Kirby - Q1 2013
April 25, 2013
Transcript
Operator (participant)
Welcome to the Kirby Corporation 2013 First Quarter Conference Call. My name is Leslie, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I'll now turn the call over to Steve Holcomb. Mr. Holcomb, you may begin.
Steve Holcomb (VP of Investor Relations)
Good morning. Thank you for joining us. With me today are Joe Pyne, Kirby's Chairman, President, and Chief Executive Officer; David Grzebinski, Kirby's Executive Vice President and Chief Financial Officer; and Greg Binion, Kirby's President, Marine Transportation Group. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to 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 risk factors can be found in Kirby's annual report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission. I will now turn the call over to Joe.
Joe Pyne (Chairman, President, and CEO)
Okay, thank you, Steve. Late yesterday afternoon, we announced first quarter earnings of $1 per share, excluding a $0.05 per share credit, which decreased the fair value of the earn-out liability associated with our United acquisition. Our results exceeded our guidance range for the first quarter. The range was $0.82-$0.92 per share. In the 2013 first quarter, our inland tank barge fleet continued to maintain high utilization rates with consistent and healthy levels of demand across all our markets. Greg Binion will have more to say about our inland operations later in the call. In our coastal tank barge fleet, improvements in demand continued again in all markets during the quarter.
The first quarter also is historically a little slower due to some seasonality in that business, so all in all, it was a good quarter. Driving this improvement was demand for coastal transportation of crude oil and natural gas condensate and some new coastal movements that came out of inland customers that we service, and also strong utilization rates out of the Allied and Penn fleets, which were both acquired late last year. The quarter was also helped by a strong heating oil demand associated with cold weather up in the Northeast. In our land-based diesel engine service business, the market for manufacturing of new pressure pumping units continues to be somewhat challenging.
Partially offsetting this decline is, in making pressure pumping units, a progress that we're making in remanufacturing these units. We remain confident in the long-term strategy of growing the service side of our land-based business. And I think as we do that, the business will be more stable and predictable. We're also making good progress in making this process more efficient and making the supply chain work better. I also want to remind you that United is only about 5% of the 2013 forecasted EBITDA for Kirby.
With respect to our legacy diesel engine business, the marine business, while market conditions were generally stable across most of the markets they service, the low water conditions on the Mississippi River last year did lead some customers to defer several major projects that we expected to do in the first quarter to later in 2013. The Gulf Oil service market has stabilized. It is moving to a more normal levels after sharp declines caused by Macondo. And the power generation market in that business is stable with continued good sales and engine generator upgrade projects. Before turning the call over, I wanna comment on an incident that involved some of Kirby equipment last night that's gotten some media attention.
At about 8:30 P.M., yesterday evening, two empty, unmanned tank barge, barges owned by Kirby Inland Marine, which were carrying last cargo, natural gasoline, were being cleaned by a Mobile shipyard and caught fire and exploded. Now, these barges were empty when this happened. The barges had been turned over to the shipyard and were in the shipyard's custody when this incident occurred. Three individuals were injured, and we understand they're hospitalized with burns. No Kirby employees were injured. The U.S. Coast Guard, the Mobile Fire Department, and Kirby's strike team responded with its personnel and resources, and Kirby is fully engaged in working with the Coast Guard in determining the cause of this incident.
Of course, our, our thoughts and prayers today are with the injured and their families, which, were affected by this incident. I'm gonna turn the call now over to, Greg Binion, who will discuss our inland tank barge market, and then David, who will discuss the coastal tank barge business and, and then give you a financial update. Following their remarks, I'll conclude with some, closing comments about the second quarter, the, the year, guidance and outlook, and, talk a little bit about, my, my succession plans, mine and the board's succession plans, with respect to my duties as the- as Kirby's Chief Executive Officer.
Greg Binion (President of Marine Transportation Group)
Well, thank you, Joe, and good morning to all. For the first quarter, our inland marine transportation business continued to perform well, with equipment utilization in the 90%-95% range, and also with continued favorable term and spot contract pricing. The low water conditions on the Mississippi River system that began in May of 2012 and persisted through the balance of 2012, and also into the early part of 2013, abated, and we generally experienced normal water levels through the end of the first quarter. However, recently, with snow melt and more recent rains, we are currently experiencing some high water conditions on the upper Mississippi and Illinois Rivers. Inland marine transportation revenues from our long-term contracts, that is one year in duration or longer, were 75% of the total revenue, with time charters comprising 57% of revenue.
Turning to inland marine transportation pricing, term contracts during the first quarter continued to renew at mid-single digit levels when compared with the 2012 first quarter. In spot pricing, which includes the price of fuel, were stable to slightly higher when compared with the 2012 fourth quarter spot price, spot market rates. With respect to inland marine tank barge capacity, during the 2013 first quarter, we took delivery of 19 new tank barges totaling 533,000 barrels of capacity. We retired 15 tank barges and transferred 1 tank barge to the coastal fleet, removing 253,000 barrels of capacity.
So net-net, during the 2013 first quarter, we added three tank barges to our fleet, but increased our inland capacity by 280,000 barrels, as the barges that were added were generally larger capacity barges than the ones that were removed. As of March 31st, we operate 844 inland tank barges with a capacity of 16.9 million barrels. For the remaining nine months of 2013, our inland transportation construction program will consist of 36 inland tank barges with a total capacity of 658,000 barrels and three towboats. For 2013, the cost of new inland tank barges and towboats delivered throughout the year will be approximately $115 million.
At the present time, we expect to finish 2013 with approximately 17.2 million barrels of capacity, or about 500,000 barrels above the 16.7 million barrels, where we began the year 2013. I will now turn the call over to David.
David Grzebinski (EVP and CFO)
Thank you, Greg. Kirby Offshore Marine's overall equipment utilization rate improved to the 90% range during the first quarter. As Joe mentioned, all of the coastal markets continued to improve, driven in part by increased demand for crude and condensate moves and the cooler weather in the Northeast. The improvements in the coastal business are very encouraging, although we continue to watch the markets closely and look for opportunities to enhance our results in each region. We also continued to make progress in expanding our coastal business to our inland customers, as Joe mentioned. I do wanna make a quick comment about the second quarter. It will be impacted by a heavier shipyard schedule for coastal equipment.
This is just the timing of planned maintenance for our coastal fleet, and the reason for mentioning it is really to highlight a difference between our inland and coastal business. With 82 barges in the coastal business versus 844 in the inland business, shipyards can cause some lumpiness between quarters. But this is in our second quarter guidance, and we just wanted to highlight it. As of March 31st, 2013, approximately 70% of our coastal operations revenues were under term contracts, and this compares with 60% in the first quarter of 2012. The balance 30% are in spot contracts, that is, contracts less than a year long. The improvement represented the addition of Allied and Penn fleets to our fleet, as well as new contracts signed in the fourth quarter of 2012, and in the first quarter of 2013.
With respect to coastal marine transportation pricing, term contracts that renewed during the first quarter increased in the high single-digit range, and in some cases, higher than that, when compared to the year-ago period in 2012. Spot contract rates during the first quarter increased mid to high single digits when compared sequentially with the fourth quarter. The integration of Penn into Kirby Offshore Marine is progressing as planned. Penn's accounting has been successfully transitioned to Kirby Offshore Marine, and the transition of administrative functions, sales, dispatching, maintenance, and operations is well underway and should be completed by the end of the second quarter.
Moving to the financial data, as Joe noted, our 2013 first quarter earnings per share of $1 per share includes a $0.05 credit, decreasing the fair value of the contingent earn-out liability associated with the United acquisition. As of March 31st, the contingent earn-out liability stands at $14 million. Marine transportation revenues grew 25% for the quarter. Operating income grew 30%. The inland sector contributed approximately 68% of the first quarter marine transportation segment's revenue, with the coastal sector contributing about 32% of the revenue. Despite the winter weather conditions, our inland operations maintain an operating margin near the mid-20% range for the quarter.
The coastal business operating margins also despite the winter weather conditions improved significantly to the mid double-digit range when compared to low single digits in the first quarter of 2012. The overall marine transportation segment's first quarter operating margin was 21.3%, which compares with 20.4% for the first quarter of 2012. Our diesel engine services revenue for 2013 first quarter was 39% below the year-ago quarter. Diesel engine services operating income was 40% lower than the 2012 first quarter, and the segment's operating margin was 10%, compared with 10.2% from the year-ago quarter. Without the adjustments to the earn-out, the first quarter operating margin for diesel engine services segment would have been approximately 7%.
The decline in revenue and operating income and operating margin was primarily due to the lower results at United. United contributed approximately 65% of the diesel engine services revenue, segment revenue, and, excluding the earn-out, earned a low- to mid-single-digit operating margin in the first quarter. The legacy diesel engine operations contributed approximately 35% of diesel engine services revenue during the quarter, and their operating margin was in the low- to mid-double-digit range. Total debt as of March 31st for the corporation was $1.1 billion, and our debt to total cap ratio was 38.4%.
In late February, we drew the remaining $225 million from our new $500 million private placement senior notes program, and we used that to retire the older $200 million private placement that matured on February 28th, 2013. As of March 31st, we had $148 million outstanding on our revolving credit agreements. This morning, our revolver's outstanding balance was $106 million, as we continue to delever with our free cash flow. With that, I'll turn the call back to Joe.
Joe Pyne (Chairman, President, and CEO)
Okay, thank you, David. Yesterday afternoon, we announced our 2013 second quarter guidance of $1-$1.10 per share. This compares with $0.85 per share earned in the 2012 second quarter. For the year, we raised our guidance range to $4.10-$4.30 per share. Again, this compares to $3.73 per share earned last year. This annual guidance range includes the $0.05 per share adjustment that we made in the first quarter to the United earn-out. Our second quarter guidance of $1-$1.10 per share assumes a modest improvement over the 2012 pricing in our inland tank barge business.
These markets, the markets that we service in this business are currently operating close to full utilization levels for the fleet. It assumes a continued improvement in coastal utilization and corresponding higher term and spot contract pricing. As David noted earlier, the 2013 second quarter has a heavy coastal equipment planned maintenance schedule that will impact the results, but this is reflected in our guidance. We feel that we're bumping along the bottom in the land-based oil service market with United, still believe that this business is going to improve late this year, early 2014. Our guidance assumes the heritage diesel engine service business will remain consistent with the last nine months of 2012. With respect to our balance sheet, it's strong.
Our cash flow continues to be excellent. 2013 is a year of lighter capital investment. We're predicting capital expenditures in the $190 million-$200 million range, compared to $313 million incurred in 2012. For 2013, we will continue to pay down our debt and remain positioned to take advantage of any acquisition opportunities if they come along during the course of the year. I want to take a few minutes and discuss the organizational changes that we intend to make at Kirby, which I and the Kirby Board of Directors believe will strengthen Kirby's organization and prepare us for the future. Succession is a responsibility which the Kirby Board takes very seriously. We like to say that we make decisions at Kirby as if we're running the company into perpetuity.
This includes preparing our management team for the future. Our business success is dependent on a competent and motivated management team and employee base. Yesterday afternoon, I announced my intention to step down early next year as Kirby's Chief Executive Officer, but remain as an active and engaged Chairman. I intend to work with David Grzebinski as the next Chief Executive Officer for Kirby, and I expect that he'll be named to this role in early 2014. I've been with Kirby for 35 years. I've run Kirby's marine transportation business since 1984, and I've had the honor of being Kirby's CEO since 1995.
I do not want to retire, but I'd like to be less engaged in the day-to-day running of the business and focus my efforts more on strategic matters and in helping develop future talent, which will continue to position this company well for the future. David Grzebinski will make a great CEO. He has the, the wisdom and skill sets which will ensure his success, and I'm confident that Kirby will continue to thrive under his leadership. In the past two years, we have significantly expanded our marine transportation business and are now the largest inland and coastal tank barge operator in the United States. We have a, a diverse geographic footprint, the most diverse in the business, serving inland and coastal customers from Chicago to Houston and Maine to Hawaii.
Because of this business expansion, I've asked Greg Binion, Kirby's current Chief Operating Officer, to serve in a new role, which focuses on marine transportation as the President of our Marine Transportation Group, which will include all our marine operations. I look forward to working with Greg in his new role. Our company is in great shape for the future. We're in markets which are growing. We have reinvested in our assets and have a very strong management team. I look forward to remaining with the team, but in a more strategic capacity, beginning early next year. Operator, this concludes our prepared remarks. We're now ready to take questions.
Operator (participant)
Thank you. We'll now begin the question-and-answer session. If you have a question, please press star, then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. We also ask that you please limit yourself to one question and one follow-up question. So once again, if you have a question, please press star, then one on your touch-tone phone. Your first question comes from Jon Chappell with Evercore Partners. Please go ahead.
Jonathan Chappell (Managing Director)
Thank you. Good morning, guys.
Joe Pyne (Chairman, President, and CEO)
Good morning.
Morning, Jon.
Jonathan Chappell (Managing Director)
Joe, first question for you regarding the coastal business and one of the first comments you made. I thought it was pretty interesting, given the Penn and the Allied acquisitions and just your general entrance into this business, about the potential synergies you can get from your inland customers. So you'd mentioned that you've seen some new coastal movements from some of your inland customers, and maybe you can just talk about where you kind of sit in the process of this right now. Is this, you know, kind of the first inning of these cross-business synergies? And how the do the customers come to you, or have you been marketing for this business proactively?
Joe Pyne (Chairman, President, and CEO)
Jon, it, you know, it's a little of both, but, of course, we're marketing both the coastal and inland fleets together to our customers. You know, first inning, yeah, it... You know, I would say we're further along than that because, you know, certainly the market understands what our capability is. When we first entered this business, we had a fairly high concentration of traders as customers, and it was our objective to, to move from working essentially for traders to a mix of traders and major oil companies and shipping companies.
And I would say that we've been quite successful in doing that. You're never gonna completely eliminate the traders because they have some significant volume, but their volumes often are a little more volatile than the shippers who actually control the cargoes. Yeah, we have a ways to go, but I think that we're engaged in conversations with all the people that we need to be engaged with. And I think over time, you'll have many of the inland customers being serviced by Kirby Coastal Equipment.
Jonathan Chappell (Managing Director)
Okay, that's great. And then for my one follow-up, for David, you also mentioned, you know, still looking for opportunities in this coastal business, and I, and I really wanna focus on this part of the, the business 'cause it's done so well in such a short period of time. Has it moved so fast, though, and kind of exceeded your expectations that maybe the asset prices have moved a little bit as well? And are there still Penns and Allieds out there for you in 2013, given the, the, rampant improvement in the margins?
David Grzebinski (EVP and CFO)
Yeah, you know, it's as you know, it's hard to predict acquisitions, and you never know why any one company might be ready to sell versus another. But clearly, since the market's moving, the likelihood of getting an acquisition done at a reasonable price goes down. But clearly, there could be, you know, other drivers in having somebody sell. That said, I would say that more opportunity exists in potentially building some new equipment for the space. I think, you know, there's over 50 in the 200,000 barrels and less kind of class, there's over 50 barges that are 25 years or older. And, you know, there is some increased demand here.
So, you know, I think there's been recent news about new crude by rail to new water terminals on the West Coast. So, there could be... I would characterize it as there's probably more opportunities for some new build equipment, just because of the increased volumes and the aging fleet than through acquisition.
Jonathan Chappell (Managing Director)
Okay. That's very helpful. Thanks, guys.
Joe Pyne (Chairman, President, and CEO)
Thanks, Jon.
Operator (participant)
Our next question comes from Michael Webber with Wells Fargo. Please go ahead.
Michael Webber (Analyst)
Hey, good morning, guys. How are you?
Joe Pyne (Chairman, President, and CEO)
Good morning.
Michael Webber (Analyst)
My first question is around the coastal fleet and the utilization improvement we saw there. Can you maybe kind of pinpoint the kind of commodity exposure that really kind of got that over the hump kind of quarter-over-quarter to the 90% level? And then, kind of with that elevated maintenance schedule looking in Q2, Q3, I know that's not gonna really be reflected in numbers, but is there some sort of belief that we could expect in terms of utilization in that business for Q2?
David Grzebinski (EVP and CFO)
Yeah, well, let me take that in two different pieces. You know, when one, in terms of commodity risk, given the fleet makeup, the former K-Sea fleet or the legacy coastal fleet, if you will, was predominantly refined products. And then when we added Penn and Allied, we added more chemical capability, and with Penn, we added more black oil capability. So in terms of rough capacity, in terms of commodities, it's the fleet's about 50% refined products and probably 30% black oil. The remainder is chemicals and other things. So that kind of gives you a feel for the commodities.
But, you know, all of those commodity areas, volumes are picking up a little bit throughout the United States.
But in particular, the crude and condensate moves have been what has tightened up the market a bit. In terms of the second quarter maintenance, we only wanted to highlight that just because you may see some lumpiness between quarters, depending on where shipyards land. This is just, you know, shipyards are driven by regulatory inspections, and, and, you know, we've got different fleets that we've added, and, and it just happens that, that it hit, you know, fairly heavy second quarter. What really, what, what really that impacts is, is, is, you know, some revenue that you, you, you have those units out in the shipyard.
It's all in our numbers. We just wanted to highlight it because, you know, typically our second and third quarters are gonna be stronger because the weather's better.
Michael Webber (Analyst)
Gotcha. All right, that makes sense. Then, I guess, as my follow-up along that coastal business, you know, I guess 70% of that business is already on long-term contracts. That's basically, I think, flat quarter-over-quarter. And it certainly seemed like spot activity picked up there, driving, you know, the utilization increase. I guess the question is, you know, what do you need to see from a rate perspective or just from a marketing perspective, that would let you go in and fix additional chunks of that business to kind of get to that 80%-85% long-term run rate you guys are really looking for?
David Grzebinski (EVP and CFO)
Yeah, well, you'll see us working on that. You've seen it increase through 2012, and you'll see it, the amount of term increase through 2013 as well. You know, it's just the way the business goes, and as we look to the long-term major customers and work to meet their needs, you'll see that the amount of term go up going forward. I don't know if hopefully, that answered your question.
Michael Webber (Analyst)
Yeah, I mean, if there's any sense on timing, I mean, I know it's pretty difficult to gauge, but in terms of kind of pace.
David Grzebinski (EVP and CFO)
Yeah, it's hard. I wouldn't want to predict it because I'm sure I'd be wrong, whatever I said. But it's, you know, it's dependent on where we are with customers. You know, the spots business, too, isn't, you know, it's not day-for-day kind of spot business. This is, you know, we can consider a six-month contract, a spot contract. So, you know, you're working with the customers to meet your immediate needs. As you might imagine, you know, as Joe mentioned, we're transitioning some of our long-term inland customers in there. So we're being very thoughtful and working very carefully with each customer. You know, the last thing we want to do is abandon a customer at the wrong moment.
Michael Webber (Analyst)
Gotcha. Okay, great. Thanks for the time, guys.
Operator (participant)
Our next question comes from Greg Lewis with Credit Suisse. Please go ahead.
Gregory Lewis (Analyst)
Hey, thanks, guys. Good morning. Hey, congratulations on all your new positions. I just had a couple questions. You know, David, you mentioned in the coastal fleet, you know, the potential for new equipment entering the space. From what I gather, at least one other private coastal barge operator has either placed or is in the process of placing some new coastal equipment. I mean, is this something that we could actually see out of K-Sea over the next sort of couple quarters? And what sort of structure would that look like if you were to go down a new construction path? I mean, has there been conversations about maybe attaching any sort of new coastal barge to a long-term contract?
Is there any sort of appetite for that?
David Grzebinski (EVP and CFO)
Yeah. No, we are in conversations with several customers about potentially building new equipment. There has been, as you mentioned, one person that has announced that he's building some larger equipment, much larger than the size that we participate in. You know, I'm not sure what, you know, what he did in terms of contracts. He may have just done it on speculation, we're not sure. But, you know, our view would try to get a longer-term contract to secure new construction and, you know, be thoughtful about it. Again, we're in conversations with customers, and it wouldn't be prudent to say too much about it.
But I would anticipate that it's likely that the industry will need to build some capacity here in the near term.
Gregory Lewis (Analyst)
Oh, okay, great. And then just, you know, shifting gears over to United. It sounds like, I guess, margins in the first quarter were in that sort of low single-digit range. As we think about that going forward, I guess, firstly, was that flat versus Q4 of last year, or was that flat, down, up? And as we think about as the year progresses, could we sort of see margins maybe pick up a little bit through the end of the year?
David Grzebinski (EVP and CFO)
With respect to the first part of your question, the margins in the first quarter were slightly better than they were in the fourth quarter. Yeah, you know, we're really not forecasting much improvement in United. Having said that, there's certainly more positive news in that space than there was, you know, even in the fourth quarter. Looks like equipment's going back to work, yeah, inventories are being absorbed. Yeah, we're getting more inquiries. But having said that, you know, we're still very focused on making that more of a service model than a manufacturing model, and we think we're making good progress in that area, and we think the demand's there.
So, you know, our focus is gonna be fixing and overhauling these things, less in manufacturing. We're not gonna step out of manufacturing altogether, but the emphasis is gonna be more in the service area.
Gregory Lewis (Analyst)
Okay, that's perfect. Thank you very much for the time.
David Grzebinski (EVP and CFO)
Thanks, Greg.
Operator (participant)
Our next question comes from Ken Hoexter with Bank of America. Please go ahead.
Ken Hoexter (Analyst)
Hey, great, good morning. Dave and Greg, congratulations, and Joe, enjoyed working with you for the past 12 years. Look forward to your new role as well. When you passed 90% utilization on the inland barging side, maybe eight to 10 years ago, you saw pricing scale significantly for a few years. Is that what you would expect to occur in the coastal business? I guess maybe you could just talk about the opportunities there.
Joe Pyne (Chairman, President, and CEO)
Yeah. Yeah, let me start with that question. You know, what you see in with respect to pricing is the objective of pricing to new construction pricing. You're... In, you know, eight to 10 years ago, we had pricing at levels, frankly, that were significantly below what was required to build new equipment.
And you saw a more rapid escalation as pricing caught up to those levels. You know, maybe a, yeah, a way to look at this, Ken, is to, you know, I'm gonna get David to speak to this, is to look at it from the perspective of the cost per barrel of our fleet compared to kind of a cost per barrel range that you'd need to replace that fleet. And you'll and you can get a sense for what pricing is gonna need to do to really justify a lot of new investment in the offshore fleet.
Ken Hoexter (Analyst)
Yeah.
David Grzebinski (EVP and CFO)
Now, Ken, if you look back at the dollar cost per barrel of capacity acquired for the K-Sea, the Penn and the Allied fleets, and even the Seaboats fleets, we spent approximately $150 to, call it $175, per barrel acquired. New build construction, say, if you were to build a 150, a 150,000-barrel unit or a 185,000-barrel unit, for example, it would be north of $400 a barrel in terms of construction cost. So that gives you a feel for how much the rates would have to increase. And you know, the rates have been increasing, so it's... But there's still ways to go to really justify new build construction.
Ken Hoexter (Analyst)
Yeah, and that's with power, just to clarify.
David Grzebinski (EVP and CFO)
Yeah. No, that's an excellent point. Yeah, Joe's point is that's on a kind of a unit tow basis. That's the barge and the tug together, because in offshore, they're paired together.
Ken Hoexter (Analyst)
Right.
David Grzebinski (EVP and CFO)
So it includes the cost of the tugboat, which is a very significant cost for an offshore unit, given the high horsepower requirements.
Ken Hoexter (Analyst)
Understood. And so but to my point, that means you have what would be just like you saw multi-years of strong pricing on the inland. We could see that similar occurrence in the offshore business just to catch up to before you'd have the period of that expected building.
Joe Pyne (Chairman, President, and CEO)
Yeah, you'll get some preemption, of course, 'cause you have some operators that are willing to take a bet on what's gonna happen. Certainly, you know, the conversations that we're having with the customers with respect to adding new capacity has increased. So that's all encouraging. You know, current rate levels do not justify building a lot of new equipment. The rates are gonna have to continue to rise. Is there, you know, some linear comparison to the inland fleet? I mean, you know, certainly conceptually, that's probably right. You know, what actually happens, how quickly it occurs, is yet to be known.
Ken Hoexter (Analyst)
Wonderful. If I can get my follow-up on United. The margin rebound you talked about, obviously, I understand what you're talking about in terms of not focusing on manufacturing rebound. But is there something you can do on the cost side at United to continue to scale? I mean, obviously, you scaled it sequentially, but is there something that you can do on the cost side without business coming back, that can get those margins at United, you know, climbing even faster?
Joe Pyne (Chairman, President, and CEO)
Well, you could, but you'd be giving up some of your upside. The premise that we're operating under is that we're gonna build a world-class service model. We're gonna work on processes, we're gonna work on training, we're gonna work on the supply chain. And that those margins will build as we drive more volume through the, you know, through the facility. And that we don't think that that's a long-term, you know, issue. We think that, you know, you're gonna see an improvement, if not late this year, early next year. Yeah, you can always short term make something look better by just cutting costs.
But, you know, long term, you have to balance that with what your strategy is for the business.
Ken Hoexter (Analyst)
Wonderful. Thanks for the time.
Joe Pyne (Chairman, President, and CEO)
Thanks, Ken.
Operator (participant)
Our next question comes from Jack Atkins at Stephens. Please go ahead.
Jack Atkins (Analyst)
Good morning, guys, and thanks for taking my questions. So, I guess just to start off here, if we could maybe talk about any sort of inflationary costs that you may be seeing on the marine transportation side of the business. And I guess the rationale for the question is, I was a little bit surprised we didn't see some more strength on the incremental margin side, just given the accelerating pricing at coastal, and just sort of wondering, you know, if maybe you have some wage inflation or healthcare costs that are having an impact there.
Joe Pyne (Chairman, President, and CEO)
Yeah, Jack, you also have to weigh in that the offshore business, although higher margins, represent a greater percentage, so that's gonna affect the overall margins of the business. You, you understand what I'm saying?
Jack Atkins (Analyst)
Sure, sure.
Joe Pyne (Chairman, President, and CEO)
Yeah, as coastal margins rise, the overall margins will improve. I wouldn't read anything kind of into the small increase in margins, and it's also in the first quarter, which is weather affected.
Jack Atkins (Analyst)
Sure, sure.
David Grzebinski (EVP and CFO)
Yeah, if Jack, if you look at our first quarter margins in inland before the coastwise business, you'll note that the first quarter is always the lowest operating income margin. So some of that is what you're seeing here, too. Yeah.
Jack Atkins (Analyst)
Okay. Okay, absolutely. That makes a lot of sense. Then, you know, I guess, you know, just to follow up on the last question about the diesel engine side, just sort of curious if maybe we could get an update on the progress being made on some of the productivity improvements. You know, I know that we've kind of touched on improving margins sequentially there, but just, you know, I know that improving productivity on the land-based side of the diesel engine services business has been a focus, and just wondering if you guys have any updated metrics you'd be willing to share with us?
Joe Pyne (Chairman, President, and CEO)
Well, I don't want to, you know, quantify the improvement. I'll, I guess I'll qualify it. It, you know, we, we're very pleased with the time it now takes to move a frac unit that's being remanufactured from the time we receive it to the time it's ready to send out to the customer. Some of our most recent statistics are really excellent, but I want to, I wanna use the test of time to make sure that we're, you know, we're comfortable with those numbers. But we're, we have recently approached, in terms of, the time it takes to remanufacture a unit, our ultimate objective.
So we think that. And that's, you know, that a lot of things go into that. It's improving your supply chain, it's improving training, it's working with your customer to get him to respond to, you know, what he really wants done with the unit. Just a lot of things. And we feel very good about the direction, but just bear with us before we start throwing metrics out. We wanna make sure that they're correct before we put them out.
Jack Atkins (Analyst)
That's, that's completely understandable. Thanks again for the time, and, congratulations on a great quarter.
Joe Pyne (Chairman, President, and CEO)
Thanks, Jack.
Operator (participant)
Next question comes from John Barnes with RBC Capital Markets. Please go ahead. John Barnes, your line is now open to ask a question.
John Barnes (Analyst)
Sorry about that, guys. Having a technology issue. Hey, nice quarter. Just a couple of quick questions. Number one, on the inland barge side of the business, I know volumes obviously are very good. However, there's some discussion about ag volumes that may be because of the drought conditions that existed last year. There's not gonna be as much demand for fertilizer and that type of thing. Understanding that ag volumes are about 8%, I think, of your revenue, can you just talk a little bit about the outlook there? Is there any concern about, you know, that being a little bit weaker in the back half, and does that just create capacity for all the stuff that's growing right now?
Joe Pyne (Chairman, President, and CEO)
John, actually, the fertilizer volumes are about, you know, 3%-5% of what we carry.
You know, we're not, we're certainly not hearing anything. You wanna comment on that, Greg?
Greg Binion (President of Marine Transportation Group)
Yeah, the only thing I'd say, John, is recent rains that we talked about that's causing some of the flooding on the upper Mississippi is making the fields wet. And yeah, so there's, I think there's recently been some concern about are the farmers gonna be able to apply some of the fertilizer. So some of our business that we do in that section is time charter and long-term contracts, so we're really insulated from volumetric changes there. And the balance of it is really kind of seasonal, with really kind of strong spring and fall seasons and slower summer times, and we have that plugged into our forecast.
I don't think you're gonna see any surprises that we haven't anticipated in our forecast going forward.
John Barnes (Analyst)
Okay. All right. The second thing is, I just, you know, obviously with, you know, all of the growth, we've seen in things like crude by rail and crude by barge and things like that, you know, where do you think the current order book stands for liquid barges today? And are you concerned at all about any overbuilding in the inland barge business, given how good things have been, how robust pricing has been? Have you seen anything that gives you any concern at all on capacity coming into the market?
Joe Pyne (Chairman, President, and CEO)
Yeah, John, you know, I think you know that that's something that we watch carefully, and we're always concerned. But you know, based on what came in last year, it was absorbed, and there's still volumes that are going uncovered, so there is demand. But anytime you add, I think net, we think we added about 200 barges to the fleet last year. Anytime you add that number, you watch it carefully. You know, what we hope will happen is that with volumes you know, consistent and growing as if we do overbuild a little bit, you'll see it in utilization rates, and that will be an alarm bell, but the industry then will back off from building. But you know, you have to, this is a supply and demand game. We like to think that the service that we offer, the fact that we're very transparent and that safety is a very, very important component of what we do.
That combined with great flexibility and the ability to manage power and frankly barges, I think, more efficiently than our competition, that our utilization rates, when things turn down, are gonna be higher than the average utilization rates in the fleet. As you look at 2013, I think the order book is where, Greg?
Greg Binion (President of Marine Transportation Group)
About 260.
Joe Pyne (Chairman, President, and CEO)
About 260. So, you know, you're gonna retire, I would, I would think, around 100 barges, so you may add another 150, 175 barges this year. You know, right, you know, right now, every barge that we have delivered, we're the major builder, incidentally. I mean, we're, we're, we're building more barges than anybody, and, and we're still replacing a lot, so net-net, we don't add that much. But every barge that we get delivered, we immediately put into service.
John Barnes (Analyst)
All right, very good. Thanks for your time, guys. Congrats on all the new roles.
Greg Binion (President of Marine Transportation Group)
Thanks, John.
Joe Pyne (Chairman, President, and CEO)
Thank you.
Operator (participant)
Our next question comes from Chaz Jones with Wunderlich. Please go ahead.
Chaz Jones (Analyst)
Yeah. Hey, good morning, guys. Thanks for taking my questions. I was just wondering if we could maybe go back to the order book on the coastal side, and maybe if you could just remind us sort of what's the lead time on getting coastal assets? And maybe along those lines, how much single hull capacity is still slated to come out of the market?
David Grzebinski (EVP and CFO)
Yeah. Yeah, Chaz, this is David. It's... You know, if you were to put in an order now into a shipyard, you probably wouldn't get delivery until sometime mid-- sometime in 2015. So it, it's a long lead time. That's for the bigger units. You know, there are some very small coast-wise units that that can come out pretty quickly. But, it's the big units that are, the the big, the 100 to 150 that are in higher, higher demand right now. You know, it-- with that kind of lead time, it, it's gonna take a while. In terms of single skin, the, you know, we think it's still, you know, mid, mid-single digit in terms of percent or number that are in there.
But a good portion of those are the smaller capacity units. They do have to come out by the end of 2014. So that is a factor, but it is the smaller amounts of capacity that those are predominantly single skins.
Chaz Jones (Analyst)
But I guess, so the point is, that basically, over the next two years, there's really no capacity on the horizon that's slated to enter the market?
David Grzebinski (EVP and CFO)
Yeah. Yeah, I would say that's true, except for the, the, you know, the, the larger units that, the one larger unit that we know of that, that somebody may be building, but it's, it's, it's in a 250,000 barrels or, or larger class.
Chaz Jones (Analyst)
Okay. And then as a follow-up, just sticking with coastal, I know a lot of time has been spent on coastal. You know, mid-teens type margins here, they certainly have come up quickly. I think, if memory recalls, and correct me if I'm wrong, you guys have talked about, you know, that business maybe historically, you know, mid- to maybe higher teen-type margins as peak. Is there anything structurally that prevents you, let's say, over the next couple of years, of getting more to 20% type operating margins on coastal?
David Grzebinski (EVP and CFO)
No, and in fact, I think we fully would expect to be up into the low 20s in terms of margins with our structure.
Chaz Jones (Analyst)
Great. That's all I had, guys. Congratulations on a great quarter and echo everybody else's comments on your new roles.
David Grzebinski (EVP and CFO)
Thank you.
Joe Pyne (Chairman, President, and CEO)
Thanks, Chaz.
Operator (participant)
Next question comes from Kevin Sterling with BB&T Capital Markets. Please go ahead.
Kevin Sterling (Analyst)
Thank you. Good morning, gentlemen.
David Grzebinski (EVP and CFO)
Good morning.
Joe Pyne (Chairman, President, and CEO)
Good morning.
Kevin Sterling (Analyst)
And Joe, congratulations on your pending retirement. Joe and David, I'm hearing more and more instances of companies like Tesoro. They're building out coastal transloading facilities to service West Coast refiners, bringing Midwest Bakken crude oil, you know, by rail to the West Coast and then putting it on barge. And, you know, that's happening on the West Coast. Are those same type of opportunities happening on the East Coast and Gulf? Are you seeing those same dynamics as well in the coastal business?
David Grzebinski (EVP and CFO)
Yeah, you're hearing about some things being discussed, but more on the East Coast, it's about rail to, say, Albany or coming out of the Bakken and unit trains and getting over to Albany. There is some talk about reversing something called the Number 9 line that would take it into Portland, Maine, where you would go to a marine terminal and then move it down. But again, a lot of that's talk. It's... I think, you know, this Tesoro joint venture that was recently announced is, I think the West Coast is moving a little faster than the East Coast on building marine terminals and offloading facilities. But that said, you know, all the unit trains to Albany has been going on for a while, and that continues to do well. And that is a marine movement once it gets to Albany.
Joe Pyne (Chairman, President, and CEO)
Yeah, there's also some inland terminals being built, too. So water transportation is gonna be a key component to getting shale liquids, crude oil, and natural gas condensate to where they can be processed.
David Grzebinski (EVP and CFO)
And I would add that there's also some pipeline connectivity from Eagle Ford to the Corpus Christi area that supports marine transportation movements as well.
Kevin Sterling (Analyst)
Right. That was a great—that's a great follow-up, because that's gonna be my next question. You get a lot of talk about the coastal business because I'm, I'm hearing there's more and more kind of inland barging business. I've, I've heard there are between 250 to 300 inland barges moving crude alone. Are you guys seeing those type of numbers on the inland business?
Joe Pyne (Chairman, President, and CEO)
That may be right now. You know, we’ve been saying two to 250, I think, and we’re adding a little capacity. So that sounds about right.
Kevin Sterling (Analyst)
Okay, well, great. Really appreciate your time this morning. Like everyone else said, congratulations on the pending changes. Joe, once again, congratulations on an upcoming retirement.
Joe Pyne (Chairman, President, and CEO)
Well, thank you. I'm, I'm hopefully not completely retired. I'm gonna be an active chairman for a while.
Operator (participant)
Our last question comes from Matt Young with Morningstar. Please go ahead.
Matthew Young (Analyst)
Good morning, guys. Thanks for taking my question. I think, most of my questions have been answered. But just to follow up quickly on the coastal cross-selling topic, perhaps you could provide just a general idea of the mix or the percentage of inland customers that have coastal cargo requirements. Are we talking maybe a quarter, half? Just to get an idea of that magnitude.
Joe Pyne (Chairman, President, and CEO)
That's a great question. I'm not sure we know the answer. I think, you know, certainly almost all the majors have both inland and coastal requirements. And, you know, many of the chemical companies, frankly, have them, too. As we're working, for example, Dow Chemical, both coastal and inland, Lyondell, both coastal and inland, and others. So, I just don't know what the percentage is, but a lot of them-
Matthew Young (Analyst)
It's pretty broad.
Joe Pyne (Chairman, President, and CEO)
Yeah, have both types of requirements.
Matthew Young (Analyst)
Great, thanks. And then just a quick follow-up on United's manufacturing. I think in the last quarter, the previous release, you had said something about some deferred business or some equipment orders that were deferred that you thought might provide a boost to the second quarter or the second half of this year. Is that? Are you still expecting that?
Joe Pyne (Chairman, President, and CEO)
Yeah. Yeah, yes, we are. This was equipment that was anticipated in the fourth quarter that was moved into 2013. So, we do expect to see some of it in 2013.
Matthew Young (Analyst)
Okay, great. That's all I had. Thanks.
Operator (participant)
That concludes the question and answer session. I'll turn it back to the speakers for final remarks.
Steve Holcomb (VP of Investor Relations)
We appreciate your interest in Kirby and for participating in our call. If you have any additional questions, please give me a call. My direct dial number is 713-435-1135. We wish you a good day.
Operator (participant)
Thank you, ladies and gentlemen. That concludes today's conference. Thank you for participating. You may now disconnect.