American Commercial Lines Inc. Q2 2010 Earnings Call Transcript

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 |  About: American Commercial Lines Inc. (ACLI)
by: SA Transcripts

American Commercial Lines Inc. (ACLI) Q2 2010 Earnings Call July 29, 2010 10:00 AM ET

Executives

Dave Parker - VP, IR

Mike Ryan - President and CEO

Tom Pilholski - Senior VP and CFO

Analysts

Jimmy Gibert - Rice Voelker

Sterling Adlakha - Stephens Inc.

Ken Hoexter - Bank of America Merrill Lynch

Mike Baudendistel - Stifel Nicolaus

Chaz Jones - Morgan Keegan

Steve O'Hare - Sidoti & Company

Operator

Good day ladies and gentlemen and welcome to the second quarter 2010 American Commercial Lines Incorporated earnings conference call. My name is Carole and I'll be your coordinator for today.

At this time all participants are in listen-only mode. We will be facilitating a question and answer session, towards the end of this conference. (Operator Instructions). As a reminder ladies and gentlemen this conference is being recorded for replay purposes.

It is now my pleasure to turn the presentation over to Mr. Dave Parker, Vice President of Investor Relations. Sir you may begin.

Dave Parker

Thank you, Carole. Good morning. Thank you for joining us. Today, we will be discussing our financial results for the quarter and six months ended June 30, 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 a live webcast featuring a slide presentation which can also be accessed at aclines.com. I'll remind you that if you plan on viewing the slide presentation 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.

Additionally, in today's presentation and in the slides references to year-to-date, those are intended to refer to the six months ended June 30, 2010. 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, David. I think the last time we got together it was snowy, cold Jeffersonville and now it's tropical, rainy Jeffersonville. So, we've had hot days on the river this summer but welcome to all of you and thank you for joining us.

Our second quarter earnings performance was stronger than first quarter and stronger than second quarter 2009. This strength demonstrates to us that our strategies are beginning to produce positive results. We continue to make significant progress with cost reduction programs in both transportation and manufacturing. Our aggressive focus on cost control drove the $10.4 million improvement and our transportation segment's operating income compared to the prior year quarter.

We also lowered our interest cost by 17% due to lower outstanding debt balances. We were able to improve our transportation operating ratio 7 points to 95.2% versus the prior year quarter.

Our rightsizing strategy at Jeffboat allowed us to breakeven overcoming greatly reduced demand volumes. Our prudent cash management allowed us to also fund the building of 50 new dry covered hoppers in the first half of 2010 as we reinvested in our fleet.

We have seen some volume recovery and our key transportation business lines of liquids and metals, but volumes still remain below pre-recession levels. Pricing levels, although are now stabilized, also remain well below levels achieved in produce of normal volume. We remain cautiously optimistic relative to the sustainability of the recovery phase as there's still a long road back to a healthy economy and to pre-recession business levels. While the economy is showing new signs of life, the recovery is still fragile at this stage.

In manufacturing at Jeffboat, production levels declined significantly as potential customers continue to delay capital spending for new barges. We right sized the manufacturing business and production capacity during the recession. These actions positioned us to still generate positive operating income in the first half. We also achieved this despite the negative impact of a one month labor strike in April.

In May, we reached a new three year agreement with our represented workers at the shipyard. We were able to successfully work with the union to find wage and healthcare alternatives that we hope will help us to be competitive in the new barge production markets in the near future.

Historically, we generated stronger financial results in the second half of the calendar year driven by demand from the grain harvest and the impact of that demand on grain and spot shipping rates. Based on the early USDA forecast for the harvest, we believe that trend will continue. We expect to experience a more traditional grain demand increase this year in late third quarter and early fourth quarter compared to last year when the harvest was delayed due to weather conditions.

In the market place the June federal reserve base book analysis continues to report modest ongoing increases in economic activity in all districts with some improvement and employment and capital spending. Manufacturing is described as gradually improving although inventory investment was noted to be slowing. The army core of engineer's industry tonnage statistics indicated positive year-over-year trends.

While we see a directional change in the economy, this has not yet produced enough in overall free level increases and pricing strength to fully revitalize the entire transportation market. While some item increases are reported in truck, rail, and barge sectors, overall barge freight demand still remained less than the current barge supply in many equipment types and shipping lines in the first half of 2010.

Industry statistics also show that bulk and liquids volumes continue to run approximately 25% and 11% below the previous five year average. Though we did continue to see increases in liquids and dry bulk ton-mile volumes in the second quarter, the comparisons are to the very low base of 2009. We continue to monitor the increased metals and liquid activity to determine if it is inventory replenishment or the result of sustained economic improvement.

Our grain freight pricing was higher in the quarter than in the prior year quarter but remains over 2% compared to the first half of last year. The USDA now estimates that grain exports for the current marketing year are expected to increase slightly. Though we have seen some improvement in forward rates for the harvest, we remained cautious on our grain outlook due to the recent declines in the USDA forecasted exports continuing excess barge capacity and the fluctuating grain freight spreads between the Gulf Outlet and the Pacific Northwest.

Overall, we believe that while economic conditions are improving, it is unlikely we will return to previous session business levels in 2010. Today, we run ACL with a strategic initiative playbook which focuses on our business fundamentals. We deploy and manage people, direct programs and execute investment strategies following these strategic initiatives.

Reviewing our seven strategic initiatives we are continuing to make progress. First, driving safety to zero. We have a zero tolerance goal for unsafe acts or conditions. Zero means the target of an absolutely safe operation and flawless care of our customers' cargo. Year-to-date, we have had 21% fewer personal injury incidents. In total, for all types of claims including cargo claims, we have had a reduction of over 40% or over $1.5 million year-to-date.

Business mix improvement, this category measures progress attracting new land base business share to ACL as well as our success improving our financial performance by converting spot business to mutually attractive long term contract commitments. With the economy beginning to strengthen, we are seeing the return of our higher revenue contract business. Our organic growth success continues as well as we achieved over $14 million of organic growth in Q2 now totaling over $29 million year-to-date in 2010.

Reinvestment in our fleet, in the second quarter we completed our 50th new dry covered hopper this year for the ACL fleet. Supported by a strong cash performance we will build approximately 50 more new covered hoppers in the second half of 2010 as well, with of many of these completed in time to hit the water and go right into grain harvest service in the fourth quarter.

All these new bills are replacement units for scrap barges and do not add net new capacity to the overall barge market place. As a reminder, new units are much more efficient for us as maintenance costs on each new dry hopper barge are generally less than 500 hours a year. While average cost on the old units we are retiring exceeds $12,000 annually, making them work 20 times more expensive. And new barges can to be use to transport any commodity at any location greatly improving days under load performance.

Schedule service, this is not as mystical as it sounds. As you hear and see more of our scheduled service initiative, you'll learn how basic this concept is. We are challenging our people in field operations to do more work with less. Less in this case means fewer people, fewer terminals, less assets like boats. As we reduce the cost, we are standardizing the operating practices so that we execute the operating plan the same way at all fleets and locations. Consistency and dependability that our customers can count on.

In the quarter we reduced boats in use without compromising service to customers and saved approximately $3 million year-to-date. In addition to running fewer boats, we have reduced the size of mainline cruise this year, saving $500,000 year-to-date. So far this year we have also mothballed underutilized fleet facilities and consolidated operations saving approximately $1.7 million. We will determine if we need to reopen some of these sights as the freight volumes continue to grow.

Order to cash, this program continues to focus on totally revamping our billing and collection process but as we go through the process, we are picking up wins. Year-to-date we have identified over $1 million in billing errors or miss-billings as we have focused on improving billing and collection efficiency.

Jeffboat optimization, we are currently running to the size of the market. We have two manufacturing lines operating and they are close to sold out for the remainder of the year. These optimizations efforts allow us to remain close to breakeven for the quarter, even with a dramatically smaller bill demand. Year-to-date, we remained profitable at Jeffboat as we continue to build for select external customers and for ourselves replacing older units in our fleet.

Recruiting, retention, and organization, we continue to relocate key positions moving them closer to our employees and customers in our new northern and southern regional field locations. We also continue to consolidate roles and eliminate redundant positions. We continue to fill our talent pool at ACL as we hired four new graduates from maritime academies in Q2 to be maritime engineers for ACL, and we hired four new experienced regional management personnel from the professional ranks of several top US companies, filling key vacant leadership roles. Now I will let Tom discuss the financial results with you.

Tom Pilholski

Thanks Mike. The next slide contains the summary of our financial performance. Despite the decline in revenues for the quarter and year-to-date periods compared 2009, we improved earnings per share from continuing operations by $0.12 for the quarter and $0.20 year-to-date. We also reduced total debt balances by $47.4 million from last year's second quarter and by $6.8 million sequentially when compared to the end of this year's first quarter while continuing to reinvest in the fleet.

You can also see on our top of the chart that quarter-over-quarter transportation revenues improved reflecting increasing demand that we have recently been seeing in some of our transportation markets. I will review the details of transportation revenues and earnings on the next few slides.

Regarding manufacturing, the decrease in revenues versus 2009 was driven by a change in both the volume and the mix of barges produced. This year more of Jeffboat's capacity was devoted to cover dry hopper bills for ACL's transportation segments. Also, there has been a significant decline in building higher margin tankers as well as dry hopper barges for external customers that have reduced customer orders and the impact of the month-long labor strike in April.

The details of barges built are included in the appendix to today's presentation. The changes in the major EPS components are detailed on this next chart. The primary drivers saw significant improvements in transportation segment earnings driven by cost reductions, reduced interest cost on lower outstanding borrowings and some non-comparable severance in using off disclosure expenses in last years first quarter that primarily impacted year-to-date comparison.

These improvements were partially offset by an expected significant reduction in our manufacturing segment earnings. On the next slide is a summary of transportation revenues by major categories. We have seen significant increases in steel related shipments and other bulk products both year-over-year and sequentially versus this year's first quarter. Although we have seen some recent improvement in grain volumes, in the early part of the quarter, grain volume was very weak as farmers were awaiting better prices before they shift.

The decline in salt is not a demand issue but due to production and labor strike related issues had a major customer in this market. Our lower margin coal business, primarily with one utility declined as we expected this year. Our liquids, chemical, and petroleum market revenues are up year-over-year based on improvements in volume, partially offset by lower contract and spot pricing.

Non-affreightment revenues experienced significant declines driving most of the overall revenues decline year-to-date with combined towing no demurrage revenues $2.4 million for the quarter and $11 million year-to-date. This next slide is a much more granular look at our revenues on a fuel-neutral basis by commodity segment for the second quarter of the past three years. A similar slide for the year-to-date period is included in the appendix.

As you can see despite the year-over-year improvements in key steel and chemical markets and the coal and energy market, they are still well below the levels of 2008, so are towing and day rate charter revenues which are generated almost entirely from liquid barges.

On the next slide are the key changes in overall EBITDA compared to 2009 for the quarter and year-to-date period. Changes in commodity volumes, rates and mix excluding grain negatively impacted EBITDA by $2.6 million in the quarter and $15.9 million in the first half. Decreased non-affreightment revenues in towing, demurrage and liquid charters accounted for almost the full decline in the quarter and 85% of the decline for the first half.

Grain contribution was driven down by lower volume essentially flat pricing and higher fuel cost. More difficult weather conditions this year reduced boat productivity by $2.9 million in the quarter and $6.1 million for the first half due to persistent high water conditions in most of the river system and ice in the first quarter.

Despite these negative factors, EBITDA in the transportation segment increased $8.9 million in the quarter and $13.9 million in the first half due to significant cost reductions. Other operating reductions of $7.8 million in the quarter and $21.4 million in the first half were achieved primarily through reducing claims and repair expenses, improved fuel efficiencies and by internally staffing boats that formally were operated using chartered (crews).

SG&A expenses, excluding non-comparable items related to the prior year were $5 million lower in the quarter at $10.2 million lower for the first half primarily attributable to lower salary, medical and insurance claims course. The impact of the prior year non-comparable severance and use in office closure costs mostly in the prior year's first quarter represented an additional $5 million in first half SG&A savings.

Our asset management actions including scraping and boat sales also contributed to the year-over-year improvement. Our manufacturing segment declined $10.9 million for the second quarter and $14.8 million for the first half driven by lower external production volumes and lower margins on current year deliveries. We do not foresee a rebound in the manufacturing segments until overall barge industry freight demand and capital market conditions improve.

The long term need for barge replacements still exists due to the age of the industry fleet, the barge freight demand though improving is not yet sufficient to drive new build demand for replacement of retiring capacity. Our external backlog was $61 million at June 30, 2010 consisting primarily of hopper and deck barges to be delivered this year. The backlog was $84 million at June 30 2009.

As you can see on our next slide despite difficult economic conditions we continue to generate positive cash flow from operations, so changes in working capital and other non-cash charges resulted in an unfavorable comparison to prior year. We generated $12.9 million in cash from operations during the first six months compared to $57.5 million in the prior year.

Primary drivers of the decline compared to last year are lower cash flow from reductions in receivables compared to prior year due to improved second quarter sales this year and higher manufacturing inventory levels driven by the pre-volume of steel for (lack) in favorable steel purchase prices and by strikes and weather delay delivery of several barges at Jeffboat. The higher inventory is expected to reverse over the balance of the year which will generate cash flow.

On a full year basis, we expect working capital changes to be essentially neutral. An increase in current income tax receivables related to our 2009 net operating loss positively impacted change in non-cash items shown and negatively impacted changes in working capital reflected on this slide for the six months ended June 30, 2010 by approximately $17 million.

We expect that the remaining $13 million income tax receivable will be received in the third quarter offsetting the impact of the $12.5 million semi-annual bond interest payment we made in July. Borrowings on our revolving credit agreement increased by $4.2 million in the first half to $159 million at June 30 primarily due to the net cash use for investing activities and the net negative change in the working capital discussed above.

Debt decreased $6.8 million in the quarter compared to the first quarter. Total availability into the company's revolving facility was approximately $230 million at June 30. This is $162 million above the bottling level at which the financial covenants in our credit agreement would become applicable. During the first half of 2010, the company had $21.9 million of capital expenditures largely related to the cost of 50 new dry covered barges put into service.

We also generated $7.3 million in proceeds from asset management actions in the first half from the sale of surplus boats and we collected a $2.3 million government grant related to the partial funding of a capital project at Jeffboat, which was completed in 2009. The proceeds for these two items offset approximately half of the capital investment for building new barges so far this year.

We currently expect to build approximately 100 huge volume hopper barges for use by ACL's transportation segment in 2010, 50 of which were completed in the first half. Combined with maintenance capital expenditures which extended lives of existing fleets, we expect that our total capital expenditures will be approximately $70 million in 2010.

Also as Mike mentioned earlier, historically we generated stronger financial results in the last half of the year driven by demand from the grain harvest and the impact of that demand on grain and spot shipping rates. This resulted in higher cash flow in the second half which we again expect will occur this year.

I'll now turn the call back over to Mike.

Mike Ryan

Thanks Tom. Our blueprint for running ACL now in good economic times and in bad is based on excelling in the execution of our strategic initiatives. Today we cited examples of cost cutting progress, reinvestment momentum, productivity improvement and customer service focus. By improving the business fundamentals we will be ready to providing a greater value to our customers and to optimize our company's earnings potential when freight demand levels return.

We believe that focus on the operational aspects of our business coupled with a recovering economy positions us for stronger sustainable future earnings. We will continue with this work and keep you posted on our progress at the end of each quarter. We are now ready for questions.

Question-and-Answer Session

Operator

Thank you, Sir. (Operator Instructions) And gentlemen your first question comes to you from the line of Jimmy Gibert of Rice Voelker. Please proceed sir.

Jimmy Gibert - Rice Voelker

It looks like some good progress on cost cutting. I know you all gave some details on how that was done in the quarter, but could you talk a bit more about where those savings came from and I guess mostly what the prospects are for further cost savings and where those might come from down the road?

Mike Ryan

I think when you look at our cost cutting efforts, initially it was more headcount driven, it was a payroll but it didn’t have a specific number attached to it and had more to do with how we were organized and we were centrally organized at that point and the idea was to move out closer to the customers and to the employees for more effective management.

So, when we decentralized the organization, we took about 25% of that headcount out. So, that was the initial big ticket item, big surge was there but what you are seeing now is really the fine tuning of those types of programs in place, the ability to take fleet locations that are underperforming and to really idle them and save $1 to $2 million, to look at running the operation with fewer boats with smaller crew sizes.

Those are some of the categories that are, they are designed to really look at a better performance and a safer performance. So, I think you are going to see the positive results continue in each of those strategic initiatives I mentioned. We have internal metrics and that's why I went through some of those examples to tell you what safety actually means to reduce the number of injuries and incident. So, reduce the number of cargo claims.

All of that has a target of zero attached to it and so there's still upside on those categories. So, I think you'll see us continue to focus on providing a better service at lower cost and we are just going to keep reporting those successes to you.

Jimmy Gibert - Rice Voelker

And just one more on the grain volumes, I see they're down in the quarter year-over-year but I hear that just recently, maybe the last three, four weeks, that price improvement of corn have gotten some of the farmers shipping more. Are you guys seeing that right now? Or maybe, just more simply, could you talk to us a bit about how you think the grain volumes look so far in Q3 and what you may be planning for volumes in Q4.

Mike Ryan

I think we are seeing it not only in the grain but the non-grain sector as well. Jimmy, there's growing demand for the barge capacity that we have. I think our numbers were lower earlier in the year because you didn’t really see the recovery volumes hitting yet. So, everybody was in the grain market and taking a larger share then they usually took at lower prices but I think we are starting to see that demand return.

One of the things that’s kind of promising for us is we are not even in the harvest season yet and we are seeing non-grain demand start to impact the drive free market. So, that’s a good position for us because it will give us some price leverage not only on grain but on non-grain as we move into the second half of the year. But I think you are right on with the grain comments, they are going to start leasing in advance to the harvest and then during the harvest and I think we should probably see a pretty healthy grain event this year.

Jimmy Gibert - Rice Voelker

Well, that's good. Okay, well thanks and that's great news on the cost-cutting, Mike. Appreciate it. Talk to you later.

Operator

Thank you, Sir. Gentlemen your next question comes to you from the line of Alex Brand of Stephens Inc. Please proceed sir.

Sterling Adlakha - Stephens Inc.

This is Sterling actually in for Alex today. I have a housekeeping question to kick off. But Tom, what kind of tax rate can we expect in the back half?

Tom Pilholski

It’s a little lower than where we have been running.

Sterling Adlakha - Stephens Inc.

It was what you have been running in the first half of 2010?

Tom Pilholski

Yes. But given how close it is to a breakeven standpoint there's some volatility in the tax rate as you close it to a breakeven type number. The tax rate becomes, it can fluctuate but not have much of a dollar impact.

Sterling Adlakha - Stephens Inc.

So, then you are talking about a significantly higher tax rate year-over-year, is that correct?

Tom Pilholski

It will be somewhat higher.

Sterling Adlakha - Stephens Inc.

Somewhat higher, okay. All right, thanks Tom. On the tank barges the count for tank barges is down again sequentially 354 for the first quarter of 341. Is that due to scraping of tank barges?

Tom Pilholski

Yes.

Sterling Adlakha - Stephens Inc.

Okay and how do we think about the fact that you are scraping tank barges but one of the initiatives of improving product mix involves adding to the liquid business and we know you're not building Jeffboat for your own use? So, how should we reconcile these two factors?

Tom Pilholski

The return of the business mix improvement and the higher percentage of liquids is really something you need to look at as a multi-year event and the first steps of this are really to not out build the market at the moment. I think you need to have the volume come back to you, the price come back to you and the movement back into contracts first. So, it's more of a timing issue, it's not a question of, if we'll do it. It's a question of when we'll do it.

We know we have to get back to a level of liquid capacity of about 5 million barrels and that’s 5 million barrels is where we were 2007 and 2008 but there's no sense in putting that out in order if the market won't consume that. So, we’ll go back to that bill program when the market calls for that and we’ll be right after our initiative to take it to 35% to 40% kind of number for liquids in the future.

Sterling Adlakha - Stephens Inc.

With the deep order horizon oil spill are you guys involved with any type of clean up work or burn building, or anything to that extent and if so now that the week is capped, how long do you think that kind of work to continue?

Tom Pilholski

That was kind of an non-event for us, it didn’t interrupt our shipping patterns and we were approached for use of our barges for kind of the blocking, the marsh blocking and so some of our barges are in that use right now but we are not, its not a big element for us, not a big program for us and I assume as more of this dissipates through time and mother nature, we'll see those barges come back and most of those barges are going to get scrapped anyway. So it's not something that’s been taken out of our key shipping lines.

Sterling Adlakha - Stephens Inc.

And then just lastly can you tell us how many contracts expired in the quarter and of those how many you renewed and so forth?

Mike Ryan

Regarding this, I better be careful, I will say that I'm getting one finger held up to needs, so its one. We had one and it was renewed. It was a small one, most of ours are, I had to give you that color because you are not in the room (inaudible) holding a finger up.

Sterling Adlakha - Stephens Inc.

I can imagine what finger Tom is holding up.

Tom Pilholski

It wasn’t that finger.

Mike Ryan

Most of our contracts expire at the end of the year. They have a December 31 expiration so we'll see a lot more activity here in the second half.

Sterling Adlakha - Stephens Inc.

So, when you say most, does that mean the majority of contracts that you have would expire in December or do you just mean?

Tom Piholski

No, they roll, it's just about 25% to 30% that expire each calendar year but they are set up mostly on calendar year. The liquids, there's fewer of those and they kind of renewed during the year but most of our contracts are on the dry side and most of those are set for a December 31 date. So, we'll have more activity there in Q3 and much more in Q4.

Operator

Thank you, sir. Gentlemen your next question comes to you from the line of Ken Hoexter of Bank of America Merrill Lynch. Sir, you may begin.

Ken Hoexter - Bank of America Merrill Lynch

Can you talk a bit about what your target is for your dry and liquid fleets, obviously you talked about bringing down the capacity, can you talk about where you want to take that, when you feel like you've reached your kind of minimums on network reduction? Thanks.

Mike Ryan

We've talked about getting the dry fleet down. There are two elements to it, for both fleets. One is an age element, one is the size element and what we've been focusing on is taking the age of our drive fleet down from the average of 20 down to something in low teens and when we model that on the dry side, that's a fleet closer to about 1,500 barges as opposed to 1,700 or 1,800 barges and our thinking behind that is you retire the older fleet and have one fleet that’s got more utility and we'll get more utilization out of it.

So, on the dry side, that’s a number that we look at longer term in normal freight demand. On the liquid side, its maintaining the same type of barrel capacity we had in 2007-2008 which is a mix of 10,000 barrel barges in 30,000 barrel barges that total about 5 million barrels of capacity. Seasonally about 60% (10-Ks) and 30% as far as the overall barrel capacity. So, you'll see us scrap that plan and you'll see us replace that plan. At this point we think the strength is going to come from prices and price leverage and contract strength if we maintain the static capacity with the replacement program. That’s what you'll see us doing.

Ken Hoexter - Bank of America Merrill Lynch

Great. If I look at the revenue per dry barge based on kind of just taking your inner company eliminations between growth in at Jeffboat and dividing the number of internal bills, it seems like the revenue per dry barge has continued to fall into the low $400,000 per barge range. Is that something that is starting to stabilize at these levels? And can you talk about pricing at all on the manufacturing side?

Mike Ryan

For building dry barges?

Ken Hoexter - Bank of America Merrill Lynch

Yes.

Mike Ryan

Yes, we've seen the steel prices start to jump a little bit compared to where we were in the spring time. So, that’s starting to layer on some additional cost. What we traditionally do is set that up as a pass through but it's still something that a buyer has to overcome. So, you are still looking at, with anywhere between $700 and $800 a ton steel, you are still on the 5 to 525 range depending on what bells and whistles you put on a drive barge.

So, that math might work for somebody who is going to go into a demand market, you still have people sitting on the sideline saying I don’t have the demand so there is no need to build it. So, I'm not sure at this point if it's just economics as much as it is timing for somebody to come back and start to build.

Ken Hoexter - Bank of America Merrill Lynch

Okay, and what's the capacity? You talked about having both of the dry runs, you talked about your backlog of $84 million. What's your capacity to build right now in terms of number of barges?

Mike Ryan

Depends on what you were building with our (dries). Right now we are buildings dries and its usually about five a week, we can put in the water on hoppers and we are building deck barges on the second line so that's a different calculation, it’s got more of a sub-structure to it. So there's more work and there's more hours associated with it but with the two lines open we can average about five a week on the dries and we'll have to see how many we can do on the decks.

Ken Hoexter - Bank of America Merrill Lynch

And then, you talked about backlog of $84 million, I just want to clarify. Is that all external right? That's not including your internal bills? That's 15 in the back half.

Mike Ryan

The $84 million was prior year, this year its at $61 million, is the backlog through June 30.

Ken Hoexter - Bank of America Merrill Lynch

So, again, to clarify, is that external and internal, or just external?

Mike Ryan

No, that’s just external.

Ken Hoexter - Bank of America Merrill Lynch

Okay. And then just to come back to the transport side, you talked about volumes, but can you talk about what's going on the pricing side?

Mike Ryan

The pricing has started to show some signs of strength and the way its going to come back is, we are going to see the volume come first and this isn’t calculus or anything. Once that capacity is consumed, there will be opportunities for price leverage and the price leverage will appear first on the spot markets and then we'll see it occur on the contract basis and we are starting to see it on the spot opportunities and we don’t really have the leverage yet to have that discussion about longer term contract pieces and longer term price. But, we are seeing it on the dry side as the available units for putting into service are shrinking and even our 30,000 barrel units on the liquid side. We haven’t had a 30,000 barrel available for about a month and a half going out into the market place we have been sold out.

So, I think we are going to see the pricing follow that. We are seeing the pricing follow it actually in the spot market but I think the true test is going to be, can you migrate from the spot into the contract and I think that will be the next step that tells us whether we are looking at sustainability or just kind of random acts.

Ken Hoexter - Bank of America Merrill Lynch

I guess, just to wrap up, I guess that's where I was heading was, are you seeing the customers still shifting to spot, or are they staying with the comp. Are they shifting to soft market? That's my final one, thanks.

Mike Ryan

I think there's still enough capacity out there that people are playing in, continuing to play in the stock markets but its tightening in our lanes anyway, in our categories and we are starting to have the same discussion we had a couple of years ago about how you protect the pipelines and the raw material pipelines or chemical or intermediate pipelines and that’s a contract discussion. So, we are probably more on a talking phase than execution phase but we are moving into that phase.

Operator

Thank you, sir. Gentlemen your next question to you from the line of Mike Baudendistel of Stifel Nicolaus. You may begin.

Mike Baudendistel - Stifel Nicolaus

I have a question. You guys talked about the more traditional grain harvest expected this year, I assume you mean both in terms of how concentrated the harvest will be and the fact that it should be earlier this year versus last year. So, I'm just wondering if you expect some of the volumes maybe that you moved in the fourth quarter last year that's moving the third quarter this year, and also wondering if you have the opportunity just to move more in the fourth quarter because the industry will be able to get more shipments in on the river before the locks close.

Mike Ryan

Yes. You have got it nailed right down there, Mike. That’s exactly what's going to happen. It will move early, it will move in a compressed timeframe and it will move before the upper closes. So, the race here is to get them to the gulf unload it and back.

Mike Baudendistel - Stifel Nicolaus

Okay, that's good to hear. I also noticed that the USDA was talking about the corn and soybean acreage being up a little bit relative to last year, kind of at the expense of wheat which is down a little bit. I'm just wondering if that has any impact on your grain business one way or another.

Mike Ryan

Not really. The smallest, when you look at those three categories of grain, the smallest amount we handle is wheat and the big player is corn. So, corn and beans are hot but that’s going to work for us, we do participate in the wheat market but not to the extent we do on the corn side.

Mike Baudendistel - Stifel Nicolaus

Okay, and then, I guess finally on the ocean spread side, it seem to have settled in here at the $24 to $25 a metric ton. I was wondering if that's supportive of moving, kind of the margin moving freight on the river, or would you like to see it a little bit lower than that?

Mike Ryan

Well, actually in the last couple of days I think its actually slipped a little lower than that, but you are right, its somewhere between $20 and $25 and I think that's strong enough to sustain that activity to the gulf. But some of the underlying elements of what's going to move stuff back and forth to the gulf is actually the quality of the grain, they have got to blend some of the old crop with better grains here to meet the specs and so sometimes its not going to be just economics, its going to be the ability to get the cargo and shape for an actual sale. So, that’s going to help play with promoting the gulf as well.

Operator

Thank you, sir. Gentlemen your next question to you from the line of Chaz Jones of Morgan Keegan. Please begin.

Chaz Jones - Morgan Keegan

Maybe a question to start out for Tom. Just on the SG&A side, you guys have done a real good job of rationalizing the headcount as. Is 10.6 a number where we stabilize, or how should we be thinking of that moving forward?

Tom Pilholski

It could be slightly higher, we paid some claim adjustments there made in the second quarter not of a great magnitude but it could be in the $11 million range as we go forward.

Chaz Jones - Morgan Keegan

So, that should be kind of sustainable in 2010, maybe once business starts to pick back up significantly then we start to turn higher?

Tom Pilholski

Yes, $11 to $12, in that range.

Chaz Jones - Morgan Keegan

Okay, and then it seems like you guys are pretty optimistic about ACL's prospects in the back half of the year. I was just curious, could you give us any sense for Jeffboat, first half of the year was kind of around breakeven, does that change in the back half of the year and also aside from what you're building for yourself, are there going to be many external barges that you're building at Jeffboat in the back half of the year?

Mike Ryan

The line one is hoppers right now and that’s where we'll build our 50 and that we do have some external orders on line one as well. Line two, is all external orders right now. So, I think you'll see us by the end of the year Jeffboat will be profitable. We'll make money at Jeffboat but we are going to keep it in that kind of scale back size just to make sure that we are not putting too much capacity on that we have to justify building a barge just to pay for overhead.

So, you'll see us keep that size under control and we'll wait and (inaudible) for that market to come back. We just don’t want to keep the lines open hoping for business, we'd rather run the program, make some money and kind of bridge through the recovery period so we have some of the bigger clients back.

Chaz Jones - Morgan Keegan

Mike, are you primarily going to be building dry then it sounds like, and I guess just to kind of follow on that, it sounds like you have the capacity, if you say there's roughly 26 weeks in the back half of the year to build over a 100 dry cargo barges which is up significantly from where you were at in the first half of the year. But it sounds like from what you're saying, you can probably, even though the capacity is there, will not be building five a week?

Mike Ryan

We will be building five a week, we are going to actually build more than that if you had all the lines open and you were running full out. So, that you'll see us once we switch to ours. You will see us switch to about five units a week going in the water. That's kind of a, I don’t want to say it’s a no sweat kind of schedule but that's a pretty moderate schedule of production for us and we'll hit that for the rest of the year on our bills and the external bills that we need to finish up on that line.

Operator

Thank you, sir. Gentlemen your next question to you from the line of Steve O'Hare of Sidoti & Company. Please proceed.

Steve O'Hare - Sidoti & Company

I was just wondering if you could tell me, in terms of what's the strike cost. Was it basically the difference between breakeven and the small loss?

Mike Ryan

The strike impact was somewhere in the $0.250 to $0.5 million range, not a material impact for the full year.

Steve O'Hare - Sidoti & Company

And then the other thing is in terms of some of the metrics for statistics that you look for in terms of the business maybe turning or improving in anyway or maybe coming off the bottom in terms of demand or capacity. I mean are any of those things looking better at this point, or kind of trending in the right direction from your point of view?

Mike Ryan

Yes, and I'll tell you Steve, one of the things we look at, not the only thing but one of things is the available units everyday because as we improve the efficiency of the operation, it creates more capacity turning units faster. And in some of our categories I mentioned it earlier on the 30,000 barrel units that we have, this morning there aren’t any. We don’t have any available to making them available to a customer and we've had that situation on 30-Ks now for about a month.

So, that’s the kind of tightening in the marketplace that we like to see. We are starting to see that in the other categories as well and that’s the sequence of recovery for us. It moves from the return of the demand to pressurize the system and then we get into a much stronger position for stock pricing and then contract discussions and we are starting to see that.

Now, that’s going to be accented here in the second half with the grain harvest but I think even as you go through the grain harvest we will continue to see this underlying element of non-grain that continues to return as well and puts more demand for the long-term on our system.

Steve O'Hare - Sidoti & Company

Okay, in terms of capacity, it sounds like you guys and Kirby are being, let's say, responsible regarding capacity. Are you seeing similar actions from some of the, maybe the marginal competitors out there, and if the industry as a whole kind of behaving rationally in capacity at this point?

Mike Ryan

Yes, I think the place to look for that signal is what are people building with us and what are people building with Trinity and I think what you are seeing on both of those order books appears to be just replacement tonnage. There's not a replacement volume units. So there is not a lot of dramatic expansion in any of the categories dry or liquid. So, I think the industry has been responsible through this, maybe more out of fear but now out of maybe experience as well coming out in the recovery.

Operator

Thank you, sir. Ladies and gentlemen this concludes the question-and-answer portion of today's conference. I'll now turn you to presentation back to Mr. Mike Ryan for his closing remarks. Sir?

Mike Ryan

Thank you. The freight volumes are returning to the land based and the water based carriers. You are seeing it on the rails, the trucks and we are seeing it here. At ACL, our property is leaner now and it's ready to handle more efficiently the post recession freight volumes. We are committed to driving forward with our strategic initiatives continuously improving customer service while remaining focused on the delivery of positive financial results to our investors. Thank you all for joining us today and we'll talk to you at the end of next quarter.

Operator

Ladies and gentlemen thank you very much for your participation in today's conference. This concludes your presentation and you may now disconnect. Have a great day.

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