Kirby Corporation (KEX) Q4 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the Kirby Corporation 2019 Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Eric Holcomb, Kirby's Vice President of Investor Relations. Please go ahead.

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 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. This conference -- during this conference call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available on our website in the Investor Relations section under Financials. As a reminder, statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2018. I will now turn the call over to David.

Thank you, Eric, and good morning, everyone. Earlier today, we announced adjusted fourth quarter earnings of $0.58 per share. This excludes onetime charges of $0.53 per share, including oilfield-related inventory write-downs and severance. On a GAAP basis, we reported earnings of $0.05 per share for the 2019 fourth quarter. For the full year, GAAP earnings were $2.37 per share. Excluding the onetime charges, 2019 earnings were $2.90 per share, which compares to 2018 earnings of $2.86 per share. Today, I want to discuss 3 acquisitions, with the most significant being the signing of a definitive agreement to purchase the marine transportation fleet of Savage Inland Marine for approximately $278 million in cash. The purchase of Savage's fleet, which includes 90 tank barges and 46 to towboats, is an excellent strategic fit with Kirby's Inland Marine business. I'll discuss more about the Savage acquisition in a few minutes. We also purchased a small barge fleeting operation in Lake Charles, Louisiana during the fourth quarter. Lake Charles is an area that has experienced significant petrochemical expansion in the last year with more new projects planned in the future. With this acquisition, we improved our inland fleeting capabilities in this critical market, and we will be better able to service our customers' growing barging needs. In distribution and services, we purchased Convoy servicing Company In early January for $40 million. Convoy is the primary supplier of Thermo King refrigeration equipment and services and parts in Northern Texas and Colorado. This significantly expands our geographic distribution territory with this OEM. Looking at the fourth quarter, our inland marine transportation business results declined relative to a good third quarter as our operations were slowed by seasonal impact of wind and fog along the Gulf Coast. While overall delay days increased 33% sequentially, our weather-related delays more than tripled. And this significantly affected our efficiencies and profitability. Additionally, chemical plant refinery -- chemical plant and refinery utilization levels softened a bit during the quarter, due in part to extended turnarounds. Also, as announced on our third quarter conference call. We had higher planned barge maintenance, which contributed to higher operating expenses relative to the third quarter. That said, the inland business is very strong, and I will discuss more about what we are seeing in the market during my outlook comments. In coastal, market fundamentals were good with our barge utilization in the mid-80% range. Throughout the quarter, the market experienced limited availability of large capacity vessels, particularly in the Atlantic and Gulf Coast regions, and this resulted in tight market conditions and continued pricing increases on renewing contracts. Additionally, several of our barges, which had been trading in the spot market have now entered into new term contracts. In distribution and services, revenues and earnings declined relative to the third quarter as our oil and gas customers curtailed their activity and spending levels. The impact was felt in our distribution business, which experienced reduced demand for new transmissions and overhauls, parts and service as well as in manufacturing where there were a lack of orders and weak demand for remanufacturing. Although we believe oilfield activity levels will modestly recover in 2020 and pent-up demand is growing, the timing of a recovery for these businesses remains unclear. During the quarter, we implemented additional workforce reductions, and we also adjusted the valuation of certain oilfield and pressure pumping-related inventory to align with current market conditions. While these decisions were difficult, we believe these actions were necessary to rightsize our business. In summary, the fourth quarter had some challenges. Despite these headwinds, we have ensured that Kirby's long-term earnings power remains intact. The inland market remains strong. Fundamentals in coastal are improving, and we continue to strengthen our inland fleet through acquisitions. Pent-up demand is growing in the oil and gas market, and our recent actions rightsize the segment for near term while maintaining our ability to benefit from the inevitable market recovery. In a few moments, I'll talk more about the Savage acquisition and our outlook for 2020. But before I do, I'll turn the call over to Bill to discuss our fourth quarter segment results and the balance sheet.

Thank you, David, and good morning, everyone. Before I review our segment results, I want to provide additional details on the onetime charges we incurred in the 2019 fourth quarter. In total, we recorded pretax charges of $40.3 million or $0.53 per share. The most significant charge relates to oilfield and pressure pumping inventory write-downs totaling $35.5 million or $0.47 per share, including several rigs, which were constructed by Stewart & Stevenson prior to our acquisition in 2017. The remaining charge relates to workforce reductions, which resulted in severance and early retirement expenses totaling $4.8 million or $0.06 per share. These charges are included in the segment results of which $3.3 million relates to distribution and services and $1.5 million relates to marine transportation. Turning to our segment results. In the 2019 fourth quarter, Marine Transportation segment revenues were $402 million with an operating income of $54.5 million and an operating margin of 13.6%. Compared to the same quarter in 2018, this represents a 5% increase in revenue and a 2% increase in operating margin. Increases are primarily due to higher pricing in our inland marine acquisitions. Compared to the third quarter, revenues declined 3% and operating income decreased by $8 million. These reductions are largely attributable to increased delay days and the impact on demand of lower refinery and chemical plant utilization. Additionally, relative to the third quarter, we had increased planned shipyard maintenance in both inland and Coastal. In the inland business, revenues were approximately 7% higher than the fourth quarter of 2018, due to our recent acquisition and improved pricing. Compared to the third quarter, inland revenues declined slightly as a result of increased weather delays and lower refinery and chemical plant utilization. During the quarter, the inland business contributed approximately 78% of marine transportation revenue. Long-term inland marine transportation contracts or those contracts with a term of 1 year or longer, contributed approximately 60% of revenue, was 62% from time charters and 38% from contracts of affreightment. Term contracts that renewed during the fourth quarter were higher in the low to mid-single digits, and spot market rates increased in the mid-single-digit range year-on-year. During the fourth quarter, the operating margin in the inland business was in the mid-teens and included $1.1 million of onetime severance and retirement expense. In the coastal business, fourth quarter revenues were unchanged year-over-year, with higher pricing and barge utilization being offset by retirements of coastal vessels that occurred in 2019. Compared to the third quarter, revenues declined approximately 7% as a result of planned shipyard maintenance and seasonal activity reductions in Alaska. Tight market conditions resulted in several barges being placed into new term contracts during the quarter and contributed to utilization in the mid-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 approximately 10% year-on-year and term contracts renewed higher in a range of 5% to 15%. During the fourth quarter, the percentage of coastal revenue under term contracts was approximately 85%, of which approximately 85% were term -- time charters. Coastal's operating margin in the fourth quarter was in the mid to high single digits and was favorably impacted by lower operating expenses, which were partially offset by onetime severance and retirement expenses of $400,000. With respect to our tank barge fleet, a reconciliation of the changes in the fourth quarter and full year 2019 as well as projections for 2020, is included in our earnings call presentation posted on our website. Moving to distribution and services. Revenues for the 2019 fourth quarter were $253.9 million with an operating loss of $2.7 million. Excluding severance charges of $3.3 million, distribution and services operating income was $0.6 million. Compared to the 2018 fourth quarter, revenues declined approximately 25% with operating income down $30.9 million, primarily due to lower activity in our oil and gas-related businesses. This was partially offset by higher power generation and commercial marine sales. Sequentially, revenues were unchanged overall, but segment operating income was lower as a result of lower activity, sales mix, seasonal reductions and backup power utilization in severance. In our oil and gas market, revenue and operating income were down year-on-year due to reduced oilfield activity levels, which resulted in low demand for new and remanufactured pressure pumping units, new and overhaul transmissions and engines as well as parts. In the fourth quarter, the oil and gas-related businesses represented approximately 47% of distribution and services revenue and had an operating margin in the negative mid to high single digits, which included $3.3 million of severance expense. In our commercial and industrial market compared to the 2018 fourth quarter, revenue increased as a result of improvements in power generation, commercial marine and on-highway businesses. Compared to the third quarter, revenues declined modestly, primarily due to seasonal reductions in rentals of standby power generation equipment and sales of Thermo King refrigeration units. These reductions were partially offset by increased sales of new marine engines. For the fourth quarter, the commercial and industrial businesses represented approximately 53% of distribution and services revenue and had an operating margin in the mid-single digits. Turning to the balance sheet. As of December 31, total debt was $1.37 billion and our debt-to-cap was 28.9%. During the quarter, we used cash flow from operations to fund $64.1 million of capital expenditures and to purchase the inland barge fleeting company in Louisiana. During the quarter, we paid down $65 million in debt. As of this week, our debt balance was $1.37 billion. I'll now turn the call back over to David to discuss our guidance for 2020 and the Savage acquisition.

Thank you, Bill. Before I discuss our guidance for 2020, I'd like to comment more on today's announcement regarding the purchase of Savage's Inland Marine transportation fleet. Savage's fleet consists of 90 inland tank barges with approximately 2.5 million barrels of capacity, and they have 46 inland towboats. The majority of Savage's fleet conducts towing operations on the lower Mississippi River system and the Gulf Intercoastal Waterway, using about 78 barges with an average age of approximately 10 years. The remaining barges are used in a bunkering business along the Gulf Coast. This acquisition will further improve our ability to service customers, lower the average age of our fleet and reduce future capital expenditures. It is a perfect strategic fit. Additionally, the Savage bunkering business, which has significant operations in New Orleans, expands our existing operations beyond Texas and Florida, giving us the ability to service bunker customers in this important Gulf Coast port. The purchase price of approximately $278 million will be financed through additional borrowings on our revolver, and we expect the deal to close late in the first quarter subject to normal closing conditions and regulatory approvals. In 2020, we expect this acquisition will be modestly accretive to Kirby's earnings, taking into consideration integration and maintenance costs, inherited contracts, time needed to integrate the fleet and interest expense. Beyond 2020, as we realize the benefits of anticipated synergies, this acquisition will provide significant enhanced earnings power for Kirby. With respect to our guidance in our press release this morning, we announced our 2020 guidance of $2.60 to $3.40 per share. Our guidance range contemplates continued growth for inland Marine, including a contribution from Savage, flat to modest growth in coastal and year-on-year reductions in distribution and services. Our capital spending for 2020 is expected to be between $155 million and $175 million, and it includes requirements for this average fleet. This range represents a year-on-year CapEx reduction of approximately 30% to 40%, and our free cash flow generation should be very strong in 2020. Looking at our segments. In marine transportation, we expect the inland barge demand -- that inland barge demand will remain robust throughout 2020, driven by modest increases in GDP and additional volumes from new petrochemical capacity coming online. As a result of these factors, we expect our barge utilization rates will remain strong in the low to mid-90% range during the year, and that term contracts are expected to continue to renew higher. Together with the anticipated contribution from Savage, we expect inland revenues will increase in the low double-digit to mid-teens range compared to 2019. In coastal, we expect strong customer demand and tight market conditions throughout the year, which will contribute to continued pricing increases on term contracts. With many of our spot market barges recently placed into new term contracts, we anticipate that our barge utilization will be in the mid to high 80% range throughout the year. However, as previously announced, Kirby plans to retire 4 coastal barges in 2020, 3 of which are large capacity vessels that would have required new ballast water treatment systems at their shipyards, which we determined would not yield an adequate return on capital. Additionally, we currently anticipate reduced activity in our coal transportation business during 2020. These factors combined will have an impact on the full year in coastal and are largely -- and are expected to largely offset improved pricing and utilization. As a result, we anticipate that coastal revenues will be flat to modestly higher year-on-year. Overall, in marine transportation, we anticipate that 2020 revenues will increase in the high single digits to the low-teens year-on-year. We expect the marine transportation operating margin should improve into the mid-teens for the full year, with inland in the high-teens and coastal in the low to mid-single digits. With regards to quarterly performance, we anticipate the first quarter will have the lowest contribution of the year due to normal seasonal factors as well as significant planned shipyard maintenance in coastal. Quarterly results should improve beyond the first quarter. Moving to our Distribution and Services segment, we expect that oil and gas activity levels will remain limited in the near term. Although we expect pressure pumping activities will increase in 2020 in excess of industry capacity and ongoing customer fleet rationalization initiatives will likely restrain significant increase in manufacturing orders. We do anticipate that incremental sales in our oil and gas distribution business will improve relative to fourth quarter 2019 levels as the year progresses. In our commercial and industrial markets, we anticipate growth in our on-highway businesses and in the industrial markets, including the contribution from the Convoy acquisition to our Thermo King business. Overall, in distribution and services, we expect 2020 revenues will be down 12% to 17% compared to 2019, with commercial and industrial representing approximately 65% of segment revenues for the full year. The lower end of our guidance range assumes continued weakness in the oil and gas market. The high end assumes manufacturing activity approves -- improves with incremental orders for new and remanufactured pressure pumping units and higher service and sales in oil and gas distribution. Segment operating margins are expected to be in the low to mid-single digits for the full year with the first quarter being the lowest. Now to wrap things up. 2019 was a good year with strong growth in marine transportation. Although the year presented many challenges for distribution and services, we have taken the necessary actions to adjust to changing market conditions and delivered positive earnings and significant free cash flow for 2019. In inland marine, we posted near double-digit growth in revenues and strong margin improvement in 2019, despite historic flooding and the demands of integrating a major acquisition. In 2020, we are poised to repeat this with continued growth and the anticipated closing of Savage. Once the acquisition is complete, our fleet business portfolio and workforce will better -- will be better able to service our customers than at any point in our history. We continued -- with continued strong demand expected, inland marine is positioned to deliver meaningful increases in revenue and earnings for the foreseeable future. In coastal, our actions to reduce cost and improve the efficiency of the fleet have begun to pay off, and we've had 3 consecutive quarters with positive operating margins. The market has improved significantly, barge utilization is increasing and prices are moving higher. Industry capacity is expected to remain tight in the coming years. And although our 4 barge retirements in 2020 will impact our financial performance in the near term, we expect improving returns in the coming years. In distribution and services, while the oilfield continues to present some challenges, we are confident that pent-up demand is growing and a recovery is inevitable. In the meantime, we've taken the necessary actions to reduce costs and rightsize our operations. In commercial and industrial, the Convoy acquisition and other efforts to grow our businesses internally will provide additional diversity, stability and earnings power for the segment in 2020 and thereafter. And finally, we took significant steps in 2019 to strengthen our balance sheet and improve our financial flexibility. In 2020, we expect to generate significant free cash flow with strong marine operations, positive contributions from distribution and services and reduced capital expenditures. Debt reduction will be our top priority, although we could take advantage of some acquisition opportunities if they align with our strategy and create positive returns for our company and our shareholders. Operator, that concludes our prepared remarks. We are now ready to take questions.

[Operator Instructions]. Our first question comes from Randy Giveans with Jefferies.

So yes, first, congrats obviously on the Savage acquisition. New Orleans is a great place for a bunkering business. I might be a little biased. But for the acquisition, what is the EBITDA contribution kind of on a full year run rate? And then for the inland tank barges, what percentage of days are those 90 barges contracted for this year? Just trying to get a sense of how large and maybe how quickly the earnings uplift will be from that acquisition.

Yes. Sure. Well, look, as you know, to state the obvious, this is right in our wheelhouse. It fits perfectly within Kirby. The bulk of those 90 barges are on the Gulf Coast in the lower Mississippi River system. So they fit perfectly into our fleet. There will be some significant synergies as we integrate it and have the ability to better service our customers with the higher likelihood of having prior cargo compatibility for moves. So it fits perfectly into Kirby. We think the revenue contributions, a little more than $100 million. We paid in the high -- on a trailing EBITDA basis, we paid in the high 9s. So when you factor in synergies, we'll be in the kind of the 7s in terms of EBITDA multiples. So it's pretty much standard for us. We're very pleased with it. I think their utilization's fairly high right now, and we're excited to have them as part of Kirby. They're -- it's a young fleet, very well maintained, very well run. We're getting some excellent shore staff, and we're getting some excellent mariners with the acquisition. And frankly, we're delighted to have this acquisition coming to us.

Okay. Sounds good. And then secondly, your press release mentioned D&S revenues declining 12%, so I think 17% this year. Can you break that out between oil and gas and non-oil and gas? And then kind of more details, what's the current backlog for the kind of oil and gas, pressure pumping, manufacturing and services?

Yes. Let me try and put some context around what's happening in D&S and what's in our guidance. Look, in the fourth quarter, we saw our customers not only curtailed their capital spending, but they cut OpEX. They cut maintenance spending. That's unsustainable. They're going to have to come back and do some maintenance work, but they are very driven to show free cash flow and cash flow. So when we look at 2020, we had to book end it. So if you take 2019 in D&S, we made about $70 million. Now we did generate a lot of free cash flow, probably $125 million in free cash flow in 2019 out of that business. But -- so we made $70 million in '19. But as you saw in the fourth quarter in D&S, we were essentially breakeven. So if you say those are the bookends for 2020, what do we think? We think on the low end of our guidance, we're going to be somewhere in the middle of that, maybe on the lower side of the middle because we just don't know how many frac spreads and oilfield activity will come to fruition. That said, in January, we're hearing frac crew utilizations up about 4%. So we just try to book-end it from the high end to the low end. If the frac market comes back, that would get us to our high end. The low end is assuming kind of the halfway between those 2 book-ends, maybe a little less than halfway. In terms of backlog, we don't disclose that. But as you might imagine, there were almost no orders for new equipment in the fourth quarter.

Sure. And then I guess, finally, your non-oil and gas revenue, you do expect that to increase 2020 over 2019.

Yes. Yes, we sure do. If you -- in our prepared comments, we said commercial and industrial will be about 65% of D&S revenues, which is up from about 45%. Yes, when you look at the on highway, we expect GDP-plus something growth and you look at power generation, that market is still growing. A lot of people need backup power generation. When you look at marine and our marine engine repair, that's growing nicely with all the activity on the inland. And even in offshore, oil and gas seems to be picking up a little bit in terms of engine repair. So yes, commercial and industrial is growing next year. The big swing factor is what happens in manufacturing.

Our next question comes from Jack Atkins with Stephens Inc.

Jack, you there?

David, can you hear me now?

Yes, we got you.

Okay. Sorry, I was on mute. So I guess, just to start off, yes, I think what has people kind of scratching their head this morning with the guidance is we're kind of looking now for the third year in a row at about $3 in earnings at the midpoint, and it's a fairly wide guidance range, wider than you guys typically provide. But we seem to have a strong and improving inland business. Coastal seems to have found a footing and is on the upswing. Obviously, D&S is a challenge, but it seems to have stabilized there from what you guys have said and the actions you've taken. And we've had 3 large acquisitions at inland. So I guess, as you sort of think about what -- the business as we move -- sort of move forward here, what's holding the earnings power back? Because I think a lot of people are sort of expecting things to begin to really take a step forward, given the leverage in the Marine business, if that makes sense.

Yes. No, I think you summarized the guidance very well. Look, inland is improving. You look at our prepared comments, we've got nice revenue growth in inland, continued margin growth. The whole industry in inland is 90% to 95% utilized. So as you saw, we had pricing increase on term contracts that renewed in the fourth quarter. We think that's going to continue. So inland is not holding us back. If anything, it's advancing nicely and on target. And clearly, these acquisitions are going to continue to provide earnings leverage as we go forward. Coastal, that's sound footing, and that's a nice way to say it. We did have -- we are going to have 3 large units retire in 2020. And -- but as those retire, utilization will tighten up even more and we would expect coastal to continue to see pricing improvements. I think we had anywhere from 5% to 15% pricing improvements on term contracts that renewed in Coastal in the fourth quarter. So that looks positive. The real drag is the manufacturing side of distribution and services. In the first half of 2019, we had a lot of orders we were executing. So we had good results there. And the issue really is we don't know how many new orders for new frac equipment will occur in 2020. We know there is pent-up demand. We know they're working the equipment very, very hard, the equipment out there that's working. And that's really driving the wider range and, quite frankly, the lower results. If we repeated 2019 and made $70 million in D&S, we'd be well above the top end of our range, but we just have to handicap it, Jack, and that's what we tried to do.

Okay. Okay, got you. And I guess for my follow-up, it has been really encouraging to see you guys do these consolidating acquisitions within inland? And I guess, as we've been reading in the press the last few weeks, the #2 player in the inland market is contemplating a restructuring here. I guess my question for you is how do you think that's going to play out? And what impact could that have on Kirby as you look out over the next couple of years?

Yes. Look, it's no secret that ACL has been very highly levered. I mean in part, that's the private equity ownership model. I think they've done very well. The management team there is when you're highly levered, they're doing everything they can to take care of their customers and run the business the best they can. It's just too much leverage. I think if they go into a bankruptcy situation, that will give them some relief. What it means for us or the industry? It's hard to say. It's probably best for me not to speculate.

Our next question comes from Jon Chappell with Evercore ISI.

David, I wonder -- I think Jack's asking the right questions. And if you allow me, I just want to use my two to dig in a little deeper. First, on the oil and gas side, I think it's clear how you explained kind of the worst-case scenario, the lower end of your guidance range. But you said that through these severance cuts and inventory write-downs, you've kind of rightsized the business for the challenging environment. If you were to go into a kind of continuation of the 4Q run rate well into 2020, is there more rightsizing that could be done? Because it feels like the low end of the guidance range, as it relates to oil and gas, would indicate a negative margin throughout the year as opposed to a breakeven, which is maybe explained in the press release.

Yes. No, you're absolutely correct. But let me put what we've done in context. And when you look at D&S, we've taken out somewhere between 500 and -- 550 to 600 employees, very, very painful. In our manufacturing business, we've reduced headcount by about 50%. Could we do more? Would we do more? We think we've got it about right. At some point, this market is going to recover, and we want the ability to respond. But clearly, if activity doesn't pick up, we'd have to do some more. But I think we've rightsized it and got about right now. We are doing some other things to take out some costs, and hopefully, that will come principally among -- one of them is putting everybody on the same computer system, which we had these disparate businesses on different computer systems. So we're going to be able to share resources and importantly, share inventory and things like that. So we're not standing still. We're working to improve the business at its core. But I do think we've rightsized it about right. If we get more of the fourth quarter, and that looks like it's going to continue throughout 2020, then we may have some more to do.

Okay. That makes sense. And then for my follow-up on the inland business, this is maybe me just being a bit of a broken record. But the high-teens guidance for '20, you've come out of this bottom, the pricing's reset, the contracts are renewing, you have a younger, more modern fleet, you have more in-house power and we have a recent track record from 2012 to 2016 with margins in the mid-20s. One would think it could be that or better. So why are we still looking for high-teens in '20? And when can we get to that 20-plus percent margin run rate on a business that seems to be kind of all systems go right now?

Yes. Good question. When we put our forecast together, it's an average for the full year. So it includes the first quarter, which is typically a lower margin, and then the fourth quarter is a little higher than the first quarter but it's generally lower. So when we look at the margin profile, it's an average for the full year. I think third quarter will pierce that 20%. But if things continue as we expect with the pricing increase, yes, we will get above 20% for a full year average. We're just putting together what we think for 2020 just now. But all the signs are there with continued utilization in the mid- to high-9 -- excuse me, the low to mid-90% for the industry. Plants continue to come online. Building of new equipment seems kind of steady at low levels. If you look at net adds, we'd probably add 75 barges to the industry this year in 2020, and that's about a 2% increase in barge count, which is in line with GDP. So as we look at it, inland should stay pretty much in the same utilization range, maybe get a little tighter as the plants have more demand. So we should be getting towards the -- into the 20s. We need to be there to justify all the capital we've got deployed. I think the whole industry needs to be in that range to justify the capital and the service we're providing. So I hear you, and we're on that steady climb. But we're just kind of giving you the view of the average of the margin for 2020.

Our next question comes from Michael Webber with Webber Research.

I wanted to kind of pivot away from margins. I think Jon kind of hit it. The -- just to dig in on Savage, at 9.5 to 10x EBITDA and I think like $100 million of revenue on a mid-teens margin, you're looking at $0.05 to $0.06 of accretion per quarter. One, is that in the ballpark? And then two, in the 9.5 to 10x for new capacity or for Savage, where does that compare to new capacity? And is that where you think market should be for the inland fleet?

Yes. Look, let me put it in context from a replacement capital standpoint. The Savage, when you look at all the assets that we get with the Savage acquisition, the replacement cost is probably $460 million. Now if you discount that for some of the age, we're paying below discounted replacement value. So we feel pretty good about that. Yes, 9.5 to 10 EBITDA on a trailing range is -- look, it's pretty full priced, but with synergies were down in our 7s. The accretion won't come until we get the synergies, and that's going to take us the better part of 2020 to get that. We may get some towards the end of the year. So that's the context that we look at it. To your -- perhaps I'm answering a different question. But where the rates need to be to justify capital for newbuilds, they need to be 20% higher. A new 30,000-barrel barge is about $3 million. And when you put the towboats in with it to get a justified return, a 10% type return, rates have to be 20% higher. And I think the industry knows it. I think we're all trying to justify our capital and the additional expense that's coming through regulations. For example, we've got, as you know, inspected towboat, Subchapter M. That's adding a lot of cost to the industry. So there's cost pressures in the equipment cost, really drive the need for higher pricing. And I think it has to happen over time. Otherwise, we'll never be able to really replace equipment as things wear out.

Michael, another way to look at it is that for the Savage acquisition, with the synergies, we get a 12% return on capital. And if you look at building new, we just can't get there. So this is the way -- this is the 12% return, and that's what drives us. Your numbers sort of triangulate how we think of it, too. And you could do it the other way, too, just look on return on capital.

Yes, and I appreciate that. I don't want to beat a dead horse here, but if I kind of think about the context of 9.5x on EBITDA using synergies to kind of get to the 12% return on capital you're referencing and I dovetail that with what everyone else is doing this morning, trying to reconcile the guide versus where the market seems to be trending and I look at the historical results in 2013, 2014, 2015, you were generating considerably less on the OFS side in the mid-30s, I think sometime -- some in the high-teens and earning in the -- around $4.40 share. And the biggest delta between then and now is going to be new capacity that's been added on the inland side as well as on the D&S side, but on the inland side as well. And I'm just trying to dig into the synergies that are -- that need to be recognized to get to that return hurdle. And if I look at it within the context of historical results and the guide into a tight market, it would suggest that those synergies aren't there. So I'm just trying to -- I'm trying to reconcile those two. So any help or any clarity would be helpful.

Well, Michael, when we say synergies as economies of scale and when we first integrate, we have double manning. We have a lot of things that has to happen this year to do it right, and that puts cost in for the first year. So the synergies happen quickly, but there's additional costs that come in on top of it. And I hear you about the return. I mean in the end, what we've seen is price will have to continue to move up in order to -- and that's the other factor. Costs have gone up in the industry, and we have to get our -- the revenue up, too.

Let me also put it in context of 2014. If you take pricing on term contracts in 2014 versus where they are today, pricing in 2014 is probably about 15% to 20% higher in 2014 than it is now on term contracts. If you take a 2-barge tow, for example. In '14, the average contract price was at least 15% above where it is right now. So we still got room to grow here. It has to happen.

Okay. If you'll allow me to sneak one more in. In terms of the bunkering business in the Gulf, is there a scenario where you guys would entertain, expanding that to either coast where there's a bit of distress and some pricing pressure?

Okay. Short answer is, yes, there's a scenario. As you know, we look at our industry. And anything that floats, we get interested in. But let me be clear. I said it in our prepared comments, we need to delever now. Of course, we just did another large acquisition. But to put that in context, we bought Cenac last year, and basically our free cash flow paid for Cenac. We would hope our free cash flow is going to be a lot higher this year than it was last year, and we should be able to delever and get our balance sheet back where we like it so we can look at acquisition opportunities.

Our next question comes from Ben Nolan with Stifel.

There we go. Can you hear me?

Yes.

Good. Yes, I thought I was going to be next. So I've -- well, my first question relates sort of to Savage, but also just sort of to the broader business. It was just doing the towboat to barge comparison, and it's pretty close to 2:1, and you guys like to say that you can do 3:1. But at the same time, you're still building new towboats. How should we think about that capacity? Are you overpowered at this point or getting close to overpowered? Or -- why continue to spend capital on new tows when you can go out into the market and buy things like this and just effectively get excess capacity or power?

Yes. No, well, this -- let me be clear, this does help us spend less capital. We're getting a younger fleet. It helps bring the average age of our towboat fleet down. That said, our customer base is requiring younger and younger towboats. So when you look at the average age of our towboat fleet, we have to bring it down. There are some customers that won't use towboats that are older than 25 years old. Actually, there are some that won't even use them if they're older than 15 years old. So we have to take out some of our old horsepower, but I will say that doing Savage reduces the need to replace a lot of that horsepower. So it's just one of those things where you got to look at all the horsepower and the requirements of our major customers for age. And so we'll continue to build some replacement horsepower, but this acquisition actually slows how much we have to spend. When you look at our CapEx guidance, you can tell we've reduced it by 30%, 40% versus last year, versus '19, and that will drive significant free cash flow. And oh, by the way, just as a reminder, we have our own small shipyard here in Houston area right next to our facility, where we can build our own towboats on a slow ratable basis. And that keeps our capital cost down as well.

Got you. Okay. That's a helpful color. And then changing gears for my follow-up, just curious on -- there is small, just $40 million put on the Convoy acquisition. I appreciate that, that sort of increases your geographic footprint in that product and probably also deemphasized the oil and gas for D&S a little bit. But just in terms of capital allocation, that business, it looks like it does -- I don't know about Convoy in particular, but the industrial side of D&S does high single-digit kind of margins, whereas spending that same capital either in the inland or maybe even in the coastal to the extent that it's continuing to improve, it seems like it's a high return proposition. Is there some sort of a special economies of scale or synergies or something that you think are really important that add to the value of that acquisition when thinking about where the dollars go?

Yes. You're precisely correct. There is some scale that we get with that acquisition. We had the southern part of Texas in our Thermal King business. This gives us the northern part. So now our Thermo King business is $100 million-type -- revenue-type business, and it's a very solid contributor and it's relatively stable. So there's a lot of benefits to it, and there are synergies there. But to your broader point, we'd much rather deploy capital in our marine business. This was just a perfect little tuck-in that fit great with our existing Thermal King business, and it is non-oilfield to your point, which helps diversify the revenue in D&S.

We also -- one other aspect of it is the EBITDA multiple or the purchase is a little better than what we've lowered and, as well, the CapEx needs going forward are very low. So from our point of view, it was a nice fit without any ongoing capital needs.

Our next question comes from Greg Lewis with BTIG.

David, I just wanted to touch a little bit more broadly on the market, I mean, talking about margins. I mean, I guess, as I think about it, it seems like we're, I don't know, maybe 4 to 6 quarters into the up-cycle in inland. And I'm just kind of wondering if you could go back and look at previous upswings in the market. Is anything -- are you seeing anything that's different? Or is it kind of -- this is typically how a recovery looks, kind of any kind of color around that, I think, will be helpful.

Yes. I would say this is a more normal cycle. I think the 2012 to 2014 cycle was very sharp up because of all the shale crude that came on to the market, and it came on quickly. There weren't the pipeline. So it snapped up probably faster than our other prior cycles. If you go back into the 2000, coming out of the 2000 to 2003 barge recession, if you will, that up-cycle took 5 to 7 years to play out, and this is probably more normal. It's more ratable. You're seeing our contracts renew in the kind of low to mid-single-digit range, and that's kind of more normal, more ratable. Back in that 2013, 2014 time frame, things got so tight with all the crude coming on. You'll recall, we used to run about 150 barges in the industry in crude, and it got up to 550 in that 13, '14 time frame. So that was probably the anomaly and how fast it went up. This is more steady slow rise. And that's, frankly, what we like because you don't get the fast, fast money, so to speak, building new barges. This is -- you're going to see a more ratable market. You won't see a bunch of people building equipment on spec. So we kind of like this slow and steady grind up. Now would we like to get there faster and stay there longer? Sure. But this is a more normal cycle.

Okay. And so like one, I mean, and just touching on Bill's comments about finding the Savage, which was 12% return on capital. Clearly, right now, you guys are well below that for other parts of -- for the core company. Just kind of curious, as we think about it, we've heard a lot about distress in the market. I don't know why Savage sold, but clearly, they were out and you guys have done some consolidation. What type of -- I mean, is 12% kind of a high hurdle rate? So is this -- I mean, when we view the company, is this kind of a high single digit, 10% type? I mean what -- I mean, clearly, you guys wanted to generate the highest returns possible. What kind are you targeting? And what do you think is reasonable as we look out over the next, I don't know, 1, 2 years?

Yes. Look, our cost of capital is probably 8%, plus or minus a little. We target 12% over the life of the equipment we buy. So you got to think about it in terms of 30-year lives. And you also have to look at it on an after-tax basis. Clearly, with bonus depreciation, if you will, the tax attributes of this equipment are pretty good. And so when we look at our investments, we look at it as a discounted free cash flow, as you know. We think we should be targeting 12%. Typically, we're realizing a little lower than that. But I would say that's very cycle-dependent and endpoint-dependent when you look at it. But our hope would be throughout the cycle. We average 10% or better return on capital. But that's -- these cycles are long. And one of the things that we have is if you look at our 3 different businesses, if you will, D&S, coastal and inland, they're all different in terms of cycle. I would say D&S, a very short cycle; the inland business is kind of medium-cycle; and then the coastal business is a very long cycle because of the way equipment comes in and out of that business. So -- but when you put it all together, our hope would be, through the cycles in each business, we earn above a double-digit cost of capital.

The return on cost of capital. Now our other competitors and stuff, you obviously see there's been some pain whether it's on the inland side. You've seen -- you're seeing pain with some of our larger competitors. On the coast-wise side, you're seeing some pain as well with some of our competitors. That should tell you where we are in the cycle. We're in the early innings of both the coastal and the inland cycle in my mind. Their financial stress is an indication of that.

Yes. I mean, I guess, what I'm wondering is, I mean, clearly, you have a diverse customer base. You have the pet-chem players, you have the more energy players. Is part of what's going on is just maybe filtering through the barge business? I mean you see it firsthand in the D&S side of the business where it's all about capital discipline, and capital discipline is making all decisions. Is it possible that, that's filtering into inland?

Yes -- no. Well, no. I'd say no. But clearly, with the financial stress and the additional cost of doing business in the inland business, in particular with Subchapter M and inspected towboats, stronger vetting requirements from our major oil fill -- oil customers, stronger environmental compliance, which is a good thing, all these are good things because they're making our industry better, but they add a lot of cost. So I think that cost is making it more difficult for all of us in the barge business to give returns. And so we have to get pricing up to justify this business. And I think that is permeating itself through the business. I think all of our barge competitors are struggling with, hey, we've got to recover these costs of doing business. And so to that extent, it's probably adding some more capital discipline to the industry. I know that's a long convoluted answer, but I think everybody is focused on trying to justify their expenditures and get returns on what they're spending.

All right, Joelle, we're going to run a little longer. We're going to take one more call and then we'll wrap it up.

Our next question comes from Justin Bergner with G.research.

First off, the guidance range of $0.80. I mean that compares to the guidance range of $0.50 entering last year, and I guess you sort of had a similar 500 basis point range for D&S revenue when you were entering last year as you do enter 2020. So what sort of drives the broader range in the guide, given that the D&S revenue range is similar?

Well, it is D&S and the variability in D&S. And we think the variability actually has grown a little bit because of what's going on in terms of the manufacturing business. We -- when we saw the fourth quarter and manufacturing -- new manufacturing orders were essentially nonexistent and they cut OpEx spending, it obviously made us as we thought through 2020, take a little more cautious view with our range.

Okay. That's helpful. And then just secondly, on the coastal side, the lack of forecasted margin improvement in 2020 versus 2019. I'm not sure I fully follow that. I understand the lack of material revenue guide, the retired barges. But with pricing up, it would seem like there should be some margin improvement there versus where you finished '19.

I think the key part of that, they were high-capacity, nice-margin vessels, and just they were at the end of life. And when you factor in, having to put ballast water treatment with the short period of life that was left, it didn't make any sense. So they were good margin contributors. The -- remember, a lot of our business is under term contract that has to renew through the year. So we see an upward progression, everything getting better, but we did lose some good margin contributors -- or will lose through the year, yes.

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back over to Eric Holcomb for any closing remarks.

All right. Thank you, Joelle, and thank you, everyone, for participating in our call today. If you have any additional questions or comments, feel free to reach me today at 713-435-1545. Thanks, everyone. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.