Behind The Numbers – Kirby Corp (KEX)
Kirby Corp (KEX), a premier tank barge operator, operates through two distinct segments:
Marine Transportation (58% of Revenue) – Operates tank barges and towing vessels that help transport bulk liquid products throughout the Mississippi River System, the Gulf Intracoastal Waterway, and coastwise along all three U.S. coasts. It transports petrochemicals, black oil, refined petroleum products, and agricultural chemicals.
Distribution & Services (42% of Revenue) – Sells after-market service and replacement parts for engines, transmissions, electric motors, drives, and controls, specialized electrical distribution and control systems, energy storage battery systems, and related oilfield services equipment.
As of December 31st, 2022, the equipment owned and operated by Kirby consisted of 1,037 inland tank barges with 23.1 million barrels of capacity, and an average of 277 inland towboats, as well as 29 coastal tank barges with 3.0 million barrels of capacity, 27 coastal tugboats, four offshore dry-bulk cargo barges, four offshore tugboats and one docking tugboat.
Some important factors to know about Kirby and the industry is that marine transportation inland and coastal services are conducted under term or spot contracts for customers with whom the company has traditionally had long-standing relationships. Typically, according to their 10-K filing, term contracts range from one to three years, some of which have renewal options. The majority of the marine transportation contracts with its customers by revenue are for terms of one year. A term contract is an agreement with a specific customer to transport cargo from a designated origin to a designated destination at a set rate or at a daily rate. Time charters, which insulate the company from revenue fluctuations caused by weather and navigational delays and temporary market declines, represented approximately 58% of the marine transportation’s inland revenues under term contracts during 2022 and 2021. Meanwhile, a spot contract is an agreement with a customer to move cargo from a specific origin to a designated destination for a rate negotiated at the time the cargo movement takes place. Spot contract rates are at the current “market” rate and are subject to market volatility. Kirby typically maintains a higher mix of term contracts to spot contracts to provide the company with a reasonably predictable revenue stream while maintaining spot market exposure to take advantage of new business opportunities and customers’ peak demands.
Last week, the company reported its Q2 earnings that beat on EPS ($0.95 vs $0.85 estimate), but missed on Revenue ($777.2M vs $780.19M estimate). When you look past the headline numbers, you will find that Marine Transportation segment revenues were $427M, operating income was $64M, with an operating margin of 15%. Compared to the second quarter of 2022, total Marine revenues increased 5% and operating income increased 108% driven by increased pricing and improved operating efficiencies in the Inland market.
In their post-earnings note, BofA highlighted how Kirby expects Inland margins to exit 2023 near the 20%-range (vs 18%-range in Q2) as spot barging rates continue to increase mid-single digits sequentially. “Demand for tank barging capacity is expected to remain steady, given high refinery utilization, while tank barge capacity is expected to decline given the looming barge maintenance bubble, which is expected to impact 20% of the Inland fleet annually in ’23 and ’24 (800/year vs 4,000-barge industry fleet). We believe the tank barge market will stay robust given limited new build slots and strong demand visibility.”
For the Distribution & Services segment, revenues were $350M, operating income was $30M, and operating margins were 8.5%. Compared to the second quarter of 2022, the Distribution & Services segment saw revenues increase by 20% with operating income increasing by 78%. In the oil and gas market (which represents 48% of segment revenue), revenues were up 30% Y/Y and 14% sequentially. Management would say, “We experienced steady demand for new engines, transmissions and parts throughout the quarter.”
Finally, Stifel analyst Benjamin Nolan would comment, “While there have been signs of tempered demand for the movement of petrochemical, strong refined products activity and importantly limited supply has continued to drive up pricing for barge spot rates up more than 20% yoy. In the quarter, the more interesting dynamic was the strength in the Distribution and Services business which was solid in both the industrial and energy products. Despite a falling rig count, Kirby continues to see healthy ordering activity for e-fracs for the remainder of the year.”
