Kirby Corporation (KEX) Q4 2007 Earnings Report, Transcript and Summary

Good morning, and welcome to the Kirby Corporation 2007 Fourth Quarter and Year-End Earnings Conference Call. My name is Amber and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. [Operator Instructions]. At this time I would like to turn the show over to Mr. Holcomb.

Thank you for joining us this morning. With me today is Berdon Lawrence, Kirby's Chairman; Joe Pyne, the President and Chief Executive Officer of Kirby; and Norman Nolen 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 press release... in the conference call with respect to 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, 2006 filed with the Securities and Exchange Commission. I will now turn the call over to Joe Pyne.

Thank you, Steve. And good morning. The 2007 fourth quarter was the 16th consecutive quarter that earnings exceeded the same quarter the previous year. And the fourth year in row that we've reported record financial results. Late yesterday, we reported fourth quarter earnings of 64%... $0.64 a share, a 45% increase, compared to the $0.44 per share, reported for the 2006 fourth quarter. And for the year our 2007 earnings were $2.29 a share, that's a 28% increased, compared to the $1.79 per share number for 2006. During the fourth quarter... the 2007 fourth quarter, marine transportation demand remains strong in all of our four transportation markets. Our tank barge capacity remained essentially fully utilized and we continued to experience a favorable pricing environment. We did experience more weather delays compared to the third quarter, weather delays in the fourth quarter were 60% more than the third quarter of 07. As weather conditions deteriorated sharply along the Gulf Coast as well as the Midwest. Contract's renewed during the fourth quarter with increases in the 8% to 10% range over the same period of 06 and spot rates were 12% to 13% over the 2006 fourth quarter rates and remain above contract rates. Rates in 2007 essentially did what we thought they would do, as we forecasted at the beginning of 2007. Volumes with our... from our term contract customers continued to remain strong, during the last half of 2007. 80% of our marine transportation revenues were from term contract customers and 20% from customers in the stock market. This compares to 75, 25... 75% term contract, 25% spot during the first six months of 2007 and for 2006 it was 70% contract, 30% spot. During the fourth quarter, we operated an average of 258 boats, three more than the third quarter and 15 more in the fourth quarter of 06. During 2007, we took delivery of four new towboats, purchased three used towboats, and chartered the balance... chartered horsepower [ph] availability continues to improve growing our towboat still is a challenge but we have made some significant progress in the crewing area; during 2007 adding 44 pilots to our system. Our goal in 2008 is to add another 70 to 75 pilots and during the month of January we are on track to achieve that. Our Marine Transportation segment operating margins improved to 21.8% for the fourth quarter, up from the 19% margin same period last year, but slightly lower than the 22.9% experienced in the third quarter. That can be explained by weather delays. The lower margins, fourth quarter versus third quarter. Continued strong demand including strong demand in the fertilizer business, which is very incremental to our business, favorable contract and spot rate increases and operating efficiencies from the additional horsepower, all contributed to the higher margins, when you compare the fourth quarter this year to the fourth quarter last year. Here Diesel Engine Service segment fourth quarter results reflected again a strong demand for services imparts in the majority of the markets that we service. Some seasonal and expected softness related to our high speed engine business. The fourth quarter results do reflect the accretive acquisition of Saunders Engine and Equipment Company, company that we bought in July of 07. Our diesel engine service, fourth quarter, operating margins were up a little bit 15.6%, compared with the 13.4% for the fourth quarter of 06 and they are also slightly above the 15.5% margins that we experienced in the third quarter. The higher margins reflect that continued strong markets, strong labor utilization, service rate and products pricing increases and of course the acquisitions that we completed in 2006 and 2007. Now before turning the call over to Norman, I do want to comment some of the recent volatility in Kirby stock price. Sometimes we see the market; the equity market is not particularly caring how they grew Kirby with other parts of the transportation industry. Recently, we observed that our stock appeared to be trading negative news about the ocean shipping markets both the liquid and dry bulk market. Our stock appear to be caught up in some general concerns about overcapacity in this markets and of course concerns about the U.S. economy. Over the past several weeks, we also have received several calls from investors about the potential of new manufacturing capacity coming on for the building of domestic U.S. tank barges. While the ocean shipping liquid and dry bulk markets appear to be facing some substantial increases in worldwide capacity, the domestic tank barge industry has enjoyed relative stable supply with only modest capacity additions which have been easily absorbed. Now having made this point, prices to build new tank barges have risen substantially over the past several years, and several small shipyards have announced that they intend to build tank barges. Several Kirby competitors have also announced that they intent to increase the size of there tank barge fleets. Long to medium term, we believe that market will absorb the capacity which the industry is adding. Long term we must always be concerned about excess barge capacity and watch for science of overbuilding. Offsetting this risk of overbuilding is the simple fact that the tank barge industry has an old plate [ph] as one-third of it is 30 years or older and much replacement building will need to occur in the future. Kirby has always tried to run its business prudently with a significant portion of our equipment committed to contract. Today, approximately 80% of our business is under contract for a year or longer. I will come back at the end of prepared remarks and talk about our projections or forecast of 2008 for both first quarter and the full year, but let me turn the call now over to Norman to talk about the financial results.

Thanks Joe. Our fourth quarter numbers continue to reflect strong manufacturing... strong marine transportation and diesel engine services markets. Marine transportation revenues increased 23% over the fourth quarter of 2006 on higher volumes and pricing, and we reported a 21.8% operating margin in that segment. Ton miles in the fourth quarter were 13% higher, in the fourth quarter of 2006, primarily due to continued strong refined products and agricultural chemical movements on the Mississippi River which involve longer distances than movements on the Intracoastal Canal. Our barrel capacity increased 1.7% above last year and remained essentially fully utilized during the fourth quarter. We also operated 15 more towboats than we did in the fourth quarter last year. With experienced typical wither weather conditions in the fourth quarter with delay days increasing 60% over the previous quarter, but 5% less in the fourth quarter of 2006. On the diesel engine services side, the high-speed business represented $24 million out of the total $59 million of diesel engine services revenues in the fourth quarter. The high-speed group which was formed with four, 2006 and 2007 acquisitions which were Global Power Systems, Marine Engine Specialists, P&S Diesel Services and Saunders Engine and Equipment Company, with each acquisition immediately accretive to earnings. Kirby generated $81 million of EBITDA in the fourth quarter which is 35% over the fourth quarter of 2006, and the EBITDA margin was 26.2%, compared to 23.7 in the 2006 fourth quarter. The marine transportation EBITDA margin was 29.5%, up from 26.9% a year ago, and the diesel engine services EBITDA margin was 17.6%, up from 15.1 in the 2006 fourth quarter. Capital spending for the 2007 year totaled $164 million including $68 million for new barge and towboat construction, and $96 million primarily for upgrades to our existing fleet. During 2007, we spent $67 million on acquisitions including $13.3 million to the acquisition of Saunders in July. The other acquisitions were primarily for the purchase of tank barges that were previously leased or managed by Kirby with a goal of higher financial rewards from ownership versus leasing. We lowered our debt to capitalization ratio from 32.9% at the end of last year to 27.9% at December 31, 2007 and our average cost of debt during the fourth quarter was 5.8% for 2000... and for the 2007 year 5.9%. Interest rate swaps and interest rate collar hedges, approximately 67% of our $297 million of outstanding debt as of the end of the year 2007. Finally, this month we purchased 80,500 shares of Kirby common stock at an average price of $39.45. I'll now turn the call over to Berdon.

Thank you, Norman. During 2007, we took delivery of 26 barges with a total capacity of 630,000 barrels; three, 2100 horsepower; and one, 1800 horsepower towboats. The capital spending for the new equipment in 2007 was $68 million. The new tank barges were a combination of replacement barges for older barges retired from service as well as new capacity. As of December 31, 2007, our fleet capacity totaled 17.3 million barrels, an increase of 300,000 barrels, or a 1.7% increase, compared with the 17 million barrels we operated at the end of 2006. For 2008, we anticipate delivery of 26 barges with the capacity of 570,000 barrels and five, 1800 horsepower towboats. The cost of the new equipment is $70 million. We expect the new capacity additions to increase our total fleet capacity in the 1% to 2% range after consideration of anticipated requirements. I will now turn the call back to Joe.

Thank you, Berdon. Kirby's business remains strong. We read the papers of course and are very aware of the negative news about the economy. We continue not the see any real weakness in the volumes we carry nor do we hear concerns expressed by our customers about their 2008 volumes. Certainly some of the chemicals we carry or use by the housing and automobile industries, however, housing and automobiles represent much less of the total chemical volumes used in United States than they did 20 to 30 years ago. It appears to us that any weakness in housing and automobiles is currently being offset by a strong export market. Today, all we know is what we see and what we are seeing is continued strong volumes and strong demand for tank barging services. With this in mind, yesterday afternoon we announced our 2008 first quarter guidance of 57% to 62%... excuse me, $0.57 to $0.62 per share, a 24% to 35% improvement when compared with the $0.46 per share earned in the first quarter of 2007. Part of the improvement in the 2008 first quarter outlook over last year, is due to the increased availability of chartered and owned towboats and the easing of crewing shortages [ph]. The first quarter is historically, a most difficult quarter because of weather. January 2008 has been a difficult month with more weather delays that we experienced last January. As for the weather impact for the quarter we'll have to wait and see what February and March have in store for us. But we have factored normal weather delays into our guidance. For the 2008 year, our guidance is in a range of $2.55 to $2.70 per share from 11% to 18% improvement, when compared to our $2.29 per share results this year. For 2008, we are looking for continued demand for our services in both our business segments throughout the year. We think given the softness occurring in the U.S. economy it is prudent to forecast more modest rate increases and we are forecasting in the numbers that we just gave you mid single digit both contract and spot rate increases. We are also assuming lower GDP growth for 2008 than we experienced in 2007, but not a recession. Now operator will for now open the conference call up for questions. Question And Answer

[Operator Instructions]. Your first question comes from Lisa Dong with Westwood Management. Lisa your line is open. Your next question comes from Alex Brand with Stephens.

Good morning guys. Joe, I guess I want to follow-up on some of the, the sort of macro issues you were talking about. I guess the first part of my question would be is, as some of your confidence in the growth in spite of the economy, is that at all related to how you are seeing contract terms emerged, in other words, is capacity still tied enough that you are able to lock-in some good contracts for may be more than a year so that's given you some increased visibility?

Yes, yes it is. It... there is quite a demand equation in the business, its still strong and our... if you note that our spot to contract mix is moved more towards contracts, 80% now contracts here are longer and the average life of our contracts is also stretched out a little bit. So we are really in pretty good shape going in to this year. Having said that, we are still forecasting based on conversations that we have had with our customer base they are positive rated [indiscernible].

Okay and sounds like we are supposed to minimize our questions. So let me just follow up with one other if I could. You said that you felt like housing and autos was being offset by exports?

Right.

Can you... do you have any way to quantify sort of what... how much of your business is related to exports because I guess I wouldn't have thought that would have been too big of a part of our business in the past?

Well the U.S. chemical business historically exported 10% to 12% of the volume, over the past several years that trunk... I don't have the numbers in front o me but due to the low dollar we are... and strong global demand that number scrapped up a little bit. What's also happening Alex is the, the U.S. industrial business is doing better and that's driven by exports. We are exporting things that we haven't exported in years just because the relative weakness of the dollar makes things that we make in United States are lot more competitive on a worldwide basis.

Okay, that's helpful color. Thanks a lot Joe.

Thank you.

Your next question comes from Jonathan Chappell with JP Morgan.

Thank you. Good morning.

Good morning Jonathan.

First question is on the spending plans; you gave us guidance on the 08 of $150 million to $160 million. I know its probably too early to think about 09 already since we just got the 08 outlook, but that would be four years straight of a $100 plus million in spending is this primarily fleet renewal. Is this trying to take advantage of what you see as capacity tightness in the industry and how come you look at the go-forward as far as maintaining these levels of spending because actually from our estimates if you don't keep spending the $100 plus million you could potentially be debt free by the end of next year?

The first part of your question is yes. We don't forecast 2009 CapEx, but we do... we will talk about barges and towboats contracted for in 2009 that doesn't include some options. We haven't exercised yet and we are not going to comment whether we are going to exercise or not, but we are contracted to build 14 barges and 6 towboats in 2009. Now with respect to being debt free its kind of a... it's a good and bad problem, our strong cash flow. We... I think our cash flow in 2007 was... we reduced debt by $15 million. $15 million and what was total cash flow? For operations? We'll get that number, but it is very strong. What we... you know what we do with cash; our priorities are acquisitions, stock repurchases paying down debt. We haven't considered a dividend and we are hopeful that the acquisition environment is in fact will improvement now that some of the... I don't want to offend anybody but some of the faster money is... appears to have diminished, but your observation that cash flow is very, very strong and that the debt continues to go down hopefully we'll get a position to continue to grow the business through acquisition and where appropriate add capacity. We are certainly intent to replace capacity that is retiring that having too little that won't be a problem. Our cash flow from operations in 2007 was right around $235 million.

What was the actual cash at the end of the year? Can you just give us that?

Well we don't keep cash on our balance sheet, we de minimis.

Right, okay. Alright since I squeezed six questions [Multiple Speakers].

Your next question comes from Natasha Boyden with Cantor.

Thank you operator. Good morning gentlemen.

Good morning.

Just wondering if we would get an idea on your operating margins on the marine transportation side was actually 21% in 07. You've done a great job in bringing those up year-over-year. Can you give us an idea of whether or not we can expect those margins to continue to improve? I know you said these may be things will slowdown a little bit, but do you think you can keep it in that range given a slowdown over the next year or so?

Well we are certainly not forecasting any decline Natasha. Its going to depend on what the economy does. And gosh there's usual over the... all over the map on that, but we are not forecasting based on the rate assumptions that we have in our model or declined the margins.

Okay. So you didn't keep that but its... you think it will be a little tough to may be improve them a little bit given where things stand at the moment or you think you may be out of squeeze [ph] some what out of what you got right now?

Yes you always hope you can squeeze some more. We will just see.

Okay. Seeing the job [ph] and I think you don't provide [ph] with most important question, just very briefly can you give us may be some update on some of the issues you've been facing in the past. I know you talked about some clearing cost have been missing [ph] and giving some sort of labor personnel been the problem [ph] are you still seeing that?

Well we think that starting midpoint last year, the crewing issues began to moderate. We think that they will continue to moderate in 2008. Now a lot of that has to do with our aggressive training program but we don't expect to have the crew shortages this year than we had last year. And hopefully, that will translate into some moderation with respect to crew cost to.

Okay, great. Well thank you very much, gentlemen.

Your next question comes from John Barnes with BB&T Capital Markets. John Barnes - BB&T Capital Markets: Hey, good morning guys.

Good morning John. John Barnes - BB&T Capital Markets: Joe, lots have been made about some of the investment tax credit legislation it is kind of working it's way through the congress as part of the stimulus package. As you look at some options like that, last time when they did bonus depreciation did any of those type of incentives caused you to change your capital spending at all? Would you accelerate the purchase of maybe some of that 09 equipment into 08 or is that... is it just too long a lead time to really take advantage of?

John I don't think there is capacity to loop anything up, 09 to 08. We think that the available capacity is pretty much booked somewhat... I don't think it's going to be... we'll certainly get advantage... give some tax advantages from the equipment that we're building, but I don't think its going to cause much to be moved from one year to another. John Barnes - BB&T Capital Markets: Okay, alright. And then going and looking at the breakdown between the spot and the contract business. If I'm not mistaken I recall you saying a couple of quarters ago that you wouldn't mind a little bit more spot business just to take advantage of the current rate environment and what do you see is the optimal split between contract and spot?

I think that depends on kind of your view of business levels. We're... at this point just given all the concerns that are out there, we're comfortable with a higher contract mix. If you asked us that question, year ago we probably said that may be a little more equipment in the spot market would allow us to take advantage of some additional things, but a lots happened in the last year and being more prudent... having a little more prudent business model, I think it's appropriate. John Barnes - BB&T Capital Markets: Alright. And then lastly, could just talk a little bit about the current competitive environment and... its... you've had a large competitor talk about moving more aggressively into your business, given where rates are in the liquid market right now, you know that always tends to be an attractive... an attractive into the industry may be bring somebody that hasn't normally been there. Have you seen much in the way of new entrants or planned the new entrants into the liquid market or do you feel like we are still several years away from anybody being a bigger player there?

Yes. Well certainly one company has said that they want to increase there tank barge ship market capacity. But there have been others that have been building all along and the business thus far has absorbed all that and we think short to medium term it will continue to absorb it. As I said in my opening remarks, you want to watch capacity, you are always concerned about it, anybody that has been in this business certainly as long as Berdon and I have and has have lived through the 80's remember the pain. Now, the scenario that was in place to produce the overcapacity situation in the 80's does not exist that. There was artificial demand, there was artificial building, there was a much newer fleet. It was a much more difficult time then any thing that we are seeing today. I don't... when Kirby here, Kirby is coming off its fourth consecutive year record earnings, and I think that human nature has people kind of looking over the fence and saying, should have liked to have some of that too. So you do hear talk about people entering the business. What I've said about that in previous calls is that it got to do more than just talk and you got to also do more than to show up with bunch of parties [ph]. There is some infrastructure power people issues that talk all part of the business all need to be, to be addressed. Truthfully [ph] there is even with the new shipyard is only so much... growing so many barges you can build and then give it to you and that gives you little comfort that there isn't going to be the kind of supply overhang. It's developing in the ocean tank ship and dry bulk ship markets. John Barnes - BB&T Capital Markets: Alright and just along those lines the manufacturing capacity that has come on appears to be in the smaller tank barges. Am I correct there and so it's not really... sound really budding up on what you guys do. It tends to be a little bit smaller is that correct or?

It's both but there is more, more smaller barges being talked about being built than larger barges. Just kind of editorialize a little bit. When you push the price of the tank barge out, toward this day you enable people that couldn't build it at the lower prices to build. So you are saying people that they were companies that would not be put out efficiently or profitably build the tank barge at price X, now that it's price X plus some more can suddenly enter the market. I think that's what's happening. It kind of a joke around here we say capitalism works when there is profits to be made, people look to make them. John Barnes - BB&T Capital Markets: Very good.

I also think John that if the prices of barges go down, all of that capacity will disappear. John Barnes - BB&T Capital Markets: Very good. Thanks for your time guys.

Your next question comes from Ken Hoexter with Merrill Lynch.

Great. Good morning.

Hi Ken.

I just want to understand something you had said earlier, Joe on the tows. You had said that the charter availability has increased nicely despite the strong demand. Can you kind of explain... may be delve into that a little bit about how that's possible that you are seeing increased capacity?

Yeah it's the towboat ships that we charter. We charter about a third of the power we used to move our barges and really 2000... well the summer of 2005 through probably early 2007. The towboat volume was very tight. We believe that the tightness was caused by rebuilding efforts that occurred along the Gulf Coast, as a result of Katrina and Rita, both with respect to the infrastructure, as well as the all service business. And some of that has... some of that pressure has come off. As well as additional data towboats have been added. And beginning kind of mid-2007, we saw some of the pressure come off that market and where we were saying we were 10 boats... 8 to 12 boats short in the beginning of 2007 and 2006, today we are pretty much in balance. So we are... the availability of power is much better today than it was a year ago and that makes us more efficient because we had some delays that were caused by the fact that we had barges to move and towboats to move.

That's helpful. And then, just coming back to the margin side. As you get in to the low 20s can you talk about what you see... do you see yourself getting near peak margins on the marine side if you get back into that mid 20s that you had for 40 [ph] I think anything structural changes that keeps you limited there or can you keep can you surpass those levels? Can you kind of give your thoughts on that?

Well, help me take this through. But I think that what happened structurally is that another mode of transportation would begin to compete with you and we don't see that happening. I think what potentially will happen is either volumes will drop and you don't create some excess capacity that will limit rate increases or new capacity will come up and do it the same thing. Because pricing has everything to do with utilization... spot pricing at least has everything to do with utilization and it's kind of correlate very, very closely with the overall industry utilization rate.

Okay. And then, you said... you mentioned that the strength of chemicals... is there anything that's kind of leading the charge as far as what is showing the fastest or highest increase in demand?

No, I don't. I think chemicals generally are still strong. We... where you see... may be a better way to comment at your question is it where you see any weakness at all its typically around chemicals that go into the housing business, but the market is strong enough to absorb any capacity that might be affected there that other areas.

So no one come out of these?

I don't think so. Your chemical analyst may be able to find one better than we can, but we are not seeing it.

My last one just a quick number question. Your length of haul is that something you can talk to... it sounds like an increase because of the movement up the Mississippi is there a number you have on that?

Well you see at ton miles and we... the river business is longer voyages less, less port time and produces more ton miles. But we don't publish any thing that goes through than that can.

Alright. Great, thanks for the time.

Sure.

Your next question comes from Chaz Jones with Morgan Keegan.

Hey. Good morning guys.

Morning.

I know you have comment on the past about you prefer to keep your debt to cap levels in that kind of 40% range and certainly, Joe, I think you made a comment that perhaps evaluations are becoming a little more attractive on the acquisition front as may be some fast money has left the space. Is there a one market that may be you could comment on that perhaps is more conducive acquisition to you, whether its marine transportation or diesel engine services segment?

Yes, I'm not sure we can answer that question, because Chaz we've always been kind of opportunistic buyer of assets and it's hard to predict how they come at you because of the host of reasons that drive people to sell, but I think that certainly a little less, let me... how do I say this, a little less velocity is helpful to getting the acquisition market back to the levels that you could actually have a discussion with somebody about buying 2007 was a... was a tough year to talk to an operator about selling the fleet.

And then the follow up I had may be just at DFL, as we looked at 2008 any significant changes in what you guys were expecting in terms of the utilization of those vessels there, or is there any abnormality in maintenance in 2008?

Yes, that's a good question. We probably should address that in our text. We are not forecasting any maintenance, any real maintenance in 2008. So, we should have stronger earnings, and take some fuels [ph] in 2007. It gets buried in the transportation which we don't separate.

Okay. Great. That's all I had guys?

Your next question comes from Jimmy Gilbert with Rice Volgo LLC [ph].

Hey it's Jimmy Sibear [ph].

We knew that was you.

You gathered that much. Guys, I want to ask you about. We keep hearing here about expansion in the domestic petrochemical refineries in the U.S. and how does this new capacity coming on... when do you think some of that will hit. Do you have any numbers on? Have you all done any internal projections about that?

Well probably the more publicized expansions are the refined, the refined product expansion where you have Marathon, Motiva, Valero [ph] and others talking about expanding. I know that the Marathon expansion is underway and I... we know from these discussions with in another part of our business that the others are... we are talking about how they stage the equipment to do the expansions. But I don't know it the others have informally started to have. I think that we forecasted slightly less 2 million barrels a day of additional capacity that was projected to come online. And its certainly a lot of that will go by pipeline but also a lot of that will go by barging. It's too early to suggest you how much additional barging demand that will create. I think it would be more of a guess today than a process that would deliver a number that you could use. Concerning chemical expansion, extensions are happening all the time, they are just not they are happening at new sites or happening within the bench line so to speak. There has been some new chemical capacity added over in the Baton Rouge area. There is some other capacity we talked about in the Houston area. But all total I think it's positive, it says that the manufactures continue to believe that domestic market is going to grow and it needs additional products to support that growth.

Right. And also, Joe, if you could talk a little bit about the relationship between inland tank barge and the rail, we hear about rail margins increasing and with the higher fuel cost doesn't that make the barge relatively more efficient and has that opened up some new opportunities for you guys.

Yes, we've always been less expensive than rails with almost all the movements that we look at. When the movement has great enough volume to be put in the barge and geographically goes to prices where barge is serviced. Now as rail margins increases rail prices increase, I think shippers are always looking for... producer cost of when they get volume they'll try to put it on barge.

[indiscernible]

Right. It's not a significant amount of cargo that we see on any given year. On the dry side you probably see a little more of it frankly dry cargo freights between rail and barge on a consistent basis. So as you pump up rail rates, barging becomes more attractive. But we are not in that business, we are in the liquid business. I think in the 30 years that I have been in the business, Berdon has been in the business probably than I, you can count number of real movements from rail to barge. Probably one hand every year of that, it just doesn't much that moves around.

Right. And just to understand the ethanol opportunity is small but it is occurring for you is that right?

We are moving some ethanol. We have for years. We do think that there will be more ethanol offered to the barge business in 2008 than has been previously just because of the capacity that's coming on along the river and that the mandated amount that you've got to use, and how much we are going to carry its hard to say. We don't think it is going to be significant.

Okay. Well gentlemen, thank you very much.

Thank you.

Your next question comes from David Yuschak with SMH Capital.

Good morning gentlemen. How are you?

Good morning.

Just a couple of things, Joe, you mentioned earlier about the... how expenses from these barges you have got and could you give us a sense as to the kind of capital cost per barrel that you've kind of faced today versus what you did a year ago and two years ago and what you think might be the outlook beyond them per barrel basis?

You got to back more than a year or two because they've been rising over a period of probably 6 or 7 years. We can give you an idea and in 2000... we call it 10,000 barrel barge cost about $700,000, today that price is 1.5 to 1.6 at a 20-28,000 barrel barge, 2000 we were building for about 1.3, today, 2.3 to 2.4 a hot oil barge with heaters $2001.8 million, today, 3.2 to 3.4 somewhere in that range. Can you do the math David?

Yes, sure. I appreciate that. As far as your contract mix of 80% right now. As far as I know... as far as I can remember and you guys could correct me. I never think I've ever seen you guys at 80%. Again it's been around 70, 75ish --

Yes, yes.

On a long-term basis.

Now, yes, that's probably right.

Could you give us a sense as to the duration as well as being up at these higher levels is the duration of this contracts, could you kind of a 1ish type of things. But are you seeing the average duration expanding to it and if so how much?

Let me answer it this way. We will have about 35% of our contract revenue going forward this year. And so its already renewed. Exposed for renewal at 2008.

Okay.

And in 2009 the numbers are little less.

Okay. And one last question, as far as the... your debt to cap ratio, just coming to the back of the envelope all things just from what your comments were about capital spending. You can get your debt to cap ratio down about 20% or so. What levels on your credit would you be faced with a potential upgrade to that credit? What kind of circumstances would you need? Could you be getting pretty close I would think certainly you don't want to do?

Our credit agreements are based on our ratings by Moody's, S&P and Fitch. And so its really a function of... we have a rating pricing grid and if the ratings go up our pricing changes, ratings down pricing changes there too. So it's not a ratio that we look at surely it's the decision of the rating agencies they would determine that.

And with Moody's they are going to be concerned about size that's the issue with that.

Okay. Those sizes as far as the big size of the company is concerned.

Yes correct.

Okay. So you get a penalty for being small company I suppose... in their eyes anyway a smaller company.

Yes they probably would say penalty but...

And then one last question as far as there is a lot of taking about what are they spending with the water doing all that. Do you see that as an important opportunity as far as making water rates more efficient and does that bring the potential for... to the waterway or just still back to things have to be logistically near the water for you to bit attracted in that product.

David it's good news, this is Berdon. Its good news in the effect that congress is recognizing, that we need to maintain our waterways infrastructure to keep U.S. industry competitive, in a very competitive global market. So we are seeing improvements that need to be done to the existing system and we are delighted that we are able to do that.

Okay. I think that's all I got guys. Thanks.

Thanks David.

There are no further questions at this time.

It's okay. Well thank you operator.

Thank you for... this is Steve Holcomb. We appreciate your interest in Kirby and for participating in our call. If you have any additional questions, you can give me a call. My direct dial number is 713-435-1135, and we wish you a good day.

This concludes today's conference call. You may now disconnect.