Q3 2024 Kirby Corp Earnings Call
The End
Speaker Change: Good morning, and thank you for joining the Kirby Corporation 2024 third quarter earnings call with me today are David <unk>, Kirby's, Chief Executive Officer, Christian O'neil, Kirby's, President and Chief operating Officer, and Raj Kumar Kirby's Executive Vice President and Chief Financial Officer.
Speaker Change: Slide presentation for today's conference call as well as the earnings release, which was issued earlier today can be found on our website. During this conference call, we may refer to certain non-GAAP or adjusted financial measures.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Forward looking statements involve risks and uncertainties and our actual results could differ materially from those anticipated as a result of various factors. A list of these factors can be found in Kirby's latest Form 10-K and in our other filings made with the SEC from time to time I will now turn the call over to David.
David: Thank you Kurt.
And good morning, everyone before we begin I would like to recognize our employees, especially our Florida based team members that were recently impacted by Hurricane Milton.
David: The basketball being storm left considerable damage across Florida, disrupting the lives of our employees in the area and many were left without power for several days.
David: During the storm and the immediate recovery thereafter, they remain focused on safety and continued to meet the needs of our customer and our businesses as well as support each other during the event.
David: Want to thank them for their exceptional efforts and resilience during this challenge.
David: Now turning to earnings today, we announced third quarter earnings per share of $1 55, compared to 2003 23 third quarter earnings per share of $1 five our third quarter results reflected steady market fundamentals in both marine transportation.
David: Asian, and distribution and services, even though we experienced some modest weather and navigational challenges for marine and continued supply challenges in distribution and services.
David: These headwinds were offset by good execution in both marine and distribution and services during the quarter that led to strong financial performance with total revenues up 9% and earnings per share up 48% year over year.
David: We also generated over $130 million of free cash flow in the quarter, which we used to further strengthen our balance sheet by paying down $70 million of debt and to buy back $56 million in stock.
David: In inland Marine transportation, our third quarter results reflected further gains in pricing offset somewhat by the modest impact from poor navigational conditions due to weather and lock delays.
David: From a demand standpoint customer activity was steady with barge utilization rates running in the 90% range throughout the quarter spot prices increased in the low to mid single digits sequentially and in the low double digit range year over year.
David: <unk> contract prices also renewed up higher with high single digit increases versus a year ago.
David: Overall third quarter inland revenues increased 11% year over year and margins were in the low 20% range.
In coastal market fundamentals remained steady with our barge utilization levels running in the mid to high 90% range.
David: During the quarter strong customer demand and limited availability of large capacity vessels continued which resulted in high 20% increases on term contract renewals year over year and average spot market rates that increased in the low double digit range year over year.
David: Overall third quarter coastal revenues increased 23% year over year and the operating margin was in the mid teens.
David: Turning to distribution and services demand was mixed across our end markets with growth in some areas offset by slowness or delays in other areas.
David: In power generation revenue grew 4% sequentially, but was down 6% year over year driven by supplier delays.
David: The pace of orders was strong adding to our backlog with several large project wins for backup power and other industrial customers as the need for power becomes more critical.
David: And oil and gas revenues were up 19% year over year and up 8% sequentially driven by some growth in our E. Frac business that was partially offset by a very soft conventional oil and gas business.
David: In our commercial and industrial market revenues were up 4% year over year, driven by steady demand in marine engine repair, partially offset by softness in on highway truck service and repair.
Speaker Change: In summary, our third quarter results reflected ongoing strength in market fundamentals for both segments. The inland market is saw solid and we saw continued upward pricing in coastal.
Speaker Change: Industry wide supply demand.
Speaker Change: It makes remained very favorable our barge utilization is strong and we are realizing real rate increases.
Speaker Change: Increased demand for power generation and distribution and services is mostly offsetting softness in oil and gas and other areas.
Speaker Change: Talk more about our outlook later, but first I'll turn the call over to Raj to discuss the third quarter segment results and balance sheet in detail.
Raj Kumar: Thank you David and good morning, everyone.
Raj Kumar: In the third quarter of 2020 for Marine Transportation segment revenues were 486 million and operating income was $99 million with an operating margin around 21%.
Raj Kumar: Compared to the third quarter of 2023 total marine revenues inland and coastal combined increased $56 million or 13% and operating income increased $36 million or 57%.
Raj Kumar: Total marine revenues were flat compared to the second quarter of 2024, while operating income increased 5%.
Raj Kumar: Weather and lock delays modestly impacted operations as we experienced three hurricanes during the quarter.
Raj Kumar: Although the Hurricanes had limited direct impact on our operations. They did briefly slow customer activity during the quarter.
Raj Kumar: Overall, we experienced a 33% year over year increase in delay days. These headwinds were offset by solid underlying customer demand improved pricing and most importantly execution.
Raj Kumar: Looking at the inland business in more detail the inland business contributed approximately 81% of segment revenue average barge utilization was in the 90% range for the quarter, which was an improvement over the third quarter of 2023, but but slightly lower than the second quarter of 2020.
Raj Kumar: For.
Raj Kumar: Long term inland marine transportation contracts or those contracts that a term of one year or longer contributed approximately 65% of revenue with 62% from time charters and 38% from contracts of affreightment.
Speaker Change: As David mentioned improved market conditions contributed to spot market rates, increasing sequentially in the low to mid single digits and in the low double digit range year over year.
Speaker Change: Term contracts that renewed during the third quarter were up on average in the high single digits compared to the prior year.
Speaker Change: Compared to the third quarter of 2023 inland revenues increased 11%.
Speaker Change: Primarily due to higher term and spot contract pricing.
Speaker Change: Inland revenues were flat compared to the second quarter of 2024 inland operating margins improved by around 350 basis points year over year and by 75 basis points sequentially, driven by the impact of higher pricing and ongoing cost management, which help blunt lingering inflationary.
Speaker Change: Pressures.
Speaker Change: Now moving to the coastal business.
Speaker Change: <unk> revenues increased 23% year over year due to high contract pricing and fewer shipyards.
Speaker Change: Overall coastal had an operating margin in the mid teens range, resulting from higher pricing and shipyard timing.
Speaker Change: This will temporarily temporarily reversed in the fourth quarter, given the higher number of shipyards, we have on schedule.
Speaker Change: The coastal business represented 19% of revenues for the Marine Transportation segment.
Speaker Change: Average coastal barge utilization.
Speaker Change: Was in the mid to high 90% range, which is in line with both the third quarter of 2023, and the second quarter of 2024.
Speaker Change: During the quarter the percentage of coastal revenue under term contracts was approximately 99% of which approximately 99% what time charters.
Speaker Change: Average spot market rates were up in the low double digit range year over year.
Speaker Change: Renewals have term contract prices were higher in the high 20% range on average year over year.
Speaker Change: 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 2024. This is included in our earnings call presentation posted on our website.
Speaker Change: At the end of the third quarter. The inland fleet had 1095 barges, representing $24 2 million barrels of capacity at.
Speaker Change: On a net basis, we expect to end 2024 with a total of.
Speaker Change: 1093, inland barges, representing $24 2 million barrels of capacity.
Speaker Change: Coastal marine is expected to remain unchanged for the year.
Speaker Change: Now I'll review the performance of the distribution and services segment.
Speaker Change: Total segment revenues for the third quarter of 2024 were $345 million with an.
Operating income of $30 million and an operating margin of eight 8%.
Speaker Change: Compared to the third quarter of 2023, the distribution and services segment revenue increased by $10 million or 3%, while operating income decreased by $3 million or 8% due to mix.
Speaker Change: When compared to the second quarter of 2020 for segment revenues increased by $6 million or 2% and operating income increased by $1 1 million or 3%.
Speaker Change: Moving to the segments in more detail in power generation, our revenues tied to industrial end markets were up 16% sequentially and 61% year over year, we continue to see significant power generation orders, resulting in higher backlog from backup power data centers.
Speaker Change: And other industrial applications.
Power generation revenues tied to the oil and gas space were down sequentially and year over year as product delays continued to contribute to lumpiness.
Speaker Change: All together with the decline in oil and gas related Allergan related to power generation revenues were down 6% year over year and operating income was down 26% year over year with operating margins around 10%.
Speaker Change: Power generation represented 30%, 32% of total segment revenues.
On the commercial and industrial side steady activity in marine repair offset lower activity in other areas, particularly on highway truck service.
Speaker Change: As a result, commercial and industrial revenues were up 4% year over year.
Speaker Change: Operating income increased 15% year over year, driven by favorable product mix and ongoing cost savings initiatives.
Speaker Change: Commercial and industrial made up 47% of segment revenues and had operating margins in the high single digits.
Speaker Change: In the oil and gas market we.
Speaker Change: We continue to see softness in conventional frac related equipment as low rig counts and lower fracking demand tempered demand for new engines transmissions and parts throughout the quarter. This softness is being partially offset by solid execution on backlog and new orders of E frac related equipment.
Speaker Change: Revenues in oil and gas were up 19% year over year and up 8% sequentially, while operating income was down 14% year over year, but up 166% sequentially as lower conventional work continues to get replaced by execution on <unk> backlog.
Speaker Change: Oil and gas represented 21% of segment revenue in the third quarter and had operating margins in the mid to high single digits.
Speaker Change: Now I'll turn to the balance sheet.
Speaker Change: As of September 30, we had $67 million of cash with total debt of around $979 million and our debt to cap ratio improved to 22, 9%.
Speaker Change: During the quarter, we had net cash flow from from operating activities of around $207 million.
Speaker Change: Third quarter cash flow from operations benefit benefited from a working capital reduction of approximately $30 million.
Speaker Change: We continue to target unwinding more working capital in the fourth quarter and into 2025, we use cash flow and cash on hand to fund $76 million of capital expenditures our capex.
Speaker Change: Primarily related to maintenance of marine equipment.
Speaker Change: Free cash flow generation during the quarter was just over $130 million.
Speaker Change: During the quarter, we used $56 million to repurchase stock at an average price of $115 and reduced our debt by around $17 million.
Speaker Change: As of September 30, we had total available liquidity of approximately $570 million.
Speaker Change: For 2024, we remain on track to generate cash flow from operations of 600 to 700 million.
Speaker Change: Driven by higher revenues and earnings.
Speaker Change: We still see some supply chain constraints, especially in the power generation space, causing some headwinds to managing working capital in the near term having.
Speaker Change: Having said that we are targeting to unwind more working capital as other ship in 2024 and into 2025.
Speaker Change: With respect to Capex, we expect capital spending to range between $325 million to $355 million for the year. This represents a slight increase from our prior range as we plan to make additional investments in our power generation rental business.
Speaker Change: Approximately $200 million to $240 million associate is associated with marine maintenance capital and improvements to existing inland and coastal marine equipment and facility improvements.
Speaker Change: Approximately $115 million is associated with growth capital spending in both of our businesses.
We expect the net result should continue to provide approximately $300 million to $350 million of free cash flow for the year.
Speaker Change: As always we are committed to a balanced capital allocation approach and we will use this cash flow to return capital to shareholders and continue to pursue long term value, creating investment and acquisition opportunities.
Speaker Change: I'll now turn the call back to David to discuss our fourth quarter outlook.
David: Thank you Raj.
David: While we ended the quarter in a strong position in our businesses. The beginning of the fourth quarter. So far was challenged by Hurricane Milton.
The hurricane impacted our marine operations and temporarily temporarily shut down some of our distribution and services locations. Our teams worked hard through the challenging environment and we are pleased to have quickly returned to normal working conditions.
David: For detail on the marine outlook, our overall outlook remains solid for the final quarter of the year driven in large part by limited availability of equipment, which was what will be tempered by the onset of seasonal weather a bit of softness in the refining market and some higher maintenance levels.
David: And inland we continue to anticipate positive market dynamics due to limited new large construction.
David: Demand is solid, but we have seen a little softening in the refining sector early in the quarter. Nonetheless, with these solid market fundamentals, we expect our barge utilization rates too.
David: Be around the 90% range throughout the remainder of the year. We also expect continued improvement in term contract pricing as renewals occur throughout the final quarter of the year.
David: We continue to see inflationary pressures in some areas.
David: And there is an acute mariner shortage in the industry driving up labor costs. These pressures along with the increasing.
David: Cost of equipment should continue to put upward pressure on prices.
David: That said, we expect inland revenues will be flat to slightly down in the fourth quarter due to normal seasonality.
And consequently, operating margins are expected to be down as compared to the third quarter.
David: In coastal market conditions remain very favorable and supply and demand are in balance across the industry fleet.
David: Steady customer demand is expected in the fourth quarter with our barge utilization in the mid 90% range, we expect margins in the fourth quarter to be in the mid to high single digits, given a number of planned shipyards in the fourth quarter.
David: Revenues are expected to be down in the mid single digits sequentially because of the shipyards.
David: And the distribution and services segment, we see near term uncertainty from supply issues.
David: Customers deferring maintenance and lower overall levels of activity in the oil and gas sector. However longer term, we expect incremental demand for products parts and services and oil and gas as rates of investment improved from what feels like a close to the bottom market in <unk>.
David: Oil and gas.
David: In commercial and industrial the demand outlook in marine repair remained steady while on highway service and repair is somewhat weak in the current environment.
David: Similar to oil and gas the on highway market feels close to bottoming.
David: The trucking recession that we've experienced recently.
David: In power generation, we anticipate continued strong growth in orders as data center demand and the need for backup power is very strong.
David: We do anticipate extended lead times for certain OEM products to continue contributing to volatile delivery schedule of new products in the fourth quarter and in 2025.
David: Overall, the company expects the segment revenues to be down in the mid single digits sequentially with operating margins in the mid to high single digits, but lower than the third quarter.
David: To conclude overall solid execution and good market conditions led to a strong quarter for us and we have a favorable outlook as we look into this quarter and next year.
David: A lack of meaningful new buildup of equipment and marine has supply in check and we continue to receive new orders for power generation equipment as we work through supply issues, our balance sheet is strong.
David: And we expect to generate significant cash flow this quarter and in 2025, we see favorable fundamentals continuing and expect our businesses will produce solid financial results as we move through the remainder of this year and then to the next few years.
David: 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 opt.
Speaker Change: Operator. This concludes our prepared remarks Christian Raj and I are now ready to take questions.
Speaker Change: Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please stand by we'll be <unk>.
Now the Q&A roster.
Speaker Change: Our first question comes from Daniel Enbrel Stephens, Inc. Your line is open.
Daniel Enbrel: Yeah, Hey, good morning, guys. Thanks for taking our questions and congrats on quarter.
Speaker Change: Okay. Thanks Dana.
Daniel Enbrel: I want to start on the inland side.
Speaker Change: On pricing it looks like contract rate increase of high single, that's up from mid singles and <unk> in the slides David It looks like you took down your net <unk>.
Speaker Change: Exercise at yearend expectation there can you just provide maybe given that backdrop and update on the spot price environment here at <unk> and from your vantage point, how do you feel about breakeven and contract renewals coming into year end and then maybe you can talk about.
Speaker Change: Sure.
Speaker Change: Well, let me break that some pieces in cushion krishnan chime in as well.
Speaker Change: Yes.
Barge count I think we're going from.
Speaker Change: 1095 on inland <unk> thousand 93, Thats, just some normal retirements.
Speaker Change: As as some barges hit that 35 year Mark.
Speaker Change: In terms of age, which is actually part of what the industry is going to be doing.
Speaker Change: <unk> is continuing to retire.
Speaker Change: Barges, which is good because theres not a lot of new supply coming on in the market.
Speaker Change: And.
Speaker Change: Look, we're fundamentally a supply and demand business and supplies in check.
Speaker Change: We've seen.
Speaker Change: The cost of barges go up.
Even this last quarter, we're hearing $4 5 million for a new 30000 barrel clean barge. So supply has been in check and that's a good thing I think year to date through the third quarter is about 22 barges that have been delivered.
Speaker Change: Not sure how many will be delivered in the fourth quarter, but it's not going to be an enormous number at all.
Speaker Change: And then with retirements like.
Speaker Change: You're seeing us going to retire some barges I think the industry is going to retire a fair number of barges. So we may actually see from a supply standpoint, a net contraction in the number of barges out there.
Speaker Change: So when you look at that supply picture.
Speaker Change: It's pretty strong for us and the industry.
Speaker Change: We have seen a little pullback in refiners here in the last few weeks last month, or so and Christian will give you some more color on that.
Speaker Change: But that's a little bit on the demand side. There are some bright spots in the demand side, but when you put supply and demand together, it's still in a good spot.
Speaker Change: We as you saw our pricing was up sequentially.
Speaker Change: On spot 3% to 5%.
Speaker Change: And on year over year basis spot prices were up 10% to 12%.
Speaker Change: Term contracts renewed in the 6% to 9% range in the fourth.
Speaker Change: Third quarter.
Speaker Change: And we're set up for a good renewal cycle in the fourth quarter and Christian can give you some more color on that so we're very constructive.
Speaker Change: Looking forward in a more of the same here I'll turn it over to Chris to give you a little more color on the demand side and.
Speaker Change: What he CNN and feeling on day to day side sure. Thank you David Hey, Good morning, Daniel.
What you see around Q4 spot price in courseware, we're early into the quarter is a lot of the normal seasonality.
Chris: Peak driving season winds down around labor day.
Chris: <unk> get into turnaround season start doing their maintenance can affect some of the volumes.
Speaker Change: If you look forward if shipbuilding remains lower rates keep going higher can you just walk through the puts and takes of kind of where you see inland margin getting to in the coming years.
Speaker Change: Sure sure.
Speaker Change: Yes, let me, let me start by saying, we continue to fight inflation, but that said we are getting real price increases not just nominal price increases.
Speaker Change: When you look at 'twenty three 'twenty four full year average in and we like looking at it on a full year average basis because of the seasonality of the weather that Christian just talked about.
Speaker Change: Some of the some of the demand seasonality from from some of our end customers, we like to look at it year over year and you heard in Rogers prepared comments sequentially.
Speaker Change: Our margins were up 75 basis points second quarter to third quarter in inland.
Speaker Change: For the full year.
Speaker Change: Year over year, we're up about 350 basis points is what he said so we had said for 24 versus 23, we'd be up 300 to 400 basis points. We're smack Dab in the middle of that based on the number of Raj gave looking into 'twenty five.
Speaker Change: They will be up 200 to 300 basis points in that range.
Speaker Change: There's a lot going on that can affect that as you would expect inflation being one of them.
Speaker Change: Labor rates, we've been through.
Speaker Change: Pretty acute labor market in the marine sector.
Speaker Change: There's been shortages of mariners across the board across the whole industry, both inland and coastal so we've been fighting that.
Speaker Change: You heard the newbuild prices for barges just.
Speaker Change: All the inputs are up and I know that.
Speaker Change: You see the rhetoric.
Speaker Change: The political debates, but inflation is real we're still seeing it even with steel prices coming down a little bit all of the other input prices are up so.
Speaker Change: You put all that in there, we still think probably 200 to 300 basis points for inland next year.
Speaker Change: I think peak margins to your base question.
Speaker Change: The next couple of years at least.
And again that gets back to the supply demand picture. When you. When you think about building new equipment and a 30000 barrel barge at $4 $5 million, we need prices up at least 30% from where they are so we're very constructive about it.
Speaker Change: Could you see term get up to 70%.
On the average next year maybe.
Speaker Change: We'll see we're comfortable with where it is because.
Speaker Change: We have this view that some.
Speaker Change: Client demand is going to stay.
Speaker Change: Really good for the next several years.
Speaker Change: Okay, Great and then I had a I did want to ask about the oil price.
Speaker Change: Clearly, it's volatile realizing that fuel is largely a pass through for you but I.
Speaker Change: Guess, what I'm wondering is it.
Speaker Change: Now.
Speaker Change: How should we be thinking about the impact on <unk>.
Speaker Change: Whether it's a little bit on the margin side or.
Speaker Change: How should we be thinking about.
Speaker Change: In an environment, where I don't know, let's frame it both ways. If we look at where we are in the oil price today, maybe if its up.
Speaker Change: $15 off our $15 down what type of impact do you think that maybe has on your ability or around pricing and really just on margins.
Yes.
Speaker Change: You hit it on the nail on the head fuel.
Speaker Change: Fuel is a pass through for US we work really hard with our customers. We don't want to make money on fuel, we don't want to lose money on fuel most of our customers are better able to handle that that fuel risk than we are anyway.
Speaker Change: From a direct impact.
Speaker Change: It's not much I think.
Speaker Change: The higher the price deck for oil usually is better for our chemical customers in our refiners. So on the margin the higher the oil price probably the better for our for our industry.
Speaker Change: The lower it.
Speaker Change: Does stimulate some demand and what we really do care about is it volumes so in a.
Speaker Change: By and large it's a mix.
Speaker Change: But I would say is biased to the upward side the higher it is usually the better for us.
Speaker Change: Look you want your customers, making money there.
A lot nicer to deal with when they are making good money so that.
Speaker Change: Not that they're not nice to deal with any day, but.
Speaker Change: But you understand now that said look on the D&S side.
Speaker Change: The oilfield even at this price deck of $70 for <unk> and <unk>.
73 for Brent, our D&S oil and gas business, the conventional oil and gas business is is minimal it's almost nonexistent for the first time in probably two decades, we will not deliver.
Speaker Change: This year, a conventional frac system.
Speaker Change: All of our orders are.
Speaker Change: Electric Frac and I mean, you can see it from some of our customers announcing the impairments as they write off some of their old conventional frac equipment.
Speaker Change: Our base oil and gas business is really low very very weak.
Speaker Change: Now have we bottomed I don't know.
Speaker Change: We're just very thankful that we have a great E frac offering.
Speaker Change: And.
Speaker Change: That is.
Speaker Change: Is making great gains in everybody seems focused on E. Frac, just because of the inherent efficiency.
Speaker Change: And we're happy to have that so to your base question, if oil and gas goes up or down I still think E frac will be good.
Speaker Change: Until.
Speaker Change: The bulk of the pressure pumping equipment out there is E. Frac I think will continue to grow E. Frac, because it's just that that much more efficient for for both our customers and the E&P customers themselves. So that's a long winded answer I hope I got.
Speaker Change: Got it great Super helpful. Thanks, guys have a great day.
Speaker Change: Great. Thanks, Greg.
Speaker Change: Our next question comes from Ben Nolan Stifel.
Speaker Change: Yes.
Speaker Change: Hey, Ben.
Ben Nolan: Hey, Hey, guys.
Ben Nolan: I wanted to hit on the <unk>.
Ben Nolan: Electrification.
Ben Nolan: Electrification business a little bit.
Ben Nolan: There is obviously the supply chain.
Ben Nolan: Issues that you talked about but it sounds like you're continuing to grow the backlog.
Speaker Change: First could you maybe frame that and.
Speaker Change: Maybe what is the backlog or how much did it grow or something like that in the third quarter and.
Speaker Change: Is it possible for you to maybe frame in how you think about what the.
Speaker Change: What the Tam or whatever what you think is doable for that business in the next I don't know.
135 years something like that.
Speaker Change: Sure.
I'll try and give you some <unk>.
Color were a little reticent.
Speaker Change: Back backlog numbers every every quarter, but.
Speaker Change: First.
Speaker Change: The well worn excuse of blaming things on supply chain.
Speaker Change: Doing that but frankly, you've seen it with the big engine the big engines out there right now.
Speaker Change: <unk> ordered engines right now from any of the major engine suppliers. It's 26 deliveries so we've been struggling with that.
Speaker Change: It's delayed.
Speaker Change: Some of our data center.
Speaker Change: Deliveries.
Speaker Change: That said, you'll start to see some data center deliveries in the late first quarter of 'twenty, five and then into the second quarter. So.
Speaker Change: Theres, a big pig in the Python in it.
Speaker Change: Continue to grow our backlog.
Speaker Change: We will start to see some deliveries next year.
Speaker Change: And it will become more meaningful that said the backlog is in.
Speaker Change: Just throw out a number it's hundreds of millions of dollars and that's up from.
Speaker Change: Kind of $50 million, a few years ago. So.
Speaker Change: We continue to have.
Greater than one book to Bill.
Speaker Change: It's continuing to go well.
Speaker Change: We're getting some new customers in the data center World.
Speaker Change: I would also tell you that our rental business is doing really well Christian you want to share some some color and just what we're seeing on rental.
Speaker Change: Yes, I mean, obviously it was very.
Speaker Change: Busy hurricane season for Us and so we were we were chasing storms, helping the box stores keep run in the rental backup power business was quite strong.
Speaker Change: So again, we don't really like Hurricanes, but as David commented before we have a small slight hedge.
Speaker Change: So the rental business had a good quarter.
Speaker Change: On the back of the back of a heavy storm season.
Speaker Change: Yes.
We're investing in that.
Speaker Change: You may have seen our capex ticked up a little here at the end of the year and Thats, we are adding to our rental fleet frankly.
As we as we look at the demand for power.
Speaker Change: It continues to go up and then just to be clear when we do backup power, we're talking big industrial scale, we're not talking smaller residential.
Speaker Change: 25 kw units, we're talking 500 kw to two.
Speaker Change: Two Meg type things so that business continues.
To grow we're going to continue to invest in it.
Speaker Change: With our normal capital discipline.
Speaker Change: Right. Okay. That's helpful and if I could go back to the marine side.
Speaker Change: Maybe similar but not exactly like Greggs question, one of the things that we've seen lately and Christian you sort of touched on this earlier.
Speaker Change: They crack spreads refineries have narrowed.
Speaker Change: If it's seasonality or what but.
Speaker Change: Is there is there a connection between the crack spreads in your business like do you want big crack spreads and that incentivizes the movement of freight or is it not as direct or that.
Speaker Change: I think I'll answer it this simply when crack spreads are good our major refinery customers are extremely happy they are China throughput as much as they possibly can.
Speaker Change: Not just the big global integrated refiners, but even some of the smaller niche regional refiners.
Speaker Change: Tend to see their throughput go up as they supply the market.
Speaker Change: So generally.
Speaker Change: Hi, crack spreads have historically been a very good thing for us as well as.
Speaker Change: The ability to to.
Speaker Change: And move our rates and a good crack spread environment.
Speaker Change: That said, we care a lot about just refinery utilization when you are on the.
Speaker Change: The supply side of taken.
Speaker Change: Feedstocks in or move into finished product out what we really probably care about at the end of the day is the utilization of refineries and how much the liquids.
Transacting.
Speaker Change: Are all connected.
Speaker Change: But we do typically enjoy high crack spread environments.
Speaker Change: I think you are coming off some pretty halcion highs in the crack spread world and today I think historical if you look at the crack spread today, even though it's down it's still good versus historical crack spreads.
Speaker Change: Alright, I appreciate it thanks.
Speaker Change: Keep in mind chemicals, the chemical market is about 60% of R. R.
Speaker Change: Our inland inland inland revenues driven by the chemical manufacturers. So while we like high crack spreads were paying very close attention to GDP, we're paying very close.
Speaker Change: Close attention to the economy those are the things that drive the chemical margins and.
Speaker Change: Again, not spiking the football we do see chemicals, a little better in Q4, and we will continue to watch that closely but we are hearing from our chemical customers is the strength of their U S operations versus their European assets are Asian assets or middle eastern assets and so.
Speaker Change: The thematic.
Speaker Change: The theme, we've always talked about is.
Speaker Change: The economic development in the Gulf Coast with a good workforce.
Speaker Change: And a stable workforce and the billions of dollars.
Speaker Change: Vested in the chemical manufacturing industry in the Gulf of Mexico, We are a direct beneficiary of that and what we're hearing consistently from our chemical customers is that their U S assets are outperforming their global assets and so we.
Speaker Change: We think we're beginning to see a little bit of volumes come that come back there that feels pretty good.
Speaker Change: Alright excellent I appreciate the thorough answer.
Speaker Change: Yes, Sir thanks Pat.
Speaker Change: Okay.
Speaker Change: Our next question comes from Greg.
Speaker Change: Loss equal ski Libre research and advisory.
Speaker Change: Hey, guys. Good morning, how are you doing hey, good morning, Greg.
Greg: You probably get this question a lot, but just wanted to touch on the free cash flow, obviously theres a lot of it.
Other other than share buybacks is there anywhere to deploy that cash within the business itself any.
Greg: Specific direct growth opportunities out there in inland coastal or DNS.
Speaker Change: Hey, good morning, Greg.
Speaker Change: Yes.
Speaker Change: We're going to see a lot of good free cash flow generation. This year is going to be.
Very strong three 300 $350 million of free cash flow.
Speaker Change: You've seen us buy back stock this.
Speaker Change: Year to date, we've done about 53% of our free cash flow has been directly allocated to stock buyback.
Speaker Change: We've always balanced that with.
Speaker Change: Investments.
Speaker Change: David mentioned.
Speaker Change: <unk> into the power generation rental business.
Speaker Change: Strong returns, we're very disciplined when we look at.
Speaker Change: We've got a very good framework that allows us to.
Speaker Change: Direct investment decisions.
Speaker Change: You should you should see us continue to balance that you've also seen in this quarter, we paid down some relatively higher.
Speaker Change: Cost of debt.
Speaker Change: That.
Speaker Change: Puts us in a very strong position from a balance sheet perspective so.
Speaker Change: As we've always said.
Speaker Change: We look at it inland investments, we look at stuff that we wanted to do around power generation with.
Speaker Change: In the <unk> side on distribution and service side, you should see us do some tuck in type investments that we've always talked about so overall it is hard to predict.
Speaker Change: Hard to predict acquisitions, but.
We like our stock we've been doing stock buybacks I think you should see us continue to do that going forward.
Speaker Change: Yes, I would also add Greg just more from a longer term standpoint.
Speaker Change: Our capex is elevated this year and a little bit last year, and maybe a little bit next year because of the maintenance bubble that we've talked about both on the inland and offshore.
Speaker Change: As that.
That tempers.
Youll see our free cash flow go up.
We are always open to acquisitions, but as Raj said quite plainly we are a very disciplined approach, it's always about being able to earn our return on invested capital.
Speaker Change: We would love to do inland acquisition, that's our bread and butter, we are quite good at integrating those and adding customer service when we do it.
Speaker Change: So.
That's always our preference, but given the inland markets.
Speaker Change: Pretty good right now.
Speaker Change: Getting a meaningful transaction in a reasonable price is probably lower you may see us do a little more in power generation, but it's not going to be.
Speaker Change: Company bedding type stuff it would be more a little vertical integration here or there with some bolt ons.
Speaker Change: We're always open to it we're always looking at it we probably looked at a dozen acquisitions a quarter, but.
Speaker Change: Don't see us doing a lot because we do keep that discipline.
Speaker Change: But look the good news is we've got the cash flow to do the right things.
Speaker Change: In the absence of <unk>.
Speaker Change: Good investments, we'll buy the best barge company that we know of out there which is Kirby stocks.
Speaker Change: Got it awesome. Thanks, guys and then speaking of the maintenance cycle, David curious where is the market right now on the barge maintenance cycle on assuming that it hasnt reached peak yet.
Speaker Change: Presumably next year, what are you expecting in terms of market impact.
I'm going to give that Christian because Christian lives. It every day.
Speaker Change: Yes, Thanks, Greg.
Christian: Regarding the maintenance bubble that we reference over the $24 25, you'll see 47% of the inland tank barge industry has to go through its COI renewals certificate of inspection and so 2024.
Christian: Probably really the peak of that the 2025 is not far behind so both years have very heavy maintenance cycles for the for the industry and again it's.
Christian: According to my math, its about 47% of the tank barges will have to go through their COI. So the maintenance bubble is still there we're still the industry is still.
Christian: Progressing through it and.
Christian: It will continue to be a factor for supply demand.
Speaker Change: Got it alright, thanks, a lot guys take care.
Christian: Thanks.
Speaker Change: Our next question comes from Ken <unk> at Bank of America.
Speaker Change: Hey, great good morning.
And I agree Dave with your answer a few more years of the.
Speaker Change: A few hundred basis points, hopefully that continues on the island.
Speaker Change: Jumping over to coastal <unk>.
Speaker Change: Given the move to the mid teens margins was that with the capacity pulled out I know, Chris you were just talking about the.
Speaker Change: Huge run up in the surveys I think you were just talking about the inland side there right because we've got it yes.
Speaker Change: All out for coastal right and so given the move to mid teens, where should we see that one run to Dave or Chris.
Yes, I'll start and Chris can add some color look on the offshore side.
Speaker Change: 30 months shipyard cycle. So every 30 months you've got to bring these units in for pretty expensive shipyards and so.
Speaker Change: We're going to see it starting in the fourth quarter and carrying over into the first quarter a little bit next year four four.
Speaker Change: Our coastal fleet, so that's going to impact the fourth quarter quite a bit in terms of sequential margins that said.
Speaker Change: If you look at <unk>.
Speaker Change: Year over year full year average.
Speaker Change: We think.
Speaker Change: Coastal margins should be up 300 basis points and 25.
Speaker Change: <unk> 24 on a full year average.
Speaker Change: Chris you can add some color what youre seeing in that market.
Speaker Change: And also the new build side of it yes.
Chris: Yeah, I think I'll begin with the context that our offshore fleet is 100% termed up today as we sit on this conference call.
Chris: The supply and demand dynamic is very good we see no new construction.
Chris: If a player were to want to add some tonnage to the market it would not deliver until 2028.
Chris: It's a very positive dynamic.
Chris: Our rates at the level of rate that we're able to gain here in recent recent quarters year over year. Our term business is up in the realm of 25% to 28% on term rate increases in the spot year over year, we've pushed rates.
Chris: 11% to 13% so.
Chris: We see we see a lot of a lot of momentum a lot of demand and not a lot of supply. So the coast coastal fundamentals are set up very nicely for a long long run I think.
Speaker Change: Yes, Christian was telling me earlier.
Speaker Change: Somebody wanted to order a new unit you wouldn't see it to what 28.
Speaker Change: You started 2028.
Speaker Change: So we're really excited about coastal as you know Ken you've followed us for a long time it was pre.
Speaker Change: Pretty brutal on us for for a number of years and it's good to start getting back and start earning that capital back that we've deployed.
Speaker Change: I'm, just not used to seeing that.
Speaker Change: Double digit.
Speaker Change: Hello, guys.
Speaker Change: I'm sorry, what was the comment there about fourth quarter on margins that coastal we do see the seasonal pullback or yes, yes. They are fairly ahead of them pull back.
Speaker Change: We were mid we were mid teens in the third quarter.
Speaker Change: Probably be mid to high single digits in the fourth quarter because.
Speaker Change: Some of these big units.
Speaker Change: I can't give you the dollar per day number but.
Speaker Change: <unk>.
Speaker Change: Tens of thousands of dollars and you get a few of those big units in you still have all the cost of we keep the crews the cruise help out in the maintenance process, we still have.
Speaker Change: A bunch of supplies we.
Speaker Change: We do have we have some maintenance expense that gets expensed not capitalized. So when you put all that together that pulls down the margins, especially when you have some of these big units it hit the shipyard so.
Speaker Change: We focus on the.
Speaker Change: Full year average in <unk>.
And youre going to see that continue to go up it's a very tight market right now I think any given day, we're high <unk> in terms of.
Speaker Change: Utility.
Speaker Change: I only ask because.
Speaker Change: Had 6% it sounds like it's even better than that that part of the pull back it sounds like you were saying even even higher.
Speaker Change: So Christian is there a war a bet between inland and.
Speaker Change: Postal who gets to 25% 30% first.
Speaker Change: There's always a healthy level of competition round here.
Speaker Change: Gets us out of bed in the morning, So yeah alright.
And linked contracts.
Speaker Change: Accelerated back to high single digit.
Speaker Change: For mid single digit I guess thoughts heading into the <unk> season.
Speaker Change: I know you've talked a little bit about the state of refined demand in Paris.
Speaker Change: About what goes on here or given the move to maybe if we get the change of administration more drilling.
Speaker Change: Does that enhance lower Nat gas prices and maybe even boost production.
Speaker Change: Going forward.
Speaker Change: Yes, I think lower natural gas.
Speaker Change: Natural gas prices would boost chemical production are certainly make it even better for our U S based.
Speaker Change: Our global chemical customers with Big U S facilities.
Speaker Change: Natural gas is a key input so the lower natural gas prices. Good. It's also good for our <unk> business.
Speaker Change: But lower oil prices.
Speaker Change: We talked a little bit earlier.
Speaker Change: The price deck, particularly with crack spreads and stuff gets a little wonky, the higher or the lower the oil price goes so.
Speaker Change: It's hard to say.
Speaker Change: But natural gas is probably the largest input to the chemical space.
So that that could be a positive.
Speaker Change: Certainly a big input for our Frac business and Oh by the way on power Gen were building.
Speaker Change: A lot of gas.
Speaker Change: What we call Prime power. So that's people that will take our our natural gas.
Speaker Change: Power equipment and.
Speaker Change: Make prime power to put in the grid. So we're seeing that grow we picked up an order from.
Speaker Change: Somebody thats doing that just this quarter so.
Speaker Change: It's interesting at lower natural gas prices helps helps that whole model in terms of prime power and using our natural gas recip product to generate it.
Speaker Change: And I'm, sorry, your thoughts into the bid season.
Speaker Change: Oh.
I am sorry, the bid.
Speaker Change: Fourth quarter renewals, yes, yes, I'll, let Christian talk about that.
Speaker Change: We can't give you the price that we're expecting but it should be pretty good yes.
Speaker Change: We're excited about our fourth quarter term renewals again, youll see a lot of that benefit next year, but theyre going very well.
Speaker Change: We've had a really good year operationally the team is executing at a very high level, our safety record is incredible and.
Speaker Change: As of today, our customers are very very happy and we're being rewarded in Q4 for our hard work and again.
Speaker Change: We're positive about it.
Speaker Change: High single digit low double digits mid teens to 20%.
Speaker Change: Yes, we're in favor of all that.
Speaker Change: Yeah.
Speaker Change: Guys I appreciate it so it'll be good.
Speaker Change: It will be good okay. Thanks.
Thanks for the time guys. Appreciate it. Thank you thanks, Ken.
Speaker Change: Our last question comes from Scott Group Wolfe Research.
Speaker Change: Hey, Thanks, Good morning, guys good morning.
Speaker Change: Yes.
Speaker Change: I guess, we've got weather delays in maintenance and on all of that.
Scott Group: But when I look just like tonnage is inland tonnage is down 15% versus two years ago.
Scott Group: Youre talking about revenue down a little bit sequentially.
Speaker Change: How how much of this if any would you say is a demand issue.
Speaker Change: Yes ill, let Krishna answer that yes, so you're thinking about ton miles.
Speaker Change: In the past periods, you're talking about versus today, there's been some sort of fundamental.
Speaker Change: Demand change and some trade lanes, one is the crude oil barrel coming out of the Utica, which is up the Ohio River quite a distance a lot of ton miles.
Speaker Change: That Utica barrel.
Speaker Change: And to come and go.
Speaker Change: A lot of that ship shipping has slowed down and the crude oil complex and so that impacts our ton miles in the industry as ton miles.
Speaker Change: The other piece of the business that can whip around ton miles as our fertilizer business.
Speaker Change: <unk> business large volume business Thats loaded in the Gulf of Mexico, and taken up into the Heartland Big toes big volumes in the fertilizer business was.
Speaker Change: It has been a very quiet in Q3, we're starting to see a resurgence in Q4.
Speaker Change: But those are those are mainly the two items that have whipped around the ton miles. Thank.
Speaker Change: Thank you you're referring to.
Speaker Change: Again, we've absorbed those barges in other parts of the business.
Speaker Change: Fertilizers coming back nicely so.
Speaker Change: <unk>.
Speaker Change: I think those are probably the historical trends you see are most likely long haul crude oil and long haul fertilizer.
Okay.
Speaker Change: And then can you just give us an update where are we on.
Speaker Change: Sort of your perspective industry orders build activity on the inland side would you think we see more or less new construction 25 relative to 'twenty four.
Speaker Change: Well.
The order book, we see pretty clearly in 'twenty four I think David referenced earlier, it's about 40, some odd margins of which only 20, some odd have been delivered.
Speaker Change: Hard to see deeply into the order book next year, but we really don't see anything different I'll give you a personal observation haven't been around the business for 27 years now I will tell you the status of the shipyard industry. Those shipyards that are focused and have the ability to build a good tank barge.
Speaker Change: Is diminished versus some of our past cycles, a lot of that has been driven by <unk>.
Speaker Change: Still emerging in a way from the Covid realities of the inflationary issues around labor in particular as well as other inputs in the shipyard and so I think there's also a large number of hopper barges being built to replace in the dry cargo side of the business those hopper barges compete for the capacity.
Speaker Change: City for new construction with tank barges.
Speaker Change: I think we see a.
Speaker Change: If you look if you look in the windshield.
Speaker Change: I don't see a whole lot of a lot of new construction I think we see consistent replacement construction.
Speaker Change: Don't think I see anybody speculatively building.
Speaker Change: Into the market and I'll give you a really interesting anecdote.
Speaker Change: We price our largest periodically and interestingly in our most recent set of conversations the price of an inland 30006 pound tank barge went up from the prior quarter. So.
Speaker Change: This was a $4 5 million quote for a clean 36 found barge.
Speaker Change: Even though the price of steel plate steel has abated, a little bit which is something we watch it very closely that is tied to tank barge pricing.
Speaker Change: The shipyard commented that due to labor due to all the other inputs due to the inflationary price of paint due to all of those other factors that despite a slight change in abatement in the price of steel the price of the barge actually went up so I think youll continue to see discipline around tank barge new construction.
Speaker Change: No.
Speaker Change: I know our shareholders, probably wouldnt want US building Bard is at $4 $5 million in order to get a return on those youre going to have to have $13 $14000. A day tells the market is not there yet so I think we see just some rational rational behavior around it in the shipyards still really are constrained.
Speaker Change: Okay and then just lastly, if I can you made a comment earlier you would be disappointed this cycle of inland didn't get to a 27% margin I think you said.
Speaker Change: What's the answer you would be disappointed if coastal didn't get to.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: I'd say, it's 20% I think are.
Prior peak was about 15%, 16%, which we've already bumped up against.
So.
Speaker Change: We keep.
Speaker Change: There was a little question earlier about the competition between inland and coastal.
Speaker Change: It does exist in the coastal guys.
Speaker Change: Are pushing hard I think both Christian I'd be disappointed if we don't cross 20% in the coastal margins.
It's a good time for them.
Speaker Change: But you do know that there is a little bit of.
Speaker Change: A difference in the model.
Speaker Change: Coastal barge in the towboat are the tugboat are a pair.
Speaker Change: As in inland you can push multiple barges with a single towboat.
Speaker Change: So theres a little advantage that inland has but that said our coastal guys or are.
Speaker Change: We're out there pushing hard.
Speaker Change: Thank you for the time guys.
Scott Group: Thanks, Scott I appreciate it.
Speaker Change: This concludes the question answer session I would now like to turn it back to Curt limits for closing remarks.
Curt limits: Thank you Jason and thank you everyone for joining us today as always if there's any follow up questions reach out to me directly throughout the day.
Speaker Change: Yeah.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.