Kirby Corporation (KEX) Q3 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to the Kirby Corporation 2022 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. We ask that you limit your questions to one question and one follow-up. [Operator Instructions] Please note this is being recorded. I would now like to turn the conference over to Mr. Kurt Niemietz, Kirby's VP of Investor Relations and Treasure. 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 www.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 Corp’s Form 10-K for the year ended December 31, 2021. I will now turn the call over to David.

Thank you, Kurt, and good morning, everyone. Earlier today, we announced third quarter revenue of $746 million and earnings of $0.65 per share. This compares to 2021 third quarter revenue of $599 million and adjusted earnings of $0.17 per share. Both of our segments continued to steadily improve during the quarter, delivering higher revenue and operating income, both sequentially and year-over-year. The third quarter's results reflected improved market fundamentals in both Marine Transportation and Distribution and Services, partially offset by continued inflationary cost pressures, as well as ongoing supply chain challenges that delayed sales in our Distribution and Services business. In inland marine transportation, continued high refinery utilization led to a steady improvement in demand with our overall barge utilization running in the low-90% range. Tight market conditions due to limited supply of barges, as well as cost inflation continued to put upward pressure on prices with spot prices up in the high single-digits sequentially and in the mid-20% range year-over-year. Pricing on term contracts moved higher as well with term contracts renewing up in the low-teens versus the year-ago period. Overall, third quarter inland revenues increased 9% sequentially and margins improved into the low double-digit range. While we continue to face headwinds with inflationary pressures in the quarter, we expect margins will gradually improve further as fuel and other cost escalation contract clauses reset in the fourth quarter and into 2023. In coastal, market conditions steadily improved with our barge utilization in the low-to-mid 90% range and some incremental pricing gains with spot prices up in the high single-digit sequentially. Better coal shipments in our dry cargo business also contributed to improved revenues and increased operating margins. Overall third quarter coastal revenues increased 6% year-over-year, and operating margins were in the low to mid single-digits. In Distribution and Services, similar to last quarter, our markets remained very active across the segment and contributed to strong sequential and year-over-year improvement in revenue and operating margins. In oil and gas, high commodity prices and increased oilfield activity contributed to improved demand for new transmissions, parts and services. In manufacturing, our backlog continue to grow with the addition of new orders for our environmentally-friendly pressure pumping equipment and power generation equipment for e-frac. However, as expected significant supply chain issues delayed many new equipment deliveries during the quarter. We continue to work diligently to manage the current supply chain environment. In our commercial and industrial markets, overall demand remained solid across our different businesses, with growth coming from the marine repair, power generation and on-highway sectors. In summary, despite meaningful inflationary and supply chain challenges in the quarter, our third quarter results reflected continued improvement in market fundamentals for both segments. The inland market is inflecting nicely, demand is strong and rates are moving higher. While the coastal market remains challenged by industry supply dynamics, our barge utilization is good and we realized modest rate improvements. Demand in Distribution and Services is strong and our backlog is growing. While supply chain issues are expected to persist for the foreseeable future, looking forward, we see continued strong market fundamentals. We continue to focus on working safely, efficiently and responsibly to meet and exceed our customers' needs and expect to drive incremental earnings growth into 2023 and beyond. 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.

Thank you, David, and good morning, everyone. In the third quarter of 2022, Marine Transportation revenues were $433 million and operating income was $41.7 million with an operating margin of 9.6%. Compared to the third quarter of 2021, Marine revenues increased $95 million or 28% and operating income increased $25 million or 147%. Compared to the second quarter of 2022, Marine revenues increased $27 million or 7% and operating income increased $11 million or 35%. These increases were driven by strong customer demand, favorable operating conditions and improved pricing. However, we continue to face inflationary cost pressures and expect to recover these increases in costs as contracts and escalators reprice throughout the remainder of the year and into 2023. The inland business contributed approximately 80% of segment revenue. Average barge utilization was in the low-90% range for the quarter, which is similar to the utilization seen in the second quarter of 2022 and compared to the low-80% range in the third quarter of 2021. Long-term inland marine transportation contracts or those contracts with a term of one year or longer contributed approximately 60% of revenue with 56% from time charters and 44% from contracts of affreightment. Improved market conditions contributed to spot market rates increasing sequentially in the high single-digits and in the mid-20% range year-on-year. Term contracts that renewed during the third quarter were up on average in the low-teens, compared to the prior year. However, only a handful of smaller term contracts renewed during the quarter. Compared to the third quarter of 2021, inland revenues increased 35%, primarily due to increased barge utilization, higher term, and spot contract pricing and increased fuel rebills, as we saw the average cost of diesel increased almost 90% year-over-year, compared to the second quarter of 2022, inland revenues were up 9%, driven by increased term and spot market pricing, higher average barge utilization and higher fuel rebills. Inland operating margins was in the low double-digits and improved both sequentially and year-over-year, but remained impacted by rapidly rising fuel prices and inflationary cost pressures. These cost headwinds were offset by gains in utilization and pricing. The coastal business represented 20% of revenues for the Marine Transportation segment. Average coastal barge utilization was in the low to mid-90% range, which compares to the mid-70% range in the third quarter of 2021. During the quarter, the percentage of coastal revenue under term contracts was approximately 65%, of which approximately 92% were time charters. Average spot market rates were up in the high single-digit sequentially and renewals of term contracts were higher in the 20% range year-over-year. During the quarter, coastal revenues increased 6% year-over-year with improved barge utilization, higher contract prices and higher fuel rebills. Overall, coastal had a positive operating margin in the low to mid single-digits. 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 2022. This is included in our earnings call presentation posted on our website. Now I'll review the performance of the Distribution and Services segment. Revenue for the third quarter of 2022 were $313 million with operating income of $22.3 million, compared to the third quarter of 2021, the Distribution and Services segment saw revenue increased by $52.4 million or 20% with an operating income improving by $11.3 million or 103%. When compared to the second quarter of 2022, revenues increased by $20.5 million or 7% and operating income increased by $5.6 million or 34%. In the oil and gas market, favorable commodity prices and increased rig and completions activity contributed to a 37% year-on-year increase and a 13% sequential increase in revenues. We experienced increased demand for new transmissions and parts throughout the quarter. As David mentioned, we continue to navigate ongoing supply chain challenges, especially in our manufacturing business. Despite these supply chain headwinds, the manufacturing business experienced continued favorable trend in new orders and deliveries. Overall, oil and gas represented approximately 47% of segment revenue in the third quarter and had operating margins in the mid single-digits. On the commercial and industrial side, strong activity contributed to an 8% year-on-year increase in revenues with improved demand for equipment, parts and service in our marine repair and on-highway businesses. Power generation was up modestly year-over-year. Compared to the second quarter of 2022, commercial and industrial revenues increased by 2%. Our Thermo King business continued to experience delays due to ongoing supply chain constraints that impacted revenue growth. However, this headwind was offset by increased activity in marine, power generation and on-repair highway. Overall, the commercial and industrial business represented approximately 53% of segment revenue that had an operating margin in the high single-digits during the third quarter. Now I'll turn to the balance sheet. As of September 30, we had $37 million of cash with total debt of $1.1 billion and our debt-to-cap ratio improved to 27.3%. During the quarter, we had cash flow from operations of $66 million and we generated cash proceeds from sales -- asset sales of retired marine equipment of $10 million. We used cash flow and cash on hand to fund $41 million of capital expenditures or CapEx. Our disciplined approach to capital allocation enabled us to further strengthen our balance sheet and return capital to shareholders. During the quarter, we decreased debt by $18 million and repurchased slightly more than 70,000 shares at an average price of $63.33 per share for a total of $4.8 million. As of September 30, we had total available liquidity of approximately $521 million. With respect to CapEx, we continue to expect full-year CapEx of approximately $170 million to $190 million, primarily for required maintenance on our marine fleet. We also expect to generate cash flow from operations of $390 million to $450 million with free cash flow, defined as cash flow from operations minus CapEx, of $200 million to $280 million. We continue to work through supply chain constraints that are challenging working capital in the near-term, but we expect to unwind this working capital as orders shipped later this year and into the first half of 2023. We are committed to a balanced capital allocation approach and we'll use this cash flow to repay debt opportunistically, return capital to shareholders, and continue to pursue long-term value-creating niche investment and acquisition opportunity. I will now turn the call back to David to discuss our outlook for the remainder of 2022.

Thank you, Raj. As discussed, the third quarter had good incremental improvements in revenues and operating income in both our segments. In Marine, steady demand, driven in large part by higher refinery and chemical plant utilization, should continue to support high barge utilization. Combined with limited new barge construction and inflationary recovery means, we expect these dynamics to support further increases in inland rates. While all this is very encouraging, we are mindful of the ever changing economic landscape and potential recessionary headwinds. Additionally, we continue to monitor the current record-low water conditions on the Mississippi River for which the full impact remains to be seen. Although the current low water conditions impact only a portion of our inland marine business and we have some contract protections to help limit the magnitude, the low water headwinds are dynamic and real. As always, we will manage the factors we can control. Nonetheless, we continue to be encouraged with refinery and petrochemical plant activity remaining at near-record levels resulting in increased customer volumes. Barge availability is constrained as there is minimal new barge construction. These positive factors are expected to contribute to our barge utilization running in the low to mid-90% range for the foreseeable future. These favorable supply and demand dynamics are expected to drive further improvements in the spot market, which currently represents approximately 40% of inland revenues. We also expect continued improvement in term contract pricing as renewals occur with a significant amount of term contracts renewing in the fourth quarter. Overall, for the 2022 full-year versus 2021, we expect inland revenues will grow approximately 20% to 25%, and we expect near-term inland operating margins to be in the low to mid-teens and to continue to gradually improve in 2023. In the coastal market, conditions are expected to remain steady, but will remain somewhat challenged by underutilized barge capacity across the industry. Even with some market softness, Kirby's coastal barge utilization is expected to be in the low to mid-90% range. Full-year 2022 coastal revenues are expected to be flat to up in the low single-digits, driven primarily by good fundamentals in our core liquid cargo business and higher coal shipments in our offshore dry cargo business, offset by the company's exit from Hawaii. Revenues and operating margins are also expected to be impacted by ongoing planned shipyard maintenance and ballast water treatment installations on certain vessels. Overall, coastal operating margins for the remainder of the year are expected to remain in the low to mid-single digits. Looking at Distribution and Services, we have a favorable outlook with anticipated strong demand for equipment, parts and service in distribution and a growing backlog in manufacturing. In the oil and gas market, high commodity prices, increased rig counts and growing well completions activity are expected to yield strong demand for manufacturing and OEM parts, products and services in the distribution business. We expect the current commodity price environment will contribute to further increases in rig count and frac activity in the fourth quarter and into 2023. U.S. land rig counts have grown to over 760 rigs, which represents a full-year average increase of approximately 42% with steady growth expected for the remainder of the year. Similarly, the active frac spread count is approaching 295. With this growth, we expect to see increasing demand for transmissions, engines, parts and service in distribution. In manufacturing, we have a growing backlog position. We've added new incremental orders in the third quarter and we expect this trend will continue. As I mentioned earlier, we expect the supply chain issues and long lead times for OEM equipment, which in some cases are extending beyond a year to remain a challenge. These issues are likely to contribute to some choppiness with new product deliveries, which could potentially shift into ‘23 and into 2024. In commercial and industrial, we're forecasting steady demand in on-highway with increased trucking and municipal repair work, continued improvement in bus ridership and an increased demand for Thermo King refrigeration products, offset again by the lingering supply chain delays. In power generation, new backup power installation, parts and service activity are expected to remain solid as demand for electrification and 24/7 power grows. Marine repair is also expected to be strong with increasing activity in the Gulf of Mexico and improved commercial markets on the East and West Coast. For the 2022 full-year, we expect revenue growth in the low-double-digit percent range for commercial and industrial. For KDS as a whole, while supply chain issues are expected to continue impacting new product and equipment deliveries, we continue to expect 2022 segment revenues will increase by 25% to 30%, compared to 2021, with commercial and industrial, representing approximately half of segment revenues and oil and gas representing the other half. We expect segment operating margins will be in the mid to high single-digits for 2022. To conclude, Kirby's third quarter results showed steady improvement in the face of ongoing challenges. Both of our segments performed well during the quarter, delivering improved revenue and operating income sequentially and year-over-year and our teams executed well on near-term objectives, as well as our long-term strategy to provide value to Kirby and our shareholders. We exited the quarter with healthy long-term fundamentals and both of our businesses are very well-positioned to continue delivering value. Although we see favorable markets continuing and expect businesses will provide improving financial results, we are closely monitoring potential economic headwinds, as well as the potential of short-term weather and water-related impacts to our business. Having said that, as we look long-term we are confident in the strength of our core businesses and our long-term strategy. We intend to continue capitalizing on strong market fundamentals and driving shareholder value creation. Operator, this concludes our prepared remarks. We are now ready to take questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ken Hoexter with Bank of America. Your line is now open.

Great. Good morning, Dave and Raj.

Good morning, Ken.

A little bit of an echo here. Can you talk a bit of -- it seemed like you moved a bit more off contract and into the spot market, maybe a little bit fewer take or pays. Maybe talk about the shifting market part of the cycle. I know the fourth quarter is going to be really big for you as you price some of those term contracts. So maybe talk about the state of the market and maybe throw in thoughts on the low water levels, what does that mean for the business and pricing as well? Thanks.

Yes, sure, thanks. Thanks for the question, Ken. About those astros? No, all seriousness limit --

Missed it. I didn't see anything.

No, the term-to-spot ratio, one thing in a rising market like we've had and the spot revenues going up faster than contract revenue as rate increases have -- get rolled into spot contracts quicker. I think that you'll see that ratio spot the contract change a little bit here in the fourth quarter as we renew some of these big term contracts that we have coming due at the end of the year. So that's the comment on the spot versus contract ratio. We're really happy with where we are with spot and contract right now. In a rising market, it's good to have pretty good spot exposure. But again, that ratio has been impacted a little bit by how fast we've been able to raise spot rates versus the term contract rate. But term contract rates will price higher here in the fourth quarter and they need to. I think, one, we've got a great supply and demand situation, but it's needed, because of the inflationary pressures, that's another part of it. So we've got a pretty good dynamic now. Supply is not growing, demand is holding okay. I mean we're watching for a recession maybe next year. But right now, you can look at refinery utilization is pretty strong, chemical plants are -- utilization is strong. I think the chemical guys, when you look at their earnings, it's -- a lot of it's about Europe. You can imagine, if you've got chemical manufacturing in Europe and you're facing the feedstock problems that they have in Europe right now, it's pretty dicey. But when you look at the chemical plants in the U.S., their feedstock position is pretty good. Particularly, if you look at natural gas prices have been dropped here recently. So from a demand side, we're pretty excited about where we're at right now. But we are watching and looking for a potential recession next year but the good news is, even if that -- if we get a little pullback in demand, the supply is so tight, I think we'll be alright. And it's not just the supply of barges it's the supply of mariners and horsepower, which remain tight. So it's about as constructive as we can be now. You mentioned low water and you and I've talked about low water. It's gotten worse since you and I talked, Ken. The river has been shut down probably half a dozen times in the last week or so. The Corps -- the Army Corps of Engineers, the Coast Guard, the industry and our customers, we're all working together to try and keep things moving on the river. The Coast Guards has cut down the number of -- the size of the tows. They've lowered draft restrictions. So we're loading more at nine feet instead of, as the dry cargo guys would do, about 12 feet at times. So we're doing everything we can, but this is unprecedented. I think this is the lowest river has been in at least 30, 40-years and maybe an all-time low. I think there's some rain in the forecast later this week. Hopefully it's enough to help out. All that said, it's about 20% of our fleet, it moves on the river system. Christian told me earlier -- well, this weekend, it was about 198 barges, so when you think of our 1,000 barges, that gives you roughly 20%. Now, the good news is we have some contract protection -- well, actually pretty good contract protection with navigation delays. But it's not the same as running. It's a little less profitable and so you may see a little bit of a -- could be anywhere from $0.02 to $0.05 kind of headwind for this quarter depending on when this thing -- when the water starts flowing again. It's real, it's impacting the U.S. supply chain in a meaningful way. I would tell you, for the dry cargo operators, this is just really, really painful, because they run 50 barge tows. Our tows are much smaller and we generally load at lower drafts than they do. So it's impactful, but I think we'll get through it. Again, we're fortunate, we have some contract protection with navigation delays. But the good news is everybody is working together, whether it's our customer base, the industry, the Corps or the Coast Guard, everybody is trying to keep it flowing, both northbound and southbound.

Great. And, if I could get my -- go ahead.

Ken, I was just going to add, you referenced the Q4 term contract renewals, you're right. It is a substantial quarter for us, we have around 35% of our contracts renewing in Q4.

Yes, it's the point we've all been -- I think, waiting for, right, is that big fourth quarter. Dave, on the other side of the business, the D&S, it seems like things have finally clicked and hitting here. This is kind of what you've been waiting for maybe for a couple of years now. I think the question has always been the strategic importance of the segment. Maybe you want to address your thoughts on the business as we move forward here and as things start to get a little better from your point of view.

Yes. Now to your point, D&S is really starting to roll right now. Inbound orders are up across the business. Obviously, oil and gas, particularly anything electric frac is very strong. We continue to take orders. Commercial and industrial is the same. It's pretty strong. We are being impacted by supply chain for sure, I mean, some engine packages are at least a year out. So in some cases, we won't get deliveries until ‘24. So supply chain is impacting us a bit. But to your point, a more on the strategic should Kirby split, kind of, the marine and the KDS business. We've always been open-minded to it. We've just got to make sure it creates shareholder value. The Board discusses it is committed to creating shareholder value. So when the numbers make sense, it might make sense to split the two businesses. Clearly, last year at trough EBITDA and trough EBITDA multiple didn't make sense. So with this strength, it's getting to make more and more sense. But we'll see we've still got to work through it. Meanwhile, we're running the business really well. The both the marine team and the KDS team are hitting on all cylinders. And it's good when the team is working hard and the market is working in the right to the same direction. So we're pretty excited about where we are right now.

Can I just ask one clarification? Sorry, Kurt, I just want to make sure I understand. In the press release, you said high levels of shipyard activity in coastal. Do you mean more newbuilds or did you mean the ballast water treatment that you were talking about later on? I just want to understand if you were talking about newbuilds?

No, it's not newbuilds. It's all ballast water treatment. We -- fortunately, of our 30 units or so -- 29 or 30 units, I think we've got all but six of our units have ballast water treatment, so we've got those six left to do and those are big, long, heavy shipyards and they're on some of our bigger units. So that's going to impact this here a little bit in the fourth quarter and more importantly into ‘23. Now in terms of new construction on coastal, nothing. We're not hearing anything on the drawing board and, yes, which is really good for the pricing environment, because we're almost in supply demand balance now. And even if somebody wanted to build a new unit right now, you wouldn't see it for three years. You got to do the engineering and the construction. You wouldn't deliver until ‘25 at best case. And I'm not sure anybody in their right mind would go build a new unit now. Just to give you a benchmark, when we built our 185,000 barrel ATB, it was about an $80 million unit and I would tell you, it's about $140 million if you try to build it now, just because steel prices, labor costs and input prices. So it's very constructive on the supply and demand standpoint for coastal, and we should start to see rates moving on a go-forward basis in the coastal business.

Thanks for the clarification. Thanks for the time, guys. I appreciate it.

Hey, thanks, Ken.

Great job.

[Operator Instructions] Our next question comes from Jack Atkins with Stephens. Your line is now open.

Okay, great. Good morning, and congrats on a solid quarter here. I guess, David, as we think about the fourth quarter outlook, obviously, the ranges that you guys provided from a line item perspective or for the full-year, but you also made a comment in the press release that you expect to deliver improved financial results in the coming quarters. I know you've got some issues with high water -- excuse me, low water issues here in the fourth quarter, but would you expect, based on the momentum in the business that you're seeing now, to be able to have improved earnings quarter-over-quarter in the fourth quarter versus the third quarter?

Yes, we haven't really given complete guidance but, as you know, Jack, and having followed us for a long-time, the third quarter is usually the best of the year. First quarter is usually the lightest and then followed by the fourth quarter, which is -- it's not as light as first, but it's usually lighter than certainly the second or the third and that's because of the weather. Weather starts to impact the Marine business and it can be meaningful, particularly, with fog. We get -- fog seems to be the thing that impacts us the most in terms of moving. So when you combine, kind of, fourth quarter weather, lower water, it -- we haven't put out guidance, but you can see a flattish quarter and, depending on the river, maybe down a little bit or if the river clears up, maybe up a little bit. But it's -- I wouldn't say it's going to be sequentially a blow-out, because of both the weather and the low water. And most of those big term contracts that we've talked about in the Marine business, they reprice at the end of the quarter and you don't start to see that pricing roll through until kind of January.

Okay, now that's helpful. I just think it's kind of got to get everybody on the same page there in terms of --

Let me talk about D&S. D&S, though, could be a little better sequentially. The issue is supply chain and whether we can get the shipments and there could be some mix issues too. Some products that we ship could be a lower margin than other products. And so it -- D&S is pretty strong right now, it's really about managing the supply chain, which is frustrating and I know it sounds like an excuse most corporations use nowadays, but it is real.

Okay so maybe Marine flattish and D&S a bit better quarter-over-quarter, that makes sense. And I guess, maybe, kind of, shifting gears a bit, but when you kind of think about the momentum as we head into the next year, I guess there are some puts and takes, but would love for you to maybe kind of flesh it out a bit. But when we think about -- I'd love for you to maybe kind of quantify, if you can, the differential right now between where spot rates are and maybe where contract rates are, just so we can kind of get a sense for how much upward momentum there may be on contract rates as we go through the renewal process? And then as you kind of think about what your chemical customers are telling you and maybe even what your refined product customers are telling you as we go into next year with the sort of the cloudy economic backdrop, I guess, is there anything you can maybe help us with as we sort of think about how they're positioning their business for next year? Would just love some color there as well?

Yes, sure. Yes, look, contract pricing is -- or said another way, spot pricing is above contract, which is what you have in a healthy market. I would say it's 10% to 20% differential, just depends on the contract and exactly what spot comparison you're doing. So it -- but that's a healthy gap and we like that gap and it should help the pricing environment. On our chemical side and refined product side, the customers are very positive, I would say. Volumes are good. I would say the chemical customers, if anything, are probably more -- seem a little more worried than refine customers based on the economic headwinds and a lot of that is Europe. I mnea -- can you imagine if you had a European chemical facility right now, it's got to be maddening with natural gas around $5 or less here in the U.S. and goodness knows what natural gas costs in Europe as a feedstock. So it's an interesting time. I think, as I said earlier, everybody's kind of watching the recession, not to second guess the Fed, but I think they've done enough. I think the soft landing's about now. But that's with absolutely no data to support, but feels that way.

Okay. Thank you again for the time.

Thanks, Jack.

[Operator Instructions] Our next question comes from Ben Nolan with Stifel. Your line is now open.

Thank you. Hey Dave and Raj. If I could just start where -- maybe where you just left off there, David, talking about sort of the chemical side of the business specifically, and I know that's the majority of what you're doing on the river or inland. It feels to me like -- well, I know historically, you've said that, that chemical side of the business is pretty GDP linked. But normally, when we go into a downturn, you also see a decline in oil and gas activity and production and so forth. Do you think that at -- if the danger of famous last words, do you think that the environment that we're in right now is any different than where we normally would be in a period of weakness as it relates to how you think about customer demand for barges?

Yes. Kind of the worst thing you can hear in investing is different this time, right? Look, GDP does impact our volumes. You've seen that Ben in our history where we get a recession and volumes pulled back and demand grows with GDP as well. So I think it's not different. If we do get a recession and we get a pullback in GDP, it will impact demand. I would tell you that maybe the difference now is there's just no new construction, right? The cost of building new barges is just very, very expensive. So that's in check, and then if you layer in, kind of, retirements, which are going to happen, right, especially when you go to bring an old barge into the shipyard and you look at the cost of replacing steel. It's kind of mind numbing. So that might be the difference. It's just a dynamic of new supply. Even if we get a little pullback in demand I think we'll still be tight. And then when you layer in kind of the horsepower picture, where we're short mariners, the industry's short horsepower, that's kind of a newer dynamic or little stronger dynamic than we've had. Now going to the oil and gas side, it's -- the interesting dynamic is Europe, right? They're going to be short refined products, because of the refinery feedstock. So I think what we're seeing is export volumes are up a little bit on the refined products side. And that's helpful. Is that means different this time? No, it's a little -- I think it's a little tailwind maybe for the U.S. refinery complex and less -- to a lesser extent, for the chemical complex. So I don't know if that's a long-winded answer. That's a long answer, but I don't think it's different this time with respect to demand. I would say what is a little different this time is supply. There's just limit on supply just based on the cost of new supply. And then, of course, the cost of keeping older equipment running. So that's probably the 1 thing that's different right now.

Okay. That's helpful. And then for my follow-up, one of the things that we've heard about the river is that it's causing the low water levels are causing horsepower to really be tied up and your larger power towboats aren't able to operate as well? Or you just can't get your -- it's challenging for towboats and that's causing the price to go up? Is that -- I know that's certainly true in the dry barge market. Are you seeing that same thing flow through on to the tank barge market? And is it providing any level of uplift? And then if I could sort of tag an extra one on there. I know that there was 1 extra barge that was reactivated in the quarter based on the presentation. Do you guys have any -- are you basically fully spent here? Or are there other pieces of equipment that could be brought back in if demand warranted?

Yes. Let me take that in pieces. First, on the horsepower side, yes, the big horsepower, the big 10,000 horsepower towboats on the river that push 50 dry cargo barges, their draft is too big. So they're being tied up, so most of our horsepower is smaller, because our toe sizes are smaller. I think we have one big vessel that's on the bank right now, because her draft is too much for the river. But most of our horsepower is a little smaller. Now it is, to your point, helping give a little tailwind to kind of the market. Particularly, if you look at dry cargo rates, they're up 200%. It's certainly helping on the liquid side as well. It's putting some more tightness in the market. That said, hopefully, this is a temporary situation. We get some much needed rain and get the river going again. The second part of your question was kind of reactivation. I think as you would have expected during the pandemic, a lot of barges were, kind of, put on the bank and tied up generally the older ones and the ones with a little more maintenance headaches were, kind of, put on the bank. We're reactivating a handful of those. I think maybe in the fourth quarter, we might have 10 to 15 coming back in. There's not a whole lot left. But the problem with these barges that were tied up last several years, cost of bringing them back in with steel prices and labor are really high. We're only bringing back the ones that make sense -- is it going to be a whole lot more? No, but maybe another quarter or two of five or so barges after we get through the fourth quarter could come back for us. I don't think there's a big hangover -- overhang excuse me, hangover, overhang in that supply there. But there's some that can come I think the gating factor is just the cost of bringing off the bank. Again, you hear it in our comments and everybody's comments these days, inflationary pressure. And then when you put steel prices on top of it, and labor prices. It's really -- the inflation is real, and it's causing supply to stay in check even more so than the cost of new builds, which is a good thing. And it's also -- it truly is part of the conversation you have with your customers, because these inflationary costs are real, and we need price increases to just stay even.

Yes. That makes sense. Well, I appreciate the answers and maybe I'll bump into you a minute made over the weekend and go astros.

Thanks, Ben.

[Operator Instructions] Our next question comes from Jonathan Chappell with Evercore. Your line is now open.

Thank you. Good morning.

Hey, good morning.

David, I want to pick up just where you left off. You guys had mentioned cost escalators a couple of times in your prepared remarks and in some of the Q&A. So kind of a two-parter here. One, does this mean that when you look at margins similar to prior cycles, given all the cost inflation, you should be at similar levels based on the pricing environment, you'll get all this cost inflation back and we should think about this upturn similar to the prior upturns from a margin perspective? And two, given the economic headwinds that you spoke about, do you foresee any more pushback from the cost escalators just given maybe the customer cautiousness or uncertainty?

Yes. So let me break that down in a couple of pieces here, and I'll let Raj chime in to if I don't cover it all. First is fuel, we get -- there's a lag on fuel. So that recovering fuel costs we have escalators that work. Some of them are direct pass-throughs, some of them are monthly, some of them are quarterly, some take four months to work through. So those are some of the escalators we're talking about. I think we get a little -- we can get a little pencil with there. But over time, those fuel escalators average out and they work out, and we work with our customers, and we don't want to make money on fuel escalators, and we don't want to lose money on fuel either. So -- and our customers agree with that. The -- we all work is to try and make fuel as neutral as possible. And then on some of the contracts we have, either CPI or PPI, which tries to keep up with inflation, and I say tries, it generally doesn't because you can see certain categories in some of the supplies that we buy for our boats have inflated double-digits, in some cases, 20% things like radars and in line use on the boat. So CPI, PPI is meant to keep up with the general cost of inflation. I would tell you it's not perfect and we're a little behind. But when we talk about escalators, we're talking about CPI, PPI and then some of our contracts also have labor escalators, which you take a portion of what you think your labor is in the contract and you use an index, a labor rate index, which we calculate some of our contracts have. So we get to recover some of that. I would tell you that we need the price increases and so that leverage you just talked about were in past where we saw these price increases, you would think margins would pop more. And in prior cycles, I would say, yes, it would pop more than we're seeing now, because this -- we're part of what we're keeping up with this inflation here. So that is a little bit of a headwind against margin increase. That said, we're still expecting margins to increase. They're just not popping like you would have seen in prior cycles. And that's -- it's really purely about the inflation environment.

And if I could add, I'll just say that this is where we need rate to increase, because of David's comments on inflation. And I think this approach that we are taking towards being very focused towards rate increases very critical for us. If I can just add, in Q2, we saw fuel as a headwind. I think we talked about that in Q3, it came out that fuel was kind of flat. We're starting to see fuel increase right now. So that kind of supports what David was saying in terms of that whipsaw effect. So we'll see where fuel goes, I'm looking at the forward curve going into next year. And if that plays out, then we see recovery on fuel to as the year progresses.

Okay. That's helpful. Just for the follow-up, I wanted to take Jack’s first question just a little bit further. I know I don't want to get into short term headwinds, but I think it's important to kind of frame how we should look at ‘23. David, you said 1Q is typically the weakest quarter for all the obvious reasons. But if you're resetting most of these term contracts late 4Q that will be marking to market conceptually much higher. You're getting some of these cost escalators through, all else equal on like the worst winter weather ever or the worst drought ever, should 1Q be better than 4Q as we think about just this market upturn as opposed to traditional seasonality?

We haven't put pencil to paper otherwise I’d answer, but I think what you're saying makes sense. But we just -- we haven't penciled it all out. I mean, we've got a lot of contracts, as Raj mentioned in his prepared remarks or in one of the answers was about 35% of contracts are repricing. We've got to see how that reprices. And before we can declare that. But in theory, I could see what you said absolutely happening.

I think with regards to Q1, we're hedging for weather, right, and the situation on the Mississippi, right? So I think if you go back, consequent history says typically has bad weather. But all things being equal to your point, Jon, yes, if we get to where we need to get on this 35% renewal, we should see better margins.

Okay, awesome. Thank you, Raj. Thanks, David.

[Operator Instructions] Our next question comes from Greg Lewis with BTIG. Your line is now open.

Hey, good morning, everybody. And how those [Technical Difficulty]

How about those [indiscernible]?

How bad? So I guess my first question is around how inland fleet is managing to the low water i.e. You mentioned there's around 200 barges, you also mentioned that due to draft restrictions, you kind of have the light load. I guess what I would say is in the environment that we're in now. It is longer than we think. Should we expect more or less barges upriver?

Yes. I think Greg, the short answer is I don't know. But I will tell you, Christian and I talk about it with our ops guys, we're worried about a complete shutdown of the river unless we get some meaningful rain. So that would be a tremendous impact, as you might imagine. Fortunately, with liquid barges, we are already lower draft. We can go a little lower if you go too low though, some of the boats don't go much lower in terms of draft. I think the interesting thing is the cycle times, even with periodic openings that the cycle times of moving a barge up and down river are elongating. So paradoxically, you're seeing more barge demand from this. The problem is particularly with contracts of freightment, you're not moving as fast. But with time charters, you're doing okay. And then we have navigation clauses, which kick in, but there's usually something we call free time, which allows at the start of a voyage, if you get delayed by navigation with a certain number of hours before the delay clauses navigation like clauses kick in. So it's -- I'm fuzzing it up a little bit on purpose. It's just hard to say. I would tell you we are worried about a complete shutdown. But as -- if you look at liquid versus dry cargo, we're in much, much better shape, and then our navigation delay clauses help for sure. And then part of the offset is the slower cycle times, which increases some demand in the whole ecosystem of the large market. So that's a long way of saying it's really hard to quantify, and it could be a $0.02 to $0.05 headwind in the fourth quarter, maybe more if we go the full fourth quarter without some meaningful rain.

Okay, great. And then I did want to pivot over to Florida. I know that's a big market Tampa for the coastal business. So I was kind of hoping how you think what’s happened on the West Coast of Florida maybe is impacting coastal if at all? And then just kind of a two-parter there. On the C&I, I imagine there's a lot of demand for power generation and things like that. Kind of curious what this whole impact of the storm on the West Coast, Florida is having on coastal and C&I?

Yes. A couple of different impacts. On -- obviously, we have a number of our branches in C&I shut down during the quarter with the storm. We had minor damage in one or two of the places, mostly power outage. But as you know, we have our own backup power. So we're able to cover our facilities. Our rental fleet in C&I got as close to sold out as I've ever seen. We provide backup power to people like Walmart, Target, Costco, some health care interest as well. And so we kept very busy there. On the actual coastal side, we had to the delays some voyages into just north of Tampa. We go into in and out of Crystal River with a couple of big units, and we've got a small vessel there as well. We lost essentially a couple of weeks where the charter higher there, because of the storm. And then we had some equipment in shipyards in Tampa that paradoxically, when storm surge went the other way. They actually grounded while they were in dry -- not in dry dock, while they were in the shipyard, so that's delayed some things. So obviously, we have some ship time. But that's kind of all in our thought process. Most of that was seen in the third quarter. I would say there's a little lingering on the rental fleet as you go into fourth quarter, because some of that stiff -- some of that rental equipment is still on hire. But it's as a meaningful storm, but probably less meaningful than the other hurricanes that hit us in like Louisiana or on Texas where we have a lot more inland barges. So long way of saying it, it was impacted. We didn't put cents per share, but it did impact us a little bit, but not enough to make us call it out for the quarter.

Okay. Alright, everybody. Hey thank you for the time.

Yes, alright. Thanks, Greg.

[Operator Instructions] Our next question comes from Greg Wasikowski with Webber Research. Your line is now open.

Hey, David and Raj. Good morning. Thanks for fitting me in here.

Hey, Greg. Good morning.

So I wondered -- David, could you talk a little bit more about the towboat market, what you've seen versus what you're currently seeing on labor constraints? What you guys are doing with that dedicated CapEx? And how that ultimately translates to utilization and rates and margins, how it flows through?

Sure. Yes. Well, look, labor is really tight. I would tell you, labor rates are up mid to high single-digits across the board in both businesses and the marine business in lesser extent on the D&S side is probably on the lower end of that range. But there's been definite labor wage inflation. And you understand it, right? I mean, inflation is impacting just about everybody, just go to the grocery store to feel it. But that certainly not helped the margin situation. And again, to echo Raj's comment, that's one of the reasons we need these price increases to keep even with inflation. In terms of what that's doing to our towboat, we're a little constrained. I would tell you that we had more mariners, it would be better. But we're probably in better shape than most of our competitors, because we have the school that I've talked about before where we train our own mariners and our ops team and Christian had the foresight to start that school up in January of last year, which was -- at the time, it was painful, because it was a cost during the pandemic that was kind of a headwind, but it was a good thing that we did it. Now in terms of capital, the second part of your question, our CapEx, I would tell you, trying to minimize it a bit. We've invested in our fleet over the last five years, six years. We bought some companies with younger fleets. Our fleet is probably in the best shape it's ever been. We certainly don't need to build any new equipment. There may be some specialized equipment we might build a special line barge or something for a specific customer we might do or a special towboat, something we call a retrack which is a towboat with a retractable wheelhouse And we are building, I would say the only real new build we have right now is our hybrid electric towboat that we have being built right now that should deliver sometime in the first half of ‘23, which we're excited about and getting a lot of customer interest for because of its emissions profile. But I would tell you, our CapEx and Raj can better guidance. We don't have guidance for next year, but we're trying to minimize CapEx because our fleet is in great shape and we like that event?

I would just add, Greg, that the last two years, we were in the throes of the pandemic, and we manage CapEx and there's probably a bit of a catch-up we're doing this year. But most of it, if you look at it, most of it is maintenance-related, which basically is what I'm referencing to the -- managing it through the pandemic and coming out right now. And as you can see, utility has improved. So we need our fleet to be in a position to address the demand that we're seeing.

Got it, okay. Thanks, guys. And then back to the D&S and overall strategy, I wanted to explore the pros and cons of a split outside of the economics and finding the right price. So -- are there any other factors or synergies that we might not be thinking about from the outside looking in? Could you be losing any sort of scale or simplifying your overall supply chain, maybe a tie-in with marine repair. Anything like that, that we might not be thinking about?

There is some synergy our distribution services engine repair group works on our fleet and our towboats all the time. That's maybe 4% or less of revenue on the KDS side. So there's that synergy and the other synergies are really just corporate overhead and sharing corporate overhead. I guess there is some future synergies that could be there, and that would be doing this electric hybrid vessel. Our colleagues at Stewart & Stevenson, which is Kirby-owned company, are very good at electrification, battery systems and electric drive equipment. So that's almost a future kind of thing. We're just building our first diesel electric towboat. So that would be something. But when you look at it, it's -- there's not a lot of synergies between the 2 other than the marine repair business.

Okay. And real quick, what about the same kind of question for oil and gas versus C&I? Is it a possibility or something you'd entertain to split those two groups, maybe hang on to C&I and split off oil and gas? Or is that more of a package deal?

No. I think the Board is engaged in Cognizant would look at anything and have -- and continues to look at anything that might enhance shareholder value. If the Board is of the mindset of if we can do one or the other or both and it adds value to the shareholders, they're definitely open to that. It's just -- none of it's worked out thus far. But I will say this, the D&S market in whole, you heard our comments, it's pretty constructive right now.

Yes. Okay. Thanks, David. Good luck again, fully.

Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Kurt Niemietz for any closing remarks.

Thank you, Michelle, and thank you, everyone, for participating on the call today. If you have any follow-up questions, reach out to me directly, 713-4051077. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.