Kirby Corporation (KEX) Earnings Call Transcript & Summary

We are going to move on to our next presentation here. Very excited again. I don't know how many, but it's been many, many years that you guys have been coming to this, so I appreciate it. But we have David and Raj from Kirby. And how about this, we'll let David and Raj or David, you -- why don't we just start out by -- people are probably familiar with it, but just who Kirby is, and then we'll get into the Q&A.

Sure. Well, thanks for having us. Great to be here. Although I hear it's raining, we haven't seen outside today. Look, Kirby has two main businesses. One is marine transportation, where we move liquids on the inland waterways of the United States in barges, using towboats, tugboats, that's our largest and most profitable area. The other part of our company is what we call distribution and services, which does a number of things, including make frac equipment or backup power equipment to maintain anything with an engine or a transmission. We're doing a lot around electrification in that business. Right now, there's big demand for backup power, given everybody needs power 24/7 now. So that's another part of our business. Those are the two different businesses. I would tell you both of them are doing pretty well right now, but the outlook for the Marine business is about as good as I've ever seen.

All right. Well, let's start big picture. Both of the -- both of your businesses are doing pretty well. But especially, I think people can look at the transportation world more broadly, and this is a transportation conference and 2023 wasn't very exceptional. So what -- and the economy has been alright, but it hasn't been gangbusters, and here you are talking about if things are just plowing forward. So what's driving that? And is there any risk of it not continuing?

Sure. The long and the short of it is our barge business is a supply and demand-driven business. Right now, demand for barge movements is pretty strong. It's generally liquids that we move go up or down with GDP. So the volumes generally grow at 3-plus percent in terms of annually. A recession can obviously pull that back. So demand for our barges is pretty strong right now. You can look at the refiners and the chemical companies, and they're all doing fairly well. But a big part of the story is the supply side. Nobody is building new barges right now for a number of reasons. Probably the most important is the cost of barges has doubled. It used to cost about $2 million to build a 30,000 barrel clean barge. Right now, that's about $4.3 million, and that's over 5 years, it's doubled. The other thing is the cost of borrowing has gone up for our entire industry. We have a lot of private smaller players that would borrow using secured financing and get borrowing at 3% to 4%. Now it's costing them 9% to 11%. So when you add, the cost of the equipment has gone up, the cost of borrowing has gone up. Nobody is really building. And so we've got demand growing, no supply coming on. We're extremely tight as a business. And when we're tight like this, we get pretty good rate increases. There's another factor too that's happening through the next 2 or 3 years, and that's -- there's a maintenance bubble in the industry. We're a regulated industry. So every 5 years, there's a big inspection period done with the Coast Guard. And about 25% of the fleet is going to be in maintenance for these regulatory inspection with the Coast Guard for the next couple of years. And so that's keeping supply even more tight. So with the supply and demand imbalance, and actually tight, we're getting pretty good price increases, high single digits to low double-digit type price increases and the incremental margins are pretty high, and that's flowing to the bottom line.

So supply and demand. Really supply is helpful on the barge side. But the other half of the business, in terms of revenue, is distribution and services, just a whole lot of different things. And that's been pretty good, too. Again, in an economic landscape, that's all right, but maybe not exceptional. Is that how you think about where the D&S business is or what's driving that?

Yes. Well, just for context for those who aren't familiar with Kirby's story. The way we got into distribution and services business was we couldn't repair our towboats, so we bought an engine repair company, and we've continued to build that business up and doing anything with an engine or a transmission. Right now, we have basically four areas in distribution and services. One is oil and gas. We're the largest manufacturer of fracking equipment in the United States, and that is going electric, which I'll come back to. Then we also do backup power. We build backup power equipment. We provide backup power for New York Stock Exchange, Costco, Walmart, Target, Tenet Healthcare, JPMorgan in New York and the like. We provide backup power to data centers. That business is growing a lot right now because everybody does need power 24/7. We do marine repair, where we repair towboats and tugboats and ferries and whatnot. And then we do on-highway transmission and engine repair and -- we do that in about 80 locations around the U.S., including refrigeration equipment on Class 8 trucks. So those are the 4 areas in distribution and services. And I would say anything, electric is growing kind of double digit. The rest is on-highway stuff and the marine stuff is more GDP, flattish. And the oil and gas is down a little bit because the oil and gas market is a little weaker. The only exception there is electric fracking. Everybody wants electric fracking because the emissions profile and the cost of electric fracking is probably about half what a conventional fracking is.

I want to get back to that. But that sort of brings me around to a fundamental question about Kirby. So the barge business, underlying demand, call it grows GDP-ish, there are pockets within the distribution and services business that are seeing structural outsized growth and some of that is just cyclical with energy or whatever. When you think -- when you guys think about Kirby from a big picture perspective, do you view this as a growth business? Or do you view it as sort of an economically linked business? How are you thinking about what the future of the company looks like against that macro backdrop?

Yes. Well, I think the -- we split oil and gas into what we call commercial and industrial. And I would tell you, commercial and industrial and D&S is growing a lot, primarily because of electrification. Would I call it a growth business? I don't know. We -- AI is actually helping data center demand, but we're not an AI story. So it is kind of a growth business. I would say the bigger picture is, why do we have Marine and Distribution and Services together? We've talked about this before, could we split them up. We just haven't been able to make the math work to where we could break it into 2 different companies. So we're running them both hard and we're going to try and run D&S for some growth. But it is not as capital intensive as the Marine side. So it's not taking a lot of capital to grow.

Okay. So we'll separate them. So there's pockets of D&S that are growth -- but let's just think about Marine. Structurally, do you think Kirby's Marine business is a growth business? I mean, the industry is what the industry is, but how do you view your position within the industry?

Yes. Well, we're about 27% market share in the Inland side, probably a little less in the coastwise side. We have been a consolidator. As you're aware, we've purchased about 35 different marine companies. There's probably 28 left in our industry. We'd love to buy a few more. So the growth will be from inorganic, I would say, from further consolidation. The base business grows at GDP. So it's not going to be a growth business in terms of Marine unless we do acquisitions. But as you know, we always look at acquisitions in the Inland side, and we'll continue to look for them. It's really about price discipline. We stay very disciplined, and we're not going to chase deals just to get a deal.

So with that backdrop, let me ask you this, Raj, so some growth in some areas, although those areas tend to be not terribly capital intensive. Obviously, there's maintenance CapEx and replacement CapEx. With how David sort of laid out the view for the company going forward is, what does that mean for capital allocation on your end?

So first thing I'll say that, last year and going into this year, I think you've seen that our CapEx has been slightly elevated. And that's all related to the maintenance bubble that David was talking about. But even in those situations, we've still been very astute in generating free cash flow. I think barring any acquisition opportunities that make sense for us consolidating Inland especially, you should see us continue to do what we've been doing, which is return capital to shareholders. I mean, last year, what we did was 80% of free cash flow was directed towards share repurchases. You should see a majority of the free cash flow going towards share repurchases, even going into this year.

Are there any things as you look out -- and you guys have been pretty clear that the preference for inorganic growth is on the Inland side and not really anything else. But those opportunities are limited to a certain extent. I mean, you have -- what you said 28 other smaller competitors, but it takes two to tango, right? And you're obviously buying back shares. Are there any places where you're like -- you know what, maybe this is a new business that we're not in, but it has synergies or good connectivity with what you're already doing? Or is that just not in the cards?

No, I would say we're going to stay pretty close to our core businesses. That said, if it floats and it's in the U.S., we're probably going to look at it. But you wouldn't see us go too far afield. And we'll give you an anecdote, we had an opportunity to operate some cruise ships in the Inland waterways and I don't know if our captains could deal with a cargo that talks back to, so we decided not to do that.

I wouldn't deal very well with that myself. Alright, so stick to the knitting. So again, this sort of comes to capital allocation, but it also comes to the supply and demand side. And again, let's stick with -- and then although coastal barge could fit here, too. David, you said that supply side is an issue. And the industry, if I'm not wrong, has in terms of the number of barges, has been shrinking for the last 3 years. And still, nobody is ordering anything. And I know you're a little sensitive around the math, but can you give me a sense as to sort of what that gap is between sort of where the market is and where people might start to lose some of that capital discipline?

Yes. I think rates need to be about 40% higher to justify building new equipment right now. The cost of barges has doubled. The cost of towboats has almost doubled. So to get a double-digit return, rates to use a 2 barge tow, day rate as an example, would need to be in the $13,000 to $14,000 a day. Right now, spot rates are more $9,000 to $9,500; term are more like $8,000 to $8,500. So rates have a long way to go before the math works to build. That's really good because we don't want people to build. But we start getting closer to those low teens day rates, and you may see some speculative building. But I think that's 4 to 5 years out. So we've got a good runway. On the coastwise business, it's even more acute. To give you an example, we've built a 185,000-barrel barge unit 5 years ago, and it cost us $80 million. To build that unit today, it would cost about $135 million. And so nobody really is going out to build with those kind of numbers, particularly where rates are. That said, even if somebody wanted to build in the coastwise business, you wouldn't see that barge unit until late '27. So we've got a good runway for both Inland and offshore.

And from the perspective of operating leverage, you talk about rates needing to be 40% higher. What -- there's obviously taxes, but other than taxes, are there any incremental costs that would be associated with a higher day rate at all for you guys?

No. I mean, as you know, we're seeing inflation. I think everybody is seeing inflation, right? We still see wage inflation. There's a shortage of mariners in our industry. So there's a lot of upward pressure on labor rates. Maintenance costs have gone up, particularly because the shipyards -- the maintenance-oriented shipyards are full. We're seeing things like paint and anything electronic is still has a fairly high rate of inflation. So we're still fighting that. But Raj could probably give you a feel for incremental margins with these rates going up. A lot of it falls through...

Yes. If you think about the way I would look at it is, it's not -- to David's point, it's not 100% incrementals, right, because of the inflation. So I would say it's closer to like right now, 60% to 70% probably flow through. One factor that's really driven both the cost of new barges as well as when you look at the maintenance cycle, it's steel. Steel cost has gone up considerably, plate steel that is -- and it hasn't abated. So that building a new barge or even when you go into maintenance, you use a lot of steel. So that has a bearing in terms of the cost of our maintenance.

Okay. So you guys obviously, though by a long shot, the largest share in the tank barge market, a pretty large percentage of the business, even in the distribution and services side, especially in certain geographies. Can you talk to sort of the economies of scale and the secret sauce of why that's important and what makes it unique to Kirby and harder to replicate?

Yes. On the marine side, size matters. We're more likely to have a barge in the right place for a customer than any other operator. Also some of the big customers, the big integrated oil companies, they like to put a lot of business with people that can handle it. And our barge fleet is of the size that we can handle big players, and that's helpful. But I would say the biggest area that we have leverage is -- we operate about 290 towboats. About 60 of those are chartered in. And what we do is we flex up and down with the charter fleet. Our fleet is so large that we can do that -- that we can outsource a piece of it and flex up and down. Others have tried, but they just don't have the flexibility we do. So what we do is if business slacks off, we'll take one of those charter boats and we'll lay it off. We'll just turn it back to the charter owner and that allows us to keep the horsepower as a variable cost somewhat, whereas other businesses, we'll keep it as a fixed cost. So we flex up and down, doing that -- we can do that because of the size of our fleet. We have had other players try it, but they're only doing 1 or 2 boats. And so it doesn't have quite the impact that we have with our size. On the D&S side, we do have some benefits of scale, but it's not like we see on the marine side.

Well, at this point, are there any questions in the room or I'll keep going. I can't see anybody though. Okay. All right. So I'll keep going. Let's -- even though this is a transportation conference, let's spend a little time on the fracking business. It has -- as you guys know, it's been something that institutional investors did not like married with Kirby because it was viewed as highly cyclical and what not. But David, you mentioned this e-frac thing. And maybe talk through where you see that going and how you think that the business fits in with what you do in the rest of Kirby?

Yes. Again, we got into the distribution business because we needed to repair our towboats, so we bought a diesel engine shop. And the towboat, if you think about it as a diesel engine and a gearbox running a propeller -- well a frac unit is a diesel engine with a transmission running a pump. And that's kind of how we got into it. Conventional frac equipment is a diesel engine, transmission and a pump. Right now, with electric frac, what you do -- what we do is, we take a natural gas recip engine, generate electricity, put it all together and then distribute it to an electric pump. So the emissions profile is so much better. And then -- and the cost is cheaper because it's natural gas run engines. So the industry is moving as fast as it can towards electrification of frac equipment. We're at the forefront of it. We've got -- we're on generation 5 of our electric frac. Our first electric frac was built in 2014. So we've got a good history. We've got a great offering out there, so we're seeing demand for that. Conventional frac, there's almost no demand now. One of the things we've done to smooth out earnings and also control the technology of the electric frac is we're leasing some of that frac equipment and it's smoothing out the earnings profile. So try to take some of the volatility out with that by leasing some of the electric fracs. Now the -- I guess the pain point of leasing is that sets some capital tied up on the books. But so far, it's worked out pretty well. We get pretty good, pretty good returns on invested capital on leasing e-fracs.

Okay. So let's move back to the more traditional transportation side. And most people that are here are doing dry cargo, whatever it would be, containerized cargo. You guys are doing exclusively liquids. Well, almost exclusively liquids. Can you talk through some of those end markets a little bit? What are you seeing? And for you guys, it's primarily chemicals, a lot of -- many, many different chemicals, but -- and then refined products and as you even -- you go all the way from high end, I think jet fuel all the way down to asphalt, right? So where are you seeing those industries going in terms of volumes and underlying demand?

Yes. So the largest piece is chemicals, probably 50% to 60% of our fleets moving chemicals. Petrochemicals have been okay. With China being off, we saw a little soft -- little softening last year. But when you look at the U.S. chemical industry, it's got a feedstock advantage here in the U.S. compared to Europe, for example, similar in Asia. So the feedstock advantage the U.S. has is tremendous and all the plants that have been built over the last 5 years, they're also the most efficient in the world in terms of chemical capacity. I think the problem is, and if you look at the multinational chemical companies, they've got European presence, maybe an Asian presence and a U.S. presence. With the war in Ukraine and the energy situation in Europe, those chemical plants are not so efficient. So they've been cutting them back. They can't just shut them down because of labor issues. So they're cutting them back, but they're leaving them running instead of running the U.S. plants full out. And that has impacted us a little bit. Now that said, it's coming back. We're seeing some chemical demand from Asia reemerge and -- so the chemical industry is pretty strong in the U.S., and it's getting a little better, that is what I would say from last year. Refined products, you can look at the refiners, they're all doing very well right now. I think the demand for gasoline and jet fuel, a little less on diesel, we could get your opinions on diesel trucking. But the refiners are doing well. Their volumes are high. We're enjoying a good time on the refinery side. Black oil products like asphalt are steady. You sure wish the building of highways would emerge because that would move a lot more asphalt. But that said, it's stable. I mean, we've seen a little pullback in housing, and roofing tiles are some demand for asphalt, but it's pretty state. Put it all together, it's still -- the liquid volumes are really growing at GDP. [indiscernible] it's -- we prefer a little more growth in chemicals, but it's okay. Demand is solid.

Right. If trucking improves, there's more diesel. There's probably also more engine repair work and [indiscernible] it would be good for you guys. Okay. So this is a question, I think, is going to be coming up more and more over the course of the year. How do you -- do you think -- I mean we're moving into an election season, and it's going to be pretty polarizing. Is there one way or the other that you're positioning the company. I mean you got to be able to go both directions, but is there a risk to Kirby in one direction or the other depending on the outcome of the election, do you think?

No, not appreciably. We benefit from the Jones Act. I don't know if everybody is familiar with the Jones Act, but the Jones Act means that if you move a cargo from one U.S. port to another, it has to be done on a U.S.-built vessel, a U.S. crude vessel and a U.S.-owned vessel and that's the Jones Act. It's been around for over 100 years. Some people view it as protectionist, but it's not. It's really about homeland security and national security. That said, I think Biden is pretty pro Jones Act; Trump, we're not sure. I think he views -- American Jobs as important, but that could be a wildcard, right? If he came in and attacked the Jones Act. That said, there's bipartisan support in both the House and the Senate for the Jones Act. But that would be one of those existential risks that we would worry about. But I don't -- I honestly don't believe he'd be against it, but we really don't know his position.

Just a couple of minutes, anybody, go ahead.

[indiscernible]

Yes, it's a great question. We operate, as I said, 290 towboats and we look hard at alternative fuels. Right now, we burn ultra-low sulfur diesel. We built our first electric towboat and she's operating in Houston, but it's one, right? And it's got a great emissions profile, and we love the electric towboat, but we're ways off. We have looked at burning ammonia and looked at burning methanol. Honestly, ammonia scares me. We move ammonia on the Inland waterways. I think it's -- everybody is familiar with ammonia. It's very hazardous. If you think about an engine room with ammonia, and it becomes a compliance-based entry thing. So we're a little against ammonia just because of the risks. Methanol has a much easier profile to use. But its fuel density is a lot less than diesel. We're working with the engine manufacturers on methanol. We'll see where that goes. Maersk is to use a specific -- I think they're building a dozen methanol-driven and maybe two or three ammonia driven vessels. We'll see -- it's got ways to go, and it's going to take some time. We distribute ammonia and methanol. So we'd be happy with those as alternative fuels. It's just the capital cost of converting our fleet would be in the billions. So that's the issue more than anything is how do we gradually get there or how do we accelerate how we get there. Yes. I'm on the board of and was a founding member of something called the Blue Sky Maritime Coalition and our whole goal is to figure out how to get shipping to net zero carbon. But it's a challenge. It's -- the biggest impediment in my view is the capital cost, the replacement capital cost. It's going to be incremental. So we'll see. I don't know if that answered your question, but it's kind of a long nonanswer.

All right. Well, we are running out of time. I don't know if there are any last questions, but if not, I probably need to stop it here. All right. Well, David and Raj, really appreciate you guys coming out again and always enjoy hearing the Kirby story.

Thanks, Ben.