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

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

Thank you, Kurt, and good morning, everyone. Earlier today, we announced third quarter revenue of $746 million and earnings of $0.65 per share. This compares to 2021 third quarter revenue of $599 million and adjusted earnings of $0.17 per share. Both of our segments continued to steadily improve during the quarter, delivering higher revenue and operating income, both sequentially and year-over-year. The third quarter's results reflected improved market fundamentals in both Marine Transportation and Distribution and Services, partially offset by continued inflationary cost pressures, as well as ongoing supply chain challenges that delayed sales in our Distribution and Services business. In inland marine transportation, continued high refinery utilization led to a steady improvement in demand with our overall barge utilization running in the low-90% range. Tight market conditions due to limited supply of barges, as well as cost inflation continued to put upward pressure on prices with spot prices up in the high single-digits sequentially and in the mid-20% range year-over-year. Pricing on term contracts moved higher as well with term contracts renewing up in the low-teens versus the year-ago period. Overall, third quarter inland revenues increased 9% sequentially and margins improved into the low double-digit range. While we continue to face headwinds with inflationary pressures in the quarter, we expect margins will gradually improve further as fuel and other cost escalation contract clauses reset in the fourth quarter and into 2023. In coastal, market conditions steadily improved with our barge utilization in the low-to-mid 90% range and some incremental pricing gains with spot prices up in the high single-digit sequentially. Better coal shipments in our dry cargo business also contributed to improved revenues and increased operating margins. Overall third quarter coastal revenues increased 6% year-over-year, and operating margins were in the low to mid single-digits. In Distribution and Services, similar to last quarter, our markets remained very active across the segment and contributed to strong sequential and year-over-year improvement in revenue and operating margins. In oil and gas, high commodity prices and increased oilfield activity contributed to improved demand for new transmissions, parts, and services. In manufacturing, our backlog continues to grow with the addition of new orders for our environmentally-friendly pressure pumping equipment and power generation equipment for e-frac. However, as expected, significant supply chain issues delayed many new equipment deliveries during the quarter. We continue to work diligently to manage the current supply chain environment. In our commercial and industrial markets, overall demand remained solid across our different businesses, with growth coming from the marine repair, power generation, and on-highway sectors. In summary, despite meaningful inflationary and supply chain challenges in the quarter, our third quarter results reflected continued improvement in market fundamentals for both segments. The inland market is inflecting nicely, demand is strong, and rates are moving higher. While the coastal market remains challenged by industry supply dynamics, our barge utilization is good, and we realized modest rate improvements. Demand in Distribution and Services is strong, and our backlog is growing. While supply chain issues are expected to persist for the foreseeable future, looking forward, we see continued strong market fundamentals. We continue to focus on working safely, efficiently, and responsibly to meet and exceed our customers' needs and expect to drive incremental earnings growth into 2023 and beyond. I'll talk more about our outlook later, but first, I'll turn the call over to Raj to discuss the third quarter segment results and the balance sheet.

Thank you, David, and good morning, everyone. In the third quarter of 2022, Marine Transportation revenues reached $433 million, and operating income was $41.7 million, resulting in an operating margin of 9.6%. Compared to the third quarter of 2021, Marine revenues increased by $95 million, or 28%, while operating income rose by $25 million, or 147%. Compared to the second quarter of 2022, Marine revenues grew by $27 million, or 7%, and operating income increased by $11 million, or 35%. These growths were fueled by strong customer demand, favorable operating conditions, and improved pricing. However, inflationary cost pressures remain a challenge, and we expect to offset these increases as contracts and escalators adjust throughout the rest of the year and into 2023. The inland business accounted for about 80% of segment revenue. Average barge utilization was in the low-90% range for the quarter, consistent with the second quarter of 2022, and improved from the low-80% range in the third quarter of 2021. Long-term inland marine transportation contracts, defined as agreements with a term of one year or longer, contributed approximately 60% of revenue, with 56% derived from time charters and 44% from contracts of affreightment. Improved market conditions resulted in spot market rates rising sequentially in the high single-digits and year-on-year in the mid-20% range. Renewed term contracts during the third quarter were up on average in the low-teens compared to the previous year, though only a few smaller term contracts were renewed during this period. Inland revenues were up 35% from the third quarter of 2021, primarily due to increased barge utilization, higher pricing on term and spot contracts, and additional fuel rebills, driven by a nearly 90% year-over-year increase in the average cost of diesel. Compared to the second quarter of 2022, inland revenues increased by 9%, supported by higher term and spot market pricing, improved average barge utilization, and greater fuel rebills. Inland operating margins were in the low double-digits and improved sequentially and year-over-year, though they were still impacted by rapidly rising fuel prices and inflationary cost pressures. These cost challenges were mitigated by gains in utilization and pricing. The coastal business represented 20% of revenues for the Marine Transportation segment. Average coastal barge utilization ranged from the low to mid-90% range, which is better than the mid-70% range seen in the third quarter of 2021. Approximately 65% of coastal revenue came from term contracts, with roughly 92% being time charters. Average spot market rates increased in the high single-digit sequentially, and term contract renewals saw increases in the 20% range year-over-year. In the quarter, coastal revenues rose 6% year-over-year, attributed to improved barge utilization, higher contract prices, and increased fuel rebills. Overall, the coastal business achieved a positive operating margin in the low to mid single-digits. Regarding our tank barge fleet for both inland and coastal operations, we have provided a reconciliation of changes in the third quarter along with projections for the remainder of 2022, which is available in our earnings call presentation on our website. Now I will review the performance of the Distribution and Services segment. Revenue for the third quarter of 2022 was $313 million, with operating income of $22.3 million. Compared to the third quarter of 2021, the Distribution and Services segment saw revenues increase by $52.4 million, or 20%, with operating income improving by $11.3 million, or 103%. When compared to the second quarter of 2022, revenues rose by $20.5 million, or 7%, while operating income increased by $5.6 million, or 34%. In the oil and gas market, favorable commodity prices and increased rig and completions activity drove a 37% year-on-year revenue increase and a 13% sequential revenue increase. Throughout the quarter, we experienced heightened demand for new transmissions and parts. As David mentioned, we are still navigating ongoing supply chain challenges, particularly in our manufacturing business. Despite these headwinds, the manufacturing side saw continued positive trends in new orders and deliveries. Overall, oil and gas accounted for about 47% of segment revenue in the third quarter, with operating margins in the mid single-digits. In the commercial and industrial side, strong activity led to an 8% year-on-year revenue increase due to improved demand for equipment, parts, and services in our marine repair and on-highway sectors. Power generation also saw a modest year-over-year uptick. Compared to the second quarter of 2022, commercial and industrial revenues increased by 2%. Our Thermo King business faced ongoing delays due to supply chain constraints, which impacted revenue growth; however, this was countered by increased activity in marine, power generation, and on-highway repair. Overall, the commercial and industrial business accounted for approximately 53% of segment revenue, with an operating margin in the high single-digits during the third quarter. Now, turning to the balance sheet. As of September 30, we had $37 million in cash and total debt of $1.1 billion, with our debt-to-cap ratio improving to 27.3%. During the quarter, we generated $66 million from operating cash flow and received cash proceeds of $10 million from the sale of retired marine equipment. We used our cash flow and available cash to fund $41 million in capital expenditures. Our disciplined capital allocation approach has further strengthened our balance sheet and allowed us to return capital to shareholders. We reduced our debt by $18 million and repurchased over 70,000 shares at an average price of $63.33 per share for a total of $4.8 million. As of September 30, our total available liquidity was approximately $521 million. Regarding capital expenditures, we anticipate full-year CapEx between $170 million and $190 million, primarily for required maintenance on our marine fleet. We also expect to generate cash flow from operations ranging from $390 million to $450 million, with free cash flow, defined as operating cash flow minus CapEx, projected to be between $200 million and $280 million. We are continuing to address supply chain constraints that are affecting our working capital in the near term, but we expect to ease this working capital situation as orders ship later this year and into the first half of 2023. We remain committed to a balanced capital allocation strategy and will utilize this cash flow to repay debt as opportunities arise, return capital to shareholders, and pursue long-term value-creating investments and acquisition opportunities. I will now turn the call back to David for our outlook for the remainder of 2022.

Thank you, Raj. As discussed, the third quarter had good incremental improvements in revenues and operating income in both our segments. In Marine, steady demand, driven in large part by higher refinery and chemical plant utilization, should continue to support high barge utilization. Combined with limited new barge construction and inflationary recovery means, we expect these dynamics to support further increases in inland rates. While all this is very encouraging, we are mindful of the ever-changing economic landscape and potential recessionary headwinds. Additionally, we continue to monitor the current record-low water conditions on the Mississippi River for which the full impact remains to be seen. Although the current low water conditions impact only a portion of our inland marine business and we have some contract protections to help limit the magnitude, the low water headwinds are dynamic and real. As always, we will manage the factors we can control. Nonetheless, we continue to be encouraged with refinery and petrochemical plant activity remaining at near-record levels resulting in increased customer volumes. Barge availability is constrained as there is minimal new barge construction. These positive factors are expected to contribute to our barge utilization running in the low to mid-90% range for the foreseeable future. These favorable supply and demand dynamics are expected to drive further improvements in the spot market, which currently represents approximately 40% of inland revenues. We also expect continued improvement in term contract pricing as renewals occur with a significant amount of term contracts renewing in the fourth quarter. Overall, for the 2022 full-year versus 2021, we expect inland revenues will grow approximately 20% to 25%, and we expect near-term inland operating margins to be in the low to mid-teens and to continue to gradually improve in 2023. In the coastal market, conditions are expected to remain steady, but will remain somewhat challenged by underutilized barge capacity across the industry. Even with some market softness, Kirby's coastal barge utilization is expected to be in the low to mid-90% range. Full-year 2022 coastal revenues are expected to be flat to up in the low single-digits, driven primarily by good fundamentals in our core liquid cargo business and higher coal shipments in our offshore dry cargo business, offset by the company's exit from Hawaii. Revenues and operating margins are also expected to be impacted by ongoing planned shipyard maintenance and ballast water treatment installations on certain vessels. Overall, coastal operating margins for the remainder of the year are expected to remain in the low to mid-single digits. Looking at Distribution and Services, we have a favorable outlook with anticipated strong demand for equipment, parts, and service in distribution and a growing backlog in manufacturing. In the oil and gas market, high commodity prices, increased rig counts and growing well completions activity are expected to yield strong demand for manufacturing and OEM parts, products, and services in the distribution business. We expect the current commodity price environment will contribute to further increases in rig count and frac activity in the fourth quarter and into 2023. U.S. land rig counts have grown to over 760 rigs, which represents a full-year average increase of approximately 42% with steady growth expected for the remainder of the year. Similarly, the active frac spread count is approaching 295. With this growth, we expect to see increasing demand for transmissions, engines, parts, and service in distribution. In manufacturing, we have a growing backlog position. We've added new incremental orders in the third quarter and we expect this trend will continue. As I mentioned earlier, we expect the supply chain issues and long lead times for OEM equipment, which in some cases are extending beyond a year to remain a challenge. These issues are likely to contribute to some choppiness with new product deliveries, which could potentially shift into ‘23 and into 2024. In commercial and industrial, we're forecasting steady demand in on-highway with increased trucking and municipal repair work, continued improvement in bus ridership, and increased demand for Thermo King refrigeration products, offset again by the lingering supply chain delays. In power generation, new backup power installation, parts and service activity are expected to remain solid as demand for electrification and 24/7 power grows. Marine repair is also expected to be strong with increasing activity in the Gulf of Mexico and improved commercial markets on the East and West Coast. For the 2022 full-year, we expect revenue growth in the low-double-digit percent range for commercial and industrial. For Kirby as a whole, while supply chain issues are expected to continue impacting new product and equipment deliveries, we continue to expect 2022 segment revenues will increase by 25% to 30%, compared to 2021, with commercial and industrial, representing approximately half of segment revenues and oil and gas representing the other half. We expect segment operating margins will be in the mid to high single-digits for 2022. To conclude, Kirby's third quarter results showed steady improvement in the face of ongoing challenges. Both of our segments performed well during the quarter, delivering improved revenue and operating income sequentially and year-over-year and our teams executed well on near-term objectives, as well as our long-term strategy to provide value to Kirby and our shareholders. We exited the quarter with healthy long-term fundamentals and both of our businesses are very well-positioned to continue delivering value. Although we see favorable markets continuing and expect businesses will provide improving financial results, we are closely monitoring potential economic headwinds, as well as the potential of short-term weather and water-related impacts to our business. Having said that, as we look long-term we are confident in the strength of our core businesses and our long-term strategy. We intend to continue capitalizing on strong market fundamentals and driving shareholder value creation. Operator, this concludes our prepared remarks. We are now ready to take questions.

We will now begin the question-and-answer session. The first question comes from Ken Hoexter with Bank of America. Your line is now open.

Great. Good morning, Dave and Raj.

Good morning, Ken.

Can you discuss your shift from contract agreements to the spot market and potentially fewer take-or-pay contracts? I would also appreciate your insights on the changing market cycle. The fourth quarter seems crucial for pricing some of those term contracts. Additionally, could you elaborate on the current state of the market and the implications of low water levels for your business and pricing? Thank you.

Yes, of course, thank you for the question, Ken. Regarding those Astros, I'm being serious now.

Missed it. I didn't see anything.

The term-to-spot ratio is influenced by the rising market we're experiencing, with spot revenues increasing more rapidly than contract revenues since rate hikes can be integrated into spot contracts more quickly. We expect the ratio of spot to contract rates to shift slightly in the fourth quarter as we renew some significant term contracts due at the year's end. Overall, we are pleased with our current spot and contract position. In a rising market, having good spot exposure is advantageous. However, the ratio has been slightly affected by the pace at which we can raise spot rates compared to term contract rates. We anticipate higher term contract rates in the fourth quarter due to a strong supply and demand dynamic, which is essential in light of inflationary pressures. Currently, supply is not increasing while demand remains stable. We are monitoring the potential for a recession next year, but refinery utilization is strong, and chemical plants are also performing well. In the U.S., chemical plants have a favorable feedstock position, especially with recent drops in natural gas prices. While we are optimistic about demand, we remain vigilant about possible economic downturns. Nonetheless, even with a slight decrease in demand, the tight supply situation should help us manage. This tightness extends beyond barges to include mariners and horsepower. Regarding low water levels, the situation has worsened recently, with the river being shut down multiple times. The Army Corps of Engineers, Coast Guard, and others are collaborating to keep navigation operational. The Coast Guard has adjusted the size of tows and lowered draft restrictions, resulting in loading at nine feet instead of the usual twelve. This unprecedented water level could be the lowest in decades, and although rain is forecasted, its impact is uncertain. About 20% of our fleet operates in this area, translating to approximately 198 barges out of our 1,000-barge fleet. Fortunately, we have solid contract protections in place for navigation delays, but these come with reduced profitability. We may see a slight headwind of $0.02 to $0.05 this quarter depending on when water levels improve. This issue significantly affects the U.S. supply chain, particularly for dry cargo operators who operate larger tows. Although it is challenging, we believe we will manage through this situation with the collaborative efforts of all stakeholders.

Great. And, if I could get my point across, go ahead.

Ken, I was just going to add, you referenced the Q4 term contract renewals, you're right. It is a substantial quarter for us, we have around 35% of our contracts renewing in Q4.

Yes, this is the moment we've all been waiting for, especially the big fourth quarter. Dave, in the D&S part of the business, it seems like things have finally come together. This is what you've been anticipating for perhaps a couple of years. The key question has always been about the strategic significance of this segment. Perhaps you could share your thoughts on the business as we move forward and as conditions begin to improve from your perspective.

Yes. Now to your point, D&S is really starting to roll right now. Inbound orders are up across the business. Obviously, oil and gas, particularly anything electric frac is very strong. We continue to take orders. Commercial and industrial is the same. It's pretty strong. We are being impacted by supply chain for sure, I mean, some engine packages are at least a year out. So in some cases, we won't get deliveries until ‘24. So supply chain is impacting us a bit. But to your point, more on the strategic should Kirby split, kind of, the marine and the KDS business. We've always been open-minded to it. We've just got to make sure it creates shareholder value. The Board discusses it is committed to creating shareholder value. So when the numbers make sense, it might make sense to split the two businesses. Clearly, last year at trough EBITDA and trough EBITDA multiple didn't make sense. So with this strength, it's getting to make more and more sense. But we'll see we've still got to work through it. Meanwhile, we're running the business really well. The both the marine team and the KDS team are hitting on all cylinders. And it's good when the team is working hard and the market is working in the right to the same direction. So we're pretty excited about where we are right now.

Can I just ask one clarification? Sorry, Kurt, I just want to make sure I understand. In the press release, you said high levels of shipyard activity in coastal. Do you mean more new builds or did you mean the ballast water treatment that you were talking about later on? I just want to understand if you were talking about new builds?

No, it's not new builds. It's all ballast water treatment. Fortunately, of our 30 units, I think 29 or 30 have ballast water treatment completed, so we have six left to address, and those are in major shipyards for some of our larger units. This will affect our results in the fourth quarter and, more significantly, into 2023. As for new construction in coastal, there’s nothing happening. We're not hearing about any projects in development, which is beneficial for the pricing environment since we're approaching a supply-demand balance. Even if someone wanted to construct a new unit now, it wouldn’t be available for three years due to the necessary engineering and construction processes, with delivery at the earliest in 2025. It’s hard to imagine anyone would choose to build a new unit at this time. For context, when we built our 185,000 barrel ATB, it cost about $80 million, but now it would be around $140 million due to rising steel prices, labor costs, and other input prices. This situation is favorable for supply and demand in coastal, and we should anticipate rate increases in the coastal business moving forward.

Thanks for the clarification. Thanks for the time, guys. I appreciate it.

Hey, thanks, Ken.

Our next question comes from Jack Atkins with Stephens. Your line is now open.

Good morning, and congratulations on a solid quarter. David, regarding the fourth quarter outlook, I see you provided ranges from a line item perspective and for the full year, but you also mentioned in the press release that you expect to achieve improved financial results in the upcoming quarters. I understand there are some challenges with low water issues in the fourth quarter, but given the current momentum in the business, do you anticipate improved earnings in the fourth quarter compared to the third quarter?

We haven't provided complete guidance, but typically, the third quarter is our strongest. The first quarter tends to be the weakest, followed by the fourth quarter, which is not as weak as the first but usually less robust than the second or third, primarily due to weather conditions. Weather, especially fog, significantly impacts our Marine business. Consequently, with the combination of fourth quarter weather and lower water levels, we haven't issued specific guidance, but it may result in a flat quarter or, depending on river conditions, a slight decrease or increase. However, I wouldn't anticipate a significant sequential improvement due to the weather and low water levels. Additionally, the major contracts in our Marine business adjust pricing at the end of the quarter, and you'll begin to see those changes reflected starting in January.

Okay, now that's helpful. I just think it's important to ensure that everyone is aligned on this.

Let me discuss D&S. D&S has the potential to improve sequentially, but we are facing challenges with the supply chain and the ability to get shipments out. There may also be some issues with product mix, as some of the items we ship may have lower margins compared to others. D&S is currently strong, but the focus is on effectively managing the supply chain, which can be frustrating. I understand this may sound like a common excuse used by many corporations today, but the challenges are genuine.

Marine performance is stable while D&S shows slight improvement from the previous quarter. As we look ahead to next year, there are various factors to consider, and I would appreciate your insights on this further. Specifically, could you clarify the current difference between spot rates and contract rates? Understanding this will help us gauge the potential upward movement in contract rates during the renewal process. Additionally, what feedback are you receiving from your chemical and refined product customers regarding their strategies for next year, especially considering the uncertain economic conditions? I would appreciate any insights you can provide on that front.

Yes, contract pricing is currently higher than spot pricing, which indicates a healthy market. The differential is between 10% to 20%, depending on the specific contract and spot comparison. We consider this gap beneficial for the pricing environment. On the chemical and refined product sides, customer sentiment is quite positive, and volumes are strong. However, chemical customers appear a bit more apprehensive than refined product customers due to economic challenges, particularly in Europe. For example, European chemical facilities are facing significant issues with soaring natural gas prices compared to the much lower prices here in the U.S. It's a complex situation. As I mentioned earlier, many are observing the potential for a recession. I believe the Federal Reserve has taken sufficient measures, and a soft landing seems possible, though this impression is not backed by concrete data.

Okay. Thank you again for the time.

Thanks, Jack.

Our next question comes from Ben Nolan with Stifel. Your line is now open.

Thank you. Hey Dave and Raj. If I could just start where you left off, David, discussing the chemical side of the business. I understand that's the majority of your operations on the river and inland. It seems to me that, historically, you've indicated that the chemical segment is closely linked to GDP. However, typically in a downturn, there is also a drop in oil and gas activity and production. Do you believe that the current environment is different from what we usually see in a period of weakness regarding customer demand for barges?

Yes, one of the most concerning things in investing is the idea that this time is different. Historically, GDP does affect our volumes, and we've seen in the past how a recession leads to a decline in volumes and demand aligns with GDP. So I believe the situation isn't different. If a recession occurs and GDP declines, it will influence demand. However, one notable difference now is the lack of new construction; the cost of building new barges is extremely high. Additionally, as we consider retirements, especially when an old barge is sent to the shipyard and the cost of replacing steel is reviewed, it can be overwhelming. This situation appears to constrain new supply. Even if we experience a slight decrease in demand, I anticipate that we will continue to be tight on supply. Moreover, when considering the horsepower aspect, we face a shortage of mariners, which is a new and stronger challenge compared to previous periods. Regarding the oil and gas sector, the peculiar situation in Europe is noteworthy; they are facing a shortage of refined products due to refinery feedstock issues. Thus, we are seeing a slight increase in export volumes for refined products, which is beneficial. Does this indicate that things are different this time? Not really—it may provide some support to the U.S. refinery sector and, to a lesser extent, the chemical sector. In summary, while I don’t believe demand is uniquely different this time, the supply side is distinct due to the constraints on new supply costs and the expenses associated with maintaining older equipment. That's probably the main difference at this moment.

Okay. That's helpful. For my follow-up, I’ve heard that low water levels in the river are affecting horsepower availability, making it harder for larger power towboats to operate effectively. This challenge seems to be driving prices up. Is this also impacting the tank barge market, similar to what we've seen in the dry barge market? Are you experiencing any positive effects from this situation? Additionally, I noticed that one extra barge was reactivated this quarter according to the presentation. Are you currently operating at full capacity, or do you have other equipment ready to be brought back if demand increases?

Yes, let's break it down. First, regarding the horsepower, the large 10,000 horsepower towboats that can push 50 dry cargo barges have too much draft and are currently tied up. Thus, most of our horsepower consists of smaller vessels due to smaller tow sizes. We do have one large vessel out of service because its draft is excessive for the river conditions, but generally, our fleet is smaller. On a positive note, this situation is providing some support to the market, especially with dry cargo rates increasing by 200%, which also benefits the liquid side of operations by tightening the market. However, we hope this situation doesn't last long and that we receive much-needed rain to improve river conditions. As for your second question about reactivating barges, many were put out of service during the pandemic, particularly the older models that required more maintenance. We are reactivating a few of these, with around 10 to 15 expected to come back by the fourth quarter. However, not many are left, and the costs associated with bringing them back are high due to rising steel and labor prices. We will only reactivate those that are financially viable. While we might see a few more barges reactivated in the next quarter or two after the fourth quarter, there isn't a significant surplus in supply. The main constraint is the cost of reactivation. The inflationary pressures we’re experiencing are compounding these costs, impacting our supply and the pricing landscape, making it essential to implement price increases just to maintain our current position.

Yes. That makes sense. Well, I appreciate the answers and maybe I'll bump into you at Minute Maid over the weekend and go Astros.

Thanks, Ben.

We will now begin the question-and-answer session. Our next question comes from Jonathan Chappell with Evercore. Your line is now open.

Thank you. Good morning.

Hey, good morning.

David, I want to pick up just where you left off. You guys had mentioned cost escalators a couple of times in your prepared remarks and in some of the Q&A. So kind of a two-parter here. One, does this mean that when you look at margins similar to prior cycles, given all the cost inflation, you should be at similar levels based on the pricing environment, you'll get all this cost inflation back and we should think about this upturn similar to the prior upturns from a margin perspective? And two, given the economic headwinds that you spoke about, do you foresee any more pushback from the cost escalators just given maybe the customer cautiousness or uncertainty?

Let me break this down into a few parts, and Raj can add to it if needed. First, regarding fuel, there is a delay in recovering fuel costs. We have mechanisms in place, some of which are direct pass-throughs, while others adjust monthly or quarterly, and some take up to four months to fully take effect. We can be a bit flexible with this. Over time, the fuel escalators even out, and we work collaboratively with our customers to avoid making or losing money on fuel costs. Our goal is to keep fuel costs neutral. Additionally, for some contracts, we utilize CPI or PPI adjustments to keep pace with inflation. However, these adjustments often fall short as some of the supplies we purchase for our boats have seen significant inflation, sometimes exceeding 20%. While CPI and PPI aim to align with general inflation, they are not foolproof, and we find ourselves lagging. The escalators we reference include CPI, PPI, and specific labor escalators in some of our contracts, where we link labor costs to an index. We do need these price increases, as past experiences would suggest that margins would typically rise more significantly during such increases. Previously, we might have seen a stronger improvement in margins, but the current inflation environment presents challenges. Despite this, we still anticipate an increase in margins, albeit not as pronounced as seen in prior cycles, primarily due to the current inflation landscape.

And if I could add, I'll just say that this is where we need rate to increase, because of David's comments on inflation. And I think this approach that we are taking towards being very focused towards rate increases very critical for us. If I can just add, in Q2, we saw fuel as a headwind. I think we talked about that in Q3, it came out that fuel was kind of flat. We're starting to see fuel increase right now. So that kind of supports what David was saying in terms of that whipsaw effect. So we'll see where fuel goes, I'm looking at the forward curve going into next year. And if that plays out, then we see recovery on fuel to as the year progresses.

Okay. That's helpful. Just for the follow-up, I wanted to take Jack’s first question just a little bit further. I know I don't want to get into short term headwinds, but I think it's important to kind of frame how we should look at ‘23. David, you said 1Q is typically the weakest quarter for all the obvious reasons. But if you're resetting most of these term contracts late 4Q that will be marking to market conceptually much higher. You're getting some of these cost escalators through, all else equal on like the worst winter weather ever or the worst drought ever, should 1Q be better than 4Q as we think about just this market upturn as opposed to traditional seasonality?

We haven't calculated it yet, so I can't provide a definitive answer, but I understand your point. As Raj mentioned earlier, around 35% of our contracts are subject to repricing, and we need to assess how that will impact us before making any declarations. In theory, I can see the scenario you described occurring.

I think with regards to Q1, we're hedging for weather, right, and the situation on the Mississippi, right? So I think if you go back, consequent history says typically has bad weather. But all things being equal to your point, Jon, yes, if we get to where we need to get on this 35% renewal, we should see better margins.

Okay, awesome. Thank you, Raj. Thanks, David.

Our next question comes from Greg Lewis with BTIG. Your line is now open.

Hey, good morning, everybody. And how those.

How about those?

I guess my first question is around how the inland fleet is managing to the low water i.e. You mentioned there's around 200 barges, you also mentioned that due to draft restrictions, you kind of have the light load. I guess what I would say is in the environment that we're in now. It is longer than we think. Should we expect more or less barges upriver?

Yes, Greg, the short answer is I don't know. However, Christian and I have discussed it with our operations team, and we are concerned about a potential complete shutdown of the river unless we receive significant rainfall. This would have a considerable impact. Fortunately, with liquid barges, we already operate with a lower draft, and we can go even lower, though some boats have limits on how low they can go. Interestingly, despite periodic openings, the cycle times for moving a barge up and down the river are increasing, which oddly results in greater demand for barges. The issue primarily lies with freight contracts, where movement isn't as quick. However, time charters are performing adequately. We also have navigation clauses in place that provide some leniency for delays at the start of a voyage due to navigation issues. It's challenging to quantify the situation definitively, but we are concerned about a total shutdown. In comparing liquid to dry cargo, we are in a much stronger position, and our navigation delay clauses are beneficial. Part of the offset is the slower cycle times, which increases demand in the entire barge market. In summary, it's difficult to measure this accurately, and it could represent a headwind of $0.02 to $0.05 in the fourth quarter, possibly more if we continue without significant rainfall throughout the quarter.

Okay, great. And then I did want to pivot over to Florida. I know that's a big market Tampa for the coastal business. So I was kind of hoping how you think what's happened on the West Coast of Florida maybe is impacting coastal if at all? And then just kind of a two-parter there. On the C&I, I imagine there's a lot of demand for power generation and things like that. Kind of curious what this whole impact of the storm on the West Coast, Florida is having on coastal and C&I?

Yes, there were a few different impacts. We had several branches in Commercial & Industrial shut down during the quarter due to the storm. There was minor damage at a couple of locations, primarily related to power outages. Fortunately, we have our own backup power, which allowed us to sustain our operations. Our rental fleet in C&I came very close to being fully rented out, serving clients like Walmart, Target, Costco, and some healthcare providers, so we were quite busy there. On the coastal side, we experienced delays with some voyages just north of Tampa. Our operations include movement in and out of Crystal River with a few large units, along with a small vessel. We essentially lost a couple of weeks on charter hire because of the storm. We also had some equipment in shipyards in Tampa, which ironically grounded when the storm surge moved in the opposite direction, causing additional delays. While we did experience some vessel downtime, most of these effects were observed in the third quarter. There may be some lingering impact on the rental fleet as we head into the fourth quarter, as some rental equipment remains under contract. Overall, it was a significant storm, but its impact was likely less severe compared to previous hurricanes we've faced in places like Louisiana or Texas, where we have a greater presence with inland barges. So, to summarize, there was an impact, but we didn't quantify it specifically for earnings purposes this quarter.

Okay. Alright, everybody. Hey thank you for the time.

Yes, alright. Thanks, Greg.

Our next question comes from Greg Wasikowski with Webber Research. Your line is now open.

Hey, David and Raj. Good morning. Thanks for fitting me in here.

Hey, Greg. Good morning.

David, could you elaborate on the towboat market, specifically what you've observed compared to your current situation regarding labor constraints? What actions are you taking with your dedicated capital expenditures, and how does this impact utilization, rates, and margins?

Labor conditions are quite challenging, with labor rates rising in the mid to high single-digit percentage range across both our businesses. In the marine business, the increases are on the lower end of that scale. We're definitely seeing wage inflation, which is affecting our margins. Inflation is a universal issue; just visit a grocery store to see its impact. This situation reinforces the need for price increases to keep pace with inflation. Regarding our towboat operations, we're experiencing some constraints. While having more mariners would be beneficial, we are in a better position than many of our competitors because of our training school established last year. Initially, it was a costly move during the pandemic, but in hindsight, it has proven to be a valuable investment. As for our capital expenditures, we're looking to minimize them. Over the past five to six years, we have invested in our fleet and acquired companies with younger assets. Our fleet has never been in better condition, and we do not have a need for new equipment at this time. We may consider specialized equipment for specific customers, such as a unique line barge or a specialized towboat called a retrack, which features a retractable wheelhouse. Currently, the only new construction we have underway is a hybrid electric towboat scheduled for delivery in the first half of 2023, which is generating considerable interest due to its emissions profile. We are aiming to minimize capital expenditures going forward since our fleet is in excellent shape.

I would just add, Greg, that over the last two years, we faced the challenges of the pandemic, and we managed our capital expenditures with some catch-up occurring this year. Most of this spending is related to maintenance, which reflects our efforts to navigate through the pandemic and our current situation. Utility performance has shown improvement, so we need our fleet to be well-prepared to meet the demand we are experiencing.

Got it, okay. Thanks, guys. Regarding the D&S and overall strategy, I wanted to discuss the advantages and disadvantages of a split beyond just the financials and determining the right price. Are there any other considerations or synergies we might not be aware of? Could this decision impact our economies of scale or simplify our supply chain, perhaps in relation to marine repair? Is there anything like that we should be considering?

There is some collaboration between our distribution services engine repair group and our fleet and towboats. This accounts for about 4% or less of revenue on the KDS side. Additionally, the other synergies are primarily related to sharing corporate overhead. There may be potential future synergies related to developing electric hybrid vessels. Our team at Stewart & Stevenson, a Kirby-owned company, excels in electrification, battery systems, and electric drive equipment, which is more of a future initiative. We are currently working on our first diesel electric towboat. Overall, there aren’t many synergies between the two aside from the marine repair business.

Okay. And real quick, what about the same kind of question for oil and gas versus C&I? Is it a possibility or something you'd entertain to split those two groups, maybe hang on to C&I and split off oil and gas? Or is that more of a package deal?

No, I think the Board is engaged and Cognizant would consider anything that might enhance shareholder value. If the Board is open to doing one or both options that add value to shareholders, they are certainly willing to explore that. However, none of this has materialized so far. I will say that the D&S market as a whole is currently looking quite positive.

Yes. Okay. Thanks, David. Good luck again, fully.

Thank you.

Thank you.

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

Thank you, Michelle, and thank you, everyone, for participating on the call today. If you have any follow-up questions, reach out to me directly, 713-4051077. Thanks.

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