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

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. 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 31, 2021. I will now turn the call over to David.

Thank you, Kurt, and good morning, everyone. Earlier today, we announced second quarter revenue of $698 million and earnings of $0.47 per share, or $0.49 per share excluding one-time nonrecurring items that occurred in the second quarter. This compares to 2021 second quarter revenue of $560 million and earnings of $0.17 per share. Both of our segments continued to steadily improve during the quarter, delivering higher revenue and operating income sequentially and year-over-year. The quarter's results reflected improved market fundamentals in both marine transportation and distribution and services, and were partially offset by higher fuel costs and inflationary pressures as well as continued supply chain challenges that delayed sales in distribution and services. Before turning to the second quarter results, I would like to take a moment to comment on recent developments in one of our newest business lines, Kirby Offshore Wind. Following our first quarter announcement, we are pleased to congratulate our partner Maersk on signing a preferred supplier agreement with Equinor and BP for the 1.2 gigawatt Beacon Wind offshore project. This is in addition to the awards for Empire Wind 1 and 2. We are very excited about the outlook for this new business and look forward to building on our strong relationship with Maersk and its customers. Now, turning to the second quarter looking at our segments. In inland marine transportation, high refinery utilization led to a steady improvement in demand with our overall barge utilization increasing into the low 90% range. Tight market conditions, in part due to limited supply of barges, continued to put upward pressure on prices, with spot prices up approximately 10% sequentially and mid-teens year-over-year. Pricing on term contracts moved higher as well with term contracts renewing up in the mid-teens. Overall, second quarter inland revenues increased 14% sequentially and margins improved into the high single-digit range. The results were impacted by increases in fuel costs, coupled with inflationary pressures in the quarter. We expect margins will improve as fuel and other cost escalation contract clauses reset as the year progresses and into 2023. In coastal, market conditions further improved with our barge utilization in the low 90% range and some incremental pricing gains with spot prices up in the low double digits. Improved coal shipments in our dry cargo business also contributed to better revenues and increased operating margins. Overall, second quarter revenues increased 14% sequentially and operating margins were in the low single digits. In distribution and services, our markets remained very active across the segment and contributed to meaningful sequential and year-on-year improvement in revenue and operating margins. In oil and gas, high commodity prices and increased oilfield activity contributed to improved demand for new transmission parts and services. In manufacturing, our backlog remained healthy 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 commercial and industrial markets, overall demand remains solid across our different businesses, with growth coming from the marine repair and on-highway sectors. Demand was also strong in our Thermo King refrigeration business with double-digit growth sequentially and year-on-year, despite ongoing supply chain delays. In summary, despite significant inflationary and supply chain challenges in the quarter, our second quarter results reflected continued improvement and market fundamentals for both segments. The inland market is improving nicely, demand is strengthening and rates are moving higher. While the coastal market remains challenged by industry supply dynamics, our barge utilization is good and we realized modest rate improvements. Demand in distribution and services is strong and our backlog is healthy. While supply chain issues are expected to persist for the foreseeable future, we see continued growth going forward. All of this is positive for Kirby. And as we continue to work safely, efficiently and responsibly to meet and exceed our customers' needs, we expect to drive incremental earnings growth in the second half. In a few moments, I'll talk more about our outlook. But first, I'll turn the call over to Raj to discuss the second quarter segment results and the balance sheet.

Thank you, David, and good morning, everyone. In the second quarter of 2022, marine transportation revenues were $405.7 million with operating income of $30.8 million and an operating margin of 7.6%. Compared to the second quarter of 2021, marine revenues increased $72.8 million or 22% and operating income increased $12.3 million, or 66%. Compared to the first quarter of 2022, marine revenues increased $50.2 million or 14% and operating income increased $13.9 million or 82%. These increases were driven by strong customer demand and improved pricing. As expected, second quarter operating margins were impacted by increased fuel costs that increased revenues through rebuilds, but are dilutive to margins. We also continue to face inflationary cost pressures and expect to recover these increases in costs as contract escalators reprice throughout the remainder of the year and going into 2023. The inland business contributed approximately 78% of segment revenue. Average barge utilization was in the low 90% range for the quarter, which compares to the mid-80% range in the first quarter of 2022 and the low to mid-80% range in the second quarter of 2021. Long-term inland transportation contracts with a term of one year or longer contributed approximately 60% of revenue with 57% from time charters and 43% from contracts of affreightment. Improved market conditions contributed to spot market rates increasing sequentially in the low double digits and in the mid-teens year-on-year. Term contracts that renewed during the second quarter were up on average in the mid-teens compared to the prior year. However, only a handful of smaller term contracts renewed during the quarter. Compared to the second quarter of 2021, inland revenues increased by 25%, 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 more than 93% year-over-year. Compared to the first quarter of 2022, inland revenues were up 14% driven by increased term and spot market pricing, higher average barge utilization and higher fuel rebuilds. Inland operating margin approached double digits and was mainly impacted by rapidly rising fuel prices. We expect margins to improve into the low double digits as fuel escalators begin to kick in throughout the balance of the year. The coastal business represented 22% of revenues for the marine transportation segment. Average coastal barge utilization was in the low 90% range, which compares to the low to mid-70% range in the second 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 low double digits. During the quarter, coastal revenues increased 12% year-on-year with improved barge utilization, higher contract pricing and higher fuel rebuilds. Overall, coastal had a positive operating margin in the low single digits, marking the return to profitability for the business. With respect to our tank barge fleet for both the inland and coastal businesses, we have provided a reconciliation of the changes in the second quarter as well as projections for the remainder of 2022. This is included in our earnings call presentation posted on our website. Now I'll review the performance of the distribution and services segment. Revenue for the second quarter of 2022 was $292.3 million with operating income of $16.7 million. Compared to the second quarter of 2021, the distribution and services segment saw revenue increase by $65.6 million, or 29%, with operating income improving by $10.5 million, or 169%. When compared to the first quarter of 2022, revenues increased by $37.1 million, or 15%, and operating income increased by $5.7 million, or 52%. In the oil and gas market, favorable commodity prices and increased rig and completions activity contributed to a 52% year-on-year increase and a 21% sequential increase in revenues. We experienced increased demand for new transmissions and parts throughout the quarter. As David mentioned, we continue to see 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 45% of segment revenue in the second quarter and operating margins in the low to mid-single digits. On the commercial and industrial side, strong activity contributed to a 15% 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-on-year due to timing of major projects. Compared to the first quarter of 2022, commercial and industrial revenues increased by 10%. Our Thermo King business achieved strong sequential and year-on-year growth, but continued to experience delays due to supply chain constraints. This headwind was offset by increased activity in marine and on-highway repair. Overall, the commercial and industrial business represented approximately 55% of segment revenue and had an operating margin in the high single digits during the second quarter. Now turning to the balance sheet. As of June 30, we had $25.1 million of cash with total debt at $1.14 billion, and our debt to cap ratio improved to 27.9%. During the quarter, we had cash flow from operations of $63.4 million and generated cash from proceeds from asset sales of $9 million from the retirement of marine vessels. We used cash flow and cash on hand to fund $44 million of capital expenditure or CapEx. During the quarter, we decreased debt by $18.7 million and repurchased slightly more than 310,000 shares at an average price of $58.33 per share for a total consideration of $18.1 million. As of June 30, we had total available liquidity of approximately $879 million. With respect to CapEx, we continue to expect full-year CapEx of approximately $170 million to $190 million, primarily for required maintenance on our marine fleet. We also expect to generate strong cash flow from operations of $390 million to $450 million with free cash flow defined as cash flow from operations minus CapEx of $200 million to $280 million, reflecting a slight decrease from prior expectations as supply chain constraints challenged working capital in the near term. We expect to unwind this working capital as orders shipped later this year and into the first half of 2023. We are committed to a balanced capital allocation approach and we'll use this cash flow to repay debt and continue to pursue long-term value-creating niche investment and acquisition opportunities, as well as opportunistically return capital to shareholders.

I will now turn the call back to David to discuss our outlook for the remainder of 2022. Thank you, Raj. While our second quarter was not without challenges, we delivered incremental improvements in both our segments and we expect this trend to continue. In marine, strong demand driven in part by high refinery and chemical plant utilization should continue to increase our barge utilization. Combined with the limited barge supply, we expect this to contribute to further increases in the inland rates. In distribution and services, demand is healthy across the segment and we continue to receive new manufacturing orders. While all of this is very encouraging, we are mindful of near-term macroeconomic headwinds, including slowing economic growth, prolonged inflationary pressures and potential new COVID subvariants. As always, we will manage the factors we have control over and we will continue our focus on cost containment and working capital management. Looking at a more detailed outlook for our businesses, we expect favorable conditions to continue in inland marine. Refinery and petrochemical plant utilization is at near record levels resulting in increased customer volumes. Barge supply is constrained as there is minimal new barge construction. These factors are expected to contribute to our barge utilization running in the low to mid-90% range. These favorable supply and demand dynamics are expected to drive further improvements in the spot market, which currently represents approximately 40% of inland revenues as well as continued improvement in term contract repricing as renewals occur. The negative impacts of rapid increases in fuel costs and material inflation to costs are expected to be continued headwinds, but will be mitigated when escalations in contracts occur during the second half of the year and into 2023. Overall, for the full year, we expect inland revenues will grow approximately 20% to 25% with progressive growth throughout the year as the business improves and term contracts are renewed later in the year. Barring further inflationary or fuel cost pressures, we expect near-term inland operating margins to be in the low double digits and to continue to gradually improve for the remainder of the year. In coastal, market conditions are expected to steadily improve through the remainder of the year, 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 coastal revenues are expected to be flat to up in the low single digits, driven primarily by improving 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 are expected to be in the range of near breakeven to low single digits for the remainder of the year. Looking at distribution and services, we expect a favorable outlook with strong demand for equipment parts and service and distribution and a healthy backlog in manufacturing. In the oil and gas market, high commodity prices, increasing rig counts and growing well completions activity are expected to yield strong demand for OEM products, parts and services in the distribution business. In oil and gas, we expect the current commodity price environment will continue to further increase rig counts and frac activity throughout '22 and into '23. U.S. land rig counts have surpassed 750 rigs, which represents a full year average increase of approximately 56% with steady growth expected for the remainder of the year. Similarly, the average frac spread count is now approaching 290, 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 have a healthy backlog position. We added new incremental orders in the second quarter, and we expect this trend will continue. Offsetting this, we expect that supply chain issues and long lead time 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, shifting between quarters and potentially into 2023. In commercial and industrial, we are forecasting strong demand in on-highway with increased trucking and municipal repair work, continued improvement in bus ridership, and increased demand for Thermo King refrigeration parts, offset by lingering supply chain delays. In power generation, new backup power installations, parts and service activity are expected to remain solid as demand for electrification and 24/7 power grows. Marine repair is also expected to be strong with increasing 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 commercial industrial in the low double-digit percentage range. While supply chain issues are expected to continue impacting new product and equipment deliveries and distribution and services, we continue to expect 2022 segment revenues will increase 25% to 30% 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 to high single digits for the duration of '22. To conclude, overall, Kirby second quarter results showed steady improvement. Despite inflationary headwinds, both of our segments performed well during the quarter, delivering improved revenue and operating income sequentially and year-over-year. We exited the quarter with strong fundamentals in our businesses. We see favorable markets continuing and we expect our businesses will produce gradually improving financial results in the coming quarters. We're keeping a watchful eye on growing economic headwinds and are focused on managing the areas we can control. In inland, market conditions are tight with strong customer demand and high barge utilization, working to push rates higher. And the price of a new barge remains near historical highs. We believe these factors will lead to continued improvement in market conditions and contribute to healthy earnings improvement as the year progresses and we enter 2023. In coastal, although overall market conditions still need more time to recover, we saw modest improvements in demand with our barge utilization above 90%. We also realized some modest rate gains in both spot and term contracts. These factors, combined with our previous efforts to rightsize the fleet and exit unprofitable markets, led to a return to profitability in this business. We believe our coastal business is well positioned for continued and improved profitability. In distribution and services, we saw healthy demand in commercial and industrial and oilfield fundamentals remained very favorable with the current commodity price environment. This is expected to lead to incremental activity for new OEM parts, equipment, and services across our distribution businesses. In manufacturing, although supply chain issues continue to pose an ongoing headwind, our backlog remains very strong. Demand for our environmentally-friendly pressure pumping equipment continues to grow, and we see high activity levels with improved revenue and returns expected through the remainder of the year and into 2023. As we look ahead, we are attentive to growing uncertainty in the economy, but are confident in the strength of our core businesses. We intend to continue capitalizing on strong market fundamentals and driving shareholder value creation. Operator, this concludes our prepared remarks. We're now ready to take questions.

We will now begin the question-and-answer session. As a reminder, we ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Jack Atkins from Stephens.

Jack, are you there?

Yes. David, can you hear me?

Yes. Thank you.

Okay, great. Good morning. Thanks for taking my questions. Sorry about that. So I guess maybe to start, it's encouraging to hear the commentary about it feels like increasing momentum across the business. Maybe to start with inland, as you kind of think about your outlook for the pricing environment as we kind of go into the back half of the year and maybe into early 2023, can you maybe frame that up with sort of how you're thinking about it today versus maybe how you were thinking about it three months ago, six months ago? It feels like momentum is maybe accelerating a bit there. So would just be curious about that. And then I guess from a bigger picture perspective, where would you say we are from like a pricing perspective today relative to 2019 levels, just to kind of level set that? And I will also be curious if you have a view on costs today versus 2019 levels?

Yes, good morning, Jack. Inland transportation feels quite strong at the moment. Demand has increased, with refineries operating at full capacity and chemical plants also running heavily. Crude is moving well, making the demand side robust. As you know, there hasn't been much new construction, which has created a favorable supply and demand situation that we've not seen in quite some time. This trend is contributing to increasing momentum. We've observed a very strong spot market, and if anything, it's becoming even stronger, which is significant as we approach contract renewals typically scheduled for the late fourth quarter. We're looking forward to these renewals given the current market conditions. You pointed out inflation and costs, and we are indeed experiencing that. The headline in the Producer Price Index is at 9%, but steel prices have surged over 200%, particularly as we repair many barges. This inflationary pressure is allowing the industry to adjust pricing accordingly, which is necessary to offset rising operational costs. Transportation costs for crude, for instance, have risen significantly, and food costs are widely recognized to be increasing. While we are contending with inflation, I can assure you that we are securing real price increases, though we do need substantial hikes to counteract inflation. The crewing situation in the industry is particularly challenging. The horsepower aspect is critical, and many companies are struggling to find qualified mariners. COVID-19 has exacerbated this issue. This shortage is impacting pricing, as there is a need to offer competitive wages to attract crews and ensure we have the horsepower necessary to operate barges. In short, momentum is improving, and we are optimistic about our position as we prepare to renew term contracts for 2023. Fortunately, Kirby has its own training school, which we opened last January, and we have been successfully hiring and training deckhands, tanker men, and captains. While the situation remains tight, we’ve managed to crew our vessels effectively.

It's great to hear that. For my follow-up question, I would like to discuss the share repurchases. It seems like it's been a while since you repurchased any stock. Could you elaborate on what that might indicate regarding your capital allocation opportunities? I understand that you would likely prefer strategic mergers and acquisitions if they are available. Could you walk us through the decision to resume buybacks and how you're considering stock repurchases in relation to M&A in the future?

Yes, Jack, good morning. It's Raj here. So we did $18 million of share repurchase in Q2. Now the way we approach capital allocation is in a very balanced manner. Our three main priorities are debt repayment, returning capital to shareholders and, to your point, having dry powder to execute on value creating investments. The near-term goal is on the debt side to get the debt to EBITDA 2.5x or sub 2.5x. You've seen us pay down debt over the last 12 months, and we will continue to execute on that. But I think opportunistically, we'll also be looking to do share repurchases. You will have noted that we saw some slight headwinds in terms of free cash flow for the remaining part of this year. Actually, that's a good dynamic because we are building working capital for the growth that we are seeing, especially in the KDS business. But even after that, with the cash flow that we're generating, I think we're going to be in a good position to pay down debt, do a bit of share repurchases as the year progresses, as well as have some dry powder for investments that are value creating. We will continue to have this balanced approach, and that's going to be our main focus.

Okay, great. Thank you, Raj, for that. I really appreciate it, guys. I'll turn it over.

Thanks, Jack.

Thank you. Our next question comes from the line of Ken Hoexter from BofA.

Hi. Good morning, Ken.

Thank you for taking my question. I wanted to shift the focus to the coastal side. You've mentioned some momentum in this area, but the supply and demand dynamics still seem a bit challenging. How are you approaching this as we move into 2023? Can you discuss some of the factors that will be important in turning the situation in your favor from a pricing perspective? Thank you.

Sure. Thanks for the question. Yes, the coastal business is much longer cycle than the inland business and it's really about the increments of capacity, right. On the inland side, it's 10,000 and 30,000 barrel barges. On the coastwise, they range anywhere from 80,000 barrels all the way up to just under 200,000 barrels. So the increments and capacity are bigger and the cost of the equipment is much more expensive. So it's a much longer cycle business in the coastwise business. That business got overbuilt when there was crude by barge and before crude was allowed to be exported. So the industry has been overbuilt. We've been taking out old capacity, others are as well. And the market is finally just getting back into balance. We got some price increases in this quarter on the handful of contracts that renewed. I would expect that momentum to gain. We got back into profitability. I think going into '23 and '24, I would expect the market to be very strong for the coastwise business. As you're aware, it takes two to three years to build new capacity in the coastwise business. To build a new 185,000 barrel barge and towboat probably cost you, oh gosh, $80 million or so, maybe $90 million or $100 million, with steel prices. So nobody's going to build new capacity in the interim. And I think that's going to continue to allow that supply and demand dynamic to tighten. We're certainly starting to see price increases and push those. Another dynamic in the coastwise business is ballast water treatment. We've been putting ballast water treatment systems in all of our barges and we're almost complete that process. That's adding some cost to the industry, which needs to be recovered. I would tell you we're ahead of most of our competitors in terms of installing ballast water treatment systems. And that sets it up nicely for Kirby, because we've got the bulk of that capital behind us. Now we still have some shipyards to do, and you'll see that model around in our quarters as certain shipyards go through. But we're really excited about where we are in the coastwise business. And it should be a nice dynamic for the next three to five years. Again, just to reiterate, because it takes so long for new capacity to come in and there's no new capacity even being considered right now. So we're excited about where coastal can go in the coming year.

Thanks for that. And then just following up on inland margins in 2023. With fuel recapture and pricing accelerating, do you think that 20% plus margins is attainable?

Yes, the short answer is yes. Margins need to improve. As you know, we have a substantial portfolio of contracts, and it takes time for those contracts to roll over, often several years to really get them operating efficiently. The good news is spot pricing is likely around 20% higher than contract pricing. Contract renewals should begin to have an impact in '23. I would hope that by the end of the fourth quarter, we will see margins in the mid-teens for the inland business. With those renewals, we should start reaching 20% margins sometime in '23. We haven't finalized any calculations yet, as much depends on how the contract renewal cycle unfolds. Nevertheless, it's looking promising, and we are quite excited about our position. However, I want to emphasize that inflationary pressures still exist, and much of this pricing is essential to counter inflation.

Thank you. Our next question comes from the line of Ben Nolan from Stifel.

Good morning, Ben.

I wanted to shift the focus to the D&S side of the business. It seems you've lowered your revenue growth guidance slightly, which I assume is due to supply chain challenges. First, can you confirm that? Second, since it appears that demand significantly outstrips your ability, or anyone's ability, to meet it, are you starting to notice some pricing power? Additionally, looking ahead, what do you consider a realistic margin for that business in a healthy environment, perhaps next year?

Good morning, Ben. I'll discuss the outlook for our business. The slightly reduced outlook we provided is a result of supply chain issues. I believe this is a conservative estimate. The current bottlenecks are inconsistent, and we didn't want to be overly optimistic given our recent experiences with supply chain challenges. It's important to note that this isn't due to a lack of demand; demand remains strong. Our order book is robust, and our backlog has increased about five times over the past year. We are very encouraged by this activity. As I mentioned earlier, we are also seeing growth in working capital, which I view as a positive sign as we prepare for the anticipated demand in the latter part of this year and early next year.

Yes. On the pricing, let me comment on that, Ben. We are getting some pricing increases for sure. I think about it in terms of margins. We think KDS absolute margin should be able to get into the high single digits. We're pushing pricing where we can. Certainly, the demand picture helps that. And we're being judicious about it. And I'm pretty excited about the way that's going. But as Raj says, it's really a shift to the right because of the supply chain. But the demand is there, the backlog is there and we're working through the supply chain issues, as everybody is. It's starting to feel like supply chain is a worn-out excuse across corporate America today, but it is real. We're seeing it in some small parts and actually some of the bigger OEM pieces as well. It's just a fact I think everybody's dealing with. But the good news is that the demand hasn't gone away. It's just fulfilling that demand has shifted a little bit.

That's helpful. Going back to Jack's question, I understand you haven't provided any guidance for next year. However, looking ahead, it seems like the business is making progress. Cash flows are improving, and leverage is decreasing. As we consider future free cash flow, I'm trying to gauge whether there are any significant capital expenditures we should be aware of or if you've essentially completed the necessary spending, except perhaps for offshore wind, and as cash flows improve, more of that should convert into free cash flow.

Yes, I believe that's accurate. We have no significant capital expenditures beyond the wind project. Even for the wind, that's likely under $100 million spread over the next two and a half years, so it won't pose a significant burden on our capital expenditures. Essentially, we're just looking at maintenance capital expenditures. I can tell you that our fleets are in the best condition I've ever seen. We have a young and healthy barge and boat fleet that we've been maintaining effectively. Therefore, it's simply maintenance capital expenditures with no major capital spending expected in the near future. As a result, free cash flow should improve. This is why Raj mentioned our priorities, focusing on reducing debt a bit more and considering opportunistic share repurchases. An acquisition might be a possibility, but I would prioritize the first two for now.

Thank you for that information. I would like to know how you consider dividends in relation to share buybacks, given that dividends have not traditionally been part of Kirby's strategy.

Yes. I think we prefer a buyback over dividends is certainly something we discussed at the Board level. But I would say we'd prefer a share buyback before dividend.

All right. I appreciate it. Thank you.

Thanks.

Thank you. Our next question comes from Greg Wasikowski from Webber Research.

Good morning. Can you guys hear me all right?

Yes. Good morning, Greg.

Good morning. Sorry, I had some connection issues and missed a few questions. So if I'm repeating anything, feel free to give me the stiff arm. But I'll start with inland. How does the health of the 10,000 market compare to the 30,000 market right now? And if you're seeing any sort of lag, can you kind of talk about why that may be the case?

Yes. I would say the 10,000 market is slightly stronger than the 30,000 market. However, both markets are very strong; the 10,000 market is a bit stronger because it mostly involves smaller lot chemicals, which have been performing well. A lot of this activity is related to the river transportation. The 10,000s often rely on a line haul service that operates up and down the river. Overall, both markets are strong right now, and while the 10,000 market might be a bit tighter, the good news is that they are both very tight.

Got you. Thanks. And then on D&S, how would you characterize D&S right now compared to sort of the heyday in 2018? If we remove the effects of supply chain constraints, do you think you'd be back on your way to 1.4 billion, 1.5 billion in revenue with high single digits, maybe even touching 10% operating margins? Or are there other factors in place, it's just a different ballgame here or is supply chain really the only thing holding it back at this point?

Yes, I believe the main issue is the supply chain. There are some inflationary pressures, but the supply chain is really what's holding us back. Would we be at the levels of 2018? I would say yes. As Raj mentioned, our backlog has increased five times compared to a year ago, so the backlog is significant. We are receiving a substantial number of electric frac orders driven by either E-frac or equipment for power generation at well sites. This includes a natural gas reciprocating engine combined with electric distribution equipment, and demand for this has been robust. Electric frac is definitely the preferred choice for frac equipment right now, and demand is increasing. Does it feel like 2018? It certainly does. The only drawback is that our customers, the pressure pumping companies, are being very disciplined with their spending, which I think is healthier for the business. But to answer your question, if it weren't for the supply chain issues, I believe we would be close to the performance of 2018.

Got you. Thanks, David. I think I'm last in line here, so maybe I'll squeeze in one more, if you don't mind. Do you guys still have sideline capacity in inland? And if so, is that just a function of labor at this point? And then, if so, when do you expect to be able to potentially get that capacity back to work?

Yes, we have just a very small bit of capacity on the bank is what we would call it. You saw we brought in about nine barges off the bank. That's equipment we deferred maintenance on and put on the bank during COVID. And we're bringing it back. It's a small amount. I don't think it's material. We may have another 20 or so or maybe even more to pullback, but it's not material in terms of the industry. It will help us. Obviously, that's more capacity. I think that the gauging factor is, as you mentioned, the horsepower getting the towboats to run that equipment. And that's across the industry. Everybody's facing that. There's a shortage of horsepower. And frankly, that's a good thing, right? It makes the pricing environment good. It really tightens up the market nicely. But we do have, to your point, some equipment we can pull off the bank, but it's not material, Greg, but thanks for that question.

Thank you. Our next question comes from the line of Greg Lewis from BTIG.

Hi. Good morning, Greg.

Good morning, everybody.

Greg, are you there?

Hello. Do you not hear me?

Yes, we can hear you now. It seems like there was a pause for a second.

Okay, great. Hi, thank you and good morning, everyone. David, I have a question and I've been experiencing some technical issues this morning, so someone may have already asked this. You mentioned that inflation is impacting margins. As we consider the current situation regarding inland pricing and spot and time charters, if we were to adjust for inflation based on the current market, where do we stand? Are we in a mid-cycle pricing environment considering inflation adjustments, or are we at a different point? Any insights on how we should view spot and time charters would be helpful.

Yes, that's a great question. I believe we are in the mid-cycle phase. If I were to use a baseball analogy, we are likely in the third or fourth inning. It's still about tightening up, and we have a long way to go. For instance, the cost of constructing a new 30,000 barrel barge exceeds $4 million. This indicates that we are in the early stages. Price increases are essential to counteract inflation, which is a real concern. I've mentioned steel, but labor costs are also rising. Additionally, paint prices have gone up by 25%, and costs for hotels and rental cars have increased by the same percentage. This inflation contributes to the price hikes we are experiencing. Therefore, I emphasize that we are still in the early stages. We need to achieve a reasonable return on capital, and we will get there. The positive aspect is that demand remains strong while supply is managed. To sum up, I believe we are still in the early innings, probably the third or fourth.

Okay, great. And then I know we've been talking D&S and the dropping revenue, and I guess more of the pushing of the rights. Is there any way to kind of parcel out on the supply chain side? Clearly, E-frac is gaining momentum and is the future. But is there any kind of way to parcel out and maybe there is no difference between the supply chain for the conventional frac equipment versus the E-frac equipment? And around that, did that have anything to do with the change in the guidance?

No, it's not about any single issue in the supply chain. It could be something like a pressure regulator needed for gas flow in a natural gas reciprocating engine, or it might be an engine from a major manufacturer or a printed circuit board. The challenges are widespread across the supply chain, involving unexpected items like a pressure regulator. A $450 pressure regulator may seem minor, but it can indeed delay shipments. It's not limited to one specific issue; it's a broader problem. The larger components from manufacturers, whether they are engine packages or otherwise, tend to have a greater impact due to the significant revenue they represent. However, it's difficult to pinpoint just one problem. We are navigating through it. Customers and suppliers are working to resolve these issues daily. The positive aspect is that no one is canceling orders, demand continues to grow, and we just need to manage the situation.

Okay. Perfect. Thank you for the time. Everybody, have a great rest of the day.

All right. Thanks, Greg.

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 everyone for participating on the call today. If you have any follow-up questions, please call me at 713-435-1077.

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