Kirby - Q3 2014
October 30, 2014
Transcript
Operator (participant)
Welcome to the Kirby Corporation 2014 third quarter earnings conference call. My name is Mila, and I will 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 we will allow one question and one follow-up per participant. This conference is being recorded. I will now turn the call over to Sterling Adlakha. Sterling, you may begin.
Sterling Adlakha (Head of Investor Relations)
Thank you, Mila, 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 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 www.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 31, 2013, filed with the Securities and Exchange Commission. I will now turn the call over to Joe.
Thank you, Sterling, and good morning. Yesterday afternoon, we announced record third-quarter earnings of $1.34 per share. That compares with $1.21 per share reported for the third quarter 2013, a quarter that included an $0.08 per share benefit with a reduction of the earn-out liability associated with our acquisition of United Holdings in 2011. During the third quarter, our inland and coastal tank barge fleets maintained their strong levels of utilization. Our inland volumes, however, were negatively impacted by petrochemical plant and refining outages, which in turn affected our horsepower efficiency. Our horsepower efficiency was also somewhat impacted by bringing boats on in advance of barge deliveries that were delayed during the fourth quarter, principally for weather.
In addition, the relocation of bunker assets out of our Florida bunkering operation resulted in a reduction of bunker revenues and operating income. We believe the negative impact from plant outages is largely behind us and anticipate improved customer demand and better horsepower efficiency going forward. In our offshore markets, our third-quarter results reflect continued trends, which we've seen all year, of strong utilization, increasing customer demand, and better pricing. In our marine diesel engine and power generation business, we performed well with healthy levels of demand in most of our markets. Our land-based diesel engine business exhibited strong year-over-year growth due to industry tailwinds, which are driven by higher levels of demand for oil field service equipment, including the sale of new, as well as overhauling and remanufacturing existing pressure pumping units.
The temporary factors which had an impact on our inland volumes in the third quarter are largely subsided, and we are on pace to have a good fourth quarter, as reflected in our recent updated guidance. Both our diesel engine service business and Marine Transportation segments are exhibiting high levels of activity, which have contributed to raising our full-year guidance. I'll now turn the call over to David.
David W. Grzebinski (CEO)
All right. Thank you, Joe, and good morning. In the Marine Transportation segment during the third quarter, our inland marine transportation business continued its overall strong performance with equipment utilization in the 90%-95% range, with low single-digit increases in both term and spot contract pricing. Following some significant shutdowns of petrochemical plants and refineries in the quarter that Joe mentioned, our inland utilization briefly dropped, but never dropped below 90% and has since improved. The outages we saw in the third quarter were concentrated along the Gulf Coast and impacted our horsepower efficiency. As Joe mentioned, we also brought on horsepower in advance of new barge deliveries during the quarter. Let me also comment briefly on our bunker business.
Due to a contract change by a bunker customer, we removed 3 boats and 3 barges from our Florida bunker operation, incurring both relocation costs and lower revenues. As a result of these things, our inland marine business was a little softer for the quarter, but the impact from the outages, as Joe mentioned, are largely behind us. Pricing on inland marine transportation term contracts that renewed during the quarter increased in low single-digit levels when compared to the year-ago quarter. Spot contract rates, which include the price of fuel, increased modestly compared with the second quarter and remained above term contract rates.... Long-term inland marine transportation contracts, those contracts with a term of 1 year or longer in duration, contributed about 80% of our revenue, with 56% of those contracts as time charter and 44% as contracts of affreightment.
Due to strong demand from term customers and limited available capacity, we continue to expect term contract revenue to remain around the 80% level for the remainder of the year. Moving to the coastal marine sector, it also continued to perform well, with equipment utilization in the 90%-95% range. During the third quarter, approximately 85% of coastal revenues were under term contracts, compared with about 75% a year ago. Demand for coastal marine transportation of refined products, black oil, which includes crude oil and condensate, as well as petrochemicals, remain strong. The construction of all four of our new coastal ATBs and tugboats is proceeding on schedule.
We continue to expect the first new vessel to deliver in the fall of 2015, followed by deliveries roughly every 6 months thereafter, until the fourth unit is delivered in early 2017. With respect to coastal marine transportation pricing, term contracts that renewed during the third quarter increased in the mid- to high single-digit range when compared with the year-ago quarter. Spot contract prices, which include the price of fuel, continued to improve sequentially during the third quarter and remained above term contract rates. Let me take this opportunity to briefly comment on recent volatility in the oil markets. The growth in domestic production of crude oil over the past several years has certainly added meaningful volumes to both ours and the industry's inland and marine transportation and coastal marine transportation markets.
Due to the contractual nature of our marine businesses, brief fluctuations in pricing or in the oil price spreads between Brent and WTI, for example, tend to have very little impact on us, either from a volume standpoint or a revenue standpoint. Assuming oil prices remain at current levels, we don't expect to see a significant decline in U.S. production, or for that matter, the volume of that production that makes its way to water. If WTI were to remain below $70-$80 a barrel for a sustained period, growth in the waterborne transport of crude oil could be muted. However, long...
We believe lower domestic feedstock costs are likely to provide further economic incentive to proceed with announced plans to expand U.S. petrochemical capacity, which we see as a long-term positive for our marine business. As a reminder, we still expect significant petrochemical capacity to come online between 2016 and 2018, which should be a positive for our marine business. In our Diesel Engine Services segment, our marine diesel and power generation markets experienced stable and steady demand. The land-based diesel engine services market continued to improve, building on the trend of increased demand that began earlier this year. Overall, we saw healthy levels of demand across our entire oil field equipment, sales, and services portfolio, including both new and remanufactured pressure pumping units.
With respect to the current price of oil as it relates to this business, we have not seen any material change in ordering patterns from our major oil service customers. Should oil prices move significantly in either direction from current levels, we would expect the medium-term outlook for our land-based diesel engine services business to correspondingly change in the direction of significant moves. However, with all that said, we think oil prices, oil price changes are likely to significantly impact this business in the near term, in the fourth quarter. I'll now turn the call over to Andy, who will provide some detailed financial information, and then I'll come back and finish with a discussion on the outlook.
C. Andrew Smith (EVP and CFO)
Thank you, David, and good morning. In the 2014 third quarter, Marine Transportation segment revenue grew 3%, and operating income declined 1% as compared with the third quarter of 2013. The inland sector contributed approximately 70% of marine transportation revenue in the third quarter, with the coastal sector contributing approximately 30%. Our inland sector generated a third quarter operating margin in the mid- to high-20% range, and the coastal sector generated an operating margin of approximately 20%. Overall, the Marine Transportation segment's third quarter operating margin was 25%, compared with 26.1% for the 2013 third quarter. The year-over-year decline in the Marine Transportation segment margin was a result of the impact of the aforementioned plant closures, which negatively impacted horsepower efficiencies along the Gulf Coast and lower Mississippi River....
The change in bunker operations, and the addition of horsepower in advance of new barge deliveries, which were delayed into the fourth quarter of this year. The inland marine operating metrics show a year-over-year increase in ton miles and a corresponding decrease in revenue per ton mile. As we have cautioned in the past, our ton miles and revenue per ton mile are influenced by a multitude of different factors. These metrics are sometimes useful when looking at longer-term trends in our inland marine business, but tend to have little utility when evaluating results in a single quarter. The third quarter increase in ton miles as compared to the 2013 third quarter reflects fewer delay days, better operating conditions on the Mississippi River system, and the relocation of some canal assets to river service.
River moves, which have a longer length of haul and generate more ton-miles, were less impacted by the Gulf Coast chemical plant and refinery outages. The combination of increased ton-miles and the lost bunkering revenue, which David mentioned, led to a year-over-year decrease in revenue per ton-mile, but is not reflective of actual inland pricing trends. During the 2014 first nine months, we took delivery of 40 new inland tank barges with a total capacity of approximately 480,000 barrels. We retired 26 inland tank barges and returned 5 lease barges, removing nearly 480,000 barrels of capacity. The net result was an addition of 9 inland tank barges to our fleet, with no change to our overall capacity. Of the 40 inland tank barges delivered, 37 were 10,000-barrel barges and 3 were 30,000-barrel barges.
For the 2014 fourth quarter, we expect to take delivery of 21 30,000-barrel inland tank barges with a total capacity of approximately 600,000 barrels, most of which we expect to deliver late in the fourth quarter. Due to delays at our shipyard supplier, 5 of the 30,000-barrel barges scheduled for late 2014 delivery have slipped into next year. Combining 2014 additions with our current planned fourth quarter retirements will still result in an approximate capacity at year-end of 17.8 million barrels, 500,000 barrels above our current 17.3 million barrel capacity level. Earlier this month, we signed a shipyard contract to build 4 additional 30,000-barrel barges in the second half of 2015.
Our current inland tank barge building plan for 2015 now calls for the construction of those four barges, as well as the previously announced 30 10,000-barrel tank barges, which we expect to be delivered in the first half of the year. In 2015, we also expect to take delivery of the five 30,000-barrel barges I mentioned, which were originally scheduled for delivery late this year. In the coastwise sector, the construction of all four of our coastal articulated tank barge and tugboat units is proceeding as planned. The first two of the new ATB units, with 185,000 barrels of capacity each, are now under customer contract. Moving on to our Diesel Engine Services business, revenue for the 2014 third quarter increased 102%, and operating income increased 121% compared with the 2013 third quarter.
The segment's operating margin came in at 8.6%, compared with 7.9% for the third quarter of 2013, or 1% excluding the benefit from reducing the United contingent earn-out liability. Our land-based operations contributed approximately 80% of the Diesel Engine Services segment's revenue at a high single-digit operating margin. As David mentioned, this business continues to improve with strengthened 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 20% of the Diesel Engine Services revenue, with an operating margin of approximately 10%. On the corporate side of things, our cash flow remains strong, which is funding our marine equipment construction plans.
Our 2014 capital spending guidance is currently in the $370 million-$380 million range, including approximately $125 million for the construction of the 61 inland tank barges and one inland towboat expected to be delivered in 2014, and approximately $110 million in progress payments on the construction of the new ATBs. The balance of $135 million-$145 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities, as well as Diesel Engine Services facilities. We have also purchased three bareboat chartered coastal tank barges, which we inherited in the K-Sea acquisition and have operated since, for $31.8 million, one during the quarter for $6.5 million, and the other two subsequent to quarter-end for $25.3 million.
The purchases of these barges are not included in our 2014 capital spending guidance. Total debt as of September 30th was $649 million, a $100 million reduction from our total debt of $749 million as of December 31st, 2013. As of today, our debt stands at $674 million. Our debt-to-cap ratio fell to 22.4% as of September 30th, compared with 27% as of December 31st, 2013. I'll now turn the call back over to David.
David W. Grzebinski (CEO)
All right. Thank you, Andy. In our press release, we announced our 2014 fourth quarter guidance of $1.30 - $1.40 per share. And this compares with $1.13 per share earned in the 2013 fourth quarter. For the full year, we raised our guidance to a range of $5.04-$5.14, and this compares with $4.44 earned in 2013. Remember that 2013 earnings included a cumulative 20-cent per share benefit due to the elimination of the United earn-out contingent liability. Our fourth quarter guidance assumes normal seasonal operating conditions in our marine transportation markets, which includes the normal impact of weather on our inland system and the reduction of specific volumes that are related to restricted operating conditions in our Alaska operations.
It also assumes a continued strong coastal market with higher term and spot contract pricing. In our inland markets, our guidance assumes normal horsepower efficiency and alleviation of most of the lost volume from the third quarter planned outages, and higher term and spot contract pricing. As we mentioned last quarter, with inland marine pricing currently at historical high levels, we expect pricing increases to be in the low single digit range, and capacity increases to be the primary driver of our inland marine revenue growth. For our Diesel Engine Services group, we expect to see continued improvement in our land-based markets. Our fourth quarter guidance assumes our Diesel Engine Services, marine and power generation markets will remain stable.
And the difference between the low end and high end of our guidance range is primarily related to the severity of winter weather, which typically limits vessel operations in both of our marine markets and the rate of improvement within our land-based Diesel Engine Services business. In summary, 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 our already fairly strong balance sheet. That balance sheet will allow us to pursue any additional acquisitions if the opportunities present themselves. With that, operator, would like to turn over the call to questions.
Operator (participant)
Sure. 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 would like to remove yourself from the queue, please press the pound sign or the hash key. There will be a delay before the first question is announced. 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 our first question comes from Michael Webber from Wells Fargo. Michael, please go ahead.
Michael Webber (Analyst)
Hey, good morning, guys. How are you?
David W. Grzebinski (CEO)
Hey, good morning.
Michael Webber (Analyst)
Hey, David, I wanted to touch on your comments around most of the growth coming from additions and capacity, and we've talked about M&A a number of times. But just curious, with the weakness we're seeing in the crude space, and we've seen a little bit more activity, I guess, with the larger joint asset getting sold to an MLP, you know, whether the market has softened up to the point that it might be a bit easier to get something done. So maybe within the context of, you know, M&A activity behind the scenes now versus six months or a year ago, are you seeing any uplift or, you know, a window opening up with kind of sentiment, maybe a bit more divided?
David W. Grzebinski (CEO)
Yeah, well, you know, it's tough for us to comment directly on,
Michael Webber (Analyst)
Sure
David W. Grzebinski (CEO)
M&A activity. As you know, M&A activity is tough to predict. But I wanna be clear on the... you said oil weakness. Let me just clarify, and make sure what I said on the, on my prepared remarks, is fully out there. That is, you know, we've seen a lot of crude and condensate growth, and we're still seeing that growth in-- I just wanna be clear, but if oil prices weakened, even into the 70s, I still think you'll see some production growth. I just it just may not be as much. So I wanna clarify that. It things are still pretty good in the market. You know, if it gets down below 60, you know, that's a different story.
You may actually stop seeing oil production growth. But, you know, from the analysis we've done and in talking to customers, if the oil price... Well, a lot of the break evens on some of these shale formations are in the sixties, so it's got a ways to go. I actually think that The Wall Street Journal had a little article that said, you know, it's probably $20 away before they'd start shutting in production. So we're seeing growth still. It's just, if the oil price goes down much more, it could mute the growth, but we'd still probably have growth. So I don't want that oil price for you to think of it as a big trigger to people ready to sell and get out of the business.
Operator (participant)
Our next question comes from Jack Atkins from Stephens. Please go ahead.
Jack Atkins (Analyst)
Okay, great. Thanks for the time this morning, guys. You know, you called out several discrete items on the marine side. You know, in the past, you guys have helped us sort of quantify that in terms of the EPS impact. Is there any way for us to sort of, kind of think about the earnings impact that those items on the marine side had in the quarter? Because clearly, I think it was an unusual quarter from that respect.
David W. Grzebinski (CEO)
Yeah. Yeah, well, Jack, yeah, but I'm not trying to be defensive here. We were still within our range, right? $1.30 - $1.40. But if we didn't have some of those headwinds, we would have been in the upper end of our range. You know, yeah, there's a little bit of each of them, right? The bunker business was a little bit, and the outages and horsepower efficiency was a little bit as well.
Jack Atkins (Analyst)
Okay, David, that's, that's really helpful. And, and no, I mean, I, I wasn't trying to be critical of the quarter. I just-
David W. Grzebinski (CEO)
Well, I know.
Jack Atkins (Analyst)
I was just curious of that. And then the... I guess my follow-up question, you know, is sort of thinking about, you know, the cash flow, and, you know, you guys have done such a great job generating a lot of cash here over the course of the last couple of years, even paying down quite a bit of debt. And you've got a lot of dry powder if M&A were to sort of come along. But, you know, in the absence of M&A, how do you guys think about maybe allocating capital? Is it potentially time to maybe looking at, maybe returning more cash to shareholders? And just sort of how do you think about that, you know, going forward?
David W. Grzebinski (CEO)
Yeah. Now, and Jack, you've heard us say that, you know, there's times to buy companies when they're available at a reasonable price. There's time to build equipment, which we're doing now. There's times to delever, and then there's times to buy back your shares. Clearly, we're building equipment now. You can see it in our capital spending. I think that'll be the case for a while. That said, you know, acquisitions, as we were talking with Mike about, they're hard to predict. That's one of the reasons we try and keep our balance sheet fairly strong, so that we can react when opportunities come. In terms of returning cash to shareholders, you know, it's given what we've got in front of us, I don't think it's time right now.
But as you know, we've repurchased shares many times over the years, and we'd be willing to do that again if it made sense. And also, as we've mentioned, of course, we've talked about a dividend with the board, and it's just not time yet, but it's something we're thinking about all the time. But again, just to reiterate, I think with the opportunities we have in front of us, with the equipment we're building, that'll be the best use of cash for the near term.
Operator (participant)
Our next question comes from Gregory Lewis, from Credit Suisse. Please go ahead.
Gregory Lewis (Analyst)
Yes. Thank you, and good morning.
David W. Grzebinski (CEO)
Good morning, Greg.
C. Andrew Smith (EVP and CFO)
Good morning, Greg.
Gregory Lewis (Analyst)
You know, David, we saw that you, I guess, bought the one leased-in coastal barge, and then I guess subsequently, you bought another two. As we think about the remainder of the coastal fleet, or I guess, some of the legacy K-Sea assets, how many more assets are potentially leased in that Kirby could potentially buy back?
David W. Grzebinski (CEO)
Yeah. Now, when we bought K-Sea, I think there were 7 leased-in barges. So I think we've got 4 left that we could buy. As you know, these are, you know, lease agreements that go for multi years, and you only get an opportunity to buy them at certain times. So we'd much rather own than lease our equipment. It gives us more flexibility with the equipment, and it's less constraining. And, you know, basically, it's economically neutral to pull it in off of the lease. So we like to go ahead and just purchase it off the lease.
Operator (participant)
Our next question comes from John Mims, from FBR Capital. John, please go ahead.
John R. Mims (Analyst)
Hey, good morning, guys. Thanks for the update. So let me ask a question on the diesel, and I guess kind of two-part question. Obviously, a big acceleration in revenue this quarter. You know, is this kind of 230 numbers, is there something, you know, particular to this quarter that, that caused that surge, or is that a run rate that is sustainable?
David W. Grzebinski (CEO)
Yeah. Yeah, John, John, I'm going to answer that. But just, operator, would you allow each caller a follow-up question? Just want to make sure everybody gets a chance to get two questions in if they want.
John R. Mims (Analyst)
Yeah. Thanks.
David W. Grzebinski (CEO)
Um, John-
John R. Mims (Analyst)
Follow-up. Yeah.
David W. Grzebinski (CEO)
Yeah. John, yeah, you know, we've had a pretty good ramp-up, and I think, you know, our hope is that we'll continue at this level.
John R. Mims (Analyst)
Okay. Yeah,
David W. Grzebinski (CEO)
We've seen-
Go ahead.
John R. Mims (Analyst)
We've seen strong demand, and this oil, oil price volatility really hasn't impacted anything.
Okay. And let me ask you then on that, on the incremental margins in diesel as well. I mean, down a little bit from where they were in second quarter, is there any, you know, startup costs or any sort of inefficiencies that limit incremental margins when you see this kind of surge in revenue? Or, you know, if you can run at the $220, $230-ish type range per quarter, should we start to see incremental margins in that business pick up at that revenue run rate?
David W. Grzebinski (CEO)
Yeah. Yeah, yeah. No, you've heard us say that we believe, you know, new equipment margins should be in the high single digits and reman in the low to mid-teens. We're not where we want them to be yet. There's still some inefficiency, and we're just not where we want the margins to be. But that's a long way of saying, we should see some margin improvement over time. A lot of this is, as you say, you know, ramping up and dealing with some supply chain inefficiencies and bringing on new labor.
John R. Mims (Analyst)
Right. So how would you model that ramp up right now? I mean, just given what you do know, I mean, what—how should we... Does, is along over time mean a couple of years or a few quarters?
David W. Grzebinski (CEO)
Yeah, it's probably somewhere in between those.
John R. Mims (Analyst)
Sure.
David W. Grzebinski (CEO)
It could take us a good year to get where we need to be.
John R. Mims (Analyst)
... Okay. You have a steady progression. Cool. Fair enough. Thank you so much.
Operator (participant)
Our next question comes from Kelly Dougherty from Macquarie Group. Please go ahead.
Kelly Dougherty (Analyst)
Hi. Thanks for taking the question. Just want to follow up on diesel real quick. How much of the effort to improve the profitability is predicated on changing mix towards reman or, or growing the top line versus just cost actions or things you can do on your end? You know, so if there was, you know, a sustained lower oil price environment and maybe the growth outlook was a little bit lower, can you still, you know, control things on your end to, to get that profitability up?
David W. Grzebinski (CEO)
Yeah. Yeah. Oh, I'm sorry, we got a little feedback on the line, got an echo. Yeah, it's a mixture of that. We clearly aren't where we need to be efficiency-wise, so we, you know, even if things were less robust, so to speak, we should still get some margin improvement. But clearly, if you get both, the margin improvement should be better. I hope that answered your question, Kelly.
Kelly Dougherty (Analyst)
Okay, great. Thanks. And then maybe if you could just, you know, maybe walk us through the different businesses in Inland and Coastal, you know, what your direct crude exposure is, you know, how many barges are allocated towards crude, and then, you know, maybe some indirect relationships. Just trying to get a sense of, you know, if we do see a sustained lower oil price environment, it seems that the exposure that you have is actually pretty limited.
David W. Grzebinski (CEO)
Yeah. No, we have on our inland business about 7% of the fleet. I think it's, you know, 60 barges or so. And then on the coastwise side, you know, it's about 14 or so percent, kind of mid-teen%, of our equipment's moving crude.
Kelly Dougherty (Analyst)
And you-
David W. Grzebinski (CEO)
But you'll recall that a lot of our stuff is in year-long type contracts, so that the volatility, the day-to-day volatility doesn't really affect it in the near term.
Kelly Dougherty (Analyst)
But if we were to see any kind of sustained weakness, you could take... I mean, it's a small part of the fleet overall, and then those vessels could be, I guess, with extensive cleaning, you know, they could be repurposed and put into, you know, different use so that maybe, you know, you are able to retire some that are getting old, or maybe you didn't need to add as many barges on the other end.
David W. Grzebinski (CEO)
Yeah, that's correct.
Kelly Dougherty (Analyst)
Okay.
David W. Grzebinski (CEO)
And most of our contracts have clean-out clauses on them, so we actually can get coverage for cleaning out the barges.
Joseph H. Pyne (Chairman)
And, David, you might also comment on where that equipment is. I mean, a lot of it is servicing basins that have very low costs and are supplying Gulf Coast refineries at, you know, crude oil and crude oil condensate. So they're gonna be the last to shut in.
David W. Grzebinski (CEO)
Yeah. Yeah.
Kelly Dougherty (Analyst)
Thanks.
David W. Grzebinski (CEO)
The bulk of our equipment, Kelly, is here in the Gulf Coast, the vast majority of it. We do have some stuff on the East Coast and West Coast, but the bulk of it is here, you know, picking up crude in the Corpus area and moving it across Gulf or along the Intracoastal Waterway. And that's Eagle Ford and Permian crude, and most of the break-even areas there are pretty low. And then, of course, the refineries in the Gulf Coast love the low-cost crude that they're getting. So it's—I would think it's gonna be, as Joe points out, one of the last things to be let off.
Kelly Dougherty (Analyst)
That's really helpful, guys. Thank you very much.
Joseph H. Pyne (Chairman)
Thank you, Kelly.
Operator (participant)
Our next question comes from John Barnes from RBC Capital Markets. John, please go ahead.
John Barnes (Analyst)
Hey, thanks. Good morning. Hey, you know, in terms of the facilities that you talked about being offline and predominantly on the Gulf Coast, I mean, I was kind of keeping a running tab. It seems like, you know, Lyondell's facility in La Porte, Texas, is back up and running, and there's an expansion coming, and, you know, there's a couple others, I think CP Chem or somebody, you know, they had one that's off and maybe still off. Can you give us an idea of, you know, kind of what percentage you think of the total plants you serve or capacity you serve was offline, and what percentage of that has come back?
David W. Grzebinski (CEO)
Yeah, I wouldn't characterize it in terms of percentage of plants that we service. I mean, clearly, some plants have more volumes for us right in the heart of our ability to move equipment around and be very efficient. So it's not necessarily the volume of plants, sometimes the specific plant and where the equipment is. So John, I'm not trying to be evasive, it's just that it's not a percentage-type answer for us. It's really about the efficiency across our system and where those plants are, and how we're able to repurpose equipment when they don't need it.
John Barnes (Analyst)
So it's a little bit more of a hit to maybe the line haul network or something than it is. I mean, it's just... So if I'm thinking about it, you've got some type of network that runs, you take one hub or one piece of the feeder out of it, and you know, that kind of disrupts it. Is that more the way to think about it than we didn't see enough volume out of a particular location?
David W. Grzebinski (CEO)
Well, it’s a combination of all of that, right?
John Barnes (Analyst)
Okay.
David W. Grzebinski (CEO)
I mean, it could be volumes down, it could be customer sitting on a piece of equipment or releasing a boat and us not being able to get that boat to where we can redeploy it without incurring some costs. So it is a, it's multifaceted and pretty complex, actually.
John Barnes (Analyst)
Okay, all right. And then, you know, kind of across our entire universe, we keep hearing about the capacity shortfall in terms of equipment types. I'm talking about, you know, obviously, with the rail service problems, and they've talked about lack of horsepower and crews and that kind of thing. You know, certainly, that seemed like it kind of, you know, jumped up and bit you a little bit. I mean, kind of a high-class problem, right? When you need more horsepower and crews, and, you know, that says something about volumes. Can you just talk a little bit about your outlook on both of those? Do you feel like you're just—you're kind of in reaction mode to the volume levels right now?
Or, you know, do you think that, you know, based on training classes and your orders with the shipyards on towboats and that kind of thing, that at some juncture, you kind of get ahead of that curve? And when do you think you do jump ahead of that curve?
David W. Grzebinski (CEO)
Yeah, no, that, that's a good question, John. You know, in terms of the equipment, I think, we've seen a lot of equipment come out in the last few years, and, and basically, industry has kept up, supply has kept up with demand, and we've been in that kind of a, a very, very even, balanced situation with equipment coming on, as it's needed. To your point, though, that, you know, the crews, it, it's been a lot of equipment that's come on over the last 3-5 years. And, you know, crew, there's some pressure on crew wages and some, some crew shortages.
But as you know, you've been to our training center, we work very hard to train our own mariners, bring them in, put them on the deck and work them all the way up into the wheelhouse. We are seeing some wage pressure, but we're able to crew our vessels. I do think it does impact the charter boat community a little bit. You know, there's some shortage, and so we are seeing some wage pressure across the marine fleet.
Okay. All right. Very good. Thanks for your time, guys.
Thanks, John.
Operator (participant)
Our next question comes from Jon Chappell from Evercore. John, please go ahead.
Jonathan Chappell (Analyst)
Thank you. Good morning, guys.
David W. Grzebinski (CEO)
Good morning, John.
Jonathan Chappell (Analyst)
David, I want to get back to the Diesel Engine Services business. Appears like it's back from the dead a little bit here. You mentioned strength in both reman and manufacturing. Just curious, as this revenue looks, you know, similar to that back in the heady days of 2011, how much of this improvement is kind of a return to the OEM-type business, manufacturing business, and how much of this is a success in your transition towards more of a remanufacturing business?
David W. Grzebinski (CEO)
Yeah, a lot of new equipment. It, it—so it's been driven a lot by new equipment orders. We have seen, reman, though, come up, quite a bit. But it, you know, it's off a low base, right? So, you know, reman volumes are, I don't want to say they're doubling, but, but they've gone up a lot, but it's a low base. So what we've really seen pick up is, is the new equipment in terms of absolute dollars and, and number of units.
Jonathan Chappell (Analyst)
Okay. Then my follow-up on the margin, if I just take what Andy said, you know, land-based was 80% of revenue and then roughly a 10% margin, we kind of back into what the marine diesel engine service margin would look like. It actually looks pretty low. Was there something anomalous in the third quarter with the marine business? Was this something seasonal? And, you know, could this potentially, you know, lead to upside in the future quarters?
David W. Grzebinski (CEO)
Yeah, yeah. Well, be careful with the margins and putting too fine of a point. We give rough, you know, we say 10% range and there. So it... The diesel engine, the legacy diesel engine systems business is right around the double-digit, 10% margin range. And just remember that there's some seasonal moves there, based on when our customers want to work on their vessels. You know, there's sometimes some, in advance of a big grain harvest, there may be some work, and as they're getting ready for the grain harvest, there could be less work.
And then in the winter months, as you know, the first quarter is usually pretty strong for our marine diesel repair business because, you know, the upper parts of the river system are impassable because of ice.
Jonathan Chappell (Analyst)
Okay.
David W. Grzebinski (CEO)
So there is some seasonality. But now, there's the long and short of it, I don't think there's anything out of the ordinary in the legacy diesel business.
Jonathan Chappell (Analyst)
Okay. Thank you, David.
David W. Grzebinski (CEO)
Thanks, John.
Operator (participant)
Our next question comes from Ken Hoexter from Merrill Lynch. Ken, please go ahead.
Ken Hoexter (Analyst)
Great. Good morning.
David W. Grzebinski (CEO)
Hey, Ken.
Ken Hoexter (Analyst)
Dave, can you talk about coastal rates for a minute? It seems like, you know, you give us the inland revenue. So if we kind of back into the offshore marine and using just the barges, and since you don't separate kind of the dry cargo from the actual offshore, you know, we kind of just take an overall average, and it seems like that might have slowed in terms of the growth. Is that what you're seeing maybe on a sequential or year-over-year basis? And going back to where are you relative to your reinvestable levels? You used to talk about rates needing to get to a certain level before you would start to see that fleet expand.
David W. Grzebinski (CEO)
Yeah. No, we're still seeing, you know, mid- to high-single-digit price increases in the coastal business. We're still below the level we think for reinvestment, but we're getting closer. You know, maybe we're oh, 15% below. I mean, 15%-20% below still. So there's still they still need to come up. And, you know, as we look at it, the contracts that we've signed for the future, you know, those rates are they're gonna be where they need to be for us to get our 12% hurdle rate. So but there's still a ways to go.
Ken Hoexter (Analyst)
But to clarify, are you seeing that growth decelerate tremendously? Or, I mean, what if that was high single digits, what was it the last few quarters?
David W. Grzebinski (CEO)
No, it's stayed in high single digits.
Ken Hoexter (Analyst)
Okay.
David W. Grzebinski (CEO)
I don't think we're seeing any deceleration at all.
Ken Hoexter (Analyst)
Okay, so no concerns with it. Okay, good. And then on the-
David W. Grzebinski (CEO)
Sorry.
Ken Hoexter (Analyst)
Oh, no, please go ahead. Finish up.
David W. Grzebinski (CEO)
Yeah, no, you asked about the dry cargo business in on offshore. As you know, it's a pretty small part of our business, and we had just put in those new units, right? Replacing the old units that we've used for over 30 years. But that business, you know, was already under contract, so there's not been a lot of change there. We do have a little more depreciation expense because of the newer units, but still, you know, no real change in the price structure on the bulk of our dry cargo business.
Ken Hoexter (Analyst)
No, that was... Yeah, that's helpful. And I was, yeah, really referring to the coast-wise, which it's great to see that that's not decelerating then. The my second question, follow-up is on the size of the fleet. You mentioned, or Andy mentioned, growing from 173 to 178. Do you get concerned at some point in terms of fleet growth relative to your size and the industry growing before the petrochem markets come online? Are there interim things going online that are chewing up that demand? Just want to make sure that we don't get into an oversup- I guess, how you measure getting into an oversupply or building too fast before you start to see that demand really take off in, I guess, what another year or two?
David W. Grzebinski (CEO)
Yeah. No, it's a delicate balance, but clearly, we, we think, we can put that equipment to work, in the interim. To your point, it's really 16, well, probably mid-16 and beyond, where before the big chemical plants come on. But obviously, there's enough incremental demand here for us to believe that we can put that equipment to work or we wouldn't have built it. And that, you know, that's still the case. We, we do believe we can put it all to work.
Ken Hoexter (Analyst)
Okay. Just a final wrap-up, if I can. The bunkering issue, can you explain that? What that was or the size of that in terms of-
David W. Grzebinski (CEO)
Yeah
Ken Hoexter (Analyst)
What that customer shift was?
David W. Grzebinski (CEO)
Yeah, happy to. We had a contract with a customer in Florida to handle the bunker volumes throughout Florida. That customer sold the business to another entity. That other entity, who's now a new customer, basically changed the way they were doing business, and shut down a couple ports, so we had to reposition some equipment. And they've also changed a little bit of the way they're doing the business. So it had you know, the repositioning cost us some in the quarter, but there is also kind of a revenue dip from it. Some of it will come back, and some of it won't. I would... You know, I think it was about $0.01-$0.02 in the quarter.
If you annualize that number, you know, about half of it'll come back over time, but as we reposition the equipment, but some of it just won't come back because it, the business just went away. Does that make sense?
Ken Hoexter (Analyst)
Truly appreciate. Yeah, no, totally. And truly appreciate the insights, and time. Thank you.
David W. Grzebinski (CEO)
Thanks, Ken.
Operator (participant)
Our next question comes from David from Iberia. David, please go ahead. David, are you on the line? If you're muted, please unmute your phone. If you're on a speakerphone, please pick up the handset. At this time, we cannot hear you. We'll move to our next question. It comes from Matt Young, from Morningstar. Matt, please go ahead.
Matthew Young (Analyst)
Good morning, guys.
David W. Grzebinski (CEO)
Good morning.
Matthew Young (Analyst)
Regarding the land-based business, real quick. In the past, you've mentioned customers are gradually getting more comfortable with remanufacturing equipment. Wondering if there's a prevailing opinion that reman equipment is subpar or cost-inefficient versus new?
David W. Grzebinski (CEO)
No, I think reman will continue to grow. I think there is a desire. Look, it makes economic sense. You can reman a piece of equipment, get roughly the same life at a less cost. So it's really a capital discipline by our customers, and some of them are moving down the line. But there's also. There's another dynamic too, right? Newer equipment has sometimes, you know, this equipment is really put through its paces because they're running it so hard, and there are some of the newer designs have some increased efficiency. So there's a trade-off there.
But clearly, the reman makes economic sense, and, you know, it is really a capital and economic decision by our customers, and I think they see the value of it. Also, just, just let me clarify. There's, you know, there's kind of maintenance and repair, and then there's full reman. So maintenance and repair is just kind of fix what's broken, but a full reman is you basically come in and you rebuild the entire frac unit, the pumping unit, if you will. So you could replace the transmission or refurbish the transmission, refurbish the engine, refurbish the pump and paint it, and it basically runs like new. It's just, it's not new, and it's, but it's still very effective and cost-effective for them.
Matthew Young (Analyst)
I would assume then that customers generally can't do that themselves. They'd have to outsource that?
David W. Grzebinski (CEO)
Well, um-
Matthew Young (Analyst)
Depending on the size-
David W. Grzebinski (CEO)
Some of the customers, you know, the very large customers, and you know who they are, the Schlumberger and Halliburton of the world, they certainly have the capability of it, but it's hard work. You know, tearing apart an engine and a transmission and rebuilding it is hard work. It's time-consuming, and so they do like to outsource it. Some of the routine maintenance, they're happy to do internally. More and more, they're outsourcing the remanufacturing.
Matthew Young (Analyst)
Do you have a lot of competitors that handle the remanufacturing, or is it a very limited marketplace?
David W. Grzebinski (CEO)
Well, there's always too many competitors, right?
Matthew Young (Analyst)
Sure.
David W. Grzebinski (CEO)
Yeah, no, there's a handful. It, you know, remanufacturing is much more difficult than building new. So there's probably, you know, 15 people that are building new equipment and maybe, you know, 5 or so that are really, you know, capable of doing the remanufacturing.
Matthew Young (Analyst)
Okay. All right, thanks. Appreciate it.
Operator (participant)
Our next question comes from Fran Okoniewski from Friess Associates. Please go ahead.
Francis Okoniewski (Analyst)
Yeah, good morning. Thanks for taking my call.
David W. Grzebinski (CEO)
Hey, Fran.
Francis Okoniewski (Analyst)
On the chemical and petrochemical side, when we start to see capacity increase in 2016, 2017, I'm just trying to understand, is this a little bit more of a specialized market for you, for the industry? And is there any sort of a benefit to overall mix, as we see this increase?
David W. Grzebinski (CEO)
Yeah, I wouldn't say it's, it's specialized, but clearly, you know, we're, we're pretty big in the petrochemical side. We've, we've really focused on it. You know, if you think about our product mix versus, say, the standard industry, we're, you know, if you look at our entire fleet, marine fleet, 50% of what we move is petrochemicals. If you look at our inland fleet, it's about two-thirds, you know, about 67% is petrochemicals. I would say if, if you look at our competitors, their product mix is, is not as, as healthy in, in terms of petrochemicals.
So, that's a long way of saying we've got some long-established relationships in the petrochemical space that, that, one, we covet, and, and two, that, we work very hard day in and day out to make sure they're, they're comfortable, and we can, and, cover their needs. So I, I, it's probably not a direct answer, but it, it does give you a, a feel for that, that there is some level of differentiation around petrochemicals.
Francis Okoniewski (Analyst)
Okay, thanks.
Operator (participant)
Our next question comes from John Mims, from FBR Capital Markets. John, please go ahead.
Hey, thanks, guys. Thanks for a quick follow-up. I had a question on the coastal fleet because I've been getting this, you know, several questions about ECA zone regulations as far as emissions on the engine side, but also water, ballast water treatment. Is there any expense or cost that we should anticipate upcoming as far as getting your fleet up to par with the new regulations? And, you know, that on one side, but on the other side, is there any anticipation that these new regulations would accelerate retirements from your competitors? I know a lot of the fleet is already fairly old on the ATB market.
David W. Grzebinski (CEO)
Yeah. You know, on kind of the Tier emission standards, of course, you know, we're gonna comply there, and I think the whole industry is, and anything that you're building new has the new... Well, if you start building it after this year, it'll start having the new Tier emission standard engines, and everybody will have to deal with that, and we'll have to pass the costs on to our customers. The stuff that's being built now is still before the Tier 4 standard, if you will, and is, I don't want to say grandfathered in, but it's all allowed by law. On ballast water, you know, the Coast Guard has still not opined on what type of ballast water system they'll approve.
There's a couple different types out there. But yes, it's gonna be a cost to, you know, just order of magnitude, it could be $1.5 million per unit on ballast water, but the entire industry is gonna have to deal with it. Quite frankly, I think of it as something that we're probably more capable to deal with than some of our competitors, just because of our balance sheet. If it does accelerate, you know, the retirement of some older equipment, that's a good thing from our standpoint. Hard to put a number on how many pieces of equipment that might be, but as you've heard us say in the past, John, the...
You know, the coastwise fleet, the 200,000 barrel and less barge fleet, you know, there's 40 or so vessels that are over 30 years old. So, maybe those ballast water investments could help, to your point, accelerate a couple of retirements, which I think that'd be healthy for the industry.
John R. Mims (Analyst)
Right. Thank you. Yeah, because that's-- I'd heard a number higher than 1.5, and that was sort of the argument that these older vessels, it's, it's-- you would never recoup the investment. So I didn't know if we should think of that as an expense coming in for y'all or something that would push pricing, you know, just as supply is shrinking. So that's helpful.
David W. Grzebinski (CEO)
Okay. Thank you.
Thanks, John.
Operator (participant)
Our next question comes from Kelly Dougherty from Macquarie Group. Please go ahead. Kelly, are you on the line?
Kelly Dougherty (Analyst)
Hi, can you hear me?
Operator (participant)
Yes.
Kelly Dougherty (Analyst)
Sorry about that. Just wanted to follow up on the outlook for remanufacturing. If oil prices are lower, do you think that that makes people, your customers, more inclined to lean towards your manufacturing? You talked about it as a, as a capital discipline decision. So if they're not making as much money, is it too simplistic to say that, you know, they better appreciate the economics of remanufacturing? And is there any kind of point where you think at, you know, $90 or $100 oil, here's our thoughts on reman, and maybe at $70 or $80, it's, you know, that plus 10%, or any way to think about that?
David W. Grzebinski (CEO)
Yeah, but I like the thought process, and it's very logical. But there are a lot of moving parts for our customers and, you know, sometimes it could be a basin-by-basin decision. Kelly, the short answer is I don't know. I think economics makes sense and usually win out in the long run, so what you articulated would make perfect sense. But you know, they're managing a number of dynamic things. You know, where their crews are, where their equipment is, how old some pieces of equipment are, and... But clearly, economics should win out in the long run. So, I like your logic.
Kelly Dougherty (Analyst)
Hopefully, they do, too.
David W. Grzebinski (CEO)
Yeah, I think so.
Kelly Dougherty (Analyst)
Thanks very much.
David W. Grzebinski (CEO)
Thanks, Kelly.
Operator (participant)
We have no further questions at this time.
Sterling Adlakha (Head of Investor Relations)
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.