Kirby Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 8 speakers on the call.

Operator

Welcome to the Kirby Corporation 2023 Second Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Curt Nimitz, Vice President and Treasurer. Please go ahead.

Speaker 1

Good morning, and thank you for joining us. With me today are David Grzebinski, 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.

Speaker 1

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 ks for the year ended December 31, 2022 and in our other filings made with the SEC from time to time. I will now turn the call over to David.

Speaker 2

Thank you, Kurt, and good morning, everyone. Earlier today, we announced 2nd quarter revenue of $777,000,000 and earnings per share of $0.95 Both of our segments continued to perform well during the quarter and produced higher revenue and operating income sequentially and year over year. In Marine Transportation, Pricing on spot and term contracts continued to benefit from strong demand and limited availability of barges. Favorable weather conditions and increased operating efficiency helped improve margins for both inland and coastal. Distribution and Services delivered improved margins and business remains stable at high levels.

Speaker 2

Overall, we had solid results and we generated $113,000,000 of free cash flow, which helped support In inland marine transportation, our 2nd quarter results reflected continued improvement in pricing together with better weather conditions and operating efficiencies. From a demand standpoint, customer activity was strong in the quarter with barge utilization rates running in the low 90% range. Spot market prices were up in the mid single digits sequentially and in the mid to high 20% range year over year. Term contract prices also renewed up with low double digit increases versus a year ago. Overall, 2nd quarter inland revenues increased 11% year over year and margins were in the high teens range.

Speaker 2

Also shortly after the end of the second quarter, we acquired 23 inland tank barges from an undisclosed seller. With a total capacity of 265,000 barrels and an average age just under 14 years, These barges will be a nice addition to the Kirby fleet. In coastal, market Fundamentals continue to improve with our barge utilization levels running in the mid to high 90% range. During the quarter, we saw solid customer demand and limited availability of large capacity vessels, which resulted in high teens price increases on term contract renewals and increases on new spot deals in the high 20% range. As mentioned on our Q1 call, our results this year are being impacted by planned shipyard maintenance on several large vessels.

Speaker 2

Consequently, 2nd quarter coastal revenues decreased slightly year over year, but Operating margins were positive in the low single digits. Demand remains strong across our markets with continued new orders combined with high levels of backlog. In manufacturing, revenues were up sequentially and year over year as high market acceptance drove strong demand for our environmentally friendly pressure pumping equipment and power generation equipment for e frac. However, as expected, persistent supply chain issues, particularly with electronic And Electrical Components delayed many new equipment deliveries during the quarter. We continue to work diligently to manage these supply chain Challenges.

Speaker 2

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, our 2nd quarter results reflected ongoing strength in market conditions for both segments. The inland market is strong and rates continue to push higher helping to offset inflation. Well, our coastal revenue is challenged near term by planned shipyards. Industry wide supply and demand dynamics remain very favorable.

Speaker 2

Our barge utilization is good and we are realizing price 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 very strong. I'll talk more about our outlook later, but first, I'll turn the call over to Raj to discuss the Q2 segment results and the balance sheet.

Speaker 3

Thank you, David, and good morning, everyone. In the Q2 of 2023, Marine Transportation segment revenues were $427,000,000 and operating income was $64,000,000 with an operating margin of 15%. Compared to the Q2 of 2022, total marine revenues increased $21,000,000 or 5% and operating income increased $34,000,000 or 108 percent driven by increased pricing and improved operating efficiencies in the inland market. Compared to the Q1 of 2023, total marine revenues, inland and coastal together increased 4% and operating income increased 49%. Inland was up, while Coastal was down and I'll provide more details on this in a minute.

Speaker 3

First, let me discuss the inland business in more detail. The inland business contributed approximately 82% of segment revenue. Average barge utilization was in the low 90% range for the quarter. This was slightly down from the utilization seen in the Q1 of 2023 as weather conditions improved and operating efficiency increased. This compares to the low 90% range in the Q2 of 2022.

Speaker 3

Long term inland marine transportation contracts or those contracts with a term of 1 year or longer contributed approximately 55% of revenue With 62% from time charters and 38% from contracts of affreightment, improved market conditions contributed to spot market rates increasing sequentially in the mid single digits and in the mid to high 20% range year over year. Term contracts that renewed during the Q2 were on average up in the low double digits compared to the prior year. Compared to the Q2 of 2022, inland revenues increased by 11%, primarily due to higher term and spot contract pricing. Inland revenues were up 4% compared to the Q1 of 2023 as higher pricing was partially offset by lower rebuild revenues due to lower fuel prices. Inland operating margins improved sequentially from the low teens To the high teens as the benefits of higher pricing and improved operating conditions were seen throughout the quarter.

Speaker 3

Now moving to the Coastal business. Coastal revenues decreased 15% year over year as downtime from planned shipyards was partially offset by higher contract prices and improved barge utilization. Overall, Coastal had a positive operating margin in the low single digits as improved pricing was partially 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 to high 90% range, which compares to the low 90% range in the Q2 of 2022.

Speaker 3

During the quarter, the percentage of coastal revenue under term contracts was approximately 85%, of which approximately 90% were time charters. Average spot market rates were up in the mid single digits sequentially and renewals of term contracts were on average higher in the high teens range 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 Q2 as well as projections for 2023. This is included in our earnings call presentation posted on our website. At the end of the second quarter, The inland fleet had 10.45 barges representing 23,300,000 barrels of capacity.

Speaker 3

On a net basis, we currently expect to end 2023 with a total of 10.73 inland barges, representing 23,600,000 barrels of capacity. This increase is driven by a modest number of reactivations and the acquisition of a small number of barges from an undisclosed seller that David mentioned. Coastal Marine is expected to remain unchanged for the year. Now I'll review the performance of the Distribution and Services segment. Revenues for the Q2 of 2023 were $350,000,000 with operating income of $30,000,000 and an operating margin of 8.5%.

Speaker 3

Compared to the Q2 of 2022, The Distribution and Services segment saw revenues increase by $58,000,000 or 20 percent with operating income increasing by 13,000,000 was 78%. When compared to the Q1 of 2023, revenues increased by $12,000,000 or 4% and operating income increased by $7,000,000 or 31%. In the oil and gas market, Revenues were up 30% year on year and 14% sequentially. We experienced steady demand for new engines, Transmissions and parts throughout the quarter. As David mentioned, we continue to manage through supply chain bottlenecks, especially in our manufacturing business.

Speaker 3

Despite these issues, the Manufacturing business experienced continued favorable trends in new orders and backlog driven by our e frac units and associated power generation equipment. Overall, oil and gas represented 48% of segment revenue in the 2nd quarter and had operating margins in the mid to high single digits. On the commercial and industrial side, strong activity contributed to a 12% year over year 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 52% of segment revenue and had an operating margin in the high single digits in the 2nd quarter.

Speaker 3

Now I'll move on to the balance sheet. As of June 30, we had $37,000,000 of cash with total debt just under 1,000,000,000 During the quarter, we reduced our debt balances by $81,000,000 and our debt to cap ratio improved to 24.3%. During the quarter, we had net cash flow from operating activities of $211,000,000 2nd quarter cash Flow from operations improved sequentially as better collections were partially offset by a slight inventory build as a result of supply chain delays. We continue to target unwinding working capital as the year progresses and are making progress towards this goal. We used cash flow and cash on hand to fund $98,000,000 of capital expenditures, of which $60,000,000 was related to maintenance of equipment and the remainder was directed to growth CapEx in marine and e frac.

Speaker 3

During the quarter, we had free cash flow of $113,000,000 of which we used $34,400,000 to repurchase stock at an average price of around $72 As of June 30, we had total available liquidity of approximately 516,000,000 For 2023, we expect to generate net cash flow from operating activities of 500 to $580,000,000 Our CapEx guidance for 2023 is still expected to be in the 300 to $380,000,000 range. Of this, up to $140,000,000 is related to growth CapEx in both of our businesses. It is important to note that even with the anticipated higher level of capital spending, we expect to generate $150,000,000 to $200,000,000 in free cash flow. We are committed to a balanced capital allocation approach and we expect to use this free cash flow to continue to repurchase stock, pay down debt and look for value added and Acquisitions. I will now turn the call back to David to discuss the remainder of our outlook for 2023.

Speaker 2

Thank you, Raj. We exited the quarter with continued strength in our businesses. Pricing in the marine market Continues to improve and demand is strong. And Distribution and Services, despite persistent supply chain constraints and delays, Demand for our products and services continues to grow and we continue to receive new orders in manufacturing. Overall, we expect our businesses to deliver improved financial results in the coming quarters.

Speaker 2

While all of this is encouraging, we are mindful of challenges related to a slowing global economy, additional economic headwinds due to higher interest rates and choppiness in the oil and gas market. Also labor constraints and inflationary pressures continue to contribute to rising costs across our businesses, although some of that is starting to moderate. Even with these headwinds and uncertainties, we remain very positive and expect to drive strong cash flow from operations. In inland marine, steady demand driven in part by high refinery and chemical plant utilization should continue to support high barge utilization. Limited new barge construction and high industry maintenance requirements for the next several years, Combined with lingering inflationary pressures are expected to further support inland rate increases.

Speaker 2

Barge availability remains very constrained. These factors are expected to contribute to RBarge 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 45% of inland revenues. We also expect continued improvement in term contract pricing as renewals occur throughout the remainder of the year. In the Q3, our inland marine operations will be challenged by near term headwinds associated with lock closures on the Illinois River and recent unplanned refinery outages.

Speaker 2

However, improved efficiencies generated by better weather And continued increases in pricing should offset this and yield modest sequential improvement in revenue and operating margin for our inland business in the 3rd quarter. Overall, we are on track to grow inland revenues in the double The low double digit range for the full year and expect near term inland operating margins to average in the high teens for the full year With gradual improvement for the remainder of 2023 ending the year close to, if not at 20%. In coastal, market conditions are expected to follow a steadily improving path As the industry is getting very close to supply and demand balance across the fleet, even if there is some market softness, Kirby's coastal barge utilization is expected to remain in the low to mid 90% range. Full year 2023 coastal revenues are expected to be flat year over year. Good fundamentals in our core Liquid Cargo Business and Higher Coal Shipments in our Offshore Dry Cargo Business are expected to be largely offset by this year's planned maintenance and ballast water treatment installations, which in terms of shipyard days is almost doubled compared to last year.

Speaker 2

Operating margins are expected to be Near breakeven to low single digits on a full year basis. That said, looking forward, 2024 will be a much better year for Coastal. Looking at Distribution and Services, we continue to have a favorable demand outlook For equipment, parts and service across the segment. In the oil and gas market, despite the near term headwinds of lower commodity prices And lower rig counts, we expect strong demand for manufacturing as well as for OEM parts, Products and Services in our distribution business. As an early mover in e Frac, Our units have a long standing operating history of safety, performance and reliability and we see a growing understanding from our customers of the total The lower total cost of ownership of E Frac.

Speaker 2

Our latest generation of units have increased power and are performing well in the field. As a direct result, we added new incremental orders for e frac and associated power generation equipment in the Q2 and we expect this trend will continue. And although we've seen a slight improvement in supply chains, In general, we expect the delays and long lead times for OEM equipment, which in some cases extend beyond a year to remain an ongoing challenge. These issues are likely to contribute to some choppiness with new product deliveries, which could potentially shift Between the final quarters of 2023 and perhaps even into 2024. In Commercial and Industrial, we expect Steady demand in on highway parts and service driven by increased on highway and municipal repair work, Continued improvement in bus ridership and increased long term demand for Thermo King refrigeration products.

Speaker 2

In power generation, new backup power installations, parts and service activity are expected to remain solid as demand for And 20 fourseven power continues to grow. 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 2023 full year, we are on track to achieve revenue growth in the low double digit range for commercial and industrial. Well supply chain issues are expected to continue impacting new product and equipment deliveries in distribution and services. We expect 2023 segment revenues will increase 10% to 20% for the full year with commercial and industrial representing 60% of revenues and oil and gas representing 40%.

Speaker 2

We expect segment operating margins will be in the mid to high single digits for 2023. To conclude, Both our segments performed well during the quarter, delivering improved revenue and operating income, and our team executed well on near term objectives. Our balance sheet is very strong and we expect to generate significant free cash flow this year and expect to use free cash flow for share repurchases, Debt repayment and high value added projects. Although we see favorable market Conditions continuing and expect our businesses will produce improving financial results in 2023, we are closely monitoring The potential for a recession or an economic pullback that may impact 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.

Speaker 2

Our Marine business are in the early innings of a multiyear recovery and demand remains solid in distribution and services Despite recent macro headwinds, we intend to continue capitalizing on our strong market fundamentals and driving shareholder value. Operator, this concludes our prepared remarks. We're now ready to take questions.

Operator

And our first question comes from the line of Jack Atkins with Stephens Inc. Your line is now open.

Speaker 4

Okay, great. Good morning and congratulations on a great quarter here guys.

Speaker 2

Hey, thanks Jack.

Speaker 4

So I guess David, if we could maybe start for a minute just in terms of the pricing backdrop. There seems to be Still quite a bit of momentum, both year over year and sequentially in terms of spot and contract pricing. Is there any way to maybe think about The differential, like how far below spot how far is contract pricing below spot pricing right now? And We've had this window where not a lot of capacity has been built. How much longer do you think we have before you start seeing the order boards Increase in terms of new capacity maybe getting built?

Speaker 2

Sure. Well, let me talk about the pricing first and then I'll get into The new builds and what prices would be needed to justify new builds. Look, I mean, you saw our numbers. Spot pricing was up mid single digits sequentially, Up over 20% year over year. Term contracts that renewed were up low double digits.

Speaker 2

So it's pretty healthy. There's still a good gap between spot and contract with spot being probably 10% to 15% above contract. So that's as you know is a Healthy market dynamic. You know what's driving that, Jack, it's supply and demand. Demand has held up okay.

Speaker 2

We have seen some weakness in chemicals, but it's been at the margin, not Overly material. Refined products is still pretty strong. The rest of our trade lanes are pretty strong. So demand is holding up. Supply is what's really helping, right?

Speaker 2

It's all it's in check. I think this year On the order boards about 27 barges to be delivered. And if you combine this year and last year, it's still the lowest it's been in decades. So there's not a lot of new capacity coming on. And we really don't see that changing much.

Speaker 2

If you think about The cost of a new 30,000 barrel barge is pretty high right now. It needs to be because steel prices are high and labor inputs are high. So the cost of new barges is high, prices don't really support building new yet. I'll come back to that in a second. The other thing, look, the cost of money has gone up.

Speaker 2

We have a lot of private competitors in our space And borrowing rates have gone up. And then you overlay bonus Appreciation slowly disappearing. It's about 80% this year, down from 100%. Next year, it goes to 60% and then 40% the following year. So when you put all that together, there's not a lot of building that's going to happen.

Speaker 2

I would tell you, rates do need to continue to go up because inflation is still here. We're still trying to offset inflation every day. It's real. You can see it in consumables, you can see it in wages, you can see it in shipyard costs with steel up, labor inputs up. The wages obviously are we're feeling that.

Speaker 2

And then you've got other things like medical. We continue to see medical Inflation. So look with inflation, you need rates $12,000 to $13,000 a day on a 2 barge tow to justify building To get a double digit return, the bonus depreciation obviously impacts that too, right, because Bonus depreciation helps front end load the cash flow. So that's what we're seeing, not a lot of building. So that's kept Supply and demand tight and demand continues to go okay.

Speaker 2

We are mindful of The ever rising interest rates, I mean, it's pretty clear the Fed's trying to temp down the inflation I just talked about. So we're watching that carefully. But so far, our demand is holding up and supply is in check. So we remain constructive. I will tell you that there's some interim headwinds here in this quarter of the Illinois River.

Speaker 2

Some of you know on the call that the Illinois is closed now and it's scheduled to be closed the whole of the 3rd quarter. That's a little bit of a headwind. And there's been a couple of refinery fires and outages that have impacted things. But even with that, we're staying pretty darn busy And the market is very constructive right now for us.

Speaker 4

Okay. That's super helpful, David. I guess just as a quick follow-up for As we think about the balance sheet here and sort of capital allocation, what's the maybe the Is there an update in terms of the targeted level of debt that you're going to maybe try to run at, whether it's debt to EBITDA, debt to cap, Raj, and then I guess when we think about the buyback activity, dollars 34,000,000 I think in the second quarter, is that the kind of the run rate we should be thinking about here Given the level of cash flow you should be generating or on a quarterly basis or was that sort of front loaded? I mean, just kind of can you help us think about that?

Speaker 3

Yes. Sure, Jack. It's a good question. I think in the prepared comments, we talked about how we're looking at capital allocation. I mean, it's a balancing act.

Speaker 3

You saw we closed on an acquisition a couple of weeks ago, very value creating acquisition. We've got a balance between the projects that we have in front of us. Share buyback, of course, is a priority. And on the debt side, I think You could see us pay down a bit more debt, but to a lesser extent. So the way I would look at it is, as we go through the rest of the year, Barring any attractive projects, you should see us prioritize share repurchases.

Speaker 4

Okay. All right. Thank you very much for the time guys.

Speaker 5

Thanks Jack.

Operator

One moment for your next question. And your next question comes from the line of Ben Nolan with Stifel. Your line is now open.

Speaker 6

All right. Thanks. Good quarter, guys. Real quick, hopefully this doesn't count as a question. Dave, you mentioned you'd need barge rates of $12,000 to $13,000 a day for a 2 barge tow.

Speaker 6

Just to help contextualize that, where would you say is roughly The place that we're at right now.

Speaker 2

Yes. I got to be careful doing that, Ben, for competitive reasons. Obviously, our lawyers would fuss at me if they if I gave current rates. So I'm going to avoid that a little bit. I think you can there's some outside services that can give you an indication.

Speaker 2

We just can't for legal reasons signal Kind of pricings, but you can get the range. It's out there Pretty readily available. I'd rather not say. That's fine.

Speaker 6

The I wanted to circle back On to the acquisition you announced, I think it was 23 barges, it sounded like they were maybe 10,000 barrel barges Roughly. And David, you said right now it doesn't make sense to build new. Can you maybe talk through what you're seeing With respect to secondhand acquisitions, obviously prices are higher there too, but how are you thinking about the relative economics And attractiveness of acquiring secondhand equipment.

Speaker 2

Yes. No, this was It was kind of a one off deal. The great thing about this deal, it was all barges. As you've heard us discuss, We have the ability to leverage our infrastructure and work barges pretty readily with our existing Horsepower, so it's a very good deal for us in terms of that. I would tell you it's a significant discount To replacement value, as you would expect, it was mostly 10s, but there were a number of specialty barges in this 23 Barge acquisition, I think it was a total of 7 specialty barges.

Speaker 2

So you can't just Take the price and divide it, but it fit perfectly with us. I would say, it's a good 50% below replacement value in terms of cost. And we're really excited about it. It's kind of Our bread and butter, a drop in consolidating acquisition, it's right in our wheelhouse, so to speak.

Speaker 6

Okay. And then lastly for me, Raj, maybe, I think it was $240,000,000 of maintenance CapEx This year, obviously, that includes a decent amount of shipyard costs associated with the coastal fleet. Just for next year, Is it possible to maybe without giving specific guidance, but maybe frame in how I should think about what the run rate maintenance CapEx should look like?

Speaker 3

So Ben, this shipyard bubble is actually going to stretch into next year. So I think if you look at the maintenance CapEx on the inland side, I think we'll still see the bubble continue. On the coastal side, we should be done with all of the ballast water treatment, installations, etcetera, by The middle of the year. So the way I would describe it is inland is probably going to stretch into 2024 and Coastal is probably going With the ballast water, it should end by the middle of the year. So I don't know whether I've given you color that that's enough, That's what we're looking at right now.

Speaker 3

So I would say probably slightly lower, but not materially.

Speaker 6

Okay. And then just once that's done, how should I think about sort of what a normalized maintenance CapEx? I mean, is it, I don't know, 200 or 150 or I don't know.

Speaker 3

So without giving you numbers, I think what you could do is go back to What we used to do prior to all the shipyard bubble that we are talking about right now. Bear in mind though, those numbers need to be adjusted for inflation, right? So we've seen, to David's earlier point, considerable inflation there. I would say the $160,000,000 to $180,000,000 range could be reasonable.

Speaker 6

Yes. Perfect. All right. I appreciate it. Thank you.

Speaker 5

Thanks, Ben. Thanks, Ben.

Operator

One moment for your next question. And your next question comes from the line of Ken Hoexter with Bank of America. Your line is now open.

Speaker 7

Hey, this is Nathan dialing in for Ken Hoexter. Congratulations on the fantastic results. I'd like to just Dig a little deeper into the VARGE acquisition. I mean, we're currently in just A fantastic rate environment for the inland marine side of the business. I'm just curious on what you're seeing within the secondhand space and availability of these types of consolidation related opportunities?

Speaker 7

Thanks.

Speaker 2

Yes. There's not a lot of activity there. There's always a few Smaller deals out there that they could transact. We've seen a few in our space here recently, Couple smaller deals. Yes, I wouldn't say it's overly active, Nathan.

Speaker 2

It's more just kind of one off deals, sometimes larger companies Selling off their barge fleets. But look, price expectations are going to be going up, Right. I mean, it's a pretty good market when you look at a multiyear upcycle here. As we look at the maintenance bubble, The supply being relatively in check and demand pretty solid, I think price Expectations are higher. So it's always hard to forecast acquisitions.

Speaker 2

So I'm always cautious, But I would say there's probably going to be fewer than more going forward. That said, you never Yes. People want to sell at the top and people like us want to buy at the bottom. So We have to meet in the middle and it's hard to predict where that middle is.

Speaker 7

Yes. It's just curious what motivates operators To cut capacity here, I guess as my follow-up, on Distribution and Services, pretty material step up in operating margins. Hi. In your prepared remarks, I think the team referenced still some supply chain related constraints. Have we seen any type of improvement there?

Speaker 7

And maybe talk a little bit about what's driving this margin improvement sequentially? Thanks.

Speaker 2

Yes. Well, let me take the supply chain one first. It's improved on the margin, but there We talk about whack a mole sometimes. You get one part of the supply chain lined out and another part pops up. But I would tell you where we've been most affected is on electrical and electronic type parts.

Speaker 2

As you know, we're building a lot of electric frac equipment and power generation equipment. That supply chain has been choppy at best. It is improving at the margin, but it's still As Raj would say, hand to hand combat. That said, we're delivering in some backlog and so That's helping margins across the board. When we're not delivering equipment, it just it keeps margins in check.

Speaker 2

And as we start deliveries, margins tend to improve. And also we're just running better. I would tell you, we've taken a lot of costs out And now that things have run a little smoother, it helps the margin. I don't know, Raj, anything you want to add?

Speaker 3

Yes. I think to build on what David just said, Nathan, I think we've done a lot of work in terms of leading out Our operations on the KDS side, and we're starting to see the benefit of that. But we are cognizant of the supply chain issues, to David's If everything works out and deliveries get shipped, margins will be better, right? But then if you have a supply chain hiccup, Yes. We start to see some headwinds there.

Speaker 2

Yes. I mean, when you have to say you can't get certain parts that you've designed in And then all of a sudden you've got to switch parts. There's a whole new design effort and management of change process where you got Yes. It just eats up engineering hours, it eats up labor hours as you make supply chain changes. So The good news is that as the supply chain continues to improve, that should help us on a go forward basis.

Speaker 7

Great. That's helpful. Thank you.

Speaker 3

Thanks, Nate.

Operator

One moment for your next question. And your next question comes from the line of Greg Wieczynski with Reber Research. Your line is now open.

Speaker 5

Hey, David and Raj. I wanted to talk about the rate bogey here Sure. Potentially new orders kind of coming in being now at $12,000 or $13,000 per day. I think last time we talked about it, It's closer to $11,000 or $12,000 per day. So I just I want to understand, As we move closer to that point, does the way you think about it, does that $12,000,000 or $13,000 per day Contemplate further cost increases like we've seen?

Speaker 5

Or is there potential for that bogey to kind of continue Moving higher as we get closer and therefore maybe there's even more breathing room than people realize right now.

Speaker 2

Yes. No, it's been inflation. I mean, you've heard me rattle off all the inflation inputs, but Cost of compliance has gone up, whether it's with the Coast Guard or our customers' vetting standards. And then you get into Tier 4 engine packages on boats. They're more expensive.

Speaker 2

They're more expensive to operate. There's it's just a whole host of little things that keep adding up. There is a little bit forward looking To your question directly, there is a bit of forward looking inflation in that 12% to 13% number. Yes, you're right. I mean, 6 months or a year ago, we were $1,000 below when gave you that number.

Speaker 2

And I would just tell you that inflation has continued across the board in almost every category. We've seen even just on consumables, whether it's line, paint and things that we use on a regular basis, They've gone up and then of course everybody knows about food, rental cars. You can imagine With our 3000 or 4000 Mariners moving them every day, getting them to boats, Just the cost of moving around and putting them in hotels as they crew on or crew off or getting rental cars for them Or whatnot to facilitate getting them to where they need to be. Those costs have gone up and have continued to go. Now the good news is we're seeing a little bit of that Moderate now.

Speaker 2

I think we've seen rental car rates come down a bit, hotel rates not so much, but airfare It's come down a little bit, but not a lot on it. So it's I'm Not giving you a direct answer, but directionally, we do see more inflation and I put a little more of inflation In that number, but that's what's been driving the increase. I mean, you can look at steel prices alone and that tells you a lot.

Speaker 3

And I think, Greg, even you're going to have to add the cost of money has gone up, right? That should be in your calculus when you look at the rate increase That we're talking about right now.

Speaker 5

Yes, for sure. No, that's helpful. Thanks guys.

Speaker 3

I will say that the cost of eggs have come down, so that's a good story.

Speaker 5

Yes. Next, I wanted to revisit the idea of Vertical integration for you guys and I can see this from two angles and it might ramble a bit, but just want to flush them out here. So the first And kind of more practical would be to expand San Jac or acquire additional repair and maintenance yard So that you guys can maybe avoid longer lines over the next few years at yards for your own fleet and then potentially Benefit from the upcoming maintenance bubble that we see in the market. The more far fetched, I guess, would be to Think about acquiring or develop enough barge building capacity where you have some control or some say over the Why in the future if and when we do get to the place where new orders start to come into the market. I realized that the huge move and probably unlikely, but still I think worth acknowledging at least and seeing what your opinions are for that, but mostly contemplating Expanding repair and maintenance capacity for Kirby and kind of integrating vertically a little bit.

Speaker 5

How do you think about that?

Speaker 2

Yes. Well, as you're aware, we bought San Jac Shipyard out of bankruptcy a number of years ago. That has helped us. It doesn't cover and not even close to covering all our maintenance needs, but they do help us with maintenance. One of the exciting things about San Jac is we're just they're about to christen the first Diesel hybrid electric towboat in August, and that's really exciting.

Speaker 2

We're getting a lot of traction with that, A lot of customer interest in it. It's got a great carbon footprint. We've got the ability to use green dock power for it. So it could be in terms of emissions, almost emission free working in the Houston harbor areas Initially, so we're really excited about San Jac's enabled that. We have expanded San Jac a bit to help with barge maintenance As well as boat maintenance, but look, we've got, as you know, a lot of barges and a lot of boats.

Speaker 2

We need The whole ecosystem supporting us. And look, we've got great partners and they've been helpful, Always been a partner always been partners, I would say, but they've seen inflation. We're seeing Yes, the cost of maintenance go up with each shipyard, what you would expect. Now in terms of building new barges, I mean, Look, I mean, you know the players there. I mean, Arcosa is probably the most efficient and they build an excellent barge.

Speaker 2

Yes. Is that something we'd want to get into? No is the short answer. Again, we've got great partners. So we work pretty well as an ecosystem.

Speaker 2

And San Jac is different for us. It's really kind of A small part of our maintenance and also doing things like building Electric Hybrid Boats, which could be a good future for that, but it's not something that would be A massive investment or undertaking for us in the shipyard space.

Speaker 5

Okay. That makes sense. All right. Thanks, guys. Thanks,

Operator

And I see no further questions on the queue. This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Kirby Q2 2023
00:00 / 00:00
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