Hub Group, Inc.
Q3 2009 Earnings Call Transcript

Published: 22 Oct 2009

[Operator:]

Good afternoon and welcome to the Hub Group third quarter conference call. We will begin with the discussion of the financial results led by Terri Pizzuto, Executive Vice President, Chief Financial Officer, and Treasurer, followed by an overall business discussion to be conducted by Dave Yeager, our Chairman and CEO. The company will make its prepared presentation followed by a question-and-answer session. Mark Yeager, Vice Chairman, President and Chief Operating Officer, will join us for the question-and-answer session. At this time, all participants are in listen-only mode. Comments made by Hub Group employees during this conference call may contain forward-looking statements. Actual results could differ materially from those projected in these forward-looking statements. Our SEC filings contain additional information about factors that could cause actual results to differ materially from those projected in these forward-looking statements. Copies of these SEC filings may be obtained by contacting the company or the SEC. Now, I would like to introduce Terri Pizzuto, the Chief Financial Officer of Hub Group.

[Terri Pizzuto:]

Thanks, Sherika, and thank you all for joining us. I want to begin by covering three things. First, operating margin is higher in the third quarter than any other quarter this year. Second, intermodal volume improved as the quarter progressed. And third, Hub yield initiatives have significant gross profit potential. Here are the key numbers. For the third quarter, Hub's diluted earnings per share was $0.26. Hub's third quarter operating margin was 4.1%, that's compared to 5.3% in 2008. Operating margin is higher than the 3% we had in the first quarter and the 3.7% we had in the second quarter of this year. At the end of September, we had a $123 million in cash and no debts. Now I’ll discuss details for the quarter, starting with revenue. Intermodal revenue decreased 27%. This change includes a 12% decline for fuel and 9% volume decrease, a 4% price decrease and the 2% decrease per mix. While our intermodal volume was down 9% for the quarter, our customer direct 53-foot business, which is the biggest piece of our intermodal business, was only down 4%. Our wholesale business, which is the business we do with other intermodal marketing companies, was down 61% due to price pressure. ISO business, which is business that we handle, that’s mostly in 40-foot international containers, was 28% lower than last year. ISO business was down because of periodic shortages of equipment and competitive pricing. ISO and wholesale together represent only 8% of our total volume. We’ve now experienced the full impact of the bids, which is why price and mix were down 6%. We expect that trend to continue into the fourth quarter. Truck brokerage revenue decreased 27% due to 4% lower volume, 15% lower fuel, and an 8% decrease for price and mix. Mix changed because our length of haul went down by 4% or 31 miles. Truck brokerage volume is down 4%, but it was better than the 6 to 7% volume declines that we saw in the last three quarters. We also had a tough comp this quarter, since we had the hurricane-related work in 2008. A couple of other highlights in truck brokerage are the gross margin as a percentage of sales increased by about 250 basis points, compared to last year and we had 40 new customers in the top 50 growing customers. Logistics revenue was 2% higher than last year since we brought on a few new customers. We think this sale trend will continue in the fourth quarter. Gross margin as a percentage sales was 12.4%, that’s up slightly from last year. Total gross margin went down by $15 million. The biggest driver of that decrease was intermodal. In order of magnitude, the intermodal margin decrease was due first to price, second to mix and finally to volume. These declines were partially offset by cost reductions that came from better management of our drayage operations and other margin initiatives. Total costs and expenses were $32.3 million in the third quarter of 2009, compared to $35.9 million in 2008. The main reasons for the decrease in costs are lower headcount, bonuses, commission and travel. We had a 1,029 employees excluding drivers at the end of September, that’s an increase of 13 people compared to the end of June. We added people in logistics for new customers that we are bringing onboard and a contract for our new terminals. We think that our cost and expenses in the fourth quarter will be between $32.5 million and $33.5 million. Now, I will discuss 2009 full year earnings guidance. For 2009, we are comfortable that our diluted earnings per share will be within the current analyst range of between $0.82 and $0.91, assuming there is no further deterioration in the economy. Weighted average diluted shares for 2009 are estimated to be $37.5 million. Turning now to the balance sheet and how we used our cash. During the quarter, we only spent $600,000 on capital expenditures. We'll probably spend $3 million on capital expenditures in the fourth quarter. Free cash flow was $9 million in the third quarter. To wrap it up for the financial section, we are proud of our strong balance sheet and our focus on reducing costs during this economic downturn. With that, I'll turn it over to our CEO, Dave Yeager.

[Dave Yeager:]

For the third quarter, Hub's intermodal volume declined 9%, which was actually a little bit better than we had forecasted just a few months ago. We are particularly encouraged that the volume declines lessened as the quarter progressed. Part of this is attributable to some new business wins, but, overall, we believe that business conditions are better and have become more stable. During the quarter, we saw what we hoped is the bottom of the freight cycle with freight volumes slowly coming back. We expect that our volume will be down in the fourth quarter in the 4% to 8% range. Due to the economic downturn and a lesser price environment, our gross margin did decline substantially during the quarter. As margins have declined, we have continued to maintain tight controls on our costs. The difficult cuts we made earlier in the year have enabled us for the second quarter in a row to reduce our costs and expenses by $3.6 million. Service improved on all railroads during the quarter, compared to last year with the Union Pacific showing the largest improvement. The trains ran faster than last year with improved on-time performance and because of this improved service, feet utilization was excellent. Even though our UP fleet was substantially larger, the utilization of that fleet actually improved year-over-year. For much of the third quarter, capacity was plentiful. However, we started seeing some significant equipment shortages on the West Coast in September. Equipment has also recently become tightened in gateway cities of Memphis, Chicago, Kansas City and St. Louis. So the good news out of that is that unlike last year at this time, we are experiencing a peak shipping season. The only downside is that it’s unclear at this point how long peak will last. We are hopeful that this seasonal increase signals a return to more normalized shipping patterns. The transition of our fleet to the Union Pacific was completed during the third quarter. This process went smoothly with no operational issues. This transition to the Union Pacific the last four months has been seamless to our customers and the reaction of these customers has been very positive. We believe we are poised to gain share as we benefit from having our fleet primarily concentrated on the Union Pacific River. As we discussed last quarter the UP and NS intermodal business models complement Hub Group’s asset-light business model. There is significant fleet that operates on both of these networks, but we can also take advantage of containers of these wherever it’s supplied. We remain the largest user of these rail containers which gives us the ability to flex our capacity up or down, as necessary. Now despite the drop in demand for truck services, Comtrak, which is our wholly-owned drayage company, managed to grow its volume during the third quarter. Much of this volume increase was in the Eastern region where we have seen an overall growth in business levels. On the regulatory front, Comtrak has been working on complying with the California Air Resource Board, or CARB, regulations, which are going to go into effect on January 1, 2010. These rules state that only tractors meeting certain emission standards will be allowed to enter ramps in California as of January 1, again 2010. Comtrak will be compliant by the state. We are also working closely with a third-party drayage partners in California to ensure that they also will be compliant. While there is still some work to do, we fully expect to have adequate capacity that’s in compliance with these rules by January 1. Our brokerage volume was down 4% in the third quarter. We did bring on some new business earlier in the year, they partially offset the lower volumes of existing customers and we do continue to improve the efficiency of this business. Operating productivity per load improved by 20.7% year-over-year. In this market, where capacity is plentiful, we are able to buy better, which improves the gross margin. There remain significant excess capacity in the truck market, and although we are seeing some spot shortages now that where in peak season, we anticipate that the tightness in capacity will last as peak subsides. Unyson Logistics had a steady quarter with revenue up 2%. We will be on boarding some additional business in the fourth quarter and we expect to see continued growth from this business in the quarters ahead. Unyson recently won the Quest for Quality Award from Inbound Logistics Magazine. This is the second year in a row that Unyson won this prestigious award, which is determined by customer survey data. We believe that this award will flex the success of Unyson’s efforts to closely work with our customers to engineer strategies that more effectively control their supply chains, and by more effectively controlling supply chains, these customers are saving money. One more upbeat note is that Hub has recently been recognized for commitment to the environment by receiving the SmartWay Award. For the second year in a row, the US Environmental Protection Agency awarded Hub Group its SmartWay Environmental Excellence Award. Hub was one of the three logistics companies to receive this award. We earned this honor because of our continued leadership and conserving energy and lowering greenhouse gas emissions. We will continue to partner with our customers to help them convert from truck to intermodal, thereby saving money and reducing their carbon footprint. In conclusion, despite a brutal pricing environment, our intermodal franchise protected its market share through this downturn. Although we have had to sacrifice some short-term margin to do so, we have preserved our longstanding customer relationships and are also growing with some significant new accounts. Hub's fleet conversion to the Union Pacific has been flawless, and we believe that this partnership positions Hub well for the future. Our intermodal volume while declining did improve through the quarter, and although the economy, still there's a long way to go, we believe that the future remains bright for intermodal due to the excellent service [whereas] cost advantage over truck and the environmental benefits. With no debt, strong cash flow and improving operational cost model and excellent customer and vendor relationships, Hub remains well positioned to take advantage of what is hopefully an improving economy. At this time, we will open the line up to any questions you may have.

[Operator:]

(Operator Instructions). You have a question from the line of Edward Wolfe of Wolfe Research. Please proceed.

[Edward Wolfe:]

What does it mean that there is a peak? In terms of volumes in October to-date and September versus a year-over-year in July and August, what are you seeing as a pickup when you say there's some equipment shortages and you really feel the peak?

[Dave Yeager:]

Well, in Southern California, in particular, we are seeing equipment shortage although and really is beginning to affect the entire country. It's just that the retailers appear to be restocking their shelves to some extent. We're seeing a lot of increase in Mexico. There is just more consumer products. So we have products that are sold in retail stores as well as consumer products that appear to be being shipped right now. It’s always seasonal as the retail stores begin to stock their shelves for the holiday season that we would normally see this type of an increase. We’ve seen it as early as August 15 and those late as through January of next year. We just don’t know how long this is going to go at this point, but it certainly is a peak right now.

[Edward Wolfe:]

When did it began and how do you think of since we didn’t have a peak a year ago, how the volumes are improving as you go year-over-year, how it is so far in October and how are they, can you take us through September and August and July that kind of thing, how it’s ramped up?

[Dave Yeager:]

Well, they did improve through January, August and September and continue to improve thus far in.

[Terri Pizzuto:]

Yes. Through July, August, and September, they did every month. They went up ahead. It’s too early in October to tell you how we’re doing, because we only have measurements through 15 days of October. It certainly looks better. So what we think fourth quarter will be down between 4% and 8% with intermodal volumes.

[Edward Wolfe:]

That’s relative to the minus 9 year-over-year in third quarter?

[Terri Pizzuto:]

Correct. We think right. So we think when you compare fourth quarter ’08 to fourth quarter ’09 will be down between 4% and 8% and we were down 9% in Q3.

[Edward Wolfe:]

As things have tightened, are the rails and/or are you putting in any kind of peak surcharges?

[Dave Yeager:]

No, the pricing is pretty well set for this year. I mean it was a very good season and the pricing is pretty locked in right now. You do see some of the guys that have more of a transactional business model attempting to secure higher rates out of the West Coast for us anyway. We are pretty well locked in where we are.

[Edward Wolfe:]

Terri, in the EPS guidance range of 82 to 91, what do you have as the first, third quarter, the third quarters EPS. In other words, in first quarter ’09, what are you using as the number I think second, third?

[Terri Pizzuto:]

We are using the number we reported each quarter, which was $0.17 in Q1, $0.22 in Q2 and then $0.26 in Q3.

[Edward Wolfe:]

In terms of acquisitions, can you give a little bit update about what you are seeing in the marketplace and in your various businesses, what looks a little bit more likely versus of it?

[Dave Yeager:]

Well, obviously we are continuing to look very aggressively. To-date, obviously, we have not had any success on the companies that we have focused on, we come close to a couple but have not been able to bring a quite over to the finish line. Again our primary focus is on truck brokers, particularly those that they have business model than us would be very attractive to us, another IMC either with the different business model or one that’s similar could be quite attractive to us as well. The drayage for the most part, there might be a few regions that would be of interest to us, but for the most part I think that that we intend to grow organically.

[Operator:]

Your next question comes from the line of Alex Brand of Stephens. Please proceed.

[Alex Brand:]

Let me start on the [TO] brokerage, I think I heard volume down 4. What about the pricing mix and fuel components there?

[Terri Pizzuto:]

Pricing mix was down 8% and fuel was down 15%.

[Alex Brand:]

I just didn't hear that when you said it. Let's see. I guess, Terri, can you walk us through? You gave us some metrics on direct, wholesale, and ISO, can you break it down though by industry vertical? Like I'm wondering if what you are seeing in the quarter is consumer products an area you are seeing it in or one of the other segments and maybe you could just break that down for us and where you’re seeing things start to get better?

[Terri Pizzuto:]

Sure, I'll be happy to. As Dave mentioned, retail is growing well for us. That was up 15% in the quarter, because of some new customers that we are growing with. Consumer products on the other hand was down 11%, and that's due to one of our customers sold part of their business, and so that's pulling us down a bit there, and a couple other customers we lost to competitors, because we didn't want to meet their price, because that business was pretty price sensitive. Durable goods was down 11%, which is better than last quarter. That's not down as much as the 18%. We were down last quarter, because we picked up with some of the electronics companies, as Dave mentioned. Papers, down 10.

[Alex Brand:]

Okay.

[Terri Pizzuto:]

You want transportation, that's down 32%.

[Alex Brand:]

Now, I think I heard Dave say that in the East, you saw volume growth at contract, and maybe I shouldn't focus on contract. But just broadly, can you talk about eastern growth versus transcon shrinking or what however that worked out?

[Terri Pizzuto:]

Local east was down 5% for Hub overall, but we’re still seeing a lot of conversion from truck to intermodal with our large growing customers. What pulled that down this quarter was one of our large customers selling part of their business that change represents over half of our volume decline in local east in the quarter and was the biggest contributor to the decline.

[Dave Yeager:]

I’ll just give you a little bit of color as far as Comtrak. Those are relatively new terminals in the east. So as a result of that, I mean they are expanding it very aggressively, very rapidly, because we have a significant business base in those areas.

[Alex Brand:]

Is this an investment phase or is this hurting your margins overall until they get ramped up?

[Dave Yeager:]

Not really.

[Terri Pizzuto:]

No.

[Dave Yeager:]

No. I mean this usually have that type of a problem when you’re growing just by a few drivers and you’ve got a very small driver base, but we’ve been able to throw the driver base pretty quickly. So that it’s a sustainable from a profitability perspective.

[Alex Brand:]

Let me just ask one more and I’ll turn it over. Staying with the Eastern Rail thought. There is a lot of talk out there about deals with Eastern Rails that maybe one of your competitors gets a sweet heart deal with one of the Eastern Rail. How do you think about the environment, you’re obviously very happy with Norfolk Southern, would that change the competitive marketplace if something like that were to happen?

[Dave Yeager:]

Well, A, we don’t think it’s going to happen. We don’t believe that there is going to be a “court sweet heart deal.” Certainly, if it was to take effect, it would have a short-term impact, but again we really don’t foresee that occurring. We would be very, very surprised. We had a working relationship. Most of our business is on the Norfolk Southern. We do use CSX pretty substantially as well, but certainly NS has the bulk of our volume. So, we really do not believe that there is going to be a better deal out there. We think ours is quite compensatory to the Norfolk Southern and we will be competitive with anything that’s received by any other entity.

[Operator:]

Your next question comes from line of Jon Langenfeld of Robert W. Baird. Please proceed.

[Ben Hartford:]

Hi, this is Ben Hartford in for Jon this afternoon. If could start, could you just talk generally in the third quarter any benefits hat you had either from the drayage specific initiatives that you have going on and then the conversion? What type of magnitude are we talking about in terms of the benefit that you realized this quarter?

[Terri Pizzuto:]

In terms of drayage savings, we are making a lot of process there. We are very proud of our team that is doing that. So we are realizing savings from the dray bed, and in September, we saw better performance in terms of matching up inbound and outbound loads than we’ve seen in a while. So when we do that that saves us money. So some of those savings offset our margin decline in intermodal. We also have other margin initiatives with [Assetorial] and for instance we have got lower cost because we are working closely with our drayman and our customers to increase our container utilization by carefully monitoring our pools of equipment.

[Ben Hartford:]

Then, on the UNP side, you did talk about improved asset turns in the quarter do in part to velocity, which is understandable, but how much are you starting to see some of the early benefits post-migration specific to UP with that business in terms of improving utilization specifically through asset turns and the likes there?

[Mark Yeager:]

This is Mark Yeager. Yes, we definitely are. I think as David mentioned, we have seen a record utilization out of the UP fleet, and with the combination of the new operating model, which we are, I would still say in the early stages of being able to extract the potential benefits of that, but we are also seeing it because of the outstanding service that we've seen out of the UP as well. So those combined have definitely helped us improve our turns, get better utilization out of those boxes and get them where they need to be. So, so far the results have been very encouraging and I would still say though that we've got some value to extract.

[Ben Hartford:]

Sure. When do you feel like you'll be able to move from the early stages to where you are heading full stride and when is it? Is it months, quarters or is it a 24-month type horizon that you are looking at?

[Mark Yeager:]

I don't think it's 24 months. I think sum of the two is digesting the new traffic flows that we are seeing as a result of this debt activity. So I think we're going to be spending most of this fourth quarter, continuing to refine and be realizing more and more value over the course of time, but it's not a 24-month process by any means, it will always a cumulative process. It will always be something that we continually try to continue to route out new efficiencies, but at the same time I think will be very much tough and operating full steam in the new model into 2010 and really have extracted a lot of the value at that point.

[Ben Hartford:]

Then you guys mentioned obviously some of the tightness in capacity, some of the spot activity in the quarter, but when you look at some of the port volumes, there is a bit of disconnect between what we are seeing on the import side and really generally what we saw in the third quarter with respect to seasonality. So is there an explanation that you guys have been able to figure out that can explain that disconnect?

[Mark Yeager:]

You know the disconnect meaning that import volumes remain fairly soft?

[Ben Hartford:]

Yes, versus the seasonal sequential bill that we saw through the quarter both with you guys specifically and really broadly across the domestic freight side?

[Mark Yeager:]

Yes, it’s a little tough. I mean I think it’s not uncommon for the international market and the domestic market to be somewhat disconnected. There is no question. In terms of the Hub story, I think what we’ve been able to do is bring on some new accounts that have offset a lot of overall softness within the economy. I think some of our more successful competitors have been able to do a similar thing. So we are still not seeing the kind of transloading activity, for instance that we would see typically that would certainly show up in the steam ship numbers, but we are seeing a lot of for example Tier 1 activity with the electronics trade that I think David referenced that wouldn’t necessarily manifest themselves in port activity.

[Ben Hartford:]

Then on the wholesale side, obviously down this quarter, but have you seen an increase in conversations among IMCs in that business, given some of the uncertainty with their existing partners that may have risen during the quarter?

[Mark Yeager:]

I think the IMCs are certainly having some conversations. We haven’t seen a real increase in wholesale activity for us. A lot of that was driven by IMCs who felt the need to have freight on the Burlington Northern. If that service differential has lessened or gone away, you really haven’t seen as much need for the wholesale product as you had in previous historic periods. So we don’t anticipate that we are going to see a big pick up in the wholesale product offering going forward.

[Terri Pizzuto:]

Right. Unlike our total intermodal volume that improved as the quarter progressed, wholesale did not. I mean with that being down 61% isn’t even that great.

[Dave Yeager:]

So while we may protect our existing wholesale customers Ben, I don’t think we are looking for new ones right now, our whole networks had capacity anyway.

[Operator:]

Your next question comes from the line of Todd Fowler of KeyBanc. Please proceed.

[Todd Fowler:]

Dave or Terri, I guess a question about the guidance from a high level perspective, thinking about where you ran year-to-date from an earnings per share and backing in to the full year guidance gives us the range for the fourth quarter of $0.17 to $0.26, but it sounds like at this point volumes are going to be a little bit better than where they were at the second quarter when you laid out back half of the year. The range you laid out for the full year at this point, this just basically to say that you are comfortable at the low end and there could be some upside or is there something else that we should think about that binds are going to be a little bit better, but the earnings per share guidance for the fourth quarter is basically in line with where we were when you laid out the full year guidance?

[Terri Pizzuto:]

You’re right, Todd. We basically said, we are comfortable with the guidance the analyst range which was between $0.82 and $0.91, assuming there is no further deterioration in the economy. Whereas last quarter when the range was different, I think it was between $0.80 and $1.04. At that time, we said we felt comfortable with the low end of the range. So, a little different now only because the analyst range had changed.

[Todd Fowler:]

I guess nothing else coming through, I mean there is no from a cost standpoint or from a margin standpoint nothing different in the fourth quarter, I mean price is pretty much upside at this point and you got some visibility and where volumes should shake out at?

[Terri Pizzuto:]

Right.

[Todd Fowler:]

Terri, you made a comment about volumes firming towards the end of the quarter, can you talk a little bit about what happen with price during the quarter and I know that a lot of the rates were set, but at this point do you feel that if things [stay] consistent that you do have some leverage on the pricing side when it comes down to talking about price on a go-forward basis?

[Mark Yeager:]

Well, it took us years to really get price up to any degree with our clients' pricing dropping as significantly as it did this year. It's going to be a long process. This is not something that our customer wins, are not going to be something our customers give up easily. I think if we see less capacity in the system, in the market that could have an impact. You seen an increase in business that could have an impact, but once you give up these types of prices discounts that have gone through this marketplace, it's very difficult to recoup and certainly takes time to recoup.

[Terri Pizzuto:]

We have the results of the bids right now, which we got at the beginning of the quarter, and those will be good for a year. So that's why we felt comfortable saying that price and mix will also be down 6% in the fourth quarter.

[Todd Fowler:]

Let me ask you this way. I guess going into 2010, do you feel that pricing probably maybe if it doesn't go up, it doesn't go down? Then what are you seeing from some of your competitors, are there still people that even though things have firmed are doing things that you might not consider rational with regards to price?

[Dave Yeager:]

Of course, we work through the major bid season at this point. I think at this point, the rates are continuing to come in on the low side, where we traditionally see them. Again, we don't have the volume of bids that we had earlier in the year at this point in time. One, in fact, I think that we are pumping along the bottoms at this point. As far as 2010, that's a really good question. Again, a lot of it's dependent up on the economy, a lot of it's depending up on the amount of capacity that's within the marketplace and I think that will drive where pricing ends up.

[Todd Fowler:]

Then thinking about a little more in 2010, how do you feel about cost at this point? Obviously, you've done a good job and you always do on controlling costs as you think about where volumes are trending and I think you made the comment that the networks are close to capacity at this point. Are there costs start to come back in either incentive comp or wage increases or even more headcount? How do you think about costs from where we are at this level going into 2010?

[Terri Pizzuto:]

We’ll give a little more color on that next quarter when we release, but our intermodal model is very leverageable, so we don’t plan on adding many people there. Logistics as we bring on new accounts, we have to add some people as we did this quarter. For the bonus incentives that you talked about, the process for that is we do our budgets and then the Board looks at the budget, that’s an EPS target, that’s used for our incentive comp. So we haven’t gone through that whole process yet. As we do, we should have more information on that in the next quarter.

[Dave Yeager:]

The good news is that in fact, well, there is incentive comp in 2010, it will be because EPS is up.

[Terri Pizzuto:]

Yes. That’s right.

[Todd Fowler:]

Last one and I think we got part of the answer, but, Terri, can you breakdown again what the volume growth was in the eastern, what it was in the west? I think we got part of the eastern. I also want to be sure I think you said it was down 5%, but you had one customer that would account half of that. So if you exclude the one customer, are you saying the volumes would have around 2.5% and then what was in the west?

[Terri Pizzuto:]

In the west, our transcon volumes were down 16%.

[Todd Fowler:]

Did I understand the piece about the east correctly?

[Terri Pizzuto:]

You did.

[Todd Fowler:]

Okay, got you.

[Operator:]

Your next question comes from the line of John Barnes of RBC Capital Markets. Please proceed.

[John Barnes:]

Going back to your commentary on pricing and then you don’t have any visibility or limited visibility into 2010. If we get into next year and there are still some downward bias on rates. What point do you think you have to go back to the rails and start looking for some rate relief with the railroads and what’s your opinion on their willingness to negotiate, as they try to hold onto their own pricing power?

[Dave Yeager:]

Well, I think the way that they have actually worked with us on, but it’s on a count by count basis not so much a broad way decrease. So we will keep them in the loop as, if there is pricing pressure downward, which honestly I do not anticipate. I would be very surprised unless we have that proverbial WW and the economy falls yet again. We should not have downward pricing, but we would keep them a little, but we certainly would first time at the first site of more blood.

[John Barnes:]

Again sticking on that subject and it would be the dead horse here, but in terms of just the excess truck capacity and I know you are still seeing fair amount of activity on highway conversion to intermodal and that type of thing, but are you still seeing any pressure from traditional truckload players pursuing intermodal loads and has that been a culprit in the weaker price that you have seen?

[Dave Yeager:]

I think anecdotally we have seen some circumstances in which shippers were able to actually convert back to over-the-road versus intermodal because of low vol numbers that came in the door, not too much we would bid. Most of the time bids are segregated out intermodal or highway. We think the occasional shipper, who has shipped it back to the highway mode is normally or often times predicated on, wanting to come back if the market does shift back. So I can't say that that we would look at that as a major factor in the volume loss that we did suffer. Most shippers remain committed to trying to get as price as they can into the intermodal network, just wanted to make sense. Certainly, shippers are continuing to get calls everyday from over-the-road carriers looking for more break. There's no question about that, but most of the shippers we deal with I think have made modal determinations whenever they get that call.

[John Barnes:]

Then lastly just one more question on the cost side. I'm sorry if I missed this, but you are kind of keeping at levels, you've got a couple of quarters here and I guess it's kind of that $32.5 million range somewhere in that ballpark. I'm just outside of a popping compensation, incentive compensation as a result of things better. Axe that out, because we know that's going to influence it some. I'm just kind of curious as to how long do you think you can hold the line? We're kind of this 32 million, I’m just trying to get an understanding for how much would volume have to increase before you begin to see a major uptick in that level of cost. I imagine there are some volume-related costs that would add back in at some point, but can you hold the line on that longer and maybe we see some outsized margins as margins begin to recover, or will it be more immediate? The cost will show up as the volume show up.

[Terri Pizzuto:]

We think we can hold that for a while, especially with how efficient our intermodal operations are being on one western railroad right now, the great savings we are seeing, the reloads that we are doing and intermodal being so scalable. So we really expect to hold that fairly constant even when volume increases.

[Operator:]

Your next question comes from the line of Kevin Sterling of BB&T. Please proceed.

[Kevin Sterling:]

Real quick Dave, you talked about asset utilization improvement, how fast are you turning your containers these days?

[Mark Yeager:]

We’re doing better than two turns a month which is good.

[Terri Pizzuto:]

And better than last year.

[Mark Yeager:]

Yes, better than last year. We’re under 14 days on the UP fleet right now.

[Kevin Sterling:]

Do you think that kind of improved?

[Mark Yeager:]

If we can squeeze a little bit more out that, not a tremendous amount but we can squeeze a little more out of that.

[Kevin Sterling:]

Okay.

[Dave Yeager:]

That is very good utilization, Kevin. I think that that would be competitive with anybody else in this business. In fact, it is at the lowest levels right now, that we’ve ever seen the utilization, it’s the best. So our rail service is solid and I think we’re getting better too with the turns and the economy is improving a little bit. It’s helped us just with the amount of customer freight available.

[Kevin Sterling:]

Since you talked about CARB compliance, since you are becoming the CARB compliant on the West Coast, do you think there is an opportunity for you to pick up some additional dray business?

[Dave Yeager:]

That’s a really good question. We do think that there is some opportunities there. We’re being very aggressive in that market. We want to grow it, because there is going to be some amount of capacity that falls out with this. Some guys just don’t have the capital to be able to invest in the equipment. We are fortunately in the position where we can, and so there is definitely some opportunity for us to expand our drayage business in California.

[Kevin Sterling:]

Just one last question. You talked about pricing being weak, any particular lanes where you are seeing weak pricing?

[Dave Yeager:]

The transcontinental lanes from the East Coast to the West will be absolutely the most severe that we had seen. We had one carrier who has been a bit rationale out of Southern California to the east, which makes no sense at all, but nonetheless they were. So but predominately just to answer that question specifically, it’s [Northeast].

[Operator:]

(Operator Instructions). Your next question comes from the line of Edward Wolfe of Wolfe Research. Please proceed.

[Edward Wolfe:]

Asked and answered. I appreciate it.

[Operator:]

There are no further questions in the queue. I would like to turn the call back over to Mr. Dave Yeager. Please proceed.

[Dave Yeager:]

Well, again, thank you for taking the time to listen to our call. As always Terri, Mark or I would be available if you have any further questions and again thank you for taking the time to listen to the call.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.