Welcome to the Corporation 2022 First Quarter Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. We ask that you limit your questions to one question and one follow-up. Please note this is being recorded. I would now like to turn the conference over to Mr. Eric Holcomb, Kirby's VP of Investor Relations. Please go ahead.

Good morning, and thank you for joining us. With me today are David Grzebinski, Kirby's President and Chief Executive Officer, and Raj Kumar, Kirby's Executive Vice President and Chief Financial Officer. A slide presentation for today's conference call as well as the earnings release which was issued earlier today can be found on our website at kirbycorp.com. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available on our website in the Investor Relations section under Financials. As a reminder, statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated. As a result of various factors, including the impact of the COVID-19 pandemic on the company's business. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31st, 2021. I will now turn the call over to David.

Thank you, Eric and good morning everyone. Earlier today, we announced first quarter earnings of $0.29 per share. The quarter's results reflected improved market fundamentals in both Marine Transportation and Distribution and Services. As anticipated, our Marine Transportation business was significantly challenged by the COVID-19 Omicron variant. But the magnitude was at the high end of our guidance range with a total impact of approximately $0.10 per share. We also continued to experience significant supply chain constraints in Distribution and Services which delayed sales during the quarter. Looking at our segments, in Marine Transportation overall inland market conditions improved during the quarter. However, our financial results were significantly impacted by Omicron, with virus cases escalating across the U.S. during January and February, we experienced modestly reduced customer volumes and a decline in our barge utilization to the mid 80% range. We also experienced a material increase in positive virus cases amongst our mariners, which resulted in crewing challenges, lost revenue and increased operating costs. That said, inland market conditions rapidly improved in March as the cases of the Omicron variant declined. We saw improving fundamentals with refinery utilization rising to above 90%, resulting in increasing customer demand. Consequently, by mid-March, barge utilization improved considerably to above 90% for the first time since the start of the pandemic. These factors led to tight market conditions, improved spot market pricing and further increases in term contract rates. Overall, first quarter inland margins were in the high single-digit range, but we experienced notable improvement during March with low double-digit operating margins for the month. In Coastal, market conditions modestly improved with our barge utilization increasing to the low 90% range. We also realized some small pricing gains for the first time in two years. Similar to inland, Coastal was materially impacted by the Omicron variant in January and February. Reduced coal shipments at our dry cargo business also contributed to sequentially lower revenues and increased losses. Overall, first quarter Coastal operating margins were negative in the mid-single digits. But we did see results improved closer to breakeven in March as the Omicron impact dissipated. In late March, we officially announced our entry into the offshore wind market with our newest business line, Kirby Offshore Wind. This entity will be operating feeder barge services that transport wind towers and turbines from ports to offshore wind turbine installation vessels. We are partnering with Maersk using a 20-year firm agreement and our first joint project will be installing wind equipment for Empire Wind, a joint venture between Equinor and BP off the coast of Long Island, New York. We intend to construct two new deck barges with low emission diesel electric hybrid tugboats for combined capital expenditures of approximately $80 to $100 million over the next three years. The Empire Wind Project is expected to commence operations in late 2025 or early 2026, pending the completion of Maersk's new wind turbine installation investment. We are very excited about this new growth area and particularly pleased to partner with world-class operators such as Maersk, Equinor, and BP on this foundational project for the U.S. offshore wind market. Moving to Distribution and Services, our markets remain strong across the segment and contributed to meaningful, sequential and year-on-year improvement in revenue and operating margins. In oil and gas, strong commodity prices and increased oilfield activity contributed to improved demand for new transmissions and parts in distribution. In manufacturing, our backlog continued to grow with incremental orders for new, 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. In commercial and industrial, overall demand remained solid across our different markets, with the largest growth coming from the Marine repair and on-highway sectors. Demand was also strong in our Thermal King refrigeration business, but its revenues and operating income declined sequentially due to continued supply chain issues. In summary, despite significant COVID and supply chain challenges in the quarter, our first quarter results reflected continued improvement in market fundamentals for both our segments. The inland market is improving, demand is strengthening and rates are moving higher. While the Coastal market remains challenged, our barge utilization is solid and we realized modest rate improvements for the first time since the start of the pandemic. Demand in Distribution and Services is strong and our backlog continues to grow. While supply chain issues are expected to persist for the foreseeable future, we see continued growth ahead. All of this should bode well for Kirby and ultimately drive incremental earnings growth as the year progresses. In a few moments, I'll talk more about our outlook. But first I'll turn the call over to Raj to discuss the first quarter segment results and balance sheet.

Thank you, David. And good morning, everyone. In the first quarter of 2022, Marine Transportation revenues were $355.5 million with an operating income of $16.9 million and an operating margin of 4.8%. Compared to the first quarter of 2021, Marine revenues increased $54.6 million or 18% and operating income increased $15 million. Compared to the fourth quarter of 2021, Marine revenues increased $5 million or 1%. Marine Transportation operating income increased $15 million year-on-year from significantly improved market conditions, resulting in higher revenue, but declined $8.7 million sequentially. As David mentioned, the Omicron variant materially impacted our Marine businesses in the first quarter, which resulted in lost revenue, crewing challenges, and increased operating expenses. The Omicron impact was approximately $0.10 per share. Normal seasonal winter weather, inflationary cost pressures, and rapidly rising fuel costs, which could not be immediately rebuilt per customer contract terms also contributed to lower operating income. The inland business contributed approximately 78% of segment revenue. Average barge utilization was in the mid 80% range for the quarter, which compares to the mid to high 80% range in the fourth quarter of 2021 and the mid 70% range in the first quarter of 2021. We did, however, see barge utilization improve nicely to the low 90% range in March as the effects of Omicron diminished. Long-term inland Marine Transportation contracts, or those contracts with a term of one year or longer, contributed approximately 65% of revenue, with 58% coming from time charters and 42% from contracts of Affreightment. Improving market conditions contributed to spot market rates increasing in the mid-single digits sequentially, and 15% to 20% year-on-year. Term contracts that renewed during the first quarter were up in the high single-digits on average compared to the prior year. Compared to the first quarter of 2021, inland revenues increased by 24% 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 by more than 50%. Compared to the fourth quarter of 2021, inland revenues were up by 2% driven by increased term and spot market pricing and higher fuel rebuilds, but partially offset by lower average barge utilization and lost revenue related to Omicron. Inland's operating margin was in the high single-digit and was impacted by normal seasonal weather and significantly impacted by increased costs and inefficiencies related to the Omicron variant. We did, however, see operating margins improve in the low double-digit in March as the impact of Omicron subsided. The coastal business represented 22% of revenues for the Marine Transportation segment. Average coastal barge utilization improved to the low 90% range, which compares favorably to the 90% range in the fourth quarter of 2021 and the mid-70% range in the first quarter of 2021. During the quarter, the percentage of coastal revenue under term contracts was approximately 80% of which approximately 90% were time charters. Average spot market rates and renewals of term contracts were higher in the mid-single digits. During the quarter, coastal revenues increased 1% year-on-year with improved barge utilization and higher fuel rebuilds being mostly offset by reduced coal shipments in the dry cargo business, the company's exit from Hawaii, and loss revenue associated with the Omicron variant. Compared to the fourth quarter of 2021, coastal revenues declined 2% due to reduced coal shipments, the company's exit from Hawaii, and loss revenue related to Omicron. These reductions were partially offset by increased barge utilization and higher fuel rebuilds. Overall, Coastal had a negative operating margin in the mid-single digits in the first quarter which was significantly impacted by increased costs related to the Omicron variant. With respect to our tank barge fleet for both the inland and Coastal businesses, we have provided a reconciliation of the changes in the first quarter, as well as projections for the remainder of 2022. This is included in our earnings call presentation posted on our website. Now, I will discuss the performance of the distribution and services segment. Revenues for the first quarter of 2022 were $255.2 million, with operating income of $11 million. Compared to the first quarter of 2021, the Distribution and Services segment saw revenue increase by $59.3 million or 30% with operating income improving by $8.1 million. When compared to the fourth quarter of 2021, revenues increased by $14.5 million or 6%, and operating income increased by $3.5 million. In the oil and gas market, favorable commodity prices and increased rig and completions activity contributed to a 71% year-on-year increase and a 20% sequential increase in revenues. In Distribution, we experienced increased demand for new transmissions and parts throughout the quarter. The manufacturing business also experienced a meaningful increase in new orders and deliveries of environmentally-friendly, pressure pumping and e-frac-related power generation equipment. Overall, oil and gas represented approximately 42% of segment revenue in the first quarter and had an operating margin in the low-single digits. On the commercial and industrial side, increased economic activity contributed to an 11% 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 modestly down year-on-year due to the timing of major projects. Compared to the fourth quarter of 2021, commercial and industrial revenue declined by 2% primarily due to supply chain constraints in the Thermal King business, which delayed many new product sales. This reduction was partially offset by increased activity in Marine and on-highway repair. Overall, the commercial and industrial business represented approximately 58% of segment revenue and had an operating margin in the mid to high single-digit during the first quarter. I will now turn to the balance sheet. As of March 31st, we had $32 million of cash with a total debt of $1.15 billion, and our debt-to-cap ratio declined to 28.4%. During the quarter, we generated cash flow from operations of $32 million and we had net proceeds from asset sales of $14 million, including retired Marine vessels. We used cash flow and cash on hand to fund $35 million of capital expenditures or CapEx, as well as to purchase the assets of a small marine gearbox repair company in the Distribution and Services segment that totaled $4 million. During the quarter, we repaid $9 million of debt. As of March 31st, we had total available liquidity of approximately $886 million with respect to CapEx, we continue to expect full-year CapEx of approximately $170 to $190 million, which is primarily comprised of maintenance requirements for our marine fleet. We also expect to generate strong cash flow from operations of $420 to $480 million with free cash flow defined as cash flow from operations minus CapEx of $230 to $310 million. We intend to use this cash flow to firstly repay debt and secondly to fund any potential attractive niche investments and acquisition opportunities that create long-term shareholder value. We will continue to take a disciplined approach to pursuing accretive value enhancing growth opportunities. I will now turn the call over to David to discuss our outlook for the remainder of 2022.

Thank you, Raj. While our first quarter results had some challenges, we exited the quarter in a solid position. We see momentum continuing to build and we expect our businesses will deliver improved financial results in the coming quarters. In Marine, refinery utilization has returned to pre-pandemic levels. Our barge utilization has been at or above 90% since mid-March and inland rates are inflecting nicely. In Distribution and Services, demand is growing across the segment and we continue to receive new manufacturing orders. While all of this is very encouraging, we are mindful of near-term potential headwinds, including new COVID-19 sub-variants, potential demand destruction resulting from high commodity prices and prolonged inflationary pressures. As always, we will diligently manage these factors and continue our relentless focus on cost and working capital management. Looking at the outlook for our businesses in more detail in inland Marine with Omicron headwinds mostly behind us, we expect a very favorable market going forward. Strong refinery and petrochemical plant utilization, increased customer volumes, and minimal new barge construction, should contribute to our barge utilization being at or modestly above 90%. These favorable dynamics are expected to yield further improvements in the spot market, which currently represents approximately 35% of inland revenues; as well as improvement in term contract rates. Significant increases in fuel costs, since the beginning of the year are resulting in higher rebuild revenue to customers. Fuel rebuilds are a pass-through to customers, and as a reminder, they come with no associated profit. Additionally, fuel escalators on term contracts of Affreightment can take a quarter to roll through the P&L. This coupled with inflationary pressures, are expected to be near-term margin headwinds until all of our fuel and other escalation clauses reset. Overall, for the full year, we expect inland revenues will grow 15% to 20%, with progressive growth throughout the year as business continues to improve and term contracts continue to renew. We expect near-term inland operating margins to be in the low double-digits so they continue to gradually improve as the year progresses, barring any further fuel or inflationary headwinds. In Coastal, market conditions are expected to modestly improve through the year, but remain challenged by underutilized barge capacity across the industry. Despite the industry softness, Kirby's Coastal barge utilization is expected to be strong in the 90% range. Full-year Coastal revenues are expected to be down in the low single-digits, driven primarily by the company's exit from Hawaii and reduced coal shipments in our offshore dry cargo business. Starting in the second quarter, we expect increased shipyard activity from scheduled regulatory surveys and ballast water treatment installations on certain vessels. This is expected to continue through the fourth quarter. These factors should be partially offset by improving market dynamics, small rate gains in favorable barge utilization, overall, coastal operating margin are expected to improve relative to the first quarter and range between a low-single-digit loss to near breakeven as the year progresses. Looking at Distribution and Services, we maintain a favorable outlook with strong demand for equipment, parts and service and distribution, and a solid backlog in manufacturing in oil and gas, we expect the current commodity price environment will contribute to further increases in rig counts and frac activity in 2022. Industry analysts currently predict U.S. land rig counts will rise to near 700 by year's end, which would represent a full-year average increase of approximately 40%. Similarly, the average active frac crew count is expected to climb to as many as 250, representing a 20% increase over 2021. With this growth, we expect to see increasing demand for transmissions, engines, parts, and service and distribution. In manufacturing, we started the year with a strong backlog, we added new incremental orders in the first quarter, and we expect this trend will continue. However, we do expect that supply chain issues and long lead time items from OEMs will extend through the year and beyond the year, and remain a challenge. These issues are likely to contribute to some choppiness with new product deliveries shifting between quarters and potentially into 2023. In commercial and industrial, we anticipate strong demand in on-highway with increased trucking and municipal repair work, continued improvement in bus brighter ship, and increased demand for Thermal King refrigeration products. In power generation, new back-up power installations parts and service activity are all expected to remain solid as demand for electrification in 24/7 power grows. Marine repair is also expected to be strong with increasing oil and gas activity in the Gulf of Mexico and improved commercial markets on the east and west coasts. For the full year, we expect revenue growth in the low double-digit percentage range for commercial and industrial. While supply chain issues could impact new product and equipment timing in Distribution and Services, we continue to expect 2022 segment revenues will increase by 30% to 40% year-over-year. 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-single-digits for the duration of 2022. To conclude, the first quarter was not without its challenges, including COVID-19 and supply chain issues. However, we exited the quarter with strong momentum. And we are well-positioned to meaningfully grow earnings during the remainder of the year. Inland customer demand is strong. With barge utilization returning to pre-pandemic levels and rates moving higher. The price of a new barge remains at historical highs. And we expect extremely limited new barge construction this year. This should drive continued improvement in market dynamics and contribute to healthy earnings improvement as the year progresses. In Coastal, although the market still needs more time to recover, we saw modest improvements in demand with our barge utilization above 90%. We also realized some rate gains for the first time since the pandemic started. These factors combined with our efforts to right-size the fleet and exit unprofitable markets, will result in reduced near-term losses and it will better position us for better days in the Coastal business ahead. In distribution and services, we saw a strong demand, and see strong demand in commercial and industrial, and oilfield fundamentals are favorable with the current commodity price environment. This is expected to drive incremental activity for new OEM equipment, parts and service across our distribution businesses. In manufacturing, although supply chain issues continue to pose a headwind, our backlog is very strong. Demand for environmentally-friendly pressure pumping equipment continues to grow, and we see activity picking up with improved revenue and returns through the remainder of the year. As we look ahead, we intend to continue capitalizing on our strong momentum and delivering improved financial results. Operator, this concludes our prepared remarks. We are now ready to take questions.

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

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

Yeah. Good morning, Jack.

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

Yes, sure. The short answer is yes. The second half could easily see mid-teen margins, but let me walk through the industry structure and pricing dynamics in the progress that we've seen in inland marine. And I would say but for our Omicron, it's been actually better than we expected. But let me spend just a few minutes on Omicron, though, because Omicron did hit us pretty hard. You'll remember last year Delta variant hit the fleet and we had some crewing issues. But, Omicron was much worse, actually. At one point, Jack, we had 15 inland boats down with crews with COVID. Once it hit a crew member, it would spread through the entire crew and we'd have to quarantine the boat and sometimes shut it down and get people off, and then backfill with either charter boats or other boats. So there was a lot of cost and a lot of disruption, and that hit us really hard in January and February. But it wasn't too dissimilar to what you saw in the airline industry. You will remember them canceling flights throughout January and into February. We saw that. We characterized it as costing us about $0.10 in the quarter. Most of that was in the inland side, just a little bit on the offshore side, probably 80%, 90% was in the inland side. We did have a couple of big offshore units go down with the Omicron variant too. The good news is, as soon as that started dissipating in March, things really started hopping. One, refinery utilization popped back up. It was a little depressed with Omicron, but now into March it got up above 90% and it's still going strong. The higher commodity prices are no doubt helping. We saw our barge utilization jump up in March into the 90s, low 90% range. We saw some pretty strong pricing. I mean, just for the quarter we averaged 15% to 20% on spot pricing increases. And I would tell you in March, it was probably closer to 25%. But for the quarter, the average 15% to 20% on spot on a year-over-year basis. On contracts we were in high single-digits for the quarter. And that momentum was stronger in March than throughout the rest of the quarter, and I would tell you that it's carried on into April. So we've seen really good dynamics, supply and demand are very tight. As you're aware, barge pricing for new barges is up considerably. A new 30,000-barrel barge, clean barge costs about $4.2 million. A black oil barge is about $5.2 million. And to put that in context, if you were to build a two barge tow brand-new equipment, you'd need rates above $10,000 a day to justify building new equipment. So that new equipment pricing is absolutely helping the structure of the industry. There's not much new-build equipment there, and if you were to build new equipment you'd be in needs some pretty strong prices to justify it. And then there's the demand side. The demand side continues to grow. We're excited about that. You can see the refineries are doing better, the petrochemical companies are doing better. So from a supply and demand standpoint, it's probably better than we would've expected. And I would tell you, Christian O'Neill has been doing this for almost 30 years, said this has been about the best pricing environment he's seen. Yes, we feel pretty good about it. Now all that said, Jack, as you know, we've got some inflation in costs and we've seen some pretty heavy inflation, crew costs in particular going up. But Raj Kumar, why don't you share a little bit on the inflation data?

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

It's a long way of saying, and I apologize for the lengthy response, Jack, that the industry structure is better than we've seen in some time on the inland side. We're experiencing price increases, which we need, and the market is very tight and seems to be maintaining that tightness. However, there is one caveat. We're all considering the possibility of a recession. The good news is that economists estimate a 10% to 20% chance of a recession, which is relatively low. When assessing the outlook for margins in the second half of the year and into 2023, that is the caveat. Otherwise, I would suggest you'll see mid-teens margins, and by late 2023, margins in the inland business will likely start with a two. We're quite optimistic about our position in the cycle, and if anything, it's going a bit better than we expected after overcoming Omicron.

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

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

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

Hey, Jack. Thank you.

Thanks, Jack.

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

David and Raj and Eric. For my first question, let's discuss the barge market a bit more. David, you mentioned that the market would need $10,000 a day to make any new builds worthwhile. Can you provide an update on where we stand currently? Also, could you discuss the current supply and demand situation in the towboat market?

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

Just towboat. The tightness in towboats margin.

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

That's helpful. For my follow-up, I want to switch gears a bit to the marine side and discuss the offshore wind business. Congratulations on securing that deal. I’m curious about your outlook on the timing of further developments. Are we looking at potentially one new project each year, or is that market advancing faster than what we've experienced so far?

Yes, Christian and I are very optimistic about this market. When we examine the announcements and upcoming projects, there's a notable 32 gigawatts of offshore wind power planned for the eastern seaboard alone. Considering the likely demand for vessels to support that, we are constructing two feeder barges, but we estimate that around 26 vessels will be needed to fulfill that demand, indicating a tight market. Currently, we are aware of only two other companies building vessels: Dominion and another group focused on this. This means there are three market entrants that we're aware of. While we know others are also exploring opportunities, we anticipate a need for about 20 to 25 vessels over the next decade, which reassures us about our position. We're just initiating with these first two barges and are thrilled about their efficiency compared to traditional options, which should offer around 30% more efficiency in costs for our customers. Specifically, this involves the Empire Wind projects with BP and Equinor. We are very enthusiastic about collaborating with esteemed operators like Maersk, BP, and Equinor on these initial projects. It will be interesting to see how things develop, though it will take until 2025 to have these vessels ready, and they likely won't be operational until 2026. We understand that these projects require time to launch, as do new builds, but we are eager about the prospects ahead.

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

Thanks, Ben.

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

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

If we were to reset everything right now based on prices, everything would increase by about 15%. You know that the fourth quarter is the busiest time for term contract renewals. We currently have 35% in spot contracts, which are day-to-day, along with some six-month contracts in the spot market. If we were to roll everything today and everything was marked to market, I think we would be approaching a 20% margin, but that’s just a rough estimate. I would need to calculate it out, but definitely expect mid to high double-digit margins if we could reset all at once. However, it takes time for all these contracts to renew, and some are multi-year contracts, which, fortunately, include escalators for CPI and labor costs. Additionally, the fluctuations in fuel prices are relevant. Last year, the average fuel price we paid in the first quarter was $1.65, while this year we averaged $2.50 in the first quarter, and in March and April, we were paying between $4 and $4.75 a gallon. This affects our revenue without contributing to margins, which dilutes our margins a bit. Also, some contract escalators can take a quarter to take effect, so we may see a slight impact on our margin in the second quarter, but by the third quarter, those escalators will align. We are committed to making fuel costs a pass-through for our customers; we don’t want to profit or lose on fuel. To answer your main question, the rate environment is very favorable, and if we had the ability to adjust everything instantly, we would see a significant boost in margins.

I would like to add to David's comments that while he mentioned fuel, we are also observing inflationary costs in other areas, so we need to be aware of those increases as we move through the year.

That's a good bridge to my follow-up, Raj. Earlier in the call when you're talking about a lot of these inflationary pressures, and then especially when you were answering Ben's question about the crewing issues. And I was thinking to David's comment three months ago that you could touch to handle on the margin at some time in 2023, which you have affirmed. Then I was thinking in the next step though, which is how is that changing the competitive landscape? You have a lot of competitors out there that don't have your size or your scale, that must have much more difficult times handling these higher costs, higher barge prices, crewing issues. You've bounced off the bottom now when nobody wants to sell, so given the fact that the rates have improved but this cost inflation is probably more punitive to the smaller operator. Does this increase your abilities to maybe further consolidate the market at this point?

I believe that the entire industry is raising its rate structure. Everyone is experiencing inflationary and crude pressures and understands the need to respond accordingly. The overall rate base in the industry has improved from its lowest point, and while our size offers certain advantages, the industry as a whole is adapting. With the challenges in crewing towboats, it is essential to have competitive rates to attract or retain crews for our vessels. We are seeing improvements across the structure, which is more positive than we've seen in quite some time. As for acquisition opportunities, predicting them is always challenging, but we are committed to remaining disciplined.

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

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

Good morning, great to hear about the successful passing of inflation. I want to clarify something regarding the timing of the contracts after the non-fuel adjustment, which is why Raj mentioned the second half. I’d like to quickly understand that. My main question pertains to D&S: what will push margins above mid-single digits? Is it due to increased production volumes, or is labor affecting the gains? Please discuss what could enhance the margins in the D&S segment.

Let me address both points quickly. Raj's comments were primarily about fuel, which has increased by 50%, creating a bit of a challenge. We need to wait for the fuel escalators to take effect, which we expect will become noticeable in the third and fourth quarters, providing some assistance. For multiyear contracts, the Consumer Price Index and Producer Price Index usually reset in the fourth quarter, so we won't see those adjustments until then. The real exposure comes from multiyear contracts, while most others renew annually, with a significant portion in the fourth quarter. We feel confident about keeping pace with inflation. Currently, we're managing to stay aligned with inflation in the spot market, so we're not overly concerned about inflationary pressures even though they exist. Regarding your question about margins in D&S, I want to mention that manufacturing has faced low margins on new orders due to being early in the series of new-generation electric equipment, which incurs substantial engineering costs and rework. The initial orders yielded low margins, but they are improving. I firmly believe that we can reach high single-digit margins in our D&S business as we progress through the backlog. This outlook depends heavily on the supply chain, as highlighted by the 80-week delays for new engine orders, but we remain optimistic about margin improvement.

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

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

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

Yes, thanks again.

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

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

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

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

Yes. The short answer is that labor has been the limiting factor. We do have some equipment, and we're bringing about nine barges off the bank, but the challenge has been getting crews to move the equipment. I would say that things are progressing steadily. There is some equipment that was sidelined during COVID that can come back, but the crew situation is likely the main hurdle. I see this as a reasonable buffer to prevent things from spiraling out of control and discouraging people from building new assets. Currently, building new equipment just doesn't make sense. Nevertheless, I remain optimistic about our structure, even with some of that sidelined equipment coming back.

Okay. Thanks, David.

Alright. Thanks, Greg.

Okay Operator, we will take one more caller and then we will close out.

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

Oh, you bet.

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

Yeah. Again, it's for the two units. Again, it's a deck barge with an ATB that would be one unit. So we're building two units, at roughly $40 to $50 million per unit. We'll start construction, we'll be in the shipyards doing engineering. Now that capital will be spread between now and early 2025. I think the bulk of it will be done by early 2025 and then we'll be doing seed trials in 2025 and probably the gating factor to put the equipment to work is the WTIV, the wind tower installation vessel that Maersk is building, they're building it in I believe Korea, and it's a big, expensive vessel and it's going to take a while to build. But in terms of our capital spend, it will be spread out between now and 2025. And I'm not sure exactly milestone payments, but I would just treat it kind of ratably between then and now. Not a big spike in any one quarter or one year. And obviously, our free cash flow, I think is very sufficient to support that level of CapEx.

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

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

Right. Okay. Appreciate the color.

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

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