Kirby Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

Key Takeaways

  • During Q3, revenue increased to $765 million and earnings per share rose to $1.05, up from $746 million and $0.65 a year ago.
  • In the Inland Marine segment, barge utilization was in the high 80% range with mid-single-digit sequential pricing gains, though Illinois River lock closures and weather delays limited ton-mile growth.
  • Coastal transportation saw spot rates climb mid single-digits sequentially and low 30% year-over-year with utilization in the mid-90% range, but margins were near breakeven due to planned shipyard maintenance.
  • The Distribution & Services segment delivered 7% revenue growth year-over-year and nearly 10% operating margin, with commercial industrial demand offsetting oil and gas supply chain delays that delayed some equipment deliveries.
  • The company ended Q3 with $42 million of cash, $451 million in total available liquidity, and expects to generate $100–150 million in free cash flow this year, which it plans to use primarily for share repurchases.
AI Generated. May Contain Errors.
Earnings Conference Call
Kirby Q3 2023
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Kirby Corporation 2023 Third Quarter Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. We ask that you limit your question to one question and one follow-up. I would now like to turn the conference call over to Mr.

Operator

Curt Nimitz, Kirby's VP of Investor Relations and Treasurer. Please go ahead.

Speaker 1

Good morning, and thank you for joining us. With me today are David Brzezinski, Kirby's President and Chief Executive Officer and Raj Kumar, Kirby's Executive Vice President and Chief Financial Officer. A slide presentation for today's conference call as well as the earnings release, which was issued earlier today can

Speaker 2

be found on our website.

Speaker 1

During this conference call, we may refer to certain non GAAP or adjusted financial measures. Reconciliations of the non GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available on our website in the Investor Relations section under Financials. As a reminder, statements contained in Conference call with respect to the future are forward looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated as a result of various factors.

Speaker 1

A list of these risk factors can be found in Kirby's Form 10 ks for the year ended December 31, 2022, and in our other filings made with the SEC from time to time. I will now turn the call over to David.

Speaker 3

Thank you, Curt, and good morning, everyone. Earlier today, we announced 3rd quarter revenue of $765,000,000 and earnings per share of $1.05 This compares to 2022 3rd quarter revenue of $746,000,000 and earnings of $0.65 per share. Both of our segments continued to perform well during the quarter despite facing some temporary challenges. In Marine Transportation, Pricing on spot and term contracts continued to benefit from strong demand and limited availability of barges, but results were impacted by the Illinois River lock closure and several refinery outages during the quarter. Distribution and services delivered improved margins even as we continued to work through supply chain challenges during the quarter.

Speaker 3

Overall, our earnings increased sequentially and year over year and we continued to repurchase stock during the quarter. In Inland Marine Transportation, our 3rd quarter results reflected continued improvement in pricing, partially offset by The headwinds from the Illinois River closure that I mentioned as well as the refinery outages in the quarter. From a demand standpoint, Customer activity remained strong in the quarter with barge utilization running in the high 80% range. Stock market prices continue to progress higher and were up in the mid single digit sequentially and in the mid teens range year over year. Term contract prices also renewed at higher rates with high single digit increases versus a year ago.

Speaker 3

Margins were in the high teens. In coastal, market fundamentals accelerated with solid customer demand And limited availability of large capacity vessels resulting in spot prices increasing in the mid single digits sequentially and in the low 30% range year over year. During the quarter, our barge utilization in Coastal continued to run in the mid-ninety percent range. As mentioned before, our results this year are being impacted by planned Shipyard maintenance on several large vessels, which led to an overall decrease in 3rd quarter coastal revenues And operating margins just below breakeven. In Distribution and Services, Demand remains strong across our markets with steady levels of service and repair work combined with high levels of backlog.

Speaker 3

In our commercial and industrial market, overall demand remains solid across our different businesses With growth coming from the marine repair, power generation and on highway sectors. In oil and gas, Revenues were down as we continue to manage through persistent supply chain issues, particularly With electrical and electronic componentry, which delayed many new equipment deliveries during the quarter. We continue to work diligently to manage these supply challenges. Even with the decline in revenues, operating income And oil and gas was up both sequentially and year over year, driven by favorable product mix And operating efficiencies. Overall, revenues were up 7% year over year and operating margins improved to just under 10%.

Speaker 3

In summary, our Q3 results reflected ongoing strength in market conditions for both segments. Despite the temporary headwinds in the quarter, the inland market is strong and rates continue to push higher, helping to offset lingering inflation. While our coastal revenue remains challenged near term by planned shipyards, industry wide supply demand dynamics Remain very favorable. Our barge utilization is good and we are realizing healthy rate increases. Betty demand in distribution and services is contributing to further growth in the segment and while supply chain bottlenecks are expected, The outlook for the market is strong.

Speaker 3

I'll talk more about our outlook later, but first I'll turn the call over to Raj to discuss The 3rd quarter segment results and the balance sheet.

Speaker 2

Thank you, David, and good morning, everyone. In the Q3 of 2023, Marine Transportation segment revenues were $430,000,000 and operating income was $64,000,000 with an operating margin of 15%. Compared to the Q3 of 2022, total marine revenues decreased by $3,000,000 or 1%, while operating income increased $22,000,000 or 52%. Increased pricing And improved operating efficiencies in the inland market were partially offset by lower inland utilization due to the Illinois River closure, some refinery outages and coastal shipyards. Compared to the Q2 of 2023, Total marine revenues, inland and coastal together, increased 1%, while operating income was flat.

Speaker 2

Looking at the inland business in more detail. The inland business contributed approximately 82% of segment revenue. Average barge utilization was in the high 80% range for the quarter. With the reopening of the Illinois River, our utilization has moved into the low 90% range as we begin The Q4. Long term inland marine transportation contracts, or those contracts with a term of 1 year or longer, Contributed approximately 55% of revenue with 66% from time charters and 34% from contracts of affreightment.

Speaker 2

Tight market conditions contributed to spot market rates increasing sequentially in the mid single digits and in the mid teens range year over year. Term contracts that renewed during the Q3 were on average up in the high single digits compared to the prior year. Compared to the Q3 of 2022, inland revenues increased by 2% primarily due to higher term and spot contract pricing. Inland revenues were up 1% compared to the Q2 of 2023 As higher pricing was partially offset by lower utilization given the Illinois River closure, inland operating margins were in the high teens during the quarter with the benefit of higher pricing partially offset by lower utilization. Now moving to the coastal business.

Speaker 2

Postal revenues decreased 13% year over year and were up 1% sequentially as downtime from planned shipyards was partially offset by higher contract prices and improved barge utilization. Overall, Coastal had near breakeven operating margins as improved pricing was offset by increased shipyard days. The coastal business represented 18% of revenues for the marine transportation segment. Average coastal barge utilization was in the mid-ninety percent range, which compares to the low to mid-ninety percent range in the Q3 of 2022. During the quarter, the percentage of coastal revenue under term contracts was approximately 90%, of which approximately 90% were time charters.

Speaker 2

Average spot market rates were up in the mid single digits sequentially In the low 30% range year over year and prices on term contract renewals were up in the low double digits year over year. With respect to our tank barge fleet for both the inland and coastal businesses, we have provided a reconciliation of the changes in the 3rd quarter as well as projections for the remainder of 2023. This is included in our earnings call presentation posted on our website. At the end of the Q3, the inland fleet had 10.71 barges representing 23,600,000 barrels of capacity. On a net basis, we currently expect to end 2023 With a total of 10.73 inland barges representing 23,600,000 barrels of capacity driven by a modest number of reactivations in the Q4.

Speaker 2

Now I'll review the performance of the Distribution and Services segment. Revenues for the Q3 of 2023 were $335,000,000 with operating income of $33,000,000 and an operating margin around 10%. Compared to the Q3 of 2022, the Distribution and Services segment saw revenues increase by $22,100,000 or 7% with operating income increasing by $10,900,000 or 49%. When compared to the Q2 of 2023, Revenues decreased by $15,000,000 or 4% and operating income increased by $3,000,000 or 11%. On the commercial and industrial market, strong activity contributed to a 28% year over year and 17% sequential increase In revenues with improved demand for equipment, parts and service in our marine repair and on highway businesses.

Speaker 2

Power generation was also up year over year. Overall, the commercial and industrial business represented approximately 63% of segment revenue and had an operating margin in the high single digits in the 3rd quarter. In the oil and gas market, revenues were down 16% year on year and 27% sequentially. We continue to manage through supply chain bottlenecks, especially in our manufacturing business, which led to shipment delays in the quarter. Despite these issues, the manufacturing business experienced continued favorable trends in new orders and backlog driven by our e frac units and associated power generation equipment.

Speaker 2

Overall, oil and gas represented approximately 37% of segment revenue in the 3rd quarter and had operating margins in the low double digits. Now I'll turn to the balance sheet. As of September 30, 2023, we had $42,000,000 of cash with total debt just over $1,000,000,000 During the quarter, we increased our debt balance by $69,000,000 and our debt to cap ratio increased to 25.3%. During the quarter, we had net cash flow from operating activities of 96,300,000 We used cash flow and cash on hand to fund $104,000,000 of capital expenditures, of which $50,000,000 was related to maintenance of equipment and the remainder was directed to growth CapEx in Marine and e Frac. We continued to return capital to shareholders in the quarter and repurchased $23,300,000 of stock at an average price of around $80.31 As of September 30, we had total available liquidity of approximately $451,000,000 With respect to cash flow, depending on the timing on working capital, We would likely expect to generate close to $475,000,000 to $525,000,000 of operating cash flow and $100,000,000 to $150,000,000 in free cash flow this year.

Speaker 2

We are committed to a balanced capital allocation approach and we expect to use most of this free cash flow to continue to repurchase stock. I will now turn the call back to David to discuss the remainder of our outlook for the Q4. Thank you, Raj.

Speaker 3

We had a good quarter with both our businesses performing well despite some temporary headwinds. Refinery activity remains at high levels. Our barge utilization is strong in both inland and coastal and rates are steadily increasing. While we expect some near term issues in the Q4 related to low water conditions on the Mississippi River, Increasing delay days due to normal seasonal weather and high levels of shipyard activity in coastal, Our outlook in the marine market remains strong. In Distribution and Services, despite ongoing supply chain constraints and delays, Demand for our products and services is good and we continue to receive new orders in manufacturing.

Speaker 3

Overall, we expect our businesses to deliver improved financial results in 2024. While all of this is encouraging, we are mindful of challenges related to a slowing global economy, geopolitical unrest and additional economic weakness due to high Interest rates. Even with these uncertainties, we remain very positive and expect to drive strong cash flow from operations going forward. Diving into the businesses in more detail, I'll start with inland. Favorable conditions are expected to continue going forward, driven by the combination of high refinery and petrochemical plant utilization and minimal new barge construction across the industry.

Speaker 3

Kirby expects these strengths to be partially offset by increasing delay days due to normal seasonal weather that we generally see in the Q4 and we also expect the low water conditions on the Mississippi River to have an impact. And further, there are some inefficiencies remaining with some lock maintenance in Louisiana. The company still expects further improvement in spot market prices, which currently represent approximately 45% of inland revenues. Current contracts are also expected to continue to reset higher. Overall, 4th quarter inland revenues are expected to be roughly flat sequentially with a modest improvement in margins And we still expect to end the year close to 20%, if not at 20% margin.

Speaker 3

In the coastal market, conditions have tightened considerably and the industry is close to supply and demand balance across the fleet. As we've discussed, our coastal revenues and operating margins continue to be impacted this year By an approximate doubling of planned shipyard maintenance days and ballast water treatment installations on certain vessels. Hervey expects steady customer demand through the balance of the year with barge utilization in the low to mid 90% range. Rates are expected to continue improving as the availability of equipment is tight across the industry. For the Q4, coastal revenues are expected to be up in the low to mid single digits compared to the 2023 Q3 As we continue to progress through major shipyards, however, there is some possibility of the shipyards Extending into early 2024.

Speaker 3

Postal operating margins are expected to be near breakeven So low single digits on a full year basis. Moving to Distribution and Services. Steady demand in commercial and industrial and favorable oilfield fundamentals are expected to continue throughout the remainder of 2023 and into 2024. And commercial and industrial steady markets are expected to remain in the 4th quarter with incremental activity in power generation, marine repair and on the highway. This activity should be partially offset by lower rental equipment activity as the hurricane season winds down.

Speaker 3

That will create a slight headwind to margins. In the oil and gas market, despite the near term volatility in Within manufacturing, the company expects demand for environmentally friendly Pressure Pumping and e Frac Power Generation equipment to remain strong with new orders and increased deliveries of new equipment for the remainder of the year and into 2024. Supply chain issues and long lead times are expected to persist in the near term, contributing to some volatility of deliveries and potentially shifting some deliveries from the Q4 into next year. Overall, the company expects 4th quarter segment revenues to be up in the low to mid single digits sequentially with Lower operating margins impacted by mix and dropping into the mid to high single digit range from the To conclude, both our segments performed well during the quarter in the face of some temporary challenges and our team executed well on near term objectives as well as on our long term strategy. Our balance sheet is very strong and we expect to generate significant free cash flow in coming quarters and we expect to use free cash flow for share repurchases, debt repayment as well as opportunistic growth projects.

Speaker 3

Although we see Favorable markets continuing and expect our businesses will produce improving financial results as we head into 2024. We are closely monitoring the potential for a recession as well as the potential short term weather and low water related impacts in our Marine business. Having said that, as we look long term, we are confident in the strength of our core businesses and our long term strategy. Our Marine businesses are in the early innings of a multiple year recovery and demand remains solid in distribution and Services despite recent macro headwinds. We intend to continue capitalizing on strong market fundamentals And driving value for the shareholders.

Speaker 3

Operator, this concludes our prepared remarks. We are now ready to take questions.

Operator

Thank you. At this time, we will conduct a question and answer session. Please standby while we compile the Q and A roster. Our first question comes from Ben Nolan of Stifel. Ben, your line is open.

Speaker 4

Thank you. Good morning, David and Raj. So

Speaker 5

Hi, good morning, Ben.

Speaker 4

Hi. So for my first question, I wanted to ask a little bit on the inland side. Well, actually inland and coastal. We've gone through a number of years now with very little in the way of ordering activity. And I know that You guys have been pretty vocal about saying the economics for new equipment still don't line up.

Speaker 4

But at some point, the industry is going to need Some replacement CapEx. Can you maybe put a little color around that and how you think about it with respect to your own fleet?

Speaker 5

Yes, Ben. Thanks for the question and good morning. Yes, look, the cost of new equipment, as you know, has Pretty much doubled in the last 5 years. Steel prices are up, labor input costs are up, paint up, Just skilled labor for welding is up. Radars and electronics on boats are up.

Speaker 5

Just about everything, high performance line on the towboats are up 60%, 70%. So all the input costs have gone up. So if you take like a 2 barge tow, the $4,000,000 per barge, that's $8,000,000 and then you put a $6,000,000 to $7,000,000 Tow boat with it, you're talking about $15,000,000 worth of capital equipment for a 2 barge tow and to get a 12% Or a 10% type return on that equipment, you'd need north of $13,000 a day now. So It doesn't make sense for anybody to build right now. Rates need to come up and they need to keep going up.

Speaker 5

We're still fighting inflation. So I just don't see anybody jumping to build in this environment until those rates Start to really get up there, and that's when you'll start to see it. Now the other part of the equation, as we talked before about, Just the cost of borrowing money right now has gone up a lot. I would say it used to be about 3%, 4% if you were using Sure. Financing now, I would imagine a smaller company would have to pay north of 10% to get to borrow money and then you're losing bonus depreciation.

Speaker 5

So building equipment in that environment With the cost of debt being almost double digit, it may be well above $13,000 a day to justify it. Could be even higher, maybe 14%. But it's all about the cost picture. Now that said, we are You are seeing some equipment that was tied up during COVID come off the bank. Some of it It will never come off the bank, but you'll see us reactivating.

Speaker 5

You probably, I think Raj gave an estimate that we're reactivating a handful Before year end here, we're almost done reactivating our laid up fleet. But I would imagine as equipment continues to get tight and You're not building a whole new set of equipment. People will if the numbers can work, we'll start to bring some stuff off the bank. But That's only maybe 2% to 3% that could come off the bank, if that, it may already have been off the bank. So It's a long way of saying, I just don't see building for another year or 2, depending on how fast rates go.

Speaker 5

It's pretty in check right now. I think, I don't know, we since we last updated you guys on the call here, I think we There were 22 barges being built this year. We got an update and it's 27 barges. Now retirements will be high this year. With the maintenance bubble, as you start to bring older equipment in for these big heavy maintenance shipyards, you look at the cost and you say, well, I'm not going Put $2,000,000 into a 25 year old barge.

Speaker 5

I'll just retire it. So you could see retirements be A little more than we expected. It could be north of 75, but we don't have a good handle on that. We only know what we're retiring. It's hard to say what the industry is retiring.

Speaker 5

So that's a long drawn out answer, Ben, but I don't see anybody building For a couple of years based on just based on the economics right now.

Speaker 2

And then Ben, I'll just add on the coastal side, To David's point, we're not seeing any building. And if you were to build, the lead times are going to take you into the 2027 timeframe.

Speaker 4

Right. Well, I appreciate that you guys answered a lot of questions in that one question there. My second one though, If I could move over to the D and S side, it seems like some of these supply chain issues are persistent and We're not hearing that as much from other places. I'm curious if that is pushing sales into next year and sort of What line of sight you have for the D and S business going into 2024? Appreciating that you haven't given guidance on that yet, but just Looking to understand how you feel about sort of what's already in the bag for next year.

Speaker 4

And then maybe, David, I know that you and I have talked about the, the voltigrid stuff a little bit. Curious how that is playing out and if Maybe you could give a little color on that with nd and s.

Speaker 5

Sure. Yes, supply chain, I don't want to overstate the Supply chain woes, but it's almost it's hit and miss. We can have problems getting Variable frequency drives and then it will clear up for a while, then it may come back. We might have problems getting some electric componentry and then it will start To deliver, but it has improved in some areas and A few months later, it goes back again the other way. I will say this, some of our engine suppliers, for example, We can't get engines until 2025 in some cases.

Speaker 5

So, there are still some heavy Headwinds there. That said, we are seeing on parts for engines, that's getting better. We do a lot of repair work, as you know, Ben, so we are seeing some improvement there. I would just say it's bouncing around. It is on the margin better than it has been, but it's It's still impacting us a bit.

Speaker 5

We did say in our prepared remarks that you could see Some shipments in the 4th quarter shift into the 2024. But by and large, it's more of the same, I guess, is What I would say in terms of supply chain and shipments, and you'll see it bounce around a bit.

Speaker 4

Okay. And on VoltGrid,

Speaker 5

Yes. VoltaGrid, for those not familiar, VoltaGrid is one of our customers. We don't like to talk About direct customers, but they provide power by the hour, not only to the frac space, but other places in industry, and we build a lot of their equipment. They continue To expand and to build, we continue to get orders from them. They're a world class organization And growing well.

Speaker 5

Probably best for me not to give you much more detail than that.

Speaker 4

All right. I appreciate it. Thanks, Dave and Roger.

Speaker 5

Thanks, Ben.

Operator

Thank you. Stand by for our next caller, please. Our next call comes from Ken Hoexter of Bank of America. Ken, your line is open.

Speaker 6

Hi, thank you. This is Nathan Donley in for Kinhexxer. Congratulations on the great quarter. My question is on the inland marine side. So seeing that ton miles are down 3Q, 11% on partly some of the factors the teams mentioned.

Speaker 6

I noticed the call out on Mississippi water levels and some of the lock delay days based off of weather and just wanted to get a scale on What that represents in terms of an operating challenge from a volume perspective? Should we assume somewhat of a similar level of decline this quarter versus the last.

Speaker 5

Yes. Hey, good morning, Nathan. Thanks for the questions. Yes. Your note on the ton miles is a good one, and we should elaborate on that.

Speaker 5

As you know, the Illinois was closed. If you think about what we do on the Illinois, it's usually taking barges from the Gulf Coast all the way up Illinois and sometimes into Chicago, that's a long journey and generates a lot of ton miles. And When the Illinois closed, there's a lot less ton miles just from that. The other thing is crude. We move a lot of Crude condensate from the Northeast from the Utica and the Marcellus, and those are pretty gassy Fields and so when they're when gas prices are low, they're not producing as much condensate.

Speaker 5

And so we don't get those crude moves All the way from the Ohio Valley down to the Gulf Coast. So that's fewer ton miles. That said, we're still pretty busy. As you heard, our utilization was Good. So if you look at revenue per ton mile, it's up.

Speaker 5

That's because we're busy in other parts of the system. We have something we call a cross channel, which may be just taking a barge from one part of Houston to another part of Houston, which could tie up the barge for days, but there's a lot of revenue, but not many miles in that. So You got to be careful with ton miles and revenue per ton mile. And as you correctly noted, Illinois had an impact on that. Now Illinois is back open.

Speaker 5

We started deploying barges in October. So that's starting to pick back up. And we're still impacted because it takes a while to get all that equipment moving again and get it upriver. But we do have lock delays. There's A major lock in the New Orleans area that's closed and it's causing routes to be rerouted and diverted and that's adding Some back some delays into the system, but we're working through that.

Speaker 5

That's normal. I would say what is different is the low water on the Mississippi, it got to a record low again. That said, we got some rain in the Ohio Valley just last week, which May help out a bit. In the past, I think when we had record lows, it cost us about 0 point 0 $2 to 0.3 Since $0.02 to $0.05 in a quarter. This should be less than that, but it's hard to say right now.

Speaker 5

We're watching it. Yes,

Speaker 2

the order

Speaker 5

of magnitude is probably in that 2 well, it's going to be in that range $0.02 to $0.05 but Feels like this should be less than that, but given the recent rain, hard to say. It's trying to predict weather and see where that all plays out. Hopefully that answered the question Nathan.

Speaker 6

No, that does. Thanks a bunch, Steve. And I guess my next question is just sort of a little more big picture. Trying to understand how the team is looking at the contract exposure side of things, particularly in inland. I see that you've mentioned that roughly it's currently more or less around half the book right now, but Historically, this could trend well into the 80s.

Speaker 6

I mean, we're talking about historically tight vessel capacity and strong demand. Could we see this sort of locking in of current rates kind of ramp gradually higher into the next couple of years?

Speaker 5

Yes. No, good observation here. As you've noted, we're about 55% Term and 45% spot. And I would just say, directionally, we don't mind having a big spot exposure. We do that kind of on purpose, especially in a rising rate environment.

Speaker 5

Sequentially, we saw inland rates up mid single digits. Year over year, spot rates were up mid teens. So we're enjoying our spot position. I will say this to your point, customers are they're well aware of the maintenance bubble. And we're seeing a little push to Extending and maybe terming up more equipment or getting longer spot deals.

Speaker 5

We call it a spot deal Something less than a year, instead of 1 month deal, they might be doing 3 months or 6 months deals. Now they're starting to get a little nervous about this maintenance bubble, because the spot market is very, very tight right now.

Speaker 6

Makes sense. Thanks for the comments, Dave.

Speaker 7

Thanks, Nathan.

Operator

Thank you very much. One moment for our next caller. Our next call comes from Jack Atkins of Stephens Inc. Jack, your line is open.

Speaker 8

Okay, great. Good morning, everybody. Thanks for taking my questions.

Speaker 5

Hey, good morning,

Speaker 8

Jack. So David, I'd like to maybe go back to Ben's first question, if I could. It was sort of a capacity question, but maybe ask it in a different way. I mean, I think historically, There's been a lot of focus around new barge construction and relative to retirements and the impact that could have on Capacity or not. But I guess one big piece of capacity is also the ability to get mariners to crew your boats.

Speaker 8

And Could you maybe talk about that as a capacity constraint? Because what we're hearing through the channel is that's as Challenging in terms of hiring qualified folks to operate your boats as maybe be able to build a barge. So that's a limiter for capacity as well, but I wanted to maybe get your thoughts on that.

Speaker 5

No, I mean, that's an excellent point. Horsepower, as you know, is how we move the barges and we've got to crew these vessels. And we've seen A very, very tight labor market. It's been hard to get crews. Fortunately, Kirby has got our own school.

Speaker 5

So We anticipated some of this and started the school basically almost 2 years ago, ramping up even as COVID was going on. We're doing okay. We're short mariners. I'll be honest, we're short mariners, but we're able to crew our vessels right now. A lot of Mariner's working a little overtime to help do that, which is good.

Speaker 5

They're good team players. But it is absolutely a factor in the tightness in the market. There is just not a lot of available horsepower, which is making it really tight. So you've got tight barge availability and tight boat availability and that just As you would imagine, makes it even more difficult to get moves going. So thanks for bringing that up.

Speaker 5

It's a good point. We don't talk about it a lot, But it is a major factor. And that's part of the inflation picture, right? I mean, there's some labor inflation. We've been dealing with that, and part of it is because we're short mariners in the whole ecosystem.

Speaker 8

Yes. Okay. That makes sense. I just wanted to kind of get your thoughts on that piece. And then I guess just as we kind of think about The bigger picture, this is maybe a 2 part question, but both as it relates to sort of your Q4 outlook And then kind of longer term going into 2024, I guess, has the when you think about relative to 3 months ago, has 4th quarter outlook changed at all?

Speaker 8

And if so, is that really kind of tied purely to the water levels? Or is there anything else going on there in terms of Customer demand and maybe that will give you a chance to talk about just the output that you're seeing from some of your key customer groups within inland.

Speaker 5

No, the 4th quarter outlook hasn't changed a lot. If anything, it's got a little better, because We're tighter than we I mean, you always deal with weather in the Q4 and we're starting to see it. And As you know, Jack, fog is as bad as low water. It's actually worse because Mississippi is only about 20% to 25% of our volume. But the Gulf Coast, where we're very active, a fog day can really bog down the fleet.

Speaker 5

And we always see that in the Q4. That said, weather does tighten up utility too, right? I mean, you're just not moving as efficiently. So it does tighten up utility. I would say, if anything, it's as expected, maybe marginally better just because we're so tight On spot, now that Illinois is open back up, the Low River, that's a little bit of a headwind because You have to run lower drafts.

Speaker 5

You have to be careful and wait for dredges and things like that. So Yes, it's all it's calling all in our outlook for now. But I think what's important is We're heading into a contract renewal period in the Q4. As you know, that's usually a pretty heavy Contract renewal time and the market's tight. Our customers are sophisticated.

Speaker 5

They know it's tight. They know there's maintenance bubbles there. So we feel we're pretty energized about the outlook. It's too hard it's too early to talk about 2024 yet, but it certainly feels good going into the major contact

Speaker 8

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

Speaker 5

Thanks, Jack.

Operator

Thank you. Our next Call comes from John Daniel of Daniel Energy Partners. John, your line is open.

Speaker 7

Hey, David. Thank you for including me.

Speaker 2

Hey, John.

Speaker 7

I got just one question on the environmentally frac equipment. Would you characterize the interest, not orders, the interest As accelerating or stable right now? And then also, is it coming from a broader customer base or is it the same customers?

Speaker 5

It is broader.

Speaker 6

Okay.

Speaker 5

It is broader. And I would say Accelerating, maybe too strong of a word, but improving. I wouldn't say accelerating because that makes it sound Like it's a huge ramp, but it is improving. The interest is improving. I mean, John, you know this better than anybody that the efficiencies you get with E Frac Are so pronounced and so good for not only our customers, the pressure pumpers, but the E and P companies, The savings is there.

Speaker 5

And obviously, everybody likes the ESG benefits, but the operational savings It's so significant. And I think and you should tell us because you know the customers As well as we do, but I think you're just going to see continued building of e frac And conventional frac, you won't see much of going forward in terms of new builds.

Speaker 7

No. I tend to agree. There's a lot of stuff that needs to be replaced out there.

Speaker 5

Yes. Well, the only other thing I would say on you say accelerating, but we're seeing some interest internationally now 2 on frac, on e frac. So, I would say that's kind of new to the game.

Speaker 7

Would you be willing to share which markets are the most interested? I understand you don't want to.

Speaker 2

Yes. Well, I think As Dave mentioned, it's

Speaker 5

the Middle East. Yes.

Speaker 7

Okay, fair enough. All right. On the supply chain constraints, the electronic components,

Speaker 2

Do you

Speaker 7

have any more color you could add us like what's really driving that? Are they diverting supply to other sectors? Or they just can't make it fast enough?

Speaker 5

Yes, it's the latter. They can't make it fast enough. We buy I don't want to name the vendor because everyone would not be Nice, but we buy variable frequency drives, for example, from Scandinavian area and they just can't make it fast enough, Which is an interesting dilemma. Sometimes you get enclosures that back up and that's you would think that's You don't want to call it dumb iron, but you would think enclosures wouldn't be a problem, but that gets backed up.

Speaker 7

Interesting. Okay.

Speaker 5

All kinds of different electric componentry and things around electrics seems to be backing up. And John, you know this. If you look at all the data centers going up and now you've got things like chat, GPT and AI, And just we've seen another surge for backup power, whether it's at data centers or whatnot. We use that same equipment in generating electricity for the frac spreads. So it's there's just a lot of demand in the system and That's what's going on.

Speaker 5

It's usually just electric or electronic related.

Speaker 7

Okay. Well, that's very helpful and I appreciate you letting me Ask some questions today. Thank you.

Speaker 5

Sure, John. Thanks. Take care.

Operator

Yes, sir. Thank you. One moment for our next question. Our next question comes from Greg Wazakowski of Weber Research and Advisory. Greg, your line is open.

Speaker 9

Hey, David and Raj. Good morning. How are you guys doing?

Speaker 5

Hey, good morning, Greg.

Speaker 1

Hey, so

Speaker 9

I wanted to check-in on that Chunk of term contracts that rolls over in Q4. I know it's early days here, but I wanted to see how would you characterize your initial And your level of confidence when looking into Q4 right now, say, versus your expectations and level of confidence last year and the year before?

Speaker 5

Yes. Well, last year, we didn't we were still recovering a little bit from COVID. So This year is much, much better environment than last year. Last year was good, don't get me wrong, but we were still, hey, is COVID really gone? Is the market really coming back?

Speaker 5

Are the volumes on the river coming back? So and we did see it come back. And of course, Q1 of this year, we had some pretty tough weather conditions and whatnot. So I would say contract renewals feel better this year. I want to use the word significantly better, but They certainly feel better.

Speaker 5

It's a tight market. This maintenance bubble is real. Our customers have lots of volumes to move and you can look at the share buybacks Among our customer base and it tells you how good they're doing, right? So, yes, the barge cost to them in terms of Moving refined products or chemicals is nothing and they should be generous.

Speaker 9

Understood. Okay. Thanks, David. And then, can you talk a little bit more about your power generation fleet in Q3 and Q4 so far. I'm just curious how demand compared to last Your relative to the severity and the frequency of storms of last year versus this year, maybe remind us operationally, do customers essentially have Is standing annual rental agreements regardless of what the storm activity really is or would increase

Speaker 5

Yes. It's usually a stand every customer is a little different, Greg. It's usually a standby fee during hurricane season. And then if we deploy, the rates go up a lot. It was a mild hurricane season this year, thank goodness, because that impacts our marine But we kept pretty busy with the rental fee because everybody has gotten smart about putting stuff on standby and paying us for it.

Speaker 5

But as we exit the hurricane season, that tapers off a bit, as you would expect. I would just tell you that the general theme is This, every company knows they need power 20 fourseven and they've gotten smarter and smarter and smarter about having backup power Options, we do also sell backup power all over the place. We sell backup Power generation equipment to data centers, we sell it to banks and financial institutions, we sell it to hospitals. And that's part of What's helping KDS do better is our power generation business and manufacturing or assembling that Kind of equipment and delivering it to institutions that really Don't want to take a chance with not having power.

Speaker 9

Yes, got it. Okay. Thanks, David. Hope you're doing well with your Astros.

Speaker 5

Well, you know the answer to that question, but At least there's another Texas team that's in. Yes.

Speaker 9

That's right. That's right.

Speaker 5

All right. Thanks, Greg. Yes.

Operator

Thank you. As there is no further questions, this concludes our question and answer session. And I would now like to turn the conference back over to Mr. Curt Nimitz for any closing remarks.

Speaker 1

Thank you, Corey, and thank you everyone for joining us on the call today. If there's any follow-up questions, please reach out to me anytime today.

Operator

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

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