Kirby - Q1 2014
May 1, 2014
Transcript
Operator (participant)
Hello, and welcome to the Kirby Corporation 2014 first quarter earnings conference call. My name is Daniel, and I'll be your operator for today's call. 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 will now turn the call over to Steve Holcomb. Mr. Holcomb, you may begin.
Steve Holcomb (Head of Investor Relations)
Thank you for joining us this morning. With Sterling Adlakha and myself are Joe Pyne, Kirby's Chairman, David Grzebinski, Kirby's President and Chief Executive Officer, and Andy Smith, our Executive Vice President and Chief Financial Officer. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at kirbycorp.com in the investor relations section under non-GAAP financial data. Statements contained in this 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 Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission. I will now turn the call over to Joe.
Joe Pyne (Chairman)
Thank you. Thank you, Steve. Yesterday afternoon, we announced record first-quarter earnings of $1.09 per share. These results included a $0.03 per share of severance charges and an estimated $0.03 per share earnings impact from the result of weather and insurance deductible costs. But they still fell well within our published range of $1.05-$1.15 per share given in January. This compares with $1 per share reported in the 2013 first quarter, a quarter that included a $0.05 per share benefit for the reduction of the earn-out liability associated with the acquisition of United Holdings in April of 2011.
During the quarter, our inland and coastal tank barge fleets continued to experience healthy levels of demand across all their markets, high equipment utilization, and favorable pricing trends. We did experience higher than anticipated delays in our inland marine operations caused by weather in the Midwest, which persisted longer than we had estimated in our first-quarter guidance. Severe ice conditions restricted our movements on the upper inland river system and extended beyond which, you know, what is typically expected for most years. We also saw greater than normal delays in our inland business along the Gulf Coast because of winter weather systems. With respect to the coastal marine operations, they were also impacted by weather.
The cold weather in the Northeast did provide some offsetting benefit in the form of higher heating oil volumes, transported in the Northeast. With respect to our land-based diesel engine market, it showed modest signs of improvement during the quarter. We think this market will continue to improve this year, and we should see a more material recovery in this business later this year. With the change in roles at Kirby, the cadence of our earnings call will change slightly. David will discuss our quarterly results and provide more detail on our marine transportation and diesel engine service markets. Andy will then provide the financial update. After Andy's comments, David will conclude with some comments about our 2014 second quarter, and then full-year outlook.
Before I turn the call over to David, I do want to comment both on our succession plan and the incident that involved a Kirby vessel that occurred in the Houston Ship Channel on March 22. With respect to the succession plan, last night, we announced the board's election of David Grzebinski as our President and Chief Executive Officer and his election as a Kirby director. When we announced the plan to transition that role in April of last year, when we first announced it, I am very pleased that the board chose David. I plan to continue to stay as an active chairman of the board and look forward to working with David in his new role.
We also intend to transition the principal investor relations role for Kirby from Steve Holcomb to Sterling Adlakha this year. Steve has worked for Kirby for 41 years and has done a superb job heading our IR effort. Steve will remain with Kirby, helping with our SEC filings and ensuring a smooth transition. With respect to the very unfortunate incident and spill that involved the Miss Susan on March 22, we're very grateful for the high level of cooperation and coordination shown by federal, state, and local agencies and the US Coast Guard in the cleanup efforts. Under the pollution laws of the United States, as Kirby owned the barge carrying the product, we're required to pay for the cleanup, which has gone very well. As of today, the cleanup effort is essentially complete.
We will, in coordination with all these agencies, continue to monitor the affected areas for any lingering effects, and we'll respond accordingly, but we don't expect there'll be much left. The cause of the accident is still unknown. The Coast Guard and the National Transportation Safety Board are in the process of carrying out their investigation, and there is no time limit set for its completion. With respect to the financial impact, we have reserved $100 million on our balance sheet for the claim. Aside from the $1 million deductible, we expect our insurers to reimburse us for all these costs. As a company, we carry $1 billion of insurance for pollution and liability exposures. I'll now turn the call over to David.
David Grzebinski (President and CEO)
All right. Thank you, Joe, and good morning. Let me first say that it is both an honor to be elected by the board as Kirby's CEO and an immense challenge to follow in the footsteps of such a great leader as Joe Pyne. I'm, I'm very grateful for the opportunity to be Kirby's CEO, and I look forward to continuing to work with Joe as Executive Chairman. During Joe's almost 20-year tenure as CEO, Kirby has compounded its earnings at greater than 15%-- 15% per year, and the stock price has increased to over 1,144%, compounding at approximately the same rate as the earnings. Joe's leadership has been truly remarkable, and it's comforting to know that he'll still be around as our chairman. Now I'll turn to our marine transportation business.
During our first quarter, the inland marine transportation sector continued its overall strong performance with equipment utilization in the 90%-95% range and favorable term and spot contract pricing. As Joe mentioned, we did experience high delay days during the quarter, which was primarily a result of the heavy winter weather that created freezing temperatures on the Upper Ohio River, Illinois River, and Upper Mississippi River. We also experienced, as Joe mentioned, numerous frontal systems along the Gulf Coast with high winds and fog. So delay days totaled almost 2,900 days, which was over 40% higher than the roughly 2,000 delays reported in the first quarter of last year in 2013. Most of the poor weather that we experienced on the Mississippi River system in the quarter subsided by late March.
However, frontal systems bringing fog and high wind to the Gulf Coast did continue to negatively impact our Gulf Coast operations through the end of April. However, at this time, operating conditions throughout most of the river system and on the Gulf Coast are favorable. For the first quarter, inland transportation revenues from our long-term contracts, that is, contracts greater than one year or longer, were about 80% of revenue, with 57% from time charters and 43% from contracts of affreightment. The increase in term contracts as a percent of revenue from last year is a direct result of a decrease in spot contract moves resulting from the difficult weather, as more equipment was required to meet the term contract volumes.
Going forward, we expect the percentage of term and spot contract revenue to trend back to the 75/25% level, which was consistent with 2013. Inland marine transportation term contracts that renewed during the first quarter increased in the low- to mid-single-digit level when compared to the first quarter a year ago, and spot contract rates, which include the price of fuel, increased modestly compared with the fourth quarter, and they still remain above contract rates, which is consistent with what we experienced through 2013. Our coastal marine transportation sector also continued to perform well, with utilization in the 90%-95% range, which is above the 90% range we saw through most of 2013.
And during the first quarter, approximately 80% of the coastal revenues were under term contracts, compared with 60% for the 2013 first quarter and 75% for the 2013 fourth quarter. All the coastal product markets remain strong, and last night we announced the board of directors has approved the exercise of our option to construct a second 185,000-barrel coastal tank barge and tugboat unit on the West Coast. And the estimated progress payments for this additional unit are included in our updated capital expenditure guidance. In addition, the board also approved the construction of two new 255,000-barrel coastal ATBs and tank barge and tugboat units.
The cost of these units will depend on our discussions with customers, horsepower size, market conditions, and steel prices, and at the time when we enter into shipyard contracts. We expect to have those vessels under contract prior to their delivery, and we expect the total cost to construct both ATBs to be in the range of $125 million-$145 million. The bulk of the cash expenditures for these two additional vessels is expected to be in 2015, with delivery dates somewhere in the mid-2016 range.
With respect to coastal marine transportation pricing, term contracts that renewed during the first quarter increased in the high single-digit range, when compared to the first quarter a year ago, and spot contract rates, which again, include the price of fuel, continued to improve during the quarter and remained above term contract rates. Moving to the diesel engine services segment, the first quarter reflected positive results across most of the end markets. In our marine diesel and power generation markets, demand was generally stable. However, there was some improvement in the Midwest, East Coast, and Gulf Coast marine markets. The land-based diesel engine business services market benefited from an increase in both the demand for oil field equipment and the demand for service.
We did sell a small number of new pressure pumping units in the quarter, and we're seeing heightened demand for remanufacturing. So we're cautiously optimistic that demand will continue to improve in 2014, and that there will be a more sustainable improvement in, in this business, the land-based business, by the end of this year or early next year. I will now turn the call over to Andy for some detailed financial information, and then I'll come back and discuss the outlook.
Andy Smith (EVP and CFO)
Thanks, David, and good morning. In total, marine transportation segment revenues grew 4%, and operating income grew 9% as compared with the 2013 first quarter. The inland sector contributed approximately 70% of the first quarter marine transportation revenue, and the coastal sector, approximately 30%. Our inland sector generated a first quarter operating margin in the mid-20% range, while the coastal sector operating margin for the first quarter was in the high teens, compared to a mid-teens margin for the 2013 first quarter. Overall, the marine transportation segment's first quarter operating margin was 22.4%, compared with 21.3% for the 2013 first quarter.
With respect to inland tank barge capacity, during the 2014 first quarter, we took delivery of 27 new tank barges, totaling approximately 290,000 barrels of capacity, and retired 10 tank barges, removing approximately 135,000 barrels of capacity. The net result was an addition of 17 tank barges to our fleet and an increase to our inland capacity of 155,000 barrels, bringing our total inland tank barge capacity to 17.4 million barrels. Our previously announced 2014 inland transportation construction program, including those barges that delivered in the first quarter, is expected to consist of 66 inland tank barges with a total capacity of approximately 1.2 million barrels.
Currently, we expect to finish 2014 with approximately 18.1 million barrels of capacity, or 700,000 barrels above our current 17.4 million barrel capacity level. Moving on to our diesel engine services business, revenues for the 2014 first quarter increased 9%, while operating income was down 9% compared with the 2013 first quarter. In 2013, we had a $4.3 million benefit to operating income from adjusting the earn-out for United Holdings. Adjusting for the effect of the earn-out benefit in 2013, operating income was up approximately 30% quarter-over-quarter. The segment's operating margin was 8.3%, compared with 10% for the 2013 first quarter, or 6.9% excluding the earn-out benefit.
Our land-based operations contributed approximately 60% of the diesel engine services segment's revenue and swung to profitability this quarter with a low to mid-single digit operating margin. As David mentioned, we are seeing real signs of improvement in our land-based operations, with a pickup in the sale of engines and transmissions, parts and service, as well as the sale of some new pressure pumping units. Remanufacturing demand, while slow in the first half of the quarter, increased in the last month of the quarter. We continue to expect more meaningful improvement later in the year or early in 2015. The marine and power generation operations contributed approximately 40% of the diesel engine services revenue, with an operating margin in the mid-teens range.
On the corporate side of things, we continued to pay down our debt during the 2014 first quarter, thanks to continued strong cash flow. Our 2014 capital spending guidance is currently in the $320 million-$330 million range, including approximately $135 million for the construction of 66 inland tank barges and 1 inland towboat, approximately $55 million in progress payments on the construction of a 185,000-barrel ATB, scheduled to be in service in mid- to late 2015, and approximately $25 million dollars and progress payments on the second 185,000-barrel ATB to be placed in service in the first half of 2016.
The balance of $105 million-$115 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities, as well as diesel engine service facilities. Total debt as of March 31st was $708 million, a $41 million reduction from our total debt of $749 million as of December 31st, 2013. Our debt-to-cap ratio fell to 25.3% as of March 31st, compared with 27% as of December 31st, 2013. At March 31st, we had no outstanding borrowings under our revolving credit agreement, compared with $41 million as of December 31st, 2013.
This morning, our total debt outstanding was $695 million, as compared to $13 million, a reduction, I'm sorry, of $13 million since the end of March. I'll now turn the call back over to David.
David Grzebinski (President and CEO)
Thank you, Andy. Let me talk a little bit about the outlook. In our press release, we announced our 2014 second quarter guidance of $1.25-$1.35 per share. This compares with $1.11 per share earned in the second quarter of last year, and that quarter included $0.07 per share benefit due to the reduction of the United earn-out liability. For the 2014 year, we raised our guidance to $4.80-$5 per share, compared with $4.44 in 2013. Remember also that the 2013 earnings included $0.20 per share benefit due to the elimination of the United earn-out. Our second quarter guidance assumes a modest improvement in pricing for our inland marine transportation markets, with normal improvement in seasonal weather patterns.
It also assumes a continued strong coastal market with higher term and spot contract pricing. For our diesel engine services group, we are cautiously optimistic that we have seen the bottom of the cycle for our land-based market and should see improvement continuing throughout 2014. Our second quarter guidance also assumes our diesel engine services, marine, and power generation markets will remain stable. The primary difference in our 2014 second quarter $25 low end and $35 high-end guidance range is related to different assumptions regarding seasonal weather conditions on both our inland and coastal marine transportation markets and the level of improvement in our land-based diesel engine services market.
For our full year 2014 guidance of $4.80-$5 per share, the primary drivers between our low end and high end include the potential improvement of the land-based diesel engine services market and utilization and operating conditions for our marine business. In summary, the year has begun on very solid footing, with 2014 forecast to be our fourth consecutive year of record operating results. Our balance sheet is strong. Our excellent cash flow allows us to continue to build new inland and coastal equipment, as well as to continue to pay down debt, and we still remain optimistic for potential acquisitions. So with that, I'd like to turn the call over to questions. Operator, can you open the line?
Operator (participant)
Yes, of course. We will now begin the question-and-answer session. If you have a question, please press star then one on your touchtone 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. Once again, if you have a question, please press star then one on your touchtone phone. And if you would, please limit yourself to one question and one follow-up question, that would be greatly appreciated. And I have a question from Jack Atkins from Stephens.
Jack Atkins (Analyst)
Great. Good morning, guys. Thanks so much for the time. So, I guess just to start off with, David, to go back to your last point on the M&A environment, you know. Just curious to get a sense for how you see that today. Clearly, demand is robust across most of your business lines and improving in, you know, in the diesel engine business. Are you still seeing M&A opportunities that, you know, you would say are at reasonable prices? And if you don't see those opportunities out there, you know, how do you think about managing the balance sheet in terms of deleveraging versus returning cash to shareholders?
David Grzebinski (President and CEO)
Yeah. No. So thanks, Jack. Yeah, as you know, and as you stated, the market's pretty good right now. Demand's high and looks like it's going to be that way for a while. So price expectations of sellers are pretty, you know, they're more likely to not meet our return hurdles if we paid the full price that they might be asking. So, but you never know. As you know, a lot of our potential acquisitions have unique situations. They could be sole proprietors and whatnot. But price expectations of sellers is clearly up, given the strong demand. So the likelihood of an acquisition is probably not as high as we'd like, but there's always possibilities out there. That said...
You know, in the absence of acquisitions, we're what you see us doing is building some capacity, you know, and we've talked to you about this before. There's times to build capacity. There's times to do acquisitions. There's times to delever, and then there's times to buy back your stock. And clearly, we're in at that time, where we believe it's time to build capacity, and you see us building both inland and coastwise capacity. That said, we're, you know, constantly talking to the board about potential dividend, and we'll continue to evaluate that. But right now, we think we've got some good uses for our cash.
Jack Atkins (Analyst)
Okay, great. Thank you, David. And then as a follow-up, just curious to get a little bit more color on the improving fundamentals within the diesel engine services business on the land side. I think that business took a nice step forward in the first quarter. You know, just curious to know what your customers are telling you about their plans and expectations for the remainder of the year. And, you know, how do you think about capacity within that business, and would you look to selectively add some capacity if demand continues to improve?
David Grzebinski (President and CEO)
Yeah. No, it clearly, we've come off the bottoms that we saw last year. You know, the diesel, the land-based diesel engine business, improved from kind of a modest, slight loss last year in the last few quarters to a mid- to low-single-digit operating margins this quarter. As we said, that there's some increased demand for service and parts and equipment, as well as, as you heard, some new frack units we sold. We continue to see that building. Our inquiry level is up considerably. The customers are quite constructive about their needs and desires going forward. I think from our perspective, we've got to get the margins up. You know, pricing is still depressed, and we've got some work to do there.
So, that's going to take some time to play out, but that's going to be our focus here in this year.
Jack Atkins (Analyst)
Okay.
David Grzebinski (President and CEO)
Try and get those margins up to where we think they need to be.
Jack Atkins (Analyst)
Great, David. Thanks so much for the time.
Operator (participant)
Okay, I have a question from Michael Webber from Wells Fargo. Michael, please go ahead.
Michael Webber (Analyst)
Hey, good morning, guys. Again, congrats to David and Andy and everybody for their new roles.
David Grzebinski (President and CEO)
Thank you. Thanks.
Michael Webber (Analyst)
Thanks. I wanted to just stay on coastal. And David, in your remarks, I believe you gave a range to those two ATBs that just got board approval at, I think, $125 million-$145 million in total. And I think, you know, that they would come in a bit cheaper than the previous two, I guess, the one that's under construction and the one you just bought. Is that a function of the fact that they're a bit smaller, or is that you guys getting a bit more scale with the order and exercising those options?
Then, if you can talk a bit about the kind of contract tenor that your clients are discussing and the kind of geography in terms of where you think those will end up trading.
David Grzebinski (President and CEO)
Sure. Yeah, no, the first two that we... Well, the first one we announced was 185,000 barrels, so it's, you know, it's a little bit bigger than the 155. So there, there's a price difference there. And a big, big driver in price differences is certainly horsepower, right?
Michael Webber (Analyst)
Right.
David Grzebinski (President and CEO)
The 185 requires a higher horsepower, and horsepower costs are high. So the size is probably the biggest differentiation there. But, the range really depends on the customer requirements and the horsepower. I mean, there's horsepower differences that you can use for the 155. You could use a 6,000 horsepower and 8,000 horsepower, so that's why we have a range there. A lot depends also on where we end up with final customer requirements, because there are certain things you can do to the barge to meet certain customer needs. You know, initially, the 185s are on the West Coast. We're building them out there at Gunderson, as you know. You know, the other two barges, that's yet to be determined. We're in discussions with customers now, about that.
So it's a little premature to share with you where they might be working and for who. Well, we wouldn't want to comment on for who anyway.
Michael Webber (Analyst)
Sure.
David Grzebinski (President and CEO)
You know, hopefully, that gives you a flavor of it.
Michael Webber (Analyst)
No, no, that's helpful. And then just to kind of follow up on that, you touched on this a bit, but I kind of wanted to expand on it. You mentioned obviously asset values are pretty high here, and you commented on that in your M&A discussion. But just where are returns right now on newer, larger scale coastal assets? And if you think about kind of incrementally where we could go from here, I mean, I would assume that pricing has ticked up to the point that you guys feel comfortable stepping into new builds again. But from here, how much incremental upside do you think you could see to asset values and/or to pricing?
David Grzebinski (President and CEO)
Yeah. Well, we continue to see. Well, first, let me address that we fully expect to get our 12% after-tax return on our vessels.
Michael Webber (Analyst)
Okay
David Grzebinski (President and CEO)
The new build. So, but we continue to see, you know, high single-digit price increases on the coastwise business. If you think about it, we're seeing pretty strong demand, you know, increasing demand in product moves, across the business. You've got a supply, if you think about the fleet and the coastwise business,... you know, in our market, which we think about the barges less than 200,000 barrels, there's about 265 barges, and a good 45 of those are older than 30 years old. So, you know, we can see supply come out just from that. So it's a long-winded way of saying, you know, we would expect the, you know, the pricing and the market dynamics to remain in place for a while.
Great. That's helpful. Thanks for the time, Gus.
Operator (participant)
I have a question from John Chappell from Evercore. John, please go ahead.
John Chappell (Analyst)
Thank you. Good morning.
David Grzebinski (President and CEO)
Good morning.
John Chappell (Analyst)
David, on the diesel, diesel engine services part, the kind of a little bit of renewed optimism for the end of this year and into 2015. Just trying to decipher how much of that has to do with kind of the transition that you've been speaking about over the years to the remanufacturing side of the business. And you mentioned that you needed to get the prices up in the land base, and I assume that was for the OEM. But seems like the slow transition may be finally starting to occur, and how much of the optimism is associated with that?
David Grzebinski (President and CEO)
Yeah, I mean, it's a mixture of both reman and new equipment, certainly service and parts, too. There's, you know, spare parts and service are increasing with the age of this fleet. So, you know, it's a mixture of both. I wouldn't say it's being led by reman. You know, clearly, we're still it's still very early days in reman, and our focus has been to get our capacity and throughput up on that and to get the remans to proceed quicker through our facility. But it's still developing, and it's still early days, but I would say the improvement is across all parts of the land-based business, whether it's parts, service, reman, and some new OEM equipment.
John Chappell (Analyst)
Okay. That helps. And then, as my follow-up, just on the inland business, the pricing. You'd mentioned, and this is going to sound like nitpicking, but, hear me out. You mentioned the the pricing, the term contracts is up low to mid-single digits, and the spot price is up, I wrote down modestly. Seems like maybe that's a little bit lower than some of the ranges you've given in, in previous calls. Is the strength in that core business kind of plateauing a little bit? I know you've spoken about the the risk of eventually overbuilding this market. Are you starting to see the capacity start to catch up with the demand a little bit, or are we still a little bit ways away from that?
David Grzebinski (President and CEO)
No, we think we're a ways from that. You know, every-- we're still running 90%-95%, essentially fully utilized. And, you know, every new barge that comes out of the shipyard is immediately put to work. So, you know, renewals ebb and flow. You have, we don't renew all the contracts, you know, all at once at one period of the year, so they ebb and flow. And, you know, I wouldn't read anything into that. We're still very very positive. Well, as you saw us building 29 new 30,000-barrel barges, it looks like things are good for a while.
John Chappell (Analyst)
Great. All right, I appreciate it. Thanks, David.
David Grzebinski (President and CEO)
Thank you, John.
Operator (participant)
I have a question from Ken Hoexter from Bank of America. Ken, please go ahead.
Ken Hoexter (Analyst)
Yeah. Hi, guys. This is actually Sean Collins on Ken's team. Good morning.
David Grzebinski (President and CEO)
Good morning, Sean.
Ken Hoexter (Analyst)
And you know, your business is obviously doing very well, and you're experiencing strong demand. Can you comment on what you're seeing on the domestic economy side? Obviously, first quarter weather slowed things down, but if you had to normalize for that, how does the economy look out there?
David Grzebinski (President and CEO)
Yeah, but, you know, we're kind of in this shale gas and liquid renaissance. So we're a little... We're benefiting from that, and I would say almost in spite of the economy. The economy is still a little tepid. When you think about, and particularly in our coastwise business, a good part of what we move is refined products. And refined products are really, you know, gas, diesel, gasoline, jet. And, you know, those volumes are up, and demand's up, but it's not, you know, what you would have expected and hoped from the economy. If the economy really gets going again, we could see even more demand, from our perspective, both on the refined product side and then the asphalt.
Some of what we move coastwise is asphalt, which is driven by, you know, home building and road construction and whatnot. So, you know, the economy's kind of mixed from our perspective, but we're benefiting from this shale gas and oil renaissance, more than anything else.
Ken Hoexter (Analyst)
Okay. That's great. That's helpful. Thank you. So you, you know, estimate that the weather cost you $0.03 in the quarter. Can you just... You know, so I guess that's, it's almost $2 million. Can you just talk a bit about what's in that number and how that worked out?
David Grzebinski (President and CEO)
Yeah, so what, you know, we said 3 cents, I think, but which would be closer to $3 million than $2 million. But yeah, when weather gets tough, what happens is you slow down. You can't move. And part of what we do on the inland side is we have time charters, which is 57%, but then 43% are contracts of affreightment, and contracts of affreightment, just to simplify it, might be where we get paid x dollars to move from point A to point B. And then when weather comes, those contracts of affreightment slow down. You're not as efficient. You've got to go slower. You may get delayed by fog. So that really is what impacts you.
And then you may also, you know, have to add horsepower, depending on the situation. You move slower, particularly in the ice conditions on the upper river system. We had to move a lot slower and add, add some, some horsepower there. So The ice, believe it or not, beats up the, the, the boats and barges, and so we had a little bit of extra maintenance expense to, to repair, some of that equipment that got beat up by ice. So it's, it's a, it's a mixture of things, and I don't know whether that answers your question, Sean, but it, it's hard to be more specific than that.
Ken Hoexter (Analyst)
No, that's helpful insight. I appreciate it. Okay. Thank you very much, guys.
David Grzebinski (President and CEO)
Thank you, Sean.
Operator (participant)
I have a question from Gregory Lewis from Credit Suisse. Gregory?
Gregory Lewis (Analyst)
Hi. Thank you, and good morning, and, and congratulations on a great quarter.
David Grzebinski (President and CEO)
Thanks.
Gregory Lewis (Analyst)
Dave, I guess my first question is related to in mid-March, you announced that you were going to, you know, go back and order more inland barges. I guess of those 29 inland barges, I guess it looks like 18 of those were from shipyard contracts from another operator that were, I guess, not exercised. Is that what happened? Could you explain a little bit the genesis behind, you know, that order being placed?
David Grzebinski (President and CEO)
Yeah. No, we had a competitor that, to use a phrase, got out a little over his skis, and it was really about being able to handle those additional barges from a crewing and boat standpoint. And at first, he wanted us to charter those barges from him, and of course, we didn't want to do that. We'd rather own them outright. So it was a win-win for us. We were able to keep the capacity coming into the market from a competitor and get the capacity ourselves. So we basically stepped into that gentleman's contract with the shipyard.
Gregory Lewis (Analyst)
Okay. Wow, great. That seems really good. And then just real quick on the pressure pumping or the DES business. When we think about, I guess, two years ago, when I believe it was, a new unit cost about $1 million, and a remanufactured unit cost, I think you were quoting $500,000-$600,000. In terms of pricing, as we look right now, is that kind of where the rate? Is that kind of where pricing is? Is it sort of up from that, those levels, down from those levels, sort of as we come out of the cycle?
David Grzebinski (President and CEO)
Yeah, I, I think, you know, pricing is, is so much customer dependent and, and equipment option dependent, as you, as you might imagine, and particularly on reman, you, you just never know what, what you have to do. But I would just say this: the pricing is not where it needs to be. It, it's lower than it is, and, and, and you see that in our margins. We, we do need to push some pricing up, going forward. So, yeah, and you would expect that coming out of the bottom of the cycle, which I think is the nature of your question.
Gregory Lewis (Analyst)
Okay, guys. Thank you very much for the time.
David Grzebinski (President and CEO)
Thank you, Greg.
Operator (participant)
Okay, I have a question from Kevin Sterling from BB&T Capital.
Kevin Sterling (Analyst)
Hey, good morning, guys. It's actually William Horner on for Kevin.
David Grzebinski (President and CEO)
Good morning, William.
Kevin Sterling (Analyst)
David, going back to the coastal business for a second, and I appreciate the color you gave on the supply side, but more focusing on utilization, which, as you noted, ticked up a bit this quarter, despite some of the challenges from the weather. Kind of given the current market conditions, how much higher do you think utilization can go?
David Grzebinski (President and CEO)
Yeah, it's similar to the inland. You know, 90%-95%, you're essentially fully utilized. So it -- we're, you know, coastwise, because coastwise has some time charter, more time charter, it's 80% time charter, you can get a little better, but, effectively, full utilization is 95%.
Kevin Sterling (Analyst)
Okay. Thanks. I appreciate that. And from a follow-up with the drawdown of crude at Cushing in recent months and with the resulting supply glut in the Gulf Coast, are you seeing any direct impacts to your either inland or coastal volumes down there as a result of the supply glut?
David Grzebinski (President and CEO)
No, I don't think so. No, we haven't seen that.
Kevin Sterling (Analyst)
Okay. All right, thanks.
David Grzebinski (President and CEO)
All right. Thank you, William.
Operator (participant)
Okay, I have John Mintz from FBR Capital Markets. John, please go ahead.
Chris Carey (Analyst)
Hi, guys. This is Chris Carey on for John. I just want to get back to the diesel business. You know, we've been expecting some improvement there for a long time, and you know, this quarter was certainly a step in the right direction. But I'm just kind of wondering how you guys think about trends tracking the potential development of that business. Is it really just a function of, you know, order inquiries, pricing inquiries? Or is there sort of a measuring stick that you guys use to kind of gauge the outlook in that business beyond those inquiries which I mentioned?
David Grzebinski (President and CEO)
Yeah. You know, just external gauges that we look at, certainly the land-based rig count and horizontal rig count we look at, and that gives you some indication. The other thing we look at a lot is you can see the pressure. The public company oil service companies that have pressure pumping exposure, they'll often talk about their North American land business and where their pressure pumping margins are going. And you can see in recent announcements that things are improving. And you know, once their margins start improving, they get a lot more constructive with their capital spending and their maintenance and repair budgets. So that's the kind of a external indicator that we look at.
Chris Carey (Analyst)
Okay. Yeah, that's, that's helpful. And then, you know, on the margin progression in that business, you know, given what you just said, I mean, do you think about, you know, possible margin expansion in that business more on the pricing side, given that it is quite low currently? Or are there still kind of operational efficiency improvements that you can make within that business to kind of squeeze out additional margins?
David Grzebinski (President and CEO)
Yeah. Good question. You know, our margins, as we said this quarter, were low to mid-single digits. We think kind of on the OEM side, the assembly and manufacturing side, we should have high single-digit margins. And on the repair and service side should be mid-teen kind of operating margins. And to get there, we're going to need a couple things. Pricing is certainly one aspect, but we also need more volume helps, right? I mean, you get more fixed cost spread, and certainly our throughput could help. So it's a combination of all, but you know, pricing would certainly be one thing that could help a lot as volume increases as well.
Chris Carey (Analyst)
Right. Right, that makes sense. And then, you know, just as my follow-up, and I know it's been touched on a couple of times here. But, you know, when we're thinking about how to model kind of the barrel additions and the net barge additions in the year, I think, you know, correct me if I'm wrong, but I think I heard kind of like 18.1 million barrels is the goal for the full year. Is that correct? Okay. So when we're thinking about kind of the progression, I mean, is that, you know, about 230,000 barrels a quarter, or, you know, is it a little lumpier than that?
David Grzebinski (President and CEO)
Yeah. No, it is very much back-end loaded. You know, when we took, we got the Trinity shipyard contract, and assumed that position from the other competitor, that was late in the year. You know, they were pretty much sold out for most of the year, so we kind of finished off the year for Trinity. So it's back-end loaded. It'll be kind of late in the year.
Chris Carey (Analyst)
Okay. Okay, and you expect kind of net additions to kind of track that same sort of progression? I mean, you know, with the first quarter, what, about 17, but I think we're looking at 66 for full year, if I'm not mistaken there. So on, on kind of the net additions to the fleet, are we thinking about it? It'll track kind of the volume, the barrel volume progression as well, as far as being a bit more back-end loaded?
David Grzebinski (President and CEO)
Yeah. Yeah. Yes.
Chris Carey (Analyst)
Okay. Okay. No, that's all the questions I had. Great quarter. Thank you.
David Grzebinski (President and CEO)
Thank you, Chris.
Operator (participant)
Following question comes from David Beard from Iberia. David, please go ahead.
Good morning, gentlemen.
David Grzebinski (President and CEO)
Good morning, David.
David Beard (Analyst)
You know, I was wondering if you could just look out into 2015 and 2016 relative to capacity additions. You know, you've been in the inland side, mostly you've been taking 58, 66 barges and kind of keeping your market share relative to capacity, and you've brought your fleet age down. Do you think you'll kind of stick within that sixty-ish new barge orders for the next two, three years? Or is there a point where you got the fleet age to where you want, and you'd bring that number down and let other guys take capacity, or how do you think about that?
David Grzebinski (President and CEO)
Yeah, well, I don't think... We haven't declared yet. I don't know that we'll build at that level going forward, but, you know, we're still thinking through that, and as the year develops and as we... You know, one of the things that's happening, well, inland, you know, we move a lot of chemicals, and one of the things we're assessing and watching carefully is all the new construction that's been announced in the chemical space, and how that plays out. You know, those big chemical facilities take a while. They can take years to just permit, so a lot of that capacity may not come on until 2016, 2017.
We're going to watch and see how that develops, and it'll be a dynamic decision process as that develops.
David Beard (Analyst)
Okay. And maybe, you know, you guys have usually been pretty countercyclical in terms of investing, which would, you know, tell me at some point in time, you'd put less money in inland barges, I guess, with the caveat that the mix could shift towards chemicals. Is, is that still your approach as we look out over deliveries for 2015, 2016, 2017?
David Grzebinski (President and CEO)
Yeah. You know, we're, I mean, you, you know us well, David, that we're very return on capital focused, and we look at the life of the asset and what it can earn through its life and make sure that we can get our returns. So, you know, the cycle plays into that. But, you know, what we're seeing now is this, this is this cycle is a little longer than most, and it continues to develop. So it's really hard to declare any more than that at this point.
David Beard (Analyst)
Well, no, helpful. I appreciate the call. Thank you.
David Grzebinski (President and CEO)
All right. Thanks, David.
Operator (participant)
The following question comes from Nick Bender. Nick, please go ahead.
Hey, good morning, gentlemen. Congratulations on the quarter and the new appointments. I wanted to come at the capacity discussion one more time. Can you give us a little bit of a sense of, you know, with the contracts that you've entered into, both on the inland side and on the coastal side, what you're seeing at shipyards, what the order book looks like currently, and sort of how you feel about that capacity dynamic, sitting here in, you know, the beginning of 2014 and looking out to the future?
David Grzebinski (President and CEO)
Yeah, let me break that into—well, first, good morning, Nick. Let me break that into two, to the two segments, the inland and the coastwise. On the inland side, you know, Trinity and Jeffboat are the largest, the two largest inland shipyards. And, you know, Trinity is sold out for this year, from our knowledge. And, so that kind of puts a cap on the capacity that will come in. I think Jeffboat focuses on, you know, they're owned by American Commercial Lines, ACL, and, you know, they focus primarily on their own equipment. So it feels like the shipyards are sold out for this year on the inland side. I think they're developing their order book for next year.
So it feels like, you know, there's not a lot of extra capacity that could come in in the near term. On the coastwise business, you know, it's still early days. There's any number of shipyards out there. You know, we've announced our units, our 4 units. You know, there's a couple other of our competitors that announced 1 or 2. So it's still early days, and there appears to be ample shipyard capacity, at least for the near term, on the coastwise side.
Great. That's, that's helpful. You know, you guys have done such a, such a prudent job of sort of aligning the, the product exposure in the inland and coastal markets. You know, as we sit here today, and you're sort of focused more on some of the new build activity, do you, do you look out at the market and think of, of any other products that you'd like to get exposure to, or, one particular product line where you would like more exposure than you currently have, that might lead you either down the, the path of M&A or just, organic new build activity?
No, you know, we're very liquid focused, so pretty much any liquid we're, we'll move. You know, there are... We tend to follow what our customers need and focus on our customers' needs and what their, you know, we have some very long-term customers, and as their product makes changes, we tend to, you know, adapt and make sure we have the right equipment to meet those needs. But that, you know, we're if it's liquid, we're pretty much involved with it now, so there's nothing we need to add from an acquisition standpoint on that side.
Understood. I'll just make one more here real quick. As far as the land-based market goes, is sort of the uptick that you've seen in legacy markets with legacy customers, or are you seeing growth and expansion in any sort of new geographies or jurisdictions as you look at the market?
No, we have, we're pretty much, you know, North American-based, domestic, US-based. However, some of our customers, you know, some of the bigger customers, obviously, may have us reman equipment, and then they'll take it, internationally. And in fact, we know a couple of them have done that in the past. So but it is primarily domestic focused, which is what you would expect, given the shale impact. And in terms of customer mix, you know, like, you know, we've got the standard customers, and that mix hasn't changed a lot. We may have picked up a new customer here or there along the way.
Uh, understood.
Because of our ability to offer the service on it.
Sure, sure. All right. Thank you, guys. I appreciate the time.
All right. Thank you, Nick.
Operator (participant)
The following question comes from Matt Young from Morningstar. Matt, please go ahead.
Matt Young (Analyst)
Good morning, guys. Thanks for squeezing me in. Most of my questions have been answered, but I just wanted to clarify. So in the diesel engine segment, it sounds like you think the right margins for manufacturing should be somewhere around in the high single digits and mid-teens for reman, correct?
David Grzebinski (President and CEO)
Yes, that is correct.
Matt Young (Analyst)
Could you provide an idea of where the reman margins are now and where they were throughout most of 2013, just generally?
David Grzebinski (President and CEO)
Yeah. Well, through most of 2013, we didn't have enough volume to have our operating margins actually in the positive. So, you know, it's really hard to disaggregate it because we didn't have the volume to absorb all our fixed costs. You know, clearly, we're not happy with where the margins are yet, and, you know, every day we're working to get those margins up through either getting more efficient, trying to get more volume, and also get more price. So it's hard to be more specific than that, Matt.
Matt Young (Analyst)
That's fair. So, I mean, the improvement, and I know you spoke about this, but then the improvement is a combination of demand and efficiency, but probably mostly leverage from demand at this point.
David Grzebinski (President and CEO)
Yes, that's correct.
Matt Young (Analyst)
And then, could you just remind us real quick what the mix is, just approximately, of the reman? I mean, it's kind of small right now, but reman versus manufacturing.
David Grzebinski (President and CEO)
Yeah, we break it into, we kind of lump spare parts, other service revenue, and reman together, and I want to say that's about 70% of our land-based business, and 30% is OEM.
Matt Young (Analyst)
Okay. That's helpful. All right, thanks.
David Grzebinski (President and CEO)
All right. Thank you, Matt.
Operator (participant)
Okay, and I have no further questions at this time.
David Grzebinski (President and CEO)
Sure.
Sterling Adlakha (Director of Investor Relations)
We appreciate your interest in Kirby Corporation and for participating in our call. If you have additional questions or comments, please contact me, Sterling Adlakha. My direct line is 713-435-1101. We wish you a good day.