Corporation 2022, First Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. 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. [Operator instructions]. Please note this is being recorded. I would now like to turn the conference over to Mr. Eric Holcomb, Kirby's VP of Investor Relations. Please go ahead.

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 at kirbycorp.com. 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, including the impact of the COVID-19 pandemic on the company's business. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31st 2021. I will now turn the call over to David.

Thank you, Eric and good morning everyone. Earlier today, we announced first quarter earnings of $0.29 per share. The quarter's results reflected improved market fundamentals in both Marine Transportation and Distribution and Services. As anticipated, our Marine Transportation business was significantly challenged by the COVID-19 Omicron variant. But the magnitude was at the high end of our guidance range with a total impact of approximately $0.10 per share. We also continued to experience significant supply chain constraints in Distribution and Services which delayed sales during the quarter. Looking at our segments, in Marine Transportation overall inland market conditions improved during the quarter. However, our financial results were significantly impacted by Omicron, with virus cases escalating across the U.S. during January and February, we experienced modestly reduced customer volumes and a decline in our barge utilization to the mid 80% range. We also experienced a material increase in positive virus cases amongst our mariners, which resulted in crewing challenges, lost revenue and increased operating costs. That said, inland market conditions rapidly improved in March as the cases of the Omicron variant declined. We saw improving fundamentals with refinery utilization rising to above 90%, resulting in increasing customer demand. Consequently, by mid-March, barge utilization improved considerably to above 90% for the first time since the start of the pandemic. These factors led to tight market conditions, improved spot market pricing and further increases in term contract rates. Overall, first quarter inland margins were in the high single-digit range, but we experienced notable improvement during March with low double-digit operating margins for the month. In Coastal, market conditions modestly improved with our barge utilization increasing to the low 90% range. We also realized some small pricing gains for the first time in two years. Similar to inland, Coastal was materially impacted by the…

Thank you, David. And good morning, everyone. In the first quarter of 2022, Marine Transportation revenues were $355.5 million with an operating income of $16.9 million and an operating margin of 4.8%. Compared to the first quarter of 2021, Marine revenues increased $54.6 million or 18% and operating income increased $15 million. Compared to the fourth quarter of 2021, Marine revenues increased $5 million or 1%. Marine Transportation operating income increased $15 million year-on-year from significantly improved market conditions, resulting in higher revenue, but declined $8.7 million sequentially. As David mentioned, the Omicron variant, materially impacted our Marine businesses in the first quarter, which resulted in lost revenue, crewing challenges, and increased operating expenses. The Omicron impact was approximately $0.10 per share. Normal seasonal winter weather, inflationary cost pressures, and rapidly rising fuel costs, which could not be immediately rebuilt per customer contract terms also contributed to lower operating income. The inland business contributed approximately 78% of segment revenue. Average barge utilization was in the mid 80% range for the quarter, which compares to the mid to high 80% range in the fourth quarter of 2021 and the mid 70% range in the first quarter of 2021. We did, however, see barge utilization improved nicely to the low 90% range in March as the effects of Omicron diminished. Long-term inland Marine Transportation contracts, or those contracts with a term of one year or longer, contributed approximately 65% of revenue, with 58% coming from time charters and 42% from contracts of Affreightment. Improving market conditions contributed to spot market rates increasing in the mid - single-digits sequentially, and 15% to 20% year-on-year. Term contracts that renewed during the first quarter were up in the high single-digit on average compared to the prior year. Compared to the first quarter of 2021, inland…

Thank you, Raj. While our first quarter results had some challenges, we exited the quarter in a solid position. We see momentum continuing to build and we expect our businesses will deliver improved financial results in the coming quarters. In Marine, refinery utilization has returned to pre-pandemic levels. Our barge utilization has been at or above 90% since mid-March and inland rates are inflecting nicely. In Distribution and Services, demand is growing across the segment and we continue to receive new manufacturing orders. While all of this is very encouraging, we are mindful of near-term potential headwinds, including new COVID-19 sub-variants, potential demand destruction resulting from high commodity prices and prolonged inflationary pressures. As always, we will diligently manage these factors and continue our relentless focus on cost and working capital management. Looking at the outlook for our businesses in more detail in inland Marine with Omicron headwinds mostly behind us, we expect a very favorable market going forward. Strong refinery and petrochemical plant utilization, increased customer volumes, and minimal new barge construction, should contribute to our barge utilization being at or modestly above 90%. These favorable dynamics are expected to yield further improvements in the spot market, which currently represents approximately 35% of inland revenues; as well as improvement in term contract rates. Significant increases in fuel costs, since the beginning of the year are resulting in higher rebuild revenue to customers. Fuel rebuilds are a pass-through to customers, and as a reminder, they come with no associated profit. Additionally, fuel escalators on term contracts of Affreightment can take a quarter to roll through the P&L. This coupled with inflationary pressures, are expected to be near-term margin headwinds until all of our fuel and other escalation clauses reset. Overall, for the full year, we expect inland revenues will grow…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] As a reminder, we ask that you please limit your questions to one question and one follow-up. Our first question comes from Jack Atkins with Stephens. You may proceed with your question.

Okay, Greg. Good morning, and thank you for taking my questions.

Yeah. Good morning, Jack.

So David, I guess maybe to start with inland Marine, if we could. I guess I'd be curious to get your perspective on how the year has progressed relative to, maybe your initial expectations as when we entered the year, obviously COVID provided some volatility in January and February. But just from my industry structure perspective, we think about the progression of pricing, the progression of your utilization rate. Is that proceeding maybe in line with or perhaps better than you initially anticipated? I guess maybe following up on that, we think about where margins can go in the second half of this year. If you're in the low double-digits in the second quarter perhaps, is it right to think that mid-teens or maybe even higher than that is realistic for the second half of the year? Just trying to bracket the opportunity set there. Thank you.

Yes, sure. The short answer is yes. The second half could easily see mid-teen margins, but let me walk through the industry structure and pricing dynamics in the progress that we've seen in inland marine. And I would say but for our Omicron, it's been actually better than we expected. But let me spend just a few minutes on Omicron, though, because Omicron did hit us pretty hard. You'll remember last year Delta variant hit the fleet and we had some crewing issue. But, Omicron was much worse, actually. At one point, Jack, we had 15 inland boats down with crews with COVID. Once it hit a crew member, it would spread through the entire crew and we'd have to quarantine the boat and sometimes shut it down and get people off, and then backfill with either charter boats or other boats. So there was a lot of cost and a lot of disruption, and that hit us really hard in January and February. But it wasn't too dissimilar to what you saw in the airline industry. You will remember them canceling flights throughout January and into February. We saw that. We characterized it as costing us about $0.10 in the quarter. Most of that was in the inland side, just a little bit on the offshore side, probably 80%, 90% was in the inland side. We did have a couple of big offshore units go down with the Omicron variant too. The good news is, as soon as that started dissipating in March, things really started hopping. One, refinery utilization popped back up. It was a little depressed with Omicron, but now into March it got up above 90% and it's still going strong. The higher commodity prices are no doubt helping. We saw our barge utilization jump up…

Yes. Thank you, David. Inflation has been an issue, like everything in all industries right now. I mean, we're looking at affairs going up 25%, food's gone up 10% and if you look at food, poultry, chicken, fish, that's gone up like 14% to 15%, so that's quite a sizable increase there. Voyage costs have also gone up quite a bit, 10% to 12% there. So inflation has come up meaningfully, we're managing through it. These price and rate increases that we have, have been favorable, have been helping us, but we need to see real price increases and not versus nominal price increases.

It's a long way of saying, and I'm sorry for the long-winded answer here, Jack, that the industry structure is about as good as we've seen in a while on the inland side. We are getting price increases -- we need to get the price increases and the market is very tight and looks to be holding with the tightness. Now, there is one caveat. We're all looking at the potential for a recession. The good news is the economists are seeing 10% to 20% chance of recession, so it's still pretty low. When you look at the outlook for margins in the back half of the year and into’23, that would be the caveat. Otherwise, I would say you're going to see mid-teens and then late’23, you'll probably see margins in the inland business starting with the two. We're we're pretty excited about where we are in the cycle and I would say if anything, it's going a little better than we anticipated once we got through through Omicron.

Okay. That's great to hear. Maybe one quick follow-up, if I could. On the Distribution Services side, obviously demand is extremely strong, but there's just a limit on what you can do because of the lack of components and parts, because the supply chain challenges. How does the strong demand potentially manifest itself in the business? And if you can't do more new-build work, is there opportunity to do some remaining fracturing work? Do you see tailwinds from a pricing perspective? Can you kind of walk us through? I would think it'd be a benefit even if you can't do more units just given how strong the activity levels would be.

Good question. We are seeing supply chain delays in that business and frankly, some of it has gotten better, some of it has gotten worse. I can give you an example. One of our major OEM engines suppliers, a year ago, it's 26-week delivery lead times. And then they went to 56-weeks and now they're up to 80-week delivery times on major engine pieces still. That hasn't been helpful. That said, I would tell you that our backlog is up good, 500% from kind of lows of last year on our book-to-bills, well over one time. So the inbound continues. We're managing through the supply chain disruptions. They've gotten a little better in some places, a little worse in other places. But I think it's stable, but delayed. So that's manifesting itself. I would tell you, we expect margins to increase in that business over the next 12 to 24 months. As we progress this backlog, the structure is pretty good. We are seeing our OEMs ask for big price increases. We had one major OEM ask for a 15.5% price increase on one of their major engine lines, and that we're passing on, we're working hard to pass that on. I would say the good news is that anything ESG related has been really strong. [Indiscernible] is okay, but when we look at our customers, particularly in manufacturing, they really -- if they're deploying new capital or significant dollars, they want a good ESG profile. So our electric frac backlog is growing, our power generation equipment that goes into driving electric frac has gone up a lot, so anything with a low carbon footprint or an improved carbon footprint has been growing, and that's good. The inflationary pressures are helping a little bit. We're pushing price increases, we're keeping up with the inflation and maybe making a little headway there. So it's all good. It's a good construct and what we're seeing, would it be better if we didn't have all the supply chain delays? Sure. But we still feel pretty good about how it's shaping up.

Okay. That's great. David, Raj, Eric, thanks for the time.

Hey, Jack. Thank you.

Thanks, Jack.

Thank you. Our next question comes from Ben Nolan with Stifel. You may proceed with your question.

David and Raj and Eric. For my first one, we'll stay with the barge market a little bit. I guess maybe I'll sneak two in here, but David, you mentioned the market would need $10,000 a day to justify building any -- just sort of level set, what's the kind of in where we are at the moment? If you could help, there. And then associated with that, can you talk to what the towboat market supply and demand looks like at the moment?

Yeah, sure. Well, the levels set, that $10,000 number is really a few build two 30,000 barrel barges at $4.2 million each, that's $8.4 million. And then you put a $6 million to $7 million towboats on top of it, you're talking about $15 million in capital, and to get a 10% type return you're going to need $10,000 a day on a day rate, that's where I came up with that number. We're below that now, where pricing is up quite a bit, I don't want to get too specific on current pricing because, I don't think our attorneys would like that very much. But it's quite a bit, it's 30% below that $10,000 numbers, so it's got a way to go. But the structure is much better in terms of pricing and improving. And the second part of your question was? I'm sorry.

Just towboat. The tightness in towboats margin.

Actually that's probably what's helping drive pricing more than anything else in the market right now. Crews are short, fortunately, we occur be started our training school up in earnest in January of last year and we've been hiring all long, our crewing situations is okay. But for the impact we had with Omicron, but I would tell you crewing is tight across the entire industry. I think there would be more boats working if they can be crude. We are seeing labor and wage pressure but the industry is really tight on towboats and that is helped driving the whole pricing dynamic. We can't get the crews. Whether it's the great resignation or people just decided they don't want to be away from their families by living on a boat, it's put pressure on the crewing environment. That's actually not bad for the price dynamic and the rate dynamic for our industry, but it is to your questions, very, very tight on crewing right now.

That's helpful. And then to -- for my follow-up, just to switch gears a little bit onto the -- it's still on the marine side, but thinking through the offshore wind business a little bit, congratulations on winning that deal. Just trying to think about how you're thinking about the cadence of incremental developments, is this going to be something where maybe you get one of them a year or something like that or is that market progressing more quickly than where we've come thus far?

Yes, Christian and I are very bullish about this market, when we look at what's been announced and what on the projects, that we know are coming forward, I think it's 32 gigawatts of power going on offshore wind all on the eastern seaboard, that's just the eastern seaboard. So when we look at the potential demand for vessels to service that, we're building two feeder barges but the demand for that service is probably 26 vessels to service that, so we think that market is going to be tight. We know of basically two other people building vessels right now, Dominion is building one and then there's another group building some vessel to do that. So there's three market entrants if you will, that we're aware of, I know other people are looking at it, but when we think about that, a need for probably 20 to 25 vessels over the next decade, we feel pretty good about that structure. We're just starting with these first two. We're very excited about the efficiency level of this feeder barge to installation vessel. We think from a traditional standpoint that's about 30% more efficient in terms of what our customers will be paying for. And again, this is Empire Wind which is BP and Equinor. We're really excited to be partnering with world-class operators like Maersk, and BP and Equinor on these first sets of projects. So we'll see where it goes, but again, it's going to take -- it's 2025 before we will have these vessels out and probably really don't start working until’26. We'll see there's a lot going on. These projects take a while to get going, these newbuilds take a while right now to go, but we're very excited about it.

Alright. I appreciate the color. Thank you, David.

Thanks, Ben.

Thank you, our next question comes from Jon Chappell with Evercore. You may proceed with your question.

Thank you. Good morning. Hey, good. David, how are you? Back to the barge business again. We frequently asked about the timing of contract renewals. Clearly spot moves much more quickly. You have a pretty large book. It takes time, basically like 12 months to the doctor market. But if we try to think about how fast spots moved and the leverage of your model. If you could waiver one today in reset your entire contract portfolio at the appropriate spot level. How much would that move your contract pricing on average and doesn't have to not a 5%, 6%, 7% percent. Is it mid - single-digits high single-digit, low double-digit. And in that immediate pie in the sky, what would the margin look like for inland barge if you were able to reset it all today.

Yeah. If we reset everything right now, based on prices everything will move up about 15% and that would, in terms of rates, you do know that most of the -- fourth quarter is the heaviest quarter in terms of term contract roll. Remember we do have 35% spot, that's spot is a day-to-day spot, some contracts that are six months in length in the spot market. But if you were to roll that all and today it was -- everything was marked-to-market, I think we'd be getting pretty dang close to a 20% margin, that's just a guess. I'd have to pencil it out, but certainly mid to high double-digits, that's if you could wave the one. But as you know, it takes a while for all these contracts to roll and some of the contracts are multi-year and the good thing about the multi-year contracts is they do have CPI and labor type escalators. I would say also the fuel dynamic is something that -- not that we are getting pencil whipped, but in the first quarter of last year, the average fuel price we paid was a $1.65. We averaged $2.50 in the first quarter, but I would tell you in March and April we're paying anywhere from $4 to $4.75 a gallon. So one, that all comes in as revenue with no margin, so it's a little dilutive to margin, but two, some of those contract escalators take a quarter to roll through. We will be a little impacted in our second quarter margin, but by third quarter, those escalators will all catch up. So there is a little bit of fuel dynamic in our margins, but I would say, and you know this, Ben, we work hard to make sure fuel's a pass-through. We don't want to make money on fuel. Our customers don't want us to make money or lose money on fuel. We work hard to make it a pass-through. But back to your core question, the rate environment is very positive and if we could wave a magic wand, which would be lovely, we'd get a nice pop in margins.

The only thing I'll add to that, to David's comments are -- David mentioned fuel I think we're also, to my earlier comment, seeing inflationary costs in other areas, so we need to be mindful of those increases too as we progress through the year. It's coming back to that fuel comment, in the second half I do see us cycling out of the fuel situation and coming out nicely.

That's a good bridge to my follow-up, Raj. Earlier in the call when you're talking about a lot of these inflationary pressures, and then especially when you were answering Ben's question about the crewing issues. And I was thinking to David's comment three months ago, that you could touch to handle on the margin at some time in’23, which you have affirmed. Then I was thinking in the next step though, which is how is that changing the competitive landscape? You have a lot of competitors out there that don't have your size or your scale, that must have much more difficult times handling these higher costs, higher barge prices, crewing issues. You've bounced off the bottom now when nobody wants to sell, so given the fact that the rates have improved but this cost inflation is probably more punitive to the smaller operator. Does this increase your abilities to maybe further consolidate the market at this point?

I'd like to think so, but I will tell you the whole industry is taking the rate structure up. They -- I think everybody in the industry is feeling the inflationary pressure and the crude pressure, and they know that they need to respond. So I think the whole industry rate base has come up off the bottom and -- but obviously, we -- our size does have some advantages. But I think the industry is responding. Look, when you can't crude towboats, you got -- you got to have rates to go out and hire or make sure you're supporting the crews in your vessels. So we're seeing it across-the-board to the structure to use the structure, the industry structure is probably about as positives. We've seen in a while. But we'll see about acquisition possibilities, as you know, that's been very hard to predict. But we're staying disciplined is the way I would leave it.

Okay, that makes sense. Thank you, David. Thanks, Raj.

Thank you, our next question comes from Ken Hoexter with Bank of America, you may proceed with your question.

Hey, good morning, great stuff on passing inflation through, I guess just so I understand that quick follow-up there, is there something that is -- is it just the timing of the contracts when you get past the non-fuel through, is that why Raj you were saying the second half. I just want to understand that really quick, but my question is on D&S, what gets you above mid - single-digits margins there? Is that just production volumes kicking in, is that labor offsetting the gains, maybe just talk about what can ramp the D&S segment margins.

Let me take both of those really quick. The inflation -- Raj's comments were more about fuel, right? These fuel escalators and fuel rising 50% has been a little bit of a headwind. You've got to wait for those escalators to kick in. And what we're really talking about is those escalators will start showing up in the third and the fourth quarter in a meaningful way, so that'll be of help. On multiyear contracts the CPI and PPI, those usually reset in the fourth quarter. We wouldn't see those until the fourth quarter. A multiyear contract is only real exposure there, most of the other contracts renew annually. And as you recall, Ken, most of that is in the fourth quarter. So we feel pretty good about our ability to stay up with inflation. And so far, certainly in the spot market, we're staying up with inflation. We're not too worried about the inflationary pressure, although it is there. The second question you had was on the margins on D&S. I would tell you in manufacturing, given that a lot of the new orders were kind of the first series in some new-generation electric equipment, the margins were really low on those. As you imagine with a first generation or a new generation, there's a lot of engineering costs and a lot of rework as you dial it in. The initial orders that we had had low margins and their improving. I do believe strongly that we'll get to high single-digits in our D&S business as this backlog progresses. We'll start to see that come in as the year progresses and certainly into’23. A lot of that depends on the supply chain, again, you heard the 80-week delays on orders for new engines is a long time, but we still feel pretty good about margin progression.

And your thoughts on gains on sale is this just barges that are coming due for exploration that you're selling? What are the gains that you're starting to recognize in the business?

Yes, sure. Every quarter we have two or three million in gains on sales typically. This quarter was a little higher, it was about four, I think a little over four, and a lot of that was the Coastwise equipment that we sold after last year's move where we cleaned up, and so it was a little more than normal. Typically, we try and keep that a little lower, but we were cleaning up some of that old coastal equipment and with the scrap steel prices it helped a lot. We were able to get some better pricing on some of the stuff that we sold. Alright, that's kind of a little anomalous but it should still always range in that $1 million to $3 million, it was a little higher this year in terms of gains or this quarter.

Thanks for that, Dave. I mean it just sounds like the setup here is exactly what you'd finally been waiting for, right? With pricing finally kicking in margins on the inland ramping up, not really seeing capacity come in. It's taken a while to get here, but good luck. Thanks for the time and thoughts.

Yes, thanks again.

Thank you.

Thank you. Our next question comes from Greg Wasikowski with Webber Research. You may proceed with your question.

Hey, good morning guys, how are you doing? Hey, good. How are you? Great, thanks. David, you already touched on this a little bit, but I wanted to get your updated thoughts on the pace of the recovery in inland. We've talked about it being a little bit more on the slow and steady side of things versus cycles in the past. But given the pivot in March and April, the general sense of urgency for everything energy-related globally. Have your thoughts around the cadence or the pace of this recovery changed at all in the past, call it six to eight weeks?

Yeah. We are pinching ourselves a little bit because the last six to eight weeks have been very strong. Will that temper itself a little bit? I don't know. But yeah, I would say the pace if it continues at this, is faster than we had expected, so we feel pretty good about that. What could derail is probably a good ancillary question. I think we talked a little bit about our recession, but that still feels like a way off. I think the war, we're all watching Ukraine, something that happens bigger there, more global that could derail things. So anything it could derail is probably big on the macro side. I don't think there's anything structurally that we see within the industry that concerns us right now. Our customers are making more money, they're busier, their demand's up. That's all constructive. And as we mentioned, the cost of building new equipment is just really high, given steel prices in particular. So we feel really good about the structure, and don't see much to change that industry structure right now. So the short answer is yes, the pace is a little better than what we had been anticipating.

Great. Thanks. And then a follow-up also on inland, correct me if I'm wrong, but I think you guys still have some capacity that was sidelined from COVID in 2020. What is the timeline for that capacity that potentially re-enter the market? And is it more like market dependent with rates and utilization or has labor been the gating factor there?

Yes. The short answer is labor has been the gating factor. We do have some equipment, we're bringing I think 10-11 barges off the bank -- actually, Eric just told me it's nine; but crewing is the gating factor, just getting getting crews to move the equipment. But I would tell you it's going ratably, is what I would say. There is some equipment that was sideline during COVID that can come back, but the crewing situation's probably gaining that more than anything else. I view it as probably a decent shock absorber so that things don't get out of hand and people don't run off to go build new stuff. Just building new right now just does not make sense. Again, I feel really good about the structure even with some of that sidelined equipment coming back.

Okay. Thanks, David.

Alright. Thanks, Greg.

Okay Operator, we'll -- we're going to take one more caller and then we'll close out.

Thank you, our last question comes from Chris Robertson, with [Indiscernible], you may proceed with your question.

Hello David, thanks for taking my question in here at the end.

Oh, you bet.

So I just wanted to turn back to the wind projects. So can you get into more of the construction timeline, when there will be some capital spending associated with those two barges, and kind of the cadence on that?

Yeah. Again, it's for the two units. Again, it's a deck barge with an ATB that would be one unit. So we're building two units, at roughly $40 to $50 million per unit. We'll start construction, we'll be in the shipyards doing engineering. Now that capital will be spread between now and early’25. I think the bulk of it will be done by early’25 and then we'll be doing seed trials in’25 and probably the gating factor to put the equipment to work is the WTIV, the wind tower installation vessel that Maersk is building, they're building it in I believe Korea, and it's a big, expensive vessel and it's going to take a while to build. But in terms of our capital spend, it will be spread out between now and’25. And I'm not sure exactly milestone payments, but I would just treat it kind of ratably between then and now. Not a big spike in any one quarter or one year. And obviously, our free cash flow, I think is very sufficient to support that level of CapEx.

Okay. And a quick follow-up. It's a related question on your CapEx guidance for the full year, should we think of that as being pretty smooth out across the quarters or will there be any lumpy quarters?

Yeah. You can think about it that way. Smooth it out over the quarters, Chris.

Okay. Great. Thank you guys for the time.

Also I just want to mention most of this CapEx is maintenance related, so that's a good assumption to have.

Right. Okay. Appreciate the color.

Thanks, Chris. And thank you, everyone for participating on the call today. If anyone has any questions or comments, I will be available throughout the day, feel free to contact me at 713-435-1545. Thanks, everyone. Have a great day.

Thank you. This concludes our question-and-answer. This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.