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 & Services, and several members of his, 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 in 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 trans-- marine transportation segment and a distribution and services segment.
We 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. 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 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 two small divestitures in 2015, and most notably, the two large transformational acquisitions were in 2011, United Holdings, and in 2017, September of 2017, with Stewart & Stevenson, and those were both timed with pretty good upcycle in the oil and gas business. So who we are, Kirby Distribution & 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. In 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. And later in the presentation, we'll spend a little more time talking about each of the industry verticals that make up that 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, 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.
So 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 and many of the other things that you saw outside here today. And 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, the 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. Our territory represents approximately half of the U.S. population, three of the five 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 work to follow our customers around the country.
Okay, now I want to 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 oilfield 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, 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. So 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 where of the geographies of 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's really compelling right now is the amount of reactivation and rebuilding of equipment that is going on. We sell the parts, we sell the service that puts the frac equipment back to work in the United States, and it's, it's served us well, and we're, we're optimistic about the future prospects of that business. We've got about 22 service centers, again, located in the key shale basins. Our next largest industry subsegment is our legacy commercial marine services business.
So this is the group that, that services towboats, fishing boats, other commercial heavy marine equipment that operates on both America's inland waterways as well as offshore. One of our largest customers you saw this morning with our Kirby Inland Marine and Kirby Offshore Marine. Just a very powerful franchise, a very stable business, very ratable. 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, 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, 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-powered 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 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 and 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 a wonderful opportunity for us to sell parts and service in the marketplace. This is another market that's probably been underinvested in by us, and we see 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 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 install 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 U.S. drilling and completions activity. The remaining 60% of the distribution business is really tied to the overall U.S. commercial and industrial market. We see within each of those segments, we've got a couple opportunities for us to double down and then grow, but mostly it's about execution and leveraging our cost base to efficiently service our customers.
So that's the distribution business, and I want to take a few minutes 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, in proprietary designs, and even within the first months of, of the transaction, post-closing of the transaction, we were able to, 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 four main facilities, Oklahoma City, Odessa, Edmond, and then the facility we're in right now, our Telge Road facility, represents about 600,000 sq ft of capacity. We also have two 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, 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, 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.
We 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 3 weeks ago. I'll now kind of... We'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. 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. The second real source of advantage there is thinking about our technology. We have led innovation over the last couple 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—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 have employed 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 are here today saw a little bit of this in the data van. This is the software that controls the frac. Stewart & Stevenson's solution is proprietary, and 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 3-5 years old or older than 5 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 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 five 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 base 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. New product is about half that. The market there in North America, and 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 downhole. 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. That, again, we could hold a very civilized conversation right next to a unit that's running at full speed. To the right of that is the electric frac that we worked with another customer on. Bottom right is our AccuFrac technology that you saw on the data van, and on the left is a data center that we installed last year. Again, these are multiple power generation backup units on a data site in the middle of nowhere.
So as we think about this business, this is really a service business. At its core, it's about distribution, and it's about taking those products and engineering them for our customers. We feel like we've got three meaningful sources of differentiation. One is the technical solutions we bring with our over 2,000 employees and the breadth of products that we represent. The network scale advantage we have. That size and that scale is meaningful. And then finally, the partnerships that we have with our OEM base and our customer base, where we work with both partners up and down the chain to truly think about how we can help them add value. As we think into the future, in the medium term, not even long term, but medium term, where are our kind of leverage points for earnings growth?
The first is about rationalizing our cost base and our asset base. So this is finish the integration with Stewart & Stevenson, but it's also about a lot more. It's about truly looking at that network and how can we get the most value out of it, not only from a cost base, but from a growth opportunity base. How can we better serve our customers? The second is data extended services. So it's taking that AccuFrac to the next level, but it's also taking similar approaches to that, which we're already doing in the power generation world, in the marine, engine world, and all of the other industry segments as well. It's focusing on a few of the industry verticals we talked about in the distribution segment. So in particular, the power generation, the on-highway, those are two segments where we feel like we're underpenetrated.
Rail King is another highly profitable business that we can focus on and grow. And then finally, it's about expanding our OEM relationships. So this might be about adding new geographies, or it might be about filling holes in our product line. This might be about working with our current OEM partners to help fill holes in our product line and ultimately better serve our customers, have more touchpoints with our customers. All right, so with that, thank you very, very much for your time and attention, and what questions do you have? Jack. One second, I think because we're on the webcast, we're gonna be handing out microphones, and I, of course, will ask David and Bill and any of the other executive team to hop up as appropriate.
Great. Well, Joe, thank you for that presentation. It's Jack Atkins with Stephens. Could you just to start off with maybe talk a bit about the game plan in terms of how you wanna get deeper penetration into the on-highway markets and the power generation markets, and sort of what the timeline looks like?
Yeah.
Sort of what the high-level strategy is there?
Yeah, great question. The first step for us was kind of reorganizing our sales force. We had a sales force that at Stewart & Stevenson and at United, that was really more centered around geography. It was product line agnostic. It was industry agnostic. By shifting them to a functional focus, where we've got a core group of folks that are every day chasing power generation opportunities, marine opportunities, industrial opportunities, on-highway opportunities, in a very focused way, we think can grow our penetration and ultimately grow our customer relationships there. Timeline-wise, we're already seeing some green shoots there. Those relationships, though, take time to build.
I will note on the power generation side, several of those, the projects that we sell into are large, and the gestation cycle can be quite long, so it will take time to build. But we're excited again about the bottom line opportunities in those two opportunities. Yes, sir.
Thanks, Joe. A couple questions. Jon Chappell from Evercore. First, on slide 30, when you lay out the kind of mix of the manufacturing side, if we remember back to the United transaction back in 2011, I think there was a thought process then that there'd be a transition more towards reman ufacturing as a greater piece of the revenue pie. So that 55, let's call it 75, 25, where do you ultimately think the reman business can get, and what's the margin difference between reman and OEM?
So great, great question. This is, I, I do wanna note, inclusive of LTM for both companies, so kind of pro forma looking back as we try to describe the business that we are right now. If you look backwards at just UE Manufacturing, it would be closer to 50/50, if not even a little higher on service, and that those aren't exact numbers. We think longer term that, that should grow up from this 25/75 number. Given what we've inherited with Stewart & Stevenson and, you know, our pipeline right now, I kind of hesitate to give a target number, but it is something we're focused on growing. We have additional capacity. We have also the ability to move work around internally within our network, which we're already doing, to move more new product work out of Oklahoma into our Telge facility or vice versa, to balance demand load.
So we do think we have the capacity to grow that service number pretty significantly. Your second question was on margins. We do expect that the service business has slightly higher margins. Some of that can get caught up in parts and the markup associated with parts, but it should have slightly higher margins.
Okay. And then second, I was talking to Joe Pyne earlier today, and, and he referenced the Stewart & Stevenson acquisition as being similar to what the Hollywood Marine acquisition was back in the late 1990s for the inland barge business. So I wasn't covering the company back then, but I imagine with Hollywood Marine, there was some cost synergies that were the plan, but ultimately, what made it transformative were the revenue synergies that came from it. So as you integrate Stewart & Stevenson, we're almost one year from the initial announcement-
Mm-hmm.
How are the cost synergies gone?
Yep.
But more importantly, how do you look at the revenue synergy potential?
So I'll start with the cost synergies. We committed in the first year $20 million of cost synergies. We're well on track to achieve beyond that in the first year. We're comfortable that we'll achieve those synergies in the first year. We also believe that there are additional cost synergies available. Like all things we do at Kirby, we were quite conservative in our assumptions around what we would expect in an acquisition model. On the revenue side, there are meaningful synergies as well. We have already had three new build opportunities that we've booked, that I'm convinced if Stewart & Stevenson and United were not together, neither of us would have been able to fulfill. It was a bit of a sum of the parts, and we were able to chop the work up and spread it out across the network and achieve the business.
So look, I think there are meaningful revenue opportunities as well. And then, you know, everything we talked through on the distribution side, we've seen significant sales uplift because putting these businesses together, it's just, it's easier to do business with a company like this when we can follow them across that network. It's very powerful for our customer base. Yes, sir.
Thank you. Justin Bergner with Gabelli & Company. A two-part question. On the margins in the business, are they higher in the distribution side, or are they higher in the manufacturing and remanufacturing side? And sort of help us think about, I mean, obviously, just I guess, if we're in a normal part of the cycle, you know, what limits the margin expansion in the manufacturing and remanufacturing? How high could it theoretically get up to?
Sure. Okay, so a couple of questions there. Right now, the margins are about the same in both sides of the business. We think there's opportunities on both sides. So, I don't know if I want to be any more specific than that, but,
I mean, clearly, there are certain. So you saw his list of distribution trade lanes. I mean, there's certain ones of those that have very high margin and certain ones that are lower margin. It's probably best from a competitive standpoint, we don't talk about that, but on average, what he said is the way to think about it.
Yeah. On the manufacturing—the second question was kind of what limits the upside on the margin in manufacturing and remanufacturing. I think there's a couple things, and one is supply chain constraints. So we're already seeing that, the ability to get parts and new engines and new transmissions. The other thing does delay or create kind of supply chain friction. I think we've done better at that than anybody, but it's still a challenge. And with our scale, we can move stuff around, and we can work with customers to move commitments around to try to keep everybody happy. And that's the value of scale. That, though, does challenge the ability to kind of push margins too high.
And I think the second thing is there's just a lot of, there's a lot of kind of small, scrappy independents that will kind of enter this market and, you know, try to do kind of, I'll call it bootleg reman. You know, they'll come in and do, "Oh, no, we can do that." And it's, it's - they'll push the kind of the fringe of that market to kind of cheap reman. It isn't truly full reman or full service, but it's, it will keep you running. So your price, to some extent, is always checked by that. We think we've got barriers to entry with our OEM relationships, with our scale, but you're always going to be checked to some extent at the low end of that service .
We get a premium to them for sure, but they keep you from pushing it too far, I guess, is how I'd say.
It's Mike Webber from Wells Fargo.
Hey, Mike.
You, you talked a bit about some of the innovation happening here, I guess, some of the quieter tech, some of the electric power. Can you talk a bit about penetration and then maybe a sense of scale around margin differences and or opportunity set within some of those more innovative solutions you guys are coming up with?
I'm not sure I understand it, but your penetration, you're looking for a kind of a market share number?
Yeah. How meaningful is it for you right now? And do you think it's gonna be an increasingly meaningful part? I mean, I mean, material factor in the next 3-4 years.
I don't know if the innovative things that we're doing still feel a little specialized. I don't know if they're gonna truly kind of revolutionize the market. They tend to be customer specific, and even beyond that, and when I say customer, I'm talking the pressure pumpers. And then from the pressure pumpers to the E&Ps, specific to certain applications. So my perspective, and could very well be proven wrong here, is that I don't think those technologies are going to, you know, assume a large, significant market share of pressure pumping i f that was the question.
Yeah.
Yep, margin-wise, you know, I'd say it's, it's commensurate with the amount of R&D work and engineering work that goes into it.
And then, specifically, you guys should get the slide up here now when we think about new product on the international market.
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?
Yeah, it varies significantly b y 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 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 ultimately that the idea, or do you think that there's substantial economies of scale or efficiencies to be gained to that?
I would say so. So, yes. There are certain situations where you can get assigned territories by an OEM, but where there's an incumbent, 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, 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, of which could, 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 kind of, 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 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 y ou 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 2 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 2 biggest constraints for us right now are just kind of demand, right? There is meaningful demand, but like we've mentioned before, this upcycle on 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 are some demand components to it. Again, this isn't 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 2 years ago, didn't exist 1 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.
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 in for seven years. But as you said at the beginning, both have very long histories. So it's a new day 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 t hat 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.
You know, you said, I think it was Odessa, you're running three shifts right now?
Yeah. I'm sorry, three shifts in Oklahoma City.
Okay. Can you give us the, like, you know, how many shifts you're running at the other three locations?
1 and 1.
Okay.
Or 1 and 1.5. We would, we would run more at Odessa, just given the surge of, and 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, are meaningful.
Which one was restarted?
That was Odessa.
Got you.
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 t hat 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, but it is in North America. But that being said, 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's 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 internationally?
With local content, did you say?
Yeah. And h ow do you work around that?
In the US?
No, international. International.
Internationally.
Yeah.
We're not really doing reman work internationally right now. For new equipment, yes, that's always a challenge. 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, t remendous 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, 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 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 is number one, I think, at every facility here, and that's risk management. Environment, not to impact the environment. And 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're trying 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. Strategic growth in this industry and in the marine industry primarily, is best done by acquisitions. 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. I picked 2010, 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 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 barge age has declined by almost two years. Total marine assets have gone up 27%, so 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 from $573 million to over $1.6 billion.
If you're taking it Kirby as a whole, you look at those assets, about 30% of the assets of that company are in D&S, distribution and services now, 70% in marine. So 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. And 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 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 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 actual revenue has almost over doubled. 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 going from 37% to 25%, that alone would be if you retrospectively 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. And finally, the share, one of the costs is slight dilution.
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 we don't have up here is 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 costs down.
Again, that interest cost on an EPS basis is pretty minor, that change, but i t is capital. Capital was employed. And we highlight why, why would you invest in Kirby? It's the two strong franchises, it's the 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 acquisitions or n ew 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 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 k eep cash taxes below book.
Yeah, we still have, y ou 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. It just so given the acquisitions, what we can use to apply against taxable income and the rules that were in our capital spending.
Hi, Chris Leshock with Ballast Equity. The last slide, slide 7, 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, if I, 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, that'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.
If you took the 13 times 4 quarters-
Yeah.
$52 million at a 37% tax rate, divided by $0.57
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 on the margins?" 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. Oh, actually, that would be using the 37% tax rate, because I, I would do it with the 37%, and then I would just work out the tax rate separately. But any, 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, you know, much larger in 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 the challenge for Christian is no. And that was 24% margins for, and for 2014 for Marine, our, 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 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, in the marines, 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 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 delever 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, anything else?
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.