Kirby Corp (KEX) 2013 Q4 法說會逐字稿

Welcome to the Kirby Corporation 2013 fourth-quarter, year-end conference call. My name is Trish, and I'll be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I would now like to turn the call over to Steve Holcomb. Mr. Holcomb, you may begin.

Thank you for joining us this morning. With me today are Joe Pyne, Kirby's Chairman and Chief Executive Officer; David Grzebinski, Kirby's President, Chief Operating Officer and Chief Financial Officer; Greg Binion, President of our Marine Transportation Group; and Andy Smith, currently our Executive Vice President of Finance.

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 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 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission.

I will now turn the call over to Joe.

Thank you, Steve. Yesterday afternoon we announced record fourth-quarter earnings of $1.13 per share, near the upper end of our $1.05 and $1.15 per share guidance range. That compares to $1.03 per share reported for the 2012 fourth quarter, a quarter which included a $0.09 per share credit reducing the contingent earn-out liability associated with our acquisition of United Holdings in April of 2011.

For the year, we again achieved record earnings of $4.44 per share compared with $3.73 per share for the 2012 year. Our 2013 results included a $0.20 per share and the 2012 results of $0.05 per share credit to the earn-out liability associated with the acquisition of United. The United contingent liability earn-out was eliminated as of September 30, 2013. Our guidance range for last year was $4.37 to $4.47 per share.

During the fourth quarter, our Marine Transportation Inland and coastal tank barge fleets continued to experience healthy levels of demand across all markets, high equipment utilization levels and favorable pricing trends. We continue to benefit from strong US petrochemical production levels, stable refinery production levels, the export of refined products and fuel oils, and the movement of crude oil and natural gas condensate from the US shale formations. We did experience higher than anticipated delay days in our Inland operations during the quarter, primarily the result of high winds and fog along the Gulf Coast as well as some difficult weather in our coastal operations.

Our land-based Diesel Engine Service market remain challenged. We think this will improve in 2014. Our Marine diesel and power generation markets were stable with results consistent to the prior quarters in 2013.

As we announced in early January, David Grzebinski was named President and Chief Operating Officer, the first step in the succession plan that we announced in April of last year with the goal of transitioning my Chief Executive Officer position to David this year. I want to welcome Andy Smith to our management team. Andy started in early January and his current title is Executive Vice President Finance.

Andy will replace David as Kirby's Chief Financial Officer in late February, after the filing of Kirby's 10-K for 2013. I intend to step down as Kirby's CEO at our annual shareholders meeting in late April. I will remain as Kirby's Executive Chairman and look forward to working with David and the Kirby management team.

I will now turn the call over to David, who will discuss in more detail our Marine Transportation and Diesel Engine Service markets and give you a financial update. Following his remarks, I will come back with some comments about our first-quarter and year-end guidance and outlook.

Thank you, Joe, and good morning to everyone. Let me start with our Inland business. During the fourth quarter our Inland Marine Transportation sector continued its overall strong performance with equipment utilization in the 90% to 95% range and favorable term- and spot-contract pricing.

We did, as Joe mentioned, experience high delay days during the quarter, which was primarily the result of seasonal frontal systems along the Gulf Coast and accompanied with some high winds and fog. Delay days totaled 1,985 days, which was 34% higher than the 1,479 delay days reported in the fourth quarter of last year and 54% higher than the 1,289 delay days reported in 2013 third quarter.

For the fourth quarter, Inland Transportation revenues from our long-term contracts, that is contracts over one year or longer, were 75% of revenue with the remaining 25% spot. Of the term contracts, 57% were from time charters and the remaining 43% from contracts of affreightment.

In the Inland Marine Transportation group, term contracts renewed during the fourth quarter at a rate of mid-single digit increases compared with the 2012 fourth quarter, which was consistent to prior quarters during 2013. Spot-contract rates were up. They remain above term-contract rates, which is also consistent with the 2013 prior quarters.

Moving to Inland tank barge construction, during 2013 we took delivery of 70 new tank barges totaling approximately 1.4 million barrels of capacity. We also retired 46 tank barges and returned 4 leased tank barges, removing approximately 800,000 barrels of capacity. For 2013 netting the two, we ended up adding 20 tank barges to our fleet and increasing our Inland capacity by approximately 600,000 barrels.

As of December 31, we operated 861 tank barges with a capacity of 17.3 million barrels. Also during 2013, we took delivery of three 2,000 horsepower Inland tow boats.

At the present time our 2014 Inland construction program will consist of 37 Inland tank barges with a total capacity of approximately 400,000 barrels. Payments on new Inland tank barges delivered during 2014 will be approximately $45 million. Currently, we expect to finish 2014 with approximately 17.5 million barrels of capacity, or about 200,000 barrels above our current capacity level.

On the Coastal side, the Coastal Marine Transportation sector continued to perform well with equipment utilization about 90% during the fourth quarter, which is consistent with most of 2013 and well above where we were in 2012. All of the Coastal markets remain strong, driven in part by increased demand for crude and condensate moves. We also continued our progress in expanding our Coastal business to Inland Marine customers. During the fourth quarter, approximately 75% of Coastal revenues were under term contracts, which compares with about 70% a year ago.

The increase came from new contracts signed during 2013. With respect to Coastal Marine Transportation pricing, term contracts that renewed during the fourth quarter increased in the high-single digits, and in some cases higher than that, when compared with the 2012 fourth quarter. Spot-contract rates continued to improve during the fourth quarter and remained above term-contract rates.

Earlier this month we announced the signing of an agreement to construct an articulated 185,000 barrel coastal tank barge with a 10,000 horsepower tug at a cost of approximately $75 million to $80 million. We anticipate this unit will be delivered in mid to late 2015. The unit will be chartered to a major customer for a four-year period with a one-year extension option. This coastal barge has the capability of moving crude oil or petrochemicals.

With utilization in the 90% level range for the Coastal feed and increased demand for the movement of crude oil and natural gas condensates, we believe new capacity is needed to meet demand and also to replace older units, which will be removed from service in the coming years.

In total, the Marine Transportation segment revenues grew 14% and operating income grew 20% compared with the 2012 fourth quarter. The Inland sector contributed approximately 70% of the Marine Transportation segment revenue with the Coastal sector the remaining 30%. Our Inland Marine sector earned a fourth-quarter operating margin in the upper 20% range, while the Coastal sector operating margin for the fourth quarter was in the mid teens, which compares to low-double digits for the 2012 fourth quarter. Overall, the Marine Transportation segment's fourth-quarter operating margin was 24.8%, which compares from a year ago to 23.6%.

As Joe noted, our 2013 full-year earnings of $4.44 per share included a $0.20 per share credit from the adjustments to the contingent earn-out liability associated with United. The contingent earn-out liability was eliminated as of September 30 of 2013. We do not expect any more adjustments to the earn-out as the earn-out period is over. As we know, this $0.20 per share addition to our 2013 earnings will not be repeated in 2014.

Moving on to our Diesel Engine Services business, revenues for 2013 fourth quarter increased 2%, but operating income was down 64% compared with the fourth quarter of 2012. However, in 2012 we had $8.2 million credit from the earn-out. Without the effect of the earn-out the operating income would have been down about 3.6%. The segment's operating margin was 3.5%, which compares to 10% from the year-ago quarter, which if you adjust out the earn-out that I talked about, $8.2 million, the year-ago quarter would have been about a 3.7% margin.

The decline in operating income in the Diesel Engine business was primarily based due to our land-based operation. Our land-based operations contributed about 60% of the Diesel Engine Services segment revenues and they did report a small operating loss. The marine and power generation operations contributed 40% of the revenues and had an operating margin in the 10% range.

On the corporate side of things, we continue to pay down debt, during the fourth quarter and the full year, thanks to continuing strong cash flows. Total debt as of December 31 was $749 million, a $386 million reduction from our total debt of $1.14 billion at the end of last year. Year-end 2012 debt reflected the debt balance from the fourth-quarter acquisitions of Allied and Penn.

Our debt-to-total cap ratio fell to 27% as of year-end 2013, and that compares to 39.9% a year ago. As of December 31, we had $41 million outstanding under our revolving credit agreement. As of this morning, we have $34 million outstanding under the revolver. Our term loan balance at December 31 was $208 million, which compares to $468 million from December 31 of 2012.

I will now turn the call back to Joe.

Thank you, David. Our 2014 first-quarter guidance is $1.05 to $1.15 per share. This compares with $1 per share earned in last year's first quarter, a quarter that also included $0.05 per share credit from United's contingent earn-out liability.

For the 2014 year, our guidance range is $4.75 to $4.95 per share, compared to $4.44 in 2013. Remember that 2013 earnings included an accumulative $0.20 per share credit to the same earn-out liability. Our first-quarter guidance assumes a modest improvement over 2013 fourth-quarter pricing in our Inland Marine Transportation markets, markets that continue to operate at close to full utilization levels. It also assumes a continued strong Coastal market of higher term and contract pricing.

Our first-quarter guidance includes some negative impact from unfavorable winter weather conditions, which we are experiencing, certainly this month. On the Inland side, we've experienced some extreme cold weather conditions on the upper river system, with below freezing temperatures, heavy ice on the Illinois, Upper Mississippi and Upper Ohio rivers, and with windchill factors as low as 40 degrees below zero.

We continue to operate on these rivers, despite the heavy ice conditions, but with additional horsepower or reduced tow sizes. The forecast for the area from St. Louis to Chicago is to remain below freezing for at least the next 10 days. Now, predicting weather is something that we are not good at. If the weather continues to remain as miserable as it currently is, we may not have enough weather delays in our forecast. However, we are hopeful that we will see the usual weather improvement we normally see beginning in late February and extending into March.

For additional Engine Service group, we do feel that we are at the bottom of the cycle for our land-based market and should begin to see improvement sometime in 2014. Our first-quarter guidance assumes our Diesel Engine Service marine and power generation markets will remain stable and similar to where they were in 2013 and the land-based Diesel Engine Service will see little if any improvement in the first quarter. The primary difference in our 2014 first-quarter $1.05 low-end and $1.15 high-end guidance is the severity of the weather conditions in both our offshore and inland markets and the level of improvement, if any, in our land-based Diesel Engine market.

Turning to the year-end guidance, the low end of our 2014 year guidance, of $4.75 per share, assumes our Inland Marine Transportation equipment utilization will remain in the 90% to 95% range and the Coastal equipment utilization will average over 90%, consistent with 2013, and some modest improvement in both Inland and Coastal pricing. It assumes our marine and power generation markets will remain consistent with 2013 and our land-based markets will not see an improvement until late this year. Primary drivers in the high-end guidance of $4.45 per share -- our Inland rate increase is consistent with last year, higher Coastal equipment utilization and higher pricing and consistent improvements in the land-based Diesel Engine Service market through this year.

In summary, 2013 was a record-setting revenue and earnings year for Kirby, with 2014 forecasted for another year of record operating results. Our balance sheet is strong, and as David noted, our debt-to-total cap ratio was 27%. Our excellent cash flow allows us to continue to build new tank barges, primarily as replacement barges for older equipment, construct the new 185,000 barrel ATB unit and continue to pay down debt. We are very well positioned for any potential acquisitions that also may present themselves over the course of this year.

Operator, that concludes our prepared remarks. We are now ready to take questions.

(Operator instructions)

Michael Webber, Wells Fargo.

Welcome, Andy.

Thank you.

I wanted to focus on the Coastal market; and you placed an order for your first ATB, or I guess your latest ATB, a bit earlier. Just curious maybe how much of an opportunity is there within that Coastal market to place additional orders and expand to keep that growth rate in place?

I know we've talked about that for the last couple of quarters, but maybe since you pulled the trigger on one, how much of an opportunity set is there? Are you any closer to adding to that?

Michael, this is David. There is still quite a bit of opportunity. There has not really been much new coast-wise capacity added in the 200,000 barrel and less market.

We see increasing demand for moves. Crude and condensate moves are part of that, a big part of that.

We've also seen other volumes pick up as well. We are, of course, in discussions with other customers about their needs; and it is quite possible that we could build additional units beyond just this 185,000.

That's helpful. As my follow up, along those lines, earlier this year or very late 2013, we saw Kinder Morgan enter the coastal space via APP and their MRs.

When you think about that new entrant, do you look at them as a potential competitor around the coastal space, granted that they're operating larger assets? And do you think we will see other large land-based players start to enter the Jones ex space?

We, of course, operate smaller units; so we're not going to directly compete with them. I see it, frankly, as positive because it's affirmation, by a pretty sophisticated investor or somebody that understands the supply chain of its customer base, that the marine vessel is an important component of the supply chain.

We welcome them in the space. We think that they are a very good operator and glad to have them there.

To be clear, Mike, we don't compete with the MR tankers. Most of our moves our regional in nature. We get into some smaller docks that these big tankers can't get into and whatnot.

Sure. The question is more around them moving into the space and doing more, and I think Joe handled that. Thanks, David; and thanks, Joe, and thanks for the time.

Greg Lewis, Credit Suisse.

David, you mentioned a little bit on the guidance about some of the weather delays -- wind, fog -- as that pertains to the Coastal market, just given that the weather dynamics of the Coastal business are a little bit more harsher than what we see from time to time in inland.

How should we be thinking about that? Because, clearly, it seems like as you think about the first quarter, that is going to be -- could provide some delta to your earnings performance. I guess in the fourth quarter, it impacted it.

Where should we be thinking about that having the most impact? Is that more the West Coast impact? Is that in the Gulf of Mexico? Or is it on the US East Coast? Or is a combination of all three?

It's probably closer to a combination. Certainly, in the West Coast up in Alaska, the season can extend in the fourth quarter. It can be shortened, depending on how quickly the weather moves in.

Likewise, as you come out of the winter months, how quickly you can go back to work in the Alaska market. On the East Coast, we've had ice on the Hudson River, which I'm sure you are familiar with.

That does slow us down a little bit; and in some cases, you have got to be careful how you move through ice.

It is mitigated, though, by time charters.

Then, my follow-up question, is just going to be more on Inland. You guys, are in a great spot here. The market's been going in your favor for the last few years.

As we think about the market and how customers are thinking about the market right now as we start in 2014, have customers changed their mindset at all in terms of thinking, the outlook for this sector pretty tight, supply, demand looks pretty tight?

Have you seen customers wanting or trying to have conversations with you and others about potentially building out their contract duration and extending charters? Are you seeing any of that, or is it more just status quo in that market?

No more than usual. I think the customers are comfortable with the length of term with their operators. So, we're not seeing a push for that much length.

It depends on the customer, of course. I would say that it is about were it was in 2013.

Okay, guys. Thank you very much for the time.

Jon Chappell, Evercore.

Joe and David, my first question is on the land-based Diesel Engine Services. Obviously, a little bit of potential light at the end of the tunnel here.

I'm just wondering when you think about the potential for a modest improvement in that business, what is the balance between current the OEM stuff, which has been very successful in years past and as the gas price has moved up pretty significantly over the last three months, versus the re-manufacturing stuff that it seemed you that you've been shifting your focus to since you have taken on United?

John, as you know, we think that the real sweet spot at United is going to be the remand business. Having said that, if we had the capacity and we get orders for new equipment, of course we're going to build it. We would like to have a combination of both.

As you look at the ratio of new versus remand, we would like to weight it towards remand. We think the opportunity for margin improvements are better there, the service side of the business.

We think it's more predictable. We think it is steadier. That does not mean that we're not going to pursue building new frac spreads and related components.

Got it. Then for my follow on, a theme that we talk about frequently is just the uses of cash. You obviously have a still pretty decent sized CapEx program and then the ATB build for your customer.

When you think about the amount of cash that you are generating, already paid down a lot debt. You could potentially be not debt free but close to debt free, with the exception of your senior notes. How do you weigh the opportunities between new builds, building to suit, acquisition opportunities and maybe just an update there?

Then also, any further thought to the implementation of a modest dividend, which may not have to be mutually exclusive with expansion going forward?

John, I think it's going to be fairly consistent with our prior answers here. We are going to maintain our fleet and look at maybe adding some additional Coastal equipment as you see us do with this 185,000.

They're quite expensive, $75 million to $80 million. If we add some more of that, it could use some cash.

Clearly, we will maintain our fleet and keep that in top-notch condition. We will be looking for acquisitions, as we always do.

They're hard to predict. That would be our first choice for use of cash.

Consolidating acquisitions, as you know, there's still 40 plus inland players out there and a dozen or so coast-wise players. It is hard to predict acquisitions. That would be our preferred use of cash.

Absent being able to get one done, we'd probably delever some more. Clearly, we are looking at, if we continue this way, we'll have to return some cash to the shareholders.

We'll look for either share repurchase opportunities or a dividend. Again, we hope to be able to use it to add some equipment coast-wise, as well as do some acquisitions.

Just to follow up on David's comment, I think we believe that we can continue to use our free cash flow reinvesting in the Business. If we conclude that that's not possible, then we will consider other things.

We think the prospects of continued investment still are strong.

Understood. Thanks, Joe and David.

Ken Hoexter, Bank of America Merrill Lynch

Joe, congrats on your next steps; and thanks for the legacy of a solid management team you leave behind.

Maybe, David, you can talk a bit about, now that -- to follow on John's question on CapEx there, your thoughts on the market overall in terms of pace of growth that you see on the market -- let's go with the Inland barge side of first.

There is some building going on, surely. It's probably around the same level as it was last year. Retirements are around the same level, we anticipate. We don't know for sure.

Right now, all that capacity is being absorbed. Every day we are searching for barges to satisfy customers' needs. So, things are pretty good now.

Can we overbuild? Will we over build? You know we will. As an industry, we always do.

It seems like with the volumes that we're seeing now, it's going to continue for a while. Then, we've got this chemical renaissance that is happening with the chemical plant expansions, indeed even Greenfield plants. They're going to take years to play out.

As you know, takes a while to permit and build these big ethylene plants and large chemical complexes. We will see where that goes, but so far so good. Again, I'm not trying to sugarcoat it. As an industry we will overbuild. Just doesn't seem like we're there anytime in the near term.

On the coast-wise business, I think we have a pretty long runway. It takes, as you know, 18 months to 2 years to add capacity. Not a lot of capacity being built right now.

Then, when you look at the fleet, at least the fleet of 200,000 barrels and less, there are 270 or so in that fleet; a good 40 of them are 25 years or older. I think we have got a longer runway on coast-wise. It looks pretty good.

Let me just add some color to overbuilding. I think what David is referring to is the inevitability of capital-intensive businesses not standing good times. With respect to this particular business cycle, we are providing -- the volumes are consistent.

The industry is going to recognize when it can't absorb the equipment. I am reasonably optimistic that we will pare down the building.

Even as you look at shipyard slots and availability for 2014, there are slots available. I think the industry is mindful that there is only so much capacity that can be absorbed.

So barring a volume event, I'm not particularly worried about it.

I appreciate that insight. Thank you. Just the new barges, is this solely for crude? Is it for petroleum? I'm sorry, chemical? What is the goal with the new adds, talking about the ATB?

Is this our add?

I'm sorry, the ATB, yes.

She'll be capable of moving crude or petrochemicals. The initial thought is probably crude. The customer can change direction because the barge is very capable.

Ken, coming back to your original question, were you looking for what you think our view is of our growth rates going forward?

No, I think Dave hit on it initially. Just on the thoughts on the runway for the whole market. Just to understand, and he got to the point right there on the overbuild, or you threw in there the not overbuild at some point.

It really was the industry growth and relative to what the industry is adding in terms of capacity.

Got you.

My last one is just back to the thoughts on rates. When you think about the Coastal Marine, if I look at the Inland barging, once that hit that utilization over that 90%-95% range, it seemed like you had maybe two years of very, very robust rate growth and then kind of a long runway of mid-teens growth.

Any reason why we shouldn't think about that in terms of rates as you get back to that reinvest-ability level on the coastal business?

Meaning that -- ?

That we see some super-sized rate increases to get you to the point of reinvest-ability on the Coastal side and then get proper returns for the investments.

Initially, you're going to see a two-tier market. You're going to see higher rates for newer equipment then you get for existing equipment.

Then, that gap is going to narrow. How quickly it narrows, that is uncertain.

To get reinvestment in the Business, particularly with respect to replacement investment, you need to get rates up that justifies you spending the money to replace the equipment. It will happen. It happened on the Inland side of the business.

You may not get all rates up to replacement; it may be a blended rate. Rates should continue to rise until you approach the kinds of returns that you need to invest the capital to build the vessels.

Wonderful. Surely appreciate the time and the insight. Thanks, guys.

Jack Atkins, Stephens.

Just go back to Ken's first question about the expansion that we are seeing and we are hearing about on the domestic chemical side, you guys list quite a number of projects in the back of your investor deck.

When you all are modeling the industry out internally and looking out over the next 2, 3, 5 years, what sort of growth rate do think that just the domestic chemical barging industry we'll be seeing here over the next several years? It seems like there is a fairly long runway of growth ahead of us.

Jack, it's really hard to predict in terms of percent. I wish we were smart enough to pencil it out and say it's going to be 4.5% annual growth or some number like that.

It is really hard to say because as you look at these projects, it just depends on the project.

Certain projects may have quite a lot more barge moves than others; for example, a methanol project could have a lot or an ammonia project, for example. Whereas, if it is just a light hydrocracker that could just ethylene that is converted into polyethylene, could be not a lot. If it is a flexicracker, it may have some co-products and whatnot.

It is complicated. We really don't know. Just thinking about it holistically, if all of that chemical capacity gets built, a good portion -- or not a good portion, but a significant meaningful amount will end up on the water.

It is going to be positive, for sure. Some of it depends on where it is going to go.

Remember, the longer the trip, the more barges it takes. I don't think there's a computer model big enough to figure all that out, but it's clearly positive.

That's understandable. For my follow up, on the Diesel Engine side, we have been sort of anticipating a recovery in that market now for the better part of a year. Certainly, I think all indications are we may see that in the second half of 2014.

At what point would you all begin to look at the business and maybe say -- we're carrying some extra costs here; and if we don't see that recovery take place, maybe it's time to pare back and get that business profitable, just based on the current level of demand?

Great question. This year. (laughter)

Joe, is there a way to quantify the extra cost that you think you are carrying, though?

Oh, I'm not prepared to do that right now. We have certainly looked at that, but we believe that that business is going to recover.

You could take costs out of it now, but it would look pretty foolish if the business is doing well towards the end of the year and you are not prepared to accommodate it.

We think that there is not only a lot of remand that needs to happen, but there's also some additional equipment that is going to be built. We want to position ourselves to do that.

We have already incurred most of the pain. Truthfully, we have said this before, that we predicted the slowdown in 2013. We also predicted a ramp up in 2011 and 2012.

What we got wrong was the magnitude of both of them. When you even them out and you bring the earnout back, it actually has been an okay investment for us.

We think that 2014 is going to be the year where we get back on track. We're very well positioned, we think, to capture that remand business, which long term should be steadier, better margins, a nice kind of service business that has similar characteristics to what we do on the Marine side.

Okay, guys, thanks for the time.

Kevin Sterling, BB&T Capital Markets.

It's actually William Horner on for Kevin. Sticking with Diesel for a second and the signs that the improvement you all saw late in the quarter, I was hoping you could provide more color on the reason behind this?

Do you think it was indicative of customers firming up their 2014 capital plans? Maybe the spike in natural gas prices we saw? Or do you think it was just more general green shoots of the cycle starting to turn?

It is probably more -- we are hopeful that it is green shoots. There could be some year-end capital spending true up that you occasionally see. It feels pretty positive, William.

I would call it green shoots, at least that is our hope. It certainly feels that way; when you talk to the customers, they are a lot more constructive this year.

I think they are being prudent and cautious. They don't want to overcommit, but they are certainly a lot more constructive. We are quoting a lot more potential activity both on remand and new equipment.

Okay. Great, David, that's helpful, thank you. Going back to the Marine business during the quarter, is there any way we can quantify the weather impact, either from a top-line or earnings perspective?

Yes, it is really difficult. It's just so difficult because there's so many different moving parts.

William, it's just too difficult to quantify. Probably be easier at the end of this quarter.

Fair enough. Okay. One more and then I'll turn it over.

Have you seen or do you anticipate any impact to the Inland crude space now that the southern leg of the Keystone pipeline has opened up?

We are certainly not seeing it. There's still plenty of demand.

Remember that what is driving the use of barges to transport crude oil in the Inland space is Eagle Ford crude oil condensate to the Houston/Port Arthur area, and crude oil and condensate stranded in the Midwest that needs to come south to be refined and does not have pipeline availability; and then some Canadian crude still. But, we are really not seeing that leg have an effect on the routes that we service.

Okay, Joe. That's helpful. Appreciate your time.

Chaz Jones, Wunderlich

My first question was just thinking about the rail tank car standards that have been talked about a lot recently with accidents. If the government moves to raise the standards for rail tank cars, if that would have any implications, whether positive or negative, for Kirby's Marine business -- obviously, understanding that you're equipment is already double-hulled?

We are not only double-hulled, we are inspected, taken out of the water, walked around, gauged. And so we welcome that the same criteria is imposed on other modes of transportation. It is going to raise your costs. We are kind of already there.

It may improve the cost advantage that barges have. Barging already endures a cost advantage to rail, so it is just going to expand it, if it does anything.

Got it. Just looking for a little bit of clarification on the guidance, particularly the land-based side of the business.

Obviously, you pointed to perhaps not a lot of improvement in Q1, but maybe some progress as the year goes on. Are we thinking about returning to low to mid-single digits type operating margins there, or are we thinking about that wrong?

As we think, particularly about United in the Diesel Engine land-based business, we've built into our guidance a little bit of a recovery in the back half of the year. I don't have the margin of the top of my head; but it's probably mid-single digits moving up from where it is now, is what we are anticipating as we move through the year.

Okay. Great. Thanks, guys. Thanks for taking my questions.

John Barnes, RBC Capital Markets.

Joe, in your comments about pipeline capacity and some of the crude coming out of the Midwest that maybe does not have pipeline availability. Right now you have got a couple of pipelines that are actually down for maintenance -- I think the Ozark being the big one.

Are you seeing any impact on volumes of crude oil coming out of the Midwest as a result that pipeline outage?

We don't think so; but truthfully, John, I'm not sure we would know. The crude oil coming out of Midwest that we handle is pretty consistent, no really change to the flow there.

We are not hearing anything within the business. But I'm not sure we know.

All right. My second question is two-part -- one near-term, one longer-term. That is, in 2014, are you aware of any maintenance work to be done on the rivers that would have similar kind of implications as you experienced last year with the lock outage at Algiers and that kind of thing?

The longer-term portion of that question is with the transportation bill being proposed right now on that kind of thing, do you believe that there is going to be better funding for some of these projects and we should see more of these projects that maybe improve the efficiency in the river system over the next several years?

Assuming water gets through, and every indication is that it will, it may be later this year before it's passed. There is some concern about getting through some of the primaries before it gets back to Congress for a vote.

It went out of the House almost unanimous, so I think it is going to get through. That is certainly going to help.

I think more important than the marginal efficiency improvements is that we are committed to making the investments in the infrastructure that are going to make it more reliable. You referred to Algiers Lock; well, Algiers Lock was an unplanned outage. And some of the other problems last year were unplanned outages.

With respect to looking at 2014, I don't think there is anything that is unusual that is occurring from a planned perspective. I think that most -- every year you are doing something.

I don't think there is anything that is atypical to the maintenance cycle that has not been there for the last several years.

Okay. Thanks for your time and congrats on your new role.

Thank you, John.

John Larkin, Stifel.

I had a question around the notion of utilization.

You mentioned that the utilization of the Inland barge fleet has stayed constant at about 90% to 95%, later on mentioning that that was very close to full utilization. Then the Coastal utilization has stayed at about 90%.

Then, there was a comment in your prepared remarks suggesting that perhaps that can be pushed up. What is the maximum utilization rate that is operationally possible, given the real world?

Is there anything different between the Inland operation and the Coastal operation that makes those maximum levels different?

95% is probably essentially max capacity. It's hard to get over 95% without doing some crazy things.

We are essentially at full capacity on the Inland side. Coast-wise, you get some movement regionally.

Alaska has some seasonality, so you do have some equipment that doesn't get used year-round. Likewise, you can have some other things that -- for example, New York Harbor, when it is very cold, we can be very busy in New York Harbor.

So, there is some seasonality that factors into your overall utilization, more so on the Coast-wise business than the Inland business.

Inland, like I said, is full capacity, running 90% to 95%. Coast-wise is in the 90%s.

We have periods where we are up close to that 95% range. I don't know if that answered your question, John?

Yes, I think it is. It sounds like your awfully close.

I was really trying to think about the incremental margins that might be available. If you could push Coastal up from say 90% to 95%? I would guess that those incremental margins are rather attractive?

They're very attractive.

Or are they pushing up against the reasonable utilization levels already?

Yes, I think that's right. There's some room left, though, to be sure.

Okay. Then, as the market has improved, how have the shipyards behaved in terms of pricing tank barge construction?

Have you seen those prices rise? Or are you a big enough player through thick and thin that you're able to mitigate some of that pricing pressure?

It is always a tug of war, John.

I think we do have a lot of leverage because we have more units than anybody else in the country, and we try to use that leverage. I would say that the shipyard pricing is modestly up.

Okay. I take that to be in, say, single digits?

Yes. Low single digits.

Got it. Thank you very much.

John Mims, FBR Capital Markets.

This Chris Carreon for John. Just broadly speaking -- I'm not sure who wants to take a stab at this one -- but there has been, obviously, a lot of talk in the market about the net backs for crude oils and pipes versus rails.

I was just wondering where barge sits into the pricing standpoint there? If it's say $10, a little bit more, to take, per barrel, to move from Bakken to the Gulf, I wonder how much that price changes if you were to switch to barge in say Chicago or St. Louis than going down to the Gulf? Just trying to get an idea for the differentiation of the value proposition there.

Yes, that's a good question.

Look at it this way. The customer, and some of these guys are very sophisticated, are working hard on an everyday basis to get the cheapest reliable feedstock to the refinery. That is very dynamic because you can have differentials in different crudes.

West Texas, Louisiana and Brent, Saudi -- they're going to be priced at given times differently. You have transportation options that change, that get disrupted; so it is a very dynamic process.

Over the long run, you're going to have a system that delivers the objective of that low-cost feedstock that is reliable. It's got to be reliable; because if you don't have it, you shut the facility down.

Right.

When you're looking at barge versus rail, you're going to have to look at it in the context of pricing, reliability, pricing of the product, reliability of that source. It's going to move around a lot; it is going to be a very dynamic process.

Right. Just to that point, my sense is that there has been more talk around crude by rail, perhaps a bit of regulation coming in, to be determined of course.

I wonder if you guys are getting any more interest from producers looking to maybe shift their shipping methods in order to hedge maybe a little bit of that regulatory risk? I don't know if you are seeing that, but any color would be really helpful.

Most of the supply is not on the river, so it either has to go by pipeline or rail or truck to get there. So look at rail as a way of delivering product to the river, where it can then be loaded on barges.

The reason that rail is popular and that pipelines have not taken that volume is that rail is not demanding long-term agreements. It's flexible with respect to moving crude oil from different sources.

In the total feedstock cost dynamics, it is going to be a combination of rail, pipeline and marine vessels that meet particular shippers' requirements. It is going to move around, and it is going to move around based on a number of factors.

As you look at our business, we think that we're going to continue to be a significant transportation mode moving it. At least for what we see today, it is going to continue to grow.

The demand is going to continue to grow as more crude oil, more gas condensate comes online.

Right. Thanks for that. That is really helpful. As my follow-up question and it's right along that same point, I was just wondering if you guys had any color on pricing differentials between railing crude to California refineries?

Obviously, again, a lot of regulatory hurdles there, versus railing crude to the Pacific Northwest, and then barging it down in coastal barges -- whether it is via Vancouver, Washington, or any other ports? Wondering how you guys are thinking about that opportunity on the West Coast?

We think that the Marine component is going to be an important logistical part of supplying crude to those refineries. Now, some of it is going to be railed in; but a lot of it is going to be moved by water.

The differentials, I'm not sure anybody really knows what they are yet. But there are a lot of challenges for getting a lot of crude oil delivered by rail into California.

Right.

There are a lot of moving parts in that.

Chris, this is David. You might call Steve Holcomb afterwards.

There's a newsletter out there that talks about some of these rates. They estimate some of the rates, and he can share that with you.

Okay. Thanks, David, that's really helpful. Okay, well that's it. I really appreciate you guys this time.

Operator, we'll take one more call please.

Matt Young, Morningstar.

Most of my questions have been answered, but I just wanted to follow up on the previous question. In the Coastal business, in terms of the shale oil movements that you talked about, what would you say that most of the longer-term growth is likely to come from on a regional basis?

Would you think that would be on the West Coast, perhaps on the Columbia River area and so forth? Or in East or maybe even across Gulf?

I think it is all of the above. We are seeing it pretty much everywhere.

Across Gulf, we are moving a lot across Gulf from Corpus Christi to Houston/Port Arthur to New Orleans area. West Coast, they're still trying to get the unit trains out to the West Coast and get that permitted, but that is starting to pick up. It looks like it's going to grow fairly healthy.

Then, of course, there are a lot of unit trains going into Albany, making -- from Albany, they will be taking crude and condensate down the Hudson to the refineries on the East Coast.

Matthew, it's more all of the above than anything else.

Do the refineries -- are they continuing to adjust and shift to some of the lighter crude? Is that where most of this is coming from?

Yes. The East Coast refineries are set up to run light.

They have been running Brent, is a lighter one. The Gulf Coast, where refineries are really design more for heavier crude, and they have been putting in some pre-flash units and some other equipment help maximize the potential of the lighter feedstock.

All right, great. That's all I had. Thanks.

We certainly appreciate your interest in Kirby and for participating in our call.

If you have any additional questions or comments, 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 today's conference.

Thank you for participating. You may now disconnect.