Kirby Corporation

Good morning and welcome to the Kirby Corporation 2024 First Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. We ask that you limit your questions to a one question and one follow-up. To ask a question during this session, you will need to press star 11 on your telephone. You will hear an automated message that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. We ask that you mute all speaker lines. I would now like to turn the conference over today to Kurt Nimitz, Kirby's VP of Investor Relations and Treasurer. Please go ahead.

Good morning, and thank you for joining the Kirby Corporation 2024 First Quarter Earnings Call. With me today are David Grzybinski, Kirby's president and chief executive officer, Raj Kumar, Kirby's executive vice president and chief financial officer, and Christian O'Neill, president of Kirby's Marine Transportation Group. A slide presentation for today's conference call, as well as the earnings release, which was issued earlier today, can be found on our website. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available on our website in the investor relations section under financials. As a reminder, statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby's latest form 10-K filing and in our other filings made with the SEC from time to time. I will now turn the call over to David.

Thank you, Kurt, and good morning, everyone. Before we begin, I would like to take a moment to announce that effective tomorrow, at Kirby's annual meeting, Christian O'Neill will become Kirby's president and chief operating officer. In this new role, Christian will report to me as CEO and will be responsible for the day-to-day operations of both our marine transportation and our distribution and services businesses. With over 25 years with the company, spanning roles across various businesses, Christian brings a wealth of experience, a history of operational excellence, and a strong customer-focused mindset that will benefit KDS and Kirby as a whole as we continue growing the company. I'd like to congratulate Christian on this new role and thank him for his many years of service at Kirby.

Thank you, David. I'm humbled and excited to assume my new role, and I'm very optimistic about the future for Kirby. In all my years with the company, I can say that the market fundamentals we're enjoying today are the most promising and on par with some of the best times we've experienced. I'm looking forward to what Liza had for us. Well said, Christian.

Now, looking at our earnings, earlier today we announced first quarter revenue of $808 million and earnings per share of $1.19 million. This compares to 2023 first quarter earnings per share of 68 cents. Overall, both our segments performed well during the quarter, delivering significantly higher revenue and operating income year over year. The first quarter's results reflected steady market fundamentals in both marine transportation and distribution and services. These were partially offset by modest weather and navigational challenges for marine, and continued supply chain constraints in DNS. During the quarter, we remained focused on operating safely and efficiently and delivered solid results even with these headwinds. In inland marine transportation, our first quarter results were modestly impacted by delay days. Throughout the quarter, our operations were challenged by high winds, ice delays on the Illinois River, fog along the Gulf Coast, and lock delays throughout the system. These weather and navigational issues slowed transit times and impacted the financial performance of our contracts of a freightment. Overall, delay days increased 22% compared to the fourth quarter of 2023, but were down modestly year over year. From a demand standpoint, customer activity was strong in the quarter, with barge utilization rates running in the low to mid 90% range throughout the quarter. Market conditions remained strong due to continued customer demand and limited barge availability, coupled with inflation, which contributed to favorable pricing. Spot prices were up in the low to mid single digits sequentially and in the 15% range year over year. Term contract prices also renewed up higher with low double digit increases versus a year ago. Overall, the first quarter inland revenues increased 14% year over year and margins were in the high teens. In coastal, market fundamentals remain strong with our barge utilization levels running in the mid to high 90% range. During the quarter, we saw solid customer demand and limited availability of large capacity vessels which resulted in low 20% range price increases on term contract renewals and low 30% increases in spot market prices. These increases help mitigate inflation, particularly with shipyards, and partially offset the capital expense from the addition of ballast water treatment systems. Our planned shipyard maintenance on several large vessels continues to wind down and we brought back one large unit for maintenance in the quarter. Overall, first quarter coastal revenues increased 20% year over year, and operating margins were in the high single to low double digit range. Turning to distribution and services, beginning this quarter, we are going to provide detail on DNS in three areas. Power generation, commercial and industrial, and oil and gas. where commercial and industrial comprises 43%, power generation 41%, and oil and gas 16% of KDS revenues. We are doing this to appropriately reflect the significance of the power generation market to our growth. Our power generation market is made up of installation and service on new power generation units, as well as standby and rental backup power equipment. The fundamental strength of this market is driven by the incessant demand for 24-7 power from data centers and other industrial, financial, healthcare, and retail customers. Power generation is a key driver of growth for distribution and services, and we are excited by the long-term outlook for this market. In total, demand was stable across our markets in DNS, with continued new orders and high levels of backlog. In power generation, strong order growth drove a 42% sequential and 50% year-over-year increase in revenues, with several large project wins from data center customers. In manufacturing, revenues were up 8% sequentially, driven by deliveries of previously delayed shipments and healthy demand for our EFRAC and related products. In commercial and industrial market, overall demand remained steady across our different businesses, with growth coming from the marine repair sector. In summary, our first quarter results reflected continued strength in market fundamentals for both segments, despite weather and supply chain issues. The inland market is strong, and market conditions continue to support higher rates, and coastal Industry-wide supply-demand dynamics are favorable, our barge utilization is good, and we are realizing real rate increases. Strong demand for power generation and distribution and services is mostly offsetting weakness in oil and gas and to a lesser extent in some other areas. I'll talk more about our outlook later, but first I'll turn the call over to Raj to discuss the first quarter segment results and balance sheet in more detail.

Thank you, David, and good morning, everyone. In the first quarter of 2024, marine transportation segment revenues were $475 million, and operating income was $83 million, with an operating margin of 17.5%. Compared to the first quarter of 2023, total marine revenues increased $63 million, or 15%, and operating income increased 40 million, or 93%. Compared to the fourth quarter of 2023, total marine revenues, inland and coastal together, increased 5% and operating income increased 22%. As David mentioned, fog and high winds along the Gulf Coast produced a 22% sequential increase in delay days and negatively impacted operations and efficiency, while planned shipyard activity and weather impacted the coastal business. These headwinds were offset by solid underlying customer demand, improved pricing, and most importantly, execution. Looking at the inland business in more detail, the inland business contributed approximately 81% of segment revenue. Average barge utilization was in the low to mid 90% range for the quarter, which is slightly better than the utilization seen in the fourth quarter of 2023 and compares similarly to the first quarter of 2023. Long-term inland marine transportation contracts or those contracts with a term of one year or longer contributed approximately 65% of revenue with 62% from time charters and 38% from contracts of a freightman. Improved market conditions contributed to spot market rates increasing sequentially in the low to mid single digits and in the 15% range year over year. Term contracts that renewed during the first quarter were up on average in the low double digits compared to the prior year. Compared to the first quarter of 2023, inland revenues increased 14%, primarily due to higher term and spot contract pricing and fewer delay days. Inland revenues increased low to mid single digits compared to the fourth quarter of 2023, despite unfavorable navigation and operating conditions. Inland operating margins improved by nearly 150 basis points, driven by the impact of higher pricing and continued cost management, which helped stave off lingering inflationary pressures. Now moving to the coastal business. Coastal revenues increased 20% year over year, due to higher contract prices and fewer shipyards. We had one large vessel conclude its planned shipyard and reenter service during the quarter. Overall, Coastal had an operating margin in the high single to low double-digit range, resulting from higher pricing and cost leverage. The Coastal business represented 19% of revenues for the marine transportation segment. Average coastal barge utilization was in the mid to high 90% range, which is in line with the first quarter of 2023. During the quarter, the percentage of coastal revenue with under term contracts was approximately 96%, of which approximately 98% were time charters. Average spot market rates were up in the low to mid single digits sequentially and around 30% year over year. Renewals of term contracts were higher in the low 20% range on average year over year. With respect to our tank barge fleet for both the inland and coastal businesses, we have provided a reconciliation of the changes in the first quarter as well as projections for 2024. This is included in our earnings call presentation posted on our website. At the end of the first quarter, the inland fleet had 1,078 barges representing 23.8 million barrels of capacity. On a net basis, with the newly acquired barges we announced today, we expect to end 2024 with a total of 1,094 inland barges representing 24.2 million barrels of capacity. Coastal Marine is expected to remain unchanged for the year. Now I'll review the performance of the DNS segment. Revenues for the first quarter of 2024 were $333 million, with an operating income of $22 million and operating margin of 6.6%. Compared to the first quarter of 2023, the DNS segment saw revenue decrease by $5 million, or 2%, with operating income decreasing by approximately 3%. When compared to the fourth quarter of 2023, revenues decreased by 14 million, or 4%, and operating income decreased by 7 million, or 23%. In power generation, revenues increased 50% year-over-year, as we saw a pickup in orders from data centers and other industrial customers for power generation and backup power installation. We also continue to see steady deliveries of natural gas-driven power generation equipment in the oil and gas space. Power generation operating income was up 45% year-over-year and had operating margins in the high single digits. Power generation represented 41% of total segment revenues. On the commercial and industrial side, steady activity in marine repair partially offset lower deliveries due to supply chain bottlenecks in our Thermo King business. As a result, commercial and industrial revenues were down 7% year-over-year. Operating income increased 11% year-over-year, driven by favorable product mix and ongoing cost-saving initiatives. Commercial and industrial made up 43% of segment revenues with operating margins in the high single digits. Compared to the fourth quarter of 2023, commercial and industrial revenues decreased by 13% as Thermo King supply chain constraints were partially offset by increased activity in marine repair. Operating income was up 28% over the same time period driven by favorable product mix. In the oil and gas market, we continue to see softness in conventional frac-related equipment as low rig counts tempered demand for new engines, transmissions, and parts throughout the quarter. This softness is being partially offset by execution on backlog and new orders of EFRAC equipment. Revenues in oil and gas were down 43% year over year and 38% sequentially. Oil and gas represented 16% of segment revenue in the first quarter and had operating margins in the mid single digits. Now turning to the balance sheet. As of March 31st, we had $75 million of cash with total debt around $1 billion, and our debt-to-cap ratio remained below 25%. During the quarter, we had net cash flow from operating activities of $123.3 million. First quarter cash flow from operations was impacted by a working capital bill of approximately $30 million driven by underlying growth in the business. We continue to target unwinding working capital as the year progresses. We use cash flow and cash on hand to fund 81 million of capital expenditures of CapEx, primarily related to maintenance of equipment. During the quarter, we also used 41.8 million to repurchase stock at an average price just under $84. As of March 31st, we had total available liquidity of approximately 491 million. For 2024, We are on track to generate cash flow from operations of 600 to 700 million on higher revenues and EBITDA. We still see some supply chain constraints posing some headwinds to managing working capital in the near term. Having said that, we are targeting to unwind this working capital as orders ship in 2024 and beyond. With respect to CapEx, We expect capital spending to range between $290 and $330 million for the year. Approximately $190 to $240 million is associated with marine maintenance capital and improvements to existing inland and coastal marine equipment and facility improvements. Approximately $90 million is associated with gross capital spending in both of our businesses. The net result should provide approximately $300 million of free cash flow for the year. As always, we are committed to a balanced capital allocation approach and will use this cash flow to opportunistically return capital to shareholders and continue to pursue long-term value creating investment and acquisition opportunities. I will now turn the call back to David to discuss the remainder of our outlook for 2024.

Thank you, Raj. Both of our segments performed well during the quarter, delivering improved revenue and operating income, and our team executed well despite weather-related delays in the marine transportation segment and continuing supply chain constraints in DNS. We continue to see favorable fundamentals as 2024 progresses and we expect steady quarterly earnings progression for the remainder of the year. Our outlook in the marine market remains strong for the full year. Refinery activity is at high levels, our barge utilization is strong in both inland and coastal, and rates are increasing across the board. In distribution and services, we are seeing an uptick in demand for power generation, products and services, and we continue to receive new orders in manufacturing, both of which are helping to soften the inherent volatility of our oil and gas markets. Overall, we expect our businesses to deliver improving financial results as we move through the remainder of 2024. In inland marine, we anticipate positive market dynamics due to limited new barge construction in the industry, and many units going in for maintenance combined with steady customer demand. With these strong market conditions, we expect our barge utilization rates to be in the low to mid 90% range throughout the year. Overall, inland revenues are expected to grow in the mid to high single digit range on a full year basis. However, I need to give the normal caveats. A potential recession along with a drop in demand could impact expected growth, as could unexpected lock delays or low water conditions. That said, we expect operating margins will continue to gradually improve during the year from the first quarter's level and average around 20% or higher for the full year. In coastal, market conditions have strengthened considerably and supply and demand is favorable across the industry fleet. Strong customer demand is expected throughout the year with our barge utilization in the low to mid 90% range. With major shipyards and ballast water treatment installations concluding, revenues for the full year are expected to increase in the high single to low double digit range compared to 2023. Coastal operating margins are expected to be in the high single to low double digit range on a full year basis. In distributions and services, we expect to see incremental demand for products, parts, and services in the segment. In commercial and industrial, the demand outlook in marine repair is strong, while on-highway is somewhat weak with the exception of refrigeration products and services. In power generation, we anticipate continued growth as data center demand and the need for backup power is very strong. However, You've heard us talk about supply chain issues. The bottom line is if we could get more large engines, we would be able to package them into the power generation market given the strength we see. Engine supply, however, is constraining our growth here. In oil and gas, activity levels are lower but seem to be bottoming. Our manufacturing backlog does provide stable levels of activity throughout most of 24. We do anticipate extended lead times for certain OEM products to continue, and they will contribute to volatility in delivery schedules, but we're working through that. Overall, the company expects segment revenues to be flat to slightly down on a full year basis, with operating margins in the mid to high single digits slightly lower year over year due to mix. To conclude, overall, we're off to a solid start in 2024 and have a favorable outlook for the remainder of the year. Our balance sheet is strong, and we expect to generate significant free cash flow despite high levels of capex this year. And we expect to use the majority of that free cash flow for share repurchases or growth opportunities. We see favorable market continuing and expect our businesses will produce improving financial results as we move through the year. As we look long term, we are confident in the strength of our core businesses and our long term strategy. We intend to continue capitalizing on strong market fundamentals and driving shareholder value creation Operator, this concludes our prepared remarks. We are now ready to take questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, we ask that you limit your questions to one question and one follow-up. To ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

Let me guess, Ben's first.

Our first question comes from Ben Nolan at Stiefel. Ben, your line is open.

Hey, guys, appreciate it, and good quarter. Well, I guess, well, first, congrats, Christian, on the upgrade here. And since you're on, I'll go ahead and ask you this one if it's all right. As I look at the first quarter, I think it was – a whole lot better than what I thought it was going to be like on the marine side. Normally we get three, four, 500 basis points of margin improvement moving into the second and third quarter. If I put all of that together, my numbers come up higher than the six to $700 million of operating income. Can you maybe walk me through sort of what, uh, where the conservatism is on that or, you know, I don't know, just how to frame in what looks like a lot more acceleration than sort of is in the guide.

Yeah. Hey, Ben, this is David. I'll start and then kick it over. Yeah, yeah. Whoever. This is Christian's first call. We don't want to scare him. No, in all seriousness, you know, we talked about year-over-year again as you know the quarters move around and we can have hurricanes low water lock delays high water you know the way we like to look at it is in 23 going into 24 we're talking about a 300 basis point pickup in margins on average for the full year obviously we're off to a great start here I you know part of that was was a little better weather but I you know, I think the way to look at it is, you know, kind of a full year average increasing 300 basis points. I'll let Christian give you some color on, you know, kind of the inflationary and some other things that are headwinds. But I think the important thing, Ben, is this is multi-year. You know, we've said that we could see a similar rise in 25 in terms of margins. And based on what we're seeing in the market and in kind of the supply-demand picture, it's probably likely to hit 26. But I want to let Christian give you some more color on all the things that are happening and around the margins.

Yeah, I mean, a couple of items that might justify a little conservatism is there's very high price of steel, shipyard inflation very high. David has referenced the maintenance bubble that the industry is experiencing in previous calls. You know, that is real. There's a lot of equipment going through major cycles. And add to that tough labor inflation, just the cost of almost everything we do to feed and travel and crew the vessels, there's still a lot of pressure around the cost side that probably merits some of that conservatism. And then the unknowns. I mean, David referenced weather, hurricane season, lock delays, and other things.

But, Ben, you know, I mean, we're pretty optimistic. You know, you've probably heard my comments about 20% or higher. It's hard to spike the football here in the first quarter, if you know what we mean.

Yeah, I got you. Well, and then I guess for my follow-up, just to change gears a little bit, I appreciate the breakout on the power generation side. I was curious about two things. First of all, when you did break that out, was it all out of the industrial side of it or was a portion of it from the oil and gas side? And then along those lines, as we think about power generation going forward, is there any recurring revenue element to that or is it, you know, you build and sell the equipment and then you're done with it?

Yeah, no, there is recurring revenue. But let me start with the first part of your question. In power generation, just to You know this, Ben, because you've followed us. But let me just expand for those that aren't as familiar with PowerGen at Kirby. I mean, we've done backup power, whether it's for the New York Stock Exchange or financial institutions or rental backup power for large retailers like Costco and Target. And we also do it for like tenant health care and other places like that. But You know, that's been typically, we've been doing that for decades. You know, it's standby diesel-generated power. We do it for nuclear power plants, for example. What we've seen, though, is that it's growing, and particularly with EFRAC, you saw that in the fracturing market that they can use electric FRAC and save a lot of money, particularly if they burn natural gas. So that's power generation, but That power generation that we can do on a well site, for example, can be sold into the grid. And many of our customers are not just focused on their oil and gas-driven power generation needs. They're looking to sell us prime power or onto the grid. So we are seeing a broad-based need for power. And it transcends oil and gas. It goes into industrials. Obviously, the data centers and AI are huge, but we're seeing it in hospitals. We're seeing it everywhere. Everybody needs power 24-7. Now, to your specific question, that 41% of our revenue in power generation, about half of that 41% is currently being used as power on frac sites. That said... It is expanding, and those uses of that power generation are expanding. Some of our customers are going into not just standby, but to prime power generation and selling into the grid. So it's exciting. As you heard in my prepared remarks, we could sell more if we could get the large engines Some of the engine OEMs are just flat sold out. But it's really promising, kind of the demand profile. Now, in terms of recurring revenue, it's everything you can think of. We do installations, obviously. We do maintenance and service. So we're kind of a full shop. I would tell you that our strength in power generation is packaging. We are very good at packaging. We'll take an OEM's engine, package it for a customer-specific application. We're also very good at making things mobile and rugged. We're excited about it. We see a huge amount of opportunity here, and we're looking forward to growing it. It's been growing. Oil and gas, as everybody knows, 23 to 24, you can listen to some of our customers out there in the public space. They're down year over year. Fortunately, we've had PowerGen to kind of offset a little weakness in oil and gas. Now, all that said about oil and gas, I do think it's bothering me. We're starting to see signs that it's bothering. At any rate, that's a long, rambling story.

No, I appreciate all the color for sure. And I guess I better stop there with my two questions. So thanks and congrats again, Christian. Thanks. Thanks, Ben.

One moment for our next question. Our next question comes from Sharif El-Megharbi at BTIG. Your line is now open.

Hey, good morning. Thanks for taking my questions. I think last quarter, you guys talked about having 80 inland barges offline at any one point this year. So just to start, what's a normalized level, and are other operators going through a similar maintenance bubble?

Yeah, I'll start and turn it over to Christian, but Yes, is the short answer. The entire industry is going through a huge maintenance bubble, which will last at least the next two years and probably into the third year. Yeah, we're probably, well, Christian has the details. I'll let him chime in.

Sure. You know, Sharif, the maintenance bubble we're referencing stems from the born-on dates of the barges. You know, every five years we're going into major maintenance cycles. And, you know, those built you know, 15, 10, and five years ago are coming around in a big way. You know, we're still in that range of 80-something barges in the yard any given day. That gets better a little bit as we get into the rest of the year. But, you know, on average, you're hard to say because there's some variation, but you're in the 40 to 50. A fleet like ours with 1,100, almost 1,100 barges is probably what you're looking at on average.

Yeah. Yeah, but to be clear, all of our competitors are facing this. And, yeah, look, our customer base understands it. You know, I think part of the kind of the margin answer for Ben is just the maintenance costs alone is a headwind of margins. You know, everybody's experiencing it. The shipyards are full. You know, the shipyards have had labor issues, you know, just hiring people and paying higher wages because they need them. So we are seeing, you know, kind of the maintenance inflation plus just the strong demand for maintenance capabilities across the industry is part of that margin question. I know that wasn't your question, Sri, but I would just tell you that Every competitor is experiencing the same thing right now. It's just an odd, acute time for maintenance in our industry. But that's very positive for us in terms of the supply and demand picture, right?

So that wasn't – you didn't answer my question, but you segued very well into my follow-up question.

Oh, I'm sorry. What question did I miss? I'm sorry.

No, you didn't miss anything. You set me up for the second question. So I guess with the supply-demand balance kind of improving and this big chunk of the fleet on the sidelines, does that introduce kind of more volatility into barge pricing and then know could we see some reactivations or like you said because of the cost associated with it and the lack of shipyard availability um does that sort of stop more barges entering the company entering the market i understand yeah um that's a good question you know during covid there were were a number of barges we we did it ourselves but

But throughout the industry, a number of barges put on the bank just because during COVID, it didn't make sense to maintain them. But I would tell you that by and large, almost all of the stuff that was put on the bank during COVID has now been reactivated. So I don't think there's a shadow fleet, to use a word, to be reactivated. I think anything that could have been reactivated has been reactivated. Further, the price of new barges is still very high. It used to be five, six, seven years ago, it was a couple million dollars for a clean 30,000-barrel barge. Now, what's the price, Christian?

Here, $4 million north of $4 million for a plain vanilla clean 30,000-barrel.

Prices to justify new construction are still 40% plus away. We just don't see any new building. People are busy trying to maintain their fleets. Cost of money's gone up. So we don't see a lot of new supply coming in. Demand's pretty solid right now. So we feel really optimistic. I think Christian and I and Raj have been thinking this has got three to five years to run.

Yeah, and Sharif, I would add, if you look at the last three years, we've seen the lowest amount of new construction activity within 20 years. So the last three years are the lowest we've ever seen. And consider you still have another 500 barges in the market that are over 30 years old that are candidates for retirement. So supply side looks pretty good going forward.

Got it. Jeff, I appreciate the color. All right, thanks.

One moment for our next question. Our next question comes from Danielle Imbrow at Stevens Inc. Your line is now open.

Hey, guys. This is Grant on for Daniel. Thank you for taking my questions. At Coastal, you saw a pretty huge step up in profitability in the first quarter, which is kind of with a pretty wide full-year range for your margins at Coastal for the rest of the year. I was hoping maybe you could help us size up kind of the magnitude and cadence of the sequential improvement throughout the year in that segment as you continue to see pricing renew higher. Thanks.

Yeah. Sure. Thanks for the question, Grant. Christian, I'll tag team this one. Let me just start by looking, kind of like we talked about the margin profile in inland. The best way to look at this, because of the way shipyards are and certain activities, is kind of a year over year. In 23, our coastal business kind of bounced along, break even. A couple quarters, we made a little money. A couple quarters, we lost a little money. This year, we're projecting high single digits, low double digits. That's a 10% improvement in margins, roughly, just year over year. Why is that? It's the same supply and demand story as inland. The industry's full. We're all running 95 plus percent utility. Demand's good. I would say there's an even longer outlook, positive outlook for coastal, because it takes three years to build something new, and nobody's even contemplating building new right now. So, you know, best case, you won't see any new supply probably for five years. So we're pretty bullish. You know, Christian, you could probably describe some more about the pricing environment and what we're seeing in coastal.

Yes, thanks, David. I think what you see in the pricing right now is the industry is trying to help offset the capital expenses that came with the ballast water treatment systems that we installed. For example, at Kirby over the last five years, we had to deploy just shy of $100 million to get our ballast water treatment systems installed. I think the industry as a whole is recouping that. Inflation is definitely a part of the rate story. And David explained it well. There is no new construction in the offshore space right now. And supply and demand is working well to help that rate structure.

Thanks, guys. And maybe just back to power generation real quick. You know that the demand for the service has increased sharply. I'm just kind of curious what you've seen from a margin perspective, you know, with the trend there over the last couple of years. And do you think you can see kind of continued sustained margin improvement as as you scale that business, and also, I guess, just on kind of the in-market side, is there a margin differential between the data centers and maybe the frack sites?

Yeah. Let me take the last one first. I mean, basically, fracking has a little better margin profile, and that's because it has to be more rugged. It has to be mobile, whereas a data center is kind of a stationary, non-harsh environment. So Margins are a little better on the frac environment, power generation side. But that said, margins in PowerGen are kind of mid to high single digits. With some scale, maybe we could get closer to the high single digits, low double digits. But inherently, a big piece of any power generation is the large, you know three megawatt type engine that comes from one of the big engine manufacturers and those those prices are pretty well known so it's hard to mark up you know one of the biggest component pieces where we're able to get your margin really is in our packaging you know that's our strength is packaging and making it customer specific and you know that's where our margin is inherently You know, we don't get much margin on the engine itself. It's really everything goes around it. That said, though, we're obviously, as volumes increase and we look at, you know, some vertical integration, you know, we would hope to bring margins up higher.

Thanks, David. Congrats on the quarter.

Thank you.

One moment for our next question. Our next question comes from Greg Wazowski at Weber Research and Advisory. Your line is now open.

Hey, good morning, everyone. Christian, congratulations. Welcome to the call. Thank you very much.

Much appreciated. Good morning, Greg.

Yeah, good morning. David, appreciate your color earlier from Ben's question on the PowerGen stuff. I wanted to follow up on that if I could, and specifically the data centers and the stationary power side of things. And I'm curious how you think about the environment as it pertains to technology. So you got diesel gensets, batteries, hydrogen, combinations of all kinds of different alternative fuels and microgrids, et cetera, all at different price points and different levels of maturity. So I'm just curious how Kirby's viewing approaching that market within that context and kind of as an add-on, you know, whether or not that's an area of opportunity for you guys with respect to M&A, if that's something that you're paying attention to or not.

Yeah, the short answer is yes, of course, it's an area for M&A. But, you know, in terms of the technology, a data center, it's generally standby power. They're not running prime. They're not generating power generally. generally speaking, for their own use. It's really just backup. So diesel-powered backup power is a good fit for that. That said, with natural gas, the operating costs of natural gas are cheaper. The problem with the data centers is just getting the natural gas to the data centers. That said, obviously, with natural gas prices being cheap, everybody's looking for ways to burn natural gas. I think that is actually helping the prime power kind of efforts. People see that if you can get natural gas cheap, you can generate power pretty cheaply and sell it to the grid at the right time. So we're seeing a lot of interest in that. We're agnostic. We build anything. Again, that's our strength is packaging what the customer needs for their specific application. And I would just tell you the variety of applications is enormous. You can imagine that a Walmart Target has a different view of how backup powers could work versus... you know, a fracker versus a data center versus, you know, a Bitcoin mining shop. You know, we try and be agnostic to it. You know, look, we're excited about this space. We're looking for ways to grow it, obviously. You know, there's a lot of inherent growth, which is pretty much limited by engine availability, but Clearly, we'd be open to vertically integrating and adding some ability to add our share of wallets in terms of packaging. Got it.

Big pie out there for sure. I appreciate the color. Next one, pretty similar, and I think I've asked you this before, but can you talk a the backup power. And I think I'm speaking mostly to the rentals or temporary. And I, I mean, I'm, I'm no meteorologist, but you know, I keep hearing that we're on pace for hottest summer of the year and potential, you know, worse than normal extreme weather for later in the year. And who knows if that's true or not, but is that something that, you know, Kirby, is that actionable for you guys? Is that something that you can prepare for? And how does that play into ultimately like, you know, growing that segment? Or does the, you know, uncertainty of the weather kind of make that too difficult? How do you think about that?

Yeah, Greg, we're all grinning here because you can imagine our marine fellows do not like adverse weather and hurricanes, but our power rental group loves hurricanes. And so we kind of have a... a smile on our face as we think about that because we hate hurricanes for all the right reasons in the marine business and from just the impact to people. But we do rent a lot of large power and a lot of that power that we rent is kind of on a standby basis that You know, they pay a standby fee, and then once it's deployed in a hurricane situation or an adverse weather situation, you know, the rate goes up considerably. We have a fairly large power rental fleet. Last year we expanded that a bit, and I think we spent about $10 million in new capital to build new power generation. We continue to build new power generation capabilities for rental. But, you know, that's a small part in terms of our power generation revenue. The bigger pieces are packaging, you know, for whatever application.

Hopefully that's helpful content. Yeah, no, I appreciate it, guys. I'll turn it over there. Thanks, Greg.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by as I compile the Q&A roster. Our next question comes from Adam Rosowski of Bank of America. Your line is now open.

Hi, thanks. Good morning, Dave Raj, and congrats to Christian. I'm on for Ken Hexter today. Good morning. Good morning. Maybe just starting with the inland spot rate momentum, you know, trending up mid-teens. What's your view of the base case for continued momentum here, and is it fair to think that these could turn into similar levels of contract gains later in the year?

Yeah, look, We're in a very healthy market. As Christian said, this is one of the best environments we've seen in a very long time. I would tell you that the good news is that spot rates are well above term rates, probably 15% above term, which is what you want in a healthy market. That way, you have some ability to raise term pricing. That said, our customers are very sophisticated. They understand what's going on with the maintenance bubble. They understand what's going on with inflation and how we need to recover that. I would say the rate momentum for term contracts should continue, kind of like we saw. I think we said... and our prepared remarks that year-over-year term contracts that renewed in the quarter were up double digits, low double digits. So I would suspect that goes. I don't know. Chris, do you want to add anything to that?

No, I think that's well said. I think, you know, the momentum we see is real. You know, the pricing that the industry needs to get to to get to a replacement capital or the point where people are reinvesting again, there's still room to go. We're seeing that in the spot market. And we'll continue to press and try to cover our inflationary pressures with our terminals as the year continues.

Great. Very helpful. Thanks. And then just on the barge addition in the quarter, you added 13 barges. Is this just private owners looking to sell more? Can you talk about how that transaction developed and if there's potential for any more down the road here?

Yeah, I mean, periodically we have various people that want to sell for various reasons. I mean, it could be that they just have some excess equipment. They could have some cash flow needs or whatnot. We did several of these types the last couple years. We do them opportunistically. We've stepped into shipyard contracts for people with We'll take – look, our ecosystem knows we're a logical buyer, and we get the opportunity to get them. I'll let Christian talk to the desirability of what we just got.

It's kind of a home run. Yeah, no, thanks very much, David. The opportunity to acquire two high-horsepower river line haul class vessels – is really fortuitous for us. We're very happy to have them. They improve our fuel efficiency, our performance, our emissions footprint in our big line haul operation. And the 30,000-barrel barges and specialty barges fit right into what we do, and we'll feather that equipment into the portfolio here in about the next 30, 60 days very easily.

Appreciate the time. Thanks, Adam.

One moment for our next question. Our next question comes from Derek Pontizer at Barclays. Derek, your line is now open.

Hey, good morning, David. I appreciate you letting me on the call.

Yeah, good morning, Derek. Glad to have you.

Thanks. I just wanted to ask about your outlook on EFRAC pumping equipment, your message being constructive on the power generation side. But could you talk to us about customer conversations, ordering potentially additional EFRAC equipment, or potentially new customers that you're speaking with looking to acquire some of the EFRAC equipment or do a leasing model? Just maybe some more thoughts and color on that.

Sure. I would tell you that it's very active on the EFRAC side. See, nobody's really building conventional fracs anymore. I don't know if it's dead forever, but it's hard to see people building conventional fracs going forward. I think some people have converted, and we were involved in converting a lot of conventional fracs over to DGB, dynamic gas blending units. And it's really just about economics, right? I mean, burning gas is so much cheaper than burning diesel. And electric takes it to the next level, right? I mean, you'll see not only is it cheaper to operate, you're burning 100% natural gas, but the maintenance cost goes down for the operators as well. That's not to say it's simple equipment. I mean, this is very sophisticated equipment. So it's a long answer here, but we are seeing continued demand. And I would say they're not expanding the frac horsepower. It's really replacement at this point. If anybody's got some old frac equipment that they're going to cut up, they're going to replace it with electric. So we're seeing new demand. We're seeing it from existing customers and potential new customers. We're pretty excited about it. We think we've got the best widget out there. Obviously, other people think the same, but I would put our equipment up against anybody's. It's state-of-the-art, and we're excited about it. We have done some leasing. I think we're pretty happy with our lease portfolio. We're not anxious to add to it now. We've deployed quite a bit of capital in that space, but But we are seeing a lot of activity and interest in electric frac.

I appreciate that. And do you think, are you happy with kind of your capacity cadence as far as ability to get X amount of e-frac pumps out per year? Do you see that expanding over time as more and more of the pressure pumping companies adopt to this next generation frac equipment?

Yeah, I'd love to give our manufacturing guys the challenge. I mean, I think we've got an evening shift. I'd like to go to 24-7 to expand, but, you know, we're supply constrained more than anything right now. Yeah, it's the same type of engines that you see for power generation, right? I mean, we're talking about natural gas recif engines in They generate the electricity on the well site, and those same engines are being used, as we talked about, in other power generation activities. So we're supply constrained more than anything. Again, if we could get more engines, we'd certainly take them.

Great. Thank you, David. Appreciate the call. I'll turn it back.

Thanks, Derek.

This concludes our question and answer session. I would now like to turn it back to Curt Nimitz for closing remarks.

Thank you, Amber, and thank you, everyone, for joining us today. Should you have any follow-up questions, please feel free to reach out to me.

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