Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Pacer International, Inc. (NASDAQ:PACR)

Q1 2008 Earnings Call

May 6, 2008 5:00 pm ET

Executives

Lawrence C. Yarberry - Executive Vice President and Chief Financial Officer

Michael E. Uremovich - Chairman and CEO

Analysts

Alex Brand - Stephens Inc.

Thomas Wadewitz - J.P. Morgan

Jon Langenfeld - Robert W. Baird & Co.

Ed Wolfe - Wolfe Research

John Barnes - B B & T Capital

Analyst for Todd Fowler - KeyBanc Capital Markets

David Campbell - Thompson, Davis & Co.

Operator

Welcome everyone to the first quarter earnings conference call for Pacer International, Inc. (Operator Instructions) I would now like to turn the conference over to your host Larry Yarberry, Chief Financial Officer.

Lawrence Yarberry

By now you should have received the press release that we put out at about 4:00 Eastern today and in the press release it has of course the press release and financial statements comparing the first quarter this year with last years first quarter and it also has a balance sheet and an income statement.

As usual before we start our presentation, we need to make our normal disclosure regarding forward-looking statements or predictions of future operations. Such statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 and are based by management’s beliefs, or interpretations of information currently available.

These statements and assumptions involve certain risks and uncertainties and actual events may differ from these expectations as specified from time to time in filings with the Securities and Exchange Commission and we assume no duty to update these statements as of any future date.

As information, you can also listen to this earnings release on our website, which is www.pacer-international.com.

Now I’d like to turn our conference to our chairman and CEO Mr. Mike Uremovich.,

Michael Uremovich

Obviously if you’ve seen the press release, we had a very solid quarter and are pleased with the results. Revenue increased over $44 million, an increase of about 9.5% over 2007. Net income was up over 80% with EPS nearly doubling from $0.21 to $0.41 in the quarter. It was particularly heartening to be able to report these results, in spite of significant unusual items in the first quarter of ’08, as well as very volatile market conditions.

As we indicated in our earlier discussion for ’08, we expected some increased costs driven by three major factors in 2008: one was the continued accrual of incentive payments for our employees during the year; second some increased transition expenses as a result of implementing our new IP system and finally, some increased operating costs as a result of the VNSF contract.

This last item did not affect the first quarter, but the other two items, plus several customer bankruptcies and other matters, added over $4 million in additional costs in the first quarter of ’08 when compared to ’07. Without these costs results would have been even stronger.

In addition, as you know from the reports of other companies, market conditions are very volatile. The quarter started slowly, accelerated about mid-quarter and then softened again late in the quarter. There is a palpable tentative unease in the customer community and volumes are generally flat to slightly down in most segments relative to prior year. Market conditions in the most recent weeks have also been very inconsistent, with some weeks being relatively strong and others notably weak, when compared to prior year.

In spite of these conditions, our core intermodal business and intermodal segment was particularly strong. Income from operations increased $12.7 million, $11.4 of that from Stacktrain and $1.3 million from a combination of cartage and Rail Brokerage or door-to-door services.

All lines of business on the Stacktrain increased revenue, with particularly strong performance from the international and ocean carrier services. Our efforts to improve our cost structure also resulted in lower labor costs.

Total Stacktrain volumes were essentially flat, as international increases roughly offset slight domestic decreases.

Domestic volumes declined roughly 3.5%, but these declines were offset by increases in freight revenue per unit.

We’re particularly heartened by the increases we saw in our direct customer or retail IMC business. Volumes were up 85 in the quarter, yields improved and this unit was able to offset some declines in the wholesale channel on the Stacktrain. This growth follows on the heels of double-digit growth in the fourth quarter of ’07, demonstrating the building momentum in our core intermodal product.

In the fourth quarter we were not able to grow profitability as rapidly as revenue in our retail IMC product. In this quarter profitability, when compared to prior periods, grew faster than revenue. These improvements demonstrate that our focus on the end-user customer is delivering sustainable results. Our ability to continue and accelerate this improvement is critical to maximizing our added value to customers as rail costs continue to increase.

While I speak of the various intermodal businesses separately, since they’re reported that way, this is somewhat of a simplification: when our retail business grows rapidly and profitably, so does our Stacktrain business. Our wholesale and retail businesses are closely related.

In the lanes where Stack operates, over 80% of our retail business moves in Pacer equipment. It is the rapid growth of this retail door-to-door business that demonstrates our increasing ability to be directly competitive with bimode carriers and competitive IMCs. This progress has been hard won and we’re proud of the folks who made it happen. Providing door-to-door service is the core future business of Pacer and a growing strength of our retail business is a solid foundation on which to build our company. I’ll speak a little more of our longer-term focus in a few moments.

The significant movement in fuel prices between ’07 and ’08 contributed to our revenue increase, but also had significant cost and market impacts. Rising fuel prices impact us in several different ways, given the various fuel cost provisions of our underlying rail contracts.

Generally speaking, when fuel prices rise we enjoy some benefit in the immediate quarter in which the increase occurs, depending upon which carrier and under which contract the traffic moves; however, this benefit can be mitigated in subsequent quarters as the industries catch up to fuel price increases.

At the same time we receive some revenue benefit, we suffer revenue losses in that volumes and competitive pressures increase in the market. Fuel prices also negatively affect our intermodal trucking and retail operation, because there is a lag between the fuel increase and the time our price increases to the beneficial cargo owner. We’ll also have some short-term fix contracts where recovery of full fuel increases is not possible.

In aggregate fuel was a significant contributor to our first quarter results, especially given a comparison to last year’s fuel price; however, any quantification that requires simplifying assumptions, that would be misleading given our mix of products in the myriad of market affects.

We expected our first quarter to show some benefit from fuel and in the same vein, we expected that benefit to be reduced or even eliminated as the year progresses and a lapping of tacked up fuel prices works their way through the numbers.

Overall for the year we had expected the rapid rise of fuel to be essentially neutral, when comparing all of ’07 to all of ’08. If fuel remains at present levels, we may see some overall positive effect, but when combined with very tenuous market conditions we are not willing to draw any conclusions about the combined net effect by year-end.

For these reasons and because we also expect some cost increases later this year, we urge you to be very cautious in extrapolating the very strong first quarter improvement as holding for the entire year.

We continue to experience meaningful, steady, improvement in service provided by our underlying rail carriers. Average intermodal train speed associated with core carriers continue to increase and is at their highest level since 2003. Our other key performance indicators, such as total system velocity, terminal congestion, trains held and over the road performance are also much improved when compared to previous years results.

Network velocity continues to increase and our rail products are more consistent and reliable. We continue to forecast on going steady improvement and additional nature capital investment by our primary underlying rail carriers at key locations throughout the network will continue to support further improvements.

When compared to a similar period in 2007, this rail service improvement provided the same additional capacity as nearly 600 more containers in our fleet, or roughly 2%.

Less positively, we were disappointed in the overall performance of the logistics segment. Total revenue was up approximately 12%, but operating income fell. Operating income was down slightly less than $700,000 for the units in total.

This disappointment primarily centered on the transport or flatbed unit, resulting from excess capacity in the market, declining prices, higher fuel costs and increased claims expense. Compounding this problem, our SCS or transportation management group lost a major customer, who elected to bring the freight management function back in-house, during 2007 and we’re feeling the lapping effects of that loss.

Partially offsetting this decline were lower legal costs, some positive legal settlements and reduced labor and severance costs when compared to the same period of 2007. In addition, our international unit recorded improved operating income for the 2008 period compared to 2007, do to increased export and agricultural aid shipments.

Our truck brokerage product delivered a significant increase in operating income, albeit from a small base: it’s particularly encouraging to begin to see this unit deliver on its promise. The warehousing and transload unit also did well in the quarter. Market conditions are difficult and uncertain across all product lines.

The domestic intermodal market is flat to slightly down and there is continued excess truck capacity, which increases pressure on prices. Rail service remains pretty good overall, with only normal and derailment issues plaguing us during the quarter. Only the international export market appears robust and growing at the moment.

There’s a great deal of nervousness among shippers, particularly retailers, and the consistent drum beat of negative news from Wall Street, Washington and the media, seem to weigh on everyone’s minds. We have noticed developing weakness in some of the markets that causes us to remain very cautious about expectations for the rest of ’08.

Corporate expenses increased primarily from the accrual of incentive pay, interest expense declined slightly, capital expenditures in the quarter were just over $3 million, $3.1 million, entirely from our new IT investment.

Our guidance for the year remains the same, $1.60 to $1.70. We expected the first quarter to show strong improvement over ’07 and our performance was in line with internal expectations.

Again, as I mentioned earlier, we urge you not to take the first quarter and adjust annual expectation by the historical, quarterly calendarization. We do not expect to see similar improvement over the second, third, and fourth quarters, as we have seen in the first.

We will be absorbing some additional rail costs as we increase volumes on the BNSF, we will have some unusual expenses for the implementation of our SAP system, and we have adjusted our expectations for the market behavior in the second half.

We believe our guidance is realistic and we are not adjusting it at this time. If conditions change and warrant some update, we will obviously provide it, but right now we think the $1.60 to $1.70 should remain your expectations.

While we have some $60 million remaining on the authorization to repurchase shares, we’ve not been particularly active in the market in recent months. This authorization expires in June and the board at our meeting today decided to extend the authorization for an additional year.

We believe some of the pessimism around our stock is misplace, but we wish to husband most of our resources for the challenges facing us over the next several years. Current outstanding shares are $34.6 million.

Our cash flow remains very strong. Debt has been further reduced to $54 million in the quarter and we expect to continue reducing it through the year. We generated $20.1 million in cash from operations during the first quarter and we expect to generate free-cash flow of about $80 million this year. We see no reason why solid cash generation should not continue over the next several years.

During the quarter we used cash to pay the regular dividend, further reduce debt and continue our investment in the new IT system. We ended the quarter with cash on hand.

Let’s turn for a moment to our rail contracts. Like our major competitors relations with our rail vendors are typically characterized by multi-year agreements that are periodically renewed and when renewed, reflect than current market conditions.

Though it’s impossible to predict a specific market condition several years in the future, these contracts have consistently been renewed in ways that permit company’s like Pacer to continue to grow and deliver strong financial results.

As most of you are aware, we began an enhanced relationship with the BNSF at the end of the first quarter. This is a multi-year arrangement with increasing volumes over the entire BNSF system. We felt it was of strategic importance to Pacer to offer services on both major western railroads as we transition our focus to heavier emphasis on door-to-door services for our customers. While we expect the usual start-up challenges, we are pleased to report that they have been minimal thus far and we look forward to this addition to our portfolio.

We continue our dialogue with the Union Pacific. They have been Pacer’s primary partner in the West and we expect to continue to route major volumes over their system. Our current contract with the UP expires in about 3.5 years, late in 2011. We initiated discussions to explore the possibility of transitioning this contract at an earlier date in order to remove uncertainty, and we believe misperceptions, about our rail relationship.

To date we have been unable to receive sufficient inducement from the railroad to make it economically desirable for us to transition early. Our contract has significant economic value to us and we will not transition early without redeeming that value.

While our dialogue with the Union Pacific continues and we remain hopeful that some early transition might be possible, as of today we have to assume we will operate under our current contract until expiration in October of 2011, at which time we would expect to operate under a new contract that reflects the conditions in the market at that time.

It is still possible that we would transition early, but we feel it only prudent to move forward as if our contract remains in place until October of 2011. In any event, we remain confident of our future beyond the expiration of the contract. We’re the largest intermodal customer on the Union Pacific and a major player in the market. Both company’s are desirous of a continuing healthy business relationship and we’re confident that UP and Pacer will be doing business together for a long time.

Our current UP contract, while having some advantages, is not dissimilar in many aspects to other competitors in the market, in terms of contract duration and other features. We have renewed contracts with railroads in the past and we will do so in the future, just as our major competitors do.

While it’s impossible to predict precise market conditions four years hence, we do expect margins on some portions of our current wholesale ramp-to-ramp business to decline from historic levels, as we expect some portion of these margins will be captured by the railroads under newer contracts. To counter this expectation, we are increasing our focus on the full range of door-to-door services in both the wholesale and retail channels. We will increasingly provide these services in a combined truck and intermodal product with supporting logistics services.

We will make our money by providing customers an integrated door-to-door product with attendant coordination, information and supporting logistic services. This already occurs in our newer rail contracts and we would expect future rail contracts to reflect this fact.

I know that many of you would like us to predict just how much this might affect Pacer’s overall profitability and I simply cannot tell you that. Quite simply, I don’t know what precise market conditions will be at the end of 2011 and hence can’t predict our profitability in some of the segments. I am confident that we can generate healthy margins on other parts of the businesses and redirect our efforts over the next several years to mitigate potential future loss of margin in the ramp-to-ramp sector of the business.

In order to get this accomplished, we’re going to have to redeploy some of the resources we will generate over the next several years, strengthening our market position, our organic growth, but also perhaps by acquisition.

We will increase our market presence by aggressively growing the sales force, by expanding geographic reach, by expanding our local and regional trucking capability and by continuing to improve our position with major customer groups. We have already begun this transition.

This is why we focused so much this past year on improving the door-to-door service and our volume growth in this difficult market, demonstrates our success in doing so. Our customer feedback makes it clear to us that we’ve made significant progress in improving our services and we will continue to do so.

Other strategic efforts are aimed in the same direction. We know we have to become more efficient in many of our activities and we’re investing in new systems and processes to make this happen. The implementation of our new SAP system remains on schedule and on budget. We expect to begin transitioning some of our financial and operating systems over the next several months. This will form the basis for significant productivity improvements in all of our operations.

Our initial steps in improving efficiency have shown results in our financial performance during this most recent quarter.

We also know our logistics products have to improve and over the last several quarters we have made some progress in that area as well. We were disappointed that performance in our transport or flat board bed division in the first quarter clouded some of the operating progress, but we know from more detailed and recent information that this unit has improved as well.

The other logistics units continue to get better and become more integrated with our intermodal products. The international unit is handling record volumes of business at record profitability levels, primarily due to increased export traffic.

The warehouse operation on the west coast remains strong. Leadership changes and restructuring in the truck brokerage division have resulted in first quarter operating profit above levels in that unit for several years. We also believe there is significant opportunity in expanding our transportation management activity, which we characterize as SCS or supply chain services.

We may conclude that some of these units require additions in order to reach critical mass. This is especially true in our cartage and truck brokerage units. If the appropriate opportunity presents itself, we will not hesitate to acquire over the next year or two. We have no specific situation facing us at the moment, but we do expect to aggressively search for them.

To summarize, Pacer will continue with strategic focus of being a premier provider of door-to-door intermodal transportation using both truck and rail modes. We will support these services with growing and profitable logistics products.

We continue on our strategic path that emphasizes a strong door-to-door product supported by enhanced logistics services, improved rail relationships, and productivity improvements. Except for the deterioration in our flatbed trucking operation, we have made significant improvements in all phases of this effort.

As of today it appears we will continue to operate on our UP contract until scheduled expiration in October of 2011, though we will continue discussions regarding an early transition. We will continue to use the Union Pacific as our major western rail partner as we grow our business on the BNSF.

Our productivity will improve as the new IP system and redesigned work processes are implemented.

Our financial position remains strong and we expect to generate significant resources over the next several years to enable us to build upon our current strong market position. We are confident of our strategy and have seen progress in our efforts. Our numbers demonstrate that.

We intend to keep our focus on our business and on implementing our strategy.

At this time I’d be pleased to take some of your questions and I’ll be assisted in the responses by Mr. Yarberry, our Chief Financial Officer.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Alex Brand - Stephens.

Alex Brand - Stephens Inc.

Mike you talked about that you couldn’t quantify the benefit of fuel, but I’m assuming you can tell us, if we look at your revenue, you said volume, I think, was flat in stack and up in retail, so how much was price and how much of that price was fuel?

Michael Uremovich

Well the difficulty I have with it Alex is because the retails, we make more money when the retail business grows and it grows on stack; so, you get this offset where it may have helped stack profitability and hurt retail profitability, depending upon how the fuel worked its way through.

We looked at this in a lot of different ways and I guess my best estimate would probably be that the fuel impact on the revenue side was probably something in the 25% to 1/3 or a little, perhaps maybe even 40% kind of range and the rest of it was improved productivity, because our costs are coming down in many of these areas, as well as some price.

Price has been a little more difficult in the first quarter as the market’s been a little more tenuous and some of it is in yields because we had some customer situations where we had to take some action that resulted in us losing the business frankly, or not being willing to make certain bid kinds of concessions.

That’s the best estimate that I can give you.

Alex Brand - Stephens Inc.

Okay, but you did say, did you not, that you thought fuel was a significant contributor? Were you speaking of just revenue or is that earnings too and that’s part of the reason we shouldn’t extrapolate Q1?

Michael Uremovich

That’s part of the reason you shouldn’t extrapolate Q1.

Alex Brand - Stephens Inc.

Okay, now stack volumes flat, but retail up 8%, do you have a good feel for, I mean it doesn’t seem like the market’s growing at all. Do you know where you’re taking that share from; is it maybe mostly smaller players or any thoughts on that?

Michael Uremovich

It’s a mixed bag, Alex. There were a couple of pretty sizable wins that we could point to, but more of it is a little bit from a lot of different players basically. I mean I couldn’t say that it came from this particular IMC or this particular bimodal, no. There was not gain from any one particular group.

Lawrence Yarberry

I think though that we have seen and others have seen that there has been some highway business move up the rails as the rails have improved their service.

Alex Brand - Stephens Inc.

You started being serviced at the beginning, basically, of the second quarter. Is that right?

Michael Uremovich

That’s correct. There’s basically no effect of the BNS arrangement in the first quarter.

Alex Brand - Stephens Inc.

It sound like there’s some start-up costs with that, but should we think of that as incremental revenue to what you do on the UP now, or is there going to be more customer shifting from UP over?

Michael Uremovich

Well I think we’ve been pretty clear that our expectation is that we both end up some new markets on the BNSF that we are not currently in and obviously that business would not be shifting from the UP. It’s not clear at the moment which business is going to end up where, Alex, we’re trying to sort that through as we go.

We have no specific plans to pick up huge pieces of business off the Union Pacific and move it over to BNSF at this point. We’re ramping up our BNSF business primarily from growth and from new markets.

Alex Brand - Stephens Inc.

So at this point we should think of that as probably incremental revenue, but it’s minimally profitable with the start-up costs.

Michael Uremovich

That’s probably accurate, at least in the very initial stages, yes.

Operator

Your next question comes from Tom Wadewitz - J.P. Morgan.

Thomas Wadewitz - J.P. Morgan

On the fuel question, just because it sounds like it was a pretty big impact, is there any way you can talk about magnitude of earnings impact? I mean is it kind of $0.05 a share in the quarter, is it $0.10, is there any, I know it’s hard to fine tune it, but if you were going to put it in a kind of a range, or some high level way to think about the earnings impact, it is possible to do that?

Michael Uremovich

No.

Thomas Wadewitz - J.P. Morgan

Given that fuel prices just seem to keep going up, is it likely that you would see a benefit in second quarter from fuel as well?

Michael Uremovich

Well Tom, we may and one of the things that we would like to be would be to look and see at the end of the second quarter and perhaps at that point revisit our expectations for the year. Right now we’re, excuse the pun, hedging that a bit, mostly because of these very tenuous market conditions.

Thomas Wadewitz - J.P. Morgan

I mean, but essentially if fuel keeps going, your assumptions in your guidance imply that fuel would either level out or decline, but if fuel kept going up than you’d probably have a greater benefit than what’s reflected in the current guidance. Is that a reasonable way to think about it?

Michael Uremovich

Yes.

Thomas Wadewitz - J.P. Morgan

In terms of the Burlington Northern, is there a significant difference in the price point you’re able to achieve in the market from the BN service you’re offering versus the UP? I guess that’s assuming that you have some service points that are overlapping where you’re offering either UP or BN service, or I mean were offering both.

Michael Uremovich

Yes, at the moment no. The perception in the marketplace and I’m not going to argue about whether it’s actually true or not, but the perception in the marketplace is that the DNSF is still the premier intermodal carrier.

We will work pretty aggressively to try to get a premium on that service, but it’s really early for us to tell right now, because obviously we’ve only been moving freight for the last several weeks on the BNSF; so, we don’t know whether or not we’re going to be able to get a significant premium there or not, we’re going to try, but obviously we’ll have to react to market conditions.

Thomas Wadewitz - J.P. Morgan

Later in the year when we’re talking about this service, would you expect it to be a more meaningful percent of revenue that you’d care to identify? Or, a more meaningful percent of volume? Or, is the ramp that you’re talking about in the BN contract gradual enough that it’s not really going to be a big, meaningful percent of revenue that you’ll talk about, even looking out a few quarters?

Michael Uremovich

Certainly on the run rate basis by the end of the year it would be meaningful. Whether the entire year impact is meaningful we’ll have to wait and see.

Operator

Your next question comes from Jon Langenfeld – Robert W. Baird & Co.

Jon Langenfeld - Robert W. Baird & Co.

On the fuel side, does it vary much by UP versus CSF on the Stacktrain side specifically or is it pretty similar in terms of how the fuel surcharge works and the revenue you garner from it?

Michael Uremovich

John, those contracts are confidential between ourselves and the railroads and so I think it’d be in appropriate for me to talk about the differences in the fuel structures.

Jon Langenfeld - Robert W. Baird & Co.

I guess maybe a broader question then, there is not an industry standard fuel surcharge that’s being applied to the various contracts you have? I guess you have three or four of them out there as well and they vary?

Michael Uremovich

Yes, they along with the other conditions in the contracts obviously do vary.

Jon Langenfeld - Robert W. Baird & Co.

On the domestic business, you said domestic on the Stacktrain was flat, but your retail business was essentially up 8%. Would that domestic business be down in Stacktrain without the retail contribution?

Michael Uremovich

Yes.

Jon Langenfeld - Robert W. Baird & Co.

And what’s some of the driver of that?

Michael Uremovich

Well the overall intermodal market, which in the domestic arena was flat to down in the first quarter.

Jon Langenfeld - Robert W. Baird & Co.

Okay and have you rationalized the high-end data? I mean they show domestic container box growth as being positive year-to-date, if you just isolate again on domestic container box growth. Have you rationalized kind of how you guys view the market relative to that data? I know there’s a lot of different things going on there, but.

Michael Uremovich

John I haven’t. Honestly I didn’t get an opportunity to look at the most recent data. The most recent data that I saw showed the loadings down.

Jon Langenfeld - Robert W. Baird & Co.

Includes some of trailers or even with the containers?

Michael Uremovich

I don’t remember, but I believe it was container.

Jon Langenfeld - Robert W. Baird & Co.

When you think about what’s happened on the fuel side, we’ve seen kind of anecdotal evidence that that’s helping to sustain a relatively healthy intermodal market relative to the truck market. Would you concur with that view, that the high fuel prices are driving more shippers to domestic intermodal?

Michael Uremovich

Yes.

Jon Langenfeld - Robert W. Baird & Co.

And you feel like you’re positioned to benefit from that? Because I know your retail business has shown volume growth during the last couple quarters, but are you benefiting more and more because fuel is driving more customers to the solution, regardless of whose offering it?

Michael Uremovich

Well I think it’s a combination thing. I think our share has, in certain of these key markets, as a share of the retail side has improved, but I think there is also some general market growth or increased market coming from the truck side.

Jon Langenfeld - Robert W. Baird & Co.

You kind of touched on it a little bit in your prepared remarks, but the pricing environment, it sounded like it was a little bit volatile in the first quarter. Could you just provide some color there?

Michael Uremovich

Well it’s just bouncing around. As you know there is a particular kind of bid season that goes on and we have seen some price pressure on some of those bids that were certainly stronger than in prior periods. I don’t know whether that’s coming as much from truck as it may be from other intermodal operators at this point, but there is some price pressure there.

Jon Langenfeld - Robert W. Baird & Co.

How do you feel like your pricing discipline is today, relative to six or nine months ago?

Michael Uremovich

Well I think it’s much stronger. As you’ll recall, probably two or three calls ago I indicated that I thought there was some area’s where our pricing might have been too aggressive in certain areas and that we were tightening up on that. I think we have taken steps in that direction, but we’re continuing to look at it.

We’re very, very focused on the yield and the growth of profitability. The big thing we have seen of late of course is that the balance is kind of screwed up, frankly. The eastbound business from Southern California is much weaker than I think we would have anticipated.

Right now we’re overbalanced westbound, which is pretty unusual.

Lawrence Yarberry

I don’t know how some of those things are swinging back and forth John.

Jon Langenfeld - Robert W. Baird & Co.

Net positive or negative, the lack of international boxes to reload that to the west coast or east coast, I can see that being both plus and a minus. How do you guys look at it?

Michael Uremovich

Generally speaking I would view that as a net negative, because we have a pretty reasonable business in reloading those boxes for shipping companies who would not typically have the outbound volume, but right now they’re soaking up all their own boxes with their own export traffic.

Jon Langenfeld - Robert W. Baird & Co.

The logistics business, I guess a lot of the headwinds you faced in the first quarter sound like they’re going to still be there. Any reason to think this segment crosses back into profitability here in any quarter this year?

Michael Uremovich

Absolutely. The problem in logistics in this quarter was isolate to one of the units and that just overwhelmed performance in some of the others, John, so it’s a matter of fixing that one unit and it will be profitable certainly.

Lawrence Yarberry

Yes, I think we’re very confident that the next three quarters, the rest of the year, will be profitable.

Jon Langenfeld - Robert W. Baird & Co.

Which division, is that the trucking side?

Michael Uremovich

It was the flatbed trucking operation and as you know flatbed trucking in certain areas of the trucking business, has been hit particularly hard in the first quarter and we certainly felt that.

Operator

Your next question comes from Ed Wolfe - Wolfe Research.

Ed Wolfe - Wolfe Research

First the $4 million in cost for the IT and the employee accruals. How do we think about that going forward? Is that for a quarter, three, four quarters, or does that start to come down or up?

Michael Uremovich

Going forward we will continue to approve the employee incentive and the SAP costs are probably pretty much the same, so you’re probably looking at about $3.5 million, $4 million.

Ed Wolfe – Wolfe Research

Then the B&E costs at start-up, when do they begin? The start-up costs with Burlington.

Michael Uremovich

They’re starting in the second quarter, Ed.

Ed Wolfe – Wolfe Research

How do we think of those going forward?

Michael Uremovich

Where you’re going to see it is, you may not see it in an absolute number; you’ll see it in some deterioration of margin, because the business that we put on the BN would be less profitable in aggregate than the business put on the UP.

Ed Wolfe – Wolfe Research

How do I think about it in terms of operating or EBIT dollars? You know you gave me $4 million for these other two, tell me there’s a third coming on. How do I start to model that?

Michael Uremovich

I think it’s going to be pretty minor this year. It will grow, but at the end of the year it could b, maybe, something significant, but I don’t think you’ll see much in the numbers this year.

Michael Uremovich

You mentioned a positive legal settlement in the quarter. What was that and how much was that?

Michael Uremovich

It was a positive outcome of a legal case: actually two or three cases where we didn’t have to pay as much as we originally thought.

Ed Wolfe – Wolfe Research

So where is that reflected? Is that a cash flow event or is it on a P&O?

Michael Uremovich

I don’t think there’s any P&O impact.

Ed Wolfe – Wolfe Research

The positive impact from fuel, I guess we should assume that there is some underlying benefit in a 15-year-old UP contract that probably, at best, has an art cast and not a real fuel surcharge; is that the way to think about that?

Michael Uremovich

Again, Ed, we’re not really in a position to talk about some of the details of the contracts with any of the railroads at this point.

Ed Wolfe – Wolfe Research

Okay, but I mean directionally, a 15-year-old contract, back then they weren’t, I mean we shouldn’t assume it has a modern fuel surcharge up? Okay.

Was retail intermodal profitable in the quarter?

Michael Uremovich

Yes.

Ed Wolfe – Wolfe Research

Was it profitable in a year ago quarter?

Michael Uremovich

No.

Ed Wolfe – Wolfe Research

Was it profitable in the fourth quarter?

Michael Uremovich

About break even, if memory serves me right. Let us look quickly at the numbers.

Ed Wolfe – Wolfe Research

Mike, it’s been a long time since logistics has returned its cost in capital if ever. At some point are there some parts of this business it’s just worth shutting down or getting out of?

Michael Uremovich

There may be Ed. We’re not there yet. I was disappointed, obviously in our flatbed operation. I think particularly in the truck brokerage and the SCS and the international side of the business, those are pretty closely related to our core intermodal product, so we’d be much more reluctant in those areas to do anything.

Ed Wolfe – Wolfe Research

How much revenue do you have in the flatbed business and how much of an EBIT loss was there?

Michael Uremovich

I don’t think we break those down. We do it at the segment level, Ed.

Ed Wolfe – Wolfe Research

But, directionally it can’t be that big of a business can it?

Michael Uremovich

I think we have publicly talked in the past of revenues slightly in excess of $100 million, you know it was $125, $130 million in revenue.

Ed Wolfe – Wolfe Research

That’s just for flatbed?

Michael Uremovich

Yes.

Lawrence Yarberry

And Ed, the rail brokerage was profitable in the fourth quarter.

Ed Wolfe – Wolfe Research

Is that fourth quarter ’07?

Lawrence Yarberry

Yes.

Ed Wolfe – Wolfe Research

Larry, this $6.5 million in corporate overhead. I think Mike said something about the accruals for salaries were there. What else is in there, or is that the whole thing?

Lawrence Yarberry

No, that’s not the whole thing. That’s a big piece of it and probably why we’re year-over-year higher. What’s in there is the incentive payment for the whole company for all employees and for all of the corporate overhead expense, the corporate officers.

Ed Wolfe – Wolfe Research

What is that payment, exactly, to all employees? Can you go over that?

Lawrence Yarberry

It’s incentive payment based on the company achieving certain financial results and the segments achieving certain financial results.

Ed Wolfe – Wolfe Research

Do you expect those payments to be reflected through out the year in this line item?

Lawrence Yarberry

Yes, we will approve quarterly for the incentive payments.

Ed Wolfe – Wolfe Research

So around $4 or $5 million we should think per quarter?

Lawrence Yarberry

No, it’s closer to $2.5

Ed Wolfe – Wolfe Research

So there is $3 or $4 million of other things in here, in other wards?

Lawrence Yarberry

Oh yes.

Operator

Your next question comes from John Barnes - B B & T Capital Markets.

John Barnes - B B & T Capital

Can you give us an idea, are there some minimum volumes required, part of the BN contract this year that you have to meet and is there some partial you have to whip out by the end of the second quarter and then by the end of the year?

Michael Uremovich

Well you know, obviously we have made a commitment to BNSF over the length of the contract relative to certain levels of traffic, but we’ve not discussed those numbers publicly. But, there’s no required minimum.

John Barnes - B B & T Capital

So there’s no required minimum and there wouldn’t be any kind of penalty if it was to take you longer, or you got some positive resolution there, they’d cut more of your traffic on the UT?

Michael Uremovich

Well the penalty, yes there is no penalty except that we would not get the kind of economics under the arrangement with the BNSF that if we didn’t reach the commitments that we made to them.

John Barnes - B B & T Capital

Okay and can you give us and idea of the magnitude between say their standard price and if you put those thresholds. I mean is it 25% lower than what they would charge you, or is it a greater magnitude than that?

Michael Uremovich

No, we wouldn’t want to talk about that John.

John Barnes - B B & T Capital

All right, I’ve got to try. Going back to Ed’s, in terms of a logistic business, you know we talked to Don about this a couple of times and it seems like it’s always kind of one business that crops up. It’s something in one. I’m just kind of curious, flatbed, more economically sensitive all of part [trike] in the quarter, what have you; there are a lot of things that could influence it.

Bucking or setting aside economic issues or conditions that you’d have no control over like a strike at a major customer or something. Are you comfortable with number one, you’ve got the right people in place and number two, that that business is right sized for what you want it to accomplish, or do you think there is some further restructuring of a couple of those businesses that needs to take place?

Michael Uremovich

We don’t believe that the businesses are particularly right sized, particularly in truck brokerage, as a matter of fact, perhaps in warehousing as well as international. There’s a critical mass issue particularly in truck brokerage that makes it very difficult for us to deliver the kinds of results we need to deliver when you’re only running a business that size; so, no they’re not right sized.

We have made changes in three of those divisions in terms of the leadership of them and I am very pleased with the additions that we have made: Larry Savage in truck brokerage and Mike Ritters in the transport or flatbed area are very strong additions to our team. That’s not to say that there won’t be additional ones, but those have been very significant improvements.

John Barnes - B B & T Capital

Therefore, we could see some further restructuring in a couple of these business units that need to be right sized?

Michael Uremovich

That’s possible, yes.

John Barnes - B B & T Capital

Not to elaborate on the start-up costs per se, the dollar amount, but could you give us an idea of what those start-up costs entail? Is it mostly equipment repositioning? Could you just give us some idea of what those are for?

Michael Uremovich

Yes, it’s mostly equipment repositioning and it’s mostly also added costs in your operations, because now in some cities you’re going to be operating out of two terminals instead of one: that is one on the BN, one on the UP and that makes local dispatch a little more difficult and a little less efficient and requires more equipment repositioning than you would normally have as well.

John Barnes - B B & T Capital

Could you give us a little bit of color in terms of the challenge on intermodal pricing, facing two things: number one the competitive environment with trucks and smaller INCs and then secondly the difficulty in trying to realize pure pricing gains with fuel surcharges and fuel costs as high as they are now.

Could you just elaborate on kind of what you’re seeing, what kind of push back you’re getting in the marketplace and I don’t know if you could provide us with an example or two, or maybe even just a comparison versus a different time period as to the magnitude of competition you’re seeing from other players?

Michael Uremovich

Well, fuel and price of course are separate things in these kinds of situations. What you have seen is increased rate pressure in the major metric, what I’ll characterize as matrix bids: some of it coming from trucking, some of it coming from other intermodal players as the marketplace softens a bit.

Again, I can’t point out any individual player or situation in that regard. It’s just that we were perhaps a little more bullish on the ability to get price in this very volatile market situation has introduced a level of caution that is a little greater than we thought, frankly John, and that’s kind of where we are.

It’s very, very hard to talk about price generally, because it’s always a specific situation, an individual customer situation, so I really don’t know how to generalize about that.

Operator

Your next question comes from Analyst for Todd Fowler - KeyBanc Capital Markets.

Analyst for Todd Fowler - KeyBanc Capital Markets

It looked like you paid down some debt in the quarter. I just wanted to get a sense, going forward how we should think about that in terms of debt, capital spend, debt reductions versus maybe some share buybacks with the extension on the authorization.

Lawrence Yarberry

We paid down $10 million of debt in the first quarter. As we talked, as Mike talked, the board extended the share repurchase program for another year. Our capital expenditures for the year will be about $12 to $15 million, mostly SAP. We spent $3 million in the first quarter, of that, so it’d be probably pretty even going forward.

We will look to pay down additional debt with our tax; well we ended the quarter with cash on hand of about $9 million. We paid out most of that April 15 with our estimated tax payment.

Analyst for Todd Fowler - KeyBanc Capital Markets

The issues with the flatbed business, but I just want to get a sense of what you’re seeing with that business here over what you saw in April; any improvement at all?

Michael Uremovich

The answer to that is yes. At this point, I’m not sure, at this point it’s hard for me to sort out whether or not the improvement that I’ve seen in the preliminary April numbers comes from any improvement in the marketplace or improvement in things that we have done. Because what we get on an operating basis deals with aggregate revenue from mile and truck turn and fuel and those kinds of things. I can see the operating numbers improve, but I’m not sure that I can attribute that to marketplace behavior or to our internal efforts.

Operator

Your next question comes from David Campbell - Thompson, Davis.

David Campbell - Thompson, Davis

You mentioned that the intermodal business with Burlington would be less profitable, at the beginning. Then you said efficiency’s in terminals would be a factor, so some of it is lower gross margin and then some of it is you will see in the direct operating costs?

Michael Uremovich

Yes.

David Campbell - Thompson, Davis

Was Easter a negative as far as intermodal business in March?

Michael Uremovich

I don’t know.

Lawrence Yarberry

Year-over-year, Easter I believe was in April last year and March this year and it does have some impact, yes.

Michael Uremovich

I mean you lose the day, but [inaudible] effort and you lost a day in the first quarter instead of losing a day in the second quarter.

David Campbell - Thompson, Davis

All right, so how does April feel relative to March? Is there any change in intermodal growth?

Lawrence Yarberry

It’s far too early for me to know that, but I do know that there is, as I mentioned week-to-week volatility in the business where we’ll see one week up relative to prior year and we’ll see the next week down relative to prior year so, I don’t know how it’s going to sort out David, I’m sorry I really don’t.

Operator

There are no other questions in queue.

Lawrence Yarberry

Thank you very much all of you, for those of you who are still on, for staying with us today.

Again, we think we had a pretty good quarter and are pleased with the way things are developing here at Pacer and are absolutely confident that we can position this company for a strong long-term future. After the expiration of legacy contracts, as well as getting our core businesses back on the track they need to be.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Pacer International, Inc. Q1 2008 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts