US Xpress Enterprises Inc (USX) 2006 Q3 法說會逐字稿

Thank you for standing by. Welcome to the U.S. Xpress third quarter conference call. At this time all participants are in a listen only mode. Following today's presentation, instructions will be given for the question and answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Tuesday October 24, 2006. At this time I'd like to turn the presentation over to Tripp Sullivan of corporate communications. Please go ahead sir.

Good morning. Thank you for joining this U.S. Xpress conference call. On the call today will be Max Fuller and Pat Quinn, Co-chairmen; Ray Harlin, Chief Financial Officer; and Jeff Wardeberg, Chief Operating Officer.

Before we begin, I'd like to cover the safe harbor language. Certain statements made in this conference call may be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended; and Section 27A of the Securities Act of 1933, as amended. You should consider carefully the risks and uncertainties described in our press release issued last night, and various disclosures and filings with the Securities and Exchange Commission.

The company disclaims any obligation to update or revise any forward-looking statements to reflect actual results or changes, and the fact affecting the forward-looking information. I'll now turn the call over to Ray Harlin. Ray?

Thank you Tripp. Good morning. We thank you for taking the time to participate in our third quarter conference call. We will briefly discuss the results of our operations for the third quarter of 2006, and following these comments we will be glad to respond to any questions.

Consolidated revenues for the quarter increased 33.4% to $396.6 million. Excluding the effect of fuel surcharges, revenues increased 27.5% TO $334.8 million. Net income for the 2006 third quarter was $7.3 million or $0.47 per fully diluted share, versus net income of $4 million or $0.25 per fully diluted share in the prior year third quarter.

Let me now address a few of the key events and factors which contributed to the significant improvement in earnings for the third quarter, which represented a new record for our company for quarterly earnings per share.

The results of our turn around of the Xpress Global operations continued during the third quarter despite a slowing freight environment in the floor covering industry. For the quarter, Xpress Global had operating income of $1.5 million on revenues of $24.1 million, or an operating ratio of 93.8%; compared to the prior year quarterly revenue of $24.1 million and an operating loss of $2.2 million.

As in the first half of 2006, continued execution by management of their plan of achieving improved all time customer service, better yields and approved cost control, contribute to the much improved operating performance.

Revenues, excluding the effect of fuel surcharges of our truck load operations, increased 29.4% to $312 million, while operating income improved by 51.6% to $17.7 million in the third quarter of 2006. The increase in revenue and net income was attributable primarily to the contributions of Arnold and Total, in which we increased our ownership to 80% on February 28, 2006.

On a combined basis, Arnold and Total generated revenues of $76.8 million, and operating income of $6.6 million, representing an operating ratio of 91.4%. Both of these companies achieved substantial sequential quarterly improvements in operating income.

Regarding our U.S. Xpress truck load operations, revenues declined by 2.2% to $236.6 million, while operating income declined by 4.5% to $11.2 million. As has been widely discussed in previous industry releases, freight demand during the third quarter was clearly softer than in the prior year third quarter, and the spot market has been depressed throughout the 2006 third quarter.

In the 2005 third quarter U.S. Xpress benefited from the significant capacity constraints and very strong spot market, which favorably impacted the truck load industry, and the aftermath of the hurricanes during the third quarter of 2005.

Despite these factors, we achieved comparable margins in our U.S. Xpress truck load operations on a quarter-over-quarter basis, which we believe indicates that we have definitely improved the results of our core base business within our truck load operations.

Let me now turn to the truck load metrics included in our press release. The truck load statistics for the quarter ended September 30, 2006 include both Arnold and Total for the full quarter, while 2005 statistics include only U.S. Xpress truck load operations.

As the average length of haul, Total and Arnold on a combined basis, is approximately 420 miles, or approximately 38% lower than our U.S. Xpress truck load operations, their average miles per tractor, per period, will generally be less than U.S. Xpress truck load operations, and their combined rate per revenue mile and dead head percentages will generally exceed U.S. Xpress truck load operations.

For example, the combined average revenue per revenue mile, dead head percentage, and revenue miles per tractor for Arnold and Total, on a combined basis in the third quarter of 2006, was $1.79, 16.4% and 21,350 miles respectively.

On a quarter-over-quarter basis our consolidated rate per revenue mile for our truck load operations improved less than 1%. However, the prior year rate per mile reflected a very strong spot market and a significant amount of paid dead head. These positive factors were generally not experienced in the third quarter of 2006.

On a sequential quarterly basis, our rate is up over 2%, and in our base contractual business we estimate that our year-over-year rate per miles, within U.S. Xpress, increase exceeds 3%; while the rate per miles increases for Arnold and Total both exceeded 4% on a year-over-year basis.

Focusing on U.S. Xpress truck load operations only, our utilization declined slightly to 24,420 from 24,495 in the prior period; and our dead head percentage declined to 10.76 from 11.32% reported in the third quarter of 2005.

Our length of haul within the U.S. Xpress truck load operations was approximately 665 miles for the 2006 third quarter. If you exclude our team and intermodal operations, the length of haul for U.S. Xpress truck load operations was approximately 500 miles in the third quarter of 2006.

At September 30, 2006 the average age of our total tractor and trailer fleet, including Arnold and Total, was approximately 23 months and 50 months respectively. In anticipation of the introduction of the new engine requirements in 2007, we will be taking delivery of approximately 1,900 additional tractors through the first quarter of 2007, which will substantially reduce our fleet age, and significantly delay our need to purchase tractors with the new 2007 engine.

Based on current delivery schedules, we expect the age of our tractor fleet to approach 1.5 years in the first quarter, and our trailer fleet to approach 40 months in the third quarter of 2007. For all of 2006 we now anticipate net capital expenditures to be in the range of $130 million.

From a balance sheet perspective, our long term debt, including current maturities at our securitization facility was $329.1 million at September 30, 2006; the stockholders equity at $245.3 million; our debt to total capitalization at September 30, 2006 was 57.3%.

During the quarter we announced the completion of the acquisition of a 49% interest in Abilene Motor Express, a truck load carrier with approximately 170 tractors and over $35 million in annual revenue. Abilene is a well managed and profitable carrier, with significant opportunity for profitable growth in the future.

In closing, we are pleased to have achieved another quarter of record earnings per share, which exceeded by $0.01 the previous record of $0.46 per share, reported in the fourth quarter of last year. Over the past two years our management team has diligently pursued a strategy of improving returns in each of our business units, and achieving the turn around at Xpress Global, acquiring 80% of Arnold and Total, and through the diversification and reshaping of our U.S. Xpress truck load business, we believe we have made significant strides toward our goal, and continue to have significant opportunities to improve returns in the future.

We will now be glad to respond to any questions.

[OPERATOR INSTRUCTIONS]

Our first question comes from Justin Yagerman with Wachovia Capital Markets; please go ahead.

Sorry about that, I had the mute function on. How are you doing, guys?

Good.

I just wanted to talk to you, get a sense, could you remind us what percentage of your business is spot related?

It varies, but it's going to run, generally, from 10% to 15%.

When looking at that in the quarter, it sounded like your contractual rates were considerably stronger than the revenue per loaded mile. I mean I'm sure there was some mix adjustment that was going on there. How bad is the spot environment that things have kind of deteriorated to the 50 basis points that you posted on revenue per loaded mile?

Actually the spot market's probably as soft as we've seen it since the year 2000. There's still freight out there, but it's gotten really cheap real fast, and it's really occurred here in the last probably 45 to 60 days, but more so here in the last two to three weeks.

Justin our base contractual rate continues to show strong improvement year-over-year in all segments of our business.

Yeah I know, that's why I guess I'm so surprised at how fast the spot market has moved away. When you talk to your customers, are they still talking to you about, because we've heard from other carriers that peak season, customers are still talking about peak freight, it's coming, it's coming. What are they saying to you when they're talking to you? Are they making plans for more capacity this last week of October or into November at all?

Justin, this is Jeff Wardeberg. The customers that we're talking to are indicating that there will be an up tick in peak season business. They're unclear, at this point, as to exactly when that's going to happen, and are a little surprised that it hasn't happened already.

But I'm not hearing from them that they're making additional capacity plays.

So I guess, is the expectation at this point that it's not enough to soak up the excess capacity in the spot market? Do you have any visibility into that?

I think when we look at it we're seeing obviously some additional business going to the intermodal side of the capacity market. We're seeing the housing sector and the automotive sector with significant softening, and our theory is that a lot of the carriers that serve those markets are moving into the truck load environment that we play in.

We're also seeing private fleets that predominantly handle their own company's products playing in our environment. So we're seeing capacity come into our truck load environment from those various factors.

So there's actually the private guys, I don't know if you're willing to say who, but I'm assuming fleets like the Wal-Marts or the Targets or what have you of the world, are actually coming in and competing in the third party market?

I'm not going to identify for you which ones we're seeing, but we are seeing some private fleets entering the truck load markets, some smaller private fleets.

Okay, smaller private, okay that's the first we've heard of that. I guess that's all I'm looking for. I mean can you just kind of go through, if possible, I know it's always hard to break this out, but you guys segmentation by revenue, if you look at verticals, how much is retail, manufacturing, auto, housing?

It has not changed that much from the things we've done on previous presentations, and we're not prepared to go through that for the third quarter yet as far as the segmentations. But it has not changed dramatically from what we've disclosed in the past.

Okay, I appreciate it gentlemen, thanks a lot.

Thank you. Our next question comes from Tom Albrecht with Stephens, Inc., please go ahead.

Hey guys, good morning. Better morning than your stock's indicating, but nice quarter nonetheless. A couple of questions, you mentioned that spot was 10% to 15% of your revenues. I know it's hard to be exactly precise, but the way I really look at it, and I'm wondering what your thought is, is on the long haul business, it's actually quite a bit more of that.

And so, maybe 10% to 15% of your consolidated but - I really picture your dedicated and your regional business as a very small player in the spot market. Am I correct on that?

That's a fair assessment, to a certain extent. [inaudible-two people talking].

So, would it be, like, 30% of the long haul business, perhaps, that plays in the spot, typically in the second half of the normal calendar year?

That's a hard thing to break down. You know, really Tom, we don't have a lot of long haul business anymore. Our average length of haul for our trucks, other than teens and [inaudible-two people talking] is about 500 miles.

Right.

I mean, that still means we do some longer length of haul, but it's a small piece of the total pie. I mean, the spot market enters into the regional - enters into our on-demand business and it enters into the medium-to-long haul business that we have. So, it varies.

Right.

The spot market is not exclusively long haul business at all.

It's market-by-market; market-by-market, geographic-by-geographic. It depends on demand in a certain geographical area that kind of draws it.

Right, Okay. No, I agree totally; I just thought maybe it was worth noting that what spot you have possibly is more disproportionately focused on the longer haul.

Let me ask a couple of other questions. How did you inter-modal revenues perform? What were they and what were they a year ago?

They are down just slightly from last year in the quarter.

Okay. Now even though stuff's going by inter-modal, in general, and you made that statement; is there anything we can glean from the fact that your inter-modal revenues were down just slightly?

I think that, if you look at how the inter-modal's moving, you've got international containers that are coming directly off of ships.

Yes.

Then, trans-loaded directly onto a train and maybe run all the way to Chicago. So, that basically means for the domestic guys, which we would be one of them, probably wouldn't play as strongly in that environment. And if you talk to the BNSF that's on the western railroads, they've gotten a lot of traction to the international products coming in. And, they're actually moving it that way.

So, that's where a lot of the changes occur.

Okay.

And then, part of our inter-modal business being down is because of the inter-modal business we do. You know, we've been refining and focusing on the more profitable lanes and that's more of a reflection of why we see it down a little bit this year.

Right; yeah, no I agree totally. What about XGS? You've had a terrific turnaround this year. But I -- I just really worry about that as I look into 2007 a little bit. The revenue growth has essentially been flat; you took a tremendous amount of cost out. But, we know that carpet hauling is tied so much to housing starts. Can you give us any perspective on whether you think you can continue to make at least $1 million in operating income per quarter?

On average, on a seasonal - remember, it's a seasonal business - [inaudible-two people talking].

Yes, I know.

And so, first quarter and fourth quarter are seasonally slower periods. But, we think we've got the business model fixed. We think we've got the right model and we're not as concerned about a slowdown as it might appear.

Now Tom, one thing that we did as we were fixed in XGS, we actually went in and created more variable costs in how they deliver the product out in the field, which has helped the company as revenues decline a little bit on the top line. We don't think that the bottom line will decline nearly as drastically.

What specifically did you do? Because, you were always owners/operators there, as I recall. So, I don't know how you get much more - [inaudible-two people talking].

Some of the locations where we used to have our own facilities out in the field, we set up agents….

Okay.

…and agents in the smaller markets, so we don't have that high fixed costs and not have the volume going through the network.

All right, so even if revenues were to drop 10%, I mean, in the old days, that would lead to a 50%, 60% drop in operating profit. You feel like it'll be much more resilient without putting exact numbers in your numbers in your mouth?

I think that's a fair assessment that we think, with the softness in revenues, that we can - we may not make 7% but we will still be in a [pod] that's operating income [inaudible].

What about - I know you don’t give guidance, per se, but, as I look at the fourth quarter, you know, a year ago, you did, I believe, $0.46; $0.46 or $0.48, I forget.

$0.46.

$0.46, yes. And, we all know that freight's more challenging; and it's going to be through the end of the year. I mean, even just because of the comps are tougher; even if [inaudible] could've been a little more vibrant. But, you've got maybe a quarterly run rate of $6 million in Arnold ATS operating income.

What're your thoughts on whether you can at least match last year's number? Just any thoughts at all that you might want to give.

As we've said, Tom, we're not giving guidance and obviously with a lot of months to go in the quarter. You know, from a historical perspective, in more normal years, this was not unusual to see fourth and third quarters be very comparable if the trends in freight stay the same.

So, I think that that's as far as I'm going to go at this point in time.

I'm trying my best to trap you but [laughter].

You try all the time, Tom. [More laughter]. And we're being as direct as possible also [inaudible-two people talking].

No, I know you are [inaudible-two people talking]

[Inaudible-two people talking] difficult as I think you'd see in the third quarter, our U.S. Xpress truck [inaudible] business is the base business has much improved.

Arnold has totally consistently provided good returns and we continue to work towards improving those. We've added the Abilene Transactional, which is a fine and profitable carrier.

So, we've done a lot of things. I just don't tell you what freight might do in the next two months that would change any outlook that we might have.

But that being said, on the normal type of basis, you would expect the third quarter and fourth quarters, give or take a couple of pennies, to be equivalent.

Right, right. Refresh my memory, what was the start date for Abilene? And, what's the annual revenues for that?

Their start date was the beginning of September; it closed right at the end of August.

Okay.

And, their revenue rate is around $37 million, $38 million right now.

Okay. All right and then, gee whiz; when you talk about softness, Max, you know, you've got a lot of new parts to the business that make it feel like you're growing. But I know, deep down, what you're really referring to is sort of unit metrics. Maybe it's miles-per-truck or load-per-week, or whatever.

What - what's the magnitude of the decline in maybe the miles-per-truck per week, thus far in October, as we think about things on a year-over-year basis?

Hey Tom, we really, on a year-over-year basis, to date in October, have not seen a dramatic decline. And for a significant decline in the metrics as it relates to miles-per-truck and the efficiency of trucks.

We have not seen that at all. The biggest thing is [inaudible several people talking] is mile rates, the paid [inaudible] and spot rates that were predominant a year ago in October because of the capacity constraints, that does not exist right at the moment.

Okay.

That is the biggest difference if I had to put my hands on the [inaudible], that is the biggest difference between last year and this year at this point in time.

You're - you're basically saying if this were May or June, freight's pretty good. It's just that for October -.

It's decent, yes.

Okay, all right. Well that's helpful as we try to roll through a few numbers here. Okay, I think that's it guys. Thanks very much.

Thank you. Our next question comes from John Larkin, with Stifel Nicolaus. Please go ahead.

Thank you for pronouncing the name of our firm correctly. I think it's the first time that's happened this earnings season.

But in any event, a couple of questions for you; I know it's dangerous to go much beyond the next couple of weeks, the way many investors are thinking these days. But, if you could take a longer-term look, say, out over a three-to-five-year planning horizon, where do you think the operating ratio for US Xpress truck load operation can get?

Is it possible that it could catch up to, say, Total Transportation in Mississippi and Arnold, at some point here over the three-to-five-year horizon?

I think in the past, we basically have discussed that there's really no reason why we can't equal some of our peers in the marketplace. And some of those guys are running in the high 80s and the low 90s. And we think that, if we continue to improve our core business, which over the last several quarters you've seen some pretty good improvement; over time, we'll get to the same place they are.

You know, three to five years should be enough time for us to get there; we'd predict three but at least the five, we should - we're seeing substantial improvements in the markets that we're in. We're getting real good traction. Now, we've got to get the velocity and that's what we're working on every day.

A slower market here is probably going to slow the process down a little bit. But, over the long-term, we should pop out at the backside of a slowdown pretty aggressive.

And John, I think that's evidenced by the progress we've made in the Solo regional fleet, which is still a significant portion of our business. And, as you know, we've brought down the length of haul, segmented the business up. We're starting to get more terminal-oriented. And, we've seen a minimum on the metrics through improved dead head and improved yields.

So, we're making traction in there and that is probably the key part of our getting our operating ratio to be equivalent, if not better, than some of our peers in the group.

Is it fair to say that your revenue per loaded mile, with your base contract business, exclusive of whatever you see in the spot market, is about in line with everyone else that provides roughly the same kind of service? Or, do you still have some catch up to go there?

We think we've done a lot of catch up. It's hard to say. I think we've - what our focus is, is in matching up the freight and getting more efficiency and a better match to the regional freight in turns.

So, the real improvement in operating margin is going to come from just turning the trucks faster, fewer empty miles, better utilization of the assets?

It's really; that's right, to a certain extent. But it's really continuing to develop the network. And when I talk about the network, it's where we have trucks that land and how we - which markets we send them back to, which customers we're dealing with; how long they get hung up in between loads.

So, the network is probably the biggest thing, but some of what you said is true. We do have to get better utilization and lower dead head and, hopefully, better yields.

But the network is part of what gets you there.

What, what information…[inaudible].

Let me give you an example, John, of some of the headway we're making. In the Solo fleet, which is the regional shorter haul fleet, we were running about a little under 500 miles. Our dead head, year-over-year, has improved by over 3%.

So, we've gone from 16% to 13% type dead head. That is a huge - and that's due to a better network and a better mix of customers and things like that.

[Inaudible] stock market.

And our net freight has improved and therefore, our net rate has improved dramatically and our yields in that market have improved.

So, those are the type of things where we say we've got the momentum of improvements. That's where it is and that is almost 2,000 of our trucks in the U.S. Xpress core business.

Okay, and, let's see; I had another question; regarding, you know, historically, the business has been, perhaps, more seasonal than some of the other truck load carriers. You know, as you have become more of a regional player, both with TTM and Arnold and the 2,000 trucks in the core business, be more regionally oriented.

What's your sense about the first quarter of next year? Are there any additional steps that you can take to insure that, at least the company is profitable in the first quarter? I know that's historically been a challenge.

John, I think that if you go back and look at the changes that we've made in our base business, when we used to be in the long haul business, the nature of the freight was imported goods going into a distribution center.

If you look at, really, how our business has changed, most of what we do today is the distribution center out to the stores. So, the January, February and July slowdowns that we used to have, if you look at this year, it has not been as pronounced as it used to be when we were in the long haul market.

We've also done quite a bit in the dedicated arena where those trucks tend to operate more consistently. So I'm not going to say January's going to be a great January, especially with the spot market environment that we're seeing at the present time. But our core business in January will be a lot more consistent than what we've had in past years, because of the nature of the business that we're in.

In fact, in the long haul business they're not filling those DCs in January and February, but in fact they are filling the stores. They have the sales at year end, and then they're trying to replace the stores from what they've got either in a pipeline or in the DCs. So that business is a lot more consistent. And if you look at the bulk of the business that we do today, that's where we're at.

And just to maybe add to that John, and I think it's evidence that what Max says is true, if you look at the slow months, like a July or whatever, our yields this year are much better than our yields in prior years during these slow months. That's because we're not so dependent on generating top line revenue as much as we are on generating the right revenue.

Where do we stand with respect to the conversion into the shorter haul and more dedicated, more regional markets? Are you where you'd like to be, or is there still more conversion to go out?

We're still moving some assets, but we're substantially there. With the multiple business units that we've got and with the change in economy, you'll see us continue to move assets around to where we get better yields. We've got a market that's weak you'll see us move them into a market that maybe has more demand and better returns.

With a declining market here, you'll probably see us move more assets out of the spot market capacity into things like dedicated and more in that DC to store type business. If you see the spot market get real strong, you may see us pull some back so we can play the high dollar spot market. But you play the cycles, and we're substantially where we want to be; now we've got to get the network refined, and that's what we're working on.

The customers are not irritated when you flow equipment from sort of opportunity to opportunity?

No, it's more incremental equipment. Your core business usually stays pretty consistent, it's the incremental equipment that you may have on the market that is pushing you maybe into that spot. So we'll move it into something that gives us a better return, maybe into, like I said, a dedicated type of account.

Okay. Now of the 1,900 new trucks that are coming on stream between now and sometime in the first quarter, how are those going to be financed, and what impact is that going to have on the availability under your credit facility, if any?

Partially leased and partially owned I guess is the response. As far as the availability under our credit facilities, we still have significant availability. We expect to keep significant availability because those trucks have already been arranged under lease, or we had adequate direct financing to cover them, and we have positive cash flow to help pay a proportion of them too. So our liquidity should remain very similar to what it is today.

And I guess it will improve somewhat next year as you really reduce the number of new trucks that you take into the fleet.

The key is our debt will flow through the first quarter and then once we get through, starting in the second quarter, we'll start to substantially reduce the debt.

Then just one last question. You've now done three of these deals to start you out with partial ownership and then if you like the test ride you can take your ownership percentage up, I guess, on some kind of an option that you've designed into the agreement. Are there additional deals like that out there that you're evaluating? Would you see the company doing saying one of those a year, or two of those a year in future years? They seem to be working pretty well for you.

I think it's a little big hard to sit here and say we'll do one a year, or two a year. When those unique opportunities come along you'll probably see us seize the opportunity. But we look at probably 15 or 20 companies for every one that we get serious about. And you don't know which one it's going to be sometimes. So it's kind of hard to sit there and put a number on it, and a target.

We think that it gives us better traction in the regional markets or some specialty markets that we want to be in long term. And that's the primary reasons for the acquisitions.

And long term, John, it helps to extend our terminal network. You know we've come from a long haul carrier where we don't have a lot of terminals, but as we become more of a regional player this will help expand our terminal network with support the number of trucks that we have.

As the demand environment has softened a little bit here, have you seen an increase in the number of deals that you're being shown, or that you're looking at?

Not a dramatic increase, although since really the first part of this year there's been a lot of activity flowing across the desk. But it has to be, I mean we're very, very picky I guess, and we're not motivated buyers, we're waiting for the right thing, has the right people and the right company.

Well thank you very much.

[OPERATOR INSTRUCTIONS]

Our next question will come from Chaz Jones with Morgan Keegan. Please go ahead.

Good morning guys. Maybe if I could turn our attention back to rates here, and I wanted to focus on the fourth quarter. Certainly we're up against some pretty tough comp year-over-year. If the spot pricing environment doesn't get any type of up tick here, and we don't really see demand improve sequentially, is there the potential out there that revenue per loaded mile could actually be down year-over-year in the fourth quarter?

Chaz I think we've said that throughout the year, that we expect our rate per mile to be down in the fourth quarter, but that's not an indication of what we might expect through margins. I think we've shown this quarter that with that rate came a lot of cost also.

Right, right.

And it's going to be down because of the spot market of last year. Last year we were getting so many dollars for dead head and stuff like that, that you're not seeing this year. So that's going to be one reason, if we can just come somewhere close to last year's rate we think that would be a big win.

Okay. And the equipment that you're bringing on here at the end of 2006 and beginning of 2007, is any of that equipment going to be growth oriented, or is that just going to be dictated by demand and drivers?

It can be growth because of the way our packages are set up. It can be growth or it can be replacements and we'll let drivers and demand decide what that is.

Okay. And one other question I had, I know you guys aren't breaking out really revenues across the divisions specifically, dedicated rail and team and regional I guess being the four divisions, but are you really seeing any difference there in terms of relative strength or weakness in demand when you look at those divisions individually?

Dedicated is generally contractual business, so demand is not as big of an issue in our dedicated arena. And to a certain extent teams are in a niche business and it's not quite as impacted as the rest of the truck load business.

Actually some of the truck load business are on such consistent runs that demand doesn't seem to adversely affect it, but some incremental capacity it does.

Okay. And then lastly here, if I go back and look at my notes, I think last year Arnold and Total did about a 95 OR. In this quarter we saw almost 360 basis points improvement in that OR. Yet it seems like the commentary has been that it's a soft environment. Is there an area that is really driving that improvement? Has it been the ability to get some cost synergies there? And I guess tack on to that, is that a sustainable type of operating ratio as we look out here for Arnold and Total, I guess in this environment.

All those things. I mean really what has happened is all those things and management of those companies has done an excellent job. Their rate increases and their net realization is up in excess of 4% year-over-year; they have realized some cost savings this year, especially on the insurance side of the business, because they are part of our insurance program now.

There's some other things that they have done, so they've performed at a high level and managed their business. So all in all that's where it's coming from.

Are you there?

Yes Chaz, I decided to shut up.

Well I know the stock doesn't reflect it, but great quarter guys.

Your next question comes from Dan Moore with Focus, please go ahead.

Hey guys, good quarter. I just had one question to ask. I'm looking at a freight index here that goes back over the last six or seven years, and historically it looks like the last week of October kind of marks a peak for a more traditional season, as shippers are gearing up for Thanksgiving. At least the spot market, which I would assume is as good a proxy for the broader market than anything. Can you just kind of elaborate on, in a traditional environment, or more typical environment, peak season environment, what weeks kind of mark the zenith or apex for the market? Is it generally the last week of October, the first week of November? I know there's going to be some movement there, but if you could just refresh my memory, that would be helpful.

When you look at how [inaudible] usually starts, it usually start in late September and ramps all during the month of October, and the last two weeks of October is usually the very top of the peak, then it usually starts tapering, sometimes the second week of November.

This year it's been a very late arrival, we're seeing, the only place we're seeing anything you could call peak right now would be in southern California, and there seems to be a shortage of trucks in that market. But anywhere else in the country that's not true. So this is not going to be a normal peak we don't think.

That's really all I had guys. Thanks again, I really appreciate the time, and a really good quarter.

Thank you. Our next question will come from Tom Albrecht.

Just a quick follow up. Your tax rate has always been volatile. I'm just kind of curious if you've got any near term thoughts. I was a little surprised that it went up. I was modeling more like what you did in the second quarter, 43.6 and it was 45.9. Just what should we be thinking about the next couple of quarters?

To give a short explanation Tom, our tax rate's impacted in a big way by a couple of things. We've got three different companies that have three different tax characteristics. Some have per diems, some don't have per diems. As you know, per diems are a big factor in determining what your effective tax rate is.

So you've got three companies, you've got to estimate three pre-tax incomes, and you've got to estimate three types of permanent differences. So we can have changes in, for example, the higher your minority interest, since that's not a deductible item on your income statement, that will drive your consolidated number up.

All that being said, that's what's caused the volatility. I do not expect our effective rate to go higher than it is in this quarter.

Okay, so for safety sake maybe model 45, 46, so that if we get surprised, so be it.

Yes 46 probably, that would be a good start.

Okay, thank you.

Thank you. Our next question is a follow up from John Larkin. Please go ahead.

Just a quick question on the dedicated operations, which is becoming a bigger part of the business. Is it safe to say that those are priced to be more profitable than what I would call the free running truck load business?

Historically, John, their margins have been better than our truck load business, yes.

Okay, so is that still the case? Has there been any change to that?

That is still the case.

Okay, that's very helpful. Thank you.

Thank you. And at this time, we have no additional questions in the queue. And we'll turn the conference back to you for any closing remarks.

Okay. We'd like to thank you for your interest in the company and listening into our call and we look forward to talking to you again next quarter.

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