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Presentation

Operator: Good morning, and welcome to the Kirby Corporation 2022 Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. We ask that you limit your questions to one question and one follow-up. Please note this is being recorded. I would now like to turn the conference 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 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 and in 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. Before we get into the details of our fourth quarter and full-year results, I’d like to take a moment to touch on a press release we issued earlier this month. The Board initiated a process in early 2022 with the support of our independent financial and legal advisors to review a range of alternatives, including a potential sale or spin-off of the Distribution and Services business. The Board is keenly focused on maximizing value for shareholders and regularly reviews and actively manages Kirby’s portfolio. Following a thorough exploration of potential options, including discussions with a number of potential strategic and financial counterparties, the Board concluded that under current financial market conditions, the best way to enhance shareholder value is to continue to execute on our strategic plan for both the marine transportation and distribution service business.

As always, we remain committed to maximizing value for shareholders. And we’ll continue to evaluate all opportunities to do so. But as you know, the difficult financing environment is impacting the ability of both sponsors and strategics to pursue and consummate transactions. We have deep operational expertise and unique capabilities that position both of our businesses to deliver long-term growth and enhanced performance. This is underscored by our strong financial results and operating performance in 2022. We are encouraged by the bright prospects of the company’s two segments and look forward to continuing to operate these businesses from a position of strength. Now turning to our financial results. Earlier today, we announced fourth quarter revenue of $730 million and adjusted earnings of $0.67 per share.

This compares to 2021 fourth quarter revenue of $591 million and adjusted earnings of $0.27 per share. Both of our segments performed well during the quarter delivering significantly higher revenue and operating income year-over-year. The fourth quarter’s results reflected steady market fundamentals in both marine transportation and distribution and services, partially offset by unfavorable weather and low water conditions, normal seasonal slowness, as well as ongoing supply chain challenges that delayed deliveries in distribution and services. In Inland Marine transportation, strong refinery utilization led to steady demand with our overall barge utilization running in the 90% range. Tight market conditions, due to strong demand and limited supply of barges coupled with continued inflationary pressures, put upward pressure on prices with spot prices up in the low single-digits sequentially and in the 20% to 25% range year-over-year.

Term contracts also reviewed up in the 10% to 15% range versus a year ago. Overall, fourth quarter Inland revenues increased 24% year-over-year and margins improved into the low teens range. Low water conditions on the Mississippi River, as well as the onset of winter weather made for difficult operating conditions in the quarter with a significant increase in delay days. While we continue to pace headwinds with inflationary pressure in the quarter, we started to witness some moderation and operating margins continue to improve reaching their highest level since 2020. 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 low to mid-single-digits sequentially.

Better coal shipments in our dry cargo business also contributed to improved revenues and increased operating margins. Overall, fourth quarter coastal revenues increased 8% year-over-year and operating margins were in the low single-digits. In Distribution and Services, demand remained strong across our markets with continued growth in new orders and backlog. In manufacturing, revenues were up sequentially and year-over-year, driven by healthy demand 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 continued supply chain challenges. 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 summary, our fourth quarter results reflected continued strength in market fundamentals for both segments, despite meaningful weather and supply chain challenges. The Inland market is inflecting nicely, demand is strong and rates are moving higher. While the coastal market remains challenged near-term by industry-wide supply dynamics. Our barge utilization is good and we’ve realized modest rate improvements. Strong demand in Distribution and Services is contributing to further growth in our backlog, while supply chain issues are expected to persist for the foreseeable future, the outlook for the market is strong. We continue to focus on working safely, efficiently and responsibly to meet and exceed our customer needs and expect to drive incremental earnings growth into 2023 and into 2024.

I’ll talk more about our outlook later, but first I’ll turn the call over to Raj to discuss the fourth quarter segment results and the balance sheet.

Raj Kumar: Thank you, David, and good morning, everyone. In the fourth quarter of 2022, marine transportation revenues were $423 million and operating income was $47 million with an operating margin of 11.1%, compared to the fourth quarter of 2021, marine revenues increased $72 million or 21% and operating income increased $21 million or 82%. Compared to third quarter of 2022, marine revenues were down 2% and operating income increased by 12%. As David mentioned, the historic low water conditions on the Mississippi River ¸as well as freezing weather along the Gulf Coast that curtailed refinery and plant utility made in the quarter negatively impacted operations. These negative factors were partially offset by solid underlying customer demand and improved pricing.

The Inland business contributed approximately 80% of segment revenue. Average barge utilization was in the 90% range for the quarter, which is similar to the utilization seen in the third quarter of 2022, and compares to the mid to high-80% range in the fourth quarter of 2021. Long-term Inland marine transportation contracts or those contracts in the term of one year or longer contributed approximately 55% of revenue with 60% from time charters and 40% from contracts of affreightment. Improved market conditions contributed to spot market rates increasing sequentially in the low single-digits and in the low to mid-20% range year-over-year. Term contracts that renewed during the fourth quarter . On average in the 10% to 15% range, compared to the prior year.

Compared to the fourth quarter of 2021, Inland revenues increased 24%, primarily due to increased barge utilization, higher term and spot contract pricing and increased fuel rebuilds as the average cost per diesel was up 60% year-over-year. Compared to the third quarter of 2022, Inland revenues were down 2%, driven by unfavorable operating conditions due to low water on the Mississippi River and winter weather. Inland operating margins were negatively impacted by 147% sequential increase in delay days. However, the margins were in the low-teens and improved both sequentially and year-over-year as delay days and inflationary cost headwinds were more than offset by gains in 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 90% range in the fourth quarter of 2021. During the quarter, the percentage of coastal revenue under term contracts was approximately 65% of which approximately 90% were time charters. Average spot market rates were up in the low to mid-single-digit sequentially and renewals of term contracts were higher in the low teen range year-over-year. During the quarter, coastal revenues increased 8% year-over-year with improved barge utilization, higher contract prices and higher field rebuilds. Overall, coastal had a positive operating margin in the low 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 fourth quarter, as well as projections for 2023.

This is included in our earnings call presentation posted on our website. Now I’ll review the performance of the Distribution and Services segment. Revenues for the fourth quarter of 2022 were $307 million with operating income of $17 million, compared to the fourth quarter of 2021, the Distribution and Services segment saw revenue increased by $67 million or 28% with operating income increasing by $10 million or 127%, when compared to the third quarter of 2022, revenues decreased by $5.4 million or 2% and operating income decreased by $5.2 million. The sequential decrease in revenue and operating income was attributed to ongoing supply chain delays, as well as some seasonal slowness activity. In the oil and gas market, favorable commodity prices and increased rigs and completions activity contributed to a 44% year-on-year increase in revenues.

We experienced strong demand for new entrants and parts throughout the quarter. As David mentioned, we continue to navigate a tough supply chain environment, especially in our manufacturing business. Despite the supply chain headwinds, the manufacturing business experienced continued favorable trends in new orders and backlog. Overall, oil and gas represented approximately 42% of segment revenue in the fourth quarter and had operating margins in the low single-digits. On the commercial and industrial side, strong activity contributed to an 18% year-over-year 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. Compared to third quarter of 2022, commercial and industrial revenues increased by 8%.

Our Thermal King business continued to experience delays due to supply chain constraints that impacted revenue growth. However, this headwind was offset by increased activity in marine, power generation and on-highway repair. Overall, the commercial and industrial business represented approximately 58% of segment revenue and had an operating margin in the high single-digits during the fourth quarter. Now I’ll turn to the balance sheet. As of December 31, we had $81 million of cash with total debt at $1.1 billion and our debt to capital ratio improved to 26.2%. During the quarter, we had cash flow from operations of $132.9 million and we generated cash proceeds from asset sales of retired marine equipment of $4 million. We used cash flow and cash on hand to fund $52.3 million of capital expenditures or CapEx, primarily related to maintenance of equipment.

During the quarter, we decreased debt by $39 million. There was no repurchases of company stock during the quarter given the blackout associated with the company’s strategic review. As of December 31, we have total available liquidity of approximately $585 million. For 2023, we expect to generate cash flow from operations of $480 million to $580 million. We continue to work through supply chain constraints that are challenging working capital in the near-term, but we expect to unwind most of this working capital as orders shipped in 2023 and into 2024. With respect to CapEx, we plan to provide further guidance on 2023 expected CapEx later this year as we gain more clarity on projects, including planned shipyards and the impact of supply chain delays.

We are committed to a balanced capital allocation approach and will use this cash flow to opportunistically return the capital to shareholders and continue to pursue long-term value creating niche investment and acquisition opportunities. I will now turn the call back to David to discuss the remainder of our outlook for 2023.

David Grzebinski: Thank you, Raj. As discussed, we achieved strong fourth quarter results in both our segments and we expect that to continue into the first quarter. In Marine steady demand driven in large part by high refinery utilization and chemical plant utilization should continue to support high barge utilization. Limited new barge construction combined with inflationary pressures are expected to further support Inland rate increases. While all of this is very encouraging, we are mindful of the ever-changing economic landscape and the potential recession. We continue to expect refinery and petrochemical plant activity to remain high with an increase in customer volumes. Barge availability is constrained as there is minimal new barge construction expected in 2023.

These positive factors are expected to contribute to our barge utilization running in the low to mid-90% 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 our Inland revenues. We also expect continued improvement in term contract pricing as renewals occur throughout the year. Overall, we expect Inland revenues will grow approximately below double-digits year-over-year and expect near-term Inland operating margins, the average in the mid-teens and to continue to gradually improve throughout 2023 ending the year close to if not 20%. In Coastal, market conditions are expected to remain steady, but will remain somewhat challenged near-term by underutilized barge capacity across the industry.

Even with some market softness Kirby’s coastal barge utilization is expected to remain in the low to mid-90% range. Full-year 2023 coastal revenues are expected to be flat year-over-year, driven primarily by continued good fundamentals in our core liquid cargo business and higher coal shipments in our dry cargo business, offset by the company’s plant, maintenance and ballast water treatment installations, which are driving an almost doubling of maintenance days, compared to 2022. Operating margins for coastal are expected to be near breakeven to low single-digits on a full-year basis. Looking at distribution and services, we have a favorable outlook with anticipated strong demand for equipment parts and service distribution and a growing backlog .

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 products — parts and service in the distribution business. We expect the current commodity price environment will contribute to further increases in rig count and frac activity in 2023. U.S. land rig counts have grown to over 770 rigs, which represented a full-year average increase in 2022 of approximately 28% and we expect that growth to continue into 2023. Similarly, the active frac spread count is approaching 295. With this growth, we expect to see increasing demand for engine parts and service in distribution. In manufacturing, we have a growing backlog position. We added new incremental orders in the fourth quarter and we expect this trend will continue As I mentioned earlier, we expect that supply chain issues and long lead times from four 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 between quarters in 2023 and perhaps even into 2024. In Commercial and Industrial, we are forecasting steady demand in on-highway with increased on-highway and municipal repair work, continued improvement in bus ridership and increased demand for Thermo King refrigeration products offset by lingering supply chain delays. In power generation, new backup power installations, 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 2023 full-year, we expect revenue growth in the low-double-digit range for commercial and industrial. While supply chain issues are expected to continue impacting new product and equipment deliveries in distribution and services, we expect 2023 segment revenues will increase by 10% to 20%, compared to 2022. With Commercial and Industrial representing approximately 60% of segment revenues and oil and gas representing the remainder. We expect segment operating margins will be in the mid to high-single-digits for 2023. To conclude, Kirby’s 2022 results showed steady improvement in the base of ongoing challenges. Both our segments performed well during the year delivering improved revenue and operating income and our team executed well on near-term objectives, as well as our long-term strategy.

We exited the year with healthy long-term fundamentals for both our businesses and they’re both very well positioned to continue delivering value. Although we see favorable markets continuing and expect our businesses will provide improved financial results, we are closely monitoring the potential for a recession. Having said that, as we look long-term, we are confident in the strength of our core businesses and we are confident with 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.

Operator: We will now begin the question-and-answer session. Our first question comes from Jack Atkins with Stephens. Your line is now open.

Jack Atkins: Okay, great. Good morning. And guys congratulations on being able to really capitalize on the pricing opportunity in the fourth quarter. Nice work there. So I guess, I would love to kind of get your thoughts as we kind of think about the 2023 outlook David and Raj, you may want to tag team this one. But as you sort of think about, sort of, what’s baked in there, can you help us think about are you factoring in any, sort of, mild recession, soft landing, hard landing, kind of help us think about that? And then to what degree do you feel like the market is going to be able to support continued rate renewals in Inland above inflationary cost increases. Can you kind of walk us through both of those items in terms of what’s baked into your outlook for 2023?

David Grzebinski: Yes, sure, Jack. Well, look, I mean, the market fundamentals particularly with Inland are really strong right now. Demand has continued to be strong. We’re seeing refinery utilization as everybody knows is strong. We did see a little pullback in chemicals in the fourth quarter, but it — that started to come back again in the first quarter, but not enough to impact kind of the demand picture. So the demand picture is still very strong on the the supply picture is even better. Nobody’s really building any new equipment of substance. And because prices are high, rates aren’t anywhere close to justifying new construction. But then there’s a big maintenance bubble that’s hitting the entire Inland industry for the next two years.

And it’s really about — there’s a five-year shipyard major process and it’s about one, most of the barges were built or a good portion of them were built a number of years ago. So the industry is going to hit pretty heavy maintenance schedule in €˜23 and €˜24. So that’s actually going to help barge availability remained really tight. So when we look at the outlook for Inland, it’s very strong. It’s about as strong as we’ve ever seen it in terms of supply and demand balance. So that’s a long way of saying, I think the rate environment is going to increase and continue it needs to, by the way, if we’re ever going to get to rates that justify replacement capacity. That said, as we look through €˜23, we didn’t factor in a big recession at all.

We think as we look at the demand for our products, most of it should continue even with a mild recession. That said, if we get a sharp down recession that could impact us. We did not factor that into our guidance. We think we’ll — to use a phrase power through this potential economic weakness. And it’s really all about our supply and demand position. It’s about as strong as we’ve seen, Jack.

Jack Atkins: Okay, David. That’s really helpful. Thank you for that. And I guess maybe, kind of, shifting gears, Raj, I’d like to kind of dig into the cash flow and the CapEx comment for a moment. Can you maybe walk us through why you all are not comfortable providing a CapEx outlook for 2023 at this time? And maybe if it’s possible to kind of give a range? I think folks are trying to — you guys are generating very strong free cash flow. To me that’s a very important part of the valuation case around the stock. Any sort of help you can give us there in terms of what’s going on from a CapEx perspective?

Raj Kumar: Yes, Jack, good morning. Yes, thank you. Yes, you’re absolutely right. We generate very strong free cash flows, but David mentioned the maintenance days that we’re going to have to deal with, it’s an industry-wide phenomenon and we’re seeing — the shipyards that we’re seeing is across the board, it’s both for Inland as well as offshore, right? Inland loan is going up like 20% to 25%. So we’re dealing with this situation right now. We’re dealing with also the supply chain issues. We’ve also impacted some of us CapEx spend, as well as whatever other inflationary pressures that we’re seeing. So right now, there are a lot of puts and takes. The team is penciling it out, I think we should be in a position to give you better CapEx number, more meaningful CapEx number very soon. We should be able to — be able to do that. But right now, we’re not in a position to provide a real CapEx number.

David Grzebinski: Yes. I think, Jack, just to add to that. Look, the cash from operations is going to be strong. Obviously, we’ve got maintenance CapEx cycle here that we’re still working through. But I would just tell you in terms of deployment of free cash flow. Obviously, you saw the share repurchase authorization we’re pretty excited about that. As you look at opportunities, kind of, the best parts company go by right now is Kirby. So we’re pretty excited about it. And we’ll have updates as we progress through the first quarter.

Jack Atkins: And just to follow-up on that really briefly though, I mean, is there any reason why you still wouldn’t be in a position to generate very healthy free cash flow in 2023 even though there’s still a little bit of uncertainty around what the CapEx should be. There’s not a scenario where you would not be of strong free cash flow generator this year. Is that correct?

David Grzebinski: Right. Yes, we think we’ll have good free cash flow.

Raj Kumar: Yes, I think that’s a fair statement, Jack.

Jack Atkins: Okay, okay. Thank you again for the time guys. Really appreciate it.

Operator: Please standby for our next question. Our next question comes from Ken Hoexter with Bank of America. Your line is now open.

Nathan Ho: Great. This is Nathan Ho dialing in for Ken Hoexter. Great quarter guys. Just on Dave’s comments on strong inflationary — on the inflationary pressures coming off a little bit on the Inland side. We’re just recalling back to your November update where some of the cost items were up 70% and above. Just wanted to see how the management team sees cost turning into 2023? And with this new backdrop of normalizing commodity costs, how does that affect the exit rates of 20% Inland margins for 2023?

David Grzebinski: Yes. No, inflation is — it’s still here as I think most of us feel. What I would tell you on inflation is we haven’t seen grow any further. But look, when we look at food for our marine crews, those prices are up 10%, but they haven’t gone further up. But it’s still a lot higher than we’ve traditionally had. If you look at crew transportation, whether it’s rental cars or airline flights, those costs are up significantly from, kind of, the norms anything electronic-related, for example, radars or things on our boats are still up. What I would say, maybe we didn’t state this right in our prepared remarks, but inflation hasn’t come down, but it hasn’t grown any further. So we like to say that’s abating, but we haven’t really seen prices contract, we’ve just seen them not go up as much as they were kind of flattish from where they were last quarter.

So that helps. Obviously, we’ve needed price increases just to keep up with inflation. If inflation stays in check and doesn’t grow anymore, that obviously would help our margin profile and kind of get to where we talked about in our prepared remarks in terms of the end of the year. Now if inflation goes up further, that’s going to obviously have an adverse effect to margins. But right now we feel pretty good that things are kind of flattening out. Obviously, the Fed will see what they do today and it’s being very aggressive to tame inflation. So that’s good and bad. Obviously, we hope it doesn’t trip us into a recession.

Nathan Ho: I see. And just to clarify, on the margin targets set for 2023 across the segments, that’s baking in sort of a flattish cost structure into this year? Would that be correct?

David Grzebinski: Yes, flattish in terms of general inflationary. I think, obviously, we’re going to have crew labor costs go up. I think everybody is seeing labor costs continue to rise. But that obviously is going to happen. We factored a little bit of that in. If it gets acute, that we’d have some headwinds. But right now, we’ve factored in a little labor inflation. But the rest of the inflationary pressures we think will just kind of stay where they are at. We don’t anticipate any sharp price increases across most of our supply chain.

Nathan Ho: Great. And just as a follow-up on the capital strategy into 2023. I’m aware that the CapEx plan is still on the works. But in terms of capital deployment, are there any updates on how the company is seeing M&A into 2023? How are you viewing, say, the availability of opportunities here?

David Grzebinski: Yes. is there are opportunities out there. It’s best for us not to comment on any of those, but look, there are opportunities out there. But I would tell you, look, we’ve had a history and we always like to consolidate particularly our Inland tank large market. That said, I feel strongly and the Board does too, the best barge company to buy right now is Kirby. When we look at our prospects in marine and in our distribution business, it’s about as good as we’ve seen in the long while. So we’re quite excited and we believe that it’s going to be multi-years. It’s not just a one year, kind of, phenomena. So when we look at capital deployment for acquisitions, we’re factoring in Kirby looks pretty good right now.

Nathan Ho: Got it. Thanks again for the time.

Operator: Please standby for our next question. Our next question comes from Greg Lewis with BTIG. Your line is now open.

Greg Lewis: Yes. Hi, thank you and good morning, everybody, and thanks for taking my question. Definitely good to see as is starting to find its groove. I did want to touch a little bit on kind of the, I guess, ongoing dynamics in that market and a lot of us to follow the refinery products industry or looking at that Russian oil embargo on products that’s coming out in February and some of the challenges are that, kind of, the refining industry might have to face or actually more of an opportunity than challenges, I guess. But as we think about that coming next month, is there any way we can think about or how are you thinking about potential changes in activity feedstock? We’re hearing a lot about, obviously, it’s going to be problems with DGO. What type of setup does that should we think about that creating in the first part of this year?

David Grzebinski: Yes. Let’s break it into a few of our trade lines. I don’t want to get too specific for obvious reasons with competitors and customers. But look, the refinery complex is really strong right now. Demand for refinery type — refined product moves is very, very strong right now. Probably the strongest we’ve ever seen in. Yes, I think a lot of that is kind of reopening, we’re also seeing export volumes look pretty good. So look, the refiners had great cracks spreads and they’re pulling back a little bit, but they’re still in terms of traditional crack spreads are still pretty strong. And the refinery complex in the U.S. is probably the most efficient in the world. I think refineries in Europe, that’s a home another situation.

And then if you pivot to chemicals, it’s really more the same, right? The chemical complex in Europe obviously, the natural gas price is high and energy price is high, it’s really suffering the U.S. position in chemicals one, you’ve got brand new plants or very efficient plants that were recently built in the last four, five years. Good feedstock position. So chemicals though did pull off a little bit in the fourth quarter. They’ve been coming back slowly here so far in the first quarter. It’s a little early to say how far that’s going to go. Obviously, when you listen to the Chemical Company’s earnings calls, Europe is hurting him a little bit on housing starts, hurting a little bit as well. But so far, it feels pretty good and things are — the volumes and pulled off enough to really impact our demand and supply picture.

When you look at black oil and other things that’s pretty strong. I will tell you we talked about the maintenance bubble that’s hitting the industry. I would tell you it’s more acute in black oil than it is and anything else. There’s a huge number of black oil barges that are going to have to be maintained across the industry in 2023 and 2024. But demand seems to be holding up in black oil. And then if you look at Ag products, that’s been pretty strong as well. So we look at each of those trade lanes and have been very encouraged by the demand picture. Now that said and you heard it in my cautionary comments about the potential recession. I mean, it could come, it could pull back a little bit. But right now, when we look at the demand side of things and the supply, it’s still really positive for us, Greg.

Greg Lewis: Okay. That’s great to hear. And then you did touch a little bit on pet chems, you know, I guess Q1 is seasonally the weak quarter for you. I guess maybe given the fact that we’ve seen, I guess what natural gas price is down 30% year-to-date, could that kind of collapse in natural gas prices maybe help Q1 be a little less weak just given the fact that as a pet chem plant, that’s got to be — we have must be in a very — much more profitable environment than we were, say, six to eight weeks ago?

David Grzebinski: Yes. Look, you’re right, our first quarter is almost always our weakest quarter of any year and that’s really weather related. It’s one thing with low water, but fog just really shuts us down on the Gulf Coast through the first quarter a lot, and then we get impacted. So that’s part of the weakness. But to your point, I think natural gas prices being a little lower, certainly is going to help the chemical complex be a little more profitable, which should help volumes a bit. And then I think at some point we’re going to see China open back up and China is a big consumer of chemicals as you know. The other interesting thing that Venezuelan crude for example imports — that’s positive. It gets a heavier fruit slate into the Gulf Coast that has more byproducts as you know.

That really helped the entire barge complex just all the different derivatives that can come from a heavy crude slate. So maybe that helps a little bit in the first quarter. But look, first quarter, as you know, it’s been our weaker quarter of the year. But again, the overall supply demand picture for us in 2023 is very robust. And we’re pretty excited about what we see in front of us, Greg.

Greg Lewis: Okay, great. Thank you, very much, and nice job on the quarter guys. Thanks. Have a great day.

David Grzebinski: Thanks, Greg.

Operator: Please standby for our next question. Our next question comes from Greg Wasikowski with Webber Research. Your line is now open.

Greg Wasikowski: Hey, David and Raj. How are you doing?

David Grzebinski: Good.

Raj Kumar: Good morning, Greg.

Greg Wasikowski: Yes, thanks. Thanks for taking the questions. First one, David, curious if you — can you just talk about what you’ve seen with rate movements so far? Or through Q4 and so far into Q1? I know, it’s a smaller sample size. But from what we’ve seen, there’s been maybe a little bit of plateau in that period. So could you comment on that? And then if you revisit your thoughts around the pace of the recovery versus the overall sustainability of the recovery of that relationship, where we were towards the back end of 2022 versus how 2023 is shaping up from a sustainability perspective, it would be great?

David Grzebinski: Sure. Sure, Greg. Look, in our prepared remarks, probably heard some of this, but sequentially, we saw spot rates up mid-single-digits. That was off of a very strong third quarter. So fourth quarter sequentially was still up mid-single-digits on spot. Contract — well, and then if you look at spot year-over-year, it’s still up 20%-plus from a year-over-year on spot. Term contracts were up double-digits, which that’s on a year-over-year basis, which is pretty strong. I would tell you we’re still seeing a good pricing environment. It’s still very tight and prices are still rising. Really haven’t filled of plateauing. Maybe some of the market checks are seeing that, but we’re not. It’s still very, very strong.

And it needs to be. I mean, it’s — we’ve talked about inflationary pressures, but we’ve got a situation where we’re still a long way away from being — having rates to build replacement capacity. So we need to continue with a good price momentum. And given as tight as we’re seeing it in terms of supply and demand. We’re not seeing a pullback in rates at all. And again, I talked a little bit about the maintenance cycle that the industry is going to see. It’s going to have a profound impact too, it’s — profound is probably too strong at work, but it’s certainly going to add some momentum to this. So that’s a long way of saying, again, we’re pretty optimistic you can’t get noise in the winter months. I’ll just say that, so maybe I don’t know what your market checks are telling you, but sometimes you hear some noise in the winter months.

But again, we’re very positive, Greg.

Greg Wasikowski: Okay, great. That’s helpful. Thanks, David. And then somebody has got to ask about D&S, so I guess I’ll do it. Are you expecting to — I’m just trying to see like kind of where that stands heading into 2023 now that the strategic review is closed? Are you still expecting to kind of market that business for sale into 2023? Are you only entertaining unsolicited offers at this point? Obviously, under the caveat that you’re always evaluating all options for shareholder value yada, yada, yada. But just trying to see how front of mind this is for — going into 2023? Or is it more of — in the rearview mirror at this point?

David Grzebinski: It’s more in the rearview mirror. But look, I mean, you said it well, we’re always open to ways to hedge shareholder value. And should the market change? Or something happen that makes us spin off — makes sense? We’d absolutely look at it. That said, the business is really strong right now. We’ve had good in-bound, our electrification kind of a product offerings are very strong. E-frac is doing really well. Whether it’s backed up power generation, that’s always also doing well. And if you think about it, everybody wants power 24/7 and when you start worrying about the fragility of the grid that makes even more sense. On highway, our commercial and industrial business is strong. Our marine repair business is strong.

So as we look at KDS going into €˜23 and into €˜24, it feels pretty good, kind of, reiterating some of our thoughts about Kirby. But both our marine business and our KDS business are in good solid up slings that we feel will last for several more years. So KDS is strong, but that’s it. I’ll go back to kind of the way you’ve phrased it. We’re always open for ideas. We ran a very thorough process on this and we’re focused on executing our strategy right now. But if something changes, we’ll absolutely look at it.

Greg Wasikowski: Okay got it. Thanks a lot guys.

Operator: Please standby for our next question. Our next question comes from Ben Nolan with Stifel. Your line is now open.

Ben Nolan: Hey, David. Can you hear me, okay?

Raj Kumar: Yes.

David Grzebinski: How are you doing, Ben?

Ben Nolan: Oh, great. Good luck. How are you guys?

David Grzebinski: Good.

Ben Nolan: Good. I wanted to — if I could, just circle back to where we were just left off from the D&S side and then also mix it in there a little bit with what you were talking about. With respect to pricing for inflation. The margins were a little bit lower than I thought given, sort of, everything that’s going on in tracking equipment and the pricing power that seems like it should be there? Should we think of that as just a function of there’s been a lot of inflation in that market. And so you’ve had a lot of pricing power, but it basically kept up with inflation. Now to the extent that maybe inflation is beginning to moderate, that’s really where you should see margins? Or is there some sort of economies of scale, dynamic where — now you get to a certain point where margins just inflect, because you’re able to do a little more volume? Or how should we think about the margin profile on that side of the business?

David Grzebinski: No, I think you characterized it very well. In slates, we’ve been raising prices in with D&S, but it’s basically kept pace with inflation. The other thing we have is a little bit of a supply chain, kind of, margin erosion. And let me give some context around that. Talk about $1 million piece of equipment with 400 to 1,000 parts and all of a sudden you can’t get some parts, certain parts and so you reengineer a replacement part and this is pretty sophisticated equipment and we like to make sure we’ve nailed the engineering down. So every time you shift a source or shift a part design or something to meet a supply chain headache, it adds a little cost. So there’s that dynamic as well. So it’s an inflation and a supply chain dynamic that’s impacting margin.

That said, our guys are pushing price and they need to, right? I mean, we’ve got to offset these costs. But I would just say, particularly on our KDS manufacturing, the supply chain has been really, really tough. It’s not new. Everybody’s saying it. But some of our OEMs for some engine deliveries, we can’t get engines until 2025 even ordering now. So the supply chain issues are still real, but it’s something we’re working through. And the good news is demand from our customers is there. And it’s really us in hand-to-hand combat dealing with delays that come inevitably. When you’ve got a parts list that runs in the hundreds and you’re short one or two parts that are key to finishing the equipment. That said, you know, we’re keenly focused on getting KDS margins up into the high single-digits and got the whole organization working hard towards that.

Ben Nolan: Okay. That’s helpful color. I appreciate it. And then I wanted to talk a little bit about just barge supplies. You mentioned it with respect to supply and demand pricing really enough. We’ve seen that what I think that we’re 22 tank barges delivered last year, some ridiculously small number. It would seem to me that there’s probably likely to be a shrinking of the barge fleet this year and that would lend itself to substantially higher secondhand prices. I was wondering, if you could maybe characterize that? And then to that answer, how do you feel about buying equipment or other companies, if there is a little bit of price escalation for secondhand equipment?

David Grzebinski: Yes, I don’t think you hit them. One of the reasons we actually think Kirby is a great barge company to buy. But no, you’re right, I think with the maintenance cycle that we’ve talked about here on the Inland side, a lot of companies are going to be taking their barges in for their five-year maintenance cycle and look at it and they’ll just say, man, it doesn’t make sense to continue it. So we will see retirements over the next two years, because of this maintenance cycle. So with little building and in a pretty heavy maintenance cycle, you should see some pretty healthy retirements over the next few years, which to your point is going to point to — one is going to help the supply demand situation get even tighter, but it’s going to make people look for equipment.

So, yes, I think there is a situation just, because the replacement cost of equipment that any transaction or buying a consolidating transaction, price expectations could be very, very high. So as you know, we’re pretty disciplined about that. And we certainly not going to chase a consolidating move, particularly when we feel as strong as we do about Kirby’s outlook.

Ben Nolan: Okay. That’s helpful color. I appreciate. Thanks, David.

David Grzebinski: Thanks, Ben.

Operator: Our next question comes from William Baldwin with Crescent Securities. Your line is now open.

David Grzebinski: Hey, good morning, Bill.

William Baldwin: Thank you, very much and good morning, Dave, Raj, (ph). Raj, could you comment a little bit on the cash from operations here in the fourth quarter? Looks like that at least based on what you were talking about at the end of the third quarter that, that didn’t come quite at the level that you had anticipated as you talk about the factors that, number one, am I interpreting that correctly? And secondly, if so, what contributed to a little bit of a shortfall there?

Raj Kumar: Yes, Bill, you are right. Cash, cash from operations in the fourth quarter missed our expectations and that was driven actually by on the D&S side. We had inventory build, and I think between David and I have used the word supply chain quite a (ph) on this call, but it’s a true phenomenon, so we’ve had issues in terms of getting product shipped out. And what’s happened is that’s resulted in a build of working capital in the fourth quarter. My expectation is as we get into the 2023 time-frame, we will shift those products. So whatever does it work in progress right now, we’ll get — we’ll go into finish goods over three and three and three and get shipped out. So yes, we put ourselves out there, we set ourselves a higher expectation. We tried to execute through it, but the supply chain challenges just got the better of us.

David Grzebinski: Yes. Just to put a little color on that, Bill. We probably had $50 million worth of sales at KDS that didn’t materialize that we would have expected in normal supply chain environments to have materialized in the fourth quarter. So if you think about construction in progress or work in progress, those inventories are higher. Our working capital certainly is a lot higher than we like, and the bulk of that is from supply chain issues. But there’s also a phenomenon on receivables, so I think with higher interest rates, we’ve seen customers push out their payables, which are our receivables. And so we’ve seen a little build in working capital. We’ve got to go after that, but it’s something that’s perhaps economy-related and supply chain.

William Baldwin: That’s very helpful. Thank you. Secondly, I was going — on the supply chain issues, you mentioned engines being a very critical product that’s not being delivered. Are there any other important components or parts that you could highlight that are given you a real issue on supply chain on shortages?

David Grzebinski: Yes, there’s an electric component trade. On the e-frac side and kind of the natural gas reset power generation side. For example, things like electric panels, you would think that would be a pretty easy thing. But there’s a lot of pieces and parts related to electrification that, that are jammed up in the supply chain.

William Baldwin: Is there any visibility there, David? As you look out in 2023? I mean, do you have any line of sight on meaningful improvements?

David Grzebinski: Yes, we do. I mean, each component, we put our supply chain team on and they get a path forward. And then something else, Raj calls it whack a mole, it’s kind of like the gained whack a mole

Raj Kumar: Count down on one and

David Grzebinski: You know, some other supply chain piece pops up. But it is component-by-component. We get in a pinch on a component. We work with fire, work with alternative sources, reengineered some things and get it back lined up. But then, frankly, something else pops up. It’s a bit frustrating. But look, we’re managing through it. We still had a pretty good revenue quarter in ADS and it’s just we’re still taking inbound and delivering. It’s just the deliveries are taking longer.

Raj Kumar: Yes, Bill. If I could add, our book-to-bill is about one. So that’s a very healthy order rate that we’re looking at. So it’s not the lack of demand today at this point.

William Baldwin: No, no, it’s got to be very frustrating. And also it seems like I mean, a number of your product lines obviously have applications far beyond the oil and gas business. And so you got opportunities that you could be out there going after that or just right now you’re limited on doing?

David Grzebinski: Yes. No we’re — look, just the electrification, whether it’s a micro grid or whatnot, but it is amazing. When we look at our, for example, our backup power rental fleets, our utilization last year, even with the light Hurricane Storm season, our utilization was probably the best it’s been. It’s just every company needs and wants to have power 24/7. So the electrification of the U.S. and the world for that matter seems to be a real phenomenon. And it’s actually — it’s driving many opportunities from design and new product standpoint for KDS.

William Baldwin: Just one last really clarification, David. If I read correctly in the release, you indicated that in the Inland barge business, you were looking for net — small net increase in net new barges in 2023? And what I hear on the call would not lead me to. To think that’s going to be the case. Did I read that correctly in the release that there would be a net increase?

David Grzebinski: No. Maybe for us, we are — we had some barges on the bank that we brought back, maybe — but it was only a handful. Yes, it was two. Kurt is giving me the — keep signing.

William Baldwin: Okay. So that relates to Kirby and not the industry there is what you’re saying?

David Grzebinski: Correct. Yes. We don’t see any as I think one of maybe Ben said that there was 22 barges built last year in the industry. Yes, that’s about right. The order book from what we hear is anemic and we don’t see anybody building. Now there could be some people that tied up some barges during the pandemic and there may be some of those coming back. But again, I think you see a net decline in barges in 2023.

William Baldwin: Right. Well, I knew that had been your expectation for quite a while and I just misinterpreted what was said in the release there. And that comment pertains to Kirby, not the industry. So that clarifies it. I appreciate it. Thank you very much.

David Grzebinski: Thanks, Bill. All right. Have a good day.

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

Kurt Niemietz: Thank you, operator, and thank you everyone for joining on the call today. If you have any follow-up questions, please feel free to reach out at me at 713-435-1077. Thank you.

Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.