Hub Group, Inc.
Q4 2007 Earnings Call Transcript

Published: 7 Feb 2008

[Operator:]

Good afternoon and welcome to the Hub Group fourth 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 Vice Chairman and CEO. The company will make its prepared presentation followed by a question-and-answer session. Mark Yeager, President and Chief Operating Officer, will join us for the Q&A session. At this time all participants are in 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 Ms. Terri Pizzuto, the Chief Financial Officer of Hub Group. Please proceed.

[Terri Pizzuto:]

Thanks, Denise. Thanks for joining us. I want to begin by covering three things. First, we had a record quarter. Second, we had rock solid growth across all of our service lines and third; we had a one time $0.04 a share tax benefit. Here are the numbers. For the fourth quarter, Hub's diluted earnings per share increased 38% from 2006 to $0.47. Hub's fourth quarter operating margin was 5.7%, as compared to 5.2% in 2006. For the full year, we generated $71 million in free cash flow after CapEx. That's equal to a $1.82 share of free cash flow. At year end, we had $38 million in cash and no debt. Now, I'll discuss details for the quarter, starting with revenue. Intermodal revenue increased 2%. This change includes the 3% volume increase offset by a 1% revenue decrease, related mostly to mix. The volume increase comes mainly from an increase in local east market and an increase in business for transportation companies. We define local east as freight that runs on the eastern rail network. The impact from mix also release to growth in our local east traffic. The average length of half for local east business is about half of what it is on all our business. We finished the year with intermodal volume growth up 2.5%, despite a difficult trade market. Truck brokerage revenue increased 15%, due to higher volume, pricing and mix. We're proud of these results and we will stay in focus on growing this business. We overcame our tough comp for truck brokerage in the quarter and replaced business we lost with new business. Logistics revenue was 1% higher than last year due to some new customers. As you know because of the contract change for a large customer in the second quarter, we are now reporting net margin in this revenue for that customer. Without this change, our logistics revenue would be up about 20%. We continue to bring on new logistics customers. Gross margin dollars grew by over $2 million or about 4%. This margin expansion comes from, number one strong results in truck brokerage, number two intermodal growth, and number three logistics landing new customers. Total costs and expenses in the fourth quarter were $34.8 million that's compared to $36.3 million in 2006. Most of that expense decrease relates to lower telephone expense, outside consultants and temporary labor costs. We expect that our quarterly costs and expenses will be in a range of between $37 million to $39 million for 2008. We had 1,081 employees excluding drivers at the end of December, that's down 8 people compared to the end of last year. It's an increase of 17 people compared to the end of September. Most of the people that we added are in contract and in IT. The growth operating margin was 5.7% compared to 5.2% last year. We continue to concentrate on improving this important metric through the margin enhancement team, growth across all our service lines and costs containment. The effective income tax rate for the quarter was 31%. We had a one time $0.04 a share tax benefit this quarter. That's because we had a dispute with the IRS that was resolved. Now turning to our balance sheet and how we used our cash. During the fourth quarter of 2007, we bought a total of $38 million worth of stock, and completed our $75 million share buyback plan. We purchased 1.5 million shares during the quarter at an average price of $25 a share. In November our Board authorized the purchase of about another $75 million of common stock. That authorization expires June 30, 2009. We haven't purchased any shares under this new authorization. During the quarter we spent $1.8 million on CapEx. For the full year $10 million. As I said earlier, we have $38 million in cash and no debt at the end of the quarter. We continue to look for drayage and other acquisitions that are consistent with our strategic plan. Now, I'll discuss 2008 full year earnings guidance. Each quarter end, we compare our full year earnings per share forecast for the publicly available analyst range. For 2008, we're comfortable that our diluted earnings per share will be within the current analyst range of between a $1.50 and $1.62. Our weighted average diluted shares for 2008 are estimated at about $38 million. To wrap it up, Hub had a healthy quarter and a very challenging freight market. Although it's tough out there, we face 2008 with a strong determination to do well. And now, you'll hear from our CEO, Dave Yeager.

[Dave Yeager:]

Great, Thank you Terri. We had an impressive finish to 2007. In the fourth quarter, we grew our intermodal volume, we returned to double-digit brokerage growth and we maintained our momentum in Logistics. Our growth combined with our continued emphasis on margin enhancement and cost controls generated another record quarter. We're very pleased with our intermodal volume growth of 3% in the fourth quarter. The second half of 2007 proved to be a very difficult freight market. In a slow economy such as we experienced in the second half, demands softened while capacity remained consistent. This naturally creates an imbalance putting downward pressure on rates. As we talked about in previous conference calls, part of the beauty of Hub's asset length business model, is that we are able to have strong net income results whether the economy was striving as it was in '04 or soft economy as we've experienced in the second half of '07. In a strong economy we've been able to increase margins and improve our business mix. In a slower economy such as what we are experiencing now, we’re able to purchase our transportation better, thereby, creating the potential for margin expansion and improved returns. I'm pleased to report that while peak got out to a slow start, it did end strong and lasted longer than we had anticipated. Many of our retail accounts bounced back in the fourth quarter from the rather significant declines that we had seen in third. Rail service remained quite good throughout peak. We continue to see improvements on all major rail lines when comparing the fourth quarter of ’07 at the same period in ’06. Not only our train speeds improving, which again that helps us to improve the utilization of our fleet, we are also seeing more consistency in service and it's this consistency that's the number one concern of our customers. Our fleet continues to perform well, to keep our fleet up to date, we’ve been retiring many of the older containers. We plan to replace the remainder of our 48 foot containers that are currently in our fleet with new 53 foot containers. By the end of the third quarter of 2008, our total fleet will be about 10% larger than in 2007 and we will be the only provider with a significant fleet presence on both western lines. We believe that our fleets give us a competitive advantage over our traditional [IMC] competition. And having fleets on both of western rail roads allows us to use the best service and price options that are available for our customers. None of the asset based intermodal providers have this capability and we believe that access to both rail networks gives Hub a competitive advantage versus these competitors. Our drayage business remains an important component of our intermodal strategy. In 2007, Comtrak focused on successfully converting the majority of Hub's in-house dray operation to its processes and technology. In 2008 that focus will shift to growing its driver base and its business base. For '08 we've set some very aggressive driver recruitment goals for Comtrak. To date we've added 50 drivers which brings our total driver count to over 1,200. Comtrak will strive to grow in all of their markets but they are going to be particularly focused on expansion in Atlanta, Chicago and Dallas where we already have a good base of business and have significant potential for profitable growth. Comtrak also continues to grow its international dray business. During the past few months, Comtrak has successfully levered Hub's existing customer relationships to win new business. We continue to see significant potential for growing this service offering by leveraging the relationships that Hub's has with our existing account base. Despite tough comparables in the soft truck market, our truck brokerage revenue increased by 15% in the fourth quarter. As we previously discussed, we had some significant project work in the fourth quarter of '06 that did not repeat itself in '07. Our brokerage team did a fine job of overcoming this challenge by growing with new accounts or by gaining share of existing customers. We've also been able to continue to grow our carrier capacity. As a result of our focus on carrier management coupled with the soft freight economy, truck capacity remains strong and available. And with the former Head of our truck brokerage now our Chief Marketing Officer, we expect to see an additional emphasis on selling this line of business. We do believe that the brokerage business has significant growth potential as we still have many large intermodal accounts for whom we do not provide truck capacity. We will continue to leverage these relationships in our efforts to gain more truck business. Our logistics business also continues to do well. In a soft economy such as we are currently experiencing many of our customers are looking to take costs out of their supply chains. Our Unyson Logistics business offers customers the opportunity to take costs out through the application of technological solutions. All of our segments in the logistics business are experiencing growth. A few examples are, we just have been awarded the business from two pharmaceutical companies to perform deliveries to their sales personnel. We also recently won the right to manage the LTL spend of a large consumer products company and have been awarded the expedited business of a large retailer. Thanks to this new business coming onboard, as well as a robust sales pipeline, we expect logistics to continue to grow throughout 2008. In conclusion, 2007 was another year of significant accomplishments for Hub Group. To mention just a few, in 2007, we grew our intermodal volume for the year by 2.5%. We refined our go-to-market strategy and realigned our sales and operations teams. We reduced our costs and expenses as a percentage of revenue and improved our operating income as a percentage of revenue while generating $71 million in free cash flow. We completed the purchase of $75 million worth of stock while finishing the year with $38 million in cash. And most importantly, 2007 saw Hub increase its net income from continuing operations by 25% over 2006's record earnings. We take all this momentum into '08 and look forward to another great year. At this time, we'll open the line up to any questions you may have.

[Operator:]

(Operator Instructions). And your first question comes the line of Ed Wolfe from Bear Stearns. Please proceed, sir.

[Ed Wolfe:]

Thanks. Good afternoon.

[Dave Yeager:]

Hi, Ed.

[Terri Pizzuto:]

Hi, Ed.

[Ed Wolfe:]

Hi, Dave and Terri. Couple of different things. First, you gave a number, Dave, about 50 drivers added year-to-date at Comtrak -- what was the base of that, was it 1,080?

[Terri Pizzuto:]

1,170. We had 1,176 drivers at the end of year and so we've added 50 at Comtrak.

[Ed Wolfe:]

How do you explain the pick-up in volume? When you look at it, I think it was minus 2% last quarter -- go into positive 3 in intermodal volume. You talked about the East Coast, what is it about East Coast, is it exports? Is it new customers? How do we think about that change?

[Dave Yeager:]

It is an ongoing focus for us the east at this point in time. We've been able to grow it successfully. A lot of it is new customers. There is also gaining some share from some existing clients. So that was the major drivers that we had within east. We also, our wholesale product, which we offer to other IMCs in the west, that has also been very good, very beneficial in the fourth quarter in particularly. And I think the third issue was that our retail business, the Home Depots, and the Sears and the Targets of the world, they were down significantly in the third quarter, and while they didn't get back to '06 levels in the fourth, there was a pretty significant improvement.

[Ed Wolfe:]

But do you think that improvement was you taking market share within them -- because we certainly haven't seen improved retail numbers reported.

[Dave Yeager:]

No, I don't think that's the case, and that's I think one of the reasons that we thought the peak was going to be shorter than it actually what we experienced. And I think it's just that the retailers were taking in product at a slower pace to keep their inventories at a minimum.

[Ed Wolfe:]

Okay. Can you take us through the volume growth in intermodal if we look at October, November, December, and now in January?

[Dave Yeager:]

We really don't go by months. We pretty much try to just lump it in with the quarter, but it was relatively consistent.

[Ed Wolfe:]

How is first quarter doing so far?

[Mark Yeager:]

That's another one we don't talk about.

[Ed Wolfe:]

Hey, Mark. I didn't realize you were there as well. Okay, is there any reason to think that the 15% truck brokerage revenue and the 3% intermodal volume won't continue at this point? I mean in your guidance, in your expectation is there any reason why that should either get better or stay flat get worse?

[Dave Yeager:]

You know one of it's going to be -- we do feel really good about the realignment, the company with its operation as well as some of the changes we have made in the sales area. I think a part of it is the function of the overall economy. Right so far, it doesn't feel a lot different than the fourth quarter of '07, but I think that's to a large extent what's going to be the biggest regulator to [give] the worth of those two segments. Do you have anything to add?

[Mark Yeager:]

No, I think that's right. We've said for a long time that we though highway would be a long-term, double-digit grower. It will go through peaks and valleys and have to come over some tough comps here and there, but we think that that's a sustained model that we are really just beginning to penetrate our existing customer base and a lot of opportunities outside of our existing customer base as well.

[Ed Wolfe:]

But Mark…

[Terri Pizzuto:]

Right on the highway side…

[Ed Wolfe:]

Do you want to talk about the zero, year-over-year in third to 15, that's a big swing and the comps are fairly easy as we come around. So is it safer to say closer to the 15 and the zero would be in your expectation?

[Terri Pizzuto:]

I think we'd say high single-digits -- that is what we are hoping for in '08. I mean our volume was up in highway, but it wasn't up as much as our revenue, and our volume increased with retail paper and electronics companies, that growth Dave mentioned in his prepared comments, the growth that we had was about 50% from existing customers and 50% from new customers. So we were hoping we can continue to replace what we have lost but it is a tough market out there.

[Ed Wolfe:]

Okay, you talked about a larger fleet by the end of '08 of leased containers by 10%, where did you end the year in '07 as a percentage that are long-term leased versus day to day with the railroads and where does that go to by year end '08 under this strategy?

[Dave Yeager:]

Okay, under this strategy, it will end up to be almost about 50-50.

[Terri Pizzuto:]

60-40.

[Dave Yeager:]

60-40. 60% actually are on the operating leases, which are co-terminus with our railroad contracts and the remainder supplied by the rails.

[Ed Wolfe:]

And where did it end in '07?

[Terri Pizzuto:]

About that same, close, it will be close to the same percentages.

[Ed Wolfe:]

So you're expecting close to 10% volume growth, should we assume that for '08?

[Dave Yeager:]

Well, don't forget that our fleets recognize only about 60% of our own overall business. We [starving] under 40% there. We certainly are very much looking forward to '08 and what I had like to characterize it is 10% growth there.

[Ed Wolfe:]

One last thing (inaudible), if I think the $0.43 you reported in the quarter, and that of $0.04 for the tax and just look at what fourth quarter has represented of the following, your earnings in the last couple of years has been 18% to 22%, in the middle it implies over $2 of earnings you are on a run rate at right now. You gave a share count of 38, Terri, which should already be below with the full-share buybacks since I'm guessing you didn't buy it all back the first day of the quarter. How do I think about slowing down my model wanting to go up? Why shouldn't run rate keep playing out, and why shouldn't the share count be significantly lower? I'm assuming you're planning to start to use that $75 million in share repurchases?

[Dave Yeager:]

Of course, our preference is always for accretive acquisitions and we obviously, we haven’t been able to get any done in the fourth quarter, although we continue to work on that. Again, a lot of this is going to be determined by the overall health of the economy. I think about the single biggest driver here of where we're going to find ourselves at end of 2008. I haven't read anybody that any of the columnists that are forecasting at the beginning of '08 anyway is going to be that strong.

[Ed Wolfe:]

Is it fair to say $1.50 to $1.62 assumes no improvement in the economy?

[Dave Yeager:]

Yes. As Terri said.

[Terri Pizzuto:]

Yes.

[Dave Yeager:]

As Terri said we're comfortable with the analysts range.

[Terri Pizzuto:]

Yes.

[Ed Wolfe:]

Okay. And Terri you said $35 million of the total expenses in the quarter will go to 37 or 39 can you walk us through why that's going up like that?

[Terri Pizzuto:]

Sure, we have raises to employees that are effective January 1. Some of our employee benefit costs increased. We have more people and more travel and entertainment.

[Ed Wolfe:]

How much did the January 1st the salaries go up?

[Terri Pizzuto:]

It ranges between 3% and 5%.

[Ed Wolfe:]

Okay, in terms of depreciation, or SG&A issue, we expect those to go up or is most of the expense going to go up in salaries and benefits?

[Terri Pizzuto:]

Most of it would go up in salaries and benefits, other than the travel and entertainment, which should be part of G&A and D&A stays about the same.

[Ed Wolfe:]

You guys having a big party, with all this travel and entertainment?

[Dave Yeager:]

We will invite you, Ed.

[Terri Pizzuto:]

With the sales realignment and lot of our sales guys going to be hunters now, they will be traveling more and we have made our focus growing our large customers, and getting in new accounts, and so its just going to cost just a little more to do that.

[Ed Wolfe:]

Thanks, guys. Thanks a lot for the time, I appreciate everything.

[Dave Yeager:]

Thanks, Ed.

[Mark Yeager:]

Thanks, Ed.

[Operator:]

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

[George Pickral:]

Hey guys, this is George for Alex.

[Dave Yeager:]

Hey, George.

[Terri Pizzuto:]

Hey, George.

[George Pickral:]

First question, you obviously had good volumes this quarter, and your operating margin has been above 5% for six of the past seven quarters, so it's obviously been improving too. Dave can you maybe give your thoughts on where you see both of those going in '08 both the volume and the operating margin?

[Dave Yeager:]

Well, from an operating margin, I mean, while we have had improvements, there is no question about that. We continue to benchmark and focus on some of our competitors that candidly have been better and, while we've closed the gap, the gap still exists, so a lot of these people are at 7%. So, we are going to continue to strive to get to that point, and there is more room for expansion. But I honestly, George, think of it as a real good idea, there is nothing that all of a sudden, it's not like a wild switch, it really is incremental changes, it's really focusing on the details and operating more efficiently. But I can assure you that the bad news is that there is still room, and the good news is that there is still room for improvement there.

[George Pickral:]

But I guess it sounds like it won't be cost-driven, now if it's going to be getting better business, operating more efficiently?

[Dave Yeager:]

Well, it is operating more efficiently, getting some better business -- but it's also so from a cost perspective. If you take into -- if you feel as though operating activities are part of the costs, round tripping our trucks better doing things such as that. All those incremental types of improvements giving better access to our dispatchers, make better selections on equipment choices, all those types of things with some of the technology enhances we have had will in fact be headed into our market.

[George Pickral:]

Okay, is it too crazy -- I think 7% would be too [lost] to your goal by the end of the year?

[Dave Yeager:]

Yes.

[Terri Pizzuto:]

I think, our goals towards is, we did 5.5% for the entire year of '07, and our goal will move with that.

[George Pickral:]

Got you. Secondly, I don't know -- how good of an apples-to-apples comparison this is, but can you maybe talk about what rails pricing for you all was like in the last downturn, and if you could, kind of what you expected to be like, this time around?

[Dave Yeager:]

Well, I think that, as the rails show, we were very rational in 2007. As you know, we had some very aggressive pricing moves in '04 through 2006, when the economy was very strong, and I think that the rails early on recognized that there the economy was in trouble and that trying to increase pricing would be a mistake and so, while we did have the one area you could always increase in the fourth quarter is off of the West Coast because it demands so much of our supplies something like both outstrips supply. So that's really the only increase that we experienced in the second half of the year. For 2008, I think we will find it be comfortable, I don't think you're going to see much pricing change, -- you might actually see some downward pricing pressure early in the first half.

[George Pickral:]

Great, thank you so much for your time.

[Dave Yeager:]

Thanks, George.

[Mark Yeager:]

Thanks, George.

[Operator:]

(Operator Instructions). Your next question comes from the line of Todd Fowler from Keybanc Capital Market. Please proceed.

[Todd Fowler:]

Good afternoon, everybody.

[Dave Yeager:]

Hi, Todd.

[Terri Pizzuto:]

Hi, Todd.

[Todd Fowler:]

Hi guys, Terri can you talk a little bit, I'm sure if you disclosed this in the past, but how much of your truck-brokerage revenue does come from intermodal customers, and with the new business on the truck-brokerage side here in the fourth quarter, where is that going to go or where could that go, going forward?

[Dave Yeager:]

Right now it should about 25% as far as customers the use intermodal -- larger intermodal customers that, in fact, use our trucking capabilities as well. That is a number – I don't think we have ever quantified as far as how large it could be, but it should be significantly larger. I think the important venues we have existing relationships, these people trust us we understand their business and there is no reason that we cannot in fact become competitors in the truck market and service them and that motor transportation as well and that’s going to be our target.

[Todd Fowler:]

Maybe, if I can ask a little bit differently

[Terri Pizzuto:]

Not much different.

[Todd Fowler:]

Okay.

[Dave Yeager:]

That's the disappointing point.

[Todd Fowler:]

I'm sorry.

[Todd Fowler:]

That's the disappointing point. But we really do. We think of David Marsh, who headed up highway for us, now running our marketing organization, including sales. One of the first things he is doing is making sure that our sales people are trained effectively for selling truck brokerage because it is a different sale than selling intermodal, and the vast majority of our sales people were grown up within this industry. And so I think that will be a big positive. We just had a National Sales Meeting, and a large part of it was going through with the sales people in selling all of our products and not just the intermodal product, which, of course, is vitally important, and we want them to continue to sell, but there is other weapons that we can give them as they go out and search for business.

[Todd Fowler:]

Okay, great. And then I guess, thinking a little bit about the current environments, especially on the retail side, how difficult does it become in 2008 to get some of the volume growth with your core customers or core retail customers? Obviously, if they are facing a softer environment, and maybe if you have anything that you have heard from a preliminary stage from what some of your main customers obviously without you giving any confidential information. But what they are thinking about from a holiday season or a peak season, my guess will be that they are a little bit cautious in the current environment but maybe you've heard differently.

[Dave Yeager:]

No, we have heard nothing different. Mark, do you have any commentary on that?

[Mark Yeager:]

No, I'd agree with that completely. I think that most people are not anticipating a very robust economy in '08. I think our retailers by and large were more optimistic about the second half of '07, early in '07 than I would say they are about the second half of '08, early in '08. So I think what we are banking on is that we are not going to get a lot of help from the economy, we are going to have to create our own opportunities and do that by expanding with some retailers we are not currently doing business with and then also growing some share within some of our existing relationships. While we don't think that the pool of retail business is going to get a lot bigger in '08.

[Todd Fowler:]

Okay. And then, Mark, how does the East Coast then fit into that as far as you are looking at opportunity sharing those sorts of things? I mean, how do you put that as far as I don't want to say a priority but the opportunity that's out there?

[Mark Yeager:]

Well, you know the East has been a real area of growth for us, it kind of fights against the logic of truck rates coming down and taking business away from the intermodal product, which is what you think would happen. But what we've been able to do is establish some very solid service levels, and I think we are penetrating into some markets that may be more traditional in motor lanes with our local east. We have also done extremely well between the West Coast and the Southeast, particularly Southeast to the West Coast, it's been an area of nice growth for us. And there is some new service offerings out there that are making very reliable numbers and a substantially faster as much as the full day faster than they historically were. Once again, you know potentially opening up some, what may have been truck freight moving into intermodal. So we think that there are some opportunities for us out there, in the local east as well in the long haul Southeast California markets.

[Todd Fowler:]

And I guess there is a decent segueway -- I mean, Davy mentioned, I think, a couple of times about a larger presence on both Western rails. Can you talk, what your box count is on the Indian Pacific right now, and maybe a little bit more about what do you think that offers and then at the same time, is there any risk with your relationship with the Burlington Northern and the volumes that you move with the Burlington Northern by leveraging across your both rails?

[Dave Yeager:]

We have a significant relationship and always have with all the railroads. We are the single largest intermodal marketing company on every railroad. That's a specific strategy. It's been part of our strategy for the last decade and a half, so that's very consistent. We're going to be in -- we are adding, we're building right now, 1,000 boxes. They are just contracted that will go on the Burlington Northern, those are red boxes or huge [CIUs], which will go on the Burlington and the Norfolk Southern and then we're adding a couple of thousand boxes on the Indian Pacific as well. Primarily, in response to larger [centric] service improvements we are seeing, I mean, if you look at their service from the Southern California, in conjunction with Norfolk Southern into the South East, it is the best service available. None of the asset-based carriers offer that, and we think that is a clear competitive advantage when we have a day- to three-days-better transit than what the asset-based guys have.

[Todd Fowler:]

Okay, that's helpful. And then just one last one; real quickly. We're hearing consistently that rails have, obviously been, still moving up their prices, but as the markets soften, I look at where your gross margins came in the fourth quarter. I know this is a seasonally softer quarter, but coming in a 13.6 on the gross margin line, is there anyway to think about how much of that is a function of the market and the rails being little more aggressive on the price side, and then softer pricing versus how much of that is just the seasonality and I’m really trying to think about going forward into 2008? What will we see in the gross margin line on a year-over-year basis?

[Dave Yeager:]

That's a very good question. If I am not mistaken, in the fourth quarter -- and there are a few reasons for this -- our gross margin does tend to lag a little bit. But for one thing, it's because of the tightness of capacity. We're limited in always being able to optimize and select the lowest priced box because out of Southern California in the middle of October. You will take anything regardless of $200 higher or not, so there is a lot of self-optimization that takes place during peak, though of course also volumes are extremely high, so in the aggregate it usually proves to be a pretty good quarter. We do believe there will be some pricing pressures, but we've always had that during downturn, that we really do believe that we will be able to buy cheaper and thereby being able to continuing to expand our margins.

[Todd Fowler:]

Okay, great. Thanks a lot guys.

[Dave Yeager:]

Thanks, Todd.

[Operator:]

And from Robert W. Baird, your next question comes from the line of Jon Langenfeld. Please proceed.

[Jon Langenfeld:]

Good afternoon.

[Dave Yeager:]

Hi, Jon.

[Jon Langenfeld:]

First on the pricing side, can you just talk a little about how price was in the quarter and, I'm assuming there is prior little pressure on price and fuel surcharge probably offset that, is that good a way to read it?

[Dave Yeager:]

No, not really. I mean fuel surcharge, it might add to revenue, but if you think about it, 70% of all of our business we are on the customer's fuel surcharge, and they are for the most part very interactive. And so you will see that most of them are re-priced on a monthly basis based on the Department of Energy stats.

[Jon Langenfeld:]

Okay.

[Dave Yeager:]

So I think from a pricing-environment perspective, we had a few irrational players, and there has been some pressure on prices. We are seeing that right now one player in particular hit the panic button early out of California what we think is prematurely, but nonetheless it happened, but again that's just part of the business. We're always going to have at least one irrational competitor.

[Jon Langenfeld:]

So when we think about your 2.5% intermodal revenue growth, you said 3% volume and a little pressure just to get a mix, but where would fuel surcharge come in there?

[Terri Pizzuto:]

Well actually we said intermodal revenue increased 2% in the quarter.

[Jon Langenfeld:]

Right.

[Terri Pizzuto:]

So that was, you're at 3% volume, and it was offset by 1% decrease related mostly to mix? So, price was pretty flattish.

[Dave Yeager:]

As Terri has said, the east business is about half the distance [line haul] was.

[Jon Langenfeld:]

Yeah, I understand that. I guess I'm just wondering

[Terri Pizzuto:]

We were up 2.5% for the whole year.

[Dave Yeager:]

Jon, I don't know -- we are going to have to get back to you.

[Jon Langenfeld:]

Okay, that's fine.

[Dave Yeager:]

We will have to thoroughly analyze that.

[Jon Langenfeld:]

That's fine, that's fine. And then moving over to the truck-load brokerage fees

[Mark Yeager:]

Yeah, I think the good side on that story is that the majority of this was ongoing work that produced the growth on the highway side. We did not see aberrational project work that should create a more difficult hurdle as we did see in certain periods in 2007. So we like seeing, we love the project work -- we're good at it, but it does create sometimes some lumpiness that can be a little bit of difficult to overcome. Fourth quarter was not a story about lumpy business or special projects.

[Jon Langenfeld:]

Great, great and then was it mostly business, more business from existing customers versus new customers or both?

[Terri Pizzuto:]

50-50.

[Dave Yeager:]

Yeah.

[Terri Pizzuto:]

50% new, and 50% existing.

[Mark Yeager:]

We've brought a lot of new relationships to bear, and we brought some customers that have been doing business with us on the logistic side as well.

[Jon Langenfeld:]

In the pipeline into '08 for new customers, how does that look relative to where it's been on the last year too?

[Dave Yeager:]

We think its well positioned, our sales folks are very eager to sell it, and it’s a good product out there so, we feel that we have a whole lot of business, a lot of relationships on the intermodal side that we need to tap into better, but also we're exploring new relationships more as well. So, we feel that highway can continue to post new numbers.

[Jon Langenfeld:]

Okay and then just, I've got some numbers questions, what sort of tax rates do we look out for next year for '08?

[Terri Pizzuto:]

We think about 38.5% or 39%.

[Jon Langenfeld:]

38.5% to 39% and then the lower tax rate in the fourth quarter, excluding the gain, I'm assuming that’s just chewing up the year?

[Terri Pizzuto:]

You're exactly right; it's chewing up the provision to the tax return.

[Jon Langenfeld:]

And then what would, what should we think about for CapEx for '08?

[Terri Pizzuto:]

We're thinking around $10 million to $11 million.

[Jon Langenfeld:]

Okay and then finally on the bonuses in the fourth quarter, well I'm assuming you will buy back to more normalized bonuses in the fourth quarter versus the third quarter, was there any catch-up provisions for bonuses in the fourth quarter given how strong the performance was?

[Terri Pizzuto:]

Our bonus in the fourth quarter was about $400,000 less than our bonus in the fourth quarter of last year.

[Jon Langenfeld:]

Also still a tailwind, okay. I guess -- given how strong it was -- you simply didn't meet the goals set out at the beginning of the year from a full-year perspective to pay out more bonus. I guess I'm little bit surprised it’s not greater than it was last year?

[Dave Yeager:]

Jon, in fact you are now invited to our fourth quarter.

[Jon Langenfeld:]

I’m just trying to put a plug in for you guys.

[Dave Yeager:]

We will use you as a plug. That's exactly right we did not in fact achieve the targets necessary from the Board in order to garner more funds.

[Jon Langenfeld:]

Okay, good enough. All other good targets to have I guess. Nice job.

[Dave Yeager:]

Thanks, Jon.

[Operator:]

(Operator Instructions). Your next question comes as a follow-up question from the line of Ed Wolfe from Bear Stearns. Please go ahead.

[Ed Wolfe:]

Just do you have any guidance for headcount, how we should think about that in ’08 over ’07?

[Terri Pizzuto:]

Dave is still approving every single new hire that we have -- it’s pretty strict, so we would guess it wouldn’t go up too much.

[Dave Yeager:]

We’re trying to limit it, I think that yes there are a few areas in some of the increase we’ve had with some of logistic projects we got a ramp up a little bit early in all, but we’re going to continue to stay very focused on keeping that down, and when everyone is brought up, whether it’s for new business or not, I can’t simply question them whether not they in fact can use existing resources to particularly during the first half of the year when business is always softer, can you get by with out that.

[Terri Pizzuto:]

And the other area would be even up a little bit in sales.

[Dave Yeager:]

Right, yeah. And we are because we have been -- we cut back a little bit too far in the sales, and we've got some new hires in that area, which we think will be beneficial.

[Ed Wolfe:]

Would some of those be 18 added quarter-over-quarter?

[Terri Pizzuto:]

No.

[Ed Wolfe:]

Okay. What's the difference, when I look at logistics revenue that you reported in the quarter of 37.2, what was the net revenue look like? Is there much of or any transportation spend, or is the net and the gross pretty similar?

[Terri Pizzuto:]

But there is transportation spend in there because we are actually paying the carriers and managing that relationships and responsible for it. So there are transportation costs in that.

[Dave Yeager:]

It's really account-specific.

[Terri Pizzuto:]

Yeah.

[Dave Yeager:]

So some we pay in the transportation, and some of which we do not..

[Ed Wolfe:]

So on that assumption, we should assume that the gross yield for that is higher than it is for the rest of the business?

[Terri Pizzuto:]

It's a little higher, yeah.

[Ed Wolfe:]

Okay, thank you.

[Dave Yeager:]

Thanks, Ed.

[Operator:]

And your next question comes from Robert Dunn from Sidoti & Company. Please proceed.

[Robert Dunn:]

Hi, how's it going? Just -- I think I just missed it. The operating expense guidance of 37 to 39, was that just for the first quarter, or would that range hold through each of the four quarters?

[Terri Pizzuto:]

That's for each of the four quarters.

[Robert Dunn:]

Okay, great. Thanks very much.

[Terri Pizzuto:]

You are welcome.

[Operator:]

We have no further questions in queue. I would now turn the call back over to Dave Yeager for closing remarks. Please proceed sir.

[Dave Yeager:]

Okay. Great. Well, thank you for joining us today. Certainly, if you have any additional questions we're always available for discussions. So thank you again for joining us.

[Operator:]

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