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Executives

Dave Parker – Vice President, Investor Relations

Mike Ryan – President & CEO

Tom Piholski – Senior Vice President & CFO

Analysts

Sterling Adlakha – Stephens

John Larkin – Stifel, Nicolaus

Scott Weaver – Merrill Lynch/Bank of America

Chaz Jones – Morgan Keegan

John Parker – Jefferies

American Commercial Lines Inc. (ACLI) Q1 2010 Earnings Call April 28, 2010 10:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2010 American Commercial Lines Incorporated Earnings Conference Call. My name is Kiesha [ph] and I'll be your coordinator for today.

At this time all participants are in listen-only mode. Later, we will be conduct a question and answer session, towards the end of this conference. (Operator Instructions).

I would now like to turn the call over to Mr. David Parker, Vice President, Investor Relations and Corporate Communications. Please proceed

Dave Parker

Thank you, Keisha [ph]. Good morning to everyone and thank you for joining us. Today, we will be discussing our financial results for the first quarter ended December March 31, 2010. 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, 2009 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 aclines.com in the investor relation sections under non-GAAP financial data.

Also, as a reminder you can follow along today via 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, we will now proceed and I'll now turn the call over to Mike

Mike Ryan

Thanks David and good morning. The economy in Q1 still presented us with freight volume and pricing challenges, a continuation of the lower demand levels for the freight services which existed during the recession years of 2008 and 2009. While we do see some positive volume activity in certain sectors of our liquid and dry markets, these positive volume trends still only represent a fraction of what we need to return to pre-recession levels, but we welcome good news in any size or shape.

As we have stated in previous call, we use this recession period to realign our organization to eliminate cost and to focus on increasing productivity. This would have been a path we traveled with or without the recession, but the recession certainly gave us a greater sense of urgency for focusing on the removal of obstacles, which were keeping us from achieving greater levels of profitability.

I will cover many of these efficiency enhancement steps in our strategic initiative section in a few minutes. In the first quarter of 210, our transportation segments operating income increased by $6.2 million reflecting tighter cost control and higher gains from our asset management actions. Our manufacturing segments operating income was at a breakeven level down $4.1 million versus Q1 of last year.

Jeffboat delivered 33 dry covered barges for ACL internal use in Q1. This new build activity for ACL's transportation segment marks the beginning of our fleet reinvestment strategic initiative. Approximately one half of the cost of the new barges for ACL was offset in the quarter by the proceeds of assets sales.

In the first quarter, Jeffboat also had 25 weather related loss production days. With this economy we still need to see greater freight volume and pricing before we will achieve sustained profitability. But we are not waiting for the economy to come back to work on improving our systems.

Focusing on improving our cost and productivity not only positions us to whether this current challenging economic times, it positions us for much greater financial performance when the freight levels return to pre-recession levels. The April federal reserve base book analysis continues to report increases in economic activity in almost all districts with improvement in manufacturing mining and energy activity.

The army core of engineer's industry tonnage statistics also report small positive year-over-year trends. However, these signs of a directional change for the economy have not yet produced enough in overall freight level increases and pricing strength revitalize all of the transportation market.

While some volume increases in truck, rail and barge sectors are appearing. Overall barge rate demand remains less than the current barge supply. The army core of engineers industry statistics also show that bulk and liquid volumes continue to run approximately 24% and 14% below the average volume of the previous five years.

ACL has not yet seen strong demand return to the transportation market. We did have higher liquid ton-mile volume in Q1 but that was in comparison to last years extremely low levels. The metals markets also rose slightly in volume. Though we are encouraged by a quarterly uptick in shipments of metals products and liquid cargos, these are still modest sequential volume improvements overall.

With regard to the increase and liquid rate per-ton miles we have fewer barges and charter/day rate service in the current offsetting any benefit of the increase liquid rate per-ton miles.

We continue to monitor the increased metals and liquid activity to determine if it is an inventory replenishment or the result of sustained economic improvement. Our grain freight pricing was off nearly 10% compared to the first quarter of last year. Reducing estimates from earlier reports for 2010 the USDA now estimates that grain exports for the current marketing year are expected to increase about 2% over this past year.

We remain cautious on our grain outlook due to this revised forecast. With excess barge capacity in the market place this year and fluctuating grain freight spreads between the Gulf Outlet and the Pacific Northwest due to Western Railroad programs. It is too early to project magnitudes of strength or weakness in our full-year 2010 grain program potential.

In manufacturing, we continue to shift for a smaller build program designed to produce sustained earnings over a long period of time by maintaining optimal production levels. In 2010, it is our intention to operate just both with only two production lines.

Our external backlog was $69.7 million at March 31, 2010 compared to $183 million at March 31, 2009 and consists primarily of hoppers and deck barges. Margins on new barges have narrowed considerably within the industry due to overall reduced building demand. Many traditional customers have not been building barges recently as they are holding on to their valuable capital dollars.

At the momentum we do have a bit of a challenge to our near-term plans in manufacturing as our Jeffboat labor force choose to strike on April 4. We look forward to their return to work as we will be building barges this year and filling our book of orders for 2010. In these challenging economic times we have to control our cost of Jeffboat in order to remain competitive and to have any chance at being successful in winning new barge bids against the rest of the U.S barge building industry.

We believe economic conditions, while improving slightly will not produce significant revenue improvements for our business in 2010. With the economy and its recovery pace beyond our control, we remain focused on improving our business fundamentals, the things we can control which make us more productive. Focusing on these things we can control what we refer to as our strategic initiatives.

Lets take a look at the seven strategic initiatives starting with driving safety to zero. In Q1 we achieved a reduction of 11% in incidents and 29% in claims dollars for accidents and injuries and transportation manufacturing in our drive to a zero incident level. Business mix improvement, in Q1 we started to see a slight return of our highest value drive contract business and our liquids volumes, both of which make up the core of our preferred long term portfolio mix.

In the quarter we were also recognized by GE Energy with an award for new product introduction as we provided customized water solutions for the movement of GE wind energy components in 2009. This is representative about the new market share we are committed to bring into the river and shipping on ACL, taking it away from the land based modes. And speaking of new growth, we continue to achieve organic growth with $14.9 million in wins in the first quarter of 2010 including over $7 million in conversion from rail.

Re-investment in our fleet. We added 33 new dry covered hoppers to our fleet. These units are out in revenue producing service right now as we started our initiative toward reducing fleet age and improving utilization in our barge fleet. Scheduled service, we hired Chris Shepherd from CSX to be our new director of service design.

Chris is a strong addition for us as we brings to ACL a great track record of success and network design implementation. Chris will lead our scheduled service program starting with the standardization of local operations. He will then oversee the synchronization of these local networks into the system network. A product from this work is the service schedule for our customers. Our customers can use these schedules to plan their shipments and inventory levels when shipping on our system.

In an early test of this efficiency improvement potential in Q1 of this year, we actually reduced origin-destination transit time from the Gulf to the Ohio River by 40%. We implemented local tow blocking practices and then combined the new local changes with a run through tow service, bypassing intermediate terminals and cutting eight days off of our transit time. This is a great utilization for us and value creation for the customer as they benefit from fewer days of transit and lower inventory costs. This will be a key weapon for us as we pursue high margin business conversion from land based modes of transportation.

Order to cash is first the capture of all billable events followed by the timely and efficient collection of bills for the work performed. This program is in motion as well. In the last six months we have identified over $1 million in billable work performed which we are now capturing through billing. $300,000 of this work occurred in Q1 of 2010.

Jeffboat optimization, with the Q1 launching of our most recent 50,000 barrel barge, we have for now reduced our 2010 manufacturing footprint to two active production lines.

We will maintain production at levels we believe will efficiently support the building of our internal barge needs and a comparable number of external builds. However, we must remain cost competitive in order to have any chance at winning the smaller number of outside business opportunities which are available today.

Recruiting retention and organization; we continue to move forward with our management, realignment and field management deployment. In 2009, we concluded the reduction of 25% of our workforce and initiated a redeployment of managers to the field closer to customers and to employees.

In March of this year, we completed the redeployment of our Northern division operations management team, and we crescent our new Northern region operations headquarters in Cairo, Illinois. Now with Northern operations headquartered in Cairo, and our Southern operations headquartered in Harahan, Louisiana; our operations leadership is better positioned to drive efficiencies out of our systems and to champion productivity changes with hands-on programs run by network experts.

We'd included a variety of other quarterly metrics that we routinely monitor and the Appendix to our slide presentation. I'd like to turn the presentation over to Tom now to discuss our financials.

Tom Piholski

Thanks Mike. The next slide contains a summary of our financial performance. The transportation revenue changed for the quarter was primarily due to lower charter, towing and demurrage revenue, a decline in total ton miles and negative grain pricing. I will get into more detail regarding transportation revenues at the moment.

The decrease in manufacturing revenues for the quarter was driven by a change of the mix of barges produced as this year more of Jeffboat's capacity was devoted to internal covered dry hopper bills for our transportation segment. The details of barges both are included in the Appendix and today's presentation, which will be available on the website following our call today.

The $0.08 smaller diluted loss per share from continuing approbations in the current year is attributable to $0.23 of non-comparable cost above reorganization and write-offs related to a customer bankruptcy included in prior year results and $0.05 in higher transportation segment income in the current year quarter.

These positives were partially offset by $0.19 lower manufacturing segment operating income and $0.01 impact of all other items, primarily higher interest expense and a differential tax rate. The transportation segment improvement was driven by lower cost, which I will review in a moment while the decline in manufacturing segment income is due to lower revenues as well increased lost weather days.

The next slide illustrates the mix change in transportation revenues. Overall, transportation revenues declined 14% on a fuel-neutral basis in the quarter as a result of $10.6 million or 30% decline in lower towing, charter and demurrage revenue. 10% lower grain pricing and a 16.5% lower over affreightment volumes driven by 37% lower coal volumes and 13.5% lower grain volumes.

Excluding coal and grain our remaining volumes declined by 4%. Though our liquid affreightment ton volume increased, the benefit was offset by the decline in charter day rate demand for similar commodities as well as lower spot and contract pricing. Metal revenues of a smaller base also improved nicely in the quarter but remain well below 2008 levels.

Our predominant coal volume has moved under our large end contract where ton miles declined more than one third from the prior year. The 28% decline is salt volume was largely attributable to production issues at a major customer. The improved sales mix resulting from increased higher margin liquid and metal volumes and decreased lower margin coal volumes though overall ton-mile fuel allusive pricing slightly higher than the prior year.

However, the positive mix impact was more than offset by lower coal grain and salt volumes and a significant decrease in the barge and charter revenues. The Terra Nova supply of barges in the industry is also negatively impacting our grain and other spot pricing, especially liquids and scrap metals.

Though the majority of our contract renewals occurred during the fourth quarter we did renew five dry and two liquid contracts in the first quarter at a blended weight decrease of 5%. We continue to face significant price competition on every bid and are now limiting the tenure of new contracts to protect future pricing levels.

On the next slide of key drivers of increase of approximately $1 million of EBITDA compared to prior years first quarter. Changes in commodity volumes rate and mix grow by $13 million decline in EBITDA in the quarter with a margin impact of revenue declines in the non-affreightment revenues of towing, demurrage and liquid charters accounting for almost one half of the decline.

Grain pricing down almost 10% over the prior year quarter and volumes down 13.5% over the prior year impacted by EBITDA by $4.3 million, more difficult weather conditions in this years first quarter resulted a $3.2 million reduced boat productivity primarily due to ice on the Illinois River and persistent high water conditions in most of the river system.

Despite these negative factors, EBITDA on the transportation segment increased $4.9 million due to a significant quarter-over-quarter cost to reductions. Non-SG&A cost reductions of $13.8 million was driven by $6.4 million in lower repaired and uninsured claims cost and $7.4 million in lower compensation and other operations related cost.

SG&A expansions were $4.9 million lower in the quarter due to lower compensation cost, personal injury claims and marketing expenses. Also the non-comparable reorganization cost incurred in the prior year first quarter represented an additional $4.7 million in quarter-over-quarter savings. Our asset management actions also contributed in addition of $1.9 million in the current year quarter.

Partially offsetting the $4.9 million increase in transportation EBITDA was a decline of $3.9 million in our manufacturing segment. Driven by the lower external production volumes and lower margin on current year deliveries due to the reduced customer demand and the resulting competitive pricing pressures in the industry.

As you can see on the next slide, despite difficult economic conditions we continue to generate positive cash flow from operations, though changes in working capital and other mix are non cash charges resulted in an unfavorable comparison to prior year.

We generated $0.3 million in cash from operations during the quarter, compared to $25.1 million in the prior year. Approximately three quarters of current year decline in cash from operations was driven by unfavorable changes in working capital. The working capital changes were primarily timing related, attributable to a difference in the timing of the payment of interest on outstanding debt compared to the prior year, higher inventory levels driven by our internal barge build program this quarter and by weather delay delivery of several external tank barges at Jeffboat.

Long term debt increased by $11.3 million in the quarter to $356.8 million at March 31st, primarily due to the changes in working capital and the net cash used for investing activities in the quarter. Total availability into the company's revolving facility was approximately $223 million at March 31st.

During the first quarter the company $15.5 million of capital expenditures, primarily related to cost of new dry covered barges. We also generated $7.2 million in proceeds from asset management actions in the quarter, primarily from the sale of surplus boats. These proceeds offset a significant portion of the capital investments. In addition, we collected a $2.3 million government grant payment related to their funding of 75% of a capital project at Jeffboat which was completed in 2009.

We currently expect to build 50 to 70 new dry hopper barges for use by our transportation segment in 2010. Combined with our maintenance capital expenditures which extend the lives of existing fleets, we expect that our total capital expenditures will be in the range of $50 million to $60 million in 2010.

I will now turn the call back over to Mike

Mike Ryan: Thanks Tom. The first quarter is traditionally a challenging for us as our historic business levels are generally at their lowest at this time of the year. A weak economy and lagging freight orders did compound this impact for us in this first quarter but we're not waiting for the economy to come back to improve our operating model.

Today you heard about and saw examples within our strategic initiatives of our cost cutting progress, productivity improvement and our customer focused success. By improving our business fundamentals we're ready to provide even greater value to our shippers and we will optimize our company's earnings potential when freight demand levels return.

Operator we're now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Alex Brand with Stephens. Please proceed.

Sterling Adlakha – Stephens

Good morning guys. This is Sterling Adlakha in for Alex today. First I wanted to ask about some of the sales and disposition of equipment you had, $3.9 million in a gain on disposition of equipment. Can you tell us what's in that number and what's in the $7.2 million proceeds from asset management actions?

Tom Piholski

Primarily most of the gains as well as most of the asset proceeds, the $7.2 million is related to boat sales -- surplus boat sales.

Sterling Adlakha – Stephens

Okay so, are the sales in the $3.9 million, is that part of the $7.2 million, or they are separate?

Tom Piholski

That's part of it.

Sterling Adlakha – Stephens

Okay. Could you tell us what the spot and contract pricing was for liquid in the quarter?

Tom Piholski

For contract renewal pricing you mean?

Sterling Adlakha – Stephens

Yes.

Tom Piholski

Yes. We had a total of seven, I think we had five dry and two liquid that is renewed on a blended basis of the 5% decrease.

Sterling Adlakha – Stephens

That's okay, that's five dry and two liquids.

Tom Piholski

Right.

Sterling Adlakha – Stephens

Anything on the liquid pricing front, you can give us maybe an idea of spot pricing now and how it turned it through the quarter?

Tom Piholski

I think it's still weak. I think what you are looking at though is as volume comes back if it's not in a contract; it's going to be under that type of spot pricing pressure. So, I don't think you are going to see a real big uptick here in pricing. The volume will come back before the pricing comes back, and that's what you have to watch for on the dry and the liquid.

Sterling Adlakha – Stephens

Great. Okay, lastly I had a question about the commentary in the release. The release mention said excess barge capacity as a result of lower demand, that things indicate that the capacity situation could be resolved with demand improvement, I think that's the case or do we need to see rationalization on the capacity side as well?

Tom Piholski

I think the fallout has occurred right through the recession. So, I think you're going to see as this cascades from truck to rail or water, you'll see that tighten up the market. You'll see it tighten up the capacity. There is still that dynamic of barges falling out as well. So, I think both of those actions, both of those activities will tighten things up on liquid and dry barges and we'll see a return of pricing strength.

Sterling Adlakha – Stephens

Thank you very much for the time.

Tom Piholski

Thank you.

Operator

Your next question comes from the line of [inaudible]. Please proceed.

Unidentified Analyst

Okay Mike. Thanks for taking my questions.

Mike Ryan: Jimmy, you're calling in enough now that they're getting your name right.

Unidentified Analyst

Yes. I know I must be getting the same.

Mike Ryan

That's good.

Unidentified Analyst

Mike, I've heard about the pickup in liquid refine product movement by barge pretty much started I guess midway through Q1 with some visibility I guess to the start of April, and your liquid volumes were up 20% in Q1 year-over-year. Do you see that more as a inventory restocking process, or is that do more to economic conditions actually getting better or and put another way how sustainable is that strength?

Mike Ryan

Yes. That's the question we are looking for. Jimmy, when we see this repeat itself for several more months we have a better idea whether this is a sustainable event or whether its replenishment. It's slow enough for this point that it looks like. It's got a steady pace to it, but until we get some more data points up against that it's hard to declare what it is.

Unidentified Analyst

Mark, also through today you still see that strength, it hadn't fallen off?

Mike Ryan

No.

Unidentified Analyst

And then I had a question for Tom. Tom, you guys have done a pretty good job and of brining costs and – I wanted to see if you can talk about how further you think you can go with cost reductions and will it be in the same areas of there are other new areas you might begin to explore for some cost reductions.

Tom Pilholskiv

Jimmy I am going to hop this one.

Unidentified Analyst

Okay.

Mike Ryan

I think the big changes, the big realignment numbers and cost reductions we saw in 2008 and 2009. We probably won't see anything of that magnitude but there is still opportunities and pockets that exist whether its people or assets on how we run the property. The decentralizing of the management is really eye-opening for us. We are able to see where we have got extra boats and extra assets that we don't need. Where we can continue to get a little more aggressive in the number of people that we actually need to execute not just a continuation of service but an improved service and we are seeing that but the thing that we – I encourage our team not to do this, don't put a bogie out there and go and try and it. We did that on the realignment side, we just don't know what does the right structure need to look like and when we were done it was $50 million lighter.

We're going to continue with the process of what's the better program, whether its assets or people or a combination of the two and we'll continue to report on what those numbers are but just guessing at it, its probably not going to be 50 another $50 million but there is more cost to take out of this.

Unidentified Analyst

Okay that's good to hear and if you look at what's going on rail. There has been a decided pick up in coal movements in Q2 and obviously it looks like coal was not – fell of quite a bit in the quarter for your guys in terms of volume versus last year. Are you seeing any change in that in coal volumes in the second quarter, they are picking it up at all for you all?

Mike Ryan: First on the rail side, we loved that their volumes are picking up because as they get tighter we will see ours tighten up too because –

Unidentified Analyst

Sure.

Mike Ryan

Again the cascading and then that comes to the water, they have had upticks in coal and forest products and number of things that eat up equipment and locomotive power. So, all of those things working our favor to get them out of these tactical markets that they have been playing in just to get through the recession and back to their old program.

So, that's a big positive for us when we see their volumes pick up we feel good about that. Our coal is in so much, we have got a smaller portfolio of coal. Tom, mentioned that the large end contracts is a – that's a utility and its kind of behaving like most of the utilities on the water and the rails there, they are not necessarily up yet. But on our smaller areas of co-opportunity that we focus on those are starting to show some strength both domestic and export which is good news. We had a good export program a couple of years ago. So, seeing some interest on the export side again first quarter and into second quarter is a positive sign.

Unidentified Analyst

Well again that was something else I want to ask you about. I mean saw some this weak down here I saw some mid-stream transfer loading of coal with the crane in the river picking up the coal out of a barge and putting it in a ship and I nearly thought we'll -- I see that with grain a lot but that looks like export coal to me. Is that something we can look to as an area of strength in export coal?

Tom Pilholski

Its more of a spot market right now. It doesn't behave the way returning markets do on manufacturing lines or production lines. So its probably more a spot opportunity right now. We're not seeing long term contracts. They're just kind of bids that grow for weeks and months at a time, not necessarily for years.

Unidentified Analyst

All right. That eats up some idle equipment or some spare equipment that's floating around out there.

Mike Ryan

That's all good, yeah. Can we move on to the next question? Appreciate your questions but we've got accommodate some others.

Unidentified Analyst

Yes, thank you very much.

Mike Ryan

You bet. Next question please operator?

Operator

Your next question comes from the line of John Larkin with Stifel, Nicolaus. Please proceed.

John Larkin – Stifel, Nicolaus

Hey, good morning gentlemen.

Mike Ryan

Good morning.

John Larkin – Stifel, Nicolaus

Getting back to the rail volumes, I think actually coal has been still pretty weak due to the huge stockpiles at the utilities. You have seen some strength in export which you just talked about but it was more really the chemicals and the metals area, particularly in the East that were extremely strong, particularly in the month of March after we got beyond the rough weather. Norfolk Southern as an example, they reported last time chemical volumes and metals volumes were both up over 30% in the month of March. That doesn't sound like your seeing anything close to that level of volume.

Tom Pilholski

Not magnitude John but directionally the strongest part of our quarter was March and we saw, as you look at the quarter and you look at the month, we actually made money in March. So the upticks in volume that we saw in, as you said the metals and the chemicals and liquids side are trending that way. They got stronger as the quarter went on.

John Larkin – Stifel, Nicolaus

Okay, and then there wasn't a whole lot said about the strike at Jeffboat. I guess that's been underway now for a few weeks. Can you talk about what led to the strike and what needs to happen in order for the workers to come back on stream?

Mike Ryan

Yes, it's a contract renewal discussion and both sides are talking right now and we're optimistic that we'll find common ground and get these guys back to work and start making barges again.

John Larkin – Stifel, Nicolaus

Is it an hourly rate issue, benefits related issue, anything in particular?

Mike Ryan

I'm not going to discuss what the elements are that are under consideration but when its settled you'll know exactly what they were.

John Larkin – Stifel, Nicolaus

Okay, fair enough. So you think -- yes, that's moving along nicely. You mentioned that the governing covenant limits the availability to $155 million. What is the governing covenant currently?

Mike Ryan

Basically the covenants will fall into place and we'll have to maintain the covenants if availability under $390 million revolver falls below $68 million. So the $155 million is the difference between the $223 million total availability and the $68 million required to avoid covenant compliance.

John Larkin – Stifel, Nicolaus

Okay, is there a particular covenant that ends up being the one that is most difficult?

Mike Ryan

The covenants are fairly lenient. They're a senior -- the primary one is a senior leverage ratio covenant, so it' not a total debt covenant ratio. It's basically an adjusted EBITDA type formula in relation to the outstanding revolver debt. So it's a fairly lenient one that we are well in compliance with.

John Larkin – Stifel, Nicolaus

Okay and then there has been a lot of discussion with respect to the rail roads about how -- as the volume built back which I guess were in the early stages of -- that there is an ability to absorb that incremental volume without having to add back a lot of the people that perhaps you've cut out of the network over the last couple of years. Can you talk a little bit about the operating leverage is available? Is there some sort of a sweet spot here over the next 10% or 15% of volume that you pickup or you're already got the equipment? You got the turbo, you've got the barge, won't have to add for many people in order to absorb that volume in? Isn't it true that the margin that your incremental profitability is tremendous at that point?

Mike Ryan

Yes. John, that's a great point because the program that we kicked off in the beginning of 2008 was to realign for the long-term. Really, it didn't anticipate the recession or cost cutting. It wasn't gee we need to cut $50 million, let's figure out how to cut $50 million. It was put together a better position organization to manage both from the headquarters and the field, so what we are looking at right now is the structure that we believe is required to handle 2006, 2007 kind of levels of business. So, we don't anticipate adding back much of any manpower or management as a result of a return to pre-recession levels.

John Larkin – Stifel, Nicolaus

Do the tows themselves have surplus capacity in the same sense that a railroad would have surplus capacity?

Mike Ryan

Absolutely. And when they are running it at 12, we're trying to fill it out to 15. When the train is running at 30, they're trying to fill it out to 65.

John Larkin – Stifel, Nicolaus

So same concept applies there.

Mike Ryan

Yes.

John Larkin – Stifel, Nicolaus

For the scheduled network, I guess?

Mike Ryan

Yes. The scheduled pieces is really interesting because that's -- the fellow who came over from CFX is going to join some of its old cohorts who were over there doing the same thing, but to start to schedule the local piece and the long-haul piece is really going to put us in a good position to get customers comfortable with transferring more of the land base percentage over to the water. It's not going to be – you're going to take it all off to the land, but it is a comfort level where they can go from 10% of their business on the water to 20% of their business on the water without really sacrificing too much in the way of transit or inventory in transit.

John Larkin – Stifel, Nicolaus

Got it. And then –

Mike Ryan

John, there is -- one additional element of capacity is the backhaul percent in the low to miles percent.

John Larkin – Stifel, Nicolaus

Right.

Mike Ryan

It's not even just going from 12 to 15 in a tow. Its we're moving a higher level of empties than we have in the past. So, there is more capacity to be picked up when that starts to fill up as well.

John Larkin – Stifel, Nicolaus

And most of that is in the north band direction where you need to help?

Mike Ryan

Yes.

John Larkin – Stifel, Nicolaus

And then just maybe last question on the spread of the dry bulk ship rates from the PNW and the Gulf you know, the railroads like to talk about that particularly would be in and but you won't be hearing as much from here going forward now that they're around by virtually half a way, but the surplus of bulk ships you would think you would favor the trends at the grain over the Gulf ports, but it doesn't seem like the volume is panning out that way? Any comments as to what's happening there?

Tom Pilholskiv

Well I think the number is the differential still in the high-20s which favors the P&W but there is a saturation point there that they had and I think as we were talking about the volumes returning to the rails they don't necessarily chase things that are just volume as volume return. So, that number used to be closer to about a $20 differential that used to the get the swing.

So, you do see people chasing tonnage still as volumes comeback up but I think you are right, I think we are going to see a return to the Gulf and if we see a decent grain harvest I think we will see a return to the river segments here in the second half. I mean there is a great planting going on, its way ahead of schedule, way ahead of last year, way ahead of five year trends of core planting side. I think the things that drive grain back to the water will fall into place here as business returns to the rails and that number starts to get oil more favorable for the Gulf.

John Larkin – Stifel, Nicolaus

All right. That's all I had. Thank you very much.

Mike Ryan

Thank you. Next question please operator.

Operator

Your next question comes from the line of Ken Hoexter with Merrill Lynch/Bank of America. Please proceed.

Scott Weaver – Merrill Lynch/Bank of America

Hi guys it's actually Scott Weaver in for Ken.

Mike Ryan

Hi Scott.

Scott Weaver – Merrill Lynch/Bank of America

Hi just talking a little bit about the conversion from rail. Is it purely access rail capacity when you start seeing volume? When is there, can you talk a little bit more about the competitive dynamics and the question really follows just a lot of the uptick we have seen in grain as well as coal in the first quarter relative to what you guys saw?

Mike Ryan

On the conversion piece Scott its – I think when you looked at in 2006 and 2007, people were looking for alternatives to rail because they were so plugged, they were so congested. There was actually de-marketing going on rail that worked to our favor but as the recession volumes hit.

I think people were looking for more economical alternatives that has been on the list of things to address but in six and seven it was more I need an option and in eight and nine its I need a more economic option and so I think it shifted a little during these recession years but I think both of those elements are what our transportation decision maker looks at, do I have to spend additional capital on rolling stock fleet, do I have to build more rail inside my plant, do I have to pay for accessorial service charges that go up or can I do this by water or some percentage of it by water.

So, I think the dynamic shifted for what the driver was but we are still seeing that impact we are still seeing almost $15 million in conversion here in the first quarter both dry and liquid. So, that's a positive sign, and the question on the coal and the grain volumes we -- the thing about the grain volumes on the water because there was so much barge capacity even though there was a lot of grain moving, there are lot more people chasing the grain.

So, as the market tighten up both on the rail and the water side you will see a return to more traditional players who handle their more traditional books and portfolios of business. We are obviously a big grain holder so we are looking forward to people going away and going back to their old markets and stop pestering us on the grain side.

Scott Weaver – Merrill Lynch/Bank of America

Hey Mike, Tom and David, Ken. Just on the strike, is that all of the workers? I guess has everything shut down and then on the backlog, what percentage external?

Mike Ryan

We have 600 workers on strike and we're still launching barges. We launched two last week, one this week. So we continue to work. There is a management staff that's still working on barges, obviously not at the same pace but we're still producing barges. Again the talks are ongoing and there is nothing to report from those sessions yet but they are talking. So that's a good thing. The backlog is $70 million and that's $69.7 million but $70 million is all external.

You there Ken? Operator, if you could go on to the next question please?

Operator

Your next question comes from the line of Chaz Jones with Morgan Keegan. Please proceed.

Chaz Jones – Morgan Keegan

Yes, hey. Good morning Mike, Tom and Dave.

Mike Ryan

Hey Chaz.

Chaz Jones – Morgan Keegan

Hey just at Jeffboat on the backlog, at this point, how much of production capacity is left in 2010 at Jeffboat?

Tom Pilholskiv

Well that depends on when have labor back in the yard. Prior to the strike we had capacity available in the fourth quarter and so its going to be function of how quickly do we get the lines back up and running with employees.

Chaz Jones – Morgan Keegan

So assuming that a strike comes at the end at some point in the second quarter, your pretty much booked through the rest of the year?

Tom Pilholskiv

Yes

Chaz Jones – Morgan Keegan

Okay, that's what I was trying to get at. And then Mike, a lot of conversation centering about excess capacity in the barge market. Is there any silo where capacity is tighter? I guess what I was trying to get at is, is the liquid sort of tighter than the drive side or vice versa?

Tom Pilholskiv

Yes, I think what we're seeing over the first 90 days of 2010 is the tightening of the liquid side. So not necessarily the dry as much but its -- that's not unusual in the first quarter on the barge side that there is excess capacity on the dry side but I think an encouraging sign is the tightening and increased number of orders on the liquid side.

Chaz Jones – Morgan Keegan

Okay, and then last question. As we transition more business to scheduled service, how should we be thinking about how that manifests itself? Is that going to help improve better ton miles, better pricing, lower cost, all the above? I'm just trying to think through that.

Mike Ryan

I think there is an all of the above kind of choice there. You should be able to -- if you're presenting something that creates more value for our customer, you can probably charge more for it. So that's going to create some pricing strength for someone who is willing to pay more for something that looks more like a land based alternative. So that's one deal on the pricing leverage. The other side is the efficiency of our fleet. We talked about building a newer fleet and replacing the old barges. Part of that model is the efficient turns of that fleet. We want to get to a point where we can use 1500, 1600 barges the way we used to use 1900 barges by replacing the old and putting them in more dedicated lines of service.

The long-term portfolio that we were moving towards before the recession especially on the dry side was looking more towards committing to being pipeline players for inventory pipeline players for dry shippers, where we were signing long-term contracts and moving their freight in that manner.

So, it plays right into a scheduled service when you have an origin and destination pair from the Gulf to the Ohio river, it's now going to be in a three year contract. The fast you turn those units more money make, and that's the whole idea of doing, making more money with your assets, but before we talked about it now we are actually producing the product it's going to do it.

Chaz Jones – Morgan Keegan

Right. Are there any targets internally that you guys have that you've said we wanted X amount of our business to be honest scheduled service by this point of time?

Mike Ryan

I think its -- we are so early in the activity, Chaz. It's more getting our arms around. What can you standardize locally, what can you rationalize as far as terminal locations, assets needed people. It's a really -- there is a lot of steps in these before we get to a point where we model this entire system and say it was like half under schedule than half under kind of milk run.

Chaz Jones – Morgan Keegan

Sure.

Mike Ryan

But that is -- those are the steps in the exercise to create the building blocks and then when you run the model to determine how much fits in each category.

Chaz Jones – Morgan Keegan

Okay, well great, that's all I had. You guys are doing a good job on the cost side.

Mike Ryan

Thanks Chaz.

Operator: Your next question comes from the line of John Parker with Jefferies. Please proceed.

John Parker – Jefferies

Hi. I didn't see your cash flow statement. Can you tell me what the share base compensation was in the quarter? If you want to get back to me, that's fine.

Mike Ryan

The total share base compensation for the quarter was -- it was basically almost flat. It was $100,000.

John Parker – Jefferies

$100,000 for the whole quarter?

Mike Ryan

Yes. Compared to -- yes $100,000.

John Parker – Jefferies

Okay, and then you've mentioned your backlog was 70. I think I have written down those that 50 at the end of the year. So, obviously you took new orders, its like maybe net orders of that $30 million in the barge business. Can you give me any color; give us a color on what types of orders you're seeing?

Mike Ryan

they are dry orders and there smaller orders -- really with the way we're looking at the market place with the absence of the lot of the bigger players. We were kind of quilting together. Orders of 10 barges to 20 barges at a time open hoppers and covers, so that's -- they were all added since our last call.

John Parker – Jefferies

Okay and has that order of activity continued into April or any other additional activity you can comment on?

Mike Ryan

Yes. The dialogue is ongoing. We still have people looking at replacement needs and again a lot of the big guns with the big parent companies behind them are still waiting for the capital to get released, but we're seeing some people sticking their toes in the water to see if it's time to go on the 10 to 15 barge replacement. But the raw material prices are starting to kick in as well. So we're -- that's going to be a factor in the economic decision too as steel pricing starts to rise.

John Parker – Jefferies

Okay and on the face of that your SG&A was almost cut in half from last year I think I missed a part of the call. You talked about some unusual items in last year's SG&A but what is the magnitude of change from last year and then can you give us any idea about going forward. Is this a 11.6 number sustainable going forward.

Mike Ryan

The magnitude of the total change is $9.6 million for the quarter and what we said earlier in the call it was $4.7 million was basically items last year that weren't repeated, primarily for the reorganization we had and the closure in the Houston office and a bankruptcy charge that we had last year in the first quarter and then we had essentially another $5 million of other SG&A cost reductions, a combination ahead of possibly being in wages, some other being in share based compensation and lower personnel injury claims. So, in terms of the go forward rate we don't project that but it will in the range of what we had in the first quarter maybe slightly higher.

John Parker – Jefferies

That's all I have. Thank you very much for your help.

Operator

With no further questions in the queue. I will like to turn the call back over to Mike Ryan for closing remarks. You may proceed.

Mike Ryan

Thank you those were great questions and I appreciate you calling in and asking us questions. As we mentioned we are not for the economy to rebound. We are working now on improving the execution of our business fundamentals, excelling at the execution of these fundamentals of our business in a recovering economy will make us very profitable in the long-term. We look forward to keeping you posted on the progress we achieved in this program. Thank you for joining us today.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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Source: American Commercial Lines Inc. Q1 2010 Earnings Call Transcript
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