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ACL's subsidiary Jeffboat LLC accounts for 22.8% of its total revenue, and is the second largest domestic manufacturer of dry cargo and tank barges.^[5] Jeffboat operates in a virtual duopoly, as its market share added to that of competitor Trinity is 99%.^[6] Jeffboat is in the early stages of replacing many of the old, outdated barges in the dry cargo industry, and it has a backlog of orders worth over $2 billion.^[7] The smaller liquid barge industry is soon to follow, as the average age of a fleet has increased by more than 20% in the past 10 years. ^[8]This, in part, is why Jeffboat accounted for 79% of ACL's revenue growth in 2007 despite its small size.

Vertical integration provides ACL's transportation segment with priority in Jeffboat's manufacturing schedule and the opportunity for collaboration between barge architects and barge operators. This will help the firm as it expands its fleet of liquid barges to meet the demand created by rising oil prices. While the rise in oil's price has its benefits for ACL, it also has a negative effect on the company's overall balance sheet since it signs long-term contracts with customers that prevent it from recovering fuel costs when these costs are rising. Higher oil prices combined with difficult weather conditions lowered net income by 51.9% in 2007. ^[9]

[edit] Business and Financials

The fortunes of ACLI have been tied to the health of the dry cargo industry. From 2005 to 2006 operating income nearly tripled, as contract prices in both the liquid and dry cargo industry rose over 20%. From 2005 to 2007, as grain transportation volume fell by 25%, the companies marine transportation revenues increased just 3%. Faced with slowing revenues but greater fuel and barge replacement costs, net income fell 30%. Overall, the company had revenues of $1.09 billion and a market capitalization of $795.93 million in 2007.^[10]

^[11][12]

^[13]

American Commercial Lines operates three business segments:

• Dry Cargo Inland Marine Transportation: ACL operates 14.8% of the dry cargo barges on U.S. waterways. Revenues from this segment account for 56% of ACLI's overall amount, with 34% of that revenue coming from grain transportation.

• Liquid Cargo Inland Marine Transportation: ACL transports bulk liquid products, and operates 13.2% of the inland liquid tank barges in the U.S. This segment accounts for 21% of ACL's overall revenue.

• Dry Cargo and Tank Barge Manufacturing: This segment accounts for 22.8% of ACL's overall revenue, but accounted for approximately 78.5% of its revenue growth in 2007. ACL, through Jeffboat, design and constructs both inland and ocean service vessels, and operates marine repair facilities. Jeffboat's subsidiary Jefflabs, researches new cargo and tank barge designs.

The earnings potential of ACL's dry cargo barges as measured by their average revenue/expense per barge fell to 1.14 in 2007. The measure shows the companies' vulnerability to external forces. Falling grain volume led to low revenue growth of 9% in 2007, much smaller than expense growth of 17% due to rising fuel costs and unfavorable weather. The company's growth strategy calls for the expansion of its liquid barrel capacity by over 15%. To finance that expansion, ACL has increased its debt to earnings before interest, taxes, depreciation and amortization ratio expense to 3.21 in the first quarter of 2008, just .04 less than its maximum of 3.25. If that ratio rises above 3 in the next quarter, the terms of ACL's credit agreement lets its lenders declare all amounts outstanding immediately due. As ACL would not be able to pay off all of its debt, it is seeking to amend those covenants. If the company is unable to do so, it will slow down its barge replacement speed.^[14]

^[15][16]

[edit] Trends and Forces

[edit] Rising Fuel Costs Increase Short-Term Costs of Marine Transportation

When ACL's predecessor company went through bankruptcy in 2003, more than 80% of its contracts were negotiated at a low margin: 27% did not contain fuel cost recovery clauses, 52% did not adjust for inflation as measured by CPI, and 81% did not compensate for rising labor costs.^[17] As oil prices have risen, so have the company's expenses. In 2007, fuel expenses represented 23% of transportation expenses, compared to 11.6% in 2003.^[18][19] As of January 2008, 23% of contracts were made during or before 2004.^[20] As these old and unfavorable 'legacy contracts' expire, further increases in fuel expenses will be mitigated, as 99% of new contracts include fuel cost recovery clauses.^[21] Even so, for newer contracts there is a 30- to 90 day lag before prices can be adjusted. Furthermore, fuel expense is a significant component of the costs of other fleeting, shifting and towing services that ACL uses. These costs are passed through to ACL in the form of higher rates, and cannot be passed on to customers. These services are necessary, as ACL's shipping and towing capacity cannot meet demand alone and fulfill its contractual agreements. ^[22] Nevertheless, the ton mile per gallon of fuel of one barge is 40% greater than a rail car, and 270% greater than a truck’s. A further increase in oil prices will lower operating margins but bring with it new customers and greater revenue as companies are forced to find cheaper alternatives for their transportation needs. ^[23]

[edit] Both ACL's Barging and Manufacturing Operations Can be Disrupted by Adverse Weather and River Conditions

Like other shipping and transportation companies, ACLI is hurt by adverse weather and river conditions. Both of the company's business segments are vulnerable to unfriendly weather, especially the impact of hurricanes on its revenues. Equipment and facilities will be damaged, and transportation delayed. A number of Jeffboat's manufacturing operations are conducted outdoors, leaving them subject to weather delays, flooding, and damages. In 2007, adverse weather events lowered the company's gross profit by $4.7 million. In the first quarter of 2008, the number of days in which barges were unusable rose 70% compared to last year, due to inclement weather.^[24]

[edit] Rates and Volume for Grain Shipments Are Volatile, Pressuring Operating Margins and Profitability

Each grain shipment is made under a spot market contract, which is based on current market prices. All future shipments are made under their own contracts. Grain prices and volume are influenced by a number of factors, including global economic conditions, domestic and international agricultural production, and weather conditions that affect harvest volumes. In 2007, grain volume fell by 25%, lowering its share of the company's transportation revenue from 24.8% to 19%. This contributed to a fall in gross profits of 25% in that year. If grain prices fall or volume continues to decrease, the company's dry cargo transportation segment will suffer. Predicting future prices and volume of such a volatile commodity is difficult, which is why ACL has set the goal of earning no more than 10% of its total revenue from grain transportation in the unspecified future. ^[25]

[edit] The Liquid Transportation Industry Is Growing Much Faster Than The Dry Bulk Transportation Industry

ACL earns 27.3% of its transportation revenue from liquid cargo contracts, and 72.7% from dry cargo contracts.^[26] Liquid transportation currently represents only 15% of the overall inland marine transportation sector, but this sector is growing. In 2007 the volume of liquid cargo transported increased by more than 10%. This growth has been fed by growing demand for petrochemicals, of which production has increased by 3%, 8%, and 1% in the first, second, and third quarters of 2007 respectively. Many petrochemical production facilities are on the U.S. Inland Waterways, translating greater production into greater domestic transportation needs. ^[27][28][29] In comparison, the volume of dry bulk shipping fell by approximately 10% in 2007. In light of this inequality, ACL is increasing its position in the liquid industry. Furthermore, rates for shipping liquid products rose 15% more than for shipping dry products in 2007. In 2008 ACL will begin production of enough barges to add about 15% to its current liquid barge barrel capacity, while retiring over 20% of its dry cargo fleet.^[30]

[edit] Competition

American Commercial Lines is the second largest company by revenue in each of the three industries in which it operates: bulk inland liquid and dry cargo transportation, and dry cargo and tank barge construction.

[edit] Comparison to Ingram Barge Company

Within the dry cargo transportation industry Ingram Barge Co. is the largest inland barge operator, with about 33% more barges than ACL. The two companies compete primarily over prices. Ingram, like ACL, intends to expand in the liquid transportation industry.^[31] However, the average age of Ingram's fleet is 4 years younger than that of ACL, so ACL will use this opportunity to retire 20% of its dry cargo fleet and increase liquid transportation capacity by 15%. Within the liquid transportation industry ACL already has more than double the barges than Ingram, and the average age of Ingram's liquid fleet is 28.5, approximately 26% higher than ACL's. This gives ACL an advantage over its competitor in this fast-growing sector. Ingram's liquid fleet is in a replacement cycle, but faces a delivery delay of over a year. ACL, on the other hand, owns its own barge manufacturing company.

Source: ^[32]

[edit] Comparison to Kirby Corp.

Within the liquid bulk transportation industry Kirby Corp. is the largest inland barge operator, with twice the number of barges as ACL. Its large fleet lets Kirby capture customers that want a single source for barge services, and lets the company quickly reposition ships to meet short deadlines. However, the average age of Kirby’s fleet is 33% greater than that of American Commercial Lines, meaning the company is likely to incur significant maintenance and replacement costs in the next decade. Due to barge construction backlogs it will take Kirby at least 2 years to replace all of its older barges.^[33][34] As ACL increases its position in the liquid bulk industry competitive pressures will increase. However, as long as demand continues to rise competition will not significantly impact margins.

[edit] Comparison to Trinity Inland Barge Group

Trinity has 58% of the barge manufacturing industries market share, compared to 41% for ACL's subsidiary Jeffboat. The two companies compete on the quality of manufacturing, design capabilities, speed of delivery, and price. As the dry cargo industry is in the early stages of a replacement cycle, both companies have a backlog into late 2008. Jeffboat's backlog is over $400 million, of which about half was priced at discount to compensate for late delivery times and compete with Trinity. ^[41]

[edit] References

1. ↑ ACLI 2007 10-K, Item 1, Page 4
2. ↑ ACLI 2007 10-K, Item 1, Page 5
3. ↑ JPMorgan Presentation March 19, 2008
4. ↑ American Commercial Lines Investor Presentation May 21, 2007
5. ↑ ACLI 2007 10-K, Item 1, Page 4
6. ↑ American Commercial Lines Investor Presentation May 21, 2007
7. ↑ JPMorgan Presentation March 19, 2008
8. ↑ American Commercial Lines Investor Presentation May 21, 2007
9. ↑ ACLI 2007 10-K, Item 7, Page 36
10. ↑ Yahoo Finance
11. ↑ ACLI 2007 10-K, Item 7, Page 47
12. ↑ ACLI 2006 10-K, Item 7, Page 40
13. ↑ ACLI 2007 10-K, Item 1, Page 5
14. ↑ ACLI 2006 10-K, Item 1A, Page 23
15. ↑ ACLI 2007 10-K, Item 7, Page 47
16. ↑ ACLI 2006 10-K, Item 7, Page 40
17. ↑ American Commercial Lines Investor Presentation May 21, 2007
18. ↑ ACLI 2007 10-K, Item 2, Page 19
19. ↑ ACLI 2007 10-K, Item 6, Page 30
20. ↑ ACLI 2007 10-K, Item 1, Page 8
21. ↑ American Commercial Lines Investor Presentation May 21, 2007
22. ↑ ACLI 2007 10-K, Item 7, Page 45
23. ↑ American Commercial Lines JPMorgan Presentation March 19, 2008
24. ↑ The Courier-Journal
25. ↑ ACLI 2007 10-K, Item 7, Page 44
26. ↑ ACLI 2007 10-K, Item 1, Page 5
27. ↑ Thomas News Petrochemical Inventories April 30, 2007
28. ↑ NPR Petrochemical Survey
29. ↑ NPR Petrochemical Survey
30. ↑ ACLI 2007 10-K, Item 7, Page 43
31. ↑ Ingram Investor Relations
32. ↑ ACLI 2007 10-K, Item 1, Page 11
33. ↑ KEX 2007 10-K, Item 1, Page 2
34. ↑ American Commercial Lines JPMorgan Presentation March 19, 2008
35. ↑ Yahoo! Finance
36. ↑ Yahoo! Finance
37. ↑ American Commercial Lines Investor Presentation May 21, 2007
38. ↑ American Commercial Lines Investor Presentation May 21, 2007
39. ↑ Yahoo! Finance
40. ↑ Yahoo! Finance
41. ↑ ACLI 2007 10-K, Item 7, Page 46