Hub Group, Inc. (HUBG) Q3 2007 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Hub Group Third QuarterConference Call. We will begin with a discussion of the financial results ledby Terri Pizzuto, Executive Vice President, Chief Financial Officer andTreasurer, followed by an overall business discussion to be conducted by DaveYeager, our Vice Chairman and CEO. The Company will make a prepared presentation, followed by aquestion-and-answer session. Mark Yeager, President and Chief Operating Officerwill join us for the question-and-answer session. At this time, allparticipants are in a listen-only mode. Comments made by Hub Group employees during this conferencecall may contain forward-looking statements. Actual results could differmaterially from those projected in these forward-looking statements. Our SEC filings contain additional information about factorsthat could cause actual results to differ materially from those projected inthese forward-looking statements. Copies of these SEC filings may be obtainedby contacting the company or the SEC. Now, I would like to introduce Ms. Terri Pizzuto, the ChiefFinancial Officer of Hub Group. Please proceed ma’am.

Thanks, Denise. I want to begin by covering three things. First,we had a record quarter. Second, our operating margin was 5.9%. Third, we had afew one-time items in the quarter. Here are the key numbers. Hub's third quarter diluted earnings per share is up 27%from 2006. The third quarter operating margin was 5.9%. That’s compared to 5.1%last year. The three one-time items included in the quarter are: Number one, a bonus adjustment of a penny a share or $0.5million net of tax. This bonus adjustment relates to reducing incentive compthat we recorded in the first half of the year. Number two, A tax benefit of$0.03 per share, or $1.2 million. This tax benefit relates to a change in Illinois tax law thatrequires us to re-value our deferred tax liability. And number three, about$300,000 of pre-tax cost related to the DNJ deal that we terminated. The net impact of these one-time items was $0.04 a share.Without these one-time items we still had a record quarter, and 15% earningsper share growth. Now, I will discuss details for the quarter, starting withrevenue. Intermodal revenue was down 5%. This decrease is due a 2% volumedecline, a 2% price decrease, and a 1% mix change. While we are not happy aboutthe volume lost, but the good news is that when you compare the third quarterof 2006 to the third quarter of 2007, we preserved our growth margin despite a toughfreight market. Truck brokerage revenue was flat on slightly lower volume. Whatwe did here is turn around the 6% revenue decrease that we saw last quarter. Iwant to remind you that we have a difficult comp for highway in the firstquarter. Last year, we had some special projects in the fourth quarter that we won’tbe doing this year. Logistics revenue was 4% higher than last year. Thisincrease in revenue came from several new customers and an increase in businessfrom existing customers. As you know, because of the contract change for a largecustomer in the second quarter, we are now reporting net margin as revenue forthat customer. Without this change, our logistics revenue would be up about 25%. Hub's gross margin, as a percentage of sales, increased to13.8% compared to 13.3% last year. Our logistics and intermodal businessesdrove this increase. Hub's total cost and expenses in the third quarter were $32.8million, compared with $35.5 million in 2006. We promised we'd keep a close eyeon our costs, and that we would reduce cost where we could. That’s exactly whatwe did. We had 1,064 employees excluding drivers at the end ofSeptember. That's a decrease of 32 people, compared to the end of June. Abouthalf of those people came out of the Truck brokerage group. Another reason cost and expenses are lower than last year,is because we had about $2 million less in variable compensation for bonus andcommission. The bonus includes the pretax adjustment of $900,000 that I talkedabout earlier. We tightened our belts and continued to critically evaluate allof our costs. We expect that quarterly cost and expenses will be in the rangeof $34 million to $36 million for the fourth quarter of 2007. The key metrics that we use to benchmark against ourcompetition is gross operating margin. Hub's third quarter gross operatingmargin was 5.9%. This is the highest operating margin in Hub's entire 36-yearhistory. We accomplished this because we had stringent cost controls and goodpricing discipline. The effective income tax rate for the quarter was about 35%,because of the tax law change, I talked about earlier. We are forecasting thatour effective tax rate for the fourth quarter will be about 40%. Remember that we do have a dispute with the IRS that shouldbe resolved during the fourth quarter. If we win, we'll have a $1.5 millionreduction in tax expense in the fourth quarter. So this could bring theeffective tax-rate below the 40%. Now turning to our balance sheet and how we used our cash.We had $40 million in cash and no debt at the end of September. Free cash flowfor the third quarter was about $10 million. DSO deteriorated a couple of days,due mainly to our retail customers slowing up payments. We are working onimproving that. During the quarter, we spent about a $1 million on capitalexpenditures. For the full year, we think capital expenditures will be in therange of $9 million to $10 million. We now have all of our 2000 new 53-footcontainers. These containers were financed with operating leases that haveabout a 6-year term. We are disappointed that we weren't able to complete the DNJacquisition, but this was the right decision based on the results of the duediligence. While we are always looking for good acquisition candidates, we alsouse our cash to buy back stock. In October of 2006, the Board authorized thepurchase of up $75 million of our common stock. That authorization expires onJune 30, 2008. During the third quarter, we purchased about $24 millionworth of stock. In October, we purchased an additional $3 million worth ofstock. That equates to purchasing about 835,000 shares in the last half of theyear. This means, we can still purchase up to $35 million under the currentauthorization. Now I am going to discuss 2007 full year earnings guidance.For 2007, we expect that our earnings from continuing operations will be in therange of $1.39 to $1.44 per diluted share. This excludes the $0.04 a sharetax benefit that I mentioned earlier, that we could have in the fourth quarter.The weighted average diluted shares are estimated at about $39.5 million for2007. These shares assume no more repurchases under our share buyback plan. To wrap it up, we feel good aboutour strong financial performance this quarter in a weak trade market. Ouroperating margin of 5.9% was a new record. And finally, we are excited aboutthe organizational changes that Dave will discuss that we think will put us onthe right track to grow our business. And with that I will turn it overto Dave.

Great, thank you, Terri. We arevery pleased to deliver another record quarter with earnings per share of 27%over a record quarter last year. We managed this growth despite a sluggisheconomy, the market was highly competitive in the third quarter with the usualsuspects, cutting price irrationally to gain volume. As you know, peak season got offto a slow start and the pricing environment has remained unstable. Notsurprisingly, Hub's intermodal volumes were impacted by the weak freightmarket. While we were able to growintermodal volume by 5% in the second quarter, our intermodal volume was downabout 2% in the third quarter. Many of our major retail customers were down inthe third quarter. In fact, the reduction in business from our retail customersmore than accounts for our volume decline. As its further evidence, retail hasrepresented 32% of our overall business for the last several years. In the third quarter, retailaccounted for only 27% of our revenue and while we have not lost any retailcustomers the volumes were down this past quarter. We were able to increase ourconsumer product volumes, but not enough to make up for the retail shortfall.On the positive side, our [ice serve] business and that of our wholesaleservices continues to grow and we continued to control cost consistent with ourmodel. In addition, rail servicecontinues to improve, and our fleet utilization remains good. As always,capacity of a West Coast is a challenge this time of year where we have beenable to meet the needs of our customers. We have taken delivery of all 2000 new53-foot containers. These containers weremanufactured in China andwide the U.S. via the port of Los Angelesproviding us with the additional capacity in Southern California during peak. We plan to retire the order containers inrail owned fleet to ensure an appropriate fleet size in '08. As expected the railroads didtake some price increases this fall with most of the increases taking effect onSeptember 1st. The largest of these increases were off the West Coast. Despitethe fact that several of our competitors did not seek the price on theincreases, we worked hard to pass them on to our customers in order to preservemarket. Our efforts to increase theamount of dray we performed took a step back this quarter. We lost over 100drivers in the past few months as we converted our operations in the Midwest to Comtrak. We knew going in that with thisconvergence we could lose some drivers due to an adjustment to the pay scale,and the requirement of the drivers that they adopt Comtrak's technology andtheir processors. We still plan to integrate ourtwo remaining U.S.operations in the Comtrak after the first of the year. We do not expect thedriver attrition we've experienced in the Midwestas the pay scales on the West Coast are similar with Comtrak's pay. On one perspective the truckmarket remained soft. Unlike '04 and '05, most major freight indexes show thatsupply exceeds demand. Our truck brokerage business improved from the 6%revenue decline in the second quarter with revenue flat in the third quarter aswe continue to bring on solid opportunities. Our logistics business continuesto perform well, with revenue growing 4%. Earlier this year, we told you thatwe have landed two new logistics accounts that would startup in the thirdquarter. Both of these accounts are now fully operational. We also haverecently won several smaller logistics awards that will be implemented in thefourth quarter. We’ve had our current managementstructure in place since our organizational realignment in early '04. Thischange helped us reinvigorate the company, and as a result our margins andprofits are up. And while we are having another very strong year and have had arecord third quarter, we believe we have not been tapping our full potential.I’m pleased to announce today that we have made some organizational changesthat help address these issues. Effective immediately, DavidMarsh, who has ably led our Truck brokerage groups since 2004, will become ourChief Marketing Officer. David will be responsible for all sales, intermodalcustomer service and intermodal pricing. David has demonstrated the ability togrow our brokerage business these last four years. Since taking over in early'04, our brokerage business has grown 145% and its profitability is more thandoubled. He replaced 10 of 18 Directors and completely re-invented ourbrokerage product and processes. Now, while our core intermodalproduct is in much better shape than brokerage was in '04, we look to David tohelp us significantly improve our sales effort. We are purposefully putting oursales, customer service, and pricing groups under one individual so that thesegroups are aligned and focused on our goal of growing volume and profit. We'll also be changing thestructure of our sales and marketing organization. Prior to the realignment ofHub Group in '04, we had a strong and significant natural account sales group.With the change in '04, we assigned many of our strongest national accountpeople to managing sales people versus managing accounts. This will be changed. We are reinvigorating ournational account effort by the creation of a national accounts group who willsolely focus our large customers in gaining share over those large customers. From a pricing departmentperspective, our pricing analysis had been generalist, whereby they have beennegotiating pricing for rails and drayage. This will be changed so that we willhave a specialist in each of the areas who will focus on driving the best pricefor service. In a soft freight market, we believe this will allow us tooptimize profitability. And finally, customer service. Inthe past rail operations in customer service had been one. We gradually changedthat to reflect to peer customer service function group and a peer Intermodaloperations group. Customer service will berestructured yet further to optimize the customer experience, focusingparticularly on differentiating the experience for our largest clients. I amalso pleased to announce the prescriber who has been in charge of strategy andyield will be our Chief Intermodal Officer. In this role, Chris will assumeresponsibility for intermodal Operations and retain responsibility for yieldand fleet management. For the past few years, Chris hasbeen an instrumental part of helping us improve margins and reducing our costs.We look to Chris to continue our history of operational excellence and look forways to continue to use technology to more efficiently service our clients. Chris will also be responsiblefor increase in the profitability of business already in-house. We look for himto use forecasting to improve the allocation of our capacity and to optimizeour usage of fleet versus non-fleet containers. We also expect improvements inhow we purchase drayage and the allocation of the drayage business betweencontract and outside suppliers. I am very enthusiastic about thisnew structure and believe the one either will help us continue on the winningstreak we have enjoyed over this last few year's. In conclusion, we are very pleased with our record earningsthis quarter. We know we have some work to do on growth, but our underlyingcost structure, diverse customer base, and vendor relationships position uswell. These advantages, coupled with the restructuring we've announced today,will help facilitate our growth over the long-term. At this point, we can open the line to any questions you mayhave.

(Operator Instructions). And your first question comes fromthe line of Edward Wolfe from Bear Stearns. Please proceed sir.

Yeah, hi. Good afternoon.

Hi Ed.

Hi Ed.

And I apologize. I'm in a car, and doing my best to digestthis thing. And if I came in badly Scott will pick up for me. Intermodalvolumes, can you take us through a little bit of how we went from kind ofaccelerating in a difficult intermodal market to decelerating kind of with themarket this quarter?

Well I think Ed; first of all, it's to our large extent, asI've said in the prepared remarks. If you look at our overall revenue, ourretail accounts declined dramatically. And I think that's just plainly a --what's occurring within the retail market, their sales were down, they aretaking on inventories, and as a result of that, again we went from their retailrepresenting 32% of our volume down to 27%. I think the other issue is that we may have been a littlebit slow. We didn't react as quickly as we might. I don't think we've lost muchvolume, but some of our competitors have been very aggressive from a pricingperspective, and so I don't think it's that we've lost business, but we may nothave been quite as - achieved the same volume that we had anticipated in biz.

Why do you think that the regional business all of a suddenin this quarter slowed down? What changed in the marketplace, that's what I amtrying to understand?

The retail business?

Yeah.

I think it's just plainly that; number one; the retailersare slower than they were this time last year. And I think number two, Ed thatthey are very aggressively working on tightening their inventory.

Yeah, I think the retailers had disappointing sales inSeptember due to the uncertain economy and a lingering summer weather. I guessapparel sellers, furniture stores, and departments stores were the biggestlosers.

So do you think from fourth quarter minus 2% volume is wherewe should be or is it getting worse? How do we think about it?

I don't we're getting worse, no. I would not anticipate us-- I would say that we'll be more flattish to slightly up, which I know iscontrary to what my Chief Financial Officer maybe thinking about. I do think that that's news there, and there are somereasons for that. It's not just pure guess or pure wish. There is an extrabusiness day and I think the whole key Ed is going to be how long peak goes,does it go in fact to mid-November through thanksgiving till mid-December wedon't have a clear vision of that right now and that’s why the range iscandidly a little wider than we would normally offer.

Okay. Terri, you and certainly Tom before you've have alwaysbeen kind of conservative in the operating expenses. You gave guidance for thequarter of I think was. What was it 34 to 36?

34 to 36.

You are exactly right.

Yeah, and you came in better than that this quarter. Isthere a reason why 33 should become 34 to 36 or you are trying to stayconservative not knowing the volume exactly how it might come in?

Let me tell you some of the differences between Q3 and Q4that we are thinking about when we gave that guidance. Number one; we won'thave the one-time benefit of the $900,000 related to the reversal of the bonusthat we recorded in the first half of the year. There is also one more payrollday, and we'll probably have a few more heads than we had in the third quarter,since we are beefing up our sales personnel and adding a few heads in otherdepartment.

Okay. Can we look out to 2008 and say that's a run rategoing forward at this point or is it too early to know?

Yeah, it's too early for us to know, we'll give thatguidance.

Yeah, we never have really gone through the budgetingprocess completely, so that's something we can give you a little bit more coloron later.

Okay. On the truck brokerage side, volumes are doing theopposite, they are improving. We are seeing this happened at J.B. Hunt wheretruck's going down and intermodal's going way up. And is there a quid-pro-quothat you are pushing some stuff this quarter away from intermodal back tobrokerage after a last quarter doing the opposite or how do we think aboutthat?

No, it's just simply that we've been able to somewhat ratethe ship. And I think in the fourth quarter we'll be getting it over a coupleof accounts we had lost, from the brokerage perspective?

We do have a tough comp though and…

Because of the difficult comp.

In the fourth quarter, because we did have some specialproject worked. So, I guess, how we would think about that is, could rangeanywhere from may be down 3% or up 3% in revenue for Q4.

And the acquisition, what happened this is the second timein two quarters where you saw something obviously in due diligence, whathappened?

Yeah, there were certain representations that managementmade about the business, and how it was doing. And when we did our duediligence work, we found that business was not performing as well as whatmanagement had represented.

Yeah then this is just candidly causing us to reconsider thesize of the acquisition. So, we'll go through the same work and through thesame expense from the legal prospective and an auto perspective with acquiringa contract and a $100 million in revenue as we do something that's $12 million. So, I think you'll see us be in a lot more selective andalso be delaying until we are 100% positive if it's going to go through, anyannouncements?

Are there any costs in the third or fourth quarter relatedto that deal not happening or is the deal in general?

We mentioned that 300,000 of cost this quarter that weexpensed in Q3, so we will not have any in Q4 Ed.

Okay. There's been a lot of talk recently in the ports of LAabout the driver status and getting rid of the owner-operator [drayage]. Canyou talk a little bit about what impacted if any that might have on to yourbusiness?

Well, this is obviously somethingthat is still a work in process. It really is kind of a political football atthis point in time. I would find it difficult to believe that you could get ridof the owner-operator base and their capacity and put in all green trucks. I dothink that you could make a conversion of a series of years, but it dependsupon how strong the union is going to be there and if they are going to be ableto push this through the port authority. Mark do you have anything to add tothat?

No. I think that’s right.

But if it is pushed through, howdoes that impact your model. How do you deal with that?

It doesn’t really impact ourmodel since we don’t really do the peer pickups in Southern California. We don’t actually receive the freight until it hasbeen transloaded. So you would have no impact on us. It would impact ourcustomers because it certainly would increase their costs.

Okay. Thanks a lot for the time.I appreciate it.

Thanks Ed.

And your next question comes fromthe line of Alex Brand from Stephens. Pleaseproceed, sir.

Thanks. Good evening.

Hi, Alex.

Hi, Alex.

I just want to understand on thepricing dynamic where we are now, I mean, I understand there is aggressivepricing in the quarter its, I guess, if yours was down 2% you felt like you hadto respond to some of that and you would have hoped to get more volume out ofthat. Now you got a price increase, what’s the sort of outlook for thatsticking through at least the rest of the peak season?

Well, we think that the priceincrease, it is a regionalized increase predominantly off of the West Coast.And the west coast market remains relatively firm. So, we believe that, thatprice increase will hold and we are certainly going to work diligently to makesure that happens. To the extent that prices have come down, I don’t think weanticipate that we are going to see further erosion in price within themarketplace; we think it’s pretty much reached its bottom particularly in the Chicago, LAmarket where we saw a lot of that price erosion in order to feed West Coastdemand. So we think it's probably stabilized at this point.

Is there another way of sayingthat the unnamed competitors are being more rational now?

Well, I can't say that we canconfirm that. There is still some irrational pricing out there; it doesn’tappear to be continuing to fall, however.

Okay. So similar to what I hadasked Dave on volume, and Dave sounds somewhat optimistic on volume. We don’tthink we are going to have a run rate here down volume and down pricing for theforeseeable future, economy notwithstanding?

Well, don’t believe, no, I meanwe are very focused on maintaining, we want to grow that business. From apricing perspective, I think that it would be the real tale will be after thefirst of the year at post peak when we see the amount of capacity out there andhow aggressive some may become. I think that's a bit of wild card right nowAlex. So I don’t really want a give a prediction on that.

Okay. And another outlook basedquestion. If I look at your guidance which looks like it forces most of us tocome down for Q4, is the outlook basically look it's okay right now, but ifpeak season were to sort of stop in mid-to-late November, then there is nocushion in the numbers, so the numbers need to be more conservative, am Ithinking about that the right way?

You know, Alex, we want to giveyou the best estimate that we could, and because it's a challenging freightmarket, it makes it more difficult to predict or forecast earnings. So we gaveyou the best and tightest range we could.

Yeah, I know that it's a littlebit wide with a $0.05 variance there, and it is dependent upon the one perpeak. Again, you need to write on the head there if it does in fact go into midDecember, certainly the range will encompass wherever we are or we believe itwill.

Now, if things being the way theyare, Dave are you sort of continuing -- do you still have a comfort that youcan drive respectable profit growth in the current environment. I'm not askingyou to make a macro-call, if it's no better and no worse, can you continue todrive profit growth for the foreseeable future?

Yes, we still have areas ofimprovement that we can make internally and again a lot of what's these organizationalrestructuring is specifically focused on that its two part. Its one, underChris Kravas's group with yield with our intermodal ops. They are going to befocused on increasing our yield and there is a lot of areas we can do itthrough better optimization of our drayage through better utilization of ourequipments in specific routes, so they are more profitable than others. Then you have the sales side togrow our volume and that's under David Marsh and you get those three groups,which have always reported separately. Customer service reported to anindividual, sales to an individual, pricing to an individual. This way you gotthe umbrella of one guy has got the responsibility to grow the business. So, Ido believe that we still have a lot of areas for improvement internally.

Okay, just one more if I could.The stock buyback, its seems like you guys were relatively aggressive in Q3 andyou've already bought more in Q4, you have enough cash on your balance sheet tocomplete the rest of your authorization but not to do that in make acquisitionsat the same time. Is there any color you can give us for what the appetite isfor leverage and whether or not you feel like you are comfortable with that thebalance sheet can handle it, and if you need to buy stock you can do that, andyou can make acquisitions at the same time?

Well obviously we have our Boardmeeting later on this week. That will be one of the topics of discussion.Certainly, we are not adverse to buying back shares and making acquisitions,and again our balance sheet is pristine and certainly our free cash flow issignificant. So we would have no issues with going into some debt and then alsobe having the ability to service that debt.

Yeah, we have $15 untapped creditline right now, that we could use.

And we just have that, just tohave it.

Right.

Okay. That’s good, I appreciatethe help guys.

Thanks, Alex.

And your next question comes fromthe line of Mike Halloran with R.W. Baird. Please proceed.

Good afternoon, everybody.

Hi Mike.

Hi Mike.

Just looking at the volume trendsin the quarter, could you just talk about how they progressed on ayear-over-year basis for you generically not significantly?

On a year-over-year, what do youmean?

I mean, just -- when you look atyour volume growth spend obviously you were down 2% for the broader quarter,did that get worst as the quarter progressed or was that pretty constant in thequarter, could you talk about current event?

We really don’t talk about thaton a month-by-month basis, but it was relatively consistent for the entirequarter.

Okay, and then could you justdelve a little bit deeper on what's -- you were down 2% this quarter; theenvironment doesn’t seemed to be getting any better here. Could you talk aboutwhat gives you the confidence that in the fourth quarter the volumes willcomeback little bit? And then I guess related to that, how far into theorganizational restructuring are you currently, and do you anticipate if that'sgoing to be some sort of benefit to the upcoming quarter as well?

To address the last issue first. This is the direct resultof a go-to-market strategy that we had worked through with Sarbanes earlier inthe year and I do not believe it's going to have benefits for us in Q4. I dothink that this is a longer-term play that again we are going to be. Thesetypes of changes or pricing will incrementally improved, our yield willincrementally improve as we better optimize our equipment in our drayage utilization. So, those were all incremental areas of improvement. Andcertainly, as we can service our large customers better, that will in factallow us to come to, earn the right to handle more of their business and gainshare. So it's not going to be an immediate impact. Back to your other issue, as far as with why we believe thatin fact we'll be able to grow volume or we are not be down 2%. Again, first ofall, we do have an additional business there. So, that is very, very helpfulfor us. Second of all, we do have a decent pipeline, and during this peakperiod, we also have our fleeter's up somewhat versus the prior year. So, Ithink, all those things give us a bit of an advantage while peak lasts. And thewhole issue is going to be how long does peak go?

That's fair. And then, on the acquisition side, can you giveme more focus on a larger acquisition. Could you talk a little bit about thepipeline out there for larger acquisitions and if there's, you know, just howplentiful the opportunities are and what valuations are looking like?

This is still a work in process, and as much as the DNJ dealjust recently fell apart and we are doing some soul searching at this point intime. The pipeline, I can't say that the pipeline is as full for acquisitionsas it is for, in fact, new customers. But it's something we are going to be,there is still -- there is some in the pipeline, but it's in the very earlyevaluation status and nothing would have been in 2007.

That's fair. I appreciate the time.

Okay, thanks Mike.

(Operator Instructions). And your next question comes fromthe line of Todd Fowler from KeyBanc Capital Markets. Please proceed sir.

Good afternoon everybody.

Hi, Todd.

Hi.

Terri with the headcount numbers, can you talk a littleabout win, is that - the 30 people are basically like always, that's somethingthat you saw the run rate from the expense reduction or the entire (inaudible)during the third quarter or will that ramp up, and you'll see a little bit moreof the benefit in the fourth quarter?

We saw most of it throughout the quarter.

Okay. So there wouldn't be a sequential improvement in thefourth quarter?

No.

Okay.

And as I mentioned earlier, we do intend to increase headcounta bit on the sale side.

Okay. Did you give numbers for what the headcount increasewill be then?

No.

Okay. And then, just I guess directionally then. Obviouslyit seems like a big portion or a large number coming out of truck brokerage.Did that strategically change the focus there when you think about the longerterm growth rates of that business? I mean, historically we were talking aboutI think mid-teen type growth and then obviously pulling out a large portion ofpeople there. Did that change, what we should think about that business growingout?

No, we still believe it's more a function of the marketresponding to that market. We were building with the expectations that it wouldbe growing in the high teens from a volume and sales perspective. When in fact,we saw it's growing the other way, we decided to cutback on some of that buildup. And so that's a direct result of that Mark?

Yeah, I think, that's right and the other thing that needsto be understood is in this market capacity it isn’t as difficult to source. Soit doesn't require quite a bench work.

That's fair enough, I guess.Nobody would argue at that point. And then Dave, give me some comments onprepared remarks and maybe Terri you mentioned this, but you talked about thecontainer fleet doing some retirements, could you go over exactly what you aretalking about, I guess from a number standpoint, or maybe just can you go overthose points again?

Sure, as you know, we have afleet that is comprised of 7400 boxes, which are under operating lease directlywith Hub Group, we then have another 3000 on the Union Pacific that they ownedand another 4,000 on top of that that are owned by the [BN]. Those four and Norfolk other that operateon the [BN]. Though, we are going to be retiring all of our 48's by the end ofthis year that's about 14,000 containers. The other boxes, but we have our ownboxes. We are right now analyzing our fleet to see what the optimal size is,and in all calendar I think in this environment we are evaluating if in factits better to have a larger fleet, which we control and therefore have the responsibilityfor or if its better to play the field and use other outside service providersto supply the equipment.

And I guess, there is a follow-upwith that, are there any cost associated with doing this retirement, and thensecondly if you make a decision obviously control more of your own boxes eitherthrough operating leases or direct ownership, what sort of lead time do youhave or do you need to actually grow the fleet or to increase the fleet throughownership?

The lead time to increase throughownership is probably just couple of months, it's really not again because theeconomy is a little bit slow, there is a fair amount of capacity to buildcontainers.

I think that the major driverthere is negotiating the terms with the rail, and that would be the main thing,getting the boxes in. We would want to time it, likelihood similarly to how wehave timed it this year and the previous year, so that the majority of thelandings are in and around the busy time on the West Coast.

Okay.

I would emphasize about that thecontainers, which we have the operating lease for, there is no questions aboutthose. Those run, the operating lease is a contiguous run at the same time asour rail contract, and so those will always be in service.

You are right. We both talkedabout the 2000 containers that we got in Todd, those are the red boxes. Thoseare included in the 7400 as Dave mentioned.

Okay, good. Now that’s helpful.And then, Dave, just to be clear on the QS conversion, it sounds like or maybeI just don’t remember correctly but are you pushing back the conversion of thetwo remaining facilities or is that still progressing on schedule.

Yes. We decided to postpone untilafter peak, just because you don’t want too much noise during peak season. Youreally need to focus on execution to make sure we are meeting our client’s demands.So, we did intentionally push it off till after the first of the year, butagain we believe that we have some issues here in the Midwest with the way thatwe were paying drivers and essentially what’s occurring is that any time wewould be to able to optimize the driver they were getting a 100% of the benefitwe are getting none of it. And so kind of defeats thepurpose of building volume and building base, but we are over that in the Midwest now. We are very stable under driver account nowand we really don’t anticipate any issues in Southern California as the pay scales there is based on productivity whichis similar to the contract model.

Okay. And then what is the driveraccount just to have the number?

1,165. That includes employeesand owner operators.

Okay. Do you break out thedrivers separately?

No, that would include companydrivers in or around the total drivers.

Okay, fair enough. And just realthought quickly lastly. Terri thinking about the gross margins I think thathistorically you have seen gross margins in the fourth quarter be compressed orfeel some pressure. I think that last year might have been a little bit of ananomaly. When we think about the fourth quarter this year, any thoughts on whatwould you anticipate. We saw you a very strong gross margins in the first andsecond quarter. Sequentially a little bit of a softening here in the thirdquarter. Any directional thoughts I guess on what you would anticipate based onthis market, what we have seen historically or what we have seen recently forthe fourth quarter on the gross margin line.

We would think it would be similarto perhaps the third quarter, where we mentioned during the first quarter andsecond quarter costs of that that 14.4% was a little high. So it could besimilar to what we experienced in Q3.

So, was it your recent history, Iguess.

Yeah.

Okay, fair enough. Thanks a lotguys

Thanks Todd.

At this time we have no furtherquestions in queue. Ladies and gentlemen, thank you for your participation intoday's conference. This concludes the presentation and you may now disconnect.Have a great day.

Thank you.