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Kirby Corp. (NYSE:KEX)

Q2 2011 Earnings Call

July 28, 2011 11:00 a.m. ET

Executives

Steve Holcomb - Investor Relations

Joseph Pyne - President, Chief Executive Officer & Director

Greg Binion – President, Chief Operating Officer

David Grzebinski – EVP, Chief Financial Officer

Analysts

Alex Brand – SunTrust Robinson

Ken Hoexter – Merrill Lynch

Kevin Sterling – BB&T Capital Markets

George Pickral – Stephens

John Barnes – RBC Capital Markets

Chaz Jones - Morgan Keegan & Co.

Steve O’Hara – Sidoti & Company

Operator

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

I will now like to turn the call over to Mr. Steve Holcomb. Mr. Holcomb you may begin.

Steve Holcomb

Good morning, thank you for joining us. With me today are Joe Pyne, Kirby’s Chairman and Chief Executive Officer, Greg Binion, Kirby’s President and Chief Financial Officer, and David Grzebinski, 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 10-K for the year ended December 31, 2010 filed with the Securities & Exchange Commission.

I will now turn the call over to Joe.

Joseph Pyne

Thank you, Steve. Late yesterday, we announced net earnings for the 2011 second quarter of $0.77 per share, tying Kirby’s previous record earnings of $0.77 per share reported third quarter of 2008 and reflecting a 43% improvement over the $0.54 per share reported as second quarter last year.

Our 2011 second quarter results included an estimated $0.07 per share impact, negative impact, from the record setting high-water experience throughout the Mississippi River system during the quarter. I’m pleased to report the river system is now back to normal water levels and this occurred kind of mid-July.

The 2011 second quarter was a very active time for Kirby on the acquisition front and I want to briefly bring you up to date with respect to where we are on these acquisitions.

On April 15, we completed the acquisition of the United Holding, a land-based diesel engine and transmission service provider as well as an oil service equipment manufacturer. United is doing well, capitalizing on strong demand in the land-based oil service business, and they are accretive – were immediately accretive to our second quarter earnings, and frankly, ahead of our plan.

To help us manage our expanded diesel engine service business, I’m pleased to announce that David Whisenhunt has joined the Kirby organization as the Executive Vice President of Engine Services. David will bolster our diesel engine service management team and will work with both Kirby Engine Systems, which is our heritage business and United, which is our new business.

David brings 30 years of diesel engine service, over 30 years of diesel engine sales, operations, and management experience to this segment of our business. He previously held positions with The Wood Group, GE Power, and Steward Stevenson.

The acquisition of K-Sea Transportation was completed on July 1. K-Sea is a large U.S. coast wise tank barge operator. K-Sea has a diverse geographic footprint and operates on the East, west and Gulf Coast as well as on the Great Lakes, and in Alaska and Hawaii, and owns one of the youngest fleets in the U.S. coastal tank barge business.

We believe our purchase of K-Sea and our entrance into the U.S. coast wise tank barge market was well timed. This business, supply and demand is coming into balance and it’s improving as demand improves, and as single-hual barges are phased out of service. And also, term and spot rate contracts are currently stabilizing.

Our relatively quick earnings recovery would have been very difficult to forecast a year ago. For a business that traditionally reflects the domestic economy, our success is surprising but also understandable. Low natural gas prices from shale formations have not only changed the competitiveness of the U.S. Petrochemical business, but it provided new crude oil volumes to be transported by tank barge, we think, both inland and off-shore tank barges. And has also helped drive the success that we’re seeing our land-based diesel engine service business

I’m going to come back at the end of our prepared remarks and talk about our 2011 third quarter and our full-year outlook, including United’s and K-Sea’s anticipated contributions.

Now I’m going to turn the call over to Greg, to recap our Marine transportation and diesel engine service second quarter operations.

Greg Binion

Thank you, Joe, and good morning to all. During the 2011 second quarter, Kirby’s petrochemical and black oil fleets achieved utilization rates in the low to mid 90% range, the highest equipment utilization rate since the third quarter of 2008. This high equipment unitization was driven by continued strong customer volumes as well as the high water and flooding conditions on the Mississippi River system experienced during the second quarter that created delays and increased transit times.

During the quarter, 66% of our Marine transportation revenue were produced servicing our petrochemical customer base. The domestic petrochemical industry continues to benefit from low priced natural gas, providing it with a competitive advantage to global markets.

This feed stock advantage continue to result in improved volumes of domestically produced petrochemicals for both domestic consumption and exportation. The black oil fleet which produced 21% of our Marine transportation revenues, continued to see heavy demand driven from higher refinery output and the continued exportation of heavy fuel oil.

We are also beginning to move crude oil produced from South Texas, Eagle Ford Shale formations, loaded in the Corpus Christi, and delivered to the Houston and Louisiana area, as well as the transportation of crude oil from the Midwest to the Gulf coast.

The second quarter also benefited from all four of our Ocean going dry-bulk barge and tug units working in the coal and rock trade.

Revenues from our long-term contracts, that is contracts with over 1 year in duration, remained at 75% and the mix of time charter and the freightment business, continued at approximately 56% and 44% respectively.

With a respect of pricing during the second quarter, when term contracts were renewed, we achieved price increases in the 3 to 5% average range, when compared with the 2010 second quarter. This is an improvement over the 2 to 4% increase in the term contract prices achieved during the 2011 first quarter when compared to the 2010 first quarter.

Additionally, our multi-year contracts have annual escalations based on labor and producer price index. Some of these are adjusted each January, and this year’s adjustment provided rate increases in the 1 to 2% range.

Spot contract pricing during the second quarter increased in the mid-to-high single digit range compared with the 2011 first quarter, and in the high-single to low-double-digit range when compared to the 2010 second quarter. Contributing factors to higher spot contract pricing were higher equipment utilization levels, both from improved volumes and the high water and flooding conditions, as well as from a 23% increase in fuel prices, 2011 second quarter over first quarter which are included in spot market pricing.

When you exclude the fuel price impact, the second quarter spot market pricing increased in the mid-single digit range compared to the 2011 first quarter. We anticipate our customers – excuse me, our petrochemical customers volumes will remain strong as they benefit from low natural gas prices, a major feed stock in the production of petrochemicals.

We also continue to hear a planned plant expansions of petrochemical and refinery facilities on the Gulf Coast that will benefit both our inland and off shore tank barge operations going forward.

We also anticipate that the movement of crude oil will increase over today’s levels with the continued development of the South Texas Eagle Ford Shale formations, as well as possible other increases in crude oil movements from the Midwest refineries to the Gulf Coast – Midwest to the Gulf Coast.

We continue to invest in our inland fleets, both in terms of new construction and upgrading existing equipment. This program continues to improve the reliability of the fleet, improves our customer service, and reduces the number of – it reduces our shipyard cost and the number of days out of service.

During the 2011 first half, we took delivery of 21 new 30,000 barrel tank barges and five 10,000 barrels charter barges, adding approximately 650,000 barrels of capacity. However, during the first half, we retired 32 tank barges and returned two charter barges, thereby reducing our overall active capacity by approximately 600,000 barrels.

We did add 20 tank barges with the purchase of the ship-bunkering operation of Enterprise in February, which added approximately 400,000 barrels of capacity. So net-net our active tank barge fleet increased by about 450,000 barrels during the first half of 2011.

As of June 30, we operate 837 tank barges with a capacity of 16.4 million barrels.

For the 2011 second half, we plan on taking delivery of 19 new tank barges with a capacity of approximately 500,000 barrels. We also plan on continuing to retire older barges. Net-net at the end of 2011, our total inland tank barge capacity should remain at 16.4 million barrels.

In addition to inland tank barges, we’re building three, 2,000-horsepower tow boats for delivery in 2011 and early 2012. We’re also building two offshore integrated dry-bulk barge and tow-boat units for use under long-term contracts. The cost of the two units is approximately $100 million and they’re scheduled to be completed in 2012. We will make progress payments on these two units totally approximately $35 million during 2011.

K-Sea’s fleet consist of 38 – excuse me, 58 tank barges, 54 of which are double hull with an average age of 9 years, and 63 tow boats. K-Seas total tank barge capacity is 3.8 million barrels. Of K-Seas four single hull vessels, three are scheduled to be operated through 2014, then will be scraped or sold. As Joe say’s, K-Seas fleet is one of the youngest in the coastwise trade.

Turning to the diesel engine services segment, during the 2011 second quarter, our April 15 acquisition of United had a significant positive impact on the segment’s revenues and operating results. United contributed approximately 70% of the segments revenue during the second quarter and achieved an operating margin in the high single digits.

Both the United’s revenue and operating margins were better than we originally expected, and were achieved despite some supply chain disruptions from trailer manufacturers who were hit by recent tornados in the midwest and also the midwest flooding.

United’s manufacturing and servicing of hydraulic fracturing equipment, sale of transmissions and diesel engines in the compression business were all above our expectations.

The heritage diesel engine services segment also benefited from a continued strong power generation market with several engine generator set upgrade projects and strong part in engine sales in the power generation sector.

However, we continue to see a weak service in direct parts sales across the majority of our Gulf Coast oil services market as our customers continue to defer major service projects.

We also continue to see some pricing pressure in the Gulf Coast high-speed markets as competitors bid for the reduced level of service work in parts sales. We do anticipate this market to slowly improve during the second quarter of 2011 and in the 2012 as the industry adjust to the new safety regulations and drilling permits are issued.

I’ll now turn the call over to David.

David Grzebinski

Thank you, Greg. Good morning everyone. Let me provide a few more financial details. Kirby’s marine transportation revenue was 16% above an operating income, 18% above the 2010 second quarter. The segment’s operating margins were 21.9% compared with 21.6% from last year’s second quarter. High-water and flooding issues throughout the quarter negatively impacted the quarter’s results and operating margin.

Our estimated operating margin without the negative impact of the high water and flooding was 23.8%. The continued positive operating margin reflected the improved petrochemical and black oil products demand and equipment utilization, and higher term and spot contract pricing during second quarter that Greg mentioned. These positive factors were partially offset by a 23% increase in diesel fuel prices.

With the purchase of the United on April 15, our diesel engine services revenues increased 293% and operating income, 328% above last year’s second quarter. The segment’s operating margin was 10.3% compared with 11.3% reported in the first quarter of this year.

As Greg reported, United’s revenues were better than we expected from both the service and manufacturing sectors, and their operating margin was slightly higher than historical United operating margins, as some volume leverage flowed through to the bottom line.

However, and we’ve made this comment before, United’s operating margins are lower than Kirby’s Legacy heritage diesel engine segment margins by at least a couple of percentage points due to the manufacturing sector carrying lower margins.

This quarter, Kirby’s Legacy diesel engine services operating margins were strong due to the timing of several power generation projects, which helped this, segments overall margins.

We continue to generate significant cash during the 2011 first half with EBITDA of 180 million. At March 31, we had 172 million of cash and cash equivalence on the balance sheet. We used this cash and borrowings under our revolver facility to fund the $270 million purchase of the United.

Our capital spending for the first half was 98. – excuse me, 98 million and consisted of approximately 60 million for new tank barges and tow boats and approximately 38 million for capital upgrades to the existing fleet.

Our capital spending guidance for 2011 is 225 to 235 million, and includes approximately 120 million for construction of the 40 inland tank barges and two inland tow boats, and progress payments on 2012 inland tank barge and tow boat construction.

The guidance also includes approximately 35 million in progress payments for the construction of two offshore dry-bulk barge and tug units. Anticipated capital expenditures for K-Sea for the 2011 second half are minimal.

We currently have agreements for the construction of 52 new tank barges with the capacity of approximately 935,000 barrels for delivery in 2012. The cost is approximately 95 million, and the majority of which will be spent in 2012.

We financed the K-Sea acquisition with a new $540 million unsecured term loan and approximately 1.9 million shares of Kirby common stock.

The term loan was funded on July 1, which was the closing date of the K-Sea acquisition, is with a group of commercial banks and has a five-year maturity. The term loan has a variable interest rate based on LIBOR. The interest rate spread varies with the company’s senior debt rating, and is currently 150 basis points over LIBOR. The term loan is subject to quarterly amortization and is pre-payable in whole or in part without penalty.

As of June 30, our debt to total cap ratio was 20.5% reflecting the borrowings under our revolver to fund the United acquisition. On a pro forma basis, assuming that K-Sea acquisition had closed on June 30, thereby adding the 540 million term loan to Kirby’s outstanding debt, and reflecting the issuance of 1.9 million shares of Kirby common stock. Kirby’s debt-to-total cap ratio would have been approximately 38.8%

I’ll now turn the call back to Joe.

Joseph Pyne

Thank you, thank you, David. I’m going to talk about our guidance for the third quarter and for the year. We announced our 2011 third quarter guidance range of $0.82 to $0.87 per share yesterday afternoon. This compares with the $0.57 per share reported for the same quarter last year.

For the third quarter, we’re forecasting that utilization of our inland petrochemical and black oil products fleets will continue to range the low-to-mid-90% level. And based on these utilization rates, pricing should improve modestly.

Our guidance assumes that the U.S. Petrochemical production of both domestic and exported chemicals will remain strong on a – based on continued low natural gas prices. In addition, our guidance assumes that the U.S. Gulf Coast refinery utilization will be stable with continued exports of fuel oil and heavy fuel oil All of this should result in continued favorable term contract renewals as well as favorable spot rates.

For the third quarter, we do anticipate lower results from our existing offshore operation, which consist of four dry bulk units, as one of those units enters the shipyard for some major maintenance during the quarter.

Our third quarter guidance assumes positive operating income from K-Sea, however, acquisition transaction fees, interest expense on the new term loan and the negative impact on earnings per share from issuing the additional shares as part of the acquisition, will offset K-Seas operating income from a EPS standpoint for the quarter.

With respect to the diesel engine service sector, our guidance assumes continued strong manufacturing and service levels out of United, and generally in line with their performance during the second quarter.

We also anticipate that in the marine engine part of our business, it will improve based on some customers overhaul projects, which were deferred out of the second quarter, into the third quarter. And also some modest improvement in the oil service business in the Gulf Coast.

Our previous guidance for The United contribution to the 2011 year earnings was in the 20 to $0.25 per share level or range. We’re pleased to say that based on current projections, United contribution to our third quarter earnings as well as our year-end guidance exceeds those levels.

For the 2011 year guidance range, we have raised and tightened our earnings estimate to a historic record level of $3 to $3.10 per share from the guidance that we issued earlier, which was $2.70 to $2.90 per share. A significant improvement when you compare it to the $2.15 per share we earned for 2010. Our record previous earnings were the 2008 earnings of $2.91 per share.

Before I open the call up for questions, I want to comment further on Kirby’s growth opportunities going forward. We’re very pleased with this year’s acquisitions and the strong management teams, which they bring with them.

These are businesses that we’re already in; the diesel engine service and liquid barge transportation. They all either extent our geographic footprint or position Kirby to service a new market. They also extend our future investment opportunities.

Kirby’s in great financial shape. Our debt-to-total cap, as David reported, is in the 38% range. If we were to apply our excess capital to paying down debt, including factoring in our anticipated capital expenditure program, we will be debt free sometime in 2014.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator instructions). Our first question comes from Alex Brand from SunTrust Robinson. Please go ahead.

Alex Brand – SunTrust Robinson

Hey, good morning, guys.

Joseph Pyne

Good morning.

Greg Binion

Good morning.

Alex Brand – SunTrust Robinson

I hate to do this, Joe, because you just went through so much detail on your guidance, but I just want to understand that it sounds like everything is kind of tracking, in terms of recovering. United is doing a little better than you thought, so when I look at – if I take Q2, and I add back the $0.07, I would normally expect your business to be a little stronger in the third quarter, and I’m just wondering if there are some puts and takes there that maybe I need to be reminded about.

Joseph Pyne

Yeah. Well, a couple of things: the existing offshore business has a unit and shipyard so that is going to reduce the contribution from that segment.

Alex Brand-Stephens Inc.

Yeah, I just didn’t think that was that big; that’s part of the reason I asked.

Joseph Pyne

Yeah, and then the existing diesel heritage diesel engine business, which those earnings are driven by the projects that they are in the middle of, will – that part of the business, the power generation part of the business is also down a little bit.

Alex Brand – SunTrust Robinson

Okay, and with respect to K-Sea, last time we had a call, you didn’t own it yet and you were reluctant to talk about synergies and things you thought that might – you could maybe affect by putting the businesses together. Is there any color you could maybe give us on what that might look like if there is anything you can bring to bear on their cost structure?

Joseph Pyne

Yeah. Alex, it’s still too early to quantify, but we estimated that we would capture $7 million of synergies pretty quickly. And we will have captured that by the end of the third quarter. What we’re doing with respect to the integration with K-Sea is we are working with their management team, with a defined process of identifying additional synergies. That is going to occur in the third quarter, early fourth quarter. We’ll make some decisions this year, and really look, probably early in 2012, for that to be implemented.

I think until that process is over, it would be premature to suggest anything more than we’ve put out. We think there is more there, but not willing to quantify yet.

Alex Brand – SunTrust Robinson

Okay, fair enough. Those are my two, so I’ll get off. Thanks guys.

Joseph Pyne

Thank you.

Operator

Thank you. Our next question comes from Ken Hoexter from Merrill Lynch. Please go ahead.

Ken Hoexter – Merrill Lynch

Hey, good morning, Joe and Dave and team. As I look at the business really starting to ramp up, and now you’ve got full focus on getting the synergies on the mergers, you did a great job during the down turn and taking costs out, I think a lot better than we had anticipated. But as you see this start to ramp up, and you even highlighted how pricing is finally starting to kick in to gear as well. What do you expect in terms of cost ramping up in both sides of the business, as you are going to take on more volumes?

Joseph Pyne

Yeah, Ken, with respect to the inland marine business, we don’t think that based on hard capacity levels that we need to add people – at least G&A people, and we won’t have to add power either because we are essentially fully utilized so all of the power is in there.

If we add capacity, then you’ll have to add power and there will be some G&A costs that would be associated with that capacity, depending on how much you add.

On the diesel engine side, we sized that business so they could see improvements in the 10-15% range, and not have to add people. So, I think the message here is that those costs that we took out should pretty much stay out, as margins and rates improve.

Ken Hoexter – Merrill Lynch

Great feedback. Thanks.

Then, you know, K-Sea – to Alex’s question, you were getting more into a synergy discussion on what you would anticipate, but maybe just taking a step back and talking about the business itself. And can you comment on how the business is in that market. And you know, obviously, you made the acquisition but didn’t go into great detail because you wanted to close it before commenting on it, but maybe you could talk about how the fundamentals are trending in that segment, relative to the inland segment, and how you gain those synergies over time.

Joseph Pyne

Great. That’s a great question. That business went through a lot of pain in 2009 and ’10, and I’m talking about not specific to K-Sea. It was just part of the pain. What we see is the excess capacity shrinking. We think that as the single skin barges come out, and they all have to be out by the end of 2014, it’s going to continue to move to balance. But what is also encouraging is that the recent reopening of a couple of Delaware Bay refineries, one is just opening, and I think another one is scheduled to open later this year, should improve volumes. And there are also opportunities for the movement of crude oil from south Texas, this Eagle Ford play, we think along the Gulf Coast.

So, we are encouraged with respect to what we see. We think the recovery is going to be over the next several years. We don’t think that it’s going to happen this year. We think you’re just going to see a gradual strengthening of this business, and it should be back to, frankly, where it was in 2007, early 2008. But it’s going to take a couple of years to do that.

Ken Hoexter – Merrill Lynch

Thanks for the touch up.

Operator

Thank you. Our next question comes from Kevin Sterling from BB&T Capital Markets. Please go ahead.

Kevin Sterling – BB&T Capital Markets

Good morning, everyone.

Joseph Pyne

Good morning.

Kevin Sterling – BB&T Capital Markets

Joe, I’d like to touch on utilization. You’ve got really good utilization. Do you think you could continue to push your barge utilization, or do you think we’re near peak?

Joseph Pyne

Yeah, Greg, you want to take that?

Greg Binion

Sure. Kevin, it’s like a little bit like unemployment. There is some time period between our voyages on large contracts of freightments that you just can’t get to, and we are in the mid-90% level range, you’re pretty close to getting there.

Having said that, we serve several markets, and there is always an opportunity to improve the way we assign vessels to voyages and try to compress that, and we work on that every day, as evidence by our improvement in our horse power utilization rates over the last couple of years. But in general, when you get to the mid-90’s it gets pretty difficult to push beyond that.

Kevin Sterling – BB&T Capital Markets

I’d like to follow-up on that, because I think, Joe, it was a year, maybe a year and a half ago you were talking about your utilization being higher than the industry’s, and I’m wondering where you think we are today. Of course, your utilization continues to be very strong. Do you think the industry has caught up, in particular given the growth we’re seeing in crude oil by barge?

Joseph Pyne

Kevin, we do believe that the industry utilization rates are about on par with where we are today, and that is part of the reason why pricing has begun to move. Quite frankly, maybe just a little sooner than we thought. Some of that is driven by base demand, and some of that has been because of this historic high water event that we had during the second quarter.

Kevin Sterling – BB&T Capital Markets

Okay, thank you. That’s a good explanation.

Male

Thank you, Kevin.

Operator

Thank you.

Our next question comes from George Pickral from Stephens, please go ahead.

George Pickral – Stephens

Hey guys. Kind of following up on the last line of questioning. As it stands now, I think you said you have, Greg said, 52 barges on order for next year. Do you have any thoughts on whether those will be used to grow the fleet, or if you are simply going to use them for replacement again next year, kind of like you’ve been doing over the past couple of years?

Greg Binion

George, primarily, they will be used for replacement.

George Pickral – Stephens

Okay. My follow-up then, barge margins if you exclude the weather, around 24% like you said, which is essentially near the peak margins in ’08. It looks like K-Sea’s is going to bring that number back down to the last 20’s. Joe, I think in the past you’ve talked about getting up to the high-20’s barge operating margin.

Do you need to revise that, or do you still kind of stand by that? Is that kind of the right way to think about peek margins at this point?

Joseph Pyne

When we talked about that, we were talking about inland margins. David, do you want to…

David Grzebinski

I think in the legacy business, or the inland margins, we could be in the mid-20% range, and maybe a little above that. As pricing rolls through here, and we have taken a lot of cost out of the business, and we’ve streamlined the operation to better serve the customer, and it’s paying dividends. So we should hit higher highs in the legacy business, if you will, but as you pointed out, George, K-Sea will bring down the average of the segment margins a couple percent, at least.

And over time, it will get back up, and we will get everybody kind of at the same level, but K-Sea’s markets, as Joe mentioned, are just now in the process of recovering.

George Pickral – Stephens

Okay, great. Thanks for the time.

Operator

Our next question comes from John Barnes from RBC Capital Markets. Please go ahead.

John Barnes – RBC Capital Markets

Good morning, guys. Couple of questions. I want to follow-up back on George’s question about the barge orders. You said primarily for replacement, so primarily lose a little bit of earnings there. So, what are you thinking in terms of growth next year, with those barges?

Joseph Pyne

John, we haven’t fully declared, but it does appear to us that the volume levels are going to be pretty strong, and that may warrant some additional capacity, but we are not ready to say that that is going to happen, yet.

John Barnes – RBC Capital Markets

Okay. That makes sense. Can you give us an idea that once those barges are delivered, and you finish the program this year, what is going to be the age of your inland barge fleet at that point? Do you have a rough guess?

Joseph Pyne

It’ll be in the 19 year range, but it continues to move down. Our barge age will move down in 2011, and move down again in 2012. So, we’re looking at, in 2012 potentially, 18, maybe even a little less, on average.

John Barnes – RBC Capital Markets

Okay. Joe, going back to K-Sea’s and the coast-wise business again, I’m just curious as to if you look at the business and your growth opportunities, obviously they’ve got a customer base, do you see more opportunity to sell in to new customers, or do you see more opportunity to sell in to the existing customer base?

Joseph Pyne

Actually, both. Greg’s inland tank barge business has been working very closely with the K-Sea sales team, and I’m going to let him comment on some of the things that you are talking about.

Greg Binion

Sure, John. We’ve been comparing notes and talking about opportunities where there may be the cross sale between the two fleets. And one of the areas of strength, of course, that we have on the inland side is with the petrochemical customer base. And K-Sea has several units that are capable of moving those, but just don’t have the relationships that we do. So we’re in terms of the process of trying to introduce them to those customers.

Additionally, we are just making sure that they see all of the opportunities that we see on the Kirby inland marine side from Eagle Ford shale play.

Additionally, there are times when our business deep loads and we may have some spot requirements that we are unable to apply inland equipment against, so we again want to make sure that K-Sea sees that.

So, those are the kinds of things that we’re doing on a day-to-day basis, as well as exchanging information about our customer base relationships that we enjoy.

Joseph Pyne

I think that, just further commenting on K-Sea, I think that the customer base sees K-Sea as a great company, strong management team, but was concerned with respect to how they were structured, and their – not necessarily their viability, but the limits that the MLP structure and debt has on their fleet. I think almost to the customer that we’ve talked to welcomes K-Sea under an umbrella that is financial a lot stronger than where they were on a standalone basis.

John Barnes – RBC Capital Markets

Okay, that makes sense.

Last question for you guys. I appreciate the commentary around pricing, and obviously, I agree with the sentiment about a little more than expected, a little sooner than expected.

I’m curious, the last time we saw utilization popped at these levels and you had as an outlook, you guys were willing to take on a little more contractual business than spot. I think you’d always maintained a goal to get back down to that 75/25 split. But I’m just curious, with utilization improving as quickly as it has, with rates having popped back up and with what I think is going to be a very balanced supply demand equation, are you starting to see an uptick in requests for more contractual quotes, or do you think we still need a couple more quarters of this kind of strength before you start to see that uptake?

Joseph Pyne

You’re beginning to see it, but remember that we moved our spot contract exposure from 70 to 80% because we were, frankly, concerned that the business just couldn’t carry the capacity that was being introduced much longer, so we did it as a conservative measure.

I think that at least where we sit now, based on equipment that is being projected to be built in 2012, that we are going to have a pretty strong market, assuming the economy hangs together, assuming that natural gas prices remain at these approximate levels for a while.

I’d be comfortable, or we would be comfortable probably with probably a little more spot exposure. Now, what happens is, you go to the market and you test it and say I’m willing to let this business go because the customer’s not going to agree to the rate increase. I think what surprised us a little bit is that the customer did agree to it, which is indicative of where we are in the market. All of that has to be qualified by the fact that there is a very difficult operating environment out there, and there may be some anomalies that were occurring this current quarter that over time will work through the system and utilization may come down a little bit.

We are pleased with what we see, we’re pleased with the talk of new capacity. We’re seeing some of that. When I say new capacity-new petrochemical capacity-we are encouraged by the liquids that are coming out of south Texas that need to be transported by barge because the infrastructure just isn’t there to move it by pipeline. So, a lot of positive things that are encouraging. We just need to let the year play out, see where utilization ends up and hopefully the industry is going to be disciplined with respect to capacity, and so far they have been. So, things are looking pretty good.

John Barnes – RBC Capital Markets

Okay. Nice quarter guys, I really appreciate your time.

Operator

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

Chaz Jones – Morgan Keegan & Company

Good morning everyone.

Joseph Pyne

Good morning.

Chaz Jones – Morgan Keegan & Company

I just want to ask a big picture question here, maybe thinking about the inland marine industry over the next five years. You know, kind of going back historically, if my recollection is right, you know, tonnage or volume growth kind of track GDP in the industry maybe over the last 20-30 years, 2-3%. But with these secular trends going on with the export story, with the plant production increase, more product moving in to Houston, Corpus, these sorts of things? Has that changed the historical sort of baseline tonnage trend, maybe up to the 5-6% range over the next five years, or do we have to see housing and auto to come back stronger for that to play out?

Joseph Pyne

Well, it’d be interesting if housing and auto did come back strong. That would be another significant boost to volumes that need to be moved. Our utilization rates are at these levels without that, which is encouraging, indeed.

Chaz, I’d hesitate to try to quantify that. I think the traditional GDP growth rate for our business is probably too low, based on what you just said, but I think it’s too early to say it’s double. It also depends on, what is GDP? Pretty anemic right now.

Chaz Jones – Morgan Keegan & Company

But it sounds like if it played out that way, the current capacity situation on the industry isn’t high enough to even handle the volume.

Joseph Pyne

If everything came back right now, that’s correct.

Chaz Jones – Morgan Keegan & Company

Okay. Then, I had just one quick follow-up. Just one the corporate expense fund, and I know this is an itty-bitty thing, but that was up in the quarter. I’m going to guess that was related to acquisition, activity, expenses and those sorts of things. If it wasn’t, let me know, and then should that come back down below 4 million, or is that a new range for it with the acquisitions?

David Grzebinski

Chaz, this is Dave. It’s related with the acquisitions. We will have some more acquisition expenses in the third quarter, but then the fourth quarter you should see it come down a bit.

Chaz Jones – Morgan Keegan & Company

Okay, great. Thanks guys.

Operator

Thank you.

Our next question comes from Steve O’Hara from Sidoti. Please go ahead.

Steve – O’Hara – Sidoti & Co.

Hi, good morning.

Joseph Pyne

Morning, Steve.

Steve – O’Hara – Sidoti & Co.

Could you just talk-I don’t know if you said it or not-but are you guys still looking for acquisitions actively? Then, going back to the debt cap, what could you theoretically bring that up to, or what is your comfort level there, if you were still looking?

Joseph Pyne

I’m going to answer the first part, then I’m going to let David answer the second.

We are always looking for acquisitions, but the issue is what is out there, and what is the relative value?

David Grzebinski

On the debt to cap, it comes down to debt to cap, as Joe mentioned, we’re about 38% debt to total cap right now. We believe we could get up to about 50% and still maintain an investment grade rating. So, that gives us some capacity, but as we mentioned, the cash flow generation of the company is pretty strong, so we should be able to de-lever pretty quickly, so, if an acquisition came tomorrow, we’d have the room to get up towards the 50%, but if it’s six months of the year, the cash flow generation will add to our capability, if you follow me.

Steve – O’Hara – Sidoti & Co.

Okay, then going back to the scheduled refinery openings, how much of that is in your guidance, and how does that change it if it’s not?

Joseph Pyne

Yeah, I’ll let Greg comment on the inland marine, and how it might affect inland marine, but as it relates to K-Sea, refinery utilization coming up is certainly helpful. The volumes are still fairly low, and they’ve got a ways to go, so it’s going to take some time.

We haven’t factored a lot of that in to the guidance as it relates to K-Sea. I don’t know if you want to comment on-?

Greg Binion

Sure. On the golf coast, petrochemical expansion, there are some of those that are really pretty short term that have happened, or will happen pretty quickly. Typically, it’s reopening existing plants that have been moth balled. Those are all in our numbers. There are some longer term additional capacity that’s in the three to five year time frame that is excluded.

The message though is that our customers are really encouraged by the current environment around feed stock pricing, and also taking advantage of the tremendous infrastructure that the US has to offer them along the Gulf Coast, and are making decisions today, that are long term capital investments on the golf coast that will position them to produce more products in the long-term in this area, so we are very encouraged by that.

Steve – O’Hara – Sidoti & Co.

Okay, great. Thank you very much.

Operator

Thank you, and I am showing no further questions at this time.

Joseph Pyne

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

Operator

Thank you.

And thank you ladies and gentlemen. This concludes today’s teleconference. Thank you for participating. You may now disconnect.

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Source: Kirby Corp CEO Discusses Q2 2011 Results - Earnings Call Transcript
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