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Pacer International, Inc. (NASDAQ:PACR)

Q4 2007 Earnings Call

February 11, 2008 5:00 pm ET

Executives

Lawrence C. Yarberry - Chief Financial Officer, Executive Vice President

Michael E. Uremovich - Chairman of the Board, Chief Executive Officer

Analysts

Analyst for Alex Brand - Stephens Inc.

Brannon Cook - J.P. Morgan

Ed Wolfe - Bear Stearns

Mike Halaren - Robert W. Baird

Todd Flower - KeyBanc Capital Markets

David Campbell - Thompson, Davis & Co.

Alex Yaggy - Morgan Stanley

Operator

Ladies and gentlemen, thank you very much for standing by and welcome to your fourth quarter and year-end earnings conference call. (Operator Instructions) I’d now like to turn the conference over to our first host, Mr. Larry Yarberry. Go ahead, sir.

Lawrence C. Yarberry

Thank you. By now you should have received a press release that we put out at 4:00 Eastern today and in the press release, it has our -- of course our press release and financial statements comparing the fourth quarter this year with last year and year-to-date this year with last year, as well as a balance sheet and an income statement.

As usual, before we start our presentation, we need to make our normal disclosure regarding forward-looking statements or predictions of future operations and such statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on management’s belief or interpretation of information currently available. These statements and assumptions involve certain risks and uncertainties and actual events may differ from these expectations as specified from time to time in filings with the Securities and Exchange Commission. And we assume no duty to update these statements as of any future date.

As information, you can also listen to this earnings release on our website, which is www.pacer-international.com.

Now I’d like to turn our meeting over to our Chairman and CEO, Mr. Mike Uremovich.

Michael E. Uremovich

Thank you, Larry and welcome to all of you. I want to first address our fourth quarter performance and then quickly summarize the full year before turning briefly to ’08 expectations. We are generally pleased with our fourth quarter. Total consolidated revenues increased $38 million from a similar period in 2006, an increase of 7.6% in a soft freight market.

More importantly, earnings per share increased 3.5% to $0.59 for the quarter. These results were in spite of a $1.6 million charge in restructuring costs in the quarter and the decision to award special incentives to our people, in light of their extraordinary effort this year.

Total income from operations was down slightly in the quarter, largely because of the decision to accrue for special awards to our people.

Recall that in last year’s quarter we reversed that accrual and later determined we would see to pay out partial awards for 2007 if appropriate and approved by our board compensation committee. We accrued for some modest payments in this quarter, recognizing the efforts of our people. At the segment level, both intermodal and logistics income from operations improved over the same quarter last year.

We are particularly pleased with our revenue growth. This demonstrates our continuing progress in one of our major objectives -- to have a world class intermodal product. Intermodal revenues increased 8.4% from the fourth quarter of 2006. Stacktrain revenues were up $34 million, or 10.4% from all three lines of business. Domestic volumes were up 5.5% and unit revenue was also up 5.6%.

Automotive revenue was up 10% on only slightly increased volume and a 9.5% increase in revenue per unit. International revenue was up 11.4% -- 2.8% from volume, 8.3% from increased revenue per unit. These results were gratifying in that we continue to grow our share of the intermodal markets we serve in a very difficult trade environment.

We are also extremely pleased about the 20% revenue growth and 17.5% volume growth in our rail brokerage units. This is a significant acceleration of our growth rate over the first three quarters of ’07. The first two quarters of this year showed stability but little growth and the third quarter was modestly ahead of prior year. Our fourth quarter demonstrated again that customers are rewarding Pacer for the improved quality of our service.

We did not take as much of the increase in revenue to the bottom line that we would have liked because of rail cost increases and a very competitive market environment. However, net revenue per unit did improve 4% over the third quarter of 2007 and we’re very focused on the quality of the business we handle.

As I mentioned in my third quarter call, the balance of growth with margin is always a very difficult one to make. We are mindful of that balance and are carefully examining our sales efforts in light of the challenging market.

Income from operations in the intermodal segment improved 16% compared to the same quarter in 2006 with improvement in Stacktrain, cartage, and rail brokerage performance. Overall operating margin in the intermodal segment was down slightly over the first quarter of ’06 and improved by 2% versus the third quarter of ’07.

The margin performance is a continuing challenge as rail cost increases and truck competition remains fierce. This challenge will continue in 2008 and I’ll speak a little more about that later in my remarks.

We continue to see progress in our logistic units during the quarter. Revenues increased modestly, up slightly over 4% in the quarter over the same period in ’06. More importantly, operating income excluding our severance costs doubled, though from an admittedly small base. Even including restructuring charges and expenses, operating income improved nearly 20%.

Our distribution and warehouse services division operating profit in the quarter was down slightly as a result of accruing for a stolen trailer while we pursue the responsible third parties.

Revenues were up over 15% and excluding the stolen trailer, operating income would have been up over 25%. Our supply chain revenue grew 35% as they added a new major customer. The international forwarding unit continues to grow revenue with the strength of the U.S. export market aiding their growth of nearly 6%.

The trucking units continue to be challenged. Although the truck brokerage results are not yet where we expect them to be, they are showing initial signs of improvement and we are very encouraged by progress. The transport unit, mostly flatbed operations, continues to face difficult market conditions but the new leadership in this unit is taking corrective actions and we expect continued improvement in their performance. This is the third quarter in which logistics has shown significant improvement over the same period prior year.

Now let’s take a quick look at the entire year’s performance. For the full year, we think we performed well in a weakening freight environment and we took a series of steps to position our company for the future. We maintained our focus on the four initiatives, the same four that I have covered with you in prior calls. That is, continuing the development of a world-class intermodal product; redefining our relationships with our major rail suppliers; improving performance in logistics; and rationalizing our cost structure and improving productivity. We made good progress in all of these areas in 2007.

The intermodal segment contributed $112 million to income from operations compared to $132.6 million in 2006. The year-to-year comparison for our intermodal segment is difficult because of the settlement of several arbitration cases and other rate disputes in 2006, which improved results in that year.

Revenue for all three stacktrain lines of business improved over 2006. International revenues were up nearly 15%, auto business increased almost 13%, and domestic revenues were up over 7%.

Rail brokerage revenues also increased over 2006 by 3.6% and revenues from cartage were 2.1% higher. The overall gross margin percentage for the intermodal segment did decrease in 2007 versus 2006 due to the arbitration and other rate dispute settlements benefiting 2006, but also from increased competition and lower pricing to maintain equipment flows and minimize repositioning cost. Gross margins were also impacted by increases in underlying rail transportation cost both in contract lanes pursuant to market rate adjustment provisions, as well as in non-contract lanes.

Our logistic segment continued its improvement with operating income of $4.1 million, 156% above last year even while absorbing about $2 million in restructuring costs. In fact, the units -- for the units that constitute the current logistics segments, this was the best performance in the last five years.

Our international and warehousing units show particular strength throughout the year. Gross margins were down slightly, driven primarily by competitive pressures in several of the trucking units, primarily the transport division. All units within the logistic segment improved over last year with the exception of these trucking operations, which continued to be impacted by the economic slowdown.

During 2007, we also undertook several corporate wide initiatives which we believe will position our company for the future. We instituted a facility rationalization program and a severance effort during the past year and reduced employment by 134 personnel, or 8.5% from 2006 and closed our facilities. This program, which is nearly complete, decreased our income from operations by $6.0 million in resulting restructuring cost but we believe has laid the foundation for improved profits in the future.

I committed to you during one of our earlier calls that we would reduce our SG&A expenses by $10 million when compared to the run-rate in 2006 and we have slightly exceeded that. The number was close to $14 million on a like-to-like basis.

As another step to improved future performance, in September of 2007 we entered into a software license agreement with SAP to license an enterprise suite of applications, including the latest release of SAP’s transportation management solution. Once implemented, the new system is expected to provide an integrated streamlined platform across business units, providing better management information, eliminating duplicated work and dispersed data and enhancing services and communications. The new system is expected to be implemented over the next 28 months.

In April of 2007, we refinanced our term loan and revolving credit facility with a $250 million five-year revolving credit. In connection with the refinancing, we charged to expense $1.8 million for the write-off of existing deferred loan fees related to the prior facility.

Also during 2007, we reduced our outstanding shares of common stock by roughly $2.9 million, or approximately 7.9% pursuant to our share repurchase program which began in 2006. We currently have 34.6 million shares outstanding. A total of $60.7 million remains under the repurchase authorization which expires June 15, 2008.

Our cash flow remains strong. Our operating cash flow increased more than 50% in 2007, reaching $108 million. Pacer returned approximately $95 million to shareholders, repurchasing over $70 million in stock and paying $23 million in shareholder dividends while investing over $10 million in our new IT system. Debt now stands at $64 million.

In spite of this progress, our market capitalization has deteriorated. We believe largely as a result of concern over our future rail relationships since our ongoing operating results clearly do not account for the stock price decline.

Let me turn to a couple of specific items of interest relative to our rail relationships. We continue our discussions with the Union Pacific regarding relationships beyond the expiration of our current contract. We are exploring the possibility of an early termination and transition to a new, more permanent relationship. The discussions are active and while no specific outcome has yet been determined, we remain hopeful of reaching an early agreement.

If we cannot reach an early agreement, the Pacer will continue honoring the letter and spirit of our current agreement as we are confident the U.P. will also do while we explore other options to transition to a post contract environment.

Remaining under the terms of the current agreement will give us nearly four years to continue strengthening our customer relationships and ensure our current strong position in the intermodal market and that it is further enhanced. We are among the largest participants in the intermodal arena and bring significant value to both our customers and rail suppliers. We expect to remain a significant player whether our U.P. contract is renegotiated early or continues until expiration in late 2011.

While margins in some segments of our intermodal business would likely be affected by a new contract, our business model is solid and we are confident we can continue to offer a robust and profitable intermodal service on multiple railroads.

As a first step in that direction, we are pleased to announce that we have reached agreement-in-principle with the Burlington Northern for a significant expansion of our use of their system. We expect to finalize that agreement within weeks and to begin using the BN throughout their system in April of this year, about 60 days from now.

While we cannot discuss the specifics of the agreement, it will be multi-year in duration and anticipates a ramp-up with the result of Pacer becoming a major customer of the BN. We are very enthusiastic about the developing relationship with the BN and believe it demonstrates Pacer's ability to adapt to the changing rail environment. Pacer will have access to BNSF’s entire intermodal network within the United States upon initiation of this service in April. Interline service will be available via CSX to and from Pacer-served CSX locations. We will utilize both BNSF’s premium or container on flat car and expedited trailer on flat car service networks.

Pacer direct door-to-door service will be available for both service levels. Our customers will be able to choose the right product, either on the BN or U.P. network that meets their needs in a particular market or lane.

This agreement does not mean we are immediately reducing significant volumes on the U.P. The initial volumes to be carried by the BN will be modest relative to our entire book of business but they are expected to increase over time.

Both railroads have a major role to play in Pacer's future and we believe it is in our interest to deal with both roads. Each has specific strengths, geographies, and service offerings that are valuable to our customers and we want to maintain and maximize our ability to offer broad, competitive services.

Turning to guidance for 2008, there are several things to keep in mind as you think about next year, or this year, now. First, the freight economy is in particular disarray at the moment and our ability to predict the timing and magnitude of volume recovery is limited.

Secondly, our new relationship with the BN will result in some increased costs that will be reflected on our purchase transportation expense in the intermodal segment. There will be some initial start-up costs as we move toward dual operations. The amount of these costs will be a function of the speed of our ramp-up with the BN and our ability to capture increased yield from the market.

Also, as you know, we are engaged in a major IT installation and while many costs will be capitalized, there will be some items that must be expensed. These expenses will include some training in parallel operations and we move to integrate our operating and financial systems.

Finally, we strongly believe that our shareholders are best served by a motivated and committed workforce. To that end, we have included in our guidance some expenses for incentive payments. While these increased costs and the tenuous economic situation in mind, with these in mind, we currently estimate 2008 earnings per share to be between $1.60 and $1.70. While this might be slightly below some of your expectations, an increase of earnings per share in the high-single-digit range as we move to new rail relationships and invest in our business will demonstrate our ability to transition Pacer from its historical structure to one poised for future growth and increased profitability.

I need to caution you about the calendarization of these earnings. We do not provide quarterly earnings guidance but urge those of you who are focused on individual quarters to be very careful about quarterly comparisons during 2008. We expect to begin transitioning our new BN arrangement at the end of the first quarter. The SAP expenses will vary from quarter to quarter and the rapid rise of fuel prices late in 2007 will make quarterly comparisons to 2008 difficult.

We will try to provide some greater transparency to those changes during our earnings call as we go through the year but we want to provide some early warning against simplistic comparisons.

Our baseline capital budget in 2008 is $22 million and includes $19 million for the SAP project with the remainder for normal computer replacement items.

Capital expenditures in 2008 will be funded by operating cash flows. Cash flow is expected to approximately $85 million.

Overall, we are pleased with the progress in 2007 and confident of 2008. We recognized early in 2007 that we had to make some changes to focus our core intermodal product to move to restructure our rail relationships, to improve our logistics units, and to reduce cost. When we realize the magnitude of the changes we required, we adjusted our earnings guidance and since then have met our commitments. We grew our intermodal business when the market was declining, demonstrating our improved service and ability to secure new business.

We initiated a major effort with our railroads resulting in significant expansion of our business opportunities with the BN and initiated discussions with the U.P. about a post-2011 environment.

Our logistics units dramatically improved with these units having record years. At the same time, we refinanced our debt, generated over $100 million in cash flow, and returned close to $100 million to our shareholders while we took costs out of the company.

Challenges remain, to be sure, but we are facing them with confidence in spite of a problematic 2008 economy. Our management team is strong, buttressed by some new additions and we are committed to delivering long-term value to our shareholders. Our company has a solid foundation and we are confident of our transition. We believe we have made significant progress in 2007. We know we are doing the right things and we’ll continue along that path.

Now I’d like to open the forum for your questions. Bob, you can queue up whatever questions we may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Alex Brand with Stephens.

Analyst for Alex Brand - Stephens Inc.

This is George for Alex. Sorry, I may have missed it -- the 160 to 170, did you say what sort of growth rate you are assuming for the industry in terms of volumes? Are you assuming flat or down?

Michael E. Uremovich

No, we did not say.

Analyst for Alex Brand - Stephens Inc.

Will you?

Michael E. Uremovich

Right now, our forecasts look at something in the range of mid-single-digits, George.

Analyst for Alex Brand - Stephens Inc.

Okay. Thank you. Next, the BN contract, is this for new and expanded business or is this just kind of incorporating what you do with them now?

Michael E. Uremovich

This is for new and expanded business primarily. Just so everyone knows, we are of course operating under, as we do with all of our rail suppliers, operating under a non-disclosure agreement so I will be unable to be very specific about any of the terms or volumes or things like that around the agreement itself.

Analyst for Alex Brand - Stephens Inc.

Right. I understand. I’m just curious -- it seems like JB Hunt and Hub have a stranglehold on the BN. I’m just wondering what sort of -- if you could get a contract with them for pricing good enough to compete with those two.

Michael E. Uremovich

Well, clearly we would not have entered into an agreement with the BN if we did not think it was in our interest to do so, George. But in terms of BN’s strategy and pricing policies and things like that, those are questions much better directed to them.

Analyst for Alex Brand - Stephens Inc.

Okay. Lastly, switching gears, we haven’t heard about Pacer Direct in a while. Can you comment on how that’s going and maybe how it went in the fourth quarter where peak season was choppy and if it was better or worse than expected because of that?

Michael E. Uremovich

Well, we were -- in terms of our overall door-to-door product, we were pretty pleased with volumes in the fourth quarter. Pacer Direct has been, as you know, directed more at some of the other intermediary players in the business. That had some choppy early development. I think that generally speaking, its volumes in the fourth quarter were up faster than our market in total but we are reluctant to break those out separately. It remains a very exciting development from our point of view and we think that it’s very helpful in our overall growth rate.

Analyst for Alex Brand - Stephens Inc.

Great. Thank you for your time.

Operator

Thank you. Our next question is from the line of Brannon Cook.

Brannon Cook - J.P. Morgan

Good afternoon. A question on the gross margin performance in the intermodal business. In past quarters, you talked some about the mix shift that negatively impacted you in the third quarter. You had some pressure on the north/south lanes with again some of the truckers. Can you talk about how mix impacted you in the quarter and also some of the pricing pressures that were there in the third quarter, how they fared in the fourth quarter?

Lawrence C. Yarberry

Well, again the railroads continued to raise prices, especially in the non-contract lanes. And in today’s freight environment, the competition is very tough and we are not able to pass all of those rail increases on to our customers. And again, the biggest part was in north/south business from Mexico.

Michael E. Uremovich

The north/south continues to be a major issue for us, Brannon. We have a very, very strong market position to and from Mexico and we are going to defend that because we believe that that is very important for our longer term future.

The other thing to recall here is that this is a company that is faced with some transition and we expect -- and I’m sure that you all expect -- our underlying rail costs will be increasing during the course of our transition. And I wish I could precisely tell you where that’s going to end and where the ongoing margin would be but very candidly right now I cannot. We’ll have to wait and see how this new arrangement with the BN works, how rapidly we get things up and running, and how much we can extract from the marketplace in doing so.

Lawrence C. Yarberry

And there will be some costs, as Mike mentioned, to get the BN up and running. We’ll be managing basically two railroads with equipment on both and there will be some costs as we bring that up to speed and that cost will go into your purchased transportation which will reduce our margin a bit.

Brannon Cook - J.P. Morgan

Should we think about the cost pressures being more dramatic in terms of impacting margins in the first part of the year? I guess you’re starting up in April, over the first couple of quarters and then moderating a bit or is this going to be a process where it’s just kind of gradual expansion of working with Burlington Northern so we are going to see those cost pressures a bit more evenly distributed over the next year or so?

Michael E. Uremovich

If I had to make a judgment right now, it would be that they would be more evenly distributed. It’s very difficult to predict because in large measure, it’s a function of how rapidly our customers grab on to the new service, how effective we are at selling it, and as I say, how much we can extract from the market as we move forward.

Brannon Cook - J.P. Morgan

Okay, and then a question on the logistics business. Baked into the earnings guidance you gave for the full year ’08 of $1.60 to $1.70, how much operating income contribution do you have from the logistics business? Obviously you did a meaningful amount of cost-cutting this year and I think there was a target or a looking for logistics to improve in ’08 versus ’07. Would the $10 million range be a reasonable level to look for?

Lawrence C. Yarberry

Ten-million of operating profit for logistics? I think we’ll be moving towards that range, absent restructuring charges and all that stuff that we had this year.

Michael E. Uremovich

Yeah, we would not normally project the specifics of that in advance and I think I’d prefer to stay away from that.

Brannon Cook - J.P. Morgan

Okay, and then just a final question on the cost savings -- in terms of the cost reductions you’ve done this year, could you remind us the benefit we should look for in ’08 of those cost reductions and where exactly they are going to show up?

Michael E. Uremovich

Well, the reality is that we are going to give back some of the ’07 savings. Recall that I committed that SG&A would be down by $10 million. It’s actually down by about 14 on a like-to-like basis, but I’m afraid we are going to give some of it back in terms of the SAP expenses that will not be able to be capitalized. We’re going to give some of it back in terms of incentive payments for our people and you’ll see some in the transportation purchase line as a result of the BN as well.

So I’m not -- at this point, I don’t want to predict exactly what the SG&A is going to be but you’re not going to -- we’re going to have to give some of those savings back, I’m afraid.

Lawrence C. Yarberry

We also are planning to give our employees a salary increase mid-year.

Brannon Cook - J.P. Morgan

Okay, great. Thanks for the time.

Operator

Thank you. Our next question is from the line of Scott Group with Bear Stearns.

Ed Wolfe - Bear Stearns

It’s actually Ed Wolfe in with Scott. Just a little more clarity on the BNI contract, if we could -- is this both for wholesale and retail or is it one or the other?

Michael E. Uremovich

Ed, again we’re governed by a non-disclosure agreement so I’m not going to go into any details but it is a broadly based contract.

Ed Wolfe - Bear Stearns

And again, I’m just trying directionally to get a sense here -- when you talk about some start-up costs around it, you’re not talking about taking some legacy business that’s on the U.P. contract and moving it here. You’re talking about taking stuff that’s already at a higher cost basis and moving -- where is the business that’s going to BNI coming from, I guess is the question?

Michael E. Uremovich

Ed, we’re just not going to be very specific about that. We’re going to develop this market with the BN, with the BN services and I think I’d prefer to leave it at that.

Ed Wolfe - Bear Stearns

So you’re not -- we’re not going to know during this process whether it’s wholesale or retail business you’re doing?

Michael E. Uremovich

As we do it, Ed, we will certainly be able to describe what business and where our growth is coming from and those sorts of things but we don’t -- just as our competition doesn’t describe specifically how much of what business goes on what railroad, we don’t think it’s appropriate for us to do that either.

We do have some initial chassis costs in the -- in repositioning things and running on two railroads is going to increase some costs for us, so we are going to be relatively cautious as we go through the start-up phase.

Ed Wolfe - Bear Stearns

That makes sense. In terms of -- you also noted an early termination talk with U.N.P. Just directionally, would that involve them paying you or you paying them?

Michael E. Uremovich

I’m not going to go into those kinds of details, Ed.

Ed Wolfe - Bear Stearns

Okay. Can you talk a little bit about fuel in the quarter? Obviously revenue per shipments were up quite a bit. How much of that was fuel and how much of that came to the bottom line? How much of the benefit in the quarter or were you hurt by fuel year over year?

Lawrence C. Yarberry

Certainly the higher fuel surcharge is a positive for Pacer. We have not calculated how much to the bottom line but as the fuel price goes up, the surcharge goes up, it is a positive for Pacer.

Ed Wolfe - Bear Stearns

Okay. I’m sorry, Larry, it’s just a little hard to hear you. You were saying it’s positive obviously for revenue but it’s also positive on the bottom line as it rises?

Lawrence C. Yarberry

Correct.

Ed Wolfe - Bear Stearns

Can you explain what that is, what they arbitrage is with fuel in times of rising?

Lawrence C. Yarberry

I think as we talked before, the transportation providers charge us a fuel surcharge and we add that surcharge to our freight bill to the customers.

Ed Wolfe - Bear Stearns

And so you are collecting faster than you are having to pay because there is a lag of a couple of months with the railroads? Or is it the underlying legacy contract that has different annual kinds of provisions?

Lawrence C. Yarberry

No, there is some lag, of course, with the railroads versus as we change it but basically what we are doing is we will add a fuel surcharge to our total freight bill versus the railroad adding a surcharge to their freight bill to us, so there’s a surcharge on that margin.

Michael E. Uremovich

It’s the spread, Ed. What happens obviously is that we add a surcharge to our total bill and the rail purchase transportation expense does not amount to the same number so the percentage of the fuel surcharge ends up making us a little money.

In some of the retail areas, in the rail brokerage areas, we may actually lose a little because of the timing issue, so it’s a plus and minus. But in aggregate, it is a positive for us.

Ed Wolfe - Bear Stearns

Give or take a nickel in the quarter? Is that as fair as any as a guess?

Michael E. Uremovich

Ed, we’re not going to talk about the specifics of the fuel impact.

Ed Wolfe - Bear Stearns

All right. Larry, just a couple of details -- can you give the share count for the quarter?

Lawrence C. Yarberry

Yeah, 34.6.

Ed Wolfe - Bear Stearns

That’s the average fully diluted?

Lawrence C. Yarberry

That’s the average fully diluted and we will start the year with 34.6.

Ed Wolfe - Bear Stearns

Okay, and days in the quarter versus a year ago?

Lawrence C. Yarberry

I believe they are the same.

Ed Wolfe - Bear Stearns

And how about in the first quarter -- is it the same?

Lawrence C. Yarberry

I believe that would be the -- well, we do have a leap year this year.

Ed Wolfe - Bear Stearns

But then we have -- I think Easter is early this year, so I think you might be flat. I’m not sure.

Lawrence C. Yarberry

I don’t know. I just don’t know.

Ed Wolfe - Bear Stearns

Okay, we’ll check back offline. One other question here -- on the SAP costs, the non-capitalized costs, how much are you looking at?

Lawrence C. Yarberry

We haven’t identified those specific costs. We know that there are these three or four items that we have baked into the earnings guidance and I think what we will do is be no more specific than the earnings guidance provides.

Ed Wolfe - Bear Stearns

Okay. Directionally though in terms of when it comes in, when is the peak for that and when does it start to come down again?

Lawrence C. Yarberry

I think the SAP costs are pretty much even throughout the year, might be front-loaded a little bit as far as the operating expense part.

Ed Wolfe - Bear Stearns

Okay. Thanks, guys, for the time. I appreciate it.

Operator

Thank you. Our next question is from the line of Mike [Halaren] of Baird.

Mike Halaren - Robert W. Baird

Good afternoon. Just on the guidance again, are there any one-time items included in that guidance for next year or is that a GAAP guidance range?

Lawrence C. Yarberry

No, that is a GAAP guidance which includes the SAP costs. It includes the BN start-up costs and it includes a little higher special incentives to our employees.

Mike Halaren - Robert W. Baird

And I know you said you didn’t want to quantify the individual cost of the SAP and the BNI contracts -- is there any way you can give a generalized, grouping them together how much your guidance assumes from overall costs?

Lawrence C. Yarberry

No, not at this point.

Mike Halaren - Robert W. Baird

Okay, and then switching gears to the rail brokerage, could you just give a little bit more color what drove the strength, the 20% revenue growth there? How much of that, or if any at all is related to more price aggressive activities to gain market share or was it really just the model starting to come together a little bit?

Michael E. Uremovich

I think it’s primarily on the volume side and I think it’s a matter of the model beginning to come together better and the sales force being more directed. We were not particularly price aggressive in the fourth quarter and as a matter of fact, as I told you in an earlier call this year, I thought there were a couple of cases where we might have been too price aggressive in mid-year and we certainly put the clamps on that.

Mike Halaren - Robert W. Baird

And I guess related to the price aggression, I know you said that the north/south lanes in particular are pretty price aggressive, but taking that out of the mix, what does the overall pricing environment look like? And then specifically from a -- the truck versus other intermodal competitors, where is the pressure coming from and how aggressive are other intermodal providers out there being?

Michael E. Uremovich

Well, we see truck more in the northbound portion of the north/south traffic, more than we do actually in the southbound session. There is some aggressiveness in the long-haul east/west intermodal markets by one or two players periodically. We don’t see that -- we don’t see nearly the aggressiveness in that market as we do in those markets that are susceptible to truck competition.

When you get to 2,000 mile length of hauls, it becomes pretty difficult for many of the motor carriers to be competitive with intermodal anyway.

Mike Halaren - Robert W. Baird

I appreciate the time.

Operator

Thank you. Our next question is from the line of Todd Flower with KeyBanc Capital Markets.

Todd Flower - KeyBanc Capital Markets

Good evening, everybody. Mike, I just want to be clear on what you are thinking about property expenses -- I think that last quarter you had given a range of I think it was $185 million to $190 million as your run-rate in 2008, so if I understand everything that you are saying here tonight, we shouldn’t necessarily use that as guidance for 2008 on the SG&A line?

Michael E. Uremovich

My hope is that that’s where we are going to be. I am being a little -- I’m hedging a little bit at the moment because I’m not quite sure about some of the SAP non-capitalizable items and I’m not sure about -- most of it is in the incentive. And so I would -- I think the 195 number, we’re probably going to be able to beat that on a like-to-like comparison. I don’t know whether we are going to be able to beat that in aggregate is fundamentally the problem, Todd. I just don’t know yet.

Todd Flower - KeyBanc Capital Markets

Okay, so if we split that and use like $190 million, anything above that could be related to SAP type charges, as well as maybe some incremental bonus?

Michael E. Uremovich

Yes.

Todd Flower - KeyBanc Capital Markets

Okay, that’s helpful. And then, kind of along the same lines, the direct operating expenses, the operating leases here in the quarter, you’ve been at a pretty normalized run-rate of about $31 million throughout the year, jumped up to $34 million. Was there anything particular that happened here in the fourth quarter? And then what should we think about that for going forward into 2008?

Michael E. Uremovich

It was the longer -- remember in the fourth quarter, that’s a six-week period.

Todd Flower - KeyBanc Capital Markets

That’s right. Okay. And I’m sorry, I missed this in the prepared comments, Mike, but what were the actual rail brokerage? What were the volume numbers versus the price numbers here in the quarter?

Michael E. Uremovich

Let’s see -- rail brokerage in terms -- I’ve got to go back and find it, Todd. Excuse me while I -- why don’t you go ahead on to your next one and I’ll find it in the meantime.

Todd Flower - KeyBanc Capital Markets

Okay, and the next one was just going to be on what you are thinking for the container fleet into 2008. I think that again in the third quarter, you weren’t set with what the actual increase in the fleet was going to be and I was curious if you had a little more clarity at this point.

Lawrence C. Yarberry

On our container fleet, we have put in orders for 3,000 to be delivered in 2008 and we will probably retire about 1,900 and we should be at the end of the year around 29,125 containers. If you look at the end of ’07, we actually retired a few more than what we brought on and our container fleet from the end of ’06 to the end of ’07 actually went down about 500 units.

Michael E. Uremovich

And Todd, the gross revenue in rail brokerage quarter to quarter was up 20%, volumes were up 17%.

Todd Flower - KeyBanc Capital Markets

Okay, and then just lastly, if you could, maybe a little bit more color on the logistics, the operating income. Even when I adjust for the impairment charge in the quarter, it looks like a little bit of a sequential decline from the run-rates where you had been in the first, second, and third quarter of the year. Anything in particular that happened here in the quarter that we should think about going forward? Again, I think this was an area where you had kind of given a range of maybe $2 million or so as a good run-rate going forward and it looks like we slipped below that in the fourth quarter, so anything we should think about there?

Michael E. Uremovich

In terms of that -- for the consolidated in logistics, we were a little bit short of that but there was nothing in particular there. We had some seasonality things and we had the issue with the stolen trailer, obviously, out in California which hit our distribution services division pretty hard. And we have had continuing weakness in the transport flatbed business, which is not -- which is frankly not getting any better in the short-term.

Lawrence C. Yarberry

We also took some additional claim costs in the quarter and as of now, I believe all of our major claims that we have are fully provided for.

Todd Flower - KeyBanc Capital Markets

And how much would a stolen trailer generally be -- is that like $300,000 or $500,000 or --

Lawrence C. Yarberry

Yeah, this was a $300,000 number because it was full of [cotton shoes] [inaudible].

Todd Flower - KeyBanc Capital Markets

Okay, and then just Larry, on the claims cost, a ballpark number for how much that might have been -- a couple-hundred thousand there, or --

Lawrence C. Yarberry

Probably a little more than that.

Todd Flower - KeyBanc Capital Markets

Okay. Thanks a lot, guys.

Operator

Thank you. Our next question is from the line of David Campbell with Thompson, Davis & Co.

David Campbell - Thompson, Davis & Co.

Good afternoon. Did you say the costs in the fourth quarter, logistics unit costs for severance was $1.6 million -- is that what I heard?

Michael E. Uremovich

No, David, that was for the total year.

Lawrence C. Yarberry

It was $500,000 in logistics.

David Campbell - Thompson, Davis & Co.

Five-hundred in logistics -- and more in the fourth quarter in intermodal?

Lawrence C. Yarberry

Intermodal had a very small piece, like $100,000 and corporate had $1 million.

David Campbell - Thompson, Davis & Co.

Okay. And what would you say the -- do you have any estimate of what the industry’s intermodal revenue growth was in the fourth quarter?

Michael E. Uremovich

No, honestly, David, I do not.

David Campbell - Thompson, Davis & Co.

But you believe you’ve gained market share?

Michael E. Uremovich

Yeah, we gained -- the last numbers that we have, which are basically October/November numbers, indicate that our share continues to grow, that we are clearly outgrowing the railroad intermodal growth numbers and that’s the basis for that sort of conclusion.

David Campbell - Thompson, Davis & Co.

Okay. So is there any reason that wouldn’t happen in 2008?

Michael E. Uremovich

No.

David Campbell - Thompson, Davis & Co.

Largely because of -- a lot of it because the railroad brokerage business, right? And that’s growing -- suddenly growing very quickly?

Lawrence C. Yarberry

It is growing and of course, as that business grows with our strategy of capturing multiple margins, we try to put as much of that business on to our stacktrain operation.

David Campbell - Thompson, Davis & Co.

Right, right. Okay, thank you very much.

Operator

Thank you. Our next question is from the line of Alex Yaggy with Morgan Stanley. Alex, is your line muted?

Michael E. Uremovich

He may have dropped off.

Operator

Right. Okay, well there are no other questions.

Michael E. Uremovich

All right. Well, I thank you all for joining us. Again, we are enthusiastic and confident about our company. We recognize that a number of you have been concerned about the rail relationship situation and we are moving aggressively to fix that. We think we are very, very much getting our house in order internally and this is a company that has a very strong foundation, we believe, for continued success beyond any legacy contract that might be there.

So we thank you and if we can provide any further information for anybody, as always Larry and I are available.

Lawrence C. Yarberry

Bob, if you could please announce the replay call-in numbers, if you have them?

Operator

Absolutely, sure. I sure do. Ladies and gentlemen, this conference will be available for replay after 7:30 Eastern this evening through March 11, 2008. You can access the replay system at any time by dialing 800-475-6701 and entering the access code of 907876. Any international participants can reach the replay by dialing 1-320-365-3844, and entering the access code 907876. And that does conclude your conference for today, ladies and gentlemen. Thank you for your participation and you can now disconnect.

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Source: Pacer International Q4 2007 Earnings Call Transcript

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