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Quality Distribution, Inc. (NASDAQ:QLTY)

Q1 2013 Earnings Call

May 02, 2013 10:00 am ET

Executives

Robin Cohan - Vice President

Joe Troy - Executive Vice President and Chief Financial Officer

Gary Enzor - Chief Executive Officer

Analysts

Tom Wadewitz - JPMorgan

Kevin Sterling - BB&T Capital Markets

Jack Atkins - Stephens

John Barnes - RBC Capital Markets

Jeff Kauffman - Sterne Agee

David Tamberrino - Stifel

Ryan Cieslak - KeyBanc Capital Markets

Operator

Good day, everyone, and welcome to the Quality Distribution First Quarter 2013 Results Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Ms. Robin Cohan, VP Controller. Please go ahead.

Robin Cohan

Thank you, operator, and good morning, everyone. We’re delighted to have you join us today for our first quarter 2013 earnings call. Our speakers today are Gary Enzor, our CEO; and Joe Troy, our CFO.

Before I turn the call over to Joe, I’d like to caution all participants that comments made by Quality’s employees during this conference call may contain forward-looking statements. Actual results could differ materially from those projected or expected in these forward-looking statements.

Listeners are urged to carefully review and consider the various disclosures made by the company in this conference call and the risk factors disclosed in the company’s Annual Report on Form 10-K for the year ended December 31, 2012, as well as other reports filed with the Securities and Exchange Commission.

Copies of the company’s Annual Report on Form 10-K and other SEC reports are available on our website at www.qualitydistribution.com and on the SEC’s website. The company disclaims any obligation to update any forward-looking statements after this conference call.

At this time, all participants have been placed in listen-only mode. The forum will be open for questions following the presentation.

With that, I would now like to turn the call over to our CFO, Joe Troy.

Joseph Troy

Thank you, Robin, and good morning, everyone. Before we begin, I want to remind you that we refer to certain non-GAAP measures such as adjusted EPS and adjusted EBITDA that management uses to evaluate the business and to help provide additional measurements of earnings and cash flow that may be important to the investment community.

Let me first say that Gary is attending funeral this morning and therefore calling in from a different location. We will do our best to coordinate Q&A session. And given the situation, we will be keeping this morning's call to 40 minutes or less.

On a GAAP basis, we reported Q1 net income of $0.34 per diluted share compared to $0.26 in Q1 of last year. Adjusted net income was $0.14 per diluted share compared with $0.18 per diluted share in Q1 of last year, adjusted for the items mentioned in our release. Except for the earnout adjustment which impacted our Energy segment, all other adjustment items impacted our Chemical segment.

Excluding fuel surcharges, first quarter consolidated revenues were up 22.5%, versus last year, driven primarily from our 2012 Energy Logistics acquisitions and organic growth in both, our Chemical and Intermodal Logistics businesses.

After adjusting for the items mentioned in the release, first quarter consolidated operating income was $13.7 million, a decrease of $0.5 million versus the prior year. Overall operating margins fell 140 basis points, strong improvements at Intermodal were offset by lower income at Chemical and Energy. Our insurance expenses this quarter was due to elevated claims activity that remained within our target range of 2% to 3% of revenues.

On a sequential basis, Q1 consolidated revenues exclude surcharges and consolidated adjusted operating income, both increased roughly 6.6% versus Q4, a solid performance from Chemical and Intermodal offset the decline in Energy.

As noted in the release, we continue to aggressively address asset repositioning and utilization issues in Energy and expect these efforts to have a positive impact on operating results in the coming quarters.

Turning to our segments; Chemical Logistics revenues excluding fuel surcharges, in Q1 rose 3.2% versus last year, primarily due to higher pricing in solid volumes. Chemical Shipments demand was very strong early in Q1, however adverse weather conditions late in the quarter, mostly in the mid-western region of the U.S. tempered the improvement.

Customer demand remains robust as we head into our heavier Q2 season and we are working diligently to keep driver counts on an upward trajectory to realize elevated levels of revenues.

Operating income in Chemicals after adjusting for the non-operating items was down $1 million as better pricing and volumes were offset by higher equipment lease expense, increased depreciation expense from the affiliated asset acquisition in the fourth quarter of last year and increased insurance costs.

The affiliate conversion cost had lingered longer than expected. However, the team at Chemicals is rapidly closing this chapter and becoming more asset-light by successfully affiliating one company terminal in Q1, a second terminal in April and three more in the near future.

Energy Logistic segment revenues were $41.1 million, an increase of $30.2 million over the prior year quarter resulting from the three acquisitions made in 2012.

On a sequential basis, revenues were $1.9 million, or 4.9% versus the fourth quarter of 2012, principally due to solid organic growth in our affiliate and company operations in both, the Eagle Ford and Woodford shales.

These improvements were partially offset by lower revenues within the Bakken and Marcellus shale. Slowing drilling activity in the Bakken region led to a decline in fresh and disposal water, transportation revenues which also adversely impacted our disposal well revenues and profitability.

We have offset some of this decline with incremental oil hauling volumes which should continue into Q2. Given the less predictable nature of water demand, we are strategically shifting our product mix toward more stable oil revenues across each of our shale regions. This will result in higher utilization of our 200 barrel oil trailers, which carries the added benefit of being interchangeable among the oil producing shales in response to shifts in production.

Our Energy segment reported an operating loss of $0.5 million in first quarter of 2013, compared with operating income of $0.8 million in the prior year period. Losses in Marcellus and lower asset utilization continue to impact performance. We have aggressive cost, asset utilization and revenue enhancement actions underway and expect to see tangible progress toward returning the segments' profitability in the coming quarters.

We achieved the key milestone with today’s announcement of a new affiliate relationship for our Marcellus and Utica businesses. Operationally, we had recently suffered from having access specialized $110 barrel assets in a rapidly declining natural gas only drilling environment. This has led to a more than 70% reduction in our quarter-over-quarter revenues in Marcellus, resulting in operating losses over the last two quarters.

Given the dynamics in the market, we actively search for the right operators to manage the day-to-day business and remained poised for what we believe will be an eventual rebound in drilling. This independent affiliate will be assuming operations of one terminal immediately and the remaining two terminals over the next 60 to 90 days, allowing us to reduce our equipment base and return to our asset light position in the eastern shale region.

At the same time, we expect customer services levels to improve by allowing the successful locally-owned and managed independent business to manage daily operations. In connection with this transaction, we had sold and leased certain assets of the one terminal thus far and also acquired the affiliate's customer base which generated about $17 million in revenues in 2012.

We anticipate selling additional assets as we affiliate at the two terminals and expect to incur cash and non-cash charges in Q2 from these actions, primarily related to potential severance costs and asset sale losses.

Intermodal segment revenues excluding fuel surcharges were up $2.4 million, or 8.5%, primarily due to a very strong storage, rental and service revenue. Demand for ISO container shipments continue to be favorable which has led the increases in trucking volumes and a stable to upward environment for pricing.

Our New York, New Jersey Intermodal facility has rebounded well following Hurricane Sandy last year and we expect volumes and profitability of this location to grow nicely in 2013.

Operating margins at Intermodal expanded over 400 basis points, primarily on increased storage and service revenues, which typically carry higher margins, enhanced cost controls and improving profitability in the Northeast. We continue to see positive indicators in the Intermodal business. However, this business is not as seasonal as chemicals, so we do not expect the same type of quarter-over-quarter improvement heading into Q2.

On a consolidated basis, cash flow from operations was $8.6 million in Q1, an increase of $6.9 million over the prior year quarter. As noted, we had negative net CapEx for the second quarter in a row as we continue capital spending and aggressively sold off assets.

We will continue to actively manage our spending and look for additional opportunities to optimize our fleet in the coming quarters and remain comfortable with our previously discussed net CapEx spending range from the year of $10 million to $15 million.

As we move forward to 2013, we will continue to evaluate the best allocation of capital and use of our free cash flow. Our primary focus remains on debt reduction, additional share repurchases and opportunistic growth investments with an overriding goal of maintaining the prudent level of liquidity to run our business.

That concludes my prepared remarks. And at this point, I’ll turn the call over to Gary.

Gary Enzor

Thanks, Joe. Our key takeaway from Q1 is that Boasso and chemical and performing well on a good trajectory, so we expect that to continue going forward. Our main opportunity and focus during Q2 and into Q3 is to improve energy.

Energy revenues are on steady to upward trends, but we faced margin challenges driven by water revenue declines in the Bakken, Marcellus and Woodford. We've done a decent job back [for] crude oil, the margins have been negatively impacted as we move assets between shales and idle water assets and weigh them to P&L As we move into Q2, the chemical segment is running about 3% higher excluding fuel surcharge during the first four weeks.

The Intermodal segment is our mid-single digits and I will expect that to track mid-to-high single digits moving forward, And Energy contributed about $13 million in revenue for the first four weeks of Q2, which is currently tracking about the same as last quarter.

We said last quarter, we believe our chemical and intermodal segments had the right trajectory and actions plans starting the year and the results show that. We believe this trend will continue. We also said last quarter we expect a near-term drag in Energy as we work to utilize assets and reposition them and that occurred as well. We are taking immediate and aggressive actions on many fronts to enhance our profitability and returns to this segment.

As Joe mentioned, we just added a new independent affiliate in Marcellus, and our objective will be to have them manage operation in the Marcellus and Utica, so we end up with a completely asset light operation in those shales. Once we fully convert our Marcellus and Utica operations through this affiliate which will result significant asset sales, we will sell or convert our remaining one-tenth, which will improve both, our profitability and returns in these shales.

Moving west, our two existing affiliates in the Woodford and Eagle Ford continue to grow nicely and provide us with solid margins as is our company-owned operations in Eagle Ford. Our primary challenges today are improving our company operations in the Woodford and Bakken shales.

We expect a seasonal improvement in water volumes in the Bakken as drilling activities increase through the end of winter and we have plans to add approximately $20 million annualized oil revenue in both shales over the next quarter or so, which will provide lift to these operations.

We continue to see growth opportunities in new and contiguous shale as well and we are deploying existing assets to capture volume in areas such as the Permian, West Texas and in Wyoming. In addition, we have targeted $5 million to $8 million annualized cost improvement actions to take [cost] energy that will be executed over the next 100 days. When we add this up, we have clear line in sight to drive $3 million plus of incremental quarterly EBITDA into our Energy business over the next couple of quarters.

Overall, Q2 is typically better than Q1 and we would expect that to be the case again. However, while we are optimistic there is still lot of work to be done, especially in energy. So, would caution our analysts and investors about being too aggressive with our expectations for Q2 especially as compared to Q2 of last year. We expect the comparison to get easier in the back of half the year given the trends in our Energy business.

Overall, we continue to expect a better 2013 and will be spending majority of our time blocking and tackling in the Energy segment. We also expect to continue to reduce our asset intensity and generate free cash to deploy for debt reduction and share buyback. The actions we outlined today are all aimed at making positive improvements and enhancing value for our shareholders.

Operator, we'd now like to open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will hear first from Tom Wadewitz with JPMorgan.

Tom Wadewitz - JPMorgan

Yes. Good morning.

Joe Troy

Good morning, Tom.

Tom Wadewitz - JPMorgan

First I guess two things, clarify one of the comments you had towards the end there, Gary. The second quarter earnings you had same comments and kind of keeping expectations in check, are you saying you expect earnings down year-over-year in second quarter or you are just saying it's tough to see very significant growth year-over-year? I just want to make sure I understand that comment correctly.

Gary Enzor

Yes. I think, Tom, we don't guide, so I didn't want to be too specific what we are saying, and we expect to do better than Q1, but it's going to be tough versus Q2 of last year, because there's quite a difference between the two.

Tom Wadewitz - JPMorgan

Okay. All right, let's see. I might have missed some of the details or nut cut some of the detail on your comments on Marcellus. How do you think that market kind of normalizes for you? You have seen obviously a big reduction in activity there then you've also seen natural gas prices that are up pretty sharply from the year where they were a year ago, so how do you view that market opportunity for you and what I don't know if there is new equilibrium or kind of normal level of activity, but how do you think that plays out?

Gary Enzor

Yeah, I think, A, we like the way we are positioned there, because we've got the new affiliate. He is a very large, strong operator in the region, and so he can handle that region for us. I know, we've got a pipeline of revenue that looks like there should be additional revenue to flow in the next quarter or so and all really depends on what happens with natural gas, but overall I think we are pretty happy with. Looking forward, we hope that it's near by.

Tom Wadewitz - JPMorgan

Okay. And, in terms of the margin impact of what you are doing there, have you already gotten rid of the equipment that seems to be a drag or a portion of that or is that something that would still be to come in the future that would help you in margin side overall just in terms of that underutilized equipment in the Marcellus?

Joe Troy

Yes. So, Tom, in the second quarter as soon as we affiliate, we had sold number of units to this new affiliate, but we still have a number of assets left over and that will be a little bit of a drag on the P&L, but we'll continue to sell assets through the full affiliation. So, there is two more terminals to go on so we we'll still continue to sell assets and then once that done, just want to make sure that we have the proper assets in place for the affiliate and for potential growth, then we will start selling off or converting those assets into something else, so through Q2 there is going to be a lot of that activity going on.

Tom Wadewitz - JPMorgan

Are there additional sales to the same affiliate or you are saying you have additional affiliates that you will sell terminals to?

Joe Troy

In essence it will be both, but primarily the former because we have two more terminals to affiliate and those two terminals had assets that are allocated to them today that are operating and that affiliate is going to need those assets.

Tom Wadewitz - JPMorgan

Okay. Great. Thank you for the time.

Joe Troy

Thanks.

Operator

Now, we'll hear from Kevin Sterling with BB&T Capital Markets.

Kevin Sterling - BB&T Capital Markets

Thank you. Good morning, Joe and Gary

Joe Troy

Good morning

Kevin Sterling - BB&T Capital Markets

Real quick, Joe, could you quantify the weather impact? Is that possible?

Joe Troy

Yes. I can't really give you the numbers, but we started out of the gauge if you remember on the Q4 call, Gary mentioned that we were up quite a bit in January and so that was a pretty significant number coming out of today, so in order to drag us downward for an overall 3% from where we started. Even though 3% is good, it could have been higher had we not had the storms, but it's hard to put numbers to it.

Kevin Sterling - BB&T Capital Markets

Okay. I got you. It sounds like your commentary in April kind have been pretty good. Is that fair to say?

Joe Troy

Yes. That's fair.

Kevin Sterling - BB&T Capital Markets

Okay. Then, Gary, I know you don't like to give guidance, but maybe I can drill down little bit more into Q2, this is just deal with Energy business, do you think it will be breakeven in Q2 or should we still look for a slight loss?

Joe Troy

Kevin, again we don't want to guide that tightly, but there is a couple of things that obviously we are encouraged by. One is this affiliation will translate from Marcellus region that was generating losses into a region that we have profitability, so that would be a benefit to the P&L.

As we continue to move assets up, that's going to be take depreciation out. So, if you exclude the one-time items that we are likely going to have in Q2 then our expectation would be to have better result in Q2 than we did in Q1, but I don't want to get too tight with an expectation

Kevin Sterling - BB&T Capital Markets

Okay. That's fair.

Gary Enzor

A little clarity in three businesses, we also had a really good Q1 roughly 20% operating margin, so it's tough for them to do a lot more than that they normally get a little bit of lift. And Chemical usually gets a little bit of lift or decent amount of lift between Q1 and Q2 and Energy just we still a lot of rocking and attack be there, so we want to see it improve, but we don't expect a dramatic improvement between quarters.

Kevin Sterling - BB&T Capital Markets

I got you. But basically at the end of the day we shouldn't see the energy business worsen. Is that fair?

Gary Enzor

You said it should not?

Kevin Sterling - BB&T Capital Markets

Yes.

Gary Enzor

It should not? Excluding any charges, one-time items that we will take for the affiliation and other assets sales.

Kevin Sterling - BB&T Capital Markets

Okay. Thank you. Just one last question, because you guys were [with Tom]. How should we think about hours of services changes? What impact if any could they have on your business and I realize the length in haul is relatively short, so maybe it won’t have an impact. Have you guys thought about hours of service?

Gary Enzor

Yes. I mean, again the later point you made is most accurate. The biggest issue is the way that reset works and the new change. It's not the hours, because of our length in haul. So it will have a nominal impact and we will raise rates to make sure we still get our returns.

Kevin Sterling - BB&T Capital Markets

Got you. Okay. Gentlemen, thanks for your time this morning. Congratulation on the free cash flows. Well, it's great to see.

Gary Enzor

Thank you.

Operator

Now, we’ll hear from (Inaudible) with Bank of America.

Unidentified Analyst

Hi. Great. Good morning. Joe, can you talk about the path to affiliate the rest of the assets and energy and are there any other affiliates that are not strong financial that you are in discussions with?

Joe Troy

With respect to the rest of the energy business our growth shale-by-shale, so in the Eagle Ford, we already had a very successful affiliate that operates in. We have a company-owned store that was our first acquisition and both of those operations are working well, so we don’t really anticipate any changes from that perspective in the Eagle Ford.

Then in the Woodford shale, we also have a similar situation where we got a combination of an affiliate who is doing oil hauling and our company operation was doing mostly water. And right now, that will probably main mission for the near-term, but we have opportunities to potentially affiliate that business down the road, is a manageable levels of business, but we can do that.

A tougher prospect would be the Bakken just because of mass, it’s a much larger organization. We still have some asset utilization issues we need to grapple with, some product mix issues. So, that would be a little bit tougher, but Gary you want to add anything to that?

Gary Enzor

Yes. What I would add, [Ken] as you know the Bakken is roughly 90% on our operator, so you really have the asset light nature and affiliates there already. And I think if you think about it at a macro level, roughly year, year-and-a-half ago we had tangible assets to revenue in the low 30s.

As we’ve grown in the energy space, that’s crept up into the low 40s, low-to-mid 40s. We will get that back into the low 30s between now and the next 18 months. We are aggressively working in getting the tangible assets to revenue back, where we think it should be.

Unidentified Analyst

Just a quick follow-up, now that chemical logistics, you're done with the EOBR impact. What is kind of organic do you anticipate?

Gary Enzor

Again, I think, we’ve said that on a lot of prior conversations we think the chemical business can be a mid-single-digit grower over the next few years and we think Boasso is a high-single-digit grower and energy can potentially grow double-digit, so I don’t think we've changed from that position.

Unidentified Analyst

Appreciate. Thanks, Joe.

Joe Troy

Thank you.

Operator

Now moving to Jack Atkins with Stephens Investment Bank.

Jack Atkins - Stephens

Good morning, guys. Thanks for the time. Just a couple of items here, Gary, could you maybe walk us through in a little bit more detail the turnaround strategy at Energy and you talked about an additional $5 million to $8 million of annual cost actions there. Is that in addition to what you guys have already announced on the third quarter and fourth quarter calls. And then could you maybe take us through what exactly those cost actions are?

Gary Enzor

Yes. I mean, I don’t want to go into a lot of detail on them, but essentially we got to right-size some of the organizations as the revenue hasn’t been where it needs to be and we've got our own software called (Inaudible) that we are rolling through the shales. As we roll our software through to shales, we are able to see where compensation gets out of whack and we are able to manage over time a lot better and take actions to drive that cost down.

And, as we got our hands around these businesses and gotten better control of the, [David], we also think there is a lot of savings that we can achieve in the shops in tires and maintenance, so it's pretty much a standard across the board and it's primarily in Oklahoma and North Dakota where we expected to achieve them. We are already going to benefit in the Marcellus through the affiliate relationship.

Jack Atkins - Stephens

Okay. That’s helpful color. And then so just kind of follow-up on that I think is the right way to think about it that we should maybe see half of that $3 million quarterly benefit in the third quarter, shouldn't see much at all in the second quarter, but then we get into the fourth quarter, we should be on full quarter run rate, is that the right way to look at that?

Gary Enzor

Yes. I mean, I think that’s good direction.

Jack Atkins - Stephens

Okay. And then just one last question for me, the cash flow was very nice in the quarter as you guys talked about. Could you maybe kind of expand on your plans for cash for the remainder of the year? How do you balance that between fulfilling the rest of the buyback and pay down debt? And, Joe, if have any sort of internal goals on the amount of debt that you plan on paying down this year I think that’ll be helpful to hear.

Joe Troy

Yes. So, Jack as you know, the balance between debt and share buybacks for the fourth quarter and the first quarter, but the primary use of the cash is in debt reduction. And, you should expect us to continue to have that balance going forward.

One of the things that obviously we have our eye very clearly on is the potential to [be a] brand called prior to November of this year which is $22.5 million I’ve got to balance that with liquidity that’s why I made a comment in my prepared remarks, so we have a goal but having debt to EBITDA being less than four times at the end of the year, debt around four times. So, right now we stated about 4.7. There's still some EBITDA to be garnered for a full year period from some of the acquisitions. So, that’s really the target for the balance of this year and then longer term we target a 2 to 2.5 remains the same.

Jack Atkins - Stephens

Okay. That’s really helpful guys. Thanks so much for the time.

Gary Enzor

Thanks, Jack.

Operator

And now John Barnes with RBC Capital Markets has the next question.

John Barnes - RBC Capital Markets

Hi. Thanks. Gary number one on, in terms of the cost actions and rightsizing the organizations in the energy side, is this essentially or this is pure headcount reduction or is there, you know, I understand your selling assets and that kind of thing associated with the affiliation of some of the terminals, but as you do that does that mean corporate employment or headcount has to come down as well?

Gary Enzor

Again, John, it's across the board. Like I said, there is lot of options, there is lot of opportunities in the jobs, there's lot of opportunity to do a better job with maintenance as we get our around this business, so better job with tires. It's really across the board.

John Barnes - RBC Capital Markets

I guess I’m just trying to get a feel for which one of those actions is going to have the most immediate impact?

Gary Enzor

I think it’s organizational alignment in the field and shop and maintenance savings as we've taken over these businesses that really didn’t have the same levels of systems and processes. We are going to be able to get arms around this cost items out there.

John Barnes - RBC Capital Markets

Okay. All right. Obviously, your efforts have been so focused on energy in the last 18 months or so as they should have been. I’m curious now with the amount of proposed investment in petrochemical manufacturing in the Gulf of Mexico and some places like that. Have you begun to look or see opportunities to maybe to grow chemical more aggressive on a go-forward basis? Is there affiliate opportunities, or given the strength in the outlook of that business have those valuations you gotten positively responsive?

Gary Enzor

No. I think there are opportunities and I think that market will provide more opportunities over the next 24 months, but near-term, we are just focused on getting our ROI and our returns back where they need to be, so we are not really focused on acquisitions or any type of substantial additions in the chemical space right now.

John Barnes - RBC Capital Markets

Okay. And then lastly, obviously, you had a couple of quarters there where the whole On-Board Recorders issue had hit you from a recruitment standpoint rather recruitment standpoint. Are we largely passed that issue now?

Gary Enzor

We're completely passed that issue now.

John Barnes - RBC Capital Markets

Okay. So, no lingering effects? No inability to recruit into those jobs? None of that issue?

Gary Enzor

No. Driver is actually is like once you have it, so we are just getting through the initial phase.

John Barnes - RBC Capital Markets

I understand. All right, guys. Nice quarter. Thanks for your time.

Gary Enzor

Thanks, John. Okay.

Operator

Next question will come from Jeff Kauffman with Sterne Agee.

Jeff Kauffman - Sterne Agee

Thank you very much. Congratulations, nice to see these numbers. Couple of questions, are you seeing any kind of rebound of net cash activity at Marcellus shale with net gas prices being where they are? And then kind of the second on that line of questioning. Following what John said, are you seeing any benefit from the actual chemical volumes being turned out by your shipping customers or that gas is being where it is?

Gary Enzor

On the first question, we are seeing opportunities particularly with our new affiliate for growth in the Marcellus. So, as long as the trajectory stays where it is, or improves slightly, we are seeing additional revenue opportunities in that shale given the natural gas isn't quite in a quite innovation as it was last year. Then on the chemical side, yes, I mean we have more freight than we can move. Our biggest constrain on a chemical side is the drivers, adding drivers.

Jeff Kauffman - Sterne Agee

All right. And, what are you doing to help with that? Is that a function of your affiliates there?

Gary Enzor

It's a function of supporting the affiliates. We do have an excellent owner operator leasing program that we are kicking off in the next week or so that we really think is going to help. We have already seen like a prototype of that providing good results in the California market and we continue to work like everybody else to get drivers. It's just a lot of hard work and lot of social media and lot of newspaper ads and every angle like every other.

Jeff Kauffman - Sterne Agee

A question is for Joe primarily with respect to energy. You spent about $110 million on acquisitions mostly in the energy area. As I look at Marcellus and its affiliation, how much was spent originally on acquiring assets in Marcellus. And once you complete the affiliation, how much of that investment might we end up recognizing as a loss or write-down?

Joe Troy

I can't give you the really the latter yet, because we are still in the early phase of divesting assets and we actually may be able to repositioned and refurbish some of them for other uses. And so we have been looking very hard at that. I am going to give you round number somewhere in the $25 million to $30 million range is what we spent on assets in the Marcellus region. That's rough range.

Jeff Kauffman - Sterne Agee

Alright, and are we pretty much done with earn out reversals at this point in your opinion or might there be additional as we, are you accruing it as we go or are we pretty much done showing up the books in that respect.

Joe Troy

The accrual that we had that were on the books are now all gone are either paid out or reversed.

Jeff Kauffman - Sterne Agee

Okay. Alright. Guys, thanks and congratulation.

Gary Enzor

Thank you, Jeff.

Operator

Now moving to David Tamberrino with Stifel.

David Tamberrino - Stifel

Yes. Thanks. I was wondering if you guys could give a little bit more detail on the trend of utilization levels in energies and logistics specifically where utilization levels were 4Q, 2012 and 1Q, 2013 and how they are trended so far in the second quarter 2013.

Gary Enzor

Yes, again I don't have the exact percentages, but I think we have said on prior calls that we corrected a number laid on the last call that it was probably in a low to mid 80s, and it has been constantly improving slightly and as we just sold some assets to our new affiliate, we think you will need a decent amount more for the other two terminals that is going to take or converting some of those assets for getting more oil business. Our goal will be to get into the low to mid 90s by the end of the year.

David Tamberrino - Stifel

And at that point that low to mid 90s range, where do you see the energy logistics business margin going? Is that kind of reversion to some of the levels we saw in 2012 in the beginning or rebound that 95% range in terms of…

Gary Enzor

What we said in this release was, we see three 3-plus million of incremental margin that we are working on to add through and get that loaded in two three quarters from now. When the energy business is running properly it should make double-digit margins or higher on an operating margin basis. So, that's where it will run when got it.

David Tamberrino - Stifel

Okay. And then kind of moving on back to chemical logistics and driver kind of you noted that it was up 2% year-over-year. How did that trend sequentially from 4Q to 1Q?

Joe Troy

Driver accounts?

David Tamberrino - Stifel

That's correct.

Joe Troy

Well, driver accounts were up sequentially. I don't have the percentage right in front of me, David, I'll try to dig it out, but we do that sequential increase.

David Tamberrino - Stifel

Okay. And I guess I missed your went through a little quickly on intermodal operating margin obviously they were very impressive not just sequential but year-over-year. How much of that is attributed to other higher service revenue and higher margin. What historically have been the service revenue margins and did I note that you said 2Q shouldn't be as robust as Q1 was in terms of the margin there?

Joe Troy

Yes. So, David, we had a lot of movement of shipments that came into the ports during Q1, and so the substantial portion of the improvements did come from the people side of the business where the storage, the handling, the heating and cleaning et cetera where that occurs.

I don't really want to talk about the exact margins, because I don't really want our competitors to know the type of margins we generate, but they are very healthy compared to the trucking side of business.

So, again, because we had that influx of container shipments in the first quarter that we don't really expect that level of robustness to carry into the second quarter although we are optimistic that we will continue to see good trends in the trucking side and ISO container shipments, so it's not that we are pessimistic about. It's just we don’t see it as robust a quarter-over-quarter improvement.

David Tamberrino - Stifel

Okay. Thank you.

Joe Troy

Thank you.

Operator

We have time for one final question and that will come from Ryan Cieslak with KeyBanc Capital Markets.

Ryan Cieslak - KeyBanc Capital Markets

Hey, thanks for taking my call guys.

Joe Troy

Hi, Ryan

Ryan Cieslak - KeyBanc Capital Markets

Gary, if I heard you correctly, do you say you had roughly $20 million of annualized oil revenue you planned to on-board you are going forward?

Gary Enzor

Yes. That's correct

Ryan Cieslak - KeyBanc Capital Markets

So when does that exactly come on? That's something that gradually will hit the books here in end of the second quarter or back half of the year, maybe just some color around there.

Gary Enzor

Majority will hit in the back half of the year. You will get pretty close to half year's worth of that in the back half.

Ryan Cieslak - KeyBanc Capital Markets

And that's including the incremental revenue that you guys are, I know it's maybe not oil related but the incremental revenue you are getting from the affiliate you guys just announced?

Gary Enzor

Correct.

Ryan Cieslak - KeyBanc Capital Markets

And you said that was roughly $17 million?

Joe Troy

Yes. That's the revenue level that the affiliate was doing within his own operations prior to our affiliation, so he is brining revenues to the table, we are bringing revenue to the table as you assumed from terminals. So, that's why we called that number out, because we will get a benefit from his business that we bring him for.

Ryan Cieslak - KeyBanc Capital Markets

Okay. And then the $5 million to $8 million in cost savings that you called out, does that include some of the positive P&L impact that you can see from this affiliate conversion?

Gary Enzor

I'd say a little. I mean, there are lot of cost actions that I said would take place in the Woodford and the Bakken. We'll get some benefit as well in the Marcellus.

Ryan Cieslak - KeyBanc Capital Markets

Okay, and then maybe just a couple housekeeping question, Joe. Do you have the percentage then how we should be thinking about? If you look at the energy business going forward, what percent will be affiliated at least in the second quarter, I think you guys were at the lower 20% range at the end of the year. Where does that go following some of these new affiliates coming on board?

Joe Troy

You are talking about just the Energy business?

Ryan Cieslak - KeyBanc Capital Markets

Right

Joe Troy

Then somewhere probably in the 25% to 30% range. It will depend on the revenue growth level within our company and operation as well and how good our other affiliates do, but that's probably a good ballpark.

Ryan Cieslak - KeyBanc Capital Markets

Okay. Got you. Then the last one I had just going back to intermodal. I know you said that you are not expecting the same year-over-year improvement in the margin there, but should we be thinking about you should still see better margins than that roughly 13% to 14% range that I think you guys are trading in 2012 or just trying to get a sense of really where those margins should be from a normalized level going into the next couple of quarter?

Joe Troy

Yeah. I don't want to pinpoint on exact number, but we would expect improvement in margin.

Ryan Cieslak - KeyBanc Capital Markets

Okay. Fair enough. Thanks, guys.

Joe Troy

Alright. Thank you.

Operator

Ladies and gentlemen, that will conclude today's question and answer session. I will turn the call back over to your host for any additional or closing remarks.

Gary Enzor

Again, we would just like to thank everyone for participating in this quarter's conference call and apologize that we had to hand a little bit earlier. Thanks.

Operator

Ladies and gentlemen, this will conclude your conference for today. Thank you for your participation.

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