Good morning, and welcome to the Kirby Corporation 2020 Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Eric Holcomb, Kirby's Vice President of Investor Relations. 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 Bill Harvey, Kirby's Executive Vice President and Chief Financial Officer. A slide presentation for today's conference call as well as the earnings release that was issued earlier today can be found on our website at kirbycorp.com. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available on our website in the Investor Relations section under Financials. As a reminder, statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated as a result of various factors, including the impact of the COVID-19 pandemic and the related response of governments on global and regional market conditions and the company's business. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2019, and subsequent quarterly filings on Form 10-Q. I will now turn the call over to David.

Thank you, Eric, and good morning, everyone. Earlier today, we announced 2020 second quarter earnings of $0.42 per share. This quarter's results were heavily impacted by COVID-19 and the resulting reductions in demand for Kirby's products and services. In addition to the effects of declining activity, we incurred charges of $0.06 per share, including bad debt as a result of the bankruptcy of a large oil and gas customer and severance costs. During the quarter, we aggressively reduced costs across the company and focused on cash generation, resulting in decent earnings and strong cash flow despite the challenging market dynamics. We'll talk more about the second quarter's results in a few moments. Our pandemic response plan, which we activated in early March, has successfully ensured business continuity, uninterrupted customer service and the safety of our employees. I'm pleased to report that all of Kirby's businesses have continued to operate without disruption. I'm proud of the resilience of our dedicated employees during these difficult times. And it's through their efforts that we are dealing with the challenging circumstances and ensuring continuous operations without sacrificing our commitment to safety and customer service. Moving to our segments. In marine transportation, the inland and coastal markets were significantly impacted by COVID-19 and the resulting decline in demand for many of the products which we transport. During the second quarter, refinery utilization declined sharply from 82% at the beginning of April to 68% in May before gradually recovering to 75% at the end of June. Chemical plant utilization also dropped to 70%. With our customers' activity levels materially reduced, barge requirements in both inland and coastal dropped sharply, particularly in late May and in June. In inland, although the quarter benefited from storage requirements for crude and refined products, the magnitude of the demand reduction for movements of refined products, black oil and some petrochemicals resulted in a sharp decline in our barge utilization from the low 90% range in early April to the mid-70% range by the end of June. Also contributing to the lower utilization were better weather and reduced flooding on the Mississippi River, which contributed to a 37% sequential decline in delay days and improved efficiencies across the waterways. There was a very limited spot market in the quarter. And it became highly competitive as the quarter progressed with spot pricing declining. Term contract pricing, however, was stable in the quarter. In coastal, reduced consumer demand for refined products and black oil had a significant impact on the spot market. As the quarter progressed, the industry experienced increased availability of 80,000 and 100,000 barrel barges and limited barge requirements on the West Coast. As a result, our barge utilization declined from the low 80% range in April to the low 70% range in June. There was minimal change in pricing for both spot charters and renewing term contracts. To help minimize the financial impact of the lower barge utilization and declining revenues, we continued to take aggressive actions to lower marine transportation costs during the quarter, including significant reductions in horsepower, operating costs and G&A expenses. As a result, inland operating margins increased both sequentially and year-on-year and coastal margins remained about breakeven despite the decline in revenue. In distribution and services, second quarter activity declined as our core markets were significantly impacted by reduced economic activity, stay-at-home orders and low commodity prices. Our oil and gas markets virtually stopped as the U.S. rig count dropped 50% sequentially, wells were shut in and the number of active frac crews declined approximately 80%. As a result, customer demand for new and remanufactured pressure pumping equipment evaporated and sales of equipment, parts and service slowed materially. Additionally, one of our large oil and gas customers filed for bankruptcy, resulting in an approximate $0.04 per share hit to earnings. In commercial and industrial, the economic slowdown and stay-at-home orders significantly reduced activity levels, particularly in the on-highway and power generation businesses. In on-highway, we experienced reduced activity at our repair centers as fleet miles declined nearly 15%, metropolitan areas went on lockdown and major tourist destinations closed. In power generation, new orders and service demand declined sharply as many major projects were postponed. The bright spots in this market were the marine repair and Thermo-King refrigeration businesses. Although these businesses reported sequential reductions in revenue, both maintained solid activity levels throughout the quarter. In response to these challenging market dynamics, we took further steps to realign the distribution and services cost structure, including additional workforce reductions, furloughs and strict management of all discretionary costs and capital expenditures. We expect that these efforts will be fully felt in our third quarter results. In a few moments, I will talk about our outlook for the balance of the year. But before I do, I'll turn the call over to Bill to discuss our second quarter results and the balance sheet.

Thank you, David, and good morning, everyone. In the 2020 second quarter, marine transportation revenues were $381 million with an operating income of $51.4 million and a margin of 13.5%. Compared to the 2020 first quarter, our revenues declined 6%, even with the addition of Savage Inland Marine and operating income improved $700,000 or 1% as a result of the significant cost reduction initiatives implemented during the quarter. The revenue reductions are due to the lower inland and coastal barge utilization, reduced fuel rebuilds, retirements of 2 large capacity coastal barges, and planned shipyard activity in coastal. During the quarter, the inland business contributed approximately 80% of segment revenue and had an average barge utilization in the mid-80% range. Long-term inland marine transportation contracts, or those contracts with the term of 1 year or longer, contributed approximately 65% of revenue with 68% from time charters and 32% from contracts of affreightment. Term contracts that renewed during the second quarter were stable. However, as a result of lower barge utilization across the industry, spot market rates declined approximately 5% to 10% sequentially and year-on-year, primarily in refined products and black oil. During the second quarter, the operating margin in the inland business was in the mid- to high-teens. In the coastal business, spot market conditions deteriorated as a result of reduced demand for refined products and black oil transportation. These market dynamics yield sequential and year-on-year reductions of barge utilization into the mid-70s range. Average spot market and term contract rates were stable. During the second quarter, the percentage of coastal revenue under term contracts was approximately 85%, of which approximately 90% were term charters. Coastal's operating margin in the second quarter was breakeven. With respect to our tank barge fleet, a reconciliation of the changes in the second quarter as well as projections for the remainder of 2020 are included in our earnings call presentation posted on our website. Moving to distribution and services. Revenues for the 2020 second quarter were $160.2 million with an operating loss of $14.1 million. Compared to the first quarter, revenues declined 33% with a $17.9 million reduction in operating income. In oil and gas, significant reductions in rig counts and limited fracking activity resulted in very low demand for our oil and gas-related products and services. The quarter's results included approximately $3.3 million of bad debt expense related to the bankruptcy of an oil and gas customer and $1.4 million of severance. In commercial and industrial, the impact of declining economic conditions and stay-at-home orders resulted in significant reductions in equipment, parts, and service demands in the on-highway and power generation businesses. The marine repair business experienced solid demand but was down sequentially and year-on-year due to reduced major overhaul activity and engine sales. During the second quarter, the commercial and industrial businesses represented approximately 81% of segment revenue and had an operating margin in the low-single-digits. The oil and gas businesses represented approximately 19% of segment revenue and had a negative operating margin. Turning to the balance sheet, as of June 30, we had $108.5 million of cash, total debt was $1.64 billion and our debt-to-cap ratio was 35%. During the quarter, we had strong cash flow from operations of $170.6 million, enabling debt repayments of $60 million. We used cash flow and cash on hand to fund capital expenditures of $43.6 million and the acquisition of Savage for $279 million. At the end of the quarter, we had total available liquidity of approximately $537 million. Despite the impact of COVID-19 on our businesses, Kirby's balance sheet remains strong, and we have good liquidity that we expect will increase for the balance of the year. We do not have debt maturities due until 2023. And we have substantial room under our debt covenants. Capital spending is expected to trend down significantly for the balance of the year as the first and second quarters had significant regulatory shipyard expenditures in coastal. For the full year, we expect capital expenditures of approximately $150 million, which represents a 40% reduction compared to 2019. As a result, we expect to generate free cash flow of $250 million to $350 million, which as previously disclosed, includes approximately $125 million of tax refunds as a result of the recent U.S. CARES Act legislation. Before I close, I'd like to quickly address income taxes. During the second quarter, we had an effective tax rate benefit as a result of net operating losses that were carried back to prior higher tax rate years as allowed by the CARES Act legislation. We expect that the third and fourth quarters will have a low effective tax rate of 10% or less. I'll now turn the call back over to David to discuss our outlook for the remainder of 2020.

Thank you, Bill. In the last few weeks, some encouraging macro trends have begun to emerge. Refinery and chemical plant utilization is slowly moving higher, demand for refined products is increasing, frac activity is improving and trucking fleet miles are rebounding modestly. As a result, we have recently started to see some slight improvement in our activity levels. While this is positive, the resurgence in positive virus cases, new government restrictions and continued high unemployment creates uncertainty as to the timing of a material economic recovery. Given these factors, we intend to remain focused—very focused on cost control, capital discipline, and cash generation until we see a significant improvement in activity. In the inland market, the sharp decline in demand in barge utilization that was experienced throughout May and June has stabilized in recent weeks as refinery and chemical plant utilization levels have modestly improved. These improvements have resulted in some slight increases in customer requirements, leading us to believe the inland market has reached bottom. However, with continued uncertainty surrounding the virus, a material recovery for the inland market is not expected until general economic activity rebounds. With inland barge utilization starting the quarter in the mid-70% range, we expect that our average third-quarter utilization will be sequentially lower and spot market pricing could remain under pressure until a more meaningful improvement in demand is realized. In the meantime, we will continue to reduce costs across the business as necessary, including managing our horsepower requirements to align with demand as well as strict management of operating costs, G&A expenses, and capital expenditures. Overall, with average barge utilization and demand expected to be at lower levels for the third quarter, we anticipate inland revenues and operating income will decline compared to the second quarter. Despite these near-term headwinds and given that this downturn is demand-driven versus supply-driven, we are confident that the inland business can get back on a path to normalized margins in the low to mid-20% range in a healthy and fully recovered market. In the coastal market, approximately 85% of the revenues are under long-term contracts, which have minimal renewal exposure prior to the end of 2020. Demand in the spot market is expected to remain at low levels for the near-term. In the third quarter, we will retire one additional large capacity vessel. However, reduced shipyard maintenance will help to improve the quarter's overall results. As a result, we expect third-quarter coastal revenues and operating income will modestly improve sequentially. In distribution and services, we anticipate the activity in the oil and gas market will remain extremely challenged for the duration of 2020. The U.S. rig count, which has declined from nearly 800 rigs in the first quarter to approximately 250 rigs today, is expected to only slightly improve for the duration of the year. Additionally, although there are reports of incremental fracturing activity expected in the second half, the significant amount of spare pressure pumping capacity that exists across the industry will likely limit any material recovery in new construction and maintenance activities for the foreseeable future. As a result, although we're seeing a slight pickup in activity now, we do not expect a significant rebound in our oil and gas distribution and manufacturing businesses for the remainder of the year. In commercial and industrial, although our core businesses continue to experience reduced activity levels as a result of COVID-19, there have been some positive indicators in on-highway and power generation sectors in recent weeks. Fleet mileage in the nation's trucking industry has modestly rebounded from their lows in the second quarter and power generation projects, which were previously deferred, are being rescheduled for the coming months. While we hope these trends continue, the ongoing spike in virus cases and the possibility of new lockdowns and restrictions could delay the recovery. On a more positive note, we anticipate increased seasonal utilization in the power generation rental fleet and higher activity in the Thermo-King refrigeration businesses during the remaining summer months. The marine repair business is expected to be stable in the third quarter but will likely decline in the fourth quarter due to normal seasonal factors, including the dry cargo harvest season. We are actively managing the distribution and services cost structure, and we'll continue to make adjustments to mitigate the impact of reduced activity as necessary. Although our recent efforts were not fully reflected in the second quarter's results, we expect to realize the benefit of these cost reductions in the third quarter. As a result, we expect the distribution and services operating margins will sequentially improve in the third quarter but still remain below breakeven. For the full year, we expect segment margins at a loss. However, it's important to remember that D&S business requires very little capital and consequently should contribute cash flow to the company for the year. In conclusion, the second quarter was very challenging. Our activity levels dropped significantly and we had to make some very difficult but necessary decisions to reduce costs. Although it appears activity has bottomed and we are entering the initial phases and stages of the recovery, significant uncertainty remains. In the third quarter, we expect overall earnings will be sequentially lower with inland down, coastal up slightly, and losses in distribution and services meaningfully less. We are confident that Kirby is in position to deliver decent full-year results despite the challenging backdrop. From a liquidity perspective, our strong free cash flow generation in the second quarter enabled us to reduce debt by $60 million and ensure ample liquidity for these uncertain times. We expect this trend to continue in the third and fourth quarters with us generating strong free cash flow of $250 million to $350 million for the full year. As previously disclosed, we plan to use this cash to further enhance liquidity and reduce our debt for the foreseeable future.

Thank you. We will now begin the question-and-answer session. Our first question comes from Jon Chappell with Evercore. You may proceed with your question.

Thank you. Good morning, everybody.

Hi. Good morning, Jon.

Good morning, Jon.

David, I appreciate all the detail you provided on the outlook. So please forgive me while I dust off some math here and just try to understand the direction of the second half of the year, both quarters. So at the low end of your operating cash flow guidance range, that would say about $158 million in the second half, and if we say $110 million of run rate D&A, and that's about $48 million and the second quarter was $25 million. So if the third quarter is going to be down sequentially from the second quarter, it sounds like even your low-end expectation would have at least a decent ramp sequentially in 4Q. Is that how you're thinking about it? Or is there still risk to the fourth quarter looking closer to 3Q?

No. Yes, that's how we're thinking about it. I think even as we think about inland being down sequentially, maybe we should have said flat to down, but we'll see. We definitely feel like we've bottomed and activity level is starting to pick up. You can see it with the refinery activity coming back on. But we're starting from a lower average utilization. So that's part of our thought process. But when we look at cash flow, obviously, the tax refund is going to be a part of it, which we benefit from in the CARES Act. But even beyond the tax refund, we do feel like activity is picking up. Look, you've heard us say this before, our volumes follow GDP. We just saw the flash and the GDP is down 32% or something like that for the second quarter. I think GDP is starting to pick back up. We feel it—we see it not only with the bottoming in inland but we see it also in our on-highway and power generation. And believe it or not, even some activity in the oilfield, albeit at a low level. So we factored that into our kind of cash flow view. But to your point, the tax refund is a big part of that cash flow that we're forecasting for the year.

Okay. That makes sense. And then look, just a follow-up on...

And Jon...

Yes. Bill has something...

One thing I want to point out is the tax refund, we did receive some of it in the second quarter. The majority is in the back half of the year. So when you look at the number that we talk about in the tax refund, a little over $30 million of it was received in the second quarter. So when you do your calculation, just keep in mind that, that full amount, only part of it is in the back half of the year.

Understood. Thanks Bill. David, for my follow-up, the – I was thinking about inland and maybe similarities and differences to the last major crisis, the global financial crisis. And you were very clear this is a demand-driven, not a supply-driven. So maybe if you could just rewind a little bit and talk about the similarities and differences and what that tells you about the pace of utilization pricing and probably more importantly, the return to normalized margins in inland.

Sure. If you go back and you look at the Great Recession versus the Great Lockdown, the Great Recession, it was pretty short-lived. I mean it bounced back as the economy bounced back. Our earnings took about—we had a dip in earnings and then it came back. And the lag was—we had probably a 6-month lag with what happened with the economy. Again, that was all demand-driven. It wasn't an oversupply. There weren't a lot of barges floating around. The demand fell off, so the utilization fell off. But as soon as demand came back, utilization came back. I would say the downturn we saw from 2015 through 2018 was supply-driven. And that was—there were 400 extra barges in that market and maybe 500 at the worst. And it just took a long time for demand to absorb it. If GDP is grinding forward at 2% to 3%, it took a long time to absorb the 400 to 500 barges. When we go into the Great Lockdown, where we are now, it is more like the Great Recession than it was that huge overbuilding bubble that we had in the 2015 to 2017 range. It's all demand-driven. Prior to COVID, I think you heard us say we hit the highest utilization we ever had, which was 97-plus percent. And pricing was really on a tear. Right now all the utilization decline we've seen has not been because supply came in; it's really been all about demand disruption. And it's particularly sharp in refined products and jet fuel, in particular, if you want to get really specific, but petrochemicals to a lesser extent. But it's been broad-based. It's really just about consumption in the U.S. And that's why we're optimistic. Now, there is some building going on in the industry. You know that, right? The order book for new barges, which was all placed before COVID, it had about, call it, 125 to maybe at the high end, 150 barges coming in. But those were all ordered pre-COVID and probably 25 or more were carryover from '19 that didn't get delivered. And what we're hearing about everybody that had ordered barges or many people that had ordered barges are trying to get the deliveries pushed out or even canceled, so again, very, very light new barge construction, net of retirements. So a long way of circling back to say this is demand-driven. It feels more like that Great Recession period rather than that bubble from all the crude-by-barge overbuilding.

Understood. Thanks for the insight, David.

Thank you. Our next question comes from Ben Nolan with Stifel. You may proceed with your question.

Great. Thanks. Hi, David. Hi, Bill.

Hi.

So I have a couple. Well, let me follow up on what you were just talking about there, David, sort of comparing maybe the fleet from where it is right now to maybe the last downturn. Obviously, there is less on order. But can you maybe talk about sort of the state of the – if you know, the state of the balance sheet to the competition and also maybe the ability to see supply removed from the fleet? And obviously, you used the last downturn to really consolidate quite a lot. But do you think that, that aspect of it, maybe some supply compression can happen in this downturn as well?

Yes. I think you'll see more retirements than we've traditionally seen in the last several years. Even when we look at Kirby's retirement plans, we've retired more barges than we anticipated this year. And we've done, just as you would expect, looking at the cash flow that would be required to extend the life of a barge and saying, hey, look, we don't need to spend that now. Let's retire that barge or put it aside. I think every competitor is going through that same analysis. I would say, clearly, Kirby's liquidity is pretty strong. I don't have great information about some of the smaller private players. But I would imagine their liquidity is pretty stressed right now. I think that's going to lead to more retirements or at least deferred maintenance or maybe even tying up barges and having to spend a lot of money to bring them back later. Yes, it's hard for me to give you any more information because most of these companies are private. But I can imagine they're under some stress. With that falloff in utilization that the whole industry faced, it's pretty difficult. But I think one of the things that Kirby benefits from is our horsepower structure. We were able to cut a lot of horsepower costs. And obviously, we took a lot of cost structure efforts to reduce our costs as well. I'm sure they're doing the same. But my guess is some of them are pretty nervous right now.

Yes. That makes sense. And then just sort of—in maybe the category of a black swan kind of event, do you have any thoughts on the potential for—if the Dakota Access Pipeline is shut-in, what that might mean for more business coming out of crude-by-barge and how you might—that might impact or sort of out of nowhere help the inland market a little bit?

Yes. It's funny. We're chuckling amongst ourselves here because we were wondering if this question might come up, and we were— we were going back and forth, well, is it a positive? Or is it a negative? And we could see a case for both. So I think net-net, it's a nonevent to us. Maybe a slight negative, but we'll see. It wasn't material as we discussed the pros and cons of that shutting down.

Okay. All right. I appreciate the time, guys. And good work on cutting costs. That was pretty impressive.

Thanks, Ben. Appreciate it.

Thank you. Our next question comes from Mike Webber with Webber Research. You may proceed with your question.

Hi. Good morning, guys. How are you?

Good. How are you doing?

Good. David, I wanted to dig into maybe the pricing here. I know we've talked a little bit about utilization already. But in terms of what you guys guided towards and what you talked to in Q2, you noted that term pricing was stable while spot pricing had rolled over pretty significantly. The stable term pricing maybe falls a little bit outside the norms of what we heard kind of elsewhere in the industry. I'm just curious, is that a function of your specific book? Would you expect term prices to kind of roll with a lag relative to what you saw in the spot market? Or maybe are you actually actively contracting term barges at the same pace now at that price point that you were moving in Q1? Just a bit more color on how you think that—those pricing dynamics will play out as kind of the Q2 economic hit kind of rolls through your book.

Yes. No, this is a good question. We did see, as you heard in Bill's comments, the spot pricing is down 5% to 10% in the second quarter. We saw a little more pressure on it as we've gone through July here. Our book of business hasn't—we haven't felt it on the term pricing. But as you would expect, if this continues and we don't get that activity ramp back up, we will see term pricing go down. I think it's a combination of our book and maybe our unwillingness to give a lot on term pricing. Yes. I think this market is coming back. I think we bottomed. We're seeing the activity. Utilization, of course, on average, is a little lower, at least at the start of this quarter. But we've got—and maybe we're a bit optimistic, but we're starting to see that activity come back. So we've been pretty resilient trying to hold the line a little bit. But as you would expect, I mean, supply and demand work and if that—the oversupply or the lower utilization continues for a while longer and doesn't start to come back, we absolutely will see term prices follow spot pricing. I don't think I—I don't think that's a surprise.

No. In terms of that mix within your inland book, I think you're kind of right at 65%, just still levering around 2/3 of it on term. What's the range you would expect that to widen out to if we did see a material drop in term pricing? Could we see that run—I'm sorry, drop to—could we see that term piece kind of drop into the high 50s as you guys hesitate to put more barges out on term if in fact that you roll? What's the way around there?

Actually, what's happened is our term contract percentage has actually gone up and would have gone up more but for Savage. So I think in the first quarter, we said we averaged about 60% term; this quarter—second quarter was about 65%. So that is us losing some of the spot business but retained term, right? So the percentage of term went up. And then you also have to factor in that we rolled in 90 barges, 90-plus barges with Savage. And Savage's book was essentially 100% spot. So—but for that, our term portfolio would have been a higher percentage. But let me be clear, that's because we were getting a lot of spot equipment back during this activity downturn.

Right. Okay. And then I guess the follow-up or second question, I don't think I heard you guys mention this, but we've seen headlines around the ventilator program you're working on with Rice and Apollo. I believe we saw some approvals. It doesn't seem like there's much of an impact as we look to your guidance on D&S. I'm just curious how we should think about that business and what impact it could have either on a short-term or a long-term basis.

Yes. No, I think it's not material impact. Look, that's a low-cost ventilator. We developed it with Rice, which was actually—they were great to work with. But it's a ventilator that probably does about 90% what a big ventilator does or a mainline ventilator. But it costs about $5,000 versus $50,000. And really, the target market there is for the developing world. You can imagine just that price point is better. Will it be material to Kirby? No. It's—it was just—we had, believe it or not, some idle engineers that weren't working on building frac equipment. So they built this. Now—but let me talk about D&S for a second because we had a pretty sizable loss in the second quarter. I expect that to be meaningfully less. We've restructured the business for a smaller business going forward. In our oil and gas business, I think we're down—we reduced our headcount by about 63%—60% to 65%, really restructured the whole business completely. So I think as we get some volumes back and we're starting to see a little activity in the oilfield that is starting to see starting to see the on-highway stuff come back and the power generation. So I think we bottomed there as well. But to your core question, the ventilator really won't have an impact on any of that. It's really just activity base coming back.

Sure. Okay. Great. I'll turn it over. Thanks, guys.

Thanks, Mike.

Thank you. Our next question comes from Randy Giveans with Jefferies. You may proceed with your question.

Hi ladies, how is going?

Very good Randall.

So for the marine business, obviously, you aggressively reduced costs, offsetting some of the reduction in revenues. Do you expect these cost reductions to stick over their fee increases when business starts to improve? And I guess, more specifically, for the third quarter, fourth quarter, do you expect the operating cost and G&A expense to be closer to the 1Q levels or 2Q levels?

I think they'll be closer to the Q2 levels. When you look at a lot of our cost, a big portion of our cost is horsepower. You've heard us use charter boats before, right? And we do that as a shock absorber for demand. So we laid off some charter boats. And that's part of the cost. And as volumes pick back up, we'll add charter boats back. So that part is more variable. But the G&A cost savings that we've implemented and just across the board in terms of expense control, I don't expect to see that come back. This will make us a leaner machine as the world comes back.

Yes, Randy. Well, G&A for the marine group was down 16%, as you know. And they did a great job, and they're continuing to focus on—they have new initiatives they're working on.

Perfect. All right. And then looking also at the inland utilization, it fell to, I think, the mid-70% range at the bottom, coastal in the low 70% range. But for the full quarter, I think the average was closer to the mid-80% range for inland and maybe mid-70% for coastal. So what are the current kind of utilization levels as of maybe today? And then also, you mentioned the term contract pricing on expiring contracts was stable. How busy is that term market? And are you seeing any changes in the duration of the term contracts, maybe even bringing it into 6 months or extending out to 24 months?

Yes. Well, the duration of the term contracts is different for inland and coastal. I'd say inland is shorter. But coastal, you have more multiyear term contracts. So there's more length in coastal. And I think that's, by necessity, that's bigger, more expensive equipment. So the whole industry pushes for longer-term contracts. But as you asked, the utilization, again just to restate this, we started the second quarter in the 90% range and ended the quarter in the mid-70s. So it averaged about 85%. We started the third quarter kind of in that mid-70s, and we're starting to see it tick up a little bit here just recently. Has it gobbled 5%? No, but we're starting to see it improve. And similarly on coastal, we saw basically a similar thing. We've had a little luck putting some spot equipment back to work in coastal. But not enough to say it's time to ring the bell. But again, it's signs of activity improving.

Look, Randy, one thing when you think of term contracts, everyone is unique. And we've talked in past calls, when the pricing was moving up, the pricing moved up slowly on term contracts. And it's because they're value-added and in long-term relationships. So you shouldn't think of it all as a commodity type of business. There's a big portion of it that is very relationship-driven. And we—and on the way up, it goes slow and the value add that we provide is pretty unique.

Yes. And I would add one more thing, and I should mention that particularly on the inland side, one of the things, because of the size of our fleet, we're one of the ones that can offer contracts of affreightment instead of time charters. So a time charter is X thousand dollars a day, right? But a contract of affreightment is more X dollars to move barrels A to B—from point A to point B. So in a market where volumes aren't as certain and that—those contracts of affreightment are very attractive to certain customers. So I would say we're—that's an enticement that Kirby has a benefit of being able to do more contracts of affreightment than some of our other competitors. So we are seeing a lot of interest in contracts of affreightment. But as you know, we've always had a good piece of our portfolio in contracts of affreightment. But I would say that's a positive in this kind of environment.

Got it. Okay. And then just following that on the liquidity of the term market, are there still an ample amount of kind of requests or bids for that? Or are you seeing those charterers or customers kind of just leaning toward spot for now?

I'd say it's a mixture. There's some customers that are rolling term contracts. And obviously, everybody always wants a lower price. So there is some of that, that's going on. And there are some term moves that are going to spot. People are—some customers are viewing this weakness as a chance to, hey, look, I don't need to give length because there's going to be a fair amount of spot equipment available. I think that's normal. We saw that a little bit in the Great Recession as well. I think that's a normal market dynamic, Randy.

Got it. All right. That makes sense. Well, the news is the same everyone in Houston during COVID, so you all stay safe.

Okay. Thanks, Randy. Thank you.

Our next question comes from Greg Lewis of BTIG. You may proceed with your question.

Yes. Thank you and good morning, everybody.

Hi, Greg.

David, I guess my first question is around C&I. I mean, obviously, it's taken a huge step up on a relative basis. And I just want to understand, I mean, you called out the marine repair business specifically. Any kind of color you can give around that in terms of maybe the size of the marine repair business, how strong it was? I mean—and maybe a little bit around the split between maybe personal and however you refer to it as personal and commercial or just—and thinking about it, right? I mean one of the things that is a trend that we're hearing is consumers are changing their spending habits. And I'm just kind of curious, is that part of what's driving the marine repair business you've seen? Any kind of color around C&I and as it pertains to that, I think, would be super helpful.

Yes. No. So there's—Greg, there's two parts to that marine repair business. There's the industrial piece and then the consumer piece, which would be the wealthy yacht people. On the industrial side of marine repair, it's been very strong. I say very strong, but relative to the U.S. economy, it's been strong. And I would equate that to up through—at least through April, all the industrial horsepower was working pretty regularly and they wanted to keep it working. So that business has continued to do okay. Even the dry cargo market, as you probably are aware, has done okay. So that horsepower continues to need to be repaired. We did see some deferments of yacht-type deals. But I will say it's—that those personal things, I guess, if I had to quarantine, I wouldn't mind doing it on a big yacht, right? So yes, there would be—there's a bit of that dynamic. So to put that business in context, for the year, our marine repair business, call it, $200 million to $250 million kind of business. And it's still on that trajectory for this year even in COVID. So that's been probably one of our pleasant surprises that it wasn't as impacted by COVID as some of the other stuff. The other parts of C&I, the on-highway, the truck repairs, they got hit pretty hard. All the bus repairs are probably the worst, right? I mean if you think about Disney World and Disneyland shutting down, they don't need to maintain those buses. The buses that go to take people from city centers to casinos, all that type of leisure-related has changed. Now does that come back? And that's probably the root of your question. I mean is there a permanent change in consumer behavior? I don't think so. I think people are going to want to take their kids to Disney World and people are going to want to gamble. So I think they may come back slower, right, because people are much more cautious with COVID. But ultimately, I do think it comes back. Our focus really at D&S has been to really right size it for a lower oil and gas environment going forward. The C&I side, we have taken out costs, that's probably down 20% in terms of headcount but not like 60-plus percent that we had in that oilfield manufacturing side.

Okay. Great. And then just, Bill, one real quick and maybe it's just a timing issue. Historically, Kirby has not a lot of cash on the balance sheet. And this quarter, I mean, you've built up last quarter for Savage. Savage is done. You still have $100 million of cash in the balance sheet. Is that more of a timing issue? Is that more just around—just given uncertainty or maybe we're going to be a little acquisitive? Just kind of just want to understand a little bit more about the cash position.

No, that is a bit of conservatism and just being careful at this point, so the lower risk. Like we're generating, as you can guess, strong cash flow. Even now, we generated $40 million in July. So we won't go much above $100 million. But it's more conservatism than anything else.

Okay, guys. Thank you very much. Have a great time.

Thank you.

Thank you. Our last question comes from Jack Atkins with Stephens. You may proceed with your question.

Good morning, everybody. You've got Wade on for Jack this morning. Thanks for taking our question.

Good morning, Wade.

So wanted to kind of get your thoughts on industry utilization from here and how quickly you think we can get back to that, call it, 90-plus percent level. Do we need U.S. gasoline consumption and industrial activity to get back to levels more like last year for that to happen? Or what is it that you kind of see as being the catalyst for that?

I think it's like you say. It will be interesting, though. I think there is a—and this might get to Greg's thought, too, that is there a change in consumer behavior? I think there are probably a lot fewer European vacations going forward, at least for the next 6 to 12 months, and a lot more driving vacations. So how does that work in terms of our mix of volumes in refined products? We'll see. I do believe that the U.S. economy, it's not going to be a sharp V. It's—hopefully, it's not a bathtub, but we're going to come back and it's going to be ratable. That's my feeling. That's a guess, Wade. And it may take 6 months or longer to get that utilization back up into the area of high 80s to low 90s. It's hard to say. I really don't have a good prediction for that. It is entirely U.S. economy-focused. I think as GDP grows, our volumes will grow and our utility will go up. You get into an area I'm just not very good at, which is predicting GDP. So I do believe we come back with the U.S. economy though and to a lesser extent the world economy, right? Because some of the products we do make go to—our customers send to Latin and South America as well as China.

Okay. Yes, I definitely follow you there. That makes sense. And then maybe just a quick follow-up, point of clarification. You mentioned that you've seen a bit of pickup in activity in recent weeks and was wondering if you could comment on what commodity types you've seen that improvement in.

Yes. For competitive reasons, I don't want to get too specific. But it's where you're seeing activity pick up, right? We're seeing refinery utilization go up and chemical plant utilization go up. I don't want to get too specific in terms of trade lanes.

Thanks, Wade. All right. We'll take one more caller, please.

Okay. Thank you. Our last question comes from Sanjay Ramaswamy with Bank of America. You may proceed with your question.

Hi. Good morning, guys. Thanks for taking my question here.

Good morning.

Good morning. So just to clarify, obviously the inland margins in 2Q were pleasantly surprisingly up 30 bps here in marine. Any way to quantify the impact of the down 15% in delay days on performance metrics here and maybe how we think about decrementals going forward?

Yes. No. Look, our margins were up in inland sequentially and year-over-year for that matter. And that was the cost-cutting that we put in. We do—when delay days go down, we do make more money on our contracts of affreightment. Contracts of affreightment, as we've described earlier, is going from point A to point B at x dollars a barrel. So the better the weather, the shorter that trip is. And then that leaves that equipment available to be used for a future move. I think in a low utilization environment, that's less valuable than it would be in a high utilization market, as you would expect. I mean that's very logical. So in terms of decrements and increments, it's hard for me to give you any real specific as to the impact on margins. Typically, in a normal year with seasonality, we do see a margin decline as weather gets worse. Even though utilization ticks up, we make a little less money on those contracts of affreightment. So for example, our fourth-quarter margin is usually a bit lower than our third-quarter margin. I think in this environment, that's hard to say. We're not—probably not getting as much benefit from the lower delay days in our contracts of affreightment just because there's so much equipment available to pick up moves. It really is not adding incremental moves if you follow what I'm saying.

Yes. No, that makes sense. That's handy. And just maybe shifting to D&S for my follow-up, I mean, you said you've cut headcount in the oil and gas business by about 60%, 65%. Can you just provide maybe a little bit more color on this restructuring that you mentioned? And maybe talk about in an environment where the U.S. rig count does sequentially rebound in '21, maybe from the lows of 250 to somewhere in that 300 to 400 range, how do you see margins potentially rebounding to positive territory here and maybe the cadence of the duration of that?

Yes. Look, we've cut the structure, as you would expect. We have multiple facilities. We've closed some facilities. We've consolidated some key resources into one area. We've obviously kept—we didn't cut off our leg. We did cut the fat off, but we didn't cut our leg off. We still have the engineering and design horsepower to continue to do business in the oil and gas space. We just recognized that it's not going to be the market that it once was. I mean we were at one point in the market, there were 450 frac spreads running in the U.S. market. I think at the low, it got down to about 50 frac spreads running. I think we're probably closer to 100. I'm looking at Eric here.

85 to 90.

85 to 90 is what he's saying. We saw some numbers from one of the key pressure pumpers that anticipated just to keep U.S. production flat, both on an oil and gas basis, you need about 200 frac spreads running. So there's a view that this market will come back and will end up adding these frac spreads back. I think the repair and replacement business will come back with that. But again, it's at a lower base. It's half the number of frac units out there that we had before. But it is a commodity-driven market. And if oil prices start to really pop, I'm sure that could change.

One thing we didn't add is we've also, of course, had to furlough a lot of people. And at the standpoint, these are people that has the activity—as the activity increases, we will just increase the hours. So we're ready when the activity increases.

Yes. Let me just add one thing, Sanjay, just since I think it's important to think about. We're going to see and we are seeing anything ESG-focused is really good. So as we do talk to our customers that are surviving in this downturn in the oil and gas sector, anything that has a good environmental footprint is really positive. A lot of our customers want to look at electric frac, e-fracs. They're looking at DGBs, which is dynamic gas blending, even gas turbines to drive frac equipment. Really, a real good effort by the industry, and I think this is broad-based from the investing world, a focus on carbon footprint. And so anything that has some ESG component that reduces the carbon footprint is getting more attention and more positive moves. And that's where people are going to be investing money. Now I would tell you, that's an expertise of ours. We've probably built more e-fracs than anybody else in the industry. And we certainly have converted a number of frac spreads over to dual fuel and gas burning to increase the amount of natural gas that can be burned on a frac unit. So that is one little sliver of good news in a pretty challenged industry right now.

That's great. Great color on that. Thanks guys.

Thanks, Sanjay.

Thanks, Sanjay. And thank you, everyone, for your interest in Kirby and for participating in our call today. If you have any additional questions or comments, you can reach me directly today at 713-435-1545. Thank you, everyone. Have a great day.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.