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Good day, and thank you for standing by. Welcome to the Kirby Corporation Second Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Matthew P. Kerin, Vice President of Investor Relations. Please go ahead.
Good morning, and thank you for joining the Kirby Corporation Second Quarter 2026 Earnings Call. With me today are David Grzebinski, Kirby's Chief Executive Officer; Christian G. 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; 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.
Thank you, Matthew, and good morning, everyone. Earlier today, we announced second quarter earnings per share of $1.67, up 11% sequentially and in line with the prior year quarter. Our results reflected solid execution across both our businesses supported by constructive marine transportation fundamentals, high asset utilization, and ongoing momentum in key distribution and services end markets. In marine transportation, customer demand remained healthy. Utilization levels were strong, and inland marine pricing continued to improve. In distribution and services, results benefited from continued demand growth in Power Generation and strong marine repair activity. Overall, our businesses performed well during the quarter, supported by healthy end-market conditions, disciplined execution, and our continued focus on operating safely and efficiently. In inland marine, market fundamentals strengthened during the quarter. This was supported by strong refinery utilization, increased refined product and crude-related movements, and healthy petrochemical activity. These factors combined with limited industry capacity additions supported barge utilization in the low 90% range. We continued to see positive pricing momentum during the quarter with spot market rates improving sequentially and term contract renewals increasing year-over-year. Notably, current spot market pricing has improved from recent lows in the fourth quarter of last year and has returned to levels last seen a year ago. You will recall that in mid-2025, a sharp reduction in heavy crude imports into the Gulf Coast, primarily from Venezuela, weighed on refining activity and related byproduct movements. Those conditions have since improved with Venezuelan imports now well above first-half 2025 levels. However, as previously communicated, rising fuel costs created a temporary margin headwind during the quarter. Although we expect this impact to reverse in the third quarter, as contractual recovery mechanisms take effect. Overall, the inland business delivered operating margins in the high-teens range, reflecting healthy demand, strong utilization, and improving pricing. In coastal marine, customer demand remained healthy during the quarter with barge utilization in the high 90% range. Market-specific dynamics affecting certain small-capacity articulated tug-barge units in the 80,000- to 100,000-barrel range resulted in low-single-digit declines in term contract renewal rates. However, overall market conditions remain favorable, supported by strong refinery utilization, strong customer demand, and limited availability of large-capacity vessels. Our coastal business delivered operating margins in the low- to mid-teen range, reflecting the impact of elevated shipyard activity as previously disclosed. Turning to distribution and services, our performance reflected the strength of our positioning across a diverse set of end markets. Segment revenues increased 6% year-over-year, supported by sustained growth in Power Generation and continued strength in our commercial and industrial business. Operating margins improved more than 300 basis points sequentially, reflecting a favorable mix including greater activity on behind-the-meter power solutions in our Power Generation business. In Power Generation, revenues increased 8% year-over-year with demand for behind-the-meter and backup power solutions continuing to be driven by durable secular trends. While demand remains robust, the timing of OEM engine deliveries continues to govern how quickly we can fulfill orders. In commercial and industrial, revenues increased 12% year-over-year supported by healthy marine repair activity and continued growth across several end markets. In oil and gas, revenues improved sequentially from the first quarter but were still down year-over-year as activity remains subdued despite modest improvement in market conditions from recent lows. Overall, the segment delivered solid results across the portfolio, demonstrating the strength of the company's market positions and the momentum in several key growth areas. In summary, Kirby delivered a solid second quarter, underscoring the strength of our operating model and the momentum we are seeing across both businesses. In marine transportation, inland performance continued to improve driven by pricing gains and healthy barge utilization, while coastal demand and utilization remained strong despite market-specific pricing pressure in certain areas of the fleet. In distribution and services, Power Generation remained a key growth driver; commercial and industrial activity performed well; and oil and gas showed sequential improvement from recent lows. Taken together, these trends reinforce our confidence in the outlook for the remainder of the year which I will discuss in more detail later in the call. But first, I will turn it over to Raj to walk through the segment results, balance sheet, and capital allocation.
Thank you, David, and good morning, everyone. In the second quarter of 2026, Marine Transportation segment revenues were $537 million and operating income was $88 million with an operating margin of 16.4%. Compared to the second quarter of 2025, total Marine Transportation revenues increased $44 million or 9%, while operating income decreased $11 million or 11%. The year-over-year decline in operating income primarily reflected the temporary impact of higher fuel costs before contractual recovery mechanisms take effect, as well as elevated shipyard activity in coastal marine. Compared to the first quarter of 2026, total Marine revenues increased 8% while operating income decreased 2%. Looking at the inland business in more detail, inland contributed 80% of Marine Transportation segment revenue, with average barge utilization in the low 90% range for the quarter. Long-term contracts—or those with a term of one year or longer—contributed approximately 65% of inland revenues, with 57% from time charters and 43% from contracts of affreightment. Improved market conditions resulted in average spot market rates increasing in the low- to mid-single-digit range sequentially while remaining down in the low-single-digit range year-over-year. Term contracts that renewed during the second quarter increased in the low-single-digit range year-over-year. Compared to the second quarter of 2025, inland revenues increased 9% while operating margins were in the high-teens range. Moving to the coastal business, Coastal represented 20% of revenues in the Marine Transportation segment with average barge utilization in the high 90% range, above both the first quarter of 2026 and the second quarter of 2025. For the quarter, the percentage of Coastal revenue under term contracts was approximately 93% of which approximately 100% were time charters. Renewals of term contracts were down in the low-single-digit range year-over-year due to previously mentioned market dynamics in the 80,000- to 100,000-barrel articulated tug-barge market. Coastal revenues increased 10% year-over-year with operating margins in the low- to mid-teens range. Coastal was impacted by elevated shipyard activity as anticipated and modestly lower year-over-year term pricing. With respect to our tank barge fleet, for both the inland and coastal businesses, we have provided a reconciliation of the changes during the second quarter as well as projections for the full year. This is included in our earnings call presentation posted on our website. At the end of the second quarter, the inland fleet had 1,034 barges representing 25.2 million barrels of capacity, and is expected to be slightly up in 2026. Coastal marine is expected to remain unchanged from the second quarter of 2026. Now I will review the performance of the distribution and services segment. Revenues for the second quarter of 2026 were $385 million with operating income of $38 million and an operating margin of 10%. Compared to the second quarter of 2025, Distribution and Services segment revenues increased by $23 million or 6% with operating income increasing by $3 million or 8%. This growth was primarily driven by continued strength in the Power Generation business and higher marine repair activity. Compared to the first quarter of 2026, revenues increased by $39 million or 11% and operating income increased by $15 million or 63% reflecting improved activity levels, favorable mix, and stronger performance across several end markets. Moving through the segment in more detail, in Power Generation, we continue to see meaningful order activity for behind-the-meter and backup power solutions for data centers and other industrial applications. This has supported continued growth in backlog. However, OEM engine availability continues to influence the pace at which demand converts to revenue. Overall, Power Generation revenues increased 8% year-over-year, with operating margins in the high-single-digit range. Power Generation represents approximately 40% of total segment revenues. In Commercial and Industrial, strong marine repair activity contributed to a 12% year-over-year increase in revenues and an 11% increase in operating income. The business represented approximately 50% of segment revenues and generated operating margins in the low-double-digit range. In Oil and Gas, activity improved sequentially during the quarter, driven by better demand for parts and services. Revenues increased 20% sequentially, and operating income increased 67% sequentially, although results remain below prior year levels despite the modest improvement we have seen in market conditions from recent lows. Oil and Gas represented approximately 10% of segment revenues and generated operating margins in the mid- to high-single-digit range. Now I will move on to the balance sheet. As of quarter end, we had $39 million of cash on hand and total debt of $1.04 billion with a debt-to-capitalization ratio of 23.1%. We ended the second quarter with $566 million of available liquidity. During the quarter, net cash provided by operating activities was $72.2 million and capital expenditures were $71.5 million. The second quarter included elevated working capital requirements, primarily associated with stronger business activity and the timing of collections, as well as higher fuel rebills in our marine business. We expect these working capital requirements to normalize during the second half supporting a meaningful improvement in free cash flow. With respect to capital expenditures, we continue to expect full-year capital spending to range between $220 million to $260 million. Approximately $170 to $210 million is associated with marine maintenance capital including improvements to existing inland and coastal marine equipment and facilities. Approximately $65 million is associated with growth capital spending across both businesses. For the full year, we remain on track to generate cash flow from operations of $575 million to $675 million. Our capital allocation strategy remains focused on maximizing long-term shareholder value, balancing disciplined investment in our businesses with consistent return of capital to shareholders. In the second quarter of 2026, we returned $59.7 million to shareholders through share repurchases at an average price of $142, and we have repurchased approximately $25 million to $29 million of additional shares quarter-to-date in the third quarter at an average price of $140. These repurchases reflect our confidence in the long-term earnings power of the business and our view that at recent levels, share repurchases represent an attractive use of free cash flow. At the same time, we continue to evaluate disciplined acquisition opportunities within our core businesses, particularly in marine, where we see the potential to enhance our service capabilities, drive fleet efficiency, and generate attractive long-term returns. Taken together, our balanced approach allows us to invest in high-return opportunities across our portfolio while consistently returning capital to shareholders. With that, I will now turn the call back to David to discuss our outlook for the second half of the year.
Thank you, Raj. As we look at the balance of the year, we remain encouraged by the direction of the business. Across our portfolio, we are seeing the continuation of many of the same tailwinds that supported our second quarter results, including healthy demand, solid asset utilization, and continued inland pricing improvement. While the broader operating environment remains dynamic, we believe our market-leading businesses and disciplined operating approach position us well for the second half of 2026. As a result, we have reaffirmed our full-year earnings per share growth guidance of 5% to 15% and currently expect results to trend toward the upper end of that range. Our confidence is supported by continued inland pricing momentum, the expected recovery of fuel cost timing impacts, healthy utilization across marine transportation, and improving second-half conversion of Power Generation backlog as OEM engine availability improves. In inland marine, we continue to see a favorable operating environment. Demand from refining and petrochemical customers remains healthy, supported by strong refinery utilization and steady petrochemical activity, while barge availability across the industry remains relatively tight and pricing momentum continues to build. With spot pricing continuing to lead term pricing, we believe the setup remains constructive as additional contracts renew through the balance of the year, particularly during the seasonally heavy fourth quarter renewal period. Together, these factors give us confidence in our outlook for the inland business. Overall, inland revenues are expected to grow in the high-teens to 20% range for the full year, although the fuel-related headwind in the second quarter may make the upper end of that range difficult to achieve. In coastal marine, underlying market conditions remain supportive with healthy customer demand and strong barge utilization. Overall, revenues are expected to increase in the mid-single-digit range for the full year with operating margin in the mid- to high-teens range, reflecting the impact of lower margins in the second quarter due to elevated shipyard activity and the market-specific pricing dynamics for the 80,000- to 100,000-barrel portion of our fleet. In distribution and services, growth in Power Generation and strong marine repair activity are expected to continue driving segment results. In Power Generation, customer demand remains exceptionally strong particularly for behind-the-meter power solutions serving data centers and other industrial applications. While OEM engine availability continues to affect the timing of customer deliveries, our backlog and customer conversations continue to support a strong multi-year outlook. Importantly, growth in behind-the-meter power applications also creates longer-term service and parts opportunities as our growing installed base begins to operate at higher utilization levels. Within commercial and industrial, marine repair demand is expected to remain healthy while on-highway activity remains constrained. In oil and gas, activity is expected to remain subdued but has modestly improved from recent lows. Overall, we expect segment revenues to increase in the mid-single-digit range for the full year with operating margins in the mid- to high-single-digit range. To conclude, we delivered solid second quarter results and remain well positioned for the second half of the year. Marine transportation fundamentals remain favorable, supported by healthy demand, strong utilization, and improving inland pricing. In distribution and services, Power Generation continues to be a key growth driver, while commercial and industrial activity remains healthy. Supported by our market-leading positions, enhanced service capabilities, fleet efficiency, and disciplined operating approach, we remain confident in our outlook and our ability to deliver toward the upper end of our full-year earnings per share growth guidance. Operator, this concludes our prepared remarks. Christian, Raj, and I are now ready to take questions.
分析師問答
Thank you. As a reminder, to ask a question, please press star one. To withdraw your question, please press star one again. And our first question comes from John Chappell of Evercore ISI. Your line is open.
Thank you. Good morning. Hey, good morning, gentlemen. David, last quarter you spoke to the potential for inland margins to exceed the last peak. Given what has been happening with the rate of change on both term and spot, what you are seeing from a demand perspective and also from a capacity add perspective, would you say that still holds? And if so, can you help with your path on timing? Is that kind of a 12- to 18-month return to those types of levels, or is it more of a prolonged kind of steady move higher?
Yeah. It is the latter, John. Right now, supply and demand are in balance and tight. Nobody's really building any equipment. We are seeing slow, steady increases — you heard low- to mid-single-digit increases. It is going to take a while to get up to the past peak in margins, which was about 28%. I absolutely believe we will get there. It is slow and steady. As you heard in our prepared remarks, we are set up for a good fourth quarter renewal season, and that will bode well for 2027. We just see that continuing. You will recall we had the maintenance bubble that rolled off last year. Well, that maintenance bubble is going to start again in late 2027 and 2028. So I think we are set up for a multi-year, slow march up. I would say this: newbuild economics are still about 40% away, so nobody is building equipment at these prices. So it should be a good, long five-year march up. I do not know exactly when we will hit peak margins, but it is set up for a good long run.
Awesome. That is great. Hate to ask about this, but have to. The Jones Act waiver: have you seen any impact either in coastal — I would imagine more in coastal than inland — from the waivers? And I guess maybe more importantly, from some of your contacts in D.C., do you have a sense for if the waivers will continue to be extended? Obviously, the war headlines change day to day, but as we approach mid-August with the potential for another waiver extension, anything you are hearing on that?
Sure. There has been no impact at all in the inland side, and just a tiny bit on the coastwise side. For us, we are pretty termed up and we do not have much exposure. Some industry participants have seen it. The waiver — there have probably been 150 non-Jones Act moves, maybe a little more. The vast majority, 85% plus of those, have had nothing to do with national security or homeland resilience; it has really just been traders making profits. We do not think the waiver makes sense. We understand what the administration is trying to do, which is trying to help the consumer, but frankly the Jones Act really does not add much cost at all — maybe a penny a gallon — so it is not achieving what I think the waiver was intended to do, which was to help prices at the pump. It is a blanket waiver, and that is what we do not like. We would prefer a specific waiver: if Jones Act equipment is not available, then sure, use non-Jones Act equipment. We certainly do not want to stand in the way of supporting the administration's goals. The waiver was extended another 90 days to August 16, I think, is the last day of the waiver. Obviously with the conflict in the Middle East and the Strait of Hormuz, the administration is considering extending the waiver. We are hopeful that if they do extend it, it will be a specific waiver. You could even see it being as specific as Gulf Coast to the West Coast, because the West Coast is where there may be a problem if there is a problem. We will see. The administration has not done anything yet; I know they are contemplating it. Our view is it should be a specific waiver rather than a blanket waiver. We have not really seen a big impact for Kirby. We have heard of a couple participants losing some contracts because of non-Jones Act equipment. So far, it is benign.
I think, secularly, Kirby has really been unaffected. Maybe some barrels on the edges, particularly in the offshore space. We are fully utilized at Kirby Offshore Marine. Between David and me, we've heard perhaps some ripples for competitors more exposed to the spot market. We have been in a good spot in our utility and our contract portfolio. However, the waiver does need to go away — if not alone for the benefit of the hardworking American mariner and the workforce that supports them. While we understand the intentions in supporting the war effort, the effect has not been as advertised. It is very difficult on the workforce: we are out there recruiting and retaining and trying to motivate mariners, and they see jobs being taken by foreign mariners. It is just not fair. So time for it to end. I got a little political there — sorry — but from a supply-demand perspective, we have not really felt it, but I think some competitors have felt pressure.
Yeah. Thanks.
Thank you. And our next question comes from Benjamin Mohr of Citi. Your line is open.
Hi, good morning, David, Christian, Raj and Matthew. Congrats on the beat and raise. Thanks for taking the questions. I wanted to see if we could discern the drivers behind your raise toward the upper end. Can you talk to rank and maybe kind of the impact on your rates on the marine side from the Venezuela heavy crude imports perhaps stepping up further, Calcasieu Lock, maybe a higher impact than what you thought before, crack spreads widening and maybe sustained longer even after an eventual end to the Iran war, and petrochem exports with you being part of the inland supply chain? And then on the Distribution & Services side, any impact from trucking capacity exits driving trucking spot rates?
Well, good morning, Ben. Let me start with marine and go to Distribution & Services; Christian can add specifics. We are comfortable with the high end of the range. We did not raise the low end because geopolitical dynamics could give a curveball. But we feel very positive as we enter the second half, and many of the things you mentioned are reasons. Venezuelan crude is up over 600,000 barrels a day from lows of around 200,000. Calcasieu Lock is coming into play; Christian can give color on that. Crack spreads are pretty much at record levels and our petrochemical customers are doing a little better. We are seeing good, solid demand in the inland space in particular. Given that and the lack of capacity additions, rates are going up — slow and steady; these are low- to mid-single-digit increases, which offset inflation a bit. Distribution & Services is similar: healthy demand for behind-the-meter power systems, which we like because behind-the-meter tends to run more and creates a service component that will grow after installations reach higher duty cycles. Marine repair has been very solid. So a lot of things are going right now and we feel really good about it. Christian, do you want to dive into crack spreads and Venezuela?
When I think about the items you referenced, they explain why PADD 3 refining and chemical manufacturing win globally every quarter: crack spreads, petrochemical improvement, Venezuelan crude imports, and Calcasieu Lock. All of those together represent why servicing PADD 3 is important and profitable right now. Crack spreads touched $16.09 a barrel, an all-time record high last week. Calcasieu Lock work continues and should wrap up around September 18. The lock closes daily from 7:00 a.m. to 7:00 p.m., creating some congestion on the Intracoastal Waterway between Texas and Louisiana. Right now they are working inside the gate, which is a bit more disruptive and typically requires an assist to get through the lock. We will see that increase in activity while the work continues, but it should wrap up in September. We always battle things like weather, locks, ice, or storms; these delays are part of the industry. Calcasieu is an issue today, but overall we are blessed to work in PADD 3 every day.
Thanks so much for the great insights there. What is assumed for your buyback and other income as part of your guide?
You have seen we have continued to buy back our stock—we were fairly aggressive in the second quarter. We like the stock price where it is and are happy to continue to buy it. Raj talked about using free cash flow to buy back stock when we do not have acquisitions. Free cash flow was a little lower in the second quarter than we expect due to working capital build, principally around receivables because business has been good. A big portion relates to Power Generation receivables and higher fuel rebills. As that working capital frees up, we will have more free cash flow and we are happy to buy back stock with it. We always prefer to do an acquisition or buy assets when opportunities make sense; they are hard to predict. In the absence of those, we are excited to buy back shares. In terms of our guidance, we do not include the benefits of the share buyback explicitly. Also, because share repurchases happen over the average for the year, their impact on this year's EPS guidance is less as you progress through the year, but they certainly matter for next year's EPS.
Appreciate that. Last one from me. You have noted the supply side is still very favorable with very low newbuilds. A concern is that it could increase eventually with a strong market. What is the range for the age of your fleet currently versus historical average, and at what age do you typically retire fleet?
There are two ways to look at this: barges and towboats. Our average barge age is about 18 years. We have roughly 1,100 barges, and they typically can run until about age 30, sometimes stretched to 35, but maintenance and upkeep make that less sensible. We are comfortable with our fleet age. Towboats can go roughly 35 years; the average age of our towboat fleet has come down a lot from purchases over the last three to five years. From an industry standpoint, pricing has to be about 40% higher to justify new capital deployment. We are not seeing justification for new builds right now. Christian can comment on shipyard capacity.
We think we have line of sight to about 60 barges being built this year. That represents pretty much replacement capacity for retirements. Construction remains very much in balance with current capacity. The economics simply do not work today. To build a two-barge tow—two new barges and a new boat—you are still roughly 40% below where you need to be to earn an adequate return. Shipyard capacity is somewhat reduced from the pre-COVID era; construction costs are high due to expensive labor and elevated steel prices. Many of the inflationary pressures that weigh on our transportation business—labor, paint, steel, electronics—remain high, so rates still have a way to go before newbuild economics make sense.
Wonderful. Appreciate the time and insights always.
Thanks. Thank you. And our next question comes from Bascome Majors of Stephens. Your line is open.
Thanks for taking my questions. David, I know there is not much you can say in specificity, but could you walk us through your thoughts on the high-level value creation for yourselves and shareholders from the Distribution & Services segment, including Power Generation? Specifically, what is the long-term thought process on capitalizable earnings when the aftermarket really starts to flow through? How do you balance that nearer term versus the interest in something that is growing heavily, along with any cash flow or tax leakage considerations?
Tough question but a good one. We always look at our portfolio and capital deployment. Over the years, Kirby has done many acquisitions across marine and Distribution & Services; we are always looking to add where it makes sense. What drives us and the board is shareholder value. We are very happy with our portfolio: the marine business is rock solid and Power Generation continues to exceed our expectations. There will be a significant service annuity that emerges from the installed base. We expect our Power Generation installed base to double in the next 18 months based on backlog and deliveries. Regarding backlog, we previously gave a range; to update you today, our new backlog range is $1.0 billion to $1.5 billion, and the majority of inbound has been behind-the-meter power, which is what we like because it runs more and creates long-term service opportunities.
When you look at the opportunity in the aftermarket, our data center and power service customers are looking for turnkey solutions to ensure uptime—downtime is the enemy. Chad Jost and his team are putting together an enhancement called Kirby Integrated Power Systems. We will be going after that aftermarket; we believe the CapEx cycle is strong now and in future years we can generate aftermarket value that exceeds the original product value. Data centers require uptime and create an outstanding service opportunity. We do this every day; we are just enhancing it with talented technicians and a focused management team. The job site for these techs will be the data center and we are going after that aftermarket opportunity to drive high-level value creation through the cycle.
Thank you both.
And our next question comes from Scott Group of Wolfe Research. Your line is open.
A couple things on pricing. Where are we on spot relative to contract in inland right now? Do you think we can accelerate out of this low-single-digit contract range? And on Coastal, is the Q2 issue with coastal pricing down related to the Jones Act waiver, or is this a separate issue? I want to understand what is going on in Coastal right now.
Let me take your Coastal question first. We have had four years of continuous rate increases at Coastal and what we called out is the normal ebb and flow of negotiation. We had a couple of units trade off their all-time highs; this is not a Jones Act associated issue or a broad price pressure event. It's normal renewal negotiation. Fundamentally, the fleet remains in a great spot and we are fully utilized. The rest of the fleet enjoyed rate increases year-to-date; this was just a slight tick down from all-time highs for a very small subsection.
We like the slow and steady approach into the heavy renewal season in the second half. We are constructive. While we would welcome larger increases, the market is what it is; slow and steady increases are easier to achieve and sustainable. We are not unhappy with slow and steady.
Follow-up on Coastal: what percentage of the market is this 80,000- to 100,000-barrel market? Is this temporary or are we at a peak?
When you break down the offshore fleet you have different sizes and classes. We compete against MR tankers in some lanes. The subsection we called out is roughly 20% to 25% of the market — the 80,000s and 100,000s. These trade refined products, many in the Northeast, which is a competitive part of the world. Changes in European imports that move around New York Harbor and the Northeast impacted these particular trade lanes. I would not read too much into these two renewals for the whole fleet; the rest of the fleet did enjoy rate increases year-to-date.
When we report rate increases they are simple averages, not weighted averages. We actually had a couple of items in the 80s that renewed higher, but the simple average made it appear a touch lower. It is likely temporary. No one is building capacity in the offshore side — even if they started now it would take roughly three years for delivery — so we are constructive on Coastal long-term. We do not like price declines, but this is the normal ebb and flow after multiple years of consistent increases.
If I can ask Raj one quick one: some years Q3 is higher than Q4, some years Q4 is higher than Q3. Any thoughts on the cadence of the back half?
Scott, I probably do not want to get into specific quarterly flows. What I will say is the second half is looking really strong with everything we are seeing. Pricing should continue to go up and supply dynamics remain favorable. If I could give a quick color: Q3 is probably better than Q4. Overall, we are very excited about the second half.
Thank you, guys. Appreciate the time.
Thank you. And our next question comes from Gregory Lewis of BTIG. Your line is open.
Morning. Christian, could you talk about the impact of higher diesel prices and the fuel pass-throughs? Diesel prices ripped about 30% in March and April. How should we think about the time lag for that? Is New York diesel a good proxy? How much of a headwind was higher fuel prices to Q2 results?
Gregory, we discussed this in the quarter. We estimate a $0.05 to $0.10 headwind to the second quarter from fuel timing. We expect to catch that up in the third quarter, as contractual recoveries come through. We work hard to make fuel a pass-through — we do not want to make money or lose money on fuel. Customers are generally best able to absorb fuel fluctuations; contract escalation and de-escalation clauses vary — some reset 30, 60, or 90 days. A few are longer. We buy the fuel and there is a lag to get reimbursed, but by and large we expect to come out neutral on fuel this year, and third quarter should be favorable as that working capital normalizes. Use Gulf Coast fuel prices as a better proxy for us since that is where we buy most fuel.
Sounds good. Thanks for the time.
Thank you. And our next question comes from Ken Hoexter of Bank of America. Your line is open.
Good morning. There seems to be a change in tone: the outlook jumps to the top end this quarter but you are also talking about five years to get to inland peak margins, which seems slower than previously discussed. Why has the thought process changed quarter to quarter? Is this a longer lead time to get to those peaks?
Maybe conservatism, Ken, and a realization from what we saw last year. We lost some pricing last year even when supply-demand seemed balanced — that was a surprise and it made us more conservative. Could it go faster? Sure. We would favor that. But slow and steady is still constructive for us and allows consistent free cash flow generation we can use for buybacks. The change in tone is really driven by what happened last year; we do not think that repeats but macro and geopolitical dynamics could create volatility. Fundamentally, things are very good across the businesses, but we are also still fighting inflation.
So what is leading to the improving outlook? Coastal seems to have some pressure in pockets; inland had a fuel headwind; Power Gen growth slowed to single digits year-over-year. What gives you confidence at the top end of your guidance?
Let me take each. I do not believe Coastal is at peak margins — I expect Coastal margins to exceed 20% in the coming years given tight markets and limited new capacity. The coastal noise is mostly a small subsection. Inland is improving; last year was the anomaly. Power Generation backlog is growing meaningfully, and while OEM deliveries constrain near-term revenue conversion, the inbound is behind-the-meter which creates future service opportunities. The inbound and the seasonal renewal dynamics set up favorably for the second half and 2027. We are not dour — we are excited about what is in front of us.
Thanks.
Thank you. And our next question comes from Gregory Wasikowski of Webber Research. Your line is open.
Good morning. On inland, curious about overall efficiency gains in the market over the years from asset performance, technology, AI, etc. Has that had a material impact on net demand or the rate of improvement in spot and term markets? Could that contribute to a flattening slope in price improvement?
Customers are using technology and AI to gain efficiency, but Kirby's value proposition already brings efficiency via scale, diversity of barge sizes, line-haul network, and horsepower optimization. We deliver efficiency every day through geographic footprint and broad cargo capability. There are technological improvements—Tier 4 engines are a bit more fuel efficient, electronics are better and safety has improved—but we have not seen a major reduction in demand for barges because Kirby already operates highly efficiently. So we continue to see strong demand for our services.
On the maintenance/redelivery schedule: with the next cycle coming in the back half of the decade, how should we think about that compared to the last cycle that impacted the market?
In 2027 to 2028 you'll have barges that are about five years older, so the intensity of shipyard work and U.S. Coast Guard majors will be higher. Barges will be in shipyards for longer periods and will require more steel replacement, paint, and other work. While you cannot predict everyone's subjective condition, you should likely see longer shipyard stays and therefore more consumed available days in that cycle.
Appreciate the color. Thanks.
Thanks, Gregory.
I am showing no further questions at this time. I would like to turn it back to Matthew P. Kerin for closing remarks.
Thank you, David, and everyone on the call for participating in our call today. If you have any additional questions or comments, please feel free to contact me. Thank you, and have a good day.
This concludes today's conference call. Thank you for participating, and you may now disconnect.