Q4 2024 Kirby Corp Earnings Call
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Questions to one question and one follow up.
Please note. This event is being recorded I would now like to turn the conference over to Mr. Kurt.
Kirby: Kirby's Vice President of Investor Relations and Treasurer. Please go ahead.
Speaker Change: Good morning, and thank you for joining the Kirby Corporation 2020 for fourth 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: A slide presentation for today's conference call as well as the earnings release, which was issued earlier today can be found on our website.
Speaker Change: 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 as a reminder, statements contained in this conference call with respect to the future.
Speaker Change: Our forward looking statements. These statements reflect management's reasonable judgment with respect to future events forward looking statements involve risks and uncertainties and our actual results could differ materially from those anticipated as a result of various factors.
A list of these risk factors can be found in Kirby's latest Form 10-K filing 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 earlier today, we announced fourth quarter.
David: GAAP earnings per share of <unk> 74 cents, which included a one time charge of 74 cents related to a noncash write down of inventory in our distribution businesses, which was partially offset by a one time credit for a change in Louisiana tax law of 19 cents.
David: Excluding these one time items, which Raj will provide more detail on later adjusted earnings for the quarter were $1 29 per share.
David: Our fourth quarter results reflected some seasonal softness in both marine transportation and in distribution and services as we experienced weather and navigation challenges for marine and typical seasonal slowness in activity in distribution and services.
David: These headwinds were offset by good execution from our teams in both segments during the quarter and that drove strong year over year financial performance with adjusted earnings per share up 24% year over year.
We also generated over $151 million of free cash flow in the quarter, which was used to further strengthen our balance sheet by paying down $105 million of debt and to buy back $33 million of stock.
David: We ended the year on a good note and we anticipate strong growth in 2025.
David: In inland Marine transportation, we experienced normal headwinds from poor operating conditions and a slight slowdown in some trade lanes during the quarter.
From a demand standpoint refinery activity dipped in the early part of the quarter. However activity began to pick up and tightened utility as we exited the quarter overall, our barge utilization rates averaged in the 90% range for the quarter spot prices were flat to slightly.
David: Down sequentially, but were up in the high single digit range year over year.
David: More importantly, our term contract renewals were in line with our expectations with high single digit increases versus a year ago.
David: Fourth quarter inland operating margins were approximately 20%.
David: In coastal market fundamentals remained steady with our barge utilization levels running in the mid to high 90% range during.
David: During the quarter stable customer demand combined with a continued limited availability of large capacity vessels resulted in mid to high 20% year.
David: Year over year increases on term contract renewals and average spot market rates increased in the low teens range year over year.
David: Planned shipyards impacted the quarter with fourth quarter coastal revenues, increasing only 6% year over year with an operating margin in the low teens.
David: Turning to distribution and services demand was mixed across our end markets with growth in some areas offset by slow this or delays in others and power generation total revenues grew 16% sequentially and 36% year over year.
David: <unk> of orders with strong adding.
David: Adding to our backlog with several large project wins from major backup power and industrial customers as the need for power remains critical.
David: And oil and gas revenues were down 38% year over year, and 24% sequentially driven by a very soft conventional oil and gas business.
David: This was partially offset by some growth in our E Frac business.
David: In our commercial and industrial market, even though revenues were down 7% year over year.
David: Driven by softness in on highway truck service and repair operating income was up 28% year over year due to favorable product mix and ongoing cost control initiatives.
David: In summary, while our fourth quarter results were challenged by temporary seasonal issues the underlying market fundamentals for both segments remain positive so far in the first quarter. We are seeing inland utility improve which is helping firm up spot prices overall with rates and some trade lanes.
David: Starting to push higher and coastal industry wide supply.
David: Demand dynamics look very favorable for the years to come our barge utilization is strong and we are realizing strong rate increases in.
David: In distribution and services demand continues to grow for power generation and is mostly saw offsetting softness in the legacy oil and gas arena.
David: All in all we have a very favorable outlook for our business.
David: As we look into the coming year I'll talk more about our outlook later, but first ill turn the call over to Raj to discuss the fourth quarter segment results and the balance sheet.
Raj: Thank you David and good morning, everyone.
David: In the fourth quarter of 2024.
David: Marine Transportation segment revenues were 467 million and operating income was $86 million with an operating margin around 18%.
David: Compared to the fourth quarter of 2023 total marine revenues inland and coastal combined increased 3% and operating income increased 26%.
David: Total marine revenues decreased by 4% compared to the third quarter of 2024.
David: Weather and lock delays meaningfully impacted our operations as the beginning of winter weather combined with with lock maintenance of a few high traffic trade routes drove a 30% sequential increase in delay days during the fourth quarter.
David: Looking at the inland business in more detail.
David: The inland business contributed approximately 82% of segment revenue.
David: Average barge utilization was in the 90% range for the quarter, which was in line with the fourth quarter of 2023 as well as the third quarter of 2024.
David: Long term inland marine transportation contracts or those contracts with a term of one year or longer contributed approximately 65% of revenue with 63% from time charters and 37% from contracts of affreightment.
David: Slower market conditions early in the quarter contributed to spot market rates that we're flat to slightly down sequentially, but increased in the high single digit range year over year.
David: In contrast, our term contracts that renewed during the fourth quarter, while up on average in the high single digit range compared to the prior year.
David: Compared to the fourth quarter of 2023.
David: Inland revenues increased 3% primarily due to Hyatt.
David: And spot contract pricing.
David: Inland revenues decreased 3% compared to the third quarter of 2024.
David: Inland operating margins were right around 20% driven by the benefit of higher pricing and ongoing cost management, which help blunt lingering inflationary pressures.
David: Margins fell sequentially as expected given the challenging operating conditions caused mainly by weather and lock delays and seasonal softness in refinery activity, we experienced in the early part of the quarter.
David: Now moving to the coastal business.
David: Coastal revenues increased 6% year over year, driven by higher contract prices that were partially offset by an increase in shipyards.
David: Overall coastal had an operating margin in the low teens range benefiting from higher pricing and partially offset by shipyard timing.
David: Given the high number of planned shipyards on the schedule the margin headwind from shipyards is expected to linger into the first quarter of 2025 before improving as we move through the balance of 2025.
David: The coastal business represented 18% of revenues for the Marine Transportation segment.
David: Average coastal barge utilization was in the mid to high 90% range, which improved from both the fourth quarter of 2023, and the third quarter of 2024.
David: During the quarter the percentage of coastal revenue under term contracts was approximately 100% of which 99% of our time charters.
David: Average spot market rates were up in the low teens range year over year and renewals have term contract prices were higher in the mid to high 20% range on average year over year.
David: 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 outlook for the full year of 2025.
David: This is included in our earnings call presentation posted on our website.
David: At the end of the fourth quarter. The inland fleet had 1094 barges, representing $24 2 million barrels of capacity.
David: And it is expected to increase slightly in 2025.
David: Coastal marine is expected to remain unchanged for the year.
David: Now I'll review the performance of the distribution and services segment.
David: Total segment revenues for the fourth quarter of 2020 for what $336 million with an operating income of $27 million and an operating margin of 8%.
David: During the fourth quarter of 2024, the company recorded a $56 3 million noncash inventory impairment charge in the distribution and services segment, primarily related to weak market conditions for conventional diesel fracturing equipment.
David: This was based on current market conditions, and our view on the industry outlook, which includes decreased customer demand for conventional diesel fracturing equipment, driven by an industry wide shift to electric fracturing equipment.
David: As such the company determined that certain inventory had limited commercial opportunity and the carrying value of these inventories while accordingly adjusted.
David: Compared to the fourth quarter of 2023, the distribution and services segment revenue decreased 3%, while operating income decreased 7% due to lower revenues and mix.
David: When compared to the third quarter of 2020 for segment revenues decreased by 3% and operating income decreased by 12%.
David: Moving to the segment in more detail in power generation, our revenues tied to industrial end markets were up 38% year over year, we continue to see significant power generation orders, resulting in higher backlog from backup power data centers and other industrial applications.
David: Power generation revenues tied to the energy space were up 160% sequentially and 34% year over year as some shipments caught up from previously delayed product orders.
David: Altogether total power generation revenues were up 36% year over year and operating with operating margins in the high single digits.
David: Power generation represented 39% of total segment revenues.
David: On the commercial and industrial site steady activity in marine repair, partially offset lower activity in other areas, particularly on highway truck service.
David: As a result, commercial and industrial revenues were down 7% year over year.
David: Even though revenues in C&I were down year over year favorable product mix and ongoing cost savings initiatives drove a 28% year over year increase in operating income.
David: C&I made up 45% of segment revenues and had operating margins in the high single digits.
David: In the oil and gas market, we continue to see softness in legacy conventional frac related equipment as lower rig counts and lower fracking activity tempered demand for new engines transmissions service and parts throughout the quarter.
David: This softness is being partially offset by solid execution on backlog and new orders of <unk> related equipment revenues.
David: Revenues in oil and gas were down 38% year over year, and 24% sequentially, while operating income was down 58% year over year and 31% sequentially.
David: Oil and gas represented 16% of segment revenue in the fourth quarter and had operating margins in the mid to high single digits.
David: Now I'll turn to the balance sheet as of December 31, we had $74 million of cash with total debt of around $875 million and our debt to cap ratio improved to 27%.
David: During the quarter, we had net cash flow from operating activities of around $247 million fourth quarter cash flow from operations benefited from a working capital reduction of approximately $82 million, we use cash flow and cash on hand to fund $97 million of capital expenditures.
David: While capex, primarily related to maintenance of marine equipment.
David: Free cash flow generation during the quarter was just over $150 million.
David: We used $33 million to repurchase stock at an average price of $116 and reduced our debt by around 105 million further strengthening our balance sheet.
David: As of December 31, we had total available liquidity of approximately $583 million.
David: For all of 2024, we generated cash flow from operations of $756 million driven by higher revenue and earnings.
David: We still see some supply constraints, especially in the power generation space.
David: Closing some headwinds to managing working capital in the near term.
David: Having said that our teams executed well throughout 2024, and we unwound $93 million of working capital for the year.
David: With respect to Capex, our total capital spending was $343 million for 2024.
David: Approximately $230 million was associated with our marine maintenance capital and improvements to existing inland and coastal marine equipment and facility improvements.
David: Proximately $110 million was associated with growth capital spending in both of our businesses.
2025, we expect capex to fall into the $280 million to $320 million range.
David: Altogether.
David: We generated $414 million of free cash flow for the year, which exceeded the high end of our guidance driven in part by favorable working capital release, we expect 2025 to be another good year for free cash flow generation.
David: 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.
David: I will now turn the call back to David to discuss our 2025 outlook.
David: Thank you Raj.
David: While we managed through challenging operating conditions in the fourth quarter. We ended in a very strong position in our businesses.
David: Finery activity is starting to increase our barge utilization is improving in inland and spot rates are beginning to pick back up.
David: While we expect typical seasonal weather conditions to propose some.
David: Some near term headwinds in the first quarter and high levels of shipyard activity to linger near term and coastal our outlook in the marine market remains strong for the full year.
David: In distribution and services demand is expected to remain mixed across our products and services and our actions taken over the past few years to limit volatility of this segment are paying off.
David: For DNS, we expect flat to slightly lower results for the segment, despite a very tough oil and gas market.
David: For Kirby overall, we expect our businesses combined will deliver another strong year of financial growth in 2025, with a 15% to 25% increase year over year and earnings per share.
David: Moving to specific detail on the segments in inland Marine we anticipate positive market dynamics due to limited new barge construction.
David: The demand softening we saw in the refinery sector in the fourth quarter has improved and barge utilization rates are firming up.
David: We expect our barge utilization rates to be in the low to mid 90% range for the year with continued improvement in term contract pricing as renewals occur throughout the year. However, we continue to see inflationary pressures and there remains an acute mariner short.
David: Ginny industry, which continues to drive up labor costs.
David: These pressures along with the increasing cost of equipment should continue to put upward pressure on spot and contract pricing.
David: Overall inland revenues are expected to grow in the mid to high single digit range for the full year.
David: As we usually see normal seasonal winter weather has started and is expected to be a headwind.
David: To revenues and margins in the first quarter. However, we expect operating margins will gradually improve during the year with the first quarter being the lowest and the average for the full year up 200 to 300 basis points.
David: In coastal market conditions remained favorable in supply and demand remained balanced across the industry fleet.
David: Steady customer demand is expected to keep our barge utilization in the mid 90% range.
David: Revenues for the full year are expected to increase in the high single to low double digit range compared to 2024, driven by higher pricing on contracts.
David: Coastal operating margins are expected to be in the mid teens range on a full year basis.
David: With the first quarter, the lowest due to weather and a high number of planned shipyards.
David: In the distribution and services segment, we see mixed results as near term volatility driven by supply issues customers deferring maintenance and lower overall levels of activity in oil and gas is partially offset by orders for power generation.
David: In commercial and industrial the demand outlook in marine repair remains steady while on highway service and repair remains weak in the current environment, although the on highway market feels close to bottoming from the trucking recession.
David: And oil and gas, we expect revenues to be down in the high single to low double digit range as the shift away from conventional frac to E. Frac continues to take place and customers continue to maintain considerable capital discipline.
David: In power generation.
David: We anticipate continued strong growth in orders as data center demand and the need for backup power is very strong we expect extended lead times for certain OEM products to continue.
David: <unk> to a volatile delivery schedule of new products throughout 2025.
David: Overall, the company expects total segment revenues to be flat to slightly down for the full year with operating margins in the high single digits, but slightly lower year over year.
David: To conclude overall 2024 was a record year for earnings and we have a favorable outlook as we look to this year and beyond.
David: Lack of meaningful new build of equipment and marine has supply in check and we continue to receive new orders for power generation equipment as we manage through supply issues.
David: Our balance sheet is strong.
David: And we expect to generate significant free cash flow in 2025, we expect our businesses will produce solid financial results in 2025 with higher margins and strong earnings growth for the year and we see good fundamentals continuing as we look out to the next few years operator.
Chris: This concludes our prepared remarks, Chris.
Chris: Christian Raj and I are ready now to take questions.
Speaker Change: Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question Press Star one again due to time restraints. We ask that you. Please limit yourself to one question and one follow up question. Please standby, while we compile the Q&A roster.
Daniel: And our first question will come from the line of Daniel <unk> with Stephens. Your line is open.
Hey, Good morning, guys. This is reed on for Daniel.
Reed: I just wanted to first look at pricing.
Daniel: When we look at the puts and takes here so far in the first quarter we have.
Daniel: Difficult weather some better refinery activity can you talk about all the puts and takes and kind of.
Daniel: What is driving that improved pricing and once we move past this difficult whether what gives you the confidence that we can continue to get strong pricing through the year.
Daniel: Along with maybe some update on the competitive trends you're expecting in 2025 sure. Good morning, Ralph Thanks for the question.
Daniel: Christian.
Daniel: Tag team this a bit but.
Daniel: Look.
Speaker Change: We did see a little as Christian will tell you a speed bump in the fourth quarter, we saw utility pulled back a little bit as refiners cut back.
Speaker Change: I think utility got down into the 90% right around 90% range, we saw spot.
Speaker Change: Spot pricing weaken a little bit for us it was down zero to 2%.
Speaker Change: That is all abated now we're.
Speaker Change: Our utilities Christian can share some recent utility numbers.
Speaker Change: The refiners are back.
Speaker Change: That speed bump went away. So we are very tight in terms of supply and demand right now.
Speaker Change: As you know drives pricing Christian will give you a little more color on that why don't you go ahead and do that Christian I'll circle back on the other part of the question, yes, Sir Thanks, David Good morning Reed.
Speaker Change: You saw the typical winter weather patterns that tend to affect Q4 and Q1.
Speaker Change: Frontal passages fog.
Speaker Change: Maybe a little ice forming on the Illinois River and around the election, I think David characterized it well we saw.
Speaker Change: We began to talk about an in house here as a speed bump.
Speaker Change: However, as the election kind of played out and people got back to work. The holiday season was a bit long with the way the holidays fell we saw some trading activity.
Speaker Change: Slow down I can tell you today is a snapshot in time standing here.
Speaker Change: We have seen utility recover we have seen spot pricing recover very nicely and so that's why we characterize it as a speed bump we did see.
Speaker Change: A bit of a.
Speaker Change: Softness in funding activity in some of our core refiners. However.
Speaker Change: Tell you today looking at the numbers, where we're seeing it rebound back nicely in Q1, yes, and really the second part is whether look what weather does help tighten up utility.
Speaker Change: Usually we get.
Speaker Change: Couple of percent.
Speaker Change: Extra utility with weather, we don't always get paid for that extra utility that's why it impacts the margin.
Speaker Change: But look first quarter is always our lowest in terms of margin on the inland side.
Speaker Change: I think the Big picture is don't focus on the first quarter focus on what we're telling you for the full year in terms of the margins and we've said there'll be up to 200 to 300 basis points.
Speaker Change: We're pretty excited about where we are.
Speaker Change: A Christian as being modest I mean, we were I think.
Speaker Change: The last week or so we've been at $95 96, I think we even bump 97% utility which is for us.
Speaker Change: Sold out so even if.
Speaker Change: Whether it starts to get better.
Speaker Change: That comes down a couple percent from better weather, we will still be really tight in terms of utility. That's why we are so constructive about.
Speaker Change: Kind of the pricing environment, and Thats, all driven by supply and demand I mean, there is theres not a lot of new supply and demand back.
Speaker Change: After that little speed bump, we had in the first quarter, the fourth quarter and I would just add to that David We had we had a nice term renewal cycle in Q4.
Speaker Change: Youll begin to see that pay dividends in 2025, as we referenced on the conference call.
Speaker Change: <unk>.
Speaker Change: Term contracts that renewed in the fourth quarter high.
Speaker Change: High single digits.
Speaker Change: Year over year, and Youll have that momentum going into 2025 as well.
Speaker Change: Very helpful. Thank you.
Speaker Change: Just kind of shifting to the cost side.
Speaker Change: You talked about Mariner wage inflation on equipment inflation do you have an expectation for 2025 and what are you seeing that Cowen.
Speaker Change: Yes, no I'm glad you brought that up Reed.
Speaker Change: Yes.
Speaker Change: That's another reason spot pricing is going to go up this year.
Speaker Change: We have inflation.
Speaker Change: Inflation.
Speaker Change: Yes.
Speaker Change: Excuse me a lot of discussion in the economy. These days and we see it.
Speaker Change: The industry not just Kirby is very tight on Mariners, we have a slight advantage because we have our own school and we produce our own mariners, but it is very tight and so that's obviously putting wage inflation into the picture.
Speaker Change: But the inflation is more broad based than just that and I'm not talking about the price of eggs, which seems to get a lot of attention. These days.
Speaker Change: <unk>.
Speaker Change: The shipyards the shipyards that we use day in and day out.
Speaker Change: They're busy one two they had the same labor constraints.
Speaker Change: I used to run three shifts $24, seven and they're having problems filling out that last shift.
Speaker Change: So they've got some labor pressure.
Speaker Change: Things like radars and anything electronic we've seen inflation so yeah.
Speaker Change: We said all of that last year, so I'm, not giving you anything new but what I would tell you is it hasnt abated its still there.
Speaker Change: And frankly, that's why we need.
Speaker Change: So the pricing to continue to March up to offset some of that inflation, which is real.
Speaker Change: Frankly, our competitors and our customers understand it.
Speaker Change: They get it because they're dealing with it too so it's there in terms of quantifying it.
Speaker Change: It's hard for us to give you a precise number on inflation, but again if you. If you look at that two to 300 basis point improvement in inland margins that kind of an incorporates both price increases plus inflationary increases.
Speaker Change: Perfect. Thank you guys. Thanks.
Speaker Change: Thanks, Rick Thank you Rick.
Speaker Change: Thank you one moment our next question.
Speaker Change: And that will come from the line of Ben Nolan with Stifel. Your line is open.
Ben Nolan: Thank you and good morning, guys.
Speaker Change: So if I could pick up.
Speaker Change: If I can pick up on the barge side real quick.
Speaker Change: We look forward there's a couple.
Speaker Change: Unique things that are going on a little somewhat unique.
Speaker Change: And hope to get your comments on it first of all you have any perspective on it.
Speaker Change: If there are.
Speaker Change: Tariffs on Canada, and Mexico, what that.
Speaker Change: Are there any implications for the barge industry and then also I saw from yesterday lined outside they were closing a refinery in Houston.
Speaker Change: Is that a needle mover at all for you guys as well just any color on on some of those things that are just happening in the market on your business sure.
Speaker Change: Ill, let Christian handle the lyondell.
Speaker Change: Question, but let me just talk broadly on tariffs.
Speaker Change: It's an interesting thing with tariffs.
Speaker Change: So far it looks like the administration's using it as a negotiation tool rather than anything broad based.
Speaker Change: Our view from a marine side is tariffs, although we're very pro business and don't like a lot of tariffs but.
Speaker Change: If they happen.
Speaker Change: Its generally good for for Kirby in that.
Speaker Change: We're essentially 100% domestic.
Speaker Change: That would drive more onshoring of more.
Speaker Change: Activity in the U S.
Speaker Change: So we probably benefit.
Speaker Change: From that.
Speaker Change: It would also could be inflationary depending on how how robust the tariffs would be inflation is not necessarily bad for us we work hard to offset it.
Speaker Change: But we have a huge installed base of equipment and.
Speaker Change: Inflation would make replacing that equipment more expensive, which.
Speaker Change: Good.
Speaker Change: My view extend the cycle, even further than we think it would be because it could be that much more expensive to replace or add new equipment. Christian why don't you tell them about what's going on.
Speaker Change: It's delicate for us to talk about a specific customer but.
Speaker Change: Christian can give you some color on that.
Ben Nolan: Hey, good morning, Ben.
Speaker Change: In regards to the refinery in Houston.
Ben Nolan: We do service it and it is it is it is part of our demand, which you tend to see.
Ben Nolan: Seen this over the years when other refinery or chemical plant.
Ben Nolan: Shut down or exit the service as you begin to see the logistical feedstock or finished product supply that that refinery serviced start to come from other places the end customers, who needed that chemical or those refined products or the feedstock come.
Ben Nolan: Come from other places in the market at times I've seen that the benefit to the barge business as logistics change and the ton miles that you have to travel to service the same customers with refined products. It can actually be a positive in terms of barge days that it takes to service the market that that refinery use to market.
Ben Nolan: That said, we never like to see refining capacity exit the market, but I think I'm not I'm not a refiner.
Ben Nolan: But I will tell you I think the rationalization of some of this older refining capacity in the United States is probably a good thing for many of our customers that operate.
Ben Nolan: Global World scale refineries, they will they will pick up this demand.
Ben Nolan: From the exit of this older refineries. So I think while we don't like to see the volumes go away day to day.
Ben Nolan: I'm not sure it has any dramatic impact to what we do in the Houston Harbor, and you may actually see opportunities that arise out of new trade lanes.
Ben Nolan: Great.
Ben Nolan: Very helpful. I appreciate both of those answers.
Ben Nolan: And then for my second question I was hoping it sounds like.
Ben Nolan: The power business is humming, along particularly in the fourth quarter.
Speaker Change: Well first of all can you give any context on on how the backlog build and maybe any color on how you maybe anticipate that growing over the course of the year or at very least sort of maybe contextualize the conversations youre having with customers.
Speaker Change: We think that our business might might fair over the course of the year.
Speaker Change: Sure Chris.
Speaker Change: Christian I'll split this question a little bit here.
Speaker Change: Look.
Speaker Change: Power Gen is a real thing.
Speaker Change: Data center demand is real.
Speaker Change: R E Frac side is real.
Speaker Change: We are seeing orders continue I'll, let Christian gave you some color on the backlog, although we don't like to give a specific backlog number.
Speaker Change: But it's lumpy.
Speaker Change: Ben.
Speaker Change: Obviously, it's growing you can see that in our numbers.
Speaker Change: Offsetting the weakness in conventional oil field.
Speaker Change: But it's lumpy picture this data center or it could be call it $30 million to $50 million worth of equipment. They want it all at once.
Speaker Change: The supply chain takes.
Speaker Change: A few quarters to get that going and then.
Speaker Change: It's a lumpy delivery. So when you look at our quarterly progression. This year it could be lumpy because of the first quarter. We don't really haven't been any big data center deliveries, but second quarter, we should have some big deliveries so it'll be lumpy.
Speaker Change: But the overall trend is growing and I'll, let Christian can give you some color on backlog now thanks for the question Ben Thank you David.
Speaker Change: If you frame up our power Gen journey.
Christian Raj: Four years ago, you had a backlog of our numbers in the tens of millions of dollars, but we don't discuss backlog to the dollar here and I will tell you that going into 2025.
Christian Raj: 80% of our backlog is power Gen. It's in the hundreds of millions of dollars in backlog.
Christian Raj: Good French hedge us who manages our power Gen business and does a great job.
Christian Raj: Tell me something interesting the other day this year.
Christian Raj: We will deliver.
Speaker Change: Our we will hit the milestone of delivering one gigawatt of natural gas power generation products into the market. So that's a significant milestone for DNS.
Speaker Change: I think it shows you the momentum and the market penetration that we're enjoying as a player in this market. It is dynamic it is lumpy as the revenue flows through as David mentioned, but we do see the backlog. We're excited about it and we're building out a very good team to capitalize on it.
Speaker Change: Excellent.
Speaker Change: Again appreciate answers from both of you.
Speaker Change: Good good color I appreciate it.
Speaker Change: Thanks, Matt good thank you.
Speaker Change: Thank you one moment our next question.
Speaker Change: And that will come from the line of Kenn Hoekstra with Bank of America. Your line is open.
Speaker Change: Hey, guys its Adam Ross Koski on for <unk>, Thanks for taking the questions.
Speaker Change: Maybe it'll look a little bumps.
Speaker Change: Despite seasonal pressure still strong inland supply demand dynamics.
Speaker Change: You've spoken about a two to 300 basis point long term margin improvement opportunity.
Speaker Change: Just provide some color on.
Speaker Change: Where rates are and what where rates would need to go to justify a significant new new builds or capacity additions and how youre looking at that over the next couple of years.
Speaker Change: Yes, you bet.
Speaker Change: Can't really give you specific market pricing because the.
Speaker Change: The attorneys in the room will kill me so.
Speaker Change: That said look.
Speaker Change: We had a little speed bump that Christian and I have described in the fourth quarter, we saw spot pricing declines zero to 2% which is.
Speaker Change: Barely.
Speaker Change: <unk> gimbal.
Speaker Change: We're seeing that.
Speaker Change: We've already regained traction there here so far in January but it's early days, you've got you've got to let it play out for the year.
Speaker Change: That said spot pricing is well above term.
Speaker Change: It's probably in the order of 10% above term right now we like that.
Speaker Change: That is a healthy market when it gets really sporty it could be 15% above of term.
Speaker Change: Maybe on that way now, but right now it's kind of 10% above term.
Speaker Change: And then if you look at where.
Speaker Change: Pricing needs to go to justify.
Speaker Change: Building new equipment.
Speaker Change: For two barge tow, it's got an increase probably 40% from where we are now.
Speaker Change: And in that.
Speaker Change: Code.
Speaker Change: Two barge tow would need to be.
I'm, saying in the $14000 a day rate kind of thing.
Christian Raj: Look our our competitors understand that and as Christian mentioned, there's a lot of discipline in terms of new construction right now.
Christian Raj: It just doesn't make sense to build new equipment.
Christian Raj: What little building is happening is entirely for replacement right now.
Christian Raj: So.
Christian Raj: Our estimation, we don't know exactly what our competitors are doing but.
Christian Raj: Our estimation is its all for replacement.
Christian Raj: To do build new capacity, we need significant rates.
Christian Raj: <unk>.
Christian Raj: Got it that's helpful. Maybe just a little bit more on this year.
Christian Raj: You noted you expect.
Christian Raj: <unk> to be the trough given some of these temporary seasonal pressures.
Christian Raj: Is it any color on just.
Christian Raj: How much of a trough it is and really I'm thinking about seasonality for the rest of the year typically you have a little bit of a bump in the second and third quarters.
Christian Raj: But maybe fall.
Christian Raj: Back down in the fourth is there anything unique happening one first quarter to impact any of that seasonality or just any thoughts.
Speaker Change: Sure no you've got the seasonality right I mean, the first quarter is usually the lowest second and third quarter pickup nicely third quarter is usually the highest fourth quarter dips back down a little bit, but not as low as first quarter.
Speaker Change: It's the normal seasonality, we expect that this year the only other caveat would be.
Speaker Change: For our coastal business, we have a very heavy first quarter shipyard cycle.
Speaker Change: They'll start unwinding in the second quarter, so that'll that'll impacted but coastal is rocking right now I'd say rocking. It is probably too strong of a term, but it is doing really well, we're essentially sold out.
Speaker Change: And the fleet's performing well, we just have that normal.
Speaker Change: Required shipyard maintenance and we're going to go through it so that'll help the out quarters, it'll help second third and fourth quarter for coastal once we get some of these big shipyards behind us so that would be the only other seasonal factor.
Speaker Change: <unk>.
Speaker Change: That I can think of anything else Christian no. David that was well said, we're seeing the normal the normal seasonality in Q1, you've got a little bit of ice forming on the Illinois River you have got some lock outages, you've got some some bridge construction going on but it really nothing.
Speaker Change: In Q1 that is beyond <unk>.
Speaker Change: Our typical normal winter weather battle.
Speaker Change: It will be the trough, but.
Speaker Change: We see things recovering very nicely out of the quarter and were actually very optimistic about the rest of the year.
Speaker Change: Thanks and purchased one clarifying.
Speaker Change: You noted the gaps I believe on the inland side is about 10% spot to term is that the same across coastal I mean with that spot up low teens in terms of high 20%.
Speaker Change: Is that a same dynamic as well and really really were a 100% termed up. So there is really no spot market in and coastal right now so.
Speaker Change: As typically the term contracts are a year in nature, we do have several that are multi year.
Speaker Change: So it's really as those term contracts renewed pricing will go up there is really not a lot of spot market at all.
Speaker Change: So.
Speaker Change: C N and I think thats pretty consistent for most of the industry right now it is very tight yes, the only spot market that really exist as maybe the re letting of a term piece of equipment and you will see that at a premium to the term rates because they're shorter duration trips. However, I think David summarized it very well.
Speaker Change: I mean the market is.
Speaker Change: All but sold out and if you look at the percentage increases that we're getting on our offshore renewals.
Speaker Change: We're getting rate at a clip that.
Speaker Change: We've never seen before I mean, it's pretty big chunks, when you or youre moving rates, 20%.
Speaker Change: In our renewal cycle, but Adam just like on the inland side, we need it right. There's been inflation the cost of new equipment has gone up substantially just to give you a benchmark number 185000 barrel ATB, we built one about 567 years ago, and the 80 million.
Speaker Change: Range to build that today, it's $130 million to $135 million. So.
Speaker Change: That's inflation as cost as yields cost of construction.
Speaker Change: So.
Speaker Change: The rates do need to go up like that to get anywhere close to replacement replacement economics, and everything we've said about supply and demand on the inland side is is the same on the coastal side.
Speaker Change: Even worse, because if you wanted to build a new 185000 barrel unit today.
Speaker Change: Didn't get it until probably the end of 2007, maybe in the first part of 2008 so.
Speaker Change: We're again, we're seeing a long runway here for ourselves.
Speaker Change: And we're pretty pretty constructive and excited about what's in front of me.
Appreciate the thoughts thank you.
Speaker Change: Thanks, Ed Thanks, Adam.
Speaker Change: One moment for our next question.
Speaker Change: And that will come from the line of Sharif Mcguffey with BT AIG. Your line is open.
Sharif Mcguffey: Hey, good morning, Thanks for taking my question.
Speaker Change: First thinking about the supply of inland barges, you mentioned retirements could keep growth flattish. So given the overall inland fleet is aging.
Speaker Change: Is it realistic to see bar, just keep working past that 35 year, mark or is that viewed as something of a hard cut off in the industry.
Speaker Change: That's a great question historically the age of our barge is driven by the major oil company or the major chemicals.
Speaker Change: <unk> rules as well as the economic decision does it make sense to keep investing in the 30% 35 year old asset I'll give you a little color.
Speaker Change: It's an inexact science, but we saw 75 barges retire in 2020.
Speaker Change: 2000, 22024, excuse me and we don't know exactly if they retired but we do know that their certificate of inspections.
Speaker Change: Removed so that was an average age of 42 years, the barges that retired in that bucket.
Speaker Change: I think youll see perhaps one way to adjust.
Speaker Change: The lack of new construction is for carriers.
Speaker Change: To try to stretch the age of their fleets now you will still run up against the vetting rules of the major oil companies and the major chemical companies.
Speaker Change: How they decide to flex or interpret that is still in play we don't know.
Speaker Change: But typically rule of thumb.
Our barge gets to.
Speaker Change: 30 years I mean, that's that's its useful life.
Speaker Change: So great question.
Speaker Change: I will tell you that.
Speaker Change: Carriers like us are still.
Speaker Change: Waiting to see how that plays out.
Speaker Change: That's interesting and then.
Speaker Change: For my second question I wanted to circle back on.
Speaker Change: What Ben was mentioning with powergen the color on the backlog is very helpful and.
Speaker Change: Well just in the last couple of weeks, we've seen a handful of big Nat gas partnerships announced.
Speaker Change: But thats all long lead time stuff, which I imagine lends itself to backup power Gen that runs on the same fuel.
Speaker Change: I'm wondering what kind of opportunity you see over the next sort of three plus years longer term and what youre hearing from customers there.
Speaker Change: Look our power Gen portfolio as.
Speaker Change: Is multifaceted. So for example, most data centers are diesel backup Jens stationery there they are installed.
Speaker Change: Stationary backup for New York Stock Exchange some of the major money Center banks in New York et cetera. So that's one bucket stationary diesel than we have mobile diesel where will.
Speaker Change: We will provide mobile backup power generally around storms or ice storms or.
Speaker Change: Utility disruptions.
Speaker Change: About.
Speaker Change: One megawatt or two megawatt.
Speaker Change: Trailer full of backup power that's diesel run that can come.
Speaker Change: Come to the back of a Walmart or a target or a costco and plug in in and run the store and in our <unk>.
Speaker Change: In a storm type situation, so that bucket for us is growing.
Speaker Change: You saw our Capex go up a little bit last year because of that we just need more rental assets demand.
Speaker Change: For backup power just continues to grow and having mobile backup power is good.
Speaker Change: And then you get into.
Speaker Change: Natural gas generation, which is it can be mobile or stationary and thats growing as well and as you might imagine natural gas is a lot cheaper.
Speaker Change: Than diesel.
Speaker Change: So there is a lot of.
Speaker Change: Excitement around that we do.
Speaker Change: We do that as well.
Speaker Change: A lot of mobile some stationary some of it is that goes to customers that sell power by the hour. Some of it is prime power some of its backup power. So all of those buckets are growing.
Speaker Change: It's hard to get too specific without getting into the customers on each one of those buckets.
Speaker Change: But we're excited about the whole portfolio.
Speaker Change: I think what we can do is natural gas generation is really exciting because the cost.
Speaker Change: Per kilowatt hour is.
Speaker Change: It's not as competitive as say a big utility could do but it is it is.
Speaker Change: Cost effective and being able to sub in there.
Speaker Change: For for needs as is important and useful to many of the industrial customers that we have.
Speaker Change: Thanks, very much for taking my question.
Speaker Change: Alright take care. Thank you. Thank you as a reminder, if you would like to ask a question. Please press Star 111 moment. Our next question and that will come from the line of Greg Wasikowska with Webber Research. Your line is open.
Greg Wasikowska: Hey, good morning, everyone. How are you doing.
Speaker Change: Hey, good morning, Greg Hi, Greg.
Greg Wasikowska: I wanted to go back to the order book I know you guys had talked about it a lot, but it's a point worth hammering home.
Speaker Change: David I think I heard you say this but.
Greg Wasikowska: Whereas confirming.
Greg Wasikowska: If we see deliveries in 2025 start to outpace 2024, it's worth kind of hammering home that point that.
Greg Wasikowska: It is expected to be mostly replacement tonnage.
Greg Wasikowska: The first question and the second is just not that.
Greg Wasikowska: That 40% number.
Greg Wasikowska: For rates to justify building.
Greg Wasikowska: Then at that point for some time now I want to say probably a couple of years.
Greg Wasikowska: It's a question that gets asked every quarter. It's a question that we get all the time and it's yes. The answer is 30% 40% of all the time.
Greg Wasikowska: What needs to change in order for that to not be the answer anymore and really that's getting at.
Speaker Change: What do you what.
Speaker Change: What do we and investors and people who are following the stock need to need to look for in order to start getting nervous or better better pose what today.
Speaker Change: Not need to look for in order to remain calm.
Speaker Change: Yes, what I'm getting.
Speaker Change: I'll stop there. So it's a fair question because that 30%, 40% need is some I've said for to your point the last 234 years.
Speaker Change: But.
Speaker Change: Around $14000 a day for two large tow right now to justify I think probably three years ago I would've said 12000 so.
Speaker Change: Why does it go up the cost of our barge has gone from.
Speaker Change: Well five years ago, It was probably $2 5 million for 30000 barrel barge now.
Speaker Change: <unk>, probably as Christian just mentioned I think $4 5 million for 30000 barrel clean barge.
Speaker Change: And then that's the barge side whats driven the cost up there.
Speaker Change: Steel prices for sure, but thats only about 30% of the input.
Speaker Change: Slaver cost its welding.
Speaker Change: It's all the paint costs all of that has gone up and then when you go to the boat side and we've gone from tier two tier three boats to now tier four.
Speaker Change: So.
Speaker Change: Tier four one cost more to operate.
Speaker Change: You have all kinds of considerations for the engines are more expensive.
Speaker Change: The operation of the boats are more expensive.
Speaker Change: It's at least on just a regular towboat that added about $1 million in cost.
Speaker Change: And then just financing equipment has also gone up so.
Speaker Change: We usually talk when we talk about pricing unlevered returns, but for many of our competitors.
Speaker Change: They've got leverage in the cost of borrowing has gone up so you put all that together and Thats why.
Speaker Change: The breakeven cost continues to rise so even though we're getting some price increases that delta really hasnt closed now I'm going to turn it back to Christian He has very specific numbers on 24 build in retirement, and then 25 kind of what our crystal balls hearing yes. Thanks David.
Speaker Change: Regarding the barge order book and it's a bit of an inexact science, but we do have really good information.
Speaker Change: We're looking at what we think was about 34 barges delivered in 2024, we know the majority of these barges were replacement.
Speaker Change: There's probably about another 10 barges that are going to slide <unk>.
Speaker Change: Two into 2025 that were in.
Speaker Change: The order book was probably in the <unk> and those will slide into this year.
Speaker Change:
Speaker Change: The 2025 order book, we think is lining up to be about 50 to 60 inland barges.
Speaker Change: But I will tell you that at 50 to 60, new construction orders.
Speaker Change: The present shipyard capacity that can build a high quality inland tank barge is full if.
Speaker Change: If you wanted to build another barge beyond that $50 60, well into 2026 to get delivery. So I think the capacity to build inland barges in the United States.
Speaker Change: Is diminished from what it was once upon a time when we saw the the hyper aggressive building during the days of chasing the shale crude barrel.
Speaker Change: So supply is as in check.
Speaker Change: I've never seen it in my 28 years.
Speaker Change: And so I think even even at an increase from say 30, 30 to 40 barges to 50 to 60 year over year.
Speaker Change: We feel quite confident that the majority of this is replacement, which puts the industry and the supply side and very very good shape.
Speaker Change: On top of that.
Speaker Change: 20% of the industry.
Speaker Change: We'll also have to go through a maintenance cycle is.
Speaker Change: The maintenance bubble continues.
Speaker Change: So we still see a high level of major maintenance, that's going to require and by the way that bubble comes back in 2028 in a big way. So I think when you when you compound all of that or add all that together, you've got a supply side that looks as good as we've ever seen it I've ever seen it and you are.
Speaker Change: Clipped clipping along at 75 barges retired in 2024, and if you take if you take that 40 $41 42 year old.
Speaker Change: Large group is a group I mean, you still got 500, plus barges that need to retire in the next five years. So I think when you bake all that together.
Speaker Change: Supply sizes in check as we've ever seen it.
Speaker Change: Got it thanks, guys that's really helpful.
Speaker Change: A question, we've gotten I'm curious to hear your answer is kind of a follow up to that still thinking about that 40% number that rates need to go up and the answer to that being the same as that cost.
Speaker Change: Increased.
Speaker Change: Along with rates, yet Kirby has been able to improve margins.
Speaker Change: Rapidly in the last couple of years, while that 40% number has stayed the same which is a bit of.
Speaker Change: A disconnect I guess so.
Speaker Change: Answer might be that yard availability, but.
Speaker Change: Can you connect the dots for how you guys have been able to improve your margins, even though the costs have been rising and generally from the industry standpoint that 40% number is still remain constant.
Speaker Change: No.
Speaker Change: <unk> our price increases have had real price not just nominal price soon we needed to get there look we're still a long way from.
Speaker Change: Rates that get a reasonable return on invested capital and yes.
Speaker Change: We work hard.
Speaker Change: Our job we believe for our shareholders is to get a good return on invested capital. So we're trying to outpaced inflation and we have been making some headway, but we still have ways to go.
Speaker Change: Anything you want to add Christian attributed to the management team.
Speaker Change: No we've done a good job executing through it through the through the inflationary environment I think David summarize it Werent extremely capital disciplined company that flows through the DNA and the teams both marine DNS and.
Speaker Change: We enjoy.
Speaker Change: Some really good customer relationships, we have really really good dialogue around what inflation looks like to Kirby, they listen and we've been able to stay above.
Speaker Change: Inflation and get real rate and honestly our service our service justifies a lot of that and I would say that.
Speaker Change: It's probably part of part of why you see us performing on the margin.
Speaker Change: Right.
Speaker Change: Cost environment, we're in and the team is doing the team is doing a great job, yes, Kristian makes a really good point, we really try and work to save our customers money.
Speaker Change: Because of the size of our fleet, we often are able to pull horsepower off to save them money and redeploy that horsepower somewhere else in our system.
Speaker Change: So they are only just paying for the barge, we work really hard to save them money.
Speaker Change: So.
Speaker Change: Thats all part of the calculus, when you come to the rates. They know we work hard to to save them money. So they will pay a little more so.
Speaker Change: Don't we shouldnt get any more specific than that but.
Speaker Change: The real answer is we need some real rate increase.
Speaker Change: Get our returns where you as shareholders want to see them.
Speaker Change: Got it okay. Thanks again, guys I appreciate you, saying that that one.
Speaker Change: Thanks, a lot thanks.
Speaker Change: Greg.
Speaker Change: This concludes our question and answer session I would now like to turn the conference back over to Mr. Kurt <unk> for any closing remarks.
Kurt: Thank you Shari and thank you everyone for joining the call today as always please feel free to reach out to me afterwards.
Speaker Change: This conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Okay.
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