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Kirby Corp  (NYSE:KEX)
Q3 2018 Earnings Conference Call
Oct. 26, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Kirby Corporation 2018 Third Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded. I'd now like to turn the conference over to Mr. Eric Holcomb, Kirby's VP of Investor Relations. Please go ahead.

Eric Holcomb -- Vice President of Investor Relations

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 investors.kirbycorp.com. During this conference call, we may refer to certain non-GAAP or adjusted financial measures.

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is included in our earnings press release and is also available on our website in the Investor Relation section under Financials. 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 in Kirby's Form 10-K for the year ended December 31st, 2017 as well as in subsequent filing on Form 10-Q for the quarter ended June 30th, 2018.

I'll now turn the call over to David.

David W. Grzebinski -- President & Chief Executive Officer

Thank you, Eric and good morning everyone. I'll start my comments today with a summary of the third quarter results and then turn the call over to Bill to walk through the segment financials.

Following Bill's comments, I'll discuss our fourth quarter and updated full year guidance before turning the call over for question and answers. Yesterday afternoon, we announced 2018 third quarter earnings of $0.70 per share. This compares to our guidance range of $0.50 to $0.70 per share and represents a 35% increase compared to the 2017 third quarter earnings of $0.52 per share.

In the third quarter, our inland marine transportation business continued its recovery from the downturn and experienced a steady increase in activity, increasing volumes from petrochemical and black oil customers, refinery turnarounds and some major lock infrastructure projects, all helped to drive up tank barge utilization.

At the end of the third quarter, Kirby's inland fleet utilization was in the mid-90% range. As a result of these tight market conditions, spot market rates increased between 3% and 5% compared to the second quarter. Furthermore, as anticipated, term contracts renewing in the third quarter repriced higher in the mid-single digits on average.

All of these factors together with lower operating costs, reduced maintenance expenses and efficiencies realized from favorable summer weather conditions, helped to boost inland operating margins. In the coastal sector, market fundamentals showed signs of improvement with favorable activity levels across the entire network, driven in part due to some refinery turnarounds, summer storm disruptions and good operating conditions on the West Coast.

With respect to pricing, while spot rates were generally unchanged during the quarter, we renewed several term contracts modestly higher.

Looking at the broader market, the widening of the Brent/WTI spread has increased the number of crude oil shipments from the Gulf Coast to the East Coast refineries. While not directly impacting our fleet thus far these incremental shipments in the coastwise trade are generating more activity for MR tankers and larger ATBs that have been working in our fleet's trade lanes since the downturn, most notably in refined products.

Provided the spread remains widened, we believe that our fleet could benefit as the larger vessels shift their focus to crude, thereby increasing our activity and utilization in the future.

As anticipated, the distribution and services segment reported a sequential decline in revenue and operating income following strong results in the second quarter. Vendor supply chain issues which were highlighted on our last earnings call, delayed the completion of many pressure pumping units under construction.

Additionally, the well-publicized Permian pipeline takeaway capacity issues reduced pricing for pressure pumping operators and logistical challenges in the oilfield resulted in lower activity for some of our major customers during the third quarter.

This temporary softening of activity drove a slight sequential reduction of new orders for oilfield equipment including pressure pumping equipment and new transmissions and overall transmission in parts. Despite these reductions, compared to the second quarter, demand for pressure pumping unit remanufacturing and service remained strong throughout the third quarter.

In our commercial and industrial market, compared to the second quarter, we experienced increased utilization in our specialty equipment rental business, most notably with generators and compressors dispatched during the peak hurricane season.

Results in the commercial marine business although significantly improved year-over-year, were largely unchanged sequentially. Reductions in inland towboat service during the dry cargo harvest season were offset by higher sales of new marine diesel engines.

In summary, although results in Distribution and Services sequentially declined as expected, the pause due to the Permian has an end insight in 2019.

Further, some of our customers are ramping up maintenance and beginning to order equipment in anticipation of the 2019 rebound. In marine transportation, things continue to move in the right direction. Inland pricing has inflected higher, barge utilization is nearly at capacity and operating margins moved meaningfully higher.

Coastal is showing signs of life again with increased revenue, some contracts renewing higher and operating margins improving earlier than anticipated. In a few moments, I'll talk more about our outlook for the fourth quarter and the remainder of the year.

But before I do, I'll turn the call over to Bill to discuss our third quarter segment results and the balance sheet.

William G. Harvey -- Executive Vice President of Finance & Chief Financial Officer

Thank you, David and good morning everyone. In the 2018 third quarter, our Marine transportation segment revenues were $382 million with an operating income of $48.5 million and an operating margin of 12.7%. Compared to the same quarter in 2017, this represents a 20% increase in revenue and a 36% increase in operating income.

Compared to the second quarter, revenues increased $3.8 million, operating income increased $10.3 million and operating margin increased 2.6%.

The significant improvement of profitability is attributable to improved pricing, enhanced operating efficiencies for the inland fleet, reduced operating and maintenance cost especially related to Higman fleet and higher demand in coastal.

In the inland market, revenues were approximately 30% higher than the third quarter of 2017 due to the Higman acquisition, increased demand in utilization, additions to our pressure barge fleet and improved pricing. During the quarter, the inland sector contributed approximately 75% of marine transportation revenue which is unchanged sequentially.

Long-term inland marine transportation contracts or those contracts with the term of one year or longer contributed approximately 65% of revenue with 58% attributable to time charters and 42% from contracts of affreightment. Term contracts that renewed during the third quarter were higher in the mid-single digits. Spot market rates increased 3% to 5% and were 20% to 25% higher year-on-year.

During the third quarter, the operating margin in the inland business improved to the mid to high-teens. In the coastal marine market, third quarter revenues declined to (ph) 5% year-over-year primarily due to barge retirements completed at the end of 2017 which reduced the total volumes transported. These reductions were partially offset by barge utilization improving to the 80% range.

Although pricing is contingent on various factors, such as geographic location, vessel size, vessel capabilities and the products being transported, in general, average spot market rates were unchanged compared to the 2017 third quarter.

However during the quarter, we did see a number of term contract renewals reprice higher. During the third quarter, the percentage of coastal revenues under term contracts remained at approximately 80% of which approximately 85% were time charters. The coastal business operating margin improved to breakeven during the quarter.

With respect to our tank barge fleet, in the inland sector during the quarter, we retired 9 barges with a total capacity of approximately 141,000 barrels. At the end of the 2018 third quarter, the inland fleet had 981 barges representing 21.6 million barrels of capacity.

During the fourth quarter, 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 3 additional barges with approximately 40,000 barrels of capacity. On a net basis, we currently expect to end 2018 with a total of 979 inland barges representing 21.6 million barrels of capacity.

In the coastal marine market, we returned 1 charter barge with a capacity of 77,000 barrels during the quarter. As mentioned last quarter, we expect to take delivery of a new 155,000 barrel ATB in the fourth quarter.

However, we intend to retire an older vessel with a similar barrel capacity currently operating in our fleet. We also intend to return 1 additional charter barge with a total capacity of 58,000 barrels in the fourth quarter. On a net basis, we currently expect to end 2018 with 53 coastal barges with 5 million barrels of capacity.

Moving on to our Distribution & Services segment, revenues for the 2018 third quarter were $322.8 million with an operating income of $23.9 million. Compared to the 2017 third quarter, revenues increased to $100.3 million primarily due to the incremental contribution from S&S and the improved market conditions in the commercial marine, diesel engine repair business.

Compared to the 2018 second quarter, revenues declined 24% or $101.7 million and operating income declined $16.3 million primarily due to reduced deliveries of pressure pumping units in our oil and gas business. During the third quarter, the segment's operating margin was 7.4%. In our oil and gas market, revenues and operating income were up year-on-year due to the acquisition of S&S occurring late in the 2017 third quarter.

Additionally, increased orders and deliveries of new pressure pumping equipment this year were offset by lower pressure pumping remanufacturing activity as well as a reduced demand for new and overhauled transmissions.

Compared to the second quarter, the reduction in revenue and operating income was due to the timing of new pressure pumping unit deliveries which were delayed as a result of ongoing vendor supply chain issues. Recent softening of activity in the oilfield which impacted some of our key oil and gas customers also contributed to reduced demand for new transmissions and parts as well as transmission overhauls during the quarter.

For the third quarter, the oil and gas business represented approximately 60% of distribution and service revenue and had an operating margin in the mid to high-single digits.

In our commercial and industrial market, compared to the 2017 third quarter, revenues and operating income increased primarily due to the acquisition of S&S. We also experienced year-over-year increases in demands for overhauls and service on marine diesel engines, particularly related to the inland towboat market and the high-speed offshore market along the Gulf Coast.

Compared to the second quarter, revenues in our commercial marine business were stable with reduced inland service due to the harvest season in the dry cargo markets being offset by the sale of several new large diesel engine packages in the Northeast.

Activity in the power generation market was unchanged year-on-year, but higher compared to the second quarter due to seasonal increases in rentals of standby power generators and compressors. For the third quarter, the commercial and industrial businesses represented approximately 40% of Distribution and Services revenue and had an operating margin in the mid to high-single digits.

Turning to the balance sheet. As of September 30th, total debt was $1.4 billion compared to the end of second quarter, total debt declined $43 million. Our debt-to-cap ratio at the end of the third quarter was 30.2%. During the quarter, the delayed deliveries of pressure pumping units resulted in a meaningful sequential increase in working capital, I expect that these units are delivered in the coming months will benefit as we draw down working capital.

As of this week, our debt balances had further reduced to $1.38 billion. I'll now turn the call back over to David to discuss our guidance for the fourth quarter and the remainder of the year.

David W. Grzebinski -- President & Chief Executive Officer

Thank you, Bill. In our press release yesterday afternoon, we announced our 2018 fourth quarter guidance of $0.55 per share to $0.75 per share. This range implies a 2018 full year GAAP guidance range of $2.27 per share to $2.47 per share, which contained several one-time items disclosed in the first and second quarters including $0.04 per share for Higman and Marine acquisition fees and expenses, $0.04 per share for severance, $0.05 per share for expenses related to an amendment to an employee stock plan and $0.30 per share for expenses related to Kirby's Executive Chairman's retirement.

Looking at our segments, in Marine Transportation, we expect inland barge utilization for the fourth quarter will be in the low to mid-90% range and will be strong because of demand, continued lock closures and seasonal weather impacts.

As a result, we expect that inland pricing will continue to move higher. Overall, we expect inland revenue and operating income will be flat to up slightly compared to the third quarter with the benefits of the higher pricing offset by reduced efficiencies on contracts of affreightment as deteriorating seasonal weather conditions add to higher delay days.

In the coastal market, we expect stable pricing and overall utilization around 80% for the remainder of this year. During the fourth quarter, we have scheduled shipyards for several of our large capacity vessels which will have a negative impact on revenue and operating income.

As a result, we expect coastal operating margins to be in the negative low to mid-single-digit range for the fourth quarter. For our Distribution and Services segment, we anticipate that revenue and operating income in the fourth quarter will be similar to the third quarter.

In our oil and gas manufacturing business, we expect that pressure pumping remanufacturing activity will remain robust as our customers ready their fleets for the increased oilfield activity anticipated in 2019. With respect to new pressure pumping equipment, we expect to deliver many of the units currently under construction, some of which have been delayed during the third quarter by vendor supply chain issues.

The current build (ph) schedule however reflects many of the more recently ordered units to deliver late in the fourth quarter.

Together with the timing of OEM deliveries, it is possible that the completion of some units could be delayed into the first quarter of 2019 and therefore have an adverse impact on our revenue and profit for the fourth quarter.

In our oil and gas distribution business, the current slowdown in activity for our key customers is expected to persist through the fourth quarter and result in lower transmission sales and overhauls.

In our commercial and industrial markets, we expect the fourth quarter to be modestly down sequentially, primarily driven by seasonal declines in demand for standby power generation and other specialty equipment rentals as well as reduction in sales of the Thermo-King refrigeration units following the summer peak.

Now to wrap things up, our third quarter results were strong despite some short-term challenges in our Distribution and Services segment. The Marine Transportation segment definitely exceeded expectations and delivered solid operating margin improvement.

As we look forward, we remained very positive on Kirby's near-term and long-term potential. The inland marine business is gaining momentum. Utilization rates are high, contract prices are increasing, and operating margins are improving. Higman contracts are rolling off and being repriced at current rates. This acquisition as well as recent pressure barge acquisitions are fully integrated and yielding positive returns to our fleet.

With incremental volumes expected in 2019 from new petrochemical plants and crude pipelines, low tank barge construction and ongoing lock infrastructure issues, we expect that our inland business will continue to improve.

The coastal market is showing initial signs of recovery and operating margins returned to breakeven levels during the third quarter. While the fourth quarter is expected to be negatively impacted by scheduled maintenance activities on some of our larger vessels, I do feel more confident that we are seeing improvement in this business.

We recently made some significant investments to improve the efficiency of our fleet including 6 new state-of-the-art tugboats and a new 155,000 barrel ATB.

These investments combined with anticipated industry requirement -- retirements and improving market conditions should yield better operating margins next year. Distribution and Services, while challenging in the near-term, has significant runway ahead of it. All signs point to a strong year in 2019 as Permian pipeline infrastructure issues are resolved and our customers are making plans for increased activity.

As a result, we've received new orders and our customers are planning for new pressure pumping equipment to be delivered in 2019.

Our market leading remanufacturing and services business including our fully operational facility in the Permian is expected to remain very busy as customers seek economic opportunities to remanufacture fleets currently working in the field today.

Beyond the oilfield, demand for power generation is increasing, inland marine has recovered and offshore commercial marine is seeing signs of life. These improvements, combined with the continued realization of synergies should generate opportunities for some operating margin expansion in 2019.

And finally, our balance sheet remains strong. Debt reduction remains our top priority in the near-term. However, we will continue to take advantage of any attractive acquisition opportunities to grow in our core businesses and deliver incremental returns to our shareholders.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And the first question comes from Jon Chappell with Evercore.

Jonathan Chappell -- Evercore Group -- Analyst

Thank you. Good morning guys.

David W. Grzebinski -- President & Chief Executive Officer

Hey, good morning, Jon.

Jonathan Chappell -- Evercore Group -- Analyst

David, I wanted to start with inland, but actually your last couple of comments on D&S were pretty interesting. So you're somewhere optimistic on '19 and may be the narrative in the market right now. So what's the timing on kind of ramping your mind? I know you haven't budgeted 2019 yet, but when you do start seeing things start returning to quote-unquote normal and in the meantime, can you just give a little bit of a color about your backlog as it sits right now and the potential for that to kind of cushion any near-term headwinds?

William G. Harvey -- Executive Vice President of Finance & Chief Financial Officer

Sure. Let me start actually with backlog, because I think it is interesting. If you go back to our last call, and you compare the backlog then to what it is now, the backlog is about the same. So in other words, we booked about the same amount that we shipped in the second -- the third quarter.

So backlog staying high. What we are doing now is receiving orders for delivery into '19. So that's why we're getting more excited. In fact, Joe Reniers who runs that business for us is out there trying to hire 50 to 100 techs right now.

So we're very busy. A lot of it is some maintenance that's happening on the front-end as people try and prepare. Others are looking for equipment deliveries in the first part of '19. I think it is in anticipation of a recovery next year, I say recovery, it's not really a recovery, it's a resumption of growth. If you look at the Permian, it's still producing quite a bit and they are still fracking up there.

So there is a lot of equipment being used, and as you know, the operating conditions and how hard they run this, it tears up the equipment and some of the older stuff needs to be replaced, some of the new stuff can be a remanufactured or just simply, some simple maintenance. So as we look at it and listen to our customers, they are anticipating a pretty good 2019 as some of these pipelines come on in the Permian.

And let's not lose track that they're still operating this equipment. It's not growing as much as it had been, but it's still being operated. So that actually plays to us because there is a huge maintenance component and then there is a replacement component as well.

All that said, there are other things that are happening in the industry. Technology keeps moving forward. If you go back 5 years and I think OPEC kind of underestimated the resiliency of the US land market and the technology advances that our customers make, and so that's a long way of saying that technology keeps increasing.

We're doing more stuff bigger engines now on frac units, they are adding sound enclosures to make it more environmentally and sound friendly, they are adding dual fuel options looking at electric frac. So technology keeps improving as well. So pump technology improves, so all of our customers keep moving the ball forward and take out old fleets and bring in new fleets or repair the ones that they think have some good life.

So when we look at 2019 and my comments, prepared comments, we tried to reflect that because that's what we're seeing.

Jonathan Chappell -- Evercore Group -- Analyst

Okay. That's very useful. And then for my follow-up, if I can switch back to Marine. Clearly it's shown that it's moving in the right direction, I think faster and more meaningfully than anyone really expected. Are you seeing anything that gives you reason for pause, that the pricing momentum or the margin momentum is slow? Whether that's macro or whether it's kind of speculative ordering now for new equipment? Any reason to believe that '19 should be sustainably better than '18 especially as you kind of recontract pricing?

David W. Grzebinski -- President & Chief Executive Officer

Yeah, and the short answer is, we think it will continue. That's a short answer. Let me give you some color around that. Utilization across the industry is quite robust. I think the industry is in the 90% and 95% utilization range, but essentially as you know at 95%, that's pretty much full utilization.

We're coming off of 3 years of bad times where last year cash pricing, excuse me -- spot pricing was below cash cost, so there is a needed recovery. Many of our competitors got close to the brink of bankruptcy, and so there is a need to get pricing up and recover from the debts of last year.

Spot pricing is up about 20%, but that just gets it back to kind of P&L breakeven and depending on their debt levels and their interest carry, or interest cost, it still needs to go meaningfully higher. And with the utilization, where it's at, everything is set up to continue the price increases.

Now I would say this on new builds. We think new builds in 2018 are about 60 -- well, mid-60s in terms of new equipment. Of course, retirements outstripped that in 2018. I think we've retired 40, 45 barges this year. So we retired pretty much the bulk of what was built this year and others retired.

Next year, we're hearing the order book is about 120 or so barges right now. We think retirements will be around that, plus or minus a little. So net new adds is probably very little, I mean, we know for a fact on that 120 order book, the vast majority of them are for replacement. We've heard that in the market.

So, when you put all that together with the demand increasing from these new petrochemical plants, refinery expansions, the new crude that's going to be hitting the Gulf Coast coming out of Permian when the pipelines come on, that should all be good for the demand.

So supply and demand are tight now. I think demand is going to continue to grow. Supply is not growing. It's probably flattish, maybe up tiny bit. So all that pretends for a continuation of what we've seen on pricing and utilization.

Jonathan Chappell -- Evercore Group -- Analyst

Great. Very helpful. Thank you David.

David W. Grzebinski -- President & Chief Executive Officer

Thanks Jon.

Operator

Thank you. And the next question comes from Justin Bergner with Gabelli & Company.

Justin Bergner -- Gabelli & Company -- Analyst

Thank you and good morning.

David W. Grzebinski -- President & Chief Executive Officer

Good morning, Justin.

Justin Bergner -- Gabelli & Company -- Analyst

I was curious about the improvement in the coastal market. The factors that helped in the third quarter, do you see those persisting into 2019? And do you think that business has the potential to be profitable in 2019 where things stand today?

David W. Grzebinski -- President & Chief Executive Officer

Short answer is yes, this year we probably averaged a margin of minus 5% for the year, we broke even in the third quarter. We know the fourth quarter is going to be back down because we've got five of our larger units for scheduled shipyards. So we know that's going to impact the fourth quarter but once that's behind us and given the cost that we've taken out of that business, and the signs of life both increased demand, slight increase in demand, retirement of older equipment, the new ballast water treatment regulations are going to accelerate some of the retirements that have to happen.

So when we look at supply and demand in that business, it's going to get tighter. So I definitely think we could see profitability next year or breakeven. The spread between WTI and Brent is also helping as long as that persists, the MR tankers will be used to move crude oil out of the Gulf Coast up to the East Coast which keeps those larger units out of our trade lanes.

They dipped down occasionally in our trade lanes and display some of our equipment, but that's also a positive. I don't see that spread tightening because of all the crude that's going to come out of the -- of West Texas. So that's the long answer. The short answer again is we definitely think we can get to breakeven or may be profitable next year if things continue the way we're seeing them now which we believe they will.

Justin Bergner -- Gabelli & Company -- Analyst

Okay. Great. And then just one quick clarification question on guidance. I think last quarter you had called out the $0.05 for the amended employee stock plan, $0.30 for the executive chairman's retirement. The $0.04 for Higman acquisition fees and the $0.04 per share for severance, those were also anticipated in your earlier guide correct? You're just sort of clarifying the magnitude here?

David W. Grzebinski -- President & Chief Executive Officer

We just wanted to make, I know you guys have a job to put out -- to compare to our guidance. We just wanted to put all the special items for the year in one place. So that's what we did.

Justin Bergner -- Gabelli & Company -- Analyst

Okay. So none of those hopefully would repeat next year including the $0.04.

William G. Harvey -- Executive Vice President of Finance & Chief Financial Officer

Definitely none of those would repeat next year.

Justin Bergner -- Gabelli & Company -- Analyst

Okay, thank you.

Operator

Thank you. And the next question comes from Michael Webber with Wells Fargo.

Michael Webber -- Wells Fargo Securities -- Analyst

Hey, good morning guys, how are you?

David W. Grzebinski -- President & Chief Executive Officer

Hey, Michael how are you?

Michael Webber -- Wells Fargo Securities -- Analyst

Good. David, just on the inland market. I know you guys talked to I guess, 3% to 5% spot permit this quarter and about 25% of the trough levels, and you also mentioned term pricing this quarter finally starting to move I think you mentioned mid-single digits.

Is the right way to look at that that we're starting to see term pricing improve at slightly healthier foot (ph) than spot? And if so, is that something that you think is accelerated as we move into Q4, or it's kind of a further indication of that market getting a bit healthier.

I'm just curious how those different bases (ph) have trended so far?

David W. Grzebinski -- President & Chief Executive Officer

No. Spot pricing has moved quicker than contract. But that's kind of normal. You need spot pricing above contract to get the contract pricing to move higher and that's been happening. I would say spot pricing is 5% to 10%, may be even greater than 10% above contract. So that's good. We needed that to happen in order to get the contract pricing to start rolling higher.

This is kind of the first quarter, third quarters where we started to see contracts renewing higher. I expect that trend will continue, equipment is tight and as equipment gets tighter, as you might expect our customers start worrying about barge availability.

And so that pushes it more toward contracts which should start to accelerate contract pricing gains.

Michael Webber -- Wells Fargo Securities -- Analyst

Yeah. So is it right to point whether that acceleration and term pricing should start to kind of outpace that early spot move?

David W. Grzebinski -- President & Chief Executive Officer

Yes. I don't know if it will outpace spot moves. Hopefully they both continue to march up, and I like the spot being a little higher than contract, because that just puts the emphasis on securing those contract prices higher.

Michael Webber -- Wells Fargo Securities -- Analyst

Yeah. It's helpful, then just a follow up, just kind of tied together, the inland market with kind of some of the dynamics we're seeing in D&S. Just from an inland ton mile perspective, can you kind of -- if we fast forward to 2020 and we kind of de-bottleneck the Permian, can you talk about what that mix looks, what your ton mile mix looks like in that scenario, where you got more accrued (ph) in the Gulf. Does that cannibalize some of that longer haul business in the Bakken or elsewhere?

Can you just kind of talk about what you think that ton mile mix looks like in the next couple of years, as you try to get to some of the segments?

David W. Grzebinski -- President & Chief Executive Officer

Hard to predict, but I would say most of the long crude moves are Canadian are coming down from Canada, and that's at a very big steep discounted WTI. I would think that would persist, I think the crude coming out of the Permian going to either Corpus or Houston, some of it will go direct to export. We know there is a group trying to build another loop if you will and offshore loading facility for VLCCs.

So some of it will go direct for export, I think the pipelines in the Houston will go into some of the refineries. We heard rumors of one of our major customers may be building another refinery in the Houston area or at least buying an old one and upgrading it. So I do think we'll see some volumes as that crude get processed when the Gulf Coast increase.

So from a ton mile standpoint, we may see less miles, but more moves because if a lot of that stays in the Gulf Coast, the moves are shorter, but you still get paid for short moves, and sometimes our most profitable moves can be Houston and cross channel if you will. Short ton miles, but you get paid for using the barge and supplying the customer.

So it -- the ton mile makes us a little hard to gauge, but in general, may be the ton miles come down a little bit to your point, but I don't think that the Canadian crude moves disappear, because it's one the US refineries or Gulf Coast refineries like that heavy crude, they're set up to crack heavy crude.

And two, it's just a big discount. So there is a pretty good arbitrage move for the refiners to use it.

Michael Webber -- Wells Fargo Securities -- Analyst

Got you. Okay, that's all. I appreciate the time guys, thank you.

David W. Grzebinski -- President & Chief Executive Officer

Thanks Mike.

Operator

Thank you. And the next question comes from Randy Giveans with Jefferies.

Randy Giveans -- Jefferies -- Analyst

Hey, thanks guys. How are you all?

David W. Grzebinski -- President & Chief Executive Officer

Very good.

Randy Giveans -- Jefferies -- Analyst

Good. Quick question. So it looks like your Marine Transportation revenues were up slightly and your operating maintenance costs were down even more significantly kind of from 2Q level. So what exactly drove those cost reductions on the marine side? And do you expect 4Q '18 costs to decrease further? Or kind of go back to those 2Q levels?

William G. Harvey -- Executive Vice President of Finance & Chief Financial Officer

Well, 2Q was elevated because of the Higman fleet, remember we got the Higman fleet in mid-February late February and there was a lot of catch-up maintenance.

So Q2 was probably elevated. Q3, we integrated and caught up on some of that maintenance, but maintenance should be around the level in Q3, and going forward, yeah, it depends on the shipyard cycle, well, obviously we called out the coastal shipyard business and planned maintenance that we have there will be elevated in the fourth quarter.

But I would say, it's probably closer to what we saw in the third quarter maybe go up a little bit from where it was in the third quarter, but it's going to be in that range, because the bulk of the catch-up maintenance that we knew about for Higman fleet is done.

Randy Giveans -- Jefferies -- Analyst

Sure. That's helpful. And then one more question for Roy (ph), you commented that power generation demand is increasing, so is that business something you're focused on growing and if so, kind of, how do you expect to do that? And then how much on annual EBITDA does that business contribute?

William G. Harvey -- Executive Vice President of Finance & Chief Financial Officer

Yes. So power generation as you know there are lot of these data centers and what not around the United States and they are growing, and even financial institutions and companies, corporate want to have backup power generation particularly along the Gulf coast where we get hammered by hurricanes occasionally.

So we -- through our Stewart & Stevenson acquisition, we do a lot of backup power generation and particularly on the rental side, for example, big retailer, we provide backup power generation that's on basically semi trailers that goes into hurricane impacted areas for a large retailer and essentially you plug in the trailer and it gets the store backup and running and they're able to service the customers which are desperate to get the supplies out of the store too.

So, when you add data centers, hurricane and retail backup power, it's becoming a growth area for us. We're excited about it. In terms of volume and EBITDA, I'm not prepared to answer that, we can, in our Analyst Day, we kind of outlined kind of the percent revenue.

I would say the operating income margins are similar to the average for that group, but I don't have that on the top of my head, Randy. But we could probably, Eric can probably help, give you a feel for that, but I do believe it is a growth area, and frankly it's part of that diversification we talked about because it has a little different cycle and a little different end use, and frankly it's growing because of the way the world uses computers now and needs instant access to data. So we're pretty optimistic about growing that market.

Randy Giveans -- Jefferies -- Analyst

Got it. Makes sense. Thanks again.

David W. Grzebinski -- President & Chief Executive Officer

Thanks Randy.

Operator

Thank you. And the next question comes from Kevin Sterling with Seaport Global.

Kevin Sterling -- Seaport Global Securities -- Analyst

Well, thank you. Good morning gentlemen.

David W. Grzebinski -- President & Chief Executive Officer

Hey, good morning.

Kevin Sterling -- Seaport Global Securities -- Analyst

Sorry, but your Astros are making a little serious this year, (Multiple Speakers), got to run. David you mentioned some of the Higman fleet contracts rolling off in 2019. How much of that business do we think (ph) about in 2019 that could be rolling over that you guys have the opportunity to reprice?

David W. Grzebinski -- President & Chief Executive Officer

Yes. It's hard to quantify, let's see. Let me come back into it a little bit. When we bought Higman, they were about 60% contracted, 40% spot, I'd say that's up now, we're probably 65% contracted on average, because we've integrated it fully into our fleet.

On average, these contracts reprice probably two-thirds of marine (ph) price in a year, the other are multiyear. So I would say it would still reprice through '19, but the big impacts happening now, they -- because of where they were financially, they had to take jobs they could get, just to keep cash flow and paying their crews.

So they were -- some of the contracts were paper thin in terms of margins if not at a loss. And so we're happy to see them repricing back to kind of market now. It still got ways to go, but I think by kind of mid-'19, the bulk of them will be repriced.

Kevin Sterling -- Seaport Global Securities -- Analyst

Okay. Awesome. And kind of keeping on the pricing thing there, obviously you were seeing better pricing in inland and a better demand supply equation, but is there any way to tell a part of this pricing narrative, how much could be attributed to some of the bad actors if you will in the past couple of years who found their religion regarding pricing and are all now acting more rational if you will?

In addition just kind of regular market demand supply dynamics? Does that make sense?

David W. Grzebinski -- President & Chief Executive Officer

Yes. I don't know if I'd call it bad actors. I think, look, it was a long painful three years, and people got to the point where they had to bring out pricing. It's just -- it was unsustainable as we talked about. Some of the kind of the lower, I don't want to call them lower tier, because it implies something different, but the guys that were at the lower end of the pricing have booked up much of their fleet and are busy now, and they are seeing that the incremental pricing can get them back to profitability.

So some of it is happening whereas some of those lower bottom prices are coming up. I don't know if you'd call that religion or not yet, but it's certainly, they are more constructive about it, and that's a positive.

Kevin Sterling -- Seaport Global Securities -- Analyst

Yeah. And obviously you guys, you're doing the same thing with Higman where you're replacing that book of business?

David W. Grzebinski -- President & Chief Executive Officer

Exactly right. Exactly right.

Kevin Sterling -- Seaport Global Securities -- Analyst

Okay, well, that's all I had. Thanks for your time this morning.

David W. Grzebinski -- President & Chief Executive Officer

Alright. Thanks.

Operator

Thank you. And the next question comes from Jack Atkins from Stephens.

Jack Atkins -- Stephens -- Analyst

Hey, good morning guys. Thanks for taking my questions.

David W. Grzebinski -- President & Chief Executive Officer

Hey Jack.

Jack Atkins -- Stephens -- Analyst

Hey, David, hey Bill. So I guess let me start off with Distribution and Services for a moment. I guess my sort of question is sort of thinking about what the go-forward run rate is there from a revenue level? I mean, it certainly seems like we're pushing some revenue out, right out of the third quarter into the fourth quarter because of the vendor bottlenecks issues.

But there are still new orders there. So I guess what I'm trying to understand is, kind of as we look forward, is this business as you think about it generating in the $300 million to $350 million of revenue a quarter, or is this more of the $400 million to $425 million revenue quarter that we saw certainly in the first half of the year?

Just trying to figure out the trajectory of this business as we go into 2019 from a revenue perspective?

William G. Harvey -- Executive Vice President of Finance & Chief Financial Officer

One thing to look at is as David talked about on activity, we were very active at the sites, and we talked about in the press release about an inventory going up and a lot of that was work in progress, about $40 million, and that's just quarter-to-quarter.

That's working for -- and some of that has been offset by deferred revenue because we're getting progress payments, but that's just in the quarter-to-quarter buildup is $40 million and that's not including any profit, and as you know with the revenue recognition, we don't get any profit and it doesn't go through our income statement until you deliver.

So the base actually, activity level which was frankly closer to the second quarter than it was to the -- to what you see, and I mean second quarter revenues than you would have seen in the third quarter numbers.

Jack Atkins -- Stephens -- Analyst

Okay. So the expectation is when we get through these bottleneck issues early in 2019, I would guess that they will return back to something closer to that $400 million level. Is that the way we should interpret all that?

William G. Harvey -- Executive Vice President of Finance & Chief Financial Officer

Yes. I mean the second quarter was a very good quarter with a lot of good business, the revenue there was $424 million for the second quarter. So the numbers don't point to getting it right back there or right away, but the message really is the activity and what's going on right now is you're not seeing that activity in the third quarter revenues.

And you will see the revenues in the third, in the fourth quarter, some of it may spill over to the first quarter, but these are -- this is inventory that work in progress that is going to be shift.

Jack Atkins -- Stephens -- Analyst

Got you. All right. And then as a follow-up question on the marine side of the business. David, could you talk about IMO 2020 and sort of as that maritime regulation is implemented, obviously it doesn't have an impact on what you're paying for fuel (ph) because you're already compliant. I'm not asking about that. I'm more curious what is it due to product flows and the demand for distillates and maybe distillates moves by barge that you guys could participate in either on the inland side or on the coastal side?

Does that, would you expect that to have any impact on the business? And if so, when should we think about that may be showing up?

David W. Grzebinski -- President & Chief Executive Officer

Yes. I don't think it will materially change our business. We bunker now, we bunker ships now. We bunker with heavy fuel oil in some cases, and as it shifts to ultra low sulfur diesel, we will bunker that as well, maybe you see a little more volume here locally, because we've got that coming out of the refineries here.

But it's hard to say that it's going to be materially different. We'll see. I mean, one of the things we want to figure out and watch our customers is what happens to their profitability, because clearly the more profitable our customers are, the better.

There could be an increase in blending which might help us, right? They blend at different grades and that might lead to more barge moves to reposition -- to position for blending. We'll see it, it's really hard to predict for us right now, but I would say it's probably neutral to may be slightly positive if there is a lot of blending going on.

Jack Atkins -- Stephens -- Analyst

Okay, great. Thank you again for the time.

David W. Grzebinski -- President & Chief Executive Officer

Thanks Jack.

Operator

Thank you. And the next question comes from David Beard with Coker & Palmer.

David Earl Beard -- Coker & Palmer -- Analyst

Hey good morning, gentlemen.

David W. Grzebinski -- President & Chief Executive Officer

Good morning, David.

David Earl Beard -- Coker & Palmer -- Analyst

Question on inland pricing, I think you mentioned it moved up about 20%, but it's still at P&L breakeven. How much further would pricing need to move to justify a new build? And do you think the industry would put new build orders based on spot prices? Or would they want to see contract prices moving higher to justify a new build? Thanks.

David W. Grzebinski -- President & Chief Executive Officer

That's a great question, David. I would say spot prices are being at P&L breakeven is a start, but prices would need to be 25% higher to get to where you'd start to consider good economics for new build. Now that said some people aren't disciplined about looking at returns on capital and some people like to build on spec.

I'm not sure we're seeing a lot of that. There may be of that 120-or-so barges that are on order for 2019 may be 20-or-so maybe a little more might be on spec, but we're still a ways from the prize that's needed to justify new builds.

And by the way as you're well aware, barge pricing is going up and in part because steel prices are up. So the pricing needed to justify new builds is going higher because of steel pricing.

And also, you may recall that Trinity brought Jeffboat and essentially shutdown Jeffboat, now they are going to open up we understand you're going to open up their Louisiana line which didn't have the capacity of Jeffboat. Jeffboat was a huge shipyard as you might imagine, but that having a consolidated barge building industry is not helpful to low barge pricing.

But we're OK with that if it's more expensive to build barges may be barges don't get built as robustly as they have in the past cycles, but I still think we're a long way away from justifying a new build, but that doesn't mean there aren't some speculative players.

David Earl Beard -- Coker & Palmer -- Analyst

That does gives you a lot of headroom. And just shifting over to D&S, would you be able to quantify in your guidance how much revenue you're expected to slip into the first quarter of '19 or a range or some color there would be helpful? Thanks.

David W. Grzebinski -- President & Chief Executive Officer

We put our guidance for the fourth quarter and it reflected sort of a down scenario and an up scenario for how much will flow through in the fourth quarter. So there could be some slippage, our guidance reflects everything, and that's -- but it's really tough for us to quantify that, because it's really the degree of guidance, the degree that could slip.

David Earl Beard -- Coker & Palmer -- Analyst

Got it. With the higher end assuming you're (inaudible) little or is there some slippage in that assumption?

David W. Grzebinski -- President & Chief Executive Officer

The low end versus the high end means that most of it would slip and we did not include and we did not assume all of it because we have -- we are far along on a lot of these shipments, but we did assume at the low end that have significant portion slip.

David Earl Beard -- Coker & Palmer -- Analyst

Okay, good. That's helpful. Thanks for the time, gentlemen. Appreciate it.

David W. Grzebinski -- President & Chief Executive Officer

Thanks David.

Operator

Thank you. And the next question comes from Ken Hochstein with Merrill Lynch.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Hey good morning. Dave, your operating margin for inland used to be in the mid to upper '20s, now you're in upper teens, as pricing comes up I just want to get your big picture thoughts on where it's possible to get back to just want to understand, has anything -- I guess structurally give either the acquisition or the product mix or even on the other side given your cost cutting could it go even higher?

David W. Grzebinski -- President & Chief Executive Officer

Yes. I would say that I fully expect it to be able to get back to our peak margins at some point in the cycle, as you will recall they were in the high 20s, we almost got to 30% in terms of peak margins. That's a long way off, obviously, but I would say, our normalized margin through the cycle is probably in the low to mid-20s, and I fully expect us to get back there, I would say given our fleet's composition, we could go higher.

The level of synergies and integration that we're able to achieve, given our fleet size, I think we could get higher in terms of margins.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

And I presume that's really just led by the pricing at this point, just to get back, is that kind of your --

David W. Grzebinski -- President & Chief Executive Officer

As you know Ken, that the pricing is kind of rolls right to the bottom line, so very high incremental margins.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Okay. And then a follow-up question would be your thoughts, you talked about all the wave of petrochem plants that were opening and you already mentioned a bunch of the crude and other opportunities. Now that we're closer to having some of those open operating flows have started to move or just still about to start in a couple of others.

What are your thoughts now in terms of the growth that is going to -- are you seeing any of that? Before you were like, hey we don't know if it's go to International or stay domestic. Any update, thoughts on kind of what's shifting may be toward your way or away?

David W. Grzebinski -- President & Chief Executive Officer

Yes. I would say one of the things we've seen, and not to get too specific here, but pressure cargoes we're seeing those increasing and shifting our ways, things like methanol and some of the chemicals are shifting. I think crude, going forward, I think the refineries are using all the crude they want. So most of that will go for export or up to the East Coast.

So ultimately, a lot of that's going to be as you know, polyethylene and that polyethylene will go for export, but as you know, there are also byproducts that come out of an ethylene plant and that's part of why we're seeing an increase in pressure cargoes.

There is still pressure cargoes that come out even in some of the flyer (ph) feedstock ethylene plants. I know it's not very precise, Ken. So I apologize, but we definitely are seeing some growth because of these petrochemical expansions and its GDP plus 2% to 5% is kind of the way, I'm thinking about it. It's really hard to quantify in terms of barge count, but we're definitely seeing it.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

I guess what I was just trying to get out from your thought there is, you just gave a GDP plus 2% to 5%, if there is some big shock to the system in demand, that's going to get ramped up in the next, 1, 2 years because of what's coming online or if it's more gradual that you kind of intimated there in terms of kind of leading pricing overtime, but not any kind of quick fix rebound on pricing?

David W. Grzebinski -- President & Chief Executive Officer

Yes. I think it's gradual. I don't think it would be a shock. Just the things come on too radically, not all the plants are starting up at the same time, and we are running at 95% utility right now. So it's weird (ph), all this is coming on in an environment where the industry is fairly tight.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Yeah. Sounds great. Appreciate the time guys. Thanks for the thoughts.

David W. Grzebinski -- President & Chief Executive Officer

Thanks Ken. Okay Keith, we'll take one more question, please.

Operator

Okay, great. And it comes from Bill Baldwin from Anthony Securities.

David W. Grzebinski -- President & Chief Executive Officer

Hey, Bill. Good morning.

Bill Baldwin -- Anthony Securities -- Analyst

I hope everybody is doing well.

David W. Grzebinski -- President & Chief Executive Officer

Yeah.

Bill Baldwin -- Anthony Securities -- Analyst

On the D&S side, did the revenue in the third quarter come in pretty much in line with your expectations as far as the performance was concerned on the revenue side?

David W. Grzebinski -- President & Chief Executive Officer

Yes. It did. It was pretty much exactly as we expected. When you look year-over-year you got to remember the last year, we only had Stewart & Stevenson for three weeks-or-so, and so when you look year-over-year it's still a pretty big revenue increase, but to your point, it was as expected.

The third quarter revenue and operating income was essentially as expected for Distribution and Services. The surprise in the quarter for -- I say surprise, but the upside from the quarter really was all about inland marine performing better and coastal marine performing a little better.

When you look at year-over-year margin difference between the third quarter last year and third quarter this year on D&S, that's all about mix. Distribution and Services at Stewart & Stevenson has more distribution if you will, and so that's in a little lower margin. So when we added all the revenue from Stewart & Stevenson, that mix brought down essentially our average operating margin but there was still a huge contribution margin in there.

William G. Harvey -- Executive Vice President of Finance & Chief Financial Officer

One thing I should mention Bill, when I mentioned the inventory and the sales that are being deferred, the actually -- when you look at D&S they actually lowered their SG&A cost compared to the second quarter quite nicely down $3 million and because of how fixed cost absorption works, if they would have had their revenues of the work in progress build up, their margins would have been roughly the same as the second quarter. So it's really a question of timing.

Bill Baldwin -- Anthony Securities -- Analyst

Joe has done a good job over there?

David W. Grzebinski -- President & Chief Executive Officer

Yes. Not good enough, but he's doing a job.

Bill Baldwin -- Anthony Securities -- Analyst

Doing a job? On the reman side then, I know you can't give specifics but on a relative basis, second quarter versus the third, did reman, held up a lot better than the overall D&S. I mean, was that fairly a steady demand for the remanufacturing business in the third quarter?

David W. Grzebinski -- President & Chief Executive Officer

Yeah. It was. Re-man is a gain, and that's right in our sweet spot.

Bill Baldwin -- Anthony Securities -- Analyst

And then two quick questions there. On a competitive environment, how would you describe the competitive environment in the reman area? I mean, is Kirby such a leader in that business that your first choice or for your customer base is going to Kirby reman or -- (multiple speakers) vision out there.

David W. Grzebinski -- President & Chief Executive Officer

We certainly like to believe so Bill. I think so. When we reman these units, they operate like new, we've got a reputation, a high-quality reputation on reman. You can get remans done cheaper by some of our other competitors, but as in any market you've got people to care about quality and kind of want the high-end reman, and then there is people that are very price-sensitive.

But I would say we've got a good market niche, high market share and I would say we're preferred certainly by the top tier or top two-thirds of the pressure pumping market. We do quality work, and we like to believe we're the best at it and we certainly think we have probably 60% market share in that space.

Bill Baldwin -- Anthony Securities -- Analyst

That's superb. I mean that was the goal when you got into that business years ago. Is there opportunity to expand capacity in that business you think overtime then? Is that market going to should grow and expand or do you take it in different basins, I guess the business comes from you from basins all over though.

David W. Grzebinski -- President & Chief Executive Officer

It does. Remember these frac units are on trailers and they can travel at 60 miles an hour. But that said, we have a facility in Midland Odessa. We've just expanded it, added a lot of capability there. I've hired a lot of people, still trying to hire people in Midland Odessa, so we have expanded essentially in that area.

Bill Baldwin -- Anthony Securities -- Analyst

And my last question are you seeing some alleviation on the vendor supply situation, or will that begin, bottleneck begin to clear up a little bit?

David W. Grzebinski -- President & Chief Executive Officer

So the bottlenecks are clearing up, but look, a part of this is supply chain issues there is new technologies and look we went from to Tier three to Tier four engines or Tier two engines to Tier four engines from a machine standpoint. So that's all new technology. There is new pumps being developed. So that's new technologies with the new tier standards and the new bigger engines there is new transmissions that are coming out.

So the supply chain issues aren't just bottleneck delivery problems, but some of it is -- these are new designs.

And with every new design, there is always kind of ramp up issues and issues that our OEMs are dealing with. And I would say this, they are dealing with them but they do have an impact.

Bill Baldwin -- Anthony Securities -- Analyst

And you see that continue into 2019, David?

David W. Grzebinski -- President & Chief Executive Officer

I'm hopeful by the end of this quarter the bulk of them will be resolved.

Bill Baldwin -- Anthony Securities -- Analyst

Okay. Well, thank you very much. Good job.

David W. Grzebinski -- President & Chief Executive Officer

Alright, thanks Bill.

Eric Holcomb -- Vice President of Investor Relations

Alright, thank you Bill and thank you everyone for participating in the call today. If you have any questions or comments, feel free to reach me directly at (713) 435-1545. Thanks everyone and have a great day.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Duration: 66 minutes

Call participants:

Eric Holcomb -- Vice President of Investor Relations

David W. Grzebinski -- President & Chief Executive Officer

William G. Harvey -- Executive Vice President of Finance & Chief Financial Officer

Jonathan Chappell -- Evercore Group -- Analyst

Justin Bergner -- Gabelli & Company -- Analyst

Michael Webber -- Wells Fargo Securities -- Analyst

Randy Giveans -- Jefferies -- Analyst

Kevin Sterling -- Seaport Global Securities -- Analyst

Jack Atkins -- Stephens -- Analyst

David Earl Beard -- Coker & Palmer -- Analyst

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Bill Baldwin -- Anthony Securities -- Analyst

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