Apr 24, 2008
Executives
G. Stephen Holcomb - VP, IR Joseph H.
Pyne - President and CEO Norman W. Nolen - EVP, Treasurer and CFO C.
Berdon Lawrence - Chairman of the Board of Directors
Analysts
Jon Chappell - JP Morgan Alex Brand - Stephens Inc. Natasha Boyden - Cantor Fitzgerald John Barnes - BB&T Capital Markets Ken Hoexter - Merrill Lynch Chaz Jones - Morgan, Keegan & Company, Inc.
Charles Rupinski - Maxim Group Daniel Burke - Johnson Rice & Company
Operator
Good morning my name is Elisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Kirby Corporation's First Quarter Earnings Conference Call.
All lines have been place on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session [Operator Instructions].
Thank you. Mr.
Holcomb, you may begin your conference.
G. Stephen Holcomb - Vice President, Investor Relations
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 to non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at www.kirbycorp.com in the Investor Relations section under non-GAAP financial data. Statements contained in this 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 our Annual Report on Form 10-K for the year-ended December 31, 2007 filed with the Securities and Exchange Commission.
I will now turn the call over to Joe.
Joseph H. Pyne - President and Chief Executive Officer
Thank you, Steve, and good morning. The 2008 first quarter was the 17th constitutive quarter that our earnings exceeded the same quarter of the previous year.
Late yesterday, we reported first quarter earnings of $0.68 per share, a 48% increase compared to the $0.46 per share reported the same period last year. During the 2008 first quarter, this quarter we continued to benefit from the employment of additional vessel personnel and the operation of additional towboats.
We did experience a 15% increase in the delay days in the 2008 first quarter compared to the same period the year before as more severe weather conditions occurred along The Gulf Coast and in the Midwest coupled with the high water conditions on the Mississippi River and its tributaries principally in March. Although, those conditions continue today.
High water conditions are throughout the Mississippi River system and I will come back to this and talk a little bit more about it later in the call. Contracts renewed during the first quarter increased year-over-year by high single to low double-digit percentages, stock market rate increases were approximately mid-single digit percentages above the 2007 fourth quarter and if you go back a year and look at the first quarter of 2007, spot rates were up about 15%.
Volumes for most of our term contract customers continued to hold up during the first quarter. 80% of our marine transportation revenue is currently under term contract and 20% is in the stock market.
This compares to a 75-25 contract spot mix first quarter of 2007. We did see some weakness in the refined products market during the quarter and had several tows waiting on orders but being paid for under time charters.
The refined products business is traditionally is seasonal and first quarter is a slower period typically for that market. We expect that we will begin to see more demand for refined products movements as we approach the summer.
Over the past year, the number of time-charter contracts has continued to increase as customers attempt to control capacity to ensure the availability of the equipment. Today approximately, 57% of our contract business is under time charter.
This increase in time charter has reduced the volatility and the financial results attributable to weather and navigational delays. While 2008 first quarter reflected, when I mentioned earlier a 15% increase in delay days over the same period a year before, the increase in time charters most certainly dampened the negative financial impact to these delays.
Also during the first quarter, we operated an average of 260 towboats, two more than the fourth quarter and 12 more than the same period the year before. Charter horsepower availability continues to improve and as I mentioned earlier, the crewing of our towboats is less of a challenge than it was in 2007.
Kirby's revenue during the quarter were also affected by the recovery of higher diesel fuel cost through contract escalation formulas. Now all of Kirby's term port [ph] contracts and a few of our time charter contracts have fuel escalation causes designed to recover increases in the cost of fuel.
This fuel escalation… these fuel escalation causes recover the cost of fuel, when fuel goes up and get back that cost when fuel prices decline. How well this works is, it can't vary based on a number of things such as navigating conditions, tow sizes, the route that the trip is taking and the loading and discharge ports selected under the term contract.
In the first quarter of 2008, the net impact of all of this was a positive $0.02 to $0.03 per share. Our marine transportation segment operating margins was 21.3% during the quarter and now that's up from 18.4% first quarter of '07.
Continued strong demand favorable contract and stock market rate increases, of course increased efficiencies from what we talked about earlier and improving in horsepower area and a greater time charter exposure all contributed to this higher margin. Turning to the diesel engine segment for a minute, first quarter results reflected strong demand for services and parts and in our medium speed engine market.
During the first quarter of each year, we typically get the benefit of increased seasonal work for Midwest and Great Lakes customers grew because of the upper Mississippi River and the Great Lakes are essentially closed during the winter, take that opportunity to do their maintenance. And this year, we also had a large power generation project that was concluded during the quarter that helped the quarter.
We did see some seasonal softness that we anticipated and or diesel engine service to Gulf Coast high-speed oil service customers. The first quarter also reflected the acquisition of Saunders, which was made in July of 2007.
This was an accretive acquisition. Our diesel engine services' first quarter operating margin improved 16% compared to 15.2% the year before and the 15.6%, the quarter before, that's the fourth quarter of last year.
The higher margin reflects continued favorable markets, a good labor utilization in the medium speed business and some service rate and part pricing increases. I will come back at the end of our prepared remarks and talk about the 2008 second quarter and of course, the full-year outlook and also address the high water conditions that we are experiencing on the Mississippi River system.
I'd like to now turn the call over to Norman to talk about the financial results.
Norman W. Nolen - Executive Vice President, Treasurer and Chief Financial Officer
Thanks, Joe. As Joe said we continued to benefit from overall favorable marine transportation and diesel engine services markets in the first quarter.
Marine transportation revenues increased 25% over the first quarter of 2007 and were impacted by higher term and spot rates and a recovery of higher fuel and other operating cost through contract rate escalations. During 2007, our barge fleet was almost fully utilized and 1% increase in ton miles in the first quarter of 2008 over last year was primarily due to changes in our trip mix between the river system and the Gulf Intercoastal Waterway.
Our barge fleet's barrel capacity was unchanged from last year but we operated 12 more boats than in the first quarter of 2007, which helped to overcome 15% more navigation delays. Operating income for the marine transportation business increased 44% and we reported a 21.3% operating margin in that segment.
In Diesel Engine Services segment, revenues increased 6% and operating income increased 12% with a 16% operating margin. It demonstrated a medium speed diesel care market benefits from plant maintenance for Midwest customers whose equipment is normally less utilized during winter months and as expected seasonal softness negatively impacted our Gulf Coast high-speed market.
The company generated $85.5 million of EBITDA in the first quarter, a 33% increase over the first quarter of '07 and the EBITDA margin was 25.9% compared to 23.5% last year. The marine transportation EBITDA margin were 29.1%, up from 27.2% a year ago and the Diesel Engine Services EBITDA margin was 18.1%, up from 16.6% last year.
Capital spending for the 2008 first quarter totaled $48.8 million which included $27.4 million for new barge and towboat construction and $21.4 million primarily for upgrades to our existing fleet. We also purchased six agricultural chemical barges, which we had previously leased for $1.8 million during the quarter.
Our debt-to-capitalization ratio dropped from 27.9% at December 31 to 26% at March 31, '08 and our average cost of debt for the first quarter of 2008 was 5.4%. We had interest rate swaps and interest rate collar… and an interest rate collar, which hedges $200 million of our $283 million total outstanding debt as of March 31, 2008.
And finally during the first quarter we purchased 80,500 shares of Kirby common stock at an average price of $39.45 per share. I'll now turn the call over to Berdon.
Berdon Lawrence - Chairman of the Board of Directors
Thank you Norma. During the 2008 first quarter, we took delivery of nine barges with a total capacity of 230,000 barrels and one1800 horsepower towboat and also retired 10 barges with a total capacity of 240,000 barrels.
As of March 31, our fleet capacity remains at 17.3 million barrels, the same as December 31, 2007. For the reminder of 2008, we anticipate the delivery of 17 barges with a capacity of 350,000 barrels and four 1800 horsepower towboats.
The cost of the new equipment will be approximately $80 million. We expect the new capacity addition to increase our total fleet capacity by approximately 1% after consideration of anticipated requirements.
At our Annual Meeting this week, the Kirby shareholders elected two new Directors to the Kriby Board, Rod Clark and Rick Stewart. Rod Clark served in various positions at Baker Hughes including President and Chief Operating Officer from 2004 until his retirement in January of this year.
Rick Stewart served as President and Chief Executive officer of GE Aero Energy, a division of GE Energy as an officer of General Electric Company from 1998 until his retirement in December 2007. We certainly welcome these gentlemen to our Board and look forward to working with them in building value for our shareholders.
I will now turn the call back to Joe.
Joseph H. Pyne - President and Chief Executive Officer
Thank you. Berdon.
Yesterday, we forecasted the second quarter with guidance of $0.69 to $0.74 per share. This is a 23% to 32% improvement compared to the $0.56 per share earned during the second quarter of 2007.
This guidance includes a $0.02 to $0.03 adjustment for the additional cost and lost revenue anticipated by poor operating conditions on the Mississippi River System. River conditions today match the conditions of the 1983 floods, which was the last significant flood that we experienced in the business.
For the 2008 year, we have raised our guidance to $2.74 to $2.89 per share, up from the previous guidance of $2.55 to $2.70 at a somewhere between a 20% and 26% improvement when you compare to the $2.29 earned in 2007. I can appreciate that Kirby's performance appears to be an exception as compared to most other transportation companies.
Except for some weakness in the refined products area, we remained busy. And we do anticipate refined products to get stronger as we approach the summer.
We talked about the very negative news from many of the major new sources about the economy in our last conference call. We do continue to see the US chemical business holding up pretty well despite the economy.
Certainly there is some weakness around parts of the chemical business, which are closer to housing but any excess barge capacity this has created is currently being absorbed. Frankly, all we really know is what we see.
If what you read every day about the economy is correct, our visibility has been reduced and our ability to forecast the future is certainly more challenging today than it was let's say last year. We are comforted however by continued strong chemical movements by rail, a strong export market for chemicals and chemical products we think driven by the cheap dollar and our own strong barge utilization rates.
Operator, we're now ready to open the conference call up for questions. Question and Answer
Operator
[Operator Instructions]. Our first question comes from the line of Jon Chappell from JP Morgan.
Your line is open.
Jonathan Chappell - JP Morgan
Thank you. Good morning, guys.
Joseph H. Pyne - President and Chief Executive Officer
Good morning.
Jonathan Chappell - JP Morgan
Joe, your closing remarks hit the nail right on the head. I am trying to figure out the strength in this business with all the headlines that we're seeing.
The question I had and you briefly mentioned it with the export market, I don't know if you can quantify this or not but how much is the export market really helping your business and your utilization. And maybe the best way to quantify that is, is there any percentage of business that exports representing right now versus say over the five-year average?
Joseph H. Pyne - President and Chief Executive Officer
John, I think the exports for chemicals are certainly up over the last several years. Traditionally, the US chemical manufacturing complex exported somewhere between… let me continue to answer your question, John that you typically get 10% to 12% and we think that those levels today are about that range.
But the thing you don't know is how much of the US chemical production is going into things that we make, that were previously imported or now exported, so it's pretty complex.
Jonathan Chappell - JP Morgan
And then one follow-up, just related to the fuel surcharges or the escalators in the contract prices rather, what percentage of your annual contract rollovers took place in the first quarter and then what's the kind of break down over the next three quarters as we look for what's happened with the fuel prices over the last 12 months to continue to impact your contract pricing.
Joseph H. Pyne - President and Chief Executive Officer
Yes. I want to answer that generally and not specifically with respect to quarter-to-quarter because it can move around some.
But about 60% of our business will come up for renewal this year either contracts or of course spot business that is renewed on a trip-by-trip basis. And fuel will escalate or deescalate based on diesel prices on a monthly or quarterly basis for all of those contracts.
Jonathan Chappell - JP Morgan
Okay. Thanks a lot, Joe.
Joseph H. Pyne - President and Chief Executive Officer
Sure.
Operator
Next question comes from Alex Brand from Stephens. Your line is now open.
Alex Brand - Stephens Inc.
Thanks. Good morning guys.
Joseph H. Pyne - President and Chief Executive Officer
Good morning.
Alex Brand - Stephens Inc.
Joe, you mentioned in those closing remarks about the capacity that is being produced right now is being absorbed but we are nowhere near the ramp up that is being discussed for later this year and into '09, do you have a feel for what that might ramp up to and where we might get past the point of sort of easily absorbing it. And I guess as part of that question, from a scrapping perspective steel prices are way up, so, is there more incentive to take barges out now then maybe there was?
Joseph H. Pyne - President and Chief Executive Officer
Well, with respect to scrapping at, it's… that’s hard to say, I would be speculating. But you typically do you see scrap prices drive retirements particularly when scrap prices are high.
With respect to the capacity issue, as you know we discussed this in some detail on the first quarter conference call and our conclusion is that capacity is always something to be concerned about. The industry is building additional capacity.
How much actually gets delivered in any given year varies by a number of things. I don't want to suggest that we are not concerned about it, sure we are, but this industry has to do a lot of replacement building.
And I think it remains comforting that even with all the noise in the economy that as capacity is added we continue to absorb it. I'm not going to predict because I don't think it's possible to predict when or if capacity is going to be an issue.
Alex Brand - Stephens Inc.
Okay. And with respect to your guidance, I think you've talked about how more times orders reduces the seasonality that we should think about when we are modeling, and then you also said Q2 you've assumed the water level… the water conditions were not ideal, does the rest of your '08 guidance assume normal operating conditions?
Joseph H. Pyne - President and Chief Executive Officer
Yes, it does as best we can forecast.
Alex Brand - Stephens Inc.
Okay, fair enough. Thanks a lot.
Joseph H. Pyne - President and Chief Executive Officer
Thank you.
Operator
Next question comes from the line of Natasha Boyden from Cantor Fitzgerald. Your line is open.
Natasha Boyden - Cantor Fitzgerald
Thank you operator. Good morning gentlemen.
Joseph H. Pyne - President and Chief Executive Officer
Good morning.
Natasha Boyden - Cantor Fitzgerald
You said during your call that 57% of your contracts are now on the time charter and obviously that helped [inaudible] in the first quarter by reducing the volatility of your results due to the weather… hello?
Joseph H. Pyne - President and Chief Executive Officer
Yes Natasha we seem to be having some interference so you’d rather ignore it.
Natasha Boyden - Cantor Fitzgerald
Okay. Is that...
obviously that as I said that clearly helped, is that something you now wanted to include say in sort of the long-term focus of the company and if so, what kind of balance would be ideal for you in terms of long-term charters versus past?
Joseph H. Pyne - President and Chief Executive Officer
That's an excellent question and I'm not sure I'm ready...?
Natasha Boyden - Cantor Fitzgerald
To answer it.
Joseph H. Pyne - President and Chief Executive Officer
There are advantages and disadvantages to time charter frankly. Kirby has a fleet that's big enough where we can really take advantage of opportunities when the equipment isn't dedicated.
So they are of kind of mixed... it's mixed blessing.
I mean certainly first quarter you probably wanted everything time-chartered because of the weather impact on freight rates. And also certainly, just given all the concern out there, there is some comforts in having time charters that aren't different to volume swings.
Long-term that's how we're going to have to think hard about.
Natasha Boyden - Cantor Fitzgerald
Okay. I'm not going to push you for a number because I say probably, you're not going to give me one anyway.
And then really just, it is follow-up just looking your balance sheet very strong, continues to be very strong and then you're leverage is very low? Thoughts of use of capital, any thoughts there?
Joseph H. Pyne - President and Chief Executive Officer
We're continuing to look for acquisitions; we are continuing to pay debt down, which should just further strengthen the balance sheet. So when appropriate, will buyback our stock.
At this point, we are not paying a dividend. We certainly talk about that little loss.
You're almost to the point where you can do almost everything.
Natasha Boyden - Cantor Fitzgerald
Yes.
Joseph H. Pyne - President and Chief Executive Officer
Based on cash flow.
Natasha Boyden - Cantor Fitzgerald
Is the dividend something, I mean Kirby has never really been a dividend payor. Is that something that at this point given the strength of the balance sheet that you would consider?
Joseph H. Pyne - President and Chief Executive Officer
Well, we'll certainly consider, not at a position to say whether we do it or not, but it's certainly something we will consider.
Natasha Boyden - Cantor Fitzgerald
Okay. Thanks, thanks very much gentlemen.
Joseph H. Pyne - President and Chief Executive Officer
Yes, thank you.
Operator
Next question comes from John Barnes from BB&T Capital Markets. Your line is open.
John Barnes - BB&T Capital Markets
Hi. Good morning guys.
Joseph H. Pyne - President and Chief Executive Officer
Good morning John.
John Barnes - BB&T Capital Markets
Joe, your comments about delay days and that type of thing in the second quarter, are you factoring in a similar amount to what you saw? I think you said 15% increase in the first quarter, are you modeling in, I mean is your guidance based on kind of 15% increase in the second quarter’s low, or is it something less than that?
Joseph H. Pyne - President and Chief Executive Officer
Yeah. That's a good question, John, because we trying to quantify it in terms of pennies, what's your...
what you typical see of course is much better weather conditions in the second quarter, but because and I think you'll continue to see that. But what the river does to you is it slows transit times and it increases cost as it relates to power, additional power that you end up putting into your system to meet schedules and to also meet requirements for horsepower, it should go in and out of the river, through [inaudible].
And I don't think that you're going to see that... those slower trip times quantified river… whenever you want.
So what we did was try to put in pennies. I mean, we certainly are forecasting less efficient operations but I don't think that it's going to be measured so much in weather delays.
John Barnes - BB&T Capital Markets
Okay, very good. And then, going back to the capacity discussion for just a minute, have you seen any material uptick in the amount of power capacity coming online?
I hear all the discussion about the number of barges but has there been any immaterial uptick in the amount of power coming online?
Joseph H. Pyne - President and Chief Executive Officer
There is some additional boats being build, which we think is again is positive. Now, the challenge is how you're going to accrue it, but there is some additional power out there.
Berdon Lawrence - Chairman of the Board of Directors
And there is a lot of old towboats that need to go away?
Joseph H. Pyne - President and Chief Executive Officer
Yes, that's a good point because we're looking at some new regulations that will put some stress on older power.
John Barnes - BB&T Capital Markets
Do have a feel for the percentage of the fleet that would be under now that would fall under that?
Joseph H. Pyne - President and Chief Executive Officer
You have a feel for the fleet that's going to be under stress, what you don't have a feel for is the willingness of operators and the money to comply with the new regulations.
John Barnes - BB&T Capital Markets
And could you share at all us to what those you new regulations look like?
Joseph H. Pyne - President and Chief Executive Officer
Well it's a... we are moving the towboat from a...
an un-inspected towboat to an inspected towboat.
John Barnes - BB&T Capital Markets
Got you.
Joseph H. Pyne - President and Chief Executive Officer
Yes, the coast guard and it's going to raise the bar. From a Kriby perspective, we are in great shape but there going to be parts of the industry that are going to struggle meeting that new standard.
John Barnes - BB&T Capital Markets
Okay. Very good.
Nice quarter guys. Thanks for your time.
Joseph H. Pyne - President and Chief Executive Officer
Thank you.
Operator
Next question comes from Ken Hoexter from Merrill Lynch. Your line is open.
Ken Hoexter - Merrill Lynch
Great. Good morning.
Hi, Berdon, Joe and Norman. On the diesel engine services side, have you noticed seeing any kind of decreased demand with the economic sensitivity, can you talk a bit about the sensitivity of that business?
Joseph H. Pyne - President and Chief Executive Officer
Yes, we're... Ken we're really not the decreased demand is in the high-speed area and it's related to The Gulf oil service business that was anticipated and it is mostly seasonal and we anticipate that the second half of the year is going to be stronger.
Ken Hoexter - Merrill Lynch
Okay. Last quarter, you said you kind of were targeting your fleet to grow 1% to 2% this year, I think in his comments, Berdon noted maybe just 1% increase in the fleet based on retirements and what you're buying, is that...
are you downsizing your forecast or are you, just how shall I look at that comment?
Berdon Lawrence - Chairman of the Board of Directors
Yes, I wouldn't read anything into that. I think we are just further...
further refining our forecast based on retirements really.
Ken Hoexter - Merrill Lynch
Thanks. And then on the lastly on your contracts the 80%, can you comment how much is going to paper pay now and does that really begin to alleviate some of these delayed days.
Berdon Lawrence - Chairman of the Board of Directors
Yes. Well, certainly almost 60% of that is paper pay and there is another probably 5%, 10% of it is consecutive ridge where the customers obligated to pay for the tow even if he is not going to load it.
Ken Hoexter - Merrill Lynch
Okay.
Berdon Lawrence - Chairman of the Board of Directors
Okay.
Ken Hoexter - Merrill Lynch
And then just, but most of the customers obligated pay for the towboat if [inaudible] showed it, meaning that it does covers some of these delayed days.
Berdon Lawrence - Chairman of the Board of Directors
Well. No, the delay days weather is going to be more mitigated by your time charters and your freight made contracts.
Now we do have some protection with respect to ice conditions on the Upper River system during the winter and we have some lock protection, where if you get some significant locking delays for a number of reasons you share those cost with your customers. So our affreightment contracts do help us there.
But where they don't help us is you get that weather and you're not moving the operating exposure is on you where you know time charter you know the customers is paying for the tow on a daily basis.
Ken Hoexter - Merrill Lynch
That's what I am asking, so the 60% that it's paper pay are the kind of covered.
Berdon Lawrence - Chairman of the Board of Directors
Yes, all delays other than the ones that you impose on yourself like maintenance problems. If you got to take the barge boat out for maintenance problems, the customer are...
the customer is not going to pay for that. But for most everything else yes, the customer pays for it on a daily basis.
Ken Hoexter - Merrill Lynch
Okay. Thanks for the time guys.
Operator
Next question comes from the line of Chaz Jones from Morgan, Keegan. Your line is open.
Chaz Jones - Morgan, Keegan & Company, Inc.
Yes, hi, good morning, guys. Nice quarter.
Joseph H. Pyne - President and Chief Executive Officer
Thank you Chaz.
Chaz Jones - Morgan, Keegan & Company, Inc.
I wanted to circle back around the guidance I know in the fourth quarter call, you said that given some economic uncertainty that your baseline assumption, is it related to the pricing in the marine transportation business was kind of mid-single digits. Has that changed at all with your increased guidance shift?
Norman W. Nolen - Executive Vice President, Treasurer and Chief Financial Officer
Yes, no we're still.... Chaz, we're still forecasting pricing, guidance in that mid-single digit going forward now.
In the first quarter, we did maybe a little better than that but going forward we're holding to that forecast.
Chaz Jones - Morgan, Keegan & Company, Inc.
Okay. And then maybe circling back around to the earlier comments on the export markets maybe this bigger picture down the road perhaps giving some secular trends with export commodities, could you envision Kirby perhaps at some point in the future, maybe entering the dry commodity business for you know on items such as coal, if we continue to see strong export outlooks for those types of commodities.
Joseph H. Pyne - President and Chief Executive Officer
Yes, we think that the coal businesses is a very attractive business, you have contracts that are forecastable and the to perish [ph] it, certainly at the dollar remains weak that you're going to have an export component to that. And we've always said that, that's the most attractive part of that business, of course, that's the part that everybody wants to.
So it would take a special entry point. I will comment on the dry cargo business, in general we are not in it, but frankly the fundamentals of that business look pretty good given the demand for food products.
I would think that for the foreseeable future barring these anomalies that you have caused by weather and high river conditions, very tough operating environment, particularly for the dry cargo guys. That business is actually going to be or it should be pretty strong, going forward.
Chaz Jones - Morgan, Keegan & Company, Inc.
Okay, great. That's helpful.
Thanks, Joe.
Operator
Next question comes from Charles Rupinski from Maxim Group. Your line is open.
Charles Rupinski - Maxim Group
Hi. Good morning.
Congratulations on the quarter.
Berdon Lawrence - Chairman of the Board of Directors
Thank you.
Charles Rupinski - Maxim Group
I just had a quick question on your diesel repair business and margins you did another great job of improving margins year-over-year. And, I'm just curious as to sort of what earning we might be in that, as far as getting efficiencies in pricing and if a lot of further improvement would be dependent on more accretive acquisitions and efficiencies?
Joseph H. Pyne - President and Chief Executive Officer
Well. What we said about diesel engine margins is that we think that we can get those margins up into the high teen area.
And, that's going to be a function of continued improvement in the efficiency of our operation, which is more on the cost side and pricing. Acquisitions that we make going forward may or may not drive the margins.
Let me give you an example, if we bought a diesel engine company that had a greater exposure to selling engines and engine packages and we have bought some of that. That tends to drive margins down, but not in a negative way.
I mean, if we do that we’ll have to come and explain it but because it's still good business, it still leads to more business servicing engines and you have to… we have a kind of saying in that diesel engine group as you could... you got to plant for trees to harvest them.
Charles Rupinski - Maxim Group
Got it.
Joseph H. Pyne - President and Chief Executive Officer
So you got to sell the engines to service. So acquisitions my might point is that acquisitions may help or may bring margins down a little bit.
Charles Rupinski - Maxim Group
So the thing about it is through the same-store margins versus acquisitions and thinking of it that way.
Joseph H. Pyne - President and Chief Executive Officer
Yes. I think that’s the fair way to look at it.
That's really what you want us to do is to make improvements and strike some pricing to get margins up but in the step that we already own.
Charles Rupinski - Maxim Group
Okay. Great.
And just one follow-up really quickly just in general on the barge business, there’s overall cost inflation certainly you follow a lot of shipping companies in general that you have been had the issues of cleaning cost and other cost. I am just curios if you're building any inflation or what kind of inflation you'll be building into your thinking about the overall cost or operating cost?
Joseph H. Pyne - President and Chief Executive Officer
Well operating cost in the business have risen almost in all areas. I actually think that some of that pressure is going to be diminished going forward.
The crew issues are getting behind the industry. So I think you have always see not always but at least in our foreseeable future we're forecasting, crew increases to be above the cost of inflation but we're not going to see.
We don't think. Hope we don't see in the near- term these double-digit increases that we've experienced last couple of years.
And we think that some of the pressure with respect to horsepower and maybe even some of the pressure with respect to the shipyard is easing a little bit.
Charles Rupinski - Maxim Group
Great. Well, thank you very much for your time.
Joseph H. Pyne - President and Chief Executive Officer
Yes. Thank you.
And just to add... we’ve said this before don't underestimate the effects of those hurricanes in 2005 on our business.
It's beginning. We are beginning to get enough distance between 2005 and today we're seeing that the pressures ease.
Charles Rupinski - Maxim Group
Great. Well, I’ll keep that in my thinking thank you.
Operator
Next question comes from Jimmy Gilbert [ph] from Rise Volker [ph]. Your line is open.
Unidentified Analyst
Hi, Joe. It's Jimmy Chebere [ph], something is wrong with my name?
Joseph H. Pyne - President and Chief Executive Officer
We know it.
Unidentified Analyst
Okay good. Joe, you talked about new boats coming into the total fleet.
Could you just talk again about the age of the fleet and your thoughts on scrapping that might have to go on.
Joseph H. Pyne - President and Chief Executive Officer
Jimmy with respect to the towboat.
Unidentified Analyst
No, I was talking about the tank barges.
Joseph H. Pyne - President and Chief Executive Officer
Barges. Well, the average age of the fleet is in the mid 20s, about a third of it is 30 years or older and the cost of maintaining a barge as it gets older, gets increasingly more expensive and the market frankly will be biased, or can get biased against barges that are certainly 40 years older.
So we think that, there is going to be a lots of replacement tonnage that's going to be needed in the future. Remember that in the 1980s, this industry built very, very little equipments.
So you have a big gap between that part of the fleet that's been built in the last 10 years and that part of the fleet that's 30 years or older.
Unidentified Analyst
Okay. Now also I have gotten some information about scrapping for a dry cargo barges like for instance, we are hearing that for jumbo hopper, you scrap that for $90,000 and that's up substantially from I guess $35,000 in the beginning of '07.
Then I had some information that they were going for $60,000 and just last week I heard $90,000. What you're hearing on scrapping proceeds for 10,000 barrel or 30,000 barrel barge?
Joseph H. Pyne - President and Chief Executive Officer
Yes, I hadn’t heard that the dry cargo barges were being scrapped to that. 10,000 barrel barges if it’s clean and [inaudible] have a little more steel with a hopper so it's going to go for a little more if it's scrap.
Unidentified Analyst
Right.
Joseph H. Pyne - President and Chief Executive Officer
And of course say 30,000 barrel barge even more, but frankly I want to kind of do the analysis with new scrapping prices, but frankly with the in tank barging, you get more value or at least have in last couple of years selling it into alternative services like deck barges or spud barges then you actually get from scrapping the barge, maybe scrap prices have gotten to the point where your better value is just scrapping.
Unidentified Analyst
Right. Well, it spills through the roof, but, and also, Joe you talked about the utilization or there were some talk about utilization, what's the rate of utilization you guys have right now, if you can say?
Joseph H. Pyne - President and Chief Executive Officer
It's in the middle 90s, is about where it's been.
Unidentified Analyst
Okay. Must be tough to improve on that, I mean --.
Joseph H. Pyne - President and Chief Executive Officer
Yes, we’re… mostly Asia is actually booked.
Unidentified Analyst
All right. Well, I really appreciate.
Thanks a lot.
Joseph H. Pyne - President and Chief Executive Officer
Thank you Jimmy.
Operator
Next question comes Daniel Burke from Johnson Rice. Your line is open.
Daniel Burke - Johnson Rice & Company
Good morning all.
Joseph H. Pyne - President and Chief Executive Officer
Good morning.
Daniel Burke - Johnson Rice & Company
Just a couple of market questions left. In the tank barge business, in the refining side of the business you mentioned improvement expected into Q2.
Is that really just continued on seeing refining utilization uptick or do you need to see sort of the regional differentials between our product in the mid-continent in the Gulf coast expand like they have the last couple of years?
Joseph H. Pyne - President and Chief Executive Officer
I think, I actually think that the regional differences driving, barging have less influence today than they did let’s say three or four years ago. I think it's going to be driven by inventories and by just more prime [ph] products being made, which is driven by refinery utilization.
At this point in the gasoline markets, you've got a lot of areas that have to get rid of their gas for the winter and get on with the gas for the summer. They are actually mandated changes in that markets.
I'm sure, you know and depending on the demand for refined products you can get periods in the market where there is just less transportation demand out there, until they can sell the gas that they frankly can't use when the chemistry of what they sell is mandated to change.
Daniel Burke - Johnson Rice & Company
Sure. That's useful.
And then on the chemical side, a lot of the questions have dealt with over the last couple of quarters, the demand side, but you're potentially seeing some decent feedstock escalation now maybe in the propylene, polypropylene chain. Any sign from your customers that they are seeing any level of margin squeeze or is that sort of a global phenomenon on the feedstock side, so sort of a move point?
Joseph H. Pyne - President and Chief Executive Officer
I don't know. I think there is some margin squeeze.
I think they are in fact talking about it. But remember that we are sensitive to that but our business is driven by volumes not so much by margins.
Daniel Burke - Johnson Rice & Company
And so you are not seeing these signals that the volumes levels would decline then?
Joseph H. Pyne - President and Chief Executive Officer
No, they really aren’t.
Daniel Burke - Johnson Rice & Company
That's useful. Thank you for the comments.
Joseph H. Pyne - President and Chief Executive Officer
Sure.
Operator
Next question comes from Ron Lalonde [ph] from Wachovia. Your line is open.
Unidentified Analyst
Thank you. Could you give us some insight into how the acquisition of CIMAC by TEPCO might affect you or the industry in day rates?
Joseph H. Pyne - President and Chief Executive Officer
Really, I don't know how it's going to affect day rates other than just kind of speculation that we can do. I guess our view of TEPCO’s acquisition of both CIMAC and Horizon, they bought another one too is that consolidation is positive, it continues to make the market we think more rational.
TEPCO paid a... I would say a premium price for both of those assets to get entry into the market.
And certainly, I don't think that they want prices to go down. And I think it's an indication also that they think that this business is going to continue to do pretty well.
Unidentified Analyst
And speculation on rates?
Joseph H. Pyne - President and Chief Executive Officer
Well, I'm just really uncomfortable, other than to say that I don't think they are eager to see them decline. I think we are getting on thin ice when we talk about where we think day rates are going to go.
Unidentified Analyst
Thank you.
Operator
Sir, at this time there are no further questions.
Stephen Holcomb - Vice President, Investor Relations
We certainly... this is Steve Holcomb again, we appreciate your interest in Kirby and for participating in our call and if you do have any additional questions, please give me a call.
My direct dial numbers, 713-435-1135 and we wish you a good day.
Operator
This concludes today's conference call. You may now disconnect.