Kirby Corporation

Good morning and welcome to Kirby Corporation 2021 First Quarter Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. We ask that you limit your question to one question and one follow-up. To ask a question, you may press the star, then the one key on your touchtone telephone. To withdraw your question, press the pound key. Please note this event is being recorded. I would now like to hand the conference over to Mr. Eric Holcomb, Kirby's VP of Investor Relations.

Sir, please go ahead. Good morning, and thank you for joining us.

With me today are David Grzbinski, Kirby's President and Chief Executive Officer, and Bill Harvey, Kirby's Executive Vice President and Chief Financial Officer. A slide presentation for today's conference call, as well as the earnings release, which was issued earlier today, can be found on our website at kirbycorp.com. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available on our website in the investor relations section under financials. As a reminder, statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated as a result of various factors, including the impact of the COVID-19 pandemic and the related response of governments, on global and regional market conditions and the company's business. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2020. I will now turn the call over to David.

Thank you, Eric, and good morning, everyone. Earlier today, we announced a net loss of $0.06 a share for the 2021 first quarter. The quarter's results were heavily impacted by the continuing effects of the COVID-19 pandemic and winter storm Uri, which brought extreme cold temperatures to the Gulf Coast during February and virtually shut down the Gulf Coast refining and petrochemical industry for the balance of the quarter. I'd like to start by talking specifically about the major winter storm and the significant impact it had on Kirby and our customers. It has essentially pushed back our recovery a full quarter. The storm descended into Texas and Louisiana in mid-February, bringing with it a severe cold wave. During the storm, the Texas electric grid collapsed, plant infrastructure and pipelines froze, and business came to an abrupt halt. Our customers' facilities were forced into hard emergency shutdowns. which contributed to unit damage even beyond what typically happens with events like hurricanes, where an orderly shutdown can be planned and implemented. As a result, refinery and chemical plant utilization and production levels plummeted for an extended period. In the refining complex, utilization in Pad 3, which is the Gulf Coast, declined to 41%. This represents the lowest level on record in EIA's published data. It did not fully recover back above 80% until the end of March. In petrochemicals, the impact was also extensive, stretching across the entire Gulf Coast petrochemical complex and impacting our major customers. Operating rates at nameplate levels Ethylene plants in Texas declined from 86% in January to the year 40% in February and March, corresponding to a 51% decline in production and feedstock consumption. At the height of the storm, the majority of capacity and production was offline, including 75% of U.S. ethylene capacity, more than 80% of U.S. olefins capacity, 90% of ethylene glycol production, more than 80% of polypropylene production, 65% of propylene production, and over 60% of epoxy resin production. Overall, the damage was so widespread and severe that some of our largest customers have just recently restarted their plants and are not yet back to full production levels. With this impact on our customers, it goes without saying that Kirby's businesses were also significantly impacted, particularly in inland, where demand and overall volumes materially declined in February and through a large portion of March. As you would expect, this had a negative impact on pricing, which had stabilized prior to the storm. Distribution and services was also impacted by the storm, with most of our locations in Texas, Oklahoma, and Louisiana closed for several delays, contributing to reduced activity, lower revenue, and project delays. Overall, we estimate the winter storm directly contributed to losses totaling approximately nine cents per share during the first quarter. Looking at our segments, in marine transportation, The inland market started the quarter with gradually improving demand as economic activity was improving and refinery utilization had returned to levels not seen since the summer of 2020. However, this upward momentum sharply reversed as the winter storm set in and refineries and chemical plants along the Gulf Coast abruptly shut down. These weak market conditions contributed to continued pricing pressure in the quarter. with further reductions in both average term and spot pricing. However, towards the end of the quarter, refinery utilization recovered to over 80%, and most chemical plants came back online. As a result, our barge utilization recovered late in the quarter, and by early April, it was over 80%. Importantly, this improvement contributed to stabilization and modest gains in spot market pricing in the last few weeks. In coastal for the quarter, market dynamics were largely unchanged sequentially, with continued low demand for refined products and black oil transportation. This contributed to minimal spot requirements and low barge utilizations. In distribution and services, we experienced improved demand throughout much of the segment, which contributed to sequentially higher revenues and a return to positive operating income. The most significant improvement came from our oil and gas businesses, which experienced increased demand as U.S. rig counts and frack activity continued to recover from lows seen in the pandemic. In manufacturing, incremental orders and deliveries of new environmentally friendly and remanufactured pressure pumping equipment, as well as some seismic equipment, contributed to the corridor's results. There was also increased demand for new transmission parts and service in our oil and gas distribution business from major oil field customers. In commercial and industrial, the continued recovery resulted in sequential improved demand levels in our on-highway and power generation businesses. Marine repair activity also increased with higher demand for major overhauls following the dry cargo harvest season in the fourth quarter. These gains, however, were offset by reduced product sales in Thermo King as a result of supply chain delays and lower new engine sales in marine repair. When combined with closures and lower activity associated with the storm, there was an overall sequential reduction in commercial and industrial revenues. In summary, the first quarter was tough, and the freeze ultimately pushed back our recovery. In a few moments, I'll talk about the remainder of 2021, including our more favorable outlook in the second half of the year. In the meantime, I'll turn the call over to Bill to discuss our first quarter segment results in the balance sheet.

Thank you, David, and good morning, everyone. In the 2021 first quarter, marine transportation revenues were $301 million, with an operating income of $1.9 million and an operating margin of 0.6%. Compared to the 2020 first quarter, marine revenues declined $102.3 million, or 25%, and operating income declined $48.8 million. The reductions are primarily due to lower inland and coastal barge utilization, significantly reduced pricing in inland, and the impact of the winter storm. These reductions were partially offset by the Savage Inland Marine Asset Acquisition, which closed on April 1, 2020. Compared to the 2020 fourth quarter, revenues increased slightly by $1.5 million, inclusive of increased rebills related to higher fuel prices partially offset by a reduction in freight revenue. The reduction of freight revenue included lower pricing and volume reductions as a result of the winter storm. These were partially offset by a modest sequential increase in overall barge utilization. Operating income declined $27.2 million, largely due to the impact of significant disruptions in winter storm-related volume reductions particularly as it related to contracts of refrainment, as well as lower term and spot pricing in inland. Also contributing were seasonal wind and fog along the Gulf Coast, flooding on the Mississippi River, and ice on the Illinois River. Additionally, we did incur increased maintenance employee costs in the quarter's results as we began to ramp up our operations in anticipation of increased activity levels. This will continue in the second quarter. During the quarter, the inland business contributed approximately 75% of segment revenue. Average barge utilization was in the mid-70s range, representing a significant reduction as compared to the low to mid-90s range in the 2020 first quarter, but up from the high 60s range in the 2020 fourth quarter. Barge utilization continued to be impacted by the effects of COVID-19, as well as reduced refinery and chemical plant volumes as a result of the winter storm. Long-term inland marine transportation contracts, or those contracts with a term of one year or longer, contributed approximately 65% of revenue, with 61% from time charters and 39% from contracts of a fragment. Term contracts that renewed in the first quarter were down in the highest single digits on average. Average spot market rates declined approximately 5% sequentially and 25% to 30% year-on-year. However, late in the first quarter, rates stabilized and started to move off the bottom. During the first quarter, the operating margin in the inland business was in the low to mid single digits. In coastal, our business continued to be challenged by significantly reduced demand for refined products and black oils, as well as weak spot market dynamics. During the quarter, coastal barge utilization was in the mid-70s range, which was unchanged sequentially, but down from the low to mid-80s range in the 2020 first quarter. Average spot market rates and renewals of term contracts were generally stable. During the first quarter, the percentage of coastal revenue under term contracts was approximately 80%, of which approximately 85% were time charters. Coastal's operating margin in the first quarter was in the negative mid-single digits. With respect to our tank barge fleet, a reconciliation of the changes in the first quarter as well as projections for the remainder of 2021 are included in our earnings call presentation posted on our website. Moving to distribution and services, revenues for the 2021 first quarter were $195.9 million, with an operating income of $2.9 million and an operating margin of 1.5%. Compared to the 2020 first quarter, distribution and services revenues declined $44.8 million, or 19%, and operating income declined $0.8 million. These reductions are primarily due to the pandemic lower oil field activity in the winter storm. with the impact to operating margins mitigated by significant cost reductions throughout 2020. Compared to the 2020 fourth quarter, overall demand for our products and services steadily improved with revenues increasing 5.6 million or 3% and operating income increasing 5.8 million. Favorable sales mix contributed to the increase in operating income. In commercial and industrial, Increased economic activity resulted in improved demands for parts and services in the on-highway, power generation, and marine repair businesses. However, lower sales of ThermoKing products, reduced deliveries of new marine engines, and closures associated with the winter storm resulted in an overall sequential reduction in commercial and industrial revenues. During the first quarter, the commercial and industrial businesses represented approximately 68% of segment revenue. Operating margin was in the mid-single digits and benefited from favorable sales mix. In oil and gas, improving market dynamics in the oil field contributed to sequential increase in revenues and operating income during the first quarter. Our manufacturing businesses experienced sequential improvement with increased orders of new environmentally friendly and remanufactured pressure pumping equipment for domestic markets and seismic units for international markets. Our oil and gas distribution businesses also improved sequentially with improved demand for new transmissions, parts, and services for major oil field customers, but was partially offset by facility closures during the winter storm. For the first quarter, The oil and gas-related businesses represented approximately 32% of segment revenue and had a negative operating margin in the mid-single digits. Turning to the balance sheet, as of March 31st, we had $52 million of cash and total debt of $1.35 billion, with a debt-to-cap ratio of 30.4%. During the quarter, cash flow from operations was $103 million, which included a tax refund of 117 million. In the quarter, we repaid 120 million of debt and used cash flow and cash on hand to fund capital expenditures of 14 million. At the end of the quarter, we had total available liquidity of 776 million. Looking forward, capital spending in 2021 is expected to be approximately 125 million to 145 million, which represents nearly a 10% reduction compared to 2020 and is primarily composed of maintenance requirements for marine fleet. We expect to generate free cash flow of $230 to $310 million in 2021. I'll now turn the call back over to David.

Thank you, Bill. Although the first quarter was very challenging, many of Kirby's businesses are seeing more favorable market conditions and improving levels of demand. I'll talk more about the anticipated recovery in each of our major businesses in a moment, but overall, we expect a sequential increase in revenues and a return to profitability in the second quarter. That said, the improvement in the second quarter will be muted due to the effect of lower pricing on contracts renewed in recent quarters, as well as increased spending in anticipation of a much busier second half. We anticipate improvement in the third and fourth quarters as the economy continues to recover, refinery and chemical plant production continues to grow, and our barge utilization improves above the 82% to 84% we've seen in April. In the inland market, with our barge utilization starting the second quarter over 80%, most refineries and chemical plants back online, and improving weather conditions, we expect better results going forward. From a macro viewpoint, the economy is steadily improving and pent-up demand is significant. The winter storm reduced product inventories, and with higher commodity and product prices and increasing crack spreads, the economics for our customers are becoming increasingly more favorable. We believe this will drive increased production in the coming months which should bode well for the inland market. With little construction of new barges and retirement of barges occurring across the industry, we expect an improvement in the spot market and our barge utilization to move up into the high 80% to low 90% range in the second half of the year. Market conditions are looking more favorable and spot market pricing appears to have bottomed as we are now seeing some positive momentum. However, we expect it to take some time for reduced pricing on term contracts, which were renewed lower last year and during the first quarter, to reset. Overall, in the second quarter, we expect revenues and operating income will sequentially improve due to higher barge utilization, improved weather, and more favorable operating conditions. However, as mentioned, certain costs, including maintenance, horsepower, and labor, are expected to increase in the second quarter as operations ramp up. Beyond the second quarter, we do expect third and fourth quarter revenues and operating income to meaningfully improve with better spot market dynamics. On a full year basis, as compared to 2020, Given the tough first quarter and second quarter, anticipated second quarter, we continue to expect revenues and operating income will be down year over year. The lower average barge utilization, reduced term contract pricing, and the impact from the recent storm are the main drivers for the anticipated year over year decline. In coastal, our outlook has not materially changed. We expect coastal second quarter revenues and operating margin will be similar to the first quarter. However, we do expect coastal market conditions will begin to improve in the second half of the year as demand for refined products and black oil increases, resulting in higher barge utilization and reduced operating losses in the second half of the year. Looking at distribution and services, we expect further growth in the second quarter and the remainder of 2021, driven by a more robust economy and increased activity in the oil field. In commercial and industrial, we anticipate continued improvement in on-highway with increasing truck fleet miles, some recovery in bus repair, and increased part sales as a result of our new online sales platform. We also expect increased ThermoKing product sales And in power generation, demand for new equipment, parts, and services is expected to grow as the need for 24-7 power becomes increasingly more important. In marine repair, although activities remain strong, we do expect a year-on-year reduction in revenues, primarily due to reduced new engine sales. In oil and gas, we believe current oil prices will contribute to increased rig counts and well completion, as 2021 progresses. As a result, we expect to see higher demand for new engines and transmissions, parts and service in distribution, as well as increased remanufacturing activities on existing pressure pumping equipment in the coming quarters. With respect to manufacturing of new equipment, an intensifying focus on sustainability and the desire of many of our customers to reduce their carbon footprint will likely result in increased demand for Kirby's portfolio of environmentally friendly equipment during the remainder of the year. Currently, we anticipate increased sales of new electric and dual-fuel pressure pumping equipment, as well as natural gas power generation equipment. For distribution and services in the second quarter, we expect the economic growth, anticipated manufacturing deliveries, and increased thermal conductivity product sales will drive sequential improvements in segment revenues and operating income with margins rising into the low to mid single digits. For the full year, our expectations have not materially changed. We anticipate significant year-over-year growth in revenues and operating income with commercial and industrial representing approximately 70% of segment revenues and oil and grass representing the balance of 30%. We expect E&S margins will be in the low to mid single digits for the full year, with the first quarter being the lowest and the third quarter being the highest, with the expectation that normal seasonality will likely result in some reduction in operating margins in the fourth quarter. In conclusion, the first quarter's results were disappointing. Although we expected lower pricing and winter weather to contribute to a sequential reduction in first quarter revenues and earnings, the winter storm threw us and many of our customers a curveball. Ultimately, the storm was a disaster for the state of Texas and created significant disruptions across the industry supply chain that will likely be felt for many months to come. We do anticipate improving markets as the pandemic eases and demand continues to rise, especially since product inventories for certain refined products and chemicals have fallen significantly in a very short period of time. Also, prices for many finished goods, including refined products, plastics, and other consumer products, are escalating at rapid rates. As a result, many of our customers are working hard to ramp up production, which will ultimately be positive for our outlook. So while the winter storm pushed back our recovery, looking forward, the underlying economic outlook remains strong. As a result, We firmly believe we will see improving results for the balance of the year. Operator, this concludes our prepared remarks. We're now ready to take questions.

Thank you. And we will now begin the question and answer session. Ask a question. You may press star, then 1 on your touchtone telephone. If you are using a speakerphone, please pick up your handset before pressing the key to withdraw your question. Please press the pound key. As a reminder, we ask that you limit your question yourself to one question. And our first question comes from Jack Atkins from Stevens. Your line is now open.

Okay, great. Thank you for taking my questions. Good morning, everyone.

Hey, good morning, Jack. How are you?

Doing great, David. Thank you. So I guess maybe if we could start on Inland. Can you help us think about the cadence of contract renewals as you move through the year? Because it sounds like obviously you're expecting things to get significantly better in the second half. So can you walk us through sort of how those contract renewals are distributed as you move through the next maybe three or four quarters? And I guess more broadly, at what level of utilization do you think you need to What level of utilization do you think you need to see before contract rates start to move higher sequentially and you start seeing a more meaningful improvement in spot rates?

Yeah, well, let me take the last question first because we're there. As of this morning, we were above 85% utility in the last couple weeks we've seen. spot market pricing improve a little. That said, first quarter was tough, and we saw sequential decline in spot pricing. It was down sequentially 5% on spot pricing. Term contracts rolled over down maybe, you know, high single digits. So, you know, first quarter is really tough, and we've got to work through that term contract portfolio. You know, about 65% of our revenues are term contracts. You know, two-thirds of those roll over in about 12 months. So to your point, we need contract pricing to start to move upward. The first step is really to get spot pricing moving, and that's starting now. We're extremely busy. As you heard in our prepared remarks, there's a lot of good news out there. Our customers across the board are returning to profitability. You can see the refiners are making money now. The integrators are making money now. The The chemical companies are making money now, and even pressure pumpers are doing better. So, you know, things are really improving. Refinery utility hit 89% in Pad 3 last week. You know, some of our public company refining customers said that they were going to be in the low 90s in terms of refinery utilization here in the second quarter. Commodity prices are up. Crack spreads are up. Airlines are hiring pilots now. And even the CDC came out and said that cruise lines could start operating in July. So when we look at that and we see how much our utility has jumped up in the last few weeks, we're pretty constructive. More than pretty constructive, we're downright positive. Our activity is growing, and it's going to get really sporty here. We've been hiring mariners. We've started up our school in January in anticipation of more volumes coming our way and what's happening. That's a long-winded answer to say the utility is improving. As you know, Jack, once that utility starts to get above the mid-80%, pricing starts to go the other way. Particularly given the outlook, I think it's going to stay that way and start to ramp up. Now, in terms of when everything price resets, you know, as you know, with term contracts, it's going to take a while, right? I mean, they roll off kind of ratably over 12 months, so it'll take a while. The good news is 35% of our portfolio is spot pricing, and that'll move a little faster.

Okay, that's all really encouraging to hear. And you're right, the outlook is very positive. I guess for my follow-up question, David, I think as we look forward, there's a substantial amount of earnings power within your three different business lines. There is inflation in the broader economy, though, and it's been a tough 12 months. How are you thinking about the long-term earnings power of the business? Has that really changed in your mind given what's happened over the last 12 months, or do you still feel like this is a business that over time can see you know, margins in the 20s, you know, if you can get multiple years of solid price increases?

Yeah, the short answer is yes. We feel that we've got a lot of earnings leverage, and we can on the inland get back into, you know, kind of the 20% margin. I would tell you, look, second quarter is going to be muted. You know, we still have the low pricing that we're working our way out of, and, again, As utility ramps up, we're having to spend some money to get utility back, get some equipment off the bank. So I think second quarter margins are going to be muted. They should be better than first quarter, but it'll still be a tough quarter. But as we get into third quarter, it's going to start to ramp. I think we'll see inland margins into the double digits in the third and fourth quarter. I do think it's hard to predict, but 2022, we could start to get in the mid-teens and higher, maybe even the high teens. We'll see how that all plays out. As you know, a lot can change in a short period of time with the economy. I do think inflation is a positive thing for Kirby. Clearly, wage inflation is a headwind, but When you think about commodity inflation and just inflation in general, when you've got a huge fixed asset base like we do with our barges and their long-lived assets, the replacement cost of that asset base goes up with inflation. And, you know, of course, that makes it harder for new supply to come into the barge market, which is a good thing. So, you know, in general, inflation is a good thing for us. outside of kind of wage inflation. We are seeing some pressure on hiring. It's harder to hire people. But that said, we've started classes at our school here at Kirby. As you know, we've got the only school that can issue a Coast Guard license to our mariners. And we've started classes in January, ramping up in anticipation of what we're starting to see now.

On the inland marine side, for instance, one thing that's happened over the last year, it's not just been hunkering down, but they've made huge strides in a lot of areas. For instance, when you look at the acquisition of Savage, there's less SG&A now than there was before Savage. I think there's been a lot of steps taken there to not just focus inward, but just get better. I really do think that the actual inland marine business It's better now than it was a year ago.

Okay, absolutely. That's great to hear. Thanks again for the thoughts, guys.

Thank you. Thank you. And our next question comes from Randy Gibbons from Jefferies. Your line is now open.

Howdy, gentlemen. How's it going?

All right, Randy.

How are you?

Great. So I guess starting with DNS, you know, nice to see that kind of back in profitability. And you mentioned, right, continued improvement throughout the year. So which business segments for the DNS will be kind of the main driver of this improvement? And also, you know, DNS business obviously smaller now than it's been in previous years. So what kind of income can it contribute maybe on a quarterly basis by the end of the year? Are we thinking $5 million, $10 million, $20 million?

Yeah. So in DNS, as you know, we've got our manufacturing business, which is largely oil field related, and then we've got the commercial and industrial segment. You know, what we're starting to see is the manufacturing business is starting to ramp up. Our labor utilization is in the mid to high 90% range. We're hiring people. And what that's about, Randy, is our customers are very sensitive to their carbon footprint, and we have been taking orders for environmentally friendly rack equipment. For example... electric frac equipment, power generation equipment that drives electric frac equipment. You know, the inbound has been pretty good. But as you know, we don't have the percentage completion accounting, so it's kind of we can't book the revenue until it shifts. So, you know, that's going to take a while to come up. come through the income statement. As you heard in our prepared remarks, the third quarter is going to be a little better. First quarter was the worst, and I think second quarter will be better than first quarter. Third quarter will be the best, and then seasonality will impact the fourth quarter. But when you look at BNS in general, revenue year over year will be up I think earlier in the year we said 10% to 30%. I would tell you it's about 20% now, maybe better than that because we're getting a lot of traction with our environmentally friendly equipment. In commercial and industrial, we're starting to see the on-highway business start to pick up. Our labor utilization has been improving. We've been hiring there as well. You know, so in general, it's getting better across DNS. You know, year over year, up 20% in revenue. Margins, you know, this year, well, this quarter, we're kind of low single digits. I think for the year, we'll average around 5%, kind of mid-single digits. I think as we get into next year, given our cost structure is so much leaner in that business, I think we'll get into the high single-digit margins next year.

Wow, okay. And then looking on the inland side, turning back to that, obviously you're very positive on inland barge utilization, right, with your expectation for high 80s, low 90% later this year. That said, what are your thoughts on pricing, right? When do you expect pricing to maybe reach those pre-COVID levels? And then when do you expect kind of customers to go back to term instead of just keep relying on spot pricing?

I think spot pricing is starting to move now. We're starting to see here in recent weeks upward movement on spot contracts. I think it's going to take a while before that gets into term contract pricing renewals, but it's not far off. We just have to have spot pricing get back above contract pricing, which it will, and it's starting that before you start to see the term contracts move. You know, the good news, and you've heard us say this before, when you get utility contracts, in that mid-80% range, and it looks like it's going to stay there. And actually, right now, it looks like it's going to get even more sporty than that. Pricing should move really, really nicely in the coming quarters. So I'm not sure if that answers your question, but all the things are lining up for improvement. Now, I don't think we get back to the pricing we saw pre-pandemic, you know, for a few quarters. It just takes a while. I mean, it's like turning an aircraft carrier, right, to get all these contracts to roll over, and it just takes time. You know, the average length of a term contract is probably 12 months, right? I mean, we do have some multi-year, but, you know, the average is 12 months, and, you know, they kind of roll ratably per quarter. So it just takes time, and it'll happen, though. I would tell you we're about as enthusiastic about, you know, what utilities looking like that we've been in years.

And when we say contracts over a 12-month term, those are typically long-term contracts where we add a lot of value and it's a strong relationship, and they haven't really been impacted with the volatility we've seen over the last year because of the pandemic. Those are long-term, good contracts. They're not drags on us.

Got it. And then just quickly to quantify that, you said it might take some quarters to get from where we are now on spot to where we were pre-COVID, but spot prices are rising. Are we 20% below, 50% below relative to pre-COVID levels on current spot pricing?

Yeah, I think spot prices are down 25% to 35% from where they were pre-COVID.

Randy, when you think of spot prices, remember that spot for us occurs over a couple months. So they're not quite long, but it still takes time for trips to end and then new trips to begin and pricing. So that's why when we say we're muted in the second quarter, it's simply because it takes a month in order to start to transition.

Sure. Yeah, these aren't five-day voyages. Exactly. Thanks so much, fellas.

Thank you. And our next question comes from Ken Hoekstra from Bank of America. Your line is now open. Great. Thanks. Hey, good morning, Ken.

Just to revisit that last question there, when you talk about the time, if utilization has moved up to 85%, I just want to clarify, it takes a couple quarters historically, I think you guys have talked about, for pricing to get back. But I guess to dig into that, you've seen those pricing competitors move go away and you're, you're clearly seeing the market accelerate faster. It, do you think it's the same timeframe as you've talked historically or, you know, does the tightness and the speed of the rebound matter to get that a little quicker or is it still all dependent on the contract timing?

Yeah. Uh, that's all, all of the above really can. I, it's the speed of this thing is, it's been surprising. When you look at, you know, first quarter, I think we averaged, I'm looking at Eric here at 75% utility. Um, and he's nodding. So, you know, and now we're at 85%, right? So, you know, in the course of essentially a month, we've added 10% utility. I think that momentum continues. You know, I don't know that in the next month we'll be at 95%, certainly not, but it's pretty sporty now, and I think the faster that utility goes up, you know, the more the faster the spot pricing will go. You know, is it going to be similar to what we've seen in past cycles? It actually, pricing may increase faster than in prior up cycles, just because the snapback is being so strong. But, you know, there's no guarantees to that. You know, a lot goes into pricing. But this is a pretty good environment right now. And, you know, look, Across our industry, we're pretty hungry. We've been – it's been a tough, tough, tough year and a half, and, you know, all of our competitors have been hurting, including us. So, you know, and then the other thing is there's been limited new construction. I think, you know, the order book this year is essentially any new orders that's been nonexistent. We understand from our polls that there's about 36 barges to be delivered this year. All of those were ordered, you know, essentially over a year ago. So, you know, no new construction, pretty sharp snapback in utility, a bunch of hungry barge operators here that have been really suffering. You know, it's lining up pretty good. But, you know, for me to say, well, it's going to be up 25% in a quarter, I don't think that's the case. But it should be pretty sporty.

Okay. So when you're looking at the inland market fundamentals, you're not seeing any kind of – obviously, you just mentioned the order book's really thin, continued retirements. So not seeing any – how about the cost side of the equation? Incremental costs, as you mentioned, you know, tugs, boats needed for the snapback to meet this. And any update from what you're hearing from the refineries?

Yeah, no. The cost structure is going up. You know, I would say – We will see some wage pressure. You know, we will give our mariners a raise this year. You know, they richly deserve it, to be honest. But we're going to see some wage pressure a little bit. We're seeing food, obviously. You know, energy costs, if you look at fuel costs, are up. Supplies are up. But, you know, it's still, I would say, 3% to 4% kind of inflation right now. Steel is obviously a whole other ballgame, but we're happy with steel prices going up because it means nobody will build or there will be muted building. We'll have a little inflationary pressure on the cost side for sure, but pricing should definitely be able to take care of that easily. And your second question, I'm sorry, was, oh, refiners, what are they saying? Yeah, they've been very positive. You know, cracks beds have come back out. They're starting to see jet fuel come back. You know, I don't know if you've flown in a while, but, look, the leisure traveler is back. You know, leisure travel is way up. The business travel really hasn't come back as much yet. So the refiner is, you know, still a little hungry to see more jet fuel coming. You know, that said, the airlines are hiring pilots, you know, in anticipation of a much stronger June is what some of them have said. Some of our refiner customers have said they're targeting 92% utility for, you know, 90, 92, 94% utility in kind of the second quarter and prepare for the summer driving season. So, yeah, it's pretty constructive, you know, I think. They had a rough time. We all had a rough time through this pandemic, and they're happy to get back running. I would say the mood and music from all our customers is about as positive as we've seen in years, to be honest.

That sets up really nice. So if I can just sneak one more in terms of your perception, your historical perception of perspective, I guess, just with past recoveries. I mean, how do you do this? I don't know, maybe go back to 15, 16 or anything even prior to the speed with which you're looking at on this recovery.

Yeah, that's a great question. You know, I'd like to think that it's going to be, you know, faster because it went down faster, so it should come back faster. but it's always risky to say that it's going to come back faster than it has in prior cycles. Famous words, it's different this time, is always a dangerous thing. But, look, it did go down faster than we've ever seen. I think it's, you know, look, 10% utility in one quarter has been pretty sharp. We've never really seen that kind of movement. So, you know, maybe it comes back faster. I just... Boy, I'm hesitant to say it's a whole lot different this time. But it did go down sharply, and hopefully it comes back sharply.

And one thing to add on that is simply that the deep freeze was like basically the market was recovering at the end of January, and then the deep freeze drove things like Pad 3 to levels well below it's ever been before for the refineries. So it's sort of the culmination of where we were in a recovery that was very nice coming up, And then we had a deep freeze that solved it and drove it down. And the rebound off of that is pretty significant as things have recovered. So the combination of the two makes it unprecedented. And the line, if you just look at our utility going up, the slope of that line over the last bit has been pretty steep. And when we compare it internally, we just don't see that.

Very helpful, Bill. Thanks, Dave.

Appreciate the time. Thanks.

All right. Thank you.

Take care.

And thank you. And our next question comes from John Chappelle from Evercore ISI. Your line is now open.

Thank you. Good morning. Good morning. David, I wanted to revisit an answer to one of Jack's questions. I believe you said in one of the prior conference calls that your operating margin in Inland was approaching 20% before the pandemic. But then you mentioned, you know, 22, you might see mid to high teens margins. Despite all the positive commentary you've given both on the macro and from your customers, I'm just wondering, has anything kind of structurally changed with that business where peak or even mid-cycle margins may be lower going forward? Or is it just kind of a slower return to where you were early 2020, just given the depth and the duration of this downturn?

Yeah, it's more of the latter. Nothing's structurally changed. I would tell you actually our cost structure is probably the best it's been in years. in recent years um yeah look we we hit uh pre-pandemic i think one month we we hit we bumped to 20 on inland margins um you know gosh should we be back to 20 and at the end of this year boy i'd love to say so it's just when you know look we know it takes a while to roll these contracts and and it's just going to take time um it's it's almost a math problem more than than anything else. You've got maybe 20% of your contracts rolling in a quarter. The fourth quarter is always a bigger quarter. It just takes a while for the whole math of the whole portfolio to get the margins up. The first set of price increases won't be as much as the second set and the third set. So it's almost a mathematical problem more than anything else. I wish we could jump back right to those higher margins, but as a practical matter, it takes a while for that whole contract portfolio to roll.

And it does depend on how tight the spot market is and how sharply that goes up, because... Again, we have 35% spot, and then we have 15%, or if you take on the average of the first quarter, we had another 25% that was not working. So the math of that is pretty substantial. So it's unprecedented for the company to see things move up as fast as this could happen if it gets really tight.

Yeah, understood. And then, David, you know, this frequently comes up, but maybe it's most relevant today than any time in the recent past. I mean, you're sitting with $776 million of liquidity. You just mentioned that the entire industry has gone through an incredible period of pain. And when someone like you're seeing it, then I have to imagine others are seeing it in a much worse manner. You know, I feel like post some of your recent M&A, you brought more power in-house, you've modernized your fleet, you've improved your cost structure. Have we seen enough kind of light at the end of the tunnel where maybe some potential sellers think, okay, we're through the worst of it and maybe it's time to roll this industry up a little more? Or is it still you need to see margins improve greatly and maybe asset values improve greatly before there may be some natural sellers in the market?

Yeah, look, I think there are some opportunities even now, but I think our view would be to de-lever a little bit more. It's more about our comfort with leverage. You heard our free cash flow estimates. We're going to de-lever a little more, get our balance sheet a little stronger, let margins pick up a bit, but certainly I think there's some consolidation opportunities out there. It's been another tough period for all of us, competitors included. So, you know, maybe there's some potential transactions out there. But again, near term, we want to de-lever the balance sheet a bit more.

And I think one thing on the balance sheet, when you step back and look at it, I think you hit on a few points. One of them is that the acquisitions was of new equipment and So we're in a position now where we're spending about 60% of depreciation in CapEx, and it's not because we're restraining and keeping things, and not because we're not doing what we should be doing. It's just simply that new equipment took all that pressure away. So when you step back and look at it, we expect to deliver very, very quickly, and we are delivering very, very quickly, and we expect our credit metrics to get to where we can be very comfortable pretty quickly, too.

Okay. Understood.

Thanks, Bill. Thanks, David. And... Thank you. And our next question comes from Greg Lewis from BTIG. Your line is now open.

Yeah, hey, thank you, and good morning, everybody. Hey, good morning, Greg. Good. Hey. Bill or David, you know, I was hoping, you know, you called out the $0.09 charge. Is there any way to kind of unpack that? I mean, it looks like it was in primarily on the cost side. But I'm just kind of curious, you know, as we try to fine-tune the margins here, how we should be thinking about that $0.09.

Yeah, as you can expect, most of it was in marine, and it related to most of it inland. And it partially was due to, as we step back and look at it, there was some cost element repairs because there was damage. That was about a million dollars when you add it across the company, including some DNS there. But there was a big portion of it that was related to freight trips. You know, as you know the business, we were frozen in place because of the deep freeze where we couldn't unload, we couldn't load, and we were under contract for freightment. And that was about two-thirds of it right there. We were just simply – we couldn't get rid of the horsepower, and because our customers were stopped, there was nothing we could do. And then there was some other – things like harbor and other boats outfitted but unable to work because of shutdowns. What we did not include in there was the lost opportunity cost, so to speak, of low activity, et cetera. So, yeah, it's basically cost-driven with the fact that one of the costs is we put in shed horsepower.

Yeah, let me expand a little bit on horsepower, Greg, because it's an important thing. Look, We had probably 90 charter boats, and they're great guys. And we cut all the way down to about 12 charter boats, tried to keep as many on as we could to keep them working. They're a great part of what we do to deliver. And then we tied up probably 40 of our own boats. And it just takes time to bring all that equipment back. and cost. And, and, you know, we weren't hiring people during that time. So attrition was working. So when you think about horsepower and everything that goes around it, it's taking time to ramp that up. And that's why, you know, we talked about muted second quarter. That's putting, that's margin pressure. We've got, you know, we've got to pull boats off the bank. We've got to rehire charter boats. We've got to, um, you know, train and hire new people. We've been running, um, you know, deckhand classes and mariner classes since the first of the year, which we did in anticipation of it. But, you know, my point is this. You know, again, it's just like pricing. It's going to take a while to get that up. We're going to have to expend some money. We're doing that. But it's all going in the right direction.

Okay. And it sounds like at this point that's pretty much wrapped up.

Yeah. Not on the part David was talking about, but the storm element. But we're going to continue to be ramping up through the second quarter. Sorry.

Okay. Okay. Perfect. And then just another question on DNS. You know, David, I guess I'm curious, you know, what's your view on how the fleet looks like and look at the pressure pumping for athletes looking? I mean, clearly, you know, there's questions around, you know, some cannibalization and and really you mentioned in your prepared remarks the push to EFRAC. How should we be thinking about that as this kind of unfolds this year? I mean, you mentioned improving margins. Are we in a process where really the real benefit from this is going to really be in 22 for you as opposed to maybe second half?

No, I think we'll see some in the second half, but 22 will probably be better. I think, look, they're running about 200 crack spreads now is my understanding, but they continue to advance their capabilities, and they're fracking more with less equipment. So there's that dynamic. That said, I think One of our major customers said that there's about 10% to 12% percent equipment retired in a year. And I think anything new that's being added is really ESG-centric. They're going to replace things with either electric or dynamic gas blending just to reduce the carbon footprint. So, you know, that's playing out. I think the good news for Kirby is that, you know, we have a great product offering in both electric crack and electrification of the well site where they're doing the completion. So we're pretty excited about that. There is some remanufacturing for sure. We're starting to see that pick up a little bit more. But I think it's going to be a gradual build. There's still a lot of capital discipline, which is good. I think it's healthy. Both the E&P companies and the pressure pumping companies are very capital disciplined. So I don't think it's going to be a big spike up like we saw in 2011 in the frack industry where everybody was building as much as they could. It's going to be more gradual, more rateable. more ESG-focused, and I think that just continues to build momentum into 22. Perfect.

Sounds good to me.

Thanks, guys.

Thank you.

Thank you. And our next question comes from Ben Nolan from Stiefel. Your line is now open.

Hey. Good morning, guys. Hi, Ben. Hey, I wanted to ask a little bit, maybe on the barge supply side, I appreciate the color you gave, David, on the, I think you said 36 barges you expect to be delivered this year. And we always talk about barge removals. Maybe an update there would be good, too. Obviously, you guys are doing some. But one of the things that we've heard happens in weak markets, and maybe especially given what we saw in the first quarter as owners were put away or beach equipment for a little while that it starts to get a little, well, usually it's the worst equipment that that happens to in the first place and bringing it back can sometimes be a little tricky. I'm curious if you think that might be the case here that maybe the industry ramp up of supply might not be so easy given sort of the stress balance sheets and equipment that probably needs repaired and everything else that Any color around that along with removals there? Yeah, sure.

Yeah, you know, we don't know the precise numbers from last year, but just thinking about this year, we think 36 new builds are what we're hearing out there. You know, gosh, you know, that's just kind of a survey by our maintenance and ops guys. It could be plus or minus 510 of that. But, you know, just in retirements, you know, we're talking 25 planned so far for 21 just for Kirby. So just Kirby kind of balances that 36 out. That said, I think other people are doing just what you said. You know, they put some of their older, worse equipment on the bank. We as an industry are still, you know, suffering from very low prices. So I think, you know, muted maintenance spending and some of that stuff may be just scrapped. You know, with scrap steel prices up a bit, you know, the economic decision might drive more retirement. I don't have a great feel for that. I wish I could say it's going to be, you know, 120 to 150 barges this year. Just don't know. You know, when things start to get sporty, it's amazing how much equipment can come back into the market. That said, you know, it's still a lot of work to get that equipment back and very expensive because, as you say, we all tied up our older equipment and it tends to be the worst equipment. And when it's sitting idle, you know, it doesn't get better. It deteriorates, as you know. So... You know, that's a long non-answer. Sorry, Ben. I wish I could be more precise. But, you know, what we do know is 36 on the order book, and we're going to retire 25. We feel pretty confident about that. But the bigger picture is how much actually does get cut up across the industry. I'm not sure. It's certainly north of our 25. It could be in the 100, you know, north of 100. It's just hard to say at this point.

And, Ben, it's really a combination of getting the equipment back and the actual crewing and other things. The supply response to demand will be difficult. As the demand spikes up, it's hard to do the maintenance, but it's also hard to crew it. And it's not just Kirby and that, so it's everybody.

Sure. No, I appreciate that. And, again, I appreciate that. I know it's hard to speak for the whole universe of owners out there. But the other question or my follow-on here relates a little bit to coastal. I know last year, David, you were saying sort of in the – as you were sort of looking towards a rebound post-COVID, that coastal was maybe the area where you thought you could see the steepest V-shaped recovery. I'm curious if that still holds, if you think that might have the most juice of any of the areas that you look at.

As you know, the elasticity of demand, so to speak, is sharp in the coastal business because just bigger units of capacity, a smaller fleet, there's probably less than 300 coastal tugs, excuse me, ATB barges in less than 200,000 barrels. So it's a much smaller market. So when things start to move and get sporty, it's just a longer process when you think about bringing new capacity in, right? Because it takes a good full two years to build a whole new unit. So, you know, when that market starts to come back, it... it will snap back, you know, probably stronger and stay up longer. It's just a much longer cycle. All that said, you know, as you heard, we're losing money in coastal. It's still a tough market. We're starting to see refined products come back, so that's getting better. You know, with the infrastructure plan, you know, that could be better because that could be a lot of asphalt. We move a lot of asphalt and black wool products offshore. That said, there's also the overhang of one of our competitors that just went through bankruptcy, and we'll see what happens to that equipment. It's been tied up and under-maintained, so it's going to cost a lot of money for it to re-enter the market. But that overhang's out there. We're watching it carefully. Long and short of it, I feel pretty good about the supply and demand situation in the coastal market because there's no new delivery scheduled, and, you know, it takes two years to build new equipment. So I feel pretty good about the supply. And when I think about demand with refined products coming back, which is, you know, the bulk of what gets moved in the coastal business, I feel pretty good about that.

All right. I appreciate it. Thanks, guys.

Thanks, Ben.

Thanks, Ben. Okay, operator, we're going to run a little long here and take one more caller.

Thank you. The last question comes from Justin Bergener from T-Bar Research. Your line is now open.

Oh, thanks, David. Thanks, Bill, for fitting me in. Good morning. Good morning. Most of my questions have been answered, so just – A quick clarification question or two and then one bigger picture question. On the clarification side, when you were talking about DNS and high single-digit margins next year, were you referring to the whole segment or were you just referring to the commercial and industrial side? And then a second part of that clarification question was you were talking about 90% plus utilization on the manufacturing and remanufacturing side. Is that just kind of given the current tight labor that you have? and that would not be as tight once you brought back some labor. It just seemed like a high number, both of those.

Yeah, we were talking about the whole segment on the margins. And on the labor, we use a lot of variable labor there. So our job is to keep high utilization. So there is volatility a little because orders come in bunches. But we tend to run it over the last year as we've realigned, as they've done a great job of realigning the business and managing it differently. We tend to run at a pretty high utilization. Yeah, I would say, look, Bill's right.

When we talk high single digits next year, that's for the whole segment. The manufacturing is a little more volatile because it's more oil-focused. The commercial industry is a little steadier. But we're hiring in both sides of it, both C&I, commercial and industrial, and in the manufacturing business. And also... You know, we've talked a little bit about it, but we've got a new digital platform that we rolled out over a year ago. And that's, you know, in CNI, when you're buying industrial equipment that we sell and we represent for OEMs, you know, digital platforms getting traction. So, you know, that helps because it's a lower cost to serve, right, using OEMs. using a digital platform. So we're pretty excited about how all of DNS is rolling up. I do think we'll get back into the high single digits in 2022.

Okay, and then just one last big picture question. Clearly your balance sheet is still levered and you're focused on de-levering, but if you didn't have the leveraged balance sheet that you had today, where would you be putting, you know, free cash flow to work? Would you be continuing to consolidate the inland industry, or would you be looking at other diversifying sources of acquisition, or would you be focusing on share repurchase, just trying to get a sense as to, you know, where your capital allocation priorities lie once the balance sheet de-levering is... Yeah, I would say, you know, continued consolidation of the inland is always pretty close to the top of our...

desire when our balance sheet's strong. But, you know, also, you know, buying back stock is something we've done over time. You know, so it's one of those two things. You know, I think, you know, continuing to consolidate the inland business is a good thing because, you know, that's just good for the whole industry structure, you know, the We've got 30 players in there, and I'd love to see it about 15. We'll see. I know that's probably another non-answer, but that gives you a feel for how we think about it.

Justin, when you look at the inlet acquisitions, you can see it in our numbers. As I said earlier on the call, we make an acquisition like Savage, and we have huge synergies. We end up having the SG&A actually has come down year over year for England, even though we added that. So the synergies are very apparent there and generate a lot of value for us.

Okay, thank you.

Thank you, Justin. Thanks, everyone, for joining us on the call today and for your interest in Kirby. If you have additional questions, you're welcome to reach out to me today. My number is 713-435-1545. Thanks, everyone, and have a great day.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.