Knight-Swift Transportation Holdings Inc (KNX) 2006 Q1 法說會逐字稿

Good morning.

My name is Crystal, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Swift Transportation first quarter earnings call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you.

I would now like to turn the call over to Mr. Bill Cunningham.

Sir, you may begin your conference.

Good morning and greetings from Phoenix, Arizona.

Bill is actually my dad and he's not with us.

But this is Bob Cunningham, and we welcome you to our first quarter conference call.

You can access the slides we will be discussing at swifttrans.com in two different places under our Investor Relations tab, so for those of you who don't have those up, you can open those up really quick there.

We'll begin today with our required disclosure.

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 expects, believes, anticipates, intends, estimates, or similar expressions are intended to identify these forward-looking statements.

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

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

Well as everyone's noticed from our press release we had a very strong first quarter, and I will tell you as a management team it's very gratifying to begin seeing the results of the plans and initiatives that we've implemented.

Our focus on bottom line profitability and improving our core operating metrics resulted in net earnings of $37.5 million in the quarter, which is a 93% improvement over the first quarter of 2005.

We're proud of our performance and the progress we're making.

We realize this quarter's performance along with the success we had in the fourth quarter are early steps on a longer journey to return our Company to profitability levels we once enjoyed.

We remain dedicated and focused as a team and we will be relentless in pursuing the goals that we have laid out.

Our total revenue for the quarter was $763 million, which is a 2.7% increase from the first quarter of 2005.

Net revenue, excluding fuel surcharge, was $664 million, which is a decrease of 1.8% year-over-year.

This decrease was the result of our decision to reduce the fleet size in the last half of 2005.

The decrease in fleet size was partially offset by increases in revenue per loaded mile and utilization that I will discuss with you in just a minute.

Included in our operating results are two items that we consider unusual in nature.

The first item in 2006 is a litigation settlement for which we received a benefit of $5.15 million pre-tax, and the second item is a market-to-market of our interest rate derivative that was a pre-tax benefit of $811,000.

As we disclosed in our press release in the first quarter of 2005, we had a $4.4 million gain on the sale of some real estate and the pre-tax benefit of the change in our interest rate derivative was $1.8 million.

I will discuss the next financial metrics both as reported and excluding these one-time items.

Our operating ratio in the quarter was 91.3%, or 91.9% excluding the litigation settlement.

This adjusted number is a 390-basis-point improvement compared to the first quarter of 2005.

Our net earnings in the quarter were $37.5 million, or $33.8 million excluding the unusual items which is more than double the adjusted 2005 figure.

Our earnings in the share -- our earnings per share in the quarter were $0.50 as reported, and $0.45 excluding the unusual benefit.

This is also more than double our adjusted 2005 earnings per share.

Please note that Glynis will review calculations that reconcile our GAAP reported numbers to the adjusted numbers shown on this slide when she discusses the financials in detail in a few minutes.

All right.

Let's move to slide 4, which is our revenue per loaded mile excluding fuel surcharge.

On these next slides, I will highlight our performance on our operational metrics for the quarter and we'll begin now with rates.

Our average revenue per loaded mile, excluding fuel surcharge, for the quarter was $1.61 which is up $0.07 year-over-year, or 4.3%.

You'll recall that we sold our auto haul business in April of 2005, and we previously estimated that the impact of this sale on revenue per loaded mile to be $0.02 to $0.025.

So on an apples-to-apples basis we are actually up about $0.09, or approximately 6% year-over-year.

This will be the last quarter we need to give this comparison since the second quarter of 2005 had limited impact due to the fact that auto haul was sold early in April.

We had previously estimated that we expected our revenue per loaded mile to increase approximately 4% to 6% for this year, and we still believe that that's a reasonable expectation.

Slide 5, our utilization improvements.

As you'll recall in the first quarter of 2005 was fairly robust compared to a typical quarter in the truckload industry.

We view 2001 first quarter as a more typical quarter for first quarter.

West Coast was softer than the central and east and despite the softer demand in the first quarter we improved our average loaded mile per tractor per week by 11 miles, or approximately 1% compared to the first quarter of 2005 to 1,855 weekly loaded truck miles.

This is in addition to the 5% increase between the first quarters of 2004 and 2005 that we realized.

In general, I have to tell you that we did not experience any material changes to our business as a result of inventory adjustments by big box retailers.

Our decision not to bring in new trucks in Q1 and the other productivity initiatives we've been working on have enabled us to offset the softer freight market and any impact from the hours of service changes.

Slide 6.

Continued to realize improvement in our deadheads.

Our percentage of empty miles decreased 80 basis points in the quarter compared to last year.

We've made significant improvements in this area over the last two years and anticipate continued improvement going forward, but expect those additional improvements will come at a slower pace.

Slide 7 is our revenue per tractor per week, once again excluding fuel surcharge.

Those operational improvements we just discussed are generating increases in the overall productivity of our tractors.

Our revenue per tractor per week increased $141 for the first quarter of 2005 to $2,991, which is approximately a 5% improvement.

We'll continue to pursue the course we have set which is focused on bottom line growth through improvement in utilization, rate, and cost control.

Next slide is an update on our intermodal operations.

I want to give you a status of where we sit there.

Our first quarter was slower than we anticipated in our intermodal operations due to a couple of factors.

First, there was no carryover from the fourth quarter in the first few weeks of January, which was the case in -- in quarter one of 2005.

We also had a competitor announce that they were bringing in 5,000 new units through the West Coast ports, and they were offering below market rates to move those containers out.

We chose not to match the one-time rates to move our boxes.

The good news is that the volumes at the end of March and into April have been picking up.

As of today, we've received a total of 1,441 units from the BNSF max fleet.

Due to the fact that many of the BNSF containers are nearing the end of their lease terms we've agreed with the BN not to assume additional max containers.

The total of the BNSF containers we will assume should be somewhere in the neighborhood of 1,500 units.

It's our understanding that the BN will continue to run their remaining containers through their lease terms.

So instead we purchased an additional 2,000 new 53-foot steel containers which we would think would better suit our long-term focus on intermodal growth, and so essentially what we end up with is a brand new steel container at a lower cost.

We'll begin receiving these units in June and we expect to have all 2,000 by August 31 of this year in time for the peak retail season.

So we expect our total fleet at that time will consist approximately of the 1,500 units we assumed from the BN, those are the max boxes, and the 3,500 purchase units for a total fleet of approximately 5,000 53-foot containers.

So with that, Glynis will now take you through the financials in more detail.

Thank you, Bob, and good morning everyone.

As Bob has discussed, our total revenue for the quarter was $763 million, a 2.7% increase over the first quarter 2005.

Our fuel surcharge revenue, which is shown on the bottom right-hand corner of this slide was $99 million for the first quarter of 2006 compared to $66.4 million for the first quarter of 2005.

This increase in fuel surcharge revenue is primarily the result of the increase in diesel fuel prices year-over-year.

Excluding fuel surcharge, revenue -- our net revenue was just under $664 million in the quarter compared to $676.2 million in 2005.

The decline, as Bob discussed, was driven by our smaller fleet size which was partially offset by increases in rate and utilization.

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

The following slides will summarize our operating expenses as a percentage of net revenue.

Moving onto slide 11, looking at salaried wages and employee benefits on the left-hand side, our salary and employee benefits declined 20 million in the quarter compared to the first quarter of 2005.

As a percent of net revenue, salary, wages and employee benefits declined $20 million in the quarter compared to the first quarter of 2005.

As a percent of net revenue, salary, wages and employee benefits dropped to 34.5% compared to 36.8% in the first quarter of 2005.

This decrease is primarily due to a reduction in Company miles year-over-year related to the smaller fleet, and a reduction in expenses related to fringe benefits, primarily worker's composition expense.

Over the past 12 to 18 months, we've significantly improved our worker's compensation, claim handling processes, and management, and this has resulted in a reduction in both the number of claims and their subsequent development.

We've always had fluctuations both positive and negative based on the development of prior year claims and current year activity.

The positive fluctuation this quarter of approximately 7.4 million was greater than normal.

While we cannot predict the magnitude of fluctuations in the future, we would not expect them to be at this level but we would expect some variation going forward.

In addition, the increases in our revenue per loaded mile have more than offset the increases in our salary and wages resulting in the decline in the -- in this line item after percentage of revenue.

Moving on to the right-hand side of the box, operating supplies and expenses, these declined 5.5 million year-over-year, or from 9.9% of net revenue to 9.3% of net revenue.

Part of this reduction in expenses was a decline in tractor maintenance related to our limited trade activity in the first quarter of 2006.

We also realized cost savings in over-the-road expenses, travel, legal and other miscellaneous admin expenses.

Moving onto to slide 12, talking about fuel expense.

As we've discussed in previous conference calls, we evaluate our fuel expense net of fuel surcharge revenue related to Company-driven miles.

The calculation to determine Company net fuel expense is shown on the bottom left-hand corner of this slide.

Resulting from that calculation, our net fuel expense in the quarter decreased from 12.7% of revenue in the first quarter of 2005 to 10.1% in the first quarter of 2006.

This decline is primarily related to converting more of our customers to a specific West Coast fuel surcharge throughout the latter half of 2005.

On average for this quarter, we had the benefit of just about a penny from fuel.

Purchase transportation increased 11.1 million in the quarter compared to the first quarter of 2005; 6.4 million of this increase was an increase in the fuel surcharge reimbursement to owner-operators and other third party providers such as rail.

Excluding fuel surcharges, purchase transportation increased from 16.5% of net revenue in the first quarter of '05 to 17.5% of net revenue this year.

The increase here is primarily related to the growth in our intermodal business and so you should anticipate this line item continuing at that rate going forward, or increasing as we expand our intermodal business.

Moving on to slide 13, insurance and claims.

Our insurance and claims expense decreased $4.6 million in the quarter compared to 2005.

This decrease was the result of a $5.15 million favorable litigation settlement that was recorded in February of this year.

Excluding this benefit our insurance claims expense was 6.2% of net revenue in the quarter compared to 6.0% in the first quarter of 2005.

We are still expecting our insurance and claims expense, excluding this unusual item, to be approximately 5.6% of net revenue for the full year as we had previously disclosed.

Moving on to rent, depreciation and amortization.

Since we are continuing to replace leased tractors with owned equipment, for analysis purposes we believe it best to combine our rent expense with our depreciation and amortization expense when comparing year-over-year results.

In the first quarter of '06, our rent, depreciation and amortization expense increased $2.4 million, or from 9.6% of net revenue in 2005 to 10.1% of net revenue in 2006.

Moving on to slide 14, communication and utilities, and operating taxes and licenses, our communication and utilities expense decreased $933,000 year-over-year, or 10 basis points as a percent of revenue.

Our operating taxes and licenses declined $5.3 million in the quarter, or from 2.5% of net revenue in 2005 to 2.1% of net revenue.

I'm sorry 3.5.

They declined by $3.5 million in the quarter from 2.5% of net revenue to 2.1% of net revenue in the first quarter of 2006.

This result is primarily from a decrease in the number of vehicles licensed related to the smaller fleet, as well as a decrease in property taxes.

As Bob mentioned in the beginning of our presentation, our operating ratio was 91.3% in the quarter.

In the bottom right-hand corner of this slide you can see the reconciliation to adjust for the benefit of the litigation settlement I previously disclosed.

Our operating ratio excluding this benefit was 91.9% compared to 95.8% in the first quarter of 2005, a 390-basis-point improvement.

Slide 15 provides you with a reconciliation of our GAAP to our operational financial results and walks you through OR, pre-tax earnings, net earnings and EPS.

These are the same adjustments that we outlined in our press release.

The box on the left-hand side provides the adjustments for the first quarter of 2005 and includes the gain on real estate sale and the derivative benefit.

The box on the right provides the adjustments for the first quarter of this year and includes the litigation settlement and the derivative benefit.

Just a brief note on our tax rate.

The tax rate on the first quarter of 2006 is 38% compared to 39% in the first quarter of 2005.

This was an impact of approximately $0.01 per share in the quarter.

We anticipate that our tax rate going forward will remain at the 38%.

Moving on to our balance sheet on slide 17, our balance sheet remains healthy.

Debt to total capital has dropped to 36.6% compared to 41.1% in December of 2005 as we paid down debt in the first quarter.

Our net CapEx in the quarter was approximately $5 million.

This is down due to the fact that we had limited new equipment purchases in the first quarter.

Our cash flow from operations was $119.2 million compared to $81.7 million in the first quarter of 2005, or 46% increase year-over-year.

With that, I will now turn the presentation back over to Bob for a summary.

Thanks, Glynis.

Before we open up the line for questions, let's provide you with a quick review of our focus and our goals.

I'm on slide 18.

As we discussed at our investor meeting in February, we're focused on bottom line growth.

Our network management tools are helping with better freight selection and contributing toward our improvements in utilization and rates.

Our active fleet management will allow us to manage our fleet through troughs and peaks in demands.

Continue to focus on our core, complementary businesses where we know how to make money.

Smart fueling initiatives remain critical, especially in light of the fact we're now seeing $3 a gallon diesel.

We continue to review our terminal network, and finally we believe that our change to a four-year truck life on our new tractors will help reduce maintenance costs and retain drivers.

So let's review these goals on slide 19 now and 20 of our three to five-year projections that we laid out for everybody in New York in February by way of review.

Our three to five-year goal for net revenue excluding fuel surcharge is somewhere between $3.8 and $4.5 billion.

Intermodal revenue is part and parcel of that and would be somewhere in the neighborhood of $450 million to $550 million.

Our revenue per loaded mile, excluding fuel surcharge, $1.75 to $1.95 range.

That would give us an operating ratio of somewhere between 88% and 89%.

Our utilization on our weekly loaded truck miles, 1,975 to 2,000, and a deadhead somewhere in the neighborhood of 10.5% to 11%.

We would expect our average operating fleet to weigh in between 18,500 to 19,500 units and our trailer to tractor ratio to decrease to 2.5.

On slide 20 we expect we're not putting anything in these calculations for fuel.

We expect fuel to remain flat and in accordance to what we're able to recover with our fuel surcharge program.

We do expect our miles per gallon to decrease by 30, 40 basis points as we bring on these new engines and we have the less efficient fuel with the low sulfur diesel.

We are projecting maintaining a $10 million reserve in our insurance.

We expect our insurance as a percent of net revenue to come in somewhere in the neighborhood of just under 5%.

Expect to generate free cash flow of about $150 million and net capital expenditures to come in somewhere between $450 million and $500 million.

All that we believe reasonable goals with upside potential.

So now on slide 21, let's give a summary as we head into Q2 and after a very strong quarter.

We recognize this was a tremendous quarter, but we view it as one quarter on our quest to achieve the three to five-year goals we just reviewed.

Our goals remain the same and our time line remains the same.

The path is not linear but our vision is clear.

As far as expectations, we believe that demand will be good for the rest of the year barring any unforeseen downturn in the economy.

We also believe that capacity will remain tight and that the ongoing driver shortage will continue to be an issue.

Our fleet will remain relatively flat in Q2 as compared to Q1.

We've begun to receive new units and we will continue to do so throughout the rest of the year, but we will use our trade to help manage our fleet size.

Unfortunately, fuel is going to continue to increase.

Fuel surcharges generally lag, so depending on the size of the spikes in the diesel fuel index we may have some negatives related to fuel in this upcoming quarter and the quarter beyond.

Like I said, $3 fuel is already here in California.

We're not going to change our practice of giving guidance, but in light of the results we achieved in the first quarter we wanted to shed some light on our expectations for Q2.

And at this time we believe that the upper end of the analyst estimates for Q2 prior to this press release are in line with our current expectations.

So with that, we'll open it up to questions and answers.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster.

We're still pausing.

Your first question comes from Tom Wadewitz from J.P. Morgan.

Good morning and congratulations on a fantastic quarter.

Really great results.

Thanks, Tom, good morning.

Let's see.

I wanted to talk with you -- I guess I have two different lines of questions here, two different questions.

One is, you know, you talked about the three to five-year goals, kind of reiterated those.

Is it reasonable to think that you could see that performance just a bit sooner because I think that the traction, the evidence that you showed in the first quarter was pretty dramatic and is it -- do you think it's possible to really see these numbers come in a bit sooner than you originally expected?

I think it's possible, Tom.

Obviously, there are things that will happen faster than others and there's low hanging fruit that you're able to pick off earlier than other things that are tougher to develop.

I think it is possible.

You -- you mentioned fuel as something to be aware of.

Are there other things that, you know, we should really pay close attention to that might work against you in the coming quarters on the operational turn around that might have been a little better in the first quarter, or is it really just fuel that would maybe throw you off the pace that you began on in the first quarter?

Nothing that I feel like is unique to Swift.

The driver issue remains extremely critical out there in the marketplace and that -- that will continue to, you know, be an issue for all of us.

You know, that's the main thing.

In addition, as we bring new trucks in -- into this second quarter, we've got the costs of bringing those in and out of our system and -- and handling the trades.

Do you feel like you're really, you know, kind of hitting your stride with the use of IT tools?

You talked a lot about that at the analyst meeting, and the revenue prioritization tool, I think, being a big one.

It appears that that's really flown through.

Do you think that there's -- you know, that's still pretty early in the process of -- of those tools?

Well, as we've stated before, that's an ongoing process and our goal is to continually be reviewing that.

The bottom 20% of our -- of our freight mix and -- and seeing what we can do to upgrade it so that's a continual ongoing process, and we have made some -- we have made some good progress.

There's still more to come there.

I guess maybe a more specific way of saying -- is the full sales force using the revenue prioritization tool now or is there still some training and further roll out of that?

No, sir, absolutely.

The full sales force is involved and knows how to use it well and is heavily incentified to deliver rate.

Okay.

I -- one last one and I'll pass it along and apologize for so many questions, but the pricing you got, I guess if I adjust for auto haul carrier it looks like it was something like 5.9% year-over-year in revenue per loaded mile, and that's better than most of the other carriers.

Is that -- you you think that you can continue to, you know, realize pricing better than the other carriers through this year?

Well, to the extent that we missed some opportunities early on in this cycle in 2004 and 2005, I think there's still some room for us to catch up, and as I stated, you know, we still think that 4% to 6% for 2006 is achievable and we're headed in that direction.

Thanks a lot for the time.

Again, congratulations on the results.

Thank you, Tom.

Appreciate it.

Your next question comes from John Barnes from BB&T Capital Markets.

Good morning.

How are you?

Good.

How are you?

I'm good, thank you.

Could you talk a little bit about your learning curve on this intermodal stuff?

Taken delivery of the containers.

I got to tell you how impressed I am to not go out on a competitor's initiative to fill some empty boxes.

That shows a lot of restraint.

Can you give us an idea of how that learning curve is going?

I think the reason -- the fact that we didn't jump in and play the rate game is evidence of the fact that we've got good talented folks in our intermodal department with a long-term focus, and we weren't willing to start off, you know, selling our opportunity short.

And as volumes picked up at the end of March and it started into April, I think that's proved to be, you know, the right decision.

Okay.

And you know, given the -- this -- you know, this issue with the lease terms and that kind of thing that you were explaining on the intermodal containers, does that change your outlook in terms of how you're going to grow the container fleet going forward?

Are you going to purchase more now and not look to the rails to take over some of their debt -- some of their containers?

Yes, sir, that's exactly right.

We did purchase an additional 2,000 units, which will come in here and be ready for us to get in customers' hands before the end of August, and that coupled with the 1,500 boxes that we will complete the lease on with the BN Nax boxes gives us a total of about 5,000 units.

But I'm talking going into '07 and '08, is this changing the way you're viewing growth of intermodal?

Is this going to be, you know, you guys thought maybe it was a 50/50 split between taking over some rail boxes and buying some and continuing to grow the fleet and has that now changed to Swift's going to be a bigger buyer of containers on a going forward basis?

No, I don't think it changes.

It changed the mix from our boxes that we leased and assumed.

But the total of the 5,000 is pretty much in line with what we earlier talked about.

It's probably delayed a few months as a result of a slow Q1 and the fact that we're -- we're buying these new boxes and they'll be in at the end of August.

We previously said we'd have somewhere between, a growth of somewhere between 1,500 and -- and 2,500 units.

And and remember that happens as BN will take units out as their leases expire, so that won't be all additional growth.

All right.

That's fine.

Thank you for the clarification.

And then on the fleet size real quick, just, you know, do you feel like the fleet is now appropriately sized?

I mean, have you done all the right sizing you need to on the fleet size barring some dramatic change in the economy or something and we're not going to see, you know, this ramp in the number of trucks in operation?

We do not expect to continue to shrink the fleet at this time.

We're projected for some growth throughout the rest of the year.

Okay.

All right.

Very good.

And then lastly, in your analyst meeting you talked about, you know, getting into the driver schools more aggressively, trying as a form of recruitment.

Can you give us an update on where that stands?

We opened up, you know, three more academies last year.

Our graduates from those academies are up 28% and so that continues to be, you know, a good program for -- for Swift.

Okay.

Very good.

Nice quarter, guys.

Thank you.

John, thank you.

Have a good day.

Your next question comes from Ed Wolfe from Bear, Stearns.

Good morning, Ed.

Good morning, Bob.

Can you -- just a head's up first of all.

I don't know if you're aware of this, but the slides, you can't print them out and they're a little bit hard to read, some of them so I don't know if you can repost those at some point.

But just a heads up on that.

Ed, there's a PDF version also that you can pull up after and should be able to print those off.

They're, the slides are found on two different places on our web site.

So for everybody that's having that problem, go to the PDF version and print those off, and if you still remain having trouble after that send us an e-mail and we'll forward them out to you again.

Thanks.

I've got a crack team working on that.

Just in terms of the fleet, it looked like you gave us a net CapEx number of just $5 million or so.

Can you take us through from a capital spending perspective what was spent in the quarter and what you expect for the year?

Your 10-K talked about $380 million gross.

It didn't really give a net CapEx number.

We spent $26 million gross in the quarter.

Okay.

So I -- I'm guessing that that's just the fact that the tractors and trailers and most of the boxes are going to come in after the first quarter?

Right.

We had a specific strategy of not bringing in a significant number of, amount of new equipment in the first quarter so the new equipment starts coming in -- started in April.

And for the full year, is 380 still a good gross number?

Correct.

And as a net number, 250?

Is that fair?

I would say that I'd probably, maybe somewhere between 250 and 280.

Okay.

And just in terms of how you think about that, you obviously managed it beautifully in terms of trading out and keeping the fleet tight during the first quarter both intermodal and on the truck side.

How do you look at the -- you said, Bob, the fleet should be flat quarter-over-quarter in the second quarter.

Should it be that way for the rest of the year so you're really just trading one for one or do you trade out something extra so you're negative in the first quarter and as the seasonality picks up how much flexibility do you have to grow that fleet if the demand is there?

We have excellent flexibility to grow the fleet to demand through our trade cycle, Ed, and so we've got lots of flexibility on the upside.

Anticipate -- we do anticipate some moderate growth throughout the remainder of the year.

So a flat second quarter and then a little bit of growth in third and fourth kind of thing?

I think that would be a good model.

Yes, sir.

In terms of the boxes, you had a slide and you've talked about 5,000 boxes.

Are there 1,500 that you already have before the 2,000 and the 1,500 you've talked about?

That's correct.

Yes, sir.

So that's a total of 3,500 new, Ed.

The 15 that we've already got in, they were completed by fourth quarter of '05 and then the additional 2,000 that will be in by August of this year.

And those first 1,500 that came in last year, those were Nax boxes also?

No, those were new ones.

We did both, Ed.

We've said we assumed 1,400, and what did I say, 41 of the Nax boxes plus we had the 1,500 new ones that we purchased new year which were in by the end of Q4, and now in addition, we're going to buy 2,000 more units which will be in by the end of August in time for the heavy retail season this year, and that will give us a total of 5,000 53-foot containers.

How do we think about revenue in the intermodal business?

There's $21 million of other revenue here.

How much of that is intermodal and how do I think about a run rate as you ramp up here?

We don't break it out at this time, Ed.

We'll see what happens here this year.

We might end up breaking that out in 2007, but for now we don't break that out.

There's no way to give an average revenue per box, how we should think about it, realizing that's rough, but average?

What we previously said, Ed, is we get to a run rate around $100 million by the end of the second quarter.

I'm sorry, Glynis. $100 million by when?

A run rate by $100 million by the end of the second quarter with the pushout in terms of our not taking on the Nax boxes and bringing on the containers in the -- primarily in the third quarter, the 2,000 containers in the third quarter.

I'd say probably maybe more realistic to say that we've got to that run rate in the third quarter.

Okay.

The fuel surcharge and the net fuel impact, I had trouble reading your slide so I'll go back and look at that, but if I take the fuel surcharge and revenue that you reported of 99.1 versus 66.4, I realize that's the surcharge for both owner-operators and drivers and then I deduct the difference in the year-over-year of the fuel expense that you report, which is just the drivers without the owner-operators, then I've got to add back the fuel impact that's -- the rest of that for the owner-operators is in the purchase transportation line?

That's correct and on the slide we've kind of broken that out for you.

Slide 15, Ed.

Yes, again I have trouble reading it and I haven't printed it out, but I'm going to do that, but just directionally what percentage of that 138.6 or how much is the fuel for the owner-operators?

Of the 138.6, there's 22 million of fuel for owner-operators and rail.

So it's not just owner-operators.

Now that we have rail it's fuel and rail.

It's all kind of non-Company related surcharge.

And what was that a year ago?

15.7.

Thanks very much for the time.

Okay.

Thank you, Ed.

Take care.

Your next question comes from Ken Hoexter from Merrill Lynch.

Hey, Ken.

Good morning.

Good morning.

A little bit of feedback there.

Outstanding job.

Great to see the numbers flowing through and the turn around on track, but if we could talk a little bit about volumes.

You know, should we see -- I know there was a bit of some large customers doing a shift of their inventory methods early in the year and that clearly didn't impact you to the small extent we thought it might, but should we see some sort of velocity pickup in the second half from some of these customers as they focus more on moving goods at a faster pace, or could that mean more or less than truckload moves as they move to smaller, more frequent shipments?

Can you talk a little bit about that?

I -- I don't -- I don't think you're going to see a shift to more LTL.

They're doing everything they can to reduce their costs.

I think they're looking for more opportunities to find intermodal solutions and develop more truckload solutions so I think that's their focus there.

I don't think you're going to see a significant -- we got a lot of feedback on the call?

Yes.

Ken, can you hear us okay?

Are we coming out bad to you?

No, I can hear you perfectly now.

It started out fuzzy but now it's perfect.

Apparently, we're having some trouble with the call so we apologize for that.

I don't see significant differences with our customers and our customers aren't indicating that there is going to be major changes there that we should anticipate.

Great.

And then I think you mentioned earlier a little bit of West Coast weakness.

Can you talk about what that was stemming from?

Is that just still from ocean freight moving to the East and not coming out at the ports, or is there something deeper on the West Coast just economically that we're feeling?

No, I -- I think what we said was Q1 was -- of 2006 was much more typical of a first quarter, and it came on the heels of a more robust Q1 which had some hangover from a very strong 2004 fourth quarter and we didn't have that.

I mean, the ports were backed up and there was a lot of that import traffic that, you know, that hung over into January of 2005.

This year we didn't have that and it was much more typical of a softer -- of a normal quarter, which is softer in the West, typically, and the East and the Central were -- were a little stronger.

Great.

Last one is just on the litigation expense -- or gain, sorry, what was that from?

It's from a settlement with an insurance broker -- a former insurance broker that we had.

Okay.

Great.

Great job.

Great to see.

Thanks.

Thanks, Ken.

Your next question comes from Chaz Jones from Morgan, Keegan.

Hey, Chaz.

Good morning.

Hey, good morning, Bob.

Good morning, Glynis.

Nice quarter.

Thanks, Chaz.

Just one quick question here.

A lot of them have been asked, but can you give us a sense for the average fleet age?

You know, directionally or in absolute terms, the reason I'm asking, I'm just curious on the maintenance side.

Have we really reaped the benefits yet from, you know, the lower trade cycle that -- that went in place and then the trucks that you got rid of at the end of last year, you know, the 1,250?

I mean, my sense would be that those were older trucks, as well?

That would be correct, Chaz.

Our current operational fleet age is about 2.4 and it will be moving south and we should end up just under 2, you know, as we bring on these new trucks throughout the remainder of this year.

So we really haven't seen much of the benefit on the maintenance side from those changes yet?

That is correct.

Okay.

That's all I had, guys.

I appreciate it.

Chaz, thank you very much

Your next question comes from Jon Langenfeld from Robert W. Baird and Company.

Good morning, all.

Hey, Jon.

Good morning.

Bob, can you talk a little bit about customer feedback?

You know, obviously, you're going in with higher rates and you're probably having to walk away from some lanes of freights with customers, so I guess I'm interested in the type of feedback you're receiving from the larger customers.

We're trying to go in these rate increases in a partnership fashion with our customers.

We're taking a look at these lanes and these rate increases on a surgical basis, if you will, and not necessarily just across the board.

We're using our technology tools to identify lanes where we can improve on velocity and other things that help us where we may not necessarily need, you know, as much of a rate increase, and we're looking at balancing the freight we haul with lanes that work better in our system and we're trying to do that in a partner fashion with these customers.

They've been very receptive to it.

To the extent that we were, you know, below market in our -- in being aggressive and going after rates, you know, we still have some catchup room and so that's one of the reasons why we're able to have some success there.

Okay, and is it pretty evident, you know, when we look on certain lanes that you are below market and so the customer can look at carrier A and look at Swift and say, hey, it does make sense, these rates are coming up?

Jon, it's never evident.

Every customer we go to they tell us we're the highest of anybody.

So that's a game we always have to play, but we're -- you know, as I said earlier, we think that that 4% to 6% goal for this year is achievable and we've started out the quarter which is the toughest quarter to get rate in meeting that objective, so we hope to be, you know, successful for that effort for the remaining three quarters of this year.

Okay.

Good.

And then just in terms of the seasonal trend it seemed like you made reference a couple of times to the fact that you had a typical -- what used to be considered a typical first quarter and things kind of ramped into March and does April look okay here, as well?

April's looking out okay.

I mean, the ISI remains a good index for us.

The ISI for April is still down over last year of 4.4% as of the reports came out yesterday.

So -- but -- but it's definitely better than the first -- the first quarter.

Okay.

And then do you have anything on the fuel side, any accelerators?

I know some of your competitors went out over the last six months and said, you know, fuel gets over X amount, then the surcharge actually increases on a per mile basis to try to get more of the recovery?

We don't have anything specifically like that.

We are working with customers, particularly who are heavy West Coast shippers with a West Coast fuel surcharge.

Typically the West Coast pad has been significantly higher and so we are working with some of those customers that have heavy West Coast volumes.

So should we think about 85% coverage on the fuel expense?

Oh, I think typically that's good.

I mean, you've always got your -- what you don't recover is your deadhead and your idle and so that's going to get you pretty close.

Okay.

And then two other puts and takes in terms of the quarter, if I missed it I apologize, the gains, were there any material gains on equipment sales?

I think we reported gain of $1.3 million and that was related to getting rid of the assets associated with our truck delivery operation.

But in terms of outright sale of assets?

No, there was nothing material there.

Nothing material.

Okay.

On the salary wages and benefit line, can you just review that with me one more time.

You talked about $7.5 million positive kind of coming back in this quarter, what does that typically look like, and -- is the 34.5%, is that a good first quarter wages and benefit as a percent of net revenue, is that a good bogey?

I would say that maybe something more around 35% would be a better bogey going forward.

The fluctuations in the worker's comp reserve occur all the time. 7.4 was higher than normal but there is some amount that occurs there, so I would say going forward, maybe 35% is a more reasonable estimate.

Okay.

Thank you very much.

Nice job.

Thanks, Jon.

Your next question comes from John Larkin from Stifel Nicolaus.

Hey, John.

Good morning.

Good morning, Bob.

Would you believe Stifel Nicolaus?

I would.

They have my name as Bill.

I heard that at the beginning.

In any event as far as the dedicated operation is concerned, I know some of the truckload carriers in an attempt to try and get the drivers home on a more regular basis are trying to shift assets over in that direction, but since you don't break that out separately could you give us color as to whether that's one of your initiatives, as well?

Our search for dedicated is always ongoing and we have a separate marketing team that is specifically targeted to help work with the rest of our folks in bringing those kind of opportunities to the table, and so that -- that is definitely a focus of ours.

It's a focus for the whole entire industry, John.

Is the percentage of business that you're doing on a dedicated basis higher than it was this time last year?

We don't break that out but I think as a rule it's definitely up a little bit and we're continuing to look for dedicated opportunities all the time.

I don't think you mentioned this, but I'll ask the question anyway.

On driver pay, what do you see throughout the rest of the year?

Do you think you'll have to take a pay increase once, twice, or not at all?

You know, at this stage we don't have anything on the books, we have previously stated that we anticipate the necessity of that occurring, and, obviously, to the extent that we can keep our trucks up and running without it we're going to do it for as long as possible.

With all the new trucks coming in, most of the new trucks are Volvos, is that correct?

Yes, sir.

That's correct.

And a lot of the older trucks are Freightliners.

Has it been much of an issue to convert all the parts inventories and maintenance operations from one vendor to another?

Has that created any inefficiencies that perhaps go away when you're close to 100% Volvo?

It hasn't been a big issue, John, and we continue to work close with both vendors and they've been -- you know, they've been very good in helping us and very good in ramping up, you know, dealer support across the country.

Okay.

And then -- then just lastly, I know some of the rules of thumb that the Company had used in their operations historically such as having a lot of terminals, fueling most of the trucks at those terminals, you know, you've begun to question those rules of thumb.

Any updates on additional terminals that you might be closing or additional fueling that may be done on the outside?

Well, the fueling initiatives are on a daily basis and the bulk fuel that we have across the country works to our advantage in many instances.

It's not 100% and the nice thing we have with the technology we're using today is we're able to smart fuel and we're able to, you know, buy at the truck stop when it's more advantageous, and when it's not we've got our bulk facilities, so that's an ongoing process that is driving good decisions there.

As far as closing terminals and what have you, there's nothing on the books now.

We'll continue to look at opportunities.

You know, there is potential consolidation down the road, but nothing that's on the books right now, John.

All right.

That's very helpful.

Thanks very much.

Thank you.

Have a good day.

[OPERATOR INSTRUCTIONS] Your next question comes from Craig Harris from Arizona Republic.

Good morning.

Hi, Craig.

Good morning.

Hi.

Congratulations on your stock price today.

It appears that is a record high.

What was the previous record yet to date with what the price was on that in 2002?

You know what, Craig, I don't have that, I don't know.

Can I get that from you later today at your office?

Yes, we can get that to you later.

Could you elaborate a little bit on the litigation and what that case stemmed from and how it came out?

You know, it was a settlement with a previous insurance broker that had been filed how long?

How many -- several -- several years ago that we just happened to be able to get settled.

What -- I know there's probably a handful, can you summarize, less than nine months ago, your stock was about $16 a share and now you're over $30.

How would you summarize, you've been able to turn things around so quickly?

Well, I'd have to say that it's a combination of a lot of things.

First of all, I would say that we were probably undervalued at -- we were definitely undervalued at the $16 stock, and today through improved revenue per loaded mile, our improved surcharge recovery, improved utilization, our cost controls all of those factors contribute to, you know, improving our earnings per share which is helping drive the stock price.

Can you talk a little bit about with unemployment rates going down, has its been more of a challenge to find drivers?

I know it's always tough to find drivers, but has it been even tougher and what have you had to do to keep your drivers?

It -- it is the number one problem for our industry and it's the number one issue at Swift Transportation and we developed -- we're unique in the fact that we have our own driving academies which we're able to train men and women on how to drive our rigs and train them in accordance with our safety rules and regulations and requirements, and so we've been able to be, you know, successful in that arena, but it is the continual challenge and demographics would indicate that it will remain a challenge for the foreseeable future for our industry.

I know last year you were successful in clearing up the SEC investigation, where are things at with the FMCSA, and to follow-up on that since that cloud's been kind of removed, is that another reason that the Company has done so well and been able to turn itself around?

Well, that was certainly -- it was certainly nice to get that solved and I think that has been a help, Craig.

And on the FMCSA, where are you at with that?

Our safety rating is satisfactory.

Our relationships with those folks are very good.

Satisfactory is the highest rating that the FMCSA is able to give.

I'm sorry to ask so many questions.

I'll try to wrap it up here.

When you pass on the rate increases to customers, ultimately, I mean, how much of that do they pass on to consumers?

Since Wal-Mart is your biggest customer, is that ultimately passed on there?

You know what?

Craig, I have no ability to comment on what Wal-Mart -- how they -- any of our other customers pass on their increases.

They're always looking for efficiencies in their operations, as well.

Thank you for your time.

Thank you, Craig.

Your next question comes from Tom Albrecht from Stephens, Inc..

Hey, Tom.

Good morning, everyone.

Great job again on the quarter.

Just a few factual questions.

What was your length of haul, Glynis or Bob, in the quarter?

538 versus 541, so we were down 3 miles.

Okay.

The other that's -- other income expense, is that, Transplace is in that if I recall?

Yes.

Transplace is in that.

How much was Transplace's loss and have you written that off 100% now?

Have not, it's about $700,000 in the quarter.

How much more investment do you have in that and might you write that off as the year goes on?

We have about $3 million more, not necessarily of investment, but of a loan that we made to them in January of last year and that loan remains outstanding.

As they have losses we write that off against the loan.

Okay.

And then there was so much good stuff here this morning, I didn't either hear or maybe you didn't say anything.

On the operating taxes and licenses, that was down fairly dramatically.

Are there some different things you're doing with the states to drive that expense lower or what -- what kind of went on there?

I mean there are two things.

One, the operating taxes are down by virtue of the fact that our fleet actually is down.

There's an absolute reduction there.

The other thing is that we've moved to registering most of our vehicles in Oklahoma last year and that actually has resulted in some savings with regard to operating taxes, as well.

Where were you before?

All over.

It was kind of dispersed before.

States are funny on that.

And then I know you've mentioned possibly, you know accelerated equipment as the year goes on.

How big might we want to think about the equipment gains as a line item?

I think going forward equipment gains are minimal.

Still going to be -- okay.

All right.

And then how are you doing on your unseated trucks?

Well, we remain in -- in pretty good shape.

You know, as we were throughout last year.

Okay.

And then lastly, like on page 7 and also in the press release where your revenue per tractor per week, 2,991, but your revenue per tractor per day is 608.

If I divide 2,991 by 5 that's about 598, not 608, so I'm not sure, you know, exactly what that was if there's a half week in your weekly average or something, but it didn't quite reconcile.

More of an FYI.

We'll look at that.

And really the last question, the true last, how many trailers do you have right now?

Oh, we're right at 50,000 give or take a couple percent.

How much?

51.

Just over 51.

Just over 51,000.

And are you 100% trailer tracking or are you still --

Right now we're just a little over 30,000 and we will be here this next -- should be by the first part of August at -- we should have all 50,000 with the trailer tracking.

Okay.

Good.

All right.

Keep up the good work.

Thanks.

Hey, thanks, Tom.

Appreciate it.

Your next question comes from Justin [Jaegerman] with Wachovia Securities.

Hey, good morning.

I thought I was at the beginning of the queue.

I guess I must have really screwed up.

You guys said that you were comfortable with $0.50 as the high end of consensus for second quarter and just wanted to get a sense of how comfortable you guys are with that?

You know, I mean that doesn't imply too much sequential improvement in the OR even with revenue being down year-over-year.

I just wanted to get -- I mean, usually we've seen more of a bump from first quarter to second for you guys, and you know, given the usual seasonality there, you know, is that just kind of the extent of what you're willing to comment, or is that just saying, you know, is that kind of what your expectations are?

Well, I think, you know, the comment speaks for itself.

It is what our expectations are right now.

The head winds that we have coming into the next quarter into this quarter are -- with fuel and the driver situation remain formidable.

We also, as we bring in this new equipment and take old units out there's some additional costs that we didn't have in Q1, and the last thing we want to do -- one of the things that we're trying to do is drive consistency.

The last thing we want to do is set up an expectation that's unrealistic, you know, we don't have any chance to hit, doesn't make any sense, so we're trying to -- that was the reason for the caution, Justin.

Oh, no, that's definitely fair.

I guess given the extent that fuel could run in the second quarter and that you guys are a bit cautious on that, what are your internal expectations for diesel prices when you're looking at it in the second quarter?

Well, my crystal ball is really foggy.

I mean, who knows?

I don't know how they justify $3 fuel today and I don't know how to -- I don't know what to say on that, Justin, other than the fact that we have fuel surcharge in place with our customers.

The customers understand, you know, the impact of that on our operation and you know, we will continue to recover, you know, the same percentage that we have historically.

Sure thing.

Do you guys have an estimate on what ultra low sulfur diesel is going to do to those prices?

We've been told anywhere between $0.05 to $0.10 on the upside, and we don't know at the stage but that's the best range we've been given to date.

That's fair.

That's somewhat around the same thing that we've been hearing, as well.

I thought that I had a good handle on it and you made a couple other comments throughout the call that confused me a little bit.

What is your ending expected container count for '06 on the intermodal side?

5,000.

That's 5,000.

So that's the 3,500 plus the 1,500?

Yes, sir, it is.

I confused that there may be another 1,500 in there somewhere.

Sorry about that.

No worries, it was probably on my end.

I know you said basically April should be -- April through June should be pretty flat on the fleet count.

And then you got growth in the second half.

What kind of growth are we looking at there?

Did you go into a little bit more detail on that or --

It will be minimal, Justin, but there will be some.

If the market ends up being, you know, extremely hot, we have the ability to flex up.

The minimal growth will be in support of our intermodal dray and our dedicated operations that we continue to bring on.

That's fair.

So I mean is 3% to 5% kind of unreasonable, or is that above or below what you're thinking?

I'd say that's high from where we're going to go.

We're -- we're looking at minimal increase in the fleet size throughout the remainder of the year.

And I would expect, depending on the economy, that could change in '07 given your 3 to 5-year guidance?

It will and that's the nice thing about where we sit.

We have that flexibility to ramp up if we need to.

When you guys look out at that guidance, it implies something like $3.50 in earnings, maybe a bit more, depending on which side of things you're going towards.

I mean, when do you foresee that growth taking place, the bulk of that when you do your internal kind of expectations?

Is that weighted more towards the, you know, third to fifth year, or is that -- if things stay the way they right now, I know '07 and '08, is that coming right in '07 and '08?

We just tell you it's going to be there in that 3 to 5-year period and don't break it out any further than that.

We're leaving that for your creative genius.

Let's hope so.

I guess the last question that I've got for you is I -- I got a random e-mail about a potential trucker strike in southern California having to do with the Los Angeles [Tracaro] collective, and I was wondering if you guys had heard anything about this given your presence on the West Coast and if it's anything meaningful at all that we should be thinking about?

No, sir, not at all.

Those rumors come and go on a regular basis and they're not -- have no view on that at all, don't expect anything to materialize there, whatsoever.

All right.

Well, thank you and congratulations on the progress.

Thanks, Justin.

We've got time for one last call and then I'm told we need to cut this off.

Your last question comes from Tim Jenkins from Tiger Management.

Hi, guys.

Good morning.

Can you hear me?

Yes, sir, we can.

How are you?

Good.

I had a question on the fuel expense item.

Can you first off tell me what your Company fuel cost per gallon was in the quarter?

We don't disclose that, Tim.

Isn't that disclosed in your 10-Ks?

No, it's not.

Okay.

Well, I guess what I -- I'll ask it a different way then.

If I look at your fuel costs on a per mile basis, just looking at total Company miles, it looked like it was up about 14% year-over-year.

And if I look at what actual diesel costs were up year-over-year, it looked like they were up somewhere in the mid-20s%, and if I look at a per-mile basis to some of your competitors they were all up in the mid-20s to 30%.

I'm just trying to understand why you guys are so efficient at keeping fuel costs down in the quarter?

Our fuel costs were up 20.5%.

I can tell you that.

Based on what metric?

Cost per gallon.

Cost per gallon?

Our fuel cost per gallon was up 20.6% quarter-over-quarter.

So how come your fuel cost per mile was only up 14%?

I don't know how you're getting to fuel cost per mile for Company miles.

I'm just dividing it by the total miles that you guys provided.

Well, you're looking at Company fuel expense and dividing it by total miles.

You have to look at Company fuel expense and divide that by Company miles, specifically, so, we don't disclose that so you'd have to make an assumption about the split between Company miles versus owner-operator miles to split out that number --

Uh-huh.

To kind of arrive at your calculation and I would just -- if you look at our press release, we have 33, just over 3,300 owner-operators for the quarter so about 19% to 20% of our overall vehicles.

Is there any reason that your fuel costs on either a per mile basis or a per truck basis wouldn't track the diesel price increase on a year-over-year basis?

We say that it does track that.

Okay.

It definitely does track that.

I would say that we should be doing better than our competitors because we have more volume.

Right?

And more bulk facilities.

And more bulk facilities.

And how does the bulk facilities benefit you?

It gives you another option to, often times and historically, there is a -- a pretty good difference between bulk and truck stop fuel.

And so we're able to take advantage when that exists in bulk fuel as opposed to the truck stop.

Okay.

Great.

Thanks.

Thank you very much.

All right.

Thanks, everybody.

Appreciate your support of Swift Transportation.

Look forward to a good Q2 and the rest of 2006.

Have a great day.

This concludes today's Swift Transportation first quarter earnings call.

You may now disconnect.