Jul 25, 2013
Executives
G. Stephen Holcomb, Vice President-Investor Relations Joseph H.
Pyne – Chairman, President and Chief Executive Officer Greg R. Binion – President-Marine Transportation Group
Analysts
Jonathan B. Chappell – Evercore Partners Gregory Lewis – Credit Suisse Jack Atkins – Stephens Inc Veronica Zhang – Bank of America Merrill Lynch John Barnes – RBC Capital Markets Michael Webber – Wells Fargo Securities LLC Chaz Jones – Wunderlich Securities Kevin Sterling – BB&T Capital Markets David J.
Tamberrino – Stifel, Nicolaus & Co., Inc. David Beard – IBERIA Capital Partners Matthew Young – Morningstar, Inc.
Operator
Welcome to the Kirby Corporation 2013 Second Quarter Earnings Conference Call. My name is Christine, and I will be the 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 would now like to turn the call over to Mr.
Steve Holcomb. You may begin.
G. Stephen Holcomb
Good morning. Thank you for joining us.
With me today are: Joe Pyne, Kirby’s Chairman, President and Chief Executive Officer; David Grzebinski, Kriby’s Executive Vice President and Chief Financial Officer; and Greg Binion, President of Kirby’s Marine Transportation Group. During this conference call, we may refer to certain non-GAAP or adjusted financial measures.
A reconciliation of the non-GAAP financial measures to 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 forward-looking statements.
These statements reflect management’s reasonable adjustment with respect to future events. Forward-looking statements involve risk and uncertainties.
Our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby’s Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission.
I will now turn the call over to Joe.
Joseph H. Pyne
Thank you, Steve. Yesterday afternoon we announced second quarter earnings of $1.11 per share, which included a $0.07 per share were reversal of the earn-out liability from our April 2011 acquisition of United Holdings and in addition of $0.03 per share negative impact from a combination of high water and lock issues.
During the 2013 second quarter our inland and coastal tank barge fleets continued to benefit from strong U.S. petrochemical production levels as stable refinery volumes, the export of lube oils and diesel fuel, as well as movements of crude oil and gas condensate from shale formation, both the inland and coastal fleets maintain high equipment utilization levels and higher pricing trends.
Second quarter was negatively impacted by heavier shipyard schedules in the coastal area something that we discussed during our second quarter conference call. With respect to our land based diesel engine business the market for manufacturing new pressure pumping units continues to be slow, partially offset the situation is the remanufacture of these units, which continues to progress as we expected.
It does appear that this business is on the bottom and we are seeing some signs of improvement. In our – on the marine side of diesel engine business while market conditions were generally stable across majority of our markets, the high work conditions during the quarter on the Mississippi River did lead some of our customers to differ several maintenance projects, but we expect to see these projects later this year.
With respect to the oil service market in the Gulf of Mexico that stable power generation markets are also stable. I’m going to now turn the call over to Greg who will take you through our marine transportation business and then David will take you through the financial side of the business and I’ll come back at the end of the call with some concluding remarks.
Greg R. Binion
Well thank you Joe and good morning to all. I will address the inland market first and then followup with the coastal market.
For the second quarter our inland marine transportation business continues its overall strong performance with equivalent utilization in the 90% to 95% range and as Joe said favorable terms and spot contract pricing. In the 2013, second quarter we saw high water conditions on the Mississippi and Illinois River that persisted really throughout the second quarter.
This was the result of snow melt and consistent range. The high water conditions resulted in slower transit times, additional horse power requirement and assist boats at numerous ridges and locks.
Additionally, the Bayou’s lock is located on the Gulf Intracoastal Waterway near New Orleans was closed due to structural damage from late March until July 18. This created heavy congestion in multi day relays at Harvey Locks in the New Orleans area and also along the ultimate route to the Mississippi River at Bayou Sorrels and Port Allen Locks.
The high water and lock delays negatively impacted our second quarter results by an estimated $0.03 per share. Inland transportation revenues from a long-term contracts that is one year longer were 75% of the total revenue in the mix of time charter and the fragment contracts for the second quarter were 58% time charter and 42% of fragment.
Moving to inland marine transportation pricing, term contracts during the second quarter continued at mid single-digit levels when compared with the 2012 second quarter. Second quarter spot contract pricing on the average remained about 5% higher than term contract pricing.
Turning to new inland tank barge, and towboat construction, during the 2013 first six months, we took delivery of 51 new tank barges totaling about $1.1 million barrels of capacity, and two inland towboats. We retired 26 tank barges, and returned three chartered tank barges removing approximately 450,000 barrels of capacity.
So net-net during the 2013 first six months, we added 22 tank barges to our fleet increasing our inland capacity by approximately 650,000 barrels. As of June 30, we are operating 863 inland tank barges with the capacity of $17.3 million barrels.
In May, we signed contracts for the construction of 50 new 10,000 barrel inland tank barges and two new 30,000 barrel inland tank barges totaling approximately 580,000 barrels of capacity. 11 of the 10,000 barrel tank barges in both of the 30,000 barrel tank barges are scheduled for delivery in the 2013 fourth quarter with remaining 39 new 10,000 barrel tank barges to be delivered in 2014.
For the 2013 first half, we expect to place into service 17 inland tank barges with the capacity – for the 2013 second half, we expect to place into service 17 inland tank barges with the capacity of approximately 270,000 barrels, and one new towboat. For 2013, the cost of new inland tank barges and towboats delivered throughout the year will be approximately $135 million.
At the present time, we expect to finish 2013 with approximately 17.3 million barrels, about the same as our present capacity level, and approximately 675,000 barrels above the 16.7 million barrels of capacity we had at the beginning of 2013. Moving to the coastal business, Kirby Offshore Marine’s overall equipment utilization remains in the 90% range during the second quarter, consistent with the 2013 first quarter, and significantly above the 75% utilization range for the 2012 second quarter.
All of the coastal markets with the exception of the New York and Philadelphia, Harbor Ship Bunkering markets remain strong driven in part by increased demand for crude oil and condensate moves, and continued progress in expanding our coastal business to our inland customers base. As we previously noted the 2013 second quarter was impacted by heavy shipyard schedule for coastal equipment.
As of June 30, 2013, approximately 75% of the coastal operations’ revenue were under term contracts compared with 60% of the 2012 second quarter, with this balance coming from spot contract revenues. This improvement represented the addition of Allied and Penn as well as new contracts signed in 2012 fourth quarter and the 2013 first half.
With respect to coastal marine transportation pricing, term contracts were renewed during the second quarter increased in the high single-digit range, and in some cases higher when compared with the 2012 second quarter. Second quarter spot contract pricing was on the average 15% to 20% higher than term contract pricing.
The New York Harbor bunker market has been challenging for us. Last week we entered into agreement to sell the small bunkering tank barge fleet that operates in the New York and Philadelphia harbors to another operator.
We anticipate the closing to occur during the 2013 third quarter. I want to emphasize that we are not exiting the New York and Philadelphia harbor markets just the ship bunkering portion of these markets.
With that I will turn the call over to David.
David L. Lemmon
Thank you Greg and good morning everyone. As Joe noted, our 2013 second quarter earnings per share of $1.11 included $0.07 per share of credit for the earn-out.
As of June 30, the earn-out liability stands at $7.9 million. Marine transportation revenues grew 24% and operating income grew 36% over the 2012 second quarter.
The inland factor contributed approximately 70% of the second quarter marine transportation revenue and the coastal sector of approximately 30%. Despite the high water levels and lock issues are inland operations earned in operating margin of over 25% for the second quarter.
The coastal operations, operating margins despite the high maintenance quarter remained in the mid-teens compared to the low single-digits for the 2012 second quarter. The overall marine transportation segment, second quarter operating margin was 23% compared with 21% a year ago.
Our diesel engine services revenue for 2013 second quarter was 17% below the year ago quarter and diesel engine services operating income was inline with the 2012 second quarter. However, without the $6.1 million earn-out adjustment, the operating income would have been 42% lower than the 2012 second quarter.
The segments operating was 10.7% compared to 8.9% from the 2012 second quarter. The decline in revenue and operating income was due primarily to the lower results in our land-based operation.
Our land-based operation contributed approximately 65% of the Diesel Engine Services segment revenues and excluding the earn-out credit, earned a mid-single digit operating margin. The legacy diesel engine operations contributed about 35% of the Diesel Engine Service revenue with an operating margin in the 10% range.
As Greg mentioned, some of our CapEx, we are increasing our capital expenditure guidance from $230 million to $240 million for the year and that’s up from the guidance of a $190 million to $200 million. Capital expenditures guidance for new construction increased by $20 million to $135 million, reflecting 13 inland tank barges scheduled for delivery in the fourth quarter as Greg noted.
Capital upgrades and improvements to the existing inland and coastal equipment increased by approximately $18 million to the $83 million to $93 million range, which is up from previous guidance of $65 million to $75 million. Total debt as of June 30 was $1.02 billion and our debt-to-total cap was approximately 35.7%.
As of June 30, we had $70.9 million outstanding under our revolving credit agreement, which compared to a $145 million as of March 31 of 2013. However, this morning our revolvers’ outstanding balance was $43 million as we continue to delever with our strong cash flow, and over the past six months we’ve paid down $150 million of debt, and as of last night our debt for the company is at $985 million.
With that, I’ll turn the call back to Joe.
Joseph H. Pyne
Okay. Thank you, David.
Yesterday we announced our third quarter guidance of $1.5 to $1.15 per share. This compares with $0.95 per share earned in the 2012 third quarter.
For the year we raised our guidance to a range of $4.15 to $4.35 per share compared to the $3.73 per share earned in 2012. This annual guidance range includes a $0.05 per share first quarter and a $0.07 per share second quarter adjustment to the United earnout.
Our third quarter or year guidance range does not include any additional adjustment to this earn out. Our third quarter guidance assumes a continued improvement over 2012 pricing for inland transportation, markets we’re currently operating at close to full utilization levels.
It assumes the continued improvement in coastal utilization and corresponding higher term in spot contract pricing. We feel as I mentioned earlier that we’re at the bottom of the cycle in our land based market and still believe that we’re going to see some improvement late this year early next year.
Our guidance traditionally assumes our legacy diesel engine service market will remain consistent with first half of 2013. During last quarter’s conference call, I talked about my intention to step down as Kirby’s CEO early next year, but remained as an active Chairman with David Grzebinski assuming the position of President and CEO early next year.
This transition remains on track. As part of my transition plan, I tend to establish a sale plan in accordance with SEC Rule 105-1 and sell 200,000 of my Kirby shares.
Most of my net worth is in Kirby’s stock or some diversification is prudent thing to do. I intend to hold on to my remaining shares.
With respect to the last 12 months and the inland side of our business, we’ve had some unusual and challenging operating conditions high and low water and some significant and again unusual infrastructure problems, which have opposed some headwinds on our earnings. I’m hopeful that this is for the most part behind us and that we will experience going forward in more typical operating conditions for the balance of this year in to next year.
Operator, that concludes our prepared remarks. We are now ready to open the call up for questions.
Operator
Thank you. We will now begin the question-and-answer session.
(Operator Instructions) Our first question comes from Jon Chappell from Evercore Partners. Please go ahead.
Jonathan B. Chappell – Evercore Partners
Thank you. Good morning, everyone.
Unidentified Management Speaker
Good morning, Jon.
Jonathan Chappell – Evercore Partners
Joe and David, I was going to ask you about use of cash even before the press release came out, but then there I think there was a little bit clarity there in the end to CapEx budget. I am just wondering with the ramp up in the spend on barge new build, is that kind of a statement about the acquisition environment that price has kind of run away from you because of the strength in your core businesses and should we expect you to focus a lot of the cash flow generation on maybe organic growth to new builds?
Unidentified Management Speaker
I think it certainly says that there are opportunities to add capacity, which as you know we do prudently. I am not ready to say that acquisitions are behind us at least at this point.
It was one noted report couple days ago with more that selling their fleet at a good rich value. We look – we think that’s positive because it demonstrates other’s enthusiasm with respect to this market.
Along the way, there is going to be other acquisition opportunities. We’ll just have to evaluate them based on what we think our view is of the cycle and our ability to get the returns that we’re trying to run the company to achieve.
Jonathan B. Chappell – Evercore Partners
Okay. And then I guess the true kind of follow-up to that.
What was the yard capacity if you would be able to go out and order those barges, and what is the kind of mean for the total industry capacity? But there is opportunities for you to expand through some new builds with pretty timely a prompt deliveries?
Are you concerned at all that others would follow suite given the returns and you can see maybe an acceleration of the capacity growth?
Gregory R. Binion
Hey, John, this is Greg. One of the things you have to recall is, we’re constantly looking at our fleet and this 50 barge order is really the large part of fleet replacement – fleet replacement order was done on small capacity and we’ve been talking to the shipyards for quite a while before we actually price the order.
In terms of maybe a way to think about it is that, in terms of capacity to get new barges, the timeline now looks like kind of the tail end of 2014, the second half of 2014, there is some shipyard availability. So that’s a little shorter timeline than we had at this time last year.
So, I think that there is – it’s certainly easier to get additional capacity now than it was a year ago.
Jonathan B. Chappell – Evercore Partners
And did the change your view on kind of the supply demand dynamic over the next 12 months to 18 months?
Gregory R. Binion
Well, I think what it say is that the industry is maybe a little more cautious with perspective ordering new equipment to where they were a year ago. Yeah, we’ll have to see, the order book a year ago was, at this point really fully booked the 2013 year.
Jonathan B. Chappell – Evercore Partners
Okay. That’s great.
Thanks Joe, thanks Berdon.
Operator
Thank you. Our next question comes from Gregory Lewis from Credit Suisse.
Please go ahead.
Gregory Lewis – Credit Suisse
Yes. Thank you, good mornings guys.
Unidentified Company Representative
Good morning.
Gregory Lewis – Credit Suisse
Just, I guess staying on Jonathan’s question on the CapEx, I mean, so it looks like the fleet capital upgrades were increased by about $18 million for the year. Where those capital upgrade, is that something that’s being driven by customer demand, is it regulation, is it simply, your guys confidence in upgrading that equipment enables you to get a better return just if you would provide some color around the decision to upgrade…
David L. Lemmon
Yeah, Greg, this is David. Yeah it’s a little bit of all of it.
There are some opportunities where you can for example just to give you one example, in the Coast wise fleet where you could add vapor recovery to an existing barge, which gives it more optionality and functionality and allows us to – for example to maybe move some comments with it or you may take a wire boat and ride into a [notched] boat where you get better utilization in tough weather environment. But it’s all of what you said looking for ways to extend life and the usefulness of our equipment.
Gregory Lewis – Credit Suisse
Okay. Great and then just on the sale of the bunkering business in New York and Philadelphia, I guess you could just loosely sketch out what was involved, I mean what type of equipment if any and – like how much cash is being realized for the sale of that?
Unidentified Company Representative
Yeah, now it’s – this is all very small equipment in the New York and Philly market. For us it was 5 small barges, very small barges, we’re still in the New York and Philly markets and the North East markets in a big way.
Our focus in on the cleaning equipment and some of the bigger equipment where, quite frankly we find it much more attractive. In the New York ship bunker market, there was a lot of capacity up there to be brought, it was a small business for us, only about $10 million in revenue on an annualized basis and to be bond, we were kind of at breakeven and loosing money for periods of time.
So, it’s just the slight little tweak. We’re still focused particularly with the van and excuse me, the Penn and Allied acquisitions.
We’re still focused on that larger market up there with the bigger pieces of equipment.
Gregory Lewis – Credit Suisse
And then actually just a real quick, did you do bunkering anywhere else beyond this two regions?
Unidentified Company Representative
Yeah. No, we’re in bunkering in a big way in the Miami market.
We’ve got lot of equipment and infrastructure, nice business for us and in all along the Gulf Coast, we’re bunkering in a big way. The New York market has way too much equipment, a lot of players and we had a small presence in that.
Unidentified Company Representative
And just, and remember Greg that we were actually, we’ve been talking about this for a number of quarters. We’ve moved equipment out of New York positioned it another places.
One of the beauties of Kirby is our flexibility and our ability to move equipment to respond to market opportunities reeling throughout the system. In the near Harbor, our focus has kind of moved, this is some of the business that we inherited with our K-Sea acquisition has moved as David suggested with Allied and Pan to kind of larger coastal units, and this allows us to kind of fully focus on continuing to develop that business, and exiting a business that had been little problematic really since we bought it.
Gregory Lewis – Credit Suisse
Okay, guys. Hey, perfect.
Thank you for the color.
Operator
Thank you. Our next question comes from Jack Atkins from Stephens.
Please go ahead.
Jack Atkins – Stephens Inc
Good morning, guys. Thanks for the time.
So I guess first off, David and Greg could you maybe quantify the revenue impact from the increased coastal maintenance that you guys undertook in the quarter, and if you could give us some color on was that maintenance level that you actually under took higher than what you were expecting kind of going into it or was it about what you thought it would be?
David W. Grzebinski
Yeah, Jack the – in our guidance for the second quarter we had the maintenance time in loss revenues day, and the actual cost of the maintenance that we incurred in the shipyard this quarter. Within our guidance range and as expected, as you look forward, the amount of shipyard maintenance that’s scheduled is going to go down in the third quarter, and go down even further in the fourth quarter, so we’ve got a lot of tailwind coming, it’s just a way the regulatory shipyards fell and again it was it’s kind in our guidance range.
Jack Atkins – Stephens Inc
Okay, okay, thank you for that. And then David, I guess just to kind of think about them on the margin side of the marine transportation business.
How should we think about incremental margin there for the next call it a year or so, I would think with favorable pricing trend that you are seeing both on the inland side and really accelerating pricing on the coastal side. Something in excess of like 35% incremental margin in doable, but it just was curious to kind of here, how you all think about incremental margins over the next four to six quarters.
Joseph H. Pyne
Yeah. But you are right actually incremental margins are quite good, because when you get price increases, it’s unless you have some cost inflation.
Now we see a little bit of cost inflation here and there, but it’s the by and large the price increases do fall to the bottom line, so incremental margins can be very healthy. To be honest I haven’t put pencil to paper on the coastal and inland incremental margins as price increases go through, but your estimate if anything might be a little low, but incremental margins are quite good.
Jack Atkins – Stephens Inc
.
Operator
Thank you. Our next question comes from Ken Hoexter from Bank of America.
Please go ahead.
Veronica Zhang – Bank of America Merrill Lynch
Hey, guys. This is actually Veronica Zhang in for Ken.
Joseph H. Pyne
Hi Veronica.
Veronica Zhang – Bank of America Merrill Lynch
H, how are you. So just on offshores, so we’ve seen that 90% utilization level carryover for two quarters.
I was just wondering what needs to happen at this point for us get to mid-90s 95 level. And if it’s just all pricing at this point?
Joseph H. Pyne
Utilization?
Veronica Zhang – Bank of America Merrill Lynch
.
Joseph H. Pyne
It’s not, I think it’s going to get there as equipment continues to leave the business and volumes improve. So it’s just – I think it’s a matter of time.
Pricing is, they already are in a pretty good pricing environment, so pricing should continue to be favorable going forward.
Veronica Zhang – Bank of America Merrill Lynch
And I guess, since I mean, six to nine months ago, you guys were seeing contract renewals at maybe low single digit and now you are seeing high single digit, where does that sort of go to?
Unidentified Company Representative
I think you’re going to see this kind of rate escalation for a little while. We are still significantly below replacement value pricing.
There is continued demand for the equipment. You’re coming off of but very low pricing levels.
So you’re going to continue see a favorable trend for a while.
Veronica Zhang – Bank of America Merrill Lynch
Okay, and just one last thing. I think you mentioned that you had spot prices, about 15% to 20% higher than your long-term contracts, where has that delta sort of been trending over the past couple of months and where do you see that going?
Unidentified Company Representative
Yeah, the other last over the quarter that 15% to 20% really describes the last quarter, second quarter, and the expectation that Joe kind of painted is that should continue for the foreseeable future and event. That gives me the confidence of saying that pricing trend should continue.
Now, whether it’s going to stay at that level, 15% to 20% above contract pricing is a bit unusual, what you typically see in a more normal market is spot pricing leading contracts 5% to 7% something like that. So when you see a delta of that magnitude, it gives you a pretty good indication of the direction that the market is going.
Veronica Zhang – Bank of America Merrill Lynch
I must say, thank you for the time.
Operator
Thank you. Our next question comes from John Barnes from RBC Capital.
Please go ahead.
John Barnes – RBC Capital Markets
Good morning, guys. A couple of questions, along those same line of questioning around pricing, when we’ve seen spot rates move this magnitude over a couple of quarters, I think in the past Kirby has started to see more customer demand for longer-term contracts or contracts more on a day rate basis that kind of thing.
Can you just speak to as spot rates have popped up as contractual rates are moving higher, what kind of behavior you are seeing out of your customer base in terms of demands on terms and linked and things like that?
David L. Lemmon
Yeah, John, this is David. Just can use coastwise as an example, but you saw that over the last basically year, we’ve gone from about 60% contracted.
Last quarter, we are on 70%, this quarter about 75%, so you are precisely right. As pricing is going up, the customers are looking for longer contracts, they are wanting to get those term contracts in place to protect themselves.
We would be very thoughtful as you would expect. You want contracts with the right customers with the right volumes and right markets and we are slowly hedging that contract mix up.
Joseph H. Pyne
And with respect to the offshore market, that’s principally a time charter market.
John Barnes – RBC Capital Markets
Right.
Joseph H. Pyne
You don’t have as the freightment to time charter mix in the inland business, about 90% to 95% of that business is going to be on time charters.
John Barnes – RBC Capital Markets
Okay, all right. And I think you said in the past that especially on the inland business you’ve always looked for – you’d like to have maybe [cargo] represent as much as, say 25% of your total business.
Have those percentages changed, I mean, or is it just what the market will it bear?
Greg R. Binion
Yeah, hi, John, it’s Greg. I’ll take that.
I think it’s still above that ballpark because the spot market gives us a couple of things. It gives us flexibility to take care of our term customers when their needs accelerate and they need more capacity from this.
We can evacuate from the spot market into those needs. And it also gives us an opportunity when our term customers, particularly on time charter equipment, when they don’t have the need, because we’re in the spot market everyday we can take that equipment, use it elsewhere and reduce their costs and decrease their cost per unit delivered.
So for these few reasons I think you’re going to see us try to maintain that spot presence about that level.
John Barnes – RBC Capital Markets
Okay. And then, Dave, last quarter you indicated that you were beginning to have conversations with coastal customers about longer term deals that would facilitate the purchase of new vessels.
Is there any update to those discussions or you’re closure to making a decision along these lines?
David W. Grzebinski
Yeah I would say they are progressing and everything is moving forward in a positive manner.
John Barnes – RBC Capital Markets
All right. Very good.
Thanks for your time, guys. Appreciate it.
Operator
Thank you. Our next question comes from Michael Webber from Walls Fargo.
Please go ahead.
Michael Webber – Wells Fargo Securities LLC
Hi, good morning, guys. How are you?
Joseph H. Pyne
Good morning.
David W. Grzebinski
Good morning.
Michael Webber – Wells Fargo Securities LLC
Hey, John and David, just trying to jump back onto the idea of coastal new builds for a second and you mentioned that they’re progressing. Can you maybe give us some kind of quarter-over-quarter color around maybe, kind of how that customer demand is shaping up and then early indications around size, type, and any sort of timeframe and then maybe also on a cost basis anything we were talking about $400 a barrel, whether that’s still relatively viable in terms of what you guys are saying from not going to some of the other (inaudible)?
Unidentified Management Speaker
Well, it’s delicate. You don’t want to get into too many specifics given you’re talking to customers.
But when we threw out the $400 a barrel number that was for a coast wise 185,000 barrel and those numbers can move around depending on how much horsepower you put behind each barge. Clearly, this is the process you work with your customers, you talk to a shipyard, we come back and you give them options about what they can do on the barge and/or with the tug in terms of horsepower and speed and whether they want certain attributes on the barge like a crude oil washing system or a vapor recovery system.
So it’s the process, it’s the best way to describe it and it in terms of how that process is going its very, very positive and you just don’t want to jeopardize a customer situation by getting too specific.
Michael Webber – Wells Fargo Securities LLC
Got you. We’ve seen more CSO activity in the Gulf (inaudible) and some Jones Act shuttle tanker there.
Would that be something you guys would be specially interested in or is that a little bit too far away from your core competencies?
Unidentified Management Speaker
You never say, never. But right now that’s certainly not our focus…
Michael Webber – Wells Fargo Securities LLC
Fair enough. And just as – kind of my follow up kind of at a different subject, but and you guys get questions on a dividend pretty regularly, and you’re obviously looking now at the capital towards the newer assets.
By getting to the size, you guys could probably think about doing both in terms of returning capital to shareholders and growing. A) are you thinking about the dividend and b) you need to kind of come to some sort of final investment decision on any sort of new build tonnage before you would seriously think about making that move or could you do it in tandem?
Joseph H. Pyne
You know, depending on the – of course the opportunity I mean or some scenarios where you could absorb most of your cash responding to opportunities, but I think that you are getting pretty close to being able to do both, and we certainly talk about it at the board level, we’ll continue to talk about it, but I don’t really want to signal where we’re going with it yet.
Michael Webber – Wells Fargo Securities LLC
Okay, that’s it. Thanks for the time guys.
Joseph H. Pyne
Thank you, Mark.
Operator
Thank you. Our next question comes from Chaz Jones from Wunderlich Securities.
Please go ahead.
Chaz Jones – Wunderlich Securities
Yeah. Hey, thanks.
Good morning. I was just curious, I was wondering that the coastal side of the business if all the cost synergies have been realized from the acquisitions therefore in the fourth quarter, is there still some more opportunity there?
Joseph H. Pyne
We probably can see through some of the SG&A moves that we have indeed seen some cost benefit. Yeah, and the bulk of it has gone Chaz, there maybe a little bit of improvement as we finish out the year here, as there is still some pieces in transition, but I would say the bulk of the cost savings is down.
Chaz Jones – Wunderlich Securities
Okay, that’s helpful. And then as a follow-up, I know it’s a small piece of the business, but the Ocean Transport segment that it does the drive bulk you referenced that two units being place back into service.
Is that looking out to the second half, you are going to ramp back up a little bit in terms of revenue, I know it’s somewhat profitable?
Greg R. Binion
Yeah, Chaz, Greg here. We did get our second unit and, of course, we’ll get revenue uplift and a little bit of an earning uplift from that second unit going into service.
So there will be a positive impact going forward.
Chaz Jones – Wunderlich Securities
Okay, great.
Operator
Thank you. Our next question comes from Kevin Sterling from BB&T Capital Markets.
Please go ahead.
Kevin Sterling – BB&T Capital Markets
Thank you. Good morning, gentlemen.
Joseph H. Pyne
Good morning.
David W. Grzebinski
Good morning.
Kevin Sterling – BB&T Capital Markets
So, David, how should we think about the collapse and spread for WTI and do you see any impact on your accrued volumes in your coastal business as a spread kind of came in some?
David W. Grzebinski
Yeah, I don’t think so. Kevin, I don’t think anybody believe it’s sustainable, but it’s driven more by anomalies and you are producing a lot of crude oil that’s being priced significantly above the marginal costs that’s going to be sold at probably lower prices and that spread is going to widen.
But at this point, I don’t think we’ve seen anything that at least in the markets it were in, that is driven by the spread contraction.
Kevin Sterling – BB&T Capital Markets
Well, right. So even that spread contraction we saw in second quarter, really didn’t have an impact on your volumes.
Is that fair to say?
Unidentified Company Representative
That’s right. Because I don’t think the market believes them truthfully.
And it may have an impact on larger volume moves from the Gulf Coast up to the East Coast but of course we are not in that market.
Kevin Sterling – BB&T Capital Markets
Right, right. And Joe, you guys have highlighted an improvement in your legacy marine engine services business.
Is this a function of maintenance that has been delayed and probably coming back, and do you expect this strength or this improvement that you saw in second quarter to continue for that foreseeable future as maintenance that was delayed as it looks like in…
Unidentified Company Representative
We think that that business is going to continue to improve. There are several trends that affected, probably the most significant one is the Gulf of Mexico resurgence, permits are being issued, they’re beginning to drill, it requires new power or power to come off the bank and be deployed.
Some of that equipment is also reaching its overall cycle. So all that I think plays into that market.
Now with respect to the deferrals, the deferrals were more in the inland river business where some overhauls that were planned for the second quarter were pushed into the third quarter and that happens pretty consistently. You make sure your budgets and forecasts are appropriate to your customers and they have a kind of a view of when they can fit these things in and that view is very dynamic, it moves around.
So those overhauls will move around. But I think that generally that business should continue to improve end of the foreseeable future.
Kevin Sterling – BB&T Capital Markets
Right, okay. Thanks very much of your time this morning, I really do appreciate it.
Joseph H. Pyne
Thank you, Ken.
Operator
Thank you. Our next question comes from David Tamberrino from Stifel.
Please go ahead.
David J. Tamberrino – Stifel, Nicolaus & Co., Inc.
Great. Thank you for taking my questions gentlemen.
Earlier you mentioned on the coastal side of the market that pricing was still kind of below where the replacement value would be. How much further does pricing have to go there in order to get up to that level?
Joseph H. Pyne
It’s still got a little ways to go, but we will get closer and closer, maybe 10% to 20%...
David W. Grzebinski
It depends on the unit.
Joseph H. Pyne
Yeah well it depends on the unit in the market, but it’s got some way to go, but it’s getting closer.
David J. Tamberrino – Stifel, Nicolaus & Co., Inc.
And how pricing surpass kind of prior peaks in the coastal market, or we still below there as well?
Joseph H. Pyne
Approaching peak price, and we think that it’s going to trend, for a number of reasons it’s going to trend higher. One, you have new volume, two, you continue to have equipment that’s being taken out of business so your supply and demand is going to tighten up.
Now the cost of replacing this equipment is more expensive and frankly maintenance is getting more expensive. It’s getting older, you have, because of a very difficult market last three or four years, some deferrals, it’s got a lot of things that are working through that business that suggests that you really need to make more money to get it healthy.
David J. Tamberrino – Stifel, Nicolaus & Co., Inc.
Okay. And then maybe shifting gears to the guidance for the quarter, I was wondering if you could just provide a little bit color on what provides the variability from the top end to the bottom end of the range for 3Q?
Unidentified Company Representative
We were joking. It’s a relative better or worse performance in the markets that we are in.
I think that continued favorable pricing in inland and offshore markets, some marginal improvements in the Diesel Engine business is the top end. The bottom end is less pricing in both the Marine Transportation segments and continued deferral of maintenance in the Diesel Engine business.
Those would be the kind of the broad, I guess, influences on the range.
David J. Tamberrino – Stifel, Nicolaus & Co., Inc.
Okay. And then, digging into Diesel Engine Services business for the inland new manufacturing and remanufacturing, did you see or did you note what the split was in between revenue for kind of new manufacturing versus remanufacturing with a view towards the question is have you seen a pick up in remanufacturing business over the quarter and starting to head to 3Q?
Unidentified Company Representative
Yeah, we did break that out. The land based revenues are about 65%, our legacy business is about 35%.
Reman manufacturing are still only about, call it between 30% and 40% of what we’re doing in the plan-based business. We haven’t broken out how much reman and new is, but I would say, the bulk of what we are doing on our manufacturing facility up there is remanufacturing.
We’re not really building new fracking units now we are – we have sold some existing frack units that we had in inventory that from canceled orders last year. So there are, as Joe mentioned there, we’re seeing sings that we bottom, because we’re actually selling some inventory frack units.
But we’re not really making new frack units at this time.
Unidentified Company Representative
Let me just add just a little more color there. What we’ve said is that, we like as an objective to see that business about 30% new product and about 70% reman service parts and distribution, and that’s about where we are.
The manufacturing is about 30% to 40% of that business in service parts and distribution 60% to 70%.
David J. Tamberrino – Stifel, Nicolaus & Co., Inc.
Okay. Thank you for your time.
Unidentified Company Representative
Thank you.
Operator
Thank you. Our next question comes from David Beard from IBERIA.
Please go ahead.
David Beard – IBERIA Capital Partners
Good morning, gentlemen.
David W. Grzebinski
Good morning.
Joseph H. Pyne
Good morning.
David Beard – IBERIA Capital Partners
I wanted to just ask a question or clarification on guidance and then just talk a little bit about CapEx for next year. In your guidance what did you assume first and second quarter earnings?
Joseph H. Pyne
Where do we start?
David Beard – IBERIA Capital Partners
Yeah. This gives the difference if that’s between operated and actual reporting, and just wanted to make sure that I backed into your fourth quarter earnings accurately.
Joseph H. Pyne
Yeah. I want to make sure I understand the question, we’ve reported $1 first quarter and we reported $1.11 second quarter, and within those numbers there were $0.11 in there now.
The ranges that we had, I think the first quarter initial ramp is what’s $0.95 to $1.5 or $0.90 to $1.00.
David W. Grzebinski
I think it was $0.90 to $1.00.
Joseph H. Pyne
$0.90 to $1.00, and then the second quarter guidance was $1.00 to $1.10. We get into where you want to be.
David Beard – IBERIA Capital Partners
Maybe it’s a little bit simpler, when I add up first quarter plus the second quarter, plus the guidance of third quarter, and then use the $4.15 to $4.35, I’m going to get an implied range for the fourth quarter. But it makes a difference if the first and second, if I’m using $1 reported or the $0.95 the same in the second quarter $1.11 versus $1.07.
It really, since you gave fourth quarter implied guidance, I’m just trying to make sure we’re using the right numbers to back into that.
Joseph H. Pyne
Yeah let me try and help you, year-to-date we have our number what is the GAAP number, and that is in our guidance. So that is inclusive of the earn out of $0.11 – $0.11 to $0.12.
But going forward, third and fourth quarter we’ve got no earn out in it. So, you know what we’ve made or was is it $2.15 year-to-date and no excuse me, what was it?
Unidentified Company Representative
$2.11.
Unidentified Company Representative
$2.11 year-to-date I don’t have the number right here, sorry. $2.11, so if you take our range of $1.05 to $1.15 that does imply your fourth quarter and that is what you are getting at – that is guidance for the fourth quarter implicitly.
David Beard – IBERIA Capital Partners
Yeah, then the follow-on would be it is a $1 plus it’s $1.11, you take the low end at $1.05 for the third quarter that implies $0.99 for the fourth quarter, which isn’t up very much from last year’s $0.94. And so…
Unidentified Company Representative
Well, yeah….
David Beard – IBERIA Capital Partners
(inaudible) in to the fourth quarter and why would not be up much year-over-year?
Unidentified Company Representative
Yeah, I think it depends on where come out in the third quarter, it’s $1.05 to $1.15 in the third quarter, which means the potential range is for the fourth quarter, but it could be $0.99 to a $1.09.
David Beard – IBERIA Capital Partners
Yeah.
Unidentified Company Representative
And of course, we’ll adjust that depending on what happens in the third quarter, right.
David Beard – IBERIA Capital Partners
Okay. Now that’s helpful and can you talk a little bit about CapEx in 2014 just because you have brought the average age of your fleet down quite substantially, would you expect 2014 to be another big year of CapEx as you finish that or shall we see a drop off and could it be significant?
Unidentified Company Representative
Yeah, absent the decision on coast-wide building, you would have a pretty strong drop off actually, because we don’t need to do much replacement building in the inland fleet, so it could – if we are at $2.30 to $2.40 this year, we could be down $1.50 to $1.75 next year absent in the coast-wise building.
David Beard – IBERIA Capital Partners
Okay, great. I appreciate it.
Thanks, guys.
Operator
Thank you. Our next question comes from Mat Young from Morningstar.
Please go ahead.
Matthew Young – Morningstar, Inc.
Good morning, guys. Thanks for fit me in.
One last quick question here, it sounds like the coastal utilization gains are mostly coming from the crude and some cross-selling, are some of those also at this point coming from the fleet phase outs, or is that more of a gradual benefit?
David W. Grzebinski
Yeah, more gradual, yeah, and I don’t think there has been a lot of equipment retired yet. We are in a very strong market, people are looking for every way they can extend the life of these equipment and keep going for the next shipyard.
Gregory R. Binion
Yeah, but having said that, it does the single skin fleet has gone end of next year.
Matthew Young – Morningstar, Inc.
Okay. And then assuming that the crude movements are mostly if I have this right coming from the old pan operations, could you comment if there is any – how some of the legacy products maybe more or fine products with the original KC operations, are they fairly strong at this point?
David W. Grzebinski
No, I think everything is pretty much strong across the board.
Gregory R. Binion
And we are putting KC equipment with crude oil too. There is some legacy KC equipment that too in the crude oil, right now.
Matthew Young – Morningstar, Inc.
Okay, that’s helpful. Thanks, that’s all I had.
Operator
Thank you. We have no further questions at this time.
Joseph H. Pyne
Well, we appreciate your interest in Kirby and for participating in the call. If you have any additional questions, you can give me a call, my direct number is 713-435-1135, and we wish you a good day.
Operator
Thank you, and thank you ladies and gentlemen. This concludes today’s conference.
Thank you for participating. You may now disconnect.