Good morning, everyone. My name is Eric Holcomb, and I am the Vice President of Investor Relations here at Kirby. Thank you to everyone here in Channelview, as well as online, for joining us. With me today is Christian O'Neil, President of Kirby's Marine Transportation Group, and several key leaders on Christian's team. Also here are Joe Pyne, Kirby's Chairman, David Grzebinski, Kirby's President and CEO, and Bill Harvey, Kirby's Executive VP and CFO. Before we begin, please be advised that today's presentation contains forward-looking statements. These statements reflect management's reasonable judgment with respect to future events and 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 Form 10-Q for the year ended December 31, 2017, and our recent filing on Form 10-Q for the quarter ended March 31, 2018. I will now turn the presentation over to Christian. Christian?
Thank you very much, Eric, and welcome to all of y'all to the Kirby Marine Transportation Group portion of our 2018 Analyst Day. My name is Christian, as you just heard. I humbly serve as the President of the Marine organizations. I wanted to take a moment to introduce some other members of our team who are here today. And if you guys don't mind standing up, and gals, as I call your name, these will be the folks that are with you all day. We'll be in your pocket. We'll be here to answer your questions, and we'll be shepherd you around our training center, which we're very proud of Jim Guidry, who you guys met last night, is our Executive Vice President, Vessel Operations.
Mel Jodeit, Executive Vice President of Marketing and Sales in our Inland Marine Group. Craig Tornga is Vice President, Vessel Operations and Engineering at Kirby Offshore Marine. John Hallmark, Vice President of Sales and Strategy at Kirby Offshore Marine. Todd Behlke, Vice President of Vessel Operations at Kirby Inland Marine. Taylor Dickerson, Project Manager at the Marine Companies, and I don't take any credit for this slideshow. Taylor should take the credit. She did a great job putting this all together. So there, there's other members of the Marine group here, but. Those are the, those are the ones that I knew were gonna be here. Amongst the seven of us, there's 166 years of marine transportation experience, many of that here at Kirby.
If we add the legendary Bill Harvey and the legendary Joe Pyne, we could probably tack on another century to that. So there's a lot of experience in this room. I don't know if it's that much, though, of course. But there's a lot of experience, and we're here to answer your questions today. So whether it be technical stuff about the marine business or about, you know, kind of the markets and things we're in every day, we're happy to help you, and you've got the right group of people to answer your questions thoroughly. I'm gonna walk through the slide deck here today that we prepared, and at large, you know, from a, as we back away, it'll give you a good overview of our marine companies, our operations.
We'll give you some color on where we are in the cycle, and ultimately, what we think differentiates Kirby from the other marine companies we compete with. The slide deck is great, and I think you'll enjoy the deeper dive than probably just the typical roadshow. There's some pretty good detail we'll go into today. But I will consider this day a success if you leave with an appreciation of the culture of Kirby. And what I mean by that is in your interactions today with our employees, when you see the details on how we maintain our equipment and our facilities, and the pride, the humble pride you'll detect when you interact with our employees, I think you'll get a good feel for what really is the true differentiator of Kirby, and it's the people, and it's the culture.
We're focused on safe, reliable customer service. We focus on doing the right thing and having flawless operations and execution, and we do this all wrapped in a blanket of extreme capital discipline that you guys know and understand from following Kirby over the cycles. I hope those tenets shine through today, and we're happy to have you. So without further ado, I'll jump into the presentation here. This first slide is pretty much an overview. As you guys know, Kirby is the leader in the industry, well-positioned for continued growth. Some of you all are very familiar with Kirby.
You've been following us for years, but for some of you who may be a little newer, we operate on the inland waterways of the United States, the Atlantic Coast, Pacific Coast, Gulf Coast, the Great Lakes, and we also service Alaska and Hawaii. We're principally in the business of moving bulk liquids, but we do have some divisions that move bulk products, primarily coal and some project cargoes. Kirby's fleet is large and diverse, large and diverse. We account for 27% of the inland market. That's measured by the number of barges in the market, and 25% of the offshore market capacity, that's measured by barrel capacity, and we'll talk a little bit more about those in detail later.
Yesterday, just anecdotally, I pulled the number of barrels that we moved in calendar 2017, and I think this will give you another touch point for the scale and scope of what we do at Kirby every day. We moved 277 million barrels of product in the inland companies last year, and we moved 121 million barrels of product in the offshore companies last year. That is a lot of liquid. We're fortunate to operate under the Jones Act, or as I like to call it, the Merchant Marine Act of 1920. This bipartisan law supports the promotion and maintenance of America's merchant marine.
The important concept of cabotage rests in that, in the Jones Act, and that requires shipping in the U.S., between U.S. ports to be performed by U.S. flag vessels, owned by U.S. citizens. In times of war, the Merchant Marine can be an auxiliary fleet for the Navy, and it's proven itself more than capable, as it's been called on, from times, from the Revolutionary War, all the way to the recent operations in the Middle East. And a lot of the mariners that work for Kirby are able to go, when in need, step up and perform a duty for their country. Barges are also environmentally friendly.
I used to do a presentation when I ran one of our divisions called Osprey Line, and it had a picture of a big locomotive just chugging black smoke, and it was probably from the, you know, turn of the century kind of locomotive. I gave a speech, and I was talking about the environment benefits of barge versus rail. One day, I had a rail guy in the audience, and he raised his hand and said, "Christian, that's not what our locomotives look like anymore." However, I will tell you that the rail industry does generate about 30% more carbon dioxide to move the same freight we do. When you think about on-highway transportation, it generates about 1,000 times more emissions than barge transportation. So it's an extremely green, friendly way to move product.
As you go around today, and you get on the ship channel, you're on the Observer, you'll see our barges, and you'll be able to tell a 30,000-barrel barge from a 10,000-barrel barge. And when you think about that, and you look at that barge, that barge represents 144 tank trucks, or in rail cars, it represents 16 rail cars. So, great, efficient way to move freight, and think I made that point. Next. So here we are. We're blessed in this country to have 12,000 miles of navigable waterways that link the heartland of America to the world. You can go from Saint Paul, Minnesota, down to New Orleans or Houston or Pittsburgh to those locations. It's an incredible network of rivers, truly a world-class network of rivers.
Regarding our inland infrastructure, when you think about the opportunity set for Kirby, more than 22% of domestic petroleum and petroleum products are moved by barge. That's a lot. Beyond the inland rivers, we operate, as I said, on the coasts, the Great Lakes, Hawaii, and Alaska. Next slide, Taylor. So what drives our revenue? We tend to think about our equipment and our fleets and our business around the products that they move. A lot of the disciplines in our company, particularly in Mel and John's group on the sales floors, may be divided by products. You've got guys who are really experts at certain products and focus on those markets, and that's kind of how we look at it from a high level. There are four major groups. One of those is chemicals.
Much of this is the feedstocks that go into the manufacturing of plastics, textiles, other manufacturing, gasoline blending. Black oil, which represents the viscous, heavy, bottom part of the barrel, goes into bunker fuel for ships, asphalt for road construction, things like carbon black that make tires. Refined products, fuel for vehicles, home heating, for those of you from the Northeast, although I think a lot of that's done with natural gas now, but still, still a lot of home, home heating, No. 2 oil business that we do in the Northeast, and jet fuel. We also move agricultural chemicals, liquid-based fertilizers, primarily.
The growth of the corn industry and the ethanol subsidies have resulted in an increase of demand for products we move, like ammonia and UAN, and I'll go more into that detail on those markets in a bit. But just at a very high level, that's kind of the products that we're moving and touching every day and kind of, you know, how they impact the economy of the country. So I want to move and talk about our coastal division first. So pictured here, if you go back a slide, Taylor, this is one of our modern ATBs, a 185,000-barrel articulated tug barge unit. So when you look at this, and you note, it looks like a ship, doesn't it?
One of the great things about it is that it performs like a ship. Because of its bow, because of its structure, because of the engineering, we're able to achieve ship-like speeds. We're able to weather the sea state, much like a ship. And, these units very much have the characteristics of a ship, but they have the benefit of being a tug barge unit. The tug can come out of the notch if needed, and the crew component is structured such that it is cost competitive when compared to a ship. Go ahead, Taylor. So Kirby is the largest coastal operator by barrel capacity. That's the blue bar on this graph. There's another carrier who owns more barges, more hulls than us.
However, their primarily, or many of their units are in the smaller 30 to 50,000-barrel trade lanes. We sort of define this market as we look at Kirby's, Kirby's niche is 195,000 barrels and below. As you can see in that set, we have significant considerable market share. But when I look at this slide, I also see the opportunity for growth and the potential for future consolidation. Thanks, Taylor. I really like this slide because it shows the kind of breadth of our offshore operation. We've got a diversified product mix. We've got a growing and black oil, chemical and black oil niches.
You'll note when we entered the offshore market in 2011 with the acquisition of K-Sea, we were heavily dependent on the refined products market, which can be a homogeneous, easier to carry type of product. But over time, with some acquisitions, some new construction, we were able to diversify the fleet, and we grew our presence in the chemical and black oil niches. These are typically higher-margin products. They require special equipment, special expertise, and quite frankly, our offshore group has done a phenomenal job of establishing a reputation with our customers as really being known to be experts at handling those niche cargoes and those specialty cargoes. We enjoy that reputation. So we're in a good position at Kirby Offshore Marine, even though it's been a difficult market.
I know David, when they talk on the quarterly calls, you get a good flavor for those markets. And it has been difficult, but we have the scale at Kirby Offshore Marine. We have the diversity. We're in multiple geographies. We've got strong niche positions in black oil and chemical, and we're very comfortable in this 195,000-barrel and smaller space, and I'll touch on that a little bit. So you have the medium-range tanker market, which I'm sure some of you all follow, and some of your other marine stocks or companies you may be investing in. And then you have that set kind of right below that, which is where we like to operate. It's kind of our sweet spot.
By doing that, we're able to access terminals, ports, fleets, different docks at different refineries that are made for smaller pieces of equipment, barge docks, per se. And we don't necessarily have to compete exactly for the infrastructure that the MRs are focused on, or the long leg trade lanes that the MRs really built successful for long-haul crude, long-haul gasoline, those types of moves. So we really like, and are intentionally in, the size sweet spot where we are in this 195,000 barrels and below. We're also leading the effort to rationalize the market. There's a lot of equipment out there that got built. There's a lot of older equipment that needs to go away, and I think Joe referenced it well last night.
We're leading that effort, and we're leading it by design, and it's good for the market. And others will follow suit, are going to have to follow suit. But not only does this right-size the market for us and help with supply and demand, but this is gonna significantly decrease our future CapEx needs at Kirby Offshore Marine. I think that's important for you all to take away and understand that today. So next slide, Tim. So where are we in the cycle? We are at the bottom, it feels like, but conditions are definitely slowly improving, and we're starting to see the green shoots, and we're starting to see some opportunities. John and his team have been able to recently achieve som pricing increases. And over the last four years, it's been hard, though, with you know, margins.
Op margins have decreased 30% and you know we've seen stability in some recent spot markets. The MRs, which I referenced earlier even though we're not directly tied to that market, some of you guys may follow that. They're enjoying rate increases in the realm of 20% right now, on some recent fixtures as a data point. But despite a challenging rate environment, 80% of our revenues still flow from term contracts, and I'm very pleased to tell you and John and your team did a great job, we have renewed every term contract for 2018 in this portfolio at Kirby Offshore Marine. The chemical and black oil markets are not overbuilt. We still enjoy a very strong position in these markets.
But one of the things that the downturn has done is it forces us to go to the Kirby playbook, which is managing one thing that we manage really well around here, and that's cost. You know, none of us enjoy doing what we have to do sometime around cost. But to give you an example, in Kirby Offshore Marine, if you were to look at our costs a year ago to where they are today, we've brought our costs down approximately 14%. And this isn't consumables like fuel or rope or line. This is G&A-type costs, wages, other costs that are gonna help when this thing turns and are gonna help put Kirby Offshore Marine in a position to come out the chutes when the market gets a little better.
We see some good things happening. We see the Brent and WTI spread blowing out. We see MRs migrating out of clean markets back into crude oil long-haul markets, and there's more right-sizing coming for the fleet. Additionally, we're gonna enjoy a little help from the government in the regulatory realm, which is the promulgation and the necessary installation of ballast water treatment systems. So that began in earnest in January of 2018, and we'll go through the next five years. And those pieces of equipment that come into the shipyard for their cycles are going to be required to make the capital investment, either to put ballast water treatment on or not. And that's gonna help accelerate the retirement of a lot of our competitors' equipment.
Talking to that in a bit more detail here, you know, I won't go into this slide unit by unit, but, I think what you see here is a pretty clear line of sight on the tonnage that's gonna exit the market in the next few years. We're gonna do our part, but we also see some other carriers that, you know, we think will have to make those same decisions, and that's gonna bring us back to balance.
And, you know, I think in total, we're looking at 4.5 million barrels of capacity that you can actually pretty much see the bull's-eye painted on and realize that the rational owner, you know, is not going to reinvest in this equipment at this age and with the CapEx you're gonna need to do. This is an interesting slide, a bit of a painful slide, but I think when I look at this slide, I see where we can go. At least that's what I like to look at, and I know David's gonna hold me to, and our team, to getting these margins back to where they were in the top of the cycle, 2014.
But I think the other interesting thing to take away from this is that we, you know, at Kirby, with our balance sheet and our capital discipline, and our understanding of the markets, and our relationships in the markets, there's opportunities for us. And we took advantage of that when we entered the market, the timing thereof, when you see the acquisitions in the blue boxes. And, you know, I think what you see now in this part of the trough, when you go to the further right on the X-axis, is you see, you know, us reinvesting. And, you know, Joe talked last night about the new construction. We delivered two new boats on the West Coast. We have six more under construction in the Gulf.
We delivered four new ATBs, similar to the picture I showed you earlier, best-in-class, modern equipment with all the bells and whistles. We're investing countercyclically, and that's what we're able to do at Kirby, and that's one of the things we've really done well at Kirby over the years. And while, you know, it's not a blue acquisition, you know, down there in the trough at 1Q18, it's heavy investment in some organic growth that that's gonna replace some equipment we have, and it, it's really investing at the right time of the cycle. We got a really, really good deal on the stuff we're building right now. Shipyards are very hungry, and I think that's gonna pay big dividends for us over the life cycle of that equipment.
So let me leave you with some of the differentiators for Kirby Offshore Marine. You know, we successfully have leveraged our relationships and our reputation on the inland side. And when we entered the business, we bought some really good legacy companies, but we were able to high-grade the customer portfolios in all of those companies. And we were able to do that in part by our reputation and our relationships that we've joined the inland side. So we're high-grading the Kirby Offshore Marine portfolio. We're building new equipment, and we're in some nice niches that I talked about a little bit earlier. So, and again, we're looking at this business, and Joe used to always say it, you know, we look at this thing as if we're gonna run it in perpetuity.
You know, we're making decisions today, even though we're in a negative margin part of the cycle, that are for perpetuity, for the long, the long run, and that's where the value is in Kirby. So let's talk a little bit and shift to our groundwater operations, our inland operations. As in the offshore market, we are the largest tank barge operator. We still see a lot of potential for opportunistic growth in this market as well. Today, we're operating over 1,000 barges, 302 boats. 70% of the revenue in the inland marine space is under term contract, and 50% of that is time chartered units that are paid for every day.
A lot of stability here, but also a lot of opportunity for further consolidation, as you see the other players that are listed on this graph here. Our inland fleet is extremely flexible. Scale matters in this business, and you'll get a sense of that when you get on the Observer, and we go look at our fleets today and some of our operations. If you're a customer and you call Kirby, there is a much higher chance that we have the right bottoms with the right equipment in the right location. We can save you money. We don't have to clean your barge. And guys, we capitalize this on every day in the spot market. It is absolutely an advantage of our scale. We have our own cleaning facility. We have our own fleets.
We leverage our infrastructure, we leverage our geography, and we're a one-stop shop. If you're a globally major oil integrated company, and you want to call a marine company who can handle everything from the very lightest end that you move to the heaviest part of the bottom of your barrel, that's Kirby. And there's not many, if any, other of our competitors that can do that. We also leverage our flexibility in our towboat fleet. And the way we manage horsepower is a tremendous competitive advantage as well. We have a large cadre of charter boat owners that we manage as if they were our own boats, and I'll talk more about this model lately, but there's a great slide that sort of demonstrates how we're able to manage horsepower through the cycles, and I'll talk a bit more about that.
This is a pretty busy slide, but it's got a lot of great information. I think it's an awesome slide. When you look at this, let me just give a brief description. The X-axis represents the number of barges in the industry. The Y-axis is the year, the date. Below the Y-axis is Kirby's share by number of barges in the inland industry. The red trend line is the age of our fleet, and the gray boxes represent the downturns. So when you look at this slide, what you see here is a company that was able to reinvest in the downturns, and over the last three, the three that have probably been the most prominent in my career, we've been able to do that.
You look at the first downturn, 2001 - 2003, we were able to acquire Union Carbide, Dow's captive barge fleet, Exxon's captive barge fleet, and SeaRiver, and one of our competitors, Coastal Towing. You look at what happened in 2009, and although it wasn't an acquisition, again we leveraged Kirby's balance sheet, and we took a long-term view, and we chose to build in 2009, when no one else was building barges, really, not very many others, and we built 50 barges countercyclically. And then you look at where we are today, a lot of activity between 2015 and 2018, and I'll talk a bit more about a couple of these acquisitions later. But again, I think history will show that these were well-timed good value opportunities to consolidate and grow the business.
But I really think this is one of the things Kirby does well, and, you know, I think we're timing these acquisitions here, 2015- 2018, quite well for the cycle. So, you know, we're. We talked a little bit, I guess, last night about the petrochemical build-out and shale gas revolution, and the opportunities that lie there within. What I wanted to do is sort of zoom down and maybe, you know, highlight a few of the what we see as new volumes that are coming to the waterways, and those are some of the products shaded in green. There's no doubt that the benefits of the shale crude condensate, and cheap natural gas are impacting our volumes in a positive way.
And I know several of you were, when we were talking last night at dinner, were curious about kind of where those opportunities lie, or how do you define those opportunities? And I'll do it for you at a high level with these subsets of cargoes. These are cargoes that, you know, methanol goes into formaldehyde, acetic acid, MTBE. It's in your windshield washer fluid. You know, it's a good solvent. We're seeing tremendous growth in that market. You know, propylene, ethanol, ammonia, glycol, all volumes that we're seeing, and we're seeing some of these come from sources that we've, you know, new customers, new facilities.
These are barrels that historically haven't been part of the opportunity set, and they're there today, and we're working very hard, Mel and John Hallmark and their team, to capitalize on those. And we track all the projects very closely. Y'all have probably seen our IR slide that has all the projects and the capacities and, you know, we're very tuned in. We're watching it closely, and we're excited about, you know, what cheap natural gas means to particularly the Gulf Coast, but even other places. And additionally, you know, when crude gets right and Brent and WTI blow out, there's opportunities to move some incremental crude barrels and, you know, that's been something we've seen be a bit fickle.
It comes and goes, but when it comes, it can come in some pretty significant volumes. Okay. So as I pointed out in the offshore markets, in the inland markets, we also enjoy a diversified product mix, and one of the things we are heavily focused on is the petrochemical part of the barrel. We've got the molecules surrounded at Kirby Inland. Again, we're moving the heaviest, most viscous products you can produce in an oil refinery, and we're moving the very, very lightest light ends that come out as pressurized chemicals or LPGs. And, we've got a great mix, and, you know, we're seeing the growth in the pet chem that I just referenced in the last slide, with the promulgation of cheap, cheap natural gas and the opportunities that it provides.
Again, trying to put some color around the petrochemical build-out, you know, this is one visualization that we found from one of our consultants of how it affects key products that are in the Kirby portfolio. This slide is not all-encompassing of all the products that we're seeing growth in, but it's a pretty good sample set. You know, I'll point you particularly to the bottom, lighter blue bar, you know, in the methanol piece. We have been participating in a very significant way in the methanol growth that's going on in the United States right now.
Again, I think this what I like about this slide as well, is it only goes through 2022, but I think you heard David reference last night, you know, as we, as we talk to our customers, and we get out and we visit with them, you know, you're starting to see what I guess has been sort of tagged as the second wave of pet chem build-out. And, you know, you look at Exxon and SABIC's recent announcement down in Corpus Christi, what they're planning down there, and some other projects that are being talked about, it does certainly start to feel like there is not just this set of product, but there's a you know second wave, and some would even argue there'll be a third wave. So again, what does that mean?
That probably means sustained growth, sustained advantage manufacturing for the US Gulf Coast, for the US Petrochemical Market, and Kirby's gonna participate in that in a big way. What I want to do here is discuss two sort of models we use in the inland market, and if you didn't get enough video with Creedence Clearwater Revival this morning, we're going to hit you with some more here. But we operate in two modes. One is the unit tow model. It's similar to a taxi cab, nonstop transit, dedicated boat, dedicated barges, go wherever you want, you own the unit, and it's quicker delivery. But we also, at Kirby, have the scale and the mast to operate a very efficient and powerful line haul model.
We're one of the only liquid carriers that operates a dedicated line haul model in the Gulf of Mexico, along the Intracoastal Waterway, from Baton Rouge to Mobile to Corpus Christi, even to Brownsville. So what that means is we're able to offer the benefits of the line haul model, which essentially, at its core, is lower cost. It is a slower delivery, but certain customers look at it as floating tankage. Certain customers look at it as, it's so reliable and timely, and it's on a fixed schedule that they can afford the slower transit times. You'll see, the first video we're gonna queue up, and there's gonna be three of them, is gonna be a line haul tow transiting from New Orleans to Baton Rouge, and you'll see them building tow in New Orleans.
You'll see them dropping barges at various docks along the Mississippi River. This is the same evolution that takes place at Kirby every day, departing Baton Rouge to the Ohio River, the Illinois River, the Upper Mississippi River, and then along the Gulf Intracoastal Waterway. We're one of the only ones that do that on the Gulf Intracoastal Waterway. So you can share freight, you can share the cost of a boat with six other shippers, and we're one of the only people that do that. The second video you'll see is the Canal Line haul tow, which is what I just referenced. You'll see them in Bolivar, Texas building tow and departing for Baton Rouge. Then finally, you'll see a unit tow up on the Allegheny River, making a lock.
So without further ado, I guess we have some more videos to queue here. Is that right?
If you're from St. Louis in the city, working for the man every night and day. And you're never lost in Mississippi, yeah, riding by the way. Jamie might have been. Busy and keep on burning. Down there and keep on burning. Rolling, rolling. Rolling on the river. Seen a lot of faces in Memphis, on the dock days down in New Orleans. But I never saw the good side of the city, till I hitched a ride on a riverboat queen. Busy and keep on burning. Down there and keep on burning. Rolling, rolling, rolling on the river. Rolling, rolling, rolling on the river. If you come down to the river, and you're going to try to see who you. You don't have to worry, they are running. Deeper on the river, I've been still. Busy and keep on burning. Down there and keep on burning.
Rolling, rolling, rolling on the river.
So, I haven't told you about the new high-tech fast tugboats we've come up with. As you can see, they're very effective. Those videos are great. One of our captains is very talented. He's got a whole library of these, and we all enjoy viewing them. One of the things I want you to take away or what you should take away from those is kind of the flexibility of the horsepower and what we were doing in those videos.
What you saw there is us taking the power unit, the higher cost piece, which, on this slide here, we kind of lay out some economics of, a broad range of what it might cost to build a new boat or might cost to build a new barge, depending on the bells and whistles, and sort of the operating costs that flow with those. You know, for a barge, you know, you got maintenance and repair costs, but it's lower than the boat, typically. You're paying for things like insurance and tax. But when you get to the horsepower side, you've got the crew, maintenance as well, supplies, ropes, you know, things like that, food, technology.
If you guys just wanna get a feel for the technology or what it looks like in a modern towboat today, I mean, I guess you guys are gonna enjoy the simulator. But there's a great picture in our training room right here of one of our modern tugs. Those of you can see it, but that, that's the modern wheelhouse today. So you know, there's an investment in technology that you make on the tow, and then the same insurance, tax types costs. But if you're able to take the cost of that boat and spread it, and you're able to to leverage your scale, you're able to save your customers money and still give them a really, really, really good reliable service. And that's what we do at Kirby. We optimize. We're constantly optimizing. We manage costs tightly.
And, you know, that's in part what allows us to have, you know, higher returns. And, you know, we invest in technology, we invest in talent, we invest in all kinds of things to achieve that. And, it's a pretty powerful part of our flexibility and our model. So if you were to take what I just said about optimizing horsepower and think about what's going on in this picture? So you're going back to 2002 all the way to 2018. You're measuring our barge utility, which is a direct reflection of the market, supply and demand, volumes, what's going on. And then you measure our towboat utilization, which in theory, should mirror your barge utilization, right? It's the same market. But what do we do? We manage the heck out of that cost. We use IT.
We use a scheduling staff. I talk to the guy that runs our horsepower at least three times a day, and unfortunately, I talk to him on vacation every day as well. We talk about horsepower all the time, and that's very, very important. This slide, to me, is—it's the Mona Lisa. It's the verification of everything, all the effort we put into managing that cost piece here for you. And it's—that's pretty powerful stuff, to keep your towboat utilization near 100%, even though the vagaries of the market may come and go. That's a big piece of what we do at Kirby. I wanted to touch on Higman. I got a couple of questions last night. Higman is the largest marine acquisition we made since the Hollywood acquisition in 1999.
You know, $419 million. We're looking at $10 million-$12 million in cost synergies. However, I am very, very comfortable to tell you there's more synergies to come out of that. An excellent young fleet, good boats, good barges, very young, really helped our age. One of the things we do really well at Kirby is integrate companies, and one of the guiding principles when we do get into one of these integrations is that we don't come in with our chest stuck out like the conquering hero. We are willing to really listen and learn from the company we acquired to look at what they did well.
You know, you look at the management team in this room, I think, you know, Jim comes from Sabine, I come from Hollywood, Mel comes from Alamo, Joe's original Kirby, John's original Kirby. But, you know, Mr. Ivey came from Rio, Rio Marine. You know, we're sort of the United Nations of towboating, but we've taken all the good ideas, all the good principles, all the good talent from all these companies that we rolled up. When you put it together, the end product's even better, and we've seen that with Higman. We've seen some things we really like that Higman did, how they did it, how they maintained certain types of equipment, how they had stripping systems on barge design, and we'll take those best practices.
When we did the Higman integration, we focused a team, took them out of the day-to-day operations to not have the acquisition be a distraction. And so we had a very dedicated team. We didn't want, you know, the core operations of the company to be distracted in the least bit, and that was something we really did successfully in this integration. And we did a phased integration. The safety management systems that we operate under today and that we're required to operate under and codified with all of our major petrochemical and refining customers, what we chose to do is sort of phase the integration over different tranches of boats so we could get all the procedures onto the boat.
We could get the culture of 10 boats at a time set, and we're rolling those over, and we'll complete that integration fully in June. Communication during integration is critical. Customers, vendors, just continuous communication, and we really focused on that in this one. So this picture to me represents synergies. Let me explain it to you. The dry dock that these two legacy Higman boats are sitting on are part of San Jac Marine. San Jac Marine is a shipyard that we purchased out of bankruptcy last year, and it is, it's right here near our nexus of operations, so we own the shipyard. And what you see here is two legacy boats getting fixed in our yard. Now, these two boats are modern, but they were laid up.
Higman didn't have work for them, so they were tied up, so they're coming back into the market. These two boats will go replace two older Kirby boats that, you know, Jim had budgeted CapEx on for this year. We're not gonna have to spend that CapEx. We're gonna replace those two older boats with two seven-year-old boats. The cost at which we're able to repair and put these things into service is highly advantageous because of Kirby's purchasing power. There's a lot of synergies flowing from this transaction, a lot of them that you can identify in that picture. We've listed some of the other Higman synergies here in the bottom left-hand corner. I won't go into these but you know all of this I think really helps the saving and not deploying the future CapEx.
I think all of that really continues to just augment what is already really strong cash flow for the marine companies at Kirby. So most recently, we acquired the inland marine assets of Targa, $69.3 million. We closed it last week 16 pressure barges, carrying a lot of the products that we identified as growth products in the petrochemical build-out. And the majority of this fleet came with good term contracts. And, you know, we like the pressure barge space. You know, we get a premium for our expertise in the pressure barge space, and it's a good niche for us. It requires a high level of experience.
There's a lot of risk around these cargoes, and Kirby does a really, really good job, and it's recognized as being the kind of foremost company in that space. So part of our scale and part of our advantage lies in our infrastructure, and today, you'll get a good sense of that when we're on the Observer. But beyond the core business, we have a lot of supporting businesses, 22 fleets, all over the Intracoastal and along the Mississippi River in Houston, Baton Rouge, Corpus Christi. We've got the capacity to put 800 barges in those fleets. We have our own tankering services, and reall, the nexus of our operations, and 100 of our own shore tankermen trained and dedicated to servicing Kirby's needs.
And the tankerman, he does the transfer, he loads and discharges the barges. We have our own cleaning facility, which is pictured here, at the top, and our own fueling dock. We do our own fueling operations in Houston, Freeport, and Corpus. And then most recently, you know, we entered the shipyard business, but that little shipyard we bought also came with a spot for 27 barges to fleet. So, you know, all of these infrastructure advantages, they allow us to control those important complementary services that ultimately kind of roll into the ultimate customer service proposition. So by being able to control our shipyard, and being able to control our cleaning, and being able to control our fleet, we're able to give reliable, dependable, really good service. And, oh, by the way, these are also pretty good side businesses.
When we look at the margin chart on the inland side, you know, there's significant upside. You know, one of the probably longest, deepest, most painful cycles is what we're in today. But the one thing we do know is that it will and is going to come back. And I was talking to, I think it was John, last night. You know, I fully expect margins to get back to peak, but that's gonna be our job to achieve that. And David and our management team are they're gonna hold us to that.
I fully expect that the tailwinds we're enjoying, the way we go about the business, you know, how we execute the cost initiatives that we've put into place during the down cycle, I fully expect that we can get back to peak margins. So kind of to put a fine point on this, you know, what makes Kirby different? As Jim told you at the very beginning, safety is our franchise to operate. We are hyper-focused on that at Kirby. You'll get a sense of that with everybody you interact with today. We've got a great group of customers who are very loyal to Kirby and support us. You know, we're heavily ingrained in the supply chain of many of those blue-chip companies. We have employees within the four walls of their refineries. We have employees that help them run their docks.
We have employees that sit on their trading floors and help them schedule marine equipment. We are deeply integrated into those companies' supply chains and really a complement to their supply chains. As I alluded to or I explained earlier, we are militant about how we manage horsepower. We have tremendous scale. We're able to, you know, save the customer money by leveraging that scale. This U.S. Coast Guard accredited training center you're sitting in right here, we will issue. Is it 2,200 licenses and accreditations and, so we, you know, again, the pipeline of talent that we couldn't be more focused on that. I began my career in this room actually 21 years ago. You know, this is where it all begins. This is where you get stamped with the Kirby culture.
And having a U.S. Coast Guard certified training center is a tremendous competitive advantage as well. It's an investment in the company. It's an investment in the quality of Kirby and what we do. We entered the shipyard space here in Houston. And again, we're very disciplined with our capital and our balance sheet. You know, we're able to do things countercyclically that others, quite frankly are not. The key takeaways from today again I just hit on them kind of redundant, but take this with you safety focused, capital discipline. We're a consolidator. We're in it for the long run. We look at things as if we're running this company in perpetuity. That's the backdrop for how we make decisions.
We're essential to the, you know, the transportation of bulk liquids in the United States. We just are. And, you know, the coastal market's at the bottom, but we definitely see the opportunities, and we're, you know, there's some green shoots coming up there. In inland, we definitely are feeling the tailwinds of new volumes and new opportunities, and again the benefits of us consolidating the market. I don't know, David anything else there?
No, no, that's. Yeah, those are our prepared remarks. Christian and his team are here to answer questions, and, you know, I'll chime in as well.
Great.
But we're ready to take the questions. I think we have a mic. [crosstalk] Why don't we start with Jon?
Thanks. Jon Chappell from Evercore .
Christian, two questions for you. So, first, on the inland side, I think you did a really great job talking about the cycle on coastal. I'll get to that in a second. But how do we get back to the peak margins in the inland? What do you need to see? You talked about what you've done on the Kirby side.
Right.
That's great. No one's bigger than the market, so kind of capacity trends-
Okay.
Just a little bit about demand, and then maybe just some recent color on what you've been talking about with the tailwinds, pricing term versus spot.
I'll take a shot at this. They, you know, I think part of getting back to peak margins is gonna just be the new opportunity set of products out there. The new growing demand for petrochemical movements. Oh sorry. I think that's part of the story. I also think that we are positioned just from the action we took in the downturn, and I think if you look back at Kirby's history you know when you see us coming out of a cycle, you know, the cost structure's in a really good place, and the returns come back pretty quick. I think we're poised to help the bottom line with just how we've managed costs today. The market is the market.
You know, I can only guess that others are probably, you know, have felt the pain, and there's hopefully been a lot of hard lessons learned, and a lot of discipline that the market itself will have as far as getting supply-demand right. You know, I think that's something you'll see. A couple items.
Yeah. Let me add a little to that. I think on supply and demand, we've seen two things. Obviously, the demand picture that Christian shared with us is pretty good. I think it's gonna be sustained for a while, given the petrochemical build-out. But on the supply side, a couple things: one, we're not seeing a lot of building right now which is good but there's two other things that are kinda helpful on the supply side. One, probably temporary, and who knows what happens with it and that's tariffs on steel. Yeah, the higher the cost of the steel to replace barges, that's good for Kirby. So that's, we'll see how temporary that is or how impactful it is. Personally, it's probably.
My view is it's not that significant. The other thing is, there were two main shipyards in the inland space building inland barges. There are a number of smaller ones, but the two main ones were Jeffboat, that was owned by ACL, and the other one is owned by Trinity. Trinity's public, for those of you who know them. The good news, and this is from our perspective, is that, Jeffboat was shut down, and essentially, Trinity bought the shipyard. So now Trinity has you know frankly a dominant, or at least a very sizable position in the shipyard business on building inland barges. You know, that's probably gonna mean higher prices for inland barges. Again, that's not necessarily a bad thing.
We already own a lot as Christian said. We have a small shipyard. We could do some incremental stuff on the margin, but higher barge pricing means probably a longer cycle and more rational building. We are a long way from rates that justify new building, but we'll get back there. You know, the cycles do happen. We, as you know, like cycles. We'd like them to be longer and stronger on the upside, and I do think we'll get. And frankly, I'll be disappointed if Christian doesn't get margins above last peak cycle margins. But it will cycle, but Kirby will be there with our balance sheet, and we'll continue to consolidate. One final comment on why it's better is look the industry continues to consolidate.
I think if you, if you go back a decade or two, the number of competitors in the business was probably closer to 80, now we're probably closer to 40. You know, Kirby did the majority of the consolidating, but it is a more consolidated market, which is generally better for businesses. We still have a number of competitors out there. I don't wanna minimize that, but. So when you add all that up, you know, I think Christian and I'd be disappointed if we don't get past prior margin peaks but you know, every day, you gotta fight it. You gotta go out and get after the cost and service the customers better and better.
Thanks. And then just the second one on that last point of consolidation. So I feel like a lot of people have written coastal off. I have. I don't have you making money in coastal for my forecast horizon but you know, I think Christian pointed to some really positive trends eventually happening in that business. And then also on slide six, mentioned the potential for consolidation. Maybe putting words into your mouth. So I think we always think of coastal as like the last rung on the ladder as far as capital deployment, but do you see what's happening there, kind of mimicking what's happened in inland, where at the bottom of the cycle you can actually make some real countercyclical investments that position you for even better peak margins in the coastal business?
Yes. Coastal doesn't have the leverage points that inland does. You saw Christian's slide on the horsepower utilization. The inland side just has much more leverage, given how we manage the equipment. On the coastwise, you've got one barge and one boat together, and they work as a pair, so you don't get the horsepower leverage. That said it's a good business, and it's a business we can earn our capital through the cycle. We are cash positive in that business now. Of course, it's painful in the P&L side right now. But what we're doing, and as Christian mentioned, is we're investing in the fleet here. The average age of our fleet's come down, both on the horsepower side and the barge side.
We're building some new horsepower now, which will, when the market comes back, be a big advantage. You know, fuel efficiency matters on these long coastwise moves. So that said, the coastwise market is more specialized, and that's what we like is the niches that Christian described. I think we can earn our cost of capital and will earn our cost of capital through the cycle. The cycles are longer because the increments of capacity are larger. And, you know, when you're one long in a smaller market, it's more painful than when you're one short it's much, much nicer. So, we're still committed to that market. I think it's a good business.
We'll be very prudent with our capital, but I do believe, and Christian had a slide that said it's 12-18 months, it may be even 24 months before, before we're kind of back into, to a good area with that. You know, we wouldn't do any consolidating moves until we were kind of ready to come out of the bottom of the cycle. But that said, predicting acquisition's tough. And, you know we're, we're always prudent with the capital, very disciplined on our models. I would say we'd probably prefer another inland acquisition or two but before the offshore any offshore acquisitions. But, again it's hard to predict acquisitions.
Anything you want to add?
No, well said.
Just super quick last one tying everything together. Can you get back to peak margins in coastal, or has there been a secular change in that business or just the upturn's never gonna be as strong as it was six, seven years ago?
No, I absolutely believe we can get past. I believe we can get past peak margins in the last cycle. You know, we may see a failure or two in that business. It's pretty rough. You can see the margin chart, and you can imagine what a highly levered competitor might be going through right now in that space. But there's nothing fundamental that has changed that would say that we shouldn't be able to get to back to peak margins. And then, with the investments we've made in the fleet, we should do better. Cash operating and maintenance costs should be better.
Thank you.
Jack?
Hey, guys. It's Mike Webber from Wells Fargo.
Oh! Oh, hey, Mike.
If possible, can we go back to slide 11? Actually, the slide you're just referencing on the coastal margins.
That's our least favorite slide.
Yeah, I know. Sorry. Well, it's the most interesting slide, I think, so outside of the one where you give the actual utilization data, which I think everybody would love to get a copy of if we can get the Excel. If you were to overlay coastal ATB prices on this chart, what would it look like? And you kind of addressed this, but in terms of your opportunity set in coastal, it's largely gonna be a function of the pain of other people around you. So when you think about that market, maybe within the context of what you just saw in inland, like, how should we think about the similarities there? So one, how would it look like if you overlaid it?
And then two, how should we think about pain in the coastal market relative to what we just saw with Higman and I nland?
Yeah, I'm not sure I understand your question. ATB pricing is so dependent upon the vessel and the size. You know, we can get. Christian, what did you pay for one of your 185s?
Seventy.
Yeah, $70, $74, $75 million. You know, a 155s been, what $65 million? Something like that. So you know it those are just barrel supp- sizes, and then it, it depends whether you put crude, crude oil washing on it inert gas systems. All the bells and whistles can really add to the cost. So, was your question about the supply of the ATB
Right.
or ATB pricing realization in the market?
Well, I was just trying to get a sense of how much countercyclical investing there's been, but then really where we should think about asset values moving around in the context of those margins.
Yeah. Well, I guess the best way to do that would be, Christian you give them a feel for the new tugboats that you're building and how, you know, percentage-wise, how low you think they are from what peak building would have been.
And Craig, you can help me out here, but I would say if you built what we're building at the peak, you're probably $3 million- $4 million more per unit.
You're building 15.5.
Yeah, and we're building at 12 and some change. So yeah.
Okay.
Yeah.
And one more. You mentioned wider difs and starting to see some of the MRs come out and start moving back to coastal, or sorry, moving back to crude and kind of leaving more product rate. When we think about inbound inquiries associated with kind of wider LLS, or MEH diffs are you guys actually seeing any inbound inquiries as well, or should we just purely think about that as, say, something that's going to like, OSG, and they're gonna pull their assets out, and that's gonna leave business for you?
Yeah. We see crude right now, recent crude demand. I answered that, right?
Yeah. We, we don't move a lot of crude. You know, we've had one unit termed up on moving crude, but we've gotten some spot moves occasionally now. Yeah, look, the crude moves really are coming from basically PADD 3, going out to PADD 1 , which is a long-haul move. It, you know, it's, it's ideally suited. Well, I'm sorry. When we go from PADD 3 , really, Corpus Christi up to the East Coast, to the Delaware Valley area, where some of those old, inefficient refineries are, and they like that discounted crude. So, you know that's, that's an MR tanker move. There have been some, some large barge moves in that market. OSG does some of that. OSG has particularly done well with, with the lightering as, as it comes in from Europe.
So, you know, I wonder how their lightering business is doing now that we've backed out some of the European or Mid-Eastern crude, and replaced it with some of the low-cost WTI. But we do move it. It's nothing like we saw back in 2012, 2013, 2014, where we probably had about 10% of our fleet moving crude. Now it's just really one unit and occasional spot move. Anything to add?
I would say that the real quick, at the peak of the market, we saw the newbuildings were in construction and coastal spaces, that there were crude projects that were planned that were gonna put roughly 1 million barrels of crude on the water every day. So you think about the driver there and the capacity increase from construction in the MR space. And when those crude projects went away, those MRs started moving into some of our traditional spaces, the clean petroleum products, the gasoline markets into Florida. So for us, as we look at the cycle and what's gonna get us back to where we need to be, you want to look at crude, in particular, the MRs.
So the three that moved from clean petroleum products back into crude, that's about 1 million barrels of capacity that shifted out of the space that we operate in. And the other thing is to look at the retirement schedule. We put the slide up that shows you the older equipment. Ballast water treatment's gonna push that equipment out over the next five years, so you can kind of see capacity both driven by movement into crude and the retirements due to ballast water treatment are gonna help us get supply and demand back in sync.
Thanks.
Great. Thank you, guys. Jack Atkins from Stephens. A couple questions, one on the inland side and then another on the coastal. But for inland, I think we've been seeing better utilization trends now since the fourth quarter, so call it, you know, maybe six, seven months of much improved utilization trends. Can you speak about what's happening just in terms of spot rates versus contract rates? And, you know, how much longer do we need to see utilization trends, you know, in the 90% plus range before we start seeing contract rates move higher? And what really needs to happen here over the course of the next, you know, couple of months to sort of make sure we're on track to hit the up mid-single digit expectation for the second half of the year?
You want me to take it? So, we've definitely seen a good acceleration in spot pricing. And as a data point, just recently, we fixed a term contract right in line with that, where spot pricing is today, which is a really good sign. You know, by measure of, you know, percentage, I think you've seen spot rates jump, you know, 15%, you know, over the last. I don't know, help me out, 15% or so over the last, you know three or four months.
Just before the first of the year.
Yeah. And so we're feeling pretty good about pricing right now. You know, key is gonna be to maintain it, but there's a utility and rate have to be connected. Did we have perhaps something different through this downturn with some other players and some other behavior that affected that market? But it feels like the rational and visible hand is working again in a positive direction for us.
Okay.
I don't know if that answered your question.
Yeah, totally. That, that helped. Dave, did you want to-
No, I think Christian's point, just to add to it, is that spot pricing is on top of contract before. Look, for the last. Well you saw the chart with the downturns highlighted, you know, from the end of 2014 through the first part of this year, spot pricing has been below contract. That is not a good market, right? Because that puts pressure on all your term contract renewals. What Christian's telling you right now is that spot pricing is now at contract and starting to bump above it, which is good. That means we're gonna start to see term contracts start to roll over at higher levels. And we forecast this a little when we gave our guidance that we thought the second half, we'd start seeing that inflection on the term contracts.
I would tell you that, you know, from a macro standpoint, that's all still lining up well. We may be a little ahead of schedule, but we'll see. You know, the market moves around a little bit here. But with demand and supply being in balance, and if not, feeling like we're gonna be a little short of supply, that's exactly what we need. And I, You know, look it's overdue. The rates are still very, very low, and, you know, we talked about rates last year being at cash flow breakeven. Right now, they're just getting back to P&L breakeven, so they've got a ways to go, and we're probably still, what 30% from rates that can justify new builds? So it's got a ways to go. It's just starting.
Everything is kind of lining up, and we've hit this crucial point where spot pricing is at contract and bouncing above that. That, that's really important.
Great. And then one follow-up on the coastal side. If we think back to last peak in terms of LTM EBIT, peak was in 2014. It was, you know, call it $97 million in coastal operating income, if you take your midpoint of your margin numbers that you guys give quarterly. So call it right around $100 million. But you had 70 boats operating then. Now, I think, call it 56 boats operating. How do you think about the ability to get back to peak EBIT? I know you guys are talking about getting back to peak or better than peak margins. Do you think you can get back to peak EBIT as you go through the next cycle? And on a shorter-term look, I mean, you know, certainly sounds like things are bottoming on the coastal side.
That's really encouraging. When do you think you can get back to breakeven on your coastal business? Thank you.
Yeah, you know, we did, we did take out some capacity. Our capacity's probably, and this is just an estimate, I don't have the numbers. Maybe, maybe Eric does, but, or you, you remember them. We're about 10% lower in terms of barrel capacity from what we had at the last peak. Like, that's, that's a guess. It feels about right, huh? Yeah.
But everything we've added is bigger.
Yeah.
Everything we retired is in that small well, or a few bigger units, right?
Yeah. So we didn't lose that much capacity. So we've got newer, bigger units, so the earnings power should be a little more powerful. But, you know, we hadn't put pencil to paper in terms of, you know, what could peak earnings be, not just peak margins. We can run that exercise. It'd be a good exercise to do. What was the second part of your question?
Just getting back to breakeven on the-
Oh, yeah coast.
I don't know, Christian, you want to offer him?
Yeah. I mean, you know, we're, we're seeing some positive things around, around right now for the, you know, first time in a long time, which, you know, hits the bottom or coming off the bottom. Difficult for me to prognosticate when we get back to breakeven, but, you know, you know, hopefully, it's, it's, it's really soon, but it could be a year. You know, there's a lot of those contracts that we have are annual. Majority of them are annual. We have some longer terms, so, you know, a year would probably be as good a guess as any today, knowing what we know. John, you, you look at the pricing every day. Agree with that?
Yeah. I would say, you know, talk about green shoots, one of the things that's positive in the market is that we're seeing charters asking for a term position, pricing on term position rather than spot covers. So that's always a positive sign that you're hitting the bottom, coming off the bottom.
Hi, guys, Ben Nolan from Stifel. I know if you go over to slide number 19, I know that it's the one that shows the build-out of the petrochemical infrastructure. And I know that in the past, you said-
Nineteen?
19, I think. I know that in the past you've said it, it's kind of hard to say exactly how much that translates into, into barge volumes. But next year, it looks like there's a big step up, specifically in methanol. I don't know, a 15% or so step up. Are you beginning to have conversations with guys saying, "Hey, this is happening, we're gonna need barges?" I mean, are you starting to get any clarity as to how much this is actually gonna mean?
Yes.
I take that to mean in a positive way?
In a positive way.
Okay.
Yeah.
And then, I'll guess you'll leave it there, but.
Yeah, Ben, you can imagine that many of our competitors might be listening to this webcast, so we're not trying to be coy. It's kind of trying to be cautious.
I understand.
Yeah.
And then switching gears a little bit, again, I hate to jerk you around, but on slide number seven, it's the revenue mix on the offshore side. And that's a pretty big delta in terms of, you know, how it's changed. Now, is that just a function of the market sort of having condensed and or is there something more meaningful happening that going forward, we, you know, are should we expect a lot more petchems in there? You know, how should that project, do you think, into the future?
In the short run, I don't think it'll change all that much. You know, there's some projects that we're looking at in the petchem space that could grow the petchem piece. In the shorter run, I think it looks a lot like that. But there are some there's a project or two that we're looking at in the petchem space that could grow that space.
Also, the black co-products.
And black co-products yeah.
Okay. Then lastly, for me. I know there's a couple of deals in the market now on the offshore side, and sellers. And you guys have always sort of shied away from the bigger S. Is there ever a point at which you'd consider maybe looking at something over 195,000 barrels?
Yeah, I guess I could just say yes again, but let me put some context on it. Look, the MR tankers is even more concentrated than the large barge piece, and we've never say never. If the prices were really cheap, maybe, maybe we would. I'd say it's not our highest priority. You know, inland would be much higher and then probably the coastal business before the MR. In terms of consolidating what we've got and building and adding to our breadth and scope in the trade lanes we already exist. The MR tanker market, you know, is even more painful when you're one long. It's quite good when you're one short, obviously.
But, you know, we may look at it at some point, but it would have to be very attractive, and we'd have to feel that we didn't have any other opportunities that might be imminent to either in the inland side or even the coastal side. Our number one priority right now would be, you know, continuing to build that inland franchise and consolidate that out.
Hi, it's David Beard, Coker & Palmer. Back to your peak margins, peak pricing question. Can you give us a sense of where pricing would be below peak to get you back to your peak margins?
Not sure I understand the question, David.
Well, does pricing have to get back to peak for margins to get back to peak? It seems like you're implying that pricing doesn't have to get back to peak. Were we talking 5% below or 20% below, or a little hard to tell?
Yeah, it's a little hard to tell. I, I don't think we have to have pricing back at the peak to get to peak margins. Just from the cost leverage, I mean, you saw some of the levers that, that Christian outlined. You know, when we look at how much cost we can save with the Higman fleet and the leverage that we'll get out of all the little things that, that gives us, we may not have to be at peak pricing to get back to peak, peak margins. But, you know, it's hard to differentiate that and put pencil to paper. I don't know. Christian, you have anything to add to that or no?
I think that's well said. I think there, you know, there are obviously some things that we do as a management team every day to get you and, to get the investor back to, back to peak margins, even without peak pricing, and that could include, in part, the synergies David referenced from Higman, perhaps. I think the mix of the fleet, I think the growth in the, in the pressure side of our fleet is a positive story, good margin business that'll help, help the whole. You know, we'll try. Hard to say exactly, you know, if we could, but my sense is that, that, that we're in a position where we'll, we'll earn margins when, when pricing starts to come back.
And your question may be right on the money, that what we're implying is we've got the company in a good position to enjoy whatever pricing comes back. Will it get to peak, and the rates have to be exactly as they were in the past to get to peak? That's pretty hard to say, I think, but I'll say we're doing a lot of good things that are going to help margins in general, and part of that's the mix of what we're buying and how we're integrating it.
Then, David, just a question on peak free cash flow. Looking at that question in another way, it seems with the average age of your fleet much lower, you could get back to peak free cash flow, excluding any acquisitions, much quicker. Is that fair or?
Yeah, no, that's very fair. You can imagine that our maintenance expense. Now, we've got a larger fleet, but in terms of a proportion, given that the average age of our towboat fleet now on the inland side is much younger, the average age of our offshore fleet is getting younger by the day. You know, maintenance CapEx, if you will, should be a little lower, which should drive higher cash flow, higher free cash flow, so.
Bill Baldwin with Baldwin Anthony. Christian, in the black oil coastal market, are there any products in that black oil area that are more important to you than others, as you're moving?
Sure. I mean, we could talk, you know, they're all important to me.
Right.
But, you know, the margins, some equipment has a bigger thermal heater, so it's able to handle higher, more viscous cargoes. So in the black oil world, the bigger the heater, the more coils you have, the type of pumps you have, if you can handle vacuum tower bottoms, asphalt, coker feed, those heaviest of the heavies, you tend to be in a good spot, you know, less than the homogeneous fuel oils and VGOs. But that ability to handle the highly viscous cargoes like asphalt and such is a desirable niche.
What routes do those cargoes generally drive? You know, when you're moving the asphalt and, those higher viscous cargoes, coming out of refineries, I guess, here on the Gulf Coast, where are you generally taking those cargoes?
Taking them to Florida. Florida's part of the market and really intra-Gulf of Mexico, they'll move, and even up the East Coast. And you'll also move imported asphalt that may land in the Atlantic Coast, and you'll distribute that to Florida or to other places in the Northeast. And there's even, you know, a Canadian piece of what we do around that.
Do you move much in the way of your low sulfur diesel, diesel fuel on in the coastal market?
We do move some. John, are you going to talk about diesel? That, that will come and go, but we do move it.
I just wonder if you think the IMO, when that goes in, hopefully goes into effect, will that, you think, impact your volumes in that business?
That's a great question. I think there's a lot of people trying to figure out what the world looks like after IMO 2020. You know, one theory is that you'll see a heck of a lot of blending. If you do see a heck of a lot of blending, that's going to be really good for Kirby. You know, if the refineries, which I don't think they'll do, but if they choose to make an investment where they can make, you know, that'll be interesting, but I think the most likely way to get to that is gonna be blending of cargoes. Taking the high sulfur and the low sulfur, putting them together to make what will be the new marine fuel.
Right.
You know, we've been following the CapEx investment on the shipping fleet itself. It doesn't look like beyond the cruise ship guys, you really don't see the big investment in the scrubbers. I mean, you see some.
Yeah.
2% of the fleet, so it doesn't appear that it's gonna be on the ship side. You know, one scenario is that you see a heck of a lot of blending, and I hope we do. I think that'd be really good for cargo.
Yeah. Let me add, I was with a group of refiners and we discussed this the other night at a dinner. The big issue is compliance, and you know, it'll be interesting to see how compliance goes. When you look at it, the only real way to ensure compliance is the flag state. So if you flag the vessel, obviously, if it's U.S. flagged, it's easy to you can be pretty assured you're gonna have compliance there. Some of the other flag states are very likely to enforce compliance, but there are other flag states that are less worried about that compliance.
So, when we talk to you know, ABS, American Bureau of Shipping, or we talk to other people in the industry, the real question is: how do you ensure compliance? And, you know, if you're flagged in Liberia or Panama, do you think there's gonna be much compliance? Who knows? We don't know how that's gonna look. And so, you know, maybe many of the shipowners are just taking a wait-and-see attitude to see how it all works. But if everybody did start phasing out that heavy fuel oil, it would make a big difference. You know, the refineries got to figure out what they're gonna do as well and rejigger their feedstock slates and whatnot. You know, we're watching it. It's hard to say.
I will tell you this all of Kirby's boats run on the ultra, ultra-low sulfur diesel-
Right.
right now, so that's a good thing.
On the petrochemical side, Christian, any particular products more important to you than others in the coastal side, and-
Once again, they're all important. You know-
Well, I know, but I mean in terms of-
No, I-
-relevance to your business-
I think,
or you take them.
I think, you know, that graph indicates that methanol is a growth story for us.
On the coastal side also?
I'm speaking inland when I speak there.
I'm talking coastal.
Coastwise.
Chemicals.
Sorry.
coastwise chemicals, I mean caustic soda, some others. You want to take it?
One of the things I'd say about the coastal business is 20 years ago, there were a lot more petrochemicals on the water. A lot of those volumes moved overseas, and when you see the renaissance in the US Petrochemical Infrastructure and expansion, that's gonna be a good thing. We should see the petrochemical volumes increase. So if you look at the slide here, you would expect petrochemicals in the longer run to be a bigger-
Right.
bigger piece of the pie.
Where would you be moving those petrochemicals?
Along the-
Coming out of the Gulf Coast.
Coming out of the Gulf, going up to the East Coast.
Going to the East Coast. Just one last question: Do you move much product from the refineries out of the LA area? Or, you know, like, Valero's down there, PBF Energy?
Yeah.
There in Torrance. You know, some issues there about whether those refineries are gonna have to switch to, you know, out of hydrofluoric, sulfuric acid and because of air quality issues and so forth.
So we do move a little bit of refined products in and out of those ports, and that's gasoline and distillate. But overall, the volumes on the West Coast are down pretty significantly over what you saw, say, peak market, 2014, 2015. And the-
Do you expect those to recover, though, or not?
They should recover. A lot of that is the MRs that were built and taken on contract on the West Coast to support the crude projects. Those have all kind of moved into that space, so they're moving a lot of refined products that have been forced into the program.
I see. Thank you.
There were two really big crude projects on the West Coast. That was the Clatskanie project that was gonna bring crude to water, and then the Endeavor project up in Canada, and neither one of those projects materialized.
Yeah.
Hence, the length of the MRs on the West Coast.
They were gonna.
Thank you. Justin Bergner with Gabelli & Company. My question relates to the inland marine business. How would you characterize the sort of cost curve for the industry in the inland marine business? I realize that there's no slide, and maybe a slide wouldn't even be able to be drawn, given the information that's available. But how would you characterize that, and how has that changed kind of over the last five to ten years? Maybe thinking about some of the more higher-cost parts of the, the industry.
Yeah, I mean, you can actually go back to the towboat and barge slide with the capital cost.
The one with the line on it?
Yeah. No, no, no. Yeah. Because it'll, it'll describe some of the el- no, no, the capital cost one. Yeah, there you go. Yeah, if you look at it, your crew, crew's a big cost. Labor inflation during this, this downturn has been, been pretty, pretty benign, right? I mean, the inland companies in particular have been fighting for their lives in many cases, so there's not been a lot of, you know, wage, wage increases. You know, as we get busier, you'll, you'll start to see that go up, just out of necessity. You know, there'll be- we'll, we'll have crew shortages in the industry, and that'll put pressure on wages. That happens every cycle, but that's a big component of cost.
Maintenance and repair costs are pretty much similar to they have been in all cycle supplies, pretty much similar. I would say technology, and with technology, is compliance. The industry has just gotten much more sophisticated, and the compliance costs are going up. All of our customers have their own vetting departments now. We have Subchapter M, if you're familiar with that. Subchapter M is a Coast Guard regulation, where now we're gonna have inspected towboats. We're actually big proponents of that because, you know, one, we think all our towboats are already qualified, but that will bring up the standard across the entire industry. So many of our competitors are gonna have to invest a lot more into their towboats. We're investing into our towboats as always in keeping the running condition, top-notch.
But what we have to do is have systems on board that are used by the Coast Guard and other people that are inspecting the towboats to say, "Oh, yeah, you're doing all these things. You're doing all the maintenance. You're doing all the different pieces that they want to ensure that you're doing as part of " So I would say the industry is having to spend a lot of money on technology and compliance. And that's, that's probably been the biggest expansion of cost. I would say, you know, fuel, lubes, paying insurance, you know, frankly, taxes have gone down, as you know, here in the U.S., so that's good news. Insurance is probably the same.
So I would say, you know, there are some normal cycle costs, like with crew costs going up, and then I would say the real big area is technology and compliance. I mean, Jim, Christian, anything to add to that? No.
Yeah, just as a follow-up to that, I mean, would you hazard to sort of state that the, I guess, cost gap between you and the average player in the industry, obviously, a private company, has widened in your favor over the last, you know, five years, even though the overall margin profile is obviously at trough for Kirby?
Yeah, I would say the gap is about the same. Yeah, we've probably—we've been investing in that technology and compliance piece probably more aggressively than others, so we're probably ahead of the curve, but they're gonna have to catch up on that. We know that from a Subchapter M compliance standpoint. We know that just based on what we hear in the industry. In terms of insurance, we've had a pretty good advantage there. You know, size does help there as well. Our safety performance helps there. But, you know, the gap between us and competitors is probably the same. I don't think it's shifting a lot. I don't know, Christian or Jim?
Yeah, that's probably accurate. I will say, you know, one thing, when you do an acquisition like Higman, you kind of get a bird's eye view into what somebody else's cost structure was. I'll tell you, you know, when you compare kind of where we were and where they were, there were definite Kirby advantages. I'm not sure if those are proportionally greater than they were historically, but they do exist, and that was an interesting lens into those cost differences.
Yeah. Yeah, we see our procurement side is able to save some money. We generally have, In terms of things we buy, we generally get better pricing. We get better shipyard pricing. That said, and this is not a comment on Higman, but you do anecdotally hear about competitors running with lighter crews or fewer crew members and cutting some corners here or there that, frankly, we just wouldn't do. So but that's, you know, that's a sporadic thing. I wouldn't call it a systemic thing.
Mike Koharski from SVPGlobal. You mentioned the 15% increase in pricing over the last 3-4 months. How much of that is attributable to just higher diesel prices, and what would it be kind of ex-fuel?
That's agnostic. What I was talking about was just-
That's fuel neutral.
Just direct fuel neutral.
Got it.
Yeah.
Okay.
Okay, any other questions? Eric, what's, what's next?
All right, then we'll close this out. All right, this concludes this morning's webcast. We will reconvene this afternoon on the session for Distribution and Services and corporate at approximately 3:15 P.M. Eastern Time. Thank you for joining us. You can now disconnect.
My name is Eric Holcomb, and I'm the Vice President of Investor Relations here at Kirby. Thank you to everyone here in Houston and for those online for joining us. With me here today is Joe Reniers, President of Kirby Distribution and Services, and several members of his team Also here is Joe Pyne, David Grzebinski, and Bill Harvey. Before we begin, please be advised that today's presentation contains forward-looking statements. These statements reflect management's reasonable judgment with respect to future events and 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 Form 10-K and our most recent filing on Form 10-Q for the quarter ended March 31, 2018. I will now turn the stage over to Joe. Joe?
Okay.
All right, thank you, Eric, and to everyone here in Houston, welcome. Thank you for joining us today. I hope you all enjoyed, enjoyed the tour. We are hiring, so if any of you are looking forward to maybe taking a job out there, just please do let me know. We'd be happy to bring you aboard anytime. Okay. Well, again, thank you all for spending a little time with Kirby Distribution and Services. With the Stewart & Stevenson acquisition in September of last year, we significantly grew the business and changed the complexity a fair amount, and we look forward to the opportunity today to tell you a little bit about the business.
Kirby, in general, as you know, we've got two main segments: a marine transportation segment and a distribution and services segment. e finished 2017 in the distribution and services segment, generating about 40% of the overall company's revenue and about 40% of the overall company's earnings. In 2018, we expect full year revenues in the range of $1.4 billion-$1.7 billion, with operating margins in the high single digits. And when we posted our first quarter results of 2018, we finished roughly on track with that, with revenues of $401 million and 9.2% operating margins.
Kirby is a company that has completed, has or has a track record of a lot of successful accretive acquisitions, and our distribution and services business is really no different. We have completed 19 acquisitions in our history, with 2 small divestitures in 2015, and most notably, the two large transformational acquisitions were in 2011, United Holdings, and in 2017, September 2017, with Stewart & Stevenson.
Those were both timed with pretty good upcycle in the oil and gas business. So who we are, Kirby Distribution and Services. We're 65 locations across North and South America, and we can add to that another 224 dealer locations. These are independent companies that represent us in servicing the customer. Extremely useful in remote locations or where there's a specific customer need, where we need to respond quickly. We've got 4 international sales offices that sell our manufactured products, about 2.5 million feet of shop capacity, and most. What we're most proud of is over 2,000 employees that are dedicated to safely, efficiently, and effectively servicing our customers. Thinking about the industries we serve, about 60% of our revenue base is derived in the energy sector. That's predominantly associated with North American land drilling and completion activity, but it's also got some exposure to international land-based drilling.
The other 40% is our commercial industrial sector, and there is quite a bit of diversity within that commercial industrial sector. We'll spend later in the presentation. We'll spend a little more time talking about each of the industry verticals that make up that segment. The other way we think about our business is our product and service lines. We've got a distribution business and a manufacturing business. Our distribution business is about two-thirds of our revenue base. So this is Kirby, through our subsidiaries, representing our OEM partners, our original equipment manufacturing partners. And we represent them locally, sell their product, help them engineer that product or help our customers engineer that product into their equipment, sell them parts, and service their equipment.
That is what being a distributor is, and it comes tied to a geographic territory where we mostly have exclusive territorial rights to service that OEM's product. The other third of the business is our manufacturing segment. S o this is us taking the equipment that many times we represent as an OEM partner, and taking that, engineering it into a finished product, like a frac unit, like a coiled tubing unit, or many of the other things that you saw outside here today. Again, we'll go through in a little bit more detail what all is entailed within the manufacturing group. We go to market with several different brands. All of our brands are well-respected in the industry.
They've got good reputations for quality and service. I'd note the United Engines brand has been around since the 1950s. The Marine Systems brand has celebrated its 50th birthday and has been around since the 1960s, and the Stewart & Stevenson brand goes back to 1902. When we think about the power of the network that we've put together in this distribution and services business, it, it really is something special.
On the distribution side, territory that we represent, with exclusive distribution rights, represents approximately 80% of the drilling and completion activity going on in North America. So that's the Eagle Ford, it's the Permian, it's the SCOOP in Oklahoma, it's the DJ Niobrara Basin in the Colorado region. It's the Haynesville in Arkansas. An amazing opportunity from an oil and gas perspective. We have nationwide service rights to service the marine, marine transportation business. We represent. Our territory represents approximately half of the U.S. population, 3 of the 5 fastest growing states, and about a third of the vehicle miles traveled in the U.S..
Our manufacturing side is really about leverage, so taking that scale and then leveraging it from an equipment packaging perspective. We have a leading market share, or excuse me, the leading market share in pressure pump manufacturing in the United States. We have leading market share in pressure pump remanufacturing in the United States, and we've got an international presence of roughly $100 million a year that we think is a prime opportunity for growth.
So when we think about our distribution partners, we are the largest distributor in the world for the brands that we represent. Several of them, the larger ones, we're more than double the size of our closest distributor peer. That gives us a heck of a lot of value as we think about going to market and gives us scale as we, as we work to follow our customers around the country. Okay, now I wanna spend a few minutes diving into the distribution side of the business. So as I said, distribution is about two-thirds of the revenue base of our company. What really sets us apart as a distributor is our scale. We have the largest trained, factory-qualified technician base in the country, most likely in the world, as best we can tell, and we use that to service our customers.
Our sources of differentiation really are all about that scale, the ability to follow our customers in that exclusive territory and meet their needs in a cost-efficient way, develop deep relationships with our OEM partners, and it truly is a partnership when we can come in with a broad customer perspective, the things that are most important to our customer base, and help our OEMs engineer and improve the quality of their products to meet our customer needs.
Supply chain reach. With our scale, we can get the right part to the right place at the right time, better than anybody else in the country. Customer integration. On any given day, we have our personnel working in our customers' facilities. Many of them feel like they're, they're actually customers of Halliburton or Schlumberger or any of the other large oil field service companies that are out there, or the large on-highway fleet operators that are out there.
And we've got an industry-leading in-house training capability that really sets us apart. So we think about the revenues in the distribution side of the business, about half of it is parts. So this is us stocking and supplying parts out to the customer base of proprietary OEM parts. About a quarter of it is finished product, so taking engines, transmission, and other major components, us helping our customers engineer it into their product and getting it into the marketplace, or it's the service we provide.
So now I'll spend a few minutes diving into each of the industry verticals that we serve in our distribution business. So the first and the largest is our oil and gas business. Within the distribution group, about 40% of our revenues is made up of oil and gas customers. As I mentioned before, this is closely tied to the on-land drilling and completion activity going on in the United States right now.
What really sets us apart here is our reach. As I mentioned before, we cover about 80% of the geographies where drilling activity is going on. That gives us phenomenal ability, a phenomenal ability to follow our customers around and help service them seamlessly. From a demand perspective, what is really compelling right now is the amount of reactivation and rebuilding of equipment that is goin d Kirby Offshore Marine. Just a very powerful We've got a lot of customers that, you know, thoughtfully invest in their business, like our own marine transportation group, and we service all the major industry players in marine transportation.
The second part of marine transportation, we really inherited with Stewart & Stevenson, and it's, it's marine transportation, but with a whole lot nicer habitability. It's predominantly yachts and sport fishing vessels. This is a relatively small portion of our distribution revenues at 5%, but it's a very stable business, it's profitable, and it's really about us servicing the network and servicing the franchise. Predominantly, our customers are charter operators and individuals of high net worth.
One market we're really excited about is power generation So power generation makes up only about 10% of our distribution revenues, but this is a market where we feel like we're really under-penetrated, and we have an opportunity to grow. It's also a market that really, the intrinsic growth opportunities are quite significant, with the number of data centers coming online that all have backup diesel power generation capacity and with businesses and regulatory requirements for backup power generation in natural disaster zones.
And if you think about our territory with the Gulf Coast, with Florida, and with the East Coast, those are all areas that have suffered hurricane challenges and where backup power generation is an important market. So we're excited about an opportunity to grow that. Another power generation market is our legacy nuke power generation or nuke backup power generation group. So this group takes EMD engines and other, OEM equipment in a, in a very niche market where they engineer it into nuclear backup generation. This is a business that's highly regulated.
It's governed by the regulations of the NRC, very high barriers to entry. While it's about 5% of the revenues of the distribution business, it's highly profitable in a niche that adds a lot of value for Kirby. Our on-highway business. So we inherited a significantly large on-highway business with Stewart & Stevenson. It represents about 10% of our distribution revenues. This is all about scale with the number of branches and the number of dealers we have across the country. This is a wonderful opportunity for us to sell parts and service in the marketplace. This is another market that's probably been underinvested in by, by us, and we see as a, as a meaningful growth opportunity. Mining. Mining represents about 5% of the distribution revenues.
We've got a strong incumbent position in several coal mines in South America. On any given day, we have about 150 technicians working in coal mines in Colombia, maintaining haul trucks, like you see here, as well as other shovels and other mine support equipment. Again, a good, stable, ratable business. The mines that we're working in are, are baseload. They're selling coal to Europe and to Asia and have mining plans that go out 15 years, and again, a very stable, ratable business. Our industrial equipment business. So this is all about taking the engines and transmissions for the OEMs that we represent, helping our customers engineer them into their products in a wide variety of applications.
This is a bit of a catch-all, but it's everything from material handling to agriculture equipment to forestry equipment to construction equipment, and huge installed base out there and again, a parts and service opportunity for Kirby. And finally, in the distribution segment, we've got a specialty equipment rental business. So this business is a bit of a niche play. This doesn't compete with the United Rentals of the world. This is very specialized on high-spec equipment, large industrial generators, high capacity air compressors, high capacity material handling fork trucks, railcar movers, like you saw outside the Rail King unit.
And this is an opportunity for us to use our industrial customer relationships when, you know, they're putting in a plant turnaround or need backup power for us to fulfill their needs. So in closing on the distribution business, so distribution business, approximately two-thirds of the revenues of Kirby Distribution and Services. Of that, approximately 40% is tied to the land-based oil and gas business. That is all about US drilling and completions activity. The remaining 60% of the distribution business is really tied to the overall US commercial and industrial market. We see within each of those segments, we've got a couple opportunities for us to double down in and grow, but mostly it's about execution and leveraging our cost base to efficiently service our customers. So that's the distribution business.
N ow I want to take a few minutes and, and dive into the manufacturing side of the business. So manufacturing is the remaining one-third of our, of our, distribution and services business. While we call it manufacturing, I would really describe it as a service business. We have two main brands, United Engines Manufacturing or UE Manufacturing, which we've owned since 2011, and Stewart & Stevenson Manufacturing Technologies, which we acquired with Stewart & Stevenson in September of last year When we acquired United Engines Manufacturing in 2011, we did it with the strategy of building and growing the reman business in land-based drilling.
So taking, legacy equipment that's operating in the field, reconditioning it, putting a new life on it, and putting it out in the field. That's a franchise that's worked extremely well in our commercial marine business, and we always had the strategy it would work well in the land-based business, and it's that thesis is proving out. So the business at UE Manufacturing predominantly focused on reman, as well as what we would call highly customized solutions, oil field solutions, so building highly specialized frac equipment. I'll compare that with our strategy at Stewart & Stevenson Manufacturing, a much broader product portfolio. So they build frac equipment, coiled tubing units, and many, many other products. More standardization in the products they build. A high focus on customized control, something that UE Manufacturing did not have.
While we didn't plan the acquisition of Stewart & Stevenson around this manufacturing business, we did find, as we put them together, they complement each other beautifully. Very little overlap in customer base, very little overlap in proprietary designs, and even within the first month of the transaction, post-closing of the transaction, we were able to achieve cross-selling opportunities. I think there is real value in thinking about these businesses as complementary.
Capacity. When we think about capacity, we focus on a couple things. We focus on quality and speed, is number one, and number two is scalability. This is a cyclical business. It's oil field centric. It's gonna cycle. Having the ability to quickly cycle up and down with the market is an important trait, and we'll talk a little bit about that. So 4 main facilities, Oklahoma City, Odessa, Edmond, and then the fcility we're in right now, our Telge Road facility, represents about 600,000 sq ft of capacity. We also have 2 other facilities that are idle.
When we think about quality and speed, we have world-class fab shops that are able to quickly and efficiently turn highly customized equipment. So when we're doing a reman, a remanufacture of a unit, frequently, you know, these are units that were built by somebody else with piece part components that were custom made and need to be rebuilt. Our fab operations are able to quickly and efficiently remanufacture parts overnight and have them ready the next day for installation on the unit. It's a true source of advantage. When we think about scalability, the Oklahoma City facility currently running three shifts, seven days a week, scaling up to meet reman capacity.
The UEM Odessa facility, four months ago, the facility was idle, not one person assigned to it. W e now have over 150 frac units on site with a staff complement of 45 people, reactivating a fleet for several customers. So, we're able to quickly respond to the market opportunities in a cost-efficient way. So for those of us who are in the room today, you got to do the tour, you got to see some of our equipment, but what you didn't get to see is kind of how all this comes together. We've got here, I'm about to click on a video showing a time-lapse building of a frac unit. So we'll play it, and then I'll replay it with a bit of a voiceover.
Okay, so that represented one shift. That was one 10-hour shift building of a frac unit here at the Telge Road facility for one of our customers.
This was done about three weeks ago. I'll now kind of, w e'll play it again, and I'll give a bit of a voiceover. So our technicians are preparing the chassis. That's the mount for the radiator, and the radiator is mounted. It's the pump on the back of the unit. Engine and transmission unit coming in and being set, and effectively, the end of the shift. So beyond this, the next steps are hosing, wiring, putting on the hydraulics and the piping, and then taking the unit to test. So this is maybe the most glamorous part of it, where you see the major components hung, but certainly, there's a lot of work that's done beyond the 10 hours of 10 man-hours that are put into hanging the majors.
Okay, so as we think about the hydraulic fracturing market, which is, again, the majority of the business in our manufacturing segment, there's really two main opportunities as we think about it. One, on the left side of the page, is engineered product. So this is new equipment. So what makes us special? We feel like with our scale and our size, we have unique advantages in being able to quickly and efficiently meet customer needs and pull on our supply chain to get piece parts, and components faster than anybody else, and that is a huge source of value in this market. S econd real source of advantage there is thinking about our technology. We have led innovation over the last couole of years.
We worked with several of our key customers to build a quiet frac, a sound-enclosed unit, that when running at full speed, at full power, at full horsepower, you could have a conversation or a cell phone conversation right by. Highly useful in environmentally sensitive areas or in residential areas, areas like where they're drilling in Colorado. We have built a we've worked with a customer to build an electric frac unit, actually, several electric frac fleets. We've built dry guar units and dry friction-reducing hydration units. We've built several new blenders that employ kind of new technology that is cheaper to operate and cheaper to maintain. These are all kind of incremental innovations that add a lot of value to our customers and make for very loyal customers. And finally, I'd note the AccuFrac technology.
Those who were here today saw a little bit of this in the, in the data van. This is the software that controls the frac. Stewart & Stevenson's solution is, is proprietary, and it, it is industry-leading. The other side of the manufacturing business is the right side of the page. It's remanufacturing. I mentioned this earlier, but when we think about the amount of horsepower that's out there, the amount of horsepower that is three to five years old or older than five years, or is approaching 15,000 run hours or 20,000 run hours, this equipment is tired and needs to get rebuilt. It is highly in our customers' economic interest to rebuild that equipment, and we've got a unique and, and high quality and highly efficient approach to doing that.
This is a bit of a before and after of what a remanufacture process looks like. So the top pictures are all a legacy unit that was over 5 years old, had been running in the field, and was effectively at end of life. The bottom pictures are the same unit after it had been remanufactured. We unfortunately didn't have a remanufactured unit here today, but we did have one at OTC. We had it parked immediately adjacent to a brand-new unit, and it was hard for even industry veterans to look at the units and tell the difference. A true rebuild can effectively restart the life of a used unit. And why is that important?
So when we look at the economics of building a new unit, we have now entered a new world where EPA Tier 4 qualified engines have to be put on any new frac unit that is built for use in North America.
That has raised the price of a new frac unit approximately 25%. So going from a legacy Tier 2 unit to a Tier 4 unit, the price has gone up about 25%. When you compare the price of that new unit to what you can remanufacture to effectively a zero-hour rebuild, we call it, so taking it back to the beginning of life, a Tier 1 or a Tier 2 unit, you can do it for approximately half the price. The economics just make sense, and a lot of our customers are realizing that and using that as a source of advantage. What we've seen in 2016 at UE Manufacturing, where we are focused on remanufacturing, in 2016, about 20% of our capacity was dedicated to reman. You can think of capacity as bay space or man-hours, about 20% of our capacity. In 2017, it was 85% of our capacity.
Truly, a lot of our customers are moving to really focusing on their legacy fleets and getting them back to work. Finally, within our manufacturing group, just to double-click on our AccuFrac technology and why we think it makes a difference. One is the controls. It is an industry-leading solution that provides our customers that use the AccuFrac technology, a unique approach in how they can control their frac. It also provides the ability for telematics, where they can remotely monitor equipment. Not that a person in the field wouldn't, of course, operate a frac unit with the greatest tender love and care, but it gives the ability, gives the ability for the folks back in corporate to watch how that unit's being run.
It also gives the ability, the telematics gives the ability to do remote predictive analytics around maintenance requirements for the unit. And then finally, the telematics give us the ability for an e-commerce channel. So our ability to work with the customers around what parts do you need, what services do you need, and when do you need them? And we'll get the right part to the right place, at the right time, with the right technician. So we think that's a real source of advantage for Kirby. So in closing on manufacturing, again, about a third of our overall distribution and services revenue. ew is about half that. The market there in North America, this is domestic, I'm sorry, is predominantly driven by drilling and completion activity in North America and driven by the state of various people's fleets.
Remanufacturing services, driven by the same thing, with a special emphasis on the state of our customers' fleets. And then new product international. This represents about 20% of our business, and we think an opportunity for growth is the fracturing process is starting to mature internationally, and people are starting to put more pressure and more volume down-hole. Okay, so the path forward. I'll pause here and comment on the pictures that are on the screen. So at the top left, that's our quiet frac unit that we worked with a customer on developing.
eah.
-hmm.
. But more importantly, how do you look at the revenue synergy potential?
Yes.
Can you talk a little bit about some of the economic differences and some of the differences in equipment that you might be placing in the international market, and how that might be trending differently than domestically?
Yeah, it varies significantly-
Yeah By market. We've built some for a very specialized customer of ours in one geography that was a highly specialized unit that was probably well equipped to operate where it was gonna work, probably nowhere else in the world. You compare that to what's going into, for example, the Middle East, those units, again, vary significantly. Some of them look a lot like the units you saw here, others are more truck-based, and it—right now, it still varies. Margin-wise, tend to be a little bit better, but again, just associated with the risk profile. And that, again, very much depends by customer.
So,
Yes, sir.
Ben Nolan from Stifel. On the distribution side, obviously, you guys have pretty good market penetration, but there are geographies where you're looked to be notably absent.
Right.
Is acquisition really the only way to penetrate those markets? And is that ultimately the idea, or do you think that there's substantial economies of scale or efficiencies to be gained to that?
I would say so, yes. There are certain situations where you can get assigned territories by an OEM, but where there's an incumbent, or I should say, where there's a well-performing incumbent, it would typically be an acquisition model into a geography we don't currently represent. You could enter with an alternative brand, but again, that each case is specific. I would say our priorities are really focusing on what we've got. We've bought a meaningful franchise that the asset base, which can do a lot more. I think the organic opportunities for us are meaningful and significant, and that's really where we need to focus our time.
It's not so much on the acquisition side, other than, you know, call it bunts and singles, kind of small little add-ons or bolt-ons, but something meaningful, that wouldn't be our priority right now.
Joe, just a quick follow-up. You mentioned you had two facilities that were idled right now.
Yes.
How can we—how should we think about the utilization of your manufacturing capabilities in aggregate, both operating facilities and those that aren't operating, and the timeline to sort of get back to, you know, all facilities operating, getting back to, you know, I know you can operate 100% utilization, but-
Right.
You know, something, something resembling full utilization. Is that something that happens this year or not? And you know, do the supply chain bottlenecks maybe prevent that from taking place?
You read my mind, Jack. So I think there is significant upside within the facilities that we've got right now. I don't imagine in the near term reactivating any of the two idle facilities. So I think there's a lot we could do. There's a lot we can do with this facility. This facility in its past has put out a lot more product than it is right now, so we could certainly ramp it up. Really, the two biggest constraints for us right now are just kind of demand, right? There is meaningful demand, but like we've mentioned before, this upcycle in the oil and gas side feels different, and it feels better. Our customers are being very thoughtful, very return on capital focused.
This isn't 2011 or 2014, where they're coming in, you know, plunking cash down and saying, "Build them as fast as you can." This is, you know, they're coming in very thoughtful with a model, focusing on returns, saying, "Okay, here's what we wanna do. Let's be really thoughtful about what we build." So it is. There's, there's some demand components to it. Again, this isn't true, a true run-up like it was before. The demand feels ratable. And then there's just the supply chain constraints. A lot of the supply chain constraints have been driven by this transition to Tier 4.
All the engine OEMs are pushing out new models that, you know, didn't exist two years ago, didn't exist a year ago, and spooling up their supply chain for that Tier 4 has been a challenge for, really, for all the OEMs. They're largely catching up, but it, it's still a challenge. Yes, Dave?
Follow-up, Joe. On this morning, we talked a lot about peak margins with the marine business. Maybe a more difficult question for you to answer, seeing as how you're just integrating Stewart & Stevenson now, and, I mean, even United's only been here for seven years. But as you said at the beginning, both have very long histories. So it's a new day in, in the oil and gas markets, but kind of pie in the sky as you think about these businesses combined. High single digits is this year, where do you think the peak margins in this business can be?
You know, there's a lot of work to do. There's probably another couple hundred basis points of opportunity there. Look, this is a competitive business. It has the benefit that it, it's also relatively asset light, compared to our marine colleagues, but it, that does mean competition's real as well. But with cost and revenue opportunities, we think there's probably another couple hundred basis points. Okay. Anything else? Yes, sir.
On the next one. You know, you said, I think it was Odessa, you're running three shifts right now?
Yeah.
Can you-
I'm sorry, three shifts in Oklahoma City.
Can you give us the, like, you know, how many shifts you're running at the other three locations?
1 and 1.
Okay.
1 or 1.5. We would run more at Odessa, just given the surge of. This is. I would describe Odessa as light service work, and it's more about reactivation right now. But the labor constraints in Odessa are meaningful.
Which one started?
That was Odessa.
Gotcha.
The question was, for the folks who could not hear, which facility was restarted recently, and that was Odessa.
Yes, sir.
Is there any opportunity to do this, that kind of work or remanufacturing internationally?
Yes. Yes. I think the challenge is where. The other challenge is the installed base of horsepower internationally isn't close to the scale that it is in North America. But that being said, there, remanufacturing is more than about frac. It's, it's cementing equipment, it's coiled tubing support equipment, it's coiled tubing equipment. So there, there's other, other work and possibilities there as well.
This might be a little too far out, but along the lines of that question, have you gotten to the point where you're running into local content issues with the reman process?
Yes.
-internationally?
With local content, did you say?
Yeah.
Um-
How do you work around that?
In, yeah, in the U.S.? No.
No, intern-internationally.
But internationally-
Yeah.
We're not really doing reman work internationally right now. For new equipment, yes, that's always a challenge.
Mm-hmm.
Internationally, particularly in the Middle East, those requirements seem to be lightening up. Right now, it's not ideal, but it has certainly lightened up compared to where it was a year and a half, two years ago.
Mm-hmm.
But it's a challenge that we work to manage through.
Okay, anything else? Well, thank you all so much. This is, you know, I think, like one of our questioners said, and Joe Pyne commented, this is—the Stewart & Stevenson was a transformational acquisition for us. It completely changed the shape of the business, but it. Tremendous amount of opportunity, tremendous amount of value we've already created, but so much more that we can do, and we're very excited about that. And I appreciate all of you taking a few minutes to come here, or a few hours, I should say, to come see us and see what we do out here, so thank you. Okay. With that, I'll hand it off to Bill Harvey.
Well, yeah, I mean. Okay. Well, I hope you've had a good day today and get a sense of the operations and the culture of Kirby. Something I, as again, as you all know, I've been here for three months in Kirby, and I can tell you that that sense you got of the culture is what I had from day one. So it's a great culture, and one of the backdrops I thought that would make sense to review was the common threads. And what and the common thread I think you heard in almost every place was the capital allocation strategy. And so we're gonna spend just a few minutes covering that strategy and how it's applied and what the history has been of that. First and foremost, there's an intense focus on earning the cost of capital.
And it's easy to say, but it's a discipline to do it, and it has to be a disciplined investment approach. From day one, every project is looked at to get the hurdle rate, every acquisition, every meeting is focused on the cost of capital. Prudent risk management, safety, and is number one, I think, at every facility here, and that's risk management, environment, not to impact the environment. In insurance, there's some unique risks that are best protected by an event risk, by a comprehensive insurance plan. Balance sheet management at Kirby is part of our strategy. It's not just part of—you hear a lot of companies talk about balance sheet management, but at Kirby, it's part of the strategy. It puts the company in position to act when it's the best time to act.
Real opportunities emerge countercyclically, and that's what we'll try to take a look at in the next few minutes, about what has been the history of that and what's changed in the company. We also invest in the franchise for the long term through the cycle. I think one of the current investments which talked about this morning was the coastal ATB tugboats, and that investment's going on right now in a bad coastal market, but it sets the company up for the long term and invests at the right time. And strategic growth in this industry, from and in the marine industry primarily, is best done by acquisitions. And so the history of Kirby is to take advantage of that, and timing is what is the critical component.
You saw part of this earlier in other presentations about the acquisition strategy and how balance sheet management fits into that. Looking at 2010 to 2018, you see that during the downturn, the upturn initially, there's a series of acquisitions were made just before that, and the debt ratio got as high as 40%. Immediately after that, it moved down to 22%. 2015 was a pretty slow market, not a lot of opportunities, and there was a share buyback done. And then you see over the last short period, there's been a significant amount of acquisitions. When you take into account Higman, Stewart & Stevenson, and Targa, a lot of acquisitions, about $1.25 billion were spent and has moved the debt ratio back up to 31%.
Now, you do that when you have the confidence you can have the cash flow to, to reduce that. And, and Kirby has a long history of substantial cash generation through the cycle. If you look at every year, this is a slide many of you have seen before, the operating cash flows of the company have consistently been above the CapEx, and we put the CapEx, guidance we've given at $200 million-$225 million for 2018 there. So given the management of the CapEx, given the history, you see why there's the confidence there that we can reduce the debt pretty dramatically, pretty quickly. Then we wanted to take a look at what's really occurred over the last four years. We picked. I picked 2010, or sorry, 2014, and we're using actual data.
It's always easier to use actual data, so you can see Q1 2014, the number of inland barges, Q1 2018, it's gone up 15%. Coastal barges, in the meantime, as we talked about this morning, has reduced 24%, but the total number of barges in the company, up 12%. And more importantly, the total capacity is up 17%. So that's net, inland, and coast, cap- and coastal. If you look at the average barge age at the same time, it's reduced by 1.7 years. So another way to put it, over the four-year period, instead of aging, the actual, the actual barge age has declined by almost two years. Total marine assets have gone up 27%.
So in the marine assets of Kirby have moved from $3.1 billion to about $4 billion. So significant growth while improving the asset quality of the company. And then what we wanted to highlight is, during the downturn, the operating leverage of the company has increased. We look at distribution and services, the transformation that Joe just discussed, and it's been even bigger. It's actually created a strong franchise. This takes Q1 2014, $153 million of quarterly revenues, Q1 this year, $400 million, and an increase of 162% in revenues. Margins, 8.4% there, up to 9.6%, 1.2% expansion of margins.
So you take the quarterly income going up, and the assets have moved up, up from $573 million to over $1.6 billion. If you're taking it in Kirby as a whole, you look at those assets, about 30% of the assets of the company are in D&S, distribution and services now, 70% in marine. So what, what's happened is it created a national distribution and service engine franchise with a significant increase in earnings potential. And we talk a lot about what could the earnings be in the future. We wanted to highlight, while things have been not going well, there's been a dramatic increase in the operating leverage of the company and the position of the company to earn going forward.
This slide is a summary of just what the EPS did over that period. So again, we've highlighted it was during a period of declining EPS. This year, we've turned, and it started to go back up, but we have an increase in marine capacity, 17%. To put it in perspective, in 2014, Kirby earned about $422 million of operating income in marine. So and the margin for good then, 24%. If you take that analogy and just have taken an average, you can see what you could get a 17% increase if everything stayed the same in 2014 in operating income, which on an EPS basis, is pretty substantial. On the revenue side, the D&S is even a different story altogether.
The D&S going up 162% has a very dramatic increase. You take, In 2014, the whole year, the margins were 7%, 7.2%. The margins have gone up, and the, and the actual revenue has over doubled. So the, so with what Joe has just discussed, too, the increase in D&S margins going up 3%, he mentioned that he thinks he can widen it a little more. We're using it off of the 2014 base. So as you all know, in the first quarter, the margins were above 9%. Already, we have part of that. What's changed, too, and it's not immaterial, the tax rate.
Tax rate on EP- going from 37% to 25%, that alone would re- if you retrospect, if you look at 2014, would be over $1.25 a share, just the tax rate alone, and the other numbers above there are just as substantial. Finally, the share, one of the costs is a slight dilution. We had-- There had to be shares used, about 5.3% dilution, if you want, compared to 2014. And remember, there was a share buyback there. So one of the reasons that number is smaller than what you would anticipate, just looking at S&S, is there was a share buyback over that period. The final thing that I don't, we don't have up here is the int- the debt level. Debt level has gone up.
2014, the interest cost for the company for the full year was about $22 million. We're running about $40 million a year right now, but we do think that's gonna come down pretty, pretty quickly, where our goal is to, in the short term, direct the cash flow and reduce debt, and that'll, that'll bring the interest cost down. Again, that interest cost on an EPS basis is pretty minor, that change, but we have to. It is capital. Capital was employed. And we highlight why, why would you invest in Kirby?
It's the two strong franchises, it's a proven growth ability, it's a strong outlook in both core businesses, it's the conservative financial management, the balance sheet being maintained and, and putting ourselves in an opportunity for new, new, new acquisitions or new, new opportunities, investment-grade rating, and then the return on capital-driven decisions, which the history shows the timing of them is critical, and the company has done them at the right time. And finally, just what's in place right now. Compared to 2014, there's been a dramatic increase in the marine, marine operating leverage. There's been a huge increase in D&S operating leverage. And with that, I'll open up for questions.
Thank you. Justin Bergner, Gabelli & Company. With respect to the tax rate, do you have a perspective on how much your cash tax rate has changed from tax reform? Because obviously, you were using depreciation before to-
Yeah. We still-
Keep cash taxes below book.
Yeah, we still have that. You know, the rules stayed in place, so given where we are now, we don't expect to pay cash taxes in the next year or two. So given the acquisitions, what we can use to apply against taxable income and the rules that we're in our capital spending.
Hi, Chris Leshock with Ballast Equity. The last slide, slide seven, it had the chart 2014 earnings of $4.93. Do you have an estimate on how much of that was non-marine?
Well, you could take. I have it. I could get it for you, but if you just take the revenues, if you take the revenues from the previous slide-
Yeah, the quarterly, it's $0.60.
Yeah. So it's a very small number. If you take the quarterly revenues for $153 million, I'm trying to think if I could get that for you.
Well, I took the 13 times 4 quarters.
Yeah.
$52 million at a 37% tax rate, divided by 57-
Yeah.
Fifty-seven cents.
If you look at the increase on this slide, and if you say, "What, what has been the impact of the D&S revenue increase in the margins?" And you use the tax rate, you're gonna be over $2 per share increase.
Again, that's just math you can do from the 2014 note statements, looking at where we are now and looking at the increase in revenue and the increase in margin and just using, again, the 25% tax rate. Or actually, that would be using the 37% tax rate, because I would do it with the 37, and then I would just work out the tax rate separately. But any way you look at it, it's over $2 a share.
It's Mike Webber from Wells Fargo. Considering what you just went through in terms of the taxes, S&S, the increased leverage there, Higman, SEACOR, now much larger in the fleet, is it fair to look at 2014 as a mid-cycle number?
Yeah, you'll have to make that. I think it was a good year, but there was a lot of moving parts. I think that what David talked about this morning was should we be satisfied with 2014 margins? And we're and the challenge for Christian is no. The twenty, and that was 24% margins and for 2014 for Marine, our challenge is to get higher margins than that.
Mm-hmm.
D&S is just a new business, so you can't compare it. The pickup with D&S
Sure
is huge.
Right. Thanks.
Okay. Well, thank you, everyone. This concludes our Analyst Day. It's the first one in probably 12 years, I think, right, Joe? It's been about 12 years. We felt it was important, given all that we've done here recently with the acquisitions of Higman, Targa, and other acquisitions in the marine space, and then, of course, the acquisition of Stewart & Stevenson. We felt it was important to give you a little more deeper dive into the businesses, give you a feel for the leverage points, and listen, we're very excited. If you look at where we are right now in the businesses, inland marine's coming out of the bottom, just starting an upward trend. I think coastal is at the bottom.
Maybe it's another year or two before it emerges, but it's definitely at the bottom. And then when you look at distribution and services, we're really just started an upcycle in the oil and gas side about six months ago. And that's, I think it's fresh legs, it's very early innings. And then if you look at the rest of the non-oil and gas business, there is a tremendous amount of potential in distribution and services. One, as the U.S. economy continues to improve, and then, two, if you take my self-serving macro view from last night, I think the industrial economy in the U.S. is gonna grow. And when you look at the products that we represent and we work with, I think that's gonna be powerful for distribution and services.
So at any rate, we're pretty excited right now. It's a good time for us. We just came off of a good period where we were able to put our balance sheet to work. And as Bill mentioned, we'll deliver pretty rapidly. The free cash flow should go up pretty substantially here in the next couple of years. And you know, we'll do it again. These businesses do cycle, but what we try and do is be prudent through those cycles and invest your capital wisely. So that's all we have, and we really thank you for coming, and have a safe trip home, and thanks again. Eric, you wanna hang on?
Yeah. So, this concludes the webcast. Thank you, everybody, here in Houston and online for joining us today, for your interest in Kirby. If you have any questions, you can feel free to give me a call anytime. My number is 713-435-1545. Thanks for joining us.