Forward Air Corp (Delaware) (FWRD) 2004 Q4 法說會逐字稿

Good morning. Thank you for joining today's Forward Air Corporation fourth quarter earnings teleconference. Today's conference is being recorded. As a reminder, all lines will be in a listen-only function during the presentation. (OPERATOR INSTRUCTIONS.) Now for opening remarks and introductions I would like to turn the conference over to Lera Doherty. Please go ahead.

Thank you Operator. Good morning and thank you for joining us. Before we begin, I would like to point out that both our press release and this call are accessible on our website at www.forwardair.com. With us this morning are our President and CEO Bruce Campbell and our Chief Financial Officer Andrew Clarke.

By now you should have received our press release announcing fourth quarter and fiscal year 2004 results, and declarations of a three-for-two stock split and of a cash dividend policy, which we furnished to the SEC on form 8-K and on the wire last night. Allow me to point out that the financial results contained in our press release and discussions this morning of those results do not reflect the announced stock split.

Please be aware this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the Company's expected future financial performance. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in our filings with the Securities and Exchange Commission and in the press release issued yesterday evening. And, consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

With that caveat, I'll now turn the call over to Bruce Campbell, President and CEO.

Thank you, Lera, and thanks to each of you for joining our call this morning. Before turning this over to Andrew for the financial review, I would like to take a moment to highlight a few of the key issues from our earnings announcement.

First, for the first time in the history of our Company, we are pleased to announce the initiation of a $0.06 per share cash dividend. We feel this is a strong reflection of the Forward Air model and our ability to generate free cash flow. Secondly, for the third time in the relatively short history of our Company, we are pleased to announce a stock split, in this case a three-for-two stock split.

I would like to close by thanking all of our Forward Air teammates, both our employees and independent contractors for their extraordinary contributions in the fourth quarter and the full year. We are most grateful for your efforts. And now Andrew.

Thank you Bruce and thank you all for joining us this morning. After I've concluded the financial review portion of the call, we will open the line to your questions.

Let me first start by echoing Bruce's comments. A special thanks to all our employees for the record results for the fourth quarter of 2004. We're pleased to report them and we are very proud of our continued focus on profitable growth and margin improvement.

In the fourth quarter operating revenue increased 19 percent to a record $77.6 million. Traditional line-haul revenue, including fuel surcharge, was 65.6 million, an increase of 20.1 percent. Average weekly line-haul tonnage increased 14.5 percent to 31.7 million pounds versus last year. Average revenue per pound, including the effect of fuel surcharge, was up 4.9 percent versus last year. We experienced a good mix of freight during the quarter and our average shipment size increased by just over 4 percent. Logistics revenue increased nearly 24 percent to $6.8 million and other revenue increased nearly 2 percent to 5.1 million.

On a year-over-year basis, income from operations increased 35.2 percent to a record $15.7 million. More importantly, the Company's operating margin expanded to 20.2 percent, another record for the Company. Purchased transportation costs decreased 30 basis points to 42.5 percent of operating revenue versus last year. For the airport-to-airport network, purchased transportation was 40.7 percent of revenue, which is down from 41.8 percent last year. This result was driven by higher yields on freight, better load averages, and using more owner-operators as our average owner-operator count increased from 479 last year to 559 units this year. Purchased transportation for the logistics business was 70.7 percent versus 70.2 percent last year.

Salaries, wages, and benefits decreased 20 basis points versus last year. The primary driver of this change as a percent of operating revenue was the increase in health care costs, which rose over 60 percent versus last year, an increase well in excess of our top-line growth. The dollar amount on salaries and wages, including incentives, however, grew in line with revenue.

We experienced significant positive operating leverage from the fixed-cost portion of our model. Operating leases decreased 140 basis points to 3.9 percent of operating revenue on slightly less dollars spent. Depreciation and amortization decreased 60 basis points to 2.2 percent. Insurance and claims decreased 50 basis points to 1.1 percent of revenue versus last year. We continue to have very good experience on the auto liability side and our proud of our results. Finally, other operating expenses increased 10 basis points to 7.8 percent. However, this figure was down 10 basis points from the third quarter of this year.

For the year, total revenues grew 16.8 percent to 282 million. Operating income grew 33 percent to 53.6 million. Operating margins expanded by 240 basis points to a record 19 percent. Earnings per share grew nearly 32 percent to $1.57. For the year, the Company's return on invested capital was 67.5 percent. Our pre-tax return on assets was 28 percent. Our return on equity was nearly 21 percent.

Some of the other statistics for the quarter. Total assets grew to over $214 million. The Company's cash and total investment position grew during the year by over 25 million to nearly $112 million. The Company repurchased a total of 300,000 shares of its common stock during the year at an average purchase price of $37.90. Accounts receivables were at $38.3 million and accounts receivable days were 49. Allowance for doubtful accounts was 1.1 million at the end of the year, reflecting the high quality of our receivables. Operating cash flow for the year was 39.2 million and net capital expenditures were 11.2 million. That is versus 32.7 million of operating cash flows from last year and $2.9 million of capital expenditures. The Company ended the quarter with operating terminals in 80 cities, which has been the number since the beginning of the year.

We are especially pleased to announce, as Bruce indicated earlier, that the Board of Directors has initiated a dividend policy with an expected quarterly payout of $0.06 per share after giving effect to the three-for-two stock split. Management will continue to seek out acquisitions that fit the Forward Air model and will continue to repurchase shares in accordance with its Board-approved plan. We think the initiation of a dividend policy is an excellent manner by which to return value to our shareholders.

Now our outlook for the first quarter of 2005. The Company expects revenue to grow between 11 and 15 percent versus last year and fully diluted earnings per share on a split-adjusted basis, to be between 26 and 28 cents per share. These estimates depend on a number of variables, many of which are outside the Company's control. During the first quarter of last year, the Company's fully diluted net income per share was 21 cents, again on a split-adjusted basis. We expect capital expenditures for 2005 to be in a range of $7 million.

That now concludes the financial review portion of the call. On behalf of all Forward Air employees and independent contractors, thank you for joining us this morning. I will now turn it back to the Operator for your questions.

Thank you sir. (OPERATOR INSTRUCTIONS) Ed Wolfe at Bear Sterns.

Good morning. I apologize. I am jumping in and out of the webcasts all day as well, so I didn't hear your remarks. If you talked about this, I apologize. Bruce, can you talk a little bit towards a phenomenal quarter in terms of 19 percent internal growth, sub-ADOR (ph). How do you go from now 79 OR, if it's possible, to a 75 OR over X number of years? What do you need to see? Is it more volume through the network? Is there anything left to do on the cost side? How far can you go and what do you need to do to get there?

I think we have to do the same things that we did to get from an 85 to 79A. That is to concentrate on all the different areas. We obviously need revenue growth to feed the model. We obviously need to be able to make good investment in our spending so that we get a return on it. I don't think you are going to see a lot of improvement on the labor side. We're not interested in squeezing our people and getting a return there. We're more interested in flexing our model in terms of – we have 60 Company-owned terminals out there that we still think we have capacity in and can make better utilization of. We have opportunities to improve on our PT, primarily in the areas of balance. As you know, the West Coast – getting to and from the West Coast – getting from the West Coast is actually easy. Getting to the West Coast is difficult. We have an intense program going on now to improve what we call the flow process. The answer is varied. There is no one single magic bullet. It's a combination of all of them.

When you say the network has capacity, if you had a – I know this is rough. How much capacity is it? Would you say roughly 90 percent utilized? Is there some way to look at that?

There really isn't. If you look at certain facilities in our network, it would be probably close to 100 percent. If you looked at a few of our slower performing facilities, we may have as much as 50 (?ph) capacity. The same theory applies on the lanes. We have some lanes that are running very full. We have other lanes that we have opportunities in.

After over a year of not really growing the fleet, the last couple of quarters you started to grow the owner-operators quite a bit. Did that impact the ability in the near-term to leverage? Do you then have to bring more freight to take the next step forward in margin over time over this base of drivers? Or am I looking at that the wrong way?

I really think you are. I read your comments. Perhaps we can do this offline. I struggled with the other side of the sword. Our owner-operators, while they are under exclusive contract to us, we have absolutely no commitment that if we don't run them today, that we owe them any money. On the other hand, the real world tells you if we don't run them on a fairly consistent basis, they are not going to stay around. They are business people also. Having said all of that, the more owner-operators we are able to attract and bring to our model and sufficiently utilize them – i.e., more and more loads going to the West Coast so we can pull more and more loads off the West Coast under our own power as opposed to utilizing outside carriers – actually improves our operating performance and it improves our quality of service.

So I don't have the concerns that you talked about.

I was just talking about in the near-term. If you have 280 million in revenue and you have 500 drivers, your revenue per driver is higher and your utilization is better than if you have 280 million and 600 drivers. Obviously you need to grow. You need to add drivers as you need them. You have done a great job of doing that and improving the margin. But I am guessing, at some point as you are ramping up drivers initially, it's harder to also grow the productivity of them at the same time in the same degree. Is that fair?

Not really because again, it's an issue of – if we need them and use and pay them. If we don't, we don't. But here is the bigger issue. When the day comes that perhaps what you are espousing becomes true, that would be a great day in our history because it means we have too many owner-operators. That is not the case today because we continue on the revenue side to push it.

The owner-operator count fluctuates. As we've said on numerous occasions, our revenue figure is not driven by the number of owner-operators that we have. It is simply a function of how many we recruit. If we have demand on any given night for freight that outstrips our owner-operator, we will go to the outside. We will use outside carriers such as Warner and the like to move our freight. We're not constrained by—we don't—we're not constrained by the fact that an owner-operator is or is not available to run for that particular time. We will run the freight. We will, in best-case scenarios, use owner-operators. In the event that we don't have those to operate network, we will go to the outside.

If I look out at consensus numbers right now, they are implying somewhere around 60, 70 basis point improvement off of the 81 annual you did for '04. I am guessing that, if the economy holds up, you are feeling pretty good that you can achieve that. Is that fair?

Obviously we're looking at, in our first quarter guidance, an improvement versus the first quarter of last year in our operating margins. We always strive for operating margin improvement. If you go back two years, at the end of 2002 our operating margin was 14 percent. There were a lot of people who asked us at that time, how much improvement they thought we could get. We extracted 250 basis points in 2003 and another 240 this year. So we've certainly exceeded our own expectations for operating margin improvement. The higher the bar gets, the higher that we need to perform.

Can you talk to the pricing environment right now? The yields that are reported took a big step forward this quarter, although I understand a lot of that has to do with mix. Can you talk to pricing – what you saw in '04 and how you expect that to look in '05 versus '04?

Obviously we saw the same thing the other people did – the other carriers. That is it was a strong pricing environment. We're obviously happy about that. At the same time, a lot of that pricing upward mobility was driven also by costs. We saw – it became harder in certain areas and primarily in the PT area. Our opinion is, yes – pricing is good. But it needed to be good in order to get us where we are today. As we look forward to 2005, we're hoping for a solid yield year. It doesn't have to be outrageously good. We're comfortable with where we're at. But we don't think and don't anticipate that sliding backwards.

And the competitive market as you see it out there. Who now are your largest competitors and what are you seeing from them?

Ed, we're going to run pretty tight on timing. So, why don't we open it up to other people who are going to have questions. If you have additional ones, we can certainly follow-up offline.

Fair enough. Have a good day.

Tony Cristello from BB&T Capital Markets.

Thanks. Good morning. One, can you talk a little bit about the quarter in general? Did you see any month better than the other in progression? Also, any commentary on how January was shaping up.

The quarter was fairly good across-the-board. October, obviously, is always a great month in this type of business. But we weren't disappointed in either our results of November or December. We are really not going to comment on 2005 yet, other than to say we're not disappointed with where we're at.

Okay. With the growth that you had in owner-operators this year, I am assuming you are still looking to add some, but not at the pace that you did this year. Do you have any plans in terms of what you want to add in the first quarter in terms of additional owner-operators?

What has changed is while perhaps back in August, July we were pushing just to add owner-operators, we have refined that process because we have a little bit better density there today. Now we're really pushing hard to find teams and to find the right location. For instance, if we need power out of Los Angeles as opposed to in the past, we would take them anywhere. So the search has become much more refined. As far as how many more would we add? Again, the answer is as long as we can find a good quality safety-driven owner-operator, we are going to hire him.

Are you paying any more now than you were a couple quarters ago? Or is that about – has been pretty consistent?

If you recall, back in August of last year we initiated our first-ever increase to our owner-operators, taking them from 90 to 93 cents. That has served us well. It has served them well. We're pleased with where we are right now and don't anticipate any changes.

Okay. Andy, maybe you can comment in terms of – did you repurchase some shares in the quarter?

We did.

What was the – can you quantity that and the average price?

I can – right now 73,000 shares in the fourth quarter, average price of $45.22.

Okay. How much left do you have authorized?

It's right around one million shares on the two million.

Great. Thanks.

Jon Langenfeld from Robert W. Baird.

Good morning. On the competitive landscape, you had ACI go out of business in December. US Express obviously struggled a little bit to secure capacity. How much incrementally did that benefit you or do you see that benefiting you in the near term?

The ACI really had minimal, if any, effect. It opened some doors that weren't open before. There are some real issues obviously with the customers of ACI that we are, in all honesty, very concerned about. We're being very, very cautious there. That is not to say that as we go through the year, maybe some of those doors will open. That is a wait-and-see.

The other competitors – we always have competition. We always keep our eyes open. But it's hard to win a race when you are looking over your shoulder. So we look ahead as opposed to behind.

Nothing from the standpoint – I guess when you look at it, you don't see any major change in the competitive landscape over the last three or six months?

Not really, no.

Okay, good. On the pricing side, I know your pricing renewals come up this quarter, I believe. Shall we think about it in terms of the less-than-truckload players are talking about 3 to 4 percent potential price increases and then obviously the truckload guys in the high single digits. What should we think about when we look at Forward Air?

I think your first comment on LTL carriers is probably correct.

Okay. Finally, the percent of miles driven by outside carriers, is that still in the 15 to 20 percent range?

Yes.

Okay. That's been a little bit higher, but consistent throughout the year?

Yes. Actually that is what we were talking about earlier in terms of the owner-operator/outside-power mix. So as we bring on more owner-operators, it's not only to satisfy increased demand, but it's also to decrease the number of miles that we rely on outside providers for.

How low has that gone?

You'd have to go back a number of years when we were almost entirely owner-operator and not really a lot of outside power to now where it's not uncommon for it to be at 15 to 20. It has been as high as 25. But now it is back down into that 15, plus or minus, percentage range, which is where we're comfortable operating.

Okay, great. Thanks. Nice job on the quarter.

Gregory Burns from J.P. Morgan.

Very solid quarter. Just a couple of questions. Did you – I may have missed it. I've been on and off. Did you say what share price was in the quarter? Is it possible to calculate such a thing?

No, it's not possible to calculate it. What we did – all we can tell you is that in the first quarter of '04, which is what we're doing in the first quarter of this year, is taking a rate increase. There are things such as shipment size – if you look at the third quarter as an example, our yield was up 1 percent, but our average shipment size was up over 9 percent. Now in this quarter, our yield is up nearly 5 percent. But that average shipment size increase was only just over 4 percent. You've got other issues such as mix, which is a longer length of haul will tend to have a higher yield. A shorter length of haul will obviously have a lower yield.

Right, okay. On the subject of price, can you refresh my memory in terms of your contract structure. Is there a lag effect? If the market rate for freight moved up, let's say in November, how long would it take to effectively implement that across? Is it instantaneous? Do some people have some sort of contract protection and there is a rollover effect?

We've had some minimal contracts out there – BAK, LM, a few people like that. For the most part, other than the notification period, which is typically anywhere from 30 to 60 days, it becomes instantaneous.

But our policy, to follow-up on that, is our pricing is done once a year. So, when we take a rate increase, as we did in the first quarter of 2004, we didn't take a rate increase in the third or fourth quarter of 2004 other than individual new customers that come on.

Got it. So it's the difference in the LTL where they put a list increase that goes into the year. Okay.

And Andy, your revenue guidance, 11 to 15 percent, that would be—even the high end would be below what you've done over the past three quarters. Are you just being conservative? Is it a function of more difficult comps? Are you seeing something in January and February that, at a low end of the range – 11 percent, if I heard correctly – would be significantly slower than basically anything you did last year.

You always tend to see the drop-off sequentially in the fourth to the first quarter. That 11 percent, if you just run the numbers, doesn't envision any more dramatic drop-off than what we've seen in years past. The other issue that probably isn't widely recognized is the fact that the way the dates fall in the first quarter of this year – and it will have an impact on us – it is where Easter falls. Last year it was a second quarter event. This year it's a first quarter event. That does have a seasonal impact on us.

Got you. Bruce, was there any difference in the quarter between growth either from the forwarders or from the airlines? Is one significantly outperforming the other?

It was fairly consistent across-the-board.

Okay. Thanks a lot.

John Barnes of Credit Suisse First Boston.

Good morning. Congratulations. Bruce, going back to Ed's question on the margins for a moment. If you take labor out of the picture in terms of the ability to really leverage anything there, what's left? You are still going to have your operating leases. I guess you can leverage D&A a little bit. At this juncture are we looking at a situation where further cost reductions are pretty much exhausted and this has to boil down to pure density and pricing play?

I think essentially it's pricing. Then it's also (indiscernible) efficiencies. We have to become more efficient. That doesn't mean that you go out and whack costs. It means you just become better investors and you get more productivity, especially in the areas where you have opportunities. We continue to think we can get better.

Okay. In terms of looking at your network, is there any material network redesign planned for the next year to 18 months? Specifically any additional terminal additions at this juncture?

Specifically today there are no plans to open anything. We are looking hard at doing a satellite terminal in LA because of the way the business is changing out there and because there is so much business. So we will look real hard at that, probably in the second quarter of this year for a third quarter opening. We always look at what we call secondary cities. An example would be Reno. If business stays good and we have opportunities there with our forwarder friends, that could happen. That is not high on the list as we sit here today.

Okay. Going back to the competitive landscape for a moment, the market share shift goes without saying. Are you hearing anything specifically from your customer base that leads you to believe that they are looking for a longer-term partner, that they are tired of divvying up the business the way they have been and like what they are seeing in the consistency of the Forward Air network that is causing you to pick up more market share than you thought you would? Is it forcing you at all to turn down business, I guess, (1) to keep the network as fluid as possible, and (2) to make sure you're not taking on lower quality freight than you would really like to?

I think you see from our results the fact that we've entered partnerships and have been able to establish those over the past few years. We have a very effective national accounts program that has helped us do that. You can see the results – almost 20 percent growth. From that standpoint, we have indeed entered partnerships. We value those partnerships and will continue to work to improve them this year and into the future.

What was the second part? I'm getting older. I don't remember the second part.

Yes. I an sorry. I should break this down. The quality of the business you are dealing with, the quality of the freight, did you go – with the kind of prices we saw, it certainly looks to me like you were improving the quality of customer and the type of freight you are handling. As you capture a little bit more share, does that become more difficult to do?

Thank you for asking that again. We have historically – if you tendered us a pound of freight, we moved it. It didn't matter if we had capacity or didn't have capacity. (indiscernible) move it. What we are not interested in doing is moving freight, filthy (ph) loads what we call acceptable levels, but we run our freight. The only time we have is when we could not reach pricing agreement with the customer. There are some cases, even our good customers, they have some lower-yielding trash, (ph) they will take it to a secondary carrier or another choice. For the most part, if you tender us freight and we've agreed on price, we find a way to move it and move it properly.

Okay, alright. Again, congratulations on a good quarter.

Ken Hoexter from Merrill Lynch.

Good morning. I want to follow-up on John's question on the capacity. Can you talk a little bit about what you can do when some of those lanes where you said you might be running out (?add) on your 100 percent capacity to keep adding more growth. Is that getting more – you said it sounded like some of the lanes might be pretty full also. What opportunities do you have to expand your capacity there?

Depending on the lane – each of them has a little bit different characteristics – we can simply add more power to it and continue to move it. There are some cases where we get into out-of-balance situations, meaning more freight going to a particular area than we think we have the potential to bring out. In those cases, we tend to look at pricing opportunities. Can we increase the head-haul price? The opposite is also true. Can we decrease the back-haul price. Each lane has its own unique characteristics and each lane is treated accordingly.

But is this—is any part of the capital budget looking at expanding some of the facilities in some of those centers where you are running near capacity as well?

We lease all of our facilities with the exception of (inaudible - background noise), so for us to take on additional space, as we have done and will continue to do in the appropriate markets, would simply show up on the operating lease line item.

So you just lease more doors within that facility?

We lease more space.

Okay. On the logistics business, if I recall right, I think you had a much higher percent of PT as a percent of logistics revenue last quarter. I think you said early in the call it was down to 70 and change for this quarter. Is this something that you can get back into the mid 60's? You were at, back in 2002 or – I guess what kind of costs can you continue to pull out of the logistics part of the purchased transportation?

That number fluctuates. Part of it obviously depends on the supply picture out at the truckload market. A lot of that business is truckload brokerage. A lot of times we'll go to the outside. Primarily we like to use our owner-operators where, as Bruce mentioned earlier, there is a balance issue. In the event that we can't do that, we'll fill it from an outside carrier. Obviously if we go to the outside and the prices that they're charging are much more expensive, we do have with some of our partners, contracts—contractual pricing. Over the short run, our margin in that business contracts and not until we are able to take a rate increase will it expand again.

So that range, that 65 to 70 percent is where it is going to be, depending on what the pricing market on the truckload side, in any particular quarter, is going to tell us where we'll be in that range.

Great. Then one wrap-up question. Bruce, help me understand on the dividend side a little bit, should we look at this as now possibly returning to the 25 or 30 percent type of revenue growth in the late 90's? Or is this just the next phase that you are building too much cash and there are not that many acquisition candidates out there that fit your niche business that this is the right move?

Here's how I'd like you to look at it – you and others. We build our war chest. We have adequate cash on hand. Secondly, we generate cash, last year a fairly considerable amount. So we feel comfortable that we can do both. We can go out and make any appropriate acquisition when we find the right one. That day will come, hopefully.

Secondly, we think we can return money to investors. The two aren't related from the standpoint that if you do one, you can't do the other. We think we can do both and we think that's a tribute to the Forward Air model.

Great. I appreciate the time. Thank you.

David Ross from Legg Mason.

Good morning Bruce. Good morning Andy. Just to talk about acquisitions. In the past you've said that you look at tuck-ins, which are competitors. But it seems to me you are also running out of the (indiscernible) business. My question is what type of complementary service offering to invest (ph) for Forward Air and not upset your customer base?

We've talked about a number of different, over probably the last four or five conference calls – about a number of service offerings that we're looking to expand into. Those continue to be the same areas that add value to our customers and don't directly compete with them. At the same time, the financial metrics and the operational metrics have to meet with what our standards are.

Okay. Then the last question on customer mix. What is the mix currently? I guess it could be international freight orders, domestic freight orders. It seems like you are getting a lot of business on the West Coast, which would (indiscernible) international shipment.

Five years ago, that was easy to say. Today it isn't because those two types have blurred together. 81 percent of our freight today comes from freight forwarders. How much of that is international and how much of that is pure domestic is anybody's guess. If I had to guess, I would agree with your comment that we are seeing a fairly sizeable increase in the international-related transportation. But I can't give you that in an absolute number.

I understand. Thank you.

David Campbell with Thompson, Davis, & Co.

Hi Bruce and Ed. I want to ask on the health care costs, first of all. Your forecast for the first quarter seemed to suggest you have a solution to that 60 percent increase in the fourth quarter. Secondly, what was that? Can you give us the dollar amount of that increase in the fourth quarter?

I can't give you the dollar amount of the increase, but I can tell you that again, no different than our (indiscernible), which we are self-insured up to $0.5 million. On the health care side, we're self-insured up to 250,000. As a result any time we have an occurrence or an incident or a multiple number of those, that impacts us. That is what happened in the fourth quarter.

And largely unpredictable?

Someone goes on a dialysis machine or someone has a heart attack, we certainly don't predict that and it does tend to skew our results.

Okay. Bruce, you said that the ACI business, which you did not pick up much of, and that is largely because of the question about the ACI customers or issues about their customers. Are you referring to the liquidity of the customers? Is that what you're referring to?

There were two issues with them. Obviously they are in cost-saving mode. We're not interested in going below a certain price. In many cases, they were unable to reach that. We certainly understand that. Maybe the day will change when we can get agreement on that. The other side is, candidly, there were a few of them that were concerned with liquidity.

Great, well I can understand that. Finally, what was the number of owner-operators at the end of the quarter?

It was right at 550 – 555.

Okay, so you didn't add any in December to speak of?

But, again, you really----

No net increase.

In October because that is the busiest month.

Thank you very much.

Donald Broughton with A. G. Edwards.

Good morning. Your reward for when you could get better than 15 percent operating margin was to hear all of us asking whether you could ever get it above 20. Now your reward is, can you ever get it to 25. Great performance and I am reluctant to usually say that ever on a conference call. To get it above 20 is, in and of itself, a great thing.

I am looking at the individual line items. Insurance certainly was a highlight of where you made great gains. On an ongoing basis, do you have a range that we ought to look at as sustainable?

If you look at the first three quarters – 1.4 million, 1.8 million, and 1.3 million – what happens in the fourth quarter is you get actuarial studies done that let you know whether you are over or under reserve for your line (ph) analysis on past occurrences. In the last two fourth quarters – meaning '04, and '03 – you'll see that that number came down. What you look is that figure at the first, second, and third – that is the number plus or minus whatever the particular occurrence is.

Perfect. You said you initiated rate increases at the beginning of the year. I didn't hear a number attached to that.

If we can back up just a moment, then we'll answer that. I think while it's great to look at safety from the standpoint of numbers, a real tribute to our safety group led by Miss Loretta and our owner-operators who performed unbelievably, so we are very pleased with that.

Our price increase goes into effect March 1. It's 3 percent across-the-board with the exception of the West Coast, where we have both LA and San Francisco slated at 9 percent.

Fantastic. Thanks gentlemen.

Art Hatfield of Morgan, Keegan.

Morning. Actually, I'd like to jump 25 and see when you're going to get 30 percent margins. That is for another day. All my questions have been answered except one. I would like you to touch on if it ever makes sense in any of your lanes when density is to the point where you would start thinking about whether there is a benefit to switching from owner-operator to Company-owned trucks.

That is a great question. I think you could make a strong case that that is indeed a true statement, Art. Here is why we haven't done that in the past. One is we've made a commitment to the owner-operator to do the best we can in terms of helping their business, which in turn helps us. Two is we're not crazy about making the investment in the equipment. Three is you have to have a little bit different infrastructure. We'd have to go into maintenance. We'd have to have people taking care of drivers that are touch (ph) drivers as opposed to owner-operators, which is a little bit different settlement process. Would the economics work to do that? The answer is yes. You are absolutely right. Would they work overall for us? The answer is probably not.

It's also important to remember that they would work now. But if you go back into 2001, 2002 they wouldn't have worked. Everyone always talks about asset ownership when things are going well. We think the hallmark of Forward Air is you get these great returns when the economy is doing well and when the Company is performing well. But at the same time, you don't have that asset overhang when things aren't going well.

Great. That's helpful. Thanks.

Kevin Wind (ph) from Hollandaise (ph) Capital Management.

Good morning. Nice quarter. This is a question concerning your terminal expansion plans or as you put on the call earlier, essentially lack thereof. Is that from feeling like you can still have very attractive growth rates from your current network of terminals? Another way of asking the question, if you were interested in expanding the number of terminals, how many more potentially attractive terminal sites are there available to you at this point?

The key metric is where our customers are. We could open in a smaller city. If there are no customers – and the customers are our freight-forwarder partners, then we're not going to do any business. We think we have our facilities located in the proper cities across the US. We are in continual dialogue with our freight forwarder partners in terms of where they are going to move to and where they are going to open. If they chose, for instance, to open in a particular city, we would probably follow them. That is really what drives our decision.

If the number of terminals stayed what they are now over the next two to three years, what kind of growth rates do you think you can get? You've made some suggestions of what 2005 looks like. Over a two-to-three-year period and further penetrating your customer base, what kind of growth rates can you have leaving the number of terminals the same?

If you look at the number of terminals that we've had in place over the last—since the end of '02, it has remained flat. It's been at 80. To echo Bruce's comments, we're where are customers are. We're comfortable where we are. We've given guidance for the first quarter of this year. It's the policy of the Company to give guidance one quarter in advance.

Okay. Thanks.

(OPERATOR INSTRUCTIONS). There appear to be no further questions at this time. I will turn the conference back to our moderators for any additional or closing remarks.

Again, Thank you for joining us everyone. I'd like to remind you that our replay of this call is available on our website at www.forwardair.com. Thank you.

That does conclude today's conference. We thank you for your participation. Once again, the replay will be available at www.forwardair.com. You may now disconnect.