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Executives

Steve Holcomb – VP – Investor Relations

Joseph Pyne – Chairman, CEO

Greg Binion – President, COO

David Grzebinski – EVP, CFO

Analysts

Ken Hoexter – Merrill Lynch

Alex Brand – SunTrust Robinson

Mike Buttonfield – Stifel Nicolaus

Kevin Sterling – BB&T Capital Markets

Chaz Jones – Morgan Keegan

David Beard - Iberia Capital Partners

Steve O’Hara – Sidoti & Company

Jimmy Gibert - IBERIA Capital

Sander Todd - Creighton

Kirby Corporation. (KEX) Q3 2011 Earnings Call October 27, 2011 11:00 AM ET

Operator

Welcome to the Kirby Corporation Third Quarter Earnings Conference Call. My name is John and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to 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 Operating 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 are with respect to the future or 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 and quarterly report on Form 10-Q for the period ended June 30, 2011 filed with the Securities and Exchange Commission.

I will now turn the call over to Joe.

Joseph Pyne

Okay. Thank you, Steve, and good morning. Late yesterday we announced record setting net earnings for the 2011 fourth quarter of $0.94 per share, which reflects a 65% improvement over the $0.57 per share reported for the 2010 third quarter.

This quarter, we also closed the acquisition of K-Sea Transportation on July 1st. K-Sea is a coastwise and local tank barge operator with a diverse geographic footprint, operating on the east, west and Gulf Coast as well as the Great Lakes and in Alaska and Hawaii and owns one of the younger fleets in the U.S. coastwise tank barge business.

The K-Sea fleet consists of 57 tank barges, 54 which are double hull with an average age of about nine years and 63 tugboats. K-Sea's total tank barge capacity is 3.8 million barrels.

Our record third quarter results reflects a strong inland tank barge transportation market. Accretive operating earnings from K-Sea a robust land-based diesel engine service business and an improved marine and stable power generation service business.

Original earnings guidance range for the third quarter was $0.82 to $0.87 per share. On September 19th, we announced that we expected our third quarter results to exceed $0.90 per share. Yesterday, we announced $0.94 per share. Stronger than expected petrochemical volumes stable, domestic refinery production held by some export volumes, favorable weather, higher term and contract rates all impacted our results for the third quarter.

Development of U.S. shale formations for oil and gas, not only drove our land-based diesel engine service business, but also a low price natural gas is driving U.S. petrochemical volumes and the liquids coming out of these formations are providing black oil volumes to move, all very positive.

As we expected, and as we've commented on before K-Sea's accretive operating results were generally offset by investment banking and legal fees, higher interest expense and the dilutive effect of the issuance of 1.9 million shares that Kirby stock associated with this acquisition.

For the third quarter K-Sea's equipment utilization rate was in the mid to high 70% range. The Atlantic Pacific and Hawaii fleets experienced good equipment utilization rates. The New York harbor-based fleet reflected lower utilization rates due to some overcapacity principally on the bunker market. With respect to pricing, contracts in this market renewed basically as expiring, but spot contract rates improved in the low to single-digit percentage range.

During the 2011, third quarter approximately 60% of K-Sea's coastwise and local revenue was under contract and 40% was in the stock market. A time charter is represented about 90% of the revenues under term contracts in the third quarter.

With respect to K-Sea, we are working with Tim Casey and his management team integrating K-Sea were appropriate into Kirby. We expect this integration process will be completed early next year. K-Sea's market is certainly more difficult that are in the transportation business. We're pleased with our their progress and believe that this business should continue to improve over the next couple of years as single hull vessels leave the market and volumes improve.

I'll come back at the end of end of our prepared remarks and talk and about our fourth quarter forecast as well as the full year outlook. Now we're going to turn the call over to Greg for a recap of our – and the marine transportation business and diesel engine services business also.

Greg Binion

Thank you, Joe and good morning to all. The domestic petrochemical industry continues benefit from low price of natural gas providing it with the competitive advantage to global markets.

This feedstock advantage continued to provide us with improved volumes at domestically produce petrochemicals for a domestic consumption and also for exportation. Kirby's black oil fleet continues to see strong demand driven by stable refinery output and the exportation of heavy fuel oil.

In addition, we are benefiting from some new incremental demand driven by the movements of crude oil produced from South Texas, Eagle Ford shale formations from the Corpus Christi area, the Houston, and the South Louisiana refineries. And also, Canadian crude oil movements from St. Louis area to refineries in lower Mississippi River as well.

We expect the movements by crude by barge will continue as shale formations are further developed. The agricultural chemical market was also very strong during the latter half of the third quarter with the traditional Midwest fall filled. During 2011, third quarter Kirby and marine's petrochemical and black oil fleets achieved utilizations in the low to mid 90% range.

In our inland markets revenues from long-term contracts that is, one-year or longer in duration remained at 75% and the mix of time charter and freightment business continued at approximately 54% and 46% respectively.

Moving to inland marine transportation pricing, contracts that were renewed during the third quarter achieved price increases in the mid-to-high single-digit range when compared with the 2010 third quarter. This compares with the low to mid single digit range achieved in the 2011, first and second quarters compared to the – for contracts renewed during the period of the 2010 corresponding quarters.

During the third quarter, spot pricing which includes the price of fuel increased in the high single to low double-digit ranges compared with 2011 second quarter. We continue to invest in our inland fleet both in terms of new construction and upgrading our existing barges. This program continues to improve the flexibility of the fleet, improves customer service and reduces shipyard days and out of service days.

During the 2011 first nine months we took delivery of 32 new 30,000 barrel tank barges and 5,000 to 10,000 barrel charter barges, adding about 955,000 barrels of capacity. Offsetting this during the first nine months we retired 51 tank barges in return four charter tank barges, thereby reducing our overall active fleet by about 980,000 barrels.

We added 20 tank barges with the purchase of ship bunkering operating of the enterprise in February, adding approximately 400,000 barrels of capacity. So in net-net, our active tank barge fleet increased by approximately 375,000 barrels during 2011 first nine months. As of September 30, we operated 827 tank barges with the capacity of 16.3 million barrels.

For the 2011 fourth quarter, we are planning on taking delivery of eight new tank barges with the capacity of about 200,000 barrels. We also plan on continuing to retire older barges. So net-net at the end of 2011, our total inland tank barge capacity should remain at 16.3 million barrels.

In addition to inland tank barges, we are building six 2,000 horsepower inland towboats with two scheduled for delivery in the fourth quarter of 2011 and four scheduled for 2012 delivery.

We are also building two offshore articulated dry bulk tug barge units for use under long-term contracts. The cost of these units is approximately $100 million and their scheduled to be completed in the second half of 2012. We'll make progress payments on these two units totaling about $35 million during 2011 with the balance in 2012.

In addition to two offshore units I just noted, Kirby's 2012 new constructions will consist of 52 inland tank barges with the total capacity of about 930,000 barrels. The cost is about $95 million, the majority of which will be expended in 2012.

For 2011, we anticipated that industry-wide, about 150 tank barges will be delivered into service, 40 of which are for Kirby and we've been estimating that about 150 older tank barges would be retired from service.

Due to the improved demand for inland petrochemicals and black oil barges and federal tax incentives on new equipment, during 2011, we estimated approximately 200 tank barges are currently on order industry-wide for delivery throughout 2012. In offset, and it will be offset to some degree depending on market conditions by retirements.

Short to medium term, we do not see this is a problem for Kirby as current 2011 and projected 2012 petrochemical and refinery production level increase crude oil movements in the current tank barge utilization level support these new additions.

Turning to the diesel engine services segment, our April 15, acquisition of United continued to have a significant impact before the third quarter revenues and operating results. United contributed approximately 75% of the diesel engine services segment revenue during the third quarter achieving an operating margin in the high single-digits.

United's revenue and operating margins continued to be better than we originally expected. United's manufacturing of hydraulic fracturing equipment and sale and service of transmissions and diesel engines were above our expectations as exploration and development of the United States shale formations continues at a rapid pace.

Our Legacy diesel engine services segment also benefited from continued strong power generation market with engine generator set upgrade projects and strong parts and engine sales.

Our service to the inland marine operators improved during the third quarter, a reflection of the improved inland liquid marine transportation market and maintenance on river vessels prior to the Midwest fall harvest.

I'll now turn the call over to David.

David Grzebinsk

Thank you, Greg. Good morning, everyone. Let me provide a few financial details. Kirby's marine transportation revenues were 51% above and operating income 52% above the 2010 third quarter.

The marine segments operating margin was 22.2% compared with 22.1% for the third quarter of 2010. The significant increase in both revenues and operating income included continued strong performance from our inland marine transportation sector with high equipment utilization levels and favorable pricing as Greg mentioned.

Our legacy marine transportation sector achieved an operating margin in the mid 20% range during the third quarter. The segment revenue increase included K-Sea, which contributed approximately 20% of the third quarter's marine transportation revenues. As expected, K-Sea was accretive to our third quarter operating income. For the third quarter, K-Sea's operating margin was in the low double digit range.

Our diesel engine services revenues increased 338% and operating income 371% above last year's third quarter with the increase predominantly due to the acquisition of the United on April 15.

The segment's operating margin was 10% compared with 9.3% reported for the 2010 third quarter. As Greg reported, United's revenues and operating results were better than we expected both from the service and manufacturing sectors and the operating margin in the high single digit range was higher than historical United operating margin, as the higher volume leverage flowed through to the bottom line.

Kirby's legacy third quarter diesel engine services operating margins was strong due to timing of several power generation projects and the improved inland marine market, which helped the segment's overall margins.

We continue to generate significant cash during the first nine months of the year, with EBITDA of $308 million. Our capital spending for the first nine months was $163.2 million and consisted of $110.1 million for new tank barges and towboats as well as progress payments on the two new offshore bulk dry barges that Greg mentioned. And then, another $53 million for capital upgrades to the existing fleet. Capital expenditure for K-Sea's and United during the third quarter were minimal.

Our capital spending guidance for 2011 remains in the range of $225 million to $235 million, which includes approximately $120 million for construction of new equipment. As you know, we financed the K-Sea's acquisition with a new $540 million unsecured term loan and approximately 1.9 million shares of Kirby common stock.

The term loan was founded as July 1st the closing date of the K-Sea acquisition. As of September 30th, the term loan balance was $513 million. Also as of September 30th, we had $83 million outstanding under our $250 million revolving credit facility. This morning, our revolvers outstanding balance was $33 million, since the acquisition of K-Sea, our peak debt hit $860 million, but as of yesterday it was $747 million, a reduction from the peak of $113 million.

Based on our current cash flow productions with no further acquisitions and tank barges in towboat construction at levels equal to scheduled retirements, we would anticipate being debt free some time during the year of 2014. Let me be clear we do not anticipate this happening, as historically Kirby has done the major consolidator in the inland tank barges sector. And now being the largest operator in the 180,000 barrel coastwise trade, we believe we will be able to entertain consolidation opportunities in that area as well.

As of September 30th, our debt to total capitalization ratio was 36% compared with 20.5% at June 30th. This reflects the new term on associated with K-Sea acquisition, less some debt repayments during the quarter. I'll now turn the call back to Joe.

Joseph Pyne

Okay. Thank you, David, I want to give you some insight with respect to the fourth quarter. Yesterday afternoon we announced our 2011 fourth quarter guidance range of $0.97 per share to $1.02 per share. This compare to $0.59 per share reported for 2010 fourth quarter.

Our fourth quarter guidance assumes that the U.S. petrochemical production for both domestic use and export will remain relatively strong based on continued low U.S. natural gas prices and we will continue to export some diesel fuels as well as heavy oil.

We are forecasting for the fourth quarter in the marine transportation utilization levels to be in the low 90% range. This is one or two percentage point off of the full utilization levels or practical of full utilization about 95%.

The third quarter was a very frothy driven by low inventory levels which were the result of infrastructure issues caused by the flood in the second quarter. The market is returning to more normal levels. Still high utilization and with rate momentum but not quite a frothy environment we saw at the beginning of the third quarter.

For the fourth quarter, we do anticipate higher results from our four offshore drive boat units as all four of those units are fully employed for the quarter. Our fourth quarter guidance assumes positive operating results from K-Sea. However, anticipated winter weather conditions the seasonality in there Alaska and Great Lakes business and interest expense coupled with the impact on EPS on issuing the 1.9 million shares associated with this acquisition will offset most of K-Sea's contribution operating income for the quarter.

For diesel engine, the service sector, our guidance assumes continued strong land-based manufacturing and service levels from United, generally inline with how United perform during the third quarter.

We anticipate our Legacy diesel engine market will be inline with the third quarter and our power generation market will have a fewer engine generator upgrade projects and some lower parts in engine sales. We also anticipate our Gulf Coast oil service market to reflect continued modest improvement during the fourth quarter.

Our 2011 guidance range was raised and tightened to a new level of $3.30 per share to $3.35 per share. Our previous guidance levels had been $3 to $3.10 per share and of course much improved from the $2.15 reported last year. Our previous record year and this is a historical record for Kirby was in 2008 when we reported $2.91 per share. Now, obviously we are very pleased with our operating results thus far this year.

The acquisitions we have made positions Kirby in markets which we believe will perform well and have growth opportunity. We are rapidly paying down our debt as David mentioned $113 million already from peak debt levels, at least as of yesterday.

Our two businesses, which are in more challenging markets are K-Sea and our Legacy diesel engine business will continue to improve as capacity tightens and volumes expand for K-Sea and drilling activity increases in the Gulf of Mexico for our Legacy diesel engine business.

Operator, I think we will now open the call 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 Ken Hoexter from Merrill Lynch. Please go ahead.

Ken Hoexter – Merrill Lynch

Hey. Good morning Joe and Dave.

Joseph Pyne

Good morning.

Ken Hoexter – Merrill Lynch

If I can jump in on the chemical car loading, if I look at the rails, we've seen moved to kind of negative volume growth the last few weeks, yet you talked about low natural gas, I guess, Greg talked about low natural gas prices remaining positive for outlook. I just want to understand, we haven't seen it separate from rail volumes too often, why would you see that strength to continue?

Joseph Pyne

You actually do see it historically separate from time to time, Ken, having watch this through 27 years. And in your railcar loadings you have other things, it's not purely a liquid measure. There are some plastic pallets for example in those numbers also. We are not hearing any concern from our customers with respect to the volumes that we carry, we were also probably a little closer to kind of base inventories and then rails are. Now, we do think that some of the demand in the third quarter was pent up demand, not satisfied in the second quarter and we are bringing down kind of our utilization estimates a couple percentage points, but overall we are not concerned about volumes in the third quarter, it should be in fourth quarter.

Ken Hoexter – Merrill Lynch

Wonderful. And Joe, can you talk about, are you seeing an increase move toward, moving crude as opposed to kind of refined product as we've seen more of the Balkan and other flows.

Joseph Pyne

Yes, that's a good question and they are certainly, crude oil movements are significantly up. Four or five years ago you would count number of barges. Actually moving crude oil, one or two hands. Today there are close to we think about 140, 150 barges that are inlet barges that are directly involved in moving crude oil and some offshore equipment also moving crude oil. The movements are mostly down river, moments of Canadian crude oil to Baton Rouge marines refineries and then Eagle Ford liquids move to the Houston, Port Arthur and New Orleans markets.

We think, if that's going to continue to grow that production levels are estimated to be four to five times what they are currently. And that's both in Eagle Ford and Balkan. We also think that Canadian crude movements are going to grow. Some of the Eagle Ford movements will be ultimately kind of medium term moved by pipeline. But we think that the way these volumes are growing and where the pipelines are placed. There is still going to be some significant amount that will be moved by water and don't really, we frankly these – the number of barges involved we think you know, going forward you'll have at least that many in the short-term even more in the long-term, you know it, there is enough flexibility of barging gives and enough limitation in the pipeline to keep that demand pretty strong.

As it – will replace in terms of volume refined products been moved? Well for Kirby we've already moved more black oil. But specifically, to crude oil it's possible, I think it's possible that you'll see the movement of crude oil equal to maybe the number of barrels that are currently moved for refined products. Probably a little too early to tell but, you feel pretty good about it.

Ken Hoexter – Merrill Lynch

It sounds like a great opportunity. Can I jump over to United, it seems like each quarter this acquisition has done better than expected and significantly. So can you talk about maybe what the top line growth is, is it kind of longer term? Is it a 5% growth or double digit growth? Just give us some perspective in and maybe talk about what drove it beyond the expectation?

David Grzebinski

Yes, hi Ken, it's David. Yes, what's driving it beyond the expectations is that they've ramped up the manufacturing capability a lot faster and a lot better than we had anticipated when we bought them. The management team there has been very focused and they have done the excellent job getting the throughput facility. And obviously, we talked little bit about the margins were little better than we expected there and you can see it in the volumes also. So, that's what driven the out performance versus expectations.

In terms of revenue growth, it is in the oil service patch right. They do tend to have boom-bust cycles and you do see that in equipment and we do expect at some point that this will turn down and that's why we are really trying to focus on the service side business to grow that up before the eventual downturn comes. But that said, it feels to us that this frac opportunity in the natural gas and cheap liquids are on the path to energy independence for the U.S. and given that we think this trend is going to stay here for a while. Now how does that translate into revenue growth going forward? It's really hard for us to put a number on it right now. I would say for just in the near term 2012 looks on part to 2011 on a full year basis and maybe up some, we are still tanking orders now for 2012 and it's still fairly strong.

Ken Hoexter – Merrill Lynch

Wonderful. I just want to understand the offshore articulated dry barges that you are buying, the two, that's in addition to the four that you currently have right? So are they – I think you said they are coming on contract, how long are those contracts and what was the, I guess rational for expanding that market.

Joseph Pyne

Yes, it's actually are not expanding it, these are assumed to replace the capacity that we currently have in that business. This is a contract Ken, that goes back to 1977, which is a very long-term relationship and what we are doing is replacing some older equipment. Whether all that older equipment goes away or not is still to be determined. There looks there is some additional opportunities to continue to employ it, but at least for the coal trade we are going to put these two new units in the coal trade.

Ken Hoexter – Merrill Lynch

Wonderful, that makes lot of sense. Just my last one, it's just on K-Sea, I thought you had said you are going to break out and keep separate K-Sea and results, is that, is it just a one quarter kind of post acquisition, where you are blending in or I just want to understand going forward now we should look for K-Sea? Are you really fully integrating this so it's not going to be a completely separate line item.

Joseph Pyne

Yes, closer to the latter there. We are fully integrating into the marine segment. We will try and as we did this time, give you the percent of revenue and give you an indication of where the margins were as we've said on the call, the margins were in the Legacy marine business were in the mid 20% range and K-Sea, they were in the low double digits and that revenue was about 20% of the marine total for the quarter. Hopefully that gives enough to model it, we don’t plan on giving more disclosure on that side. But, as we integrate, we can share more

Joseph Pyne

And let me also add that our strategy is to face the market as a tank barge operator that has both the inland and coastal capacity and that there will be places where it doesn’t matter if it moves inland or coastal. Yeah, just bring your requirement to us and we will fulfill it. That’s kind of the strategy which would tend to report based on that strategy kind of one single marine transportation unit.

Ken Hoexter – Merrill Lynch

All right, Greg, Joe, Dave, thanks, appreciate the time.

David Grzebinski

Thank you, Ken.

Operator

Our next question comes for Alex Brand from SunTrust Robinson. Please go ahead.

Alex Brand – SunTrust Robinson

Thanks guys. I just want to verify you guys want one question and a follow up, right?

David Grzebinski

Yeah, thank you Alex.

Alex Brand – SunTrust Robinson

Okay. So, I just want to try to get a little color if I can on the guidance, I want to make sure understand what, I heard, I think I heard a lot of things whether it will be negative that will be flat, United, you think will do sort of sequentially similar, utilization will be a little bit lower and so all those things are why I typically think of the fourth quarter being more flat to down and flat to up as you’ve guided. Is it just barge pricing being up sequentially that’s the driver, I'm just trying to get a handle on what it is and how sustainable it is?

David Grzebinski

Yeah, that’s right. It's the right momentum as it, cash gets forward kind of the good side of what it was doing a couple of years ago, which was going in the another direction.

Alex Brand – SunTrust Robinson

Okay.

David Grzebinski

And there is also transaction fees are not, we had some transaction fees in corporate general expense that won’t reoccur in the fourth quarter.

Alex Brand – SunTrust Robinson

Okay, all right, good. And when I think about where pricing is can you help us if not quantitatively at least qualitatively understand, how far are your prices now from prior peak levels and when do you think, you would get there. Is there anything that would keep you from getting there and exceeding that level?

David Grzebinski

Yeah Alex, as I’ve said that we’re, we are approaching the peak levels that we were at previously and as it always really just kind of a supply and demand function in terms of can we get there. I think I would add that its, I think, its easier to return then to get there the first time. So, hopefully that observation is accurate.

Alex Brand – SunTrust Robinson

All right, thanks for the time guys.

David Grzebinski

Take care, Alex.

Operator

Our next question comes from Mike Buttonfield from Stifel Nicolaus, please go ahead.

Mike Buttonfield – Stifel Nicolaus

Hi, thank you. I want to ask you question on the accounted rate increases I think you said they're increasing mid to high, a single on a traditional inland barge area. Are those are pricing that were negotiated last year at this time or earlier than that, kind of early 2010 or there any that was best negotiated in 2009?

David Grzebinski

Yes, that most of those were negotiated a year prior, but there is some that were older than that as well. The vast majority are about a year old.

Mike Buttonfield – Stifel Nicolaus

Okay. And also wanted to ask with your book of business up at 40% on spot in the same market, are rates now at a level that you like to lock in, rates under contract on a little bit larger portion of that business or you are going to maybe wait to see if, you know, rates on the contract business increase little bit more?

David Grzebinski

Mike, that is the KC business is at 40% sharp. The businesses is about 25% spot. But, I think, it frankly depends on the future business if you are looking at and the customer. But, we do think that rates in that business are going to continue to trend up as capacity comes out and some of the volume comes back. So, we’re optimistic about the rate environment there. If you go into, if you do term some of spot business up, you will – it's a strategy you are going to try to limit the term on that.

So that as rates rise, you can take advantage of higher rates on renewals and that’s typically what we do on the Inland side and what’s in KC and its team tries to do on the offshore also.

Mike Buttonfield – Stifel Nicolaus

Great details, thank you.

Operator

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

Kevin Sterling – BB&T Capital Markets

Thank you. Good morning gentlemen.

Joseph Pyne

Good morning.

Kevin Sterling – BB&T Capital Markets

Joe, is there a pricing differential between moving crude oil versus the core black oil petrochemical business and as well as that crude business mostly spot or that is a contract?

Joseph Pyne

We are moving it to – under contract for the most part, I’m sure there is something moved on a spot basis, but we are not doing much of it. And I would say, it’s about, its the black oil rate levels. We don’t have that much equipment engaged in it yet, because our traditional black oil market was so strong. But, we see that as a growing market and we have some customers that are continuing to put some pressure on us to put more equipment there.

Kevin Sterling – BB&T Capital Markets

Okay. Let me, kind of like a follow up along that. So, it sounds like you are probably getting more calls now, then say six months ago to move oil out of the shale and, I mean, if you can get your hands on capacity, is that where you would place it?

Joseph Pyne

Not necessarily. It depends on frankly, how we see the longevity of that particular movement. Our strategy has always been to work with our existing customer base, on movements that we think are long term movements, in other words the volumes that are going to be there going forward. We would rather do that then take a short term opportunity that we don’t think is sustainable now.

Having said that, I do think that the volume that we are seeing today particularly coming out of the Eagle Ford and Canadian crude that is being exported into the (Bad Ridge) area, that volume is sustainable. The issue is how much more volume is going to be sustainable over the long run as the gathering systems are put in. With respect to the (Bad Ridge) movement there isn’t really a lot of talk about a pipeline there, but the Eagle Ford gathering systems that – we are going to go in that’s going to take some of that volume.

Kevin Sterling – BB&T Capital Markets

Okay, thank you. And, then one follow up. Greg, I think you had mentioned, you said there are 200 I think tank barges on order for 2012, how does that rank with years past?

Gregory Binion

Yeah, it’s up from 2011 by about 50 barges, but that the mix has changed also, if you look back on the barges that will be delivered in 2011, only about 50 of those barges were 10,000 barrel barges. And, if you look at the mix as you go into 2012, about 85 of those barges will be 10, 000 barrel barges. The tanks really have not seen much of a replacement cycle so far, the most of the building has been focused in the 30,000 barrel market. And as a result you know, I’m talking industry wide here, the age of the tanks is really creeping up there and it needs some replacements. So, you’re starting to see that so you know, on a capacity basis it’s not quite as aggressive as it sounds.

Kevin Sterling – BB&T Capital Markets

Okay. I appreciate the time and the color. Thank you and congratulations on a real solid quarter. Thank you.

Gregory Binion

Thanks Ken.

Operator

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

Chaz Jones – Morgan Keegan

Yeah. Thank you, thanks for taking my question, nice quarter guys. You gave a lot of great detail on KC, just data point wise. One question I had there was, you talked about the utilization of fleet being 75% to 80%, could you give us a sense for maybe where that was either last year in the second quarter, just kind of give us sense maybe better sense for where they are in the cycle?

Gregory Binion

Yeah, it was lower last year and lower even more the year before so. You are beginning to see the recovery fast.

Chaz Jones – Morgan Keegan

Okay.

David Grzebinski

And down, and down from significantly down from the year 2008 levels.

Chaz Jones – Morgan Keegan

Right, and then the follow up question I had I think Greg, you mentioned that spot rates were up 8% to 12% sequentially, did you comment on what spot rates were up year-over-year?

Gregory Binion

No, what I said about spot rates was kind of high single digit to low double digit range, and we did not comment year-over-year. Fuel is included in that number and it’s gets pulled around quite a bit by fuel.

Chaz Jones – Morgan Keegan

Okay. I guess, that’s the end of my question. Thanks guys.

Gregory Binion

Thanks, Chaz.

Operator

Our next question comes from David Beard from Iberia, please go ahead.

David Beard - Iberia Capital Partners

Good morning, gentlemen.

Gregory Binion

Good morning.

David Beard - Iberia Capital Partners

For the industry capacity of, capacity digit of 200 barges, are the ship yards full at 200 or could there be some additional movement sometime during the year?

Gregory Binion

You know, I can’t speak for Jeff though, but certainly the yards that we use Trinity, West Gulf and some other smaller ones are at capacity. So, I'd with the exception of JEPO, which I just don't have a good feel for it. I think, they are about there.

David Beard - Iberia Capital Partners

Okay. So, it seems it's going to be hard for that order book to build beyond the 200 for next year?

Gregory Binion

Yes, not without opening additional capacity.

David Beard - Iberia Capital Partners

Okay, and you think the retirements would approach 200 or is it just too early to tell?

Gregory Binion

You know, it's too early to tell, but to grudge point, there is a good percentage of those barges that are 10,000 barrel barges and that age profile that plead is old, older. So, we think that what it would be quite a lot of capacity the next couple of years, it's going to have to come out of the 10,000 barrel fleet.

David Beard - Iberia Capital Partners

Okay, and lastly just to switch a little bit to the cash flow, because you done a great job paying down debt. What I just take the net income across the DDNA plus the CapEx. It seems that free cash flow number there would be 25 or 30 million a quarter, but you seem to have paid down debt faster than that, am I missing something or have you been more efficient on working capital?

Gregory Binion

Well, I don't know, I wish we were more efficient on working capital always, but now it's timing of deferred, we get deferred taxes and timing of tax payments helps or lack there of, having to make a tax payment. Bonus depreciation clearly is a big benefit for us this year, it's a 100% bonus depreciation this year, next year it drops down to 50% and obliviously that's a big help from your cash paid for taxes.

David Grzebinski

We also typically generate more cash in later part of the year, it's beginning of the year, tiny capital expenditures that kind of thing.

David Beard - Iberia Capital Partners

Okay great, thank you for your time.

Operator

Our next question comes from Steve O’Hara from Sidoti & Company, please go ahead.

Steve O’Hara – Sidoti & Company

Hi, good morning. Could you just talk about your operating margin goals for KC and maybe where they peaked in the past?

Gregory Binion

Yeah, they peak in the kind of a high teens historically and it goes back to 2007, 2008. We think that integrated was Kirby that KCs costs are going to be lower. So, we don’t see any reason to think that if they get back to where they were in 2008 rate levels get back there that the margins are going to be higher. Are they going to be in the mid 20% range as we see in the inland business, I think it’s too early to tell, but I think that they should be pretty close to the other side of the business when their market gets to where we think it’s moving towards.

Steve O’Hara – Sidoti & Company

Okay, thank you. And then you guys have said that your size matters in the inland business, is it as important for the coast wise business as well or is it maybe a combination of the two, that’s more important.

Gregory Binion

Yeah, I think it’s both, I think that as we expand the offshore business that their ability to service their customer base be flexible leverage, they are G&A cost will help and I think that as we integrate them into Kirby that helps too.

Steve O’Hara – Sidoti & Company

Okay, thank you very much.

Operator

Our next questions from the Jimmy Gibert from IBERIA Capital, please go ahead.

Jimmy Gibert - IBERIA Capital

Hey guys, thanks for taking my question. When I talked to people about export chemicals, I always get the question also these guys have tankers they move chemicals overseas, but I mean I know that’s not true, but if I am right you guys benefit from higher export chemical volumes because you are feeding more raw materials into refinery and more finished product out of the refinery to the terminals then load the finished product onto tanker to go overseas, is that the pretty much the way it works?

Joseph Pyne

Jimmy, that’s pretty much the way it works. What we participate in and everything from the crude oil going to the refineries, the intermediates going from refineries to petrochemicals and them sometimes there are several intermediate steps and ultimately to either a domestic user or to a terminal where it’s loaded on the ships you talk about for export markets.

Jimmy Gibert - IBERIA Capital

If the KC natural gas prices I mean everything on the screen on the most part is green expert for the natural gas and that seems to be a pretty stable price down here, if not lower. So, that would just mean that volumes would continue to increase at the refineries is that right?

Joseph Pyne

Yeah, it does well for the US petrochemical complex and for used for the existing infrastructure and also for additional project that had been talked about in the variety of locations in the United States, 80% of the US petrochemical production in Texas and Louisiana. And both of those venues have been talked about recently by numbers of players for additional investment particularly over the next, the next five years or so. So, that's encouraging as well.

Jimmy Gibert - IBERIA Capital

And just one more real quick, if I want to order a 30,000 barrel tank barge today and you said that the yards have capacity for 12. When can I take delivery of 30,000 barrel tank barges, if I order it today?

Joseph Pyne

It would be in the first part of 2013 more than likely.

Jimmy Gibert - IBERIA Capital

Okay, all right. Thank you guys very much.

Joseph Pyne

Thank you, Jim.

Operator

Our next question comes from Sander Todd from Creighton, please go ahead.

Sander Todd - Creighton

Hello Joe, how are you?

Joseph Pyne

Fine, thanks Sander.

Sander Todd - Creighton

Just a quick clarification I had one that was answered and this one I think was answered. But I want to make sure on the contract pricing for this most recent quarter. I heard two things, one is they were basically rolling over and one that they are up in the low to mid single digits from a year ago. I'm assuming that they are rolling from the escalated base price which is lower single digits, higher than the un-escalated based price of the original contract that they are replacing it. Am I interpreting that correctly?

Joseph Pyne

Yeah Sander, what Greg said was for the third quarter as contracts rolled over, they rolled over at rates that were in the mid to high single digit rate increases. Okay. And then, what I said, was that the third quarter was a floppy quarter with lots of pent up demand and it really, this wasn’t enough equipment to move the cargo that needed to be moved. That we anticipate that we're going to come back to more normal levels, still very high utilization. The third quarter we're moving the utilization rates down, a couple of percentage points not much, which is slightly of fully utilization. We still have right momentum, but I think, it's really, too early to tell if rate momentum is going to be in the kind of mid-single digit or is it going still be in the kind of high single digit. So, what for the quarter the way that we're forecasting our earnings, we are actually moving the earnings momentum down a little bit, but certainly not ending it.

Sander Todd - Creighton

Okay.

Joseph Pyne

Where we said that contracts were rolling over as expiring was in the KC example, contracts rolling over at expiring, you know, some represent them, but on average, they are at same levels. Spot rates are actually up a little bit. Does that makes sense to you?

Sander Todd - Creighton

It does, it does. One another question with respect to the refined product in petrochemical exports. The industry has been set up for years, say handle moments in the opposite direction and we are moving and exporting this material in great volume, are there any bottlenecks in the terminal link space that are preventing growth or retarding growth to some degree?

Joseph Pyne

No, not that I know of, not that can't be corrected. There is a lot of incentive to correct any bottleneck, but an import terminal can be an export terminal just as easily.

Sander Todd - Creighton

Sure, sure. Okay, that was all I had. Thank you.

Operator

We have no further questions at this time.

Joseph Pyne

Well, we certainly appreciate your interest in Kirby Corporation and participating in our call, if you have an additional question, please 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 your participation. You may now disconnect.

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