JOHN MCCOWN - TRAILER BRIDGE INC (TRBR)
CEO Interview - published 03/07/2005

DOCUMENT # ABF611

JOHN D. MCCOWN, Chairman and CEO of Trailer Bridge, Inc., has been with
Trailer Bridge since its founding in 1992. Mr. McCown worked closely
with Trailer Bridge's founder, transportation pioneer Malcom McLean, the
inventor of container shipping, from 1980 until Mr. McLean's death in
2001. Prior to his involvement in the marine field, Mr. McCown was a
corporate loan officer for a New York City bank. He has an undergraduate
business degree from Louisiana State University and an MBA from Harvard
Business School.  

Sector: shipping

TWST: What is Trailer Bridge?


Mr. McCown: We're an asset-based freight company. We use hard assets to
move freight between the mainland and Puerto Rico.

TWST: What type of hard assets?


Mr. McCown: The assets we own and control include vessels, containers,
which are the boxes cargo is loaded into, chassis, which are the wheel
sets containers are put on when not stacked on the vessel, tractors to
move container/chassis units over-the-road, and the equipment for
loading and unloading the containers from the vessel. We are integrated
and handle the whole land and sea movement. Our assets are
differentiated both by their size and youth. We believe that these
tangible hard asset differences make them more cost-efficient and give
us an edge in our market.

TWST: Specifically what kind of differences are you talking about?


Mr. McCown: Our assets are fairly unique among our competitors. The two
main differentiating characteristics are, first, the size of our
container equipment and, second, the type of vessels we operate. All of
our containers are 53 feet long. While that's the domestic standard, the
typical overseas marine container is just 40 feet long. Our 53 footers
are not only longer, but they are higher and wider so that results in
50% more inside cubic space. That translates into a bunch of cost
advantages, most particularly on the land leg of the journey. The high-
cube 53 foot units have been the domestic truckload standard for over a
decade as trucking costs per mile are nearly identical across equipment
sizes and you always want to pull the biggest equipment to get the best
cost economics. The typical load moving to Puerto Rico generally has a
500 mile or more inland leg prior to being loaded on the vessel for its
1,121 mile sea voyage, so your best economics come from moving it the
same way it would move as a domestic load. That requires 53 footers.
Getting up to 50% more freight in those big boxes also effectively
results in cargo handling efficiencies as you're loading and unloading
less boxes on the vessel and your customer also harvests some
efficiencies on his own loading dock. The second key differentiating
aspect of our assets is the type of vessels that we operate. These
vessels result in relative cost-efficiencies for our 1,121-sea leg. Our
vessels are giant barges, including two 736 foot long, three story
vessels that are the largest barges in the world, that are towed with
large 8,000 horsepower ocean-going tugs. Tug/barge combinations have a
number of cost advantages relative to self-propelled vessels.

TWST: What are the differences between the tug/barge units you operate
and self-propelled vessels?


Mr. McCown: At every expense line, tug/barges have significant favorable
cost comparisons relative to self-propelled vessels. Start with the crew
costs. Tugs typically have crews of six versus a crew of 23 on the self-
propelled vessels. On top of that, tug crew members have a different
wage scale relative to crew members on self-propelled vessels. So on top
of a big difference in crew number, there is also a per man-day
difference. Tug/barges move at nine knots, which is half the speed of
self-propelled vessels. But our slower speed results in much less fuel
consumed per mile. Our much cleaner fuel costs more, but we're still
left with a fuel cost per unit mile cost advantage. In addition, both
new construction and maintenance costs on barges are well below similar
size self-propelled vessels.

TWST: What do you move to Puerto Rico.


Mr. McCown: Puerto Rico is an island economy where the large majority of
what 4 million people eat, wear, drive or otherwise buy comes to them by
a vessel. Consumption of all of these staples results in a consistent
and predictable overall market. It's not terribly seasonal because,
again, it's focused on consumption. Except for petroleum products and
other things that move in tankers and bulk carriers, we and our
competitors move just about everything that goes to Puerto Rico.

TWST: What sort of growth are you seeing in your market?


Mr. McCown: Over the last 10 years, the compounded annual growth rate of
container freight moving from the US to Puerto Rico has been 1.7% a
year. The consumption nature of the market translates into the
southbound lane being much larger with 3.5 times the volume moving south
as moving north. Northbound has been growing more, 5.1% per year over
the last 10 years, due to more light manufacturing activity on the
island. Fundamentally, the overall market we serve is stable and
predictable and can be counted on to grow slightly above the population
growth rate. We like that demand aspect of our market.

TWST: Any notable regulation or barriers to entry in your market?


Mr. McCown: The Puerto Rico market is covered by legislation known as
the Jones Act. This requires freight moving between all US ports
including Puerto Rico to move on US flag vessels built in the US and
owned by US citizens. So that's a major barrier to entry. It's a key
investment consideration when somebody is looking at our company. The
Jones Act has been around for 80 years; more than 60 countries have
similar laws. It's an absolute legal barrier to foreign operators coming
in, and we just don't see that going away. The relatively high cost of
building vessels in the US, particularly self-propelled vessels, also
acts as an indirect barrier to entry to domestic operators. As a result
of that, the vessels in Jones Act markets and, more specifically, in the
Puerto Rico lane, are quite old. In fact, a defining characteristic of
the Puerto Rico market for our competitors is the age of their vessels.
Conversely, Trailer Bridge's vessels are comparatively young, which we
feel is an advantage.

TWST: What factors drive customer decisions in your business?


Mr. McCown: Price in an all-inclusive sense, which starts with the
freight rate and includes all the factors that affect a customer's
economics. Service attributes can be reduced down to their economic
effect and we attempt to incorporate everything into our analysis. We
highlight and sell the end to end cost per cubic foot that results from
someone using our integrated freight system.

TWST: If I was a potential customer, what's the single best reason to
select your company versus a competitor?


Mr. McCown: Our assets and freight system put us in the best position to
consistently deliver better overall supply chain economics, which makes
their own business more competitive and better able to grow and serve
their own customers.

TWST: Tell us about your competitors. How many are there?


Mr. McCown: We are one of four competitors moving freight to Puerto
Rico. We are the smallest competitor, but we have the lowest overall
cost per unit mile; we like that combination. The competitors can be
divided into two groups of two companies each, those which use self-
propelled vessels and those which use tug/barges. Each year for the last
decade the percent of the total freight moving on tug/barges has
increased, going from less than one-third to more than half today. While
we're pleased with our present cost per unit mile advantage, we see the
vessel age factor widening that gap in the future.

TWST: How so? What is the competitive effect of the age of the vessels?


Mr. McCown: Our vessel fleet is eight years old; that's about one
quarter the age of our competitors, whose fleets average around 29
years. The maintenance cost on old vessels like those, particularly dry-
docking, just keeps on going up. Vessels as old as our competitors'
legally have to go into a dry dock every two and a half years as opposed
to five years for our new vessels. The dry-docking expenditures on our
new vessels are running about $175,000 per occurrence. Contrast that
with expenditures that are running around $6 million to drydock an old
self-propelled vessel. That's just replacing wasted steel and the amount
and cost to fix increases each time. As extraordinary as that cost is,
the only way they can avoid it is to build new vessels, which would
saddle them with even higher overall costs,  given new construction
prices. New self-propelled vessels of the size used in the Puerto Rico
market would cost more than $150 million today. Either in the form of
higher maintenance or even higher capital costs, we know that all of our
competitors costs will be moving up quicker than our costs. We have
renewed our fleet and our vessels will last another 30 years, so we've
already gone through a major hard asset replacement cycle that still
looms for our competitors.

TWST: What's the agenda at this point? What are your priorities for the
next 12 to 24 months?


Mr. McCown: We are focused on improving our numbers. We're starting to
reap the benefits from a major shakeout in our market that resulted from
the withdrawal of a competitor and the scrapping of their old vessels
that translated into a 25% reduction in capacity. We've spoken
extensively about this specific competitive situation in quarterly
releases and earlier TWST interviews and I'd refer you to those if you'd
like to know more. Driven by these sector-specific changes, this year
we've returned to profitability and each sequential quarter has expanded
rather markedly on the improvement versus the year-ago quarter. We still
think that the effect of what is really an extraordinary realignment in
the supply/demand dynamics of the Puerto Rico market still has a ways to
run.

TWST: What's your reasoning behind that belief?


Mr. McCown: We and others have benefited from volume increases but we
believe the full effect of the rate increases from changes within the
sector is still rolling out. We're seeing that in our own contract
renewals. While our own rates began increasing as contracts were renewed
in 2004, they would still need to go up, on average, another 20% to 25%
just to be back where they were in the mid-1990's before the shakeout
began. Whether and when we can get them all the way back to that level
is debatable, but we are renewing contracts with nice rate increases and
various indicators point to continuing upward movement in pricing.

TWST: Are there other markets besides Puerto Rico that you see yourself
getting into?


Mr. McCown: We have a replicable system that will work well in other
marine markets. We like the Jones Act and the barriers and benefits it
brings to a system like ours, so down the road we can envision ourselves
in Hawaii and Alaska, the other two major Jones Act liner markets.
Presently, we are focused on the Puerto Rico market and believe that our
best immediate returns will come from leveraging assets over what we now
have in place. Increased density utilizing the ports we now serve will
play an important role in our expansion plans. Short sea markets such as
the Dominican Republic offer the possibility for add-on service without
significant incremental outlays. Under the right set of circumstances,
Cuba could be an extraordinary opportunity for us should the US end its
embargo of the country. Our system doesn't require any portside
infrastructure and this reduces risks and speeds up entry as we expand
in markets we now serve and markets we will serve in the future.

TWST: What are the main trends that are playing out in your business and
the Puerto Rico market today?


Mr. McCown: I see three. First and foremost is what is flowing out of
our sectors improved supply/demand dynamics, which began in 2003 with
volume increases, continued in 2004 with initial rate increases and is
still continuing today with further rate increases. Look at and stay
tuned to our quarterly releases for that. The other two trends, which
are longer-term and have been evident for the last 10 years, are the
consistent movement toward larger equipment and the consistent movement
toward tug/barge units. Both of these fundamentally relate to shipper
choices relating to the types of hard assets that can deliver better
sustainable value. The use of larger equipment not traditionally used by
marine carriers has gone from just 7.5% of the freight in 1995 to 29.7%
in 2003, a four-fold increase. While that's a big relative increase, the
average equipment length used for Puerto Rico shipments is still only
43.25 feet, 18% below the average length used on the mainland, and the
inside cube of equipment is, on average, 25% below what is used on the
mainland. As much as that has increased, it still has a long way to go
to get to the efficient size shippers are used to for domestic movements
and that will produce further opportunities for us as all of our
equipment is the 53 feet size shippers prefer. Likewise, shippers are
opting for moving more freight each year on tug/barge units, driven by
better cost-economics compared to self-propelled vessels. In the case of
the revitalized market trend and the two longer-term trends, the past is
the window to the future and I see them all continuing. While not a
trend, our business has also benefited rather extraordinarily by a
transaction we put in place at the end of 2004 in December.

TWST: What transaction was that and how did it benefit you?


Mr. McCown: We closed on a series of deals where we bought an affiliate
that had previously chartered two vessels to us and bought some
equipment that we had been leasing. We funded all of that with an $85
million public bond offering. All together we did away with $11 million
of annual cash lease cost and replaced that with $6 million of fixed
incremental cash interest cost. So that transaction resulted in cash
expense benefits of $5 million per year. The affiliate we acquired also
owned some $24 million of our preferred stock, so the acquisition
effectively did away with what eventually would have been $2 million a
year of cash dividends. So from an overall annual cash standpoint, you
can look at that transaction as being $7 million to the benefit of our
shareholders. Again, it's a one-time event, but it's a sizable one-time
event that will benefit us by a fixed amount each year. Recognizing the
transforming nature of this series of transactions made possible by our
bond deal, the leading shipping finance publication recently selected
ours as the public bond deal of the year. It was a nice financial
transaction to cap off the year where we began seeing the results from
the changes in our market.

TWST: Introduce us to your top-level management team.


Mr. McCown: We have an outstanding management team that has been
basically intact with the company since we were founded. There are seven
officers who collectively have over 175 years of experience in the
marine freight business with much of it focused on the Puerto Rico
market. This group stayed intact through a long and wrenching sector
shakeout based upon their belief, driven by their knowledge and
experience, that we had the superior business model and would weather
the competitive storm. All of our officers are aligned with shareholders
as a substantial part of everyone's personal balance sheet is tied to
the performance of our stock. One aspect worth noting is our insider
purchase activity. Our company has had 308 insider market transactions,
all but two of which were purchases. That goes back to our IPO and, in
fact, includes our IPO. We've never really had any meaningful insider
selling and purchases have occurred every month for over six years. Our
insiders have collectively purchased over 425,000 shares, an amount that
goes into a double-digit percentage of the public float, and are
continuing to purchase. In December 2004, there were seven insider
purchases, the most active number of insider purchases in 20 months.
Personally, I've never sold any Trailer Bridge stock and have added to
my position through 194 direct and indirect open market purchases over
the years.

TWST: What message would you like to give Wall Street?


Mr. McCown: That what has happened in our business in the past was
driven by factors that are fairly easy to get your head around.
Similarly, there are fundamental factors still present in our business
and market today that can give you insight into our relative competitive
advantages. The core investment thesis for someone looking at our stock
still has a lot of similarity to the potential someone could have seen
from reviewing and analyzing the points made in our 2001 interview with
TWST. Anyone who saw the potential and bought at the end of 2001 was
rewarded with appreciation of 61% in 2002, 158% in 2003 and 72% in 2004
for a three-year compound rate of return of 93% per year. For many of
the same reasons, I believe our future remains bright. The analysis of
what has happened and likely what will continue to happen in the Puerto
Rico market is really the same whether you are an investor or a shipper.
It is fundamentally a classic case of better business models supplanting
higher cost models. I expect our story will one day become a Harvard
Business School case study and taught in financial and competitive
analysis classes for what it says about the importance of detailed
fundamental analysis of all relevant facts.

TWST: What is the core investment thesis for someone considering your
stock today?


Mr. McCown: That the combined effects of a 25% capacity reduction in a
market with extraordinary barriers to entry and a consistent growth will
benefit all participants, but most particularly the participant with the
lowest overall costs and youngest assets. Beyond the clear edge we have
in our present market, we have a replicable system (which includes two
patents and a third that we are pursuing) that can be deployed with
similar relative advantages in other markets down the road. Just as big
box retailers brought in better cost models, we are effectively a big
box freight system that is a better cost model. On a cost per effective
mile basis, we're more like Jet Blue while our competitors are more like
US Air.

TWST: Thank you. (DWA)


JOHN D. MCCOWN
 Chairman & CEO
 Trailer Bridge, Inc.
 10405 New Berlin Road East
 Jacksonville, FL 32226
 (904) 751-7100
 (800) 554-1589 - TOLL FREE
 (904) 751-7444 - FAX
 www.trailerbridge.com

Copyright 2005 The Wall Street Transcript Corporation
All Rights Reserved


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