Kirby Corporation (NYSE:KEX) Q3 2023 Earnings Call Transcript

Kirby Corporation (NYSE:KEX) Q3 2023 Earnings Call Transcript October 26, 2023

Kirby Corporation beats earnings expectations. Reported EPS is $1.05, expectations were $1.02.

Operator: Good morning, and welcome to the Kirby Corporation 2023 Third Quarter Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference call over to Mr. Kurt Niemietz, Kirby’s VP of Investor Relations and Treasurer. Please go ahead.

Kurt Niemietz: Good morning, and thank you for joining us. With me today are David Grzebinski, Kirby’s President and Chief Executive Officer; and Raj Kumar, Kirby’s Executive Vice President and Chief Financial Officer. A slide presentation for today’s conference call as well as the earnings release, which was issued earlier today can be found on our website. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available on our website in the Investor Relations section under Financials. As a reminder, statements contained in this conference call with respect to the future are forward-looking statements.

These statements reflect management’s reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby’s Form 10-K for the year ended December 31, 2022, and our other filings made with the SEC from time to time. I will now turn the call over to David.

David Grzebinski: Thank you, Kurt, and good morning, everyone. Earlier today, we announced third quarter revenues of $765 million and earnings per share of $1.05. This compares to 2022 third quarter revenue of $746 million and earnings of $0.65 per share. Both of our segments continued to perform well during the quarter despite facing some temporary challenges. In Marine Transportation, pricing on spot and term contracts continued to benefit from strong demand and limited availability of barges, but results were impacted by the Illinois River lock closure and several refinery outages during the quarter. Distribution and Services delivered improved margins even as we continue to work through supply chain challenges during the quarter.

Overall, our earnings increased sequentially and year-over-year, and we continued to repurchase stock during the quarter. In Inland Marine Transportation, our third quarter results reflected continued improvement in pricing, partially offset by the headwinds from the Illinois River closure that I mentioned, as well as the refinery outages in the quarter. From a demand standpoint, customer activity remained strong in the quarter with barge utilization running in the high 80% range. Spot market prices continue to progress higher and were up in the mid-single digits sequentially and in the mid-teens range year-over-year. Term contract prices also renewed at higher rates with high single-digit increases versus a year ago. Margins were in the high teens.

In Coastal, market fundamentals accelerated with solid customer demand and limited availability of large capacity vessels, resulting in spot prices increasing in the mid-single digits sequentially and in the low 30% range year-over-year. During the quarter, our barge utilization in Coastal continued to run in the mid-90% range. As mentioned before, our results this year are being impacted by planned shipyard maintenance on several large vessels, which led to an overall decrease in third quarter Coastal revenues and operating margins just below breakeven. In Distribution and Services, demand remains strong across our markets with steady levels of service and repair work combined with high levels of backlog. In our commercial and industrial market, overall demand remains solid across our different businesses with growth coming from the marine repair power generation and on-highway sectors.

In oil and gas, revenues were down as we continued to manage through persistent supply chain issues, particularly with electrical and electronic componentry, which delayed many new equipment deliveries during the quarter. We continue to work diligently to manage these supply challenges even with the decline in revenues, operating income in oil and gas was up both sequentially and year-over-year, driven by favorable product mix and operating efficiencies. Overall, revenues were up 7% year-over-year and operating margins improved to just under 10%. In summary, our third quarter results reflected ongoing strength in market conditions for both segments. Despite the temporary headwinds in the quarter, the Inland market is strong and rates continue to push higher, helping to offset lingering inflation while our Coastal revenue remains challenged near term by planned shipyards, industry-wide supply-demand dynamics remain very favorable.

Our barge utilization is good, and we are realizing healthy rate increases. Steady demand in Distribution and Services is contributing to further growth in the segment and while supply chain bottlenecks are expected, the outlook for the market is strong. I’ll talk more about our outlook later. But first, I’ll turn the call over to Raj to discuss the third quarter segment results and the balance sheet.

Raj Kumar: Thank you, David, and good morning, everyone. In the third quarter of 2023, Marine Transportation segment revenues were $430 million, and operating income was $64 million with an operating margin of 15%. Compared to the third quarter of 2022, total Marine revenues decreased by $3 million or 1% while operating income increased $22 million or 52%. Increased pricing and improved operating efficiencies in the Inland market were partially offset by lower Inland utilization due to the Illinois River closure, some refinery outages and coastal shipyards. Compared to the second quarter of 2023, total Marine revenues, Inland and Coastal together increased 1%, while operating income was flat. Looking at the Inland business in more detail.

The Inland business contributed approximately 82% of segment revenue. Average barge utilization was in the high 80% range for the quarter. With the reopening of the Illinois River, our utilization has moved into the low 90% range as we begin the fourth quarter. Long-term Inland Marine Transportation contracts or those contracts with a term of 1 year or longer, contributed approximately 55% of revenue with 66% from time charters and 34% from contracts of affreightment. Tight market conditions contributed to spot market rates increasing sequentially in the mid-single digits and in the mid-teens range year-over-year. Term contracts that renewed during the third quarter were on average up in the high single digits compared to the prior year. Compared to the third quarter of 2022, inland revenues increased by 2% primarily due to higher term and spot contract pricing.

Inland revenues were up 1% compared to the second quarter of 2023 as higher pricing was partially offset by lower utilization, given the Illinois River closure. Inland operating margins were in the high teens during the quarter with the benefit of higher pricing partially offset by lower utilization. Now moving to the Coastal business. Coastal revenues decreased 13% year-over-year and were up 1% sequentially as downtime from planned shipyards was partially offset by higher contract prices and improved barge utilization. Overall, Coastal had near breakeven operating margins as improved pricing was offset by increased shipyard days. The Coastal business represented 18% of revenues for the Marine Transportation segment. Average Coastal barge utilization was in the mid-90% range, which compares to the low to mid-90% range in the third quarter of 2022.

During the quarter, the percentage of Coastal revenue under term contracts was approximately 90%, of which approximately 90% were time charters. Average spot market rates were up in the mid-single digits sequentially and in the low 30% range year-over-year and prices on term contract renewals were up in the low double digits year-over-year. With respect to our tank barge fleet for both the Inland and Coastal businesses, we have provided a reconciliation of the changes in the third quarter as well as projections for the remainder of 2023. This is included in our earnings call presentation posted on our website. At the end of the third quarter, the Inland fleet had 1,071 barges, representing 23.6 million barrels of capacity. On a net basis, we currently expect to end 2023 with a total of 1,073 in Inland barges, representing 23.6 million barrels of capacity, driven by a modest number of reactivations in the fourth quarter.

Now I’ll review the performance of the Distribution and Services segment. Revenues for the third quarter of 2023 were $335 million, with operating income of $33 million and an operating margin around 10%. Compared to the third quarter of 2022, the Distribution and Services segment saw revenues increased by $22.1 million or 7% with operating income increasing by $10.9 million or 49%. When compared to the second quarter of 2023, revenues decreased by $15 million or 4% and operating income increased by $3 million or 11%. On the commercial and industrial market, strong activity contributed to a 28% year-over-year and 17% sequential increase in revenues with improved demand for equipment, parts and service in our marine repair and on-highway businesses.

Power generation was also up year-over-year. Overall, the Commercial and Industrial business represented approximately 63% of segment revenue and had an operating margin in the high single digits in the third quarter. In the oil and gas market, revenues were down 16% year-on-year and 27% sequentially. We continued to manage through supply chain bottlenecks, especially in our manufacturing business which led to shipment delays in the quarter. Despite these issues, the manufacturing business experienced continued favorable trends in new orders and backlog driven by our eFrac units and associated power generation equipment. Overall, oil and gas represented approximately 37% of segment revenue in the third quarter and had operating margins in the low double digits.

Now I’ll turn to the balance sheet. As of September 30, 2023, we had $42 million of cash with total debt just over $1 billion. During the quarter, we increased our debt balance by $69 million, and our debt-to-cap ratio increased to 25.3%. During the quarter, we had net cash flow from operating activities of $96.3 million. We used cash flow and cash on hand to fund $104 million of capital expenditures, of which $50 million was related to maintenance of equipment and the remainder was directed to growth CapEx in marine and eFrac. We continued to return capital to shareholders in the quarter and repurchased $23.3 million of stock at an average price of around $80.31. As of September 30, we had total available liquidity of approximately $451 million.

With respect to cash flow, depending on the timing on working capital, we would likely expect to generate close to $475 million to $525 million of operating cash flow and $100 million to $150 million in free cash flow this year. We are committed to a balanced capital allocation approach, and we expect to use most of this free cash flow to continue to repurchase stock. I will now turn the call back to David to discuss the remainder of our outlook for the fourth quarter.

David Grzebinski: Thank you, Raj. We had a good quarter with both our businesses performing well despite some temporary headwinds. Refinery activity remains at high levels. Our barge utilization is strong in both Inland and Coastal, and rates are steadily increasing. While we expect some near-term issues in the fourth quarter related to low water conditions on the Mississippi River, increasing delay days due to normal seasonal weather and high levels of shipyard activity in Coastal, our outlook in the marine market remains strong. In Distribution and Services, despite ongoing supply chain constraints and delays, demand for our products and services is good, and we continue to receive new orders in manufacturing. Overall, we expect our businesses to deliver improved financial results in 2024.

While all of this is encouraging, we are mindful of challenges related to a slowing global economy, geopolitical unrest and additional economic weakness due to high interest rates. Even with these uncertainties, we remain very positive and expect to drive strong cash flow from operations going forward. Diving into the businesses in more detail. I’ll start with Inland. Favorable conditions are expected to continue going forward, driven by the combination of high refinery and petrochemical plant utilization and minimal new barge construction across the industry. Kirby expects these strengths to be partially offset by increasing delay days due to normal seasonal weather that we generally see in the fourth quarter. And we also expect the low water conditions on the Mississippi River to have an impact.

And further, there are some inefficiencies remaining with some lock maintenance in Louisiana. The company still expects further improvement in spot market prices, which currently represent approximately 45% of Inland revenues. Term contracts are also expected to continue to set — reset higher. Overall, fourth quarter inland revenues are expected to be roughly flat sequentially with a modest improvement in margins and we still expect to end the year close to 20%, it’s not at 20% margin. In the Coastal market, conditions have tightened considerably and the industry is close to supply and demand balance across the fleet. As we’ve discussed, our Coastal revenues and operating margins continue to be impacted this year by an approximate doubling of planned shipyard maintenance days and ballast water treatment installations on certain vessels.

Kirby expects steady customer demand through the balance of the year with barge utilization in the low to mid-90% range. Rates are expected to continue improving as the availability of equipment is tight across the industry. For the fourth quarter, Coastal revenues are expected to be up in the low to mid-single digits compared to the 2023 third quarter as we continue to progress through major shipyards. However, there is some possibility of the shipyards extending into early 2024. Coastal operating margins are expected to be near breakeven to low single digits on a full year basis. Moving to Distribution and Services, steady demand in commercial and industrial and favorable oilfield fundamentals are expected to continue throughout the remainder of ’23 and into 2024.

In commercial and industrial, steady markets are expected to remain in the fourth quarter with incremental activity in power generation, marine repair and on-highway. This activity should be partially offset by lower rental equipment activity as the hurricane season winds down. That will create a slight headwind to margins. In the oil and gas market, despite the near-term volatility in commodity prices and rig counts, we expect continued demand for manufacturing as well as for OEM parts, products and services. Within manufacturing, the company expects demand for environmentally friendly pressure pumping and eFrac power generation equipment to remain strong with new orders and increased deliveries of new equipment for the remainder of the year and into 2024.

Supply chain issues and long lead times are expected to persist in the near term contributing to some volatility of deliveries and potentially shifting some deliveries from the fourth quarter into next year. Overall, the company expects fourth quarter segment revenues to be up in the low to mid-single digits sequentially with lower operating margins impacted by mix and dropping into the mid- to high single-digit range from the almost 10% range we had this quarter. To conclude, both our segments performed well during the quarter in the face of some temporary challenges, and our team executed well on near-term objectives as well as on our long-term strategy. Our balance sheet is very strong, and we expect to generate significant free cash flow in coming quarters, and we expect to use free cash flow for share repurchases, debt repayment as well as opportunistic growth projects.

Although we see favorable markets continuing and expect our businesses will produce improving financial results as we head into 2024, we are closely monitoring the potential for a recession as well as the potential short-term weather and low water-related impacts in our Marine business. Having said that, as we look long term, we are confident in the strength of our core businesses and our long-term strategy. our Marine businesses are in the early innings of a multiple-year recovery and demand remains solid in Distribution and Services despite recent macro headwinds. We intend to continue capitalizing on strong market fundamentals and driving value for the shareholders. Operator, this concludes our prepared remarks. We are now ready to take questions.

Operator: [Operator Instructions]. Our first question comes from Ben Nolan of Stifel.

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Q&A Session

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

David Grzebinski: Yes, Ben, thanks for the question. Yes, look, the cost of new equipment, as you know, has pretty much doubled in the last 5 years. Steel prices are up, labor input costs up, paint is up, skilled labor for welding is up, radars and electronics on boats are up, just about everything, high-performance line on the towboats are up 60%, 70%. So all the input costs have gone up. So if you take like a 2-barge tow, $4 million per barge, that’s $8 million, and then you put a $6 million to $7 million towboat with it. You’re talking about $15 million worth of capital equipment for a 2-barge tow and to get a 12% or 10% type return on that equipment, you’d need north of $13,000 a day now. So it doesn’t make sense for anybody to build right now.

Rates need to come up and they need to keep going up. We’re still fighting inflation. So I just don’t see anybody jumping to build in this environment until those rates start to really get up there. And that’s when you’ll start to see it. Now the other part of the equation, as we talked before about just the cost of borrowing money right now has gone up a lot. I would say, it used to be about 3%, 4%, if you were using secured financing. Now I would imagine a smaller company would have to pay north of 10% to get — to borrow money, and then you’re losing bonus depreciation. So building equipment in that environment with the cost of debt being almost double digit, it may be well above $13,000 a day to justify it. It could be even higher, maybe $14,000.

But it’s all about the cost picture. Now that said, we are — you are seeing some equipment that was tied up during COVID come off the bank. Some of it will never come off the bank, but you’ll see us reactivating these probably — I think Raj gave an estimate that we’re reactivating a handful before year-end here. We’re almost done reactivating our laid-up fleet, but I would imagine as equipment continues to get tight and you’re not building a whole new set of equipment, people will — if the numbers can work, we’ll start to bring some stuff off the bank. But that’s only maybe 2% to 3% that could come off the bank. If that, it may already have been off the bank. So it’s a long way of saying, I just don’t see building for another year or 2, depending on how fast rates go.

But it’s pretty in check right now. I think — I don’t know we — since we last updated you guys on the call here, I think we said there were 22 barges being built this year. We got an update and it’s 27 barges. Now retirements will be high this year with the maintenance bubble, as you start to bring older equipment in for these big heavy maintenance shipyards, you look at the cost and you say, well, I’m not going to put $2 million into a 25-year-old barge, I’ll just retire it. So you could see retirements being a little more than we expected. It could be north of $75 million, but we don’t have a good handle on that. We only know what we’re retiring. It’s hard to say what the industry is retiring. So that’s a long drawn-out answer, Ben, but I don’t see anybody building for a couple of years based on — just based on the economics right now.