Q2 2022 Kirby Corp Earnings Call
Okay.
Good morning, and welcome to the Kirby Corporation 2022 second quarter earnings Conference call. All participants will be in listen only mode. After today's presentation. There will be an opportunity to ask questions. We ask that you limit. Your question. So one question and one.
Follow up too.
To ask a question you May press Star one one on your Touchtone phone. Please note. This event is being recorded.
I'd now like to turn the conference over to Mr. Kurt Nimitz Kirby's VP of Investor Relations and Treasurer. 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 Www Dot 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 various 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.
Thank you Kurt and good morning, everyone.
Earlier today, we announced second quarter revenue of $68 million and earnings of 47 per share or <unk> 49 per share excluding onetime nonrecurring items that occurred in the second quarter.
This compares to 2021 second quarter revenue of $560 million and earnings of <unk> 17 per share.
Both of our segments continued to steadily improve during the quarter delivering higher revenue and operating income sequentially and year over year.
The quarters results reflected improved market fundamentals in both marine transportation and distribution and services.
And were partially offset by higher fuel cost and inflationary pressures as well as continued supply chain challenges that delayed sales and distributions and services.
Before turning to the second quarter results I would like to take a moment to comment on recent developments in one of our newest business lines Kirby offshore wind.
Following our first quarter announcement, we are pleased to congratulate our partner mirrors on signing a preferred supplier agreement with Ecuador, and BP for the one two gigawatt Beacon wind offshore project.
This is in addition to the awards for Empire Wind, one and two we are very excited about the outlook for this new business.
And look forward to building on our strong relationship with Maersk and its customers.
Now turning to the second quarter looking at our segments in inland Marine Transportation high refinery utilization led to a steady improvement in demand with our overall barge utilization increasing into the low 90% range.
Tight market conditions in part due to limited supply barges continue to put upward pressure on prices with spot prices up approximately 10% sequentially and mid teens year over year.
Pricing on term contracts moved higher as well with term contracts renewing up in the mid teens.
Overall second quarter inland revenues increased 14% sequentially and margins improved into the high single digit range.
The results were impacted by increases in fuel costs, coupled with inflationary pressures in the quarter, we expect margins will improve.
As fuel and other cost escalation contract clauses reset as the year progresses and into 2023.
In coastal market conditions further improved with our barge utilization in the low 90% range and some incremental pricing gains with spot prices up in the low double digits.
Improved coal shipments in our dry cargo business also contributed to better revenues and increased operating margins.
Overall second quarter revenues increased 14% sequentially and operating margins were in the low single digits.
Yeah.
And distributions and services or markets remained very active across the segment and contributed to meaningful sequential and year on year improvement in revenue and operating margins.
And oil and gas high commodity prices and increased oil oilfield activity contributed to improved demand for new transmission parts and services.
In manufacturing our backlog remained healthy with the addition of new orders for our environmentally friendly pressure pumping equipment and power generation equipment for E. Frac. However, as expected significant supply chain issues delayed many new equipment deliveries during the quarter.
We continue to work diligently to manage the current supply chain environment.
In commercial and industrial market overall demand remains solid across our different businesses.
With growth coming from the marine repair and on highway sectors.
Demand was also strong in our thermo King refrigeration business with double digit growth sequentially and year on year, despite ongoing supply chain delays.
In summary, despite significant inflationary and supply chain challenges in the quarter, our second quarter results reflected continued improvement in market fundamentals for both segments.
The inland market is improving nicely demand is strengthening and rates are moving higher while the coastal market remains challenged by industry supply dynamics.
Barge utilization is good and we realized modest rate improvements.
Man in distribution and services is strong and our backlog is healthy while supply chain issues are expected to persist for the foreseeable future. We see continued growth going forward.
All of this is a positive for Kirby and as we continue to work safely efficiently and responsibly to.
To meet and exceed our customers' needs, we expect to drive incremental earnings growth in the second half.
In a few moments I'll talk more about our outlook, but first I'll turn the call over to Raj to discuss the second quarter segment results and the balance sheet.
Thank you David and good morning, everyone in the second quarter of 2022 Marine Transportation revenues were $405 7 million with operating income of $30 8 million.
And an operating margin of seven 6%.
Back to the second quarter of 2021, Marine revenues increased $72 8 million or 22% and operating income increased $12 3 million or 66.
6%.
Compared to the first quarter of 2022 Marine revenues increased $50 2 million or 14% and operating income increased $13 9 million or 82%.
These increases were driven by strong customer demand and improved pricing.
As expected <unk>.
Quarter operating margins were impacted by increased fuel costs that increase revenues through rebuilds, but are dilutive to margins.
We also continue to face inflationary cost pressures and expect to recover these increases in cost as contract escalators reprice throughout the remainder of the year and going into 2023.
The inland business contributed approximately 78% of segment revenue.
Average barge utilization was in the low 90% range for the quarter, which compares to the mid 80% range in the first quarter of 2022, and the low to mid 80% range in the second quarter of 2021.
Long term inland transportation contracts or those contracts with a term of one year or longer contributed approximately 60% of revenue with 57% from time charters and 43% from contracts of affreightment.
Improved market conditions contributor to spot market rates, increasing sequentially in the low double digits and in the mid teens year on year.
Term contracts that renewed during the second quarter were up on average in the mid teens compared to the prior year.
However, only a handful of smaller term contracts renewed during the quarter.
Compared to the second quarter of 2021 inland revenues increased by 25%.
Primarily due to increased barge utilization higher term and spot contract pricing and increased fueled rebuilds as we saw the average cost of diesel increased more than 93% year over year.
Compared to the first quarter of 2022 inland revenues were up 14% driven by increased term and spot market pricing higher average barge utilization and higher field rebuilds.
In the operating margin approached double digits and was mainly impacted by rapidly rising steel prices, we expect margins to improve into the low double digits as fuel escalators begin to kick in throughout the balance of the year.
The coastal business represented 22% of revenues for the Marine Transportation segment.
Average coastal barge utilization was in the low 90% range, which compares to the low to mid 70% range in the second quarter of 2021.
During the quarter the percentage of coastal revenue under term contracts was approximately 80% of which approximately 90% of what time charter.
Average spot market rates in renewables of term contracts were higher in the low double digits.
During the quarter coastal revenues increased 12% year on year with improved barge utilization higher contract pricing and higher fuel rebuilds.
Overall <unk> had a positive operating margin in the low single digits, marking the return to profitability for the business.
With respect to our tank barge fleet for both the inland and coastal businesses. We have provided a reconciliation of the changes in the second 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 review the performance of the distribution and services segment.
Revenue for the second quarter of 2022 with $292 3 million, we had operating income of $16 7 million.
Compared to the second quarter of 2021, the distribution and services segment saw revenue increase by $65 6 million or 29%, we had operating income improving by $10 5, million% to 169%.
When compared to the first quarter of 2022 revenues increased by $37 1 million or 15% and operating income increased by $5 7 million or 52%.
In the oil and gas market favorable commodity prices and increased rig and completion activity contributed to a 52% year on year increase and a 21% sequential increase in revenues.
We experienced increased demand for new transmission and parts throughout the quarter as David mentioned, we continue to see supply chain challenges, especially in our manufacturing business.
Despite the supply chain headwinds the manufacturing business experienced continued favorable trends in new orders and deliveries.
Overall oil and gas represented approximately 45% of segment revenue in the second quarter and had operating margins in the low to mid single digits.
On the commercial and industrial side strong activity contributed to a 15% year on year increase in revenues with improved demand for equipment parts and service in our marine repair and on highway businesses power generation was up modestly year on year.
The timing of major projects.
Compared to the first quarter of 2020 to commercial and industrial revenues increased by 10%, our thermo King business achieved strong sequential and year on year growth, but continued to experience delays due to supply chain constraints. This headwind was offset by increased activity in marine and on highway repair.
Overall, the commercial and industrial business represented approximately 55% of segment revenue and had an operating margin in the high single digits during the second quarter.
Now turning to the balance sheet as of June 30, we had $25 1 million of cash with total debt at $1, one 4 billion.
And our debt to cap ratio improved to 27, 9%.
During the quarter, we had cash flow from operations of $63 4 million.
And generated cash from proceeds from asset sales of $9 million.
From the retirement of marine vessels.
We used cash flow and cash on hand to fund $44 million as capital expenditure all capex.
During the quarter, we decrease debt by $18 7 million and repurchased slightly more than 310000 staff at an average price of $58 33 per share for a total consideration of $18 1 million.
As of June 30, we had total available liquidity of approximately $879 million.
With respect to Capex, we continue to expect full year capex of approximately $170 million to $190 million.
Primarily for required maintenance on our marine fleet.
We also expect to generate strong cash flow from operations of $390 million to $450 million with free cash flow defined as cash flow from operations minus capex of $200 million to $280 million.
<unk>, a slight decrease from prior expectations as supply chain constraints challenge working capital in the near term.
We expect to unwind this working capital as audit strip later this year and into the first half of 2023.
We are committed to a balanced capital allocation approach and we will use this cash flow to repay debt and continue to pursue long term value, creating niche investment or acquisition opportunities as well as opportunistically returning capital to shareholders.
I will now turn the call back to David to discuss our outlook for the remainder of 2022.
Thank you Raj.
While our second quarter was not without challenges, we delivered incremental improvements in both our segments and we expect this trend to continue in.
In marine strong demand driven in part by high refinery and chemical plant utilization should continue to increase our barge utilization.
Combined with our limited barge supply we expect this to contribute to further increases in the inland rates.
In distribution and services demand is healthy across.
The segment and we continue to receive new manufacturing orders.
While all of this is very encouraging we are mindful of near term, Mike macroeconomic headwinds, including slowing economic growth prolonged inflationary pressures and potential new COVID-19 sub variance.
As always we will manage the factors we have control over and we will continue our focus on cost containment and working capital management.
Looking at a more detailed outlook for our businesses, we expect favorable conditions to continue in inland marine.
Refinery and petrochemical plant utilization is at near record levels, resulting in increased customer volumes barge supply is constrained as there is minimal new barge construction.
These factors are expected to contribute to our barge utilization running in the low to mid 90% range.
These favorable supply and demand dynamics are expected to drive further improvements in the spot market, which currently represents approximately 40% of inland revenues as well as continued improvement in term contract re pricing as renewals occur.
The negative impacts of rapid increases in fuel costs and material inflation to cost are expected to be continued headwinds, but will be mitigated when escalations in contracts occurred during the second half of the year and into 2023.
Overall for the full year, we expect inland revenues will grow approximately 20% to 25% with progressive growth throughout the year as the business improves and term contracts renew later in the year.
Barring further inflationary or fuel cost pressures, we expect near term inland operating margins to be in the low double digits and to continue to gradually improve for the remainder of the year.
In coastal market conditions are expected to steadily improve through the remainder of the year, but will remain somewhat challenged by underutilized barge capacity across the industry.
Even with some market softness kirby's coastal barge utilization is expected to be in the low to mid 90% range.
Full year coastal revenues are expected to be flat to up in the low single digits, driven primarily by improving fundamentals in our core liquid cargo business and higher coal shipments in our offshore dry cargo business off.
Offset by the company's exit from Hawaii.
Okay.
Revenues and operating margins are also expected to be impacted by ongoing planned shipyard maintenance and ballast water treatment installations on certain vessels.
Overall coastal operating margins are expected to be in the range of near breakeven to low single digits for the remainder of the year.
Looking at distribution and services, we expect a favorable outlook with strong demand for equipment parts and service and distribution and a healthy backlog in manufacturing.
And the oil and gas market high commodity prices, increasing rig counts and growing well completions activity are expected to yield strong demand for OEM products parts and services in the distribution business.
Oil and gas we expect the current commodity price environment. We will continue to further increase rig counts and frac activity throughout 'twenty, two and into 'twenty three.
U S land rig counts have surpassed 750 rigs, which represents a full year average increase of approximately 56% with steady growth expected for the remainder of the year.
Similarly, the average Frac spread count is now approaching 290, which representing a 20% increase over 2021 with.
With this growth, we expect to see increasing demand for transmissions engines parts and service and distribution and manufacturing we have a healthy backlog position, we added new incremental orders in the second quarter and we expect this trend will continue.
Offsetting this we expect that supply chain issues in long lead time, OEM equipment, which in some cases are extending beyond a year to 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 are forecasting strong demand in on highway with increased trucking and municipal repair work continued improvement in bus ridership and increased demand for thermo King refrigeration part offset by lingering supply chain delays.
In power generation, new backup power installations parts and service activity are expected to remain solid as demand for electrification and $24 seven power grows.
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 commercial industrial in the low double digit percentage range.
While supply chain issues are expected to continue impacting new product and equipment deliveries in distribution and services. We continue to expect 2022 segment revenues will increase 25% to 30% year over year with commercial and industrial representing.
Only half of segment revenues in oil and gas representing the other half.
We expect segment operating margins will be in the mid to high single digits for the duration of 22.
To conclude overall Kirby second quarter results.
So steady improvement despite inflationary headwinds both of our segments performed well during the quarter delivering improved revenue and operating income sequentially and year over year.
We exited the quarter with strong fundamentals in our businesses.
We see favorable markets, continuing and we expect our businesses will produce gradually improving financial results in the coming quarters.
We're keeping a watchful eye on growing economic headwinds and are focused on managing the areas we can control.
And inland market conditions are tight with strong customer demand and high barge utilization.
Working to push rates higher.
And the price of a new barge remains near historical highs. We believe these factors will lead to continued improvement in market conditions and contribute to healthy earnings improvement as the year progresses, and we enter 2023.
And coastal although overall market conditions still need more time to recover we saw modest improvements in demand with our barge utilization above 90%.
We also realized some modest rate gains in both spot and term contracts.
These factors combined with our previous efforts to rightsize, the fleet and exit unprofitable markets.
Led to a return to profitability in this business, we believe our coastal business is well positioned for continued and improved profitability.
In distribution and services, we saw healthy demand in commercial and industrial and oilfield fundamentals remain very favorable with the current commodity price environment.
This is expected to lead to incremental activity for new OEM parts and equipment and services across our distribution businesses and.
In manufacturing, although supply chain issues continue to pose an ongoing headwind our backlog remains very strong demand for our environmentally friendly pressure pumping equipment continues to grow and we see high activity levels with improved revenue and returns expected through the remainder of the year and into two.
23.
As we look ahead, we are attentive to growing uncertainty in the economy, but are confident in the strength of our core businesses.
We intend to continue capitalizing on strong market fundamentals and to driving shareholder value creation.
Operator. This concludes our prepared remarks, we're now ready to take questions.
Okay.
We will now begin the question and answer question to ask a question you May Press Star one one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
As a reminder, we ask that you please limit yourself to one question and one follow up.
Our first question comes from the line of Jack Atkins from Stephens.
Questions.
So Jackie there.
Yes, David can you hear me, yes. Thank you okay, great. Yeah. Good morning, Thanks for taking my questions sorry about that.
So I guess, maybe maybe to start it's encouraging to hear the commentary about.
It feels like increasing momentum across the business.
Maybe to start with inland.
As you kind of think about your outlook for for the pricing environment.
Kind of go into the back half of the year and maybe into early 2023 could you maybe frame that up with sort of how youre thinking about it today versus maybe how you were thinking about it three months ago six months ago. It feels like momentum is maybe accelerating a bit there. So it would just be curious about that and then I guess from a bigger picture perspective, where would you say we are for Micah.
Pricing perspective today relative to 2019 level just to kind of level set that.
Also be curious if you have a view on cost today versus 2019 levels.
Yes, sure well good morning, Jack.
Yes inland inland feels pretty strong right now.
You have heard our comments on supply and demand demands up.
You've got refineries.
The refinery is running flat out chemical plants are running pretty pretty heavy crudes moving.
So on the demand side is pretty strong and as you know there is there is not much.
Much in the way of new construction, so the supply and demand dynamic is better than we've seen in a long time.
I would say that is.
Adding to an increase in momentum here.
We've seen a very strong spot market.
And and I would say if anything it is it is getting stronger.
That's important as we head into contract renewals as you know contract renewals are back half loaded typically late fourth quarter.
We're excited about heading into those renewals given the market now you did bring up.
Inflation in costs. So we are seeing it.
The headline <unk>, 9%, but I can tell you is steel.
We repair a lot of barges steel is up over 200%. So we're seeing inflationary pressures and Thats frankly, why the industries.
To get some of this pricing we need it.
To absorb some of the inflationary costs crew transportation for example is up considerably it's double digit.
Food everybody knows about food.
Costs being up so we are seeing inflation, but I would tell you, we're getting real price increases but.
We do need.
Healthy price increases to offset this inflation I would also tell you that.
The crewing situation across the industry is very challenged.
As you know the horsepower side of the equation is critical and I think the industry is having problems crewing.
Crewing boats.
Certainly COVID-19 hasnt helped that.
So that is helping the pricing dynamic and I would tell you that it's.
Whether you call it momentum or not it's certainly contributed more in recent in recent months.
We just can't find Mariners now Fortunately Kirby as you know has its own school.
We.
Open that school up last last year in January and they have been hiring and training.
Kansas tanker men and.
Captains so.
We're in pretty good shape, we have been able to crew our vessels, but it is tight and.
It is it is an industry phenomenon that we're experiencing now and is helping rates because.
You got to pay up to get.
Crews and to get.
To get the horsepower to move barges.
So I would say momentum is better.
Is the short answer.
We're excited about where we're at and looking forward to.
Rolling term contracts into 'twenty three well that's great. That's great to hear and then I guess for my follow up question I'd like to maybe touch on the share repurchases I think it's been quite some time since you all repurchased some stock.
I guess could you maybe talk about what that May signal in terms of the opportunities for capital allocation.
I know you guys would probably prefer to do strategic M&A, if it's available.
I guess kind of what if you kind of walk us through.
Yes.
Turning to buybacks back on and sort of how youre thinking about repurchasing stock versus M&A moving forward.
Yes, Jack good morning Raj here.
No.
Yes, we did $18 million a share repurchase in Q2 now.
The way we approach capital allocation has been a very balanced manner.
The main priorities are debt repayment.
Turning capital to shareholders.
To your point, having dry powder to execute on value creating investments.
The goal the near term goal is on the debt side to get to a debt to EBITDA of two five times or sub two five times.
You've seen us pay down debt over the last 12 months.
We will continue to execute on that but I think opportunistically, we will be also looking to do share repo.
You would have noted that.
We saw some slight headwind in terms of free cash flow.
For this for the remaining part of this year, that's actually that's a good that's a good dynamic because we are building working capital for the growth that we're seeing especially in the <unk> business, but even even after that with the cash flow that we're generating I think we're going to be in a good position to pay down debt do a bit of share repurchases as the year progresses.
As well as.
Have some dry powder for four investments that are value creating.
We will continue to have this balance approach and thats going to be our main focus.
Okay, great. Thank you Roger but I really appreciate it guys I'll turn it over.
Thanks Jack.
Thank you. Our next question comes from the line of Ken Cheng from Bolsa.
Hey, good morning, Kent on for Ken. Thank you for taking my question.
Maybe just switching over to the coastal side. So you mentioned some momentum in this business, but that.
Supply.
Demand dynamics still remain a bit challenge. So how are you thinking about this kind of into 'twenty three and maybe just talk about some of the moving parts on.
What it will take two.
Turned some of these.
Things back into your favor from a pricing standpoint. Thank you.
Sure Yeah. Thanks for the question, yes, the coastal business is much longer cycle than than the inland business and it's really about the increments of capacity on the inland side. It's 10000 30000 barrel barges on the coast wise.
They range anywhere from 180000 barrels all the way up to <unk>.
Just under 200000 barrels so the increments of capacity or bigger.
And the cost of the equipment is much more expensive so.
<unk> longer cycle business in the coastwise business.
That business got overbuilt, when there was crude by barge and before crude was <unk>.
Allowed to be exported so the industry has been overbuilt.
We've been taking out old capacity others are.
Power as well.
And the market has finally, just getting back into into balance we.
Got some price increases in this quarter on on the handful of contracts that renewed I would expect that.
Momentum to gain we got back into profitability.
I think.
Going into 'twenty, three and 24 I would expect the market to be very strong for the coastwise business.
As you are aware it takes two to three years to build new capacity in the coastwise business.
To build a new 185000 barrel barge and towboat probably cost you.
Oh, gosh $80 million or so maybe 90 90 or 100 with with steel prices. So nobody is going to build new capacity in the interim and I think that's going to continue to allow that supply demand and.
Supply and demand dynamic to tightened, we certainly starting to see price increases.
And push those.
Another dynamic in the coastwise business as ballast water treatment.
We've.
We've been putting ballast water treatment systems and on all of our barges and we're almost.
Complete that process that's adding.
Adding some cost to the industry, which needs to be recovered.
I would tell you. We're ahead of most of our competitors in terms of installing ballast water treatment systems.
And that sets it up nicely for Kirby because we've got the bulk of that capital behind US now we still have some strip yards to do.
And youll see that marvell around in our quarters as certain shipyards go through but.
We're really excited about where we are in the coastwise business.
It should be a nice dynamic for the next three to five years.
Yeah again, just to reiterate because it takes so long for new capacity to come in and there is no new capacity, even even being considered right. Now. So we're excited about where coastal can can go in the coming year.
Thanks for that and then just following up on inland margins in 2023 with <unk>.
Youll recapture and pricing accelerating do you think that 20% plus margins is attainable.
Yes, the short answer is yes.
Yes.
Margins have progressed.
As you know we have this big contract portfolio and it takes it takes a while for that thing.
All of those contracts to rollover and frankly, it takes several years to really get them humming.
The good news is as spot pricing is probably a good 20% above contract pricing.
The contract renewals should should kick in and start to show up in 'twenty three.
I would hope by the.
By the end of the fourth quarter were into the mid teens in terms of margins for the inland business in with contract renewals that should get us into starting to touch the 20% margins sometime in 'twenty three.
We havent put pencil to paper on that.
A lot of it depends on how this contract renewal cycle goes but.
It's setting up nicely.
And we're very excited about where we are but but again just to reiterate.
Inflationary pressures are there and.
Lot of this pricing is needed to offset.
Inflation.
Okay.
Thank you. Our next question comes from the line of Ben Nolan from Stifel.
Good morning.
I wanted to jump over to the D&S side of the business a little bit.
Yes.
Thank you took down your revenue growth guidance a little bit.
I assume that's all just being shifted to the right because of supply chain.
Constraints.
First of all I guess just to validate that but.
And then secondly, given <unk> it seems like demand is substantially greater than your ability to or anybody's ability to deliver are you beginning to see some.
Some pricing power there.
And.
It's a function of that.
Where do you think it's realistic maybe next year or when.
As we look forward what do you think is a realistic margin for that business in a healthy environment.
So Ben.
Good morning, all I'll talk about the.
Outlook for this business yes.
The slightly lower outlook that we provided was due to supply chain and I am going to say, that's probably on the conservative conservative end of the spectrum. The bottlenecks that we're seeing right now.
It fits and starts right. So we didn't want to come out and we didn't want to be too spotty with that number given given what our recent experience has been with supply chain. It's not for lack of demand that that's the point I want to make.
For you.
The demand is still strong the order book still strong.
Backlog over the past 12 months has grown about five times so.
We're very encouraged.
This business is we're seeing a lot of activity I think I spoke earlier about the working capital growth and I look at that as a very positive sign because we are building working capital for the anticipated demand that we're going to have going into later later part of this year and into next early next year.
On the pricing.
Let me comment on that Ben.
We are getting some pricing increases for sure.
I think about it in terms of margins.
We think Katie is absolute margin should.
Should be able to get into the high single digits.
We.
We're pushing pricing where we can.
Certainly the demand picture helps that.
And.
We're we're being judicious about it.
And I'm pretty excited about the way that's going.
But as Raj says.
The shift it's really a shift to the right.
Because of the supply chain, but the demand is there the backlogs there.
And we're working through the supply chain issues.
As everybody is.
Starting to feel like supply chain or worn out excuse across the.
Corporate America today, but but it is real we're seeing it.
In some small parts and actually some some of the bigger OEM pieces as well as just the fact that I think everybody is dealing with.
But the good news is that the demand hasn't gone away. It's just fulfilling that demand has shifted a little bit.
Okay. That's helpful.
And then if I could go back a little bit too to Jack's question appreciating that you guys haven't given any any guidance for next year or whatever but.
As you look forward it seems like the business growing all everything is going in the right direction cash flows are getting better leverage is coming down.
As we think about free cash flow going forward I'm, just trying to get a sense of if there is any if theres any substantial capex that we need to be thinking about here or alternatively are you sort of at a point here, where you're kind of outside maybe the offshore wind.
You've kind of spent what you needed to spend incrementally as the cash flows improve more and more of that should be dropping to free cash flow.
I think the latter is correct we have no.
No big Capex spending outside of the wind and even the wind is.
That's probably less than $100 million spread over the next two and a half years. So it's not going to be a big headwind on Capex really we've just got maintenance Capex I would tell you.
That our fleets in the about the best shape.
I've seen it we've got a young healthy barge and boat fleet, we've been maintaining it very well.
So it's really just maintenance Capex, we don't have any big capital expenditures on the on the horizon.
So free cash flow should accelerate.
And that's why you heard Roger talk about.
Kind of our priorities here in terms of.
Pay down a little more debt and then look at it after.
Opportunistic share repurchases in.
Maybe maybe there's an acquisition out there, but I would say the first two are a higher priority right now.
Alright, I appreciate it well actually just to tag onto that dividends at all is that is that it's never been part of the Kirby theme.
Theme, but.
How do you weigh that versus buyback.
Yes, I think we prefer a buyback over dividends is certainly something we discuss at the board level, but.
I would say, we would prefer a share buyback before dividend alright I appreciate it. Thank you.
Thanks.
Thank you.
Again, if you have a question. Please press star one one.
Our next question comes from the line of Greg Woznick Koski from Webber research.
Okay.
Good morning can you guys hear me alright.
Yes, good morning, Greg.
Alright, yes, sorry, I have some connection issues in just a few questions. So if I if I'm repeating anything feel free to give me the stiff arm.
Not at all.
Sure.
I'll start with the inland.
How does the health of the 10-K market compared to the 30 K market right now.
If youre seeing any sort of lag can you kind of talk about.
Why that may be the case.
Yes.
This is just on the margin I'd say, the 10-K market's just a little stronger than the 30 K market.
But they are both very strong to be honest they are both very strong.
<unk> 10-K, a little because it tends to be more small lot chemicals and that that's been pretty strong.
A lot of that is up river. It goes up river. So 10 case tend to be more in our line haul service that goes up and down the river.
But they are both very strong right now and I would say it's pretty balanced.
At the margin may be 10 gigs a little tighter.
But the good news is.
And for both very tight.
Got you thanks and.
And then on DNS.
How would you characterize E&S right now compared to.
During the heyday in 2018, if we remove the effects of supply chain constraints here do you think you'd be back on your way to 141 $5 billion in revenue with.
High single digits, maybe even touching 10% operating margins are.
Are there other factors in place, it's a different ballgame here our supply chain really.
The only thing holding them back at this point.
Yes, I'd say, it's pretty much just supply chain holding it back there are some inflationary pressures but.
Yes.
It's really the supply chain is holding back would we be at the 2018 levels, Yes I.
I would say yes.
Are you heard Roger comment our backlogs up five times, what it was 12 months ago. So the backlogs there.
We are getting.
Quite a bit of electric Frac type.
Sure.
Orders.
Based on either.
E frac or power generation equipment.
To generate power on a well site.
It's basically a natural gas <unk>.
We put together with some some distribution equipment electric distribution equipment and Thats been very strong we're seeing a lot of demand for that.
Electric track is I would tell you the preferred.
Frac equipment choice right now and so that's been increasing.
So the demands there.
Is it like 2018, yet sure feels like it.
And then.
With the only caveat is as our customers the pressure pumping companies.
We are being very disciplined.
It's not.
<unk>.
They're not spending capriciously, they're being very disciplined and I actually think thats healthier for the business.
But at the root of your question. If we didn't have the supply chain would we be close to what we were doing in 2018, I would say yes.
Got you thanks, David.
I think I'm last in line here, so maybe I'll squeeze in one more if you don't mind.
Still has.
Sideline capacity in inland.
And if so is that just a function of labor at this point and then.
If so when do you expect to be able to potentially get that capacity back to work.
Yes, we have.
Just a very small bit of capacity on the bank is what we would call. It you saw we brought in about nine barges off the bank.
That's equipment, we do we deferred maintenance on and put on the bake during COVID-19 and we're bringing it back it's a small amount.
Don't think it's material.
We may have another 20, or so or maybe even more of that pulled back.
But it's not material in terms of of the industry. It will help us obviously thats more capacity.
I think that the gauging.
Factor is as you mentioned the horsepower getting getting getting the <unk>.
<unk> boats.
To run that equipment.
That's across the industry everybody is facing that Theres just.
There is a shortage of horsepower and <unk>.
Frankly, that's a good thing right.
It makes the pricing environment, good it really tightens up the market nicely.
But we do have to your point some equipment, we can pull off the bank.
It's not material, Greg, but thanks for that question.
Got you okay. Thanks, David.
Thank you. Our next question comes from the line of Greg Lewis from <unk>.
Hey, good morning, Greg everybody.
Greg you there Greg.
Do you not hear me.
Yes, we can hear you now it seemed like there was a pause second okay, great well, thank you and good morning, everybody.
David.
I had a question and I've been having some technical difficulties this morning.
So I may have someone may have already asked this but I mean clearly.
You highlighted inflation.
<unk>.
Dean.
Headwind to margins et cetera, but as we think about where we are in terms of inland price seen in spot and time charters.
We were to try to installation of just where the market is right now.
Where are we or are we kind of in gist.
As I think about where margins are and where they're going or are we kind of in like a mid cycle pricing environment on and adjust that inflation.
Or are we or any kind of color around that in terms of how we should be thinking about spot and time charters.
Yes.
I think.
One that's a great question.
Yes, I think mid cycles about right. We're probably I was thinking as you were asking the question of the baseball analogy what inning are we in as probably the third or fourth inning I mean, it's really just tightening up.
And we've got a way to go ways to go.
Again, you look at that.
The cost of building a new barge.
Our new 30000 barrel barges over $4 million well over $4 million. So.
This this is early innings as the way I think about it.
We do have to have the price increases to offset inflation that is real.
I talked about steel, but labor costs are going up.
Just things like paint paint up 25% right.
The hotels, we do crew changes and hotels are up 25% rental cars are up.
25% so.
That inflation is real and that's part of Av.
Of the price increases that we're getting.
So that's why I say, it's very early innings, we've got a long way to go to to get to a reasonable return on capital and we're going to get there.
And the good news is the demands there and the supply is in check.
So.
I guess just to reiterate I think we're early innings, probably third and fourth inning.
Okay, Great and then.
I know, we've been talking about DNS and.
The drop in revenue and I guess, the more of the pushing up the rate.
Is there any way to kind of parcel out.
On the supply chain side, I mean, clearly E. Frac is gaining momentum and as the future, but is there any kind of way to parcel out and maybe there is no difference between.
The supply chain for the.
The conventional frac equipment versus the E frac equipment.
And in the round that.
Did that have anything to do with <unk> with the.
Change in the guidance.
No.
It's funny, it's not any one particular thing in the supply chain it could be like I say, a pressure regulator that we need to.
To regulate gas flow into natural gas recip or it could be.
In engine from one of the major Oems.
Or a printed circuit board, it's pretty much across.
Across the entire supply chain and it's weird things that you wouldn't expect like a pressure regulator of $450 pressure regulators it seems like.
Is that holding up a shipment in and yes. It can so it's not any one particular thing it's more broad based than that.
The ones that the.
The bigger items from the OEM.
Whether theyre engine packages are not those are the ones that are more impactful just because of the size of the revenue associated with them, but.
It's hard to say its just any one thing Greg we're managing through it.
Think the customers.
And the suppliers are all.
Trying to get.
Everything lined out and it's just a grind every day, but the.
The good news is nobody's canceling orders demand is still growing and.
We just got to manage through it.
Okay.
Okay perfect Hey, Thank you for the time everybody have a great.
Rest of the day.
Alright, thanks for your time.
Thank you. Our next question comes from the line of Ben Nolan from Stifel.
Hey, Brad I appreciate you letting me and again I Didnt want to Overstaying. My welcome. The first time that I wasn't quite down.
I do have two more if you don't mind. So the first is one of the things that we've talked a little bit about labor, but one of the things that we've heard out of the rails. In particular is that in addition to just having the shortages and challenges hiring retention has been a big problem.
And they've lost people because people don't like the lifestyle or whatever I'm curious if that spills over.
All into what you guys are doing.
Yes, a little bit.
Yes.
There is a different lifestyle living on.
A vessel for a good portion of your.
Youre working year.
We have seen a little of that.
I would tell you.
We raised wages earlier than anybody else and it was a healthy increase 7% to our mariners.
But we felt that was necessary.
We haven't seen our turnover go up.
Kind of.
At historical levels.
But you hear antidotes.
I know youll get an occasional youll hear somebody say, hey look I just I.
I'm, just going to work from home and pivot to a different job we have seen some of it but is it is it a material impact to us no, but it's certainly impacting the industry.
Yes.
There is enough out there that we know are our exiting or don't want to work anymore.
I think.
Our package in terms of benefits and wages and the stability of working for somebody like Kirby.
<unk> is an attraction and it probably keeps our turnover a little lower than then.
Some others that's on the Marine side I would tell you on the technician side for <unk>. It has been a challenge.
It's tough to find it's tough to find mechanics, it's tough to find assemblers.
But we're grinding through it.
I don't think we're any different than than most industries right now.
The labor market is tight.
And as you think about recession, that's probably one of the caveat you don't see the unemployment that you would normally see with a recession there.
There are jobs out there if people want to work so.
Maybe that's what keeps us out of a recession is there is enough employment demand out there to to keep this economy going.
But yes.
Kind of bouncing around here, but.
The long and the short of it is where our turnovers.
<unk> normal in marine a little higher in our <unk> side, but we're managing through it.
Okay. That's helpful and then last and honestly. This is the last one for me.
Yes.
I think 40% of the inland market you had said is spot.
Contract renewals coming up ran at the end of the year.
But it's a tightening tightening markets are a little tight tightening.
Do you think at all about sort of shifting the mix a little bit and saying.
The market is going to be tight so maybe where we're comfortable letting a little bit more right in the spot market and trying to to improve margins that way or.
Or inverse of that you go ahead and.
That's good so you lock it in.
Yes, no a very intuitive question.
You may have noticed that we've gone from about 35% spot to 40% spot in a rising market, we prefer being in the spot market. So we've.
Kind of intentionally done that I will tell you another sign of the strength of the market as is now customers are starting to worry about availability. So they're trying to term up more so that's an interesting dynamic that's happening now and in a very tight market, that's usually what happens.
The customers get a little worried about availability. So they are like well man, we'd better term term up and.
But conversely, we like being in the spot market in a rising rate environment.
That dynamic will shift here and of course, we're going to take care of our customers first and foremost but.
It's nice to see them to start worrying about.
Barge availability.
Alright I appreciate it thank you guys.
Yes, Thanks Ben.
Thank you. This concludes our question and answer session I would like to turn the conference back over to Mr. Kurt <unk> for any closing remarks.
Thank you everyone for participating on the call today, if you have any follow up questions. Please call me at 71343510 707.
Okay.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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