US Xpress Enterprises Inc (USX) 2003 Q2 法說會逐字稿

Good day everyone and welcome to the US Xpress Enterprise Incorporated Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Tripp Sullivan of Corporate Communication. Please go ahead sir.

Thank you, good morning. Thank you for joining the US Xpress 2003 Second Quarter Conference Call. On the call today will be Max Fuller and Pat Quinn, Co-Chairman, Ray Harlin, Chief Financial Officer and Jeff Waterberg, Executive Vice President of Operations at US Xpress and Bill Lusk, President of our Xpress Global Systems 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 limitation these risks and uncertainties include economic recession, downturns in the customer's business cycle, 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 and press releases in periodic reports on Forms 10-K and 10-Q. Now I'll turn the call over to Ray Harlin to summarize the operating results for the quarter.

Thank you Tripp. Good morning. We will briefly discuss the results of our operations for the quarter and following my comments we will be available to respond to any questions. During the second quarter, we continued the momentum of year over year improvements and the operating results of each of our business units. This was achieved despite the continuing lackluster economic environment. Overall, our consolidated revenues increased 7.6% to 231.9 million and our consolidated earnings increased to 2.2 million or 16 cents per diluted share compared to 931,000 or 7 cents per diluted share in the comparable 2002 quarter. This represents the sixth consecutive quarter of year over year earnings improvement for our company. Contributing to the growth in revenues was our truckload operations, which increased revenues excluding the effects of fuel surcharges by over 3% to 197 million. This increase in revenue was primarily the result of a 2.9% increase in revenue per loaded mile to $1.286 representing primarily increased rates in our over-the-road and team expedited operations.

As in the first quarter our recent owned dedicated contract operations experienced significantly higher growth rates. Revenues of our Xpress Global Systems operations for the second quarter increased 25.3%. Strong demand from existing customers and new business awards from both our retail and manufacturing customers resulted in an increase of 24% to 22.9 million and revenues for our floor covering distribution operations. The addition of new customers and the increase in volume from our existing customers enabled us to increase revenues in our airport-to-airport operations by over 32% to 12.5 million. Earnings operating income our truckload operating income increased 10.7% to 5.7 million. We posted this gain despite a generally sluggish freight environment for much of the quarter, which combined with a greater percentage of revenues from regional and dedicated contract business contributed to 2.9% decline in utilization based on average revenue miles per tractor per period.

Operating margins in our truck load operations after considering the impact of interest improved by almost 1%. The improved operating margin was driven by improved pricing, the increase in revenues and controls over fixed overhead expenses, which increased at a lower rate in the revenues. These improvements were offset to a degree by increases experienced in insurance and claims expense resulting from higher premiums in our excess coverage and increased claims expense. We also incurred increased maintenance expense on a per mile basis of approximately 7%. Due in part to our decision last year to extend the life of our tractor fleet. As I will discuss in a moment we expect these maintenance expenses to be somewhat lower in the second half of the year as we continue to replace tractors. Operating income of our Xpress global system operations increased to 1.2 million in the second quarter compared to 454,000 in the comparable 2002 quarter. Operating income in [indiscernible] floor covering distribution operations improved significantly as a result of improved pricing and higher yield as we continue to gain market share in the floor covering industry

On a standalone basis the airport-to-airport operations incurred an operating loss for the quarter. Although we experienced significant improvements in the margins within this operation in the second half of the quarter has freight density within our existing national airport-to-airport network accelerated. From a balance sheet perspective we continue to reduce our outstanding debt as long-term debt including current maturities has been reduced since December 31, 2002 by approximately 35 million to 132.6 million at June 30, 2003. These reductions reflect the use of cash generated from operations of approximately 18.3 million year to date and the use of operating leases to finance a significant portion of our revenue equipment additions and replacements during the first half of 2003 due to income tax considerations. As a result, proceeds from the sale of equipment exceeded our capital expenditures by $21.3 million. Our liquidity remains very strong with over 37 million available for borrowing under our revolving line of credit. While we are encouraged by the progress we have made in 2003 in improvements to operations and profitability of each of our business segments we have not achieved the earnings level we consider accessible

In our truckload operations, our goal of 3% pricing improvement for the year and maintaining strict control of our overhead expenditures are largely on target. However, our objectives of improving utilization in the range of 1 to 3% and reducing debt head [phonetic] by 1% have not yet been accomplished in part due to the sluggish freight environment. Achieving these objectives would provide significant earnings leverage in the second half of 2003 for our truckload operations and we are focused on meeting these objectives. During the quarter our average tractor fleet declined slightly from the first quarter as our owner operated fleet contracted slightly and we decided to accelerate the turn in of some of our older tractor fleets. Average age of our fleet has improved to 25 to 26 months and our plan to replace over 800 tractors in the second half of the year should further reduce the ages of fleet. For the remainder of the year we expect our average fleet to approach 55,450 to 55,000 unless we experience a significant improvement in the overall trucking and freight environment. With respect to Xpress global operations our objective of significantly - of significant margin improvement in our floor covering distribution operations are being achieved while our internal profitability expectations for our airport-to-airport operations have not yet been met. However, we are making significant progress in improving our density and the efficiency of our existing network. The key is to making this operation profitable every month. We continue to be optimistic about the future of this business and the growth opportunities it presents. We thank you for participating in the call today and our management team would be glad to respond to any questions at this time.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question please do so by pressing the "star" key followed by the digit "1" on your touchtone telephone. Also after using a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment. We'll proceed in the order that you signal us and take as many questions as time permits. Once again that is "star" "1" if you have a question. We'll go to John Barnes with Deutsche Bank.

Hey guys. It looks like you had a little bit more of a shift to off balance sheet debt - the rental expense was up again. Can you just give me an idea what you believe is the right balance of on balance sheet and off balance sheet.

John, it's Ray Harlin. Really the determination of on balance and off balance sheet depends on two things. Number one our tax situation whether or not we can use the depreciation in the current year. And number two at times the market for leased equipment is better than the market for direct financing from a spread standpoint. So those two factors determine it. In the first half of the year, because we don't need the depreciation for tax purposes because of loss at airport that we had. We have used - we will probably start increasing ownership in the second half of the year to take advantage of the income -- taxable income we'll be generating.

The tractors that you're going to take on the - replacing the 800 trucks in the second half of the year. Can you give us an idea of what type of equipment you're bringing on and especially with regard to the type of engine you're bringing on?

Well, actually we're bringing on three different brands of tractors, Freightliner, Volvo and also Peterbilt, which each one of those have different engines in them. Since the rules have somewhat changed with the engine [guides] we've decided let’s - let’s put a variety of them out there to test different engines to find out which one is performing the best and they’ll probably make up what we buy next year. So at this point we do have the Caterpillar [ACERT] Engine coming in, which we haven’t received yet. We have a [Cummings] [phonetic] [indiscernible] engines and we also have Detroit engines. So, but as we get deeper into this year, we'll start getting results on the different products and we'll know, which one to focus on primarily next year.

Okay. Any experience thus far that you can share with us?

So far the fuel economy is one of the major negatives. The Detroit and [Cummings] is showing around a 5 to 6% degregation in fuel economy. The truck cost is quite a bit more for that engine and at this point those are the two negatives. Most of the issues that we have are all small porky issues that early in the cycle with a new truck - you pretty well work those out and so far they worked pretty good. Their performance from a driver's point of view is extremely good, very responsive. So some of the negatives of the industry and people were saying that [what] will happen with these engines has’nt realized at least at this point.

Okay. Last question I will turn it over, can you give us an idea what you think the timing is for the airport-to-airport business to actually begin to show consistent profitability?

Bill.

We're -- I think on track for the balance for the year, we believe that the airport-to-airport business and all of our businesses within the Xpress Global operation will be contributors for the second half of the year.

And the acceleration and density, can you just give us an idea where is that coming from? Is it market share gains? Is that have you seen any signs of life in that business yet in terms of rebounds in tech shipments and things like that?

Well those are great questions - and the answer is really yes to those. We are definitely seeing an increase from hi-tech producers; consumer electronics like PCs, televisions, plasma screens that type of thing, as well as, even base products like computer chips. But we also have a very strong focus on growing our business with national accounts and frankly in our first couple of years of business we were supported more by smaller forwarders and the airlines. However that's changing at this point. We are receiving some significant business awards from the major domestic and international forwarders. So that really results more from a change in our marketing focus perhaps than any improvement in the economy.

Okay. Thanks for your time guys.

Thank you.

And our next question comes from Chaz Jones with Stephens Inc.

It's actually Dan and Chaz. Good morning guys.

Good Morning.

Congratulations on a good quarter. I wanted to ask a couple of questions here if we could. Just to start off with I'd love to hear a little bit about the current demand environment, what you saw through the quarter and how the water feels to you right now.

Well, you know, I think that the quarter was mixed and there is certainly some sluggishness in the economy. You know we’ve seen it I think, a little better at the end of June and at the beginning of July and talking with customers over the last couple of days this week. [It we stay] to be optimistic about the second half improving and being better so. It is not horrible, but it is certainly isn't great.

How would you characterize the last two weeks of June. [We] heard from a lot of carriers that it was a pretty robust period. You would expect that it would be simply because it was quarter end, but was there anything to or is there anything to discuss about the quarter's end that you’d find unique in anyway?

I do not think particularly. I think it was, you know, it was - it was pretty handled pretty smoothly by our people. Again I think there could have been more freight moved through the system at that period of time. We didn't see it but we were maxed out to the end. Although I think that the first part of July maybe just where the holiday fell. For the first part of July, its feeling a bit better than what it felt a year ago and it’s showing, you know, that we did not have that bit slow down that sometimes accompanies the 4th of July.

Well, its helpful. Thanks, Pat. What about fuel? It is probably a question worth asking here. If you do the rudimentary math and look at the change in fuel surcharge versus the change in fuel and fuel taxes, I think that math may be a little misleading. Ray, could you talk to us a little bit about that?

Yeah Dan. As you know, fuel this year, I think the DOE rated average was up 13% year-over-year. But since we had a decline in trend and fuel cost this year during the quarter, in essence, after you take into account fuel surcharges, and you take into account the amount that we passed on to [inaudible]. Fuel was basically in neutral year-over-year. Very, very small positive left in a penny a share.

Okay. And then this is probably a question worth asking just for everyone's modeling purposes moving forward but can you talk to us briefly Ray about how you allocate revenue and expense for the carpet and logistics business and if at some point in the future that allocation changes in line as the business grows?

The carpet and the -

Airport-to-airport, yes?

Airport-to-airport operation. You know, obviously the overhead parts. They try to do it on an activity base. And [indiscernible] where we have [inaudible] docks. But there's a lot of different methods but we refine that as we go, but it’s primarily on an activity based methodology.

Okay.

You know, the revenues are directly attributable. The line haul is generally separable easily. It’s really the overhead and the docks – that’s because we put the two together that we have some allocations that need to be made and again we try to do it on an activity basis.

That would be approximately 35 million in revenue that was hauled this quarter. How much was hauled by US Express capacity?

Over $7.5 million.

Thanks, guys. Appreciate it.

And now we'll go to Thom Albrecht with BB&T.

Hey guys. A follow-up question there. You alluded to the fact that your expectations for the carpet portion of Express Global Systems is improving, but you didn't want to provide any numbers there. And you also alluded to the fact that you expect the airport side to be a positive contributor. Could you help us understand? I mean what is a positive contributor $100,000 maybe in the second half of the year. Could you just talk a little bit more about that?

Yeah I think Tom, its fair to say and Bill Lusk said it earlier that we expect [comp] rate on a profitable basis in the second half of the year. We are not in our minds counting on a significant contribution from the airport-to-airport business. But we do expect it to be profitable. And that excludes the profit side of the business in the truck [indiscernible] because we haul a lot of that freight and we have through to our subsidiary market rates.

Right.

So, that's on the standalone basis we expect them to be profitable. Before covering distribution businesses essentially doubled this margin in the last - over the last year. And we expect that the margins in the second quarter will continue into the third and fourth quarter and possibly with some improvement.

Okay. How small was the loss in airport during the second quarter? I mean if you're that close to being profitable in the second half of the year it would seem that your ...

Thom, we have not disclosed bottom line numbers because of -- primarily because of the allocations that have to be made and, you know, [let this progress] so ...

Sure.

Until we start disclosing the numbers, I guess, I'll stay away, but I do think we feel comfortable in saying - we hate to say it - that they did operate at an operating loss.

Okay. And how about the outlook for rates, you've done a pretty good job especially with as much of your business it is still a long haul. Last two to three quarters to get your rates up. Can we look for 3% -- 3.5% rate hikes year-over-year in the second half of this year?

Tom, this is Jeff Waterberg. And I guess, you know, we've set a goal of 3% for the year, and we're encouraged by what we've produced so far. And we're going to continue to go after that.

Okay. How much of, you know, for example would you turn in 173 company trucks during the second quarter? And I know part of that was a decision that just accelerates trades, but was any of that tied to maybe just exiting some business that you found less desirable?

We do that almost everyday. Not so much that we return trucks and just because we exited business, but we are constantly looking at each [lane] and that bottom 20% as we're looking at how we are allocating equipment to it. If it's not profitable or not as profitable, say at some other [place], then we’re actually allocating the trucks to the more profitable freight.

Okay. Has your turnover in that lower 20% accelerated the last quarter or two? Because it does seem like you are beginning to show some improved yield management and just wondering if that lower 20% is turning over a little bit quicker as you focus on this?

[indiscernible] so. We started this [program] last year. And it accelerated quite a bit in the first quarter, and even more so in the second quarter. And we think that with any slight improvement of the economy that 20% is almost totally replaced with more profitable freight. So we think that it will continue to accelerate. But that bottom 20% is what we'll constantly work on. It’s not so much always just the customer, a lot of times its [lined] its way out of wack or maybe [crossing] in that [way] for other customers is better. So we had to bring that customer up to par. So its really part of blocking and tackling that we do on a daily basis.

Right. What about -on the owner/operator? You guys did really a good job in '01 and '02 when it was very difficult to get owner/operators for the last couple of quarters - now you're seeing that shrink a little bit sequentially. Should we just assume we've entered a period now that's going to be more difficult to get owner/operators and if such maybe not model any growth there?

Well, there’s a couple ways to look at. We are seeing more pressure on the ability to get additional owner/operators. We still expect to see some growth there but in talking to the guys at Peterbilt yesterday – they said that they started to see more sales to that type of individual here over the last two months. So, assuming that individuals coming back into the market in bigger numbers it will probably make it easier for all of us to be able to attract more owner/operators. But I would expect to see some slack of growth in those numbers and Thom, we have not changed our strategy, it’s a tough environment for owner/operators [that all] out but our strategy is still to make the owner/operator a [higher] proportion of our fleet at we look forward.

Okay Ray, you also mentioned on the maintenance cost per mile they were up without I think 7%.

Right.

As they - I guess we really shouldn't look for 7% improvement in the second half of the year though it’s usually doesn’t, you know, even Steven doesn’t really [hope]

Clear. I’d say the key to it is - we can achieve 7% improvement if we got the utilization - that we met utilization objectives and it picked up. So I think we'll see improvement for sure just all things being equal. But if we see improved utilization and then we'll start to see improved maintenance cost on a per mile basis.

Okay. Can you talk about your thoughts on driver pay - I mean about half the industry is still saying that the drivers are abundant and funny and then a few others are kind of hinting at it, getting a little more difficult. What is your read on that right now? And do you believe that we will have a driver pay increase sometime in the next 12 months?

I'm not sure where these guys are at -- or they’re saying that drivers are not a problem because as we've gotten deeper into this year it continues to escalate. We do think during the second half of the year we’re going to have to do, what we're calling, some pay adjustments and probably there won't be so much across the board as certain segments like maybe regional or dedicators [phonetic] or certain segments may have to have some adjustments to their pay. But I do think the driver situation has continued to get much harder as I talk to a lot of my competitors. They're starting to see issues in that arena that they haven't seen before too, or at least over the last year or so. But we did have a substantially more pressure on driver's in this company than we've had over the last two years and expect that to continue maybe even continue to accelerate as we get deeper into the years. That's going to be a more competitive environment.

So are you saying then the adjustments are more likely to be in dedicated and regional or in the long haul? I guess I misunderstood you Max.

It’s going to be more in a segment as opposed to across the board.

Okay.

You look at our driver pay and say you want to increase it by 2% or 3%. That’s probably not how it's going to happen. We'll look at the competitive environment that we are - in say regional and see where we need to be. We’ll look at the competitive environment on themes. We look at the competitive environment, maybe on our solo drivers. So we continue to look at the pieces, and we think that we’ll have to do some adjustments to those pieces but maybe [aggregate] over all probably won't be as great as 2% or 3% like some people had talked about.

Okay and then I guess, Pat, as you described kind of end of the quarter freight volumes, I don't know that I heard you really talk about how the first half of July has gone. I sense from a number of carriers that there is a little bit of glimmer of hope out there. July for a July, I should say, has not been too terribly bad. Can we get some comments there?

You missed my comments, Tom, because that's exactly what I said that it is better this July than traditionally, and it doesn't seem we have that post 4th of July slowdown we've had. We are cautiously optimistic about where July is at so far.

Is that retail and manufacturing related? I know Bill talked about the consumer electronics on the – more the XGS, but I'm wondering if that's kind of both of those broader sectors for US Xpress or is it more retail at this point?

Most is retail and consumer products that we're seeing in it. We don't really have all that much manufacturing itself so...

Okay good. Thank you for the time.

Thanks Tom.

And we'll move to Michael LaTronica with Morgan Joseph.

Good morning gentlemen.

Good morning.

A nice, solid quarter. Congratulations. Max, I have a question for you about the stock market. Last time we spoke we talked about taking advantage of opportunities as capacity started to become an issue and that it might be advantageous to divert some available capacity to the stock market to take advantage of may be some better rates. Are you seeing any of that?

Actually at this point not much and some cases that were [argues] using stock market [processing] to replace some of this bottom 20%. And we still think that we’ll continue to accelerate [indiscernible] firmness in the freight environment.

Okay. And I got to get a faster finger because most of my questions have been answered. I just have one house keeping issue of link of haul in the quarter versus a year ago.

It's really almost exactly the same.

Okay. Because I expected that with Global starting to do more business that that might be dropping a bit.

You mean for the quarter versus last year?

Yes.

That's the same.

Okay. That will do it. Again, good quarter thanks.

Thank you.

And now we have Ed Wolfe with Bear Stearns.

Hey guys.

Hi Ed.

Hey Ray, can you give a sense for CAPEX for the year, some guidance?

Yes. I think that we will be showing [cash] CAPEX in the probably now in the $25 range.

That's a net number, net of proceeds?

That's net.

Okay. And - so most of those replacements are going to come on leases?

No, in the second half of the year, quite a bit of the replacement will come on as direct finance.

Okay. When the model. We got driver pay that around the edges is going to be going up. You've got more equipment as a percentage than a year ago as a rental expense, as opposed to being capitalized. So there's more lease payments and then you've got the new equipment coming on with slightly worse fuel mileage and a higher price. So how are you going to offset these higher costs going forward? I mean, utilization is something that you've talked about it, and Max talked about. Is there anything else on the cost side?

Number one; the trucks coming in obviously don't represent the entire portion of our fleet. So that impact is dedicated somewhat until you replace your fleet over the next two years. Obviously, we're operating that -- left on a optimum utilization. Utilization has a dramatic impact on your -- not even -- not only on your fixed costs but on your variable costs because there’s always a fixed component to that variable cost. We have seen these grow revenues but we keep our fixed cost at pretty much at a constant level or, [less] than our revenue increases. Driver wages, the fact that we think we will probably be making selected increases in driver wages but it won't be across the board and it will be done over a period of time. So, there are a lot of areas that provide opportunity of growth to continue to improve and also, it’s not just pricing, it’s yields on the loads - it's were we run the [lanes]. It's [inaudible]. We think we have a lot opportunity to take care of the potential cost increases we see coming down the road in the, both the short term and then the longer term basis. And also if you look at the leveraging affect of rate increases as well as increased utilization that leverage effect is pretty strong. So any improvement in either one of those will help tremendously.

By utilization, you mean, miles per average tractor?

That's right, yes.

And where can that go to, I mean, we're at 31/7. Where can that be?

This depends on who we’re talking to in this room. I think probably using Ray’s figures somewhere in the 5% range, obviously I'm more optimistic, so my numbers [indiscernible].

What's the timing to see them improve 5%?

Well, it's been - partially on the economy. We can go out and increase volume, but as we increase volume we'll probably have to reduce rate to do it and we think that yields too are low on freight today. So we decided not to grow the fleet until yields come up. To a certain extent, a lot of our competitors are doing the same thing - we’re all waiting instead of going out and trying to increase utilization and adversely affect maybe the bottom line. Our goal is to hopefully [abate]. And that's where a lot of our successes have come from so far.

Okay. And, how about in terms of direction of insurance? Do you get a sense of -- I'm surprised that I'm hearing from a lot of competitors that insurance yields - like it hasn’t bottomed yet. You get that same sense?

That the...?

That insurance costs generally haven't bottomed yet?

I don't think they’ve bottomed -- I think we've seen that the higher percentage already take place for the larger carriers -- the larger carriers are really looking at excess coverage when it comes to premiums. But they're still [indiscernible] in that excess market.

Do you have anything that comes due the next 6 months?

We are in the market in September.

And that's for your umbrella or for what?

For our umbrella.

And our partners.

Our partners don't expect to have a lot of problems with our umbrella - and I probably should’nt say this but I'm semi-optimistic that we will not see a significant increase from where we are [indiscernible].

But will you take more exposure?

That may be a little more optimistic. But again I'll state that's a small part of our total insurance and claims calls.

Yes.

So the key to our success and any carrier’s success of the top carrier’s is the safety program and controlling the claims that you have and that's the key to whether your insurance expense is going to go up over the next year or so.

Okay. Just switching gears for a second, a question for Bill. With the airport to airport, can you give us a sense what the base of the revenue is right now and also talk to pricing? Are you seeing pricing stabilizing in the industry or is it weak or is it strengthening or is it flat?

As to pricing, we're actually seeing some strengthening. And frankly, we have never elected to participate in the gutter pricing arena. But our belief and our plan is that we’ll be pretty well positioned to move forward with a reasonable increase something in the 3% to 5% range. We're targeting in the September-October time frame. So the short answer is yes, we're seeing pricing firming in that business. Now, I'm not sure that I understood your question as to the base of revenue.

How much revenue did you do in the quarter in that business?

We did 12.5 million.

12.5 million. And is that a fair run rate if you multiply that times four or is there something seasonal?

Generally speaking, the third and fourth quarters are stronger by 10% to 15%.

Okay and I think you said either in the press release or it's growing 30% or something like that.

32.

32%. Thank you very much everybody for the time.

Thanks.

Thank you.

Nick Farwell from the Arbor Group is next.

Good morning.

Hi Nick.

Max or Pat, you talked about the tone of business in an aggregate sense. Could you talk a little bit about the long haul portion of your business? For example, if you look at the operating revenues, you are up 3% in truck, I’m grossly assuming that that was – that regional dedicated may have grown faster than that and perhaps long haul was less than that, or actually had a decline. And I'm curious if that is in fact the case and also if, in fact, you're seeing some improvement in long haul here in July.

That is the case, Nick; you've described the situation. You know, long haul always tends to somewhat improve in the last six months of the year. As your major retailers etcetera start either filling warehouses or moving it. So we're seeing some firming and I don’t know if that’s improved [indiscernible] but certainly resources have moved that US Xpress into the shorter regional operations and dedicated during the first half of the year continue at this time to still slightly -- continue to do that.

If, in fact, there was a rather noticeable improvement in long haul, would you be strapped in terms of your availability of capacity?

I think where [indiscernible] enables to improve the yields on those. You know, you've got 20% maximum talking about. You just replaced those at that point in time. You picked the best of the most profitable freight to move.

If you listen to me, we got at least 5% unused capacity in the utilization and if you listen Max we got 10% unused.

We’re not adding drivers, but we’ll get the 5% first and then we'll worry about the next part.

Okay.

[indiscernible] 500 shorts overninght. So we saw [indiscernible] increase in demand it would be a wonderful opportunity for us to increase our yields and increase our margins dramatically.

So really we're going to see it first or we should see it first in yields pretty quickly.

Right.

Okay. Bill, just to follow on a little bit on the logistics. Is it reasonable to expect a continued roughly 20% growth rate in the carpet business in the second half of the year given the price increases that took place in the first half?

Yes, it is. We're seeing extremely strong demand from the big box retailers and have a number of the smaller big box guys joining the customer base, yet, this year along with some fairly sizable commercial product retailers since that business is rebounding. So we're real comfortable with the idea that we should be able to maintain that 20% or so rate of growth.

And wouldn't it also suggest you get some leverage so that margins if they were something in the - my numbers were say 6% here in this quarter but as that rolls through into the second half of the year, certainly the third seasonally better third quarter that you should some improvement in operating margins?

I believe that we will and we continue to move ahead with price increases in that business. And the pricing has really firmed there and we have some pricing power that we can count on.

Hey Nick, I appreciate this question. We've just increased Bill's budget for the second half of the year.

Bill, he asked me to ask a question. Looking at airport to airport, does it feel comfortable to you given the current environment that you can sustain roughly a 30% year to year gain in revenues in the second half of the year?

Yes, it does.

To what degree, does the change in the customer mix as you depicted it just earlier in the call reflect to say major freight forwarders reflect you're taking share from forward and perhaps reaching a critical mass where some of the large freight forwarders are feeling comfortable to divert some of their freight to you guys? What are the other factors?

Well, I think that's an important factor. Those larger forwarders have had now a little over two years of experience with us. We have a network that is comparable to our largest competitor and the quality of service that is comparable.

And pricing.

That frankly is a little stronger than our largest competitor. So I believe that with the consolidation that's also going on in the domestic international forwarding business that a larger percentage of our revenue will be represented by those larger forwarders than the smaller ones.

Is it your -- how do I ask this -- is it your expectation that you should see, not only improved profitability -- achieving profitability here in the second half of the year, but that now that you have the current network and critical mass that that level of profitability should be enhanced rather, I'll call it, noticeably in a gross sense for next year assuming that's a relatively stable economy as opposed to dramatic changes.

I think that's a safe assumption. Though we're not basing our performance on that assumption alone, we're also moving ahead pretty aggressively with some operational enhancements that include things like optimization. Final optimization that will help reduce our cost as well.

Last thought on that is, to what degree do you say you need to build out additional terminals in the airport to airport business, or if you pretty much completed that infrastructure.

That is fairly well complete. We have our own company stores in just about every major market or near every major gateway airport in the country, and going forward as we expand the network, we may do so with existing company facilities that don't presently offer the airport to airport service. And that may also be combined with terminal services provided by third parties if it becomes necessary to further expand that.

Is it your sense that as you model this business that it should achieve operating profitabilities at least in concert with the carpet business?

Yes, I think that's fair to say.

And might that be achieved over the next year or two or do you think it's longer time frame.

Well, our hope and my continued pressure would say that we need to do that sooner rather than later.

Okay. Thank you very much. One last question Ray. You indicated that your objective would be, assuming the economy affords you that opportunity to have trucks at roughly 5450 or 5500 at the end of the year, which suggests if you purchase 800 you turn in roughly 650 for the incremental 150. If in fact that takes place and you achieve your current earnings targets, how much debt reduction might still take place if any?

Given all those possibilities, I do not expect us to reduce debt further than it is. In fact I could think it might go up slightly the rest of the year, because we are going to switch to buying versus leasing so we might see a slight increase in debt for rest of the year.

And that means if in fact you purchase 800 -- if you take 800 trucks you'd purchase roughly all 800 out?

No, not all 800.

Yes, okay.

Let's not assume that - but a substantial number of them.

So really it would be in large measure a function of the lease mix still that would dictate the debt reduction?

Really, what would dictate the debt reduction entirely might need to add depreciation as we try to maximize cash flows and the maximization of cash flows means you try to target to where you sheltered your taxes to the extent you can.

Thank you very much, I appreciate it.

Thank you.

And again that's "star" "1." If you have a question, we'll go to Doug Hall [phonetic] with Morgan Keegan.

Congratulations on the quarter, guys. It's John for Doug, and all of our questions have been answered.

All right, thank you.

And there are no further questions at this time. Mr. Harlin, I'll turn the conference back over to you for any additional or closing remarks.

Okay. We thank everybody for taking part in this conference, and we'll see you next quarter.

That does conclude today's conference call. Once again, we thank you for your participation.