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Kirby Corporation (NYSE:KEX)

Q4 2008 Earnings Call

January 29, 2009 1l:00 am ET

Executives

G. Stephen Holcomb - VP of IR

Joe Pyne - President and CEO

Norman W. Nolen - EVP, Treasurer and CFO

C. Berdon Lawrence - Chairman of the Board of Directors

Analysts

Jonathan Chappell - J.P. Morgan

Alexander Brand - Stephens Inc.

Ken Hoexter - BAS-ML

Noah Parquette - Cantor Fitzgerald

John Barnes - BB&T Capital Markets

Jimmy Gilbert - Rice Voelker

David Yuschak - SMH Capital

Daniel Burke - Johnson Rice & Company

(Dvorst Hinman) - Walt, Howsten and Company

Chaz Jones - Morgan, Keegan & Company, Inc

Matt Mylam - Seneca Capital

(Gregory McCosko) - Lord, Abbett & Co.

(Michael Harvey) - Halogen

Charles Rupinski - Maxim Group

Operator

Good morning, my name is Carrie and I will be your conference operator today. At this time I would like to welcome everyone to the Kirby Corporation 2008 fourth quarter earnings conference call. (Operator Instructions)

Thank you Mr. Steve Holcomb, you may begin your conference.

G. Stephen Holcomb

Thank you for joining U.S. this morning. With me today is Berdon Lawrence, Kirby's Chairman, Joe Pyne, the President and Chief Executive Officer of Kirby and Norman Nolen, our Executive Vice President and Chief Financial Officer. During the 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 web site, 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 annual report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission.

I will now turn the call over to Joe.

Joe Pyne

Thank you Steve.

The 2008 fourth quarter was the 20th consecutive quarter that our earnings exceeded the same quarter the previous year, and 2008 was the fifth year in a row that we reported record financial results. Late yesterday we reported a 13% increase in our fourth quarter earnings, reporting $0.72 per share compared with the $0.64 per share recorded for the 2007 fourth quarter, and a 27% increase over our 2008 year earnings, reporting $2.91 per share, compared to the $2.29 per share for 2007.

Also included in our fourth quarter results was a $6 million before-tax, or a $0.07 per share after-tax, increase in our allowance for doubtful accounts due to the deteriorating economic environment that we're facing.

On the marine transportation side, petrochemical companies responded very aggressively to the worsening economic environment during the fourth quarter, announced a number of plant closures and reduced volumes within our market area in order to reduce their inventories. Alliance held up well in the third quarter because companies were in a catch-up mode following hurricanes Gustav and Ike. However our volumes were significantly weaker in the fourth quarter – 22% under last year, especially in our up-river markets. That's the part of our business that's closer to the end-user.

Throughout most of the fourth quarter we were able to utilize excess river equipment that principally the barges that work on the river in the canal where demand was stronger. We do anticipate that overall demand will stabilize, but will stabilize at levels below the first half of 2008 levels. Once our customers have completed their inventory adjustments and begin to get confidence with respect to what substandable (ph) demand is.

Kirby has historically used charter boats to satisfy approximately one-third of its horsepower requirements, which gives U.S. the flexibility to balance horsepower needs to current demand. To date, and over the high in the fourth quarter, we've released 23 charter boats in the last several months, which has helped U.S. reduce the margin erosion caused by falling demand. We are currently operating today 242 towboats, and we continue to downsize our tow boat fleet when warranted by market changes.

We will also address lower demand through cost reductions, which include an early retirement program and a reduction of shore staff in the first quarter. Also, deferring some capital projects when appropriate for them and idling some equipment and deferring maintenance on that equipment.

Our fourth quarter included a $0.06 after-tax per share timing benefit for lower diesel fuel costs, which fell from $3.99 per gallon in the third quarter to $2.59 per gallon in the fourth quarter. We do anticipate a reversal of this trend in the current quarter, I'll address that later in the call when we discuss our first quarter guidance.

Our fourth quarter term-and-spot revenue mix remained at 80% term and 20% spot. Time charter or day rate contracts which reduced revenue volatility caused by weather, navigation delays and market declines, ended the year at a high at 60% of total contracts, though we do expect that percentage to decrease as barge availability increases.

This isn't necessarily negative to Kirby because we've always have been able to leverage our flexibility, our power, our infrastructure, trade lanes and size to use our equipment more efficiently under our freight (inaudible) contracts renewed during the fourth quarter increased 8 to 10% over the same period in 2007. Spot rates which are impacted by falling fuel prices declined 5 to 6% over the quarter compared to the third quarter, but remained 8 to 10% higher than the fourth quarter of 2007.

Our fourth quarter results also included a $6 million before tax or $.07 per share increase in our reserve per doubtful accounts. We think this is a prudent precaution based on the impact of the recession on several of our customers in the petrochemical industry.

In our diesel engine service segment, which has experienced strong medium speed market performance over the first nine months, saw service levels and direct part sales weakened in the fourth quarter as its customers activity slowed, particularly in the power generation in rail markets, and from some seasonal fluctuations in the marine transportation market.

High speed market which has not been as strong did see some modest improvement in the fourth quarter. We think principally driving by repairs that our customers were doing to their equipment affected by Hurricanes Gustav and Ike. We’re also pleased to report that our 2008 return on capital has significantly exceeded our stated objective or target objective of a 12% return on invested capital. In 2008 we earned almost 15% compared to 13.2% in 2007 and 12.2% in 2006.

I’m going to come back at the end of the call and talk about 2009 first quarter and our full year outlook. But I’ll now turn the call over to Norman for his comments.

Norman W. Nolen

Good Morning. Our marine transportation fourth quarter operating margin improved to 23.4% compared to 21.8% for the fourth quarter of 2007. The improved margins were driven primarily by higher term and contracts pricing, lower fuel costs, and fewer boats operated. And partially that’s off-set by the $6 million dollar increase in the allowance for doubtful accounts.

The operating margin in our diesel engine services segment decreased 12.3% in the fourth quarter, from 15.6% in the fourth quarter of 2007, and was impacted by lower labor utilization, lower power generation revenues, and a higher percentage of lower margin engine and equipment sales.

During the 2008 fourth quarter we generated $89.6 million of EVA Dow, an 11% increase over the fourth quarter of 2007. And the EVA Dow margin was 27.4% compared to 26.2% in the fourth quarter of 2007.

Strong cash flow in the fourth quarter was sufficient to fund a larger than normal annual defined benefit pension contribution of $32 million, and still allow for a $22 million reduction of debt.

Our total debt reduction was $50 million for the year, and our debt to capitalization ratio declined to 21.7% at December 31, down from 27.9% at the end of 2007. Our average cost to debt for the 2008 fourth quarter was 5.0%.

Capital spending for the 2008 fourth quarter was $31.5 million, including $14.8 million for new barge and tow boats, and $16.7 million primarily for upgrades to the existing fleet.

Our capital spending totaled $173 million for 2008, which included $89 million for new barges and tow boats, and $84 million primarily for upgrades to our existing fleet.

Our 2009 capital spending guidance range is $185 million to $195 million, and includes $140 million for new barges and tow boats.

For 2009 we anticipate continued positive cash flow and a continued reduction in our debt to capitalization ratio. I’ll now turn the call over to Berdon.

C. Berdon Lawrence

Thank you, Norman and good morning. During 2008 we took delivery of 26 new barges with the total capacity of 586,000 barrels and four 1,800 horse powered tow boats. We also added five new chartered barges with a total capacity of 110,000 barrels during 2008, purchased six barges previously chartered and sold, scrapped, moved to the inactive status or returned to the lessor, 30 barges with a capacity of 549,000 barrels.

As of December 31, we owned or operated 914 tank barges with a capacity of 17.5 barrels.

For 2009 we expect delivery of 48 barges with a capacity of 1,132,000 barrels and five 1800 horse powered tow boats. The cost of the new equipment is approximately $140 million.

We will also place and service seven new barges under a seven year charter with a capacity of 74,000 barrels and anticipate the retirement of 41 barges with a total capacity of 757,000 barrels.

We expect the new capacity additions and chartered barges net of anticipated retirements to increase our total fleet capacity in the 2 to 3% range. Three 10,000 barrel barges and two 1800 horse powered tow boats, all of which are from 2009 orders, are now scheduled for delivery in early 2010.

At the present time we have signed no further 2010 equipment commitments. I’ll now turn the call back to Joe.

Joe Pyne

Thank you, Berdon. As we stated in our press release yesterday, our visibility for 2009 is certainly not very clear. Some of our customers have announced plant closures and layoffs as they have adjusted to changing economic conditions.

Until they have found an ongoing sustainable level of production, our ability to accurately forecast our business will be challenging.

For the month of January, we continued to see weakness in up river movements of the more finished petrochemical products. These are the products that are closer to the end user. Although it’s harder to fine tune river tows, which normally consist of multiple barges, we are using fewer boats, and in some cases to maintain a greater efficiency.

We have a little more flexibility in the gulf headed coastal waterway. And as volumes weaken, we can take boats out more easily to match the tonnage requirements. Most tows on the gulf coast are one to three barge tows.

Kirby’s term contracts which represent 80% of our transportation revenues will help provide stability to our earnings in 2009. Approximately 50% of the contract revenue will renew however in 2009.

Most of our term contracts have been enforced for many years and contain fuel adjustment clauses that were written when fuel price volatility was a fraction of what it was in 2008. Although fuel adjustment formulas are reasonably efficient over an entire cycle of fuel price movements, they have in the aggregate adjusted less accurately during periods of high volatility.

We’re estimating that between $.03 and $.06 per share during the first quarter will be a negative impact of the timing of fuel versus the 2008 fourth quarter. And we’ve mentioned this before, as contracts come up for renewal, we’ve been improving the fuel adjustment mechanism which works both for U.S. and our customers better, and takes some of the volatility out of this.

Our first quarter guidance also included an estimated $.05 per share charge for early retirements and staff reductions to correspond with the downturn in our operations. We’ve also implemented a hiring freeze, offered early retirement incentives to certain employees who will be 60 years old or older during 2009, in certain designated departments and job classifications. We have frozen management salaries, and we also intend to reduce shore staff in the first quarter in total by about 5%.

With all this in mind we announced our 2009 first quarter guidance of $.45 to $.55 per share, compared with the $.68 per share earned first quarter of last year. For the year our guidance is $2.40 to $2.65 per share, compared with the $2.90 per share achieved in 2008.

Both the quarterly and annual guidance range is wider than we historically give. However, we feel it’s prudent given the uncertainty and lack of visibility in regards to final 2009 volumes.

We are all looking for some good news in the midst of this gloomy period. I do believe that we’ll see some improvement in the up river part of our business within the next couple of months. As customers restart plants to meet what they believe is sustainable to demand.

Demand will return this year, but we believe it will be at lower levels than 2007 and the first half of 2008. Now some of that is dependent on your view of the economy. Our current view is that the economy is not going to see a growth in 2009.

Kirby does enter this period of uncertainty with strong customer relationships, a very strong balance sheet, sustainable cash flows, which will exceed our capital expenditures this year, no real commitment to capital in 2010, and the ability to continue to fine tune our fleet up or down as necessary.

As I indicated earlier, our visibility is poor as to what the economy is ultimately going to do. Frankly, there isn’t much we can do about the economy anyway. What we can do is focus on what we can control, which is to manage our customer service levels, be safe, and control our costs, and look for and take advantage of opportunities which will present themselves during this period.

That was our game plan in every down period since I’ve been with Kirby, which is 31 years this year. And that will be our game plan now. We will see opportunities during this period, and fortunately we have disciplined over the last several years, and enter this period with a very strong balance sheet that we can use to take advantage of opportunities to grow our business, opportunities that make financial sense to U.S. and our shareholders.

Operator, we’ll now open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jon Chappell of J.P. Morgan.

Jonathan Chappell - J.P. Morgan

Thank you. Good morning everybody. Joe, I can understand the wide range of the guidance and the volumes being the wild card. I was hoping maybe you could give U.S. a little insight as to the pricing expectations you’ve included in that guidance range, both on the spot and the contract renewal front?

Joe Pyne

Jonathan we think that contract pricing will for the most part roll over as expiring. And spot pricing will be flat to slightly down.

Jonathan Chappell - J.P. Morgan

That helps. And then on the cost/margin slide, have you compared 2009 as you see it right now compared to some of the other down turns, do you think that the margins on the marine side could hold in the middle better or do you think you’re more flexible on the cost side? And then the same thing on the diesel engine services side. It seems that the margin got hit a lot harder in the fourth quarter. Is it just harder to remove costs quickly in that part of the business as activity slows?

Joe Pyne

Let me address the diesel engine business first. There were some anomalies in the fourth quarter, principally with the timing of projects that we think will continue into the first quarter, but for the rest of the year will really come back to more normal levels. So as you look at fourth and first quarter, you are going to see some margin compression. But we should get a lot of that back in the next three quarters in 2009.

Concerning barge line margins, we hope so. It has a lot to do with your view of how long this is going to last, and is it going to get worse. But if we’re at the bottom now, I would expect that margins would hold up certainly better than the 2000 and 2003 downturn.

If this is going to get worse and it’s going to be several years, I think margins will come under a little more pressure, frankly.

We put guidance out there. I think you’re going to find that a lot of people didn’t. We did it really because we thought that it would help everybody to understand kind of our view of the world. But that’s our view. And there are many different views, frankly.

We’ll just have to see. Snapshot in time, we think that those forecasts are pretty good. But each day, as you know well, we wake up to new and different news. See how that news trends.

Jonathan Chappell - J.P. Morgan

That was very helpful, Joe. I appreciate it. Thanks a lot.

Operator

Our next question comes from the line of Alex Brand of Stephens.

Alexander Brand - Stephens, Inc.

Hey, good morning guys. I guess I want to follow up on that to make sure, just sort of understand the process, Joe. So if you’re assuming spot prices are relatively flattish, can you talk about then as you go into customer discussions for contract renewals, kind of what the implication is for pricing on those and how we should think about contract pricing?

Joe Pyne

Well, if spot pricing is flattish then I think a reasonable scenario is roll over as expiring. And that’s the assumption. Alex, I know you know this, but just for the benefit of others, spot pricing is going to be driven by utilization.

Right now, utilization in canal is still pretty good. If utilization declines, then it’s going to put more pressure on spot pricing. But even in the 2000 to 2003 recession, we were able to, for the most part roll contracts over as expiring.

Alexander Brand - Stephens Inc.

Okay, fair enough. I think I missed what Berdon said about deferring some deliveries for this year, but can you just broadly talk about what you may have deferred into 2010, and I guess I’m kind of surprised that you’re still thinking to add 2% to 3% capacity, but perhaps you were not able to defer, because I think you had discussed before that you were going to try to push some of that stuff off.

Joe Pyne

Yeah, and we’re still working with shipyards to move some of that equipment into 2010. These are commitments, as again you know, that were made in early 2008, mid 2008, and they’re firm commitments. We have—again, working with shipyards—moved several barges into 2010, and I think one or two boats—two boats. It’s our hope that we could actually move some more equipment into 2010, but we’re not assuming that in our forecast.

With respect to actually growing capacity, we’ll look at that very carefully as capacity comes on, and we may well idle some additional capacity so that we’re staying capacity neutral. But again, I don’t want to commit to that because I don’t have any clarity on what our actual demand is going to be yet.

Alexander Brand - Stephens Inc.

Fair enough, thanks for your time Joe.

Joe Pyne

Sure.

Operator

Your next question comes from the line of Ken Hoexter of Merrill Lynch.

Ken Hoexter - BAS-ML

Hi, good morning Joe and Norman. The one rail had noted that there was some chemical plants that had some extended down time, and they were starting to see some of those plants reopen. I just wanted to see what you were seeing from your perspective on the demand site.

Joe Pyne

Yeah Ken, that’s what I was alluding to when I said that we thought our upriver business would get a little stronger as plants reopened.

What you don’t know, and I frankly—and I certainly don’t know. Maybe there’s somebody out there—maybe you know—what the sustainable level is. You know, these are very different times then early 2008, and there is demand out there, but you don’t know quite where it is.

Two-thirds of the chemicals that are made go into non-durable goods, but consumer kind of goods. So there is a base-level demand that keeps the chemical business going. We just don’t know exactly where it is.

Ken Hoexter - BAS-ML

Okay. You said utilization was still good, particularly in the rivers—

Joe Pyne

No, in the canal—

Ken Hoexter - BAS-ML

I’m sorry, in the canal, you did say canal, yeah. I just want to clarify I guess, you know, if ton miles we down over 20% in the quarter, I would have thought we would have seen some of that bounce back I guess. I thought that was greatly impacted by the hurricanes in the third quarter. I expected it to be down, but I guess your ton miles were down over 20%, so how can that utilization still be good if you’re seeing that level of volume decline?

Joe Pyne

The ton miles on the river were down significantly, and this is what happened. I think that the first two quarters of 2008 were strong quarters, positive GDP growth, and the U.S. chemical business was—around the edges was being affected, but for the most part was okay.

You go into the third quarter, and we get into hurricane season that dramatically affected the chemical business. I think maybe 30% or 40% of it was actually down on the Gulf Coast, and volumes of course were significantly curtailed. The chemical business comes back up, and our volumes get—or demand gets distorted based on really the collapse of capacity caused by the hurricane. So you really go into late September/October with lower overall demand, but some inventory adjustments that really keep U.S. pretty busy.

Then the full impact of what I would call a consumer strike was seen first at the retail basis and worked itself back up through the supply chain, and you saw chemical companies, particularly major chemical companies radically go into a destocking phase. Where chemical companies close plants to a degree that I don’t think either Berdon or I have seen in the time that we’ve worked in this business.

Remember, that chemical inventories were built at very high crude cost. Crude in some cases was $140 a barrel, and high natural gas costs. So they just destocked, and you saw probably the most violent destocking maybe in the history of the chemical business, and we’re going to affect us. When you’re getting rid of volume, you’re not going to move volume to replace it.

Now, we’re kind of I think, the most part through that, and you’re going to begin to get restocking—I think that’s what the railroads are eluding to, and that’s what I’m eluding to—that is going to cause transportation levels to increase, but at some point they’re going to level off. And it’s at that point where they level off that you’re uncertain about.

So I do think that you’re going to get some improvement, but what I don’t know is the long-term sustainable level yet.

Ken Hoexter - BAS-ML

Great. That’s helpful. Can I just get two number clarifications from Norman? On the nine single hull vessels, did you move those to inactive?

Norman W. Nolen

No.

Ken Hoexter - BAS-ML

Okay. And then the—have you ever broken out the percentage of high-speed versus medium-speed?

Norman W. Nolen

No we haven’t.

Ken Hoexter - BAS-ML

Okay. Great. Thanks for the time guys.

Joe Pyne

Yeah, and Ken, with respect to the single hull vessels, five of them will be—at least five will be out this year.

Ken Hoexter - BAS-ML

Okay. Great.

Operator

Your next question comes from the line of Noah Parquette of Cantor Fitzgerald.

Noah Parquette - Cantor Fitzgerald

Hi, good morning. Most of my questions have been answered. I just had about on the cost side, with your staff reduction that you’re implementing. What do you think the GNA run rate will be in 2009? How much lower do you expect that to be?

Joe Pyne

The cost is about going to offset the run rate decline; they’re off setting.

Noah Parquette - Cantor Fitzgerald

Oh, the one-time cost?

Joe Pyne

Yeah.

Noah Parquette - Cantor Fitzgerald

Okay. And will that be mostly in the first quarter?

Joe Pyne

Well the cost is going to be in the first quarter, the run rate’s going to be in the next three quarters.

Noah Parquette - Cantor Fitzgerald

Okay. And then in the share/repurchase side, can you remind me how much you have remaining under your authorization?

Joe Pyne

We have over a million shares.

Noah Parquette - Cantor Fitzgerald

Would it be fair to say that you kind of focus on retiring debt this year, given the situation?

Joe Pyne

It’d be better to say that we’re going to focus on opportunities.

Noah Parquette - Cantor Fitzgerald

Okay. All right, thank you.

Operator

Your next question comes from the line of John Barnes of BB&T Capital Markets.

John Barnes - BB&T Capital Markets

Hey, good morning guys, a couple of questions real quick. First, with the chemical companies that you do business with, can you talk a little bit about what kind of inventory levels you’re seeing? I’m getting a read for, I don’t care when they start back up necessarily. I know you don’t have any control over that, but what I’m trying to gauge is if there are some kind of material demand change, how quickly—would it be a fairly explosive demand, solely because inventory levels have been drawn down so lean? Is that a fair assumption?

Joe Pyne

We sense that inventories are different in different areas. So, you may get some significant demand in one area that you don’t see in another. That’s a good question John, and I hesitate to give you an answer, because I don’t know.

John Barnes - BB&T Capital Markets

Okay, all right.

Joe Pyne

It’s going to—it’s probably going to be all over the board frankly.

John Barnes - BB&T Capital Markets

Okay, all right, very good. Given the struggles that some of your customer base has had, I mean the chemical industry, it seems like an announcement a day almost with some of these guys and some of their issues.

I’m kind of curious, has the market to buy private fleets from these companies become a little more attractive? I mean are they actually looking to now shed assets to generate cash and that type of thing? And do you think there’s an opportunity to maybe delve back in there where that market’s been shut off for a while?

Joe Pyne

Yeah. They’re not that many left, of course owned by chemical companies. The largest fleet is owned by an oil company, a refinery. But I think that that’s probably fair. That they’re certainly going to look at a number of things that will raise cash, and my guess is that we’ll have an opportunity to look at some fleets.

John Barnes - BB&T Capital Markets

Okay, very good, and then lastly, to your comment about you may idle some additional capacity just to kind of manage your capacity a little bit better. When you idle that, is that basically just putting it in storage for now? It’s very easy to pull back into service, and could you give U.S. a magnitude kind of estimate as to what you think might be necessary to offset what you’re taking in, given the current demand environment?

Joe Pyne

Well the magnitude would be an equal amount of tonnage that is coming in—

John Barnes - BB&T Capital Markets

So it would be vessel for vessel?

Joe Pyne

Yeah, I think so. I mean based on what we’re seeing now. But this is, as you know, it’s a very fluid environment, and you’re making adjustments based on what you think is going to happen going forward, but at least this snapshot in time, I think that would be what you’d do.

John Barnes - BB&T Capital Markets

Okay, and in terms of your guidance, could you just give U.S. a little color on the difference between 240 and 265? I’m just trying to gauge, is the 240 just an absolute depressing kind of outlook, and the 265 is kind of a continuation of what you see now? Or just a little color on that.

Joe Pyne

Yeah. We hope what you said is right.

John Barnes - BB&T Capital Markets

Okay, very good.

Joe Pyne

I think that’s a fair analysis of where we are.

John Barnes - BB&T Capital Markets

Okay, very good. Thanks for your time guys.

Operator

Your next question comes from the line of Jimmy Gilbert of Rice Voelker.

Jimmy Gilbert - Rice Voelker

Hey Joe, thanks for taking my call. You guys talked about changing your contracts to improve the fuel escalation provisions to sort of deal with the increased volatility and fuel costs. How are those changes going to be made? Is it going to go from—I right now it’s month-to-month adjustments. Would you go quarter-to-quarter? Or how would that work?

Joe Pyne

We’re not so much talking about the monthly or quarterly adjustment, it’s just that these contracts are pegged off of fuel prices. Some of them are really quite low and aren’t realistic going forward, that impose volatility when you have a peg of let’s say, $.80 and fuel is $4.00. You really don’t—it’s not in the best interest of either party. I don’t think that when they were designed, it was ever contemplated that fuel would move as much as $2.00—actually more than that, $2.50 in a given year.

Jimmy Gilbert - Rice Voelker

Okay. I might have missed this, but you talked a little bit about the ton miles, but do you guys place a rough number on your capacity utilization? Like what it was in Q4 2008, versus what it was in 2007?

Joe Pyne

Yeah, we’re happy to talk about that. I just—I think you know this, that the utilization is a weather impacted number, meaning that you could be fully employed, but not moving, and in the afreightment contracts, that’s painful.

Our utilization on the canal is still in the low 90% range, which is good. Our utilization on the river, which is the most impacted area, and again, that’s where the product that we move is closest to the end user. It’s down I think year-over-year 30%. Now we think that’s going to improve, but that’s a substantial drop.

Jimmy Gilbert - Rice Voelker

All right, well thank you very much Joe.

Joe Pyne

Thank you Jimmy.

Operator

Your next question comes from the line of David Yuschak of SMH Capital.

David Yuschak - SMH Capital

Yeah, good morning guys. Last year, you guys kind of had foresight to move your contracts from 70% to 80%. As you look into this year, what’s the potential of that fading back, and how much could it fade back as the customers say, look, I really don’t know what my needs are right now. I might come back to another contract six months from now to do that, because I just don’t know what my needs are. What do you think that could—how low could that go if, in fact, you just have customers out there that say, we’ll do a contract, but not right now, that they kind of force you back into the spot market.

Joe Pyne

I’d be speculating David to give you a number, but we have a very good success rate of maintaining the contracts that we want.

I think that most of the customers that we work for, and who we contract with, contract with U.S. to get assurity that the service is going to be there. There’s some strategic reasons why they contract that go beyond just taking advantage of an opportunity in the market.

There are exceptions to that of course, but I think I’d be surprised to see our contracts slip too much.

David Yuschak - SMH Capital

Because you always, historically, kind of ran at that 70% level no matter what.

Joe Pyne

We did, and—

David Yuschak - SMH Capital

But I would think it the worse case that could be. No more then 70, I would think, back there, because of the long-term norm.

Joe Pyne

We saw things changing in the market well over a year ago, but certainly didn’t anticipate anything to the magnitude of what occurred. But we knew things were going to be a little different, so we let contracts slip up a little bit. In a normal market, I think that we’re very comfortable with that 70/30 split.

David Yuschak - SMH Capital

You always did well with that any way. As far as your capital spending for next—for 2009, how much of that 185/195 do you think you can slip into next year, just by pushing stuff out?

Joe Pyne

Well, we don’t know, because these are commitments; 140 of it is commitments to build equipment, where we have signed contracts.

David Yuschak - SMH Capital

Right.

Joe Pyne

We’re working with the shipyards to see if it’s beneficial to both of U.S. to slide some of it into 2010, because we don’t know what we’ll be able to do yet.

David Yuschak - SMH Capital

Does the decline in steel prices have any impact on those as far as kind of—

Joe Pyne

We have favorable steel pricing in the barges that we’re building, so we’re—

David Yuschak - SMH Capital

Okay. So that’s not an issue at this point.

Joe Pyne

Well it may be in future years, but at least to barges that we’re building, it’s not really an issue.

David Yuschak - SMH Capital

Okay. As far as your volumes in the canal, could you give U.S. a sense as to how they did in the fourth quarter?

Joe Pyne

They were strong in the fourth quarter.

David Yuschak - SMH Capital

Okay. Now one last question here. With the weakness in your end mark in upriver, what’s the potential that that back-feeds into your canal? Because that’s basically where you get intermediaries as a demand isn’t it? Potentially that begins to back up there just because of the economy being as weak as it is?

Joe Pyne

Well the chemical trade on the river is principally a 10,000 barrel trade. Where you get back up into the canal is in the refined products area, which is a 30,000 barrel trade. When you see weakness in the refined products market, that equipment typically bleeds over into the canal, and you’ve followed this long enough to have heard U.S. talk about that. We really didn’t see that in the fourth quarter.

David Yuschak - SMH Capital

So if anything, as long as we can get refined products doing all right, the canal will not get to be a problem in this down cycle? Is that fair to say?

Joe Pyne

Well I wouldn’t say that, because I don’t know that. That’s certainly what we hope, and it all goes to your view of how long is this going to last, and is it going to get worse?

I think what we’re comfortable saying, is that at least to this point, that the canal is still pretty strong.

David Yuschak - SMH Capital

Okay. That’s all I need to know. Thanks guys.

Operator

Your next question comes from the line of Daniel Burke of Johnson Rice.

Daniel Burke - Johnson Rice & Company

Good morning guys. I’d like to return to just one specific one on the full year 2009 guidance. If we look at the low end at $2.40. I know you suggested earlier that from Q2 to Q4 of this year, the diesel services business should show some improvement due mostly to timing issues. But what I’m wondering, is, is the low end of that guidance predicated on improvement in the barge business from current levels? Or from the Q1 level that you’re seeing right now?

Joe Pyne

No. Not the low end.

Daniel Burke - Johnson Rice & Company

Okay. So that’s sort of assumed status quo versus the activity level you all are witnessing right now?

Joe Pyne

Well the range does. The range I think a previous caller gave kind of his perspective on the range, that the range was in the high end, kind of what you’re seeing now, and the low end a more pessimistic view. I think that’s about what it is.

Daniel Burke - Johnson Rice & Company

Okay. Then the second question would be on the second-hand barge pricing. Can you share any details on where barge pricing has trended in the second-hand market here over the last six months? And while you’re shedding horse power, I mean can you be active in that market? And are you interested in being active in that market if you’re looking at contract-free barges?

Joe Pyne

When you say second-hand, you’re talking about the sale of equipment?

Daniel Burke - Johnson Rice & Company

Yes.

Joe Pyne

Yeah. There really hasn’t been much equipment sold over the last six months, and this is a little different business then you’ll see in the blue water business, where second-hand prices are a good indicator of the market.

Here, you have a more stable market. As you look at some of your blue water companies, earnings volatility is significantly higher then the kind of volatility that we’re talking about here. So you’re going to get a—unless you get gross over capacity, you’re going to get more stability in the sale of equipment then you would get offshore.

Daniel Burke - Johnson Rice & Company

Thanks Joe.

Joe Pyne

That answer your question Dan?

Daniel Burke - Johnson Rice & Company

Yeah, I think so.

Joe Pyne

Okay.

Operator

Your next question comes from the line of Dvorst Hinman (ph) of Walt, Howsten and Company.

Dvorst Hinman - Walt, Howsten and Company

Hi, I had a few questions. I got on the call a little bit late, so I apologize if they’ve been asked. Did you disclose the operating cash flow number for the fourth quarter?

Joe Pyne

We—let’s see, is it in the table yet? It will be—

C. Berdon Lawrence

It will be in the queue.

Joe Pyne

It will be in the queue.

C. Berdon Lawrence

Ten K; and only EBITDA is off this time.

Dvorst Hinman - Walt, Howsten and Company

Okay, and on the bad debt charge we took in the fourth quarter, was that related to a specific company? Or is that just our thoughts entering a weaker environment in terms of customers paying less?

Joe Pyne

Yeah the latter.

Dvorst Hinman - Walt, Howsten and Company

All right.

Joe Pyne

I mean there are of course, companies that make up that, but it’s more a view of weakness in the chemical area, and the credit challenges that some chemical companies are going to have.

Dvorst Hinman - Walt, Howsten and Company

Now are we adjusting our bad debt reserve methodology going into 2009, relative to 2008?

Joe Pyne

No, I don’t think so. I mean there’s a process that you go through, determining what the reserve’s going to be, and that process I think was consistent—has been consistent over the years.

Dvorst Hinman - Walt, Howsten and Company

All right, and obviously, you guys have been in this business for a long time. Can you help me understand from a competitive standpoint, the pricing thought process of your competitors. You yourself talked about maybe taking some capacity out of the market.

Do we have competitors that are capital constrained, and maybe more willing to price very aggressively in this type of environment? Can you just help me understand that? That’s a lot of questions at once I guess.

Joe Pyne

Pricing is going to be driven by utilization, and also, the financial requirements of the individual operator. So you theoretically could get a competitor that has fixed costs that he has to cover, and prices to cover those fixed costs. We’re not seeing that yet, and we’re really not forecasting it. But certainly there’s a scenario where that could happen.

Dvorst Hinman - Walt, Howsten and Company

Have we saw that at any point in the past? I know you talked about was it 2002?

Joe Pyne

Yeah. You saw some pressure on spot pricing. But we’re not seeing it yet. We’ll just have to see.

Dvorst Hinman - Walt, Howsten and Company

All right, and then I guess one more on the diesel price movements. Obviously, a lot of volatility. We addressed some of it with the new contract terms. Have we looked at hedging at all in terms of our use of diesel fuel?

Joe Pyne

Well, we’ve looked at hedging some of the spot exposure, but the contracts have escalators/de-escalators in them, so hedging them wouldn’t be appropriate, because the truth over the fuel cycle, they will float up and down recovering your fuel.

When we refer to changing the escalator—the fuel escalators, it more has to do coming up with formulas that take some of the significant volatility out of that business which we then have to explain to you. That fuel represents $.06 or $.03 to .$.06, or $.02 of the earnings. Trying to get the earnings comparisons on an apple-to-apple basis.

Dvorst Hinman - Walt, Howsten and Company

All right, and I guess I’ll try to sneak in one more. Do we have any estimate for pension contribution for 2009?

Joe Pyne

It’s hard to project, because it depends on two big factors. One is the discount rate, which is generally a corporate discount rate—a corporate bond discount rate. The other is the performance in the market. Our contributions in recent years have been 0, $7.5 billion, $12 million and this year it was $32 million.

I would certainly hope that would start getting some of this back which would minimize our contribution, but it just—it generally depends on the market.

Dvorst Hinman - Walt, Howsten and Company

All right, thank you.

Operator

Your next question comes from the line of Chaz Jones of Morgan, Keegan.

Chaz Jones - Morgan, Keegan & Company, Inc

Yeah, hey, good morning everyone. Maybe looking at this question, I think perhaps limited to the trucking industry in the past, but I guess given your perspective on the industry, in a recession, do you generally see any of the small operators, you know, yield to failures or bankruptcies or things of that nature Joe?

I guess what I’m getting at is, you know, are there some of the smaller players who maybe bit off more then they could chew during the good times the last several years, and in the way of levering up the balance sheet to replacing throughout their fleets. And with the current credit market we’re facing some challenges.

Joe Pyne

Yeah, well I wouldn’t want to have to renew a credit line in this market, and there may be some of that. There may be situations where—and I think this goes way beyond the barge business, where companies have committed to capital projects that are in the process of being developed—in the case of the barge business, the barges being built—and they get to where they have to pay for them and they can’t.

With respect to the financial health of some of the other operators in the business, they are almost all private, so it’s very difficult to determine how they’re leveraged or what financial structure they use in their business model, but I actually think that business has to get worse before you see the kinds of pressure on those companies that would cause a failure. Remember that, you know, our canal business is still pretty strong.

Chaz Jones - Morgan, Keegan & Company, Inc

Okay, that’s all I have, that’s helpful, thanks.

Question

Your next question comes from the line of Matt Mylam of Seneca Capital.

Matt Mylam - Seneca Capital

Yeah, hi guys. I was wondering if you could talk a little bit about kind of what new growth estimates would be today if you were to purchase or place an order for a new vessel right now. In the past, talking to builders, we’ve heard estimates between $1.5 million to $3 million for a tank barge. You know, depending on the size and whether it’s a Black Oil barge being on the higher end of that range, so have these costs moved down proportionately with the 50% drop in the fuel prices?

Joe Pyne

Yeah. The answer is they really haven’t. We are not seeing 2010 prices really significantly lower then the 2009. Now, in our 2009 contracts, we do have some favorable steel pricing in them.

Steel is down from I guess a high of $1,000 to $1,200 a ton to mid $700’s? Yeah, it could go lower, I think in the early 2000, I think it was down to about the $350 level, and I don’t—you’ve got estimates all over, all over the board on where steel’s going to be.

I think the thing that’s also increased in building barges is shipyard margins and if you’re not going to build any equipment in 2010, and you want to entice somebody to build it, then you’re going to have to give some margin up. That could have a greater effect on the cost of a barge then I think that steel does. In a tank barge, about 40% of the cost is the steel cost.

Matt Mylam - Seneca Capital

All right, and those numbers that I drew up before, the $1.5, the $3 million, are those kind of still accurate in today’s—

Joe Pyne

Yeah they are, $1.5 would be a 10,000 barrel, chemical barge; $3 million would be a clean, 30,000 barrel chemical barge in that range. Maybe a little higher for a Black Oil barge, maybe $3.2 million for a Black Oil barge.

Matt Mylam - Seneca Capital

And what kind of return do you think you would earn in today’s spot day rates and new costs for ordering a new vessel?

Joe Pyne

At current market, I think you’d get an adequate return.

Matt Mylam - Seneca Capital

Is there any way to kind of quantify that?

Joe Pyne

Well our target’s 12%, and all I know is our business model. I don’t know somebody else’s business model, so I don’t know what kind of return they’re going to get.

Matt Mylam - Seneca Capital

I see. Okay, thank you.

Operator

Your next question comes from the line of Gregory McCosko of Lord, Abbett & Co.(ph).

Gregory McCosko - Lord, Abbett & Co.

Yes, I’m glad I got picked up late in the call. It’s nice to say hello Joe, Berd, Norm. I’m going to probably ask a few questions that are perhaps a little naïve, but just help me understand the contract situation again. When you say roll over, does that mean that the pricing is going to be the same? What does that imply to pricing?

Joe Pyne

Yeah, that’s your objective to just extend the contract as it is.

Gregory McCosko - Lord, Abbett & Co.

So in other words, that would imply that the pricing would be flat.

Joe Pyne

Yes.

Gregory McCosko - Lord, Abbett & Co.

Okay, and then, is the 50% that you mentioned, is that a normal renewal rate on an annual basis?

Joe Pyne

Yeah, it’s in that range Greg.

Gregory McCosko - Lord, Abbett & Co.

Okay, and you’re saying that you expect basically all, or most of all contracts that are coming up to renew with you again. Why wouldn’t they renew with fewer barges, or less demand on capacity and make their spot mix more spot versus contract?

Joe Pyne

Well we have some customers that will do that Greg, but we—well I think that most of our contracts have equipment dedicated to them, and some of them don’t. You know, when you’re talking about requirement contracts, there’s no equipment dedicated to them, and there are some significant requirement contracts with our larger customers.

But those that do have equipment dedicated to them, I think size their demand pretty accurately to what they need from U.S. in terms of equipment.

Gregory McCosko - Lord, Abbett & Co.

Okay, and then the range, you know, we’ve had a couple discussions here about that 240 low, and the top versus the bottom. Would—I mean are the dire straights kind of worse then the 2000 – 2003 time frame? I mean and when we say the worst period of time, would that incorporate kind of the downside that we saw in that period of time?

Joe Pyne

Oh, I mean I don’t know. I mean can you tell me what this economies going to do?

Gregory McCosko - Lord, Abbett & Co.

No, I can’t, none of U.S. can. That’s why we’re all asking you Joe, we think you probably know.

Joe Pyne

Yeah, I’m not—I don’t. I don’t want to be facetious, but the truth is that we’re in a period of great uncertainty. We debated whether to put numbers out at all, and we said, you know, we thought that the market would benefit from what we were seeing today.

The big unknown is what are we going to see six months from now, and your visibility is just so poor, that when you get into that, you’re just really speculating, and I just hesitate to do that. I’d rather you do that.

Gregory McCosko - Lord, Abbett & Co.

All right, well, I—forgive me for keeping to push, but on the contract renewal, they come kind of evenly throughout the year? Is it early in the year versus late?

Joe Pyne

It’s pretty ratable over the year.

Gregory McCosko - Lord, Abbett & Co.

Okay. I mean I guess, that will be really—I mean what you see during this quarter, and the first part of the year, in terms of those renewals, you’ll kind of have a sense of what your customers are expecting from the market, and that will give you better visibility for the rest of the year I guess. Is that a fair way to look at it?

Joe Pyne

Yeah, I think by mid-year you’ll have a hope. You’ll have a better feel for what’s happening.

Gregory McCosko - Lord, Abbett & Co.

All right. Well I know you guys are doing a good job. That’s a lot.

Joe Pyne

Thank you.

Operator

Your next question comes from the line of Michael Harvey of Halogen (ph).

Michael Harvey – Halogen

Thanks, my question’s asked and answered, thank you.

Operator

Your final question comes from the line of Charles Rupinski of Maxim Group.

Charles Rupinski - Maxim Group

Good afternoon everybody. I just have a quick question, most of my questions have been answered, but do you have a view—you talked about pushing—potentially pushing back some equipment that you have on schedule.

But do you have a view about the overall barge capacity given the environment, I think that the number had been talked about maybe a few months ago, of 200 new barges being delivered. Do you have a sense about how that might pan out as far as the delivery schedule over the next year or so, and how that might affect the overall supply?

Joe Pyne

There are a number of barges that we’re committed to in 2008, or 2009 delivery, and what actually happens in 2009, I don’t know, but I can say that somewhere in the 180 barge mark, and that’s both 10,000 barrel barges and 30,000 barrel barges, as well as some specialty barges were on order. I think if you talk to the shipyards, they’d at least at this point say, we’re going to build them.

As you get into 2010, that really drops off. We practically don’t know of almost anything that’s planned to be built in 2010, where you did know, last year at this time what was going to be built in 2009.

Mid year you’ll have a better feel, but we think that it’s going to be—you know, just based on what we see today, a relatively nominal amount.

Charles Rupinski - Maxim Group

I just wanted to follow a question. When you talked about the utilization for the canals versus the river for the quarter, and I think I remember that it was in the 90’s for the canal utilization and then for the river, 30% down year-over-year. Would that be correct?

Joe Pyne

Yeah, period-over-period; fourth quarter-over-fourth quarter, yeah.

Charles Rupinski - Maxim Group

Plus, you know, just a real quick question; the 30% down, do you have like a number from and to? In other words is that down from 90 down to 60? Something in that range for the—

Joe Pyne

Yeah, it’s, you know in the 65% to 70% range.

Charles Rupinski - Maxim Group

Thank you very much!

Operator

There are no further questions at this time. Gentlemen do you have any closing remarks?

Joe Pyne

We appreciate your interest in Kirby Corporation, and for joining U.S. in the 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.

Operator

This concludes today’s conference. Thank you for your participation. You may now disconnect.

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Source: Kirby Corporation Q4 2008 Earnings Call Transcript
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