Q3 2020 Kirby Corp Earnings Call

Good morning, and welcome to the Kirby Corporation, 2023rd quarter Earnings Conference call.

To summarize all participants will be in listen only mode should you need assistance. Please see no a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions. We ask that you limit your questions to one question and one follow up.

A question you May Press Star then one on your Touchtone phone to withdraw your question. Please press the pound key.

Please note. This event is being recorded I would now like to turn the conference over to Mr., Eric Kokomo Kirby is vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining US with me today are David Grzebinski, Kirbys, 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, which was issued earlier today can be found on our website at Kirby Cork Dot com.

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

As a reminder statements contained in this conference call with respect to the future are forward looking statements. These statements reflect managements reasonable judgment with respect to future events.

Discuss in a few minutes.

Looking at our segments and marine transportation, the inland and coastal markets experienced reduced volumes as demand for transportation of refined products crude and black oil remained depressed.

Although the economy began to recover during the quarter refinery utilization only slightly improved as refiners were challenged by weak demand high inventories and low crack spreads refinery utilization average only 78% compared to the previous five year third quarter average of 93.

Percent.

Petrochemicals modestly improved sequentially, but chemical plant utilization of 74% remained below levels experienced in 2018 and 2019.

These factors contributed to challenging market conditions across inland and postal, including limited spot requirements and lower pricing, particularly for refined products crude and black oil moves.

Our barge utilization and marine financial results were also impacted by severe weather weather, which affected our operations across the Gulf coast in East Coast.

During the quarter, there were 20 named storms, including three major Hurricanes and one tropical storm all of which made landfall in the heart of our operations in Texas and Louisiana.

These storms resulted in significant disruptions, including delays across our fleet and some prolonged closures of our customers plant key waterways and at certain dogs bank.

Thankfully through the professionalism and expertise and effort of our employees there was little to no damage to our equipment or are people or our facilities.

Overall, the impact of COVID-19, as well as the severe weather resulted in average barge utilization in the inland business and the low 70% range and coastal in the mid 70% range in the third quarter.

And distribution and services are third quarter results improved as the economy, starting to recover lockdowns eased across the U S and some oilfield activity emerged importantly, we also benefited from cost reduction initiatives and total distribution services revenue increased 10.

Percent sequentially and operating income returned to slightly above breakeven.

And commercial and industrial beyond highway and power generation businesses sequentially improved as the economy started to reopen and on highway we experienced increased demand for truck and municipal fleet repairs at our major facilities as U S fleet miles improved approximately 5%.

Repair activity for buses, however remained depressed as people continued to limit travel at major tourist destinations and on public transportation.

And power generation activity approved as customers resumed installations of major backup power systems order, new equipment and parts and requested service. We also benefited from increased utilization in the power generation fleet due to the major hurricanes along the Gulf Coast.

And marine repair revenues declined sequentially, primarily due to lower engine sales, but activity levels remained solid throughout the quarter.

And the oil and gas market activity started to recover as U S track activity bounced off the bottom and some of the wells, which were shut in during the second quarter came back online.

Active frack cruise.

Are believed to have bottomed around 50 during the second quarter increased to over 100 by the end of the third quarter, but they are still significantly down from approximately 300 last year.

This activity improvement resulted in higher service parts and re manufacturing demand in our oil and gas business. Additionally, we delivered some new environmentally friendly pressure pumping units during the quarter.

In a few moments I will talk about our outlook, but before I do I'll turn the call.

Over to Bill Harvey to discuss our third quarter segment results and the balance sheet.

David and good morning, everyone.

And the 2023rd quarter Marine transportation revenues for $326 million with an operating income of $32.4 million and an operating margin of 10, 1%.

Compared to the 2022nd quarter Marine revenues declined $64 million or 16% and operating income declined 19 million. The reductions are primarily due to lower inland and coastal bar utilization reduced fuel rebuilds and the impact of hurricanes during the quarter, However aggressive call.

Cost reduction helped to limit the impact on operating margin.

During the quarter the inland business Contributive, approximately 77% of segment revenue and had an average parts utilization in the low seventies range long term inland marine contracts are those contracts with a term of one year or longer contributed approximately 70% of revenue with $60.

7% from time charters and 33% from contracts of affreightment.

Term contracts that renew during the third quarter, we're down in the low single digits spot market rates, However declined approximately 10% sequentially and year on year with refined products crude and black oil experiencing the most pricing pressure during the third quarter the operating margin in the inland.

Business was in the mid teens.

And the coastal business spot market opportunities continued to be limited as a result of reduced demand for refined products and black oil transportation.

Hurricanes and tropical storms in the Gulf of Mexico, and Atlantic resulted in considerable delays and reduced efficiencies.

Overall, Archie utilization was in the mid seventies range slightly lower sequentially, but down from the mid eighties range in 2019.

Average spot market rates were generally stable during the quarter, but term contracts that renewed during the quarter were lower in the mid single digits. During the third quarter percentage of coastal revenues under term contracts was approximately 85%.

Of which approximately 90% were term charters.

Coastal's operating margin in the third quarter was in the negative mid single digits.

With respect to our tank barge fleet, a reconciliation of the chart changes in the third quarter as well as projections for the remainder of 2020 are included in our earnings call presentation posted on our website.

Moving to distribution of services.

Revenues for the 2023rd quarter or 176 million with an operating income of $1.1 million compared to the second quarter revenue has improved 10% with a $15.3 million improvement in operating income.

The sequential improvement in operating income is primarily due to cost reduction measures as well as the absence of some one time charges that occurred in the second quarter.

And commercial and industrial activity levels improved sequentially in the on highway and power generation sectors as the economy started to recover and Lockdowns east as well the power generation business experienced increased utilization in the rental fleet as a result of hurricanes along the Gulf coast that.

Marine repair business continued to experience solid demand, but was down sequentially due to reduced engine sales.

And oil and gas revenues and earnings sequentially improved is U S. Frack activity increased from the second quarter Lowes and our businesses experienced modest increases in service and parts demand as well in the manufacturing business benefited from the sale of environmentally friendly pressure pumping units and re manufacturing or.

Orders for major oilfield customers.

During the third quarter, the commercial and industrial businesses represented approximately 72% of second segment revenue and had an operating margin the mid single digits, the oil and gas related businesses represented approximately 28% of segment revenue and had a negative offering art margin and the low double digits.

Turning to the balance sheet.

As of September 30th we had $120 million of cash in total that was $158 billion and our debt to cap ratio was 33.9%.

During the quarter, we had strong cash flow from operations of $117 7 million and enabling debt repayments of $65 million. We also use cash flow and cash on hand to fund capital expenditures of 36 $6 million.

At the end of the quarter, we had a total available liquidity of $613 million since the end of the quarter. We have continued to generate solid free cash flow as of this week are total that was 153 billion.

Capital spending is expected to continue to check trend down during the fourth quarter for the full year, we expect capital expenditures of approximately $150 million.

Which represents a 40% reduction compared to 2019.

As a result, we expect to generate for free cash flow of $300 million to $350 million, which includes tax refunds in the cares Act as previously disclosed.

Before I close I'd like to quickly addressed income taxes during the third quarter, we had an effective tax rate benefit as a result of net operating losses losses, which would carry back to prior higher tax years as allowed by the cares Act legislation, we expect the fourth quarter to also have low tax rate.

I will now turn the call back over to David to discuss our outlook for the fourth quarter.

Thank you Bill the last six months have been very challenging times for most everyone, including Kirby.

But before COVID-19 shutdown economies around the world Kirby's inland Marine business recorded some of the strongest barge utilization levels in our history activity was very strong pricing was increasing at high single to low double digit percentage rates and approaching levels not seen since.

<unk> 2014 operating margins, we're on a path to exceed 20% and coastal capacity was tightening and contracts were renewing higher and double digit increments and distribution services are commercial and industrial businesses were growing with a strong economy and there was increasing demand for backup.

Power generation.

Even oil and gas, which had struggled in 2019, we're showing signs of recovery with expectations for improved demand later in the year, especially with respect to kirby's environmentally friendly pressure pumping equipment.

Since then unprecedented in steep activities clients have occurred across the company. It goes without saying the biggest question on everyone's mind is when will the economy recover significantly and get back on track. It is clear the economy is improving refining refinery and chemical.

Plant utilization is up from April Lowes.

And the oil and gas sector is showing some signs of life.

We believe our activity levels have bottomed.

And we will see gradual improvement throughout next year, however, with the pace of the economic recovery relatively slow refinery utilization hovering in the mid 70% range and signs of a potential wait a second wave of Covid are starting to appear.

The risk too and the slope of this recovery is highly uncertain. We believe our fourth quarter will be difficult with results negatively impacted by seasonality and continued low barge utilization.

However, as we said before we believe this downturn is demand driven and our utilization will recover when demand rebounds.

As the impact.

Impact of the virus is mitigated in the coming months. We are optimistic better days are ahead in 2021 in the meantime, we intend to remain very focused on cost control capital discipline cash generation and debt reduction.

Let me run through some business by business thoughts.

In the inland market during the fourth quarter, we expect slight improvement embarked utilization provided economic activity continues to slowly grind higher and new lockdowns related to COVID-19 are not implemented.

We also expect to benefit as refinery and chemical plants slowly recover from recent hurricanes, along the Gulf Coast, which notably include a powerful storm in early October and yet another storm this week.

The Illinois River, which was shutdown throughout the third quarter is also reopening by the end of October and toes are starting to move in and out of this important waterway.

However, in the absence of a material economic recovery in with expectations that demand for refined products and crude oil will will remain muted. The inland market is expected to remain challenging with pressure on pricing.

Additionally, increase delays are expected with the onset of normal seasonal winter weather.

Which will affect operating efficiencies and reduced profitability on contracts of affreightment.

Overall as compared to the third quarter, we anticipate inland revenue as an operating income will be flat to down slightly in the fourth quarter.

And coastal the demand in the spot market is expected to remain at low levels for the near term until the meaning recovery from refined products and blackhall demand as realized however term contracts, which represent approximately 85% of our coastal revenues are.

Expected to remain stable with minimal renewal exposure prior to the end of the year.

As well Postal's results are expected to modestly benefit from reduced hurricane related delays.

As a as a result, we expect Coastal's fourth quarter revenues and operating margin will be flat compared to the third quarter.

And distribution services during the fourth quarter, we expect demand for parts of new engines, and commercial and industrial to be modestly benefited from an improved economy, particularly in on highway and marine.

But normal seasonality and marine repair in power generation is likely to result in sequential reductions in revenue in operating income.

And the marine repair business, we expect reduced major overhauls in service during the dry cargo harvest season and in power generation utilization of the rental fleet is expected to decline as hurricane season ends.

And the oil and gas market, we anticipate demand for part service in new pressure pumping equipment will remain limited during the fourth quarter, although oilfield activity has modestly recovered from second quarter levels.

Continued low commodity prices and.

And potential E&P budget exhaustion are expected to result in reduced customer spending during the fourth quarter.

As well as significant amount of spare pressure pumping capacity remains across the fracking industry and many of our customers continue to rationalize their feet fleets.

Further reducing the near term need for Kirby's oil and gas products and services.

Overall as compared to the third quarter, we expect distribution services revenues will decline modestly and operating margins will likely return to a small loss nonetheless, because the DNS business requires very little capital. We expect a segment will contribute positive free cash flow during the quarter.

In conclusion, the third quarter was difficult, but our efforts to contain costs resulted in solid earnings despite a difficult demand backdrop.

Although the economy is beginning to grind higher and we believe activity has bottomed across our businesses demand for Kirby's products and services remains well below pre covid levels.

And the fourth quarter, we expect overall earnings will be sequentially, lower with DNS slightly down inland flat to slightly down and coastal flat despite.

Despite the near term challenges we are confident curvy is in a strong position to recover once the material improvement in the economy materializes, which we anticipate will begin to occur in 2021 provided COVID-19 is contained.

Supply Marine transportation remains in check with limited new large construction and inland.

And no new incremental capacity planned for coastal and.

In DNS the economy will drive increased demand for on highway power generation and marine parts and service and the oilfields Kirby's, leading position as a leading provider of remanufactured services and new environmentally friendly pressure pumping equipment is also expected to drive increase day.

Man for this segment.

In the meantime from a liquidity perspective, we have generated strong free cash flow of $230 million year to date.

Which is which has enabled us to build significant cash on our balance sheet for these uncertain times. We expect this trend will continue in the fourth quarter with us generating strong free cash flow of $300 million to $350 million for the full year, which we will we will we will direct to reducing debt.

Operator. This concludes our prepared remarks were now ready to take questions.

We will now begin the question and answer session to ask the question you May Press Star then one on your Touchtone phone.

Yeah, you're using a speaker phone please pick up your handset before pressing the keys.

To withdraw your question. Please press the pound key.

As a reminder, we ask that you please and the questions to one question and one follow up.

And our first question will come from the line of Jack Atkins from Stevens May begin.

Jack you there.

David can you hear me Okay. Yeah, we've got guys. The morning, good morning, sorry about that thank you for taking my questions.

So so maybe if we could just starting to start with to.

The demand backdrop within within inland.

David could you could you may be kind of help us think about.

What's really driving your customers demand trends here is we look out over the next six months miles driven has picked up we're seeing the industrial economy sort of come out.

Oh that's.

Trough.

Do we do to see more of that to ultimately drive.

More volumes from your customers, both refineries and chemical to or is there something else going on it's impacting customer customer activity more broadly.

No I think it's the former in your alternatives area. Let me just give you a little context here.

If you look at it.

And utilization.

Pre covid, we were in the mid nineties.

Pretty robust.

Refinery utilization was in the mid to high 90% range.

At the bottom of Covid.

We dropped.

To 70%, maybe dip below 70% utilization on inland.

And refinery utilization got to the high sixties.

It's bounce back a little bit pre.

Pretty similar driving.

Utilization and the refineries got up to about 80%, but then it did back last couple of weeks down to 72, and I think it's about 75 right now across the system 74, six to be precise and when you look at our utilization it moved almost.

Almost in line with that.

And.

What do I think is going on I think that's all about.

Economic activities people driving it's diesel miles driven passenger miles driven and they are going up but.

Not enough to to get the demand up for the refiners too.

To really crank out there <unk>.

Products out of their of refineries jet.

Jet fuel is one of the big big problems.

The jet fuel demand is just way off.

So diesels off too and gasolines off but they are they are coming back to and that's why we say we believe our utility has bottomed, we're starting to see a slow climb out of that.

You can look at Tom Tom I don't know, whether you've done to that website online, but they they they track global traffic congestion and you can you can go to any city in the world really and look at global.

Congestion will truly is about how much car traffic and bus traffic as as in the cities and we're starting to see that come up.

Certainly not pre covid levels.

But even as this outbreak has continued you are still seeing the the congestion.

<unk> levels rise I mean, we track Houston pretty carefully and you can see.

Every week, it's a little better even even as cases rise and and what's happening and I can use curvy as an example, world's in backed up our offices around the country. We've got about 70 locations. We're open for business.

But we're doing it.

And a smart cautious way, we've probably only got about a quarter to a third of our people in the offices and we're rotating them in and out I think that phenomenon is occurring across.

Across the United States, So you're you're getting people driving again, but it's not the full crush that you'd normally seen so I think that in and of itself between passenger miles flown vehicle miles driven it's just not enough yet to drive.

That refinery utilization back up into the into the eighties and even into the nineties, it's just going to take a while and I think that's probably the biggest disappointment is how long this is taking and how long it's it's taken to grind up.

But it's.

It's on it's on a path to go up it's just much slower than I think any of us would hope.

Yeah.

With jet being so so bad I think when you look at the refiners in their crack spreads they're they're just atrocious, it's really tough form so.

They're juggling and running as fast as they can without jacking up their utilization because.

Basically.

Losing money.

The harder they run and that's that's what's keeping their utilization in check.

On an island chemicals, we've seen that come back a little better than refineries.

But their utilization is still down probably in the low seventies low to mid seventies, and where they were in the high high seventies low eighties in terms of utilization. So that's come back a little better I think thats about reemergence.

Asian demand.

And export of chemicals.

So we'll see.

As we've said Jack this is <unk>.

Demand driven downturn versus the supply driven downturn that we had from.

Basically 2015 through 2017, so we're we're a little more constructive.

Not at all.

Okay, David Thank you for that.

Sort of color and I guess, maybe for my follow up question.

The stock is training below tangible book value. Your your your profitable you're generating substantial free cash flow I know the goal is to delever.

At what point should we begin thinking about you guys being able to allocate capital towards buying back stock because I think historically you guys like to buy businesses.

Training below they're depreciated replacement value and I've got to think that at your current valuation relative to your long term outlook.

View this is a pretty compelling opportunity to maybe acquire your own business. So how should we think about that.

In light of your current valuation here.

I think.

I think you're thinking about it exactly the way we are right. Then we we just had our board meeting.

Clearly that part of the discussion.

We view.

Our earnings potential look we're we're the strongest player in both of <unk> and.

And our marine business in the industry in our view.

And.

Our earnings leverage when things come back is quite strong. So you're right. I think this is is an incredible time I do believe this uncertainty has.

Has us a little more cautious and we've been delevering to get our credit mix metrics a little stronger.

But clearly Kirby's curvy stock is in our view.

A great value it below tangible books so.

I don't want to commit to anything but it's certainly something we look at okay very good okay.

Okay, great. Thank you for the time.

Thank you and our next question on complying Microbubble on global research.

They begin.

That's about it.

Good morning, Michael Michael.

Yeah, I wanted to solve firstly I sort of a high level question.

Yes, I think it was the writings kind of it on the wall that is going to be tough year kind of pending pending.

Pending of Covid recovery add it's.

Taking a bit longer than than you and most expected.

Yeah, one of the one of the key themes, we haven't really hoedown at all during totaled has been.

It's a pretty broad D carbonization push and I'm just curious.

Maybe you can kind of setting kind of a resumption of normalcy to the side.

Seen a number of IOC.

But larger players start to position their businesses for.

Or maybe more expansive long term growth trends in that area.

Are you guys contemplating at board level or internally.

What the demand profile postponement really looks like and how it might be different than it was heading in I mean, obviously the business mix was.

Cycle over cycle was different kind of right heading into cover than it was say in 2014 in 2015, when you've got the mid.

Mid 20% margins with ease.

Wondering what the.

Ultimately be thought about.

I'll be has different dimambro fireworks post Covid and then what you can do to tap into some of those growth friends cause I think most people would agree to it.

That the long term growth trajectory of.

Maybe black oil and frak might not be enough to garner the kind of multiple but maybe it was 10 years ago.

Yeah, No I think that's an excellent question Michael <unk>.

Clearly.

G trend.

And the D. Carbonization trend is is not only their it's gaining momentum where.

We are working with with our.

Are integrated major customers on.

Both Christian O'neill, the President and we're Marine group.

And myself are on on different.

Committees with with some of our integrated major customers in our big chemical customers on deep carbonization and how we can we can do that in the inland space.

In terms of its total demand destruction I think it's going to take.

Take awhile to play out, but but clearly there is going to be some demand destruction on refined products as as we continue down this path towards the carbonization. So at the bottom line is you still going to need energy in the world. The energy continues usage continues to grow.

As the underdeveloped world expanded.

It's.

Livingston.

All right.

We are working on and actually some some.

Very nice carbon reducing projects throughout Kirby both in our marine space and also in Frak, we've been building.

Electric Frack units for five years now.

We're probably the market leader.

We're doing more and more electrification if you look at SMS.

That.

That.

That's good I think we're going to we're going to pivot and provide some projects.

I do think.

Barging is probably the best mode of station.

Move on a carbon friendly way if you look at our our carbon.

Footprint per ton-mile versus rail, we're probably 25% better and if you look at Trump trucking, we're probably an order of magnitude better in terms of moving product. So if anything margin should.

Should be.

Mode of choice to move.

Yeah.

I guess it easy to that.

Question to come off as kind of a kind of a high concepts.

Kind of a high concept window dressing.

Yes, it kind of tangibly in terms of your customer base pivoting towards.

Maybe a different long term future is that something you think manifests itself for you all in just a ramp and pneumonia and methanol volumes is there something where you kind of.

And then in tangible ways, where you shift your fleet mix and or maybe pivot the Stewart and Stevenson footprint does something where you can get a more diversified.

I don't know if it's anyway, I know I know that the DNS business services the nuclear industry already I'm just I'm, just wondering will be specifically whether the airways.

Gradually shift the book.

It's a higher growth sectors.

Yes.

Yes is the short answer.

These committees that Christian and I are on.

Alternate fuels.

Mentioned to have a methanol and ammonia well, we probably move more ammonia in the United States than anybody else in and we probably move more methanol in the United States and anybody else.

So those those would be great alternative fuels remarks are standpoint, but look.

Complex you start handling ammonia is one of the most dangerous.

Products, we carry so as we pivot to that that fuel choice it could be tough.

I would also tell you and we've got to be careful because we're under NDA is but we're looking at a couple.

When support type things that where our expertise in marine can support offshore wind.

So.

We're looking at at at the changing World and we've got to.

Lot lots of projects that that can bring that forward for us and and generate revenue.

But.

You are precisely correct is two of the big alternative fuels arm methanol and ammonia.

There is some talk of hydrogen obviously nuclear is interesting and we do have.

Good exposure to the nuclear business.

Think your bill is very against nuclear power for some reason, but it is one of the true ways to get carbon free energy.

Yeah.

Anyway.

I know you publish a lot on this space and we read your stuff regularly so thank you for that.

If you were to kind of an interesting excess for that so I'm just wondering to what degree that ultimately creates growth opportunities that maybe you wouldn't be talking about a couple of quarters to go. So I can can definitely follow up on it.

Just look back on an earlier question I think it was like a buybacks.

What tangible book Lily, one I guess, how realistic of that and then to give.

Given the leveraged profile and maybe in a in a pretty.

Uncertain future I guess near term, but.

In terms of how you look at the valuation would tangible book.

Would that be devaluation metric you guys are really focus on I guess.

Tend to think about it and that you guys are still trading and of course, the 9595 to 10 times EBITDA.

Still going to be at par north of what you'd be buying a new borrowed yet. So if you think about it and we're just like there's a asset replacement it's.

Yeah that.

That would be the equity prices still giving you guys credit for creating value, where they think you are buying hard assets.

That's going to be quite a any any any premium so is it.

It looks like the really thank you you would be leaning into that right now.

Yes.

Look at as we said we're focused on debt reduction right now in the interim.

It's certainly the stock price is very attractive to us that that said when we value things we use the DCF.

Not really we don't look at it from a tangible book value I do believe that's an indication of value for sure and one of the one of the things I think we're all trying to figure out is given.

Given the massive stimulus that's going on in the United States, the the deficit growing as much.

I think we're headed towards inflation and hard asset companies and our asset base actually is pretty good and an inflationary environment.

I don't know what what tools that said has but.

Paying off expensive that with cheap future dollars is probably one of the ways to get out of the massive deficit.

That we're going to have in the United States. So.

Inflation typically Kirby has done pretty well in high inflationary environments that Michael over from the from the debt reduction mode.

Davis covered we expect to generate substantial cash flow of the fourth quarter, which would put our debt level that level lower than it was at the last December and.

Or liquidity well over $700 million so.

The time, we need to do we believe that the time will need should reduce step materially.

Is not expensive and we will manage the credit metrics and make sure that remain investment grade, but we do see substantial cash flow and the company.

Okay I.

I appreciate your time guys. Thanks a lot.

Thank you Michael.

Okay.

Our next question complain Randy giving from Jefferies.

They begin.

How's it going.

Very well how are you doing alright, alright, so on the last quarterly call you got it too DNS improving in the third quarter, but remaining below breakeven levels. However, you were clearly able to turn a small profit here. So I guess what drove the speed was an incremental revenue or was it kind of law.

<unk> than expected costs, and then I guess following those cost reductions how high do you expect quarterly operating income could recover too and good or or maybe at least normal times.

Yeah. Good good question Randy.

Third quarter.

Kind of being above breakeven.

Was better than we expected I would say there are two factors one or cost savings was.

Came through a little stronger than we thought that our team is really going after everything they can.

As you would expect in this environment and that that was really good.

Then the second thing is we were able to shift some.

Some some environmentally ESG friendly frack units during the quarter that we had.

It hasn't been working on in hand, basically not on an inventory, but they were almost complete so we were able to ship.

<unk>.

It's a team now all of our all of our pressure pumping customers frankly, well in our marine customers to everybody seems to be very focused on carbon reduction and we had some units and some expertise in that that we.

We had some product that.

One of our customers was able to take in the third quarter. So that helped right that helped in the quarterly results I think your broader question is and it probably gets to what are we what are we thinking about in 2021 for DNS.

I firmly believe that returns to profitability.

I think the magnitude of that depends on where the U S. Economy goes I wish I wish I had a better answer than a more specific answer but I definitely believe we will be profitable in DNS in 2021.

<unk> two.

That I can't I can't answer because we just just don't know how how long this.

Grinding out.

Of economic growth going to take.

Certain sectors of the economy U S economy are rebounding.

Pretty fast but.

In the old industrial side of the economy is a little slower that said.

Yeah, I just mentioned ESG, we do have a lot of ESG friendly products.

Stuart Stevens and we're developing more daily.

This electrification trend is going on in and we have a lot of products in and around that so.

We'll see I wish I could give you a better answer Randy it's just.

A little too uncertain right now as we look at 2021.

Thus, there and I'm, assuming a lot of the cost you've been stripping out is relatively variable. So if business does return you can bring that back to ramp up operations right.

I guess for Bill the tax rate that has certainly been the line item that has kind of been all over the map I guess the last few quarters. So what what drove that eight 4 million tax benefit in the third quarter and then for modeling purposes, right and what kind of quarterly tax expense or maybe benefit should we use for.

Four Q 20 in 2021.

Yeah.

Good question again.

Also the cares brandy and what we as you know we can.

User Nols circle logo that go back and applied against Us.

And get tax refunds and again, if you remember that take care of that the tax refunds or in years when the tax rate was 35% versus so we actually get a pick up there in that effects. The tax rate, we had guided to 10% low 10% within just a nature of that.

There is some noise around any tax rate and of course, we actually had a tax benefit.

Respectively for this year I think if you use 5% or maybe a little less than 5% you'll be fine.

We do have some noise again that noise in another way to look at the noise. It's actually part of the reasons, we get cash there's cash associated with it so it's not a non-cash item in some ways.

But there is volatility Randy and I think for this year for use 5% or less you'll be fine and next and eventually we will transfer the 25% next year will be lower though lower than 25% because we do have it again it up the year 2020 does provide us some tax benefit.

Sure and then just to clarify that 5% is that for the full year or four Q no sorry, no I should've said that for the fourth quarter.

So there will be a attacks loss there'll be an expense on that line item I believe so but again, it's very very difficult and they put in.

It could be breakeven it could be zero it could be it should be at or around that okay.

Okay. There's so many moving parts.

That's fair I just didn't know if the eight four with something you were planning on duplicating all or anything.

In fact, if you look at it for the third quarter, we had about about 15 to 17 benefit because of that.

Yep, it's out yet.

Got it well hey, thanks again for the time good luck on the fourth day. Thanks. Thanks Randy.

Thank you. Our next question will come from the line of John Chapel from Evercore ISI. Please go ahead.

Good morning, everybody.

Good morning, John.

David I wanted to start on the on the demand side and I think conceptually the refinery utilization being low makes complete sense, but when we think about petrochemicals and housing and autos being two of the bigger and markets and housing is on fire autos are rebounding aggressively off the bottom are there any other end markets that are kind of pressuring the utilization at the <unk>.

<unk> or is it just a function of needing to catch up to these other industries that are recovering.

Yeah, I think that's the ladder.

Pet Kempson, then okay I think.

We've been pleased about some things like methanol for example has stayed pretty steady ammonia stayed pretty steady pressure products.

And I can use pressure products as an example, butadiene, which is a pressure product goes into tire manufacturing during covid. They shut it down because there was no real vehicle manufacturing going on I think you'll start to see that come back.

As demand for tires go up so there are some bright spots in petrochemicals, but.

Some of the some of the.

Pet Kim volumes and volumes go into.

Fuel Blendstock and whatnot.

The other thing is hurricanes didn't help heck Kim volumes at all in the third quarter.

Like Hurricane Laura for an example hit Lake Charles.

Really hard and.

One of our customers plants was shut down for a full month.

That's just really painful.

There's still some plants that aren't open in the Lake Charles area, there's still trying to come back up so.

There's there's a lot of noise and that but.

Kim has not been hit as hard as as the refinery complex, but.

They do interact with one another right because some of the pet him.

Blends go into they go into Blendstock and the refineries and whatnot. So.

There are somewhat linked.

Okay and then.

Tying that in can you help us think about contract renewals I know that they are not entirely lumpy, but maybe not completely smooth either with this precipitous drop in <unk> utilization and spot rates and kind of your outlook for four Q.

Is it gonna take some time.

Tennessee recovery in the margins because you're going to have term contracts reset lower for the next nine to 12 months or can we see the term contracts kind of stabilized as soon as you see the whites of the eyes on utilization back to 85%, where we can see a more aggressive margin expansion in the early part of 21.

Yes.

Well, you've heard us a utilization needs to be in the mid mid eighties to kind of get pricing positive pricing momentum with it in the low seventies, we are continuing to see pricing pressure in the spot market.

I think bill gave some numbers that we were.

Spot pricing was down in the quarter sequentially about 10% and probably down 10% roughly.

From a year ago term pricing and a term contract renewals was down more like mid single digits, which is a little better there.

The term contracts have a longer outlook and people people think about what's going to happen in the future more there versus spot.

I think we will see pressure in the fourth quarter on pricing still.

Think.

We are seeing utilization as I said, it's bottomed and it's starting to pick up we just need to get into that 80% range before.

Feel real confident about <unk>.

Margins going back the other direction I think we're going to see some pressure for awhile when in 21 that reverse is.

Is is too hard to predict right now.

I hate to say this because it sounds like a Pat answer a lot depends on covid.

I appreciate it David Thank you alright. Thanks. Thanks so.

Thank you all next question complain all Greg Lewis from D. T I G.

<unk>.

Yeah, Hey, thank thank you and good morning, everybody David you touched a lot on on the tangible book value of the company.

Clearly.

Then a little bit of pressure on <unk>.

Utilization I guess, what I'm wondering is and will you lay out the good chart.

Deliveries I guess, what I'm wondering is.

As you're talking to potential two things. One is typically you guys tend to be counter cyclical and reach out and go to ship yards when they're in need of orders to place orders maybe to keep those yard so <unk>.

I guess first is that something that you're thinking about doing where we are right now and then just to follow up on that as we think about barge pricing.

An asset values.

Is there the potential for any breakdowns that we could be seen as as we kind of progress over the next.

Guess as we headed towards year and just given the.

The challenges.

The sweeps kind of faced and 2020.

Yes.

Great.

Good to hear from you.

I would say in the inland market.

Work.

We kind of in the low seventies in terms of utilization. We're we're not we're not looking for extra barges right now so I'm going to build some new barges.

Really doesn't make sense for the near term for sure and as you've heard us say before we'd much rather by barges from another company, then and build new.

So.

I don't see us building new barges.

In the interim.

In terms of the new builds in the industry and the retirement.

Look we.

Think.

There's not a lot of new order's going into the shipyards to your point and I think the retirements are going up you can look at our retirements. We we expanded how many we were going to retire this year just looking at.

They're the discounted cash flow that they could generate for some of these older barges in it I think we're up to about 80 barges retired this year.

Retired are kind of.

Later.

So.

I just don't see is going into the shipyard to bill at this time Greg.

In terms of impairment.

Look.

The great thing is we're still making money I mean, if you look at the end of the market kind of mid teens margins.

That's pretty good.

That may go down a little bit but.

It it is still generating pretty pretty good cash flow. So we feel pretty good about that I think if you look on the barges.

Two.

The future or in the long term to cover its historical cost is not even a question I mean.

We are profitable if you look at it there's always a little a few things that we idol or a few things that we lay up to go away but.

I think the online franchise is so strong it's not something that I think there is any big risks.

Okay, Great and then I think you kind of touched on it but like clearly what we think about what.

What's the word I'm seen as soon as doing clearly he Frank always get.

Yeah. It's just it's a big piece of equipment on the oilfield, it's easy to kind of understand or are there other things that SNS is working on other products or anything where it can kind of kind of kind of move the.

Move the oilfield into a more environmental R. E. S. G kind of position beyond beyond the Frank or are there other things that the companies kind of looking at doing and working with customers and helping them move that forward.

Absolutely.

We've got a whole list of ESG friendly products that.

That one we've been selling for awhile and some that are newer.

I would say.

Just sticking with Frack, there's kind of three real good areas, one just a direct E frack, which.

You have maybe a turban generating electricity driving electric drive.

To the pumps.

And we've been doing that kind of work for five years would probably one of the the market leader in that in that space.

There are some others that are coming out with new ones.

Then there is what I would call electric drive, which nessus isn't necessarily.

Gas turbine driven to generate electricity, but you could have a.

Dual get a diesel gas.

Dual fuel engine driving electric generation to the electric drive.

And then there's obviously just the traditional instead of just burning diesel it's could be we call. It DGB, which is a cat prospect one of the one of the products out there is a cat product called DGB, which is dynamic gas blending where they can burn up too.

80% natural gas with no methane slip or littler little to note methane slipped. So these are all products that we work with our customers on and they are very ESG friendly, but I would tell you other.

Other areas just electrification.

Backup power.

Things that are going into electrification and you see you see it, particularly <unk>, but but there's a trend towards electrification around around the United States and the world for that matter.

And we have some products that we offer into that space.

We do for example give you. Another example, and Hurricanes, we have we have standby power and.

Literally on.

Essentially an 18 Wheeler truck that can come in and plug into the back of the big Big box store to get it open for communities that have been impacted.

Obviously, we keep refining and developing how we can do that more efficiently.

Think about.

Kind of an electric caddy, where you can just plug into the back of the store versus.

Spending a lotta time.

Rewiring things and splicing into into a stores electric.

Connections. So we're we're working a lot of things like that it's it's an exciting time.

<unk>.

<unk>.

It's part of where where the world's hasn't right now so we're trying to capitalize on it.

Absolutely, Okay, Hey, everybody. Thank you for your time.

Thanks, Greg.

Earlier, we'll we'll take one more one more question.

Sounds good our next question will come from the line now Sanjay where my Swami from Bank of America, you may begin.

He got it thanks for.

For taking my question.

All right.

A simple one to start.

I was looking at the revenue Tom Mall.

And the quota and that was $8.09 so just to.

All my question I think that was up 11% year on year. It was that was that just a function of the below a ton miles all I mean, how do we how do we think about that.

Yes.

It's interesting.

Revenue per ton-mile can move around a lot depending on on the voyages. So if you are.

If you are just doing a bunch of cross channel.

Moves in Houston, you'll get have low.

You can have low.

10 miles, but pretty good revenue because it's it's about that that move Conversely, if youre going upriver or you can have a lot of 10 miles in the revenue per ton mountain drops.

I think we just had some noise in the quarter do you have the numbers bill.

Yes in the quarter and remember to that of this quarter with their all the hurricanes and the delays there were very low ton miles relative terms were last year was the third quarter is an excellent quarter from the point of view of movement. We went so I do notice that you do point out. The fact that you know it was eight nine since this quarter last.

Year was eight cents.

Yeah.

So there's a lot of things there, but in the end it a lot of it relates suggests David said the length. It as well just the weather last this year with all of those hurricanes it really froze things for extended.

70% of our our business is under term contract so they they would be.

Even if you're not move and you'd probably get some some revenue and very little tunnel.

But I think now that that makes a lot of sense. Thanks for that.

And just for the follow up question. It just it just made me thinking about potential second wavers infection on a potential but ATT at right now.

And maybe put the potential saw the kind of lockdowns.

Maybe you just can you can you talk to the potential scale of the cost cutting kind of initiatives that you can take and so I just thought that you can take out of books.

And that's in England on in the second quarter, you guys did a great job of.

Of taking cost out with in England, and now Dns's path to profitability such as maybe the potential scales of the cost of them both of those businesses just to keep it keep the margin somewhat steady.

Yeah, I mean, we continue to fight, but as you as you know.

Is.

The longer you go after cost cutting the harder it gets right.

I think and marine we've taken out probably $120 million in cost.

And.

That's an enormous amount.

We're still looking at our cost structure and looking for ways to cut it similarly, we've probably taken out.

Well very painfully, we've taken a lot of heads out of our DNS business.

Is there a lot more to do there.

Not a lot is my short answer.

So.

That's part of the equation on thinking about margins right.

<unk>.

The levers that we can pull to pull down costs are are still pretty.

Pretty soon right now because we've taken so much out so far.

And.

And every every company.

As things get worse, you get smarter about how you can take classes. So we're continuing to look at that.

And.

I think one of the keys, though is.

Luckily no. This is a demand driven.

Situation, we know demands coming back we know there's huge tent.

Desire to get back to normal life.

And I do think of vaccines, not that far off and who knows where it.

When it gets too too is sufficient distribution number and has an impact.

That could be.

My mind worst case mid mid summer of next year.

And.

As the economy opens back up the demand will come back I think there's a huge amounts of.

The pent up desire to go back to some some type of normalcy and.

So we don't want to cut.

To use the proverbial say.

We've cut cut the fat out cut into maybe a little of the muscle, but we certainly don't want to cut all the muscle out or it gets to the bone because we've got to be able to respond.

Some very long winded answer to to his sorry about that.

I think so.

That's great re look at it and just part of the issue in the third quarter, which was the high inventory levels, our customers had and they work those down so.

As the demand our demand is linked their demand and when they had high inventory as you can imagine what they were doing so we think that.

I think personally that what will happen even in a lockdown scenarios it might be more it will be more steady from our site. It may not improve but it'll be more study.

That's it I appreciate it thanks a lot.

Okay. Thank you.

Alright, Thank you Sanjay and thanks to everyone for your interest in Kerby.

Participating in today's call. If you have any questions or comments you can reach me directly today 7134351545.

Everyone and have a great day.

Thank you.

The conference hasn't also created thank you for attending tastes presentation you may now disconnect.

Okay.

Okay.

[music].