Hub Group Inc (HUBG) 2007 Q1 法說會逐字稿

Good afternoon and welcome to Hub Group's first quarter 2007 conference call. We will begin the 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. At this time, all participants are in a listen only mode.

We would like to start by noting that statements made in the course of this conference call that state the Company's or management's projections, intentions, hopes, beliefs, expectations or predictions of the future including projections regarding 2007 earnings are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those projected in such forward-looking statements is contained from time to time in the Company's SEC filings, including but not limited to the Company's reports on the Form 10-K for the year ended December 31st, 2006. Copies of these filings may be obtained by contacting the Company or the SEC.

Now I would like to introduce Terri Pizzuto, the Chief Financial Officer of Hub Group. Please proceed.

Thanks, Kami, and hello. I want to begin by covering four things. First, we had a record quarter. Second, our growth margin as a percent of sales was higher than normal, due mostly to a one-time item. Third, our total costs and expenses were also higher than normal due to several one-time items. Fourth, the net impact of these one-time items on the bottom line really wasn't significant.

Okay, here are the numbers. All of the amounts I am going to discuss relate to continuing operations. Our first quarter diluted EPS was up 38% from 2006. Our first quarter operating margin was 4.6% compared to about 3.8% a year ago. We bought $12.5 million of stock during the quarter, at quarter end, we had $35 million in cash and no debt.

I'll discuss details for the quarter starting with revenue. Intermodal revenue increased 10%. This increase is from a 4% volume increase and a 5% increase from the addition of Comtrak. The combined effect of pricing, fuel and mix was an increase of 1%.

Truckload brokerage revenue increased by 7% due to higher volume, pricing and mix. We are really focused on growing the yields in this business.

Logistics revenue was 16% higher than last year because we increased our business from our current customers. We are really continuing to work hard to increase the sales pipeline. We are delighted that we signed a new contract with one of our largest logistics customers in March. We are going to be recognizing revenue for this customer's new contract on a net basis beginning in the second quarter of 2007. What this means is that rather than having all revenue and all costs reported gross on our income statement, we will basically show the gross profit as the revenue. This account had been running about $40 million a year in gross revenue and we do expect that the profitability for the new contract will be roughly the same as it is right now.

Gross margin dollars grew by $9.3 million or about 20%. This growth comes primarily from Comtrak, since we only owned it for one month in the first quarter of '06 and from our very strong results in truck brokerage. There was more capacity in the truck brokerage market, and that allows us to buy better. We also had better mix and more project work than we did in the first quarter of 2006. In 2006, most of our project work was in the second and fourth quarters.

Our gross margin as a percent of sales increased to 14.4% compared to 13.3% last year. This increase comes mostly from doing more of our own drayage more efficiently, a one-time profitable vendor deal and truck brokerage. If you really look at our historical quarterly gross margin as a percent of sales in 2006, it ranged from a high of 14% to a low of 13.3% in two quarters. Our gross margin for the whole year '06 was 13.6% so as you can see, the 14.4% growth margin in the quarter is unusually high. Our goal for this year, 2007, is to improve on the 13.6% gross margin that we had last year.

Total cost and expenses were $38.4 million compared to $33.7 million in 2006. About half of that increase in salaries and benefits, and general and administrative expense relates to our addition of Comtrak. We had $350,000 of severance costs in the first quarter of '07 that are included in salaries and benefits. We also spent about $1 million for a marketing project this quarter and that project is now done.

We generally expect our quarterly costs and expenses to be in the $37 million to $38.5 million range. These expenses don't include any performance units. We had 1,106 employees at quarter end, excluding drivers. That is an increase of eight people, who are all in the truck brokerage division.

The operating margin was 4.6%. That is compared to 3.8% last year. This is the highest operating margin for the first quarter in Hub's history. There are four ways to achieve high operating margins. One, an increase in our Company-owned drayage operations; two, growth in truck brokerage; three, the margin enhancement teams; and, finally, cost control.

Our effective income tax rate for the quarter was about 40%. We also implemented a new accounting rule related to income taxes during the quarter -- FIN 48. We will be disclosing that we have a dispute related to our 1997 federal income tax return. Over the years we have recorded a liability totaling $1.4 million related to this dispute. However, if the dispute is resolved in our favor, we will reverse that liability into income.

Turning now to our balance sheet and how we used our cash. During the quarter we spent about $2 million on CapEx. For the entire year we think CapEx will be in the $10 million to $11 million range. We are purchasing 2000 new 53 foot containers for our fleet. These purchases are going to be financed with operating leases that have a six-year term.

In October, we said that our Board authorized the purchase of up to $75 million of our common stock. That authorization expires in June of '08. During the first quarter, we did purchase about 408,000 shares at an average price per share of $30.62 totaling the $12.5 million.

We are continuing to look for strategic acquisitions. Each acquisition candidate has to meet three criteria. The criteria are a good cultural fit, a healthy company that is not a fixer upper, and one with results that are accretive to Hub.

Now I'm going to discuss 2007 full year earnings guidance. At quarter end we compare our full year EPS forecast to the publicly available analyst range. For 2007, we expect our earnings from continuing operations to be within the analyst range of $1.31 to $1.40 per diluted share. The weighted average diluted shares are estimated at about 40 million for 2007. The shares don't assume that we've repurchased anymore shares under our buyback program.

To summarize, we are really happy with our solid performance this quarter. We had a one-time positive item impacting margin that was offset by some one-time costs and expenses. We posted our highest quarterly intermodal volume growth in over two years and our operating margin was a new first quarter record.

Now I will let Dave Yeager, our CEO, take it away.

Great. Thank you, Terri.

We are very pleased with our strong start to the year. Hub's asset light business model, coupled with our ongoing focus on margin enhancement, has resulted in a record first quarter in what has proven to be a soft freight market.

Our intermodal business performed well during the first quarter with revenue growing by 10% and volume increasing by 4%. In addition, the Company's overall gross margin grew by 20%. These increases occurred in a relatively soft freight market. In fact, preliminary reports indicate that overall domestic intermodal actually declined slightly in Q1. And while we are pleased with the volume growth, we continue to focus aggressively on growing our margins.

Another factor potentially impacting the freight market is that shippers have recognized the softness in the economy. As a result, we've seen twice as many intermodal bids in the first part of this year compared to the first part of '06. While we are pleased with the initial awards from these bids, a softer market always presents a margin challenge and it is incumbent upon us to maintain our pricing as well as our purchasing discipline.

We continue to see improvement in rail service during the first quarter. Although in the past few years, we've managed to drive through some very difficult service conditions, this trend of improved service allows us to have better utilization of our rail fleet, improved the predictability of service to our customers, and ultimately makes intermodal a more attractive option. It also improves the economics of intermodal for the railroads, which helps justify the capital expenditures necessary to support future intermodal growth.

As expected in the first quarter, there was a surplus of intermodal capacity in most areas of the country. We did see some significant demand for equipment off the West Coast periodically during the first quarter; but all in all we were able to meet the needs of our customers on an ongoing basis. Helped by improved service our fleet utilization again improved, compared to the first quarter of '06.

As previously disclosed, we placed an order for 2,000 new 53-foot containers this year. These containers are currently being built in China and will be delivered over the next few months before the peak shipping season. These containers will be used on the BN and Norfolk Southern rail networks and will replace approximately 2,400 of our containers that we are turning in throughout the year.

We're also in the process of adding 1,000 53 foot containers to our fleet that moves on the UP and NS. These are rail-owned boxes that have been marked for Hub's exclusive use. Once these containers are added we will haveover 3,000 containers in the UP Norfolk Southern fleet, a net add of 1,000 containers.

Despite the slight increase in our overall fleet size, our fleet meets only about 60% of our daily needs. The remaining capacity comes from the neutral rail fleets and, therefore, even if the economy does slow down further, we will be able to keep our fleet of containers moving.

Our drayage operations help us serve our customers and improve our competitive position. We are working to grow our driver base and convert our remaining QS terminals to Comtrak. We expect to have this completed by the end of the year.

We have owned Comtrak now for a year and we continue to be very pleased with their leadership and operational discipline. With Comtrak's help, we are improving the efficiencies of our drayage network and our purchase of drayage services.

Turning to the brokerage business, its revenue grew by 7% for the quarter. Now this growth is not as robust as prior quarters, but in this softer truck market, we were able to buy better and did see margin increase in a more rapid pace than revenue. Our quarter was also aided by some higher margin project work. These special projects are very service-sensitive and our brokerage team has been doing a great job meeting the specialized needs of our customers.

There continues to be an excess of truck capacity in the market. As expected, we are seeing a substantial number of bids for truck service as well. And as with intermodal we are participating in a number of bids and we are working with our carrier base to secure price concessions for our clients.

Our Logistics group continues to grow their business with revenue up over 16% for the quarter. As Terri had noted we've recently completed a contract renegotiation with our largest Logistics customer. We are pleased that our customer recognized our ongoing efforts to generate efficiencies for them. We generate savings by using our technology-based solutions, which optimize shipments by carrier and mode and consolidates LTL shipments into full truckloads. Our customer pipeline continues to be robust as we look to add new customers to this solid base of business.

So overall, we had a great first quarter. Our asset light business model proved resilient in a soft freight economy and that, coupled with our ongoing focus on margin enhancement, positions Hub Group for success for the remainder of the year.

Now we will open the line up for any questions.

(OPERATOR INSTRUCTIONS) Ed Wolfe with Bear Stearns.

Just a quick row of questions if you will, just some follow-up for everything that you said. Starting, Dave, you said at the end that truck brokerage there's a lot of supply of truck out there and a lot of bids out there. What are you seeing in terms of rates when you're purchasing trucks versus a year ago?

There's no question. The truck rates have dropped. On order of magnitude I would be guessing but I will guess for you. I think it is probably in the area of 10% or so. So we are seeing some aggressive pricing by the motor carriers at this point in time.

And is that for contractual bids or is that mostly spot market kind of stuff?

It's actually both.

The one-time positive, Terri, that you talked about, that's the vendor deal. Can you explain what was that in the quarter? What did it contribute and I don't understand what a vendor deal means.

It was a little less than 50-ish basis points and it relates to railroads.

And what you mean by 50 basis points? Did the -- what was the operating income impact from it?

It was about 50-ish basis points. A little less than that. $2 million.

Little under $2 million.

And why is that not ongoing? I just -- I don't get it.

It was a special deal that we got.

It's a one-time. It will not recur. I wish it was but it will not recur.

And it's $2 million of operating profit not $2 million of net revenue? So make sure I'm looking at it correctly.

It's $2 million to the gross margin line.

So then net revenue has $2 million?

Correct.

Okay. That's different.

It helped our gross margins.

But I would say that it -- that's why it's a little bit unusual. The way that the quarter looks. So the gross margin is a little bit high, but at the same time we had some SG&A one-times as well, like the consulting fee of $1 million one-time which kind of offset each other.

What was that marketing project you mentioned for $1 million?

It was a go to market strategy that we have been working on with a consulting firm.

You mentioned in the past quite a bit. Is that over going forward?

No. This is a new one. I don't think we've mentioned it before.

No. It hasn't been mentioned before. It's new. It's done. Now we just need to actually engage and execute it.

Why is intermodal growth for Hub and J. B. Hunt as well in the last two quarters gone up when the reported intermodal items on the rails have decelerated?

We have been as you know over the past several years very focused on culling out certain low margin accounts; and we continue with that focus. But at the same point in time we have worked very diligently with our sales force to get out and drive in additional volumes. Because certainly there's a lot of leverage there and a lot of capabilities if, in fact, we can grow.

So I think it's a question that a lot of the hard work of our sales and marketing staff is beginning to pay off and, again, we are going to continue to focus on the margin. But we are very focused on the growth.

From our competitors that you mention, I think they have obviously been successful at doing both for the past eight quarters or so.

So you don't think this is an increased transloading impact at this point?

No. I would guarantee you it's not.

Really we focused on the right lanes and year-round business. That is the other thing we did when we targeted the volume we wanted to go after.

Yes. Terri, you talked about the FIN 48 dispute. Is that a scenario where you are kind of the plaintiff? You can only win, but there's no downside to you from this case?

We have it fully accrued for the $1.4 million. So there is no impact to the financials if we lose and if we win, you're right. We would have a $1.4 million pickup.

And that would be a one-time kind of advantage?

It would and it will be resolved by the end of the year.

Dave, the $40 million gross revenue Logistics contract. That's the same one you talked about after fourth quarter in terms of just your accounting for it differently? But from a net revenue and operating income it's fairly the same?

It is that same one, yes. And of course, during the fourth quarter we saw the negotiations going in that direction and we just wanted to give you a heads up.

Last question, you said the headcount is up eight people and, yet, you had some form of severance. Does that mean it is going to be down going forward and there's some ongoing benefit? How do we think about that $375,000 severance in the quarter?

Of that severance about two-thirds relate to people who are gone and so they are not in our headcount right now anyway. Not any one specific department, kind of just a smattering of people.

And it's not just one person?

Right, no.

-- What do you think about headcount going forward?

We don't really predict headcount going forward. I mean we try and control our costs so we would only add a person if Dave approved it.

I think though the one area where we've seen some growth is brokerage. All eight were actually in the truck brokerage division as Terri had said. We will continue to staff that as we need to because that's obviously one of the major growth areas; and the others again we do feel as though we have a scalable model (inaudible) in the intermodal segment. And so I would be hopeful that we will continue to maintain our costs and our headcount at a reasonable level.

Alex Brand. Stephens.

Dave, I'm wondering on the volume front, I know you don't want to give volume guidance, but up four -- I think has to be much stronger than any of us were looking for. Would you attribute some of that or all of that to the vendor deal, which I think I understand exactly what that was. But did that allow you to go out in get some business at sort of one time that boosted the volume? Or is this part of your longer-term strategy that you think is beginning to pay off?

The one-time vendor deal had nothing to do with the volume increase. So they are completely separate items. So, no, it did not contribute.

I did think it is our longer-term strategy and I don't like forecasting volume because I'm so bad at it. But, no, we are very -- this is a question where our sales force is. They've been focused on growth. We are seeing some positive things within the bids that we are receiving feedback upon.

I mean we are just encouraged with where we are positioned at this point in time and what our capabilities will do.

Last year, I think if memory serves, you had an up volume in Q1 as well and then kind of disappointingly turned quickly negative in Q2. Is that a possibility again?

You know, it is always a possibility because we are going to keep -- continue to focus on margin. Our number one goal is on margin enhancement. So we are going to continue to focus on that. I think we did just recently cull an account which we had had it for about a year and no matter what we did we couldn't make money. So you eventually have to jettison those when you just have to admit defeat.

But no. I do believe that I'm hopeful that we can continue to grow. I think our sales force is very integrated with some of the products we are offering. With the enhanced railroad service it certainly makes selling intermodal less of a challenge. So I feel good about it; but again being such a poor predictor in the past I would hate to predict this one.

Is the interline with UP and Norfolk Southern now beginning to give you some help? Is that part of maybe the better service that you're able to sell?

It is certainly a very good service route. We do believe that, of course, they will be even enhancing that yet further later on in the year; but we've had very good success with that route into the Southeast to date.

And Terri, you said net revenue growth in truck brokerage was faster than 7% on margin expansion. Can you quantify that?

We are focused on yield there and our margin did grow more than revenue because of the capacity in the market, the favorable mix and then special projects. I can tell you that we expect double digit revenue growth going forward. But we don't really break out margins.

And Dave, can you -- my last question transloading. I mean a hot topic but you continue to kind of say that you aren't not seeing anything yet. Are you getting more questions about it, more shippers talking to you about it? What are your thoughts on that?

We certainly are seeing customers talking about it. We have seen some initial forecasts from some of our existing accounts on their potential increases in transload activity for this coming year. So we are seeing -- we certainly are seeing more. The extent of what we are going to see as an increase on it, I am still uncertain. I think that's why, Alex, we --while we do believe it's going to be a positive for us, we -- it's been difficult to quantify as of yet.

And in all candor, if all the transloading takes place in six weeks it is not going to have much of a positive economic impact on us. If peak is spread out a little bit more because people understand that there is going to be a very tight capacity market for those six weeks just prior to the holiday season, it could certainly be stronger for us.

Adam Thalhimer. BB&T Capital Markets.

Could you talk a little bit about the integration of QS into Comtrak? I think that was something you're doing fairly slowly at one point. Now it seems like you are jumping in with two feet. I guess first of all what is the financial impact of that? I mean does that -- are there costs that you can take out as you integrate those businesses? Or does that actually add cost this year? And then what are the long-term benefits of that as well?

Well, what I would say is this is that from a cost perspective it's not so much synergies and taking cost out. What it is is Comtrak is just, frankly, they run the drayage better from a service perspective and they are more profitable. So as we convert the QS operations over and we take on their technology, it has a lot of benefits.

And have we seen all those benefits in the four locations that we have already transitioned. We have seen some of it and, again, their operating disciplines, all of that comes into play when you see the conversion of QS. From QS to Comtrak.

Now in the case of is there any costs associated with it? There is. We have about $1.5 million I believe roughly in Information Technology which is -- .

Right. They have InfoTrac which is the computers in the truck that basically can tell you whether a driver is idling or where the driver is. So all that equipment when we convert over from QS is, that goes into each truck for either the driver or in the case of 70% of our drivers it's owner-operators. So regardless it would go on their truck and that is capitalized though.

Right and then so there is some capital expense upfront but ultimately the margins, that is one of the major reasons that we wanted Comtrak so badly was the great management team and great technology that will allow us to be more efficient.

We do have some minimal costs like travel and training of course, when we convert the QS over, but it's not significant.

And then, how many locations are left to convert QS locations?

We have only done the four like Dave said. We did Jacksonville, Atlanta, St. Louis, and Kansas City. So we've got California to do and Illinois to do.

Right. So we have three left. We have Northern Cal, Stockton, L.A. and Chicago.

And then what is the outlook for growing that business or adding locations going forward? Is there a geographic area where you feel like you need to add some coverage?

That's a very good question. We are currently combined. Comtrak and QS, handles about 32% of our existing business. So we can certainly begin to grow organically by opening up in a city we are not in and add in drivers and thrown in our business mix into that. We are also looking very aggressively at any potential acquisition candidates.

As I think we had said last quarter we have not been able to find any yet that met our proper criteria but we are continuing to look. We are in some discussions at this point in time and we are hopeful that we will be able to expand through acquisition to a few new geographies yet this year.

Another area that we expect to grow with Comtrak on is international drayage. Right now, we are focused on doing the conversion and so once we get that under our belt, we can focus some more on selling the international drayage as well.

Then you mentioned some improvements in rail service. Can you just expand upon that a little bit?

Each -- well, three out of the four major railroads saw double-digit improvement as far as on a percentage basis for their on-time performance '07 versus '06. So we are very encouraged by that and, again, it's still not up to the level that it needs to be or was in fact in 2002. But we certainly are seeing that the capital expenditures, the huge amounts of moneys the railroads have reinvested in their infrastructure are beginning to pay off.

I guess just one final question here. If I look at your truck brokerage business, you talked about the favorable mix and the net revenue margin expansion but you also mentioned that there are increased bids out there. I guess my question would be, how long can you benefit from the net revenue margin expansion before you have to pass along the lower truck pricing to the shipper?

That's another very good question because obviously we are seeing pressure from our clients and it's a bit of a cat and mouse game. I mean there's no question that you've got to be very focused on making sure that you're able to decrease your cost in proportion to any decreases you may receive in revenues. And it's just incumbent on us to maintain that pricing and purchasing discipline.

So it is something that you have got to be very cautious of. It can get away from you if you aren't focused on it but that is an area that we have a lot of brain power working on it.

So there's no -- it's not like it just goes on -- it's not like it's just a positive benefit for another two quarters and then goes away. It's something that you can benefit from from a long time, but you just have to stay focus on it.

If we manage the process properly, yes, we can benefit from it for the extent of however long the softer freight economy may be.

We have a carrier development group and that is one of the things that they work on, a relationship with the carrier that's at a national level as well as a local level. So we are constantly negotiating and working with the carriers; and in this kind of a capacity -- too much capacity, not enough demand -- the carriers are happy to work with us because we give them consistent freight.

Jon Langenfeld with Robert W. Baird.

A follow-up on that Comtrak question. What's the plan when you go in and convert one of these over to Comtrak's operating processes? Are you going to be happy if you can get to the Comtrak margin in six months or a year or kind of what is the timeframe on that?

We don't have a definitive timeframe. It is something that evolves. What we have seen is that you do get a pretty quick uptick. And then it does take time to make sure that you are consistent with the operating disciplines and people there's a learning curve obviously with the technology and how to use it to the biggest benefit. So it's -- .

The more Comtrak does the conversions, the more efficient they get at it, too, because now they've already done four. They already started in Illinois with our Ohio QS's. So it's really pretty efficient right now.

Is there anything structural that stands out at you that some locations aren't going to be able to achieve the Comtrak-like margin? I know there's variances from each place but anything material that sticks out at you?

Well, you have -- when you go -- we -- as long as we support Comtrak management and don't back down to what local issues may exist, we will be able to, in fact, put in their disciplines and operate efficiently.

And what I mean by that, Jon, is that some drivers, some owner-operators when you want to put a computer into their cab they'll just say "No. I'm not having Big Brother watch me."

Now if they give it two weeks they will actually fall in love with it and wonder how they ever operated without it. But those -- it's those types of issues that you can't back off of --the core competencies and what's required for Comtrak in order to put in those disciplines and the policies and procedures that they have.

And then changing gears to the brokerage side. You had mentioned the project work that you had last year in 2Q and 4Q if I heard that correctly. I also heard, Terri, you said your plan is to grow double-digit revenue growth there. Yet in the first quarter it wasn't, and I understand gross profits it's growing very very well. But I guess the question is that double-digit growth been moving forward? Is that a function of you going out and getting project work? Is it a function of try to get more volume through this system? More yield? I mean what would be your thoughts there?

I would suggest to you that it's all those things. Certainly we like the project work. It's a core competency now that we do quite well and so we would like to expand on that with our variety of customers. But it's not solely based upon that.

Certainly, we are becoming more efficient at selling some of our intermodal customers over to the highway side. We're working on that very diligently. Still not where we need to be on that by the way. But it's something that I think we are getting better at and our sales force is becoming more comfortable selling. In addition again David Marsh and his group with Hub Highway, they focus very much on collaborative accounts and integrating ourselves within those customers.

So it will grow in fits and starts and sometimes it may plateau, but I think in the longer timeline we will always be towards the double-digit growth.

Then the project work you were referring to, you talked about a couple of times. Is there any of that on the intermodal side or is that pretty much the brokerage side?

Pretty much brokerage.

Yes. There's some intermodal that is utilized in those; but for the most part it's so very service-sensitive and a lot of the lead times we have aren't adequate for intermodal. Certainly being an intermodally focused company we are good for these kind of projects because if it's possible we are going to move it on the rails, and save the money. But much of it -- the timeframes are just a little bit too tight.

And then even relative to some of the other competitors, not just Pacer but some of the others out there we talked to and your growth and J. B. Hunt's growth stands out significantly. How -- as you move forward you are clearly taking share here. But I mean as you move forward how do you get the salespeople's head around the fact that this is a share gain piece that we are going after? And how do you try to build on the success you have -- you have had, excuse me? I guess that's what I'm trying to drill towards.

Well you really do -- once you have your products very well defined and what you want your -- what you want your sales force to sell. We are much more directive than we used to be on our sales effort. Our guys used to go out and then shoot and then point. It's much more now we are looking for specific corridor, specific volumes, these are the people that we quoted in the past that may have this business. Go after them, here's your price.

I think the other thing that probably will help us some as Dave mentioned before is the marketing study that we just did. We got very fine tuned with that and know exactly what we need to do to continue.

Yes and then, again, that is something we have not really begun execution on. It is something that will be longer-term implementation over this year and in 2008. But keeping our sales force very focused, understanding our product offering, where our competitive advantages are, I think we positioned ourselves relatively well to take advantage of that and to go after share.

That's helpful and then lastly, you mentioned something that was a little bit counterintuitive to me and you talked about getting price concessions from some of your transportation providers. I believe you were talking about rails at the time. They don't seem to be in the business these days of giving price concessions to anyone. So could you just elaborate on what you were thinking there?

If I said that I retract my statement. It was not from the rail part. I believe at that point in time we were actually discussing the highway and the truck (multiple speakers) and there, the truckers of course historically, they react much more quickly to changing market conditions. And so that is where we have seen the price concessions.

No, you are absolutely correct we are not saying that from the rail end at this point. Because although there is some softness obviously with some of the volume declines we have seen on some of the rails that have already announced their earnings, they are still networks that have finite capacity that believe that they can fill it out without having to offer price concessions.

Todd Fowler. KeyBank.

Back to the drayage. I think, Terri, you'd mention that there is obviously more of a shift of doing more drayage internally. Could you guys reminding where you stand I guess from a percentage standpoint? And what the opportunity is to bring more third-party dray in-house?

We are about 32% right now and as we convert each QS office over to Comtrak that is one of the things that we look at. Mike Bruns and his team figure out which of our intermodal loads they can do the drayage on most efficiently, and effectively for our customers. Ultimately we want our customers to be happy.

So where can that 32% go in the near-term?

Our ultimate goal is 50 to 60% but in the near-term it's --

That's a matter of definition of near term.

-- vaguely define near-term?

Near-term if we could get to 40% this year I would be very pleased just through organic growth. The real limiting factor on that continues to be getting driver capacity. We are very fortunate. We have business and so we can transition that business relatively quickly; but it is a question of being able to attract the drivers.

Then I guess looking at the volume increase in the intermodal side, how much of that is new customers? How much that is existing customers? And what's the nature of the business? It certainly sounds like it's more -- it's not just spot. It's more longer-term in nature. Is that a fair characterization?

That is a fair characterization. If we look at it, I would say it's probably about half and half new customers and capturing share with our existing customer base. That is not a question I had prepared for, in all candor. But we have been able to add some significant clients in the first quarter. And so it's probably about 50-50 organic customer expansion, as well as new customers.

Then with the new customers that you are seeing as they make the transition intermodal or if it is a transition intermodal like (inaudible), is the differential right now part or is the motivation is the pricing between the trucking intermodal? Is it the efficiencies of the rails? What are some of the things I guess you are hearing from the customer base that (inaudible) migration?

Two things. No. 1, I would like to point out also that the 4% increase in volume, that was despite the fact that we actually decreased by 1% with automotive suppliers that we had jettisoned last year as well as we are lapping our volume decline with Wal-Mart which was an additional 1%. So the 4% was on top of that. I'm sorry, you need to repeat your question again because I wanted to get that point across.

Just as far as when people are coming and using more normal services from the shipper base, I mean is it more along the lines of rail efficiencies? Is it a cost differential between truck and intermodal? Is there anything that you are seeing in the marketplace that's kind of being the tail end of the intermodal business that you're seeing?

Certainly, price is a major priority. Customers aren't going to convert from truck to rail unless there is a significant difference in price. Just because the inconsistency in service and plus with the large amount of truck capacity that is available in the current market. So that's part of the cost just to play. Then, it does get down to service to a large extent -- .

Capacity, whether we have the boxes, when they give us the freight. That was the criteria of one of our big customers that we grew substantially this year that we had at the tail end of last year. We had the capacity, we had a strong relationship with the people so that helps too.

So price and capacity are probably the two biggest attracting points to customers for rail intermodal and of course, consistency of service. It makes it a lot easier to sell to a client to convert when, in fact, we can tell them it is going to be five days and not three days to seven days.

Then as far as the economics related to the length of haul, are you seeing because of the improved efficiencies is there a new pool of freight that is coming online? If you to get down to maybe an 800 mile length of haul that is comparable versus a truckload move or is there still liked around 1000 mile threshold that you would see to get the economics to work on intermodal versus truck?

I do think that obviously the economics are such that they become more compelling with the longer the length of haul. We feel as though we can in some markets -- some specific markets -- Chicago, Atlanta, Chicago East Coast, which are more like 750 to 900 mile ranges that we can be competitive with truck. So that is there currently and, again, with the -- especially with if the service can be consistently second AM Chicago to Atlanta you can attract a lot more business than with uneven and inconsistent service.

I do know with some of the bids that we're getting, too. I know the criteria that we have looked at to pull out the intermodal bids the intermodal loads we wanted to bid on. We looked at what lane it was in and sometimes like Dave said it would be less than 1,000 or 750 miles. But if that was a lane where rail service was good we decided to bid on it this year whereas last year we might not have.

One last one real quickly. It looks like there was about a $5 million payment to Comtrak coming through the cash flow. Is there anything else any other payments that we will see going forward? Or is that pretty much everything related to the Comtrak acquisition? From a cash perspective?

That was the payment related to the '06 earnout and, then, we have another earnout related to this year that would be paid in the first quarter of '08.

And is there a cap for that?

Yes; then we're done.

It is a $5 million cap.

(OPERATOR INSTRUCTIONS). At this time, we have no more questions. On behalf of Hub Group, thank you for attending today's conference. This concludes the presentation. You may now disconnect and have a great day.