Kirby Corp Q4 FY2020 Earnings Call

Good morning, and thank you for joining us. With me today are David Grzebinski, Kirby's President and Chief Executive Officer; and Bill Harvey, Kirby's Executive Vice President and Chief Financial Officer. A slide presentation for today's conference call as well as the earnings release, which was issued earlier today, can be found on our website at kirbycorp.com. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available on our website in the Investor Relations section under Financials. As a reminder, statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated as a result of various factors, including the impact of the COVID-19 pandemic and the related response of governments on global and regional market conditions and the company's businesses. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2019, and in subsequent quarterly filings on Form 10-Q. I'll now turn the call over to David.

Thank you, Eric, and good morning everyone. Earlier today we announced 2020 fourth quarter earnings of $0.37 per share. The quarter's results were impacted by the COVID-19 pandemic, which reduced demand for Kirby's products and services, particularly in Marine Transportation, where we experienced low volumes and continued poor market dynamics and poor barge utilization. Across the company, we have tightly managed costs, which has helped maintain overall Marine Transportation margins near 10%, and distribution and service margins near breakeven. Our fourth quarter earnings also included a tax benefit as a result of the CARES Act, which Bill will discuss in a few minutes. Looking at our segments, in Marine Transportation, the inland and coastal markets experienced challenging market conditions, with low demand particularly for the transportation of refined products, crude oil, and black oil. Although the economy showed some modest signs of improvement during the quarter, increasing cases of COVID-19, high product inventories, and impacts from two Gulf Coast hurricanes contributed to a slight sequential decline in quarterly average refinery utilization. During the quarter, refinery utilization averaged 77%, compared to a previous five-year fourth quarter average of 90%, and it ended the quarter at 80%. Chemical plant utilization modestly improved 1% sequentially, but remained below 2019 levels. Overall, for our inland and coastal businesses, there were minimal spot requirements, low barge utilization, and additional pricing pressures throughout the quarter. In Distribution and Services, fourth quarter revenues sequentially improved, benefiting from the continued economic recovery, higher product sales in commercial and industrial, and some pickup in activity in oil and gas distribution. In the commercial and industrial markets, we experienced increased demand for parts and service in the on-highway and power generation businesses, higher product sales in Thermo King, and increased deliveries of new marine engines. These gains were partially offset, however, by normal seasonality, including lower utilization in power generation rental fleet following the hurricane season, as well as reduced major overhauls in marine repair during the harvest in the dry cargo market. In the oil and gas market, activity continued to recover as many E&P companies modestly increased spending during the fourth quarter, and well completion activity improved. Active frac crews, which bottomed around 50 in the second quarter, improved every month during the fourth quarter, and finished the year in excess of 150. This activity improvement contributed to higher demand for new transmissions, parts, and service in our distribution businesses. In manufacturing, remanufacturing activity was steady, and we received additional new orders for environmentally-friendly fracturing equipment. In a few moments I'll talk about our outlook for 2021, but before I do I'll turn the call over to Bill to discuss our fourth quarter segment results and the balance sheet.

Thank you, David, and good morning everyone. In the fourth quarter, Marine Transportation revenues were $299.4 million, with an operating income of $29.2 million and an operating margin of 9.7%. Compared to the 2020 third quarter, marine revenues declined $21.2 million or 7%, and operating income declined $3.2 million. The reductions are primarily due to significantly reduced pricing in inland, reductions in inland barge utilization, and increased delay days as a result of seasonal weather. Aggressive cost reductions helped to limit the impact on operating margin. During the quarter, the inland business contributed approximately 75% of segment revenue. Average barge utilization declined modestly into the high 60% range as a result of the second wave of COVID-19, continued weak refinery utilization in an extended hurricane season. Long-term inland marine transportation contracts, those contracts with a term of one year or longer, contributed approximately 70% of revenue, with 62% from time charters and 38% from contracts of affreightment. Term contracts that renewed during the fourth quarter were down in the low double digits on average. Spot market rates declined approximately 10% sequentially, and 25% year-on-year. During the fourth quarter, the operating margin in the inland business was in the low-to-mid teens. In coastal, the market continued to be challenged by significantly reduced demand for refined products and black oil. We experienced weak spot market dynamics, and some chartered equipment was returned as term contracts expired. During the quarter, coastal barge utilization was in the mid-70% range, unchanged sequentially but down from the mid-80% range in the 2019 fourth quarter. Average spot market rates were generally stable, but term contracts continued to renew lower in the mid-single digits. During the fourth quarter, the percentage of coastal revenues under term contracts was approximately 85%, of which approximately 85% were time charters. Coastal's operating margin in the fourth quarter was in the negative low-to-mid-single digits. With respect to our tank barge fleet, our reconciliation of the changes in the fourth quarter as well as projections for 2021 are included in our earnings call presentation posted on our website. Moving to Distribution and Services, revenues for the 2020 fourth quarter were $190.3 million, with an operating loss of $2.9 million. Compared to the third quarter, revenues improved $14.4 million or 8%. The sequential improvement was primarily due to modest economic improvements and increased product sales in the commercial and industrial market. These gains were offset by lower revenues in the oil and gas market due to the timing of pressure pumping equipment deliveries to manufacturing. Segment operating income declined slightly during the quarter as a result of product and service sales mix. In commercial and industrial, mostly sequential improvements resulted in increased demand for parts and service in the on-highway and power generation businesses. Higher Thermo King product sales and the timing of new marine engine deliveries also contributed to sequential increases in revenue. These were partially offset by normal seasonality, including lower utilization of the power generation rental fleet, and reduced major overhaul demand in marine repair. During the fourth quarter, the commercial and industrial businesses represented approximately 78% of segment revenue. Operating margin was in the low single digits, and was impacted by a higher mix of product and parts revenue during the quarter. In oil and gas, revenues and operating income sequentially declined primarily due to reduced deliveries in new pressure pumping equipment and manufacturing. This reduction was partially offset by increased demand for new transmissions, parts, and services in oil and gas distribution as U.S. frac activity continued to improve. During the fourth quarter, the oil and gas-related businesses represented approximately 22% of segment revenue, and had a negative operating margin in the mid-teens. Turning to the balance sheet, as of December 31, we had $80.3 million of cash, total debt was $1.47 billion, and our debt to capitalization ratio was 32.2%. During the quarter, we had strong cash flow from operations of $85.1 million, and we repaid $109.8 million of debt. We also used cash flow and cash on hand to fund capital expenditures of $18.8 million. For the full year, we generated $296.7 million of free cash flow, defined as cash flow from operations minus capital expenditures. This amount was slightly below the low end of our previously disclosed guidance range of $300 million. This guidance range contemplated a significant income tax refund related to the CARES Act of over $100 million, which was not received as expected prior to the end of the year. We now anticipate this refund will be received during the 2021 first quarter. At the end of the year, we had total available liquidity of $684 million. Looking forward, capital spending is expected to continue to trend down in 2021. For the full year, we expect capital expenditures of approximately $125 million to $145 million, which represents nearly a 10% reduction compared to 2020, and is primarily composed of maintenance requirements for our marine fleet. As a result, we expect to generate free cash flow of $230 million to $330 million, which includes the tax refund previously discussed. Before I close, I'd like to address income taxes. During the fourth quarter, we had an effective tax rate benefit as a result of net operating losses, which were carried back to prior higher tax years as allowed by the CARES Act legislation. In 2021, we expect our income tax rate will be around 25%. I'll now turn the call back over to David to discuss our operational outlook for 2021.

Thank you, Bill. With 2021 behind us, we are all looking forward to better days in the new year. As we review our performance this year, we see some initial signs of recovery. In Marine Transportation, refinery usage has consistently increased to the low 80% range. Inland market activity has seen a slight uptick, and our barge usage has risen from its lowest point to the low to mid 70% range. Demand in Distribution and Services continues to recover thanks to an improving economy and favorable commodity prices. However, it's important to acknowledge that we are still dealing with a global pandemic, which keeps demand for our products and services at near-record lows and adds uncertainty to the timeline for significant economic recovery. This makes it difficult to predict outcomes for 2021, as we face a wide array of possibilities. In the short term, we anticipate challenging market conditions, especially in Marine Transportation, where industry barge utilization remains very low and pricing is highly competitive. Additionally, the recent rise in COVID-19 cases has complicated vessel crewing, particularly in coastal areas. In Distribution and Services, the extent and timing of recovery are closely linked to broader economic stability and developments in the oil and gas markets. Despite these near-term pressures and uncertainties, we are optimistic that the latter half of 2021 will show substantial improvement. In the meantime, we will stay focused on controlling costs, maintaining capital discipline, generating cash flow, and reducing debt. In the inland market, we expect the current tough conditions to persist briefly, with gradual improvements expected in the second quarter, leading to a more significant recovery in the latter half of the year as demand rises. We foresee our results in the first quarter to decrease sequentially and be the lowest of the year. Normal seasonal winter weather delays and lower pricing on contract renewals will likely overshadow modest gains in average barge utilization. Beyond the first quarter, as the economy improves, we anticipate increased activity leading to a better spot market environment. Even amidst the pandemic, new petrochemical plants are set to come online, while new barge construction remains minimal and many barges are being retired across the industry. This situation should help enhance the market and is expected to lead to a substantial increase in barge utilization to the high 80s or low 90s percentage range by year-end. Regarding pricing, we expect continued pressure in the short term, as rates typically align with barge usage. Therefore, while market conditions appear more favorable later this year, we anticipate a decline in full-year revenues and operating margins compared to 2020, primarily due to lower average barge utilization and pricing impacts from contract renewals. In the Coastal sector, we expect the challenging market conditions and low barge utilization to noticeably affect our 2021 results, contributing to year-on-year decreases in both revenues and operational losses. Throughout 2020, most of the coastal fleet operated under term contracts set in more favorable market conditions during 2019 and early 2020, which helped soften the financial impact as demand decreased during the pandemic. However, as these contracts begin to expire and demand for refined products and black oil remains low for the foreseeable future, we foresee reduced pricing in the coastal business for 2021. Additionally, the retirement of three older large-capacity coastal vessels due to ballast water treatment regulations, along with another barge scheduled for mid-2021 retirement, will further affect our revenue and operating margins compared to 2020. In the first quarter, we expect coastal revenues and operating margins to decline sequentially as we face ongoing challenges in the spot market pricing and difficulties in crewing our vessels. However, similar to inland, we anticipate that coastal market conditions will improve as the year goes on, resulting in better barge utilization and reduced operational losses by the second half of 2021. In Distribution and Services, we forecast a stronger economy and heightened activity in the oil field, leading to significant year-over-year demand increases across much of the segment. In the Commercial and Industrial sector, we expect ongoing improvements in on-highway activities as truck fleet mileage rises and bus repair demands start to recover as work resumes. We also foresee growth in on-highway parts sales due to the launch of our new online sales platform. Furthermore, demands for new installations, parts, and services in power generation are projected to grow as the need for electrification and round-the-clock power intensifies. In the oil and gas sector, we believe current better oil prices will result in higher rig counts and well completions throughout 2021. Industry experts predict the average number of active frac crews could approach 200, marking a noteworthy improvement compared to 2020. Consequently, we expect increased demand for new engines, transmissions, parts, and services in distribution, as well as enhanced remanufacturing activities for existing pressure pumping equipment. Regarding the production of new equipment, the ongoing surplus of traditional pressure pumping capacity in the industry may limit order volumes for conventional fleets. However, a growing emphasis on ESG factors within energy and industrial sectors is anticipated to boost demand for Kirby’s extensive array of environmentally friendly equipment throughout the year. Overall, we predict that 2021 revenues and operating income in Distribution and Services will significantly improve compared to 2020, with the revenue distribution roughly split 70% for commercial and industrial and 30% for oil and gas. While this projection depends on the timing of a significant economic recovery, we expect operating margins for the segment to fall within the low to mid-single digits for the full year, the lowest being in the first quarter and the highest in the third quarter, with a usual seasonal drop occurring in the fourth quarter. To conclude, 2020 was a challenging year marked by unprecedented difficulties. The commitment of our dedicated employees to maintain business continuity while prioritizing safety and actively working to reduce costs was commendable. I am very proud of our achievements against such a tough backdrop. Looking ahead, even though we continue to face some immediate challenges and uncertainties, we are confident that Kirby is well-positioned for a significant recovery once the pandemic subsides and the demand for our products and services rises. In Marine Transportation, it's worth noting that just a year ago, inland barge utilization was at an all-time high, and inland operating margins were nearing 20%, with prices climbing in both inland and coastal markets. Despite the significant drop in demand due to the pandemic, overall industry supplies remain stable, with minimal new barge construction in the inland sector, no new capacity in coastal, and substantial retirements across both areas. These factors bode well for our businesses and are expected to lead to a notable tightening in the barge market when demand rebounds. Considering our inland fleet expansion over the past three years, which has increased barrel capacity by approximately 40%, along with our ongoing initiatives to boost the efficiency of our inland and coastal fleets, we see considerable earnings potential in Marine Transportation. In Distribution and Services, while navigating through the pandemic and an unprecedented downturn, we remained focused on enhancing our operations throughout 2020. We took decisive and proactive measures to streamline and right-size our business for the near term while reinforcing it for long-term success, including the consolidation of businesses and support functions, renewing and expanding OEM relationships and offerings, completing the implementation of a unified ERP system, launching a new online parts sales platform, and developing and prototyping new products for the growing trend of electrification. Overall, we anticipate improved outcomes as the economy recovers and oilfield activity increases, and our efforts during 2020 will significantly enhance long-term returns for this segment. Finally, regarding liquidity, we generated robust free cash flow of nearly $300 million during a challenging year and made substantial progress in reducing debt. We expect 2021 to be a strong year for cash flow, projecting $230 million to $330 million in free cash flow for the entire year. We plan to use this cash flow to further reduce debt and bolster liquidity. Operator, that concludes our prepared remarks. We are now ready to take questions.

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

Hey guys, good morning. Thank you for taking my questions.

Yes, good morning, Jack.

Hi, Jack.

So, David, maybe if we could start with one of your closing points there at the end, just around industry capacity. And I'd be curious to hear your thoughts on both inland and coastal. But I think we went into this downturn with about, call it, 3,900 inland barges. Where do you think we're going to stand maybe at the end of 2021? How much capacity do you think the industry is going to take out just because of the difficulty we've seen over the last 12 to 18 months? And then I'd be curious to get your thoughts kind of looking at the coastal market the same way; how much capacity do you think is going to come out by the time we get to the other side of this?

Yes, in 2020, there were around 140 to 145 new barge deliveries. Sander Toth from River Transport News reported 143, which seems accurate. However, the number of retirements is uncertain. Initially, we planned to retire only 10 barges in 2020, but we ended up retiring about 95, significantly affecting the net number of new barges. I expect retirements to exceed 150, possibly reaching over 200 in 2020. A survey from Informant in March or April will provide more clarity on this. Looking at 2021, 36 barges ordered before the pandemic carried over into this year and not much new construction is anticipated. Retirements are still happening, and we know from our network that there has been a lot of retirements, but we lack specific numbers. Overall, I believe barge capacity will decrease substantially in 2021, though it’s difficult to quantify. Just before the pandemic, Kirby's utilization peaked at over 95%, which bodes well for demand recovery. On the new build front, increased steel prices are affecting both retirements and the cost of new barges, which have risen by 25% to 35%. This suggests that building new capacity will be expensive, making us optimistic about the supply and demand situation in the inland sector. The outlook is even better for the coastal sector as there is little new capacity coming in. OSG has delivered a couple of replacement units, but I am not aware of any current orders. The lead time for ordering an offshore barge is significant—at least two years, even with designs ready. Consequently, the coastal market is likely to experience greater demand elasticity upon recovery, and we feel positive about the current supply and demand situation.

Okay, that's helpful. Thank you, David. And I guess just for my follow-up question, kind of thinking about the balance sheet and cash flow. You're going to, hopefully if everything goes according to plan, in 2021, with net debt somewhere in the, call it, $1.1 billion-ish dollar range, has the last couple of downturns in the barge market that we've seen since the end of 2014, has that changed the way you guys are thinking about your capital structure long-term, and the amount of debt that you want to hold on the balance sheet? Has anything changed long-term, David or Bill, just curious to get your thoughts around the capital structure and how you plan on looking at that in the future?

No, Jack, I don't think anything has changed significantly. At the end of the year, our debt-to-cap was about 32%. Based on this year's cash flow, we could reduce it to the mid-20s. This is a conservative strategy. In the short term, we aim to use cash flow to pay down debt and enhance liquidity. However, if you look at the company's metrics, they are improving and doing so quite rapidly.

Okay. That's helpful. Thanks for the time, guys.

All right, thanks, Jack.

Thank you. The next question comes from Jon Chappell with Evercore. Your line is now open.

Thank you. Good morning, everybody.

Good morning, Jon.

David, you described a situation that contrasts two halves. Currently, regarding the inland business, you addressed the changes in the contractual renewal pricing over the past year. I have two questions: first, what percentage of your inland business is up for contract renewal in the first half of the year, which might be somewhat weaker? Second, how willing are you and your customers to consider shorter-term contract renewals to avoid entering the market during a downturn and potentially missing the start of a recovery in the second half of the year?

Our renewals usually happen steadily throughout the year, with the fourth quarter being the busiest. If there is a particularly heavy quarter, it tends to be the fourth due to the year-end mindset. In the first half, renewals are not notably heavy. As you've heard from our prepared remarks, spot pricing is down 10% compared to the previous quarter and 25% from last year. Additionally, term pricing for renewals in the fourth quarter has decreased by low double digits. This indicates that our margins will be under pressure this year as those prices impact us. However, as utilization increases, pricing should improve. Currently, we have a significant spot portfolio, with about 30% in spot and 70% in contract, which allows for a swift rise in our equipment pricing. The contracts renewing in the first half will likely be lower, but we expect the second half to be more favorable. As prices rise, we should see rapid benefits, although historically, it takes around a year for margins to fully reflect changes, both upward and downward. Therefore, it will take some time, but we have a substantial amount of spot equipment that can adjust pricing quickly.

Okay, that's helpful. And then, second follow-up, just completely switching gears, when you made the Stewart & Stevenson acquisition, there was a lot of, I think, cost synergies that you had identified, and I think this downturn has probably accelerated, or maybe even helped you exceed some of those cost targets, with a little bit of green shoots in the oil patch with consolidation kind of picking up and with you having about as lean of a structure as you can possibly have in that business. When you think about the next couple of years, do you think that you're long for the business or maybe the complete opposite? Now that you have this kind of hopefully lean structure that the benefits from an upturn, is there more to do as far as capital deployment in that business?

Yes, I don't think you'll see us deploy new capital there. What you will see, and this will take some time for us to roll out, we've invested in R&D and new product development. We alluded to it in the prepared comments. Look, electrification is happening, and Stewart & Stevenson in particular has some great technology and know-how and engineering resources, and we've got some really good ESG-centric products that are rolling out. So, we're pretty excited about that. Some of that is being applied to the oil field. As you know, we've made a lot of electric tracks over the years, and those are the kind of the one style of electric track is to use gas turbines to drive electric drive, and then to a pump, but there's basically electric grids now that can drive electric pumps, and using natural gas generation to generate the electric power, we're right in the square, middle of that, and that's getting some traction. But also, importantly, those electrification products can be used well outside the oil field. And we're working hard on that. It's not anything, we're ready to give you numbers for you to build into your model, but I will tell you, it's moving along with a lot of speed. And there's a lot of excitement in the company about that. So when you're all out together with a lean cost structure, a rebound in the economy and commercial and industrial being about 75% of distribution and services, we're pretty excited about it. Now does that mean we put new capital in there? No, I think that's one of the great things about D&S is it doesn't require a lot of capital. It's got a pretty low capital base; it's generally around working capital is where you deploy the capital. So that's probably a long non-answer. But yes, I would characterize it as we're pretty excited about what we've got in front of us. We made a lot of good changes, a lot of investments during 2020. And I think KDS is poised to really contribute to the Kirby's bottom line.

Okay, I really appreciate that. Thank you, David.

Thanks, Jon.

Thank you. The next question comes from Ken Hoexter with Bank of America. Your line is now open.

Great, good morning, Dave, Bill, and Eric.

Good morning, Ken.

Good morning. It sounds like the coastal environment is challenging, but let's focus on inland first. Can you share your thoughts on the current conditions? You mentioned some new capacity and ongoing retirements, but refinery utilization is improving from the lows. Could you elaborate on how long it took for those changes to impact rates? Are we talking about a quarter, or does it generally take longer to see that shift?

Yes, that's a good question. Right now, let me address utilization briefly, as it drives pricing. The perception that utilization is tightening, and that it will continue to do so for a while, is what influences pricing. In the fourth quarter, our utilization dipped to the high 60%, which was the lowest we've recorded, but we are now seeing it in the low 70s. I believe we are between 70% and 75% utilization, and it is gradually increasing. This increase is partly due to the recovery of refinery utilization. While refinery utilization is improving, it's important to note that there is a mathematical aspect at play since some refineries were shut down, leading to a slight decrease in the denominator. So even though nameplate utilization appears higher, it's probably 2% to 3% higher than it would be on a constant capacity basis. However, the important point is that refinery utilization is continuing to rise, which positively affects our utility based on the volumes we handle. We are optimistic about the upward trend in utilities this year, and I don't foresee any factors that could hinder this progress. It won't take long to halt the decline in pricing and begin an increase. I wish I could specify whether this will occur in the first, second, or third quarter, but I believe it will happen this year and will likely progress quickly. As we discussed earlier, there has not been much new construction, and the supply and demand balance should tighten rapidly, driving pricing upward. I apologize for not being more specific. You mentioned coastal challenges, and the situation there is similar; however, I think coastal has stronger elasticity, as they involve larger units that travel farther. That being said, coastal is more focused on refined products, which have been affected more significantly by industry structure changes compared to inland. Still, I believe the same dynamics apply. As utility improves, pricing will recover quickly, and we'll see a return to contract activity. We've noticed an increase in equipment being moved from term to spot because our customers lacked sufficient volumes. We anticipate this changing, and I believe it is already starting to change. The positive trend we observed in COVID-19 statistics shows a strong decline in new infections, suggesting that things are moving in the right direction.

Thanks, Dave. I just wanted to follow up on that. Regarding coastal operations, how significant is the staffing issue? Is it becoming a pay concern, or is it simply a matter of not being able to get operators to the sites? Are you observing that vessels are parked or is this more about a lack of demand?

Yes, there is definitely a lack of demand, but we have been impacted as well. Coastal vessels often remain far from shore during their voyages. If there is a COVID case among the crew, the vessel must return to shore for decontamination and crew replacement. This process can be costly and time-consuming, potentially leading to significant losses for these high-value units, as you could lose a week's worth of earnings, which can range from $30,000 to $40,000 a day. We have experienced some of this impact in the fourth and first quarters. However, the primary concern remains the decline in demand, and we are hopeful that this trend will soon reverse.

Great, thanks. I appreciate your time.

Thanks, Ken.

Thank you. The next question comes from Randy Giveans with Jefferies. Your line is now open.

Hi gentlemen, how is it going?

Great. How are you doing?

Great. So, just looking at D&S and kind of run rate going forward, it fell back to a loss in the fourth quarter from a slight gain in the third quarter. So, maybe what drove this sequential decline, and then following the ongoing cost reductions, when do you expect another quarterly profit in this segment?

Yes, we anticipated the sequential decline. A significant factor is the seasonality we experience in the fourth quarter compared to the third quarter. In the third quarter, we typically see a substantial amount of rental income due to hurricane season, which extends slightly into the fourth quarter. However, rental utilization generally declines in the fourth quarter for standby backup power used during hurricanes, as we had predicted. Additionally, our Marine repair business, including diesel engine and gearbox repairs, also experiences seasonality in the fourth quarter because the dry cargo fleet is active at that time to handle the harvest. Therefore, we see increased business in the third quarter, but during the fourth quarter, dry cargo operators utilize their equipment, resulting in less repair work. Both of these factors contribute to the observed seasonal decline. Some of this trend will reverse in the first quarter with an uptick in Marine repair maintenance. Thankfully, we hope not to face any hurricane season in the first quarter, which would further aid recovery. What will truly support D&S is product deliveries and an improving U.S. economy. We sell a variety of spare parts, truck parts, and backup power solutions, all of which are driven by economic activity. As the economy strengthens, we expect profitability to increase. In oil and gas, we secured some orders in the fourth quarter that will begin to be delivered in the first and second quarters, leading to expected profitability from that as well. While I can't specify when we will be profitable in any given quarter, we have indicated that for the full year, we foresee D&S achieving low-to-mid single-digit operating margins with revenue growth. Revenue could rise between 10% to 30%, depending on how quickly the U.S. economy begins to revitalize. Overall, we are quite optimistic about KDS for 2021.

Got it, okay. And then turn into like acquisitions and growth, clearly movie theaters, video game stores they're getting all the love right now, but not saying you should expand into those businesses, but any appetite for acquisitions in the inland barge market, keep the streak of annual barge consolidation going, and then what about expansion into maybe offshore or wind and LNG?

Yes, that's a great question. As Bill mentioned, we're concentrating on strengthening our balance sheet during this pandemic. We will reduce our debt further and we always consider consolidating acquisitions, but that will be on hold until we gain more clarity and stability. You raised an interesting point about wind energy, which is an exciting sector. There are numerous projects planned, especially on the east coast, with about 28 gigawatts of wind power in the works, representing significant opportunities for Jones Act compliant vessels. It's encouraging that President Biden has recently expressed support for the Jones Act, which may create opportunities for marine companies under this framework. Various types of vessels are needed for installation, transportation of equipment to wind farm sites, as well as maintenance and crew support. This could represent a substantial growth area, and Kirby is certainly exploring this as we are one of the largest marine companies in the U.S. While we are in discussions, we are not in a position to disclose further details, but it does hold promise for growth. However, Kirby remains disciplined in its capital allocation, ensuring that we pursue good prospects with appropriate contract coverage before committing significant capital.

Yes, I would assume that would be the case. So, good to hear, thanks so much.

Thanks, Randy.

Thank you. The next question comes from Greg Lewis with BTIG. Your line is now open.

Hey, thanks, and good morning, everybody.

Good morning.

David, I'm going to ask a question around competitors. I mean, you touched on it like, 'Hey, before pre-COVID, you guys were getting inland margins up into the 20% range,' but really that was kind of like what maybe a 90, 120-day period, where if we were to look back over the last five years, it's really been a challenging market and maybe not to call out specific competitors, but at this stage of basically a five-year extended downturn, but there are competitors that it's been very public, that Bouchard has a lot of equipment that's not really operating as they go through what they're going through, but is there any kind, can you paint a similar picture to any companies without mentioning names? Is that happening at all in the inland side, or when we look at the inland fleet maybe companies are more stronger than we think for? I'm just trying to get a feel for that.

Yes, sure. Let me just ramble for a second. Of course, you know on the inland side, the ACL had gone through a bankruptcy; they were just over-levered and they were trying to do their best and did their best; they just had way too much leverage for the downturn that we went through. I think there are a number of companies that are severely levered right now, but as you know, we were able to pick-up Higman because they were over-levered in a declining market. And so, it's out there. The bankruptcies, it always seems like they can last longer than you would think when they get over-levered. But certainly, there are some people that are very, very stressed here in this current environment. We've seen some pricing go down below cash costs, which is very frustrating, right? That either they're desperate or they don't really understand their cost structure in order to do that, but it's a sign of how bad the market got. I'm encouraged with what we're seeing in utility. And I think it'll come back pretty quickly. We're starting to see the utility move north, which was really good, but there are undoubtedly some people out there that are close to bankruptcy. It's probably good not to comment specifically about anybody, whether it's on the inland side or the office side. I mean you mentioned one of them. Anyway, yes, it has been five years. It's been a tough five years. But again, I think we're part of a critical infrastructure to run the U.S. economy. And ultimately, things come back. We were starting that as you said, I know it was only 120 days but things were all moving in the right direction before this COVID pandemic.

And Greg, I might add that I don't think we can point our fingers at competitors with respect to the downturn. It was no relation to competitors. There was some building, but not meaningful. It was really due to the pandemic and the one-time drop in demand, and it wasn't competitor action. Now we may like that some of them maybe hit the bottom, but this is an unprecedented decline. It's simply something the industry has never seen and a lot of industries have never seen a decline like this.

Yes, no doubt. And then just shifting gears, I mean clearly there are going to be some opportunities on the D&S side. It's interesting that as you think about some of your customers that operate in the oil patch, sometimes it's tough to let go off existing equipment. And so, clearly there are going to be an opportunity for new equipment as there is replacement, but is there anything that D&S or Kirby or Stewart & Stevenson in terms of maybe retrofitting some existing equipment to kind of start moving it towards more environmentally friendly? Is that something that the company is looking at, or is more, hey, as older stuff gets retired we just replace it with more environmentally friendly stuff? Thanks.

Yes, you're correct. We have made significant upgrades, transitioning from older tier engines to newer tier four engines. Additionally, we have converted many standard diesel engines to biofuel. Caterpillar has introduced the dynamic gas blending engine, capable of operating on up to 80% natural gas alongside diesel without any methane emissions. Most of our new construction projects are now utilizing biofuel or electric options, and this trend continued into the fourth quarter. You're right that many of these upgrades are driven by ESG considerations, which also help owners reduce operational costs. Electric options require less maintenance, and biofuel engines lower fuel expenses. Natural gas remains relatively inexpensive, and these trends are expected to persist. Therefore, I don't anticipate the reemergence of conventional frac units in the near future.

Okay, great. Thanks very much everybody.

Okay. Thanks, Greg.

Thank you. The next question comes from Ben Nolan with Stifel. Your line is now open.

Hey, good morning, guys.

Hey, Ben.

I wanted to follow up as you’re looking into the issue of refinery utilization that David mentioned. A few refineries have shut down, and it’s uncertain if they will reopen. Is there anything related to refinery utilization or capacity that you believe has changed significantly in terms of underlying barge demand? Are the refineries that have closed going to have a substantial long-term impact on barge activity?

No. I think the large very efficient refiners are the survivors. The ones with very complex integrated capabilities, they are going to be survivors. I think some of the smaller ones have shutdown because perhaps they are not as efficient. So, that's what you would expect. The older plants get shutdown first. And whether they restart or not, we'll see. We have heard that there is one refinery that's looking to restart. And that's really good news because it had some barge utility with it. So, some of them will restart. I don't think all of them will restart. I think some of them were inherently disadvantaged from a refinery complexity standpoint and refinery efficiency standpoint. The other thing is you're seeing biofuel and other environmentally-friendly products that that our refining customers are adding to their portfolios. And we're starting to see some of those type moves emerge. So I don't think there is anything systemically that makes it all go away. EVs obviously will have a longer-term impact, but there is a debate about how long that takes and if some of that demand destruction is absorbed or replaced by emerging markets demand growth. If you think of the developing economies, typically they start to burn more energy as they developed and I don't think that that phenomena changes. So, but longer-term obviously we're all thinking about the impact of EVs and what that can do to demand, but I think it's got multiple years, if not decades to play out. I know some friends with EVs, but they also have a suburban in their garage. So I think it's got a ways to play out.

Right, right. Well, yes, you mix the word. If you can mix the word hydrogen in the conversation here, you add 10% to your share price. So maybe that would help it.

Well, we've talked about changing our name to Kirby Game Stop.

There you go. Switching gears a little bit over to D&S, it sounds like things are starting, especially on the industrial side of the business. It sounds like they're starting to normalize a typical seasonality, but you've done some acquisitions there; obviously there has been a lot of costs that's been pulled out of the whole system longer-term. Has your thinking changed at all with respect to what you think your operating margins might be able to look like there? Is this still sort of mid to high single-digit, call it mid-cycle run rate operating business or is there any chance that you've been able to fine-tune that business enough, so that you can kind of eke out an extra 3% to 4%, something like that?

I would like to mention that our cost structure improvements and steps taken to streamline management teams, reduce costs, and enhance our IT systems, ERP systems, and online platforms have resulted in a decrease in the cost to serve customers. This positions us for potential margin expansion. However, I want to emphasize that we need to see a recovery before I can make any firm commitments. That said, our team is well-prepared for a rebound in the U.S. economy and is ready to capitalize on it. I believe we could achieve some positive margin leverage, although it's a bit challenging to estimate at this moment.

Got it. All right. I appreciate it. Thank you.

Thank you. All right. Thanks, Ben, and thanks everyone. Unfortunately, we've run out of time. Thanks for joining our call today. If you have any additional questions, feel free to reach me today at 713-435-1545. Thanks, everyone. Have a great day.

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