Knight-Swift Transportation Holdings Inc (KNX) 2006 Q2 法說會逐字稿

Good morning my name is Alice and I will be your conference operator today for.

At this time I would like to welcome everyone to the Swift Transportation second quarter earnings conference call. [OPERATOR INSTRUCTIONS].

I would like to turn the call over to Mr. Bob Cunningham President and CEO.

You may begin your conference, sir.

Thank you, good morning and greetings from Phoenix, Arizona.

With me today is Glynis Bryan our Chief Financial Officer.

Welcome to Swift Transportation second quarter conference call.

You can access the slides we'll be discussing at swifttrans.com under the investor relation tab.

We'll go ahead and begin today with the required 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 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 results 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 Exchange Commission.

All right, let's go ahead and get started with a slide number three To summary of our second quarter.

For the second quarter our total revenue increased 1.9 % to $813 million.

Excluding fuel surcharge revenue, our net revenue decreased 3.2 % year over year To $686 million for the quarter.

This decrease in net revenue was primarily due to the 8 % reduction in our average operating fleet and the majority of that decrease in the fleet occurred in the second half of 2005.

The impact of that fleet reduction was partially offset by the increase in revenue per loaded mile which I will discuss with you in just a minute.

Our operating ratio in the quarter was 90.2 excluding the $4.8 million benefit from the change made to our 401-K program which was discussed in our press release.

Our operating ratio was 90.8.

Adjusted net earnings in the quarter were $42.2 million that's up 40 % year over year on a comparable basis.

This excludes the 401-K benefit and the impact of the interest rate derivative.

Adjusted earnings per share were up 37 % to $0.56 per share.

The adjustments I'm referring to were outlined in detail on our press release and are contained in a reconciliation that Glynis will discuss later on in this presentation.

Slide four is a year-to-date summary of where we are at.

Our year-to-date revenue was $1.58 billion.

That's up 3.2 % over the first six months of 2005.

Excluding fuel surcharge revenue, our net revenue was $1.35 billion which is a reduction of 2.5 % year over year.

Similar to the results for the second quarter, the reduction in net revenue is driven by the reduction in our average operating fleet up 7.7 % which is partially offset by the increases we have achieved in revenue per loaded mile.

Our operating ratio improved by 300 basis points year over year on an adjusted basis.

Again these adjustments are the same as outlined in our press release and are detailed later in this presentation.

This reduction in our operating ratio is a result of several actions.

Number one, our ability to achieve rate increases in the Market.

Number two, our ability to recover the impact of increasing fuel costs through effective fuel surcharge programs with our good customers.

Number three, our operational focus to improve utilization of our tractors by increasing the number of loaded miles driven and reducing our number of empty miles.

Number four, our effort to manage our admin and support expenses in conjunction with the size of our fleet.

The good news is we've taken all these actions while at the same time maintaining and strengthening our focus on safety.

These efforts have resulted in net earnings year to date of $83 million or $76 million excluding the unusual benefits we received from a litigation settlement in the first quarter and the 401-K change in the second quarter and, of course, the impact in the Market value of the derivatives in both years.

On an adjusted basis, our net earnings have increased to 66 % year over year and our EPS has increased 61 % to $1 in 2006 compared to $0.62 in the first six months of 2005.

On the next few slides, I'm on slide five now, I'll highlight our performance on the operation metrics for the quarter.

We'll go ahead and begin with our revenue per loaded mile.

Our average revenue per loaded mile, excluding fuel surcharge for the quarter, was $1.63, that's up $0.06 year over year or approximately 4 %.

Slide six is our weekly loaded truck miles.

Our weekly loaded truck miles in the quarter were 1910 which is essentially flat year over year.

This Major was negatively impacted in 2006 by an increase in the unmanned truck count.

The driver Market I can tell you is as challenging as I've ever seen in my entire career.

It continues to be a problem for us at Swift as it is for the rest of the industry.

We're actively exploring several alternatives to address recruiting and retention of company drivers and owner operators.

We'll talk a little bit about that later.

One change we Made this quarter was a revision to our owner operator fuel reimbursement program in which Swift absorbs all increases in fuel costs above a certain level thus protecting the owner operators from increases in fuel price.

I can tell you this program has been extremely well received by the owner operators and I think essentially from an owner operator standpoint, it's eliminated their issue with fuel.

While we're on the subject of owner operators let me talk for just a minute about interstate equipment leasing.

IEL is a company wholly owned by Jerry Moyes and provides equipment and financing to 2100 owner operators or approximately two-thirds of Swift's owner operator fleet.

To be clear, all owner operators, not just those 2100 but all owner operators have a operating contract with Swift but some of them receive financing for their equipment from IEL.

The interstate equipment leasing relationship was never formalized with Swift Transportation.

Since Jerry's resignation in October, 2005 we've been negotiating the terms of our business relationship with IEL but we've not yet reached agreement.

While we anticipate a continuing relationship with IEL in the absence of a written agreement, we cannot be sure of the nature of the relationship going forward.

Slide seven is our deadhead percentage and as you can see by the results here on slide number seven, our disciplines are round reducing empty miles are continuing to drive improvements.

Our deadhead dropped another 40 basis points year-over-year to 11.6 % for Q2.

Slide eight is our revenue per tractor per week.

Our operational improvements driven by rate increases and deadhead reductions and our ability to maintain our utilization have enabled us to improve our revenue per tractor per week to $3,106 in the second quarter and that's an increase of 3.7 %.

Next on slide nine is an intermodal update.

Our progress in intermodal continues.

Our revenue has more than doubled in the quarter compared to last year.

The good news is we've received some meaningful awards on business from key customers from some of the key southern California traffic moving east. 745 of our new containers have arrived in June that's of the last 2,000 we announced in the previous quarter.

And the remaining 1,255 units will be in by Aug. 31, in time for the peak retail season.

Total fleet at the end of August will be 5,000 53-foot containers.

We expect to be at the run rate as we previously announced of $100 million in revenue some time this month, the month of July.

And again I would tell you our customer acceptance and our pricing awards are in line with our expectations, and we continue to remain excited about the intermodal opportunities.

I'll now turn the discussion over to Glynis and she'll take you through some of the financials in more details.

Thank you, Bob.

Good morning everyone.

I'm going to start on slide 11.

As Bob discussed our total revenue for the quarter was $813 million which is a 1.9 increase from the second quarter 2005.

Year-to-date total revenue was $1.58 billion compared to $1.54 billion for the first six months of 2005 or roughly 2.3 % increase.

Our reconciliation from total revenue to net revenue is shown on the bottom of the chart on slide 12.

Excluding fuel surcharge revenue as shown on the slide, our net revenue was $686 million in the quarter compared to $709 million in 2005.

This is a 3.2 % decline and as Bob mentioned, was due to the 8 % reduction in both the size of our operating fleet somewhat offset by improvements by revenue per loaded mile and increases in intermodal revenue.

On a year-to-date basis, our net revenue excluding fuel surcharge revenue declined 2.5 % year over year to $1.35 billion.

Since fuel surcharge revenue 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 following slides will summarize our operating expenses then as a percentage of net revenue.

Moving on to slide 13, salaries, wages, and employee benefits.

This line item decreased by $26.9 million in the second quarter of 2006 compared to the second quarter of 2005 and $46.8 million in the first six months of 2006 compared to the same period In 2005.

The reduction is primarily due to a decrease in driver wages resulting from a reduction in the number of miles driven by company drivers also associated with our smaller fleet size.

In addition, we've experienced a reduction in expenses related to fringe benefits and workers' compensation which I will walk you through.

In the second quarter of 2006, we recorded a $4.8 million one-time reduction in expenses associated with a change in the discretionary match portion of our 401-K program.

As stated in our press release, the change reflects reduction in the company's match for employees that do not themselves contribute to the 401-K plan.

Adjusted for this benefit our salary, wages, and employee benefits dropped to 33.3 % of net revenue in the second quarter and 33.9 % year-to-date.

This compares to 35.4 in the second quarter of 2005 and 36.1 % for the first six months of 2005.

Over the past 18 months, we have improved our workers' compensation claim handling management, and this has resulted in a reduction in the number of claims and their subsequent development.

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

The improvement this quarter of approximately $6.9 million and the $7.4 million that we reported in the first quarter 2006 was greater than normal.

We expect to have continuing benefits from our improved workers' compensation management practices albeit not at the levels that we've experienced in the first two quarters of this year.

At this time we expect the ongoing benefits to be in the range of $3 to $4 million per quarter.

Moving on to Operating supplies and expenses on slide 14, Operating supplies and expenses declined $5.8 million in the second quarter and went from 10 % of net revenue in 2005 to 9.5 % of revenue in 2006, a decline of 50 basis points.

For the first six months of 2006, Operating supplies and expenses have dropped $11.3 million from the same period in 2005 or from 10 % of net revenue to 9.4 % of net revenue.

These net reductions are the result of decreases in maintenance and road expenses associated with a smaller fleet and a reduction in travel and other administrative costs partially offset by increases in driver recruiting expenses at this time.

Moving on to fuel on slide 15.

As we discussed in previous conference calls, we evaluate our company fuel expense net of the fuel surcharge revenue related to company miles driven.

The calculation for this net fuel expense is shown on the bottom of the slide.

So as you can see, our net fuel expense in the quarter decreased from 10.8 % of net revenue in the second quarter of 2005 to 10.6 % in the second quarter of 2006.

I'm going to spend a little bit of time going over the methodology that Swift uses to calculate the impacts of the changes in the cost of fuel on results in the quarter.

So, Swift has historically reported and continues to report the EPS impact of fuel strictly based on changes in the fuel costs per gallon year-over-year and the fuel volume in the current quarter.

In the second quarter of 2006, fuel costs per gallon increased by approximately $0.58 or 27 % over the second quarter of 2005.

This change is multiplied by the number of gallons consumed in the current quarter that results in a cost benefit compared to the year over year difference in net company fuel surcharge revenue.

The result is a positive or negative amount that is then tax affected and divided by the number of shares to determine the EPS impact.

So this methodology, while taking into account changes in cost per gallon, does not take into account any changes in volume year over year.

Based on this methodology consistent with how we've reported in prior quarters, this would have resulted in roughly a $0.06 negative impact on EPS.

Consistent with how most of the transportation analysts look at fuel, we also look at company fuel based on costs per mile and based on net company fuel costs on a year-over-year basis.

The different methodologies result in varying fuel impacts on EPS.

From the negative $0.06 that we just discussed to a positive $0.03 on EPS.

Our calculation on the cost per mile basis results in a negative $0.01 impact on EPS this quarter.

The difference in the numbers at the bottom of the slide relating to Net company fuel expense would result in a positive $0.03 impact on EPS this quarter.

Just to be clear, this last methodology that results in a positive $0.03 impact is based on the difference between net fuel expense on the table at the bottom of slide 15 so for the second quarter of 2006 $72.5 million versus $76.5 million in the second quarter 2005.

Given the variations in results, we have remained consistent with reporting the EPS impact on Swift on the historical basis that Swift has used.

Purchase transportation on slide 16 increased by $825,000 in the quarter compared to the second quarter of last year.

Fuel surcharge revenue reimbursed to operators and other third parties increased approximately $9 million in the quarter.

Excluding these surcharges purchase Transportation dropped from 17.8 % net revenue to 17.2 % of net revenue.

Increases in rail costs associated with growth of our intermodal business more than offset by reductions in miles driven and associated payments Made to owner operators and other third parties.

On a year-to-date basis, purchase transportation increased $11.9 million year over year.

Fuel surcharge reimbursements grew by $15.4 million as shown on the bottom of this page.

Excluding these fuel surcharge reimbursements, purchase transportation has increased from 17.2 % of net revenue in 2005 to 17.4 % of net revenue in 2006.

Yet again the increases in the intermodal business were partially offset by reductions in owner operator and other third party expenses.

Insurance and claims expense on slide 17.

Insurance and claims in the quarter were 5.6 % of revenue which is consistent with the percentage last year.

On a year-to-date basis, excluding the $5.1 million favorable litigation settlement we disclosed in the first quarter, insurance and claims expense was 9.5 % of net revenue also fairly consistent with the prior year at 5.8 %.

I'm sorry it was 5.9 % of net revenue in 2006 versus 5.8 % of net revenue in 2005.

In June, 2006, Swift began insuring risks through our wholly-owned insurance captive Mojave Transportation Insurance Company.

In addition to ensuring our own risk, this subsidiary also allows Swift to provide insurance policies to our own operators.

This will add approximately $3 million a quarter to the insurance and claims line item going forward.

It should result in a minimal positive impact on EPS since these costs will be offset by premium income which will flow through other revenue rather than the insurance line.

Looking at rent expense, depreciation, and amortization on slide 18.

As we continue to replace leased tractors with owned equipment for analysis purposes, we believe it's best to combine our rent expense with our depreciation and amortization expense when comparing year over year results.

In the second quarter of 2006, the total of our rent depreciation and amortization expense was relatively flat on a year-over-year basis.

As a percentage of net revenue, the sum of these expenses increased to 9.4 % from 9.1 % last year.

We have seen reductions in our expenses related to tractors and trailers as we have reduced the fleet size.

These decreases have been offset by increases in depreciation associated with the [Petrilla] tracking methodology which we began installing in the second quarter of 2005, and we expect to be complete in August of this year as well as increases in both rent expense and depreciation associated with the intermodal containers.

As you may recall, we have assumed leases from the [inaudible] for approximately 1500 containers.

We also purchased 1500 of our own containers last year, and we are currently in the process of receiving an additional 2,000 containers for a total of 5,000 containers by the end of August.

Keep in mind that these numbers no longer include the gain or loss in the disposal of equipment.

We have a separate line on the P&L to segregate these items.

In the quarter the loss under the disposal equipment was $626,000 compared to a gain of $1.1 million last year.

Year-to-date, the gain on disposal is $668,000 compared to a gain of $811,000 for the first six months of 2005.

Our operating ratio on slide 19 per GAAP was 90.2 % for the second quarter of 2006.

As shown on the bottom of the page, excluding the benefit from the adjustments of our 401-K Match and our operating ratio for the quarter, our operating ratio for the quarter was 90.8 % or 210 basis point improvement year over year.

This improvement was driven by reductions in the workers' comp expense as well as increases in our revenue per loaded mile and the results also of our cost-control initiatives implemented this year.

Our ability to keep our expenses in line with the smaller fleets and revenue base has enabled the majority of these margin benefits to flow through to the bottom line.

Year to date our operating ratio as reported was 90.7 %.

Adjusted for the 401-K benefits and favorable litigation settlement received in the first quarter, that operating ratio is 91.3 % or 300 basis point improvement over the first six months of 2005.

Before I move on to the balance sheet, I wanted to make a note about other income and expenses and our tax rates.

In 2006 we had other income of $224,000 for the quarter and in 2005, we had an expense of $392,000.

This difference is primarily related to the reduction in our portion of the loss associated with our investment in Transplace.

Our tax rate has trended up this quarter to 38.8 %.

We expect it to be at about 38.5 % going forward for the remainder of the year.

On slide 20 our balance sheet remains healthy.

Debt to cap shown on slide 20 has dropped 34.1 % compared to 41.2 % in December of 2005 as we've paid down over $110 million of debt in the first six months of 2006.

Our net CapEx for the quarter was approximately $89.7 million, year to date is $94.9 million.

Our cash flow from operations in the quarter was $77.7 million bringing the total to $196.9 million on a year-to-date basis.

Slide 21 reconciles our reported GAAP numbers to the adjusted results Bob and I have used to offset this presentation in discussing our financials for the second quarter and year to date.

These are the same adjustments that we have outlined in our press release and are provided here for your convenience.

I will now turn the presentation back over to Bob for a wrap-up.

Thank you Glynis.

Before we open the line for questions, let me highlight a few points that we've got shown here on slide 22.

First the driver shortage remains critical.

We are aggressively addressing our recruiting and retention needs as we speak.

That's an ongoing process, some of the items we've been working on include operational initiatives to improve the predictable home time for our drivers.

As we mentioned in our press release and I mentioned earlier, we revised our owner operator fuel reimbursement program to keep them whole when fuel prices exceed a certain level.

We've also implemented a significant internal driver appreciation program.

We continue to make great progress with our turnaround plan.

Focus on our network management tools through concentration on improving our rates, increasing our utilization, and reducing deadhead is driving improvements in our revenue per tractor per week.

Net fuel expense as a percentage of our net revenue remains in line in spite of considerable spikes up and down in the cost of fuel.

And we continue to control our expenses and our non-driver to tractor ratio is improving.

We've realized significant benefits from our improved management of our workers' compensation claims and we expect those improvements to continue as Glynis discussed.

We've paid down $110 million of debt this year which reduces our debt to cap from 41 % to 34 % and all of this progress rolls out to a 90.7 year-to-date operating ratio which is a number that we're very proud of as a management team.

Looking forward the Market remains favorable for truckloads in our estimation.

Our customers are bullish on the second half of this year And continue to be aggressive in lining up capacity for their peak season, and we believe that capacity will remain very tight overall as a result of the critical driver environment.

We will remain focused on partnering with our customers to establish more effective solutions for both of us as we progress towards our goals and most importantly, we intend to keep our focus on increasing the bottom line and increasing our earnings per share.

And with that we'll go ahead and open the line for questions.

Operator, if you're there we'll go ahead and take questions.

[OPERATOR INSTRUCTIONS].

Our first question comes from the line of Ken Hoexter with Merrill Lynch.

Hi Ken, good morning.

I guess the first question has to come -- you mentioned on the IEL leasing but you also didn't mention a word about the Jerry Moyes or the poison pill you put in place.

I guess is that something -- it was tough to gather from the release, is that something that is already adapted, is that something you still need to work for and can you describe kind of what Made you feel -- it sounded like you feel there was either something in progress or something imminent, do you want to give a little color on the process there?

The shareholder rights agreement is in effect, it was in effect as of at the end of the board meeting on Tuesday.

It's a narrowly focused and shareholder friendly plan which protects the rights of all the company's shareholders against potentially abusive takeover tactics.

The board announced that they believed the adoption would allow the management team to continue to focus on performance improvements for the benefits of all shareholders.

We are not aware of any pending transaction or offers and the stockholder protection agreement is not intended to prevent an acquisition of all of the common stock of Swift at a full and a fair price.

There's no dilution Ken.

It's not taxable and it won't affect our earnings per-share so does that answer question?

Definitely, definitely I just wanted to hear your overview as for your rationale for that.

The management turnover at intermodal, is there anything that was driving that - I saw you replaced your EVP there.

Is it going according to plan, you know the containers in place everything moving, it sounds like revenue is doing a good job, is there a profitability, are you making progress on that, can you talk about that as well.

Ken, there has been no management changes in intermodal for 2006.

We did have a change in the fourth quarter of '05 but there's been nothing this year.

Mark Young is our EVP who was at our investor meeting in February that everybody met in New York who's leading the charge, and as I said earlier in the presentation, he's doing a very good job with this team and we've had some nice awards from some key customers, some of our top five, top ten customers on some of the most competitive and critical lanes to the success of any intermodal operation and that's, as I mentioned, the Southern Cal business moving east and so we're pretty bullish about our progress there and are happy with where we're at year to date.

Great, great overview.

Now if I could get one last specific question in.

We're hearing a lot from the other trucking companies a lot of switch over from the dedicated drive as capacity is getting tight customers are willing to pay more, are you engaged in any switch to dedicated because it just doesn't feel like it from seeing your deadhead miles continue to improve while other companies seem to be worsening because of that shift so is there a desire or what are you feeling in the Market particularly on the edges right now, is there a little bit of loosening in any capacity?

First of all, the switch to dedicated wouldn't automatically necessarily have an effect on deadhead other then if anything it should lower it.

That's because typically on your dedicated business in a lot of cases their planning round-trip miles.

We do have a marketing team who is solely incented to help grow our dedicated business, our dedicated business is up year-over-year.

It's not material so we don't break it out but is a focus for all of us in the industry and it's a focus for several reasons.

First and foremost, typically the drivers are home on a more regular basis so turnover is significantly less.

Second, drivers are running in the same lanes a day after day and so your safety issues are better and last, your dedicated drivers almost end up being an extension of the company you're working with, employees so customer service is always really good so we're doing everything we can to look for and expand our dedicated opportunities.

Great.

Thanks for the time this morning.

Thanks, Ken.

Okay.

Your next question comes from the line of Tom Wadewitz from J.P. Morgan.

Good morning Bob, good morning Glynis.

Let's see, I have I guess two different issues I want to touch on here.

When you look at the cost performance has been very impressive and as you look we see the driver issue getting more difficult, I'm wondering how much risk you see to that cost performance as you need to take some actions in order to get sufficient drivers and those actions probably cost you something, can you give us a sense of what you think you need to do in driver pay perhaps, how much this fuel initiative with the owner operators would cost and you know how much risk that is, how the comp and benefits line looks.

We had the driver wage budgeted in our annual operating plan starting in I think March or April and so we've had that budgeted and we would probably expect the need to give an owner operator increase fairly quick.

We're still evaluating what we need to do from company driver standpoint.

The owner operator fuel program is a moving target based on the cost of fuel and that's been in place since May 15.

And as I indicated earlier, we've heard nothing but the owner operators are very, very happy with that program, all our feedback there has been extremely positive and so we continue to monitor our unmanned trucks and our turnover numbers to determine what's the best course of action concerning wage increases and that's our intention for the rest of the half of this year.

Do you think that you can bring in those -- you identified in your release a number of trucks, 480 some trucks I think that were -- I don't know if you to want call them unseated but you hadn't brought them into the fleet yet with perhaps the driver issue being part of that, as you try to do that, do you think that improvement in comp benefit line item flows a lot or is there still room for some year-over-year improvements as you try to be more aggressive on the drivers.

I think we stated that we expect that comp benefit of wages to be somewhere in the neighborhood of 33 or 34 % of revenue and so that's still our anticipation there.

Okay, great.

And the second issue I wanted to touch on was on the pricing side, in terms of revenue per loaded mile, the 3.8 % increase was a little bit less than in the first quarter.

I would have thought that with your revenue prioritazation too and so forth and perhaps lagging some of the other truckers with pricing wise in the last few years that that number would be a bit stronger and if you could give us some thoughts on how we should view that in the second quarter and perhaps whether it accelerates going forward.

We previously stated that we expect 4 to 6 % for the year and that's still where we're at now In the middle of July.

We don't have any one quarter that's particularly light or rich as far as contracts that come up for renewal and so that is a process that happens continually through the years as our various contracts for customers come due and we're still of the belief and that there's still enough strength and concern about the capacity and the desire for our shippers to make sure that they're able to handle their peak retail season that we're going to be able to hit that 4 to 6 % increase.

Okay.

So your still pretty upbeat on pricing?

We are, yes sir.

Okay.

Thank you for your time.

Thank you.

Have a good day Tom.

Okay.

You too Bob.

Your next question comes from the line of John Barnes with BB&T Capital Market.

Good Morning guys.

Hi John, good morning.

A couple of questions here, going back to Ken's question on just personnel changes I think you Made some changes at the VP level on both ops and sales in the West or maybe to the east and then owner operations in the West, can you just talk about some of the turnover in management personnel?

We had no turnover at the executive level.

We have had a couple of our folks leave, some of the turnover was the result of us letting people go and we also had two folks leave who we hated to see go, one was an opportunity to go into business for himself and another had some serious personal issues that he needed to take care of and we hated to see both of those men go.

I would tell you overall that neither one of those departures had anything to do with the team and related to their personal issues that they had with their families so so we're replacing them with good, strong people in some cases inside some outside, and I would tell you that the management team remains united and unified on the direction that we need to go as a company, and I would say moral is as good as it has been since I've been back.

Okay.

And the company initiated change, could you get into a little color there, are you still battling through some people who aren't on the new program or do you think we get most of that out.

At this stage of the game I think we're through all that, I'm not aware of any, there's nothing pending that we're aware of right now at all and I don't see any issues there.

Okay.

And looking at the intermodal business, can you give us an idea as you've gotten started here how much of your business is pure domestic originated traffic and how much of your business is transloading international goods into domestic containers?

I don't have that break out to be honest with you.

I would tell you that as a rule I would say that most of the stuff coming out of Southern Cal is probably import transload business --

Okay.

-- as a rule and the rest of it I don't know the answer to that John but I would say definitely that's the case on the Southern Cal originating business.

Okay.

Burlington Northern has talked about it, UP Made a case this morning on their earnings call that they're seeing a slowdown on their domestic intermodal primarily because a lot of things are bypassing Transload and are going direct in international containers, I'm just curious is this Southern California business going to be the predominant growth opportunity for you or is this a means of getting the containers into Service and do you think domestic originated business elsewhere in the country is going to be a faster growing piece going forward?

Well, I think we've all witnessed a significant change and I think it's temporary in the Southern Cal Market and just that the shippers who were really burnt in 2004 have been pretty aggressive this past year or so in diverting international traffic to other ports in southern Cal.

But all the projections are that imports are going to continue to increase, Southern Cal remains the key and the major ports of entry for all of that far East manufacturing and business and so I would think that that's going to remain a key intermodal Lane.

As far as growth, all of our customers are looking for opportunities where they can to increase their intermodal business and that's one of the fundamental reasons why Swift chose to leverage our relationships with those customers that we have and to participate in that effort with them.

And so they're constrained by the issues and lack of flexibility that you have with the rail but where they're able to they're looking to convert that.

Okay.

All right.

And last question, did I hear you right that there was a loss on the sale of revenue equipment in the quarter?

Yes.

Okay.

And can you just go into detail as to -- everybody that's reported thus far has seen gains and I think that's to be expected given the amount of buying going on us, is it just you're swapping out older equipment than most of your competitors and therefore that's leading to a little bit of a loss on the sale of this equipment or is there something else I should be looking at?

No, I think you're bang-on in terms of your assessment.

On average our fleet age is older than Werner or Knight or any one of those so we are swapping out older equipment At this stage than they are and I think that they're probably getting better pricing in the marketplace as a result of the age of their equipment.

All right.

Very good.

That's what I thought.

All right guys.

Nice quarter, thanks for your time.

Thank you.

Your next question comes from the line of David Mack with [inaudible] Goldman and Company.

Hi guys have you doing?

Great, good morning, how are you?

Pretty good.

Could you explain a little bit more about how the relationship with IEL has worked in the past and I guess you said it's not a formal relationship so what kind of practices were there and what are you trying to -- what kind of changes are you trying to affect through the formalization?

David, Swift has had a long-term relationship with IEL and we want to continue that long-term relationship with IEL.

There was nothing formalizing the way [inaudible] and that's what we're trying to formalize now that Jerry's gone gone so that there's a memorandum of understanding between both parties on how all the nuances of the relationship with a third party are transacted.

If the owner operator program which we stated appears to be very beneficial at Swift.

And it's worked well for IEL, it's worked well for Swift and that's why we believe intend both parties interest in bring that to finalize this agreement and continue that relationship on.

Okay.

The owner operator drivers are contracted with Swift.

Right.

And Jerry financed approximately 2100 of those trucks and provide the tractor for them.

And what about insurance, is it up to them to supply their own insurance or they ensured through IEL or through you guys?

They provide their own insurance as I think I said in my comments, we started a captive insurance subsidiary in June and we're actually insuring [inaudible] if they choose to use that facility.

Some of the owner operator exposure through that is captive but they pay for their own insurance premium and their own insurance.

You guys talked a little bit about how it's a challenge to recruit drivers and you're definitely not alone there.

I just wanted to understand, you said there are 489 units not placed in service are those all of the unseated trucks or are there other trucks that you have that don't have drivers?

[Inaudible], David.

There are two components.

Unseated trucks relate to our operating accounts.

Trucks that are available for discount that not been touched for an X number of time We call unseated trucks. 489 units are in our total asset pool but they have not yet been placed in service so they're not in operational pool so there are two separate numbers.

I'm sorry, you broke up -- what was the first number?

I didnt actually give you a number.

Okay.

[inaudible].

The difference between operational trucks and the total [inaudible] unmanned trucks is a conflict that applies to the operational [inaudible].

A unit is available for dispatch but it is not touched in an X amount of time we count it As an unmanned truck.

That number, as Bob said [inaudible] separately we received 1,098 units and of that 1,098 units some were placed in service I guess 500 and some 600 some were placed in service but 489 of those new units coming in were not in Service.

Okay.

And not the operational truck count.

Okay.

The last thing I wanted to ask you about, I know it's early going but how has July been looking in terms of overall demand, it sounds like geographically it's been spotty but I wanted to know what you guys were seeing?

You know, the [inaudible] is up just a tad.

It's not a lot different than last year [inaudible] at this stage of the game --

Hello?

David, can you hear me.

Yes, yes.

Okay, so demand is up a little bit?

[inaudible] is up a little bit year over year not materially from last year.

Okay.

Great.

Well, thanks a lot.

Will talk to you, follow-up later.

Thanks, David.

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

Hey, John do we have an echo or can you hear us okay?

A little bit of an echo, it sounds a little better now.

It came on when David got on but it sounds -- if we have a problem, let us know.

Sounds good now.

Just so I'm clear on the workers' comp side, the $3 to $4 million sustainable benefit is that just due to the better processes you have in place or does that eventually run its course as well.

No, I'd say it's due to the improvement in the processes that we've Made so we believe it's a continuing benefit not just for 2006, maybe is that your question?

Yes, that's exactly my question.

Okay, good.

I'm not saying its going to be three to four million forever.

Just a continuing benefit and as we go through an actual analysis at the end of this year for 2007, we'll have a better picture of what that's going to be for 2007.

Okay.

So like when we think about the comparison for next year then, I mean are we not looking at potentially comparing against or having you talk about the seven million one-time benefit you had in the first quarter and second quarter because I guess I'm just wondering how much of that is kind of one time in nature?

Well, at this point she said that ongoing we expect in the foreseeable future for right now about a $3 to $4 million benefit ongoing.

Okay.

All right I just wanted to make sure we're clear on that, and then how is the non driver head count, I know you've been aggressively managing that.

Where do we stand on that and do charges come up of any materiality in terms of as you take in that non driver head count down?

No.

Most of that's -- any charge we would have had primarily would have occurred in the first quarter so really nothing at all in Q2 in that regard.

And it's just a matter of managing through attrition and our goal is to grow the fleet here for the remainder of the year but that's contingent on our ability to keep and attract new drivers but that's been improving bit by bit every month and we've still got some room to build there.

Okay, good.

And then I guess from the standpoint of the fleet count, it looks like the fleet ending count was up quarter to quarter, that's the first time in over a year so consistent maybe with what you're saying, does it look like you're going to be able to seat if those trucks, you have some confidence and so you're willing to take on a slightly larger fleet than what you've been dealing with in recent quarters?

Our goal is to increase it here through the end of the year and we're working hard on the driver shortage issues to help make that happen.

We're talking a few hundred trucks it's not going to be monstrous but it will continue to grow slightly.

Right.

Okay, good.

And then finally not trying to get you to give guidance here, but if I look at earnings historically they've been very volatile on a seasonality basis.

And we can all adjust out the one timers however we feel but in general the third quarter for most trucking firms is as good as the second, all things being equal, maybe a little bit better, there's nothing inherent in your business that would make it any different, is that an accurate statement?

Jon, I would tell you that four out of the last five years Q3 at Swift has been less than Q2.

That's what history tells you looking back at our EPS.

Okay.

Maybe I'm looking at different numbers because I show three of the last five being up with the last two being down sequentially and those were volatile years so maybe I'll follow up offline on that.

All right, because I think if you look at the normalized numbers you'll see that that's the case.

Okay.

Very good, thank you.

Thank you, appreciate it.

Your next question comes from a line of Chad Bruso with Morgan Stanley.

Great, thanks.

Just a question on the fleet utilization, yours is basically flat but others have reported some declines compared to a year ago.

And we heard from many of them that they're complaining of hours of service changeover, how should we interpret the relative performance, did you see a negative impact from the hours of service change but offset with your prioritization tools or is there something with your freight mix where you maybe didn't see as much of an impact?

No, Chad, the hours of Service rules have an impact on all of us.

We've been working very proactive with our customers.

I would tell you that our customers are very much aware of the issue there.

It's difficult to measure but it definitely has had some impact and I would like to think and we believe that our prioritization tools and our efforts there have enabled us to primarily offset that and produce, rather than a decline maybe at least maintain where we were at.

Based on what you're seeing today, can we see utilization improve on year over year basis in the next couple quarters?

That's our goal and we're working hard to help make that happen.

Sounds good.

And just one last one.

I know intermodal is pretty small at this point, but how do the intermodal move's impact your operating stats meaning if you pick on a box and Swift does [inaudible] how do you report the miles, does that show up in the truck operating stats or do you break that out entirely?

I'm sorry Chad, could you repeat the question for me?

Sure.

For the intermodal, how do those stats show up in what you report meaning if you move an intermodal box 2,000 miles does that show up in the miles that you report for the tractors?

No.

No, it's separate.

The [inaudible] component may be at the beginning and the ending of that move that we do, that Swift does, [inaudible] the line hold move on the rail is not in our numbers.

If it moves by truck it's in the numbers, the portion that moves by rail is not.

Sounds good, thanks for the time.

Thank you, appreciate it.

Next question comes from the line of Jordan Alliger with Deutsche Bank.

Hi.

Hi, Jordan.

Just a big picture question.

Just wondering why you think right now the drivers situation is more critical it seems and we've heard that from a few people that it's even been in the recent past, and I ask just because the general senses is that while the economy is still solid, it might not be quite as strong as it was in the past couple of years so I'm just wondering what you think the key factors are and I guess tied into that, if things are so tight, are you seeing a rise in shipper complaints about the inability to get things to where they need to go at the right time?

Things do remain tight Jordan.

I would tell you that we haven't had complaints from customers at this stage of the game but that's one of the reasons why I think they're concerned about running at capacity for their peak retail season, coming up in the second half of this year and so they are -- I do believe they are nervous about that.

Driver shortage is also always tougher in the summer particularly with construction and as a rule, unemployment is fairly low, and it remains a very difficult job but that's why we're looking to increase the dedicated opportunities while were concentrating on our operational analogies to get these guys predictable home time so they have an opportunity to have a family life and unfortunately demographics are working against us and as the baby boomers age, as the union LTL driver, I think the ATA said the average union LTL driver was in his late 50's, as he retires this shortage even gets more critical because those are jobs that some of these truckload drivers will want because they're home on a nightly basis.

Can this shortage, assuming it persists, have an adverse impact in what you're trying to do from a financial target standpoint longer-term?

First of all I think it will continue to give us the ability to insist on rate increases and I think it will work.

It speaks well for our intermodal program and the opportunity there as shippers first look to shift business to an intermodal option.

We provided a nice alternative for them and are able to leverage our existing customer relationships for those intermodal needs so in those two instances that will certainly be a help.

Okay then, thanks very much.

You take care, thank you.

Your next question comes from a line of Tom Albrecht with Stephens, Inc.

Hi, Tom.

Hi, Bob and Glynis, good morning.

I wanted to go back to one of the earlier questions on the seasonal patterns because I know that in recent years, your third quarter has been less than your second quarter, but I really kind of view that in the context of two things.

The 2000 to 2001 was more economic and there really seemed the be a period of years where, maybe you didn't quite get MS Carriers going the way everyone initially thought it would be.

But when I look back at the old Swift, in the 90s, there was a period of 7 out of 8 years where September earnings were higher than in June.

And so my gut is kind of like with the earlier question most of the freight world tends to do add or a little bit more in earnings.

And I know you don't give guidance, but it just doesn't make sense if you're fixing the company that the September quarter should be as erratic or down as it used to be.

Well, we don't want it to be either.

And we certainly don't expect to be.

And, you know, I was here in those 90s.

And in most cases, Q3 was our very best quarter, I think if my recollection is correct.

It was, yeah, actually.

You know, some of that's changed here now as of late Q4 has been better.

There isn't a fundamental reason why our Q3 should be different than the rest of the industry that I can come up with.

And certainly, you know, last year was an exception that we had to -- we dealt with.

But our goal this year certainly is to smooth out the peaks and the valleys.

We've got three quarters working in that direction.

And this quarter is quarter number four on that quest, and we're going to work hard to make sure that you know we give it a earnest effort to produce, you know, good numbers.

Right.

Okay.

And let me just ask you another question too.

What was the motivation to put in the press release the idea that of the new tractor deliveries you've got 489 tractors that aren't yet in service perhaps because of drivers or whatever?

I mean that, I mean you're always going to be taking tractors and there's always going to be timing issues.

Was there some other motivation for actually putting that in the press release?

It's one of the reasons, we probably wanted to give some color as to why our net revenue was down.

And it was a result of the, you know, our lack of ability to seat as many drivers as we wanted to and to get as many of these new trucks into the system.

And so, you know, had we had those drivers in those trucks running, we would have had, you know, better revenue and that which is what our goals were.

Okay.

We were trying to give you color in the interest of full disclosures.

Okay.

And then, I just want to go back to the workers' comp one more time.

When I think of things, anything remotely related to insurance, whether it's workers' comp or BIPD, et cetera, I think of reserves either being adequate or inadequate.

And when you're realizing benefits, I know you've changed processes, but are you effectively overreserved there? and so processes and old injuries play through you're seeing, you're basically drawing your reserves?

No, here's how it works as I understand it.

The -- our insurance actuaries which is based on a historical multiple year performance on work comp claims.

We have, and as a result then they determine what we need to accrue for.

As we perform better than that through managing these claims better through -- and we've done a very good job with closing these claims out.

Workers' comp claims continue to grow.

We've had an earnest effort.

That's produced some significant results.

Now as these actuaries come back in and reevaluate our process, obviously what they're asking for is to accrue, will decline.

But so, in the short-term right now, as these improvements have come and are ahead of their loss pick, you know, we are over accrued and that's why we're able to take these increases and ongoing or take this back to income and on an ongoing basis, Glynis, indicated you know $3-4 million we expect to continue to be able to be in that same situation.

Okay.

Did I explain that good enough for you?

Well, conceptionally, yeah, but I'm wondering did you change your independent actuary?

No, we haven't changed anything at all.

The actuaries don't give as much credit to the recent experience as we'd like them to.

Okay.

So they're looking at a history over five to seven years, and they're looking at that experience over that longer period of time and saying based on that experience all the years you need a prior year loss pick of X and a current year loss pick of Y. But that is actually not the way actuaries work.

Okay.

So it's real easy fact that they look at a longer period of time in the longer period of time that they're looking at our experience wasn't as great.

So some of that not as good experience is weighing into the ultimate loss pick that they're developing for us.

And as we go forward, each year that we continue to have this good experience a loss pick will eventually come down.

Okay.

All right.

So okay.

I mean, that certainly helps, I wanted that color.

Lastly, do you have a length of haul figure for this second quarter?

I didn't see it in the stat book today.

It's 528.

All right.

Pretty --

I'm sorry.

Fairly consistent with where we've been.

Where were you in the first quarter?

I somehow got a blank in my model.

538.

538 in Q1.

Okay.

Okay.

Okay thanks very much.

Keep up the good work.

Thanks, Tom.

Operator, we've got an opportunity to take one more phone call.

Okay, your next question comes from Justin Yagerman with Wachovia Securities.

Hey.

Last, but hopefully not least.

Just to kind of go back, you know with IEL, you put it in the press release, it's always been in your SEC documents, I've got to imagine that you guys have been doing a little more work on this relationship and trying to figure out what to do here.

Have you done any work on what it would cost you guys if you were to take over the financing on those owners operators and equipment? and kind of how do you think about that you know in case this relationship doesn't work out?

We have done that, we do have a plan in place should that become necessary.

We don't think it will become necessary.

That's not our goal, but should it become so, we're going to be able to react immediately.

Is there a cost penalty involved in that?

There'll definitely be a debt penalty.

We'll have in the event that we're carrying the financing.

So that will be the biggest impact.

Okay.

And looking at fleet growth, you know, you guys brought on, you said about 1,000 tractors, 489 of which are not in the pool yet?

You know, how are you thinking about bringing those tractors on in the next, you know, in the next two quarters?

How should we be thinking about planning our tractor growth in our models?

Get the drivers that you want.

We said subject to our ability to, you know, keeping drivers, we're hoping to add somewhere between 300 plus drivers here, trucks as we move here through the second half.

Okay.

Looking at CapEx and planning on the fleet and all the rest, where do you see net CapEx falling out this year and going into next year, what are you seeing on that end?

We think net CapEx is going to be about $290 million this year for tractors.

And next year for tractors we anticipate to be about the same at this stage.

Flat in '07.

That's just tractors.

That's just tractors?

What about total CapEx?

Total for trailers I think we're estimating $95 million this year and $120-125 million next year.

Okay.

So --

And then there'll be a miscellaneous 20 or so of other --

Non-equipment --

Non-equipment related to CapEx expenditure.

And those are net or gross numbers?

Net.

Those are net?

Okay so you're looking at the 385 on the net number for this year right now?

No.

What did we say? 289?

290 for the tractors.

You said 290 for the tractors and 95 for the trailers.

I'd say the trailer number is probably going to be closer to 60.

We have to get back to you exactly on that.

Okay.

Either way that's up from what we had in our model.

Are you guys doing any kind of prebuys or any of the tractors that are, you know, not in service, you know, being part or anything like that ahead of 2007 regulations?

We are not and haven't done and will not be at all.

Are we up from what we said before, is he right on that?

Hang on just a second.

Just give me one second here.

I actually think that the number I gave you for tractors -- 290 million --

Yep.

I've got 385 gross in my model and 280 net number.

Actually that's what I was going to tell you is that the 280-290 is the total net capital expenditure number.

For 2006 the total net tractors trailers, all things combined is the 290.

Okay, that's not nearly as much of an increase from what we have.

And that should be about flattish in or slightly up in 2007 as you guys take on more trailers?

Yeah, as we take on more trailers.

Okay, okay.

That jives better with what I've got.

When you guys think about your insurance.

I mean, you talked a little bit around it but you know you guys still have the highest deductible of at least, you know, your public peers right now.

What are you thinking in terms of that planning?

When does that come up for renewal?

Is that given the easier market, from what we can tell in, you know, for carriers that have decent safety records, what's your thoughts on where that self-insured retention goes over the next years?

We evaluated that at the end of last year, our actual policy comes up for review at the end of this year.

We're actually right now in the process of looking at that in terms of premium for lower deductible relative to the $10 million and relative to what we perceive our claims to be and the management of that process.

We actually believe we have a very good claims management process and that we've done a good job with regard to our safety record.

So we just look at the cost benefit tradeoff between buying insurance at a lower deductible relative to our own internal experience in terms of managing the claims.

We'll look at that and make a decision between now and the end of the year.

Sure, but there's got to be a qualitative, unquantifiable volatile premium that you kind of have to figure into that equation.

So how does that, you know, offsetting volatility of earnings, how does that factor into your thought process?

I actually think that we're going to have last year regard to our history at the $10 million SIR, and last year it cost us about 150 basis points at the OR level.

We're going to have a lot of this year's experience with regard to what that volatility is with regard to our earnings.

And I think we're going to make an assessment based on those two years of history we have.

And yes, we would factor that into our decisions with regard to the final decision we're going to make.

If you look back at our decision with hindsight, our decision to go to that was the right one.

And having had a chance to make that choice over again we'd make the same choice today.

All right.

You know, I mean as long as you cannot have a $10 million above claim you're probably all right.

But what you have to understand is that in the last peak that we're accruing to, there's an assumption about claims of different levels in there.

So if Swift were to have a $10 million claim in one month, you're not going to see a pop of $10 million in that quarter associated with that claim necessarily because we're accruing to an overall experience pool that looks back at and how they've developed.

Sure.

And Swift's past history when you go back ten years, they've had some developments back then.

That's a very fair point.

The last question and then I'll turn it back is, you know, where do you guys see your average age of your tractor and trailer fleets have you tested any of these engines and what are you guys seeing?

We're slightly, right now we're about 2.5 and as we bring on these new tractors, that will continue to decrease.

And we don't have a ton of experience, you know, with these, with the new engines.

I would overall initially the potential degradation that we were worried about is significantly less.

The bigger issue probably the diesel with the lower BTU.

And so overall, we don't expect the impact to be, you know, significant.

Okay.

Do you guys get -- I know you do a decent amount of fueling, do you get regulated at your own terminals?

We absolutely do, and all of our tanks are properly labeled and identified.

Thank you very much.

You take care.

You too.

There are no further questions, are there any closing remarks?

Nope, we're good.

Thanks for your time, everybody.

This concludes today's conference call, you may now disconnect.