Kirby Corporation

Good morning and welcome to the Cary Corporation 2021 Third Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please sign in 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 please limit your questions to one question and one follow-up. To ask a question, you may press star then one on your touchtone phone. to withdraw the 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 on Kirby's Form 10-K for the year ended December 31, 2020. I will now turn the call over to David.

Thank you, Eric, and good morning, everyone. Earlier today, we announced adjusted earnings of 17 cents per share for the 2021 third quarter, which excludes a one-time non-cash charge totaling $4.58 per share related to our coastal marine business. On a gap basis, we reported a net loss of $4.41 per share. Overall, our quarter was messy, with the one-time charge in coastal, a devastating hurricane which significantly impacted our inland marine business, and increased issues related to COVID-19. We'll talk more about each of these, including the one-time charge, in a few moments. But first, I'll discuss our key markets. In marine transportation, our inland business started the quarter with improving customer demand. In August, however, barge volumes declined as the cases of the COVID-19 Delta variant increased, which slowed the pace of the economic recovery and reduced demand for refined products and crude. Vehicle miles traveled in the U.S. declined, including an overall 4.4% decline in August, with all regions of the U.S. impacted. In our operations, we experienced a meaningful rise in positive cases among our mariners. As a result, we incurred increased costs to charter additional horsepower during the quarter to ensure our operations were seamless. Our inland business was also materially impacted by Hurricane Ida, a significant Category 4 storm which made landfall near New Orleans in late August. This storm left a widespread path of destruction which led to prolonged shutdowns of many customer plants as well as significant damage to marine equipment and waterway infrastructure. As this storm approached, all refineries and chemical plants in the New Orleans-Baton Rouge corridor were forced into shutdowns. The storm damage was so significant that many remained closed or operating at reduced production levels through September and in some cases well into October. At the height of the storm, more than 2 million barrels of refinery capacity per day was offline, reducing PAD 3 refinery capacity utilization from 93% in August to 79% in September. In the petrochemical sector, with nearly the entire complex shut down, operating rates at nameplate ethylene plants in southeast Louisiana declined from 89% in August to 24% in September, and production fell as much as 75% compared to August. From a marine transportation perspective, The storm surge was so significant the Mississippi River flowed backwards, causing many industry barges to break free and resulting in damage to numerous vessels, customer docks, and waterway infrastructure. It's been estimated that as many as 2,000 dry cargo and tank barges were damaged during the storm, which included 30 Kirby tank barges. All of this resulted in a full closure of the Mississippi River for about a week and a lengthy closure of parts of the Gulf intercoastal waterway, which remains in effect today. This closure has resulted in lengthy alternative routes and significant lock delays throughout September and October. Overall, we estimate the damage caused by the hurricane on our equipment directly contributed to lost revenue and additional costs totaling approximately $0.08 per share during the third quarter. Moving to coastal, the market remained challenging during the third quarter, but we did experience some increases in spot market demand, which contributed to modest increases in barge utilization and reduced operating losses. More importantly, we took significant actions to improve our coastal business, including the sale of our marine transportation assets in Hawaii and the retirement of 12 laid-up wire tank barges and four tugboats in the coastal fleet. These actions resulted in a one-time non-cash impairment charge in the third quarter. However, there are significant positives, and it positions the coastal business for success going forward. First, our risk profile is greatly reduced by exiting Hawaii, which is a remote market that has generated poor returns for many years. The retirement of our outdated and laid-up coastal wire barges and tugboats improves our cost structure and materially reduces future capital outlays. Frankly, many of our customers view the old wire tow technology as less safe and less reliable than when compared to newer ATBs. Overall, going forward, we expect our smaller fleet will allow us to focus on attractive markets and more efficient, safe, and cost-competitive equipment will ultimately generate improved earnings and favorable returns. In distribution and services, momentum continued to build with improved activity levels, contributing to significant sequential and year-on-year increases in revenues and operating margins. In commercial and industrial, the timing of major backup power installations and seasonal utilization improvements in the rental fleet led to strong sequential activity in power generation. Increased demand for Thermo King product sales and service also contributed favorably to the quarter's results. These gains were partially offset by modest activity reductions in marine repair, primarily due to reduced major overhauls and temporary facility closures following Hurricane Ida. In oil and gas, increasing U.S. rig counts and completions activity drove strong incremental demand for new transmission parts and service from major oilfield customers. This growth contributed to 25% sequential growth in oil and gas revenues and positive operating margins for the first time in more than two years. In manufacturing, although supply chain constraints delayed the deliveries of several orders and led to a sequential reduction in revenues, our backlog grew meaningfully with significant new demand for our environmentally friendly pressure pumping and electric power generation equipment. In October, Kirby acquired a small energy storage systems manufacturer based in Texas, which has been a key partner in the development of our new power generation solutions for electric fracturing equipment. This acquisition will be important to the development of future energy storage solutions for the oil field, as well as industrial and marine transportation applications. In summary, our third quarter results reflected a challenging environment as well as key operating decisions in coastal marine. The good news is that we have seen a significant improvement in inland market fundamentals in recent weeks, with increasing customer demand and higher barge utilization in the high 80% range. Distribution and services also continues to improve with the economy. In a few moments, I'll talk more about these developments as well as the rest of our outlook. But first, I'll turn the call over to Bill to discuss more about the one-time charge, as well as our segment results and balance sheet.

Thank you, David, and good morning, everyone. Before I review our segment results, I want to provide a little more detail on the one-time charge and Coastal Marine. During the third quarter, we sold our Coastal Marine transportation assets in Hawaii including four tank barges and seven tugboats for cash proceeds of $17.2 million. We also retired 12 wire tank barges and four tugboats, which had limited customer acceptance and low utilization. These events resulted in a non-cash impairment charge of $121.7 million. As a result, the company concluded that a triggering event had occurred and performed interim quantitative impairment tests on Coastal Goodwill, which resulted in a non-cash impairment charge totaling $219 million. In total, the company recorded a non-cash impairment related to Coastal Marine equipment and associated goodwill totaling $340.7 million before tax, $275 million after tax, or $4.58 per share. Looking at our operating segments. In the third quarter, marine transportation revenues were $338.5 million with an operating income of $16.9 million and an operating margin of 5%. Compared to the 2020 third quarter, marine revenues increased $17.9 million or 6% primarily due to higher fuel rebuilds in inland and coastal as the average cost of diesel fuel had increased 76%. Improved barge utilization in inland is offset by lower pricing on term contracts that had renewed during the last year. Operating income declined $15.5 million, primarily due to Hurricane Ida, lower term contract pricing, and increased maintenance. Compared to the 2021 second quarter, marine revenues increased $5.6 billion, or 2%, due to modest improvements in coastal barge utilization and increased fuel rebuilds. Operating income declined $1.6 million as a result of sales mix, increased horsepower costs, and the impact of Hurricane Ida. During the quarter, the inland business contributed approximately 76% of segment revenue. Average barge utilization was in the low 80% range, which was slightly down compared to the second quarter, but improved compared to the low 70% range in the 2020 third quarter. Barge utilization during the quarter was heavily impacted by reduced volumes as a result of COVID-19 Delta variant and customer shutdowns following Hurricane Ida. Long-term inland marine transportation contracts or those contracts with a term of one year or longer contributed approximately 65% of revenue with 56% from time charters and 44% from contracts of a freightman. With respect to pricing, Average spot market rates were stable compared to the second quarter and the 2020 third quarter. Of the few term contracts that renewed during the third quarter, average rates were down in the low to mid single digits. Compared to the 2020 third quarter, inland revenues were up 3% due to significant increases in fuel rebills and improved barge utilization, offset by lower average pricing on term contracts. Compared to the second quarter, inland revenues were stable. Overall, the inland market represented 76% of segment revenues and had an operating margin in the mid to high single digits. In coastal, spot market conditions improved modestly resulting in barge utilization in the mid 70% range during the quarter. Average spot market rates and renewals of term contracts were stable. During the third quarter, the percentage of coastal revenues under term contracts was approximately 80%, of which approximately 85% were term time charters. Revenues in coastal increased 4% sequentially and 13% compared to the 2020 third quarter, primarily due to higher fuel rebuilds and modest increases in spot market activity. Overall, coastal represented 24% of marine transportation segment revenues and at a negative operating margin, the low single digits. With respect to our tank barge fleet, a reconciliation of changes in the third quarter as well as projections for the remainder of 2021 are included in our earnings call presentation posted on our website. Moving to distribution of services. Revenues for the 2021 third quarter were $260.4 million, with an operating income of $11 million and an operating margin of 4.2%. Compared to the 2020 third quarter, distribution and services revenue increased $84.4 million or 48%, and operating income improved $9.9 million. Compared to the 2021 second quarter, revenues increased $33.7 million or 15%, and operating income increased $4.9 million. These improvements are primarily due to a significant increase in demand for our oil and gas products and services, as well as the improved economic conditions across the U.S., which has raised demand for equipment, parts, and service in the commercial and industrial markets. In commercial and industrial, increased economic activity contributed to increased sequential and year-on-year demand for equipment, parts, and service in on-highways. Thermo King, and Power Generation. The Power Generation rental fleet also benefit from increased utilization during the summer storm season, including Hurricane Ida. Marine repair revenues were down sequentially and year on year due to reduced major overhauls, as well as activity reductions at our Louisiana facilities following Hurricane Ida. During the third quarter, commercial and industrial revenues increased 9% sequentially and 20% year-on-year. Overall, the business represented approximately 59% of segment revenue and had an operating margin in the mid single digits. In oil and gas, favorable commodity prices and increased activity in the oil field contributed to significant sequential and year-on-year increases in revenues and operating income. The most significant increase was in our distribution business with better demand for new transmissions, parts and service from major oilfield customers. Our manufacturing businesses also experienced substantial increases in new orders for pressure pumping and frac-related power generation equipment. While manufacturing revenues increased sharply year-on-year, the business was negatively impacted by the timing of deliveries and OEM supply chain issues. During the third quarter, oil and gas revenues increased 25% sequentially and 120% year-on-year. Overall, the oil and gas-related businesses represented approximately 41% of segment revenue and had an operating margin in the low to mid-single digits. Turning to the balance sheet, as of September 30th, we had $54 million of cash and total debt of $1.21 billion with a debt-to-cap ratio of 29.8%. Since the SAVIS acquisition of April 1, 2020, we have repaid nearly $500 million in debt. During the quarter, we generated strong cash flow from operations of $83 million, net of capital expenditures of $34 million, free cash flow was $49 million. We also sold assets with net proceeds of $22 million during the quarter, primarily composed of coastal marine assets in Hawaii. At the end of the quarter, we had total available liquidity of $908 million. As of this week, our net debt has been further reduced to 1.2 billion. For the full year, we expect capital spending to be approximately 120 million to 130 million, which represents more than a 15% reduction compared to 2020 and is primarily composed of maintenance requirements for our marine fleet. We also expect to generate free cash flow of 250 to 290 million for the full year. Lastly, from a tax perspective, we expect an effective tax rate of approximately 29% in the fourth quarter. I'll now turn the call back over to David. Thank you, Bill.

Although the third quarter certainly had its challenges, we are very encouraged by the improving market fundamentals across our businesses, which are setting the stage for materially improved earnings in the coming year. In the near term for the fourth quarter, we expect a sequential improvement in overall revenues and earnings driven by increased volumes and more favorable market conditions in marine transportation, offset in part by nominal and normal functionality and continued supply chain issues in distribution and services. In the inland market, although some issues associated with Hurricane Ida have carried over, including extended customer shutdowns, barge repairs, and waterway closures, our outlook remains very positive. During October, our barge utilization has been in the mid-80 to high 80% range, with recent utilization at the high end of that and in the high 80s. Some of this increase can be attributed to waterway closures in Louisiana, which have extended transit times. However, turnarounds and pent-up demand are also driving up barge volumes. While the waterways are expected to fully reopen soon, we expect barge utilization levels will be minimally impacted due to the ramping up of Hurricane Ida-affected plants, economic improvements, new chemical plants coming online, and the onset of winter weather. With increased inland activity levels, minimum new barge construction and continued retirements we expect further improvements in the spot market going forward. During the fourth quarter and into next year, term contracts that renewed lower during the pandemic are expected to reset and gradually reset to reflect the improved market conditions. Overall, inland revenues are expected to sequentially increase in the fourth quarter, with operating margins improving to around 10%. In coastal, we expect the market will continue to recover with modest demand improvement for refined products and black oil transportation. The recent retirement of the wire barge marine equipment will result in coastal barge utilization being around 90% for the fourth quarter. Although the Hawaii equipment has been sold, we will continue to operate the assets under a charter agreement through the end of the year when our existing customer contracts expire. In the fourth quarter, we do anticipate some elevated shipyard activity on several of our larger capacity barges, and that will result in a coastal revenue reduction in the mid-single digits compared to the third quarter. Coastal operating margins are expected to be at or slightly below break-even in the fourth quarter. Looking at distribution and services, favorable commodity prices and increasing rig counts as well as well completions are expected to yield continued strong demand in our oil and gas distribution business. In manufacturing, activity levels are also expected to remain strong, driven by new orders in our growing backlog of environmentally friendly pressure pumping equipment and and frac-related power generation equipment, as well as some modest remanufacturing of conventional equipment. However, the OEM supply chain issues are expected to persist throughout the fourth quarter, and they will delay some sales and project deliveries into 2022. As a result, we expect our oil and gas businesses will experience a modest sequential reduction in revenues and operating income in the quarter. In commercial and industrial, despite improving economic activity, there will be normal seasonality in marine repair, thermal king, and power generation, resulting in sequential reductions in revenue and operating income in the fourth quarter. Overall, compared to the 2021 third quarter, distribution and services revenues are expected to decline modestly with operating margins in the low to mid single digits. Now to wrap things up, although the third quarter's results were disappointing, we see improved results in the fourth quarter despite planned shipyards and coastal and seasonality and supply chain issues in distribution and services. More importantly, We see strong momentum building across our businesses, which we believe will drive increased revenues and meaningful earnings growth in the coming years. In inland, our barge utilization has recently touched 90%, with October averaging in the mid to high 80% range. With the world economy beginning to emerge from the pandemic, low inventories of refined products, and oil demand expected to meet or exceed pre-pandemic levels in 2022, we believe inland has turned the corner. With minimal new barge supply, we expect our inland business will steadily move higher with improved pricing, earnings, and returns going forward. In coastal, although market conditions remain challenging, recent improvements in the SPOC market should lead to barge utilization around 90%. Our difficult but necessary decisions to exit the Hawaii market and retire unutilized assets are long-term positives that will allow this business to focus on its best assets and markets to generate positive earnings as the market improves. In distribution and services, economic growth will benefit our commercial and industrial businesses in the coming quarters, and oil and gas with strong commodity prices and expectations for increased U.S. gas-directed drilling, we are increasingly optimistic about enhanced demand for our products and services. Further, a heightened customer focus on low-carbon solutions, including environmentally friendly pressure pumping equipment and our power generation solutions for EFRAC, has translated into significant growth in our backlog. These increasing levels of activity will lead to improved profitability in 2022. And finally, our strict capital discipline and intense focus on cash flow generation throughout the pandemic has enabled us to significantly reduce our debt and increase our liquidity. As a result, we are very well positioned to act on future strategic opportunities to increase our earnings potential going forward. Operator, this concludes our prepared remarks. We are now ready to take questions.

Thank you. 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. The first question comes from Ben Nolan with Tifo. Your line is open.

Thank you, Anne. Good morning, Dave and Bill. For my first question, I wanted to start with something a little bit more maybe strategic or a function of sort of where the broader market landscape is headed. And certainly one of the things that we're seeing is all the supply chain issues, but it's impacting things like driver shortages and even on the railroads, them being somewhat capacity constrained, and definitely inflation and some of those, specifically those other two categories. I'm curious sort of what the crossover is if those areas are starting to see significant inflation. Is there any ability for some of the excess chemical or petroleum products to sort of be priced out of the market or for you guys to capture share if those other two modes of transportation get more expensive?

Yeah, I'm not sure there's a lot of crossover. There could be some. Basically, if it can move on water, it does. I would just tell you in general... You know, inflation is happening. We're seeing a little wage pressure. We gave some raises in July. But we've not had a problem filling positions. As you know, Ben, we started our school, which is kind of a Kirby advantage. We started training mariners in January and have continued throughout the year. So we feel pretty good about where we are in terms of our labor supply. and we're pretty excited about that. We are seeing some inflation with supplies and food and whatnot, but so far it's okay. The big news for us really is that demand is growing. We're starting to see it. I mean, you can see it in the consumer, right? The consumer is doing better. Gasoline demand is back up above the five-year average. Manufacturing orders are up. You know, our chemical customers are doing really well. You can look at their earnings announcements. Our refining and integrated customers are, you know, seeing inventories low one, but crack spreads really high. You know, one of our independent refining customers that had shut down their refinery during COVID has restarted it. So, You know, from our perspective, demand's increasing. It's not really crossover demand. It's just real demand that we saw in our base business. And as you know, that demand with supply and check means that we're headed for a much better pricing environment. We're starting to see that now. We're getting price increases in the spot market. Spot prices are above contract prices, and things are moving along really well there.

Great. That's good color. I appreciate it. And then for my second question, just to switch gears a little bit, on the coastal side, I know you guys have sort of been mentioned or danced around some of the opportunities around offshore wind development. I'm curious if you can just sort of give some sort of an update as to where that stands and maybe frame in the opportunity set from a Kirby perspective.

Yeah, well, we've got to be very careful. We're under a couple different NDAs, so we really can't say too much in specific, but you could imagine we very much want to be in the wind service business, whether it's wind installation or service, and we're working hard on it. As you've seen with these offshore installations, the contracts kind of drag out over time, and it's not moving as fast as anybody wants, but So suffice it to say we're in the middle of things and looking forward to some meaningful avenues of future growth for Kirby in our marine operations. I can't really tell you much more than that. I wish I could, but we'll see as these projects progress.

Understood. I'll be on the lookout for that, so appreciate it. Thanks, guys. Thanks, Ben.

Thank you. Our next question comes from John Chappelle with Evercore ISI. Your line is open.

Thank you. Good morning, everybody. Good morning, John. David, on the inland contract renewal, so Bill said 3Q. There was a few contracts, and I guess they were reset down. So when you think about 4Q and 1Q, can you speak to some level of magnitude on number of contract renewals as a percentage of your book, and also given everything you've just laid out with utilization touching 90%, petrochemical production coming back online, would you anticipate at least flat to starting to see some positive revisions in the contractual renewals this quarter?

Well, I'd be more positive than that, actually. We've kind of lapped the lows of COVID renewals. So, What we anticipate is contract renewals in the fourth quarter will be up. We'll see how much they'll be up. But when you look at what's happening in the inland market and particularly tightness around horsepower, tightness around supply is growing, we're very optimistic and we think we'll renew quickly. A contract's higher spot pricing is well above contract pricing. And we're about to reprice some of these, the COVID low contracts. So I can't be too specific because, you know, it's a negotiation with numerous customers. As you know, fourth quarter is usually one of the heavier quarters. I would say it's kind of twice any other quarter. First, second, and third are kind of all around the same. maybe a little more in the first and the second and the third, but the fourth is always the heaviest. So we're pretty optimistic. We're heading in. Demand's tight. Pricing is going up. You know, labor and mariners are in short supply. Horsepower is in short supply. It is set up to go up. It needs to, it has to, and it will.

Great. And then sticking with that theme as well, you know, a lot of people tend to watch refined product utilization, refinery utilization, because we actually have visibility on that every week. I think that data you provided on the petrochemical numbers out of southeast Louisiana was pretty meaningful when you go from 89% to 25%. Is there any – I know that some of your new customers are coming back online, but when you think about 4Q overall or maybe just kind of November and December run rates post a ramp-up period. What are you expecting for the petrochemical plant utilization and overall production as it kind of rebounds from that 75% decline?

Yeah, I'll just look at south. I'll use southeastern Louisiana ethylene as an example. You know, pre-Hurricane Ida, Ethylene plants in that corridor were running around 89%. As you heard, they dropped to 25%. I think they're back up to 89% and maybe even higher than that. Some of the big chemical customers, you know them. They're saying they're running full out. Some of the refiners are saying the exact same thing. The independent refiners are saying they're going to run out, run hard. Also, we're seeing a little heavier feedstock mix, which is pretty positive for barging. The heavier the feedstock mix, the more byproducts. Those byproducts generally lead to a little more barge movements. Some of them are heavier products and not as readily moved in pipelines. It's shaping up nicely. You know, it's always good when your customers start making more money, right? Whether it's the chemical guys or the refiners or the integrated, they're all doing better. And, you know, that's good. And they're doing better because demand's picking up. And, you know, I think we're all tired of talking about COVID, but its demand impact has been real. And, you know, hopefully we're turning the corner again. We had the Delta variant. Hopefully there's not another variant coming. But everything looks pretty good from our perspective, just looking at refinery utilization and chemical plant utilization, ethylene production, aromatics production, C4 coproduct production. They're all kind of increasing. They've recovered from Ida and actually are starting to get above our pandemic levels and back to pre-pandemic levels. All right. Well, that's all great to hear. Thank you, David.

Yeah, thanks.

Our next question is from Jack Atkins with Stevens. Your line is open.

Okay, great. Good morning, and thanks for taking my questions.

Hey, good morning, Jack.

So, David, I guess maybe to start with maybe a two-parter on inland, you referenced sort of some heavier feedstocks. I would be curious if maybe you could expand on that a bit with natural gas prices moving higher over the course of the last several months. Can you maybe talk about how that impacts your business? Is that a positive or a negative as you think about petrochemical output and activity? And then with fundamentals accelerating in the inland market, Is there maybe any thought to going to some shorter-term contracts just to be able to participate in maybe a stronger pricing environment as you look six or maybe even 12 months out? Just trying to think of a way to capitalize on that versus locking yourself into a 12-month commitment now right as the market's beginning to turn.

Yeah. Let me take the first part first. The Look, as natural gas prices go up, you know, ethane is part of that kind of split. And ethane is a big feedstock for the ethylene plants, right? But as those prices go up, you'll crack more naphtha or heavies. You know, it could be C4s or propane. They'll start, you know, cracking heavier because, one, you know, the mass starts to work for them for the heavier feedstocks. And, you know, we're seeing that. You know, I think there's Dan Lippy and others that publish on that. But the heavier feedstocks are going into the chemical plants. And, again, that's good for us. You know, the more NAPSA they crack, the more heavy that you'll see. You could see C4s and butadiene coming out. Butadiene is a nice one because it's a pressure cargo. And, you know, Kirby's got a pretty good position in pressure products. So, yeah, the Flexi crackers are taking advantage of kind of the pricing dynamics and cracking a little more heavy. In terms of more spot versus contract, you know, Bill, you said the spot's about, what, 35% of our book right now. And then we've got a lot of contracts that are going to reprice here in the fourth quarter. So, Yeah, 35% spot still feels about right. I hear you loud and clear. We'd like to capture more price increases, but we'll roll through this and see where it goes. It feels pretty good with 35% spot. That'll reprice pretty quickly. Jack, did we lose you?

No, no, I'm here. Sorry, I was on mute. Thanks, David, for that. Yeah. So I guess for my follow-up question with regard to the coastal barging market and the action that you took there to sort of clean up some underperforming assets, with utilization now at 90% or so kind of moving forward, understanding there's some issues in the fourth quarter to kind of clean up there as you complete some contracts. But Do you feel like that business now, even at current pricing, can be break-even to modestly profitable? How are you thinking about the profitability impacts of the actions that you took during the quarter?

Yeah, we're hopeful we'll be break-even-ish next year. There's still a little overhang in excess equipment in the coastal market. I think everybody's aware of the Bouchard equipment out there. And there's still a fair amount of idle equipment amongst our competitors. The good news is, as we talked about, demand is increasing, right? If you think about the coastal business, it's pretty heavy in terms of refined products. And as you heard in some of my previous comments, refinery utilization is up, product inventories are low, crack spreads are stronger. Volumes are picking up. They just need to pick up a little more. There's still too much supply in the offshore business. But we're getting closer to the turn there. I think that turn is further out than the inland turn just because of how overbuilt that market got. As you recall, Jack, a few years back there were probably – A third of the fleet was moving crude by barge, and I would say it's a lot less than that. There's only a handful of the coastal barges moving crude oil now. So all that excess capacity has to be soaked up by refined products demand, and that's happening. It's just happening a little slower. But it's heading in the right direction. We're doing our part. We're taking out... these older wire equipment pieces. And I also think that ballast water treatment may drive some others out to retire. We're pretty far along on our fleet with ballast water treatment. I think a few other of our competitors are behind the curve on ballast water treatment. So as they start to spend that capital, perhaps we'll see some retirement. It's a long-winded answer to say that supply and demand is still a little out of balance, but it's heading in the right direction. We took the actions we felt that were necessary, and I think we'll be break-even-ish next year.

based on what we see now. And Jack, one thing, David mentioned the prepared remarks, but it's not insignificant. It allows us to focus the spending on the good assets. The assets that are retired in the Hawaiian assets would have required significant capital, and that's not the place to put capital.

Okay. No, it makes total sense. Thanks for the time, guys.

Thanks, Jack. Thank you. Our next question comes from Ken Hoekster with Bank of America. Your line is open.

Hey, good morning. Hey, good morning, Dave and Bill. Just at the ONG side of DNS, maybe can you talk a bit about the supply chain issues? You talked about the drag on margin versus the rising demand. Maybe your thought, obviously, no easy answer to the supply chain, but your thought on how long that remains an overhang?

Yeah, it's... Look, it's what you've been hearing. I can tell you that we're having problems with engine deliveries. We're having problems with transmission deliveries. As you might imagine, with the electrical nature of much of what we're taking in an inbound, circuitry and components, motherboards and chip-based stuff has been slow. I would tell you that If we could have gotten some engines and a few other electrical components, we would be shipping more product in the fourth quarter. I think it resolves itself in early 2022, but it's real. I know you guys are tired of hearing about COVID and supply chain. We're tired about it too, but it's been real. You know, you can look at some of the big engine OEMs. They're starting to catch up, so I'm optimistic. But they were real. I think the encouraging thing, though, Ken, is our backlog has jumped meaningfully. I mean, our book-to-bill is a huge percentage. And, you know, we're not talking tens of millions. It's more like hundreds. And the backlog is really growing significantly. A lot of it is ESG-centric, I'll tell you. In oil and gas in particular, any new equipment has got an element of carbon reduction for our customers and our customers' customers. We're very excited about it. You may have heard also that we bought a small company during the quarter that that builds ESS's energy storage systems or batteries, if you will. ESS sounds a little more sophisticated, but one of the things we do is we add that battery system to a frac spread and it helps even the electric load on the generation equipment as they're ramping up and down on their pressure pump and the actual pumping. That's vertical integration, but the great thing about the ESS capabilities, we're able to extend those into other parts of our KDS business, the distribution business. You can imagine in commercial and industrial, the need for electric power keeps growing, and having a strong ESS offering will help us and is helping us. And then you can even take it to marine. We're building a basically an electric hybrid towboat right now. It will be able to run completely on electric power, and we're really excited about that. We see that as a future and also a place to add product from this very small acquisition, but it's got high technology. That's a long, rambling answer. I hope I got the answer you wanted there.

No, yeah, it's just, I guess, to understand it, it's helpful. So, I mean, it sounds like from your thoughts on inland, really seeing some strength flow through. Maybe I'm a little confused in your follow-up answer from Jack in terms of, are you still concerned on the coastal pricing while you're seeing that inflection at inland? Maybe just a little clarity there. On that, and then just a real quick follow-up.

Yeah, so while we're seeing a nice inflection on inland in terms of pricing, I would characterize coastal as flat and not yet rising the way it needs to. So sorry for that confusion, but inland is definitely moving on pricing, and coastal hasn't really started. But it's not declining. It's just not going up the way we'd like.

So, you know, let me just ask you on corporate actions. I know that's the third one, but, you know, I guess I'm a little surprised by the move to eliminate part of the inland and close the marine side versus I think the general expectations where maybe something was coming down the pike on, you know, on scaling or descaling on the distribution and services side. Maybe just step back and your thoughts on what are the parts of the business? It sounds like you're adding more with this acquisition on the EFRAC side, but How do you think things stand now within the organization?

Oh, yeah. No, I think we're very excited about Marine. I think you'll see it. Look, this small acquisition is, I mean, really small. It's immaterial in some ways. Yeah, it's really basically assuming some working capital liabilities, and that's the extent of it. Very little cash outflow. So it's not meaningful at all in terms of materiality, in terms of cash. As we look at our business, you know, the serious cash deployment would be to continue to consolidate the inland marine business if we're doing anything. You may see us spend some meaningful CapEx on wind support-type vessels, depending on contracts and how that might go. But, you know, the... The big capital deployment will be in the marine side of the business. I think the offshore assets, that was more of a restructuring. As we look at it, our customers, they really have gravitated away from wire offshore barges to the favor of ATBs, and we just kind of took that and said we need to restructure around that. But the meaningful capital deployment or acquisitions will likely be in the marine side. I would tell you on DNS, we're running with the electrification side, and that has been meaningful in the oil and gas side as we've seen EFRAC come up and power generation used in in well servicing. I would tell you the rest of that commercial and industrial is coming along too. Almost every business nowadays is looking at the grid reliability and what they need to do to protect themselves. So we're pretty excited about that, but as you know, that doesn't take a lot of capital, right? It doesn't require us to go buy companies or a lot of CapEx. It's really pretty low CapEx. This small acquisition really was a small piece of vertical integration because we're already selling the ESS with our EFRAX. Great. Thanks, Dave. Appreciate the time.

Thanks, Dave. Thank you.

Thank you. Our next question comes from Randy Givens with Jefferies. Your line is open.

Howdy, gentlemen. How's it going? Very good. How are you doing, Randy? Good. So I guess first question, are there still any real lingering impacts from Hurricane Ida, or has that largely subsided? I know you mentioned there was an $0.08 negative impact during the third quarter, so just trying to get the expected impact here in the fourth quarter.

Yeah. In October, there were probably a couple cents worth of impact that came We factored into our thinking. The plants are just now coming up. We still have repair activities going on right now with some of the barges that were impacted from Ida. They haven't all been repaired yet. They're underway. That should take care of itself in the next three or four weeks. The revenue is still down a little bit because of that, and Some of our major customers were just now ramping back to full capacity, but they're coming back. I'd say the only real lingering thing is the Intercoastal Waterway is still closed near New Orleans, but I think that's going to open up in the next week or so. What that does is causes us to divert around a little longer transit times to get to that New Orleans Baton Rouge corridor. So it's almost behind us, and there's some headwinds in the fourth quarter there, but it's not near as large as what we saw in the third quarter. And as we talked a little bit about what our fourth quarter will look like, that's all in the guidance.

Yeah. All right. And then for the sale of the Hawaii assets, the retirement of that wire equipment, how meaningful is that in terms of potential profitability or maybe lost profitability for coastal And then I guess on the other side of the sales of those assets, I think you mentioned this a little bit here a few minutes ago, but any appetite for additional kind of larger inland tank barge acquisitions at this point?

Yeah, I'll let Bill talk a little bit about the magnitude of kind of revenue and operating income for that, but I'll come back and talk about acquisitions.

Yeah, we looked at those assets were underperforming assets. They were not assets that were generating profitability, Randy, and the contracts were ending and we didn't see profitability prospectively and as well there would have been capital employed. So we would have had to invest capital. So the way we looked at it, it was the right time to leave. We had lined up all the contracts to the end of the year. So we sold the assets and took $17 million and we'll deploy our capital elsewhere.

Got it. Okay.

Yeah, and in terms of acquisitions, look, it's no secret there's been a lot of pain in the marine side, both offshore and inland. I think this market's been one of the worst ever in history. We were coming out of the bottom pre-pandemic, and then the pandemic just kind of set a new low. Many of our competitors have been and operating at cash break-even or lower. You know, we had some contracts way down there as well. You can look at our inland margins, right? They were kind of record lows. Now that's coming back. You know, we were, you know, low mid-single digits. Now we're kind of, I think we did around 7.5 in the inland side in the third quarter. We're thinking we'll do 10% margins in the fourth quarter. I would see, hopefully, we get into the mid-teens and 22 and inland. But when you start at really low margins and break even for many of our competitors, there could well be some opportunities. I would caveat this, and that is we've been very prudent through this pandemic. We've paid down a lot of debt, as you heard from Bill. We've I think since the Savage acquisition, we've paid down over $500 million in debt. We're still generating really strong cash flow. We'll continue to deliver and be prudent as we look for acquisitions, but there could well be some. I would just tell you we're going to be prudent. It's been a rough couple years, and there's a lot of pain out there, but by the same token, we want to delever a little more. We've gotten our debt to total cap down below 30%. I think it's 29%. I'm looking at Bill, 29%-ish. So we're going to delever a little more, but there could be some prospects in the coming year or two.

Okay. That all makes sense. Thanks for the time, and go Astros. Thanks, Randy.

Thank you. And our next question comes from Greg Lewis with BTIG. Your line is open.

Hey, thank you. Thank you, and good morning, everybody. You know, David, I wanted to touch on, you know, I mean, clearly the Q3, there was major disruptions, you know, across the barge industry, whether it was on the refining side and the pet chem side. As we think about it historically, traditionally Q3 was a good quarter, utilization pricing, it seems like, then you kind of step down a little in Q4, and then in Q1 you really step down in terms of utilization and spot pricing. Just given what we saw in Q3, does that kind of change how we should be thinking about the normal seasonal path? Maybe not in Q4, but in Q1 and what that means in terms of setting up Q2?

Yeah, no, good question. Look, there's no doubt that the Q3 was messy. We had the restructuring of coastal. Hurricane Ida was about $0.08. COVID, we didn't really talk much about it because I think we're all tired of talking about COVID, but that probably cost us $0.05 or $0.06. As COVID hit our marine crews, we had to divert tows. We had to take them off higher because We had to, you know, re-crew. We had higher medical costs, et cetera. And then we had a higher tax rate, if you throw that onto the third quarter, too. So it was a messy quarter. As I look forward, I would tell you that, you know, some of those kind of headwinds are definitely going away. Ida's gone away. Third quarter is almost always our best, and that's because of our contracts of refratement. As you know, when the weather's good, You know, that's where we make good margins. So, you know, I know it sounds cliche, but I think if quarter three was an anomaly, as you do know, quarter four has the weather and quarter one has some weather as well. That'll be normal, but it won't be near as bad as, say, what Ida and COVID did to us in this quarter.

Another way to look at that is weather is still a factor, and first quarter and fourth quarter have that, but it is a rising market. So the rising tide of pricing and utility is there.

Yeah. Okay, great. And then, I mean, you touched on, you know, obviously the barge. the loss of barges or submerged barges was more of a dry bulk barge phenomenon than wet. Is there any sense to us, I mean, do we have any sense for, you know, maybe, you know, what type of negative impact on barge supply, whether it's, you know, medium-term or long-term, you know, Ida had on the tank barge market?

Yeah, I think it's all temporary. You know, if The amount of liquid barges that were impacted was pretty significant. There were some customer docks that were impacted. Yeah, I don't know if it would drive some retirement. If you had a damaged old barge, you may retire it. But there's a lot of barges in the shipyards now recovering from Ida. But I think it's very temporary. It was more dry cargo barges. and other vessels that were impact. The liquid tank barge market was impacted and I think, you know, I use Kirby as an example. We probably had 30 barges. We only got a handful left to come out of repair. So we're almost through it and I wouldn't think the rest of the industry is much different than we were in that. It was a meaningful impact though. To have the Mississippi River go flow northward and rip a lot of fleets up, it was a significant impact. But I do think it's largely temporary and not a systemic change to the inland market.

Okay. Great. Okay. Hey, everybody. Thank you for the time.

Thanks, Greg. Hey, Carmen. This is Eric. We'll take one more question.

Yes, sir. Our next question is from Greg Wasikowski with Weber Research. Your line is open.

Hey, David and Bill. Good morning. Thanks for squeezing me in. Greg, how are you doing? Good, good. First question is on the inland order book and just looking at the order book and prices for new barges. Supply side looks pretty constructive for probably the next few years to come. I'm just curious, the increase in new build prices, is that kind of directly attributable to higher steel prices, or are there other factors that play there? And I'm thinking specifically, is there any sort of hesitation from owners or underlying technology obsolescence risk embedded in there, kind of looking ahead 5, 10, 20 years in the future? And maybe saying it another way, if steel prices were normalized, will we still be looking at a constructive supply picture here?

Yeah, that's a good multi-factor question there. I would tell you, so look, new barge, whether it's clean or dirty or hot, you know, hot oil barge, the prices, you know, if you go back to 2017, 2018, prices are almost gosh, I would say almost double. A big portion of that is steel. But, you know, look, everything that goes into it has gone up in price too, right? I mean, you can think about paint. You can think about, you know, welding and labor. You know, it just costs more now to build them. You know, and that's why, you know, as we think about inflation, it's not a necessarily a bad thing for kirby we've got this huge installed base of barges that are are relatively young and well maintained um and yeah so the higher the cost of new barges kind of the better the better for us is the way we look at it um but steel is no doubt the the majority of that cost and um it's it's um Yeah, steel is up where the price of barges went up 100%. Steel's up 300% since pre-pandemic. So you could imagine that steel's up. I would tell you that most owner-operators right now are not building new equipment. There has been some on order. It's been on order for a while. Deliveries are... nominal and I would say retirements should outstrip the deliveries there. You know, in terms of your technology obsolescence, there's not, you know, a barge is a barge. It's a big steel box, but they are more and more sophisticated, but there's not a lot of technology obsolescence. I would tell you that there is, because of ESG, it's becoming more and more important is is the pressure rating of a barge. A typical industry barge had a three-pound pressure rating. Kirby's only built six pounds. So if you think about it, fugitive emissions from a six-pound barge are a lot less than they are in a three-pound barge. And the market's starting to recognize that. And by the market, I mean our customers. They're worried about their fence line emissions. And there's a premium coming and starting for six-pound barges. Now, is that an obsolescence thing? Not sure it's an obsolescence thing. It's just a fact, right, that everybody wants their emissions down. Those emissions are getting measured more and more and reported more and more. So we're seeing a premium kind of leak into the market, well, driven into the market by more desire for six-pound barges versus three pounds. But that's not, you know, it's not, technical obsolescence per se. Got it.

That's helpful. Thank you. And then one more quick one just on the pace of inland recovery. Just thinking about it in terms of, you know, it's not as V-shaped as maybe previously thought six months or a year ago. Can you speak to maybe the benefits of it being of a longer, flatter curve and maybe it being more sustainable in the long run than a V-shaped recovery?

Yeah, you know, the obvious benefits of that are it keeps building down longer, right? But it's also, you know, there's a lot of pain and not that you like a lot of pain, but that pain may discourage people from building new barges or trying to expand as we look at some of our competitors, it's tough on them. It's tough on us. So maybe that sobers people up about building and expanding. So that could be a benefit as well. But we'd like to see our returns up. I'll just say that. So not that we want a sharp fee, but things need to move, and they are moving. and it's welcome.

Okay, John, appreciate the time, guys.

Thank you. Thanks, Greg. All right, thanks, Greg, and thanks, everyone, for joining us today. If you have any additional questions or comments, feel free to reach out to me directly throughout the day. I will be in the office. Thanks, everyone. Have a great day.

And the conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.