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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to the Kirby Corporation 2021 Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. We ask that you please limit your questions to one question and one follow-up. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Mr. Eric Holcomb, Kirby’s Vice President of Investor Relations. Please go ahead.
Good morning and thank you for joining us. With me today are David Grzebinski, Kirby’s President and Chief Executive Officer; and Bill Harvey, Kirby’s Executive Vice President and Chief Financial Officer. A slide presentation for today’s conference call as well as the earnings release, which was issued earlier today, can be found on our website at kirbycorp.com. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available on our website in the Investor Relations section under Financials.
As a reminder, statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management’s reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated as a result of various factors, including the impact of the COVID-19 pandemic and the related response of governments on global and regional market conditions and the company’s businesses. A list of these risk factors can be found on Kirby’s Form 10-K for the year ended December 31, 2020.
I will now turn the call over to David.
Thank you, Eric, and good morning everyone. Earlier today, we announced the adjusted earnings of $0.17 per share for the 2021 third quarter, which excludes a one-time non-cash charge totaling $4.58 per share related to our coastal marine business. On a GAAP basis, we reported a net loss of $4.41 per share. Overall, our quarter was messy with the one-time charge in coastal, a devastating hurricane, which significantly impacted our inland marine business and increased issues related to COVID-19. We’ll talk more about each of these, including the one-time charge, in a few moments, but first I’ll discuss our key markets.
In marine transportation, our inland business started the quarter with improving customer demand. In August, however, barge volumes declined as the cases of the COVID-19 Delta variant increased, which slowed the pace of the economic recovery and reduced demand for refined products and crude. Vehicle miles traveled in the U.S. declined, including an overall 4.4% decline in August with all regions of the U.S. impacted. In our operations, we experienced a meaningful rise in positive cases among our mariners. As a result, we incurred increased costs to charter additional horsepower during the quarter to ensure our operations were seamless.
Our inland business was also materially impacted by Hurricane Ida, a significant category four storm, which made landfall near New Orleans in late August. This storm left a widespread path of destruction, which led to prolonged shutdowns of many customer plants, as well as significant damage to marine equipment and waterway infrastructure. As this storm approached, all refineries and chemical plants in the New Orleans, Baton Rouge corridor, were forced into shutdowns. The storm damage was so significant that many remain closed or operating at reduced production levels through September and in some cases well into October. At the height of the storm, more than 2 million barrels of refinery capacity per day was offline reducing Pad III refinery utilization from 93% in August to 79% in September. And the petrochemical sector with nearly the entire complex shutdown operating rates at nameplate ethylene plants in the Southeast excuse me, in Southeast Louisiana declined from 89% in August to 24% in September and production fell as much as 75% compared to August.
From a marine transportation perspective, the storm surge was so significant. The Mississippi River flowed backwards causing many industry barges to break free and resulting in damage to numerous vessels, customer docks and waterway infrastructure. It’s been estimated that as many as 2,000 dry cargo and tank barges were damaged during the storm, which included 30 Kirby tank barges. All of this resulted in a full closure of the Mississippi River for about a week and a lengthy closure of parts of the Gulf Intercostal Waterway, which remains in effect today. This closure has resulted in lengthy alternative routes and significant lock delays throughout September and October. Overall, we estimate that damage caused by the hurricane on our equipment directly contributed to lost revenue and additional costs totaling approximately $0.08 per share during the third quarter.
Moving to coastal, the market remain challenging during the third quarter, but we did experienced some increases in spot market demand, which contributed to modest increases in barge utilization and reduced operating losses. More importantly, we took significant actions to improve our coastal business, including the sale of our marine transportation assets in Hawaii and the retirement of 12 laid up wire tank barges and four tugboats in the coastal fleet. These actions resulted in a one-time non-cash impairment charge in the third quarter. However, there are significant positives and it positions the coastal business for success going forward.
First, our risk profile is greatly reduced by exiting Hawaii, which is a remote market that has generated poor returns for many years. The retirement of our outdated and laid-up coastal wire barges and tugboats improves our cost structure and materially reduces future capital outlays. Frankly, many of our customers view the old wire tow technology as less safe and less reliable when compared to newer ATBs. Overall, going forward, we expect our smaller fleet will allow us to focus on attractive markets and more efficient, safe, and cost competitive equipment will ultimately generate improved earnings and favorable returns. In distribution and services, momentum continued to build with improved activity levels contributing to significant sequential and year-on-year increases in revenues and operating margins.
In commercial and industrial, the timing of major backup power installations and seasonal utilization improvements in the rental fleet led to strong sequential activity in power generation. Increased demand for Thermo King product sales and service also contributed favorably to the quarter’s results. These gains were partially offset by modest activity reductions in marine repair, primarily due to reduced major overhauls and temporary facility closures following Hurricane Ida. In oil and gas, increasing U.S. rig counts and completions activity drove strong incremental demand for new transmissions parts and service from major oil field customers. This growth contributed to 25% sequential growth in oil and gas revenues and positive operating margins for the first time in more than two years.
In manufacturing, although supply chain constraints delayed the deliveries of several orders and led to a sequential reduction in revenues, our backlog grew meaningfully with significant new demand for our environmentally, friendly pressure pumping and electric power generation equipment.
In October, Kirby acquired a small energy storage systems manufacturer based in Texas, which has been a key partner in the development of our new power generation solutions for electric fracturing equipment. This acquisition will be important to the development of future energy storage solutions for the oil field, as well as industrial and marine transportation applications.
In summary, our third quarter results reflected a challenging environment as well as key operating decisions in coastal marine. The good news is that we have seen a significant improvement in inland market fundamentals in recent weeks with increasing customer demand and higher barge utilization in the high 80% range.
Distribution and services also continues to improve with the economy. In a few moments, I’ll talk more about these developments as well as the rest of our outlook. But first, I’ll turn the call over to Bill to discuss more about the one-time charge as well as our segment results and balance sheet.
Thank you, David and good morning everyone. Before I review our segment results, I want to provide a little more detail on the one-time charge and coastal marine. During the third quarter, we sold our coastal marine transportation assets in Hawaii, including four tank barges and seven tugboats for cash proceeds of $17.2 million. We also retired 12 wire tank barges and four tugboats, which had limited customer acceptance in low utilization. These events resulted in a non-cash impairment charge of $121.7 million.
As a result, the company concluded that a triggering event had occurred and performed interim quantitative impairment tests on coastal goodwill, which resulted in a non-cash impairment charge totally $219 million. In total, the company recorded a non-cash impairment related to coastal marine equipment and associated goodwill totally in $340.7 million before tax, $275 million after tax or $4.58 per share.
Looking at our operating segments, in the third quarter marine transportation revenues were $338.5 million with an operating income of $16.9 and an operating margin of 5%. Compared to the 2020 third quarter marine revenues increased $17.9 million or 6% primarily due to higher fuel rebuilds in inland and coastal as the average cost of diesel fuel had increased 76%. Improved barge utilization in inland is offset by lower pricing on term contracts that had renewed during the last year. Operating income declined $15.5 million primarily due to Hurricane Ida lower term contract pricing and increased made it’s.
Compared to the 2021 second quarter, marine revenues increased $5.6 billion or 2% due to modest improvements in coastal barge utilization and increased fuel rebuilds. Operating income declined $1.6 million as a result of sales mix increased horsepower costs in the impact of Hurricane Ida.
During the quarter, the inland business contributed approximately 76% of segment revenue. Average barge utilization was in the low 80% range, which was slightly down compared to the second quarter, but improved compared to the low 70% range in the 2020 third quarter. Barge utilization during the quarter was heavily impacted by reduced volumes as a result of COVID-19 Delta variant and customer shutdowns following Hurricane Ida.
Long-term, inland marine transportation contracts or those contracts with a term of one year or longer contributed approximately 65% of revenue with 56% from time charters and 44% from contracts of affreightment. With respect to pricing, average spot market rates were stable compared to the second quarter and the 2020 third quarter. Of the few term contracts that renewed during the third quarter, average rates were down in the low-to-mid single-digits. Compared to the 2020 third quarter, inland revenues were up 3% due to significant increases in fuel rebuilds and improved barge utilization offset by lower average pricing on term contracts. Compared to the second quarter, inland revenues were stable. Overall, the inland market represented 76% of segment revenues and had an operating margin in the mid-to-high single-digits.
In coastal spot market conditions improve modestly resulting in barge utilization in the mid 70% range during the quarter. Average spot market rates and renewals of term contracts were stable. During the third quarter, the percentage of coastal revenues under term contracts was approximately 80% of which approximately 85% were term time charters. Revenues in coastal increased 4% sequentially and 13% compared to the 2020 third quarter, primarily due to higher fuel rebuilds and modest increases in spot market activity. Overall coastal represented 24% of marine transportation per segment revenues, and that a negative operating margin in the low single digits. With respect to our tank barge fleet, a reconciliation of changes in the third quarter, as well as projections for the remainder of 2021 are included in our earnings call presentation posted on our website.
Moving to distribution and services. Revenues for the 2021 third quarter were $260.4 million with an operating income of $11 million and an operating margin of 4.2%. Compared to the 2020 third quarter distribution and services revenue increased $84.4 million or 48% and operating income improved $9.9 million, compared to the 2021 second quarter revenues increased $33.7 million or 15%, and operating income increased $4.9 million. These improvements are primarily due to a significant increase in demand for our oil and gas products and services. As well as the improved economic conditions across the U.S. which has raised demand for equipment, parts and service in the commercial and industrial markets.
In commercial and industrial, increased economic activity contributed to increased sequential and year-on-year demand for equipment parts and service in on-highway. Thermo King and power generation. The power generation of rental fleet also benefit from increased utilization during the summer storm season, including Hurricane Ida. Marine repair revenues were down sequentially and year-on-year due to reduce major overhauls, as well as activity reductions at our Louisiana facilities following Hurricane Ida. During the third quarter, commercial and industrial revenues increased 9% sequentially and 20% year-on-year. Overall, the business represented approximately 59% of segment revenue and had an operating margin in the mid-single digits.
In oil and gas, favorable commodity prices and increased activity in the oil field contributed to significant sequential and year-on-year increases in revenues and operating income. The most significant increase was in our distribution business with better demand for new transmissions parts and service from major oil field customers. Our manufacturing businesses also experienced substantial increases in new orders for pressure pumping and frac related power generation equipment. While manufacturing revenues increased sharply year-on-year, the business was negatively impacted by the timing of deliveries and OEM supply chain issues.
During the third quarter oil and gas revenues increased 25% sequentially in 120% year-on-year. Overall, the oil and gas related businesses represented approximately 41% of segment revenue and had an operating margin in the low-to-mid single-digits.
Turning to the balance sheet. As of September 30, we had $54 million of cash in total debt of $1.21 billion with a debt-to-cap ratio of 29.8%. Since the Savage acquisition of April 1, 2020, we have repaid nearly $500 million in debt. During the quarter, we generated strong cash flow from operations of $83 million. Net of capital expenditures of $34 million, free cash flow was $49 million.
We also sold assets with net proceeds of $22 million during the quarter, primarily composed of coastal marine assets in Hawaii. At the end of the quarter, we had total available liquidity of $908 million. As of this week, our net debt has been further reduced to $1.2 billion. For the full year, we expect capital spending to be approximately $120 million to $130 million, which represents more than a 15% reduction compared to 2020 and is primarily composed of maintenance requirements for our marine fleet. We also expect to generate free cash flow of $250 million to $290 million for the full year.
Lastly, from a tax perspective, we expect an effective tax rate of approximately 29% in the fourth quarter.
I’ll now turn the call back over to David.
Thank you, Bill. Although the third quarter certainly had its challenges. We are very encouraged by the improving market fundamentals across our businesses, which are setting the stage for materially improved earnings in the coming year. In the near-term for the fourth quarter, we expect a sequential improvement in an overall revenues and earnings driven by increased volumes and more favorable market conditions in Marine transportation offset in part by nominal and normality and continued supply chain issues in distribution and services
In the inland market although some issues associated with Hurricane Ida have carried over, including extended customer shutdowns, barge repairs, and waterway closures. Our outlook remains very positive. During October, our barge utilization has been in the mid-80% to high 80% range with recent utilization at the high end of that and then a high 80s. Some of this increase can be attributed to waterway closures in Louisiana, which have extended transit times. However, turnarounds in pent-up demand are also driving up large volumes.
Well, the waterways are expected to fully reopen soon. We expect barge utilization levels will be minimally impacted due to the ramping up of Hurricane Ida affected plants, economic improvements, new chemical plants coming online and the onset of winter weather. With increased inland activity levels, minimum new barge construction and continued retirements, we expect further improvements in the spot market going forward.
During the fourth quarter and into next year, term contracts that renewed lower during the pandemic are expected to reset and gradually reset to reflect the improved market conditions. Overall inland revenues are expected to sequentially increased in the fourth quarter with operating margins, improving to around 10%.
In coastal, we expect the market will continue to recover with modest demand improvement for refined products and black oil transportation. The recent retirement of the wire barge marine equipment will result in coastal barge utilization being around 90% for the fourth quarter. Although the Hawaii equipment has been sold, we will continue to operate the assets under a charter agreement through the end of the year when our existing customer contracts expire.
In the fourth quarter, we do anticipate some elevated shipyard activity on several of our larger capacity barges. And that will result in a coastal revenue reduction in the mid-single digits compared to the third quarter. Coastal operating margins are expected to be at or slightly below break even for the fourth – in the fourth quarter.
Looking at distribution and services, favorable commodity prices and increasing rig counts as well as well completions are expected to yield, continued strong demand in our oil and gas distribution business. In manufacturing activity levels are also expected to remain strong, driven by new orders and our growing backlog of environmentally friendly pressure pumping equipment and frac related power generation equipment, as well as some modest remanufacturing of conventional equipment.
However, the OEM supply chain issues are expected to persist throughout the fourth quarter and they will delay sales – some sales and project deliveries into 2022. As a result, we expect our oil and gas businesses will experience a modest sequential reduction in revenues and operating income in the quarter.
In commercial and industrial, despite improving economic activity, there will be normal seasonality in marine repair, Thermo King and power generation resulting in sequential reductions in revenue and operating income in the fourth quarter.
Overall compared to the 2021, third quarter distribution and services revenues are expected to decline modestly with operating margins in the low-to-mid single-digits.
Now to wrap things up. Although the third quarter’s results were disappointing, we see improved results in the fourth quarter, despite planned shipyards and coastal and seasonality and supply chain issues and distribution and services. More importantly, we see strong momentum building across our businesses, which we will believe with – which we believe will drive increased revenues and meaningful earnings growth in the coming years. And inland our barge utilization has recently touched 90% with October averaging in the mid-to-high 80% range.
With the world economy beginning to emerge from the pandemic, low inventories of refined products and oil demand expected to meet or exceed pre-pandemic levels in 2022, we believe inland has turned the corner. With minimal new barge supply, we expect our inland business will steadily move higher with improved pricing earnings in returns going forward.
In coastal, although market conditions remain challenging recent improvements in the spot market should lead to barge utilization around 90% are difficult, but necessary decisions to exit the Hawaiian market and retire on utilized assets are long-term positives that will allow this business to focus on its best assets and markets to generate positive earnings as the market improved.
In distribution and services, economic growth will benefit our commercial and industrial businesses in the coming quarters in oil and gas with strong commodity prices and expectations for increased U.S. gas directed drilling. We are increasingly optimistic about enhanced demand for our products and services.
Further, a heightened customer focus on low carbon solutions, including environmentally friendly pressure pumping equipment and our power generation solutions for eFrac has translated into significant growth in our backlog. These increasing levels of activity will lead to improve profitability in 2022.
And finally, our strict capital discipline and intense focus on cash flow generation throughout the pandemic has enabled us to significantly reduce our debt and increased our liquidity. As a result, we are very well positioned to act on future strategic opportunities to increase our earnings potential going forward.
Operator, this concludes our prepared remarks. We are now ready to take questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ben Nolan with Stifel. Your line is open.
Thank you and good morning, Dave and Bill.
Hi, good morning, Ben.
Hi. My first – for my first question, I wanted to start with something a little bit more store – maybe strategic or a function of sort of where the broader market landscape is headed. And certainly one of the things that we’re seeing is all the supply chain issues, but it’s impacting things like driver shortages and even on the railroads being somewhat capacity constraint and definitely inflation in some of those – specifically those other two categories. I am curious sort of what’s the crossover is? If those areas are starting to see significant inflation, is there any ability for some of the excess chemical or petroleum products to sort of be priced out of the market for you guys to capture share if those or the two modes of transportation get more expensive?
Yes. I’m not sure there is a lot of crossover. There could be some – basically if it can move on water, it does. I would just tell you in general, inflation is happening. We’re seeing a little wage pressure. We gave some raises in July, but we’ve not had a problem filling positions. As you know, Ben, we started our school, which is a kind of a Kirby advantage. We started training mariners in January and have continued throughout the year. So we feel pretty good about where we are in terms of our labor supply and we’re pretty excited about that. We are seeing some inflation with supplies and food and whatnot, but so far it’s okay. The big news for us really is that the demand is growing.
We’re starting to see it. I mean, you can see it in the consumer, right. The consumer is doing better. Gasoline demand is back, backup above the five-year average. Manufacturing orders are up. Our chemical customers are doing really well. You can look at their earnings announcements. Our refining and integrated customers are seeing inventories low one, but the crack spreads really high. One of our independent refining customers that had shutdown their refinery during COVID has restarted it. So, from our perspective demand is increasing. It’s not really crossover demand. It’s just real demand that we saw in our base business. And as you know that demand with supply and check means that we’re headed for a much better pricing environment. We’re starting to see that now. We’re getting price increases. In the spot market, spot prices are above contract prices and things are moving along really well there.
All right, great. That’s a good color. Appreciate it. And then for my second question, just switch gears a little bit on the coastal side, I know you guys have sort of been mentioned or danced around some of the opportunities around offshore wind development. I’m curious if you can just sort of give some sort of an update as to where that stands and maybe frame in the opportunity set from a Kirby perspective?
Yes. Well, we’ve got to be very careful. We’re under a couple of different NDAs and we really can’t say too much in specific, but you could imagine we very much want to be in the wind service business whether it’s wind installation or service and we’re working hard on it. As you’ve seen with these offshore installations, the contracts kind of drag out over time and it’s not moving as fast as anybody wants, but suffice it to say we’re in the middle of things and looking forward to some meaningful avenues of future growth for Kirby in our marine operations. I can’t really tell you much more than that. I wish we could, but we’ll see as these projects progress.
Understood, I’ll be on that lookout for that. So appreciate it. Thanks guys.
Thanks, Ben.
Thanks, Ben.
Thank you. Our next question comes from John Chappell with Evercore ISI. Your line is open.
Thank you. Good morning everybody.
Hi, good morning, John.
David on the inland contract renewal, so Bill said 3Q, there was a few contracts and I guess they were reset down. So when you think about 4Q and 1Q, can you speak to some level of magnitude on number of contract renewals as a percentage of your book, and also given everything you’ve just laid out with utilization touching 90% petrochemical production coming back online, would you anticipate at least flat to starting to see some positive revisions in the contractual renewals this quarter?
Well, I’d be more positive than that actually. We’re – we’ve kind of lapped the lows of COVID renewals. So what we anticipate is contract renewals in the fourth quarter will be up. We’ll see how much they will be up, but when you look at what’s happening in the inland market and particularly tightness around horsepower, tightness around supply is growing, we’re very optimistic and we think we’ll renew a contract higher spot pricing is well above contract pricing. And we’re about to reprice some of these – the COVID low contract. So I can’t be too specific because it’s a negotiation with numerous customers.
As you know, fourth quarter is usually one of the heavier quarters. I would say it’s kind of twice any other quarter. First, second, and third are kind of all around the same, maybe a little more in the first than the second and the third, but the fourth is always the heaviest. So we’re pretty optimistic. We’re heading in demands tight. Pricing is going up. Labor and mariners are in short supply. Horsepower is in short supply. It is set up to go up. It needs to, it has to and it will.
Great. And then sticking with that theme as well, a lot of people tend to watch refined product utilization, refinery utilization, because we actually have visibility on that every week. I think that data you provided on the petrochemical numbers out of Southeast Louisiana was pretty meaningful when you go from 89% to 25%. Is there any – I know that some of your new customers are coming back online, but when you think about 4Q overall, or maybe just kind of November and December run rates post a ramp up period, what are you expecting for the petrochemical plant utilization and overall production as the kind of rebounds from that 75% decline?
Yes. When we – I’ll just look at south – I’ll use Southeastern Louisiana ethylene as an example. Pre-Hurricane Ida, they were – ethylene plants in that corridor were running around 89%, as you heard, they dropped to 25%. I think they’re backed up to 89% and maybe even higher than that. There’s some of the big chemical customers, you know them, they’re saying they’re running full out and some of the refiners are saying the exact same thing. The independent refiners are saying they’re going to run out – run hard. Also we’re seeing a little heavier feedstock mix, which is pretty positive for barging. The heavier feedstock mix, the more byproducts. And those byproducts generally lead to a little more barge movements – maybe some of them are heavier products and not as readily moved in pipelines.
So it’s shaping up nicely. It’s always good when your customers start making more money, right. Whether it’s the chemical guys or the refiners or the integrated, they’re all doing better and that’s good and they’re doing better because demand is picking up. And I think we’re all tired of talking about COVID, but its demand impact has been real. And hopefully, we’re turning the corner. We had the Delta variant, hopefully there’s not another variant coming. But everything looks pretty good from our perspective, just looking at refinery utilization and chemical plant utilization, ethylene production, aromatics production, C4 co-product production. They’re all kind of increasing. They have recovered from Ida and actually are starting to get above pre-pandemic levels and back to pre-pandemic levels.
All right. Well, that’s all great to hear. Thank you, David.
Yes, thanks.
Thanks, John.
Our next question is from Jack Atkins with Stephens. Your line is open.
Okay, great, good morning and thanks for taking my questions.
Hi, good morning, Jack.
So, David, I guess maybe to start with maybe a two-parter on inland, you’ve referenced sort of some heavier feed stocks. I would be curious maybe you could expand on that a bit with natural gas prices moving higher over the course of the last several months. Can you may be talk about how that impacts your business? Is that a positive or negative as you think about petrochemical output and activity? And then with the fundamentals accelerating in the inland market, is there – maybe any thought to going to some shorter term contracts just to be able to participate in maybe a stronger pricing environment as you look six or maybe even 12 months out, just trying to think of a way to capitalize on that versus locking yourself into 12 months commitment, but now right as the markets beginning to turn.
Yes. Let me take the first part first. The – look as natural gas prices go up, ethane is part of that kind of split and ethane is a big feedstock for the ethylene plants, right. But as those prices go up, you’ll crack more naphtha or heavies, could be C4s or propane. They’ll start cracking heavier because one the math starts to work for them for the heavier feedstocks. And we’re seeing that. I think there’s Dan Lippy and that publish on that, but the heavier feedstocks are going in to the chemical plants. And again, that’s good for us. The more naphtha they crack, the more heavies that you’ll see. You could see C4s and butadiene coming out. Butadiene is a nice one because it’s a pressure cargo and Kirby has got a pretty good position in pressure products. So, yes, the flexi crackers are taking advantage of kind of the pricing dynamics and cracking a little more heavy. In terms of more spot versus contract, Bill, you said the spots about what 35%...
35…
35% of our book right now. And then we’ve got a lot of contracts that are going to reprice here in the fourth quarter. So, 35% spots still feels about right. I hear you loud and clear. I mean, we we’d like to capture more price increases, but we’ll roll through this and see where it goes. It feels pretty good with 35% spot that will reprice pretty big – pretty quickly. Jack?
We lose you.
No, no, I’m here. Sorry. I was on mute. Thanks. Thanks David for that. Yes. So, I guess, for my follow up question with regard to the coastal barging market and the action that you took there to sort of clean up some underperforming assets with utilization, now at 90% or so kind of moving forward understanding there’s some issues in the fourth quarter kind of clean up there as you complete some contracts. But do you feel like that business now, even at current pricing can be breakeven and modestly profitable? How are you thinking about the profitability impacts of the actions that you took during the quarter?
Yes. We’re hopeful, we’ll be breakeven-ish next year. There’s still a little overhang and excess equipment in the coastal market. I think everybody’s aware of the blueshot equipment out there. And there’s still a fair amount of idle equipment amongst our competitors. The good news is, as we talked about demand is increasing, right? If you think about the coastal business, it’s pretty heavy in terms of refined products. And as you heard in some of my previous comments, refinery utilizations up product inventories are low, frac spreads are stronger, volumes are picking up. They just need to pick up a little more. There’s still too much supply in the offshore business. And, but we’re getting closer to the turn there. I think that turn is further out than the inland turn just because of how overbuilt that market got after.
As you recall, Jack, a few years back, there were probably a third of the fleet was moving crude by barge. And I would say, it’s a lot less than that. There’s normally a handful of the coastal barges moving crude oil now. So all that excess capacity has to be soaked up by refined products, demand and that’s happening. It’s just happening a little slower. So, but it’s head in the right direction. We are doing our part. We’re taking out these older wire equipment pieces. And I also think that ballast water treatment may drive some others out to retire. We’re pretty far along on our fleet with ballast water treatment. I think a few other of our competitors are behind the curve on ballast water treatment. So as they start to spend that capital, perhaps we’ll see some retirement.
So it’s a long-winded answer to say that supply and demand’s still a little out of balance. But it’s heading in the right direction. And we took the actions, we felt that were necessary. And I think, we’ll be breakeven-ish next year based on what we see now.
And Jack, one thing, David mentioned in the prepare remarks, but is not insignificant. It allows us to focus the spend on the good assets. These – the assets that are retired in the Hawaiian assets, we would’ve required significant capital, and that’s not the place to put capital.
Okay. Now makes total sense. Thanks for the time guys.
Thanks Jack.
Thank you. Our next question comes from Ken Hoexter with Bank of America. Your line is open.
Hey, good morning.
Good morning, Dave.
Hey, good morning, Dave and Bill. Just at the O&G side of DNS. Maybe, can you talk a bit about the supply chain issues? You talked about the drag on margin versus the rising demand. Maybe your thought obviously no easy answers to the supply chain, but your thought on how long that remains an overhang.
Yes. It’s look – it’s what you’ve been hearing. I can tell you that, we’re having problems with engine deliveries. We’re having problems with transmission deliveries, as you might imagine with the electrical nature of much of what we’re taking in an inbound circuitry, and components motherboards, and kind of chip based stuff has been slow. I would tell you that, if we had, could have gotten some engines in a few other electrical components, we would’ve – we would be shipping more product in the fourth quarter. I think, it resolves itself, in early 2022, but it’s real. I know you guys are tired of hearing about COVID and supply chain. We’re tired about it too, but it’s been real.
You can look at some of the big engine OEMs they’re starting to catch up. So, I’m optimistic. But they were real. I think that the encouraging thing though, Ken, is our backlog has jumped meaningfully. I mean, our book-to-bill is a huge percentage. And we’re not talking tens of millions, it’s more like hundreds. And backlog is really growing. A lot of it is ESG centric. I’ll tell you, in oil and gas in particular kind of any new equipment is got an element of carbon reduction for our customers and our customers, customers, and you so that we’re very excited about it. And you may have heard also that we bought a small company during the quarter that that builds ESS, energy storage systems or batteries, if you will. ESS sounds a little more sophisticated.
But one of the things we do is, we add that battery system to a frac spread, and it helps even the electric load on the generation equipment as they’re ramping up and down on their pressure pump, the actual pumping that’s, so that’s vertical integration, but the great thing about the ESS capabilities. We’re able to extend those into other parts of our KDS business, the distribution business you can imagine a commercial and industrial and the need for electric power it keeps growing and having a strong ESS offering will help us and is helping us. And then you can even take it to marine, we’re building basically an electric hybrid tugboat right now, Ken it will be able to run completely on electric power. And we’re really excited about that. We see that as a future and also a place to add product from this very small acquisition, but with it’s got high technology. No, that’s a long rambling answer. Hope, I got the answer you wanted there.
No, yes. It’s just, I guess to understand it’s helpful. So, I mean, it sounds like from your thoughts on inland really seeing some strength flow through, maybe I’m a little confused in your follow up answer from Jack in terms of, are you still concerned on the coastal pricing while you’re seeing that inflection at inland? Maybe just a little clarity on and then just a real quick follow-up there.
Yes. So well, we’re seeing a nice inflection on inland in terms of pricing. I would characterize coastal as flat in not yet rising the way it needs to, so sorry for that confusion, but yes, inland is definitely moving on pricing and coastal hasn’t really started, but it’s not declining. It’s just not going up the way we’d like.
So, let me just ask you on corporate actions. I know that’s a third one, but I guess I’m a little surprised by the move to eliminate part of the inland and coastal marine inside, versus I think the general expectations were maybe something was coming down the pipe on scaling or descaling on the distribution and services side. Maybe just step back and your thoughts on what other parts of the business. It sounds like you’re adding more with this acquisition on the eFrac side, but how do you think things stand now within the organization?
Yes, no, I think we’re very excited about marine. I think you’ll see it look, this small acquisition is, I mean, really small…
Its 40 – it’s immaterial in some ways…
Yes, it 40 really basically assuming some working capital liabilities, and that’s the extent of it, very little cash outflow. So it’s not – it’s not meaningful at all in terms of materiality in terms of cash. As we look at our business, the serious cash deployment would be to continue to consolidate the inland marine business. If we’re doing anything, you may see us spend some, some meaningful CapEx on wind support type vessels depending on contracts and how that might go. But the big capital deployment will be in the marine side of the business.
I think the offshore assets, that was more of a restructuring as we look at it, our customers that they really have gravitated away from wire offshore barges to the favor of ATBs. And we just kind of took that and said, we need to restructure around that. But the meaningful capital deployment or acquisitions will likely be in the marine side, I would tell you on DNS, we’re running with the electrification side. And that has been meaningful in the oil and gas side, as we’ve seen eFrac come up, and power generation used in well servicing.
I would tell you the rest of that commercial and industrials coming along too, almost every, every business nowadays is looking at the grid reliability and what they need to do to protect themselves. So, we’re pretty excited about that, but as you know, that doesn’t take a lot of capital, right? That’s, doesn’t require us to go buy companies or a lot of CapEx. It’s really pretty low CapEx. This small acquisition really was a small piece of vertical integration because we’re already selling the ESS with our eFracs.
Great. Thanks, Dave. Appreciate the time. Thanks. Bill.
Thank you.
Thank you. Our next question comes from Randy Giveans with Jeffries. Your line is open.
Hi gentleman, how’s it going?
Good.
Good. How are you doing Randy?
Good. So I guess first question, are there still any real lingering impacts from Hurricane Ida or has that largely subsided? I know you mentioned there was an $0.08 negative impact during the third quarter, so just trying to get the expected impact here in the fourth quarter.
Yes. There – in October, there were probably a couple cents worth of impact that we factored into our thinking the plants are just now coming up. We still have – we have repair activities going on right now with some of the barges that were impacted from Ida. They haven’t all been repaired yet. They’re underway that should be take care of itself in the next three or four weeks. The revenue is still down a little bit because of that. And some of our major customers were just, just now ramping back to full capacity, but they’re coming back. I’d say the only real lingering thing is the inter-coastal to waterway is still closed near New Orleans. But I think that’s going to open up in the next week or so.
What that does is causes us to divert around a little longer transit times to get to that new Orleans Baton Rouge corridor. So it’s almost behind us and there were, there’s some headwinds in the fourth quarter there, but it’s not near as large what we saw in the third quarter. And as we talked a little bit about what our fourth quarter will look like, that’s all in the guidance.
Yes. All right. And then for the sale of the Hawaii assets, the retirement of that wire equipment, how meaningful is that in terms of potential profitability or maybe lost profitability for coastal, and then I guess on the other side of the sales of those assets, I think you mentioned this a little bit here a few minutes ago, but any appetite for additional kind of larger inland tank barge acquisitions at this point?
Yes. I’ll let Bill talk a little bit about the magnitude of kind of revenue and operating income for that. And, but I’ll come back and talk about acquisition.
Yes, we looked at those assets were underperforming assets. They were not assets that were generating profitability look Randy, and the contracts were ending and we didn’t see profitability perspectively and as well, there would’ve been capital employed. So, we would’ve had to invest capital. So the way we looked at it was the right time to leave. We had lined up all the contracts to the end of the year. So, we sold the assets and took $17 million and we’ll deploy our capital elsewhere.
Got it. Okay.
Yes. And in terms of acquisitions look it’s no secret there’s been a lot of pain in the marine side, both offshore and inland. I think this market’s been one of the work ever in history. We were coming out of the bottom pre-pandemic and then the pandemic just kind of set a new low. Many of our competitors have been an operating at cash breakeven, or lower, we had some con some way down there as well. You can look at our inland margins, right? They were kind of record lows. Now, that’s coming back, we were, low, mid-single digits. Now we’re kind of, I think we did a round 7.5 in the inland side and in the third quarter, we’re thinking we’ll do 10% margins in the fourth quarter. I would see, hopefully we get into the mid teens in 2022 in inland.
But when you start at really low margins and break even for many of our competitors, there could well be some opportunities. I would caveat this and that is, we’ve been very prudent through this pandemic we’ve paid down a lot of debt as you heard from Bill. I think since the Savage acquisition, we’ve paid down over $500 million in debt, we’re still generating really strong cash flow. We’ll continue to de-lever and be prudent as we look for acquisitions, but there could, well be some, I would just tell you we’re going to be prudent. It’s been a rough couple years, and there’s a lot of pain out there. But by the same token, we want to de-lever a little more. We we’ve gotten our debt-to total cap down below 30%. It’s now got, I think it’s 29%. I’m looking at Bill 29%-ish so we’re going to de-lever a little more, but there could be some prospects in the coming year or two.
Okay. Yes, that all makes sense. Thanks for of time.
Thanks, Randy.
Thank you. And our next question comes from Greg Lewis with BTIG. Your line is open.
Hey, thank you. Thank you and good morning, everybody. David, I wanted to touch on, I mean, clearly the Q3, there was major disruptions, across the barge to weather was on the refining side and the Petchem side. As we think about it, historically, traditionally Q3 was a good quarter utilization pricing. It seems like then, you kind of step down a little in Q4 and then in Q1, you had really step down, in terms of utilization and spot pricing, just given what we saw in Q3, does that kind of change, how we should be thinking about normal, the normal seasonal path, maybe not in Q4, but in Q1 and what that means in terms of setting up Q2?
Yes, good question. Look there’s no doubt that Q3 was messy. We had the restructuring of coastal Hurricane Ida was about $0.08. COVID we didn’t really talk much about it, because I think we’re all tired of talking of COVID, but that probably cost us $0.05 or $0.06. As, COVID hit our marine crews, we had to divert toes. We had to take them off higher because we had to re-crew, we had higher medical costs, et cetera. So and then we had a higher tax rate if you throw that onto the third quarter too. So it was a messy quarter as I look forward. I would tell you that, some of that those kind of headwinds are definitely going away. Ida’s gone away.
Third quarter is almost always our best, but and that’s because of our contracts of affreightment as you know when the weather’s good, that’s where we make good margins. So, I know it sounds cliche, but I think it quarter three was an anomaly. As you do know quarter four has the weather and quarter one has some weather as well. That that’ll be normal, but it won’t be near as bad as say what Ida and COVID did to us in this quarter.
Other way to look at that, weather’s still a factor. It was a factor in first and first quarter, fourth quarter have that, but it is a rising market. So the rising tide, the rising tide of pricing and utility is there.
Yes. Okay, great. And then, I mean, you touched on, obviously the barge, the loss of barges or submerge barges was more, of a dry bulk barge phenomenon than wet. Is there any sense to, I mean, do we have any sense for, maybe what type of negative impact on barge supply, whether it’s medium term or long-term, Ida hat on the tank barge market?
Yes, I think it’s all temporary, the amount of liquid barges that were impacted were, was pretty significant. There were some doc customer docs that were impacted. Yes, I don’t know if it would drive some retirement, if you had, a damaged old barge, you may retire it. But it’s, there’s a lot of barges in the shipyards now recovering from Ida. But I think it’s very temporary. It was more dry cargo and other vessels that were impact the liquid tank barge market was impacted. And I think, I use Kirby as an example, we’ve probably had 30 barges. We only got a handful left to come out to repair.
So, we’re almost through it. And I wouldn’t think the rest of the industry is much different than we were in that. It was a meaningful impact though. It’s to have the Mississippi river go flow northward and rip a lot of fleets up. It was a significant impact, but I do think it’s largely temporary and not a systemic change to the inland market.
Okay, perfect. Great. Okay. Hey everybody. Thank you for the time.
Thanks Greg.
Hey, Carmen. This is Eric. We’ll take one more. One more question.
Yes, sir. Our next question is from Greg Wasikowski with the Webber Research. Your line is open.
Hey, David and Bill. Good morning. Thanks for squeezing me in
Greg. How you doing?
Good. Good. First question’s on the inland order book and just looking at the order book in prices for new barges, supply side looks pretty construction, pretty – sorry constructive for in probably next few years to come. And I’m just curious is, the increase in new build prices is that kind of directly attributable to higher steel prices or are there other factors that play there and I’m thinking specifically, is there any sort of, hesitation from owners or underlying technology, obsolescence risk embedded in there, kind of looking ahead five, 10, 20 years in the future. And maybe saying it another way if steel prices were normalized would we still be looking at a constructive supply picture here?
Yes, that’s a good multifactor question there. I would tell you, so look new barge, whether it’s clean or dirty or hot, hot oil barge, the prices, if you go back to 2017, 2018 prices are almost, I would say almost double a big portion of that is steel. But look, everything that goes into it has gone up in price too. Right. I mean, you can think about paint, you can think about, welding and labor. Yes, it’s just cost more now to build them, and that’s why, as we think about inflation, that’s, it’s not a necessarily a bad thing for Kirby. We’ve got this huge installed base of barges that are relatively young and well maintained.
And yes, so the higher, the cost of new barges kind of the better, the better for us is the way we look at it. But steel is no doubt that, the majority of that cost and it’s yes, steel is up where the price of barges went up a 100%, steel is up 300% since pre-pandemic. So you could have imagined it steel that I would tell you that, most owner operators right now are not building new equipment. There has been some on order it’s been on order for a while deliveries or nominal. And I would say retirements should outstrip the deliveries there, in terms of your technology obsolescence, there’s not, barge is a barge. It’s a big steel box, but they are more and more sophisticated, but there’s not a lot of technology obsolescence.
I would tell you that there is because of ESG, it’s becoming more and more important, is the pressure rating of a barge. A typical industry barge had a three pound pressure rating, Kirby’s only built six pounds. So if you think about it, [indiscernible] emissions from a six pound barge are a lot less than they are on a three pound barge. And the market’s starting to recognize that. And by the market, I mean, our customers, they’re worried about their fence line emissions and there’s a premium coming and starting for six pound barges. Now, is that an obsolescence thing? Not sure it’s an obsolescence thing. It’s a, it’s just a fact, right. That everybody wants their emissions down. Those emissions are getting measured more and more and reported more and more.
So we’re seeing a, a premium kind of leak into the market, well driven into the market by more desire for six pound barges versus three pounds, but that’s not, it’s not technical obsolescence per se.
Got it. That’s helpful. Thank you. And then one more quick one just on the pace of inland recovery it’s thinking about it in terms of, it’s not as V-shaped as maybe previously thought six months or a year ago. Can you speak to maybe the benefits of it being of a longer, flatter curve and maybe it being more sustainable in the long run than a V-shape recovery?
Yes, the obvious benefits of that are, it keeps building down longer, right. But it’s also there’s a lot of pain and not that you like a lot of pain, but that pain may just discourage, people from building new barges, or trying to expand as we look at some of our competitors. It’s tough on them, it’s tough on us. Look I’m so, maybe that, that sobers people up about building and expanding, so that could be a benefit as well, but we’re now we we’d like to see our returns up. I’ll just say that. So not that we want a sharp fee, but things need to move and they are moving and it’s welcome.
Okay, Appreciate the time guys.
All right. Thank you.
Thanks, Greg.
All right. Thanks Greg. And thanks everyone for joining us today. If you have any additional questions or comments, you feel free to reach out to me directly throughout the day. I will be in the office. Thanks everyone. Have a great day.
And the conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.