Q1 2022 Kirby Corp Earnings Call
By pressing the star key followed by zero after today's presentation there'll be an opportunity to ask questions. We ask that you limit your questions to one question and one follow up.
Jack a question you May Press Star then one on your Touchstone telephone 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 Holcomb Kirby's VP of Investor Relations. Please go ahead.
Good morning, and thank you for joining US with me today are David <unk>, Kirby's, President and Chief Executive Officer, and Raj Kumar Kirby's Executive Vice President and Chief Financial Officer.
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 Corp 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 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 very.
These factors, including the impact of the COVID-19 pandemic on the company's business.
A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2021, I will now turn the call over to David.
You, Eric and good morning, everyone.
Earlier today, we announced first quarter earnings of 29 per share the quarter's results.
Results reflected improved market fundamentals in both marine transportation and distribution and services.
As anticipated our marine transportation business was significantly challenged by the COVID-19, Omicron variant, but the magnitude was at the high end of our guidance range with a total impact of approximately <unk> 10 per share.
We also continued to experience significant supply chain constraints in distribution and services, which delayed sales during the quarter.
Looking at our segments in Marine transportation overall inland market conditions improved during the quarter.
Our financial results were significantly impacted by omicron with virus cases escalating across the U S. During January and February we experienced modestly reduced customer volumes and a decline in our barge utilization to the mid 80% range. We also experienced a material increase in pause.
Byron cases, amongst our Mariners, which resulted in Crewing challenges lost revenue and increased operating costs.
That said inland market conditions rapidly improved in March as the cases of the Omicron variant declined we saw improving fundamentals with refinery utilization rising to above 90%, resulting in increasing customer demand.
Consequently by mid March barge utilization improved considerably to above 90% for the first time since the start of the pandemic.
These factors led to tight market conditions improved spot market pricing and further increases in term contract rates.
Overall first quarter inland margins were in the high single digit range, but we experienced notable improvement during March with low double digit operating margins for the month.
In coastal market conditions modestly improved with our barge utilization increasing to the low 90% range. We also realized some small pricing gains for the first time in two years.
Similar to inland coastal was mirrored materially impacted by the Omicron Barrett in January and February .
Reduced coal shipments in our dry cargo business also contributed to sequentially lower revenues and increased losses.
Overall first quarter coastal operating margins were negative in the mid single digits, but we did see results improve closer to breakeven in March as the omicron impact dissipated.
In late March we officially announced our entry into the offshore wind market with our newest business line Kirby offshore wind.
This entity will be providing feeder barge services that transport wind towers and turbines from ports to offshore wind turbine installation vessels we.
We are partnering with Maersk using a 20 year firm agreement and our first joint project will be installing wind equipment for Empire wind a joint venture between <unk> and BP off the coast of Long Island, New York.
We intend to construct two new tank that two new deck barges with low emission diesel electric hybrid hybrid tug boats for combined capital expenditures of approximately $80 million to $100 million over the next three years.
The Empire Wind project is expected to commence operations in late 'twenty five or early 'twenty six pending the completion of merch new wind turbine installation vessel. We are very excited about this new growth area, and particularly pleased to partner partner with World class operators such as Maersk.
Ecuador and BP on this foundational project for the U S offshore wind market.
Moving to distribution and services or markets remained strong across the segment and contributed to meaningful sequential and year on year improvement in revenue and operating margins in.
In oil and gas strong commodity prices and increased oilfield activity contributed to improved demand for new transmissions and parts and distribution in.
In manufacturing our backlog continued to grow with incremental orders for new environmentally friendly pressure pumping equipment and power generation power generation equipment for E Frac.
However, as expected significant supply chain issues delayed many new equipment deliveries during the quarter.
In commercial and industrial overall demand remains solid across our different markets with the largest growth coming from the marine repair and on highway sectors demand was also strong in our thermo King refrigeration business, but its revenues and operating income declined sequentially due to continued supply chain.
Issues.
In summary, despite significant COVID-19 and supply chain challenges in the quarter. Our first quarter results reflected continued improvement in market fundamentals for both of our segments.
The inland market is improving demand is strengthening and rates are moving higher while the coastal market remains challenged our barge utilization is solid and we realized modest rate improvements for the first time since the start of the pandemic.
Demand in distribution and services is strong and our backlog continues to grow well.
While supply chain issues are expected to persist for the foreseeable future. We see continued growth ahead all of this should bode well for Kirby and ultimately drive incremental earnings growth as the year progresses.
In a few moments I'll talk more about our outlook, but first I'll turn the call over to Raj to discuss the first quarter segment results and balance sheet.
Thank you David and good morning, everyone.
In the first quarter of 2022 Marine transportation revenues were $355 5 million with an operating income of $16 9 million and an operating margin of four 8%.
Compared to the first quarter of 2021 Marine revenues increased $54 6 million or 18% and operating income increased $15 million compared to the fourth quarter of 2021, marine revenues increased $5 million or 1%.
Marine Transportation operating income increased $15 million year on year from significantly improved market conditions, resulting in higher revenue, but declined $8 7 million sequentially.
As David mentioned, the Omicron Varian materially impacted our marine businesses in the first quarter, which resulted in loss revenue crewing challenges and increased operating expenses.
The omicron impact was approximately <unk> <unk> per share.
Normal seasonal winter weather inflationary cost pressures and rapidly rising fuel costs, which could not be immediately rebuild but customer contract terms also contributed to lower operating income.
The inland business contributed approximately 78% of segment revenue average barge utilization was in the mid 80% range for the quarter, which compares to the mid to high 80% range in the fourth quarter of 2021, and the mid 70% range in the first quarter of 2021.
We did however, see barge utilization improved nicely to the low 90% range in March as the effects of omicron diminished.
Long term inland marine transportation contracts are those contracts with a term of one year or longer contributed approximately 65% of revenue with 58% coming from time charters and 42% from contracts of affreightment.
Improving market conditions contributed to spot market rates, increasing in the mid single digits sequentially and 15% to 20% year on year.
Term contracts that renewed during the first quarter will opt into high single digits on average compared to the prior year.
Compared to the first quarter of 2021 inland revenues increased by 24%, primarily due to increased barge utilization higher term and spot contract pricing and increased fuel rebuild as we saw the average cost of diesel increased by more than 50%.
Compared to the fourth quarter of 2021 inland revenues were up by 2% driven by increased term and spot market pricing and higher fuel rebuilds, but partially offset by lower average spot barge utilization and lost revenue related to army crop.
Inland operating margin was in the high single digits and was impacted by normal seasonal weather and significantly impacted by increased costs and creating inefficiencies related to the army Kron Varian.
We did however, see operating margins improve into the low double digits in March as the impact of Omicron subsided.
The coastal business represented 22% of revenues for the Marine Transportation segment average coastal barge utilization improved to the low 90% range.
Compares favorably to the 90% range in the fourth quarter of 2021, and the mid 70% range in the fifth in the first quarter of 2021.
During the quarter the percentage of coastal revenue under term contracts was approximately 80% of which approximately 90% with time charters average spot market rates and renewals of term contracts will higher in the mid single digits.
During the quarter coastal revenues increased 1% year on year with improved barge utilization and higher fuel rebuilt being mostly offset by reduced coal shipments in the dry cargo business the company's exit from Hawaii and loss revenue associated with the omicron variant.
Compared to the fourth quarter of 2021 wholesale revenues declined 2% due to reduced coal shipments the companys exit from Hawaii and loss revenue related to <unk>.
These reductions were partially offset by increased barge utilization and higher fuel rebuilds.
Overall <unk> had a negative operating margin in the mid single digits in the first quarter, which was significantly impacted by increased costs related to the omicron railroad.
With respect to our tank barge fleet for both the inland and coastal businesses. We have provided a reconciliation of the changes in the first quarter as well as projections for the remainder of 2022. This is included in our earnings call presentation posted on our website.
Now I'll discuss the performance of the distribution and services segment.
Revenues for the first quarter of 2022 with $255 2 million with operating income of $11 million.
Compared to the first quarter of 2021, the distribution and services segment saw revenue increase by $59 3 million or 30% with operating income improving by $8 1 million.
When compared to the fourth quarter of 2021 revenues increased by $14 5 million or 6% and operating income increased by $3 5 million.
In the oil and gas market favorable commodity prices and increased rig and completion activity contributed to a 71% year on year increase and a 20% sequential increase in revenues in.
In distribution, we experienced increased demand for new transmission transmissions and parts throughout the quarter. The manufacturing business also experienced a meaningful increase in new orders and deliveries of environmentally friendly pressure pumping an E frac related power generation equipment.
Overall oil and gas represented approximately 42% of segment revenue in the first quarter.
And had an operating margin in the low single digits.
On the commercial and industrial side increased economic activity contributed to an 11% year on year increase in revenues with improved demand for equipment parts and service in our marine repair and on highway businesses.
Generation was modestly down year on year due to the timing of major projects.
Compared to the fourth quarter of 2021, commercial and industrial revenue declined by 2%, primarily due to supply chain constraints in the thermo King business, which delayed many new product sales.
This reduction was partially offset by increased activity in marine and on highway repair.
Overall, the commercial and industrial business represented approximately 58% of segment revenue and had an operating margin in the mid to high single digits during the first quarter.
I will now turn to the balance sheet as of March 31, we had $32 million of cash with a total debt of $1, one 5 billion and our debt to cap ratio declined to 28, 4%.
During the quarter, we generated cash flow from operations of $32 million and we had net proceeds from sale asset sales of $14 million, including retired marine vessels.
We use cash flow and cash on hand to fund $35 million of capital expenditures, all capex as well as to purchase the assets of a small marine gear box repair company in the distribution and services segment that totaled $4 million.
During the quarter, we repaid $9 million of debt.
As of March 31, we had total available liquidity of approximately $886 million.
With respect to Capex, we continue to expect full year capex of approximately $170 million to $190 million, which is primarily comprised of maintenance requirements for our marine fleet.
We also expect to generate strong cash flow from operations of $420 million to $480 million with free cash flow defined as cash flow from operations minus capex of $230 million to $310 million.
We intend to use this cash flow to firstly repaid debt and secondly to fund any potential attractive niche investments and acquisition opportunities that create long term shareholder value.
We will continue to take a disciplined approach to pursuing accretive value enhancing growth opportunities.
I will now turn the call over to David to discuss our outlook for the remainder of 2022.
Thank you Raj.
While our first quarter results had some challenges we exited the quarter in a solid position.
We see momentum continuing to build and we expect our businesses will deliver improved financial results in the coming quarters.
In Marine refinery utilization has returned to pre pandemic levels, our barge utilization has been at or above 90% since mid March and inland rates are inflicting nicely.
In distribution and services demand is growing across the segment and we continue to receive new manufacturing orders.
While all of this is very encouraging we are mindful of near term potential headwinds, including new COVID-19 sub variance potential demand destruction, resulting from high commodity prices and prolonged inflationary pressures.
As always we will diligently manage these factors and continue our relentless focus on cost and working capital management.
Looking at the outlook for our businesses in more detail in inland marine with omicron headwinds, mostly behind US we expect a very favorable market going forward strong refinery and petrochemical plant utilization increased customer volumes and minimal new barge construction should.
Tribute to our barge utilization being at or modestly above 90%.
These favorable dynamics are expected to yield further improvements in the spot market, which currently represents approximately 35% of the inland revenues as.
As well as improvement in term contract rates.
Significant increases in fuel costs since the beginning of the year are resulting in higher rebuild revenue to customers.
Fuel rebuilds are a pass through to customers and as a reminder, they come with no associated profit.
Additionally, fuel escalators on term contracts of affreightment can take a quarter to roll.
Through the P&L.
This coupled with inflationary pressures are expected to be near term margin headwinds until all of our fuel and other escalation clauses reset overall for the full year, we expect inland revenues will grow 15% to 20% with progressive growth throughout the year as business.
Continues to improve and term contracts continued to renew we.
We expect near term inland operating margins to be in the low double digits and to continue so it continued to gradually improve as the year progresses, barring any further fuel or inflationary headwinds.
In coastal market conditions are expected to modestly improve through the year, but remained challenged by underutilized barge capacity across the industry.
Despite the industry softness Kirby's coastal barge utilization is expected to be strong in the 90% range.
Full year coastal revenues are expected to be down in the low single digits, driven primarily by the company's exit from Hawaii and reduced coal shipments in our offshore dry cargo business.
Starting in the second quarter, we expect increased shipyard activity from scheduled regulatory surveys and ballast water treatment installations on certain vessels. This is expected to continue through the fourth quarter. These factors should be partially offset by improving market dynamics small rate gains and favorable barge.
Utilization.
Overall coastal operating margins are expected to improve relative to the first quarter and range between a low single digit loss to near breakeven as the year progresses.
Yeah.
Looking at distribution and services, we remain we maintain a favorable outlook with strong demand for equipment parts and service and distribution and a solid backlog and manufacturing.
And oil and gas we expect the current commodity price environment will contribute to further increases in rig counts in fact frac activity in 2022.
Industry analysts currently predict U S land rig counts will rise to near 700 by year's end, which would represent a full year average increase of approximately 40%.
Similarly, the average active Frac crew count is expected to climb to as many as 250, representing a 20% increase over 2021.
With this growth, we expect to see increasing demand for transmissions engines parts and service and distribution and manufacturing we started the year with a strong backlog, we added new incremental orders in the first quarter and we expect this trend will continue.
However, we do expect that supply chain issues in long lead time items from Oems.
<unk> extend through the year and beyond the year and remain a challenge.
These issues are likely to contribute to some choppiness with new product deliveries shifting between quarters and potentially into 2023.
In commercial and industrial we anticipate strong demand in on highway with increased trucking and municipal repair work continued improvement in bus ridership and increased demand for thermo King refrigeration products.
In power generation, new backup power installations parts and service activity are all expected to remain solid as demand for electrification and $24 seven froze.
Marine repair is also expected to be strong with increasing oil and gas activity in the Gulf of Mexico, and improved commercial markets on the east and west coasts.
For the full year, we expect revenue growth in the low double digit percentage range for commercial and industrial.
While supply chain issues could impact new product and equipment timing in distribution and services. We continue to expect 2022 segment revenues will increase by 30% to 40% year over year with commercial and industrial representing approximately half of segment revenues in oil and gas.
<unk> the other half.
We expect segment operating margins will be in the mid single digit single digits for the duration of 2022.
To conclude.
The first quarter was not without its challenges, including COVID-19, and supply chain issues. However, we exited the quarter with strong momentum and we are well positioned to meaningfully grow earnings during the remainder of the year.
And inland customer demand is strong with barge utilization returning to pre pandemic levels and rates moving higher.
The price of a new barge remains at historical highs and we expect extremely limited new barge construction this year.
This should drive continued improvement in market dynamics and contribute to healthy earnings improvement as the year progresses and.
In coastal although the market still needs more time to recover we saw modest improvements in demand with our barge utilization above 90%. We also realized from rate gains for the first time since the pandemic started.
These factors combined with our efforts to rightsize the fleet and exit unprofitable markets will result in reduced near term losses, and it will better position us for better days in the coastal business ahead.
In distribution and services, we saw strong demand and see strong demand in commercial and industrial.
And oilfield fundamentals are favorable with the current commodity price environment.
This is expected to drive incremental activity for new OEM equipment parts and service across our distribution businesses and.
In manufacturing, although supply chain issues continued to pose a headwind our backlog is very strong demand for environmentally friendly pressure pumping equipment continues to grow and we see activity picking up with improved revenue and returns through the remainder of the year.
As we look ahead, we intend to continue capitalizing on our strong momentum and delivering improved financial results. Operator. This concludes our prepared remarks, we are now ready to take questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone telephone.
If youre using a speakerphone please pick up your handset before pressing the key to withdraw your question. Please press the biology.
As a reminder, we ask that you. Please limit your questions to one question and one follow up.
Our first question comes from Jack Atkins with Stephens You May proceed with your question.
Okay, great. Good morning, and thank you for taking my questions.
Yes, good morning, Jack.
David I guess, maybe to start with inland Marine if we could I guess I'd be curious to get your perspective on maybe how the year has progressed relative to.
Maybe your initial expectations.
When we entered the year, obviously COVID-19 .
<unk>.
Volatility in January and February , but just from my <unk>.
Industry structure perspective, you think about the progression of pricing the progression of your utilization rate.
That proceeding may be in line with or perhaps better than you initially anticipated I guess, maybe following up on that.
We think about where margins can go in the second half of this year.
If you are in the low double digits in the second quarter, perhaps is it right to think that mid teens or maybe even higher than that is realistic for the second half of the year, just trying to kind of bracket the opportunity set there. Thank you.
Yes sure.
Yes. The short answer is yes, the second half could easily see mid teen margins, but let me walk through kind of the industry structure and pricing dynamics.
The progress that we've seen in inland marine.
And I would say, but for omicron, it's been actually better than we expected.
Let me spend just a few minutes on omicron, though because.
Amit.
Did hit us pretty hard you'll remember last year Delta variant hit it hit.
Hit the fleet and we had some crewing issues, but omicron was much worse actually.
One point, Jack we had 15 inland boats down with cruise with Covid I mean, it once it hit a crew member it would spread through the entire crew and we'd have to quarantine the boat and sometimes shut it down and get people off and then backfill with either charter boats or other boats and so there was a lot of cost in.
A lot of disruption.
And that hit Us really hard in January and February it wasn't too dissimilar to what you saw in the airline industry, you remember them canceling flights.
Throughout January and into February we saw that.
I think we characterize it is costing us about <unk> <unk> in the quarter most of that was in the inland side.
Just a little bit on the offshore side, probably 80%, 90% was in the inland side.
We did have a couple of big offshore units go down with with the omicron variant to the.
The good news is as soon as that started dissipating.
In March.
Things really started hopping.
One refinery utilization popped back up it was a little depressed with omicron.
But now.
Into March it got up above 90% and it's still going strong.
The higher commodity prices on a no doubt helping.
We saw our barge utilization jump up in March into the nineties low 90% range. We saw some pretty strong pricing I mean, just for the quarter, we averaged 15% to 20% on spot pricing increases and I would tell you in March it was probably closer to 25%.
But for the quarter it averaged 15% to 20% on spot on a year over year basis on contracts, we were in high single digits.
For the quarter and that momentum.
Was stronger in March and throughout the rest of the quarter. So.
And I would tell you is that it's carried on into April .
So we've seen really good.
Dynamics of supply and demand are very tight.
As your as you are aware barge price pricing for new barges is up considerably.
New 30000 barrel barge clean clean barge costs about $4 2 million a black oil barge is about $5 2 million and to put that in context, if you were to build.
Two barge toe brand new equipment.
You'd need rates.
Oh, well above 10000, a day to justify building new equipment. So.
That new new equipment pricing is absolutely, helping the structure of the industry. There is not much new newbuild equipment, there and if you were to build new equipment you'd need some pretty strong prices to justify it.
And then there's the demand side the demand side continues to grow we're excited about that you can see the refiners are doing better the petrochemical companies are doing better.
So from a supply and demand standpoint, it's probably better than we would have expected and I would tell you.
Christian O'neil, who has been doing this for almost 30 years said this has been about the best pricing environment <unk> seen.
So yes, we feel pretty good about it now all that said Jack as you know we've got some inflation.
In.
And costs.
We've seen some some pretty heavy inflation.
Crew costs in particular going up but Raj why don't you share a little bit on the inflation data yes. Thank you. Thank you David.
Inflation has.
It has.
Been an issue.
Everything in all industries right now I mean, we're looking at.
<unk> going up 25% foods gone up 10% and if you look at food poultry chicken fish, that's gone up like 14% to 15%. So that's quite sizable increase their.
Voyage costs have also gone up quite a bit 10, 10% to 12% there so inflation is.
Come up meaningfully we're managing at managing through it these price and rate increases that we have have.
Been favorable have been helping us, but we need to see real price increases.
Nominal price increases.
So it's a long way of saying sorry for the long winded answer here Jack that the industry structure is about as good as we've seen in a while on the inland side.
We are getting price increases we need to get the price increases.
And the market is very tight and looks to be holding with the tightness now.
There is one caveat I would say we're all.
All looking at the potential for a recession and the good news is the economists are saying, 10% to 20% chance of a recession, so it's still pretty low.
So when you look at the outlook for margins in the back half of the year and into 'twenty three that would be the caveat otherwise I would say youre going to see mid teens and then.
I think kind of late 'twenty, three you'd probably see margins in the inland business starting with the two so we are.
So we're pretty excited about where we are in the cycle and I would say if anything it's gone a little better than we anticipated once we got through through omicron, Okay Thats good.
Great to hear maybe one quick follow up.
If I could on the on the distribution services side.
Obviously demand is extremely strong, but there's just.
A limit on what you can do because of the lack of components and parts.
Supply chain challenges I guess.
How does the strong demand kind of potentially manifest itself in the business and if you can't if you cant do more newbuild work is there opportunity to do some remanufacturing work do you see tailwind from a pricing perspective can you kind of walk us through.
I would think it would be a benefit even if you cant do more units.
Just given how strong the activity levels would be.
Yes.
<unk>.
It's a good good question, we are seeing supply chain delays in that business in and frankly some of it has gotten better some of it's gotten worse I can give you. An example, one of our major OEM engine suppliers a.
A year ago 26 week delivery lead times.
And then they went to 56 weeks and now they are out to 80 week delivery times on major engine pieces. So.
That hasnt been helpful that said.
I'd tell you that our backlogs up good 500% from kind of a lows of last year, our book to bills well over.
Well over 1%.
A one time so.
The inbound continues.
We're managing through the supply chain disruptions.
Got in a little better in some places a little worse in the other places, but I think it's.
It's stable as stable, but delayed.
So that's.
That's manifesting itself I would tell you.
We expect margins to increase in that business over the next 12 to 24 months.
As we progress this backlog.
The structure is pretty good we are seeing our Oems ask for.
Big price increases we had one major OEM ask for a 15, 5%.
Price increase.
On one of their major engine lines.
That that we're passing on we're working hard to pass it on I would say the good news is that anything ESG related.
Has been really strong.
<unk>, okay, but.
When we look at our customers is particularly manufacturing they really if they're deploying new capital or significant dollars. They want a good ESG profile.
Our electric Frac backlog has grown.
Our power generation equipment that goes into driving electric Frac is has gone up a lot.
So anything.
With a low carbon footprint or an improved carbon footprint has been growing.
And thats good.
The inflationary pressures are helping a little bit we're pushing price increases.
And.
We're keeping up with the inflation and maybe making a little headway there so.
So it's all good it's a good construct and what we're seeing.
Would it be better if we didn't have all the supply chain.
Delays sure but.
We still feel pretty good about how it's shaping up.
That's great David Raj Erik Thanks for the time.
Thank you thanks Jack.
Thank you. Our next question comes from Ben Nolan with Stifel. You May proceed with your question.
Yes, David.
And Raj and Eric.
Well I guess for my first one.
We'll stay with the barge market a little bit.
<unk>.
Maybe I'll sneak two in here, but David you mentioned the market would need $10000 a day.
To justify building.
Any just sort of level set what's the kind of.
And where we are at the moment.
If you could help there and then sort of associated with that can you talk to sort of what the towboat market supply and demand looks like in a moment.
Yes sure.
The.
While the level set that $10000 number is really if you build 230000 barrel barges that $4 2 million each.
$8 4 million and then you put.
$6 million to $7 million towboat on top of but youre talking about $15 million in capital in to get it.
10% type return youre going to need $10000 a day on a day rate, that's where I came up with that number we're below that now where pricing is up quite.
Quite a bit.
I don't want to get too specific on current pricing because I don't think our attorneys would like that very much but.
It's quite a bit is 30% below.
Of that 10000 dollar numbers. So it's got a ways to go.
But.
The structure is much better in terms of pricing and.
And improving.
And then the second part of your question was I'm sorry.
About the tightness in both markets.
Actually that's that's probably what's helping drive pricing more than anything else in the market right now.
Cruiser short.
Fortunately, we have Kirby started our training training school up in earnest in January of last year, and we've been hiring all along so our crewing situations, okay, but for the impact we had with omicron, but I would tell you crewing is tight across the entire industry.
I think there'll be more boats working if they could be crude.
We are seeing labor.
And wage wage pressure.
The industry is really tied on tow boats and that has helped driving.
The whole pricing dynamic.
We can't get the crews.
Whether it's the great resignation or people just decided.
They don't want to be away from their families by living on a boat.
It's put pressure on the on the Crewing.
<unk>.
And that's.
That's actually not bad for for the price dynamic in the rate dynamic for our industry, but it is to your to your question is very very tight on Crewing right now.
Okay. That's helpful.
And then two for my follow up just to switch gears, a little bit on to the.
Well.
I guess, it's still it's still on the marine side, but.
Thinking through the.
The offshore wind business a little bit.
Congratulations on winning that deal.
Just trying to think about how you're thinking about the cadence of incremental development is this going to be.
Be something where maybe maybe you get one of them a year or something like that or is that market progressing.
More quickly.
And kind of.
Where we've come thus far.
Yes, I'm well.
Christian and I are very bullish about this market.
When we look at what's been announced on the projects.
That we know are coming forward I think it's 32 gigawatts of power going on offshore wind all on the eastern Seaboard, that's just the eastern seaboard. So.
When we look at the potential demand for vessels to service that.
We're building two feeder barges, but the demand for.
For that kind of service is probably 26 vessels to service that so we think that market is going to be tight.
We know of basically two other people building vessels right now Dominion's building one and then there's another group building building some vessel vessels to do that so theres three market entrance. If you will that we're aware of I know other people are looking at it but when we think about that.
Our need for probably 20 to 25 vessels.
Over the next.
Next decade, we feel pretty good about that structure. We're just starting with these first two.
We're very excited about the efficiency level of this feeder barge to installation vessel we think.
From a traditional standpoint, that's about 30% more efficient in terms of.
What our customers will be paying for it.
And again this is empire wind, which is which is <unk>.
<unk>, we're really excited to be partnering with.
The World class operators like Maersk and BP in Ecuador on these first set of projects. So we'll see where it goes.
Again.
It's going to take its 2025 before we will have these vessels out probably really don't start working until 'twenty six.
You will see there is there is a lot going on at these projects take a while to get going these new builds take a while right now to go.
And.
So, but we're very excited about it.
Alright, well I appreciate the color. Thank you David.
Yes, Thanks, Dan.
Thank you. Our next question comes from Jon Chappell with.
Evercore you May proceed with your question.
Good morning.
Hey, David.
How are you.
Okay.
Back to the barge business.
Again, we frequently asked about the <unk>.
Timing of contract renewals clearly spot moves much more quickly you have a pretty large book. It takes time basically like 12 months to kind of Mark.
The book to market, but if we try to think about how fast spots moved and the leverage of your model. If you could wave a wand today and reset your entire contract portfolio at the appropriate.
Spot level.
How much would that move your contract pricing on average and it doesn't update not 5%, 6%, 7% is it mid single digit high single digit low double digit and then in that immediate.
Of pie in the Sky, what would the margin look like.
Our inland barge, if you were able to reset at all today.
Yeah.
If we were to reset everything right now.
Based on prices.
Everything will move up about 15%.
That would.
Terms of rates.
You do know that most of that most of the while the fourth quarters. The heaviest quarter in terms of term contract roll remember, we do have 35% spot.
That spot is in kind of day to day spot some contracts that are six months in length in the spot market, but.
If you were to roll that all in today. It was everything was mark to market.
I think we'd be.
We get pretty close to 20% margin.
That's just a guess I would have to pencil it out but certainly high.
Mid to high.
Double digits.
If you could wave one but as you know it takes a while for all of these contracts to roll in.
Some of the contracts are multi year and the good thing about the multiyear contracts as they do do have CPI and labor type escalators.
I would would say also the fuel dynamic is something that.
Not that we're getting pencil whipped but.
In the first quarter of last year. The average fuel price. We paid was $1 65, we averaged $2 50 in the first quarter, but I would tell you in March and April were paying anywhere from $4 to $4 75, a gallon so.
One.
Thats all comes in as revenue with no margin. So it's a little dilutive to margin, but two.
Some of those contract escalators take take a quarter.
Our quarter to roll through so.
He will be a little impacted in our second quarter margin, but by third quarter those those.
<unk> will all catch up so there is a little bit of fuel dynamic in our margins.
But I would say.
And you know this man, we work hard to John we work hard too.
To make sure fuels are pass through we don't want to make money on fuel our customers don't want us to make money or lose money on fuel. So we work hard to make it a pass through.
But back to your core question.
The rate environment is very positive and if.
If we could wave a magic, one which would be lovely.
We get a nice pop in margins okay.
The only thing I'll add to that to David's comments are.
David mentioned fuel I think we're also to my earlier comment seeing.
Inflationary cost in other areas right, so we need to be mindful of those.
This increase is due as we progress through the year, so coming back to the fuel comment.
Second half I do see us cycling out of the <unk>.
Fuel situation coming out nicely.
But thats.
Good bridge to my follow up Raj.
Earlier in the call. When you were talking about a lot of these inflationary pressures and especially when you were answering Ben's question about the Crewing issues I was thinking to Davids comments three months ago that you could touch to handle on the margin. It sometime in 'twenty, three which you have affirmed that I was thinking of the next step, though which is how is that changing the competitive landscape.
A lot of competitors out there that don't have your size or your scale that much that must have much more difficult times handling these higher costs higher barge prices crewing issues.
You've bounced off the bottom now and nobody wants to sell so given the fact that the rates have improved but this cost inflation is probably more punitive to the smaller operator does this increase your abilities to maybe further consolidate the market at this point.
I'd like to think so.
But I will tell you the whole industry has taken the rate structure up.
They.
I think everybody in the industry is feeling the inflationary pressure in the crude pressure and they know.
They need to respond so I think the whole industry.
Rate base has come up off the bottom.
Got you.
Obviously, our size does have some advantages but.
I think.
The industry is responding look when you can't crew.
Crude tow boats.
You got to you got to have right to go out and hire or make sure youre supporting the crews and in your vessels. So.
We're seeing it across the across the board the structure to use the structure of the industry structure is probably about as positives we've seen in a while.
But.
We'll see about acquisition possibilities is as you know thats been very hard to predict.
But we're staying disciplined is the way I would leave it.
Okay that makes sense. Thank you David Thanks Raj.
Thank you. Our next question comes from Ken <unk> with.
Bank of America, you May proceed with your question.
Hey, good morning, great stuff on passing inflation through I guess just to just so I understand that quick follow up there is there something that is is it just the timing of the contracts when you get past the non fuel through it that why Raj you were saying in the second half I just wanted to understand that that real quick but my question is on on D&S.
Yeah.
What gets you above mid single digit margins. There is that just production volumes kicking in is that labour offsetting the gains maybe just talk about what can ramp the DNI segment margins, Yes, let me take both of those real quick.
Yeah the inflation.
Roger's comments were more about fuel right. These fuel escalators and fuel rising 50% has been.
A little bit of a headwind right.
Hugh.
You've got to wait for those escalators to kick in in <unk>.
What we're really talking about is those escalators will start showing up in the third and fourth quarter in a meaningful way so that'll be a help on the multi year contracts that CPI and PPI those usually reset in the fourth quarter.
So we wouldn't see those.
Until the fourth quarter.
So that.
The multi year contract as the only real exposure there most of the other contracts.
Kind of renew annually and as you recall, Ken most of that in the fourth quarter. So we feel pretty good about our ability to.
To stay up with inflation and so far certainly in the spot market, we're staying up with inflation. So.
We're not not not.
Too worried about the inflationary pressure, although it is there.
The second question you had was on on the margins on DNS I would tell you in manufacturing.
Given that a lot of the new orders were.
The first series and some some new generation electric equipment.
The margins were really low on those.
As you imagine with a first generation or.
When new generation there is a lot of engineering costs and a lot of rework as you as you dial it in and so the initial orders that we had had low margins and they are improving so I do believe strongly that we will get to.
High single digits.
And our DNS business is as this backlog progresses.
And so we'll start to see that come in as the year progresses, and certainly into 'twenty three.
A lot of that depends on the supply chain again, you heard the kind of the 80 week delays on orders for new engines.
As a long time, but.
We still feel pretty good about margin progression.
Yes.
And your thoughts on gains on sale as this just.
Barges that are that are coming due for exploration that you are selling what are the gains that you are starting to roll.
Yes sure.
Every every quarter, we have $2 million to $3 million in gains on sales typically this quarter was a little higher is about for I think a little over four.
And a lot of that was.
Coastwise equipment that we.
We sold after after last year's move where we cleaned up and so it was a little more than the normal tip.
Typically we try and keep that a little lower but.
We were cleaning up some of that old coastal equipment in and with the scrap steel prices. It helped a lot and we were able to get.
Some better some better pricing on some of the stuff that we sold.
Alright.
<unk>.
A little anomalous, but.
It should still always range in that.
$1 million to $3 million it was a little higher this year in terms of gains.
This quarter.
Okay. Thanks for that Dave.
It sounds like the setup here is exactly what you'd finally been waiting for rate with pricing finally kicking in margins on inland ramping up not really seeing capacity come in.
It's taken a while to get here, but good luck, thanks for the time and thoughts.
Yes, Thanks, Ken.
Thank you. Our next question comes from Greg Welcome Tulsky with Weber Research you May proceed with your question.
Hey, good morning, guys how are you doing.
Good how are you.
Great. Thanks.
David you kind of already touched on this a little bit, but I wanted to get your updated thoughts on the pace of the recovery in inland and we've talked about it being a little bit more on the slow and steady side of things versus cycles in the past, but given the pivot in March and April .
And the general sense of urgency for everything energy related globally.
Thoughts around the cadence or the pace of this recovery changed at all in the past call. It six to eight weeks.
Yeah.
Yes, we're pinching ourselves a little bit because of the last six eight weeks have been very strong.
Will that will that temper itself, a little bit I don't know, but.
Yes, I would say the pace. If it continues at this is faster than we had expected. So we feel pretty good about that what could derail. It is probably a good ancillary question.
I think we talked a little bit about.
A recession, but that still feels like a way a ways off.
I think the war, where all watch in Ukraine.
If something.
If something happens.
Bigger, they're more global that could derail things, so anything that could derail us probably big on the macro side I don't think theres anything structurally that we see within the industry.
That concerns us right now.
Our customers are making more money, they're busier their demands.
That's that's all constructive and as as we mentioned.
Cost of building new equipment is just really high given steel prices in particular, so we feel really good about the structure and don't see much too much to change that industry structure right now so.
The short answer is yes, the paces, a little better than we than we had been anticipating.
Great. Thanks, and then a follow up also on inland correct me, if I'm wrong, but I think you guys still have some capacity that was sidelined from COVID-19 in 2020, what is the timeline for that capacity to potentially re entered the market and is it more like market dependent with.
Rates and utilization or has the labor kind of been the gating factor there.
Yes. The short answer is labor has been the gating factor, we do have some equipment.
We're bringing in I think 10 11 barges off the bank actually Eric just told me is nine.
And yes, but crewing is the gating factor.
Just getting getting crews to move the equipment, but I would tell you. It's it's going.
Ratably as what I would say.
There is some equipment that was sidelined during COVID-19 they can come back but.
But.
The crewing situations, probably gating that more than anything else.
I view it as.
Probably a decent shock absorbers, so that.
Things don't get out of hand, and people don't run off to go build new stuff.
Just building new right now just does not make sense. So.
Again, it kind of feel really good about about the structure.
And even with some of that sidelined equipment coming back.
Alright, Okay. Thanks, David.
Alright, Thanks, Greg.
Okay, operator, we're going to take one more caller and then we'll close out.
Thank you our last question comes from Chris Robertson with Jefferies. You May proceed with your question.
Hello, David Thanks for taking my question in here at the end.
You bet.
So I just wanted to turn back to the wind projects. So can you get into more of the construction timeline when there'll be some capital spending associated with those two barges.
And kind of the cadence on that.
Yes again.
The two two units again, it's a deck barge with an ATB that would be one unit. So we are building two units.
Roughly 40% to $50 million per unit.
We will start construction.
We will be in the shipyards in doing engineering now.
That capital will be spread between now and 'twenty early 'twenty five I think bulk of it will be done by early 'twenty five.
And then and then we'll be doing C trials in 'twenty five and.
Probably the gating factor to put equipment to work as is the <unk>.
The witness.
When installation vessel wind tower installation vessel that Maersk is building they are building I believe Korea.
It's a big expensive vessel is going to take a while to build.
But in terms of our capital spend that will be spread out between now and 'twenty five and.
I'm not sure exactly milestone payments, but I would just treat it kind of ratably between then and now.
Not a big spike in any one quarter or one year.
And obviously, our free cash flow I think is very.
Very sufficient to support support that level of Capex.
Okay, and a quick follow up and it's a related question on your Capex guidance for the full year should we think of that as being pretty smooth out across the quarters or will there be any lumpy quarters.
Yes, you can think about it that way.
Smooth it out over the over the quarters Chris.
Okay, well thank you.
Okay.
I just wanted to mentioned most of this capex is maintenance related so that's a good assumption to have.
Right right. Okay I appreciate the color.
Thanks, guys, alright, Thanks, Chris and thank you everyone for participating on the call today if.
If anyone has any questions or comments I will be available throughout the day and feel free to contact me at 70 134 to 3515.
Everyone have a great day.
Thank you. This concludes our question is this.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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