US Xpress Enterprises Inc (USX) 2004 Q4 法說會逐字稿

Good day everyone and welcome to US Xpress Enterprises Incorporated Conference Call. Just to remind you, today's call is being recorded and at this time for opening remarks and introduction, I would like to turn the call over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead Mr. Sullivan.

Good morning, and thank you for joining the US Xpress 2004 Fourth Quarter Conference Call. On the call today will be Max Fuller, Co-Chairman, Pat Quinn, Co-Chairman, Ray Harlin, Chief Financial Officer and Jeff Wardeberg, Chief Operating Officer.

Before we begin, I would like to cover the Safe Harbor language. This conference call contains certain forward-looking information and 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 customers' 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 10-K and 10-Q. I'll now turn the call over to Ray Harlin to summarize the operating results.

Good afternoon. We will briefly discuss the results of our operations for the year and quarter, and following my comments we will be available to respond to any questions.

The fourth quarter of 2004 represents the 12th consecutive quarter of year-over-year improvements in reported earnings, and we achieved our highest ever quarterly earnings per share this quarter. Further, we achieved a milestone with annual revenues exceeding the $1 billion mark. We are pleased with these achievements and believe we have a strategy for continuing this growth in revenue and earnings during 2005.

For the quarter, consolidated revenues increased 30.4% to 312.3 million. Excluding the effects of fuel surcharge, revenues increased 24.6% to 288.9 million. For the year, revenues increased 18.8% to 1.1 billion and including the effect of -- and excluding the effect of fuel surcharges, annual revenues increased 16.5% to over 1 billion.

Net income, excluding the effects of a 454,000 pre-tax charge for the early extinguishment of debt, increased 134% to 6.2 million or 42 cents per diluted share. For the year, net income before the early extinguishment of debt charge increased 118% to 16.6 million or $1.16 per share.

The significant growth in revenues and earnings for the quarter was driven by the performance of our truckload operation. For the quarter, truckload revenues excluding the impact of fuel surcharges increased 21.6% to 248.8 million. This growth in revenue was driven by our dedicated and expedited rail operations along with a 22% increase in our rate per loaded mile.

A summary of our truckload revenues for the quarter, excluding fuel surcharges and other miscellaneous revenue along with year-over-year growth percentages by service type is as follows; our dedicated operations revenue was $45.7 million, a 92% quarter-over-quarter increase.

Expedited rail was 38.5 million, an increase of 169%. Regional was 26.8 million, a 5.6% increase. Expedited team revenues were 43.2 million, a 30% increase. And our medium to long haul solo fleet revenues reduced by 17.7% to 86.6 million.

For the quarter, operating income of our truckload operations increased by 189% to 18.1 million, which represented a 440 basis point improvement in operating ratios to 92.7 for the quarter. The improved margins were again driven by the expansion of our dedicated contract, and the aforementioned rate increases, and the increase in the expedited rail program. We achieved significant rate improvements across all of our truckload service line.

The increase in the rates per loaded mile resulted from a number of factors, including an 8.4% decline in our length of haul, the expansion of our dedicated and regional revenues as a percentage of our total truckload business, negotiated customer rate increases, and replacement of lower yielding freight, a significant increase in pay deadhead miles as customers agreed to pay repositioning charges to obtain capacity and improved recovery of detention charges and high demand for expedited on-demand services, which command a premium rate.

The improvement in operating performance of our truckload operations was achieved in the face of certain significant increases in operating costs. Among these increases was an approximately 17% increase on a per mile basis of driver wages and benefits, primarily as a result of increase in pay rates initiated in the first and fourth quarters of 2004.

As discussed in our prior quarter conference call, we implemented significant pay increases for our solo, regional, and team drivers during the fourth quarter. Our fuel prices averaged over 40% higher in the fourth quarter of 2004 versus the prior year period.

Although we have improved our fuel surcharge schedules on many customers, the significantly higher fuel prices combined with the lower fuel efficiencies of the EGR engines, we estimate negatively impacted our quarterly earnings per share by approximately 7 cents per share, compared to the 2003 fourth quarter. Improving our fuel surcharge recovery will be a major focus in 2005.

Insurance and claims expense, as a percent of revenue increased from 5.7% to 7%, largely due to the increase in our provision for liability claims in the fourth quarter of 2004. This increase resulted primarily from the growth in current year claims. Our deductible amount, under our primary liability insurance program, has increased significantly since September 2001. Prior to such climb, our deductible amount was $3,000.

Over the last three years, our deductible amounts have increased from 250 million to 2 million for liability and $250,000 for workmen's compensation. The amounts recorded at December 31, 2004, for both workers compensation and liability reserve were based in part upon the actuarial studies performed by third-party actuary.

At December 31, 2004, our total tractors operating our truckload fleet was at 5,034 versus 5,338 in the prior year. The 5.7% decline is almost entirely in our owner/operator fleet as our company fleet is essentially flat.

Similar to others in the industry, we are facing a very challenging driver in owner/operator recruiting market. Despite an approximate 20% increase in driver pay in 2004, and an increase in owner/operator pay, adding incremental capacity to our over the road fleet continues to be a challenge, as it is with our competitors.

Given this environment, with no signs of improvement in the supply of drivers in the immediate future, we continue to believe that truckload capacity will continue to be constrained over the next year.

Turning to our Xpress Global operations, revenues for the quarter increased 17.9% to $42.6 million. The floor covering distribution revenues increased year-over-year by 11.7%, 25.3 million. And airport-to-airport revenues increased 28.2% to 17.3 million.

However, operating results were disappointing as Xpress Global incurred an operating loss of 4.5 million compared to operating income of 492 in the prior year fourth quarter. Although there are number of factors contributing to this poor performance, the primary causes included rapidly escalating rates for third party carriers during the quarter, and management failures to control overhead cost, which increased at a rate well in excess of revenue growth.

Additionally, the changes, which were made to the airport-to-airport line haul network and the integration of the Columbus Hub, which we discussed at the conclusion of the third quarter did not produce the efficiencies, which were anticipated. In the face of the disappointing results, we have made changes in the leadership of Xpress Global, including replacing the top management of the airport-to-airport division.

Additionally, we have appointed Craig Fuller as President of the US -- as President of Xpress Global. Craig previously served in various management positions with US Xpress since May 2000.

Since early January, Craig has managed the team, have taken a number of actions to substantially reduce fixed overhead costs and purchase transportation costs. In the meantime, we continue to pursue opportunities to improve our revenues in the airport-to-airport operations and have recently opened an additional market.

As we discussed in our press release, we completed a number of significant transactions, we believe provide a solid foundation for our future growth. We completed 200 million in new financing which lowered our foreign cost. In December, we completed the public offering of 2 million shares of common stock, which generated enough proceeds to the company of approximately 47.7 million.

And finally, we completed the acquisition of a 49% equity interest in Arnold Transportation, a truckload carrier providing dedicated and regional truckload services with a fleet of approximately 1500 trucks.

From a balance sheet perspective, our long-term debt, including the current maturities of debt and the securitization facility-- I'm sorry. From a balance sheet perspective, our capitalization-- our debt to total capitalization stands at approximately 39% at December 31, 2004.

Our liquidity remains very strong with over 100 million available borrowing capacity under our existing credit facility. For the current year, our cash flow from operations will approximate 60 million with capital expenditures of approximately 80 million.

Our capital expenditures increased significantly in the last quarter as we switched a considerable amount of equipment from operating leases to ownership to generate depreciation to minimize our cash taxes.

Looking forward, our goal is to continue the trend we have established over the last two years of improving the profitability of our truckload operations. Strategically within the truckload operations, we will continue to shift assets to services and freight which provide for higher returns.

We believe there continues to exist significant opportunity to expand or expedite our rail and dedicated services at desirable margins. Additionally, we have a number of initiatives ongoing within our truckload operations to improve the utilization, reduce costs and enhance our safety programs.

Within the US -- within Xpress Global, our new management team is now focused on improving our cost structure while improving the efficiency of our entire organization. We believe with the changes we are putting in place, we can continue to grow both floorcover (ph) in airport-to-airport revenues on a profitable basis. With that, we thank you for participating in the call and we would be glad to respond to any questions.

[Operator Instructions].

And we go first to date to Dan Moore from Morgan Keegan.

Good afternoon guys.

Hi Dan.

Congratulations on a good quarter, especially in the core business. Ray, I know you're going to love this, but I think a lot of questions here, at least with me, are going to focus on XGS.

If you adjust for the loss during the quarter, it looks like EPS would have been closer to something in the high 50 cent range, 58, 59 cents, something like that. And while this division doesn't represent a large portion of revenue, it clearly had a material impact on fourth quarter results.

Can you give us a better sense of what exactly you are doing to bring that division into a breakeven level of profitability such that you might have a better idea for modeling purposes what the upside potential is there over the next 12 months?

Dan, I'm going to pass that one off to Max.

I would have done the same.

Dan, actually, there has been a comprehensive review of that whole operation where we actually even looked at it and said, does it make sense to shut this thing down to stop losses? As we did the review, we found that there's some unique opportunities in that company that we would miss.

We put in what we consider very strong management team that's really focused to get that thing to profitability and to grow that business. Part of the changes that we did is we did the same thing we did it here at US Xpress three and four years ago, where we basically went to our customers and ask them what services they needed, what wasn't working right, what needed to be changed? So, we've taken a very customer-centric approach.

And part of the problem we had before, and I'll get down to a few details here, is that we tried to copy Ford's business model, and for some reason, we have never been real good at copying other people's models. So, we basically have chartered somewhat our own direction here.

We still will be in that area of providing that type of service, but we're going to do it a little bit differently, really focused with some special needs that the customers have. In the last four weeks with the management team that's in there, we have reduced overhead costs by several million dollars, we've eliminated probably a couple hundred people, which we think was in operation, we changed where the Columbus Hub was supposed to be the thing that's going to save us a lot of money and improve service.

We've actually changed to where we're not utilizing the Columbus Hub to the level that we were. They'll still be in our network, but its going to be lesser important. What we found was as we ran stuff through the Hub, we actually were delaying service to some of our customers instead of improving.

So making the changes that we're making, we're actually improving our service for the customer. We've actually added some additional schedules, which you think as we're cutting costs, you know, that would be something that we wouldn't do, but that's something that customers are asking for.

We also -- after cutting some pretty sizable dollars in fixed cost, we've also been able to cut purchased transportation by quite a few percentage points at the same time by giving good and better service than what we did before. So, it was kind of an all-out battle on cost in that operation but the real focus is kind of twofold. It's really what the customer really wants and what they'll pay for, and then, number two, is how to deliver that service and deliver it at a profitable level.

So, we have, like I said, we've had a very comprehensive approach on this whole thing, and its kind of all hands on board to make sure that we look at all the variables. And like I said, we looked at, does it make sense to shut it down? We still believe there are some real unique opportunities there that we think we can bring to the table during the year 2005.

So, it sounds like you guys have been kind of expanding over the last 12 months to build scale, build out the platform, and entail some costs that you wouldn't have otherwise as a result of those efforts. Now you are retrenching, focusing on opportunities and lanes where you feel like you can get a more commensurate return. Clearly it's a different strategy, what's the end gain?

The end gain, obviously, is profitability and building a good long-term business. Your comment on retrenching that maybe partially true, but its really not the real focus here. The focus is developing services that customers are willing to pay for, and sometimes that service is not even available in the marketplace.

But, you're right, Dan, cost has been cut significantly. We were on the growth mode and we're still on the growth mode but we're going to do it at a lower cost and in a smarter way.

When could we expect to see this operation breakeven -- reasonably expect to see this operation breakeven?

That's probably the question that we're asking here internally at the same time. We think probably mid-year or so.

Okay. And can you give us any idea out of the gate here what we might expect for the first quarter just so -- I mean, if you didn't have so much earnings leverage, it would be a lot easier, but a million here or there can have a huge impact on the bottom line. Can you give us any visibility for the first quarter?

I think it's fair to say, Dan, based on a lot of these actions that's taken place in the last 30 days , at the end of December at the end of January, and we're redoing our forecast and things like that. But we're looking in the range of a million to a million and a half in the first quarter results.

Okay. Right.

Again, it's early in the quarter and we have a lot of things to do. But we do not foresee the same results that we've had in the fourth quarter given the reductions in costs that have been made.

I hear you. Maybe to focus in on a couple of other areas, can you give us an update on Arnold, how things are progressing there? And tie in the rate discussion, give us a sense for how rates are trending in Arnold relatively to what you had in your core business?

You know, the Arnold transaction was completed early in December. We were excited about it when we did the transaction, and we continue to be excited about it. They are operating their business. As we said going in, they've got their management crew, they're operating their business.

We have had our management get together and talk about areas where we can help each other, where we can improve cost structures. We have assisted them in updating their equipment, their trailer fleet. They have added about 100 tractors so far since the acquisition.

Are you helping them with that?

We're helping them with the equipment that's necessary to do that. However, we are not financing, it is being financed by third party. So, we're still very pleased with where we are on the Arnold situation, and we're working to identify areas where they bring value to us and we bring value to them. So it's in the early stages, but we haven't seen anything that changes our enthusiasm for the transaction.

And how much earnings did you recognized in the quarter from that?

It was not material. We only had 25 days, I think 20 days of results.

Okay. Maybe to talk a little bit about driver pay; obviously the driver environment is really tight, which is a double-edged sword. On the one hand, it helps to keep capacity in check and give you an opportunity to go discuss potential for additional rate increases from your customers. On the other hand, it's a difficult thing to manage. How is driver turnover trending, and what do you expect from the standpoint of magnitude of driver pay increases in '05?

Actually, if you look at what we did this last year, well, we had two increases and if you look at the combined total just right under 20% year-over-year increase. So, we think most of the increase that we have to do is basically under our belt.

And, of course, we're not sitting here saying no increase to 2005, but we think that if there is, it probably would be late year and it probably would be a lesser amount, substantially lesser amount than what we had to do -- did this last year. Turnover is trending downward where we've got -- we're improving but we're not adding trucks, which is the kind of the other side of that equation.

But I think we're down in -- what -- 80s, Jeff, if I remember on turnover, which has improved over the last couple years, but at the same time we're not gaining enough -- but, yes, we seek additional trucks. That's the reason we're not buying trucks at this point. The goal is to get the turnover down to the point where it's at a good level and we can sustain it, and then, hopefully, have some additions of trucks, as we get deeper into this year.

What about guidance guys? I haven't heard anything on the guidance front. Are you in a position to update us on full year guidance and, maybe, the first quarter? And I may have one or two other questions, and then, I'll turn it over.

Let me respond to that question, Dan. We have not given specific guidance in this release today. I think we are prepared to say that we are -- we have not taken exceptions to the earnings consensus that is out there for the year. I think the first quarter is the difficult quarter to give a firm number at this point in time because of the Xpress Global situation. But despite what the first quarter might be, we still feel very confident about the full year.

Sure. And how has demand trended thus far through January and on a year-over-year basis, how would you compare it to the same period a year ago?

You know I think and maybe everybody has a comment. I mean unfortunately January is always January and we always think it's going to be a lot better than it is. So, I think it has been a fairly normal January from my standpoint.

And it has been a little bit mixed. We have had several devoured since we have got variety of operations. Some haven't seen as much weakness as others. But it is -- like Ray said it is still January.

I mean we've had weather and we have had other things. So, I think - we'll start to see a fairly sizable ramp up as we go through the rest of the quarter.

We've had areas of the country stay stronger like the West Coast for example and perhaps it typically has been in January and perhaps the Southeast has been a little softer than what it typically has been in January. So it's kind of bounced around, but like January is January.

Fair enough. I will turn it over. Thanks for the time guys.

Thank you Dan.

We'll go next now to Nick Farwell (ph) with the Arbor (ph) Group.

Good afternoon. I just want to follow on a couple questions that Dan asked. I noticed that the fleet as you mentioned Ray continues to contract especially owner/operators. When do you expect that the fleet might stabilize?

I think we were there. I mean we don't plan on contraction this year. And in fact our goal is that moderate additions to the fleet. So -

And if you look at the nature of the contraction that we had, it's basically owner/operator fleets were people had multiple trucks. And most of that's pretty well gone at this point. So, we think that contraction is probably behind us.

Do you think Max you can grow your, you know, assuming there are significant changes in the economic environment requiring there major rate increases and/or compensation to drivers. In other words some stability as you describe that earlier suggesting maybe another rate increase the end of the year for drivers pay increase, I mean -- that you could grow your fleet 1 to 3 or 4%? Is that -- and is if larger going to be company I assume?

Probably, at this point I'd probably say it would be more company that would-be owner/operators. Until fuel price is probably stabilize, and some of the cost pressures on equipment stabilizes, I think you're going to see the numbers of owner/operators in this whole of industry be relatively tough to get.

Those guys -- a lot of them ran for the exits and they're sitting there watching the volatility here. And they like being a company driver in some cases, as opposed to having to make that truck payment every month. So, I think as we get deeper into the year, you'll see some net increases on the company side, we will continue to push on the owner/operator side, but we would anticipate more success on the company driver side.

But I think it's fair to say, we would like to add 3 to 5% to our entire fleet this year. And Jeff and his people -- there are a lot of programs and initiatives going, but it's a tough market.

What do you expect, Ray, is a reasonable outlook for price? Sorry, revenue per loaded mile, if you want to look at it that way. If you had a very strong second half of the year.

I'm going to push that one off on Jeff.

Lucky Jeff. Mr. Implementer.

Hello Nick. How are you?

Hi. Good morning.

I guess, my comments on price are going to be a little bit guarded. Obviously, we had a very nice year in 2004. We are active in the market right now. And having success early in the year, but I don't want to get pegged down to a specific percentage point at this point.

Certainly you'll grandfather, the second half of the year and you could sort of figure what that would be and assuming there is no attrition from that, and again making some growth assumptions that it gets you least into the seasonally stronger spring period of time. One would have to thing something like 10 percent, just grandfathering what you have already done would be sort of reasonable kind of number. Is that a fair sort of starting point?

I think Jeff -- I think what Jeff, was talking about was...

Incremental.

Going out and get incremental increases over where he is today. But given that our average rate per model last year for the full year was $1.483 (ph).

Right.

I think that, clearly we expect the average for this year get closer up to the fourth quarter number. So, yes, that would be in that 10% range.

Ray do you intend to change your fuel hedging strategy or you're approached to that in any significant way given the stubborn nature of diesel fuel prices?

Yes. We have made some significant changes, so our tariffs already to improve recoveries. And I know, Jeff, and his people have been approaching customers about setting up more effective mechanisms then -- that is a major task going on as we speak.

Yes. But fuel hedging probably won't change what we had in the past because of the high price of fuel. But the fuel surcharge mechanism will definitely change, as we get deeper into the year. And our desire is to take a lot of the volatility of our earnings by getting more neutral surcharge put in place to neutralize the volatility of the fuel prices.

Is that generally Max, this is a gross generalization, a contract by contract effort to put those escalators or make sure it's clearly understood by the customer, implementing that what you have already achieved, or is there something else in a general sense it's required?

It's basically a contract by contract basis and a big issue is every customer would like to have their own program, with all the (inaudible) that they deal with. And in the past, there has not been a lot of consistency.

Yes.

So, as we go out and try to push here, we are having to have customers change somewhat the way they do business, which is not always easy.

Yes. Okay. You commented I think, Ray that your gross cash flow was -- from operations was 60 and you spent 80. Do I recall or that is correct?

That's correct.

Do you have some insight for or some projection you could provide us for the current fiscal year '05?

Yes. The cash from operations I would expect to be in the 65 to $70 million range and CapEx to be in the 70 to $75 million range.

And that's gross before your decision to whether lease or?

No. I'm sorry, that is net.

That is net? Okay.

Our net CapEx. But it is a...

Okay. But that's net of what you return I meant --?

Right. No, that's net of sales...

Disposition?

But that also assumes that we increase the proportion of our fleet that is owned versus lease.

Okay. So much like you did in the fourth quarter to keep the tax rate down?

Right.

Okay.

But what were in the process because of our improved profitability, we're increasing the ownership percentage of our fleets, and we will have to do that next year to minimize cash taxes payable.

Right. And what guidance would you give us for tax rate for '05 something in 45 -- 6 area again?

Yes. 40 -- I would say 44 or 45 per range.

Okay. And then the average shares outstanding of course weren't influenced much because of the timing of the offering. If I use something like 16.5ish, is that a pretty good guess for fully diluted shares outstanding for the year?

Yes.

Okay. And I am making some gross assumptions that there's some modest influence from the stock price on your options in there unless that is it -- I assume that's...

That impacts the amount of dilution.

All right. Thank you very much.

Thank you, Nick.

We'll go next now to John Larkin with Legg Mason.

Good afternoon everybody.

Hello John.

I had a question about the massive 22% increase in revenue per loaded mile sans the fuel surcharge, I don't think I've never seen anything quite that impressive before certainly not out of a truckload carrier, but could you help us understand a little bit more where that came from?

I am guessing some of it is just pure price, some is probably allocating the equipment to more profitable accounts, and maybe the last part of it is due to the strategic repositioning into what I would call the niche markets. Do have a feel for how that broke down right or passed to that matter?

John, I'm going to give you some guide but we do -- you know it's a tough number to capture because of all the moving parts. Obviously a big portion of it, although not the majority of it would be negotiated increases with existing customers, but we've done a lot of replacement of freight from what used to be an existing customer. So which is in effect a price increase.

So, that's -- in round numbers, that has to be somewhere in the 7 to 10% range, but that's not something that I can tell you. We also had a big change in mix. If you look at our decline in the length of haul, and you look at the increase in our dedicated and regional revenues as a percentage of the total, because as you see our -- over the road solo business has declined significantly. So that shift is having a fairly dramatic impact on our rates.

Deadhead miles, that did have -- I cannot give you an exact number but that's not insignificant the fact that we're now being paid for deadhead miles more than we have in the past. And I think that will continue throughout this year. Detention is a small piece of it, but we continue to improve our detention recoveries.

And then we did take advantage of the on demand market, which contributed to that increase. So I know I am not helping, because I don't have an exact break down, but I think pure price increases is in that 7 to 10% range.

That gives me the color I was looking for. And also Max had talked about the two big driver pay increases in 2004. One of them went into effect in the fourth quarter. And I guess my question is when was that fully rolled in the fourth quarter?

And do we have the problem of getting the full dose of that driver pay increase in the first quarter without potentially impinge upon margins perhaps more so than you saw on a seasonally adjusted basis in the fourth quarter?

We got role down in stages. The first stage was in October -- November? Okay, November. And then we did another group in December. So -- and with the different divisions we have, we have the ability to do that.

So, as you look into the first quarter yes, there is going to be some increases in cost as you got - got all those different divisions that got an increase. That will impact to first quarter. But you got a lot of it actually in the fourth quarter.

You probably got a couple pennies per mile cost in the first quarter John, related solely to driver pay increases.

You mentioned you had roughly a 100 million of availability on your renegotiated lines?

That's correct.

Is virtually all of that accessible or --?

Yes. That's all available for borrowing and --

None of the covenants come into play some where below that?

No, all of that is immediately available. We will be paying down in fact, this quarter some of our debt that has prepayment penalties on it, the prepayment came down lower, and so we waited until after year-end to pay those down. So we -- our cost of borrowing will continue to come down in the first quarter.

Okay. Now that just to get back to maybe Dan's question and ask it a little bit directly on the pace of the improvement at Xpress Global, sounds like you're thinking you may lose roughly 1.5 million in the first quarter, plus or minus or maybe 0.5 million, and then in the second quarter, is it going to be of that magnitude or are we going to be sort of on the straight line basis working our way closer to zero at that point? Any flavor for how that unfolds in the second or third quarter?

I mean, usually in the second quarter is a strong quarter for that business. So -- I guess, because we are early in the stages or of the changes, we've made it pretty difficult for us to pick a number. But our expectation is everything gets better after the first quarter.

I see. That's very helpful. Thank you very much.

Thank you.

[Operator Instructions].

We go now to Michael Latronica with the Excalibur Group.

Good afternoon. Ray and Max.

Hi.

Wonderful quarter.

Thank you.

I had trouble getting on to the call, so pardon me, excuse me if you've gone through some of this already. Ray, you were given some information that was a very nice breakdown on within truckload about between dedicated rail regional, and I only caught part of it. Would you mind going through that again?

Hey, Mike, that's my statement. You might call me afterwards and we will go through that.

No problem -- no problem. You also talked about surcharge programs and changes you want to put in place in 2005. Where do you stand on percentage recovery right now? What do think your recovering on as a percentage of the incremental cost of fuel?

That's a hard number because it depends on which way fuel is going up down in the round I mean, I think, at the a level we are at today, we're in that 75 to 85% range depending what fuel's -- what directions its going in.

That is fair enough. And the speed at which it is moving.

Yes, and on the speed at which it moves.

Yes, and just an accounting thing. I realize that you only had a few days with Arnold in fourth quarter for the accounting is that going to be showing up as a minority interest?

No, It will be showing up as a investment in an unconsolidated subsidiary on the balance sheet. The income statement, it will show up as a one line item for our 49% share of their income.

Okay. Most of my other questions have been already been answered.

Be sure and call me Mike, and I will give you those data that I've gave earlier.

I'm sure will Ray. Thank you very much. Once again, great quarter.

Thanks very much.

We'll go next now to Rob Sarly with Bear Stearns.

Hi, guys. How are you doing?

Hi, Rob. How are you doing?

Not too bad. Most of my questions have been answered, but I have one follow-up question. Going back to XGS real quick, it looks like your overall total purchase transportation line was up 330 basis points as a percentage revenue over last year.

Correct.

Can we assume that the - it's about the same increase that the air to air group or do you have the break out there of what your purchase transportation was up in that group?

In the airport-to-airport group?

Right

Yes. Do you know, obviously you know the biggest part of that that increases the rail program.

Okay.

Yes. On a consolidated number, that is --

On a consolidated number.

Yes. That purchased transportation increases significantly year over year because of the big increase that we've had in our rail program.

Okay.

So, on purchased transportation for the -- on purchased transportation for Xpress Global for the quarter, it is up approximately $7 million.

Okay. And do have the number for the express rail?

I'm sorry; I do not.

Okay. That was all I had. Thank you.

Thank you, Rob.

Moving next now to Tom Albrecht with Stevens Incorporated

Hi, guys. I don't know if you can hear me. I am in a difficult location here but ...

Do you all have an office?

We will have temporary space next week. So, I wanted to explore the in XGS a little more, I know, Max know you give a very thorough and common sense explanation, but I guess, the single biggest that I'm thing I am puzzled by, is you lost 1.2 million in the third quarter and then 4.5 million in the fourth quarter.

And it would not seem to me that there would be that much of the swing factor related to sheer cost and wasted expenses in that. It would seem to me it's either it has to be a break down and operations or just a purchase transportation really represented the vast majority of the $3 million loss.

Tom, there are actually two areas where we have had some tremendous negative impact. One is, the group that we brought in late last year basically did not watch the overhead, so there were throwing people at the problem. So the head count bloated relatively fast in the third and fourth quarter.

And then also when you look at how they were trying to use the Columbus Hub, there were increasing their costs substantially just to run stuff through Columbus. If they have bypassed Columbus, they would not have occurred. So, it's really those two things together that's really created a problem. And then the other things compound it was the low track to per trailer.

They were getting, if I recall the number 15,000 or less per trailer load factor, which -- those came two or three things together just really came into a negative area. Another thing that happened to them is that with the market been relatively tight for truck capacity is they were having to pay extra premium for -- to get trucks as they were moving away from US Xpress in the last half of last year.

They paid a pretty sizable premium to get that capacity. I think, as they go into the first quarter, they do not have that. So there's almost convergence of several things all at one time that really put the pressure on.

And Tom I think, you've got to look trend of the last two quarters with the strategy that was being followed with the volume driven strategy, which makes sense. But it was volume driven strategy without regards to what you pay for a truck or what you pay for purchased transportation, taking freight just because it's tendered to you and having to order a truck doesn't drive your costs up dramatically.

So they were -- we were adding people, we were adding things planning on significant growth. And the growth was coming although not as high as they're anticipated. The overhead and purchased transportation and the things Max talked-about adds up real quick. Especially, late in the quarter because that's where you saw the capacity strength. The volume was growing and they had to go out and they were buying trucks for a lot of money.

Okay. And -- so how many people roughly does XGS employee today and what's the approximate mix of full-time versus part-time?

There are over 1000 dock workers and office employees throughout the country. Many of these dock workers are full-time/part-time people that we do not keep them on full-time, if we do not have capacity.

Right.

And I'm sorry, you asked --?

It's just so 50/50 mix; part-time/full-time or do you not really have that available?

The are a large majority that are full-time, and at this time, there's a significant portion of that there are hourly people working on the docks with which we have some flexibility with how many hours, they might work during any one week.

Okay.

But they are full-time employees of Xpress Global.

Okay.

And we try to control hours based on the capacity -- based on the amount of freight that's flowing through any one facility, obviously.

And then I wanted to ask two on the rate per mile. Let me ask it in a different way. I think, it was one of the other carriers said that, despite what their average was in the fourth quarter and yours was 1.627 that that was probably bloated by 3 to 4 cents a mile, due to the things that happened in the fourth quarter, where you're paid for deadhead miles, where you're paid bonuses, if you can get certain loads.

So should we look for the first quarter to maybe be 3 or 4 cents a mile less even though that would be a hardy rate increase year-over-year?

Yes. I would say it to be 4 to 7 probably.

4 to 7, okay. And then just on the dedicated several years ago there used to be higher paying and few years ago wasn't necessarily higher paying, but it could be more profitable because turnover would be less and your costs were easier to manage. You're running the same routes all the time.

I'm just wondering today in light of what's happened in the marketplace, our rate per mile figures higher in dedicated than other opportunities so can you just sort of address that?

I think, you've got to be careful with the generalization because all the contracts are different. We have contracts that's for example short delivery that are short-hauls with a lot of accessorials where the rate is very high.

Okay.

We've got long haul deep breadth with high miles, very high miles that the rate is low. So I think, it's really across the board but in general it's -- for us it's higher rate business than what are solo businesses.

And mostly because it's real short miles. It's store delivers.

Okay. And then lastly, on the XGS, you said that there had been discussions during the fourth quarter whether or not to even shutdown the airport-to-airport business. At what point would you do that? You talked about there are still unique opportunities, you want to see, if you can make money on. But at what point would you go back and revisit that basic question?

I think, we've -- as with anything we have, we would address and we addressed it. When we saw the results in late December and were able to identify the amount of bleeding that has taken place.

I think that's what Max was referring to, that we took a hard look and said that we've made the wrong decision here as of late to continuing to support airport-to-airport. We're -- and I think, as we've said, we think, with the right controls over cost and the right management group that there is money to be made, without significant additional investment.

Okay.

And typically margin is bigger than what you see a normal truckload.

Yes. I know that. It has been such an elusive proposition that I think, we're all wondered about it again. And it's unfortunate because you're really rocking and rolling again. And...

Tom, I think, as we get deeper into this year, you're going to be very excited.

And Tom I think, it's fair to say that we are not -- we are very disappointed with the fourth quarter. We're not going to let that happen again. We will not let to bleed us to death.

Okay. So maybe I will use that as a headline on one of my first notes here. You know, by mid year you will be pretty excited. Thanks very much guys.

Thanks.

Thank you.

We will go next now to Donald Broughton with AG Edwards.

Still at AG Edwards. Yes, I look at insurance cost per mile. It went up pretty dramatically, up almost 12 cents a mile. You obviously had some higher incidence or severity. Can you give us a little color and tell us what happened?

Well, I think, as I talked about in the earlier, I do not think, it was up 12 cents a mile, I think, it was about...

That was up to 12 cents a mile.

Up to 12, okay. I'm sorry. It's a combination of things. Number one, it is a growth in our current year-- this is the first year that we have been $2 million deductible for full-year that we've been $2 million deductible. We had some fairly significant accidents that have been settled throughout the year. And that has driven our claims experience up higher than we expected it to be. So there is some of that in there.

We've always had an actuarial report performed on our (inaudible) always in the last three years on our workman's compensation. We employed an actuary this year because we're now three years into self-insurance for high deductible. And there was -- that number came out slightly higher than what we expected.

So there's a combination of growth and existing claims and some catch-up of other things. I expect that our insurance expense on an ongoing basis would be closer to that 5.7 to 6% would be a reasonable number to look at.

Yes, it was tracking really pretty solidly over the last six, seven quarters in that 7 to 8% -- 7 cents to 8 cents of mile range and then all sudden just took a big jump. You know, perhaps...

...deductible and the impact. We have been increasing that really over the last two to three quarters. And given that we have an actuarial review, I feel pretty good about where we are now.

And again Ray on the purchase transportation line can you give us a number on how much of that was the check written to the railroads for their -- in a mobile services provided?

On the quarter?

Yes.

It was around - with fuel it was around 22 million.

Really almost total of the year-over-year increase in purchase transportation came from mobile services.

But you had an offset yet. Yet it going up within mobile -- a number of owner/operators going down. So, yes, that's in global, we have increasing in global, we have increase in rail and offset by the owner/operator.

Because I am saying is the biggest driver -- because we really weren't doing very much in the mobile year ago.

About $7 million last year.

7 million last. Okay. Great. Thank you very much. I'll allow someone else to ask a question.

Thanks Donald.

And just one final reminder any question today, please press "star" "one." And we will go next to a follow-up question from Nick Farwell .

Ray you commented that you will have Arnold on the income statement as a line -- specific line. It was not in the fourth quarter. I assume that was because it was not material.

That is correct. That's correct.

So it start -- we will start seeing it at the first quarter, some number that will be perhaps up of the operating revenue line or?

Yes. We will make for we disclosed in the future I didn't say was important for 20 days of operations but for the first quarter we will be reporting what Arnold performance is and it will show up as a one line item with in our income statement.

And that will be just be I assume you're -- per right share of their operating income?

That's correct.

Okay.

No. That will be of their after-tax income.

After tax is basically that, as that gets larger, your tax rate get smaller since that is an after-tax number not tax effective by the corporate rate?

That's...

It is fastest rate too.

Without going into all the complications of how we provide taxes, generally we will pick up their after-tax number of 49% of their bottom line net income will go to will be our number one report on our income statement.

Do you expect any write-offs from-- when you expect, perhaps a loss of 1 million to 1.5 million in logistics in the first quarter, does that included any write-off from the downsizing of logistics' business during the January timeframe?

It does include some severance pay.

It does?

Yes.

And so it maybe some portion that 1 million to 1.5 million is sort of non-recurring item that will flow through that first quarter.

Yes. That estimate that we stated would include severance that we aware of.

And was there some also that loaded up the fourth quarter?

Not material. No.

Okay. I was a little surprised and I may be looking this incorrectly that utilization although up modestly, I think, was indeed 2%.?

Miles per tractor?

Yes. I think that's what I use.

Yes.

In case -- in the deadhead -- did not improve noticeably maybe that's a best way to put it, given the tight capacity in the current marketplace. Is that just a function of the mix shift that's going inside your gross businesses?

Two things, it is mixed and in fact we remain, I don't have the exact number - a lot more debt had miles that we got paid for.

Yes. Okay.

Customers ask us to reposition and we did it.

Because you're getting paid to do it.

That's right.

Okay. So do I -- when I look at the utilization and the tight environment, I would have thought that would have improved more noticeably than it did. But that's more just the deadhead issue you're talking about?

You remember (inaudible) was down was 8%, I think it was and I think a combination of that and...

And paid deadhead.

And paid deadhead drove our XP (ph) models up.

Okay. And what would you suggest us is a reasonable interest expense number versus the 9.2 million in '04 just as a sort of a guidance number? Since we really only saw a piece of the pay down in the course of the December quarter.

So if we look at the December quarter, I can extrapolate a number. I just was curious, if you could perhaps give us a little more guidance. Assuming your CapEx sort of expectations in the -- sort of your ...

I think its safe to say, our -- let me do it this way. So I don't have to figure out a number. Right now, we have approximately $150 million in balance sheet debt.

Yes.

And our average cost of borrowing right now is around 4.4%.

About 4.5. Okay.

Yes, so that we will see if interest rates -- and we have some additional moves, we're going to make that will bring that down from where it is today, but we also have some interest rate pressures probably in the marketplace. So, I think that can give you a pretty good feel for what - because I don't think the debt will go up or down significantly throughout the year.

Okay.

If you use it, does invest in our capital.

All right. So the two will basically offset each other. Its in fact you assume more operating leases or I'm sorry -- you end up owning the equipment, that maybe offset by some measure of debt reduction in the interest formula you are paying.

That is correct.

Okay. Thank you again.

Thank you.

And gentlemen, it appears we have no further questions for the day. I would like to turn the conference back to you for any closing or concluding remarks.

We would like to thank everybody for participating in our call. Like we said, we're pretty excited about the results of this quarter, this past year. And we're dedicated to making this 2005 even a better year. Thank you.

Thanks very much.

And again that will conclude today's US Xpress conference call. We thank you all for joining us and wish you a great day. Good-bye.