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Executives

Joe Pyne – Chairman, Chief Executive Officer

Greg Binion – President, Chief Operating Officer

David Grzebinski – Executive Vice President, Chief Financial Officer

Steve Holcomb – Vice President, Investor Relations

Analysts

Jack Atkins – Stephens

Kenneth Hoexter – Bank of America

Chaz Jones – Wunderlich

Greg Lewis – Credit Suisse

Steve O’Hara- Sidoti & Co.

David Beard – Iberia

John Larkin – Stifel Nicolaus

John Chappell – Evercore Partners

Alex Brand – SunTrust Robinson

Kirby Corporation (KEX) 2012 Guidance Call June 25, 2012 9:00 AM ET

Operator

Welcome to the Kirby Corporation Announces Revisions to 2012 Second Quarter conference call. My name is John and I’ll be your operator for today’s call. [Operator instructions]

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

Steve Holcomb

Good morning. Thank you for joining us. With me today are Joe Pyne, Kirby’s Chairman and Chief Executive Officer; Greg Binion, Kirby’s President and Chief Operating Officer, and David Grzebinski, our Executive Vice President and Chief Financial Officer.

During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at kirbycorp.com in the Investor Relations section under non-GAAP financial data. Statements contained in this conference call 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 risks 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.

Joe Pyne

Okay, thank you Steve. On Friday afternoon, we publicly revised and lowered our second quarter guidance to $0.80 to $0.85 per share from the previous guidance of $0.97 to $1.02 per share. For the year, we revised our guidance to $3.45 to $3.70 per share, again from the previous guidance of $3.85 to $4.05 per share.

Let me start with some comments on our inland tank barge and marine diesel engine service businesses, both of which are performing well and above 2011 second quarter levels. Our inland tank barge market remains strong with equipment utilization levels in the 90 to 95% range, leading to continued favorable pricing trends. During the second quarter, we did see some temporary lower petrochemical volumes than anticipated from one of our major customers due to both unscheduled and scheduled plant maintenance issues. We also experienced some low water levels on the Mississippi River system which has led us to light load equipment going upriver and resulted again in some lower revenue.

Looking forward, we anticipate our inland market to remain positive based on the high utilization levels in the industry’s tank barge fleet. We are currently hearing a lot about inventory destocking caused by the collapse in crude oil pricing and the global economic weakness, but this has not translated into reducing utilization and the industry capacity additions are all being absorbed.

With respect to our marine diesel engine service market, it continues to improve due to the overall health of its inland marine transportation customers, improving Gulf of Mexico oil service markets, and the power generation market which we participate in is also stable. We anticipate these businesses to remain positive for the second half of 2012.

Our challenges for the second quarter and for the year are principally in our newly acquired businesses. With respect to United Holdings and K-Sea Transportation, now Kirby Offshore Marine, I want to emphasize that although we’re disappointed with this year’s performance, we’re not disappointed in the land-based diesel engine service business opportunity and the offshore tank business as investments for Kirby long-term. When we purchased United Holdings last April, we recognized that it had some cyclical exposure to manufacturing. We said that we intended to reduce this exposure by focusing on the overhaul and maintenance of this equipment versus manufacturing the equipment. What we did not predict was the unprecedented and sudden collapse of natural gas prices, which has essentially halted new orders for frac spreads and reduced the window to make the transition to re-man. Frankly, we didn’t predict the strength of this business last year. Although painful, it has forced us to expedite the implementation of our remanufacturing plan.

With respect to K-Sea, now Kirby Offshore Marine, their market will improve and as it does, rates and earnings will get better. Yes, we’re disappointed in the additional maintenance we will be incurring to bring this equipment up to our standards, but we will get this behind us. When we bought K-Sea, it was a public company and the need to maintain strict confidentiality than we have experienced with other, non-public acquisitions, and the equipment inspection window was much shorter. We relied on maintenance records and discussion with K-Sea management to determine the condition of the fleet and the assessment of the adequacy of its maintenance program. Based on post-acquisition shipyards and performance issues with the equipment, we concluded that we needed to invest more in the equipment.

This is what happened. I’m not offering it as an excuse. We made a business judgment error which turned out to be wrong. The tank barge business is about servicing customers reliably and safely with equipment which can consistently meet the customer’s vetting requirements. Well-maintained equipment pays for itself through higher utilization rates because equipment is out of service less for unplanned maintenance events and the customer wants to use it more because it’s reliable and safe. This is the model which we have successfully employed in our inland business. This is the model we will employ in the offshore business going forward.

I’m now going to turn the call over to David, who will take apart the differences between our original earnings guidance and our revised guidance.

David Grzebinski

Thank you, Joe. First, I want to remind you that our first quarter results included a charge that was not included in our previous $3.85 to $4.05 guidance range. A 4.2 million before tax or $0.05 per share charge relating to the earn-out associated with the United acquisition was not included in that guidance. Adjusting for this change, our previous guidance would have been $3.80 to $4 a share.

As Joe stated, during the second quarter in the inland marine business, we did see temporarily lower petrochemical volumes than we anticipated from one major customer due to unscheduled and scheduled plant maintenance issues, and we are experiencing low water levels on the Mississippi River which has led to light loading of tank barges. We are estimating that the negative impact of these issues will be in the $0.03 to $0.04 per share range for the second quarter. Also, Joe stated our legacy diesel engine services market continues to improve. As a result, our revised second quarter guidance range reflects a $0.01 to $0.02 positive per-share impact and a $0.03 to $0.04 positive per-share impact for the year.

For our land-based diesel engine services market with the current low price of natural gas, the incentive to drill for natural gas has declined, leading to a reduction in the number of fracturing units being employed and a reduction in drilling rates. This in turn has filtered down to United with order cancellations and postponements. This happened much faster than we had anticipated in our original 2012 second quarter and full-year guidance. Some of the revenue lost from the postponements and cancellations will be partially offset by the demand for remanufacturing of older frac units. While the transition from manufacturing to remanufacturing of frac units is occurring, it will take several quarters for it to obtain optimal efficiency levels.

In addition, corresponding with the reduction in drilling activity in the North American shale gas formations, our service of land-based diesel engines and sale of engines and parts has slowed. For the second quarter, we estimate that the negative impact from United on our second quarter guidance is in the $0.07 to $0.09 per share range and $0.15 to $0.18 per share for the full 2012 year.

With respect to Kirby Offshore Marine’s maintenance issue, for 2012 we are estimating the amount to be expensed and the resulting loss of revenue days will negatively impact the second quarter by an estimated $0.02 per share and the full year by an estimated $0.08 to $0.09 per share. In addition, during the second quarter and after we had issued our second quarter guidance, the northeast coastal and New York Harbor markets further softened, resulting in lower equipment utilization levels and more competitive bidding for available movements. We are estimating this softness, offset by some improvement in the Pacific-Alaskan-Hawaiian markets, will negatively impact our second quarter results by $0.01 to $0.02 per share and will impact the full year by $0.04 to $0.05 per share.

With the continued softness and excess capacity in the northeast and New York Harbor fleets, we have moved two tank barges to the Gulf Coast and have two additional tank barges and tugboat units currently en route to the Gulf Coast where we will employ them in the Gulf Coast market. The repositioning costs are part of the negative impact I just referred to.

I will now turn the call back to Joe.

Joe Pyne

To summarize, our two legacy businesses are doing fine. United Holdings and Kirby Offshore Marine position us to pursue additional growth markets. United performed very well in 2011, surprising us on the upside. We did not contemplate this performance, nor are we forecasting it into the future. We are forecasting a business principally focused on service, parts and distribution with some manufacturing which is replacement driven. There is nothing that we are seeing that suggests that this business model is not a good one and one which produces earnings and operating margins in line with our original investment objective.

Kirby Offshore Marine will improve as capacity is removed from the system and volumes return. When operating independently, K-Sea achieved operating margins in the mid-double digit range. We see nothing which suggests that operating margins won’t be better under the Kirby model once the supply and demand becomes more balanced. The long-term strategy for this business remains intact.

There is a lot of uncertainty in almost all markets today caused by low growth rates and high unemployment in the U.S. and slower or no growth globally. However, long term our position in the U.S. transportation system looks very good. In the next four to five years, over $1.5 trillion is projected to be invested in U.S. manufacturing in chemicals, energy, automobiles, and heavy equipment, driven by relatively flat labor costs and low cost energy. Cheap and abundant shale gas, the source of United’s problems today, provide great opportunities for us in the future. The ratio of natural gas prices to crude oil prices provides the U.S. with a significant cost advantage, not only for the manufacturing of chemicals but for a host of other items.

Because we must live in today’s market environment, it is easy to get discouraged; but the rationale that was the premise for these acquisitions is still intact and they will be good, long-term investments.

Operator, we are 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]

Our first question comes from Jack Atkins from Stephens. Please go ahead.

Jack Atkins – Stephens

Good morning guys. Thanks for taking my questions. So first off here, I was wondering if we could maybe just kind of compare your old guidance to your new guidance for a moment. David, if I remember correctly, and you touched on this briefly in your comments that the old guidance excluded not only the earn-out liability of $0.05, but then there was $0.03 of severance charges as well that I believe were excluded when you guys updated guidance following 1Q results. So could you maybe talk about why you all decided to include those charges in your new guidance range when they have been excluded before?

David Grzebinski

Well basically because they’re behind us. We have got about 2.4 million in the first quarter, and I’ll tell you now that we’re going to have about $600,000 in the second quarter of severance, a total of about $3 million that we know about now.

Joe Pyne

Yeah, we thought it was confusing the market so we just lumped it all in, and we’ll start with these new numbers.

Jack Atkins – Stephens

Okay, great. And then when you think about your new guidance range, if I’m reading the press release correctly, the delta between the low end of $3.45 and the high end of $3.70 really has a lot to do with how United performs through the back half of the year. And so I was wondering if you could maybe talk about for a moment what both the low end and the high end of the guidance assumes, of whether it’s for United’s new built frac-related activities or the remanufacturing activities. Help us sort of understand what gets you to the low end and to the high end there.

Joe Pyne

Yeah, the high end is contingent on United as a whole performing better. It’s part re-man, it’s part the distribution side of the business, parts in distribution, as well as manufacturing. So you need to see some recovery in the natural gas markets to certainly spur the manufacturing side. The low end would include problems in the re-man area where your move to make that process efficient is taking longer than we anticipate. I think that with respect to com, we have the cost side nailed down pretty well but you could have some further deterioration in some of their markets.

We feel pretty good about Kirby Inland Marine and Kirby Engine Systems. Those markets seem to be holding together pretty well. So I think all of those factors kind of go into the high end—low end of the guidance range.

Jack Atkins – Stephens

Okay, great. And last question from me and I’ll jump back in queue, but Joe, could you maybe touch on the pricing dynamics that you saw in the inland marine business during the second quarter, both on a contractual basis and on a spot basis?

Joe Pyne

Yeah, we’re going to give that specific information when we announce our second quarter earnings, but the answer to your question, I’d just say that the pricing trends remain positive.

Jack Atkins – Stephens

Okay, great. Thank you, guys.

Operator

Our next question comes from Kenneth Hoexter from Bank of America. Please go ahead.

Kenneth Hoexter – Bank of America

Great, good morning. Dave, I guess if we look at the targets that you’ve set, you started with about $3.78 when you mentioned earlier with your pre-announcement that you’d be about $0.02 to $0.09 below your prior bottom end of the range, given what was going on at K-Sea. So if I look at the reductions and exclude the charges, it looks like you’re bringing down first quarter by about $0.17 but the full year by maybe a little bit less, maybe only $0.16 from that $3.78 for the midpoint. Are you suggesting maybe by the outlook that the back half of the year is maybe as stable as you had thought, or I’m just trying to read through what your note is here on the second half of the year.

David Grzebinski

Yeah, I think clearly the chem markets should be more stable. KES, as you heard, we’re pulling up the full-year impact that KES is going to provide, and there is some movement between quarters with United. The third quarter will be a little better in United than the second quarter; so yeah, on the margin you’re correct.

Kenneth Hoexter – Bank of America

Okay. And then Joe, can you talk about K-Sea? What gets this market turned and utilization up? Where does this need to get fixed on the K-Sea side, or Kirby Offshore?

Joe Pyne

Yeah, I think from a market perspective, probably the most disappointing part of the market is the New York Harbor part. There’s just too much equipment that is competing for the volumes that are there. Part of our strategy is to reduce our presence in that market, which we can do because we can take that equipment and work it in the Gulf Coast, so that’s going to help New York Harbor.

With respect to the more coastal part of our business – you know, east coast, Gulf Coast, west coast – as capacity comes out, that business will improve. As we’ve said, if volumes begin to come back, and I think they’re going to be led by the strengthening in the economy, you’ll get that improvement sooner. You know, medium term I’m not concerned about that business. New York Harbor is going to be a mess for a while, but we uniquely can help ourselves in that area; and the other coastal markets are just going to be dependent on capacity and volume improvements.

Kenneth Hoexter – Bank of America

And what percent of the fleet is in that New York Harbor region right now?

Joe Pyne

What percent of our fleet? It’s mostly smaller barges, maybe—let’s see here, 15 to 20% if you count the number of barges. But if you do it by capacity, it’s much less.

Kenneth Hoexter – Bank of America

Thanks, Joe.

Operator

Our next question comes from Chaz Jones from Wunderlich. Please go ahead.

Chaz Jones – Wunderlich

Yeah, good morning. One question I had was I understood the impact on Q2 volumes from the major customer in inland marine. Is there expected to be any ongoing impact in the second half of the year, or is that just related to 2Q?

Joe Pyne

Yeah, we think that it’s going to be over second quarter.

Chaz Jones – Wunderlich

Okay, and then the follow-up question I had was I know the bias has been to continue to pay down debt, at least over the last three or four quarters. Obviously the stock’s come in quite a bit. Has there been any discussion yet, Joe, maybe at revisiting any type of buyback?

Joe Pyne

Absolutely. Yeah, we’re always talking about that.

Chaz Jones – Wunderlich

Okay, that’s all I had. Thanks, guys.

Operator

Our next question comes from Greg Lewis from Credit Suisse. Please go ahead.

Greg Lewis – Credit Suisse

Yes, thank you, and good morning. David or Joe, when you talk about the diesel engine service business, I believe in the first quarter you talked about a noticeable pickup in potential remanufacturing units. I think at the time there were maybe 25 units potentially coming in to get remanufactured. Could you sort of give us an update – has that proceeded as you expected? Is the backlog sort of the same? Has that backlog of potential remanufacturing units come down? Really, just looking for a little bit more color on that segment of the business.

Joe Pyne

Yeah Greg, I think we said at the end of the second quarter that we had 27 units in the shop, and that number is roughly the same. It’s kind of a rotating number of units. We think the demand is there. There is going to be some efficiency issues as you get the work process defined so that you can get them through the shop in an efficient way. We’ve said that we think that it’s a six- to eight-week process. I would tell you that the first units are of a higher end of that range, but we think that through process improvement we can drive it down. The margins, we still believe, are going to be in the kind of low to mid-single digit level margins, again as we work through the efficiencies—excuse me, double digit, kind of low to mid-teen margins.

Greg Lewis – Credit Suisse

Okay, but in just thinking about from the Q1 call, the 27 units in the shop, is it still the same 27 units or have any actually been redelivered out into the market?

Joe Pyne

Oh no, it’s moving through the shop. No, some of those have been delivered.

Greg Lewis – Credit Suisse

Okay, thank you very much.

Operator

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

Steve O’Hara – Sidoti & Co.

Hi, good morning. Could you just talk about what type of visibility you have currently into maybe the United business, and I guess maybe even your other businesses as well?

Joe Pyne

Yeah. Well, the way you put together a forecast is you have to make assumptions around the business environment that you’re going to be operating in. With respect to United, that business environment has changed rapidly. Based on the—the assumptions that we’ve put together for United have been ones that we’ve spent a lot of time internally with as well as externally, talking to people in the business, talking to customers. It’s our best estimate, but that environment is very volatile and it could go both up and down.

With respect to Kirby Offshore Marine, I think we have better visibility. I think that that market isn’t as volatile as the United market, but again, who would have predicted a year ago that natural gas prices would have been below $2 at some point in the quarter?

Kirby Inland Marine, I think our visibility is pretty good. Kirby Engine Systems, I think it’s pretty good. I think probably the wild card is United, but we’ve spent a lot of time trying to analyze both the upside and downside of that business, and I think based on the assumptions we’re making we’ve got it right. Let’s just hope the assumptions are correct.

Steve O’Hara – Sidoti & Co.

Okay. I guess as a follow-up, given the uncertainty I think you guys referenced, would you say you’ve kind of leaned towards the, let’s say, lower end of the range in terms of your thinking? I mean, given the fear that you mentioned and the uncertainty out there.

Joe Pyne

Well, we hope we have. I don’t know how to answer that, other than that.

Steve O’Hara – Sidoti & Co.

Okay. Thanks a lot.

Operator

Our next question comes from David Beard from Iberia. Please go ahead.

David Beard – Iberia

Good morning gentlemen. Could you just review what charges you had in your guidance, and then just summarize again for me the other impacts? I guess what I see old guidance to new guidance, there are $0.16 of charges including what’s in the first quarter and then what’s related in the rest of the year. Is that correct?

David Grzebinski

Yeah, let’s go. The earn-out we took in the first quarter was a nickel – $0.05, and what we said in the inland marine customer outage we said was $0.03 to $0.04 for the year. The Kirby Engine Systems we said was an offset of $0.03 to $0.04 positive, right? United’s problems we said were $0.15 to $0.18 negative, and then the Kirby Offshore maintenance issues were $0.08 to $0.09 negative, and then Kirby Offshore Marine northeast markets $0.04 to $0.05 negative. That’s kind of for the full year.

David Beard – Iberia

That’s very helpful. And capital spending plans?

David Grzebinski

Yeah, capital spending plans are up. We had originally said our capital spending was in the range of 265 to 275. Some of the spending on maintenance at Kirby Offshore Marine is capital, so that’s increased; and then we’ve also spent some on down payments for our inland marine build program of next year, so it’s taken it up about—we’re about 290 to 300 million in total capital now for the year.

David Beard – Iberia

All right, great. Thank you.

Joe Pyne

Yeah, we’ve given you a lot of numbers, particularly in David’s dialogue, and I think what we’ll do is we’ll take those numbers and put them out in an 8-K so that everybody will have them in front of them.

David Beard – Iberia

Okay, great. That would be helpful, guys. Appreciate it. Appreciate the details.

Operator

Our next question comes from John Larkin from Stifel Nicolaus. Please go ahead.

John Larkin – Stifel Nicolaus

Yes, good morning gentlemen and thanks for taking my question. Could you go into a little more detail on the types of things that you’re having to do to the Kirby Offshore Marine vessels? Is that concentrated more with the barges or the tugboats or towboats? What exactly was it that you missed in the initial due diligence that you’re now rectifying?

Joe Pyne

Yeah, it’s on both the tugs and the barges. It ranges, John, on a case-by-case basis. There could be some coating. In many cases, there are some coating problems where you get inside the valve tanks and you inspect them, you see they haven’t been coated as well as they should have been, and we need to bring them up to standard. There is some steel work. When we get into engines, we’re finding some things that need to be adjusted and fixed, things out of alignment, couplings that were undersized. It’s a host of things and it transcends both the tugs and the barges.

John Larkin – Stifel Nicolaus

Could you share with us the total expenditure and how much of that is capitalized and over how many years the capital portion might be depreciated?

Joe Pyne

Yeah, well it depends in terms of the years. It’s on a vessel-by-vessel case, but just in total spend for 2012 we’re going to spend—there are kind of three buckets. There’s a capital bucket, there’s a deferred dry dock bucket, and then an expense bucket. But for 2012, we’re going to spend about $14 million more than we had anticipated, and in 2013 the total spend will be about 3 million, maybe a little more – 3.5 million more than we had anticipated. And then by the time you get to ’14 and ’15, it actually starts going the other way because some of this is a pull-forward and we should get some benefits in 2014 and 2015.

John Larkin – Stifel Nicolaus

Okay. That’s very helpful. And then you mentioned you’re going to be moving a couple of more vessels on top of the two that you’ve already moved from, I guess the New York metro market down to the Gulf.

Joe Pyne

That’s correct.

John Larkin – Stifel Nicolaus

How many of the barges in Kirby Offshore Marine are flexible enough to be redeployed into, let’s say, the Intracoastal Waterway type market?

Joe Pyne

It gets a little bit more tough when you go to the inland marine area because some of the barges have notches in them, and to get ultimate flexibility you’re going to want a barge that’s easily adapted to a push boat in the inland marine area. So part of some of the costs that we’re incurring with moving these boats is we’re going to have to cut the sterns off of a couple of them so we can put them in inland service. So there is some flexibility, but there is some cost with that flexibility.

Greg Binion

But to answer your question, most of the New York fleet, if you’re willing to move it and spend the money on, you can put in inland service. They are 20,000 to 30,000 barrel barges, so they will fit in an inland application.

John Larkin – Stifel Nicolaus

Okay, but the rest of the barges are not as flexible, those that are running coast-wise? Is that a correct statement?

Joe Pyne

The larger barges, yes.

Greg Binion

The larger barge market is a better market, John.

John Larkin – Stifel Nicolaus

Okay. And then the reasons for the softness in demand in the New York metro area, is that at all tied to the three refinery closings, or was there something else going on there?

Joe Pyne

No, it’s equipment that’s worked it’s way north out of the Chesapeake and new entries in that market.

John Larkin – Stifel Nicolaus

Got it. Very helpful. Thank you.

Operator

Our next question comes from John Chappell from Evercore Partners. Please go ahead.

John Chappell – Evercore Partners

Thanks guys. Just a follow-up to the share buyback question – is there a current authorization in place right now? And then second, your free cash flow should go up significantly in 2013. I know that about six months ago, there would probably have been a little bit more optimism about potential acquisitions, especially in Kirby Offshore Marine. Given what’s happened with the K-Sea fleet and then given what’s happened with the share price, has there been a little bit of a shift in priority maybe to buybacks?

Joe Pyne

Well certainly at these prices, buying stock is very attractive. Having said that, acquisitions are opportunistic and you need to evaluate how they fit as they come along. And our balance sheet and cash flow should support both, depending on the size of the acquisition that you’re making. So yes, we’re focused on the attractiveness of our stock, and as you know, John, we have bought a lot of stock back historically. Since I’ve been the CEO of Kirby, we’ve bought 22 million shares back. We like to do that because it’s like buying barges, except we know more about them than if we’re buying somebody else’s barges.

John Chappell – Evercore Partners

Is there a current authorization in place, Joe?

Joe Pyne

There is.

John Chappell – Evercore Partners

How much remains on that?

Joe Pyne

About 1.2, I think—

David Grzebinski

One-point-six.

Joe Pyne

Is it 1.6? Okay.

David Grzebinski

I believe; I’m not positive.

Joe Pyne

Okay, but it’s over a million shares.

John Chappell – Evercore Partners

Okay. All right, thanks for your time.

Operator

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

Alex Brand – SunTrust

Hey, good morning guys. Joe or David, either one – I think all of us are kind of trying to get a handle on whether there’s more risk at United. You guys have given a lot of color and detail, and I appreciate it, but I’m going to ask you for more if it’s possible. When you look at the way you forecast this and whatever you guys built in for what sounds like conservative assumptions, can we think about it like, okay, manufacturing is done, and that was about half the business, and then we make some assumptions about the service business at a mid-teens margin. Does that kind of approximate the way you guys are thinking about it and explain why you don’t think there’s much, if any, more downside risk to that forecast?

Joe Pyne

I think that’s fair. Of course, there is going to be some manufacturing that will continue, Alex, because we’re manufacturing in the compression side of our business and there will be—you may not build frac spreads for a period of time. You’re going to build them; that’s not going to go away forever, but there are some other specialized equipment that we also build, so there is going to be some manufacturing always occurring. And I think that mid-teen margins for the re-man business is appropriate. I think we have some efficiency issues that we need to work through, but we don’t see any real barriers to working through them.

You know, did we forecast the worst case scenario? No, we didn’t; but did we forecast what we think is a realistic scenario? I think we did.

Alex Brand – SunTrust

So Joe, what I’m trying to get at, I guess, in a different way is I’m trying to get back to the run rate of the business now, how that compares to when you bought it, and I think you said accretion for the balance of the year – at that point, three quarters remaining – was going to be, like, $0.20. So does this thing continue the run rate at or above your original expectations even now, or is it really not as attractive as you had originally hoped?

Joe Pyne

Yeah, David, why don’t you answer that.

David Grzebinski

Yeah, no it’s about what we would have expected. It may be a little better, actually, still than what we had originally modeled. When we look at an acquisition, we do a free cash flow model, so we look at cash flow; but earnings, obviously, is part of it. We had forecast kind of that initial run rate that you had talked about continuing through ’13—well, into ’13 and then down-turning in ’13. So the downturn that we had forecast happened earlier, but the order of magnitude when we put our model together for the acquisition, the earnings are in that range right now.

Joe Pyne

And as I think we have discussed, Alex, 2011 with respect to United was an upside surprise. I think that we had suggested when we announced that acquisition that the earnings contribution would be in the $0.20 to $0.25 range, and it was a lot more than that, which makes the comparisons year-over-year very difficult. You’ve had an unprecedented collapse, a sudden collapse in natural gas prices, and you went from manufacturing a lot of equipment to coming to a screeching halt, at least with respect to frac spreads. Our plan, as we’ve said repeatedly, is to move this business into the less volatile service area, which we’re doing, and we think that once that occurs, you are going to continue to manufacture but it’s going to be mostly replacement. It’s not going to be additional capacity. You’re going to get returns and earnings that are going to be consistent with the original thesis that we made the acquisition on. So once we get through this period, I think it’s going to be seen as a really good kind of addition to the business, but it’s not going to hit the ball out of the park every year as it certainly did in 2011.

Alex Brand – SunTrust

Joe, in the core inland business, you mentioned that there’s some talk of destocking risk but you haven’t seen it. I wonder if you would just tell us what your confidence is—utilization is high now, meaning pricing is also good; but we are building a lot of barges, and are you confident that we can get through this year and get into next year and not have the perfect storm where there is a coming drop-off in demand right when a bunch of capacity is about to hit the market?

Joe Pyne

Well, there is nothing certain, Alex, but I don’t see anything that suggests that happening. On an everyday basis, we can book more 30,000 barrel barges. The weakness that we saw in the second quarter for the one upriver customer was principally in smaller barges. We think that that’s behind us. We’re seeing demand improve there.

Sure, there are scenarios where you’re going to have another kind of global meltdown – I mean, there’s a lot of noise out there, but our view is that that’s not going to happen. There are certainly scenarios that could cause that to happen. I think it would be a volume issue. I don’t think it’d be so much a capacity issue.

Alex Brand – SunTrust

Okay. Thanks for the time, guys.

Operator

[Operator instructions] We have no further questions at this time.

Steve Holcomb

We appreciate your interest in Kirby and for 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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