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Executives

Steve Holcomb - VP, IR

Joe Pyne - Chairman & CEO

Greg Binion - President & COO

David Grzebinski - EVP & CFO

Analysts

Jon Chappell - Evercore Partners

Alex Brand - SunTrust Robinson

Jack Atkins - Stephens

Scott Weber - Bank of America-Merrill Lynch

John Barnes - RBC Capital Markets

Kevin Sterling - BB&T Capital Markets

Jimmy Gibert - IBERIA Capital Partners

Chaz Jones - Morgan Keegan

David Beard - IBERIA Capital Partners

John Larkin - Stifel Nicolaus

Kirby Corporation (KEX) Q4 2011 Earnings Call February 3, 2012 11:00 AM ET

Operator

Welcome to the Kirby Corporation 2011 fourth quarter and year earnings conference call. My name is Sandra 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 is Joe Pyne, Kirby's Chairman and Chief Executive Officer, Greg Binion, Kirby's President and Chief Operating Officer, and David Grzebinski, Kirby’s 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 Kirby’s website at kerbycorp.com in the Investor Relations section under non-GAAP financial data. Statements contained in this conference call 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 September 30, 2011 that was filed with the Securities and Exchange Commission. I will now turn the call over to Joe Pyne.

Joe Pyne

Okay, thank you Steve. Late yesterday, we announced record setting net earnings for the 2011 fourth quarter of a dollar per share reflecting a 69% improvement over the $0.59 per share reported for the 2010 fourth quarter. For the year, we announced record earnings of $3.33 per share, a 55% increase compared to $2.15 per share for 2010. Our record fourth quarter and year earnings were the result of strong demand for inland tank barge service, modest earnings contribution from our coastal marine tank barge business, strong earnings from our land-based diesel engine service business and improved earnings from our heritage marine diesel engine service business.

I will speak briefly about K-Sea’s results, our coastal tank barge operation. And I am going to turn the call over to Greg Binion who will update you on our inland marine transportation and diesel engine service markets.

With respect to K-Sea, K-Sea’s operating results were as expected for both fourth quarter and the year. Fourth quarter is generally a more difficult quarter for coastal business due to some seasonality in the cargos, we carry principally the refined products and either the closure or a reduction in demand in Alaska and on the Great Lakes, as poor weather conditions affect those operations.

In addition, the fourth quarter included a $1,250,000 severance charge associated with integrating K-Sea’s back office into Kirby’s.

For the fourth quarter, K-Sea’s equipment utilization was approximately 75% to 80% with respect to pricing. Contracts in this market that renewed during the fourth quarter were basically flat and spot contracts improved in the low-to-mid single digit range year-over-year.

During the fourth quarter, approximately 60% of K-Sea’s revenues were under term contract and 40% were in the spot market.

Time charters in this coastal business represent approximately 90% of the revenues under term contracts for the quarter. With refined product demand tying K-Sea more to the US economy than our inland operation, K-Sea’s equipment utilization levels and pricing environment remains below our inland transportation business.

As we continue to fine tune K-Sea’s cost structure, the US economy improves and industry capacity is removed from service, coastwise utilization rates should improve as well as K-Sea’s profitability. I will come back at the end of this call and talk about the full and first quarter outlook for 2012 and let me turn the call now over to Greg.

Greg Binion

Thank you, Joe and good morning to all. During the fourth quarter, our inland marine transportation sector continued its strong performance with utilization rates and favorable pricing trends. Low price natural gas continue to positively impact the global competitiveness of the US petrochemical industry. The feedstock advantage provided continued strong volumes of domestically produced petrochemicals for domestic consumption and exportation.

Kirby’s black oil fleet continues to see strong demand driven by stable refinery output and the movement of crude from the Midwest of the Gulf Coast and also out of South Texas. Our refined products demand remain positive benefitting from the Midwest to Gulf Coast movements of ethanol and our agricultural demand was also brisk benefitting both from domestic lead produced and imported ag products. Consequently during the 2011 fourth quarter Kirby’s petrochemical and black oil inland fleets achieved utilization rates in the low to mid 90% range.

Revenue from our long-term contracts that is one year in duration or longer remained at 75% and the mix of time charter and our freight business continued at about 55% and 45% respectively

Turning now to inland marine transportation pricing. Term contracts which renewed during the fourth quarter achieved rate increases in the mid single-digit range when compared with the 2010 fourth quarter. Spot contract pricing which includes the price of fuel saw rate increases in the mid-to-high single-digit range when compared with the 2011 third quarter. Our multi-year contracts have annual escalations based on labor and producer price index. Some of these are adjusted each January and the adjustment effective on January 1, 2012 provided rate increases in the 2% range.

During 2011, we continue to invest in our inland fleet, both in terms of the new construction and upgrading existing barges. This reduces maintenance cost in out-of-service days and improves the reliability of our fleet and our service to our customers. If we roll forward to the end of 2012 and exclude our non-certificated fleet which moves primarily fertilizer solutions, our average inland tank barge fleet age will be about 16.5 years old.

During 2011, we took delivery of 30,000 barrel tank barges and two new pressure barges totaling approximately 1.1 million barrels of capacity. During 2011, we retired 66 tank barges totaling 1.25 million barrels of capacity. We also added 20 tank barges with the purchase of the ship bunkering operation of Enterprise in February of 2011 adding approximately 400,000 barrels of capacity. So net net, during 2011 our active inland tank barge fleet capacity increased by about 250,000 barrels.

As of December 31, 2011 we operated 819 tank barges with a capacity of 16.2 million barrels. We also took delivery of one 2000 horsepower inland towboat in the 2011 fourth quarter.For 2012 our construction program will consist of 25,000 to 30,000 barrels inland tank barges and 30 new 10,000 barrels inland tank barges with the total capacity of approximately one million barrels. We are also building five canal towboats for 2012 delivery. The cost of the new inland tank barges and towboats is approximately $100 million, the majority of which will be expended in 2012. We will also continue to retire our older inland tank barges during 2012.In the 2012 fourth quarter, we also expect to take delivery of two new offshore articulated, dry cargo barges and tug units for use under long-term contracts. The cost of these units is approximately $100 million. During 2011 we did make progress payments on these two units totaling $33 million and the balance will be paid in 2012.For 2011 we estimate the industry placed into service approximately 160 inland tank barges, 40 of which were Kirbys. We estimate that a 100 to 125 were retired from service, the majority of which were 35 years or older. Due to improved demand for inland petrochemical and black oil products barges and federal tax incentives on new equipment, we estimate that approximately 235 inland tank barges were on order industry-wide for delivery throughout 2012, 55 of these are Kirbys. Short to medium term we don't see this as a problem for the industry as we believe that increased market volumes and fleet retirements will keep supply and demand in relative balance.

Turning now to our diesel engine services segment; our April 15 acquisition of United had a positive impact on Kirby’s fourth quarter and the full year financial results. United contributed approximately 75% of the diesel engine services segment's revenue for the fourth quarter. United's operating margin was in the low double-digit range.With continued exploration and development of the nation’s shale formations, United’s revenue and operating margins were better than expected. Manufacturing and servicing of hydraulic fracturing equipment and the sale of land base transmissions and diesel engines remains robust.Finally our legacy diesel engine services segment, which evolves in green market also improved, as well as our power generation market with engine generator set upgrades, parts and services all being stable. The Gulf Coast oil service market was similar to the third quarter with lower than historical levels of drilling rigs working in the gulf in the resulting competitive environment for service work.I will now turn this call over to David.David Grzebinski

Thank you, Greg. Good morning, I will talk about margin and then provide a few more other financial details. Continued strong performance in our inland transportation sector and the purchase of K-Sea effective July 1st resulted in Kirby’s margin transportation revenues being 44% above and operating income 48% above the 2010 fourth quarter.The marine segments operating margin was 21.8% compared with 21.2% for the 2010 fourth quarter. Without the severance charge at K-Sea, operating margins would have been 22.2% for the fourth quarter.As Greg noted, during the fourth quarter, our inland marine transportation sector had continued high equipment utilization in the 90% to 95% range, with some softness in November, but a fairly strong rebound in December. So our legacy marine transportation sector maintained its strong operating margins in the mid-20% range during the fourth quarter.K-Sea, which contributed approximately 20% of fourth quarter’s marine transportation segment’s revenues, they contributed to our fourth quarter operating income with margins in the low single-digit range.With the acquisition of United, our diesel engine services revenues increased to $215 million in the quarter from $54 million a year-ago and operating income was $23 million compared with $7 million for last year’s fourth quarter. The segment operating margins were 10.6% compared with 12.8% for the 2010 fourth quarter. However, without the earn-out adjustment, which I will discuss in more detail in a minute, operating margins would have been approximately 12%.United’s strong performance continued in both the service and manufacturing sectors and their operating margins were in the low double-digits, which is higher than historically United operating margins and this is driven by higher volume leverage, which basically flowed through to the bottom-line.On the cash flow side, we continue to generate significant cash during 2011. Our EBITDA was 436 million for the year. Our capital spending for 2011 was $226 million and consisted of $115 million for new inland tank barges and tow boats, $33 million in progress payments for the two new offshore dry-bulk barge and tug units that Greg mentioned and then $78 million primarily for capital upgrades to existing inland and coast-wise equipment. Capital expenditures for K-Sea and the United were minimal.Our capital spending guidance for 2012 is currently in the range of $255 million to $265 million and that includes approximately $100 million for the construction of new equipment and approximately $70 million in progress payments of the two dry-bulk units that Greg noted. The balance is for upgrades to existing marine equipment and some small spending in the diesel engine services facilities area.As of December 31st we had $95 million outstanding under our $250 million revolving credit facility, which included the $42.7 million acquisition of the Seaboats fleet that we completed in late fourth quarter. This morning our revolver's outstanding balance was $73 million.Now, I would like to talk about the earn-out. As you know, we have this earn-out in place as part of our acquisition of the United Holdings. The former owners received $270 million on closing, but can receive an additional $15 million payable in 2014 if certain financial targets are met during 2011, 2012 and 2013. A fair value estimate of the amount we think we will have to pay under this arrangement is determined each quarter and held as a contingent liability on our balance sheet. Any changes to the estimate we believe we will pay runs through the income statements. If we increased our estimate of the payout we would increase the contingent liability and it would lower our earnings.Conversely, if lower the estimate we would reduces the liability, thereby increasing our earnings. During the fourth quarter we booked $3.7 million or $0.04 per share in expense as our estimate if the amount we would have to pay increased. For the year 2011 we booked a total of $6.3 million or $0.07 per share in expenses. As there are two full years remaining for the earn-out period you can understand that we maybe required to make further adjustment either up or down to this contingent liability. We have consequently excluded any potential changes to the earn-out contingent liability from our guidance.Joe will share our outlook and guidance shortly. I will now turn the call back to Joe.Joe PyneThank you, David. There is certainly still some uncertainty in the US and world economies and this uncertainty is reflected somewhat in our 2004 guidance. Our 2012 year guidance range is $3.85 to $4.05 per share. This compares with the $3.33 per share, which we just reported for the 2011 year. Our 2012 low end guidance of $3.85 assumes that our inland and costal marine transportation equipment utilization and pricing will consistent with the 2011 second half and that our diesel engine service land based market will not be as strong as it was in 2011 with some second half softness in the manufacturing of principally hydraulic fracking units.

The high-end guidance of $4.05 per share assumes both marine transportation markets will improve modestly with corresponding higher term and spot contract pricing. On the diesel engine service side, our high end guidance assumes that our land-based market will be similar to what it was in 2011 with continued strong manufacturing and remanufacturing of hydraulic fracking equipment, as well as some modest improvement in our marine power generation and Gulf Coast oil service markets.

There has been much market discussion about the rapid expansion of fracking units in the oil and gas business and the effect of the natural gas prices on the need for drilling and fracturing equipment. We have had no customer cancelations and our 2012 backlog is about the same as it was this time last year.

Moving to the first quarter guidance of $0.86 to $0.93 per share; in our marine transportation segment we are forecasting that both our inland and coast-wise overall equipment utilization levels and pricing will remain relatively consistent with the fourth quarter. Weather issues and lock delays will impact the first quarter.

During January, we experienced of course some of these delays. The first quarter will also be negatively affected by a major maintenance issue with one of the key locks on the Gulf Intracoastal Waterway which causes the lock to be deactivated for short periods of time.

In summary, 2011 was a terrific year for Kirby with record revenues, earnings and cash flow and of course we recorded the record results. Significant acquisitions completed in 2011 were positive in the marine transportation and diesel engine areas and the markets are complimentary to our legacy market and we believe position us well for continued growth.

Our balance sheet is strong and our cash flow is excellent. Our two businesses which are in more challenging markets are coastal business and our legacy diesel engine business should improve as capacity tightens and volumes expand with respect to the coastal trade and drilling activity increases in the Gulf of Mexico with respect to our legacy diesel engine business.

Operator, that’s all of our prepared remarks. We’re now ready to take questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question is from Jon Chappell from Evercore Partners. Please go ahead.

Jon Chappell - Evercore Partners

Gentlemen, first question is on the diesel engine services business. When you’re talking about the guidance at the very end of your prepared remarks, you said that 2012 backlog for fracking equipment is the same as 2011. And then when you read your commentary about the assumptions in the high and the low end of your range, that would seem to match up with the higher end of the range.

So my question is the ordering for the fracking equipment, how did that progressed through the fourth quarter from beginning to end and so far earlier this year and do you feel that maybe your customers are a little bit more reluctant to order than six months ago as pressure pumping margins may have decreased?

David Grzebinski

Jon, this is Dave. Let me answer that a little bit as it relates to the backlog. You know, the order pattern tends to be back-end loaded in the year. So you know, you work on your backlog through the first two quarters and then you build the back-up in the last two quarters. So far, as Joe indicated, the backlog’s approximately where it was at the beginning of last year. What we don’t know is what the strength of the year will be going forward, obviously, the low natural gas prices is impacting gas directed fracturing, but a lot of our customers are moving their equipment to more oil directed as you would expect; we’re just a little cautious on how that might play out through the remainder of the year.

Joe Pyne

And Jon, just to give you a little more color, I am going to ask Greg to talk about some of the other things that we’re doing at United. But you know, clearly, the change in natural gas prices is something that we’re watching very, very carefully at this point; we are not hearing anything that worries us, but I think that we all know that can change. So let’s talk a little bit about some success in diversifying that business and also the service side of the business.

Greg Binion

Sure. We talk a lot about United and pressure pumping, but really one of the big for us that United has had over the last year or so is to be able to diversify its product offering and we are now at a point where really we would extend that product offering so we can provide all the equipment needed by frac operation. So of course pressure pumps, so we also offer blenders, cementers, hydration units and transfer pumps and recently added the capability to provide our customers with the data van.

So, and one of the things that we’ve seen is interest in addition to what Dave has talked about an interest in the pressure pumping equipment; we’ve also seen some expanded interest in these other non-pressure pumping products. So we are excited about the diversification and the capability to provide our customers with a complete suite of frac equipment.

The other thing that we’ve been working on is the thing that really brought us to United in the first place and that is centered around the service component of the business as it relates to remanufacturing ability; you think about the frac market there is somewhere in the 7,000 frac pumps that are out there operating in very harsh conditions everyday. And so we’ve been trying to position ourselves as one of the premier remanufacturers of this equipment as you can remanufacture and make like new a frac pump for roughly 60% to 70% of the cost of new.

As we go into 2012 this interest in remanufacturing is really strengthening as our customers, the operators of these fleets have been able to grow their fleet size to the point where they can take some capacity out and afford to have it offline and do this process which you know takes several weeks. And also they have established their capital budgets to accommodate this remanufacturing of frac fleets.

We did a small number of test units last year which were successful and we’ve got a more of that program as we go into 2012. And we have in place the marketing effort, the process for accomplishing this efficiently, the supply chain in place and then the people with the skill-sets required to deliver to our customers.

And to that finally I would say that the facility that we have where we really focus our manufacturing is flexible and allows us to do a mix of both new and remanufacturing pressure pumping units and also to build these non-pressure pumping also related products.

Joe Pyne

In fact that facility was build for remanufacturing units and it is our objective overtime to reduce the exposure to manufacturing and increase the service aspects of that business.

Jon Chappell - Evercore Partners

That’s incredibly helpful; I almost feel like I am cheating by asking my follow-up question, but I am going to do it anyway. On the marine side, Greg you maybe mentioned that the black oil fleet seems some strong demand Midwest to Gulf and Texas; are those deals are developing and then you know as we tie in the fracking business and what you are seeing with some of your customers going to drilling more oil. How do you look at the growth potential for your black oil business?

Greg Binion

Well, we see that you know in the short term that’s probably going to continue to grow as more oil finds its way to water and delivers to refineries along the Gulf Coast. Long-term, we think that most of the ratable production is going to find its way to pipeline and that's been the way it’s been. And History has taught us that that's how it works. However we think there will be some continued movement of crude oil by barge as barges are much more flexible and as we feel to develop, they do have different types of crude oil that are produced and so as a result of that, you need flexibility to move those different types of crudes to the refineries that can run them most efficiently. So we think it will be a component that stays on the water.

Joe Pyne

Jonathan, shorter answer would be flat to maybe some modest increase in black oil, but we don't think that this is going to drive the significant increase in black oil demand long term.

Greg Binion

And medium term.

Operator

Thank you. And the next question is from Alex Brand from SunTrust Robinson. Please go ahead.

Alex Brand - SunTrust Robinson

Shifting gears to your core business. It sounds like your new build plans for this year are still mostly replacement and I know you guys like to make sure that you are disciplined in maintaining price in the market, but isn't there an opportunity for you to maybe get some volume growth year and take advantage of the balance of some growth and some price.

Joe Pyne

Yeah, that's a good question Alex and with respect to the 2012 order book, there are 10 to 13 barges that we can make new capacity by delaying retirements and we will call that during the year based on how the market is doing. So there is plans for potential new capacity in the current order book.

And let me just also comment on the 2012 projected capital expenditures. Going forward, 2013 and 2014, we’re getting to the end of our significant rebuild program. So we should see CapEx for at least replacement equipment taper off at the end of 2012 and we should see lower numbers going forward.

Alex Brand - SunTrust Robinson

Well (Inaudible) so we like cash flow.

Joe Pyne

So do we.

Alex Brand - SunTrust Robinson

Free cash. Alright, then a second question, David, can you just remind us when you bought K-Sea, what was your expectation for what that business would contribute to the bottom line in 2012 and where are you in the process of sort of integrating and getting that accretion?

David Grzebinski

Sure. When we announced the acquisition, we said that we would save in 2011 on an annualized basis, about $7 million and that would add to the earnings of K-Sea. As we move through it and you heard some of the severance charges that we outlined this quarter. We think the annualized savings going forward is about on the order of $10 million, which is probably a little better than we expected in terms of earnings contribution from K-Sea. I think what we need to watch here is how the market develops, the US economy is still fairly weak and refined products demand is still weak and we’ve got to see that come back before we get significant accretion, but it will be a positive contributor to our earnings in 2012 this year.

Alex Brand - SunTrust Robinson

So, all that you’re saying, you only baked in the cost savings for this year until you see the cycle on the coastwise start to play out?

David Grzebinski

Yeah, pretty much. And, Alex, it might because K-Sea a public company. You can go back and look at historic peak margins and you can look at their earnings during that period and make some assumptions. They should, in our system, our business model, operate the entire margins and greater profitability because of the cost that we can take out.

Operator

The next question is from Jack Atkins from Stephens. Please go ahead.

Jack Atkins - Stephens

So, just to start off here, I guess my first question is with regard to future petrochemical investments domestically, I think it’s interesting that over the last couple of weeks, we’ve seen domestic natural gas producers sort of pump the brakes a little bit with regard to their expectations for production in 2012, hoping to kind of get natural gas prices back up to that $4 mcf level over time. So, I guess, the main part of my question here is, when you think about the rationality of natural gas prices over the next 12 to 18 months and maybe moving back higher if we see production come in, at what point, do you think domestically our petrochemical producers begin to lose their feedstock advantage and you see some pullback in [group] capacity expansion.

Joe Pyne

Yeah. Jack and another component to that is probably even more important than the actual price of natural gas is the differential between crude oil and natural gas and historically it was between six and seven times. So you can multiply 250 times 7 and you can see the crude oil would be very, very low for petrochemical manufacturing complexes around the world, but a large number of them were based on liquid feedstock slates where the US manufacturing capacity was really based on cheap natural gas and people worried about that when gas back in the early 2000s spiked upto to high single digits, low double-digit numbers and it’s really apparent that that we have got plenty of gas and that that is not going to happen for a while. And it also doesn’t look like crude oil is going to come down in value to the point where it goes back to its historical relationship. So we are not really worried about that and I think that based on that, you are beginning to see chemical companies talk about investments in North America and there’s been lots of noise and they have been already decisions to add additional capacity.

Jack Atkins - Stephens

Hey great. Thank you for that nice color Joe and then when you think about the M&A environment as it stands today, you have three different areas of your business where you could look to make acquisitions and then it’s always a potential for bolt ons beyond that or new verticals. But I was wondering if you could maybe just comment on how you would prioritize your strategy for M&A going forward between your inland marine business, your coastwise business and then also your diesel engine service business.

Joe Pyne

And I might add to your point that we’ve kind of expanded our investment horizons which is exciting for a company that is going produce enormous free cash flow 2013 and forward. We’re a disciplined buyer of assets. We’ve learned over time that when you make capital mistakes, they’re very painful and they are with you forever. So within that discipline okay we look at the opportunities which say that all those businesses have opportunities in either bolt ons or acquiring businesses and we’re looking at all areas evaluating those areas based on the capital decision and the objective of getting a 12% return with the cycle. That also tell you that I think that the acquisition environment is actually pretty good. 2011 was great, 2012 I think will also be good.

Jack Atkins - Stephens

Okay great. And then one last follow up and I’ll jump back in queue. Greg, you talked about the number of new builds margins you expected for the industry in 2012, could you maybe comment on how many barges you expect to be retired by the industry in 2012 as well?

Greg BinionYeah Jack that's difficult to predict but at this point in time we think that it’s somewhere about a little over half or probably be replacement capacity and the balance will be expansion. I would also point out that in addition to just the raw number of barges in the mid-330 range there's a high number of 10,000 barrel barges that are being built this year in the somewhere in the 80% to 90% range and that's more than normal. So while the number of barges is high you also need to temper that with the fact that there's quite a few of them there that are 10s versus 30s.Joe PyneAnd those 10s will be replacement for most part.Greg BinionRightOperatorThe next question is from Ken Hoexter of Merrill Lynch. Please go ahead.Scott Weber - Bank of America-Merrill LynchGood morning. This is Scott Weber in for Ken. I am just trying to get a better sense for the margin that entering services. United was a mid to high single-digit margin business and I understand that Dave said that you are getting volume leverage there now from manufacturing, but the margin must have really expanded for the overall segment to come out at about 12%. So can you just talk a little bit more about the volume leverage you've experienced and if you've been able to take out any cost there or if you would expect the manufacturing margins at least to normalize back to the single-digit once equipment sales ease.David GrzebinskiYeah, without the earn-out adjustment margins in the segment, as you correctly pointed out, were about 12%. Clearly we are getting volume leverage. We haven't taken costs out of United and in fact they've been expanding because they've ramping up their capacity. So what we've really seeing is just that fixed cost spread as the volume of both manufactured equipment and service-related items and parts goes through the organization and more of it is just falling to the bottom line because the G&A cost aren’t going up in line with that as they exercise the leverage.Now I guess the second part of the question was, will margins drop, go back to a more normal range and I would say that it’s depended on the volume. It will scale up and down with volume. Clearly if volume comes down we will address the cost structure but right now things are pretty much right-sized for where we are inGreg BinionAnd I might quite add that as we transitioned to more service, you should see higher margins in that part of business. Scott Weber - Bank of America-Merrill LynchGot it okay and that is helpful thanks. And just as a follow up on K-Sea, can you talk about the trade patterns for the coast wide fleet right now and how the North East refinery shut down might impact that business at all?David GrzebinskiWe don’t think it is negative we think it is positive because we are going to see distribution to that area likely accumulating more ton miles. I think it is too early to talk about that in any detail. I can tell you that the refined products trade in Northeast actually is pretty strong right now, where we have utilization problems, it’s more on the black oil side.OperatorThank you. The next question is from John Barnes from RBC Capital Markets. Please go ahead.John Barnes - RBC Capital MarketsCan you talk a little bit about the first quarter? I am interested in just, obviously you’re dealing with easier weather conditions and that type of things and I am just trying to understand the range that you gave on guidance, is in the low end building in the potential for the weather to revert to a more normal pattern and is the top end, the continuation of what we’re seeing now or if this weather kind of continues to play out, is there, you know, I guess what I am asking is there upside of that. I am trying to figure out how you modeled in weather, I am sorry.Joe PyneYeah, right. Gosh, who knows what it’s going to be. Remember that this sounds a little precocious but remember that weather on the East Coast is not necessarily weather on the Gulf Coast. And we have seen this year, I think, more than we had seen in the last couple of years is more fog and more frontal system delays, you get a frontal system through Houston and you can’t go across the Houston Bay today.And what we haven’t seen is what we saw last year which was heavy icing conditions in the early part of the year and then in the first quarter of ’11, the ice all melted. It went away. So, I think it’s too early. When we're putting these assumptions John, is just kind of normal weather and if it’s worse then it affects earnings negatively and if it is positive it is all better, but based on what we know today, I wouldn’t say that January was a great weather month or it was the worse either.John Barnes - RBC Capital MarketsI know the focus on diesel engine now is very heavy on United and that business, but just kind of curious as to the old core diesel engine business, the offshore stuff, that type of thing. Can you just talk to what kind of trends you are seeing on that? Are you still seeing some recovery in that business? Joe PyneI would let Greg to respond to that.Greg BinionJohn, as you have suggested we have seen some pre-service levels in the Gulf during the fourth quarter and we are hopeful that will continue in the first quarter. We are encouraged by the fact that the improved rig counts, permits are being issued, there is some deep water rigs are moving back to Gulf of Mexico and some chatter in the market about may be some more of that happening later in the year. And our customers just appear to be more of needing us this year than there were last year. So it seems to be an improving area of the market for us.John Barnes - RBC Capital MarketsAnd one last question. With the discussion around a shift between manufacturing and Parts and Service on the United business, can you just remind us what is the differential there today, in terms of what percentage is OEM and what percent is Parts and Service and where do you think ultimately that mix shifts to?Greg BinionIt is about 55% manufacturing John 45% parts, service distribution and we think that it should look more like 70% of part service distribution and 30% manufacturing and that will move around of course based on demand in any given year, but we were willing up some manufacturing to do more service. We don’t want to exclude manufacturing because those are the relationships and the units at some point you have the best opportunity bring back in and maintain.John Barnes - RBC Capital MarketsAnd timeframe for that shift?Greg BinionWe’re working hard on it. Transition is going to be started this year. We’ll still have a large backlog, so you physically can’t get to 70-30 at this point, but I think over the next couple of years, we should be getting there.OperatorThank you. And our next question is from Kevin Sterling from BB&T Capital Markets. Please go ahead.Kevin Sterling - BB&T Capital MarketsJoe let me ask you about your contracted book of business in the barging side. How much is really drilling of this year and when do most of this contracts re-price?Joe PyneI will let Greg address, how much is drilling of it. They re-price kind of through the years. So there is no one quarter that is particularly loaded with renewals. You want to talk on that?Greg BinionYes, and with respect to the volume of our business that re-prices very year, some years are heavier than others but when you include this spot component of our business, a mix of 25% of our revenues stream about 60 %to 70% of our business re-prices very year.Kevin Sterling - BB&T Capital Markets

And just kind of follow-up to that; those contracts are staggering away from one to three years at repricing, is that the right way to think about it?

David Grzebinski

Actually some are longer than that, but yes there is a blend of those that are renewing all the time as Joe pointed out.

Kevin Sterling - BB&T Capital Markets

And so you would be pricing some of those older contracts then from a couple of years ago?

David Grzebinski

Yeah, there is some of that that occurs…

Joe Pyne

There is a few but it, remember that I think we’ve said there is 35% of the contract revenue is in long-term agreements and a lot of that’s with two customers, so your exposure to them depending on the years is going to be relatively minimal with respect to renewing contracts at higher rates. The others if they were put together in 2009 would come up. If they are put together in 2008 they wouldn’t.

Kevin Sterling - BB&T Capital Markets

And then one last question, a lot of talk about the mix from oil and gas in the Shale’s, are you seeing a benefit to your utilization in the Eagle Ford Shale from gas, oil and Eagle Ford being liquid rich? Do you think you see incremental demand or is it relatively net neutral to your overall demand level kind of as we see the shift from maybe more oil, from gas to oil?

Greg Binion

Yeah, it can be hurt; it’s certainly going to be beneficial as you get; but in the Eagle Ford what you have to remember is that there has really been a pretty strong focus in the liquid plays down there since they started developing that there is relatively few gas wells. So I am not sure you are going to see a big shift, but there is quite a large amount of barges that are being used in that area to move that’s why we estimated to be around a 100 range, 100 barges, upon industry basis; that’s not our participation.

Joe Pyne

Yeah, we’re a minor player down there Kevin, and that’s just in Eagle Ford; what you are seeing is drilling equipment and fracking equipment moving out of gas rich formations and into formation that have higher concentrations of liquids. That you are seeing there.

Kevin Sterling - BB&T Capital Markets

Are you seeing any barges being used to tie – actually used for storage capacity oil?

Joe Pyne

No.

Kevin Sterling - BB&T Capital Markets

Any contemplation?

Joe Pyne

No, never really.

Operator

The next question is from Jimmy Gibert from IBERIA Capital Partners. Please go ahead.

Jimmy Gibert - IBERIA Capital Partners

Regarding the Gulf of Mexico I think most people assume you guys work on the boat engines; but then you also work on the compressors that power all these drilling rigs?

Greg Binion

Well, we work on drilling rig engines and we work on some other things, you know some matters and that kind of thing; but most of it is the engines on both the drilling rigs and the boats.

Jimmy Gibert - IBERIA Capital Partners

And also I wanted to see if I get your comments on capacity adds at the Gulf region refineries, I mean I heard about, I heard a refinery in Pascagoula hiring 300 new guys to work on an expansion that they have up and running. Could you just talk about expansions in the Gulf region refineries in general?

Joe Pyne

Yeah, I’ll let Greg address that; you know, there is talk every month, each month about somebody considering expansion and there are some that in fact are happening now.

Greg Binion

As Joe pointed out, there has been a number of announcements; now some of these announcement are large world-scale ethylene crackers that may or may not happen, you know, in the latter part of the decade. But there are some that are pretty close, that are smaller bolt-on that are very likely to occur. Also, there is the interesting news recently, where a methanol producer has decided to move some assets that are down in Chile to the Geismar area for activation in the US market and participation in the low-cost natural gas.

And then there has been some restarts of some places that have been idle and thought might never come back online, but they have around methanol and the production also of ammonia. So there is a – and then I guess and end up with, there has also been some interest in gas-to-liquids projects. There is two that are currently being studied for the Gulf Coast at this point in time as well.

And then, on the refining side, there has also been some in defense line addition capacity adds along the Gulf Coast to take advantage of all the infrastructure that’s available here and the refinery interplay that occurs as people trade and move intermediates between refineries to optimize the refinery runs. So there is a lot of activity on the Gulf Coast and we think it’s all beneficial for us long-term.

Operator

The next question is from Chaz Jones from Morgan Keegan. Please go ahead.

Chaz Jones - Morgan Keegan

Just wanted to ask about K-Sea, with the utilization, word is, obviously, I know there is pockets of (inaudible) in the refining products and probably a little bit of that single skin capacity overhang. But, I guess the nature of my question was, is there any potential other products that those barges could actually move, that might help improve K-Sea’s utilization before the broader market comes back?

Joe Pyne

Chaz yes, we think that we’re in a good position to help them do that. You are right that this fleet has a greater percentage of single skin barges than inland fleet. You know, it’s around 8% of the fleet is single skin and that capacity must leave the US trade by the end of 2014 and as the economy improves, we think their traditional markets will come back.

But there is other things that we can help K-Sea do. You know, Kirby is the largest mover of chemicals in the waterway system. There are chemicals that move offshore and we think that through our relationships with these major chemical manufacturers that we can put them in position to move chemicals which is going to help them. But also believe that the combined Kirby with K-Sea, is even bigger piece of the market and the relationships that we have with those existing customers can be levered to position K-Sea for potentially more cargos than they could buy themselves. So I think all of that is going to be positive-ish and going to take a little while the work is way through.

Chaz Jones - Morgan Keegan

And then the second question I had was just on the contract rates; if memory serves me right, I think you commented in the third quarter that kind of contract rates were up mid to high single digits and if I heard you right you said the contracts rates were up mid single digits this quarter. I guess the nature of the question is, first of all, are contract rates decelerating at all; are we reading into that wrong or was there something more inline with comps to getting more difficult or that the market was maybe a little frothier in the third quarter given all the catch-up volume related to flooding?

Joe Pyne

You’re talking about the inland?

Chaz Jones - Morgan Keegan

Inland, yes.

Joe Pyne

We actually said I think it was at the end of the third quarter that we expected that some of the froth would come out of the market that you went through a very disruptive flooding situation in the second quarter and the rates would at least the velocity of rate would come down a little bit and you know in the kind of low to mid single digit area. If you look at the year, on average rates were up 4% or 5% in the year for contracts that renewed in 2011. Did that answer your question?

Chaz Jones - Morgan Keegan

No it did. Again, I just didn't want to misinterpret like I said that contract pricing was actually, the improvement was decelerating. That's why I wanted to clarify, I know you guys have said that on the last call and it sounds consistent with what you had previously said.

Joe Pyne

Yeah, we hope it’s consistent.

Operator

Thank you. The next question is from Greg Lewis from Credit Suisse.

Unidentified Analyst

It’s actually Anthony (inaudible) for Greg this morning. I just have a quick question on the legacy marine business. If you look at earnings this past quarter, they kind of revealed some weak performance in production levels across the major chemical producers even when you kind of consider seasonality this quarter and the tone for the next few quarters seems pretty cautious as end users face a pretty uncertain demand and headed into restock their inventories. I guess can you just talk a little bit about how you guys expect this to translate into ton miles and revenue per ton miles over the next year.

Joe Pyne

Yeah. That I would say is pessimistic. I think what the chemical companies are saying is that it’s going to be modest growth and listening to the Class I railroads, I think they are also saying that and that's kind of what we are saying that chemical capacity is going to be growing modestly until more facilities come online. And that's because you still have a very weak economy. And you still have unemployment that is, I guess, this morning it was 8.3% after adding 250,000 jobs and after 1.2 million people dropped out of the work force. That’s pretty negative. The GDP was a little better in the fourth quarter, but it’s expected to moderate. That’s the kind of thing that we’re talking about when I talked about the outlook. There is still a lot of uncertainty out there. But, even with all of that, I don’t think that we’re concerned in that legacy marine business that it’s in trouble at all. I think, that we stayed pretty busy throughout the quarter. Some slight weakness maybe in November, but it came back strong in December. Low inventory levels, not restocking is positive for us and it actually creates more consistent demand when you stock up it, it creates some short-term demand, which I think collapsed, so we’re not sure that the environment that you just described is negative at all as we kind of understand our business and how it services those customers.

Unidentified Analyst

I guess, would it be kind of fair to say that like looking more to the latter half of 2012 is kind of when we could see increase in volumes as these end users kind of begin to actually start restocking?

Joe Pyne

I think that’s right. And again we talked about that.

Operator

Thank you and the next question is from David Beard from IBERIA. Please go ahead.

David Beard - IBERIA Capital Partners

Just wanted a clarification on, I mean, your outlook, I believe, for the industry, did you say expected deliveries of 350 tank barges and scrappage of 175?

Joe Pyne

No, we shed 230 and scrappage of somewhere in the 100 to 120 range we anticipate.

David Beard - IBERIA Capital Partners

Okay.

Joe Pyne

You get that 230, yeah.

David Beard - IBERIA Capital Partners

And with the fleet growing with those numbers, what’s your outlook relative to demand to meet that growth?

Joe Pyne

Yeah, I think David you’re going need that capacity to service requirements that actually some growth in tank barge capacity is necessary. Now if you look at the 2011-2012 order book remember that that is the either 100% or 50% deduction, accelerated tax depreciation. We’ll see what they do in 2013, I hope they are in there because as we look at 2013 order book at least at this point it is very modest and you typically see more robust orders about this time. And our follow-up with respect to it is that there are a number of operators that you know looked at their requirements next couple of years and then use the opportunity of 2012 to build those requirements, because from a cash flow perspective you have a real advantage.

David Beard - IBERIA Capital Partners

And then just as a follow-up to switch to your capital spending needs; I noticed you said about $90 million in maintenance; are there a couple of big projects in there or is this an ongoing number that we should consider?

David Grzebinski

No, its going to be in the range, maintenance CapEx with K-Sea and the legacy of marine businesses is going to be $70 million to $90 million. But we’ll also have some facilities expenditures in there that are increasing that number a little bit for 2012.

Operator

The last question will be from John Larkin from Stifel Nicolaus. Please go ahead.

John Larkin - Stifel Nicolaus

Most of my questions have been asked already, but your cash flow outlook here Dave is very strong; it look to me like you might be in a position to pay down all of your debt here during the course of the year, you know aside from maybe opportunistic share repurchases, would the company consider perhaps instituting a dividend at this point, given how strong your cash flows have been and should continue to be?

David Grzebinski

I don’t think we can pay down all our debt this year; we have roughly $800 million in debt; EBITDA this year I think we said is going to be in the range of $500 million, maybe between $500 million and $540 million. But as you heard our capital spending is in the range of $250 million to $255 million. So you know the free cash flow is isn’t enough to pay down all our debt.

Now going forward, without acquisitions, clearly we could delever our balance sheet and probably be debt free by 2014. Clearly, we hope there will be acquisitions; but to answer your question directly about considering a dividend, we’re getting to the size that we’re talking regularly to the Board about that. We think a modest dividend and continued growth maybe possible, but right now given the platform we have for growth, it maybe a little soon for that, but we’re at least talking about it now and thinking through it.

Steve Holcomb

We appreciate your interest in Kirby Corporation and participating in our 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 ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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