Knight-Swift Transportation Holdings Inc (KNX) 2006 Q3 法說會逐字稿

Good morning.

My name is Bobby, and I will be your conference operator today.

At this time I would like to welcome everyone to the third quarter Swift Transportation conference 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).

I would now like to turn the conference over to Mr. Bob Cunningham, President and CEO of Swift Transportation.

Thank you.

Mr. Cunningham, you may begin.

Good morning and greetings from Phoenix, I am sorry we had a little phone problems here.

Welcome to the Swift Transportation third quarter conference call.

This is Bob Cunningham and with me is Glynis Bryan, our Chief Financial Officer.

You can access the slides we are going to be discussing at swifttrans.com under the Investor Relations tab and the link to financial presentation.

We will go ahead and begin with the financial disclosures real quick.

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.

Statements are based on Swift Transportation's current plans and expectations and involve risk and uncertainties that could cause future activities and results of operations to be materially different from those set 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.

Before I get into the results for the quarter I want to take a minute and explain the circumstances which led us to give an [urgent] earnings warning and subsequently adjust our expectations 10 days later.

First as are all well aware, the peak season did not materialize in the quarter as we were all expecting.

As we looked at our operational results during September and projected our performance with reasonable assumptions, we became aware that earnings were not likely going to meet consensus estimates at that time.

In the process of closing the books at quarter closed we realized that our reasonable assumptions for workers compensation and fuel in particular were too conservative.

And when we realized that we thought it was best to update our disclosure rather than wait until today to release the information.

I want to provide you with some additional details about these two items before we move into our overall performance for the quarter.

Slide number three highlights in brief detail our workers compensation process.

We are essentially self-insured for workers compensation and have established a proactive management process to help minimize our exposure.

That includes the following; the first thing we did was implement a prehire driver screening process with standards for physical activity and endurance.

We created an internal claims coordination group to better manage claims throughout their life cycle.

We hired a new third party administrator or TPA to ensure claims are more closely scrutinized, handled consistently and are properly reserved.

We began resolving claims in a more timely manner and last but not least, we implemented return to work programs.

Light-duty office work to get injured employees back to the workforce.

We started seeing a benefit from these initiatives in 2005, and the benefits continued and increased in 2006.

This has resulted in a reduction in two areas.

Reduction expense related to the development of older claims which means old claims from prior years are not increasing in cost as much as initially estimated.

And those estimations were established based on our previous experience.

And second, reduction in expense for current claims.

To calculate the workers compensation expense we rely on our third party administrator and our actuary.

In the third month of each quarter our third party administrator provides our actuary, with our most recent experience and claims data.

We receive back from our actuary revised development factors for prior year claims and an updated loss pick rate for the current year.

These factors apply to our TPA's claim reserves result in our workers compensation expense required for the period.

In the third quarter the factors received from our actuaries one week after our press release were lower than we had anticipated, which resulted in a benefit of $9.9 million for prior year claims.

Going forward we estimate that the run rate for workers comp as a percentage of revenue will increase up to 100 basis points in 2007 compared to 2006 in the salaries, wages and benefits line item.

The other factor that impacted our forecast was fuel, that is found on slide number four.

Fuel has two components, fuel expense and fuel surcharge revenue.

We have hundreds of different fuel surcharge programs, many have varying lag times related to the DOE index.

In periods of rapid declining or increasing fuel prices it becomes more difficult to determine the impact of the lag and the varying fuel surcharge programs.

As it turned out, we were way too conservative.

Fuel expense is based on the cost of fuel, the number of miles our company trucks drive, the average mpg for those truck and all the other various fuel expenses we occur with our transmix operation, yard goats, refrigeration units and so on.

And please keep in mind that we purchase close to one million gallons of diesel every day.

As it turned out, we were too conservative in each of those does assumptions we made which caused our actual fuel expense to be lower than we anticipated.

That is what happened.

I take full responsibility for having misjudged the fuel variance, and I apologize for the problems this caused.

In September we experienced an unprecedented $0.46 drop in fuel prices and we should have waited until all the numbers were in before issuing an earnings warning.

Needless to say we are going to do everything possible not to repeat this mistake.

With that, I would like to move onto the results for the quarter.

The summary for our results for the quarter are shown on slide 5.

Total revenue for the quarter was up slightly, excluding fuel surcharge revenue, our net revenue was down 3.3% in the quarter, primarily due to the decrease of our fleet size, which was partially offset by an increase in revenue per loaded mile.

Excluding the charges noted in the press release, our adjusted operating ratio for the quarter improved 290 basis points year-over-year to 91.3%.

Adjusted net earnings increased 64%, and our adjusted EPS for the quarter is up 58% year-over-year.

Glynis will take you through a reconciliation of these adjustments later in the presentation.

The next few slides starting with slide 6 I will highlight our performance on our operational metrics for the quarter, and will go ahead and began with rates.

Our average revenue per loaded mile excluding fuel surcharge for the quarter was $1.64, which is up $0.055 year-over-year or approximately 3.5%.

Year-to-date our improvement is $0.061 or 3.9%.

As we look at our results compared to our benchmark carriers, we still have work to do regarding our revenue per loaded mile.

Starting to see some pushback from customers as a result of lower freight volumes and additional capacity in the marketplace.

I do not foresee major customers requiring us to lower rates but increases will be tough to come by in the near future.

On slide 8 we have our loaded utilization.

Utilization was down 4.4 in the quarter off of a very tough comp in 2005.

If you remember, we started downsizing our fleet in Q3 of '05 and had historically low unmanned truck count in that period.

This coupled with the disappointing freight volumes and the driver shortage in 2006 resulted in the year-over-year decline.

Our unmanned truck count was up year-over-year sequentially and sequentially over Q2 of '06.

We've seen great improvement in the last half of September and the month of October.

We would expect to see continued improvement in our unmanned truck count throughout the rest of this year trending back to historically normal levels.

On slide 9 we show our benchmark comparison for our loaded utilization miles; our change in the weekly loaded truck miles, although down, was still better than our benchmark carriers.

Slide 10 is our deadheads, deadhead remained at 11.6 in the quarter, which in a softer freight environment we are in we view as very positive.

As you can see by the year-to-date slide on the right this is the fourth year in a row that we've made substantial improvements in this metric.

Slide 11 shows how we back up to our benchmark carriers and we lead those carriers in year-over-year change for deadhead as we were essentially flat with Q3, 2005.

Slide 10 is our overall productivity.

As a result of our higher unmanned trucks and softer freight, our revenue per tractor per week was down $32 in the quarter compared to last year.

Year-to-date trend remains very positive with an increase of $75 per tractor per week.

On slide 13 our change in our revenue per week was down $32 as this graph indicates; there is still plenty of work for us to do.

That work will be centered around rates, unmanned trucks and our retention efforts.

And with that I will turn it over to Glynis Bryan to go through our financials in more detail.

Thank you, Bob, and good morning everyone.

I'm going to start on slide 15.

As Bob mentioned our total revenue increased $815 million in the quarter compared to $813 million in the third quarter of 2005.

Year-to-date our total revenue was 2.39 billion compared to $2.35 billion for the first nine months of 2005.

Excluding fuel surcharge revenue, as shown on slide 16, our net revenue was $682 million in the quarter compared to $705 million in 2005.

This 3.3% decline was primarily due to a 4.6% reduction in the size of our average operational fleet, and this was offset by improvement in revenue per loaded mile and increases in intermodal revenue.

Year-to-date September our net revenue excluding fuel surcharge revenue declined 2.8% year-over-year to just over $2 billion.

A reconciliation from total revenue to net revenue is shown on the bottom of this chart on slide 16.

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

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

On slide 17 salary wages and employee benefits.

Our GAAP reported number as disclosed in our press release decreased $49 million in the third quarter compared to the third quarter of 2005, and 96 million on a year-to-date basis.

In the third quarter of 2005 we recorded $12.4 million charge associated with the acceleration of stock option vesting.

Excluding this charge as shown on the bottom left of slide 17, our salary wages and employee benefits decreased $37 million year-over-year for the quarter or from 35.9% of net revenue to 31.7% of net revenue.

There are four major sources for this decline.

The first is a reduction in driver wages related to the reduction in overall Company miles driven.

Second is a reduction in nondrivers salaries and wages associated with headcount reductions taken earlier this year.

The third is a reduction in our medical expenses and other miscellaneous benefits charges, and the fourth is a reduction in our workers compensation expense explained earlier.

Third quarter 2006 includes a benefit of $9.9 million related to the reduction in prior claims development for workers compensation.

Excluding this benefit, salary wages and employee benefits would have been 33.1% in the quarter compared to 35.9% last year.

Moving onto year-to-date, we need to adjust the stock option acceleration in 2005 as well as a $4.8 million benefit from the change in our 401(k) program that we recorded in the second quarter of 2006.

These adjustments are shown on the bottom right of slide 17.

Excluding these items, salary wages and employee benefits have declined by 79 million year-to-date or from 36% of net revenue in 2005, to 33.2% of net revenue in 2006.

The sources of the reductions are the same as those previously given for the quarter.

On slide 18 operating supplies and expenses, this line item has declined $4.9 million in the third quarter or from 11% of net revenue in 2005 to 10.6% in 2006.

For the first nine months of 2005 operating supplies and expenses have dropped $16.2 million compared to 2005 or from 10.3% of net revenue to 9.8%.

These reductions are results of decreases in equipment maintenance associated with maintaining a smaller fleet, and reductions in travel and other administrative expenses offset by increases in recruiting costs and intermodal related expense.

On slide 19 talking about growth and net fuel expense, as we've discussed in previous conference calls we evaluate our fuel expense net of fuel surcharge revenue related to Company miles driven.

The calculation for this net Company fuel expense is shown on the bottom of this slide, 19.

Our Company fuel expense in the quarter decreased from 11.4% of net revenue in the third quarter of 2005 to 10% in the third quarter of 2006.

The primary reason for this decrease was the lag associated with fuel surcharge recovery the last year.

As you may recall in the third quarter of 2005 we were in a period of rapidly rising fuel prices, associated with the disruptions from Hurricane Katrina and Rita.

As Bob discussed earlier, we collect our fuel surcharge revenue on a lagging basis and in periods of rapidly rising fuel costs our fuel charge recovery lags.

In 2005 we were penalized by this in the third quarter but subsequently benefited in the fourth quarter last year when fuel surcharges caught up as fuel prices started to come back down.

Despite the impact of Katrina and Rita in 2005 in this quarter, the third quarter 2006 our average cost per gallon increased by $0.27 or 11% versus the third quarter last year.

However, in the month of September fuel cost per gallon declined by $0.23 or 8.6% over September 2005.

To calculate EPS, the EPS impact of fuel costs, this change in our average fuel cost per gallon is multiplied by the number of gallons consumed in the current quarter.

This cost is then compared to the additional Company fuel surcharge revenue received, and the result is a positive or negative amount that is then tax effected and divided by the number of shares to determine the EPS impact.

Swift has historically reported and continues to report the EPS impact of fuel based on changes in the fuel cost per gallon year-over-year.

This methodology does not take into account any changes in volume year-over-year and is impacted by the magnitude of the change in fuel cost and the lag effect related to fuel surcharge recovery.

In the third quarter of 2006 based on this methodology the benefit was $0.01.4 per diluted share year-over-year.

Purchase transportation increased $864,000 in the quarter compared to the third quarter of 2005.

Fuel surcharge revenue reimbursed on our operators and other third parties increased approximately $6 million in the quarter.

Excluding these surcharge recoveries purchase transportation dropped from 18% of net revenue to 17.8% of net revenue in the quarter.

Increases in rail costs associated with the growth of our intermodal business were more than offset by a reduction in miles driven and associated payments made to owner operators.

On a year-to-date basis purchase transportation increased $12.8 million year-over-year.

Fuel surcharge reimbursement grew by $22.1 million as shown on the bottom right section of this page.

Excluding these fuel surcharge reimbursement, purchase transportation was flat as a percentage of revenue of net revenue at 17.5%.

Again, the increases in the intermodal business were more than offset by reduction in owner operator expenses.

Moving onto insurance claims on slide 21, insurance claims in the quarter was 6% of net revenue compared to 4.6% last year.

We incurred higher claims expense in the quarter, and as you may recall, we started the captive insurance company in June, which added approximately $3 million per quarter to this expense line item.

The additional expense associated with the captive is offset by premiums received that is included in other revenue.

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 5/9% of net revenue compared to prior year of 5.4%.

Looking at rents, depreciation and amortization on slide 22; as we continue to change the mix between leased and owned equipment for analysis purposes we believe it is best to combine our rental expense with our depreciation and amortization expense when comparing year-over-year results.

Included in depreciation amortization expense in the quarter, was an impairment charge of $9.2 million, of which $7.8 million was for translucent trailers previously designated as assets held for sale and $1.4 million was related to property and equipment in Mexico.

In the third quarter 2005 we had a $6.4 million impairment charge for certain trailers that was also included in depreciation expense.

Excluding these impairments in both years, as shown in the table, rent depreciation and amortization expense increased $5.4 million or from 9.1% of net revenue to 10.2% of net revenue.

In addition to the increases in rent and depreciation for new intermodal equipment and trailer tracking technology in the third quarter, we successfully renegotiated higher residuals for tractors acquired during 2003 through 2005, that will be returned to the manufacturer at 38 and 48 months instead of 60 months.

This change resulted in higher depreciation expense in the month of September and will also result in higher depreciation expense on an ongoing basis as we adjust our depreciable lives on these units down from five years to a combination of three to four years.

This change increases our ability to managing units over their life cycle, provides improved asset management flexibility and will result in a younger fleet over time.

We estimate the impact in the fourth quarter to be approximately $2 million, an increase of $2 million, but expect this will decrease in each subsequent quarter as we start turning in units.

Also in the third quarter we began leasing tractors as the economics for doing so became favorable.

This will increase O.R. slightly as financing cost associated with leasing will be incurred as rental expense rather than interest expense which is below the line.

This will have a slight positive impact on EPS overall since the implicit interest rate on the leases is less than our interest expense on our revolver.

On slide 23 we reconcile our reported GAAP numbers to the adjusted results Bob and I have referenced in our discussions of our financials this morning for the third quarter and for the year-to-date.

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

Moving onto slide 24, I'm talking about capitalization.

Our balance sheet remains healthy.

Debt to total cap has dropped 30.8% compared to 41.2% in December 2005 as we paid down over $165 million in debt in the first nine months of 2006.

As I have mentioned, we started leasing tractors and the number of leased tractors has increased by 762 since the beginning of the year.

Our net CapEx in the quarter was approximately $48.4 million and is $143.3 million year-to-date.

Our cash flow from operations in the quarter was $102.9 million, bringing the total to $299.8 million year-to-date.

I will now turn it back over to Bob for a summary and wrap-up.

Thank you, Glynis.

I would like to summarize by talking about some of the initiatives we're working on and trends we see in the marketplace; on slide 25 is some of those intermodal trends.

We believe that one of the reasons for the lack of peak that truckload has been experiencing is partly due to the changes in our customers' intermodal mix.

Intermodal freight is definitely increasing.

There are new ports of entry and the volume of IPI or intermodal points inland, thus are the international boxes that move intact, are increasing which are creating new inland deconsolidation points.

The good news is our existing terminal network is well positioned to take advantage of these trends.

We have major terminal operations with existing drayage capabilities in Los Angeles, the Bay, Portland, Seattle, Kansas City, Dallas, Chicago, Memphis, Georgia, South Carolina, Virginia and in New Jersey.

Virtually all of the major intermodal hubs.

My crystal ball anticipates that intermodal is going to continue to grow with our customer base, and the fact that we have 5000 plus containers and a great foundation upon which to build is going to serve us very well.

Slide number 26 is dedicated.

We are continuing to grow our dedicated business, dedicated business is a win-win solution for both Swift and our customers.

From our customer's perspective we're able to provide existing capacity, free up their capital, give them flex for their ability to surge and from Swift's side it is typically higher margin than our over the road business, provides driver career path, typically have a three to five-year contract with these dedicated customers.

We have a specific initiative to target backhaul opportunities to further improve our margins, and we're growing the business with new and existing customers.

Slide 27, are Mexico, we are more fully integrating our Mexican operations to increase operational efficiencies with our sister company south of the border Transmix.

We've restructured the management team and aligned objectives across border.

We hired a new ace for a sales manager and he is in the process of upgrading our Mexican sales team.

His team is working on new customers and expanding existing relationships on both northbound and southbound traffic.

We're adding trucks to support this growth and expect to be at approximately 500 trucks by the end of this year.

We've had some good success with the B1 and the H2BVisas drivers, and we are continuing to work on obtaining additional visas.

In the event the U.S. government opens the border to Mexican trucks, which is part of the NAFTA provision, Swift is ideally positioned to capitalize on this opportunity.

Equipment update on slide 28.

We renegotiated our contract with our tractor vendor, and we were successful in obtaining higher residual values at 38 and 48 months for the tractors, which were acquired between 2003 and 2005.

As a result, instead of having these tractors run 60 months we will be turning them in between 38 and 48 months.

In addition in response to the softer freight environment and to manage the unmanned truck count, we've deferred our fourth quarter purchases to 2007.

This will adjust our 2006 purchases to a total of 2500 units, and we're currently planning to purchase between 2500 and 3000 tractors in 2007, dependent upon market conditions.

As we discussed in our press release, we have some older translucent trailers that we acquired with the MS acquisition that are being held for sale, and we are pleased to report that we have a letter of intent to sell those units over this next 12 months.

Some other initiatives on slide 29, that we're working on, we recently added to our sales marketing talent.

We have replaced six and added five more professionals to our team.

All of these additions have significant industry experience and most have intermodal experience, and we're arming this group of new sales tools to further penetrate the market.

We are continuing to improve our customer service, our strategic focus on velocity and load optimization is having a positive impact in this area.

We're also growing our brokerage business.

We hired a new manager with 15 years of brokerage experience with the Mark VII XL logistics organization.

And we're expanding our customer base, and we're generating new customers for our brokerage.

And as always, we have a continued focus on cost reductions and cost containment.

As far as drivers found on slide 30, the drivers situation was a challenge in the third quarter, but it's improving as we move into the fourth.

We've initiated many programs to help recruit and retain drivers.

As many of you heard, we kicked off our Thanks a Million! program over the summer which is a driver recognition program, which also promotes safety.

On September 10th we randomly selected 10 winning drivers that met our program criteria.

Eight of these drivers won $10,000, and the runner-up also received $10,000 and the opportunity to drive a new Volvo 880 with all the bells and whistles for the year.

And our grand prize winner received $1 million.

The photos on slide 30 is of the winners and their spouses.

The program was a big success, and we're currently running it for another 12 week period.

In January we will recognize 10 more drivers who will receive $10,000 and the grand prize winner will once again receive $1 million.

In addition, we increased our driver pay and made improvements to the driver pay structure.

We have ongoing operational initiatives to increase the predictable home time for drivers and other quality of life matters.

As I mentioned earlier, we're using the H2B and the B1 visas for our Mexican divers, and we've also had some success recruiting drivers from Puerto Rico.

The driver market remains tight.

Historically this time of year turnover is better due to the upcoming holidays, and this coupled with our initiative and our second Thanks a million! program should help to lower our unmanned truck count back to normal levels.

Let's wrap up things with slide 31 by summarizing our earnings progress.

Our adjusted operating ratio in the quarter was 91.3 or a 290 basis point improvement from the adjusted 2005 number of 94.2.

Our ability to keep our expenses in line with a smaller fleet and revenue base has enabled the majority of our improvements to flow through to the bottom line.

Year-to-date our adjusted (indiscernible) ratio was 91.3 in 2006 compared to 94.3 in 2005.

An improvement of 300 basis points.

No small feat and a number that I would tell you this management team is very proud of.

Net earnings and EPS found on slide 32.

Our adjusted net earnings increased 64% in the quarter and 65% year-to-date.

Similarly, our adjusted EPS is up 58% for the quarter and 60% year-to-date.

Moving to slide 33, you can see from the growth in our earnings per share we are at the top of the class amongst our benchmark carriers, and the entire industry for that matter.

I want you to know that this management team is managing with a long-term perspective.

We are keeping our composure and working together to pull through the current industry slump.

Our industry is experiencing a storm, and that is all it is, it is a storm.

It is not an end or a detour to our operating plan.

We continue to -- as we continue on our path to improve our performance of our company and reward our investors.

With that, Bobby, let's open it up to questions.

(OPERATOR INSTRUCTIONS) Jordan Alliger, Deutsche Bank.

Can you talk a little bit about -- you commented on a little bit on the environment we're seeing now, and obviously third quarter was a bit soft.

Any changes on the margins moving into October, and then sort of tied in with that, any thoughts -- I mean is the stuff -- the goods coming in from Asia and what have you, are we seeing that sitting in warehouses at the ports?

I'm just trying to understand why the truckers are not getting as much of the freight that does seem to be coming in from overseas.

Jordan, the volume particularly in the West did kick up a fair amount on the first of October.

That was at least 45 days late from what is typical.

The central and the east are still soft.

I am not aware of any goods sitting in warehouses in the port waiting to be distributed.

I think its more of a function that these shippers have done a good job and our customer base in shortening our supply chain and trying to eliminate peak, certainly as we discussed the increase in the intermodal mix is definitely having an effect on the truckload business.

And my crystal ball would tell you that it is probably a portent of things to come rather than just a onetime event.

I think this all started in 1984 when the ports were clogged up and the UP had a major line down out of Southern California due to a landslide and a lot of goods didn't make it to the marketplace, continued last year with progress in 2005.

What did I say? 1984, where did that come from?

In 2004.

And then in 2005 with Katrina and Rita and some of the increase in the hurricane business I think it masked some of the progress it made in flattening out these peaks, certainly we are all seeing it this year in 2006.

And just a follow-up question on the workers compensation.

If I heard you right I think you mentioned that the run rate in '07 relative to '06 would be 100 basis points higher impact.

Up to 100 basis points compared to 2006.

That will be in the salaries wages and benefits line item, Jordan.

And if you exclude that and just think about it from a normal run rate based on your expectations for adding drivers and tractors and what have you, what do you say the underlying compensation or wage per mile might look like, normalizing for that noise, if you will, or adjustment?

We don't give a wage per mile but what we do, what we did say and what we predict is somewhere in the neighborhood of 33 to 40% net revenue going forward. 33 to 44%.

Thank you very much.

Jon Langenfeld, Baird.

Thanks for taking the call.

Bob in the current environment, let's say it moves forward as is, what do you think a reasonable rate growth assumption is for Swift?

We are hoping at least 2% next year, Jon.

Okay, and does that -- I know relatively your rates are a little bit lower than your competitors on a like for like basis, but I am assuming if the environment is weak it is tough to make that up.

Shippers tend to be more on a relative basis, how much more are you coming back to me with.

Is that kind of the correct assumption?

Not necessarily.

I still think we have some room to make up some ground there, and we are working to try to do that.

Okay, so I guess with that said, then, if the environment is tough do you think you can have rate growth that is better than your competitors?

That's certainly our goal, Jon.

Okay, good.

And then how has your thoughts on the compensation plan for your salespeople changed if at all?

Because I know rate growth was the primary component of the bonus.

It was the primary component for our bonus in 2006 and we are still working on what we're going to do in 2007.

Fair enough.

And then can you talk to me a little bit about the fleet, the numbers.

I look at your total fleet count and I look at your average fleet count, and the ratio there has been going up significantly.

Is that just the unseeded tractor count differential that had worsened in the quarter?

Essentially yes, John.

We had indicated at the end of the second quarter that we thought the numbers were going to deteriorate going into the third quarter before they started improving going into the fourth quarter.

So we had units coming in in the third quarter similar to what we had in the second quarter, and we weren't able to push those out into operating fleet and seat all those units.

But that will exclude going into the fourth quarter.

And your average fleet number only includes the seated tractors?

No, it includes all tractors under dispatch, so there is an unmanned number included in there.

And then the incremental above the average fleet count and the total fleet count would be what?

The incremental above between the average and the total is some of these units I'm talking about with regard to new units coming in that are not -- have not yet been placed in-service as well as what we normally have there, which is a combination of our school unit.

At the academies, we have seven academies, and we have trucks that we provide to those academies to train the drivers.

A combination of units coming in that are going to be traded and getting ready for trade in that normal prep process.

So we have a normal base of units in our total fleet that are never a part of the operating fleet associated with those things.

Got it.

And then can you in light of your change of assets, on assets what is your CapEx, net CapEx target do you think for this year and next year?

Our net CapEx year-to-date this year we are at 143 million.

We did 70 million of leases, separate and apart from that.

And we don't have a lot of equipment coming in in the fourth quarter, so I would think that our number is going to be still somewhere in that range.

We have a couple more units coming in but not very many.

Okay, and how about next year?

Next year we said we're going to be between 2500 to 3000 units, so I don't think that our numbers for next year have really changed significantly as of this time.

And then it will just matter in terms of whether it is leased or purchased, what hits the CapEx line.

Okay very good.

Thank you.

Tom Wadewitz, JPMorgan.

I wanted to drill down a little bit further on the comp and benefits in the third quarter.

If I look at the improvement in second quarter and making an adjustment for the workers comp reduction and also considering that there is a reduction in loaded miles, you had I think about a 3.4% year-over-year decrease in comp and benefits.

If I do the same exercise in third quarter it looks like an 11% reduction.

So just I guess directionally it seemed that there was a significant improvement in comp and benefits in third that you didn't see in second.

And I'm wondering Glynis if you can -- you highlighted a few different things -- if you can tell us what was the biggest impact?

If it was medical or what else it would have been and whether we should forecast that continuing to provide a benefit going forward.

(technical difficulty) the primary driver is just reductions absolute wages; part of it is related to change in the driver miles.

That is (technical difficulty) and the other part of it is related to the (indiscernible) that we have made in our G&A, our (technical difficulty)

Was there bigger--.

(technical difficulty) to the back end of the year because we started out beginning of 2005, and we grew our administration employees grew in 2005 and we started making reductions in 2006.

The (technical difficulty) comp dramatic later more dramatic comps ended up taking people and (indiscernible) include 12.4 million in the third quarter 2005 to the stock option expensing, we're not doing that.

I am making adjustments for that.

So what is the overhead the impact of overhead reduction a lot greater in third quarter, or was it something else because it still seems like that year-over-year reduction in comp and benefits was significantly greater in third quarter than it was in second.

Yes, so our numbers of employees on a year-over-year basis -- I am not going to give you the numbers -- third quarter to third quarter we had a more dramatic reduction in the numbers of employees for third quarter than we had for example first quarter to first quarter.

Okay.

Does that answer your question?

Okay, so it sounds like you have a couple more quarters were you would benefit from that overhead reduction on a year-over-year basis.

Right.

Okay, good.

And I guess one other issue I wanted to touch on.

In terms of thinking about fuel you did a good job explaining things, but as I look at what the steady-state should be when you have caught up on fuel, in net fuel expense I think it was about 5.3% the way I calculated it in the third quarter; fourth quarter last year was 5.4 for net fuel expense, and those are pretty low levels compared to what we've seen in other quarters.

Is that sustainable as you headed in third quarter, or is that something where you may be timing benefit and that net fuel expense is not quite as good in fourth quarter and maybe the steady-state isn't quite as low as that?

What I see is like 5.3, 5.4%?

I am not sure where you're getting your 5.3 or 5.4%.

I would've thought that our fuel, net fuel expense excluding the surcharge fees for owner operators, etc. the calculation that we walked through on slide 19, net fuel expense last year was 9.2% as we reported in the fourth quarter last year.

And as we sit here today, it was 11.4.

I understand.

The number is really small on this slide, I am not taking out the owner operators, so I should improve for that.

But I guess the way you show it is the third quarter kind of a sustainable level, or does that back off a little bit in terms of net fuel expense because you had kind of a benefit in third quarter?

I think if you looked at the year-to-date that's a better measure than just looking at the third quarter alone.

Okay, so look at the year-to-date and that is kind of a fair way to think of it going forward?

Yes.

Okay.

Thank you for the time.

Tom Albrecht, Stephens Inc.

I've got a few different questions here.

Kind of following up on Tom's question, if you have taken headcount out, particularly at the nondriver level, I don't understand why you wouldn't want to share numbers on that.

That would be something to be proud of; you know how Wall Street likes numbers, whether it be the ratio of drivers to nondrivers or something.

Because clearly you have taken some out but you seem a little hesitant to reveal that number.

I think you can see the benefit of what was taken out when we give you all the adjustments with regard to what you back out to get to the normalized run rate.

That is salaries wages and benefits are down on a year-over-year basis.

I know, I know.

I just guess I don't understand the hesitancy in talking about the driver to nondriver ratio, where you've been, where you are -- because that is a thing trucking companies usually are pretty proud to talk about if they are making progress, and you are, but you are sort of hesitant to discuss it.

We just never disclose that number, Tom.

We can look at doing that on a go forward basis but we are definitely moving in the right direction, and expect continued improvement in that area.

Okay.

I think, Tom, if you in the Q, in the K actually we give you the breakdown of our employee base and what we said in the first quarter is that we took out just over 10% of our nondriver base.

Okay.

That was my next question was, I remember there was a first quarter event, I just could not remember the amount.

Approximately 10%.

And I will go back on the Q and get the actual number.

And Glynis, when you were answering one of the questions about the drop in medical, the phone system went back into an echo mode.

How much did you say you benefited from lower miscellaneous medical and other expenses and salaries, wages and benefit?

I did not actually say a number, I just said it was not significant; the most significant piece in there would be the $4.8 million that we disclosed for the 401(k).

And that $4.8 million because the total was what, trying to remember -- there was also an accelerated stock vesting separate from that, that was 12. -- sorry go ahead.

The $12.4 million of stock Op acceleration expense was in 2005.

Right.

And the 4.8 was in the second quarter of 2006.

Okay, that's right.

I wanted to ask also on operating supplies and expenses while that was still is improvement year-over-year, it was the first time in about a year that it had been over 10% of freight revenues.

Is that because of all the large numbers of tractors being prepared for trades, or is it the age of the fleet?

Why would that have risen, or was it just a sluggish revenue base?

Part of it is related to the revenue base, but I think that part of it is also related to hiring.

We spent more on hiring in the third quarter, the year-over-year basis given the tough driver market, and I think those are the main pieces.

Okay, and then -- let me see here.

Leasing is increasing a little bit again.

What is the approximate ratio of lease versus owned on the fleet?

I will tell you that question -- I'll answer that question in one second.

Okay.

It's actually on slide 24, and we're at 78% owned to 22%.

That will just be a decision you make every quarter on what is the most appropriate financial decision or do you see that carrying through for the next year?

It's strictly based on how lucrative the bank market remains and how good the rates are that they give us on a leasing basis.

Okay.

It's an economic decision totally.

And I just want to make sure on the WK -- workers comp, if I sort of use a worst case scenario, you are talking about maybe as much as about $31 million, $32 million more on that line item in '07 if it is a full 100 basis points.

That wouldn't be my calculation.

1% of that would be about $32 million of your revenues if it is a hit to the line item by up to 100 basis points.

I guess I was looking at my year-to-date revenue.

I'm just taking my '07 revenue estimate, which I know may not be precise, but times 0.01.

But when we were coming up with the guidance, the number that we had and that you would have had would have been only year-to-date revenue, the nine-month 2006 year-to-date revenues.

So when we were giving you that 100% basis point number, it is a good clarification question.

Thank you, Tom.

When we were giving you that number, we were giving it to you based on the year-to-date revenue number.

Okay, and we should look at that on the freight revenues or the total revenues?

Total.

Okay, so maybe $24 million is kind of what you're thinking, 23, 24.

23, 24 is the right number, Tom.

Okay.

And then I'm sorry to kind of keep going over these little things like that -- the D&A, I mean even though D&A is going to be going up because of the decisions that you made, really I'm just going to model the total of D&A plus equipment rents going up because you are going back to more leases again.

Correct, yes.

I think you actually put those two line items together.

Okay, and then -- I think here, I think that's all I've got for now, I might have a follow-up.

Thank you.

John Barnes, BB&T Capitol Markets.

Good morning, guys.

Bob can you give us an idea, just are we getting close to a point where we are going to get a fairly clean quarter in that kind of all these onetime items are largely out of the way?

You feel like you have gotten the impairment charges necessary in all of that type of stuff addressed where we are close to just having consistent clean quarters?

John, I sure hope so. that's certainly our goal, and there isn't anything out there on the immediate horizon that we know of that has the potential to bite us.

So I hope that's the case.

Okay, all right.

Secondly, from the sales side always glad to see somebody addressing their sales effort.

Where are you hiring these people from, especially the ones that you say are coming with intermodal experience?

You know what, all 11 of them were more from the replacements and additions all came from -- with the exception of one came from our good competition.

So all in the industry?

All in the industry.

Very good.

And then lastly, as you look out, are you to a point with your vendors yet in terms of the tractors that -- are you getting to a point where you can kind of begin to set it up on as you get the drivers in you can take delivery of the equipment?

Or is it still fairly long lead-time where you got to commit okay, this quarter or the first quarter you're going to have to take 500 pieces of equipment.

Or do you think there is still some flexibility there to negotiate with them that if things were to soften a little bit in '07 that 2500 to 3000 could be more like 2000 if necessary?

We have that flexibility, and our vendors have been great to work with.

Okay, so if you don't need the equipment you do have the ability to pull back further?

That's correct.

Very good.

Guys, thanks for your time.

Thank you, John.

Jason Seidl, Credit Suisse.

One quick question.

Bob you were talking about that you guys were hoping to get 2% rate increases at one point, and I think you made another comment that you're not going to see any decreases but you might see just maintaining the rate increases.

Now when you say maintaining are you talking flat or are you talking sort of more towards the 2% or is that 2% sort of like the goal right now?

Our goal is to get as much as possible.

We're going to continue to use our operational tools that we have to drive better decisions, and where we can internally increase the book of business that we are hauling with our existing customers.

Obviously in a market we're afraid its (indiscernible) and predicted to be tough on a going forward basis here, increases from customers are going to be more difficult to come by.

We've got good partnerships with our customers, great relationships with those folks.

I don't see them coming back to us and requiring us to cut our rates in order to keep the business.

As new bids come up and we are bidding with the rest of the industry out there increases are going to be tougher to come by.

I do think that those bids though are going to be relative to what our competition's bid and not necessarily relative to what we currently are hauling business for.

And because we are lagging behind I think we do have probably a better opportunity than some to get increases.

So we are not penalized by our customer base or any stretch of the imagination in that regard.

So I think we've got as good of upside as anybody in that arena but it is going to be tough sledding.

Okay, and not to beat a dead horse on the workers comp, but Glynis, you said you weren't going to benefit obviously as much in the fourth quarter.

Could you clarify that more in sort of a dollar range for us?

No, I think we clarified it with regard to say that we think our administration salaries and wages and benefits would be in the 33 to 34% range up to 100 basis point improvement.

Okay, fair enough.

Thanks, guys.

Ken Hoexter, Merrill Lynch.

I just actually want to follow-up on that request just for a second just because Bob you know that the driver market is loosening a little bit which is enabling you to seat some tractors.

I just want to know in that environment why would you not see prices starting to fall if you're starting to see some loosening of capacity a bit?

Well, I don't think our customer is going to back to us and ask us to renegotiate existing business.

That's not the kind of customer base we have.

And we've got contracts with both customers and I don't foresee them coming to us and say, hey somebody gave us a lower bid so we need to cancel your contract and go in.

That is not the kind of relationship we have with those folks.

Just refresh my memory.

Most of your contracts are in the third or fourth quarter or do you renew in the beginning of the year?

\ They are scattered throughout the year, and I am not particularly heavy -- I would say fourth quarter is my lightest, but it is pretty much spread throughout the year.

Okay.

I just want to delve into this the captive insurance line just for a second because you noted that with your new self-insurance but the revenues I think you said were thrown into other revenues and then we're going to keep seeing insurance and claims climb because of that.

Are we kind of at the peak?

Is this all in there, or can you talk a bit about the run rate so we can kind of interpret how well you are doing on controlling that cost or because your self-insurance is so high we could keep seeing claims go up over the next year or so?

Sure.

The captive started June 1, so in the second quarter we did not have a full quarter's benefit.

We anticipate that in the insurance and claims line the captive as it relates specifically to the owner operator insurance that we are providing, is going to add about $3 million to our normal run rate for insurance and claims.

The rest of that of what is in in our insurance and claims line is related to the normal Swift base of business, and we did have higher claims experience on that base in the third quarter.

We are still though anticipating that we're going to end up the year at the 5.6% of net revenue that we've kind of given as some generic guidance out there.

Okay, so if it is going to go up about $3 million on the claims line would you expect, what do we see a $3 million boost in --?

The revenue line essentially offsets -- there is a little bit of profit clearly associated with that, but it is a little bit higher on the revenue line than it is on the claims line.

Perfect.

Okay.

It is not a loss item for us.

And Bob, can you talk a bit about the utilization of the container side of the business?

You mentioned still you got the 5000 containers, but when I was just recently on a rail trip down in Dallas and we passed a yard where there were seemingly 100's of Swift containers stacked up by the side of the road.

I don't know if that was -- they might have just been the new ones that were just delivered I presume.

But can you talk about the utilization on the container side?

Our utilization has been good and quite honestly, today this particular week I could use 5000 more.

We haven't disclosed any specifics as far as turns in, but they are -- we are happy with the progress there, and expect it to continue; it gets better every single month and of course we are -- with intermodal business being hot right now they are moving.

Okay, and then on the efficiency side, utilization seems to be the big focus kind of in this turnaround from the beginning of the year really and going back to the analyst conference you host in, seemed like things were on track.

But I think Glynis noted that -- I forget the number I think it was something was down 4% this quarter, utilization or revenue per tractor.

Is there something you can do to kind of get that back on track or am I recalling the wrong number?

No, we said our utilization was down 4.4% in the quarter.

That is the year-over-year comp is really tough, last third quarter '05 is when we reduced our fleet and we had a historically low unmanned truck count.

But we're going to continue to focus on utilization, and if you look at the year-to-date number we still have some good progress there.

Certainly as we do a better job with seating trucks and improving our retention, that will help in that number, as well.

Okay, and just two quick numbers questions to wrap up.

One, can you breakout contract versus spot exposure?

And then what percent of revenues are let's say from forest and auto businesses?

Virtually no spot and minimal forest and auto.

Either one of those percentages are both very small percentages with us.

Appreciate the time, thanks, Bob.

Justin Yagerman, Wachovia Capital Markets.

Wanted to just delve in a little bit here.

You were talking about bonus pay and for your sales guys who obviously have been doing a decent job going out and getting rate for you.

When does that hit the P&L, and how should we be thinking about that?

Is that included in your salary wages and benefit guidance?

It is already in there.

There will be no hit there.

I guess looking at kind of the shift of what Ken was just talking about with utilization and it looks like you have another difficult comp coming up in Q4, because you decreased the tractor count year-over-year last year also and utilization was up almost 2% then on a total mile basis.

How are you thinking about that going forward, and basically I guess the other part of that question is was there any kind of mix shift going on this quarter that impacted pricing, and utilization?

No, there wasn't any mix shift that would have impacted pricing utilization, Justin.

I would tell you on a go forward we're going to continue to use the operational metrics that you have seen and we talked about numerous times to help us as our retention and our unseated truck counts improves, that's certainly going to help.

This new sales talent, which has been brought onboard its going to help.

We have a unique advantage to most of our competitors in Mexico that we haven't fully exploited that we are going to push hard and we have an emphasis on.

And we've got some additional opportunities there, and we are going to tackle all of these fronts and do what we can do.

Looking at I guess the pricing environment right now, you know you guys obviously posted decent pricing in the quarter and without much mix it is even more impressive, I guess.

But what are you seeing right now in October and what do you expect.

A few of your competitors have noted that its getting increasingly competitive out there.

I mean I guess if you don't have much spot exposure it is probably not as big a deal, but could you talk a little bit to what you're seeing and what you're hearing from customers?

We don't have any spot exposure but I would tell you that on current bids, which is the best measure I can give you Justin, there is lots of competition and customers are warning about being too aggressive and trying to get additional rates.

So it is going to be difficult on a go forward basis to get the same kind of increases that the industry is experienced for the last two years.

Are you seeing any of your bigger customers that have their own private fleets taking freight away from you to put on their own trucks to keep their assets utilized?

I have not seen that, no sir.

Okay, and then I guess, Tom was trying to get at this for and I kind of saw where he was coming from.

On the fuel expense side you guys have been doing a -- I think you answered maybe him but it was breaking up a little bit.

You guys have been doing really impressively in terms of offsetting fuel expense with fuel surcharge, and I guess just getting a sense of the run rate going forward would be helpful.

Because I know it is a different way of calculating it but its kind of the easier way and you just net fuel expense per company mile against fuel surcharge per company mile to come up with a net fuel expense.

Doesn't take the owner operators as well into effect.

But you guys are down about $0.03 or so on a year-over-year basis as far as I can see, and I'm sure your calculations show something slightly different but on relative terms it should work out the same.

Is this year the best year to take as a kind of a go forward run rate for what fuel expense is going to do and how you're going to be able to offset it with surcharge, or should we be using, I mixed the last two years because we had such a volatile diesel year now?

I would think fuel as an expense of revenue should be this year's reflected the increases that we've made in our surcharge program which actually started in end of 2005.

And in addition some other initiatives that we have not talked about today centered around fuel are tackled idle in a big way and measuring our idle fuel with our trucks (technical difficulty) visibility with that.

That certainly had some additional benefit that we have not talked about that is being reflected; a combination of all of those things.

But as fuel as a percentage of revenue for what we had this year should be pretty accurate on a go forward basis, let's say.

Just to clarify, Justin, it would be our calculation, the calculation that we gave you on slide 19, making sure that you back out the owner operator and the rail component, etc. when you're looking at company fuel expense as a percent of net revenue.

That is 10.5% range year-to-date basis.

I think is that you should be looking at going forward.

Okay, so the 10.5% but calculated your way is kind of --

Yes, -- if you're looking at company fuel expenses as a line item on your -- in your model then you need to make the adjustments for owner operator and rail, specifically because rail is growing on a year-over-year basis.

That makes a lot of sense in itself.

Thank you.

Looking at kind of the next year and you're planning in Q4 you said you're now taking tractors, so how should we be thinking about the additions or subtractions to your fleet over the next year as you look out, what is you're planning on that end?

I think we're planning on our fleet being relatively flat.

Just relatively flat?

We should keep flat for the next year?

What will perhaps vary from that will be what happens with our owner operators and what we are doing there.

We are always looking to add good owner operators.

But outside of that any deviations would be more of a timing issue than anything?

That is correct.

For now I think you should model flat.

Okay, and you know you talked about driver pay obviously being one of the things that is helped you with the driver situation this year.

Can you just remind us how much your total compensation for drivers is up year-to-date?

Right now?

Well we said that the increase would averaged about $0.02 a mile, and that went into effect on October 1, so that is not reflected yet.

And that will be an average for both our company, drivers and our owner operators.

Okay, but without -- I mean what is that as a percentage of total for you guys?

I don't have that in front of me.

Call us back and we will give that to you after.

But it is less than four.

Less than 4%?

Okay.

And then I guess not to beat a dead horse but on the workers comp side the last couple of quarters you guys have been saying that the benefit would not be as big as the last quarter, and here we are with a $10 million benefit in this quarter.

Is there any chance of upside surprise as we go forward?

Because it really does skew what expectations are.

We know about the skewing part.

Fair enough.

Justin, as far as we know it shouldn't.

The third quarter was a rollup, and I went into pretty good detail about how all that happened.

And then if I think if you use what we said on a go forward basis for your 2007 model you come pretty close.

But that would be a nice surprise.

It is highly unlikely.

I hear you.

Okay.

Appreciate your time, guys.

Thanks, as always.

We got time for two more calls here.

Chaz Jones, Morgan Keegan.

Just two quick questions.

One, is there anything to update with interstate leasing in terms of the discussions that are going on?

You know, the discussions are ongoing, and nothing materially different than what we talked about last time, Chaz.

Okay.

Great.

And then last question was you sounded like you're seeing some improvement in terms of the driver environment in getting more trucks seated.

If I recall on the last call you had mentioned that you had a little less than 500 trucks that had been delivered but not necessarily put into service yet.

Could you maybe give us a sense for where that number stands now?

It is down from there.

No, sorry, it is up from there.

I thought it was 489?

489 was the number at the end of the second quarter last year that we disclosed and the number this quarter is slightly up from there.

Okay.

If you go back and you look at the second quarter number.

I have 489 written down.

Right.

But if you look at the statistics we gave you in the second quarter, we gave you the operating fleets and the total fleet and the delta there was just under 1700 units.

Also between our operating fleet and our total fleet this quarter is 1994.

Okay.

That delta, it will give you your growth.

Okay, great.

Thanks for the comments, guys.

Scott Flower, Banc of America Securities.

I wondered if you could give us some sense, and obviously it may be hard to break this apart, but is what you're seeing in the driver market more related to some of the things you've done and obviously maybe you haven't seen the effect of the pay increase or is anything just loosening in the labor markets relative to the construction and housing?

I know there may be no simple way of just aggregating, but do you have any sense of whether more of what you're seeing is what you're doing versus maybe the market a little looser for drivers in general?

I think its a combination of all of those things and time of year.

Definitely the housing and construction market down, I think that is obviously a help.

I think our initiatives are help.

We talked about the Thanks a million! program.

That has been a big success for us and I mentioned that we are running that for a second.

Can you give us any directional sense of what your turnover has done?

How is it a small improvement, noticeable improvement?

It is definitely -- we are still below 100 on turnover, and at this time of year it typically improves, Scott, first of all people as you get closer to the holidays drivers don't like change, so they are less likely to move.

And that coupled with what has happened in the housing and in the construction industry slowing up and the other initiatives that we are implementing, has all helped.

Okay, and then I guess just a couple other items.

And I know you talked a little bit about how shippers were forcing to try to flatten peak.

And is some of this related?

Are you seeing any other effects such as changes in inventory or is this just changes in where folks are embarking goods, Houston versus the West Coast?

I am just trying to get a sense or also are you seeing perhaps bleedover from other carriers that do have automotive and housing and you are just not getting as much of the pie for perhaps the traditional retailers?

I am just trying to get a sense of are there other things at work here beyond just the flattening peak phenomenon, I know the last couple of years you described pretty well.

I think there probably has been some bleedover from other industries have done; obviously those folks are having to load those trucks, so they are out there competing in some new space.

I think that would certainly add to the situation that I described earlier that we are in.

Okay, and then maybe the last two areas is could you give us some sense of -- obviously the sense is good, but where are you relative to your revenue targets on intermodal?

Obviously you seem to indicate seasonally and relative to how intermodal in general in general is going.

Things are going well.

Could you give us some sense in your progress on the revenue side on your intermodal product?

We'd indicated before that it would be on an annualized run rate of $100 million, which we are in line with our targets there.

Okay, and the last question I had is -- and I know that there are lots of initiatives going on on the cost side but I guess I am trying to better triangulate when some of the different initiatives hit this year and trying to understand what incremental things on top of those may be occurring that will lap later in '07 as opposed to anniversarying earlier in the year.

Now that you talked about the nondriver headcount seemed to be a first quarter phenomenon; obviously some of the workers comp (indiscernible) have bled through this year.

I am just trying to get a sense of obviously the bigger picture initiatives as opposed to every little single thing you've done.

It is tough to quantify that, Scott.

I would tell you that there isn't any one particular time that any faster than any other than some of the initiatives are already bearing fruit right now.

Certainly our hiring expense and our retention issues are down from where they have been.

And as I indicated should be for the remainder of the quarter.

And I expect that trying to continue into the first part of '07.

Okay.

Well, thank you very much all.

All right.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.