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 be an opportunity to ask questions. We ask that you limit yourself to one question and one follow-up. [Operator Instructions] Please also note this event is being recorded. I'd now like to turn the conference call over to Mr. Eric Holcomb, Kirby's VP of Investor Relations. Please go ahead.

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 Relations 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 31, 2017, as well as in subsequent filing on Form 10-Q for the quarter ended June 30, 2018. I will now turn the call over to David.

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 cost reduced maintenance expenses and efficiencies realized from favorable summer weather conditions help 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, well 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…

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 costs especially related to the 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 and 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 are 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 approximately 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…

Thank you, Bill. In our press release yesterday afternoon, we announced our 2018 fourth-quarter guidance of $0.55 to $0.75 per share. This range implies a 2018 full-year GAAP guidance range of $2.27 to $2.47 per share. What’s 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 deficiencies on contracts of the freight 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 the pressure pumping remanufacturing activity will remain robust as our customers ready…

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

Thank you. Good morning, guys.

Hey, good morning, Jon.

David, I was going to start with inland, but actually your last couple of comments on D&S were pretty interesting. So you somewhere more optimistic on 2019 and maybe the narrative in the market right now. So what's the timing on kind of ramp in your mind? I know you budgeted 2019 yet, but when you start -- things start returning to “normal” and in the meantime, can you just give a little bit of color about your backlog as it sits right now and the potential for that to kind of cushion any near-term headwinds?

Yes, sure. Let me start actually with the backlog because I think it’s 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 another words, we book 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 2019, so that's why we’re getting more excited. In fact the Joe Rainier who runs the business for us is out there trying to hire 50 to 200 techs right now. So we’re very busy. Lot of it is some maintenance, its happening on the front-end as people try and prepare. Others are looking for equipment deliveries in the first part of 2019. I think it's in anticipation of a recovery next year. I say recovery it’s not really a recovery. It's a resumption of growth. If you if you look at the Permian, it still producing quite a bit and they’re still fracking up there, so there’s 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 remanufactured or just simply some simple maintenance. So, as we look at it and listen to our customers, they’re 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 play to us because there's a huge maintenance component and then there's 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 five years and I think OPEC kind of underestimated the resiliency of the U.S. 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’re adding sound enclosures to make a more environmentally and sound friendly. They’re 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 fleet or repair the ones that they think have some good life. So, when we look at the 2019 and my comments, prepared comments we try to reflect that because that's what we’re seeing.

Okay. That’s very useful. And then from my follow-up if I can switch back to Marine, clearly it shown that’s moving into right direction, I think faster and more meaningful than anyone really expected. Are you seeing anything that gives you reason for pause that the pricing movement or the margin momentum may slow? Whether that’s macro or whether it’s kind of speculative ordering now for new equipment? Any reason to believe that 2019 shouldn’t be sustainably better than 2018 especially as you kind of recontract pricing?

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. Right now I think industry is in the 90% to 95% utilization range which essentially as you know at 95% that's pretty much full utilization. We’re coming off of three 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’s 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 costs, it still needs to go meaningfully higher. And with the utilization where it’s at everything 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 the retirements outstrip 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 here in the order books 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, the refinery expansions, the new crew that's going be hitting the Gulf Coast coming out of premium 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 to for continuation of what we've seen on pricing and utilization.

Great. Very helpful. Thank you, David.

Thank, Jon.

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

Thank you and good morning.

Good morning, Justin.

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 a potential to be profitable in 2019 where things stand today?

Short answer is yes. We’re – this year we probably average to margin of minus 5% for the year. We broke even in the third quarter. We know the four quarters 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 in the signs of life it 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 dip down occasionally in our trade lanes and display some of our equipment, but that's also positive. I don't see that that spread tightening because of all the crew that's going to come out of West Texas. So that's the long answer. The short answer again is we definitely think we can get to breakeven or maybe profitable next year if things continue the way we’re seeing them now which we believe they will.

Okay, great. And then just one quick clarification question on guidance; I think last quarter you'd 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 there?

Yes. We just wanted to make – I know you guys have a job to put out your – to compared to our guidance. We just wanted to put all the special items for the year in one place, so that’s what we did.

Okay. So those – okay, so none of those hopefully would repeat next year including the $0.04?

Definitely, none of those would repeat next year.

Okay. Thank you.

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

Hey, good morning, guys. How are you?

Hey, Michael, how are you?

Good. David, just on the inland market, you guys talk to I guess 3% to 5% spot permit this quarter and about 25% on the trough levels. And you also mentioned term pricing next quarter finally starting to move. I think you mentioned mid single-digits. Is it right way to look at that if we’re starting to see term pricing improve at a slightly healthy equip than spot. And if so, is that something that you think is accelerated as we move into Q4 or its kind of further indication of that market getting a bit healthy and just curious how those different cases have trended so far?

Yes. Spot pricing is 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 pricings five to 10 maybe 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 or third quarters where we started to see contracts renewing higher. I expect that trend will continue. Equipments tight, and as equipment gets tighter, as you might expect our customers start worrying about barge availability, and so that pushes him more towards contracts which should start to accelerate contract pricing gains.

That’s since where the point where that acceleration and term pricing should start to kind of outpace that early spot moves?

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

Okay. It’s helpful. Then just a follow-up, just trying to kind of tie together, the inland market with kind of some of the dynamic we’re seeing in D&S. Just from an inland ton mile perspective and if we fast-forward 2020 and we kind of debottleneck the Permian, can you talk about what that mix looks? Would your ton mile mix also like -- in that scenario we got more crude [ph] hitting the Gulf? Does that cannibalize some of that longer haul business in the Bakken or elsewhere? Can you just talk about what you think that ton mile mix looks like for the next couple of years as we try to get some of the segments?

It’s hard to predict, but I would say most of the long crude moves are Canadian, are coming down from Canada and that's had a very big steep discounted WTI. I would think that would persist. I think the crude coming out of the Permian and going to either Corpus or Houston, some of it will go direct to export. We know there's 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 maybe 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 gets processed from the Gulf Coast increase. So from a ton mile standpoint we may see less miles with more moves because of the lot of that stays in the Gulf Coast, the moves are shorter, but you still get paid for short moves and sometimes that our most profitable moves can be Huston cross channel if you will you. Short ton miles but you get paid for using the barge and supplying the customer. So the ton mile makes us a little hard to gauge, but in general maybe the ton miles come down a little bit to your point, but I don't think the Canadian crude moves disappear because of the -- it's -- one the U.S. refineries or Gulf Coast refineries like that heavy crude. They set up the crack heavy crude. And two, it's just a big discount. So there's a pretty good arbitrage move for the refiners to use it.

Got you. Okay. That’s helpful. Appreciate your time guys. Thank you.

Thanks Mike.

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

Hey, thanks guys. How you all?

Very good.

Good, good, quick questions. So it looks like your Marine transportation were up slightly and your operating maintenance cost were down even more significantly kind of from 2Q level. So, what exactly drove this cost reductions on the Marine side? And do you expect 4Q 2018 cost decrease further or kind of go back to those 2Q levels?

Well, 2Q was elevated because of the Higman fleet. Remember, we got that Higman fleet mid-February, late February [ph] and there was a lot of catch-up maintenance. So Q2 was probably elevated. Q3, we integrated and caught up on some that maintenance. But yes, maintenance should be around the level in Q3, and going forward, yes, it depends on the shipyards like 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 that in that range because the bulk of the catch-up maintenance that we knew about for Higman fleet is done.

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

Yes. So power generation as you know, there are lot of these data centers and what not around the United States and they’re growing and even financial institutions and companies, corporates what 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 powered -- backup power generation and particularly on the rental side, for example, we provide backup power generation that's on basically semi trailers that that goes into hurricane impacted areas for a large retailer and essentially you plug in the trailer and it gets the store back up and running and they're able to service the customers which are desperate to get 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 outline 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 top 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 than in 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.

Got it. Makes sense. Thanks again.

Thanks, Randy.

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

Thank you. Good morning, gentlemen.

Hey, good morning.

Sorry about you [Indiscernible]. David, you mentioned some of the Higman fleet contracts rolling off in 2019. How much of that business do we think about in 2019 that could be rolling over that you guys have the opportunity to reprice?

Yes. Its hard to quantify, let’s see – let me back into it 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 that fully into our fleet. On average these contracts reprice probably two-thirds of them reprice in a year, the other are multiyear. So I would say it was still reprice through 2019, but the big impacts happening now. Because of where they were financially they had to take jobs that could get just to keep cash flow and paying their crews. So they were -- some of their contracts were paperthin in terms of margins if not at a loss. And so we’re happy to see him repricing back to kind of the market now. It’s still got a ways to go, but I think by kind of mid-19 the bulk of them will be repriced.

Okay, awesome. And kind of keeping on the pricing thing there, obviously you were seeing better pricing in inland and you have a better demand/supply equation. But is there any way to tell part of this pricing narrative, how much could be attributed to some of the bad actors if you will the past couple years who found their religion regarding pricing and are now acting more rational if you will, in addition to just kind of regular markets demand/supply dynamics? Does that make sense?

Yes. I don't know if I’d call it bad actors. I think, look, it was a long painful three years and the people got to the point where they had to bring up pricing. It just – it was unsustainable as we talked about. Some of the kind of lower – I don’t want to call 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're seeing that that the incremental pricing can get them back to profitability. So some of it is happening where some of those lower bottom prices are coming up, I don't know if you'd call that religion are not yet, but it certainly they’re more constructive about it. And that’s positive.

Yes. But obviously you guys, you're doing the same thing with Higman where you're repricing that book of business?

Exactly right, exactly right.

Okay. Well, that’s all I had. Thanks for your time this morning.

All right. Thanks, Kevin.

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

Hey, good morning, guys. Thanks for talking my question.

Hey, Jack.

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 fourth quarter because of the vendor bottleneck issues, but there 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 in revenue a quarter? Or is this more of the $400 million to $425 million revenue quarter that we saw through 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?

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, 40 million and that’s just quarter-to-quarter, that’s working for. And some of that's been offset by deferred revenue because we’re getting progress payments. But that's just in the quarter-to-quarter buildup this 40 million. And that’s not a good in any profit and as you know with the revenue recognition we don't get any profit and it doesn't go to our income statement and so you deliver. So the base actually activity level which was frankly closer to the second quarter than it was to the year to what you see and I mean second quarter revenues then you would have seen in the third quarter numbers.

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

Yes. I mean, the second quarter was a very good quarter with a lot of good business, revenue there was 424 million for the second quarter. So the numbers don't point to getting right back there right away, but what is 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.

Okay.

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

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 because you’re already compliant. I’m not asking about that. I'm more curious, what does it do to product flows and the demand for distillates and maybe distillates moves by barge that you guys could participate either on the inland side or on the coastal side. Would you expect that they have any impact on the business? And if so when should we think about that may be showing up?

Yes. I don't think it'll materially change our business. We bunker now, we bunker ships now. We bunker with heavy fuel oil and some cases and as it shifts to ultra low sulfur diesel we’ll 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 more profitable our customers are the better. There could be an increase in blending which might help us, right? They blend the different grades and that might lead to more barge moves to reposition, to the 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's a lot of blending going on.

Okay, great. Thank you again for the time.

Hey, thanks Jack.

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

Hey, good morning, gentlemen.

Hey, good morning, David.

My question on inland pricing, I think you mentioned it moved up about 20%, but it's still a 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 they want to see contract prices moving higher to justify a new build? Thanks.

That’s great question, David. I would say, spot pricing being at P&L breakeven is the start, but prices would need to be 25% higher to get to where you'd start to consider good economics for new builds. Now that said, some people aren't as disciplined about looking at returns on capital. Some people like to build on spec. I'm not sure we’re seeing a lot of that. There maybe of that 120 or so barges that are on order for 2019, maybe 20 or so maybe a little more might be on spec, but we’re still a ways from the price that's needed to justify new build. And by the way, as you're well aware, barge pricing is going up 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 bought Jeffboat, now they’re going to open up, we understand, they are 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 having like a consolidated barge building industry, you knows is not helpful to low barge pricing, but we’re okay with that, if it’s more expensive to build barges maybe barges don’t get built as robustly as they have in 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.

Now that does give 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 expected to slip into the first quarter of 2019 or a range or some color there would be helpful? Thanks.

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

[Indiscernible] with the high end is still none of our little or is there still some slippage in that assumption?

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

Okay. Good, that’s helpful. Thanks for the time gentlemen, appreciate it.

Thanks, David [ph]

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

Hey good morning.

Good morning everyone. And Bill your operating margin for Inland used to be in the mid-to-upper 20s. Now you are in the 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 changed, given either the acquisition, the product mix, or even on the other side, given your cost cutting, could it go even higher.

Yes, I would say I fully expect us 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 the 30% in terms of peak margins. We – 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 this to get back there. I would say, given our fleet composition, we could go higher. You know that the level of synergies and integration that we were able to achieve given our fleet size, I think we could get higher in terms of margins.

And presume, that’s really just led by the pricing at this point, just to get – is that kind of you…

Yes, as you know Ken that the pricing this kind of rolls right to the bottom line. So very high incremental margins, right.

Okay. And then follow up question would be, your thoughts, you talked about all the wave of petrochemical plants that were opening and you already mentioned a bunch of the crude and other opportunities. Now that we are closer to having some of those opened operating flows that have started to move or just still about to start and a couple of others, what are your thoughts now in terms of the growth that is going to – are you seeing any of that – you know before you like we don’t know if it’s going to go international or stay domestic, any update thoughts on kind of what’s shifting maybe towards your way or away?

Yes, I would say one of the things we’ve seen and to get too specific here, but pressure cargoes we are 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 for export or up to the east coast. So, ultimately a lot of that’s going to be as you know poly ethylene and that poly ethylene 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 are seeing an increase in pressure cargoes. There is still pressure cargoes that come out even in some of the lighter feedstock type of flame 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 it’s GDP plus 2% to 5% kind of the way I’m thinking about it. It’s really -- really hard to quantify in terms of barge count, but we’re definitely seeing it.

Yes, I guess what I was just trying to get at from your thought there is you just gave me what the GDP plus 2 to 5 if there’s some big short to the system and demand that’s going to get ramped up in the next one, two 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 flex [ph] rebound on pricing?

Yes, I think it’s gradual. I don’t think it will be a shock. It’s just that things come on too ratably, not all the plants are starting up at the same time and we are running at 95% utility rate now, so it’s where all this is coming on in an environment where the industry is fairly tight.

Yes, it sounds great. Appreciate the time guys. Thanks for the thoughts.

Thanks again.

Okay, Keith, we’ll take one more question please.

Okay. And that comes from Bill Baldwin from Anthony Securities.

Hey Bill.

Hope everybody is doing well. 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?

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 and still a pretty big revenue increase, but to your point it was as expected, and the third quarter revenue and operating income was essentially as expected for distribution & services. The surprise in the quarter for – I see a 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 third quarter last year and third quarter this year on D&S, that’s all about mix. Distribution & Services at Stewart & Stevenson has more distribution if you will, and so that’s at a little lower margin. So when we added all the revenue from Stewart & Stevenson that mix brought down essentially are average operating margin. But there are still huge contribution margin in there.

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

But Joe’s done a good job over there.

Yes, I think so. Not good enough, but he’s doing a job.

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

Yes, I know it was. Reman is again and that’s right in our sweet spot.

And then two quick questions. On the competitive environment, how would you describe the competitive environment in the reman area? I mean is it – is Kirby such a leader in that business that your first choice for your customer base is going to be Kirby reman or [Indiscernible] out there?

Yes, 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 reman, it’s done cheaper by some of the 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’s the people that are very price-sensitive, but I would say we’ve got a good market niche and high market share and I would say we are preferred certainly by the top tier, top two thirds of the pressure pumping market. We do quality work and we like to believe, you know we’re the best at it, and we certainly think we have probably 60% market share in that space.

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 think in different basins, can you go, or…

Well we have.

Do you think it’s different basins, can you go or -- I guess the business comes to you from basins all over or..

It does. I remember these frac units are on trailers and I think can travel at 60 miles an hour, but that said, we have a facility in Midland, Odessa. We’ve just expanded it, add 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, in that area.

And my last question, are you seeing in some alleviation on the vendor supply situation or you have to get in the bottleneck begin to clear up a little bit.

Yes, so the bottlenecks are clearing up, but look a part of this is supply chain issues. There’s new technologies and look, we went from a tier 3 to tier 4 engines or tier 2 engines to tier 4 engines from the mission standpoint. So that’s all new technology. There’s new pumps being developed, so that 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’s you know these are new designs and with every new design there’s 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.

And you see that continuing into 2019.

You know I’m hopeful by the end of this quarter the bulk of them will be resolved.

Okay, well thank you very much. Good job.

All right. Hey thanks, Bill.

All right. Thank you Bill and thank you everyone for participating in our call today. If you have any questions or comments, you can feel free to reach me directly at 713-435-1545. Thanks everyone and have a great day.

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