Kirby Corporation

Good morning and welcome to the Kirby Corporation 2022 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. We ask that you limit your questions to one question and one follow-up. To ask a question, you may press star 1 1 on your phone. Please note this event is being recorded. I would now like to turn the conference over to Mr. Kurt Inman, Kirby's VP of Investor Relations and Treasurer. Please go ahead.

Good morning, and thank you for joining us. With me today are David Grzbinski, Kirby's President and Chief Executive Officer, and Raj Kumar, 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 www.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 risk and uncertainty, and our actual results could differ materially from those anticipated as results for various factors, including the impact of COVID-19 pandemic on the company's business. A list of these risk factors can be found in Kirby Corp's Form 10-K for the year ended December 31st, 2021. I will now turn the call over to David.

Thank you, Kurt, and good morning, everyone. Earlier today, we announced third quarter revenue of $746 million and earnings of $0.65 per share. This compares to 2021 third quarter revenue of $599 million and adjusted earnings of $0.17 per share. Both of our segments continued to steadily improve during the quarter, delivering higher revenue and operating income both sequentially and year-over-year. The third quarter's results reflected improved market fundamentals in both marine transportation and distribution and services, partially offset by continued inflationary cost pressures as well as ongoing supply chain challenges that delayed sales in our distribution and services business. In inland marine transportation, continued high refinery utilization led to a steady improvement in demand with our overall barge utilization running in the low 90% range. Tight market conditions due to limited supply of barges as well as cost inflation continued to put upward pressure on prices, with spot prices up in the high single digits sequentially and in the mid 20% range year over year. Pricing on term contracts moved higher as well, with term contracts renewing up in the low teens versus the year-ago period. Overall, third quarter inland revenues increased 9% sequentially and margins improved into the low double-digit range. While we continue to face headwinds with inflationary pressures in the quarter, We expect margins will gradually improve further as fuel and other cost escalation contract clauses reset in the fourth quarter and into 2023. In coastal, market conditions steadily improved with our barge utilization in the low to mid 90% range and some incremental pricing gains with spot prices up in the high single digits sequentially. Better coal shipments in our dry cargo business also contributed to improved revenues and increased operating margins. Overall, third quarter coastal revenues increased 6% year over year and operating margins were in the low to mid single digits. In distribution and services, similar to last quarter, our markets remained very active across the segment and contributed to strong sequential and year-over-year improvement in revenue and operating margins. In oil and gas, high commodity prices and increased oil field activity contributed to improved demand for new transmissions, parts, and services. In manufacturing, our backlog continued to grow with the addition of new orders for our environmentally friendly pressure pumping equipment and power generation equipment for heat rack. As expected, significant supply chain issues delayed many new equipment deliveries during the quarter. We continue to work diligently to manage the current supply chain environment. In our commercial and industrial market, overall demand remains solid across our different businesses, with growth coming from the marine repair power generation and on-highway sectors. In summary, despite meaningful inflationary and supply chain challenges in the quarter, Our third quarter results reflected continued improvement in market fundamentals for both segments. The inland market is inflecting nicely, demand is strong, and rates are moving higher. While the coastal market remains challenged by industry supply dynamics, our barge utilization is good, and we realized modest rate improvements. Demand in distribution and services is strong, and our backlog is growing. While supply chain issues are expected to persist for the foreseeable future, looking forward, we see continued strong market fundamentals. We continue to focus on working safely, efficiently, and responsibly to meet and exceed our customers' needs and expect to drive incremental earnings growth into 2023 and beyond. I'll talk more about our outlook later, but first I'll turn the call over to Raj to discuss the third quarter segment results and the balance sheet.

Thank you, David, and good morning, everyone. In the third quarter of 2022, marine transportation revenues were $433 million and operating income was $41.7 million, with an operating margin of 9.6%. Compared to the third quarter of 2021, marine revenues increased $95 million, or 28%, and operating income increased 25 million or 147%. Compared to the second quarter of 2022, marine revenues increased 27 million or 7% and operating income increased 11 million or 35%. These increases were driven by strong customer demand, favorable operating conditions, and improved pricing. However, we continue to face inflationary cost pressures and expect to recover these increases in cost as contracts and escalators reprice throughout the remainder of the year and into 2023. The inland business contributed approximately 80% of segment revenue. Average barge utilization was in the low 90% range for the quarter, which is similar to the utilization seen in the second quarter of 2022 and compares to the low 80% range in the third quarter of 2021. Long-term inland marine transportation contracts, or those contracts with a term of one year or longer, contributed approximately 60% of revenue, with 56% from time charters and 44% from contract appraisement. Improved market conditions contributed to spot market rates increasing sequentially in the high single digits and in the mid-20% range year-on-year. Term contracts that renewed during the third quarter were up on average in the low teens compared to the prior year. However, only a handful of smaller term contracts renewed during the quarter. Compared to the third quarter of 2021, inland revenues increased 35%, primarily due to increased barge utilization, higher-term and spot contract pricing, and increased fuel rebuild, as we saw the average cost of diesel increase almost 90% year-over-year. Compared to the second quarter of 2022, inland revenues were up 9%, driven by increased term and spot market pricing, have a higher average barge utilization and higher fuel rebills. Inland operating margins was in the low double digits and improved both sequentially and year over year, but remained impacted by rapidly rising fuel prices and inflationary cost pressures. These cost headwinds were offset by gains in utilization and pricing. The coastal business represented 20% of revenues for the marine transportation segment. Average coastal barge utilization was in the low to mid-90% range, which compares to the mid-70% range in the third quarter of 2021. During the quarter, the percentage of coastal revenue under term contracts was approximately 65%, of which approximately 92% were time charters. Average spot market rates were up in the high single digits sequentially, and renewals of term contracts were higher in the 20% range year-over-year. During the quarter, coastal revenues increased 6% year-over-year with improved barge utilization, higher contract prices, and higher fuel rebills. Overall, coastal had a positive operating margin in the low to mid single digits. With respect to our tank barge fleet for both the inland and coastal businesses, we have provided a reconciliation of the changes in the third quarter, as well as projections for the remainder of 2022. This is included in our earnings call presentation posted on our website. Now, I'll review the performance of the distribution and services segment. Revenue for the third quarter of 2022 was $313 million, with operating income of $22.3 million. Compared to the third quarter of 2021, the distribution and services segment saw revenue increase by $52.4 million, or 20%, with an operating income improving by $11.3 million, or 103%. When compared to the second quarter of 2022, revenues increased by $20.5 million, or 7%, and operating income increased by $5.6 million, or 34%. In the oil and gas market, favorable commodity prices and increased rate and completion activity contributed to a 37% year-on-year increase and a 13% sequential increase in revenues. We experienced increased demand for new transmissions and parts throughout the quarter. As David mentioned, we continue to navigate ongoing supply chain challenges, especially in our manufacturing business. Despite this supply chain headwinds, the manufacturing business experienced continued favorable trends in new orders and deliveries. Overall, oil and gas represented approximately 47% of segment revenue in the third quarter and had operating margins in the mid to single digits. On the commercial and industrial side, strong activity contributed to an 8% year-on-year increase in revenues with improved demand for equipment, parts, and service in our marine repair and on-highway businesses. Power generation was up modestly year-over-year. From past the second quarter of 2022, commercial and industrial revenues increased by 2%. Our Thermo King business continued to experience delays due to ongoing supply chain constraints that impacted revenue growth. However, this headwind was offset by increased activity in marine, power generation, and on repair highways. Overall, the commercial and industrial business represented approximately 53% of segment revenue that had an operating margin in the high single digits during the third quarter. Now I'll turn to the balance sheet. As of September 30th, we had $37 million of cash with total debt of $1.1 billion, and our debt-to-cap ratio improved to 27.3%. During the quarter, we had cash flow from operations of $66 million, and we generated cash proceeds from asset sales of retired marine equipment of $10 million. We used cash flow and cash on hand to fund $41 million of capital expenditures, or CAPEX, Our disciplined approach to capital allocation enabled us to further strengthen our balance sheet and return capital to shareholders. During the quarter, we decreased debt by $18 million and repurchased slightly more than 70,000 shares at an average price of $63.33 per share for a total of $4.8 million. As of September 30th, we had total available liquidity of approximately $521 million. With respect to CapEx, we continue to expect full-year CapEx of approximately $170 to $190 million, primarily for required maintenance on our marine fleet. We also expect to generate cash flow from operations of $390 million to $450 million, with free cash flow, defined as cash flow from operations minus CapEx, of $200 to $280 million. We continue to work through supply chain constraints that are challenging working capital in the near term, but we expect to unwind this working capital as orders ship later this year and into the first half of 2023. We are committed to a balanced capital allocation approach and will use this cash flow to repay debt, opportunistically return capital to shareholders, and continue to pursue long-term value-creating niche investment and acquisition opportunities. I will now turn the call back to David to discuss our outlook for the remainder of 2022. Thank you, Raj.

As discussed, the third quarter had good incremental improvements in revenues and operating income in both our segments. And marine steady demand, driven in large part by high refinery and chemical plant utilization, should continue to support high barge utilization. Combined with limited new barge construction and inflationary recovery needs, we expect these dynamics to support further increases in inland rates. While all of this is very encouraging, we are mindful of the ever-changing economic landscape and potential recessionary headwinds. Additionally, we continue to monitor the current record low water conditions on the Mississippi River, for which the full impact remains to be seen. Although the current low water conditions impact only a portion of our inland marine business, and we have some contract protections to help limit the magnitude, the low water headwinds are dynamic and real. As always, we will manage the factors we can control. Nonetheless, we continue to be encouraged with refinery and petrochemical plant activity remaining at near record levels, resulting in increased customer volumes. Barge availability is constrained as there is minimal new barge construction. These positive factors are expected to contribute to our barge utilization running in the low to mid 90% range for the foreseeable future. These favorable supply and demand dynamics are expected to drive further improvements in the spot market, which currently represents approximately 40% of inland revenues. We also expect continued improvement in term contract pricing as renewals occur, with a significant amount of term contracts renewing in the fourth quarter. Overall, for the 2022 full year versus 2021, we expect inland revenues will grow approximately 20% to 25%, and we expect near-term inland operating margins to be in the low to mid-teens and to continue to gradually improve in 2023. In the coastal market, conditions are expected to remain steady, but will remain somewhat challenged by underutilized barge capacity across the industry. Even with some market softness, Kirby's coastal barge utilization is expected to be in the low to mid-90% range. Full-year 2022 coastal revenues are expected to be flat to up in the low single digits, driven primarily by good fundamentals in our core liquid cargo business and higher coal shipments in our offshore dry cargo business, offset by the company's exit from Hawaii. Revenues and operating margins are also expected to be impacted by ongoing planned shipyard maintenance and ballast water treatment installations on certain vessels. Overall, coastal operating margins for the remainder of the year are expected to remain in the low to mid single digits. Looking at distribution and services, we have a favorable outlook with anticipated strong demand for equipment, parts, and service in distribution and a growing backlog in manufacturing. In the oil and gas market, high commodity prices, increased rig counts, and growing weld completions activity are expected to yield strong demand for manufacturing and OEM parts, products, and services in the distribution business. We expect the current commodity price environment will contribute to further increases in rig count and frac activity in the fourth quarter and into 2023. U.S. land rig counts have grown to over 760 rigs, which represents a full-year average increase of approximately 42%, with steady growth expected for the remainder of the year. Similarly, the active frac spread count is approaching 295. With this growth, we expect to see increasing demand for transmissions, engines, parts, and service and distribution. In manufacturing, we have a growing backlog position. We've added new incremental orders in the third quarter, and we expect this trend will continue. As I mentioned earlier, we expect the supply chain issues and long lead times for OEM equipment, which in some cases are extending beyond a year to remain a challenge. These issues are likely to contribute to some choppiness with new product deliveries, which could potentially shift into 2023 and into 2024. In commercial and industrial, we are forecasting steady demand and on highway with increased trucking and municipal repair work, continued improvement in bus ridership, and increased demand for thermopane refrigeration products, offset, again, by lingering supply chain delays. In power generation, new backup power installation, parts, and service activity are expected to remain solid as demand for electrification in 24-7 power grows. Marine repair is also expected to be strong, with increasing activity in the Gulf of Mexico and improved commercial markets on the east and west coasts. For the 2022 full year, we expect revenue growth in the low double-digit percent range for commercial and industrial. For KDS as a whole, while supply chain issues are expected to continue impacting new product and equipment deliveries, we continue to expect 2022 segment revenues will increase by 25 to 30% compared to 2021, with commercial and industrial representing approximately half of segment revenues and oil and gas representing the other half. We expect segment operating margins will be in the mid to high single digits for 2022. To conclude, Kirby's third quarter results show steady improvement in the face of ongoing challenges. Both of our segments performed well during the quarter, delivering improved revenue and operating incomes nationally and year-over-year, and our teams executed well on near-term objectives as well as our long-term strategy to provide value to Kirby and our shareholders. We exited the quarter with healthy long-term fundamentals and both of our businesses are very well positioned to continue delivering value. Although we see favorable markets continuing and expect businesses will provide improving financial results, we are closely monitoring potential economic headlines as well as the potential short-term weather and water-related impacts to our business. Having said that, as we look long-term, we are confident in the strength of our core businesses and our long-term strategy. We intend to continue capitalizing on strong market fundamentals and driving shareholder value creation. Operator, this concludes our prepared remarks. We are now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star 11 on your phone. As a reminder, we ask that you please limit your question to one question and one follow-up. Please stand by while we compile the Q&A roster. The first question comes from Ken Hoxter with Bank of America. Your line is now open.

Great. Good morning, Dave and Raj.

Good morning, Ken.

A little bit of an echo here. Can you talk a bit, it seemed like you moved a bit more off contract and into the spot market, maybe a little bit fewer taker pays. Maybe talk about the shifting market part of the cycle. I know the fourth quarter is going to be really big for you as you price some of those term contracts. So maybe talk about the state of the market and maybe throw in thoughts on the low water levels. What does that mean for the business and pricing as well? Thanks.

Yeah, sure. Thanks. Thanks for the question, Ken. Um, how about those Astros? No, no, in all seriousness. Missed it.

Didn't see anything.

Go Jets. Um, no, the, the, uh, term to spot ratio, um, you know, one thing in, in a rising market like we've had and, uh, The spot revenue is going up faster than contract revenue as rate increases get rolled into spot contracts quicker. You know, I think that you'll see that ratio of spot to contract change a little bit here in the fourth quarter as we renew some of these big term contracts that we have coming due at the end of the year. So, you know, that's the comment on the spot versus contract ratio. We're really happy with where we are with spot and contract right now. In a rising market, it's good to have pretty good spot exposure. But again, that ratio has been impacted a little bit by how fast we've been able to raise spot rates versus term contract rates. But term contract rates will price higher here in the fourth quarter, and they need to, I think, One, we've got a great supply and demand situation, but it's needed because of the inflationary pressures. That's another part of it. So we've got a pretty good dynamic now. Supply's not growing. Demand's holding okay. I mean, we're watching for a recession maybe next year, but right now you can look at refinery utilization. It's pretty strong. Chemical plants utilization is strong. I think the chemical guys, when you look at their earnings, a lot of it's about Europe. You can imagine if you've got chemical manufacturing in Europe and you're facing the feedstock problems that they have in Europe right now, it's pretty dicey. But when you look at the chemical plants in the U.S., their feedstock position is pretty good, particularly if you look at natural gas prices having dropped here recently. So from a demand side, we're pretty excited about where we're at right now, but we are watching and looking for a potential recession next year. But the good news is even if we get a little pullback in demand, the supply is so tight, I think we'll be all right. And it's not just the supply of barges, it's the supply of mariners and horsepower, which remain tight. It's about as constructive as we can be. Now, you mentioned low water, and you and I have talked about low water. It's gotten worse since you and I talked, Ken. The river has been shut down probably a half a dozen times in the last week or so. The Army Corps of Engineers, the Coast Guard, the industry, and our customers, we're all working together to try and keep things moving on the river The Coast Guard has cut down the size of the tows. They've lowered draft restrictions, so we're loading more at 9 feet instead of, as the dry cargo guys would do, about 12 feet at times. So we're doing everything we can, but this is unprecedented. I think this is the lowest the river's been in at least 30, 40 years and maybe an all-time low. I think there's some rain in the forecast later this week. Hopefully it's enough to help out. All that said, it's about 20% of our fleet moves on the river system. Christian told me earlier, well, this weekend it was about 198 barges. So when you think of our 1,000 barges, that gives you roughly 20%. Now, the good news is we have some contract protection, well, actually pretty good contract protection with navigation delays, but it's not the same as running. You know, it's a little less profitable, and so you may see a little bit of a, you know, could be anywhere from two to five cent kind of headwind for this quarter, depending on when this thing, when the water starts flowing again. It's real. It's impacting the U.S. supply chain in a meaningful way. I would tell you for the dry cargo operators, this is just really, really painful because they run 50 barge tows. Our tows are much smaller, and we generally load at lower drafts than they do. Okay. It's impactful, but I think we'll get through it. Again, we're fortunate. We have some contract protection with navigation delays. But the good news is everybody's working together, whether it's our customer base, the industry, the Corps, or the Coast Guard. Everybody's trying to keep it flowing, both northbound and southbound.

Great.

And if I could get my – oh, go ahead.

Ken, I was just going to add, you referenced the – Q4 term contract renewals. You're right. It is a substantial quarter for us. We have around 35% of our contracts renewing in Q4.

Yeah, it's the point we've all been, I think, waiting for, right, is that big fourth quarter. You know, Dave, on the other side of the business, Adina, it seems like things have finally clicked and hitting gear. This is kind of what you've been waiting for maybe for a couple of years now. I think the question has always been the strategic

importance of the of the segment uh you know maybe you want to address your thoughts on the business as as we move forward here and as things start to to get get a little better from from your point of view yeah now to your point dns is is really starting to roll right now um you know in inbound orders are up across the business you know obviously oil and gas particularly anything Electric frack is very strong. We continue to take orders. Commercial and industrial is the same. It's pretty strong. We are being impacted by supply chain, for sure. Some engine packages are at least a year out. In some cases, we won't get deliveries until 24. Supply chain is impacting us a bit, but to your point, more on the strategic, should Kirby split kind of the marine and the KDS business. You know, we've always been open-minded to it. We've just got to make sure it creates shareholder value. You know, the board discusses it and is committed to creating shareholder value. So when the numbers make sense, you know, it might make sense to split the two businesses. You know, clearly last year at Trough-Ibidaw and Trough-Ibidaw multiples, it doesn't make sense. So, you know, with this strength... You know, it's getting to make more and more sense. But we'll see. We've still got to work through it. You know, meanwhile, we're running the business really well. Both the Marine team and the KDS team are hitting on all cylinders. And, you know, it's good when the team's working hard and the market's working in the right, the same direction. So we're pretty excited about where we are right now.

Can I just ask one clarification? Sorry, Kurt. I just want to make sure I understand. In the press release, you said high levels of shipyard activity and coastal. Do you mean more new builds or did you mean the reef, the ballast water treatment that you were talking about later on? I just want to understand if you were talking about new builds.

No, it's not new builds. It's all ballast water treatment. Fortunately, of our 30 units or so, 29 or 30 units, I think we've got all but six of our units have ballast water treatment. So we've got Those six left to do, and, you know, those are big, long, heavy shipyards, and they're on some of our bigger units. So that's going to impact this year a little bit in the fourth quarter and, more importantly, into 23. Now, in terms of new construction on coastal, nothing. We're not hearing anything, you know, on the drawing board, which is really good for the pricing environment because we're almost in supply-demand balance now. And even if somebody wanted to build a new unit right now, you wouldn't see it for three years. You got to do the engineering and the construction. You wouldn't deliver until 25 at best case. And I'm not sure anybody in their right mind would go build a new unit now. Just to give you a benchmark, when we built our 185,000 barrel ATB, it was about an $80 million unit. And I would tell you it's about $140 million if you tried to build it now, just because steel prices and labor costs and input prices. So, you know, it's very, you know, very constructive on a supply and demand standpoint for coastal. And we should start to see rates moving on a go-forward basis in the coastal business.

Thanks for the clarification. Thanks for the time, guys. Appreciate it.

Hey, thanks, Ken.

Great job.

Please stand by for our next question. Our next question comes from Jack Atkins with Stevens. Your line is now open.

Okay, great. Good morning and congrats on a solid quarter here. I guess, David, you know, as we think about the fourth quarter outlook, you know, obviously the ranges that you guys provided from a line item perspective are for the full year. But you also made a comment in the press release that you expect to deliver improved financial results in the coming quarters. I know you've got some issues with low water issues here in the fourth quarter, but would you expect, based on the momentum in the business that you're seeing now, to be able to have improved earnings quarter over quarter in the fourth quarter versus the third quarter?

Yeah, we haven't really given complete guidance, but, um, as you know, Jack, I haven't followed this for a long time. Um, you know, third quarter is usually the best of the year. Um, you know, first quarter is usually the lightest and then followed by the fourth quarter, which is, is, uh, it's not as light as first, but it's usually lighter than, than, uh, certainly the second or the third. And that's because of weather, you know, weather starts to impact the Marine business. And it, you know, it can be meaningful, particularly with fog. We get fog seems to be the thing that impacts us the most in terms of moving. So when you combine kind of fourth quarter weather, lower water, you know, it we haven't put out guidance, but you could see a flattish quarter. And depending on the river, maybe down a little bit, or if the river clears up, maybe up a little bit. But I wouldn't say it's going to be sequentially a blowout because of both the weather and the low water. And most of those big term contracts that we talked about in the marine business They reprice at the end of the quarter, and you don't start to see that pricing roll through until kind of January.

Okay. Now, that's helpful. I just think it's kind of good to get everybody on the same page there in terms of – Let me talk about DNS.

DNS, though, could be a little better sequentially. The issue is supply chain and whether we can get the shipments, and there could be some mix issues to some – Some products that we ship could be a lower margin than other products. So DNS is pretty strong right now. It's really about managing the supply chain, which is frustrating. And I know it sounds like an excuse most corporations use nowadays, but it is real.

Okay. So maybe marine flattish and DNS a bit better quarter over quarter. That makes sense. And I guess maybe kind of shifting gears a bit, but, you know, when you kind of think about the momentum as we head into next year, I guess there's some puts and takes, but would love for you to maybe kind of flesh it out a bit. But, you know, when we think about – I'd love for you to maybe kind of quantify, if you can, the differential right now between where spot rates are and maybe where contract rates are, just so we can kind of get a sense for – for how much upward momentum there may be on contract rates as we go through the renewal process. And then, you know, as you kind of think about what your chemical customers are telling you and maybe even what your refined product customers are telling you as we go into next year with sort of the cloudy economic backdrop, you know, I guess is there anything you can maybe help us with as we sort of think about how they're positioning their business for next year? We'd just love some color there as well.

Yeah, sure. Yeah, look, contracts pricing is, or said another way, spot pricing is above contract, which is what you have in a healthy market. I would say it's 10% to 20% differential. It just depends on the contract and exactly what spot comparison you're doing. But that's a healthy gap, and we like that gap, and it should help the pricing environment. On our chemical side, side and refined product side, the customers are very positive, I would say. Volumes are good. I would say the chemical customers, if anything, seem a little more worried than refined customers based on the economic headwinds. And a lot of that is Europe. Can you imagine if you had a European chemical facility right now? It's got to be maddening. with natural gas around $5 or less here in the U.S., and goodness knows what natural gas costs in Europe as a feedstock. So, you know, it's an interesting time. I think, as I said earlier, everybody's kind of watching the recession. You know, not to second-guess the Fed, but I think they've done enough. I think the soft landing's about now, but... You know, that's with absolutely no data to support, but it feels that way.

Okay. Thank you again for the time.

Thanks, Jack.

Please stand by for our next question. Our next question comes from Ben Nolan. With people, your line is now open.

Thank you. Hey, Dave and Raj. If I could start maybe where you just left off there, David, talking about sort of the chemical side of the business specifically, and I know that's the majority of what you're doing on the river or inland areas. it feels to me like, well, I know historically you've said that that chemical side of the business is pretty GDP linked. But normally when we go into a downturn, you also see a decline in oil and gas activity and production and so forth. Do you think that at the danger of, you know, famous last words, Do you think that the environment that we're in right now is any different than where we normally would be in a period of weakness as it relates to how you think about customer demand for barges?

Yeah, kind of the worst thing you can hear in investing is different this time, right? Look, GDP doesn't impact our volumes. You've seen that, Ben, in our history. where we get a recession and volumes pull back and demand grows with GDP as well. I think it's not different if we do get a recession and we get a pullback in GDP. It will impact demand. I would tell you maybe the difference now is there's just no new construction. The cost of building new barges is just very, very expensive. So that's in check. And then if you layer in kind of retirements, which are going to happen, right, especially when you go to bring an old barge into the shipyard and you look at the cost of replacing steel, it's kind of mind-numbing. So that might be the difference. It's just a dynamic of new supply. Even if we get a little pullback in Demand, I think, will still be tight. And then when you layer in kind of the horsepower picture, where we're short mariners, the industry's short horsepower, that's kind of a newer dynamic, a little stronger dynamic than we've had. Now, going to the oil and gas side, you know, it's the interesting – dynamic is Europe, right? You know, they're going to be short refined products because of the refinery feedstock. So I think what we're seeing is export volumes are up a little bit on the refined product side. And, you know, that's helpful. Is that, you know, does that mean that it's different this time? No, it's a little, I think it's a little tailwind maybe for the U.S. refinery complex. And To a lesser extent for the chemical complex. So I don't know. That's a long-winded answer. That's a non-answer. But I don't think it's different this time with respect to demand. I would say what is a little different this time is supply. There's just a limit on supply, just based on the cost of new supply. And then, of course, the cost of keeping older equipment running. So that's probably the one thing that's different right now.

Okay, that's helpful. And then for my follow-up, one of the things that we've heard about the river is that it's causing, the low water levels are causing horsepower to really be tied up, and your larger power, towboats aren't able to operate as well, or you just can't get your, it's challenging for towboats, and that's causing the price to go up. I know that's certainly true in the dry barge market. Are you seeing that same thing flow through onto the tank barge market, and is it providing any level of uplift? And then if I could sort of tag an extra one on there. I know that there was one extra barge that was reactivated in the quarter based on the presentation. Do you guys have any – are you basically fully spent here, or are there other pieces of equipment that could be brought back in if demand warranted?

Yeah, let me take that in pieces. First on the horsepower side, yeah, the big horsepower, you know, the big 10,000 horsepower towboats on the river that push 50 dry cargo barges, their draft is too big. So they're being tied up. So, you know, most of our horsepower is smaller because our tow sizes are smaller. I think we have one big vessel that's on the bank right now because her draft is too much for the river. But most of our horsepower is a little smaller. Now, it is, to your point, helping give a little tailwind to kind of the market. Particularly if you look at dry cargo rates, they're up 200%. It's certainly helping on the liquid side as well, putting some more tightness in the market. You know, that said, hopefully this is a, you know, a temporary situation. We get some much needed rain and get the river going again. The second part of your question was kind of reactivation. I think, you know, as you would have expected during the pandemic, a lot of barges were kind of put on the bank and tied up, you know, generally the older ones and the ones with little more maintenance headaches were kind of put on the bank. We're reactivating a handful of those. I think maybe in the fourth quarter we might have 10 to 15 coming back in. There's not a whole lot left, but the problem with these barges that were tied up last several years, the cost of bringing them back in with steel prices and labor are really high. We're only bringing back the ones that make sense. Is it going to be a whole lot more? No, but maybe another quarter or two of five or so barges after we get through the fourth quarter could come back for us. I don't think there's a big hangover, overhang, excuse me, hangover, overhang in that supply there. But, you know, there's some that can come back. I think the gating factor is just the cost of bringing off the bank. Again, you hear it in our comments and everybody's comments these days, inflationary pressure, and then when you put steel prices on top of it and labor prices, it's – It's really the inflation is real, and it's causing supply to stay in check even more so than the cost of new builds, which is a good thing. And it's also – it truly is part of the conversation you have with your customers because these inflationary costs are real, and we need price increases to just stay even.

Yeah, that makes sense. Well, and I appreciate the answers, and maybe I'll bump into you at Minute Maid over the weekend and go Astros.

Please stand by for our next question. Our next question comes from Jonathan Chappell with Evercore. Your line is now open.

Thank you. Good morning. David, I want to pick up just where you left off. You guys had mentioned cost escalators a couple times in your prepared remarks and in some of the Q&A. So kind of a two-parter here. One, does this mean that when you look at margins similar to prior cycles, given all the cost inflation, you should be at similar levels based on the pricing environment, you'll get all this cost inflation back and we should think about this upturn similar to the prior upturns from a margin perspective. And two, given the economic headwinds that you spoke about, do you foresee any more pushback from the cost escalators just given maybe the customer cautiousness or uncertainty?

Yeah. So let me break that down in a couple pieces here and I'll let Raj chime in too if I don't cover it all. you know, first is fuel. You know, we get, there's a lag on fuel. So that, you know, recovering fuel costs, you know, we have escalators that work. Some of them are direct pass-throughs. Some of them are monthly. Some of them are quarterly. Some take four months to work through. So those, you know, those are some of the escalators we're talking about. You know, I think, you know, we get a little, We can get a little pencil with there, but over time, those fuel escalators average out and they work out. And we work with our customers, and we don't want to make money on fuel escalators, and we don't want to lose money on fuel either. And our customers agree with that. We all work to try and make fuel as neutral as possible. And then on some of the contracts, we have either CPI or PPI contracts. which tries to keep up with inflation. And I say tries, it generally doesn't, you know, because you can see certain categories in some of the supplies that we buy for our boats have inflated, you know, double digits, in some cases 20%, you know, things like radars and line that you use on the boats. So, CPI, PPI is meant to keep up with the general cost of inflation. I would tell you it's not perfect and we're a little behind. But when we talk about escalators, we're talking about CPI, PPI. And then some of our contracts also have labor escalators, which you take a portion of what you think your labor is in the contract and you use an index, a labor rate index, which which we calculate some of our contract evidence. So we get to recover some of that. I would tell you that, you know, we need the price increases. And so that leverage you just talked about or in past where we saw these price increases, you would think margins would pop more. And, you know, in prior cycles, I would say, yes, it would pop more than we're seeing now because we're part of what we're keeping up with is inflation here. You know, so that is a little bit of a headwind against margin increase. That said, we're still expecting margins to increase. They're just not popping like, you know, you would have seen in prior cycles. And it's really purely about the inflation environment.

And, you know, if I could add, I'll just say that this is where we need rate to increase because of David's comments on inflation. And I think, you know, this... approach that we are taking towards being very focused towards rate increases is very critical for us. If I can just add, in Q2, we saw fuel as a headwind. I think we talked about that. In Q3, it came out that fuel was kind of flat. We're starting to see fuel increase right now. So that kind of supports what David was saying in terms of that whipsaw effect. So we'll see where fuel goes. I'm looking at the forward curve going into next year. And if that plays out, then we should see recovery on fuel, too, as the year progresses.

Okay. That's helpful. Just for the follow-up, I wanted to take Jack's first question just a little bit further. I know we don't want to get into short-termism, but I think it's important to kind of frame how we should look at 23. David, you said 1Q is typically the weakest quarter for all the obvious reasons. But if you're resetting most of these term contracts late 4Q, that'll be market-to-market conceptually much higher. You're getting some of these cost escalators through. All else equal on the worst winter weather ever or the worst drought ever. Should 1Q be better than 4Q as we think about just this market upturn as opposed to traditional seasonality?

We haven't put pencil to paper. Otherwise, I'd answer. But I think what you're saying makes sense. Makes sense. But we just haven't penciled it all out. I mean, we've got a lot of contracts, as Raj mentioned in his prepared remarks, or in one of the answers was about 35% of contracts are repricing. We've got to see how that reprices before we can declare that. But, you know, in theory, I could see what you said absolutely happening.

I think, you know, with regards to Q1, we're hedging for weather, right, and the situation on the Mississippi, right? So I think if you go back, consequent history says that Q1 typically has bad weather. But all things being equal to your point, John, yeah, if we get to where we need to get on this 35% renewal, we should see better margins. Okay.

Awesome. Thank you, Raj. Thanks, David. Thank you, Raj. Thanks, David.

Again, to ask a question, please press star 1-1 on your phone. Our next question comes from Greg Lewis with BTIG. Your line is now open.

Hey, good morning, everybody. And how about this, Greg? How about this, Billy? How about it? I guess my first question is around how the inland fleet is managing to the low water, i.e., you mentioned there's around 200 barges. You also mentioned that due to draft restrictions, you kind of have to light load. I guess what I would say is in the environment that we're in right now, if it is longer than we think, should we expect more or less barges upriver?

Yeah, I think, Greg, the short answer is I don't know, but I will tell you, you know, Christian and I talk about it with our ops guys. We're worried about a complete shutdown of the river unless we get some meaningful rain. So, you know, that would be a tremendous impact, as you might imagine. You know, fortunately, With liquid barges, we are already lower draft. We can go a little lower. If you go too low, though, some of the boats don't go much lower in terms of draft. I think the interesting thing is the cycle times, even with periodic openings, the cycle times of moving a barge up and down river are elongating. So paradoxically, you're seeing more barge demand from this area. The problem is, particularly with contracts and refratement, you're not moving as fast, but with time charters, you're doing okay. And then we have navigation clauses, which kick in, but there's usually something we call free time, which allows at the start of a voyage, if you get delayed by navigation a certain number of hours before the navigation delay clauses kick in. I'm fuzzing it up a little bit on purpose. It's just hard to say. I would tell you we are worried about a complete shutdown. But if you look at liquid versus dry cargo, we're in much better shape. And then our navigation delay clauses help for sure. And then part of the offset is the slower cycle times, which which increases some demand in the whole ecosystem of the liquid barge market. So that's a long way of saying it's really hard to quantify, and it could be a two to five cent headwind in the fourth quarter, maybe more if we go the whole fourth quarter without some meaningful rain.

Okay, great. And then I did want to pivot over to Florida. I know that's a big market, Tampa, for the coastal business. So I was kind of hoping how you think what's happened on the west coast of Florida maybe is impacting coastal, if at all. And then just kind of two-parter there, on the CNI, I imagine there's a lot of demand for power generation and things like that. Kind of curious what this whole impact of the storm on the west coast of Florida is having on coastal and CNI.

Yeah. A couple different impacts. Obviously, we have a number of our branches in CNI shut down during the quarter with the storm. We had minor damage in one or two of the places, mostly power outage. But as you know, we have our own backup power, so we're able to cover our facilities. Our rental fleet in CNI got as close to sold out as I've ever seen. You know, we provide backup power to people like Walmart, Target, Costco, you know, some healthcare interests as well. And so we kept very busy there. On the actual coastal side, you know, we had to delay some voyages into just north of Tampa. We go into in and out of Crystal River with a couple big units, and we've got a small vessel there as well. We lost essentially a couple weeks worth of charter hire there because of the storm. And then we had some equipment in shipyards in Tampa that paradoxically, when the storm surge went the other way, they actually grounded while they were in the shipyard. So that's delayed some things. Obviously, we lost some shipyard time. But that's kind of all in our thought process. Most of that was seen in the third quarter. You know, I would say there's a little lingering on the rental fleet as you go into the fourth quarter because some of that stuff, some of that rental equipment is still on hire. But it's, you know, it was a meaningful storm, but probably less meaningful than the other hurricanes that hit us in, like, Louisiana or Texas, where we have a lot more inland barges. So a long way of saying it, you know, it was impacted. We didn't put, you know, cents per share, but it did impact us a little bit, but not enough to make us call it out for the quarter. Okay.

All right. All right, everybody. Hey, thank you for the time. All right. Thanks, Greg.

Please stand by for our next question. Our next question comes from Greg Wisakowski with Weber Research. Your line is now open.

Hey, David and Raj. Good morning. Thanks for fitting in here.

Hey, Greg.

Good morning. So David, could you talk a little bit more about the towboat market, what you've seen versus what you're currently seeing on labor constraints what you guys are doing with that dedicated capex and how that ultimately translates to utilization and rates and margins, how it flows through. Sure.

Yeah. Well, look, labor is really tight. I would tell you labor rates are up mid to high single digits across the board in both businesses, in the marine business and in To a lesser extent on the DNS side, it's probably on the lower end of that range. But there's been definite labor wage inflation. And you understand it, right? Inflation is impacting just about everybody. Just go to the grocery store to feel it. But that's certainly not helped the margin situation. And again, to echo Raj is coming. That's one of the reasons we need these price increases to keep even with inflation. In terms of what that's doing to our towboat, we're a little constrained. I would tell you that if we had more mariners, it would be better. But we're probably in better shape than most of our competitors because we have the school that I've talked about before, where we train our own Mariners and, and, you know, uh, our ops team and, and Christian had the foresight to start that school up, uh, in January of last year, which, which was at the time it was painful because it was a cost, uh, during the pandemic that, uh, was kind of a headwind, but it was a good thing that we did it now in terms of capital, the second party question, uh, you know, our, Our CapEx, I would tell you, we're trying to minimize it a bit. We've invested in our fleet over the last five years, six years. We bought some companies with younger fleets. Our fleet's probably in the best shape it's ever been. We certainly don't need to build any new equipment. You know, there may be some specialized equipment we might build, you know, a special line barge or something for a specific customer. we might do, or a special towboat, something we call a retrack, which is a towboat with a retractable wheelhouse. And we are building, I would say the only real new build we have right now is our hybrid electric towboat that we have being built right now that should deliver sometime in the first half of 23, which we're excited about and getting a lot of customer interest for because of its emissions profile. But, you know, I would tell you our CapEx and Raj can give you better guidance. We don't have guidance for next year, but, you know, we're trying to minimize CapEx because our fleet's in great shape and we like where it's at.

I would just add, Greg, that, you know, the last two years we were in the throes of the pandemic and we managed CapEx and there's probably, you know, a bit of a catch up we're doing this year. You know, but most of it, if you look at it, most of it is maintenance related, which, you know, which basically is what I'm referencing to the managing it through the pandemic and coming out right now. And as you can see, utility is improved. So, you know, we need our fleet to be in a position to address the demand that we're seeing.

Got it. Okay. Thanks, guys. And then back to DNS and overall strategy. I wanted to explore the pros and cons of a split outside of the economics and finding the right price. So are there any other factors or synergies that we might not be thinking about from the outside looking in? Could you be losing any sort of scale or simplifying your overall supply chain, maybe a tie-in with marine repair, anything like that that we might not be thinking about?

There is some synergy. Our distribution services engine repair group works on our fleet and our towboats all the time. That's maybe 4% or less of revenue on the KDS side. So there's that synergy. The other synergies are really just corporate overhead and sharing corporate overhead. I guess there is some future synergies that could be there, and that would be doing this electric hybrid vessel. Our colleagues at Stewart and Stevenson, which is a Kirby-owned company, are very good at electrification, battery systems, and electric drive equipment. You know, that's almost a future kind of thing. You know, we're just building our first diesel electric towboat. So, you know, that would be something. But, you know, when you look at it, there's not a lot of synergies between the two other than, you know, the marine repair business.

Okay. Real quick, what about the same kind of question for oil and gas versus CNI? Is it a possibility or something you'd entertain to split those two groups, maybe hang on to CNI and split off oil and gas, or is that more of a package deal?

No, I think the board is engaged and cognizant and would look at anything and continues to look at anything that might enhance shareholder value. The board is of the mindset of if we can do one or the other or both, you know, and it adds value to the shareholders, they're definitely open to that. It's just, you know, none of it's worked out thus far. But I will say this, the DNS market in whole, you heard our comments. It's pretty constructive right now.

Yeah. Okay. Thanks, David. Good luck against Philly.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Kurt Inman for any closing remarks.

Thank you, Michelle, and thank you, everyone, for participating on the call today. If you have any follow-up questions, reach out to me directly, 713-405-1077. Thanks.

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