Kirby Corporation (KEX) Earnings Call Transcript & Summary

All right. Good morning, everybody, and welcome to day 1 and the first fireside chat session for the 25th Annual Stephens Investment Conference. My name is Jack Atkins, and I'm the airfreight and service transportation analyst here at Stephens, and we really appreciate everyone taking time to be with us here today, both in the room and online. And we're very pleased to start the conference this morning with Kirby Corp. who we've known for quite some time, and is one of the -- just a premier company on our coverage list, specializing in the inland tank barge industry, both inland and then offshore as well. From Kirby, we have the company's CFO, Raj Kumar; and Vice President of Investor Relations and Treasurer, Kurt Niemietz. So Raj, why don't I turn the floor over to you for some introductory comments, and then we'll go into Q&A.

Thank you, Jack, and thank you, everyone, for attending our fireside chat and taking the time here to learn about the Kirby story. So let me just give you an overview of the company. So as Jack mentioned, we are the largest inland tank barge operator in the United States. We have about 1,071 tank barges with 274 tugboats. We also have a coastal business on the marine transportation side, that's about 28 barges with about 25 tugboats. We also have a distribution and service business. This is related to diesel, repair, transmissions, oilfield services as well as power generation equipment. What I will say as an overview of where we are right now is both businesses are doing very well, and I'll get into that more as we go through the Q&A. Have inflected nicely after the pandemic, and I think we are well positioned for a very nice run. The fundamentals of the business are strong, and I'll explain that in a minute. Yes.

Okay. Well, great. Well, why don't we dig right into the kind of the -- what I call the core business. I know you view all your businesses as core, but we talked about the inland barge segment here, which is really the driver for the company from an earnings perspective. Let's kind of talk about where fundamentals are. There's a lot of questions about the broader economy and what's happening from an economic perspective. But you guys are really sort of in a sweet spot right now because you're not seeing incremental capacity coming into the market and your underlying customers are still producing at a high level. So can you just talk about that supply-demand balance, both in terms of what's happening from a demand perspective? But then longer term, just kind of the second part, what's happening in terms of supply coming into the market?

Yes, that's an excellent question, Jack. So if you look at our Q3 earnings results, we talked about utilization, which is what we track on the inland side, it was in the high 80s. And a lot of that's driven by the fact that we had a lock closure in Illinois that pulled some headwinds in the Q3 time. Now since those locks have opened up, we've seen utilization steady up very nicely. It's in the low 90% range right now, which is where we were kind of before those lock -- the Illinois lock closures. And so from a utilization perspective, we've seen improvement. Now to your question, Jack, on demand, refinery utilization is high. So volumes are there. We've seen activity levels very steady in that area. On the chemicals side, we've talked about chemicals, it ebbs and flows. As you all know, you've seen these chemical companies coming out with their results, and there have been challenges there. What I would say is you need to take a step back when you look at chemicals. These are global companies. They have regions that are underperforming and regions that are doing slightly better. You can think about Europe and Asia, probably more challenged than the United States. We have a feedstock advantage. A lot of investment has gone into the chemical complex in the U.S., so that just drives efficiency. So with that, how I would describe it is if you're looking at the chemical space, the U.S. is by far well positioned compared to the other regions. What we've also noted is while pricing has been in a headwind for chemical companies, volumes have been quite stable in the U.S. So that kind of explains where we are in terms of our demand profile. I'm not saying that it's not without challenges. It's with challenges, but it's been stable. That's how I'd describe chemicals. On the refinery side, different story. Utilization aside, things are doing well there. On the supply side of the equation, it is tight. No one's building new barges. We're also going through a maintenance bubble right now, and I can get into that in a bit. And that's causing a lot of supply headwinds which just is explaining why the market is so tight right now.

And I guess let's talk a little bit about the supply side for a moment. When you think about the number of barges that are being built this year, can you maybe frame that up for folks relative to the number of barges that are being retired industry wide? I know it's tough to get exact numbers, but your relative sense for that.

Right. So we track number of new barges that are coming into the market, right? So this year, it's 22 barges. Last year, it was 27, I think, if memory serves me. At those levels, how I'd describe it, it's nothing to write home about, seriously. Typically, we used to run 75 to 100 barges a year. So you're looking at 1/4 of that entering the market, right? So 20 -- call it, 20 to 25 barges a year right now. People are not building barges. The cost to build a barge has doubled. Before the pandemic, a 30,000-barrel barge was probably close to $2 million. Right now, it's about $4 million. So at where the rate environment is right now, the justification to build a barge at $4 million is just not there. Talking about retirement, so the industry has about 4,000 badges industry-wide. Rough math, typically, we see about 100 barges being retired each year. There are 2 dynamics at play right now. You're going through a maintenance bubble. So there's going to be an evaluation that needs to happen as to whether you want to take an older barge and put it through the maintenance bubble and spend that money, right? So that could accelerate retirements. And at the same time, given the market is so tight, some people may want to extend the life of their barges. So typically, we see maybe 75 to 100 barges being retired, but given where the market is right now, there could be some puts and takes there given where maintenance is and given how tight the market is.

Okay. That's helpful. And as we go through the Q&A here, if there are questions from the audience, please don't hesitate to jump right in to the discussion here. But I guess let's kind of -- maybe kind of think about this for a moment. So if it costs $2 million to build a barge before COVID, it's $4 million today, that's not including the cost of a towboat, which has also gone up a lot and the cost to crew a barge, where do you think you need day rates to be to support investment in new capacity right now?

With all the inflation that we've seen, and while it's moderated some this last -- the second half of this year, it's still very present. With all the inflation we've seen, I think ballpark it needs to be, what, $12,000 to $13,000 easy to get a double-digit return, right? And actually, you touched on an important point, Jack, on the horsepower and the crewing, those are also gating factors in terms of supply, right, because no one's building new boats right now. And as we've talked about before, crewing is an issue. I mean we've managed through crewing. We've got our own training facility, Coast Guard sanctioned training facility. So that's kind of blunted the impact of our issues with regard to getting crewing. We have a well-crewed fleet. We have a pipeline of mariners that comes out -- that come out from this -- from the training facility. So that's helped us a lot. So -- but crewing as well as horsepower, those are the limiting factors that are going to impact supply.

So if it's $12,000 to $13,000 a day to get a double-digit return, where -- what's a 2-barge tow currently running for right now?

Roughly, I would say, around -- it's in the 9 handle.

Okay. So we've got a long way to go.

We do, yes.

Yes. I was talking recently to some private barge companies, some of your private competitors, and they told me that they're being offered some longer-term contracts substantially above current market rates to build new barges and then turning those contracts down because they don't think they can crew the boats. And so I guess maybe we could just talk a little bit more about the crew side because everyone focuses on building a barge and getting a towboat, but you need to talk about the crew. I mean your own training academy, I think it's going to be a significant competitive advantage for you there.

Yes, we look at it -- yes, it is. I mean -- but more importantly, it drives a lot of other factors for us, right? The safety training that we provide for our mariners is known in the market. It's recognized by our customers, especially our blue-chip customers really appreciate the safety protocols that we have in place and the safety training that we provide our mariners. We're very clear on career development, career pathing for our mariners. So we do a lot around ensuring that the attraction to be a mariner is there. And we kind of differentiate ourselves that way. We also look at -- our compensation philosophy is a bit different. We look at what we call total rewards and a benefits package that you can -- these are good paying jobs, right? I'm not going to deny that -- labor inflation is still there. It's still going to be present. And I keep saying that because folks need to understand, that's why we need to keep going up the rate, right? Because I think there's this sense that, oh, inflation has moderated. That's -- yes, it's moderating, but it's still there, right? But to your point about it being a competitive advantage, yes, I do agree with you, it is. But it's an overall philosophy that we're looking at in terms of how we crew and man our boats and what sort of culture we're driving through the company.

Okay. That makes a lot of sense. You guys have been pretty public talking about the margin kind of step as you look out over the next couple of years, particularly exiting this year at or about a 20% margin on the inland side. If I think back to -- I got to go all the way back to 2014, the last time we had a sustained period of pricing power in the inland market that lets you achieve an LTM, inland margin in the upper 20s. By the way, we kind of back into the bracket that you guys put out there. As I sort of think about it and look forward, there have been a lot that changed over the last decade. Do you still feel like that an upper 20s operating margin at inland is achievable long term?

Yes. I mean with this sort of supply dynamic, I think the way -- what you'll see happen is, yes, we've called out, like we should be -- we're close to 20%. Even with all the inflation, we're close to 20%. It is a milestone that we want to achieve, right? And I think I want to be clear here, when we say 20%, it's not in the quarter, it's exiting the year. Or if we hit a particular month. And I say that because we need to be cognizant in our business. It's seasonal, right? You have -- like we're going into the Q4, late Q4, going into Q1 period, weather is going to be a huge impact, right? Low water is a huge impact for us right now, right? So we are managing through that. We all know that when -- every year we talk about it. Nothing is different this year. I mean maybe low water was worse last year. It's quite bad this year, but it's very hard to predict weather, right? This week, it could be good. Next week, it could be worse, right? Or it could be better. So we have that seasonality in any particular month or quarter, and that could drive a difference in [ op inc ], right? So what we are looking at is can we hit that threshold in any particular month in the quarter? And once we hit that, then we know we have earnings resiliency that's going to get us there, right? So I think that's one milestone we're looking to hit very, very soon. Now the next milestone will be to get to that mid-20%, right, and onward. And given where the supply is with barges and no new builds happening, right, most of -- a lot of the manufacturers of barges are tied up doing dry goods barges, hopper barges. Even the labor to build a new barge is kind of constrained. So when you see all of those dynamics, I think, to your point, getting to that 25% and then moving on to -- sorry, the mid-20s and then moving on to the higher 20s is something that we can part ourselves in the next couple of years.

As we think about that, moving to 20% and beyond 20% over the next couple of years, how should we think about the incremental margins within your inland business? Because obviously, you've had inflationary cost pressures. But a lot of the incremental revenue that you're going to be realized, it will be on the pricing side. So how should we think about incremental margins within the inland marine business?

So let's -- before I get -- before I answer your question, I'm going to talk about pricing. So pricing is steadily increasing even at these levels, right? So I said we are in a 9 handle in terms of day rates. Quarter-over-quarter, we did about mid-single digits in terms of pricing. What I want everyone to be aware of is when you're coming off maybe 2 years ago, $6,000 day rates, and now you're at $9,000 rates, the rate of increase is going to be very different. But what we look at is the steady increase that we are seeing, right? So we're continuing to see steady increase. And as I mentioned, we need to see that steady increase because all the cost moves in. To your point, in 2014, it was a very different environment in terms of our cost profile compared to where we are right now. Our cost profile in 2014, insurance was very different in terms of -- it's much higher right now. Safety, Coast Guard requirements, inspections, et cetera. The regulatory cost alone has gone up quite a bit from 2014. So we've got to address all of that. So as we as we move with the price increase, I think where utilization is concerned at these levels, I would say that we're kind of pushing the boundaries of being fully utilized. Anything you're going to see in terms of incremental margin is going to have to come from pricing. I'm not going to get into specifics as to what that step-up is. I'm going to say one milestone is 20%. The next milestone is the mid-20s.

And you see -- you think mid-20s in a couple of years is doable?

I think we'll have to see, right? That's...

Not to put you on the spot.

We'll have to see. Because like I said, there's weather in Q1. There's -- weather could play a factor for us in later part of Q4. I talked about -- we got through the Illinois lock closure and now we've got a lock closure near Baton Rouge, which we are trying to work around, right? That creates efficiency issues. Low water creates efficiency issues. That -- all of that has a bearing on earnings, right?

No doubt.

That's near-term.

Right.

Longer-term fundamentals -- how I'll describe it is longer-term fundamentals are strong.

Sure. Absolutely. Absolutely. Okay. Well, I'll move on to a different topic, Raj, how about that. So why don't we transition to the offshore business for a moment? Because that's been a -- it's a business that you got into in the 2011, '12, '13 timeframe through acquisition. You have really kind of consolidated that business down, sold different pieces over the last couple of years, I'm thinking about your Hawaii business, and to really focus on a particular part of the coastal barging market. As you kind of think about this business moving forward, you're starting to see price. You're also going to a maintenance bubble there. But it feels like we're on the cusp of an earnings inflection for your coastal marine business. Walk us through what's happening within kind of the offshore marine.

Yes, Jack, I would describe it as the table is kind of set in that business. And maybe I should just touch a bit on the maintenance and some of the requirements in the coastal business that some folks may be wondering, hey, why are they still breakeven? So there is a requirement in the coastal business to have ballast water treatment installations. And we are mostly through that. We will be done with ballast water treatment by early to mid-next year. So let's say, the first half of next year, we'll be done with all of our ballast water treatment. So when I look into '24, the coastal fleet is very well positioned. Now when a coastal barge goes into maintenance, the number of days it's in the shipyard is anywhere from a minimum of, let's say, 90 days to 120 days. So it's 90 to 120 days where you don't earn any revenue and you're holding the cost for that barge and it's not operating. So once we get into next year and get through all of this ballast water treatment, we'll have, what I call, a fully operating fleet, and it will be out there earning its keep, so to speak. Now what I will say with the pricing environment in coastal is, because supply is also tight in the coastal market is pricing has inflected very nicely. So year-over-year, if you look at term contract pricing, it's gone up about in the low 30s, low 30% range. So very good outcome for us. The market is tight. Supply is tight. There are about less than 300 barges, I think, in the whole market. We have about 28. We have the best, most efficient coastal barge fleet. We're getting through the ballast water treatment ahead of everyone else. And the price to build a new barge is also quite prohibitive. If I recall, we built a 185,000-barrel barge before the pandemic for $85 million. To build that same barge right now it will be closer to $130 million. And even if you wanted to build that barge right now, I think the earliest delivery in terms of lead time would get you into an early 2027 timeframe. So all of that just says, hey, supply is in check. There's demand, right? Rates are showing the profile that we were talking about. So as we get into 2024, you have a fully operating fleet. You'll have your regulatory maintenance, that's always going to be there, but you're not going to have all of this ballast water issues, you should be fully operational, and we should start to see it inflect very nicely.

So we get through with the maintenance bubble, let's say, by midyear next year. Your -- to your point, the table is set from a rate perspective. The utilization is strong. I mean how quickly can we see margins recover? I mean is this something that you can be back into a double-digit margin pretty quickly? It's -- so just your -- you would be there now, if not for this maintenance work that you're doing.

Yes. So because the first half of the year still has that headwind.

Right.

I think getting to double digits is probably a '25 sort of phenomena. I'd say high single, low double. I think next year, you're going to see it transition out from breakeven and start to creep up. That's the step up, actually, yes.

Okay. Okay. No, that makes sense. I think that's one area where folks are confused, which is when you kind of think about the cost that you're incurring because you're not letting your crews go. You're maintaining your costs, but you're not recognizing the revenue there...

Right. Yes. And if you go back and look at the coastal business, it's been challenging, no doubt about it. But I think where we are sitting right now is in a very good place. And I think people are going to be very happy with how the coastal business is going to perform.

Absolutely. One area that you guys were talking about, if it's early this year or late last year, was offshore wind. Is there any update there in terms of how you're thinking about that? We haven't really seen much -- I know the offshore wind market has become pretty challenging from -- as you're customers are thinking about it. Is that still a market that Kirby is interested in investing in?

Well, we are always evaluating. And we're always looking at what's the next frontier. But we look at it from a lens of what's the hurdle rate that we're going to earn, what's our return on invested capital. We are very focused on that. That is a metric that -- it's kind of...

That's core to Kirby. It's always core.

Core to Kirby. We live by it. So whatever we are evaluating right now in terms of offshore wind is within that lens. And if we indeed pursue anything there, and we're still in very -- we're still in negotiations, but we're very aware of the challenges for the upstream in the market. So we're very cognizant of it. If we do anything, it needs to -- we need to ensure that we get the returns that we need to get in this market, failing which, I mean, it will be difficult for us to proceed with it.

Okay. All right. That sounds good. I just wanted to kind of get that out there because it's a question I get from time to time from investors. So now we've got you on record on that. Let's transition to the Distribution and Services segment for a moment. It's -- over the last decade, it's been a -- it's more plus. It's been a wild ride there, cycle to cycle. The peaks have been very high. The troughs have been pretty low. It feels like we're in a little bit different place right now because of e-frac and sort of what's happening there. But I know that your Distribution business isn't just energy lever. There's a lot going on. So maybe kind of talk a little bit about what lives within your Distribution and Services segment. What you do there? And then after we do that, I'd love to talk about e-frac.

Right. So on the Distribution business -- Distribution and Services is how we term this business. I'll break it into 4 categories, right? So we have an on-highway business. This is basically diesel repair related to trucks and buses, Class 8 trucks. So that's one business. It's -- it typically grows with GDP. It's had some challenges, as you would expect of late with everything that's going on in trucking. The next business is the power generation business that we have. We do a power generation rental business. That's been doing very well for us. Returns its cost of capital -- more than returns its cost of capital. We then have our oilfield business with e-frac, which is clearly, a very strong product in the market. I think it's well recognized there, and we can talk about it a bit more. And we have a marine repair business, which is -- kind of supports our marine strategy.

That's the original...

That's the original genesis of the Distribution and Services business. That too, with everything going on in the maintenance bubble, it's helping us a lot. We've -- in fact, that business helped us with our ballast water treatment installations for our offshore business. So there are some synergies. There are some synergies there that work out for us very nicely. So those are the 4 aspects of the business. I would say the marine business is doing well, too. Returns its cost of capital, does more than that, and we're very happy with it.

Okay. That's a good overview there. So look, if we could maybe talk about the energy piece of D&S. What are you seeing there, I guess, first from your customers as you just kind of think about moving into 2024? And with the push into the more of the e-frac side of things, does that remove some of the cyclicality, at least for now, within your distribution services business?

So the first few units of our e-frac, because we wanted to kind of protect the IP and we want stability of earnings, and we had 2 very strong customers, marquee customers that wanted to look at a lease model. So we did those. To your point, it gives us stability of earnings. We're very happy with it. The returns justify the lease model there. I think what I would say is as we go into 2024, there's a lot of capital discipline with our customers in the oilfield space. And that capital discipline drives CapEx decisions. There -- what we're seeing as we go into '24 is there could be some mix headwinds, not so much e-frac related, but on the conventional frac side, right? So when we do remanufacturing work from the conventional frac side, it's good margins. It's a lot of work, and that's kind of tapering down. Now that will get slowly transitioned down and replaced with e-frac. But you could have a kind of a timing difference in terms of lull, right? So that's what I've seen going into 2024.

So remanufacturing kind of tapering off, but then the...

But the e-frac coming -- yes.

The e-frac picking back up.

And the issue with the e-frac is with the capital discipline, there could be a period of time where we see that mix headwind play into 2024.

Okay. But you've got a fairly -- I mean you've got a fairly sizable backlog there. I know you don't disclose your book-to-bill.

Yes, we can talk about it.

But does that give you some visibility into 2024, though, just with the backlog?

It definitely does. It definitely does. And you are absolutely right. The backlog does help. The issue with backlog is all the supply chain problems that we have, right? So it's more of execution. I don't mean to sound like the supply chain guy, but pick your category, right? One day, it's door handles and the next day, it's something with an electronic device, and we've got all of our OEMs, some of them are courting us support supply a year out, right? So we've got to manage through that. Now having said all of that, working capital and this inventory build that we have is -- management team is maniacally focused on it. I mean we -- we're measured against it. It's part of our goals for the year, and we're working through it, right? What gives me reticence is to give you a number and say, like, hey, we're at this level. I'll be at this level at the end of the year. It's very hard to do that when we're working through all the supply chain issues. We tried to do a lot of things last year, like reengineer stuff and do substitutions. Some worked, some didn't work. So it's not an easy equation to just say, hey, I'm going to deplete so much of working capital.

Let me just...

What I will say is there is going to be working capital conversion. It's going to happen in Q4, and it probably may slip into early part of next year.

Okay. Let's take a step back there because I want to -- I just want to kind of double-click on the distribution piece for a minute because we think about it historically for Kirby, the distribution segment has been boom or bust. We've had a strong 18-month period, followed by a very challenging period. We've been in a period of relative, I wouldn't say it's been boom, but we've been operating at a really high level, but it feels like we're at a fairly sustainable level of profitability here, at least for a period of time. I mean do you feel like that we're kind of we're in a window here where the business can be -- the distribution business can be stable? It's not going to be something we're going to have to talk about every quarter with -- it's either going to be a big upside driver or it's a downside drop. I mean it feels like it's -- we're kind of at a point here where the business should be able to maybe execute a little bit more consistently.

I would agree with that. My only caution is on the supply chain and the execution side because that creates a bit of, hate to use word choppiness, but it is choppiness, right? And if things go well -- again, execution. If things go well, we produce the results. If things don't go well, things get stuck on the balance sheet, right? And -- but to your point, all things being equal, if we work through all the supply chain issues, we should execute to the backlog. There could be some mix headwinds as we get into early '24 timeframe, but we've done a lot in terms of taking out cost and managing costs and optimizing costs. We're still on that journey. And I think we'll still be able to realize some of those cost -- the cost creep that we saw with all the inflationary issues that we also saw in the D&S business. But yes, to your point, we should be able to execute.

Okay. Maybe one more question on e-frac just because I don't think people appreciate the fact that you do have a market-leading solution there. And your customers are increasingly looking for a more ESG-friendly -- and it's also lower cost to operate a solution there. So can you just talk about what percentage of the North American frac fleet is sort of more of an e-frac right now? And where can that go? I mean it's -- to me, that's a fairly exciting piece of your business.

Yes. So the thing about e-frac is it's an ESG. It's very ESG favorable, to your point, because on the well side, you're flaring natural gas. So instead of using -- instead of having to logistically move diesel there and everything else, you use the natural gas to produce electricity to run the e-frac. So it's a win-win on all aspects, right, ESG as well as, honestly, the cost side of the equation is also very favorable. So if you look at -- it's still in its infancy. And if you think about where it needs to get to, it is going to grow. And in fact, the way I look at it and the way we look at it is, if there's attrition in this space, I think the first equipment to get retired is going to be the conventional frac because it is more expensive to run it, and e-frac is going to remain, right? So we are quite comfortable. Right now, I think, it's less than 10% e-frac.

E-frac is about 15 million horsepower.

Yes. 15 million horsepower.

E-frac is about 10% of that.

So it's less -- it's about 10%. So it's not a big market, and it's poised to grow. What we're seeing in -- with our customer is a lot of discipline in terms of how it's getting deployed, which, to some degree, kind of ties in with your comments about stability, right? Because this business has, in the past, been peaks and troughs. But now I think with capital discipline you're going be a -- you're going to see a bit more stability in terms of the earnings that you get.

Last question on this piece of the business, then I'd like to ask you about cash flow and CapEx and cash returns to shareholders. But you talked about these lease fleets that you're deploying, where are we in terms of that being rolled out? Is that more of a 2024 impact?

So we are rolling them out as we speak. We already have 1 unit out. And as the year progresses and going into next year, we will start deploying more.

Okay. How many total units are going to be deployed here?

Right now, it's about 5.

Okay. And, I mean, we think about the mix impact, that's positive for margins for the business, right, because that's a higher margin relative to your -- over at D&S, right?

Yes.

Yes.

And will all of 5 of those be deployed by when?

So all 5 will be deployed by early '25.

Okay. All right. All right. Any questions on this before we go to cash flow and returns? Yes, sir.

Curious on the engine business, in particular. Any thoughts around that?

On...

Like the engine services, what do you do in that side of the business?

So on the engine side of the business, there is the marine engine side of the business. So we basically maintain and repair engines in the marine -- for the marine industry. That's one aspect of it. We -- that business also maintains our fleet. We also do engine repair for on-highway. So think about trucks, buses, et cetera. Like I mentioned, the marine side is doing well. On the on-highway, we've seen a bit of a pullback right now. I think one would expect that, whatever that's going on with trucking. It has been doing very well over the past 2 years, but we're seeing a bit of a pullback right now.

Let's talk a little bit about cash flow. It's one of my favorite topics. So when we kind of think about the business looking over the next couple of years, knock on wood, we'll have margins going up, profits going up. How are you thinking about the capital needs of the business, looking forward here? And kind of what are your thoughts on what that should mean for cash flow?

Okay. So this year was kind of an unseasonably high year for CapEx because we were going through the shipyard maintenance bubble. We're going to see that continue into next year. But the magnitude should not be as high as this year. We also had the -- we also invested some money in the e-frac leasing business. That should not be recurring after we get through the 5 units.

Okay. So it's more -- that will be a '24 -- okay.

Yes. And so thinking about CapEx, next year is going to be higher than run rate because of the shipyards that we are looking at on the inland side, especially.

You mean higher than like historical mean?

Historical. Not this year, right? So this year was quite high because of shipyards. We had investment into e-frac. The investment in e-frac will continue into next year. We'll continue the shipyards on the inland side, but we'll be done in all the ballast water treatment by the middle of the year. So you should see us have a lower CapEx in 2024. So from a cash flow perspective, I think you've seen us -- even with all this higher CapEx that we've had, we're still poised to generate free cash flow. You've seen us been very active doing stock repurchases. I think you should see us continue to do that. We always evaluate -- Kurt and I always look at this -- David, Kurt and I, we always look at where our debt levels are and what's the cost of our debt against what's more accretive from an EPS point of view. But I don't expect that we pay down any debt unless it makes sense and it's accretive for us. So by and far, you should see us do stock repurchases. Now we say all of that, but we are always looking at value-creating projects, right? And you saw last quarter, we were able to get some inland tank barges and some specialty barges at a very good price, a very good value for us. Makes a lot of sense for us to consolidate that into our inland business. We'll keep looking for opportunities like that. It's an easy integration. It joins our fleet immediately. And at these demand levels and these utilization levels, they're easily put to work. So we'll continue to look at those opportunities. On the Distribution and Service side, we look at very niche type investments that kind of leapfrog our electrification push. But I don't expect that to be any -- very big numbers there. So by and far, I mean, long and short of it is, you should see us continue to do stock repurchase.

Okay. That's encouraging. I guess thinking about the CapEx piece for a minute, what is normal sort of maintenance CapEx for Kirby? How do you think about that?

So back in the day, before inflation reared its ugly head, I would say $150 million to $180 million. Now, in this day and age, I would say it's probably closer to $180 million to $200 million. That's normalized. And we won't see normalized levels until we're in the '25 timeframe.

Okay. That's really helpful. Maybe on the M&A front here, with the inland market's pooling up, would you say there are potentially any larger acquisitions out there that could come to market? Or is it going to be more tuck-in opportunities, do you think?

It's very hard to say, Jack. It's very hard for us to predict that. It all depends. Where interest rates are right now, it's brought a lot of discipline to the industry, right? So I mean we are investment grade. The way I'd term it is fortress balance sheet, right? Investment grade. Our average cost of borrowing is less than 5%. Marginal cost is about 6.5%, right? I'm not sure how -- what the other market participants are experiencing in terms of interest rates, right? If they're not investment grade, which I know they're not, it's probably closer to double digits, right? And I think that's also coming to the calculus of why nothing is getting built. Bonus tax depreciation going away also comes into play. Tightness in the credit markets. Most of these guys borrow from regional banks. Regional banks, the situation there. So credit is tight, right? So we like that discipline. But having said that, if someone's buying because of where interest rates are and there's something we can do that's value-creating for us, we will look at that. But everyone knows that the market is getting tight. So the bid ask may be something that -- at the end of the day, we look at everything from an ROIC perspective.

Right. And if I think back historically, you've looked at it, too, in terms of what's depreciate replacement value. You try to -- can I buy it for cheaper than I can build it on a life cycle of that?

Yes, that has been our strategy all the while.

Right. Absolutely. Well, do we have any additional questions from the audience? We've got time for a couple more here before we close up.

How many of the 28 in the 300 coastal are underearning because of the maintenance?

How many out of the 28...

Your 28 of the market's 300 that are underearning because of maintenance.

I would say a lot of them are underearning because if you look at the industry as a whole, a lot of these companies are in distress, right? Some are functionally bankrupt, some are in the process of trying to get sold. So that just gives you an idea as to the CapEx requirements and the investment that's required to keep a fleet like this in operation, you need to have the wherewithal to do it. Now in terms of our fleet, if you look at the 28, we're getting through it. We're getting through all of the ballast water. We're getting through all of the maintenance. If I'm going to call it by middle of next year, we should be in a very well positioned place to have a fully operational fleet. Obviously, you've got regulatory maintenance. That's typical in this business and it cycles through, but it's not going to be like this bubble that we saw over the past 2 years.

And it's hard to tell of the 300, the competitors, how many are fully functional coastal?

Well...

So they're behind on their ballast water.

Yes, they're behind on their ballast water. It's hard for me to give you a number on how -- of the 300, how many are fully operational. I will say that, to Jack's point, and Jack is right, they're behind on ballast water. We're ahead on ballast water. The rate environment is picking up really nicely. And on the shipyards and on that, they're going to experience the same thing that we are experiencing. So it's not just unique to Kirby.

You've just gotten now through it before they have. And it's interesting because there's a -- maintenance bubble's happening on the inland side, too, right, with a larger portion of them going through their -- was it the 10 year?

Right. 10 years.

Yes, 10 -- yes.

Yes, we're go to a 10-year on the inland side.

And that will continue in '24 as well?

It will, yes.

For the industry?

So just to give you an idea on the inland side. Typically, it's about 150 to 200 barges that go through -- in the industry that go through maintenance. This year and next, it's about 700 to 800. So that's about 20% of the fleet, industry-wide that's going into maintenance. Now the maintenance is not going to be as long as a coastal barge, but it still is going to add to the supply impediment that we are seeing in the marketplace.

Yes. It's nice to have that extra capacity out during a little bit of a choppy macro as well. So okay. Any last questions here before we let these guys get back to their one-on-ones?

Just the coastal rates?

Depends.

Depends on the size.

Depends on the size of the barge.

You said you're up in the 30s?

Yes, up in the 30s year-over-year.

Rising similar to inland...

No, I would say that the -- if you look at it year-over-year, we've gone 30% on coastal. Year-over-year on inland, we've gone about 15% to 20%. So coastal is going to be -- the thing about coastal is the pricing elasticity is a bit more stickier. 90% of our coastal fleet is termed out. So it's going to drive a different pricing profile.

Did you have a question? Did you have a question?

I was just curious the jump in terms of the number of the ships that are under maintenance now versus the board -- the 700 versus the 150. Why is there such a big jump?

Because when you go back 10 years ago, there was a barge building cycle that happened. So a lot of barges were built. And it's just based on that birthday. Now you're 10 years -- you're at the 10-year anniversary. And because you had all these barges that were being built 10 years ago, they've got to go through the inspections.

All right.

Do you expect double-digit sort of pricing on the [ annual type ] the next couple of years? [ The margin to effect ] that maybe 1,200 to 1,300 freight that's needed or how you'd expect pricing to play out?

So we -- if you look at the past few quarters, we've been doing like mid-single to high single spot increases, right? We're getting ready in Q4 to go through a big term contract renewal period for us in Q4. So with where supply is and how we're seeing supply contract with the lack of building, with the maintenance bubble, I would expect that we'd see that steady clip rate to go up. Now my only caution is as rates go up, as I mentioned earlier, at $6,000, getting a 10% increase is easier than at $9,000. So we need to look at the -- you need to look at the rate, but also the magnitude of the change, right?

But there's still, to Andrew's point, there's a long way to go before you get to the...

There is a long way -- yes. Yes. Absolutely.

Okay. All right. Well, we'll leave it there. Gentlemen, thank you so much for your time. Really appreciate it.

Thank you, Jack.

Thank you.