奧多明尼昂貨運 (ODFL) 2006 Q4 法說會逐字稿

Good morning and welcome to fourth quarter 2006 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through February 8 by dialing 719-457-0820. The confirmation number for the replay is 5637459. The replay may also be accessed through March 1 on the Company's website which is at ODFL.com.

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 Old Dominion's expected financial and operating performance for first quarter and full year 2007. For this purpose any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words 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 Old Dominion's filings with the Securities and Exchange Commission and in today's news release, 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.

At this time for opening remarks, I would like to turn the conference over to the Company's Chairman and Chief Executive Officer, Mr. Earl Congdon. Please go ahead, sir.

Good morning everyone. We appreciate you being with us this morning to discussed a solid quarterly operating performance for Old Dominion, which produced another year of substantial profitable growth. I have a few prepared remarks to begin this morning, and then I will ask David Congdon to discuss the quarter in more detail. After Wes Frye reviews our numbers and guidance, we will be glad to take your questions.

As you have seen in our news release this morning, Old Dominion's revenues and earnings were stronger than we anticipated when we talked with you during our last conference call. The fourth quarter was one of the toughest quarters we and our industry have experienced in some time, as I think industries statistics will support. Because Old Dominion has remained consistent in its strategies to expand both market share and our service center network, we were able to produce double-digit growth in revenues, while exceeding the top end of our earnings guidance range, and producing our 21st consecutive comparable quarter improvement in our operating ratio.

Our results for the fourth quarter contributed a to another very strong annual performance by Old Dominion. Our revenues for 2006 increased more than 20% for the third consecutive year, again, driving growth in earnings per diluted share at a rate in excess of 30%.

Over the same three-year period, our operating ratio has improved 250 basis points, including a 100 basis point improvement to 89.8 for 2006 compared with 2005. This is the first time our full year full year operating ratio has been below 90% in our fifteen years as a public company.

Now in face of greater uncertainty about the direction of the economy, which became more apparent in the fourth quarter, and after a number of severe winter storms already in the first quarter of 2007, we are taking a more cautious position regarding our near-term financial forecast. As our guidance indicates, we still expect to produce profitable growth for the current fiscal year. We will also continue the steady implementation of our growth strategies regardless of the short-term environment, because through these ongoing efforts we build a foundation for future profitable growth over the longer-term.

As result, we reaffirm our goal of achieving revenues of more than of $2 billion for 2010, with expanded margins. We have a clear understanding of the steps needed to achieve this goal in the coming years and the resources to support our plan. Put simply, while cautious about 2007, we remain very optimistic about our long-term prospects for significant profitable growth.

Thanks again for participating in this call this morning. And now I will ask David Congdon to discuss the fourth quarter in more detail.

Good morning. Let me begin by repeating the comment Earl made, and that is we believe our fourth quarter performance was solid, especially in the face of a tough industry environment. When we talked in our third quarter conference call we mentioned that a key metric, weight per shipment, had decreased to the early weeks of October, and after its growth rate had slowed in each sequential month of the third quarter. This trend continued for the rest of October and most of November, with the result that our late per shipment fell 1.8% for the fourth quarter. This is the first quarterly decline in this measure in over three years.

In the latter weeks of the fourth quarter we were encouraged when this trend moderated somewhat, helping us produce higher tonnage growth for the quarter than anticipated. In addition, our shipment per day increased at a 12.7% rate for the fourth quarter, which was the second strongest quarterly growth rate all year other than the third quarter.

Our declining weight per shipment and an increased length of haul supported a 3.8% increase in revenues per hundred weight, excluding fuel surcharge, versus the fourth quarter of 2005. We also managed to produce a sequential increase in revenue per hundred weight, also including fuel surcharge, from the third quarter of 2006. Through a combination of these variables, our fourth quarter performance exceeded the high end of our guidance.

From an operational standpoint, we were pretty close to the range we gave, since about $0.04 of the $0.05 by which we exceeded the range was split about evenly between the impact of lower than expected effective tax rate and a favorable experience in our reserves for insurance claims.

Consistent with our principal growth strategy, virtually all of our growth, 98% for the year, was generated through service centers that have been in operation at least one year. The resulting increase in freight density and other economies of scale drove the further improvement in our operating ratio.

We continued to expand our service center network during the fourth quarter with the opening of four new centers. With these openings and we have added 28 new service centers for the full year through both acquisition and organic expansion. In addition, we added capacity at a number of our existing centers. We completed 2006 with 182 service centers in operation. And we intend to continue to expand our network at a steady pace, real estate availability permitting.

As I have mentioned before, to achieve our 2010 target of $2 billion in revenue we expect to have between 200 and 250 service centers in operation. As we implement this expansion, we also expect to achieve our objective of obtaining full whole state coverage throughout the Continental United States, up from the 37 states in which we provided this service at the end of 2006.

To summarize my remarks this morning, let me reiterate our belief that we are well-positioned to continue producing long-term secular growth. Through this growth and continual focus on improvements in operating efficiencies, we are confident that we can transform these opportunities into further profitable growth and increased shareholder value.

Thank you again, and here's Wes to review our financials.

Old Dominion produced revenue growth for the fourth quarter of 12%, which was the first time in 2.5 years that our topline quarter over quarter growth fell below 20%. Despite this lower rate of growth, our revenues still came in better than anticipated for the quarter, helping to increase freight density and revenue per service center within our base of centers in operation for more than a year.

This growth produced expanding operating leverage for the quarter. And combining the impact of this leverage with favorable experience in our insurance reserves resulted in an improvement in our operating ratio to a 90.1 for the fourth quarter from a 90.8 for the comparable quarter of 2005. This 70 basis point improvement more than offset the 40 basis point increase in our interest expense as a percentage of revenues for the fourth quarter, which resulted from increased debt to fund our capital expenditure program.

In addition, a reduction in our tax rate, which we do not expect to continue in 2007, contributed to a growth in net income for the fourth quarter of 21.5% and an increase in our net profit margin to 5.6% for the quarter from 5.2% for the fourth quarter of 2005. Earnings per diluted share increased 23.1% for the fourth quarter to $0.48 from $0.39, and compared with our guidance for the quarter of $0.40 to $0.43.

While I won't go into a lot of detail about Old Dominion's results for the full year, we were pleased with our overall performance. Revenue growth of 20.5%, drove a 100 basis point improvement in our operating ratio to an 89.8 for the year, as well as a 36.4% growth in earnings per diluted share.

We continued to have a very sound financial position at the end of 2006 after completing major capital expenditure initiatives during the year. Our net debt to total capital was 30.9% at year-end, within the range of our expectations. Total net expenditures for 2006 were approximately $208 million, including the acquisition of UW Freight in January of '06.

Our real estate CapEx for the year was approximately $80 million, over 90% of which was to add or enlarge service centers in the existing network. We also spent approximately $115 million for tractors and trailers, and $10 million on our information technology infrastructure. Our original guidance for 2006 was in the range of $245 million to $255 million, of which $126 million was real estate investment compared to the actual expenditures of about $80 million.

Because our real estate CapEx was less than anticipated due to the real estate availability and construction timelines, we plan to roll back spending into 2007. And as a result, we believe total CapEx for 2007 will be approximately $245 million. That would include $120 million for real estate, $65 million of which are new projects to be initiated in 2007, $108 million for tractors and trailers, and $14 million for continued IT initiatives. With the benefit of continued substantial cash flow from operations, we expect to fund these capital expenditures while keeping our ratio of debt to total capitalization in the 35 to 37% range by year-end 2007.

Turning now to our guidance for 2007, we today established a range of expected earnings per diluted share for the year of $2 to $2.05. As we discussed in our news release, we base this guidance on a current economic environment that remains challenging, and that we don't expect to strengthen appreciably until perhaps the second half of the year.

Our tonnage growth for January was just over 10%, which included a 7% increase in shipment, combined with a 3% increase in weight per shipment. At this point it is difficult and early to make a conclusion of this increase in shipment weight is economic or freight mix, or if it will be sustained throughout the first quarter.

We also today established our earning guidance for the first quarter in the range of $0.32 to $0.35 per diluted share, which reflects the additional impact of the winter storms that repeatedly struck the Northeast and Midwest in January.

And this concludes our prepared remarks. Operator, we will be happy to open the floor for any questions at this time.

(OPERATOR INSTRUCTIONS). Ed Wolfe, Bear Stearns.

Just a couple of clarifications there at the end. Shipment weight, up 3%. Is that sequentially January over December or is that year-over-year?

Are you talking about the fourth quarter?

I thought you said for January that shipment weight was up 3%.

The shipment is down from December, the shipment weight. Sequentially it is down but the 3% is year-over-year.

In December year-over-year how much was that down or up? I guess it was down.

In December it was down 1.7% in December year-over-year.

Do you have the same numbers for November and October?

Yes, I do. October, as we had mentioned, it was down about 1%, and then it increased in November to 2.1%.

Down 2.1?

Down, excuse me, down 2.1. And in December it was down 1.7. And now it is up 1.3 to January. (multiple speakers). It is up 3% in January. But the actual weight per shipment sequentially from December to January is down slightly from 1,529 pounds to 1,520. Year-over-year it is up 3%.

Where do I see -- you said you had benefit from reserves for insurance claims. But when I look at your insurance and claims line it looks like it is high, not low.

The insurance what that was that positively reflected exactly workman's compensation, which is in the -- it is in the fringes line. So it is a little difficult to see, but you'll see the improvement in wage and salaries and benefits, and that is where it is.

How much is that in there?

Is about $0.02 net of taxes, the effect. As we have talked about, that plus the tax rate is about $0.02 each.

What was -- it looks like there were something that went wrong on the insurance side that -- maybe a bad claims quarter or something.

No, last year -- we had a positive last year. And you will see that last year it was 1.8%. But you'll see the 2.8 this year was fairly comparable to the overall for the year of 2.6.

That's helpful in that. I would be interested, David and Earl, what you're seeing out there in terms of the competitive environment and pricing, particularly what you're seeing right now and what you're expecting as contracts start to come up?

Do you want to do that, David?

Yes. The competitive environment, it is definitely competitive out there. We are seeing some increase of pricing pressures, but it is not terrible in our view. It is still somewhat what we have always seen. It is spotty, different places and different carriers doing things that we think might be crazy. But for the most part we think the pricing environment is pretty stable.

Net of fuel, I think your revenue per hundred weight was up 3%, something like that. Does that sound right?

Net of fuel our revenue per hundred weight in the fourth quarter was up 3.8, correct.

I'm just assuming that the mix, because a year ago you have a lot more truckload in the mix because of the hurricanes and all that, that if you normalized that maybe that 3.8 is 2.5 or something like that. Is that a fair way to think about the rates you're getting right now, 2, 3% pure pricing?

That is totally anecdotal and a little bit subjective. It is hard to calculate, and as you well know, to shift through all the different variables that cause a rate per hundred weight. But if you want to look at it that way, you can.

What I am trying to get at is if it is 2 to 3 right now, where do you see that at 6 months and 12 months from now directionally?

We will be going through a rate increase that will be effective in early April. The question is is how would that be sustained, and I think some of that will be due to what the economic activity is and what the discipline is. And we are thinking that in the LTL sector that still it is fairly well disciplined pricing. And so we're hopeful that the pricing will remain stable. Where it ends up perhaps in the 2, 2.5% range is probably a realistic range. That is tightly totally anecdotal. It will be what it is, but hopefully it will be in that range.

For you guys roughly, what percentage of your contracts come up throughout the year in each quarter?

About 50% of our business, 50 to 55 is contracts. It pretty much matures ratably throughout the year. There's not really a spike from what we can see on a big maturation month or quarter.

For your full year guidance what is the underlying assumption in terms of how many terminals you open up and tonnage and price within there?

We look at our growth -- we did in fact look at our growth somewhat from an economic view. And we are tending to believe, wrongly or rightly, that the view "The Economist" is talking about the first half GDP to be 2%, maybe even below, maybe climbing to the 2.8 to 3% in the second half. We haven't really established exactly which service centers that would make up that growth, although there would be some, but nothing material. Last year 98% of our growth came from our existing network. That will be the case this year as well.

You're spending more money on CapEx for real estate, so I'm assuming you are opening up some stuff, or is it just replacing --?

Yes, most of that, as it was this year -- as I mentioned in the conference call 90% was just enlarging or adding service centers in our existing network coverage area.

In the Atlanta area we went from 1 to 3 service centers.

Exactly.

When I think about your somewhat conservative guidance in your own words for the year, assuming the economy just slowly gets better, 2 to 2.05, what kind of revenue growth should are you thinking in that underlying trend?

We haven't and usually don't give guidance on our revenue growth, just earnings per share.

But I'm guessing that double-digit tonnage is still expected?

Yes. I think in the 10% range for sure on tonnage.

Brannon Cook, JP Morgan.

You guys have a solid track record of growing tonnage at double-digit rates across different economic cycles and environments. You did that -- I was impressed with the fourth quarter tonnage. Can you talk a bit about your value proposition. When you're going in the market and taking share, does your sales pitch in how your salespeople go and try to win your business, has that changed at all in the more challenging freight environment? All these things -- assume things are always a bit competitive, but do you have to shift your strategy bit in a more challenging freight environment like it might be in '07 to hit that double-digit rate?

I think our ability to be considered as a single source provider for both regional, interregional and international freight services and expedited services, our complete portfolio of services enables us to be considered as that single source provider. I don't see our pitch changing that much at all in a difficult freight environment. I think that those advantages we have in the marketplace still hold true and should allow us to continue taking market share.

As you look back in the fourth quarter were you more or less successful in the regional markets or the national markets?

It is pretty much across the board, although our length of haul stayed relatively the same. So to tell the truth I haven't looked at the quarter as a whole by length of haul or by segment yet. But I suspect it will be pretty much remain the same, that we grew fairly significantly in each segments of those markets. But no one would be much greater than the other.

You guys came out with CapEx guidance in '07 of $245 million. I guess looking out it seems likely have you have pretty succinct plan for long-term growth and how you're going to get to the $2 billion market in revenue. Looking past '07 to '08/09 should we think about CapEx coming down below the $200 million level in order for you to hit those revenue targets? And is '06 and '07 a bit elevated from a capital spending perspective?

Yes. I think you can look at CapEx to be down, especially as a percentage of our revenue. As our revenue continues to -- and we have reinforced the $2 billion by 2010. Certainly we will still have an appetite for real estate, but as a percentage of that revenue, real estate should come down. In fact the literal dollars of CapEx should come down. But I will suffice that to say if there is opportunities out there on real estate, we will take advantage of it.

Still half of our service centers are leased and half are owned, so as we grow our revenue per service center and outgrow some of these leased facilities, we typically look at owning a facility, the larger the facility is.

I guess you talked about a lot of your real estate spending was simply enlarging existing facilities. As you look past '07, do you feel like you're going to be in pretty decent shape from a capacity perspective with your existing facilities?

We hope not. It is a problem, but it is a very pleasant one to have. We are going to be constantly outgrowing facilities because of that growth rate.

That is a good problem to have. Thanks for the time guys.

Jason Seidl, Credit Suisse.

A couple of quick questions. Wes, you mentioned the 10% growth on the tonnage, were you talking for the year or for the quarter?

For the year.

For the year, so do you think that might be a little bit of challenge in the first quarter, given the weather and given your comps with --?

That remains to be seen. We did in fact have 10% growth in January -- tonnage growth.

That is fair enough. Can I just assume that some of your guidance trepidation is going to just on some of the expenses in terms of associated with some of these winter weather, because I can easily get you guys above your guidance range when running the numbers?

Yes, we try our best to control obviously the direct cost in weather-related activities from the leverage, but you do lose that leverage in overhead. (indiscernible).

When you guys are opening new service centers now, is it still just taking only a couple of months to get them profitable?

For the most part, that is true. Sometimes they are profitable even in the first month. It all depends on how much freight you have in the area when you open one up. For example, these three service centers in Atlanta, we spun off a certain amount of business into North Georgia and another certain amount of business into our new West Atlanta service center. So they started off with a substantial amount of business day one, and were profitable day one.

And the combination of the three is better then the one that we had before. So if you're going into a new state, like when we opened up Bismarck, North Dakota, it is a slightly different situation. It takes a little bit longer to get that one profitable. Although we did start with a small amount of business that we were giving to agents to begin with.

Perfect. Gentlemen, thanks for the time as always.

David Campbell, Thompson Davis & Company.

Thanks for taking my questions. I just wanted to get in a little bit about the winter weather in January. In general that shouldn't affect tonnage but it -- is that correct? It should probably affect your expenses more?

Of course it affects tonnage. If you can't pick up the freight, you can't haul it.

What I mean is eventually it gets picked up in the month unless --.

That is a theoretical thing that is debated, but in the many cases it does not. You might bring back some of it, but most cases you do in fact lose tonnage.

Okay. And if affects expenses it would be primarily in your overtime, and therefore labor costs -- either in salaries and labor costs?

I think we do a pretty good job of controlling the direct labor costs. Obviously if there's nothing -- no freight moving, we don't put the labor out there. But it does hinder your leverage on your overhead that is fixed in nature. That is where the cost is more or less affected.

Right. When you say it should switch to the long run, long-term, your $2 billion goal for 2010, is that excluding fuel surcharges?

That would be including fuel surcharges.

Including fuel. You say that would be on a base of up to 250 service centers?

In that range.

I guess that pretty much -- on the balance sheet, can you give us any year-end cash balances or cash from operations in the fourth quarter?

At the end of the year we had cash on the balance sheet of about $87 million. We will use that cash principally in the first quarter and some of the second quarter to fund our CapEx requirements, such that by the end of the year there were be very little cash on the balance sheet. It will be all invested in our growth and in the CapEx.

Do you have number for cash from operations in the fourth quarter?

Cash from operations. Well, I mean --.

First of all, it was $43 million in the third quarter.

Well, if you just take the -- are you just looking at cash flow by taking simply the net income plus depreciation?

And other items, other changes in assets and liabilities.

We haven't compiled our full cash flow position, but the net income is $17.8. We had depreciation of $17.9. That would be a number to start with, $35 million.

Justin Yagerman, Wachovia.

I wanted to just run through -- I don't know if you gave it yet -- but tonnage growth by month in Q4. I think you mentioned January, but if you could repeat it again, I would really appreciate it.

I would be glad to. The tonnage growth in October was, as we mentioned on our conference call, in the third quarter was 12%. And that tonnage growth percentage dropped to 9.9 in November and stabilized at 9.9 in December as well.

Then in January then -- I think you guys have said this before --.

10%.

Ten%?

10% was where our tonnage is in January.

It looks like November and December seemed to, at least as of now -- obviously time will tell -- but be at bottom for where the tonnage -- well, the slowdown, I guess. Most of the other companies we saw tonnage decline, so I am used to thinking in that frame of mind.

Anyhow, moving on, I wanted to just touch on acquisitions and the market out there. Included in your CapEx guidance for 2007 are you guys thinking about acquisitions at all?

We are constantly interested in acquisitions. They really aren't -- there's nothing big out there right now. And we don't have any acquisition revenue in our forecast. We're assuming none.

So as of now everything is organic growth. Did you guys give a target number for service centers for this year? I'm assuming that is going to be at least comparable to this past year, or do you expect that to slow as we get out towards the out years of your goal?

When we were doing our planning back in September for next year, we have a list of over 20 service centers, but many of them are going to require land and construction, or hopefully finding a facility to lease. And we have not given a specific number as to how many we will open for next year. Historically, absent acquisitions, we have been doing ten to fifteen a year, but we're just are a bit uncertain right now.

I guess but that, as you said, depends on real estate availability and the rest, and obviously we saw it.

If they were all available, we might add 20, but we don't suspect that will be the case.

When we have talked at different points through the quarter you guys have talked about being able to potentially be more aggressive on the cost side within your business, because of the fact that the growth rate appears to have slowed a little bit, at least with the current economic situation. Did you find that in the fourth quarter? Is that what led to some of the acceleration in your OR improvement? And have you identified areas in 2007 that you're going to be aggressively reining in, as long as you're not worried about -- or I guess not worried about, but dealing with 25% type topline growth?

That is still -- the story is still the same as we have told before that with this slower growth we're definitely deploying our engineers out there in the field to look for improvements in the use of our technology and pick and delivery. We're looking at how we're handling freight across the dock. We're looking at our direct loading capabilities and trying to minimize break bulk handling. A continued focus on claims. All the blocking and tackling, we have a tremendous amount of focus on that right now. And we will continue to do so throughout the year.

Line haul load factor is another area that we're working on diligently and are enjoying some success.

Wes, I don't think you said this, do you have D&A target range for 2007?

We haven't, but we suspect as a percent of revenue it will be very similar to '06.

Then I guess with the tax rate, I would imagine that that is just truing up in the fourth quarter for how your taxes progressed throughout the year?

That is correct. It had to do with some tax exempt investments that we had this excess in that was obviously non-taxable and effected the rate down. Since we're going to spend that cash in '07, we won't have that advantage, so it will go back up into -- what we're assuming right now about 39.8%.

Okay. So right around that 40% mark that you guys have talked about. I think that is all of my questions. Thank you. I appreciate the time.

Tom Albrecht, Stephens, Inc.

A terrific quarter. A couple of questions more about nuances. Your total shipment growth of 12.7% was the best effectively since the third quarter of '05. I know fourth quarter of '05 was about the same. I'm just surprised that that accelerated from the last two or three quarters. We know tonnage was not at the same rate, but many insights into why the shipment count -- because that is indicative of underlying demand for your services, maybe you're just that good, but any thoughts there?

I think it is primarily market share.

I do too. I just was curious.

We're getting more multiple shipments than we -- our growth in multiple shipments is up. And I just think more and more customers are recognizing us for our coverage and our service products, and trusting us with more of their freight.

When you say multiple shipments, David, do you mean shipper X shipping out of three different locations, or they are shipping overnight and second-day out of the same location with you?

I'm talking about quantity of shipments being picked up at a single location. That we are -- have good trends in our multiple shipment count.

Then it is probably not going to be that much of a factor now, because you're looking both at cost and growth just in case the environment goes either way, but have you ever modeled at what level you think you might lose productivity, either in line haul or P&D, if your tonnage growth fell below a certain rate? Does that make sense?

No, we haven't really modeled that.

Or intuitively, even do you have a --?

Intuitively any time we see -- if we saw a tonnage growth that was actually down year-over-year that would not be good.

Yes.

But we still are seeing the increases. By virtue of the previous discussion about multiple shipments, we still see the ability of having some leverage in our productivity based upon that density improvement. As long as the shipment count and tonnage is up, we see that to be a positive on addressing continued efficiency in terms of density.

I agree. Then on your CapEx numbers, did you give gross numbers too? We're just trying to fill out a couple of spreadsheets here.

Growth meaning net of any --?

No, gross. Those figures you gave were net, the 208 and 245.

We did not, but that implied -- our gross number is more in the 255. We anticipate sale of around $10 million.

Then I guess one last question. A year ago a lot of the LTL carriers benefited disproportionally from heavier shipments, so-called truckload freight moves. Can you tell if that phenomenon of the shifting back to truckload has stopped at all? Because you were pretty good at giving metrics a year ago at growth in shipments above certain sizes. Is the shift back done now at this point?

From all that we can see -- it never is a large percentage of our overall revenue. It is probably discussed more than what the relative size of it even warrants.

Right.

It has shifted. I think in the fourth quarter of '05, it was like 2%, or a little over 2% of our revenue. And in fourth quarter '06 I had dropped down to about 1.6 or 1.7%, given a few percentage points that I'm just recalling from memory.

Saying it another way, in the fourth quarter of '05 we were seeing some acceleration in our large shipments. We were -- there was a good grow rate in large shipments. And this year the number of large shipments has been relatively flat through the quarter. It is flatness against a rise of last year, so year-over-year we have -- it has had a negative impact, or it has reduced our overall weight for shipment in the fourth quarter compared to what it was last year.

Good. Go ahead. I'm sorry.

To a small degree it affected that weight per shipment.

Guys, keep up the good work. Thank you.

Art Hatfield, Morgan Keegan.

Just one question. Most of our questions have answered, but I kind of want to go in the opposite direction. Tom was talking about productivity. If I look back since early '98, you guys have done a great job of growing the business, but you have also done an excellent job on the cost side. I would say on average, my numbers could be off a little bit, but you have been able to improve the operating ratio since '98 on average of about 50 basis points. As you have grown out the geographic network, and you start to drive the revenue growth through the individual terminals, what kind of leverage opportunities do you have? Should we be thinking about OR improvements accelerating from this point going forward?

You're welcome to think about that, but --.

You know better than I do so what are you saying?

We have always -- our focus has always to grow the topline, while also improving the OR, the margins. And we have been able to do that. We think that we still have a lot of density. Our market share is still relatively low, and in our newer expansion territories even lower. So we think we definitely have the opportunity to grow our density in existing area, and thereby that incremental margin, which we still think is in the 10 to 15% range. Yes, we think we have continued opportunity to improve our margins and thereby reduce our operating ratio. We don't give guidance on where that might be. We we did an 8 in front of that for the year of '06. And believe me, we will continue to focus on that.

I understand that. But is it fair for us to think going forward that maybe the balance between profit growth -- and I don't want to imply that you're going to stop growing revenue, but as you get bigger the rate of growth slows somewhat, and so the balance both shifts more towards margin improvement.

We have always I guess put the growth ahead of the operating ratio, knowing that eventually the operating ratio would come down probably more rapidly than -- in a slow growth situation -- than when you're opening massive numbers of new service centers. So the operating ratio should get better.

John Larkin, Stifel Nicolaus.

Nice job on the quarter. Believe it or not, none of my questions have been answered, or asked for that matter.

Maybe we won't be compelled to answering them either.

There you go. Any softness by region that you can speak about? Some of the truckload carriers mentioned that the Southwest, the Texas area in particular, and the Southeast were exceptionally soft, and the other areas not nearly so bad. Anything you can glean from the data on that subject?

We just haven't gotten -- are you talking about basically now in January or --?

I'm talking about the fourth quarter.

We haven't calculated all of our metrics for that yet, but it looks like that we had pretty decent growth in all of our regions. Obviously, by definition our more mature wouldn't have had as much growth as the newer markets of the West. The biggest growth came in the Western and in the Midwest.

Was the Southeast the weakest growth?

If you say it is weak, but it is still pretty darned good growth. I think if you looked at it for the year, if we grew 20% overall, the Southeast probably still grew at 15.

You would attribute that just to the maturity of the Southeast market rather than softness there?

Absolutely, yes.

The CapEx budget for '07 was a little bigger than we thought. A lot of money being spent on incremental tractors and trailers. I guess some of that is replacement. I am wondering how much of that increase is due to just the increased price of the '07 model trucks?

That is interesting. We did some prebuy there. And we have '06 engines in virtually all of our '07 purchases. We are just tickled to damn death about it because we have saved about $10,000 a tractor.

Nice job there. So most of those are going to be delivered I would guess then early in the year?

During the first half I think.

Anything new to report on additional customer adds, or perhaps former customers that only dealt with you in a particular region that have been rolled out more across what is becoming a national network?

We can't talk about specific customers, our competition is listening.

But are you all the time adding new customers, or is most of the growth just coming from existing customers that you're doing more with?

It is really a combination. We are seeing growth in new customers and we are seeing growth with existing customers. It is really a combination.

Would you say you've got a nice balance between large customers and small customers, your small customers I think being sort of your historical base?

Yes. Our mix of, call them, contract or national accounts to what we call field accounts is -- the mix is staying pretty much stable, so we are going in both areas.

That interesting. And then the mix between retail and what might be more of a cyclical industrial base, any shift there?

Not of any consequence. Still about 18 to 20% retail and about 45% industrial.

And the rest would be, just out of curiosity, while you're on that subject?

20% is third-party logistics, and we can't boil that down to any industry segment. But that is 20%.

That is going faster than the overall business?

I don't know if it is faster, but maybe over a period of a couple of years -- I think two years ago it was more like 17%. So it is more a higher percentage of our overall rig mix now.

Any competitive changes that you have noticed since UPS acquired Overnight and renamed it UPS Freight and/or any changes since FedEx bought Watkins and renamed it?

No competitive pressures from either one of those that we are feeling any different than since before they made those acquisitions.

Earl, you talked a little bit about how you are -- one of your primary operational focus points is on getting the line haul load factor up, which I guess gets more and more difficult as more and more of the traffic becomes palletized. Could you give us a little more flavor for where the load factor is now, and where you think it could do with some of the programs you are implementing?

One of the strategies that is taking it up, we're putting load bars in the trailers, so that we can double stack the pallets without having to put a pallet on a pallet. It is bringing our damage claims down nicely. And it is helping to get the load factors up. There's another strategy or two that David might want to address on that.

Through our technology and our handheld computers and our dispatch systems we are capturing the late by destination every day, and that is allowing us to do better planning of our line haul each evening at every origin. So that too helps the load average and should help us reduce the break bulk handling.

How far along through that process of improving the load factor are you? Are you in the first or second inning, or is that pretty well along?

We kind of had our ups and downs. We went through a lull last year where the load average went back -- was off from where we thought it should be. But it has come back in the fourth quarter to a respectable level. How much better can it get than what it was in the fourth quarter, I don't know the answer.

The offset to that, and something that we have to be very sensitive about, is that improving the load average you don't give up the level of service that we have worked hard to achieve. And it is very sensitive to the customer.

That is the balancing act that you have to do. You can improve load average very quickly, but you've got to be very careful about the service product.

I understand. Then one last question on the broad area of technology, it looks like you've got $14 million reserved for investing in additional technology in '07. My impression was that the handheld system was pretty much rolled out Companywide. Your dockyard management system is pretty well rolled out Companywide. Is there anything else going on that would lead to such -- what appears to be relatively large MIS investment in 2007?

There are -- I don't have that sheet in front of me. Actually, in '06 we had about $12 million slated, but we only spent $10 million. And there was I think $2 million for some projects that we were considering that we just didn't do anything with. But on this year's $14 million budget, we've got about $3.6 million that involves projects that require further investigation and return on analysis to do.

And one big one is -- go back up to that, Wes. The biggest one is looking at OCR, optical character recognition technology, so when these can scan bills of lading into the system we can do some automation of our bill entry. And that is like $1.6 million of the $3.5 million. Wes keeps taking my spreadsheet away from me. Then there's a whole -- there's about a whole bunch of other projects in there too that I don't want to get into the detail of.

You haven't tapped out on the productivity potential of the technology investment you are --?

I think we are in a mode where just our maintenance of technology is probably annually going to be a $10 million thing. Keeping being the AS/400 up to speed with the fastest processors and all of our network applications and thin client farms and just keeping all the disk storage out to speed. It is just -- it seems like it is going to be in the $10 million range is my gut feel for technology, just as a -- on a maintenance --.

It is just the amount you spend to stay in the game of being technologically in the ballpark.

That is terrific color on the technology side. Thank you very much. And congratulations on a terrific quarter in a very difficult environment.

Ed Wolfe, Bear Stearns.

My questions were asked and answered again.

(OPERATOR INSTRUCTIONS). [Curt Moore], [RCM].

A great quarter guys. A couple of quick things. First of all, can you talk about any kind of industries where you're seeing demand, particularly stronger or weaker than your overall demand?

No, it is hard to boil it down to a specific industry. One specific industry could double, but in the scope of -- since we're really diversified, it is hard for one industry to have a major impact. That is one of the benefits of our diversification.

In terms of manufacturing --.

(multiple speakers) particular industry we see stronger than other.

I guess the good news here is that we have not had a lot of business in the building industry and home improvements kind of industry, which has seen some softness. And our mix of retail in the total is still less than 20%. So those would be I think the hardest hit sectors to which we have a very limited exposure.

We're not an in automotive either. So that is another week sector, as you know.

In terms of service centers, new service centers, did you mention how many you're planning to open for 2007?

No, we have not mentioned a specific amount. I did mention that we have 20 on a list. But it could probably -- it could be in the say 10 to 15 range. But we're just not real definite on that at this point.

Anywhere from 0 to 20.

I know it varies by service center, but kind of thinking about a service center in its first year and how much you gain in revenues and how much you gain in operating income at that service center versus in a third year, how much do revenues and service center profit grow from the first to the third year typically?

The growth rates are really good. When you are operating from a small base you can -- the percentages look wonderful. Normally when we open a service center it is in a city where we have been serving that city for several years from some other location. But when you are on in federal run in a relatively large city and your truck is coming from say 50, or even sometimes 100 miles away, you don't get a lot of market share. Consequently when the new service center opens, you see excellent, excellent growth in that city. And you might have losses for a month or two, normally we turn profitable after that.

Thank you.

An interesting story, we had three spin offs in Florida last year, I believe. Meaning that in Miami we opened Pompano Beach. And the profit in the two service centers was greater than we had when we were serving the entire area from Miami. Even though we had additional overhead and what not, the reduction in stem time and miles produced more profit for the combination of the two service centers. We did the same thing on the West Coast of Florida, and again in the Orlando area.

And having no more further questions in the queue, I would like to turn the call back over to Mr. Earl Congdon for additional and closing remarks.

Thank you all for your participation, your excellent questions, and above all your interest in our Company. So if you have any further questions, feel free to give us a call later this afternoon or later. Good day to all of you.

Good-bye.

Good-bye.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation, and you may now disconnect.