Kirby Corporation

Thank you for standing by, and welcome to the Kirby Corporation 2021 Second Quarter Earnings Conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone, as today's program may be recorded. I would now like to introduce your host for today's program, Eric Holcomb, Vice President of Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us. With me today are David Grzybinski, 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 risk 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 on 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 net earnings of 17 cents per share for the 2021 second quarter. The quarter's results were improved across both segments as the U.S. economy continued to rebound, the Gulf Coast petrochemical and refining complex recovered from winter storm Uri, and oil field activity and spending ramped up. Overall, our activity levels increased significantly in both marine transportation and distribution and services. which led to a 13% sequential increase in total revenues and a material improvement in earnings. Looking at our segments in marine transportation, the inland market experienced a strong improvement in demand with overall barge utilization increasing into the low to mid 80% range. The quarter started with some softness as many petrochemical plants struggled to restart following the February winter storm, which shut down up to 50% of the Gulf Coast production for a period of time. But by early May, however, most of the petrochemical complex had resumed production. Refinery utilization was firmly in the high 80s, and demand for refined products was steadily increasing as the U.S. economy reopened. As a result, activity in the barge markets started to ramp up nicely, and barge pricing moved off the bottom. The inland market tightened further in mid-May when the colonial pipeline shut down and many of our customers turned to barges for transportation and storage. In a matter of days, our barge utilization increased to near 90%. While this event was temporary and overall activity levels moderated in June, the inland business experienced a favorable shift in market dynamics. As a result, inland ton miles increased 17% when compared to the first quarter. Average spot market pricing also improved sequentially for the first time in more than a year, and although still down relative to last year, term contract pricing pressure moderated. Overall, inland revenues sequentially increased 13% and operating margins recovered into the high single digits. In coastal, market fundamentals for the second quarter were largely unchanged with continued low barge utilization and few spot requirements. However, overall pricing remained stable during the second quarter. In distribution and services, we experienced continued positive momentum with improved activity levels strong sequential and year-on-year increases in revenues, and operating margin levels not seen since the third quarter of 2019. The most significant increases came from our oil and gas businesses, which experienced increased demand as U.S. rig counts and track activity moved higher and our customers increased their spending levels. In manufacturing, incremental orders and deliveries of new environmentally friendly pressure pumping equipment and frac-related power generation equipment contributed favorably to the quarter's results. We also experienced a strong increase in demand for new transmissions, parts, and service in our oil and gas distribution business from major oilfield customers. In commercial and industrial, the continued economic recovery resulted in sequential improved demand in our on-highway businesses. Product sales in Thermo King also increased during the quarter. These gains were partially offset by sequentially lower revenues in commercial power generation related to the timing of large backup power installations. Marine repair activity was also down modestly during the quarter. In summary, the second quarter was a turning point for Kirby, with both our segments, experience improved activity levels and better financial performance. We expect to see this momentum continue in the second half of the year. And in a few minutes, I'll talk more about our outlook for the remainder of 2021. But before I do, I'll turn the call over to Bill to discuss our second quarter segment results and the balance sheet.

Thank you, David, and good morning, everyone. In the 2021 second quarter, Marine transportation revenues were $332.9 million with an operating income of $18.5 million and an operating margin of 5.6%. Compared to the 2020 second quarter, Marine revenues declined $48 million or 13% and operating income declined $32.9 million. The reductions are primarily due to lower inland and coastal barge utilization and significantly reduced pricing in inland partially offset by increased fuel rebills due to higher diesel prices. Compared to the 2021 first quarter, marine revenues increased 31.9 million or 11%, and operating income increased 16.6 million. These increases are primarily a result of increased inland barge utilization and improved spot market pricing. As expected, second quarter operating margins were somewhat impacted by increased maintenance and boat costs as we continue to ramp up our operations. During the quarter, the inland business contributed approximately 76% of segment revenue. Average barge utilization improved into the low to mid 80% range compared to the mid 70% range in the 2021 first quarter. Inland barge volumes increased sequentially as the US economy continued to improve as the COVID-19 pandemic lessened and Gulf Coast refinery and chemical plant activity recovered from the effects of winter storm Yuri. Barge demand also benefited from the colonial pipeline outage in May. Overall, these factors contributed to a 70% increase in ton miles as compared to the first quarter. Long-term inland marine transportation contracts, or those contracts with a term of one year or longer, contributed approximately 65% of revenue with 57% from time charters and 43% from contracts of a freightman. The significant increase in barge activity in the second quarter contributed to average spot market rates improving approximately 10% sequentially. However, average spot rates remained down approximately 10 to 15% when compared to the 2020 second quarter. Only a few term contracts renewed during the second quarter, and average rates were down in the mid to high single digits. It will take time as market conditions improve for term contracts to renew higher, and we will need to see spot prices remain above term contract prices to get term contract pricing going in the right direction. As term contracts renew higher, we will see improvements in operating margins. Overall, during the second quarter, the operating margin in the inland business was in the high single digits. In coastal, Our business continued to be challenged by weak demand for refined products and black oil. During the quarter, coastal barge utilization was in the low to mid 70% range, primarily due to weak spot market dynamics on the west coast in Hawaii, where economies have experienced a slower recovery from the pandemic. Despite reduced barge utilization, coastal revenues improved slightly, both sequentially and year on year due to increased fuel rebills. With respect to pricing, average spot market rates and renewals of term contracts were stable. During the second 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 second quarter was in the negative mid-single digits. With respect to our tank barge fleet, our reconciliation of the changes in the second 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 second quarter were $226.7 million, with an operating income of $6.2 million and an operating margin of 2.7%. Compared to the 2020 second quarter, distribution and services revenue increased $66.5 million, or 42%, and operating income improved 20.3 million. Compared to the 2021 first quarter, revenues increased 30.8 million, or 16%, and operating income increased 3.3 million. These improvements are primarily due to a significant increase in demand for our oil and gas products and services, as well as the improved economic condition across the U.S., which is raising demand for equipment, parts, and service in the commercial and industrial markets. In commercial and industrial, increased economic activity across the U.S. resulted in improved sequential and year-on-year demand for equipment, parts, and services in our on-highway business. Revenues in our thermal king business were also higher. In power generation, activity increased year-on-year due to higher sales and installations following the pandemic, but was down sequentially due to the timing of backup power installations in the northeast. Marine revenues were down sequentially and year on year due to reduced major overhauls. During the second quarter, the commercial and industrial businesses represented approximately 62% of segment revenue and had an operating margin in the mid-single digits. In oil and gas, improving market dynamics and increased activity in the oil field contributed to significant sequential and year-on-year increases in revenues and operating income. Our manufacturing businesses experienced substantial increases in deliveries of new pressure pumping and PRAC-related power generation equipment, as well as steady demand for seismic units for international markets. Our oil and gas distribution business also improved sequentially and year-on-year with increased demand for new transmissions, parts, and service from major oilfield customers. For the second quarter, the oil and gas-related businesses represented approximately 38% of segment revenue and had a negative operating margin in the low single digits. Turning to the balance sheet, as of June 30th, we had $53 million of cash and total debt of $1.28 billion with a debt-to-cap of 29.1%. Since the SAVA's acquisition on April 1, 2020, we have reduced debt by $427 million. During the quarter, we generated strong cash flow operations of $95 million. Net of capital expenditure of $24 million. Free cash flow was $71 million. At the end of the quarter, we had total available liquidity of $852 million. As of this week, our net debt was $1.2 billion, and total liquidity was $881 million. For the full year, we continue to expect capital spending to be approximately $125 to $145 million, which represents nearly a 10% reduction compared to 2020 and is primarily composed of maintenance requirements for our marine fleet. We also expect to generate free cash flow of $250 to $310 million for the full year. Lastly, from a tax perspective, we expect an effective tax rate of approximately 27% in the third and fourth quarters. I'll now turn the call back over to David.

Thank you, Bill. The last 15 months have been challenging with weak markets, poor operating conditions, and declining financial performance. As economies reopened in the second quarter, we experienced a welcome increase in overall demand and greatly improved market conditions. With the US and international economies continuing to reopen, and demand for refined products and oil field equipment and services increasing, we see this positive momentum continuing into the second half of the year. As a result, we expect to see improvement in revenues and earnings for both of Kirby's segments. While we are very encouraged about the recovery, we are, however, cautiously watching the rising number of COVID-19 cases in parts of the U.S. and around the world just now. There is a risk that these spikes, which are already resulting in new lockdowns in some locations, could adversely impact the recovery, refinery utilization, and refined products demand. Although we expect this could slow the pace of the recovery, we do believe that momentum will continue to build. Additionally, as many of you know, labor constraints across the industrial supply chain are creating delays. in manufacturing lead times and other supply chains. It is possible that we could see some anticipated product sales or deliveries of our manufactured equipment delayed in the second half of the year. In the inland market, our outlook remains positive. As of today, our barge utilization is in the mid-80% range, driven by strong activity levels in the refining and petrochemical complex. Barring a significant step change in COVID, we expect barge activity should continue to increase during the last two quarters of this year as a result of improving demand, including increased refinery activity, higher refined products consumption, and new petrochemical plants coming online. With minimal construction of new barges and barge retirement still occurring, we believe our barge utilization will increase into the high 80% to 90% range as the year progresses. This should support further improvement in spot market pricing during the second half of the year. Overall, in the third quarter, we expect revenues will sequentially improve with increasing demand and spot market pricing. Although we have some modest labor inflation starting in the third quarter, we expect operating margins to increase. As a result, we expect inland operating margins will be in the low double digits, 10-ish, if you will, during the third quarter. We expect further improvement in revenue and margins for the fourth quarter, but results could be tempered by the normal seasonal weather disruptions. In coastal, we expect the market will recover slower with some improvement in barge demand during the remainder of the year. In recent weeks, spot activity has modestly improved with higher economic activity and increased demand for refined products. As a result, our barge utilization has increased slightly, particularly on the West Coast, where overall demand levels have been slower to recover from the pandemic. Overall, we expect coastal barge utilization will be in the mid-70% range in the coming months, which should yield third and fourth quarter revenues slightly higher than the second quarter. We expect coastal operating margins will improve in the second half of the year, but still remain below break-even in the negative low to mid-single-digit range. Looking at distribution and services, we expect that economic growth and Improvements in the oil field and summer seasonality will result in sequential revenue growth with improved operating margins. In commercial and industrial, we anticipate continued improvement in on-highway with further recovery in bus repair activity and increased parts revenue from our new online sales platform. We also expect increased ThermoKing product sales and service during the peak summer demand season. In power generation, we expect increased backup power equipment sales and installation. And in our rental fleet, we should see some seasonal increases in utilization during the hurricane season. In marine repair, we expect a sequential reduction in revenues, primarily due to the harvest season and the dry carbon markets. In oil and gas, we believe current oil prices will contribute to continued increases in the rig count with incremental well completions activity as 2021 progresses. As a result, we expect to see higher demand for new engines and transmissions, parts, and services in the distribution segment for the remainder of 2021. In manufacturing, a focus on sustainability and efforts of oil field companies to reduce their carbon footprints continues to generate increased inquiries and new orders for Kirby's portfolio of environmentally friendly equipment, including electric and dual fuel pressure pumping units and highly efficient natural gas power generation equipment for EFRAC. We also are experiencing increased orders to remanufacture existing pressure pumping As a result, we anticipate increased deliveries of manufactured and remanufactured products in the back half of 2021. However, as mentioned previously, supply chain delays could result in some equipment delivery shifting between quarters and potentially into 2022. Overall, for the full year, our expectations have not materially changed for DNS. We anticipate significant year-on-year revenue growth of 15% to 25%, with commercial and industrial representing approximately 65% of revenues, and oil and gas representing the balance of 35%. We expect DNS operating margins will be in the low to mid-single digits for the full year, with the third quarter being the highest. In the fourth quarter, normal seasonality will likely result in some sequential reduction in operating margins. Before we wrap up, I want to briefly comment on two other matters. First, today we announced that Bill Harvey will be retiring as Kirby's CFO early next year. Bill has been an integral part of the Kirby team for the last four years and has helped to guide us through several large inland marine acquisitions and the integration of Stewart & Stevenson. Bill's contributions to Kirby's success and our financial strength have been significant, and he will certainly be missed. Additionally, earlier this week, we released our new 2021 sustainability report. This report represents another milestone in our ESG journey, with new emissions disclosures for the full company, as well as enhanced disclosures on safety, employee training, and governance. You can access our new report in the sustainability section on our website. Now, to wrap things up, Although there is some uncertainty around COVID-19 and its impact on the recovery, we remain very optimistic about Kirby's outlook. The second quarter was an important turning point for the company from a financial perspective, with increased earnings in both segments. Most importantly, for the first time in over a year, we experienced a positive inland market that benefited from rising demand and favorable operating conditions, and a major disruption. While the Colonial Pipeline outage provided a temporary boost to the business, it highlighted that the inland market is well along on its path to recovery and how rapidly barge utilization can tighten and how quickly spot prices can move. The world economy is still in disarray. With much of Europe still essentially shut down and India, Mexico, and South America not fully open, as the world economy fully recovers from the pandemic and demand for liquid normalizes around the world, we are confident our inland businesses will regain pre-pandemic utilization levels in the 90% range, bringing with it improved pricing, earnings, and returns. In coastal, although market conditions remain challenging, continued retirements of industry capacity and a lack of any new construction will keep capacity in check and allow for a solid rebound once the U.S. economy fully recovers. And finally, in distribution and services, we have come a long way in the last year with steady improvements in financial performance. Our distribution businesses have not yet fully recovered, and there is room for further improvement as we go forward. With more favorable oil field fundamentals and increased demand for lower carbon solutions, our new and highly efficient environmentally friendly pressure pumping and power generation equipment is capturing the attention of our customers and translating into new orders that will provide additional growth in the second half of the year and into 2022. We have made substantial progress during the last year in very difficult markets. We realigned our cost structure, expanded our product offering in DNS, and improved our financial flexibility. Our marine markets have stabilized and are beginning to improve. All of this has set the stage for improved earnings and returns and will allow us to take advantage of future growth opportunities. Operator, this concludes our prepared remarks. We are now ready to take questions.

Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Jack Atkins from Stevens. Your question, please.

Okay, great. Good morning, guys, and thank you for taking my questions. And, Bill, I just want to say congratulations on your retirement. I appreciate it, Jack. So I guess maybe my first question here is with regard just to – how things are trending within Inland. You mentioned you're currently running at about 85% utilization rate. Just be curious to know, are your customers giving you any indication for how they're expecting their activity levels to trend over the balance of the year? And how do you think that's going to impact utilization as we move through the third quarter? And I would just be kind of curious as well, David, could you talk about where we are right spot rates relative to contract rates or spot rates back at or above contract rates? And, you know, if you could just sort of update us there, I think that'd be helpful.

Sure. Yeah. Good morning, Jack. Look, the inland trends, you know, continue to improve. We've, you know, in the first quarter, we were down in the mid-70s in terms of utility. We got to low 80s at the beginning of the second quarter, kind of ramped up into the mid-80s. And then The colonial pipeline outage had a little spike, got us up to high 80s to essentially 90%, and a little less than 90%. But then it started to taper off as colonial came back in, and better weather started to help transit time. So we did end the quarter kind of in the mid-80s. But the important thing is... spot pricing and contract pricing improved a bit. Contract pricing was still down year over year. You know, you go all the way back to the second quarter in 2020, so we kind of lapped that quarter. Those were higher prices back then. So contract pricing was down kind of mid to high single digits, but spot pricing was up in the double-digit range, around 10%. And that, to your question, puts spot pricing above contracts now. And that's what we need. We need that to stay above contracts. We need the customers to believe it's going to stay that way for a while. And then that contract portfolio will start to renew higher. That may take another quarter or two before we kind of lap contract prices and they start renewing higher. But look, margins improved. We kind of went from low to mid-single digits in inland in the first quarter to kind of high single digits. We'll be in double digits next quarter and in the third quarter. Fourth quarter is going to be hard to say because weather can impact us a bit, but all the trends are in the right direction. I mean, it's When you think about customers and what's going on in the world right now, crude demand seems to be back. It's within kind of the five-year historical trends. Crude storage is now just, well, it's actually below the five-year average now. TSA checkpoint data shows throughput has improved about 20% in the last year. quarter or so. Gulf Coast refineries are back in the 90% range. Chemical activity barometer is up. Retail sales are up. Leading indicators are up. New manufacturing orders are up. So, you know, the economy feels like it's coming back. I think we're all a little nervous about COVID right now. You know, we're seeing some cases within Kirby pop up again and, you know, hearing about some spotty Lockdown, so in the past, I think last quarter I used 40. It's hard to use that word when you're looking at COVID reemerging here. But all of that economic data shows that things are continuing to move and open up. I think when we talk to our customers, what they're telling us is that the international and export volumes are still not there. You know, they're probably 15% lower than they were, you know, pre-COVID. And when you think about that, it kind of makes sense. You've got Mexico, Latin America, South America, you know, essentially in various stages of shutdown. Europe still really hasn't opened up. India is, you know, kind of reacting and essentially locked down. So a lot of those export volumes are down. So domestically, things are improving, but the global economies are not quite back, and that's what we're hearing from our customers.

Okay.

All that said, it's pretty positive.

Well, that makes a lot of sense, and I understand the need to maybe be a little bit cautious given the rise in COVID that we're seeing out there. So I guess from our follow-up question, David, as we think out over the next couple of years, I would be curious to get your thoughts on how you would expect industry capacity to trend. What's your expectation around net retirements for 2021? And given the rise in commodity prices and steel prices, where do you think rates would need to go to, or maybe if you want to think about magnitude of an increase from where we are right now, just to support building for replacement, much less thinking about building for expansion on the inlet side?

Thanks so much. Thanks for that question, Jack. Look, we think the order book is about 70, between 70 and 75 barges. I think the actual count that we have is 72 barges for delivery this year. About half of them have been delivered. The first half were really all ordered pre-pandemic and they just started delivering. But new barge pricing is at an all-time high. If you look, you know, kind of price changes from 2020 to 2021, a clean 30, the price for a clean 30 is now almost 40% higher than it was last year. Steel prices are driving a big part of that. You know, clean 30 now is probably $3.8 million. You know, in 2018, just to reference that, it was about two and a half. 2017, it was round two to build a clean 30. So steel prices have driven that up, labor to a lesser extent. But look, nobody's building a lot of barges right now, and retirements are up. Scrap steel prices are up, so retirements are a little more palatable. So it's pretty constructive right now. We don't see really a net add in terms of new barges. And in fact, it What we saw with Colonial makes us feel pretty good about kind of the unutilized overhang. For us to, in the space of two weeks, to see the industry kind of go to sold out and clean, dirty market, it shows you how little overhang there really is. And I think a lot of that's because of the retirements that have occurred and there's not a lot of new equipment coming in. And to be fair, a number of our competitors, including us, still have some equipment on the bank. So, you know, from a supply and demand standpoint, it feels pretty good right now.

Thank you, David.

Thanks, Jack. Thank you. Our next question comes from the line of Ken Hoekstra from Bank of America. Your question, please.

Great. Thanks, Dave and Bill. Great round out on the details, and congrats, Bill, as you enter the next phase of your career. Dave, just a quick wrap-up on one of Jack's questions there. But you noted the rates down mid to high, single digits, utilization at 80%. What's the normal flipping point for those rates to be positive? Is it the mid-80s that you need to get utilization into 90s? And are there parties that are still pressuring rates in the market?

Yeah, it's historically been in the mid-80s. Maybe that's moved up a little. Maybe it's got to be, you know... 87, 88. I think there's a key psychological piece, too. And we've seen this. You know, the customer's got to believe it's going to stay there. And so I think as the economy improves and this utilization hits the mid-80s and it's in the mid-80s now, that customer view that it's going to stay that way for a while or perhaps even get tighter really helps the pricing dynamic. So we're right there at that dynamic. And we're very encouraged. Spot pricing is now above contract. And we had a nice move. It was helped by the Colonial. And I think what that did is it let the customers know just how tight we can get in a short period of time.

I thought that was a great rundown in terms of the supply-demand. Can you provide the same thoughts on coastal and where that market stands with respect to your supply-demand pricing dynamic?

Yeah, the market's pretty much in balance now. I say in balance. I mean, we're still kind of mid-'70s utility, but some markets are – are less utilized than others. The Atlantic Coast is better utilized than, say, the West Coast. But there's no new construction that we're aware of. No new barges are being built. And the coastal market, it takes a long time. It could take up to two years or longer to get a new coastal tug and barge unit. Now, that said, the Bouchard assets are out there. You may have seen that they were sold out of the bankruptcy court. Somebody's going to have to sink a lot of money back in to get some of that equipment moving. So that's a slight overhang in the market. But as you heard in our prepared remarks, coastal pricing kind of held flat. But its utility is less than on the inland side. Look, as you know, the coastal market's more about refined products than it is chemicals, whereas the inland market's a little more chemical heavy. So, again, we need to see the refined market just continue to expand, and I think that will soak up capacity, you know, with the caveat that Bouchard equipment may come back over a period of time. I think it takes several years for that equipment to come back in any meaningful manner. just knowing how much maintenance will need to be done on that equipment.

Just the last one real quick. You mentioned the labor tightness. Is it tough to get labor now? I know you've had long-term employees, but how are your training classes? How is it getting the guys on the water or your teammates on the water in this environment?

Yeah, it's tough. And we're able to do it. We started our, opened up our training school in January. We've been running classes ever since then. Been getting pretty good traction in hiring. Similarly in D&S, we've been hiring mechanics. I wouldn't say it's easy at all, but we're able to get the employees. It's working, but it is getting tighter. For sure. But right now, we're not short labor. We're able to crew everything and continue to add employees. We're still running new deckhand classes in our marine business, and we're still adding technicians both in commercial and industrial and in our manufacturing business at KDS. But we're able to find them. It's just not easy.

Great. Appreciate the fact.

Thank you. Thank you. Our next question comes to the line of John Chappelle from Evercore. Your question, please. Thank you.

Good morning, everyone. Hey, good morning. Uh, David, in, uh, one of your responses to Jack's question, you said you're probably a quarter or two away from lapping contract pricing. Um, so I assume that to mean going to year over year improvement. It's important, I think, maybe to understand the timing of your contract renewals throughout the course of the year. You said in 2Q you had a few term contracts renewed lower. What does the third quarter and the fourth quarter look like as a percentage of the term contracts? And I ask this because if you're still resetting those kind of lower year over year in the back half of this year, then clearly that puts a little bit of a delay into the financial impact of term resetting higher as opposed to if you still only have a few more left to go, this year, then everything kind of comes with upward momentum starting in the second half, starting next year.

Yeah, I would say the third quarter renewal portfolio is about similar to the second quarter, but the fourth quarter will be heavier. Our fourth quarter is always a little heavier. The other three quarters are pretty similar. we get a lot of fourth quarter renewals. And sometimes those fourth quarter renewals get extended a little bit and end up closing into the first quarter. But we're generally a little heavier in the fourth quarter. Okay.

And based on where the market was in last year's fourth quarter, which not quite at the depth but getting pretty close, and given the utilization trends that you pointed out, I know you said a quarter or two, but are you kind of cautiously optimistic that by the time we get to 4Q this year, at least you'll be back to kind of break even, if not a bit higher on the term pricing?

Yeah, I would say that's fair. Okay. Everything seems to be headed in that direction, you know, with that caveat of the COVID situation. But, you know, you heard me rattle off some of those macro things. statistics. So we feel like it's headed that way for sure. And that feels right.

And in your closing comments, you mentioned realigning the cost structure of DNS, which is obviously something you've been working on for some time, even before COVID. Can you speak to the cost structure at Inland? Maybe some in-house power from acquisitions, maybe a bit more aggressive with trimming the fixed cost base because of the pandemic and what you think that means to the pace of a margin recovery once you finally start to see that term in flack?

Yeah, no, we've, as you would imagine, we've taken out SG&A heads kind of through the downturn. You'll remember 15, 16, 17 were downturns. We took out quite a bit of SG&A overhead, but then we bought Higman, Senac, and then Savage, which basically had some shoreside support and some shoreside overhead. And we've basically taken that back out, and we're back down to where we were pre all those acquisitions. So we feel pretty good about the SG&A. I mean, you always want to improve it, but... It feels pretty good. I do think our margins should have some more upside leverage. Given our fleet's larger and when things start to move, that leverage should help push to higher margins.

Okay. Just look across all companies, you'll notice SG&A, second quarter to second quarter is down about 9%. So there's a lot of activity last year, marine, but E&S and corporate to really focus on that.

I did notice that, Bill. Is that kind of sticky, so to speak? You expect it to stay at the second quarter level?

Yeah, you know SG&A bounces around, but especially the first quarter, but excluding the first quarter, which has some jumping around points. It's really the new level of SG&A of the company. Okay, great.

Thanks, Bill. Thanks, David.

Yeah, thanks, John. Thank you. Our next question comes to the line of Randy Giffords from Jefferies. Your question, please.

Howdy, gentlemen. How's it going? It's good. Randy, how are you? All right. Doing all right. Two questions for me. First, obviously, the oil and gas market, you mentioned, still has the negative operating margin despite the increased drilling activity, the improved sales of the new transmission parts and services. So I guess, was that just due to timing delays, and as a result, 3Q21 is set up to be that much better?

Yeah, let's talk about it. As you know, in our DNS business, we've got commercial and industrial and an oil and gas business. The commercial industrial was profitable, kind of in the low to mid single digits, kind of mid-single digits, if you will, in terms of margins. Oil and gas is still a little negative. The good news there is we've had good inbound. Our backlog is up pretty meaningfully. One of the things we're seeing is we've got a lot of new products. Really, if you think about electric microgrids and supporting electric tract equipment and electric frac build-outs. We've got some new generation products, and in that new generation products, there's kind of the first set of them. The margins are really thin, and there's a lot of engineering and testing that goes on. So that's a long way of saying, yes, we believe the margins will improve in that business next quarter and certainly into 2022. as we deliver more and more of the EFRAC and power generation support equipment for EFRAC. Backlog continues to build. We continue to take new orders. It's pretty exciting. I would say that all of our pressure pumping customers are very focused on ESG right now, which generally means more EFRAC. There is some... dynamic gas blending, dual fuel work. But the bulk of the orders we've been receiving have been in EFRAC, and the new generation EFRAC has basically some startup lower margins. I think we'll be solidly profitable in the coming quarters around these new EFRAC products.

Okay. And then good segue with your ESG comments. Any updates on Jones Act, wind vessels, or LNG equipment? And then speaking of electric, from your oil and gas comments, a competitor of yours is building an all-electric tugboat. So is there any interest from Kirby to get into that as well?

Well, the short answer is yes to the last. We frankly are starting to build a diesel hybrid electric towboat. here in the Houston area. We'll try it in the Houston market. That all-electric vessel you're talking about is more for ship assist rather than pushing barges, which has a different load profile. We're constantly moving barges in the towboat industry, so ship assist is a little different, although they do move a lot of ships around. On the wind, we've got to be careful. We're under a couple NDAs, so we can't say a whole lot. But we're optimistic that we'll get a chance to build some Jones Act equipment to support the wind build-out. And we just can't say a whole lot more than that, Randy.

All right. We'll be waiting. But, hey, Bill, sad to see you go, but obviously enjoy your retirement. Well, thanks so much, Randy. Yeah, let's be clear.

Bill's going to be around for a little bit longer. It's not until the first part of 22, but his golf game needs the help. That is true. Sounds good.

Well, thank you.

Thank you. Our next question comes from the line of Ben Nolan from Steeple. Your question, please. Hey, good morning, gentlemen.

Morning, Ben. I wanted to I wanted to get back to something that you sort of touched on. I think it was on Jack's question initially. And the idea is effectively on the term and contract pricing. Where would you say that we are right now relative to sort of mid-cycle levels? And then to Jack's point, do you think those mid-cycle levels have moved up at all as a function of you know, steel inflation and perhaps wage inflation that I think you'd mentioned earlier. Do you think the new normal is a little higher than the old normal?

Yeah. Um, well, let me take your last, the last part of that question first, uh, with barge pricing for, for a brand new clean 30,000 barrel barge being 3.6 to $3.8 million. Um, in order to get a return on capital on that, that's got to be materially higher. We're talking, you know, for a two-barge tow kind of north of $8,500 a day to get double-digit IRR. So the short answer is yes, you know, with the cost of price of new equipment and, of course, with some labor inflation on top of that. And, oh, by the way, we are seeing, you know, food inflation. You know, when we do crew transport, whether it's renting cars or flying, we're seeing those costs come up. Hotel costs are coming up as we have to put crew members in hotels before they crew on. So we are seeing some inflation, and all things being equal, that labor and cost inflation and the cost of the equipment inflation should drive higher, the need for higher, as you stated, mid-cycle pricing. The other thing is, we haven't talked much about this, but as you get into ESG and look at the engine packages on towboats and tugboats, you've got to start moving to Tier 4 engine packages, which are much more expensive in frankly, more expensive to operate. So when you put all that together, yes, we're going to need higher mid-cycle pricing throughout the industry to recover any kind of capital.

And going back, relative to that $8,500 that you mentioned, how should we think about where we are at the moment?

Yeah, I'd rather not talk directly about where market pricing is now. You know, if you looked at, I think, OTR, and there's a couple other people out there that can talk about market pricing. I think my attorney would kick me if I started talking about direct pricing on a call.

All right. Fair enough. And then my second question is, you'd mentioned it. We haven't really talked a lot about it, but some supply chain bottlenecks with respect to the DNS side. I was just hoping that maybe you could flesh that out a little bit. I mean, are there any specific areas or how big of a headwind is that? Is it, you know, on the margin or is it potentially?

Yeah, it's on the margin. I would say it's very minor. It's something we're watching closely. You know, anything with electronics and as you might imagine with electric frack stuff, there's a fair component of chips and control mechanisms in that. Anything with that is seeing a little delay. Has it gotten acute or anything with us? No, not yet, but it's something we're watching closely. The other thing is cast and forged parts. We're seeing a little backup on that, but I would say it's all on the margin right now. All right. Fair enough. I appreciate it. Thanks, guys. Thank you.

Thank you. Our next question comes from the line of Greg Lewis from BTIG. Your question, please.

Hey, thank you, and good morning, everybody. Hey, good morning, Ray. David, I was hoping you could talk. I mean, clearly things are starting to line up for DNS, at least on the oil field service side. Could you talk a little bit about, you know, as utilization has moved up in the pressure practically, like what is, how you're thinking about what's on the sidelines, what type of, what type of status is the equipment in? Is there an opportunity there where we're going to have to do rebuilds like we've done in previous cycles, or is it more along the lines of, hey, a lot of that stuff is kind of seen as done, and it's going to be more of a shift towards the EFRAC, which you've been touching on?

Yeah, it's probably closer to the latter than the former. I would say, look, there's a lot of installed systems equipment out there that is still functional, it still can be remanufactured and have quite a bit of life left in it. We're seeing a little bit of that come back now, but I would say any new capital, the definite trend on new capital is for EFRAC. That said, maintenance and maintenance capital, Look, the economics are still good. If you've got these fleets, traditional diesel-driven fleets, it still makes sense to remanufacture them. We're just not seeing a lot of it, to be honest. Essentially, most of the new orders or orders in period have been ESG-related. As we get tighter, that dynamic changes. will, in my opinion, change and we'll see more remanufacturing. Will this be kind of blowing and going like we saw in 2011? I don't think so, Greg. I think it feels, rightly or wrongly, a lot more capital discipline. I think many of the private companies in particular, there's not as much capital available. If there is capital, the lenders kind of want to see an ESG, uh, foot forward. So, um, all that said, I still think remand makes sense and, and we'll see more remand rather than less as we, we go forward. It's just been pretty thin now. We're starting to see more of it, but it's still kind of early days in that, that area, in my opinion.

Okay. Okay, great. And then just one more for me, um, And you touched on it, hey, refining utilization is back over 90%. It's been there for the last couple months. Is there any way to think about how long we need that refining utilization to be in that plus 90 market to kind of help tighten the coastal market, right? I mean, it seemed like, what, back in 17, it dropped below 90 for a few months. Is there any kind of way to kind of try to track that and think about coastal really improving?

I think that's the right thing to look at. I would just tell you on refinery utilization, be a little careful in that in the last year and a half, about 5% of the refining capacity was either shut down or idled. So, yeah, we're back up above 90%, but that's on a lower base. It was about a million barrels, roughly, plus or minus a little bit, a million barrels of refining capacity that's been shut down and idled. Now, we've seen some good signs recently. The Calcasieu Refinery came back online, and so that's coming back. But as you think of refinery utilization, you've got to factor in that about 5% of the total complex was shut down. And we need some of that to be restarted. Now, the other interesting thing is rather than restarting that, we're seeing more biodiesel and renewable diesel, which, you know, particularly if you take soybean oil and make it into diesel, those are going to be barge moves kind of most likely coming out of the Midwest as they make renewable diesel. We're watching all that. Does that help the coastal market, the renewable diesel? Maybe. We've actually had a coastal unit go and move some renewable diesel. We're watching it, but again, we're still at lower levels and I think we need some of the export market to come back and some of those refineries that have been idle to come back to really make a dent in the coastal utilization.

Okay, great. Hey, thank you very much for the time. And Bill, hoping to catch up with you in early October.

Very good. Thanks. Thanks, Greg. Operator, we're going to take one more caller.

Certainly, our final question then for today comes from the line of Bill Baldwin from Baldwin Anthony Securities. Your question, please.

Okay, thank you. Good morning, fellas. Good morning, Bill. Always good to hear nice comments and better business outlook. I'm interested in what you can talk to us about regarding your new... natural gas power generation equipment, particularly today as you focus on the industrial markets. You talked quite a bit about the power generation I think utilized now more in your EFRAC equipment for the oil and gas markets. That sounds like interest there is definitely expanding and broadening out as far as the user base is concerned. In the industrial markets, what's your go-to-market strategy there? What markets are you really focused on there? Can you just shed a little bit of insight and color on there?

Sure. I'll tell a little bit more on EFRAC before I go into the commercial and industrial power generation. In EFRAC, Stewart and Stevenson started making his first generation EFRAC back in 2013, which was all around the gas turbine driving electric drive. And the newer kind of generation that everybody's excited about is using, you know, natural gas power generation engine packages, you know, from CAT or MTU to basically develop electric power with, say, 10 natural gas power generation engines on a microgrid on a well pad. And there's an element of having backup energy storage there so that you can run all the natural gas generation equipment at its peak efficiency and take them on and offline correctly. When you start to look at the commercial market, it's more one-off rather than a big microgrid that generates huge numbers of megawatts. What we've seen is a lot more standby backup power. We have a power generation rental fleet that, frankly, we get a lot of business from our hurricane backup. During hurricanes, The likes of the big box stores will put us on standby in case there's an outage. I think as you've seen with the Texas storm, which took out a good part of the grid, and some of the challenges in California with the electric grid, and then as you think of EVs taking more of the electric grid, I think businesses in general are looking more and more at backup power. We're really trying to capture parts of that market with our OEMs that we represent, the engine manufacturers. That's how we are. We're a distributor, as you know, Bill, for a number of people. Essentially, we're using that relationship to go to market for backup power. We have a pretty good presence up in the Northeast, and we've been working to get into backup power for big financial institutions to lesser extent in Florida for some of the kind of healthcare nursing home hospital type backup power. It'll be interesting to see as the grid gets more and more utilized and electricity becomes more and more important as electrification occurs across both the passenger car market and other markets, what the demands for backup power will be. We're trying to position it. I would tell you that we're going to market in the future will be to take that backup power and couple it with our energy storage system, i.e. our battery system, so that there's a situation where you can charge the battery and you'll always have backup power and not need as much in terms of diesel to drive backup power. Maybe there's a coupling with solar on certain rooftops of commercial buildings. That's That's all kind of new areas that we're working on. You know, there's nothing to put in the model yet for that market, but that's what we're looking at and what we're pursuing from an ESG standpoint, Bill.

Bill, did we lose you? All right, well, we'll go ahead and close it out on that note. Thanks, Bill, and thank you, everyone, for your interest in Kirby today. and participating in the call. If you have any questions or comments, you can reach me directly at 713-435-1545. Thanks, everyone, and have a great day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.