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Executives

David Parker - VP of IR

Clayton Yeutter - Chairman of the Board

Mike Ryan - SVP, Sales and Marketing and incoming President and CEO

Tamra Koshewa - VP, Finance and Corporate Controller

Analysts

Alex Brand - Stephens Inc.

Chaz Jones - Morgan, Keegan & Company

Ken Hoexter - Merrill Lynch

John Barnes - BB&T Capital Markets

American Commercial Lines Inc. (ACLI) Q4 2007 Earnings Call February 19, 2008 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 American Commercial Lines Incorporated Earnings Call. My name is Nicole and I'll be your coordinator for today. (Operator Instructions)

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

David Parker

Good morning and thank you for joining us. Today we will be discussing our fourth quarter and year-end December 31, 2007 financial results.

Before we begin our discussion I want to remind you that statements made during this conference call with respect to the future are forward-looking statements. Forward-looking statements involve risks and uncertainties. Our actual results may differ materially from those anticipated as a result of various factors.

A list of some of these factors can be found in American Commercial Lines SEC filings including its Form 10-K on file with the Securities and Exchange Commission.

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

On the call today we have Clayton Yeutter, Chairman of the Board; Mike Ryan, Senior Vice President, Sales and Marketing and our incoming President and CEO; and Tamra Koshewa, Vice President, Finance and Corporate Controller.

With that, I would like to turn the call over to Clayton Yeutter.

Clayton Yeutter

Thank you, Dave. I am Chairman of the Board of ACL as most of you know and as Dave indicated to you normally I would not be on this call but I get the privilege of being with you this morning because we have the privilege of announcing to you a change in the top level management of the company.

As you know by now from the press release that you've seen, Mike Ryan will be succeeding Mark Holden as President and CEO of American Commercial Lines effective March 1, and Mike will also become a director of the company at that time.

Mark Holden has led the company for the past three years as you know since it emerged from bankruptcy in early 2005. Mark's three-year employment agreement expired in January and he expressed a desire at that time to move on and do other things and engage in other challenges and opportunities.

We wish him well in those endeavors and we certainly thank him for all his contributions to the company over the past three years and for leaving behind a very strong management team.

We are also mighty pleased to move Mike into this slot. It is always a pleasure to promote internally rather than have a need to go external with the choice of a CEO. Mike joined us in 2005. He has done a fabulous job on sales and marketing activities since then and has also been a very innovative visionary participant in developing and executing the company's strategy to transform ACL from simply a barge company into a transportation company.

We are confident that he can build on the strong foundation that has already been established for him and take ACL to a much higher level of performance and as the years unfold.

Normally, Mark, of course, would handle this call since he is the sitting CEO but we thought that we should change the modus operandi this time because even though we will concentrate on the numbers for the last part of 2007 and all of 2007, your interest as listeners, everybody in the investment community will be principally in knowing what this management change means to ACL and the future. And that is why we have asked Mike to lead the call today.

And with that, I would like to turn it over to Mike Ryan.

Mike Ryan

Thank you, Clayton. Thank you for those kind words. They are great. I am excited to take the reins and I am excited about the opportunities ahead for ACL. I am proud to take the helm of an organization that historically has had the best safety record in the industry, that has been named as a responsible care partner, an organization that puts its people first and provides the safest, cleanest and most cost-effective innovative transportation solutions to our diverse customer base, an organization which has very high growth potential.

I have met many of you on the call today at various conferences but still would like to provide a brief summary of my background. I have 27 years of experience in the transportation industry, with assignments in the truck, class one rail and barge sectors. I held senior leadership positions in all of these units, including top positions directing several commercial business units, with Cfx Transportation.

Since I joined ACL, we have designed the company's shift towards the stronger, more reliable portfolio base. My team built a new sales and customer service program over the past two years, which is focusing on business retention and organic growth, expanding ACL's market share into more ratable lines of business. We will maintain our current strategy of taking every opportunity, both in transportation and in manufacturing, to stabilize our revenue stream with more predictable, ratable and profitable business.

We launched this effort in 2006 with new contract agreements in our transportation segment. We will continue this initiative in transportation and imply in manufacturing as well. Our industry is subject to many external forces and we will continue to take aggressive steps to neutralize those effects on our revenue base and profitability.

Before turning the call over to Tamra, I want to acknowledge what has happened over the course of the last year regarding expectations of ACL's performance. It starts by looking back at 2006. Our 2006 earnings results were abnormally strong. It was an unusual year. Due to tight capacity, enormous export grain demand, strong imports and strong domestic coal we had a steep increase in revenue in 2006 compared to 2005 and earlier years.

We did not in retrospect adequately quantify the volatility associated with this positive business spike, and therefore we did not do a good job of guiding you from 2006 into 2007. We believe that 2007 was a more normal baseline year. One you should use as the benchmark for future expectations and one upon which we expect to build.

Our revenues for the full year in 2007 were over $1 billion and our EBITDA was $160 million. We finished the year with the solid fourth quarter despite significant unrecovered fuel cost increases and grain volume and rate pressures.

Our manufacturing segment continued to improve its production throughput and reduce its labor hours in the shipyard. We continue to execute on our strategic priorities while managing through the challenges our industry faces.

Now I'd like to turn the call over to Tamra Koshewa, Vice President of Finance and Corporate Controller who will cover our financial results in more detail. After which I will discuss our commercial progress and 2008 outlook followed by a Q-and-A session. Tamra?

Tamra Koshewa

Thanks Mike. First, I'd like to report that our independent auditors are concluding their work on our 2007 financial audit, and we expect the clean audit opinion to be included with our Form 10-K which we will file in the coming week. We also expect to report no material weaknesses in our internal control and to be in full compliance with SOX 404.

Now turning to revenues. In our earnings release, we reported fourth quarter 2007 revenues of $302.5 million, a 13.8% increase compared with $265.9 million for the fourth quarter of last year. And we reported full year 2007 revenues of $1.05 billion, an 11.4% increase compared with $942.6 million for the full year 2006.

The manufacturing segment drove the majority of the quarterly and annual increase with sales that were $24.5 million, an $84.7 million higher than the prior year quarter and year respectively.

Transportation segment revenues increased $23.1 million year-over-year. We had increased revenues from our liquids business, strong bulk pricing and higher coal volume. These factors were almost completely offset by lower grain volume and lower grain rates, as well as lower coal ton-mile rates. We also had higher revenues from barge scrapping. Revenue per average barge operated for 2007 increased 8.8% to $277,018 from $254,640 in 2006.

Average fuel-neutral rates per ton-mile for liquid cargo freight increased 13.4% and decreased 1.2% for dry cargo freight, driven by a 25 point decline in the average grain freight as compared to 2006. Excluding grain, the average fuel-neutral rate for the dry business increased 4.9% over 2006. And on a blended basis, average fuel-neutral rates per ton-mile were flat year-over-year.

Liquid demand continues to be strong, led by petrochemical and refined product markets. Overall liquid volumes including both affreightment contract revenues and non-affreightment revenues were up 18% in 2007 compared to 2006. We continue to see customer interest in redeployment of our liquid asset from traditional affreightment contracts to charter and day rate arrangements with on average 33 more liquid tank barges moving into day rate service during 2007 as compared to 2006.

This higher level of deployment at higher rates for this type of service drove charter and day rate revenue up $22.5 million year-over-year. Overall volume increases in the market included increased volumes of ethanol and bio-diesel with customers entering day rate contracts to ensure that their logistics requirements are met.

Dry volume was down 5.3% year-over-year, primarily attributable to lower grain volume and weaker bulk imports. Our grain volume was down almost 20% for the year compared to 2006. This significant decline points to the volatility that persists in the grain market, largely due to shipper behavior and the timing of grain export.

Year-over-year bulk volume loss was attributable to the impact of the weak U.S. dollar on imports and the slowdown in the U.S. economy, particularly housing. We continue to see demand in our coal business, though year-over-year pricing has been lower with more of our volume in 2007 coming from lower price per ton-mile on export coal moves. We also reported net income for the quarter of $23.7 million or $0.46 per diluted share, a 32.3% decrease compared to $35 million or $0.56 per diluted share for the fourth quarter of 2006.

Results for the fourth quarter of 2006 included a gain of $4.8 million net of tax or $0.08 per diluted share on the sale of the company's Venezuela operations and a charge for the early retirement of debt of $900,000 net of tax or $0.01 per diluted share.

Results for the fourth quarter of 2007 included an after-tax charge of $1.5 million or $0.03 per diluted share for the withdrawal from a multi-employer pension plan for represented employees of our terminal operations and a one-time $1.8 million or $0.04 per diluted share for favorable tax adjustment related to expected realization of certain deferred tax assets.

Net income for the fully year was $44.4 million or $0.77 per diluted share, a 51.9% decrease compared to net income for the full year 2006 of $92.3 million or $1.47 per share.

Results for 2007 included after-tax charges of $16 million or $0.28 per diluted share for debt retirement expenses related to the retirement of the company's Senior Notes and replacement of its credit facility.

Earnings before interest, taxes, depreciation and amortization (EBITDA) for the fourth quarter of 2007 were $54.4 million, with an EBITDA margin of 18% compared to $70 million for the fourth quarter of 2006, an EBITDA margin of 25.9%.

For the full year 2007, EBITDA was $159.8 million, an EBITDA margin of 15.2% compared to $211.8 million for the full year 2006, an EBITDA margin of 22%.

The decrease in operating results in 2007 was driven by decline in operating margin, higher interest cost, lower other income partially offset by lower income tax expense. Lower transportation margin resulted from cost inflation in excess of revenue growth.

Cost inflation was driven by increases in the number of vessel employees, fuel cost particularly during the fourth quarter, external fleeting, shifting and cleaning costs, vessel repair cost, selling, general and administrative expenses. These costs were partially offset by higher scrapping income and gains from the disposal of assets.

Per gallon fuel cost escalated 34% to $2.52 per gallon in the fourth quarter, driving approximately $12 million to $14 million increase in fuel cost year-over-year from an essentially flat position at the end of three quarters.

Now turning to manufacturing, our manufacturing business prior to inter-company elimination generated $5.4 million of EBITDA on $76.9 million of revenue in the fourth quarter compared to $6.2 million of EBITDA on $58 million of revenue in the fourth quarter of 2006.

After inter-company elimination, manufacturing EBITDA was $4.3 million, a modest improvement over 2006 and a substantial increase from third quarter 2007.

External EBITDA as a percentage of revenue was 5.9% for the quarter. For the year, total manufacturing revenue was $290.1 million and our EBITDA was $21.4 million. After inter-company elimination manufacturing generated $10.4 million of EBITDA for the year on revenue of $239.9 million. External EBITDA as a percentage of revenue for the year was 4.3%.

Total manufacturing production volume increased 28% in 2007 over 2006, with deliveries of 361 dry hopper barges, 41 tank barges and two special vessels, for a total of 404 units compared to 315 units in 2006.

During the year, we built 50 dry hopper barges and 13 tank barges for internal use. Lower manufacturing margins year-over-year results primarily from inefficiencies associated with the 28% increase in production. Higher labor rates associated with the new contract for represented employees and continuing impacts of legacy contracts.

As we've previously discussed, the manufacturing business has grown faster than our transportation business. Manufacturing has historically had significantly lower margin rates at 5% to 9% compared to our transportation business at 20% plus margin. As a result, our overall margins are diluted as manufacturing grows faster than the total.

We have spoken to you in the past about legacy contract at Jeffboat. I would like to give you a little more clarity around this issue.

We have defined legacy contracts as any contract that was signed in 2005 or prior. These contracts were priced at a lower estimated margin than in contracts signed during 2006 and 2007. There are also unsigned options in these legacy contracts that if executed would extend the impact of this lower margin on our business through 2011, almost 60% of our 2007 volume was under legacy low margin contracts.

Our manufacturing sales backlog at the end of 2007 was $429 million. Approximately 50% of this backlog is under legacy contracts. If all the outstanding legacy contract options are exercised, we would expect approximately 50% to 55% of our volume in 2008 to be affected and 30% to 40% in 2009 and 2010.

All legacy contracts contain steel price escalation clauses. However, the majority of dry option barges are not covered by waiver or other cost escalation clauses. We will continue to provide you with updates on the status of our backlog and the magnitude of legacy contracts included in that backlog.

Our 2007 transportation results can be summarized as roughly a $21 million increase in revenue, offset by $65 million increase in costs for a net earnings reduction of approximately $44 million pre-tax.

Of the $44 million, roughly a third is simply the effects of lower grain rates year-over-year, one third is unrecovered direct fuel cost inflation and one third is discretionary spending for accelerated trainee wage increases offset by lower incentive compensation accruals, the decision to buy out a multi-employer pension plan, and vessel upgrades.

Our discretionary spending continues to be in our two most important areas, our fleet and our people. We have been investing heavily to recondition our liquid fleet in order to grow this business. We continue to see improvement in our manufacturing business as production has increased and labor hours per barge have been declining.

However, our fourth quarter external production included many barges that were attached to low margin legacy contracts and while our labor hours per barge are lower than earlier in the year, we still incur too many hours on the barge as we sold externally during the quarter.

Finally, I would now like to discuss our cash flow and balance sheet. First, we generated a $115.8 million in cash from operations in 2007, over 2.5 times our net income. Debt increased by $320.3 million during the year to $439.8 million at the end of 2007.

The increased borrowing in 2007 was primarily the result of $300 million used to fund the repurchase of 12 million shares of ACL common stock, leaving us with approximately 50 million shares outstanding at December 31, 2007. The treasury shares represent almost 20% of the previously outstanding share total.

Capital expenditures were a $109.3 million in the year ended December 31, 2007. In addition, net cash used in investing activities included $15.6 million for the acquisition of towboats and certain assets from the McKinney Company, $6.2 million investment in Summit Contracting and $4.3 million for the acquisition of Elliot Bay Design Group.

Proceeds from property dispositions were $23.3 million including $15.9 million in proceeds of a sale and leaseback transaction involving 28 barges.

I will now turn the call back over to Mike for review of industry trends. Mike?

Mike Ryan

Thanks Tamra. From a market perspective, barge industry volumes in general continue to be down year-over-year on tons moving on the inland waterway system. The total industry tonnage declined 2.4% for the year, with bulk down 15%, grain down almost 8% and coal down 5%. Liquids continues to be the growth commodity across the industry, with tonnage up almost 10%.

Our volumes for the year measured in ton miles were negatively impacted by both grain and bulk, down 18% and 5% respectively. In the fourth quarter, we experienced continued volatility from grain despite record estimated export levels, with our ton miles down 23%. We saw our bulk volumes beginning to rebound with 6% growth in the quarter over 2006, but bulk imports remained weak.

We ended the year with a transportation revenue portfolio of 25% grain, 27% liquids, 30% bulk, 9% coal and 9% steel. This compares favorably to our 2006 mix of 32% grain, 24% liquids, 28% bulk, 8% coal and 8% steel. We continue to make progress towards our stated strategy of 40% liquids, 20% coal, 20% bulk, 10% grain, 5% steel and 5% emerging markets.

As our portfolio shifts we are driving pricing discipline and tighter contract terms into our agreements, despite aggressive competition particularly on the dry business. In 2007 we repriced approximately one-third of our contract business with an average fuel-neutral increase of 15%. Most of this new contract pricing went into effect January 1st of this year. We now also have favorable terms for fuel escalation, labor cost and CPI inflation escalators on over 85% of our contracts.

Taking a page from the rails, we have 15-day payment terms in over 90% of our contracts as well. In 2008 over one-quarter of our contract portfolio will reprice again. We expect average increases to again approach double-digit strength. The majority of these will renew in the fourth quarter 2008.

Our commercial objective continues to be to identify and capture new demand. We will compete for existing inland waterway tons, but our primary target remains modal conversion of rail volumes to barge movements. We are focused on capturing new business that fits our stated strategy of adding profitable, ratable business in lanes where we have our greatest operating efficiency.

We signed up over $60 million in annual organic growth during 2007. As I have reviewed with you on the last call, our organic growth is fueled by the increasing transportation demand from new petrochemical and chemical programs, as well as from providing alternatives to rail in the liquids business and in the coal and energy sectors.

Our Q4 organic growth base is strong. In the fourth quarter, some of our key successes included major wins in multi-year liquid deals with record setting margins as well as in multi-year coal and energy contracts in lanes which eliminate empty barge movements for us maximizing fleet efficiency.

Also in 2007, we activated our own industrial development arm with our investment in Summit Contracting. The combination of our commercial prospecting team and Summit's engineering expertise has opened a new opportunity channel for us to work with customers on the design and development of new shipping site locations, again a page from my past when we developed such new shipping infrastructure with rail customers. Now we will do the same for those who want to ship by barge.

We will compete for new modal share, which is why you saw us launch scheduled service on our assets in 2007. In order to compete with other modes, like rail, we need to present service offerings which rival and defeat our competitors. You probably will not hear much about scheduled service from other barge companies.

Most are content with the inland water market share they have. We believe bringing new higher margin business to the water is the better long-term solution for achieving ratable, profitable growth. We will continue to aggressively market our services to our existing and new customers, as a transportation service provider, focused on setting a new standard and on-time delivery. We believe this is a value to our customers, one which will position us for sustainable organic growth.

Now I would like to discuss our outlook for 2008.

As noted in our earnings release yesterday, we plan to no longer provide annual earnings guidance due to a number of factors. The volatility in the transportation industry as a whole and grain shipping in particular along with the weak economy, escalating fuel cost and unpredictable weather patterns, limit our ability to accurately predict financial results at this time.

Looking forward, we will be providing quarterly updates on reliable metrics. These metrics will enable investors and analysts to track our progress toward increasing our transportation business based on a stronger portfolio and contract base and toward improving efficient production at Jeffboat.

In transportation, we will continue to provide you with information on contract renewals, pricing and portfolio composition. And in manufacturing, we are working to develop two to three metrics which will enable us and you to track our progress in the areas of productivity and portfolio improvement.

As I mentioned earlier, we see 2007 as more of a traditional performance year and we expect that 2008 results will be more in line with 2007, reorganizing the increase in volatility and external variables that impact our business.

For the transportation segment, we expect to see some benefits from our transportation portfolio reshaping in 2008 but expect to have continued headwind from grain volatility, weak imports and inflation.

Our revenue portfolio at the end of 2007 was approximately 35% spot and 65% under contract. As mentioned earlier, we plan to renew approximately one-fourth of our contract business this year at fuel-neutral increase levels approaching double digits. We expect grain rates to be flat to slightly down 2008 and we expect our grain volume to also be down year-over-year. We will be adding approximately 30 to 35 new liquid tank barges into our fleet in the third and fourth quarter.

We plan to scrap approximately 180 dry hopper barges during the year and expect to not renew charters on approximately 70 dry hopper barges. For the manufacturing segment, we are planning modest growth as we continue to improve our efficiency in the shipyard while working to our legacy contracts as discussed previously. Our barge production will be more diversified in 2008 based on our current backlog.

We plan to sell approximately 295 barges for external and internal customers, approximately two-thirds of these will be dry hopper barges, 30% will be liquid tank barges and 2% will be ocean-going vessels. And as I mentioned earlier, we plan to build approximately 30 to 35 liquid tank barges for our ACL transportation segment, with delivery of those expected in the third and fourth quarter.

We plan approximately $110 million to $120 million in capital expenditures during the year for continued upgrade of our vessels, barge fleet and facilities, as well as for our new ACL liquid tank barges.

Lastly, we expect our tax rate to be approximately 38% of pre-tax income.

Now we'll turn the call back over to the operator for questions and I'll make some closing remarks after the Q-and-A session.

Question-and-Answer Session

Operator

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

Alex Brand - Stephens Inc.

Thanks, good morning, Mike.

Mike Ryan

Good morning, Alex.

Alex Brand - Stephens Inc.

Just with respect to some of the progress you talked about in coal and energy, and the modal conversion strategy. Without naming specific customers, can you give a more specific example of how something maybe has gone and where you've had some success so we can just understand what kind of progress you are making?

Mike Ryan

Sure, I'll give you a couple of examples. One, on the interior system movements from rail heads to actual industrial sides that are multi-modal in form, and again without naming a customer, these are coal flows that were traditionally rail, or rail to barge where we've been able to introduce ourselves in lanes where we had empty activity. So we're actually repositioning empty equipment, and went back in and bid to capture multi-year coal, rather than waiting for grain that was just spiking up and down.

So that's one example where we kind of repositioned the assets to pursue a more stable base and stable flow of business on our interior section which actually reduced our empty days and empty miles.

A second example is actual conversion of origins; some of the export flow is right now were coming off of the eastern carriers and going rail direct to the Gulf. We've been successful in introducing new western originations in rails to barge combinations to actually displace number of those moves. So we've had some interesting success and it has been multi-modal in impact. So it's kind of paid some dividends knowing not only the barge side but the rail side.

Alex Brand - Stephens Inc.

And competitively speaking, I mean how aggressive do you have to be in pricing? Or since you are going after business that, I assume, your traditional barge competitors are, is pricing not the primary competitive dynamic for that business?

Mike Ryan

Well, you still have to have a fairly competitive price, but it is still, the trade-offs that we are realizing are still improving the overall profitability. So that the business that we are displacing not only is ratable but it is a higher margin.

Alex Brand - Stephens Inc.

Okay. If I can, I just have a couple of technical questions. Can you quantify Tamra if you did it and I missed it, I apologize. How many barges were scrapped in the quarter and how much is that and where is it on the P&L?

Tamra Koshewa

We scrapped 62 barges on the dry side in the fourth quarter.

Alex Brand - Stephens Inc.

Okay. And how much did you get from that, where do I see it on the P&L?

Tamra Koshewa

It is recorded as a reduction in our operating expenses in the P&L. I believe that was about $3 to $4 million in the quarter.

Alex Brand - Stephens Inc.

Okay. What was the gain on disposition that was on the P&L?

Tamra Koshewa

That was related to a vessel that we sold in the quarter.

Alex Brand - Stephens Inc.

Okay. And I think you gave average barges. Can you give us how many barges actually had at the end of the quarter?

Tamra Koshewa

Yes, the total average barges at the end of the quarter was 2,844 barges.

Alex Brand - Stephens Inc.

Is that also the actual number that you had or that's just the average?

Tamra Koshewa

No, that's just the average.

Alex Brand - Stephens Inc.

Okay.

Tamra Koshewa

The actual number was 2,828 barges.

Alex Brand - Stephens Inc.

The 2,828, and how many of those were dry?

Tamra Koshewa

2,440.

Alex Brand - Stephens Inc.

Okay. I will let somebody else have it. Thanks guys.

Mike Ryan

Thanks Alex.

Operator

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

Chaz Jones - Morgan, Keegan & Company

Hey, good morning everyone.

Mike Ryan

Good morning, Chaz.

Chaz Jones - Morgan, Keegan & Company

Just one quick question here for you. Looking at some recent industry news, it looks like the Bush administration has proposed eliminating the current fuel tax that they use to fund the Inland Waterway Fund, with a new tax based on lock usage fees. If that were to go through, could you maybe talk how that might impact operations?

Mike Ryan

Well, I am not sure, it's going to impact operations as much as it's going to impact the economics that are involved with movements on the inland water system and I think there are lot of questions there as far as I guess first if Congress is going to pass it and second how that impact is going to be absorbed and dispersed.

But as a company and as an industry, within the industry we certainly are continuing to tend to take a leadership role here in pursuit of the investment in the locking down infrastructure, because it is certainly an overlooked area as far as need for capital and refurbishing. I think you will see that's more active in 2008, locking arms more with our customer base, our shipper base to make sure that that message is driven a little louder and clearer in Washington.

Chaz Jones - Morgan, Keegan & Company

If it were to pass, I mean is there anyway you can quantify and I'm not talking about a number or anything like that. But I mean is there potential that it could be detrimental from an expense standpoint, it gets shift from a fuel packs to a lot of block usage packs?

Mike Ryan

Chaz at this point I don't think we have enough visibility to know what that impact will be?

Clayton Yeutter

Mike, this is Clayton. Can I interject on this one?

Mike Ryan

Sure.

Clayton Yeutter

Normally I would not get involved in this at all but since I'm here in Washington, D.C., and a little closer to that issue than Mike is. Let me just say there is no chance that that's going to become law. So I wouldn't waste anytime being concerned about it. It would have a negative impact on the barge industry, if it were to happen, but it's a hypothetical, in my judgment does not have one chance in a million of becoming law.

Chaz Jones - Morgan, Keegan & Company

Okay. That's all I had. I appreciate the commentary, Clayton and Michael.

Mike Ryan

Thanks Chaz.

Operator

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

Ken Hoexter - Merrill Lynch

Hi, good morning. In the quarter, just a couple of numbers first, can you tell what the internal build for liquid and dry was, I think you only gave the year end?

Mike Ryan

Pulling that out right now, Ken.

Ken Hoexter - Merrill Lynch

Okay.

Tamra Koshewa

We built 13 liquid barges internally in the quarter. And so that answer your question?

Ken Hoexter - Merrill Lynch

Yeah, and dry?

Tamra Koshewa

We didn't build any dry.

Ken Hoexter - Merrill Lynch

Okay. And I guess Mike you would…?

Tamra Koshewa

I'm sorry. Let me clarify that. Did you mean dry in the quarter? We've built 90 dry barges in the quarter. Sorry about that.

Ken Hoexter - Merrill Lynch

All right. Mike you had kind of talked about Jeffboat growth, I guess, slowing a bit, I think you said some modest growth in the shipyard. Were you talking in terms of number of vessels being built? Do you lean more toward liquid? Should we see revenues for Jeffboat increase I guess in at double digit range in 20%, 40%, I'm just trying to put a level on what kind of growth we should expect at Jeffboat?

Mike Ryan

Yeah, the growth in the shipyard is addressing revenue growth and profitability. The actual number of barges is going to reduce because of the portfolio mix, and the different types of barges that will actually be produced. There'll be more liquid barges produced and there will be more of the blue water units produced.

So there is actually a total barge count reduction. So the increases that we're targeting though are on the productivity side which would translate the bottom line on the overall sales, as we reduced the legacy count that puts us in an increasingly better position to increase sales and profit.

Ken Hoexter - Merrill Lynch

All right. You had said 30 to 35 new liquid builds would be internal. Are you going to build any internal dry barges?

Mike Ryan

No. In 2008?

Ken Hoexter - Merrill Lynch

Yes.

Mike Ryan

No.

David Parker

Kevin, this is Dave. We've got a clarification to your earlier question. I think Tamra has some additional information.

Tamra Koshewa

Were you asking for just internal builds or total builds during the quarter?

Ken Hoexter - Merrill Lynch

I'll take both if you have it.

Tamra Koshewa

Okay. The total builds that we had for Liquids were 13 and we had 90 dry.

Ken Hoexter - Merrill Lynch

Okay.

Tamra Koshewa

The internal amount of those were, no liquid internal builds during the quarter and nine dry hopper internal builds.

Ken Hoexter - Merrill Lynch

Okay, great. Thank you.

Tamra Koshewa

And we also had two special vessels that we sold during the quarter. They were external.

Ken Hoexter - Merrill Lynch

Okay. Now Mike earlier you had mentioned that, I think you said 180 dry barges were scrapped, I think you were talking about 2007. I am sorry what your target for 2008, was that correct?

Mike Ryan

Right.

Ken Hoexter - Merrill Lynch

And then you said you're not going to renew 70 barges, that in addition to the 180 and are those on leases that you are going to let expire or are you also going scrap those 70?

Tamra Koshewa

Those are also on leases and that's incremental, so we are not scrapping them, we are just not renewing the lease.

Ken Hoexter - Merrill Lynch

Not renewing leases. And what of the, you had given the number before the 2800, 28 are now left on lease for what are those, I guess all the leases are the dry side, right?

Tamra Koshewa

Correct.

Ken Hoexter - Merrill Lynch

So what is about 2457 that's dry?

Tamra Koshewa

The 2440 is dry at the end of the year, of how many barges we had at the end of December.

Ken Hoexter - Merrill Lynch

Okay. And then how much of those are..?

Tamra Koshewa

2445 barges, 388 liquid barges for a total 2828.

Ken Hoexter - Merrill Lynch

And then of the 2440, what are on lease versus own?

Tamra Koshewa

I don't have that readily available. I have to get back to you on that.

Mike Ryan

We will circle back with you on that piece of information, Ken.

Ken Hoexter - Merrill Lynch

Okay. And then I guess if we look at the margins overall, what would you expect, it sounds like you are looking for a little bit less of an internal build program particularly in the first half of the year. It sounds like nothing much is on plan.

Tamra Koshewa

That's correct. All the internal builds will be in the second half of the year.

Ken Hoexter - Merrill Lynch

So what kind of margins do you look for, do we return to the same level as last year, do you get more incremental benefits because the legacy contract start to decline or legacy pretty much the same level as the prior year?

Tamra Koshewa

As I spoke up in my remarks, approximately 60% of our volume in 2007 was under the legacy contracts, and we're expecting 2008 to be a little bit better than that in terms of what percentage of legacy contracts we will have, I think it was 40% to 50% as the range that I gave for 2008. But we are not prepared to comment on specific margin targets for Jeffboat in 2008.

Ken Hoexter - Merrill Lynch

Okay. And then just a quick question on the transportation side, you'd mention that, I think you gave a couple of different numbers than you had in the release. I don't know if there was some reason for that, but it sounded like that you were saying when you were talking about the revenue per barges, I thought in the release you said that it was basically flat or down, I guess 0.3%. But when you pulled out the grain, rates were up 8%. Did you give a grain?

Tamra Koshewa

I think you might be confusing revenue per barge versus fuel-neutral rate increases.

Ken Hoexter - Merrill Lynch

Yes.

Tamra Koshewa

The revenue per barge increase was 8.8% in 2007.

Ken Hoexter - Merrill Lynch

And what was grain itself, I guess what was the spot rates doing in the quarter?

Tamra Koshewa

We said on average the spot rates were down 25 points year-over-year.

Ken Hoexter - Merrill Lynch

25 points or 25%?

Tamra Koshewa

That's on the grain tariff rate.

Ken Hoexter - Merrill Lynch

I'm sorry.

Tamra Koshewa

On the grain tariff rate, we said that it was down 25 points.

Ken Hoexter - Merrill Lynch

25%?

Tamra Koshewa

25 point on the grain tariff.

Ken Hoexter - Merrill Lynch

On the grain tariff. Okay, I got it.

Tamra Koshewa

Correct.

Ken Hoexter - Merrill Lynch

All right, great. Thanks for the time.

Tamra Koshewa

Thanks Ken.

Mike Ryan

Thanks Ken.

Operator

(Operator Instructions) Your next question comes from the line of John Barnes with BB&T Capital Markets. Please proceed.

John Barnes - BB&T Capital Markets

Hi, good morning guys.

Mike Ryan

Hi, John.

John Barnes - BB&T Capital Markets

As you look at '08, can you give us a little bit of an outlook on the pricing side, especially on the liquid side; I mean that was pretty sound performance during the quarter. Can you just, how much of that do you expect to continue into '08?

Mike Ryan

John, I think that's on a pretty steady pace. I don't see it deteriorating much, but I don't see it spiking much either. It looks like it's a pretty steady demand and we are in a pretty good position here to get in front of it and it looks like, actually it looks like most of the inland waterway players are right in that same queue, so it looks pretty steady from here.

John Barnes - BB&T Capital Markets

All right. And then can you just comment on the dry side, would you expect it to be kind of flattish in '08 as well, the way it ended this year?

Mike Ryan

Yeah, I think it's going to look a lot like this year and we are seeing with the fall off of the imports. We've got a lot of capacity looking for loads and I think that's going to hold those rates right where they are and maybe even slightly off a little bit.

John Barnes - BB&T Capital Markets

Okay. In terms of the import traffic, is it a matter of two or three things you needed to fix imports? Is it a matter of you got to have a little bit better housing, you got to have a little bit strong dollar, something like that in order to get it going again? Or is there a simpler fix in the near term, or should we expect similar type declines in import activity in '08?

Mike Ryan

I think it's primarily driven by the dollar John. I think that while the housing does impact all the direct and indirect events, most cement wants to near its home anyway, it's not going to travel a long way. So that's big player on the inland water system that would remain depressed. But until the dollar swings, we're not going to see that import recovery coming through the Gulf again.

John Barnes - BB&T Capital Markets

Okay. Is there a material margin difference between your export traffic and your import traffic? Do you care all that much, I guess you are loosing backhaul loads, but is it that profitable that an acceleration there really matters? Or would you prefer longer-term, would you prefer more export traffic over more import traffic?

Mike Ryan

Actually John, the export traffic often appears a spot and it's not always as attractive and tougher to predict. So the import base is a little more predictable as its speeding industries. So you see a little bit more ratability on the imports than the exports.

But what we've been working on through the fourth quarter has been stabilizing the bulk movements. Even though they might not necessarily be imports, they are North bound and they match up well with our grain portfolio on a South bound basis. So we're trying to be as nimble as possible but locking these into longer term contracts so that we can again stabilize that base.

John Barnes - BB&T Capital Markets

Okay All right. In terms of Jeffboat, do feel like given your growth outlook in 08 for Jeffboat, the number of bills, do you feel like at this point that you have the headcount where it should be? Or do you foresee further reductions there to more right size the cost structure, so it's kind of go along with the plan to growth?

Mike Ryan

I think we are in a good spot right now, John. For the work we need to accomplish there, I think that headcount level is probably where we need to be right now to support that and tend to do it.

John Barnes - BB&T Capital Markets

Okay. Going back, I didn't catch all of your comments in terms of the Jeffboat backlog and the number of options. And sounded like, from Tamra's comments that those options could have bit of a drag on Jeffboat's results through 2010, am I correct?

Tamra Koshewa

Actually 2011.

John Barnes - BB&T Capital Markets

2011, okay. Now, at what point do you get clarification that those options are actually going to be. I guess given the pricing that those options are at, is it safe to assume all of those barges are going to get built and therefore we should be modeling in that type of drag through 2011, is that the more conservative thing and more appropriate thing to do? The only reason they wouldn't build.

Tamra Koshewa

Well if they don't have the capital to execute the financing, to execute the option contracts, but that's the reason we gave the range in terms of what the impact could be, assuming that all of those options were exercised.

John Barnes - BB&T Capital Markets

All right. So borrowing some financing difficulty, we should assume that especially given the prices, those things are priced at, that we are going to see all of those options exercised?

Mike Ryan

We should assume that John, and prepare for that, because that in itself will eliminate any surprise. We should eliminate that, we should assume that, so we eliminate any questions going forward and we talked about the different metrics we want to share with you going forward, some of what we are going to develop as far as Jeffboat metrics will include the move away from legacy, and the progress we're making in that direction. So that will be something we'll share going forward as far as progress with what that whole backlog looks like.

John Barnes - BB&T Capital Markets

Okay. All right. Last question and this is directed towards Clayton. I mean since you've put yourself out here, I got to take advantage. I mean, could you elaborate a little bit as to the Board rationale and thinking behind not extending contracts for senior management. I find it particularly interesting just given that quite honestly these guys were not on a high note with this quarter. This was a very, very sound result exceeding expectations down year-over-year with still exceeding expectations.

I'm just kind of curious as to walk us through the decision process there not to extend contracts for senior management. Can you elaborate at all on any further management changes we may see in the other positions leading the company and update us on the status of the CFO search?

Clayton Yeutter

Well, I certainly cannot elaborate on other folks leaving the company. We'd hope that we'd hot have a lot of turnover in that regard, but that's very much up to Mike in terms of. He has a relationship with the top management team and how he'd like to construct his own management team going forward. And that's very much a CEO decision more than a Board decision, although obviously we will work together as we move forward.

But Mike has an excellent working relationship with that whole top senior management team. And so I don't really look for a lot of turnover there unless Mike would like to see some additional turnover.

As to the extension of agreement, certainly that was not an issue so far as Mark was concerned, it was Mark's decision not to ask for an extension of his employment agreement, so that was not a decision by the board in any respect.

In terms of other employment contracts that might not be extended that simply a matter of where do we really want to use employment agreements at ACL. I have never been a great fan of employment agreements in any of the companies on whose Board's I have sat, and I have sat on lot of corporate boards over the last 15 years, and I've had 55-year work career, and have never had an employment agreement in my life. So I'm not a great fan of employment agreements, that seems to me that we have built in plenty of motivation for folks who want to stay at ACL.

We have an excellent contemplation program for our top executives. We think we will continue to reward them very well for first rate performance, and therefore we don't really see the need for employment agreements moving forward, but that's an individual decision to be made as we go on, and there may be specific situations where we would want to use them and some situations where we wouldn't.

The whole objective obviously for the Board and for Mike and as CEO of the company is to attract top quality people and provide them the leadership and the inspiration and the motivation to do well and then to reward them for effective execution, so that's what we'll do going forward. And we really do not see employment agreements as big part of that. I think it's the overall atmosphere in which people work and the way in which they're treated and the way in they are rewarded is a whole lot more important than whether or not they have an employment agreement.

John Barnes - BB&T Capital Markets

And the status of a CFO search?

Clayton Yeutter

Oh, I am sorry. We're in the process of doing some interviews where we are down to looking at some very attractive candidates, and my guess being a bit optimistic here is that we are likely to have a new CFO in place very quickly, hopefully within the next 30 days or so.

John Barnes - BB&T Capital Markets

And can you just talk what's taking so long there. My understanding was a candidate had been identified that everybody was pretty pleased with and then for whatever reason got cold feet and chose not to pursue it. Can you just elaborate a little bit as to what may be taking some time there?

Clayton Yeutter

That issue put a little bit on hold because of the CEO selection, the exercise. We could have finalized the decision in the CFO area before naming Mike as the CEO but that in essence would have been imposing a CFO on him. We'd have been willing to do that as a Board if felt that we absolutely had the right person, but obviously all other things being equal I'd rather have that selection be made after the CEO is selected.

So that we know that the chemistry between the CEO and his new CFO is going to be what we desire and what he desires. So I believe we are in a better situation now where Mike can clearly play a major role in the final selection of a CFO. And as I said, we think we are making major progress in that regard at the moment and the one particular candidate that looks awfully good to us is one that to us as a Board is one that looks awfully good to Mike as well. So we will see if that materializes.

Mike Ryan

John, just to echo Clayton's remarks. I have been more active now in the interview process and the searching, I think you will see that accelerate. But Chris has been functioning in the CFO role and continues to until the end of month and as you saw in the press release will remain on for a couple of months as we transition.

But he has got a heck of a team. I mean he has got a solid financial team down there that does a great job on day-to-day, as well as in events like this. I mean you've seen Tamra stepping up today and handling all of this. So in all the pockets here, one of the things that Mark did do a great job up here was building a team and it wasn't just ahead, it's drilled down deep. So it's a pretty deep bench and we are going to move forward with that CFO, but I want to make sure you know that there is a heck of team underneath that, in that discipline as well, that's getting it done.

Clayton Yeutter

That's really a good point and I will just elaborate for a one second on that Mike, simply to say that that has made the CFO search a lot easier, because the CFO candidates can very readily note that they have a heck of a lot of talent that they will be able to work with at ACL and I believe that has made this lot a really attracted one to some folks who might not otherwise be interested in coming to a company with $1 billion in sales.

John Barnes - BB&T Capital Markets

Okay. All right. Thanks guys for your time.

Mike Ryan

Okay.

David Parker

Operator we understand, are there any more questions in the queue right now?

Operator

There are no questions in queue at this time.

David Parker

Excellent. We'd like to have Mike then make some concluding remarks. Thank you.

Mike Ryan

And I'll be brief, I know we went a little long there. Basically this concludes our call. And I'd like to thank all of you for joining us today. We look forward to speaking to you again at the end of the next quarter. And thank you for joining us.

Operator

Thank you for your attendance in today's presentation. This concludes today's teleconference. You may now disconnect. Good day.

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Source: American Commercial Lines Q4 2007 Earnings Call Transcript
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