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Rush Enterprises, Inc. (NASDAQ:RUSHA)

Q3 2007, Earnings Call

October 19, 200710:00 am ET

Executives

Marvin Rush - Chairman of the Board

Rusty Rush - President and Chief Executive Officer

Marty Naegelin - EVP

Steve Keller - VP and CFO

Jay Hazelwood - Controller

Derrek Weaver - CCO

Analysts

John Barnes - BB&T Capital Markets

Peter Nesvold - Bear Stearns

Andrew Obin - Merrill Lynch

Chaz Jones - Morgan Keegan

Chase Becker - Credit Suisse

Gary Lenhoff - Ironworks Capital

Milan Gupta -Southpoint Capital

Andrew Casey - Wachovia Securities

Operator

Good day, everyone and welcome to the Rush Enterprises Inc.Third Quarter Earnings Results Conference Call. This call is being recorded. Atthis time, I would like to turn the call over to Mr. Marvin Rush, Chairman ofthe Board, for opening remarks. Please go ahead, sir.

Marvin Rush

Good morning and welcome to our third quarter 2007 earningsrelease conference call. On the call with me today are Rusty Rush, Presidentand Chief Executive Officer, Marty Naegelin, Executive Vice President, SteveKeller, Vice President and CFO, [Jay Hazelwood], Controller and Derrek Weaver,Chief Compliance Officer. Now Mr. Keller would like to say a few wordsregarding the forward-looking statements.

Steve Keller

Certain statements we will make today are consideredforward-looking statements as defined in the Private Securities LitigationReform Act of 1995. Because these statements include risks and uncertainties,our actual results may differ materially from those expressed or implied bysuch forward-looking statements.

Important factors that could cause actual results to differmaterially from those expressed or implied by such forward-looking statementsinclude, but are not limited to, those discussed in our Annual Report on Form10-K for the year ended December 31, 2006 and in our other filings with theSecurities and Exchange Commission.

Marvin Rush

Now, we would like to give you an update on our progress.Let's talk about the third quarter results. In the third quarter, the company'srevenues totaled $522 million, a 20% decrease from revenues of $651 millionreported for the same period last year. Net income for the quarter was $13million or $0.34 per diluted share compared to $16 million or $0.43 per dilutedshare in last year's third quarter.

Let's talk a little bit about the third quarter businesssegment results. The truck segment recorded revenues of $491 million in thethird quarter of 2007 compared to $626 million in the third quarter of 2006.The Company delivered 1820 new heavy-duty trucks in the third quarter of '07compared to 3512 heavy-duty trucks in the same period of '06. This significantdrop in sales from 2006 to 2007 is the result of the exceedingly strong truckdeliveries in 2006 as the industry prepared for the 2007 emissions regulationsto take effect.

Revenue from Class 8 truck sales decreased approximately$168 million or 43% to $223 million in the third quarter of '07 from $391million in '06. Looking forward, we expect to deliver approximately 7200 to7500 Class 8 trucks in 2007, which would result in Rush being off approximately37% in Class 8 truck deliveries for the year versus an expected industrydecline of 47%. I am extremely proud of our 37% increase in our third quartermedium-duty trucks sales compared to the industry's overall decrease of 4.3%.

In the third quarter of '07, 1520 new medium-duty truckswere sold versus 1109 new medium-duty trucks in the same quarter last year.Revenue from medium-duty trucks sales increased approximately $16 million or27% to $76 million in the third quarter of '07 from $60 million in '06.

This increase is directly related to the focus over the pastseveral years to penetrate the medium-duty market segment in the areas where weoperate, providing a knowledgeable, dedicated sales staff and offering abreadth of products to meet the varied needs of the customer base. We expectmedium-duty sales to continue to grow as our medium-duty franchises mature intheir respective markets and we strengthen relationships with our customers inthis segment.

The company delivered 1032 used trucks in the third quarterof '07 compared to 999 used trucks in the same period of '06. Revenue for usedtruck sales increased $4 million or 8% to $53 million in the third quarter of'07 from $49 million in the third quarter of '06.

Despite the decline in Class 8 truck sales during the thirdquarter of '07, our parts, service, and body shop sales increased 9% to $116million in the third quarter of '07 compared to $106 million in 2006, resultingin another quarter of solid absorption rate performance. Our third quarterabsorption rate increased to 105.1%, compared to an absorption rate of 104.5%for the third quarter of '06 while the same store absorption rate increased to106.1% year-to-date for '07 compared to 105% year-to-date for '06.

Let's talk a little bit about the construction equipmentbusiness. The company's construction equipment segment recorded revenues ofapproximately $25 million in the third quarter of '07 compared to $21 millionin the third quarter of '06. New and used construction equipment sales revenueincreased 23% to $19.5 million in the third quarter of '07 from $15.9 millionin the third quarter of '06. Construction equipment parts and service salesincreased 19% to $5.1 million in the third quarter of '07 from $4.3 million inthe third quarter of '06.

Let’s talk a little bit about the industry outlook. Weaknessin the housing market and the overall weakness in freight volume have promptedsome large truck carriers to downsize their fleet. Additionally, largetruckload carriers currently have excess inventory of trucks with pre-'07emission engines that they have not put in service yet. These factors willcause the Class 8 truck market to remain soft into the beginning of 2008. Webelieve normal customer trade cycles and new diesel emission releases scheduledto take effect in 2010 will result in increased Class 8 truck orders beginningin the second quarter of '08.

The magnitude of the '08 and '09 pre-buy will be largelydictated by the general economic conditions. If economic conditions in the U.S.are good, we continue to believe that 2009 could be a record year for U.S.Class 8 deliveries.

We are now prepared to answer any questions you may have.Operator, please review the procedure for asking questions.

Question-and-AnswerSession

Operator

(Operator Instructions) And we'll go first to John Barnes ofBB&T Capital Markets.

John Barnes - BB&TCapital Market

Good morning, guys. Congratulations on the quarter. Rusty, acouple of questions for you real quick. First of all, on your medium-dutybusiness, how much bigger does your medium-duty business have to get before youfeel like you start mirroring the industry trends? I mean, you've far outpacedthe industry on medium-duty sales, so I just want to know how much farther youthink you have to go before you start to feel the industry trends onmedium-duty?

Rusty Rush

Well, I would tell you, I personally don't want to put atimeslot or a time segment on that, John, but again, we still have plenty ofroom for growth in our medium-duty arena. If you look out, we are still amaturing organization and I think that shows in the quality of the numbers ifyou look back from quarter to quarter to quarter.

And I really don't have a timeline on when we will matureout to the Class 8 to more mirror the industry. We like to think that wewouldn't mirror the industry totally anyway and we would always outperform theindustry, whatever arena we are in. But we see nothing that we believe is goingto continue to slow the growth trends that we have shown over the last threeyears really.

John Barnes -BB&T Capital Market

Okay. And can you remind us again, how many of yourlocations are you now selling medium-duty out of?

Rusty Rush

Well, we sell our medium-duty at every location we have. Youmust remember the Peterbilt medium-duty product is actually the largestmedium-duty brand that we still deliver. So, even if we don't have access incertain market areas to other brands, we always sell the Peterbilt medium-dutyproduct.

John Barnes -BB&T Capital Market

All right, very good. With this, I guess truck recession orwhatever we want to call it these days and the falloff in Class 8 truck sales,can you give us an idea of how acquisition multiples come in at all? I mean arethey starting to look more reasonable again or do you think it is still alittle too rich out there?

Rusty Rush

No, I don't believe it will be too rich, I think, youremember, dealers are on the tail of the food chain, as I like to say. Wedeliver to the end users. The first part of the year, there was some carryoverfrom '06, but right now, I am sure everyone is feeling the crunch every day aswe go forward with the last Class 8 deliveries.

If you are tied directly to Class 8 sales without adiversification of an earnings stream, which I don't want to say, but somedealers are, I would imagine that the market will continue to get tougher as wego forward, as we wait for a ramp back up in sales, which I do believe, aswe've stated in there, that we look for intake to possibly pick up, but it willprobably be towards the second quarter of next year, that would be my guess.

John Barnes -BB&T Capital Market

Do you have any plans right now for a Greenfield Rush site?Are you contemplating opening up a new dealership from the ground up or wouldanything be done primarily through acquisitions?

Rusty Rush

No, we are always doing that. You can look back andhistorically, we will probably put in two or three new points every year. Youmust remember that they are normally in smaller markets surrounding a largemetropolitan area such as we will be opening a new store later before year endin Pueblo, Colorado.

I have got two others on the drawing board right now thatI'm looking at and one of them for sure I have approved. Although I don't wantto talk about it, but Greenfield sites smaller markets that surround largermetro markets, as we've pushed our network out into that area of responsibilitywe have. So that is consistently going on. Actually in this quarter, we openeda small dealership already in San Luis Obispo, California,so that is an ongoing process all the time.

John Barnes -BB&T Capital Market

Okay. Last question. Can you kind of get real granular forme and tell me, I know Class 8 is weak, but where are your pockets of strengthright now? You and I have talked a little bit about oil and gas. Where are yourpockets of strength right now?

Rusty Rush

Well, that's one of the things we rely on is our diversityof geography, our diversity of customer base and our diversity of earningsstream inside these dealerships not just related to Class 8 sales. So,obviously with the housing markets what they are on the coastlines in Floridaand California, also Arizona we are feeling that, we are feeling it in there,but fortunately with the diversification of the markets that we serve, thecenter of the country with oil and gas of course is strong, refuse is strongthrough the center of the country, Oklahoma, Texas, Colorado, the equipmentstore.

Commercial construction still remains fairly strong in thesemarket areas and I look for it to remain strong through end of '08 in commercial through the center ofthe country, as we wait for residential to pick back up. But I am sure we arestill later in '08 from our thoughts before we will ever see any pickup in theresidential side in any of these coast markets.

John Barnes -BB&T Capital Market

Very good. Guys, nice quarter. Thanks for your time.

Rusty Rush

You bet.

Operator

And we'll take our next question from Peter Nesvold of BearStearns.

Peter Nesvold - BearStearns

Good morning, guys.

Rusty Rush

Good morning, Peter.

Peter Nesvold - BearStearns

Can you talk about pricing maybe and across all yourproducts? So, on new trucks, how much of the price increases are sticking andmaybe talk a little about '06 versus '07 models. Used trucks, we heard somecautious comments out of Ryder recently and then construction equipment becauseI think if there was something, if I were to try to find an issue, though it ishard to, I feel like on this quarter the construction equipment margins were atouch lighter than I was expecting.

Rusty Rush

Well, Marty, do you want to touch on equipment?

Marty Naegelin

Peter, do you want me to talk about the constructionequipment markets first? Their pricing is competitive in the constructionworld; no doubt about that. As the markets interestingly enough have softenedon the coastlines, our manufacturer has gotten more aggressive with its lack ofdiscounting in our market territory because we have had a pretty dad gum goodrun. Year-to-date, we are up 18% in the market in our Houstonterritory. So, as a result, maintain the market share goals that we have beenafter. We have taken some margin deterioration.

That's not really alarming to us. It is pretty much alongthe lines that we expect and that we wanted to accomplish for market sharereasons and profitability is still very strong in that organization as measuredeither by EBITDA margins or pre-tax margins. So, from a construction equipmentmarket, we are real strong in Houstonright now.

Rusty Rush

I'll attack on the used truck side, Peter. We are seeingsigns of some softness out there in certain areas in used trucks. Is it a steepcliff, a falling rapid decline? No. But there is some softness in some markets.Fortunately, our product line that we use, PACCAR product line, and we sell allkind of brands of used trucks, don't get me wrong, but the majority we move arePACCAR products, are holding their values fairly well in their market arenas.They have historically done that during times of used trucks and devaluations.

On the Class 8 side, on new truck sales, manufacturers havegotten their build in line with the marketplace, so pricing is pretty muchbeing passed through. Earlier in the year, there was some heavier discountingto try to keep the factories up and running, but even pricing cannot drive whenthere is no demand, cannot make demand where there isn't any when you have hadthe excessive pre-buy that we had last year because in my mind we've probablytook 50,000 to 60,000 units out of '07 and delivered them in '06. So, thedemand wasn't there and manufacturers have now gotten their lines in line. So,there is basically a price through with the cost of the new engines beingpretty much passed on through. And that goes pretty much for medium-duty also.

Peter Nesvold - BearStearns

Comments in the release and also in the prepared commentsabout…

Rusty Rush

Peter, could you speak up, Peter?

Peter Nesvold - BearStearns

Sure. And maybe to follow-up on the comments in the releaseand then in the prepared comments about trade cycles, can you elaborate a biton that and what is a typical trade cycle these days? Is it three years, is itfour years, what really defines that? Is it just internal maintenance programsat your customers? Is it sliding residual value guarantees? What gives you alittle more confidence in a rebound of demand based on those trade cycles?

Rusty Rush

Well, what gives us confidence is the fact that the majorityof the trucks that were sold in '05 and '06, we believe will need, people willwant to replace them prior to the 2010 emission issues. Most people, remember,it is hard to just give you a generic trade cycle because a lot has to do withwhat markets you are serving whether we are talking about truckload or the manydifferent niche markets that we play in, which historically they hold theirtrucks longer in the construction business, in the refuse business. Thosetrucks are normally held anywhere from a 7 to a 10-year lifecycle, compared tothe first owner on the truckload side usually carrying it anywhere from threeto five years depending on application, whether you are running regional or youare running 48 states.

So, it is not so much to do with maintenance; it has more todo with where the product is being performing. So, we believe there will stillbe a fairly large truckload pre-buy in '09. It is just going to be condensedgiven the softness in their markets, but with some downsizing in fleets, Ibelieve we are going to see some pretty good bankruptcies on the truckload sidein the first quarter of this year.

Delinquencies have risen, so there will be a littlecleansing going on too to get the fleet, the truck fleet out there from atruckload perspective back in line with where it needs to be from a freightdemand, from a freight perspective.

So, I firmly believe that there is not going to be a problemgetting the '09 pre-buy. It's a matter of size. I have spoken and said that Ican't pick the size of the pre-buy for you at this time. It is just too hazyfor us out there. But we do believe there is going to be a pre-buy and thefurther it goes before it starts, the larger the pre-buy will be in '09. Sincemost numbers for '08 have been ratcheted down, I do believe that that justpushed out the pre-buy and more into '09, which could make a larger spike init.

Peter Nesvold - BearStearns

I can't say I disagree with you at all on those comments.Last question, you talked about maybe orders rebounding sometime around Q2 '08.When do you start to rebuild dealer stock? I mean, do you go below a typical,which I believe was probably typical 60-day inventories, given the freight environmentand maintain 60 days? When do you start to, do you have to wait for that orderto come in before you start filling up your, or adding a little bit to yourdealer stock?

Rusty Rush

Well, I would tell you, Peter, that we will know demand.We'll see it. We don't, we typically keep more than 60 days first off. Becauseof the breadth of markets that we represent, if I strictly wanted to just selltruckload off the front line and not go into the markets that we dive into, Icould stock a 60-day inventory. But to hit the different specifications for thedifferent markets, we historically keep between 90 and 100 to 120-day supplystock inventory.

From a customer, reflecting back on your comment that wemade about second quarter order intake picking up, we believe sometime it maybe latter second quarter or not, but there is, we have more activity currentlyout there than we have seen, say, 60 days ago. There is more, there is stillactivity out there, more activity than what we saw, say 60 days ago. Now thatdoesn't mean that the customer base is pulling the trigger on the orders, butthe activity level is definitely trending higher.

Peter Nesvold - BearStearns

But isn't that typical for October? I mean you don't get alot of activity in the summer. So just seasonal…?

Rusty Rush

No, it's typical, but we didn't have any activity really allyear. Peter, we were still, we had some, but very dampened, but we see -- it istypical to start talking, but it is nice to see anyway after you have comethrough the last six months of inactivity. Now like I said, that doesn't meanorders are being placed currently and you can see that in the order intake inSeptember, but the activity level is picking up, which gives us hope that youwill see order intake pick up sometime in the second quarter.

Peter Nesvold - BearStearns

Something's better than nothing.

Rusty Rush

If not sooner and that means delivery going into the latterhalf of next year.

Peter Nesvold - BearStearns

Okay. Thanks for the time, guys.

Rusty Rush

You bet, Peter.

Operator

And we'll take our next question from Andrew Obin of MerrillLynch.

Andrew Obin - MerrillLynch

Yes, good morning.

Rusty Rush

Good morning Andrew.

Andrew Obin - MerrillLynch

I just have a question on the margins on parts and services.They sort of go up and down from quarter-to-quarter, but just looking out intonext year, where should they be to the upper end of the current outlook orshould they be towards the lower end? What drives the difference actually?

Rusty Rush

Partsobviously maintain less margin than service growth. So, when you get moreservice growth, you get some expansion in margin from a gross margin line.

Andrew Obin - MerrillLynch

That's what I'm trying to understand. Are you saying, so, asI'm thinking about the fourth and first quarter given that we are sort ofdelaying buying new trucks, so does that mean that there is less truckutilization on the road, and so the margin would fall, or does it mean thatpeople have to do a bit more maintenance and it will go up?

Rusty Rush

Well, if you think about it simply, as the fleet ages, youare going to spend more money on parts and service when the average age of thefleet gets growth. So, see, all our service work is not just to the truckloadside again. It is dictated into these segments where they do hold their truckslonger, the vocational businesses that we talk about, the niche markets. So,those lifecycles are a lot longer, twice as long as the truckload side. Butfrom a margin perspective, Andrew, I can't nail it to the exact point, but Iwould tell you to expect between 40% and 42% blended margin.

Andrew Obin - MerrillLynch

And I am just going through construction equipment sales.I'm just a little bit surprised to see that you guys continue to grow thenumber. And I am just wondering, and I apologize if you have answered thatalready, I could have missed it, but what drives the increase, given all thebad news about residential weakness in the U.S.?And is it the market being different, is it the brand being different, is ityou guys being different, what is going on?

Marty Naegelin

It's a little bit of everything. Andrew, this is Marty.

Andrew Obin - MerrillLynch

Hi, Marty.

Marty Naegelin

Houstonresidential is starting to slow. There is no doubt about that. But thecommercial market in the Central Texas corridor is very,very strong right now. If you combine that with a very strong oil and gasmarket and that is what drives Houston.The market for construction equipment units in Houston,our 20 county-area right now is about 2700 units and that is as large as wehave ever seen it.

Andrew Obin - MerrillLynch

And so, it doesn't sound like you expect it to fall off acliff anytime soon?

Marty Naegelin

Not as long as oil and gas is $90 a barrel. I mean, it isjust amazing what is going on over there. The year-to-date market is up 18% inconstruction equipment deliveries.

Andrew Obin - MerrillLynch

Would that mean actually that you should see a pickup fromthose customers? That should offset some of the, I know you guys have beenconcerned with what is happening with the truckers, but wouldn't the oil andgas customers come in, in the first half? I apologize if you have said thatalready.

Marty Naegelin

No, that's the vocational strength we have talked about inthe truck side.

Andrew Obin - MerrillLynch

Okay.

Rusty Rush

Yes, as I addressed earlier, that is the center of thecountry, it is still very strong for us and what we rely on is that diversityof geography and diversity of customer base in markets that we serve.

Andrew Obin - MerrillLynch

I can't nail you to $2 anymore because you have changed yourshare count, so I have to come up with a new number. Thanks a lot.

Rusty Rush

Thanks, Andrew.

Marvin Rush

Thank you, Andrew.

Operator

And we'll take our next question from Chaz Jones of MorganKeegan.

Chaz Jones - MorganKeegan

Yeah, hi, good morning, guys.

Rusty Rush

Good morning, Chaz.

Marvin Rush

Hi Chaz.

Chaz Jones - MorganKeegan

Nice quarter.

Rusty Rush

Thank you.

Chaz Jones - MorganKeegan

Let's see. What did I have left here? Do you guys still haveany '06 inventory left on the lot?

Rusty Rush

Yes. It's obviously tailed longer than I want, but if youlook at the third quarter, one of the nice things about the third quarter wasthat we had a pickup in the third quarter of '06 sales, pre-'06, pre-'07 enginesales.

Chaz Jones - MorganKeegan

Sure

Rusty Rush

But we still carry it. It's coming down, but I look for itto help us during the fourth quarter also.

Chaz Jones - MorganKeegan

Do you expect to be through most of that by the end of theyear, Rusty?

Rusty Rush

Yes, most of it, which you are always going to have somestragglers. I mean, that's just, I don't care what year you look at. I can takeyou back 30 years, that is always the case. But as far as to get through themajority of the inventory, I would imagine we will get through the majority ofit here in the fourth quarter.

And it's reflective, one thing you have got to look at, Iwant to go back. Remember, when you look at those truck sales and you say, wow,they went from 3500 to say, 1800 Class 8s. But remember the units we lost werethe truckload big fleet business. We have large fleets we have not deliveredany units to and it is very reflective, if you look at the margin on Class 8truck sales quarter-over-quarter.

If you look at the margin from third quarter of last year tothird quarter of this year, it is two points total higher. So, obviously youcan see the mix changed into the more owner operators, smaller type mix ofbusiness. But it is really the truckload that we missed and that is where mostof those units went into. So that's the lower margin business that we do.

Chaz Jones - MorganKeegan

Right.

Rusty Rush

The truck margins were very high for the quarter, as high asI have ever seen them, but that is a mix issue. We still kept that diversity ofcustomers that we serve.

Chaz Jones - MorganKeegan

Okay. And then, maybe moving over to the medium-duty side,very strong quarter there.

Rusty Rush

Yes, sir.

Chaz Jones - MorganKeegan

You gave some guidance in terms of expectations on the heavy-dutyfront for the full year. I know in the past you have said a target would be, ora goal, however you want to characterize it, 6000 medium-duty trucks in '07.

Rusty Rush

Right.

Chaz Jones - MorganKeegan

Could you still do that?

Rusty Rush

I think that's a little, that's a little bit of a stretch.We are going to get close, but given where we are at year-to-date, we might bea couple hundred short. I would expect something in line with the third quarter…

Chaz Jones - MorganKeegan

Okay.

Rusty Rush

…fourth quarter, give or take a few points. I am not goingto, you are not going to sit there and nail me down, but we would have todeliver 1717 units. That might be a little bit of a stretch in the fourthquarter. But in the medium-duty business, a lot of those buyers, they aretalking to their accountants right now and figuring out what they need topurchase for depreciation issues.

That market tends to drive a lot higher in December and soyou'll see some buyers that maybe I don't see right now will show up here inthe next 30 to 45 days as they try to figure out how to pay the government alittle less money.

Chaz Jones - MorganKeegan

So, you don't expect a sequential fall-off there in terms ofmedium-duty sales from third to fourth quarter?

Rusty Rush

No, not from third. We may not reach last year's fourth quarterbecause it was just huge.

Chaz Jones - MorganKeegan

Okay.

Rusty Rush

But we will, I don't expect any sequential clip or anythingin the medium-duty sales. I am not going to sit here and tell you guaranteethat there will be exactly identical with the third, but they are going to bein that range.

Chaz Jones - MorganKeegan

Sure, sure.

Rusty Rush

Okay.

Chaz Jones - MorganKeegan

And then maybe jumping back over to acquisitions. I know wealways spend a lot of time talking about acquisitions on the dealership front.Is there any activity out there in terms of your other ancillary services,whether that be insurance, construction, those types of areas where you areseeing some opportunities?

Rusty Rush

I don't know that we are seeing opportunities, but we aredefinitely wide-eyed and looking. Right. I mentioned, I think in last quarter,we talked about that we acquired an insurance book of business and an insuranceagency on the West Coast and we are looking at stuff, but I really don't liketalking about that until such times as we get something nailed down. But Iwould expect activity level from possible acquisitions to look at to accelerateas we still work through the next probably six months before we see any pickupin the real Class 8 order intake in my mind.

Chaz Jones - MorganKeegan

Okay, great. I appreciate the commentary, guys.

Rusty Rush

And any ancillary businesses that are affected should also, thereshould be more opportunities show up and we are definitely looking.

Operator

And we'll take our next question from Chase Becker of CreditSuisse.

Chase Becker - CreditSuisse

I had a quick question regarding…

Rusty Rush

Could you speak up, please? I'm sorry.

Chase Becker - CreditSuisse

Sure. It's Chase Becker in for Jamie. A quick questionregarding, just looking at your SG&A, I mean obviously you are coming off adepressed sales base here, but as we look out forward, what are yourexpectations in terms of how that should be trending? I mean, if we look backtowards the end of last year, you are kind of in the high single-digits and nowyou are kind of running at around 12%. How should we think about that goingforward?

Rusty Rush

Remember, as we have talked in the past, you cannot look atour SG&A and manage it. You have to break it into its pieces and parts. Youhave to take the S side and then look at it on the G&A side and that is howwe manage it because the S side is so directly related to truck sales. And whenyou see revenue drop like it has, obviously SG&A goes up, but you have toview it, we look at just G&A and that is how we manage this businessbecause the S side is the variable selling component that is going to ebb andflow with truck sales.

The G&A piece year-over-year, quarter-over-quarter froma G&A perspective, we were up 4.7% and that is how we manage it and that ison a same-store basis because remember you have got to strip out acquisitionsout of there too because you manage off of same-store. You can't look at itthat way. We have given guidance in the past that our goal was to stay in the5% range from a G&A perspective. When you take 3.5% of that or better isinflation to begin with. Then you are trying to grow your business.

And the best way to look at the G&A is to look at theabsorption rate and if you look at same-store absorption rate, we increased bya point. From where we were, we were up a point. So we are, year-to-date. So,we are very, very happy, which means our employees, our managers, our peopleare doing an outstanding job of managing in a tough environment.

Chase Becker - CreditSuisse

Congratulations again on that absorption rate. Lastquestion, obviously, it doesn't sound like there is any significant differencefor your outlook for 2008, I mean, I think you were kind of indicating roughly the same time period lastquarter. Anecdotally, when you are talking to your customers, do you seeany difference in maybe the trajectory to how that ramps up going into the thirdand fourth quarter or I mean are you at all concerned that, I mean, how firmare you that the second quarter is really when this is going to start pickingup because it seems like over the last couple of months, the orders weregetting better and then in September, of course, it looked pretty weak again.So, I mean, just what are your expectations and how comfortable do you feelwith heading into that second quarter, that you are really going to see apickup?

Rusty Rush

When you say orders were picking up for a couple months, Idon't quite view it that way. I think yet again break it into its pieces andparts. You don't know how many of those trucks being ordered are for deliverycurrently or are those extended deliveries into the third and fourth quarterand next year, into the second. You never know that when you see that orderintake number come in.

Also you look at the percentage of export orders. What wasit? 10% last year and it is running 30% or so this year. I mean that is a hugedifference. Those are going offshore. So, I really never saw any order pickupduring the summer when you really broke it down into its pieces and parts.

I would tell you I am pretty solid on the fact that we willbegin to see order intake pick up in the second quarter of next year, whichcorrelates probably to deliveries in the third and fourth quarter. But again, Irelate to how we are performing in this type of environment with only 1800deliveries. And obviously, if you look at the last second quarter, thirdquarter, it speaks for the diversity of the earnings stream of thisorganization. So, till we get that huge ramp-up, when we get that, I think thenyou will see a change when those deliveries go up.

We are going to continue to try to grow the absorption. Weare going to continue to work on our ancillary business. Our crane business isoutstanding, our crane rental business. Our equipment store has doneoutstanding. So, we will continue to rely on those other pieces of the earningsstream and especially the parts and service side. Remember, that is where weget more margin than anything else in this organization.

People get so caught up in Class 8 deliveries and we lookforward to Class 8 ramping up, but we are out to prove this year and throughour execution that we can perform in an environment such as this where marketsare off 50%, but our total earnings are not going to be off 50%.

So in answering your question, it's still a little hazy outthere. This is what we believe. That it will pick up in the second quarter, theintake will. Is that a guarantee? No. But we will perform inside whateverenvironment, whatever hand we are dealt.

Operator

Mr. Becker, was there anything further, sir?

Chase Becker - CreditSuisse

No, thank you.

Operator

And we'll take our next question from Gary Lenhoff of IronworksCapital.

Gary Lenhoff -Ironworks Capital

Hi, thanks. Rusty, you just touched on the question I had.Can you tell us what G&A dollars were in Q3 and what they were in the priorQ3 of last year?

Rusty Rush

Let me go here. Like as I said, they are up 4.7%. Let mepull the number, Marty.

Marty Naegelin

Let Steve or I answer that question. We break, as we saidbefore, selling expense out of G&A expense and when reported, it isselling, general and administration. In the third quarter of this year, ourG&A expense total was $54,874.

Gary Lenhoff -Ironworks Capital

Okay. Do you happen to have the number from last year?

Marty Naegelin

No. Last year…

Gary Lenhoff -Ironworks Capital

I'm sorry. You said it was up 4.7%?

Marty Naegelin

Yes, that's right.

Rusty Rush

Same-store.

Marty Naegelin

Same-store.

Gary Lenhoff -Ironworks Capital

Same-store.

Marty Naegelin

That $54,874, a $1.578 million was new acquisition.

Gary Lenhoff -Ironworks Capital

Okay. So, I can do the math.

Marty Naegelin

So, you can do the math there.

Gary Lenhoff -Ironworks Capital

Great.

Marty Naegelin

Now one other last little tidbit of information.

Gary Lenhoff -Ironworks Capital

Sure.

Marty Naegelin

Sequentially in total, not same-store, but in total, that$54,874 is down from the second quarter of $55,793. So, we look at it not justquarter to quarter, but sequential as well.

Gary Lenhoff -Ironworks Capital

Sure. That's very helpful. Second question, a portion of yoursales across your product line, across your truck, and your truck sales andconstruction sales require third-party financing. I would be curious if youcould give us some insight as to what you are seeing in the current financingenvironment. Do you have truck buyers, smaller guys who might be having aharder time financing acquisitions? What do you see out there?

Rusty Rush

Well, I would tell you that it is, the environment is stillokay, it's decent. We have seen maybe, we do most of the financing we place,the majority, 75% or 80% of it is placed with two lenders and of course theyare big players in this market. So, when you look at the other, yoursecond-tier lenders, I have seen one pull out. I have seen another one maybetighten some of their credit, their credit practices, but overall, it is notthat bad.

You can see, but you do see rising delinquencies, which mayforeshadow some tightening further in the credit market. If you look at it, itis pretty interesting to see that, it is interesting to see delinquencies upmore on the coastlines. If you go back, they've basically doubled since thefirst of the year for the Floridaarea and the California area,while they've still maintained, they have gone up in the center of the country,but they are still half of what they are on the West Coast. And what they areprobably two-thirds of what they are on the East Coast. The West Coast seems torun the highest delinquencies, but we are still doing an outstanding job on theF&I side.

If you look at the units, the lack of units that were soldversus where we are, we are up in finance and insurance quarter-over-quarteragain. So that shows you that the business we lost was more the truckloadbusiness, the big fleets of we don't get involved in on the financing side. Wehave been able to maintain our F&I margins because the market sectors havehelped carry that. We don't normally gather finance and insurance income offthe large fleet truckload business.

Gary Lenhoff -Ironworks Capital

Do you know what portion or what percentage of yourmedium-term truck sales and construction equipment sales do require third-partyfinancing? Is it the majority?

Rusty Rush

On the Class 8, in this type of environment, I would tellyou Class 8 is probably 50 medium runs. Probably we penetrate I think around25% to 27% right now. A lot of those are professional businesses that havestrong banking relationships and things like that, the medium-duty market.Remember, it is a total different market obviously and dealing with a lot ofdifferent sectors. So, they are ongoing private small businesses, so theyalready have banking relationships, so your opportunities for financing are alittle less.

Gary Lenhoff -Ironworks Capital

From pricing.

Rusty Rush

Yes, their banks, they are getting them financed.

Gary Lenhoff -Ironworks Capital

Sure.

Rusty Rush

But they are getting them through their overall mainrelationship, but we penetrate just a hair under 30% of that medium-duty, ofthose medium-duty deliveries that we have that we facilitate the third-partyfinancing on, but we look to grow that. We've put a lot of focus on that in thelast year.

I can take you back a year and a half ago, we weren't 10%,but we have hired experts to take care of just the medium-duty finance businessa year and a half ago and it obviously shows in our penetration rates. So, we aretrying to capture every piece of the pie we can and all the ancillary thingsbecause that is where the truck is the engine that drives the train.

It is providing a service of financing and a solution to allneeds for a customer that we are after because that is the better marginbusiness and that is what a customer wants. It is no different. They want asolution and we are about providing transportation solutions.

Gary Lenhoff -Ironworks Capital

Great. That's very helpful. Thank you.

Rusty Rush

You bet.

Operator

(Operator Instructions) We'll go next to Milan Gupta of SouthpointCapital.

Milan Gupta - Southpoint Capital

Hi, guys. Great quarter.

Rusty Rush

Thank you.

Milan Gupta - Southpoint Capital

I just had a question. If you could shed a little more coloron Q4. You've made a few comments here and there, particularly on themedium-duty side, but I was wondering on the Class 8 side and the other partsof your business how things might be trending, how you might fare versus theindustry?

Rusty Rush

Sure. Well, Class 8-wise, I think we gave a range there ofdeliveries and if you back out the first three quarters, you can get, I wouldanticipate that our deliveries may be a little less than what they were insecond and third quarter in Class 8. As I gave you a range, you would back intothat somewhere in the, I understand, somewhere I gave you the range of 7200 to7500 and we have delivered 5719 units. So, you can see the range in there.

I would anticipate, you never know as you get towards year endbecause, again, there is a lot of, there is some variability in there withstock sales. There is also, I can still sell you a truck today if you want toorder one specifically designed for yourself. I can order you a truck and getit. So, I would think it would be within 10% where we were, if not, if we get anice year end run, it could be upward, the delivery number could come in likethe second and third quarter or it could be down 150 to 200 units.

I am not, but again, I'd say we will do better than theindustry. I expect to end up the year 10 points ahead of the industry decline.So right in line with where we are at because the industry decline onlysteepens every month I look and ours does too, but we will outperform theindustry.

Our market share in Class 8 in the markets that we serve is40% higher for Peterbilt than the rest of the country. So, we believe we do anoutstanding job representing our Class 8 manufacturer and we will continue toget more than our share than the national average.

Milan Gupta - Southpoint Capital

Okay. And then if you could talk a little more about just, Iknow you don't want to talk about the specific acquisitions, but just in termsof the types of things that you are looking at. Before I thought constructionmight be something you guys are interested in, but you guys are also looking atinsurance and medium-duty, so I was just wondering how you guys think aboutpriorities?

Rusty Rush

I would tell you that in all those markets you talked aboutwe have got something we are looking at. That doesn't mean it is going tohappen, but whether it be insurance, whether it be CE, whether it be the truckside, there are opportunities on all, but I really don't want to add a wholelot of color to it other than that.

Milan Gupta - Southpoint Capital

And you have got substantial cash balance. Can you talkabout the size of things you are looking at and potential other uses for thecash?

Rusty Rush

Well, most acquisitions that we would do we would flow rightout of cash flow and right out of the bank balance that we have and the cashflow that we will generate in the fourth quarter. So, I don't think they willrequire any debt or any other type of, we will fund it internally like wehistorically do. We went to, I think the secondary we did in November of '04was to fund our largest acquisition ever and if that type of acquisition cameabout, we would determine the means with which we would fund it. But I don'tsee anything that large on the horizon right at the moment.

Milan Gupta - Southpoint Capital

Got you. But other uses of cash, potentially dividends orshare repurchase, is that something you guys..?

Rusty Rush

Not right now. We still don't believe that is in the bestinterest of this company. As you know, I have got a stated goal to take thisthing to $5 billion with a 20% ROE over the cycle and our powder is dry and weare anxiously, I don't want to say anxiously, but watching the market forpotential acquisitions and we would prefer to take that cash and fund growth inthe organization so we can return, to return better for our shareholders.

Milan Gupta - Southpoint Capital

Got it. Thanks.

Rusty Rush

You bet.

Operator

And we'll take our next question from Andrew Casey of Wachovia.

Andrew Casey -Wachovia

Good morning and thanks for taking my question. I would liketo get your view on what rising delinquencies and your caution about Q1truckload bankruptcies would potentially have on future used truck prices. Andthen, absent, if you can hypothetically look at this, absent an emissionschange influence, what does that typical used trend usually indicate for newClass 8 demand? Thanks.

Rusty Rush

Yes, absent that, well, there's been some changing dynamicsin the world in the distribution of used trucks. There are a lot of used trucksgoing overseas that weren't going there 5 and 10 years ago. There are lots oftrucks being sold, especially it's more the generic type trucks that maybe someof my competitors sell, the more cookie-cutter type trucks going into Russia,into Asia, into South America. Idon't have the numbers in front of me. In fact, I am really trying to gatherthem myself here right at the moment.

But there is a lot larger, so that helps absorb some of thetrades that are coming back off the big years of '04, '05 and '06. So thatgives me a fairly good feeling that there won't be, we won't have too much usedtruck side pressure that would dampen the pre-buy, simply because thedistribution of used trucks has changed to a more global view than what ithistorically has been in this industry.

Now, as far as delinquencies, that is just, they normallyrise this time of year anyway. But it is a little tough on the coastlines rightnow, so, I don't see it being anything, you want to go back to 2000. It wasthree times this bad, so I don't see it getting anywhere near what weexperienced in 2000, 2001, 2002, when the overall economy, we were in themiddle of a recession and we had all these effects going on, plus we had justcome off a 10-year run by one manufacturer of shortening lifecycles because hewas trying to buy market share. And there was more than one reason for whatcaused our industry to have the huge decline in 2001, and I don't see those onthe horizon right at the moment.

Andrew Casey -Wachovia

Thank you very much.

Rusty Rush

You bet.

Operator

And we'll take follow-up question from Peter Nesvold of BearStearns.

Peter Nesvold - BearStearns

Hi, Rusty.

Rusty Rush

Hi Peter.

Peter Nesvold - BearStearns

Just one last question here. Can you talk a little bit abouthow many trucks you took into new inventory either directly into dealer stockor kind of passing through you to go to an end-user in 2Q? How does thatcompare to the number of trucks you accepted in 3Q, and what do you expect tohappen in 4Q?

Rusty Rush

You are talking about customer order trucks there, Peter?

Peter Nesvold - BearStearns

No, I am talking about trucks that pass through you from anOEM. So if OEM XYZ, because I know you deal with multiple OEMs of something andgenerically. You know, how many trucks were delivered to you or deliveredthrough you, and you can talk percentages, 2Q versus 3Q, 4Q? How does thattrend?

Rusty Rush

Peter, everything is delivered through me. Everymanufacturer I represent, we go through us.

Peter Nesvold - BearStearns

No, I understand. But I just mean, you know, maybe, I knowthe money does, the money flows through you. Maybe physically it doesn't, Idon't know, but I am just trying to understand how does the year trend in termsof new equipment being shipped through you?

Rusty Rush

Well, you know, we bought less than we sold, if that's whatyou are asking. I mean, obviously, because we are working down inventories andyou can see that in the balance sheet. It was fairly clear in the balance sheetthat inventories have come down. I mean, we negotiate and handle the customer,every customer. I'm still trying to follow, we don't really courtesy.

If you're talking about courtesy deliveries, ourmanufacturers do not go direct. Maybe in the medium-duty business, there may bea large Ryder dealer or U-Haul dealer that we are not involved in, but I don'tdo any of that. Everything we do is generated by us.

Peter Nesvold - BearStearns

What I am trying to understand…

Rusty Rush

I'm trying to get a feel for what you're trying tounderstand.

Peter Nesvold - BearStearns

…another question. Just picking numbers out of the air, ifyou bought 250 trucks from your OEM and just picking a random number in Q2, didthat go to 300 in 3Q, did it go lower? Do you see it going higher or lowergoing into 4Q?

Rusty Rush

I would tell you it was down, no question.

Peter Nesvold - BearStearns

It was down in 3Q versus 2Q?

Rusty Rush

Yes, no question. No question. We delivered more stockinventory and the trucks that were delivered in Q3 were purchased, a lot ofthem were purchased in Q2 because we had to prep them, get them ready fordelivery and they flowed into Q3, which correlates to what I said about Q4possibly being a little less in overall absolute deliveries. We will probablymaintain stock deliveries we hope, stock sales where they are at with fewersold customer orders if that is what you are driving at in the fourth quarter.

Peter Nesvold - BearStearns

Well, I didn't quite get that, so I guess it's a littleclearer to me now that you accepted fewer deliveries of new equipment…

Rusty Rush

No question.

Peter Nesvold - BearStearns

But in 4Q, do you expect to accept delivery of more or lessthan 3Q?

Rusty Rush

In Q4, I expect to probably receive less, continue less andwe finished off the tail earlier in the year of everything and I continue, andmanufacturers tried to go out and sell some of the new engines with some heavyincentives earlier in the year and now everything is pretty much leveled out.Production is more in line with what market demand is, which has giveninventory, which continues to drive inventory down. So, I would expect theinventory to continue to go down, not as dramatically as it did from Q2 to Q3,but it will continue to decline because when you look at our inventory, it isnot all sitting on the shelf for sale.

We have always got a huge number that is in process ofdelivery, what we call IPD trucks that we are rigging up. But that number willcontinue to go down in the future, but again, the key piece is margins are upbecause the business we are doing is the higher margin business we do, whichhelps soften some of the overall. You can't look at it and say, wow, 3500 to1800 as I stated earlier on the call. You have got to look at the margins andlook at the mix of business also. But absolute deliveries from the manufacturerto us will be less in the fourth quarter than they were in the third. Noquestion.

Peter Nesvold - BearStearns

Okay. Thanks again.

Rusty Rush

You bet.

Operator

And gentlemen, we have no further questions at this time. Iwill turn the call back over to you for any additional or closing remarks.

Marvin Rush

Thanks a lot, guys. Talk to you whenever you need to talk tous, just give us a call. Other than that, we will talk to you next quarter.

Rusty Rush

We appreciate your time. Thank you.

Operator

And that does conclude today's conference call. Thank youfor your participation. You may disconnect at this time.

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