Welcome to the Kirby Corporation 2012 Fourth Quarter Conference Call. My name is Allen and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.
I will now turn the call over to Steve Holcomb. Mr. Holcomb, you may begin.
Good morning. Thank you for joining us. With me today are Joe Pyne, Kirby’s Chairman and Chief Executive Officer; Greg Binion, our President and Chief Operating Officer and David Grzebinski, our Executive Vice President and Chief Financial Officer.
During this conference call we may refer to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at kirbycorp.com in the Investor Relations section under non-GAAP financial data.
Statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management’s reasonable judgment with respect to future events. Forward-looking statements involve risk and uncertainties. Our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby’s Form 10-K for the year-end December 31, 2011, filed with Securities and Exchange Commission.
I will now turn the call over to Joe.
Thank you, Steve and good morning. Yesterday afternoon we announced fourth quarter earnings of $1.03 per share including a $0.09 per share credit decreasing the fair market value of the earnout liability. The liability associated with our acquisition of United Holdings in April 2011. Despite this credit, we exceeded our guidance range, if you take the credit out of $0.83 to $0.93 per share.
For the year, even with the collapse of the land-based pressure pumping business, we still achieved record earnings of $3.73 per share or a 12% increase when you compare our $3.33 per share for last year which again were record earnings for the company.
In the 2012 fourth quarter, our inland tank barge business maintained high utilization rates with consistent and healthy levels of demand across all our markets. Low water conditions in the Mississippi River did continue to affect our operations during the quarter forcing us to light load cargo for cargo destined to Northern parts of the river system and making us a little less efficient because of the longer transit times and the reduced cargo levels.
Among other achievements for inland operations during the quarter, we executed the renewal of a multi-year contract with options with one of our largest customers ExxonMobil. In our coastal fleet, we experienced improvement in demand in all markets during the quarter. The fourth quarter historically is a little slower given the seasonality of this business. We attribute this to a combination of tighter capacity from new demand for coastal transportation of the crude oil and natural gas condensate, but also to higher heating oil demand associated with cooler weather in the Northeast during December.
We are also working more for inland customer base; this is encouraging. These are inland customers that have coastal requirements. As many of you are aware, we made the decision last year to invest more capital in our coastal fleet in 2012 and frankly for the next couple of years to bring our coastal equipment up to our internal maintenance standards. We think this investment will pay long-term dividends principally because it allows the fleet to meet the vetting requirements of our major inland customers, but it also makes it more reliable.
In our land-based diesel engine business, the market for new pressure pumping units continues to be very weak and is the primary factor of the decline in overall diesel engine service revenue from last year. Year-over-year revenue decline was a result of a significant reduction in orders for manufacturing in our land-based business. Also experiencing a decline in the sale of engines transmissions and parts; partially offsetting this decline in manufacturing is an increase at remanufacturing and maintenance of existing pressure pumping units.
The remanufacturing business is significantly more specialized and labor intensive than our manufacturing business. We continue to make progress in reducing the number of man hours required to service this equipment. We are not satisfied yet with our performance, but we think we are making good progress. While 2013 starts out to be a year of uncertainty over drilling activity with overcapacity in the US pressure pumping market, we are confident in the long-term strategy of growing the service side of this business and making this business more stable and predictable. The overall demand for new and remanufactured oil service equipment may yet improve later this year; we’ll see.
We spend a lot of time last year explaining this business; I thought it might be helpful to just summarize here where we are currently with United; this is our land-based diesel engine service business. We are moving United to a service platform which will principally maintain pressure pumping equipment and as demand returns manufacture this equipment to meet new and replacement requirements. We will also focus on continuing to expand this business’ existing supply and distribution business and also our compression service business which manufactures compression equipment for natural gas transmission and electric utilities; you know perhaps a good way to get your arms around this business as it currently situated is United which is this land-based diesel engine business for 2013 is going to be around 5% of our total forecasted EBITDA.
Our legacy diesel engine service business reported slightly lower operating results during the quarter; while overall market conditions were generally stable across the majority of the marine markets, the low water conditions on the Mississippi River did delay several of our Midwest customers to differ several maintenance projects into 2013. Power generation market benefited from strong power sales and engine generator setup great projects during the fourth quarter.
I am going to turn the call over to Greg who will discuss our inland tank barge markets and then to David who will discuss the coastal tank barge market and also give you a financial update. At the end of the call, I am going to come back and make some comments about the first quarter outlook and the 2013 year outlook.
Thank you, Joe and good morning to all. For the third quarter, our inland marine transportation sector continued to perform well with equipment utilization in the 90% to 95% range with continued favorable determents by contract pricing. Low water conditions on the Mississippi River which began in May of last year persisted through the fourth quarter and into the 2013 first quarter reducing our volumes and increasing costs.
However, the situation is currently improving. The first days of rock removal by the core engineers in the affected areas between St. Louis, Missouri and Cairo, Illinois will be completed soon and the core engineers advises that the second and final phase should be completed in early February. The rock removal will allow us to transit this area with deeper drays at a given river stage. Additionally, December and January rainfall in the Ohio and lower Mississippi River basins have improved water levels in both areas.
Having said that, the Midwest is still in the drought and future droughts will be contingent on precipitation in the Midwest in the form of both rain and snow. Looking forward to the beginning of the second quarter, spring time does typically bring increased precipitation in the Midwest. Additionally, the Corps of Engineers increases flows on the Missouri river in the spring to support the navigation season on the Missouri river.
These seasonal events should improve the operating conditions in the St. Louis and Cairo areas around the beginning of the second quarter. Inland marine transportation revenues from our long-term contracts that is one year or longer in duration were 75% of total revenue with time charters comprising 59% of revenue.
Turning to the inland marine transportation pricing, during the second quarter, term contracts continued to renew at the mid single-digit level when compared to the 2011 fourth quarter. Spot contract prices which include the price of fuel were stable to slightly higher when compared with the 2012 third quarter spot rates.
Moving to capacity, during 2012 we took delivery of 56 new tank barges totaling 1 million and 58,000 barrels of capacity and retired 55 tank barges with 910,000 barrels of capacity. In addition, we completed the transfer of four coastal tank barges to the inland fleet adding 91,000 barrels of capacity or a net capacity addition of 239,000 barrels.
We also added the line belt fleet as 17 tank barges with 243,000 barrels of capacity and remind you that this is a fleet that we provided the towing services prior to the acquisition of these assets. So net-net, during 2012 we added 22 tank barges to our fleet and increased our capacity by 483,000 barrels.
As of December 31, we operate 841 tank barges with a capacity of 16.7 million barrels of capacity. We also took delivery of five 2,000 horsepower inland tow boats in 2012. Our 2013 inland transportation construction program will consistent of 55 inland tank barges with a total capacity of 1.2 million barrels and three tow boats.
Payments for the new inland tank barges and tow boats delivered during 2013 will be approximately $115 million. At the present time, we expect to finish 2013 with approximately 17.2 million barrels. As was the case in 2012, we don't think the added capacity will negatively impact the supply and demand balance in 2013 given the increasing overall demand in the petrochemical, crude oil, black oil and refined products markets in the expectation that the industry will continue to retire some older barges.
I will now turn the call over to David.
Thank you, Greg. Kirby offshore marine’s overall equipment utilization improved to the mid-to-high 80% range during the quarter and some days even higher than that. As Joe mentioned, all of the coastal markets reflected signs of improvement driven in part by increased demand for crude and condensate moves and also by cooler weather in the northeast.
The improvement in the coastal business is very encouraging, although, we continue to watch the markets closely and look for opportunities to enhance our results in each region. We are making progress with expanding our coastal customer base to our inland customers and on the improvement in the overall condition of our coastal vessels.
The acquisitions of Allied and Penn during the fourth quarter also contributed to our higher results during the quarter. Allied and Penn contributed approximately 5% of the marine transportation segment revenues during the quarter and added $0.03 per share to our fourth quarter results and that more than offset the additional interest expense and transaction fees incurred.
Our 2012 fourth quarter results were negatively impacted by Hurricane Sandy that made landfall near Atlantic City, New Jersey and it did impact our operations along the Atlantic seaboard and in the New York harbor. We did incur some damage to our (inaudible) facility and number of our employees, automobiles that were parked at our facility were damaged and we also incurred some delay days related to the hurricane itself. The financial impact for Sandy for the fourth quarter was about a penny a share, maybe a little more than a penny a share for the quarter.
As of December 31, approximately 70% of our coastal operations revenue was under the term contracts and that compares with 60% for the 2012 third quarter. The balance of course is with spot contract. The improvement represented the addition of Allied and Penn as well as some new contract signed during the fourth quarter.
With respect to the coastal marine transportation pricing, term contracts that renewed during the fourth quarter increased in the high single-digit range and in some cases higher. Spot contract rates were up in the mid-to-high single-digit range as well.
Moving to the financial data, as Joe noted, our 2012 fourth quarter earnings per share of a $1.03 included $0.09 for credit decreasing the fair value of the contingent earnout liability associated with United. This was partially offset by an estimated $0.02 to $0.03 negative impact from the low water conditions Greg mentioned in Hurricane Sandy.
Marine transportation revenues grew 14% and operating income grew 23% over the 2011 fourth quarter. The inland sector contributed approximately 75% of fourth quarter marine transportation revenue and the coastal sector was approximately 25%. Despite the low water issues, our inland operations maintained an operating margin in the mid 20% range for the fourth quarter.
The coastal operation’s operating margin was in the low double-digit range. The overall marine transportation segment’s fourth quarter operating margin was 23.6 which compares with 21.8 for the 2011 fourth quarter. Our diesel engine services revenue for the 2012 fourth quarter was 39% below the 2011 fourth quarter and diesel engine services operating income was 42% lower than the 2011 fourth quarter.
The segment’s operating margin was 10% compared with 10.6% in the year ago quarter. However, if you back out the earnout adjustment, the fourth quarter operating margin for diesel engine services segment was approximately 4%.
The decline in revenue of our operating income and operating margin was due primarily to the lower results from United. In the fourth quarter, United contributed approximately 65% of the diesel engine services segment’s revenue and earned the low single-digit operating margin, if you exclude the $8.2 million credit that was reduced to fair value of the contingent earnout liability.
The legacy diesel engine operation contributed approximately 35% of the segment’s revenue during the fourth quarter and had an operating margin in the high single-digit range. Total debt as of December 31 was $1.14 billion and our debt-to-total capitalization ratio was 39.9%.
Last month we drew $275 million down from our new $500 million private placement senior notes facility to facilitate the closing of the Penn Maritime acquisition. We intend to draw down the remaining amount in conjunction with the February 2013 maturity of our $200 million private placement.
As of December 31, we had a $192 million outstanding under our revolving credit agreements and as of this morning, our revolver’s outstanding balance was about a $165 million. I will now turn the call back to Joe.
Thank you, David. Our 2013, first quarter guidance is $0.82 to $0.92 per share. This compares with the $0.91 per share earned in the 2011 fourth quarter. For the year, our guidance is $4 to $4.20 per share compared to $3.73 for 2012. In the first quarter of 2013, we face a relatively tough comparison. During the 2012 first quarter the level of activity at United manufacturing operation was at a very high level as we worked through our backlog. The decline in this business really didn't begin to occur until the second quarter of last year. So I noted earlier this business segment represents now a relatively small part of our overall business less than 5% of our forecasted EBITDA. It may see some improvement latter half of this year, but we are not going to forecast that on our guidance.
For the marine transportation segment, we are very encouraged by the improvement in our coastal markets. During the fourth quarter of last year and continuing into 2013, our coastal business has seen some meaningful improvement in demand which we anticipate will contribute to not only higher equipment utilization but also improved pricing over the course of this year. In our 2013 first quarter guidance, we include a negative impact from winter weather conditions for marine operations and some continuation of the low water issues on the Mississippi river which have kind of bled over into the first quarter roll the river is improving. However, we anticipate strong equipment utilization and favorable pricing in our marine markets.
Moving to our guidance, the low end of our guidance, the $4 per share assumes that our inland transportation equipment utilization and pricing will be consistent with 2012 and our coastal markets will reflect more modest improvement in both pricing and utilization. It assumes our diesel engine land based market will continue to experience softness throughout the year and our legacy diesel engine business as the marine business will remain consistent with 2012 levels. The primary driver in our high end of guidance that's the $4.20 per share number is tied to the performance of our coastal marine business. The higher guidance assumes that much improved utilization and corresponding higher term and spot contract pricing along with a modest improvement in utilization and pricing for the inland marine transportation business.
Now remember with respect to the inland business, we are currently operating close to full utilization and we are back to the peak pricing levels on this business. For additional engine service segment, our high end guidance assumes that the land based market will continue to experience ongoing softness throughout the year and the marine engine business which includes servicing equipment that is in the Gulf coast and Gulf of Mexico oil service markets and the power generation market will modestly improved.
In summary, 2012 was a strong year for growth in Kirby with record revenue in earnings. We're very encouraged by our recent Allied and Penn acquisitions in the coastal sector, completed late last year and we believe that they will both compliment our current coastal operations as we integrate these companies in to our business, and we think that there are some synergies and cost that we can continue to squeeze out as well as selling opportunities as we service inland customers, coastal requirements.
Currently, the integration of Allied and Penn are on track and they are proceeding as we expected. With respect to our balance sheet, the balance sheet is strong. Our cash flow is excellent. 2012 was the year of heavy capital investment which is a typical for us, as we see an economic and industry recovery. Having refreshed a significant portion of our inland fleet and with an eye of continued cash flow, 2013 should be a year where we pay down debt but still keep position for opportunistic potential acquisitions as they present themselves over the course of the year.
Operator, this will end our prepared remarks and we're ready now to now to enter the question and answer period.
Thank you. (Operator Instructions) Our first question is from Gregory Lewis with Credit Suisse. Please go ahead.
Gregory Lewis - Credit Suisse
David you touched on the coastal fleet a bit. Clearly there has been an increase in the amount of contract, term contracts you have for that fleet and I think you mentioned that went from 60% to 70%. As we think about this fleet over the next 12 months, should we think about that term contract exposure rising or you are comfortable with that sort of 30% type of level of spot pricing contracts?
I think you will see it move up a little bit throughout the year. We ultimately would like to get that fleet about 80% may be 85% termed up, but the markets rising a little bit we are going to go slow and prudently through that but the other thing I would add to that is both the Allied fleets and the Penn fleets were pretty heavily termed up they were in the 90 plus percent range so that actually help the average but it is slowly moving up and we are targeting the 80% range mid-80% range ultimately is where we’d would like to be.
Gregory Lewis - Credit Suisse
Okay, perfect. And then just switching gears over to the inland side of the business; Greg you mentioned that you are taking delivery of about 55 inland barges and clearly the market is tight, utilizations in the high, low-mid 90s, pricing and sort of mid-high single digits. Thinking about that, should we think about retirements of any barges this year in terms of, I think you mentioned that last year you added about 20 to 25. Should we think about the sort of a similar amount of retirements this year or could these really all be incremental?
We will have some retirements as well during 2013. We will have some incremental volume that, when you net out some timing differences that we had anticipated some barges that would continue in services through 2013 just from operational considerations we took, we took out the service in 2012 that our capacity growth should be about the same in 2013 as what we had in 2012.
Greg, most of that is retirement, we are still replacing to fleet and we are adding incremental capacity but we are always careful about that.
Your next question is from Jon Chappell with Evercore Partners. Please go ahead.
Jon Chappell - Evercore Partners
David, follow-up question on the coastal as well, obviously the pickup in demand has driven the kind of acceleration in the fleet utilization. To try to think about the actual broader fleet not just your coastal fleet, but how do you see the trend of capacity based on the current order book for coastal type assets and then the phase out whether they are single haul or 90 related phase outs over the next 12 to 24 months?
Yeah, a good question. We haven't heard of any real new construction being announced in terms of capacity additions in the coast wise business, but there are still a number of single skins out there I think we estimated still around 8% that has to come out by 2014. Pricing is just not where it needs to be to justify new construction yet. But so far it looks like it will stay pretty tight as the crude and condensate help drive demand. Does that answer your question?
Jon Chappell - Evercore Partners
Yeah, it does very well. And my follow-up is probably also for you David, one can you give us the year end cash balance, try to figure out the cash flow statement and then also as part of that what are your assumptions for, do you say your free cash in the 2013 guidance range; I mean with your $175 million to $200 million of capital expenditures you should be generating close to $200 million of free cash, so are you just assuming that's going to be used for debt reduction sitting on the balance sheet or for any acquisitions?
Yeah, its hard to predict acquisitions as you know, but we ended with about $11 million in cash at year-end. Of course, you know our debt position of $1.14 billion in debt at year-end. We expect we will generate maybe in the order of $250 million in free cash flow. As you saw our capital expenditures, they are $200 million, maybe a little lower, EBITDA should be close to $600 million, that should allow us pretty good free cash flow. We will use it to delever for now, but its hard to predict acquisitions; but without any acquisitions in mind, I would expect that we’ll reduce the debt levels. And we never really do forecast acquisitions, its kind of hard to do as you know.
Jon Chappell - Evercore Partners
Right; I was just wondering about these, the cash and the guidance range, if it’s you know taking out 4.5% debt or earning 0.5% of the bank I try to think?
Yeah, we will pay down the debt and as you know our capital structure has a good chunk of bank debt which can be prepaid without penalties and that's one of the reasons we use the bank debt, so we can use that cash flow.
And truthfully, its at such low interest levels that its not as meaningful as it used to be, as you pay it down.
The next question comes from Jack Atkins with Stephens. Please go ahead.
Jack Atkins - Stephens
I guess first off here on guidance, when we think about 2013 from the marine transportation side, so what you are all assuming as far as low water, is that expected to sort of, is that sort of embedded in the guidance going forward or are you expecting low water conditions to essentially be not a factor in the second and the fourth quarters of the year?
Well in our guidance we do not assume that the river is going to be as problematic as it was kind of the latter half of last year. But in the first quarter you just have a number of things that tend to make it less efficient, weather, fog, and potential ice and potentially some more water issues that are continuing on the upper part of the Mississippi River. But I would say that, you know, quarter two through four this year we have in the guidance kind of normal weather, normal operating condition kind of your normal series of small problems on the inland system and in the coastal area.
Jack Atkins - Stephens
Okay, that makes sense and just to follow-up turning to diesel engine side, Joe you mentioned that you expected United to be about 5% of EBITDA. You only think about that, that’s about $25 million to $30 million in EBITDA for the year. But it seems like we're tracking a little bit below that right now just given the fourth quarter levels and just sort of curious, you know, what you all have seen in that business in the last couple of months; it seems like we saw a fairly substantial degradation in performance there from the third quarter. Just sort of curios how you are looking at that in 2013 and sort of what's happened in the last couple of months?
That’s a fair question and a good observation. What we saw in the fourth quarter, the cancellation of a little, but it was mostly pushing out equipment orders that were expected in the fourth quarter into 2013. And we’re forecasting a difficult first quarter. We think that some of that was pushed out into the second half of the year and into the second quarter too, but the service platform is developing; we're pleased with the trend, we are not satisfied with the end result yet, but we think that we are going to get it there.
So, we are being purposely conservative as we project that business, but there is some chance that some manufacturing might come back in the latter part of the year, but we are not going to forecast that; I think that it’s still a pretty dynamic market and I think that a healthy kind of skeptical kind of approach to that business is appropriate right now; that’s going to pass. There is enormous energy development that’s going to occur in this country; I think we are well positioned to take advantage of it.
Yes, we are going to focus on the service annuity part, because we think that it is a more stable, more predictable piece of it; but, when there are opportunities to build some equipment, we will pursue them but we are not going to do it at the expense of customers that we have developed in the service part of the business.
Our next question is from Ken Hoexter with Merrill Lynch. Please go ahead.
Ken Hoexter - Merrill Lynch
Great, good morning. Dave, I want to hit you on the coastal side again, but may be can you talk a little bit about the, I guess you talked about the utilization, may be breakdown by end product, chemical, crude and alike and where is the growth and margin opportunity from your point of view?
Yeah, it’s pretty broad based; as you know we were primarily with KC refined products that the bulk of that fleet was moving refined products. Then of course is black oil and then the allied fleet was chemical and we are seeing a tighten up across all three of those trade lengths if you will. Its I think you know just the availability of coast wise equipment, as you know you can move it around, you can, sometimes you can use different pieces of equipment in different trade lengths, but there is a cost to doing that. So its helped tighten, the whole market is tightened up, as you’ve seen with the utilization.
Ken Hoexter - Merrill Lynch
So is this because of the increase of oil demand coming in that's chewing up a lot of excess capacity or is it each sub-sector is chewing up its own…..?
No, I think its more the former than the latter; I think, yeah the crude and condensate is tightened up the market and that's kind of got everybody looking at what's available and so its more crude and condensate right now.
Ken Hoexter - Merrill Lynch
Great, and then if I can get my follow-up on what drives those high single digit pricing; is that I guess looking at that offshore and marine is it improved utilization, is it the less capacity as your service improvements; what from your point of view is driving that and how much room do you view it as still left to go or is it totally utilization dependent?
Well, utilization has tightened up, its very much like the inland, when you cross that 85% things start to improve from an pricing environment. But remember we are coming off of a very low pricing bottom if you will. So we’ve got a long way to go to get pricing backup to where its sustainable long-term viability for the business, its been low, so we’ve got some room to go.
Ken Hoexter - Merrill Lynch
So would you put kind of a dollar per day rate on that where it I guess the returns need to be at?
Yeah, I don't want to get too specific in terms of dollars per day rate.
So equipment specific can because you got anything from 20,000 barrel barge to 185,000 barrel barge in it and its going to vary based on size of the equipment and the capital you have employed in the equipment. We will think about that because I know that would help you but it will have to be kind of an average number where you could take a series of equipment about the same size and put something together, we will think about it.
Ken Hoexter - Merrill Lynch
And then just I guess to clarify, the first question I asked Dave how often can the equipment move back and forth between, on the barges you can clean them out and spend money to move different products but on when you are talking the close to ice can you shift between the different markets so if the crude continues to scale, can you move some of the Allied or Penn assets over or what does it stay dedicated?
It usually stays, it’s pretty sticky. I mean, to move crude you are going to want to put for example, you want to invest and put vapor recovery on a unit and that cost capital you got to go into the shipyard and you are always going to look for a higher use but its not something we are going to move around a lot.
Yeah, in turn it depends on the type of equipment, Allied is chemical you wouldn't want to move Allied around. You could take a refined products barge; they already have vapor recovery in it and move that to crude pretty easily. Moving to crude is with the right vapor equipment is easy part moving out of it is a little more difficult because you then have to clean the barge. It could be done. It is done. We do it on the inland system but you want to be thoughtful because it’s expensive to do.
The next question comes from John Barnes with RBC. Please go ahead.
John Barnes - RBC
Joe, the commentary around the assumption that the river conditions won't be as problematic as they were in 2012 and 2013 and do you see some other things, the (inaudible) continuing to capture some share on the crude but rail reversal of seaway pipeline, it just seems like there are a lot of things that are kind of piling up in terms of that might change the market dynamic a little bit in your market. Do you have any concerns about the volume shifting a little bit and maybe running into a problem on the inland side where their develops maybe a little bit of excess capacity in the system?
Yeah, you are talking about kind of a typical year as you go into it. This is a business that's just so dynamic; I mean there's always something that's happening with either the river system or hurricane or something. So in terms of your question about river conditions who knows I mean there will be something this year that will be different than what we thought but every year we have something that's different and historically its all in the numbers.
With respect to how the crude oil is ultimately going to play out, I think the first thing I would say is that it's going to be a very long-term process. Shippers are always looking for the most efficient way to transport their cargos and their feedstock and crude oil being a feedstock.
And you are going to see them kind of ultimately solve that equation but it's going to take many years and what's interesting about I think this period is that we can keep discovering new opportunities and we keep creating new transportation challenges and the pipeline for example, is a very implacable way of accommodating this kind of changing situation because you can’t move the pipeline.
I think it is an opportunity for rail I think that rail also provides an opportunity for barge and we're seeing that where rail is delivering, for example, Bakken crude oil to St. Louis to (inaudible), they are talking about and in fact positioning to move it on the West Coast. We think that that’s all marine transportation opportunities.
So, I am not really particularly concerned about it, short-to-medium term, long-term, you just don’t know. With respect to your capacity question, we're building equipment in this business and the equipments being absorbed and that’s something that we watch very carefully because that can be where you get into trouble.
And we are hoping frankly that the rest of the industry is watching it carefully too. So that, if you see around the edges some deterioration in utilization levels that people are going to crank back pretty quickly. And the nice thing about this business is that you typically are looking only about a year out with respect to construction.
So if that happens, you do have barges that will deliver but you can turn it off pretty quickly and John, you have watched this. This is a long answer but you asked a very complex question. You followed this long enough to know that what happened in 2008 into 2009 where you went from a pretty healthy building program to really nothing in 2009 except for the opportunistic building that really we did. So you can crank it back.
John Barnes - RBC
Yeah I guess, the concern I have is you know what I am talking about being near kind of peak pricing again and that kind of thing and that tends to be I guess the point where you start to see decisions being made about what to do to own capacity that’s all I have to worry about is just when you hit that inflection point where somebody makes a decision and okay pricing is good enough we are got to adding aggressively to the inland fleet or something like that, and I am just worried about if one of these limitating factors (inaudible) of some sort kind of eased off with that all of a sudden create some excess and if the orders already placed that’s kind of where I am getting at, so…
Yeah I actually think that’s the right concern. That is the right concern, you want to watch that because excess capacity is problematic, but based on kind of our view through this year, we are not terribly concerned about it, but we certainly worry about it, we worry about capacity being added, but through 2012 and we think through 2013 there is enough volume out there to absorb it.
John Barnes - RBC
One other question, now I am going back what you said about this industry always finds a way to throw something at you, the labor issues at the East Coast ports and the Gulf Coast ports beginning a lot of traffic, do you know especially from a container standpoint, just out of curiosity, do you have any concerns about that’s building over impacting your business either on the inland side or the coastal side, somebody decided to order or pick it or something like that, is there any concern there?
Yeah, I don't think so John. We go almost exclusively to private ports; the concern would be more that particular union is always in the conflict with somebody around the country. You get more concerned if the union that represented one of your major customers was making a lot of noise, we are not hearing that and don't expect it.
The next question comes from Chaz Jones with Wunderlich. Please go ahead.
Chaz Jones - Wunderlich
Just wondered if I could maybe get a little bit more specific on the pricing side and the marine on the guidance, are we kind of to assume that favorable pricing means that contracts are going to continue to kind of renew in the call it 4% to 6% range.
Yeah, its I would say low to mid-single digit range and you could have a size six or as low as two or three, but you are at levels that are really a peak pricing levels, and one of the, this is something I didn't mention in John’s answer but I'm not sure that for the good of the business you don't want to see some capacity coming in and not price it to really unrealistic levels. These kind of more modest levels are levels that suggest that a more sustainable pricing environment that is not going to get you into trouble as quickly as if you were seeing high to high single digit to low double digit increases that we saw really last time the prices were at this level.
Chaz Jones - Wunderlich
And then my follow-up I guess more related to Penn and kind of the timing of the acquisition as it came in at December, the 500,000 shares that were issued those will be more fully reflected in the first quarter and the additional D&A related to Penn should we kind of expect D&A to step up maybe to the $170 million range in 2013.
Yeah, no you are exactly right. Penn, the impact of the new shares will, there's almost no impact in the fourth quarter and then of course it rolls through next year it will be more impactful. Also D&A should be in the 170 to 175 million range as you correctly pointed.
The next question comes from Jimmy Gilbert from Iberia Capital.
Jimmy Gilbert - Iberia Capital
Joe you talked about a west coast crude movement opportunity, we know about the Albany route, I heard about some coast wise maybe a two barge contract from New Orleans to Philadelphia, how does the west coast hookup work.
Yeah, its just another outlet for Bakken crude that can be railed to the west coast and then put marine equipment and take them to refineries in California.
Jimmy Gilbert - Iberia Capital
In California. Okay.
That's principally the movement. I mean it could go to Washington based refineries too, but we think that that actually is going to happen. I mean there are investments being made to facilitate that really as we speak.
Jimmy Gilbert - Iberia Capital
Okay. And then I got a little lost in the peak pricing discussion. When you guys talk about peak pricing, my impression is you are not talking about an absolute limit on pricing where the price versus the value of the commodity becomes cost prohibitive, whether the price of transportation becomes cost prohibitive. You are talking about pricing getting back to prior peak levels. Is that right?
That is exactly right. We got a long way to go before we start buffing against other modes of transportation.
The next question comes from David Beard with Iberia. Please go ahead.
David Beard - Iberia
Maybe just help us understand the pricing and supplies around the inland barge side. You’ve sometimes given some numbers in terms of the industry deliveries and scrapings for last year or an outlook for this year. Do you care to put ahead those numbers out there yet?
Not yet because we like to do is wait for the industry survey that comes out in March, typically comes out in March. But we can guess at it, but I think it’s hast safer to, when we talk about numbers to have that in hand. What we are saying is we still have requirements in the industry on an every day basis that are going unfilled. So the capacity that is been built is being absorbed.
David Beard - Iberia
Then my next question, turning to the coastal wide side and maybe to ask the new build questions in a different ways. Is there a way you can measure across all the asset categories, what percent increase you’d need in pricing for new build economics to make sense?
Yeah, it's again, not to make short of the answer here. It's so equipment dependent and whether you are building a 30,000 barrel offshore barge or a 185,000 barrel or a black oil or a clean or a chemical with special linings, it’s got some ways to go. We are just coming off the bottom on pricing, so it’s hard for me to give you an absolute percentage David sorry it’s a difficult thing to quantify.
David Beard - Iberia
And I was trying to make the point that utilization moves ahead of pricing and pricing actually has a ways to go, now whether that way is 10% to 20% or if you are going to need more 20% to 40% I was trying to bracket it that way but I understand where you are.
And David you are right utilization is the leading indicator, but it’s more than just pricing too because you are talking about long life equipment, expensive equipment and the terms of that contract are going to be important. I don’t think you go out and just build this stuff speculating on the market, you want some surety that the customer is willing to take it on terms that make you feel good that you are going to get paid back.
The next question comes from Steve O'Hara with Sidoti & Company. Please go ahead.
Steve O'Hara - Sidoti & Company
I was just curious if you could talk a little bit more about the United business and long-term you talked about transitioning that business service overtime, and first where do you see the manufacturing component as a percentage of may be revenue in the long-term and then second in terms of the service business, what the size of these addressable market and how long does it take to kind of get to what your goals are in terms of that transition?
Great, those are good question. It a tough market right now, as some excess capacity gets absorbed just out there. We think that is going to happen through 2013. In terms of where we want to go with it, and we’ve said that it’s like about 70% of the business to represent the service rim and supply and distributions side of the business and about 30% be manufacturing. Now that will scale up, scale down based on demand but what we want to be is disciplined with respect of the service side. So when that manufacturing scale is up, we are not doing at the expense of long term relationships that we are building with customers that want us to service, maintain and remand their equipment.
I would say that we are working hard on kind of building that service model that we are very focused on it. We are focused on reducing the number of days it takes us to rebuild equipment. We have certain internal pretty aggressive targets that we think we can get to, but we are working on with our customers to finding what they want us to do. There could be some variability and the time it takes you to rebuild the stuff based on kind of they are searching for the right balance. So what you want to do is you rebuild it. We think we are getting throughout that. We think the customers are a much better feel for what they’d like to accomplish and we still think that this is a business where margins should be in the kind of mid teen area.
It’s a strong service model. We actually think we are a little ahead of others who are trying to do this in terms of process and focus and the quality of our end product, not discourage, but I think that 2013 though is not going to be great year and what we've tried to do is put something that puts it in perspective with respect to the other parts of our business. We have really a great marine franchise here that is doing very well. It comes from a side which we have developed really in the last 18 months, is well positioned to do a lot better going forward. The diesel engine business is a business that we are in. The marine side is stable. It’s going to do fine and this land based side we think we are going to position it so that as we come out of this we are going to be able to take advantage of some real opportunities as demand comes back.
Steve O'Hara - Sidoti & Company
And just quickly two other things, what's your capacity right now in terms of the ability to manufacture or remanufacture units, how many can you do in a year and then what's the kind of goal there, and then are you guys cash tax payers in 2013 and when do you expect to be.
We are very much a full tax payer. Our tax rate is well cash tax payers. Yeah, absolutely. Yeah I'm sorry I was focused on the (inaudible), yes we are cash tax payer.
We think that the current capacity of that facility is about little over a 100 units and our target would be at least to double it.
We have no further questions at this time. I will turn the call back to Steve Holcomb for closing remarks.
We appreciate your interest in Kirby and for participating in our call. If you have any additional questions please give me a call. My direct dial number is 713-435-1135 and we wish you a good day.
Thank you. Ladies and gentlemen this concludes Kirby Corporation’s 2012 fourth quarter conference call. Thank you for participating. You may now disconnect.
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