Q3 2022 Kirby Corp Earnings Call
Okay.
Good morning, and welcome to the Kirby Corporation 2022 third quarter earnings Conference call.
All participants will be in a listen only mode.
After todays presentation, there will be an opportunity to ask questions.
We ask that you limit your questions to one question and one follow up to ask a question you May Press Star one one on your phone.
Please note this event.
Is being recorded.
Now like to turn the conference over to Mr. Kurt.
Minutes, 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, 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.
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 or 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 COVID-19 pandemic on the company's business.
These risk factors can be found in card reports 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 third quarter revenue of $746 million and earnings of 65 per share.
This compares to 2021 third quarter revenue up.
$599 million and adjusted earnings of <unk> 17 per share.
Both of our segments continued to steadily improve during the quarter delivering higher revenue and operating income both sequentially and year over year.
The third quarter's results reflected improved market fundamentals in both marine transportation and distribution and services, partially offset by continued inflationary cost pressures as well as ongoing supply chain challenges that delayed sales in our distribution and services business.
Yes.
In inland Marine Transportation continued high refinery utilization led to a steady improvement in demand with our overall barge utilization running in the low 90% range.
Tight market conditions due to limited supply of barges as well as cost inflation continue to put upward pressure on prices with spot prices up into the high single digits sequentially and in the mid 20% range year over year.
Pricing on term contracts moved higher as well with term contracts renewing up in the low teens versus the year ago period.
Overall third quarter inland revenues increased 9% sequentially and margins improved into the low double digit range.
While we continued to face headwinds with inflationary pressures in the quarter, we expect margin will gradually improve further as fuel and other cost escalation contract clauses reset in the fourth quarter and into 2023.
In coastal market conditions steadily improved with our barge utilization in the low to mid 90% range and some incremental pricing gains with spot prices up in the high single digits sequentially.
Better coal shipments in our dry cargo business also contributed to improved revenues and increased operating margins overall third quarter coastal revenues increased 6% year over year and operating margins were in the low to mid single digits.
In distribution and services similar to last quarter, our markets remain very active across the segment and contributed to strong sequential.
And year over year improvement in revenue and operating margins.
In oil and gas high commodity prices and increased oilfield activity contributed to improved demand for new transmissions parts and services in.
In manufacturing our backlog continued to grow 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 our commercial and industrial market overall demand remains solid across our different businesses with growth coming from the marine repair power generation and on highway sectors.
In summary, despite meaningful inflationary and supply chain challenges in the quarter, our third quarter results reflected continued improvement in market fundamentals for both segments.
The inland market is inflicting nicely demand is strong and rates are moving higher.
While the coastal market remains challenged by industry supply dynamics, our barge utilization is good and we realized modest rate improvements.
Demand in distribution and services is strong and our backlog is growing while supply chain issues are expected to persist for the foreseeable future looking forward, we see continued strong market fundamentals.
We continue to focus on working safely efficiently and responsibly to meet and exceed our customers need and expect to drive incremental earnings growth into 2023 and beyond.
I'll talk more about our outlook later, but first I'll turn the call over to Raj to discuss the third quarter segment results and the balance sheet.
Thank you David and good morning, everyone.
In the third quarter of 2022 Marine Transportation revenues were 433 million and operating income was $41 $7 million with an operating margin of nine 6%.
Compared to the third quarter of 2021, marine revenues increased $95 million or 28% and operating income increased $25 million or 147%.
Compared to the second quarter of 2022, marine revenues increased $27 million or 7% and operating income increased $11 million or 35%. These.
These increases were driven by strong customer demand favorable operating conditions and improved pricing.
However, we continue to face inflationary cost pressures and expect to recover these increases in cost as contract and escalated repriced throughout the remainder of the year and into 2023.
The inland business contributed approximately 80% of segment revenue.
Average barge utilization was in the low 90% range for the quarter, which is similar to the utilization seen in the second quarter of 2022 and compares to the low 80% range in the third quarter of 2021.
Long term inland marine transportation contracts or those contracts with a term one year or longer contributed approximately 60% of revenue with 56% from time charters and 44% from contracts of affreightment.
Improved market conditions contributed to spot market rate increasing sequentially in the high single digits and in the mid 20% range year on year.
Todd contracts that renewed during the third quarter, while up on average in the low teens compared to the prior year.
However, only a handful of smaller term contracts renewed during the quarter.
Our past the third quarter of 2021 inland revenues increased 35%, primarily due to increased barge utilization.
Spot contract pricing and increased fuel rebuild as we saw the average cost of diesel increased almost 90% year over year comp.
Back to the second quarter of 2022 inland revenues were up 9% driven by increased and spot market pricing.
Higher average box utilization and higher fuel rebuilds.
In that operating margin.
It's in the low double digits and improved both sequentially and year over year, but remained impacted by rapidly rising fuel prices and inflationary cost pressures.
These cost headwinds were offset by gains in utilization and pricing.
The coastal business represented 20% of revenues for the Marine Transportation segment.
Average coastal barge utilization was in the low to mid 90% range, which compares to the mid 70% range in the third quarter of 2021.
During the quarter the percentage of coastal revenue under term contracts was approximately 65% of which approximately 92% were time charters.
Average spot market rates were up in the high single digits sequentially and renewal of term contracts were higher in the 20% range year over year.
During the quarter coastal revenues increased 6% year over year with improved barge utilization higher contract prices and higher fuel rebuilds.
Overall coastal had a positive operating margin in the low to mid single digits.
With respect to our tank barge fleet for both the inland and coastal businesses. We have provided a reconciliation of the changes in the third 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.
Revenues for the third quarter of 2022 were $313 million with operating income of $22 3 million.
Compared to the third quarter of 2021, the distribution at the segment saw revenue increased by $52 4 million or 20%, we had operating income improving by $11 3 million or 103%.
When compared to the second quarter of 2022 revenues increased by $20 5 million or 7% and operating income increased by $5 6 million or 34%.
In the oil and gas market favorable commodity prices and increased rig and completion activity contributed to a 37% year on year increase and a 13% sequential increase in revenues.
We experienced increased demand for new transmission and parts throughout the quarter.
As David mentioned, we continue to navigate ongoing supply chain challenges, especially in our manufacturing business.
Despite the supply chain headwinds.
Manufacturing business experienced continued favorable trends in new orders and deliveries.
Overall oil and gas represented approximately 47% of segment revenue in the third quarter and had operating margins in the mid to single digits.
On the commercial and industrial side strong activity contributed to 8% year on year increase in revenues with improved demand for equipment and <unk>.
Service and our marine repair and on highway businesses.
Our generation was up modestly year over year.
Compared to the second quarter of 2020 to commercial and industrial revenues increased by 2%.
Our thermo King business continued to experience delays due to ongoing supply chain constraints that impacted revenue growth.
However, this headwind was offset by increased activity in marine power generation at <unk> Highway.
Overall, the commercial and industrial business represented approximately 53% of segment revenue that had an operating margin in the high single digits during the third quarter.
Now I'll turn to the balance sheet.
As of September 30, we had $37 million of cash with total debt of $1 1 billion and our debt to cap ratio improved to 27, 3%.
During the quarter, we had cash flow from operations of $66 million and we generated cash proceeds from sales asset sales of retired marine equipment of $10 million.
We use cash flow and cash on hand to 541 million of capital expenditures our capex.
Our disciplined approach to capital allocation enabled us to further strengthen our balance sheet and return capital to shareholders.
During the quarter, we decreased debt by $18 million.
And repurchased slightly more than 70000, Chad at an average price of $63 33 per share for a total of $4 8 million.
As of September 30, we had total available liquidity of approximately $521 million.
With respect to Capex, we continue to expect full year capex of approximately $170 million to $190 million, primarily for our required maintenance on our marine fleet.
We also expect to generate cash flow from operations of $390 million $450 million with free cash flow defined as cash flow from operations minus capex of $200 million to $280 million.
We continue to work through supply chain constraints that are challenging working capital in the near term, but we expect to unwind. This looking capital S. As auto ship 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 Opportunistically return capital to shareholders and continue to pursue long term value, creating niche investment and acquisition opportunities.
I will now turn the call back to David to discuss our outlook for the remainder of 2022.
Thank you Raj.
As discussed the third quarter had good incremental improvements in revenues and operating income in both our segments in marine steady demand driven in large part by high refinery and chemical plant utilization should continue to support high barge utilization.
Bind with limited new large construction and inflationary recovery needs. We expect these dynamics to support further increases in inland rates.
While all of this is very encouraging we are mindful of the ever changing economic landscape and potential recessionary headwinds.
Additionally, we continue to monitor the current record low water conditions on the Mississippi River for which the full impact remains to be seen.
Although the current low water conditions impact only a portion of our inland marine business and we have some contract protections to help limit the magnitude the low water headwinds are dynamic and Rio.
As always we will manage the factors we can control.
Nonetheless, we continue to be encouraged with refinery and petrochemical plant activity remaining at near record levels, resulting in increased customer volumes barge availability is constrained as there is minimal new barge construction.
These positive factors are expected to contribute to our barge utilization running in the low to mid 90% range for the foreseeable future.
These favorable supply and demand dynamics are expected to drive further improvements in the spot market, which currently represents approximately 40% of inland revenues. We also expect continued improvement in term contract pricing as renewals occur with a significant amount of term contracts renewing in the fourth quarter.
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Overall for the 2022 full year versus 2021, we expect inland revenues will grow approximately 20% to 25% and we expect near term inland operating margins to be in the low to mid teens and to continue to gradually improve in 2023.
In the coastal market conditions are expected to remain steady, 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 2022 coastal revenues are expected to be flat to up in the low single digits, driven primarily by good fundamentals in our core liquid cargo business and higher coal shipments in our offshore dry cargo business offset by the company's exit from Hawaii.
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 for the remainder of the year are expected to remain in the low to mid single digits.
Looking at distribution and services, we have a favorable outlook with anticipated strong demand for equipment parts and service and distribution and a growing backlog in manufacturing.
And the oil and gas market high commodity prices increased rig counts and growing well completions activity are expected to yield strong demand for manufacturing and OEM parts.
Alex and services in the distribution business, we expect that current commodity price environment will contribute to further increases in rig count and frac activity in the fourth quarter and into 2023.
U S land rig counts have grown to over 760 rigs, which represents a full year average increases of approximately 42% with steady growth expected for the remainder of the year.
Similarly, the active frac spread count is approaching 295.
With this growth, we expect to see increasing demand for transmissions engines parts and service and distribution and manufacturing we have a growing backlog position we have.
<unk> added new incremental orders in the third quarter and we expect this trend will continue.
As I mentioned earlier, we expect the supply chain issues and long lead times for OEM equipment, which in some cases are extending beyond the year to remain a challenge.
These issues are likely to contribute to some choppiness with new product deliveries, which could potentially shift into 'twenty three and into 2024.
In commercial and industrial we are forecasting steady demand in on highway with increased trucking and municipal repair work continued improvement in bus ridership and an increased demand for thermo King refrigeration products offset again by lingering supply chain delays.
In power generation, new backup power installation 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 activity in the Gulf of Mexico, and improved commercial markets on the east and West Coast.
For the 2022 full year, we expect revenue growth in the low double digit percent range for commercial and industrial.
For kgs as a whole.
While supply chain issues are expected to continue impacting new product and equipment deliveries.
We continue to expect 2022 segment revenues will increase by 25% to 30% compared to 2021 with commercial and industrial representing approximately half of segment revenues in oil and gas representing the other half we.
We expect segment operating margins will be in the mid to high single digits for 2022.
To conclude Kirby's third quarter results showed steady improvement based upon growing challenges both of our segments performed well during the quarter delivering improved revenue and operating income sequentially and year over year and our teams executed well on near term objectives as well as our long term.
Strategy to provide value to Kirby and our shareholders.
We exited the quarter with healthy long term fundamentals.
In both of our businesses are very well positioned to continue delivering value.
Although we see favorable markets, continuing and expect businesses will provide improving financial results. We are closely monitoring potential economic headwinds as well as the potential <unk>.
Short term weather and water related impacts to our business.
Having said that as we look long term, we are confident in the strength of our core businesses and our long term strategy. We intend to continue capitalizing on strong market fundamentals and driving shareholder value creation. Operator. This concludes our prepared remarks, we are now ready to take questions.
We will now begin the question and answer session to ask a question you May press star one on your phone.
As a reminder, we ask that you please limit your questions.
To one question and one follow up.
Please stand by while we compile the Q&A roster.
The first question comes from Ken <unk> with Bank of America. Your line is now open.
Great Good morning, David Raj.
Good morning.
Little bit of an echo here can you talk a bit up it seemed like you moved a bit more off contract and into the spot market, maybe a little bit fewer take or pays maybe talk about the shifting market part of the cycle I know the fourth quarter is going to be really big for you is as you price some of those term contracts. So maybe talk about the state of the market.
And maybe throw in thoughts on the low water levels, what does that mean for for the business and pricing as well. Thanks.
Yes sure. Thanks, Thanks for the question Ken.
<unk>.
How about those Astros.
No no no.
It doesn't say anything.
Sure Jeff.
Okay.
The term to spot ratio.
One thing in a rising market like we've had.
<unk>.
The spot revenues going up faster than contract revenue as rate increases.
Get rolled into spot contracts Quaker.
I think that you'll see that ratio of spot to contract change a little bit here in the fourth quarter as we renew some of these.
Yes.
Big term contracts that we have coming.
Coming due at the end of the year.
So that's the comment on the spot versus contract ratio.
We're really happy with where we are with spot and contract right now.
Sure.
It's.
In a rising market is good to have pretty good spot exposure.
But again that ratio has been impacted a little bit by how fast we've been able to raise spot rates versus term contract rates, but term contract rates will.
We will price higher here in the fourth quarter and they need to I think one we've got a great supply and demand situation, but.
It's it's needed because of the inflationary pressures that's another part of it.
So we've got a pretty good dynamic now supplies.
Growing demand holding okay.
Were watching for recession, maybe next year, but.
Right now you can look at refinery utilization is pretty strong chemical plants or utilization was strong.
The chemical guys. When you look at the earnings.
A lot of it is about Europe .
You can imagine if you've got chemical manufacturing in Europe , and you're facing the feedstock problems that they have in Europe right now it's pretty dicey.
But when you look at the chemical plants in the U S. Their feedstock position is pretty good.
Particularly if you look at natural gas prices, having dropped here recently, so from a demand side, we're pretty excited about where we're at right now.
But we are watching and looking for.
Potential recession next year, but the good news is even if that if we get a little pullback in demand. The supply is so tight I think we'll be all right and it's not just the supply of barges, it's the supply of Mariners in and horsepower.
Which remains tight so.
It's above as constructive as we can be now you mentioned low water and you and I've talked about low water.
It's gotten worse.
Since you and I talk Ken.
The river has been shut.
Shut down.
We have half a dozen times in the last week or so.
The core the Army Corps of Engineers the Coast Guard.
Industry and our customers were all working together to try and keep things moving on the river.
Coastguards cut down the number of.
The size of the toes.
They've lowered draft draft restrictions. So we're we're loading more at nine feet instead of as a dry cargo's Guy guys would do about 12 feet at time, so well.
We're doing everything we can but this is unprecedented I think this is the lowest the river has been and at least 30 40 years and maybe an all time low.
I think theres some rain in the forecast.
Later this week hopefully it's enough to to help out.
All that said.
It's about 20% of our fleet that moves on the river system Christian told me earlier.
Well this weekend there was about 198 barges so.
When you think of our thousand barges that gives you roughly 20, 20%.
Now the good news is we have some contract protection well actually pretty good contract protection with with navigation delays.
But it's not the same as running a little less profitable and so you may see a little bit of a.
It could be anywhere from two to five kind of headwind for this quarter, depending on when this thing.
The water starts flowing again.
It's real.
Its impacting the U S supply chain in a meaningful way.
I would tell you for the dry cargo.
Operators. This is just.
Really really painful because they run 50.
<unk> 50 barge toes, our toes are much smaller.
We generally load at lower drafts and they do.
So it's impactful but.
We will get through it.
Again, we're fortunate we have some contract protection with navigation delays.
But the good news is everybody is working together, whether it's our customer base.
The industry.
Core or the coast guard everybody's trying to to keep it flowing both northbound and southbound.
Great and if I could get bye bye, Okay. Ken I was just going to add I was just going to add you reference the Q4.
Term contract renewals you are right. It is a substantial quarter for us we have around 35% of our contracts renewing in Q4.
Yes, that's the point, we've all been waiting for right.
That big fourth quarter.
Sure.
Dave.
The other side of the business. The DNS. It seems like things are finally clicked in hitting gear. This is kind of what <unk> been waiting for maybe for a couple of years now I think the question has always been the strategic importance of the segment.
Maybe you want to address your thoughts on the business as we move forward here and as things start to.
Get a little better from from your point of view.
Now to your point DNS is really starting to roll right now.
Inbound orders are up.
Ross the business, obviously oil and gas, particularly anything electric Frac is very strong we continue to take orders.
Commercial and industrial so same it's pretty strong.
We are being impacted by supply chain for sure.
Some some engine packages or at least a year out so in some cases, we won't get deliveries until 24 so.
Supply chain is impacting us a bit but to your point more on the strategic.
Should should Kirby split kind of the marine and the KBS business, we've always been open minded to it.
Just got to make sure it creates shareholder value.
The board discusses it is committed to creating shareholder value. So when the numbers make sense.
It might make sense to split the two businesses.
Clearly last year at trough EBITDA in trough EBITDA multiples it doesn't make sense. So.
With this strength.
It's getting to make more and more sense, but we'll see we've still got to work through it.
Meanwhile, we're running the business really well.
Both the marine team and the <unk> team are hitting on all cylinders.
It's good when the team's working hard and the market's working in the right through the same direction. So.
We're pretty excited about where we are right now.
Can I just ask one clarification, sorry, Kurt I, just wanted to make sure I understand.
In the press release, you said high levels of shipyard activity in coastal do you mean more new builds or did you mean the reef.
The ballast water treatment that you were talking about later on I just want to understand if you were talking about new builds.
It's not new builds.
All ballast water treatment.
Fortunately <unk> 30 units or so 29 or 30 units I think we've got but all but six of our units have ballast water treatment. So we've got those six left to do and those are big long heavy heavy shipyards in there on some of our bigger units. So that's going to impact us a little bit in the fourth quarter and Anne.
And more importantly into 'twenty three.
Now in terms of new construction on coastal nothing we're not hearing anything on the.
The drawing board and.
Which is really good for the pricing environment.
We're almost in supply demand balance now and even if somebody wanted to build a new unit right now you wouldn't see it for three years.
Do the engineering and construction.
Wouldn't deliver until 'twenty five.
Best case.
I'm not sure anybody and the right mind would go build a new unit now.
Just to give you a benchmark when we built our our.
185000 barrel ATB it was about an $80 million.
Unit.
I would tell you it's about $140 million, if you tried to build it now.
Just because steel prices and labor costs and input prices.
So yeah.
It's very very constructive on that supply in Japan.
Standpoint for coastal and we should start to see rates moving on a go forward basis in the coastal business.
Thanks for the clarification. Thanks for the time guys I appreciate it.
Hey, Thanks, guys great job.
Please standby for our next question.
Our next question comes from Jack Atkins with Stephens. Your line is now open.
Okay, great good morning, and congrats on a on a solid quarter here I guess, David as we.
Think about the fourth quarter outlook.
Obviously the ranges that you guys provided from a line item perspective for.
For the full year.
But you also made a made a comment in the press release that you expect to deliver improved financial results in the coming quarters.
I know you've got some issues with high water excuse me low water issues here in the fourth quarter, but would you expect based on our momentum in the business that youre seeing now to be able to to have improved earnings quarter over quarter in the fourth quarter versus the third quarter.
Yes, we haven't really given complete guidance, but.
As you know Jack I haven't followed us for a long time.
Third quarter is usually the best of the year.
First quarter is usually the lightest and then followed by the fourth quarter, which is the.
Not as light as first but it's usually lighter than then.
Certainly the second or the third and Thats because of weather, whether it starts to impact the marine business.
And it would be a.
It can be meaningful, particularly with fog, we get fog seems to be the.
The thing that impacts us the most in terms of moving so when you combine kind of fourth quarter wet weather.
Lower water.
We haven't put out guidance, but you could see a flattish quarter and depending on the river, maybe down a little bit or if the river clears up maybe up a little bit, but it's I wouldn't say, it's going to be sequentially.
A blowout because of because of both both the weather and the <unk>.
Low water and most of those those big term contracts that we've talked about.
The marine business.
Repriced at the end of the quarter and you don't start to see that pricing roll through until.
Kind of January okay.
That's helpful. I, just think it's kind of good to get everybody on the same page there in terms of.
Let me talk about DNS DNS, though it could be a little better.
Sequentially.
The issue is supply chain.
Whether we can get the shipments.
And there could be some mix issues too so some.
Some products that we ship could be lower margin than other products.
DNS is is pretty strong right now.
It's really about managing their supply chain, which is which is frustrating and I know it sounds like excuse most corporations use nowadays, but it is real.
So.
Marine flattish in D&S, a bit a bit better quarter over quarter.
That makes that makes sense and I guess, maybe kind of kind of shifting gears a bit but.
When you kind of think about the momentum as we head into next year I guess, there are some puts and takes but would love for you to maybe kind of flesh out a bit but when you think about I'd love for you to maybe kind of quantify if you can the differential right now between where spot rates are and maybe where contract rates are.
And just so we can kind of get out and get a sense for.
How much upward momentum there may be on contract rates as we go through the renewal process.
Then as you kind of think about whats your chemical customers are telling you and maybe even what you refined product customers are telling you.
We go into next year with the sort of the cloud cloudy economic backdrop.
Yes.
I guess is there anything you can maybe help us with as we sort of think about how they're positioning their business for next year.
Love some color there as well.
Yes sure.
Yes look at.
Contracts pricing as art said said another way spot pricing is above contract, which is what you have in a healthy market I would say, it's 10 to 20, 20% differential just depends on the contract.
Exactly what spot comparison youre doing.
So, but that's a healthy gap and we like that gap.
It should help the pricing environment.
On our chemical side and refined product side.
Customers are very positive I would say volumes are good I would say.
Chemical customers, if anything are probably more seem a little more worried.
And then and refine.
Customers are based on the economic headwinds and a lot of that is Europe I E can.
Can you imagine if you had a European chemical facility right now it's got it's got to be maddening with natural gas around five bucks or less here in the U S and.
Goodness knows what natural gas costs in Europe as a feedstock so.
It's an interesting time.
I think as I said earlier, everybody is kind of watching.
A recession.
Not to second guess the fed, but I think they've done enough I think soft landings about now but.
That's that's with absolutely no data to support but it feels that way.
Okay. Thank you again for the time.
Thanks Jay.
Please standby for our next question.
Our next question comes from Ben Nolan with Stifel. Your line is now open.
Thank you.
Hey, Dave and Raj.
If I could.
I can just start where maybe where you just left off there David talking about sort of the chemical side of the business, specifically and I know thats. The majority of what Youre doing on the river.
Inland.
It feels to me like well I know historically, you've said that that chemical side of the business is pretty GDP linked.
But normally when we go into a downturn you also see a decline in oil and gas activity in.
Production and so forth.
Do you think that the danger of famous last words.
Do you think that the.
The environment that we're in right now is any different than where we normally would be and a period of weakness as it relates to how you think about customer demand for barges.
Yeah kind of the worst thing you can hear in investing it's different this time.
Yes.
Hello.
GDP doesn't impact our volumes.
<unk> seen that been in our history.
Sure.
Where we get a recession and volumes pulled back.
Okay.
Demand grows with GDP as well so yes.
Yes, I think.
It's not different if we do get a recession and we get a pullback in GDP it will impact demand.
I would tell you the maybe the.
Difference now is there's just no new construction right the cost of building new barges is just very very expensive. So.
That's in check.
And then if you layer in kind of retirements, which are going to happen right, especially when you.
You go to bring an old barge into the shipyard and you look at the cost of replacing steel.
It's kind of mind numbing.
So that might be the difference is just the dynamic of of new supply, even if we get a little pullback in demand I think will still be tight and then when you layer in kind of the.
The horsepower picture, where we're short mariners the industry's short horsepower.
That's kind of a new newer dynamic a little stronger dynamic than we've had.
Now go into the oil and gas side of that.
It's.
The interesting dynamic is Europe right.
They're going to be short refined products because of the refinery feedstocks. So I think what we're seeing is export volumes are up a little bit on the refined product side Thats helpful is that does that mean, it's different this time now it's a little.
I think it's a little tailwind maybe for the U S refinery complex.
Lesser to a lesser extent for the chemical complex.
I don't know Thats, a long winded answer that that's a non answer but I don't think it's different this time with respect to demand I would say what is a little different this time is supply.
There's just.
<unk> on supply just based on the cost of new supply.
And then of course, the cost of keeping older equipment running.
That's probably the one thing thats different right now.
Okay. That's helpful and then for my follow up.
One of the things that we've heard about the river is that it's causing the low water levels are causing horsepower to really be tied up in your larger.
Larger power tow boats are unable to operate as well or.
You just can't get your.
It's challenging for tebo, so that's causing the price to go up.
Is that I know thats certainly true in the dry barge market are you seeing that same thing flow through onto the tank barge market and is it providing any level of of uplift and then if I could sort of tag an extra one on there and I know that there was one extra bars. It was reactivated in the quarter based on the presentation.
Do you guys have any any are you basically fully spent here or are there other pieces of equipment that can be brought back if demand warrants it.
Yes, let me take that in pieces first on the horsepower side, yes.
The big the Big horsepower you know the big 10000 horsepower tow boats on the river that push 50 50 dry cargo barges there.
Draft is too big so they are being tied up so.
Most of our horsepower smaller because our tow sizes are smaller I think we have one big vessel.
The bank right now because her draft is too much for the river, but most of our horsepower is a little smaller now it is to your point, helping give a little tailwind to kind of the market.
Particularly if you look at dry cargo rates there they were up 200%.
It's certainly helping on the on the liquid side as well.
Putting some more tightness in the market.
That said hopefully this is a.
A temporary situation, we get some much needed rain and get the river going again.
Sure.
The second part of your question was kind of reactivation I think.
As you would've expected during the pandemic.
Lot of lot of barges were kind of put on the bank and tied up.
Generally the older ones and the ones with little more maintenance headaches.
To put on the on the bank.
We're reactivating a handful of those I think maybe in the fourth quarter, we might have 10 to 15 coming back in.
There's not a whole whole lot left.
But the problem with with these barges that were tied up.
Last several years.
Cost of bringing them back in with steel prices.
And labor.
Really high we're only bringing back the ones that makes sense.
Is it is it going to be a whole lot more no, but maybe maybe in another quarter or two of <unk>.
<unk> five or so barges after we get through the fourth quarter could come back for US I don't think Theres a big hangover.
Overhang excuse me hangover overhang.
And in that supply there.
But.
Theres some that can come back I think the gating factor is just the cost of bringing off the bank again.
You hear it in our comments and everybody's comments. These days inflationary pressure and then when you put steel prices on top of it labor prices. It's it's really the inflation is real.
It's causing is causing.
Supplied to stay in check even more so than.
The cost of new builds which is which is a good thing and it's also.
It truly is part of the conversation you have with your customers because these inflationary costs are real.
We need price increases to just Steve.
Okay that makes sense.
I appreciate the answers and.
Maybe I'll bump into at minute maid over the weekend and go Astros.
Okay.
Thanks.
Okay.
Please standby for our next question.
Our next question comes from Jonathan.
Chappell with Evercore. Your line is now open.
Thank you good morning.
Hey, good David I want to pick up pick.
Pick up just where you left off you guys had mentioned cost escalators a couple of times in your prepared remarks, and then some of the Q&A.
So kind of a two parter here one.
Does this mean that when you look at margins similar to.
To prior cycles, given all the cost inflation you should be at similar levels based on.
The pricing environment Youll get all this cost inflation back and we should think about.
This upturn similar to the prior upturns from a margin perspective.
And two given the economic headwinds that you spoke about do you foresee any more pushback from the cost escalators, just given maybe the customer cautiousness or uncertainty.
Yes, So let me break that down a couple of pieces here and I'll, let Roger chime in too.
I don't cover at all.
First is fuel.
Yet.
There's a lag on fuel so that.
Recovering fuel cost.
We have escalators that work some of them are direct pass through some of them are monthly some are quarterly some take four months to work through so those those are some of the escalators we're talking about.
I think we get a little we can get a little pencil whipped there, but over over time, those fuel escalators average out and they work out.
Work with our customers and we don't want to make money on fuel escalators, and we don't want to lose money on fuel either so.
Agree with that.
We all work is done.
To try and make fuel as neutral as possible.
And then on some of the contracts, we have either CPI or PPI.
Which tries to keep up with inflation.
And I say tries it generally doesn't you know because you can see.
Certain categories and some of the suppliers that we buy for our boats.
Inflated.
Double digits in some cases, 20%.
Things like radar, it's an in line that you use on the boat so.
CPI PPI is meant to keep up with the general cost of inflation.
I would tell you it is.
Not perfect and we're a little behind.
But when we talk about escalators were talking about CPI PPI.
And then some of our contracts also have labor.
Labour escalators, which you take a portion of what you think your labor is in the contract.
And you use an index of labor rate index, which which we calculate some of our contracts evidence. So we get to recover some of that.
I would tell you that.
We need we need the price increases and so that leverage you just talked about where in past where we saw these these price increases you would think margins would pop more.
And in prior cycles, I would say, yes, it would pop more than we're seeing now because we're.
Part of what we're keeping up with inflation here.
So that is a little bit of <unk>.
Headwind against margin increase that said, we are still expecting margins to increase as we're just not not popping like you would have seen in prior cycles and that's it's really purely about the inflation environment.
If I could add I'll, just say that.
The way, we need rate to increase because of David's comments on inflation and I think.
This.
Approach that we're taking towards being very focused towards rate increases is very critical for us.
If I can just add in Q2, we saw fuel as a headwind I think we talked about that in Q3. It came out that fuel was kind of flat.
We're starting to see fuel increase right now so that kind of stuff.
That's what David was saying in terms of that whipsaw effect. So we will see when fuel goes im looking at the forward curve.
Going into next year and if that plays out then we should see recovery on fuel too.
Youll progresses.
Okay. That's helpful.
Just a follow up I wanted to.
Jack first question, just a little bit further I know you don't want to get into short term ism, but I think it's important to kind of frame. How we should look at 'twenty three David you said <unk> is typically the weakest quarter for all the obvious reasons, but if you are resetting most of these term contracts late <unk> that'll be marking to market conceptually much higher.
Youre getting some of these cost escalators through.
All else equal on the worst winter weather ever or the worst drought ever.
Should one to be better than <unk> as we think about just the market upturn as opposed to traditional seasonality.
Yeah.
Yes, we havent put pencil to paper otherwise answer but.
I think what you're saying makes it makes sense.
But we just.
Pencil it all out.
We've got a lot of contracts.
As Raj mentioned in his prepared remarks or in one of the answers was about 35% of contracts or repricing, we've got to see how that re prices.
Before we can declare that but.
In theory, I could see what you said absolutely happening.
I think I think.
With regards to Q1, we're hedging for weather and the situation on the Mississippi.
Alright so.
Sure.
I think if you go back consequent history says that Q1 typically has bad weather.
But all things being equal to your point John .
If we if we get to where we need to get on this 35% renewal, we should we should see better margins.
Okay. Thank.
Thank you Raj and thanks, David.
Again to ask a question. Please press star one one on your phone.
Our next question comes from Greg Lewis with <unk>. Your line is now open.
Hey, good morning, everybody.
And hi, good morning, Greg.
How about those beliefs.
How about it.
<unk>.
So I guess my first question.
<unk>.
Hal.
In the inland fleet is managing to the low water. You mentioned there is around 200 barges. You also mentioned that due to travel restrictions you kind of have the light load.
I guess, what I would say is in the environment that we're in right now if it is longer than we think could we should we expect more or less barges.
Ah forever.
Yes, I think Greg the short answer is I don't know, but I will.
We'll tell you Kristian and I talk about it with our ops guys were worried about a complete shutdown of the river unless we get some some meaningful rain so.
That would be a tremendous impact as you might imagine.
Fortunately with liquid barges, we are already lower draft. We can go a little lower.
If you go too low, though some of the boats don't go much lower in terms of draft.
I think.
Interesting thing is the cycle times, even with periodic openings.
Cycle times of <unk>.
Moving a barge up and down river are elongated so paradoxically youre seeing more barge demand from this.
The problem is.
Particularly with contracts of affreightment, youre, not moving as fast, but with time charters youre doing okay.
And then we have navigation clauses, which which kick in but there's usually something we call free time, which allows.
At the start of a voyage, if you get delayed by navigation, a certain number of hours before before the delay causes navigation play clauses kick in so it's.
I'm pleasantly up a little bit on purpose.
It's just hard to say I would tell you.
We are worried about a complete shutdown.
But.
If you look at liquid versus dry cargo, we're in much much better shape.
And then our navigation delay clauses help for sure and then part of the offset is the slower cycle times, which <unk>.
Which increases some demand in the whole ecosystem of the liquid barge market. So that's a long way of saying, it's really hard to quantify it could could be two to five cent headwind in the fourth quarter, maybe more if if.
We go the full fourth quarter without some meaningful rain.
Okay, Great and then I did wanted to pivot over to Florida, I know that that's.
The big market Tampa for the coastal business.
I was kind of hoping you think what's happened on the West Coast of Florida, maybe is impacting coastal if at all and then.
Just kind of two parter there on the C&I I imagine there is a lot of demand for power generation and things like that kind of curious what this whole impact.
The storm on.
On the West Coast of Florida is having on <unk>.
Coastal in C&I.
Yeah.
A couple.
Couple of couple of different impacts.
On obviously, we have a number of our branches in C&I shut down during the quarter.
With the storm.
We had.
Minor damage on one or two other places.
Mostly power outage, but as you know we have our own backup power. So we're able to cover our facilities, our rental fleet and C&I.
It is close to sold out as I've ever seen.
We provide backup power to people like Walmart target Costco.
Some some health care.
Interest as well.
And so we kept very busy there on on the actual coastal side.
We had to had to delay some voyages into.
Just north of Tampa, we go into in and out of Crystal River.
With a couple of big units and we've got a small small vessel there as well.
Last.
Essentially a couple of weeks' worth of.
Charter charter higher there because of the storm.
And then we had some equipment in shipyards in Tampa.
Net.
Paradoxically when.
The storm surge.
Went the other way they actually grounded while they were in <unk> not in Drydock, while they were in the shipyard. So that's delayed some things obviously lost some shipyard time.
But thats kind of all in our our our thought process most of that was seen in the.
The third quarter.
I would say Theres, a little lingering on the rental fleet as you go into the fourth quarter, because some of that stuff some of that rental equipment still on higher.
But it's.
It was a meaningful storm.
But.
Probably less meaningful than the other hurricanes that hit us in Louisiana, or Texas, where we have a lot more inland barges. So.
Long way of saying it.
It was impacted we didn't put.
Per share, but it did impact us a little bit but.
Not enough to make us call it out for <unk> for the quarter.
Okay, Alright, alright, everybody hey, thank you for the time.
Alright, Thanks, Greg.
Please standby for our next question.
Our next question comes from Greg <unk> with Zukowski with Webber Research. Your line is now open.
Yeah, Hey, David and Ross Good morning, Thanks for fitting me in here Okay great.
Morning.
So I wanted to do.
David could you talk a little bit more about the towboat market, what you've seen versus what you're currently seeing on labor constraints.
What you guys are doing with dedicated Capex and how that ultimately.
<unk> translates to utilization rates and margins.
Sure.
Sure Yes.
Well look labor is really tight.
I would tell you labor rates are up.
Mid to high single digits across the board both in both businesses in the marine business and in <unk>.
A lesser extent on the D&S side is probably on the lower end of that range, but.
There's been definite labor wage inflation.
Yes.
I understand it right I mean.
Inflation is impacting you.
Just about everybody just go to the grocery store to feel it.
But.
That's certainly not helped the margin situation and again to Echo Roger's comments Thats one of the reasons, we need we need these price increases to two <unk>.
Keep even with inflation.
In terms of.
What that's doing to our towboat.
We're a little constrained I would tell you that that.
We had more mariners it would be better.
But but were.
We're probably in better shape than most of our competitors because we have.
The school that I've talked about before where we train our own mariners in.
No.
Our ops team.
And Christian had the foresight to start that school up.
In January of last year, which which was.
At the time it was painful because it was a cost during the pandemic.
What was kind of a headwind, but it is a good thing that we did it now in terms of capital the second part of your question.
Our Capex I would tell you we're trying to minimize it a bit we've invested in our fleet over the last five.
Five years six years.
Lots of companies with younger fleets are probably in the best.
Shape, it's ever been.
Certainly don't need to build any new equipment.
There may be some specialized equipment, we might build.
A special line barge or something for a specific customer we might do or a special towboat, something we call a re track which is.
A tow boat with a retractable wheelhouse.
And we are building.
I would say the only real new belt, we have right now is our hybrid electric towboat that we have being built right now that should deliver sometime in the first half of 'twenty, three which we're excited about getting a lot of customer interest for.
Because of its <unk>.
Emissions profile.
But I would tell you our capex and Raj can give you better guidance. We we don't have guidance for next year, but we're trying to minimize capex because our fleets in great shape.
<unk>.
I would just add.
Greg that last the last two years, we were.
In the throes of the pandemic.
We manage capex and this probably.
<unk>.
The catch up we're doing this year.
But most of it if you look at it most of it is maintenance related.
Which which basically is what I am referencing to the.
Managing it through the pandemic and coming out right now and as you can see utility has improved so we need our fleet to be in a position to address the demand that we're seeing.
Got it okay. Thanks, guys.
And then back to DNS and overall strategy.
Wanted to explore the pros and cons of a split outside of the economics and finding the right price. So are there are there any other factors or synergies that we might not be thinking about from the outside looking in could you be losing any any sort of scale or simplifying your overall supply chain.
Maybe a tie in with marine repair any anything like that that we might not be thinking about.
Yes, there is some synergy.
R.
Our distribution services.
Engine repair group.
Works on our fleet and our tow boats all the time.
That's maybe 4% or less of.
Revenue on the <unk> side, so there's that synergy.
The other synergies are really just corporate overhead and sharing corporate overhead.
I guess there is some some future synergies that could be there and that would be.
Doing this electric hybrid.
Vessel.
Our colleagues at Stewart, <unk> Stevenson, which is Kirby owned company are very good at electrification.
Battery systems.
<unk> electric drive equipment so.
Yes.
That's almost a future kind of thing we're just building our first.
Diesel electric.
Towboat so.
That would be something but when you look at it its theres not a lot of synergies between the two other than.
The marine repair business.
Okay real quick what about.
Same kind of question for oil and gas versus C&I.
Is it a possibility or something you would entertain to split those two groups, maybe hang on to C&I and split off oil and gas or is that more of a package deal.
No I think the.
Board is engaged in.
Cognizant and would look at anything.
And continues to look at anything that might enhance shareholder value.
The board is of the mindset is if we can do one or the other or both.
And it adds value to the shareholders.
<unk>.
Open to that.
None of it's worked out thus far but I will say this the DNS market in whole.
Our comments.
It's pretty constructive right.
Yeah, Okay. Thanks, David Good luck against silly.
Okay.
Okay.
Sure.
This concludes our question and answer session I would like to turn the conference back over to Mr. Kurt and Matt for any closing remarks.
Thank you Michelle and thank you everyone for participating on the call today. If you have any follow up questions reach out to me directly at 703.
Or is there a 517.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
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