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Kirby Corp  (NYSE:KEX)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning. Good morning, and welcome to Kirby Corporation's 2018 Fourth Quarter and Full Year Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. We ask that you limit yourself to one question and one follow-up. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Eric Holcomb, Kirby's Vice President, Investor Relations. Please go ahead.

Eric S. Holcomb -- Vice President, Investor Relations

Good morning, and thank you for joining us. With me today are David Grzebinski, Kirby's President and Chief Executive Officer; and Bill Harvey, Kirby's Executive Vice President of Finance and Chief Financial Officer.

A slide presentation for today's conference call, as well as the earnings release that was issued earlier today can be found on our website at kirbycorp.com. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available on our website in the Investor Relations section under Financials.

As a reminder, statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Looking -- forward-looking statements involve risks and uncertainties and our actual results could differ materially from those anticipated, as a result of various factors. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31st, 2017, as well as in subsequent filing on Form 10-Q for the quarter ended September 30, 2018.

I will now turn the call over to David.

David W. Grzebinski -- President and Chief Executive Officer

Thank you, Eric, and good morning everyone. Earlier today, we announced adjusted earnings per share of $0.75. This is without impairment charges and compares to our guidance range of $0.55 to $0.75 per share. GAAP earnings were a loss of $0.41 per share for the 2018 fourth quarter. This loss includes one-time after-tax charges of $1.16, primarily related to non-cash impairment of coastal vessels that would require ballast water treatment systems, as well as the impairment of the remaining portion of goodwill in our Osprey business. For the full year, GAAP earnings were $1.31 per share, including the impairment charges and other one-time items that were identified in these quarters, 2018 earnings per share were -- was $2.86 per share. This represents a 44% increase in earnings relative to 2017 earnings per share, net of the one-time items.

Today, we also announced the signing of a definitive agreement to purchase the marine transportation fleet of Cenac Marine Services for approximately $244 million in cash. Cenac Marine transportation fleet is an ideal complement to Kirby's inland fleet with well maintained 30,000 barrel barges with an average age of four years and modern towboats with an average age of six years. I will discuss more about the Cenac acquisition in a few minutes.

In the fourth quarter, our Inland Marine transportation business experienced rough -- excuse me, robust levels of activity, which resulted in tight market conditions and barge utilization levels for our fleet in the low-to-mid 90% range. With these tight market conditions, spot market rates increased in the mid-to-high single-digit range compared to the third quarter.

During the quarter, we experienced seasonal wind and fog along the Gulf Coast and extensive lock delays resulting in a 28% increase in delay days compared to the third quarter. While these conditions had adverse effects on our operating efficiencies, particularly on contracts of affreightment, our inland business maintained operating margins similar to the third quarter -- excuse me, in the high -- in the mid-to-high teens.

In December, we closed the purchase of 27, 10,000 barrel clean tank barges from CGBM with an average age of approximately five years. These barges are an excellent addition to the Kirby fleet, especially given the petrochemical build out that continues along the Gulf Coast. In coastal, market fundamentals showed modest signs of continued improvement. Throughout the quarter, we saw limited availability of large capacity vessels, particularly in the Atlantic and Gulf Coast regions, which resulted in pricing increases in the low-to-mid single digit range on renewing contracts and spot deals.

In mid-December, we took delivery of our new 155,000 barrel ATB which had been on under construction and which we acquired from another operator in the second quarter. This state-of-the-art ATB will commence operations in the first quarter and operate under a new multi-year contract with a major petrochemical customer on the Gulf Coast. As mentioned in my opening, we took a non-cash impairment charge during the fourth quarter related to 4 coastal ATBs and one 1 barge that require ballast waters treatment systems. We completed a comprehensive financial analysis on the viability of installing, these ballast water treatment systems on all vessels in our fleet.

We determine that we could not earn a sufficient return on the incremental investment for these older barges, therefore, we have elected to repair the assets and shorten the remaining life. We expect to early retire these ATBs, on their next major shipyard dates, which range between 2020 and 2023 and coincides with the mandatory compliance date for the new ballast water regulations.

In distribution and services, despite ongoing reductions in oilfield activity, as a result of lower oil prices and insufficient takeaway capacity in the Permian, we reported increases in both revenue and operating income compared to the third quarter. Vendor supply chain issues, which hindered our manufacturing Group's ability to deliver new pressure pumping units during the third quarter were largely overcome, as a result, we had a substantial sequential increase in new units delivered to our customers. Additionally, demand for remanufacturing and service was good as some customers readied fleets for 2019.

During the quarter, we continued to book a number of new orders, which resulted in an increase to our manufacturing backlog, as compared to the end of the third quarter. Our backlog today is good and should provide steady levels of activity well into the second quarter of 2019. In summary, for the fourth quarter, the impairment charge underscores our commitment to invest only, where it makes sense and enable us to avoid uneconomic future capital investments in aging equipment.

From an operations perspective, we had a solid quarter with earnings per share at the upper end of our guidance range. Inland continues to experience favorable utilization rates with prices trending higher, coastal has experienced a slight improvement in market conditions and distribution and services, financial results and backlog improved sequentially despite an uncertain oilfield market.

In a few moments, I'll talk more about our Cenac acquisition and our outlook for 2019. But before I do, I'll turn the call back over to Bill -- over to Bill to discuss our fourth quarter segment results and the balance sheet.

William G. Harvey -- Executive Vice President and Chief Financial Officer

Thank you, David and good morning, everyone. In the 2018, fourth quarter, our Marine Transportation segment revenues were $382.5 million, with an operating income of $44.5 million and an operating margin of 11.6%. Compared to the same quarter in 2017, this represents a 16% increase in revenue and 56% increase in operating income. Compared to the third quarter, revenues increased slightly and operating income decreased by $4 million. The reduction in income is attributable to increased delay days in inland and planned shipyard maintenance on several large capacity vessels in coastal that we discussed on our last earnings call.

In the Inland business, revenues were approximately 20% higher than the fourth quarter of 2017, due to the Higman acquisition, increased customer demand and additions to our pressure barge fleet. Compared to the third quarter, Inland revenues increased primarily due to rising spot market pricing. During the quarter, the Inland business contributed approximately, 75% of Marine Transportation revenue, which is unchanged sequentially. Long term inland marine transportation contracts are those contracts with a term of one year or longer contributed approximately 65% of revenue, with 59% attributable to time charters and 41% from contracts of affreightment.

Term contracts that renewed during the fourth quarter were generally higher with a few exceptions. Spot market rates increased in the mid to high single-digit range sequentially. During the fourth quarter, the operating margin in the inland business was in the mid to high teens.

In the coastal business, fourth quarter revenues were up approximately, 3% year-over-year. Compared to the third quarter, however revenues declined approximately 3%, as a result of seasonal activity reductions in Alaska and planned shipyard maintenance for several large vessels. Overall, our utilization was unchanged in 80% range.

With regards to pricing, although rates are contingent on various factors such as geographic location, vessel size, vessel capabilities and the products being transported, in general average spot market rates improved significantly year-on-year with sequential improvement in the low to mid single digits. We also realized some pricing increases on term contract renewals. During the fourth quarter, the percentage of coastal revenue under term contracts was approximately 80%, of which approximately 85% were time charters. Coastal's operating margin in the fourth quarter was in the negative mid single digits with the shipyard maintenance on several key vessels having a notable impact.

With respect to our tank barge fleet, a reconciliation of the changes in the fourth quarter and full year 2018, as well as projections for 2019 is included in our earnings call presentation posted on our website.

Looking at our Distribution and Services segment, revenues for the 2018 fourth quarter were $339 million with operating income of $28.2 million. Compared to the 2017 fourth quarter, revenues and operating income declined, primarily due to lower activity in our oil and gas business and reduced power generation equipment rentals. These were partially offset by higher demand in commercial marine. Compared to the 2018 third quarter, revenues increased 5% or $16.2 million and operating income improved $4.3 million, primarily, as a result of increased deliveries of pressure pumping units. During the fourth quarter, the segment's operating margin was 8.3%.

In our oil and gas market, revenue and operating income were down compared to the 2017 fourth quarter, due to softening of activity levels in the oilfield, which resulted in lower demand for new and overhauled transmissions, engines, and parts for our customers. Additionally, we experienced reduced demand for new and remanufactured pressure pumping units.

Compared to the third quarter however, revenue and operating income improved as recent vendor supply chain issues were resolved resulting in a significant sequential increase in the number of new pressure pumping units delivered to our customers. Furthermore, demand for remanufactured pressure pumping units also increased during the quarter. For the fourth quarter, the oil and gas businesses, represented approximately 65% of distribution and service revenue and had an operating margin in the high single digits.

In our commercial and industrial market, compared to the 2017 fourth quarter, revenue and operating income increased primarily due to improved demand for service our marine diesel engines related to the inland market and the offshore market along the Gulf Coast. This was partially offset by reduced year-on-year rentals of standby power generation equipment, which had experienced higher levels of activity during the 2017 hurricane season.

Compared to the third quarter, revenues in our commercial and industrial business declined as a result of seasonal reductions in rentals of standby power generation equipment and sales of Thermo King refrigeration units. For the fourth quarter, the commercial and industrial businesses represented approximately 35% of distribution and services revenue and had an operating margin in the high single digits.

Turning to the balance sheet. As of December 31st, total debt was $1.4 billion. Our debt to cap ratio at the end of the fourth quarter was 30.5%. During the quarter, we used cash flow from operations to fund $70 million of capital expenditures, as well as $34.7 million to purchase 30 inland barges and one towboat. Recent increases in working capital, resulting from delayed shipments of new pressure pumping units are expected to decline in the first half of 2019, as units are shipped. As of this week, our debt balance is $1.4 billion.

I'll now turn the call back over to David to discuss our guidance for 2019 and the Cenac acquisition.

David W. Grzebinski -- President and Chief Executive Officer

Thank you, Bill. Before I discuss our guidance for 2019, I'd like to comment more on today's announcement regarding the purchase of Cenac's marine transportation fleet. Cenac's young fleet consists of 63 inland, 30,000-barrel tank barges and 34 inland towboats, which operate on the lower Mississippi River system and the Gulf Intercoastal Waterway. The purchase also includes one ocean-going barge and two offshore tugboats. This acquisition is a clear strategic win, as it will improve our ability to service customers, lower the average age of the Kirby fleet and reduce future capital expenditures. The purchase price of approximately $244 million will be financed through additional borrowings and we expect the deal to close late in the first quarter subject to normal closing conditions and regulatory approvals.

In 2019, we expect this acquisition will be net neutral to slightly positive to Kirby's earnings and that's taking into account integration costs, inherited contracts, time needed to integrate the fleet and higher interest expense. Beyond 2019 as existing contracts expire and we realize the benefits of anticipated synergies, this acquisition will provide enhanced earnings for Kirby and higher returns.

In our press release this morning, we announced our 2019 guidance of $3.25 per share to $3.75 -- $3.75 per share. The midpoint of our guidance range -- range reflects more than 20% year-on-year growth in earnings per share, compared to 2018 excluding one-time charges. Our capital spending for 2019, it is also expected to be between $225 million and $245 million and that includes some capital for the Cenac fleet. This represents a year-on-year reduction in capital spending of approximately 20%.

Looking at our segments. In the Marine Transportation segment, we expect the inland barge demand -- that inland barge demand will remain strong throughout 2019 driven by modest increases in GDP, additional petrochemical capacity scheduled to start up and new Permian crude pipelines, which will bring additional volumes to the Gulf Coast. As a result of these factors, we expect our barge utilization rates will remain in the low to mid 90% range during the year and demand will continue to rise, as the year progresses. Term contracts are expected to represent approximately 65% of inland revenue with the balance coming from the spot market.

In the coastal market, we expect moderate improvement in utilization with rates ranging in the low to mid 80% range. Industry barge requirement -- retirements, which totaled 2.1 million barrels of capacity in 2018 are expected to continue, as a result of ballast water treatment regulations. This combined with stable to slight improvements in clean and crude volumes should yield low to mid single-digit pricing improvements year-on-year. Overall in Marine Transportation, we anticipate that 2019 revenues will increase in the high single digits to low teens year-on-year.

In inland, revenues are expected to increase 10% to 15% primarily due to full -- the full year impact of 2018 barge acquisitions, the contribution from Cenac and healthy customer demand. In offshore, modest pricing and utilization improvement should yield slight year-on-year revenue growth. We expect the marine transportation operating margin should improve to the low to mid-double digits with inland ranging in the mid to high teens and coastal improving to breakeven or slightly positive. These improvements are expected to occur gradually, as the year progresses with the first quarter being on the lower end of these ranges.

For our Distribution and Services segment, recent oilfield activity declines and price volatility are creating uncertainty for our key customers. As a result, we currently expect to see reduced year-on-year activity in our oil and gas distribution services business, particularly related to the sale of diesel engines new and overhauled transmissions and their associated parts. In contrast, however, the current strength of our manufacturing background -- backlog will provide for a sustained levels of activity through the first half of 2019. Additional demand for more efficient and environmentally friendly pressure pumping units, as well as equipment for international projects is expected to continue into the second half of the year.

Furthermore, demand for remanufactured pressure pumping units and service is expected to increase year-on-year, as customers seek economical alternatives to keep fleets working in the oilfield. For the year, the oil and gas market is expected to represent approximately 60% of distribution and services revenue.

In our commercial and industrial markets, we expect year-on-year growth in revenue and operating income, primarily driven by increasing demand for backup power systems and specialty equipment rentals In 2019, we have several large projects plan, which will not only provide for new equipment sales, but also for service and maintenance contracts throughout the year. Activity in our commercial marine and nuclear backup power generation business is expected to be stable for the year.

Overall, in distribution and services, we expect revenues to be flat to up mid single digits in 2019. The lower end of our guidance range assumes continued softness in the oil and gas market. The high-end assumes continued good demand through the second half of 2019 and improvement in the oilfield demand, as pipelines from the Permian come online later this year. While operating margins will be adversely impacted by unfavorable product mix, including high including higher margin oil and gas service revenues being replaced by lower margin back-up power system equipment sales, additional synergies and cost savings opportunities should keep operating margins similar to 2018 in the high single digits.

Now to wrap things up. We finished 2018 on a high note delivering strong results from operations and setting up our segments for growth in 2019. In inland marine recent acquisitions, including the anticipated closing of Cenac have made our fleet larger and more efficient than ever giving our team additional flexibility to service our customers. With continued strong demand inland marine is poised to deliver meaningful increases in revenue and earnings going forward. So the market had begun to show signs of improvement. In the last two years, we have taken significant steps to reduce the cost structure of this business, right sized our fleet to maximize returns and invested counter cyclically into new and more efficient marine equipment. Our actions paved the way for year-on-year profitability improvement and additional growth when the market fully recovers.

In Distribution and Services, while the oilfield represent -- present some uncertainty in the near term continued pressure pumping equipment orders, expansion of remanufacturing demand and growth in power generation should provide some stability in this segment during 2019.

And finally, our balance sheet remains strong. We expect to generate significant -- a significant increase in free cash flow during 2019 and debt reduction will be our top priority. But we could still take advantage of some smaller acquisitions that might align with our strategy and create positive returns for the Company and our shareholders.

So operator, that concludes our prepared remarks. We are now ready to take questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) As a reminder, we ask that you limit yourself to one question and one follow-up. Our first question comes from Ben Nolan with Stifel.

Ben Nolan -- Stifel -- Analyst

Great. Thanks. So I'm kind of little off guard here. I -- first really quick. I noticed that this quarter, you didn't provide one quarter Q1 guidance just curious if -- if maybe that's a little bit of a change in approach or what -- what to think about that?

David W. Grzebinski -- President and Chief Executive Officer

Yeah. Good morning, Ben. Yeah. There is a bit of a change. We've canvassed our -- our large shareholders and long-term shareholders and to -- to a person they've recommended us to get out of the quarterly guidance business and we -- we agree with that because we want people focusing on the long term and not -- not just the quarterly -- quarterly numbers. So that's -- that's what caused that change or what led us to that change.

Ben Nolan -- Stifel -- Analyst

Okay. Sounds good. So now onto the real business. So this Cenac acquisition looks pretty good, but trying to frame in exactly how to -- how to maybe think about the value and appreciating that it probably is going to take about a year to get the accretion out of it. But two things related to that A) let's say next year after it's fully integrated, how -- how accretive do you think something like this could possibly be? And then B) with maybe say relative to replacement cost, where does this -- where would this fall do you think?

David W. Grzebinski -- President and Chief Executive Officer

Yeah. So I'll share the exact numbers there in a second here. But look Cenac is is a great acquisition for us because it's really good equipment, very top notch group of mariners, very well run company, and there are some major synergies that come with it, particularly or in especially around capital spending. It's very young fleet. And to your point, we're buying this at a significant discount to -- to replacement value, it's probably about 35%, approximately 35% discount to replacement value. If you -- if you discount it for the 4 year -- 4 year to 5 year age on average it's still approximately 25% discount to -- to the discounted replacement value. So it's -- it's a great win for us. It helps get our fleet even younger with some really well run well, well maintained equipment and we're quite excited about it.

And now in terms of -- of accretion as we said in the call, in our prepared remarks, it's kind of neutral to slightly positive. And to your point, that's about takes a while for the synergies to come in, plus some of the contracts have to roll off that we've said a while ago, but it's -- it's more meaningful next year. It's hard to say -- to put precise numbers on it. One of the things with Cenac is we're buying assets. So we don't know their -- their financials. We know them in context of our financials. We know roughly what it would cost to run that fleet under our scenario. So we think it's going to be fairly meaningful for 2020. Don't want to give you a precise number, but it's -- it's a win-win for us.

Ben Nolan -- Stifel -- Analyst

Okay, great. I have other questions. But I think I've used up my two -- two questions there (ph). So I appreciate it. Thanks, David.

David W. Grzebinski -- President and Chief Executive Officer

Thanks, Ben.

Operator

Our next question comes from Michael Webber with Wells Fargo.

Michael Webber -- Wells Fargo -- Analyst

Hey, good morning guys. How are you?

David W. Grzebinski -- President and Chief Executive Officer

Hey, Michael.

William G. Harvey -- Executive Vice President and Chief Financial Officer

Good morning, Michael.

Michael Webber -- Wells Fargo -- Analyst

Hey, I just want to follow-up on the Cenac acquisition and David I'm trying to kind of rectify the ideas that it's acquired at a 25% discount or a steep discount to -- to replacement or even kind of -- kind of at discounted look -- kind of a look back on to where you would have been acquiring at the time versus the lack of accretion in FY1. Does that imply that -- I mean that business just -- just loss generating for the first year. I'm just trying to -- trying to just kind of -- to rectify those to kind of diverging views.

David W. Grzebinski -- President and Chief Executive Officer

No, no, it's certainly not loss generating. It's neutral to slightly accretive in the first -- first year probably less than $0.05, but it's still accretive for the first year. It just takes a while for us to get those synergies in and you know a lot of the synergies are around horsepower management and integrating their team into our team. It just takes a -- takes a while.

Michael Webber -- Wells Fargo -- Analyst

Yeah. I'm just -- I just thought like compensate the Higman right, which took like a -- I guess a quarter and a half, two quarters versus -- versus four for this.

David W. Grzebinski -- President and Chief Executive Officer

Well, yeah, hopefully, hopefully we're closer to Higman, but we're looking at it realistically. It's a great fleet and but there's a lot of work to integrate these fleets.

Michael Webber -- Wells Fargo -- Analyst

Sure.

David W. Grzebinski -- President and Chief Executive Officer

As you might imagine.

William G. Harvey -- Executive Vice President and Chief Financial Officer

And Michael, we should assume, of course that this thing will close at the end of the first quarter. So we are talking three quarters and when we do accretion, we of course put a financing cost against it for this. So...

Michael Webber -- Wells Fargo -- Analyst

Yeah.

William G. Harvey -- Executive Vice President and Chief Financial Officer

So we expect it to be accretive. We just want to be conservative about how much it can -- it really impact us after you have those integration costs in the first nine months.

Michael Webber -- Wells Fargo -- Analyst

Yeah. Okay. That's fair. That's fair. And then David on -- on -- I think in slide -- slide 6, you kind of talk about D&S and the kind of Q4, look forward to 2019, it's obviously a big area of focus. And the last bullet there, you kind of mentioned improvement in manufacture -- in new orders, in terms of the backlog and visibility and kind of a stable level of activity through Q2 of 2019, is -- is that's the right way, the right lens kind of the look -- look at your visibility into -- in the D&S. And I mean, does that imply -- what does that imply for I guess how much variability is reflected in the D&S annual guidance, if I think about that Q2 '19 figure versus say if that was Q4, '19.

David W. Grzebinski -- President and Chief Executive Officer

Yeah. It's a -- that's good question. The backlog really gets us through in -- well into the second quarter. Obviously, we need additional orders to fill up manufacturing in the back half. We think they'll come and you hear -- you hear the pressure on the pressure pumping companies for capital discipline. We actually think that's very healthy. We're having great conversations with our customers and there is now a balance between maintenance and new equipment orders. But let's -- let's be very clear, they're very busy. I mean, they're still -- there is still huge amount of activity out there and they're running this equipment, as you know, very hard. So there's a nice mix of needed replacement and maintenance.

Now the good news is they are spending within their cash flow. Now, I -- I saw some numbers for '18 were about 65% of them were spending within cash flow, and I saw some recent numbers that said it's closer to 90%, 95% are spending within their cash flow. I think that's really healthy. But we've -- it's hard to predict six months out. But based on the activity levels we think they'll continue to do what they've been doing, which is order periodic replacement equipment and then do the maintenance. So it feels a lot healthier the way they are headed. Of course, you watch the crude price move around and it gives you a little pause here. But everything we're seeing and hearing from the customers, I mean, I'm sure you've listened to or read some of the transcripts from some of the pressure pumping companies, it's relatively positive.

Permian still going strong. We saw some statistics it said that 80% of the drilling in -- in the Permian is -- is for replacement of decline curve -- declining production in the decline curve. So there's a lot going on out there. The activity is going to increase and so that -- that's good. And by the way, we do have other things in our manufacturing group besides just frac equipment. We do -- we do blenders and hydration units and nitrogen units on the frac side, but we also do seismic equipment that largely goes international. We do supply some international oilfield equipment, but then we've got non-oilfield equipment like Rail King, as you know we do make Rail King units. So all of that's pretty -- pretty healthy. And so we're -- we're pretty excited about our visibility in the first half. But to your point, it gets a little less clear when you look into the second half.

Michael Webber -- Wells Fargo -- Analyst

Okay. That's helpful. I appreciate the time guys. Thank you.

David W. Grzebinski -- President and Chief Executive Officer

Yeah. Thanks, Michael.

Operator

Next question comes from Jon Chappell with Evercore.

Jonathan Chappell -- Evercore -- Analyst

Thank you. Good morning, David.

David W. Grzebinski -- President and Chief Executive Officer

Hey. Good morning, Jon.

Jonathan Chappell -- Evercore -- Analyst

Just one more on Cenac acquisition. One of the comments you made in the press release was about the contracts and how their existing contracts or legacy contracts is one of the reasons, why it would probably just be neutral this year. Is there any way to kind of gauge or give any information on timing of their contract rollovers, are they typically kind of one year in nature, so we should expect mark to market to happen soon after the one-year anniversary. And also, anyway to put in broad terms, maybe how much below market, where your contracts, they are, as we think about the potential step up next year?

David W. Grzebinski -- President and Chief Executive Officer

Yeah. No, I think your characterization is pretty, pretty, pretty accurate there. The average contract is probably one year. They do have some multi-year contracts, so it's just going to -- it -- it'll should roll off in the next 12 months roughly the bulk of it. And yeah, it's -- as you would expect the prices, as you've seen spot prices have been going up sequentially. We've been announcing them. So it's just going to -- there are some of those older contracts, so just kind of have to reprice to the market. You could probably look at -- at what we've been saying about sequential increases in spot rates and use that as a gauge if you're trying to figure out how much of a repricing would be there. That -- that's a rough guide.

Jonathan Chappell -- Evercore -- Analyst

Okay. That's helpful. And then second on the inland margin guidance, you're talking mid to high teens, which is still seems to be a sequential year-over-year improvement over '18, which is probably the trough. But you'd mentioned back in the Investor Day in May that you thought that peak margins could be higher than they were last peak granted we're far from peak, but given the Higman transaction and the full integration in 2019 and some synergies there, the pricing improvements that you've spoken about both on the spot and the term side, is it realistic to think that you could at least maybe touch the 20s at some point in '19 or is that still just too ambitious at this point of the cycle?

David W. Grzebinski -- President and Chief Executive Officer

It's probably a little ambitious. This cycle -- well we're in early days of the cycle, right. I mean, last -- last year our inland business, I think was in 14%, 15% in terms of operating income margins. Yeah, we would expect it to be higher mid teens -- mid to high teens this -- this year. I guess at the end of the year, we could -- we could approach that if things continue on the same pace, but it may take longer than that, and we like that. We don't want spiky thing. This needs to roll out nice and orderly and it's really about the supply and demand and the demand is picking up, as the petrochemical plants come online and GDP continues to be positive. So it should be more ratable and not -- not a big ramp-up in margins.

Jonathan Chappell -- Evercore -- Analyst

Okay. And that's helpful. Thanks, David.

David W. Grzebinski -- President and Chief Executive Officer

Thanks, Jon.

Operator

Our next question comes from Gregory Lewis with BTIG.

Gregory Lewis -- BTIG -- Analyst

Hey, guys, how are you. Good morning.

David W. Grzebinski -- President and Chief Executive Officer

Hey Gregory, how are you?

Gregory Lewis -- BTIG -- Analyst

I'm doing -- I'm doing great. So I have, I guess the first question, I would ask is, you guys did a good job of kind of taking -- growing through over the last couple of years the down cycle through acquisitions, as we think about the Cenac acquisition is -- should we be thinking about that as in terms of fleet growth. I guess, how much of that do we think maybe could be renewal versus absolute incremental growth?

David W. Grzebinski -- President and Chief Executive Officer

Well, I would view Cenac as -- is mostly incremental growth, but it makes our total portfolio of age much lower. Let -- let me just give you some statistics. In the last 12 months, we've done in the marine space little less than $900 million in acquisitions, if you add them all up. So if you look at our barge capacity at the beginning of '18 to right now including Cenac the number of barges, we have is up about 26% and the barrel capacity is up 36%. So when you think about the earnings power of the company, it's the highest it's ever been and we're just -- just now coming out of the -- kind of the bottom of the cycle starting to get into a decent -- decent return kind of environment.

So with those kind of barrel capacity increases and barge capacity -- just the barge numbers increasing that's incremental and the earnings power is much, much higher than -- than it's ever been for the Company. And that's all under the context of having the average age of our barge fleet, if you look at the beginning of '18, the average age of our barges was probably about 14.5 years. I think with Cenac, we'll be maybe 13 years, maybe a little below 13 years, I haven't done the math myself here, but it's probably around 13 years. So we took another year and a half of the average age of our fleet well expanding it. So it's -- like I said earlier, when I characterized Cenac, it's kind of a strategic win.

Gregory Lewis -- BTIG -- Analyst

Okay. Perfect, guys. And then just one other. There was on -- I think it was in the Journal today talking about how you've seen increased crude by rail in the back half or the fourth quarter of 2018. I mean, as we think about US crude production, I mean, have you seen any of that also increases in crude oil volumes in -- on the inland system as of the -- over the last few months?

David W. Grzebinski -- President and Chief Executive Officer

Yes we -- yes, we have. There are -- are more barges moving crude. It's interesting with Venezuela backing out of the market potentially here we actually may see more as the -- the Gulf Coast refineries like that heavy crude. So if Venezuela's backing out, we could see more demand for Canadian crude. I don't know their capacity just to supply more demand. But that -- that might bring more volumes to the water in that -- it come down to the St. Louis area by pipeline and then transferred to barges and then comes South. We'll see, but -- but in general to the answer your question, we have seen a pickup in the number of barges moving crude, it's not astronomical, but it is more than it was at this time last year for sure.

Gregory Lewis -- BTIG -- Analyst

Okay, guys and thank you very much for the time.

David W. Grzebinski -- President and Chief Executive Officer

All right. Greg, thanks.

Operator

Our next question comes from Kevin Sterling with Seaport Global Securities.

Kevin Sterling -- Seaport Global Securities -- Analyst

Good morning, David and Bill. How are you?

David W. Grzebinski -- President and Chief Executive Officer

Hey. Hi, Kevin.

Kevin Sterling -- Seaport Global Securities -- Analyst

So David, I'll come back to Cenac by the way congrats on that acquisition, you guys do a great job, continue to sell it in the industry. But how much, I know we talked a little bit about some of their contracts and things, how much of their business was spot versus contract?

David W. Grzebinski -- President and Chief Executive Officer

Yeah, most of it was contracted. They had very little spot. I don't know the precise number, but it was -- is largely contracted fleet.

Kevin Sterling -- Seaport Global Securities -- Analyst

Yeah. Would -- would you say was it a distressed sale or they've gotten a little bit too far out in front of their SKUs (ph) with maybe a little bit more leverage since it looks like given they are young fleet, they've had a lot of growth here, the past couple of years in a tough environment? or was it just the owner just looking to kind exit the business?

David W. Grzebinski -- President and Chief Executive Officer

Yeah, it's the latter. They were not distressed at all. It is a very well run company, well -- very well capitalized. Well, we don't have -- we don't have their financials, but from what we know they were well capitalized and well run. This was not a distressed situation. It's more about the owner ready to make a change.

Kevin Sterling -- Seaport Global Securities -- Analyst

Okay. And last question here, David. It looks like after probably call it, say four years of muted inland barge deliveries, 2019 could be the first year that we see tank barge deliveries increased possibly doubling. How should we think about that? Does that give you a little bit of pause for concern or is that mainly you think for replacement?

David W. Grzebinski -- President and Chief Executive Officer

Yeah. It's mostly replacement. There is some additions there, but let me put it in context here. We've had a decline for the last 4 years in terms of net barges. I think last year the delivery -- well you know, River Transport News published by Sandor Toth is a great -- is a great journal that's put out on our business. I think in his latest version that came out this week, he was saying 2018, the number of new barges delivered was something like 77, which is pretty much a low for the last decade or so and if not the lowest in a long while. And he -- he was estimating maybe a 150 barges in '19, it may be more than that, but it's more about pent-up demand. If you think about our business with people, who have been a little cash-strapped some maybe more than others and there is a bit of pent-up demand to replace some older equipment. So we're not overly concerned. We do think there'll be some retirements here. We may see a little fleet growth, but it's probably on the order of 1% maybe in the outside 2%, but we're not overly concerned at all.

Kevin Sterling -- Seaport Global Securities -- Analyst

Okay. Well, that's all I had. Thank you for your time this morning, and I would echo what you said about Sandor he -- he does a great job with the industry. So thank -- thank you, David.

David W. Grzebinski -- President and Chief Executive Officer

Yeah. Thanks, Kevin.

Operator

The next question comes from Jack Atkins with Stephens.

Jack Atkins -- Stephens Inc -- Analyst

David, Bill, Eric, good morning.

David W. Grzebinski -- President and Chief Executive Officer

Hey, good morning, Jack.

William G. Harvey -- Executive Vice President and Chief Financial Officer

Good morning.

Jack Atkins -- Stephens Inc -- Analyst

So just -- just let me get started here on the -- on the coastal side. David, you referenced the early retirement of some of those older vessels that you kind of gave us the -- the timeline. Is there a way to think about the -- the number of barrels or just the number of vessels that you plan on retiring early. We're just -- I'm just trying to think about what the -- what the go forward or steady state fleet will look like after these retirements? How many of them (ph) retire?

David W. Grzebinski -- President and Chief Executive Officer

Yeah. There -- there's essentially five vessels being retired. One has been retired just now, we just retired it. It was actually one of the the leased barges. Then the other four will come out basically starting in 2020 all the way through '23 and again, you might just say one per year approximately coming out as they come for the regulatory shipyard. We'll plan on retiring them.

Jack Atkins -- Stephens Inc -- Analyst

Okay.

David W. Grzebinski -- President and Chief Executive Officer

So like -- yeah and it's not an immediate five vessels come out and impact the earnings. They'll -- they'll work off their -- their contracts.

Jack Atkins -- Stephens Inc -- Analyst

Okay. Okay. Makes -- makes lot of sense. On the distribution and services side, Bill, could you maybe give us an update on -- on -- on sort of where things stand in terms of equipment delivery deferrals because of the vendor bottleneck issues, It sounds like you guys have made a lot of progress getting those -- those vendor issues resolved, but do you still have some equipment that needs to be delivered in the first quarter, just trying to get a feel for where that -- where that stands.

William G. Harvey -- Executive Vice President and Chief Financial Officer

Well, there's always some equipment and there's always some delays, but the big bottleneck was over and you saw that in the results for the fourth quarter, a lot of that was toward as we mentioned in September or October excuse me -- was at -- toward the end of the quarter. So in effect what leads to (ph) that inventory. The inventory we had is (technical difficulty) and through -- going through AR. And as David mentioned earlier, the backlog got bigger through -- by the end of the quarter and that was just -- and so what we're doing now, we're just basically settling down to more steady, steady manufacturing.

Jack Atkins -- Stephens Inc -- Analyst

Okay. Okay, that's good to hear. And one -- one last one if I could squeeze it in here. Just -- just in terms of the guidance for 2019 in terms of inland revenue up, call it 10% to 15% including Cenac, is there a way to think about acquired revenue including Cenac in 2019 sort of what's your assumption is for that including, I think maybe a couple of months of Higman and some of the other smaller acquisitions, just trying to get a feel for because I know there's been quite a few acquisitions over the last 12 months, the acquired revenue that you guys are -- are assuming for 2019.

David W. Grzebinski -- President and Chief Executive Officer

Yeah that's -- I don't have the number off the top our head here. We don't have it prepared. The part of the problem is Higman and Targa are already fully integrated.

Jack Atkins -- Stephens Inc -- Analyst

Right. Yeah.

David W. Grzebinski -- President and Chief Executive Officer

Yeah. CGBM is pretty much fully integrated. I think on Cenac if you want to think about it incremental revenue could be $70 million to $100 million.

Jack Atkins -- Stephens Inc -- Analyst

On a full year -- on a full year basis.

David W. Grzebinski -- President and Chief Executive Officer

But yeah on a full year basis that's a rough number.

Jack Atkins -- Stephens Inc -- Analyst

Sure.

David W. Grzebinski -- President and Chief Executive Officer

It gives you -- it gives you a ballpark to shoot in.

Jack Atkins -- Stephens Inc -- Analyst

Okay. That -- that's helpful, David. Thanks very much. Thanks again for the time.

David W. Grzebinski -- President and Chief Executive Officer

All right. Thanks, Jack.

Operator

Our next question comes from Randy Giveans with Jefferies.

Randy Giveans -- Jefferies -- Analyst

Hey guys, good morning.

David W. Grzebinski -- President and Chief Executive Officer

Hey, good morning, Randy.

Randy Giveans -- Jefferies -- Analyst

Hey, so just looking specifically at the new pressure pumping equipment orders improving the manufacturing backlog. I'm assuming January, it's a pretty strong month for orders historically. So how have you seen orders over the last three weeks or four weeks. And then for those orders today let's call it, when would that equipment likely be delivered. Is that a lead time of three months, six months longer?

David W. Grzebinski -- President and Chief Executive Officer

Yeah. I think it's three -- January is not -- at least in our businesses tends to be no much -- not much different from any other month. So we don't -- we are not seeing any big surge or anything. This is just steady toward the end of the year. We just continue to build -- build and three months to six months is delivery is probably a pretty good estimate. Yeah. Now some of that was ongoing. When we talk about or some of it was ongoing and being delivered in the first -- in the first three months of the year, as well. This is -- this is a mix of big things, it's not a big lumpy -- lumpy backlog.

Randy Giveans -- Jefferies -- Analyst

Got it. So it sounds just like this year is an anomaly. If we were looking at January '20, '15, '16, '17, you wouldn't have much guidance for the back half of those years either in terms of backlog.

David W. Grzebinski -- President and Chief Executive Officer

That's exactly -- that's -- actually that's a great point. That's we would not see much past the next six months at any point in time.

Randy Giveans -- Jefferies -- Analyst

Okay, good. Just want to clarify that. And then you mentioned back-up power systems, back-up power generation that's kind of an area of growth. I guess, what are the margins on that business? And how much an annual revenue increases, do you expect in kind of that business in 2019 versus 2018?

David W. Grzebinski -- President and Chief Executive Officer

Yeah, excuse me, Randy. Yeah, the margins are thinner than in that business than they are in the the oilfield manufacturing business. So kind of mid single-digit kind of margins and then manufacturing tends to be high -- mid to high single-digit, sometimes we get into the double-digits at time. So from a mix and we've -- we've said that in our prepared remarks that the mix that might impact margins a little bit because of that mix, we are expecting more power generation volume this year.

I don't -- I don't have a revenue number for you, but it should be up. I am sorry, I can't give you more details. It's coming down into the segments that I don't have in front of me. But we do expect that market to grow. And if you think about power generation, we're in a 24/7 data world now and everybody seems to want back-up power generation. So we're hoping that -- that business continues to build. We see it in our rental fleet, particularly for -- during around storm, storm season that -- some of our customers want that back-up power on standby, and they're willing to pay for it. So it's a growing market. I wouldn't -- I can't characterize it in terms of revenue, but it's -- it's good business for us and we like it.

Randy Giveans -- Jefferies -- Analyst

Okay. And then a quick fiery (ph) second question on the coastal market. Any chance that makes money in the first quarter '19, I mean, second quarter, is that more of a back half 3Q, 4Q to flip to kind of a positive breakeven positive.

David W. Grzebinski -- President and Chief Executive Officer

Well we know -- yeah, good question. We know the first quarter it's probably not going to. We've got the shipyards carry over into the first quarter. So we know that there are also a little bit of a headwind there. And then that new unit starts, I think a seven year contract toward the end of the first quarter. So it'll take a while. I would say it's -- it's -- we won't -- we'll likely lose money in the first quarter, and it should ramp up through and improve through the -- the remainder of the year.

Randy Giveans -- Jefferies -- Analyst

Perfect. That's it from me. Thank you.

David W. Grzebinski -- President and Chief Executive Officer

Thanks, Randy.

Operator

Our next question comes from David Beard with Coker Palmer.

David Beard -- Coker Palmer -- Analyst

Hey, good morning gentlemen.

William G. Harvey -- Executive Vice President and Chief Financial Officer

Good morning, David.

David W. Grzebinski -- President and Chief Executive Officer

Hey, David.

David Beard -- Coker Palmer -- Analyst

Just my lot of questions have been answered, but I have a little bigger picture question on coastwise relative to Game Theory. Would you guys take the capacity out, does that tip your hit that other people may keep the boats in or convert them betting that prices will rise. and if that's not the case, could you actually make a decision later on if the market gets stronger to put these ships through dry dock?

David W. Grzebinski -- President and Chief Executive Officer

Yeah. Game Theory is a good way to put it, OK. Yes, they've got capital discipline and they're looking at barges that are 23 years to 30 years old. The -- that the math really doesn't work. I can't see -- that the market is improving, but it would take a lot for the math to start working. So it just depends on their capital discipline. Hard for us to say, we try and be very rigid on our capital discipline, for obvious reasons and that's just kind of the way we think.

That said, and to your core question, if we get to those shipyard, say in 2023 and the math is significantly differing, we could actually add the ballast water treatment and spend the money on the -- on the shipyard and extend the life another five years. So we do have some optionality there. But based on the math that we look at now and think about, we don't think that will happen, but that option is there, if the market does -- does recover or it becomes more robust.

William G. Harvey -- Executive Vice President and Chief Financial Officer

Hi, David, in our -- looking at the detail at the economics and projections and looking at different pricing scenarios, we -- the realistic scenario and our judgment at this point is that we needed to take -- take action from and mark these -- mark these or take the amortization down right now. So there is optionality, but it's not -- not -- it's not -- it's remote. It's not a high probability.

David Beard -- Coker Palmer -- Analyst

Good. Good. And then switching to inland again bigger picture relative to the petrochemical build out because we were waiting or talking about this for quite a while. Are there -- are there any data points you can point to either longer-term contracts or volume of product moved that's starting to impact the market? Or is it still a bit too early, just given the -- how the product mix is rolling out.

David W. Grzebinski -- President and Chief Executive Officer

Yeah. There are some studies out there. IHS put some studies out you can look at some of the things like methanol volumes in there, but I -- I don't know of any public free databases that show those volumes. I mean we've seen volumes increasing. And matter of fact, Eric in the back of our IR presentation shows some of the volumes that are increasing. He's got a -- a chart that shows things like butadiene, propylene, methanol and other -- other products growing, but and that comes from a third party source, but I don't know of any other data points that you can look at. You could probably Sandor Toth sometimes lock volume -- volumes do lock, you could look at that, that's -- that might be a source. But I don't have any of that on the -- on the tip of my fingers here, David.

David Beard -- Coker Palmer -- Analyst

No, no, that's fair. Appreciate the color on that and as well as the offshore game theory. Thank you.

David W. Grzebinski -- President and Chief Executive Officer

Thanks, David.

Operator

Our next question comes from Bill Baldwin with Anthony Securities.

William Baldwin -- Anthony Securities -- Analyst

Hi, good morning, David and Bill and Eric. Is everybody doing well?

David W. Grzebinski -- President and Chief Executive Officer

Thanks.

William Baldwin -- Anthony Securities -- Analyst

Congratulations on another fine acquisition.

William G. Harvey -- Executive Vice President and Chief Financial Officer

Thank you.

David W. Grzebinski -- President and Chief Executive Officer

Yeah, thanks, Now the real work starts you know, Bill.

William Baldwin -- Anthony Securities -- Analyst

I know, but you got a lot of experience with that. So you guys have done a heck of a job during this downturn, in terms of enhancing the earning power of your company.

David W. Grzebinski -- President and Chief Executive Officer

Well, thank you.

William Baldwin -- Anthony Securities -- Analyst

On the D&S side, you mentioned you had some initiatives on new -- new equipment, I believe you stated and also service and maintenance type business. Any color you can shed there as to what those initiatives might be in that -- in that segment of the business?

David W. Grzebinski -- President and Chief Executive Officer

Yeah. Over the -- over the last, well, through most of '18 we've invested in some roof line and employees in the Permian, in particular, we've ramped that facility up, it's available for our customers. We probably have 100 units sitting on the premise now. Some of them waiting for budget, the other -- and some that maybe trickling through. But we've -- we've expanded Joe Reniers and his team have expanded that facility and added -- added maintenance techs throughout -- throughout our -- our D&S business. So we've -- we've expanded that way. It's more -- it's not a lot of capital, as you know, it's -- but it's -- it is people we've added -- added the techs across the system to deal with the maintenance and the service opportunities. That's -- that's basically the summary there, Bill.

William Baldwin -- Anthony Securities -- Analyst

Are those techs primarily folks that go out to the sites, where the equipment is? Or are these techs that work their location then -- their the clients (multiple speakers)

David W. Grzebinski -- President and Chief Executive Officer

It's both. It's both.

William Baldwin -- Anthony Securities -- Analyst

Both. Okay. Back during the Analyst Day you indicated, I think it was indicated target operating margins, I believe for D&S were forecast somewhere in the 11% to 12% area based on after synergies have been realized and the integration of Stewart & Stevenson. Is that -- is that still pretty much the thinking over the next several years as said.

David W. Grzebinski -- President and Chief Executive Officer

Yeah. Over the next several years, I would say, this year we're probably still in that high-single digit range, part of it is the mix that we talked about on the power generation, but there is some cost synergies that Joe and his team have identified and they're going after. But they are going to be harder ones to get, the easy cost synergies we've got -- we've gotten already, but there is some tougher ones that we're going after and those will roll in over the next two years.

I give you, one examples, like Oracle, we're rolling out Oracle across all of the D&S locations. We had it in some of the locations. But as you know, any ERP roll out it takes -- takes unfortunately takes about a year, sometimes a year and a half to get it all up and running. But once we have everybody on Oracle things like sharing inventory et cetera and leveraging the G&A costs across the organization becomes much, much easier, but it just takes time and investment to get there and that's just one example.

William Baldwin -- Anthony Securities -- Analyst

Okay. And just one last quick one here. Roughly how much of your D&S business is international or is it percent of your revenues.

David W. Grzebinski -- President and Chief Executive Officer

Yeah, 10% -- 10%maybe 15%. It's -- it's lumpier, I would say. There is some orders that are -- that -- you can get a decent size order, but it's lumpy, right. But we are seeing more activity on international, which is -- is nice, it helps with our kind of our revenue distribution, if you will.

William Baldwin -- Anthony Securities -- Analyst

Right. I know that Schlumberger and even Halliburton both indicated they see an inflection points on the international, have been for a little bit. Is your business related to oil and gas activity, drilling and completion activity primarily overseas in the D&S...

David W. Grzebinski -- President and Chief Executive Officer

Yeah. It's primarily yeah, almost exclusively it's -- it's oil and gas activity.

William Baldwin -- Anthony Securities -- Analyst

Okay. Thank you very much.

David W. Grzebinski -- President and Chief Executive Officer

Thanks, Bill.

Eric S. Holcomb -- Vice President, Investor Relations

All right. Kevin, we've got time for one more.

Operator

Our last question comes from John Daniel with Simmons Energy.

John Daniel -- Simmons Energy -- Analyst

Hi, David, thanks for putting me in. You noted higher expected reman activity for the frac business. So congratulations there because I am not mistaken it. I think that makes you the busiest fabricator in the business. But I'm curious how you would characterize the reman projects at this point, are they -- customers embarking on call it a shave and a haircut approach? Or are they full blown rebuilds? And then to the extent if they are full blown -- OK I'll let you answer that and I'll do my follow-up.

David W. Grzebinski -- President and Chief Executive Officer

Yeah. No, sorry. It is -- it's a mix. I mean, we've got some that's shave and a haircut is a very good description kind of just fix this. We know you could do more, but we need to get it back out. We want to -- we want to keep our capital spending down and our R&M spending down. So there is some shave and a haircut stuff, and then there's some that just we'll do the full -- full reman. I mean you know, the customer base very well, John. So you know, you probably know, who does what, but it is a mix. We -- it's a broad mix of between those two extremes.

John Daniel -- Simmons Energy -- Analyst

Okay. And when someone is bringing in units today and again I kind of apologize for the technical question here. But we keep hearing about the virtues of the higher horsepower tolerance and then obviously, the Tier 4 engines are now out there, are people bringing the trailers in and upgrading the pumps to higher horsepower, are you guys adding the -- the third axle and putting on the newer engine or we -- can you just describe a little bit of what the big rebuilds are entailing these days?

David W. Grzebinski -- President and Chief Executive Officer

There's some of that, but not a lot. I would tell you, we have -- some of our newer orders are the higher horsepower up to 3,000 horsepower. So but the remans very little, well there's some -- some -- some upgrading through the higher horsepower.

John Daniel -- Simmons Energy -- Analyst

I appreciate for putting me in guys. Thank you.

David W. Grzebinski -- President and Chief Executive Officer

Thank you.

Eric S. Holcomb -- Vice President, Investor Relations

All right. Well, thank you everyone for your interest in Kirby and for participating in our call today. If you have any questions or comments, you can reach me directly at 713-435-1545. Thanks, and have a great day.

Operator

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 64 minutes

Call participants:

Eric S. Holcomb -- Vice President, Investor Relations

David W. Grzebinski -- President and Chief Executive Officer

William G. Harvey -- Executive Vice President and Chief Financial Officer

Ben Nolan -- Stifel -- Analyst

Michael Webber -- Wells Fargo -- Analyst

Jonathan Chappell -- Evercore -- Analyst

Gregory Lewis -- BTIG -- Analyst

Kevin Sterling -- Seaport Global Securities -- Analyst

Jack Atkins -- Stephens Inc -- Analyst

Randy Giveans -- Jefferies -- Analyst

David Beard -- Coker Palmer -- Analyst

William Baldwin -- Anthony Securities -- Analyst

John Daniel -- Simmons Energy -- Analyst

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