Kirby Corp (KEX) 2014 Q2 法說會逐字稿

Welcome to the Kirby Corporation 2014 second-quarter earnings conference call. My name is John, 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 this conference is being recorded.

I will now turn the call over to Mr. Sterling Adlakha, Mr. Adlakha you may begin.

Thanks, John, and thank you all for joining us this morning.

With me today are Joe Pyne, Kirby's Chairman; David Grzebinski, Kirby's President and Chief Executive Officer; and Andy Smith, Kirby's 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 are 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 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission.

I will now turn the call over to Joe.

Thank you, Sterling, and good morning.

Yesterday afternoon we announced record second-quarter earnings of $1.31 per share. That compares to $1.11 per share reported for the 2013 second quarter. A quarter that also included a $0.07 per share benefit from the reduction of the earnout liability associated with the acquisition of United Holdings.

During the second quarter, our inland and coastal tank barge fleets continued to experience healthy levels of demand across all of our markets, high equipment utilization levels, and continued favorable pricing trends, with operating conditions in both of these markets, which we would say were seasonably normal.

Overall, our Marine markets continue to benefit from the growth of the domestic petrochemical crude oil and condensate production, all of which we expect to continue to remain strong. In our marine and power generation diesel engine business, it also performed well and benefited from healthy levels of demand in most of the markets.

Our land-based business continued to show improvements, particularly as it related to orders for new pressure pumping equipment. The remand business also improved and we continue to refine our business processes, which we believe will result in better long-term performance.

I will now turn the call over to David.

Thank you, Joe, and good morning, everyone.

Starting with our Marine Transportation segment. During the second quarter, our inland marine business continued its overall strong performance with equipment utilization in the 90%-95% range and modest improvements in term and spot contract pricing.

As Joe mentioned, operating conditions were relatively normal for the second quarter. Long-term inland marine contracts, those contracts that are one year or longer, were 80% of revenue for the quarter with 56% from time charters and 44% from affreightment contracts.

Due to strong demand from term customers and limited available capacity, we now expect contract revenue to remain around 80% level for the remainder of the year. Pricing on the inland marine transportation term contracts that renewed during the second quarter, increased in the low to mid single-digit level, compared with the 2013 year-ago quarter.

Spot contract rates, which include the price of fuel, increased modestly compared with the first quarter and remained above term contract rates consistent with what we experienced in the first quarter of 2014 and throughout 2013.

On the coastal side, it also continued to perform well, with equipment utilization in the 90% to 95% range, which is in line with our first quarter, but above the 90% range we saw throughout 2013. During the second quarter, approximately 85% of coastal revenues were under term contracts, compared with 75% from the year-ago quarter.

Demand for coastal marine transportation and refined products, black oil, including crude oil and condensate, as well as petrochemicals, remained at healthy levels. As we announced was our intention last quarter to meet increasing customer demand, we have signed agreements for the construction of two 155,000 barrel coastal ATBs's and tug units.

We currently expect the first of these vessels to deliver in mid to late 2016 and the second in early to mid 2017. Estimated 2014 progress payments for these additional units are included in our updated capital expenditure guidance, and Andy will go into that in more detail later.

With respect to coastal marine transportation pricing, term contracts that renewed during the second quarter increased in the mid to high single-digit range when compared to the year-ago quarter. Spot contract rates, which include the price of fuel, continue to improve sequentially during the second quarter and remained above term contract rates.

In our diesel engine services segment, the second quarter reflected positive results across most of our markets. In our marine diesel and power generation markets, demand was generally stable. The land-based diesel engine services market benefited from an increase in the demand from the manufacturer of oilfield equipment, as well as the sale of engines, transmission parts and services.

Orders for new pressure pumping units increased in the quarter and demand for re-manufacturing remained relatively consistent with what we experienced in the first quarter.

With that I will turn the call over to Andy, who will give you some detailed financial information, and then I will return to discuss the outlook.

Thank you, David, and good morning.

In the 2014 second quarter, marine transportation segment revenue grew 8% and operating income grew 19%, as compared with the 2013 second quarter. The inland sector contributed approximately 70% of marine transportation revenue in the second quarter, with the coastal sector contributing approximately 30%.

Our inland sector generated a second-quarter operating margin in the mid to high 20% range, and the coastal sector generated an operating margin of approximately 20%, benefiting from improved year-over-year pricing and a seasonal uplift in the Alaskan market. Overall the marine transportation segment's second-quarter operating margin was 25.4%, compared with 23% in the 2013 second quarter.

Let me also comment about the seasonal effects of navigation conditions on margins and revenue per ton mile which can be misleading. Historically, our third quarter is our best operating margin quarter due to favorable navigation conditions, while the fourth and first quarters generally experience lower margins due to the seasonal weather patterns affecting navigation conditions in both our inland and offshore market. Conversely, revenue per ton mile is historically lower during periods of favorable navigation conditions and higher in the fourth and first quarters when navigation conditions are negatively affected by seasonal weather.

During the 2014 first half, we took delivery of 39 new tank barges, with a total capacity of approximately 450,000 barrels. We retired 21 tank barges and returned 5 leased barges, removing approximately 425,000 barrels of capacity. The net result was an addition of 13 tank barges to our fleet, and approximately 30,000 barrels of additional capacity.

Of the 39 tank barges delivered, 37 were 10,000-barrel barges and 2 were 30,000-barrel barges. For the second half of 2014, we expect to take delivery of 27 30,000-barrel inland tank barges with a total capacity of approximately 760,000 barrels, most of which we expect to deliver late in the fourth quarter. Combining these additions with our current planned retirements for the second half of the year of six barges with 60,000 barrels of capacity, will result in approximate capacity at year-end of 18 million barrels; 700,000 barrels above our current 17.3 million-barrel capacity level.

Our current inland tank barge building plan for 2015 calls for the construction of 30 10,000-barrel tank barges, which we expect to be delivered throughout the first half of the year.

In the coastwise sector, the construction of our two 185,000-barrel articulated tank barge and tugboat units at a cost of approximately $75 million each is proceeding as planned. With delivery of the first unit expected in mid to late 2015 and the second in the first half of 2016.

As David mentioned, earlier this month, we signed agreements to construct two 155,000-barrel coastal articulated tank barges and 6,000-horsepower tugboat units at a total combined cost of $125 million to $130 million. One of the units is scheduled for delivery in the second half of 2016 and one in the first half of 2017.

Moving on to our diesel engine services business, revenue for the 2014 second quarter increased 22%, while operating income was down 4% compared with the 2013 second quarter. However, operating income increased 62% when excluding from the 2013 second quarter the $6.1 million benefit to operating income resulting from the reduction of the United earnout liability.

The segment's operating margin came in at 8.4%, compared with 10.7% for the second quarter -- for the 2013 second quarter, or 6.3%, excluding the earnout benefit.

Our land-based operations contributed approximately 65% of the diesel engine services segment's revenue at a mid single-digit operating margin. As David mentioned, we continue to see signs of improvement in this business with strengthening demand for the sale of engines and transmissions, parts and service, as well as orders for new pressure pumping units and the re-manufacturing of existing units.

The marine and power generation operations contributed approximately 35% of the diesel engine services revenue with an operating margin in the low double-digit range.

On the corporate side of things we reduced debt by $58.7 million during the 2014 second quarter, thanks to continued strong cash flow, and added to our marine equipment construction plans. As of today debt stands at $642 million.

Our 2014 capital spending guidance is currently in the $370 million to $380 million range, including approximately $140 million for the construction of 66 inland tank barges and one inland towboat expected to be delivered in 2014, and approximately $105 million in progress payments on the construction of the new ATBs. The balance of $125 million to $135 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities, as well as diesel engine services facilities and final costs for the construction of two offshore dry bulk barge and tugboat units delivered during 2013.

Total debt as of June 30 was $649 million, a $100 million reduction from our total debt of $729 million as of December 31, 2013. Our debt to cap ratio fell to 23% as of June 30, compared with 27% as of December 31, 2013.

I will now turn the call back over to David.

Thank you, Andy.

In our press release we announced our 2014 third-quarter guidance of $1.30 to $1.40 per share. This compares with $1.21 per share earned in the 2013 third quarter, a quarter that included an $0.08 per share benefit due to the reduction of the United contingent earnout liability.

For the 2014 year, we raised our guidance to $4.90 to $5.10 per share, compared with $4.44 for 2013. Remember also that 2013 earnings included a cumulative $0.20 per share benefit, due to the elimination of the United earnout contingent liability.

Our third-quarter guidance assumes normal seasonal operating conditions in our marine transportation markets. It also assumes a continued strong coastal market with higher term and spot contract pricing.

With inland marine rates currently strong, we expect pricing increases to remain in the 3% to 5% range. Going forward we expect earnings increases to be driven by these price increases, as well as from capacity growth, as new tank barges continue to be absorbed by the market.

For our diesel engine services group, we expect to see continued improvement in our land-based market. Our third-quarter guidance assumes our diesel engine services marine and power generation markets will remain stable. The primary difference between the low end and high end of both our third-quarter and full-year guidance range is the level of improvement in our land-based diesel engine services business and operating conditions in our marine transportation segment.

In summary, the first half of 2014 has gone well and the outlook for our markets continues to be positive. We continue to invest our strong cash flow in building new inland and coastal equipment and we also continue to pay down debt and strengthen an already strong balance sheet, which will allow us to pursue any potential acquisitions that may emerge.

With that, Operator, we would like to open the line for questions.

Thank you. We will now begin the question and answer session.

(Operator Instructions)

Our first question comes from Michael Webber from Wells Fargo Securities, please go ahead.

Good morning, guys, how are you.

Good morning.

David you talked about the new ATB orders and I know last quarter when you guys were still in the process of placing those final 2 orders or looking at that you were talking to an after-tax return of around 12%. I'm just curious as to how those numbers actually came in when you placed the order, and then how those trended relative to the previous 180 orders you guys placed?

Remember, Mike, we look at -- when we look for our 12% return we look through the life of the asset and it's a discounted cash flow through the life of the asset. But rates are sufficient when you get the new equipment delivered to give us that 12% return. Rates currently aren't there, so they have to continue to grow, but the forward price that we're getting on the contract for the one new 185,000-barrel barge is sufficient to get our 12% return.

That's helpful. As my follow-up just along those lines, can you maybe talk to how much demand you are seeing out there from your customers for additional coastal ATBs and maybe on a relative basis to the work you guys have already done in terms of ordering these 4 -- how big of an opportunity is out there relevant to what you have already done?

We continue to see increased demand. A lot of crude and condensate demand. Some petrochemicals. Refined product demand is increasing. So the demand is increasing, but also, and I think this is important, when we look at the market of ATBs and barges that are 200,000 barrels and less, there are 47 that are over 30 years old. That is out of a base of about 268 barges. That is a lot of capacity that's going to have to come out in the next 5 years or so. You have got this increasing demand. You have got a supply base that some part of it is pretty old and needs to come out. It is a pretty good supply demand dynamic and we are very comfortable with our position in that and with the 4 new ATBs that we're building.

Got you, thanks for the time guys.

Thank you.

The next question comes from Jack Atkins from Stephens.

Thanks and good morning, guys. So I guess just to start off with going back to diesel -- excuse me, going to the coastal side of the business for a moment, I noticed in the press release you commented about modest pricing gains but everything we've been hearing from you over the course of the last year and a half or 2 years in terms of contract renewals indicates mid-to-probably-high single-digit contract growth, pricing growth. I'm just sort of curious, are you guys seeing maybe that market plateau in terms of the pricing gains year-over-year? Or do you still think there is some room to go in terms of getting price there?

In the coastwise market we are seeing mid-to-high single-digit price increases so that's still pretty good. As we put maybe some spot equipment onto contract, the price increases there are quite good at times. So no, I think pricing is remaining pretty strong in the coastal market. I think in the inland market as you saw, we said we think the price increases will remain in the mid-to-low single digits, 3% to 5% is what we said. So it's still a pretty good market and we take a very long-term approach on this and as we've said before, we don't want to be overly aggressive on pushing price.

Sure, that makes sense. Then as a follow-up on the diesel engine services side of the business, it sounds like that incremental demand is coming from new equipment orders. Do you think this cycle will be dominated by new equipment orders versus re-manufacturing? And at what point would you maybe think about adding some capacity to your existing facilities just given the demand I think everyone sees out there for refurbished or new frac equipment over the next couple of years?

That's a good question, Jack. We are-- As you look at the public comments from our pressure pumping customers, their business is improving. They are running 24/7 in many cases really putting the equipment to work. They are starting to get a little bit of price increase which makes them more willing to spend both new capital dollars and maintenance dollars. We continue to see re-man grow.

We are servicing more customers and different customers, but right now we are seeing an influx of new equipment orders. I think there has been some pent-up demand over the last year or so, so that's starting to play out. In terms of us increasing our capacity I guess I would just say this, we are adding a second shift, a partial second shift so we are busy right now and things continue to look like they are going to improve on the land-based side.

That's great, thanks again for the time.

Thank you.

The next question comes from Jon Chappell from Evercore.

Thank you, good morning guys. David, I can understand the ATB orders seem to be geared toward customer requests. But you also announced 30 more 10,000-barrel tank barges. Is that commentary at all about the returns you can get from new build assets relative to the acquisition environment today, and if that is the case are you concerned others may follow suit and the overbuilding that tends to happen in cyclical industries may happen sooner than you would've thought otherwise?

Good question, John. We are seeing increased demand from our customers both coastal and inland. Some new plants are coming online. We need the equipment to meet that demand. What you are seeing is with -- in the last couple of years we have had bonus depreciation and that has rolled off, so with that coming down when we look at the 2015 build plans out there and look at the shipyards, the number of new builds is actually down a little bit and we think that may be driven by the lack of bonus depreciation. But we are still seeing the need for new equipment as new plants and restarting of some old plants comes on line.

Yes, we are able to get our return on that new equipment above our hurdle rate, but pricing for acquisitions, acquisitions are just so hard to predict and there are so many different things that drive a seller. Given the market you would expect that price expectations are up a little bit, but we are happy to build the equipment for the needed demand and we will be patient on acquisitions.

All right, as my follow-up kind of on the same lines, with the balance sheet, as you continue to pay down debt at the pace of the last couple of quarters, you're going to be down to just the senior notes probably by early next year. So arguably maybe a little underlevered. I now you kind of like to be that way for flexibility, but how are you thinking about financing CapEx, particularly to have the cash to do it, but with debt being perceived as it is today, would you maybe take on a little bit more of that as well?

John, this is Andy. We have always been very consistent in how we think about our allocation of capital. We certainly will continue to look at any M&A opportunities that come along, but to the extent we think we can still build and attain our 12% after-tax return on capital, we will invest in our fleet. After that our next priority would be to pay down that additional remaining debt and then look at other alternatives with our cash beyond that.

But you would probably keep the senior notes outstanding until they come due, is that correct? Or would you chip away at those?

I don't foresee us chipping away at them right now. We have got, just in this current year, we've got about $210 million to $220 million that we're going to have to spend on our capital expenditure program, and with a relatively decent size capital expenditure program next year with the progress payments that we will have to make on the ATBs as well as our inland fleet additions. SO I don't foresee that happening any time soon, but we will sort of cross that bridge when we come to it.

John, as you know we have returned capital to shareholders with share repurchases in the past. We won't get too under-levered but we may look at a dividend. We have talked about this before, we've discussed it, Joe and I have discussed it with the Board, but you know right now it is just premature to declare anything like that.

Understood, thanks David, thanks Andy.

Our next question comes from Gregory Lewis from Credit Suisse. Please go ahead.

Thank you, good morning guys. David, when we think about the DES business, clearly it looks like customers are opting to manufacture new equipment as opposed to re-manning equipment, is there anything Kirby can do in communicating these customers? Clearly these units, the engines themselves are originally built to be re-manned. Is there any sort of value proposition that you guys are actively looking at to sort of get some of these customers to shift over to the re-manning, favoring re-manning over new equipment? Or is it just sort of we are just going to wait and see how the cycle plays out?

That's a good question, Greg. Our value selling the re-manned, if you think about, you can essentially re-man a frac unit for about half the capital cost of a new unit, maybe sometimes less than that. As the pressure pumpers look at the return on capital, that's important. We continue to value sell that. And as I said in my prepared remarks, we're seeing actually more customers. We keep adding customers and I think this is -- the market is slowly developing and getting confidence in re-manned. I think it is a relatively new phenomenon.

Some people have done re-manned. If you look at the majors like Halliburton and Schlumberger, they've internally re-manufactured all along. It is some of the other players, that are -- and we want to be their outsourced re-manufacturing -- that are coming along. It is an evolving market. I think as more and more customers get comfortable that a re-manufactured frac spread is essentially good as new, that market will continue to grow.

Okay, great. Just shifting gears to the coastal business. We have seen some news about condensate exports out of the Eagle Ford, when we think about that, I guess two things. One, has that impacted customers' willingness, or should I say have you noticed a slowdown in customers' appetite for coastal barges following those announcements? And then I guess the follow-up to that is, can you sort of have a gauge on what percentage of the coastal fleet is moving condensates out of the Eagle Ford -- if you could just provide any color around that, that would be pretty helpful.

Sure. We are not seeing any change in the customer mindset around crude and condensate. As you think about crude and condensate, they have to run it through a splitter or a topping in it or something like that, and actually those are --generally leads to some other volumes that we may get a chance to move. There's some derivative streams there. We are not really seeing anything but it's still early days and we will see how it plays out.

I would say in terms of the general market, in terms of coastal business, I know what we do, about 50% of what we move is refined products. 25%, well maybe a little more, maybe 35% is what we call black oil. Within black oil is crude and condensate. For us that is probably around 10% range. You could see that -- that may be higher for some other players.

Okay guys perfect, thanks for the time.

Our next question comes from John Mims from FBR Capital Markets.

Thank you, good morning. Let me ask you on the net additions and some of the capital plans you just laid out, it would seem that you're adding most of the net additions this year will be the 30,000-barrel barges on the inland side and you are retiring what I would assume would be six 10,000-barrel barges and then the next year adding significantly to the 10,000-barrel barge fleet. Can you talk about the dynamics between the two in the inland market in terms of absolute demand versus replacement demand, and if there's any noticeable difference in average age there? And where the inland market is going from here if you're going to see a noticeable shift toward the 10,000s versus what we have seen as more growth in the 30,000s over the last couple of years?

A lot of that is our fleet specific and what were looking at forward in terms of both customer demand for, for example like small light chemicals and [Lamotte] you would move those in 10,000 barrels barges. Also if you look at our age profile, we also think years ahead at the age of our fleet. It's also about what's available to be built. We haven't declared yet on 30,000-barrel barges for next year. We're building 10 so far, that's what we have announced. So it's a customer mix and is fleet-driven for us.

Okay. Is there a noticeable difference in average age between the two in your fleet?

Our 10,000s are older, I don't have the exact number here but our 10,000s are a few years on average older than our 30,000s.

As a follow-up on the same lines, there has been a few new methanol plants announced that are being built and one of the numbers, I think there is five down the lower Mississippi, and one of the numbers I saw thrown out is each will be producing about 5,000 metric tons of methanol per day and all of that is going to go by barge or by ship. Can you help sort of frame that if it is 5,000 metric tons per day what that would potentially mean in terms of barrel capacity? I guess barrel demand. I would assume those would go in 10,000s, right, and not 30,000s?

We know of one of our customers is starting up a plant here at the end of the year and we will be moving that methanol for that customer. It is not appropriate for me to talk about who the customer is, but we anticipate getting those volumes. I'm not sure whether they are being moved in 10,000s or 30,000s, yes, probably a little bit of both.

Okay. Is there a simple rule of thumb as far as metric tons versus barrels? I'm sure there is but I don't know it off the top of my head.

This is Joe. Your kind of standard 10,000-barrel barge moves about 1,500 tons, short tons; you can convert to metric.

But it's not as easy as that because it is based on where it's going. This is a ton mile business. If it's going up river it takes more barges. If it's just going across channel it takes less. Is not an easy calculation. You need to understand kind of the dynamics of the market and what customers are servicing and where they are located.

Right, no, I understand that. I know there is a lot of moving parts, but we're seeing kind of 2 million or 5 million metric tons of production coming online which seem to be big numbers. So I just wanted to try to back into something. Fair enough. I appreciate the time.

Thanks.

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

Good morning, is actually William Horner on for Kevin. David, going back to Greg's question on the diesel side for a second. Maybe asking in a different way, is the service and re-man business, is it accelerating a little slower than you might have thought or are you finding the traction and confidence you are gaining with your customers sort of along the lines you would expect in this cycle?

I guess it never moves as fast as you want it to, right? But no, if you go back to the last cycle in 2011. There was not much re-man at all. I think in 2011 we didn't do any re-manufacturing. It was all new, so I think this is an evolving market and the customers are really starting to get used to re-man. Could the pace be better, yes I guess it could, but I think the progress we have made from working with just a couple customers, to I think we're up over 13 different customers now that we are doing re-man for; it is evolving, perhaps not the pace that you would hope for. But it looks like it is headed in the right direction. Right now our volume is picking up more on the new equipment side but we are still taking new orders every day for re-man.

Okay, that's helpful, thanks. Maybe going back to the inland side for a minute, the last quarter you thought that your contract coverage might track back down to the 75% range but it sounds like 80% range is where it's going to stay for the rest of the year. I know it's a little early to talk about 2015, but given your capacity to adds and the appetite for the market to absorb this capacity, would you kind of think 80% might be a more normalized way to look at your contract coverage?

It's an interesting dynamic. What happens is you have these term contract customers and within their term contracts they call for a certain number of barges but then when they need extra barges, we will take our spot equipment that would normally work in the spot equipment and put it to work for term contracts customers so that's part of the dynamic you see. You never want to let a good customer go to somebody else for an additional move. It's a long way of saying that it could -- as we take delivers of the 30,000s, that could come back down a bit, but there is a general tendency for it to be closer to 80 right now.

Okay, thanks. That's all I've got, I appreciate your time.

Thank you.

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

Great, good morning. Can you talk a little bit about your thoughts on the inland capacity? If you are growing to 18 million barrels up from the 17.3 million, how the industry absorbs, and the fleet given retirements are seeming to slow as that fleet is clearly younger than what you have to do on the coastwise side?

There is a lot of equipment that has been coming in, but it's largely being absorbed. We're still running 90% to 95% utilization, but as we were talking earlier, you have got methanol plants and other plants that are coming along that are absorbing it and that is just starting. We are quite positive about the growth and demand and being able to absorb the equipment.

Also what you are seeing is -- and we've polled the shipyards, there is only about 125 units being built in the shipyards next year which is down from closer to 250 to 300 this last year. So that's -- again, we think that is about bonus depreciation rolling off. We still see demand increasing. A little less building because the incentives are a little lower for some of our competitors. I think again the dynamic is -- the supply dynamic is still pretty positive.

So I guess two follow-ups to that, you still see, then, that 3% to 5% rate as you look forward. And then to that same point you haven't placed your 30,000-barrel order yet or maybe you haven't publicized it; could be that the same thing is going on with your competitors that they haven't either announced it or is that what the yards have slotted out already? Or maybe they just haven't ordered them yet?

It's hard to speak for them, who knows? But we still continue to think 3% to 5% is the right price increase range going forward.

Okay, helpful. On the coastwise side, you talked about the absorption of capacity and industry deliveries and you said you were at low 20%s in terms of margins but not yet at 12% returns. At what level do you need pricing to get your margins to before you are at those reinvestible rates and where does this business settle in? Does it get above the inland margin side?

It has the potential to get there. It takes a while for that new coastal capacity to get in. You heard our new announced capacity here, some of it doesn't get into the market until 2017. If price increases continue in that high single-digit range, we certainly could see margins in the coastal business actually get up into the high 20% range, but we will see. We are, as you mentioned, around 20% margins now. Pricing is probably, to get to that new build pricing, is probably 15% to 25% below where it needs to be, but it's increasing.

Great, appreciate the time and thoughts.

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

Good morning, two things. Dave, your comment about the 47 sub-200,000 coastal barges that are out there that are 30 years old and older, can you comment maybe to the owners of those barges and how many of those owners do you view as having the financial wherewithal to replace them, or is that where your opportunity lies?

First, we never underestimate the willingness of banks to lend. Some of them have the wherewithal to build, and we are seeing some building. You can see the shipyard contracts that have been let, besides our barges there is approximately 10 other new builds being announced so there is some building that's coming on. But just remember it takes several years for it to get into the market and we still have that aged fleet there.

I'm not sure if I'm answering your question. I think the banks will continue to lend and there will continue to be new equipment built. It is needed and that's the primary driver, so pricing will continue to improve to drive that new building. But I think given 47 units that need to come out in the next 5 or so years, it has got to happen.

Just to comment on older capacity, every shipyard, you get a chance to make a decision whether to extend that life and in a weak market, you wouldn't extend the life and in a very strong market sometimes you make decisions to extend it for one more shipyard and sink a little bit more money into it so that's a dynamic that plays out in every cycle.

All right, that makes sense. I have worked for a couple of banks by the way that don't lend money so I can certainly point your competitors to the right ones. The other question I had is, along the same lines with these vessels that you have ordered and the ones that maybe potentially have to get replaced, what do you think is the percentage of the coastal equipment that will be built under some already negotiated contract like what you have been able to put into place? And are you at all exploring the opportunity of putting coastal vessels in place without those type of agreements whereas right now you are focusing entirely on new equipment having a new agreement in place that gives you some visibility?

When our equipment comes out it will be under contract. I guess to rephrase your question, how much of the new builds that I just described are on spec or don't have a contract yet, I'm not sure of the exact number but I think the market is strong enough that it will all be termed up and contracted out by the time it comes out of the shipyards.

Okay, and on the inland side are you starting to see any of that? Is there any increasing amount of inland capacity coming out with already negotiated contracts as well? Or is that still a little bit more under the old way where it just kind of shows up and some ebbs to contract and some goes into the spot market?

Yes, it is more of the latter, John, just because of the sheer number. As we think about it, we don't -- because we have 860 or so barges, the fleet is kind of fungible and you don't need a contract for your next 30 coming out of the shipyard. You kind of meld them into your fleet and you treat the fleet as a whole. Of course we don't view that there is much risk at all to not putting that equipment to work and in fact we need the equipment. We still routinely turn away customers that are asking for equipment.

Very good, nice quarter guys I appreciate your time.

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

Good morning, gentlemen. Just a little bit of a follow-up on the capacity additions, look at your deliveries this year in the high 60s and 30 schedule next year and the average age, you getting down to the point where your fleet seems to be at a pretty comfortable average age. Would you expect to reach that point next year or should we think that's a 2016 event?

We're always -- your fleet has a variety of ages. We think in terms of an average age because it's easy to quote a number, right? But there are -- they are a range. We have a group of barges that is 0 to 5 years old and some that are 5 to 10 years old and it goes all the way up in increments of 5. We've got buckets of them. There is always some fleet replacement that needs to happen or fleet retirement that needs to happen in any given year.

It is not just, do we get to one number. We tend to build for the retirements that we anticipate coming in. Right now we are building more than our retirements need, so are we expanding capacity, so that's a little different. In expanding your capacity your average age is going to come down, right? Because you're just going to have more new barges.

All right. Just to switch over to the coastal markets, can you talk a little bit about where peak margins may be and could we or should we use the old KSP numbers relative to peak margins, or do you think you have changed the equipment and the operations such that they may be different in this cycle?

Yes, K-Sea's peak margins, we have already passed. Under the Kirby model, we are able to leverage our cost a little better. We've got our admin costs on our shore side are shared between our inland and coastwise business so that helps margins. But also we're -- K-Sea worked kind of the lower end of the market sometimes and we are working for the major customers where there's -- you know, you get paid for your custody of their product and we work hard to meet their service needs.

We are getting an improvement above where K-Sea got it and just in the normal cycle. I think where could peak margins go, that's a hard thing for us to say, but clearly we see margins continuing to evolve and move upward over the next several years.

Okay great, thank you for your time. I appreciate it.

Our next question comes from Nicholas Bender from Wunderlich Securities. Please go ahead.

Good morning gentlemen, thanks for taking my question and congrats on the quarter. Kind of following up on the coastal margin discussion, I think it goes back to a comment that Joe had said on one of these calls a couple years back sort of thinking that coastal margin might have been more like a low-to-mid-20% type of range. Is there anything that sort of fundamentally changed that has improved your outlook there? Or is it just as you have run the business for a couple years and with conditions improving in coastal that that has changed that profile a little bit?

We have certainly consolidated into our general marine business which allows us to get more leverage, so our thinking has evolved there and the potential that that can provide has evolved. But I think given where the cost to build a new ATB and tug unit, pricing has to be higher in order to justify the returns. That implies that you're going to have to have higher margins. Is it substantially different than last cycles, I'm not sure, but clearly we believe that margins should be able to get into the high 20s.

David, let me just add to that, this is Joe. When we talked about low 20% margins, those are sustainable margins. But what happens in this business is you price as an objective to new construction rates and as you do that, prices rise for your existing fleet so you can get periods on your existing fleet where margins actually are higher. But over the long run, what is the sustainable margin? And the sustainable margin theoretically is what the margin is for the return that you're looking for. I don't know if that helps.

Yes, no, that's great, Joe, that is very helpful. Just one quick one sort of following up on all the capacity discussion that's gone on, can you give us a little commentary on the coastal side, what the order book looks like there? Obviously you've got some longer lead times, you know, 18 month to 24 month kind of time frames. And if we think about you guys potentially adding more capacity, would you expect to do it in a nearer-term timeframe or if you announce some additional capacity would it be on the longer-term sort of time horizon like you have announced with some delivery dates out in 2016 or 2017?

Let me talk a little bit about the order book. We have got our 4 barges that we are building which are primarily larger, right? 185,000s and 155,000s, 2 each. We have tracked, I think, there's 10 other orders out there and 5 of them -- well, 7 of the 10 are 100,000 barrels or less. There is some capacity being built but it's a little bit smaller than what we are building. We will see if there is more there. In terms of our plans to add additional capacity, we are evaluating that. We are not ready to declare anything at this time.

That's fair enough, that's helpful, thank you. Talking about something broad in the past just between or around synergies, rather, between inland and coastal customers and the ability to drive some incremental value there, where are you in that process? Is there any more juice to be wrung out of that at all?

We are very far along on that. Right now most of our major customers we do both inland and coast wise moves. I don't want to say there's no juice left there to squeeze, that sounds negative. Because those are the big customers, the ones you want to work with. They are the ones that are going to have the incremental volumes as crude and condensate continues to play out and as refinery capacity grows, as chemical capacity grows, those are the guys you want to be with. In terms of the synergy, maybe there is no juice there, but in terms of where you want to be and the juice that comes from the major customers, boy, that is still in front of us.

Right, that makes sense. Switching over to DES real quick, obviously not getting too caught up in sort of a quarter-to quarter-variance in maybe the OEM sort of market, but is -- the long-term objective still is to have a business model that is something along the lines of two-thirds re-manufacturing and maybe one-third OEM, is that right?

Yes, and in the re-manufacturing we put parts, other service, and re-manufacturing. You are exactly right, we would target and are targeting to get about two-thirds in that service, spare parts and re-manufacturing area, which is a little less volatile. That is why we are targeting it. Plus it's higher margin.

Absolutely. The last one; again we sort of covered the ground on M&A on the marine side but any thoughts on M&A on the DES side and in the land-based market that seems to be improving a little bit, or growth initiatives really of any type I suppose?

You know, we're always looking at it and you may see us do a small tuck in regional add in our diesel business but on the land side of the diesel business, acquisitions, I think we've got -- our platform is still getting right and growing and we have gotten a lot of opportunity there, so I'm not sure an acquisition would make sense right there in that space. You may see us do small tuck in regional type engine service acquisitions, but they are, as I say, small.

Thanks, Nick.

Great, thank you.

We have no further questions at this time.

We appreciate your interest in Kirby Corporation and for participating in our call. If you have additional questions or comments, you can reach me directly at 713-435-1101. Thank you and have a nice day.

Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating, you may now disconnect.