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Executives

Stephen Holcomb – VP, IR

Joe Pyne – Chairman and CEO

Greg Binion – President and COO

David Grzebinski – EVP and CFO

Analysts

Jon Chappell – Evercore Partners

Gregory Lewis - Credit Suisse

Jack Atkins – Stephens

Ken Hoexter – Merrill Lynch

John Barnes – RBC Capital Markets

Chaz Jones – Wunderlich

Kevin Sterling – BB&T Capital Markets

Alex Brand – SunTrust

David Beard – Iberia

Jimmy Gilbert – Iberia Capital

Bill Baldwin - Baldwin Anthony

Kirby Corporation (KEX) Q3 2012 Earnings Call October 25, 2012 11:00 AM ET

Operator

Welcome to the Kirby Corporation 2012 Third Quarter Conference Call. My name is Trish 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 would now like to turn the call over to Steve Holcomb. Please go ahead.

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 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 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

Thank you, Steve. We announced last night that our third-quarter earnings of $0.95 per share came at the upper end of our $0.87 to $0.97 per share guidance range. Inland tank barge business continues to perform well with results that were above 2011 third quarter levels despite the low water conditions throughout the Mississippi River system that created a number of operating challenges this quarter, in addition to the delays caused by hurricane Isaac which was also in the quarter.

Demand for our coastal tank barge equipment was roughly in line with the 2012 second-quarter levels although we are beginning to see some modest improvement, particularly towards the latter half of the quarter. Our marine diesel engine service, that’s our heritage diesel engine service, operating results were below their 2011 third-quarter results. This was principally due to the hurricane. The hurricane closed our Louisiana facilities for several days and low water conditions which had some of our customers deferred maintenance projects and to a lesser extent of the timing of projects.

In our land-based diesel engine service business, the market for new pressure pumping units continues to be very weak and is the primary factor in the decline in overall diesel engine service revenues compared to last year. I am going to come back at the end of our prepared remarks and talk about the fourth quarter and the year outlook.

I’ll now turn the call over to Greg Binion who will discuss our inland tank barge and diesel engine service markets. And then today David will discuss the coastal tank barge market as well as the financial update.

Greg Binion

Thank you, Joe. Good morning to all. For the third quarter, our inland transportation sector continued its overall strong performance with high equipment utilization in the 90% to 95% range with both higher term and spot contract pricing. The low water conditions on the Mississippi River which began in mid-May caused -- persisted through the third quarter causing delays, light loadings and smaller tow sizes all of which caused a reduction in our ton miles. These conditions have continued into October and could extend into the fourth quarter as we continue to experience drought conditions in the Midwest which impacts our river loadings and efficiency.

To date we have not seen sufficient rainfall to relieve the situation and there is a possibility for the situation to get worse in sections of the upper Mississippi river near St. Louis. As they did last year in the high water, the Army Corps of Engineers has done a very good job in keeping the river open and continues to work with industry to minimize commercial disruptions. We will continue to update you on the situation as it develops further.

During the third quarter, hurricane Isaac also drove increased delay days forcing us to limit or suspend operations for as many as nine days for vessels in Southeast Louisiana. While operating conditions were and remain challenging, demand across our inland markets remains strong. Revenues from our long-term contracts, that is one year or longer in duration, remain at 75% and the mix of the time charter and the freightment business for the third quarter was 58% and 42% respectively.

Turning to the inland marine transportation pricing, term contracts during the third quarter continued to be renewed in the mid-single-digit level and in some cases higher when compared to 2011 third quarter. Spot contract pricing, which includes the price of fuel saw rate increases modestly when compared to the 2012 second quarter. During the 2012 first nine months, we took delivery of 53 new tank barges, totaling 972,000 barrels of capacity and retired 40 tank barges with 635,000 barrels of capacity.

In addition, we completed the transfer of four coastal tank barges to the inland fleet, adding 91,000 barrels of capacity for a net capacity add of 428,000 barrels. We also added the Lyondell fleet of 17 tank barges with 243,000 barrels of capacity. I’d point out that as we previously operated this fleet for Lyondell, this addition does not affect our revenue or cost structure. So net, net during the first nine months, we added 34 tank barges to our fleet and increased our capacity by 671,000 barrels.

As of September 30, we operated 853 tank barges with a capacity of 16.9 million barrels. We also took delivery of three 2000 horsepower inland towboats in the 2012 first nine months. Our fourth quarter construction program will consist of two 30,000 barrel inland tank barges and two towboats. The cost of the new inland tank barges and towboats delivered during 2012 and progress payments on barges and towboats delivered in 2013 will be approximately $130 million.

We will also continue to retire older barges during the 2012 fourth quarter. At present time we anticipate our 2012 year-end capacity to be approximately 16.8 million barrels or 600,000 barrels above the 16.2 million barrels at the beginning of the year, which -- note this number includes the Lyondell addition. Our 2013 construction program consists of 56 tank barges totaling 1.2 million barrels of capacity and three towboats with vessels scheduled for delivery throughout 2013. At the present time, the majority of these new barges are planned to be replacements for older barges.

Turning to our diesel engine services segment, United, our land-based service provider, saw revenues and operating incomes decline year-over-year 25% and 43% respectively. Sequentially, revenues and operating income was close to flat. The year-over-year revenue decline was a result of the significant reduction in orders for the manufacturing of pressure pumping units. We also experienced a decline in the sale of engines, transmissions and other parts. Partially offsetting the decline in the manufacturing of pressure pumping units was an increase in the remanufacturing of pressure pumping units.

Our legacy diesel engine services business reported lower operating results, primarily due to the timing of customer deferrals of several large projects in the Midwest due to the low water conditions and due to the effect of hurricane Isaac, which closed most of our Gulf Coast operations for several days. The diesel engine services segment also incurred additional operating expenses related to start-up costs associated with the new marine product distribution agreement and a new engine certification for the power generation market.

The power generation market benefited from strong parts and continued favorable engine generator set upgrades during the third quarter.

I will now turn the call over to David.

David Grzebinski

Thank you, Greg. Let me start with Kirby Offshore Marine. Kirby Offshore Marine’s overall equipment utilization rate was just under 80% with the Atlantic, Pacific, Alaska and Hawaii markets showing some signs of improvement. Although New York Harbor remained relatively weaker, the equipment we repositioned from New York Harbor market to the inland Gulf Coast market during the second quarter has had a positive impact. And we did see some modest improvement in market conditions in the month of September.

With respect to pricing at Kirby Offshore Marine, spot contract rates were up in the mid-single-digits. No term contracts were renewed during the quarter.

Before I turn to the financials, let me update you on our Allied acquisition. We received early termination for our Hart-Scott-Rodino review and we are on track to close early in this fourth quarter. We are moving forward with our integration plans with Allied and are looking forward to the business that this will bring to Kirby.

Moving to the financial data, yesterday as we – we announced net earnings for the 2012 third quarter of $0.95 per share which included an estimated $0.03 to $0.04 negative impact from the low water conditions on the Mississippi River and the delays caused by the hurricane. And this compares to $0.94 per share reported in the 2011 third quarter.

Due primarily to the impact of challenging weather in the quarter, marine transportation revenues were relatively flat while operating income was 5% above 2011 third quarter. The inland sector contributed approximately 80% of the third quarter’s marine transportation segment revenue. Kirby Offshore Marine contribute approximately 27% of the third quarter’s revenues in marine transportation.

Despite unfavorable weather impacts, our inland operations maintained an operating margin in the mid-20% range for the third quarter. Kirby Offshore Marine’s operating margin was in the high single digit range. The overall marine transportation segment third-quarter operating margin was 23.4% compared with 22% for the third quarter of 2011.

Our diesel engine services revenue for the 2012 third quarter was 19% below the 2011 third quarter. Diesel engine services operating income was 31% lower than the third quarter year ago and the segment’s operating margins were at 8.5% compared with 10% for the third quarter of 2011. The decline in operating income and operating margin was due to the lower results at United.

United contributed approximately 70% of the diesel engine services segment’s revenue during the third quarter and United earned an operating margin in the mid-to high single digit range for the 2012 third quarter. The legacy diesel engine operations contributed about 30% of diesel engine services revenue during the third quarter and their operating margin was in the low double-digit range. At the end of August, we raised our unsecured revolving credit facility from $250 million to $325 million in part to facilitate the closing of our acquisition of Allied Transportation

As of September 30, we had $101 million outstanding on under our revolving credit agreement. This morning our revolver’s outstanding balance was $74 million. We ended the third quarter with $782 million in debt and as of this morning, it was $754 million.

That’s all I had. And I'll turn the call back to Joe.

Joe Pyne

Thank you, David. Our 2012 fourth quarter guidance is $0.83 to $0.93 per share. This compares with the $1 per share earned in the 2011 fourth quarter. For the year, our guidance is $3.53 to $3.63 per share compared to $3.33 for the 2011 year.

Our inland marine transportation sector is performing well with favorable pricing trends and we anticipate this performance to continue. Liquid movements from shale formations and Canadian crude oil movements from the upper river system have kept positive pressure on barge utilization and has absorbed new barge capacity. This should continue into next year.

Low water conditions throughout the Mississippi River system negatively impacted our third-quarter results. Our fourth quarter guidance assumes that operating restrictions and resulting delays and lower ton miles created by low water levels continue into the fourth quarter. We’re also assuming normal seasonality associated with typical winter weather conditions.

Our fourth quarter guidance assumes our coastal marine transportation business will experience a normal seasonal decline in the fourth quarter, partially offset by some very modest year-over-year improvement in rates and utilization. This business continues to improve as capacity is removed. It’s also benefiting from crude oil movements, which is absorbing capacity. We see nothing that suggests this won’t continue. The sector would also benefit from a stronger economy.

With respect to our legacy diesel engine business, our fourth quarter guidance assumes that results will reflect fewer power generation engine generator set projects, resulting in a sequential decline in the fourth quarter. The core service business with respect to our heritage business continues to strengthen. What pulls earnings around are delivery schedules of large projects and the timing of overhauls.

The largest variable in the fourth quarter and full year guidance is United and frankly this will, I think, also be true in 2013. Although we expect continued improvement in United’s revenue from the service side of this business – these are the service revenues – the current volatility in natural gas prices and the subsequent decline in demand for pressure pumping equipment to service North American shale regions creates uncertainty and lower revenue and earnings in the near term, and we believe into 2013. New orders for pressure pumping equipment have essentially stopped and the supply and distribution part of this business has slowed.

Bright spot in the business is the service of remanufacturing of oilfield equipment, particularly pressure pumping equipment. Unfortunately this side of the business will not replace the earnings dollar for dollar compared to the business operating in what is typically a more healthy environment where you have both remanufacturing and some new manufacturing. We certainly expect this business to be profitable in the fourth quarter and we also expect it to be profitable in 2013. So we’re not saying that it's going to lose money but it’s going to be as profitable as it has been in 2011 and 2012.

Except for the United business, the fundamentals of our other businesses is actually pretty strong. United business will get stronger as pressure pumping business gets better which most are projecting will occur in late 2013 or early 2014. In January when we announce our full year earnings we will be more specific with respect to our businesses and will provide some actual earnings guidance at that time.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Jon Chappell from Evercore Partners.

Jon Chappell – Evercore Partners

Joe or Greg, I am trying to figure out the sustainability of the pricing strength in the inland barge business. And the way I am thinking about it is – I don’t know if you can put a number around it – but how many of your contracts, the term contracts may still be operating on what would call kind of pre-strengthening in the market type levels? So what’s the ability to still kind of re-up contract renewals at present that are significantly higher than what you may have signed a year and half, two, maybe even three years ago?

Joe Pyne

Jon, I think that the majority of that would've been repriced, there are still a sliver that were priced in the 2009 and ’10 period. But it's not a material amount. Let me – yeah, about 50% of the contracts that we currently have will be renewed in 2013. But I think that most of this has been renewed in 2011-2012 time period. So I don’t think that you are talking about a lot of business that’s going to get a significant rate increases to adjust to current markets.

Jon Chappell – Evercore Partners

And then my follow up for David on the Kirby Offshore Marine, sounds like there are some positive developments end of 3Q going into 4Q. Can you talk about some of the new I guess trading routes that you're seeing that’s absorbing some of the tonnage and then just how that's matching up with the timing of removal of capacity and where you see the market in 2013 versus 2012 and ’11?

David Grzebinski

Sure. No, our utilization as you heard in our prepared comments was approaching 80%, which is up. The market has tightened up a little bit. Some older capacity has come out. We’ve actually retired some and we moved some capacity out of New York Harbor into the inland market. So that, that has helped tighten up. But the other thing that's happening is we’re getting some crude moves that are essentially cross Gulf, coming out of Corpus Christi area from at the Eagle Ford play that the crudes making it to Corpus Christi and then making it to water and there are some cross-Gulf moves over to the New Orleans area. And that has also helped tighten up the market.

You also heard that we got some spot price increases this quarter. So things are improving and looking up and that there's no reason that shouldn't carry into 2013.

Joe Pyne

And Jon, just a little more color on that because David talked about the Gulf Coast opportunities. But there are actually East Coast and West Coast opportunities that are beginning to pop up, which is all encouraging as you look at a model that's isn't fully utilized. So all of that should be positive, pushing this fleet to higher utilization levels. The other thing that what will help is as I mentioned in my remarks is a stronger economy. Economy improves, you will move more gasoline too.

Operator

Our next question comes from Gregory Lewis from Credit Suisse.

Gregory Lewis - Credit Suisse

Joe, to your point on East Coast and West Coast moves, are those moves from the U.S. Gulf or are those just East Coast moves?

Joe Pyne

Well some – some will be from the U.S. Gulf but that’s going to principally in larger vessels. The kind of movements that we’re seeing on the East Coast that hit naturally in our size vessels are moves such as Albany to New York Harbor where the crude oil is railed to Albany and then loaded on barges to be distributed. So that's pretty positive. We think that that's going to continue and we think that there are going to be additional kind of innovative moves that will seek the lower price shale crude oil for those East Coast refineries. Traditionally they have been supplied by imported barrels and imported barrels are at a significant disadvantage with the domestic barrels if you can overcome the transportation differential which it looks like the market is finding ways to do.

Greg Binion

And on the West Coast, Greg, I would add that there is lock in crude that’s trying to make its way to Anacortes, which will end up on the water and perhaps get distributed along the West Coast.

Gregory Lewis - Credit Suisse

So it sounds like the market is pretty strong. I mean at this point, is Kirby looking at opportunities to maybe build out its capacity in the coastal trade or are you seeing any leasing opportunities to do that?

Joe Pyne

Well of course, as you know, we’re always looking for acquisitions. But in terms of new capacity and building new capacity, prices still don't justify new capacity and of course, Kirby would rather buy capacities and build new capacity. We want to be very careful in adding capacity but pricing is just not near where it needs to be to justify new builds.

Operator

Our next question comes from Jack Atkins from Stephens.

Jack Atkins – Stephens

First of here, quickly maybe talk about marine transportation segment. I was really impressed with the sequential improvement in operating margin there despite the fact that you guys had some headaches from low water and the hurricane. So maybe first of all, if we could just talk about sort of what was going on in the third quarter to help drive the sequential margin improvement. And do you think that this level of operating margin is sustainable going forward?

Joe Pyne

Yeah let me just, Jack, caution you about some of the margin growth. In our river contracts we have minimals. So you can actually -- make this think that through. You can actually I guess it wouldn’t. I guess the revenue would be the same. So the margin should be about right. Greg, do you want to answer the rest of the question?

Greg Binion

Sure. So I think Jack, one of the things you heard us talk about for couple years now is the fact that we’ve been reinvesting in our fleet. And I think what you're seeing to a large degree is improvements in reliability and flexibility that we’re really beginning to enjoy a the pay-off with an improved tank barge fleet and started to see the fruits of that efforts.

Joe Pyne

Yeah and I would add on the comp side, you saw margins come up, in my comments from – in the second quarter from the low single digits to the high single digits. And part of that it is will cost savings that we've been talking about. It’s starting to flow through and that helps. But third quarter is also a busy time for comp, it’s our busiest quarter. And as you know when you go into the fourth quarter the Alaska business on offshore starts to slow down just because of the weather and what not. But the improvement -- some of the improvements in comp are starting to flow through as well.

Jack Atkins – Stephens

And then looking at the diesel engine services side, to me your guidance applies a pretty sharp step down there sequentially on the revenue side. Just sort of curious if maybe you could talk about your expectations in the fourth quarter for diesel engine services as it relates to the third quarter. And then also maybe just any sort of trends you saw in your diesel services business on the land based side, as you move through the quarter. And if that can help sort of enlighten us as to how you are thinking about the fourth quarter, I think call-out will be very helpful.

Greg Binion

Well, Jack, this is Greg. In the legacy business, what we saw is, as we talked about deferrals from our marine transportation customers. And also typically we have some large projects in the power generation business and while there was one on the books, it’s actually been deferred a little bit. It’s a European project and as you can imagine with the issues in Europe, that’s been put on the shelf for the time being.

As it relates to the United business, as Joe, as we mentioned the sequential downturn is really around the new product. And while the typical contracting happens in a normal year during the third quarter, that's actually been pretty quiet. We haven’t received a lot of inquiries from our customers about pressure pumping equipment. And the market for other types of equipment, some other pumping and well service equipment has been a little stronger than that but it’s still really pretty subdued. As we said the ancillary sales that go along with servicing the equipment is really based on the intensity in the area which we serve, which is really that Oklahoma and Northwest Arkansas and Northern Louisiana area, which is really a pretty gas intensive area has also come off, which is affected our parts distribution and service sales a little bit virtually as well.

And then the re-man business, we continue to work diligently to improve the throughput to our re-man shop. We’ve engaged with a consultant that is helping us look at our organization and really kind of reengineer the company so the we maximize our efficiency. It’s a work in process. We are making progress but it’s going to be slow to steady progress. As we said, that business is much more difficult to do than building new units, which is good and bad. It takes a while for us to get it right but it also is more difficult. And once we do get it right should give us a sustainable competitive advantage in that space.

Operator

Our next question comes from Ken Hoexter from Merrill Lynch.

Ken Hoexter – Merrill Lynch

Now that you’ve been operating in the offshore market for a while and you’ve made a follow-up acquisition. A couple of things. Can you just talk about – you talked a bit before about what is needing the economy and demand to come back. But looking at the vessels you now have, are you not inspecting them or are you making all the necessary investments? I just want to know if there is any other surprises that may pop up from the operating side of offshore marine?

Greg Binion

Well hopefully no surprises. We have made steady progress in our maintenance and repair program. As we said that’s going to take a good part of this year and there will be increased spending next year. But we’re making great progress on that. The reliability of the fleet has gone up and we’re not seeing the surprises that we had seen, and things have improved quite a bit.

Joe Pyne

And we’re being vetted by customers, we’re working with the customers now that we want to work for just a lot of positive things that have occurred. But to get that moving in the right direction, you have to have a service that meets their vetting requirements and the reliability requirements and the money that Kirby Offshore Marine is investing is going to do that. We’re confident of that.

Ken Hoexter – Merrill Lynch

Did you mention that you’re taking vessels from the offshore marine into the inland marine side?

Greg Binion

Yeah, we did. We took – we talked a little bit about it in the fourth quarter that we took some of the smaller vessels that were in the New York harbor that weren’t being utilized. And we moved them down to the Gulf Coast and quite frankly they have been put to work in the inland space. So it’s been a win for both businesses, the inland and the offshore.

Ken Hoexter – Merrill Lynch

So it’s not scaling the capacity too much on the inland side.

Greg Binion

Oh goodness, no. We’re as busy as we can be in the inland side really.

David Grzebinski

There was only four barges – four out of 857.

Greg Binion

Ken, these weren’t the big 80, 100,000 barrel unit. These were four 28,000 barrel units, roughly the equivalent of the 30,000 barrel inland barge.

Joe Pyne

And the physical dimensions of these barges, Ken, are really identical to what inland 30 looks like.

Ken Hoexter – Merrill Lynch

Just a follow up on the United, is there certain price that you need to see in terms of getting the rigs back to being – put back in the commission?

Joe Pyne

Ken, I think the consensus is around 4 bucks that you will begin to see more equipments go into gas formations looking for gas at the $4 level. I think that’s the best consensus view I can give you.

Operator

Our next question comes from John Barnes from RBC Capital Markets.

John Barnes – RBC Capital Markets

Just a quick question on the coastal side. You’ve elaborated a couple of times about the changes of the New York Harbor market and specifically relocating some equipment out of there. I go back and think about during the downturn Kirby took the leadership position on the inland barge side, kind of cut the industry rational as a whole by doing some things with your fleet, maybe taking some retirements early and that kind of thing.

I am just kind of curious as to how you feel about the current size of your coastal business and how close you think you are from a size perspective, to being able to kind of influence that same behavior on the coastal wise business as you were able to on the inland side?

Joe Pyne

Yeah, I am not sure that they ever truly influence it. But what we’re able to do that Kirby uniquely can do this is take barges that will fit in inland servicer and move them into that service. I think with respect to the coastal trade, doing much more of that would be giving up the opportunities going forward because we see that business moving to balance. It’s slow but steady, you see the equipment being in some cases shifted to really a product, movement of crude oil. And with any reasonable increase in the economy you’re going to stimulate more gasoline movements.

So I don't think the industry is set that far from balance. On the inland business we had in 2008 going into the recession a fleet that was older than our coastal fleet, and we used the opportunity of reduced demand as an opportunity to take barges kind of out of services, frankly it should have been taken out probably couple years before. But demand was such that we needed them and embarked on a replacement program at very attractive prices that go down age of the fleet. And as Greg explained, it significantly increased our reliability with the newer equipment. So it was a little different, I think, scenario on the inland side than on the coastal side right now.

John Barnes – RBC Capital Markets

In terms of the low water conditions that impacted the inland side, this is the first time I can recall where you had this severe situation for an entire quarter, where it kind of impacted you for the entirety of the quarter. I am just kind of curious, as you look back at the third quarter, that low river condition, light loading, that type of thing, if you hadn’t had those conditions exist would your utilization levels have been strong and do you think your pricing would have been a strong versus if you had kind of a normal river condition situation?

Joe Pyne

That’s a good question. Most of the additional capacity needed to service upriver customers is 10,000 barrel capacity. And most of that frankly is contracted, so you don’t see it in spot rates, it just takes more equipment to service the contracted business that you have. The 30,000 barrel fleet for the most part is a low river Gulf of Mexico fleet. Now there are some exceptions. So there is some crude oil now being moved out of St. Louis which is new. And there are some unit tows that operate but the bulk of the 30,000 barrel fleet is a lower river canal based fleet. And that would have been unaffected really by low water conditions and I think that the utilization which drove I think the pricing increases that we and others saw was just real demand that was being handled by that fleet.

John Barnes – RBC Capital Markets

And then can I just ask one question on CapEx, kind of two – first, the CapEx numbers that you gave in the press release there was no real mention of the CapEx dollar spend into the diesel engine business. Can you give us some color there? And then secondly, on CapEx, do you have any preliminary guidance you can give us around 2013 CapEx?

David Grzebinski

We did spend a little bit in the diesel business to buy off to lease one of our properties in Oklahoma City. But the capital spending in the diesel business is pretty minimal. Most of our spending is in the marine side as you might imagine and gets to the fleet replacement that we've had going on for several years and it continues. And this would probably be our big year. Next year we haven’t given official guidance but it could be in the order of $150 million to $200 million depending on what we do in the inland space. But that will be down obviously from this year for around 300 or little above $300 million. So -- but as you would expect, John, it’s marine driven.

John Barnes – RBC Capital Markets

Okay. And I'm assuming that $150 million to $200 million is based on the continuation of current conditions and not some material move up in the economy?

David Grzebinski

Correct.

Operator

Our next question comes from Chaz Jones – Wunderlich

Chaz Jones – Wunderlich

Just first off, does the Dow Chemical announcement earlier this week have any impact whatsoever on your business?

Greg Binion

Chaz, it’s Great. It really does not. What Dow was talking about there was really European and Asian vision production areas. So it really doesn’t impact our area at all. In fact, we've seen some of the players in the chemical space that have pending capital projects that have reiterated their plans to go forward with those that led us this morning. So we continue to be encouraged by the interest in investment in that petrochemical complex in the U.S. Gulf.

Chaz Jones – Wunderlich

And then to follow up on United, the 8% margin, just from your comments that it sounds like that’s probably bottoming out and as we’re thinking about 2013, are you saying that just from a modeling standpoint engine services revenues are probably down year-over-year, but margins are up because of that mix shift that United but potentially overall operating profits are down?

Joe Pyne

I think directionally that's right. I don’t want to comment prematurely on what 2013 is going to look like. But I think directionally, that’s about right.

Operator

Our next question comes from Kevin Sterling from BB&T Capital Markets.

Kevin Sterling – BB&T Capital Markets

You guys have talked about Kirby Offshore Marine, your utilization is just under 80%. Realistically where do you think this utilization can go in light of maybe little bit of tick up we’ve seen an improvement with some crude oil movement and improvement in the East-West. I imagine it can’t be as size your core business in the low to mid-90s. But how should we think about utilization as it continues to improve in offshore?

David Grzebinski

I think you should think of it actually fairly similar to the inland business. You could get into the 90% to 95%, you will never get above 95%. There is inefficiencies that happen. The question is how long does it take to get that utilization up? We continue -- as I mentioned earlier we continue to see older equipment retired. We moved some equipment out on the market. So that’s helping but clearly the crude demand is absorbing some capacity and driving up industry utilization. We are seeing regional period of high utilization but then it will turn back down a little bit. So that the economy could help a lot as Joe indicated but little bit of economic strength and discontinued crude movements situation could start push utilization up fairly healthy next year and maybe we get into the mid maybe even high 80s. We will have to see how it develops.

Kevin Sterling – BB&T Capital Markets

So Dave, where is (inaudible) for utilization for you guys to really push pricing, is it 80%, 85%?

David Grzebinski

Yeah it’s 85%. As I said we got a little bit of pricing this quarter but it was on a regional kind of context. You need very similar and when you need that sustained above 85% and you could get it earlier than that if the market really thinks that it’s going to get a lot tighter. It’s not only the absolute level of utilization, it’s about what the customers think it’s going to happen right – if they look forward and they saw oh, my goodness, it’s going to be harder to get a barge, then we can push pricing a little earlier. But 85% really is kind of that magic line.

Kevin Sterling – BB&T Capital Markets

And along those line too, you talked about customer behaviour in the offshore market, but remind me there’s still – we’re single-skin capacity in the offshore market that’s got to come out. So could you remind me how much single-skin hole capacity there is and when that has to come out by? And I imagine that if the economy picks up and start moving more gas and what have you and the customer sees the single hole capacity kind of exit the market, is that – that’s got to be favourable for your business?

David Grzebinski

Yeah, believe the single skin was about 8%. I think that's been coming down. We haven’t done – there is no industry survey that we kind of got to go through Coast Guard databases to get it. But it’s probably and still in that order of magnitude, maybe 5% to 8%. But it will be coming down, and it has to be up by the end of 2014.

Operator

Our next question comes from Alex Brand from SunTrust.

Alex Brand – SunTrust

I don’t remember in the time I’ve covered you that you ever had water conditions be this kind of persistent impact, and I think you said it might actually get worse. So when we look at Q3 and you say 3 to 4 was water conditions and weather. How much of that's really water conditions? I mean is it $0.03, or $0.04, or $0.05 cents impact to the fourth quarter that you're thinking about, or what?

Joe Pyne

Yeah it was 3 to 4 water and hurricane. And it’s about 1 to 2 – 1.5 and 2 on hurricane and that would be 2 to 3 water, I guess.

Alex Brand – SunTrust

And then at some point here in the fourth quarter you expect the upper part of the river to kind of close anyway, right? So it really doesn't impact at some point late in the fourth quarter and into the first quarter, is that the right way to think about that?

Joe Pyne

No, because -- unfortunately you have to get on the section that is going to be most affected to get into the Illinois river which typically does remain open. The upper Mississippi River north of St. Louis, you want to be off that river by around Thanksgiving, because it does freeze but the Illinois at typically either – that either doesn’t freeze or it freezes so that you can actually break the ice and get to ports south of Chicago. So that’s an active river.

We’re not saying it’s going to close. We’re just putting a marker down, but we are watching it carefully, that that stretch of the river is dependent on flows coming out of Missouri River before that typically reduces those flows beginning in November, and that is a potential problem. Now there are a number of things it can be done, and I think that industry and the Corp are looking at all of them. But it will all go away with just rain. And this is typically the time of the year frankly that it begins the right. So we’ll just have to monitor it.

Alex Brand – SunTrust

With respect to United, I sense maybe a little less optimism about the speed of the ramp up in re-man than I think I was hearing in the past. And I am wondering if that's just a function of – it’s been harder to get it going than you thought, and really what I'm thinking about is when we look at next year, I thought the idea was re-man is lower revenue but higher margin and so you don't lose too much profitability. But I am wondering if that's changed and when do we really lap those manufacturing comps that, that could – that re-man could make up the slack?

Joe Pyne

That’s the question. Re-man is making progress, there are just a lot of moving parts in it to make it an efficient process. And as Greg mentioned, we’re working with a consultant to help us there. I think that, that’s going to be very positive. The other issue is how much and – we’re not ready to talk about this yet but that it’s something that you should ask us about certainly January is how much can you push through the current facility without investing new capital? And that really is our focus, making it efficient and then pushing as much as you can through current facilities without investing capital. We can invest the capital. We have positioned ourselves to add to the facility that we have by buying the adjacent property and actually taking that property that was leased and buying it.

But our effort is to maximize the capacity that we have and then to add capacity once we've done that. And I think we will have a much better feeling for all of that by the first next year.

Operator

Our next question comes from David Beard from Iberia.

David Beard – Iberia

Could you elaborate a little bit about the outlook for the overall inland large fleet growth for this year and any thoughts on next year?

Joe Pyne

Yeah, we think that there is going to be another approximately 200 barges built, a combination of 30,000 and 10,000 barrel barges. And that again we think that some of that’s going to be replacement, most of our building program is replacement. And that the industry continues to need capacity to service new requirements particularly their black oil requirement, crude oil requirements. Is that what you wanted?

David Beard – Iberia

Yeah and then would you say the 200, is that for this year or are you speculating out in ’13?

Joe Pyne

No, that’s a 2013 number, this year it’s actually little more. Remember you get the tax benefits issue.

David Beard – Iberia

And then as it relates to the coastal market in general, with utilization picking up, has that changed the outlook for acquisitions in that area or prices for fleets or hasn’t changed the big picture?

Greg Binion

The acquisition environment is still okay in the coastwise and – but it could start impacting the price expectations of potential sellers. I think there is a couple things going on -- still going on that people are still recovering from what was pretty rough time in the coastwise business. And they’re making a little money and they are looking at their succession plans and saying, well, still let’s get out. But you're right if the outlook continues to brighten, it may close the window for further consolidation for a while in the coastwise. But it still looks pretty good right now. I don’t want to be too dour, too negative about that.

Operator

Our next question comes from [Jon Torres] from Argus.

Unidentified Analyst

Just wondering first of all about the ATB space. Do you see any kind of opportunity for Kirby there in terms of acquisitions and kind of synergies of your existing fleet. I guess I am kind of thinking that maybe about the OSG fleet, those guys have been in difficulty lately. Is the ATB something you’re interested in?

Joe Pyne

We already operate ATB. So the bulk of – in fact, the bulk of the comp fleet is ATB. ATB is an articulated tug barge unit where the tug locks into the notch of the barge but stays independently blend and a lot of our equipment is there. The OSG fleet, we are certainly watching it. I don’t -- it's a complicated situation. They have equipment that -- they control equipment that certainly is very attractive. But certainly if they don’t own, some of it is ineligible for the Coast Guard -- coastwise a Jones Act and some of it pretty old. As with anything it depends on the deal, whether you get excited or not, and I think that time just needs to sort out what OSG is going to do. My understanding just reading the press clips is that they have hired somebody to help and do that.

Unidentified Analyst

And just going back to the – I guess that kind of relates from my kind of view of things to crude movements, at least some of the bigger barges, are you interested to moving to crude up from Gulf Coast to the northeast? Do you see demand for crude exports from any other Gulf Coast – someone obviously mentioned Corpus Christi earlier and do you see that demand kind of improving in 2013?

Joe Pyne

Yes, and really there is two kinds of demand. There is demand that goes into -- that that is best suited for barges that are similar to what com operates which is kind of 150 and below, sweet spot probably 80,000 to 120,000 barrels. And there is man that is – that has a longer supply chain which an OSG ship or a larger barge would be better suited for it. And that would be South Texas to the East Coast.

The sweet spot for us is the shorter trip kind of demand. With respect to OSG there are couple of those barges – large barges are not eligible for that trade that they were built with the construction subsidized funds and they are not Jones Act eligible.

Unidentified Analyst

One final thing, the crude that – the barges that you are using to shuttle crude around U.S. Gulf, is more of that being done on the term basis or the spot deals that’s going on?

Greg Binion

We would say it’s more spot but clearly some of the operators are now looking for longer term deals. So it’s an evolving market. This is just really starting to take off.

Operator

Our next question comes from Jimmy Gilbert from Iberia Capital.

Jimmy Gilbert – Iberia Capital

I think maybe some people have, when you talk about low water conditions persisting into part of Q4. And then October typically the lowest water levels, and other months did you find the lowest water levels typically on the Mississippi?

Joe Pyne

It can be anywhere from about August to October. It will vary year for year – year to year in this area.

Jimmy Gilbert – Iberia Capital

And then I wanted to kind of follow up like on David’s question about the newbuilds and retirements, what if I were to call jet boat or turning marine and wanted to order a tank barge either a 10 or 30, what would be the first delivery date that could give one to me? Assuming I have the financing which I don’t.

Joe Pyne

Assuming you have the money, the major yards are really pretty booked up through 2013. So the tail end to 2013 maybe farther 2014 for you to be able to get anything from the major yards. There are some specialty yards that aren’t efficient as those major yards that maybe priced slightly higher, that may have some availability for very limited run in production. I am not sure we have the traditional visibility on the jet boat that we have. So they may have some capacity but they seem to be very disciplined with respect to how they are using their capacity.

Jimmy Gilbert – Iberia Capital

And just real quick one more, you guys talked about some West Coast movements of crude, and I don’t know we understand the West Coast inland barge movement, would that – would those be coastwise movements and how does that work?

Greg Binion

They’d be coastwise out of Anacortes up in Washington state, they have come down into maybe the California refineries. And it would just be coastwise of large barge type movement, 80,000 to 150,000 barrels and maybe if the combines are enough, the larger units the 330,000 barrel units, which is a space we don’t play in. But clearly initial volumes would probably be in smaller units, I would imagine. But that again is just starting to be discussed and it hasn’t really developed yet.

Jimmy Gilbert – Iberia Capital

And larger movements like 300,000 barrels that would be almost – is that, that would be a product tanker almost, would it?

Greg Binion

There are some large ATBs that are of that size, like Crowley and some others operating.

Operator

Our last question comes from Bill Baldwin from Baldwin Anthony.

Bill Baldwin - Baldwin Anthony

David, just a quick one here. Are you having any progress on extending out the contracts on KLM? I know you want to get a little bit more contract in there, a little less possible. Has that process begun?

David Grzebinski

It has and it’s a slow process. We just only get the customer name but we just sign a longer-term deal on the West Coast that’s out six years. So a pretty good piece of business for us, so we are very excited to do. But as Joe mentioned, we are also working with some of our inland customers and looking at some of the major carriers that are going to have the volumes year in and year out, which is what we like. And as we improve the equipment, we are working on bidding with some of these potential major customers.

And it’s a process but we are clearly focused on, on getting some of this equipment term out a little longer with some more ratable volumes that will be there year in and year out.

Bill Baldwin - Baldwin Anthony

Is your target there around 75%, 80% on contract, David, or –

David Grzebinski

Quite frankly I like to be above 80% on contract. But it’s going to take time for us to get there.

Bill Baldwin - Baldwin Anthony

So it’s a bit more of the contract, longer term contract type business in really than in the inland business?

David Grzebinski

We like it to be, yes.

David Grzebinski

We certainly appreciate your interest in Kirby Corporation and participating in our call. If you have 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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