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Earnings call: Kirby Corporation posts strong Q2 results amid challenges

EditorAhmed Abdulazez Abdulkadir
Published 2024-08-04, 10:52 a/m
© Reuters.
KEX
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Kirby Corporation (NYSE: NYSE:KEX), a leading operator in the marine transportation and distribution services sectors, reported a significant increase in its earnings per share (EPS) for the second quarter of 2024, reaching $1.43 compared to $0.95 in the same quarter the previous year.

Despite encountering weather-related and navigational challenges, the company benefited from solid execution and robust demand across its segments. Kirby's inland and coastal revenues saw substantial growth, and the company is poised to achieve the high-end of its earnings growth guidance for the full year.

Key Takeaways

  • Kirby Corporation's EPS rose to $1.43 in Q2 2024, up from $0.95 in Q2 2023.
  • Inland and coastal revenues increased by 11% and 24% year-over-year, respectively.
  • Barge utilization rates remained high in both inland and coastal sectors.
  • Distribution and Services segment reported stable demand with growth in revenue and operating income.
  • Power generation revenues increased by 9% year-over-year.
  • Oil and gas revenues saw a decline of 33% year-over-year but increased 22% sequentially.
  • The company expects year-over-year earnings growth to be at the high-end of the 30% to 40% range.
  • Kirby anticipates generating $300 million to $350 million of free cash flow in 2024.
  • Despite Hurricane Beryl, marine market conditions are improving with strong demand and pricing gains expected.

Company Outlook

  • Kirby anticipates high-end year-over-year earnings growth within the original 30% to 40% guidance for 2024.
  • The company expects to generate $600 million to $700 million in cash flow from operations and plans capital expenditures between $300 million and $330 million.
  • Free cash flow for the year 2024 is projected to be between $300 million and $350 million, to be used for capital allocation and investment opportunities.
  • Segment revenues are expected to be flat to slightly down compared to 2023, with mid-to-high single-digit operating margins.
  • The marine market is expected to continue improving, with strong demand and pricing gains in both inland and coastal sectors.
  • Demand for power generation products and services is anticipated to increase, while the oil and gas sector is expected to stabilize.

Bearish Highlights

  • Oil and gas revenues decreased by 33% compared to the previous year.
  • The company faced weather and navigational challenges, including Hurricane Beryl, lock outages, and flooding.
  • Labor availability among mariners is tight, necessitating higher wages to attract and retain workers.
  • Shipbuilding costs are high, with limited capacity in shipyards and a lack of eagerness in the industry to build new barges.

Bullish Highlights

  • Strong demand in refined products due to high demand, improving margins in power generation.
  • Positive market dynamics in the inland marine sector with limited new barge construction.
  • Favorable supply and demand conditions in the coastal sector with stable margins.
  • The company has strategies in place to mitigate navigation and weather-related challenges.

Misses

  • A decrease in power generation revenues from 41% to 32% due to timing of shipments.
  • The company did not provide specific guidance for 2025.

Q&A Highlights

  • Executives discussed performance in natural gas and refined product markets, with refined products remaining strong.
  • The breakeven rate for a 10% return on capital for new construction has risen to around $14,000 a day.
  • Margins in the inland segment are expected to improve sequentially in Q3, with caution advised for Q4 due to potential fog.
  • Coastal segment margins are expected to continue improving, with significant upticks anticipated next year.
  • Construction activity for barges has been low, but necessary replacements are being built despite reduced shipyard and labor availability.

In summary, Kirby Corporation has demonstrated resilience in the face of industry challenges, managing to deliver strong financial results and maintaining high utilization rates across its fleet. The company remains optimistic about the future, expecting continued improvement in market conditions and solid financial performance in the upcoming periods.

InvestingPro Insights

Kirby Corporation (NYSE: KEX) has shown noteworthy performance in recent times, which is reflected in the real-time data and insights from InvestingPro. With a market capitalization of $6.41 billion, the company is trading at a P/E ratio of 23.08, suggesting that investors are recognizing its earnings potential. This is further substantiated by the PEG ratio for the last twelve months as of Q2 2024, which stands at a low 0.37, indicating that the stock may be undervalued relative to its earnings growth.

An InvestingPro Tip that stands out is that analysts have revised their earnings upwards for the upcoming period, which aligns with Kirby's positive outlook and recent financial achievements. Additionally, while the stock has experienced a significant decline over the past week, with a 7.92% drop in price total return, it's important to note the large price uptick over the last six months, boasting a 31.3% return. This volatility could present opportunities for investors willing to capitalize on the company's long-term growth prospects.

Investors should also consider that Kirby operates with a moderate level of debt, which provides financial flexibility and could be a factor in the company's ability to navigate market conditions effectively. Moreover, the company's profitability over the last twelve months and the prediction that it will remain profitable this year, as noted by analysts, provide additional confidence in its financial health.

For those interested in further insights, there are additional InvestingPro Tips available at https://www.investing.com/pro/KEX, which could offer more detailed perspectives on Kirby Corporation's financial outlook and performance metrics.

Full transcript - Kirby Corp (KEX) Q2 2024:

Operator: Good day, and thank you for standing by. Welcome to the Kirby Corporation 2024 Second Quarter Earnings Conference. At this time, all participations are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Kurt Niemietz, Kirby's Vice President of Investor Relations and Treasurer. Please go ahead.

Kurt Niemietz: Good morning, and thank you for joining the Kirby Corporation 2024 second 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 Grzebinski: Thank you, Kurt, and good morning, everyone. Before we begin, I'd like to recognize our employees, especially our Texas-based team members that were recently impacted by Hurricane Beryl. Their lives were disrupted, and many were left without power for several days and actually up to a week or two, but they remain focused on and continued to meet the needs of our customers and business as well as support each other during this event. I want to thank them for their exceptional efforts and resilience during this challenge. Now turning to the second quarter earnings. Today, we announced earnings per share of $1.43, which compares to 2023 second quarter earnings of $0.95 per share. Our second quarter results reflected steady market fundamentals in both Marine Transportation and Distribution and Services, even though we experienced some modest weather and navigation challenges for Marine and continued supply challenges in Distribution and Services. These headwinds were mostly offset by good execution. Solid demand in both Marine and Distribution and Services continued during the quarter and led to strong financial performance. In inland marine transportation, our second quarter results reflected continued pricing momentum with a modest impact from poor navigational conditions due to weather and lock delays. From a demand standpoint, customer activity was steady with barge utilizations rates running in the low-to-mid 90% range throughout the quarter. Spot prices increased in the low-to-mid-single digits sequentially and in the mid-teens range year-over-year. Term contract prices also renewed up higher with mid-single-digit increases versus a year ago. Overall, second quarter inland revenues increased 11% year-over-year and margins were in the low 20% range. In coastal, market fundamentals remained steady with our barge utilization levels running in the mid-to-high 90% range. During the quarter, we saw strong customer demand and limited availability of large capacity vessels, which resulted in high-teens percentage increases on term contract renewals year-over-year. Average spot market rates increased in the high-single-digits sequentially and in the mid-20% range year-over-year. These increases helped soften continued inflationary pressures, particularly with shipyards, and helped partially offset the capital expense from the addition of ballast water treatment systems. Overall, second quarter coastal revenues increased 24% year-over-year and had an operating margin in the low-teens range. Turning to Distribution and Services, in total, demand was stable across our end-markets with sequential growth in revenue and operating income. In power generation, revenue grew 9% year-over-year and the pace of orders was strong with several large project wins from backup power and other industrial customers as power continues to become more critical. In oil and gas, revenues were down year-on-year, but up 22% sequentially, driven by some growth in our e-frac business. In our commercial and industrial market, revenues were up 9% year-over-year and 16% sequentially, driven by steady demand across our different businesses with growth coming from the Thermo King product deliveries. In summary, our second quarter results reflected ongoing strength in market fundamentals for both segments. The inland market is strong, and we see continued pricing momentum. 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 in Distribution and Services is mostly offsetting softness in oil and gas areas. I'll talk more about our outlook later, but first, I'll turn the call over to Raj to discuss the second quarter segment results and balance sheet in more detail.

Raj Kumar: Thank you, David, and good morning, everyone. In the second quarter of 2024, Marine Transportation segment revenues were $485 million and operating income was $95 million with an operating margin around 20%. Compared to the second quarter of 2023, total marine revenues increased $58 million or 14% and operating income increased $31 million or 48%. Compared to the first quarter of 2024, total marine revenues, inland and coastal combined, increased 2% and operating income increased 14%. As David mentioned, weather and lock delays modestly impacted operations, as heavy rains in the Houston area briefly closed the ship channel and two major locks on the lower Mississippi River were closed for repairs. This led to a 44% increase in delay days year-over-year, but 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 low-to-mid 90% range for the quarter, which is similar to the first quarter of 2024 and the second quarter of 2023. Long-term inland marine transportation contracts or those contracts with a term of one year or longer contributed approximately 65% of revenue with 59% from time-charters and 41% 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 mid-teens range year-over-year. Term contracts that renewed during the second quarter were up on average in the mid-single digits compared to the prior year. Compared to the second quarter of 2023, inland revenues increased 11%, primarily due to higher term and spot contract pricing. Inland revenues increased low-to-mid-single digits compared to the first quarter of 2024. Inland operating margins improved by around 300 basis points year-over-year, driven by the impact of higher pricing and continued cost management, which helped stave off lingering inflationary pressures. Now moving to the coastal business. Coastal revenues increased 24% year-over-year due to higher contract pricing and fewer shipyards. We had one large vessel conclude its planned shipyard and re-enter service during the quarter. Overall, coastal had an operating margin in the low-teens range, resulting from higher pricing and shipyard timings, which will temporarily reverse in the fourth quarter. The coastal business represented 19% of revenues for the Marine Transportation segment. Average coastal barge utilization was in the mid-to-high 90% range, which is in-line with the second quarter of 2023 and the first quarter of 2024. During the quarter, the percentage of coastal revenue under term contracts was approximately 100%, of which approximately 97% were time charters. Average spot market rates were up in the high-single-digits sequentially and in the mid-20% range year-over-year. Renewals of term contracts were higher in the high-teens 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 second quarter as well as projections for 2024. This is included in our earnings call presentation posted on our website. At the end of the second quarter, the inland fleet had 1,093 barges, representing 24.2 million barrels of capacity. On a net basis, we expect to end 2024 with a total of 1,096 inland barges, representing 24.3 million barrels of capacity. Coastal marine is expected to remain unchanged for the year. Now I'll move on to review the performance of the Distribution and Services segment. Revenues for the second quarter of 2024 were $340 million with operating income of $29 million and an operating margin of 8.7%. Compared to the second quarter of 2023, the Distribution and Services segment revenue decreased by $11 million or 3%, while operating income was flat year-over-year. When compared to the first quarter of 2024, segment revenues increased by $7 million or 2% and operating income increased by $7 million or 34%. In power generation, our revenues tied to non-oil and gas end-markets were up 16% sequentially and 87% year-over-year, driven by strong demand as we continue to see significant orders from backup power, data centers and other industrial customers for power generation equipment and backup power availability. Our power generation revenues tied to the oil and gas space were down sequentially and year-over-year as product delays continued to contribute to lumpiness. Altogether, power generation revenues were up 9% year-over-year, while operating income was up 16% year-over-year with operating margins in the low-double-digits. Power generation represented 32% of total segment revenues. On the commercial and industrial side, steady activity in marine repair and growth in Thermo King product sales offset lower activity in other areas, particularly on-highway truck service. As a result, commercial and industrial revenues were up 9% year-over-year. Operating income increased 38% year-over-year, driven by favorable product mix and ongoing cost savings initiatives. C&I made up 49% of segment revenues with operating margins in the high-single-digits. Compared to the first quarter of 2024, commercial and industrials revenues increased by 16% as a result of stable demand in most areas and higher Thermo King product shipments. Operating income was up 45% over the same period, driven by favorable product mix. 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 on backlog and new orders of e-frac equipment. Revenues in oil and gas were down 33% year-over-year but increased 22% sequentially. Oil and gas represented 19% of segment revenues in the second quarter and had operating margins in the low-to mid-single digits. Now I'll turn to the balance sheet. As of June 30, we had $54 million of cash with a total debt of around $1.05 billion and our debt-to-cap ratio was 24.3%. During the quarter, we had net cash flow from operating activities of close to $180 million. Second quarter cash flow from operations saw a working capital reduction of approximately $10 million. We continue to target unwinding more working capital as the year progresses and into 2025. We used cash flow and cash-on-hand to fund $89 million of capital expenditures or CapEx, primarily related to maintenance of marine equipment. During the quarter, we also used $43.7 million to repurchase stock at an average price of $117. As of June 30th, we had total available liquidity of approximately $488 million. For 2024, we remain on-track to generate cash flow from operations of $600 million to $700 million, driven by higher revenues and EBITDA. We still see some supply chain constraints posing some headwinds to managing working capital in the near-term. Having said that, we are targeting to unwind this working capital as orders shipped in 2024 and beyond. With respect to CapEx, we expect capital spending to range between $300 million and $330 million for the year. 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 $90 million is associated with growth capital spending in both of our businesses. The net result should 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 the remainder of our 2024 outlook.

David Grzebinski: Thank you, Raj. While we exited the quarter with continued momentum in our businesses, the beginning of the third quarter was challenged by Hurricane Beryl. The hurricane impacted our Marine operations and temporarily shut down some of our D&S locations due to power outages. Our teams worked hard despite the challenging environment, and we're pleased to have quickly returned to normal operating conditions. Despite these challenges, pricing in the marine market continues to improve and demand is strong, and our D&S businesses continue to hold steady. With favorable fundamentals in the second half of the year, we expect year-over-year earnings growth to be at the high-end of our original guidance of 30% to 40% growth. For some more detail on Marine, our outlook remains strong for the remainder of the year, driven in large part by limited availability of equipment and continued high refinery activity and improving chemical plant utilization. Specifically, in inland marine, we anticipate positive market dynamics due to strong customer demand and limited new barge construction. With these strong market fundamentals, we expect our barge utilization rates in inland to be in the low-to-mid 90% range throughout the remainder of the year. These favorable supply-and-demand dynamics are expected to drive further improvements in the spot market, which currently represents approximately 35% of inland revenues. We also expect continued improvement in term contract pricing as renewals occur throughout the remainder of the year. These increases are necessary as we continue to see inflationary pressures and there is an acute mariner shortage in the industry driving up labor costs. Also, for the third quarter, although we expect an increase in required regulatory maintenance activity to be a headwind to margins, this should be offset by pricing gains. That said, we expect operating margins will gradually improve during the remainder of the year from the second quarter levels and average just over 20% for the full year. Overall, inland revenues are expected to grow in the high-single to low double-digit range on a full year basis. In coastal, market conditions remain very strong, and supply and demand is favorable across the industry fleet. Strong customer demand is expected throughout the year with our barge utilization in the low-to-mid 90% range. With major shipyards and ballast water treatment installations behind us, revenues for the full year are expected to increase in the low double-digit to mid-teens range compared to full year 2023. We expect stable margins in the third quarter with a number of planned shipyards in the fourth quarter adding together to have Coastal operating margins to average in the low double-digit range for the full year. In Distribution and Services, we continue to see an uptick in demand for our power generation products and services and we continue to receive new orders in manufacturing, both of which are helping to soften the inherent volatility in our oil and gas markets. On the demand side, despite the uncertainty from volatile commodity prices, we expect incremental demand for parts, products and services in the segment. In commercial and industrial, the demand outlook in marine repair is strong, while on-highway impacted by a rather large trucking downturn is somewhat weak with the exception of refrigeration products and services. In power generation, we anticipate continued growth as data center demand and the need for backup power is very strong. In oil and gas, activity levels are lower but seem to be bottoming. We do anticipate extended lead times for certain OEM products to continue and that will contribute to a volatile delivery schedule for new products in 2024 and into 2025. Overall, the company expects segment revenues to be flat to slightly down on a full-year basis when compared to 2023 and operating margins to be in the mid-to-high single-digits may be slightly lower year-over-year due to mix. To conclude, overall, solid execution and favorable market conditions led to a strong first half of the year for us, and we have a favorable outlook for the remainder of the year. We see growth coming in at the higher end of our previously guided range. And as Raj mentioned, our balance sheet is strong, and we expect to generate significant free cash flow this year. We see favorable markets continuing and expect our businesses will produce strong financial results as we remove -- as we move through the remainder of this year. And as we look long-term, we're confident in the strength of our core businesses and with our long-term strategy. We intend to continue capitalizing on these fundamentals and will drive shareholder value creation. Operator, that concludes our prepared remarks. Christian, Raj and I are now ready to take your questions.

Operator: Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Greg Lewis at BTIG. The line is yours.

Greg Lewis: Yes, thank you, and good morning, everybody, and thanks for taking my questions.

David Grzebinski: Good morning, Greg.

Greg Lewis: Yeah, hey, good morning. I was hoping if you could talk a little bit more about coastal. I mean it -- this has been a long-time coming, it feels like coming out of a really a long extended multiyear downcycle. As you see what's happening in that market and I can appreciate no one's really ordering new equipment, how much of this strength in coastal is really being driven by just increasing demand? And if it is that, could you talk a little bit about that? Or has it really been a little bit of that and some fleet rationalization? And as you think about where we are -- I know you always talk about inland in terms of economics around new builds, as you think about where we are in coastal, how far away are we from that also those kind of newbuild economics that make sense?

David Grzebinski: Yeah, sure. Look, it's really tight on a supply-and-demand standpoint. I'll take the demand first. The demand is strong. It's up from where it used to be. I think part of that is just coming back out of COVID, you're seeing more refined products moving around the US. Yeah, diesel, gasoline, jet fuel demand is up. You can look at some of the international flights now have picked up. And all that's helping the ecosystem from demand standpoint. So, we're moving around a lot of refined products. There's a little bit of renewable diesel moves that are emerging as well. So, demand is good. On the supply side, that's where it's been really helpful. There's been a lot of rationalization. As we and other industry participants looked at putting in ballast water treatment and the capital costs, there was a lot of equipment that got retired, which was good. It brought the market back into balance and actually it's a very tight balance right now. So that's just on the existing supply. I think the most encouraging thing is nobody is really contemplating building now. Even if somebody would, the cost of building has gone up considerably. And to just give you a reference point, we built 185,000-barrel unit, ATB unit, which is a tug and a barge, back five years ago and it was $80 million, $80 million to $85 million. I think to build that unit today would be $130 million to $135 million maybe. So, the rates to build new equipment required are very high. So probably another 40% above where we're at right now, maybe even higher than 40%. So, rates are going up, that's a good thing. I mean, you saw in the quarter comps term pricing was up, our offshore coastal pricing was up in the high teens. Spot pricing was up in the mid-20s year-over-year. So it's good. Part of that is we as an industry have to recover the cost of all the capital that went into ballast water treatment. So that's part of it. And there's inflation out there as we've talked about. Crew costs, there is an acute mariner shortage. We're seeing it both inland and offshore. So, labor costs are going up a lot. But the bottom line is supply-and-demand is very tight and we're getting real rate increases in coastal and that looks like it will go for another three to five years at least because nobody is contemplating building anything right now.

Raj Kumar: And building a new barge in the coastal space, Greg, it's going to take at least three years from where we are sitting right now.

Greg Lewis: Yeah, no doubt, it's good to see. It looks like Coastal definitely has a long runway. I did have one more question around the inland side. Clearly, that market is kind of playing out the way the company really expected, maybe even a little bit ahead of that. Just I guess one of the questions we're hearing about now, there's some talk now of expectations of -- the natural gas market maybe tightening here in the medium-term. As I think about the inland side, pricing has been great. Any way to kind of parcel out how much of that strength has been driven by refined products versus pet-chems? Or is it kind of -- yeah, I'm just kind of curious, we're seeing great pricing everywhere, but is it more -- what's the real driver -- what's driving maybe...

David Grzebinski: Yeah, Christian and I'll tag team that here. Big picture, coming out of COVID is like that refined products that's been strong. The refineries are running pretty much flat out. Their crack spreads have narrowed a little bit, but they -- it's been pretty good and it's really about demand. Chemicals has been a little weak. Let me turn it over to Christian. He's in the trenches every day with our product demand.

Christian O'Neil: Sure. Thanks. Good morning, Greg. I think on the refined product side, you really see the strength of the US Gulf refining infrastructure. We've got world-class refineries. And you've seen trade patterns evolve a little bit post-COVID and with the conflict in the Ukraine, where our Gulf Coast refiners are supplying more refine products to markets in Europe, South America, Latin America. And so, they've had a nice strong run here. Our chemical customers are very steady with maybe some upside here going in the back half of the year.

Greg Lewis: Super helpful. Thank you very much.

David Grzebinski: Thanks, Greg. Take care.

Operator: Thank you for your question. One moment for the next question. Our next question comes from the line of Ben Nolan with Stifel. The line is yours.

Ben Nolan: Thank you, operator. Appreciate it. Hey guys, good quarter. So I've got two questions. The first one, it relates a little bit to the power side or power generation side. You talked to margins kind of now in the low-double-digits, but I remember last quarter, David, you said that you thought it was going to be hard to really push margins there. Is that changed, or are the bottlenecks enabling you to get a little bit better pricing, or you found ways to be more efficient, or what's the cause for the uplift and how you're thinking about margins?

David Grzebinski: Yeah. Part of it is mix. It depends on what segment we're doing in terms of power gen. But look, Christian has got the team focused on kind of lean manufacturing. So, we're getting a little run-through on that. But it will vary depending on the end market a little bit. But the big picture is power gen is strong. You saw our growth in power gen year-over-year revenue was only 9%, that seems weak, but the oil and gas part of power gen was down a little bit this quarter and it will vacillate quarter-to-quarter. A lot of it's based on deliveries and when it comes out of our manufacturing facilities. But the bottom-line is kind of like we said in our prepared remarks, the need for backup power and to have power in any business 24/7 is just necessary. Obviously, it becomes acute during hurricanes. And that's actually where we do pretty well is in the rental fleet, backup power. That's some of the higher margin pieces. When that's needed, the margins are pretty good in rental. Hopefully, that answers your question, Ben.

Ben Nolan: Yeah, that's helpful. I appreciate, David. And then, I guess for my second one, you guys are just talking about labor availability among mariners, and it must be nice to be in a business that has wage inflation. But is that creating -- is it simply inflationary, or are there bottleneck issues where maybe you're not able to deliver as much as you thought you could, because you don't have the people to do it or are we not sort of at that level?

David Grzebinski: Yeah, Christian and I will tag team on this one, because we've got lots of pieces to this story. Look, it's really tight. We've talked about barge supply and demand. But frankly, if we had more barges, it would be very difficult to move them, because there's just not enough mariners and the boat community and the horsepower situation is really tight. And I'm going to get Christian to talk about it. I mean, we're doing fine. We have our own school, and we produce our own mariners, which is good, but it is tight across the entire ecosystem, whether it's coastal or inland, and I'll let Christian add some more there. But obviously, we've had to give some really nice increases and it's well-deserved by our mariners, no doubt, but it is just an acute tight market. Go ahead and add some color, Christian.

Christian O'Neil: Yeah. Thanks, David. Hey, good morning, Ben. There's significant pressure around crewing across the industry as a whole, inland and offshore. We're competing against some pretty good paying shoreside jobs that are a challenge to kind of recruit some people back to the marine industry. I think we've been successful with our training center and that's kind of one of our leverage points versus the industry. But it is a challenge. Our merit cycle for the mariners occurs in July. We just went through that and gave some healthy increases to our mariners, happy to do that. But it's a challenge. It's just sort of the nature of attracting people to the marine life again. And we're having success, but no doubt it's a challenge for Kirby and the industry.

Ben Nolan: But it's not yet at the point where you're like, man, we just -- we can't do whatever XYZ business, it's not quite at that level?

Christian O'Neil: No, it is not quite to that level, but it is a bit of a dance to every day keep everything fully crewed and moving challenges around holidays sometimes and different graduations, but we keep it going. We got people that will trip over, they can earn a premium to trip and there's some levers we pull like that to keep everything moving. We have not seen an instance where we've had to shut down any major operation.

David Grzebinski: Yeah, Ben, I'd add that the industry is taking care of the customer base, but we're having to ask a lot of people to ride longer watches and longer tours of duty, so to speak.

Ben Nolan: Right. All right. Well, that does it from my two. Appreciate it. Thanks guys.

David Grzebinski: Thanks, Ben.

Operator: Thank you for your question. One moment, please. Our next question comes from the line of Daniel Imbro with Stephens. The line is yours.

Joe Enderlin: Yeah. Thanks, guys. This is Joe Enderlin on for Daniel. Thanks for taking the questions.

David Grzebinski: Good morning, Joe.

Joe Enderlin: Good morning. Just given the move higher in spot pricing on the inland side, do you have any changes in expectations on the shipbuilding side for the industry? And then, if spot prices continue to increase on the inland side, does this maybe change your thinking around the math for newbuilds? And how do you think this will change how competitors are thinking about shipbuilding or adding capacity?

David Grzebinski: Yeah, sure. The cost of newbuilds is still very high. I think the newbuild 30 is twice what it was five -- newbuild 30,000-barrel barge is probably twice where it was five years ago. So, the cost is up a lot, and the pricing needed to justify a newbuild is still 40% above where we are now. So that said, there's not a lot of newbuilding. I think for the year, we're hearing around 40-ish new barges. I think 11 have been delivered year-to-date. That's -- Christian could talk about shipyard capacity, but it gets around to rates don't justify newbuilds, people are still dealing with a big maintenance bubble, which we are. So that's chewing up a lot of company's free cash flow just to go through the maintenance bubble. And then, as we've been talking about, the mariner side of things is pretty tight. So, you put all that together and nobody is really anxious to go build. Christian, you want to add some color to that?

Christian O'Neil: Yeah, thanks, David. Hey, Joe. Yes, so plate steel remains stubbornly high, the cost of plate steel. That certainly has created an environment where we're seeing tank barge construction being at all-time highs. David outlined the numbers. I think you're also seeing capacity constrained, a lot of the shipyards reduced their workforces during COVID. And by my unofficial count, I think if you looked at the inland tank barge construction shipyard market and said, hey, what's the capacity today, I would tell you, it's probably down to about a build of about 50 barges a year if it was running full flat out. And I don't think you could get a new tank barge delivered right now until 2026. So that kind of gives you some context around newbuilds and what we're seeing.

Joe Enderlin: That's helpful. Thanks, guys. Just as a follow-up, within Marine Transportations, I guess, what are the biggest factors as far as weather, maybe navigational delays that can maybe throw you off-course for your revenue guidance? And then, what steps operationally can you take to execute against any of those factors?

Christian O'Neil: So, weather and nav delays are the two things we could tend with. It tends to be a mix as to which can be more impactful in any given quarter. I'll give you an example. We're coming out of Q2, a quarter where we had some lock outages due to maintenance that were pretty significant. And then really something as basic as flooding in the Houston and Texas area caused a 2.5 day closure of the Houston ship channel. That's something we haven't really seen. And that -- as the water goes down the watershed in Texas, we get -- the Brazos River floodgates experience record delays, again, something I haven't seen in 25 years. There are 80, 90 barge -- tows in the queue trying to get through the Brazos River floodgates. So, weather is a significant factor. Obviously, we're getting into that part of the year where you have hurricanes to worry about. And with the La Nina effect, we'll see what it looks like, but we've already had three named storms. So, weather plays a big role. And then, it's really the lock delays, lock outages, bridge repairs can impact navigation. And then, obviously, the high water, low water issues on the Mississippi River, which we've been pretty fortunate this year. There's been a short period of high water where we went into our high-water action phase on lower Mississippi River, but for the most part, the rivers behaved itself well this year, but you do see the maintenance in the locks and the bridges and other weather events, if that helps give you some context.

Joe Enderlin: Got it. That's all for us. Thank you, guys.

David Grzebinski: Thanks, Joe.

Operator: Thank you for your question. One moment, please. Our next question comes from the line of Greg Wasikowski from Webber Research & Advisory. The line is yours.

Greg Wasikowski: Hey, good morning, guys.

David Grzebinski: Good morning.

Greg Wasikowski: Good morning. Thanks for taking my questions. First one is just around higher costs than your customers. Just curious, do you think there's more of an understanding across the industry now versus this time last year or maybe even two years ago? And overall, there's just a little bit less pushback nowadays around higher prices and things like cost escalators in your contracts.

David Grzebinski: Yeah, look, our -- we have a very sophisticated customer base. They're well aware of all the levers around cost. They're -- these are some of the biggest, most sophisticated companies in the world. They do understand the labor inflation piece for sure. Obviously, they're aware of steel prices being up. I think they deal with some of the same price inflation that we do. That's a good thing. They understand it. They understand that capital costs have gone up, things like ballast water treatment, which are regulatory-driven, they fully understand that. So, they're like any other company, when business is good, they're a little less sensitive about price, and when business is bad, they get hypersensitive about it. Fortunately, their businesses have been pretty good. What we care about though is their volumes. They can have bad pricing, but still have the same amount of volume or good pricing. Now, obviously, we're all in favor of them doing really well. It's good to have healthy, viable strong earnings in our customer base. But the short answer to your question, Greg, is they do understand the cost structure and they acknowledge it.

Greg Wasikowski: Got it. Okay. Understood. And then, I want to go back to newbuilds in rates in inland, and David, we've talked about this before, if we can just try to boil it down to talking about like a headline rate for 30,000 barrel to unit tow spot rates and what that number needs to be to make the return make economic sense for people to start building again less on spec and more for making absolute economic sense? And I feel like it used to be -- we were talking about is probably like 10 or 11, excuse me, and then that number is inching up to maybe 12, I think I've heard as high as 14 nowadays. If you could estimate where it boils down to just a number to watch that headline rate of where -- not that there'd be any cause for worry given industry capacity, but where you might see some orders start to trickle in just purely based off of the economics, where would you put that now? And then do you think there's a risk that, that continues to slide higher as costs continue to rise with rates?

David Grzebinski: Yeah. Well, you're spot on. That breakeven rate, it's not even breakeven, we call it to get a double-digit capital -- return on capital like a 10% return on capital. It's just -- it's gone up. It keeps sliding up. It's probably close to $14,000 now, $14,000 a day. If you look at the capital cost of a two-barge tow, it's probably $15 million depending on the horsepower towboat that you build for it. So that cost continues to rise. But the operating costs have gone up. We've talked about labor costs, but just regulatory compliance cost keeps going up as well. All the little things that you expect do have an impact. If you think about our mariners, and we're moving around, call it, 2,500 mariners every day. That's a lot of airline flights, that's a lot of rental cars, there's a lot of costs just in that. And sure inflation is coming down, but it's -- there's still -- those costs continue to go up. So, when you factor it all in, it's been creeping up that breakeven cost to build new construction. Now, the larger point is, when do people start building? That's always some we worry about, some people try and do things on spec and build in advance of what they think is necessary. But I'd go back to some earlier comments that both Christian and I made that, one, the shipyards are tight. There's not a lot of capacity out there to build new. There's a maintenance bubble. So that's chewing up a lot of people's cash flow in the industry, including ours. I mean, we've got a big third quarter maintenance bubble here that's going to hit us. And everybody in the industry is experiencing that. So, then you roll in just the cost of borrowing money has changed considerably. Now, we'll see if the Fed reduces rates later this year, but you put it all together and it's -- it just is keeping -- building in check and we're still just -- for capital discipline, we're ways away from that newbuild price.

Christian O'Neil: Yeah, I think David described that very well. And I would tell you what you are seeing being built is replacement capacity for the most part. There's very little speculative building. There's capital discipline, I think, in the industry coming out of COVID and the price of money and you're seeing some of that. And there's just not much construction going on right now.

Greg Wasikowski: Got it. Okay. I appreciate the color, guys. And David, appreciate you swinging in an actual number there. It's really helpful.

David Grzebinski: All right. Thanks, Greg.

Operator: Thank you for your questions. One moment please. Our next question comes from the line of Ken Hoexter of BofA. The line is yours.

Ken Hoexter: Hey, great. Good morning. Just to follow-up on that, I know you gave the breakeven number, but where are rates trending now? And then, ton miles were down about 5%. It seemed a little extreme. Is that -- Christian, is that because of the lock shutdowns that you're talking about, or is there something shifting within the business? Thanks.

Christian O'Neil: No, exactly. I think what you saw in the ton miles in the quarter is we were impacted heavily by some repairs and some locks and some of the weather events I referenced. It was definitely delayed days where lock and weather can be explained by those two factors.

David Grzebinski: And Ken...

Ken Hoexter: And given the hurricane at the start of -- just let me just wrap that up. Given the hurricane at the start of the quarter, should we expect kind of flow through into 3Q?

Christian O'Neil: Yeah, I mean that was a Q3 event for us in barrel, so there'll be some impact from barrel. We weathered it pretty well as a whole in both companies, but it did have an impact and closed Houston down for a few days in the month of July.

David Grzebinski: Yeah, Ken, I'd just add that ton miles are also about the length of some trips too. We used to do a lot of like moving crude and condensate out of the upper Midwest, and those are long voyages. So, looking at ton miles, you got to be a little careful because it ebbs and flows. I think revenue per ton mile is also a thing you got to factor in as you look at things. So that's good. And in terms of your question about where our current rates are, our general counsel would probably shoot me if I gave you a current rate on a call. So, it's -- you can do some channel checks and get it. Sorry, I wish we could be more specific, but we probably not advising.

Ken Hoexter: All right. Understood on that. I guess, let's go, can you tell -- I guess, can we talk about magnitude of increase sequentially? Can I presume that they continue to decline sequentially?

David Grzebinski: Decline sequentially?

Christian O'Neil: Are you talking about ton miles?

David Grzebinski: Ton miles? Are you talking...

Ken Hoexter: No, rate.

David Grzebinski: No, they will not decline sequentially. Yeah, they'll go up.

Ken Hoexter: [indiscernible] Yeah. I said, can we presume they've increased sequentially?

David Grzebinski: I heard decline. No, they'll increase sequentially. We're -- I'll talk -- and it really gets back to margins. I'll talk big picture and then let Christian give you some more quarterly-type color. Big picture, because of the seasonality we get, you know this, Ken, winter quarters are lower margin than the summer quarters. So that's why early last year or early this year, we gave guidance that said, look at full year margin 2023 to 2024 and we said margins would be up around 300 basis points. I think we're on track to be 400 basis points or better. I think big picture, we'll see something similar barring a recession or something unforeseen, we'll see that level of increase in margins next year, and that comes from basically rate increases, both real and nominal, and I'll let Christian talk about the quarterly progression a bit.

Christian O'Neil: Yeah, we're still seeing strong pricing momentum. We'll have an opportunity to continue to reset the portfolio. As the year goes on, Q4 is one of our larger opportunities to reset the portfolio. But you're still seeing spot rates outpace term by 10% to 15%. So, we still got room to go and things feel pretty good, Ken.

Ken Hoexter: Great. And then just a follow-up on the D&S segment. And I know I think Greg was asking about it before, but I might have missed some of that. Your power generation fell from 41% of revenues to 32%. Is that a seasonal impact? I mean, I see margins went up from maybe about 7% to 11%. So, a gain in margin. Maybe you could just talk through that a little bit more.

David Grzebinski: Yeah, it's just -- it's really nothing more than timing of shipments. When certain power generation packaging gets shipped, it's nothing more than that. Again, it's almost like what we talked about with margins, you kind of got to look at it year-over-year for the full year. The good news is we're -- the demand is growing, not even shrinking right now and you'll see that revenue number move around based on shipments, particularly out of our larger manufacturing facilities.

Ken Hoexter: That's helpful just because it's neatly broken up. Appreciate the time guys. Thanks for the thoughts.

David Grzebinski: Thanks, Ken.

Operator: Thank you for the question. [Operator Instructions] I'll go ahead and promote the next question. Our next question comes from the line of Scott Group with Wolfe Research. The line is yours.

Scott Group: Hey, thanks. Good morning, guys. So, I just want to make sure I'm hearing right. Inland margin should improve sequentially Q2 to Q3. And then with the pricing opportunity, it sounds like Q4 is a heavier pricing opportunity. Should we expect another sort of uptick in margin in Q4? And then, did I hear right that you're saying that inland can improve maybe another 400 basis points next year? Just want to make sure...

David Grzebinski: That would be the higher -- good morning, Scott. That would be the higher end of what we would expect next year. It's kind of the 300 basis points, maybe we get to 400 basis points. But in terms of sequential, yeah, I think third quarter will be up versus second quarter. Fourth quarter starts to get dicey, and we don't like to, I guess, guide to a higher margin in the fourth quarter. It's just that's when weather starts, Scott. And we can get fog. Fog is actually, believe it or not worse than a hurricane, not in terms of personal impact, but in terms of being able to move our equipment around. We just basically stop moving in fog and it can -- we can have weeks of fog that just shut down our moves in the fourth quarter. So, we're very cautious about fourth quarter margins. They usually dip down a little bit versus third quarter. I don't know, Christian, anything you...

Christian O'Neil: No, I think you covered that well.

Scott Group: And then maybe can we do the same discussion around coastal, right? Obviously, there's some really good pricing there. It sounds like we're going to get like 1,000 basis points of margin improvement this year. Like, where does that low double-digit margin go to assuming that there's continued pricing momentum there?

David Grzebinski: Yeah, we haven't put pencil to paper, but it won't be -- well, we were -- in '23, to your point, we were bouncing around breakeven. We had a lot of shipyards in 2023, a lot of it was driven by ballast water treatment. We've come out of that. We got through that in -- through the first quarter. I think, we finished our last ballast water treatment in the second quarter. And so, we've had a lot more uptime. The margins have popped. You will see the margin in the fourth quarter probably get cut in half just because we've -- as Christian alluded to, we've got six or seven big shipyards on some of the bigger units. But big picture, year-over-year and going into '25, we're not really giving guidance to '25 yet, but you should see a nice pick up. It won't be 1,000 basis points, but it could be 300 basis points to 500 basis points next year. We haven't put pencil to paper, but given the price rises we're getting, and we need, you should see a very nice uptick in margins in coastal next year. All right.

Christian O'Neil: Yeah, we're feeling really good about coastal. The rate environment, operating, executing at a very high level, our uptime is about as good as it's ever been, and fleet is in great shape and it's in high demand with our customers.

Scott Group: Okay. And then just last thing, just quickly. I totally hear you like all the questions about build activity. Do you have visibility -- are the orders starting to pick up though either inland or coastal like just to start the clock, but I don't know that I've got visibility about any color you guys have?

Christian O'Neil: Yeah. I think in the context of the last three years, you're talking about 20-some-odd barges built in 2022, 20-some-odd barges built in 2023. And so, at 40 this year in 2024, year-over-year, it is an increase, but I will tell you those three years represent the lowest construction in decades in this business. So, even at 40 barges or even 50 barges a year, you're still not going to outpace the retirements. You still have 500-some-odd barges that are 30 to 40 years old and are candidates for retirement. So, I think what you see is -- some of the construction now is being done out of necessity to replace barges that are retiring. And so, I think contextually, these three years back-to-back-to-back represent by every measure, the least amount of inland tank barge construction we've seen in decades.

David Grzebinski: Yeah, I would just say offshore is even more acute, right? As Christian said earlier, if you -- or Raj said it that if you wanted to build an offshore unit right now, an offshore ATB, you wouldn't see it until the end of '27. But nobody is even contemplating building right now. So go ahead, I cut you off, Scott.

Scott Group: No, I totally get it. I just -- I'm wondering like, do you see orders so like picking up so like the 40 this year could become -- could that be 100 or whatever more next year? I don't know if you can see orders.

Christian O'Neil: Yeah, I mean we don't have clear visibility into every exact order book, but it's actually the capacity of the yards themselves, the space that they're available to sell in market, that is constrained by the reduction in some of the shipyards that historically were in existence pre-COVID compounded with the labor issues that the shipyards are facing themselves. And so, as of today, we don't -- we may not have exact visibility into the order book, but I can tell you with some level of confidence that the actual ability to build barges is diminished.

Scott Group: Helpful. Thank you, guys.

Christian O'Neil: Thanks, Scott.

David Grzebinski: Thanks, Scott.

Operator: Thank you for your question. This concludes the question-and-answer session. I would now like to turn it back to Mr. Kurt Niemietz for closing remarks.

Kurt Niemietz: Thank you, Gerald, and thank you everyone for joining our call today. If there's any follow-ups, please feel free to reach out to me.

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

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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