Simmons First National Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 1, 2024

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Kirby Corporation 2023 4th 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. Kurt Nimitz, Kirby's VP of Investor Relations and Treasurer. Please go ahead.

Speaker 1

Good morning and thank you for joining the Kirby Corporation 2023 4th Quarter Earnings Call. With me today are David Grzyvinsky, Kirby's President and Chief Executive Officer and Raj Kumar, Kirby's Executive Vice President and Chief Financial Officer. The 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 latest Form 10 ks filing and in our other filings made with the SEC from time to time. With that, I will now turn the call over to David.

Speaker 2

Thank you, Kurt, and good morning, everyone. Earlier today, we announced 4th quarter revenue of 799,000,000 and earnings per share of $1.04 This compares to 2022 Q4 revenue of $730,000,000 and earnings per share of $0.62 During the Q4, continued strong fundamentals in both our businesses resulted in significant year over year growth in our revenue and earnings. In Marine Transportation, pricing on spot and term contracts benefited from strong demand and limited availability of barges, while the onset of winter weather conditions proved to be a headwind to our efficiency in the quarter. Distribution and services delivered higher revenues sequentially, But margins were down slightly from the 3rd quarter as a result of lower demand in our power rental business and typical seasonal impact. We ended the year on a good note and we anticipate strong growth in 2024.

Speaker 2

In inland marine, we continue to experience strong demand and high barge utilization with our barge utilization rates in the low 90% range. Spot market prices continue to push higher and we were up in the low to mid single digits sequentially and in the mid teens year over year. Pricing increases on term contract renewals were up year over year on average in the high single digits during the quarter. While the efficiency of our operations was challenged during the quarter With the later days up 86% sequentially, strong pricing and utilization mostly offset this, allowing for inland marine margins to remain flat sequentially with operating margins remaining in the high teens on average. In our coastal marine business, we saw consistent customer demand during the Q4 that helped maintain barge utilization in the lowtomid90 percent range.

Speaker 2

Overall, coastal marine revenues were up 4% sequentially as improved spot and term contract pricing more than offset planned maintenance and ballast water treatment installations, which reduced equipment availability. As a result, the coastal business was able to finish the year with operating margins in the low single digit for the quarter. In distribution and services, demand in the 4th quarter remained steady throughout much of the segment, marked by a sequential increase in revenues, increases in new orders and steady backlog. In oil and gas, revenues and operating income were up and year over year as solid execution on our backlog and deliveries were partially offset by lingering supply chain delays. In Commercial and Industrial, while revenues were up sequentially, the seasonal fall off in our power rentals business led to a sequential decline in operating income.

Speaker 2

Despite supply chain issues and seasonal weaknesses Weakness. The business segment overall concluded the year very strong. Overall segment revenues were up 13% year over year and Operating margins were in the high single digits. In summary, our 4th quarter results reflected on growing strength in market conditions for both segments. Despite the temporary headwinds of seasonal winter weather in the quarter, The inland market is strong and rates continue to push higher, helping to offset lingering inflation.

Speaker 2

While our coastal revenue was challenged near term by planned shipyards, industry wide supply and demand dynamics remain very favorable. Our 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 stable. I'll talk more about our 2024 outlook later.

Speaker 2

But first, I'll turn the call over to Raj to discuss the 4th quarter segment results and balance sheet in more detail.

Speaker 3

Thank you, David, and good morning, everyone. In the Q4 of 2023, Marine Transportation segment revenues were $453,000,000 and operating income was $68,000,000 with an operating margin of 15%. Compared to the Q4 of 2022, total marine revenues increased by $30,000,000 or 7% and operating income increased $21,000,000 or 46%. Increased pricing and utilization in the inland market were partially offset by weather related inefficiencies and coastal shipyards. Compared to the Q3 of 2023, Total marine revenues, inland and coastal together increased 5%, while operating income increased by 7%.

Speaker 3

Now looking at 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. Long term inland marine transportation contracts, Although contracts with a term of 1 year or longer contributed approximately 60% of revenue with 62% from time charters and 38% from contracts of affreightment. Tight market conditions contributed to spot market rates increasing sequentially in the lowtomidsingledigitsandinthemidteensrangeyear over year.

Speaker 3

Term contracts that renewed during the 4th quarter were on average up in the high single digits compared to the prior year. Compared to the Q4 of 2022, Inland revenues increased by 11%, primarily due to highest term and spot contract pricing. Inland revenues were up 6% compared to the Q3 of 2023 due to higher pricing and the reopening of the Illinois River Locks. While inland operating margins remained on average in the high teens, We did exit a 20% in the final month of the quarter. Now moving to the Coastal business.

Speaker 3

Coastal revenues decreased 7% year over year and were up 4% sequentially as downtime from planned shipyards was partially offset by higher contract pricing. Overall, coastal had low single digit operating margins as improved pricing was partially offset by increased shipyard pace. The Coastal business represented 18% of revenues for the Marine Transportation segment. Average Coastal barge utilization was in the mid-ninety percent range, which was in line with the Q4 of 2022. During the quarter, The percentage of coastal revenue under term contracts was approximately 95%, of which approximately 94% were time charters.

Speaker 3

Average spot market rates were up in the mid single digits sequentially and in the mid 30% range year over year and prices on term contract renewals were up in the 20% 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 Q4 as well as projections for 2024. This is included in our earnings call presentation posted on our website. At the end of the 4th quarter, The inland fleet had 10 76 barges, representing 23,700,000 barrels of capacity. On a net basis, we currently expect to end 2024 with a total of 1078 inland barges, representing 23,800,000 barrels of capacity driven by a modest number of additions in the year.

Speaker 3

Now I'll review the performance of the Distribution and Services segment. Revenues for the Q4 of 2023 were $347,000,000 with operating income of $29,000,000 and an operating margin of around 8%. Compared to the Q4 of 2022, Distribution and Services segment saw revenues increased by $39,200,000 or 13% with operating income increasing by $11,600,000 or 68 percent. When compared to the Q3 of 2023, Revenues increased by CAD 12,000,000 or 3 percent and operating income decreased by CAD 4,500,000 or 14% with a decline in margins related to product mix. On the commercial and industrial market, Strong activity contributed to a 24% year over year and 5% sequential increase in revenues with improved demand for equipment, parts and service in our marine repair and on highway businesses.

Speaker 3

Power generation was also up year over year. Overall, the commercial and industrial business represented approximately 64% of segment revenue and had an operating margin in the mid to high single digits in the Q4. In the oil and gas market, revenues were down 3% year over year and up 2% sequentially as solid execution on our backlog was partially offset by lingering supply chain delays. While we saw slowing trends in our conventional remanufacturing business, we 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 approximately 36% of segment revenue in the 4th quarter and had operating margins in the low double digits.

Speaker 3

Now I'll turn to the balance sheet. As of December 31, 2023, we had $33,000,000 of cash with total debt of around $1,000,000,000 During the quarter, we decreased our debt balances by $51,000,000 and our debt to cap ratio improved to 24.2%. We achieved cash flow from operating activities of $216,000,000 for the quarter. We used cash flow and cash on hand to fund CAD 127,000,000 of capital expenditure or CapEx, of which $56,000,000 was related to maintenance of equipment and the remainder was directed to growth CapEx in Marine and e Frac. We continue to return capital to shareholders in the quarter and repurchased $52,000,000 of stock at an average price of $77.08 As of December 31, we had total available liquidity $491,000,000 For 2024, we expect to generate cash flow from operations of $600,000,000 to $700,000,000 on higher revenues and EBITDA.

Speaker 3

We still see supply chain constraints posing some headwinds to managing working capital in the near term. Having said that, we expect to unwind most of this working capital as orders shift as 2024 progresses and beyond. With respect to CapEx, we expect capital spending to range between $290,000,000 $330,000,000 for the year. Approximately $190,000,000 to $240,000,000 is associated with marine maintenance capital and improvements to existing inland and coastal marine equipment, including the remaining ballast water treatment system on some coastal vessels and some facility improvements. Up to approximately $90,000,000 is associated with growth capital spending in both of our businesses.

Speaker 3

The net result should provide approximately $300,000,000 of free cash flow for the year. We are committed to a balanced capital allocation approach and we'll use this cash flow to opportunistically return capital to shareholders and continue to pursue long term value creating niche investment and acquisition opportunities. I will now turn the call back to David to discuss the remainder of our outlook for 2024.

Speaker 2

Thank you, Raj. We had a good quarter in

Speaker 1

both our

Speaker 2

businesses 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 typical seasonal weather conditions to some near term headwinds in the Q1 and some high shipyard activity in our coastal business, Our outlook in the Marine segment remains strong for the full year. In Distribution and Services, Despite supply chain constraints that we've discussed, demand for our products and services is good and we continue to receive new orders.

Speaker 2

Overall, we expect our businesses to deliver improved financial results in 2024. While all this is encouraging, we are mindful of challenges related to a slowing global economy and additional economic weakness due to interest rates. However, even with these uncertainties, we remain very positive and expect to drive strong earnings and strong cash flow from operations going forward. In inland marine, our 2024 outlook anticipates positive market dynamics with tight conditions due to limited new barge construction in the industry and many units going in for maintenance combined with steady customer demand. With these market conditions, we expect our barge utilization rates to be in the low to mid-ninety range throughout the year.

Speaker 2

Overall, inland revenues are expected to grow in the mid to high single digit range on a full year basis. Normal seasonal weather winter weather has started and is expected to be a headwind to revenues and margins in the Q1 as usual. With respect to operating margins, we expect to gradually improve during the year With the Q1 being the lowest and averaging around 20% for the full year, what will be a 300 to 400 basis point improvement from the 2023 average. In coastal, market conditions have tightened considerably And supply and demand are balanced across the industry fleet. Strong customer demand is expected throughout the year with our barge utilization in the low to mid 90% range.

Speaker 2

With major shipyards and ballast water treatment installations In the first half of the year, revenues for the full year are expected to increase in the high single to low double digit range when compared to 2023. Coastal operating margins are expected to be in the mid to high single digit range on a full year basis with the Q1 the lowest due to weather in shipyards. In the Distribution and Services segment, despite the uncertainty from commodity prices, we expect to see incremental demand for OEM products, parts and services within the segment. In Commercial and Industrial, strong demand for power generation and stable marine repair is expected to help drive full year revenue growth in the high single digit to low double digit percent range. In oil and gas, our manufacturing backlog is expected to provide stable levels of activity through most of 2024, but will be somewhat offset by lower activity levels in the oilfield market.

Speaker 2

We anticipate lead times in the near term to continue contributing to volatile deliveries with respect to the schedule of new products in 2020 Overall, the company expects segment revenues to be flat to slightly down on a full year basis with operating margins in the mid to high single digits, but slightly lower than year over year due to mix. To conclude, we ended 2023 in a position of strength in both of our segments. In Marine Transportation, barge utilization and customer demand remains strong and rates continue to increase. In D and S, Demand for our products and services remains strong and we continue to receive new orders in manufacturing. Overall, we anticipate our businesses to deliver 30% to 40% earnings growth in 2024.

Speaker 2

Key risks putting us at the lower end of that range would be the impact of a recession, a potential recession or lingering inflation. While achieving the higher end of this range would be driven by stronger than expected chemical markets for marine and stronger than expected oil and gas markets in D and S. As we look long term, we remain confident in the strength of our core businesses and our long term strategy. Our marine businesses are in the early innings of a multiyear upcycle and demand remains solid in D and S. We intend to continue capitalizing on strong market fundamentals and driving value for our shareholders.

Speaker 2

Operator, this concludes our prepared remarks. We are now ready to take questions.

Operator

Certainly, we will now begin the question and answer session. As a reminder, we ask that you limit your questions to one question and one follow-up. One moment for our first question. Our first question will be coming from Jack Atkins of Stephens. Your line is open.

Speaker 4

Okay, great. Good morning, guys. Thanks for taking my questions. Yes, good morning, Jack. So David, I guess I'd like to maybe if I could start with the CapEx guidance for a second.

Speaker 4

The $90,000,000 I think in growth CapEx,

Speaker 5

can you kind of give

Speaker 4

us a little more color how that's split between The Marine versus the distribution businesses. And I guess as I look at the 39, If I'm reading this right, 39 new I guess, how many barges are you planning on adding in 2024? I'm just trying to get that correct as we think about Next year, are you building barges for 2024 in inland?

Speaker 2

No. What happened, Jack, is We stepped into a competitor's shipyard contract. They were building some barges in some boats. They needed to not do that and we were able to step in and get a good deal with the shipyard. So those boats and barges, it's basically 2 boats with a bow thrusting units that go with those and then 4 barges.

Speaker 2

So we stepped into those that contract for them. It was kind of underway and the competitor couldn't finish it. So we stepped into it and it's a good price. We were happy with it. Do we want building?

Speaker 2

No. New construction doesn't make sense now. We were able to get a decent price on these and so we stepped into it. So that's part of that growth CapEx. And then we're doing some things in C and I for KDS, it's helping a little bit.

Speaker 2

But The biggest part of our CapEx, as you know, is maintenance CapEx. We've talked about the maintenance bubble. It's real. It's real for the industry. It's real for us.

Speaker 2

So our CapEx is still pretty elevated with the maintenance side of things.

Speaker 4

Okay. No, that makes total sense. And thank you for clarifying that. And then I guess Maybe just to that last point, I guess as you think about new builds in 2024 for the industry relative to maybe anticipated retirements. Can you walk us through that?

Speaker 4

And then I know that a lot of the industry is going Be down for maintenance on the inland side in 2024, how much of your fleet do you think will be out for maintenance relative to your normal schedule in 2024?

Speaker 2

Yes, it's significant. It's in any given day, we'll have 80 barges out. Okay. And I think for the industry, this is going to be a big year. It could be on the order of well, I know it's north of 600 and maybe as high as 1,000 for this year.

Speaker 2

So it's a big number. I actually think this is positive for a number of reasons. 1, yes, it helps tighten up utility. But more importantly, people are busy maintaining their fleet. They're going to put their cash to that instead of going in and build new.

Speaker 2

It doesn't make sense to build new. So it I think it actually helps the whole supply picture quite a bit. But it's a known bubble and the good news is our customers understand that They're sophisticated. They get it. They know what's going on.

Speaker 2

And inflation is not helping this either, as you might imagine. Shipyards used to be Jack, they'd run 3 shifts, now a number of them can only crew 2 shifts and Shipyard costs have gone up, steel costs have gone up, labor costs are very high. So all that's factoring into keeping that supply in check. And I think that continues through 2025 to be honest.

Speaker 4

And just on that first part of the question, as you think about new builds for the industry relative to retirements, would you expect net capacity attrition In 2024?

Speaker 2

Absolutely. I think what we've heard, there's only about 20 barges, maybe 25 On dock for 2024, I would imagine, Don't have good data on retirements, but I could imagine you bring something into the shipyard and you see it's going to cost you a heck of a lot, you just soon retire it if it's only got 5 years left of its life. So we should see attrition of My guess is 50 to 150 barges this year. So we should have a net decline this year in supply.

Speaker 4

Okay. That's really encouraging. Thanks for the time, David.

Speaker 6

Hey, thanks, Jack.

Operator

And one moment for our next question. And our next question will come from Ben Nolan of Stifel. Your line is open, Ben.

Speaker 7

Thank you. Hey, David, Raj, good numbers. So my first question is on the D and S side, Specifically on the industrial side, it seems like that business has just really grown well over the last number of years. And As I'm looking forward and trying to sort out how sticky that is, I'm just curious if you maybe talk to On the industrial side, how you think of that with respect to whether it's cyclical or maybe structural and you've changed your business mix and it's just resulted in more growth or have you captured share? How are you thinking about that industrial side of the business?

Speaker 2

Yes. No, thanks for the question, Ben. Look, on the C and I side, there's really 3 parts to it. There's on highway and marine repair and then there's power generation. So I'd say the first two, marine repair And on highway really are going to move with the economy, right?

Speaker 2

We see we saw a little pullback in the on highway trucking space. You saw 1 of the truckers go bankrupt last year. We have seen a little pullback. That's in our guidance for 2024. On marine, marine repair, we do both commercial marine and pleasure craft.

Speaker 2

With being An election year, we're seeing a little pullback in Pleasure Craft, but commercial marine repair is pretty strong. As you would expect is as you hear us talk about maintaining our vessels. And then but the real secular growth story is in power generation. I think it's pretty obvious everybody needs power 20 fourseven now. Every business runs using computing power.

Speaker 2

I think AI and machine learning is only adding to that demand. So we're seeing secular growth in our on our power generation side. As you know, we provide backup power to places like the New York Stock Exchange, JP Morgan and others, as well as Retail environments like Walmart, Costco, Target and the like, as well as rentals. We rent power out. So, yes, it's we're seeing a lot of growth there.

Speaker 2

We manufacture some of that equipment. So it's It helps the manufacturing as well as the distribution side and that's more of a secular growth story.

Speaker 7

Okay. So all in, if you were just to sort of take a high level approach to it, Does it feel like the business is less cyclical than it used to be 2 or 3 years ago as a function of that power business?

Speaker 2

Absolutely. Absolutely. Oil and gas is still going to cycle. Overall, you'll see 24 versus 2023, we're seeing that revenue in D and S is going to be down flat to slightly down, and That's really all based on oil and gas. C and I is offsetting it.

Speaker 2

But you I'm sure you heard calls on the oilfield side, whether it's pressure pumpers or E and P or service companies, they're all looking for a down year, 24 over 23%. That's in our guidance and that's why you're seeing kind of flattish revenue For D and S, really the strength of C and I is making that look not as bad.

Speaker 7

Okay. And then for my second question, shifting gears a little bit. The coastal business looks like it's finally going to be in for a pretty good year. Although I was looking at it, I mean, you're down to, I think like 28 coastal barges. I mean, there was a point which you were at 80.

Speaker 7

I know that has not been obviously a focus of growth for you and you've said it least in the past, it hasn't been. But is there a point where you just need sort of critical scale? Or is there a point at which you maybe think about Adding to that or it remains sort of not the primary focus?

Speaker 2

Yes. Well, I mean, you know our preference would be inland marine. If we're going to grow anywhere, it would be an Inland Marine would be our preference. That said, coastal is going to be a great 5 year story here. We are supply and demand are in balance now.

Speaker 2

We're as you saw in our prepared remarks, We saw spot prices up year over year in the mid-thirty percent range and term contracts up in the mid-twenty percent or low 20% range. That's going to continue in 2025, 2016, probably into 2017 easily. We need it. The rates have been low. We've been bouncing along in our coastal business at breakeven.

Speaker 2

This year for 2024, we're going to be kind of mid single digits, maybe even get to the high single digits in terms of operating income margins. And really, That should continue because the supply picture. As you know, these vessels are very expensive, 185,000 barrel unit We built 5 years ago for $80,000,000 Right now, if you were to build that, it would be $130,000,000 $135,000,000 to build it. And nobody's got one on the books. And even if they did, you wouldn't get it until 2027.

Speaker 2

So we're very enthusiastic about the coastal business. Does that mean we want to go out and speculatively build? Absolutely not. I mean, we're There may be some contracts coming from customers that would get that, but We're not going to go well. And just to comment on our fleet, our actual high, I think, was 59 barges, not 80, but We took out a lot of wire barges.

Speaker 2

Wire the customer demand for wire barges was low. They were older. We've got a much higher quality fleet now. And the other thing just in terms of construct there, What happened to that business was the ban on exporting crude was lifted. At one point, we had 17 barges moving crude in the Coastwise business.

Speaker 2

Now we got 0. And that happened all across the industry. And that's why we've been in a protracted downturn in that business. And All that excess supplies has been retired and it's in balance now and we're pretty excited about it.

Speaker 7

Okay. And there's you don't think there's any critical mass issues or economies of scale issues or anything Where you are, is planning large enough?

Speaker 2

Yes. No, I think we're still one of the largest players in the space on a barrel volume Basis, probably 1 or 2. There is 2 of our competitors are trying to get together in a joint venture, so that we'll see what that brings. But we're still 1 or 2 in the market in terms of size. So We've got the critical mass.

Speaker 2

And as you know, it's the same customers that we deal with on the inland side. So, we have that scale just because Our commercial team deals and our vetting team deals with the major customers every day. It's the same group, whether it's Coastal or in the

Speaker 7

Got you. I appreciate it. And lastly, just congratulations to Joe Pine. That's a heck of a career.

Speaker 2

Yes. Thanks for saying that. I mean, Joe's he's an institution. He's basically been the father of our business for 46 years, he grew it from nothing into what it is today. He'll be missed.

Speaker 2

Thanks, Ben.

Speaker 8

Yes.

Operator

And one moment for our next question. Our next question will come from Ken Hoexter of Bank of America. Your line is open.

Speaker 9

Hey, good morning, Dave and Raj. So just by the way, first let me throw it in as well. Just Long career, long time working with Joe. So best of luck as he moves on. And thanks for all the help over the years.

Speaker 9

Your inland Barge segment, right? If 4Q exits at 20% and most contracts renew in or near 20%, sorry. And most contracts were new in the 4th quarter. Has pricing stalled at inland and thus we're not seeing accelerating acceleration in your margin target from basically 4th quarter run rate levels. I'm just trying to guess maybe Where are spot levels now?

Speaker 9

Is it possible to re achieve the mid-20s kind of that you talked about if pricing keeps accreting given your costs Hopefully, have decelerated on an inflation basis? Thanks.

Speaker 2

Yes. The short answer is, yes, we'll definitely get to the mid-20s. But let me give some color, Ken. I think it's a great question. The average for the Q4 was in the high teens.

Speaker 2

December was an okay weather month, so we touched that 20%. First quarter is always the worst weather. So we're anticipating margins will dip back down into the high teens in the Q1 because of the weather. By the second and third, we'll be Probably north of 2020. Q4, we'll have to see.

Speaker 2

That's always a tough weather month. The way I look at margins, Ken, look, we will be up year over year 300 basis points to 400 basis points in margin. Because of weather, high water, low water, hurricanes, lock closures, it's just hard to get Any one quarter is too specific, but my view is that the whole entity will be up 300 to 400 basis points. And more importantly is, we anticipate a same kind of improvement in that order of magnitude in 2025. It's this is a runway and it should take several years to play out.

Speaker 2

Now in terms of pricing rolling over or even flattening, we didn't see that. Spot prices year over year in inland were up 15% to 18%. Term pricing was up 7% to 9% year over year. So there's actually a healthy gap between spot and term. You want spot above term, What we see, it's a pretty good gap.

Speaker 2

And then even sequentially, we saw From 3rd to 4th quarter, spot pricing was up 2% to 5%. So we didn't see any flattening. Look, Pricing needs to continue to go up. We're offsetting inflation. We're trying to get returns back up to where we can get a return on our invested capital, and we're still a long way away from justifying new builds.

Speaker 2

So it's very constructive. I think you'll see the margin progression of 300 to 400 basis points up this year and then perhaps something similar in 2025.

Speaker 9

So really the best way, I guess, to take away from that You can't look at the Q4 as the exit rate run rate. You got to look at the annual as far as the improvement given the seasonality in repricing.

Speaker 2

I think that's fair. We I mean, you heard our term contracts were up in the high single digits, 7% to 9%. So That's going to roll through this year and it will progress.

Speaker 9

And then did you mention where spot rates are now for 2 tow barge?

Speaker 2

No, I didn't. Better than I shouldn't or my attorney will kick me.

Speaker 9

And then Going to the ONG side, you keep mentioning supply chain delays. I just would imagine we're well past everything post COVID And supply chain issues, I mean, maybe Red Sea is now popping up now with rerouting, but what are the issues that you're still dealing with on the supply chain?

Speaker 2

Yes. No, it's gotten a lot better, Ken, for sure. You saw our deliveries well, you could probably infer our deliveries in the 4th were pretty good out of our manufacturing facility. We were having problems with electronic componentry and one off items holding up whole series of equipment. That's kind of worked its way out.

Speaker 2

What's really happening now is long lead time, engine packages, For example, if we were to order engines today, we wouldn't get them until kind of mid-twenty 25. So that's the big componentry is the problem. The lead times on engines, in particular, have been a problem and it's really about foundry constraints in the engine world. But Yes, it's just long lead time. So we're still dealing with that.

Speaker 2

If that was compressed, we would deliver better results. If we could get engines quicker, particularly on C and I for power and generation, can we we're seeing a lot of demand for backup power. And if the engine packages could flow quicker, we'd have better numbers in D and S for 2024.

Speaker 9

Dave, I just want to clarify 2 things. 1 real quick if I can on the first answer on the margin. So Just the 300, 400 basis points. If December exited close to 2020, does that mean December 2023, does that mean December 24 could exit close to 24% for that month, just given that seasonality, is that kind of conceptually how we should think about it? And then, do we need to change the supply chain in any way to affect that change?

Speaker 2

Yes. On the margins, it depends on weather in December, right? But yes, I mean, directionally, if we saw a mild December, I think absolutely we'd be close to that.

Speaker 9

That's great. That's correct.

Speaker 2

Yes. On the supply chain, look, we use it's best for me not to name different engine But we use all kinds of different engines, and they're seeing it, whether it's a German based engine company or U. S. Based engine company. They all have the same issues in terms of foundries producing blocks and getting it through.

Speaker 2

There's not much we can do. It's their supply We're working with them trying to preorder stuff and work that side of the thing. But look, they're working hard to get the engines. They want to sell as many as they can as well. So we're working on it with them.

Speaker 2

Some of it's out of our control. We're trying to do better job planning as you would expect.

Speaker 9

Thanks a lot, Dan. I appreciate the time.

Operator

Thanks, Ken. And one moment for our next question. Our next question will be coming from Jon Chappell of Evercore ISI. Your line is open.

Speaker 8

Thank you. Good morning. Avon, I'm going to ask you a bit of a longer term question, but it ties together, I think a lot of things we've been talking about for the last couple of years or so. When you lay out a path for 300 basis points, 400 basis points both this year and next, that kind of gets us close to the mid-20s. We had spoken maybe 1.5 years ago now at this point about inflation really kind of pinching you and potentially precluding the inland margin from getting back To the cyclical peaks of 10 plus years ago, is inflation easing at all now?

Speaker 8

And when you talk about the early innings, I would assume that would mean this has a couple more years of runway. Can we revisit then those kind of mid to high twenty percent inland margins barring an extraordinary event?

Speaker 2

Yes. I'll take those in kind of reverse order. I do believe we could get to the high 20s in margin. We'll see. But inflation is real.

Speaker 2

We're seeing it even When you listen to the pundits out there, we're still seeing inflation, Not deflation. I would tell you, maintenance is Maintenance inflation has gone up a lot. We talked a little bit about the shipyards having a hard time Getting labor, steel prices haven't abated at all. In our ecosystem, Mariners are short, critically short across the entire industry. Fortunately, we have our On school where we train Mariners, but we're still really tight on crewing.

Speaker 2

So we're seeing labor inflation, everybody is seeing it. Things like paint and steel and All of that, we're still seeing inflation. Believe it or not, rental cars are we do a lot of crew moves in rental car inflation has hit us. So we're still offsetting that. I think Everybody's been a little frustrated with the pace of our margin improvement.

Speaker 2

Certainly, us, we would like to have improved it faster, but it's really about this inflation and trying to offset it. Look, our customers are experiencing the same thing. They have inflations in their refineries, in their chemical plants. They're fighting steel costs, supply chain issues and, of course, labor costs. So our sophisticated customers definitely understand it.

Speaker 2

They understand we're fighting inflation. We are getting some real price increases, but we need it to get to prices that could justify replacement capacity. So it's a long rambling response, John, sorry, but inflation is there, but The fundamentals are such that we're going to get to the mid-20s at some point. And Barring anything unforeseen, we should get to the high 20s.

Speaker 8

Yes. That's great. For my follow-up, maybe a tag team Here tying 2 things together. So David, you're able to pick up those barges that your competitor had to walk away from conceivably And you're in a obviously a great balance sheet position to do that. When I look at your buybacks in 'twenty three, as far as I can find, it's the 2nd highest year for at least 15, 16 years after 2015, and a ton of free cash flow per year guidance for 2024.

Speaker 8

So I guess the question is picking up barges in the orders or I think a one off event, but is the M and A Market kind of bubbling up a little bit now where you're off the bottom, no one wants to sell at the low, so maybe there's some activity brewing there. And how much dry powder do you want to keep for that vis a vis maybe using all this free cash flow to continue to ramp the buyback pace? So for David and Raj.

Speaker 2

Yes. I'll let Raj chime in here

Speaker 8

a bit

Speaker 2

too. We still have a Liquidity available on our revolver and our debt to EBITDA is fine. We've got plenty of borrowing capacity. And to your point, we do we're going to have a lot of free cash flow this year, and we've been aggressive buying our stock. We like our stock where it's at, particularly when we look at the next 3 to 5 years, it's going to be a good run.

Speaker 2

So we're happy to buy back our stock. That said, we always like those inland acquisitions, but we're not going to lose our price We'll be very disciplined. They're hard to predict. We did pick up we bought some barges from a competitor last year as well. We'll look for those one offs.

Speaker 2

Predicting a big deal, that's a lot harder. I would just tell you, we're going to stay disciplined. We think we've got good borrowing capacity in any event, and we also like our stock. But Raj, do you want to add in?

Speaker 3

Yes, David. Thanks, Jonathan. I think you saw last year in 2023, we dedicated about 80 plus percent of our free cash flow towards share repurchase. And to David's point, it's very difficult to predict any M and A. We always look at it.

Speaker 3

We're very, very We have a rigorous approach towards looking at projects and M and A opportunities. But barring anything that's attractive, I think you can continue to see us progressing that trend of share repurchase similar to what we did in 2023.

Speaker 8

Okay. Thank you, Raj. Thanks, David.

Speaker 2

Thanks, John.

Operator

One moment for our next question. And our earnings call will be coming from Greg Lewis of BTIG. Greg, your line is open.

Speaker 5

Hey, thanks and good morning everybody.

Speaker 2

Hey, good morning, Greg.

Speaker 3

Good morning, Greg.

Speaker 5

David and I guess is for Raj, too. I did want to ask about, I guess the decision to kind of reintroduce full year Earnings guidance, I mean, like it seems like we pulled it away a couple of years ago. I mean, David, you're talking about, I guess, a multiyear run-in terms of the operating environment. Is that kind of the genesis for what drove The full year earnings guidance back into the equation?

Speaker 2

No. I mean, we notice it's not numeric, and we're not giving quarterly. We debated a long time about whether we should give number. But I think in the kind of the environment that There's a lot of moving pieces. We thought it would be good to give a little more specificity on it.

Speaker 2

Just at the outset of this year, I don't think we're going to give quarterly guidance or anything like that or even a numerical EPS, it's just kind of we wanted to set kind of the range for the year Given everything we're seeing, both at D and S and Marine. Okay.

Speaker 5

And then we kind of changed, I guess, we reported the late days. I guess they're obviously up sequentially because of weather. Any kind of way to quantify that EPS impact? I mean was that a couple of pennies? Was it more?

Speaker 5

Any kind of color around that? Or did we Yes.

Speaker 2

I mean, the late days were up a lot, As you heard sequentially.

Speaker 9

Yes. Sure.

Speaker 2

It's hard to quantify it. There's so many moving pieces. So far in January, it's been brutal. At the same you'll remember Q1 of 2023 was a really tough quarter from a weather delay. January is as bad as last year.

Speaker 2

We'll see what February brings. It's hard to predict. But it has a real impact. I mean, you see our margins dip down in usually in the Q4 and the Q1 because of weather, it can be anywhere from a couple of 100 basis points in that range. But it's really hard to say.

Speaker 2

As you know, Greg, we have time charters and we have contracts of affreightment. And those contracts of affreightment hurt us a little bit in the winter weather, but they help us a lot summer weather. I would also say that as it with respect to the Q1, one of the things we did see and that's Reflected in our guidance here is there was a freeze and it impacted some of the refineries and chemical plants in January and they're still coming out of that. So, that So it's all in there. It's still multifaceted.

Speaker 2

And that's why we kind of look at it from trying to rebase everybody here to look at it from a year over year for the whole year average because there's so many moving parts with weather, lock delays, hurricanes. Hopefully, we don't have a hurricane this year, but Lots of moving parts. I hope that helps, Greg. I wish I could.

Speaker 3

Yes, yes. No.

Speaker 5

Like I said, yes, like I said, I mean, it's just interesting I think it kind of needs to be quantified with those numbers. And then I did just in terms of the guidance, you mentioned the potential opportunity in chemicals. Is that a function of and I don't follow the chemicals industry maybe as closely as I should. Is that a function Could you kind of talk a little bit about broad strokes, why we could see maybe chemicals be a little better Why that could help drive some upsides at the high end of the range?

Speaker 2

Yes. Look, in the Q4, we saw the The chemical industry pulled back a little bit, the volumes pulled back a little bit. We haven't seen China reemerge in terms of chemical demand back to where they used to be. So if that started in earnest It would just help volumes. As you know, we move a lot of chemicals on the inland waterways, And it would just be very constructive for us to see some growth in that.

Speaker 2

And If it came back, now we are seeing in January a little uptick in chemical movements. It's kind of one of those things on the margin that could help us and get us closer to that high end of the range.

Speaker 9

Okay. Super helpful guys. Thank you.

Speaker 3

Thank you.

Operator

And one moment for our next question. Our last question will come from Greg Wieczkowski of Weber Research and Advisory. Your line is open.

Speaker 6

Hey, good morning, David and Raj. Thanks for taking the questions.

Speaker 2

Good morning.

Speaker 6

So I wanted to ask you, David, what are you seeing out there on the order book right now on the inland side of things? And I know rates are still ways off of making that equation make sense to build new. But For the movements that you're seeing out there, does it give you any sense of concern at all? Or do you think it's kind of widely understood throughout the industry that Any chunks of orders here would be a function of either owners biting the bullet for the sake of customer section or customer retention and or fleet renewal, is there where are we in terms of Not necessarily for the economics, but in terms of sentiment and making sure that nobody panics.

Speaker 2

Yes. No, This isn't precise, but we think there are only 24 25 liquid barges on order for 2024 delivery. Certainly, nobody's panicked. I think I referenced this in some earlier comments, but most of our competitors, and including us, we're very busy just trying to maintain our fleet with this maintenance bubble that's hitting us. So that's soaking up a lot of capital for In finances for a lot of our competitors, including us, I mean, we're spending a lot more.

Speaker 2

You heard our maintenance CapEx is up A lot in the last couple of years. And so nobody is really panicking and trying to go out and build any new equipment right now. It's everybody's pretty absorbed and disciplined right now just trying to keep their current fleet running.

Speaker 6

Okay, great. That makes sense. And then you kind of alluded to this before on Labor and Mariners availability, but can you remind us how many or what percentage of towboats you guys are chartering in currently or expect to for the coming year? And then any commentary on labor constraints and wage increases kind of affecting The availability and cost of chartering in?

Speaker 2

Yes. Look, mariners are stored across the board, Whether it's in the charter fleet or owned fleets, we operate probably 290 inland towboats and 28, 27 offshore. Our charter fleet, we Don't get too specific on it, but it's in the 60 range. We're seeing labor pressure across the board and just getting qualified mariners. I think what happened is kind of interesting.

Speaker 2

People There was a trucker shortage and there was a lot of shortages of labor and A lot of people kind of moved away from maybe the marine side. They may be moving back now, It's tough to find qualified Mariners. That's why we have our own school. It's a very Skilled set of well, it's a high set of skills To push a football field full of barges with a towboat on a river that's moving with wind blowing, These are highly skilled individuals, including the tanker men and the deckhands on that. So Yes, I'm rambling a bit here, Greg.

Speaker 2

Sorry about that. But we are seeing labor pressure Both on the charter side and on the owned side, it's just there's just a shortage of them. We're trying to train them as fast as we can, but it takes a while to train for these very specific tasks that are very highly skilled.

Speaker 6

Okay. Yes, I appreciate that. How do you think it How do you think the industry kind of solves that problem? I mean, I know you guys have your school and have a method, but just industry wide, Is it simply a function of rates getting to a place where wages can increase enough to attract Additional labor back into the industry? Or do you think like is it a solvable issue?

Speaker 6

Do you see it getting solved over time? Or do you think it's just a necessary evil in the future?

Speaker 2

No, I mean, crewing is always a bit of a challenge. Look, I mean, living on a boat is it's a different lifestyle, right? I mean, some of our guys work 30 on and then 30 off or 2 weeks on, 1 week off, not being home every night is a challenge. So it's a specific lifestyle that's hard to fell just because you're away from home and family a lot. So there's that natural tension away from it from a kind of a life balance standpoint.

Speaker 2

That said, we do pay well. I think our industry plays Really, really well. We recruit in high schools. Last year, we hired 300 new Deck Mariners, and we're doing everything we can. I think it solves itself.

Speaker 2

We'll keep running as a business, but that is part of the reasons rates have to go up, Greg, to your point.

Speaker 3

With all the inflation. And the training facility that we have, Greg, helps us a lot, and it's a differentiator for us.

Speaker 6

Got it. Okay. Thanks, David and Raj. Appreciate it.

Speaker 2

All right. Thank you.

Operator

And this concludes our Q and A session. I would now like to turn the conference back to Mr. Curt Nimitz for closing remarks.

Speaker 1

Thank you, operator, and thank you everyone for joining us. If any follow-up questions, please reach out to me directly.

Operator

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

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Earnings Conference Call
Simmons First National Q4 2023
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