Kirby Corp (KEX) 2022 Q1 法說會逐字稿

Welcome to Kirby Corporation 2022 First Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Eric Holcomb, Kirby's VP 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 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 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 on the company's business. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2021.

I will now turn the call over to David.

Thank you, Eric, and good morning, everyone. Earlier today, we announced first quarter earnings of $0.29 per share. The quarter's results reflected improved market fundamentals in both marine transportation and Distribution and Services. As anticipated, our Marine Transportation business was significantly challenged by the COVID-19 Omicron variant, but the magnitude was at the high end of our guidance range, with a total impact of approximately $0.10 per share. We also continued to experience significant supply chain constraints in Distribution and Services, which delayed sales during the quarter.

Looking at our segments. In Marine Transportation, overall inland market conditions improved during the quarter. However, our financial results were significantly impacted by Omicron. With virus cases escalating across the U.S. during January and February, we experienced modestly reduced customer volumes and a decline in our barge utilization to the mid-80% range. We also experienced a material increase in positive virus cases amongst our mariners, which resulted in crewing challenges, lost revenue and increased operating costs.

That said, inland market conditions rapidly improved in March, as the cases of the Omicron variant declined. We saw improving fundamentals with refinery utilization rising to above 90%, resulting in increasing customer demand. Consequently, by mid-March, barge utilization improved considerably to above 90% for the first time since the start of the pandemic. These factors led to tight market conditions, improved spot market pricing and further increases in term contract rates. Overall, first quarter inland margins were in the high single-digit range, but we experienced notable improvement during March, with low double-digit operating margins for the month.

In coastal, market conditions modestly improved with our barge utilization increasing to the low 90% range. We also realized some small pricing gains for the first time in 2 years. Similar to inland, coastal was materially impacted by the Omicron variant in January and February. Reduced coal shipments in our dry cargo business also contributed to sequentially lower revenues and increased losses. Overall, first quarter coastal operating margins were negative in the mid-single digits, but we did see results improve closer to breakeven in March, as the Omicron impact dissipated.

In late March, we officially announced our entry into the offshore wind market, with our newest business line, Kirby Offshore Wind. This entity will be providing feeder barge services that transport wind towers and turbines from ports to offshore wind turbine installation vessels. We are partnering with Maersk using a 20-year frame agreement and our first joint project will be installing wind equipment for Empire Wind, a joint venture between Equinor and BP off the coast of Long Island, New York.

We intend to construct 2 new deck barges with low-emission diesel electric hybrid tugboats for combined capital expenditures of approximately $80 million to $100 million over the next 3 years. The Empire Wind project is expected to commence operations in late '25 or early '26, pending the completion of Maersk's new wind turbine installation vessel. We are very excited about this new growth area and particularly pleased to partner with world-class operators such as Maersk, Equinor and BP on this foundational project for the U.S. offshore wind market.

Moving to Distribution and Services. Our markets remain strong across the segment and contributed to meaningful sequential and year-on-year improvement in revenue and operating margins. In oil and gas, strong commodity prices and increased oilfield activity contributed to improved demand for new transmissions and parts and distribution. In manufacturing, our backlog continued to grow with incremental orders for new environmentally-friendly pressure pumping equipment and power generation equipment for e-frac. However, as expected, significant supply chain issues delayed many new equipment deliveries during the quarter.

In commercial and industrial, overall demand remained solid across our different markets, with the largest growth coming from the marine repair and on-highway sectors. Demand was also strong in our Thermo King refrigeration business, but its revenues and operating income declined sequentially due to continued supply chain issues.

In summary, despite significant COVID and supply chain challenges in the quarter, our first quarter results reflected continued improvement in market fundamentals for both our segments. The inland market is improving, demand is strengthening and rates are moving higher. While the coastal market remains challenged, our barge utilization is solid, and we realized modest rate improvements for the first time since the start of the pandemic.

Demand in Distribution and Services is strong and our backlog continues to grow. While supply chain issues are expected to persist for the foreseeable future, we see continued growth ahead. All of this should bode well for Kirby and ultimately drive incremental earnings growth as the year progresses.

In a few moments, I'll talk more about our outlook. But first, I'll turn the call over to Raj to discuss the first quarter segment results and balance sheet.

Thank you, David, and good morning, everyone. In the first quarter of 2022, Marine Transportation revenues were $355.5 million, with an operating income of $16.9 million and an operating margin of 4.8%. Compared to the first quarter of 2021, Marine revenues increased $54.6 million or 18% and operating income increased $15 million. Compared to the fourth quarter of 2021, Marine revenues increased $5 million or 1%. Marine Transportation operating income increased $15 million year-on-year from significantly improved market conditions, resulting in higher revenue but declined $8.7 million sequentially.

As David mentioned, the Omicron variant materially impacted our marine businesses in the first quarter, which resulted in lost revenue, crewing challenges and increased operating expenses. The Omicron impact was approximately $0.10 per share. Normal seasonal winter weather, inflationary cost pressures and rapidly rising fuel costs, which could not be immediately rebuilt for customer contract terms also contributed to lower operating income.

The inland business contributed approximately 78% of segment revenue. Average barge utilization was in the mid-80% range for the quarter, which compares to the mid- to high 80% range in the fourth quarter of 2021 and the mid-70% range in the first quarter of 2021. We did, however, see barge utilization improved nicely to the low 90% range in March as the effects of Omicron diminished. Long-term inland marine transportation contracts or those contracts with a term of 1 year or longer contributed approximately 65% of revenue, with 58% coming from time charters and 42% from contracts of affreightment. The improving market conditions contributed to spot market rates increasing in the mid-single digits sequentially and 15% to 20% year-on-year.

Term contracts that renewed during the first quarter were up in the high single digits on average compared to the prior year. Compared to the first quarter of 2021, inland revenues increased by 24%, primarily due to increased barge utilization, higher term and spot contract pricing and increased fuel rebuild as we saw the average cost of diesel increased by more than 50%. Compared to the fourth quarter of 2021, inland revenues were up by 2%, driven by increased term and spot market pricing and higher fuel rebuilds, but partially offset by lower average barge utilization and lost revenue related to Omicron.

Inland operating margin was in the high single digits and was impacted by normal seasonal weather and significantly impacted by increased cost and crewing inefficiencies related to the Omicron variant. We did, however, see operating margins improve into the low double digits in March, as the impact of Omicron subsided.

The coastal business represented 22% of revenues for the Marine Transportation segment. Average coastal barge utilization improved to the low 90% range, which compares favorably to the 90% range in the fourth quarter of 2021 and the mid-70% range in the first quarter of 2021.

During the quarter, the percentage of coastal revenue under term contracts was approximately 80%, of which approximately 90% were time charters. Average spot market rates and renewals of term contracts were higher in the mid-single digits. During the quarter, coastal revenues increased 1% year-on-year, with improved barge utilization and higher fuel rebuilds, being mostly offset by reduced coal shipments in the dry cargo business, the company's exit from Hawaii and lost revenue associated with the Omicron variant.

Compared to the fourth quarter of 2021, coastal revenues declined 2% due to reduced coal shipments, the company's exit from Hawaii and lost revenue related to Omicron. These reductions were partially offset by increased barge utilization and higher fuel rebuilds. Overall, Coastal had a negative operating margin in the mid-single digits in the first quarter, which was significantly impacted by increased costs related to the Omicron variant.

With respect to our tank barge fleet for both the inland and coastal businesses, we have provided a reconciliation of the changes in the first quarter, as well as projections for the remainder of 2022. This is included in our earnings call presentation posted on our website.

Now, I'll discuss the performance of the Distribution and Services segment. Revenues for the first quarter of 2022 were $255.2 million, with operating income of $11 million. Compared to the first quarter of 2021, the Distribution and Services segment saw revenue increase by $59.3 million or 30%, with operating income improving by $8.1 million. When compared to the fourth quarter of 2021, revenues increased by $14.5 million or 6%, and operating income increased by $3.5 million.

In the oil and gas market, favorable commodity prices and increased rig and completion activity contributed to a 71% year-on-year increase and a 20% sequential increase in revenues. In Distribution, we experienced increased demand for new transmissions and parts throughout the quarter. The manufacturing business also experienced a meaningful increase in new orders and deliveries of environmentally-friendly pressure pumping and e-frac related power generation equipment. Overall, oil and gas represented approximately 42% of segment revenue in the first quarter and had an operating margin in the low single digits.

On the commercial and industrial side, increased economic activity contributed to an 11% year-on-year increase in revenues, with improved demand for equipment, parts and service in our marine repair and on-highway businesses. Power generation was modestly down year-on-year due to the timing of major projects. Compared to the fourth quarter of 2021, commercial and industrial's revenue declined by 2%, primarily due to supply chain constraints in the Thermo King business, which delayed many new product sales. This reduction was partially offset by increased activity in marine and on-highway repair. Overall, the commercial and industrial business represented approximately 58% of segment revenue and had an operating margin in the mid- to high single digits during the first quarter.

I will now turn to the balance sheet. As of March 31, we had $32 million of cash with a total debt of $1.15 billion and our debt-to-cap ratio declined to 28.4%. During the quarter, we generated cash flow from operations of $32 million, and we had net proceeds from sale -- asset sales of $14 million, including retired marine vessels. We used cash flow and cash on hand to fund $35 million of capital expenditures or CapEx, as well as to purchase the assets of a small marine gearbox repair company in the Distribution and Services segment that totaled $4 million. During the quarter, we repaid $9 million of debt. As of March 31, we had total available liquidity of approximately $886 million.

With respect to CapEx, we continue to expect full year CapEx of approximately $170 million to $190 million, which is primarily comprised of maintenance requirements for our marine fleet. We also expect to generate strong cash flow from operations of $420 million to $480 million, with free cash flow, defined as cash flow from operations minus CapEx of $230 million to $310 million. We intend to use this cash flow to firstly repay debt and secondly, to fund any potential attractive niche investments and acquisition opportunities that create long-term shareholder value. We will continue to take a disciplined approach to pursuing accretive, value-enhancing growth opportunities.

I will now turn the call over to David to discuss our outlook for the remainder of 2022.

Thank you, Raj. While our first quarter results had some challenges, we exited the quarter in a solid position. We see momentum continuing to build, and we expect our businesses will deliver improved financial results in the coming quarters.

In Marine, refinery utilization has returned to pre-pandemic levels, our barge utilization has been at or above 90% since mid-March, and inland rates are inflecting nicely. In Distribution and Services, demand is growing across the segment, and we continue to receive new manufacturing orders.

While all of this is very encouraging, we are mindful of near-term potential headwinds, including new COVID-19 sub-variants, potential demand destruction resulting from high commodity prices and prolonged inflationary pressures. As always, we will diligently manage these factors and continue our relentless focus on cost and working capital management.

Looking at the outlook for our businesses in more detail. In inland marine, with Omicron headwinds mostly behind us, we expect a very favorable market going forward. Strong refinery and petrochemical plant utilization, increased customer volumes and minimal new barge construction should contribute to our barge utilization being at or modestly above 90%. These favorable dynamics are expected to yield further improvements in the spot market, which currently represents approximately 35% of inland revenues, as well as improvement in term contract rates.

Significant increases in fuel costs since the beginning of the year are resulting in higher rebuild revenue to customers. Fuel rebuilds are a pass-through to customers, and as a reminder, they come with no associated profit. Additionally, fuel escalators on term contracts of affreightment can take a quarter to roll through the P&L. This, coupled with inflationary pressures are expected to be near-term margin headwinds until all of our fuel and other escalation clauses reset.

Overall, for the full year, we expect inland revenues will grow 15% to 20%, with progressive growth throughout the year as business continues to improve and term contracts continue to renew. We expect near-term inland operating margins to be in the low double digits and to continue to gradually improve as the year progresses, barring any further fuel or inflationary headwinds.

In coastal, market conditions are expected to modestly improve through the year, but remain challenged by underutilized barge capacity across the industry. Despite the industry softness, Kirby's coastal barge utilization is expected to be strong in the 90% range. Full year coastal revenues are expected to be down in the low single digits, driven primarily by the company's exit from Hawaii and reduced coal shipments in our offshore dry cargo business.

Starting in the second quarter, we expect increased shipyard activity from scheduled regulatory surveys and ballast water treatment installations on certain vessels. This is expected to continue through the fourth quarter. These factors should be partially offset by improving market dynamics, small rate gains and favorable barge utilization. Overall, coastal operating margins are expected to improve relative to the first quarter and range between a low single-digit loss to near breakeven as the year progresses.

Looking at Distribution and Services, we maintain a favorable outlook, with strong demand for equipment, parts and service and distribution and a solid backlog in manufacturing. In oil and gas, we expect the current commodity price environment will contribute to further increases in rig counts and frac activity in 2022. Industry analysts currently predict U.S. land rig counts will rise to near 700 by year's end, which would represent a full year average increase of approximately 40%. Similarly, the average active frac crew count is expected to climb to as many as 250, representing a 20% increase over 2021. With this growth, we expect to see increasing demand for transmissions, engines, parts and service and distribution.

In manufacturing, we started the year with a strong backlog. We added new incremental orders in the first quarter, and we expect this trend will continue. However, we do expect that supply chain issues and long lead time items from OEMs will extend through the year and beyond the year and remain a challenge. These issues are likely to contribute to some choppiness with new product deliveries shifting between quarters and potentially, into 2023.

In commercial and industrial, we anticipate strong demand in on-highway, with increased trucking and municipal repair work, continued improvement in bus ridership and increased demand for Thermo King refrigeration products. In power generation, new backup power installations, parts and service activity are all expected to remain solid, as demand for electrification and 24/7 power grows.

Marine repair is also expected to be strong with increasing oil and gas activity in the Gulf of Mexico and improved commercial markets on the East and West Coast. For the full year, we expect revenue growth in the low double-digit percentage range for commercial and industrial.

While supply chain issues could impact new product and equipment timing in Distribution and Services, we continue to expect 2022 segment revenues will increase by 30% to 40% year-over-year, with commercial and industrial representing approximately half of segment revenues and oil and gas representing the other half. We expect segment operating margins will be in the mid-single digits for the duration of 2022.

To conclude, the first quarter was not without its challenges, including COVID-19 and supply chain issues. However, we exited the quarter with strong momentum, and we are well positioned to meaningfully grow earnings during the remainder of the year. In inland, customer demand is strong, with barge utilization returning to pre-pandemic levels and rates moving higher. The price of a new barge remains at historical highs, and we expect extremely limited new barge construction this year. This should drive continued improvement in market dynamics and contribute to healthy earnings improvement as the year progresses.

In coastal, although the market still needs more time to recover, we saw modest improvements in demand with our barge utilization above 90%. We also realized some rate gains for the first time since the pandemic started. These factors, combined with our efforts to rightsize the fleet and exit unprofitable markets will result in reduced near-term losses, and it will better position us for better days in the coastal business ahead.

In Distribution and Services, we saw strong demand and see strong demand in commercial and industrial, and oilfield fundamentals are favorable with the current commodity price environment. This is expected to drive incremental activity for new OEM equipment, parts and service across our distribution businesses.

In manufacturing, although supply chain issues continue to pose a headwind, our backlog is very strong, demand for environmentally friendly pressure pumping equipment continues to grow, and we see activity picking up, with improved revenue and returns through the remainder of the year. As we look ahead, we intend to continue capitalizing on our strong momentum and delivering improved financial results.

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

(Operator Instructions) Our first question comes from Jack Atkins with Stephens.

Okay. So David, I guess, maybe, to start with inland marine, if we could. I guess, I'd be curious to get your perspective on maybe how the year has progressed relative to maybe your initial expectations when we entered the year. Obviously, COVID provided some volatility in January and February. But just from an industry structure perspective, if you think about the progression of pricing, the progression of your utilization rate, is that proceeding maybe in line with or perhaps, better than you initially anticipated? And I guess, maybe, following up on that, when you think about where margins can go in the second half of this year, if you're in the low double digits in the second quarter, perhaps, is it right to think that mid-teens or maybe, even higher than that is realistic for the second half of the year? Just trying to kind of bracket the opportunity set there.

Yes, sure. Yes. The short answer is, yes, the second half could easily see mid-teen margins. But let me walk through kind of the industry structure and pricing dynamics and the progress that we've seen in inland marine. And I would say, but for Omicron, it's been actually better than we expected.

Let me spend just a few minutes on Omicron though, because Omicron did hit us pretty hard. Remember, last year, Delta variant hit the fleet, and we had some crewing issues. But Omicron was much worse, actually. At one point, Jack, we had 15 inland boats down with crews with COVID. I mean, once it hit a crew member, it would spread through the entire crew and we'd have to quarantine the boat and sometimes, shut it down and get people off and then, backfill with either charter boats or other boats. And so there was a lot of cost and a lot of disruption. And that hit us really hard in January and February.

But it wasn't too dissimilar to what you saw in the airline industry. You'll remember them canceling flights throughout January and into February. We saw that. I think we characterize it as costing us about $0.10 in the quarter. Most of that was on the inland side. Just a little bit on the offshore side, probably 80%, 90% was in the inland side. We did have a couple of big offshore units go down with the Omicron variant, too.

The good news is, as soon as that started dissipating in March, things really started hopping. One, refinery utilization popped back up. It was a little depressed with Omicron, but now into March, it got up above 90%, and it's still going strong. The higher commodity prices are, no doubt, helping. We saw our barge utilization jump up in March into the 90s, low 90% range. We saw some pretty strong pricing. I mean, just for the quarter, we averaged 15% to 20% on spot pricing increases. And I would tell you, in March, it was probably closer to 25%. But for the quarter, it averaged 15% to 20% on spot on a year-over-year basis.

On contracts, we were in high single digits for the quarter. And that momentum was stronger in March than throughout the rest of the quarter. So -- and I would tell you that it's carried on into April. So we've seen really good dynamics. Supply and demand are very tight. As you're aware, barge price, pricing for new barges is up considerably. A new 30,000-barrel barge, clean barge costs about $4.2 million. A black oil barge is about $5.2 million. And to put that in context, if you were to build a 2-barge tow brand-new equipment, you would need rates above $10,000 a day to justify building new equipment. So that new equipment pricing is absolutely helping the structure of the industry. There's not much new build equipment there. And if you were to build new equipment, you will need some pretty strong prices to justify it.

And then there's the demand side. The demand side continues to grow, we're excited about that. You can see the refiners are doing better, the petrochemical companies are doing better. So from a supply and demand standpoint, it's probably better than we would have expected. And I would tell you, Christian O'Neil, who's been doing this for almost 30 years, said, this has been about the best pricing environment he's seen. So yes, we feel pretty good about it.

Now, all that said, Jack, as you know, we've got some inflation in costs, and we've seen some pretty heavy inflation, crew costs, in particular, going up.

But Raj, why don't you share a little bit on the inflation data?

Yes. Thank you, David. Yes, inflation has been an issue like everything in all industries right now. I mean, we are looking at [air fares] going up 25%. Food's gone up 10%. And if you look at food, poultry, chicken, fish, that's gone up like 14% to 15%. So that's quite a sizable increase there. Voyage costs have also gone up quite a bit, 10% to 12% there. So inflation has come up meaningfully. We're managing through it. These price and rate increases that we have, have been favorable, have been helping us, but we need to see real price increases, not just nominal price increases.

Yes. So it's a long way of saying -- and sorry for the long-winded answer here, Jack, that the industry structure is about as good as we've seen in a while on the inland side. We are getting price increases. We need to get the price increases and the market is very tight and looks to be holding with that tightness.

Now, there is one caveat. I would say, we're all looking at the potential for a recession. And the good news is the economists are saying 10% to 20% chance of a recession, so it's still pretty low. So when you look at the outlook for margins in the back half of the year and into '23, that would be the caveat. Otherwise, I would say you're going to see mid-teens and then, I think, kind of late '23, you'd probably see margins in the inland business, starting with it, too.

So we're pretty excited about where we are in the cycle. And I would say, if anything, it's going a little better than we anticipated once we got through Omicron.

Okay. That's great to hear. Maybe, one quick follow-up, if I could. On the Distribution and Services side, Obviously, demand is extremely strong, but there's just a limit on what you can do because of the lack of components and parts because of supply chain challenges. I guess, how does the strong demand kind of potentially manifest itself in the business that if you can't do more newbuild work, is there opportunity to do some remanufacturing work? Do you see tailwinds from a pricing perspective? Can you kind of walk us through -- I would think it would be a benefit, even if you can do more units, just given how strong the activity levels would be.

Yes. No, it's a good question. We are seeing supply chain delays in that business in -- and frankly, some of it's gotten better, some of it's gotten worse. I can give you an example. One of our major OEM engine suppliers, a year ago, it's a 26-week delivery lead times, and then they went to 56 weeks. And now, they're up to 80-week delivery times on major engine pieces. So that hasn't been helpful. That said, I would tell you that our backlog is up good 500% from kind of lows of last year. Our book-to-bill is well over 1x. So the inbound continues. We're managing through the supply chain disruptions. They've gotten a little better in some places and a little worse than other places, but I think it's stable, but delayed.

So that's manifesting itself. I would tell you, we expect margins to increase in that business over the next 12 to 24 months, as we progress this backlog. The structure is pretty good. We are seeing our OEMs ask for big price increases. We have one major OEM asked for a 15.5% price increase on one of their major engine lines. And that, we're passing on. We're working hard to pass that on.

I would say, the good news is that anything ESG-related has been really strong. Reman is okay, but when we look at our customers, particularly in manufacturing, they really -- if they're deploying new capital or significant dollars, they want a good ESG profile. So our electric track, backlog is growing, our power generation equipment that goes into driving electric frac has gone up a lot. So anything with a low carbon footprint or an improved carbon footprint has been growing, and that's good.

The inflationary pressures are helping a little bit. We're pushing price increases, and we're keeping up with the inflation and maybe, making a little headway there. So it's all good. It's a good construct in what we're seeing. Would it be better if we didn't have all the supply chain delays? Sure. But we still feel pretty good about how it's shaping up.

Okay. That's great.

Your next question comes from Ben Nolan with Stifel.

Yes. David, and Raj and Eric. Well, I guess, for my first one, we'll stay with the barge market a little bit. I guess, maybe, I'll sneak 2 in here. But David, you mentioned the market would need $10,000 a day to justify building. Any -- just to sort of level set, what's the kind of -- where we are at the moment? If you could help there and then sort of associated with that, can you talk to sort of what the towboat market supply and demand looks like at the moment?

Yes, sure. The -- Well, the level set, the -- that $10,000 number is really, if you build two 30,000 barrel barges at $4.2 million each, that's $8.4 million and then you put a $6 million to $7 million towboat on top of it, you're talking about $15 million in capital. And to get a 10% type return, you're going to need $10,000 a day on a day rate. That's where I came up with that number.

We're below that now. We're -- pricing is up quite a bit. I don't want to get too specific on current pricing because I don't think our attorneys would like that very much. But it's quite a bit. It's 30% below that $10,000 number. So it's got ways to go. But the structure is much better in terms of pricing and improving.

And the second part of your question was? I'm sorry.

Just towboat -- the tightness of the towboat market.

Actually, that's probably what's helping drive pricing more than anything else in the market right now. Crews are short. Fortunately, we, at Kirby, started our training school up in earnest in January of last year, and we've been hiring all along. So our crewing situation is okay, but for the impact we had with Omicron. But I would tell you, crewing is tight across the entire industry. I think there'd be more boats working if they could be crewed.

We are seeing labor and wage pressure. But the industry is really tight on towboats and that has helped driving the whole pricing dynamic. It's just -- you can't get the crews. Whether it's the great resignation or people just decided, they don't want to be away from their families by living on a boat. It's put pressure on the crewing environment. And that's actually not bad for the price dynamic and the rate dynamic for our industry. But it is, to your question, very, very tight on crewing right now.

Okay. That's helpful. And then to -- for my follow-up, just to switch gears a little bit on to the -- well, not -- I guess, it's still on the marine side. But thinking through the offshore wind business a little bit, congratulations on winning that deal. Just trying to think about how you're thinking about the cadence of incremental developments? Is this going to be something where maybe, you get one of them a year or something like that? Or is the market progressing more quickly than kind of where we've come thus far?

Yes. I'm -- well, we're -- Christian and I are very bullish about this market. When we look at what's been announced and on the projects that we know are coming forward, I think it's 32 gigawatts of power going on offshore wind, all on the Eastern seaboard. That's just the Eastern Seaboard. So when we look at the potential demand for vessels to service that, we're building 2 feeder barges, but the demand for that kind of service is probably 26 vessels to service that. So we think that market is going to be tight. We know of basically 2 other people building vessels right now. Dominion's building one, and then there's another group building some vessel to do that.

So there's 3 market entrants, if you will, that we're aware of. I know other people are looking at it, but when we think about that, a need for probably 20 to 25 vessels over the next decade, we feel pretty good about that structure. We're just starting with these first 2. We're very excited about the efficiency level of this feeder barge to an installation vessel. We think from a traditional standpoint, that's about 30% more efficient in terms of what our customers would be paying for. And again, this is Empire Wind, which is BP and Equinor. We're really excited to be partnering with world-class operators like Maersk and BP and Equinor on these first sets of projects.

So we'll see where it goes. But again, it's going to take -- it's 2025 before we'll have these vessels out and probably, really don't start working until '26. We'll see there's a lot going on. These projects take a while to get going. These newbuilds take a while right now to go. And so -- but we're very excited about it.

All right. Well, I appreciate the color. Thank you, David.

Your next question comes from Jon Chappell with Evercore.

Back to the barge business. Again, we frequently ask about the timing of contract renewals. Clearly, spot moves much more quickly. You have a pretty large book. It takes time, basically, like 12 months to kind of mark the book to market. But if we try to think about how fast spots moved and the leverage of your model, if you could wave a wand today and reset your entire contract portfolio at the appropriate spot level, how much would that move your contract pricing on average? And it doesn't (inaudible), not a 5%, 6%, 7%. Is it mid-single digit, high single digit, low double digit? And then in that immediate kind of pie in the sky, what would the margin look like for inland barge if you were able to reset it all today?

Yes. If we were to reset everything right now, based on prices, everything would move up about 15%. And that would -- in terms of rates. You do know that most of -- well, the fourth quarter is the heaviest quarter in terms of term contract roll. Remember, we do have 35% spot. That spot isn't kind of day-to-day spot. Some contracts that are 6 months in length in the spot market. But if you were to roll that all and today, it was -- everything was mark-to-market. I think we'd be pretty close to 20% margin. That's just a guess, I'd have to pencil it out, but certainly high -- mid- to high double digits. That's if you could wave a wand. But as you know, it takes a while for all these contracts to roll, and some of the contracts are multiyear. And the good thing about the multiyear contracts is they do have CPI and labor-type escalators.

I would say, also, is the fuel dynamic is something that -- not that we're getting pencil lift, but in the first quarter of last year, the average fuel price we paid was $1.65. We averaged $2.50 in the first quarter. But I would tell you, in March and April, we're paying anywhere from $4 to $4.75 a gallon. So one, that all comes in as revenue with no margin. So it's a little dilutive to margin. But two, some of those contract escalators take a quarter to roll through. So we'll be a little impacted in our second quarter margin, but by third quarter, those escalators will all catch up.

So there is a little bit of fuel dynamic in our margins, but I would say -- and you know this, Ben, we work hard to -- John, we work hard to make sure fuels will pass through. We don't want to make money on fuel. Our customers don't want us to make money or lose money on fuel. So we work hard to make it a pass-through.

But back to your core question, the rate environment is very positive. And if we could wave a magic wand which would be lovely, we get a nice pop in margins.

The only thing I'll add to that, to David's comments are -- David mentioned fuel. I think we are also, to my earlier comments, seeing inflationary costs in other areas, right? So we need to be mindful of those increases, too, as we progress through the year. So coming back to the fuel comment. In the second half, I do see us cycling out of the fuel situation and coming out nicely.

That's a good bridge to my follow-up, Raj. Earlier in the call, when you were talking about a lot of these inflationary pressures and especially, when you're answering Ben's question about the crewing issues, I was thinking to David's comments 3 months ago that you could touch 2 handle on the margin at some time in '23, which you have affirmed. Then, I was thinking to the next step, though, which is how is that changing the competitive landscape? You have a lot of competitors out there that don't have your size or your scale that must have much more difficult times handling these higher costs, higher barge prices, crewing issues. You bounced off the bottom now when nobody wants to sell. So given the fact that the rates have improved, but this cost inflation is probably more punitive to the smaller operator, does this increase your abilities to maybe, further consolidate the market at this point?

I'd like to think so. But I will tell you, the whole industry has taken the rate structure up. They -- I think everybody in the industry is feeling the inflationary pressure and the crew pressure, and they know they need to respond. So I think the whole industry rate base has come up off the bottom. And -- but obviously, we -- our size does have some advantages, but I think the industry is responding.

Look, when you can't crew towboats, you got to have rate to go out and hire or make sure you're supporting the crews and your vessels. So we're seeing it across the board. The structure, to use the structure, the industry structure is probably about as positive we've seen in a while. But we'll see about acquisition possibilities. As you know, that's been very hard to predict, but we're staying disciplined, is the way I would leave it.

Okay. That makes sense.

Thank you. Our next question comes from Ken Hoexter with Bank of America.

Great stuff on passing the inflation through. I guess, just so I understand that, quick follow-up there. Is there something that is -- is it just the timing of the contracts when you get past the nonfuel through? Is that why, Raj, you were saying the second half? I just want to understand that real quick. But my question is on D&S. What gets you above mid-single-digit margins there? Is that just production volumes kicking in? Is that labor offsetting the gains? Maybe, just talk about what can ramp the D&A segment margins.

Yes. Let me take both of those real quick. Yes, the inflation -- Raj's comments were more about fuel, right? The fuel escalators and fuel rising, 50% has been a little bit of a headwind, right? You've got to wait for those escalators to kick in. And what we're really talking about is those escalators will start showing up in the third and fourth quarter in a meaningful way. So that will be a help.

On the multiyear contracts, the CPI and PPI, those usually reset in the fourth quarter. So we wouldn't see those until the fourth quarter. So that -- the multiyear contract is only real exposure there. Most of the other contracts kind of renew annually, and as you recall, Ken, most of that's in the fourth quarter. So we feel pretty good about our ability to stay up with inflation. And so far, certainly in the spot market, we're staying up with inflation. So we're not too worried about the inflationary pressure, although it is there.

The second question you had was on the margins on D&S. I would tell you, in manufacturing, given that a lot of the new orders were kind of the first series in some new generation electric equipment, the margins were really low on those. As you imagine, with the first generation or when new generation, there's a lot of engineering costs and a lot of rework as you dial it in. And so the initial orders that we had, had low margins and they are improving.

So I do believe strongly that we'll get to high single digits in our D&S business as this backlog progresses. And so we'll start to see that come in as the year progresses and certainly, into '23. A lot of that depends on the supply chain. Again, you heard the kind of the 80-week delays on orders for new engines is a long time. But we still feel pretty good about margin progression.

And your thoughts on gains on sale? Is this just barges that are coming due for expiration that you're selling? What are the gains that you're starting to recognize in the [business]?

Yes, sure. Every quarter, we have $2 million to $3 million in gains on sales, typically. This quarter was a little higher. It was about $4 million, I think, a little over $4 million. And a lot of that was the coastwise equipment that we sold after last year's move where we cleaned up. And so it was a little more than normal.

Typically, we try and keep that a little lower, but we were cleaning up some of that old coastal equipment. And with the scrap steel prices, it helped a lot. We were able to get some better pricing on some of the stuff that we sold. All right, that's kind of the little anomalous, but it should still always range in that $1 million to $3 million, it was a little higher this year in terms of gains this quarter.

I mean, it just sounds like the setup here is exactly what you've finally been waiting for, right? With pricing finally kicking in, margins on inland ramping up, not really seeing capacity come in. It's taken a while to get here, but good luck. Thanks for time and thoughts.

Your next question comes from Greg Wasikowski with Webber Research.

David, you kind of already touched on this a little bit, but I wanted to get your updated thoughts on the pace of the recovery in inland. We've talked about it being a little bit more on the slow and steady side of things versus cycles in the past. But given the pivot in March and April, and the general sense of urgency for everything energy-related globally, have your thoughts around the cadence or the pace of this recovery changed at all in the past, call it, 6 to 8 weeks?

Yes. Yes, we're pinching ourselves a little bit because the last 6, 8 weeks have been very strong. Will that temper itself a little bit? I don't know. But yes, I would say the pace, if it continues at this, it is faster than we had expected, so we feel pretty good about that. What could derail is probably a good ancillary question. I think we talked a little bit about a recession, but that still feels like ways off. I think the war, we're all watching Ukraine, if something happens bigger there, more global, that could derail things. So anything it could derail, it's probably big on the macro side. I don't think there's anything structurally that we see within the industry that concerns us right now.

Our customers are making more money, they're busier, their demand is up. That's all constructive. And as we mentioned, the cost of building new equipment is just really high, given steel prices in particular. So we feel really good about the structure and don't see much to change that industry structure right now. So the short answer is, yes, the pace is a little better than what we had been anticipating.

Great. And then, a follow-up also on inland. Correct me if I'm wrong, but I think you guys still have some capacity that was sidelined from COVID in 2020. What is the timeline for that capacity to potentially reenter the market? And is it more like market dependent with rates and utilization? Or has labor kind of been the gating factor there?

Yes. The short answer is labor has been the gating factor. We do have some equipment. We're bringing, I think, 10, 11 barges off the bank. Actually, Eric just told me it was 9. And yes, but crewing is the gating factor. Just getting crews to move the equipment. But I would tell you, it's going ratably, is what I would say. There is some equipment that was sidelined during COVID that can come back, but the crewing situation is probably gating that more than anything else. And I view it as probably, a decent shock absorber so that things don't get out of hand and people don't run off to go build new stuff. It's just building new right now just does not make sense. So again, I kind of feel really good about the structure and even with some of that sidelined equipment coming back.

Okay. Operator, we're going to take one more caller, and then we'll close out.

Your last question comes from Chris Robertson with Jefferies.

So I just wanted to turn back to the Wind project. So can you get into more of the construction timeline when there will be some capital spending associated with those 2 barges and kind of the cadence on that?

Yes. Again, it's -- for the 2 units, again, it's a deck barge with an ATB. That would be 1 unit. So we're building 2 units at roughly $40 million to $50 million per unit. We'll start construction, we'll be in the shipyards and doing engineering now. That capital will be spread between now and early '25. I think bulk of it will be done by early '25. And then, we'll be doing sea trials in '25. And probably, the gating factor to put the equipment to work is the WTIV. The wind installation vessel, wind tower installation vessel that Maersk is building. They're building it in, I believe, Korea and it's a big expensive vessel, and it's going to take a while to build.

But in terms of our capital spend, it will be spread out between now and '25. And I'm not sure exactly milestone payments, but I would just treat it kind of ratably between then and now, not a big spike in any 1 quarter or 1 year. And obviously, our free cash flow, I think, is very sufficient to support that level of CapEx.

Okay. And a quick follow-up, and it's a related question. On your CapEx guidance for the full year, should we think of that as being pretty smoothed out across the quarters? Or will there be any lumpy quarters?

Yes. Yes, you can think about it that way. Smoothed out over the quarters, Chris. I just want to mention, most of this CapEx is maintenance-related. So that's a good assumption to have.

Right, right. Okay.

All right. Thanks, Chris, and thank you, everyone, for participating on the call today. If anyone has any questions or comments, I will be available throughout the day. Feel free to contact me at (713) 435-1545. Thanks, everyone. Have a great day.

Thank you. This concludes our question and -- the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.