Kirby Corp (KEX) 2018 Q2 法說會逐字稿

Good day, and welcome to the Kirby Corporation of 2018 Second Quarter Earnings Conference Call and Webcast. (Operator Instructions) Please also note, this event is being recorded. I would now like to turn the conference call over to Mr. Eric Holcomb, Kirby's Vice President of Investor Relations. Mr. Holcomb, the floor is yours, sir.

Good morning, and thank you for joining us. With me today are David Grzebinski, Kirby's President and Chief Executive Officer; and Bill Harvey, Kirby's Executive Vice President and Chief Financial Officer.

A slide presentation for today's conference call as well as the earnings release that was issued yesterday afternoon can be found on our website at kirbycorp.com.

During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation to the non-GAAP financial measures to the most directly comparable GAAP financial measures is included in our earnings release and is also available on our website in the Investor Relations section under Financial Highlights.

As a reminder, statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found on Kirby's Form 10-K for the year ended December 31, 2017 as well as the subsequent filing on Form 10-Q third quarter ended March 31, 2018.

I will now turn the call over to David.

Thank you, Eric, and good morning, everyone. I'll start my comments with a summary of the second quarter results and then I'll turn the call over to Bill to walk through the financials in more detail. Following Bill's comments, I'll provide an update on our third quarter and full year guidance, and then turn the call over to Q&A.

Yesterday afternoon, we announced 2018 second quarter GAAP earnings of $0.48 a share. These earnings included a previously announced onetime non-tax-deductible charge of $0.30 per share related to the retirement of our Executive Chairman, Joe Pyne. Excluding this charge, our second quarter earnings were $0.78 a share, which compares to $0.48 in the 2017 second quarter and our guidance range of $0.60 to $0.80 per share.

In the inland marine transportation business, we delivered strong improvement in revenue and operating profit as this business started its recovery from the prolonged downturn and we realized the benefits of recent acquisitions.

During the quarter, our team completed the integration of Higman and also moved quickly to capture the benefits of the Targa pressure barge fleet, which was purchased in May. In total, nearly 180 barges and 75 towboats have been added to the Kirby fleet through these acquisitions this year. The dedication and experience of our team to effectively deploy these assets has kept utilization rates high. Additionally, swift and thoughtful action to maintain equipment, realize synergies and cut cost has paid dividends. As a result, I'm pleased to report that both of these businesses are exceeding expectations and contributed favorably to our second quarter earnings.

Operationally, although high water on the Mississippi River hindered our operations in the first month of the quarter, overall operating conditions and efficiencies improved sequentially as the summer months approached. As a result, Kirby and, we believe, the industry as well, experienced a modest seasonal decline in utilization with our rates hovering around 90% throughout the quarter.

This slight softening of utilization levels across the industry kept spot market rates in check with little overall change compared to the first quarter. However, with spot market rates improving 10% to 15% year-on-year, term contracts renewed up in the low-single-digit range on average during the quarter. I believe this is a positive trend that should continue and lead to the anticipated mid-single-digit pricing inflection that we've talked about happening sometime during second half of 2018.

In the coastal sector, market fundamentals remain challenging but were stable compared to the first quarter. During the quarter, we did renew a few spot contracts modestly higher, supporting our belief that this market has bottomed. Our coastal fleet utilization rate improved into the low- to mid-80% range during the quarter and our operating profit margin improved to the negative low- to mid-single digit range. While we continue to expect it to take another 12 months or so for this market to rebalance, we did take advantage of a strategic opportunity to purchase at a significant discount a new 155,000 barrel ATB for $50.1 million, which was being constructed by a competitor.

The final construction cost for this unit is expected to be approximately $65 million. Once this ATB is delivered later this quarter, we expect to retire an older vessel that is currently operating in our fleet.

The Distribution & Services segment had another strong quarter, delivering sequential and year-on-year growth in revenue and operating income, particularly in our oil and gas businesses. Despite continued vendor delays on the delivery of new engines and transmissions, our manufacturing teams delivered record volumes of new pressure pumping units and equipment to domestic and international customers, including the new units that were delayed in the first quarter.

In our commercial and industrial market, we experienced continued recovery in high service levels for marine engine overhauls and service throughout the second quarter.

Improving market conditions in the inland sector, both in liquids and dry cargo, contributed to favorable sequential and year-on-year results, as many of our customers could no longer afford to defer major maintenance on their fleets.

In our power generation business, we began to see higher utilization rates for our specialty rental units in anticipation of summer storms as well as increased demand for backup power systems. The nuclear business was stable during the quarter.

In summary, things continue to move in the right direction. Inland marine has turned the corner and is expected to continue to improve going forward. Coastal remains stable and has recently experienced some green shoots with improved utilization and a few spot contracts renewing slightly higher during the quarter. In distribution and services, although we continue to experience supply chain bottlenecks, our manufacturing teams managed to deliver a significant volume of new pressure pumping equipment to the market and have outperformed our expectations.

In a few minutes, I'll talk more about our outlook for the third quarter and the remainder of the year. But before I do, I'll turn the call over to Bill to give you some more details on the second quarter results.

Thank you, David. Good morning, everyone, and thank you for joining us.

In the 2018 second quarter, our Marine Transportation segment revenues were $378.2 million with an operating income of $38.2 million and operating margin of 10.1%. Compared to the first quarter, revenues increased 11%, primarily due to a full quarter of the Higman assets, the contribution from recently acquired pressure barges and improved operating efficiencies in the inland market.

Operating income increased $22 million sequentially, primarily due to the higher revenue, but also due to $8.3 million of onetime nonrecurring costs related to Higman, an amendment to our stock plan and severance that impacted our first quarter results.

Compared to the 2017 second quarter, revenues increased $46.9 million or 14% and operating income increased $2.6 million as lower year-over-year pricing in the inland and coastal markets reduced operating margins.

In the inland sector, revenues were roughly 30% higher than the second quarter of 2017 due to the Higman acquisition, additions to our pressure barge fleet and overall improved barge utilization. The increase, however, was partially offset by the full year impact of lower average term contract pricing and the lower average pricing of the Higman contract portfolio.

During the quarter, the inland sector contributed approximately 76% of our marine transportation revenue compared to approximately 70% in the first quarter. Long-term inland marine transportation contracts or those contracts, where the term of over 1 year contributed approximately 65% of revenue with 62% attributable to time charters and 38% from contracts of affreightment. Term contracts that renewed during the second quarter were up in the low-single digits on average compared to the 2017 second quarter. Spot market rates were largely unchanged sequentially, but went up 10% to 15% year-on-year.

During the second quarter, the operating margin in the inland business improved to the mid-teens. In our coastal marine market, second quarter revenues declined approximately 15% compared to the 2017 second quarter, primarily due to lower contract pricing and a reduction in volumes transported as a result of barge retirements completed at the end of 2017.

These reductions were partially offset by barge utilization improving to the low- to mid-80s. Regarding pricing, while it is contingent on various factors, including geographic location, vessel size, vessel capabilities and the products being transported, average clean service contract pricing for an 80,000 to 100,000 barrel barge was down approximately 10% to 15% compared to the 2017 second quarter. However, both term contract and spot market pricing were generally unchanged in the second quarter as compared to the first. During the second quarter, the percentage of coastal revenue under term contracts remained at approximately 80%, of which approximately 85% were time charters. The coastal business operating margin improved to the negative low single digits during the quarter.

With respect to our barge barrel capacity. In the inland sector, during the quarter, we retired 20 barges with a total capacity of approximately 452,000 barrels. And we took delivery of 1 specialty barge that had been under construction by Higman with a capacity of approximately 26,000 barrels. As previously announced, we also acquired 16 pressure barges from Targa with a capacity of approximately 258,000 barrels. The net result was a decrease of 3 tank barges and a total capacity reduction of 168,000 barrels.

At the end of the 2018 second quarter, the inland fleet had 990 barges, representing 21.7 million barrels of capacity.

During the remainder of 2018, we expect to take delivery of 1 additional 24,000 barrel specialty barge that was acquired through the Higman acquisition, and we also plan to retire 6 additional barges with approximately 76,000 barrels of capacity. On a net basis, we currently expect to end 2018 with a total of 985 inland barges, representing 21.7 million barrels of capacity. In the coastal marine market, there were no changes to our barge count or barrel capacity during the second quarter. As previously mentioned, we expect to take delivery of a new 155,000 barrel ATB in the third quarter. However, we intend to retire an older vessel with a similar barrel capacity currently operating in our fleet. We also intend to return 2 barges to charters with a total capacity of 135,000 barrels before the end of the year.

On a net basis, we currently expect to end 2018 with 53 coastal barges with 5 million barrels of capacity.

Moving to our Distribution & Services segment. Revenues for the 2018 second quarter were $424.5 million with an operating income of $40.2 million. Compared to the 2017 second quarter, revenues and operating income were up sharply, primarily due to the incremental contribution from S&S, strong demand for oil and gas products and services and improving marketing conditions in the commercial marine diesel engine repair business. Compared to the 2018 first quarter, revenues increased 6% or $23.2 million and operating income increased $3.2 million, primarily due to increased manufacturing activity in the oil and gas market. During the second quarter, the segment's operating margin was 9.5%, which is up about 30 basis points sequentially, but down from 11.5% in the 2017 second quarter.

In our oil and gas market, favorable oilfield fundamentals resulted in a significant increase in revenues and operating income associated with the manufacturing of new pressure pumping units both sequentially and year-on-year. During the quarter, the manufacturing business delivered a record number of pressure pumping units, which included units that were delayed from the first quarter due to vendor supply chain constraints. We also experienced continued strong demand for new and overhauled transmissions in our oil and gas distribution business. For the second quarter, the oil and gas businesses represented approximately 72% of Distribution & Services revenue and had an operating margin in the low double digits.

In our commercial and industrial markets, compared to the 2017 second quarter, we experienced increased demand for overhauls and service on marine diesel engines, particularly related to inland towboats, as the tank barge and dry cargo markets recovered. Compared to the first quarter, activity in our commercial marine business was stable. Service activity in the power generation market was unchanged year-on-year, but mixed compared to the 2018 first quarter, as seasonal increases in rentals of standby power generators were partially offset by lower service levels for major nuclear and commercial customers, due to the timing of projects. For the second quarter, the commercial and industrial businesses represented approximately 28% of Distribution & Services revenue and had an operating margin in the mid- to high-single digits.

Turning to the balance sheet. As of June 30, total debt was $1.44 billion, which represented a $450 million increase versus the end of 2017. Compared to the end of the first quarter, total debt increased slightly as strong cash flow was used for $119 million of spending, which included the $50.1 million of CapEx for the new 155,000 barrel coastal ATB and the $69.3 million of cash used to acquire the Targa pressure fleet. Our debt-to-cap ratio at the end of second quarter was 31.2%.

Looking forward, we intend to prioritize deleveraging with our free cash flow during the remainder of the year.

I'll now turn the call back over to David to discuss our guidance for the third quarter and the remainder of the year.

Thank you, Bill. In our press release yesterday afternoon, we announced our 2018 third quarter guidance of $0.50 to $0.70 per share. And we provided our full year 2018 updated guidance of $2.50 to $2.90 per share, and that excludes the onetime charges of $0.30 per share related to Joe Pyne's retirement as Executive Chairman as well as a $0.05 per share impact from a first quarter amendment to our employee stock plan.

Overall, we have lowered the midpoint of our range by $0.05 compared to the previous guidance range of $2.50 to $3 a share.

In the inland transportation market, we expect our utilization to be in the low 90% range for the third quarter and the low- to mid-90% range in the fourth quarter.

We anticipate that with increasing customer demand as the petrochemical build-out progresses, combined with continued industry tank barge retirements and minimal new tank barge construction, we will keep industry utilization at or above 90% for the duration of 2018 and into 2019. As a result, we continue to expect mid-single digit pricing improvement on term contracts that renew in the second half of 2018. As stated in prior quarters, the low end of our guidance range assumes minimal term contract pricing improvement in 2018 and the high end assumes mid- to high single-digit pricing improvement in the second half of this year.

In regards to expenses, there has been a tightening of the labor market, therefore we have recently implemented wage increases to our inland mariners and short-staffed employees. This will have a adverse impact of approximately $0.05 per share for the second half of 2018, but it is included in our updated guidance.

In the coastal market, we expect utilization in the low- to mid-80% range for the remainder of the year. Our guidance range assumes a stabilized pricing environment with no material change in market fundamentals in the near term.

Overall, the midpoint of our guidance range assumes that the full year 2018 marine transportation operating income will be flat to up slightly compared to 2017. This reflects the full year impact of term contract pricing from last year, lower inherited Higman contracts and the impact of the inland wage increases. However, we expect these to be mostly offset, or more than offset, by anticipated term and spot pricing improvements in the second half, plus favorable operational contributions from both Higman and Targa as well as some lower costs in our coastal operations.

For our Distribution & Services segment, we expect reduced revenue and operating income in our oil and gas businesses during the third and fourth quarters. Vendor supply chain issues are expected to push out deliveries of new transmissions and engines for many pressure pumping units that will be under construction. As a result, many of these new units are not expected to be completed and revenues recognized until the fourth quarter or into early 2019. Additionally, some of our oilfield customers are facing supply chain constraints of their own. Sand and labor availability as well as logistical challenges have created a shortage of resources for them. As a result of these dynamics, we have felt some softening in new pressure pumping unit equipment orders. We believe that this could have some temporary impact on our manufacturing businesses for the remainder of the year. However, remanufacturing and maintenance activities remain strong and the longer-term outlook is very favorable, and that includes Permian takeaway capacity growing. I will talk about those positives and others in a minute.

In our commercial and industrial markets, we expect the third quarter to be in line with the second quarter. Seasonal declines in our commercial marine business related to timing of major engine overhauls should be offset by increased demand for standby power generators during the hurricane season. Overall, despite the vendor challenges we are currently experiencing and some softening in new orders for pressure pumping units, we expect revenues in the Distribution & Services segment to be strong and range between $1.45 billion and $1.65 billion with operating margins in the high single digits throughout 2018.

Now to sum things up, our second quarter results were solid. In inland marine, recent acquisitions are generating positive momentum and contributions to earnings. Term contract pricing has recently started to move higher on average, and overall, it appears that a pricing inflection is likely in the second half of the year. Coastal remains stable and profitability has improved. Green shoots are starting to appear and, although it will be some time before this market reaches balance, I am confident that our recent investments to improve the efficiency of our fleet will pay big dividends in the long term.

In Distribution & Services, we had a very strong quarter, but have short-term challenges ahead of us as our vendors struggle with timely deliveries of equipment that we need to complete pressure pumping units on schedule and our customers are still trying to manage through their infrastructure issues. While this could result in a slowing of the pace of new pressure pumping units completed over a couple of quarters and into 2019 and beyond, we maintain a very favorable outlook for this business. Drilled but uncompleted well inventories continue to rise and the near-term pause will only allow the underlying supply chains time to catch up. Ultimately, we think this will extend the cycle and create more ratability in the market.

Additionally, underinvestment in long-term E&P expenditures, both in international and subsea projects over the last few years, coupled with growing world demand for oil, has changed the landscape for U.S. shale, and ultimately, the frac industry. With numerous new pipelines from the Permian to the Gulf Coast under construction or proposed, including a new 1 million barrel per day pipeline announced by Exxon and Plains, the evidence is mounting that U.S. shale will play a more meaningful role in the supply of world oil going forward. This will not only create higher demand for pressure pumping equipment in the oilfield, but it will also translate into incremental liquid volumes for our industry-leading marine transportation business.

And finally, our balance sheet remains strong. While we have recently used debt to fund a couple of sizable barge acquisitions, we are generating strong cash flow from operations. And this is keeping our debt levels relatively unchanged sequentially.

Operator, that concludes our prepared remarks. We are now ready to take questions.

(Operator Instructions) The first question we have will come from Jon Chappell of Evercore.

David, if I can start with the D&S. Just some quantification if we can. I mean, I think the vendor delays mean the backlog doesn't change and you're just going to get the revenue maybe a little bit later than you thought. Whereas the -- maybe the deceleration of new orders given the infrastructure issues could be potentially permanent lost revenue. So is there any way to kind of quantify the new guidance range? How much of that has to do with these temporary and timing issues versus, maybe a near-term outlook change as far as new ordering is concerned?

Yes, I would say that almost all of this guidance changes is temporary in nature, because of vendor delays and a little bit due to revenue recognition. But look, our current backlog as of today is actually at -- actually it's a little above where we were at the end of the first quarter. So business isn't bad, it's actually quite good. I think we're just seeing a little pause in the pressure pumping new orders. But I will say this, we're seeing an increase in remanufacturing orders and maintenance activity. I think this is all positive. Our pressure pumping customers are being very, very disciplined right now with their capital. And I think that's positive for the longevity of the cycle. But let me go back to the temporary nature here. We've had some significant vendor delays and with the new revenue recognition accounting, it makes things slide out a little bit. Bill, maybe you can bring us -- add a little color to the revenue recognition piece of this, if you...

Sure, sure. Jon, one of the aspects of revenue recognition that's front and center here is that I don't want -- people shouldn't assume that this means that our results have been normally as volatile as this creates. Normally, at the end of every quarter, there are things we have sold, there is units that are just not completed and under the new rules, instead of under the percentage of completion, we don't actually get the revenue until it's shipped and the control changes hands. Normally that would just be a marginal impact at the -- of every quarter. It depends on when the units ship, if they are just afterwards or not. Here because of the vendor delays that are really coming to play, won't be resolved or start to be resolved, better wording. In September, we have quite a few units that will be built up and we won't recognize that revenue until they are shipped. And that puts -- will spill into the fourth quarter and we're being conservative. We think some of that may end up spilling over into the first quarter. Again, what that does is it moves the revenue out until that point. And as in any business there's fixed cost above that, so that aren't absorbed until the revenue -- we realize the revenue. So that is not normally what you would occur with the shift in accounting, and normally, it would be almost a nonissue in -- with the shipped from a percentage completion.

But let me come back, Jon, to the larger outlook, and that's 2019. Look, the Permian takeaway, which is some of that is getting blamed on slowdown in new orders but again, I would say that our pressure pumping customers are being very disciplined. And in fact, some of the major customers, including one of our big customers said that, essentially, they are booking up 2019 now. So I think it's -- that this is more of a pause, and some of it -- well most of it is temporary. And we're still very bullish, and I think we're in for a good '19 and probably a good '20 as well.

All right. That's incredibly helpful. And just my follow-up, hopefully much quicker. Just trying to rectify some of the commentary on the coastal and front page of the press release, challenging. In the outlook section, challenging but a rebound expected in the next year or so. So I think a lot of people had written this business off as a money-losing business for the foreseeable future, but now you're in the low single-digit negative margins. When you say a rebound or so, and just given what you've seen with the pricing and more importantly the capacity removals in the market, can this business get back to breakeven or even profitability within the next 12 to 18 months?

Absolutely. We are seeing the inevitable retirement of older equipment, and very few new pieces of equipment coming in. As we said in our prepared remarks, we got a couple of spot contracts renewed higher for the first time and that's a welcome change. Our utilization still probably in the 80% to 85% range. So it needs to tighten up a little more before we can really start to get the business back to positive results. But everything is marching towards that. If you look at and say the industry is -- probably needs to tighten up about 5% to 8%, that's about 1.5 million barrels of capacity. But in looking at the retirements that should happen, I think the number is about 2 million to 2.5 million barrels of capacity out there that are 30 years of orders. And with ballast water treatment coming, that capacity is going to come out of the market. We're seeing it. There is some announcements by some of our competitors or at least some market knowledge that they're retiring some equipment. So we are inexorably marching towards balance. We're not as far off as we were. We're at kind of the low- to mid-80s in terms of utilization. It's not going to take a whole lot more and we've got these green shoots that have been able to get a couple of spot contracts a little higher. So the short answer is, absolutely, in the next 12 to 18 months, we'll -- this business should be profitable.

Next, we have Ben Nolan of Stifel.

So following a little bit onto Jon's question. You guys did this acquisition of another ATB in the quarter. I was curious if you can maybe frame that. And is that -- you spent a little over $50 million or maybe $60 million, I guess, after it's fully delivered, but how much would it cost to order one of those new now? And is this sort of a distressed acquisition, or just kind of something that that fell to you as just part of normal course of business?

Yes, this is, well, the short -- the first piece of the answer is, this vessel would run about $79 million new if we were to go order it, probably even higher now because steel prices have gone up. Look, this was a great opportunity. This was a competitor building a vessel and we were able to pick it up at a discount. It's a sister to 2 other 155s that we just took delivery of in the last year. It fits perfectly in our fleet. And you know us, we tend to buy at the bottom of the market or invest in the bottom of the market. And so we're excited about this. We think it fits great into our fleet and it will allow us to actually replace some older capacity ourselves. So we're actually pretty excited about it. It's kind of one of those opportunities that just falls into place sometimes, and with our capital discipline, we think this is going to be a great acquisition. It's relatively small, but it kind of fits with our normal game plan of kind of buying at the bottom of the market, just before we kind of emerge from the bottom.

Okay, that's helpful. And then for my follow-up, this is a -- maybe a little off the beaten path, but David, have you thought through maybe what might be the implications of trade issues and tariffs and those kind of things, specifically around what it might mean for the petrochemical business and your barge movements and maybe how you're positioning the company in the event that something like that materializes?

Yes, sure. Well, the short answer on steel tariffs, we actually think that's a positive for us, because it makes the cost of building new barges that much higher. But from our customers' standpoint, clearly higher steel prices make their plants a little more expensive. But what you really would worry about is some kind of trade war that prohibits the movement of petrochemicals or slows down the export of petrochemicals. A lot of the petrochemicals, particularly polyethylene, are being built for the export markets. And also with the crude market, you see there's 6 new pipelines coming to the Gulf Coast from the Permian. And then there's also been a recent announcement to put essentially an offshore LOOP facility that allow VLCCs to load and that's for export crude. So if the trade war got pretty ugly or it got worse -- I'm not sure we're in a trade war just yet. It's kind of a lot of bantering and negotiation. But if it escalated and somehow impinged the export of chemicals and the export of crude that would not be a positive, clearly. But in terms of steel, we are actually not disappointed in that. We're -- we certainly don't want a trade war, but having -- more expensive to build barges is actually a good thing for us.

Next, we have Jack Atkins of Stephens.

So David, I guess, kind of going back to the D&S segment for a moment. And when we think about sort of the puts and takes of your consolidated guidance, it sounds like the marine businesses are sort of better than what we were thinking about 3 months ago. And obviously, there are these vendor issues on the D&S side. So when we think about the changes to the guidance, could you kind of help us quantify how much of the earnings were sort of pushed out of '18, if you will, out of that '18 guidance due to those vendor bottlenecks? And Bill, if I heard you correctly, it sounds like you would expect those to be resolved in September, is that correct?

Yes, Jack, when I say resolved, that's when it's going to begin to be resolved. Remember, we have partially completed units that won't be completed, so that will push those units, the revenues associated with those sales to the fourth quarter and through the fourth quarter. So some of that will end up in 2019. So there are units that won't be -- that we expect -- and again, this is more than science. We expect there will be spillover into 2019. And the guidance change reflects some of that, but a quite of bit it is -- some of it is just a reflect -- it's a very modest change, and it reflects the wage increases and various things. It's not strictly related to that, but it's a very modest change, as you know.

Okay. That's right. I was just trying to see if there was a way to sort of quantify how much is related particularly to that one issue. Because it seems like -- those are earnings that you should expect to get back at some point.

Yes. No, those aren't lost earnings. In essence, what's happened is, we've done some work. You work -- the guys did a tremendous job already of working as far as they could to get things as almost ready. But we don't -- we can't finish the sale. The sale is done, but in other words, we can't recognize the sale, is better wording.

Okay, makes sense. And just as my follow up on the marine side, particularly the inland marine side. Given the tight labor market, it shouldn't surprise anyone that there's some wage inflation there with your crews. Could you just sort of help us think about how you all are thinking about incremental margins in the marine business, obviously excluding any impact from acquisitions? But just sort of how we should be thinking about incremental margins on price as we sort of move forward with the recovery in that market.

Yes, Jack, as you know, when you get price increases, the incremental margins are very high. We had a little bit of labor inflation here, but to be fair, it's been a couple of years since our mariners had raises. So it's good to give them those raises. But incremental margins on pricing are 80-plus percent. So I would say, as pricing rolls through here, it should be very positive. Our margins in the inland business now are kind of mid-teens, which is pretty much as low as they've ever been. A quarter or so we've been lower than that but we're coming out of the bottom. As you'll recall, we hit -- prior peaks were in the high 20s, almost 30%. I would say a normalized margin for our business should be kind of low- to mid-20% range. And there is no reason we are not going to get back to the normalized margin. Now you ask me what date and time that will happen, I can't give you that answer. But as pricing progresses, we will march towards those higher margins.

Next, we have Randy Giveans of Jefferies.

Congrats on completing the integration of the Higman and Targa acquisitions there. So now that those are behind you, should we expect additional inland tank barge acquisitions in the back half of this year?

Predicting acquisitions is a tough game. I can tell you many times, we thought we were there on some deals and then it fell away. But it's always about bid-offer spread. But look, until something comes together, we'll use our cash flow to delever, which has always been kind of our game plan. We would love to do another inland acquisition. We will see what happens. But predicting it is difficult and until something happens, we'll just use the cash flow to delever.

Okay. So not in extended negotiations currently?

Yes, probably best I don't comment more than that.

Fair. Follow-up question. So looking at your guidance for 3Q '18, $0.50 to $0.70 per share. So I guess 2 questions. First, what would cause it to be on the $0.50 range and then on the $0.70 range. And then second, even at the high end of the range, it sounds like 3Q '18 EPS will be lower, obviously, than 2Q '18 EPS of $0.78. So why is that? And do you see the 3Q '18 is kind of the bottom before EPS increases in 4Q '18 and beyond?

Yes, look, the biggest factor is the delivery of frac units, as Bill talked about, with respect to percentage completion accounting and the delivery of units. We can't recognize revenue until we get the unit shipped. And that was the big driver from Q2 -- the sequential drop from Q2 to Q3. And if anything, Marine is better in Q3 versus Q2. So that's what's leading to it. But I would say Q3 should be below, Q4 would be above Q3. And look, I -- again, I'm focused on the long-term positive here. This is -- everything we're seeing and hearing in the build-out of pipeline capacity takeaway, what's happening in the shale plays, the underinvestment in international and subsea, E&P, it -- this is going to be a long-term, very positive ramp up for the shale play. And I think -- we're actually very excited. I know it doesn't feel that way this quarter with that guidance that we just gave, but it is very, very positive. Our customers are being very disciplined with their capital. I think, that's extending the cycle and making it more ratable, but all the trends are headed in the right direction.

Okay. And then just to clarify, the biggest driver of a $0.50 3Q or a $0.70 3Q would be on the deliveries of the equipment?

Correct. Yes. Anything you'd add to that?

Just that you can't forget that Q2 was a very good quarter and that the guys did a tremendous job of getting units out. And we're not trying to smooth anything. If they can get it out in Q2 and we realize it, we do it then.

Next is Mike Webber of Wells Fargo.

Bill, just to jump into -- going back to D&S, I know there was a question earlier on but I'm trying to quantify it. But if you move the top end of the guidance down by $0.10, and $0.05 of that is wages, implies roughly $0.05 of that is kind of the cascading revenue recognition and bottleneck issue. And if I kind of back that out of, kind of tax aside, the operating income from Q2 and the D&S line, I mean it basically seems like about 10% of that, I guess, EBIT, if you will, from that business that you think is kind of rolling on a continual basis. I'm curious, one, how long is the average delay for both engines and transmissions? And obviously, since you moved the annual guidance, this extends into Q1 of '19, is it something you think that could perpetuate through most of '19? And then along those lines, how should we think about the integrity of that backlog in that context? How much flexibility is baked into those contracts? Do you think there is a risk if you miss those delivery delays -- those days? Does -- that it rolls up on you? And then what kind of recourse would you add to your suppliers? A lot of questions, but....

Yes. I'll try to answer this as simply as possible. The actual delay was 6 months, but we had -- the guys had done a very good job of being in a position that they could work through it for a couple of months. And in September, when we start -- we believe we'll start to see a resolution. And I think your numbers hang together to some degree. I would say, it's not going to perpetuate. Once the supply side is complete -- is in process, we do have to complete the orders. These are firm orders. There's no risk of them falling away. So there will be some. And we're -- one thing we wanted to build in the guidance, and to be conservative but also realistic that things don't just change overnight. We're going to have to work through the fourth quarter and it could be some of it, and probably will be, some of these units not shipped until the first quarter of 2019. But it won't perpetuate through. And again, revenue -- this business is not -- this is due to supplier delays. Revenue recognition adds some volatility but not a lot. It would normally be a few cents either way unless there's some -- a typical big order. Remember, we're talking about units here. We're not talking about $50 million, $60 million things being shipped. We're talking about frac units.

Right, okay. So your -- so there's -- you're not concerned with your indemnification from late delivery due to supplier constraints. Okay, that's helpful.

No, no. We work very closely with our customers. This is -- there's nothing hidden here.

That's helpful. The -- I guess looking at the wage inflation, it makes sense that, that market is tightening up. The $0.05, which is, I guess $0.10 annually. It's hard for me to get a sense on -- I guess, can you give us a sense where that stacks up, David, to last cycle? Like if I just think about where nominal wages are, or even inflation-adjusted wages are today for that segment of your workforce versus last cycle, is this something -- do you think there is more of this to come as we move through the recovery? Or are you kind of getting ahead of it? Just some context around that will be helpful.

I would say, we got ahead of this. We're probably one of the first ones to give wage increases in the industry. Actually that puts a little pressure on our competitors too, which isn't necessarily a bad thing. But it was bit preemptive. Look, we've been through these cycles before, and we just want to keep our mariners. And I would say, this is kind of normal increases in wages, probably a little earlier as we preempted it. And others are following our increases. I -- will there be more? I think it'll be more like GDP-type raises going forward, which I think is normal.

The next question we have will come from Kevin Sterling of Seaport Global Securities.

So David, on the coastal side, you guys were opportunistic and bought an ATB and this business, it kind of indicates it's going to still be a challenge heading into 2019. Would you want to get bigger in that business if, for say a competitor becomes distressed and you could buy a larger fleet? Or are you content with your size right now in the coastal market? I know you want to get bigger in inland, but would you like to grow out coastal if a larger fleet possibly became available, with this continued downward trend?

You know us, we are very disciplined in our capital deployment. I would tell you this, we would prefer right now another inland acquisition, but if the right opportunity came along coastal lines, we would do it. We're pretty happy in the coastal lines business right now and this asset just kind of dropped right in perfectly for us. So in terms of preference, I would say an inland acquisition would be a higher preference than the coastal. And frankly, it wouldn't be bad for us to deliver a little longer here and to shore up our balance sheet a little more. But look, in our business, you got to kind of take the opportunities when they come, and when the bid-offer spread kind of narrows. You've got to take the deals when they come. But right now, I would say, our preference would be an inland acquisition over a coastal acquisition.

Got you, okay. Switching gears to the inland business, and obviously, we're seeing pricing improve, both spot and term pricing. Outside of strong demand, what else is driving that? In the past, there has been an irrational competitor and brought in some other irrational pricing. Are we seeing that main competitor become a little bit more rational with pricing, put some of their equipment on term, keep out of the spot market? I guess, so at the end of the day, are we seeing a little more pricing rationale in inland versus some of the sloppy practices we were seeing just even a year ago?

Yes, the short answer is yes. We're seeing a little more discipline, and also people are a little busier. Look, every summer we get a little drop in utilization, that happens all the time. But as we head into the fall, we're going to get even tighter and then there's some lock delays happening right now and they look like they'll be persistent for 12-plus months. So I would say that utilization is only going to get tighter from where we are at and we're already pretty tight. So the market is becoming more disciplined and across-the-board, with all of our competitors, which look, it's needed. We've had a very long downturn that's been painful to a lot of companies and we, as an industry, kind of need this cycle to continue up. And we are seeing our competitors be more disciplined about it. Look, we can't have the rates as low as we had for as long as we had and they have got to move up. And the utilization is where it needs to be to make that happen. Supply and demand continue to tighten. There is not a lot of new builds. There is continued retirements. And then we've got some demand growth, with these plants coming online and just more liquids on the system. So everything is moving as we had hoped and if not, a little better.

Next, we have David Beard with Coker & Palmer.

Obviously, a lot of questions have been asked, but I thought I'd just ask a bigger-picture question kind of relative to earnings guidance variability, and I'll just cherry pick a couple of examples. If I look back at 3Q '13, you guys are kind of plus or minus $0.05 on $1.10 in earnings. And now, it seems we are plus or minus $0.10 on, call it a $0.60 base. Obviously, your sales per share have jumped up about 1.5x, but you could argue the variability jumped up threefold. We've got a couple of cents from the revenue recognition impact. Do you think this is really the variability? It's really just a couple of onetime items? Or do you think there has been an increase in -- I guess, sort of a decrease in visibility, increase in variability as the company has grown? I guess, kind of bigger-picture thoughts on that.

Yes, I would say, look, when you're integrating a company like us, Stewart & Stevenson and Higman, you give yourself a little more cushion. As we get further integrated and -- the predictability will go up for us. But there is some variability with revenue recognition as Bill said. If you shipped -- if you have got several units that are supposed to ship in September but they move to October that impacts you. So revenue recognition, unfortunately the accountants have added variability to the equation by removing this percent of completion ability. But it is what it is. But the big part of what we do too, is to try and predict our businesses, and integrations make it hard. You've got to give yourself a little more room in that. So inherently, we bumped out the size of the range that we give.

Yes, that's helpful, that makes sense. And you're probably going to appreciate just that acquisition integration variability, just looking at the trend in mid-guidance variability. So appreciate it.

And now our caller, the question will come from Ken Hoexter of Merrill Lynch.

Just a quick one on pricing, just following up on Kevin's question. Just the pace of new contracts, you noted spot rates were flat sequentially, still up year-over-year double digits. But is that any indication of kind of something smoothing out, just given your positive commentary there, Dave?

No, I think, you will see spot rates moving up with contract rates, you're going forward. We had a pretty quick move in spot rates. I mean, they've jumped up pretty healthily in the first part of the year. Then we had a little pause in utilization with the summer months. So I think the market took a little breather. I think, as we could -- come out of these easier summer months and with some of these lock delays, you're going to see the spot pricing moving up again. And yes, I would say it's all heading in the right direction as we had anticipated. And what's important is, it leads to term contracts renewing higher and we saw a little bit of that in this quarter and that's very positive from our perspective.

David, and just a quick follow-up, I don't know for you or Bill. But can you just remind us the impacts of the hurricanes last year, did it cause a tightening or was it more of the lock shutdowns and -- so are comps easier or tougher for you as you go through that August, September period?

Well, the hurricane -- post hurricane, there was a lot of catch-up and that kind of changed the mindset in the market a little bit. But we were on the verge of tightening up anyway without the hurricane. But when the hurricane happened, everybody got a little short of equipment, because it was such pent-up demand and that just kind of started the process of recognizing where the market was in terms of tightness.

Again, this concludes our question-and-answer session. I would now like to turn the conference call back over to Mr. Eric Holcomb for any closing remarks. Sir?

All right. Thank you, Mike and thank you, everyone, for your interest in Kirby, and for participating in the call today. If you have any questions or comments, you can reach me directly at (713) 435-1545. Thank you everyone, and have a great day.

Thank you.

All right. And we thank you also, gentlemen for your time this morning. Again, the conference call is now concluded. At this time, you may disconnect your lines. Thank you, everyone. Take care, and have a great day.