Good day, and thank you for standing by. Welcome to the Kirby Corporation 2024 Second Quarter Earnings Conference. At this time, all participations are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Kurt Niemietz, Kirby's Vice President of Investor Relations and Treasurer. Please go ahead.

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

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

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

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

Thank you. At this time, we will conduct the question-and-answer session. Our first question comes from the line of Greg Lewis at BTIG. The line is yours.

Yes, thank you, and good morning, everybody, and thanks for taking my questions.

Good morning, Greg.

Good morning. I was hoping you could provide more insight into the coastal segment. It seems like we are emerging from a prolonged downcycle. Given the current market dynamics and the fact that new equipment orders are sparse, how much of the strength in coastal is truly driven by rising demand? If that is the case, could you elaborate on it? Or is it a mixture of demand increase and some fleet adjustments? Also, considering your usual comments about inland and the economics of new builds, where do we stand in coastal regarding the kind of new build economics that would be favorable?

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

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

It's encouraging to see how Coastal is progressing, and it seems they have a promising future ahead. I have another question regarding the inland market. It appears that this market is evolving in line with the company's expectations, possibly even ahead of schedule. Recently, there have been discussions about the potential tightening of the natural gas market in the medium term. Considering the inland sector, pricing has been impressive. Can you break down how much of that pricing strength is attributed to refined products versus petrochemicals? I'm curious because we're observing excellent pricing across the board, but I'd like to know what the key drivers are.

Christian and I will cover that. Overall, as we come out of COVID, we've seen strong performance in refined products, with refineries operating at near full capacity. Although their crack spreads have slightly narrowed, the situation remains positive, primarily driven by demand. There has been some weakness in chemicals. Now, I'll hand it over to Christian, who is closely monitoring our product demand on a daily basis.

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

Super helpful. Thank you very much.

Thanks, Greg. Take care.

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

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

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

Thank you, David, for the information. For my second question, you've mentioned labor availability among mariners. It must be advantageous to be in a sector experiencing wage inflation. However, is this merely a case of inflation, or are there challenges that prevent you from delivering as much as expected due to a shortage of personnel? Or are we not experiencing that situation right now?

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

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

But it's not yet at the point where you feel unable to pursue any business opportunities; it's not quite at that level.

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

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

Right. All right. Well, that does it from my two. Appreciate it. Thanks, guys.

Thanks, Ben.

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

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

Good morning, Joe.

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

The cost of new builds remains very high, and the new build cost is approximately twice what it was five years ago. Therefore, prices must increase by 40% to make new builds feasible. As a result, there hasn’t been much new building activity, with an estimate of around 40 new barges for the year and only 11 delivered so far. There are also concerns about shipyard capacity due to rates that don’t support new builds. Additionally, companies are managing a significant maintenance backlog, which consumes a lot of free cash flow. The mariner situation is also quite constrained. Taken together, all these factors contribute to a reluctance to proceed with new builds. Christian, do you have anything to add regarding this?

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

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

Weather and navigation delays are the main challenges we face. The impact of each can vary from quarter to quarter. For instance, in the second quarter, we experienced significant lock outages due to maintenance. Additionally, flooding in Houston and the surrounding Texas area led to a 2.5-day closure of the Houston ship channel, which is quite rare. The situation worsened as the water level in Texas dropped, causing record delays at the Brazos River floodgates, with 80 to 90 barge tows waiting to pass. Weather is a critical factor, especially now that we are entering hurricane season. With the La Nina effect in play, we already have seen three named storms. Meanwhile, lock delays, outages, and bridge repairs can disrupt navigation. Fortunately, we've avoided significant issues on the Mississippi River this year, despite a brief period of high water that triggered our high-water action phase on the lower part of the river. Overall, while most river conditions have been favorable, maintenance, bridge repairs, and adverse weather events remain ongoing concerns.

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

Thanks, Joe.

Thank you for your question. One moment, please. Our next question comes from the line of Greg Wasikowski from Webber Research & Advisory. The line is yours.

Hey, good morning, guys.

Good morning.

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

We have a very sophisticated customer base that is well aware of the various cost factors at play. They are among some of the largest and most advanced companies globally and they certainly recognize the impact of labor inflation. They are also mindful of rising steel prices and are dealing with similar price inflation challenges as we are. This awareness is beneficial. They comprehend that capital costs have increased, for example, regulations like ballast water treatment, and they fully grasp those realities. Like any company, their sensitivity to pricing fluctuates based on their business performance; when things are going well, they are less concerned about prices, but when times are tough, they become more price-sensitive. Fortunately, their businesses have been performing well. What matters to us is their sales volumes; they may experience price declines but can still maintain good volume. Naturally, we hope they continue to succeed because strong earnings in our customer base are advantageous for us. In short, they are aware of the cost structure and acknowledge it.

Got it. Okay, understood. I want to return to new builds in inland rates. David, we've discussed this before, but let's focus on the headline rate for a 30,000 barrel tow spot rate and what that number needs to be for a return to make economic sense for people to start building again, moving away from speculation to pure economic rationale. It seems like previously, we were discussing rates around 10 or 11, and now that number is possibly inching towards 12, with some estimates going as high as 14. Could you estimate where that comes down to—a definitive number to monitor for that headline rate—where we might begin to see orders come in based solely on economics? Also, do you think there's a risk of that number continuing to climb as costs go up?

You're right. That breakeven rate isn't really breakeven; we aim for a double-digit return on capital, like around 10%. It's been increasing, likely approaching $14,000 a day now. Considering the capital cost for a two-barge tow is about $15 million, depending on the horsepower of the towboat, these costs keep rising. Operating costs have also increased, including labor and regulatory compliance costs. All these factors do have an impact. We manage around 2,500 mariners daily, which means significant expenses for airline flights, rental cars, and related costs. While inflation is easing, those costs are still going up. When you take everything into account, the breakeven cost for new construction has been gradually increasing. The bigger question is when will people start building? That's a concern, as some try to build ahead of demand. However, shipyard capacity is limited, and many are facing a maintenance backlog that's affecting cash flow. Additionally, borrowing costs have significantly changed. We’ll see if rates decrease later this year, but all these factors are keeping building in check, and we're quite a bit away from that new build price due to capital discipline.

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

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

All right. Thanks, Greg.

Thank you for your questions. One moment please. Our next question comes from the line of Ken Hoexter of BofA. The line is yours.

Hey, good morning. Just to follow up on that, I know you provided the breakeven number, but how are rates trending now? Additionally, ton miles were down about 5%, which seems a bit extreme. Christian, is that related to the lock shutdowns you mentioned, or is there something changing within the business? Thanks.

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

And Ken...

And considering the hurricane at the start of the quarter, should we anticipate any effects carrying over into the third quarter?

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

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

All right, I understand. Can you talk about the magnitude of the sequential increase? Can I assume that they continue to decline sequentially?

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

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

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

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

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

It's really just a matter of when shipments are made. The timing of certain power generation packaging affects this, nothing more than that. As we discussed regarding margins, it's important to consider it year-over-year for the entire year. The positive aspect is that demand is increasing rather than decreasing, and you'll see revenue fluctuate based on shipments, especially from our larger manufacturing facilities.

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

Thanks, Ken.

Thank you for your question. One moment, please. I'll go ahead and promote the next question. Our next question comes from the line of Scott Group with Wolfe Research. The line is yours.

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

Good morning, Scott. That would be the higher end of our expectations for next year, around 300 basis points, possibly reaching 400 basis points. Sequentially, I believe the third quarter will show improvement compared to the second quarter. However, the fourth quarter is uncertain, and we prefer not to project higher margins for that period. This is when weather conditions begin to affect us. Fog can be more problematic than a hurricane, as it prevents us from moving our equipment. In fog conditions, we can experience extended periods where our operations are halted in the fourth quarter. Therefore, we are cautious about fourth quarter margins, which typically decrease slightly compared to the third quarter. Christian, do you have anything to add?

No, I think you covered that well.

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

We haven't finalized our projections, but looking back at 2023, we were around breakeven. Much of that was influenced by ballast water treatment projects, which we've completed after the first quarter and wrapped up the last of them in the second quarter. This has resulted in increased uptime, leading to improved margins. In the fourth quarter, we expect the margin to decrease significantly due to several major projects we have ongoing. However, when considering the overall year-over-year outlook as we head into 2025, we aren't ready to provide specific guidance yet, but you should anticipate a solid improvement. While it won't be as much as 1,000 basis points, it could be between 300 to 500 basis points next year. Given the price increases we're experiencing, we expect to see a notable rise in margins for coastal operations next year.

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

Okay. And then just one last thing quickly. I understand all the questions about build activity. Do you have any visibility on whether orders are starting to increase either inland or coastal to begin the process? I'm not sure if you have any details to share.

We don't have complete visibility into every specific order, but the constraints on the shipyards' capacity are due to the reduction of some shipyards that existed before COVID, along with the labor challenges they are currently facing. Therefore, while we may not know every detail of the order book today, I can say with some confidence that the ability to build barges has decreased.

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

No, I totally understand. I'm just curious, do you think orders are increasing? For instance, could the 40 this year turn into 100 or more next year? I'm not sure if you have visibility into orders.

In the past three years, we've seen around 20 barges built in 2022 and another 20 in 2023. This means that with 40 planned for 2024, it does represent a year-over-year increase. However, these years have marked the lowest levels of construction we've experienced in decades. Even if we reach 40 or 50 barges per year, that still won't surpass the number of barges being retired. Currently, there are more than 500 barges that are 30 to 40 years old and likely to be retired soon. Much of the current construction is driven by the need to replace these aging barges. So, in context, this three-year period signifies the least amount of inland tank barge construction we've witnessed in a long time.

Yeah, and I would add that offshore is even more acute, right? As Christian said earlier, if you wanted to build an offshore unit right now, an offshore ATB, you wouldn't see it until the end of '27. But nobody is even contemplating building right now.

Helpful. Thank you, guys.

Thanks, Scott.

Thank you.

This concludes the question-and-answer session. I would now like to turn it back to Mr. Kurt Niemietz for closing remarks.

Thank you, Gerald, and thank you everyone for joining our call today. If there are any follow-ups, please feel free to reach out to me.

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