US Xpress Enterprises Inc (USX) 2003 Q3 法說會逐字稿

Please stand by. Good day, everyone. Welcome to the U.S. Xpress Enterprises Incorporated third quarter 2003 conference call. Today's call is being recorded. Now at this time, for opening remarks and introductions I would like to turn the call over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Thank you, April. Good morning. Thank you for joining the U.S. Xpress 2003 Third Quarter Conference Call. On the call today will be Max Fuller and Pat Quinn Co-Chairman, Ray Harlin, Chief Financial Officer, Jeff Waterberg, Executive Vice President of Operations of U.S. 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 or 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 its press releases in periodic reports on Forms 10-K and 10-Q. Now I'll turn the call over to Ray, to summarize the operating results for the quarter.

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 third quarter, we continued the momentum of year over year improvements and operating results of each of our business units.

Overall our consolidated revenue increased 8.3% to $238.3 million and our consolidated earnings increased to $2.7 million or 19 cents per diluted share compared to $1.1 million or 8 cents per diluted share in the comparable 2002 quarter. This represents the seventh consecutive quarter of year over year earnings improvement for our company.

Contributing to the growth in revenues was our truckload operations, which increased revenue excluding the effects of fuel surcharges 4.5% to $197 million. This increase in revenue was primarily the result of a 2.3% increase in revenue per loaded miles to $30.3 and a 1.4% increase in average tractors.

We experience substantial increases in our dedicated contract and regional truckload operations as we continued to shift assets to these markets and reduce our assets devoted to the medium to long haul solo truckload market.

Revenues for the third quarter in our Xpress Global Systems grew 23.6% to $37.2 million as our floor covering distribution and airport-to-airport operations experienced growth rates of approximately 28% and 16% respectively.

The floor covering revenue growth reflects strong demand in the floor covering industry along with new business awards we have received over the last year from our retail and manufacturing customers.

Revenues in our airport-to-airport operations increased as we continued to add tonnage to our existing network. Consolidated operating income increased 30.3% to $7.6 million. Our U.S. Xpress truckload operations enjoyed an increase in operating income of 19.3% to $6.9 million.

After consideration of the impact of operating between periods our truckload operating margins improved by approximately a 100 basis points. The improvement in operating truckload margins was driven by one, a 2.8 % increase in revenue per mile, the increase rate reflect success in our continuing efforts to achieve selective price increases and expansion of our dedicated contract and regional businesses in which we generate higher rates than our over-the-road solo business.

Two, we experienced a slight improvement in our utilization as measured by miles per tractor per period, and three, a minimal growth in our fixed overhead expenses in the face of a 4.5% increase in revenue and a 1.4% increase in average tractors.

The extent of improvement and margin in our truckload operation for the quarter was adversely impacted by higher than normal insurance and claims expenses, which as a percent of truckload revenue increased by over a 130 basis points, a portion of which resulted from amounts provided for a significant accident occurring during the quarters.

Operating income of Xpress Global Systems was 688,000 for the quarter versus 40,000 in the comparable 2002 quarter. This improvement was driven by increased operating income in our floor covering distribution operations as a result of increased revenues. Losses in our airport-to-airport operations continued to narrow as we achieved increased volume.

Although, overall our Xpress Global Systems achieved substantial improvements in operating income in the third quarter, results were below our expectation.

From a balance sheet perspective our long-term debt was $150.7 million in September 30, 2003 versus $167.8 million in December 31, 2002. Our debt to total capitalization stands at 47.8%.

Our liquidity is excellent with slightly over $50 million of availability on our $100 billion revolving credit agreement. Year-to-date, we have generated approximately $40 million in cash from operations and net capital expenditures have been approximately $14.4 million.

(inaudible) is approximately 20 months versus the high 20s earlier this year and the trailer fleet approximates 48 months. Given our strengthening balance sheet and approved revenue equipment aging we believe we are well positioned to take advantage of the improving business environment and the truckload industry.

As we stated in our release, looking forward to the remainder of 2003 and then to 2004, we expect the trend of year over year improvements and quarterly operating results to continue given a reasonable economic environment. In our truckload segment, our focus on improving rates and yields while controlling other overhead expenditures has yielded improved margins.

To achieve objectives for the future, these trends in pricing and yield must continue as we and others in the industry face higher costs due to a very tight market for drivers and the federally mandated hours of service regulations that take effect in January 2004. We, along with many others in the industry, will be increasing driver pay over the next six months.

Additionally, we have begun the process of working with our customers to mitigate the impact of the new hours of service regulations. However, it is clear that increased rates are required to cover these increased operating costs. We believe that given the supply of trucks in the market place versus anticipated demand, achieving rate increases to cover these costs is a reasonable expectation.

With regard to Xpress Global we believe the management of Xpress Global has positioned the company for improved results in the future. Given the market shares increase as we have achieved in floor covering distribution market and the continued maturity of our airport-to-airport operations. 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 today. If you would like to ask a question, you can please press the star key followed by the digit one on your touch tone telephone. Also if you are using a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, if you would like to ask a question, press "* 1"at this time and we'll pause for just a moment. We'll first hear from Ed Wolfe of Bear Stearns.

Hello, Ray.

How you doing?

Excellent. You said that the -- I don't know exactly how you worded it, but the -- it sounded like the economy was getting a little better. Can you talk a little bit about what you're seeing and were you're seeing it and in what parts of the country and what regions, what industries?

Be glad to, Ed. Maybe I'll turn that over to Max and Pat and Jeff and our truckload secretary to talk about.

Actually, if you look across the country and look at where business has picked up, the first half of the quarter, it was softer than it was in the second half, second half was pretty hot, almost nationwide. If you look at especially the regional operations, they're relatively busy and all the four areas of the country that we have regional operations.

If you look at certain pockets, like Los Angeles, Chicago, Memphis, Atlanta, those and Dallas, those markets have been fairly hot for the whole quarter. I think that as a quarter continued to grow, you started to see the rest of the nations start to pick up. There's still a little bit of weakness on the northeast, but I think that's been more historical than just being something that just occurred this quarter.

We do see the picking up, the retailers are pretty strong going into this Christmas season. They're looking for capacity at this point. And I really think that it's not just the retailers, it's more across the board probably in the last 30 days than it probably has been in the last two or three years.

Does October feel even better than September? Year-over-year?

So far, October hasn't let up. September was an extremely busy month and the first two weeks have been very busy in October.

We talked a little bit about the driver situation. Have you had to give the drivers some rate increase and where do you see it going in the future, it looks like your driver count is down year-over-year. Can you talk about that a little bit.

Actually at this point, we have not given a driver pay increase, but we do know that we will have to do it. We're doing some studies on the hours of service to see what impact it's going to have in at least the initial work and we're trying to qualify this that it can be as much as a 15 % degradation in solo driver mileage.

If that's true then the driver pay increase has got to be fairly substantial and the rates that we charge customers have to be fairly substantial also, so we're still doing the study. There's still some qualification that the industry has asked for on what the some of the terms in the hours of services actually say. One is, you know, can you split this 14-hour work period and if you can't, then that really restricts our ability to use drivers like we had in the past.

When you talk it over with your customers, what's their response? Do they seem willing to pay an across the board increase to offset this productivity or is it case by case? Is there anything they can do to help you?

Ed, this is Pat. You know, I've dealt with customers the last three or four weeks. Those customers who operate their own private fleets in conjunction with using outside carriers such as ourselves, completely understand what's coming on. They're not being shocked by it at off. They're wondering what they're going to do because many of their trucks are engaged in store-to-store deliveries multiple stops, etc., and that the time constraints with the 14-hour work period is devastating. They understand it very well.

And I think our job is to the remaining ones is to explain to them what's going on, why. So far, yes, I think you know there's a little gulping because it's a big gulp that's going to come, but I think they understand it is coming and there's not much they can do about it.

OK and the process -- I mean your drivers year-over-year are down. Is that something that hinders growth going forward? Are you constrained with drivers right now?

I don't think we're down year-over-year compared to last year 2002. We're about the same place we were last year. The driver market is tight and as we said last quarter, we have not attempted to grow our fleet significantly until we started seeing improved returns, but I think it's fair to say that the market has gotten very tight for drivers. We kept our trucks that we have full, but it's not --.

I'm sorry, I should have mentioned sequentially. I'm sorry about saying than incorrectly.

It's a tight market.

Is it any different in the owner/operator market than it's been? Has that gotten worse, better, the same?

I think it has continued to be a very difficult market for owner/operators, which has really been the experience over the last year. As you see, we've had some deterioration, you know, the economics that the trucking industry has been through has impact the owner/operators also.

On the airport-to-airport side of things, it looks like the revenue is strong again. Can you talk a little bit about, you had talked about putting in a 5 % rate increase on the last call in September. How that's sticking and the profitability of the airport-to-airport piece?

Well, the bulk of our rate increase actually go into effect today and we're at least three or four weeks behind the schedule that we had anticipated for an effective date at the end of the second quarter. That's primarily driven by the idea that we're looking at it on a lane-by-lane basis and attacking those lanes that are least profitable.

And the net effect, however, and the assuming that those numbers stick, will be somewhere in the 4% to 6 % range. And obviously the negotiations with certain larger customers are ongoing, but thus far, we've had reasonable acceptance from them and understanding.

On the profitability side, Ed, as we said, and I think we said that this last quarter, we see months where we are profitable or break-even, but we also see months where we're not there, so what we are not as fast as we would like, we see our operating losses in that segment narrowing. We still believe we're very close to turning the corner.

Assuming the economy holds up would you think you're profitable for the full year '04?

That is our internal expectations, yes.

OK. Thank you very much for the time.

Thanks, Ed.

Next we'll hear from Dan Moore of Stevens Inc.

Good morning, guys.

Hello, Dan.

Good quarter.

Thank you.

A couple of questions here, Ed has covered a lot of them, but to have a few follow-ups. With respect to fuel price comps in the fourth quarter and the first quarter of next year, could you just remind us if you could and it may take a minute and I'll ask a couple of other questions in the meantime, what the impact to earnings was in the fourth quarter in the first quarter as fuel prices turned it up last year?

And then if we could while you're putting your arms around that, if you could give me a feel for where unseated tractors are, if there are any currently?

I'm sorry, what was the second question, Dan?

Yes, unseated tractors? How's productivity there?

We're pretty much, we have the normal unseated that you have you know tractors going in and out unseated I mean turnover of drivers, but we don't have any significant unseated tractors other than those.

What level of pay increase are you considering then? Is that an across the board increase or is it a little bit more target specific?

We're probably going to do more target specific, dedicated obviously may have a little bit less impact than ad hoc Lionel group so it will probably be focused more on different segments depending on how the productivity of the truck is going to be affected.

Max, you talked a little bit about utilization in the first quarter for once hours of service regulations go into effect. In a best-case scenario, what do you think utilization does?

Thank you, Well, I think it really depends on several factors. One, obviously, is the economy. Number two, I think it depends on what we the industry found out on the split of the 14-hour workday, if we can split it and then the impact is going to be probably less of an impact then if it's full 14 hours that you can't split.

That's going to be a real issue for this industry. I think that in a true solo long haul operation, the 15 hours is probably degradation is probably going to be a true figure.

15 hours, I'm sorry.

I'm sorry, 15%, I'm sorry. If you get into the team operations or if you get into regional operations, then that percentage may come down somewhat, but probably not real substantial. Teams will have some impact, but nowhere close to that 15 %.

Solos that run regional that may run say 300 miles that will naturally after some time off, it may not effect them as great if we can split that 14-hour workday.

And also, I think, Max, we have to look at those people who delay excessive dwell time waiting to load or unload or just you know wasted time out there, they're going to have to pay substantial.

The waste has got to be (inaudible) out for this system to work, because once that clock starts, we are losing if the drivers are not being efficient and the wheels are not turning.

Actually, well what we're doing for optimizer today is identifying customers that are dropping customers and those customers are probably going to be more valuable to us because we keep the truck moving.

The entire equipment up, either the rates have got to go up to cover the length of time the truck is up because you're (inaudible) the guys productive hours, but the experiments we've done so far, we're getting some pretty exciting news even though it's a negative, pretty exciting news that we can mitigate piece of this.

Just to follow-up on some of that discussion as well, Max, Pat, remind me, what percentage of the fleet is solo versus team? And then if you take that one step further, and then give us an idea on that breakdown, how much, you know what percentage of the solo fleet that does multi stops.

OK, if you look at about 15% to 18% as teams. If you look at teams, they typically don't do multi stops that are more and more of a characteristic of a solo. But truthfully, truthfully, the stops are going to be a big issue.

Sure.

And more stops an the more time it burns the guys' hours is going to be more costly to us and also should be more costly to a customer.

Some of the comments we've heard is the stop charges we are going to literally go through the roof and that carriers may not even take them at all even with the stop charge through the roof.

Right. In the past, you know, stops have been say somewhere in the range of depend on who you talk to, $40 to $80 a stop. And we're looking at, propping out figures two and three times that because it's going to tie the truck up, so.

Any clarification on the impact of fuel and then I'll turn it over to someone else.

If I understood your question, you were asking about the upcoming fourth quarter and the first quarter still?

Exactly.

And now in the fourth quarter of last year, there was, you know fuel was rising throughout the quarter as you recall.

Exactly.

And we disclosed at that point in time and this was a comparison to the previous year that it was, it had a 10 cents per share negative effect on our earnings last year.

OK and in the first quarter of this year.

In the first quarter, we, as you recall, we also faced a continuing increase in fuel prices and we disclosed in the first quarter of this year that on a year over year basis that there was a $3 million pretax negative effect on our earnings.

Last question, I'm sorry. Could you quantify what the impact in a dollar -- on a dollar terms basis, what the impact of this accident was in the quarter? I didn't hear you give that number, but if you could, that would be very helpful.

Well, without -- I would say and because obviously your provision for -- (inaudible) takes into account experience, and so forth and so on, but if you compare it to what our year-to-date numbers as a percent of revenue, you get, you know probably in that relative range of what the impact was.

Fair enough. Thanks, guys.

Thank you.

We'll next hear from Michael LaTronica of Excalibur Research Groups.

Good morning, gentlemen.

Good morning.

Nice quarter. Max, could you talk just a little bit about how your cap-ex plans are going to be impacted by hours of service in this decline on utilization and productivity, you would think it would require more truck, on the other hands, seating those trucks is going to be more difficult, I would think?

Max Fuller I think you're correct in part of what you're saying. The biggest, biggest effect on cap-ex is probably not going to be as much additional trucks, but is probably going to be additional trailers. And the reason I say that is back to what I said before the drop in hub that we did before the analysis that we've done probably keeps productivity closer to where it is today.

If we can keep the customers with that drop in (inaudible), in order to do that, we probably have to take a ratio of trailers up closer to that three to one and I guess (inaudible) continues to shorten, and also we'll have to drop some, too, but as far as bringing additional trucks on, at this point, our game plan is to kind of stay in the mode that we've talked about before, keep the growth fairly minimal until we see margins in this industry improve.

Any time you see something change, change the rules as drastically as this is changing and see the fact that we the industry, are going to have to get some pretty sizable rate increases, that is probably not going to come immediately, it's probably going to come over a struggle with your customer base. Because what they're going do see is they're going to see higher rates and they're going to see a degradation in service.

And that maybe painful for those guys to really stomach and we the trucking industry are going to be the ones that are going to catch the blunt of it because they're going to retaliate back towards us. So we have to be prepared for that and I'm not sure you want to be adding a lot of additional capacity going in to that much of an unknown environment.

Yes, clearly it doesn't make sense to add capacity if you can't get drivers either. So.

And that's true, too.

So most of my questions were answered, I thank you very much for your time. Great quarter.

Thank you.

Our next question comes from Tom Albrecht of BBC Capital Markets.

Good morning, guys. I have a few other follow-up questions here. First, I talked the first minute or so Ray, what did you say the average age of the trucks was, I heard the trailers.

Yes, trucks were 20 --.

I'm sorry.

20 months.

OK. And then I wanted to talk a little bit about Xpress Global, (inaudible) profitable and all that, but I was a little surprised to see the drop-off in operating income from about $1.2 million in the second quarter to just under 700,000 here in the third quarter. How much of that was due to weakening in the carpet business maybe slowing trends? How much of it was due to the airport business maybe plateauing in its improvement? Could you just give us some insight there?

Yes, part of it, Tom, we're dealing with, I (inaudible) to say it, blow-off small numbers. We had some expenses fairly on the carpet side that were higher than we expected going and I think you'll see the margins on that side of the business bounce back. That business is still strong, so it's really due to higher expenses in the third quarter from both the general administrative, and some on the carpet side than what we expected going into the quarter.

So -

So relative to the second quarter, it was a disappointment we expected to bounce back to those levels.

Beginning with the fourth quarter and if so, then could you talk about the nature of those costs a little bit more. I mean whether they're really one time or whether they're infrastructure costs. You mentioned G&A and stuff like in that?.

We had infrastructure costs. We opened some new facilities. We've added some people to take care of the increased volume and we'll be able to gain additional efficiencies on our doc now that we've taken some actions here, so that's generally where it was.

OK. Al right. So if, for example, I modeled a million bucks in the fourth quarter as you see the world right now, that would not be an outrageous assumption.

No, we expected to get back to -- this year.

I'm trying to put words in your mouth. So.

I'm trying to keep you from doing that.

I know. On the owner/operators, I know somebody touched on this, but I want to dig in a little bit more because you had extremely good success in adding on owner/operators in 2000 all the way through 2002, really you were one of the shining stars there.

That environment seems to have at least stabilized; the owner/operators that have survived are better businessmen. The environment is a little bit better, etc., but you've gone backwards this year. Can you talk about whether there are some other specific elements at work and why you've lost that momentum?

I think primarily it's, you know, we've had a successful program, we continue to have a successful program. We've had a few fleet operators that have run into a difficult time and have dropped the number of trucks, just like many small trucking companies have done, so we've had a decline in the last six months in that (inaudible).

Also, you know, as you go through the years, it's harder to add late in the year. So that the addition time is coming up for owner/operators, so I think we're stabilized at these levels at this point in time. but keep in mind, we haven't tried to add large numbers of owner/operators like we haven't tried to add company trucks going into the kind of environment that can be here for these hours of service. We need that better to find so we know what the net effect is before we're adding more capacity.

OK. And then, I hear what you're saying. You know, Max, I think you mentioned on the 15% decline, kind of a worst case scenario, did you disclose approximately what percentage your business involves multi stops versus other traditional freight for solo drivers? I'm sure it could only be a ballpark number, but maybe help us out there a little bit.

Actually the multi stop business, express U.S. Xpress is a pretty small and this probably run 3 to 5% of our total business. I think that we're probably going to do real good going into this kind of environment because of that. And that's other than dedicated fleets, but those are more specific by contract and are dealt with differently.

Your average length of haul and dedicated, is it under 500 miles or is it something different.?

No it's in excess of 500 miles.

But it's not comparable to the rest of your fleet average of 900 or whatever it is right now, is it?

No, no. It's more like in the 550 to 600 range.

OK. And Max, when you talked about the trailers, I understand you were talking about a trailer to tractor ratio that is probably more hypothetical once we get into the hours of service world and get a sense of that. As of now though, you have not committed to a three to one type of ratio, right? You're just kind of sharing thoughts out loud on where the industry may be headed, right?

Actually the trailer ordered we have in at Wabash is a totally one to one replacement of trailers that are ready to be traded over that period of time, over the next three years. If you look at effective hours of service though, we think that may be one solution to mitigate part of the issue, the hours of service.

OK. Yes, that's what I had understood with your Wabash order, I appreciate that on the whole subject of rates and dealing with this new challenge. Approximately what percentage of your revenues would come as a result of (inaudible). It seems like a lot of carriers that I won't mention that are successful or maybe 1.5%-2% of their revenues, others, there's still a lot that are under 1%. That has to be viewed as an opportunity apart from the pure rate discussion as you address the hours of service. Can you talk about your assessorial program?

I don't have that number right in front of me. I think we're in the 1%-2% range also, but also as we said a lot of our business in multi stop so the magnitude of our assessorial might very well be relatively less than other carriers in the short haul multi stop (inaudible) and attention is a big part of that.

The window is going to be shortened or tightened in this as we go forward because obviously that time can't be regained driving so the free time for loading and unloading will shrink dramatically the number of hours will be less than it is right now.

We've developed an active detention program over the last three to four years that has been very successful, I think, in helping cover the costs that we incurred. So I think we're well situated from an internal standpoint to take action to even enhance that further, when we have the hours of service. What is the programs that (inaudible) windows of allowing.

Can I follow up there. Your detention program, has it largely been built around detention of trailers or do you have an active program for detention of drivers, the truck, that whole nature?

Actually, around both. Actually, if you look at the trailer tracking system that we're installing on our trailers, we'll have real accurate data on the trailer side, and then we obviously have pretty accurate data on the tractor side with the communications that we have installed on it. So we're probably going to actually pick up more detention with communications on the trailers than what we've had in the past.

Have you gone so far as to actually submit wording and contracts, something to the effect that as a result of potential changes in our productivity related to new hours of service rules we reserve the right to adjust our rates? Or however your lawyer might like it?

We haven't got that in the contract at this time, but we're going to discussing that.

And I also know every contract varies, but some allow more I don't know what the industry term is, kind of idle time for that driver while you're loading and unloading. But let's say it's three to four hours, obviously P&G has got their two-hour program, but how aggressive can you be to basically say zero hours going forward or else we charge you.

I know what the word zero hour is, but it's a lesser hour then the four hours that the industry traditionally had, and I think what, you know, if there's a plus to this, they may all appear to face with this change the same time. If the government mandated change in the way that the time allowable for a driver to work and therefore you know the ability to adjust it, you know should be more easy than if it was (inaudible) hours the U.S. Xpress decision (inaudible) industry wide.

Right, right, I hear you. Everybody is on a level playing field there. Lastly, as I recall, you do virtually no business with grocery warehouses and that. Is that correct?

That's correct.

Because that's like the worst challenge of all. OK, well, good, this has been helpful. Thanks for your time.

Thanks, Tom.

As a reminder, press star one to ask a question, and we'll now hear from Nick Farwell of the Arbor Group.

Gentlemen, good morning. I just had a couple of follow-ons and specifically to Tom's question about logistics. If one trends the numbers from first -- I'm sorry, from second to third quarter, and I think in the last conference call Bill in particular was feeling rather encouraged about the progress in both carpet and airport to airport. But if we look at the 700,000 down from a million two, and you assume that airport to airport was basically maybe flat sequentially losing about a 100,000 each quarter, that suggests that carpet was off rather precipitously. Are those relatively accurate observations?

Well let's explain and I'll turn it over to Bill. As we told you, he was using his rope last quarter.

I'm just wondering if there's any left. Sorry, Bill.

Ray Harlin We do not break out the operating profit per se by those two divisions. So with that caveat, I'll let Bill explain a little bit more. But like I said, we think this is a one-time situation on the carpet side. But go ahead, Bill.

Well, Nick, to raise credit of that episode, the noose has tightened a little bit further.

Sorry.

No problem. Ray's earlier comment about some of the investments that we made to improve our business were in many ways in the floor covering area, driven by some of the big box retailers' need to improve transit times on delivery. And that involves some additional staffing that we had not really anticipated and as Ray said those are really one-time investments on a go-forward basis, we expect to produce numbers comparable or better than the second quarter figures.

Now --If I could add also, on the airport-to-airport side, we are fully eight weeks behind our anticipated start date on opening our new hub in Ohio, driven by primarily construction delays there. With the opening of that facility, we'll have some significant savings on a month-to-month basis. And of course, as I mentioned earlier, our rate increases are starting and their effective dates are a little later than we had expected, and still optimistic.

With respect to the seasonality, looking at fourth versus third, is it fair to assume as in the past that you should have, you know, relatively higher volumes modestly, but relatively higher volumes in both businesses in the fourth versus the third sequentially.

That's a reasonable expectation.

And last year, as I recall, there's a fairly strong reorder period of time, sort of post Thanksgiving up to close to Christmas, which may have helped your business. Do you have any -- is that accurate? And do you have any insights as to whether you think that's likely to reoccur, especially since this appears to be a bit of a late retail season?

One thing you need to keep in mind, Nick is the calendar this year isn't as attractive as what it's been in some previous years. So I think that their performance will be relatively good. But I also am a little bit cautious about wanting to push the numbers forward very aggressively because of how the calendar hits.

And that means Christmas being on a Thursday, right? Is it Thursday or Wednesday anyway, it's in the middle, more in the middle of the week as opposed to a weekend, is that what you're referring to?

That and as well as workdays. If you look at November, was it 20. You got a real short November coming in so, revenue side built businesses ramps up during the time we ramp up, but we're constrained by the number of days with Thanksgiving and Christmas, so to achieve quarter over quarter growth in the revenue side of the truckload side, it really has to be strong in those weeks that are not holiday weeks.

How much do we lose in two or three business days during the quarter because of the calendar?

Yes, OK. I missed the fact that you lost more than a day. OK, I appreciate that. The second thing I wanted to ask Ray, this generally trying to trend the numbers on, quote, the significant accident. If you do that, you end up with a number like $700,000, roughly, is that the ballpark for what you think the impact again of this significant accident?

I put it more like in the million to million three range.

OK. And in the past, has accidents of this nature tended to occur very infrequently? This is rather unusual, if you do just give me some sense of --

Yes, as you know, we, over the last two years, have increased our deductible on our insurance as with all of the industry because of the hard market. This was a serious accident that or these are relatively infrequent for U.S. Xpress.

Have all the expense been taken against this particular situation or are there any that might be left to expense looking out over time.

There's a small number that I guess could be reached, but it would not be a material impact.

OK. Ray, could you talk to Bill bit about cash flow debt repayment during the quarter? I forgot where your debt stood.

In essence, I think we indicated this in the second quarter, our debt is actually going up from the second to third quarter as we increase the purchases of equipment versus (inaudible) equipment.

Yes.

Plus we took some equipment that was on lease and converted it to home. So we are trying to manage our income tax situation, and obviously that's a cash flow situation, so we've increased our debt from I think it was in the $120 million range in the second quarter up to the 150. Our cash flow generation in the second quarter was very strong. You know, we generated almost $20 million in cash flow, I'm sorry in the third quarter.

And there's no reason against this decision from a capital allocation standpoint, as an efficiency decision.

That's right.

I assume it continues here in the fourth quarter depending upon, again, the tradeoffs you get between the capital markets and financing it, quote unquote through your own bank?

That's right. And as we are achieving improved profitability, I will need to shelter our tax situation from a cash flow standpoint, so that will drive the decision of lease versus purchase. We try to maximize our tax situation.

And would you still expect that we should be using a 50% tax rate for the fourth quarter, reported tax rate?

Yes.

OK. And last question, I want to make sure and understand the split question that Pat and Max were talking about earlier. Is it, when you say 14 hours, has it not been defined whether a team driving together would each be able to drive 14 hours or only have 14 hours between the two of them?

No, it's primarily a solo situation and in the past, you could split the day as long as you didn't work over, as long as you got your eight-hour break. There's and reading the law and there's several interpretations and that's the reason we in the industry have asked for you know what is it the true interpretation is that the 14 hour work day can only -- can't be split like we've done in the past. And if you look at how restricted that gets to utilization on equipment, then that's what pushes the thing almost to an extreme. If we can split that day, that probably is going to have a positive effect of maybe a couple of percentage points. But.

But the 14 hours does it apply to the teams. Also, the teams are allowed to split the sleeper berth, so therefore you get that (inaudible). So on the solo then, Max, what you're saying is, if someone had worked for the sake of discussion four hours, took eight hours off they can work 14 continuously after that. 11 hours driving, are you talking about today or in the future?

I was talking about the future. I'm trying to understand the (inaudible).

They have to have take ten hours off, they have to take a 10-hour break.

Oh! OK.

OK and see the other problem that you get, is you may have a guy that brings a load in early in the morning, say and arrives at 4 o'clock in the morning, and then he needs to leave that afternoon, if he didn't get his ten hour break, then he would stop.

OK. And what you're saying is if it could be split, he might be able to take the load, bring the load in at, as you say at 7:00, it unloads in four hours and that's part of the split time, the four hours, then he can depart, but you're saying no he may have to wait there full 10 hours before he can depart.

That's a possibility.

That hasn't been defined yet.

Well, some people think it has and some think it hasn't. We want to know which one it is, so we can react to it.

OK. And then my last question is were you look at the nature of the business and you described it earlier being relatively strong across the country, except for the northeast, what is that telling you about, to the degree it does, either by industry segment, by lane segment, by region? What is that telling you about the sustainability of the current freight environment?

Well, I think that if you look at the type of customers that we're seeing, seeing the increases, it's pretty well across the board. And I guess going through multiple downturns and improving economies, my career, this is probably what we normally see in a normal pickup. This one has had a couple of false starts, but this one, over the last 30 days, probably feels more real than any we've had over the last year or so.

In addition to the retail business that Max talked about being strong, we're seeing things in the manufacturing and other areas that we haven't seen in the last say three or four years, it's probably the best it has been in the last five years.

I thank you very much. From what I'm hearing, probably the most encouraging part is what you're saying, Pat, and that is the manufacturing sector has come back to life. I think we've all been waiting for that for a long time. It seems to be awakening.

And with the notion that hopefully there's going to be an inventory restocking phase to this cycle, if it ever does occur that presumably that would give it some incremental.

It would.

Lift. Thank you very much.

Thanks, Nick.

Next we'll hear from John Wood of Morgan Keegan.

Thanks guys. Congratulations, a couple of maintenance questions. You mentioned Ray, in Q2 replacing 800 tractors in the back half of the year. How many of those did you do this quarter?

Probably about, about 400 this quarter.

So you still plan to replace another 400 in Q4.

Yes that's correct 400 to 450 in the fourth quarter.

I know you were waiting for the ACERT engines on the last conference calls. Have you nailed down what kind of buying you're going to do for 2004, as far as what engines work better for you guys or?

A little bit -little bit two (inaudible) material, we just got the CAD engines in and probably the last three to four weeks we won't probably 60 days worth of fuel mileage figures before we'll really sit there and say well, this seems to be what this engine is doing. If you recall, we've actually done a variety of engines so we can see which one is really the top performer and that's probably going to be the biggest part of our content in next year's order.

So we haven't really made our decisions for next year.

OK. OK. Great. Thanks, guys.

Thanks.

We have a follow-up question from Ed Wolfe.

Hey, guys, it's actually Justin, how you doing.

Hello, Justin.

I don't know if I heard you or if you had said it but did you give what you guys thought the fuel impact was in the quarter? You know, whether it was positive or negative and how much, if it was significant. It was significant.

It was pretty neutral.

Yes. And then, I just wanted to get an update of where you guys are for cap-ex for this year and next?

For this year, we'll be in the $25 to $30 million range, probably and for the next year, we post our estimates at around $35 million.

Around $35 million. All right. Those are the two major things, I just wanted to also get a sense for. I've been hearing that you guys have been doing an increased amount of inter-modal. I wanted to see if you could just talk a lit bit about that right now and for the relationship with Burlington.

We've done a little bit of inter-modal where we have been repositioning equipment, especially because of surges in different markets that we have. We've been doing it to handle some of the surge business that we have a got.

And we've actually been doing some experimenting. You know, at this point, I'm not sure how far, how much we're going to do over the next year, but we have been doing some experimentation and we have found there's some benefits in the surge business that you have from a lot of retailers to utilize the service.

So it's something that you're kind of piloting right now and then might turn into something bigger?

Yes, it could.

Do you see this as way of skirting some of the hours of service problems?

It could be a solution to some hours of service, but that's one of things that we're still having to study to find out.

And what kind of lanes have you been using that on, that inter-modal service?

Primarily the long haul lanes. If you look at shorter lanes, it looks like we could truck a lot faster, even with the new hours of service. If you look at the longer haul lanes, where you've had solo driver transit, then that may be an alternative. Like I said, we're experimenting and hopefully we'll come up with a better solution as we get deeper into the end of this year.

Do you have a sense for how rail service levels have been lately?

The service of BNSF where we used them has been relatively good. We've had some issues, but the service has been relatively good.

Access to like the premium trains like U.P.S. and LTL trains?

The only thing I'll let our people touch is the premium train unless it's repositioning an empty trailer.

Thank you for a customer it's on a premium train.

Right.

That's it. I really appreciate it.

Thanks.

We have a follow-up question from Nick Farwell.

Ray, I had forgotten what the impact of fuel was in the second quarter. The first quarter was 11 cents and it was in essence neutral or zero in the third. What was the second?

It was neutral. I think we said it was neutral.

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

We just want to thank everybody for participating in the call.

This concludes today's teleconference. Thank you all for your participation. You may now disconnect.