Kirby Corp

NYSE:KEX

Earnings Call Analysis

Strong earnings growth and solid operational strategies position Kirby Corporation for future success.

Kirby Corporation reported third-quarter earnings per share of $1.55, a significant increase from $1.05 a year prior, attributed to steady demand and effective execution. Revenue rose 9% year-over-year, driven by an 11% increase in inland marine transportation and a remarkable 23% in coastal revenues. The company generated over $130 million in free cash flow, using $70 million to reduce debt and $56 million for stock buybacks. Looking ahead, 2024 forecasts highlight cash flow from operations between $600-$700 million, with inland margins expected to improve 200-300 basis points. However, some seasonal headwinds might lead to a slight revenue decline in Q4.

Strong Financial Performance in Q3 2024

In the third quarter of 2024, the company reported earnings per share of $1.55, a significant increase of 48% from $1.05 in the same period last year. Revenues rose 9% year-over-year to a total of $831 million, driven primarily by solid performance in its Marine Transportation and Distribution and Services segments.

Marine Transportation Segment Growth

The Marine Transportation segment achieved revenues of $486 million, marking a 13% year-over-year increase. Operational challenges, such as the impact of three hurricanes, led to a 33% increase in delay days. Nevertheless, solid underlying customer demand and improved pricing offset these headwinds, contributing to an operating income of $99 million with margins around 21%. Average barge utilization rates for the inland business were in the 90% range, bolstered by stable contract pricing.

Inland and Coastal Revenue Dynamics

Inland marine revenues increased by 11% compared to Q3 2023, driven by higher spot and term contract pricing. Notably, term contract renewals were up by high single digits, and spot prices increased by low to mid-single digits quarter-over-quarter. Meanwhile, coastal revenues surged by 23% year-over-year, supported by elevated contract pricing and tight supply conditions. The coastal segment's operating margin maintained in the mid-teens range.

Challenges in Distribution and Services

The Distribution and Services segment faced mixed demand conditions, yet managed an overall revenue increase of 3% year-over-year to $345 million. Specific areas such as power generation reported a notable 61% increase in revenues, attributed to strong project orders in backup power and industrial sectors. However, continued softness in the oil and gas sector impacted overall performance, leading to declines in revenues related to conventional frac systems.

Balance Sheet Strength and Cash Flow Generation

The company demonstrated robust cash flow generation, producing over $130 million in free cash flow during the quarter. Cash from operating activities for Q3 2024 was approximately $207 million. During this time, the company used its cash to pay down $70 million in debt and repurchased $56 million in stock at an average price of $115. The total debt stood at around $979 million with a cash balance of $67 million.

Future Outlook and Segment Guidance

Looking ahead, the company anticipates continued positive dynamics in the marine sector, particularly in inland operations, with expected barge utilization rates remaining around 90%. Guidance for revenue growth in 2024 remains positive, projecting cash flow from operations between $600 million and $700 million due to rising revenues and earnings. However, fourth-quarter revenue is expected to be flat to slightly down due to normal seasonal effects and higher maintenance levels.

Inflation and Operating Margins

Operating margins have improved year-over-year, with inland operating margins rising approximately 350 basis points. The company expects ongoing inflationary pressures, particularly labor costs in the marine sector, to influence future profitability. For 2025, expected inland margins are projected to increase by approximately 200 to 300 basis points, reflecting a continued focus on cost management.

Strategic Capital Allocation

The company remains committed to a balanced capital allocation approach. Anticipated capital expenditures are expected to range from $325 million to $355 million for 2024. Additionally, the company will continue to allocate cash flow towards share buybacks, debt reduction, and strategic investments aimed at enhancing long-term shareholder value.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to the Kirby Corporation 2024 Third Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kurt Niemietz, Kirby's VP of Investor Relations and Treasurer.

[Kurt Niemietz, executive]

Good morning, and thank you for joining the Kirby Corporation 2024 Third Quarter Earnings Call. With me today are David Grzebinski, Kirby's Chief Executive Officer; Christian O'Neil, Kirby's President and Chief Operating 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. 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. A list of these factors can be found in Kirby's latest Form 10-K and in our other filings made with the SEC from time to time. I will now turn the call over to David.

[David W. Grzebinski, executive]

Thank you, Kurt, and good morning, everyone. Before we begin, I would like to recognize our employees, especially our Florida-based team members that were recently impacted by Hurricane Milton. The fast-moving considerable damage across Florida, disrupting the lives of our employees in the area and many were left without power for several days.

During the storm and the immediate recovery thereafter, they remain focused on [indiscernible] continue to meet the needs of our customer and our businesses as well as support each other during the event. I want to thank them for their exceptional efforts and resilience during this challenge. Now turning to earnings.

Today, we announced third quarter earnings per share of $1.55 compared to 2023 third quarter earnings per share of $1.05. Our third quarter results reflected steady fundamentals in both Marine Transportation and Distribution and Services even though we experienced some modest weather and navigational challenges for Marine and continued live challenges in Distribution and Services.

These headwinds were offset by good execution in both Marine and Distribution and Services during the quarter that led to strong financial performance with total revenues up 9% and earnings per share up 48% year-over-year. We also generated over $130 million of free cash flow in the quarter, which we used to further strengthen our balance sheet by paying down $70 million in debt and to buy back $56 million in stock.

In inland Marine Transportation, our third quarter results reflected further gains in pricing, offset somewhat by the modest impact from for navigational conditions due to weather and lock delays. From a demand standpoint, customer activity was steady with barge utilization rates running in the 90% range throughout the quarter. Spot prices increased in the low to mid-single digits sequentially and in the low double-digit range year-over-year.

Term contract prices also renewed up higher with high single-digit increases versus a year ago. Overall, third quarter inland revenues increased 11% year-over-year and margins were in the low 20% range. In coastal, market fundamentals remain steady with our barge utilization levels running in the mid- to high 90% range. During the quarter, strong customer demand and limited availability of large capacity vessels continued which resulted in high 20% increases on term contract renewals year-over-year and average spot market rates that increased in the low double-digit range year-over-year. Overall, third quarter coastal revenues increased 23% year-over-year and the operating margin was in the mid-teens.

Turning to Distribution and Services, demand was mixed across our end markets with growth in some areas offset by slowness or delays in other areas. In power generation, revenue grew 4% sequentially, but was down 6% year-over-year, driven by supply delays. The pace of orders was strong, adding to our backlog with several large project wins from backup power and other industrial customers as the need for power becomes more critical. In oil and gas, revenues were up 19% year-over-year and up 8% sequentially driven by some growth in our e-frac business that was partially offset by a very soft conventional oil and gas business.

In our commercial and industrial market, revenues were up 4% year-over-year, driven by steady demand in marine engine repair, partially offset by softness in on-highway truck service and repair. In summary, our third quarter results reflected ongoing strength in market fundamentals for both segments. The inland market is solid and we saw continued upward pricing. In coastal, industry-wide supply-demand dynamics remain very favorable. Our barge utilization is strong, and we are realizing real rate increases.

Increased demand for power generation and Distribution and Services is mostly offsetting softness in oil and gas and other areas. I'll talk more about our outlook later. But first, I'll turn the call over to Raj to discuss the third quarter segment results and balance sheet in detail.

[Raj Kumar, executive]

Thank you, David, and good morning, everyone. In the third quarter of 2024, Marine Transportation segment revenues were $486 million and operating income was $99 million with an operating margin around 21%. Compared to the third quarter of 2023, total marine revenues, inland and coastal combined, increased $56 million or 13% and operating income increased $36 million or 57%. Total marine revenues were flat compared to the second quarter of 2024, while operating income increased 5%.

Weather and loss delays modestly impacted operations as we experienced 3 hurricanes during the quarter. Although the hurricanes had limited direct impact on our operations, they did briefly slow customer activity during the quarter. Overall, we experienced a 33% year-over-year increase in delay days. These headwinds were offset by solid underlying customer demand, improved pricing and most importantly, execution.

Looking at the inland business in more detail. The inland business contributed approximately 81% of segment revenue. Average barge utilization was in the 90% range for the quarter, which was an improvement over the third quarter of 2023, but slightly lower than the second quarter of 2024.

Long-term inland marine transportation contracts of those contracts with a term of 1 year or longer, contributed approximately 65% of revenue with 62% from time charters and 38% from contracts of affreightment. As David mentioned, improved market conditions contributed to spot market rates increasing sequentially in the low to mid-single digits and in the low double-digit range year-over-year. Term contracts that renewed during the third quarter were up on average in the high single digits compared to the prior year.

Compared to the third quarter of 2023, inland revenues increased 11% primarily due to higher term and spot contract pricing. Inland revenues were flat compared to the second quarter of 2024. Inland operating margins improved by around 350 basis points year-over-year and by 75 basis points sequentially, driven by the impact of higher pricing and ongoing cost management, which helps blunt lingering inflationary pressures.

Now moving to the coastal business. Coastal revenues increased 23% year-over-year due to high contract pricing and fewer shipyards. Overall, coastal had an operating margin in the mid-teens range, resulting from higher pricing and shipyard timing. This will temporarily reverse in the fourth quarter given the higher number of shipyards we have on schedule.

The coastal business represented 19% of revenues for the Marine Transportation segment. Over average coastal [ barge ] utilization was in the mid- to high 90% range, which is in line with both the third quarter of 2023 and the second quarter of 2024. During the quarter, the percentage of coastal revenue under term contracts was approximately 99%, of which approximately 99% were time charters. Average spot market rates were up in the low double digit range year-over-year. Renewals of term contract prices were higher in the high 20% range on average year-over-year.

With respect to our tank barge fleet for both the inland and coastal businesses, we have provided a reconciliation of the changes in the third quarter as well as projections for 2024. This is included in our earnings call presentation posted on our website. At the end of the third quarter, the inland fleet had 1,095 barges, representing 24.2 million barrels of capacity. On a net basis, we expect to end 2024 with a total of 1,093 inland barges, representing 24.2 million barrels of capacity. Coastal marine is expected to remain unchanged for the year.

Now I'll review the performance of the Distribution and Services segment. Total segment revenues for the third quarter of 2024 were $345 million with an operating income of $30 million and an operating margin of 8.8%. Compared to the third quarter of 2023, the Distribution and Services segment revenue increased by $10 million or 3%, while operating income decreased by $3 million or 8% due to mix. When compared to the second quarter of 2024, segment revenues increased by $6 million or 2% and operating income increased by $1 million or 3%.

Moving to the segments in more detail. In power generation, our revenues tied to industrial end markets were up 16% sequentially and 61% year-over-year. We continue to see significant power generation orders resulting in higher backlog from backup power, data centers and other industrial applications. Our power generation revenues tied to the oil and gas space were down sequentially and year-over-year as product delays continue to contribute to lumpiness.

Altogether, with the decline in oil and gas related to power generation, revenues were down 6% year-over-year and operating income was down 26% year-over-year with operating margins around 10%. Power generation represented 32% of total segment revenues.

On the commercial and industrial side, steady activity in marine repair offset lower activity in other areas, particularly on-highway truck service. As a result, commercial and industrial revenues were up 4% year-over-year. Operating income increased 15% year-over-year driven by favorable product mix and ongoing cost savings initiatives.

Commercial and industrial made up 47% of segment revenues and had operating margins in the high single digits. In the oil and gas market, we continue to see softness in conventional frac-related equipment as lower rig counts and lower fracking demand tempered demand for new engines, transmissions and parts throughout the quarter. This softness is being partially offset by solid execution and backlog and new orders of e-frac related equipment.

Revenues in oil and gas were up 19% year-over-year and up 8% sequentially while operating income was down 14% year-over-year, but up 166% sequentially as lower conventional work continues to get replaced by execution on e-frac backlog. Oil and gas represented 21% of segment revenue in the third quarter and then operating margins in the mid- to high single digits.

Now I'll turn to the balance sheet. As of September 30, we had $67 million of cash with total debt of around $979 million, and our debt-to-cap ratio improved to 22.9%. During the quarter, we had net cash flow from from operating activities of around $207 million. Third quarter cash flow from operations benefited from a working capital reduction of approximately $30 million.

We continue to target unwinding more working capital in the fourth quarter and into 2025. We used cash flow and cash on hand to fund $76 million of capital expenditures or CapEx primarily related to maintenance of marine equipment. Free cash flow generation during the quarter was just over $130 million. And during the quarter, we used $56 million to repurchase stock at an average price of $115 and reduced our debt by around $70 million. As of September 30, we had total available liquidity of approximately $570 million.

For 2024, we remain on track to generate cash flow from operations of $600 million to $700 million driven by higher revenues and earnings. We still see some supply chain constraints, especially in the power generation space, posing some headwinds to managing working capital in the near term. Having said that, we are targeting to unwind more working capital as orders shipped in 2024 and into 2025.

With respect to CapEx, we expect capital spending to range between $325 million to $355 million for the year. This represents a slight increase from our prior range as we plan to make additional investments in our power generation rental business. Approximately $200 million to $240 million is associated with marine maintenance capital and improvements to existing inland and coastal marine equipment and facility improvements. Approximately $115 million is associated with growth capital spending in both of our businesses. We expect the net result to continue to provide approximately $300 million to $350 million of free cash flow for the year.

As always, we are committed to a balanced capital allocation approach and we'll use this cash flow to return capital to shareholders and continue to pursue long-term value-creating investment and acquisition opportunities. I will now turn the call back to David to discuss our fourth quarter outlook.

[David W. Grzebinski, executive]

Thank you, Raj. While we ended the quarter in a strong position in our businesses, the beginning of the fourth quarter so far was challenged by Hurricane Milton. The hurricane impacted our marine operations and temporarily shut down some of our distribution and services locations. Our teams worked hard through the challenging environment, and we're pleased to have quickly returned to normal working conditions.

For detail on the marine outlook, our overall outlook remains solid for the final quarter of the year, driven in large part by limited availability of equipment what will be tempered by the onset of seasonal weather, a bit of softness in the refining market and some higher maintenance levels. In inland, we continue to anticipate positive market dynamics due to limited new barge construction. Demand is solid, but we have seen a little softening in the refining sector early in the quarter. Nonetheless, with these solid market fundamentals, we expect our barge utilization rates to be around the 90% range throughout the remainder of the year.

We also expect continued improvement in term contract pricing as renewals occur throughout the final quarter of the year. We continue to see inflationary pressures in some areas, and there is an acute mariner shortage in the industry driving up labor costs. These pressures along with the increasing Cost of equipment should continue to put upward pressure on prices. That said, we expect inland revenues will be flat to slightly down in the fourth quarter due to normal seasonality and consequently, our operating margins are expected to be down as compared to the third quarter.

In coastal, market conditions remained very favorable and supply and demand are in balance across the industry fleet. Steady customer demand is expected in the fourth quarter with our barge utilization in the mid-90% range. We expect margins in the fourth quarter to be in the mid- to high single digits, given a number of planned shipyards in the fourth quarter. Postal revenues are expected to be down in the mid-single digits sequentially because of the shipyards. In the Distribution and Services segment, we see near-term uncertainty from supply issues, customers deferring maintenance and lower overall levels of activity in the oil and gas sector. However, longer term, we expect incremental demand for products, parts and services in oil and gas as rates of investment improved from what feels like a close to the bottom market in oil and gas. In commercial and industrial, the demand outlook in marine repair remained steady, while on-highway service and repair is somewhat weak in the current environment.

Similar to oil and gas, the on-highway market feels close to bottoming from the trucking recession that we've experienced recently. In power generation, we anticipate continued strong growth in orders as data center demand and the need for backup power is very strong. We do anticipate extended lead times for certain OEM products to continue contributing to volatile delivery schedule of new products in the fourth quarter and in 2025. Overall, the company expects the segment revenues to be down in the mid-single digits sequentially, with operating margins in the mid- to high single digits, but lower than the third quarter.

To conclude, overall solid execution and good market conditions led to a strong quarter for us, and we have a favorable outlook as we look into this quarter and next year. A lack of meaningful new build of equipment in marine has supply in check, and we continue to receive new orders for power generation equipment as we work through supply issues. Our balance sheet is strong, and we expect to generate significant cash flow this quarter and in 2025. We see favorable fundamentals continuing and expect our businesses will produce solid financial results as we move through the remainder of this year and into the next few years. As we look long term, we are confident in the strength of our core businesses and our long-term strategy. we intend to continue capitalizing on strong market fundamentals and driving shareholder value creation. Operator, this concludes our prepared remarks. Christian, Raj and I are now ready to take questions.

[Operator]

[Operator Instructions] Our first question comes from Daniel Imbro at Stephens Inc.

[Daniel Imbro, analyst]

Congrats on the quarter. I want to start in with that. On pricing, it looks like comp rates increased of high single, that's up from mid-single. In the slide, David, it looks like you took down your net fleet excise at year-end expectations. But can you just provide maybe given that backdrop an update on the spot price environment here in 4Q? And from your vantage point, how do you feel about bid season and contract renewals coming into year-end and then maybe into 2025?

[David W. Grzebinski, executive]

Sure. Well, let me break that into some pieces and Christian will chime in as well. Yes. In our barge count, I think we're going from 1,095 on inland down to 1,093, that's just some normal retirements as some barges hit that 35-year mark in terms of age, which is actually part of what the industry is going to be doing is continuing to retire barges, which is good because there's not a lot of new supply coming on in the market. And look, we're fundamentally a supply and demand business in supplies in check. We've seen the cost of barges go up even this last quarter, we're hearing $4.5 million for a new 30,000 barrel clean barge. So supply has been in check, and that's a good thing. I think year-to-date through the third quarter, there's about 22 barges that have been delivered. I'm not sure how many will be delivered in the fourth quarter, but it's not going to be an enormous number at all. And then with retirements, like we -- you're seeing us going to retire some barges. I think the industry is going to retire a fair number of barges. So we may actually see from a supply standpoint, net contraction in the number of barges out there. So when you look at that supply picture, it's pretty strong for us and the industry. We have seen a little pullback in refiners here in the last few weeks, last month or so, and Christian can give you some more color on that. But that's a little bit on the demand side. There are some bright spots on the demand side. But when you put supply and demand together, it's still in a good spot. We -- as you saw, our pricing was up sequentially on spot, 3% to 5% and year-over-year basis, spot prices were up 10% to 12%. Term contracts renewed in the 6% to 9% range in the third quarter. And we're set up for a good renewal cycle in the fourth quarter, and Christian can give you some more color on that. So we're very constructive looking forward more of the same here. I'll turn it over to Chris to give you a little more color on the demand side and what he's seeing and feeling on day-to-day side.

[Christian O'Neil, executive]

Sure. Thank you, David. I think what you see around Q4 spot pricing, of course, we're early into the quarter. It's a lot of the normal seasonality peak driving season winds down around Labor Day, refineries get into turnaround season, start doing their maintenance can affect some of the volumes. However, what usually offsets that in Q4 is the [indiscernible] weather conditions. We haven't had a real big dose of that yet a fog and winter cold fronts, but that will help re-tighten barge utility across the market as a whole. Interestingly, in Q4, we're also seeing a little better uptick in our chemical business. It's not a great amount, but it's something interesting to watch to maybe offset some of the maintenance being done at the large refining companies. To David's point and your question around term renewals, term renewals in Q4 are going very well. Our major customers are really happy. Our performance has been really at a very high level. They're very pleased. They reward us for that service. So of Q4 term renewals were going nicely. Now a lot of that benefit, we won't really see until 2025. But I think I heard you ask at the end of the question about that. So I want to touch on that as well.

[Daniel Imbro, analyst]

I really appreciate all that color. And then maybe a follow-up on it. David, in the past, you've talked about given just the inland backdrop, at least a few hundred basis points of margin improvement year-over-year. I think for this year and next year, you did that again in the third quarter. I guess, as you look forward and given that supply demand backdrop, where can margins get to during this cycle as you look forward, if shipbuilding remained lower, rates keep going higher. Can you just walk through the puts and takes of kind of where you see inland margin getting to in the coming years?

[David W. Grzebinski, executive]

Sure, sure. Let me start by saying we continue to fight inflation. But that said, we are getting real price increases, not just nominal price increases. When you look at '23 to '24 full year average -- and we like looking at it on a full year average basis because of the seasonality, the weather that Christian just talked about, some of the demand seasonality from some of our end customers, we like to look at it year-over-year. And you heard in Raj's prepared comments, sequentially, our margins were up 75 basis points second quarter to third quarter in inland. And for the full year, year-over-year, we were up about 350 basis points is what he said. So we had said for '24 versus '23, we'd be up 300 to 400 basis points. We're smack dab in the middle of that based on the number Raj gave. Looking into '25, I would say we'll be up 200 to 300 basis points in that range. There's a lot going on that can affect that, as you would expect, inflation being one of them. Labor rates, we've been through pretty acute labor market in the Marine sector. And there's been shortages of mariners across the board, across the whole industry both inland and coastal. So we've been fighting that. You heard the newbuild prices for barges, just all the inputs are up. And I know you see the rhetoric and the political debates, but inflation is real. We're still seeing it even with steel prices coming down a little bit, all the other input prices are up. So you put all that in there, we still think probably 200 to 300 basis points for inland next year. I think peak margins, to your base question, I'd be very disappointed if we don't go above our last cycle peak, which was about -- I think we had 1 quarter where we were 27%-ish, maybe 27.5%. I'd be disappointed if we don't go right through this cycle. We've got several more years of this based on the supply and demand picture. So we're really constructive. Christian and I are [indiscernible] ourselves about how good this feels.

[Operator]

Our next question comes from Greg Lewis at BTIG.

[Gregory Lewis, analyst]

I guess if we look back like 18, 24 months ago, David, you were very focused on, hey, we're going to be -- the market is going to be -- the fleet on the [indiscernible] side is going to be more spotty than short term than term. As we look at where we are today in terms of the spot term mix, I imagine that's been improved. I didn't hear anything in the prepared remarks. But as we look out over the next couple of quarters, how are you thinking about the mix of spot term on the inland side?

[David W. Grzebinski, executive]

Yes. No, we -- I'm surprised we didn't give that number, but it's about 65% term, 35% spot in the inland side. Yes, we're comfortable with it there because we believe spot pricing and all pricing should continue to go up for the next couple of years, at least. And again, that gets back to the supply-demand picture. When you think about building new equipment and a 30,000-barrel barge at $4.5 million, we need prices up at least 30% from where they are. So we're very constructive about it. Could you see term get up to 70% on average next year? Maybe, we'll see. We're comfortable with where it is because again, we have this view that supply and demand is going to stay really good for the next several years.

[Gregory Lewis, analyst]

Okay. Great. And then I had a -- I did want to ask about the oil price. Clearly, it's volatile, realizing that fuel is largely a pass-through for you. But I guess what I'm wondering is like how should we be thinking about the impact on -- and whether it's a little bit on the margin side or -- how should we be thinking about in an environment where I don't know let's frame it both ways. If we look at where we are in the oil price today, maybe if it's up $15 up or $15 down, what type of impact do you think that maybe has on your ability around pricing and really just on margins?

[David W. Grzebinski, executive]

Yes. I mean you hit it on the -- nail on the head, fuel is a pass-through for us. We work really hard with our customers. We don't want to make money on fuel, and we don't want to lose money on fuel. Most of our customers are better able to handle that fuel risk than we are anyway. So from a direct impact, it's not much. I think the higher the price deck for oil usually is better for our chemical customers and our refiners. So on the margin, the higher the oil price, probably the better for our industry. The lower -- it does stimulate some demand. And what we really do care about is the volumes. So by and large, it's a mix, but I would say is biased to the upward side. The higher it is usually the better for us. Look, you want your customers making money. They're a lot nicer to deal with when they're making good money. So that -- not that they're not nice to deal with any day, but you understand. Now that said, look, on the D&S side, the oilfield, even at this price deck of $70 per WTI and $73 for Brent, our D&S oil and gas business, the conventional oil and gas business is minimal. It's almost nonexistent. For the first time in probably 2 decades, we will not deliver this year a conventional frac system. All of our orders are electric frac. And I mean, you can see it from some of our customers announcing the impairments as they write off some of their old conventional frac equipment. Our base oil and gas business is really low, very, very weak. Now have we bottomed? I don't know. We're just very thankful that we have a great e-frac offering. And that is is making great gains and everybody seems focused on e-frac just because of the inherent efficiency. And we're happy to have that. So to your base question, if oil and gas goes up or down, I still think e-frac will be good until the bulk of the pressure pumping equipment out there is e-frac, I think we'll continue to grow e-frac because it's just that much more efficient for both our customers and the E&P customers themselves. So that's a long-winded answer. I hope I got you [indiscernible]

[Operator]

Our next question comes from Ben Nolan at Stifel.

[Benjamin Nolan, analyst]

I wanted to hit on the electrification business a little bit. There's obviously the supply chain issues that you talked about, but it sounds like you're continuing to grow the backlog. First, could you maybe frame that in, like, I don't know, maybe what is the backlog or how much did it grow or something like that in the third quarter? And is it possible for you to maybe frame in how you think about what the TAM or whatever -- what will you think is doable for that business in the next, I don't know, 3, 5 years or something like that?

[David W. Grzebinski, executive]

Yes, sure. I'll try and give you some color, we're a little reticent to publish backlog numbers every quarter. But first, the well-worn excuse of blaming things on supply chain. I hate doing that, but frankly, you've seen it with the big engine -- the big engines out there are right now, if you ordered engines right now from any of the major engine suppliers, it's [ '26 ] delivery. So we've been struggling with that. It's delayed some of our data center deliveries. That said, you'll start to see some data center deliveries in the late first quarter of '25 and then into the second quarter. So we're there's a big pig in the python, and we continue to grow our backlog, and we'll start to see some deliveries next year, and it will become more meaningful. That said, the backlog is -- I want to just throw out a number, it's hundreds of millions of dollars, and that's up from kind of $50 million a few years ago. So we continue to have greater than 1 book-to-bill. It's continuing to go well. We're getting some new customers in the data center world. I would also tell you that our rental business is doing really well. Christian, you want to share some color on just what we're seeing on rental?

[Christian O'Neil, executive]

Yes. I mean, obviously, it was a very busy hurricane season for us. And so we were chasing storms, helping the box stores keep running and the rental backup power business was quite strong. So again, we don't really like hurricanes. But as David has commented before, we have a small slight hedge. So the rental business had a good quarter on the back of a heavy storm season.

[David W. Grzebinski, executive]

And Ben, we're investing in that. You may have seen our CapEx tick up a little here at the end of the year. And that's -- we're adding to our rental fleet, frankly, as we look at the demand for power, it continues to go up. And just to be clear, when we do backup power, we're talking big industrial scale. We're not talking the smaller residential 25 KW units, we're talking 500 KW to 2 Meg type thing. So that business continues to to grow. We're going to continue to invest in it with our normal capital discipline.

[Benjamin Nolan, analyst]

Right. Okay. That's helpful. And if I could go back to the Marine side. Maybe similar but not exactly like Greg's question, one of the things that we've seen lately, and Christian, you sort of touched on this earlier, is that the crack spread of the refineries have narrowed. And I don't know if it's seasonality or what. But is there a connection between the crack spreads in your business? Like do you want big crack spreads in that incentivize the movement of freight? Or is it not as direct as that?

[Christian O'Neil, executive]

I think I'll answer it this simply, when crack spreads are good, our major refining customers are extremely happy. They are trying to throughput as much as they possibly can. Not just the big global integrated refiners, but even some of the smaller regional refiners, we tend to see their throughput go up as they supply the market. So generally, high crack spreads have historically been a very good thing for us as well as the ability to move our rates in a good crack spread environment. That said, we care a lot about just refinery utilization. When you're on the supply side of taking feedstocks in or moving finished product out, what we really probably care about at the end of the day is the utilization of refineries and how much the liquids are transacting. They are all connected, but we do typically enjoy high crack spread environments. I think you're coming off some pretty healthy on highs in the crack spread world. And today, I think historical -- if you look at the crack spread today, even though it's down, it's still good versus historical crack spreads. And keep in mind, chemicals -- the chemical market is about 60% of our inland revenues driven by the chemical manufacturers. So while we like high crack spreads, we're paying very close attention to GDP. We're paying very close attention to the economy. Those are the things that drive the chemical margins. And again, not spiking a football, but we do see chemicals a little better in Q4, and we'll continue to watch that closely. What we are hearing from our chemical customers is the strength of their U.S. operations versus their European assets or Asian assets or Middle Eastern assets. And so I think the thematic -- the theme we've always talked about is the economic development in the Gulf Coast with a good workforce and a stable workforce and the billions of dollars have been invested in the chemical manufacturing industry in the Gulf of Mexico. We are a direct beneficiary of that. And what we're hearing consistently from our chemical customers is that their U.S. assets are outperforming their global assets. And so we think we're beginning to see a little bit of volumes come back there that feels pretty good.

[Operator]

Our next question comes from Greg Wasikowski at Webber Research & Advisory.

[Gregory Wasikowski, analyst]

You probably get this question a lot, but I just want to touch on the free cash flow. Obviously, there's a lot of it. Other than share buybacks, is there anywhere to deploy that cash within the business itself? Any specific direct growth opportunities out there in inland coastal or B&S?

[Raj Kumar, executive]

Raj here. We're going to see a lot of good free cash flow generation. I mean this year is going to be very strong $300 million, $350 million of free cash flow. You've seen us buy back [indiscernible] I mean year-to-date, we've done about 53% of our free cash flow has been directed -- allocated to stock buyback. We've always balanced that with investments. David mentioned our investments into the power generation rental business, very strong returns. We're very disciplined when we look at ROIC. We've got a very good framework that allows us to direct our investment decisions. So you should see us continue to balance that. You've also seen in this quarter, we paid down some relatively higher cost debt that puts us in a very strong position from a balance sheet perspective. So as we've always said, we look at inland investments, we look at stuff that we want to do around power generation with -- in the KDS side, on the distribution and service side, you should see us do some tuck-in type investments that we've always talked about. So overall, it's hard to predict acquisitions, but we like our stock. We've been doing soft buybacks. I think you should see us continue to do that going forward.

[David W. Grzebinski, executive]

Yes. I would also add, Greg, just more from a longer-term standpoint, our CapEx is elevated this year and a little bit last year and maybe a little bit next year because of the maintenance bubble that we've talked about, both in inland and offshore. As that tempers, you'll see our free cash flow go up. We are always open to acquisitions, but as Raj said quite plainly, we have a very disciplined approach it's always about being able to earn our return on invested capital. We would love to do an inland acquisition. That's our bread and butter. We're quite good at integrating those and adding customer service when we do it. So we -- that's always our preference. But given the inland market is pretty good right now, we -- getting a meaningful transaction and a reasonable price is probably lower you may see us do a little more in power generation, but it's not going to be company betting type stuff. It would be more a little vertical integration here or there with some bolt-ons. We're always open to it. We're always looking at it. We probably look at a dozen acquisitions a quarter, but you don't see us doing a lot because we do keep that discipline. But look, the good news is we've got the cash flow to do the right things in the absence of good investments, we'll buy the best barge company that we know about there, which is Kirby stock.

[Gregory Wasikowski, analyst]

Got it. Awesome. And then speaking of the cycle, David, I'm curious, where is the market right now on the barge maintenance cycle? I'm assuming it hasn't reached peak yet, and it's presumably next year. What are you expecting in terms of market impact [indiscernible]

[David W. Grzebinski, executive]

I'm going to give that Christian because Christian lives it every day.

[Christian O'Neil, executive]

Yes. Thanks, Greg. Regarding the maintenance bubble that we referenced over the '24 and '25, you'll see 47% of the inland tank barge industry has to go through its COI renewal certificate of inspection. And so 2024, probably really the peak of that, but 2025 is not far behind. So both years have very heavy maintenance cycles for the industry. And again, it's -- according to my math, it's about 47% of the tank barges, we'll have to go through their CI. So the maintenance bubble is still there. The industry is still progressing through it and it will continue to be a factor for supply and demand.

[Operator]

Our next question comes from Ken Hoexter at Bank of America.

[Ken Hoexter, analyst]

And I agree, Dave, with your answer on a few more years of the few hundred basis points. Hopefully, that continues on the inland. Jumping over to coastal. Given the move to the mid-teens margins, was that with the capacity pullout? I know, Christian, you were just talking about the huge run-up in the surveys. I think you were just talking about the inland side there, right, because we've got a huge also pullout for Coastal, right? And so given the move to [indiscernible], where should we see that one run to, Dave, or Christian?

[David W. Grzebinski, executive]

Yes. I'll start, and Christian can add some color. Look, on the offshore side, there's a 30-month shipyard cycle. So every 30 months, you got to bring these units in for pretty expensive shipyards. And so we're going to see it starting in the fourth quarter and carrying over into the first quarter a little bit next year for our coastal fleet. So that's going to impact the fourth quarter quite a bit in terms of sequential margins. That said, if you look at year-over-year full year average, we think coastal margin should be up 300 basis points in '25 versus '24 on a full year average. Chris, you can add some color on what you're seeing in that market and also the newbuild side of it.

[Christian O'Neil, executive]

5

Yes. I think I'll begin with context that our offshore fleet is 100% termed up today as we sit on this conference call. The supply and demand dynamic is very good. We see no new construction. If a player would want to add some tonnage to the market, it would not deliver until 2028. It's a very positive dynamic. Our rate -- at the level of rate that we're able to gain here in recent quarters year-over-year, our term business is up in the realm of 25% to 28% on term rate increases. And in the spot, year-over-year, we pushed rates 11% to 13%. So we see a lot of momentum, a lot of demand and not a lot of supply. So the coastal fundamentals are set up very nicely for a long run, I think.

[David W. Grzebinski, executive]

Yes. Christian was telling me earlier, if somebody wanted to order a new unit, you wouldn't see it to what, '28?

[Christian O'Neil, executive]

Yes sir, 2028.

[David W. Grzebinski, executive]

We're really excited about Coastal. As you know, Ken, you've followed us for a long time. It was pretty brutal on us for a number of years, and it's good to start getting back and start earning that capital back that we've deployed.

[Ken Hoexter, analyst]

I'm just not used to seeing the double-digit [indiscernible] but I'm sorry, what was the comment there about fourth quarter on margins at coastal. We do see those seasonal pullback or...

[David W. Grzebinski, executive]

Yes, yes, fairly heavy been pull back. We were mid-teens in the third quarter. We'll probably be mid- to high single digits in the fourth quarter because some of these big units, they get -- I can't give you the dollar per day number, but it's tens of twenties of thousands of dollars, and you get a few of those big units in you still have a cost of -- we keep the crews. The crews help out in the maintenance process. We still have a bunch of supplies. We do -- we have some maintenance expense that gets expensed not capitalized. So when you put all that together, that pulls down the margins when -- especially when you have some of these big units, hit the shipyard. So again, we focus on the full year average [indiscernible] you're going to that continue to go up. It's a very tight market right now. I think in any given day, we're high 90s in terms of utility.

[Ken Hoexter, analyst]

I had 6%. It sounds like it's even better than that for pullback. You sound like you were saying even higher. So Christian, is there a war of [indiscernible] between inland and coastal who gets to 25%, 30% first?

[Christian O'Neil, executive]

There's a healthy level of competition around here. It gets us out of bed in the morning.

[Ken Hoexter, analyst]

All right. So on the inland contracts accelerated back to high single digit from mid-single digit, I guess thoughts heading into the 4Q mid-season, and I know you talked a little bit about this, the state of refined demand tariffs. I'm thinking about what goes on here or given the move to maybe if we could change of administration, more drilling, does that enhance lower [indiscernible] gas prices and maybe even boost production going forward?

[David W. Grzebinski, executive]

Yes. I think lower natural gas prices would boost chemical production or certainly make it even better for our U.S.-based -- our global chemical customers with big U.S. facilities natural gas is a key input. So the lower natural gas price is good. It's also good for our e-frac business. But lower oil prices, as we've talked a little bit earlier the price deck, particularly with crack spreads and stuff gets a little wonky, the higher or the lower the oil price goes. So it's hard to say, but natural gas is probably the largest input to the chemical space. And so that could be a positive. It's certainly a big input for our e-frac business. Oh, by the way, in power gen, we're building a lot of gas what we call prime power. So that's people that will take our natural gas power equipment and make prime power to put in the grid. So we're seeing that grow. We've picked up an order from somebody that's doing that just this quarter. So it's interesting and lower natural gas prices helps that whole model in terms of prime power and using our natural gas [indiscernible] product to generate it.

[Ken Hoexter, analyst]

And I'm sorry, your thoughts into the bid season?

[David W. Grzebinski, executive]

I'm sorry, the bid -- fourth quarter renewals?

[Unknown Executive]

Yes.

[David W. Grzebinski, executive]

I'll let Chris talk about it. But we can't give you the price that we're expecting, but it should be pretty good.

[Christian O'Neil, executive]

Yes. No, Ken, we're excited about our fourth quarter term renewals. Again, you'll see a lot of that benefit next year, but they're going very well. We've had a really good year. Operationally, the team has executed at a very high level. Our safety record is incredible. And as of today, our customers are very, very happy and we're being rewarded in Q4 for our hard work. And again, we're positive about it.

[Ken Hoexter, analyst]

High single digits, low double digits, mid teens, 20%?

[David W. Grzebinski, executive]

Yes, we're in favor of all that. It will be good. It will be good.

[Operator]

Our last question comes from Scott Group at Wolfe Research.

[Scott Group, analyst]

We've got weather delays and maintenance and all that. But when I look just like tonnages -- inland tonnage is down 15% just 2 years ago. I think you're talking about revenue down a little bit sequentially. How much of this, if any, would you say is a demand issue?

[David W. Grzebinski, executive]

Yes. I'll let Christian answer that.

[Christian O'Neil, executive]

Yes. So you think about ton miles in the past periods you're talking about versus today, there's been some sort of fundamental demand change in some trade lanes. One is the crude oil barrel coming out of the Utica, which is up the Ohio River, quite a distance, a lot of ton miles. That Utica barrel tends to come and go. A lot of that shipping has slowed down in the crude oil complex. And so that impacts our ton miles and the industry's ton miles. The other piece of the business that can whip around ton miles is our fertilizer business. That's business -- large volume business that's loaded in the Gulf of Mexico and taken up into the Heartland, big toes, big volumes. And the fertilizer business was has been very quiet in Q3. We're starting to see a resurgence in Q4. But those are mainly the 2 items that have whipped around the ton miles that I think you're referring to. Again, we've absorbed those barges in other parts of the business. Fertilizer is coming back nicely. So I think those are probably the historical trends you see are most likely long-haul crude oil and long-haul fertilizer.

[Scott Group, analyst]

Okay. And then can you just give us an update, where are we on sort of your perspective industry orders, build activity on the inland side? Would you think we see more or less new construction '25 relative to '24?

[David W. Grzebinski, executive]

Well, the order book we see pretty clearly in '24, I think David referenced earlier, it's about 40-some-odd barges, of which only 20-some-odd have been delivered. Hard to see deeply into the order book next year, but we really don't see anything different. I'll give you a personal observation, having been around the business for 27 years now. I will tell you the status of the shipyard industry, those shipyards that are focused and have the ability to build a good tank barge is diminished versus some of our past cycles. A lot of that has been driven by still emerging in a way from the COVID realities, the inflationary issues around labor, in particular, as well as other inputs in the shipyard. And so I think there's also a large number of hopper barges being built to replace on the dry cargo side of the business. Those hopper barges compete for the capacity for construction with tank barges. I think we see -- if you look in the windshield, I don't see a whole lot of new construction. I think we see consistent replacement construction. I don't think I see anybody speculatively building into the market. And I'll give you a really interesting anecdote. We price out barges periodically. And interestingly, in our most recent set of conversations, the price of an inland 30,000 6-pound tank barge went up from the prior quarter. So this was a $4.5 million quote for a clean 36-pound barge. Even though the price of steel, plate steel has abated a little bit, which is something we watch very closely that is tied to tank barge pricing. The shipyard commented that due to labor, due to all the other inputs, due to the inflationary price of paint, due to all of those other factors that despite a slight change in abatement in the price of steel, the price of the barge actually went up. So I think you'll continue to see discipline around tank barge new construction. I know our shareholders probably wouldn't want us building barges at $4.5 million in order to get a return on those, you're going to have to have $13,000, $14,000 a day [indiscernible]. The market is not there yet. So I think we see just some rational behavior around it, and the shipyards still really are constrained.

[Scott Group, analyst]

Okay. And then just lastly, if I can. You made a comment earlier, you'd be disappointed this cycle if inland didn't get to a 27% margin, I think you said. What's the answer? You'd be disappointed if Coastal didn't get to [indiscernible]

[David W. Grzebinski, executive]

Yes. I'd say it's 20%. I think our prior peak was about 15%, 16%, which we've already bumped up against. So we keep -- there was a little question earlier about the competition between inland and coastal, and it does exist and the coastal guys are pushing hard. I think both Christian and I'd be disappointed if we don't cross 20% in the coastal margins. It's a good time for them. But you do know that there's a little bit of a difference in the model. Coastal, the barge and the towboat or the tugboat are a pair, whereas in inland, you can push multiple barges with a single towboat. So there's a little advantage that inland has. But that said, our coastal guys are out there pushing hard.

[Operator]

This concludes the question-and-answer session. I would now like to turn it back to Kurt Niemietz for closing remarks.

[Kurt Niemietz, executive]

Thank you, [indiscernible], and thank you, everyone, for joining us today. As always, if there's any follow-up questions, reach out to me directly throughout the day.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.