Kirby Corporation

Good morning, and welcome to the Kirby Corporation 2023 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 question to one question and one follow-up. To ask a question, you will press star 1-1 on your telephone, and then you'll hear an automated message advising your hand is raised. I would now like to turn the conference call over to Mr. Kirk Nimitz, Kirby's VP of Investor Relations and Treasurer.

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 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. 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. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31st, 2022, and in our other filings made with the SEC from time to time. I will now turn the call over to David.

Thank you, Kurt, and good morning, everyone. Earlier today, we announced third quarter revenue of $765 million and earnings per share of $1.05. This compares to 2022 third quarter revenue of $746 million and earnings of 65 cents per share. Both of our segments continued to perform well during the quarter despite facing some temporary challenges. In marine transportation, pricing on spot and term contracts continued to benefit from strong demand and limited availability of barges, but results were impacted by the Illinois River lock closure and several refinery outages during the quarter. Distribution and services delivered improved margins even as we continued to work through supply chain challenges during the quarter. Overall, our earnings increased sequentially and year over year, and we continued to repurchase stock during the quarter. In inland marine transportation, our third quarter results reflected continued improvement in pricing, partially offset by the headwinds from the Illinois River closure that I mentioned, as well as the refinery outages in the quarter. From a demand standpoint, customer activity remained strong in the quarter, with barge utilization running in the high 80% range. Spot market prices continued to progress higher, and were up in the mid single-digit sequentially and in the mid-teens range year over year. Term contract prices also renewed at higher rates with high single-digit increases versus a year ago. Margins were in the high teens. In coastal, market fundamentals accelerated with solid customer demand and limited availability of large capacity vessels resulting in spot prices increasing in the mid single digits sequentially and in the low 30% range year over year. During the quarter, our barge utilization in coastal continued to run in the mid 90% range. As mentioned before, our results this year are being impacted by planned shipyard maintenance on several large vessels, which led to an overall decrease in third quarter coastal revenues and operating margins just below break-even. In distribution and services, demand remains strong across our markets with steady levels of service and repair work combined with high levels of backlog. In our commercial and industrial market, overall demand remains solid across our different businesses with growth coming from the marine repair, our generation, and on-highway sectors. In oil and gas, Revenues were down as we continued to manage through persistent supply chain issues, particularly with electrical and electronic componentry, which delayed many new equipment deliveries during the quarter. We continue to work diligently to manage these supply challenges. Even with the decline in revenues, operating income in oil and gas was up both sequentially and year over year, driven by favorable product mix and operating efficiencies. Overall, revenues were up 7% year-over-year and operating margins improved to just under 10%. In summary, our third quarter results reflected ongoing strength in market conditions for both segments. Despite the temporary hit winds in the quarter, the inland market is strong and rates continue to push higher, helping to offset lingering inflations. While our coastal revenue remains challenged near-term by planned shipyards, industry-wide supply-demand dynamics remain very favorable. Our barge utilization is good, and we are realizing healthy rate increases. Steady demand in distribution and services is contributing to further growth in the segment, and while supply chain bottlenecks are expected, the outlook for the market is strong. 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 2023, marine transportation segment revenues were $430 million and operating income was $64 million with an operating margin of 15%. Compared to the third quarter of 2022, Total marine revenues decreased by 3 million, or 1%, while operating income increased 22 million, or 52%. Increased pricing and improved operating efficiencies in the inland market were partially offset by lower inland utilization due to the Illinois River closure, some refinery outages, and coastal shipyards. Compared to the second quarter of 2023, Total marine revenues, inland and coastal together, increased 1% while operating income was flat. Looking at the inland business in more detail, the inland business contributed approximately 82% of segment revenue. Average barge utilization was in the high 80% range for the quarter. With the reopening of the Illinois River, our utilization has moved into the low 90% range as we begin the fourth quarter. Long-term inland marine transportation contracts, or those contracts with a term of one year or longer, contributed approximately 55% of revenue, with 66% from time charters and 34% from contracts of a fragment. Tight market conditions contributed to spot market rates increasing sequentially in the mid-single digits and in the mid-teens range year over year. Term contracts that renewed during the third quarter were on average up in the high single digits compared to the prior year. Compared to the third quarter of 2022, inland revenues increased by 2% primarily due to higher term and spot contract pricing. Inland revenues were up 1% compared to the second quarter of 2023 as higher pricing was partially offset by lower utilization given the Illinois River closure. Inland operating margins were in the high teens during the quarter with the benefit of higher pricing partially offset by lower utilization. Now moving to the coastal business. Coastal revenues decreased 13% year-over-year and were up 1% sequentially as downtime from planned shipyards was partially offset by higher contract prices and improved barge utilization. Overall, coastal had near break-even operating margins as improved pricing was offset by increased shipyard days. The coastal business represented 18% of revenues for the marine transportation segment. Average coastal barge utilization was in the mid 90% range, which compares to the low to mid 90% range in the third quarter of 2022. During the quarter, the percentage of coastal revenue under term contracts was approximately 90%, of which approximately 90% were time charters. Average spot market rates were up in the mid-single digits sequentially and in the low 30% range year-over-year, and prices on term contract renewals were up in the low double digits year-over-year. 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 2023. This is included in our earnings call presentation posted on our website. At the end of the third quarter, the inland fleet had 1,071 barges representing 23.6 million barrels of capacity. On a net basis, we currently expect to end 2023 with a total of 1,073 inland barges representing 23.6 million barrels of capacity driven by a modest number of reactivations in the fourth quarter. Now I'll review the performance of the distribution and services segment. Revenues for the third quarter of 2023 were $335 million, with operating income of $33 million and an operating margin around 10%. Compared to the third quarter of 2022, the distribution and services segment saw revenues increase by $22.1 million, or 7%, with operating income increasing by $10.9 million, or 49%. When compared to the second quarter of 2023, revenues decreased by 15 million, or 4%, and operating income increased by 3 million, or 11%. On the commercial and industrial market, strong activity contributed to a 28% year-over-year and 17% sequential increase in revenues with improved demand for equipment, parts, and service in our marine repair and on-highway businesses. Power generation was also up year over year. Overall, the commercial and industrial business represented approximately 63% of segment revenue and had an operating margin in the high single digits in the third quarter. In the oil and gas market, revenues were down 16% year on year and 27% sequentially. We continued to manage through supply chain bottlenecks, especially in our manufacturing business, which led to shipment delays in the quarter. Despite these issues, the manufacturing business experienced continued favorable trends in new orders and backlog driven by our EFRAC units and associated power generation equipment. Overall, oil and gas represented approximately 37% of segment revenue in the third quarter and had operating margins in the low double digits. Now I'll turn to the balance sheet. As of September 30, 2023, we had 42 million of cash, with total debt just over 1 billion. During the quarter, we increased our debt balance by 69 million, and our debt-to-cap ratio increased to 25.3%. During the quarter, we had net cash flow from operating activities of 96.3 million. We used cash flow and cash on hand to fund 104 million of capital expenditures, of which 50 million was related to maintenance of equipment and the remainder was directed to growth CapEx in Marine and EFRAC. We continued to return capital to shareholders in the quarter and repurchased $23.3 million of stock at an average price of around $80.31. As of September 30th, we had total available liquidity of approximately $451 million. With respect to cash flow, depending on the timing on working capital, we would likely expect to generate close to $475 to $525 million of operating cash flow and $100 to $150 million in free cash flow this year. We are committed to a balanced capital allocation approach, and we expect to use most of this free cash flow to continue to repurchase stock. I will now turn the call back to David to discuss the remainder of our outlook for the fourth quarter. Thank you, Raj.

We had a good quarter with both our businesses performing well despite some temporary headwinds. Refinery activity remains at high levels, our barge utilization is strong in both inland and coastal, and rates are steadily increasing. While we expect some near-term issues in the fourth quarter related to low water conditions on the Mississippi River, increasing delay days due to normal seasonal weather, and high levels of shipyard activity in coastal, Our outlook in the marine market remains strong. In distribution and services, despite ongoing supply chain constraints and delays, demand for our products and services is good, and we continue to receive new orders in manufacturing. Overall, we expect our businesses to deliver improved financial results in 2024. While all of this is encouraging, we are mindful of challenges related to a slowing global economy, geopolitical unrest, and additional economic weakness due to high interest rates. Even with these uncertainties, we remain very positive and expect to drive strong cash flow from operations going forward. Diving into the businesses in more detail, I'll start with Inland. Favorable conditions are expected to continue going forward, driven by the combination of high refinery and petrochemical plant utilization and minimal new barge construction across the industry. HERBIE expects these strengths to be partially offset by increasing delay days due to normal seasonal weather that we generally see in the fourth quarter. and we also expect the low water conditions on the Mississippi River to have an impact. And further, there are some inefficiencies remaining with some locked maintenance in Louisiana. The company still expects further improvement in spot market prices, which currently represent approximately 45% of inland revenues. Term contracts are also expected to continue to reset higher. Overall, fourth quarter inland revenues are expected to be roughly flat sequentially with a modest improvement in margins and we still expect to end the year close to 20% if not at 20% margin. In the coastal market, conditions have tightened considerably and the industry is close to supply and demand balance across the fleet. As we've discussed, Our coastal revenues and operating margins continue to be impacted this year by an approximate doubling of planned shipyard maintenance days and ballast water treatment installations on certain vessels. Kirby expects steady customer demand through the balance of the year with barge utilization in the low to mid 90% range. Rates are expected to continue improving as the availability of equipment is type across the industry. For the fourth quarter, coastal revenues are expected to be up in the low to mid single digits compared to the 2023 third quarter as we continue to progress through major shipyards. However, there is some possibility of the shipyards extending into early 2024. Coastal operating margins. are expected to be near break-even to low single digits on a four-year basis. Moving to distribution and services, steady demand in commercial and industrial and favorable oil field fundamentals are expected to continue throughout the remainder of 2023 and into 2024. In commercial and industrial, steady markets are expected to remain in the fourth quarter with incremental activity in power generation, marine repair, and on the highway. This activity should be partially offset by lower rental equipment activity as the hurricane season winds down. That will create a slight headwind to margins. In the oil and gas market, despite the near-term volatility in commodity prices and rig counts, we expect continued demand for manufacturing as well as for OEM parts, products, and services. Within manufacturing, the company expects demand for environmentally friendly pressure pumping and heat frac power generation equipment to remain strong, with new orders and increased deliveries of new equipment for the remainder of the year and into 2024. Supply chain issues and long lead times are expected to persist in the near term, contributing to some volatility of deliveries. potentially shifting some deliveries from the fourth quarter into next year. Overall, the company expects fourth quarter segment revenues to be up in the low to mid single digit sequentially with lower operating margins impacted by mix and dropping into the mid to high single digit range from the almost 10% range we had this quarter. To conclude, Both our segments performed well during the quarter in the face of some temporary challenges, and our team executed well on near-term objectives as well as on our long-term strategy. Our balance sheet is very strong, and we expect to generate significant free cash flow in coming quarters, and we expect to use free cash flow for share repurchases, debt repayment, as well as opportunistic growth projects. Although we see favorable markets continuing and expect our businesses will produce improving financial results as we head into 2024, we are closely monitoring the potential for a recession as well as the potential short-term weather and low water related impacts in our marine business. Having said that, as we look long-term, we are confident in the strength of our core businesses and our long-term strategy. Our marine businesses are in the early innings of a multiple-year recovery, and demand remains solid in distribution and services, despite recent macro headlines. We intend to continue capitalizing on strong market fundamentals and driving value for the shareholders. Operator, this concludes our prepared remarks. We are now ready to take questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Also, as a reminder, we ask that you please limit your questions to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Ben Nolan of . Ben, your line is open. Thank you.

Good morning, David and Raj. Hey, good morning, Ben. Hi. So for my first question, I wanted to ask a little bit on the inland side, well, actually inland and coastal. We've gone through a number of years now with very little in the way of ordering activity, and I know that you guys have been pretty vocal about saying the economics for new equipment still don't line up, but At some point, the industry is going to need some replacement CapEx. Can you maybe put a little color around that and how you think about it with respect to your own fleet?

Yeah, Ben, thanks for the question, and good morning. Yeah, look, the cost of new equipment, as you know, is pretty much doubled in the last five years. Steel prices are up. Labor input costs are up. Paint's up. you know, just skilled labor for welding is up. You know, radars and electronics on boats are up. Just about everything, you know, high performance line on the tow boats are up, you know, 60, 70%. So, you know, all the input costs have gone up. So if you take like a two barge tow, you know, the $4 million per barge, that's $8 million, and then you put a $6 to $7 million towboat with it. You're talking about $15 million worth of capital equipment for a two-barge tow, and to get a 12% or a 10% type return on that equipment, you'd need north of $13,000 a day now. it doesn't make sense for anybody to build right now. Uh, rates need to come up and they need to keep going up. Uh, you know, we're still fighting inflation. So I, I just don't see anybody jumping to, to build in this environment, uh, until those rates, uh, start to really get up there. Um, and that, that's when you'll start to see it. Now they, the, the other part of the equation, as we talked before about, uh, you know, just the cost of borrowing, uh, money right now has gone up a lot. Uh, I would say it used to be about 3%, 4% if you were using secured financing. Now I would imagine a smaller company would have to pay north of 10% to borrow money, and then you're losing bonus depreciation. So building equipment in that environment, with the cost of debt being almost double-digit, it may be well above $13,000 a day to justify it. It could be even higher, maybe $14,000. But it's all about the cost picture. Now, that said, you are seeing some equipment that was tied up during COVID come off the bank. Some of it will never come off the bank, but but you'll see us reactivating. I think Raj gave an estimate that we're reactivating a handful before year-end here. We're almost done reactivating our laid-up fleet, but I would imagine as equipment continues to get tight and you're not building a whole new set of equipment, if the numbers can work, we'll start to bring some stuff off the bank. But that's only maybe 2% to 3%. that could come off the bank, if that. It may already have been off the bank. So it's a long way of saying I just don't see building for another year or two, depending on how fast rates go. But it's pretty in check right now. I think, I don't know, since we last updated you guys on the call here, I think we said there were 22 barges being built this year a week. We got an update, and it's 27 barges. Now, retirements will be high this year. With the maintenance bubble, as you start to bring older equipment in for these big heavy maintenance shipyards, you look at the cost and you say, well, I'm not going to put $2 million into a 25-year-old barge. I'll just retire it. So you could see retirements be a little more than we expected. You know, it could be north of 75. But we don't have a good handle on that. We only know what we're retiring. It's hard to say what the industry is retiring. So that's a long, drawn-out answer, Ben. But I don't see anybody building for a couple years just based on the economics right now.

And then, Ben, I'll just add on the coastal side, you know, to David's point, we're not seeing any building. And if you were to build, the lead times are, you know, So these times are going to take you to the 2027 timeframe.

Right. Well, I appreciate that. You guys answered a lot of questions in that one question there. My second one, though, if I could move over to the DNS side, it seems like some of these supply chain issues are persistent, and we're not hearing that as much from other places. I'm curious if that is – just pushing, uh, sales into next year and, and sort of what line of sight you have, uh, for the DNS business going into 2024, appreciating that you haven't given guidance on that yet, but, uh, just looking to understand how you feel about sort of what's already in the bag, uh, for next year. And then, and then maybe David, I know that you and I have talked about the, uh, the VoltaGrid stuff a little bit. Curious how that is playing out, and if maybe you could give a little color on that within DNS.

Sure. Yeah, supply chain, I don't want to overstate the supply chain woes, but it's almost hit and miss. We can have problems getting variable frequency drives, and then it'll clear up for a while, then it may come back. We might have problems getting some electric componentry, and then it'll start to deliver. But it has improved in some areas. And then a few months later, it goes back again the other way. I will say this. Some of our engine suppliers, for example, we can't get engines until 2025 in some cases. So there are still some heavy headwinds there. That said, we are seeing on parts for engines, that's getting better. We do a lot of repair work, as you know, Ben, so we are seeing some improvement there. I would just say it's bouncing around. It is on the margin better than it has been, but it's still impacting us a bit. We did say in our prepared remarks that you could see some shipments in the fourth quarter shift into the 2024. But by and large, it's more of the same, I guess, is what I would say in terms of supply chain and shipments. You'll see it bounce around a bit.

Okay. And on VoltaGrid?

Yeah, VoltaGrid, for those not familiar, VoltaGrid is one of our customers. We don't like to talk about direct customers, but they provide power by the hour, not only to the frack space, but put other places in industry, and we build a lot of their equipment. They continue to expand and to build. We continue to get orders from them. They're a world-class organization and growing well. Probably best for me not to give you much more detail than that.

All right.

I appreciate it. Thanks, Dave and Rex. Thanks, Ben.

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your phone. Stand by for our next caller, please. Our next call comes from Ken Hoekstra of Bank of America. Ken, your line is open.

Hi, thank you. This is Nathan Donlan for Ken Hoekstra. Congratulations on the great quarter. My question is on the inland marine side. So seeing the ton miles are down 3Q, 11% on partly some of the factors the teams mentioned. I noticed the call-out on the Mississippi water levels and some of the lock delay days based off of weather, and just wanted to get a scale on what that represents in terms of an operating challenge from a volume perspective. Should we assume somewhat of a similar level of decline this quarter versus the last?

Good morning, Nathan. Thanks for the questions. Your note on the ton miles is a good one, and we should elaborate on that. As you know, the Illinois was closed, and if you think about what we do on the Illinois, it's usually taking barges from the Gulf Coast all the way up Illinois and sometimes into Chicago. That's a long journey and generates a lot of ton miles, and when When the Illinois is closed, there's a lot less ton miles just from that. The other thing is crude. We move a lot of crude condensate from the Northeast, from the Utica and the Marcellus. Those are pretty gassy fields. When gas prices are low, they're not not producing as much condensate, and so we don't get those crude moves all the way from the Ohio Valley down to the Gulf Coast. So that's fewer ton miles. That said, we're still pretty busy. As you heard, our utilization was good. So if you look at revenue per ton mile, it's up. That's because we're busy in other parts of the system. We have something we call a cross channel, which may be just taking a barge from one part of Houston to another part of Houston and which could tie up the barge for days. But there's a lot of revenue, but not many miles in that. So you've got to be careful with ton miles and revenue per ton mile. And as you correctly noted, the Illinois had an impact on that. Now, Illinois is back open. We started deploying barges in October, so that's starting to pick back up. We're still impacted because it takes a while to get all that equipment moving again and get it upriver. But we do have lock delays. There's a major lock in the New Orleans area that's closed and it's causing routes to be rerouted and diverted and it's adding some delays into the system. But we're working through that. That's normal. I would say what is different is the low water on the Mississippi. You know, it got to a record low again. That said, we got some rain in the Ohio Valley just last week, which may help out a bit. You know, in the past, I think when we had record lows, it cost us about two to three cents, two to five cents and a quarter. This should be less than that, but it's hard to say right now. We're watching it. you know, that the order of magnitude is probably in that two, well, it's going to be in that range two to five cents, but it feels like this should be less than that, but given the recent rain, hard to say, you know, it's, it's, you know, it's trying to predict weather and see where that all plays out. Hopefully that answered the question, Nathan.

No, that does. Thanks. Thanks a bunch, Dave. And I guess my, my next question is just a, sort of a little more big picture, trying to understand how the team's looking at the contract exposure side of things, particularly in inland. I see that you've mentioned that it's currently more or less around half the book right now, but historically this could trend well into the 80s. I mean, you know, we're talking about historically tight vessel capacity and strong demand. Could we see this sort of locking in of current rates kind of ramp gradually higher into the next couple of years?

Yeah, no, good observation here. You know, as you've noted, we're about 55% term and 45% spot. And, you know, I would just say directionally, we don't mind having a big spot exposure. We do that kind of on purpose, especially in a rising rate environment. You know, sequentially, we saw inland rates up mid-single digits. Year over year, spot rates were up mid-teens. So, you know, we're enjoying our spot position. I will say this, to your point, customers are well aware of the maintenance bubble. And, you know, we're seeing a little push to extending... extending and maybe terming up more equipment or getting longer spot deals. You know, we call a spot deal something less than a year. You know, instead of one-month deal, they might be doing three-month or six-month deals now. They're starting to get a little nervous about this maintenance bubble because the spot market is very, very tight right now.

Makes sense. Thanks for your time today.

Thanks, Nathan.

Thank you very much. One moment for our next caller. Our next call comes from Jack Atkins of Stevens Inc. Jack, your line is open.

Okay, great. Good morning, everybody. Thanks for taking my questions.

Hey, good morning.

So, David, I'd like to maybe go back to Ben's first question, if I could. It was sort of a capacity question, but maybe ask it in a different way. I mean, I think historically, you know, there's been a lot of focus, you know, around, you know, new barge construction and, you know, relative to retirements and the impact that could have on capacity or not. But I guess one big piece of capacity is also the ability to get mariners to crew your boats. And could you maybe talk about that as a capacity constraint? Because what we're hearing through the channel is that's as challenging in terms of hiring qualified folks to operate your boats as maybe being able to build a barge. So that's a limiter for capacity as well. But I wanted to maybe get your thoughts on that.

No, I mean, that's an excellent point. Horsepower, as you know, is how we move the barges, and we've got to crew these vessels. And we've seen a very, very tight labor market. It's been hard to get crews. Fortunately, Kirby has got our own school, so we anticipated some of this and started the school basically almost two years ago, ramping up even as COVID was going on. We're doing okay. We're short mariners, I'll be honest. We're short mariners, but we're able to crew our vessels right now. A lot of mariners working a little overtime to help do that, which is good. They're good team players. But it is absolutely a factor in the tightness in the market. There is just not a lot of available horsepower, which is making it really tight. So you've got tight barge. you know, availability and tight boat availability. And that just, as you, as you would imagine, uh, makes it even more difficult to, to get moves going. So, uh, thanks for bringing that up. It's a good point. We don't talk about it a lot, but it, it is a major factor. Um, and, and that's part of the inflation picture, right? I mean, there's some labor inflation. Uh, we've, we've been, we've been dealing with that. Um, And part of it is because we're short mariners in the whole ecosystem.

Yeah, okay. That makes sense. I just wanted to kind of get your thoughts on that piece. And then I guess just as we kind of think about the bigger picture, this is maybe a two-part question, but both as it relates to sort of your fourth quarter outlook and then kind of longer term going into 2024, I guess has the – When you think about relative to three months ago, has the fourth quarter outlook changed at all? And if so, is that really kind of tied purely to the water levels or is there anything else going on there in terms of, you know, customer demand? And maybe that'll give you a chance to talk about, you know, just the output that you're seeing from some of your key customer groups within Inland.

No, the fourth quarter outlook hasn't changed a lot. If anything, it's got a little better because we're tighter than we used I mean, you always deal with weather in the fourth quarter, and we're starting to see it. As you know, Jack, fog is as bad as low water. It's actually worse because Mississippi is only about 20% to 25% of our volume, but the Gulf Coast, where we're very active, a fog day can really bog down the fleet, and we always see that in the fourth quarter. That said, weather does tighten up utility too, right? I mean, you're just not moving as efficiently, so it does tighten up utility. I would say, you know, if anything, it's as expected, maybe marginally better just because we're so tight on spot now that Illinois has opened back up. The Lower River, you know, that's a little bit of a headwind because you've You have to run lower drafts. You have to be careful and wait for dredges and things like that. It's calling it all in our outlook for now. I think what's important is we're heading into a contract renewal period in the fourth quarter. That's usually a pretty heavy contract renewal time. The market's tight. Our customers are sophisticated. They They know it's tight. They know there's this maintenance bubbles there. So we're pretty energized about the outlook. It's too early to talk about 24 yet, but it certainly feels good going into the major contact renewals right now. Okay.

Thank you again for the time, guys. Really appreciate it. Thanks, Jack.

Thank you. As a reminder, to ask a question, please press star 11 on your phone. Our next call comes from John Daniel of Daniel Energy Partners. John, your line is open.

Hey, David. Thank you for including me. Hey, John. I got just one question on the environmentally fracked equipment. Would you characterize the interest, not orders, the interest as accelerating or stable right now? And then also, is it coming from a broader customer base or is it the same customers? It is. It is.

broader okay it's broader um and i would say accelerating it may be too strong of a word but improving you know i wouldn't say accelerating because that that makes it sound like it's a huge ramp but it is improving the interest is improving i mean john you know this better than anybody that the the efficiencies you get with efrac are are so pronounced and so good for for not only um our customers, the pressure pumpers, but the E&P companies, the savings is there. And, you know, obviously everybody likes the ESG benefits, but, you know, the operational savings is so significant. And, you know, I think, and you should tell us because you know the customers as well as we do, but I think you're just going to see continued building of EFRAC And conventional FRAC you won't see much of going forward in terms of new builds. I tend to agree. There's a lot of stuff that needs to be replaced out there. The only other thing I would say on, you say accelerating, but we're seeing some interest internationally now too on FRAC, on eFRAC. So I would say that's kind of new to the game. Yeah.

would you be willing to share which markets are the most interested? I understand if you don't want to. Well, I think you get it.

It's the Middle East. It's the Middle East.

Okay. Fair enough. All right. On the supply chain constraints, the electronic components, do you have any more color you could add? Like what's really driving that? Are they diverting supply to other sectors or they just can't make it fast enough?

Yeah, it's the latter. They can't make it fast enough. And, you know, we buy, I don't want to name the vendor because that's would not be nice, but we buy variable frequency drives, for example, from Scandinavian area, and they just can't make it fast enough, which is an interesting dilemma. You know, sometimes you get enclosures that back up, and that's, you know, you would think that's, you don't want to call it dumb iron, but you would think enclosures wouldn't be a problem, but that gets backed up, you know, Interesting. Okay. All kinds of different electric componentry and things around electrics seems to be backing up. And, John, you know this. If you look at, you know, all the data centers going up and now you've got things like chat, GPT, and AI, and just we've seen another surge for backup power, whether it's at data centers or whatnot. Right. We use that same equipment in generating electricity for the frack spread, so there's just a lot of demand in the system, and that's what's going on. It's usually just electric or electronic related.

Okay. Well, that's very helpful, and I appreciate you letting me ask some questions today. Thank you. Sure, John. Thanks. Take care. Yes, sir.

Thank you. One moment for our next question. Our next question comes from Greg Wasikowski of Weber Research and Advisory.

Greg, your line is open. Hey, David and Raj. Good morning. How are you guys doing?

Hey, good morning, Greg.

Hey, so I wanted to check in on that chunk of term contracts that rolls over in Q4. I know it's early days here, but I wanted to see how would you characterize your initial expectations and your level of confidence when looking into Q4 right now, say versus your expectations and level of confidence last year and the year before?

Yeah. Well, last, last year we didn't, you know, we were still recovering a little bit from COVID. So this year is much, much better environment than last year. Last year was good. Don't get me wrong, but we were still, Hey, is COVID really gone? Um, Is the market really coming back? Are the volumes on the river coming back? We did see it come back. Of course, first quarter of this year, we had some pretty tough weather conditions and whatnot. I would say contract renewals feel better this year. I want to use the word significantly better, but they certainly feel better. It's a tight market. This maintenance bubble is real. Our customers have lots of volumes to move. You can look at the share buybacks among our customer base and it tells you how good they're doing. The barge cost to them in terms of moving refined products or chemicals is nothing. They should be generous.

Understood. Okay. Thanks, David. And then can you talk a little bit more about your power generation fleet in Q3 and Q4 so far? I'm just curious how demand compared to last year relative to the severity and the frequency of storms of last year versus this year, you know, maybe remind us operationally, do customers essentially have Is standing annual rental agreements regardless of what the storm activity really is or would increased storm activity drive demand higher real time within the quarter?

Yeah, it's usually a stand. Every customer is a little different, Greg. It's usually a standby fee during a hurricane season. And then if we deploy, you know, the rates go up a lot. It was a mild hurricane season this year. Thank goodness. because that impacts our marine business. But we kept pretty busy with the rental fee because everybody has gotten smart about putting stuff on standby and paying us for it. But as we exit the hurricane season, that tapers off a bit, as you would expect. I would just tell you that the general theme is this. Every company knows they need power 24-7. And they've gotten smarter and smarter and smarter about having backup power options. We do also sell backup power all over the place. We sell backup power generation equipment to data centers. We sell it to banks and financial institutions. We sell it to hospitals. And that's part of what's helping KDS do better is our power generation business and manufacturing or assembling that kind of. kind of equipment and delivering it to institutions that really don't want to take a chance with not having power.

Yeah. Got it. Okay. Thanks, David. Hope you're doing well with your Astros.

Well, you know the answer to that question, but at least it's another Texas team that's in. That's right. That's right. All right. Thanks, Greg.

Thank you. As a reminder, to ask questions, please press star 11 on your phone. As there is no further questions, this concludes our question and answer session. I would now like to turn the conference back over to Mr. Kurt Nimitz for any closing remarks.

Thank you, Corey, and thank you, everyone, for joining us on the call today. If there's any follow-up questions, please reach out to me anytime today.

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