Kirby Corp (KEX) 2015 Q2 法說會逐字稿

Welcome to the Kirby Corporation 2015 second-quarter Earnings Conference Call. My name is Hilda and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

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

Thanks, Hilda, and thanks to everyone on the call 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 newly redesigned website at kirbycorp.com in the Investor Relations section under financial highlights.

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, 2014, 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 second-quarter earnings of $1.04 per share in the middle of our published range of $0.95 to $1.10 per share. That compares to a $1.31 per share reported for the second quarter last year.

During the 2015 second quarter, marine transportation tank barge fleet experienced consistent levels of demand and high equipment utilization. In the inland tank barge market, utilization remained in the 90% to 95% range. We experienced good customer demand for equipment during the quarter. However worries about future crude oil volumes and some market uncertainty continued to make it difficult to secure better pricing on contract renewals.

In the coastal market, utilization also remained in the 90% to 95% range and price increases were in the mid single-digit percentage range. As expected, we had a number of vessels in the shipyard during the quarter which impacted both our revenues and our earnings.

With respect to the Diesel Engine Service segment, revenue and operating income both declined significantly and our land based market we continue to work through a very challenging environment that shows little signs of improvement at least this year. In marine and power generation engine business continues to perform well but has been affected by weaknesses in the Gulf of Mexico oil service market.

Before I turn the call over to David, let me make some overall observations on the current environment. The lower oil prices we are seeing they may well be with us for a while. While lower crude prices are not particularly helpful in our diesel engine business released parts of our diesel engine business particularly the part and service equipment used in the oil service business and may affect some future movements barge, it is long-term positive for both the American consumer and global business and all the products they consume, lower feed stock prices help them. It also helps many of our other customers such as chemical, petrochemical plants and gasoline refinery customers.

Our strong balance sheet will certainly position for opportunities whether it's an acquisition or building equipment for our requirement.

I'll now turn the call over to David.

Thank you, Joe, and good morning. In the marine transportation segment, as Joe indicated during the second quarter, our inland marine barge demand was stable and equipment utilization in the 90% to 95% range. Long-term inland marine transportation contracts, those contracts over a year or longer contributed 80% of revenue for the 2015 second quarter with 55% attributable to time charters and then 45% from contracts of freight.

Pricing on the inland marine transportation term contracts that renewed during the second quarter was down in the low-single digits. Spot contract rates are above contract pricing. In our coast to marine transportation sector, equipment utilization remained in the 90% to 95% range. During the second quarter approximately 85% of the coastal revenues were under term contracts unchanged from a year-ago levels. Demand for coast-wide transportation of refined products, black oil and petrochemicals remained consistent with the first quarter.

With respect to coastal marine transportation pricing term contracts that renewed during the second quarter increased in the mid single-digit percent range. In our diesel engine services segment, our marine diesel and power generation markets experienced stable demand in most regions of the country, but there continues to be weakness in the supply vessel and offshore rig market in the Gulf of Mexico.

Our land-based Diesel Engine Services market remains challenging. Demand for serviced parts and distribution was relatively stable during the quarter but at reduced levels relative to 2014.

During the 2015 second quarter, we continued to execute on our share repurchase authorization buying approximately 530,000 shares for approximately $41 million or $76.99 per share. We continue to repurchase shares in the month of July with purchases that totaled 477,000 shares at an average price of $76.20.

July's purchases brought the repurchases since our first quarter call on April 30, to just over 1 million shares. Since we started repurchasing shares in late 2014, we have repurchased approximately 4.3% of our outstanding shares. Currently our unused repurchase authorization is 2.5 million shares.

I will now turn the call over to Andy to provide some detailed financial information before I come back with a discussion of the outlook.

Thank you, David, and good morning. In the 2015 second quarter, marine transportation segment revenue declined 7% and operating income declined 16%, as compared with the 2014 second quarter. The decline in revenue in the second quarter, as compared to the prior year was primarily due to a 36% decline in the average cost of marine diesel fuel.

The marine transportation segments operating margin was 22.8%, compared with 25.4% from the 2014 second quarter. The inland sector contributed approximately 70% of marine transportation revenue with the coastal sector contributing 30%. Inland marine operating conditions were challenging during the quarter due to high water conditions and lot closures in the river system as well as high cross currents at several places on the Gulf coast. Despite these challenges, the inland sector generated an operating margin in the mid 20% range. The second-quarter results for inland marine also reflected the anticipated year-over-year negative impact of $0.03 per share for higher pension expense, reflecting actuarial changes to mortality tables and a lower discount rate.

In the coastal sector, we experienced a heavy shipyard cycle in the second quarter as mentioned on our April conference call. With the 36% decline in fuel prices and a number of vessels in the shipyard, revenue in the coastal sector declined. Pricing on contracts renewing during the quarter continued to improve as David mentioned. Higher maintenance expense during the quarter ongoing impacts from higher wages, higher deferred dry dock amortization and increase and depreciation expense led to a year-over-year decline in the coastal sector operating margin which was in the mid-teens. Also impacting the coastal operating margin was the hiring of new crew members for training and preparations ahead of the delivery of our new 185,000 barrel ATBs.

During the 2015 first half, we took delivery of 35 new tank barges in addition to the six pressure barges we purchased in the first quarter increasing capacity by approximately 560,000 barrels. We retired 13 tank barges, removing approximately 220,000 barrels of capacity. The net result was an addition of 28 tank barges to our fleet, and approximately 340,000 barrels of additional capacity.

For the second half of 2015, we expect to take delivery of three 30,000-barrel inland tank barges with a total capacity of approximately 90,000-barrel. Combining these additions with our current planned retirements for the second half of the year of 12 barges with 150,000 barrels of capacity will result in an approximate capacity at the end of the year of 18 million barrels, a reduction of 60,000 barrels from our current capacity.

In the coast-wide transportation sector construction of the four coastal articulated tank barge and tugboat units continues to progress with the first unit a 185,000 barrel 10,000-horsepower ATB expected to be delivered and in service sometime during the 2015 fourth quarter. Our second new offshore vessel, also a 185,000 barrel ATB, is likely to deliver early next year. We continue to expect delivery of the third and fourth vessels, both 185,000 barrel ATBs in late 2016 and mid 2017, respectively.

Moving onto our Diesel Engine Services business, revenue for the 2015 second quarter declined 31%, and operating income decreased 66%, compared with the 2014 second quarter. The segment's operating margin was 4.2% compared with 8.4% for the 2014 second quarter. The marine and power generation operations contributed approximately 40% of the Diesel Engine Services revenue in the second quarter with an operating margin in the low to mid double digits.

Our land-based operations contributed approximately 60% of the Diesel Engine Services segment's revenue in the second quarter with a negative operating margin in the low to mid single-digits.

On the corporate side of things, our cash flow remains strong during the quarter, which helped to fund our marine equipment construction plans and $40.8 million of treasury stock purchases during the quarter.

Subsequent to the quarter, we purchased an additional 477,000 shares for $336.4 million. Any future decision to repurchase stock will be based on a number of factors including the stock price, our long-term earnings and cash flow forecast as well as alternative opportunities available to deploy capital including acquisitions.

Our 2015 capital spending is still expected to be in the range of $315 million to $325 million, including approximately $70 million for the construction of 38 inland tank barges and three inland towboats, expected to be delivered in 2015 and approximately $95 million in progress payments on the construction of the new ATBs.

The balance of $150 million to $160 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities, as well as diesel engine services facilities.

Total debt as of June 30 was $808 million, an $11 million decrease since March 31 of this year and a $91 million increase from our total debt of $717 million on December 31, 2014. The increased debt was primarily due to the acquisition of the six pressure barges in the 2015 first quarter and treasury stock purchases during the first half of the year. As of today, our debt stands at $820.1 million. Our debt-to-cap ratio at June 30 was 26.4%, compared with 24% at the end of last year.

I'll now turn the call back over to David.

Thank you, Andy. In our press release, we announced our third quarter guidance of $0.95 to $1.10 per share and for the full year 2015, we slightly narrowed our guidance to $4.10 to $4.35 per share.

With respect to the inland market, our third-quarter guidance reflects the assumed effects related to high water conditions in two separate closures of the Illinois River that we experienced in July, all of which are somewhat unusual for this point in the summer. We are assuming normal seasonal weather patterns for the remainder of the quarter and that utilization remains in the 90% to 95% range.

With respect to inland pricing, we expect a similar trend as in the second quarter. Although contract pricing has been impacted by uncertainty related to future barge movements of crude and condensate, since the second half of 2014, we believe the number of barges moving crude has fallen 30% to 40% and the industry has absorbed these barges and is still operating in the 90% to 95% range.

In the coastal market, supply and demand remains imbalanced which is supporting higher pricing on term contracts. The decline in crude oil prices is not having the same impact on contract pricing in the coastal market that we have seen in the inland market. Though some impact from lower crude prices is possible, demand for refined products -- the sector's biggest product trade continues to be quite strong. This is reflected in some recent macroeconomic statistics including new record highs for refinery operating rates and total miles driven. The coastal transportation portion of our business will be impacted by continued shipyard activity in the third quarter.

For our diesel engine services segment, and our land based sector, we expect the market to remain challenging for the remainder of the year and our guidance does not include any substantial change from the guidance we provided earlier in the year.

However, with a dip in the WTI or West Texas Intermediate Crude below $50 a barrel here in late July any recovery in the business has likely been pushed out further into 2016. As such, we continue to look at further cost reductions for this business in preparation for a more prolonged pressure pumping market downturn.

In our marine diesel and power generation markets, we continue to expect this business to earn an operating margin in the low double-digit percentage range for the year, although we expect revenue and profit to be down slightly due to the weakness I mentioned in the Gulf of Mexico oil services market.

For our full-year guidance, the difference between the low end and high end of our range is related primarily to inland marine transportation pricing. The low end of the guidance range also includes weaker than expected results in our land based diesel engine business.

As we've said in prior calls, while we expect 2015 earnings to fall below 2014, we expect our cash flow to remain strong. We continue to invest our strong cash flow in maintaining our inland and coastal equipment and we will continue to look for attractive opportunities to invest the capital in our equipment or through potential acquisitions or stock repurchases.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions). We have a question from Gregory Lewis from Credit Suisse.

Yes, thank you and good morning.

Good morning, Greg.

David, as we think about the inland and the coastal businesses, I mean both seem like utilization continues to be firm but it seems like on the inland side at least pricing continues to remain under pressure due to a slowdown. It sounds like in the crude business. And I guess I'm just trying to understand why the same driver of crude is helping you drive the coastal business higher. So if you could just sort of --it seems like the weakness in one isn't affecting the other.

Yes, dear, I think it's the way crude is being moved around but clearly this is overhang on inland side is being absorbed. As you've heard it's almost half of what it was year ago. We've been absorbing the barges. So perhaps this pricing overhang that we're seeing with contract pricing mitigates itself with time.

But on the coast-wise business as you recall the larger moves there are refined products and you can look at refinery utilization, it's running maxed out, demand -- we're seeing demand end user demand for refined products is growing I think vehicle miles driven is now at an all-time high. We've had five months in a row I think of strong uptick. So the move around of the coastal business is still pretty robust.

Now in our business, it's regional moves on the water for the coast-wise business and that isn't been displaced by some of the pipelines that you've seen in the inland sector that have come on. So things are -- it's just a little bit different market if you will. Okay?

Okay, okay, great. And then just as I think as we think about your bought back some stock, generally it sounds like you are always weighing the ability to buy back stock and look at acquisitions. Has anything changed on the acquisition front in the last couple -- in over the last quarter? Is it kind of the same? Do we get the sense that with the weakness in the commodity price there's potentially an opportunity in the medium term for acquisitions to start to service or are we kind of in this holding pattern?

Yes, as you know, it's difficult to predict acquisitions but I'll just say this. The choppier it is the more difficult it is, the more likely you are able to get an acquisition at a reasonable price. So, this period is probably more positive than it's been in the last several years because we've had a very strong upward price moving market.

But we may need more pain before we could get acquisitions but we'll see. It's just so hard to predict. We're always talking to somebody and there's always possibilities but we're going to stay disciplined and see where that goes. Meanwhile, we've got the ability to buy back our stock which clearly you saw we found attractive during the second quarter.

Absolutely. Okay, hey thank you very much and have a good summer guys.

Thanks, Greg.

We have a question from John Chappell from Evercore.

Thank you. Good morning, guys.

Good morning, John.

David, thanks for the commentary and a little bit more transparency on the pricing side. I guess so we are just still trying to figure out is just the pace of the pricing pressure in inland. So is it possible to kind of compare as that 30% to 40% of this crude oil barges have entered the market, what the tone is and maybe what the pace of contract declines look like relative to three months ago and six months ago?

Well, six months ago we were still flat on pricing. So three months it's about the same as it was three months ago.

Yes, it's a little paradoxical because we are seeing contract -- excuse me -- spot prices above contract prices and we're essentially 90% to 95% utilized in the industry. So contract prices should be going up right now. It's this hangover. It's a bit of an anomaly and Joe will tell his 35 to 40 years in this business is not seamless.

Joe, you want to make --

I'll just comment on that for everybody. It's surprising to us that contract prices are going down while spot prices are slightly up from where they were, let's say, two months ago. And the gap seems to be widening. So why is that? And I think to get pricing momentum on contract renewals, you need two things. You need equipment utilization to be at levels where they are today, but to need -- the belief that the market is going to continue to improve and support those continued utilization levels. What's absent here is the belief that the market is going to continue to improve.

Having said that, as David pointed out, we've had a lot of returns into other products of equipment that was dedicated to crude oil and that equipment has been absorbed, and I frankly think will continue to be absorbed. And what you have in the market are new operators that really don't like spot exposure, either because they're not equipped, from an organizational perspective, to work in a more dynamic market that are looking at rates that are still pretty acceptable, and they're committing their equipment for the next year at those rates. I think that once the market believes that the return of crude oil equipment is stabilized and its being absorbed I think then you'll see some pricing momentum going the other way.

That's very helpful. From a follow-up, I just wanted to ask about the shipyards little bit and the capacity. What's the delivery schedule look like today in this kind of overhang type environment relative to the last couple of years? And with steel prices down, are the shipyards becoming more aggressive under marketing as they are concern that even in a kind of softer price environment there may be a rush to build and modernize the fleet?

Yes, no. The shipyard build, well, for 2015 is down probably on the order of a 100 barges from what it had been last year. And most of those barges have been delivered. I know we've taken -- we had I think 39 barges on schedule for delivery this year. We've already taken hold, but I think four of them. And so the industry has taken much of the new build equipment already. And as I said, it's down this year quite a bit, probably 30% lower this than it was last year.

And 2016, we haven't heard much at all about 2016's order book, but that generally doesn't happen until late summer, early fall anyway. So that's a positive that this market has maybe slowdown some of the building and so we're pretty optimistic about that on the supply side of the equation.

Great. Thanks a lot, Dave and thank you, Joe.

Thanks, John.

Our next question comes from Jack Atkins from Stephens.

Good morning, guys. Thanks for the time.

Good morning, Jack.

So I guess David, when we think about spot pricing being above contractual pricing, typically that's a good forward indicator of where contractual pricing is going to go. And then we call it 12 to maybe 15, 18 months away from an influx of volumes from this petrochemical expansion here in the United States.

So, I guess as you look out over the course in the next year, year and a half, I mean at what point do you think your customers are going to -- want to start locking in capacity for what would likely become a much more -- a much tighter market over the next couple of years?

That's a good question. Short answer is we don't know. But clearly our customers have seen a big change in commodity prices and they're adjusting, they are thinking too, right? Everybody's kind of resetting what's going on with the commodity prices and trying to adjust their thinking about sourcing and whatnot. So that could be part of what's going on in terms of reluctance to term up things in the short term. Also, there's a view that maybe there's more equipment available later.

Once as these crude barges, the barges moving crude and condensate continue to shrink and that overhang goes away, it will become increasingly more obvious that we're going to stay tight. And as you say, we've got this petrochemical potential that's out there in a year or two that could add additional demand.

But it's hard to pinpoint the timing, Jack, but directionally I think what you're saying is right, demand is going to continue to grow and sooner or later the barges that are no longer going to move crude are going to be -- will reach in equilibrium. I think you'll always move some crude by barges, but it's just at what level.

And David, just to add to your comments, I mean, you are having conversations with customers about their future requirements. Those conversations that have been ongoing for, I think, the last quarter or two, but there more to come. It's not that you're not talking to people. You're talking to people about their requirements. But the requirements are far enough in the future that they're not willing to begin to commit to equipment.

Okay. That makes sense. And then, David, I guess, when you think about the Jones Act tanker market, it seems like the build rates in the Jones Act tanker market are actually pretty significant over the next couple of years. Would you guys are willing to share your thoughts on the potential impact that could have to your coastal barging business? It seems like those are two very different types of assets, but we'd curious to know if you think that could impact what you guys are doing there?

You're correct, Jack. There are two very different types of assets. Our barges -- we go from 30,000 barrels up to 185,000 barrel in size and our barges in the tankers, MR tankers are 330,000 barrel. So it quite a bit different in size and the access that the tankers versus the barges have in terms of customers, docks and unloading and tankage facilities.

So, by and large the barge business, the coast-wise barge business is regional in nature. So we could be on the East Coast going from Delaware Valley up to the New York area or West Coast Washington, between Washington and San Francisco for example, and in the Gulf Coast could be as simple as Houston to New Orleans or Corpus to Houston, very regional in nature.

The MR tankers, they're ships. They're built to go faster and carry large volumes. So their move -- their most economic moves are the long-haul moves for example, Corpus Christi to the East Coast to one of the refineries up in the Delaware Valley, where typically we wouldn't play in that type of move, so it's a different market. You are right. There are number of MR tankers coming out in the next year or two, but it is a completely different market.

Okay, great. Thank you, David. And one quick housekeeping item. Andy, I noticed that taxes in the marine segment other than on income took a step up. Could you maybe help us sort of dig into what's driving that? And also what's the go-forward share count we should be using?

Yes. The taxes went up, if the waterways use tax which would went into effect in April which it ends up on our taxes other than income line, but that's a pass-through. So, it did go up, but it's not a profitability issue.

Okay.

On share count going forward, for the year we're projecting as for the share count will be a $55 million number.

Okay, okay. Thank you, guys.

Yes.

Thanks, Jack.

We have a question from John Barnes from RBC Capital Markets.

Hey, thanks for taking my question. Dave, going back to your comments on the shipyard, just one point of clarification, when you said the shipyard for 2015 was down 100 barges, you're talking entirely on the liquid side, correct?

Yes. That's the liquid inland barge though.

Okay. Very good. Thank you. A couple of things here. Number one, you talked about acquisitions on the marine side of the business, obviously you guys do a pretty good job of buying at the trough, I would argue that the land based-diesel business is clearly getting close to a trough. Could you talk a little bit about maybe an appetite there for potential acquisitions maybe try to grow that business a little bit through acquisition and scale it up even given the volatility it's in?

Yes. I think on that business as we've seen its very volatile and before we do any consolidating moves and I'm not sure we would in that space, we want to get to where our cost are most are much more variable and where we can scale that business up and down quicker. And until we are comfortable with that I think we'd stay away from acquisitions in that land-based pressure pumping business. That said, we're working on facilities and our scalability in that business, and right sizing, because it sounds wrong, but it more enhancing our scale up and down as demand moves around there.

Okay. All right. Very good. And then, maybe going of the back of a prior question, talking about the outlook on the Petrochem side and you guys elaborated to it with the lower feedstock cost and being in that positive for your customer base. You know you've got the shipyards producing less this year. You've got the industry taking or potentially retiring more than they're taking. I mean you guys are even talking about being down slightly on a total capacity amount this year. I know it's modest, but as you view maybe some slowdown in capacity growth versus what's coming on the volume side from this petrochemical build out, how long do you think the industry could be at a capacity deficit? And how long would it take -- what do you think is the likelihood of kind of a timing of correcting that? Is it a multiyear period in order to catch backup if they get behind or is it something that could be can be righted relatively quickly?

Yes, I think the shipyards have proven that they can ramp up and build capacity. I would just say that this chemical build out is long term in nature. These plants are going come on starting late next year and through 2020, and so hopefully we don't overbuild in anticipation of that and the addition of these chemical plants is ratable enough where the market will be rational and supply and demand will stay in good balance. We're pretty tight now, so I think this pause that we have is good because it sets up the next upside for pricing which could start -- it's hard to predict but certainly the onset of these new chemical plants could help facilitate that next step up in the long-term pricing cycle.

Okay. All right. And then lastly, on the share buyback, we saw in the quarter, debt levels were slightly elevated, your debt to cap is up a little bit. You still have obviously a tremendous amount of run rate on that metric alone. It seems to us like maybe some of that incurrence of debt was even partly to fund the buyback. Given where the stock is, the fact that you've kind of dipped your toe in on buyback activity, are you comfortable levering up the company to be more aggressive with that if it does take a longer to find maybe some acquisition targets on the marine side? I mean, how comfortable are you in maybe taking on some debt given where it seems to us like the stock price today maybe your own stock is the most appealing investment at this point?

Yes, no. Clearly, we've got a lot of balance sheet capacity and no problem using that balance sheet.

So far you saw the statistics Andy gave in the second quarter. Our debt was actually down $11 million from the first quarter. Now in July, we bought back a nice slug of stocks that took it back up a little bit. But typically in our cash flow generation cycle the second half is the strongest in terms of cash flow. So we've got plenty of cash flow as you saw we like our stock where it was priced and we always have that option. We're not going to force out exactly when we're going to do, but clearly we're not shy about using our balance sheet.

Very good. Thanks for the time, Dave. Appreciate it.

Yes. Thank you, John.

We have a question from Kelly Dougherty from Macquarie.

Good morning, guys. Thanks for taking the question. Apologies to keep harping on this pricing thing, but you're just -- I think you've mentioned previously that the contracts was your largest inland customers did really come up for renewal in 2015. And I know it's really but you can help us think about how much of that revenue does come up for renewal in 2016? And if you've had any early talks with those customers either or are they may be trying to revisit at early because you see what's pricing happening now or have they given you kind of any indication of whether thinking about for next year. Just trying to get a sense of whether you expect pricing to kind of stabilize and flatten into 2016 or maybe move higher or maybe it just too early to make a directional call even?

Yes. It's too early to make a directional call in 2016, but we stay high tight like we are, it could be positive.

I would say this. Every customers is a little different and every contract is a little different and your approach each one a little different in terms of talking about, but we're talking to our customer all the time. So when we have contract renewals we're talking about how that's going to look and talking with them about their future needs. As they change, their needs change all the time.

So it's not a bright line kind walk in the door. Okay, now it's the contract thing. It's more of a process, as you would expect. We've got long-term relationships with these customers that are really just codified by that contract. These are relationships of helping them and providing them a service. So it's not a bright line item. But we do to your point -- do have some renewals coming up in 2016 and 2017. We're already in discussions with customers about how that might.

Is there a concern that -- correct me if I'm wrong, I don't think any kind of the big ones renewed in 2015, is there a concern that there's going kind of to be catch up for -- I don't know if you want to put it this way, but what they missed on a downside in 2015? Or these contract renewals kind of really just of kind of typically revolve around whatever the market is looking like at the time that you're being doing them?

Yes. Let me try this. Most of our long-term contracts that are multiyear in nature -- well, all them have escalators. So, by in large the contracts kind of keep up with what the market pricing is, so there's not usually a big (technical difficulty) you can have some catch or give back in any one renewal but its generally not a huge remarking of price.

Okay. No, that's helpful. It's as you think about next year. And then I guess as a follow-up, given some of the uncertainty on the pricing side, have you started to see higher than normal retirement just through the industry of older barges that maybe were kept in service just because pricing was so good for so long? Anyway quantify maybe that the overall impact on capacity. And is that what we've seen helping keep utilization higher than maybe it would be given where the pricing looks to be going?

It's hard to tell what's been retired and what's not being marketed. We get a sense for that annually when they informer does a little industry survey and we get a sense for what's been retired. It's very difficult for us to determine kind of on a real-time basis what's been retired or what's kind of laid up waiting for retirement. We do know our retirements and we're retiring as per our kind of schedule. I would imagine that retirements will be up this year versus where they've been the last three years. But we don't real time data on that, Kelly.

Okay, right. Just one related to that if I can, is there any way to think about your utilization is obviously remained very high, any sense you have or what the industrial overall might be closer to what the industrial utilization levels might be?

We think they are similar. We think they are in the same range that we are.

Okay, great. Thanks very much guys.

Thank you, Kelly.

We have a question from Donald Bogden from Wells Fargo.

Good morning. You touched upon this briefly and mentioned this during your last call that you are cutting cost, reducing staffing in the DES unit. To what extend is that cost rationalization complete and what is the potential to further cut cost on either DES or the inland transportation business units?

Yes, no. Thanks, Donald. We took out over 40% of our manufacturing labor early in the year. We've been taking out more cost, but it's been more of not a broad based to reduction in force. It's been more attrition related as well as is consolidating some functions. We're going to continue to look for opportunities like that.

What you don't want to do is to get rid of really high-skilled mechanic labor for example to use that as an example and not be able to respond to the customer needs when business starts to pick back up. If there is skill set that you -- a core skill set that you got to have. So it's a balance. I would say we're in that kind of balance phase keep looking for ways to take out cost rather than wholesale reductions enforce.

On the inland side again we're constantly looking at our cost structure and taking cost out where we can and where it make sense.

Right. And with that, I mean, generally the age at which you look to scrap time, and as you mentioned during your last question actually that really you're still on schedule. Are you beginning to look at maybe a slightly lesser age at which you use scrap time or generally you're consistent with where you've always been?

Yes, No. It's typically on an inland barge. It's around 35 years on average -- 30 to 35 years when start to scrap it.

Yes. You know we do everything on a case by case basis. You look at the condition of on older barge. You look at what its earnings opportunities are and what it might cost to the extent it's life through another shipyard. And frankly we do what a DCF calculation and make sure we can earn back our capital, if we expand on extending the life. And you got to believe that rationality exist throughout.

So if the cost of extending, can't get paid back, you'll see more retirements. And I think you may see more retirements here given this pricing environment we've recently had.

Right. And just one last follow-up on the dry docking. I mean, did dry docking cost generally gone down as you're seeing steel prices come in or are they relatively consistent?

No. Clearly there's a steel component. You've seen steel prices down 20%, 25%, so that's usually a pass-through from the shipyards though -- yes, that's reflected in when we go into replace steel and whatnot. We get the prevailing steel prices. And obviously when we build new construction, particularly on these four ATVs we're building there are steel escalators and de-escalators and they're based on how steel prices move and the procurement schedule, which the shipyard has.

So yes, prices come down and shipyards with steel price but the labor component and others I think are pretty consistent. I don't think they've change materially.

All right. Appreciate the color gentlemen. Have a good summer.

Thank you, Donald.

We have a question from Steve Sherowski from Goldman Sachs.

Yes. Hi. Good morning. Apologies if I miss this earlier. But are there inland barges that are still on crude and condensate or (inaudible) on an industry level. Give any sense of what percentage is in light versus heavy crude service? And I'm just trying to get a better sense of how of the existing capacity can still be relatively and expensively repurpose to serve different product types?

I don't have a definitive percentage. The Eagle Ford crude is wider. Some of the Marcellus and Utica crude is lighter so that's probably good portion of the barges. So those barges could be cleaned up fairly easily. I think the heavier crude is coming from Canada and stuff that those are little harder to clean up. But in terms of percentage I don't have a percentage for you, but I would say that its reasonably fungible to clean those barges up and put them back into service.

Got you. Okay. And then looking at longer term, I know there is large Bakken pipeline and development that would deliver crude into Netherlands and East Texas and that continue to be talk about cap line being reversed which will deliver crude into the Louisiana Gulf Coast refining market. I know that your crude volumes in the inland segment are now pretty small, I'm just trying to get a better understanding of what the risk or even potential opportunities as this poses to your coastal business and so these locations that represent a fairly large water point, delivery points and recognize its part more Louisiana than East Texas?

Yes. I'm not sure, it would be much of risk. Yes, most of the inland moves from the upper river down to the Gulf Coast have gone away anyway with the Flanagan South and Seaway pipelines, and Bakken -- more Bakken down to the Gulf Coast would put more liquids into the refineries down there which the more liquids you have generally that means more barges movements.

Now in the coast-wise, if that Bakken doesn't go by unit train to the East Coast for example to the Hudson, you may see some of those moves change. There are some barges moves that come down from all beneath down into the New York refinery area or all the way down to the Delaware Valley area.

But those refineries are going to have to source crude from somewhere. And if it doesn't come from the Bakken down the Hudson for example, even if it comes in from abroad on print on a tanker those tankers can get into most of those docks and you'll have barges that are lightering the crude and taking into to those facilities.

So I don't know if I've answered your question, but not particularly worried about risks with that new pipeline that you're asking about. There can always be transportation shifts that happen because of those new pipelines and sometimes it difficult to think exactly how everything will shift around.

Got you. That's helpful. Thank you.

Thanks, Steve.

Our next question comes from Ken Hoexter from Merrill Lynch.

Great. Good morning. Hey, Dave and Andy, if you can talk a bit about ton miles were down 3%, ton miles per barge drop 7%, yet utilization was in 90%, 95%, can you [stress]

that a bit is that a mix shift or maybe talk about what's going on there and if that's impacting pricing as well?

No. That really hasn't impacted pricing, it just a mix shift. And as you know those revenue per ton mile can move around quite a bit. Some of it have to do - in ton miles specifically some of it has to do with delays and weather and again where everything is working, but it's really is the mix shift.

So, just a couple of rapid fire ones, but the barges you mentioned that remaining crude you said I think Dave you mentioned 40% have swapped over or ready, can you talk about how much you think are still are left on the crude trading and could come back in?

Yes, sure. We think late last year we're around 550 barges. I think right now we think it's -- again we don't have perfect information here, as you know, this is an our estimate, but we think its somewhere between 325, maybe two, three, 53, 75 still in crude service.

Okay. And then --

So that's to call it 350, but I don't think all those barges would ever come out completely out of crude service. But that's the order of magnitude of the number of barges remaining.

Thanks for that. And Andy on the coastal, can you walk through the impact of dry docking for the quarter, was it about $16 million of revenues and what's to come in the third quarter?

You may be talking about the shipyard.

Sorry, yes.

Yes. In terms of revenue, the revenue, the revenue was probably off -- I wouldn't say it was $16 million. It was probably little less than that. And going forward into the third quarter, it will probably be a pretty similar look in story.

A lot of the revenue decline that you're seeing in the coast-wise business was due to the fuel effect. There's a little bit of dry docking in there, but in general, dry docking probably ended up falling down to the bottom line. You know I would say it was probably during the quarter it was $2 million to $3 million number in terms of shipyards.

Wonderful, helpful. And I guess for a bigger picture follow-up. I guess, if your ton miles don't make the difference and that was a mix changes you answered before, yet utilization is still 90%, 95% on the inland. Why do you see pricing coming down mid single-digit? Is it more -- I just want to understand that going back to said originally. Is it more just the perception of the -- whether it's the crude barges coming in or the perception of excess capacity versus what you're actually seeing if utilization stays in that range? Just because of utilization doesn't move what forces that pricing move down? Usually when utilization comes down, that's when you free up on the pricing side?

Yes. I think, Ken, it's the combination of a number of things.

One as Joe mentioned, it's the perception of the customers that may be more availability later, one.

Two, it could be -- if you're a -- just using an example, MLP and you've just got -- just had 15 crude barges returned to you and MLP wants steady kind predictable cash flow, that just say, hey look, let's just take a discount, we're still at a pretty good rate. Let's just take a discount, put them to work for another year or it could -- same token it could be private individual who says, well, that's still a pretty good rate. I'm not going to fight it. I don't have a sales force out there pushing barges and helping customer's every day. It still supports my lifestyle, I'll just take a little haircut and put them away for a year.

So there's a lot of that dynamic going on as these crude barges are returned, so it's put kind of a downward pressure on contract prices. But when the customers start to look for barges, you kind of one-off and they find that the market pretty tight and that's why spot prices are going up. So it's got a -- they're going to come together at some point.

Hey, Ken, real quick, just to clarify my comment as well. Those shipyard numbers that I gave you were sort of incremental to last year, so that's kind of over and above what we've seen in the past.

Thanks for the time, guys. Appreciate the insights.

We have a question from Kevin Sterling from BB&T Capital Markets.

Good morning. Good morning. Thank you, gentlemen, for your time. And David and Joe, I really do appreciate all the color you gave on pricing. It's very helpful and particular Joe with all your experience.

But can I - I don't want to be the dead horse here, but I'd like to ask the pricing question take a different angle and go it a different way. Do you think that the recent increase we've seen in spot pricing, do you think some of that might be weather related particular with high water, shortening [toes], et cetera may have temporarily pushed up spot pricing or do you think that spot pricing increase we're seeing now is little more sustainable? So just like to get your insights and kind of maybe what's been driving spot pricing higher or has it been weather related?

Yes, no. That's a good question and certainly some of that happens because as weather and lock delays and the Illinois is closed, it does put some artificial demand -- artificial is probably the wrong word -- but it does reduce the barge availability which makes the market tighter, so there is some of that.

But as summer goes on, summer is always better than the winter in terms of the impacts of weather and you still stay pretty busy. It's good. But to your point July was a rough weather month and that did help tighten up the market a little bit, but I would still say that the demand is out there for barges and it still pretty tight.

Yes, yes.

Hey, Kevin, I'm just from a historical perspective. You typically see utilization deteriorate during the summer, but it doesn't affect your earnings because you're operating so much more efficiently. So you kind of go into the summer utilization ticks down a little bit, then you get to the fall, it ticks up a little bit and the earnings are about the same and the reason they're about the same is really efficiency versus kind of the rate impact of increased utilization. Increased utilization typically drives rates up.

This summer has been a pretty messy summer in terms of delays, but as you get into the fall it -- I think that the natural delays of tougher weather will continue to keep utilization pretty high.

Got you. Thank you Joe and David that's very, very helpful.

And let me come at it a different way to on the contract side of pricing. And correct me if I'm wrong, and I'm not mistaken most of the new equipment that had been built and put into crude trade were 30,000 barrel barges and as those have been repurposed in put into to other trades while its more barges but effectively it's a lot more capacity on a per barrel basis. So is that kind of impacting shippers sentiment as we look and see, yes it's more barges but on a per barrel basis it's a lot more capacity on a per barrel basis. Is that having some impact on the contract pricing being weak?

Well I don't think it's so much the shipper's sentiment. I think the shipper is just taking advantage of operators who are willing to give them equipment at lower rates because the rates are still pretty good and they just don't want to fight. They are much more dynamics spot market. You know I think what's encouraging is the point that David keeps making and that is that you had all this equipment in crude oil service and suddenly we are getting it back but utilization is still in the 90% to 95% range, so it's being absorbed.

Got you. Okay. Thank you so much and have a great day. And by the way I like the functionality and effects of the newly redesigned website looks great.

Yes. So that's just for Sterling.

It was, yes, he did a very good job with that. I think you are expressing a widely held sentiment there, Kevin.

Operator, I think that's all the time we have.

Thank you, sir. At this time I would like to turn the call back over to you for any closing remarks.

We appreciate your interest in Kirby Corporation and 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. We thank you for participating. You may now disconnect.