Q4 2022 Kirby Corp Earnings Call
The conference will begin shortly.
Lower Johan during Q&A, you can dial star one one.
[music].
Okay.
Good morning, and welcome to treat the Kirby Corporation 2022 fourth quarter earnings Conference call. All participants will be in a listen only mode. After today's presentation. There will be an opportunity to ask questions. We ask that you limit your questions to one question.
One follow up to ask a question. During this session you will need to press star one on your telephone.
In here and on the main message advising your hand is raised to withdraw your question. Please press star one one again.
Please note this event is being recorded.
I'd now like to turn the conference over to Mr. Kurt The Mets Kirby's VP of Investor Relations and Treasurer.
Go ahead.
Okay.
Good morning, and thank you for joining US with me today are David Brisbin, Keith 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 <unk> 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 forward looking statements.
Statements reflect management's reasonable judgment with respect to future events forward looking statements involve risks and uncertainties and our actual results to differ materially from those anticipated as a result of various factors, including the impact of 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 and in our other filings made with the SEC from time to time.
Now I'll turn the call over to David.
Thank you Kurt and good morning, everyone.
Before we get into the details of our fourth quarter and full year results I'd like to take a moment to touch on a press release, we issued earlier this month.
The board initiated a process in early 2022 with the support of our independent financial and legal advisors to review a range of alternatives, including a potential sale or spinoff of the distribution and services business.
The board is keenly focused on maximizing value for shareholders and regularly reviews and actively manages urban portfolio.
Following a thorough exploration of potential options, including discussions with a number of potential strategic and financial Counterparties.
The board concluded that under current financial market conditions.
The best way to enhance shareholder value is to continue to execute on our strategic plan for both the marine transportation and distribution service business.
As always we remain committed to maximizing value for shareholders and we will continue to evaluate all opportunities to do so.
But as you know the.
The financing environment is impacting the ability of <unk>.
Sponsors and strategics to pursue and consummate transactions.
We have deep operational expertise and unique capabilities that position both of our businesses to deliver long term growth and enhanced performance.
This is underscored by our strong financial results and operating performance in 2022.
We're encouraged by the bright prospects of the company's two segments and look forward to continuing to operate these businesses from a position of strength.
Now turning to our financial results earlier today, we announced fourth quarter revenue of $730 million and adjusted earnings of 67 per share.
This compares to 2021 fourth quarter revenue of $591 million and adjusted earnings of 27 per share.
Most of our segments performed well during the quarter delivering significantly higher revenue and operating income year over year.
The fourth quarter's results reflected steady market fundamentals in both marine transportation and distribution and services.
Partially offset by unfavorable weather and low water conditions normal seasonal slowness as well as ongoing supply chain challenges that delayed deliveries in distribution and services.
Yeah.
In inland Marine transportation strong refinery utilization led to steady demand with our overall barge utilization running in the 90% range.
Tight market conditions due to strong demand and limited supply of barges, coupled with continued inflationary pressures put upward pressure on prices with spot prices up in the low single digits sequentially, and then the 20% to 25% range year over year.
Current contracts also renewed up.
And to 15% range versus a year ago.
Overall fourth quarter inland revenues increased 24% year over year and margins improved into the low teens range.
Low water conditions on the Mississippi River as well as the onset of winter weather.
For difficult operating conditions in the quarter with a significant increase in delay days.
While we continue to face headwinds with inflationary pressure in the quarter, we started to witness some moderation.
And operating margins continued to improve reaching their highest level since 2020.
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 low to mid single digits sequentially.
Better coal shipments in our dry cargo business also contributed to improved revenues and increased operating margins overall.
Overall fourth quarter coastal revenues increased 8% year over year and operating margins were in the low single digits.
Okay.
In distribution and services.
Man remained strong across our markets with continued growth in new orders and backlog.
Manufacturing revenues were up sequentially and year over year, driven by healthy demand for our environmentally friendly pressure pumping equipment and power generation equipment for E. Frac.
However, as expected significant supply chain issues delayed many new.
Deliveries during the quarter, we continue to work diligently to manage continued supply chain challenges.
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, our fourth quarter results reflected continued strength in market fundamentals for both segments, despite meaningful weather and supply chain challenges.
The inland market is inflicting nicely demand is strong and rates are moving higher.
While the coastal market remains challenged near term by industry wide supply dynamics, our barge utilization is good and we realized modest rate improvements.
Strong demand in distribution and services is contributing to further growth in our backlog while supply chain issues are expected to persist for the FERC seeable future. The outlook for the market is strong we continue to focus on working safely efficiently and responsibly to meet and exceed our customer.
Need and expect to drive incremental earnings growth into 'twenty, three and into 2024.
I'll talk more about our outlook later, but first I'll turn the call over to Raj to discuss the fourth quarter segment results and the balance sheet.
Thank you David and good morning, everyone.
In the fourth quarter of 2022 Marine Transportation revenues were 423 million and operating income was $47 million with an operating margin of 11, 1%.
Compared to the fourth quarter, one marine revenues increased $72 million or 21% and operating income increased 21 billion up 82%.
Compared to the third quarter of 2022 Marine revenues were down 2% and operating income increased by 12%.
As David mentioned, the historic low water conditions on the Mississippi River as rapid freezing weather along the Gulf coast that curtailed refinery and plant utility late in the quarter negatively impacted operations.
These negative factors.
Partially offset by solid underlying customer demand and improve.
<unk> pricing.
The inland business contributed approximately 80% of segment revenue.
Average barge utilization was in the 90% range for the quarter, which is similar to the utilization fee in the third quarter of 2022 and compares to the mid to high 80% range in the fourth quarter of 2021.
Long term inland marine transportation contracts or.
Those contracts have a terrible one year or longer contributed approximately 55% of revenue with 60% from time charters and 40% from contracts of affreightment.
Improved market conditions contributed to spot market rate increasing sequentially in the low single digits and in the low to mid 20% range year over year.
Gov contracts that renewed during the fourth quarter.
On average in the 10% to 15% range compared to the prior year.
Compared to the fourth quarter of 2021.
Inland revenues increased 24%, primarily due to increased box utilization higher term and spot contract pricing and increased fuel rebuild as the average cost of diesel was up 60%, yes again.
Come back to the third quarter of 2022.
Revenues were down 2% driven by favorable operating conditions due to lower water on the Mississippi River at winter weather.
Operating margins were negatively impacted by 147% sequential increase and delayed at.
However, the margins.
Low teens and improved both sequentially and year over year.
Hey, Dave and inflationary cost headwinds were more than offset by gains in 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 90% range in the fourth quarter of 2021.
During the quarter the percentage of coastal revenue under term contracts was approximately 65% of which approximately 90% what time charters.
Average spot market rates were up in the low to mid single digit sequentially and renewals of term contracts, while higher than the low teen range.
Yes.
During the quarter wholesale revenues increased 8% year over year.
With improved barge utilization higher contract prices and higher fuel rebuilds.
Overall, we still had a positive operating margin in the low 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 fourth quarter as well as projections for 2023. 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 fourth quarter of 2022 were $307 million with operating income of $17 million.
Compared to the fourth quarter 2021.
The distribution that subset segments segment saw revenue increase by $67 million or 28% with operating income increasing by $10 million or 127%.
When compared to the third quarter of 2022 revenues decreased by $5 4 billion or 2% and operating income decreased by $5 2 million.
The sequential decrease in revenue and operating income was attributed ongoing supply chain delays as well as <unk>.
No slowdown activity.
In the oil and gas market favorable commodity prices and increased rig and completion activity.
Contributed to a 44% increase in revenues.
We experienced strong demand for U S chicken parts throughout the quarter.
As David mentioned, we continue to navigate a tough supply chain environment, especially in our manufacturing business.
Despite the supply chain headwinds the manufacturing business experienced continued favorable trends in new orders and backlog.
Overall oil and gas represented approximately 42% of segment revenue in the fourth quarter and had operating margins in the low single digits.
The commercial and industrial side strong activity contributed to an 18% year over year increase in revenues with improved demand for equipment parts and service in our marine repair and off highway businesses.
Our generation was also up year over year.
Compared to the third quarter of two commercial and.
Industrial revenues increased by 8%.
Our thermo King business continued to experience delays due to supply chain constraints that impacted revenue growth. However, this headwind was offset by increased activity in marine power generation and on highway.
Overall, the commercial and industrial businesses represented approximately 58% of segment revenue and had an operating margin in the high single digits during the fourth quarter.
Now I'll turn to the balance sheet.
As of December 31.
We had $81 million of gas with total debt at $1 1 billion and our debt to cap ratio improved to $26 two perspective.
During the quarter, we had cash flow from operations of 100, $132 9 billion and we generated cash proceeds from asset sales of retired marine equipment of $4 million.
We use cash flow and cash on hand to fund $52 3 million on capital expenditures, our capex primarily related to maintenance of equipment.
During the quarter, we decreased debt by $39 million.
There were no repurchases of company stock during the quarter given the blackout associated with the Companys strategic review.
As of December 31, we have total available liquidity of approximately $585 million.
For 2023, we expect to generate cash flow from operations of $480 million to $580 million.
We continue to work through supply chain constraints that are challenging for some capital in the near term.
But we expect to unwind most of this working capital as orders shipped in 2023 and into 2024.
In respect to Capex, we plan to provide further guidance on 2023 expected Capex later this year as we gain more clarity on projects, including planned shipyards and the impact of supply chain delays.
We are committed to a balanced capital allocation approach.
Use this cash flow to 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 the remainder of our outlook for 2023.
Thank you Rod.
As discussed we achieved strong fourth quarter results in both of our segments and we expect that to continue into the first quarter.
In marine steady demand driven in large part by high refinery utilization and chemical plant utilization should continue to support high barge utilization.
Limited new barge construction combined with inflationary pressures are expected to further support inland rate increases.
Well all of this is very encouraging.
We are mindful of the ever changing economic landscape and the potential recession.
We continue to expect refinery and petrochemical plant activity to remain high with an increase in customer volumes.
Barge availability is constrained as there is minimal new barge construction expected in 2023.
These positive factors are expected to contribute to our barge utilization and 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 our inland revenues.
We also expect continued improvement in term contract pricing as renewals occur throughout the year.
Overall, we expect inland revenues will grow approximately low double digits year ago year, and expect near term inland operating margins to average in the mid teens.
<unk> gradually improved throughout 2023 and in the year close to if not 20%.
Okay.
In coastal market conditions are expected to remain steady.
<unk> remained somewhat challenged near term by underutilized barge capacity across the industry.
Even with some market softness Kirby coastal barge utilization is expected to remain in the low to mid 90% range.
Full year 2023 coastal revenues are expected to be flat year over year, driven primarily by continued good fundamentals in our core liquid cargo business and higher coal shipments in our dry cargo business offset.
The company's planned maintenance and ballast water treatment installations, which are driving an almost doubling of maintenance days compared to 2022.
Operating margins for coastal are expected to be near breakeven to low single digits on a full year basis.
Looking at distribution and services, we have a favorable outlook with anticipated strong demand for parts and service and distribution and a growing backlog of manufacturers.
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 products parts and service and the distribution business.
We expect the current commodity price environment will contribute to further increases in rig count and frac activity in 2023.
U S land rig counts have grown to over 770 rigs whats represented a full year average increase in 2022 of approximately 28%.
And we expect that growth to continue into 2023.
Similarly, the active frac spread count is approaching 295.
With this growth, we expect to see increasing demand for engines parts and service and distribution and manufacturing we have a growing backlog position.
We added new incremental orders in the fourth quarter and we expect this trend will continue.
As I mentioned earlier, we expect that supply chain issues and long lead times from four OEM equipment.
In some cases are extending beyond the year to remain a challenge.
These issues are likely did contribute to some choppiness with new product deliveries, which could potentially shift between quarters in 2023, and perhaps even into 2024.
The commercial and industrial we are forecasting steady demand in on highway with increased on highway and municipal repair work continued improvement in bus ridership and increased demand for thermo King refrigeration drive.
<unk>.
Offset by lingering supply chain plays.
In power generation, new backup power installations parts and activity 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 coasts.
For the 2023 full year, we expect revenue growth in the low double digits range for our commercial and industrial.
While supply chain issues are expected to continue impacting new product and equipment deliveries in distribution and services. We expect 2023 segment revenues will increase by 10% to 20% compared to 2022 with.
With commercial and industrial representing approximately 60% of segment revenues in oil and gas from representing the remainder we.
We expect segment operating margins will be in the mid to high single digits for 2023.
Yeah.
To conclude <unk> 2022 results showed steady improvement in the face of ongoing challenges.
Both our segments performed well during the year delivering improved revenue and operating income and our team executed well on near term object objectives as well as our long term strategy.
We exited the year with healthy long term fundamentals.
For both our businesses and they are both very well positioned to continue delivering value.
Although we see favorable markets, continuing and expect our businesses.
We will provide improved financial results, we are closely monitoring the potential for recession.
Having said that as we look long term, we are confident in the strength of our core businesses.
And we are confident with 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.
As a reminder, press star one one on your telephone and to withdraw your question Press Star One one again.
Please standby, while we compile the Q&A roster.
Our first question comes from Jack Atkins with Stephens. Your line is now open.
Hey, Greg Good morning, guys.
Guys, congratulations on being able to really capitalize on the pricing opportunity in the fourth quarter nice work there.
Thanks.
I guess I would love to kind of get your thoughts as we kind of think about the 2023 outlook, David and Raj you may want to tag team. This one but.
As you sort of think about sort of what's baked in there can you help us think about.
Are you are you factoring in any sort of mild recession soft landing heartland and kind of help us think about that and then.
To what degree do you feel like the market.
There's going to be able to support continued rate renewals in inland.
Above inflationary cost increases can you kind of walk us through both of those items in terms of whats baked into your outlook for 2023.
Yes sure Jack.
Well.
Look I mean, you know the.
The market fundamentals, particularly with inland are really strong right now.
Demand has continued to be strong we're seeing refinery utilization as everybody knows is strong did see a little pullback in chemicals in the fourth quarter, but that started to come back again in the first quarter, but not enough to impact kind of the demand picture.
So the demand picture is still very strong months and months the supply picture is even better.
Nobody is really building any new equipment of substance and.
Prices are high rates arent aren't anywhere close to justify new construction, but then there is there's a big maintenance bubble thats hitting the entire inland industry.
For the next two years and it's really about there's a five year shipyard major process.
And it's about one most of the barges were built or good portion of them were built a number of years ago.
So the industry is going to hit.
Pretty heavy maintenance schedule and 23 and 24, so that's actually going to help barge availability remain really tight so.
When we look at the outlook for for inland.
It's very strong it's about as strong as we've ever seen it in terms of supply and demand balance. So that's a long way of saying, yes, I think the rate environment is going to increase.
And continue it needs too by the way, if we're ever going to get to.
Rates that justify replacement.
Capacity.
That said.
As we look through 'twenty three.
We didn't factor in a big recession at all we think as we look at the demand for our products.
Most of it should.
Can you even with a with a mild recession that said if we get a.
Chart down.
Recession.
That could impact us we did not factored that into our guidance, we think we will.
To use a phrase power through this.
Potential economic.
And it's really all about.
Our supply and demand position, it's about as strong as we've seen Jack.
Okay David.
Really helpful. Thank you for that and I guess, maybe kind of shifting gears Raj I'd like to kind of dig into the cash flow.
The capex comment for a moment.
Can you maybe walk us through why you are not comfortable providing a capex.
Outlook for 2023 at this time and.
Maybe if it's possible to kind of give a range I think folks are trying to you guys are generating very strong free cash flow to me. That's a very important part of the valuation case around the stock any sort of help you can give us there in terms of what's going on from a capex perspective.
Yes, Jack good morning, Thank you.
Yes.
You are absolutely right, we generate very strong free cash flows, but David mentioned, the maintenance base that we're going to have to deal with.
It's an industry wide phenomena.
We'll see.
Shipyards that were seeing its across the board. It's both we're in London as well as offshore inland load is going up by 20% to 25%.
So we're dealing with this situation right now we're getting it all sort of supply chain issues would also impact the capex spend as well as whatever.
Turning pressures that we see so right now there are a lot of puts and takes the team's penciling. It out I think we should be in a position to give you a better capex number more meaningful capex number.
Very soon.
We should be able to be able to do that but right now we're not we're not in a position to provide.
Real Capex number.
Yes, I think Jack just to add to that look the cash from operations is going to be strong.
Obviously, we've got.
Maintenance Capex.
Cycle here that we're still working through.
But I would just tell you in terms of deployment of free cash flow. Obviously, you saw the share repurchase.
Authorization.
We're pretty excited about that.
As you look at opportunities.
Kind of the best parts company go by right now is Kirby so we're pretty excited about it.
And.
We will have updates as we progress through through the first quarter and just to follow up on that real really briefly though I mean is there is there any reason why you still wouldn't be in a position to generate.
Very healthy free cash flow in 2023, even though there is still a little bit of uncertainty around what the capex would be.
There is not a scenario where.
You would not be up strong free cash flow generated this year is that correct.
Right.
We will have good free cash flow I think thats the best statement. Okay. Okay. Thank you again for the time guys really appreciate it.
Please standby for our next question.
Our next question comes from Ken <unk> with Bank of America. Your line is now open.
Great. This is Nathan <unk> dialing in for Ken Hester.
Great quarter, guys just on Dave.
Dave's comments on strong inflationary on the inflationary pressures coming off a little bit on the inland side.
Recalling back to you in November update where some of the cost items were up.
70% and above.
Just wanted to see how the management team.
Cost trending into 2023 and with this new backdrop.
Normalizing commodity costs, how does that affect the exit rate of 20% inland margin for 2023.
Yes.
Inflation is.
It's still here is I think.
Most of our steel.
What I would tell you on inflation as we haven't seen it can grow we need further but.
When we look at.
Food for our marine crews.
Those prices are up 10%, but they haven't got further up.
There's still a lot higher than we traditionally have you'd look at crude transportation, whether its rental cars or airline flights those costs are up significantly from from kind of the norms anything electronic related for example, radars are things on our boats.
Still up.
What I would say.
Maybe we Didnt state this.
In our prepared remarks, but inflation hasnt come down, but it hasn't grown any any further so.
We'd like to say, that's abating, but we haven't really seen prices.
Track, we've just seen them not go up as much as they were kind of flattish from where they were last quarter. So.
That helps obviously with.
We've needed price increases just to keep up with inflation.
If inflation stays in check and doesn't grow anymore that obviously would help our margin profile.
And kind of get to where.
No.
We've talked about in our prepared remarks in terms of the end of the year.
Now if inflation goes up further.
One of them.
Obviously have an adverse effect to margins.
Right now we feel pretty good that things are kind of flattening out obviously, the fed we will see what they do today.
And it's being very aggressive pertains inflation so.
Yes, thats, good and bad obviously, we hope it doesn't trip us into a recession.
And just to clarify on the margin targets set for 2023 across the segments that is baking in sort.
A flattish cost structure into the into this year would that be correct.
Yes flattish in terms of general inflationary. Thanks, obviously, we're going to have.
Crew labor costs go up.
I think everybody is seeing labor costs continue to rise that.
That obviously is going to happen with <unk>.
Factored a little bit of that in.
It gets acute.
We have some headwinds, but right now we factored in a little labor inflation, but the rest of the kind of the.
Rest of the inflationary pressures, we think we will just kind of stay where they are at we don't we don't anticipate any sharp price increases across.
Most of our supply chain.
Great.
And just as a follow up on on the capital strategy into 2023.
Im aware of that.
The Capex plan is still filling the works but.
In terms of capital deployment are there any updates on how.
The company is seeing M&A into 2023, how are you viewing the availability of opportunities here.
Yes.
If there are opportunities out there, it's best for us not to comment on any of those but.
Look there are opportunities out there, but I would tell you. It look we've got a history and we always like to consolidate particularly our inland.
Inland tank barge market.
That said.
I feel strongly in the board does too that the best barge company or buy right. Now is currently when we look at R.
Our prospects.
In Marine and then in our distribution business, it's about as good as we've seen in the long mile. So we're.
We're quite excited and we believe that it's going to be multi years, it's not just the.
One year kind of phenomena. So when we look at capital deployment for acquisitions.
We're factoring in.
Kirby Kirby looks pretty good right now.
Got it thanks again for the time.
Please standby for our next question.
Our next question comes from Greg Lewis with <unk>. Your line is now open.
Yes, hi, Thank you and good morning, everybody and thanks for taking my question.
Definitely good to see.
Starting to find its groove.
I did want to touch a little bit on kind of the.
I guess.
Ongoing dynamics in that market.
A lot of us that follow.
Refinery products industry are looking at that Russian oil embargo on products coming out in February and some of the challenges are.
That kind of the refining industry might have to face or actually more of an opportunity than challenges I guess, but as we think about that coming next month.
Is there any way, we can think about or how are you thinking about potential changes in activity feedstocks. We're hearing a lot about obviously, it's going to be problems with pgi.
What type of setup does that should we think about that creating and the first part of this year.
Well, let's break it into a few of our trade lanes I don't want to get too specific for obvious.
Reasons with competitors and customers but.
Look the refinery complex is really strong right now demand for refinery type.
Find product moves is very very strong right now probably the strongest we've ever seen it.
Yes.
A lot of that is kind of reopening.
We're also seeing export volumes look pretty good so.
Okay.
Look the refiners had great crack spreads and theyre pulling back a little bit, but there's still.
In terms of traditional crack spreads are still pretty strong.
The refinery complex in the U S is probably the most efficient in the world.
Yes, I think so.
Our refineries in Europe , that's a whole another.
Although the situation and then if you pivot to chemicals, it's really more of the same right.
Chemical complex in Europe .
Obviously with natural gas prices high energy prices, it's really suffering.
<unk> position in chemicals, one you've got brand new plants are very efficient plants that were recently built in the last four five years.
Good feedstock position.
So chemicals, though did pull off a little bit in the fourth quarter.
<unk> been coming back slowly here so far in the first quarter is a little early to say.
How far that's going to go obviously, when you listen to the chemical companies earnings calls Europe is hurting.
A little bit on <unk>.
Housing housing starts hurting a little bit as well, but.
So far it feels pretty good and things are the volumes and pulled off enough to really impact our our demand and supply picture.
When you look at black oil and other things.
That's pretty strong.
I will tell you we talked about the maintenance bubble thats hitting the industry I would tell you it's more acute black oil than it is.
Els.
Huge number of black oil barges that are going to have to be maintained across the industry in 'twenty three and 'twenty four.
But demand seems to be holding up in black oil.
And then if you look at AG products.
It's been pretty strong as well so yes, we look at each of those trade lanes.
Have been very encouraged by the demand picture now that said and you heard it in my cautionary comments about a potential recession.
It could it could pull back a little bit but right now when we look at the demand side of things and the supply it's still really positive for us Greg.
Okay. That's great that's great to hear and then and then you did touch a little bit on pet chems.
Yes.
I guess Q1 is seasonally.
<unk> quarter for you.
I guess, maybe given the fact that we've seen I guess, what natural gas prices down 30% year to date.
Yeah.
Could that kind of.
Could that collapse in natural gas prices may be.
Q1 be a little less weak just given the fact that.
As a pet Chem plant.
We have must be in a very prompt much more profitable environment than we were say six to eight weeks ago.
Yes look.
You're right. Our first quarter is almost always our weakest quarter of any year and thats really weather related.
It's one thing with low water, but fog, just really shut us down on the Gulf Coast.
Through the first quarter, a lot of them and we get impacted so that's part of the weakness but.
But to your point I think natural gas prices being a little lower certainly is going to help the chemical complex be a little more profitable, which should help volumes a bit.
At some point, we're going to see China open back up.
China is a big.
Big consumer of chemicals as you know the other interesting thing that Venezuela crude for example imports.
It's positive, but it gets a heavier crude slate into the Gulf coast.
That that has more byproducts as you know.
Really helped help.
The entire barge complex.
All the different derivatives that can come from that.
Heavy crude slate so.
Yes, maybe that maybe that helps a little bit in the first quarter, but look first quarter as you know, it's been our weaker quarter of the year, but.
But again, the overall supply demand picture for us in 'twenty three is very robust.
We're pretty excited about what we see in front of Us Greg.
Okay, great. Thank you very much and nice job on the quarter guys. Thanks have a great day.
Thanks, Greg.
Please standby for our next question.
Our next question comes from Greg lots of Koski with Webber Research. Your line is now open.
Hey, David and Raj how are you doing.
Good morning, good morning, Greg.
Yeah. Thanks, Thanks for taking the questions.
First one David curious if you can you just talk about.
What you've seen with rate movement, so far.
Through Q4, and so far into Q1, I know, it's a smaller sample size.
But from what we've seen there's been maybe a little bit of a plateau in that period. So could you comment on that and then have you revisit your thoughts around that.
The pace of the recovery versus the overall sustainability of the recovery of that relationship.
Where we were towards the back end of 2022 versus how 2023 is shaping up.
I'm, a sustainability perspective would be great.
Sure sure Craig.
Look.
Our prepared remarks, probably hurt some of this but sequentially. We saw spot rates up mid single digits that was off of a very strong third quarter. So fourth quarter sequentially was still up mid single digits on spot contract.
Well.
Look at spot year over year, it's still up 20 plus percent.
From a year over year on spot and term contracts were up double digits, which.
That's on a year over year basis, which is pretty strong.
I would tell you we're still seeing a good pricing environment, it's still very tight and prices are still rising.
<unk>.
Really haven't filled up.
Plateauing.
Maybe maybe some of the market checks are seeing that but we're not it's still very very strong and it needs to be.
We've talked about inflationary pressures, but.
We've got a situation, where we're still a long way away from being a having rates to build replacement capacity. So we need to continue with the with a good price momentum in <unk>.
Given as tight as we're seeing it in terms of <unk>.
Supply and demand.
Yes.
We're not seeing a pullback in rates at all.
And again.
Talked a little bit about the maintenance cycle that the industry is going to see it it's going to have a profound impact to profound is probably too strong a word, but it's certainly going to.
Going to add.
Add some momentum to this.
So that's a long way of saying again, we're pretty optimistic.
You can't get noise in the winter months, I'll, just say that.
So maybe I don't know what your market checks are telling you, but sometimes you hear some noise in the winter months, but again, we're very positive Greg.
Okay.
Okay, great helpful. Thanks, David and then.
Somebody's got to ask about DNS, So I guess I'll do it.
Alright.
Are you expecting to I'm, just trying to see like kind of where where that stands heading into 2023 now that the strategic review is closed are you still expecting to.
The market that business for sale into 2023.
You only entertaining unsolicited offers at this point.
Obviously under the caveat that you're always evaluating all options for shareholder value Yada Yada yada, but just trying to see how front of mind and this is for going into 2023.
Or.
Is it more of in the rearview mirror at this point.
As far in the rearview mirror, but look I mean, you said it well we're always open always open to ways to add shareholder value and should should the market changed or something happened that makes.
Makes a spinoff makes sense with the absolutely look at it that said the business is really strong right now.
We've had good inbound.
Electrification.
Product offering offerings are very strong E. Frac is doing really well.
Sure.
Whether it's backup power generation. That's all is also doing well and if you think about it everybody wants powers 2007, and when you start worrying about the fragility of the grid that makes even more sense.
On highway our commercial and industrial businesses.
Strong.
Our marine repair business is strong so as we look at KBS gone going into 'twenty, three and into 'twenty four it feels pretty good.
Reiterating some of our thoughts about Kirby, but.
Both our marine business and our KBS business are good solid upswings that we feel will last for several more years. So.
It is a strong but that said I will go back to kind of the way you phrased that we're always open.
The ideas.
We ran a very thorough process on this.
We're focused on executing our strategy right now, but there's some changes absolutely look at it.
Okay got it thanks, a lot guys.
Ladies and buy for our next question.
Our next question comes from Ben Nolan with Stifel. Your line is now open.
Hey, David can you hear me okay.
Yes, how are you doing that great.
Great.
How are you.
Yes.
Yes.
Sure.
I wanted to if I could just circle back to where we were just left off on the D&S side and then also makes it in an area a little bit with what you were talking about with respect to pricing for inflation.
The margins were a little bit lower than I thought given sort of everything thats going on.
Tracking equipment.
The pricing power it seems like it should be there.
Should we think of that is just a function of there's been a lot of inflation in that market and so you've had a lot of pricing power, but it basically kept up with inflation now.
To the extent that maybe inflation is beginning to moderate.
Thats really where you should see margins or is there some sort of economies of scale dynamic where now you get to a certain point, where margins just inflect because youre able to do a lot more volume or perhaps should we think about the margin profile on that side of the business.
No I think you've characterized it very well.
Inflation, we've been we've been raising prices DNS.
But.
It's basically kept kept pace with inflation and the other thing. We have is is a little bit of a supply chain.
Margin erosion.
Let me give some context around that talk about a $1 million piece of equipment with 400 to about.
Parts and all of a sudden you cant get some part certain parts and so you reengineer a replacement part and.
This is pretty sophisticated equipment and we'd like to make sure.
Nailed the engineering down. So every time, you shift a source or a shift to a part design or something to me the supply chain headache.
It adds a little cost so there.
That dynamic as well so it's an inflation in our supply chain dynamics impacting margin that said.
Are pushing price and they need to write them and we've got to offset these costs.
But I would just say on particularly on our <unk> manufacturing the supply chain has been really really tough.
It is.
New I mean, everybody is saying it.
But some of our Oems.
For some engine deliveries, we can't get engines for until 2025.
Even though we're running now so the supply chain issues are still real.
But it's something we're working through and.
The good news is demand from our customers is there.
And it's really us and hand to hand combat.
Dealing with delays that come inevitably when you've got.
A parts list that that runs in the one hundreds.
Youre short one or two parts that are key to.
Finishing equipment.
That said, we don't where we are keenly focused on getting <unk>.
Margins up into the high single digits.
Yeah.
The whole organization working hard towards that.
Okay.
Helpful color I appreciate it.
And then I wanted to talk a little bit about just barge supply you mentioned it with.
With respect to <unk>.
Supply and demand pricing or anything else.
Yes.
We've seen that I think there were 22 tank barges delivered last year, some ridiculously small number it.
It would seem to me that there's probably likely to be a shrinking of the barge fleet. This year.
And that would lend itself to.
Substantially higher secondhand prices.
I was wondering if you could maybe characterize that and then and then to that answer to how do you feel about.
Buying equipment.
Other companies if there is a little bit of.
Price escalation.
For second hand equipment.
Yes.
One of the reasons, we actually think Kirby is a great.
Greg large company to buy but no.
Youre right with the maintenance cycle that we've talked about here on the inland side.
Sort of a lot of companies are going to be taking their barges in for their five year maintenance cycle and look at it.
That makes sense to continue it so we will see retirements over the next two years because of this maintenance cycle. So.
With that little building.
And the a pretty heavy maintenance cycle, you should see some pretty healthy retirements over the next two years.
Which to your point is going to.
Going too.
One month is going to help the supply demand situation get even tighter, but it's going to make people look for for equipment. So.
Yes, I think there is a situation just because of the replacement cost.
<unk> of equipment that any transaction.
Buying a consolidating transaction price expectations could be very very high so.
As you know, we're pretty disciplined about that.
Okay.
We certainly not going to chase a consolidated move, particularly when we feel as strong as we do about <unk> outlook.
Okay. That's helpful color I appreciate it thanks David.
Thanks, Patrick.
As a reminder to ask a question. Please press star one one on your telephone.
Please standby for next question.
Our next question comes from William Baldwin with Crescent Securities. Your line is now open.
Hey, good morning, Bill. Thank you very much and good morning, Dave Raj Chris.
Okay.
Rob could you comment a little bit on the cash from operations here in the fourth quarter.
Looks like that at least based on what you were talking about the end of the third quarter that.
It didn't come.
At the level that you had anticipated.
Could you talk about the factors that number one am I interpreting that correctly and secondly, if so.
What contributed to a little bit of a shortfall there.
Yes Bill.
You are right.
Cash cash from operations in the fourth quarter, Miss some missed our expectations and that was driven actually by on the D&S side.
Had inventory build and.
I think between David and I've used the whats light chain quite a fair bit on this call, but it's a true phenomenon. So we've had issues in terms of getting products shipped out.
And what's happened is that that's resulted in a buildup of working capital.
The fourth quarter.
My expectation is as we get into 2023 time frame, we will ship those products. So whatever this is work in progress right now we'll get we'll go into finished goods over change rates III. It gets shipped out. So yes, we will we put ourselves out there we set ourselves a higher expectation, we tried to execute to it but the supply chain challenges.
Just got the better of US yes. It is.
Just put a little color on that bill.
Probably.
Yes.
Probably had $50 million worth of sales of <unk> that didn't materialize that we would have expected and normal supply chain.
Environments to have materialized.
The fourth quarter. So if you think about construction in progress or with work in progress those inventories are higher.
Our working capital.
Certainly is lot higher than we like.
And the bulk of that is from.
From supply chain issues, but there is also a phenomenon.
On receivables I think with higher interest rates, we've seen customers push out their payables, which are our receivables and so we've seen a little build in working capital.
We've got to we've got to go after that but.
It is something Thats.
Perhaps.
Economy related and supply chain.
That's very helpful. Thank you.
Secondly, I was gone.
On the supply chain issues, you mentioned engines being.
Very critical product thats not being delivered.
Are there any other.
Important components or parts that you could highlight that are giving you a real issue on supply chain.
On shortages.
Yes, there has been an electric componentry.
On the Frac side.
Kind of the.
Natural gas Recip.
Power generation side.
For example, things like electric panels.
You would think that would be a pretty easy thing but.
There's a lot of.
But.
That are jammed up in the supply chain.
Is there any visibility there David.
As you look out in 2023, I mean do you have any.
And our line of sight on.
Meaningful improvement.
Yes, we do.
Each each components.
We put our supply chain team on it and they get a path forward and then something else.
Raj calls it whack, a mole kind of like the yellow.
The game whack a mole.
Down on one.
Some other supply chain piece.
But it is it is component by component.
In a pinch on that component, we worked with supplier work with alternative sources.
Reengineer, some things and get it back lined out, but then frankly something else Pops up.
It's a bit frustrating, but look we're managing through it we still have a pretty good revenue.
Quarter ABS.
It's just where.
Still taking inbound and.
And delivering and it's just the deliveries are taking longer.
Yes, Bill if I could add a book to bill is above one so thats.
So very healthy.
Auto rate that we're looking at so it's not for lack of a bad to David's point.
No no it's got to be very frustrating.
Also it seems like I mean, a number of your product lines. Obviously, you have applications far beyond the oil and gas business.
So <unk> got opportunities that you could be out there going after that.
Our disk drive now Youre limited on doing.
Yes.
Look the.
The electrification, whether it's a micro grid or whatnot, but.
Okay.
It is amazing.
When we look at our for example.
Our backup power rental fleets.
Our utilization last year, even with a light hurricane storm.
Season, our utilization was probably the best it's been.
It's just every company.
Needs and wants to have.
Power 24, seven so.
The electrification of the U S and the world for that matter.
It seems to be a real phenomenon and it's actually.
It's driving many opportunities some design, a new product standpoint for KBS.
Just one last clarification.
David.
If I read correctly in the release.
You indicated that.
In the inland barge business.
You were looking for net a small net increase in Bart in net new barges in 2023.
Here on the call would not lead me to.
To think thats going to be the case.
Yes did I read that did I read that correctly in the release that there'll be a net income mainly for us.
We are we had some some barges on the bank that we brought back maybe.
But it was only a handful.
Yes, it was two <unk>.
Kurtz, giving me, okay, so that relates to Kirby and not the industry. There is what you're saying.
Correct, yes.
We don't see you don't see any.
I think one of.
Maybe Ben said that there was 22 largest build last year right and the industry, Yes, that's about right.
The order book from what we hear is anemic.
And we don't see anybody building.
Now there could be some people that tied up some barges during the pandemic and there may be some of those coming back but again.
Youll see a net decline in bar to us in 2020.
And that had been your expectation.
For.
Quite a while.
I just misinterpreted what we've said in the release there.
That comment pertained to Kirby not the industry so that.
That clarifies it I appreciate it.
Thank you very much.
Alright have a good day.
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 operator, and thank you everyone for joining on the call today, if you have any follow up questions.
Free to reach out at me at 700 34350 707. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.
Okay.
Okay.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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