Good day and thank you for standing by. Welcome to the Kirby Corporation 2023 Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kurt Niemietz, Vice President and Treasurer. Please go ahead.

Good morning and thank you for joining us. With me today are David Grzebinski, Kirby's President and Chief Executive 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 risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2022 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. Earlier today, we announced second quarter revenue of $777 million and earnings per share of $0.95. Both of our segments continued to perform well during the quarter and produced higher revenue and operating income sequentially and year-over-year. In Marine Transportation pricing on spot and term contracts continued to benefit from strong demand and limited availability of barges. Favorable weather conditions and increased operating efficiency helped improve margins for both inland and coastal. Distribution and Services delivered improved margins and business remains stable at high levels. Overall, we had solid results, and we generated $113 million of free cash flow, which helped support an increase in our share repurchases to $34 million in the quarter. In Inland Marine Transportation, our second quarter results reflected continued improvement in pricing, together with better weather conditions and operating efficiency. From a demand standpoint, customer activity was strong in the quarter, with barge utilization rates running in the low 90% range. Spot market prices were up in the mid-single digits sequentially and in the mid to high 20% range year-over-year. Term contract prices also renewed up with low double-digit increases versus a year ago. Overall, second quarter inland revenues increased 11% year-over-year and margins were in the high teens range. Also, shortly after the end of the second quarter, we acquired 23 inland tank barges from an undisclosed seller. With a total capacity of 265,000 barrels and an average age just under 14 years, these barges will be a nice addition to the Kirby fleet. In coastal, market fundamentals continue to improve 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 high-teens price increases on term…

Thank you, David, and good morning, everyone. In the second quarter of 2023, Marine Transportation segment revenues were $427 million, and operating income was $64 million with an operating margin of 15%. Compared to the second quarter of 2022, total Marine revenues increased $21 million, or 5%, and operating income increased $34 million or 108% driven by increased pricing and improved operating efficiencies in the inland market. Compared to the first quarter of 2023, total Marine revenues, inland and coastal together, increased 4% and operating income increased 49%. Inland was up, while coastal was down, and I'll provide more details on this in a minute. First, let me discuss the inland business in more detail. The inland business contributed approximately 82% of segment revenue. Average barge utilization was in the low 90% range for the quarter. This was slightly down from the utilization seen in the first quarter of 2023 as weather conditions improved and operating efficiency increased. This compares to the low 90% range in the second quarter of 2022. Long-term inland marine transportation contracts or those contracts with a term of one year or longer contributed approximately 55% of revenue with 62% from time charters and 38% from contracts of affreightment. Improved market conditions contributed to spot market rates increasing sequentially in the mid-single digits and in the mid to high 20% range year-over-year. Term contracts that renewed during the second quarter were on average up in the low double digits compared to the prior year. Compared to the second quarter of 2022, inland revenues increased by 11% primarily due to higher term and spot contract pricing. Inland revenues were up 4% compared to the first quarter of 2023 as higher pricing was partially offset by lower rebuild revenues due to lower fuel prices. Inland operating margins improved…

Thank you, Raj. We exited the quarter with continued strength in our businesses. Pricing in the marine market continues to improve and demand is strong and distribution and services despite persistent supply chain constraints and delays, demand for our products and services continues to grow and we continue to receive new orders in manufacturing. Overall, we expect our businesses to deliver improved financial results in the coming quarters. While all of this is encouraging, we are mindful of challenges related to slowing global economy, additional economic headwinds due to higher interest rates and choppiness in the oil and gas market. Also, labor constraints and inflationary pressures continue to contribute to rising costs across our businesses, although some of that is starting to moderate. Even with these headwinds and uncertainties, we remain very positive and expect to drive strong cash flow from operations. An inland marine steady demand driven in part by high refinery and chemical plant utilization should continue to support high barge utilization. Limited new barge construction and high industry maintenance requirements for the next several years combined with lingering inflationary pressures are expected to further support inland rate increases. Barge availability remains very constrained. These factors are expected to contribute to our barge utilization running in the low to mid 90% range for the foreseeable future. These favorable supply and demand dynamics are expected to drive further improvements in the spot market, which currently represents approximately 45% of inland revenues. We also expect continued improvement in term contract pricing as renewals occur throughout the remainder of the year. In the third quarter, our inland marine operations will be challenged by near-term headwinds associated with lock closures on the Illinois River and recent unplanned refinery outages. However, improved efficiencies generated by better weather and continued increases in pricing should…

[Operator Instructions] And our first question comes from the line of Jack Atkins with Stephens Inc. Your line is now open.

Okay. Great, good morning and congratulations on a great quarter here, guys.

Hi. Thanks, Jack.

So I guess, David, if we could maybe start for a minute just in terms of the pricing backdrop. There seems to be still quite a bit of momentum, both year-over-year and sequentially in terms of spot and contract pricing. Is there any way to maybe think about the differential, like how far below spot – how far is contract pricing below spot pricing right now? And we've had this window where not a lot of capacity has been built. How much longer do you think we have before you start seeing the order boards increase in terms of new capacity maybe getting built?

Sure. Well, let me talk about the pricing first, and then I'll get into new builds and what prices would be needed to justify new builds. Look, I mean, you saw our numbers, spot pricing was up mid-single digits sequentially, up over 20% year-over-year. Term contracts that renewed were up low double digits. It's pretty healthy. There's still a good gap between spot and contract with spot being probably 10% to 15% above contracts. So that, as you know, is a healthy market dynamic. You know what's driving that, Jack, is supply and demand. Demand has held up okay. We have seen some weakness in chemicals, but it's been at the margin, not overly material. Refined products is still pretty strong. The rest of our trade lanes are pretty strong. So demand is holding up. Supply is what's really helping, right? It's all – it's in check. I think this year, on the order board is about 27 barges to be delivered. And if you combine this year and last year, it's still the lowest it's been in decades. So there's not a lot of new capacity coming on. And we really don't see that changing much. If you think about the cost of a new 30,000-barrel barge is pretty high right now and needs to be because steel prices are high and labor inputs are high. So the cost of new barges is high, prices don't really support building new yet. I'll come back to that in a second. The other thing, look, the cost of money has gone up. We have a lot of private competitors in our space and borrowing rates have gone up and then the overlay bonus depreciation slowly disappearing. It's about 80% this year, down from 100%. Next year, it goes to 60% and…

Okay. That's super helpful, David. I guess just as a quick follow-up for Raj. As we think about the balance sheet here and sort of capital allocation, what's that maybe the – is there an update in terms of the targeted level of debt that you're going to maybe try to run at, whether it's debt to EBITDA, debt to cap, Raj. And then I guess when we think about the buyback activity, $34 million, I think, in the second quarter, is that the kind of the run rate we should be thinking about here given the level of cash flow you should be generating or on a quarterly basis? Or was that sort of front loaded? I mean, just kind of – can you help us think about that?

Yes. Sure, Jack. It's a good question. I think in the prepared comments, we talked about how we're looking at capital allocation. I mean, it's a balancing act. You saw – we closed on an acquisition a couple of weeks ago, very value-creating acquisition. So we've got a balance between the projects that we have in front of us. Share buyback, of course, is a priority. And on the debt side, I think you could see us pay down a bit more debt, but to a lesser extent. So the way I would look at it is as we go through the rest of the year, barring any attractive projects, you should see us prioritize share repurchases.

Okay. All right. Thank you very much for the time guys.

Thanks, Jack.

One moment for your next question. And your next question comes from the line of Ben Nolan with Stifel. Your line is now open.

All right. Thanks. Good quarter guys. Real quick, hopefully, this doesn't count as a question. David, you mentioned you'd need barge rates of $12,000 to $13,000 a day for two barge tow. Just to help contextualize that. Where would you say is roughly the place that we're at right now?

Yes. I got to be careful doing that, Ben, for competitive reasons, not – obviously, our lawyers would fuss at me if they – if I gave current rates. So I'm going to avoid that a little bit. I think you can – there's some outside services that can give you an indication. We just can't, for legal reasons, signal kind of pricings, but you can get the range. It's out there pretty readily available. I'd rather not say.

Okay. That's fine. The – I wanted to circle back on to the acquisition you announced, I think it was 23 barges. It sounded like they were maybe 10,000 barrel barges roughly. And David, you said right now, it doesn't make sense to build new. Can you maybe talk through what you're seeing with respect to secondhand acquisitions? Obviously, prices are higher there, too. But how are you thinking about the relative economics and attractiveness of acquiring secondhand equipment?

Yes. No, this was – it's kind of a one-off deal. The great thing about this deal was all barges. As you've heard us discuss, we have the ability to leverage our infrastructure and work barges pretty readily with our existing horsepower. So it's a very good deal for us in terms of that. I would tell you it's a – a significant discount to replacement value, as you would expect. It was mostly 10s, but there were a number of specialty barges in this 23 barge acquisition. I think it was a total of seven specialty barges. So you can't just take the price and divide it. But it fits perfectly with us. I would say, it's a good 50% below replacement value in terms of cost. And we're really excited about it. It's kind of our bread and butter, a drop in consolidating acquisition, just – it's right in our wheelhouse so to speak.

Okay. And then lastly for me, Raj, maybe I think it was $240 million of maintenance CapEx this year. Obviously, that includes a decent amount of shipyard costs associated with the coastal fleet just for next year. Is it possible to maybe – without giving specific guidance, but maybe frame in how I should think about what the run rate maintenance CapEx should look like?

So Ben, this shipyard bubble is actually going to stretch into next year. So I think if you look at the maintenance CapEx on the inland side, I think we'll still see the bubble continue. On the coastal side, we should be done with all of the ballast water treatment, installations, et cetera, by the middle of the year. So the way I would describe it is inland is probably going to stretch into 2024 and coastal is probably going to – with the ballast water, it should end by the middle of the year. So I don't know whether I've given you color that's enough, but that's what we're looking at right now. So I would say probably slightly lower, but not materially.

Okay. And then just once that's done, how should I think about sort of what a normalized maintenance CapEx? I mean, is it, I don't know, 200 or 150 or I don't know.

So without giving you numbers, I think what you could do is go back to what we used to do prior to all the shipyard – this shipyard bubble that we're talking about right now. Bear in mind, though, those numbers need to be adjusted for inflation, right? So we've seen, to David's earlier point, considerable inflation there. I would say the 160 to 180 range could be reasonable?

Okay.

Yes.

Perfect. All right. I appreciate it. Thank you.

Thanks Ben.

Thanks, Ben.

One moment for your next question. And your next question comes from the line of Ken Hoexter with Bank of America. Your line is now open.

Hi. This is Nathan dialing in for Ken Hoexter. Congratulations on the fantastic results. I'd like to just dig a little deeper into the barge acquisition. I mean, we’re currently in just a fantastic rate environment for the Inland Marine side of the business. I’m just curious on what you’re seeing within the secondhand space and the availability of these types of consolidation related opportunities. Thanks.

Yes. Yes, there’s not a lot of activity. There are – there’s always a few smaller deals out there that could transact. We’ve seen a few in our space here recently a couple smaller deals. Yes, I wouldn’t say it’s overly active, Nathan. It’s more just kind of one-off deals. Sometimes larger companies selling off their barge fleets. But look, price expectations are going to be going up, right? I mean, it’s a pretty good market when you look at a multi-year upcycle here. As we look at the maintenance bubble, the supply being relatively in check and demand, pretty solid. I think price expectations are higher, so it’s always hard to forecast acquisitions. So I’m always cautious. But I would say, there’s probably going to be fewer than more going forward. That said, you never know. Yes, people want to sell at the top and people like us want to buy at the bottom, so we have to meet in the middle, and it’s hard to predict where that middle is.

Yes. It’s just curious what motivates operators to cut capacity here. I guess that’s my follow up on distribution and services pretty material step up in operating margins. In your prepared remarks, I think the team referenced still some supply chain related constraints. Have we seen any type of improvement there? And maybe talk a little bit about what’s driving this margin improvement sequentially? Thanks.

Yes. Well, let me take the supply chain one first. It’s improved on the margin, but there, we talk about whack-a-mole, sometimes, it – you get one part of the supply chain lined out and another part pops up. But I would tell you where we’ve been most affected is on electrical and electronic type parts. As you know, we’re building a lot of electric frack equipment and power generation equipment and that supply chain has been choppy at best. It is improving at the margin, but it’s still been as Raj would say, hand to hand combat. That said, we’re delivering in some backlog. And so that’s helping margins across the board. And as we’re not delivering equipment, it just – it keeps margins in check. And as we start deliveries, margins tend to improve. And also we’re just running better. I would tell you we’ve taken a lot of costs out and now that things are running a little smoother, it helps the margin. I don’t know, Raj, anything you want to add?

Yes. I think, to build on what David just said, Nathan, I think we’ve done a lot of work in terms of leading out our operations on the KDS side. And we’re starting to see the benefit of that. But we are cognizant of the supply chain issues. To David’s point, if everything works out and deliveries get shipped, margins will be better, right? But then if you have a supply chain hiccup, we start to see some headwinds there.

Yes, I mean, when you have to say you can’t get certain parts that you’ve designed in and then all of a sudden you’ve got to switch parts, it’s a – there’s a whole new design effort, management of change process where you got, it just eats up engineering hours, it eats up labor hours as you make supply chain changes. So the good news is that as the supply chain continues to improve that should help us on a go forward basis.

Great. That’s helpful. Thank you.

Thanks, Nate.

[Operator Instructions] And your next question comes from the line of Greg Wasikowski with Webber Research. Your line is now open.

Yes. Hey, David and Raj. I wanted to talk about the rate bogey here for potentially new orders kind of coming in, being now at 12,000 or 13,000 per day. I think last time we talked about it, it’s closer to 11,000 or 12,000 per day. So I just, I want to understand, as we move closer to that point, does – as the way you think about it, does that 12,000 or 13,000 per day contemplate further cost increases like we’ve seen, or is there a potential for that bogey to kind of continue moving higher as we get closer and therefore, maybe there’s even more breathing room than people realize right now?

Yes, no, it’s been inflation. I mean, you’ve heard me rattle off all the inflation inputs, but cost of compliance has gone up, whether it’s with the Coast Guard or our customers vetting standards. And then you get into tier four engine packages on boats they’re more expensive to operate. There’s – it’s just a whole host of little things that keep adding up. There is a little bit forward looking to your question directly. There is a bit of forward-looking inflation in that 12 to 13 number. Yes, you’re right. I mean, six months or a year ago, we were a $1,000 below when we gave you that number. And I would just tell you that inflation has continued across the board in almost every category. We’ve seen even just on consumables, whether it’s line paint and things that we use on a regular basis. They’ve gone up and of course everybody knows about food, rental cars. You can imagine, with our 3,000 or 4,000 mariners moving them every day getting them to boats just the cost of moving them around and putting them in hotels as they crew on or crew off or getting rental cars for them or whatnot to facilitate getting them to where they need to be. Those costs have gone up and have continued to gone. Now, the good news is we’re seeing a little bit of that moderate now. I think we’ve seen rental car rates come down a bit. Hotel rates not so much, but airfare has come down a little bit, but not a lot. So it’s – I’m not giving you a direct answer, but directionally, we do see more inflation and I put a little more of inflation in that number. But that’s what’s been driving the increase. I mean, you can look at steel prices alone and that tells you a lot.

And I think Greg, even have to add the cost of money has gone up, right? That should be in your calculus when you look at the rate increase that we’re talking about right now.

Yes, for sure. No, that’s helpful. Thanks guys.

I’ll say the cost – the cost of eggs have come down, so that’s a good story.

Yes. Next I wanted to revisit the idea of vertical integration for you guys. And I can see this from two angles, and it might ramble a bit, but just want to flush them out here. So the first and kind of more practical would be to expand San Jac or acquire additional repair and maintenance yard capacity so that you guys can, maybe avoid longer lines over the next few years at yards for your own fleet, and then potentially benefit from the upcoming maintenance bubble that we see in the market. The more farfetched, I guess would be to think about acquiring or develop of barge building capacity where you have some control or say over the supply in the future, if and when we do get to the place where new orders start to come into the market. I realize that’s a huge move and probably unlikely, but still I think worth acknowledging at least, and seeing what your opinions are for that. But mostly contemplating expanding repair and maintenance capacity for Kirby and kind of integrating vertically a little bit. How do you think about that?

Yes, well, as you’re aware, we bought San Jac shipyard out of bankruptcy a number of years ago. That has helped us, it doesn’t cover, not even close to covering all our maintenance needs, but they do help us with maintenance. One of the exciting things about San Jac is we’re just – they’re about to christen the first diesel hybrid electric towboat in August and that’s really exciting. We’re getting a lot of traction with that, a lot of customer interest in it. It’s got a great carbon footprint. We’ve got the ability to use green dock power for it. So it could be, in terms of emissions almost emission free working in the Houston Harbor areas initially. So we’re really excited about San Jac’s enabled that we have expanded San Jac a bit to help with barge maintenance as well as boat maintenance. But, look, we’ve got, as you know, a lot of barges and a lot of boats. We need the whole ecosystem supporting us and they – look, we’ve got great partners and they’ve been helpful can always been a partner – always been partners I would say. But they’ve seen inflation, we’re seeing the cost of maintenance go up with each shipyard which you would expect. Now in terms of building new barges I mean, look, I mean, the players there. I mean, our Coast is probably the most efficient and they build an excellent barge, is that something we’d want to get into? No is the short answer. Yes, again, we’ve got great partners. So we work pretty well as an ecosystem. San Jac is different for us. It’s really kind of a small part of our maintenance and also doing things like building electric hybrid boats which could be a good future for that. But it’s not something that would be a massive investment are undertaking for us in the shipyard space.

Okay. That makes sense. All right. Thank you guys.

Thanks, Greg.

[Operator Instructions] And I see no further questions on the queue. This completes today’s conference call. Thank you for your participation. You may now disconnect.