Kirby Corporation (KEX) Earnings Call Transcript & Summary

Okay. Well, let's get going here for our 9:00 fireside chat. Again, thanks for joining us. Day 2, the Stephens Investment Conference 24th Annual Edition. My name is Jack Atkins, and I'm the airfreight and service transportation analyst, and we're pleased that you all joined us both in the room and on the webcast as well. So for our 9:00 session, we've got the management team from Kirby. I think everyone in this room, hopefully, knows. If you don't, you're about to hear a little bit more about it. But Kirby, I've been covering these guys since 2011. They are the absolute category killer in the -- both the inland marine space and the coastal marine space. They're a Jones Act operator, Jones Act tank barge operator, great multiyear story, consolidation story and looking forward to hear some more about both near-term trends and longer-term opportunities. So from the company, we've got Raj Kumar, who's the Chief Financial Officer of Kirby. And we got Kurt Niemietz, who's Vice President, Treasurer and now where's the Investor Relations at. So gentlemen, thank you so much for joining us. Raj, why don't I turn the floor over to you for some introductory comments that we'll go into Q&A?

Right. Thank you, Jack. Thanks for having us. Good morning, everyone, and thank you for taking the time to attend this fireside chat. I'm going to start off by saying -- talking about the Kirby story, I'm very encouraged. I mean we are at an inflection point right now, both of our businesses, and I'll get into it. Both of our businesses are doing very well. So the main business that we have is the Marine Transportation business. We are the largest inland tank barge operator in the United States. We're the second largest by barrel capacity for the coastal business. The second business that we have is the Distribution and Service business, basically power generation, diesel distribution and services oilfields, a component to it in terms of power generation as well as playing in the frac space. If I want to look at the business and how it's been doing, 60% -- about 60% of our revenue is related to the marine business, and about 40% is with Distribution and Services. Both of these businesses are doing very well. We are coming out of, I'm going to say, barge building, overbuilding cycle that happened in the 2015 to 2017 time frame, and then you throw into that COVID and the impact of that. So the marine business is inflecting nicely. Utility is up. Rates are rising nicely, and we're very encouraged. On the Distribution and Service business, I think we all are familiar with what's going on in the oil and gas space. That has certainly helped us. Our order rate has gone up. Our book-to-bill ratio has increased nicely. Our backlog is actually 5x where it was 4 years ago -- 3 years ago, sorry, before the start of COVID. So overall, that's our sentiment right now and why we feel so positively about both of our businesses. I will now turn it over to Jack.

Okay. Well, Raj, thank you. And I'll say this. We've been hearing that -- we've been hearing the word inflection a good bit over the last 2 days but not positive inflection. So this is -- it's good news that we're talking about a positive inflection in their business. It's a nice change in tone. I guess maybe a near-term question first, kind of piggybacking off the third quarter earnings call for a moment. I think one of the big concerns folks had throughout October was water levels in the Mississippi River. I can say living in Arkansas, it's been raining a lot. So hopefully, that's helped with water levels. But can you maybe talk about sort of what's going on, on the river? I know it's a super near-term question, but would love to kind of get some clarity on that.

Absolutely. Thank you, Jack. So yes, I think in the earnings call, which was about a month ago, 3 weeks ago, I think that the water level situation was quite acute at that time. The Wall Street Journal came out with an article, and we were very concerned about what was going on. I will say the U.S. Coast Guard as well as the Army Corps of Engineers, they've done a phenomenal job making sure traffic's moved on the Mississippi. They've done a lot of work with dredging and ensuring that folks can get product to where it needs to go. I mean they're not at the pace that we used to experience before low water levels, but at least traffic is moving, right? So that's been a good outcome for us. Are we concerned? Yes, we are still concerned. But Jack, to your point, we've had a cold front come in. That's helped with a bit of the rain situation. Levels are not where we need them to be yet, but I am encouraged that given that we're going into the winter months, we probably have a bit more precipitation, and that's going to help us. I know a lot of people suffered the impact of Nicole, but I think that storm has kind of helped us through as it when deeper into the Lower 48, and there was a lot of rain, and that's also having an impact. I will make a key point here that only 20% of our business is related to the Upper Mississippi in that area.

It's 20% of the inland business?

20% of the inland business. That's right. And we also have some contractual protections, right? So that helps us in terms of navigation delays. Obviously, in terms of our draft, because we move liquids, our draft is not as pronounced as, let's say, someone who is moving dry cargo, and so that helps us also. Could there be some instances where we have to reduce the volumes that we move because of the draft levels? Yes, that could happen. That could have a bearing on profitability. But all things being equal, right now, if I were to be looking at what's the impact, I think on the earnings call, we were like saying 3% to 5%. Of course, at that time, the sentiment around it, with all the press articles, has bearing on how we calculated the number. I would say right now, we're probably in the lower end of that range.

So okay. So it's not any worse. If anything, it's maybe...

Slightly better.

Slightly better. Okay. That's good. Okay. Shifting to another hot topic that I get asked a lot about from investors with Kirby is, what's going on with chemical output and chemical customers? It's -- you all are continuing to see very positive trends in your business, but I think people are looking at the chemical complex in Europe and sort of the commentary from chemical companies, and they're worried. Well, what are you seeing in terms of what's going on in your business and your chemical customers?

So the surprising thing, Jack, is -- and it's a good thing, actually, and I think there's a thesis that supports this is utilization and demand for our barges has not changed. I mean we still see strong utility. I think your point is exactly right. Europe is where the issues currently lie. I mean, in terms of feedstock -- just let's not even talk about feedstock pricing. Let's talk about feedstock availability, right? I think when you -- when we hear a lot of these chemical companies talk about, hey, the headwinds we are facing, I think it's very centered around the European sort of situation, right? And even with where natural gas prices are right now in the United States, we still have a feedstock cost advantage. So the way I would describe it is, yes, is the overall global chemical industry under pressure right now? Absolutely, not denying that. But I think if you look at it from a regional sort of perspective, the U.S. is probably where we're going to see the best activity levels compared to the other parts of the world. So a long way of me saying that we're still seeing utilization high. We're still seeing our customers have demand for our product.

So if I go back to the third quarter call, you guys were seeing low 90s utilization rates. It doesn't sound like that's changed.

Yes. There was a slight dip in Q3. That was -- it was all related to turnaround and maintenance, and utility has picked up back to where need it to be.

All right. So I guess playing that through from a pricing perspective, are you continuing to see momentum in terms of spot market pricing? And how is -- the fourth quarter is a significant period for contractual rate renewals. How is that progressing relative to sort of the hope and the expectation?

Yes. So spot right now is probably blended, I would say, around $8,000. Terms, probably in the mid-7s. We've seen this -- over the 2022 time frame, we've seen a very, very marked increase in spot prices, right? And that's just driven by what's going on in the barge industry with supply tightness.

And just -- I hate to interrupt you. If I go back to -- when we were speaking maybe in the middle of the third quarter, spot pricing was in that sort of the $7,800 range, if I'm thinking about it correctly. So it feels like there's maybe a little bit another a little bit about it. For bulk -- okay, sorry.

Yes. Absolutely. So spots continuing to march upwards. Your question on the term contracts, and Q4 is a big term contract renewal quarter for us. And those conversations are progressing, and they're progressing well. My expectation is we should renew term contracts closer to the spot number but with a slight discount because you've got the certainty of the work that you're going to have. So that is my expectation. If you were to ask me what's driving all of this, I talked about the activity levels. I'm going to talk about the supply side, right? Supply of barges has been next to nothing this year. I think we have maybe 24 barges being built. I think 12 have been delivered to date. And then you look at -- there are some reactivations. When we reactivated a few barges, I think we reactivated about 20 barges just because we have the demand for it. Then you look at what's going to get retired this year. And I think you're going to exit the year with, from an overall market perspective, less barges than what you entered the market, okay? And then you add to that, Jack.

I don't know what's going on over there, everybody.

Someone's building a barge. So when you add to that in your calculus, right, activity levels continuing to be steady and stable.

We're going to figure out what's going on over there. Sorry about that, Raj. Well, we got some background noise here. But so you're saying -- sorry for the distraction. So the supply -- on the supply side, things are continuing to [indiscernible].

Yes. And think about the cost to build a new barge right now. The 30,000-barrel barge is probably around $4 million. It's probably 40% higher than what it was 2 years ago. And then you have to think about, hey, if I'm going to build a barge at $4 million, what's the rate I'm in, right? And we're now marching towards that rate requirement. The rate that we will need for that is probably around 10,000, right? Inflation...

You need 10,000 to be able to earn your sort of an adequate return on that, [ for ] the vessel.

Yes, exactly, right? With inflation, I did this calculation 10,000 probably 6 months ago, and this is how marked inflation has been. I'm going to say, maybe it's even 10,500 right now. And when we go into this term contract renewal cycle, it's important for us to get the rate increases because of all the inflation. And I look at our customers, yes, setting aside Europe and all the issues over there, the refiners, the petrochemical complex, I mean, they've been doing fairly well over the past year. We, on the other hand, have had 60% of our contracts based on the term. Spots helped us because we've been able to execute to that. But we need to get rate increases because inflation has just been -- has been a tremendous challenge, right? Latest CPI was 7.7%. I'm telling you, we are not seeing 7.7%. I was just...

You wish it was 7.7%.

I wish it was 7.7%, honestly. Take crew changes, right? Crew changes happen several times a month. The average cost of crew change has gone up 15%. Plated steel has gone up 200%. That's what we use for maintenance. Food, I know David jokes about making our mariners vegan. That's not going to happen, right? It just not happening, right? So food alone, meat alone has gone up. I mean we all consume this product, so we know. So it's not that going out and asking for rate is something that we're trying to do for practice. We really need it. This is...

Right. Yes. No, exactly. Exactly. So I guess maybe kind of following up on that for a moment. I mean we think back, the last time the business was truly at peak, really operating on all cylinders after 4 years of very strong price coming off of that almost super cycle. From 2011 through 2014, you were able to see mid- to upper 20% margins in the inland marine business. Since 2014, you've acquired a number of additional assets. You've grown your barge fleet significantly. You haven't really needed to add a lot of headcount to support those additional barges. There's been a lot of inflationary pressure across the business. I mean that was 8 years ago. As you sort of think about the margin structure of the business, if you were to see another several strong years from a pricing perspective, do you think we could get back to mid-20% margins, if not somewhat higher than that? Or is it better or worse just based on -- I mean, obviously, a lot has changed over almost a decade.

Yes, that's a really good question, Jack. So if you think about the business in 2014, the business in 2014 was very different from the business now. You think about the cost of insurance, the cost of vetting, Coast Guard-related regulatory costs, all that's gone up significantly. So -- and then you add to that what I just talked about, the inflationary aspects that we've been seeing over the past year that has -- which have been horrendous. So -- but to answer your question on when do we get back to those levels, it comes back to the rate perspective, right? So if the rates that I quoted just now, $8,000, $7,500, if we were back in 2014, we would be printing 20-plus percent margins, definitely. But given what's happened in the industry and the additional costs we've seen, the rate has to increase. If I were to be looking out over the next year 2023, I think it's reasonable to expect that we will claw our way back up to that 20% range. Whether it happens in Q4 of '23 or whether it happens in Q1 of '24, that's the question, right? I say that because we're mindful of what the Fed is doing in terms of interest rates and how that has an impact on housing starts, et cetera, which has an impact on the volumes we move, right? So I'm kind of like managing expectations in terms of what's going on with the broader economy. But from whatever we see right now, we have supply tightening in the barge space, activity levels. Everything points to we're going to claw our way back over the '23 time frame to get to those margins.

And if we think about the last 8 years, there have been a lot of fits and starts within the barge industry. We've had several barge recessions between COVID and all the oversupply. I guess when you think about the economy, it could be slowing down in 2023, but the supply side of the equation is very different today versus where it was maybe going into the COVID recession, going into 2015. We really haven't been adding that capacity. And so while we may see a couple of hundred basis points of demand degradation, potentially, if the economy gets worse, it feels like there's a pretty solid demand story -- excuse me, supply story there to kind of keep for the pricing.

Yes. That's a good way of putting it. Absolutely.

Okay. Okay. Great. One pushback that I get from investors sometimes when we think about Kirby, and they -- what they asked me about is like, what's the long-term sort of growth rate for the demand side of the equation for the inland marine business, especially with EVs coming in and playing a bigger and bigger role within the transportation industry on the automotive side? Do you worry about the demand for refined products longer term? And how do you kind of think about that?

Longer term.

Longer to longer term.

Very, very longer term, right? So no, EVs, I mean the uptake of EVs is something that, yes, will have a bearing on fuel demand. But right now, if you look at the mix of EVs in the market, it's not as pronounced as one would expect it to be, but -- and also, when you look at an EV, there are a lot of petrochemicals that are going to an EV. The tires are made from butadiene. I may be saying things that people don't realize when they're driving EV, but a lot of hydrocarbons are used to make an EV, the plastics, the fiberglass to whatever else, right? And that's demand for a lot of our products. I mean 50% of what we move is petrochemicals, right? Our story is -- our growth is going to be -- we're going to grow with GDP, right? And yes, EVs will have an impact on fuel demand, but I think it's more of a much, much longer-term phenomena here. And in terms of -- on the flip side of the coin, the petrochemical demand is going to be there, right? It has to be there. So that's the way we view it.

This is sort of a longer-term question as well. But when we think about the petrochemical side of the equation, we've just seen this significant wave of investment in the U.S. and North American petrochemical complex. And given everything that's happening in Europe and the sustainable, it feels like cost advantage for the U.S. petrochemical production globally. Could you -- I mean I know this is the long tail to investment, but could you see additional investment in the U.S. petrochemical complex? Obviously, that would be very good for Kirby, if they were to happen over for the next 5 years.

Yes. So we have been seeing that happen to your point. We have -- and it continues to happen, right? I think in our slide deck that we posted, we have a little schematic that shows the U.S. and new plants coming on board, what's just started and stuff like that. And absolutely, I mean, you have the pipeline calculus in there. But yes, it is going to create more demand for our products. And I think the U.S. is at a precipice of being a petrochemical powerhouse given the feedstock bonanza that we have here as compared to places like Europe and maybe less so in Asia. So yes, it's an encouraging statistic for us.

Okay. That's great. Well, let's shift gears to coastal barge, if we can, for a moment because I think David kind of sums it up well. So you're either -- if you're one barge short, you're in an incredible pricing background. If you're one barge too many, there's no floor to pricing whatsoever. Where are we in that paradigm? It feels like...

So we have the right-sized fleet. Utilization rates are high. We just need pricing to recover. I think the recent actions that we did to exit Hawaii and Alaska were good. We look at this business as it's also starting to show some promise, nothing like inland marine because it's a bit bigger of a ship to turn around, so to speak, and the...

Literally and figuratively.

Yes. And the supply side of that needs to get fixed, right? So there's basically too many...

But it feels like we're close to that being fixed.

Well, it's -- you're probably a year to 2 years out, right? So let me explain why, right? So you look at planned retirements, and over the next 2 years, there are going to be a number of planned retirements that are going to help fix the supply side of the equation. We've talked a lot of the ballast water treatment requirement from the U.S. Coast Guard regulations. We are 80% complete with that. So we should get -- we should complete all of our ballast water installations by next year. We do have some shipyards happening next year, which is basically large maintenance for our tank -- our coastal tank barges. That's going to happen. But it is a long way of me saying that there are going to be players in the market that are going to look at the age of their tank barge and have to make a decision as to whether they want to invest in ballast water. And my thesis is a lot of them are going to say, "Hey, I only got maybe 4 to 5 years left on this tank barge. Why do I want to throw in $5 million to $10 million of capital, which I'm probably not going to recover?" So I think that's going to help with the pace of retirements. That's a long way of me saying that the supply side of the equation is probably going to correct itself and will correct itself. 1 to 2 years is probably what needed for that to happen.

If I think about it, though, the coastal barging business is back to being marginally profitable, which is an improvement versus where we've been. Do you feel like we're sustainably profitable there now or it's just a function of building on this as we move incrementally forward?

We should be sustainably profitable. My only caveat there is the fact that we will be looking at a shipyard maintenance cycle next year. That could constrain our ability to execute to the market. And that's -- it's all Coast Guard-driven. It's all regulatory-driven, and we have to do this maintenance.

But as you sort of think about that, though, once the pricing cycle turns, given the increments of capacity and the cost of those incremental capacity in that particular part of the market, there should be a longer tail to pricing that would last for several years.

Absolutely. Absolutely. So when I say get back, I'm talking about making a hurdle rate, right?

Yes. Okay. That's great. So I've been sort of hogging all the questions here for the last 20 to 25 minutes. Do we have any questions from the audience? Yes, sir?

Just talk a bit about the Distribution and Service business pricing here. What's happening?

Yes, sure. Absolutely. So the -- on the pricing side of the Distribution and Service business, we've been very, very focused on it. I think you'd see that we've seen our margins expand there. Given everything that's going on in that space with the supply chain issues and inflation, we've been able to raise prices and kind of stay ahead of the curve. And we've not got a lot of pushback from our customers because they're aware that we have to do this. I mean because overall, prices are going up, things are getting tighter, and we've been able to execute to pricing there. On the manufacturing side, it's contract driven. So we are getting to a place where, as we get into '23, that we should start to be flowing back more pricing than the levels we are in right now.

Okay. Any other questions from the audience? I can keep on rolling here. Okay. Well, let me stick to the D&S segment for a moment. Raj, David -- you and David were more vocal on the third quarter earnings call about potential strategic opportunities within D&S. As you sort of think about where you are in the sort of the cycle for that business and the potential to maybe monetize certain parts of the business and kind of refocus your efforts and others. How are you kind of looking at the opportunity set in front of you within D&S? And what role is that going to play within the company longer term?

So yes, so the D&S business, I think if you go back and you see that it was a roll-up of United as well as S&S, doing very well right now, as I mentioned. There is, of course, a thesis out there that says the synergies here may not be that complementary, although we do have a core business that does a lot of work for our marine.

The original DS -- the regional distribution business. Right.

And so now I have to then look back over what happened over the past 5 years. Was that a good time to look at the transaction? Absolutely not, right? It was trough. We were going through COVID, whatever else. Multiples were very weak. So trying to do something strategic at that time was close to impossible. We were facing a lot of challenges. We have to think about liquidity, et cetera, right? So from -- right now from where we sit, absolutely, things are much better. I mean the business is doing much better. There's a tremendous inflection there. Could it be a time for us to have discussions? We would. We would definitely have -- be open to having discussions. We've said it openly. If you think about when you get a deal done, there's always the consideration of liquidity, value, speed. If I were to prioritize it, value is going to be #1. No doubt about it, right? We need some form of liquidity, too, given what we need to do strategically with our marine business. And then you think about speed, we're not in any hurry to get anything done if it's not the right value, right, if the value proposition has to make sense for our shareholders for us to be able to execute. Multiples are starting to creep back up. I am seeing margin expansion in this business. So maybe the time is right, right? But those -- someone needs to come to us with a compelling conversation. Having said all of that, as long as we own D&S, we're going to run it, and we're going to run it, get the cost leverage, get the pricing leverage that I talked about, and we're going to run it well. And we're very encouraged with the management team that we have right now in the D&S space, and they're doing a commendable job.

So first things first is to make sure that this is a transaction that, at worst, is neutral to EV and shareholder value. But at best, you would like to be able to drive -- it's got to be accretive, but...

It's got to be neutral to accretive with -- at the end of the day, it's a strategic decision, right, with an articulation of what [ remain core ], marine is going to then execute to.

Sure, right. So let's just say, hypothetically, something were to happen there, and that would create somewhat of a liquidity windfall for Kirby, if you were able to monetize that. I don't think there would be tax consequences from the sale, but we'd have to see what the price you give. Hopefully, they'll be significant. [ In your defense, right, it's good paying taxes. Let me donate your money ]. So the -- Kirby, you're on top of that, the fact that Kirby is an extremely strong position from a balance sheet perspective. You're generating very strong cash flows. You historically generated very strong cash flows. How are you thinking about the way you could allocate that capital as you look forward over the next couple of years between M&A? You've been -- you've restarted the buyback. Kind of walk us through the capital allocation waterfall.

So I think one thing that gets missed with our story is the fact that we have -- when you look back and look forward, in fact, also, we have good free cash flow yield, right? We're -- we -- in the past, we were doing around 4%. And now I think I can lean in and say that we'll start doing 5%, right, going forward and, even as the years progress, if everything I said pans out, even more than that. I think you call EBITDA around $400 million. And yes, we're in a good position in terms of free cash flow generation. Of course, I mentioned CapEx, we have some of those shipyards that we'll have to deal with next year. This year's CapEx is probably going to be in the $170 million to $190 million range. Next year, we will probably be similar, just maybe slightly more because of the shipyards that I talked about. So a long way of me saying that, hey, expectation is we're going to have more free cash flow coming in. Then you look at what's the capital allocation strategy here. Setting aside anything with KDS, even if that happens, there's this view of the time to buy barges. There's the time to pay down debt. And there's a time to return capital to shareholders, right? I think we've done a very good job this year paying down our debt. We're going to be nicely entrenched in that 2.5x debt to EBITDA next year. I think even we'll progress that as the year proceeds. That's going to put us very, very comfortably in our investment-grade rating. And then you look at the tightness that's happening in the barge market right now, that could get the bid-ask spread to be a bit wider, if you're looking at people who are looking to sell their badges, right? Also the quality of the barges becomes important for us. Having said that, could there be someone who comes to us and says, "Hey, we want to get out of this business. We want to allocate our capital elsewhere because this is a captive that we think you're better at managing"? We'll definitely take the conversation. But having said all of that, I think the near-term focus for us will be returning capital to our shareholders. That's definitely something that I think we're going to prioritize right now. Jack, you know that our strategy has always been to replenish the barge fleet by buying out our competitors but at the right point in the cycle, right? And this may not be the right point in the cycle.

Yes. Absolutely. You all were very active over a couple of year period, getting a number of deals done, which significantly expanded the fleet and deferred some CapEx that you might need to make on the vessel side. So that's great.

And that was the strategy, right, to go out, and we had to replenish our fleet because our fleet was -- if you go back, our fleet 10 years ago was around -- the average age was around 25, 26 years. Our fleet is now nicely sitting at that 15-year mark. And a lot of our customers -- and this, again, is a change, right? It's a change from -- you go back to 2014, you had that question on your margins at this rate, et cetera. One of the other things is a lot of our customers are demanding younger fleets, especially our blue chip customers. So we need to be able to execute to that. And I think it's commendable that the strategy we pursued was, hey, let's get -- let's replace our fleet, but let's look at getting it for pennies on the dollar, right, so to speak.

Right. Absolutely. And so I guess, while nearer term, over the next year or 2 or however long it might be, M&A may not be top of mind just because of the bid-ask spread on the multiples, to your point and what folks looking to get to their business. As we kind of look forward, as CFO and kind of thinking about how you want to prioritize different M&A targets, what are you looking for in an ideal M&A target? Because it's kind of where the story has gone off the rails of the past, where we've kind of gotten away from our core inland marine bailiwick.

I think from a strategic point of view, the focus is going to be on the inland marine side. I think we've -- you've seen it time again that we were very astute at rolling up in the marine, taking cost out and running it for margin expansion, right? I say all of that, please don't look at the past 3 years because COVID and the impact of that. Those were unique years. If anything we do on the KDS side, it's going to be more tuck-in type strategic investments that help with our electrification push. I don't expect anything sizable there. It's acquisitions that are probably going to leapfrog our technology advancement there, especially on the electrification side. But if you're asking overall strategy, priority is going to be inland marine.

Let me see if there's a question from the audience because I do want to follow up on electrification strategy within D&S. Any questions from the audience? Okay. It's still early in the morning. Folks [ haven't always got their cup of coffee yet ]. So it's okay. That's why I run the list [ in here ]. So let's talk about electrification within D&S because I'm not going to pretend to be an oilfield services analyst. Some would say I pretend to be a transportation analyst. But as the -- as you sort of think about the electrification push with your oil and gas customers within the -- for frac equipment, my understanding is Kirby is really the technology leader when it comes to e-frac. Talk to us about the evolution there over the last couple of years. And sort of does this maybe take some of the boom-bust cyclicality out as we sort of think about D&S? Or maybe that's too much of a stretch.

Yes. So you're right. I mean we provide the power generation, the power distribution and the e-frac pumps. So we are a leader in that side of the business. We're very encouraged by what we're seeing in that market space right now. Whether -- to go so far to say, is it going to be -- is it going to help with the boom and bust cycle? I mean anyone who's been in the oil and gas sector knows it's very hard to insulate yourself from the boom and bust cycles of the oil and gas market. However, the power generation work that we do, the power distribution work that we do, it's -- yes, we're currently focused on the frac side of it, but there's applicability to other areas, right? Like you think about the overall energy transition and electrification push, the fragility of our grid, right, there is going to be aspects of what we do in the frac space that's going to play into these sectors. And we are pursuing that to help with the cyclicality that we see in the oil and gas space. So that's our strategy with that business. We really like it. I think it's where the market is going to go. We've seen -- you think about our backup power generation work, that's done very well. This past quarter continues to do well. I hate to say it, when you have a strong event, we see demand pick up. So the overall electrification, the concept of -- think about our Thermo King business, right? Thermo King basically is mobile refrigeration. To run the refrigeration, you need to run your diesel engine to run the refrigeration. Is there a concept in there that we use a battery backup where you can turn off your diesel engine, less emissions, and it runs off the battery? Especially, I'm sure you've seen this where you go to a grocery store and there's a truck out there, the diesel is just running idle, right? Let's keep the refrigeration going. But if I were to sell you a battery to help back you up, you can turn your diesel engine off, right? So those are things that we're looking at in this business that it builds off, yes.

That's exciting. That's the exciting piece of it.

Yes.

Okay. Well, that's all my questions. I did have one kind of question to close. And Raj, you talked -- you led off the conversation by talking about how excited you are as you look out over the next couple of years. The business is at an inflection point. For those that aren't currently invested in Kirby, maybe you could just sort of wrap up with your closing thoughts on sort of why now is the time.

Yes. So now is the time for all the reasons that I talked about, right? On the marine side, the rate environment, the activity environment, the supply side dynamic that we're seeing is all very encouraging. Obviously, there are risks here. I talked about the economic headwinds with whatever the Fed is doing, whatever is going on globally, talk about housing starts. Obviously, inflation has been front and center to whatever we're doing, but we're actively pursuing rate increases to kind of stave off the impact of inflation. Could that have a bearing? Because there's always this lag, right, in terms of getting your price and then you're struggling through your inflation, that could have some sort of a headwind next year. I'm well aware of that, but we're trying to lean in, in terms of the pricing. I talked about the coastal business, and Jack, to your point, yes, we were not making money. We're kind of breakeven right now. We're deploying ourselves out of it. It's more of a longer-term story there. The inland business is probably more of an immediate story as we get into the '23-'24 time frame. And then D&S, like I said, order levels are up. Backlog has grown 5x. I only wish that we can get through all the supply chain issues that we face in that business. If that supply chain -- if those supply chain issues abate, we could ship product, right? And I think over the years, you've seen us kind of hedge ourselves because of the supply chain, and maybe sometimes, that gets misconstrued as lack of demand. It's not for lack of demand. It's for lack of getting the product in and being able to ship it. Are we still seeing those headwinds? Those headwinds are still there in terms of supply chain. I was hoping that it would get better. As the year progresses, it's kind of stayed stable. All I can say is I hope as we get into '23 and hope is not a strategy, but when you're dealing with your vendors, it's hand-to-hand combat. That's the way I'd describe it, literally. It's getting an e-mail in the morning when you come into work, saying that these guys said that they were going to supply something first week of December, and now they're saying it's January, and I'm getting -- David and I are calling a few people, and we're trying to get it shipped in December, right? So it's hand-to-hand combat.

So they don't -- we got an order to make. That's really...

Exactly. Yes. I understand you got to take Christmas off, but...

The next estimates are too high. We got to get this. So it's the...

And I've got -- and more importantly, I've got a customer -- I've got a customer who's got drilling schedule, who's got work in front of him that it's just a wave that impacts everyone, right?

Absolutely.

At least I'm glad that the customer fully understands and works with us. The frustration is felt throughout the supply chain, if that's one way I could describe it.

If I could follow up on one quick thing -- and thank you for all those thoughts. But with regard to inflation versus price increases within inland, just to make sure we kind of level set there, but I think back, you guys have been incurring a good bit of inflation over the last 18 months. And I know that that's going to continue in '23 just with the underlying economy. But when we think about the opportunity to finally catch up on price, it does feel like though that maybe there's a chance to start recouping with the price increases that you're getting now, some of the costs that you've been bearing over the last 12 to 18 months. Is that a fair way to put it? Or is it still -- it's going to be...

So yes, you're definitely recouping, but -- what -- I guess what I'm -- my comments are more in line of like what if we still see this rate of inflation going -- it keeps on ticking, then I'm having to play catch up, right? We talked about -- I talked about all the impacts of steel and everything else. And then you do get CPI escalators. It's 8%. And what we're looking at is what I call it 200% on steel, 15% on crew changes, right? So rate has to increase, and we're focused on it, right? Near term, setting aside inflation, if you look at the marine business and operating conditions, low water -- we talked about low water, we're getting also into that time period where in the morning when I'm driving to work, and in Houston, if it's foggy, I kind of know that.

Delay days.

Delay days, right? And when you get into the December, January, February time frame, we get -- those of you who are familiar with the name know that we get some weather impacts. But having said that, we're also going through 35% of our contracts renewing. So it's kind of a mixed bag in terms of the calculus there.

Okay. Great. Raj, Kurt, thank you so much for your time. Really appreciate it, guys.

Jack, thanks for having us.

Of course.

Really enjoyed it here. Thank you.