cash flow. As you saw, our capital expenditures are $200 million, maybe a little lower. EBITDA should be close to $600 million. That should allow us pretty good free cash flow.

We will use it to de-lever for now. It is hard to predict acquisitions, but without any acquisitions in mind, I would expect that we will reduce the debt levels.

Okay.

Yes. And we never do really forecast acquisitions. It is kind hard to do, as you know.

Right, I was wondering about the use of that cash and the guidance range, if it's ticking out 4.5% debt or earning 4.5% at the bank, that type of thing.

No. We will pay down the debt. As you know, our capital structure has a good chunk of bank debt, which can be prepaid without penalties. That is one of the reasons we use the bank debt, so we can use that cash flow.

Truthfully, Jon, it is at such low interest levels that it is not as meaningful as it used to be because you pay it down.

Yes. Thanks, David, thanks, Joe.

Jack Atkins, Stephens.

Good morning, guys. Thank you for taking my questions.

I guess first off here on guidance, when we think about 2013 from the marine transportation side, what are you all assuming as far as low water? Is that expected to sort of -- is that sort of embedded in the guidance going forward, or are you expecting low water conditions to be not a factor in the second through the fourth quarters of the year?

In our guidance, we do not assume that the river is going to be as problematic as it was in the latter half of last year. But in the first quarter, you just have a number of things that tend to make you less efficient, weather, fog, potentially ice, and potentially some low water issues that are continuing on the upper part of the Mississippi River. But yes, I would say that the quarter, two through four of this year, we have in the guidance of normal weather, normal operating condition, your normal series of small problems on the inland system and in the coastal area.

Okay, that make sense. And then just a follow-up. Turning to the diesel engine side.

Joe, you mentioned that you expect United to be about 5% of EBITDA. Yet, when we think about that, it's about $25 million to $30 million in EBITDA for the year. It seems like we are tracking a little bit below that right now, just given the fourth quarter levels.

I am just sort of curious what you all have seen in that business in the last couple of months? It seems like we saw fairly substantial degradation in performance there from the third quarter. I am sort of curious how you are looking at that in 2013, and what's happened over the last couple of months?

That's a fair question and a good observation. What we saw in the fourth quarter was cancellation of a little, but it was mostly pushing out equipment orders that were expected in the fourth quarter into 2013.

We are forecasting a difficult first quarter. We think that some of that was pushed out into the second half of the year and into the second quarter too.

But the service platform is developing. We are pleased with the trend. We are not satisfied with the end result, yet. We think we are going to get it there.

So, we are being purposely conservative as we project that business. There is some chance that some manufacturing might come back in the latter part of the year, but we are not going to forecast that.

I think that it is still a pretty dynamic market, and I think that a healthy kind of skeptical, kind of approach to that business is appropriate right now. That's going to pass. There's enormous energy development that's going to occur in this country. I think we are well positioned to take advantage of it.

Yes, we are going to focus on the service annuity part, because we think it is a more stable, more predictable piece of it. When there is opportunities to build some equipment, we will pursue them, but we're not going to do it at the expense of customers that we have developed in the service part of the business.

Okay, great. Thank you for the time.

Ken Hoexter, Merrill Lynch.

Great. Good morning.

Dave, I want to hit you on the coastal side again. Maybe, can you talk a little bit about the -- you talked a little bit about utilization, maybe break down by end products, chemical, crude, and the like? Where is the growth and margin opportunity from your point of view?

Yes. It is pretty broad-based. As you know, we were primarily with KC refined products. The bulk of that fleet was moving refined products.

Penn, of course, is black oil. The Allied fleet was chemical. We are seeing it tighten up across all three of those trade lanes, if you will.

I think, just the availability of coastwise equipment, as you know, you can move it around. Sometimes you can use different pieces of equipment in different trade lanes, but there is a cost to doing that. So it's has helped tighten -- the whole market is tightened up a bit as you see with the utilization.

So was this because of the increase of oil demand coming in that is chewing up a lot of the excess capacity? Or is it that each sub-sector is chewing up it's own capacity?

No, I think it is more the former than the latter. I think the crude and condensate has tightened up the market and that has got everybody looking at what is available, so it is more crude and condensate right now.

Great. Then if I can get my follow-up on what drives those high-single digit pricing?

Looking at that offshore marine, is it improve utilization, is it less capacity, is it your service improvements? What, from your point of view, is driving that and how much room do you view it as still left to go? Or, is it totally utilization dependent?

It has been utilization has tightened up. It is very much like the inland, when you cross that 85%, things to start to improve from a pricing environment.

Remember, we are coming off of a very low pricing bottom, if you will. We've got a long way to go to get pricing back up to where it is a sustainable, long term viability for the business. It has been low. We've got some room to go.

Would you put a dollar per day rate on that, where, I guess, the returns need to be at?

Yes. I don't want to get too specific in terms of dollars per day rate.

So equipment specific, Ken, because you got anything from a 20,000 barrel barge to 185,000 barrel barge. It's going to vary based on size of the equipment, the capital you have employed in the equipment.

We will think about that, because I know that would help you. It would have to be kind of an average, average number. You could take a series of equipment about the same size and put something together. We will think about it.

Thanks. Just to clarify that, the first question I asked. Dave, how often can the equipment move back and forth between -- I know in the barges, as you can clean them out and spend money to move different products. But when you're talking coastwise, can you shift between the different markets so if the crude continues to scale, can you move some of the Allied or Penn assets over, or does it stay dedicated?

It's pretty sticky. To move crude, you are going to want to put, for example, you want to invest and put vapor recovery on the unit and that costs capital. You have to go into the shipyard. You're always going to look for a higher use, but it's not something we're going to move around a lot.

And some of it depends on the type of equipment. Allied is chemical. You would not want to move Allied around. You could take a refined products barge that already has vapor recovery and move that to crude pretty easily.

Moving to crude, with the right vapor equipment is the easy part. Moving out of it is a little bit more difficult because you then have to clean the barge.

It could be done. It is done. We do it on the inland system. You want to be thoughtful because it's expensive to do.

Appreciate the time. Thanks.

John Barnes, RBC.

Good morning, guys. Joe, the commentary around the assumption that the river conditions won't be as problematic as they were in 2012 in 2013. Then you see some other things that -- the rails continue to capture some share on the crude by rail, reversal of Seaway pipeline.

It seems there are a lot of things that our kind of piling up in terms that might change the market dynamic a little bit in your market. Do you have any concerns about the volume shifting a little bit, and maybe running into a problem on the inland side where there develops maybe a little bit of excess capacity in the system?

Yes. You're talking about kind of a typical year as you go into it. This is a business that's just so dynamic. There's always something that is happening with either the river system, or a hurricane, or something.

So in terms of your question about river conditions, who knows. There will be something this year that will be different than what we thought. But every year we have something that is different, and historically, it is all in the numbers.

With respect to how the crude oil is ultimately going to play out, I think the first thing I would say, is that it is going to be a very long-term process. Shippers are always looking for the most efficient way to transport their cargoes, and their feedstocks, and crude oil being a feedstock. You are going to see them, kind of ultimately, solve that equation. It is going to take many years.

What is interesting about I think this period, is that we keep discovering new opportunities. We keep creating new transportation challenges. A pipeline, for example, is a very inflexible way of accommodating this kind of changing situation because you can't move the pipeline.

I think it is an opportunity for rail. I think that rail also provides an opportunity for barge.

We are seeing that where rail is delivering, for example, bulk and crude oil to St. Louis, to Albany. They're are talking about, and in fact positioning, to move it to the West Coast, we think that is all marine transportation opportunities. I am not really particularly concerned about it, short to medium term. Long term, you just don't know.

With respect to your capacity question, we are building equipment in this business, and the equipment is being absorbed. That is something that we watch very carefully because that can be where you get into trouble. We are hoping, frankly, that the rest of the industry is watching it carefully to.

So that if you see, around the edges, some deterioration in utilization levels, that people are going to crank back pretty quickly. The nice thing about this business is that you typically are looking only about a year out, with respect to construction. So if that happens, you do have barges that will deliver, but you can turn it off pretty quickly.

John, you have watched us. This is a long answer, but you asked a very complex question. You follow this long enough to note that what happened in 2008 and into 2009, where you went from a pretty healthy building program to really nothing in 2009 except for the opportunistic building that really we did. You can crank it back.

Yes. The big concern I have is, you know I'm talking about, being near kind of peak pricing again, and that kind of thing. That tends to be the point where you start to see decisions being made about what to do on capacity. That is all I ever worry about is just when you hit that inflection point where somebody makes the decision that pricing is good enough, we have got to start adding aggressively to the inland fleet or something like that.

I just worry about, if one of these limiting factors -- limitations, I'm sorry, kind of eased off, with that all of a sudden create some excess, if the order is already placed? That's kind of where I am getting at.

I think that is actually the right concern. That is the right concern. You want to watch that, because excess capacity is problematic.

Based on our view through this year, we are not terribly concerned about it. We certainly worry about it. We worry about any capacity being added. Through 2012, and we think through 2013, there is enough volume out there to absorb it.

Okay, all right. Very good. One other question. Going back to what you said about this industry always finds a way to throw something at you.

The labor issues at these East coast ports and the Gulf coast ports been getting a lot of traffic, especially from a container standpoint. Just out of curiosity, do you have any concerns about that spilling over, impacting your business either on the inland side or the coastline side? If somebody decided to honor a picket or something like that, is there any concern there?

Yes. I don't think so, John. We go almost exclusively to private ports. The concern would be more that that particular union is always in a conflict with somebody around the country.

You get more concerned if the union that represented one of your major customers was making a lot of noise. We are not hearing that and do not expect it.

Okay. Nice year. Thanks for your time, Joe.

Chaz Jones, Wunderlich.

Good morning guys. Just wondered if I could get a little bit more specific on the pricing side in the inland marine on the guidance. Are we to assume that favorable pricing means that contracts are going to continue to, kind of, renew in the call it 4% to 6% range?

Yes. I would say low- to mid-single-digit range. You could have as high as 6% or as low as 2% or 3%. You are at levels that are really at peak pricing levels.

And one of the -- this is something I did mention in John's answer, but I am not sure for the good of the business, you don't want to see some capacity coming in and not get prices to really unrealistic levels. These kind of more modest levels are levels that suggest a more sustainable pricing environment that is not going to get you into trouble as quickly as if you were seeing high single-digit to low double-digit increases that we saw, really, the last time the prices were at this level.

Got it. My follow up is more related to Penn and, kind of, the timing of the acquisition as it came in December. The 500,000 shares that were issued, those will be more fully reflected in the first quarter and the additional DNA related to Penn. Should we kind of expect DNA to step up maybe to the $170 million range in 2013?

Yes. No, you were exactly right. Penn, the impact of the new shares, there's almost no impact of the fourth quarter.

Of course, as a rolls through next year, it will be more impactful. Also DNA should be in the $170 million to $175 million range, as you correctly point out.

Got it. Thanks, guys. Great year.

Jimmy Gilbert, Iberia Capital.

Hi, guys thanks for taking my call, as usual. I appreciate it.

Joe, you talked about a West Coast crude movement opportunity. We know about the Albany route. I heard about some coastwise, maybe a two barge contract from New Orleans to Philadelphia. How does the West Coast hook up work?

Yes. It is just another outlet for bulk and crude that can be railed to the West Coast and then put marine equipment and taken to refineries in California.

In California, okay.

That is principally the movement. It could go to Washington-based refineries too. We think that that actually is going to happen. There are investments being made to facilitate that really as we speak.

Okay. I got a little lost in the peak pricing discussion. When you guys talk about peak pricing, my impression is you are not talking about an absolute limit on pricing where the price versus the value of the commodity becomes cost prohibitive, whether the prices of transportation becomes price prohibitive.

You're talking about price getting back to prior peak levels. Do I have that right?

That is exactly right. We have a long way to go before we start bumping up against other modes of transportation.

Right, okay. Those are my two questions. Thank you, guys.

Congratulations. That was a great job last year. Thank you.

David Beard, Iberia.

Good morning, gentlemen. Maybe just to help us understand the pricing and supply issues around the inland barge side. You've sometimes given some numbers in terms of industry deliveries and scrappings for last year or an outlook for this year. Do you care to put any of those numbers out there yet?

Yes, not yet. What would like to do is wait for the industry survey that comes out in March, typically comes out in March. That gives you -- we can guess at it. I think it is just safer when we talk about numbers to have that at hand.

What we are saying is that we still have requirements in the industry on an everyday basis that are going unfilled. The capacity that has been built is being absorbed.

Okay. And then my next question turning to the coastwise side, maybe to ask the new build question a different way. Is there a way you can measure across all of the asset categories, what percent increase you would need in pricing for new build economics to make sense?

Yes, again, not to make short of the answer here. It is so equipment dependent, whether you are building a 30,000 barrel offshore barge or 185,000 barrel one or a black oil, or a clean, or a chemical with special linings, it's got some ways to go.

We are just coming off the bottom on pricing. It is hard for me to give you an absolute percentage, David. Sorry, it is a difficult thing to quantify.

Yes, I was trying to make the point that utilization moves ahead of pricing. Pricing actually has a ways to go, now whether that a ways is 10% to 20% or if you're going to need more 20% to 40%, I was trying to bracket that way. But I understand where you are.

And David, you're right, utilization is the leading indicator. It is more than just pricing too. Because you are talking about long-lifed equipment, expensive equipment, and the terms of that contract are going to be important.

I don't think you go out and just build this stuff, speculating on the market. You want some surety that there's a customer willing to take it, on terms that make you feel good that you are going to get paid back.

Okay, good. Thanks, everyone. I appreciate the time.

Steve O'Hara, Sidoti and Company.

Hi, good morning. I was just curious if you could talk a little bit more about United business. Long-term, you talked about transitioning that business to service over time.

I guess, first, what do you see -- where do you see the manufacturing component as a percentage of maybe revenue in the long term? And then second, in terms of the service business, what's the size of the addressable market, and how long does it take to get to what your goals are in terms of that transition?

Right those are good questions. It is a tough market right now. As some excess capacity gets absorbed, that is just out there. We think that that is going to happen through 2013.

In terms of where we want to go with it, we have said that we get like about 70% of the business to represent the service reman and supply distribution side of the business and about 30% be manufacturing. Now, that is going to -- that will scale up, scale down, based on demand, but we want to be is disciplined with respect to the service side. So when manufacturing scale is up, we are not doing it at the expense of the long-term relationships that we are building with customers that want us to service, maintain, and reman their equipment.

I would say that we are working hard on building that service model. We are very focused on it. We are focused on reducing the number of days it takes us to rebuild equipment. We have some internal, pretty aggressive targets that we think we can get to.

We are working on -- with our customers defining what they want us to do. There could be some variability in the time it takes you to rebuild this stuff based on their searching for the right balance of what you want to do as you rebuild it. We think we are getting through that. We think the customers have a much better feel for what they would like to accomplish. We still think that this is a business where margins should be in the mid-teen area.

It is a strong service model. We actually think we are a little ahead of others that are trying to do this in terms of process and focus and the quality of our end product. Not discouraged, but I think 2013 though is not going to be a great year.

What we tried to do is put something that puts it into perspective with respect to the other parts of our business. We have a really great marine franchise here that is doing very well. The coastal side, which we have developed, really in the last 18 months is well-positioned to do a lot better, going forward.

The diesel engine business is a business we are in. The marine side is stable. It is going to do fine. And this land-based side, we think we are going to position it so that, as we come out of this, we're going to be able to take advantage of some real opportunities as demand comes back.

Okay. Just quickly, two other things.

What is your capacity right now in terms of ability to manufacture, re-manufacture units? How many could you do in a year? And what is the goal there? Are you guys cash taxpayers in 2013 and when do you expect to be?

Why don't you address that.

We are very much a full taxpayer. Our tax rates --

Are you cash taxpayers?

Absolutely, I'm sorry, I was focused on the statutory -- Yes, we're cash taxpayers.

We think the current capacity of that facility is about a little over 100 units, and our target would be at least to double it.

Okay. Thank you very much.

We have no further questions at this time. I will turn the call back to Steve Holcomb for closing remarks.

We appreciate your interesting Kirby and for participating in our call. If you have any additional questions, please give me a call. My direct dial number 713-435-1135. We wish you a good day.

Thank you. Ladies and gentlemen, this concludes Kirby Corporations 2012 fourth quarter conference call. Thank you for participating. You may now disconnect.