US Xpress Enterprises Inc (USX) 2002 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the U.S. Xpress Enterprises fourth quarter conference call. My name is Edie and I'll be your conference coordinator. At this time all lines are in listen-only mode with a question and answer session to follow. Should you require operator assistance while on this call, please key star 0 on your touch tone telephone and we'll be happy to assist you. As a reminder this, call is being reported for replay purposes. Now I would like to turn the call over to the host for the call, Mr. Trip Sullivan. Please proceed sir.

Good morning, thank you for joining the U.S. Xpress fourth quarter conference call. On the call today will be Max Fuller and Pat Quinn, co-chairman; Ray Harlin, CFO; and Jeff Wardeburg, executive vice president of operations. Before we begin I would like to cover the safe harbor language. This conference call contains certain forward looking information that is subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Without limitations, these risks and uncertainties include economic recession, downturns in customer's business cycles, rapid fluctuations in fuel pricing or availability, increase in interest rates, and the availability of qualified drivers. We urge you to carefully review and consider the various disclosures made by the company, in its press releases and periodic reports on forms 10K and 10Q. I would now turn the call over to Ray Harlin to summarize operating results for the quarter.

Thank you, Trip. Good morning. I will briefly discuss the results of our operations for the quarter, and following my comments, we'll be glad to respond to any questions. Net income for the fourth quarter of 2002 before a one-time charge of $1.7 million related to settlement of a previously disclosed litigation matter, was $1.4 million, or 10 cents per share compared to a loss of $599,000 or 4 cents per share in the fourth quarter of 2001. During the quarter we achieved improved operating income in each of our business units. Operating income of our U.S. Xpress truckload operations nearly doubled to $6.3 million compared to $3.2 million in the fourth quarter of 2001. Xpress global systems, our operating subsidiary which provides transportation and logistic services to the floor covering industry and expedited airport to airport transportation services, reported improvements in operating income to $38,000 for the 2002 fourth quarter, versus an operating loss of $767,000 in 2001.

As we disclosed in our release, the substantial improvement realized in our truckload operations were driven by the following key operating factors. Excluding the effect of fuel surcharges, revenues increased 11.9%, to $200.6 million. Utilization as measured by revenue miles per tractor improved by 3.8%, our average rate per revenue mile of $1.26 increased 2.4% quarter over quarter, and our average empty miles declined from 10.4% to 9.75%. These improvements reflect the improving freight environment we encountered during the fourth quarter, our ability to achieve price increases during 2002, and continued expansion of our dedicated contract and regional truckload operations, and improved execution by our operations personnel. While our truckload operating income nearly doubled in the quarter over the prior year, the extent of improvement during the quarter was limited by the substantially higher fuel prices encountered in the fourth quarter of 2002.

The extent of the impact of the fuel prices was also influenced by the trend of declining fuel prices during the comparable quarter in 2001. For example, during the fourth quarter of 2001, the department of energy published average price per gallon declined from $1.47 to $1.17 by the end of the quarter, while in the fourth quarter of 2002, the DOE index price was consistently above $1.40 level with an average of approximately $1.44. In a period of declining fuel prices, fuel surcharges provide the greatest benefit to a truckload carrier's net fuel cost. Fuel truck surcharge revenue, which mitigates to a degree the impact of rising fuel cost was $6.6 million in the fourth quarter of 2002, versus $3.8 million in the prior year quarter. The higher fuel prices, net of the fuel surcharge revenue, reduced earning per share during the fourth quarter by approximately 10 cents per share, when compared to the fourth quarter of 2001.

In addition to fuel, our truckload operating results were impacted by an increase in insurance and claims expense on a per mile basis of approximately 9%, resulting from higher premiums for our primary and excess coverage and increased claims expense. We also incurred increased maintenance expense as a result of our previously announced plans to extend operating lives of our tractors. Xpress Global Systems, formerly CSI Crown, achieved revenue growth in the quarter of 27.1% to $31.8 million. Floor covering logistics services revenue increased 23% to $19.7 million, while our airport to airport operations increased 32% to $12.1 million. Operating income in margins improved in our floor covering operations as we experienced improved load factors. While our airport to airport operation continues to grow volume in its existing network, on a stand alone basis this segment of our operations did not achieve break-even in the fourth quarter as we had expected. However, it should be noted that from a corporate rights perspective, our U.S. Xpress truckload operations received over $6 million in truckload revenue from the airport to airport operations during the fourth quarter.

Switching to take a look at our balance sheet, our long-term Debt, including current maturities, was $168 million at December 31, 2002, a reduction of $7 million from the prior year. At December 31, 2002, we had approximately $27 million in available borrowings under our $100 million revolving line of credit. For the year, net capital expenditures were approximately $21 million, with cash flow generated from operations approximating $40 million.

Looking forward, we can anticipate continued improvement in the performance of each of our operating segments. Although the first quarter of 2003 may be challenging if fuel prices continue to rise and the economy softens. As with other truckload carriers, freight in January has been somewhat slower than anticipated. However, with the reduction in the supply of trucks that has occurred over the last three years, and a return to reasonable economic levels, we would expect to experience increasing utilization and the opportunity to improve freight selection and rates within our truck load operations. Further, we continue to expand our regional and dedicated contract fleets, which provide for a more reliable revenue stream and improved returns.

With regards to Xpress Global Systems, as we continue to mature our airport to airport operations we would expect Xpress Global to begin making a meaningful contribution to the earnings of the U.S. Xpress enterprises. We thank you for participating in the call today and would be glad to respond to questions at this time.

Ladies and gentlemen, at this time if you wish to ask a question, please key star 1 on your touch tone telephone. If your question has been answered or you wish to withdraw your question, please key star 2. All questions will be answered in the order in which they are received. Once again, star 1 to ask a question, and star 2 to withdraw your question. Our first question comes from Dan Moore of Stephens. Go ahead, sir.

Congratulations on a great quarter. Just curious on the rate front, if you could give us a little bit of color as to what your outlook is there and to the extent you can, give us any sort of guidance for '03 from an earnings standpoint.

Actually, if you look at what we're doing to rates, rates are going up, almost full customer base is being faced with higher rates as we go in to renegotiate contracts. Contracts are annual contracts, so it would be a phase-in as opposed to across the board like LTL guys typically do. Rate increases for this year, probably will average somewhere in the 2.5% to 3% range, and in some cases with some customers it will be substantially more. Just really depending on which traffic lanes you're talking about, and really the consistency of freight. One area that we'll probably going to push extremely hard is in the fuel surcharge area. If you look at how much we were able to recover, it's taken us too long to get the fuel surcharge in to effect by using a one cent increment, so we'll probably change most of the fuel surcharges either in to half a cent or a quarter cent increments so that the hit that we take when prices are going up is not nearly as great. .

And I believe my other question related to earnings.

You mean expectations for next year? .

Yes.

We obviously expect substantial improvements at this point in time we are not giving specific guidance, other than we expect substantial improvement. Visibility is very tough right now, as you might expect, going in to the first quarter. But with the improvements I think you have seen in our fourth quarter, we expect those to continue in to next year.

I can't help but notice, guys, you know, on the fuel price standpoint, had fuel prices been more stable during the quarter, more normalized, whichever, you could have earned as much as 20 cents and last time we saw profitability like that, and keeping in mind that the economy really hasn't turned, you know, back in '99. So it really does seem like there's quite a bit of upside here. What sort of areas could present the most upside from an operating income standpoint as we look out over the next 12 months?

Well, obviously utilization and rates are of paramount importance as far as accelerating the improvement in operating ratio. The other costs, I think we have a good feel for. We have a good control over our fixed cost, variable costs, obviously we are impacted by fuel, the cost of new trucks will start to impact this year, but it will be weighted towards the back end of the year. To the extent we drive better utilization, it is going to drive down our variable cost and improve our variable margins. So I think the key going in to the year is utilization, selection of freight and improving your overall rates and yields.

What about tractor growth rate for '03? What sort of plans do you have on the drawing board?

Right now we are thinking in line of a couple hundred trucks, but it's really dependent on how we see the year progressing, how we see the return on assets come about. So it's completely dependent on that. Right now for our own internal planning purposes, we're at a couple hundred trucks.

And then I guess just from an equipment, age of equipment standpoint, how old is the fleet? And are there any plans to bring on some new equipment, some replacement equipment over the next 12 months?

It's around 29 or 30, as of now. We have some tractors coming on in the first half of the year, most of it it's put to the back half of the year. By the time we get to the end of the year, we'll be back in the lower 20s.

Last question, cap ex, can you give us some guidance? I didn't see it in the press release. Where did we end on a net cap ex basis in '02 and what's your budget show for '03?

In '02 we will be approximately $20 million for cap ex. In '03, I'm projecting around $25 to $30 million in cap ex.

Dan, you know, maybe give you a little more clarification on the earnings part of it. We think there is as much as 1% possibility to reduce debt. We think that there is 2% to 3% improvement achievable in utilization through what we're doing internally and through what we can achieve as the market improves. And we believe that we should be able to achieve a 2% to 3% rate increase over the next year. So those are the type of numbers that if we achieve what we're setting out to achieve, would get us to a much, much better return.

Well, a fair amount of uncertainty, I guess, given the fuel price environment and maybe a little bit of a weakness here in January, but looks like you guys are off to, all things considered, a pretty good start. And congratulations again on a good quarter.

Thank you. .

Our next question comes from Mr. Doug Cole of Morgan Keegan.

Good morning, guys. Great job on the trends across the board, those operating metrics were real encouraging. Talk a little bit more about fuel in terms of hedging. Where do you guys stand in terms of hedges as we start the year year? Wasn't it 10% or 15%?

We had and we do have some hedges in place. The hedges that we had in place were designed really to deal with a round up in fuel and was not designed to do what happened in the fourth quarter. In the fourth quarter essentially rates got up there during the third quarter, got up to a high level. Then just stayed there in the fourth quarter and went up a little bit off and on.

Okay. So they're still in place but when the fuel is running up like it was.

The ones we had were designed to protect the run-up while your surcharges kick in.

Okay. Okay. Purchase transportation, an expense item, was up 38% or so, you guys added, looks like, almost 30% to your owner operator fleet. Was there a bit of a pay increase to those guys that helped grow that side? And is that what is responsible for the little bit higher expense?

Actually purchase transportation, part of it was owner operators and obviously the field surcharge effect on those guys.

As it passes through to them?

Yes.

Okay. .

Probably the biggest component is with airport to airport and Xpress Global operations, a lot of their freight is outsourced to other carriers. And as their business grows, you will continue to see a purchase transportation go up.

The other factor there, Doug, is we are doing a lot more Mexico business and part of that goes through purchase transportation too.

Okay. Is Bill with you guys?

Bill Lusk? .

Is Bill Lusk on the call.

No, he's not.

I was going to ask a little bit about, I know there were a couple of key accounts on the carpet side of the business and they're pretty big names. I was wondering how the environment was for approaching those guys for rate increases? Are we seeing any, you know, upward lift to the rates on the carpet side?

Doug, this is Pat Quinn. I'm actually in Las Vegas at the surfaces show right now. And so yeah, those are being discussed. And you know, again, it's contractual and it's continuing, but I think they understand that this industry has needs and it's going to have to increase and change.

Okay. And seasonally as I recall, first quarter, is this a big seasonal ramp up for that business with the shows and all?

You know, the show is obviously, they have gone to basically one-industry show, it is a big show. And obviously we do participate in that business to a great extent. People are saying, it's probably the best show in five years. And usually the orders follow 30 to, you know, 30 to 45 days following the show. So you expect to see that in March.

Okay. Ray can you give me a little help with tax rate guidance for modeling in Q1 and maybe beyond?

I think a more appropriate, obviously the effective tax rate is impacted by the level of pre-tax earnings. I would use closer to 50% than 60%.

Okay. Okay. Well, I'll turn it over to somebody else. But also, Max and Pat, wanted to let you know from Morgan Keegan, our thoughts have been with you guys and Max, I always remember you telling that story about your father getting in to the trucking business through accepting a truck on trade for Volkswagen and wanted to let you know from Morgan Keegan and our thoughts have been with you guys, and you too Pat.

Thanks, Doug.

Next question is from Donald Brunson of A.G. Edwards. Please proceed.

Hello, gentlemen. Cash flow from operations in the quarter, for the full-year of '02, what was it?

For the full-year, it will be around $40 million for the full-year and I'm sorry, I didn't bring the quarter with me. I don't have third quarter.

Well, third quarter, let's see. I have got it here, look real quick in the right document. Hold on. For the first nine months, cash flow from operations was $22.2 million. Are you saying it will be $40 million for the full-year?

Yes.

So you got, what, $1.99 million in net income, $37 million in depreciation, that's $38.5. What's the difference? You run a little more out of receivables, Payable, where are we?

I'm sorry, I didn't follow your numbers, go through them again. .

Well, that's $1.99 million in net income, $37.461 million in depreciation, that's $38.560. And the difference between that and…

$38 and I said around $40, right? .

Yes. So you wrung a little more out of receivables or payables?

It's payables. I don't have it in front of me but probably the buildup on the liability side, on the claims.

Versus I guess we did $43.4 in cash flow from operations last year. Great, thanks. .

Next question from Michael Latronica of [inaudible].

Good morning, guys. Notice that you changed a little bit the way that your reporting some statistics. I did not see total revenue miles reported this quarter. I was wondering if you could help me with that. And year end trailer count and average length of haul on the quarter.

Okay, total revenue miles would just be the average revenue miles times the average tractors, that will give you total revenue miles.

Okay. How about ending trailer count?

1,730.

And I guess that will do it for me, thanks.

The next question comes from Nick Farwell of the Arbor group.

There was just a couple of little additional questions. When you commented or you noted that the inner company is $9.6 million and Ray, you commented in your comments that the amount of that portion of the business, roughly $6 million went on U.S. Xpress. Where is the other $3.5 million?

That is carpet, primarily.

Okay.

I was really just referring to the airport to airport.

Okay. And in following up on Doug's comments, when you suggested guidance of a 50% tax rate, the fourth quarter, when adjusted, was roughly 47%. Is that just basically a year end adjustment that brought that down to 47%? The reason I ask is before, I thought you were suggesting guidance closer to, say, 55%, perhaps even a little higher as a function of obviously your operating income from the truckload group. I'm just curious if you're expecting roughly a 50% tax rate for this full upcoming year.

What happens when income goes up, the tax rate will probably come down because of the per diem effect.

So your current guidance based on your internal plans for '03 now is for at least at this point in time is for a 50% tax rate? .

That's correct.

Okay. Can you give us just some feel for the--

Just to straighten something out, Nick. Maybe I missed something. But our effective tax rate was 60%.

Well, what I was using, I may have done it incorrectly, was the adjusted operating income in using the adjusted net income that you provided us the $1.4. That's all I was doing to, try to see if that was some better indication of what the tax rate might be.

To compute that number, you're right, you have to adjust the--

For the litigation?

You have to go back and figure out what your effective tax rate is after that adjustment and apply that to the adjustment to get there, you're right.

That's what I was trying to do.

Okay, I understand now.

There were several people who departed during the fourth quarter. Were there any severance cost associated associated with the departure? If so, where were they included in the income statement?

Severance cost primarily in salary and wages and we have recorded that severance cost.

Okay. The last question is, can you give us some sense, I realize it was only marginally profitable, but was the airport profitable and perhaps the carpet not profitable? Or were they both basically break-even?

No, the carpet was profitable and the airport to airport was not profitable. And we netted out to $38,000.

Thank you very much. .

Thank you.

Our final question is from Tom [inaudible] of DB&T.

Good morning. I wanted to follow up first on Nick's question. What was the approximate amount of severance cost you realized in the fourth quarter.

It was around 350,000.

And then I know earlier in the year, your goals for the regional and dedicated divisions were each approximately $70 million of revenues in '02. How close did you come to attaining those goals and do you have some '03 revenue goals for those two divisions?

I think what we said, as I recall, we were on a run rate, we wanted to be on a run rate of $70 million-plus. We are right there in both of those.

Okay. And then maybe this is for Max. You have had two quarters in a row now where your average loaded rate per mile has made solid progress. I'm just wondering how much of that would be due to the growth of regional and dedicated and how much of that would be what I would label more of a true rate increase?

I think it's probably closer to 50-50. That maybe weighted more towards true rate increase because we're hitting our customers pretty hard for rate increases any time a new contract or new bid comes out. One advantage we have had here in probably the last five, six months, is freight has been strong enough to where you don't buy business by giving cheaper rates. So what you've done is in any type of bid package, you're basically taking your rates to levels that you need to have based on different traffic lanes. So you're really not buying business. If you look at even during January here, you know, the only two segments that we have that's relatively soft or really severely soft is the Carolinas and California. And California is not soft on the long-haul but soft on the regional. .

California is also a little soft as well?

On the regional market, yes. .

And then the fourth quarter there was an increase of 228 company trucks relative to the end of the third quarter. How much of that was more of a timing on trades versus true capacity additions?

Most of it is timing on trades because of the pre-buy that we did.

Right.

If you just look at how the quarter hit and how the pre-buys had to hit, that's really the effect.

Okay. How many teams are you at right now also .

We're running just right at a thousand.

Okay. As you look out in to '03, do you want to grow the team fleet? I mean later in the year, you alluded to the fact that you might add 100 to 200 trucks depending upon the economy and that. Would that be more likely to be solo or team additions?

Probably, a lot of the growth you will see from U.S. Xpress is going to be more in the dedicated and regional markets which would tend to be more solo. As the economy starts to pick up, when it does, obviously teams are something that you can sell at a premium and we will probably take that number up also. But that's something that you probably are not going to grow until you really see that the premium rates are there to justify the higher cost.

Okay. Okay. More of a big-picture question; You know, you've got approximately a 97% operating ratio just in the trucking division. Have you really drilled it down to the level where you have taken your top, let's say 25 or top 50 accounts and figured out how many of those have maybe an OR under 95% and how many are maybe 100% or more? I'm thinking at 97% you have a lot of accounts that are probably break-even or a little worse.

One thing that ought to be pointed out when you say 97% operating ratio, you have to remember, we have a high proportion of leases versus a lot of our competitors.

Right.

So that probably a more accurate portrayal is somewhere in the 95% range.

Okay.

Because of the magnitude of the leases.

Sure. .

I think that's somewhat, somewhat gets people too far to that side.

Also to address your question, we have drilled down by customer, we have drilled down by traffic lane, we know where we need higher rates, we know what customers in what lanes if we can't get rate increases that we will abandon. And unfortunately, there probably will be a few. And the other problem that we have got is that our largest customer is only about 4% of our total volume. So the top 50 is not the total issue. It's really the top 200. So we're having to deal with a lot more customers because of how diversified that we are.

Now, the 4% figure you referred to, you used to have a couple that were 8% or so. Is that business you lost because of service or was this part of a yield management program?

Basically it's business that we have grown but we have grown other segments. If you look at our top 20 accounts, they account for approximately 40% of our business. Top 50 is 62%, and the top 100 is 78%. And typically your rate issues, you may have a couple in the top 20, but the rate issues typically lie in kind of the 100 to 150 range.

Okay. And then I guess lastly, how has the last week or so been?

Well, if you look at the second week in January, it's usually the slowest week of the year for this industry, excluding a holiday. And that basically proved to be accurate. If you look at the last two weeks, we have seen additional improvement above that week, we aren't back to the levels that we were, say, pre-Christmas, but we're probably getting within the next three to four weeks we think we will be back to that level.

Okay. Okay. Great. That's all I have, guys. Thanks.

Thank you.

The next question is from Nick Farwell of the Arbor group. Please go again, Mr. Farwell.

May I just follow up on Tom's questions. As I recall last year, January was a relatively good month and when you compare this year with last year's January, is there anything in the mix or tone of business that perhaps provides you some sense of either comfort or discomfort looking out to the first quarter?

Probably one thing that gives us some comfort is higher level of regional operations that's we're doing, there seems to be more consistency in the regional business, probably some discomfort obviously is the longer haul. And then the big plus that we have got at this point in January is that business is a little spotty instead of off totally nationwide and when it's all spotty, it's usually an indication that things will improve or things are deteriorating, we have gone from the deterioration point to where we think the economy in general will improve from this point.

Is there anything you could tell by the broker freight or sort of the flow of indications about incremental broker freight?

Well, if you look at U.S. Xpress we typically haul less than 2% brokerage freight and that was true in the fourth quarter. And I think it still holds pretty true in January. The problem that you have with the brokerage freight, it's usually fairly inconsistent and the rates aren't at levels that we would like to see. What we have seen in the brokerage side is the freight is not there on that side either.

That's what I was asking. I was just wondering if there was something going on in the market that perhaps you were seeing that would identify this year's January as differentiated from last year's January or any other past January.

I really think that, you know, it's back to supply and demand. I think last January inventory levels were getting fairly tight and consumers were still spending pretty good. I think this last December, last Christmas season, some still spent but probably not at the brisk pace it did the previous year. The people are playing conservative like we are in our business.

And the comment you made just a moment ago was that your regional business, the level of regional business was holding up better. It is my impression that the amount of trucks you put on dedicated continued to grow so as a percent of your overall business, your truckload business, the dedicated is larger this January, presumably, than last January.

Yes, yes, and that's going to be true probably over the next year also.

Which provides you some ongoing, if you will, sort of base-load of business.

True.

Okay. Is that part of the reason you may be feeling somewhat more constructive about this first quarter relative to last year's first quarter when January started out at a stronger pace? Or is it largely just the improvement in the operations themselves.

I think it's more the improvement in the operations. A lot of the changes that we worked through over the last couple years, the improvements that we put in place, I think we're starting to see benefits from it. Part of it is freight mix.

Right. And then Pat commented that there have been some price increases instituted in the floor coverings Carpet business. Have the price increases been fully implemented, sought and implemented? Or have they just been sought?

It's both, Nick. Some have been implemented, some are still coming.

If those that are coming, meaning presumably requested or about to be requested, are done so over the next short period of time, does that pretty much bring you up to pretty much take in to account your major customers and the seeking of increased prices as would be pretty much completed?

With the global logistics, Xpress global logistics largest floor covering customer, about 60% completed now, the other 40% will be completed by the first of March. That will be for the year.

Okay. Okay. Thank you very much. I appreciate it.

Thank you. .

Mr. Doug Cole is next. Mr. Cole, please proceed, sir.

Did you guys mention the length of haul in the quarter?

No, but it came in right around 850 for the quarter.

Okay. Max I thought I saw a press release that talked about a new trailer tracking and monitoring system to, I think it was Aether systems. Could you give me a little summary of that. Is that the cost of installing those in the fleet, is that in that cap ex budget that Ray mentioned? And what does that do to our monthly? And what's the monthly cost of installing that?

Well, the cost of installing obviously a new equipment will be part of that new equipment. The cost of installing in equipment that we have will probably be incurred as a one-time capital expense, I'm assuming. .

Only partial is in there, because it's not built in to be put in to all trailers this year.

Take three years to get the whole trailer fleet equipped. The tractor units will be converted probably for the most part during 2003. .

Okay. On the trailer side, you have just come to the decision that it will drive the trailer to tractor ratio down and the savings there in terms of capital is the reason we go there? Are customers demanding it? .

Customers really aren't demanding it yet. The benefits that we saw was some reduction in trailer to tractor ratio and then also reduction in cargo theft expense and then probably the biggest gain is the ability to look at your trailer fleet and where your trailers are at, where it's in the process. When it's loaded, when it's empty, so we can cut the cycle times and it will help us automate our dispatch process so that it takes less people to drive.

Okay. This is just trailer. There's no change planned currently for tractor communications? .

Tractors are going to be converted over to the Aether system also.

Okay. .

That's already been started, Doug.

Okay. So just spread out over the next two, three years and the cap ex number you gave us is still good, including those.

Yes.

Max, what about the engines? I know, I guess you guys are primarily going to be Volvo and Cummins, looks like so far. But didn't you test some of the Detroit's too? David spoke pretty positively yesterday on those engines. Have you guys been running any of them?

We have got the first ten about a week before Christmas, and I guess my opinion is, it's kind of hard to make a good decision in less than 30 days and truthfully you really won't know until the engine is about three years old how they really turned out. So that's part of the reason in our cap ex it's really back-end loaded. What we're doing is we’re going very conservatively in the first part of the year, we'll probably have 400, 500 of them that will be more loaded towards the backside of the year so that we have a chance to look at the engines, see how they're performing, understand the issues and then see if it's economically feasible for us to continue to upgrade.

Okay. All right. Make sure that's all I had. Thanks.

Next question from Nick Farwell.

May I just explore for a second the potential operating leverage in the Global Xpress business? If my estimates, using those perhaps as a template, if in fact you earn in the carpet business slightly less than, say, $2 million and lost about $1 million, say $1.2 million or so, netting out operating income of $600,000 that you reported, that suggest that's the carpet business on volume of about almost $74 million, had a 3% operating margin and obviously you lost money in the airport business. Can you just give us some sense of what you think are reasonable, acceptable levels of profitability in, say, '03 and perhaps a target looking out two, three years in those two businesses?

Well, if you look at the carpet side of the business, about 5%to 6% return is probably as good as it gets. If you look at 2003, on airport to airport, we would like to think that we can turn it positive this year and probably contribute maybe in the range of a couple percent or so. As we get in to '04, I think that you'll see airport to airport will be a pretty positive contributor, but I think that you see carpet and floor covering basically will stay somewhere in that 4% to 6% range, because that's where it historically runs. If you look at some of the other services that they're going in to, the pool distribution to a great extent that's just another incremental increase in the revenue stream.

Generally the same level of profitability?

Probably so.

Okay. So just hypothetically, if in fact you generated something like 3% in the carpet business this year, and you can maintain 3%, maybe it's 4% next year, a function perhaps of the timing of the recent contract price increases and obviously other factors, that you may have modest increase in profitability in three and to a lesser extent four, but the real swing is going to come from airport to airport going from a loss of some perhaps a million, a million two, to a level of profitability that could of course increase rather dramatically in '0 4, is that a simplistic way of looking at it?

I think what I would say to that is, we obviously, we expect in the upcoming year to have better margins in the carpet side of the business and improved performance in the Xpress, I mean in the airport to airport, you know, overall margin was relatively small for the year, so I don't think it's, you know, somewhere between 2% and 4% is probably not a bad look at the upcoming year.

And that's, you're saying that in aggregate, I assume.

I'm saying combined.

If for example we used $130 million as an estimate, that level of profitable, assuming that was achieved, might be closer to $4 million, 3%, I'm just throwing numbers out, versus the $600,000 it was reported this year? My numbers, my estimate, that kind --

We don't consider that margin this year to be representative of what that business can do.

Right, okay. Thank you. .

Next question from Tom [inaudible].

I had a couple more follow ups here. You talked about replacement trucks, sort of in general but didn't really give a number, how many trucks you would hope to replace this year.

Well, it really depends on the engine, again. If the engine performs within the 1%, --if it stays within the fuel mileage that the engine manufacturers are telling us, which is 4% to 5% degradation, if we don't have major issues on the engine, as we take them in to our fleet, drivability and break-down type issues, then you may see as many as 1500 trucks being traded with 1500 new. Part of those obviously will be leased. If you see that the engine is not performing, then we have got the ability to run some of our older trucks on up to that 52, 54-month level, maybe 60 months before we trade them. So we have some time on a big percentage of our fleet. We do have some trucks at this point at 52 months, those are going out for the new trucks and then we will probably go pretty light until we see what the new engines do.

52 months, sort of un-chartered water for you guys. How are those trucks performing in terms of availability, maintenance costs, et cetera?

Actually it's turned out to be better than we anticipated in some areas. Availability has not been a big issue if you exclude one engine issue, we have with Detroit. Cost is probably cost us a couple cents per mile in additional maintenance when you look at tires and other maintenance issues, as those trucks go out, you'll probably see maintenance start to roll back down. As far as availability, if you exclude the engine issue, it's been extremely good.

Really it's been the tire cycle that's really cost you more than the maintenance cycle, so that the just the pure maintenance has really been --

One thing that we do that most people in the industry don't do is we have always inspect extended life components in case we needed to run tractors longer and that's paid off in the cycle.

Okay. Then I wanted to pinpoint the airport business again. You did mention of course you didn't hit your break-even goal. You did make some optimistic statements, but it was still pretty open-ended on when you thought it could be break-even or a little bit better, you were confident it would ultimately contribute to margins, but I realize the economy makes that difficult, but is this going to be a '03 event, you think?

I think it's going to be a '03 event. If you look at part of the issue that we have there, we opened quite a few locations that customers asked us to open, and some of those locations aren't to the level that they're at least at the break-even point at this point. And if you look at, say a location say and pick a day, say Tuesday night, if they have a trailer goes out with only 5,000 pounds on it, obviously you're not going to make a profit on that. So in those markets that's we have opened and we did open several during 2002, in order to give our customers what they needed, their goal right now is to fill those trailers. And if you look at your long-haul cost and your overhead at the dock, you almost have to look at it as a fixed cost, so at this point, we may look at doing some things in pricing which we haven't done, in order to gain more volume to fill those trailers. That will improve the profitability.

Okay. How many facilities are you up to, approximately, right now for the airport service?

With agents we have about 81 facilities out there, airport and carpet. I don't remember the exact airport. I'll have to get back to you. I don't remember the exact airport numbers. I'll have to call you. It's 81 in total.

Okay. I think you launched with 29 or something?

Yes, sounds about right.

So you think it's like more than 50 at this point?

No, no, I don't believe so.

Then I guess I wanted to go back to a comment, Ray, you made on potential improvement in the dead head, I'm not trying to pick on you here or anything, but you thought there could be another 100 basis points of improvement there. You're at a 97-something right now. Go back to the late '90s, you were under 9%, but then ever since you bought PST it's been 9% or more and with the growth in regional and dedicated, which are shorter haul and i.e. tend to have higher dead head, I'm just --

My comment was based on the business we have today.

Okay.

That I think we, as a corporation and our operations people, when you look at our over the road and the truck that we have in the over the road and the lengths we run, realize our dead-heads too high. Obviously as we change our mix the target changes. But right now, I think we, our management group all feels that we have too much overhead, I mean too much dead-head in the over the road and in some, you know, where we're expanding in regional sites, some regional business has too much overhead until we get the density so that’s where the improvement comes, I would agree that --

We actually saw weeks in December where we're in the 9% and below range.

Okay.

But we think that we can push it down 1%. Assuming length of haul stays the same, we think 1% is being realistic. As length of haul goes down, then that number is probably going to change with it.

Sure. Okay. And then lastly, what's your approximate number of unmanned trucks setting aside wrecks, trades, the usual variables?

If you look at wrecks, trades and trucks in the shop, which we count trucks out of service each day until the shop turns loose of it, we run somewhere in the 120, 150 range. But that counts everything.

Okay.

And as big as we are, you know, you're probably going to look at a minimum of 100 trucks between wrecks and engines and things going through the shop at any given point.

So maybe 20 to 40 is sort of a talking point just if you had 30, 40 more drivers today, would you satisfy everything.

Today, I think we have everything full.

Okay.

If you looked at the fourth quarter, we probably average anywhere from 20 to 70 trucks at any given point.

Okay. Good. Thanks for the follow up.

We have a question from Nick Farwell, please go ahead.

A quick follow up. I notice interest expense sequentially was basically flat, up slightly. Based on your internal projections, would you expect debt reduction and interest expense to decline some modest amount if you annualize the fourth quarter?

In the upcoming year? .

Yes, I'm sorry, in '03.

Yes, yes. Based on our present plans for expenditures and financing and leases, I would expect we would have declining interest as we go through the year, after we get through the first quarter.

So perhaps a number something like $12 to $13 million versus the $13.4 of last year?

A small decline.

Yes, okay.

That's absent a quick ramp up in interest rates, but even with that, a large portion of our debt is fixed rate.

Right. Down modestly seems to be a fair outlook at this point in time. Would you be -- roughly what amount of debt do you think you might be paying down this year, Ray, if you hit your internal plan?

The only, I will say a number, I mean we continue to pay down I think we'll be in the $10 to $15 million range next year as long as we maintain our mix of leases versus cap ex versus owned equipment, that would be the only thing that might change that.

I was assuming that would stay the same. Unless you decided for whatever reason you could lease the equipment at a much lower rate.

The market for leased equipment for whatever reason turns out to be very good, then that might influence me to do something differently.

Right. Okay. Thank you.

Thank you.

Gentlemen there are no further questions in the queue.

Okay. Good luck, thank everybody for your participation. .

Ladies and gentlemen, this concludes the U.S. Xpress Enterprises conference call. Thank you for your participation. You may now disconnect. .