Earnings Call Transcript - KEX Q4 2022

Operator, Operator

Good morning, and welcome to the Kirby Corporation 2022 Fourth 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.

Kurt Niemietz, VP of Investor Relations and Treasurer

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 and in our other filings made with the SEC from time to time. I will now turn the call over to David.

David Grzebinski, President and CEO

Thank you, Kurt, and good morning, everyone. Before we get into the details of our fourth quarter and full-year results, I'd like to take a moment to touch on a press release we issued earlier this month. The Board initiated a process in early 2022 with the support of our independent financial and legal advisors to review a range of alternatives, including a potential sale or spin-off of the Distribution and Services business. The Board is keenly focused on maximizing value for shareholders and regularly reviews and actively manages Kirby’s portfolio. Following a thorough exploration of potential options, including discussions with a number of potential strategic and financial counterparties, the Board concluded that under current financial market conditions, the best way to enhance shareholder value is to continue to execute on our strategic plan for both the marine transportation and distribution service business. As always, we remain committed to maximizing value for shareholders. And we'll continue to evaluate all opportunities to do so. But as you know, the difficult financing environment is impacting the ability of both sponsors and strategics to pursue and consummate transactions. We have deep operational expertise and unique capabilities that position both of our businesses to deliver long-term growth and enhanced performance. This is underscored by our strong financial results and operating performance in 2022. We are encouraged by the bright prospects of the company's two segments and look forward to continuing to operate these businesses from a position of strength. Now turning to our financial results. Earlier today, we announced fourth quarter revenue of $730 million and adjusted earnings of $0.67 per share. This compares to 2021 fourth quarter revenue of $591 million and adjusted earnings of $0.27 per share. Both of our segments performed well during the quarter delivering significantly higher revenue and operating income year-over-year. The fourth quarter's results reflected steady market fundamentals in both marine transportation and distribution and services, partially offset by unfavorable weather and low water conditions, normal seasonal slowness, as well as ongoing supply chain challenges that delayed deliveries in distribution and services. In Inland Marine transportation, strong refinery utilization led to steady demand with our overall barge utilization running in the 90% range. Tight market conditions, due to strong demand and limited supply of barges coupled with continued inflationary pressures, put upward pressure on prices with spot prices up in the low single digits sequentially and in the 20% to 25% range year-over-year. Term contracts also reviewed up in the 10% to 15% range versus a year ago. Overall, fourth quarter Inland revenues increased 24% year-over-year and margins improved into the low teens range. Low water conditions on the Mississippi River, as well as the onset of winter weather made for difficult operating conditions in the quarter with a significant increase in delay days. While we continue to face headwinds with inflationary pressure in the quarter, we started to witness some moderation and operating margins continue to improve reaching their highest level since 2020. 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 low to mid-single digits sequentially. Better coal shipments in our dry cargo business also contributed to improved revenues and increased operating margins. Overall, fourth quarter coastal revenues increased 8% year-over-year and operating margins were in the low single digits. In Distribution and Services, demand remained strong across our markets with continued growth in new orders and backlog. In manufacturing, revenues were up sequentially and year-over-year, driven by healthy demand 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 continued supply chain challenges. In our Commercial and Industrial market, overall demand remains solid across our different businesses with growth coming from the marine repair, power generation, and on-highway sectors. In summary, our fourth quarter results reflected continued strength in market fundamentals for both segments, despite meaningful weather and supply chain challenges. The Inland market is inflecting nicely, demand is strong, and rates are moving higher. While the coastal market remains challenged near-term by industry-wide supply dynamics. Our barge utilization is good, and we've realized modest rate improvements. Strong demand in Distribution and Services is contributing to further growth in our backlog, while supply chain issues are expected to persist for the foreseeable future, the outlook for the market is strong. We continue to focus on working safely, efficiently, and responsibly to meet and exceed our customer needs and expect to drive incremental earnings growth into 2023 and into 2024. I'll talk more about our outlook later, but first I'll turn the call over to Raj to discuss the fourth quarter segment results and the balance sheet.

Raj Kumar, Executive Vice President and CFO

Thank you, David, and good morning, everyone. In the fourth quarter of 2022, marine transportation revenues were $423 million and operating income was $47 million with an operating margin of 11.1%, compared to the fourth quarter of 2021, marine revenues increased $72 million or 21% and operating income increased $21 million or 82%. Compared to the third quarter of 2022, marine revenues were down 2% and operating income increased by 12%. As David mentioned, the historic low water conditions on the Mississippi River, as well as freezing weather along the Gulf Coast that curtailed refinery and plant utility made in the quarter negatively impacted operations. These negative factors were partially offset by solid underlying customer demand and improved pricing. The Inland business contributed approximately 80% of segment revenue. Average barge utilization was in the 90% range for the quarter, which is similar to the utilization seen in the third quarter of 2022, and compares to the mid to high-80% range in the fourth quarter of 2021. Long-term Inland marine transportation contracts or those contracts in the term of one year or longer contributed approximately 55% of revenue with 60% from time charters and 40% from contracts of affreightment. Improved market conditions contributed to spot market rates increasing sequentially in the low single digits and in the low to mid-20% range year-over-year. Term contracts that renewed during the fourth quarter had average increases in the 10% to 15% range, compared to the prior year. Compared to the fourth quarter of 2021, Inland revenues increased 24%, primarily due to increased barge utilization, higher term and spot contract pricing, and increased fuel rebuilds as the average cost per diesel was up 60% year-over-year. Compared to the third quarter of 2022, Inland revenues were down 2%, driven by unfavorable operating conditions due to low water on the Mississippi River and winter weather. Inland operating margins were negatively impacted by a 147% sequential increase in delay days. However, the margins were in the low-teens and improved both sequentially and year-over-year as delay days and inflationary cost headwinds were more than offset by gains in pricing. The coastal business represented 20% of revenues for the Marine Transportation segment. Average coastal barge utilization was in the low to mid-90% range, which compares to the 90% range in the fourth quarter of 2021. During the quarter, the percentage of coastal revenue under term contracts was approximately 65%, of which approximately 90% were time charters. Average spot market rates were up in the low to mid-single-digit sequentially and renewals of term contracts were higher in the low teen range year-over-year. During the quarter, coastal revenues increased 8% year-over-year with improved barge utilization, higher contract prices, and higher field rebuilds. Overall, coastal had a positive operating margin in the low single-digits. With respect to our tank barge fleet for both the Inland and Coastal businesses, we have provided a reconciliation of the changes in the fourth quarter, as well as projections for 2023. This is included in our earnings call presentation posted on our website. Now I'll review the performance of the Distribution and Services segment. Revenues for the fourth quarter of 2022 were $307 million with operating income of $17 million, compared to the fourth quarter of 2021, the Distribution and Services segment saw revenue increased by $67 million or 28% with operating income increasing by $10 million or 127%. When compared to the third quarter of 2022, revenues decreased by $5.4 million or 2% and operating income decreased by $5.2 million. The sequential decrease in revenue and operating income was attributed to ongoing supply chain delays, as well as some seasonal slowness activity. In the oil and gas market, favorable commodity prices and increased rigs and completions activity contributed to a 44% year-on-year increase in revenues. We experienced strong demand for new entrants and parts throughout the quarter. As David mentioned, we continue to navigate a tough supply chain environment, especially in our manufacturing business. Despite the supply chain headwinds, the manufacturing business experienced continued favorable trends in new orders and backlog. Overall, oil and gas represented approximately 42% of segment revenue in the fourth quarter and had operating margins in the low single digits. On the commercial and industrial side, strong activity contributed to an 18% year-over-year increase in revenues with improved demand for equipment, parts, and service in our marine repair and on-highway businesses. Power generation was also up year-over-year. Compared to the third quarter of 2022, commercial and industrial revenues increased by 8%. Our Thermal King business continued to experience delays due to supply chain constraints that impacted revenue growth. However, this headwind was offset by increased activity in marine, power generation, and on-highway repair. Overall, the commercial and industrial business represented approximately 58% of segment revenue and had an operating margin in the high single digits during the fourth quarter. Now I'll turn to the balance sheet. As of December 31, we had $81 million of cash with total debt at $1.1 billion and our debt to capital ratio improved to 26.2%. During the quarter, we had cash flow from operations of $132.9 million and we generated cash proceeds from asset sales of retired marine equipment of $4 million. We used cash flow and cash on hand to fund $52.3 million of capital expenditures or CapEx, primarily related to the maintenance of equipment. During the quarter, we decreased debt by $39 million. There were no repurchases of company stock during the quarter given the blackout associated with the company's strategic review. As of December 31, we have total available liquidity of approximately $585 million. For 2023, we expect to generate cash flow from operations of $480 million to $580 million. We continue to work through supply chain constraints that are challenging working capital in the near-term, but we expect to unwind most of this working capital as orders shipped in 2023 and into 2024. With respect to CapEx, we plan to provide further guidance on 2023 expected CapEx later this year as we gain more clarity on projects, including planned shipyards and the impact of supply chain delays. We are committed to a balanced capital allocation approach and will use this cash flow to opportunistically return the capital to shareholders and continue to pursue long-term value-creating niche investment and acquisition opportunities. I will now turn the call back to David to discuss the remainder of our outlook for 2023.

David Grzebinski, President and CEO

Thank you, Raj. We achieved strong fourth quarter results in both our segments, and we expect this trend to persist into the first quarter. In Marine, consistent demand driven largely by high refinery and chemical plant utilization should continue to bolster high barge utilization. Limited new barge construction coupled with inflationary pressures is anticipated to further support rate increases in Inland. While these factors are encouraging, we remain aware of the dynamic economic environment and the potential for a recession. We anticipate high activity levels in refinery and petrochemical plants, along with an increase in customer volumes. Barge availability remains tight due to minimal new construction expected in 2023. These positive indicators are expected to keep our barge utilization in the low to mid-90% range for the foreseeable future. Favorable supply and demand dynamics should drive further improvements in the spot market, which currently accounts for about 40% of our Inland revenues. We also foresee ongoing improvements in term contract pricing as renewals occur throughout the year. Overall, we project Inland revenues will grow at a rate below double digits year-over-year, with near-term operating margins expected to average in the mid-teens and gradually improve throughout 2023, potentially reaching close to 20% by year-end. In Coastal, market conditions are expected to remain stable, although some challenges from underutilized barge capacity across the industry are likely in the short term. Despite some market softness, Kirby's coastal barge utilization is anticipated to stay in the low to mid-90% range. For the entire year of 2023, coastal revenues are expected to remain flat year-over-year, mainly due to strong fundamentals in our liquid cargo business and higher coal shipments in our dry cargo segment, albeit affected by increased maintenance days stemming from plant maintenance and ballast water treatment installations. Operating margins in the coastal segment are expected to be near breakeven to in the low single digits for the full year. Regarding Distribution and Services, we have a positive outlook, expecting strong demand for equipment parts and service distribution along with a growing backlog. In the oil and gas sector, high commodity prices, rising rig counts, and increased well completions are expected to drive strong demand for manufacturing and OEM products, including parts and service within distribution. We believe the current commodity price environment will lead to further growth in rig count and frac activity in 2023. U.S. land rig counts have reached over 770 rigs, representing an increase of approximately 28% for the full year 2022, with expectations for continued growth into 2023. Similarly, the active frac spread count is nearing 295. With this growth, we anticipate a rising demand for engine parts and distribution services. In manufacturing, our backlog position is improving, with new incremental orders placed in the fourth quarter, and we expect this trend to continue. However, supply chain challenges and long lead times for OEM equipment, which in some instances extend beyond a year, are likely to contribute to some variability in new product deliveries, possibly shifting between quarters in 2023 and even into 2024. In Commercial and Industrial, we're hopeful for steady demand within on-highway sectors due to increased municipal repair work, improvements in bus ridership, and heightened demand for Thermo King refrigeration products, although these efforts may be hampered by ongoing supply chain delays. For power generation, new backup power installations, as well as parts and service activity, are expected to remain robust due to a growing demand for electrification and continuous power supply. Marine repair activity is also projected to be strong with rising demand in the Gulf of Mexico and improved commercial markets on both coasts. For the full year 2023, we forecast revenue growth in the low-double-digit range for the commercial and industrial sectors. Even with ongoing supply chain challenges affecting new product deliveries in Distribution and Services, we expect 2023 segment revenues to increase by 10% to 20% compared to 2022, with Commercial and Industrial making up about 60% of segment revenues and oil and gas the remainder. We anticipate segment operating margins will be in the mid to high single digits for 2023. In summary, Kirby's 2022 results demonstrated steady progress amidst ongoing challenges. Both our segments performed well, delivering improved revenue and operating income. Our team executed effectively on immediate objectives and our long-term strategy. We ended the year with solid long-term fundamentals for both businesses, positioning us to continue delivering value. Although we expect favorable market conditions and improved financial results, we are carefully monitoring the risk of a recession. Nonetheless, we are confident in the durability of our core businesses and our long-term strategy, and we plan to continue leveraging strong market fundamentals to enhance shareholder value. Operator, this concludes our prepared remarks. We are now ready to take questions.

Operator, Operator

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

Jack Atkins, Analyst

Okay, great. Good morning. And guys, congratulations on being able to really capitalize on the pricing opportunity in the fourth quarter. Nice work there. So I guess, I would love to kind of get your thoughts as we think about the 2023 outlook David and Raj, you may want to tag team this one. But as you sort of think about, what's baked in there, can you help us think about are you factoring in any, sort of, mild recession, soft landing, hard landing, kind of help us think about that? And then to what degree do you feel like the market is going to be able to support continued rate renewals in Inland above inflationary cost increases? Can you kind of walk us through both of those items in terms of what's baked into your outlook for 2023?

David Grzebinski, President and CEO

Yes, definitely. The market fundamentals for Inland are very strong at the moment. Demand remains robust, and refinery utilization is high. Although we experienced a slight decline in chemicals in the fourth quarter, it has started to recover in the first quarter, without significantly affecting demand. The demand remains solid and the supply situation is even better, as not much new equipment is being constructed due to high prices that do not justify new projects. Additionally, there is a significant maintenance wave approaching the entire Inland industry over the next two years. Most barges were built several years ago, leading to a heavy maintenance schedule in 2023 and 2024, which will keep barge availability tight. Overall, the outlook for Inland is very strong, marking one of the best balances between supply and demand we have seen. Consequently, I believe rates will rise and need to continue doing so to justify replacement capacity. Looking ahead to 2023, we did not account for a significant recession. We expect the demand for our products to remain consistent, even amidst a mild recession. However, a severe recession could affect us, though we did not include that scenario in our guidance. We believe we can withstand potential economic challenges, and our supply and demand position is exceptionally strong.

Jack Atkins, Analyst

Thank you, David, that's very helpful. Shifting gears, Raj, can you explain why you are not comfortable providing a CapEx outlook for 2023 at this time? Is it possible to give us a range? It seems like you're generating very strong free cash flow, which is a crucial part of the stock's valuation. Any insight you can share regarding the situation from a CapEx perspective would be appreciated.

Raj Kumar, Executive Vice President and CFO

Yes, good morning. Thank you. You're absolutely right. We generate very strong free cash flows, but as David mentioned, we have maintenance days to consider, which is a phenomenon affecting the entire industry. We're observing this across the board, both in inland and offshore operations. Inland loans are increasing by about 20% to 25%. We're currently managing this situation alongside supply chain issues, which have also affected our CapEx spending due to various inflationary pressures. At present, there are many factors at play. The team is working on detailed projections, and I believe we will be able to provide a more accurate CapEx number soon. However, we are not ready to offer a specific CapEx figure right now.

David Grzebinski, President and CEO

Yes. I think, Jack, just to add to that. Look, the cash from operations is going to be strong. Obviously, we've got the maintenance CapEx cycle here that we're still working through. But I would just tell you in terms of deployment of free cash flow. Obviously, you saw the share repurchase authorization we're pretty excited about that. As you look at opportunities, kind of, the best parts company going by right now is Kirby. So we're pretty excited about it. And we'll have updates as we progress through the first quarter.

Jack Atkins, Analyst

And just to follow up on that really briefly though, I mean, is there any reason why you still wouldn't be in a position to generate very healthy free cash flow in 2023 even though there's still a little bit of uncertainty around what the CapEx should be? There's not a scenario where you would not be of strong free cash flow generator this year. Is that correct?

David Grzebinski, President and CEO

Right. Yes, we think we’ll have good free cash flow.

Raj Kumar, Executive Vice President and CFO

Yes, I think that's a fair statement, Jack.

Jack Atkins, Analyst

Okay, okay. Thank you again for the time, guys. Really appreciate it.

Operator, Operator

Please standby for our next question. Our next question comes from Ken Hoexter with Bank of America. Your line is now open.

Nathan Ho, Analyst

Great. This is Nathan Ho dialing in for Ken Hoexter. Great quarter, everyone. Regarding Dave's comments about inflationary pressures easing somewhat on the Inland side, I recall your November update when some cost items increased by 70% or more. I'm curious how the management team views costs as we move into 2023. With the new context of normalizing commodity prices, how does this influence the expected exit rates of 20% Inland margins for 2023?

David Grzebinski, President and CEO

Yes, inflation is still present, as most of us can acknowledge. However, we haven't observed any further increases. For instance, while food prices for our marine crews have risen by 10%, they haven't escalated beyond that. These prices remain significantly higher than what we traditionally experience. Transportation costs for our crew, such as rental cars and airline flights, have also risen considerably compared to the norm, and electronic-related items like radars are still elevated in price. I think we may not have clearly conveyed this in our initial comments, but inflation has not decreased; it simply hasn't escalated further. We prefer to say it's stabilizing, but we haven't actually seen prices decrease; they've just plateaued compared to the previous quarter, which is beneficial. We have needed to implement price increases just to keep pace with inflation. If inflation remains stable without further increases, it would positively impact our margin profile and align with what we mentioned in our previous remarks regarding the end of the year. However, if inflation rises again, it would negatively affect our margins. At this point, we feel optimistic that things are leveling off. We'll see how the Fed responds today, as they're taking aggressive measures to control inflation, which has both positive and negative implications. Our hope is to avoid any risk of recession.

Nathan Ho, Analyst

I see. And just to clarify, on the margin targets set for 2023 across the segments, that's baking in sort of a flattish cost structure into this year? Would that be correct?

David Grzebinski, President and CEO

Yes, flattish in terms of general inflationary. I think, obviously, we're going to have crew labor costs go up. I think everybody is seeing labor costs continue to rise, but that obviously is going to happen. We factored a little bit of that in. If it gets acute, that we'd have some headwinds. But right now, we've factored in a little labor inflation. But the rest of the inflationary pressures we think will just kind of stay where they are at. We don't anticipate any sharp price increases across most of our supply chain.

Nathan Ho, Analyst

Great. And just as a follow-up on the capital strategy into 2023. I'm aware that the CapEx plan is still in the works. But in terms of capital deployment, are there any updates on how the company is seeing M&A into 2023? How are you viewing, say, the availability of opportunities here?

David Grzebinski, President and CEO

Yes, there are opportunities out there. It's best for us not to comment on any of those, but look, there are opportunities out there. But I would tell you, look, we've had a history and we always like to consolidate particularly our Inland tank barge market. That said, I feel strongly and the Board does too, the best barge company to buy right now is Kirby. When we look at our prospects in marine and in our distribution business, it’s about as good as we've seen in a long while. So we're quite excited and we believe that it's going to be multi-year. It's not just a one year, kind of, phenomenon. So when we look at capital deployment for acquisitions, we're factoring in Kirby looks pretty good right now.

Nathan Ho, Analyst

Got it. Thanks again for the time.

Operator, Operator

Please stand by for our next question. Our next question comes from Greg Lewis with BTIG. Your line is now open.

Greg Lewis, Analyst

Yes. Hi, thank you and good morning, everybody, and thanks for taking my question. Definitely good to see as we’re starting to find its groove. I did want to touch a little bit on kind of the, I guess, ongoing dynamics in that market and a lot of us to follow the refinery products industry are looking at that Russian oil embargo on products that's coming out in February and some of the challenges, or actually more of an opportunity than challenges I guess. But as we think about that coming next month, is there any way we can think about or how are you thinking about potential changes in activity feedstock? We're hearing a lot about, obviously, it's going to be problems with DGO. What type of setup should we think about that creating in the first part of this year?

David Grzebinski, President and CEO

Let's break it down by our trade lines. I prefer not to get too specific due to competitive concerns. The refinery complex is currently very strong, with demand for refined products at unprecedented levels. Much of this can be attributed to the reopening of the economy, and export volumes are also looking good. Refineries are experiencing strong crack spreads, though there has been a slight pullback. Nevertheless, traditional crack spreads remain robust, and the U.S. refinery system is likely the most efficient in the world, unlike the situation in Europe. Turning to chemicals, the landscape is similar. The chemical complex in Europe is struggling due to high natural gas and energy prices. In the U.S., we have newly built, efficient plants and a favorable feedstock situation. Although chemical performance dipped slightly in the fourth quarter, they have started to recover slowly this first quarter. It's still early to predict how far this recovery will progress. The earnings calls from chemical companies indicate that Europe is facing challenges, particularly with housing starts, which affects us too. However, the overall demand and supply dynamics appear positive. Regarding black oil, the industry is facing a significant maintenance challenge that is particularly pronounced in this sector. Numerous black oil barges will require maintenance throughout 2023 and 2024, yet demand remains stable. In agriculture products, we see strong performance as well. Each trade lane indicates encouraging demand. That said, I mentioned potential recession risks; a downturn could occur. But right now, the demand and supply situation looks favorable for us.

Greg Lewis, Analyst

That's great to hear. You mentioned pet chemicals, and I know Q1 is typically a weaker quarter for you. With natural gas prices down 30% year-to-date, could this significant drop in natural gas prices potentially improve Q1 results? As a pet chemistry plant, this should create a much more profitable environment compared to six to eight weeks ago.

David Grzebinski, President and CEO

Yes, you're correct that our first quarter is typically our weakest of the year, largely due to weather conditions. Low water levels and fog significantly affect operations on the Gulf Coast during this period. However, the decrease in natural gas prices could improve profitability for the chemical sector and potentially boost volumes. Additionally, we anticipate that China will reopen, which is beneficial since it's a major consumer of chemicals. The influx of Venezuelan crude, which has a heavier mix that yields more byproducts, may also positively impact the barge complex and the various derivatives from heavy crude. While the first quarter is usually challenging, we believe the overall supply and demand outlook for us in 2023 is strong, and we are optimistic about what lies ahead.

Greg Lewis, Analyst

Okay, great. Thank you very much, and nice job on the quarter guys. Thanks. Have a great day.

David Grzebinski, President and CEO

Thanks, Greg.

Operator, Operator

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

Greg Wasikowski, Analyst

Hey, David and Raj. How are you doing?

David Grzebinski, President and CEO

Good.

Raj Kumar, Executive Vice President and CFO

Good morning, Greg.

Greg Wasikowski, Analyst

Yes, thanks. Thanks for taking the questions. First one, David, curious if you can just talk about what you've seen with rate movements so far? Or through Q4 and so far into Q1? I know, it's a smaller sample size. But from what we've seen, there's been maybe a little bit of plateau in that period. So could you comment on that? And then if you revisit your thoughts around the pace of the recovery versus the overall sustainability of the recovery of that relationship, where we were towards the back end of 2022 versus how 2023 is shaping up from a sustainability perspective, it would be great?

David Grzebinski, President and CEO

Certainly, Greg. In our prepared remarks, you may have heard some of this, but sequentially, we experienced mid-single-digit increases in spot rates following a very strong third quarter. The fourth quarter also showed sequential growth in spot rates by mid-single-digits. Year-over-year, spot rates are up over 20%. Term contracts increased by double digits on a year-over-year basis, which is quite strong. We are still observing a favorable pricing environment, which remains tight with prices continuing to rise. We haven't reached a plateau as some market checks might suggest. The demand is still robust, which is essential given the inflationary pressures we face. We're still far from achieving rates necessary for building replacement capacity, so we must maintain this positive price momentum. Supply and demand remain tight, and we're not witnessing any pullback in rates. Additionally, the industry's upcoming maintenance cycle will likely contribute to this momentum. Overall, we remain optimistic despite some seasonal noise during the winter months. I'm not sure what your market checks indicate, but we continue to feel positive about the situation, Greg.

Greg Wasikowski, Analyst

Thanks, David. I need to ask about D&S. Can you provide an update on its status now that the strategic review has concluded? Are you planning to market that business for sale in 2023, or are you only considering unsolicited offers at this time? I understand you're always looking at options to enhance shareholder value, but I'm curious about how much of a priority this is as we move into 2023. Or is it more of a past concern now?

David Grzebinski, President and CEO

It's more in the past now. However, we remain open to opportunities to protect shareholder value. If the market shifts or circumstances arise that make spinning off a good option, we will definitely consider it. That being said, our business is currently very strong. We are seeing good demand, especially in our electrification product offerings, and our e-frac services are performing well. Power generation is also thriving. With increasing concerns about grid reliability, the need for continuous power becomes even more critical. Our commercial and industrial business in the highway sector is robust, and our marine repair sector is doing well. As we consider KDS moving into 2023 and 2024, we feel positively about our outlook for Kirby. Both our marine and KDS divisions are experiencing steady growth that we believe will continue for several years. While KDS is strong, I want to reiterate that we remain open to exploring ideas. We conducted a comprehensive review, and our focus is on executing our current strategy. However, if circumstances evolve, we will certainly reassess our options.

Greg Wasikowski, Analyst

Okay, got it. Thanks a lot guys.

Operator, Operator

Please standby for our next question. Our next question comes from Ben Nolan with Stifel. Your line is now open.

Ben Nolan, Analyst

Hey, David. Can you hear me, okay?

Raj Kumar, Executive Vice President and CFO

Yes.

David Grzebinski, President and CEO

How are you doing, Ben?

Ben Nolan, Analyst

Oh, great. Good luck. How are you guys?

David Grzebinski, President and CEO

Good.

Ben Nolan, Analyst

I wanted to revisit our discussion regarding the D&S segment and connect it with what you mentioned about pricing concerning inflation. The margins were somewhat lower than I expected, given the current circumstances in tracking equipment and the apparent pricing power. Should we interpret this as a result of significant inflation in that market, where pricing power has largely matched inflation? As inflation potentially starts to decrease, will we see an improvement in margins? Or is there an economies of scale effect at play, where margins start to improve as volume increases? How should we analyze the margin dynamics for this segment of the business?

David Grzebinski, President and CEO

No, I think you characterized it very well. In slates, we've been raising prices in with D&S, but it's basically kept pace with inflation. The other thing we have is a little bit of a supply chain, kind of, margin erosion. And let me give some context around that. Talk about a $1 million piece of equipment with 400 to 1,000 parts, and all of a sudden you can't get some parts, certain parts, so you reengineer a replacement part and this is pretty sophisticated equipment and we like to make sure we've nailed the engineering down. So every time you shift a source or shift a part design or something to meet a supply chain headache, it adds a little cost. So there's that dynamic as well. So it's an inflation and a supply chain dynamic that's impacting margin. That said, our guys are pushing price and they need to, right? I mean, we've got to offset these costs. But I would just say, particularly on our KDS manufacturing, the supply chain has been really, really tough. It's not new. Everybody's saying it. But some of our OEMs for some engine deliveries, we can't get engines until 2025 even ordering now. So the supply chain issues are still real, but it's something we're working through. And the good news is demand from our customers is there. And it's really us in hand-to-hand combat dealing with delays that come inevitably. When you've got a parts list that runs in the hundreds and you're short one or two parts that are key to finishing the equipment. That said, you know, we're keenly focused on getting KDS margins up into the high single digits and got the whole organization working hard towards that.

Ben Nolan, Analyst

Okay. That's helpful color. I appreciate it. And then I wanted to talk a little bit about just barge supplies. You mentioned it with respect to supply and demand pricing really enough. We've seen that what I think that we're 22 tank barges delivered last year, some ridiculously small number. It would seem to me that there's probably likely to be a shrinking of the barge fleet this year and that would lend itself to substantially higher secondhand prices. I was wondering, if you could maybe characterize that? And then to that answer, how do you feel about buying equipment or other companies, if there is a little bit of price escalation for secondhand equipment?

David Grzebinski, President and CEO

Yes, I don't think you hit them. One of the reasons we actually think Kirby is a great barge company to buy. But no, you're right, I think with the maintenance cycle that we've talked about here on the Inland side, a lot of companies are going to be taking their barges in for their five-year maintenance cycle and look at it and they'll just say, man, it doesn't make sense to continue it. So we will see retirements over the next two years because of this maintenance cycle. So with little building and in a pretty heavy maintenance cycle, you should see some pretty healthy retirements over the next few years, which to your point is going to help the supply demand situation get even tighter, but it's going to make people look for equipment. So, yes, I think there is a situation just because the replacement cost of equipment that any transaction or buying a consolidating transaction, price expectations could be very, very high. So as you know, we're pretty disciplined about that. And we're certainly not going to chase a consolidating move, particularly when we feel as strong as we do about Kirby’s outlook.

Ben Nolan, Analyst

Okay. That's helpful color. I appreciate. Thanks, David.

David Grzebinski, President and CEO

Thanks, Ben.

Operator, Operator

Please standby for our next question. Our next question comes from William Baldwin with Crescent Securities. Your line is now open.

William Baldwin, Analyst

Thank you very much and good morning, Dave, Raj, Kurt. Raj, could you comment a little bit on the cash from operations here in the fourth quarter? Looks like that at least based on what you were talking about at the end of the third quarter that, that didn't come quite at the level that you had anticipated as you talk about the factors that, number one, am I interpreting that correctly? And secondly, if so, what contributed to a little bit of a shortfall there?

Raj Kumar, Executive Vice President and CFO

Yes, Bill, you are correct. Cash from operations in the fourth quarter fell short of our expectations, primarily due to issues on the D&S side. We experienced an inventory buildup, and supply chain difficulties played a significant role in this situation, which has impacted our ability to ship products. This has led to an increase in working capital for the fourth quarter. I anticipate that as we move into 2023, we will be able to shift these products. Whatever is currently in progress will be converted into finished goods and shipped out. We set higher expectations for ourselves and aimed to execute on them, but supply chain challenges ultimately hindered our performance.

David Grzebinski, President and CEO

Yes. Just to put a little color on that, Bill. We probably had $50 million worth of sales at KDS that didn't materialize that we would have expected in normal supply chain environments to have materialized in the fourth quarter. So if you think about construction in progress or work in progress, those inventories are higher. Our working capital certainly is a lot higher than we like, and the bulk of that is from supply chain issues. But there's also a phenomenon on receivables, so I think with higher interest rates, we've seen customers push out their payables, which are our receivables. And so we've seen a little build in working capital. We've got to go after that, but it's something that's perhaps economy-related and supply chain.

William Baldwin, Analyst

That's very helpful. Thank you. Secondly, regarding the supply chain issues, you mentioned that engines are a critical product not being delivered. Are there any other significant components or parts that you can point out that are causing real problems with supply chain shortages?

David Grzebinski, President and CEO

Yes, there's an electric component trade. On the e-frac side and kind of the natural gas reset power generation side. For example, things like electric panels, you would think that would be a pretty easy thing. But there are a lot of pieces and parts related to electrification that are jammed up in the supply chain.

William Baldwin, Analyst

Is there any visibility there, David? As you look out in 2023? I mean, do you have any line of sight on meaningful improvements?

David Grzebinski, President and CEO

Yes, we do. I mean, each component, we put our supply chain team on and they get a path forward. And then something else, Raj calls it whack a mole, it's kind of like the gained whack a mole…

Raj Kumar, Executive Vice President and CFO

Count down on one and…

David Grzebinski, President and CEO

You know, some other supply chain piece pops up. But it is component-by-component. We get in a pinch on a component. We work with alternative sources, reengineered some things, and get it back lined up. But then, frankly, something else pops up. It's a bit frustrating. But look, we're managing through it. We still had a pretty good revenue quarter in D&S and it’s just we're still taking inbound and delivering. It's just that the deliveries are taking longer.

Raj Kumar, Executive Vice President and CFO

Yes, Bill. If I could add, our book-to-bill is about one. So that's a very healthy order rate that we're looking at. So it's not the lack of demand today at this point.

William Baldwin, Analyst

No, no, it's got to be very frustrating. And also it seems like a number of your product lines obviously have applications far beyond the oil and gas business. And so you've got opportunities that you could be out there going after that or just right now you're limited on doing?

David Grzebinski, President and CEO

Yes. The electrification, whether it’s a micro grid or something similar, is impressive. For instance, our backup power rental fleets saw their best utilization last year, even during a light hurricane season. Every company needs constant power, so the electrification trend in the U.S. and globally is significant. It’s actually creating many opportunities for design and new products in D&S.

William Baldwin, Analyst

Just one last really clarification, David. If I read correctly in the release, you indicated that in the Inland barge business, you were looking for a small net increase in new barges in 2023? And what I hear on the call would not lead me to think that's going to be the case. Did I read that correctly in the release that there would be a net increase?

David Grzebinski, President and CEO

No, we did bring back a few barges, but it was just a couple. Yes, it was two. Kurt is signaling me to keep going.

William Baldwin, Analyst

Okay. So that relates to Kirby and not the industry there is what you're saying?

David Grzebinski, President and CEO

Correct. Yes. We don't see any as I think one of maybe Ben said that there were 22 barges built last year in the industry. Yes, that's about right. The order book from what we hear is anemic and we don't see anybody building. Now there could be some people that tied up some barges during the pandemic and there may be some of those coming back. But again, I think you see a net decline in barges in 2023.

William Baldwin, Analyst

Right. Well, I knew that had been your expectation for quite a while and I just misinterpreted what was said in the release there. And that comment pertains to Kirby, not the industry. So that clarifies it. I appreciate it. Thank you very much.

David Grzebinski, President and CEO

Thanks, Bill. All right. Have a good day.

Operator, Operator

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

Kurt Niemietz, VP of Investor Relations and Treasurer

Thank you, operator, and thank you everyone for joining on the call today. If you have any follow-up questions, please feel free to reach out at me at 713-435-1077. Thank you.

Operator, Operator

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