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Operator: Good morning and welcome to the Kirby Corporation 2024 First Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over today to Mr. Kurt Niemietz, Kirby’s VP of Investor Relations and Treasurer. Please go ahead.

Kurt Niemietz: Good morning, and thank you for joining the Kirby Corporation 2024 first quarter earnings call. With me today are David Grzebinski, Kirby’s President and Chief Executive Officer; and Raj Kumar, Kirby’s Executive Vice President and Chief Financial Officer; and Christian O’Neil, President of Kirby’s Marine Transportation Group. A slide presentation for today’s conference call as well as the earnings release, which was issued earlier today, can be found on our website. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliations of the non-GAAP financial measures to the most directly-comparable GAAP financial measures are included in our earnings press release and are also available on our website in the Investor Relations section under Financials.

As a reminder, statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management’s reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties and our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby’s latest Form 10-K filing and in our other filings made with the SEC from time to time. I will now turn the call over to David.

David Grzebinski: Thank you, Kurt, and good morning, everyone. Before we begin, I would like to take a moment to announce that effective tomorrow at Kirby’s Annual Meeting, Christian O’Neil will become Kirby’s President and Chief Operating Officer. In this new role, Christian will report to me as CEO and will be responsible for the day-to-day operations of both our Marine Transportation and our Distribution and Services businesses. With over 25 years with the company, spanning roles across various businesses, Christian brings a wealth of experience, a history of operational excellence and a strong customer-focused mindset that will benefit KDS and Kirby as a whole as we continue growing the company. I’d like to congratulate Christian on this new role and thank him for his many years of service at Kirby.

Christian O’Neil: Thank you, David. I’m humbled and excited to assume my new role, and I’m very optimistic about the future for Kirby. In all my years with the company, I can say that the market fundamentals we’re enjoying today are the most promising and on par with some of the best times we’ve experienced. I’m looking-forward to what lies ahead for us.

David Grzebinski: Well said, Christian. Now looking at our earnings, earlier today, we announced first quarter revenue of $808 million and earnings per share of $1.19. This compares to 2023 first quarter earnings per share of $0.68. Overall, both our segments performed well during the quarter, delivering significantly higher revenue and operating income year-over-year. The first quarter’s results reflected steady market fundamentals in both marine transportation and distribution and services. These were partially offset by modest weather and navigational challenges for marine and continued supply-chain constraints in D&S. During the quarter, we remained focused on operating safely and efficiently and delivered solid results even with these headwinds.

In Inland Marine Transportation, our first quarter results were modestly impacted by delayed days. Throughout the quarter, our operations were challenged by high winds, ice delays on the Illinois River, fog along the Gulf Coast and lock delays throughout the system. These weather and navigational issues slowed transit times and impacted the financial performance of our contracts of affreightment. Overall, delay days increased 22% compared to the fourth quarter of 2023, but were down modestly year-over-year. From a demand standpoint, customer activity was strong in the quarter with barge utilization rates running in the low-to-mid 90% range throughout the quarter. Market conditions remained strong due to continued customer demand and limited barge availability, coupled with inflation, which contributed to favorable pricing.

Spot prices were up in the low-to-mid single digits sequentially and in the 15% range year-over-year. Term contract prices also renewed up higher with low double-digit increases versus a year ago. Overall, the first quarter inland revenues increased 14% year-over-year and margins were in the high-teens. In coastal, market fundamentals remained strong with our barge utilization levels running in the mid-to-high 90% range. During the quarter, we saw solid customer demand and limited availability of large capacity vessels, which resulted in low 20% range price increases on term contract renewals and low 30% increases in spot market prices. These increases helped mitigate inflation, particularly with shipyards and partially offset the capital expense from the addition of ballast water treatment systems.

Our planned shipyard maintenance on several large vessels continues to wind-down and we brought back one large unit for maintenance in the quarter. Overall, first quarter coastal revenues increased 20% year-over-year and operating margins were in the high single to low double digit range. Turning to distribution and services, beginning this quarter, we are going to provide detail on D&S in three areas; power generation, commercial and industrial and oil and gas, where commercial and industrial comprises 43%, power generation 41% and oil and gas 16% of KDS revenues. We are doing this to appropriately reflect the significance of the power generation market to our growth. Our power generation market is made up of installation and service on new power generation units as well as standby and rental backup power equipment.

The fundamental strength of this market is driven by the incessant demand for 24/7 power from data centers and other industrial, financial, healthcare and retail customers. Power generation is a key driver of growth for distribution and services, and we are excited by the long-term outlook for this market. In total, demand was stable across our markets in D&S with continued new orders and high levels of backlog. In power generation, strong order growth drove a 42% sequential and 50% year-over-year increase in revenues with several large project wins from data center customers. In manufacturing, revenues were up 8% sequentially, driven by deliveries of previously delayed shipments and healthy demand for our e-frac and related products. In commercial and industrial market, overall demand remained steady across our different businesses with growth coming from the marine repair sector.

In summary, our first quarter results reflected continued strength in market fundamentals for both segments, despite weather and supply chain issues. The inland market is strong and market conditions continue to support higher rates. In coastal, industry-wide supply-demand dynamics are favorable, our barge utilization is good and we are realizing real rate increases. Strong demand for power generation and distribution and services is mostly offsetting weakness in oil and gas and to a lesser extent in some other areas. I’ll talk more about our outlook later, but first, I’ll turn the call over to Raj to discuss the first quarter segment results and balance sheet in more detail.

Raj Kumar: Thank you, David, and good morning, everyone. In the first quarter of 2024, Marine Transportation segment revenues were $475 million and operating income was $83 million with an operating margin of 17.5%. Compared to the first quarter of 2023, total marine revenues increased $63 million or 15% and operating income increased $40 million or 93%. Compared to the fourth quarter of 2023, total marine revenues inland and coastal together increased 5% and operating income increased 22%. As David mentioned, fog and high winds along the Gulf Coast produced a 22% sequential increase in delay days and negatively impacted operations and efficiency, while planned shipyard activity and weather impacted the coastal business. 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 slightly better than the utilization seen in the fourth quarter of 2023 and compares similarly to the first 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 62% from time charters and 38% from contracts of affreightment. Improved market conditions contributed to spot market rates increasing sequentially in the low-to-mid single digits and in the 15% range year-over-year. Term contracts that renewed during the first quarter were up on average in the low double digits compared to the prior year.

Compared to the first quarter of 2023, inland revenues increased 14%, primarily due to higher term and spot contract pricing and fewer delay days. Inland revenues increased low-to-mid single digits compared to the fourth quarter of 2023, despite unfavorable navigation and operating conditions. Inland operating margins improved by nearly 150 basis points, 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 20% year-over-year due to higher contract prices 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 high single to low double digit range, resulting from higher pricing and cost leverage.

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 first quarter of 2023. During the quarter, the percentage of coastal revenue with under-term contracts was approximately 96%, of which approximately 98% were time charters. Average spot market rates were up in the low-to-mid single digits sequentially and around 30% year-over-year. Renewals of term contracts were higher in the low 20% 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 first quarter as well as projections for 2024. This is included in our earnings call presentation posted on our website.

At the end of the first quarter, the inland fleet had 1,078 barges, representing 23.8 million barrels of capacity. On a net basis, with the newly-acquired barges we announced today, we expect to end 2024 with a total of 1,094 inland barges, representing 24.2 million barrels of capacity. Coastal Marine is expected to remain unchanged for the year. Now, I’ll review the performance of the D&S segment. Revenues for the first quarter of 2024 were $333 million with an operating income of $22 million and operating margin of 6.6%. Compared to the first quarter of 2023, the D&S segment saw revenue decreased by $5 million or 2% with operating income decreasing by approximately 3%. When compared to the fourth quarter of 2023, revenues decreased by $14 million or 4% and operating income decreased by $7 million or 23%.

In Power Generation, revenues increased 50% year-over-year as we saw a pickup in orders from data centers and other industrial customers for power generation and backup power installation. We also continued to see steady deliveries of natural gas-driven power generation equipment in the oil and gas space. Power generation operating income was up 45% year-over-year and had operating margins in the high single digits. Power generation represented 41% of total segment revenues. On the commercial and industrial side, steady activity in marine repair partially offset lower deliveries due to supply chain bottlenecks in our Thermo King business. As a result, commercial and industrial revenues were down 7% year-over-year. Operating income increased 11% year-over-year, driven by favorable product mix and ongoing cost saving initiatives.

Commercial and industrial made up 43% of segment revenues with operating margins in the high single digits. Compared to the fourth quarter of 2023, commercial and industrial revenues decreased by 13% as Thermo King supply chain constraints were partially offset by increased activity in marine repair. Operating income was up 28% over the same time 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 tampered demand for new engines, transmissions and parts throughout the quarter. This softness is being partially offset by execution on backlog and new orders of e-frac equipment. Revenues in oil and gas were down 43% year-over-year and 38% sequentially.

Oil and gas represented 16% of segment revenue in the first quarter and had operating margins in the mid-single digits. Now turning to the balance sheet. As of March 31, we had $75 million of cash with total debt around $1 billion and our debt-to-cap ratio remained below 25%. During the quarter, we had net cash-flow from operating activities of $123.3 million. First quarter cash flow from operations was impacted by a working capital build of approximately $30 million driven by underlying growth in the business. We continue to target unwinding working capital as the year progresses. We use cash flow and cash-on-hand to fund $81 million of capital expenditures or CapEx, primarily related to maintenance of equipment. During the quarter, we also used $41.8 million to repurchase stock at an average price just under $84.

As of March 31, we had total available liquidity of approximately $491 million. For 2024, we are on-track to generate cash flow from operations of $600 million to $700 million on 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 shipped in 2024 and beyond. With respect to CapEx, we expect capital spending to range between $290 million and $330 million for the year. Approximately $190 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 of free cash flow for the year. As always, we are committed to a balanced capital allocation approach and will use this cash flow to opportunistically 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 outlook for 2024.

David Grzebinski: Thank you, Raj. Both of our segments performed well during the quarter, delivering improved revenue and operating income, and our team executed well despite weather-related delays in the Marine Transportation segment and continuing supply-chain constraints in D&S. We continue to see favorable fundamentals as 2024 progresses and we expect steady quarterly earnings progression for the remainder of the year. Our outlook in the marine market remains strong for the full-year. Refinery activity is at high levels, our barge utilization is strong in both inland and coastal and rates are increasing across the board. In Distribution and services, we are seeing an uptick in demand for power generation, products and services, and we continue to receive new orders in manufacturing, both of which are helping to soften the inherent volatility of our oil and gas markets.

Overall, we expect our businesses to deliver improving financial results as we move through the remainder of 2024. In Inland Marine, we anticipate positive market dynamics due to limited new barge construction in the industry and many units going in for maintenance, combined with steady customer demand. With these strong market conditions, we expect our barge utilization rates to be in the low-to-mid 90% range throughout the year. Overall, inland revenues are expected to grow in the mid-to-high single-digit range on a full-year basis. However, I need to give the normal caveats. A potential recession along with a drop in demand could impact expected growth as could unexpected lock delays or low water conditions. That said, we expect operating margins will continue to gradually improve during the year from the first quarter’s level and average around 20% or higher for the full-year.

In coastal, market conditions have strengthened considerably 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 concluding, revenues for the full year are expected to increase in the high single to low double-digit range compared to 2023. Coastal operating margins are expected to be in the high single to low double-digit range on a full-year basis. In Distributions and Services, we expect to see incremental demand for products, parts and services in the segment. In commercial and industrial, the demand outlook in marine repair is strong, while on highway 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. However, you’ve heard us talk about supply chain issues. The bottom line is, if we could get more large engines, we would be able to package them into the power generation market given the strength we see. Engine supply, however, is constraining our growth here. In oil and gas, activity levels are lower, but seem to be bottoming. Our manufacturing backlog does provide stable levels of activity throughout most of ’24. We do anticipate extended lead times for certain OEM products to continue and they will contribute to volatility in delivery schedules, but we’re working through that. Overall, the company expects segment revenues to be flat to slightly down on a full-year basis with operating margins in the mid-to-high single digits, slightly lower year-over-year due to mix.

To conclude, overall, we’re off to a solid start in 2024 and have a favorable outlook for the remainder of the year. Our balance sheet is strong and we expect to generate significant free cash flow despite high levels of CapEx this year, and we expect to use the majority of that free cash flow for share repurchases or growth opportunities. We see favorable market continuing and expect our businesses will produce improving financial results as we move through the year. As we look long-term, we are confident in the strength of our core businesses and our long-term strategy. We intend to continue capitalizing on strong market fundamentals and driving shareholder value creation. Operator, this concludes our prepared remarks. We are now ready to take questions.

Operator: [Operator Instructions] Our first question comes from Ben Nolan at Stifel. Ben, your line is open.

Ben Nolan: Hi, guys. Appreciate it and good quarter. Well, I guess, well, first, congrats Christian on the upgrade here. And since you’re on, I’ll go ahead and ask you this one if it’s all right. As I look at the first quarter, I think it was a whole lot better than what I thought it was going to be like on the marine side. Normally we get 300 basis points, 400 basis points, 500 basis points of margin improvement moving into second and third quarter. If I put all of that together, my numbers come up higher than the $600 million to $700 million of operating income. Can you maybe walk me through sort of what – where the conservatism is on that or, I don’t know, just how to frame in what looks like a lot more acceleration than sort of is in the guide?

David Grzebinski: Yes. Hi, Ben, this is David. I’ll start and then…

Ben Nolan: Yes, whoever.

David Grzebinski: This is Christian’s first-call. We don’t want to scare him. No, in all seriousness, we talked about year-over-year. Again, as the quarters move around and we can have hurricanes, low water, lock delays, high water. The way we like to look at it is in ’23, going into ’24, we’re talking about a 300 basis point pickup in margins on average for the full year. Obviously, we’re off to a great start here. Part of that was a little better weather, but, I think the way to look at it is a kind of a full-year average increasing 300 basis points. I’ll let Christian give you some color on, kind of the inflationary and some other things that are headwinds. But I think the important thing, Ben, is this is multiyear. We’ve said that we could see a similar rise in ’25 in terms of margins and based on what we’re seeing in the market and kind of the supply-demand picture, we probably likely to hit ’26.

But I want to let Christian give you some more color on all the things that are happening in and around the margins.

Christian O’Neil: Yes. I mean a couple of items that, might justify a little conservatism is, there’s very high price of steel, shipyard inflation very high. David has referenced the maintenance bubble that the industry is experiencing in previous calls. That is real. There’s a lot of equipment going through major cycles. And add to that, tough labor inflation, just the cost of almost everything we do to feed and travel and crew the vessels. And there’s still a lot of pressure around the cost side that probably merit some of that conservatism. And then the unknowns, I mean, David referenced weather, hurricane season, lock delays and other things.

David Grzebinski: Yes. But Ben, I mean, we’re pretty optimistic. You’ve probably heard my comments, 20% or higher. It’s hard to, it’s hard to spike the football here in the first quarter, if what we mean.

Ben Nolan: Yes. I got you. Well, and then for – I guess for my follow-up, just to change gears a little bit. Appreciate the breakout on the power generation side, was curious about two things. First of all, when you did break that out, was it all-out of the industrial side of it or was a portion of it from the oil and gas side? And then along those lines, as we think about power generation going forward, is there any recurring revenue element to that or is it, you build and sell the equipment and then you’re done with it?

David Grzebinski: Yes. No, there is recurring revenue. But let me, let me start with your first part of your question. Yes, in power generation, just to – this, Ben, because you’ve followed us, but let me just expand for those that aren’t as familiar with PowerGen at Kirby. I mean, we’ve done backup power, whether it’s for the New York Stock Exchange or financial institutions or rental backup power for large retailers like Costco and Target and we also do it for like Tenet Healthcare and other places like that. But, that’s been typically – we’ve been doing that for decades. It’s standby diesel generated power. We do it for nuclear power plants, for example. What we’ve seen though is that it’s growing and particularly with e-frac, you saw that in the fracturing market that they can use electric frac and save a lot of money, particularly if they burn natural gas.

So that’s power generation. But that power generation that we can do on a well site, for example, can be sold into the grid. And many of our customers are not just focused on their oil and gas-driven power generation needs, they’re looking to sell us prime power or under the grid. So we are seeing a broad-based need for power. And it transcends oil and gas, it goes into industrials. Obviously, the data centers and AI are huge, but we’re seeing it in hospitals. We’re seeing it everywhere. Everybody needs power 24/7. Now, to your specific question, that 41% of our revenue in power generation, about half of that 41% is currently being used as power on frac sites. That said, it is expanding and those uses of that power generation are expanding.

Some of our customers are going into, not just standby, but to prime power generation and selling into the grid. So it’s exciting. As you heard in my prepared remarks, we could sell more if we could get the large engines. Some of the engine OEMs are just flat sold-out, but it’s really promising kind of the demand profile. Now in terms of recurring revenue, it’s everything you can think of. We do installations, obviously. We do maintenance and service. So we’re kind of a full shop. I would tell you that our strength in power generation is packaging. We are very good at packaging. We’ll take an OEM’s engine, package it for a customer’s specific application. We’re also very good at making things mobile and rugged. And we’re excited about it. We see a huge amount of opportunity here and we’re looking forward to growing it.

It’s been growing. Oil and gas, as everybody knows, ’23 to ’24, you can listen to some of our customers out there in the public space. They’re down year-over-year. Fortunately, we’ve had PowerGen to kind of offset a little weakness in oil and gas. Now, all that said about oil and gas, I do think it’s bottoming. We’re starting to see signs that it’s bottomed. Anyway, that’s a long rambling answer.

Ben Nolan: No, I appreciate all the color for sure. And I guess I better stop there with my two questions. So thanks and congrats again, Christian.

Christian O’Neil: Thanks. Thanks, Ben.

Operator: One moment for our next question you. Our next question comes from Sherif Elmaghrabi at BTIG. Your line is now open.

Sherif Elmaghrabi: Hi, good morning. Thanks for taking my questions. You got – I think last quarter, you guys talked about having 80 barges – inland barges offline at any one point this year. And so just to start, what’s the normalized level and are other operators going through a similar maintenance bubble?

David Grzebinski: Yes. I’ll start and turn it over to Christian. But yes, is the short answer. All the entire industry is going through a huge maintenance bubble, which will last at least for the next two years and probably into the third year. Yes, we’re probably – well, Christian has the details. I’ll let him chime in.

Christian O’Neil: Sure. Sherif, the maintenance bubble we’re referencing stems from the born on dates of the barges. Every five years, we’re going into major maintenance cycles. And, those built, 15, 10 and 5 years ago are coming around in a big way. We’re still in that range of 80-someth barges in the yard any given day. That gets better a little bit as we get into the rest of the year. But, on average, we’re hard to say because there’s some variation, but you’re in the 40 to 50. A fleet like ours is 1,100 – almost 1,100 barges is probably what you’re looking at on average.

David Grzebinski: Yes. But to be clear, all of our competitors are facing this. And yes, look, our customer base understands it. I think part of the kind of the margin answer for Ben is just the maintenance costs alone is a headwind to margins. Everybody is experiencing it. The shipyards are full. The shipyards have had labor issues, just hiring people and paying higher wages because they need them. So we are seeing, kind of the maintenance inflation plus just the strong demand for maintenance capabilities across the industry is part of that margin question. I know that wasn’t your question, Sherif, but I would just tell you that, every customer – every competitor is experiencing the same thing right now. It’s just a – it’s just an odd acute time for maintenance in our industry. But that’s very positive for us in terms of the supply-and-demand picture, right?

Sherif Elmaghrabi: Yes. But that wasn’t – you didn’t answer my question, but you segued very well into my follow-up question.

David Grzebinski: So I’m sorry, but what question did I miss? I’m sorry.

Sherif Elmaghrabi: No, you didn’t miss anything. You set me up for the second question. So I guess with the supply demand balance kind of improving and this big chunk of the fleet on the sidelines, does that introduce kind of more volatility into barge pricing? And then could we see some reactivations or like you said, because of the costs associated with it and the lack of shipyard availability, does that sort of stop more barges entering the company – entering the market.

David Grzebinski: I understand. Yes, that’s a good question. During COVID, there were a number of barges. We did it ourselves, but throughout the industry, a number of barges put on the bank just because during COVID, it didn’t make sense to maintain them. But I would tell you that by and large, almost all of the stuff that was put on the bank during COVID has now been reactivated. So I don’t think there’s a shadow fleet to use a word that to be reactivated. I think anything that could have been reactivated has been further. The price of new barges is still very high. It used to be 5, 6, 7 years ago, it was a couple of million dollars for a clean 30,000 barrel barge. Now what’s the price, Christian, $4 million?

Christian O’Neil: Yes, here $4 million, north of $4 million for a plain-vanilla clean 30,000 barrels.

David Grzebinski: Yes. So, to – prices to justify, new construction are still, 40% plus away. So we just don’t see any new building. People are busy trying to maintain their fleets, cost of money has gone up. So we don’t see a lot of new supply coming in. Demand is pretty solid right now. So we feel really optimistic. I think Christian and I have and Raj have been thinking, this, this has got three to five years to run.

Christian O’Neil: Yes. And Sherif, I would add, if you look at the last three years, we’ve seen the lowest amount of new construction activity within 20 years. So the last three years are the lowest we’ve ever seen. And consider you still have another 500 barges in the market that are over 30 years old that are candidates for retirement. So supply side looks pretty good going forward.

Sherif Elmaghrabi: Got it. Guys, I appreciate the color.

David Grzebinski: All right. Thanks.

Operator: One moment for our next question. Our next question comes from Daniel Imbro at Stephens, Inc. Your line is now open.

Unidentified Analyst: Hi guys, this is Grant on for Daniel. Thank you for taking my questions. Yes, at Coastal, you saw a pretty huge step-up in profitability in the first quarter, just kind of with a pretty full – a pretty wide full-year range for your margins at Coastal for the rest of the year. I was hoping maybe you could help us size up kind of the magnitude and cadence of the sequential improvement throughout the year in that segment as you continue to see your pricing renew higher? Thanks.

David Grzebinski: Yes. Sure. Thanks. Thanks for the question, Grant. Christian, I’ll tag team this one. Let me just start by – look, in kind of like we talked about the margin profile in Inland, the best way to look at this because of the way shipyards are and certain activities is kind of a year-over-year. In ’23, our coastal business kind of bounced along breakeven, couple of quarters, we made a little money. A couple of quarters we lost a little money. This year, we’re projecting high single digits, low double digits. So, that’s a 10% improvement in margins roughly just year-over-year. Why is that? It’s the same supply-and-demand story as inland. There’s, the industry is full. We’re all running 95 plus percent utility, demand is good.

I would say there’s an even longer outlook, positive outlook for Coastal because it takes three years to build something new and nobody is even contemplating building new right now. So, best case, you won’t see any new supply probably for five years. So we’re pretty bullish. Christian, you can probably describe some more about the pricing environment and what we’re seeing in coastal.

Christian O’Neil: Yes. Thanks, David. I think what you see in the pricing right now is the industry is trying to help offset the capital expenses that came with the ballast water treatment systems that we installed. For example, at Kirby over the last five years, we had to deploy just shy of $100 million to get our ballast water treatment systems installed. I think the industry as a whole is recouping that. Inflation is definitely a part of the rate story, and David explained it well. There is no new construction in the offshore space right now, and supply-and-demand is working well to help that rate structure.

Unidentified Analyst: Yes. Thanks guys. And maybe just back to power generation real quick. You’ve noted that the demand for the service has increased sharply. Just kind of curious what you’ve seen from a margin perspective, with the trend there over the last couple of years. And do you think you can see kind of continued sustained margin improvement as you scale that business or – and also, I guess, just on kind of the end-market side, is there a margin differential between the data centers and, maybe the frac sites?

David Grzebinski: Yes. Let me take the last one first. I mean, basically fracking has a little better margin profile and that’s because it has to be more rugged. It has to be mobile, whereas data centers are kind of a stationary non-harsh environment. So margins are a little better on the frac environment, power generation side. But that said, margins in PowerGen are kind of mid-to-high single-digits. With some scale, maybe we could, get closer to the high single digits, low double digits. But, inherently, a big piece of any power generation is the large, 3 megawatt type engine that comes from one of the big engine manufacturers. And those prices are pretty well-known. So it’s hard to mark-up, one of the biggest component pieces.

Where we’re able to capture margin really is in our packaging. That’s our strength, is packaging and making it customer-specific. And that’s where our margin is. Inherently, we don’t get much margin on the engine itself. It’s really everything goes around it. That said, though, we’re obviously, as volumes increase and we look at, some vertical integration, we would hope to bring margins up higher.

Unidentified Analyst: Thanks, David. Congrats on the quarter.

David Grzebinski: Thank you.

Operator: One moment for our next question. Our next question comes from Greg Wasikowski at Webber Research and Advisory. Your line is now open.

Greg Wasikowski: Hi, good morning, everyone. Christian, congratulations. Welcome to the call.

Christian O’Neil: Thank you very much. Much appreciated.

David Grzebinski: Good morning, Greg.

Greg Wasikowski: Yes. Good morning. I appreciate – David, appreciate your color earlier from Ben’s question on the PowerGen stuff. I wanted to follow-up on that, if I could, and specifically the data centers and the stationary power side of things. And I’m just – I’m curious how you think about the environment as it pertains to technology. So you got diesel gensets, batteries, hydrogen, combinations of all kinds of different alternative fuels and microgrids, et cetera, all at different price points and different levels of maturity. So I’m just, curious how Kirby is viewing and approaching that market within that context and kind of as an add-on, whether or not that’s an area of opportunity for you guys with respect to M&A, if that’s something that you’re paying attention to or not.

David Grzebinski: The short answer is, yes, of course, it’s an area for M&A. But, in terms of the technology, at data center, it’s generally standby power. They’re not running prime, they’re not generating power, generally speaking for their own use. It’s really just backup. So diesel, power – diesel-powered backup power is a good fit for that. That said, with natural gas, the operating costs of natural gas are cheaper. The problem with the data centers is, just getting the natural gas to the data centers. That said, obviously, with natural gas prices being cheap, everybody is looking for ways to burn natural gas. I think that is actually helping the prime power kind of efforts. People see that, if you can get natural gas cheap, you can generate power pretty cheaply and sell it to the grid at the right time.

So we’re seeing a lot of interest in that. We’re agnostic. We build anything. We’re, again, that’s our strength is packaging what the customer needs for their specific application. And I would just tell you that the variety of applications is enormous. You can imagine that a Walmart target has a different view of how backup powers could work versus, a fracker versus a data center versus, a Bitcoin mining shop. We try to be agnostic to it. Look, we’re excited about this space. We’re looking for ways to grow it. Obviously, there’s a lot of inherent growth, which is pretty much limited by, engine availability, but clearly, we’d be open to vertically integrating and adding some ability to add our share of wallet in terms of packaging.

Greg Wasikowski: Got it. And big pie out there for sure. I appreciate the color. Next one, pretty similar, and I think I’ve asked you this before, but can you talk a little bit about growth for the backup power? And I think I’m speaking mostly to the rentals or temporary. And I mean, I’m no meteorologist, but I keep hearing that, we’re on pace for hottest summer of the year and potential, worse than normal extreme weather for later in the year and who knows if that’s true or not. But, is that something that, Kirby, is that actionable for you guys? Is that something you can prepare for? And how does that play into ultimately like, growing that segment or does the, uncertainty of the weather kind of make that too difficult? How do you think about that?

David Grzebinski: Yes. No, Greg, we were all grinning here because you can imagine our marine fellows do not like adverse weather and hurricanes, but our power rental group loves hurricanes. And so we kind of have a smile on our face as we think about that because we hate hurricanes for all the right reasons in the marine business and from a, just the impact to people. But yes, we do rent a lot of large power and a lot of that power that we rent is kind of on a standby basis that, they pay a standby fee and then once it’s deployed in a hurricane situation or an adverse weather circulation, the rate goes up considerably. We have a fairly large power rental fleet. Last year, we expanded that a bit. I think we spent about $10 million in new capital to build new power generation.

We continue to build new power generation capabilities for rental. But, that’s a small part in terms of our power generation revenue. The bigger pieces are packaging for whatever application. Hopefully.

Greg Wasikowski: Okay. Helpful context. Yes, no, I appreciate it, guys. I’ll turn it over there.

David Grzebinski: Thanks. Greg.

Operator: [Operator Instructions] Our next question comes from Adam Rosowski of Bank of America. Your line is now open.

Unidentified Analyst: Hi, thanks. Good morning, Dave, Raj, and congrats to Christian. I’m on for Ken Hoexter today. Maybe just…

David Grzebinski: Good morning Ken.

Unidentified Analyst: Good morning. Maybe just starting with the inland spot rate momentum, trending up mid-teens, what’s your view of the base case for continued momentum here? And is it, fair to think that these could turn into similar levels of contract gains later in the year?

David Grzebinski: Yes. Look, we’re in a very healthy market that, as Christian said, this is one of the best environments we’ve seen in a very long-time. I would tell you that the good news is that spot rates are well-above term rates, probably 15% above term, which is what you want in a healthy market that, that, that way you have some ability to raise term pricing. That said, our customers are very sophisticated. They understand what’s going on with the maintenance bubble. They understand what’s going on with inflation and how we need to recover that. And it’s, I would say the rate momentum for term contracts should continue kind of like we saw, I think we said in our prepared remarks that year-over-year term contracts that renewed in the quarter were up double digits, low double digits. So I would suspect that go – I don’t know. Christian, you want to add anything to that?

Christian O’Neil: No, I think that’s well said. I think, the momentum we see is real. The pricing that the industry needs to get to, get to a replacement capital or the point where people are reinvesting again, there’s still – there’s still room to go. We’re seeing that in the spot market, and we’ll continue to press and try to cover our inflationary pressures with our term renewals as the year continues?

Unidentified Analyst: Great. Very helpful. Thanks. And then just on the barge addition in the quarter, you added 13 barges. Is this just private owners looking to sell more? Can you talk about how that transaction developed? And if there’s potential for any more down the road here?

David Grzebinski: Yes. I mean, periodically, we have various people that want to sell for various reasons. I mean it could be that they just have some excess equipment, they could have, some cash flow needs or whatnot. This is – we did several of these type last couple of years. We do them opportunistically. We’ve stepped into, shipyard contracts for people with – we’ll take – look, our ecosystem knows we’re a logical buyer and we get the opportunity to get them. I’ll let Christian talk to the desirability of what we just got. That is kind of a home-run.

Christian O’Neil: No, thanks very much, David. The opportunities to acquire two high-horsepower river linehaul class vessels is really fortuitous for us. We’re very happy to have them. They improve our fuel efficiency, our performance, our emissions footprint in our big line haul operation. And the 30,000 barrel barges and specialty barges, fit right into what we do and we’ll feather that equipment into the portfolio here in about the next 30, 60 days very easily.

Unidentified Analyst: Appreciate the time.

David Grzebinski: Thanks, Ken.

Operator: One moment for our next question. Our next question comes from Derek Podhaizer at Barclays. Derek, your line is now open.

Derek Podhaizer: Hi, good morning, David. I appreciate you letting me on the call.

David Grzebinski: Yes. Good morning, Derek. Glad to have you.

Derek Podhaizer: Thanks. Just wanted to ask about your outlook on e-frac pumping equipment. Your message being constructive on the power generation side. But could you talk to us about customer conversations ordering potentially additional e-frac equipment or potentially new customers that you’re speaking with looking to acquire some of the e-frac equipment, or do a leasing model? Just maybe some more thoughts and color on that.

David Grzebinski: Sure. I would tell you that it’s very active on the e-frac side. The – nobody is really building conventional fracs anymore. I think, I don’t know if it’s dead forever, but it’s hard to see people building conventional fracs going forward. I think some people have converted, and we were involved in converting a lot of conventional fracs over to DGB, dynamic gas blending units. And it’s really just about economics, right? I mean burning gas is so much cheaper than burning diesel, and electric takes it to the next level, right? I mean, you’ll see, not only is it cheaper to operate, you’re burning 100% natural gas, but the maintenance cost goes down for the operators as well. That’s not to say it’s simple equipment.

I mean, it’s just very sophisticated equipment. So it’s a long answer here, but we are seeing continued demand. And I would say, they’re not expanding the frac horsepower that it’s really replacement at this point. If anybody has got some old frac equipment that they’re going to cut up, they’re going to replace it with electric. So we’re seeing new demand. We’re seeing it from existing customers and potential new customers. And we’re pretty excited about it. We think we’ve got the best widget out there. Obviously, other people think the same. But, I would put our equipment up against anybody. It’s state-of-the art and we’re excited about it. We have done some leasing. I think we’re pretty happy with our lease portfolio and we’re not anxious to add to it.

Now, we’ve deployed quite a bit of capital in that space. But we are seeing a lot of activity and interest in electric frac.

Derek Podhaizer: Yes, I appreciate that. And do you think – are you happy with kind of your capacity cadence as far as ability to get X amount of e-frac pumps out per year? Do you see that expanding over time as more and more of the pressure pumping companies adopt to this, next generation frac equipment.

David Grzebinski: Yes. I’d love to give our manufacturing guys the challenge. I mean, I think we’ve got an evening shift. I’d like to go to 24/7 to expand. But, we’re supply-constrained more than anything right now. Yes, it’s the same, same type of engines that you see for power generation, right? I mean, we’re talking about natural gas resift engines, and they go, they generate the electricity on the well site and those same engines are being used as we talk about in other power generation activities. So we’re supply constrained more than anything. Again, if we could get more engines, we’d certainly take them.

Derek Podhaizer: Great. Thank you, David. Appreciate the color. I’ll turn it back.

David Grzebinski: Thanks, Derek.

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

Kurt Niemietz: Thank you, Amber, and thank you everyone for joining us today. Should you have any follow-up questions, please feel free to reach out to me.

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