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Kirby Corporation (NYSE:KEX)

Q1 2012 Earnings Call

April 26, 2012 11:00 AM ET

Executives

Stephen Holcomb – VP, IR

Joseph Pyne – Chairman and CEO

David Grzebinski – EVP and CFO

Greg Binion – President and COO

Analysts

Alex Brand – SunTrust Robinson Humphries

Gregory Lewis – Credit Suisse

Jack Atkins – Stephens Inc

Kevin Sterling – BB&T Capital Markets

John Barnes – RBC Capital Markets

Jonathan Chappell – Evercore Partners

Ken Hoexter – Bank of America/Merrill Lynch

David Beard – Iberia

Operator

Welcome to the Kirby Corporation 2012 First Quarter Conference Call. My name is Christine, and I will be your operator for today’s call. (Operator Instructions) 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 Steve Holcomb, Vice President, Investor Relations. You may begin.

Stephen 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 Kirby’s website at kirbycorp.com in the Investor Relations section under non-GAAP financial data.

Statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management’s reasonable judgment with respect to future events. Forward-looking statements involve risk and uncertainties. Our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission.

I will now turn the call over to Joe Pyne.

Joseph Pyne

Thank you, Steve, and good morning to everybody. Late yesterday afternoon we announced net earnings for the 2012 first quarter of $0.91 per share, reflecting a 52% improvement over the $0.60 per share reported for the same period last year. Our first quarter earnings guidance was $0.86 to $0.93 per share. In our first quarter results, there were two charges that were not included in our guidance range: a $4.2 million before tax charge, or $0.05 a share, which was the earn-out charge pertaining to the United acquisition; and a $2.4 million before tax, or $0.03 per share, severance charge associated with the integration of K-Sea into Kirby. David’s going to talk about both these charges in more detail later in the call.

Our record first quarter earnings were the result of a continued strong demand for our inland tank barge business, a strong performance from our land-based Diesel Engine Service business and improved earnings from our legacy Marine Diesel Engine Service business. Demand for our coastal tank barge equipment was about as expected given the seasonality of this business and some continued overcapacity in the coastal tank barge fleet.

In April we changed the name of K-Sea Transportation to Kirby Offshore Marine, more fully integrated our coastal operation into the Kirby family of marine transportation companies. With this renaming, we have begun the process of rebranding equipment, the organization and the service. Jim Farley was named President of Kirby Offshore Marine, having previously served as the Executive Vice President of Operations for Kirby Inland Marine. David Grzebinski will serve as Kirby Offshore Marine’s Chairman as well as Kirby Corporation’s CFO. I look forward to working with both Jim and David as we more fully integrate Kirby Offshore Marine into our marine transportation business.

Our focus is to continue to enhance this service model with the objective of providing our customers the best and safest service in the industry.

Now our legacy inland tank barge business is performing well with favorable pricing trends. We anticipate this sector to remain positive based on the favorable outlook of the U.S. petrochemical and refining industry.

For the Diesel Engine segment, our legacy business is improving due to the overall health of it inland marine transportation customers and an improved Gulf of Mexico oil service market. For our land-based Diesel Engine Service business, with the current low price of natural gas incentive to drill for natural gas has declined but the incentive to find crude oil remains very positive due to the current high price of crude oil. This business is seeing a natural rotation away from natural gas to oil exploration. As this rotation occurs, there has been a pause in new orders for the oil service equipment as the market assesses its requirements. We are using this pause to further develop the service opportunities in this business.

When we purchased United it was our objective to apply a very good, well-tested marine diesel engine service model to land-based diesel engines. It is our intention to continue to build oil service equipment, but to more heavily focus on servicing this equipment rather than manufacturing it. Later in the call Greg will share with you some encouraging comments regarding remanufacturing service opportunities. Then I’ll come back at the end of the call and talk about the second quarter as well as the full year outlook.

Now I’m going to turn the call over to David, who will speak briefly about Kirby Offshore Marine’s markets and then Greg will update you on our inland tank barge business and the Diesel Engine Service markets.

David Grzebinski

Hi. Thank you, Joe. Kirby Offshore Marine’s operating results, including the severance charge, were a bit above break even for the first quarter. As we have mentioned before, the fourth and first quarters are more difficult for our coastal operation due to seasonality. The closure or a significant reduction in demand in Alaska and on the Great Lakes, as well as poor operating efficiency caused by winter weather conditions. Also during the first quarter unseasonably mild weather in New York and the Northeast market negatively impacted demand for distillate products, particularly heating oil, which resulted in lower equipment utilization and rates in the New York and Northeast market.

As Joe mentioned, in the 2012 first quarter we took a $2.4 million or $0.03 per share charge related to severance which was for the integration of Kirby Offshore Marine’s administrative functions into Kirby. We have made the decisions and taken the steps, some of them painful from a personnel standpoint, to fully integrate Kirby Offshore Marine into the Kirby Marine family. As part of this integration, we will be closing our East Brunswick New Jersey office and consolidating our East Coast operations into our existing Staten Island, New York operations facility.

For the first quarter Kirby Offshore Marine’s equipment utilization rate was in the 75% to 80% range. With respect to pricing, contracts that renewed during the first quarter and spot contracts were basically flat. Approximately 60% of Kirby Offshore Marine’s revenues were under term contract and 40% were spot. Time charters represented approximately 90% of the revenues under term contracts during the quarter.

As we have stated before, our coastal operations primarily transport refined products, tying it more to the U.S. economy, which is a contrast to our inland fleet, which is seeing strong leverage from the chemical market. Offshore marine equipment utilization levels in pricing are weaker than in our inland transportation business. As we continue to fine tune our coastal operations, reduce costs and seek additional coastal transportation opportunities with our existing inland marine customers, our profitability will improve. Furthermore, as the U.S. economy improves and the industry’s single hold tank barges, which currently comprised approximately 8% of the coastwise capacity, when those are removed from service between now and the end of 2014 we fully expect coastal utilization and rates to improve.

I will now turn the call over to Greg.

Greg Binion

Thank you, David and good morning to all. During the first quarter our inland marine transportation sector continued a strong performance, with high utilization rates and favorable pricing trends. The U.S. produced Petrochemicals for both domestic consumption and exportation remains strong, as U.S.-produced low price natural gas continues to provide a feed stock advantage, thereby continuing the global competitiveness of the U.S. Petrochemical industry.

Kirby’s black oil fleet continued to see strong demand, driven by a stable refinery output and the movement of crude oil from the Midwest to the Gulf Coast and from South Texas. Our refined products demand remained positive, benefiting from Midwest to Gulf Coast movements of ethanol. In the agricultural chemical market the traditional spring fill started early, transporting both domestically produced and imported products. This has been driven by warmer than normal weather and low fertilizer inventories coupled with high corn prices.

Our petrochemical and black oil inland fleets operated at utilization levels in the low to mid 90% range during the first quarter. Revenues from our long-term contracts, that is one year or longer in duration, remained at 75%, and the mix of time charter and affreightment business continued at about 55% and 45% respectively.

Turning to the inland marine transportation pricing. Term contracts that renewed during the first quarter continued to be renewed in the range of mid single-digit levels, in some cases were slightly higher when compared with the same period during 2011. Spot contract pricing, which includes the price of fuel, saw rates increase modestly when compared sequentially to the 2011 fourth quarter. Our multi-year contracts have annual increases based on labor in the producer price index and some of these are adjusted each January and the adjustments to this year, which were effective January 1, provided rate increases in the 2% range.

During the 2012 first quarter we continued to invest in our inland fleet both in terms of new construction and upgrading our existing barges, thereby reducing maintenance costs and out of service days and improving the reliability of the fleet and our customer service. We took delivery of five new 30,000 barrel tank barges totaling approximately 140,000 barrels of capacity and retired 16 tank barges and returned two charter barges, thereby reducing capacity by approximately 300,000 barrels.

So net-net during the 2012 first quarter, our inland tank barge fleet declined by 13 tank barges and our capacity decreased by approximately 160,000 barrels. As of May 31st, we operated 806 tank barges with a capacity of 16 million barrels. During the quarter we also took delivery of one 2,000 horsepower inland towboat.

For the remaining nine months of 2012, our construction program will consist of 20 new 30,000 barrel inland tank barges and 30 new 10,000 barrel tank barges with the total capacity of approximately 875,000 barrels. We will also take delivery of four new additional canal towboats.

The cost of the new inland tank barges and towboats remaining in our construction program is approximately $90 million, the majority of which will be expended during 2012. We will also continue to retire older barges during 2012. At the present time we anticipate that our 2012 year-end capacity to be approximately 16.5 million barrels, or about 300,000 barrels above the 16.2 million barrels that we had at the beginning of the year.

In the 2012 fourth quarter we will also take delivery of two new offshore articulated dry-bulk tug barge units for use under long-term contracts. The cost of these units is approximately $100 million. During 2011 and the first quarter of 2012 we made progress payments on these two units totaling approximately $52 million and the balance will be paid through the remaining nine months of 2012.

Turning to our Diesel Engine Service segment. United, our land-based drilling service provider, contributed about 75% of the Diesel Engine Services segment revenue during the first quarter. Their operating margin was in the high single digits. The quarter benefited from the start up of remanufacturing hydraulic fracturing equipment.

We’re making good progress towards our stated objective of moving United to a business which is focused on the more stable service business. This will be accomplished by increasing our business levels in remanufacturing and to a lesser extent the parts and service and distribution business so that reman and service is the majority of what we do.

Let me express this in terms of revenue. In 2011 approximately 55% of United’s revenue was from manufacturing. Primarily the assembly of oil field service equipment. For 2012 we are forecasting that this will reverse. In about 55% to 60% of United’s revenue will be from re-manufacturing parts and service as we anticipate that the demand for reman will continue to increase as manufacturing slows later in the year.

Currently we have 27 units either in the process of being re-manufactured or in the queue to start, with commitments from our customers to send more units as capacity becomes available at our reman facility. Our vision for United is that the reman and service business forms a stable base on top of which we can layer in manufacturing business activity as the market presents the opportunity to do so.

Our legacy Diesel Engine Services segment marine market reported higher results benefiting from large overhaul projects for both domestic and international marine customers as well as the return of drilling rigs to the Gulf of Mexico during the first quarter. The legacy Power Generation business benefited from engine generator setup grades, service and part sales.

I will now turn the call back over to David.

David Grzebinski

Thank you, Greg. Let me provide a few financial details for the quarter. Our continued strong performance in the inland transportation sector and the addition of K-Sea Transportation, now Kirby Offshore Marine, in July 1 of last year resulted in our Marine Transportation revenues being 39% above and operating income 30% above the 2011 first quarter. The Marine segment’s first quarter operating margin was 20.4% compared with 21.8% for the first quarter of 2011.

As Greg noted, during the first quarter our Inland Marine Transportation sector’s 90% to 95% equipment utilization continued along with favorable pricing. Our legacy Marine Transportation sector maintained its strong operating margin in the mid 20% range during the first quarter.

Kirby Offshore Marine contributed approximately 20% of the first quarter’s Marine Transportation revenues, but with the $2.4 million severance charge, its contribution to our first quarter operating income was only slightly positive.

With the acquisition of United in the second quarter of 2011, our Diesel Engine Services revenues increased $231 million in the first quarter from $58 million a year ago and operating income was $23.6 million compared with $6.6 million in the first quarter of last year. The segment’s operating margin was 10.2% compared with 11.5% for the 2011 first quarter. United’s performance continued to be strong as they worked through their manufacturing backlog and ramped up service and remanufacturing. United’s operating margin was in the high single-digit range for the quarter.

We continued to generate significant cash during the first quarter with EBITDA of $125 million. Our capital spending for the first quarter was $62 million and consisted of $21 million for new inland tank barges and towboats, $19 million in progress payments on the two new offshore dry-bulk barge and tug units Greg mentioned and $22 million primarily for capital upgrades to the existing inland and coastwise fleet.

Our capital spending guidance for 2012 is $265 to $275 million, and it includes $110 million for construction and new equipment and approximately $70 million in progress payments for the two offshore dry bulk units. The balance would be for upgrades to existing marine equipment and some to diesel engine service facilities. As of March 31, we had $72.5 million outstanding on our $250 million revolving credit facility.

Now I want to once again talk a little bit about the earn-out that we have in place for our acquisition of United Holdings. The former owners received $271 million on closing, but can receive an additional $50 million payable in 2014 if certain financial targets are met during 2011, 2012 and 2013. The fair value estimate of the amount we think we will have to pay under this agreement 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 statement. If we increase our estimate of the payout we would increase the contingent liability and it would lower our earnings. Conversely, if we lower the estimate we would reduce the liability and thereby increase our earnings.

During the first quarter we booked $4.2 million or $0.05 per share in expense as our estimate of the amount we would have to pay if this earn-out increased. As there are about two full years remaining for the earn-out period, you can understand that we may be required to make further adjustments, either up or down to the contingent liability. If consequently excluded any past or potential changes to the earn-out liability from our 2012 earnings guidance.

I’ll now turn the call back to Joe.

Joseph Pyne

Okay. Thank you, David. Our 2012 second quarter guidance is in a range of $0.97 to $1.02 per share. This compares with $0.77 per share earned in the 2011 second quarter. Our 2011 second quarter results included United purchased on April 15, 2011, but did not include Kirby Offshore Marine purchased on July 1, 2011. As David explained, our 2012 second quarter guidance is before any positive or negative change to United’s multi-year contingent earn-out liability. For the year our guidance remains at the $3.85 to $4.05 per share compared to actual earnings in 2011 of $3.33 per share.

As I stated at the beginning of the call, our Inland Marine Transportation business is performing at a very high level, with favorable pricing trends, and we anticipate this performance to continue. We have 50 new barges scheduled to be delivered throughout the balance of 2012. That will further enhance our inland performance as well as profitability. As we’ve stated since the purchase of our coastal fleet in July of 2011, the coastal market is not a next quarter story, but will improve over the next couple of years. We do expect the coastal fleet will be profitable with operating margins in the high single-digit area.

Our legacy Diesel Engine Service business should improve going forward with increased drilling activity in the Gulf of Mexico.

Perhaps the largest variable in our guidance is United and the impact of the recent transition away from drilling for natural gas to the exploration of crude oil, and the impact this transition will have on new orders for equipment. We do anticipate a decrease in demand for new equipment, however, we believe this pause is providing an opportunity to free up some capacity for pressure pumping remanufacturing and will allow us to further developed and enhance that service model that really is our vision for the business when we bought it.

Operator, we’re now ready to open the call up for questions.

Question-and-Answer Session

Operator

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

Alex Brand – SunTrust Robinson Humphries

Thanks. Good morning, guys.

Joseph Pyne

Morning.

David Grzebinski

Morning.

Alex Brand – SunTrust Robinson Humphries

David, I know you’re not including the earn-out in your guidance, but I was just wondering if when we think about the run rate for the first quarter and for your guidance, what’s the right way to think about it. And what I mean by that is let’s say in the second quarter United has a really good quarter, will it do better and therefore you take an earn-out charge so they wash each other out and we don’t really have a risk from that? And by extension, is the right underlying run rate for Q1 the add-back of the severance and the earn-out adjustment? Or really just adding back the severance?

David Grzebinski

Let me talk a little bit about the earn-out first. This is a fair value calculation so what we do is we have multiple scenarios that we run and we put probabilities on it and we estimate going forward through 2013 what we think the financial measures will be that drive the earn-out and it’s a probability weighted model. So right now what we’ve accrued for our earn-out is what we actually think will occur.

But as you know, as time goes on, you get new data points, stronger or weaker, and you factor that into your probability models. So it’s a hard way – it’s hard to predict what will happen with the earn-out but right now we think we’re appropriately accrued for the earn-out with our forward look for the next year and a half, two years. The second part of your question, can you ask it again please, Alex?

Alex Brand – SunTrust Robinson Humphries

And this is coming from the fact that clients are calling and I think we all have the same question: you report $0.91. There’s a $0.03 severance so that clearly is nonrecurring. But then this nickel that’s the earn-out that we’re going to have to deal with this for a couple of years, is the underlying run rate really as strong as $0.99 for the quarter? Or should we not think of it that way? It’s really the $0.94 and going forward we should not worry about the earn-out as it reflects on the tone of the underlying business at particularly at United in that case.

David Grzebinski

Yeah, I think it’s close to the underlying run rate. Certainly with the severance that shouldn’t reoccur. We do believe that the severance, that we’re essentially done the activities that we have to do. So you shouldn’t expect, we don’t expect to see any more severance charges. So clearly that you should think of in terms of a run rate. I think the earn-outs are a little more delicate because if United does extremely well above what we’ve expected, we will have to accrue more earn-outs. It’s not a simple answer. Adding that back to the run rate is probably a little more tenuous.

Joseph Pyne

Alex, let me give maybe a little more color on the first quarter for United. The first quarter of United was a very strong quarter. We’re not forecasting that to continue at those levels going forward. The diesel engine sector had a very good quarter. And to David’s point, what you are supposed to do is you’re supposed to project what you think the earn out’s going to be, and the current amount that you have reserved is supposed to reflect what that value is. So we’ll adjust it up and down based on how that business performs.

Alex Brand – SunTrust Robinson Humphries

Thank you for that, both of you. Just to segue there then as we think about United for the rest of the year. It sounds like there’s no change in terms of you guys always thought it would switch over to more service, and that’s happening. So how should we think about that business looking this year? In other words, it sounds like revenues kind of flattening out, maybe you’re even implying that it will come down a little bit from the run rate. But the margins should go up? Can you just talk about what that progression might, at least in general terms, look like the rest of the year?

Joseph Pyne

Yeah. I think that revenue will certainly flatten, probably decline a little bit, but the service margin should be higher.

Alex Brand – SunTrust Robinson Humphries

Okay. That’s all I have, guys. Thanks for your time.

Operator

The next question comes from Gregory Lewis from Credit Suisse. Please go ahead.

Gregory Lewis – Credit Suisse

Yes. Thank you and good morning.

Joseph Pyne

Morning.

Gregory Lewis – Credit Suisse

I’d like to delve a little bit more on the Diesel Engine Service side of the business. Joe, in your prepared remarks you mentioned that there was sort of a pause in new equipment. In thinking about that, and I think on the last call you talked about the backlog being pretty strong, could you just sort of give us a sense on where the backlog is today for new manufactured equipment?

Joseph Pyne

Yeah, the backlog is down from its kind of high levels, which were mid to the end of last year, down maybe about a third. But we still have a pretty healthy backlog that we’re running with. When I say pause, I think that the market is just kind of stepping back and assessing what the transition from principally looking for gas to principally looking for oil really means for equipment demand. And you also have some logistics challenges as you move equipment that’s working in a particular area to another area. You have to get it there. You have to get the fracking material and some fluid there. You have to arrange for water. It’s a process that’s going to take a while to settle down.

What I think is different about this point in the oil service cycle is that typically when this happens, the whole sectors collapse. Energy prices have collapsed because traditionally natural gas and crude oil traded at a ratio that was driven more by the BTUs that each produced. Here you have a decoupling of natural gas and crude oil. So you don’t have a collapse, you just have a shift from based on price. The thing that we like to say here is that capitalism works: where you think you can make money, that’s where you go. You’re struggling to make money in the gas exploration area, the crude oil is priced so that you can make a lot of money in that area. And the world has got to figure out how you get the equipment there and what it means when it gets there.

There’s a lot of talk about margins collapsing in that business. I think most businesses would love to have that kind of margin collapse. You’re going from extremely high operating margins to more traditional margins. So I’m not particularly concerned that there’s not going to be enthusiasm for doing this. You’re still making plenty of money. Just trying to re-assess what it all means.

Gregory Lewis – Credit Suisse

Okay. Great. And then just really quick following up. You mentioned that there is 27 units that are going to be re-manufactured. Is there any sense on the margins on those types of units and the time it takes on a unit basis for those? I guess what I’m trying to get at is there is 27 units, what does that translate into time? And what’s the opportunity for additional units to come on for the year?

Greg Binion

Greg, this is Greg. In terms of the margins, we see as we transition from manufacturing to more service, that the margins will move from the high single digit range that we’ve seen in the United piece to more of the low double digit range that we see in the service business and our marine transportation business. So in general that’s where we think that’s going to move. The 27 that we mentioned, some of those are a work in progress and some are in the queue to come into our shop. We’re currently really in the start up phase of this.

The last call you may recall that we were talking about getting the customers and supply chain and everything lined up. And now we’re in the process of executing. Where we find ourselves is in the start up phase. So we’re not as efficient today as we believe we’re going to be in the future. I think it’s premature for us to give you an idea of exactly what the capacity through that shop looks like cause we’re really getting everything lined out and working towards getting it more efficient.

Joseph Pyne

We do believe though that there is plenty of demand out there. As we free up capacity, there is plenty of frac equipment that needs to be worked on.

Greg Binion

And we’ve, at our discussions with our customers, it’s very encouraging around that area. At this point we have commitments from our customers to continue to supply us with frac equipment that we believe is going to keep us busy with the capacity that we have available to do that work currently through the tail end of the year.

Gregory Lewis – Credit Suisse

Okay. Perfect. Thanks for the time gentlemen, and congratulations on a good quarter.

Joseph Pyne

Thanks, Greg.

Operator

The next question comes from Jack Atkins from Stephens, Inc. Please go ahead.

Jack Atkins – Stephens Inc

Thank you. Good morning, guys. Thanks for taking my questions. Just to focus back here on the inland marine side of the business. You guys showed very strong pricing power again this quarter. Just curious to get your thoughts on where you think we are in the pricing cycle on the inland marine side, and do you think that maybe we’re back to peak pricing levels there?

Joseph Pyne

Jack, yeah we’re back to levels that we were out in 2000. 2008 was really the last peak pricing period. Just based on demand, we think that the pricing environment continues to be favorable.

Jack Atkins – Stephens Inc

Right. And then when you think about the fact that we haven’t really seen a recovery in residence or construction yet and that’s typically a driver for domestic Petrochemical production and consumption. And we’re seeing some new Petrochemical capacity coming on line late this year and next year. It seems like this pricing story for you guys on the inland marine side is really a multi-year story with a number of legs to it. I just would be curious to hear how you guys are thinking about the pricing power that you have in your business over the next several years, and do you think that over time if we do see price (inaudible) higher that your customers could potentially push back at some point?

Joseph Pyne

Well, customers push back on a daily basis. But I think that for the reasons you just gave, go back to my original comment and that is the pricing environment continues to be favorable. We think that over the next year or two that’s likely to be sustainable.

Jack Atkins – Stephens Inc

Okay. Great. Last thing from me and I’ll jump back in queue. I was just curious on the diesel engine side. Could you give us some color on what percentage of United’s business in the quarter was new build versus remanufactured? I just would be curious to see how that mix has changed so far this year.

Greg Binion

Jack, as I mentioned, we’re really in the start up phase of the reman business is picking up steam but during the first quarter it really didn’t have – there wasn’t a large of it driven by that business. So it’ll grow as we go further into the year.

Jack Atkins – Stephens Inc

Okay. Great. Thank you, guys.

Operator

The next question comes from 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.

Kevin Sterling – BB&T Capital Markets

Joe, the pull down you talked about in your active barge fleet, is this more inland, coastwise or both?

Joseph Pyne

It’s inland. When we talk about barge capacity, Kevin, when I talked about 50 additional barges, I’m talking about inland barges. We’re building two offshore dry cargo barges but we’re not building any offshore liquid barges.

Kevin Sterling – BB&T Capital Markets

Okay. Great. And you also talked about leveraging your existing inland customers with the coastwise trade. How quickly do you see this opportunity ramping up? And are you seeing any customer wins now?

Joseph Pyne

The point we make there is that our customers have both inland and coastal requirements. And what we want to be able to do is offer barging services for those requirements. So when we talk to an inland customer about their overall requirements, we’re talking both about their coastal moves as well as their inland moves. And I think that we’re having a degree of success and offering Kirby as the one-stop-shop for those requirements.

Have there been some wins? Sure, there have. But I don’t know if I want to – I don’t think we’ve put them in a column yet that this is a win. But we’re certainly getting a lot of enthusiasm, which is gratifying, from the customers that we work for that we were able to provide barging services regardless of whether it’s an inland requirement or a coastal requirement.

Kevin Sterling – BB&T Capital Markets

Right. Great job. And then I guess along those lines, that’s where you can really drive margins as you consolidate some of the back office since there is some overlap of customers. Is that the right way to think about it?

Joseph Pyne

Yeah, I think that as we integrate the companies, which we’re doing, we’ll take costs out. And we’ve talked about some of those costs in previous calls, but K-Sea, now Kirby Inland Marine...

David Grzebinski

Offshore Marine.

Joseph Pyne

Kirby Offshore Marine, now Kirby Offshore Marine – they’re going to punish me when we get off this call for that – is operating more efficiently in the Kirby operating model than it certainly was as a stand-alone MLP and those costs should be eliminated going forward and that should enhance margins when you get to similar places in the pricing cycle based on the history of pricing in that business.

Kevin Sterling – BB&T Capital Markets

Okay. Great. That’s all I had. Thanks so much for your time today.

Joseph Pyne

Thanks, Kevin.

Operator

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

John Barnes – RBC Capital Markets

Hey, good morning, guys. Thanks for your time. Joe, there’s obviously been a lot made about potential refinery shutdowns in Pennsylvania. Just curious if you’ve approached by any of your customers as to potentially filling that void, either through your inland barge business or your more importantly your coastal business, maybe refined product into the northeast and Atlantic states from off the Gulf Coast?

Joseph Pyne

Yeah, there is, John, they’re are general conversations that occur about that but I think that most of the attention has been focused on if they do close those East Coast refineries, where is the product going to come from? And the thought is that some of it’s going to come up the pipeline and some of it will come up from the Gulf Coast by U.S. flag marine vessels.

That’s going to be moved principally in larger vessels than we operate. Now there are going to be some blending components that we could move and as they continue to narrow the diesel spec, there may be some diesel movements that would logically fall into smaller lots that would fit our vessels. But those kind of discussions, except on a very general, really aren’t occurring yet. I think there is more speculation about refineries closing and how that product is going to get up there than actual contractual discussions on moving it.

John Barnes – RBC Capital Markets

All right. Very good. One of the railroads talked earlier this week when they announced earnings that they were having difficulty signing longer term contracts for crude by rail movements to justify building additional storage facilities and the like in South Texas. Are you seeing that maybe Kirby is running into more opportunities to move crude, either down in Mississippi or out of the Eagle Ford at the expense of the rails because your model may be a little bit more flexible, a little bit more able to handle things on a spot basis? Where maybe the rails aren’t as set up for that?

Joseph Pyne

We’re not really going head to head with rails for downriver movements of Canadian crude or for that matter for Eagle Ford. Where the rail play is, is out of Cushing and out of Bakken. There is some talk about moving Bakken crude to St. Louis where it would be put on barge. I think with respect to the Eagle Ford, what we’ve said about barging volumes out of the Eagle Ford is that right now you don’t have a good pipeline gathering system. They are putting in pipelines and we think that there’s always going to be barging but at some point the amount of new equipment that you’re going to put in there is going to be capped. That the excess crude oil is going to be moved by pipeline.

My guess is what you’re hearing with respect to the railroads is more what’s happening with Cushing because there’s pipelines that are planned and talked about at Cushing and also pipelines that are being put in at the Bakken. And there’s resistance to long-term agreement with railroads until you really understand what those pipelines do.

John Barnes – RBC Capital Markets

Okay.

Joseph Pyne

I’m guessing there. But my guess is that’s more the discussion than an Eagle Ford or Canadian crew out of the St. Louis area.

John Barnes – RBC Capital Markets

All right. That makes sense. And lastly, just going back to your comments around the order book at United. We had Gardner Denver report earlier, they basically took their outlook on the frac market to zero. And I’m just curious as to where do you think you end this year in terms of the order book as a percentage of maybe the peak? Is it down 50 from the peak? Is it down 80 and it’s just about wiped out? I’m just trying to get a sense for as we go into 2013, is there going to be much of an order book left as we go into next year?

Joseph Pyne

Yeah, it’s really hard to say, John. I think that right now nobody is aggressively ordering certainly frac equipment. And it’s for the reasons I gave earlier. I think that the market is really trying to assess is there enough equipment out there? They’re trying to position equipment that they already own to new areas. Just a lot of turmoil in that business. How quickly that works it out I think is going to depend on – is going to drive how much equipment is going to be ordered. I just think it’s too early to tell.

John Barnes – RBC Capital Markets

Okay. All right. Guys, nice quarter. Thanks for your time, Joe.

Operator

The next question comes from Jon Chappell from Evercore Partners. Please go ahead.

Jonathan Chappell – Evercore Partners

Thanks. Good morning, guys.

Joseph Pyne

Good morning, Jon.

Jonathan Chappell – Evercore Partners

What you laid out in the press release and then also I think David’s comments earlier that the United business is about 75% of Diesel Engine Services revenue. I assume that’s still lower margin than your legacy Services business. So what’s the contribution to total Diesel Engine Services operating income from United?

David Grzebinski

Yeah, I guess, John, the way to think about that is that United as a whole runs mid to high single-digit operating margins and the legacy Diesel business is running low double-digit margins right now. So you can kind of back into that way.

Jonathan Chappell – Evercore Partners

Okay. And then unfortunately the market dictates we need to spend a lot of time on the Diesel Engine Services, or at least the United business, despite the record results at the Inland Barge business. One of the other topics that we’ve talked about in previous calls and hasn’t been updated here is the acquisition climate. Primarily I see the barge business has bounced back a lot faster and harder than maybe we would have expected 12 to 18 months ago. So maybe some missed opportunities there. But as you’ve had some time to digest K-Sea, now the Kirby Offshore Marine, and kind of assess the landscape to potential acquisition candidates there and the ability to roll off that business, how does that acquisition climate look? What’s the kind of timing you would think in where can you get from a market perspective with the coastwise business?

David Grzebinski

John, as you know the utilization in the coastwise business is a little lower at 75% to 80%. So the environment is a little better than it is in the inland. With the inland market at 90% to 95% utilization, owners of barges are doing okay. So the acquisition environment in the coastwise business is pretty good right now. We’re hopeful, we’re always looking. But I would characterize it as a pretty favorable market.

Jonathan Chappell – Evercore Partners

Do you think it’s a 2012 event?

David Grzebinski

It’s hard to predict. I don’t want to give a date, but it’s certainly a good environment.

Jonathan Chappell – Evercore Partners

Okay. All right. Thanks, David.

Joseph Pyne

Thanks.

Operator

The next question comes from Ken Hoexter from Bank of America/Merrill Lynch. Please go ahead.

Ken Hoexter – Bank of America/Merrill Lynch

Great. Good morning. Joe, you mentioned the 90% to 95% utilization rate at the inland barge. Did you update on the utilization at the offshore marine?

Joseph Pyne

We can. David?

David Grzebinski

It’s 75% to 80% utilization right now. But we’re seeing signs of firming. Things are getting a little better.

Ken Hoexter – Bank of America/Merrill Lynch

Okay. So that’s similar to where it was last quarter, if I recall correctly?

David Grzebinski

Yes. Exactly.

Ken Hoexter – Bank of America/Merrill Lynch

Okay. What needs to happen to get that, or where should that be? Should that be up at the 90% to 95% as your inland barge, or is 80% a good target there? Where should that business be at?

David Grzebinski

Yeah. I mean ideally we’d like to see it above 85% because that’s where you can really start moving pricing. What has to happen, two things really. One on the supply side and one on the demand side. The supply side I think is working itself out and that’s the retirement of about 8% of the capacity, which is single skin. As you know that’s got to come out by the end of 2014, and we’re not seeing any new builds right now. So I think from a supply side that’s got to play itself out. We’re seeing some single skins being retired, so I think on the supply side of the market, it will gradually tighten up between now and the end of 2014.

On the demand side, the economy is weak. The coast wide business is largely refined products, which it’s vehicle miles driven, passenger miles flown, diesel truck miles driven and with the economy being weak, or the weaker side of the last five years or so, that’s got to come back for you to see the demand side to come. But if you take 8% of the capacity out of the market, if we’re 75% to 80%, add 8% to that, it should start to get better.

Ken Hoexter – Bank of America/Merrill Lynch

Wonderful. Just a follow-up on the united side, obviously you bought the business that was manufacturing, know that you’re now moving away toward the remanufacturing services side. How are the – you kind of talked about how the discussions have started. How long do you anticipate the lead-time for that process? And when should we start to see that ramp up?

Greg Binion

Yeah, I think we’re seeing it ramp up right now. Where we are is that we are – the facilities that we have are really pretty fully utilized and that the first quarter was really the ramp up process. So as we go forward, we should be able to improve the process and enhance our throughput and just get better at doing this. And as we get our employees trained, as we get our customers accustomed to the process, I think you’ll see improvements going forward.

Ken Hoexter – Bank of America/Merrill Lynch

I’m sorry, maybe I really need to be more specific. I thought you said the revenues were nearly de minimis in the first quarter, so I meant ramped up on in terms of kind of revenues as a percent of the base?

Greg Binion

Right. And as...

Joseph Pyne

Towards the end of the year.

Greg Binion

Yeah. As – right. I’m sorry, I was trying to imply that the revenues would also increase, as our throughput gets firm through the end of the year.

Joseph Pyne

And Ken, the other piece to this is that we’re out assessing demand. Demand is, we think, going to be significant to remanufacture oil field equipment. I mean to the point where we’ll actually consider adding some capacity to meet it. So we think that the market’s there, and it’s a market that we’re very well positioned for. We’re the distributor for the MTU Allison transmission. We have the capability of handling a wide range of engines and transmissions. We think that we’re located well for that market. And with 6,000 to 7,000 units out there that have been worked hard over the last several years, that there’s going to be plenty of demand to service that equipment.

Ken Hoexter – Bank of America/Merrill Lynch

Appreciate the time. Thank you.

Joseph Pyne

Thank you, Ken.

Operator

The last question comes from David Beard from Iberia. Please go ahead.

David Beard – Iberia

Good morning, gentlemen.

Joseph Pyne

Good morning.

David Beard – Iberia

Nice job on the quarter. I know you have a lot of moving parts going on in the company. So my question was a little bit bigger picture, and maybe you could talk a little bit about industry deliveries and scrappings for this year, and any outlook on next year. I know we had been thinking about 230 barges delivered, 120 scrapped. Any update there for this year, and thoughts for next year?

David Grzebinski

The new deliveries may have ticked up by just a few barges. The scrap number is still pretty much the same. You know, it’s somewhere in the 100 to 150 range. It just depends on what other operators are going to do in that period. But no, I think you’ve got it just about right.

David Beard – Iberia

Okay. And given that shipyards are pretty full, what do we think next year is going to look like? Any thoughts?

David Grzebinski

Well, we think that the current order book, which includes our program, is somewhere in the, just above the 100-barge range. And it’s early in the year, so it’s still unclear as to how the order book’s going to fill up. I would remind you that in 2012, one of the incentives that was in place for orders to build was the accelerated, the bonus depreciation of 50%, which that, if you were planning on building in either 2012 or 2013, it might incent you to bring your order forward by some degree. So we think that 2012 was robust from a demand standpoint in general, but also driven by this bonus depreciation thing, which at this point in time, does not appear that it’s going to renew for 2013.

David Beard – Iberia

Right, right. Now, that’s definitely been a factor in moving these numbers year-to-year. And then maybe specifically with Kirby, what are your thoughts relative to CapEx next year? Or how should we bracket it? It seems to me it’s kind of a $90 million or $100 million barebones maintenance, 270 this year. So will we be thinking somewhere in between? Or what are your thoughts?

Joseph Pyne

Well, as you know, you said a 270 this year, 265 to 275, and as we look at this chemical cycle that’s coming in front of us, we may bump up our CapEx next year. It’s still too early to tell but we’re seeing pretty robust market here and it all depends on how the year shapes out but we may take the opportunity to expand the fleet a little bit.

David Beard – Iberia

Okay. And then last question, how should we think about expansions at some of the refineries like Motiva? Is that going to be new demand coming online? Or have they already contracted barge needs? Or are they really moving everything by pipeline? Just in general how should we think about those Gulf refinery expansions?

Joseph Pyne

I think it’s all of the above what you just said. And when you couple that with the pipeline changes that Joe talked about earlier, having a larger supply of crude that’s going to reduce the difference between Cushing and the pricing that our refinery customers are paying in the Gulf Coast, I think all that adds up to more volumes for us in the future than we’ve had in the past. So I think we see that as very positive.

David Beard – Iberia

Okay. Great. I appreciate the time and sneaking me at the end for questions and nice quarter.

Joseph Pyne

Thank you.

Operator

At this time, there are no additional questions. Please go ahead with any final remarks.

Stephen Holcomb

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

Operator

The Kirby Corporation 2012 First Quarter Conference Call, this concludes the conference for today. You may all disconnect at this time.

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