Kirby Corp (KEX) 2014 Q3 法說會逐字稿

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.

(Operator Instructions)

This conference is being recorded. I will now turn the call over to Sterling Adlakha. Sterling, you may begin.

Thank you, Mila. And thank you all for joining us this morning. With me today are Joe Pyne, Kirby's Chairman; David Gzebinski, 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 statements. 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 recorded for the third quarter 2013, a quarter that included an $0.08 per share benefit with the reduction of the earnout 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 plants 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 into the fourth quarter, principally for weather.

In addition, the relocation of bunker assets out of our Florida bunkering operations 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 have seen all year, of strong utilization and increasing customer demand and better pricing. In our marine diesel engine and power generation business, we've 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 oilfield service equipment, including the sale of new, as well as overhauling and remanufacturing existing pressure pumping units. 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 will now turn the call over to David.

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% to 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 three boats and three 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 one year or longer in duration, contributed about 80% of our revenue. With 56% of those contracts as time charged 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% to 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 remains 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 six 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, Brent and WTI, for example, they 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 US production, or, for that matter, the volume of that production that makes its way to water.

If WTI were to remain below $70 to $80 a barrel for a sustained period, growth in the waterborne transport of crude oil could be muted. However, we believe lower domestic feedstock costs are likely to provide further economic incentives to proceed with announced plans to expand US 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 oilfield 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 price changes are likely to significantly impact this business in the near term in the fourth quarter.

I will now turn the call over to Andy who will provide some detailed financial information, then I will come back and finish with a discussion on the outlook.

Thank you, David. And good morning. In the 2014 third quarter, marine transportation segment revenues 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.

A 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, a 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 in 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 a 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 five lease barges, removing nearly 480,000 barrels of capacity. The net result was an addition of nine inland tank tankers to our fleet, with no charge to our overall capacity. Of the 40 inland tank barges delivered, 37 were 10,000-barrel barges, and three 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, five 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 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 four 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 4 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 we're originally scheduled for delivery late this year. In the coast line 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 the 7.9% for the third quarter for 2013, or 1% excluding the benefit from reducing the United contingent earnout 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 strength in 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 plant. Our 2014 capital spending guidance is currently in the $370 million to $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 to $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 30 was $649 million, a $100 million reduction from our total debt of $749 million as of December 31, 2013. As of today, our debt stands at $674 million. Our debt to cap ratio fell to 22.4% as of September 30 compared with 27% as of December 31, 2013.

I will now turn the call back over to David.

Thank you, Andy. In our press release, we announced our 2014 fourth-quarter guidance of $1.30 to $1.40 per share. This compares with the $1.13 per share earned in the 2013 fourth quarter.

For the full year we raised our guidance to a range of $5.04 to $5.14, and this compares with $4.44 earned in 2013. Remember that 2013 earnings included a cumulative $0.02 per share benefit due to the elimination of the United earnout 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 Pacific 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 plant 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 and 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, I would like to turn the call over to questions.

(Operator Instructions)

Our first question comes from Michael Webber from Wells Fargo. Michael, please go ahead.

Good morning guys, how are you? David, I wanted to touch on your comments around most of the growth coming from additions in capacity. And we've talked about M&A a number of times.

But I'm just curious, with the weakness we are seeing in the crude space, and a little bit more activity with the larger [joint didasic] getting sold to an MLP, 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 M&A activity behind the scenes now versus six months or a year ago, are you seeing any uplift or window opening up with sentiment maybe a bit more divided?

It's tough for us to comment directly on M&A activity. And as you know M&A activity is tough to predict.

But I want to be clear on the -- you said oil weakness. Let me just clarify and make sure what I said in my prepared remarks is fully out there.

That is, we have seen a lot of crude and condensate growth, and we are still seeing that growth. I just want to be clear. But if oil prices weakened even into the $70s, I still think you will see some production growth. It just may not be as much. So I want to clarify that.

Things are still pretty good in the market. If it gets down below $60, that's a different story, and you may actually stop seeing oil production growth. But from the analysis we have 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 $60s, so it's got a ways to go. And I actually think the Wall Street Journal had a little article that said it's probably $20 away before they'd started 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 would still probably have growth. 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.

Our next question comes from Jack Atkins from Stephens Inc. Please go-ahead.

Okay, great. Thanks for the time this morning, guys. You called out several discrete items on the marine side. In the past you guys have helped us quantify that in terms of the EPS impact. Is there any way for us to 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.

Jack, we are still -- I'm not trying to be defensive here -- we're still within our range, $1.30 to $1.40. But if we didn't have some of those headwinds we would have been in the upper end of our range. There's a little bit of each of them. The bunker business was a little bit, and the outages and horsepower efficiency was a little bit, as well.

Okay, David, that's really helpful. No, I wasn't trying to be critical of the quarter. I just was curious of that.

And then my follow-up question, thinking about the cash flow, and you guys have done such a great job generating a lot of cash her over the course of the last couple of years, you've been paying down quite a bit of debt, and you've got a lot of dry powder if M&A were to come along. But in the absence of M&A, how do you think about maybe allocating capital? Is it potentially time to maybe look at returning more cash to shareholders? And how do you think about that going forward?

Jack, you've heard us say that there's times to buy companies when they are available at a reasonable price. There's time to build equipment, which we're doing now. There's time to delever. And then there's times to buy back your shares.

Clearly we are building equipment now. You can see it in our capital spending. I think that will be the case for a while.

That said, acquisitions, as we were talking with Mike about, they are hard to predict. And that's one of the reasons we try to keep our balance sheet fairly strong so that we can react when opportunities come.

In terms of returning cash to shareholders, given what we've got in front of us I don't think it's time right now. But, as you know, we have repurchased shares many times over the years, and we would be willing to do that again if it made sense. And also, as we have mentioned, of course, we have talked about a dividend with the Board, and it is just not time yet. But it is something that we are 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 are building, that will be the best use of cash for the near term.

And our next question comes from Gregory Lewis from Credit Suisse, please go-ahead.

Yes, thank you and good morning. David, we saw that you bought the one leased-in coastal barge and then subsequently you bought another two. As we think about the remainder of the coastal fleet or some of the legacy KC assets, how many more assets are potentially leased in that Kirby could potentially buy back?

What we bought KC I think there were seven leased-in barges, so I think we've got four left that we could buy. As you know, these are lease agreements that go for multi years, and you only get an opportunity to buy them at certain times.

We would much rather own than lease our equipment. It gives us more flexibility with the equipment, and it is less constraining. And basically it is economically neutral to pull it in off of the lease. So we like to go ahead and just purchase it off the lease.

Our next question comes from John Mims from FBR Capital. John, please go ahead.

Good morning, guys. Thanks for the update. Let me ask a question on the diesel, a two-part question. Obviously a big acceleration in revenue this quarter. Is this $230 million number, is there something particular to this quarter that caused that surge? Or is that a run rate that is sustainable?

John, I'm going to answer that. But, operator, would you allow each caller a follow-up question? I just want to make sure everybody gets a chance to get two questions in if they want.

John we have had a pretty good ramp up, And I think, our hope is, that we will continue at this level. We've seen strong demand and this oil price volatility really hasn't impacted anything.

Okay. Let me ask you, then, on the incremental margins in diesel, as well -- down a little bit from where they were in second quarter. Is there any startup costs or any inefficiencies that limit incremental margins when you see this kind of surge in revenue? Or, if you can run at the $220 million, $230 million-ish type range per quarter, should we start to see incremental margins in that business pick up at that revenue run rate?

You've heard us say that we believe new equipment margins should be in the high single digits, and re-man in the low to mid teens. We are not where we want them to be yet. There are still some inefficiency, and we are 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, ramping up and dealing with some supply chain inefficiencies, and bringing on new labor.

Great. So, how would you model that ramp up right now, just given what you do know? Does a long over time mean a couple years or a few quarters?

It's probably somewhere in between those. It could take us a good year to get where we need to be.

Okay. You have a steady progression, fair enough. Thank you so much.

And our next question comes from Kelly from Macquarie Group. Please go ahead.

Hi, thank you for taking the question. I just want to follow up on diesel real quick. How much of the effort to improve the profitability is predicated on changing mix towards re-man, or growing the top line, versus just cost actions or things you can do on your end? If there was a sustained lower oil price environment or maybe the growth outlook was a little bit lower, can you still control things on your end to get that profitability up?

It's a mixture of that. We clearly are not where we need to be efficiency-wise. So, 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.

Okay, great, thanks. And then maybe if you could just walk us through, in the different businesses, inland and coast, what your direct crude exposure is --how many barges are allocated toward crude, and then maybe some indirect relationships. Just trying to get a sense if we do see a sustained lower oil price environment, it seems that the exposure that you have is actually pretty limited.

We have, on our inland business, about 7% of the fleet. I think it is in the 60 barges or so. And then on the coast side, it is about 14% or so, mid teen percent of our equipment's moving crude. But you will recall that a lot of our stuff is in year-long type contracts, so that the day-to-day volatility doesn't really affect it in the near term.

But if we were to see any kind of sustained weakness, you could take -- it's a small part of the fleet overall, and then those vessels could be, with extensive cleaning, they could be repurposed and put into different use, so that maybe you are able to retire some that are getting old, or you maybe you didn't need to add as many barges on the other end.

Yes, that's correct. And most of our contracts have clean out clauses on them. So, we actually can get coverage for cleaning out the barges.

And, David, you might also comment on where that equipment is. A lot of it is servicing basins that have very low costs, and are supplying Gulf Coast refineries, crude oil and crude oil condensate. So, they are going to be the last to shut in.

Yes, 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, picking up crude in the Corpus area and moving it across Gulf or along the intercoastal 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. I would think it's going to be, as Joe points out, one of the last things to be let off.

That's really helpful, guys. Thank you very much.

And our next question comes from John Barnes from RBC Capital Markets. John, please go ahead.

Thanks, good morning. In terms of the facilities that you talked about being off line and predominately on the Gulf Coast, I was keeping a running tab. It seems like Lyondell's facility in La Porte, Texas is back up and running, and there is an expansion coming. There's a couple of others, I think CP Chem or somebody, they had one that is off, and maybe still off.

Can you give us an idea of what percentage you think of the total plants you serve or capacity you serve is off line? And what percentage of that has come back?

I wouldn't characterize it in terms of percentage of plants that we service. Clearly some plants have more volumes for us and are right in the heart of our ability to move equipment around and be very efficient. So, it is not necessarily the volume of plants, it 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 are able to repurpose equipment when they don't need it.

So it's a little bit more of a hit to maybe the line haul network or something than it is --. 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 that disrupts it. Is that more of the way to think about it that we didn't see enough volume out of a particular location?

It's a combination of all of that. It could be volume is 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 multi-faceted and pretty complex.

Okay. And then across our entire universe we keep hearing about the capacity shortfall in terms of equipment types. I'm talking about, obviously, with the rail service problems, and they've talked about lack of horsepower and crews and that kind of thing. Certainly that seemed like that jumped up and bit you a little bit. It's a high-class problem, when you need more horsepower and crews. 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 in reaction mode to the volume levels right now?

Or do you think that based on training classes and your orders with the shipyards on tow boats and that kind of thing that at some juncture you get ahead of that curve? And when do you think you do jump ahead of that curve?

That's a good question John. In terms of the equipment, I think we have seen a lot of equipment come out in the last few years. And basically industry has kept up, supply has kept up with demand. And we've been in that very even balanced situation with equipment coming on as it's needed.

To your point, though, the crews -- it's been a lot of equipment that's come on over the last three, five years. And crew -- there's some pressure on crew wages and 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 are able to crew our vessels.

I do think it does impact the charter boat community a little bit. There's some shortage. So, we are seeing some wage pressure across the marine fleet.

Okay, very good. Thank you for your time, guys.

And our next question comes from John Chappell from Evercore. John please go-ahead.

Thank you. Good morning, guys. David, I wanted to get back to the diesel engine services business. It appears like it's back from the dead a little bit here. You mentioned strength in both re-man and manufacturing. I'm just curious, as this revenue looks similar to that back in the heady days of 2011, how much of this improvement is a return to the OEM type business, the manufacturing business, and how much of this is the success in your transition towards more of a remanufacturing business?

A lot of new equipment, so it has been driven a lot by new equipment orders. We have seen re-man, though, come up quite a bit. But it was off a low base. Re-man volumes are, I don't want to say they're doubling, but they have gone up a lot, but it is a low base. So, what we have really seen pick up is the new equipment in terms of absolute dollars and number of units.

Okay. And then my follow-up on the margin, if I just take what Andy said, land base is 80% of revenue and roughly a 10% margin. If we back into what 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 it something seasonal? And could this potentially lead to upside in the future quarters?

Be careful with the margins and putting too fine of a point. We give rough -- we say 10% range. The diesel engine, the legacy diesel engine systems business is right around the double digit 10% margin range. And, just remember, there are some seasonal moves there, based on when our customers want to work on their vessels.

There are sometimes, in advance of a big grain harvest, there may be some work. 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 the upper parts of the river system are impassable because of ice.

So, there is some seasonality. The long and short of it, I don't think there's anything out of the ordinary in the legacy diesel business.

Okay. Thank you, David.

And our next question comes from Kenneth Hoexter from Merrill Lynch. Kenneth, please go-ahead.

Great, good morning. Can you talk about postal rates for a minute? It seems like you give us the inland revenues.

So, if we back into the offshore marine, and using just the barge, since you don't separate the dry cargo from the actual offshore, we 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? I'm 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.

No, we're still seeing mid to high single-digit price increases in the coastal business. We are still below the level we think for reinvestment, but we are getting closer. Maybe we're 15% below -- 15%, -20% below still. So, they still need to come up.

As we look out at the contracts that we've signed for the future, those rates, they're going to be were they need to be for us to get our 12% hurdle rate. But there is still a ways to go.

But to clarify, are you seeing that growth decelerate tremendously? If that was high single digits what was it the last few quarters?

It stayed in the high single digits. I don't think we're seeing any deceleration at all.

Okay. So no concerns with it. Okay, good.

You asked about the dry cargo business on offshore. As you know it is a pretty small part of our business. And we had just put in those new units, replacing the old units that we've used for over 30 years.

But that business was already under contract, so there has not been a lot of change there. We do have a little more depreciation expense because of the newer units. But still no real change in the price structure on the bulk of our dry cargo business.

That's helpful. And I was really referring to the coast-wise, which it's great to see that that's not decelerating then. My second question, follow-up, is on the size of the fleet. You mentioned or Andy mentioned growing from 17.3 million to 17.8 million barrels.

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? I just want to make sure that we don't get into an over-supply, how you measure getting into an oversupply or building too fast before you start to see that demand really take off, and I guess wait another year or two.

It's a delicate balance. But clearly we think we can put that equipment to work in the interim. To your point, it is really mid 2016 and beyond 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's still the case. We do believe we can put it all to work.

Okay. And 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 what that customer shift was?

Yes, 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 is now a new customer, basically changed the way they were doing business, and shut down a couple of ports, so we had to reposition some equipment. They have also changed a little bit of the way they are doing the business.

So, the repositioning costs us some in the quarter. But there's also a revenue dip from it. Some of it will come back, and some of it won't.

I think it was about $0.01 to $0.02 in the quarter. If you annualized that number, about half of it will come back over time as we reposition the equipment. But some of it just won't come back because the business just went away. Does that make sense?

It does, totally. And truly appreciate the insights and time. Thank you.

Matt Young from Morningstar. Matt, please go-ahead.

Good morning, guys. Regarding the land-based business real quick, in the past you've mentioned customers are gradually getting more comfortable with remanufacturing equipment. I'm wondering if there's a prevailing opinion that re-manned equipment is sub par or cost inefficient versus new.

No. I think re-man will continue to grow. I think there is a desired -- look, it makes economic sense.

You can re-man 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 is also, there's another dynamic, too. Newer equipment has -- sometimes 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 re-man makes economic sense, and it is really a capital and economic decision by our customers. And I think they see the value of it.

Also, just let me clarify. There's maintenance and repair, and then there's full re-man. Maintenance and repairs is just fix what's broken.

But a full re-man 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, but it is still very effective and cost effective.

I would assume, then, that customers generally cannot do that themselves, they would have to outsource that.

Some of the customers, the very large customers -- and you know who they, the Schlumbergers and Halliburtons of the world -- they certainly have the capability of it. But it is hard work. Tearing apart an engine and a transmission and rebuilding it is hard work, it's time-consuming.

So, they do like to outsource it. Some of the routine maintenance they're happy to do internally. More and more they are outsourcing the remanufacturing.

Do you have a lot of competitors that handle the re-manning, or is it a pretty limited marketplace?

There are always too many competitors. (laughter) There's a handful. Remanufacturing is much more difficult than building new. There's probably 15 people that are building new equipment, and maybe 5 or so that are really capable of doing the remanufacturing.

Okay. Thank you, I appreciate it.

Our next question comes from Fran Okoniewski from Friess Associates. Please go ahead.

Yes, good morning. Thank you for taking my call. On the chemical and petrochemical side, when we start to see capacity increase in 2016-2017, I'm just trying to understand, is this is a little bit more of a specialized market for you for the industry? And is there any benefit to overall mix as we see this increase?

I wouldn't say it's specialized. But clearly we are pretty big in the petrochemical side, we've really focused on it. If you think about our product mix versus, say, the standard industry, if you look at our entire fleet, marine fleet, 50% of what we move his petrochemicals.

If you look at our inland fleet it's about two-thirds, about 67% is petrochemicals. I would say, if you look at our competitors, their product mix is not as healthy in terms of petrochemicals.

That's a long way of saying we've got some long-established relationships in the petrochemical space that, one, we covet, and, two, that we work very hard day in and day out to make sure they are comfortable and we can cover their needs. So, it's probably not a direct answer but it does give you a feel that there is some level of differentiation around petrochemicals.

Okay, thanks.

Our next question comes from John Mims from FBR Capital Markets. John, please go-ahead.

Thanks, guys. Thanks for a quick follow-up. I had a question on the coastal fleet because I've been getting several questions about ECSA and regulations as far as emissions on the engine side, but also ballast water treatment. Is there any expense or costs that we should anticipate upcoming as far as getting your fleet up to par with the new regulations? That one on side, but then on the other side, is there any anticipation that these new regulations would accelerate retirements from your competitors, because I know a lot of the fleet is already fairly old on the ABT market

On the tier emissions standards, of course, we're going to comply there. I think the whole industry is.

Anything that you're building new has the -- well, if you start building it after this year it will start having the new tier emission standard engines. Everybody will have to deal with that, and we will have to pass the costs on to our customers. The stuff that is being built now is still before the tier 4 standard, if you will, and -- I don't want to say grandfathered in, but it's all allowed by law.

On ballast water, the Coast Guard has still not opined on what type of ballast water system they will approve. There's a couple of different types out there.

But, yes, it's going to be a cost. Just order of magnitude it could be $1.5 million per unit on ballast water. But the entire industry is going to have to deal with it.

Quite frankly, I think of it as something that we are probably more capable to deal with than some of our competitors, just because of our balance sheet. If it does accelerate 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 have heard us say in the past, John, the coast-wise fleet, 200,000-barrel and less barge fleet, there are 40 or so vessels that are over 30 years old. So, maybe those ballast water investments could help, to your point, accelerate a couple retirements, which I think that would be healthy for the industry.

Right, thank you. Because I'd heard a number higher than $1.5 million, and that was the argument, that these older vessels, you would never recoup the investment. So, I didn't know if we should think of that as an expense coming up for you all or something that would push pricing just as supply is shrinking. So, that's helpful. Thank you.

Our next question comes from Kelly Dougherty from Macquarie Group. Please go-ahead.

I just wanted to follow-up on the outlook for your manufacturing. 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 capital discipline decision.

So if they're not making as much money, is it too simplistic to say that they better appreciate the economics of remanufacturing? And is there any point you think at $90 or $100 oil, here's our thoughts on re-man, and maybe at $70 or $80 it's that plus 10%? Any way to think about that?

I like the thought process, and it is very logical. But there are a lot of moving parts for our customers, and sometimes it could be a basin by basin decision.

Kelly, the short answer is I don't know. I think economics make sense, and usually win out in the long run, so what you articulated would make perfect sense.

But they are managing a number of dynamic things -- where their crews are, where their equipment is, how old some pieces of equipment are. But clearly economics should win out in the long run. But I like your logic.

Hopefully they do, too. Thanks very much.

We have no further questions at this time.

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.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect