Jul 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
George Pickral - Stephens Inc. Ken Hoexter - Merrill Lynch Noah Parquette - Cantor Fitzgerald Jonathan Chappell - JPMorgan Charles Rupinski - Maxim Group Daniel Burke - Johnson Rice & Company William Baldwin - Baldwin Anthony Securities David Yuschak - SMH Capital Chaz Jones - Morgan, Keegan & Company, Inc.
Operator
Good morning. My name is Casey and I will be your conference operator today.
At this time, I would like to welcome everyone to the Kirby Corporation Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].
Thank you. I will now turn the conference over to Mr.
Steve Holcomb. Sir, you may begin.
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 kirbycorp.com in the Investor Relations section under non-GAAP financial data. Statements contained in this conference call with respect to the future are forward-looking statements.
These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risk and uncertainties.
Our actual results could differ materially from those anticipated as a result of various factors. A list of these factors can be found in Kirby's 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 Pyne.
Joseph H. Pyne - President and Chief Executive Officer
Thank you, Steve, and thanks to all those that are participating today for joining us. The second quarter this year was the 18th consecutive quarter that our earnings exceeded the same quarter the previous year.
Late yesterday, we reported second quarter earnings of 74%... $0.74 per share, a 32% increase compared to the $0.56 per share reported for the same period last year.
Our volumes for most of our term contract petrochemical customers continued to hold up during the second quarter. Approximately 80% of our marine transportation revenues are in term contracts and 20% is in the spot market.
This compares with a contract to spot mix of 75:25 during the same period last year. We did see demand for refined products and some black oil volumes going to the Midwest decline during the quarter, but we were able to divert the equipment into the canal, and we remained on time charter to the customer.
While there has historical been seasonality in the refined products market, this year the high price of gasoline will certainly affect the U.S. driving habits, leading to less gasoline consumed and consequently less gasoline transported.
Recently we have seen some improvement in gasoline volumes and expect that this trend will continue through the summer. We operated on an average of 259 boats during the second quarter, seven more than the average operating in the 2007 second quarter and nine more than we averaged during the first half of last year.
The availability of charter horsepower and crewing continues to improve. During 2008 second quarter, we did experience a 6% increase in delay days that we recorded compared to the same period the year before as high water prevailed on the lower Mississippi river and its tributaries during the quarter.
Reported delay days only reflect the time lost by a tow during transit when the tow is actually stopped. But the delays do not affect the slower trip times caused by high water conditions.
In certain cases, we also added additional river horsepower in order to meet customer delivery schedules. Contracts renewed during the second quarter increased year-over-year in the high single to low double-digit percentage.
Spot market rates, which include the price of fuel, increased 3% to 4% compared to where they were in the first quarter of this year. When we discussed the 2008 forecast in our January earnings release conference call earlier this year, we said our assumptions were that contracts would renew at rates in the mid single digits.
Contracts renewed this year have actually renewed on a year-over-year basis at higher rates, at least higher than the forecast given in January. Our Marine Transportation segment operating margin was 22% for the second quarter, up from 21% the same period last year.
Continued strong demand, favorable rate increases, increased efficiencies from improvements in crewing and horsepower, all contributed to the higher margin offset, of course, by additional cost associated with very high water conditions on the Mississippi river system. With respect to our Diesel Engine Service segment, the second quarter results were driven by continued strong demand for services and parts in our medium speed marine and power generation markets, offset by some softness in our high-speed engine business as it services the Gulf Coast oil service market.
The second quarter results also reflect the acquisition of Saunders Engine and Equipment Company which was acquired in July of 2007. With respect to margins in this business, operating margins were 15.6% compared to 16% for the 2007 second quarter.
The margin reflects continued favorable markets, high labor utilization in the medium speed side of the business, and service rate and part pricing increases implemented earlier this year. I'll come back at the end of the prepared remarks and talk about 2008 third quarter and our full year outlook and also speak to some of the expected capacity additions in the tank barge business that are reported to occur this year, next year and in 2010.
I'm now going to turn the call over to Nolen.
Norman W. Nolen - Executive Vice President, Treasurer and Chief Financial Officer
Good morning. As Joe said, we continue to benefit from overall favorable marine transportation and diesel engine services markets in the second quarter.
Marine transportation revenues increased 23% over the second quarter of 2007 and were impacted by higher term and spot rates and the recovery of higher fuel and other operating costs through contract rate escalations. During the 2008 second quarter, ton miles decreased 15% from the second quarter of 2007, primarily due to changes in our trip mix between the river system and the Gulf Intracoastal Waterway.
With weaker Midwest demand for refined products, we transferred tank barges from the river to the Gulf Intracoastal Waterway where trips are shorter. In addition, the upper Mississippi River flooding in June negatively impacted our river ton miles.
Our barge fleet's barrel capacity increased slightly to 17.5 billion barrels over last year and we operated seven more boats than the second quarter of '07, which helped our overall efficiency. Operating income for the marine transportation business increased 29%, and we reported a 22% operating margin in that segment.
Our diesel engine services segment revenues for the second quarter increased 14% and operating income increased 11% over last year and we reported a 15.6% operating margin. Our medium-speed marine and power generation market were very strong in the second quarter and our high-speed market, as we anticipated, was soft due to weakness in the Gulf Coast offshore oil service market.
Kirby generated $91.3 million of EBITDA in the second quarter, which is a 22% increase over last year, and EBITDA margin was 26.2% compared to 25.9% last year. Capital spending for the second quarter was $57.8 million and includes $36 million for new barge and towboat construction and $21.8 million for upgrades to our existing fleet.
For the first half of the year, capital spending totaled $106.5 million, including $63.5 million for new barge and towboat construction, and $43.1 million primarily for upgrades to the existing fleet. We increased our 2008 capital spending guidance from a range of $150 million to $160 million to a range of $165 million to $175 million because of shipyard schedule changes and progress payments on new barge contracts for 2009.
Capital spending for new barges and boats in 2008 should total approximately $90 million by year-end. Our debt-to-capitalization ratio dropped from 27.9% at year-end 2007 to 25.7% at June 30th, 2008, and our average cost of debt for the second quarter was 4.9%.
Interest rate swaps and interest rate collars hedged $200 million of our roughly $300 million of outstanding debt as of June 30th. I'll now turn the call over to Berdon.
C. Berdon Lawrence - Chairman of the Board of Directors
Thank you Norman. During the 2008 first half, we took delivery of 20 barges with a total capacity of 480,000 barrels and two 1,800 horsepower towboats and retired 15 barges with a total capacity of 330,000 barrels.
As of June 30th, 2008, we owned or operated 918 tank barges with a fleet capacity of 17.5 million barrels. For the remainder of 2008, we anticipate the delivery of six barges with a capacity of 98,000 barrels and two 1,800 horsepower towboats.
The cost of the new equipment for 2008 will be approximately $90 million and includes anticipated progress payments on certain equipments to be delivered in 2009. Recently we signed an agreement to charter 12 new tank barges with a total capacity of approximately 180,000 barrels.
The barges will be placed in service upon completion of their construction and the lease term will be seven years. This will add approximately 130,000 barrels in 2008 and 50,000 barrels in 2009.
We will also be assuming 15 additional new barge construction slots with a total capacity of approximately 420,000 barrels for delivery in 2009. I'll now turn the call back over to Joe.
Joseph H. Pyne - President and Chief Executive Officer
Thank you, Berdon. Yesterday afternoon we forecasted our 2008 third quarter guidance of $0.75 to $0.80 per share, which is a 17% to 25% improvement when compared to the $0.64 earned in third quarter of 2007.
For the year, we raised our guidance to $2.90 to $3 per share, up from previous guidance in the range of $2.74 to $2.89, a 27% to 31% improvement when you compare the guidance to what was earned in 2007. There has been much negative news about the inland tank barge business lately, principally in some industry press, high water, U.S.
economic problems and new capacity. We appear to have made it through the flooding and any economic problems in front of us thus far.
As for capacity, we have consistently noted that too much capacity isn't a good thing for barge business, but then it was a medium term concern, not a short-term concern. We've also noted that the age profile of the inland tank barge fleet would mitigate the length of any industry over building.
With respect to current tank barge deliveries, the market thus far has absorbed those deliveries. We also believe that future barge delivery estimates overstate the ability of some shipyards to produce barges on schedule and are further exacerbated by steel shortages, which again delay barge deliveries.
Steel prices have also risen to levels which make estimated barge prices in 2010 appear unattractive, which should have a dampening effect on barge building enthusiasm in 2010. And finally, one new shipyard which announced that they intended to build barges is already closed.
Berd noted in his comments that we recently chartered coal barges and assumed 15 spots in the 2009 building schedule from somebody that had those slots, but decided not to build. These additions of the Kirby's fleet tonnage which we will control and will be used as replacement tonnage and for current volume requirements.
Bottom line, we believe it's too early to predict what's going to happen with respect to capacity. Certainly if the industry continues to build at 2008 rates, we will overbuild.
However, we believe a more likely scenario is that the building cycle will slow due to a number of things, including high construction costs, and that the overhang of older barges will allow the market to absorb the barges currently on oil. As for Kirby, we continue to be in great shape.
We have a very strong contract position with over 80% of our total business currently under contract and our barge utilization rates remain high as evidenced by our financial performance. For the third quarter, we are forecasting $0.75 to $0.80 per share, a 17% to 25% increase over the same period the year before, and we are raising our annual guidance to $2.90 to $3 a share, again a 27% to 31% increase over where we were in 2007.
Operator, we'll now open the call up to questions. Question and Answer
Operator
Thank you. [Operator Instructions].
Your first question comes from the line of Alex Brand with Stephens.
George Pickral - Stephens Inc.
Hey, this is actually George Pickral for Alex. Joe, my first question goes back to your statements about the barge building.
I guess the question is, at these elevated prices because of steel, are you still able to get your anticipated return on capital on the new barges?
Joseph H. Pyne - President and Chief Executive Officer
For prices that we are paying, yes.
George Pickral - Stephens Inc.
Okay. Well, I guess...
let me switch gears on my follow-up question then. Why the confidence to raise guidance now, is it a function of having so many day charters as compared to last year, because I think in the past you kind of waited to see how the weather plays out in the quarter and --?
Joseph H. Pyne - President and Chief Executive Officer
No, I don't think we've done that, George. We...
we'll predict some weather when we know about it. But we don't...
we don't... we don't put other things into forecast.
Only God knows when they occur and where they'll land in the U.S. if they occur at all.
Yes, we tried in forecasting our business to the total market what we think we know. It is a forecast, it's our estimate of where we think we're going to be.
Sometimes we get it right, sometimes we get it wrong, but when we... we think we know where we're going as we talk about it.
George Pickral - Stephens Inc.
Okay, great. Thank you for your time.
Operator
Your next question comes from the line of Ken Hoexter with Merrill Lynch.
Ken Hoexter - Merrill Lynch
Great. Good afternoon...
good morning, I guess still. Sorry about that.
When you look at the 15% ton mile decrease, can you... you mentioned in the opening comments, Joe, the shift from the river down to the gulf, can you talk about how much of that 15% is because of the...
because of the floods?
Joseph H. Pyne - President and Chief Executive Officer
Yes, it's... that's hard to do.
It's a combination, of course, of slower transit times on the river, less tonnage on the river, very little movement of refined products up river as well as black oil. But we were able for the most part redeploy that equipment, sometimes to the same customer on the business that customer had on the Gulf Intracoastal Canal.
Ken Hoexter - Merrill Lynch
Okay.
Joseph H. Pyne - President and Chief Executive Officer
Yes, and when you are moving up canal, you've got to sort of avoid, of course.
Ken Hoexter - Merrill Lynch
I guess what I am just trying... in light of Dow's announcement of cutting back capacity and obviously other chemical companies shrinking demand, I'm just trying to understand whether that is due to --?
Joseph H. Pyne - President and Chief Executive Officer
No, it's not much in chemicals; it's more in the refined products, black oil and agricultural chemical area. And remember that the agricultural chemicals kind of came to a screeching halt because fields were flooded and docks were under water.
And some of those ton miles get driven by ag chemicals for a while and most get driven by the upward movement of gasoline, that just didn't occur. I wouldn't read too much into the ton miles that...
the ton mile reduction. The revenue was there, it's just...
it's just being earned in different places.
Ken Hoexter - Merrill Lynch
Okay. Then if I can add may follow-up on the capacity side.
It sounded like if I do some quick math between what Berdon was saying about the chartered in, the new slots, it looks like you're adding about 4% of capacity. I think, you mentioned before that the industry is adding may be 200 to 225 barges which, I guess, if you strip out maybe, I don't know, 75 to 100 of those for retirements, it looks like the industry is now adding 5% to 6% of capacity.
You said it's more medium term, but I guess does that level of build start to concern you on pricing in the near-term?
Joseph H. Pyne - President and Chief Executive Officer
Well, hasn't affected yet. The point I was making is that the best capacity that we are going to control that really before we didn't control, I think that the capacity is always something which you've got to worry about, make no secret of that.
We've make secret of that at Kirby, here at Kirby. Anybody who lived through the 1980s knows that capacity is going to be a problem.
But there is a big difference today than what we faced back then. Back then we had a new fleet, it was on an overhang of old tonnage.
And 2008, 2009, we're going to build a number of barges, but I'd be surprised, at least given current shipyard prices that's... that that same building rate is just going to continue, and you're right.
And then I think that equipment should be able to be absorbed by the industry. Now, of course, the other side of that is is what's going to happen with volumes.
I don't know. And again thus far our volumes, with the exception of refined products we move up the river and to a larger extent black oil have remained pretty stable.
Ken Hoexter - Merrill Lynch
Why did that yard closed that you mentioned?
Joseph H. Pyne - President and Chief Executive Officer
The availability of steel and the fact that they wouldn't be up and running to build barges during what appears to be kind of the peak of the barge building cycle.
Ken Hoexter - Merrill Lynch
Okay. Just to clarify one number if I can before passing off, the 80% contract last quarter, I think you said about 60% of that was under take or pay.
Do that hold firm even through the weather and everything else that occurred during the quarter?
Joseph H. Pyne - President and Chief Executive Officer
Yes. I think the actual number was 56% and it's about at the same level.
I think it's 53% or 54% today.
Ken Hoexter - Merrill Lynch
Great. Thanks for the time, gentlemen.
Joseph H. Pyne - President and Chief Executive Officer
Yes.
Operator
Your next question comes from the line of Noah Parquette with Cantor Fitzgerald.
Noah Parquette - Cantor Fitzgerald
Good morning, gentlemen. The 80% charter coverage, is that something...
is that a level you're comfortable right now or are you going to you look to increase it some more?
Joseph H. Pyne - President and Chief Executive Officer
I don't think we probably can increase it too much more, and not have the flexibility of servicing customers that have increased demand when refineries are in turnaround or responding to other market opportunities. We're pretty comfortable with the 80:20.
Noah Parquette - Cantor Fitzgerald
Okay. And your leverage is pretty low and the stock pulled back a little bit.
Do share repurchases look attractive to you?
Joseph H. Pyne - President and Chief Executive Officer
We don't comment on that, but we have bought shares this year at really over... well, since I've been the CEO, we've bought over 20 million shares back.
So we think that that's a good use of capital but we don't comment on when we buy or when we don't buy.
Noah Parquette - Cantor Fitzgerald
Okay, great. Thank you.
Operator
Your next question comes from the line of Jon Chappell with JPMorgan.
Jonathan Chappell - JPMorgan
Thank you. Good morning, guys.
Joseph H. Pyne - President and Chief Executive Officer
Good morning.
Jonathan Chappell – JPMorgan
Joe, you mentioned your pricing on the spot side [inaudible] I know it is only 20%, but up 3% to 4%, and that includes fuel. I would have to think average fuel is up at least 3% to 4% second quarter or first quarter, so is there a way to kind of strip out kind of the pure pricing momentum on the spot business and it looks like it's maybe slowing a bit?
Joseph H. Pyne - President and Chief Executive Officer
Yes, Jon, that's a good question. I think when you strip out fuel, then spot pricing was probably about flat.
But I think this is what you need to remember about that. We had unprecedented increases in fuel prices during the second quarter, and I think the key thing to watch is what do stock prices do now that fuel is in decline.
And thus far, we've been able to hold those numbers up. When you have that kind of pressure on fuel, it's difficult to crush rates in an environment that is a little uncertain to levels that would have real substantial stock price increases.
So I... we're going to watch it, but what we anticipate is that the difference between spot and contract is around 10%.
When fuel settles down, we'll continue, and we're not contemplating or narrowing. We're always trying to price to the spot market out here.
What happened in the second quarter is that that gap narrowed a little bit, but we are not expecting it, that narrowing to continue. We think it will widen out a little bit.
Jonathan Chappell - JPMorgan
Okay. And then the follow-up question is on your power situation.
Do you have enough own capacity at this point or at least already chartered in capacity at this point to meet your power requirements, or may there be some impact on the cost side and the need to go out and charter more tugs?
Joseph H. Pyne - President and Chief Executive Officer
Well, as we add barges, you need more power. So, we'll be in the market for more power.
Jonathan Chappell - JPMorgan
[inaudible] chartering versus own?
Joseph H. Pyne - President and Chief Executive Officer
It will be a little of both.
Jonathan Chappell – JPMorgan
Okay. All right.
Thanks, Joe.
Operator
The next question comes from the line of Jimmy Gibbard [ph] with Wright Faulkner [ph].
Unidentified Analyst
Hi, Joe. [inaudible] how are you?
Joseph H. Pyne - President and Chief Executive Officer
Good morning.
Unidentified Analyst
Just may be a little bit off topic, but on the last call you mentioned that you thought the fundamentals for dry cargo were favorable and of course you guys are in the dry cargo business. Does this mean you see the shrinking...
that the dry cargo fleet is shrinking, or is it more that you see upside in moving construction materials, fertilizer grain, things that have been sort of very, very slow for the dry cargo business last year or so?
Joseph H. Pyne - President and Chief Executive Officer
Well... no, it's more the dynamics of the fleet.
The fleet is shrinking, operators are scraping more barges and they are replacing... there is enormous demand for U.S.
grain products. And as the economy improves, you will see more of those base materials that we just talked about moved.
Unidentified Analyst
Right. I know people have talked a lot on this call already about...
we could see demographics, but do you guys sort of have in your mind a number for... an equilibrium number for net new adds or now it's new adds that we price at equilibrium?
Joseph H. Pyne - President and Chief Executive Officer
That's a... that's difficult to forecast because you have volumes assumptions kind of that you have to apply to it.
But I think the... we're still...
we're still seeing utilization rates in the kind of mid-90% range and you can... you typically see pricing leverage on the upside when you get into the high 80%.
Mid-90% utilization is essentially fully utilized. So you could...
you could add some capacity and actually see a little utilization decline, but still have pricing in the business.
Unidentified Analyst
All right. Do you...
my perception is there were 75 from tank barges scrapped last year, do you think that that's probably a decent number for this year? Or are you guys able to sort of track that and project how many you think will be scrapped in '08?
Joseph H. Pyne - President and Chief Executive Officer
You really can't. The only thing that you can do is project what you're going to do.
But you know there is a... there are a lot of barges out there that are pretty mature.
And over the next couple of years we think that there will be... that that scraping will continue and if in fact supply demand gets out of balance, I think it will accelerate.
Unidentified Analyst
Okay. Ad then I just...
I had one more question. This is sort of going into future a little bit, but I have heard about some pretty large coal to liquid plants here in the works, and at least three of which I know of are planned for construction on the inland waterways system, and the first one should be coming online in early 2011.
Does this present an opportunity for you guys and if so how big an opportunity is this?
Joseph H. Pyne - President and Chief Executive Officer
Yes, this is... you are talking about the Eastman Plant.
Unidentified Analyst
Right..
Joseph H. Pyne - President and Chief Executive Officer
Yes. There are actually more than three, six or seven that we're talking about.
We'll see how many actually gets built. But sure, it presents an opportunity.
They are going to produce things that we move.
Unidentified Analyst
And... okay, I haven't been able to...
I haven't been able to get to a capacity number for those plants in terms of barrels a day?
Joseph H. Pyne - President and Chief Executive Officer
I'm not sure we know barrels per day. We know that if they are going to...
that plant just alluded to is a petco [ph] plant and you're talking about an input of over several... over a couple of million tons.
I don't know what the output is.
Unidentified Analyst
Right. Okay, well, Joe, thanks a lot.
Joseph H. Pyne - President and Chief Executive Officer
You're welcome.
Operator
Your next question comes from the line of Charles Rupinski with Maxim Group.
Charles Rupinski - Maxim Group
Good morning. Congratulations on the quarter.
Joseph H. Pyne - President and Chief Executive Officer
Thank you.
Charles Rupinski - Maxim Group
I just had a quick question on just your end markets, you know, just may be a little color on what you're seeing? Do we have any views on how much of the positive volumes may be related to either direct or indirect export markets?
Joseph H. Pyne - President and Chief Executive Officer
I think that exports do play a role in keeping the petrochemical volumes up. There is a worldwide shortage, global shortage of chemicals and the U.S.
is filling the void in some respects. Typically, you see, 10% to 12% of the chemical capacity exported.
That number shrank to probably half that number and what we've seen is the number is really getting back to where it was.
Charles Rupinski - Maxim Group
Great. And just other question just on single versus double haul, on the regulatory front there, is that something that I guess as 2010 becomes more of an issue and is that something that you're seeing that maybe with FAS [ph] coming on in the next year to 12 to 24 months that there might be a sort of a bump off in the committed 2010 period --?
Joseph H. Pyne - President and Chief Executive Officer
Let me answer it this way. The regulatory date is 2015.
Charles Rupinski - Maxim Group
2015, okay.
Joseph H. Pyne - President and Chief Executive Officer
Yes. And what we're just saying is that we think that the market is going to push those barges out quicker than the 2015 date.
So, approximately, I guess a 140 odd barges that are single skin that are left in the business. With respect to Kirby for the most part that's behind us.
I think that we only have nine single skin barges left. They are used in very specialized services, and we plan to replace them all before 2015.
Charles Rupinski - Maxim Group
Very well. Thank you for that.
Operator
Your next question comes from the line of Daniel Burke with Johnson Rice.
Daniel Burke - Johnson Rice & Company
Good morning, all.
Joseph H. Pyne - President and Chief Executive Officer
Good morning.
Daniel Burke - Johnson Rice & Company
Question for you, Joe. You mentioned you're seeing some improvement in I guess the Midwest refined products market.
Is that really just now that normal seasonal uptick you'd expect to see there or do you think that structurally now things are improving from where they were earlier in the year?
Joseph H. Pyne - President and Chief Executive Officer
No, I think it's more seasonal. Gasoline demand is estimated to be down about 2.5% compared to where it was last year.
And I don't think there is... I think there's been some real demand destruction, but people are still driving, and there is a component of gasoline used in the Midwest that has to be imported typically about a million barrels a day is imported into the Midwest from the Gulf Coast and I think we're just getting a share of it.
Daniel Burke - Johnson Rice & Company
Okay, fair enough. And just one other quick question as well, you mentioned the higher steel prices.
What do you see or what do you realize in terms of scrap value per barge as you retire, is that a notable number or a mentionable number?
Joseph H. Pyne - President and Chief Executive Officer
Yes. It's not unnotable, but we typically see higher prices for barges used in alternative services.
Instead of scrapping a barge, we'll sell it to somebody that uses it, where that barge... I mean most of the floating casinos that are floating around this country are built on the decks of old tank barges.
So, at least for us, we're selling them into some other service has more value. In the dry cargo business, I think it's more of a factor.
Daniel Burke - Johnson Rice & Company
I see. That's it from me, thanks.
Joseph H. Pyne - President and Chief Executive Officer
Sure.
Operator
Your next question comes from the line of [inaudible] Investment Bank.
Unidentified Analyst
Good morning.
Joseph H. Pyne - President and Chief Executive Officer
Good morning.
Unidentified Analyst
I had a quick question just to follow up on the capacity point. If the industry [inaudible] reading is right that you get around 250 new barges this year, and also they seem to be larger barges than the ones that they are replacing, so that the barrel capacity increases a little bit more.
It seems that something like kind of high... mid-to-high single-digit increase.
With the current demand outlook that you guys see, is there any risk, does that put a bit of damper on pricing from where you are today, or are you comfortable with [inaudible] with that supply and demand outlook?
Joseph H. Pyne - President and Chief Executive Officer
Well, I'm not sure that we would agree that 250 barges are going to built in 2008. That's pretty aggressive based on what some shipyards have historically done.
Additionally, there are some cases, some delays in getting steel. I think the number is going to be closer to 200; frankly it isn't 250.
With respect to replacing barges with larger capacity, I'm not sure I agree with that either. Single skin barge actually for its size are going to add more capacity than a double skin barge, and yes we tend to build 10s and 30s, but I'm not sure that there is that much capacity creep.
Now I did say earlier, and I'm not sure what else I can say about the capacity issue. I did say earlier in the prepared remarks that if we continue with 2008 building levels, we will over build, and yes, that will attract pricing.
This is a supply and demand business, but I also said that we don't expect that to continue. We don't expect it to continue for a host of reasons, one of which is that steel prices in 2010 have gone to levels where it really is not all that attractive to build and you're getting a lot of push back.
Having said all that, from a Kirby perspective, 80% of our business is under contract year longer. So from a pricing perspective, we're really in pretty good shape in at least the next 12 months or so.
Unidentified Analyst
That's great, thanks. And just one quick follow-up.
Just trying to understand the movements in the revenue per ton mile increase and the cost per ton mile in place, how much of the volume decline was covered by take or pay contract because obviously you report a very large increase in a revenue for ton mile, and I was just wondering is it take or pay, just wondering how big that impact is?
Joseph H. Pyne - President and Chief Executive Officer
It wasn't that significant. I mean certainly some of that was, but it...
on an everyday basis, we have several tows that were between trips, on-time charters that were being paid for, but that's not that unusual. Customers, time charter equipment, so they control capacity...
and based on requirements within their own system, you all have periods where the equipment will be positioned, not loaded, waiting for some of that carryover loading.
Unidentified Analyst
Okay, that's great. Thank you.
Operator
Your next question comes from the line of Lou Salks [ph] with Water Street Capital.
Unidentified Analyst
Yes. Hi, thanks for taking my question.
I would love to know what you guys are seeing in terms of contracting when you are bringing in your new barges and you're signing or rowing over existing contracts, what's kind of the length of time that you're seeing on those contracts and is that time lengthening out at all?
Joseph H. Pyne - President and Chief Executive Officer
Maybe lengthening a little, but we have a fleet of almost, well, 920 barges. So, equipment...
again this is a dynamic fleet. So, equipment that we're bringing in it can be...
can go in the spot business. It can replace equipment that we're pacing out, or it could supplement contracts.
So, it's really all over the board. I think I'd more comfortable just talking about our contract mix and the terms of those contracts.
I mean, 25% of our marine transportation revenue is under contracts that won't expire this decade, some of which won't expire until 2016. Probably a little more than 50% of our contracts are on the...
we're doing on an annual basis and then the rest are anywhere from two to five years.
Unidentified Analyst
Got it. And the new...
or the... as we just look at the fleet and understand that everything is a dynamic, is your bias or is the customer's bias more towards securing capacity on a spot basis or securing capacity on a contract basis?
Joseph H. Pyne - President and Chief Executive Officer
The latter, just our customers... our customer bases, but again, we typically...
last year, our contract spot mix was 75:25. I think in the last six or seven years, the lowest it's gotten is about 70%.
So, we tend to be a... we tend to focus on customers that want contractual relationships, we do that.
That's a strategy principally because we think that that allows us to forecast and manage our business better than just getting all your equipment out in the spot market. You'll probably lose...
in a very brisk market, you'll lose some profit potential with that high a contract mix, but you'll also mitigate the downside. We'd rather...
we'd rather be more conservative than aggressive as we account for our business.
Unidentified Analyst
And so what I hear you saying really is that your customers are more on the margin they're biased towards securing contracts and the contract terms that you're signing are increasing. The length of the contract is increasing.
That --
Joseph H. Pyne - President and Chief Executive Officer
Marginally increasing.
Unidentified Analyst
Got it. Thank you.
Operator
The next question comes from the Bill Baldwin with Baldwin Anthony Securities.
William Baldwin - Baldwin Anthony Securities
Hi. Good morning, gentlemen.
Joseph H. Pyne - President and Chief Executive Officer
Hi, Bill.
William Baldwin - Baldwin Anthony Securities
Could you take a minute, Joe, and explain why the demand for black oil to be doing what is doing in here? I mean is that related to overall refinery runs or is that something on the demand side that's causing those volumes to be --?
Joseph H. Pyne - President and Chief Executive Officer
Yes, it's refinery runs, we think. There is kind of a...
interesting things happening in the refining business. This shows you how dynamic and flexible the market is.
Gasoline is down but the demand for two oil [ph] or diesel is up. And you're seeing in Europe, which uses as its transportation fuel principally two oil or diesel makes as a byproduct to diesel or gasoline which is an imported on the East Coast.
And what we're saying is that the demand for diesel is so significant on a global basis that we're actually making more diesel at record levels on the Gulf Coast and exporting them. When you do that, the mix changes and you...
the need to produce or to squeeze more gasoline out of the bottom end of the barrel diminishes. And so we're seeing less backing gas oil [ph] for example transported.
The other thing is that we are not seeing a lot of... what you typically see in the summer is asphalt.
There just isn't asphalt available and that's probably a question that you should ask a refiner, but my guess is that the demand for two oil and the margins that refiners are getting for two oil just make it a lot more profitable trying to produce as much of that than some of other things that they produce.
William Baldwin - Baldwin Anthony Securities
So, they've taken a larger portion of the barrel and development to two oil, I guess, is what you are saying?
Joseph H. Pyne - President and Chief Executive Officer
And as you do that, there is just less. Yes, I don't...
we don't want a bigger thing than it is already. Demand is not that significantly down and the real differences are just where you moving it, that we're moving more in the canal than we are in the river.
And in the summer, you typically see more ton miles in the river because you're moving gasoline up river, you are moving asphalt up river, you are moving agricultural chemicals up river. Part of that is demand destruction in the gasoline market, part of it which is very poor operating conditions on the river flooded fields, flooded docks, at least in the agricultural chemicals
William Baldwin - Baldwin Anthony Securities
Okay. So, you think this will be with us for a while, as long as this demand for two oil remains so strong?
Joseph H. Pyne - President and Chief Executive Officer
I think that the... well, refineries are going to make products that they can make money on, and certainly at these high oil prices that...
or high gasoline prices, there is some demand destruction. Now 2%, 2.5%...
and frankly, I'm surprised it is not more than, but that's what the national statistics were showing, and I think we just need to adjust our business accordingly. Remember only about 10% of what we do is in the gasoline area.
William Baldwin - Baldwin Anthony Securities
But I thought some more on the black oil than it was in gasoline.
Joseph H. Pyne - President and Chief Executive Officer
I think black oil is going to be okay.
William Baldwin - Baldwin Anthony Securities
You think it'll be okay.
Joseph H. Pyne - President and Chief Executive Officer
Okay.
William Baldwin - Baldwin Anthony Securities
Okay, thank you.
Operator
Your next question comes from the line of David Yuschak with SMH Capital.
David Yuschak - SMH Capital
Good morning, guys.
Joseph H. Pyne - President and Chief Executive Officer
Good morning.
David Yuschak - SMH Capital
Question on the... earlier Joe, you said that in your guidance, you're looking for mid single-digits on your long-term contract renewals and they are up from there.
Is that just a function of the spot market right now or is it... you maybe said earlier some of your customers want to begin to lock in some capacity, control from that capacity, and are willing to take even the risk of take and pay to have that capacity controlled?
Joseph H. Pyne - President and Chief Executive Officer
Well, there is certainly some of that going on, and hence the greater percentage of our contracted business in time charters. And you typically see...
I think the... we still think that a more reasonable forecast of our business is in the mid single-digit rate increase area.
We've seen more than that as we've renewed contracts from last year. But as you model the business, I think I would use a lower rate percentage increase, which from a Kirby perspective is double-digit earnings growth.
We're very happy with lower rate increases. We think it also takes some of the float [ph] out of building tank barges.
So I think that we don't have a problem with the mid single-digit forecast.
David Yuschak - SMH Capital
Is there any particular customer that you're dealing with who wants to may be do more of controlling some of that capacity [inaudible] is there any particular confidence or anything?
Joseph H. Pyne - President and Chief Executive Officer
There are lots of them.
David Yuschak - SMH Capital
Okay. So, it's just a broad range, it's pretty diversified.
Joseph H. Pyne - President and Chief Executive Officer
Yes.
David Yuschak - SMH Capital
And then one other question. As far as your business in the upstream...
up river, what generally would be normalized on a quarter-to-quarter basis versus maybe what you may have experienced during this quarter?
Joseph H. Pyne - President and Chief Executive Officer
I'm not sure I understand your question, David.
David Yuschak - SMH Capital
Say for instance, normally 25% of your revenue comes from moving stuff up river versus 75% in the channel. Just kind of curious, is there anything...
is there anything that was abnormally as a percentage of revenue that you didn't do in the Midwest, that you were able to funnel back into the year in your coastal water? And so it's kind of what was may be normalized business going up versus the coastal waterways?
Joseph H. Pyne - President and Chief Executive Officer
Yes, it's going to vary quarter by quarter, but about a third of our business is on the river and about two-thirds of it in canal. We haven't still bifurcated the revenue to give you an answer, just haven't thought of it that way.
The point that we're making is that, whether it works on the river or the canal, you still have revenue and the business is still there.
David Yuschak - SMH Capital
Yes. I was just kind of curious, if you were...
if it was abnormally affected in the quarter as a percentage of revenue, just to get a sense as to --?
Joseph H. Pyne - President and Chief Executive Officer
Well, you know, more revenue was earned up until now, literally. [ph]
David Yuschak - SMH Capital
Yes.
Joseph H. Pyne - President and Chief Executive Officer
So, I think ton miles is a pretty good indicator of revenue. As you look at the second quarter '08 versus the second quarter of '07, you can probably extrapolate it and answer your question.
David Yuschak - SMH Capital
[inaudible] more profitable on the coastal waterways anyway than up river?
Joseph H. Pyne - President and Chief Executive Officer
Our infrastructure is very competitive on the Gulf Coast.
David Yuschak - SMH Capital
All right, thanks.
Joseph H. Pyne - President and Chief Executive Officer
Sure.
Operator
Your next question comes from the line of Chaz Jones with Morgan Keegan.
Chaz Jones - Morgan, Keegan & Company, Inc.
Hi, guys. Nice quarter.
Just wanted to ask you quickly here on the engine services side of the business, I guess everyone has forgot about it today, but in any event it's certainly been a model of consistency from an operating margins standpoint the last four or five quarters. But if I kind of go back to may be 12 months ago, when I think you guys first said, you thought that if fundamentals stayed positive that you potentially could get the operating margin there in the upper teens, and I guess my question is, is that still the case, and may be what has to happen for you to get there?
Joseph H. Pyne - President and Chief Executive Officer
Well, I think the oil service in the Gulf Coast needs to improve. We're about there on the medium-speed side.
So, it's more an oil service story and we think that it is actually getting better. So, I'm not sure that we did...
we changed what we said over time. Mid to high teens is a reasonable target.
Chaz Jones - Morgan, Keegan & Company, Inc.
Okay, great. That's all I had.
Thanks, guys
Operator
We do have a follow-up question from the line of Jimmy Gibbard [ph] with Wright Faulkner [ph].
Unidentified Analyst
I'm sorry, guys. My questions have all been answered.
Thank you
Operator
There are no further questions at this time.
G. Stephen Holcomb - Vice President - Investor Relations
Well, we certainly appreciate your interest in Kirby Corporation and for participating in our conference call. If you have any additional questions, would you please give me a call?
My direct dial number is 713-435-1135, and we wish you a good day.
Operator
This thus conclude today's conference. Thank you for your participation.
You may now disconnect.