Kirby Corporation

Good morning, and welcome to the Kirby Corporation 2020 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. We ask that you limit your questions to one question and one follow-up. To ask a question, you may press the star, then 1 on your touchtone phone. To withdraw your question, please press the pound key. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Eric Holcomb, Kirby's Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us.

With me today are David Grzybinski, Kirby's President and Chief Executive Officer, and Bill Harvey, Kirby's Executive Vice President and Chief Financial Officer. 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 at kirbycorp.com. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available on our website in the investor relations section under financials. As a reminder, statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated as a result of various factors, including the impact of the COVID-19 pandemic and the related response of governments on global and regional market conditions and the company's businesses. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2019, and subsequent quarterly filings on Form 10-Q. I'll now turn the call over to David.

Thank you, Eric, and good morning, everyone. Earlier today, we announced 2020 third quarter earnings of 46 cents per share. The quarter's results were significantly impacted by COVID-19 and the related reductions in demand for Kirby's products and services. Our marine transportation business was also negatively affected by the record hurricane season, which significantly disrupted our operations. Across the company, we continued to aggressively reduce costs, which has helped improve distribution and services profitability and kept inland marine margins solid, despite a material, sequential, and year-on-year decline in barge utilization and revenues. Our overall earnings also benefited from a favorable tax rate, which Bill will discuss in a few minutes. Looking at our segments in marine transportation, the inland and coastal markets experienced reduced volumes as demand for transportation of refined products, crude, and black oil remained depressed. Although the economy began to recover during the quarter, refinery utilization only slightly improved as refiners were challenged by weak demand, high inventories, and low crack spreads. Refinery utilization averaged only 78% compared to the previous five-year third quarter average of 93%. Petrochemicals modestly improved sequentially, but chemical plant utilization of 74% remained below levels experienced in 2018 and 2019. These factors contributed to challenging market conditions across inland and coastal, including limited spot requirements and lower pricing, particularly for refined products, crude, and black oil moves. Our barge utilization and marine financial results were also impacted by severe weather, which affected our operations across the Gulf Coast and East Coast. During the quarter, there were 20 named storms, including three major hurricanes and one tropical storm, all of which made landfall in the heart of our operations in Texas and Louisiana. These storms resulted in significant disruptions, including delays across our fleet and some prolonged closures of our customers' plants, key waterways, and at certain docks. Thankfully, through the professionalism and expertise and effort of our employees and There was little to no damage to our equipment or our people or our facilities. Overall, the impacts of COVID-19, as well as the severe weather, resulted in average barge utilization in the inland business in the low 70% range and coastal in the mid-70% range in the third quarter. In distribution and services, our third quarter results improved as the economy started to recover. Lockdowns eased across the U.S., and some oil field activity emerged. Importantly, we also benefited from cost reduction initiatives. In total, distribution and services revenue increased 10% sequentially, and operating income returned to slightly above break-even. In commercial and industrial, the on-highway and power generation businesses sequentially improved as the economy started to reopen. In on-highway, we experienced increased demand for truck and municipal fleet repairs at our major facilities as U.S. fleet miles improved approximately 5%. Repair activity for buses, however, remained depressed as people continued to limit travel at major tourist destinations and on public transportation. In power generation, activity improved as customers resumed installations of major backup power systems, ordered new equipment and parts, and requested service. We also benefited from increased utilization in the power generation fleet due to the major hurricanes along the Gulf Coast. In marine repair, revenues declined sequentially, primarily due to lower engine sales, but activity levels remained solid throughout the quarter. In the oil and gas market, activity started to recover, as U.S. frack activity bounced off the bottom, and some of the wells which were shut in during the second quarter came back online. Active frack crews, which are believed to have bottomed around 50 during the second quarter, increased to over 100 by the end of the third quarter, but they are still significantly down from approximately 300 last year. This activity improvement resulted in higher service, parts, and remanufacturing demand in our oil and gas business. Additionally, we delivered some new environmentally friendly pressure pumping units during the quarter. In a few moments, I'll talk about our outlook, but before I do, I'll turn the call over to Bill Harvey to discuss our third quarter segment results and the balance sheet.

Thank you, David, and good morning, everyone. In the 2020 third quarter, marine transportation revenues were $320.6 million with an operating income of $32.4 million and an operating margin of 10.1%. Compared to the 2020 second quarter, marine revenues declined $60.4 million or 16% and operating income declined $19 million. The reductions are primarily due to lower inland and coastal barge utilization reduced fuel rebills, and the impact of hurricanes during the quarter. However, aggressive cost reduction helped to limit the impact on operating margin. During the quarter, the inland business contributed approximately 77% of segment revenue and had an average barge utilization in the low 70s range. Long-term inland marine contracts, or those contracts with a term of one year or longer, contributed approximately 70% of revenue with 67% from time charters and 33% from contracts of a fragment. Term contracts that renewed during the third quarter were down in the low single digits. Spot market rates, however, declined approximately 10% sequentially in year-on-year, with refined products, crude, and black oil experiencing the most pricing pressure. During the third quarter, the operating margin in the inland business was in the mid-teens. In the coastal business, spot market opportunities continue to be limited as a result of reduced demand for refined products and black oil transportation. Hurricanes and tropical storms in the Gulf of Mexico and Atlantic resulted in considerable delays and reduced efficiencies. Overall, barge utilization was in the mid-70s range, slightly lower sequentially, but down from the mid-80s range in 2019. Average spot market rates were generally stable during the quarter, but term contracts that renewed during the quarter were lower in the mid-single digits. During the third quarter, the percentage of coastal revenues under term contracts was approximately 85%, of which approximately 90% were term charters. Coastal's operating margin in the third quarter was in the negative mid-single digits. With respect to our tank barge fleet, A reconciliation of the chart changes in the third quarter, as well as projections for the remainder of 2020, are included in our earnings call presentation posted on our website. Moving to distribution and services. Revenues for the 2020 third quarter were $176 million with an operating income of $1.1 million. Compared to the second quarter, revenues improved 10% with a $15.3 million improvement in operating income. The sequential improvement in operating income is primarily due to cost reduction measures, as well as the absence of some one-time charges that occurred in the second quarter. In commercial and industrial, activity levels improved sequentially in the on-highway and power generation sectors as the economy started to recover and lockdowns eased. As well, the power generation business experienced increased utilization in the rental fleet as a result of hurricanes along the Gulf Coast. The marine repair business continued to experience solid demand but was down sequentially due to reduced engine sales. In oil and gas, revenues and earnings sequentially improved as U.S. frack activity increased from the second quarter lows and our businesses experienced modest increases in service and parts demand. As well, the manufacturing business benefited from the sale of environmentally friendly pressure pumping units and remanufacturing orders for major oil field customers. During the third quarter, the commercial and industrial businesses represented approximately 72% of segment revenue and had an operating margin in the mid-single digits. The oil and gas related businesses represented approximately 28% of segment revenue and had a negative operating margin margin in the low double digits. Turning to the balance sheet, as of September 30th, we had $120 million of cash and total debt was $1.58 billion and our debt-to-cap ratio was 33.9%. During the quarter, we had strong cash flow from operations of $117.7 million and enabling debt repayments of $65 million. We also used cash flow and cash on hand to fund capital expenditures of $36.6 million. At the end of the quarter, we had a total available liquidity of $613 million. Since the end of the quarter, we have continued to generate solid free cash flow. As of this week, our total debt was $1.53 billion. Capital spending is expected to continue to trend down during the fourth quarter. For the full year, we expect capital expenditures of approximately $150 million, which represents a 40% reduction compared to 2019. As a result, we expect to generate for free cash flow of $300 to $350 million, which includes tax refunds and the CARES Act, as previously disclosed. Before I close, I'd like to quickly address income taxes. During the third quarter, we had an effective tax rate benefit as a result of net operating losses, which were carried back to prior higher tax years as allowed by the CARES Act legislation. We expect the fourth quarter to also have a low tax rate. I'll now turn the call back over to David to discuss our outlook for the fourth quarter.

Thank you, Bill. The last six months have been very challenging times for most everyone, including Kirby. Before COVID-19 shut down economies around the world, Kirby's inland marine business recorded some of the strongest barge utilization levels in our history. Activity was very strong. Pricing was increasing at high single to low double-digit percentage rates and approaching levels not seen since 2014. Operating margins were on a path to exceed 20%. In coastal, capacity was tightening and contracts were renewing higher double-digit increments in distribution and services our commercial and industrial businesses were growing with a strong economy and there was increasing demand for backup power generation even oil and gas which had struggled in 2019 was showing signs of the recovery with expectations for improved demand later in the year especially with respect to Kirby's environmentally friendly pressure pumping equipment since then unprecedented and steep activity clients have occurred across the company. It goes without saying the biggest question on everyone's mind is when will the economy recover significantly and get back on track? It is clear the economy is improving. Refinery and chemical plant utilization is up from April lows, and the oil and gas sector is showing some signs of life. We believe our activity levels have bottomed, and we will see gradual improvement throughout next year. However, with the pace of the economic recovery relatively slow, refinery utilization hovering in the mid-70% range in signs of a potential second wave of COVID are starting to appear. The risk to and the slope of this recovery is highly uncertain. We believe our fourth quarter will be difficult with results negatively impacted by seasonality and continued low barge utilization. However, as we've said before, we believe this downturn is demand driven and our utilization will recover when demand rebounds. As the impact of the virus is mitigated in the coming months, we are optimistic better days are ahead in 2021. In the meantime, we intend to remain very focused on cost control, capital discipline, cash generation, and debt reduction. Let me run through some business-by-business thoughts. In the inland market during the fourth quarter, we expect slight improvement in barge utilization, provided economic activity continues to slowly grind higher and new lockdowns related to COVID-19 are not implemented. We also expect to benefit as refinery and chemical plants slowly recover from recent hurricanes along the Gulf Coast, which notably include a powerful storm in early October and yet another storm this week. The Illinois River, which was shut down throughout the third quarter, is also reopening by the end of October, and tows are starting to move in and out of this important waterway. However, in the absence of of a material economic recovery and with expectations that demand for refined products and crude oil will remain muted, the inland market is expected to remain challenging with pressure on pricing. Additionally, increased delays are expected with the onset of normal seasonal winter weather, which will affect operating efficiencies and reduce profitability on contracts of a freightman. Overall, as compared to the third quarter, we anticipate inland revenues and operating income will be flat to down slightly in the fourth quarter. In coastal, the demand in the spot market is expected to remain at low levels for the near term until a meaning recovery for refined products and black oil demand is realized. However, term contracts, which represent approximately 85% of our coastal revenues are expected to remain stable with minimal renewal exposure prior to the end of the year. As well, Coastal's results are expected to modestly benefit from reduced hurricane-related delays. As a result, we expect Coastal's fourth quarter revenues and operating margin will be flat compared to the third quarter. In distribution and services, During the fourth quarter, we expect demand for parts and new engines in commercial and industrial to be modestly benefited from an improved economy, particularly in on-highway and marine. But normal seasonality in marine repair and power generation is likely to result in sequential reductions in revenue and operating income. In the marine repair business, we expect reduced major overhauls and service during the dry cargo harvest season. And in power generation, utilization of the rental fleet is expected to decline as hurricane season ends. In the oil and gas market, we anticipate demand for parts, service, and new pressure pumping equipment will remain limited during the fourth quarter. Although oil field activity has modestly recovered from second quarter levels, continued low commodity prices and potential E&P budget exhaustion are expected to result in reduced customer spending during the fourth quarter. As well, a significant amount of spare pressure pumping capacity remains across the frack industry, and many of our customers continue to rationalize their fleets, further reducing the near-term need for Kirby's oil and gas products and services. Overall, as compared to the third quarter, we expect distribution and services revenues will decline modestly and operating margins will likely return to a small loss. Nonetheless, because the DNS business requires very little capital, we expect the segment will contribute positive free cash flow during the quarter. In conclusion, the third quarter was difficult, but our efforts to contain costs resulted in solid earnings despite a difficult demand backdrop. Although the economy is beginning to grind higher and we believe activity has bottomed across our businesses, demand for Kirby's products and services remains well below pre-COVID levels. In the fourth quarter, we expect overall earnings will be sequentially lower with DNS slightly down, Inland flat to slightly down, and coastal flats. Despite the near-term challenges, we are confident Kirby is in a strong position to recover once a material improvement in the economy materializes, which we anticipate will begin to occur in 2021, provided COVID-19 is contained. Supply and marine transportation remains in check, with limited new barge construction in inland and no new incremental capacity plan for coastal. In DNS, the economy will drive increased demand for on-highway power generation and marine parts and service. In the oil field, Kirby's leading position as a leading provider of remanufacturing services and new environmentally friendly pressure pumping equipment is also expected to drive increased demand for this segment. In the meantime, from a liquidity perspective, We have generated strong free cash flow of $230 million year-to-date, which has enabled us to build significant cash on our balance sheet for these uncertain times. We expect this trend will continue in the fourth quarter with us generating strong free cash flow of $300 to $350 million for the full year, which we will direct to reducing debt. Operator, this concludes our prepared remarks. We're now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press the pound key. As a reminder, we ask that you please limit your questions to one question and one follow-up. And our first question will come from the line of Jack Atkins from Stevens. You may begin.

Jack, you there?

Yeah. David, can you hear me okay?

Yeah, we got you.

Good morning. Yeah, good morning. Sorry about that. Thanks for taking my questions. So maybe if we could just sort of start with the demand backdrop within Inland. David, could you maybe kind of help us think about What's really driving your customers' demand trends here as we look out over the next six months? Miles driven has picked up. We're seeing the industrial economy sort of come out of its trough. Do we need to see more of that to ultimately drive more volumes from your customers, both refineries and chemicals? Or is there something else sort of going on that's impacting customer activity more broadly?

No, I think it's the former in your alternatives area. Let me just give you a little context here. If you look at inland utilization pre-COVID, we were in the mid-90s, pretty robust. Refinery utilization was in the mid to high 90% range. At the bottom of COVID, we dropped to to 70%, maybe dip below 70% utilization on inland, and refinery utilization got to the high 60s. Yeah, it's bounced back a little bit. You know, pre-summer driving utilization in the refineries got up to about 80%, but then it dipped back the last couple weeks down to 72%, and I think it's about 75% right now. across the system, 74.6 to be precise. And when you look at our utilization, it moved almost in line with that. And what do I think is going on? I think it's all about economic activity. It's people driving. It's diesel miles driven, passenger miles driven. And they are going up, but it's still not enough to get the demand up for the refiners to really crank out their products out of their refineries. Jet fuel is one of the big problems. You know, the jet fuel demand is just way off. Diesel is off, too, and gasoline is off. But they are coming back. You know, that's why we say we believe our utility has bottomed. We're starting to see a slow climb out of that. You can look at TomTom. I don't know whether you've gone to that website online, but they track global traffic congestion. And you can go to any city in the world, really, and look at global congestion, which really is about how much car traffic and bus traffic is in the cities. And we're starting to see that come up. It's certainly not to pre-COVID levels. But even as this outbreak has continued, you're still seeing the congestion levels rise. I mean, we track Houston pretty carefully, and you can see every week it's a little better, even as cases rise. And what's happening, and I can use Kirby as an example, we're open back up. Our offices around the country, we've got about 70 locations. We're open for business, but we're doing it in a smart, cautious way. We've probably only got about a quarter to a third of our people in the offices, and we're rotating them in and out. I think that phenomena is occurring across the United States. So you're getting people driving again, but it's not the full crush that you normally see. So I think that in and of itself, between passenger miles flown, vehicle miles driven, it's just not enough yet to drive that refinery utilization back up into the 80s and even into the 90s. It's just going to take a while. And I think that's probably the biggest disappointment is how long this is taking and how long it's taking to grind up. But it's, you know... it's on a path to go up. It's just much slower than I think any of us would hope. With jet being so bad, I think when you look at the refiners and their crack spreads, they're just atrocious. It's really tough for them. So they're juggling and running as fast as they can without jacking up their utilization because they Basically, they're losing money the harder they run, and that's what's keeping their utilization in check. Now, on chemicals, we've seen that come back a little better than refineries, but their utilization is still down probably 10%. in the low 70s, low to mid 70s, and where they were in the high 70s to low 80s in terms of utilization. So that's come back a little better. I think that's about reemergent Asian demand and export of chemicals. So we'll see. As we've said, Jack, this is a demand-driven downturn versus the supply-driven downturn that we had from basically 2015 through 2017. So we're a little more constructive about it all.

Okay. Okay, David, thank you for that sort of color. And I guess maybe for my follow-up question, you know, the stock is trading below tangible book value. You're profitable. You're generating substantial free cash flow. I know the goal is to de-lever At what point should we begin thinking about you guys being able to allocate capital towards buying back stock? Because I think historically you guys like to buy businesses trading below their depreciated replacement value, and I've got to think that at your current valuation, relative to your long-term outlook, you view this as a pretty compelling opportunity to maybe acquire your own business. So how should we think about that in light of your current valuation here?

Yeah, I think – I think you're thinking about it exactly the way we are, right? We just had our board meeting. Clearly, that's part of the discussion. We view our earnings potential. Look, we're the strongest player in both of KDS and in our marine business, in the industry, in our view, and our earnings potential leverage when things come back is quite strong. So you're right. I think this is an incredible time. I do believe this uncertainty has us a little more cautious, and we've been de-levering to get our credit metrics a little stronger. But clearly, Kirby's stock is, in our view, a great value below tangible books. So I don't want to commit to anything, but it's certainly something we look at very carefully.

Okay, great. Thank you for the time.

Thank you. And our next question will come from the line of Michael Weber from Weber Research. You may begin.

Yes, how are you? Good morning, Michael. Hi, Michael. I wanted to start first, I guess, with a high-level question. I think the writing's kind of been on the wall that it was going to be a tough year, kind of pending a COVID recovery that's taking a bit longer than you and most expected. But one of the key themes we haven't seen really slow down at all during COVID has been a pretty broad decarbonization push. And I'm just curious, you know, maybe kind of setting kind of a resumption of normalcy to decide. You know, we've seen a number of IOCs and a number of larger players start to position their businesses for maybe more expansive long-term growth trends in that area. I'm just curious, are you guys contemplating at a board level or internally, you know, what the demand profile post-COVID really looks like and how it might be different than it was heading in? I mean, obviously the business mix was, you know, cycle over cycle was different kind of heading into COVID than it was, say, in 2014 and 2015 when you got the mid-20% margins with these. I'm just wondering, you know, to what degree have you thought about how different that demand profile looks post-COVID and then what you can do to tap into some of those growth trends? Because I think most people would agree that the long-term growth trajectory of Maybe black oil and frack might not be enough to garner the kind of multiple that maybe it was 10 years ago.

Yeah, no, I think that's an excellent question, Michael. Clearly, the ESG trend and the decarbonization trend is not only there, it's gaining momentum. We're working with our – our integrated major customers on both Christian O'Neill, the president of a marine group, and myself are on different committees with some of our integrated major customers and our big chemical customers on decarbonization and how we can do that in the inland space. In terms of its total demand destruction, I think it's going to take – take a while to play out, but clearly there is going to be some demand destruction on refined products as we continue down this path towards decarbonization. But the bottom line is you're still going to need energy in the world. The energy usage continues to grow as the underdeveloped world expands its living standards. You know, we are working on actually some very nice carbon-reducing projects throughout Kirby, both in our marine space and also in frac. You know, we've been building electric frac units for five years now. We're probably the market leader. We're doing more and more electrification. If you look at S&S... That's good. I think we're going to pivot and provide some projects. I do think barging is probably the best mode of rotation to move on a carbon-friendly way. If you look at our carbon footprint per ton mile versus rail, we're probably 25% better And if you look at trucking, we're probably an order of magnitude better in terms of moving product. So if anything, barging should be the mode of choice to move. Yeah.

Yeah, and I guess it's easy for that question to come off as kind of a high-concept window dressing. But I'm asking kind of tangibly in terms of your customer base pivoting towards maybe a different long-term future. You know, is that something you think manifests itself for you all in just a ramp in ammonia and methanol volumes? Is this something where you kind of – something in tangible ways where you shift your fleet mix and or – maybe pivot the Stewart and Stevenson footprint to something where, you know, you've got a more diversified, you know, you're, I don't know if it's, I know that the DNS business services the nuclear industry already. I'm just wondering maybe specifically whether there are ways to gradually shift the book to higher growth sectors.

Yes. Yes is the short answer. You know, these committees that Christian and I are on, alternate fuels, and you mentioned two of them, methanol and ammonia. Well, we probably move more ammonia in the United States than anybody else, and we probably move more methanol in the United States than anybody else. So those would be great alternative fuels from our standpoint. But look, as complex, you start handling ammonia. It's one of the most dangerous products we carry. So as we pivot to that fuel choice, it could be tough. I would also tell you, and we've got to be careful because we're under NDAs, but we're looking at a couple wind support type things where our expertise in marine can support offshore wind. So, you know, we're looking at the changing world, and we've got... lots of projects that can bring that forward for us and generate revenue. But you're precisely correct. Two of the big alternative fuels are methanol and ammonia. There's some talk of hydrogen, obviously. Nuclear is interesting, and we do have a good exposure to the nuclear business. I think Europe, though, is very against nuclear power for some reason, but it is one of the true ways to get carbon-free energy. At any rate, it's interesting. I know you publish a lot on this space, and we read your stuff regularly. So thank you for that.

You're kind of an interesting nexus for that. I'm just wondering to what degree that ultimately creates growth opportunities that maybe you wouldn't have been talking about a couple quarters ago. So I can definitely follow up on it. Just to loop back on an earlier question, I think it was on, I guess, buybacks. Would tangible book really be – one, I guess, how realistic is that? And then two, just given the leverage profile and maybe in a pretty uncertain future, I guess, in your term. But in terms of how you would look at the valuation, would tangible book – would that be the valuation metric you guys would really focus on? I guess what we would tend to think about is if you guys are still trading – close to 9.5 to 10 times EBITDA, you know, still going to be at par north of what you'd be buying a new barge at. So, you know, if you just think about it in terms of like an asset replacement, it's, you know, that would be the equity price is still giving you guys credit for creating value, whereas if you're buying a hard asset, you know, that's going to be void of any premium. So is it realistic to really think you would be leaning into that right now?

Yeah, now, look, as we said, we're focused on debt reduction right now in the interim. But, you know, it's certainly the stock price is very attractive to us. That said, when we value things, we use a DCF. You know, it's not really – we don't look at it from a tangible book value. I do believe that's an indication of value for sure. And, you know, one of – One of the things I think we're all trying to figure out is given the massive stimulus that's going on in the United States, the deficit growing as much, I think we're headed towards inflation. And hard asset companies in our asset base actually is pretty good in an inflationary environment. I don't know what tools the Fed has, but paying off expensive debt with cheap future dollars is probably one of the ways to get out of the massive deficit that we're going to have in the United States. So, you know, inflation, you know, typically Kirby has done pretty well in high inflationary environments.

From the debt reduction mode, we, you know, as David's covered, we expect to generate substantial cash flow in the fourth quarter, which would put our debt level, net debt level lower than it was at the last December and in our liquidity well over $700 million. So we believe that the time we need to reduce debt materially is not extensive. And we'll manage the credit metrics and make sure that we remain investment-grade, but we do see substantial cash flow in the company. Okay, that's fair. I appreciate the time, guys.

Thanks a lot. Thank you, Michael.

Thank you. Our next question will come from Randy Givens from Jefferies. You may begin.

How's it going? Very good.

Doing well.

How are you, Randy? Doing all right. All right. So on the last quarterly call, you guided to DNS improving in the third quarter but remaining below break-even levels. However, you were clearly able to turn a small profit here. So I guess what drove this beat? Was it incremental revenue or was it kind of lower than expected costs? And then I guess following those cost reductions, how high do you expect quarterly operating income could recover to in good or maybe at least normal times?

Yeah, good question. Randy, the third quarter kind of being above break-even was better than we expected, and I would say there are two factors. One, our cost savings was came through a little stronger than we thought. Our team is really going after everything they can, as you would expect in this environment, and that was really good. Then the second thing is we were able to ship some environmentally ESG-friendly frac units during the quarter that we had You know, we had been working on and had them basically not in inventory, but they were almost complete. So we were able to ship those. You know, the ESG, I mean, it's a theme now. All of our pressure pumping customers, frankly, well, and our marine customers too, everybody seems to be very focused on carbon reduction. And we had some units and some expertise in that, and we had some product that, one of our customers was able to take in the third quarter. So that helped, right? That helped in the quarterly results. I think your broader question is, and it probably gets to what are we thinking about in 2021 for DNS? You know, I firmly believe it returns to profitability. I think the magnitude of that depends on where the U.S. economy goes. I wish I had a better answer and a more specific answer, but I definitely believe we'll be profitable in DNS in 2021. It's the magnitude that I can't answer because we just don't know how long this grinding out of economic growth is going to take. You know, certain sectors of the economy, U.S. economy, are rebounding pretty fast, but in the old industrial side of the economy, it's a little slower. That said, you know, I just mentioned ESG. You know, we do have a lot of ESG-friendly products at Stewart & Stephenson. We're developing more daily. You know, this electrification trend is going on, and we have a lot of products in and around that. So, We'll see. I wish I could give you a better answer, Randy. It's just a little too uncertain right now as we look at 2021.

That's fair. And I'm assuming a lot of the cost you've been stripping out is relatively variable. So if business does return, you can maybe bring that back to ramp up operations, right? I guess for Bill, you know, the tax rate, that has certainly been the line item that has kind of been all over the map, I guess, the last few quarters. So what drove that $8.4 million tax benefit in the third quarter? And then for modeling purposes, right, what kind of quarterly tax expense or maybe benefit should we use for 4Q20 in 2021?

Yeah, all right, a good question. Again, it's a result of the CARES Act, Randy, and in what we – as you know, we can – use our NOLs to go back and apply it against and get tax refunds. And, again, if you remember that the CARES Act, the tax refunds are in years when the tax rate was 35%, so we actually get a pickup there, and that affects the tax rate. We had guided to 10%, below 10%, and just the nature of that, there's some noise around any tax rate, and, of course, we actually had a tax benefit. Perspectively, for this year, I think if you use 5% or maybe a little less than 5%, you'll be fine. We do have some noise. Again, that noise, another way to look at that noise, it's actually part of the reasons we get cash. There's cash associated with it, so it's not a non-cash item in some ways, but there is volatility, Randy, and I think for this year, if you use 5% or less, you'll be fine, and eventually we'll trend to the 25%. Next year will be lower, though. lower than 25% because we do have, again, the year 2020 does provide us some tax benefits.

Sure. And then just to clarify that 5%, is that for the full year or for 4Q?

No. Sorry. No. I should have said that. The fourth quarter.

Okay. So there will be a tax loss. There will be an expense on that line item.

I believe so, but again, it's very, very difficult, and it could be break-even. It could be zero. It should be at or around that, but there's so many moving parts.

That's fair. I just didn't know if the 8.4 was something you were planning on kind of duplicating.

No, and in fact, if you look at it, for the third quarter, we had about a 15 to 17 cent benefit because of that.

Yep, yep. Got it. Well, hey, thanks again for the time. Good luck in the fourth quarter. Thanks, Randy.

Thank you. Our next question will come from the line of John Chappell from Evercore ISI. Please go ahead.

Good morning, everybody.

Good morning, John.

David, I wanted to start on the demand side, and I think conceptually the refinery utilization being low makes complete sense, but when we think about petrochemicals and housing and autos being two of the bigger end markets and You know, housing's on fire, autos are rebounding aggressively off the bottom. Are there any other end markets that are kind of pressuring the utilization at the pet chem plants, or is it just a function of needing to catch up to these other industries that are recovering?

Yeah, I think it's the latter. You know, pet chems have been okay. You know, I think... We've been pleased about some things, like methanol, for example, has stayed pretty steady. Ammonia stayed pretty steady. Pressure products, and I use pressure products as an example. Butadiene, which is a pressure product, goes into tire manufacturing. During COVID, they shut it down because there was no real vehicle manufacturing going on. I think you'll start to see that come back. you know, as demand for tires go up. So there are some bright spots in petrochemicals, but, you know, some of the pet chem volumes go into, you know, fuel blend stocks and whatnot. The other thing is hurricanes didn't help pet chem volumes at all in the third quarter. You know, like Hurricane Laura, for an example, hit Lake Charles really hard, and You know, one of our customers' plants was shut down for a full month. And, you know, that's just really painful. You know, there's still some plants that aren't open in the Lake Charles area. They're still trying to come back up. So there's a lot of noise in that. But, you know, Pet Chem has not been hit as hard as the refinery complex. But they do interact with one another, right, because – Some of the Petchem blends go into – well, they go into blend stocks in the refineries and whatnot. So they are somewhat linked.

Okay. And then tying that in, can you help us think about contract renewals? I know that they're not entirely lumpy, but maybe not completely smooth either. With this precipitous drop in 3Q utilization and spot rates and kind of your outlook for 4Q – Is it going to take some time, you know, to kind of see a recovery in the margins because you're going to have term contracts reset lower for the next nine to 12 months? Or can we see the term contracts kind of stabilize as soon as you see the whites of the eyes on utilization back to 85% where we can see a more aggressive margin expansion in the early part of 21? Yeah, I...

Well, you've heard us say utilization needs to be in the mid-80s to kind of get positive pricing momentum. With it in the low 70s, we are continuing to see pricing pressure in the spot market. I think Bill gave some numbers that we were – spot pricing was down in the quarter sequentially about 10% and probably down 10% roughly from a year ago. Term pricing – Term contract renewals was down more like mid-single digits, which is a little better. Term contracts have a longer outlook, and people think about what's going to happen in the future more there versus spot. I think we'll see pressure in the fourth quarter on pricing still. I think... We are seeing utilization, as I said, it's bottomed and it's starting to pick up. We just need it to get into that 80% range before I feel real confident about margins going back the other direction. I think we're going to see some pressure for a while. When in 21 that reverses is too hard to predict right now. I hate to say this because it sounds like a pat answer. A lot depends on COVID. That makes sense.

I appreciate it, David. Thank you. All right. Thanks, John.

Thanks, Bill.

Thank you. Our next question is from Greg Lewis from BTIG. You may begin.

Thank you, and good morning, everybody. David, you touched a lot on the tangible book value of the company. Clearly, there's been a little bit of pressure on utilization. I guess what I'm wondering is, and you lay out the good chart on deliveries, I guess what I'm wondering is, as you're talking to potential two things, one is Typically, you guys tend to be countercyclical and reach out and go to shipyards when they're in need of orders to place orders, maybe to keep those yards afloat. I guess first, is that something that you're thinking about doing where we are right now? And then just to follow up on that, as we think about barge pricing and asset values Is there the potential for any write-downs that we could be seeing, you know, as we kind of progress over the next, you know, I guess as we head in towards year end, just given the challenges that, you know, the fleet's kind of faced in 2020? Thanks.

Yeah, thanks, Greg. Good to hear from you. I would say in the inland market, you know, we're – We're kind of in the low 70s in terms of utilization. We're not looking for extra barges right now. So going to build some new barges probably doesn't make sense for the near term for sure. And as you've heard us say before, we'd much rather buy barges from another company than build new. So I don't see us building new barges in the interim. In terms of the new builds in the industry and the retirements, look, I think there's not a lot of new orders going into the shipyards, to your point, and I think the retirements are going up. You can look at our retirements. We expanded how many we were going to retire this year just looking at the discounted cash flow that they could generate for some of these older barges. I think we're up to about 80 barges retired this year, or retired or kind of laid up. So, you know, I just don't see us going into the shipyard to build at this time, Greg. You know, in terms of impairment, look, the great thing is we're still making money. I mean, if you look at in the inland market, the kind of mid-teens margins are Yeah, that's pretty good. You know, that may go down a little bit, but, you know, it's still generating pretty good cash flow. So we feel pretty good about that.

Yeah, I think if you look on the barges, to the future or in the long term to cover its historical costs is not even a question. I mean, we are profitable, and if you look at it, there's always a few things that we idle or a few things that we lay off that go away, but I think the inland franchise is so strong, it's not something that I think there's any big risk.

Okay, great. And then I think you kind of touched on it, but, like, clearly when we think about, you know, what Stewart and Stevenson is doing, clearly EFRAC always gets, you know, it's a big piece of equipment on the oil field. It's easy to kind of understand. Are there other things that S&S is working on, other products or anything, where it can kind of move the, you know, move the oil field into a more environmental or an ESG kind of position beyond the EFRAC? Are there other things that the company is kind of looking at doing and working with customers and helping them move that forward?

Absolutely. We've got a whole list of ESG-friendly products that, one, we've been selling for a while and some that are newer and I would say there, you know, just sticking with frac, there's kind of three real good areas. One, just a direct e-frac, which where you have maybe a turbine generating the electricity driving electric drive to the pumps. And we've been doing that kind of work for five years. We're probably one of the market leader in that space. You know, there are some others that are coming out with new ones. Then there's what I would call electric drive, which isn't necessarily gas turbine driven to generate the electricity, but you could have a diesel gas dual fuel engine driving electric generation to electric drive. And then there's obviously just The traditional, instead of just burning diesel, it could be, we call it DGB, which is a cat product. One of the products out there is a cat product called DGB, which is dynamic gas blending, where they can burn up to about 80% natural gas with no methane slip, or little to no methane slip. So these are all products that we work with our customers on, and they're very ESG friendly. But I would tell you, Other areas is just electrification, backup power, things that are going into electrification. I mean, you see it particularly in EVs, but there's a trend towards electrification around the United States and the world for that matter. And we have some products that we offer into that space. We do, for example, I'll give you another example. In hurricanes, we have We have standby power and literally on essentially an 18-wheeler truck that can come in and plug into the back of a big box store to get it open for communities that have been impacted. Obviously, we keep refining and developing how we can do that more efficiently. Think about an electric caddy where you can just plug into the back of the store versus you know, spending a lot of time rewiring things and splicing into a store's electric connections. So we're working on a lot of things like that. It's an exciting time. And, you know, that's part of where the world's headed right now. So we're trying to capitalize on it.

Absolutely. Okay. Hey, everybody, thank you for the time.

Thanks, Greg.

Thanks, Greg.

Operator, we'll take one more question.

Sounds good. Our next question will come from Sanjay Ramaswamy from Bank of America. You may begin.

Hey, guys. Thanks for taking my question. A simple one to start. I was looking at the revenue time in third quarter, and that was 8.9 cents. So just a I think that was up 11% year-on-year. Was that just a function of the lower ton miles? I mean, how do we think about that?

Yeah, you know, it's interesting. Revenue per ton mile can move around a lot depending on the voyages. So if you're just doing a bunch of cross-channel moves in Houston, you can have low... ton miles, but pretty good revenue because it's about that move. Conversely, if you're going upriver, you're going to have a lot of ton miles and the revenue per ton mile drops. I think we just had some noise in the quarter. Do you have the numbers, Bill?

Go ahead. Remember, too, that in this quarter, with all the hurricanes and the delays, there were very low ton miles in relative terms, where last year the third quarter was an excellent quarter from the point of view of movement. So I do notice, you do point out a fact that it was 8.9 cents this quarter, last year it was 8 cents. So there's a lot of things there, but in the end a lot of it relates to just, as David said, the length and as well just the weather this year with all those hurricanes that really froze things for extended periods.

Yeah, and we have 70% of our are businesses under term contracts. So they would be, you know, even if you're not moving, you'd probably get some revenue in very little time.

Yeah. Perfect. No, that makes a lot of sense. Thanks for that. And just for the follow-up question, just maybe thinking about, you know, a potential second wave of infection, not a potential, but it's here right now, and maybe the potential for further kind of lockdowns. Maybe just can you talk to the potential scale of the cost-cutting kind of initiative that you can take and the furthest that you can take out of both, you know, DNS and Inland? I know in the second quarter you guys did a great job of taking cost out within Inland, and now DNS is back to profitability. So just maybe the potential scale for further cost out in both of those businesses just to keep the margins somewhat steady?

Yeah, I mean, we continue to fight, but as you know, it's The longer you go after cost cutting, the harder it gets, right? You know, I think in marine, we've taken out probably $120 million in costs. And, you know, that's an enormous amount. We're still, you know, looking at our cost structure and looking for ways to cut it. Similarly, we've probably taken out, well, very painfully, we've taken a lot of heads out of our DNS business. Is there a lot more to do? to do there, you know, not a lot is my short answer. So, you know, that's part of the equation on thinking about margins, right? You know, the levers that we can pull to pull down costs are still pretty thin right now because we've taken so much out so far. That said, you know, in every company As things get worse, you get smarter about how you can take costs out. So we're continuing to look at that. I think one of the keys, though, is, look, we know this is a demand-driven situation. We know demand's coming back. We know there's huge pent-up desire to get back to normal life. And I do think a vaccine's not that far off. Who knows when it gets to a sufficient distribution number and has an impact. But that could be, in my mind, worst case, mid-summer of next year. And as the economy opens back up, the demand will come back. I think there's huge amounts of pent-up desire to go back to some type of normalcy. And so we don't want to cut, you know, to use a proverbial say, you know, we've cut the fat out, we've cut into maybe a little of the muscle, but we surely don't want to cut all the muscle out or get to the bone because we've got to be able to respond. That's a very long-winded answer to you. Sorry about that, Sanjay.

I think Sanjay... Part of the issue in the third quarter was the high inventory levels our customers had, and they've worked those down. So our demand is linked to their demand, and when they had high inventories, you can imagine what they were doing. So we think that, or I think personally that what will happen, even in the lockdown scenarios, it will be more steady from our side. It may not improve, but it will be more steady. Perfect.

I appreciate it. Thanks, guys. Thank you. All right. Yeah, thank you, Sanjay, and thanks, everyone, for your interest in Kirby and for participating in today's call. If you have any questions or comments, you can reach me directly today, 713-435-1545. Thanks, everyone, and have a great day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.