Forward Air Corp (Delaware) (FWRD) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Forward Air Corporation's First Quarter Earnings Conference Call. My name is Shaquana, and I will be your coordinator for today. [OPERATOR INSTRUCTIONS.]

I would now like to turn the presentation over to your host for today's call, Ms.Lera Doherty. Please proceed, ma'am.

Thank you. Good morning and thank you for joining us. Before we begin, I'd like to point out that both our press release and this call are accessible on the Investor Relations section of our website at www.forwardair.com.

With us this morning are our President and CEO, Bruce Campbell, and our CFO, Rodney Bell. By now you should've received our press release announcing first quarter 2007 results, which we furnished to the SEC on Form 8-K and across the wire yesterday after market closed.

Please be aware that 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 facts 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 & Exchange Commission and in the press release issued yesterday, 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 events or otherwise.

And now with that caveat, I'll turn the call over to Bruce Campbell, President and CEO.

Thank you, Lera, and good morning. I would like to begin by addressing the increase in our purchase transportation costs, which grew by over 400 basis points on a year-over-year comparison. Over a third of this increase is attributable to the change in business mix as both our truckload brokerage business and Forward Air Complete grew significantly.

As previously explained, these product offerings have higher purchase transportation cost components than our traditional airport-to-airport business segment and as a result increased our PT by approximately 150 basis points. This increase was both anticipated and expected as we entered 2007. What was not expected was a struggle we encountered during the quarter in containing the PT expense as it relates to the airport-to-airport revenue segment.

The key controllable factor that impacted us was our failure to ratchet the network back, in particular the number of direct loads we run, quick enough. This was driven in part by the most volatile demand disparity we have seen in our 16 years as a company. For example, the first few weeks of March had a very solid demand leading us to increase our capacity for the final weeks of the month only to see it flatten out. We experienced this type of up and down volumes throughout the entire quarter.

Additionally, we fought weather for what seems to have been every week of the quarter. While we always anticipate some weather disruptions in the first quarter, this year was the worst in our 16-year history. Because of the scheduled nature of the Forward Air network, it is extremely expensive to continually have to attempt to get our dedicated trucks back into their normal patterns. Because we are committed to providing the high levels of service, we have no choice but to position outside carriers to cover for where a scheduled truck should be.

We also incurred excessive out of route miles in moving freight around troubled areas. Hopefully, this problem is now behind us. I think it is important now to share with you the several steps we have taken to tighten the purchase transportation area immediately and into the foreseeable future. Equally important, we were able to do this without affecting our service offerings to our customer base. Our initial results from these changes have been very positive and we look forward to continued improvement as the quarter progresses.

The second area I'd like to address is the progress we have made in accomplishing the initiatives we feel are critical to completing the model, which we introduced the early part of this year. The expansion of our truckload brokerage continues to be strong with us experiencing over 40% growth in Q1. In addition to this strong revenue performance, we were able to establish two new regional brokerages, one in Florida and one in Greenville, both of which commenced operations in early April. We continue to look for solid revenue growth from this important segment of our product offering.

Forward Air Complete, our pickup and delivery service offering, continued to grow throughout the quarter producing just shy of $1 million of pure PU&D revenue, a number which does not include the additional line haul revenue generated as a result of this product. Importantly, Complete continues to show sequential monthly growth. Additionally, it's worthy to note we have experienced a slightly better margin in this area than we originally anticipated.

Our push into the airline segment of the market is off to a good start with a newly established team of some of the best sales professionals to actively pursue new opportunities. A large portion of this type of business requires us to participate in a bid process, and we currently have several in-house. While this is indeed a longer sales cycle, we continue to believe our efforts will be well worth the investment.

On the freight handling segment, we were able to make progress most notably in the banning and debanning area. Similar to the airline business, acquiring major wins in this area requires a long sales cycle, which we are now actively engaged in. More importantly, in the month of March we were able to hire Richard Owens as our new Vice President of [inaudible] distribution. We are excited about the opportunities this product line brings to us, yet we remain very cognizant of not creating channel conflicts with our existing customer base. We look forward to his many contributions.

I conclude by simply saying we have work to do, and I'm most confident our Forward Air team can do just that. Now Rodney Bell, our CFO, for the financial review portion.

Thanks, Bruce, and thank you all for joining me this morning. After my comments, we will open the lines for your questions.

Financial results for the first quarter 2007 are as follows. Operating revenue increased $5.1 million or 6.1% to $87.4 million from $82.3 million in 2006. The income from operations was $15.8 million, which was an approximate 6.6% decrease from $17 million reported in 2006. As a percentage of operating revenue, income from operations declined 250 basis points to 18.1% versus 20.6% in the first quarter of 2006.

Net income for the period declined $10.3 million from $11.0 million. Income per diluted share was $0.34 compared to $0.35, which is a 2.9% decrease from 2006. The components of our first quarter operating revenue were as follows. Traditional line haul revenue, which starting this quarter includes our Forward Air Complete pickup and delivery product, increased 3.3% from $71.9 million to $74.2 million this quarter.

Logistics revenue, which is primarily our truckload brokerage business increased 41.4% from $5.8 million to $8.2 million. Other revenue increased 8.7% from $4.6 million to $5.0 million.

The operating expenses associated with the first quarter of 2007 compared to the same period 2006 were as follows. Overall purchase transportation was 43.5% of total company revenue as compared to 39.4% in the first quarter of 2006.

The breakout of purchase transportation is as follows. The airport-to-airport network was 41.1% of airport-to-airport revenue compared to 37.7% in 2006. PT for logistics was 75.1% of logistics revenue versus 71.9 last year. Bruce has already covered the details behind this area.

Salaries, wages, and benefits as a percentage of operating revenue declined 100 basis points to 21.8% from 22.8% in 2006. This is primarily due to lower incentive payouts attributable to not achieving budget goals along with lower health costs due to plan changes implemented in the quarter.

Operating leases as a percentage of revenue increased 10 basis points to 4.3% of revenue from 4.2% due to higher lease payments on facility upgrades. Depreciation and amortization as a percentage was down 20 basis points but were flat on a whole dollar comparison. Insurance and claims increased slightly 10 basis points to 1.9% from 1.8% in 2006 due to slightly higher premiums and claims experience.

Finally, other operating expenses decreased 60 basis points to 7.7% from 8.3%. This was primarily due to better cost controls in discretionary spending. Other relevant operating statistics for the quarter are as follows. Total assets were approximately $213 million for both the end of the year, as well as the end of the quarter in 2007.

Cash flow from operations were $10.4 million for the quarter end. Our cash and short-term investment position decreased $22.4 million to $47.5 million from $69.9 million at year end. The company repurchased 242,000 shares of stock for approximately $7.5 million and an average cost of $31.12 per share. 1.5 million shares remain available for repurchase under our 2005 repurchase plan.

Average line-haul pounds per week for the first quarter increased 1% to 31.3 million pounds per week from 31.1 million pounds per week in 2006. Also during the quarter, our average shipment size declined 4% from 717 pounds per shipment to 688 pounds. Total shipments for the quarter were up 5% versus the first quarter of 2006.

Business days were 64 for both periods. The number of terminals remained the same at 81. Finally, guidance for the second quarter is as follows. We are forecasting operating revenues to grow 6 to 10% in Q2 2007. We are projecting EPS to come in between $0.37 and $0.41 per share compared to $0.41 per share last year.

Thank you for joining us and the operator will now start taking questions.

[OPERATOR INSTRUCTIONS.]

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

Thanks. Good morning, guys. Bruce, I guess in listening to your comments on PT, I think I have a feel for it but I would love to get some more color, if possible, as to sort of exactly what happened. Was it just weather that created your network imbalances, and can you give us a little bit more sort of clarity and comfort on what you've done to fix it so that we know that it's not going to recur?

Well, first of all, I hate to use the whine weather, but -- and we have never used the whine weather in the past, but this quarter was just unbelievable. That's part of what we do in our jobs and that's something that we have to deal with, and so we did deal with it and we'll move on from there.

More importantly to me on the PT side was our struggle to predict and adjust to the volumes on the daily basis, on the weekly basis, and the best example I can give you, although it occurred throughout the quarter, was what happened in March. We had two very solid weeks in March and thinking that we would have a normal peak, end of the quarter surge of business, you know, it fell flat and so here we are sitting on a too large of a line haul scheme and one that ended up costing us money. So, you know, it was difficult to adjust to the demand.

All of that having been said, I think we were somewhat spoiled in that we've always been able to drive the demand and we've always been able to have power. What we have done to correct the situation is we have really scaled in particular a lot of the direct loads back because if you look at the three ways we move freight it's either through our national hub, it's through one of our regional hubs, or it's a point to point. The simple way to scale back capacity is to ratchet down the [inaudible], and that's exactly what we've done.

There are many other components to it, and not to make it sound overly complicated, but I can assure you we are watching every single one of them. The metric we use every day and every week, and the first one I want to look at on Monday, is pounds per mile, and I can tell you the last two weeks have been very good. Now, I can also tell you the first two weeks of March were very good. And hopefully, we won't have occur to us in April what did in March, and if we do, we will be smart enough and quick enough to ratchet back the network.

So, having said all that, I guess in retrospect I'm somewhat disappointed in how we reacted. I think I understand it, but I don't accept it. I don't think anybody on the Forward Air team accepts it because we know we can do better, and I truly expect us to do better and to do better immediately.

Okay. So in the guidance, which seems to be kind of continued conservative revenue guidance, which is not a surprise, but the top end of your range is flat earnings, is that more reflective of, you know, until the weight per shipment really picks up, you're not going to be able to drive the earnings, or is it new initiatives or are there some lingering costs that are keeping those earnings from being a little bit better?

I don't think we -- hopefully we don't have any lingering costs. I think it's a combination of the first two and a number of other items. You know, we have traditionally -- it's even been reported today that we give bad guidance, but we have traditionally been very conservative in our guidance. You know, we've been through a less than stellar, especially compared to our previous quarters and history, and we're being conservative here.

All right. Now, if the stock is weak, you've been buying stock, but it didn't look like you were very aggressive in the quarter, is there any reason why you wouldn't be more aggressive, and there had been talk before about potential uses of your balance sheet since you haven't found anymore acquisitions. Is there anymore thoughts about being further aggressive with your share buyback program?

Well, we have authorized, as you know, still well over a million shares that, under the right circumstances and without violating any SEC regulations, we would certainly be in buying. That having been said, we continually look at our balance sheets' structure. That is a board issue, and the board meets, as you might expect, on a quarterly basis, and they will make the decision as to if there will be any change in the balance sheet and the structure or the capital structure that we have today.

All right. And my last question since we were instructed we can't queue back up, of the products that you -- are sort of your growth initiatives, do you feel like by the second half of this year we'll get more tangible production out of those products that's going to help the bottom line? And would you just comment on sort of where you think you are in terms of your progress on those initiatives?

Well, I think you have to take each one separately. The truckload brokerage -- they're doing extremely well. They have a great professional team and they are showing some really nice growth, both from a standpoint of revenue to standpoint of margins. Forward Air Complete has finally, it seems, gained some pretty good traction and we're seeing some good week-over-week, month-over-month results, and we're hoping that that continues. And that requires no more investment. We're done investing there other than we continue to do normal software updates, but nothing of magnitude there.

On the airline business, you know, we basically have just spent money there so far. We have attracted some business, but because of the nature of that business, as I discussed, it takes longer to have an impact. We have a number of bids in place now. Hopefully if any of those hit, we're going to see some real progress.

And then on our value added handling processes, again, a little bit longer on the sales cycle, but we are really concentrating our efforts there in [inaudible], which is a new product line for us. You know, we're not going to sit here and tell you we're going to generate $15-$20 million of revenue and, you know, $5 million of profit in that this quarter. You know, our goal is get that up and running. Get the infrastructure in place and let's see what we can do with it. We think it will be a very positive contributor, as we think the other three areas will be. And really, one of them already is. The second one, Complete, is very close to it, and the other two are the ones that we are in developmental stages now, so we think they're going to have, hopefully as we enter the second half of the year, a very positive impact on our financials.

Great. That's very helpful. Thanks a lot, guys.

Thank you.

Your next question comes from the line of [Dan Moore] with [Scopist] Asset Management. Please proceed.

Good morning, guys.

Good morning.

Just a couple of questions here. I was wondering if you could help us to maybe quantify the effect of weather a little bit. I know you don't like using that as an excuse, but I think certainly for my purposes it would be helpful to understand what you have deciphered as being the year-over-year impact.

You know, that's extremely difficult. We can tell you what excessive miles that we had to run out, you know, what we call out of route miles. For instance, if we had a load out of San Francisco that we had to run the southern route because we couldn't get through the mountains, which seemed to occur every week, you know, if we guessed and we did look at this and it would be a guess then because it's difficult to tie down, it would probably be around a hundred basis points, and that's a guess.

Okay. Fair enough. I appreciate it. Then, just a couple of others. Rodney, maybe if you could kind of give us a sense of an update on cap ex guidance and how you expect that to proceed through the year excluding, you know, any balance sheet initiatives the board may be considering that, you know, that's already been addressed on this call, I guess, to some extent anyway. And then when is the board going to be meeting next?

We're to gather in late May.

Okay.

By the way, Dan, I knew you were going to ask the weather question. Anyway, we're on track on our cap ex. We spent $22-$23 million in Q1 over the balance of the year. We have the building to complete in Dallas and the building to complete in Atlanta and then our normal cap ex, so that number will be around $20 to $22 million for the balance of the year.

Okay. Fantastic. Guys, appreciate it.

You're welcome.

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

Good morning, Bruce and Rodney. Question for you on the imbalances that likely came up in the quarter. How much of that is a customer cherry picking, kind of, the most difficult or the most expensive lanes and they get a little bit more creative when the shipment volumes of their own decline versus just the over weak pattern of the freight environment?

You know, I don't think we experienced a lot of what you just described, Jon. I think what we do experience, both now and have in the past, when things get slow on the truckload side is we will lose the larger shipments, such as, say, a shipment around 8,000 pounds, you know, hits what we call a pivot weight and it's almost cheaper to ship it via truckload. And we do see those type of shipments exit our network, and they go into a truckload. That's really the only cherry picking that we see in the business.

Okay. Now, the imbalances off the West Coast, I mean, do you attribute that more to the fact that, you know, the inbound international product continues to remain strong while the rest of the freight environment remains weak?

Yeah, I think that's a fair conclusion.

Were there any other noticeable imbalances in your network relative to what you'd expect to see in the first quarter?

There was not.

Okay. And then you made the comment, Bruce, about you had ramped up capacity and then the demand didn't necessarily materialize in certain weeks. What exactly did you mean by that? I mean, are you committing to capacity and then having to pay for it if you don't use it on a short-term basis?

Right. You have to, for instance, this is the first time in 16 years, Jon, that we did not experience a March, end of the month peak. We made that mistake in anticipating that peak because the first two weeks of the month were very strong.

Sure.

Which would lead you to believe that the final two weeks -- so, indeed, you start -- not scrambling, but, you know, we have processes that we go through to make sure that we have adequate power and adequate -- in the right locations across the U.S. And in some cases it will cost us money. In other cases, what typically happens is we get -- because we may have X number of trucks allocated to XYZ terminal, they will use them all, even though they didn't need that many and as a result we'll see our load average decline. That's where we really get popped.

I see.

That make sense?

Yeah, so you're not necessarily committing to these, it's just the efficiency by which you're using the third party power?

Correct. We do commit to an outside carrier as an example and we end up not using them because of the market. We typically will pay them a $250 cancellation fee, and that's the extent of it.

Okay. That makes sense. Thanks. And then lastly, can you just go through how the PUD revenue and volume appears now in your statistics, if at all? I mean, I think, what, revenue is in the line haul and that was about a million dollars or so and then the volume -- is that in your volume statistics or not?

The long-haul that's attributable to it, Jon, is in the volume statistics.

Right, but it's not -- I guess it's not double counted by any means?

On occasion our sales team tries to double count that. No, it's not.

Okay, and so the 71.9 million that you referred to in the prepared remark, that would've been kind of your pure line haul business apples to apples relative to Q1 last year?

Right.

Okay. And then the rest is all revenue directly associated with PUD?

Yes.

All right. Very good. Thanks, guys.

Thanks, Jon.

Your next question comes from the line of Brannon Cook with J.P. Morgan. Please proceed.

Good morning.

Good morning.

Good morning.

You guys talked about the volumes fluctuating a bit through the quarter, particularly in the month of March. Could you kind of give us a sense of how volume trends progressed through the quarter on a month over a year ago month basis?

Sure, Brannon. January, in terms of the tonnage in the airport-to-airport, was down just over 1%. February came back and it was up three, almost 3.5%, and then like Bruce mentioned earlier, March was kind of crazy to start off. The first two weeks were very strong and the last two weeks, which are typically and historically are two of our better weeks, were so bad that it took March down to being flat. So, from a revenue standpoint, that equated to 7.3% month-over-month in January, 8.6 in February and then only 3 in March, so you can see how dramatic the impact of March was.

Okay. Do you have the numbers on where we are so far in April?

Yeah, the first two weeks of April were, you know, just okay and we've seen some signs of life in the third week. You know, it continues to be a little bit spotty.

Okay. Could you talk a bit about the pricing environment? I guess you guys took a bit of a smaller rate increase in March than you did a year ago because you were looking for some volume commitments from customers. Can you maybe talk a bit about how that impacted you in the quarter and, you know, what to expect in the second quarter?

Sure. It's kind of interesting the way that we did is the price increase this year. We allowed customers to contractually commit to a volume commitment to forego the price increase and that's evaluated on a month-to-month basis. So, about two-thirds of our customer base committed to that, so, on March 1 the 3% increase only went to a third of our customers, so there was only a 1%, you know, total impact on the yield due to pricing, and on -- May 1 will be the first time that we -- the customers that have not been able to make that commitment, the price increase will be addressed there, so it'll be kind of, if you will, a stretched out impact versus prior years where we got the full 3% in March.

Okay. All right. Great. Thanks for the time.

Thank you.

Thank you.

Your next question comes from the line of David Ross with Stifel Nicolaus. Please proceed.

Good morning, gentlemen.

David.

Can you talk a little bit about your growth via acquisitions? I know you haven't found any in a while, but which initiatives in particular, I guess, would be [inaudible] acquisitions and, you know, also within the airport-to-airport segment, is there anything out there that's even appealing?

In the airport-to-airport there is not, although you never now how that could change, but right now as we sit here today, there's nothing that we would have an interest in. Of the four initiatives, probably the most appealing one to make an acquisition would be in our tool distribution, but that remains to be seen.

Okay. And then can you also talk a little bit about the landscape currently in the airport-to-airport business? You mentioned earlier that you may have been providing almost too good of service by loading too many -- too much freight direct terminal-to-terminal rather than running it through the hub network. You know, how important is service in winning business in this landscape and, you know, what are you seeing out there?

If you took my statement to mean that we almost provided too good of service, I apologize. That was not my intent. My intent was we again run freight three different ways. We run it through the national hub, the regional hub, and the third way is direct. When we pull down direct, it's incumbent upon our operating team to make sure that we provide the same level of service that we did when we ran it direct. In almost every single case, David, we can do that. So, we've never offered too good of service or attempted to offer too good of service. We've always tried to offer the most consistent, reliable time definite service that we sell. Does that make sense?

It does. It was very helpful. Thanks.

You're welcome.

Your next question comes from the line of David Campbell with Thompson Davis & Company. Please proceed.

Yeah, just to go further on the pull down of the direct service, Bruce, your service was in insolence, but the reason you try to do more direct is to reduce costs. Is that not correct?

No, you're correct when you have adequate volume. But the opposite is true when you don't have adequate volume because what happens then, David, is you run air on the trailer. It's not fully loaded, so instead of it actually saving you money it will cost you money. So you're original assumption is absolutely true when we have adequate volume. The moment we have less than adequate volumes, then it reverses, which is why it's so critical that we get it shoved back into a hub where we can achieve load average.

Right. And do you have any explanation at all for the second half of March, the lack of a peak? I haven't -- can you tell from destinations what the biggest problem were -- what line hauls were the weakest?

Yeah, it was basically across the board, David, and candidly, I'd rather ask you why it's down. I have no idea. Our people don't. I mean, what our customers are telling us are the same things we're telling you. It's very -- volumes are very volatile. You know, they'll have a great week and the next week it'll fall off. It just is pretty difficult to project. Hopefully, we're coming out of that. As Rodney mentioned earlier, last week was a very good week for us, but again, we make no assumptions that that's going to follow through on the quarter.

You've had this problem before. I can't remember exactly what quarters and what years, but it's not the first time that you've had a problem with the purchase transportation costs and line haul, and there was always some solution. It never took you long to adjust. Do you feel that you've done it again this time?

We certainly hope so.

In the airline bids for new business, that will fall into the logistics revenue part of your P&L?

David, it's Rodney. Part of it will and part of it will fall into the airport-to-airport. It just depends on the customer and the customer's need because it's a mixture of both truckload and LTL.

Right. And freight handling, which you said would be some new incremental business for you if you win any of it, first of all, is that going to be in the other category of revenues or is that also a mix? And secondly, just could you kind of explain a typical freight handling contract that you'd get? What do you do?

Typically, David, that will fall into other unless it's a logistic solution like we're providing for [Seaco], for instance, where we're running the line haul for them, as well as doing the handling. The type of example is for the -- type of handling contracts that we're now enjoying some success is the banning and debanning of containers, and you know, there's also other areas that we're looking at as well.

So this would be loading of containers at airports, for example, for the airlines?

That's one example. It could be ocean containers, as well, where they bring the containers to our facility and it can be loading or reloading of those and anything that can drive a fee, David, we're interested in looking at because we're leveraging our facility, our people, and our equipment, so that's the drive behind that.

Right. Right. So, you really -- you really think that the pickup and delivery business is also on its way. You mentioned two new cities, and I got that pretty fast. Was that in the logistics business where you're talking about two new cities, truckload brokerage business?

That's where Bruce mentioned the truckload brokerage. We opened a truckload brokerage here in Greenville, the corporate headquarters, that's already kicking pretty well, and then from a --primarily to address balance issues in Florida we've opened one in Miami.

Right, right, right, right. So, you expect that revenue to increase faster as the year goes on here or is it 40%? Is that a target that would continue?

You know, 40 comes on kind of a weaker [comp] in the first quarter of 2007, but with the help from these new acquisitions -- not acquisitions, but new truckload brokerage opportunities, we think the number can be, you know, in the 30 range going forward.

Right. Okay. Thank you very much for the help.

Thank you.

Your next question comes from the line of Art Hatfield with Morgan Keegan. Please proceed.

Thanks for this morning, Bruce and Rodney. Bruce, can you just talk a little bit, and I know you've gone over this, but with the P&T, the third of the increase on P&T that you address is due to mix. How should we think about that going forward? Should that become more of a drag on PT where we as analysts really shouldn't try and compare purchase transportation as a percent of revenue from where it's been historically and we should get more focused on kind of the operating income margins?

Exactly. I think you will see, hopefully as our brokerage business and our Forward Air Complete product grows, you know, this is one time when PT goes up that is good. On the other hand, our concern is maintaining our history of having good PT in airport-to-airport segment and we've got to get back to that. What you will probably see us doing is breaking out the two segments so that you can better understand, you know, how we did on the airport-to-airport segment and then how we did in the other segment so that you can clearly see our progress.

Great. That's helpful. Thanks.

Your next question comes from the line of Adam [Fallhammer] with Forward Air. Please proceed.

Good morning, guys. I guess you guys hired me, huh?

Welcome to the Company, Adam.

I'm just curious, which of the four initiatives that you talked about will add density to the airport-to-airport network?

Our PUD initiative complete in most cases adds density to the Forward Air network. Once in a while we will use loads that brokerage has acquired for balance in our LTL system. That's balance only, a truckload shipment that would help us get out of Miami, as an example, back to Atlanta. Our handling can or cannot feed every one -- well, every situation will be a little bit different, Adam. And then finally, the airport -- if it's LTL from the airline, then it will feed our system and that will be a positive. And if it's a truckload, it will go into our brokerage group and be handled there.

Okay, and then remind me. How big of an opportunity -- or what exactly are you doing for the airlines and how big of an opportunity is that?

I don't know the exact amount of the size of the market. There are a number of very large airlines in the U.S., as you might imagine. In particular, a number of foreign flags. They have -- we do everything from picking it up at the airport, the taking out of a container, deconsolidating it is the word I was looking for, and then shipping it on to destination. The reverse is then true also where we will consolidate it for an airline at a location and then ship it to whatever gateway city they require it to be moved to for further exporting. So, it's a combination of both truckload movements, LTL movements, consolidating and deconsolidating it, and in some cases clearing customs for them.

Okay. That's helpful, and if I look at -- you know, you mentioned demand was spotty in the quarter and continues to be spotty, I guess if you had three buckets and you said, okay, we've got competition from other airport-to-airport trucking companies. We've got these general lackluster economy, and then maybe a third bucket is competition from TL carriers who are desperate for freight and maybe poaching what would typically be your freight, I mean, those three buckets, I mean, what's hurting you the most?

I'm most concerned with the economy. You know, we'll fight with anybody, we'll compete with anybody, we don't mind competing. It makes us better. But, where you can't make progress is where they're in business. So, that will always be our Number 1 fear.

And then as it relates to the economy, I mean, you did mention the weight per shipment continues to be a little bit down, but not -- I mean, it doesn't seem like that's down enough to really concern you. Is that true?

Oh no. If we lose 50 pounds a shipment, which is approximately what we lost throughout the quarter, and we -- you know, if we do 50,000 shipments a week times 13 weeks time 50 pounds, it is huge how it impacts us. It also impacts us, you know, in addition to the revenue side, it impacts us on cost characteristics because it's just as easy to handle 750 pounds as it is 700. It helps our load average because every shipment that's going on the trailer weighs 50 pounds more. I mean, there are a number of very positive factors that occur when the average weight per shipment increases. It's a critical metric to us and one we watch every week.

So, when you look at what's going on in April, you haven't seen any indication that the weight per shipment's getting better?

What we've seen is the continuation of what we saw in the first quarter.

Okay. And then do the comps get easier as you look out to -- and if I look at Q3 '06 and Q4 '06, I mean, is it going to be easier for you to put up --

[Inaudible] get easier.

Okay. All right. Thanks for the time, guys.

Thank you.

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

Good morning, everyone.

Good morning.

Good morning.

You know, Bruce, if I got all the numbers right, you know, looking at the volume here and the shipment count in the quarter, not too bad. I mean, I think I got shipment counts being up 5% and pounds per week being up 1% and surely understanding that the average weight per shipment's down, but can maybe we talk a little bit about the nature of a -- do you have some account wind or some new business, or is it more business with existing accounts and what's kind of driving the overall shipment count in the pounds per week?

Well, probably what we saw the most positive growth from was our West Coast and in particular, Southern California terminals, L.A. and San Diego. That was fairly consistent throughout the quarter and they've shown continued nice growth and that's a good thing to see. We have numerous wins that our sales team brought to the table throughout the quarter. As a result of all those wins, as we go forward and if we get a little kick in the economy, I think we're in really good shape because I think your analysis is exactly right. You know, we didn't lose it, we didn't go backwards. We basically held our ground under volume. We increased our shipment count, which is a critical component for us because if it goes backwards, that's when you're losing market share. We didn't go backwards. We grew it. So, I think our people are doing a really good job there. We just need a little kick from the economy and all these wins will come through and come through loud and clear.

Okay. And then, I guess, focusing a little bit on the West Coast, then, is there still, you know, some more opportunity out there? And I think that you have some, or at least you're working on doing some expansion in the L.A. terminal. You know, where does that stand, I guess, at this point?

That's a great point. We will move our L.A. terminal, which right now is just bursting at the seams, to a new facility latter part of May/early part of June depending on the finishing of the build out. That basically triples our size in L.A. and will allow us to really go after revenue opportunities that we have been somewhat constrained from in the past.

Okay. And then just lastly, here, you know, looking at the operating range in the quarter, you know, going above 80, and certainly it's still a very good operating ratio, but, you know, thinking about the change in the business mix and some of the growth in the different business on the go-forward basis, you know, is 1Q -- do you look at that as kind of a [inaudible] giving some of the challenges with the weather and the purchase transportation costs in the quarter, you know, or is that something that we can expect to kind of, you know, see on a go-forward basis in operating ratio in these levels?

Well, I think there are two answers for that. The first answer is as we grow, you know, our complete product and our brokerage products, you will see some degradation in our operating ratio because of the higher PT cost component. On the other hand, it had better be a trial for our PT costs in the airport-to-airport because that was not a good performance. So, we think we can improve that as we've talked earlier on this call. We think we had the processes in place to see improvement there. So, hopefully, the OR comes back to a much more what we consider respectable margin.

Okay. Thank you very much for the time.

Thanks.

Your next question comes from the line of Edward Wolfe with Bear Sterns. Please proceed.

Thanks. Hey, Bruce. I know it's getting late. I just got off the call with Burlington Northern, and they basically said they see no signs of the economy improving in the second half of the year and so they took guidance down for the full year. I'm just interested in where you sit right now, what the economy feels like, not just in the immediate, but whether you get any sense for the end of the year of any signs one way or the other right now.

You know, I really wish I did, Ed. I don't. I don't think anybody in our Company can. We just completed, as we touched earlier, I don't know if you heard that, you know, last week was a stellar week. Go figure. The first two weeks of the month were less than stellar. We just simply are struggling to get a grip on, you know, what's going on out there. Some of our customers, when we speak with our customers, they're doing great. Other customers you speak to, they're doing poorly. Some of the good customers, the ones that are doing really well, are doing very poorly in certain geographical areas, so it's really a just very wide disparity across the board, and as a result, it means that we have to be more nimble. We have to approach business that, you know, we just need to be really cautious in what we do in terms of if we plan for any type of search because I'm not sure it's going to happen.

Yeah. Besides from the demand side, there's clearly an oversupply of trucks with the pre-buy and all that which you guys are immune in some parts, and I'm guessing in some other parts people can put dedicated trucks on if there's too many trucks that impact you. Can you talk a little bit the competitive side, whether what I just said is true to some degree and also whether Kitty Hawk, who is now doing some ground business, is in the picture at all from a competitive standpoint?

From a competitive standpoint we have nationwide both Kitty Hawk and then a privately owned company called [Tam]. You know, we're starting to see some of the negative pricing consequences of having that type of competitor. You know, we let them do it. I mean, we're just not going to get down and do some of the silly things that have gone on. Our goal has been and always will be, you know, to take care of ourselves and look forward and to provide the best services that we can and we think for the most part we're doing that. As far as the other side, Ed, is, you know, the oversupply of trucks and all that, the big thing that we experienced, and we touched on this earlier, is where the truckload guys come in and poach the larger shipments. That's not unusual. I mean, that occurs in slow times and we actually expected it.

Okay. You're building a lot of facilities, though, all of the sudden for you guys. You just talked about the expansion in L.A. You know, you've had Chicago, Dallas. You're adding truck terminals. Is there some component that doing that long term that makes all the sense in the world, but with the slowdown, maybe it hurts you a little more in the near term as you're building that out? Is that one way to think of things?

You know, it's certainly a risk. I mean, without question, you know, if we were unable to attract new business to any of those facilities, there would be a risk. We think we have minimized that risk because, quite candidly, in their older facilities they can't survive. I mean, we've had freight outdoors in L.A. because we didn't have room for it in the building. We also think and are working very hard as we speak to have in place business ready to go quickly after we move. An example of how we did that last year, Ed, was when we opened our Columbus addition to the hub. Within a month we had the pilot nationwide [sword] in there, which basically helped us offset that additional expense. So, you know, your question's fair. There is a risk involved there, but we also are firmly committed to expanding these other business initiatives, and we can't do it without the right building.

The 250 basis point on margin deterioration, I know this is directional, but how much of that do you think is weaker demand in the network and how much of that is we've got these new startups that have lower margins right now?

It was primarily weaker demand and the fact that we did not adjust as quickly as we should've.

Okay. Thanks a lot for the time. I appreciate it.

Thank you.

[OPERATOR INSTRUCTIONS.]

Your next question comes from the line of Ken Hoexter with Merrill Lynch. Please proceed.

Great. Good morning. Bruce, I just want to understand. On one of the previous questions you had talked about the mix of PT costs. Can you break out for this quarter what the airport-to-airport segment and what was the growth of logistics?

You want the PT for each of the segments?

Yeah. Again, just so, like you said, we can understand how the core business is doing on costs and then how much impact the growth of the logistics business is having.

Ken, it's Rodney. The breakout -- the airport-to-airport PT as the percentage of revenue was 41.1 versus 37.7 last year and for logistics it was 75.1 versus 71.9 last year.

75.1 versus?

71.9.

Okay. Great. And, Bruce, I'm just trying to understand, I guess, looking at the results, you know, you had pricing that seemed to hold in a bit, but yet purchase transportation costs going up a lot better, so would your take be that the market is holding a little bit firmer than you would've anticipated or following on Ed's question with Burlington Northern's comments that it is deteriorating out there?

I'm not sure it's deteriorating. I think probably the term is, you know, to at best holding where it has been. We aren't seeing things like -- that we touched on earlier, Ken, we're not seeing the end of March or end of the quarter peak. You know, that's certainly had an impact on us. You know, but beyond that, it's very difficult for us to predict, you know, the economy. What we see today is we see, you know, things are, at best, okay. They aren't surging. They aren't in the pits yet. Hopefully, they won't get there. But, you know, we're just in a slow time.

Okay. In the past, Bruce, you've thrown out that you would expect in good economic times volumes to be up close to double digits in slower economic times 5 to 7%. Is that commentary now over with as you've kind of more saturated this marketplace, or you know, would you adjust those kind of long term targets in any way?

I think I would have no choice, correct?

All right. So, if you're seeing now -- flat now in what is a rougher economic times, in better economic times can you get back to double digit growth or will it not be that strong when you see some sort of rebounding?

I think we can. I think without question we can.

Is that by increasing penetration or you just believe the market would grow that fast?

I think we could see the market growth that fast, but it would also take some help from increase in penetration.

Okay. Appreciate the time. Thanks.

Thank you.

At this time we have no further questions.

Thank you. Thank you, everyone, for joining us, and I'd like to remind you that there will be a replay of this call on the Investor Relations section of our website one to two hours after the call. Thank you. Good bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.