Hub Group Inc (HUBG) 2009 Q3 法說會逐字稿

Good afternoon and welcome to the Hub Group third quarter conference call. We will begin with a discussion of the financial results led by Terri Pizzuto, Executive Vice President, Chief Financial Officer, and Treasurer, followed by an overall business discussion to be conducted by Dave Yeager, our Chairman and CEO. The Company will make its prepared presentation, followed by a question-and-answer session. Mark Yeager, Vice Chairman, President, and Chief Operating Officer, will join us for the question-and-answer session. At this time, all participants are in a listen-only mode.

Comments made by Hub Group employees during this conference call may contain forward-looking statements. Actual results could differ materially from those projected in these forward-looking statements. Our SEC filings contain additional information about factors that could cause actual results to differ materially from those projected in these forward-looking statements. Copies of these SEC filings may be obtained by contacting the Company or the SEC. Now I would like to introduce Terri Pizzuto, the Chief Financial Officer of Hub Group.

Thank you, Shanika, and thank you all for joining us.

I want to begin by covering three things. First, operating margin is higher in the third quarter than any other quarter this year. Second,intermodal volume improved as the quarter progressed. And third, Hub's yield initiatives have significant gross profit potential.

Here are the key numbers. For the third quarter, Hub's diluted earnings per share was $0.26. Hub third quarter operating margin was 4.1%. That is compared to 5.3% in 2008. Operating margin is higher than the 3% we had in the first quarter and the 3.7% we had in the second quarter of this year. At the end of September, we had $123 million in cash, and no debt.

Now I will discuss details for the quarter, starting with revenue. Intermodal revenue decreased 27%. This change includes a 12% decline for fuel and 9% volume decrease, a 4% price decrease, and a 2% decrease for mix. While our intermodal volume was down 9% for the quarter, our customer direct, 53-foot business, which is the biggest piece of our intermodal business, was only down 4%. Our wholesale business, which is the business we do with other intermodal marketing companies, was down 61%, due to price pressure. ISO business, which is business that we have that is mostly in 40-foot international containers was 28% lower than last year. ISO business was down because of periodic shortages of equipment and competitive pricing. ISO and wholesale together represent only 8% of our total volume. We have now experienced the full impact of the bids, which is why price and mix were down 6%. We expect that trend to continue into the fourth quarter.

Truck brokerage revenue decreased 27% due to 4% lower volume, 15% lower fuel, and an 8% decrease for price and mix. Mix changed, because our length of haul went down by 4%, or 31 miles. Truck brokerage volume is down 4%, but it was better than the 6 to 7% volume declines that we saw in the last three quarters. We also had a tough comp this quarter, since we had the hurricane-related work in 2008. A couple of other highlights in truck brokerage are that gross margin as a percentage of sales increased by about 250 basis points compared to last year, and we had 14 new customers in the top 50 growing customers.

Logistics revenue was 2% higher than last year since we brought on a few new customers. We think this sales trend will continue in the fourth quarter.

Gross margin, as a percentage of sales, was 12.4%. That's up slightly from last year. Total gross margin went down by $15 million. The biggest driver of that decrease was intermodal. In order of magnitude, the intermodal margin decrease was due first to price, second to mix, and finally, to volume. These declines were partially offset by cost reductions that came from better management of our drayage operations, and other margin initiatives.

Total cost and expenses were $32.3 million in the third quarter of 2009, compared to $35.9 million in 2008. The main reasons for the decrease in costs are lower head count, bonuses, commissions, and travel.

We had 1,029 employees, excluding drivers, at the end of September. That is an increase of 13 people compared to the end of June. We added people in logistics, for new customers that we're bringing on board, and at Comtrak for our new terminal. We think that our costs and expenses in the fourth quarter will be between $32.5 million, and $33.5 million.

Now, I will discuss 2009 full-year earnings guidance. For 2009, we're comfortable that our diluted earnings per share will be within the current analyst range of between $0.82 and $0.91, assuming there is no further deterioration in the economy. Weighted average diluted shares for 2009 are estimated to be 37.5 million.

Turning now to the balance sheet, and how we used our cash, during the quarter, we only spent $600,000 on capital expenditures. We will probably spend $3 million on capital expenditures in the fourth quarter. Free cash flow was $9 million in the third quarter. To wrap it up for the financial section, we're proud of our strong balance sheet, and our focus on reducing costs during this economic downturn. And with that, I will turn it over to our CEO, Dave Yeager.

Great, thank you, Terri. For the third quarter, Hub's intermodal volume declined 9%, which was actually a little bit better than we had forecast just a few months ago. We are particularly encouraged that the volume declines lessened as the quarter progressed. Part of this is attributable to some new business wins, but overall we believe that business conditions are better and have become more stable. During the quarter, we saw what we hope is the bottom of the freight cycle, with freight volumes slowly coming back. We expect that our volume will be down in the fourth quarter in the 4 to 8% range.

Due to the economic downturn and aggressive pricing environment, our gross margin did decline substantially during the quarter. As margins have declined, we have continued to maintain tight controls on our costs. The difficult cuts we made earlier in the year have enabled us for the second quarter in a row to reduce our costs and expenses by $3.6 million.

Service improved on all railroads during the quarter, compared to last year, with the Union Pacific showing the largest improvement. The trains ran faster than last year, with improved on-time performance. And because of this improved service, fleet utilization was excellent. And even though our UP fleet was substantially larger, the utilization of that fleet actually improved year-over-year.

For much of the third quarter, capacity was plentiful. However, we started seeing some significant equipment shortages on the West Coast in September. Equipment has also recently become tight in the gateway cities of Memphis, Chicago, Kansas City, and St. Louis. So the good news out of that, is that unlike last year at this time, we're experiencing a peak shipping season. The only down side is that it is unclear at this point how long peak will last. We are hopeful that this seasonal increase signals a return to more normalized shipping patterns.

The transition of our fleet to the Union Pacific was completed during the third quarter. This process went smoothly with no operational issues. This transition to the Union Pacific, the last four months, has been seamless to our customers and the reaction of these customers has been very positive. We believe we are poised to gain share as we benefit from having our fleet primarily concentrated on the Union Pacific railroad. As we discussed last quarter, the UP and NS intermodal business models compliment Hub Group's light asset business model. We have a significant fleet that operates on both of these networks, but we can also take advantage of containers that these railroads supply, and remain the largest user of these rail containers which gives us the ability to flex our capacity up or down as necessary.

Now, despite the drop in demand for truck services, Comtrak, which is our wholly owned drayage company, managed to grow its volume during the third quarter. Much of this volume increase was in the eastern region, where we have seen an overall growth in business levels. On the regulatory front, Comtrak has been working on complying with the California Air Resource Board, or CARB regulations, which are going to go in effect January 1st, of 2010. These rules state that only tractors meeting certain emission standards will be allowed to enter ramps in California as of again, January 1, 2010. Comtrak will be compliant by this date. We're also working closely with our third party drayage partners in California, to ensure that they also will be compliant. While there is still some work to do, we fully expect to have adequate capacity that is in compliance with these rules by January 1.

Our brokerage volume was down 4% in the third quarter. We did bring on some new business earlier in the year that partially offset the lower volumes of existing customers. And we do continue to improve the efficiency of this business. Operating productivity per load improved by 27%, year-over-year. In this market, where capacity is plentiful, we're able to buy better, which improves the gross margin. There remains significant excess capacity in the truck market. And although we're seeing some spot shortages now that were in peak season, we anticipate that the tightness in capacity will lapse as peak subsides.

Unyson Logistics had a steady quarter, with revenue up 2%. We will be onboarding some additional business in the fourth quarter and expect to see continued growth from this business in the quarters ahead.

Unyson recently won the Quest for Quality Award from Inbound Logistics Magazine. This is the second year in a row that Unyson has won this prestigious award, which is determined by customer survey data. We believe that this reward reflects the success of Unyson's efforts to closely work with our customers to engineer strategies that more effectively control their supply chains. And by more effectively controlling their supply chains, these customers are saving money.

One more upbeat note is that Hub has recently been recognized for our commitment to the environment by receiving the Smart Way Award. For the second year in a row, the US Environmental Protection Agency awarded Hub Group its Smart Way Environmental Excellence Award. Hub was one of three logistics companies to receive this award. We earned this honor because of our continued leadership in conserving energy and lowering greenhouse gas emissions. We will continue to partner with our customers, to help them convert from truck to intermodal, there by saving money, and reducing their carbon footprint.

In conclusion, despite a brutal pricing environment, our intermodal franchise protected its market share through this downturn. Although we have had to sacrifice some short-term margin to do so, we preserved our long-standing customer relationships and are also growing with some significant new accounts. Hub's fleet conversion to the Union Pacific has been flawless and we believe that this partnership positions us well for the future. Our intermodal volume, while declining, did improve through the quarter. And although the economy still has a long way to go, we believe that the future remains bright for intermodal, due to the excellent service, rails cost advantage over truck, and the environmental benefits.

With no debt, strong cash flow, and improving operational cost flow, and excellent customer and vendor relationships, Hub remains well positioned to take advantage of what is hopefully an improving economy. At this time, we will open the line up to any questions you may have.

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

Hi, Ed.

Mr. Wolfe, please unmute your line.

Sorry I was on mute. Hi, good afternoon.

Hi.

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

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

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

Well, they did improve through January, August, and September, and continue to improve --

July, August and September.

I'm sorry.

It is through July, August and September, they did, every month, they went up, Ed, but it is too early in October to tell you how we're doing, because we were only, you know, have measurements through 15 days of October.

And it certainly looks better.

And it certainly looks better. So what we think is fourth quarter, will be down between 4 and 8% with intermodal volume.

And that is relative to the minus 9 year-over-year in third quarter?

Correct. We think -- right, so we think when you compare fourth quarter 2008 to fourth quarter 2009, we will be down between 4 and 8% and we were down the 9% in Q3.

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

Gee, in my fondest dreams, Ed. But unfortunately, no. The pricing is pretty well set for this year. I mean it was a very bid brutal season, and the pricing is pretty locked in right now. You do see some of the guys that have more of a transactional business model, attempting to secure higher rates out of the West Coast. But for us, anyway, we're pretty well locked into where we are.

Okay. And Terri, in the EPS guidance range of $0.82 to $0.91, what do you have as the first third quarter -- the three quarters EPS? In other words, in first quarter 2009, what are you using as the number, I think second and third were a little --

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

Thank you. That's helpful. In terms of acquisitions, you can give a little update about what you're seeing in the marketplace, and in your various businesses? What looks a little bit more likely versus others?

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

Thanks so much for the time. Appreciate it.

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

Hey, good afternoon, guys.

Hi, Alex.

Let's see. Let me start on the TL brokerage. I think I heard volume down 4. What about the pricing mix and fuel components there?

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

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

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

Okay.

Do you want transportation? That's down 32%.

Sure. Okay. Now, I think I heard Dave say that in the east, you saw volume growth at Comtrak, but -- and maybe I shouldn't focus on Comtrak, but just broadly, can you talk about eastern growth, versus Transcon shrinking or however that worked out.

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

Just to give you a little bit of color as far as Comtrak. Those are relatively new terminals in the east and as a result of that, they're expanding it very aggressively, very rapidly, because we have a significant business base in those areas.

And that's -- is this an investment phase, so is this hurting your margins overall until they get ramped up?

Not really.

No.

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

All right. Let me just ask one more and I will turn it over. Staying with the eastern rail thought, there was a lot of talk out there about deals with eastern rails that maybe one of your competitors gets a sweetheart deal with one of the eastern rails. How do you think about the environment? You obviously are very happy with Norfolk Southern. Would that change the competitive marketplace if something like that were to happen?

Well, A, we don't think it is going to happen. We don't believe that there is going to be a quote-unquote sweetheart deal. Certainly, if it was to take effect, it would have a short-term impact, but again, we really don't foresee that occurring.

Okay.

We would be very, very surprised. We -- our working relationship, most of our business is on the Norfolk Southern, we do use CSX pretty substantially as well, but certainly NS has the bulk of our volume. And so we really do not believe that there is going to be a better deal out there. We think ours is quite compensatory to the Norfolk Southern and we will be competitive with anything that is perceived by any other entity.

Thanks for the time, guys. I appreciate it.

Thanks, Alex.

Thank you.

Your next question comes from the line of John Langenfeld of Robert W. Baird.

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

In terms of our dray savings, we are making a lot of progress there. We're very proud of our team that is doing that. So we are realizing savings from the dray bids. And in September, we saw better performance in terms of matching up inbound and outbound loads than we've seen in a while. So when we do that, saves us money. So -- that saves us money. So some of the savings offset our margin decline in intermodal. We also have other margin initiatives with assessorials. And for instance, we have lower costs because we're working closely with our dray men and our customers to increase our container utilization by carefully monitoring our pools of equipment.

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

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

Sure. And when do you feel like you will be able to move from the early stages to to where you're hitting full stride? Is it months, quarters? Or is it a 24-month type horizon that you're looking at?

I don't think it is 24 months. I think it is -- you know, some of it too is digesting the new traffic flows that we're seeing as a result of all of this bid activity. I think we're going to be spending most of this fourth quarter continuing to refine. And realizing more and more value over the course of time. But it is not a 24 month process by any means. It will always be with a process. It will always be something that we continually try to -- continue to root out new efficiencies. But at the same time, I think we will be very much up and operating full steam in the new model, into 2010, and really have extracted a lot of the value at that point.

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

The disconnect meaning that import volumes remain fairly soft?

Yes. Versus the seasonal sequential build that we saw through the quarter both with you guys specifically and really broadly across the domestic freight side.

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

Okay. Good. And then on the wholesale side, obviously down this quarter, but have you seen an increase in conversations among IMCs in that business, you know, given some of the uncertainty, with their existing partners that may have arisen during the quarter?

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

Right. And unlike our total intermodal volume that improved as the quarter progressed, wholesale did not. I mean, with that being down 61%, it isn't doing that great.

Well, we may protect our existing wholesale customers, I don't think we're looking for new ones right now. Our whole network is at capacity anyway.

Great. Well, thanks for the time.

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

Hey, good afternoon, everybody.

Hi, Todd.

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

You're right, Todd. We basically said we're comfortable with the guidance, the analysts range, which was between $0.82 and $0.91, ssuming there is no further deterioration in the economy. Whereas last quarter, when the range was different, I think it was between $0.80 and $1.04 at that time, we said we felt comfortable with the low end of the range. So a little different now. Only because the analysts' range has changed.

Okay. But I guess nothing else coming through. I mean there is no -- from a cost standpoint or a margin standpoint, nothing different in the fourth quarter. Prices are pretty much set at this point. And have you some visibility on where volumes should shake out at?

Right.

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

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

Well, go ahead, Terri.

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

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

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

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

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

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

Yes. That's right.

Okay. So that's at least one of the prerequisites I guess that we have to have. Last one, and I think we got part of the answer, but Terri, you can break down again what the volume growth was in the east and what it was in the west and I think we got part of the east now and I want to be sure. I think you said it was down 5% but you had one customer that would account for one-half of that so if you exclude that one customer, are you saying that the volumes would be down 2.5% and what was it in the west?

In the west our transcon volumes were down 16%.

Okay. And then did I understand the piece about the east correctly, that you were down --

You did.

Okay. Got you. Thank you very much.

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

Hey, good afternoon, guys.

Hi, John.

Going back to your commentary on pricing, and I know you don't have any visibility, or limited visibility into 2010, but if we get into next year and there is still some downward bias on rates, at what point do you think you have to go back to the rails and start looking for some rate relief with the railroads, and what is your -- what is your opinion on their willingness to negotiate, as they try to hold on to their own pricing power?

Well, I think that the way that -- that they have actually worked on us but it is on an account by account basis. And not so much a broad rate decrease. So we will keep them in the loop as -- if there is pricing pressure downward, which honestly I do not anticipate. I would be very surprised, unless we have that proverbial double -- W, and the economy falters yet again, we should not have downward pricing, but you know, we keep them in the loop and we certainly would approach them at the first sight of more blood.

Okay. Again, sticking on that subject, and I hate to beat a dead horse here, but in terms of just the excess truck capacity, and I know you're still seeing a fair amount of activity, on how a conversion to intermodal and that type of thing, but are you still seeing any pressure from traditional truckload players, you know, pursuing intermodal loads, and has that been a culprit in the weaker pricing that you've seen?

I think anecdotally, we've seen some circumstances in which shippers were able to actually convert back to over the road, versus intermodal, because of low ball numbers that came in the door. Not too much in bids. Most of the time, bids are segregated out, intermodal or highway. We've seen the occasional shipper who has shifted back to the highway mode. It is normally, or oftentimes predicated on wanting to come back if the market does shift back.

So I can't say that we would look at that as a major factor in the volume loss that we did suffer. Most shippers remain committed to try and get as much freight as they can into the intermodal network as long as it makes sense. So certainly, shippers are continuing to get calls over day from over the road carriers looking for more freight. There it is no question about that. But most of the shippers we deal with I think have made modal determinations before they ever get that call.

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

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

Okay. Very good. Thanks for your time, guys. I appreciate it.

Thanks, John.

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

Thank you. Real quick, Dave, you talked about asset utilization improving. How fast are you turning your containers these days?

Mark do do you have that --

We're doing better than two turns a month. Which is good.

And better than last year.

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

You think that can improve?

We could squeeze a little bit more out of that. Not a tremendous amount. But we could squeeze a little bit more out of that.

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

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

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

Just one last question. You talked about pricing being weak. Any particular lanes where you're seeing weak pricing?

The transcontinental lanes from the East Coast to the west were the -- absolutely the most severe that we had seen. We had one carrier who was being a bit irrational out of southern California, to the east, which makes no sense at all. But nonetheless, they were. But predominantly just to answer that question specifically, it is northeast to SoCal.

Okay. Great. Thanks for your time. That's all I had. Congratulations on a nice quarter.

Thanks, Kevin.

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

Thanks, guys. Asked and answered. Appreciate it.

Thanks, Ed.

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

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

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