Hub Group, Inc.
Q1 2008 Earnings Call Transcript

Published: 30 Apr 2008

[Operator:]

Good afternoon and welcome to the Hub Group first quarter conference call. We will begin with a 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 Vice Chairman and CEO. And Mark Yeager, Chief Operating Officer, will join us for the question-and-answer portion. The company will make its prepared presentation, followed by a question-and-answer session. At this time, all participants are in a 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'd like to introduce Terri Pizzuto, the Chief Financial Officer of Hub Group. Please proceed.

[Terri Pizzuto:]

Thanks, Denise, and thanks, everyone for joining us. I want to begin by covering three things. First, we had a record quarter on a difficult comp. Second, we're excited about our strong sales in truck brokerage and logistics. And, third, our business model is resilient, even in this economic downturn, since we have different types of services to sell and we have a flexible pool of equipment. Here, are the numbers. For the first quarter, Hub's diluted earnings per share increased 21% from 2007 to $0.35. Hub's first quarter operating margin was 4.9%. That's compared to 4.6% in the first quarter of 2007. At the end of March, we had $39 million in cash and no debt. Now, I'll discuss details for the quarter, starting with revenues. Intermodal revenue increased 5%. This change includes a 3% volume decrease, offset by an 8% revenue increase related mostly to fuel. Dave will talk more about volume in a couple minutes. Truck brokerage revenue increased 20% due to higher volumes, pricing and mix. When we looked at the 50 truck brokerage customers that grew the most in gross margin, we saw that 16 of them were new customers. A few of these new customers are intermodal customers, so we're gaining some traction with cross-selling. One of the fastest growing truck brokerage customers is an intermodal customer that switched some of their freight to truck brokerage due to tighter delivery windows. Logistics revenue was 6% higher than last year, due mainly to new customers. As you know, because of a contract change for a large customer in mid-April of 2007, we now report net margin as revenue for that customer. Without this change, our logistics revenue would be up 27%. We lapped this change in reporting revenue last week. Why are we successful in bringing on new logistics accounts? Our customers tell us it's because of our technology, insightful reporting, deep understanding of their needs, and our expertise with inbound freight. For example, our inbound web portal marries up the customer's purchase order, showing what they want to buy, with the product the supplier has ready to ship. We then figure out how to consolidate and ship the freight to maximize savings for the customer. Hub's total gross margin grew by about $1 million. This margin expansion comes from the healthy results in truck brokerage, and logistics landing new customers. We're happy with this growth; especially since last year we had a one-time favorable vendor deal that added $2 million to gross margins. Total costs and expenses were $36.5 million in the first quarter. That's compared to $38.4 million in 2007. Most of that expense decrease relates to lower consultant costs, lease expense and personal computers. We expect that quarterly costs and expenses will be in the range of between $36 million and $38 million for 2008. We had 1,071 employees, excluding drivers, at the end of March. That's down 10 people compared to the end of the year. Most of the decrease was in intermodal, because we consolidated some operations. The gross operating margin was 4.9%, compared to 4.6% last year. We continue to work on improving this important metric by growing revenue, purchasing transportation more cost effectively, and critically reviewing employee cost and overhead expenses. The effective income tax rate for the quarter was 39%. Turning now to our balance sheet and how we used our cash. As I said earlier, we had $39 million in cash and no debt. We spent $850,000 on capital expenditures during the quarter. We didn't purchase any stock this quarter. That means we still have $75 million remaining under our current share buyback plan that doesn't expire until June of 2009. We're continuing to look for drayage and other acquisitions that are consistent with our strategic plans. Now, I'll discuss 2008 full year earnings guidance. Each quarter-end, we compare our full year EPS forecast to the publicly available analyst range. For 2008, we're comfortable that our diluted earnings per share will be within the current analyst range of $1.58 to $1.70. The weighted average diluted shares for 2008 are estimated at about $37.6 million. To wrap it up, Hub had a solid quarter. We increased operating income by 15% in a tough freight market. Our team has an unwavering commitment to continue this success. And with that, I'll turn it over to our CEO, Dave Yeager.

[Dave Yeager:]

Great. Thank you, Terri. Despite a weak freight market, we've started 2008 with another record quarter. We grew EPS by 21%, compared to an impressive first quarter last year. Our intermodal business was solid, and our brokerage and logistics businesses each had outstanding results. Intermodal service during the first quarter continued to improve on all four major railroads. In fact, service improved by double-digit levels on three of the four railroads. Improved service has multiple benefits for Hub and its customers. It allows us to compete more effectively against truck competition; it improves the utilization of our fleet; it reduces the amount of work we have to perform resetting deliveries, and helps our customers better manage their supply chains. Thanks in part to this enhanced rail service; we continue to see impressive utilization on our rail fleets. Our fleet management and equipment selection continues to improve because of our network optimization tool, which we implemented at the beginning of the fourth quarter. This software takes into consideration our network needs, line haul and drayage costs, equipment availability and other factors to make sure we choose the best routing option for each shipment. We've now retired all of our 48-foot containers, and therefore our fleet is comprised entirely of 53-foot containers. Our fleet additions are on schedule, and we expect by the end of the third quarter of 2008 that our total fleet will be about 10% larger than in '07. Somewhat surprisingly, given the economy, capacity was tight at times in certain gateway cities during the first quarter. We also saw a significant tightening in ISO, or 40-foot container capacity. For various reasons, including a weak dollar, there's now more export demand for those 40-foot containers, and fewer containers are being made available for repositioning with domestic freight. As Terri said, our intermodal volume declined approximately 3% in the quarter. A significant driver of our volume decline was lower business levels from our existing customers due to the soft economy. It's no secret that the current economic conditions continue to hurt our three major market segments, being retail, consumer products and durables. While we are up in wholesale and paper products and acquired more new customers than those that we lost, these gains weren't enough to offset the reduced shipping patterns of our existing customers. Despite the economy, we are optimistic about our ability to grow our intermodal volume in 2008. Although we do have a tough comparable in the second quarter, as we grew volume by 5% last year, we do have a lot of new business opportunities in our intermodal pipeline. Our sales, customer service and pricing teams have been working diligently to both retain existing business and bring in new business. Due to these efforts and the visibility of our intermodal pipeline, I expect that for the year, our volume in '08 will be greater than our volume was in 2007. Thanks to our asset-light model, coupled with very tight cost controls, you've seen us grow our net income consistently in both 2004's booming freight economy and today's freight recession. As we've discussed with you before and are now demonstrating, our asset-light model works in any economic environment. Our model allows us to use our assets where it makes sense and to use others' assets where that is more advantageous for us. In time, the cyclical downturn we're in will turn around and we will see freight demand increase. By growing our fleet now, we are positioning ourselves to benefit from an economic expansion. Our drayage business continued to add drivers during the first quarter. We again increased the percentage of drayage that we perform in-house up to 31%, from 29%. We're also working to improve the economics of the drayage that we buy from third parties, which still represents close to 70% of our drayage spend. During the first quarter, we've worked with our drayage partners in some of our largest markets to improve their book of business and our prices. We've been pleased with the results of this strategy and we will continue this work in the second quarter. As you can see from our 20% increase in revenue, our brokerage business had an outstanding quarter. We successfully brought on new customers and also continued to gain share from existing customers. Truck capacity has tightened somewhat, beyond the seasonal constraints that existed at the end of March. We believe that it is very likely a reflection of truckload capacity coming out of the marketplace. Our non-asset based brokerage model has served us well. Our brokerage business was able to grow revenue in the booming freight economy in '04 and '05, as shippers looked for excess capacity. It's working in today's slow freight economy, as truckers look to get additional freight to balance their networks. We've continued to demonstrate our value to our customers, even as truck capacity has become more plentiful. We expect this business to continue to grow in the mid-teens for the foreseeable future. We're also very pleased with the growth of our logistics units, as we've continued to grow our pipeline and implement new business. In the first quarter, we successfully onboarded some $31 million of projected annualized revenue within the retail and manufacturing verticals. It's important to note that during challenging economic conditions, our logistics division provides the technology and expertise to drive costs out of our customers' supply chains. Looking forward, our pipeline remains robust and we've recently been awarded significant outsourcing engagements in the retail and consumer products industry. These implementations will take place in the third and fourth quarters. As you may recall, we appointed a new Chief Marketing Officer last October. Since this appointment, our CMO has made quite a few changes in our sales and marketing organization. We've launched our enterprise account group. We've reconfigured our sales support team, realigned compensation to be more focused on growth, and created a separate effort around the marketing and branding of our services. We are focusing our sales, marketing, pricing and customer service groups on those customers that have the greatest growth opportunity. We expect to see a more productive sales force, a more focused pricing effort, differentiated customer service, and a consistent corporate message that emphasizes the strengths that we bring to bear as a transportation provider. In conclusion, we are very pleased with our strong start in 2008. Our intermodal, brokerage and logistics businesses all performed well, and each contributed to our record first quarter. We continue to believe that there are excellent opportunities for growth, and that our asset-light model will allow us to continue to grow our net income in any economic environment. At this time, we'll open the line up to any questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Ed Wolfe. Please proceed sir.

[Ed Wolfe:]

Hi, good afternoon, guys.

[Dave Yeager:]

Hi, Ed.

[Terri Pizzuto:]

Hi, Ed.

[Ed Wolfe:]

Why are you growing the container fleet by 10% when volumes are down 3%? I'm just trying to understand that, and if the volumes don't come back, does that just mean that the owned or the long-term leased containers just become a bigger percentage and you give up some day-to-day containers, or how do you think about that?

[Dave Yeager:]

That's exactly how we think about it, Ed. We do believe, number one, that it is going to come back, and we think that the fleet is a real key differentiator and it's got solid economics for us, but worst case, we might go from 60% to 65% as far as if our volumes remain flat, which we don't expect.

[Ed Wolfe:]

Is there some number where you don't want to get above? Is there a percentage that's the right percentage of long-term leased versus short-term rented?

[Dave Yeager:]

I would suggest that as we look at it in the 60% to 70% range is ideal, and so we're well within that at this point in time. I know last time, we had Mackenzie in, and they had looked at it; it was at about a 60% level.

[Terri Pizzuto:]

And just to clarify it, on the 60% that Dave is talking about, those are not all long-term lease. Only a portion of those boxes, which are our red containers, are under long-term lease.

[Ed Wolfe:]

And what percentage, roughly, are the red ones? I'm sorry for interrupting, Terri.

[Dave Yeager:]

The red ones are approximately 40%.

[Ed Wolfe:]

And will that move up toward 50% if you bring all 10% in and volumes don't increase?

[Dave Yeager:]

We're counting on that remaining at about 40%.

[Mark Yeager:]

That's right.

[Dave Yeager:]

It's about 9,600 of the 23,600.

[Mark Yeager:]

Right. And the target percentage in terms of what we want to be in fleet is really dependent on business mix. So, at the time Mackenzie looked at it, it looked like 60%. We've refined our business mix a little bit more, and so that number has moved up slightly. The interesting thing about the fleet is that as it's gotten bigger, we've still been able to consistently improve utilization numbers, but we certainly aren't at a point where we're over the ideal.

[Ed Wolfe:]

It feels like, without new volumes, the business is getting more profitable and we're seeing this from the railroads, also. Is that just empties, which were always counted in the volumes, being more full for exports?

[Dave Yeager:]

I think as far as the profitability, we're continuing to refine our various costs, our drayage initiative. I think we're beginning to see some of the fruits of our labor of the equipment optimization. So, it's a lot of things combined, where, candidly, we're handling the business better.

[Terri Pizzuto:]

And we're doing more of our own drayage, which also helps.

[Dave Yeager:]

Right. Which definitely helps.

[Ed Wolfe:]

Okay, Terri, you always give guidance for kind of total expense line items going forward, and you seem to be doing better, again, than the guidance. How should we look at that? Is $36 million a quarter a fair number?

[Terri Pizzuto:]

We said $36 million to $38 million, because it will definitely be a range, and you might be wondering why that came down from last quarter. Last quarter we had a lower headcount than projected, so that resulted in lower salaries and benefits this quarter.

[Ed Wolfe:]

And can you explain that? Does that go forward, that lower headcount? Why and where was the lower headcount?

[Terri Pizzuto:]

The lower headcount was mostly in intermodal. And then to answer your question about going forward, we do expect to add some heads in logistics and truck brokerage as we bring on new work. We'll also add a few to the sales force, since that's where we need to rebuilt a bit, but it's not going to be anything drastic, and Dave still approves every single new person that we hire.

[Dave Yeager:]

Right. But the logistics and the truck brokerage, those people that we bring on, they'll have enhanced revenue that they have to handle right away. This is not something that we're building on the come.

[Ed Wolfe:]

Okay, but $36 million to $38 million remains the guidance, in other words.

[Terri Pizzuto:]

Correct.

[Ed Wolfe:]

Can you talk a little bit about net revenue versus gross? It seems like yields got compressed a little bit. Was it in one mode versus the others?

[Terri Pizzuto:]

Well, our biggest contributors to the gross margin dollar increase was, first, truck brokerage, and then logistics. If you pull out the one-timer of the $2 million in intermodal for the favorable vendor deal that we got.

[Dave Yeager:]

Last year.

[Terri Pizzuto:]

Last year. Then intermodal gross profit grew too; but, we have that one-timer in there last year.

[Ed Wolfe:]

I'm just looking at your net revenue margin or your gross yield at 13.5 versus 14.4. You're telling me if I add that 2 million back, it will be better than 14.4?

[Terri Pizzuto:]

Yes.

[Ed Wolfe:]

I can do that math offline in a second.

[Terri Pizzuto:]

And actually, Ed, how we look at the yield, that's comparable to where we were at, at Q4 of '07.

[Ed Wolfe:]

Okay, so you're looking at it sequentially versus year-over-year. That's what I was doing different.

[Terri Pizzuto:]

Yes.

[Ed Wolfe:]

It looks like there was an earn-out to Comtrak. Can you talk and put a little flavor on that, and is that the last one?

[Terri Pizzuto:]

That was $5 million, and it was all this quarter, and it is the last one.

[Ed Wolfe:]

And are there any other earn-outs for any other acquisitions?

[Dave Yeager:]

No, there are not.

[Ed Wolfe:]

Okay. You didn't buy any stock back in the quarter? Should we read anything into that?

[Terri Pizzuto:]

No. We had a lot of cash needs in Q1. We paid out $9 million in bonus. You just mentioned the Comtrak earn-out, or the $5 million, and our first use of cash is always for acquisitions, so we always want to keep some in the piggybank for that. But we will buy stock opportunistically, and you can assume, since we executed in the past, that we would do that in the future.

[Ed Wolfe:]

And we should assume that the 70 million gets done before June '09, then?

[Dave Yeager:]

That is our authorization. I would suggest to you that will happen.

[Ed Wolfe:]

Okay. Can you just go through the quarter and go through intermodal volumes from January through March and what you're seeing in April?

[Dave Yeager:]

January through March was relatively consistent. There were a few switches around as far as having Easter and all, so it was relatively consistent. We obviously don't talk about the current quarter, with April, but it would be logical that we would be up at this point, because we didn't have Easter this year, which we had in '07. And Easter takes; it's probably a day and a half's worth of freight that we lose. So while we may be up now, it's too early in the quarter to really tell where we're going to be for the entire quarter.

[Ed Wolfe:]

It's just that you went from positive 3 in fourth quarter, you were minus 2 in third quarter, now you're minus 3. It's just hard to tell. How much of that minus 3 in the quarter do you think was related to the Easter? Or did you get the extra day of leap year, so it was a non-event?

[Dave Yeager:]

Well, we did get the extra day of leap year, but also the way that the holidays fell was very odd this year. Easter had an impact on us, because both Good Friday and Easter Monday are both very light shipping days. They were definitely factors, and then, the way that January 1st fell and some of the subsequent holidays were a bit odd, too, where it took out additional shipping days.

[Ed Wolfe:]

And you've talked about retail before as being a big part of things when volumes are weak. Should we assume that some of your largest customers, your Home Depot, your Sears are weak because of what's going on in the economy right now, and so those volumes are down?

[Dave Yeager:]

Retail was actually, versus Q4, was a little bit better. It was only down about 8%.

[Terri Pizzuto:]

It was down 11% in Q4.

[Dave Yeager:]

Right, but where we saw the real hit was in durable and consumer products. Durable was actually in Q4 up about 1%, and it actually fell down about 8%. It was down in the first quarter. And in consumer products, where we were down about 1% in Q4, actually dropped down by about 8% as well in Q1. So, it seems like the recessionary environment kind of went beyond retail into some of the durable goods and our consumer products companies.

[Ed Wolfe:]

And you were able to offset some of that with new customers, or how did you do that, or growing with existing customers? Then why are you only at minus 3 if those two big groups were minus twice that?

[Mark Yeager:]

Yeah, we were able to offset that with some new business. Our transportation sector, which is wholesale, and 3PLs, and then also the paper industry. We were able to land some new opportunities in the paper industry. So that helped us offset. It just didn't quite get us over the hump.

[Dave Yeager:]

And we did add more new customers than customers we lost, but, again, it wasn't enough to offset. But, again, with our current pipeline that we're looking at, we really do think that for '08, that we will drive positive numbers there on the volume front for intermodal.

[Ed Wolfe:]

When you talk about pipeline, what does that exactly mean? How real is the pipeline, how close to fruition?

[Dave Yeager:]

A lot of this with awarded business that may not have come into effect as of yet, which is going to be rolling out in the second or even some of it is late in the third quarters. I think that you know from past calls that this is not something that we normally do. This time we feel very confident that the pipeline looks good.

[Ed Wolfe:]

Okay, well, I appreciate all the time. Thank you very much.

[Dave Yeager:]

Thanks, Ed.

[Operator:]

And your next question comes from the line of Alex Brand. Please proceed.

[Alex Brand:]

Yeah, all my questions have been asked.

[Dave Yeager:]

Hey, Alex.

[Alex Brand:]

I'm kidding.

[Terri Pizzuto:]

Hi.

[Alex Brand:]

Hi. Let's just finish up with where Ed was there on volume. I assume you have no expectation in that volume growth guidance or that your outlook is that you can grow, that the economy gets better, stays pretty bad, when you think about that?

[Dave Yeager:]

We don't think about the economy getting better in 2008.

[Alex Brand:]

Okay, good. Terri, can you quantify on that? You had relatively flat intermodal yields sequentially. How much did fuel impact that Q1 yield?

[Terri Pizzuto:]

That's difficult for us to break out. We kind of treat fuel like an accessory, so we just try and recover the cost from our customers. For about 70% of our loads, we're on the customer's schedule for what we can charge them for fuel. And some of our customers, it's just buried in the rate; it's not broken out separately. We can tell you that of the revenue increase in intermodal, about 9% of it, actually was due to fuel.

[Alex Brand:]

So you get it all passed through, 100%. The only impact is in the calculation, optically, it's a squeeze.

[Terri Pizzuto:]

Yes, and the other factor, not a huge factor, but the other factor is Comtrak, and it's difficult for them to pass on fuel to the customers.

[Dave Yeager:]

They're having more pushback. I think the asset-based guys are probably having more of a pushback, as well. But, Alex, when we look at fuel, it's just another component of cost. And so when we look at a customer, we look at that customer and their gross margin in totality. If a guy has a really punitive fuel surcharge schedule, which some of them do, we raise our rates, which seems counterproductive to me, but we look at it for what's the profit that we derive from that customer. And fuel is just one of the many components, along with drayage, line haul expenses, et cetera.

[Alex Brand:]

Well, along those lines, Dave, you mentioned that you think you can improve your dray spend, but how careful do you have to be hitting those guys up for a lower rate when they're getting squeezed to death on fuel?

[Dave Yeager:]

Well, it's the way we're going about it, actually. We're looking for them, we're opening up our book of business and saying this is what we have, and by them being able to analyze that, they may have round trips and triangulations with other customers' business that we don't know about. And so this gives us that ability for them to see the business and say, gee, I have a lot of outbound business out of Bolingbrook, Illinois, and we may have a lot in. And so we're looking to more create synergies than to just abuse and beat down the rates.

[Alex Brand:]

And when you talked about some of the new business wins you have, you've gotten recently, and I'm really just talking about intermodal, although it sounds like you guys are doing a good job winning business across the platform, do you feel like you're taking share? In other words, is this somebody that wasn't using IM before, or is it more likely coming from one of the other IMCs?

[Dave Yeager:]

I'd suggest to you it's probably coming out of somebody else's pocket.

[Alex Brand:]

Okay.

[Dave Yeager:]

To be quite upfront. There is some conversion from truck, particularly with the fuel efficiency that rails have, and we have a much better fuel surcharge than would a truck, but I think that if I look at the pipeline, then an awful lot of it is taking share from other IMCs.

[Alex Brand:]

And I assume those are not your bigger competitors, usually. It's probably your smaller competitors.

[Dave Yeager:]

It's both.

[Alex Brand:]

Okay, and just a housekeeping question, Terri. The tax rate had been running, I think it was 40% for the full year last year. Is it going to run more like 38.5%?

[Terri Pizzuto:]

38.5% to 39%. It's lower this year because of the Illinois state tax law change.

[Alex Brand:]

Right, right. That's what I thought. Okay, thank you.

[Dave Yeager:]

Thanks, Alex.

[Operator:]

Todd Fowler is on the line with your next question.

[Todd Fowler:]

Hey, good evening, everybody.

[Dave Yeager:]

Hi, Todd.

[Todd Fowler:]

Dave, just back to the intermodal volumes, I just want to make sure that I'm thinking about it correctly. You're up against a difficult comp in 2Q. It sounds like you've got pretty good confidence that volumes are going to grow for the year. Should we think about, from a modeling perspective, though, that the volume growth is going to be a little bit more back-end loaded?

[Dave Yeager:]

Yes. Yes, there's no question about that, Todd. I think that, again, we're looking at the pipeline, looking at what's been awarded. It is more back-end loaded. Yes.

[Todd Fowler:]

And then, it seems like it would be a pretty significant ramp than in the back-end to compensate for the lighter volumes here in the first quarter.

[Dave Yeager:]

Well, of course, the first quarters usually are our lightest months to begin with. So it's not quite as significant to overcome as if we were down significantly in the fourth quarter. But, yes, we do believe that the ramp-ups and the awards that we've received have been very positive and for the year, we feel very confident in that approach.

[Todd Fowler:]

Okay, no, that's helpful. And then, as I think back, some of the volume growth that you saw in the fourth quarter of last year, it seemed like it was bifurcated between the local east and the wholesaling. Are you still seeing good traction with those offerings, and is that also going to be a contributor, then, as we get into the back half of the year and going forward as well?

[Dave Yeager:]

Local east was not quite as strong this past quarter as it was in the fourth quarter. Fourth quarter it was at 12%, and it was only up 2.5% in the first quarter, but we do believe that that is a market that has some tremendous potential. Some of the more recent awards that we've been receiving have in fact been focused on the eastern network, so that is an area that we think has a lot of opportunities. As far as the wholesale business, that was up, but candidly it's a small number. It's a small base off of which we're growing, so it was up, overall. Mark, do you have that? Mark Yeager 35%.

[Dave Yeager:]

35%. Yeah.

[Todd Fowler:]

But on a small base, though.

[Dave Yeager:]

It's a growing portion, so it's good business for us and something that we look forward to continue to grow.

[Todd Fowler:]

Okay. And then, with the new business, anything that we should think about as far as profitability or generally it seems sort of contribution, it sounds like, as you were just talking about the way you price or look at the businesses on a margin contribution, but nothing we should be concerned about as this new business comes on and these sort of margin erosion or change in the margins?

[Dave Yeager:]

Again, Todd, I think this is where our business model is so very attractive. One of the awards that we got is a business that we had actually had at one point from Texas to Southern California, but we lost it because our fleet economics couldn't compete. We found another supplier that, in fact, wanted business out of Texas into Southern California. So while we're not going to move it in fleet boxes, we will move it with that other supplier, and got the business back from our competitors. Again, this is part of what our model's supposed to do. Our fleet can't be the answer for all the world's ills, but the economics of it for the most part are very solid, and where we have better economics, we'll go and use those other sources of equipment.

[Todd Fowler:]

Okay. And then, the intermodal customer that switched over to truck brokerage. I mean, is that something that you would prefer to see happen, or how do you think about that internally, as far as a customer that wants to make that sort of modal switch? Would you rather have them on the intermodal side or would you rather have them on truck brokerage, or are you agnostic to it?

[Terri Pizzuto:]

They only switched some of their business over to truck brokerage. So they still do intermodal business with us, and they do more truck brokerage now than they had historically. So we want to do what's best for them. Since they had tighter delivery windows and, given the truck market, that was more cost-effective for them, but that's a customer where we're servicing them on both sides of the house, which is what we want to do, ideally, and give them the best choice for them.

[Dave Yeager:]

Yes, to answer your question specifically, though, we are agnostic. We're going to, to Terri's point, choose whatever is best for the customer, whatever they need. And, again, we can do it through truck brokerage, if that's the best way, or we can do it through intermodal.

[Todd Fowler:]

Okay, good. And then just lastly, in the release, you talked a little about purchasing transportation more effectively. Is that more of a function of the excess capacity and the softness that's in the market? Is that part of the network optimization tool that you have in place? Just a little more color on what you guys are seeing and what you guys are doing with the PT side of the equation.

[Mark Yeager:]

Sure. Part of it is associated with the optimization efforts that we've had. So what we're really trying to do is more effectively pick the correct box and routing option, depending on our customer's requirements, and I think we're doing a good job of that. We're showing some progress in terms of moving up the percentage of loads that we pick the optimal choice. And the other thing, as Dave alluded to earlier, was on the dray side, going out to the marketplace and making our dray visible to the dray community and soliciting. They are testing the waters in terms of who is interested in what pieces of business, and so far that's resulting in some favorable economics, as well.

[Terri Pizzuto:]

And we do that on the truck brokerage side, as well, try and purchase our carrier service most cost-effectively, matching up the customers' freight with what's good for them, so that it's a win-win on both sides.

[Todd Fowler:]

Okay, no, that makes sense. Nice quarter. Thanks a lot.

[Dave Yeager:]

Thank you, Todd.

[Operator:]

(Operator Instructions) Your next question comes from the line of Jon Langenfeld. Please proceed.

[Jon Langenfeld:]

Good afternoon.

[Dave Yeager:]

Hi, Jon.

[Terri Pizzuto:]

Hi, Jon.

[Jon Langenfeld:]

How is the pricing environment? How would you characterize that in the various geographies?

[Dave Yeager:]

That's an interesting question, because I know that a lot of our competitors, some of the publicly traded guys, were concerned about margin compression for the year and all. And candidly, it's always competitive from a price perspective and a service perspective, but it's no worse than normal, I don't think, at least in the intermodal space. I mean, in the over-the-road space, it's still I think pretty much of a bloodbath. It's still a very tough market being an asset-based carrier there, but intermodal, we have not seen a horrific amount of price competition at this point.

[Jon Langenfeld:]

Okay, okay, good. And then, on the truck brokerage side, many of the private companies and even some of the public companies we've seen have really had a significant amount of pressure on the gross margin line, just given fuel and given capacity firming up. You guys seem to have been able to escape that in the fourth quarter. Could you just talk directionally kind of the trends of gross margins in truck this quarter?

[Terri Pizzuto:]

Yes, gross margin as a percent of sales is down a bit compared to last year, but it's still higher than intermodal. We did grow sales, which is our goal in truck brokerage, but at a slightly lower margin percentage. And then, when compared to Q4, truck brokerage margin as a percent of sales has actually increased. That's because we were able to negotiate better with the carriers because of capacity, and we implemented some new tools.

[Jon Langenfeld:]

Can you talk a little bit about those tools?

[Terri Pizzuto:]

We implemented them in Q2, and they just help us to look at our selections better of what carriers we can use.

[Mark Yeager:]

It helps us identify which carriers are interested in particular geographies, and so we're more efficient in terms of contacting those carriers that like that business that operates in lanes that are attractive to them.

[Jon Langenfeld:]

That's obviously a significant benefit here. I mean, given what fuel has done, all else being equal, the margins would have been under, I imagine, quite a bit of pressure. So when you think about that productivity improvement, are we still on the front-end of the potential there as it relates to truck brokerage, or have you pretty much anniversaried the improved productivity?

[Terri Pizzuto:]

Well, they started using it Q2, so we're well on our way with that. And also, our yield depends on our mix in truck brokerage.

[Jon Langenfeld:]

Okay.

[Terri Pizzuto:]

That can be--

[Jon Langenfeld:]

Don't necessarily think of incremental benefit as you learn how to use these tools better? It's more just, hey, we put it in and it helped us right away, and there's no learning curve associated with it?

[Dave Yeager:]

The interesting thing is, as you add carriers and you identify which geographies they were in, there will be some incremental benefit. And also, obviously, you can't plug in all your carriers and where they like to go on day one. So there is a bit of a curve to step up there.

[Mark Yeager:]

And we've learned how to be out in the market on a regular basis conducting sort of mini-bids to try to see who's interested in what pieces of business. So we're refining our purchasing processes on the highway side, and there's still some room to go there.

[Jon Langenfeld:]

Okay. And then, can you talk about external growth that Comtrak is achieving, or how big of a priority that is?

[Terri Pizzuto:]

The percentage of our drayage that they do went up some, but given a choice, we always want them to do what's best for us economically, either do the work in-house for our customers or sell outside. And they added 78 drivers during the quarter, and really most of that was more in-house.

[Dave Yeager:]

Right. We are having some success in the international dray part. I think that's probably of note to some of the new customers that they're bringing on, because they have some unique systems for container yard management. And so that is an area that we can continue to focus on for growth. Because, Jon, traditionally, a lot of customers, what they've done, a lot of retailers and all, is that they might deal with five different steamship lines. And so, if the steamship lines controls the door-to-door move, they might have five different draymen delivering to their distribution center. And that logistically it is just very complicated for the receiver. And by designating a Comtrak as the sole provider at a distribution center, we can bring forth a lot of economic value to them.

[Terri Pizzuto:]

But to answer your question, in the quarter, we didn't have a lot of that outside customer growth. It's a good opportunity for us going forward.

[Dave Yeager:]

Yes, we did have a few new awards that we were able to garner.

[Terri Pizzuto:]

Yes. Yes.

[Jon Langenfeld:]

Okay, and then lastly, I think you told me this once before, Dave, in terms of in a given year, how much of your volume moves on the 40-foot international boxes, opportunistically? How much is that, and how big of an impact has it been that that capacity has tightened up? Has it been a positive or a negative?

[Dave Yeager:]

It's a tougher environment right now. To answer your question in two ways, number one, it's under 10% of our overall volume, but it is significant and it was down just a little bit quarter-over-quarter. I think there are some benefits here, inasmuch as we are such a large user of those boxes that we have some very strong relationships with the lines, and we are able to, in all candors, force out some of our smaller competitors who may not have the same types of relationships. On the other hand, though, it is more difficult. We have to really scramble to get the equipment, but so far our operations people have been up to the task.

[Jon Langenfeld:]

Doesn't that kind of stimulate demand then for just a pure domestic box, on the other hand?

[Dave Yeager:]

That's very true, also. We may be seeing and will see because it's gotten tighter through the quarter, I think that it's very likely that we'll see some of this 40-foot business go into 53s.

[Jon Langenfeld:]

Okay, very good. Thanks for the time.

[Dave Yeager:]

Thanks, Jon.

[Operator:]

At this time, we have no further questions in queue. I'll now turn the call back over to Mr. Dave Yeager for closing remarks.

[Dave Yeager:]

Well, great. I'd like to again thank everyone for joining us on our call. Certainly, if you have any questions, please feel free to contact us. As Terri had outlined, we're very pleased with the first quarter and we're looking forward to a great '08. Thank you very much.

[Operator:]

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