Q2 2021 Kirby Corp Earnings Call
Thank you for standing by it won't come to the Kirby.
Kirby Corporation's 2021 second quarter earnings Conference call at this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session and you'll need to press star 1 on your telephone as todays program, maybe recorded I would now like to introduce your host for today's program.
Graham Eric Holcomb, Vice President of Investor Relations. Please go ahead Sir.
Good morning, and thank you for joining us.
With me today are David <unk>, Kirby's, President and Chief Executive Officer, and Bill Harvey Kirby's Executive Vice President and Chief Financial Officer.
Slide presentation for today's conference call as well as the earnings release, which was issued earlier today can be found on our website at.
Kirby Corp Dot com.
During this conference call, we may refer to certain non-GAAP or adjusted financial measures reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available on our website in the Investor Relations section.
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 answers.
Under weighted as a result of various factors, including the impact of the COVID-19, pandemic and the related responsive governments on global and regional market conditions and the company's business.
A list of these risk factors can be found on Kirby form 10-K for the year ended December 31, 2020, I will now.
I'll turn the call over to David.
Thank you Eric and good morning, everyone earlier today, we announced net earnings of <unk> 17 per share for the 2021 second quarter.
Quarter's results were improved across both segments as the U S economy continued to rebound and the Gulf coast petrochemical and refining.
And complex recovered from winter storm, Uri and oilfield activity and spending ramped up.
Overall, our activity levels increased significantly and both marine transportation and distribution and services, which led to a 13% sequential increase and total revenues and a material improvement.
<unk> and earnings.
Looking at our segments and marine transportation, the inland market experienced a strong improvement in demand with overall barge utilization increasing into the low to mid 80% range per quarter started with some softness as many petrochemical plant struggled to restart.
Following the February winter storm, which shut down up to 50% of the Gulf Coast production for a period of time, but by early May. However, most of the petrochemical complex had resumed production refinery utilization was firmly in the high eighties and demand for.
Find products with steadily increasing and as the U S economy reopens.
As a result activity and the barge markets, we're starting to ramp up nicely and barge pricing moved off the bottom.
The inland market tightened further in mid May when the colonial pipeline shutdown.
And many of our customers turn to barges for transportation and storage.
And a matter of days, our barge utilization increased to near 90%.
While this event was temporary and overall activity levels moderated in June the inland business experienced the favorable shift in market dynamic.
<unk>.
And as a result inland ton miles increased 17% when compared to the first quarter average spot market pricing also improved sequentially for the first time and more than a year, and even and though and although still down relative to last year term contract pricing pressure.
<unk> and moderated.
Overall inland revenues sequentially increased 13% and operating margins recovered into the high single digits.
And coastal market.
<unk> for the second quarter were largely unchanged with continued low barge utilization.
Realization and few spot requirements. However, overall pricing remained stable during the second quarter.
And distribution and services, we experienced continued positive momentum with improved activity levels strong sequential and year on year increases and revenues and operating.
Brian levels not seen since the third quarter of 2019.
The most significant increases came from our oil and gas businesses, which experienced increased demand as U S rig counts and frac activity moved higher and our customers increase their spending levels.
And manufacturing incremental orders.
There's and deliveries of new environmentally friendly pressure pumping equipment and Frac related power generation equipment contributed favorably to the quarter's results. We also experienced a strong increase in demand for new transmissions parts and service and our oil and gas distribution business.
Margin from major oilfield customers.
And commercial and industrial and the continued economic recovery resulted in sequential improved demand and our on highway businesses.
Product sales and Thermo King also increased during the quarter. These gains were partially offset by.
Sequentially lower revenues and commercial power generation related to the timing of large backup power installations.
Marine repair activity was also down modestly during the quarter.
In summary, the second quarter was a turning point for Kirby with both of our segments.
<unk> experienced improved activity levels and better financial performance, we expect to see this momentum continue and the second half of the year and and a few minutes I'll talk more about our outlook for the remainder of 2021.
But before I do I'll turn the call over to Bill to discuss our second quarter segment results.
And the balance sheet. Thank.
Thank you David and good morning, everyone.
And the 2021 second quarter Marine Transportation revenues were $332.9 million with and operating income of $18.5 million and and operating margin of 5.6%.
Compared to the 2022nd quarter.
<unk> Marine revenues declined $48 million or 13% and operating income declined $32.9 million.
And the reductions are primarily due to lower inland and coastal barge utilization and significantly reduced pricing and inland partially offset by increased fuel rebuilds due to higher diesel prices.
Prices.
Compared to the 2021 first quarter Marine revenues increased $31.9 million or 11% and.
Operating income increased $16.6 million.
These increases are primarily a result of increased inland barge utilization and improved spot market pricing.
As expected second quarter operating margins were somewhat impacted by increased maintenance and both <unk> costs as we continued to ramp up our operations.
During the quarter, the and lab business contributed approximately 76% of segment revenue average barge utilization improved into the low to mid.
Percent range compared to the mid 70% range and the 2021 first quarter inland barge volumes increased sequentially as the U S economy continues to improve as the COVID-19, pandemic lessens and Gulf Coast refinery and chemical plant activity recovered from the effects of winter storm.
<unk>.
Barge demand also benefited from the colonial pipeline outage in May.
Overall these factors contributed to a 70% increase and ton miles as compared to the first quarter.
Long term inland marine transportation contracts or.
Are those contracts with a term of 1 year or longer contributed.
Contributing approximately 65% of revenue with 57% from time charters and 43% from contracts of affreightment.
The significant increase and barge activity and the second quarter contributed to average spot market spot market rates improved approximately 10% sequentially.
However.
Average spot rates remained down approximately 10% to 15% when compared to the 2022nd quarter.
Only a few term contracts with you during the second quarter and average rates were down in the mid to high single digits and it will take time as market conditions improve for term contracts to renew.
Higher and when we will need to see spot prices remain above term contract prices to get term contract pricing going in the right direction.
As term contracts for new hire we will see improvements and operating margins overall during the second quarter, the operating margin and the inland business was and the high single digits.
And coastal our business continued to be challenged by weak demand for refined products and black oil during the quarter coastal barge utilization was and the low to mid 70% range, primarily due to weak spot market dynamics, and the west coast, and Hawaii, where economies have experienced a slower recovery from the pandemic.
And might reduce barge utilization coastal revenues improved slightly both sequentially and year on year due to increased fuel rebuilds.
With respect to pricing average spot market rates and renewals of term contracts were stable during the second quarter the percentage of coastal revenue under term contracts was a.
Despite a nearly 80% of which approximately 85% were time charters coastal's operating margin and the second quarter was and the negative mid single digits.
With respect to our tank barge fleet, a reconciliation of the changes in the second quarter as well as projections for the remainder of 2021 Orange.
And <unk> in our earnings call presentation posted on our website.
Moving to distribution and services.
Revenues for the 2021 second quarter were $226.7 million with and operating income of $6.2 million and an operating margin of 2.7%.
Compared to the.
<unk> second quarter distribution and services revenue increased $66.5 million or 42% and offer operating income improved $23 million.
Fair to the 2021 first quarter revenues increased $30.8 million or 16% and operating income increased $3.
$3 million.
These improvements are primarily due to a significant increase in demand for our oil and gas products and services as well as the improved economic conditions across the U S, which is raising demand for equipment parts and service and the commercial and industrial markets.
In commercial and industrial.
20, <unk> economic activity across the U S results and improved sequential and year on year demand for equipment parts and services.
Our on highway business revenues and our Thermo King business were also higher and.
And power generation activity increased year on year due to higher sales and installations following the pandemic boes.
And count sequentially due to the timing of backup power installations and the northeast.
Marine revenues were down sequentially and year on year due to reduced major overhauls.
During the second quarter, the commercial and industrial businesses represented approximately 62% of segment revenue.
And had an operating margin and the mid single digits and the.
And oil and gas and improving market dynamics and increased activity and the oilfield contributed to significant sequential and year on year increases and revenues and operating income.
Our manufacturing businesses experienced substantial increases.
<unk> and deliveries of new pressure pumping and Frac related power generation equipment as.
And as well as steady demand for seismic units for international markets.
And our oil and gas distribution business also improved sequentially and year on year with increased demand for new transmissions parts and service from major oilfield customers.
For the second quarter, the oil and gas related businesses represented approximately 38% of segment revenue and had a negative operating margin and the low single digits.
Turning to the balance sheet as of June 30, we had $53 million of cash and total debt of $1.2.8 billion with a debt to cap of 20.
1% since the <unk> acquisition on April 1.2020, we have reduced debt by $427 million during the quarter, we generated strong cash from operations of $95 million net of capital expenditures of $24 million free cash flow was $71 million and.
At the end.
And of the quarter, we had total available liquidity of $852 million as of this week. Our net debt was $1.2 billion and total liquidity was $881 million.
For the full year, we continue to expect capital spending to be approximately $125 million to $145 million.
Which represents nearly a 10% reduction compared to 2020 and is primarily composed of maintenance requirements for our marine fleet.
We also expect to generate free cash flow of $250 million to $310 million for the full year.
Lastly from a tax perspective, we expect and effective tax rate of approximately 27.
And the third and fourth quarters.
I'll now turn the call back over to David.
Thank you Bill and.
The last 15 months have been challenging with weak markets.
Our operating conditions and declining financial performance and.
As economies reopen and the second quarter, we experienced.
<unk>, a welcome increase and overall demand and greatly improved market conditions.
With the U S and international economies, continuing to reopen and demand for refined products and oilfield equipment and services, increasing we see this positive momentum continuing into the second half of the year.
As a.
A result, we expect to see improvement and revenues and earnings for both of Kirby segments.
And while we're very encouraged about the recovery. We are however, cautiously watching the rising number of COVID-19 cases and parts of the U S and around the world just now.
There is a.
These spikes, which are already resulting in new lockdowns and some locations could adversely impact the recovery.
Refinery utilization and refined products demand.
Although we expect this could slow the pace of the recovery, we do believe that most.
Momentum will continue to build.
Additionally, as many of you know labor constraints across the industrial supply chain are creating delays and manufacturing lead times and other supply chains.
It is possible that we could see some anticipated product sales or deliveries of our <unk>.
Manufactured equipment delayed and the second half of the year.
And the inland market our outlook remains positive as of today, our barge utilization is and the mid 80% range driven by strong activity levels and the refining and petrochemical complex.
Barring a significant.
<unk> step change and Covid, we expect barge activity should continue to increase during the last 2 quarters of this year.
As a result of improving demand, including increased refinery activity higher refined products consumption and new petrochemical plants coming online.
With minimal construction and new barges and barge retirements still occurring we believe our barge utilization will increase into the high 80%.
Percent to 90% range as the year progresses.
And this should support further improvement and spot market pricing during the second half of the year.
Overall.
Third quarter, we expect revenues will sequentially improve with increasing demand and spot market pricing.
Although we have some modest labor inflation and starting in the third quarter, we expect operating margins to increase.
As a result, we expect inland operating margins will be.
And low double digits 10 ish, if you will during the third quarter.
And we expect further improvement in revenue and margins for the fourth quarter.
But results could be tempered by the normal seasonal weather disruptions.
And coastal we.
And the market will recover slower with some improvement and barge demand during the remainder of the year and.
And recent weak spot activity has modestly improved with higher economic activity and increased demand for refined products. As a result, our barge utilization has increased slightly particularly on the west coast where overall.
Demand levels have been slower to recover from the pandemic.
Overall, we expect coastal barge utilization will be and the mid 70% range in the coming months, which should yield third and fourth quarter revenues slightly higher than the second quarter.
We expect coastal operating margins will improve and the second half of the year.
We expect that still remain below breakeven and the negative low to mid single digit range.
Looking at distribution and services, we expect that economic growth improvements in the oilfield and summer seasonality will result, and sequential revenue growth with improved operating margins.
And commercial and industrial we anticipate continued improvement and on highway with further recovery and bus repair activity and increased parts revenue from our new online sales platform.
We also expect increased thermo king product sales and service during the peak summer demand season.
<unk> and power generation, we expect increased backup power equipment sales and installations and and our rental fleet, we should see some seasonal increases in utilization during the hurricane season.
And marine repair and we expect a sequential reduction in revenues primarily due to.
The harvest season, and the dry cargo markets.
And oil and gas we believe current oil prices will contribute to continued increases and the rig count with incremental well completions activity as 2021 progresses. As a result, we expect to see higher demand for new engines and transmissions.
Parts and services in the distribution segment for.
And for the remainder of 2021.
And manufacturing a focus on sustainability and efforts of oilfield companies to reduce their carbon footprints continues to generate increased inquiries and new orders for Kirby.
<unk> portfolio of environmentally friendly equipment, including electric and dual fuel pressure pumping units and highly efficient natural gas power generation equipment for E. Frac.
We also.
Are experiencing increased orders to remanufacture existing pressure pumping equipment.
<unk> as a result, we anticipate increased deliveries of manufactured and remanufactured products and the back half of 2021.
However, as mentioned previously supply chain delays.
Good result, and some equipment deliveries shifting between quarters.
And potentially into 2022.
Overall for the full year, our expectations have not materially.
Materially changed for DNS, and we anticipate significant year on year revenue growth of 15% to 25% with commercial and industrial and representing approximately 65% of revenues and oil and gas representing the balance of 35.
We expect D&S operating margins will be and the low to mid single digits for the full year with the third quarter being the highest.
And the fourth quarter and normal seasonality will likely result, and some sequential reduction and operating margins.
Before we wrap up I want to briefly.
5% on 2 other matters first today, we announced that Bill Harvey will be retiring as Kirby CFO and early next year.
Bill has been and integral part of the Kirby team for the last 4 years and has helped to guide us through several large inland and marine acquisitions, and the integration of Stewart and Stevenson.
Bill's contributions to Kirby success, and our financial strength have been significant and he will certainly be missed.
Additionally earlier this week released we released our new 2021 sustainability report. This report represents another milestone and our ESG journey.
With new ambitions disclosures for the full company as well as enhanced disclosures on safety employee training and governance, you can access our new report and the sustainability section on our website.
Now to wrap things up.
Although there is some uncertainty around COVID-19 and its.
Its impact on the recovery, we remain very optimistic about kirby's outlook.
The second quarter was an important turning point for the company from a financial perspective with increased earnings and both segments.
Most importantly for the first time and over a year, we experienced a positive.
Inland market that benefited from rising demand favorable operating conditions and a major disruption.
While the colonial pipeline outage provided a temporary boost to the business. It highlighted that the inland market is well along.
On its path.
<unk> recovery and how rapidly barge utilization can tighten and how quickly spot prices can move.
The World economy is still in disarray with much of Europe, still essentially shut down and India, and Mexico, and South America and not fully open.
As the world economy fully recovers from the pandemic and demand for liquid normalizes around the world. We are confident our inland business as well.
And pre pandemic utilization levels, and the 90% range, bringing with it improved pricing earnings.
And return.
<unk>.
And coastal although market conditions remain challenging continued retirements of industry capacity and a lack of any new construction.
And keep capacity and check and allow for a solid rebound once the U S economy fully recovers.
And finally and distribution and services, we've come a long way and the last year with steady improvements and financial performance our distribution businesses have not yet fully recovered and there is room for further improvement as we go forward.
With more favorable oil field fundamentals and increased demand for lower carbon solutions.
<unk>, our new and highly efficient environmentally friendly pressure pumping and power generation equipment is capturing the attention of our customers and translating into new orders that will provide additional growth and the second half of the year and into 2022.
Overall, we have made substantial progress.
And the last year and very difficult markets, we realigned our cost structure expanded our product offering and DNS and improved our financial flexibility our marine markets have stabilized and are beginning to improve all of this has set the stage for improved earnings and returns and will allow us to take advantage of future.
Yes growth opportunities.
Operator. This concludes our prepared remarks, we are now ready to take questions.
And certainly ladies and gentlemen, if you have a question at this time. Please press Star then 1 on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.
Future <unk> question comes from the line of Jack Atkins from Stephens. Your question. Please.
Hey, Greg Good morning, guys and thank you for taking my questions and Bill just wanted to say congratulations on your retirement.
I appreciate it Jack.
I guess, maybe my first question here is with regard just.
How things are trending within inland you mentioned you're.
For running at about 85% utilization rate and just be curious to know are your customers, giving you any indication for how they are expecting their activity levels to trend over the balance of the year and.
How do you think thats going to impact.
Utilization as we move through the third quarter and I would just be kind of curious.
As well David could you talk about where.
Where we are with spot rates relative to contract rates or spot rates back at or above contract rates and.
And if you could just update us there I think that'd be helpful.
Sure, Yes, good morning, Jack.
Look the inland trends.
Continued.
Currently and improve we've.
And the first quarter, we were down and the mid Seventy's and terms of.
Utility, we got too low eighty's at the beginning of the second quarter kind of ramped up into the mid <unk> and then the colonial pipeline outage had a little spike got us up to <unk>.
<unk> 2.
2.
And to essentially 90% and.
Little less and 90%, but then started to taper off as colonial came back in and better weather started to help.
Help transit time, so we did and this quarter kind of and the mid mid Eighty's.
Okay.
The important thing is as <unk>.
Spot pricing and contract pricing improved a bit contract pricing was still down year over year.
You go all the way back to the second quarter and 2020 so.
And we kind of lapped that that quarter those were higher.
Since back then so contract pricing was down kind of.
Mid mid to high single digits, but spot pricing was up and the double digit range around 10%.
And debt to your question put spot pricing above contracts now and Thats, what we need we need that to.
Your price above contracts and we need the customers to believe it's going to stay that way for a while.
And then those contract that contract portfolio and start to to renew higher and that may take another quarter or 2 before we kind of lap.
Contract prices and they start renewing higher.
But look margins improved and we kind of went from.
Low to mid single digits, and inland and the and the first quarter to kind of.
High single digits.
We will be in double digits next quarter and the third quarter fourth quarter is going to be hard to say because weather.
And this a bit but all the all the trends are our and the right direction.
When you when you think about.
Customers and whats going on in.
And the World right now.
Crude demand seems to be back.
Within kind of the 5 year historical.
And in essence.
Crude storage is now just well it's actually below the 5 year average now.
TSA checkpoint data shows throughput has improved about 20% and the last quarter or so Gulf coast refineries are back and in the 90% range.
Chemical activity good barometers up.
Retail sales are up leading indicators are up new manufacturing orders are up so.
The economy feels like it's coming back I think we're all a little nervous about COVID-19 right now.
We're seeing some cases within.
<unk> pop up again and.
Hearing about some spotty lockdowns and the.
Past day.
Last quarter I use 40, it's hard to be.
Use that word.
And when Youre looking at Covid re emerging here, but all of that economic data shows that things are continuing.
<unk> to move and open up.
When we talk to our customers what they are telling us is that the international and export volumes are still not there.
Probably 15% lower than they were.
Pre COVID-19 and when you think about that and kind of make sense you've.
Kirby, Mexico, Latin America, South America.
And essentially in various stages of shutdown and Europe still really has and opened up India is kind of.
Reacting and.
Essentially locked down so a lot of those export volumes are down.
So domestically things are improving but.
The global economies are not quite back and Thats what were hearing from our customers.
Okay, and all of that said, it's pretty positive.
That makes a lot of sense and understand the need to.
And maybe be a little bit cautious given given the ryzen and COVID-19 that were.
<unk> got up there so I guess from my follow up question, David as we think out over the next the next couple of years.
And I'd be curious to get your thoughts on how you would expect industry capacity to trend.
And as your expectation around net retirements from 2021, and given the ryzen and commodity prices and steel prices.
And where do you think.
Rates would need to go to or maybe think about magnitude of an increase from where we are right now just to support.
Building for replacement and much less thinking about building for expansion on the inland side. Thanks for sure.
Yes.
Thanks for that question Jack.
And we're look we're.
We think the order book is about 70 between 70 and 75 barges, maybe I don't think the actual count that we have at 72 barges for delivery this year about half of them and delivered.
The first half or really all ordered pre pandemic.
And <unk> and they just started delivery.
But new barge pricing is.
At an all time high.
If you look.
Price changes from 2020 to 2021 clean 30, the price for a clean and <unk> is now almost 40% higher than it was last.
Last year steel prices are driving a big part of that.
Clean 30, now is probably $3.8 million.
And 2018, just to reference that it was about 2 and a half 2017. It was around 2 to build a clean and <unk>. So.
Steel prices have driven that.
Labour to lesser extent.
But look nobody is building a lot of barges right now and retirements are up scrap steel prices are up so retirements are little more palatable.
So it's pretty constructive right now we don't see.
Really a net add.
And in terms of new barges and in fact that.
What we saw with colonial and makes us feel pretty good about kind of the and on.
Unutilized overhang.
For us too and the space of 2 weeks to see the industry kind of go to sold out and clean and <unk> market.
<unk>.
It shows you how little overhang, there really is and.
And I think a lot of thats because of the retirements that have occurred and theres not a lot of new equipment coming in and to be fair a number of our competitors, including us still have some some equipment on the bank. So.
From a supply and demand standpoint, it feels pretty pretty good right now.
Thank you David.
Thanks Jack.
Thank you. Our next question comes from the line of Kenn Hoekstra from Bank of America. Your question. Please.
Great. Thanks, David and Bill Great round out on the details net and congrats bill as you.
And you went to the next phase of your career.
David just a quick wrap up on 1 of Jack's questions there, but.
And the rates down mid to high single digits.
Utilization at 80%, what's the normal flipping point for for those rates to be positive as it is at the mid <unk> to get utilization up to 90 days and are there are parties.
So pressuring rates and in the market.
Yes.
Historically, Ben and the mid eighties, maybe that's moved up a little maybe it's got to be.
8.788.
I think there is a key psychological piece too.
And.
And that are seeing this.
Customers got to believe it's going to stay there and so I think.
As the economy improves and this utilization and hits the Missouri. These and it's in the mid day. These now.
That customer view that it's going to stay that way for a while or perhaps even get tighter.
Real.
Really helps the pricing dynamic so.
We're right there at that dynamic and.
And we're very encouraged spot pricing is now above contract and.
We had a nice move.
Was helped by the colonial and.
I think what that did is it.
Let the customers know just have tightened tight we can get and a short period of time.
Okay.
That was a great rundown in terms of the supply demand can you provide the same thoughts on coastal and where that market stands with respect to the <unk>.
<unk> demand pricing dynamic.
Yes.
And the market's pretty much and balanced now I'd say imbalance I mean, we're still kind of mid seventies utility.
Some markets are.
Are less utilized and others.
Atlantic Coast is better utilized and so.
The West Coast.
But.
There is no new construction that we're aware of.
No no new barges are being built and the coastal market.
There is.
And it takes a long time, it could take up to 2 years or longer to get a new coastal.
And tug and barge unit now that said the bouchard assets are out there.
You may have seen that they were sold out of the bankruptcy court.
Somebody is going to have to sink a lot of money back and to get some of that equipment moving.
And so thats, a slight overhanging the market.
But as you heard and our prepared remarks coastal pricing kind of held flat.
But its utility is less than on the inland side.
Look as you know the coastal markets more about refined products and it is chemicals, whereas in the markets little more chemical heavy so again, we need to see the refined market has continued to expand and I think that will soak.
The capacity.
With the caveat Bouchard equipment may come back over and over a period of time I think it takes it takes several years for that equipment to come back and any meaningful manner.
Knowing how much maintenance, we will need to be done on that equipment.
And last 1 real quick you mentioned the labor tightness.
Is it tough to get labor now I know you had long term employees, but is this.
How are you training questions how is it.
Getting the guys on the water and this or your teammates on the Warner and this in this environment.
And we're able to do it.
Started are opening up and our training school and in January we've been running classes ever since then.
And then getting pretty good traction and hiring.
Similar and DNS, we've been hiring mechanic.
I wouldn't say, it's easy at all.
But we're able to get the employees.
Yeah.
Yes.
It's working but it is getting tighter.
For sure, but right now we're not short labor.
We're able to crew everything and continue to add employees were still.
Still running new debt can classes and our marine.
<unk> and were still adding technicians, both in commercial and industrial and and our manufacturing business <unk>.
Yes.
But we're able to find 1.
It's just not easy.
Great Okay.
And at the time.
Thank you and thanks again.
Thank you. Our next question comes from the line of Jon Chapelle from Evercore. Your question. Please.
Thank you good morning, everyone.
Hey, good morning, John.
And David and the 1 of your responses to Jack's question, and you said, you'd probably a quarter or 2 away from lapping contract pricing.
And I assume that to mean go into year over year improvement.
It's important I think maybe to understand the timing of of your contract and news throughout the course of the year and you said and <unk> you had a few term contracts renewed lower what does the third quarter and the fourth quarter look like as a percentage of the term contracts and I asked us.
Because if you are still resetting those kind of lower year over year and the back half of this year, then clearly that puts a little bit of a delay into the financial impact of term resetting higher as opposed to if you still only have a few more left to go. This year, then everything kind of comes with the upward momentum starting in the second half and starting next year.
Yeah, I would say the third quarter renewable.
Portfolio is about similar to the second quarter, but the fourth quarter will be heavier or fourth quarter is always a little heavier and the other 3 quarters are pretty similar.
You'll get a lot a lot of fourth quarter renewals and sometimes.
Quarter over and it wont get extended a little bit and end up closing into the first quarter, but.
We're generally.
A little heavier and the fourth quarter.
Okay, and based on where the market wasn't last year's fourth quarter, which not quite at the depths, but getting pretty close and.
And those 4 utilization trends that you pointed out I know you said a quarter or 2 but are you kind of cautiously optimistic that by the time and you get the <unk>. This year at least you'll be back to kind of break even if not a bit higher on the term pricing.
And so that's that's fair.
Okay and everybody else.
Everything seems.
And given that it.
And that direction.
With that caveat of the Covid situation, but you heard me rattle off some of those macro.
Statistics and.
And so we feel like.
And we feel like it's headed that way for sure.
And that feels right.
And and at closing.
Please you mentioned realigning the cost structure of DNS, which is obviously something you've been working on for some time, even before COVID-19.
Can you speak to the cost structure and inland maybe.
Some in house power from acquisitions, and maybe a bit more aggressive.
Aggressive with trim and the fixed cost base because of the pandemic and.
And what you think that means to the pace of margin recovery. Once you finally start to see that term inflect.
Yeah, and we we've and as you would imagine we've taken out a few day heads are kind of through the downturn, you'll remember 15 and 16.
17.
Comment were downturns.
Cook.
And quite a bit.
<unk> overhead, but then we bought pigments and Nash and then Savage, which basically came.
Had some some shore side support and some choice that overhead.
And we basically taken that back.
We're back down to where we were pre all of those acquisitions. So we feel pretty good about the SG&A I mean, yeah, you always want to improve it but oh.
And it feels pretty good I do think our RMR.
Our margins are.
Should have some.
And some more upside leverage.
And <unk>.
And given our fleets larger and when things start to move.
And that leverage should help.
Pushed to higher margins.
Okay.
Just look across all company, you'll notice SG&A quarter second quarter, the second quarter is down about 9%.
A lot of activity last year, marine but off the DNS and corporate.
It really really focus on that.
I did notice that bill is that kind of sticky so to speak you expect it to stay up at San Carlos.
Yeah, you don't SG&A bounces around but it and especially the first quarter, but excluding the first quarter.
And so theres some jumping around points.
Really the new level of SG&A of the company.
Okay, great. Thanks, Bill Thanks, David.
And thanks, Sean.
Thank you. Our next question comes from the line of range. It gives from Jefferies. Your question. Please.
Howdy gentlemen, how's it going.
And so it's good Randy how are you.
Alright, alright too.
2 questions from me first obviously, the oil and gas market. You mentioned still has the negative operating margin. Despite the increased drilling activity. The improved sales of the new transmission parts and services. So I guess was that just due to timing delays.
And which as a result, <unk> 21, and is set up to be that much better.
Yeah.
Let's talk about it as you know and our DNS business, we've got and commercial and industrial and oil and gas business, the commercial and industrial was profitable kind of non.
And the low to mid single digits.
Kind of mid single digits, if you will in terms of margins.
Oil and gas is still a little negative.
And the good news there is we've had inbound and our backlog is up.
Pretty pretty meaningfully.
1 of the things we're seeing is.
And.
We've got a lot of new products.
<unk> and <unk>.
No.
Really if you think about electric micro grids and supporting the electric Frac.
Equipment and electric Frac build outs.
We've got some new generation products and in that new generation products theirs and theirs.
Kind of the first.
First set of them the margins are really thin and.
There's a lot of engineering and testing that goes on.
So theres a long way of saying, yes, we believe the margins will improve and that business next quarter and.
And certainly into 2022, as we deliver more and more of the Frac.
And power generation.
Support equipment from E Frac.
Backlog continues to build we continue to take new orders.
And it's pretty exciting and I would say that all of our pressure pumping and customers are very focused on ESG right now.
Which generally means more E frac and there is some diner.
Dynamic gas blending dual fuel.
Work, but with the bulk of the orders we have been receiving have been and E Frac and.
The new generation E. Frac has basically some startup.
Lower margins I think we will be solidly profitable in the coming quarters.
Around these these new <unk> products.
Yes.
Okay, and then good segue with your ESG comments any updates on Jones act when vessels or LNG equipment.
And then speaking of electric right from your oil and gas comments, a competitor of yours is building and all electric tugboat. So is there any interest from kirby to get into that as well.
Yes.
Well the short answer is yes of less though and we frankly are starting.
And to build on.
And diesel hybrid electric towboat.
Here in the Houston area, and we'll try it and the Houston.
And the Houston market that all electric.
So you're talking about is more for ship assist rather than pushing barges, which has a different.
Load profiles and.
And.
We're constantly moving barges and the total and total industry shipments is a little different although they do.
We have a lot of ships around but.
On the on the wind.
We've got to be careful we are under a couple.
<unk> NDA, so we can't say a whole lot, but we're optimistic that.
We'll get a chance to build some Jones act equipment to support the wind build out and.
We just can't say a whole lot more than that Randy.
Alright, although we'll be waiting, but hey, bill sad to see you go.
Go, but obviously enjoy your retirement.
Well, thanks, so much Randy.
Let me tell Eric.
Bill is going to be around for a little bit longer and it's not until the first part of 'twenty, but is golf game needs the help.
That is true it sounds.
Sounds good thanks.
Thank you our next question comes from.
Ben Nolan from Stifel. Your question. Please.
Hey, good morning, gentlemen, good.
Good morning, I wanted to I wanted to get back to something that you sort of touched on I think it was on Jack's question, initially and and and the idea is effectively on the <unk>.
Term and.
And contract pricing.
Or would you say that we are right now relative to sort of mid cycle levels and and then to Jack's point do you think that was mid cycle levels have moved up at all as a function of.
Steel inflation, and and perhaps wage inflation that I think you'd mentioned earlier do you think the new normal is.
A little higher than the old normal.
Yeah.
Well, let me take your last the last part of that question first.
And with barge pricing for a brand new clean 30000 barrel barge being 3.6 to $3.8 million.
In order to get.
And return on capital and that that's got to be materially higher we're talking for 2 barge total kind of north of 8500 to date again to get double digit IRR.
And so the short answer is yes.
With the cost of price of new equipment and of course with some labor inflation on top.
And Oh by the way, we are seeing food inflation.
When we do crude transport.
Whether its renting cars are flying we're seeing those costs come up hotel cost are coming up as we.
And I have to put crew members and hotels before they true on.
So we are seeing.
Off of that ablation, and all things being equal that net labor and cost inflation and the cost of the equipment inflation should drive.
Higher and the need for higher as you stated mid cycle.
Mid cycle.
Pricing.
The other thing is we haven't talked much about this but and.
As you get into ESG and look at the engine packages on tow boats and tugboats.
You've got to start moving to tier 4 engine packages, which are much more expensive and frankly more expensive to operate so.
And some of it all of that together.
Yes, we're going to need higher mid cycle pricing throughout the industry.
To recover.
Any kind of capital.
And maybe coming back.
Relative to debt 8500 that you mentioned I mean, it's sort of how should we think about where we are at the moment.
Yeah.
I'd, rather not talk directly about where market pricing is now.
If you if you looked at I think OTR and Theres a couple of other people out there that can talk about market pricing.
I think my attorney would kick me if I could.
And started talking about direct pricing on a call.
Alright fair enough.
And then my second question is you had mentioned it we haven't really talked a lot about it but.
Some supply chain bottlenecks with respect to the D&S side.
And just hoping that maybe you could flesh that out a little bit I mean are there any specific areas or.
How.
The headwind is that as you know on tomorrow and are or is it potentially yes. It's on the margin obviously, it's very minor it's something we're watching closely.
Anything with electronics and as you might imagine with electric Frac stuff. There is there is a fair component of chip.
Chips and control.
How big are all mechanisms and that.
Anything with that seem a little delay.
Got it and acute or anything with us no not yet, but it's something we're watching closely the other thing is cast and forged parts. We are seeing a little backup on that but I would say, it's all on the margin right now.
Alright fair enough I appreciate it thanks guys.
Yes.
Thank you. Our next question comes from the line of Greg Lewis with <unk>. Your question. Please.
Hey, Thank you and good morning, everybody Hey, good morning.
David I was hoping you could talk I mean, I mean clearly things.
Things are starting to line up for DNS at least on the oil the oilfield service side.
Could you talk a little bit about.
As utilization has moved up.
And in the pressure per Frac fleet.
Like what is how youre thinking about what's on the sidelines.
What type of.
And what type of status as the equipment and it is is there an opportunity there where we're going to have to do rebuilds like we've done in previous cycles or or is it more along the lines of hey, a lot of that stuff is kind of.
<unk> seen it.
<unk> is done and it's going to be more of a shift towards the E frac, which you've been touching on.
It's probably closer to the latter than the former I would say look theres a lot of install.
Equipment out there.
And it's still functional it's still.
And be remanufactured and have quite a bit of life left in it and we're seeing a little bit of that come back now, but I would say any new capital.
The definite trend on new capital is for E frac.
That said maintenance and maintenance capital.
So the economics are still good if you've got these and fleet lease fleets traditional diesel driven fleets.
It still makes sense to re manufacturer and we're just not seeing a lot of it to be honest.
And essentially most of the new orders.
The orders and period have been.
ESG.
<unk> related.
As we get tighter that dynamic.
Wil and <unk>.
Opinion and change and we'll see more remanufacturing.
Will this be kind of blown and go and like we saw in 2011.
I don't think so Greg I think it feels.
Yes.
And we're rightly or wrongly lot more capital discipline and I think.
Many of the private companies in particular.
Theres not as much capital available so.
If there is capital.
The lenders kind of want to see and ESG.
And put forward so.
And all that said I still think reman makes sense and we will see more room and then less as we go forward. It's just been pretty and now we're starting to see more of it but it's still.
Early days and that that area and my opinion.
Okay, Okay, Great and then just 1 more for me and.
And you touched on and Hey, refining utilization is back over 90%. It's been there for the last couple of months.
Is there any way to think about.
How long, we need that refining utilization to be and that plus 90 market.
And kind of help.
Help tighten the coastal market right.
It seemed like what back and those in 2017 it dropped below 90 for a few months.
Is there any kind of weighted.
Kind of tried to track that and think about coastal really improving.
Eric.
Net.
I think and that's the right thing to look at I would just tell you on refinery utilization.
A little careful in that.
And the last year and a half.
About 5% of the refining capacity was either shut down or idled.
So, yes, we're up back up above 90%, but that's on a lower base.
It was about 1 million barrels roughly plus or minus a little bit of 1 million barrels of refining capacity thats been shutdown and idle now we've seen some good signs recently the calcasieu.
Refinery came back online and so thats coming back.
But as you think refinery utilization and you've got a factor and that about 5% of the total complex was shut down.
And we need some of that to be restarted now the other interesting thing is rather and re <unk>.
And that we're seeing.
Being more biodiesel and renewable diesel.
Which.
Particularly if you take soybean oil and make it into diesel that's those are going to be barge moves kind of most likely coming out of the Midwest as they make renewable diesel so.
Yes.
Starting and all that.
Does that help.
Does that help the coastal market the renewable diesel maybe we've actually had.
Our coastal unit go and moves from renewable diesel so.
We're watching it but again, we're still at lower levels and I think.
Thank you.
We need some of the export market to come back and some of those refineries that have been idled to come back to really make a dent in the coastal utilization.
Okay, Great Hey, Thank you very much for the time and bill hoping to catch up with you in early October.
Very good thanks. Thanks.
Greg Operator, we're going to take 1 more 1 more caller.
Certainly our final question and then for today comes from the line and Bill Baldwin for Baldwin Anthony Securities. Your question. Please.
Okay. Thank you and good morning.
So Alan Horn and business.
All of us.
Good to hear nice.
Nice.
Comments and <unk>.
Business outlook.
Yes.
I'm interested in.
You can talk to us about.
Regarding.
Your new.
Natural gas power generation equipment.
Yeah.
As a as you focus on the industrial markets I mean, you talked quite a bit about the year.
Power generation and I hate and utilized now more and your <unk>.
E Frac equipment for the oil and gas markets.
And that sounds like is interest there and definitely expanding and broadening out.
Yeah.
As far as it user base is concerned and.
And the industrial markets.
If you go to market strategy. There you know what what markets are you really focused on there and.
And.
You know can do this share little bit and you know inside.
And color on that.
Sure Yeah.
Well listen.
Particularly.
I'll tell a little bit more on E. Frac before I go into the commercial and industrial and power generation.
And E Frac Stewart <unk> Stevenson started making his first generation E. Frac back in 2013, which was all around the gas turbine driving.
Electric drive and.
And.
The the newer kind of generation that that everybody's excited about is using.
And natural gas power generation.
Engine packages from cat or empty you too.
To basically develop electric power with say 10 natural gas.
And power generation engines on a micro grid on a on a well pad.
And those and element of having backup.
Energy storage there so that you can run all the.
And the natural gas generation equipment at its peak efficiency and take them on and off.
Gas and correctly.
<unk>.
When you when you start to look at the commercial market its more 1 off rather than a big microgrid that generates huge numbers of megawatts.
What we've seen is a lot more.
Stand by backup power, we have a power.
Offline Asian rental fleet.
And that.
Frankly, we get a lot of business from our hurricane backed up.
During during hurricanes.
And the likes of the Big box stores will put us on standby and cases and outage.
As.
As you've seen with the Texas storm, which took out a good part of the grid and some of the challenges and California with the electric grid and then as you think of Evs and taking more of the electric grid I think businesses in general are looking more and more at backup power.
And we're really.
Trying to capture parts of that market with our Oems that we represent the engine manufacturers.
And.
That's how we are we're a distributor as you know bill.
For for a number of people.
And essentially we're using that relationship to go to market for backup power.
We have a pretty good presence up in the northeast and we've we've been.
Working to get into a backup power for a big financial institutions to a lesser extent and Florida for for some.
Some of the kind of the health care and nursing home hospital type backup power.
It'll be interesting to see as the grid.
More and more utilized and electricity becomes more and more.
Important as electrification occurs across.
Yeah.
Both the passenger car market and other markets.
And what the what the demands for backup power will be.
We're trying to position.
<unk> and I would tell you that we're going go into market and the future will be to take that backup power.
Cros and.
And <unk>.
Couple it with.
Our energy storage system I E. Our battery system so that.
There is a situation where.
You can.
Charge, the battery and you always have.
Backup power.
Sure.
And not need as much in terms of diesel.
Drive backup power and maybe there is.
Couple coupling with the solar on on certain.
<unk> tops of commercial buildings. So that's that's all kind of new areas that we're working on.
Non.
There is nothing to put and the model yet for for that that market, but that's what we're looking at and what we are pursuing.
From an ESG standpoint bill.
Bill.
Okay.
Alright, well well go ahead and close it out on that note. Thanks, Bill and thank you everyone for your interest in Kirby today and participating in the call. If you have any questions or comments you can reach me directly.
At 701 and 3.4.
And for 35, 1 and $5.4.5 thanks, everyone and have a great day.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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