Kirby - Q2 2014
July 31, 2014
Transcript
Operator (participant)
Welcome to the Kirby Corporation 2014 second quarter earnings conference call. My name is John, 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 Mr. Sterling Adlakha. Mr. Adlakha, you may begin.
Sterling Adlakha (Director of Finance and Investor Relations)
Thanks, John, and thank you all for joining us this morning. With me today are Joe Pyne, Kirby's Chairman; David Grzebinski, Kirby's President and Chief Executive Officer; and Andy Smith, Kirby's Executive Vice President and Chief Financial Officer. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at kirbycorp.com in the Investor Relations section under 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 risks and uncertainties. Our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31st, 2013, filed with the Securities and Exchange Commission. I will now turn the call over to Joe.
Joe Pyne (Chairman)
Thank you, Sterling, and good morning. Yesterday afternoon, we announced record second-quarter earnings of $1.31 per share. That compares to $1.11 per share reported for the 2013 second quarter, a quarter that also included a $0.07 per share benefit from the reduction of the earnout, earnout liability associated with the acquisition of United Holdings. During the second quarter, our inland and coastal tank barge fleets continued to experience healthy levels of demand across all our markets, high equipment utilization levels, and continued favorable pricing trends. With operating conditions in both of these markets, which we would, we would say were seasonably normal. Overall, our marine markets continue to benefit from the growth of the domestic petrochemical, crude oil, and condensate production, all of which we expect to continue to remain strong.
In our marine and power generation diesel engine business, it also performed well and benefited from healthy levels of demand in most of the markets. Our land-based business continued to show improvements, particularly as it related to orders for new pressure pumping equipment. The reman business also improved, and we continue to refine our business processes, which we believe will result in better long-term performance. I'll now turn the call over to David.
David Grzebinski (President and CEO)
All right. Thank you, Joe. Good morning, everyone. Starting with our marine transportation segment, during the second quarter, our inland marine business continued its overall strong performance, with equipment utilization in the 90%-95% range, and modest improvements in term and spot contract pricing. As Joe mentioned, operating conditions were relatively normal for the second quarter. Long-term inland marine contracts, those contracts that are one year or longer, were 80% of revenue for the quarter, with 56% from time charters and 44% from affreightment contracts. Due to strong demand from term customers and limited available capacity, we now expect contract revenue to remain around 80% level for the remainder of the year.
Pricing on the inland marine transportation term contracts that renewed during the second quarter increased in the low to mid-single digit level compared with the 2013 year-ago quarter. Spot contract rates, which include the price of fuel, increased modestly compared with the first quarter and remained above term contract rates, consistent with what we experienced in the first quarter of 2014 and throughout 2013. On the coastal side, it also continued to perform well, with equipment utilization in the 90%-95% range, which is in line with our first quarter, but above the 90% range we saw throughout 2013. During the second quarter, approximately 85% of coastal revenues were under term contracts, compared with 75% from the year-ago quarter.
Demand for coastal marine transportation and refined products, black oil, including crude oil, crude oil and condensate, as well as petrochemicals, remained at healthy levels. As we announced was our intention last quarter to meet increasing customer demand, we have signed agreements for the construction of two 155,000 bbl coastal ATBs and tug units. We currently expect the first of these vessels to deliver in mid to late 2016, and the second in early to mid-2017. Estimated 2014 progress payments for these additional units are included in our updated capital expenditure guidance, and Andy will go into that in more detail later. With respect to coastal marine transportation pricing, term contracts that renewed during the second quarter increased in the mid to high single-digit range when compared to the year-ago quarter.
Spot contract rates, which include the price of fuel, continued to improve sequentially during the second quarter and remained above term contract rates. In our Diesel Engine Services segment, the second quarter reflected positive results across most of our markets. In our marine diesel and power generation markets, demand was generally stable. The land-based diesel engine services market benefited from an increase in the demand for the manufacture of oil field equipment, as well as the sale of engines, transmission, parts, and services. Orders for new pressure pumping units increased in the quarter, and demand for remanufacturing remained relatively consistent with what we experienced in the first quarter. With that, I'll, I'll turn the call over to Andy, who will give you some detailed financial information, and then I'll return to discuss the outlook.
Andy Smith (EVP and CFO)
Thank you, David, and good morning. In the 2014 second quarter, marine transportation segment revenue grew 8% and operating income grew 19% as compared with the 2013 second quarter. The inland sector contributed approximately 70% of marine transportation revenue in the second quarter, with the coastal sector contributing approximately 30%. Our inland sector generated a second quarter operating margin in the mid- to high-20% range, and the coastal sector generated an operating margin of approximately 20%, benefiting from improved year-over-year pricing and the seasonal uplift in the Alaskan market. Overall, the marine transportation segment's second quarter operating margin was 25.4%, compared with 23% in the 2013 second quarter. Let me also comment about the seasonal effects of navigation conditions on margins and revenue per ton mile, which can be misleading.
Historically, our third quarter is our best operating margin quarter due to favorable navigation conditions, while the fourth and first quarters generally experience lower margins due to the seasonal weather patterns affecting navigation conditions in both our inland and offshore markets. Conversely, revenue per ton mile is historically lower during periods of favorable navigation conditions and higher in the fourth and first quarters when navigation conditions are negatively affected by seasonal weather. During the 2014 first half, we took delivery of 39 new tank barges with a total capacity of approximately 450,000 bbl. We retired 21 tank barges and returned five leased barges, removing approximately 420,000 bbl of capacity. The net result was an addition of 13 tank barges to our fleet and approximately 30,000 bbl of additional capacity.
Of the 39 tank barges delivered, 37 were 10,000 bbl barges and 2 were 30,000 bbl barges. For the second half of 2014, we expect to take delivery of 27 30,000 bbl inland tank barges with a total capacity of approximately 760,000 bbl, most of which we expect to deliver late in the fourth quarter. Combining these additions with our current planned retirements for the second half of the year of 6 barges with 60,000 bbl of capacity, will result in an approximate capacity at year-end of 18 million bbl, 700,000 bbl above our current 17.3 million barrel capacity level.
Our current inland tank barge building plan for 2015 calls for the construction of 30 10,000bbl tank barges, which we expect to be delivered throughout the first half of the year. In the coastwise sector, the construction of our two 185,000bbl articulated tank barge and tugboat units at a cost of approximately $75 million each is proceeding as planned, with delivery of the first unit expected in mid to late 2015, and the second in the first half of 2016. As David mentioned, earlier this month, we signed agreements to construct two 155,000bbl coastal articulated tank barge and 6,000-horsepower tugboat units at a total combined cost of approximately $125 million-$130 million.
One of the units is scheduled for delivery in the second half of 2016, and one in the first half of 2017. Moving on to our diesel engine services business, revenue for the 2014 second quarter increased 22%, while operating income was down 4% compared with the 2013 second quarter. However, operating income increased 62% when excluding from the 2013 second quarter the $6.1 million benefit to operating income resulting from the reduction of the United earnout liability. The segment's operating margin came in at 8.4%, compared with 10.7% for the second quarter, for the 2013 second quarter, or 6.3%, excluding the earnout benefit.
Our land-based operations contributed approximately 65% of the diesel engine services segment's revenue at a mid-single-digit operating margin. As David mentioned, we continue to see signs of improvement in this business, with strengthening demand for the sale of engines and transmissions, parts and service, as well as orders for new pressure pumping units and the remanufacture of existing units. The marine and power generation operations contributed approximately 35% of the diesel engine services revenue, with an operating margin in the low double-digit range. On the corporate side of things, we reduced debt by $58.7 million during the 2014 second quarter, thanks to continued strong cash flow and added to our marine equipment construction plans. As of today, debt stands at $642 million.
Our 2014 capital spending guidance is currently in the $370 million-$380 million range, including approximately $140 million for the construction of 66 inland tank barges and 1 inland towboat, expected to be delivered in 2014, and approximately $105 million in progress payments on the construction of the new ATBs.
The balance of $125 million-$135 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities, as well as diesel, diesel engine services facilities, and final costs for the construction of two offshore dry bulk barge and tugboat units delivered during 2013. Total debt as of June 30th, was $649 million, a $100 million reduction from our total debt of $749 million as of December 31st, 2013. Our debt-to-cap ratio fell to 23% as of June 30th, compared with 27% as of December 31st, 2013. I'll now turn the call back over to David.
David Grzebinski (President and CEO)
All right. Thank you, Andy. In our press release, we announced our 2014 third quarter guidance of $1.30-$1.40 per share. This compares with $1.21 per share earned in the 2013 third quarter, a quarter that included an $0.08 per share benefit due to the reduction of the United contingent earnout liability. For the 2014 year, we raised our guidance to $4.90-$5.10 per share, compared with $4.44 for 2013. Remember also, that 2013 earnings included a cumulative $0.20 per share benefit due to the elimination of the United earnout contingent liability. Our third quarter guidance assumes normal seasonal operating conditions in our marine transportation market. It also assumes a continued strong coastal market with higher term and spot contract pricing.
With inland marine rates currently strong, we expect pricing increases to remain in the 3%-5% range. Going forward, we expect earnings increases to be driven by these price increases, as well as from capacity growth, as new tank barges continue to be absorbed by the market. For our Diesel Engine Services group, we expect to see continued improvement in our land-based market. Our third quarter guidance assumes our Diesel Engine Services, marine and power generation markets will remain stable. The primary difference between the low end and high end of both our third quarter and full year guidance range is the level of improvement in our land-based Diesel Engine Services business and operating conditions in our marine transportation segment. In summary, the first half of 2014 has gone well, and the outlook for our markets continues to be positive.
We continue to invest our strong cash flow in building new inland and coastal equipment, and we also continue to pay down debt and strengthen an already strong balance sheet, which will allow us to pursue any potential acquisitions that may emerge. So with that, operator, we'd like to open the line for questions.
Operator (participant)
Thank you. 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. We ask that you please limit yourself to one question and one follow-up question. Once again, if you have a question, please press star, then one on your touchtone phone. Our first question comes from Michael Webber from Wells Fargo Securities. Please go ahead.
Michael Webber (Managing Director)
Hey, good morning, guys. How are you?
David Grzebinski (President and CEO)
Good morning.
Michael Webber (Managing Director)
Hey, David, you talked a bit about the new ATB orders, and I know in last quarter, when you guys were still in the process of placing those final two orders or looking at that, you were talking to an after-tax return of around 12%. I'm just curious as to how that—how those numbers actually came in when you placed the order, and then how those kind of trended relative to the previous 180 orders you guys placed?
David Grzebinski (President and CEO)
Yeah, no. Remember, Mike, we look at when we look for our 12% return, we look through the life of the asset, and it's a discounted cash flow through the life of the asset. But rates are sufficient when you get the new equipment delivered to give us that 12% return. So, but rates currently aren't there, so they have to continue to grow. But the forward price that we're getting on the contract for the one new 185,000 bbl barge.
Michael Webber (Managing Director)
Gotcha. That's helpful. Then just as my my follow-up, just along those lines, can you maybe talk to how much demand you're seeing out there from your customers for additional coastal ATBs? And maybe just on a relative basis to what the work you guys have already done in terms of ordering these four, how big of an opportunity is out there relative to what you've already done?
David Grzebinski (President and CEO)
Yeah, no, we continue to see increased demand, a lot of crude and condensate demand, some petrochemicals, refined product demand is increasing. So the demand is increasing, but also, and I think this is important, when we look at the market of ATBs and barges that are 200,000 bbl and less, there are 47 that are over 30 years old. You know, so that's out of a base of about 268 barges. So that's a lot of capacity that's gonna have to come out in the next five years or so. So you've got this increasing demand, you've got a supply base that's some part of it is pretty old and needs to come out. So, you know, it's a pretty good supply-demand dynamic, and we're very comfortable with our position in that and with the four new ATBs that we're building.
Michael Webber (Managing Director)
Gotcha. All right, thanks for the time, guys.
David Grzebinski (President and CEO)
Thank you.
Operator (participant)
Our next question comes from Jack Atkins, from Stephens. Please go ahead.
Jack Atkins (Research Analyst)
Great, thanks, and good morning, guys.
David Grzebinski (President and CEO)
Good morning, Jack.
Jack Atkins (Research Analyst)
So, I guess just to start off with, going back to diesel, excuse me, going to the coastal side of the business for a moment. You know, I noticed in the press release, you commented about modest pricing gains, but everything we've been hearing from you over the course of the last, you know, year and a half, two years, in terms of, you know, recontract renewals indicates mid to, you know, probably high single digit contract growth, pricing growth. So just sort of curious, are you guys seeing maybe that market plateau in terms of the pricing gains year-over-year? Or, you know, do you still think there's some room to go in terms of, you know, getting price there?
David Grzebinski (President and CEO)
Yeah, no, I mean, in the coastwise market, we're seeing mid- to high-single-digit price increases, so that's still pretty good. And then, you know, as we put some maybe some spot equipment onto contract, you know, the price increases there are quite good at times. So no, I think, you know, pricing is remaining pretty strong in the coastal market. I think in the inland market, as you saw, we said we think the price increases will remain in that kind of mid- to low-single-digits, 3%-5% is what we said. So it's still a pretty good market, and we take a very long-term approach on this. And as we've said before, we don't wanna be overly aggressive on pushing price.
Jack Atkins (Research Analyst)
Sure. Sure, that makes sense. And then as a follow-up, on the diesel engine services side of the business, you know, it sounds like that incremental demand is coming from new equipment orders. You know, do you think this cycle will be dominated by, you know, new equipment orders versus remanufacturing? And, you know, at what point would you maybe think about adding some capacity to your existing facilities, just given the demand that I think everyone sees out there for refurbished or new frac equipment over the next couple of years?
David Grzebinski (President and CEO)
Yeah, no, it's a good question, Jack. We are... Well, as you look at the public comments from our pressure pumping customers, you know, their business is improving. They're running 24/7, and in many cases, really putting the equipment to work. They're starting to get a little bit of price increase, which makes them more willing to spend both new capital dollars and maintenance dollars. We continue to see Reman grow. We're servicing more customers, different customers. But right now, we're, you know, seeing an influx of new equipment orders. I think, you know, there's been some pent-up demand over the last year or so. So that's starting to play out.
In terms of us increasing our capacity, I guess I'd just say this: we're adding a second shift, a partial second shift. So, you know, we're busy right now, and things continue to look like they're gonna improve on the land-based side.
Jack Atkins (Research Analyst)
Okay, that's great. Thanks again for the time.
David Grzebinski (President and CEO)
Thank you.
Operator (participant)
Our next question comes from Jon Chappell from Evercore. Please go ahead.
Jon Chappell (Senior Managing Director)
Thank you. Good morning, guys.
David Grzebinski (President and CEO)
Good morning, Jon.
Jon Chappell (Senior Managing Director)
David, I can understand, you know, the ATB orders seem to be geared towards customer requests. But you also announced, you know, 30 more 10,000bbl tank barges. Is that commentary at all about the returns that you can get from new build assets relative to the acquisition environment today? And if that is the case, are you concerned that others may follow suit and, you know, the overbuilding that tends to happen in cyclical industries may happen sooner than you would've thought otherwise?
David Grzebinski (President and CEO)
Yeah, no, good, good question, Jon. We, you know, we're seeing increased demand from our customers, both coastal and inland. You know, some new plants are coming online. We need the equipment to meet that demand. What you are seeing is with, you know, the last couple years, we've had bonus depreciation, and that has rolled off. So with that coming down, you know, when we look at the 2015 build plans out there and look at the shipyards, the number of new builds is actually down a little bit, and we think that may be driven by the lack of bonus depreciation. But we're still seeing the need for new equipment as new plants and restarting of some old plants comes online.
And yes, we're able to get our return on that new equipment above our hurdle rate. But pricing for acquisitions, you know, acquisitions are just so hard to predict. And there are so many different things that drive a seller. But you know, given the market, you would expect that price expectations are up a little bit. But we're happy to build the equipment for the needed demand, and we'll be patient on acquisitions.
Jon Chappell (Senior Managing Director)
All right. And then, as my follow-up, kind of along the same lines, just with the balance sheet. I mean, if you continue to pay down debt, at the pace of the last couple quarters, you're gonna be down to just the, the, the senior notes, probably by early next year. So, you know, arguably, maybe a little underlevered. I know you kind of like to be that way for flexibility, but how are you thinking about financing, CapEx? You clearly have the cash to do it, but, you know, with debt being as cheap as it is today, would you maybe take on a little bit more of that as well?
Andy Smith (EVP and CFO)
Yeah, yeah, John, this is Andy. You know, we've always been very consistent in how we think about our allocation of capital. And we certainly will continue to look at any M&A opportunities that come along. But to the extent that we think we can still build, and attain our 12% after-tax return on capital, we'll invest in our fleet. After that, our next priority would be to pay down that additional remaining debt and then, you know, look at other alternatives with our cash being on that.
Jon Chappell (Senior Managing Director)
But you'll probably keep the senior notes outstanding until they come due. Is that correct? You wouldn't-- would you chip away at those?
Andy Smith (EVP and CFO)
I don't foresee us chipping away at them right now. We've got, you know, just in this current year, we've got about $210 million-$220 million more dollars that we're gonna have to spend on our capital expenditure program.
Jon Chappell (Senior Managing Director)
Mm-hmm.
Andy Smith (EVP and CFO)
And with a relatively decent sized capital expenditure program next year, with the progress payments that we'll have to make on the ATBs, as well as our inland fleet additions. So, I don't foresee that happening anytime soon, but we'll sort of cross that bridge when we come to it.
David Grzebinski (President and CEO)
Yeah. Yeah, and Jon, as you know, we have returned capital to shareholders with share repurchases in the past. And of course, if we won't get too under-levered, but we may look at, you know, a dividend. We've talked about this before, that we're—we've discussed it, Joe and I have discussed it with the board. But, you know, it's right now, it's just premature to declare anything like that.
Jon Chappell (Senior Managing Director)
Right. Understood. Okay. Thanks, David. Thanks, Andy.
Operator (participant)
Our next question comes from Gregory Lewis, from Credit Suisse. Please go ahead.
Gregory Lewis (Oil Service Analyst)
Yeah, thank you. Good morning, guys.
David Grzebinski (President and CEO)
Good morning, Greg.
Gregory Lewis (Oil Service Analyst)
Hey, David, you know, when we think about the DES business, I mean, clearly, it looks like customers are opting to manufacture new equipment as opposed to reman equipment. Is there anything Kirby can do in communicating these customers? I mean, clearly, these units are, you know, the engines themselves are, you know, originally built to be reman. Is there any sort of value proposition that you guys are, you know, actively looking at to sort of get some of these customers to shift over to the reman, favoring reman over new equipment? Or is it just sort of, we're just gonna wait and see how the cycle plays out?
David Grzebinski (President and CEO)
No, it's a good question, Greg. We are value selling the reman. If you think about, you can essentially reman a frack unit for about half the capital cost of a new unit, maybe sometimes less than that. And there is a, you know, as the pressure pumpers look at the return on capital, that's important. We continue to value sell that, and as I said, in my prepared remarks, we are seeing actually more customers. We keep adding customers, and I think the market is slowly developing and getting confidence in reman. I think it's a relatively new phenomenon. Some people have done reman. And if you look at the majors like Halliburton and Schlumberger, they've internally remanufactured all along.
So it's some of the other players that are... And we wanna be their outsourced remanufacturing that are coming along. So it's an evolving market. I think as more and more customers get comfortable that a remanufactured frack spread is, you know, essentially good as new, you know, that market will continue to grow.
Gregory Lewis (Oil Service Analyst)
Okay, great. And then just shifting gears over to the coastal business. I mean, you know, we've seen some news about, you know, condensate and exports out of the Eagle Ford. I mean, when we think about that, I guess two things. One, has that impacted customers' willingness, or should I say, have you noticed a slowdown in customers' appetite for coastal barges following those announcements? And then I guess the follow-up to that is, do you sort of have a gauge on, you know, what percentage of the coastal fleet is moving condensates, you know, out of the Eagle Ford, if you could just provide any sort of color around that, that would be pretty helpful.
David Grzebinski (President and CEO)
Sure. No, we're not seeing any change in the customer mindset around crude and condensate. I think as you think about crude and condensate, they have to run it through a splitter or a topping unit or something like that. And actually, those generally lead to some other volumes that we may get a chance to move. There's some derivative streams there. So we're not really seeing anything, but it's, you know, it's still early days, and we'll see how it plays out.
I would say, in terms of the general market, in terms of coastal business, I know what we do, about 50% of what we move is refined products. 25%, well, maybe a little more than, maybe, maybe 35% is what we call black oil, and that within black oil is crude and condensate. And for us, that's, you know, probably around 10% range. But, you know, you could see that that may be higher for some other players.
Gregory Lewis (Oil Service Analyst)
Okay, guys. Hey, perfect. Thank you for the time.
David Grzebinski (President and CEO)
Yeah.
Operator (participant)
Our next question comes from Jon Minnis from FBR Capital Markets. Please go ahead.
Jon Minnis (Analyst)
All right. Thank you. Good morning. So, let me ask you on the net additions and some of the capital plans you've laid out. It would seem that, you know, you're adding most of the net additions this year will be the 30,000 bbl barges and on the inland side, and you're retiring, which, what I would assume would be six 10,000 bbl barges, but then next year, adding significantly to the 10,000 bbl barge fleet. Can you talk about, you know, the dynamics between the two and the inland market in terms of, you know, absolute demand versus replacement demand, if there's any, you know, noticeable difference in average age there?
Kind of where the inland market is, is going from here, if you're gonna see kind of a noticeable shift towards the 10,000s?... you know, versus what we've seen is more growth in the 30s over the last couple of years.
David Grzebinski (President and CEO)
Yeah, a lot of that is our fleet specific and what we are looking at forward in terms of both customer demand for example like small lot chemicals and the lot. You would move those in 10,000 bbl barges. But also, if you look at our age profile, we also think you know years ahead at the age of our fleet. So, and it's also about what's available to be built. We haven't declared yet on 30,000 bbl barges for next year. We're building tens so far. That's what we've announced. So it you know it's a customer mix and fleet—it's fleet driven for us.
Jon Minnis (Analyst)
Okay. Is there a noticeable difference in average age between the two?
David Grzebinski (President and CEO)
Okay.
Jon Minnis (Analyst)
In your fleet?
David Grzebinski (President and CEO)
Yeah. Yeah. Our tens are older. I don't have the exact number here, but our tens are, you know, a few years on average, older than our thirties.
Jon Minnis (Analyst)
Okay. Then as a follow-up, kind of on the same lines, there's been, you know, a few new methanol plants announced that are being built, and one of the numbers, I think there's five down the Lower Mississippi, and one of the numbers that's all thrown out is, is, you know, each will be producing about 5,000 metric tons of methanol per day, and all of that's going to go by barge or by ship. Can you help sort of frame that, if it is 5,000 metric tons per day, what that would potentially mean in terms of barrel capacity? You know, I guess, barrel demand, and, and I would assume those would go in 10,000s, right? Not 30s.
David Grzebinski (President and CEO)
Yeah, no, we know of, you know, one of our customers is starting up a plant here at the end of the year, and we'll be moving that methanol for that customer. It's not appropriate for me to talk about who the customer is, but, you know, we anticipate getting those volumes. And I'm not sure whether they're being moved in 10s or 30s. Yeah, probably a little bit of both.
Jon Minnis (Analyst)
Okay. But then, is there a simple kind of rule of thumb as far as metric tons versus bbl?
David Grzebinski (President and CEO)
I'm sure there is, but I don't know it off the top of my head.
Joe Pyne (Chairman)
Well, this is Joe. Your kind of standard 10,000 bbl barge moves about 1,500 tons, short tons. You can convert to metric, but you know, it's not as easy as that because it's based on where it's going. You know, this is a ton mile business. If it's going upriver, it takes more barges. If it's just going across the channel, it takes less. So it's not an easy calculation. You need to understand kind of the dynamics of the market and you know, what customers are servicing and where they're located.
Jon Minnis (Analyst)
Right. Right. Yeah, I understand that. I mean, I know there's a lot of moving parts, but we're seeing, you know, kind of 2.5 million, you know, metric tons of production coming online, which seem to be kind of big numbers. So just wanted to try to back into something, but fair enough.
Right. I appreciate the time.
Joe Pyne (Chairman)
Yeah.
David Grzebinski (President and CEO)
Yeah. Thanks.
Operator (participant)
Our next question comes from Kevin Sterling from BB&T Capital Markets. Please go ahead.
William Horner (Associate Equity Analyst)
Good morning, gentlemen. It's actually William Horner on for Kevin. David, going back to Greg's question on the diesel side for a second, maybe asking a different way. Is the service and reman business accelerating a little slower than you might have thought? Or are you finding the traction and confidence you're gaining with your customers sort of along the lines you'd expect at this point in the cycle?
David Grzebinski (President and CEO)
Yeah, well, I guess it never moves as fast as you want it to, right? But, no, if you go back to the last cycle in 2011, you know, there was not much Reman at all. You know, I think in 2011, we didn't do any remanufacturing. It was all new. So I think this is an evolving market, and the customers are really starting to get used to Reman. Could the pace be better?
Yeah, I guess it could. But I think the progress we've made, you know, from working with just a couple customers to, I think, we're up over 13 different customers now that we're doing Reman for. So it's evolving, perhaps not at the pace that you would hope for, but it's headed in the right direction. Right now, you know, our volume is picking up more on the new equipment side, but we're still taking new orders every day for reman.
William Horner (Associate Equity Analyst)
Okay. That's helpful. Thanks. And then, you know, maybe going back to the inland side for a minute. You know, the last quarter, you thought that your contract coverage might track back down to the 75% range, but it sounds like 80% range is where it's going to stay for the rest of the year. And, I know it's a little early to talk about 2015, but, you know, given your capacity adds and the appetite for the market to absorb this capacity, you know, would you kind of think 80% might be a more normalized way to look at your contract coverage?
David Grzebinski (President and CEO)
Yeah, well, you know, it's, it's an interesting dynamic. What happens is you have these, these term contract customers, and within their term contract, they call for a certain number of barges, but then when they need extra barges, you know, we'll take our spot equipment that would normally work in the spot equipment and put it to work for, for term contract customers. So that's part of the dynamic you see. You never want to let a, a good customer go to somebody else for an additional move. That's a long way of saying that, you know, it could, as we take deliveries of the, the 30s, that could come back down a bit, but, there's a general tendency for it to, to be closer to 80 right now.
William Horner (Associate Equity Analyst)
Okay, thanks. That's all I've got. I appreciate your time.
David Grzebinski (President and CEO)
Thank you.
Operator (participant)
Our next question comes from Ken Hoexter from Merrill Lynch. Please go ahead.
Ken Hoexter (Managing Director)
Great, good morning. Dave, can you talk a little bit about your thoughts on the inland capacity, as you know, you're growing to 18 million bbl up from the 17.3. How is the industry absorption of the fleet, given retirements are seeming to slow as that fleet is clearly younger than what you have to do on the coastwise side?
David Grzebinski (President and CEO)
Yeah, no, we're, you know, there is a lot of equipment that has been coming in, but it's largely being absorbed. We're still running 90%-95% utilization. But as we were talking earlier, you've got methanol plants and other plants that are coming along that are absorbing it, and, you know, that's just starting. So we're quite positive about the growth in demand and being able to absorb the equipment.
Also, what you're seeing, and, you know, we've pulled the shipyards, so there's only about 125 units being built in the shipyards next year, which is down from, you know, closer to 250-300 this last year. So that's... Again, we think that's about bonus depreciation rolling off. So, you know, we still see demand increasing, a little less building because the incentives are a little lower for some of our competitors. So I think, again, the dynamic is supply-demand dynamic is still pretty positive.
Ken Hoexter (Managing Director)
I guess two follow-ups to that. You still see then that 3%-5% at the rate, kind of as you look forward, and then to that same point, you haven't placed your 30,000 bbl order yet, or maybe haven't publicized it. Could that be that the same thing is going on with your competitors, that they haven't either announced it, or is that what the yards have slotted out already? Or maybe they just haven't ordered them yet.
David Grzebinski (President and CEO)
Yeah, it's hard to speak for them. Who knows? But yeah, we still continue to think 3%-5% is the right price increase range going forward.
Ken Hoexter (Managing Director)
Okay. Helpful. On the coastwise side, you talked about the absorption of capacity and industry deliveries, and you said you're at low 20s in terms of margins, but not yet at 12% returns. What level do you need pricing to get your margins to before you're at those reinvestable rates? And where does this business settle in? Does it get above the inland margin side?
David Grzebinski (President and CEO)
Yeah, it has that potential to get there as you... It takes a while for that new coastal capacity to get in. I mean, you heard our new announced capacity here. Some of it doesn't get into the market until 2017. So, you know, if price increases continue in that high single digit range, we certainly could see margins in the coastal business actually get up into the high 20% range. But we'll see. We're, as you mentioned, around 20% margins now. Pricing is probably to get to that new build, pricing is probably 15%-25% below where it needs to be, but it's increasing.
Ken Hoexter (Managing Director)
Great. Appreciate the time and thoughts. Thanks, Dave.
Operator (participant)
Our next question comes from John Barnes from RBC Capital Markets. Please go ahead.
John Barnes (Managing Director and Senior Research Analyst)
Hey, good morning, guys. Two things. Number one, Dave, your comment about the 47, you know, kind of sub-200,000bbl coastal barges, you know, that are out there that are 30 years old and older. You know, can you comment maybe to the owners of those barges and how many of those owners do you view as having the financial wherewithal to replace them, or is that where your opportunity lies?
David Grzebinski (President and CEO)
Yeah. Well, well, first, you know, we never underestimate the willingness of banks to lend. So some of them have the wherewithal to build, and we are seeing some building. I don't know, you can see the shipyard contracts that have been let, you know, there's, besides our barges, there's approximately 10 other new builds being announced. So there is some building that's coming on. But just remember, it takes several years for it to get into the market, and we still have that aged fleet there. So I'm not sure I'm answering your question. I think, you know, the banks will continue to lend, and there will continue to be new equipment built. It is needed, and that's the primary driver.
So pricing will continue to improve to drive that new building. But I think it's got, you know, given 47 units that need to come out in the next five or so years, it's got to happen. Now, just to comment on older capacity. You know, every shipyard, you get a chance to make a decision whether to extend that life, and in a weak market, you wouldn't extend the life. In a very strong market, there's sometimes you make decisions that to extend it for one more shipyard and sink a little bit more money into it. So that's a dynamic that plays out in every cycle.
John Barnes (Managing Director and Senior Research Analyst)
Okay. All right, that makes sense. I've worked for a couple of banks, by the way, that don't lend money, so, you know, I could certainly point your competitors to the right ones if you want. The other question I had is, you know, along the same lines with these vessels that you've ordered and the ones that maybe potentially have to get replaced, what do you think is the percentage of the coastal equipment that'll be built under some already negotiated contract, like what you've been able to put in place? And, you know, are you at all exploring the opportunity of putting coastal vessels in place without those type of agreements? Or is right now, you're focused entirely on new equipment, having an agreement in place that gives you some visibility?
David Grzebinski (President and CEO)
Yeah, no. When our equipment comes out, it will be under contract. So yeah, I guess to rephrase your question, how much of the new builds that I just described are on spec or don't have a contract yet? I'm not sure the exact number, but I think the market's strong enough that it'll all be termed up and contracted out by the time it comes out of the shipyards.
John Barnes (Managing Director and Senior Research Analyst)
Okay. And then, on the inland side, are you starting to see any of that? You know, is there any increasing amount of inland capacity coming out with already negotiated contracts as well, or is that still, you know, a little bit more under the old way, where it just kind of shows up and some goes to contract and some goes into the spot market?
David Grzebinski (President and CEO)
Yeah, it's more the latter, John, just because it's a sheer number. As we think about it, we don't because we have, you know, 860 or so barges, you know, it, the fleet is kind of fungible, and you don't need to a contract for your next 30 coming out of the shipyard. You kind of build it into your fleet, and you treat the fleet as a whole. And, of course, we don't view that there's much risk at all to not putting that equipment to work. And in fact, we need the equipment. We're, we still routinely turn away customers that are asking for equipment.
John Barnes (Managing Director and Senior Research Analyst)
Gotcha. Very good. Nice quarter, guys. I appreciate your time.
David Grzebinski (President and CEO)
Yeah, thanks.
Operator (participant)
Our next question comes from David Beard from Iberia. Please go ahead.
David Beard (Managing Director of Energy Equity Research)
Good morning, gentlemen.
David Grzebinski (President and CEO)
Good morning.
David Beard (Managing Director of Energy Equity Research)
Just a little bit of a follow-up on the capacity additions. You know, looking at your deliveries this year in the high 60s and 30s scheduled next year, and the average age, you're getting down to the point where your fleet seems to be at a pretty comfortable average age. Would you expect to reach that point next year, or should we think that's a 2016 event?
Yeah, no. We're always. If your fleet has a variety of ages. You know, we think of it in terms of an average age because it's easy to quote a number, right? But there are, you know, there is a range. We have, you know, a group of barges that are zero to five years old, some that are five to 10, and it goes all the way up in increments of five.
We've got buckets of them. So there's always some fleet replacement that needs to happen, or fleet retirement that needs to happen in any given year. So it's not just, you know, do we get to one number? We tend to build for the retirements that we anticipate coming in. Right now, we're building more than our retirement needs, so we're expanding capacity. So that's a little different. In expanding your capacity, your average age is gonna come down, right? Because you're just gonna have more new barges.
All right. All right. And then just to switch over to the coastal market, can you talk a little bit about where peak margins may be? And, and could we or should we use, you know, the K-Sea numbers relative to peak margins, or do you think you've changed the equipment and the operations such that that may be different in this cycle?
David Grzebinski (President and CEO)
Yeah, we, you know, K-Sea's peak margins, we've already passed. You know, they, you know, under the Kirby model, we're able to leverage our costs a little better. We've got, you know, our admin costs and our shoreside are shared between our inland and our coastwise business, so that helps margins. But also, you know, we're K-Sea, K-Sea worked, kind of the lower end of the market sometimes, and we're working for the major customers, where there's, you know, you get paid for your custody of their product, and we work hard to meet their service needs. So we are getting an improvement above where K-Sea got it and just in the normal cycle. I think, where could peak margins go? You know, that's a hard thing for us to say. But clearly, we see margins continuing to evolve and move upward over the next several years.
David Beard (Managing Director of Energy Equity Research)
Okay, great. Thank you for your time. I appreciate it.
David Grzebinski (President and CEO)
Thank you.
Operator (participant)
Our next question comes from Nicholas Fender, from Wunderlich Securities. Please go ahead.
Nicholas Fender (Analyst)
Hey, good morning, gentlemen. Thanks for taking my questions. Congrats on the quarter. Kind of following up on the coastal margin discussion. You know, I think it goes back to a comment that Joe had said on one of these calls a couple of years back, sort of thinking that coastal margin might have been more like a low-to-mid 20% type of range. Is there anything that sort of fundamentally changed that has improved your outlook there, or is it just you know, sort of as you've run the business for a couple of years, and with conditions improving in coastal, that's changed that profile a little bit?
David Grzebinski (President and CEO)
Well, yeah, yeah, we've, we've certainly consolidated into our general marine business, which allows us to get more leverage. So that, that is, our, our thinking has evolved there, and, and the potential that that can provide has evolved. But I, I think given where it costs to build a, a new ATB and tug unit, pricing has to be higher in order to justify the returns. So, you know, that, that implies that you're gonna have to have higher margins. Now, you know, is it substantially different than last cycles? I'm, I'm not sure, but clearly, we believe that, margins should, should be able to get into those, the high twenties.
Joe Pyne (Chairman)
Yeah, David, let me just add to that. This is Joe. When we talked about low 20% margins, those are sustainable margins. What happens in this business is that you price as an objective to new construction rates. And as you do that, prices rise for your existing fleet, so you can get, you know, periods on your existing fleet where margins actually are higher. But over the long run, you know, the what is the sustainable margin? And the sustainable margin, you know, theoretically, is what the margin is for the return that you're looking for. I don't know if that helps.
Nicholas Fender (Analyst)
Yeah, no, that, that's great, Joe. That's very helpful. Just to—just one quick one, sort of following up on, on all the capacity discussion that's gone on. Can you give us a little commentary on what the—on the coastal side, what the order book looks like there? Obviously, you've got some longer lead times, you know, 18-24 month kind of time frames. And if we think about you guys potentially adding more capacity, would you expect to do it in sort of the, in a nearer term timeframe? Or if you, announce some additional capacity, would it be on the, on the longer term sort of time horizon, like you've announced with, with some delivery dates out in, you know, 2016, 2017?
David Grzebinski (President and CEO)
Yeah. Let me, let me talk a little bit about the order book. You know, we've got our four barges that we're building, which are primarily larger, right? 185 and 155s, two each. But you know, we've tracked it. I think there's 10 other orders out there, and you know, five of them are... Well, seven of the 10 are 100,000 bbl or less. So, there is some capacity being built, but it's a little bit smaller than what we're building. And well, we'll see. We'll see if there's more there. You know, in terms of our plans to add additional capacity, you know, we're evaluating that. We're not ready to declare anything at this time.
Nicholas Fender (Analyst)
Sure. No, that, that's fair enough. That's, that's helpful, Dave. Thank you. Talking about something brought up in the past, just between or around synergies, rather, between inland and coastal customers and the ability to sort of drive some incremental value there. Where are you in that process? Is there any more juice to sort of be wrung out of that at all?
David Grzebinski (President and CEO)
Yeah, we're very far along on that. You know, right now, most of our major customers, we do both inland and coast-wise moves. So, I don't want to say there's no juice left to squeeze there. That sounds negative because it's, you know, those are the big customers. Those are the ones you want to work with.
Nicholas Fender (Analyst)
Right.
David Grzebinski (President and CEO)
They're the ones that are gonna have the, the incremental volumes as, as crude and condensate continues to play out, as refinery capacity grows, as chemical capacity grows, those are the guys you want to be with. So there's, in terms of, of the synergy, maybe there's no juice there, but in terms of where you want to be and the, and the juice that comes from the major customers, boy, that's still in front of us.
Nicholas Fender (Analyst)
Right. No, that makes sense. Switching over to DES real quick. Obviously, it... You know, again, not getting too caught up in sort of a quarter-to-quarter variance in maybe the OEM sort of market, but is the long-term objective still to have a business model that's something along the lines of sort of two-thirds remanufacturing and maybe a third OEM. Is that right?
David Grzebinski (President and CEO)
Yeah. And in the remanufacturing, we put, you know, parts, other service, and remanufacturing. Exactly. You're exactly right. We would target, and are targeting to get about two-thirds in that service, spare parts, and remanufacturing area, which is a little less volatile, right? That's right
Nicholas Fender (Analyst)
Right.
David Grzebinski (President and CEO)
That's why we're, we're targeting it that way. Plus, it's higher margin.
Nicholas Fender (Analyst)
Yeah, yeah. No, absolutely. And then the last one, again, we sort of covered the ground on M&A on the marine side, but any thoughts on M&A on the DES side and in the land-based market that seems to be improving a little bit, or growth initiatives, really, of any type, I suppose?
David Grzebinski (President and CEO)
You know, we are always looking at it, and you may see us do a small tuck-in regional add-in in our diesel business. But you know, on the land side of the diesel business, you know, acquisitions, I think we've got... Our platform is still getting right and growing, and we've got a lot of opportunity there, so I'm not sure an acquisition would make sense right there in that space. But you may see us do small tuck-in, regional-type engine service acquisitions, but they're, as I say, small. Thanks, Nick.
Nicholas Fender (Analyst)
Okay, great. Thank you.
Operator (participant)
We have no further questions at this time.
David Grzebinski (President and CEO)
We appreciate your interest in Kirby Corporation and for participating in our call. If you have additional questions or comments, you can reach me directly at 713-435-1101. Thank you, and have a nice day.
Operator (participant)
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.