Forward Air Corp (Delaware) (FWRD) 2004 Q1 法說會逐字稿

Good morning and welcome to the Forward Air earnings conference call for Wednesday, April 28th, 2004. Your host for today is Andy Clarke.

I will turn the call over to Valera Doherty (ph). Ms. Doherty, please go ahead, ma'am.

Thank you. Good morning everyone and thank you for joining us. Before we begin I'd like to point out that both this earnings release and our call are accessible on our Web site at www.forwardair.com

Joining us this morning from Dallas Texas is Bruce Campbell our President and Chief Executive Officer and with me in Greenville, Tennessee are Andy Clarke our Chief Financial Officer.

By now you should have received our press release regarding first quarter results which was furnished to the SEC on Form 8-K and which crossed the wire last night. You should be aware this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among others regarding the company's expected future financial performance. For this purpose any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements.

Without limiting the foregoing, words such as believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors among others set forth in our filings with the Securities and Exchange Commission and in the press release related to this quarters earnings and consequently actual operations and results may differ materially from the results discussed in the forward-looking statements.

The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future easements or otherwise. I'd also like to remind that you in our call today we may discuss certain non GAAP financial measures and the reconciliation of those non GAAP financial measures for the most directly comparable GAAP financial measures will be made available on our website. With that caveat, I will now turn the call over the Bruce Campbell President and CEO.

Good morning. Thank you, Lera and thanks to each of you for joining our call. I would like to begin by thank our employees and owner operators for all their efforts in helping us to achieve record revenues and income for the first quarter of 2004. It was truly an outstanding team effort. Before I touch on some of the first quarter highlights, let me review as on past calls the monthly revenue progression during the quarter.

Both January and February revenue levels were very good easily surpassing 2003 and allowing us to get off to a very fast start. With the arrival of March we experienced even stronger results and just as importantly this acceleration has continued into April, a traditionally slow month. We are quite pleased with our year to date revenue performance.

Here are some of the first quarter highlights. As previously noted, revenue was up across-the-board but of particular interest is our logistics growth, which in spite of the fact we intentionally rid ourselves of certain less than profitable business we manage not only to replay but also grow this segment of our revenue. Kudos to our sales team. We experienced the highest levels of service in the history of our company while continuing to lower our claims ratio to its lowest levels.

We are no longer just delivering freight; we are also delivering value, kudos to our operating group. We continue our drive to provide our customers with industry leading technology with our prime focus on reducing transaction cost for both our customers and us while increasing shipment visibility.

We accomplish many successful transactions during the period with more to come kudos to our IT group. I would like to close by noting what we consider to be a significant event for both us and more importantly our shareholders as previously announced we have added three new outside independent directors to our board, Clyde Preslar, Dick Hanselman and John Langley, we are excited they joined us and look forward to all their future contributions. As shareholders you should be most pleased to have these quality individuals joining our board. With that I'll turn it over to Andrew Clarke.

Thank you for joining us this morning. After I have included the financial review portion of the call, we will be available to answer your questions. As Bruce said, we are pleased to report both record revenue and earning results for the first quarter of 2004.

During the first quarter and continuing into the second quarter we saw strength across all revenue sources as our customers continued to rely on Forward Air for its premier level of service. In the first quarter operating revenue increased 13.5% to $64.3 million. On our per day basis, this quarter having one more day in it versus last year, revenue was up 11.7%.

Our growth this quarter is the highest since its first quarter of 2001. We recorded an 11.8% increase in traditional line haul revenue to $54.4 million or a 10.1% increase on a per day basis. Average weekly line haul tonnage showed strong growth during the quarter going 8.3% to 26.6 million pounds versus last year. Average revenue per pound including the impact of fuel surcharge was up 1.6% versus last year. The fuel surcharge program was in place during the first quarter of 2003.

Logistics revenue increased 13.6% or 11.8% on a per day basis to $5.1 million. As Bruce discussed, we are very pleased with these results in light of the fact of our culling of business which fell short of profit expectations did not begin in earnest until the end of the first quarter of 2003. In other revenue increased 37.3%, 35.1% on a per day basis to $4.8 million as a result of increased acetorial(ph) business particularly our terminal handling business.

On a year over year basis, income from operations increased 25.2% to $10.7 million and the company's operating margin expanded by 160 basis points to 16.7%. Both the amount and the margin are first quarter records for the company. Purchase transportation costs decreased 30 basis points to 42% of operating revenue.

PT for the airport-to-airport network was 41.3% of revenue versus 40.3% last year. During the quarter we averaged 508 owner operator trucks versus 488 last year and 479 in the fourth quarter of 2003.

We continue to experience success in recruiting and retaining owner operators. Due to increased demands for our airport-to-airport services the company relied more on non-owner operator power during the quarter, which allows us to manage balance and flow issues more effectively over the short term. PT as a percentage of revenue for the logistics business decreased 440 basis points to 67.4% versus 71.8% last year.

Salaries, wages and benefits were down 20 basis points versus last year although the dollar amount spent in this category increased year over year as a result of increases and wages and incentives, as well as health care and workers compensation costs. The company produced more revenue during the quarter to mitigate this increase.

Operating leases decreased 40 basis points to 5.1% of and depreciation and amortization decreased 50 basis point to 2.6% of revenue. The terms of operating leverage the company generated nearly $7.7 million in additional revenue during the quarterly spend $100,000 more or these two line items. Insurance and claims decreased 10 basis points to 2.2% of revenue.

We renewed our insurance program effective April 1 of this year for a period of one year. Our self-insurance retention level remained constant versus last year at $500,000 per occurrence on the auto liability side.

Our focus on safety and ability to find the right owner operator helped keep our current unit essentially flat for the current policy year. The dollar amounts however will likely increase as we attempt to add more owner operator units to the fleet.

Finally, other operating expenses decreased 10 basis points to 8.6%. As a dollar amount this figure increased over 500,000 versus last year. However, approximately 350,000 or 1 cent per share was related to professional expenses associated with the recruitment of the three new directors as well as due diligence related to terminated acquisition discussions. Other areas that increased during the quarter were communications and utility expenses as well as general supplies and expenses.

Other relevant information for the quarter include assets grew to $183.7 million, the company's cash until investments position grew during the court to 93.3 million, an increase of $6.8 millon since the beginning of the year.

Company repurchased 12,000 shares of its common stock during the quarter and our total debt stands at $938,000. Accounts receivables were $32.5 million and account receivable days were 45. Allowance for (inaudible) accounts decreased to $1.1 million from $1.3 million at the end of last year.

Operating cash flow for the quarter was $9.6 million versus $5.7 million last year and net capital expenditures were $3 million this quarter versus .6 million in the first quarter of 2003. During the quarter our average trailer account increased to 1,306 versus 1,234 trailers last year.

The company ended the quarter with operating terminals in 80 cities, which is flat year over year. Outlook for the second quarter of 2004, the company expects to grow revenue between 10% and 14% versus last year and fully diluted earnings per share to be between 32 and 36 cents per share. These estimates depend on a number of variables, many of which are outside the company's control.

During the second quarter of last year, the company's net income for fully diluted share was 29 cents. That concludes the financial review portion of the call.

On behalf of all the Forward Air employees and independent contractors, thank you for joining us this morning and I will now turning it back to the operator for your questions.

[OPERATOR INSTRUCTIONS]. Our first question comes from Alex Brand. Please go ahead.

Okay. Kudos to you guys as well, Bruce. Andy, let me start with the guidance since you just finished with that. 10 to 14% revenue growth, but Bruce said acceleration in April, so if you're accelerating off of 13.5% to what would imply to me a mid teens top line growth rate are you just being conservative on the top line guidance there?

Well, the 13.5%, Alex, for the quarter does include one extra day. The second quarter of 2004 has the same number of days as it did last year. So backing out that extra day, it's just below 12% on the quarter over quarter for the first quarter revenue growth so that's where it was for the quarter and that's the mid pointed of our guidance for the second quarter.

But that's still -- Okay. Fair point. But it still doesn't sound like you're assuming the acceleration that Bruce said you are seeing. Is that correct? The assumption and variables that we sues in the assumptions, Alex, take into account a number of factors, and so you know, what we are seeing year to date or quarter to date in April may not necessarily follow through for the rest of the quarter as you well know.

Okay. And you gave PT for logistics. What was PT for line haul business?

41.3% verse 40.3% last year.

And that's up just because you had to get outside power as the volume ramped pretty rapidly?

That's correct. If you look at the owner operator unit count it went up roughly about 4%, tonnage went up 8% during the quarter and so over the short terms your going to the non-owner operator resources allows us to manage those balance and flow issues over the short term.

Okay. So does that imply that you still feel comfortable, I think you had said last call that there was some more opportunity on PT so this looks like, this is a short term issue but as the owner operators come on, there's still an opportunity to have PT moved down as a percentage?

Well, we always look to decrease as we did in this quarter, we always look to decrease our operating expenses as percent of revenue and obviously our success on that is going to depend on a number of factors, but we're comfortable with where we have with owner operators. Obviously we're always looking to bring on more, given where the demand picture is.

Okay. I'll just did one for question and let somebody else have it. U.S. Express said that they had -- that their airport to airport failed to deliver improved results due to lower than expected volumes in their airport to airport business and obviously your volumes are accelerating, your best (inaudible) volumes you have had in three years. Do you think there're market share gains that you are seeing there, or is it more from you doing more with your existing customers?

I think the answer, Alex, is a combination of everything. I think we're seeing an improving economy, I think we're seeing more opportunity, we have the same competition issue that we did a year ago, so you know, are we taking share away, I don't know the answer to that, I'm not sure we could ever get the correct answer to it. I think if you look at the results you can draw your own conclusion.

Okay. Fair enough. Thanks a lot, guys.

Thank you your next question comes from Ken Hoexter. Please go ahead.

Hi good morning. I just want to follow up on the owner operators, Bruce or Andy, just because it seems like some of the other carriers out there have had difficulties getting additional owner operators to sign up, are you seeing any difficulty in adding to that. Obviously you saw your tonnage grow 8% but you want to be a bit conservative make sure the growth is sustainable. Now that you see that growth continuing are you having any hard time getting the additional drivers?

No, I think if you look at our -- you know, what we had to offer, the model that we had to offer in owner operator, which is you know, you know when you're going to work, you know what revenues you're going to earn as an individual, et cetera, that it's a great place to work and as a result of that, we don't see the difficulties that some of the perhaps irregular route carriers see. So we're happy with where we are in owner operators, we have a very good group of people that handle that for us and we have been able to get the number of owner operators we need.

Okay. And then just a follow-up on the personnel expenses for employee climbed about 12% year-over-year and that's following up a couple quarters where it was in the 3 8% range. Is that volume really obviously grew a bit faster. Is there something more to that, or is that part of the pension expense you mentioned earlier?

Ken, we don't have that pension expense. If you look at it on a year-over-year basis, that, a lot of that is related to incentives during the second quarter of 2003 we put in place a new incentive program. We're very excited about it. Our people in the field are very excited about it. And when they put up these type of results, we're in favor of awarding them. So on a year-over-year basis a lot of what drove that was the incentives.

I just want to make sure I understand that, Andy, you're saying if we continue to see this kind of volume growth in the same level of productivity per driver, you would expect that to continue to grow in the double digit growth and outpace your tonnage growth?

Again, what we pay people on is not necessarily tonnage growth but revenue growth and profitability. So it could very well outpace tonnage if tonnage is lower and yield is higher, that could outpace that.

Okay. But yet if profitability is still high you're suggesting you could still see margins improve.

That's correct.

Thank you, Andy, and thank you, Bruce.

Thank you. Your next question comes from Greg Burns. Please go ahead.

Hi Bruce, Andy, very good -- a very good quarter. I wanted to go into a couple of things. One, Bruce, which segment faster or was there a difference at all in any of the forwarding customer base in the airlines and maybe speak to what (inaudible) base looks like and whether things are tightening there.

We maintained our business on the airline side and actually have seen some growth there as we reported under our logistics revenues. We continue to see expansion with Kitty Hawk so that side of the business has done well.

We -- and I guess I can announce it today -- just signed for three more years with British Airways, that's after a successful completion of the previous three years, so we're excited about that. (Inaudible) Space -- and we were with the BA people all day yesterday and last night - (inaudible) space, it depends on where it's coming from and where it's going to for the most part, if it's coming out of Asia its very, very tight but there are opportunities in other lanes, but we continued to like to be we're positioned, we like how we're positioned with the airlines, those who realize value and those who don't, you know, we'll find somebody else to offer Forward Air.

Is from your comment, though, is there a different growth rate between the Forward Air side of your customer base and the airlines they are growing inline with what we saw the overall revenue increase Forward as going faster or vice versa.

I think it's pretty even overall.

And can you speak to the capacity that you might have in the network? I realize it's, you know, specific by specific but you are growing the tonnage faster than the owner operator covers and you have more slot in the network coming off a couple slow years. Is there a number you're comfortable with in terms of how much capacity you might have in the network before you have to sort of add more to it?

Greg, that's really a dynamic process. We had no capacity coming off the west coast. We're constantly finding ways to go to the west coast because it's very, very heavy. On the other hand, you know, we have opportunities out of other cities.

So it's really difficult for us to sit here and say we're at 75% of our capacity. You know, we fortunately have a dynamic model which allows us to adjust to surges in business out of different areas of the country though we are never in a position we don't think where we either A, can't handle it or, B, can't handle it profitably. That's a very difficult question for us.

Sure. Maybe I can ask something a little more specific in the same area. I recall in the downturn that you guys were pruning the number of shuttle lanes as freight dried up. Are you now in the process of adding back lanes?

What you see us doing now is as we continue to improve density if you remember our model, our presentation, we have the hub and space system, we have the regional hubs and now the third part of that are the point to points which avoid all hubs and go directly from New York to L.A. as an example and you'll see us adding more and more lanes in that venue as opposed to the others.

Okay. And I'll probably follow up with you guys on that. Just one final question on the acquisition environment. Did I hear right that it was due diligence that was terminated and can you just explain that and also, Bruce, what does the acquisition environment look like and what are your expectations looking out for the remainder of this year?

Yeah, Greg, this is Andy. You know, as a normal course of business we continue to look at acquisitions and we'll continue to investigate them. This particular quarter in the first quarter of this year we did a lot more investigating than we had done in quarters past but subsequently did not continue those discussions but did have expenses that were related to them.

Is the issue typically (inaudible) spread evaluation or is it typical operating issues that you're not comfortable with?

Depending on the particular situation it could be a combination thereof. You can have valuation, you can have operational issues, you can go in and discover something that you know gives you pause or cause for concern. You know, as it relates to our company. So the answer is yes to all of the above.

And then finally, just looking at your cash balances in the environment, is it reasonable to expect an acquisition this year and assuming you use mostly cash we would expect that to be a credit from day one. What's the reasonable expectation given what you're seeing out there?

We would love to do an acquisition yet this year but again going back to Andrew's comments we have to find the right one, we have to be convinced that it fits into our current model, which is, low asset, intense, et cetera. But there's nothing more than you just can't go out and find them overnight and place them into the company and all of a sudden it's, it's done. It's a difficult thing to find considering our, again, considering our model.

Thanks lot guys, great quarter.

Thank you, Greg.

Thank you. Your next question comes from David Campbell, please go ahead.

Yes, thank you very much. The beginning of the conference call, the speaker alerted us to something in the Web site about the differences between GAAP and Non-GAAP. Is that normal or is that something unusual this quarter?

No that is the normal language that our lawyers have put in as a preamble to our conference call, David. We have not, that's just in the event that we do ever have Non-GAAP measures that we will. If we discuss Non-GAAP on the phone on this call we'll put it on the web. We have not discussed anything Non-GAAP on the call.

Okay. The other questions I have related to any new contracts, any new airline associations or contracts that you can talk about and the status of the free trade zone, what's going on there?

Actually, David, on the -- right next door to the free trade zone.

I thought so.

We're beginning to have the type of success story that we want. So far, so good. The airline status, as I mentioned earlier, we resigned with BA yesterday for another three years. We're excited about that. We do have other opportunities in the wind, which at this point we can't speak to.

Is the free trade zone started slower than you'd would expect?

Yes.

And that's because of integration or just people getting used to you having one?

It's the latter, it's the conceptual issue that people have really struggled with. It's an education process, we're going through it. We have taken a few lumps, nothing large there from the standpoint of getting people up to speed and getting them to utilize the facility. But I think we're on our way and I think it will bring us good results in the future. At least as I look to the leader of the free trade zone, I'm looking forward to that.

Okay. Thanks. And on the competitive front, do you see any signs of forwarders who are doing more of their own forwarding that would be - get them more proactive in contracting for their carrying their domestic cargo and less dependent upon Forward Air?

Two issues there. One is that, you know, if they're able to do that, if they can build density, that's been an issue we have dealt with for 14 years and we actually encouraged them to do that, because it will make them more successful. And then secondly as we're encouraging them to do that, we want to participate in that business. If you look at for instance CECO (ph), which is one of our largest customers, today we run a dedicated network for them, which was a normal step in the process. So even those the Forward Air may have opportunity to go outside of the Forward Air network we still have opportunity to provide them those services.

Right. And any indications that you will move into some operating station in Mexico?

You know, we have looked at Mexico on and off for 4 or five years, David. There are a number of issues there, there are a number of issues concerning the demand into and out of Mexico. I wish I could tell you concretely today this is what we're going to do. I can't.

But you keep looking at it, I sense you keep looking at it.

We do.

And is there any possibility that some international forwarders would be more aggressive in managing their -- in attracting domestic business and therefore might need you less? The other question is more related to domestic forwarders doing it. But I'm speaking more of international forwarders.

The day of international forwarder and domestic forwarder that separation is just about gone, they are all into -- if they are international they are doing domestic business and if they are domestic they are doing international, so it's really blended. It's the same situation as we discussed previously. If they have adequate or sufficient density to run between lanes, they should, and our response to that is we should help them do that, we should provide them an EUV, we should set up a network for them or whatever, so we don't view that as a threat, we view that as being a partner in their success.

Okay, Bruce. Thank you very much.

You're welcome

You're next question comes from he Hellen Becker, please go ahead.

Thank you very much operator. Hi gentlemen.. Andrew, with respect to the shares as you said you brought back, is part of the sharing purchase program or is it specific (inaudible).

Hellen, this is -- we have an authorized share buy back program. We're authorized up to 2 million shares. During the time that the buyback's been effective we repurchased over 640,000 shares so we still have authorization for just less than 1.4 million more shares.

Okay. And my other question with respect to that, would you consider establishing a dividend to some of your cash as opposed to sharing purchase program. Have you talked about that?

During every board meeting we have discussions on the capital structure of the company and it's a discussion point that we will continue to have but no decision has been made on that as of yet.

Okay. Thanks very much.

Thank you. Your next question comes from John Larkin, please go ahead.

Good morning, Bruce. Good morning, Andy. I just wanted to see if we couldn't bore a little bit into the sources of the revenue growth if you feel comfortable with that. I was wondering what percentage of the growth do you think came from what I would call traditional customers and is really related to what I would call the economic rebound and what percentage of it do you think is due to accessing new customers and a sales force pushing it into new directions?

If I could answer that I probably would be working for your firm in the economic area. You know, I think, John, with that question, we benefited from an improving economy. But along with that, we had poised our sales group with what we consider to be a great incentive program, we had poised our operating group to be able to deliver that value that we were selling and so I think we had more success than we would have had, had we not placed those programs. So you know, part of it without question is coming from an improving economy, part of it is coming from our ability to further kind of trade our customer.

Would splitting it 50-50 be too far from --

I honestly can't answer that. I don't think that would be wrong.

You mentioned --I think Andrew mentioned revenue per pound was up 1.6%. Do you have a sense for how much how much of that was pure price adjustment and how much of that might be related to changing mix, say shipment size getting larger as the economy rebounds, perhaps more like the haul business, any comments there?

Andrew?

Yes. John, what we have continued to do is take a very focused approach to pricing in looking at different lanes, different customers on those specific lanes and going in and adjusting prices sometimes up, sometimes down, depending on where demand and freight flow is and so during the first quarter the majority of that related to us being more focused and more strategic in terms of getting better pricing. There was a portion of that that related to the longer length of haul, but that was offset by the larger the shipment size the less per pound cost that it is. So those two effectively balanced each other out.

And in addition to the heavily indented sales program that you put out there, did you increase the size of the sales force or upgrade it any way over the last couple of quarters

We're always looking to upgrade. We have a great staff; I consider to be the best team in the industry. Actually we were with two fewer people this year in the year-over-year basis. So we did not grow that --

What was the total number of salesmen?

32 now.

Okay. And also there was a discussion a couple of questioners ago relating to as the business grow, you're able to first bypass the central hub in Columbus and next bypass maybe some of the regional hubs go terminal to terminal direct. Can you give us a sense for say what percent of the business goes through the central hub, what percent goes through the regions and what percent goes direct and maybe how that's changed over the past year?

I think Andrew you may have to help me with the exact numbers. We run approximately and this changes, it is a dynamic system, about 41 to 42% of the business through the hub. We run an additional 30% of the business through the regional hubs and the balance another 30% are on the directs and point to point. That changes, John, as you might well imagine as we gain density in certain lanes, you will see the point to point probably grow a little bit. You will see some of our regional hubs probably expand a little bit and you will see our dependence on that major hub on our super hub in Columbus lower.

Some of the operating ratio of proving year over year in the first quarter came from weighing a higher percentage of the business director through the regions as opposed as through the centralized hub?

I don't think in the first quarter that's difficult to get a whole lot of improvement from a density standpoint because you're dealing with January and February. You know, there was probably some efficiencies gained there. We look to gain even more efficiencies in that area, John, as the year goes on.

Thank you very much. Nice job on the quarter.

Thank you. Your next question comes from Edward Wolfe. Please go ahead.

Kudos, guys.

Thank you.

Bruce, let's talk a little bit about the margin. The record margin was in 2000, you had almost an 18% operating margin. You're already on a better run rate in the first quarter and then where can this go and you know, you actually have fewer terminals than a year ago. Was running more freight through fewer terminals how much leverage is there, what other ways besides just leverage, maybe some of the other products have better margins or different margins. Can you just talk about the potential for where this margin can go?

Well, our goal has been -- and Andy will cringe when I say this -- but our goal, internal goal, is to get this company with an OR in the 70s and to do that we'll require a whole lot of things to go right, including having some good luck. But internally that's our goal. We look at opportunities across-the-board an as we discuss with our people during our annual meeting, you know in addition to that we will always be outsiding for the airport to airport business because that's what we do.

On the other hand, most of our terminals are not hub facilities, they are end of the line terminals and they have so much airport to airport business that they can handle and they are basically very busy in the morning, very busy during the evening hours as you might expect. We push them very hard to look for other revenue opportunities and that includes opportunities like the Kitty Hawk that we have across the United States today. Opportunities to move truckloads or what we call EUV's.

Anything to make money is their goal and to grow their revenue and grow it profitability and they get paid accordingly. We stress today again while we're very, very keen on the airport to airport we stress today what are the other opportunities to handle or create revenue in Hunstville, Alabama as a suggestion.

So when that other revenue and I know it's off a small base, but when it grows 37, 38% like this quarter, that's a big positive for the margin, is that what you're saying, because it (inaudible).

It absolutely does. In most cases it's just gravy.

In terms of -- you mention in your comments about having terminated or maybe Andy did, acquisition discussions as part of the extra cost in the quarter. Could you just give us some general thoughts on what those terminated discussions were? Was it you acquiring things, you being acquired, a little of each. Where were these discussions?

We were the acquirer. You know, it was an opportunity for us to -- you know, we thought it was a great company, we just couldn't get to where we needed to be and I think that's all we should say on it.

Is it fair to say that's over with at this point?

It is.

All right. Any second quarter guidance, is there any guidance for the year or do you have any thoughts on consensus right now for the year? $1.37 or so?

No, as we have done over the last two years, it is the company's policy to give guidance for the upcoming quarter and that quarter alone.

Okay. So we shouldn't take that one way or another, that's just the policy?

That is correct.

Also, Andy, you had mentioned about -- I thought you said something to the effect of non-owner operator revenue. Were you referring to brokerage?

No, not when we were talking about purchase transportation that was the mix between owner operators operating the network and the outside brokers operating the network. It has nothing to do with our revenue side.

Okay. And can you just go back through that comment, because I didn't understand it?

Sure. As we increased our tonnage during the quarter, and we also sought to increase our owner operator tractor count, tonnage went up by 8%, owner operator tractor account went up by and this relates all to that airport to airport revenue or system revenue, we sought to and the highest use for us is to have owner operators run that, but when demand for that product outstrips a number of owner operators that we have, we go to the outside to operate our network, we go to the outside carriers to operate the network, so it doesn't relate to the revenue per se, what it does relate to is how efficiently and effectively we operate that network.

And right now brokerage is roughly what percentage of that network?

It varies on the month but for the quarter we operated sort of in the mid to low 80% in terms of the costs or in terms of the miles that were run by Forward Air owner operators and sort of high teams in terms of the number of miles that were run by outside brokers.

And just for some relative comparison, if you have it or know it directionally in 99 and 2000 when there was a very strong economy and the margin was very strong was that a similar percentage or was it different then?

No, at that point we had more owner operators were running a greater percentage of the network.

And looking at the second quarter what do you expect for that percentage to improve or go the other way?

We continue to, as we talked about recruit owner operators, a lot of that, Ed, is a function of demand and where demand ultimately ends up. Our job is to serve our customers and we're going to serve our customers with our Forward Air owner operators and if demand again is in excess of where that owner operator count is, we're going to serve them with outside power.

I guess the question is how successful are you currently in the quarter and I know it's a seasonally tough time or recruiting the owner operators and does that pay have to go up this year?

At this point, what's important to realize is, it's not necessarily a function of us having owner operators it's a function of balance and as we experience growth in certain areas of the country, that is really, really good growth, then we would not run empty to pick up that freight because we're out of balance, we would out source that to the outside carrier.

So one of my views is when you look at our brokerage usage increasing our outside carrier usage increasing that's actually a good indicator and then the opportunity for the Forward Air group is to balance that lane. So that means that we have opportunities to run more freight and let's just pick a city, Los Angeles to Los Angeles, because we have business coming out of Los Angeles, that's an opportunity. And then once we get that business, we're able to put the owner operator on it and eliminate the outside carrier at that point.

I absolutely see the opportunity from the ability to grow standpoint, I'm just trying to get a sense from the margins and returns of brokerage versus the owner operators. Is it material or is it fairly minor?

It's minor if you're out of balance. It would become material if you utilized the broker where you really had a balanced lane and you didn't have the owner operator that would become material. But we don't have that situation. The only time we use them is out of balance.

Okay. That makes sense. Thanks a lot.

Your next question comes from Donald Broughton. Please go ahead.

Most of the good questions have already been asked but real quick to follow up on Hellen's question just to make sure I'm clear. The intent of share repurchases is opportunistically offset or (inaudible) the deletion of options not a corporate finance strategy to credibly reduce the share base or grow EPS faster than net income. Is that right?

Correct.

Okay. And because to follow-up on Ed's question and the owner operator loop, Bruce, my understanding has always been that you are essentially offering those guys a dedicated run so if anybody is going to have problems with owner operators you guys are going to be the last ones to suffer problems.

I think that's a fair statement, Donald.

Thanks gentlemen.

Thank you.

Thank you. Your next question comes from Jon Langenfeld. Please go ahead.

Good morning, Bruce and Andy.

Good morning.

Nice job in the quarter. A couple follows ups here. First on a logistics side, purchase transportation seen some nice come down in that expense of the percent of revenue, but how is that happening on the FPF truckload rate going up? I'm assuming maybe that's a density play thats taking that number down.

Well, I think you have to give our people a lot of credit there, John, where they have been able to purchase the outside transportation at a better rate. We have also been able to price it better. As you know, the truckload environment is pretty good for pricing today as opposed to a year ago. It's a combination of all those factors and they have become more efficient in how they do it and that tends to come in on the bottom line.

Is that rate I think it was, what, 67%. Is that a realistic or representative run rate at seasonality adjusted?

You know, that's one of those areas that we watch very closely, but you know, if we had an opportunity to haul 100 loads at 75% PT we would probably do it. Because the -- you know, the gross revenues are still good on it and the net revenues are still good on it, so that could effect that. I hate to tell you that, gee, it's going to get better, it's going to get worse. We watch it weekly, we think we can improve upon it but if they come to us and say gee, we have this opportunity, we're probably going to jump it.

Okay. That's fair. In terms of the capacity question, any need in the near term, the next several quarters to do facility expansion at your existing facility?

You know, we, John, on an ongoing basis review our facility requirements. And in most cases when we lease a facility all of our facilities are leased with the exception of our super hub. When we look at a facility, we typically will overbuy, we will have a larger facility on the basis that we're going to grow the business into the future.

We're in a position today where we think we have adequate space in almost all of our facilities, we have on an ongoing basis I think done a great job of getting the right facilities, not too big, not too small, and I don't see us in the next year having to make any large adjustments in any of our cities with the possible exception of L.A..

Okay. Good. And then finally, just on the other revenue line, the Kitty Hawk transaction or deal that basically came into play of Q2 of last year. So you're anniversaring(ph) that in the second quarter?

We had a little bit of that in the first quarter, it actually started the month of March, it was a filtering in process and as then you stated, John, correctly, Q2 over Q2 should be fairly representative of what's going on.

Okay. And growth with that, is it pretty much -- I think you have, what, 15, 16 facilities you're working for them, so it's growth in that with that customer is it pretty much tied then to their volume?

That's a big part of it. We have also expanded some routes with them and I think one additional city so there's always going to be opportunities, but yes, they do, they grow their volumes that impacts us, also.

Okay. Thanks for your time. Nice quarter.

Thank you.

Thanks John.

Thank you. [OPERATOR INSTRUCTIONS] Thank you, sir. There are no further questions at this time.

Thank you, everyone and would I like to remind you there's a replay available on our Web site at www.forwardair.com. Thank you for joining.