Kirby Corp (KEX) 2013 Q3 法說會逐字稿

Good morning and welcome to the Kirby Corporation 2013 third-quarter earnings conference call. My name is Sherry and I'll be your operator for this call.

(Operator Instructions)

Please note that this conference is being recorded. I would now like to turn the call over to Steve Holcomb. Steve, please go ahead.

Thank you for joining us this morning. With me today are Joe Pyne, Kirby's Chairman, President and Chief Executive Officer; David Grzebinski, Kirby's Executive Vice President and Chief Financial Officer; and Greg Binion, 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 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 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.

Thank you, Steve. Good morning. Earlier this morning we announced third-quarter earnings of $1.21 per share, which included a $0.08 per share credit to the contingent earn-out liability, thereby eliminating all of the remaining earn-out liability associated with our acquisition of United Holdings in April 2011.

Our inlet and coastal tank barge fleets continue to maintain high equipment utilization levels and favorable pricing trends during the quarter. We continue to benefit from strong petrochemical production as stable refinery production levels export refined products and fuel oils, which remain strong and forced the movement of crude oil and gas condensate from shale formations in the United States. Our land-based diesel engine business remains challenging, but we do think that this business will be stronger next year. In our marine diesel engine business, the medium-speed engine business was busy during the quarter, servicing both inland and coastal customers. The high-speed market was softer during the quarter as well for the year. As a result of this continued softness, we incurred a $500,000 charge for a reduction of force during the third quarter. With respect to the power generation market, it continues to be stable.

I'll now turn the call over to Greg who will discuss our marine transportation markets, and then David will give you a financial update. Following those remarks, I'll conclude with some comments about our 2013 fourth quarter and year guidance and outlook.

Thank you, Joe, and good morning to all. I will address the inland business and then the coastal business.

Our inland business, our inland marine transportation business, continued its overall strong performance with equipment utilization in the 90% to 95% range and favorable term and spot contract pricing. The 2013 third quarter saw improved operating conditions compared with the high-water conditions on the Mississippi and Illinois River that persisted throughout the second quarter. Additionally the Algiers Locks was closed from late March until mid July, creating heavy congestion and multi-day delays in the New Orleans area and along the alternate route to the Mississippi River at the Bayou Sorrels and Port Allen locks. The congestion and delays were cleared by late July. We also experienced seasonably typical low water on the upper Mississippi and Illinois Rivers during September, which resulted in the light loading of barges transiting those areas. From the 2013 third quarter, inland transportation revenues from our long-term contracts, that is one year or longer in duration, were 75% total revenue with 59% from time charters and 41% from the freightman contracts. Moving to inland marine transportation pricing, term contracts renewed during the third quarter continued to renew at the mid single-digit levels when compared with the 2012 third quarter. Spot contract pricing levels on average remained 5% to 8% higher than term contract pricing.

Moving to new inland tank barge and tow boat construction, during the 2013 first nine months, we took delivery of 55 new tank barges totaling 1.2 million barrels of capacity and three tow boats. We retired 37 tank barges and returned four leased tank barges, removing approximately 630,000 barrels of capacity. So net-net, our 2013 first nine months, we added 14 tank barges to our fleet, increasing our inland capacity by approximately 570,000 barrels. As of September 30, we operated 855 inland tank barges with a capacity of 17.2 million barrels. For the 2013 fourth quarter, we expect to place in service 13 inland tank barges with a capacity of approximately 175,000 barrels. The cost of the new inland tank barges and tow boats as well as the two offshore dry bulk tug barge units delivered throughout 2013 will be approximately $143 million. At this present time, we expect to finish 2013 with approximately 17.3 million barrels of inland capacity, slightly above our present level and approximately 650,000 barrels above the 16.7 million barrels at the beginning of 2013.

Kirby offshore marine continued its strong performance with equipment utilization remaining about 90% during the third quarter, consistent with the 2013 first six months and significantly above the 75% to 80% utilization range for the 2012 third quarter. All of our coastal markets with the exception of the New York area market remains strong, driven in part by increased demand for crude and condensate, continued progress in expanding our coastal business to our inland customers, and the expansion of our coastal fleet during 2012 fourth quarter and the movement of petrochemicals with the acquisition of Allied and black oil products with the acquisition of Penn. As of 2013, approximately 75% of coastal revenues were under term contracts, compared with 60% for the 2012 third quarter, with the balance coming from spot contracts. The improvement represented the addition of Allied and Penn, as well as new contracts signed in the 2012 fourth quarter and the 2013 first nine months. With respect to coastal marine transportation pricing, term contracts that renewed during the third quarter increased in the high single-digit range, and in some cases higher when compared with the 2012 third quarter. And with that, I'll turn the call over to David.

Thank you, Greg, and good morning to those on the call. As Joe noted our 2013 third-quarter earnings of $1.21 per share included an $0.08 per share credit from the decreasing the fair value of the contingent earn-out liability associated with United. As of September 30, the contingent earn-out liability is zero. We have reversed $0.20 per share during 2013, making the liability zero. And we certainly don't expect to make any more adjustments to the liability. For those of you running models, this $0.20 per share addition to our 2013 earnings will not be repeated in 2014.

Marine transportation revenues grew 25% and operating income grew 39% over the third quarter of 2012. The inland sector contributed approximately 70% of the third-quarter marine transportation revenue, with the coastal sector contributing approximately 30%. Despite the lock issues in July and the low water issues in September that Greg had discussed, our inland sector earned a third-quarter operating margin in the upper 20% range. The coastal sector operating margin improved to the upper teens compared with high single-digit margins from the third quarter last year. The overall marine transportation segment third-quarter operating margin was 26.1% compared with 23.4% for the 2012 third quarter.

Our diesel engine services revenue for the 2013 third quarter declined 33%. Operating income was down 38% compared with the third quarter of last year. However, without the $7.9 million earn-out credit the operating income would have declined around 90% compared with the third quarter of 2012. This segment's operating margin was 7.9%, compared with 8.5% from a year ago. The decline in revenue and operating income was primarily due to the lower results in our land-based operations at United. Our land-based operations contributed approximately 60% of the diesel engine services segment revenue. And excluding the earn out credit, we reported an operating loss in that business, but that included some one-time expenditures with the retirement and hiring of a new President at United as well as some warranty-related expenses. The marine and power generation operations contributed approximately 40% of the diesel engine services revenue, with an operating margin in the 10% range.

Moving on to corporate items, we are increasing our 2013 capital expenditure guidance to $240 million to $250 million range, which is up from the previous guidance of $230 million to $240 million. This primarily reflects a $10 million increase to capital upgrades and improvements of marine equipment. Thanks to our strong cash flow during the 2013 first nine months, we continued to pay down debt. Total debt as of September 30 was $861 million. That represents a $274 million reduction from our total debt of $1.14 billion at the end of last year. That debt was up, as you know, from the acquisitions of Allied and Penn.

Our debt to total cap ratio fell to 31% as of the quarter end and that compared with 39.9% at the end of 2012. As of September 30, we had $49 million outstanding under our revolving credit agreement, which compares to $185 million outstanding at the end of 2012. As of this morning, we had zero outstanding under our revolver and our vested cash was at $16 million. Total debt as of this morning is $812 million and that yields a debt to total cap of about 29.8%. Our term loan balance as of September 30 was $312 million compared to $468 million at the end of the year. That's the summary of the corporate balance sheet. I'll now turn the call back to Joe.

Okay, thank you, David. In our press release this morning, we announced our 2013 fourth-quarter guidance of $1.05 to $1.15 per share. This compares to $1.03 per share earned in the 2012 fourth quarter, which included a $0.09 per share credit to the United earn-out contingent liability. For the 2013 year, we raised and narrowed our guidance range to $4.37 to an upper end of $4.47 per share, compared to the $3.73 per share for 2012. This 2013 annual guidance range includes an accumulative $0.20 per share credit to the United contingent liability earn-out, which David talked about. Our fourth-quarter guidance range does not have any additional adjustment to this contingent earn-out liability, as we have eliminated this liability from our balance sheet with the action in the third quarter.

Our fourth-quarter guidance assumes a modest improvement over 2012 fourth-quarter pricing for our inland marine transportation markets, markets that continue to operate at close to full utilization. It also assumes a continued strong coastal market with higher term and contract pricing. However, we're also assuming normal seasonality associated with poor operating conditions that are typical to the quarter. We feel that we're at the bottom of the cycle with respect to our plant-based market -- that's the United business -- and we should begin to see improvement in 2014. Our fourth-quarter guidance assumed our diesel engine service marine and power generation markets will continue to be stable and our land based market will continue to struggle. Operator, this concludes our prepared remarks. Now we're ready to take questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Jon Chappell of Evercore Partners.

Thank you. Good morning guys.

Good morning, Jon.

David or Joe, my first question revolves around the cyclicality of the core marine businesses. They've obviously been carrying the flag for you guys and posting significant strong utilization pricing gains, while the diesel engine services business continues to be somewhat of a drag. So as you think about the cycles on both of those businesses, and I know they are a little bit different, what innings would you assess, the current strength of the cycle for both inland and coastal?

And then I'll give you my follow-up right away, which is as you think about earnings growth in 2014, how much of that would be the continued strength of those two businesses versus the bounce off the bottom in diesel engine versus potential non-organic growth in terms of M&A?

Why don't I take a jab at that, Jon? This is Joe. The marine business is a cyclical business. I've been in it over 35 years and I'm seeing, not a number of cycles but several cycles. What we're seeing today is different. And it's different because for about 30 of those years we were essentially in a very slow-growth business. Business that would grow at about at best GDP and maybe a little less than GDP.

With the energy Renaissance in the US and the need to move crude oil gas condensate and the significant improved competibility of the chemical business on a global basis, you have demand that frankly I don't think that we've seen in this business for 30 plus years. Your typical cyclicality trends are going to be different here because you've got volumes that are actually growing. Now with respect to which inning you're in, I think you could make a pretty good argument that you're at the beginning innings in the coastal business, and maybe a little further along on the inland business. The only qualifier I'd put there is that on the coastal side, you're really not building much equipment. On the inland side you are adding capacity, and that capacity is being absorbed. It's being absorbed as we speak.

But you just have to look at what's coming in balanced by the volumes that are out there. Not particularly concerned about it at this point, but we certainly watch it. Do we have the ability to add a little too much capacity? We probably do. But hopefully the industry is watching it like we are and we'll reduce the construction quickly if they see utilization begin to taper off.

Now, as for the 2014 earnings, I think that with respect to our earnings, the biggest driver is always going to be the marine side. You've got more revenue with significantly higher margins, a lot of power in those earnings. United can produce some nice earnings growth, but those earnings are going to be a fraction of the total marine earnings. We do expect that the land-based business is going to improve. We expect the marine business is going to improve too in 2014, but I think that your real earnings driver is going to continue to be marine transportation. Depending on how quickly United is lifted off the bottom, that's going to help. But it's not going to help the way that continued pressure on rates and high utilization levels are going to help on the marine side.

David, do you have anything to add to that?

No, I think that's a great summary of it.

Yes, very thorough. Incredibly helpful. Thanks, Joe.

Thank you. Our next question comes from Greg Lewis of Credit Suisse.

Yes, thank you, and good morning.

Good morning, Greg.

Morning. David, could you provide a little bit more color around marine transportation's EBIT margins? It looks like they hit a record north of 26%. Was there anything specific in terms of timing that drove that margin up-lift? Is this something that we think is potentially sustainable where it's more of a mid-20%s margins as opposed to a low-20%s margins?

No, as we said in our prepared remarks, the inland business was in the high 20% range and the coast-wise business was in the high teens. Clearly very high and that gave the segment 26.1% margins. You'll have to recall this, Greg that the third quarter is almost always our best quarter. That's when the weather's the best. Things tend to go really well in the third quarter. We've been making progress on coast-wise business. That margin continues to expand as rates go up and utilizations steady.

In the second quarter, you'll recall, we had pretty high shipyard days in the coast-wise business. That's come down a little bit and we'll continue to work on that over time. Hopefully margins stay in this range for a while. But you know that our fourth and first quarters are impacted by weather. That's when things slow down. Even as we speak, we're pulling equipment out of the Alaska market, because it shuts down about this time of the year. You get impacted by weather. On the inland space, we can start to get fog in the wintertime here and you can get ice in the upper. So you have to be careful with the seasonality, so to speak.

Okay, so in other words --

Does that help?

It does. What I was wondering is, the sale of the assets in New York Harbor. It doesn't sound like those were much of a drag on margins.

Well, yes, we were essentially losing money in New York Harbor with those assets and we stemmed the bleeding a bit there. So that was certainly helpful but that should continue.

Okay, great. And then as a follow-up, when we think about where the existing fleet is, are there any potential assets either on the coastal side of the business that we potentially could see sold going forward? Or at this point, where the fleet is sized in terms of the equipment, management team's comfortable with all of the assets in the fleet right now?

I'd say we're comfortable with the fleet now. I don't see any sales coming up that makes sense. So we're pretty pleased with the composition of the fleet right now.

Okay guys. Hey, thank you for the time and congratulations on a good quarter.

Thank you, Greg.

Thank you. Our next question comes from Michael Webber of Wells Fargo.

Hey, good morning guys, how are you? Hey, good morning guys, how are you?

We're good, thank you.

Sorry, I think there's phone interference. I just wanted to first dig in a little bit more specifically around the coastal business. Earlier this year, both off and on line and we've talked about the fact that new build prices for larger scale coastal assets moved in advance a bit of rates, and returns weren't quite there yet to justify some of the new build prices.

I'm just curious as to your general thoughts around that market, around first of all whether returns have caught up, and whether either your charter prints or indications from charters have caught up with where new build prices are. Your thought process around adding larger scale, be it ATBs or other assets around the coastal business in 2014. And then shipyard capacity in that space and whether or not we see any new entrants.

Yes, take that one at a time. Several questions embedded in there. Coastal pricing as you know since essentially third or fourth quarter of last year, fourth quarter of 2012 pricing started to increase. We've had basically high single-digits, and in some cases double-digit price increases on term contracts each quarter since then. So pricing has moved up significantly, but it still has some room to run, particularly if you view that any new builds probably wouldn't hit the market until 2015.

Sure.

So there should be some room. Pricing isn't where it needs to be to justify new builds and get a good return or our required return on new builds, but we're making progress towards that. We continue to speak with our customers about their needs. We're positioned well in that. We'll continue to monitor it.

In terms of announced construction, we know we talked about one competitor that's building some very large equipment. We've heard a rumor that one person is going to build 100,000- or 200,000-barrel units but that's kind of swirling around out there. The competitor we've heard is, he owns his own shipyard, so there may be a little self serving going on there.

It's still early days as Joe indicated in his comments in the coast-wise market. Even if we were to start tomorrow, you're talking almost two years before you get delivery of the unit. So we've got some legs yet to go on this.

Sure, and then the likelihood that we see additional shipyard capacity really open up, granted it would be delivering into 2015 and 2016. Do you think that's likely at this point? And granted it's just an opinion, but in your view do you think that's likely?

I don't think additional shipyard capacity. There's plenty of coast-wise shipyard capacity out there now. It's not being used. That's different than the inland shipyard capacity. So I don't think you'd see any new coast-wise shipyard capacity. They're all looking for business now. I think we're okay there.

Great, thanks. And as a follow-up, around actually diesel engine services and you guys have talked, I think, to this the second quarter in a row. You've referenced a turn potentially in 2014.

I'm curious if you can walk us through the mechanics of what would drive that turn. Then if we think about a recovery in that market relative to the previous peak in that cycle that was really driven by a lot of new equipment, how that recovery in that business might look relative to the last peak, and how it would get phased into your results.

This is Joe. I'll take that. I don't think that you're going to see for a number of years the ramp up of new orders that you saw in the 2010 through early 2012 years, where you're adding really millions of horsepower into the pressure pumping market. What you'll see going forward will be some replacement building, some additional capacity where some domestic capacity gets exported, as you're beginning to see pressure pumping in other parts of the world. You're going to see a lot of reman. And as I think you know, we have focused on the reman, we think that's a steadier more predictable business. We think that the service business should provide higher more consistent operating margins than the manufacturing side.

Manufacturing for two to four quarters can be terrific. And then for the next two to four quarters it could be very painful. Where we think that servicing that equipment will be a requirement that will be much more consistent. It's also harder to do, so we've spent a lot of time building the organization, building the processes that we think position us well for that reman activity. Which, as we frankly listen to our customers, listen to some of the analysts that follow the pressure pumping business, looks pretty good for 2014. There should be a lot of maintenance that needs to be done.

As for new construction, one of the things that is comforting is we are seeing the level of inquiries increase. There's significantly more customers asking for availability and pricing on business. Not so much for pressure pumpers, it's more for the auxiliary equipment that is used in that business. We just sense that 2014 is going to be a better year for our business. I think the pressure pumping business in general thinks it's going to be a better year. Will pricing come back to the 2010-2011 levels? Who knows, but there should be more demand then.

Great. Thanks a lot for the time guys, I appreciate it.

Thank you. Our next question comes from Jack Atkins of Stephens.

Good morning guys. Thanks for the time.

Good morning, Jack.

My first question here is on diesel engine services, just going back to that for a moment. Curious if you could walk us through on the land-based side, what drove the significant step-down there sequentially and profitability? Because by my math, I think you lost between $3 million and $3.5 million on the land-based side. If you could walk us through the quarter there, I think that would be helpful to understand.

Yes, they had a couple things going on. One, just business fundamentals, Jack. We've been working off backlog and there's a fixed cost spread that doesn't get absorbed as your volume goes down. But again, we don't want to cut costs per se because we're preparing for next year. We are, on the margin, taking costs out. But we also had some, as I mentioned in my prepared remarks, some I don't want to call them one-time, but issues that generally don't recur.

We replaced the President of United and hired a new one. The gentleman that was there before retired. And as you know, with transitions there's always costs related to that. Then we had a warranty issue in particular that was rather significant, but that's in the number. Those items contributed to the lower results.

Okay, that's helpful. Could you quantify those costs for us, so we could understand the underlying profitability there? And then would you expect like the land-based side of the diesel engine services to be profitable in the fourth quarter? Does your guidance assume profitability there in the 4Q?

Yes, I think, well let me quantify it and then those one-time issues, if you will. They are a around $2 million, so that shouldn't repeat in the fourth quarter. We don't see the base business, we don't see much change in the base business between sequentially from the third to fourth quarter, other than those issues not recurring.

That's very helpful. Thanks again for the time.

Thank you. Our next question comes from Kevin Sterling of BB&T Capital Markets.

Thanks guys. It's actually William Horner on your Kevin.

Hi, William.

Joe, following up on your comments earlier regarding industry capacity on the inland side, I know you've noted all of the new builds are getting absorbed. Could you talk a little bit about how the order book is shaping up for next year? What's your confidence level that the industry is going to stay pretty well balanced between supply and demand in the next year?

The order book for 2014 does not absorb all of the shipyard capacity. At least now we're projecting less barges built in 2014 than 2013, but there's still time. If I had to guess, I would suspect that about the same amount of barges are going to be built in 2014 as in 2013 if demand continues at these levels.

What's my expectation? Well my expectation is that the equipment is going to continue to be absorbed. You have new volume that will continue -- that needs to be serviced, both liquids out of the shale formations and chemical plants that will begin but come on stream late 2014, 2015, 2016 and 2017. I do expect that at some point you'll see the backlog decline a bit because you can't build at these levels forever. But I'm not ready to define what forever means yet.

Okay, thanks, Joe. That's very helpful. Going back to coastal pricing for a second. I believe you all mentioned it was in the high single-digit range during the quarter. But did you, I may have missed it and I apologize if I did, did you mention what spot pricing was on the coastal side relative to contracts?

No, we didn't. As you've noted, William, we've increased our contract level and even the stuff that we consider spot, which is contracts less than a year, they are all longer in nature. They're not day-to-day spots. These are six-month type deals.

And then what's happening in the spot market, there's just less and less equipment in the spot market and it's so different from different geographies. You could have a different piece of equipment in the West Coast versus the East Coast. We didn't generalize it this quarter, but spot pricing is above contract pricing and that's part of a healthy market. It was just the amount of spot equipment in the market now is less, so it was something we didn't want to quantify.

Okay, thanks, David. I appreciate all your time.

Thank you. Our next question comes from Ken Hoexter of Merrill Lynch.

Great, good morning. David, following through on those thoughts there on pricing on the coast-wise, should we continue to see that accelerate now that you've gotten over that 90%, do you see it stabilizing? You noted you're still not at investor return levels. How much farther do you think we need to get and how fast in order to get to reinvestable levels?

Ken, it's hard to predict how fast anything is going to be. Clearly, rates need to continue to rise to get to levels that support new investment. We think that there's a need for new capacity.

Remember -- let me back up a little bit. Remember that in the inland business, you essentially have two standard size barges. You've got 10,000-barrel barges and you've got 30,000-barrel barges. In the coastal sector you have a wider range of barges. You have 50,000s, 80,000s, 100,000s, 120,000s, 150,000s, 185,000s, 250,000s, they're all over the place. Depending on the requirements, you're going to get demand differences in those capacities. Where you have demand for example, for 150,000-barrel barge, you may see rates escalate quicker there than, for example, an 80,000-barrel barge. So it's kind of hard to predict. Having said that, this is a business where all boats are lifted, so rate pressure in one area will tend to bleed over into another. But it won't be as consistent as you would like.

We think that the coastal rates in 2014 will continue to improve. They will improve also based on where a particular contract was. If you got a contract that's under market, it's going to adjust more significantly in one that was renewed this year that's renewing again next year that's more at market. When you get to these levels, probably the velocity is going to slowdown a little bit, but it's still there. There's still pressure on rights. I would think that you are going to see some new construction in the next 12 to 18 months and that's going to be very positive for the long term trend of the coastal rates.

Thanks for that insight. So if we look -- I know you've got a lot on the inland diesel engine side, the United business. But I don't really see, when you talk about having gone through the cutbacks and other things, but without metrics whether it's contracts or development what have you it's hard to see and measure the business other than what you're leading us on in terms of how it's developing. Can you give us some insight into are you seeing more customers come to you with initial contract discussion? Are you guessing in terms of that it's going to improve or bouncing off the bottom based on rig counts and what's going on in the reman business, getting more insight. Maybe if there's any more insight into how we can visibly see, since we don't have any real metrics on that business, how we see it turn.

You're talking about the land based diesel engine business?

I am, yes.

Unfortunately a lot of it is what you're hearing from your customers and reading in the trade press. There aren't a lot of metrics. The backlog is down. It's not declining anymore, but it's not growing in any significant degree either. Backlog would be a nice metric to look at. When it's growing we'll share it with you. It's pretty stable right now.

I might jump in here. In terms of external market factors to look at, Ken, I think if you look at the pressure pumpers' margins, they talk about their EBITDA margins. Whether it's Baker or Schlumberger or Halliburton, some of the other pure plays can also -- you can get some information from them in terms of their pressure pumping margins. And right now those margins are pretty low. They are at bottom. If they start moving again that should be a positive.

Now within it at the bottom, it's interesting. They're still all working. I don't know what the capacity utilization, it may be in the 80% range out there, so that equipment is, a good portion of it, is still working and it's working hard. They're working the equipment 24/7 in some cases. So the maintenance cycle that is going to happen is -- it's inevitable. With margins as thin as they are, the non-barge pressure pumper, so in other words the tier below the Halliburton, Schlumberger and Baker, they are scrimping along. So they are scrimping on maintenance too. Sooner or later -- you can't do that forever.

I know that it's not a direct indication, but if you started to see margins moving up a little bit from the majors, that would be a good indication. But as you look at the oil field sector, frac intensity as long as it stays as high, it's inevitable that there's going to have to be a maintenance cycle. I don't know if that helped or hurt, but it's the way we think about it.

No, it's absolutely helpful just to understand what your drivers are for that. Anything outside of -- we think we're hitting a turn, right? It's going to help understand how we finally get to that bottom. Appreciate the insight.

Thank you. Our next question comes from John Barnes of RBC Capital Markets.

Good morning, fellows. Dave, you've mentioned -- I think in your prepared comments you talk about a reduction in force at the land-based business. And then you commented about the change in senior management there. Was the amount of money that you talked about in terms of the incurred charges, was that a combination of those two events or was that isolating the senior management?

John, those are two separate, let me clarify. The reduction in force was at our high-speed business, which is the legacy business. And that was about $500,000 in severance costs. The change in management or the retirement, the former President at United and hiring his replacement, was the other item that I quantified as around $2 million. But that also included a warranty issue, as I mentioned. So they are separate numbers. If you added them together it would be $2.5 million.

Okay, thank you for that. I got a little confused on where that reduction in force was hitting, as well. Okay.

The other thing I wanted to ask you about, obviously 4Q tends to be a little bit of a wild card because of the weather conditions and the like. Joe, could you give us a little bit of a reminder as to where river and weather conditions were a year ago. Are you up against an easier comp or a tougher comp in terms of those issues as you look at this fourth quarter?

I think it may be slightly easier, based on what we're seeing today. There were some river issues fourth quarter 2012, that hopefully won't be 2013. In terms of the weather itself, and still really too early, mid November through the end of the year is where you're going to see the bulk of your weather. Are you looking at weather delays?

Yes, I was just looking at delays. Last year fourth-quarter delay days were right around 1,500 in the fourth quarter which is --

Yes, that's not too bad. Not too bad but not great either. Where our, at least at this point we're on track for less delays, but it's still early.

Okay, thanks. And then one question around the balance sheet. Debt continues to come down. You've got a very clean balance sheet at this point. Looking at the strategy from a historical basis, you've never been one to really buy at the top. You guys typically are very good acquirer's.

So if we're at the top of some of the markets and acquisition opportunities are going to be fewer in this kind of environment. Can you talk about prioritizing your uses of cash? Or are we going to see further debt reduction? And how much lower do you think those levels can go?

Yes, as you know, John we're very patient in terms of acquisitions. In the absence of an acquisition we'll probably continue to delever. The fourth quarter is always a good quarter for cash generation, so you could see us drop another couple percent in terms of debt to total cap by year-end.

The first half of next year is usually -- the first half there's always -- it's not a big cash generation half that the back half is usually the big cash generation. But absent an acquisition, we'll probably delever. We do look at share buybacks and we've discussed dividends before, so those are always in the mix of discussions.

Even though we're moving at the higher end of the cycle on inland, you never know on the acquisitions. There's 45 plus inland operators and sometime -- well, the vast majority of them are privately held and sole proprietorships. And you never know what a sole proprietor might do in terms of his estate planning and in terms of his personal needs. It's hard to predict acquisitions. And the same stance on the coast-wise.

We just stay disciplined. We continue to work and look at returns on capital and making sure that we don't overpay. We're always in the hunt. There's always something that we're working on. You just never know whether you're going to get where you need to be to get it done.

Okay, thanks for your time guys, nice quarter.

Thank you.

Thank you. Our next question comes from Chaz Jones of Wunderlich.

Yes, hey, good morning, guys. Curious on the New York bunkering fleet, was there any material revenue associated with that?

I wouldn't call it material, but clearly there was revenue. We were losing money in that fleet, but it's not material. You haven't seen it in terms of -- in the quarter you didn't see a big revenue hit to our marine business. In fact, revenues are still up. I think in total it wasn't very material, Chaz.

Okay, that's exactly what I was looking for. And then on the land-based engine service, I know that you spent quite a bit of time on the call talking about that, but I'm trying to get a sense when you talk about a recovery for next year, is that getting back to mid single-digit margins? Or is that getting back to high single-digit margins?

Well, we would hope it would be at least the latter, Chaz, but it depends on how quickly it moves. The reman business if that's predominantly what it's going to be, should see low double-digit margins. Just have to see how it holds.

Okay, that's all I had. Congratulations on a nice quarter, guys.

Thank you.

Thank you. Our next question comes from David Tamberrino of -- (multiple speakers)

Yay. Good morning and thanks for fitting me in here at the end. My question revolves around movements of crude oil and gas condensate during the quarter. Did you see any variability in the movements by month, based on where spreads were? Maybe speak to it on the inland side as well as the coastal side. Thanks.

Yes, a good question because apparently the railroads did see some variability. We really didn't, but again, our fleet is essentially at capacity. I think maybe if there was any variability, the variability was on the demand side. Given the fleet at operating capacity and barges as they come in and were absorbed, they continue to be absorbed. So we didn't see what the railroads saw.

Okay, so there wasn't a noticeable dip in mid-July when the spreads were the tightest on either the inland or coastal?

I guess if maybe we were better balanced you would have seen it if it was there, but nobody was really releasing equipment. They were all hanging on to it and it stayed pretty busy.

Okay, thank you.

Sherry, let's take one more question, please.

Perfect. We actually only have one more question left in the queue. David Beard from IBERIA.

Great, thank you, guys. Maybe if you would care to quantify what the industry, in terms of the inland barge industry, additions and scrappings may be for the year. If you care to take a shot at next year's, or maybe even give us a sense of where your capital spending may go next year, that would be appreciated. Thank you.

Yes, we'll tag team that question. We don't know what scrapping is for 2013. We know what we did, but we don't know what the industry has done. And we won't know until they publish that industry survey. If I had to guess, I would think it's somewhere between a 100 and 130 barges were scrapped.

With respect to the total number of barges that are going to be built in 2013, it really depends on who you're listening to. There are some industry sources are predicting as many as 300. I think our number is less than that, 260, 270, something like that. Again, we'll know when that survey is done.

2014 the order book right now is a little less. We'll just have to see.

We certainly appreciate your interest in Kirby Corporation and for participating in our call. If you have any additional question or comments please give me a call. My direct dial number is 713-435-1135 and we wish you a good day.

Thank you, Ladies and Gentlemen. This concludes today's call. Thank you for participating. You may now disconnect.