Welcome to the Kirby Corporation 2015 Third Quarter Earnings Conference Call. My name is Eric, and I'll be operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Sterling Adlakha. Sterling, you may begin.

Thank you, Eric, and thanks to everyone who's on the call for joining us this morning. With me today are Joe Pyne, Kirby's Chairman; David Grzebinski, Kirby's President and Chief Executive Officer; and Andy Smith, Kirby's Executive Vice President and Chief Financial Officer. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at kirbycorp.com in the Investor Relations section under Financial Highlights. 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, 2014 filed with the Securities and Exchange Commission. I will now turn the call over to Joe.

Thank you, Sterling, and good morning. Yesterday afternoon, we announced third quarter earnings of $1.04 per share, near the middle of our $0.95 to $1.10 per share guidance range. That compares with $1.34 per share reported for the 2014 third quarter. During the 2015 third quarter, our Marine Transportation tank barge fleet continued to experience high equipment utilization levels despite an industry-wide decline in the transportation of crude oil. In the inland marine market, utilization remained at the 90% to 95% level. We experienced strong customer demand particularly for the transportation of petrochemicals and refined products. Crude oil barges continue to be cleaned out of crude oil bottoms, but we believe this trend is beginning to bottom out. However, the availability of these barges in the marketplace continue to have some negative effect on contract renewal pricing. On the coastal side of our business, utilization also remained in the 90% to 95% range and contract renewal prices continue to increase. As expected, we had a significant number of vessels in the shipyard during the quarter, which impacted both revenue and earnings. On a year-over-year basis, our Diesel Engine Service segment remained under pressure. In our land-based division, we continue to work through a very challenging environment. In the Marine and Power Generation business, that's our legacy business, it continues to perform well except for that part that services the Gulf of Mexico oil service market. Before turning the call over, let me take a moment to recognize our newest board member, Anne-Marie Ainsworth. Anne-Marie brings a wealth of experience and knowledge about national and global supply chain logistics, safety management and extensive leadership experience in the midstream and downstream energy business. The Kirby management team looks forward to working with Anne-Marie as we leverage her knowledge to continue to grow and create shareholder value. I'll now turn the call over to David.

All right. Thank you, Joe, and good morning. I'll hit some key points in the quarter, turn it over to Andy for some detail, and then come back for an outlook. In the Marine Transportation segment, our inland marine barge demand remains in the 90% to 95% range. Long-term, inland marine transportation contracts, those contracts with a term of one year or longer in duration, contributed about 80% of revenue for the 2015 third quarter, with 55% attributable to time charters and 45% contracts of affreightment. Pricing on the inland marine transportation term contracts that renewed during the third quarter was down in the low to mid-single-digits. Our spot contract rates remained at or above term rates. However, the spot market is dynamic. So we see, on occasion, our competition offering equipment below our term rates. Unique to Kirby, most of our spot opportunities are with existing term customers. In our coastal marine transportation sector, demand for the coastwise transportation of refined products, black oil and petrochemicals remained consistent with the first half of the year. However, we have seen some increase in our spot exposure, which we attribute to increased uncertainty in the market by our customers, driven by uncertainty around crude oil supplies. During the third quarter, approximately 80% of coastal revenues were under term contracts. Kirby's coastal equipment utilization remained in the 90% to 95% range. With respect to coastal marine transportation pricing, term contracts that renewed during the quarter increased in the low to mid-single-digit percent range. In our Diesel Engine Services segment, our marine diesel and power generation markets experienced stable demand in most regions of the country except for the Gulf of Mexico oil service business where services for supply vessels and offshore rigs declined. Our land-based diesel engine services market remains challenging. Demand for service parts and distribution has remained relatively consistent with levels experienced in the 2015 second quarter, but there remains little demand for new manufacturing of pressure pumping equipment. We will continue to aggressively address costs in this business. During the 2015 third quarter, we continued to execute on our share repurchase authorization, buying approximately 892,000 shares for $63 million or an average share price of $70.97. Subsequent to the end of the quarter through this past Tuesday, we repurchased approximately an additional 292,000 shares at an average price of $64.62. October's purchases brought total repurchases for the year to over 2.9 million shares or approximately 5% of shares outstanding. Currently, our unused repurchase authorization is 1.8 million shares. I'll now turn the call over to Andy to provide some detailed financial information. And again, I'll come back and discuss the outlook.

Thank you, David, and good morning. In the 2015 third quarter, Marine Transportation segment revenue declined 7% and operating income declined 16% as compared with the 2014 third quarter. The decline in revenue in the third quarter as compared to the prior year was primarily due to a 38% decline in the average cost of marine diesel fuel as well as some impact from inland contracts renewed at lower rates throughout the year. The Marine Transportation segment operating margin was 22.4% compared with 25% for the 2014 third quarter. The inland sector contributed approximately 70% of Marine Transportation revenue, with the coastal sector contributing 30%. Inland marine weather was seasonally normal, but operating conditions were challenging due to high water early in the quarter and scheduled log closures along the Gulf Intracoastal Waterway, which contributed to a 40% year-over-year increase in delay days and a decline in ton mile. Despite these challenges and the pricing pressures that Joe and David mentioned, the inland sector generated an operating margin in the mid to high 20% range for the quarter. The third quarter results for inland marine also reflected the anticipated year-over-year negative impact of $0.03 per share for higher pension expense, reflecting actuarial changes to mortality tables and a lower discount rate. In the coastal sector, we experienced heavy shipyard activity in the third quarter as anticipated and mentioned on our July conference call. With the 38% decline in fuel prices and a number of vessels in the shipyard, revenue in the coastal sector declined both year-over-year and sequentially. Pricing on contracts renewing during the quarter continued to improve, as David mentioned. Additionally, we shortened the depreciable lives on some -- of some assets in our coastal fleet which were coming up for shipyard in 2016 and the estimated cost of…

Okay. Thank you, Andy. In our press release last night, we announced our 2015 fourth quarter guidance of $0.93 to $1.03 per share and for the 2015 full year guidance of $4.10 to $4.20 per share. With respect to the inland transportation market, our fourth quarter guidance reflects an assumption that there could be continued modest pricing pressure in our inland marine transportation market. We are assuming normal seasonal weather patterns for the remainder of the quarter and utilization that remains in the 90% to 95% range. In the coastal market, the difficulty in permitting terminals on the West Coast to get crude to water coupled with the length and magnitude of the decline in crude prices has injected some uncertainty in the coastal marketplace. This has resulted in some reluctance among certain customers to extend term contracts. This uncertainty will likely lead to an increase in the number of coastal vessels operating in the spot market. While a further impact from lower crude prices is possible, the coastal refining complex across the country continues to show strong demand for crude by water. Further, demand for refined products, the sector's biggest product trade, continues to be strong and should continue as we go into the heating oil season along with Gulf Coast -- the East Coast. Also, Kirby has the largest fleet of asphalt equipment and given the low price of crude oil combined with additional infrastructure spending, we are seeing signs of an increase in asphalt demand. So for the fourth quarter, we believe our utilization will continue to be in the 90% to 95% range. For our Diesel Engine Services segment, in our land-based sector, we expect the market to remain extremely challenged for the remainder of the year. Additionally, capital spending levels of many of our customers…

[Operator Instructions] And our first question comes from John Barnes from RBC Capital Markets.

First, David, I read your comments concerning -- and maybe this goes to Joe as well. Joe, you made the comment at the very beginning that you felt like you were beginning to see the bottom in terms of the number of vessels, I guess, converting from crude service. And Dave, I understand where you're coming from in terms of just the sheer number of vessels has declined, but it still seems like 250 to 300 is a pretty fair number. Number one, why do you think we're seeing the bottom there? Why wouldn't the remainder of those convert? And number 2, if they do, what -- does that make your guidance around pricing too conservative and could it be worse than what you're looking for?

Yes, John. They may well come out of crude service, but the industry is absorbing them and we're still very utilized across the industry. So it's just becoming a smaller and smaller number so that overhang will dissipate, if you will, and the confidence in the market and the utilization will continue to increase which should make this bottom and pricing start to turn. Now the timing is the question. But clearly, it's -- the number of barges in crude service, it's gotten smaller and smaller. And clearly, the industry is absorbing it because our utilization across the board is pretty strong still.

Yes. And David, let me just add that, John, you followed us for a number of years and know that we were always a little careful with respect to the proliferation of crude oil because it's a movement that is fungible and it's high-volume and it fits very well in pipelines. Having said that, there are areas that barging, in fact, does play a role, either pipelines aren't there or the type of crude oil or condensate is not as fungible as it is in other places. So there's always going to be -- there's going to be a need for inland and coastal barging of crude oil, but it's going to be capped. It's not going to be this optimistic scenario, which we never believed, that produced almost 600 barges in freight.

Okay. All right. That makes sense. And then, just your outlook on the coastal side. And I get where you're coming from in terms of the -- maybe the change in mix between spot and contract. But number one, your comment about maybe it becomes a little bit more difficult to leave older equipment out there. Could you remind us your estimate as to what percent of the fleet would be classified as old enough to potentially be up for retirement now? And then, number 2, is there any risk to the ATB contracts you have in place now, given this change in customer behavior? Or does it put any additional pressure on the ability to get contracts for the other 2 ATBs where, I think, you don't have an agreement in place now?

Yes. John, let me answer that in 2 parts here. Right now, we believe the industry fleet is -- it has about 47, maybe 45 to 47 ATBs or barges -- wire barges that are older than 30 years, and that's pretty old. That's on a base of 260 approximately. Now, I'm talking barges less than 200,000 barrels. So that's a pretty big number in terms of percentage, about 20%, and just less than 20% of the fleet that should retire and that's actually helped pricing and should help pricing over time as that equipment comes out. The crude offshore is interesting because there's still a lot of movements out there. And I think there would be more if you could, for example, on the West Coast, get some of these terminals that our customers would like to get belt to move crude to the coast and then move it to their refineries. So it's -- now it's relatively positive from that perspective and the refineries continue to run very heavily. In -- with respect to our ATB contracts, we do have the 2 185s. They are contracted for multi-years. And they'll be coming out, as I said, in late 2015 and in mid-2016. The 2 155s are not contracted, but we are in active discussions with customers, and that's proceeding forward. Clearly, the customer base does like newer equipment. I mean, if you've got to choose between older equipment and newer equipment, they gravitate towards the newer equipment for obvious reasons. So that kind of circles back to the first point, it's that these 47 older barges, or 45 to 47 older barges will get displaced ultimately.

And our next question comes from Jon Chappell from Evercore ISI.

Along those lines, one difference I noticed between last quarter and this quarter was last quarter you had mentioned that spot pricing in the inland barge business was above the term. This quarter, it seems like they're almost at parity. So from your experience, when you get that almost parity now between spot and time charter or term, what does that kind of foreshadow going forward as far as like the magnitude or duration of any softness in pricing? Does the spot need to get significantly below term to have that catch up? Or once you get to parity, does that kind of indicate you're getting close to bottoming in term renewals?

Yes. I think it's probably closer to the latter, but it's been bouncing around. We've seen term -- excuse me, spot prices above our term contract rates, but we have seen some of our competitors dip down and take spot moves below our term contract rate. So I think that's all a function of absorbing kind of these returned crude oil tows. So it is maybe too soon to call a bottom here. But at some point, things start to look a little more positive.

Okay. And the same type of theme is now seem to be developing in the coastal side installation. You talked about crude and uncertainty, things we've been talking about for the last 12 months in inland. Is there any way to kind of gauge what percentage of the fleet -- of the coastal fleet is in crude and could potentially move over to -- get cleaned up and move over to the refined product business, and maybe just compare those 2 businesses, October 2014 with inland with October '15 coastal, and what that may indicate as far as the pricing matter?

Yes. In the coastal side, we estimate about 5%, 6% of the coastal fleet is moving crude now. So it's a relatively low number. We have seen refined products moves pick up as refinery utilization has ramped up and they've done expansions. You can see it in vehicle miles driven and kind of the light vehicle sales numbers. The lower crude prices reflected in lower gasoline prices gives driving that demand. So as some of the crude moves off coastwise have tapered off, the refined products have picked up. And again, our estimate is that the coastwise fleet -- again, this is our below 200,000 barrels, we think it's around 6% of the fleet. So it's not that meaningful. It still can have an impact. I'd circle back to a comment I made earlier though is, if on the West Coast, for example, if you could get some of these terminals in place, there would be more crude moves out there. So the refineries like the crude and want it. So it's a little different dynamic than on the inland side where pipelines have taken some of the -- the crude moves away.

And our next question comes from Jack Atkins from Stephens.

So David, when we think about the various puts and takes in your business, and you guys clearly know what those are heading into next year, the additional coastal barges coming in and all that sort of stuff, when we think about directionality, and I understand you don't want to give guidance for 2016, I'm not asking you for that, but do you think that earnings next year will be up versus 2015? I'm just trying to understand are we looking at an up year or a down year next year?

Yes. We're -- Jack, we're just not ready to declare that. There are too many moving pieces around and we're just not prepared to opine on that yet.

Okay. I understand, David. And then, when we think about your core chemical business, that's held up very well along with the refining market over the course of the last 12 months. But we continue to hear negative data points around the industrial economy and the economy in general. Can you maybe talk about what's driving the strength in that chemical market? And I guess, as you look out into the second half of 2016, you're -- do you feel like you'll start seeing those incremental volumes come on from all this CapEx we're seeing invested in the space?

Yes. Well, I think what's really driving the petrochemical business is the low cost feedstock position. Ethane is still advantaged. We've had propane actually come in and out of advantage for the chemical group. So that feedstock advantage is -- it really puts the U.S. chemical business in a globally-competitive position. And we've seen our chemical customers work on incremental capacity increases. There are, as you know, over $100 billion in projects along the Gulf Coast that are well under the way. We have a list of all the ones that have started construction. I would say a good portion, a good 70% of them are permitted and under construction. So those chemical plants will come along in the next maybe 2 to 4 years, various stages. So that's what it's about. It's really about that incremental capacity coming on from our chemical customers because they are feedstock advantaged here in the United States.

And our next question comes from Doug Mavrinac from Jefferies.

I just had a couple of questions also on the market. First, David, as it pertains to the idea that the inland market for barges moving oil may be bottoming, can you relate to us or remind us kind of how many barges were operating in the crude oil market, say, 4 or 5 years ago before this big surge in U.S. production even occurred because the U.S. production story hasn't rolled over that dramatically, but it seems like a lot of barges have been taken out. So I'm just trying to get a sense for how many barges were operating in the oil market before the boom even occurred? And how do we compare to that right now?

Yes. No, 5 years, 6 years ago, there were probably very, very few barges, if any. It may have been closer to 0. There was some heavy Canadian crude moves off and on. And as you heard Joe's comment earlier, that was one of the reasons we kind of shied away from it because we viewed crude is best moved in the pipeline. So as all these shale plays came up, they couldn't get it in the pipeline, the pipelines didn't exist, so there was a big ramp up. And then, consequently, pipelines did come on, the Seaway Twin and the Flanagan South, and that's taken the volume down. And now we've got production declines as well. But there are places like the Utica where it's going to be very difficult to get pipelines out of the Utica down to the Gulf Coast. So those -- there actually may be kind of a floor here where there will continue to be the need for barges on the inland side to move crude and condensate, just because, logistically, you can't get pipelines everywhere.

Right. See, that's kind of what I'm thinking is that you do have a base level of production that exists today that you may not go back to where you were, but you're going to be higher than you were. So therefore, you need an increased level over what you had back then. So that's helpful. And then, just my follow-up, as it pertains to kind of the current market, obviously, you guys are very busy, both inland and coastal utilization levels north of 90%. And so clearly, sentiment is weighing on the pricing, especially on the inland. At what point does the sentiment start to look at 2017 and start saying, look, this is what's coming on the petchem side, and so all the uncertainty, all the concerns, all of my ability to kind of press pricing to the downside has kind of run its course and now maybe sentiments start to change. So from your experience, about how far in advance of the actual volumes hitting do you start seeing that shift in sentiment, especially given that the underlying fundamental utilization levels are still very, very strong?

Yes. I mean, you've hit it. The key point here is the shippers and the competitors have confidence that this kind of stabilized and demand is going to continue to be such that things will be tight. It's kind of that forward view. I don't know if there's any good rule of thumb as to timing. Once the confidence starts to emerge that -- or the concern on the shipper's side that, hey, maybe there won't be some spot availability, I better term up is when -- when prices do start to move in. In terms of a key timeframe, boy, that's hard to predict, but you can see it happening. If these return crude barges keep getting thinner and thinner and there are fewer and fewer of them and not all of them go out, but demand for the other products that we move and our competitors move, at some point, there will be a concern that the equipment is not going to be available and people will start to want to term up and that's when you get that confidence, that's when you are going to start seeing the prices. Sorry, I can't predict that. I wish I could. That would make our lives a little easier. But it's starting to feel better in that regard. I don't know. Joe, is there anything you'd like to add to that?

I think that's right. I mean, it's a bit of anomaly to have utilization rates above 90% and not have pricing power. And you -- the reason that you don't is a lack of confidence within the industry that those utilization levels are going to be sustainable. But also I think that the Kirby utilization levels are probably above at least some of the operators out there, so they have more availability. I think that once the confidence level shift to the point that when I have a spot piece of equipment, I can book it and I don't have to worry about it being idle for a period of time, then you will get the sentiment to move prices back to higher levels. I sense that as the shift out of crude oil of any inland sector begins to taper off, we're sensing it's beginning to taper off, you're going to begin to get more confidence in the market and more confidence that pricing is going to be stabilized, and you're going to see some pressure to increase rates. That hasn't happened yet, but I think that we're kind of bumping along the bottom, and when that happens, then I think everybody will feel better.

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

It's actually William Horner on for Kevin. I want to kind of stick on the coastal comments for a second here. And with it, the shift in spot capacity. Obviously, it's been a little more insulated as a result of the capacity constraints. So trying to get a handle on when did you start seeing some of these ATBs looking for a home? Was it a relatively steady shift through Q3? Or have we seen an acceleration in capacity in recent weeks?

I think it's been fairly steady here through the quarter. I guess, the shippers are just getting a little more confident that there's going to be some availability. But it's still a tight -- pretty tight market there. I mean, you saw we had price increases in the quarter.

Right, absolutely. And just, I guess, sticking with the uncertainty in the market. You highlighted in your comments the West Coast and terminal permitting issues with regards to that longer-term confidence. But were there any markets in particular where you saw some of these capacity shifts in the near-term? Was it in the Gulf or the Northeast or...

Yes, mostly the Gulf, William. There are some moves that -- well, some barges that were kind of taken out of crude service and coastwise barges taken out of crude service, given some of the production declines and then some newer MR equipment being available and absorbing some of that. But again, less than or around 6% of the -- are what we consider our market to 200,000 and below is in crude. So it's not quite the overhang that you saw in the inland side.

And our next question comes from Kelly Dougherty from Macquarie.

Just sticking on coastal, can you talk to us about some of the similarities and differences between coastal and inland? So I guess, what I'm trying to get at is there anything different structurally or customer-wise, from a capacity perspective, anything like that, that would give us comfort that what we saw in the inland market isn't going to manifest itself in coastal as well? And then, follow-up to that. What percentage of your coastal business is up for renewal in 2016 that you might think could switch over into spot versus term?

Yes. Kelly, I mean, it is different than inland. First of all, the equipment is just not as fungible, right? In the inland crude trade, it was almost all 30,000-barrel barges, all fairly similar, reasonably cheap to clean them out. In the coastwise business, the 260 barges in less than 200,000 barrels, they range anywhere from 30,000 barrels up to 200,000 barrels and so it's a mixture. They're not as fungible. Certainly, the cleanout cost, just given the size, it's much more significant. So it's -- that fungibility makes a difference. And the other thing is there is just fewer competitors, right? You've seen in our IR material, we have 40 plus competitors on the inland side and some of them jumped into crude. And then, when you look at the coastwise side, it's 15 competitors. So it's a little more concentrated market. That helps. There's a little more discipline. And you haven't seen kind of the irrational behavior that you saw in the inland building side. There's a little more discipline. And frankly, it's because the equipment is a lot more expensive and the quantities are bigger. It's just a tougher business.

No, that's helpful. And then, am I correct in thinking that there were no or very few multi-year contract renewals this year? And is it fair to assume that the majority of them renew in 2016? I'm talking on the inland side now. And if so, shouldn't that be beneficial from a pricing perspective because I imagine there's kind of non-pricing benefits that you guys bring to the table for some of these larger customers?

Kelly, this is Andy. We had a typically normal year for us. Obviously, all of our spot contracts has pricing exposure. But of our 80% of our term contracts, about half of that renews every year and about -- of the remaining half, about 1/3 of that renews every third year. And that's typical, that's about what we'll see next year.

And our next question comes from Steve Sherowski from Goldman Sachs.

I think you earlier -- you said earlier that of the 250 to 300 inland barges that are currently in crude service, they're primarily servicing either a Utica or Eagle Ford crude. Is that true? And if it is, can you just break out the percentage of what's in Eagle Ford versus Utica?

Yes. Eagle Ford is -- it also includes Permian. It's really the Gulf Coast move, right, where you load perhaps in Corpus Christi and then take it up to Houston or Port Arthur on the Intercoastal Waterway. So that -- it's not just Eagle Ford. Some of the Permian comes by pipeline to Corpus Christi. Yes. And then, the Utica, of course, the Utica and Marcellus is a condensate, that's up in the West Virginia and Ohio areas, so it comes down the river. I don't know the rough split. I would say maybe 50/50, but I don't have a good number on that.

No, that's fair enough. And do you have any updates on just reviews on crude oil exports and how that could impact, I guess, both coastal or inland businesses?

I'm sorry, can you repeat the question?

Just the potential for crude oil exports. Do you have an updated view, just given the fact that it's been in the press with increasing frequency recently? You have the exports to Mexico or at least swaps to Mexico now allowed. Any updated views on just how this could potentially impact your inland or coastal businesses if the ban is ever lifted?

Yes. Well, first, let me comment on whether the ban gets lifted. It did pass the house. Senate hasn't really done anything with it yet. But I think the administration -- the current administration has been pretty clear that they veto it. So I think before you get crude exports, it'd probably take a change in the administration. That said, we don't know if it's going to be positive or negative. There are factors that could be positive and factors that could be negative on crude oil exports. Let me just run through a couple of them real quick. If you had crude oil exports, there's a case that you're -- the WTI Brent spread would collapse and you trade at parity and that may cause some of the moves to the East Coast to change. They would probably import more Brent. I think we're seeing some of that now. But we still get coastal moves with imported Brent on the East Coast because it's usually comes in the tanker and then slide by barges. But it could move some things around. I think on the Gulf coast, one of the potentials is you would export the light crude and import heavy crude to the Gulf Coast refiners. You will recall that the Gulf Coast refiners are set up to crack the heavier crude. That could be a negative, you are not moving as much light WTI around on the Gulf Coast. But then again, it could be a positive because the heavier feedstock slate would have more byproducts, which would likely result in some additional moves. And I guess, the final factor would be hedges. That -- more volume on the system across the system, there would just be more liquids on the system because even if it went for export, it may come into a terminal. We may get a chance to touch it before it goes for export. It's just more liquids on the water would be a potential. So it's a mixed bag. We're not sure if it be a net positive or a net negative on crude exports, but we'll see. We'll see. I think it -- I don't think, in the near-term, we have to -- that it will happen. But if it does, we're not exactly sure that it will be positive or negative.

And our next question comes from John Mims from FBR Capital Markets.

So Dave, let me ask you, on the inland side, do you have a sense -- and I appreciate your utilization is looking to stay in the 90s, and I understand there may be some crude conversions that slide into non-crude service. But outside of that, do you have an industry utilization number? I'm thinking about, is there a shadow barge fleet that's tied up right now that when things start to improve, you could have that kind of leak out and push the pricing recovery out farther than people may expect?

We don't have good numbers there. We just kind of know a little bit about what's out there, but we don't have good insight to all of our competitors' fleets. As Joe said, their utilization may be a little bit lower than ours, but I don't know how material it is. We don't have perfect information there, John. But our guess is it's industry slight -- may be slightly lower than Kirby's.

Right. During the last big downturn, it was -- it dropped down to around 80% or did it break below 80%?

Yes, I think it was around 80%. There may have been a period where it dropped below, but I think it was around 80%.

Yes. It was slightly lower than 80%, David. I think the lowest it got was 78% for a very short period of time in early 2009.

All right. That's helpful. And then, let me ask you on the M&A front. So the beginning of the month, American Commercial Lines announced that they bought AEP and that there's some liquid. It's mainly dry barges there, but still a big acquisition, platinum kind of sort of doubling down on the industry. So a few questions there. One, your thoughts on industry valuations, if things are coming more in line as to where you would be more active, if there's been any material change there? Two, with these 2 -- I mean, these are 2 big barge lines combining, is there any anticipated change in the competitive environment from what you see? And then, 3, do you have any updated thoughts on the potential to diversify into the dry side, especially if we've got a few years of -- potentially of prices kind of flat to maybe down on the liquid side. Does diversifying into that dry side to compete more with ACL and others make more sense here?

Yes. Let me take one at a time. In terms of acquisition pricing, there's still -- there's always a bit of offer spread, right? But look, business has gotten tougher right at the minute. It's not as much fun as when everything is going up. So conversations have been a little more frequent, a little more constructive. We still may need a little more pain, but the conversations have gotten more constructive. But as you know, John, it's really hard to predict acquisitions. We don't want to forecast any for sure. Now in terms of a change with ACL buying AEP, I think it was a great deal for them. AEP really only had 40 liquid 10,000-barrel barges that were all leased in. I think they were building another 40, so I think they'll have a total of 80. And again, they weren't even owned by AEP. But the biggest part of AEP fleet, of course, was the dry cargo fleet, which you know. So that took ACL's position in the dry cargo fleet up quite a bit. They essentially doubled their dry cargo fleet. So I think it's a nice acquisition for ACL. As to whether we'd be in interested in dry cargo, typically, we have shied away from dry cargo. We find it a little more volatile, a little less ratable than the liquid side. And we wouldn't pursue a dry cargo, never say never, but I don't think we'd pursue a dry cargo acquisition in and of itself. But if we were to buy a competitor's liquid fleet and they had some dry cargo barges, we may well keep the dry cargo fleet and run it. But inherently, we don't like the volatility of the dry cargo fleet. It gets moved around a little more with grain -- grain harvest and other things, whereas the liquid volumes tend to move more in line with GDP, and the customer's profitability may go up and down or our liquid customer's profitability may go up and down with commodity prices, but the volumes are fairly steady. So that's a long-winded answer, John. I hope that answers your 3 questions.

And our next question comes from Ken Hoexter from Merrill Lynch.

Last quarter, you talked about reducing assets in the land-based Diesel Services segment. Could you update on the progress there? And then, similarly on the Marine side, margins are taking a bit of a hit year-over-year. Is there more to do internally there? Or is that all price-related?

Yes. Land-based Diesel, you have heard Andy's comments that we sold the Compression business. Earlier this year, we sold the Bucks, kind of a small product line out of there. So we're focusing on the core in -- at United, the core distribution spare parts and service business as well as that core manufacturing, remanufacturing business. There may be some other things we could do there, but right now we're really focused on taking out costs in that core business and getting it prepared for the inevitable rebound and some demand. In terms of margins in the Marine business, yes, the margin decline really is price. Price just kind of rolls through the bottom line. We have taken out some costs, reduced a little bit of headcount really through attrition more than anything else, but we're constantly looking at costs there. But as you know, pricing does kind of flow right through to the bottom line.

Great. Dave, on the pricing on the dry side -- not the coastwise barges, but the other ones that you run for services on an offshore basis. Is there pricing pressure on that because when we combine the coastwise trade, it looked like pricing is down, and you said modest increases. So I just want to understand because I know there's a mix of vessels that you don't talk about much. Are we seeing kind of pricing down on that? What is the utilization now of those 6 assets?

No. That -- those are our sugar. And we've got, basically, 2 coastwise barges, sometimes 3 barges, moving sugar and a couple of barges moving coal. Those are in long-term contracts, both of them. So there's not a lot of price volatility there. You do have utilization volatility. Particularly, some -- the sugar trade is on a kind of a contract of affreightment, so when weather impacts that fleet, it impacts us. And so weather can pull that around. Yes, I'm not sure what you're looking at in terms of pricing.

Yes. Ken, this is Andy. If you're looking at the revenue coming or getting into the revenue coming out of our coastal business, remember that we had much lower fuel pricing this quarter as well as a heavy shipyard cycle. And at the operating income line, another effect that you need to take into account is roughly a $3.5 million incremental depreciation and amortization effect for the shortening of the depreciable lives for some assets that were getting, quite frankly, long in the tooth and we're going to have a very heavy shipyard cycle or expensive shipyards coming up that we shortened and, essentially, have written down. So that's affected margins in the quarter. Is that what you're looking at? I don't think that it's pricing.

And our next question comes from David Beard from Coker Palmer.

David, when you talked about pricing still being under pressure for next year, should we still think about sort of a 2% or 3% price decline? Is that kind of what your feeling is going to roll into next year?

Yes. Again, it's hard to forecast. We just don't know. A lot depends on this kind of the sentiment changing as the industry deals with fewer and fewer barges in crude. So we're not -- I don't want to give you a forecast on where rates are going. It's just -- there is some uncertainty there and we don't know, we're just calling it out. Refinery utilization and other things next year can change some things and -- for the positive, right? If these refineries continue to do green -- not greenfield, but brownfield-type expansions and then the chemical guys continue to do their expansions, that demand should have an impact. Now, the timing of all that with respect to the crude barge absorption is what makes it difficult to predict where pricing could be next year.

Right. And then, just switching to the fleet of crude oil barges, the 250 to 300, I know you've mentioned most of them in the last call, had moved out of that trade, and there was a certain base level that couldn't move because of volumes and also couldn't move just because of the types of equipment. Can you give us your thoughts there? And how many of those 250 to 300 still couldn't move out of the trade?

Yes. We don't know. We really don't know. I would say some of the Utica stuff probably doesn't go away. Now, there's always a caveat, right? I mean, if low enough oil price, people will shut in production or as the decline curves take place, they just won't drill anything new or producing anything new, so it's hard to say. But we've looked at some data that says even in the mid-40s, some of these fields have pretty good IRRs, 15% after-tax type of IRRs. So some of them will definitely continue to produce. It's hard to say how much is the floor there, but there is a floor, I think.

And our next question comes from Kelly Dougherty from Macquarie.

I just wanted to follow-up on the M&A discussion. And how much leverage do you guys have the ability to take on? And would you be willing to take on some leverage for buybacks if you didn't find any attractively-priced acquisitions in the near-term?

Yes. Kelly, that's -- I mean, again, you've heard us say before, we look at all of these things in a very similar way. We run a DCF based on the different choices for capital allocation available to us in the short term, that's kind of how we make our decisions. We're at 26% debt-to-cap. So we've got plenty of ability to lever up. In the past, this company has been -- going way back to the Hollywood acquisition even over 50% debt-to-cap and in the recent, after the sort of big cycle in 2010, '11, was over 40%. So plenty of capacity available.

Yes. Kelly, we believe we could stay probably investment grade if we went up to 50%, but we had kind of a debt repayment plan that we outlined to the rating agencies. So we'd be pretty comfortable there. And you make a good point that -- at Kirby, we've always -- and I'll ask Joe to chime in here too, we've always looked at our capital allocation and you kind of look at it, it makes sense what to do. Sometimes, you build equipment, sometimes you buy acquisitions when you can get them done at reasonable prices. And in other times, you buy back your stock and yet other times, you pay down debt. And over the years, it becomes pretty obvious what the appropriate thing to do. That said, this kind of environment and our history, and I'm going to ask Joe to comment on that, this is when we typically see some opportunities. Joe, do you want to add anything to that?

I think that's right, David. If you look back to how we built Kirby, it was during periods of uncertainty. We've just come through a very good period in the -- this business. And when you do that, you have operators with a sense that it's going to go on forever when, in fact, it's not. This business still is cyclical. We try to take some of that cyclicality out with respect to the markets that we pursue and how we structure our contracts. But it takes deflating the balloon a little bit to get people back on a kind of a realistic page. And nobody likes earnings that are going the wrong way, perhaps except for me because I see it as a great opportunity to continue to consolidate this business to make Kirby stronger. I think consolidation in the business is positive. We mentioned the ACL-AEP acquisition. I think that's going to be long-term positive for the business. You'll have, in the future, I think with the larger companies, with more at stake, a much more rational market. We already have a more rational market than we had 35, 40 years ago when I entered the business. So I look at this period with some excitement. I think that we're going to actually have some good discussions with operators that recognize that the wind doesn't always blow in one direction.

And we have no further questions at this time.

We appreciate your interest in Kirby Corporation and for participating in our call. If you have additional questions or comments, you can reach me directly at (713) 435-1101. Thank you and have a nice day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.