Kirby Corporation

Good day, and thank you for standing by. Welcome to the Kirby Corporation 2024 Second Quarter Earnings Conference Call. At this time, all participation 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 will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Kurt Nemitz, Kirby's Vice President of Investor Relations and Treasurer, please go ahead.

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

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

Thank you, David, and good morning, everyone. In the second quarter of 2024, marine transportation segment revenues were $485 million and operating income was $95 million with an operating margin around 20%. Compared to the second quarter of 2023, total marine revenues increased $58 million of 14% and operating income increased $31 million of 48%. Compared to the first quarter of 2024, total marine revenues, inland and coastal combined, increased 2% and operating income increased 14%. As David mentioned, weather and lock delays modestly impacted operations as heavy rains in the Houston area briefly closed the ship channel and two major locks on the lower Mississippi River were closed for repairs. This led to a 44% increase in delay days year over year, but these headwinds were offset by solid underlying customer demand, improved pricing, and most importantly, execution. Looking at the inland business in more detail, the inland business contributed approximately 81% of segment revenue. Average barge utilization was in the low to mid 90% range for the quarter, which is similar to the first quarter of 2024 and the second quarter of 2023. Long-term inland marine transportation contracts, or those contracts with a term of one year or longer, contributed approximately 65% of revenue, with 59% from time charters and 41% from contracts of a freightman. As David mentioned, improved market conditions contributed to spot market rates increasing sequentially in the low to mid single digits and in the mid-teens range year over year. Term contracts that renewed during the second quarter were up on average in the mid single digits compared to the prior year. Compared to the second quarter of 2023, inland revenues increased 11%, primarily due to higher term and spot contract pricing. Inland revenues increased low to mid single digits compared to the first quarter of 2024. Inland operating margins improved by around 300 basis points year over year driven by the impact of higher pricing and continued cost management, which helps save off lingering inflationary pressures. Now moving to the coastal business. Coastal revenues increased 24% year over year due to higher contract pricing and fewer shipyards. We had one large vessel conclude its planned shipyard and reenter service during the quarter. Overall, coastal had an operating margin in the low teens range resulting from higher pricing and shipyard timings, which will temporarily reverse in the fourth quarter. The coastal business represented 19% of revenues for the marine transportation segment. Average coastal barge utilization was in the mid to high 90% range, which is in line with the second quarter of 2023 and the first quarter of 2024. During the quarter, The percentage of coastal revenue under term contracts was approximately 100%, of which approximately 97% were time charters. Average spot market rates were up in the high single digits sequentially and in the mid 20% range year over year. Renewals of term contracts were higher in the high teens range on average year over year. With respect to our tank barge fleet, for both the inland and coastal businesses. We have provided a reconciliation of the changes in the second quarter as well as projections for 2024. This is included in our earnings call presentation posted on our website. At the end of the second quarter, the inland fleet had 1,093 barges representing 24.2 million barrels of capacity. On a net basis, we expect to end 2024 with a total of 1,096 inland barges representing 24.3 million barrels of capacity. Coastal Marine is expected to remain unchanged for the year. Now I'll move on to review the performance of the distribution and services segment. Revenues for the second quarter of 2024 were $340 million with operating income of $29 million and an operating margin of 8.7%. Compared to the second quarter of 2023, the distribution and services segment revenue decreased by 11 million, or 3%, while operating income was flat year over year. When compared to the first quarter of 2024, segment revenues increased by 7 million, or 2%, and operating income increased by 7 million, or 34%. In power generation, our revenues tied to non-oil and gas end markets were up 16% sequentially and 87% year-over-year, driven by strong demand as we continue to see significant orders from backup power, data centers, and other industrial customers for power generation equipment and backup power availability. Our power generation revenues tied to the oil and gas space were down sequentially and year-over-year as product delays continued to contribute to lumpiness. Altogether, Power generation revenues were up 9% year over year, while operating income was up 16% year over year, with operating margins in the low double digits. Power generation represented 32% of total segment revenues. On the commercial and industrial side, steady activity in marine repair and growth in Thermo King product sales offset lower activity in other areas particularly on-highway truck service. As a result, commercial and industrial revenues were up 9% year over year. Operating income increased 38% year over year driven by favorable product mix and ongoing cost savings initiatives. CNI made up 49% of segment revenues with operating margins in the high single digits. Compared to the first quarter of 2024, commercial and industrial revenues increased by 16% as a result of stable demand in most areas and higher thermal king product shipments. Operating income was up 45% over the same period, driven by favorable product mix. In the oil and gas market, we continue to see softness in conventional frac-related equipment as low rig counts and lower fracking demand tempered demand for new engines, transmissions, and parts throughout the quarter. This softness is being partially offset by solid execution and backlog and new orders of EFRAC equipment. Revenues in oil and gas were down 33% year over year, but increased 22% sequentially. Oil and gas represented 19% of segment revenues in the second quarter and had operating margins in the low to mid single digits. Now I'll turn to the balance sheet. As of June 30th, we had $54 million of cash with a total debt of around $1.05 billion, and our debt-to-cap ratio was 24.3%. During the quarter, we had net cash flow from operating activities of close to $180 million. Second quarter cash flow from operations saw a working capital reduction of approximately $10 million. We continue to target unwinding more working capital as the year progresses and into 2025. We use cash flow and cash on hand to fund 89 million of capital expenditures, or capex, primarily related to maintenance of marine equipment. During the quarter, we also used 43.7 million to repurchase stock at an average price of $117. As of June 30th, we had total available liquidity of approximately 488 million. For 2024, We remain on track to generate cash flow from operations of 600 to 700 million driven by higher revenues and EBITDA. We still see some supply chain constraints posing some headwinds to managing working capital in the near term. Having said that, we are targeting to unwind this working capital as orders ship in 2024 and beyond. With respect to CapEx, we expect capital spending to range between 300 and 330 million for the year. Approximately 200 to 240 million is associated with marine maintenance capital and improvements to existing inland and coastal marine equipment and facility improvements. Approximately 90 million is associated with growth capital spending in both of our businesses. The net result should provide approximately 300 to 350 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 return capital to shareholders and continue to pursue long-term value-creating investment and acquisition opportunities. I will now turn the call back to David to discuss the remainder of our 2024 outlook.

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

Thank you. At this time, we will conduct the question and answer session. 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. As a reminder, we ask that you please limit your question to one question and one follow-up. Please stand by as we compile the Q&A roster. Our first question comes from the line of Greg Lewis at BTIG. The line is yours.

Yes, thank you, and good morning, everybody, and thanks for taking my questions. Yeah, good morning. I was hoping if you could talk a little bit more about Coastal. I mean, you know, this has been a long time coming. It feels like, you know, coming out of really a long extended multi-year down cycle. You know, as you see what's happening in that market and, you know, I can appreciate, you know, no one's really ordering new equipment. You know, how much of this you know, strength in coastal is really being driven by, you know, just increasing demand. And if it is that, could you talk a little bit about that? Or has it really been, you know, a little bit of that and some fleet rationalization? And as you think about where we are, I know you always talk about, you know, inland in terms of, you know, economics around new builds. You know, as you think about where we are in coastal, How far away are we from that also, those kind of new-built economics that make sense?

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

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

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

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

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

Super helpful. Thank you very much.

Thanks, Greg. Take care.

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

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

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

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

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

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

And, but, but it's not yet at the point where you're like, man, we just, we can't, we can't do, you know, whatever X, Y, Z business. It's not quite that level.

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

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

Right. All right. Well, that does it for my two. I appreciate it. Thanks, guys. Thanks, man.

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

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

Morning, Joe.

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

The cost of new builds is still very high. You know, I think a new build 30 is twice what it was five. A new build 30,000 barrel barge is probably twice what it was five years ago. So the cost is up a lot in the pricing needed to justify, you know, a new build is still, you know, 40% above where we are now. So that said, you know, there's not a lot of new building. I think For the year, we're hearing around 40-ish new barges. I think 11 have been delivered year-to-date. Christian can talk about shipyard capacity. But it gets around to rates don't justify new builds. People are still dealing with a big maintenance bubble, which we are. So that's chewing up a lot of companies' free cash flow just to go through the maintenance bubble. And then, as we've been talking about, the mariner side of things is pretty tight. So you put all that together, and nobody's really anxious to go build.

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

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

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

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

Thank you for your questions. One moment, please. Our next question comes from the line of Greg Wazikowski from Weber Research and Advisory. The line is yours.

Hey, good morning, guys. How you doing?

Good morning.

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

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

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

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

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

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

Thank you for your question. One moment, please. Our next question comes from the line of Ken Hoekstra of B of A. The line is yours. Hey, Greg. Good morning.

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

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

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

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

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

All right. Understood on that. I guess let's go. Can we talk about magnitude of increase sequentially? Can I presume that they continue to decline sequentially?

Decline sequentially? Are you talking about ton miles? Ton miles?

Oh, rates, rates, rates.

No, they will not decline sequentially. Yeah, they'll go up. Increase. Yeah, yeah.

I said, can we presume they've increased sequentially?

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

Yeah, we're still seeing strong pricing momentum. We'll have an opportunity to continue to reset the portfolio as the year goes on. Q4 is one of our larger opportunities to reset the portfolio, but you're still seeing spot rates outpace term by 10% to 15%, so we've still got room to go, and things feel pretty good, Ken. Great, great.

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

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

It's helpful just because it's newly broken up. Appreciate the time, guys. Thanks for the thoughts.

Thanks, Ken. Thank you for the question. Again, as a reminder, to ask a question, you will need to press star 1-1 on your telephone. I'll go ahead and promote the next question. Our next question comes from the line of Scott Group with Wolf Research. The line is yours.

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

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

I don't know, Christian, anything you... No, I think you covered that well.

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

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

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

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

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

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

I totally get it. I'm wondering, do you see orders picking up so the 40 this year could become, could that be 100 or whatever or more next year? I don't know if you can see orders.

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

Helpful. Thank you, guys. Thanks, Scott. Thanks, Scott.

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

Thank you, Gerald, and thank you everyone for joining our call today.

If there's any follow-ups, please feel free to reach out to me.

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