Good morning, and welcome to the Kirby Corp. 2022 Q3 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. To ask a question, you may press * 1 1 on your phone. Please note this event 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.
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 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 Q3 revenue of $746 million and earnings of $0.65 per share. This compares to 2021 Q3 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 Q3'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 low teens versus the year ago period. Overall, Q3 inland revenues increased 9% sequentially and margins improved into the 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 Q4 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 digits sequentially.
Better coal shipments in our dry cargo business also contributed to improved revenues and increased operating margins. Overall, Q3 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 oil field activity contributed to improved demand for new transmissions, parts, and services. In manufacturing, our backlog continued 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 Q3 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've 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 Q3 segment results and the balance sheet.
Thank you, David, and good morning, everyone. In the Q3 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 Q3 of 2021, marine revenues increased $95 million or 28% and operating income increased $25 million or 147%. Compared to the Q2 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 continued to face inflationary cost pressures and expect to recover these increases in cost 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 Q2 of 2022 and compares to the low 80% range in the Q3 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 contract 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 Q3 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 Q3 of 2021, inland revenues increased 35%, primarily due to increased barge utilization, higher term and spot contract pricing, and increased fuel rebuilds, as we saw the average cost of diesel increase almost 90% year-over-year. Compared to the Q2 of 2022, inland revenues were up 9%, driven by increased term and spot market pricing, had a higher average barge utilization, and higher fuel rebuilds. 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 Q3 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 digits 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 rebuilds. 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 Q3, 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. Revenues for the Q3 of 2022 were $313 million, with operating income of $22.3 million. Compared to the Q3 of 2021, the distribution and services segment saw revenues increase by $52.4 million or 20%, with an operating income improving by $11.3 million or 103%. When compared to the Q2 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 the supply chain headwinds, the manufacturing business experienced continued favorable trends in new orders and deliveries. Overall, oil and gas represented approximately 47% of segment revenue in the Q3 and had operating margins in the mid to 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 Q2 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-highway repair. Overall, the commercial and industrial business represented approximately 53% of segment revenue that had an operating margin in the high single digits during the Q3. Now I'll turn to the balance sheet. As of September 30th, 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 sale of assets 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 - 190 million, primarily for required maintenance on our marine fleet. We also expect to generate cash flow from operations of $390 - 450 million, with free cash flow defined as cash flow from operations minus CapEx of $200 - 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 ship 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 opportunities. I will now turn the call back to David to discuss our outlook for the remainder of 2022.
Thank you, Raj. As discussed, the Q3 had good incremental improvements in revenues and operating income in both our segments. In marine, steady demand, driven in large part by high refinery and chemical plant utilization, should continue to support high barge utilization. Combined with limited new barge construction and inflationary recovery needs, we expect these dynamics to support further increases in inland rates. While all of 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 Q4.
Overall, for the 2022 full year versus 2021, we expect inland revenues will grow approximately 20%-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-digit. 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 Q4 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 and distribution. In manufacturing, we have a growing backlog position. We've added new incremental orders in the Q3, 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 2023 and into 2024.
In commercial and industrial, we are forecasting steady demand in on-highway with increased trucking and municipal repair work, continued improvement in bus ridership, and increased demand for Thermo King refrigeration products, offset again by lingering supply chain delays. In power generation, new backup power installation, parts, and service activity are expected to remain solid as demand for electrification in 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 Coasts. For the 2022 full year, we expect revenue growth in the low double-digit 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%-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 Q3 results show 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 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. To ask a question, you may press * 1 1 on your phone. As a reminder, we ask that you please limit your question to one question and one follow-up. Please stand by while we compile the Q&A roster. The first question comes from Kenneth Hoexter with Bank of America. Your line is now open.
Great. Good morning, David and Raj.
Good morning, Ken.
A little bit of an echo here. Can you talk a bit? 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 Q4 is gonna be really big for you as you price some of those term contracts. Maybe talk about the state of the market and, you know, maybe throw in thoughts on the low water levels. What does that mean for the business and pricing as well? Thanks.
Yeah, sure. Thanks. Thanks for the question, Ken. How about those Astros? No. In all seriousness, let me.
Missed it. Didn't see anything. Go Jets.
No, the term to spot ratio, you know, one thing in a rising market like we've had, and the spot revenue's going up faster than contract revenue as rate increases have gotten rolled into spot contracts quicker. You know, I think that you'll see that ratio of spot to contract change a little bit here in the Q4 as we renew some of these big term contracts that we have coming due at the end of the year. You know, that's the comment on the spot versus contract ratio. You know, we're really happy with where we are with spot and contract right now. You know, in a rising market, it's good to have pretty good spot exposure.
Again, that ratio has been impacted a little bit by how fast we've been able to raise spot rates versus term contract rates. Term contract rates will price higher here in the Q4, and they need to. I think we've got a great supply and demand situation, but you know, it's needed because of the inflationary pressures. That's another part of it. We've got a pretty good dynamic now. You know, supply is not growing. Demand's holding okay. I mean, we're watching for a recession maybe next year. Right now, you can look at refinery utilization is pretty strong. Chemical plants utilization is strong. I think you know, 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. When you look at the chemical plants in the U.S., their feedstock position's pretty good, particularly if you look at natural gas prices having dropped here recently. From a demand side, we're pretty excited about where we're at right now. We are watching and looking for, you know, a potential recession next year. The good news is, even if we get a little pullback in demand, the supply is so tight, I think we'll be all right. It's not just the supply of barges, it's the supply of mariners and horsepower, which remain tight.
It's about as constructive as we can be. You mentioned high, low water, and you and I have talked about low water. It's gotten worse since you and I talked, Ken. The river's been shut down probably 6 times in the last week or so. The Corps, the U.S. Army Corps of Engineers, the Coast Guard, you know, the industry and our customers, we're all working together to try and keep things moving on the river. The Coast Guard's cut down the number of, the size of the tows. They've lowered draft restrictions, so we're loading more at 9 ft instead of, as the dry cargoes guys would do, about 12 ft at times.
We're doing everything we can, but this is unprecedented. I think this is the lowest the river's 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, you know, it's about 20% of our fleet that moves on the river system. You know, Christian told me earlier, or well, this weekend, it was about 198 barges. 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. It's not the same as running.
You know, it's a little less profitable and so you may see a little bit of a you know could be anywhere from $0.02-0.05 kind of headwind for this quarter, depending on when this thing when the water starts flowing again. It's real. You know, 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 painful because they run, you know, 50 barge tows. Our tows are much smaller and we generally load at lower drafts than they do. So it's impactful, but you know, I think we'll get through it. You know, we're fortunate. We have some contract protection with navigation delays. But the good news is everybody's working together.
You know, whether it's our customer base, the industry, the Corps, or the Coast Guard, everybody's trying to keep it flowing both northbound and southbound.
Great.
Ken-
Okay.
Ken, I was just gonna add, you referenced the Q4 term contract renewals. You're right. It is a substantial quarter for us. You know, we have around 35% of our contracts renewing in Q4.
Yeah, it's the point we've all been, I think, waiting for, right? Is that big Q4. You know, Dave, on the other side of the business, the D&S, it seems like things have finally, you know, clicked and hitting gear. This is kind of what you've been waiting for maybe for a couple of years now. I think the question has always been, you know, the strategic importance of the segment. You know, maybe you wanna 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.
Yeah. No, to your point, D&S is really starting to roll right now. You know, inbound orders are up across the business. You know, obviously, oil and gas, particularly anything electric frack is very strong. We continue to take orders. You know, commercial and industrial is the same. It's you know, pretty strong. We are being impacted by supply chain for sure. I mean, you know, some engine packages are at least a year out. In some cases, we won't get deliveries until 2024. Supply chain is impacting us a bit. To your point, more on the strategic, you know, should Kirby split the kind of the marine and the KDS business. You know, we've always been open-minded to it. We just gotta make sure it creates shareholder value.
You know, the board discusses it and is committed to creating shareholder value. When the numbers make sense, you know, it might make sense to split the two businesses. You know, clearly last year at pro forma EBITDA multiples, it didn't make sense. You know, with this strength, you know, it's getting to make more and more sense. We'll see. We still gotta work through it. You know, meanwhile, we're running the business really well. Both the marine team and the KDS team are hitting on all cylinders. You know, it's good when the team's working hard and the market's working in the right, the same direction. We're pretty excited about where we are right now.
Can I just ask one clarification? Sorry, Carter, I just wanna make sure I understand. In the press release, you said high levels of shipyard activity in coastal. Do you mean more new builds, or did you mean the ballast water treatment that you were talking about later on? I just wanna understand if you were talking about new builds.
No, it's not new builds. It's all ballast water treatment. We fortunately, you know, of our 30 units or so, 29 or 30 units, I think we've got about all but six of our units have ballast water treatment. So we've got those six left to do. You know, those are big, long, heavy shipyards, and they're on some of our bigger units. So that's gonna impact us here, you know, a little bit in the Q4 and, you know, more importantly into 2023. Now in terms of new construction on coastal, nothing. We're not hearing anything, you know, on the drawing board. Yeah, which is really good for the pricing environment, because we're almost in supply-demand balance now.
Even if somebody wanted to build a new unit right now, you wouldn't see it for 3 years. You know, you got to do the engineering and the construction. You wouldn't deliver until 2025, at best case. You know, 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. I would tell you it's about $140 million if you tried to build it now, just because steel prices and labor costs and input prices. You know, it's very, you know, very constructive on that supply and demand standpoint for coastal.
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. Appreciate it.
Hey, thanks.
Great job.
Please stand by for our next question. 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, you know, as we think about the Q4 outlook, you know, obviously, the ranges that you guys provided from a line item perspective are for the full year. You also made a comment in the press release that you expect to deliver improved financial results in the coming quarters. You know, I know you've got some issues with low water issues here in the Q4, 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 Q4 versus the Q3?
Yeah, we haven't really given complete guidance, but as you know, Jack, having followed us for a long time, you know, Q3 is usually the best of the year. You know, Q1 is usually the lightest, and then followed by the Q4, which is, it's not as light as first, but it's usually lighter than certainly the second or the third. That's because of weather. You know, weather starts to impact the marine business, and it can be meaningful, particularly with fog. Fog seems to be the thing that impacts us the most in terms of moving. So when you combine kind of Q4 weather, lower water, you know, it.
You know, we haven't put out guidance, but you could see a flattish quarter. Depending on the river, maybe down a little bit, or if the river clears up, maybe up a little bit. I wouldn't say it's gonna be sequentially, you know, a blowout because of both the weather and the low water. Most of those big term contracts that we talked about in the marine business were repriced at the end of the quarter, and you don't start to see that pricing roll through until kind of January.
Okay. No, that's helpful. I just think it's kind of good to get everybody on the same page there in terms of.
Now, let me talk about D&S.
Sure.
D&S, though, could be a little better sequentially. You know, the issue is supply chain and whether we can get the shipments. There could be some mix issues too. Some products that we ship could be lower margin than other products. 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. Maybe marine flattish and D&S a bit better quarter-over-quarter. That makes sense. I guess maybe kind of shifting gears a bit, but you know, when you kind of think about the momentum as we head into next year, I guess there's some puts and takes, but would love for you to maybe kind of flesh out a bit. You know, 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 what maybe where contract rates are, and just so we can kind of get a sense for, you know, how much upward momentum there may be on contract rates as we go through the renewal process.
Then, you know, 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 cloudy economic backdrop, you know, 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.
Yeah, sure. Yeah, you know, look, contracts pricing is, or said another way, spot pricing is above contract, which is what you have in a healthy market. You know, I would say it's, you know, 10%-20% differential. Just depends on the contract and this, you know, exactly what spot comparison you're doing. That's a healthy gap, and we like that gap, you know, it should help the pricing environment. You know, on our chemical side and refined product side, you know, the customers are very positive, I would say. Volumes are good. I would say, you know, the chemical customers, if anything, are probably seem a little more worried than refined customers based on the economic headwinds.
A lot of that is Europe. I mean, can you imagine if you had a European chemical facility right now? It's got to be maddening, you know, with natural gas around $5 or less here in the U.S., and goodness knows what natural gas costs in Europe as a feedstock. You know, it's an interesting time. I think, as I said earlier, everybody's kind of watching the recession, you know, not to second guess the Fed, but I think they've done enough. I think the soft landing's about now. You know, that's with absolutely no data to support, but feels that way.
Okay. Thank you again for the time.
Thanks, Jack.
Please stand by for our next question. 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 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 chemical side of the business is pretty GDP-linked. 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 the danger of, you know, 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?
Yeah. Kind of the worst thing you can hear in investing is different this time, right?
Yeah.
Look, I mean, GDP doesn't impact our volumes. You know, you've seen that, Ben, in our history, where you know we get a recession and volumes pull back, and you know and demand grows with GDP as well. Yeah, I think that it's not different. If we do get a recession and we get you know a pullback in GDP, it will impact demand. I would tell you maybe the difference now is there's just no new constructions, right? The cost of building new barges is just very, very expensive. You know, that's in check. Then if you layer in you know kind of retirements, which are gonna 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. 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, a little stronger dynamic than we've had. Now going to the oil and gas side of it, you know, it's the interesting dynamic is Europe, right? You know, they're gonna be short refined products because of the refinery feedstock.
I think what we're seeing is export volumes are up a little bit on the refined product side, and, you know, that's helpful. Is that, you know, does that mean that it's different this time? No. It's a little. I think it's a little tailwind maybe for the U.S. refinery complex and to a lesser extent for the chemical complex. I don't know, that's a long-winded answer that's a non-answer. You know, 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 a limit on supply, just based on the cost of new supply, and then of course the cost of keeping older equipment running. That's probably the one thing that's different right now.
Okay, that's helpful. Then for my follow-up, one of the things that we've heard about the river is that the low water levels are causing horsepower to really be tied up and your larger, you know, larger power towboats aren't able to operate as well. 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 onto the tank barge market, and is it providing any level of uplift? Then if I could sort of tag an extra one on there. I know that there was one extra barge that was reactivated in the quarter based on the presentation.
Are you basically fully spent here or are there other pieces of equipment that could be brought back in if demand warranted?
Yeah, let me take that in pieces. First on the horsepower side, yeah, the big horsepower, you know, 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. Most of our horsepower is smaller because our tow 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. Most of our horsepower is a little smaller. Now, it is, to your point, helping give a little tailwind to kind of the market. You know, particularly if you look at dry cargo rates, they're up 200%.
You know, it's certainly helping on the liquid side as well. It's putting some more tightness in the market. You know, 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, you know, as you would have expected during the pandemic, a lot of barges were kind of put on the bank and tied up. You know, 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 Q4 we might have 10-15 coming back in.
You know, there's not a whole lot left. You know, the problem with these barges that were tied up last several years, you know, the cost of bringing them back in with steel prices and labor are really high. We're only bringing back the ones that make sense. You know, is it gonna be a whole lot more? No. You know, maybe another quarter or two of five or so barges after we get through the Q4 could come back for us. I don't think there's a big overhang, excuse me, in that supply there. You know, there's some that can come back.
I think the gating factor is just the cost of bringing off the bank. Again, you know, you hear it in our comments and everybody's comments these days, inflationary pressure. Then when you put steel prices on top of it and labor prices, it's really the inflation is real. It's causing you know, supply to stay in check even more so than the cost of new builds, which is a good thing. 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.
Yeah, that makes sense. Well, yeah, I appreciate the answers and maybe I'll bump into you at Minute Maid over the weekend and go Astros.
Thanks, Seth.
Please stand by for our next question. 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 times in your prepared remarks and in some of the Q&A. 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, you know, this upturn similar to the prior upturns from a margin perspective. 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?
Yeah. Let me break that down in a couple pieces here, and I'll let Raj chime in too if I don't cover it all. Yeah, you know, first is fuel. There's a lag on fuel, so that you know, recovering fuel costs, you know, we have escalators that work. Some of them are direct pass-throughs, some of them are kind of monthly, some of them are quarterly, some of them take four months to work through. Those, you know, are some of the escalators we're talking about. You know, I think, you know, we can get a little pencil width there, but over time, those fuel escalators average out and they work out.
We work with our customers, and we don't wanna make money on fuel escalators and we don't wanna lose money on fuel either. Our customers agree with that. We all work to try and make fuel as neutral as possible. On some of the contracts we have either CPI or PPI, which tries to keep up with inflation. I say tries, it generally doesn't, you know, 'cause you can see certain categories in some of the supplies that we buy for our boats have inflated, you know, double digits, in some cases 20%. You know, things like radars and line that you use on the boats.
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. When we talk about escalators, we're talking about CPI, PPI. 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 it, so we get to recover some of that. I would tell you that, you know, we need the price increases, and so that leverage you just talked about where in past where we saw these price increases, you would think margins would pop more.
You know, in prior cycles, I would say yes, it would pop more than we're seeing now because this. Part of what we're keeping up with is inflation here. You know, 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 know, you would have seen in prior cycles. That's it really purely about the inflation environment.
You know, if I could add, I'll just say that this is why we need rate to increase because of David's comments on inflation. I think you know this approach that we are taking towards you know being very focused towards rate increases is 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 you know that kind of supports what David was saying in terms of that whipsaw effect. We'll see where fuel goes.
I'm looking at the forward curve, going into next year, and if that plays out, then we should see recovery on fuel too 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 we don't wanna get into short-termism, but I think it's important to kind of frame how we should look at 2023. David, you said Q1 is typically the weakest quarter for all the obvious reasons. If you're resetting most of these term contracts late Q4, that'll be marking to market conceptually much higher. You're getting some of these cost escalators through. You know, all else equal on, like, the worst winter weather ever or the worst drought ever, should Q1 be better than Q4 as we think about just this market upturn as opposed to traditional seasonality?
We haven't put pencil to paper, otherwise I'd answer. I think what you're saying makes sense. We just 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. You know, in theory, I could see what you said absolutely happening.
I think you know, with regards to Q1, you know, we're hedging for weather, right? The situation on the Mississippi, right? I think if you go back, recent history says that Q1 typically has bad weather. All things being equal to your point, John, yeah, 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.
Again, to ask a question, please press * 1 1 on your phone. Our next question comes from Greg Lewis with BTIG. Your line is now open.
Hey, good morning, everybody.
Good morning.
How about those?
Good morning, Greg. How about those Phillies?
How about it? I guess my first question is around, you know, how the 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 kinda have to light load. I guess what I would say is in the environment that we're in right now, if it is longer than we think, should we expect more or less barges upriver?
Yeah, I think, Greg, the short answer is I don't know. I will tell you know, 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. You know, that would be a tremendous impact, as you might imagine. You know, fortunately, with liquid barges, we're already lower draft. We can go a little lower. If you go too low, though, you know, some of the boats don't go much lower in terms of draft. I think the interesting thing is the cycle times, even, you know, with periodic openings, the cycle times of moving a barge up and down river are elongating.
Paradoxically, you're seeing more barge demand from this. The problem is, particularly with contracts of affreightment, you're not moving as fast, but with time charters, you're doing okay. 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 you know a certain number of hours before the delay clauses, navigation delay clauses kick in. It's you know 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.
If you look at liquid versus dry cargo, we're in much better shape, and then our navigation delay clauses help for sure. Part of the offset is the slower cycle times, which increases some demand in the whole ecosystem of the liquid barge market.
Yeah. Yeah.
That's a long way of saying it's really hard to quantify, and, you know, it could be a $0.02-0.05 headwind in the Q4, maybe more if we go the whole Q4 without some meaningful rain.
Okay, great. I did wanna pivot over to Florida. I know that's a you know big market, Tampa for the coastal business. I was kinda hoping how you think what's happened on the west coast of Florida maybe is impacting coastal, if at all. Just kind of two-parter there on the C&I imagine there's a lot of demand for power generation and things like that. Kind of curious what this whole impact of you know the storm on the west coast of Florida is having on coastal and C&I.
Yeah. No, a couple of different impacts. You know, obviously, we had a number of our branches in C&I shut down during the quarter with the storm. You know, we had minor damage in one or two of the places, mostly power outage. 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. You know, we provide backup power to people like Walmart, Target, Costco, you know, some healthcare interests as well. We kept very busy there. On the actual coastal side, you know, we had to delay some voyages into just north of Tampa.
We go in and out of Crystal River with a couple big units, and we've got a small vessel there as well. You know, we lost, you know, essentially a couple of weeks worth of charter hire there because of the storm. Then we had some equipment in shipyards in Tampa that, paradoxically, when the storm surge went the other way, they actually grounded while they were not in dry dock, while they were in the shipyard. That's delayed some things. Obviously lost some shipyard time. That's kinda all in our thought process. Most of that was seen in the Q3.
You know, I would say there's a little lingering on the rental fleet as you go into the Q4 because some of that rental equipment is still on hire. It's, you know, it's a meaningful storm, but probably less meaningful than the other hurricanes that hit us in like Louisiana or in Texas, where we have a lot more inland barges. Long way of saying it, you know, it was impacted. We didn't put, you know, cents per share, but it did impact us a little bit, but not enough to make us call it out for the quarter.
Okay. All right, everybody. Hey, thank you for the time.
All right. Thanks, Greg.
Please stand by for our next question. Our next question comes from Gregory Wasikowski with Webber Research. Your line is now open.
Yeah. Hey, David and Raj. Good morning. Thanks for fitting me in here.
Hey, Greg.
Good morning.
David Grzebinski, could you talk a little bit more about the towboat market, just what you've seen versus what you're currently seeing on labor constraints, what you guys are doing with that dedicated CapEx and, you know, how that ultimately translates to utilization and rates and margins, how it flows through?
Sure. Yeah. Well, look, labor is really tight. I would tell you labor rates are up mid- to high-single digits across the board, both in both businesses, in the marine business and, to a lesser extent, on the D&S side is probably on the lower end of that range. There's been definite labor wage inflation. You know, you understand it, right? I mean, inflation is impacting just about everybody. You know, just go to the grocery store to feel it. You know, that's certainly not helped the margin situation. Again, to echo Raj's comment, that's one of the reasons we need these price increases to keep even with inflation.
You know, in terms of what that's doing to our towboat, you know, we're a little constrained. I would tell you that if 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, you know, our ops team and Christian had the foresight to start that school up in January of last year, which was at the time 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, you know, our CapEx, I would tell you, we're trying to minimize it a bit. We've invested in our fleet over the last 5 years, 6 years. We bought some companies with younger fleets. Our fleet's probably in the best shape it's ever been. We certainly don't need to build any new equipment. You know, there may be some specialized equipment we might build, you know, a special line barge or something for a specific customer we might do, or a special towboat, something we call a retract, which is a towboat with a retractable wheelhouse. 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 2023, which we're excited about and getting a lot of customer interest for because of its emissions profile. You know, I would tell you our CapEx and Raj can give you better guidance. We don't have guidance for next year, you know, we're trying to minimize CapEx 'cause our fleet's in great shape and we like where it's at.
I would just add, Greg, that you know, the last two years we were in the throes of the pandemic, and we managed CapEx and there's probably a bit of a catch up we're doing this year. You know, 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. As you can see, utilization has improved, so you know, we need our fleet to be in a position to address the demand that we're seeing.
Got it. Okay. Thanks, guys. Back to D&S and overall strategy, I wanted to explore the pros and cons of a split outside of, you know, the economics and finding the right price. You know, are there any other factors or synergies that we might not be thinking about from the outside looking in? You know, could you be losing any sort of scale or, you know, simplifying your overall supply chain, maybe a tie-in with marine repair? Anything like that we might not be thinking about?
There is some synergy. You know, our distribution and services engine repair group works on our fleet and our towboats all the time. You know, that's maybe 4% or less of revenue on the KDS side. There's that synergy, you know. 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, you know, with doing this electric hybrid vessel. Our colleagues at Stewart & Stevenson, which is a Kirby-owned company, are very good at electrification, battery systems, and electric drive equipment. You know, that's almost a future kind of thing. You know, we're just building our first diesel electric towboat.
You know, that would be something. You know, when you look at it, there's not a lot of synergies between the two other than in, you know, the marine repair business.
Okay. Real quick, what about 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, no. I think, you know, the board is engaged and cognizant and would look at anything and continues to look at anything that might enhance shareholder value. You know, if the board is of the mindset if we can do one or the other or both, you know, and it adds value to the shareholders, they're definitely open to that. It's just you know, none of it's worked out thus far. I will say this, the D&S market in whole, you heard our comments, it's pretty constructive right now.
Yeah. Okay. Thanks, David. Good luck against Philly.
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. Thank you everyone for participating on the call today. If you have any follow-up questions, reach out to me directly at 713-405-1077. Thanks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.