Thank you for joining us, and welcome to the Kirby Corporation 2021 Second Quarter Earnings Conference Call. Today's program may be recorded. I would like to introduce your host for today's program, Eric Holcomb, Vice President of Investor Relations. Please proceed, Eric.

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, which 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 on Kirby's Form 10-K for the year ended December 31, 2020. I will now turn the call over to David.

Thank you, Eric, and good morning, everyone. Earlier today, we announced net earnings of $0.17 per share for the 2021 second quarter. The quarter's results were improved across both segments as the U.S. economy continued to rebound, the Gulf Coast petrochemical and refining complex recovered from Winter Storm Uri, and oilfield activity and spending ramped up. Overall, our activity levels increased significantly in both marine transportation and distribution and services, which led to a 13% sequential increase in total revenues and a material improvement in earnings. Looking at our segments, in marine transportation, the inland market experienced a strong improvement in demand with overall barge utilization increasing into the low to mid-80% range. The quarter started with some softness as many petrochemical plants 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 80s, and demand for refined products was steadily increasing as the U.S. economy reopened. As a result, activity in the barge markets started to ramp up nicely and barge pricing moved off the bottom. The inland market tightened further in mid-May when the Colonial Pipeline shut down, and many of our customers turned to barges for transportation and storage. In 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 a favorable shift in market dynamics. 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 in more than a year, and although it is still down relative to last year, term contract pricing pressure moderated. Overall, inland revenues sequentially increased 13% and operating margins recovered into the high single digits. In coastal, market fundamentals for the second quarter were largely unchanged with continued low barge utilization and few spot requirements. However, overall pricing remained stable during the second quarter. In distribution and services, we experienced continued positive momentum with improved activity levels, strong sequential and year-on-year increases in revenues, and operating margin 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 increased their spending levels. In manufacturing, incremental orders 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 in our oil and gas distribution business from major oilfield customers. In commercial and industrial, the continued economic recovery resulted in sequential improved demand in our on-highway businesses. Product sales in Thermo King also increased during the quarter. These gains were partially offset by sequentially lower revenues in 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 our segments experiencing improved activity levels and better financial performance. We expect to see this momentum continue in the second half of the year. In 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 you, David, and good morning, everyone. In the 2021 second quarter, marine transportation revenues were $332.9 million with an operating income of $18.5 million and an operating margin of 5.6%. Compared to the 2020 second quarter, marine revenues declined $48 million or 13%, and operating income declined $32.9 million. The reductions are primarily due to lower inland and coastal barge utilization and significantly reduced pricing in inland, partially offset by increased fuel rebuilds due to higher diesel 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 operational costs as we continue to ramp up our operations. During the quarter, the inland business contributed approximately 76% of segment revenue. Average barge utilization improved into the low to mid-80% range compared to the mid-70% range in the 2021 first quarter. Inland barge volumes increased sequentially as the U.S. economy continued to improve as the COVID-19 pandemic lessened and Gulf Coast refinery and chemical plant activity recovered from the effects of Winter Storm Uri. Barge demand also benefited from the Colonial Pipeline outage in May. Overall, these factors contributed to a 70% increase in ton miles compared to the first quarter. Long-term inland marine transportation contracts or those contracts with a term of 1 year or longer contributed approximately 65% of revenue, with 57% from time charters and 43% from contracts of affreightment. The significant increase in barge activity in the second quarter contributed to average spot market rates improving approximately 10% sequentially. However, average spot rates remained down approximately 10% to 15% compared to the 2020 second quarter. Only a few term contracts renewed during the second quarter, and average rates were down in the mid to high single digits. It will take time, as market conditions improve, for term contracts to renew at higher rates. 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 renew higher, we will see improvements in operating margins. Overall, during the second quarter, the operating margin in the inland business was in the high single digits. In coastal, our business continued to be challenged by weak demand for refined products and black oil. During the quarter, coastal barge utilization was in the low to mid-70% range, primarily due to weak spot market dynamics in the West Coast and Hawaii, where economies have experienced a slower recovery from the pandemic. Despite reduced 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 approximately 80%, of which approximately 85% were time charters. Coastal's operating margin in the second quarter was in 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 are included 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 an operating income of $6.2 million and an operating margin of 2.7%. Compared to the 2020 second quarter, distribution and services revenue increased $66.5 million or 42%, and operating income improved $20.3 million. Compared 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 condition across the U.S., which is raising demand for equipment, parts, and service in the commercial and industrial markets. In commercial and industrial, increased economic activity across the U.S. resulted in improved sequential and year-on-year demand for equipment, parts, and services in our on-highway business. Revenues in our Thermal King business were also higher. In power generation, activity increased year-on-year due to higher sales and installations following the pandemic, but was down sequentially due to the timing of backup power installations in 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 in the mid-single digits. In oil and gas, improving market dynamics and increased activity in the oilfield contributed to significant sequential and year-on-year increases in revenues and operating income. Our manufacturing businesses experienced substantial increases in deliveries of new pressure pumping and frac related power generation equipment as well as steady demand for seismic units for international markets. 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 in the low single digits. Turning to the balance sheet. As of June 30, we had $53 million of cash and total debt of $1.28 billion with a debt-to-cap of 29.1%. Since the Savage 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 expenditure of $24 million, free cash flow was $71 million. At the end 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 continued 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 an effective tax rate of approximately 27% in the third and fourth quarters. I'll now turn the call back over to David.

Thank you, Bill. The last 15 months have been challenging with weak markets, poor operating conditions, and declining financial performance. As economies reopened in the second quarter, we experienced a welcome increase in 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 result, we expect to see improvement in revenues and earnings for both of Kirby's segments. While we are very encouraged about the recovery, we are, however, cautiously watching the rising number of COVID-19 cases in parts of the U.S. and around the world just now. There is a risk that these spikes, which are already resulting in new lockdowns in 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 momentum will continue to build. Additionally, as many of you know, labor constraints across the industrial supply chain are creating delays in manufacturing lead times and other supply chains. It is possible that we could see some anticipated product sales or deliveries of our manufactured equipment delayed in the second half of the year. In the inland market, our outlook remains positive. As of today, our barge utilization is in the mid-80% range, driven by strong activity levels in the refining and petrochemical complex. Barring a significant step change in COVID, we expect barge activity should continue to increase during the last two 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 of new barges and barge retirements still occurring, we believe our barge utilization will increase into the high 80% to 90% range as the year progresses. This should support further improvement in spot market pricing during the second half of the year. Overall, in the third quarter, we expect revenues will sequentially improve with increasing demand and spot market pricing. Although we have some modest labor inflation starting in the third quarter, we expect operating margins to increase. As a result, we expect inland operating margins will be in the low double digits—around 10%—during the third quarter. We expect further improvement in revenue and margins for the fourth quarter, but results could be tempered by the normal seasonal weather disruptions. In coastal, we expect the market will recover slower with some improvement in barge demand during the remainder of the year. In recent weeks, 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 in 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 in the second half of the year, but still remain below breakeven in 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 in sequential revenue growth with improved operating margins. In commercial and industrial, we anticipate continued improvement in on-highway with further recovery in 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. In power generation, we expect increased backup power equipment sales and installations. And in our rental fleet, we should see some seasonal increases in utilization during the hurricane season. In marine repair, we expect a sequential reduction in revenues, primarily due to the harvest season in the dry cargo markets. In oil and gas, we believe current oil prices will contribute to continued increases in the rig count with incremental well completion 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 the remainder of 2021. In 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's portfolio of environmentally friendly equipment, including electric and dual fuel pressure pumping units and highly efficient natural gas power generation equipment for eFrac. We also are experiencing increased orders to remanufacture existing pressure pumping equipment. As a result, we anticipate increased deliveries of manufactured and remanufactured products in the back half of 2021. However, as mentioned previously, supply chain delays could result in some equipment delivery shifting between quarters and potentially into 2022. Overall, for the full year, our expectations have not materially changed for distribution and services. We anticipate significant year-on-year revenue growth of 15% to 25% with commercial and industrial representing approximately 65% of revenues and oil and gas representing the balance of 35%. We expect distribution and services operating margins will be in the low to mid-single digits for the full year, with the third quarter being the highest. In the fourth quarter, normal seasonality will likely result in some sequential reduction in operating margins. Before we wrap up, I want to briefly comment on two other matters. First, today we announced that Bill Harvey will be retiring as Kirby's CFO early next year. Bill has been an integral part of the Kirby team for the last four years and has helped to guide us through several large inland marine acquisitions and the integration of Stewart & Stevenson. Bill's contributions to Kirby's success and our financial strength have been significant, and he will certainly be missed. Additionally, earlier this week, we released our new 2021 Sustainability Report. This report represents another milestone in our ESG journey with new envisions disclosures for the full company as well as enhanced disclosures on safety, employee training, and governance. You can access our new report in the Sustainability section on our website. Now to wrap things up, although there is some uncertainty around COVID-19 and 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 in both segments. Most importantly, for the first time in 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 to 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, Mexico, and South America not fully open. As the world economy fully recovers from the pandemic and demand for liquids normalizes around the world, we are confident our inland businesses will regain pre-pandemic utilization levels in the 90% range, bringing with it improved pricing, earnings, and returns. In coastal, although market conditions remain challenging, continued retirements of industry capacity and a lack of any new construction will keep capacity in check and allow for a solid rebound once the U.S. economy fully recovers. And finally, in distribution and services, we have come a long way in the last year, with steady improvements in financial performance. Our distribution businesses have not yet fully recovered, and there is room for further improvement as we go forward. With more favorable oilfield fundamentals and increased demand for lower carbon solutions, 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 in the second half of the year and into 2022. Overall, we have made substantial progress during the last year in very difficult markets. We realigned our cost structure, expanded our product offering in distribution and services, 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 growth opportunities. Operator, this concludes our prepared remarks. We are now ready to take questions.

Our first question comes from Jack Atkins from Stephens.

Bill, I just want to say congratulations on your retirement.

I appreciate it, Jack.

So I guess maybe my first question here is regarding just how things are trending within inland. You mentioned you're currently running at about 85% utilization rate. Just be curious to know, are your customers giving you any indication for how they're expecting their activity levels to trend over the balance of the year? And how do you think that's 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 we are with spot rates relative to contract rates? Are spot rates back at or above contract rates? And if you could just sort of provide an update there, I think that would be helpful.

Sure. Yes, Jack, look, the inland trends continue to improve. We've - in the first quarter, we were down in the mid-70s in terms of utilization. We got to low 80s at the beginning of the second quarter and ramped up into the mid-80s. Then the Colonial Pipeline outage had a little spike, getting us up to high 80s, close to 90%, but then it started to taper off as Colonial came back online and better weather started to help transit times. So we did end the quarter kind of in the mid-80s. But the important thing is that 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 of 2020. So we kind of lapped that quarter. Those were higher prices back then, and contract pricing was down kind of mid- to high single digits. However, spot pricing was up in the double-digit range—around 10%. This puts spot pricing above contracts now, and that's what we need. We need that to stay above contracts. We need the customers to believe it's going to stay that way for a while, and then that contract portfolio will start to renew higher. That may take another quarter or two before we kind of lap contract prices and they start renewing higher. Margins improved as well; we went from low to mid-single digits in inland in the first quarter to high single digits. We'll be in double digits next quarter in the third quarter. The fourth quarter is going to be hard to say because weather can impact us a bit. But all the trends are in the right direction. When you think about customers and what's going on in the world right now, crude demand seems to be back. It's within kind of the 5-year historical trends. Crude storage is now below the 5-year average. TSA checkpoint data shows throughput has improved about 20% in the last quarter or so. Gulf Coast refineries are back in the 90% range. Chemical activity barometers are 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 right now. We are seeing some cases within Kirby pop up again and hearing about some spotty lockdowns. So it's hard to gauge that word cautiously, but all the economic data shows that things are continuing to move and open up. What we're hearing from our customers is that international and export volumes are still not there. They're probably 15% lower than they were pre-COVID. This all makes sense because Mexico, Latin America, South America are essentially in various stages of shutdown, Europe still really hasn't opened up, and India is responding with lockdowns. So domestically, things are improving, but the global economies are not quite back, and that's what we're hearing from our customers. All that said, it’s all looking pretty positive.

Well, that makes a lot of sense, and I understand the need to be a little cautious given the rise in COVID that we're seeing out there. So I guess for my follow-up question, David, as we think out over the next couple of years, I would be curious to get your thoughts on how you would expect industry capacity to trend? What's your expectation around net retirements for 2021? And given the rise in commodity prices and steel prices, where do you think rates would need to go to or maybe—if you want to think about magnitude of an increase from where we are right now—just to support building for replacement, much less thinking about building for expansion on the inland side?

Sure. Yes, thanks for that question, Jack. We think the order book is about 70 - between 70 and 75 barges, maybe a little less; I don’t think the actual count that we have is 72 barges for delivery this year. About half of them have been delivered. The first half were really all ordered pre-pandemic, and they just started delivering. New barge pricing is at an all-time high. If you look at the price changes from 2020 to 2021, a Clean 30, the price for a Clean 30 is now almost 40% higher than it was last year. Steel prices are driving a big part of that. Clean 30 now is probably $3.8 million. In 2018, just to reference that, it was about 2.5 million; in 2017, it was around 2 million to build a Clean 30. So steel prices have driven that up, labor to a 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 a little more palatable. So it’s pretty constructive right now. We don't see really a net add in terms of new barges, and in fact, what we saw with Colonial makes us feel pretty good about the unutilized overhang. For us to see the industry go from sold out in the Clean 30 market in just a matter of weeks really demonstrates how little overhang there is. I think a lot of that is due to the retirements that have occurred and the lack of new equipment coming in. And to be fair, a number of our competitors, including us, still have some equipment on the bank. From a supply and demand standpoint, it feels pretty good right now.

Our next question comes from the line of Ken Hoexter from Bank of America.

Great round out on the details, and congrats, Bill, as you enter the next phase of your career.

Thanks, Ken.

Dave, just a quick wrap up on one of Jack's questions there. But you noted the rates down mid to high single digits, utilization at 80%. What's the normal flipping point for those rates to be positive? Is it the mid-80s that do you need to get utilization into the 90s? And are there parties that are still pressuring rates in the market?

Yes. It's historically been in the mid-80s, but maybe it's moved up a little. Maybe it's got to be 87 or 88%. There's a key psychological piece too, and we've seen this. The customers got to believe it's going to stay there. So I think as the economy improves and this utilization hits the mid-80s, customers will believe it will stay that way for a while, which helps the pricing dynamic. We’re right there at that dynamic, and we're very encouraged. Spot pricing is now above contract, and we had a nice move. It was helped by Colonial, and I think what that did is it let the customers know just how tight we can get in a short period of time.

I thought 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 your supply-demand pricing dynamic?

Yes. The market is pretty much in balance now. I'd say in balance; I mean we're still kind of mid-70s utility, but some markets are less utilized than others. Again, I think the Atlantic Coast is better utilized than, say, the West Coast. But there's no new construction that we're aware of. No new barges are being built. In the coastal market, it takes a long time to get a new coastal tug and barge unit. That said, the Bushard assets are out there. You may have seen that they were sold out of the bankruptcy court. Somebody's going to have to sink a lot of money back in to get some of that equipment moving. So that's a slight overhang in the market. But as you heard in 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 market is more about refined products rather than chemicals, whereas the inland market is a little more geared toward chemicals. So we need to see the refined market continue to expand to soak up capacity, though the caveat is that the Bushard equipment may come back over a period of time. It takes several years for that equipment to return in any meaningful manner, given how much maintenance it will need.

Just last one, real quick. You mentioned the labor tightness. Is it tough to get labor now? I know you've had long-term employees, but is this - what's your - how are your training prices? How is it getting the guys on the water and your teammates on the water in this environment?

Yes. We're able to do it. We started our training school in January and been running classes ever since then, getting pretty good traction in hiring. Similarly, in distribution and services, we've been hiring mechanics. I wouldn't say it's easy at all, but we're able to get the employees. It's working, but it is getting tighter for sure. Right now, we're not short labor; we're able to crew everything and continue to add employees. We’re still running new deckhand classes in our marine business and still adding technicians both in commercial and industrial and in our manufacturing business at KDS, but we’re able to find them; it's just not easy.

The next question comes from the line of Jon Chappell from Evercore.

David, in one of your responses to Jack's question, you mentioned you're probably a quarter or two away from lapping contract pricing. So I assume that to mean going to year-on-year improvement. It's important, I think, maybe to understand the timing of your contract renewals throughout the course of the year. I mean, you said in 2Q 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 ask this because if you're still resetting those lower year-over-year in 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 of the year.

Yes. I would say the third-quarter renewal portfolio is about similar to the second quarter, but the fourth quarter will be heavier. Our fourth quarter is always a little heavier. The other three quarters are pretty similar, and you get a lot of fourth quarter renewals. Sometimes those fourth-quarter renewals get extended a little bit and end up closing into the first quarter, but we're generally a little heavier in the fourth quarter.

Okay. And based on where the market was in last year's fourth quarter, which was not quite at the depths but getting pretty close. And given the utilization trends that you pointed out, I know you said a quarter or two, but are you kind of cautiously optimistic that by the time we get to 4Q this year, at least we'll be back to breakeven if not a bit higher on the term pricing?

Yes, I would say that's fair. Everything seems to be headed in that direction with a caveat around the COVID situation. But you heard me rattle off some of those macro statistics, and so we feel like it's headed that way for sure and that feels right.

And in your closing comments, you mentioned realigning the cost structure of distribution and services, which is obviously something you've been working on for some time even before COVID. Can you speak to the cost structure at inland? Maybe some in-house power from acquisitions, maybe a bit more aggressive with trimming the fixed cost base because of the pandemic. And what you think that means for the pace of a margin recovery once you finally start to see that term in sight?

Yes. No, we've taken out SG&A heads kind of through the downturn; you'll remember '15, '16, '17 were downturns, and we took out quite a bit of SG&A overhead. Then we bought Higman, Cenac, and then Savage, which basically came with some shoreside support and overhead. We've basically taken that back out, and we're back down to where we were pre-all those acquisitions. We feel pretty good about the SG&A. I mean, you always want to improve it, but it feels pretty good. I do think our margins should have some more upside leverage given our fleet is larger, and when things start to move, that leverage should help push to higher margins.

And you can also just look across all company, and you'll notice SG&A from the second quarter to the second quarter is down about 9%. So there's a lot of activity last year marine, but that's incorporated to really focus on that.

I did notice that, Bill. Is that kind of sticky, so to speak? Do you expect it to stay at the second quarter level?

Yes, SG&A bounces around, but especially in the first quarter, but excluding the first quarter, which has some jumping around points, it's really the new level of SG&A for the company.

Our next question comes from the line of Randy Giveans from Jefferies.

Two questions from me. First, obviously, the oil and gas market, you mentioned still has a 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 as a result, is 3Q '21 set up to be that much better?

Yes. Let's talk about it. In our D&S business, we've got commercial and industrial as well as the oil and gas business. The commercial industrial was profitable, kind of in the low to mid-single digits—kind of mid-single digits if you will—in terms of margins. Oil and gas was still a little negative. The good news is we have good inbound. Our backlog is up pretty meaningfully. One of the things we're seeing is we've got a lot of new products. Really, if you think about electric microgrids and supporting the electric frac equipment and electric frac build-outs, we've got some new generation products. In that new generation products, the margins are really thin, and there's a lot of engineering and testing that goes on. So that's a long way of saying, yes, we believe the margins will improve in that business next quarter and certainly into 2022 as we deliver more and more of the eFrac and power generation support equipment for eFrac. Backlog continues to build. We continue to take new orders, and it's pretty exciting. I would say that all of our pressure pumping customers are very focused on ESG right now, which generally means more eFrac. There is some dynamic gas blending and dual fuel work, but the bulk of the orders we've been receiving have been in eFrac, and the new generation eFrac has basically some startup lower margins. I think we will be solidly profitable in the coming quarters around these new eFrac products.

Okay. And then a good segue with your ESG comments. Any updates on Jones Act, wind vessels, or LNG equipment? And then speaking of electric, right, from your oil and gas comments, a competitor of yours is building an all-electric tugboat. So is there any interest from Kirby to get into that as well?

Well, the short answer is yes to the last. We are starting to build a diesel hybrid electric towboat here in the Houston area; we'll try it in the Houston market. That all-electric vessel you're talking about is more for ship assist rather than pushing barges, which has a different load profile. We're constantly moving barges in the towboat industry, so ships are a little different, although they do move a lot of ships around. But on the wind, we got to be careful. We're under a couple of NDAs, 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; we just can't say a whole lot more than that, Randy.

All right. We'll be waiting. But hey, Bill, sad to see you go, but obviously enjoy your retirement.

Well, thanks so much, Randy.

Yes. Let's be clear. Bill is going to be around for a little bit longer. It's not until the first part of '22, but his golf game needs the help.

Our next question comes from the line of Ben Nolan from Stifel.

I wanted to get back to something that you sort of touched on, I think it was on Jack's question initially. And the idea is effectively on the term and contract pricing. Where would you say that we are right now relative to sort of mid-cycle levels? And then to Jack's point, do you think those mid-cycle levels have moved up at all as a function of steel inflation 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?

Yes. Well, let me take your last part of that question first. With barge pricing for a brand-new clean 30,000-barrel barge being $3.6 million to $3.8 million, in order to get a return on capital on that, that's got to be materially higher. We're talking for two barges to kind of north of $8,500 a day to get double-digit IRR. So the short answer is yes. With the cost of price of new equipment and the higher labor and cost inflation, and by the way, we are seeing food inflation when we do crew transport—whether it's renting cars or flying—we're seeing those costs come up; hotel costs are also increasing as we need to put crew members in hotels before they crew on. So we are seeing some inflation, and that labor and cost inflation, and the cost of the equipment inflation should drive higher mid-cycle pricing throughout the industry to recover any kind of capital.

And maybe going back relative to the 8,500 that you mentioned, I mean, how should we think about where we are at the moment?

Yes, I'd rather not talk directly about where market pricing is now. If you looked at, I think, OTR, and there are a couple of other people out there that can talk about market pricing, I think my attorney would kick me if I started talking about direct pricing on the call.

All right. 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. I was just hoping that maybe you could flesh that out a little bit? I mean, are there any specific areas, or how big of a headwind is that? Is it on the margin, or is it substantial?

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's a fair component of chips and control mechanisms in that; anything with that has seen a little delay. Has it gotten acute or anything with us? No, not yet, but it's something we're watching closely. The other things are cast and forged parts, and we're seeing a little backup on that. But I would say it's all on the margin right now.

Our next question comes from the line of Greg Lewis from BTIG.

David, I was hoping you could talk—I mean, clearly, things are starting to line up for distribution and services, at least on the oilfield service side. Could you talk a little bit about how utilization has moved up in the pressure frac fleet? Like, what is the situation? How are you thinking about what's on the sidelines? What type of status is the equipment in? Is there an opportunity there where we're going to have to do rebuilds like we've done in previous cycles, or is it more along the lines of, hey, a lot of that stuff has kind of seen its time and it’s going to be more of a shift toward the eFrac, which you've been touching on?

Yes, it's probably closer to the latter than the former. I would say there's a lot of installed equipment out there that is still functional and can still be remanufactured and have quite a bit of life left in it. We're seeing a little bit of that come back now. But I would say any new capital is definitely directed toward eFrac. That said, maintenance and maintenance capital—the economics are still good. If you've got these fleets and traditional diesel-driven fleets, it still makes sense to remanufacture them. We're just not seeing a lot of it, to be honest. Essentially, most of the new orders in period have been ESG-related. As we get tighter, that dynamic will change, and we'll see more remanufacturing. Will it be as significant as we saw in 2011? I don't think so, Greg. I think it feels, rightly or wrongly, a lot more capital discipline. Many of the private companies, in particular, there’s not as much capital available. And if there is capital, the lenders want to see an ESG focus moving forward. All that said, I still think reman makes sense, and we'll see more reman than less as we go forward. It's just been pretty thin now. We're starting to see more of it, but it’s still kind of early days in that area, in my opinion.

Okay. Great. And then just one more from me. And you touched on refining utilization, which 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 in that plus 90 market to kind of help tighten the coastal market? I mean, it seemed like back in '17, it dropped below 90 for a few months. Is there any way to track that and think about coastal really improving?

I think that's the right thing to look at. I would caution you in that, in the last 1.5 years, about 5% of the refining capacity was either shut down or idled. So yes, we're back up above 90%, but that's on a lower base. It was about 1 million barrels, roughly, plus or minus a little bit — 1 million barrels of refining capacity that’s been shut down and idled. Now we've seen some good signs recently, which healthy issues refiners have come back online, so that's coming back. But as you think of refining utilization, you've got to factor in that about 5% of the total complex was shut down. We need some of that to be restarted. The other interesting thing is rather than restarting that, we're seeing more biodiesel and renewable diesel. Particularly if you take soybean oil and make it into diesel, that's going to be barge moves most likely coming out of the Midwest as they make renewable diesel. So we're monitoring all that. Does renewable diesel help the coastal market? Maybe, we've actually had coastal units move some renewable diesel. We're watching it. But again, we're still at lower levels, and I think we need some of the export market to come back and some of those refineries that have been idle to come back to really make a dent in the coastal utilization.

Okay. Great. Bill, hoping to catch up with you in early October.

Very good. Thanks.

Operator, we're going to take one more caller.

Certainly. Your final question then for today comes from the line of Bill Baldwin from Baldwin Anthony Securities.

Good to hear nice comments and better business outlook. I'm interested, and once you can talk to us about regarding your new natural gas power generation equipment, particularly as you focus on the industrial markets. I mean, you talked quite a bit about the power generation; I think you utilize now more in your eFrac equipment for the oil and gas markets. And that sounds like interest is definitely expanding and broadening out as far as the user base is concerned. In the industrial markets, what's your go-to-market strategy there? What markets are you really focused on? And can you just shed a little bit of insight and color on that?

Sure. Yes. Well, I'll tell a little bit more on eFrac before I go into the commercial and industrial power generation. In eFrac, Stewart & Stevenson started making its first generation eFrac back in 2013, which was all around the gas turbine driving electric drive. The newer kind of generation that everybody is excited about is using natural gas power generation engine packages from CAT or MTU to develop electric power with, say, 10 natural gas power generation engines on a microgrid on a well pad. There's also an element of having backup energy storage there so you can run all the natural gas generation equipment at its peak efficiency and take them on and offline correctly. When you start to look at the commercial market, it's more one-off rather than big microgrids that generate huge numbers of megawatts. What we've seen is much more standby backup power. We have a power generation rental fleet from which we get a lot of business during hurricane season. The big-box stores will put us on standby in case there’s an outage. I think as you've seen with the Texas storm, which took out a good part of the grid and some of the challenges in California with the electric grid, businesses are looking more and more at backup power. We're trying to capture parts of that market with our OEMs that we represent; the engine manufacturers. That’s how we're operating. We're a distributor, as you know, Bill, for a number of people, and 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 been working to get into backup power for big financial institutions to a lesser extent in Florida for some of the healthcare, nursing home, hospital-type backup power. It'll be interesting to see if the grid gets more utilized and electricity becomes more critical as electrification occurs across both the passenger car market and other markets. We are trying to position ourselves strategically. I would say we are working to couple backup power with our energy storage system, i.e., our battery system, so that there's a situation where you can charge the battery, and you'll always have backup power and not need as much in terms of diesel to drive backup power. Maybe there are coupling opportunities with solar on certain rooftops of commercial buildings. Those are all areas we're exploring. There’s nothing to put in the model yet for that market, but that's what we're looking at and pursuing from an ESG standpoint.

All right. Well, we'll 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 713-435-1545. 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.