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Executives

David Parker – Vice President of Investor Relations and Corporate Communications

Mike Ryan – President and Chief Executive Officer

Tom Pilholski – Senior Vice President and Chief Financial Officer

Analysts

[George Pickel] – Stephens Inc.

John Barnes – BB&T Capital Markets

Chris Weatherby – BAS-ML

Bill Doyle – Forrester Research

American Commercial Lines Inc. (ACLI) Q4 2008 Earnings Call March 5, 2009 10:00 AM ET

Operator

Good morning ladies and gentlemen and welcome to the fourth quarter 2008 American Commercial Lines Inc. earnings conference call. My name is [Chenelle] and I'll be your coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. David Parker, Vice President of Investor Relations.

David Parker

Thank you, [Chenelle]. Good morning and thank you for joining us. Today we will be discussing our fourth quarter and year ended December 31, 2008, financial results. Before we begin our discussion, I want to remind you that statements made during this conference call with respect to the future are forward-looking statements.

Forward-looking statements involve risks and uncertainties. Our actual results may differ materially from those anticipated as a result of various factors. A list of some of these factors can be found in our SEC filings including our Form 10-K for the year ended December 31, 2008, and Form 10-Q for the most recent quarter on file with the Securities and Exchange Commission.

During the conference call we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at www.aclines.com in the Investor Relations section under non-GAAP financial data.

Also as a reminder, you can follow along today via a live webcast featuring a slide presentation which can also be accessed at aclines.com. If you plan on viewing the slide presentation, I'll remind you to please listen to the call via your computer speakers rather than dialing in by telephone in order to avoid a time lapse between the slide presentation and the audio.

Joining me on the call today we have Mike Ryan, our President and CEO, and Tom Pilholski, our Senior Vice President and CFO. With that I'll now turn the call over to Mike.

Mike Ryan

Thanks, Dave. Good morning. I'll begin by commenting on our fourth quarter and full year performance and reviewing our key metrics. Tom will then give some insight to the key drivers of our financial performance which were contained in the release last night. I will then provide some closing comments and after which we will take your questions.

To begin, we are very pleased to announce that by working with our existing banking group we have completed an amendment and extension of our revolving credit facility through March 31, 2011. While the terms have changed, we believe they are reflective of the current credit market. We also believe that the terms of this amendment provide sufficient flexibility and liquidity, allowing us to operate both tactically and strategically through the current challenging economic conditions.

With the amendment completed we can focus more of our attention on continuing to drive growth and productivity into our lines of business excess costs from our operations. Tom will review in more detail specific terms and impact of the amendment.

For the full year, ACL's performance was strong, producing the third best EBITDA results in the company's history, with over $156 million in EBITDA despite significant weather destructions which impacted earnings growth by approximately $16 million. In addition to significant operating inefficiencies, such as reduced tow sizes, the weather caused almost 42,000 lost barge days in 2008 versus 16,500 days in 2007.

In simple terms this is like parking 115 barges and not generating revenue from any of them for an entire year. The operating ratio which is the percentage of revenue that all operating costs represent was 80.5% in the fourth quarter, the best we have achieved in two years. The fourth quarter performance supported by the most normal operating conditions of any quarter in 2008 drove the full year operating ratio to 89.7%. This is down from 92.9% a 3 percentage point improvement over our results through the first three quarters of 2008.

For the full year, fuel recoveries almost caught up with fuel inflation. The volatility in fuel prices negatively impacted our performance in the first half but benefited us in the second half of 2008. Our fuel pricing recovery mechanism in our contracts enabled us to cover most of the costs. More importantly, positive fuel neutral pricing combined with the productivity improvements in fuel efficiency and percent loaded miles enabled us to achieve strong financial performance.

In the fourth quarter one of our significant liquids customers filed for Chapter 11 bankruptcy reorganization. We recorded a reserve of approximately $600,000 against our year end receivable from the customer. There will be some additional charges of a similar magnitude in the first quarter related to that customer's 2009 pre-petition transportation and services billed by us.

We are continuing to provide services to this customer as they pursue reorganization. We believe that we have adequately reserved for expected losses in our 2008 receivables at year end. We anticipate that other customers may struggle during this year and we are closely monitoring changes in credit worthiness.

Our manufacturing segment's fourth quarter performance was very disappointing. Manufacturing EBITDA declined by $6.9 million, due primarily to losses incurred on special vessel contracts. In a contract from April 2007, we significantly underestimated the engineering and construction costs related to one special vessel, which constituted the bulk of this loss. Also as mentioned previously, we fully intend to focus in the future on higher volume dry hoppers and tankers, minimizing our focus on special vessels.

We have learned from this. In the future if we do book new contracts for special vessels, we will execute the contracts with closely defined specifications and contractual up charges for any required re-engineering.

On a positive note, obscured in the Q4 manufacturing results was the consistency we are showing in our hours per ton on tankers, which approved approximately 9% in Q4 over the prior year quarter. We are pleased that our fourth quarter financial results were strong in the transportation segment and we are steering the manufacturing segment back to its strengths in high volume hoppers and tankers.

Our contract renewal pricing in the fourth quarter was generally positive, though not as strong as originally anticipated due to deterioration in economic conditions. On the dry side, customer demand to reset fuel base rates eroded our expected pricing strength. We chose not to renew some contracts that would have eroded margins and we did lose some contracts to competitive bids.

There were also customers who at least temporarily, suspended certain commodity movements. Despite these obstacles we renewed, moved to spot or extended 80% of the contracts up for renewal at a slightly positive blended price increase, with liquids renewing at double-digit increases.

Our sales and marketing team continues to put organic growth business with existing and new customers. In the fourth quarter, we contracted $28 million in anticipated organic growth across all our major product lines. This takes us to $93 million for the year, $33 million higher than what we gained in 2007.

This is the type of economic environment where having a professional, highly trained sales force focused on customers pays great dividends for ACL. We expect over 60% of our transportation business to be under contract in 2009 versus [spot]. For the year we added $45 million in new barge business to our manufacturing backlog. We are currently evaluating external order opportunities for the next few years along with our own internal build needs to fill out the manufacturing capacity.

Also an external order for construction of new tow boats, which we contracted in 2007, was cancelled early in 2008. We also plan to build a number of new covered dry hopper barges for our own transportation segment in late 2009 if market conditions support the need.

When demand for liquid transportation began softening in late 2008, we reduced our 2008 tanker build plan from 36 to 24 tankers, 11 of these were delivered in the fourth quarter and we delayed delivery on the remaining 13 until the first quarter of 2009. We do not plan to add any incremental tankers this year. We are prepared to further reduce our staffing and operating costs at the ship yard for a lighter 2009 production schedule if necessary.

As you can see on this slide, we have achieved sustained progress on improving or mix of business. As planned, the mix of our freight business continues to evolve to more liquid and coal, with less grain. The bulk sector dynamics will likely continue to mirror the economic conditions.

As you can also see, we continue to work through our manufacturing Legacy contracts. The percentage of our backlog that represents Legacy contracts at the end of the fourth quarter has declined to approximately 18% of our $212 million backlog, compared to 51% at the end of 2007. There are also still approximately $120 million in unexercised options under Legacy contracts at year end.

On the next slide you can see our productivity initiatives. In our productivity initiatives we have continued the trend of consuming fewer gallons of fuel per boat operating hour, and we are sustaining increases in the percentage of loaded ton miles. In the fourth quarter we achieved the second lowest level of gallons consumed per boat operating hour since the beginning of 2005. Our fuel consumption was 2% higher than in the third quarter, while moving 1% fewer affreightment ton miles.

This is primarily due to the seasonal closure of the upper river systems. When the upper river systems are closed, we are using more high fuel burn, high horsepower vessels on the lower portions of the inland the waterways.

As you can also see, our goal of optimizing our geographic footprint and matching origin and destination pairs that fit within our optimal freight lanes is paying off in enhanced productivity. Our ability to more fully utilize our assets on round-trip moves has reached into the mid-80% range this year, and was over 84% in the fourth quarter.

We have achieved strong backhaul movement this year despite weakness in imported products due to northbound domestic freight contracts we entered into at the end of 2007. This effort will be an ongoing area of focus for us, as we renew contracts, eliminate empty barge days and bring new geographically targeted organic growth to ACL.

The next slide highlights further productivity enhancements. Our transportation ton miles per average dry affreightment barge in the fourth quarter increased almost 3%, compared to the third quarter 2008. Our dry business experienced fewer delay days, improved operating efficiencies and better lane density in the quarter.

We experienced a 9% reduction in our liquid barge productivity from the third quarter and a much greater decline over last year, as the impact of the economic downturn dramatically slowed loading activity in the Gulf. Our productivity in building high volume hoppers and tank barges at Jeffboat continued to improve, compared to the prior year. As you can see from the chart on the right side, labor hours per ton of steel improved 19% on dry cargo barge construction, and 9% on liquid tank barge production this year, compared to last year.

On this slide, as I mentioned earlier, we had tough operating conditions throughout 2008. This slide summarizes the comparative loss days in our transportation segment and manufacturing segment.

I'd like to now turn the call over to Tom, who will offer additional details of our financial results. After Tom's remarks, I will summarize and then we'll answer questions. Tom?

Tom Pilholski

Thanks Mike. Before going to the slides covering our financial results, I'd first like to address the amendment of our credit agreement. The term was extended two years, from March 2009 through March 31, 2011. We believe that the terms of the amended facility provide sufficient flexibility and liquidity to operate the business, both technically and strategically through the current challenging economic conditions.

Most importantly, we can now return our full attention to our business fundamentals by continuing to drive growth and productivity while removing excess costs from our operations. Interest cost on the facility increased to LIBOR plus 250 points, to a LIBOR floor of 3% plus 550 basis points, or essentially a fixed cash cost of 8.5%, increasing by 50 basis points on September 30th and every six months thereafter. Our 2008 interest costs, including the amortization of financing costs and all the amendment fees would have been roughly $20 million more than what we reported in 2008 had the amendment been in effect during 2008.

Although interest costs substantially increased, we believe they are reflective of current market conditions. Also, the size of the amended credit facility is initially $475 million, $75 million less than the previous facility. It further decreases to $450 million at year end 2009 and then to $400 million at year end 2010. These commitment reductions can be met through cash flow from operations, as well as some asset sales, whereby 50% of asset sales can be credited to the required facility step-down.

Liquidity under the credit in effect at December 31st was $128 million, and under the terms of the amended facility it would have been approximately $53 million. We also have flexibility under the terms of the amended agreement to increase liquidity if necessary through a combination of sale leasebacks, asset sales and purchase money debt. We are also limited to $70 million of CapEx spend in each of 2009 and 2010, although this can be increased to $85 million each year if certain CapEx is funded via sale leasebacks.

On the next slide we recognize where you have seen our results, including segment performance, detailed in our press release last evening. So I will only provide some highlights and color behind the numbers, not repeat data you have already seen.

Revenues for the quarter decreased by $13 million, or just over 4%. The manufacturing segment revenues were $34 million lower or 47% below prior year, primarily due to the mix of barges built. Transportation segment revenues increased slightly over the prior year to $231 million. Gross pricing increased 13.7% with 7.1% being the fuel-neutral increase. This was partially offset by 10.6% lower ton-mile volume, lower scrapping revenue and lower outside towing revenue.

Revenues from the other segments were $19 million higher this year due to consolidation of Summit from its acquisition date in April 2008. Income from continuing operations for quarter was $23.5 million or $0.47 per diluted share, essentially the same as last year. EBITDA from continuing operations for the quarter was $56 million, compared to $54.5 million for the fourth quarter of 2007. The increase in EBITDA was driven by a very strong $7.7 million or 15.4% increase in transportation EBITDA.

Fuel-neutral price increases were the primary driver, generating $19 million of the increase, with volume related to the weak economic environment and reduced fleet size down $6.5 million. The net fuel benefits from the decline in fuel costs during the quarter contributed $5.7 million, which is more than offset by the impact of lower scrapping income, refinancing expenses and higher incentive bonus expense we incurred to improve performance.

Boat productivity, primarily from improved fuel usage and lower SGA spending, net of the incentive bonus and increased bad debt expense, also positively impacted EBITDA by $5 million in the quarter. The strong transportation segment performance was largely offset by the disappointing performance in the manufacturing segment, where EBITDA declined $6.9 million, almost entirely due to the $6.6 million in estimated accrued losses on special vessel contracts, which Mike detailed earlier.

On this next slide is full year 2008 results. Revenues for the full year were $1.2 billion, a 14% increase compared to $1.05 billion for 2007. Transportation segment revenues increased 11% over 2007, as 21% higher gross pricing, including 8.4% on a fuel-neutral basis, along with higher outside charter and towing revenue, and higher scrapping revenue more than offset the impact of 9.5% lower ton mile volume. Manufacturing revenues increased $15 million for the year or 6%, and revenues from the other segments were $43 million higher this year due to the acquisition impacts of Summit and Elliott Bay.

Income from continuing operations for the year ended December 31, 2008, was $47.5 million or $0.93 per diluted share compared to $44.4 million or $0.77 per diluted share for 2007. For the year ended December 31, 2008, EBITDA from continuing operations was $155.8 million compared to $159.9 million for 2007.

Transportation EBITDA decreased $7.9 million as the $46 million benefit of strong fuel to pricing was more than offset by the following; $16.3 million lower growth productivity, largely attributable to weather relating operating conditions in the first three quarters, $9.1 million impact of low return mile volumes, $8.2 million higher incentive compensation expense, $5.6 million in uninsured property and cargo claims increases, primarily from the three hurricanes and wage and operating costs inflation.

The impact of fuel price changes was negligible in 2008, as a significant negative impact in the first two quarters was substantially offset by the positive benefits of fuel price declines in the second half of the year.

We initiated fuel hedging in late 2007 and had 10 million gallons hedged at year end 2008. The $13 million in unrealized losses on these year-end hedges is expected to be offset by lower spot fuel pricing we expect to benefit from in 2009.

As a result, we expect fuel to have a minimal impact on our 2009 results in comparison to 2008. Despite the decline in manufacturing fourth quarter EBITDA due to the losses on the special vessel contracts, manufacturing's full year EBITDA increased $2.2 million due to productivity on hoppers and tankers and improved sales mix.

On this next slide, I'll give you some insight into our 2008 cash flow and liquidity. During the quarter we had $43 million of capital expenditures generated $47 million in cash from operations and $5 million in free cash flow and we reduced the revolver by $14 million to $419 million.

For the year ended December 31, 2008, we had $100 million of capital expenditures, used $8.5 million to complete the acquisition of Summit Contracting, received proceeds of $4 million on asset sales and we reduced the revolver by $20.5 million.

Cash from operating activities was $123 million in 2008 compared to $116 million in 2007. As you can see from the chart on the right, capital expenditures were primarily for new liquid tanker builds and maintenance improvements to our boat and barge fleet.

We scrapped 171 barges during the year and did not renew charters on approximately 79 dry hopper barges. I will now turn the call back over to Mike.

Mike Ryan

Thanks Tom. One year ago, I spoke to you for the first time as CEO. What we did not know at that time was that we had already entered a recession, what would become the worst economy in 80 years and we attacked it head on.

I'm pleased that our performance in 2008 was strong considering the operational and economic environment we encountered. We once again delivered roughly $156 million in EBITDA and made progress on many fronts.

But our work is far from over. With our credit facility renewed, we will focus our energy on the business components we can control. Two thousand nine will be a year in which we focus on identifying and meeting our customer needs for barge transportation services and ship yard bills.

In both businesses we will deliver the best quality to our customers, while driving dollars to the bottom line. Our team understands this, they get it. We need to continue to aggressively reduce costs and continue to capture more profitable business with the service and products we produce.

Looking forward we realize that the uncertain economic environment will require us to be flexible. We must expect and anticipate shifts both in customers and commodities. We will continue to focus on the key drivers of our business that are within our control such as efficient fuel usage, labor productivity and loaded mile percentages.

We are challenging every dollar of spending. We made spending cuts in 2008 which should benefit us in 2009. You should expect further cost reduction actions from us in 2009. For example, we have deferred annual merit increases for non-representative employees as an additional action to control our go forward cost structure.

We have also eliminated approximately 85 positions or 15% of our land based compensations spend. This reduction last week will generate $9.1 million of annualized savings. We will realize approximately $3.3 million in 2009 after related severance and other costs, including the cost of approximately $2.5 million associated with the closing of the Houston office. This is primarily a non-cash charge for the write-off of leasehold improvements.

Since I became CEO last March, we have saved approximately $18 million in annualized compensation costs. We have focused on eliminating redundancies and organizational layers which were not required in execute programs.

By broadening the span of control of our managers and streamlining decision making, we have eliminated one half of the Vice President and Senior Vice President positions in the last 12 months.

The closing of our Houston office allows us to further streamline our operations while continuing to reduce costs. I believe the most cost efficient model for serving our liquids customers is to have our transportation and customer service professionals in liquids working alongside our critical mass of employees in Jeffersonville.

This centralized liquid support team will allow us to sustain our growing liquids business and Dan Jaworski, our leader in liquids will remain in Houston with our liquids customers and our channel view operations personnel to continue to lead our growth program.

Two thousand nine presents a different business environment for us, we must be much more tactical in our pursuit of business, as compared to the previous three years and we are doing just that. But our long term strategic plan which we have shared with you in previous conversations remains intact.

We will continue to target transportation and manufacturing business which produces consistently higher margins. Now we'll turn the call back over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Alex Brand – Stephens Inc.

[George Pickel] – Stephens Inc.

This is actually [George Pickel] for Alex. Just so I'm sure Mike, you're building 13 tankers for yourself this year and you may or may not build covered hoppers at the end of the year, right?

Mike Ryan

The 13 are the remaining ones from 2008. They're not new for 2009 they're just rollovers from 2008.

[George Pickel] – Stephens Inc.

Right, right of the 24.

Mike Ryan

Right. Part of that spend was already work in process at year end.

[George Pickel] – Stephens Inc.

All right, so of those additional 13 that are being built, how many, the question is how many of those are replacements and how many dry barges are you planning on retiring this year?

Mike Ryan

Well the dry barge piece George, is going to be something we're going to have to assess probably as we get further into the year. If we get, as we get into the second half of the year, first we have to assess whether or not there's demand for it and whether the economics tell us to do it or not.

So we won't lock into an exact amount we'll probably just take a look at what's available as far as the space to build at the end of the year, second half of the year on the dry side and then we'll make a decision if we can put it in, do we know what's going to go right into service.

The question on the liquids, how many are replacement and how many are new? I believe most of that replaced is new capacity for us. Now, there is an element of replacement in there, but this is new capacity that we feel comfortable we are going to have out in the marketplace and we will be able to fill.

[George Pickel] – Stephens, Inc.

Okay, and the second part of my question must have sounded confusing, was how many of your existing dry barges are you retiring this year?

Mike Ryan

Oh, that is going to be in the 150 to 180 range, so what our program was looking at replacing on a one for three basis. So, if we are in the 150 to 180 range, what we would be contemplating building is somewhere in the 50 to 60 range if we chose to build.

[George Pickel] – Stephens, Inc.

Okay and my follow-up question is with Jeffboat, I guess that I am kind of cheating at two parts. The first part is can you talk about why there was such a decline in external builds this quarter versus Q-4 of 2007 and secondly, can you talk about how many external builds you plan on doing this year and will it be weighted to the first part or second part of the year?

Mike Ryan

Yes, I think what you saw was just the shift of the schedule and the timing on when we would be building for ourselves versus externally. So, there wasn't – it wasn't representative of a drop-off of business in one category or the other. It was just the timing and the scheduling that called for us to be working on our own. What was the? What was your fourth question?

[George Pickel] – Stephens, Inc.

How many external builds do you plan this year and are they weighted towards the first part or second part of the year?

Mike Ryan

The externals are they are weighted towards the first part, but most of our builds this year is external. So, with the exception of our own dry, we are building for the external market this year. So, the only thing you'll see is the concentration will flip from the liquid piece over to the dry piece as we move into the second and third quarters, so. But, most of the activity you are going to see at Jeffboat this year is going to be for outside, not for us.

[George Pickel] – Stephens, Inc.

Okay. Great. Thanks for the time.

Mike Ryan

And the internal dry builds will be built at the market needs so, or if the market demand is there and they are scheduled for the second half of the year, the latter part of the year.

[George Pickel] – Stephens, Inc.

Right.

Mike Ryan

Thanks, George.

[George Pickel] – Stephens, Inc.

Thank you.

Operator

Your next question comes from the line of John Barnes – BB&T Capital Markets.

John Barnes – BB&T Capital Markets

Okay, thanks guys. First, in terms of could you just walk through your thought process on the liquid business going forward, your strategy and, then there was a strategy put in by the prior management, being just it seems you are slowing down deliveries of liquid barges, closing the Houston Office, is there any indication there that you are pulling back from the liquid side or could you just elaborate a little bit as to the strategy on a go forward basis?

Mike Ryan

Absolutely, since I hatched that in the end of 2005 and when I was the Chief Commercial Officer, now I get to keep running it, John.

John Barnes – BB&T Capital Markets

Yes.

Mike Ryan

The liquids piece was one where it was not a point of focus here. It was sort of a filler element around the dry business and we have moved that forward in 2006 and 2007 as a higher percentage of our business and a higher dedicated piece of our business as far as scheduling the network.

What we did in 2005, 2006 and 2007, and even into 2008, we established new pricing levels, new contracts, new agreements, and really built that up to a sustained base. Now, I think what you are going to see us do here through 2009 is hold that plateau.

What we want to make sure is we don't lose ground on those three years of activity where we have built more barges. We have contracted specifically with customers for a longer-term business and longer commitments. So, what we're doing is continuing that through 2009 by either renewing to sustain, or in some cases, going after – still going after new business. So, we did actually have organic growth in the liquids piece in the fourth quarter, along with the dry business. But, we still continue to see people come to us with a request for better economics and better options and we are still the best as far as that is concerned.

When you look at how or what we are doing, though in Houston, the idea there is that we are committed to the liquids piece, but that – it's a better, stronger, more economical program when your back shop people are all together in one place. It is very expensive to operate a satellite office and that's the conclusion that we reached.

The most important thing for us to do is put good equipment, effective, competitive pricing up against those customers and a sales presence and that is what they want. So, all of the other a sundry things that we had in Houston, they were not really necessary and this is going to be a cost saving event for us and we are not going to lose one bit of effectiveness with those customers.

John Barnes – BB&T Capital Markets

Okay. All right. That is – I just wanted to make sure that I understood there was not any changes in velocity here and, then, looking at the things you were able to realize from a cost perspective, could you just walk us through? I am going to cheat a little bit here, two parts.

Number One, when the majority of the cost take out that you saw, you outlined a number of line items in the press release, but when those cost items really began to show up, and what I am trying to get is, how many more quarters of that benefit do we have rolling through the model now and is this something that was started in the fourth quarter, so we have got another three quarters of benefit and then, on top of what you have already done, how much more are you targeting? Could you kind of quantify a dollar amount of what is the next round of dollar reduction in costs that you think you can see and pull out of the business?

Mike Ryan

Yes, that is a good question and the, Tom keeps me honest here because what I do is I go through and I look at the needs whether it is personnel or equipment or operations, and if we can do it with fewer, we do it with fewer and that is personnel, that is vice presidents, that is barges and that is locations. Now, Tom keeps track of that for me.

So actually, I never really actually took a look at how many vice presidents or senior vice presidents I had. I looked at how many I needed and in the end I needed about half as many. So, I think you are going to see us do the same thing in 2009 and now we are going to look outwardly to the operations piece. Where can we be more efficient with a combination of management teams? Where can we start to do that same consolidation and eliminate redundancies at our fleet locations, on our transportation locations?

So, it is hard to predict what amounts you are going to see, but I think you are going to hear from us every quarter, something new that we have found that we have improved and I do not know what the magnitude will be. I mean, I was kind of surprised that we were over $18 million when we took out a lot of the excess heads of state we had here and we just did not need them and I think we are going to have – I think we will probably surprise ourselves as we go through the system and figure out how do you run this more efficiently, so. And the good thing about that, John, is we can control that. Nobody else controls that. So, as we go through 2009, we can decide how much cost we can afford to take out and it's not a market telling us that, it's us.

John Barnes – BB&T Capital Markets

Okay, and just going back, when did the majority of this start? I mean, was it a fourth quarter event?

Mike Ryan

Well, there was – I tell you the personnel reduction started in March and so did I. So, the first analysis of how many people we had and how many we needed started in March, the same month I started, then it continued in May and we had our third review with action last week.

So, it is kind of an ongoing event. We realized gains from that in 2008, but we'll realize more here in 2009. When you look at the fuel burn types of stats, we've got a few months into 2008. You got into in to May and June, and we decided running flat-out wasn't the right way to run, so we started to run more efficiently, rather than just run as we fast as we could. So I think you see the fuel gains that are on the charts and graphs that kind of spell out where it actually started. You can track it on those charts.

John Barnes – BB&T Capital Markets

All right. Very good. Nice quarter, guys. Thanks for your time.

Mike Ryan

Thanks, John.

David Parker

Operator, are you there?

Operator

Yes. Your next question comes from the line of Ken Hoexter – BAS-ML.

Chris Weatherby – BAS-ML

Hey, great, it's actually Chris Weatherby in for Ken this morning. I guess if I could hit first on the special barge that you mentioned, where you took a loss at Jeffboat. I just want to understand – is there any other options related to that customer for additional special barges or is there something we should be thinking about coming forward, or is that likely to be the last or close to the last one that you guys will build?

Mike Ryan

Yes, Chris, they have an option for one more, and well, I guess we've learned some lessons on what to do with the first one that we built. So we'll do everything in our power to minimize the exposure that we have. But again, we're not laid out or designed to build these one-offs, and now that we know what one of these things looks like, we will be much more aggressive getting our arms around it.

You'll probably see me more actively involved with pressing the builder of this ship to engage and help us work on it. And in fact, I'm meeting with a principal today to talk about the results of this first barge.

But yes, to answer your question, there's an option for one more and we're going to do everything in our power to make sure it doesn't have the same outcome.

Chris Weatherby – BAS-ML

Okay. And so it sounds as though it's likely to get – exercising the option's likely to exercised, but maybe you guys can mitigate some of the costs associated with that as you go forward.

Mike Ryan

Yes, and again, our focus is going to be going forward, building for the inland water market, building the dry hoppers and the liquid tanks. We're going to move away from these boutique items.

Chris Weatherby – BAS-ML

Fair enough. And I jumped on a little late, so I apologize if you guys have already discussed it. How do the margins on those type of barges look, and how do you think about the margin going forward. I think you may have talked about this a little bit, but I just wanted to make sure I understood.

Mike Ryan

Tom, you want to talk about the margins, or you want me to?

Tom Pilholski

On these special vessel or on the boats?

Chris Weatherby – BAS-ML

No, the higher volume dry hoppers and tankers that you talk about.

Tom Pilholski

The margins we're looking at are better than what we had been getting on some of the Legacy contracts and some of the new contracts we've quoted. You can see the best example of that was the one contract that we renegotiated over the summer when a customer came back to us and we were able to renegotiate the contract terms to bring them to market, and they were substantially better than the previous terms we had with the customer.

I don't want to give you the exact margins so that individual customers may know what our profit margins are under the contracts.

Chris Weatherby – BAS-ML

Okay. That makes sense.

Tom Pilholski

So the best example, and we talked about it before, is what we did when we renegotiated a contract over the summer.

Chris Weatherby – BAS-ML

Okay.

Tom Pilholski

A significant increase in profitability on a go-forward basis.

Chris Weatherby – BAS-ML

Okay. And then, I guess just switching to the pricing side, I think you mentioned 60%, I think is contract when you look forward into 2009 for the portion that's probably in the spot. How does the spot market look now? Is it at all active, or do you feel like there's any stability in that, or are we seeing pressure on those rates?

Mike Ryan

Yes, there's pressure on them. I think what we've all seen in print is, we saw extreme pressure immediately at the end of 2008 and into 2009. We didn't really see that right away. But it's definitely there. The liquids piece has, obviously, less demand so with that comes an ability for people to price lower in the marketplace to get their barges positioned and we see it on the dry side as well.

But the strong part has been, I think, that we've still had a good high loaded percentage ending the year and beginning the year, so we've been able to marry up the moves that we wanted, not necessarily giving up too much on the price side yet.

And again, as I mentioned in my comments, 2009 is a daily fistfight, and if you're not looking at it that way, you're probably going to lose a lot as the year goes on. Our mission's to hold onto that and hold onto the pricing that we have.

Chris Weatherby – BAS-ML

Okay. That makes sense. And I guess just finally on, you mentioned one of your liquid customers filed in the fourth quarter. I just want to make sure I understood. You said it was a $600,000 reserve in the quarter, and then you expect a similar charge. Is that in the first quarter of '09?

Mike Ryan

Yes.

Chris Weatherby – BAS-ML

Okay, and any sense that your receivables are – what percent of them are looking a little bit more impaired or potential to become impaired? I'm just trying to get a sense of the risk here that you guys see.

Tom Pilholski

We're following the credits every day. We haven't seen any meaningful deterioration in the aging as of this point in time, and we follow on the credit services. But if you look at just in the general customer base out there in the chemical base, there's companies that are being downgraded, so there's increased risk, and we're following it.

Mike Ryan

That's not showing up as a pattern.

Tom Pilholski

We're not seeing it yet, the impact on our receivables, but we certainly believe it's a risk out there and we're following it closely.

Chris Weatherby – BAS-ML

Okay. All right, well thanks very much for the time. I appreciate it.

Mike Ryan

Thank you.

Operator

(Operator Instructions). Your next question comes from John Barnes – BB&T Capital Markets.

Mike Ryan

Hey wait a minute. Deja vu.

John Barnes – BB&T Capital Markets

Yes, absolutely. You told me to limit it to two, so I did. I adhered.

Tom Pilholski

Two a call. I got it.

John Barnes – BB&T Capital Markets

Just a couple of follow ups on Jeffboat real quick. Could you talk a little bit about how much Legacy business do you have that you had the issues with earlier this year? Is there much of that left, or have you worked through most of that?

Tom Pilholski

Right now we have $212 million of exercised contracts – about $120 million on backlog of owner-exercised contracts, a total of about $332 million. Of the unexercised contracts, it's primarily in 2010, 2011, and the Legacy contracts is about 18% of the $212 million that we have exercised, or about $37 million.

John Barnes – BB&T Capital Markets

Okay. So, by the end of 2011 you will have stripped most of that out.

Tom Pilholski

Yes.

John Barnes – BB&T Capital Markets

Okay. All right. And then do the CapEx limits that you have in place per your new credit agreement, whether the $70 million or the $85 million – do those CapEx limits hinder the Jeffboat performance at all? Are you concerned about – does it put some pressure on that because you just can't buy as much, or does that level of CapEx give you plenty of buying power to kind of protect the results of Jeffboat?

Mike Ryan

I think we're pretty happy with that CapEx, John, and I don't think, even when you look at how the agreement ended up, I think we were planning to go to that level anyway in 2009, so just based on what we were anticipating the market to be, and what we thought the replacement levels would be.

You'll remember, from the strategic slides that we showed you, we wanted to try to take down the size of that dry fleet anyway, so in some of these quarters and months, we're actually not hurting ourselves by continuing to scrap without replacing because we need to look for that optimal level anyway, and we know it's lower than where we are.

So number one, we weren't planning on being a major component of Jeffboat in 2009, and the other piece, it shifts the timing a little bit back on how we replace the dry fleet. And again, if the markets respond well here in the second half of the year or even the fourth quarter, we'll go ahead and start putting new dry in the water – and certainly not to overbuild. We're only replacing one for every three we take out.

John Barnes – BB&T Capital Markets

Okay. And then, given the volatility – to me, it seems like you're settling into a barge business that's becoming more and more predictable and right sized and that type of thing. Jeffboat continues to kind of swing to and fro and whether or not, good results have yanked out the loss on that vessel, but have you taken a look strategically again at does it make sense ultimately for you guys to own both a barge company and a barge building company? And do you think you'd unlock a little bit more value by stripping the two apart or have you gone down that path yet?

Mike Ryan

I think there have been a couple of looks at that over the last couple of years. Certainly we've been focused more here on owning both and running both right now and I don't think we've – we really haven't advanced any discussions or concepts that look any different than getting control of both locations and driving as much profit as we can through both.

Operator

Your next question comes from the line of Bill Doyle.

Bill Doyle – Forrester Research

Did you disclose the 2009 CapEx budget?

Tom Pilholski

No we have not disclosed it. What has been disclosed publicly is in the 8-K filing which has a limit of $70 million both in 2009 and 2010, or we go to, as just mentioned before, we'd go to $85 million if certain of the new builds are funded with sale lease backs.

Mike Ryan

Right now we know that the piece that's in the budget is to build tankers, the remaining tankers in the first quarter. But as we said before it is depending on the market needs, the dry hoppers we have planned for this year, we make that decision to build and they're scheduled to be built in the latter part of the year.

Bill Doyle – Forrester Research

And barge repair, maintenance all flows through the income statement or can some of it be capitalized?

Mike Ryan

Well if you look at one of the charts we showed for the 2008 results where we spent $100 million of CapEx, $40 million of that was capitalized in terms of barge and boat improvements. There's also a nice chunk that goes too in terms of normal maintenance on the barges and the boats that goes through the expense P&L. But the rehabs and the improvements go through the CapEx budget.

Bill Doyle – Forrester Research

And is that primarily improvement to the tow boat side?

Mike Ryan

It varies. Improvement to the tow boat side – it's rehabs of the tanker barges where you can extend the tanker barge life by doing a rehab of it, basically of the external outer shell so we extend the life of our tanker fleet by doing rehabs of those with new holds.

David Parker

Operator, we'd like to go ahead and conclude the Q&A portion of the call and turn the call back over to Mike please.

Operator

I would now like to turn the call back over to Mr. Mike Ryan for closing remarks.

Mike Ryan

Thank you. As we mentioned in the Q&A and in the text, we're going to continue to aggressively reduce costs and improve productivity and accelerate our margin growth. Those are the basics and we're going to continue to operate along those lines.

We'll continue to operate and manufacture with an eye towards providing our customers with the greatest value added services and we're going to continue to do that through this tough time. I do want to thank all of you for joining us on the call. Thank you for your great questions and we'll see you and talk to you again soon. Thank you.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation, you may now disconnect. Have a wonderful week.

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Source: American Commercial Lines Inc. Q4 2008 Earnings Call Transcript
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