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Kirby Corporation (NYSE:KEX)

Q1 2009 Earnings Call

April 30, 2009 11:00 am ET

Executives

Steve Holcomb – Investor Relations

Charles Berdon Lawrence – Chairman of the Board

Joseph H. Pyne – President, Chief Executive Officer & Director

Norman W. Nolen – Chief Financial Officer, Executive Vice President & Treasurer

Analysts

Jonathan Chappell – JP Morgan

Natasha Boyden – Cantor Fitzgerald

Alex Brand – Stephens, Inc.

Ken Hoexter – Bank of America Merrill Lynch

[Jimmy Gibert – Rice Voelker]

[Asinial Jawani – Catapult]

Chaz Jones – Morgan Keegan & Company

John Larkin – Stifel Nicolaus

Daniel Burke – Johnson Rice & Company, LLC

David Yuschak – Sanders Morris Harris

Charles Rupinski – Maxim Group

Gregory Macosko – Lord Abbett & Co.

Operator

Welcome to the Kirby Corporation first quarter earnings conference 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 Mr. Steve Holcomb.

Steve Holcomb

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 this conference call we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at KirbyCorp.com in the investor relations section under non-GAAP financial data.

Statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management’s reasonable judgment with respect to future events. Forward-looking statements involve risk and uncertainties. Our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby’s annual report on Form 10K for the year ended December 31, 2008 filed with the Securities & Exchange Commission.

I will now turn the call over to Joe.

Joseph H. Pyne

Over the past five years Kirby’s earnings for 20 consecutive quarters exceeded the same quarter of the prior year, a five year trend. Unfortunately, 2009 will not continue this trend. The current US and global recession and its impact on our two businesses marine transportation and diesel engine services has ended our string of increased earnings.

Yesterday, we reported net earnings for the first quarter of $0.52 per share compared to $0.68 per share reported first quarter 2008. Our results include a $0.05 per share charge for early retirements and staff reductions that was included in the guidance that we gave in January of $0.45 to $0.55 per share. During the 2009 first quarter, in our marine transportation segment we saw lower volumes in all four of our transportation markets which are petro chemicals black oil, refined products and agricultural chemicals.

As our customers continued to respond to a weakened economic environment, we did see some small improvement in up river movements of finished petrochemical products going in to the Midwest at the end of the quarter as compared to the fourth quarter of last year where significant destocking of inventories occurred. This destocking actually continued in to the early part of the first quarter this year.

Also, as anticipated the fourth quarter destocking that we saw on the upriver part of our business made its way to the Gulf inter coastal waterway markets during the quarter resulting in lower demand for petrochemical movements and some pressure in the spot market. Refined products and black oil movements were also weaker consistent with prevailing conditions that we were seeing in the economy.

With respect to agricultural chemicals, there was softness in this area principally driven by crop prices, some credit issues with respect to farmers and current high inventory levels of the product in the Midwest. Our overall utilization for the first quarter was in the low 80% range. This would be compared to mid 90% utilization first quarter of last year. With respect to weather, we saw more favorable weather conditions and operating conditions during the quarter, almost 50% less delay days compared to the same period last year.

That helped to reduce operating expenses and offset some of the impact of lower demand but it also has an effect on utilization because it serves to put more equipment in to the market. During the first quarter we maintained our current revenue mix of 80% term, 20% spot. That was consistent with the mix last year. Time charter or day rate contracts which served to reduce revenue volatility caused by weather and navigating delays and also helped with temporary market declines remained at about 55% of our total contracts.

We do expect time charters will decline as customers release some time chartered equipment back in to the market as they react to lower volumes. We expect volumes however, and I think this is an important point to be stable to slightly improving this quarter as customers begin to rebuild their inventories. Although volumes have stabilized in recent weeks, the economy will have to start expanding again before we see any significant strengthening in demand.

We should see some short improvement as I just noted as some of our customers rebuild their inventories. But, we don’t see any significant demand return certainly to the mid 2008 levels of demand this year. During the first quarter we were generally able to renew our contracts at expiring rates. In some cases we did trade some rate for increased contract terms. Spot rates did decline during the quarter and we believe they may continue to come under pressure as we see more equipment enter the spot market principally from the release of time charters.

Fortunately, our 80% contract to spot mix, 20% spot, will give us some shelter from this. With respect to our long term agreements, these are the multiyear agreements that don’t expire during the year, the escalators that we have in those contracts for labor and the producer price index saw these contracts escalate in the 4% to 5% range in January.

During again, the first quarter, our diesel engine service segment saw demand levels for their service and direct parts sales decline in the Gulf Coast service area where we’re servicing oil service companies and to a lesser extent in the marine transportation area as customers deferred some maintenance to their equipment as their business levels declined. This also was true in the short line industrial rail market and again they tend to defer maintenance as their markets slowdown.

We did see some strength in the medium speed power generation area which benefited from favorable engine modification projects and direct part sales and a stable east coast marine market which benefited from that market continuing their overhaul programs. When adjusted for one-time costs associated with the cost reduction initiatives that we undertook in the diesel engine segment, if you add those back our operating margins would be over 11%. Later in this call I’ll come back and talk more about the diesel engine business and its margins.

During the first quarter in response to lower demand in both our business segments we did take specific steps to reduce overhead and costs. We reduced our shore staff by approximately 6% through early retirements and staff redundancies. We charged our P&L approximately $4 million before tax for these expenses which translates to about $0.05 per share. In addition, we implemented a shore staff hiring freeze for all officers and management salaries for 2008. We estimate that the early retirements and staff reductions will result in an approximately $0.02 per share savings in 2009 and then for the full year of 2010 about an $0.08 per share savings.

One important element which we’ve talked about in other calls and in conferences, that is part of Kirby’s business model, is our utilization of chartered power for a portion of our business. These chartered tow boats allow us to grow during strong markets and to contract when the market is weaker. During the quarter we were able to take out a number of tow boats. During the first quarter of 2008, just to give you a reference mark, we operated an average of 260 boats compared to the first quarter of 2009 where the average was 232 and today we’re currently operating 221 boats.

Additionally, barge retirements outpaced our building program and our tank barge fleet was reduced by 17 barges to a total number currently of 897 barges and Berdon will give you a little more color on that in a minute. These and other cost savings are the reason that Kirby was able to maintain its operating margins in the transportation segment despite declining volumes.

As we move through this period of economic challenge, we’ll continue to evaluate our shore staffing requirements, we’ll seek additional cost saving opportunities as we see them and we’ll continue to balance our horsepower with current volume requirements. Where appropriate, we’ll defer capital and we’ll reduce maintenance certainly on inactive equipment. We’ll come back at the end of our prepared remarks and talk about the second quarter and also our full year outlook but first I want to turn the call over to Norman.

Norman W. Nolen

First quarter marine transportation revenues declined 16% compared with the first quarter 2008 reflecting lower demand and lower diesel fuel prices that are passed through to our customers through fuel escalation causes in our term contracts. Approximately $16 million of the $42 million decline in revenue was due to lower fuel prices. Ton miles were 27% below the first quarter of 2008 but the impact on revenues was limited by time charter contracts.

Our marine transportation segment first quarter operating margin was 21.1% compared to 23.4% in the fourth quarter of 2008 and 21.3% in the 2008 first quarter. As Joe said, the operating margin held up well due to several factors including lower barge maintenance, improved operating efficiency, term contract escalations, better weather, lower depreciation and the impact of lower fuel costs. Excluding the charge for marine transportation, early retirements and staff reductions, the first quarter operating margin would be 22.3%.

The operating margin in our diesel engine services segment decreased to 8.7% in the first quarter compared to 12.3% in the fourth quarter of 2008 and 16% in the 2008 first quarter. Again, as Joe pointed out, excluding the charge for diesel engine services early retirements and staff reductions, the first quarter operating margins would be 11.1%. The lower margin reflected the decline in service and direct part sales to the Gulf Coast oil services and marine transportation markets resulting in lower labor utilization.

Cash flow in the quarter aided by a decline of accounts receivable sufficient to cover $65 million of capital spending and still pay down $21 million of debt. Our debt to capitalization ratio declined to 19.7% at the end of the quarter compared to 21.7% at December 31, 2008 and 25.9% a year ago. Our average cost of debt for the 2009 first quarter was 4.7%. The $64.8 million of capital spending in the first quarter included $48.5 million for new barge and tow boat construction and $16.3 million for upgrades to our existing fleet.

We slightly lowered our 2009 capital spending guidance range to $180 million to $190 million. This includes approximately $135 million for new barges and tow boats. For the remainder of 2009 we anticipate continued positive cash flow but not as strong as the first quarter though and a continued reduction in our debt to capitalization ratio.

I’ll now turn the call over to Berdon.

Charles Berdon Lawrence

During the first quarter we took delivery of 10 new barges and three new chartered barges with a total capacity of 291,000 barrels. As of March 31, we owned or operated 897 active tank barges with a capacity of 17.2 million barrels. We also took delivery of one 1,800 horse powered tow boat.

During the balance of 2009, we expect delivery of an additional 36 owned and four chartered barges with a combined capacity of 874,000 barrels and four 1,800 horse powered tow boats. The cost of the new equipment is approximately $135 million for 2009. Our current plan is to net retirements with new capacity maintaining our current capacity levels. We will continue to review this over the year and make adjustments as necessary. Two 10,000 barrel barges, one 30,000 barrel barge and two 1,800 horse powered tow boats have been pushed in to early 2010 for delivery.

I’ll now turn the call back to Joe.

Joseph H. Pyne

As we noted in January, we anticipate that overall demand will stabilize but at levels below 2008 levels. Once our customers have completed their inventory adjustments and begin to gain confidence with respect to what sustainable demand is. That assessment we made in January we think is correct based on what we’re currently seeing.

Burton gave you an update on our tank barge and tow boat construction program for 2009 and 2010. Remember that we committed to build this equipment in early 2008 when the market was very strong and ship yard space was very tight. Based on current market conditions and fleet utilization we have somewhat accelerated our retirement schedule for some of our older tank barge equipment.

Although we don’t know when the economy will begin to pull out of this recession, Kirby’s earnings and cash flow do remain healthy and we have a very strong balance sheet which will give us the ability to take advantage of opportunities as they may appear going forward. Lower utilization levels caused by excess capacity in the tank barge industry will likely be with us a while. We’re going to continue to focus on the things that we can control which is being safe, taking cost out of our business and making sure that we continue to provide our customer high service levels. We think that this coupled with right sizing our operations will help us control margin erosion.

With respect to the diesel engine side of our business, during April we have seen some slight improvement in our Gulf Coast oil service business and in the marine transportation market. We do anticipate that this trend is going to continue for the balance of the quarter. We also expect our power generation market to remain strong with some engine modification projects and direct part sales.

We have been able to bring operating margins up in the diesel engine business over the last several years. Last year we were in the mid teen area. We do believe that there’s going to be some margin erosion in this business but we’re still forecasting double digit operating margins in this sector. With all this in mind, yesterday afternoon we announced our guidance for the second quarter with a range of $0.52 to $0.62 per share which compares with the $0.74 per share that we earned same period the year before.

We’re giving a wider range than normal but we feel that it’s prudent to do that given our lack of visibility frankly, with respect to the year. With respect to the full year, we did lower our top end guidance $0.10 to $2.55 but we’re maintaining our $2.40 low end. We’ll continue to review this during the year. I think we noted that when we provided guidance for the year, we were one of the few companies that did that. We thought it was appropriate to provide it so you would have some insight with respect to how we were thinking.

As we make judgments about the year we’ll continue to adjust the guidance but at least for now we think the $2.40 to $2.55 a share is the appropriate place to be. Operator, we’ll go ahead and open it up for questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jonathan Chappell – JP Morgan.

Jonathan Chappell – JP Morgan

Joe, I wanted to ask a question about the industry capacity and you’ve highlighted that you’re doing some early retirements and what not. Are others being as proactive and removing capacity from the market? And, at the same time, have you seen any new build cancellations or anything like that given the tough banking markets right now?

Joseph H. Pyne

We frankly don’t know. I think [Jeff Boat and ACL’s earnings announcement said that they were continuing to build tank barges. Truthfully, any barge added to capacity right now is a barge that is just going to get tied up because it’s not going to be absorbed based on these volume levels. I would expect capacity to go out.

We have a lot of mature capacity that operators will have to make maintenance decisions around. About a third of the fleet is 30 years or older. But, this is not the time to be adding capacity to your fleet, this is the time as you correctly noted to be taking capacity out.

Jonathan Chappell – JP Morgan

Then, my follow up question, I think I might have asked this last quarter or maybe two quarters ago too, Kirby is clearly in a good financial position to weather a weaker volume environment and weaker credit environment as well. Have you seen any distressed sellers, any assets coming across your desk that may be attractive right now? I know you just said it’s not the time to be getting barges but, at the right price to have this financial strength to be buying at the trough of the market may be good for the long term.

Joseph H. Pyne

That’s a consolidation play not an incremental capacity play and this is the correct time to seek consolidation. I think the truth is that we haven’t gotten in to the real pain yet. That’s going to happen over the year. So, as we see more pain hopefully there will be some opportunities.

Operator

Your next question comes from Natasha Boyden – Cantor Fitzgerald.

Natasha Boyden – Cantor Fitzgerald

Given what’s going on with the economy and everything, there’s been some pretty bad news out there and the long term contract situation you have, are you comfortable with your counterparty exposure given your time charter contracts right now?

Joseph H. Pyne

Yes. There are some of our customers that are financially stronger than others but we think that we have appropriately reserved what we think our exposure is so I would say yes.

Natasha Boyden – Cantor Fitzgerald

I guess my point is do you think that this could become more of an issue in 2009? And if so, the company is obviously I presume has positioned itself in response to such an event?

Joseph H. Pyne

I think we’re positioned well for the exposure that we see. Frankly, I think that we’re a little less concerned about it today than we were let’s say three months ago.

Natasha Boyden – Cantor Fitzgerald

What would be the reason for that? Are you a little more confident in the economy in general?

Joseph H. Pyne

Yes, I think that the major destocking has occurred and that you’re going to see utilization improve. I also think that those companies that were exposed are reacting appropriately and protecting their business entities. There’s always the exposure out there Natasha but I actually feel better about it. We took a deep breath and reserved money on our balance sheet for the exposure end of last year.

Natasha Boyden – Cantor Fitzgerald

I don’t know if I asked too many questions there, I just have one quick one, I do know that you do have some more shares remaining under your repurchase program, do you have any plans to purchase any additional stock in 2009?

Joseph H. Pyne

No, we didn’t buy any stock and we were pretty clear that that wasn’t going to be our intention in our January call. This is a time when you want to preserve cash, preserve your balance sheet. Now, we’re not saying that we wouldn’t consider it at some point but at least from now we’re just preserving the balance sheet.

Natasha Boyden – Cantor Fitzgerald

There are better options on the table in other words?

Joseph H. Pyne

Yes.

Operator

Your next question comes from Alex Brand – Stephens, Inc.

Alex Brand – Stephens, Inc.

Joe, did you say how much spot pricing was down in the quarter and down more than that in April so far?

Joseph H. Pyne

I didn’t but let me say what it is, for the quarter it was 6% to 8% down. That’s fourth quarter to first quarter. That’s about where it is.

Alex Brand – Stephens, Inc.

Year-over-year that would be down how much?

Joseph H. Pyne

About 4% Alex. Just a caveat, remember that fuel was lower too.

Alex Brand – Stephens, Inc.

So you think fuel neutral it would be about flat then?

Joseph H. Pyne

It’s still down a little bit.

Alex Brand – Stephens, Inc.

Help me Joe sort of put the pieces here together because on the one hand you’re saying business stabilized, the destocking is over so we feel like volume might even get a touch better in Q2 but yet there’s a lot more pain ahead and that pain will allow us to potentially make acquisitions.

Joseph H. Pyne

That’s a good question and we kind of subtly addressed it in the remarks. It looks like that the chemical business is kind of rocking along the bottom and that there is some inventory building that is going to occur which short term will help utilization. But, we don’t know where the sustainable kind of level is right now so we don’t know where we’re going. That’s positive, on the bottom, slightly improving.

What’s negative is that you had an inefficient business in 2008 where customers worried that they couldn’t get coverage, took under contract a lot of time charters and what you’re going to see is some of those time charters release, they will go in the spot market. What the time charters do until they are released is artificially inflate utilization. What we think will happen is that you’re just going to have more equipment in the spot market which is going to put more pressure on rates at the same time that volumes are actually increasing.

Now, what we don’t know is will volumes increase enough to offset the amount of equipment in the market. That’s something that time will tell. But, in trying to kind of explain our exposure, that’s kind of where we are.

Alex Brand – Stephens, Inc.

So the volume is stable, the pricing is the real risk that you think could affect your competitors?

Joseph H. Pyne

Yes, I think that’s right.

Operator

Your next question comes from Ken Hoexter – Bank of America Merrill Lynch.

Ken Hoexter – Bank of America Merrill Lynch

Joe, can you talk a bit about the order book just a bit more? You gave great detail before but is there any ability, are these firm contracts that you have for these barges? I think you noted that you pushed out a couple of them out to 2010. Can you argue negotiating to perhaps do some more of that? Just give some background on that.

Joseph H. Pyne

No Ken, we’re going to build the equipment that Berdon talked about. We had some discussions about pushing some more equipment in to 2010 but frankly, from a cash flow perspective because of the depreciation rules in 2009 we’re better off going ahead and building that equipment and taking delivery of it in 2009. So, from a cash perspective, it’s better to go forward. Now, in 2010 other than the equipment that Berdon noted, we have no commitments currently to build 2010 equipment.

Ken Hoexter – Bank of America Merrill Lynch

How about on the other side, on retiring some of your existing fleet? It sounds like you might move to breakeven, in the previous question you just kind of highlighted how much you’re seeing volumes stabilize a bit, down I guess mid teens, what gets you to maybe move forward and pull some more equipment out? What is the age of the fleet? Are you looking at pulling stuff that’s closer to 30, 25 years?

Joseph H. Pyne

Well no, it will be the older equipment that we’ll pull. But, at the same time Ken, we’re happy to take equipment out of the market but not at the expense of market share. The whole industry needs to shed some equipment and we’re going to be prudent about it, we’re going to watch utilization levels and we’ll reduce our fleet as its appropriate to reduce it but not at the expense of servicing our customers.

Ken Hoexter – Bank of America Merrill Lynch

Your contracts, what percent now is under contract and what percent now is take or pay? Is it still 50% of it?

Joseph H. Pyne

80% is under contract. Well, we have some consecutive voyage contracts that are take or pay so probably north of 60%.

Ken Hoexter – Bank of America Merrill Lynch

60% of the 80%?

Joseph H. Pyne

Yes, right.

Ken Hoexter – Bank of America Merrill Lynch

Last question, just on the diesel engine services side, you mentioned that you thought you could keep the double digit margins, is that more on moving to additional cost cutting or is it kind of status quo what you will do or does it depend on the revenue flows over the next few months and quarters?

Joseph H. Pyne

All of that.

Ken Hoexter – Bank of America Merrill Lynch

So are there additional costs then that you’d look to pull out if we’re staying at these levels?

Joseph H. Pyne

Oh yes, we’re looking at additional cost opportunities throughout the year. We’ll continue to look at how we manage the business better, taking additional people out. We’re not contemplating that now but certainly if business levels fell we’d look at that too.

Operator

Your next question comes from [Jimmy Gibert – Rice Voelker].

[Jimmy Gibert – Rice Voelker]

I wanted to ask did the Lyondell bankruptcy create any opportunities for you guys to pick up new business? And, if you did, how important would that be in your overall revenue mix?

Joseph H. Pyne

I think it would be inappropriate to comment on Lyondell. It [inaudible] opportunities, some good, some bad but we think that Lyondell is actually going to work their way through bankruptcy and they’re going to merge as an important player and important customer of our company.

[Jimmy Gibert – Rice Voelker]

Then also you said you thought that there is more pain to come in your industry but it also sounds like you see some signs that maybe things have bottomed in the overall economy. What sort of clues do you look at or do you see in your business that maybe tell you things may have bottomed out in the overall economy? Or, is that your opinion?

Joseph H. Pyne

No, we look at volumes and the volumes seem to have stabilized and what we’re suggesting is that we’re going to see some slight improvement as customers continue to build their inventories. But, when the industry fleet is in the high 70% low 80% utilization, there’s going to be a lot of pressure. The way that that’s going to ultimately correct itself is volumes have got to come up or equipment has got to go out. Also, if this continues, if this is more than just a 2009 event, you’re going to see continued pressure on the whole business, the whole industry.

[Jimmy Gibert – Rice Voelker]

I was listening to the ACLI call yesterday and they seemed to think that some of the manufacturers in the Midwest and up north are starting to I guess restock inventories and they’re seeing some pickup at least in the sort of upper Mississippi, or I guess the north of Baton Rouge corridor. Are you guys seeing that in your business too?

Joseph H. Pyne

That’s what we are saying, that deliveries in to the Midwest appear to be improving. Now, everything is relevant. We saw probably the most significant destocking occur in the fourth quarter and the beginning of the first quarter that we’ve ever seen. Utilization rates in that particular market were 30%, 40%, 50% down. I’m not sure what ACL’s were but ours were probably about 40% down.

So, improvement from being down 40% is nothing to get terribly excited about but we do think that the trend is going to be up. That’s encouraging but I don’t want to make a bigger deal out of it than just that.

Operator

Your next question comes from [Asinial Jawani – Catapult].

[Asinial Jawani – Catapult]

I just had a quick question so I can understand the difference between what’s going on in the spot market and the charter coverage. Can you break out the average for the quarter as well as the current spot market day rates and compare that with what you realized through your charters?

Joseph H. Pyne

No, we won’t do that. That’s information we consider proprietary and not to our advantage to release.

[Asinial Jawani – Catapult]

Can you talk about how much I guess the magnitude of weakness in the spot market compared to your charter? I’m just trying to understand or get some ballpark about projecting 2010 so I wanted to try and understand how much weakness there is in the spot market relative to what’s being realized in 2009.

Joseph H. Pyne

I’d just reiterate what we said earlier and that is we rolled over for the most part contracts that were expiring in the first quarter where they were and where we gave up rate we traded it for some term and that spot rates fourth quarter to first quarter were down about 7%. I don’t think I want to say any more than that.

Operator

Your next question comes from Chaz Jones – Morgan Keegan & Company.

Chaz Jones – Morgan Keegan & Company

Maybe if I could ask the pricing question a different way, Joe you had commented that right now it’s kind of a race between volume improvement versus pricing deceleration and clearly it sounds like from the commentary in the release that the biggest concern is continued deterioration and spot pricing as more excess capacity comes in to the market. I guess my question would be generally speaking based on your past experience how many quarters does it generally take with negative spot pricing for that to translate to negative contract pricing?

Joseph H. Pyne

Chaz in the last recession which was what 2000, it kind of ended 2003 it really didn’t happen. The spot pricing was at times 25% below the contract pricing. Now, I think this is a kind of different recession so I mean the truthful answer is we don’t know. I’d hate to speculate because it would set an expectation that may not be appropriate to set.

Chaz Jones – Morgan Keegan & Company

I think everyone is trying to figure out whether ’09 is the trough year or not and obviously that’s the $64,000 question and to some degree is what happens with contract pricing probably.

Joseph H. Pyne

Add us to [inaudible].

Chaz Jones – Morgan Keegan & Company

Maybe just to circle back around on the capital structure, with the cap ex expectations over the next two years, if you guys don’t do acquisitions, it’s fairly conceivable that if you’re not debt free you’re going to be awfully close. Any updated thoughts on capital structure aside from acquisitions?

Joseph H. Pyne

Well, I’ll let Norman talk about the prospects of being debt free but let me comment that right now our focus is preserving a very healthy balance sheet given the prospects of being able to take advantage of situations in this market. Having said that, if those situations didn’t occur then we would have to do something else with the cash. We would consider at that point stock repurchases and even beginning to pay a dividend for those are kind of easy things to do. Let me just let Norman comment on that debt repayment [inaudible] the revolver debt.

Norman W. Nolen

Chaz, you’re observation is absolutely right. Right now we will probably, especially in 2010 will pay off our revolver pretty quickly. In fact, we could easily pay that off by the end of this year. We have a private placement, $200 million private placement that matures in 2013 which currently we have hedged in to a fixed rate position. So, that will give us a little I guess perhaps put us under pressure to use the cash rather than paying down the private placement which is really an attractive piece of debt, it would put us under pressure to do something like buy back stock or do a dividend. It’s just at this point we do anticipate maybe there is acquisition opportunities but clearly we’re going to be in a favorable cash position before long.

Operator

Your next question comes from John Larkin – Stifel Nicolaus.

John Larkin – Stifel Nicolaus

Not to beat a dead horse over the head here but just to make sure there’s no confusion amongst the listeners I think we pretty clearly got the numbers from you a couple of times on the spot pricing decline also that the contracts that were negotiated in the first quarter were more or less extended at the existing rates but then midway through the call that there were some inflation cost escalators including many of those contracts that might give you as much as a 4% or 5% increase in reality when you factor in the labor inflation and other elements of the inflation story. Did I hear that correct? And if so, what percentage of the contracts have those inflation adjustment mechanisms in them?

Joseph H. Pyne

Those are the multiyear contracts, contracts that in some cases don’t expire until 2013 and later. In those contracts we have the ability to adjust the contract rate for labor and for some kind of PPI index. It varies contract to contract. With respect to those contracts we saw as you work those escalation formulas increases in the 4%, maybe 5% range. That represents about 25% of our contracts.

John Larkin – Stifel Nicolaus

The other question I had regarding pricing related to your comment early on in the call that suggested that some customers may chose to essentially put some equipment back to you rather than renew the time charter?

Joseph H. Pyne

Right.

John Larkin – Stifel Nicolaus

Which effectively puts more equipment out on the spot market which could put pressure in the spot market. Can you give us any kind of a sense of order of magnitude of how big that impact might be if 80% of your fleet is on contract now, is it possible that 75% would be on contract by the end of the year or is it more dramatic than that?

Joseph H. Pyne

I think it’s probably plus or minus 5% in that area, somewhere between 80% and 70%. I think it is going to come down, I don’t think it’s going to be appreciable. But, it’s going to come down for the whole industry, that’s the point I’m trying to make.

Operator

Your next question comes from Daniel Burke – Johnson Rice & Company, LLC.

Daniel Burke – Johnson Rice & Company, LLC

Just two quick ones left I suppose, one I think last quarter you noted about 50% of the contract bids set to renew this year. I’m sure that’s sort of standard at the beginning of each year. I guess my question was is that portion of business that is renewing, is that ratable throughout the year or can you accelerate that and do more of that before ostensibly the spot market begins to lean a little more heavily on the spread between term and spot rate?

Joseph H. Pyne

Well, we’re always working with our customers to renew on terms that are favorable to both of us and are able to handle their requirements. So, I would say those discussions are going on in good times and in bad times. We like to get in front of our customers, talk about what they’re business needs are and make sure we’ve done what we’re planning to respond to those needs. If I said we’re doing that now, we do that all the time.

Daniel Burke – Johnson Rice & Company, LLC

You referred to Kirby’s utilization being in the low 80% and I think you made passing reference to the idea that maybe the industry was at or just below that threshold. Given your amount of term coverage, I’m a little surprised to see that the rest of the industry is that close. Could you maybe Joe address what you think maybe industry wide utilization is and thoughts on whether that could go below 75% or whether that’s really the bottom for companies excluding Kirby?

Joseph H. Pyne

I don’t think we know where it’s going to go. The volumes are as I said we think the volumes are stabilizing. We can only really speak to our utilization rates and I don’t know if ACL spoke to theirs yesterday. Utilization is a funny number as we’ve talked about before because it gets pulled around by weather events and navigating events. But, where we think that utilization is meaningful is that when you get in to the mid 80s, high 80s, you get some pricing stability [inaudible] pricing power but when it falls below that number you lose it pretty quickly. So, we’re really talking about utilization as an indicator of pricing direction.

Operator

Your next question comes from David Yuschak – Sanders Morris Harris.

David Yuschak – Sanders Morris Harris

As far as your assumptions Joe in the second quarter, $0.52 to $0.62, you’re saying that things look like they could be bottom stabilizing yet you had said earlier too that you had some concerns about visibility going in to the second quarter. I’m a little puzzled at the $0.52 because it would say that things aren’t going to get any better and with the performance that you’ve had in your EBIT margin here even in to the first quarter which is very impressive to begin with. What has to happen at that $0.52 versus maybe being at the upper end of the range as far as the ability to go from one to the other?

Joseph H. Pyne

We certainly were suggesting that but we’re giving a greater range. We think that’s consistent with the uncertainty out there.

David Yuschak – Sanders Morris Harris

Is that uncertainty more pricing than it is volumes maybe at this point?

Joseph H. Pyne

I think it’s probably more pricing than volumes but volumes can fall off too. I guess what I’d say about the range is that’s something that you’re going to have to make a judgment about.

David Yuschak – Sanders Morris Harris

When you take a look at your full year range, it’s -15% range and kind of that 15 basically kind of looks like it’s in the second quarter.

Joseph H. Pyne

What we’ve said about the year range though David, I think that a lot of companies aren’t forecasting at all and we’re trying to kind of feel our way through an environment that is full of uncertainties. We’ve put numbers out there and we’ve just said look this is how we see it and as we see it differently we’ll adjust the numbers. I think that’s all we can say about that. We’re giving you our best guess right now.

David Yuschak – Sanders Morris Harris

I guess that would be the same for the second half of the year too?

Joseph H. Pyne

Absolutely, admittedly it is.

David Yuschak – Sanders Morris Harris

Because when we look at the thing it kind of says you’d have to have a good pick up in the second half as well.

Joseph H. Pyne

That’s right.

David Yuschak – Sanders Morris Harris

Certainly, that’s a possibility given how bad things got at least with the spot. As far as your EBIT margins going forward, you really did a good job in this first quarter managing through the difficult time the maintenance sustained. What kind of vulnerability would you have to EBIT margins if pricing would get weaker versus some of the cost initiatives that you’re taking on the way to lower cost in this kind of environment? And, can they go higher next year from these levels?

Joseph H. Pyne

Well, they can go higher and they can go lower.

David Yuschak – Sanders Morris Harris

I’m just wondering what some of the economics of maybe getting them – can pricing really hurt the EBIT margins?

Joseph H. Pyne

Oh yes, because pricing has an effect on revenue so sure it can. But, we’re trying to maintain margins by taking costs out right now. If you continue to see revenue be down, then the margin gets more challenged. If revenue goes up then margins should expand if you can continue to control your costs.

David Yuschak – Sanders Morris Harris

So if I were to summarize some of the probes that I’ve been putting in there, pricing is going to be a really critical path to where the earnings come out this year and what potentially could be the direction of EBIT margins because right here, right now at these levels you’d have to assume volumes have to go up but the key factor from your end certainty point of view would be more pricing than it would be volume maybe?

Joseph H. Pyne

Yes, I think that’s what we’re saying. I think you’ve got that right.

Operator

Your next question comes from Charles Rupinski – Maxim Group.

Charles Rupinski – Maxim Group

I just had a question on when you talked about both for Kirby and for the industry taking out capacity, sidelining capacity given the weak environment and lower utilization, I’m just trying to get an idea of how much of that would you think about pulling from Kirby and the industry would be permanent capacity being taken out meaning vessels are scraped or reutilized in another form and how much would be just taking out temporarily or mothballing or laying up. Is there a way to think about that?

Joseph H. Pyne

Well, I think you get in to kind of your view of the recovery and what GDP growth is going to be over the next several years. I think that you hate to give a view on that but I think that capacity is going to have to come out to get utilization to levels that support price stabilization and some pricing on the upside.

Charles Rupinski – Maxim Group

Just a quick follow up, most of my questions have been answered but I’m just curious on an order of magnitude, if any, as far as your end markets are concerned, I was talking about General Motors for example having sort of taking the summer off on manufacturing, how much if any, impact would that have on your end users?

Joseph H. Pyne

Well, it will have some impact but the current housing business has been down for a while so I would say the impact isn’t going to be that significant. I think that most of that is already in the volumes that we’re carrying.

Operator

Your next question comes from Gregory Macosko – Lord Abbett & Co.

Gregory Macosko – Lord Abbett & Co.

Could you talk a little bit, go back to the fleet and the purchases and the expectations for this year and next year in terms of your adding to the equipment. I guess I wasn’t clear on the discussion of depreciation with regard to cash, etc. It would seem that if you held on to the existing both barges at this point that the return on capital might be better relative to other things and perhaps would make some sense to push that out. Discuss that with me and give me a feeling for why kind of continue to add to the new fleet?

Joseph H. Pyne

Greg, let’s just make sure we understand your question. You’re asking why would you retire equipment?

Gregory Macosko – Lord Abbett & Co.

Yes, exactly that’s the point, yes.

Joseph H. Pyne

We think that the industry needs less equipment that the roughly 3,050 barges that are out there if you’re at 80% utilization your over probably 450 barges long right now. Now, we don’t think that that’s going to continue, we think that volumes will improve and absorb some of that capacity. But, right now any incremental capacity that is added is a barge that is not going to be absorbed that the capacity is going to have to leave the system for us to get back in balance and that’s something that the industry is just going to have to reckon with.

With respect to our fleet, we’re just going to kind of maintain the status quo for right now and we’ll have slightly over at least current planning, slightly over 900 barges at the end of the year which is about the number we started at the beginning of the year. If we’re going to take any additional capacity out, those decisions are going to be made based on where we’re seeing the market going.

Gregory Macosko – Lord Abbett & Co.

But you did say you had considered pushing some out. I’m not suggesting that you add capacity, I’m just suggesting that why not just keep the same boats which I would assume would have a lower depreciated value and the return on capital would be higher but, are you forced, are there penalties and things?

Joseph H. Pyne

You’re going to have to maintain them and you’re going to have to spend in some cases some significant amounts of money to maintain them. Remember, these are inspected barges. Your older fleet you just tend to spend more money per barge, the younger fleet, yes you have more depreciation but you’re spending less maintenance money.

Gregory Macosko – Lord Abbett & Co.

Is there any other single skins left at all?

Joseph H. Pyne

No, we have five that they’re all gone within the next two years.

Gregory Macosko – Lord Abbett & Co.

So it’s basically a cash flow issue, in other words you’d spend more on maintenance as opposed to spend it now and trade out the old one. The argument then is the return on capital would be about the same?

Joseph H. Pyne

Well, I’m not sure we’ve done the calculation but from a cash perspective, you’re going to be better off taking new equipment and not spending money on the older equipment.

Charles Berdon Lawrence

You’re spending money on barges that are about to be retired one way or another.

Gregory Macosko – Lord Abbett & Co.

Then just talk if you would please a little bit about the diesel transport area where you talked about engine modification, you remained strong. Just give me some color on that market, I’m just curious about that.

Joseph H. Pyne

Well, in the marine business you’re overhauling engines and in the power generation business where we’re actually building some new units we would describe that a little different. So, it depends on kind of where you are in that business. We do both.

Gregory Macosko – Lord Abbett & Co.

So there’s more of that perhaps because people are a little bit idle so they figure they’ll fix a little bit of equipment now that it’s busy?

Joseph H. Pyne

No, they’re going to defer it Greg. What we’ve said is that we expect certainly in the oil service business that the customers are going to defer more maintenance than they’re going to do. But, having said that, I mean there is some sustainable maintenance that you’ve got to do. We hope we’ve forecasted that in to it.

Gregory Macosko – Lord Abbett & Co.

So maintenance business that you figure will pick up to some extent after having fallen off pretty sharply in the fourth and first quarters?

Joseph H. Pyne

Well, they’ll defer maintenance and then as business comes back then you’re really busy because you’ve got all this equipment sitting there that has been [inaudible] so you’ve got to do it to put the equipment back in the business.

Operator

We have no further questions at this time.

Steve Holcomb

We certainly appreciate your interest in Kirby and participating in the call. If you have any additional questions please give me a call. My direct dial number is 713-435-1135. We wish you a good day.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may all disconnect.

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Source: Kirby Corporation Q1 2009 Earnings Call Transcript
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