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Kirby Corp. (NYSE:KEX)

Q2 2009 Earnings Call

July 30, 2009; 11:00 am ET

Executives

Charles Berdon Lawrence - Chairman of the Board

Joseph Pyne - President, Chief Executive Officer & Director

Norman Nolen - Chief Financial Officer, Executive Vice President & Treasurer

Steve Holcomb - Investor Relations

Analysts

John Chappell - J.P. Morgan

Natasha Boyden - Cantor Fitzgerald

Ken Hoexter - Merill Lynch

Alex Brand - Stephens Inc.

Chaz Jones - Morgan Keegan & Co.

Mike Buttonfield - Stifel Nicolaus

Jimmy Gibert - Rice Voelker

David Yuschak - Sanders Morris Harris

Daniel Burke - Johnson Rice & Co.

Justin Myer - Lord Abbett

Charles Rupinski - Maxim Group

Operator

Good morning ladies and gentle and welcome to the Kirby Corporation second 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. Mr. Holcomb you may begin.

Steve Holcomb

Thank you for joining us this morning. Joining 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 KirbyCcorp.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, 2008 filed with the Securities & Exchange Commission.

I will now turn the call over to Joe Pyne.

Joseph Pyne

Yes, good morning. Yesterday, we reported net earnings for the 2009 second quarter of $0.63 per share compared with $0.74 per share reported same period last year. Our announced earnings guidance for the second quarter was 52 to $0.62 per share. For the first six months of this year, we earned $1.15 per share compared to $1.42 per share last year for the first half of the year.

During our 2009 first quarter, in response to the lower demand in both segments of our business, we took specific steps to reduce overhead and cost by reducing shore staff, our shore staff by approximately 60% through early retirements and staff reductions taking a $4 million before tax charge or a $0.05 per share charge against earnings.

Just as a reference point, last year at this time our shore staff headcount was approximately 10% higher than it is today, that’s a 6%, reduction in shore staff number, I think I misspoke, it’s 60%.

During the 2009 second quarter, our marine transportation demand across the majority of our market stabilized, but was well below at the prior year levels. We did see some improvements in up river movements of more finished petrochemical products when compared to the 2009 first and 2008 fourth quarters, with significant destocking of inventories occurred.

Demand on the canals stabilized and it appears to be bumping along the bottom. Weekly overall barge utilization for the second quarter ranged from a low of about 80% to a high of 85% which compares to a low of 90% to a high of 95% in the second quarter 2008.

During the second quarter, we maintained our revenue mix of revenue mix of 80% term and 20% spot. consistent with the 2009 first quarter and most of 2008. Pricing for services continued to be under some pressure. During the first quarter, we were generally able to renew our contracts at the same rates or in some cases we traded summary for increased contract terms.

During the second quarter, we experienced spot rate declines on a year-over-year basis in the 10% to 15% range which included fuel. Now we had that sharply lower fuel. Fuel would have accounted for about a half or may be slightly more than the half of this spot rate decrease.

The term Contracts Renewed during the quarter or renewals during the quarter were anywhere from renewed as expiring which would be 0% to may be 8% reduction. Time charter or daily rate contracts which reduce revenue volatility caused by weather and navigating delays and temporary market declines continue to represent about 55% of our total revenues during the second quarter.

The time charter mix was unchanged as decreases and time charter revenue were consistent with the decreases that we saw in our total revenue. We do expect the number of time charters. Contracts will continue to decline as customer’s size or time charters to their actual demand. Well our Marine transportation revenues declined $64 million during the second quarter and a $106 million from the first six months when you compare revenue to corresponding 2008 periods.

Approximately $23 million of this revenue decline for 36% of the second quarter revenue decline and $39 million or again approximately 37% of the first six month revenue decline was due to lower fuel prices. As fuel growth flowed through, our contracts being escalated or deescalated, deescalated in this case. Although we were impacted by high water both the Ohio River and lower Mississippi River, rivers during the majority of the second quarter.

Overall we experienced favorable weather and operating conditions for the second quarter as well as the first six months. The numbers show it. We saw in the second quarter, a 40% reduction in delay days and for the first six months say 45% reduction in delay days. So much slower delay days this year than last year.

The lower delay days did help to reduce operating expenses offset some of the financial impacts of lower demand levels, but of course also price down barge utilization because you have less delay days more barges to carry the cargos out there.

One key element in our business model is the use of chartered power for some of our business. Chartered power gives us the flexibility to grow during strong markets and contract when the market is weaker.

In the first and second quarters, we were able to take out a number of tow boats, mostly chartered tow boats which help reduce our costs, operating an average of 218 boats during the second quarter compared to 232 boats for the first quarter of 2009 and then when you go back to the 2008 second quarter, we operated 259 boats.

Additionally, we contained to retire more tank barges than we are building as we operated 894 tank barges as of June this year compared to 914 at the end of last year and 918 during the 2008. Being able to quickly and efficiently reduce cost is the reason Kirby was able to increase its operating margins in spite the decline in revenue and volumes.

We will continue to aggressively pursue costs that can be removed from our business providing; it does not compromise our service levels or shaking performances. Just touching on the diesel engine service segment of our business, demand levels for service and direct part sales remained weak as our customer based differed maintenance on equipment in response to lower utilization levels they were experiencing.

The medium power speed generation market did benefit from favorable engine generator set upgrade projects and from some direct part sales. The medium speed Gulf coast marine market also benefited from several international products that we did for the offshore oil service business.

I will come back at the end of the prepared remarks and talk about our third quarter and full year outlook, but let me turn the call over to Norman to brief you on the financial side of the business.

Norman Nolen

In spite of lower revenues our marine transportation segment second quarter operating margin increased to 24.4% from 22% in the second quarter of 2008. The higher margin reflected a positive impact on the first quarter’s early retirements and staff reductions, reduction of charter boats operated, more efficient operations at lower utilization rates, lower insurance claim losses and better weather and operating conditions.

The operating margin in the diesel engine services segment was 13.6% in the second quarter compared with 15.6% in the 2008 second quarter reflecting a decline in service and direct part sales to the Gulf coast oil services and in the marine transportation markets which drove lowered labor utilization.

Cash flow for the first six months aided by decline of accounts receivable was sufficient to cover a $116 million of capital spending and still allow us to pay down $37 million of debt. Our debt to capitalization ratio declined a 17 .9% compared with 21.7% at December 31 and 25.6 % a year ago.

The average cost of our debt for the first six months of 2009 was 5%. The $116 million of capital spending in the first half of 2009 included $84 million for new barge and tow boat construction and $32.6 million primarily for upgrades to our existing fleet. Our 2009 capital spending guidance remains at a $180 to a $190 million and includes approximately $135 million for new barges and tow boats.

For the remainder of 2009, we anticipate continued positive cash flow. I’ll now turn the call over to Berdon.

Charles Berdon Lawrence

Good morning, during the first six months we took delivery of 21 new barges and 7 new charted barges with a total capacity of 572,000 barrels. During the balance of 2009 we expect delivery of an additional 25 own barges with a capacity of 612,000 barrels and 318,000 horse power tow boats. The cost of the new equipment is approximately $135 million for 2009.

We committed to build this equipment in 2008 when the market was very strong and shipyard space very tight. Based on current market conditions and fleet utilizations we have accelerated the retirement schedule of some of our older tank barges. 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 barge, one 30,000 barrel barge and two1800 horse power tow boats have been pushed into early 2010 for delivery. I will now turn the call back to Joe.

Joseph Pyne

Thank you, Berdon. During the second quarter, as we anticipated we saw our overall marine transportation demand stabilized with utilization as I indicated earlier, week-to-week, somewhere between 80% and 85%.

Kirby’s earnings and cash flow remain healthy and should remain healthy. Our balance sheet will give us the ability to take advantage of opportunities which should come along in this environment. Lower utilization levels caused by excess capacity in the tank barge industry maybe with us for a while. Given this we will continue to focus on the things that we can control in the areas of safety, cost and survive levels and these coupled with reg-sizing or operations will help us control margin erosion.

In the diesel engine service segment, we believe the oil service market will remain weak. The medium speed rail market, we also anticipate, we will continue to be weak. This continued softness is primarily due to differed maintenance by customers due to reduced utilization of their equipment.

Power generation market which was the bright spot in the second quarter is anticipated to be below a second quarter levels as several projects have been deferred from the third quarter to the fourth quarter. Given all of this, yesterday we announced our 2009 third quarter guidance of $0.62 to $0.67 per share, which compares to $0.77 per share for the 2008 third quarter.

This forecast anticipates some modest improvement in the marine transportation segment, and some continued deterioration in our diesel engine business. While our visibility in regards to the 2009 second half remains a bit clouded, our low end $0.62 guidance assumes volumes will be consistent with the 2009 second quarter, this last quarter, in the high end the $0.67 guidance assumes volumes it will improve a little bit.

We have not forecasted any impact from hurricanes or tropical storms in our guidance. As for 2009 for the whole year we are maintaining our low end guidance, which was set at $2.40, but narrowing the high end of our guidance from 255 to 250.

Let me end the call with this, Kirby has a very strong balance sheet, low debt levels and favorable interest rates. A very low debts total capitalization ratio and we anticipate and project that our second half 2009 cash flow will even be stronger than our first half cash generation.

While our capital expenditures for 2009 are high because of our new barge and tow boat replacement program. We anticipate that our 2010 capital spending would be at much lower rates. All of these positive factors positioned Kirby to cope very well in this environment and give us the ability to invest in opportunities that we believe in the long term will bring significant benefit to our shareholders.

Operator, we are now ready to open the call up to questions.

Question-And-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from John Chappell from J.P. Morgan, please go ahead.

John Chappell - J.P. Morgan

Good morning. Joe, I want to ask the same question I asked three months ago. I think things have probably changed a little bit. Also your concluding remarks were a perfect lead in.

Given the substantial free cash flow generation and the low debt level, what are the opportunities that are out there right now, and maybe if you can talk a little bit about, are there captive fleets that might become available, are there fleets for any size, you have to go for onedies and twoies as far as assets are concerned. But how do to foresee the balance sheet and the opportunities kind of transpiring over the next six to 12 months?

Joseph Pyne

John, I think that there are going to be a number of opportunities and it’s going to be a range of all of what you just described. I think the important things is just be patient, whether there are a captive fleet or an independent or whether it’s just equipment, we are going to assess those opportunities as they come forward.

I think the advantage that Kirby has, that really a few companies in our business have is, is a balance sheet and the ability to borrow money that allows us to be opportunistic and take advantage of things that we see. If the economy is, I think, we believe that it will be still stable to very modest growth. There is going to be a lot of pressure on various peoples and the businesses that we are in and hopefully we can take advantage of that.

John Chappell - J.P. Morgan

When you think about the fire power that you have to make acquisitions, is there any growth CapEx for next year or is all the CapEx is going to be maintenance CapEx or what’s that type of run rate and then also you have $200 million plus on your credit facility. Do you think that the banks are there to lend even additional facilities given the strength of your balance sheet right now?

Joseph Pyne

Yes, the answer is yes, we do. We will essentially paid off our revolver, I think as of the end of the month it wasn’t fully paid off, I think there was about $8 million left on it, but that would be paid off pretty quickly.

So all off that is a dry power at favorable rates, we believe that there is additional barring capability out there or banks are telling the staff, it’s probably going to be a little more expensive though.

Charles Berdon Lawrence

I would also point out that we have investment grade rating, which is a big help in the market like this, we not only have access to the bank market but also the private placement market is pretty active right now and we feel comfortable, we can tap into that market.

Joseph Pyne

I don’t think our problem is going to be money, it’s just what is the opportunity, does it fit, how is it, how is it priced.

John Chappell - J.P. Morgan

And not to beat the dead horse here, but are there things coming across your desk right now, is this just a big variance between what you are willing to pay right now given the environment and what people are asking for or is it just a complete dearth of opportunities thus far?

Charles Berdon Lawrence

Yes, I actually think that it’s still a little early. The barge business really didn’t start to deteriorate until, well, for some segments of it, it was like last year. But for the canal segment for example it really wasn’t until the end of the year, the first quarter. So I think these opportunities are going to be ahead of us. We don’t for obvious reasons ever comment on any particular deal that we are looking at or even if we are looking at a deal.

But if you just look at the environment today versus let’s say the environment a year ago, the environment for continued consolidation in this business is certainly much better.

Operator

Our next question comes from Natasha Boyden from Cantor Fitzgerald, please go ahead.

Natasha Boyden - Cantor Fitzgerald

Thank you all, good morning gentlemen. One or two, comments in the press release I think you mentioned that there was a small pickup in up further demand essentially the results of some industries restarting that plant. Can you give us some more color as to what industries in particular and if you view this as a sustainable development?

Joseph Pyne

Yes, well, Natasha, we actually talked about that in the first quarter conference call. As you remember we anticipated that we see some improvement on the river. There was such a radical destocking that occurred at the end of the fourth quarter beginning of the first quarter that the production declines weren’t sustainable and as inventories cleared customers restarted their plans or at least most of them.

We think that what was happening today is that the customers are trying to fine tune their production to what they believe is sustainable demand and that has caused the inventory rebuilding and plans to be increasing their utilization, their capacity utilization.

Charles Berdon Lawrence

I think it is early to tell where this is going; I don’t think that we are going to see any serious decline. But I would be hesitant to predict that this trend is going to continue once the customers get comfortable kind of where that sustainable demand is.

I think realistically we are in for a period of stable to very slow growth and that the planning that we need to do is kind of around that scenario that we are not looking for short PDP growth kind of pull us out of this, what is going to pull us out of this is continuing to take capacity out of the system and working very hard on controlling and reducing cost.

Natasha Boyden - Cantor Fitzgerald

Great and that obviously is a good segue into my next question. I think you mentioned that your current yield pricing were 219 tug boats and down from 232 in the first quarter. Essentially how much capacity are you able to press release over the next coming month and have you laid up any own tow boat officials given the hard situation at the market?

Joseph Pyne

Yes, we have laid up some Kirby tow boats, I think it is 12, I think the number is 12, but the tow boat fleet today is sized to where utilization levels are. So I wouldn’t expect much more power to come out of the system, what we have done is we have taken the power out of the system that represented 90% to 95% utilization a year ago and taken it to where 80% to 85% utilization is today.

Natasha Boyden - Cantor Fitzgerald

Okay. So you don’t really anticipate perhaps not when you are going to chuffer in controversy you might have, you are pretty comfortable the way you are right now.

Ken Hoexter

Yes it is going to up and down, by 10, 12 tow boats in any given period based on utilization, but don’t look for the kind of reductions that we have just been through. You need power to move barges and the power is now sized for the utilization that we are seeing.

Operator

And our next question comes from Ken Hoexter from Merill Lynch, please go ahead.

Ken Hoexter - Merill Lynch

Great, good morning. Norman, I think you went over some of these numbers in the beginning, can you just kind of refresh us where are you on the contract book of business and where are you on as a percent of that the take or pays?

Norman Nolen

Yes. It is the contract, the spot mix is still at 80% contract, 20% spot and the time charters are still at the 55% level. But, I know you understand this Ken, but so everybody on the call understands it, that’s a relative number to the revenue reduction, total revenue reduction that you are seeing.

Ken Hoexter - Merill Lynch

So Joe when you talk about kind of the rates coming off, where were spot rates during the quarter?

Joseph Pyne

Well on a year-over-year basis they were down, 10% to 15%, over half of that we think is fuel related.

Ken Hoexter - Merill Lynch

Okay. All right. Now you talked about diesel margins actually did quite well moving up to 13% relative to I guess the last quarter, are there still costs that could be refined to get that back to where it was at 15% a year or two ago. Now you have to wait for a bit of the demand to come back on the diesel side as well.

Joseph Pyne

Well, the diesel business is a harder business to take course out of; because you are really you are selling people in the diesel business. As you reduce the numbers of people you have in that segment you lose that capacity. It’s different than just taking chartered boats out, because you can call the charter boats back when you start laying off mechanics they disburse in a charter to get back.

Having said that we are taking a hard look at that business, and kind of going through the exercise of where we think future sustainable demand is, so there maybe some opportunities to continue to take cost out, we are just not ready to declare that, but I’m comfortable telling you that we are taking a hard look at it.

Operator

Our next question comes from Alex Brand from Stephens Inc. Please go ahead.

Alex Brand - Stephens, Inc.

Hey guys how are you doing?

Joseph Pyne

Great. Thank you.

Alex Brand - Stephens Inc.

I apologize I just missed part of Ken’s question, I hope I’m not repeating, but you basically have peak margins when your barge revenues weighed out.

Joseph Pyne

Yes.

Alex Brand - Stephens, Inc.

So, there is no reason I guess, the caution necessarily goes up, but should we be thinking about that you can keep a lot of this cost save in place and that if you do get some utilization improvement, demand improvement oversight in the next two to three years that we can go up from the 24.5 % type margin to who knows what, but I mean something that we never thought of before.

Joseph Pyne

I want to think about that before we answer to that. Yes, I think the increased margins really attribute to a lot of hard work of Kirby employees really working to get cost out of the business.

Frankly, if you had asked me, yes, end of last year do you think that we would see margins increase in this environment, I probably would have said, I doubt it. We would be lucky to hang on to the margins if we have, but taking some of the pressure out of the business I think helped Alex.

I think when you are really busy trying to respond to customers requirements that may be almost beyond your real capabilities, you probably have some additional costs that once that pressure comes out, you can really focus on doing that business more efficiently. Let me think about that. That’s a fair question to ask, may be next quarter.

Alex Brand - Stephens Inc.

Can you quantify in terms of the help that you got to the margin this quarter, how much the delay days, the lower days added or was it not that meaningful?

Charles Berdon Lawrence

Well, it was meaningful in this respect. When you have poor operating conditions, you tend to use more power to meet delivery schedules and the fact that the delay days on a year-on-year basis for the first half 45% down, I think those reduce your cost and does help margins. I am reluctant to quantify because it would be pretty, pretty iffy number, but it helps.

Alex Brand - Stephens Inc.

Am I supposed to get back queue now or can I ask another one?

Charles Berdon Lawrence

You can ask one more.

Alex Brand - Stephens Inc.

Okay, thank you.

Charles Berdon Lawrence

If it is an easy one.

Alex Brand - Stephens Inc.

It is an easy one. I just want to know where we are in the renewal cycle. What percentage is left to renew in the back half?

Charles Berdon Lawrence

I think we are little more than a half way through.

Alex Brand - Stephens Inc.

Okay, thanks. Thanks for the time guys.

Charles Berdon Lawrence

Yes. Thank you.

Operator

Our next question comes from Chaz Jones from Morgan Keegan. Please go ahead.

Chaz Jones - Morgan Keegan & Co.

Okay. Good morning guys nice quarter.

Charles Berdon Lawrence

Thank you.

Chaz Jones - Morgan Keegan & Co.

May be I could ask Alex this question in a different way Joe. How much pricing pressure would you need to see in order for margins to become a little bit more susceptible?

Charles Berdon Lawrence

Well I mean, that’s probably the key question, it’s going to can be a function of how much additional cost you can remove to offset any pricing pressure you have and again I am not sure we are prepared to answer that Chaz other than to say, that as you get downward pricing and you don’t get utilization improvement, volume improvement that it’s much more difficult to support the kind of margins that we are seeing today.

Chaz Jones - Morgan Keegan & Co.

If you guys certainly have your pulse on the cost side, may be one follow up question. Did you buyback any stock in the quarter and if so, how much and at what price?

Charles Berdon Lawrence

Yes, we didn’t and if we have we would have - we would have told you in the press release, we would have told you.

Operator

Our next question comes from Mike Buttonfield [ph] from Stifel Nicolaus. Please go ahead.

Mike Buttonfield - Stifel Nicolaus

Hi, good morning gentlemen.

Charles Berdon Lawrence

Good morning.

Mike Buttonfield - Stifel Nicolaus

Got a question, going back to the prepared remarks where you talk about contracts being down that renewed anywhere from 0% to 8%. Are those strictly conflict that our one year in length you haven’t repriced any contracts down mid-single digits that are - that are longer than the year in length. Is that correct?

Charles Berdon Lawrence

It varies.

Joseph Pyne

Yes, it’s going to vary, but typically if you give a longer term contract, if you give a price reduction you are going to try to get it back on the out years and typically you are able to do that, but I can’t say that and I am not going to comment on them what contracts or where in that 0% to 8% range?

Mike Buttonfield - Stifel Nicolaus

Is there an average duration?

Joseph Pyne

Our average duration is about a year.

Mike Buttonfield - Stifel Nicolaus

Okay, about a year. If you had any customers who you expected to have rates in place with who have kind of, reneged on that and did their business again?

Joseph Pyne

Well, that happens all the time even in good markets. So, but I think that we are working very well with our customers. We like to think of our relationship with our customers as kind of long term relationships that are codified by contracts that reflect the dynamics of the market sometimes in our favor, sometime not in our favor.

Mike Buttonfield - Stifel Nicolaus

It happens in all markets, but have you seen a surge net activity?

Charles Berdon Lawrence

Surge, in what activity?

Joseph Pyne

Yes, surge in activity of customers asking for new contracts. We are already kind of locked in.

Charles Berdon Lawrence

No, we haven’t seen that. The rate discussions that we have are rate discussions at - at the expiration of the contracts. I don’t think we’ve had any customer that has come to us and said, in the middle of a contract we want a rate reduction, but we don’t come to - come to our customers when we are behind in a good market unless we have a contract we open and stay the same.

What I just want to tell you is that I think that for the most part we have a long term relationship with the customers that we do business with that that it’s a give and take relationship and we try to work together in our mutual best interest. Now, you always had the outliers that doesn’t work that way, but I think for most of our customer base these are relationships, and in some case it go back 50 years.

Mike Buttonfield - Stifel Nicolaus

Thanks Dave, I appreciate that detail, I just have one final question. On the press release you have a 19% decline in 10 miles you consider that an accurate reflection of the volume where there is still some distortion from length of pole changes.

Charles Berdon Lawrence

Yes, actually I think it’s a pretty accurate reflection of volumes and it’s consistent with what the chemical companies are saying for the most part, and they are saying about a 20% decline in volumes. Yes it’s going to vary customer by customer but overall Lee the chemical business is down about that.

Operator

Our next question comes from Jimmy Gibert [ph] from Rice Voelker [ph]. Please go ahead.

Jimmy Gibert - Rice Voelker

Joe thanks for taking my call.

Joseph Pyne

Sure.

Jimmy Gibert - Rice Voelker

Yes, I was going to ask you if you could talk about your refinery customers a little more for just a minute, and sort of the - as you see demand start to stabilize you hear about any plans from them to restart shutting capacity?

Joseph Pyne

Well, some of that - some of that’s been happened and over the core and over the half of the year, and when you say refinery customers are you talking about both plants that make refined products in chemical plants?

Jimmy Gibert - Rice Voelker

Yes. Well, I was more thinking about the chemical point?

Joseph Pyne

Yes, the chemical, you would see fine tuning going on all the time, and it goes back to really the customer base, trying to figure out where sustainable demand is. For example, about chemical and actually some closures very recently, others will bring up a plan.

It’s just pretty dynamic, and I’m not sure Jimmy that we know where it’s all going until they figure out what inventory levels they need and what production capacity they - they have to be at the support of those inventories. Yes, if we are getting closer to it because it was said earlier that it just feels to us that we are kind of bumping along the bottom and it looks like at least the national metrics, everybody looks ahead is also suggesting that.

I think that the real issue is you are not falling anymore, you are stabilizing, but with the growth rate coming out of here, that is going to pull up, not support current volumes.

Jimmy Gibert - Rice Voelker

Well, maybe like is there a certain level of a new normal level of business that you guys are looking at maybe into next year or?

Joseph Pyne

We are assuming that what we have is what we are going to have going forward. We are not basing our business decisions on a economy that - that’s going to produce a lot of growth, which means that 80% to 85% utilization is what we are going to see for a while.

So the decisions that we make to run Kirby and I suspect that the industry don’t know this for a fact, but I suspect that they are taking it along the same line that we are. That we are really talking about less capacity needed to service our customer base, and that there isn’t going to be a lot of growth.

So that capacity is going to have to come out of the system and we are doing some of that or also I would expect that the - the industry is also going to do it. Nobody is asking me about capacity additions, the barges that we are currently building, being built today or thoughts on 2010. But I think it helps answer your question. It looks like for the first half of the year somewhere around a 120 barges were added and that that number sharply slows down towards the end of the year.

At the end of the year, end of 2010 there is very little construction of the boats, and most of that construction is frankly 2009 capacity that was pushed into 2010, and if I had to project my guess is that we are going to end the 2009 year with about the same capacity that we came into it with, and remember about a third of the capacity that was being added this year is Kirby capacity, and Kirby is actually going to end in 2009 with less capacity than it had at the beginning of 2009. My guess is that’s probably going to be true throughout the industry.

End of 2010 we are going to have to figure out what the management is going to support and I do think that you are going to see capacity coming out pretty quickly, and the balancing act will be beyond it. So I think medium term the business is going to be fine. Short term we just need to get through this period and just figure out what sustainable demand supports.

That’s a long answer to your question, but I want to get that out.

Jimmy Gibert - Rice Voelker

Right. So, sort of just, so it’s the feeling is that the, I guess the aging of the total fleet will work in your favor especially in 2010.

Joseph Pyne

Yes, this is a mature fleet. A part of it is over 30 years old. So, the maintenance decisions that we have to make to maintain it are not hard decisions to make, not a hard decision, not to do the maintenance, that’s what I mean.

Jimmy Gibert - Rice Voelker

Right, well, thank you very much Joe.

Operator

Our next question comes from David Yuschak from SMH Capital. Please go ahead.

David Yuschak - Sanders Morris Harris

Good morning guys. We are taking some of my thoughts in the question then, to a follow up on with your comments were Joe, but as you look into the second half of this year, you guys have done a good job of holding into that 80%. As far as your term loans are concerned, term contracts are concerned and probably with some pretty good spot pressure here.

As you think about the second of the year, and the customers looking more towards, are you sensing the customers are thinking more spot term right now, even though you have been to hold onto those things or spot rated by where they can potentially go, given you the ability to negotiate long term food contracts.

Joseph Pyne

Yes, I don’t I am not sure where spot rates can go, they can also go lower, but whether, they will or not I think it’s too early to tell. Our 80% contract, 20% spot mix actually is higher than our traditional levels as , we’re typically 70/30. And I think when asked the last quarter we said that it’s going to be probably plus or minus, but I think it’s more likely to be minus 5%. So you could find yourself in the 75% contract, maybe even 70% contract.

David, that doesn’t particularly bother us. We like to have a spot presence. It was really an unusual decision to why that gripped up to 80%. The reason we did is that we knew that where we suspected that the things were going to change and we had customers still clambering for more equipments, so we let it ripped up.

I’m not so sure that 75, 25, 70/30 isn’t actually a better mix for us. We are in the spot market all the time, we have a lot flexibility, we can lever volumes in the spot market pretty well to take advantages of really other parts of our business. If it goes lower, I don’t think it particularly bother us.

Charles Berdon Lawrence

And you can better back up your term contract.

David Yuschak - SMH Capital

That’s why I was just kind of curious with when you mentioned, a lot of your capacities come on here, that’s going to come on in 2009 in this first half of this year and yet you are building steps to maintain that 80/20 mix.

What’s some of the dynamics, may be if your customer is preferring to do that, even though he knows what capacity has come along with all the capacity that wouldn’t come on in this first half to may be hold onto that 80 may have been shown up sooner than maybe later this year

Joseph Pyne

Well, remember that that’s a relative number David, that’s a 80/20 based on revenue that’s 20% lower. So.

David Yuschak - SMH Capital

Yes, that’s true too.

Joseph Pyne

Yes, and the number of time charters that we have, we do think may decline a little bit, but again if you are looking at a company that’s going to do well on this environment, relatively, everything is relative, Kirby is well positioned to do well as anybody with more spot exposures.

David Yuschak - SMH Capital

I have just one final question on. Lowering your guidance with the top [Inaudible] dime and nickel, is it just more concerns about the economic conditions right now or just maybe some concerns about the pricing?

Joseph Pyne

Well now just for clarity of where we think we are going to be, that’s kind of, if we do the math that’s kind of where it works, the math being if we are at the high end of the range we’re closer to 250 with the lower end of the range we are at 240.

Operator

Our next question comes from Daniel Burke from Johnson Rice. Please go ahead

Daniel Burke - Johnson Rice & Co.

Thank you for taking my call. Also, thanks for the detail on the volume of revenue that’s attributable to the fuel pass throughs. I guess if I’m thinking about things correctly the outright increase in diesel prices over the preceding couple of years could have masked to some extent underlying margin improvement at least if you look at a 1% basis, but one related question of that.

You mentioned in the press release, the operating margin on the [Inaudible] side is impressive. Can you quantify the lower insurance claim losses, was that all meaningful when we look at things year-over-year?

Joseph Pyne

It’s meaningful. Do we ever published that?

Charles Berdon Lawrence

We haven’t.

Joseph Pyne

We haven’t published it, but it’s a meaningful number and that’s, say for operations, but lower utilization, typically will help you in that area.

Daniel Burke - Johnson Rice & Co.

And Joe when you say meaningful is that worth a 100 basis points then, I mean in terms of margin, kind of look at it that way?

Joseph Pyne

Yes, I don’t think you would be qualifying it without we giving you the numbers. So I don’t think I want to comment on that.

Daniel Burke - Johnson Rice & Co.

Fair enough. Then, one other clarification, the barge utilization statistics you gave 80% to 85%, I just wanted to clarify. That was company rough wide, that wasn’t Canal only?

Joseph Pyne

No, that’s companywide.

Daniel Burke - Johnson Rice & Co.

And is it still the case that Canal is higher than the river?

Joseph Pyne

No they are about the same right now.

Daniel Burke - Johnson Rice & Co.

Okay great. Thank you.

Joseph Pyne

Plus or minus couple, couple of percentage points are about the same.

Operator

Our next question comes from Justin Myer from Lord Abbett. Please go ahead.

Justin Myer - Lord Abbett

Good morning guys.

Joseph Pyne

Good morning.

Justin Myer - Lord Abbett

Joe, most as a question I appreciate the kind of backs on the guidance,

you are assuming essentially flat utilization mix and so on as we move through the year even though it’s your point, things feel like they are kind of bottoming maybe improving a little bit, right?

Joseph Pyne

Right, certainly on the river.

Charles Berdon Lawrence

Yes. Just looking back to last year, you were called out of the time, I think it was $0.09 of impact from storms.

Joseph Pyne

Yes, last year was a pretty measurable year.

Charles Berdon Lawrence

That’s right, Yes.

Justin Myer - Lord Abbett

And that, given your markets particularly you guys heard relative to whatever historical storm activity there has been right?

Charles Berdon Lawrence

Well, what happened was those storms went right into the heart of the refining petrochemical production and it was extraordinarily disruptive, to those plants it was also disruptive to navigation on the Intercoastal canal, I think the canal, after Ike was closed for…

Joseph Pyne

11 days, and it came right up to Houston Ship Channel.

Charles Berdon Lawrence

And most of that was encapsulated in the third quarter. Either it was kind of back up and run that we modestly by the fourth quarter’s end.

Joseph Pyne

End of the fourth quarter and so it didn’t come back until the first quarter.

Justin Myer - Lord Abbett

Okay, all right. So just I am looking at the sequential kind of assumption moving forward and we just had to think about that year-over-year because that would have, it was pretty hard last year?

Joseph Pyne

Right. It would have made last year better.

Justin Myer - Lord Abbett

Okay, thanks a lot guys.

Operator

Our next question comes from Charles Rupinski - Maxim Group. Please go ahead.

Charles Rupinski - Maxim Group

Good morning Joe, Norm and Steve. I had a quick question, just a follow up on your comments. I appreciate your comments on the overall supply demand situation. When you talk about capacity being taken out, industry wide over this year and next year and the age of the fleet, is there any idea; I was thinking about how much that might come back or is that all basically barges are old enough that they are going to be scraped or reutilized or is there any of the capacity that could be taken out and come back at some point?

Joseph Pyne

Yes, typically when it goes out it doesn’t come back unless demand really sharply picks up and you can justify some really significant expenditures on an old barge and intuitively I don’t think that we are going to see that. What you typically see is barges and let me speak specifically Kirby. Kirby will not sell a barge that can come back and compete with us.

I think there are certainly a number of operators that feel the same day we do. So what we do is, look for an alternative service either out of a country or as a deck barge or a barge that is used in a fleet when they were building casinos a lot of old tank barges were platforms for casinos so truly were many of those today and we are scrapping barges too. The scrap market not as brisk as it was a year ago, but we still can scrap and make some money doing so.

Charles Rupinski - Maxim Group

Great. And just one follow-up, for 2010 is not much coming on in the log that was push out from ‘09. What about the barge manufacturers, I mean, do you have a take on what financial and other position there and from an operating standpoint over the next, say, three or four years.

The situation where they could be in some kind of distress or a situation where they might not be able to build the barges as quickly in the next cycle; anything you think about on that?

Joseph Pyne

Yes, I hate to give you a view of that because the two major barge manufacturers are both public companies, I would rather have you asked them that.

Charles Rupinski - Maxim Group

Fair enough. Well, thank you for your time.

Operator

And your next question comes from Bill Baldman [ph] from Baldman Anthony, please go ahead.

Bill Baldman

Thank you. A little bit late Joe, but we haven’t talked a lot about kind of what’s going on, can you give a little bit color and kind of update us too.

Joseph Pyne

It’s still going. It’s a relatively the dominiums part of our business, so we don’t talk about it unless somebody ask about it. But the economy as of course effective, the containers that are available for transport and other modes of transportation have tried to get competitive also.

So there is always a tug of war. The there are some things that are coming out of Washington that are intended to encourage moving containers off of roadways and railroads or railways, on to water and we are watching that. We are also diversifying a little bit to take advantage of some other markets if they can participate in and we continue to where we can look at taking cost out of that business.

Operator

And that was our last question.

Joseph Pyne

Well, good.

Steve Holcomb

Okay. We appreciate your interest in Kirby and participating in our call. If you have any additional questions or comments you can give me a call. My direct dial number is 713-435-1135. And 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 Corp. Q2 2009 Earnings Call Transcript
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