Knight-Swift Transportation Holdings Inc (KNX) 2005 Q3 法說會逐字稿

Good morning.

My name is Holly (ph) and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Swift Transportation third quarter earnings call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Jerry Moyes, Chairman and CEO of Swift Transportation.

Good morning.

Thank you, Holly, and welcome to Swift Transportation's third quarter conference call.

Today we will begin with legal disclosures.

Today's presentation and discussion will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Words such as “expect,” “believes,” “anticipates,” “intends,” “estimates,” or similar expressions are intended to identify those forward-looking statements.

These statements are based on Swift's-- Swift Transportation's current plans and expectations and involve risk and uncertainties that could cause future activities and results of operations to be materially different from those set forward in the forward-looking statements.

For further information about these risks and uncertainties, please refer to Swift Transportation's report and filings with the Securities and Exchange Commission.

First of all, I'll begin with a summary and some of the highlights for the third quarter.

Bob Cunningham will go through the operational results and Glynis Bryan will finish with some of the financial details.

One of the major highlights of the quarter was the resolution of the litigation with the FMCSA regarding our '03 safety audit and purposed reduction of our safety rating.

As disclosed earlier in the quarter, the FMCSA just completed a review of our operations and safety controls and issued a satisfactory-- or issued a safety fitness rating of satisfactory, the highest rating they issue.

The satisfactory rating resolves our current litigation over the agency's proposed conditional rating, but our current litigation with the FMCSA over civil penalties in connection with the '01 and the '03 audit is not affected by the FMCSA's recent actions.

The total fines proposed in these cases are approximately $87,000 and we're working to bring this to resolution.

Another major factor in the quarter was the resolution of the investigation by the SEC into certain stock transactions by the company and other insiders, including myself, in the first half of '04.

As we previously discussed, I have come to a settlement with the SEC and the SEC has indicated that they will take no further action against the company or any of the other insiders.

Some of the other numbers, our weekly loaded miles is up.

Our deadhead is down.

Our revenue per tractor per week is up and our intermodal implementation plans are right on track.

So with these key issues, I'll turn it over to Bob.

Good morning, everybody.

Thanks for participating.

We appreciate your attending the conference this morning.

We'll start with our revenue per loaded mile.

Our revenue per loaded mile for July was $1.555, for August was $1.584 and September $1.602, $1.602.

We continue to make progress with our revenue per loaded mile.

As you can see, we took a dip in July, which was the result of the softness in demand.

We ended up taking freight that we otherwise would not have moved to keep our fleet moving in July.

The good news is, is we got back on track in August and September shows continued success and increases there.

Next we'll go to our revenue per loaded mile for the quarter.

Our average for the quarter ended up at $1.58.

That's up $0.06 year-over-year or approximately 4%.

And, as you will recall, when we sold our auto-haul business in April we previously estimated that the impact of the sale on revenue per loaded mile would be somewhere between $0.02 to $0.025 cents.

So on an apples-to-apples basis, we're actually up $0.08 to $0.085 or approximately 5.5%, year-over-year.

Next we'll talk about our weekly loaded truck miles.

We ended Q3 at 1931 miles.

That's up from 1912 in Q2 and 1844 in Q1.

That's good, steady progress in our weekly loaded truck miles.

For the quarter we're up 19 miles per truck, both year-over-year and from Q2 and that's in spite of the soft freight demand that we experienced in July and the first part of August.

The decrease in the fleet we discussed in our pre-release conference call has enabled us to continue to improve our loaded utilization, despite the softness we experienced in the quarter.

The average truck count for the quarter declined to an average of 17,224 units in the third quarter and that compares to 17,776 in the second quarter of 2005.

Our operational truck count between June ending and September ending was down 1000 units.

Therefore, our average for the quarter ended up being down approximately 550.

We're currently anticipating our average truck count for the fourth quarter to be approximately 17,000 trucks.

The good news is, is we have the ability to flex as market dictates.

We have new units coming in to the fleet each month and we have the ability to time our trade so that we can react relatively quickly to freight demand.

We also anticipate continued improvements in our utilization as we use our prioritization tools and other disciplines to enhance our productivity.

Next we'll talk about our deadhead.

We continue to make progress in reducing deadhead.

Our deadhead dropped to 11.6% in the quarter from 12.6% last year and 12.0% in second quarter of 2005.

We think this is evidence of our network management tools and the implementation of the trailer tracking technology, all of which are helping us to reduce our deadhead miles.

We currently have trailer tracking installed on approximately 18,000 trailers and we're going to continue to-- with this implementation throughout the next year.

One of our major justifications for trailer tracking was driver satisfaction and improved turnover, in addition to the savings from empty mile and miles increases, our detention revenue and a reduction in our tractor to trailer ratio.

We'll next talk about our revenue, excluding fuel surcharge, per tractor per week.

We ended Q3 at $3051.

That's up from $2994 in Q2 and $2851 in Q1.

The yield, utilization and deadhead improvements that I just discussed are resulting in steady increases in the overall productivity of our tractors.

Our revenue per tractor increased $57 from the second quarter and $146 compared to the third quarter of last year.

We expect our progress to continue here, but as we move into fourth quarter, we've got a difficult comparison due to the $8 million of surge revenue we received last year and the very strong overall fourth quarter demand last year.

The issues with the backlog in the ports in Southern California and the problems at the railhead last year resulted in a tremendous of repositioning revenue that we can't count on this year.

Now I'll give you a quick update on our intermodal business and then I'll turn it over to Glynis to discuss our financials in more detail.

As we've previously discussed, part of our strategy to grow our intermodal operations, we reached an agreement with the BNSF to take over leases on 3800 of their 53-foot containers.

The transition of these units will take place through the first half of next year as the units are turned in, inspected, repaired where necessary and accepted by Swift.

We've currently accepted approximately 640 units to date and we've begun to place them into service.

In November, we're also expecting to receive the additional 1500 new units that we purchased.

This forms the basis for our intermodal strategy where we own and control our own equipment and we believe this gives us an advantage for our customers using IMCs who are dependent on others to furnish equipment.

We are on track to meet our $100 million annualized goal, revenue goal, by the end of the first quarter and we anticipate the ability to grow this business by $100 million annually, as we've previously discussed.

And with that, I'll turn it over to Glynis.

Thank you, Bob.

Starting on slide 11, total revenue is up 11.8% in the quarter and 15.3% year to date compared to last year.

Fuel surcharge revenue is up over 125% for the quarter and year to date and this is driven by the increases in the DOE fuel index and the change in our fuel surcharge program late in the third quarter of 2004.

Slide 12 shows our net revenue growth, that is, revenue growth excluding our fuel surcharge revenue.

Net revenue for the quarter is up almost 4% year-over-year despite the auto-haul-- despite the disposition of the auto-haul business and the softness in July and August that Bob spoke about.

Our miles in the quarter were down slightly, year-over-year, so our revenue growth this quarter is primarily driven by increased rates.

Looking at year-to-date, net revenue was up over 8.5% compared to prior year.

Approximately 57% of this growth is due to an increase in miles while 43% is a result of increases in rates.

Since the fuel surcharge is primarily dependent on the cost of fuel and not specifically related to our non-fuel operating expenses, we believe that using net revenue excluding fuel surcharge revenue is a better measure for analyzing our expenses and operating metrics.

The rest of the slides as we walk through operating expenses will, therefore, compare operating expenses as a percentage of net revenue.

Before -- I'm on slide 13 now for those following along.

Before we delve into the expenses in the quarter, I'd like to briefly summarize the one-time charges included in this quarter.

As we communicated in our earnings pre-release in late September, we accelerated the vesting on all of our outstanding stock options and also changed our long-term incentive plan going forward to minimize expense under FAS 123R that will be effective January 2006.

The acceleration resulted in a charge of $12.4 million on our P&L in the fourth-- in the third quarter and that is reflected in salaries, wages and employee benefits.

In addition, the board approved a stock repurchase plan to buy back shares of stock with the proceeds received from the exercised options.

This will help to minimize the dilutive impact of any options exercised.

As we also previously announced, we recorded a $6.4 million charge to write down the carrying value of some specialized trailers held for sale.

This charge was taken against depreciation.

So both the acceleration and the trailer impairment charge impacted our operating ratio.

Including these one-time charges, OR for the quarter was 96.5.

Excluding these one-time charges, our OR would have been 94.2.

In addition, we also recorded an impairment on an under-utilized facility in Mexico for $1.3 million.

This is reflected below OR and is included in other income and expense.

Moving on now to our actual expenses, starting on slide 14, salaries, wages and employee benefits.

Salaries, wages and employee benefits were 37.7% of net revenue in the quarter.

At the bottom of the slide, you can see the reconciliation that gives you the details on the stock option expensing that I discussed on the previous slide.

Excluding the $12.4 million impact of the stock option acceleration, salaries, wages and employee benefits declined to 35.9% of net revenue from 36.1% in the fourth quarter-- in the third quarter last year.

Our driver wages per mile have increased approximately $0.02 per mile compared to the third quarter of '04.

Year-to-date, our salaries, wages and employee benefits, excluding the stock option acceleration, are 36% of net revenue versus 37.2% for September year-to-date '04.

Moving on to operating supplies and expenses, as a percent of net revenue these increased to 11% in the quarter compared to 13.4%-- sorry, to 10.3% in 2004.

This increase was related to several factors, including maintenance costs associated with get-ready costs for units traded, installation of trailer tracking devices and our road-ready tool program.

On a year-to-date basis, our operating supplies were 10.3% of net revenue, which is essentially flat with last year year-to-date.

On fuel expenses, I'm going to spend a little time walking through this page.

We have a lot of dynamics going on here.

First of all, as you can see, fuel expense continues to increase as it's now 20% of total revenue in the third quarter.

Beginning with walking through how we calculate our net company fuel expense, if you look at the bottom portion of the chart, you can see that we start with our total fuel surcharge revenue and then back out the amount reimbursed to our owner operators.

That's because the owner operator fuel cost is included in our purchased transportation expense, not in our company fuel expense line.

The difference between these two numbers is the fuel surcharge revenue related to our company fuel surcharge expense-- to our company fuel expense, sorry.

So in the third quarter of '05, fuel surcharge revenue on the bottom of the chart was $108.1 million.

The reimbursement to owner operators was $24.1 million, resulting in net company fuel surcharge revenue of $84 million.

If you net this $84 million against the company fuel expense, we can evaluate our net company fuel expense as a percent of revenue and on a cost per mile basis.

To walk you through the numbers once again, gross company fuel expense was $162.8 million in the quarter, less the company fuel surcharge revenue of $84 million, yielding net company fuel expense of $78.8 million versus $81.4 million in the third quarter of last year.

Net fuel expense as a percent of revenue has dropped to 11.2% of net revenue compared to 12% in the third quarter of last year.

The second dynamic related to fuel is the change in the fuel surcharge revenue program that occurred late in September last year.

As you may recall, we moved from a $0.06 bracket to a $0.05 bracket late in September of 2004.

Therefore, our fuel surcharge recovery in the third quarter of '04 was poor, as we didn't have the benefit of the $0.05 bracket.

With the rise in fuel costs in the third quarter of last year, our net fuel expense was high relative to prior periods and also versus the fourth quarter of 2004 when the impact of the change in our fuel surcharge program kicked in.

So when we compare the third quarter of this year to the third quarter last year, we didn't have a negative impact from fuel, given the timing of the change to the fuel surcharge program, which gave us an easy comp, quarter-over-quarter.

However, with the skyrocketing fuel costs we experienced in the third quarter of this year, we were not able to recover as much as we did in the second quarter of 2005, where our net fuel expense was 10.6% of net revenue.

On a cost per mile basis, while we were essentially flat with last year, we were up $0.015 per mile from the second quarter of 2005.

So on a sequential basis, that actually cost us about $0.045 of EPS-- or it would have-- it cost us about $0.045 of EPS.

To talk briefly about the fourth quarter before we move on, we believe that fuel will have a negative impact on us in the fourth quarter on a year-over-year basis.

While the change in the fuel surcharge program was fully implemented in the fourth quarter of 2004-- Sorry, with the change in the fuel surcharge program fully implemented in the fourth quarter of 2004, and with the fuel cost per gallon currently up over $1 from the average of the fourth quarter of 2004, even with the improvements we've made in deadhead, we're still not covering our total mileage exposure and hence anticipate a slight negative in the fourth quarter related to fuel.

On a year-to-date basis, net fuel expense is flat as a percent of net revenue but up almost $0.01 per mile compared to 2004.

The reduction in our deadhead and idle time has enabled us to minimize and offset some of the increases in fuel costs.

Moving on to purchased transportation, slide 17, the bottom portion of this slide shows a reconciliation similar to what we just discussed for company fuel expense, essentially, excluding the impact of the fuel surcharge for owner operators on purchased transportation.

Excluding the reimbursement for fuel surcharge, revenue paid to our owner operators-- sorry, excluding the fuel surcharge revenue paid to our owner operators, purchased transportation increased to 18.3% of net revenue in the quarter from 17.9% last year.

Roughly 90% of the increase, excluding fuel surcharge, is due to pay increases we made to our owner operators.

Our rail costs were also up 85% as we get-- as we began to move more containers.

This was somewhat offset by a decrease in other third party business.

Year-to-date, purchased transportation, excluding owner operator fuel surcharge, is 17.6% of net revenue, essentially flat compared to last year.

Rent, depreciation and amortization expense on slide 18 -- our rent expense, combined with depreciation and amortization, was 9.9% of net revenue in the quarter.

Excluding the $6.4 million impairment charge discussed earlier that was included in the depreciation, our total rent, depreciation and amortization dropped to 9% in the quarter compared to 10.1% last year.

In the third quarter of 2004, our gains on the sale of owned equipment were offset by losses on leased equipment resulting in zero gains in the third quarter of '04.

In 2005, we had a net gain of approximately $700,000.

This swing in gain, a slight reduction in our trailer expenses and the benefit of our increased revenue per mile from the basis-- are the primary drivers for the reduction as a percentage of revenue.

On a year-to-date basis, rent, depreciation and amortization expense, excluding the impairment charge, total 9.2% of net revenue, down from 10.1% in the first nine months of 2004.

Moving on to insurance claims, insurance and claims expense in the quarter was 4% of total revenue.

As a percent of net revenue, insurance and claims expense was 6-- was 4.6%, down from 5.6% of net revenue in the second quarter of this year.

However, compared to the third quarter of 2004, insurance and claims increased 90 basis points on total revenue and 130 basis points on net revenue, primarily related to the fact that Swift did not incur insurance premium expense in 2004 and to the increase required for our self-insurance deductible in 2005.

Our reserve policy and accrual methodology have not changed this year.

Year-to-date insurance expense-- insurance and claims expense is averaging 4.8% of total revenue or 5.4% of net revenue.

We expect that our insurance and claims expense will average around 5% of total revenue going forward.

On our operating ratio, operating ratio for the quarter was 96.5% including the impact of the stock option acceleration and the impairment charge on trailers.

Excluding these items, our operating ratio was 94.2%.

This 40 basis point increase from the 93.8% last year in the third quarter is primarily driven by the 90 basis point increase in our insurance costs discussed previously.

On a year-over-year basis, our operational improvements in revenue per loaded mile, fuel surcharge recovery, utilization and deadhead have more than offset the increased costs we've incurred for fuel, drivers, owner operators and insurance expense.

On a year-to-date basis, our operating ratio, excluding one-time charges, was up 10 basis points year-over-year while our insurance costs have increased 140 basis points in the same time period.

Very briefly moving on to our balance sheet, our balance sheet remains healthy.

Debt to total capitalization has dropped to 42.3% compared to just under 46% in December of 2004.

Our net CapEx in the quarter was approximately $97 million, bringing the year-to-date total to $281 million.

The vast majority of our capital expenditures this year have been for replacement equipment.

With that, we'll open the floor up to questions.

Thank you.

[OPERATOR INSTRUCTIONS] John Larkin, Legg Mason.

I had a question about your plans for reporting, say, in 2006 and beyond, now that you're building an intermodal operation.

I also heard recently that you were starting up a brokerage operation.

Given that those businesses have different financial characteristics than the asset-based truckload business, do you intend to break those out separately in the financials at some point?

We're going to evaluate that in 2006, John, and so we would expect at some point that we will do that.

I think that would be helpful.

And then also you indicated that in the fourth quarter you wouldn't expect as much activity related to the congestion at the California ports, but a lot of that traffic has shifted over to less rail-intensive ports like Houston, Savannah and Charleston.

Are you picking up at least some of the incremental business out of those ports?

We definitely are.

What we're going to miss out on was the-- potentially miss out on is on the repositioning of equipment that shippers were paying for last year as they diverted that southern port traffic to the Northwest and on to other ports.

And so they were paying to reposition trucks from long distances to help cover that problem and those dynamics probably don't exist here in Q4.

And lastly, any operating ratio goals and time tables for getting the OR down?

I know you'd like to have it down in the 90 range or below.

Any thoughts from where you sit currently?

We're-- we're not going to give guidance on that.

We'll tell you that we're focused and working hard as a team to make that happen as quick as possible.

Chad Bruso, Morgan Stanley.

Bob, I believe I got this right that you expect your average tractor count to be about 17,000 in the fourth quarter here, which would be down about 5% year-over-year and down sequentially, but in the release it sounds like you were seeing a bit of a pickup here in September which has continued in October.

Could you help us reconcile the apparent disconnect there?

Well, there is no disconnect.

We've got the ability, Chad, with our trade agreements and having the luxury of having new trucks come into our fleet, we have the ability to flex as market dictates.

And that's what we're going to do.

We're going to be able to react to that.

In addition, we've had great improvement in our utilization and we're going to continue to focus on that.

But I guess if the market's improving, wouldn't we flex up rather than down or am I missing something there?

We will as we-- as market dictates.

We have the ability to do that.

Could you give us a sense, maybe-- maybe this would help provide a little color of what the profit trends were on a year-over-year basis in the months of September and October, meaning has the freight environment improved but the profit margins and the OR hasn't because of high diesel and maybe some of the insurance costs in the quarter that didn't sound like they were going to continue, the lower insurance costs?

Well, we're not going to comment on October.

Yes, the freight environment is stronger-- started stronger in September and is continuing into October.

I think that September was a good quarter for-- a good month for us from a revenue per unit perspective, which Bob showed you of $1.60, a utilization perspective, as well as a deadhead perspective.

So the month of September clearly helped us recover from the month of July, as we reported the total quarter results.

And then just-- just, though, incorporating some of the higher fuel costs and things you discussed here, are operating profits up on a year-over-year basis in the month of October so far?

No comment.

Well, we're not commenting on that, Chad.

But we will tell you that demand remains robust for October.

Jon Langenfeld, Robert W. Baird.

Jerry or Bob, I guess just more of a macro question.

As you kind of how the busy season has progressed here thus far, taking last year out of the equation and kind of comparing it to a typical busy season, how does it feel to you?

We're busy.

Business is good and we expect this to continue throughout the rest of the quarter right now.

So it's as kind of you would expect a busy season to progress?

I would say it's-- it's what we would-- a typically good fourth quarter is what it looks like right now.

OK.

And then, thanks for the detail on the fuel side.

That's very helpful.

I guess a question there, just so I'm on the right page.

If you look at the fuel surcharge impact in the quarter, on a year-over-year basis it looks positive if you just look at company miles.

Is that the right way to read that?

I mean, I have about $0.02 to $0.03 positive impact year-over-year?

It's not a $0.02 to $0.03 positive impact year-over-year.

So what-- I mean, I guess I'm looking at just company miles, the fact that your net cost per company mile is down.

Our net cost per company mile is not down.

Our net cost is flat quarter-over-quarter, which we actually take to mean the fuel surcharge program has worked for us.

Yes, absolutely.

No, I mean, I guess have your net cost per company mile at about $0.19 this year--

We wouldn't agree with that number.

OK.

Maybe I'll get you offline and compare those numbers.

And then on the other line is most of that bump or all that bump pretty much related to the intermodal rail side?

Other revenue are you talking about?

Yes.

Yes, primarily intermodal.

OK.

And then finally, I know you don't give guidance, but I just want to understand the seasonality.

If I look back over the last 7 or so years, 7-8 years, your third and fourth quarter have been pretty comparable on an earnings line with the exception of last year.

Should we expect more of that seasonal trend versus last year it seemed to be a lot of moving parts throughout the whole year?

Can you help us out in terms of that seasonality?

I think last year was somewhat of an aberration because of the points that Bob talked about with regard to the increased volumes and the shift, potentially, from rail to truck that occurred last year.

So I would say that our normal fourth quarter is probably more consistent with the third quarter.

Rick Paterson, UBS.

Just another little followup on your intermodal business, which looks like it's on track for your Q1 guidance.

Can you tell us about how you're going to set up a nationwide drayage network and talk about initial customer feedback and talk about where you think you can get that operating margin to long term?

We're not going to disclose operating margins, but I would tell you this, that, first of all, we have lots of flexibility with drayage.

We have-- with our terminal network, it gives us a unique advantage over a lot of our competitors in that we have operations in 36 different locations where we can use our own trucks and then we also have agreements with outside drayage companies in areas.

Right now, we're anticipating Swift to be able to handle approximately 80% of the dray and about 20% we'll farm out to the other carriers.

Our customers-- virtually all of our top customers have intermodal business that they've previously been giving to other folks and the reception has been good.

There is some-- we think we-- our opportunity there, in particular, is with those customers who are using IMCs that have to depend on somebody else for equipment and so we're bullish on the intermodal program and think that our customers are, as well.

Tom Albrecht, Stephens, Inc.

Bob, Jerry, Glynis, I wanted to just ask you kind of a bigger question on how you're managing the network.

For several quarters in a row you've seen the deadhead or empty mile ratio decline fairly impressively, but my experience has been that companies can sometimes focus on that too much and miss greater revenue opportunities and I guess we're all still waiting for maybe a little bit more dramatic improvement in the rate per mile.

And I'm wondering if, within your network there isn't too much of a focus on driving the deadhead lower because you can be in LA with a truck and a load at 3 o'clock this afternoon, but you might have a load at noon that's 150 miles away that pays $800 for the load versus $600.

The first one you've got a lower deadhead on, but the second one you've got a greater revenue per truck opportunity on.

Can you talk about that?

Because the other carriers with better ORs do not have a consistent record of bringing down the deadheads.

Tom, it's not-- we're not focused on any one metric and I don't believe that our prioritization tools favor any one particular metric either.

As you know, we base our freight selection on velocity, on price, on balance, on consistency and whether or not it's one of our national accounts.

And it's a combination of all of those things that helped-- helped drive that.

Our-- we're going to continue to see progress with our revenue per mile and that's our-- that's a huge focus for the operation.

It'll continue to be a big focus.

Our sales people were incentified this year in that manner and have-- have done fairly well and we're going to continue to focus on that regard, as well.

But it's not-- I don't think it's fair to characterize that our prioritization tools are driven strictly to reduce our deadhead.

OK.

And I'm just wondering, it was more of an observation, I was looking for your comment more than anything, but, Bob, bring us to speed, then, on the implementation of what I call the yield management software.

A lot of that really began to just be aggressively rolled out more in the second quarter.

Have you had an opportunity to run the numbers and actually have a sit down with each of your top 100 accounts yet?

We do share that information with our customers and we're using that for justification to help work together in a partnership on what lanes work better and where we can help one another with needs and-- and so we are doing that on a continual basis.

That will be a focus that's ongoing.

We're going to continually be able to look at the lesser performing traffic so that we have opportunities to upgrade it, either through repricing or different lane selection or what-have-you.

OK.

And I'm not able to access the slide show right now, so this might be a repeat, but did you show a slide with the monthly changes in your rate the way you've done the last couple of changes?

And, if so, where did you end up in the month of September?

We did and we'll be glad to go over that with you.

July, Tom, was the $1.555.

August was $1.584.

September was $1.602.

OK.

Yes, because you had a $1.582 during the month of June.

We did and as we indicated earlier, we took freight when July was soft that we otherwise wouldn't have in order to keep the trucks moving.

But we got right back on track here the end of August and September and we're-- we're at $1.60.

OK.

That's helpful to hear.

The quarter ended in the right direction, then.

Glynis, you mentioned in the other-- I think it was other expense category there was the $1.3 million impairment on a Mexico facility.

So is that specifically in the line item that's $3.241 million-- or wait a minute.

Excuse me, I'm looking at the 9 months.

The $1.534?

Yes.

That would be in that line item.

Was Transplace also in there and, if so, what was its figure?

Transplace is also in there and it's essentially flat year-over-year.

It was $696 this quarter and it was $672 last quarter-- third quarter last year.

Brannon Cook, J.P. Morgan.

A question on intermodal.

As you all continue to ramp up there, are there going to be any specific startup costs when you're selling to new accounts in intermodal are you essentially just retraining your existing sales staff or are you bringing in new people?

We-- we have a whole new organization that we're slowly building and a sales staff that are dedicated to intermodal that will work hand-in-hand with our existing staff on bringing in some of that intermodal traffic that's currently going to our competitors.

OK.

A question on empty tractor count.

I'd imagine-- did that number go down significantly with your reduced fleet?

Is that moving in the right direction.

Yes.

That's why it went down.

OK.

Are you disclosing that any more?

Well, we just went over all of those numbers.

OK.

OK, I missed that.

Well, I guess it's a follow-on to that, a question on driver pay and the recruiting environment generally speaking.

Your driver pay was up $0.02 year-over-year.

As we look towards next year are you pretty comfortable with your ability to recruit drivers at this point and with the pay scale or do you think there's likely to be some-- some pay increases, as well, as look towards next year?

We don't anticipate anything at this time.

The driver environment remains extremely tight and extremely competitive.

We've got a good program in place and we've done a very good job with keeping our trucks manned and, in fact, our unmanned truck count right now is probably at one of the lowest points it's ever been.

So we are going to be able to keep up with the requirements there and should the industry dictate a wage increase, we have prepared our customers when we've done our rate negotiations that in the event a drive wage increase is necessary that we're going to go back to them and ask for some additional help.

So we'll just see what the market-- what happens with the market.

Jordan Alliger, Deutsche Bank.

Why is the unmanned truck count very low?

We've been successful in our recruiting and our drivers are happy with our pay package and they're happy with the miles they're getting.

Does some of it have to do with, perhaps, better fluidity out there?

I mean, is there less franticness among shippers in terms of trying to secure capacity this peak season, so with that, even though drivers are still tough to recruit, it's not the crisis mode it was a year ago?

I don't think-- I don't think the drivers have visibility to that and so, no, Jordan, I don't think that has anything to do with it.

OK.

And then just-- you-- obviously, this sort of ties into the volume question again.

With the truck count, at least at this point, expected to be around the levels you talked about, which I think was 17,000 or so, how-- how much lead-- I know you said you could do it pretty quickly, but how much lead time do you need to sort of ramp that up again and secure the people to drive it, et cetera, especially if the volume environment remains sort of on a solid swing at this point?

Well, our recruiting efforts remain at full force and always have and will and as we have excessive drivers, that gives us the ability to cull unproductive drivers out of our fleet and so we're going to continue to be very aggressive in training and hiring drivers.

We have a-- we have the flexibility to turn in trucks on a monthly basis and we've got new-- new trucks coming in on a monthly basis.

So you've got a couple week period there, but we've got very good flexibility to help react to market-- market demand.

I mean, realizing that your planning situation is calling for the trucks that you're talking about now, I mean, and, obviously, no one can predict the future, but is there a bias in your thinking that would suggest you might be low on the trucks and it will go up at this point or is too early to say?

I think right now and based on where we're at and with the utilization numbers that we're in a pretty good situation here and when-- I think the good news is, is we're going to be, when first quarter comes, we're going to be positioned properly to handle the market demands that are typical of the first quarter.

Chris Weatherby (ph), Merrill Lynch.

I was wondering if you could comment a little bit on the hours of service rule and if you're seeing any impact on demand, specifically regarding the sleeper berth revisions?

Well, there's definitely a-- there's definitely an impact on our productivity with our teams and there's definitely with the continuous clock running nowadays, it has the potential to affect our solo drivers, as well.

So there is a potential productivity hit as-- with these new HOS requirements.

Are you seeing any-- any maybe increased competition on the LTL side?

We've heard a few carriers mention that they've been able to opportunistically pick up sort of larger freight movement and back-haul opportunities.

I'm just wondering if there's anything that you guys are seeing?

No, sir.

Not at all.

OK, and then on another point, if you could just give-- could you give us any color on new options expensing rules coming into effect for next year and sort of what you see?

Can you give us any color on whether or not you guys plan to continue your historical-- your historical procedure as far as issuing options or is there any change coming up there?

Yes.

We've actually changed our long-term incentive plan and we've significantly reduced the number of options that we're going to be granting in 2006 going forward.

So historically we've granted about 2 million on an annual basis.

Going forward we're going to be granting somewhere between 600 to 750 thousand options going forward.

I think in the conference call that we did on our pre-release we indicated that in 2006 we estimated that expense was going to be about $3 million in 2006.

That includes the expense we would also take under FAS 123R for our stock purchase program, our employee stock purchase program.

Scott Flower, Citigroup.

Hey, I know you mentioned about, obviously, your success in recruiting.

Could you also-- and maybe this, obviously, ties, could you give us some sense of how turnover statistics have been trending for you, good, bad, indifferent?

Turnover's-- turnover's up this year and it's definitely a little bit tougher environment right now.

OK.

Also-- I'm also curious.

I know that Glynis said this and I'm just trying to better understand this, at least conceptually, that in fourth quarter fuel would be, I think, a slight drag or a bit of a drag.

I forget the exact phrasing, but I'm just wondering, giving that you will lap the change in the bracketing, as well as last year fuel came off in the quarter and some of the other carriers, obviously, which didn't have your change in bracketing have talked about the substantial impact, at least at current, of fuel.

I'm just trying to get a better sense of why-- I think I heard the term slight or minimal impact, but some negative impact, why it might not be greater than that?

I'm just trying to understand that better.

I guess, to some extent, we-- in our calculations, based on our forecast about what we believe is going to happen with fuel in our performance for the quarter, that's where we're coming out that we think it's a slight negative for the quarter based on what we estimate the average cost per mile is going to be, net fuel cost per mile, is going to be quarter-over-quarter.

And also curious, could you give us any sense, Bob, regionally and/or in different industry verticals where you're seeing strength and/or weakness in the network?

Right now our strength in the network is system-wide, across the board.

We're healthy and in good shape and have been for the month of September and month to date October.

Any particular industrial verticals that are either leading or lagging?

No, sir.

OK and then the last question I had and I'll pass it on is are you participating or benefiting from any of the FEMA business in and out of the Gulf Coast or are you just sort of an indirect beneficiary of its help to tighten up some capacity at the margin?

Very little, very little direct, but we have had, obviously, the benefit of some business going in there with the existing customers.

Elliot Waller (ph), Varnan Capital Management (ph).

A question, just going back to the IM opportunity, the $100 million annual revenue run rate, that's based on the current units you have?

No, sir.

That's based on the acquisition of the 1500 new ones--

Right, right, what you bought from Burlington Northern.

And I guess Burlington Northern on the call this morning indicated they would be interested in selling more-- selling more of those units.

I don't know if you had any color on whether you guys have any plans, yet, to increase that whether it be through Burlington Northern or others and at what point would you think about increasing your current number of units that you do own?

Let me give you a little clarification.

First, we assumed 3800 leases from BN and we purchased 1500 of our own new ones.

So we'll look to where we sit late in 2006 and '07 as far as whether it makes sense to add in-house-- to add additional capacity there.

OK.

And unfortunately I can't see the presentation.

Somebody mentioned something around-- about a brokerage business?

I don't know if you could give any more color on that?

No.

That was Mr. Larkin.

We have a brokerage division.

We had a pretty good sized brokerage division prior to Transplace and we're-- we've ramped that up a bit, but it's just in its initial stages.

We're throwing some new assets and it's another potential for opportunity on a go-forward basis.

OK.

And have you given any-- any guidance on that in terms of the opportunity or potential there?

No, sir.

We haven't.

Justin Yagerman (ph), Wachovia Securities.

What's your current average length of haul?

I don't even have that. 500 and some change and I don't have that right here, Justin.

We have to get that for you.

OK.

And going forward, I guess, how are you going to break out the intermodal business when looking at your average length of haul and kind of analyzing your different segments?

When the intermodal gets to a level that dictates, we'll be breaking that out, when it makes substantial changes.

Our average length of haul for Q3 looks like it's 532.

532?

That compares to 530 on Q3 of '04.

OK.

Fairly-- pretty flat.

Yep.

Can you give the timing, I guess, over the next few quarters of how you expect the remainder of those leased containers and owned containers to be coming on?

Part of that depends on when these-- the current boxes that are out to various IMCs get them turned in and we're working on that.

It's been a little slower than what we've anticipated.

We-- we project that that's going to take at least into the first half of next year, but remember that the 1500 containers that we purchased start coming in here on November 1.

OK and those come in in lump sum or are they coming in kind of on a gradual basis?

They're coming in, I think, 400 units a month over the next 3-4 months here.

OK.

When looking at the intermodal business and then your regional truckload business, what are the differences in terms of the margin goals that you're setting for yourselves?

Ask the question again for me, Justin.

I'm sorry.

I guess when looking at-- asked another way, when looking at the intermodal business are you-- are you going to be more aggressive or less aggressive, I guess, in terms of the potential OR realization that you can get in that business compared to the regional truckload business?

Or do you conceivably think that you can get your regional business to be better?

I guess which one, at some point, when both are optimized, would be running at a better margin?

Well, I think you've got to look at our competitors and if you look at what they're posting, their intermodal margins are typically better.

So, obviously, that would be our goal.

OK.

That makes sense.

I guess switching gears for a second, I just wanted to get an update on where you guys are with '07 engines, if you have any that you're testing right now, what you're looking at and kind of what your purchase plans are going to be in 2006 as you prepare for that?

We are-- we are running some of the '07 engines currently.

Which ones are those?

We're running Cummins.

We-- for right now in 2006 we're anticipating about 3000 new units, which is part of our normal replacement cycle.

We do not have any plans to pre-buy as a result of the '07 engine.

Ed Wolfe, Bear Stearns.

Hey, Bob, you gave some numbers before on July, August and September revenue per mile for those months.

Can you give them a year ago what the comps were for those months?

If you give me a second, I can probably bring those up.

OK.

And maybe while you're doing that, just a sense-- you talked about on the auto-haul business going away negatively impacting yields about 150 basis points.

You didn't make any comments about whether they benefited or whether they benefited utilization and deadhead by.

Is there any kind of equivalent you could look at what those might have been if-- if not for that change?

There definitely was some benefit.

I don't know-- do you know, Glynis, exactly?

I'd say the benefit on deadhead, which is the one I happen to know, is somewhere south of 40 basis points.

OK.

Can you take us through a little bit about the demand and the rate environment as you go through September and now through October that you're seeing out there?

There's been a sense that demand has really picked up quite a bit and maybe the hurricanes have soaked up some capacity.

Can you talk to that and what you're seeing out there?

Demand is strong.

Our business is robust.

It's system-wide and we're-- our miles right now are very good.

You mentioned, though, that in pricing when you look to the fourth quarter it's going to be tough to get some of that repositioning stuff?

Why should that be if things are so tight?

Do you think there's a chance you can get some of that and you're being cautious or it's just an exceptional quarter a year ago?

Well, there's a couple of different things.

Just last-- Q4 of '04 was exceptional, particularly on the West Coast with all of the disruption that occurred out there with the ports and the rail and we had a significant amount of unique repositioning that was customers that paid us to bring trucks from long distances at great revenue per mile to help with those-- help get that freight off those ports.

I don't anticipate that in Q4.

We're still going to have plenty of-- plenty of business, it looks like, right now and, as I said, demand remains strong and-- but that unique occurrence last year, I think-- I don't think we can count on for Q4.

The ports and the rails this year are, obviously, in much better shape than they were last year.

OK.

That's fair enough.

Can you talk a little about the insurance deductible?

It's $10 million.

What's the plan for '06?

Is that going to change or not change?

Right now no change at all, Ed.

Is that a two-year policy?

It was a two-year policy.

Yes, sir.

OK.

And in terms of gains on sales in the quarter and going forward, will you be seeing some of these as you sell more trucks?

Can you talk to that?

I don't expect anything of any significance there one way or the other.

As I understood it, there were about $700,000 in this quarter versus flat a year ago.

Is that right?

That's right.

Yes, sir, that is correct, Ed.

But going forward that should be about zero?

It will be minimal.

I guess we consider $700,000, based on the number of units that we sold, somewhat minimal in terms of the gain.

OK.

When I look at your ending truck number that you reported, I'm not seeing the 900 change.

I don't know if I'm looking at this wrong or not.

The 900 would occur if you look at June ending versus September ending and what you're seeing is average and what we're reporting is an average.

So when you report-- because you report average, but you also do ending tractors.

The ending tractors is an average?

No, the ending tractors is not an average, sorry.

We thought you were talking about the 17,224.

No, I'm looking at 14,713 in 3Q '05 as ending tractors.

Right.

The difference is that-- between our operating fleet and our total fleet is the units that we've pulled out for trade and the new units that we have paid for that are reflected in our ending unit count that have not actually been in-serviced or licensed to actually go into the operating fleet, as well as our school vehicles that aren't part of our normal operating fleet.

Oh, OK.

So if I look at the 14,713 versus the 15,011, that's down 400.

That doesn't include all of those kind of things that are cold that I can't see, in other words.

That is correct.

OK.

Just trying to understand that.

OK and just then if you had those July to September numbers.

Sorry, Ed, let me just back up for one second.

You're looking at the company ending fleet count, which when you add owner operators to it, we reported 18,386-- is that what you're looking at?

Yes, I was just talking about the company, but if you add the owner operators, it's 18,386, correct.

OK.

In the 14, all those vehicles are in the 14.

All those vehicles, the trade vehicles, the vehicles which for sale, et cetera, those are all in those in the ending fleet count.

Wasn't the ending at second quarter 15,011?

The ending at second quarter 15,011.

When we talk about-- when Bob was talking about the year-over-year reduction in fleet, we were talking about our operating fleet, June through September.

These are the units that we're actually using to run the business.

So that ending fleet count of 17,224 that we reported is an average for the quarter.

That fleet count does not include the school trucks that I just mentioned, any accident vehicles that may be out there.

It doesn't include the trade vehicles that are in the shop in the get-ready and it doesn't include new units that came in probably in the last week of the quarter with regard to us getting them out in service.

Sure.

But let me just ask this another way.

The 18,386, the ending, what is that number going to look like at the end of next quarter?

Is that going to be up or is that going to be down from that another 450?

I don't know why-- It's not going to be down another 450.

It's going to be down a couple hundred, but it's not going to be down 450.

OK.

That's helpful.

Thank you.

Hey, Ed, at the end of the quarter there were approximately, this might help you, 750 units that are out of our operational fleet that were being--

[technical difficulties]

One moment.

We are experiencing some technical difficulties.

This is Bob Cunningham.

I don't know, I guess we only paid for an hour and we cut off here.

That's just in time, though.

You had gotten cut off and you just started to say that there 750 and you got-- units and then you got cut off.

There are 700 units that are a combination of those units that are coming into the system and units that are coming out at the end of the second quarter-- I mean, excuse me, at the end of Q3.

OK.

So if I added those to the year end, then I'm up 900.

Then I see that.

Yes, sir.

OK.

That's fair enough.

Could you really get me the July-August-September a year ago rev per mile numbers?

For you, Ed, I will.

July was $1.514, August was $1.516, September, $1.528.

Thank you very much, both of you.

Hey, Ed, remember that those numbers include auto haul.

Two more it looks like.

Tom Albrecht, Stephens, Inc.

Bob, I keep kind of going over these points.

Can you maybe talk a little bit about how much of your business, approximately, is up for renewal either in the fourth quarter or first quarter?

I know it's half the year, but maybe just a sense of how much potentially is contractually up for renewal in those two quarters would be helpful.

Tom, I don't know for sure what to tell you there.

I don't have that broken out.

Do you know if your bias is more towards the second and third quarter or more towards the fourth and first quarter?

I'm going to say, just to be safe, that we don't really have a bias.

I mean, with $3 billion worth of business, it's spread throughout the year.

Sure.

OK.

And then, you guys talked about earlier in the year how you had walked away from one piece of business that was pretty sizable, but I've not heard any additional discussions about that and maybe all the customers are giving you the rate increases you need.

But I'm just curious.

Do you have other instances where you've said, enough is enough and walked away from-- I'm not talking about 1 million or 2 bucks, but I mean something that's a little bit more sizable and almost event-changing for your company?

No, sir, I don't think there has been anything that was-- that by any stretch of the imagination has been event-changing.

I mean, we continue to work with all of our customers on a lane-by-lane basis and a shipping point to destination basis.

We're actively looking for opportunities to help improve our profitability through those prioritization tools which you're very familiar with and we-- I would tell you also that we have walked away from customers who would not support us in our fuel surcharge requirements and for the most part and I think, obviously, the numbers that Glynis went over with you in detail reflect that we've had good success there and most of our customers, by and large, have been excellent to work with in that regard.

But where we haven't been able to cooperation and people have bowed their neck and refused to, we've said, thanks, we're not going to be able to haul your freight.

And so we're trying to-- we've got an outstanding customer base that we're proud of, long-term partnerships, consistent excellent growth with existing customers and we're working together on a lane-by-lane basis to help improve our metrics.

OK.

And, Bob, would you say that the vast majority of your customers now are on a 1 for 5 fuel surcharge scale?

Because it seems like some of the other carriers, maybe, feel like they still have a fair amount of room to improve in that area.

I would say the majority of ours are probably on a 1 to 5.

OK and then, Glynis, just as a followup, I don't think I'm the only one not able to access your slides, just sort of e-mailing around and instant messaging.

So you might just double check with the services as to whether they're properly out there for us to access.

OK.

Thanks, Tom.

We'll follow up on that.

We had called before and they had indicated they were out there, Tom.

So we'll make sure you get them again.

I've checked both sources multiple times.

Donald Broughton, A.G. Edwards.

Hey, Don, good morning.

Are you-- do you have the slides in front of you, Don?

I actually can get the slides.

OK, good.

Which is amazing.

I can't read some of the bottom numbers on some of the financial slides.

They're a little fuzzy, but that's fine.

Congrats on getting over $3000 of revenue per truck per week.

It's the first time, I think, in the company's history, isn't it?

Probably is.

Yes, sir.

That's a bogey you've been working on for a long time.

So congrats on that.

Thank you.

Actually, all of the-- all of the questions have pretty much been asked.

Glynis, do you have-- I know that the amount of leasing has dropped off, at least the number of leased trucks you report has dropped off.

Do you have what the capitalized value of your operating leases stands at right now?

I don't have that number right here, but I can get that to you.

That'd be great.

That'd be great.

Thanks, everybody for your time.

I appreciate your listening in and thanks for your support of Swift Transportation.

Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude today's conference call.

You may now disconnect.