Mike Ryan - President, Chief Executive Officer
Norbert Whitlock - Executive Vice-President Operations
Tom Pilholski - Senior Vice-President and Chief Financial Officer
Tamara Kosholoa - Vice-President of Finance and Corporate Controller
David Parker – Investor Relations
American Commercial Lines Inc. (ACLI) Q1 2008 Earnings Call May 7, 2008 10:00 AM ET
Good day ladies and gentlemen. I would like to introduce your host for today’s call Mr. David Parker, you may proceed sir.
Thank you, good morning and thank you for joining us. Today we will be discussing our first quarter ended March 31, 2008 financial results. Before we begin our discussion I want to remind you that statements made during this conference call with respect to the future are forward-looking statements. Forward-looking statements involve risks and uncertainties. Our actual results may differ materially from those anticipated as the 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 or website at www.aclines.com in the Investor Relations section under non-GAAP financial data. On the call today we have Mike Ryan President and Chief Executive Officer; Norbert Whitlock, Executive Vice-President Operations; Tom Pilholski, Senior Vice-President and Chief Financial Officer and Tamara Kosholoa, Vice-President of Finance and Corporate Controller. With that I would like to turn the call over to Mike Ryan our President and CEO.
Thanks Dave, first I would like to address some of the changes within our leadership team. As you are aware in the last few months we have changed the leadership in several key positions in our Company. As we have stated in the past we have tremendous strengths throughout our key disciplines. Since our last call we have added Tom Pilholski to our team as CFO. He is a seasoned executive and will lead out account and finance unit.
Tom is a CTA and has previously served as CFO of several public companies. He has over 20 years of experiences in senior financial roles. His strong leadership and experience will enable us to proactively advance our key financial initiatives. Likewise with our change at the top on the operations side we have put in place a long time ACL and industry veteran Norbert Whitlock. Norbert’s wealth of experience and in depth knowledge of the business will be of great value to the management team as we continue to position our company for growth and select the next generation of senior leadership.
I am confident that we have the right leadership in place to advance our strategy in these challenging markets. To anchor our management team’s commitment to increase the long term value of ACL we have instituted new stock ownership guidelines as outlined in our proxy. TYhe new plan requires executive officers to hold a define multiple of their based salary in ACL Equity for as long as they remain an executive with the Company. As I have told our employees the senior team and I have chosen transportation as our carriers and we are here to take and keep ACL at the head of the class in this industry.
Now turning to the state of our business and our first quarter results. As we reported last night the first quarter was certainly a challenge for us, but the fundamentals of our business are strong and I continue to be excited about our Company’s prospects. Demand for our barge rate is solid and overall pricing has strengthened despite the difficult economy environment. We are making progress on our strategy and taking every opportunity both in transportation and in manufacturing to stabilize our revenue stream with more predictable ratable and profitable business.
While we remain optimistic about the direction and long term potential of our business we are clearly not satisfied with our financial performance in the first quarter. We must face the significant operational issues that have impacted our results. Our industry is exposed to many external forces and risks and we will take quick and aggressive proactive steps to minimize the impact of those forces on our business.
Today we will address the specifics of our first quarter challenges with you as well as the structure and discipline we are putting in place to manage and control our costs. We will discuss with you our metrics which will allow us both to measure ACL strategic progress and finally we will share with you examples of our first quarter successes. As we announced in early April our first quarter results were negatively impacted by three primary factors: unfavorable weather related operating conditions, significant increase in fuel prices and continuing softness in imports due to the weak US dollar.
First the weather; historically the first quarter is our weakest quarter due to in climate weather conditions that normally affect the northern river systems. This year however the seasonal transit delays were exacerbated by extended freezing temperatures and above normal icing in February and precipitation levels in the top 5% of recorded history causing flooding from March through May. These conditions drove our transportation barge delays in the first quarter 70% higher than last year, primarily on the Arkansas and Illinois rivers. The flooding was significant enough along the lower Mississippi that in mid April the New Orleans engineer district opened the Barnett Carrey spill way to release excess water from the Mississippi for the first time in 11 years. In addition to this the Arkansas River was shut down from the beginning of March until late last week.
The sustained high water led to operating inefficiencies, increased cost and a loss margin on delay days. These inefficiencies resulted from tow size restrictions, daylight only operations, draft restrictions and assist boat requirements. We estimate that this drove a $4.7 million decline in our transportation operating profit. In addition twice as many production days were lost in our shipyard compared to last year due to in-climate weather.
The second factor that negatively impacted our results in the quarter was to continued increases in fuel prices. Fuel impacts our transportation results in several major ways; first we have a direct cost exposure on the gallons of fuel we consume during the quarter. Our average fuel cost per gallon was up almost 60% in the first quarter compared to a year ago and up 12% over the fourth quarter 2007.
Next, fuel is a significant component of the cost structure of the third party shifting, cleaning and towing services that we must use. These costs are passed through to us in the form of higher rates. The average rate for these outside services in the first quarter increased approximately 40% over last year. And finally on fuel a portion of our fuel cost increase is recovered in revenue rate adjustments on our contract portfolio. As we have previously communicated our transportation revenue portfolio consists of approximately 65% long term contract rate business and 35% market priced spot business. We have few escalation adjustment factors on the base freight rates in almost all our transportation contracts. However, there is a 30 to 90 day lag on the adjustment factor during which we are exposed to higher fuel prices.
Depending on the timing and extent of the fuel inflations the impact during any quarter could be significant. Also these rates adjustments are passed through at cost and therefore, are dilutive to our overall margin percent. On our spot business there is no rate adjustment for fuel, therefore as fuel rates move ahead of booked forward spot market pricing we are again exposed to higher fuel prices and our margins are reduced. For example our spot drain rates were up 12% in the quarter but our fuel cost was up five times the improvement in the growing rate.
Overall we estimate that approximately $9.4 million of un-recovered direct and indirect fuel cost negatively impacted our operating profits during the quarter. Later we will discuss the steps we are taking to address our fuel related cost exposure. The third major adverse impact for us in Q1 was the continuing softness in imports. As the continued weakness in the US dollar as depressed imports resulting in a reduction in certain bulk commodity tons moved by barge.
For the quarter industry bulk tonnage was down almost 5% compared to the first quarter 2007 which we believe was largely driven by the weak imports. This has also led to stock pricing declines on these commodities of approximately 10% to 15% compared to prior year. Our bulk tons however were up 14% during the quarter because we continue to convert our business into more stable, ratable, domestic bulk commodities originating in the gulf such as salt and fertilizer at the higher rates we secure in our 2007 contract renewals.
These are the major challenges we faced during the first quarter which impacted our results. To summarize, our operating income in the first quarter declined $12.3 million compared to the first quarter of 2007. This was driven by the decline in the operating ratio of the transportation segment due primarily to the challenges I just discussed and was partially offset by improved results in our manufacturing segment.
Now I would like to turn the call over to Tom Pilholski our CFO who will cover our financial results in more detail. Afterwards I will wrap up with a discussion of metrics, cost containment initiatives and a 2008 outlook followed by a Q-and-A section. Tom.
Thanks Mike and hello everyone. I am excited to be at ACL and to be working with this team of talented people that are passionate about this business and I share Mike’s view expressed earlier that the fundamentals of our business are strong and I too am excited about the Company’s prospects.
In our earnings release we reported first quarter 2008 revenues of $270.5 million, an 18.5% increase compared to with $228.3 million for the first quarter of last year. The transportation segment drove the majority of the increase with sales over $28.7 million higher than the prior year primarily due to $12.9 million in contract fuel cost recovery, a 5.6% and overall fuel neutral rates and higher levels of non-freight revenues.
Revenues per barge in Q1 increased 22.8% to 73,000 in the quarter. Approximately half of the increase was due to higher non-freight revenues and have to higher freight revenues. The higher freight revenue per barge was due to the fuel price adjustments and the overall fuel neutral ton mile rate increases. Overall dry cargo freight rates per tone mile were up 14.3% year-over-year, with the majority of the increase driven by fuel costs pass through’s.
The average fuel neutral rates, per ton-mile for dry cargo freight increased 5.1%. The stock grain fiber pricing was 12% higher than the first quarter 2007, which we believe was driven by the tightness in barge availability due to the unfavorable operating conditions on the inland waterways during the quarter. Due to those same operating conditions our grain ton-miles volumes declined more than 25% from prior year levels.
Fuel neutral liquid cargo freight rates increased 6.7% in the first quarter compared to the same period last year. Revenues from charter and day rate contracts increased 47% due primarily to higher contract pricing and a strategic shift in asset deployments with 24 more barges on average moved into day rate towing.
Transportation ton-mile volume declined by 1.9% to 10.0 billion ton-miles; the volume decline was due to a run quarter decline in grain volume, primarily attributable to poor operating conditions on the Illinois and Arkansas rivers. Partially offset by strong domestic bulk volume and increase in coal and energy shipments and higher levels of outside towing.
Manufacturing segment revenues increased $11.9 million in the first quarter or 22.9% to $64.1 million. This was driven by an increase in the number of paint barges and special vessels sold versus the prior year and by higher steel prices passed through in wage increases. Revenues from our naval architecture and engineering company, Elliot Bay Design Group acquired in October 2007 were $1.6 million in the first quarter.
I will now talk about income. Net income for the quarter was $2.3 million or $0.05 per diluted share compared to a net loss of $1.1 million in the quarter ended March 31, 2007 or $0.02 per diluted share. Results for the first quarter of 2008 included an after tax benefit of $1.3 million or $0.03 per diluted share related to our decision to not withdraw from a multi-employer pension plan for certain represented employees of our terminal operations.
In the first quarter of 2007 after tax debt retirement expense is up $13.6 million on the retirement of our senior notes were incurred. Exclusive of those expenses in the respective periods net income decreased $11.5 million in the first quarter of 2008 compared to the first quarter of last year.
EBITDA was $23.0 million in the first quarter compared to $35.3 million last year. EBITDA as a percent of revenue was 8.5% compared to 15.5% in 2007. This decline in first quarter EBITDA was driven primarily by the decline in operating ratio of the transportation segment partially offset by improved EBITDA in the manufacturing segment.
Now I will review the segment income. Our transportation segment generated $19.0 million of EBITDA, a $204.8 million of revenue in the first quarter compared to $32.5 million of EBITDA on $176.1 million of revenue in the first quarter of 2007. EBITDA as a percentage of revenue was 9.3% compared to 18.5% last year. A decline in transportation EBITDA compared to prior year reflects the degradation of our operating ratio. This is attributable to the following items; the un-recovered portion of escalating direct and indirect fuel costs of approximately $9.4 million, marginal losses on weather related conditions of an estimated $4.7 million, higher maintenance costs of $5.8 million, higher outside towing, shipping and fleeting expenses excluding the estimated indirect fuel increase of $5.2 million, wage inflation of $4.1 million and higher selling general and administrative expenses of $2.3 million.
These cost increases were partially offset by fuel neutral revenue price increases, higher non- freight revenues and the benefit of our decision to not withdraw from a mutli-employer pension plan. The increase in SG&A expenses was driven by severance related charges, increased personal injury claims and higher medical expenses. The severance cost related to reduction in work force are expected to generate annualized savings of over $3 million dollars.
Our manufacturing segment net of inter company eliminations generated $4.0 million of EBITDA and $64.1 million of revenue compared to $2.9 million of EBITDA and $52.1 million of revenue in the first quarter of 2007. External EBITDA as a percentage of revenue was 6.3% compared to 5.5% in 2007. These results reflect the second consecutive quarter where we have sequentially improved the EBITDA margin and Jeffboats.
Despite more than twice as many weather days in the coming quarter compared to prior year, the manufacturing segment completed the same number of barges as last year with deliveries of 89 units. All of the barges sold during the quarter except for one special vessel were legacy low margin contracts. During the first quarters of 2007 and 2008 we did not build any barges for internal use.
Manufacturing realizes a one point improvement in gross margin rates despite fuel escalation past throughs that negatively impact margin rates. This improvement was driven by productivity from increased navy utilization and lower direct labor hours per barge. We reduce the total hours for turn up steel process by 12% on our dry hopper barge builds and by 19% on our tank barges versus the first quarter of 2007.
At March 31, 2008 our manufacturing sales back log including legacy and non legacy contracts was approximately $403 million of contracted revenue with expected deliveries extending into the second half of 2010. This is a decline of approximately $27 million from the end of 2007. Approximately 44% of our backlog is under legacy contracts. If all the legacy contract options are exercised we would expect approximately 50% to 55% of that volume in 2008 to be effected and 30% to 40 % in 2009 and 2010. Almost all legacy contracts contain steel price escalation clauses; however, the majority of our dry option barges are not covered by labor of other cost inflation.
Finally I would like to discuss our cash flow and balance sheet. Net cash use in operating activities was $8.3 million in the quarter as compared to $6 million in the three months ended March 31, 2007. The increased use of cash between the years was due primarily to the higher negative impact of working capital changes in the quarter and lowering that income after adding back the debt retirement expenses to the 2007 net loss as those are considered as financing cash flow.
Cash used by investing activities was $20.3 million resulting from improvements that were built in barge fleets and our facilities of $12 million and a deposit of $8.5 million to purchase the remaining 70% interest and submit contracting on the last day of the quarter. This transaction closed on April 1, 2008. Cash flow was provided from financing activities primarily by advances on our revolving credit facility. Our long term debt increase by $33.8 million over year end 2007 to $472.8 million.
We are closely monitoring the respective covenance of our credit facility. We are currently in compliance with all respective covenance, although continued compliance based on our current financial forecast may require active management steps to be taken. We believe we have various alternatives available to us to ensure that we will remain in compliance including seeking an amendment to the credit facility. We expect to provide updates of any significant actions taken.
I will now turn the call back over to Mike.
Thanks Tom. I would now like to update you on our strategic initiatives followed by a brief update on our outlook for 2008. On our last call I indicated that we would be providing quarterly updates on our strategy execution and related metrics. We have defined four key metrics that we used to measure success in our transportation and manufacturing businesses. Today I would like to share with you those metrics and our performance in the first quarter. The metrics include revenue portfolio mix, organic growth, productivity and delay days.
First revenue portfolio mix; we have stated a long term goal of changing our transportation portfolio business mix to 40% liquids, 20% coal, 20% bulk, 10% grain, 5% steel and 5% emerging markets. We continued to make progress towards this goal as evident by our first quarter performance. During the first quarter of 2008 our transportation revenues were comprised of 30% liquid, 30% bulk, 19% grain, 11% coal and 10% steel. We saw at 3 point improvement in our liquids and coal business compared to 2007. We renewed three liquid contracts during the quarter at double digit average rate increases.
For manufacturing, our portfolio measures the reduction of remaining legacy contract bills and the development of more new market price contracts. As Tom mentioned earlier during the quarter all the barges we produced were under legacy contracts with the exception of one special vessel. As you have seen and heard our performance improved at Jeffboat in Q1 2008 compare to 2007. Through efficiencies we improved our margin year-over-year on our legacy barges built during the quarter. We also signed one new contract during the quarter that increased our backlog by approximately $25 million offset by first quarter production.
At the end of the first quarter 2008 approximately 44% of our $402 million backlog was under legacy contracts compared to 50% at the end of 2007. The backlog does not include legacy options until exercised but we expect all legacy options to eventually be exercised. In organic growth; organic growth is contract business with new customers and new commodity business within our existing base of customers. As I mentioned on the last call we were successful in signing up $60 million dollars in annual organic growth during 2007 for our transportation business.
In the first quarter, our organic pace has accelerated with $28 million dollars in new business which includes $14 million dollars of bulk, $10 million dollars of new coal and $4 million dollars liquids. We are also measuring new organic growth for Jeffboat and as I just mentioned we signed one new construction contract with options during the quarter that grew our backlog by $25 million. Looking at productivity for transportation we measured productivity in terms of tone miles moved per average of freightment barge.
During the first quarter 2008 tone miles per average liquid afraightment barge improved 3.7% over the same period of 2007 while tone miles per average dry afraightment barge improved 2.7%. This is a strong achievement overcoming the unfavorable weather related operating conditions we face during the quarter. At Jeffboat we defined productivity in terms of total barge labor hours incurred for tone of steel sold. This is a function of both our direct labor hours and our overall labor force utilization.
In the first quarter 2008 our dry hopper barge production reduced its total hours per tone by 12% versus the same period in 2007 we reduced our tank barge hours per tone of steel by 19% over 2007. These productivity improvements approximated $2 million in margin improvement during the quarter and finally delay days. As previously discussed the number of barge days lost during the quarter due to river delays from in-climate weather was up 70% over the same period of 2007. At Jeffboat we lost twice as many production days during the quarter compare to the first quarter of 2007; both of these had a negative impact on our results. Going forward these metrics will allow you to track our progress as we grow our business, diversify our portfolio mix, strengthen our contract base and improve our overall profitability.
Now, let’s discuss a new focus; cost containment efforts. I would now like to discuss our focus on better controlling our cost throughout the business. We have undertaken a thorough review of all our operating and SG&A expenses with the focus on eliminating waste and cost redundancies and better managing our spend for fuel and outside services. First we have completed certain reductions in work force primarily SG&A related that are expected to generate annual savings of over $3 million. We have removed layers from the organization and we will continue to stream line our structure to fit the needs of our business model. We have also greatly reduced our discretionary spending except to where it is expected to generate growth.
Second in anticipation of further instability and fuel pricing we initiated a few hedging program in December 2007. As of March 31, 2008 we have entered into fuel swap contracts fixing the price on 4.2 million gallons of our anticipated future 2008 fuel usage. The value of these swaps at quarter end was $658,000. We will continue to evaluate and address the exposed risk associated with our annual fuel barge. In addition we are seeking to change the fuel escalation formula in our renewing contracts. We are increasing the percentage of our base revenue rate that is subject to fuel cost, so that a greater percentage of the rate escalates with fuel inflation and we are changing the external fuel cost factor that we use to adjust our rates to instead use an index which more closely mirrors our actual cost.
Finally we are assessing the cost of our outside services at a vendor level. These costs have increase significantly in the past two quarters beyond fuel inflation. We are actively working on a consolidating our buy with competitive vendors who re-determine are more fairly pricing their services with reasonable adjustments for fuel inflation and we are focused on performing more of these services with our own resources when we can to better control these costs.
Our team is working diligently to position us for success, both for the remainder of 2008 and beyond. Given that we have acknowledged the many challenges we face, I believe it’s just as important to recognize our successes and the improvements we are making in the business towards our stated strategy. In the first quarter we moved our first project cargo shipments of wind energy components which is a new dry cargo business we brought to the water at margin levels comparable to our liquids business.
In the first quarter we moved our first dry cargo shipment of construction and demolishing material from the Chicago market area. We signed four new bio-diesel transportation contracts in the quarter worth $2 million annually. We increase petroleum products revenue by 71%, predominantly in unit tows. We applied our market base pricing and sales programs that are meant this terminal increasing existing terminal pricing by 70% and selling under utilized existing capacity into the market place and a $1 million five year deal and of greatest importance we maintained and improved our industry reading safety record in the quarter and we remain committed to this leadership.
Now for 2008 and beyond we expect the impact of higher fuel costs and unfavorable weather related operating conditions to continue into the second quarter. The impact on our results has the potential to even being more challenging than the first quarter. In the cost containment category we have given several examples on how we are implementing cost discipline around all aspects of our business. Our cost containment discipline will not be a one or two quarter event. We have identified several successful practices which we will build up on. Our demand and pricing remains solid as we progress in 2008. However, based on the realities of the first four months of the year and the uncertainty of fuel price patterns and weather recovery we remain cautiously optimistic about our outlook for the second half of the year.
Looking at the entire year we still plan to renew approximately one-fourth of our contract business this year at the dual mutual increase levels approaching double digits. We expect grain rates to now higher than 2007 based on changes we saw on the first quarter and spot contracts we have already booked for the peak season, but we expect our grain volume to be down year-over-year. We will be adding approximately 30 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 through our legacy contracts as discussed previously. We still plan to sell approximately 295 barges for external and internal customers making up the majority of the production miss we had in Q1 due to weather related delays. Approximately two-thirds of these will be dry covered hoppers, dry hopper barges, 30% will be liquid tank barges and 2% will be ocean going vessels and as mentioned earlier we plan to build approximately 30 liquid tank barges for our ACL transportation segment with delivery of those expected in the third and fourth quarter.
We plan to spend approximately $110 million to $120 million in capital expenditures during the year for continued upgrade of our vessels, our barge fleet, our facilities as well as for the 30 new liquid tank barges.
Now I’ll turn the call back over to the operator for questions.
(Operator Instructions) And your first question comes from John Larkin, you may proceed.
First question related to perhaps little more information you can share with us regarding the covenance that you are apparently thinking you can pump up against your -- in the coming couple of quarters. Is there one particular covenant that is the type is -- could you define what that is and then let us sort of asses as to how much levy you have there currently.
The covenant that would be of issue would be the leverage covenant and the reason for that is it’s currently at the 3.25 to 1 leverage. At the end of the second quarter it sets down to 3.0. I don’t want to give any information as to the forecast -- because it is the forecast that somewhere we will send at the end of the quarter in terms of the covenant, but as I said on the call, we have a number of various alternatives available to u s that would enable us to stay in compliance and one of those options being an amendment of the credit facility, but we are in a compliance at the end of the first quarter and we believe we have various options to remain in compliance at the end of the second quarter.
Have you commenced discussions with the Bank group regarding an amendment?
We are always in discussions with the bank group and that’s just one topic that would generally come up in terms of what the status of our covenance is. Again we are just always in discussion with the bank groups.
That’s very helpful. Had a may be a broader question from Mike regarding your targets to move the mix of business towards less cyclical or less seasonal, less profit market oriented business and it seems like you are making some pretty good progress there. I guess the question is where is this business coming from; how of it is coming from rail, is any of it coming from other modes and what is the competitive reaction here; are you having to discount to capture incremental share in these more attractive segments? How is that planning out for you?
Actually the volumes that we are attracting; there is two real streams and some are expansions of existing flows whether its raw material or intermediate products that we are starting to assign more equipment to and starting to handle, so we are seeing expansion it with customers that we have today on their existing water program but we do have wins here and in contract and ratable basis that is coming from the rail road and that we -- you really don’t have to prices it that aggressively because its already at a pretty -- fairly decent price. It’s more a service related event that we have been able to provide a multi movable solutions to as far as an option to rail.
You think there is enough market opportunity out there to reach your ultimate revenue portfolio mix objectives without having to take traffic away from other barge operators?
Yes, actually we will continue to compete for water borne traffic but from the ACL prospective and also from the overall barge prospective I think the share that is distressed at this point on the land base business is really a primary target for all the barge carriers and I know that we’re pursuing that aggressively and it’s a sizable amount and it’s in a number of different lines of business.
Okay thank you very much for that and then just may be one final question. I had heard this from an account that I was speaking with earlier in the week and the question is on these legacy contracts on the manufacturing side you have seen in other industries where companies have gone back to their customers and said “hey look, we made a mistake. We really should have included more of a complete inflationary clause in the contracts in order for us to be here for you” three and five years from now we need to talk about perhaps some sort of a modification. Have you attempted to do that and if not why not?
Well I wouldn’t I won’t talk about specific conversations that we’re having but there is two elements here that are favorable for us; one is the continued productivity improvements at the shipyard that allow us to improve our own position on margins there on any business, so that’s working in our favor. The other is -- and it really happens on the transportation and the manufacturing side; whenever either party revisits deals, its always an opportune time to take a look at what you didn’t do or what you wish you had done and revisit those topics and that comes up quite often on both sides of the table transportation and manufacturing. So we take every opportunity to do that.
And your next question comes from Jimmy Garbet [ph]; you may proceed.
I have a question here. We have been hearing about scrapping prices that are a little surprising to us, much higher than they were probably at this time last year. I mean last year for a jumbo hopper I think the company had talked about $25,000 to $30,000 from a scrap yard for a jumbo hopper and now we are hearing these prices are up at 90,000. Do you -- and also if you could talk about that for a second and also can you give us the number for revenue from scrapping in the quarter that was in the transportation segment, can you break that out for us?
Before we go into the specifics, your right Jimmy the scrapping prices have jumped and it really is a -- it’s an interesting food chain here. We enjoy parts f it and we suffer from other parts of it, but it does influence the speed with which you move units into scrapping versus putting them into maybe a contract run of business that doesn’t require as high quality of bars. So that’s really been a change for us as far as examining the units for immediate use from scrapping revenue or put ting it into service. Tamara I’ll let you talk about the details of the scrapping.
Sure, we scrapped 70 units during the quarter, some of those were our own barges and some were third party barges and then in addition we sold 8 barges to a whole sale supplier and the income that we got from the scrapping was about $2.5million in the quarter and then there was another $200,000 of gain that we recognized on the units that we sold to the third party.
Okay and then also I want to ask a question about the shipyard. Like I see $2 million in cost savings through essentially labor efficiencies or increased productivity at the shipyard in the first quarter. Can we add that to 2Q, 3Q and 4Q. Would you anticipate those costs to stay where they are going forward?
I think we will continue to see productivity improvements in the shipyard, however we do have a mixed dynamic going on throughout the year. In the first quarter we produced a number of dry hopper barges which is where we realized a lot of the productivity dollars. We will produce dry hoppers gain in the second quarter but then in the third and fourth quarter we are producing incrementally all tank barges. In fact I think you will be able to translate all that productivity. I think it’s too soon to tell whether we will be able to translate all that productivity into the balance of the year, but certainly we are continuing to focus on it and driving those productivity improvements throughout the year.
And on the legacy it seems they are atleast some what profitable, but you finished your early legacy contracts in the first half of the year and then in the back half as I understood it, most of the contracts will not be legacy contracts. Is that correct?
There will be legacy contracts built throughout the year. The difference in the second half of the year is that we won’t have as many barges built for external purposes, because that’s when we are building the tank barges for ourselves, but there will be some legacy contracts primarily tank barges built in the second half of the year but certainly compared to the first quarter and the first half it will be below estimate.
Okay and then I just have one more question. I wanted to just talk for a second about coal. We understand there is a large number of incremental barges that work on the incremental system for export coal versus last year. So my question is are you guys participating in this business and can you talk about to what extent and what effect that might have for you.
We are Jimmy that the -- the coal that’s coming off of the Western Railroads and in some cases it’s coming off the regions like the Illinois basin are hitting the river and creating this export flow, this export demand. We are participating in that with several new contracts. A couple of them were signed in the fourth quarter and then a few more here in the first quarter. So it’s quite a bit of demand. We are trying to not bite off more than we can chew on it because what we are trying to do is match that demand up with north bound returns. We don’t want to just move those units south and leave them empty in the gulf, so what we have been able to book, we booked in round trip service, so the economic worked for us and we are able to still offer a competitive price. As much of it as you can chew on, but we want to be responsible on how much we actually bring on here. We did bring on a nice amount here in the first quarter though.
So what I mean it sounds like so the back hall is an issue, but it sounds like your back hall tone mile up 15% year-over-year in the quarter and I don’t know if I heard that right, did I hear that right?
Yeah we are matching up these moves. Once they have made entry in the gulf we are matching them up for loads coming north. So we have managed that pretty well so far with the volumes we booked.
And just one last question and this is a coal question. We know that the TVA had put out all of their coal movements – or they had a request for proposal, just to see what was going on. Did you guys participate in that and can you talk about that or is that something you just can’t talk about.
No, it’s an ongoing event right now right now we are participating in it and it’s a very competitive event and we remain optimistic at our chances for both the services and a economic package.
Okay, so have you gotten any of that signed up yet or is that still.
That’s still a negotiated issue, that’s still ongoing Jimmy.
And your next question comes from Ken Houser please proceed.
Hi, this is Jeff Lowery stepping in for Ken Houser he is traveling today. My first question I was wondering if you could just give some more color on the weather issues, you are seeing right now. I don’t know if I caught this right but you said that the conditions are worse than what was seen in the first quarter and also could you highlight some of the areas on network that are in particular trouble?
I think that what we are seeing now is some of the areas that we were dealing with in the first quarter where more -- they were more centrally located. We had specific areas on the river where in on the Ohio River we had a foot of rain and so it was more centralized. I think what we are seeing now is a more extensive delay pattern where we are seeing locks and dams that are closed on the upper Miss right down to release efforts that are taking place on the lower Miss and the Arkansas River, so I think it’s just an expanded element that we are dealing with now more so than in the first quarter and that’s why we say the delays are not something that if you get past it you are in the clear. You are dealing with it along the entire system the as the high water works its way out Norbert Whitlock is with us here today, he our head of operations and he might have some color to add on this as well.
Jeff just to add little additional color, we are having flooding conditions on the upper Miss currently; the locks have been out of service. Many of those are forecasted to go back into service today with the last one scheduled to go back in service on Friday. I will tell you however there is rainfall forecasted in the upper Mississippi basin so we will have to wait and see what impact that has. We are continuing to be impacted with daylight running through what we would term kind of the restrictive bridges on a lower Mississippi from (inaudible) and those daylight running restrictions will stay in place until the river drops out another 10 foot or more and before we get back to normal also tow size restrictions are in place today and will continue to be on the Mississippi until those gages lock at Back ridge which is currently at about 38 feet drops down to about 28 feet. So we have about 10 more foot of river fall before we are back to what I would term normal operating conditions.
Okay, great and I guess switching gears to the manufacturing side. I know last quarter I think Tamara you said you expected all of the legacy options to be exercised barring any difficulties getting access to capital and financing and you reiterated that view on this call. I was just wondering going forward, how big of a risk do you see the credit crunch factoring into not renewing those legacy contract options; is that material or is that minimum.
No I think that would make a minimum. The way these contracts are priced, I think they are going to do everything they can to exercise them.
Okay, great and then just one more question an industry question, with the increased scraping prices you are seeing how do you see the scrapping of dry cargo barges, particularly the increase from the income tax credits from 79 to 81; did you see a lot of those being pulled forward now when the prices are higher, what’s your outlook for the scrapping on the dry side and then also could you comment on the liquid side.
Well, the numbers that we stated are really not forecasted change at all. We are looking at taking 180 barges out and we won’t be pulling anything forward to catch any scrap prices. If they are doomed to go they are gone and those are the ones that were are going to end up scrapping.
Yeah and now just that I think we will see -- continue to see some acceleration on the public barges that we have been scrapping. We have ramped up our program there to try and take advantage of the pricing that we are seeing in the market place.
Your next question comes from Alex Bran you may proceed.
Let’s see; let me start with the liquid. You said you are still -- that you are still tracking and still planning to do 30 for yourself in the second half I guess I have two questions there; how much if any scrapping do you need to do -- so is that -- is there any portion to that that’s a replacement or is it all incremental and then is it too early or do you have some thoughts as to customer targets and part of the river that might make sense to be putting those barges in.
Tamara is just double checking the number right now. The replacement number is three that we are looking at for units on the liquid side, so the 27 will be net and that adds to the fleet. Those barges are all booked, so they’ll go into combination of places. You will see some in that remaining gulf service and you will see some that are for new moves up river or to compliment or supplement current moves up river, so you will see a good mix and they are all being booked at the top end of the pricing markets that we have on the liquid side, so it’s a pretty healthy program.
And Mike you say both they are under long term deals?
Obviously we won’t get a lot of financial benefit from this year because they are coming so late in the year but certainly we will expect a full year benefit next year.
Is it reasonable to think about this as 15 in the third quarter and 15 in the fourth or is more back end loaded than that.
No we would say it’s still little more back end loaded than that; probably about 25% of them coming in the third and the rest coming in the fourth because of some of the delays that we had due to the production schedules footage in first quarter from the weather.
Okay, and just on the liquid theme for a second and this is probably a new point since you have just described your outlook for liquid as pretty well locked up. Liquid rates only up 7% in the first quarter, what -- to what can I attribute that?
One of the things that we saw in the first quarter was our mix of 10 miles with a little off from our normal historical patterns. I think it came because of the weather conditions and things that we saw when you look at our rate on a 10 mile basis it wasn’t quite as high as what you would have expected with the renewals. I think we will start to see that improve into the second quarter and beyond because of some of those mix differences settling out.
Okay and Mike it sounds like you guys, you’re still reluctant to give any specific guidance but perhaps directionally we could just talk about you said Q2 -- I think your words were very challenging may be more challenging then Q1. I think you said half, cautiously optimistic; is there anymore color than that you want to give or may be could even explain fuel recovery for example should we be thinking that you get some ketchup on the fuel so may be that begins to help your results by the second half of the year. I just think some directional commentary if not specific guidance would be very helpful.
Yes, we are waiting for this to flatten, we are waiting for this spike on the fuel side to at least flatten. The recovery mechanisms are set for -- are catching up with the fuel and that’s the issue where it just stays out ahead of us, so its difficult to forecast an impact to that when we can’t get a handle on when this might hit a flat out. So that’s part of the reason or a major reason why we can’t really predict where that’s heading, but the access that we talked about trying to control the spend that we have, trying to position ourselves with more of a hedge on fuel where we can on the total spend and having some -- using some form of leverage that we have just on our own size with vendors who are on a random basis just raising their rates dramatically and using some of that overall business in the near term and the long term to try to negotiate more competitive deals for us, but it’s about us challenging as it gets to forecast it right now. So I think what we spelled out were things that we intend to apply or are currently applying and at the end of the next quarter we will be able to share with you how effective we were doing that.
All right can you just tell me before I drop off here; I think you had been tracking like a high 90% for fuel recovery in later parts of last year, can you give us what that percentage recapture was in Q1?
That’s about 85% in Q1.
And your next question comes from Chaz Jones you may proceed
Wanted to get back and may be focus on grain even though that’s going to be less of a focus for TCL moving forward, but maybe if you could help me understand the volume decrease a little bit better. Obviously moving into ’08 we kind of expected a pretty solid if not record year for coal and exports and certainly the rails if you look at their data points, seem to be enjoying that here in 2008. I guess what I’m getting to is the impact to the barge transportation side, is that being driven more so from the operating conditions or is it more of the spread that continues to favor the specific North West versus the gulf coast export market.
That’s terrific, it’s rather thrilling on both. I mean when you look at it the operating conditions that we have, have really hurried us, because we did have a book of business that we were ready to handle as were most of the other people on the river, most of the other operators on the river. So that interruption has been -- has really hit us on our grain handling. We don’t have a -- we haven’t gone to zero in grain but we still handle thousands of barges a year and grain even with a smaller programs. So the weather impact really did a number on us, but when you look at that spread between the West Coast, the Pacific North West and the Gulf, you still have a spread of between $60 and $70 a tone, so the program going off of the West Coast, the BM program and things like that, they have very strong draws away from the river still, so the combinations of those two things are pretty strong working against us. Now with that said what didn’t move still has to move and one of the things we use in forma for a lot of our information and tracking and they’ve shared with us a similar pattern here from around the 2001 time frame where you saw this type of interruption come back out with a bit of a summer spike, as the water levels dropped and the locks and dams re-opened. So their forecast is for that type of a surge here in the third quarter, the end of second, beginning of third quarter, so we’ll probably see that same type of event here and probably see the same type of pricing too because it’s all going to want to move at the same time.
Okay and then one last one, don’t mean to try to forecast mother nature here, but just given what we’ve seen in terms of weather and patterns so far in 2008 I mean is there the potential given all the rain that we’d had that crop yields were actually down significantly for corn in the ‘08, ‘09 harvest and that’s going to be a big draw on corn exports as we move out later in this year and into the early part of next year.
I think it is a concern. I think you the later you get the more likely you are to plant beans instead of corn. The numbers to watch for us are really directionally we are anything over $2 billion export bushels. It is a huge export year and one that really pressurizes the water system and it’s at 25 USDA and a little higher than that in former projection for this season. So I think you may see some fewer plantings on the corn side, but I think you are still going to see a huge volume that needs to still be exported.
You have no questions at this time. I would like to turn the call over to Mr. Mike Ryan; please proceed.
Thank you. In closing let me add that despite the major challenges that you’ve heard and listened to here on the call today, our strategy remains the same. It’s to diversify our portfolio and to take liquids, the percentage in liquids higher to the 40% level as we did in the first quarter going to 30% for the first time. We still are looking to grow organically with more new high margin business like the new wind energy components we moved in the first quarter to continuously improve our processes and profitability as we did at Jeffboat in the first quarter and to continue to reduce waste cost and redundancy in the business as we did cutting $3 million in SG&A out in the first quarter. So our strategy does not change and the challenges that we are facing just galvanize our determination to make this happen and we will make this happen. So thank you for participating on our call with us today and I look forward to addressing all of you again at the end of the second quarter.
Thank you for attending today’s conference. This concludes your presentation. You may now disconnect. Good day.
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