Hub Group Inc (HUBG) 2006 Q1 法說會逐字稿

Ladies and gentlemen, good afternoon, and welcome to the Hub Group first-quarter conference call. We will begin with a discussion of the financial results led by Tom White, Senior Vice President, Chief Financial Officer, and Treasurer, followed by an overall business discussion to be conducted by David Yeager, our Vice Chairman and Chief Executive Officer.

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. We would like to start by noting that statements made in the course of this conference call that state the Company's or management's projections, intentions, hopes, beliefs, expectations, or predictions of future, including projections regarding 2006 earnings, are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those projected in such forward-looking statements is contained from time to time in the Company's SEC filings, including but not limited to the Company's reports on Form 10-K for the year ended December 31, 2005. Copies of these filings may be obtained by contacting the Company or the SEC.

Now I would like to introduce Tom White, the Chief Financial Officer of Hub Group. Please proceed, sir.

Thank you, and good afternoon. Before I discuss the quarter, I would like to highlight a few significant items. First, we closed the Comtrak acquisition on February 28, so we have one month of Comtrak's results in our figures. Second, we have classified the results of Hub Group Distribution Services, or HGDS, as a discontinued operation. I will comment more on HGDS in just a few minutes. As a result, the primary focus of my discussion will be on the continuing operations of Hub Group. The continuing operations include intermodal, truck brokerage and logistics. And for your reference, Comtrak is included in intermodal.

So for the first quarter of 2006, revenues of continuing operations were $357 million, an increase of 8%. And gross margin was 13.3% of revenue, an increase of 18%. Diluted EPS of continuing operations was $0.41 per share, an increase of 86% from 2005. Discontinued ops EPS was $0.03 per share in both the first quarter of 2006 and 2005. As a result, the total EPS for the quarter was $0.44 compared to $0.25 in the prior-year quarter.

Now I will discuss the revenue. Intermodal revenues increased 11%, truckload brokerage revenues grew by 16%, and logistics revenues were down 25%. The intermodal business includes a volume increase of 3%, an increase of 3% from the addition of Comtrak, and a combined increase of 5% relating to pricing, fuel, and mix.

Truckload brokerage revenue increased by 16% due to higher volume, pricing, fuel and mix. We are pleased to report this double-digit increase in gross revenue, and we remain focused on growing the revenue and margin.

Logistics revenue decreased by 25%, due primarily to the loss of four customers we discussed last quarter. We have added a few new customers so far in 2006, and are working on others. Based on our current estimates, we expect the annual year-over-year revenue decline to be in the 10 to 15% range. This has been adjusted since last quarter, primarily due to the timing of new business additions. Please note that it's difficult to estimate the new business timing, so actual results may vary from these new estimates.

Consolidated gross margin dollars or net revenues grew by 18.6%, which is substantially higher than the 8% increase in gross revenues. In absolute dollars, gross margin increased by $7.5 million compared to 2005. The increase in gross margin is due to the solid results from yield enhancement actions in the intermodal business and also from our Company-owned drayage operations.

Total costs and expenses were $34 million compared with $32 million in 2005. For the quarter, we included one month of Comtrak’s expenses. For the future, we estimate total costs and expenses to be approximately $36 to $37 million per quarter.

Total headcount for continuing operations was 1,500 at March 31. The gross operating margin was 3.8% compared to 2.4% last year. And the effective income tax rate for the quarter was 40%, and we estimate a 40% rate for the full year 2006.

During the quarter, we spent $1 million on CapEx. And we estimate our full year CapEx to be in the range of $7 to $8 million.

Now I will discuss the accounting for the Comtrak acquisition. We had a third party perform a valuation of Comtrak tangible and intangible assets for accounting purposes. For your reference, the total purchase price was $40.5 million, which included the original $38 million purchase price, $1.9 million for working capital, and $500,000 for transaction costs.

In summary, the purchase price has been accounted for as follows. We have recorded $12 million of goodwill and $8 million of intangibles for the Comtrak tradename and the customer relationships. The remainder of the purchase price was allocated to specific tangible assets, including accounts receivable and property, plant, and equipment, and specific liabilities such as accounts payable and other current liabilities.

And now I will cover the discontinued operations HGDS. On April 10, we received written notice from the President of HGDS that he intends to exercise his purchase option. We are working hard to get the sale completed in the second quarter. It will be done within the terms of the previously disclosed purchase option, which calls for a purchase price of $11 million. This amount will be adjusted up or down based on changes to two items -- working capital and net property, plant, and equipment at the closing date. The final true-up will be done after we close the transaction.

Regarding the status of share repurchases, we have made no share repurchases of Hub stock in 2006. At our last Board meeting in February, we decided to focus on identifying additional acquisition candidates consistent with our strategic plan. This plan calls for increasing our company-owned drayage resources and our truck brokerage business in the next few years.

Now I will discuss 2006 full year earnings guidance. For the full year 2006, we're comfortable that our earnings from continuing operations will be within the current analyst range of $1.90 to $2.02 per diluted share. We've included Comtrak in our 2006 estimates, beginning March 1, and is considered in our guidance at about $0.01 a share per month. We have excluded HGDS from the continuing ops numbers.

For comparative purposes, the 2005 full-year diluted EPS from continuing ops was $1.42. EPS from discontinued ops for the full year 2005 was $0.18 per diluted share. Weighted average diluted shares are estimated at 20.7 million. And this estimate does not include any share repurchase impact. And now you'll hear from Dave Yeager, our CEO.

Great. Thank you, Tom. After a great 2005, we are pleased to be starting 2006 with a record first quarter. Our intermodal business continues to be the backbone of our franchise, generating over 70% of our revenue in the first quarter. Despite ongoing rail service issues, this business line had a strong quarter, with revenue growing 11.3%, and our volume growing 3.2%.

While we're continuing to work to add new business, we're also maintaining our focus on strengthening our bottom line. We have been working to improve the performance of our low-margin accounts and low-margin lanes, as well as enhancing our recovery of accessorial charges. We also work to limit the repositioning of empty containers. Despite a volatile pricing market, our continued focus on margin enhancement produced an 18% increase in gross margin for the quarter.

As part of these initiatives we have also mitigated our risk in the automotive sector, significantly reducing or eliminating our relationship with two additional automotive parts suppliers. While we continue to do some limited business for this sector, we are carefully managing our credit exposure. We believe that protecting the franchise from excessive credit risk is more important than the volume that we forego.

In general, there is currently sufficient capacity in most markets, although we have seen some tightness in specific areas. Our fleet continues to be an important part of our available capacity. Despite a larger fleet, our fleet utilization improved during the first quarter of 2006 compared to the first quarter of last year. As a result of the concerted effort to reduce the number of empty moves and improving balance in our network, we repositioned significantly fewer empty containers during the quarter compared to last year.

During the last few months, we retired 1,000 48-foot containers, and as already announced, we'll be leasing 2,000 new 53-foot containers. This will result in a net add of 1,000 containers to our BNSF/Norfolk Southern fleets. The new 2,000 containers are scheduled to be delivered in the next few months before the peak shipping season begins.

We're also very pleased to have reached an agreement with the Union Pacific Railroad on an assigned fleet. The UP has assigned 2,000 existing 53-foot containers to Hub for our exclusive use. We currently have over 300 of these containers in our network, and will be putting the remainder into service over the next few months.

We now have assigned equipment arrangements with BNSF, Norfolk Southern, and Union Pacific railroads. By the beginning of the upcoming peak shipping period, our fleet will consist of 13,600 containers. This represents less than 60% of our capacity needs on any given day. For the remainder of our customer required capacity, we utilize the neutral railroad fleet.

As anticipated, we completed our acquisition of Comtrak at the end of February. We are now operating Comtrak as a stand-alone subsidiary, but over time we will integrate our Quality Services subsidiary into Comtrak to add the benefits of Comtrak's technology. As we emphasized previously, we intend for Comtrak to continue to service both Hub and its third-party customers, and we are very pleased that the vast majority of Comtrak's customers have continued to use Comtrak's services after the acquisition.

Drayage service is a critical component for each intermodal transaction. In the past, we have outsourced most of our drayage work to third parties, and have only recently started to make the concerted effort to increase the amount of drayage we perform in-house. We will continue to work on growing our drayage business, and also look at acquisition candidates that may be a fit for Hub.

Truck brokerage continues to gain traction in the market place. Brokerage revenue grew by 16.4%, our sixth consecutive quarter of double-digit increases. Customer demand was strong during the first quarter, and as important, there was also sufficient capacity available in the market at attractive prices. This helped our brokerage group cover more loads quickly and efficiently. To ensure adequate capacity for the peak season, we continue to add new carriers to our supplier list during the first quarter.

We believe that the highway brokerage business continues to be a very attractive market for us. Each of our locations now has experienced brokerage personnel. And since our realignment in early 2004, we have seen this business go from a run rate of $200 million per year to the current run rate of close to $300 million. We're continuing to develop our people, systems, carrier relationships, and customer relationships to continue to grow this business.

As we had indicated in our last call, we expected our logistics revenue to decline during the first quarter. And they didn't let us down in that regard. Our logistics group continues to work to develop its pipeline to backfill for this business. This process continues, but the logistics sales process is a long one. And therefore, we continue to expect that logistics revenue will be down for the year over year comparison to 2005.

As Tom has discussed, the call option to buy HGDS has been exercised. We now have 60 days to attempt to close the transaction and complete the sale of HGDS. While we cannot be certain that the deal will be consummated, we do expect to sell HGDS during the second quarter, pursuant to the terms of our previously disclosed option agreement. As we have long emphasized, HGDS does not have a strategic fit with Hub, and we believe the sale of HGDS will allow us to put more focus on our core businesses.

In conclusion, we're excited about a great start in 2006. We believe that our Comtrak acquisition positions us very well in both domestic drayage and the international drayage market, and will help us compete more effectively in those areas. We're also pleased with the revenue growth in both the intermodal and brokerage businesses, and believe our first quarter bottom-line results validate our yield-management strategy.

At this time, we will open up the telephone lines to any questions that you may have.

(OPERATOR INSTRUCTIONS) Ed Wolfe, Bear Stearns.

Can you talk a little bit about the intermodal marketplace? We've heard a lot about some increased competition from some of the truck guys -- being a little bit more aggressive with boxes and so forth. What are you seeing out there? Based on you saying 3% for fuel, pricing, and mix, it sounds like pricing is down net of fuel. Is that fair?

Ed, I will let Dave answer the question. But I think we said 5% for fuel, pricing, and mix.

Well, then, can you start by breaking that out again -- the 11 and change in revenue, how that breaks out between volume, price, and mix and all that?

Yes, I'm sorry -- 3% volume, 3% from addition of Comtrak, and then the remaining 5% relating to pricing, fuel, mix.

So what of that amount is pricing, and is it positive? And obviously, even if it's positive, it's decelerated. In that context, can you talk about what you're seeing in the intermodal space for supply and demand?

Okay, well, there's no question that the pricing aggressiveness has subsided somewhat. But we kind of anticipated that. We were not aware of any general rate increases the railroads were intending to do in the first quarter. And we do believe it's the appropriate action at this point. As we discussed publicly, we believe that our customers were becoming a little weary of the rapidity with which they were seeing rate increases.

As far as the overall market is right now, Ed, you know it's a very competitive market; always has been. We are seeing some aggressiveness from one of the relatively new entrants. But it's really nothing that is unusual, I would say, as far as this market during this period of time. You always end up with an excess of capacity. And as a result of that, they start to price in certain corridors to balance their fleets.

So is it aggressive pricing right now? Yes. Is it anything that's really troublesome for this time of the year? I would say no.

Okay, when I look at your gross yield that's expanded 60 basis points in a tough to get a rate increase environment. How do we look at that? Is some of that the Comtrak mix affecting that, or are you able to get a little less from your suppliers right now?

Ed, if you go back a couple of quarters, third quarter of '05, remember we had a kind of a similar deceleration in gross yields, where we had about an 8% deceleration. At that time, we reinstituted what we call the margin enhancement teams. And these teams are focused on low margin customers, loser lanes, accessorials, drayage productivity, etc. These teams work hard during the month. And every month, they meet with Dave and Mark, our COO, etc., to review the results.

So we think that this expansion was primarily due to the great efforts of the margin enhancement teams as well as our sales force. And to a smaller extent, adding Comtrak for one month -- but a much smaller extent.

So it sounds like it feels like some modest yield expansion is ongoing, at least in the near term. Is that fair?

We have got an awful lot of focus on it. We'll continue to have that focus. To your earlier point, in a somewhat uncertain pricing environment, that could impact some of the margins over time. But again, we're going to be very focused on growing the business, on growing it profitably, and continuing our margin enhancement efforts.

So with Comtrak, you'd talked about amortization of $8 million in intangibles. What is the time period for that? Is it five years, three years?

The intangibles are very long -- some are fifteen years. So I wouldn't estimate that at very short. Trade name, customer relationships, those go out to -- trade name is indefinite, and the customers are 15 years, given the strong retention.

And the sale of HGDS -- is there a range that we should expect? Is $10 million of fair kind of ballpark number? What should we think about coming in the door to offset some of this dilution?

Oh, the cash? Yes, I would say that based upon what we know -- and you can never tell when a receivable is going to be collected. But $11 plus or minus $1 million is a close number. But $11 is probably as good as any.

And based on your comments, we should assume that that more likely goes toward the next tuck-in acquisition than a share buyback?

Yes.

Okay. And just looking at the balance sheet, you paid $40 million for Comtrak. And as of March 31, you had $19 million in cash and no debt. Am I reading that right?

You're reading it right, Ed.

How do you track utilization of your container fleet? Dave, in your comments, you said that utilization was improved. What does that mean?

What we do is we monitored the number of shipments we have within our fleet in a given week divided by the number of containers so it is pretty simple math.

For the last four weeks have averaged about 14 days to turn a box. If you look at the normal -- or what historically a rail control box used to be, it used to move anywhere from 18 to 24 days. So anything under 15 is pretty solid, we feel, although we would like to get it down a little bit closer to 13.

Should we interpret that as the rail services improving?

I would love to say that's the case. We've seen some incremental improvement. It's nothing that makes you want to stand up and cheer but we have seen some incremental improvement in the rail service that has helped. And I think it's also just an intense focus on making sure we move the equipment as soon as it's [made available.

The rails that have reported have talked about the weather being quite helpful for their [network sales] this quarter. Do you benefit from the weather as much as the rails do? How should we think about that in this first quarter seasonally versus other first quarters?

Where it does help us is it does allow them to be more fluid. And so as a result of that, we do get slightly better service. It doesn't really have any overall economic impact on us.

Alex Brand, Stephens.

On the pricing front, I guess my question on that was if there's some aggressive pricing, is that really limited at this point to the smaller customers who can take advantage of what I guess you would call sort of spot pricing versus maybe your bigger, more contract-oriented customers?

Interesting observation. It is with people or those customers which usually are smaller, which don't have large networks that they need to try and gain capacity for. So that's a pretty good observation. It's also particularly attractive for those small companies that don't necessarily have a big peak surge, such as a retail customer would. But yes, I think that that -- it has pretty well been limited to that for the most part.

It sounds like, Dave, you feel like the first quarter, there's loose capacity. And all things considered, you didn't have too much trouble managing through it in the seasonally weakest quarter, is that an accurate assessment of what you said?

I think that's a fair assessment yes.

Okay. Now, one of the things you guys were trying or have been trying to do in your truckload brokerage was to position that to fit in more with your intermodal customers so you wouldn't lose the loads that went to truck. How is that initiative going?

That's a great question, Alex. And it's actually -- we are gaining traction on that. David Marsh, who runs our highway services operation, has done a great job in working with our sales force, to when a customer does in fact divert business to over the road, it is diverted to Hub's truck operation. So we have got several large accounts which right now are having issues with the rail service who are going to convert to truck that will be using our brokerage operation.

Great. And what about -- with the Comtrak acquisition, what is the integration process? And by that, I mean not only how is integration going, but what are sort of the opportunities you're working on to leverage their expertise into your network?

Well, first of all, we do believe that Comtrak does act more efficiently and offers a better service as well as makes more money than our [QS] operation. We are -- one of the beauties of this acquisition is we don't need to integrate it at a rapid pace. QS is up. It's operating. It's profitable. So we're taking our time.

The first integration is in Kansas City, which we are actually integrating as we speak. -- Kansas City, Atlanta, and Jacksonville is where we both had operating centers. So Kansas City is going to be the first integration. We will then move to Atlanta, and then ultimately to Jacksonville.

We will then -- upon seeing those three integrations, we will determine where next to roll QS into Comtrak's technology and management practices.

I think one of the synergies that we're seeing is Comtrak is currently -- they have been examining some of our book of business for potential synergies. And we do believe that there are some significant synergies that we can derive basically by matching areas where they have backhaul needs, and where we believe they have a backhaul that can support them on a consistent basis. They do a fair amount of long distance dray, as do we. And at this point, I was in a meeting yesterday in fact that -- that was the very topic with which we discussed -- identified about a dozen opportunities which we intend to act upon immediately.

So I am really excited about this acquisition, about the way that it is moving forward. And candidly, with Comtrak management's team too, and in the finance area as well. They had a hard close for March, which was probably the quickest they have ever had to do. And we're very, very effective at it.

In terms of -- it sounds like you're pretty focused on more drayage acquisitions. Do you need to finish some integration with Comtrak so that Comtrak can be sort of the manager of those acquired companies? Is there anything we need to worry about in terms of acquisitions that you might do?

Well, I think we can assure you -- one of our criteria for acquisition of drayage companies is that we get a good operator, that we're not going to be out purchasing any fixer-uppers. That's not what we need. We need basically drayage companies that have solid management teams that will stay on and assist us operate it.

So, no, I don't foresee that happening, Alex. If you're going to go out and try a quick roll-up of a bunch of divergent local dray, then I think you could have the issue. But we definitely will not do that.

Yes, I think that has been tried.

Yes, we just don't think that that's something that we're good at. And we have got too many other areas of opportunity to be fixing up a drayage company. It's a lot easier to pay a little more and purchase a solid operator.

You know, on the other front, we're still very interested in a potential brokerage acquisition that might be complementary with either some technology we may not have, or in fact may have a different business model. But to date, I think that what's -- the multiples that are expected within that industry of those that we would look to acquire just is prohibitive. And so until that changes, we will not be purchasing any brokerage operations.

Jon Langenfeld, Robert W. Baird.

A question for you just on the intraquarter trend. Can you talk to us how to the intermodal volumes proceeded through the quarter and into April?

You know, John -- this is Tom -- we don't really like to talk about monthly trends, whether it be in the income statement or the volumes or whatever. I think there's a lot of people out there talking about them, and you'll probably get as good information from them as anybody.

Okay. Did the volume target -- did it come within your range -- what you were looking for in the first quarter? I know the comparison was a little bit easier. But what, you had targeted 3 to 5% for the year?

Right, exactly -- in volume. So it was within line. So I was pleased with it at this point time.

Right, good. How much did the improved fleet utilization -- just qualitatively, how much did that help on the gross margin line?

That's a number I don't have in front of me, John. I think it's a very good question, and one we probably should try to highlight as we move forward. But I don't have that offhand, Dave, do you?

No, I do not.

And maybe not even specifically; maybe more just qualitatively. Does it feel like that was a big, a small, a medium-size contributor to the margin?

I would say it was more of a small/medium. I think the really big areas were the others that Tom had earlier outlined.

Okay, and I guess I just kind of look back on the gross margin line -- and obviously, there's a lot of other things in there. But it's been the best gross margin we've had a while in any quarter, if I'm not mistaken.

And it sounds like a lot of it just stems back to really mid last year and really sharpening the pencil and focusing on the right price to be charging customers. Am I reading that correctly?

If you look at it -- this is a business not of dollars. It's a business of trying to capture every penny. And there's no magic light switch or silver bullet that will enhance your gross margin. It's really just getting down and grinding it out. And that's what our margin committee people have been doing. And I think they have done a great job at it, and something they're going to continue to focus on. So it really is -- it's just an intense focus in that area which is going to continue to reap benefits.

Okay, and is it kind of a natural evolution? If you go back two years ago, more focused on your internal costs -- you obviously did a great job getting that under control. And now, it is -- where is the next big area? And obviously, this came up all throughout last year until you were able to effect change there.

You know, there's really two areas that we're extremely focused on, to your point. Our success in the prior two years was really in cost reduction. We feel as though we have a solid cost platform. And now, we must in fact maintain that. That's got to be our primary focus, because we have a firm foundation. The other area that I think we have been effective on, and the first quarter results reflect that, is that of margin improvement.

The other major focus we have right now is that of sales and of growth. And I would be less than honest with you if I didn't tell you that focusing on margin enhancement and sales growth at the same time -- there's some conflict there. But again, we intend to grow this business. And we're going to be aggressive on that. But we're not going to do it at the expense of our profitability.

And on the 13.3%, John -- yes, that's the highest we've seen since '04, I think -- one of the quarters in '04. And the obvious question is, is it sustainable? And I don't know the answer. It's very competitive out there. Margins do bounce around. If you get an irrational competitor with a lot of capacity that they want to get rid of cheaply, we're going to fight to keep our strategic accounts.

So I guess what I'm signaling is that I don't know if 13.3% will be there forever. But if I was a conservative man, I would probably go down a little bit from there. But it's nice to see it; I just -- my crystal ball is no clearer than yours. But there's a lot of factors out there.

Yes, I can appreciate that. And maybe on that front, the pricing side -- I think you captured this, but I want to make sure. You have some bigger competitors out there today in startup mode. But if you look at it in the aggregate, is it any different than it was four or five years ago, when you had a number of smaller competitors, each kind of going after competitive pricing tactic?

First and foremost, I think that actually those competitors that are the new entrants are not bigger than us in intermodal. (multiple speakers)

No, I mean in general.

I know -- in general. Yes, they are in the aggregate. But I did want to make that point.

And it is different. These are a more sophisticated group. They may have some solid relationships with some larger accounts, and certainly do. But you're right. It's always been a competitive environment. The barriers to entry have been limited in the past. And so while the IMC competitors have been losing market share to some of the new entrants, I think that the level of competition really has not shifted that much. It's just that you do have a smarter competitor out there.

And then lastly on that front, how important does the brokerage side become to you in this respect? Because clearly, you have competitors out there that are offering trucks. They are offering intermodal, and may be willing to discount one side to get the other. And I don't know if you are seeing that as part of the price aggression. But does your brokerage side maybe helped stem some of that competitive force?

You know, actually, we're not seeing that as part the package. I know there has always been a lot of talk in the industry about the one-stop shop and how attractive that may be. But I think customers look at it that no one company is best in class in all areas. And certainly, no one company has all the proper requirements for any customer as far as where they're backhaul lanes are and what best fits in their network.

So no, we are not seeing the new entrants sell that. Even if they did, I don't think it would be an issue.

Brokerage is important to us because it is a great growth vehicle. We've got a great customer franchise. And I think that -- again, the highway team is working very aggressively to take advantage of that franchise to grow the business levels. And I see that continuing to outpace the growth of any other business that we have.

John Barnes, BB&T Capital.

Let's see -- how long would you go without making an acquisition before you were ready to pull the trigger on some other use of the proceeds? And I guess to Ed's previous point -- $19 million in cash; it looks like that number is going to be closer to $30 million once this deal is done. Internally generated cash flow; you have got no debt. At what point -- and what are investors telling you in terms of their willingness to be patient before you guys are back in the market looking at your stock?

Well, on that, John, I think that we have committed to our shareholders that we do not intend to just build a warchest just to build it and to have it. We don't think that is necessary in our case.

At this point in time -- again, we are hardly of a mode that $30 million to your point -if you take the $17 plus the $10 or $11 for HGDS. But the $30 or so million I think hardly warrants yet that it's a necessity to do something else with that cash. We're active in the market, looking at various acquisition candidates. And if we feel as though we're not going to be doing something for the remainder of the year or something, I think we would very seriously address the stock buyback issue. But this point in time, again, we're still very focused on the use of cash with the acquisitions. And I think the Comtrak acquisition, not only from an accretion perspective, but from a strategic perspective, is a lot better use of our funds than a stock buyback would have been.

This is Tom. I can assure you we have very heated -- or very lively discussions at the Board level on the topic. And we're comfortable that it's been aired out. I think the Board is just asking for a bit of -- just make sure -- if you can find acquisitions that can be much more accretive and add to shareholder value than buybacks, let's not -- let's do that. So we're talking quarters, not permanent plans.

All right. Along the same lines, we have seen a little bit of a change in the mentality of some companies in this space as regards to capital structure. I mean, we've seen UTI now go out and take on debt to do an acquisition. And you've get companies like UPS talking about an inefficient capital structure and wanting to do something to address that.

Do you see a mind shift going on within your own organization about using the balance sheet a little bit more aggressively and not just stockpiling cash to do something, but actually saying, okay, a debt-free balance sheet is probably not optimal, and therefore we're willing to do something a little bit more aggressive?

It's a good point. We again did that have that discussion at the Board level. And yes, if we did have a situation where we had to borrow to do an acquisition, we would. I think you have got to look back just two years or so to where we came from, when we had hundreds of millions of dollars of debt. And we really wanted to get beyond that debt. And I think if anything, we're a little bit victim of our past, but we think it's also prudent.

So the short answer is, would we take on debt to either do an acquisition or a stock buyback? I think the answer is yes.

Absolutely.

You mentioned that by peak season, you will have 13,600 containers in your fleet. How many of those do you actually own versus assigned from other fleets?

We have -- even the newer boxes is a operating lease. But it is basically -- not a lot different than ownership. That will be 5,600 53-foot containers -- or no, 5,400; excuse me. We bought 3,400 last year, and we have 2,000 that are currently being built by Singamas in Beijing.

You said that 60% of your need -- do you foresee the need to bump up to that percentage going forward, as companies like BNI are announcing they're kind of getting out of the container fleets. Are you going to have to have commitments for a larger portion of your day-to-day need, or do you think 60% is kind of as good as you need?

Well, certainly to operate on BN, you're going to need to bring the assets. So there's no question about that. 11,600 of those containers will be on the BN Norfolk Southern networks. So I believe that that gives us a pretty good foundation with them.

Please keep in mind that one of our core strategies has always been to be the largest IMC on every railroad. Now the Burlington Northern is the only railroad that really requires you to bring the equipment. The others still want to provide it for you. So as a result of that, at this point in time anyway, I don't see that we are going to have to become a lot more asset intensive, just because UP, Norfolk Southern, CSX still want to bring the asset to us. If their viewpoints change, if their strategies change, that would change with it -- but not at this time. I don't foresee that.

Okay, and then you mentioned that rail service -- you have seen spots of improvement. Can you give us an idea of who or where geographically, and just are there still -- what areas are you most concerned about as we approach the back half of '06?

Well, the biggest part for the concern is always -- the key gateways, which are usually the key chokepoints in Los Angeles itself, in the Chicago region, virtually -- once peak hits, every place is -- you're monitoring on a daily basis to make sure it's not melting down, or you're running into [chassis] issues or any of a number of others.

You know, the overall improvement we have seen, again, John, is -- it's been really incremental. It's not that all of a sudden, wow, we've got a huge improvement in service in one corridor, with probably the exception of -- we have seen the UP suddenly go to 4.5 days out of their Global III terminal, which is Rochelle out to Los Angeles. And that's a big improvement in their service levels. I would say that is the one that stands out the most. The others, like the BN has been making some incremental improvements certainly, as has Norfolk Southern and CSX.

That UP -- at its worst, what was it? (multiple speakers) ballpark it.

Oh, gee -- it's probably about a day-and-a-half better than what it had been at one point.

Okay. And then lastly, let's wrap up with UP. You have got this baby steps with them. Could you give us an idea just -- other than this one facility, the overall relationship? Are you getting the containers, and do you feel good so far about the relationship? Or at what point do you feel like you can ramp this up more aggressively?

Well, we've always felt as though we have a good relationship with the UP. I think that this just enhances that one step further. Thus far, we have about 300-plus boxes which had been turned over to us which we are operating within our network. We're going to end up getting about 70 to 90 a week ramping up, which is a good way to do it. You don't want to kick it in all at once.

I think, number one, they need to see how this works and see if they like it. And we need to see how things function with them. But overall, we really work hard at all of our railroad relationships across the board. It's one of our -- when you're, for the most part, asset-light such as we are, you have to not only sell the customer, you have got to sell the railroad. And so we are used to that. We've always worked at the relationships. And again, I think that their relationship with us is very solid.

Okay. I lied; one last thing. You mentioned that you were working very hard at focusing a little bit more aggressively on equipment relocation. Can you just give us a couple of ideas on how you have done this, how you're getting better balance, and what you're doing to kind of keep that equipment relocation cost under control?

Well, there are several things we're doing. Number one, we're not sending our equipment to certain ramp locations where we just don't have enough outbound business to cover our loads. Also, we have been somewhat aggressive in certain backhaul situations that, instead of just reloading the container back empty, we'll go out and grab somebody else's pieces of business.

So it's basically -- it's some of the things that our asset-based competitors have done well for years, and that is just managing the fleet effectively to make sure you limit the amount of your overall empty miles.

I would say one other thing. We did have a strategy that we tried last year which, candidly, just didn't work. And that was to try and create a shadow fleet, if you will, whereby we felt as though if we sent our boxes [long] into certain deficit markets or surplus markets, that in the deficit markets, we would take more containers from the neutral railroad fleet, thereby at peak creating an overall bigger fleet, if you will, using the railroad's fleet and our fleet and making it bigger.

It really didn't work. And so that was a failed strategy. We're not doing that again this year. And that also is helping us limit the amount of repos, because we're not being as aggressive on pushing our boxes into those surplus markets.

Okay. Very good. That was very helpful. Great quarter. Thanks for your time.

(OPERATOR INSTRUCTIONS) Sir, we have no further questions at this time.

Great. Well, thank you, everyone, again for participating on the call. And we'll look forward to if you have any comments, etc., to hearing from you. Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect.