Kirby Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 30, 2024

There are 11 speakers on the call.

Operator

Good morning, and welcome to the Kirby Corporation 2024 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. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Mr. Curt Imitez, Kirby's VP of Investor Relations and Treasurer.

Speaker 1

Good morning and thank you for joining the Kirby Corporation 2024 Third Quarter Earnings Call. With me today are David Grzebinski, Kirby's Chief Executive Officer Christian O'Neil, Kirby's President and Chief Operating 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 factors can be found in Kirby's latest Form 10 ks 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. Before we begin, I would like to recognize our employees, especially our Florida based team members that were recently impacted by Hurricane Milton. The fast moving storm left considerable damage across Florida disrupting the lives of our employees in the area and many were left without power for several days. During the storm and the immediate recovery thereafter, they remain focused on safety and continued to meet the needs of our customer and our businesses as well as support each other during the event. I want to thank them for their exceptional efforts and resilience during this challenge.

Speaker 2

Now turning to earnings. Today, we announced 3rd quarter earnings per share of 1.55 dollars compared to 2,003 3rd quarter earnings per share of $1.05 Our 3rd quarter results reflected steady market fundamentals in both marine transportation and distribution and services. Even though we experienced some modest weather and navigational challenges for marine and continued supply challenges in distribution and services. These headwinds were offset by good execution in both marine distribution and services during the quarter that led to strong financial performance with total revenues up 9% and earnings per share up 48% year over year. We also generated over $130,000,000 of free cash flow in the quarter, which we used to further strengthen our balance sheet by paying down $70,000,000 in debt and to buy back $56,000,000 in stock.

Speaker 2

In inland marine transportation, our 3rd quarter results reflected further gains in pricing offset somewhat by the modest impact from poor navigational conditions due to weather and lock delays. From a demand standpoint, customer activity was steady with barge utilization rates running in the 90% range throughout the quarter. Spot prices increased in the lowtomidsingledigits sequentially and in the low double digit range year over year. Term contract prices also renewed up higher with high single digit increases versus a year ago. Overall, Q3 inland revenues increased 11% year over year and margins were in the low 20% range.

Speaker 2

In coastal, market fundamentals remain steady with our barge utilization levels running in the mid to high 90% range. During the quarter, strong customer demand and limited availability of large capacity vessels continued, which resulted in high 20% increases on term contract renewals year over year and average spot market rates that increased in the low double digit range year over year. Overall, 3rd quarter coastal revenues increased 23% year over year and the operating margin was in the mid teens. Turning to distribution and services. Demand was mixed across our end markets with growth in some areas offset by slowness or delays in other areas.

Speaker 2

In power generation, revenue grew 4% sequentially, but was down 6% year over year driven by supply delays. The pace of orders was strong adding to our backlog with several large project wins from backup power and other industrial customers as the need for power becomes more critical. In oil and gas, revenues were up 19% year over year and up 8% sequentially, driven by some growth in our e frac business that was partially offset by a very soft conventional oil and gas business. In our commercial and industrial market, revenues were up 4% year over year driven by steady demand in marine engine repair, partially offset by softness in on highway truck service and repair. In summary, our 3rd quarter results reflected ongoing strength in market fundamentals for both segments.

Speaker 2

The inland market is solid and we saw continued upward pricing. In coastal, industry wide supply demand dynamics remain very favorable, our barge utilization is strong and we are realizing real rate increases. Increased demand for power generation and distribution and services is mostly offsetting softness in oil and gas and other areas. I'll talk more about our outlook later, but first I'll turn the call over to Raj to discuss the Q3 segment results and balance sheet in detail.

Speaker 3

Thank you, David, and good morning, everyone. In the Q3 of 2024, Marine Transportation segment revenues were $486,000,000 and operating income was $99,000,000 with an operating margin around 21%. Compared to the Q3 of 2023, total marine revenues, inland and coastal combined increased $56,000,000 or 13% and operating income increased $36,000,000 or 57%. Total marine revenues were flat compared to the Q2 of 2024, while operating income increased 5%. Weather and lock delays modestly impacted operations as we experienced 3 hurricanes during the quarter.

Speaker 3

Although the hurricanes had limited direct impact on our operations, they did briefly slow customer activity during the quarter. Overall, we experienced a 33% year over year increase in delay days. These headwinds were offset by solid underlying customer demand, improved pricing and most importantly execution. Looking at the inland business in more detail. The inland business contributed approximately 81% of segment revenue.

Speaker 3

Average barge utilization was in the 90% range for the quarter, which was an improvement over the Q3 of 2023, but slightly lower than the Q2 of 2024. Long term inland marine transportation contracts, or those contracts with a term of 1 year or longer, contributed approximately 65% of revenue, with 62% from time charters and 38% from contracts of affreightment. As David mentioned, improved market conditions contributed to spot market rates increasing sequentially in the lowtomidsingledigits and in the low double digit range year over year. Term contracts that renewed during the Q3 were up on average in the high single digits compared to the prior year. Compared to the Q3 of 2023, inland revenues increased 11%, primarily due to higher term and spot contract pricing.

Speaker 3

Inland revenues were flat compared to the Q2 of 2024. Inland operating margins improved by around 3 50 basis points year over year and by 75 basis points sequentially driven by the impact of higher pricing and ongoing cost management, which helped blunt lingering inflationary pressures. Now moving to the coastal business. Coastal revenues increased 23% year over year due to high contract pricing and fewer shipyards. Overall, Coastal had an operating margin in the mid teens range resulting from higher pricing and shipyard timing.

Speaker 3

This will temporarily reverse in the 4th quarter given the higher number of shipyards we have on schedule. The coastal business represented 19% of revenues for the Marine Transportation segment. Over average, coastal barge utilization was in the mid to high 90% range, which is in line with both the Q3 of 2023 and the Q2 of 2024. During the quarter, the percentage of coastal revenue under term contracts was approximately 99%, of which approximately 99% were time charters. Average spot market rates were up in the low double digit range year over year.

Speaker 3

Renewals of term contract prices were higher in the high 20% range on average 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 Q3 as well as projections for 2024. This is included in our earnings call presentation posted on our website. At the end of the Q3, the inland fleet had 10 95 barges representing 24,200,000 barrels of capacity. On a net basis, we expect to end 2024 with a total of 1093 inland barges representing 24,200,000 barrels of capacity.

Speaker 3

Coastal marine is expected to remain unchanged for the year. Now I'll review the performance of the Distribution and Services segment. Total segment revenues for the Q3 of 2024 were $345,000,000 with an operating income of $30,000,000 and an operating margin of 8.8%. Compared to the Q3 of 2023, the Distribution and Services segment revenue increased by $10,000,000 or 3%, while operating income decreased by $3,000,000 or 8% due to mix. When compared to the Q2 of 2024, segment revenues increased by $6,000,000 or 2% and operating income increased by $1,000,000 or 3%.

Speaker 3

Moving to the segments in more detail. In Power Generation, our revenues tied to industrial end markets were up 16% sequentially and 61% year over year. We continue to see significant power generation orders resulting in higher backlog from backup power, data centers and other industrial applications. Our power generation revenues tied to the oil and gas space were down sequentially and year over year as product delays continued to contribute to lumpiness. Altogether, with the decline in oil and gas related power related to power generation, revenues were down 6% year over year and operating income was down 26% year over year with operating margins around 10%.

Speaker 3

Power Generation represented 32% of total segment revenues. On the Commercial and Industrial side, steady activity in Marine repair offset lower activity in other areas, particularly on highway truck service. As a result, commercial and industrial revenues were up 4% year over year. Operating income increased 15% year over year driven by favorable product mix and ongoing cost savings initiatives. Commercial and Industrial made up 47% of segment revenues and had operating margins in the high single digits.

Speaker 3

In the oil and gas market, we continue to see softness in conventional frac related equipment as lower rig counts and lower fracking demand tempered demand for new engines, transmissions and parts throughout the quarter. This softness is being partially offset by solid execution on backlog and new orders of e frac related equipment. Revenues in oil and gas were up 19% year over year and up 8% sequentially, while operating income was down 14% year over year, but up 166% sequentially as lower conventional work continues to get replaced by execution on e frac backlog. Oil and Gas represented 21% of segment revenue in the 3rd quarter and had operating margins in the mid to high single digits. Now I'll turn to the balance sheet.

Speaker 3

As of September 30, we had $67,000,000 of cash with total debt of around $979,000,000 and our debt to cap ratio improved to 22.9%. During the quarter, we had net cash flow from operating activities of around $207,000,000 3rd quarter cash flow from operations benefited from a working capital reduction of approximately $30,000,000 We continue to target unwinding more working capital in the Q4 and into 2025. We use cash flow and cash on hand to fund $76,000,000 of capital expenditures or CapEx, primarily related to maintenance of marine equipment. Free cash flow generation during the quarter was just over $130,000,000 And during the quarter, we used $56,000,000 to repurchase stock at an average price of $115 and reduced our debt by around $70,000,000 As of September 30, we had total available liquidity of approximately $570,000,000 For 2024, we remain on track to generate cash flow from operations of $600,000,000 to $700,000,000 driven by higher revenues and earnings. We still see some supply chain constraints, especially in the power generation space, posing some headwinds to managing working capital in the near term.

Speaker 3

Having said that, we are targeting to unwind more working capital as orders shift in 2024 and into 2025. With respect to CapEx, we expect capital spending to range between $325,000,000 to $355,000,000 for the year. This represents a slight increase from our prior range as we plan to make additional investments in our power generation rental business. Approximately $200,000,000 to $240,000,000 is associated with marine maintenance capital and improvements to existing inland and coastal marine equipment and facility improvements. Approximately $115,000,000 is associated with growth capital spending in both of our businesses.

Speaker 3

We expect the net result should continue to provide approximately $300,000,000 to $350,000,000 of free cash flow for the year. As always, we are committed to a balanced capital allocation approach and we'll use this cash flow to return capital to shareholders and continue to pursue long term value creating investment and acquisition opportunities. I will now turn the call back to David to discuss our Q4 outlook.

Speaker 2

Thank you, Raj. While we ended the quarter in a strong position in our businesses, the beginning of the Q4 so far was challenged by Hurricane Milton. The hurricane impacted our marine operations and temporarily shut down some of our distribution and services locations. Our teams worked hard through the challenging environment and we're pleased to have quickly returned to normal working conditions. For detail on the marine outlook, our overall outlook remains solid for the final quarter of the year, driven in large part by limited availability of equipment, which will be tempered by the onset of seasonal weather, a bit of softness in the refining market and some higher maintenance levels.

Speaker 2

In inland, we continue to anticipate positive market dynamics due to limited new barge construction. Demand is solid, but we have seen a little softening in the refining sector early in the quarter. Nonetheless, with these solid market fundamentals, we expect our barge utilization rates to be around the 90% range throughout the remainder of the year. We also expect continued improvement in term contract pricing as renewals occur throughout the final quarter of the year. We continue to see inflationary pressures in some areas and there is an acute Mariner shortage in the industry driving up labor costs.

Speaker 2

These pressures along with the increasing cost of equipment should continue to put upward pressure on prices. That said, we expect inland revenues will be flat to slightly down in the 4th quarter due to normal seasonality and consequently operating margins are expected to be down as compared to the 3rd quarter. In coastal, market conditions remain very favorable and supply and demand are imbalanced across the industry fleet. Steady customer demand is expected in the 4th quarter with our barge utilization in the mid-ninety percent range. We expect margins in the 4th quarter to be in the mid to high single digits given a number of planned shipyards in the Q4.

Speaker 2

Postal revenues are expected to be down in the mid single digits sequentially because of the shipyards. In the Distribution and Services segment, we see near term uncertainty from supply issues, customers deferring maintenance and lower overall levels of activity in the oil and gas sector. However, longer term, we expect incremental demand for products, parts and services in oil and gas as rates of investment improve from what feels like a close to the bottom market in oil and gas. In commercial and industrial, the demand outlook in marine repair remains steady, while on highway service and repair is somewhat weak in the current environment. Similar to oil and gas, the on highway market feels close to bottoming from the trucking recession that we've experienced recently.

Speaker 2

In power generation, we anticipate continued strong growth in orders as data center demand and the need for backup power is very strong. We do anticipate extended lead times for certain OEM products to continue contributing to volatile delivery schedule of new products in the Q4 and in 2025. Overall, the company expects the segment revenues to be down in the mid single digits sequentially with operating margins in the mid to high single digits, but lower than the Q3. To conclude, overall solid execution and good market conditions led to a strong quarter for us and we have a favorable outlook as we look into this quarter and next year. A lack of meaningful new build of equipment in marine has supply in check and we continue to receive new orders for power generation equipment as we work through supply issues.

Speaker 2

Our balance sheet is strong and we expect to generate significant cash flow this quarter and in 2025. We see favorable fundamentals continuing and expect our businesses will produce solid financial results as we move through the remainder of this year and into the next few years. 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.

Speaker 2

Christian, Raj and I are now ready to take questions.

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from Daniel Imbro at Stephens Inc. Your line is open.

Speaker 4

Yes. Hey, good morning, guys. Thanks for taking our questions and congrats on the quarter.

Speaker 2

Hey, thanks, Daniel.

Speaker 4

I want to start on the inland side. On pricing, it looks like contract rates increased up high singles, that's up from mid singles in 2Q. In the slide, David, it looks like you took down your net fleet exercise at year end expectations. Can you just provide, maybe given that backdrop, an update on the spot price environment here in the 4Q? And from your vantage point, how do you feel about bid season and contract renewals coming into year end and then maybe into 2025?

Speaker 2

Sure. Well, let me break that into some pieces and Christian will chime in as well. Yes, in our barge count, I think we're going from 1095 on the inland down to 1093. That's just some normal retirements as some barges hit that 35 year mark in terms of age, which is actually part of what the industry is going to be doing is continuing to retire barges, which is good because there's not a lot of new supply coming on in the market. And look, we're fundamentally a supply and demand business in supplies and check.

Speaker 2

We've seen the cost of barges go up even this last quarter. We're hearing $4,500,000 for a new 30,000 barrel clean barge. So supply has been in check and that's a good thing. I think year to date through the Q3, there's about 22 barges that have been delivered. I'm not sure how many will be delivered in the Q4, but it's not going to be an enormous number at all.

Speaker 2

And then with retirements, like you're seeing us going to retire some barges. I think the industry is going to retire a fair number of barges. So we may actually see from a supply standpoint a net contraction in the number of barges out there. So when you look at that supply picture, it's pretty strong for us and the industry. We have seen a little pullback in refiners here in the last few weeks, last month or so, and Christian can give you some more color on that.

Speaker 2

But that's a little bit on the demand side. There are some bright spots in the demand side. But when you put supply and demand together, it's still in a good spot. We as you saw, our pricing was up sequentially on spot 3% to 5%. And on year over year basis, spot prices were up 10% to 12%.

Speaker 2

Term contracts renewed in the 6% to 9% range in the 4th in the 3rd quarter. And we're set up for a good renewal cycle in the Q4 and Christian can give you some more color on that. So we're very constructive looking forward in a more of the same here. I'll turn it over to Krish to give you a little more color on the demand side and what he's seeing and feeling on the day to day side.

Speaker 5

Sure. Thank you, David. Hey, good morning, Daniel. I think what you see around Q4 spot pricing, of course, we're early into the quarter, is a lot of the normal seasonality. Peak driving season winds down around Labor Day, refineries get into turnaround season, start doing their maintenance, can affect some of the volumes.

Speaker 5

However, what usually offsets that in Q4 is the winter weather conditions. We haven't had a real big dose of that yet of fog and winter cold fronts, but that will help retighten barge utility across the market as a whole. Interestingly in Q4, we're also seeing a little better uptick in our chemical business. It's not a great amount, but it's something interesting to us to maybe offset some of the maintenance being done at the larger finding companies. To David's point and your question around terminals, terminals in Q4 are going very well.

Speaker 5

Our major customers are really happy. Our performance has been really at a very high level. They're very pleased. They're rewarding us for that service. So Q4 term renewals are going nicely.

Speaker 5

Now a lot of that benefit, we won't really see until 2025, but I think I heard you ask at the end of the question about that. So I wanted to touch on that as well.

Speaker 4

Yes. No, really appreciate all that color. And then maybe to follow-up on it. Dave, in the past, you've talked about given just the inland backdrop, at least a few 100 basis points of margin improvement year over year, I think for this year and next year. You did that again in the Q3.

Speaker 4

I guess as you look forward and given that supply demand backdrop, where can margins get to during this cycle as you look forward? And if shipbuilding remains lower, rates keep going higher, can you just walk through the puts and takes and kind of where you see inland margin getting to in the coming years?

Speaker 2

Sure, sure. Yes, let me start by saying we continue to fight inflation. But that said, we are getting real price increases, not just nominal price increases. When you look at 2023 to 20 24 full year average, and we like looking at it on a full year average basis because of the seasonality, the weather that Christian just talked about, some of the demand seasonality from some of our end customers. We like to look at it year over year.

Speaker 2

And you heard in Raj's prepared comments, sequentially, our margins were up 75 basis points 2nd quarter to 3rd quarter in inland. And for the full year, year over year, we were up about 3 50 basis points is what he said. So we had said for 2024 versus 2023, we'd be up 300 to 400 basis points. We're smack dab in the middle of that based on the number Raj gave. Looking into 2025, I would say we'll be up 200 to 300 basis points in that range.

Speaker 2

There's a lot going on that can affect that as you would expect inflation being one of them. Labor rates, we've been through pretty acute labor market in the marine sector And there's been shortages of mariners across the board, across the whole industry, both inland and coastal. So we've been fighting that. You heard the new build prices for barges, just all the inputs are up. And I know that you see the rhetoric in the political debates, but inflation is real.

Speaker 2

We're still seeing it. Even with steel prices coming down a little bit, all the other input prices are up. So you put all that in there, we still think probably 200 to 300 basis points for inland next year. I think peak margins to your base question, I'd be very disappointed if we don't go above our last cycle peak, which was about I think we hit 1 quarter we were 27% -ish maybe 27.5 percent. I'd be disappointed if we don't go right through that this cycle.

Speaker 2

We've got several more years of this based on the supply and demand picture. So we're really constructive. Christian and I are pinching ourselves about how good this feels.

Speaker 4

Great. Couple more years is helpful there. Appreciate the color and best of luck guys.

Speaker 2

Thank you. Thanks, Daniel.

Operator

Our next question comes from Greg Lewis at BTIG.

Speaker 6

Yes. Hi, thank you and good morning everybody and thanks for taking my questions. I guess if we look back like 18, 24 months ago, David, you were very focused on, hey, we're going to be the market is going to be the fleet on the inland side was going to be more spotty than short term than term. As we look at where we are today in terms of the spot term mix, I imagine that's been improved. I didn't hear anything in the prepared remarks.

Speaker 6

But as we look out over the next couple of quarters, how are you thinking about the mix of spot term on the inland side?

Speaker 2

Yes. No, we I'm surprised we didn't give that number, but it's about 65% term, 35% spot in the inland side. Yes, we're comfortable with it there because we believe spot pricing and all pricing should continue to go up for the next couple of years at least. And again, that gets back to the supply demand picture. When you think about building new equipment and a 30,000 barrel barge at $4,500,000 We need prices up at least 30% from where they are.

Speaker 2

So we're very constructive about it. Could you see term get up to 70% on average next year? Maybe. We'll see. We're comfortable with where it is because again, we have this view that supply and demand is going to stay really good for the next several years.

Speaker 6

Okay, great. And then I had a I did want to ask about the oil price. Clearly, it's volatile realizing that fuel is largely a pass through for you. But I guess what I'm wondering is like how should we be thinking about the impact on and whether it's a little bit on the margin side or how should we be thinking about in an environment where I don't know, let's frame it both ways. If we look at where we are on the oil price today, maybe if it's up $15 up or $15 down, what type of impact do you think that maybe has on your ability around pricing and really just on margins?

Speaker 2

Yes. I mean, you hit it on the nail on the head. Fuel is a pass through for us. We work really hard with our customers. We don't want to make money on fuel and we don't want to lose money on fuel.

Speaker 2

Most of our customers are better able to handle that fuel risk than we are anyway. So from a direct impact, it's not much. I think the higher the price deck for oil usually is better for our chemical customers and our refiners. So on the margin, the higher the oil price probably the better for our industry. The lower it does stimulate some demand and what we really do care about is volumes.

Speaker 2

So by and large, it's a mix. But I would say it's biased to the upward side. The higher it is usually the better for us. Look, you want your customers making money. They're a lot nicer to deal with when they're making good money.

Speaker 2

So that not that they're not nice to deal with any day, but you understand. Now that said, look, on the D and S side, the oilfield even at this price deck of $70 for WTI $73 for Brent, Our D and S oil and gas business, the conventional oil and gas business is minimal. It's almost non existent. For the first time in probably 2 decades, we will not deliver this year a conventional frac system. All of our orders are electric frac.

Speaker 2

And I mean, you can see it from some of our customers announcing that impairments as they write off some of their old conventional frac equipment. Our base oil and gas business is really low, very, very weak. Now have we bottomed? I don't know. We're just very thankful that we have a great e frac offering.

Speaker 2

And that is making great gains and everybody seems focused on e frac just because of the inherent efficiency. And we're happy to have that. So to your base question, if oil and gas goes up or down, I still think e frac will be good. Until the bulk of the pressure pumping equipment out there is e frac, I think we'll continue to grow e frac because it's just that much more efficient for both our customers and the E and P customers themselves. So that's a long winded answer.

Speaker 2

I hope I got to what you want. That was great. Super helpful. Thanks guys. Have a great day.

Speaker 2

Thanks Greg. Thanks Greg.

Operator

Our next question comes from Ben Nolan at Stifel.

Speaker 7

Yes, thanks.

Speaker 4

Hey, Ben.

Speaker 7

Hey, guys. I wanted to hit on the electrification business a little bit. There's obviously the supply chain issues that you talked about, but it sounds like you're continuing to grow the backlog. First, could you maybe frame that in like, I don't know, maybe what is the backlog or how much did it grow or something like that in the Q3? And is it possible for you to maybe frame in how you think about what the TAM or whatever the what you think is doable for that business in the next, I don't know, 3, 5 years something like that?

Speaker 2

Yes, sure. I'll try and give you some color. We're a little reticent to get to publish backlog numbers every quarter. But first, the well worn excuse of blaming things on supply chain, I hate doing that, but frankly, you've seen it with the big engines out there are right now, if you ordered engines right now from any of the major engine suppliers, it's 26 deliveries. So we've been struggling with that.

Speaker 2

It's delayed some of our data center deliveries. That said, you'll start to see some data center deliveries in the late Q1 of 2025 and then into the Q2. So we're there's a big pig in the Python and we continue to grow our backlog. And we'll start to see some deliveries next year and it will become more meaningful. That said, the backlog is in I want to just throw out a number, it's 100 of 1,000,000 of dollars and that's up from kind of $50,000,000 a few years ago.

Speaker 2

So we continue to have a greater than a one book to bill. It's continuing to go well. We're getting some new customers in the data center world. I would also tell you that our rental business is doing really well. Christian, you want to share some color on just what we're seeing on rental?

Speaker 2

Yes.

Speaker 5

I mean, obviously, it was very busy hurricane season for us. And so we were chasing storms, helping the box stores keep running and the rental backup power business was quite strong. So again, we don't really like hurricanes, but as David's commented before, we have a small slight hedge. So the rental business had a good quarter on the back of a heavy storm season.

Speaker 2

Yes. And Ben, we're investing in that. You may have seen our CapEx tick up a little here at the end of the year and that's we're adding to our rental fleet. Frankly, as we look at the demand for power, it continues to go up. And just to be clear, when we do backup power, we're talking big industrial scale.

Speaker 2

We're not talking the smaller residential 25 kw units. We're talking 500 kw to 2 meg type thing. So that business continues to grow. We're going to continue to invest in it with our normal capital discipline.

Speaker 7

Right. Okay. That's helpful. And if I could go back to the marine side, maybe similar but not exactly like Greg's question. One of the things that we've seen lately and Christian you sort of touched on this earlier is that the crack spread of the refineries have narrowed.

Speaker 7

And I don't know if it's seasonality or what. But is there a connection between the crack spreads in your business? Like do you want big crack spreads and that incentivizes the movement of freight? Or is it not as direct as that?

Speaker 5

I think I'll answer it this simply. When crack spreads are good, our major refining customers are extremely happy. They are trying to throughput as much as they possibly can. Not just the big global integrated refiners, but even some of the smaller regional refiners, we tend to see their throughputs go up as they supply the market. So generally, high crack spreads have historically been a very good thing for us as well as the ability to move our rates in a good crack spread environment.

Speaker 5

That said, we care a lot about just refinery utilization. When you're on the supply side of taking feedstocks in or moving finished product out, What we really probably care about at the end of the day is the utilization of refineries and how much the liquids are transacting. They are all connected, but we do typically enjoy high crack spread environments. I think you're coming off some pretty healthy on highs in the crack spread world. And today, I think historical crack if you look at the crack spread today, even though it's down, it's still good versus historical crack spreads.

Speaker 7

Right. I appreciate it. Thanks.

Speaker 5

And keep in mind, chemicals the chemical market is about 60% of our inland revenues driven by the chemical manufacturers. So while we like high crack spreads, we're paying very close attention to GDP, we're paying very close attention to the economy. Those are the things that drive the chemical margins. And again, not spiking a football, we do see chemicals a little better in Q4 and we'll continue to watch that closely. What we are hearing from our chemical customers is the strength of their U.

Speaker 5

S. Operations versus their European assets or Asian assets or Middle Eastern assets. And so I think the thematic the theme we've always talked about is the economic development in the Gulf Coast with a good workforce and a stable workforce and the 1,000,000,000 of dollars have been invested in the chemical manufacturing industry in the Gulf of Mexico. We are a direct beneficiary of that. And what we're hearing consistently from our chemical customers is that their U.

Speaker 5

S. Assets are outperforming their global assets. And so, we think we're beginning to see a little bit of volumes come back there that feels pretty good.

Speaker 7

All right. Well, excellent. I appreciate the thorough answer.

Speaker 5

Yes, sir.

Speaker 2

Thanks, Ben.

Operator

Our next question comes from Greg Wasikovsky at Weber Research and Advisory.

Speaker 8

Hey, guys. Good morning. How are you doing?

Speaker 2

Hey, good morning, Greg.

Speaker 8

You probably get this question a lot, but just want to touch on the free cash flow. Obviously, there's a lot of it. Other than share buybacks, is there anywhere to deploy that cash within the business itself? Any specific direct growth opportunities out there in inland coastal or D and S?

Speaker 3

Hey, good morning, Greg. Raj here. Hey, yes, we see a lot of good free cash flow generation. I mean this year is going to be very strong, dollars 300,000,000 $350,000,000 of free cash flow. You've seen us buy back stock.

Speaker 3

I mean year to date, we've done about 53% of our free cash flow has been allocated to stock buyback. We've always balanced that with investments. David mentioned our investments into the power generation rental business, very strong returns. We're very disciplined when we look at ROIC. We've got a very good framework that allows us to direct our investment decisions.

Speaker 3

So you should see us continue to balance that. You've also seen in this quarter, we paid down some relatively higher cost debt that puts us in a very strong position from a balance sheet perspective. So as we've always said, we look at inland investments, we look at stuff that we want to do around power generation with in the KDS side, on the distribution and service side, you should see us do some tuck in type investments that we've always talked about. So overall, it's hard to predict. It's hard to predict acquisitions, but we like our stock.

Speaker 3

We've been doing stock buybacks. I think you should see us continue to do that going forward.

Speaker 2

Yes. I would also add, Greg, just more from a longer term standpoint, our CapEx is elevated this year and a little bit last year and maybe a little bit next year because of the maintenance bubble that we've talked about both in inland and offshore. As that tempers, you'll see our free cash flow go up. We are always open to acquisitions, but as Raj said quite plainly, we have a very disciplined approach. It's always about being able to earn our return on invested capital.

Speaker 2

We would love to do inland acquisition. That's our bread and butter. We're quite good at integrating those and adding customer service when we do it. So that's always our preference. But given inland market is pretty good right now, we getting a meaningful transaction at a reasonable price is probably lower.

Speaker 2

You may see us do a little more in power generation, but it's not going to be company bedding type stuff. It would be more a little vertical integration here or there with some bolt ons. We're always open to it. We're always looking at it. We probably look at a dozen acquisitions a quarter, but you don't see us doing a lot because we do keep that discipline.

Speaker 2

But look, the good news is we've got the cash flow to do the right things. And in the absence of good investments, we'll buy the best barge company that we know of out there, which is Kirby stock.

Speaker 8

Got it. Awesome. Thanks, guys. And then speaking of the maintenance cycle, David, I'm curious, where is the market right now in the barge maintenance cycle? And assuming that it hasn't reached peak yet and it's presumably next year, what are you expecting in terms of market impact when

Speaker 5

it comes to I'm going

Speaker 2

to give that to Christian because Christian lives it every day.

Speaker 5

Yes. Thanks, Greg. Regarding the maintenance bubble that we referenced, over the 2024 and 2025, you'll see 47% of the inland tank barge industry has to go through its COI renewal, certificate of inspection. And so 2024 probably really the peak of that, but 2025 is not far behind. So both years have very heavy maintenance cycles for the industry.

Speaker 5

And again, it's according to my math, it's about 47% of the tank barges will have to go through their COI. So the maintenance bubble is still there. We're still the industry is still progressing through it and it will continue to be a factor for supply and demand.

Speaker 8

Got it. All right. Thanks a lot guys. Take care.

Speaker 2

Thanks.

Operator

Our next question comes from Ken Hoexter at Bank of America.

Speaker 9

Hey, great. Good morning. And I agree, Dave, with your answer on a few more years of the few hundred basis points. Hopefully, that continues on the inland. Jumping over to Coastal, given the move to the mid teens margins, was that with the capacity pulled out?

Speaker 9

I know, Christian, you were just talking about the huge run up in the surveys. I think you were just talking about the inland side there, right? Because we've got a huge also pull out for coastal, right? And so given the move to mid teens, where should we see that one run to Dave or Chris?

Speaker 2

Yes. I'll start and Krish can add some color. Look, on the offshore side, there's a 30 month shipyard cycle. So every 30 months you got to bring these units in for pretty expensive shipyards. And so we're going to see it starting in the Q4 and carrying over into the Q1 a little bit next year for our coastal fleet.

Speaker 2

So that's going to impact the Q4 quite a bit in terms of sequential margins. That said, if you look at year over year, full year average, we think coastal margin should be up 300 basis points in 2025 versus 2024 on a full year average. Christian, you can add some color what you're seeing in that market and also the newbuild side of it?

Speaker 5

Yes. I think I'll begin with the context that our offshore fleet is 100% termed up today as we sit on this conference call. The supply and demand dynamic is very good. We see no new construction. If a player were to want to add some tonnage to the market, it would not deliver until 2028.

Speaker 5

It's a very positive dynamic. Our rates at the level of rate that we're able to gain here in recent quarters, year over year, our term business is up in the realm of 25% to 28% on term rate increases. And in the spot, year over year, we've pushed rates 11% to 13%. So we see a lot of momentum, a lot of demand and not a lot of supply. So the coastal fundamentals are set up very nicely for a long run, I think.

Speaker 2

Yes. Christian was telling me earlier, if somebody wanted to order a new unit, you wouldn't see it to what 28?

Speaker 5

Yes, sir. 2028.

Speaker 2

Yes. So we're really excited about Coastal. As you know, Ken, you've followed us for a long time. It was pretty brutal on us for a number of years and it's good to start getting back and start earning that capital back that we deployed.

Speaker 9

I'm just not used to seeing the double digit storm back from chasing partners. But I'm sorry, what was the comment there about Q4 on margins at Coastal? We do see the seasonal pullback or

Speaker 2

Yes, yes. Fairly heavy pullback. We were mid teens in the Q3. We'll probably be mid to high single digits in the Q4 because some of these big units they get I can't give you the dollar per day number, but it's tens of 20s of 1,000 of dollars and you get a few of those big units in. You still have all the costs of we keep the crews, the crews help out in the maintenance process.

Speaker 2

We still have a bunch of supplies. We do. We have some maintenance expense that gets expensed, not capitalized. So when you put all that together, that pulls down the margins on when especially when you have some of these big units hit the shipyard. So again, we focus on the full year average and Ken, you're going to see that continue to go up.

Speaker 2

It's a very tight market right now. I think any given day we're high 90s in terms of

Speaker 9

utility. No, I only asked because I had 6%. It sounds like it's even better than that part of pullback. It sounds like you were saying even higher. So Christian, is there a war, a bet between inland and coastal on who gets to 25%, 30% first?

Speaker 5

There's always a healthy level of competition around here. It gets us out of bed in the morning.

Speaker 9

All right. So on the inland contracts accelerated back to high single digit from mid single digit. I guess, thoughts heading into the 4Q season and I know you talked a little bit about this, the state of refined demand tariffs. Thinking about what goes on here or given the move to maybe if we get the change of administration more drilling, does that enhance lower net gas prices and maybe even boost production going forward?

Speaker 2

Yes. I think lower natural gas prices would boost chemical production or certainly make it even better for our U. S. Based our global chemical customers with big U. S.

Speaker 2

Facilities. Natural gas is a key input. So the lower natural gas price is good. It's also good for our e frac business. But lower oil prices, as we talked a little bit earlier, that the price deck, particularly with crack spreads and stuff gets a little wonky the higher the or the lower the oil price goes.

Speaker 2

So it's hard to say, but natural gas is probably the largest input to the chemical space. And so that could be a positive. And it's certainly a big input for our e frac business. And by the way, on power gen, we're building a lot of gas, what we call prime power. So that's people that will take our natural gas power equipment and make prime power to put in the grid.

Speaker 2

So we're seeing that grow. We picked up an order from somebody that's doing that just this quarter. So it's interesting and lower natural gas prices helps that whole model in terms of prime power and using our natural gas reship product to generate it.

Speaker 9

And I'm sorry, your thoughts into the bid season?

Speaker 2

I'm sorry, the bid? 4th quarter renewals? Yes.

Speaker 9

Yes.

Speaker 2

I'll let Christian talk about it, but we can't give you the price that we're expecting, but it should be pretty good.

Speaker 5

Yes. No, we're again, we're excited about our Q4 term renewals. Again, you'll see a lot of that benefit next year, but they're going very well. We've had a really good year operationally. The team has executed a very high level.

Speaker 5

Our safety record is incredible. And as of today, our customers are very, very happy and we're being rewarded in Q4 for our hard work. And again, we're positive about it.

Speaker 9

High single digits, low double digits, mid teens, 20%.

Speaker 2

Yes, we're in favor of all that. Guys, appreciate it. It'll be good, Ken. It'll be good. Okay.

Speaker 9

Thanks for the time guys. Appreciate it.

Speaker 2

Thank you. Thanks, Ken.

Operator

Our last question comes from Scott Group at Wolfe Research.

Speaker 10

Hey, thanks. Good morning, guys. Good morning, Scott.

Speaker 3

Good morning,

Speaker 10

Scott. I get we've got weather delays and maintenance and all that. But when I look just like tonnage is inland tonnage is down 15% versus 2 years ago, I think you're talking about revenue down a little bit sequentially. How much of this, if any, would you say is a demand issue?

Speaker 2

Yes. I'll let Chris answer that.

Speaker 9

Yes.

Speaker 5

So you're thinking about ton miles in the past periods you're talking about versus today. There's been some sort of fundamental demand change in some trade lanes. One is the crude oil barrel coming out of the Utica, which is up the Ohio River, quite a distance, a lot of ton miles. That Utica barrel tends to come and go. A lot of that shipping has slowed down in the crude oil complex and so that impacts our ton miles and the industry's ton miles.

Speaker 5

The other piece of the business that can whip around ton miles is our fertilizer business. That's business large volume business that's loaded in the Gulf of Mexico and taken up into the Heartland, big toes, big volumes. And the fertilizer business has been a very quiet in Q3. We're starting to see resurgence in Q4, but those are mainly the two items that have whipped around the ton miles that I think you're referring to. Again, we've absorbed those barges in other parts of the business, fertilizer is coming back nicely.

Speaker 5

So I think those are probably the historical trends you see are most likely long haul crude oil and long haul fertilizer.

Speaker 9

Okay.

Speaker 10

And then can you just give us an update where are we on sort of your perspective industry orders build activity on the inland side? Would you think we see more or less new construction 2025 relative to 2024?

Speaker 5

Well, the order book we see pretty clearly in 2024, I think David referenced earlier, it's about 40 some odd barges of which only 20 some odd have been delivered. Hard to see deeply into the order book next year, but we really don't see anything different. I'll give you a personal observation, haven't been around the business for 27 years now. I will tell you the status of the shipyard industry, those shipyards that are focused and have the ability to build a good tank barge is diminished versus some of our past cycles. A lot of that has been driven by still emerging in a way from the COVID realities, the inflationary issues around labor in particular as well as other inputs in the shipyard.

Speaker 5

And so I think there's also a large number of hopper barges being built to replace in the dry cargo side of the business. Those hopper barges compete for the capacity for new construction with tank barges. I think we see a if you look in the windshield, I don't see a whole lot of new construction. I think we see consistent replacement construction. I don't think I see anybody speculatively building into the market.

Speaker 5

And I'll give you a really interesting anecdote. We price out barges periodically. And interestingly, in our most recent set of conversations, the price of an inland 30,006 pound tank barge went up from the prior quarter. So this was a $4,500,000 quote for a clean 36 pound barge. Even though the price of steel, plate steel has abated a little bit, which is something we watch very closely that is tied to tank barge pricing.

Speaker 5

The shipyard commented that due to labor, due to all the other inputs, due to the inflationary price of paint, due to all of those other factors that despite a slight change in abatement in the price of steel, the price of barge actually went up. So I think you'll continue to see discipline around tank barge new construction. Know our shareholders probably wouldn't want us building barges at $4,500,000 in order to get a return on those. You're going to have to have $13,000,000 $14,000 a day tows. The market is not there yet.

Speaker 5

So I think we see just some rational behavior around it and the shipyards still really are constrained.

Speaker 10

Okay. And then just lastly if I can, you made a comment earlier, you'd be disappointed this cycle if inland didn't get to a 27% margin, I think you said. What's the answer, you'd be disappointed if coastal didn't get to a blank?

Speaker 2

Yes. I'd say it's 20%. I think our prior peak was about 15%, 16%, which we've already bumped up against. So

Speaker 3

we keep

Speaker 2

there was a little question earlier about the competition between inland and coastal. And it does exist in the coastal guys, are pushing hard. I think both Christian and I'd be disappointed if we don't cross 20% in the coastal margins. It's a good time for them. But you do know that there's a little bit of a difference in the model.

Speaker 2

Coastal, the barge and the towboat or the tugboat are a pair, whereas in inland, you can push multiple barges with a single towboat. So there's a little advantage that inland has. But that said, our coastal guys are out there pushing hard.

Speaker 10

Thank you for the time guys.

Speaker 2

Thanks Scott.

Speaker 5

Appreciate it.

Operator

This concludes the question and answer session. I would now like to turn it back to Kurt Niemits for closing remarks.

Speaker 1

Thank you, Jacinda and thank you everyone for joining us today. As always if there's any follow-up questions, reach out to me directly throughout the day.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Kirby Q3 2024
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