Knight-Swift Transportation Holdings Inc (KNX) 2011 Q2 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Swift Transportation Company second quarter 2011 earnings conference call.

(Operator Instructions) At this time, I would like to turn the call over to Jason Bates, Vice President of Finance and Assistant Treasurer for Swift.

Thank you.

Mr.

Bates, you may begin.

Thank you, Cody.

I want to welcome everyone today.

We're going to start out with the forward-looking statement disclosure, which you find on page 2 of the slides, if you would like to follow along.

This presentation, including documents which are incorporated by reference and accompanying comments may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements include, but are not limited to, anticipates, believes, estimates, plans, projects, expects, intends, will, could, may, optimism for strengthening demand, or similar expressions, which speak only as of the date the statement was made.

Such forward-looking statements are inherently uncertain, are based upon the current beliefs, assumptions, and expectations of Company management and current market conditions which are subject to significant risks and uncertainties as set forth in the risk factors section of our 10-K.

You should understand that many important facts in addition to those listed above and in our filings with the SEC could impact us financially.

As a result of these and other factors, actual results may differ from those set forth in forward-looking statements, and the prices of the Company's securities may fluctuate dramatically.

The Company makes no commitment and disclaims any duty to update or revise any forward-looking statements to reflect future events, new information, or changes in these expectations.

The presentation also includes certain non-GAAP financial measures as defined by the SEC.

To comply with SEC rules, we have provided a reconciliation of these non-GAAP measures in the appendix.

On the call today, we have Jerry Moyes, our Chief Executive Officer, Richard Stocking, our President and Chief Operating Officer, as well as Ginnie Henkels, our Chief Financial Officer.

Richard will start the call with an overview of the quarter, summarizing several of our statistics with our historical trends.

At that point, he will turn it over to Ginnie, who will provide a financial overview, summarizing the second quarter results.

Jerry will finish up the prepared portion of our call for a summary, at which time we will open up the call for a brief question and answer session.

With that, I'll turn it over to Richard.

All right.

Thank you, Jason, and hello, everyone.

We'll start on slide 4 today, where I'll provide an overview of the second quarter.

We are very pleased to report that our operating income for the second quarter is the highest reported Q2 in 5 years at $72.6 million.

Additionally, we are very pleased with the quality of our earnings, which were driven largely by rate and mileage improvements, combined with the continued focus in our strategy initiatives, as well as our disciplines.

As you can see, our rate per loaded mile, excluding fuel surcharges increased 4.7% year-over-year in the second quarter, which exceeds the 4% target we set for ourselves.

A portion of this improvement is from rate increases on our existing business, but the number's also bolstered by various strategic initiatives we have in place to improve our freight mix of business.

This will continue to be a hyper focus area for our organization in the third and fourth quarters, as we continue to engineer our network.

Additionally, we are pleased to report a 4.3% year-over-year increase in the loaded miles during the second quarter.

There were obvious various head winds in the second quarter for the entire industry, including a less than robust economic recovery, a soft West Coast rate environment, the crisis in Japan, and the rising fuel prices, which slowed consumer spending.

In spite of these headwinds, we believe a 4.3% improvement is good, but we feel we have additional opportunities for improved results.

We are concentrating our efforts on several opportunities that will assist us in exceeding these levels in the second half of 2011.

The first area includes several strategic initiatives, specifically targeting asset utilization and increasing miles.

We have various cross-functional teams working on these strategic projects and hikes, otherwise known as our high impact, [Kyton] event.

We don't have time to talk through many of them; but just to give you an example, our targeted ETA hike, which helps improved -- utilization of our drivers by improving order velocity, as well as our driver hours, as we decrease waste and time from their PTA to loaded call which will help improve their W-2, as well as Swift's profits.

Also, we have a proactive network engineering team in hike to reduce empty miles and increase our freight in different markets.

In addition to these strategic initiatives, we are pleased to announce that we have recently been awarded a significant piece of dedicated business from Walmart in our southeast region.

The award includes four incremental distribution centers, including both temperature-controlled and dry business.

We currently service nine of these distribution centers today, and each facility represents between $15 million and $20 million plus of revenue annually.

We will be taking over service of these new four facilities within the next six weeks, which will help us in our goal to increase our loaded miles in the third and fourth quarters.

While we are on the topic of strategic initiatives, I wanted to let you know that our 2011 strategic focus teams are continuing to drive improvements throughout our organization, focusing on increasing driver and non-driver satisfaction, as well as tractor and trailer utilization, and others.

We've already discussed some of these initiatives under way by our asset utilization teams.

Additionally, the driver/non-driver satisfaction teams have been busy in their own right, analyzing alternative schedules, rewards and recognition programs, driver ranking, Company-sponsored events, time-off policies and training, to name a few.

One of the key recommendations was that we expand our great leaders training in the next -- to the next level of our organization, which we accomplished in the second quarter, training approximately 150 additional leaders throughout the Company.

This training program is aimed at helping leaders enhance their skills and focusing and developing each individual on their teams.

The leaders are also trained to do a better job of listening to their employees concerns and ideas and seek their input for continuous improvement, we believe the best ideas haven't been thought of yet.

Another item I want to briefly address is the growing concern within the industry associated with driver availability.

As many of you know, our recruiting and retention programs are different than many of our peers.

As a result of our unique academy network, which provides us the ability to create our own driver pools.

We are not impacted as severely as others when the driver market tightens, which it is today.

In addition, our solid CSA scores help differentiate us from our peers.

This is a very attractive quality for experienced drivers, as well as new drivers to the industry, who want to run for a carrier who is green in all seven CSA's categories.

Finally, our driver friendly initiatives help us keep our turnover levels low.

The last item I wanted to address on this slide is our intermodal line of business.

Our overall intermodal revenues fell short of our expectations.

This shortfall was primarily associated with our traders on flat car or -- or our TOFC segment, whose reduction was partially offset by an increase in our container on flat car or COC segment, both of which I will discuss more on future slides.

If you'll turn with me to slide 5, we'll go through some of the key revenue trends for the quarter.

We will start by reviewing our total and net revenue trends, represented in the graphs on the upper portion of the slide.

Net revenue is defined as total revenue, less fuel surcharge.

As you can see both revenue categories have trended upward in the second quarter from the same quarter in 2010 and 2009.

More specifically, total and net revenue increased in the quarter of 2011 by 15.5%, and 7.7% respectively, with the difference being attributed to the rising fuel surcharge revenues.

On the bottom half of this slide, we show our trucking revenue and other revenue trends.

Our trucking revenue trend has improved 9.2% over the second quarter in 2010, which I'll discuss in more detail in the next slide.

However, our other revenue decreased 3.5% during that same period.

As a reminder, our other revenue includes our intermodal, brokerage line of business, as well as revenue received from our shop facilities and leased revenue from our owner/operators.

As indicated previously, the COC segment of our intermodal business is trending positively, and we experienced a year-over-year increase of 5.5% in our load count.

We also realized an 8% increase in our COC rate per load on a year-over-year basis.

As I mentioned on the previous slide, our TOFC intermodal segment was down year-over-year with a reduction there load count of 60%, which was the key contributing factor in the reduction of the other revenue.

There are several reasons for this decline.

First, we identified several unprofitable lines where rates needed to be renegotiated with customers.

While successful in renegotiating the rate with some customers, we made the decision to walk away from several lines where the margins were insufficient, choosing instead to utilize the trailing asset in our OTR and dedicated environment, which yields better returns.

Another contributing factor to the decline was the phenomenon we described in the first quarter.

More specifically, oftentimes it makes economic sense for us to move intermodal loads over the road to avoid dead head costs associated with repositioning equipment, and we moved close to a 1000 TOFC loads over the road in the second quarter.

In summary, even in the -- even with the reduction in the TOFC business, if you look at the other revenue trend over the last two years, although we were down 3.5% this quarter versus second quarter of 2010 at $69.9 million, we have still experienced a compounded growth rate of almost 14% per year since 2009.

As far as expectations for the rest of the year, we expect COC revenues to be up in the range of 15% plus.

However, with changes in the TOFC line, we believe that the total intermodal will be relatively flat.

On slide 6, we'll go over several key statistics for our business.

The first, shown in the upper left-hand corner of the slide is the weekly trucking revenue per tractor.

This represents how efficiently we are utilizing our equipment in conjunction with rate increases we negotiate with our customers.

Over the past two years, the -- this statistics has performed similar to our revenue trends previously discussed, increasing 4.9% to 3051.

As I have mentioned in the past, the key components to this statistics are rate per loaded mile, loaded miles, and our operational fleet count.

You'll find the trends for rate and loaded miles in the upper right corner, and the lower left corner of the slide.

They increased 4.7% and 4.3% respectively on a year-over-year basis, both of which are positive trends.

We will go over the operating fleet on the next slide.

Another key metric for our business represented in the lower right corner of this slide is our dead head percentage.

This is the measure of the uncompensated miles we run, generally associated with moving tractors to pick up loads.

As you can see, this has been an area of focus for us over the last couple of years.

While we are encouraged that we were able to achieve 10 basis point improvement in 2011 on top of a 160-basis point improvement 2010, we still have opportunity for improvement with our empty miles.

Finally, my last slide on slide 7, we'll show you our tractor trends.

The chart in the upper left corner shows our total operational trend, and the chart in the upper right corner shows the owner/operator trend.

As you can see, our total operating fleet, which includes our owner/operator fleet, has been increasing very slowly over the past four quarters, generally around 1% each quarter.

Our owner/operator division shows a similar level of growth during this same time period.

As you know, we continually review our fleet growth options.

Currently, our fleet plans remain the same as previously discussed, with an exception to grow, or expectation to grow approximately 300 owner/operators, a couple hundred day cabs, and between 50 to a 100 trucks in Mexico.

The bottom half of this slide 7 shows our adjusted operating ratio and adjusted EBITDA trends.

I believe the trends here speak for themselves and are the result of a lot of hard work and discipline over the past couple of years.

This represents a culmination of the belief and effort of the entire organization, and I'm pleased to report that our favorable year-over-year operating ratio trend continues.

From the second quarter of 2009 to the second quarter of 2011, we have achieved a 610-basis point improvement, which is even higher than the 530-basis point improvement we recorded last quarter, from Q1 '09 to Q1 of 2011.

As you can see in the bottom right corner of this slide, the adjusted EBITDA trend follows a similar pattern, with our second quarter of 2011 coming in at $131.7 million, up 44.2% from the second quarter of '09.

These results are strongly correlated to the new Swift way and a culture that fosters team work, leadership, discipline, and continuous improvement.

As I mentioned last quarter, our goal is to achieve sustained superior performance.

We've come a long, long way, but relative to our potential, we here at Swift believe we have great room for improvement, which is very exciting and motivating to each of our team members.

With that, I'll turn over the time to Ginnie to review the numbers.

Thanks, Richard.

Hello, everyone.

Moving to slide 9, I'll start with the P&L.

Our operating income for the quarter, as Rick mentioned was $72.6 million or 18.6% increase year-over-year.

Our adjusted operating ratio was $89.2, million or 100-basis point improvement from last year.

This improvement was driven by the volume in pricing increases as Richard discussed, which were partially offset by increases in fuel and equipment maintenance.

Compared to the first quarter, our adjusted OR improved 330-basis points sequentially, driven by a seasonally stronger volumes, continued pricing momentum, with 2% growth sequentially, and improved fuel recovery as prices began to retract in May and June.

Slide 10 reconciles our operating income to net income and our diluted EPS to our adjusted EPS.

Our adjusted EPS for the quarter was $0.18 compared to $0.06 in the first quarter of 2011.

The comparison to last year on a net income in EPS basis is difficult due to the significant changes in our interest expense after the recapitalization of our balance sheet last December.

The only adjustments for this quarter are the $4.3 million of amortization expense associated with the customer relationship intangible established during our going private transaction in 2007 and $4 million of amortization for unrealized losses on the interest rate swaps which we terminated in December as part of the concurrent transaction.

As we discussed in previous quarters and as included in the appendix, the full year impact of these items will be $17.1 million for the customer relationship intangible and $15.1 million for the swaps.

Moving on to the operational expenses, slide 11 highlights some of our cost categories and shows each of the percent of net revenue, which excludes fuel surcharge.

Fuel surcharge revenue is primarily dependent on the cost of fuel and not specifically related to our non-fuel operational expenses.

Therefore, we believe using net revenue, which excludes fuel surcharge revenue, is a better measure for analyzing our expenses and operating metrics.

This calculation is shown on the top of the slide.

Salaries, wages, and employee benefits have increased $15.7 million to $202.6 million in the second quarter, but are relatively flat as a percent of net revenue year over year.

The dollar increase was the result of a 4.9% increase in miles driven by Company drivers, $2.3 million of FAS 123 stock compensation expense, which we did not have in 2010, increasing healthcare costs year over year and increase in administrative staff to support the growth in the business.

However, this line item actually decreased from Q1 on a percentage of net revenue basis.

This is largely due to a mix shift in miles driven with Company drivers decreasing as a percent of total miles and owner/operators increasing.

Operating, suppliers and expenses increased $4.6 million in the second quarter which was primarily due to increases in maintenance expense, but is consistent on a percent of net revenue basis year over year.

Insurance and claims expense decreased $1.6 million to $27.9 million and decreased to 4.1% of net revenue from 4.7% of net revenue in the quarter.

Although our miles increased year over year and our actuarial loss pick to which we accrue is lower in 2011 due to our continued improvement in our accident frequency and severity.

Fuel expense for the quarter is shown on side 12, and was $168.5 million, or an increase of 45.9% from the second quarter of 2010.

We collect fuel surcharge revenue from our customers to help mitigate the increases in fuel expense.

We passed on a portion of this fuel surcharge revenue we received to our owner/operators and other third parties, such as the rail who also have to pay for fuel.

To evaluate the effectiveness of our fuel surcharges, we deduct the portion we paid to third parties, then subtract the remaining Company-related fuel surcharge revenue from our fuel expense.

The resulting net fuel expense as shown on the slide, was $57.4 million in the quarter, or 8.5% of net revenue compared to $44 million, or 7.1% last year.

The year-over-year increase was driven by the 32% increase in fuel prices and the 4.9% increase in miles driven by Company trucks.

The percent of net revenue did improve from the first quarter of 2011, as fuel prices began to subside in May and June, and we correspondingly had better recovery due to the lag effect in the latter half of the second quarter.

Recovery in the second quarter was still poor, though, compared to our normalized historical run rate, and was approximately a $0.025 impact on EPS in the quarter.

Purchase transportation expense for the quarter is summarized on slide 13.

Purchase transportation includes payment to our owners/operators, the railroads, and other third parties we use for intermodal drayage, as well as our brokered business.

This expense increased $26 million to $223.7 million in the quarter.

A portion of these payments, as I mentioned, is for fuel reimbursements made to our partners.

Excluding the fuel surcharge revenue reimbursed to the owner/operators and other third parties, purchase transportation decreased as a percent of net revenue from 25.2% to 23.3%.

This is a result of the reduction in the average cost per mile of our purchase transportation, coupled with an increase in the average rates received by our customers, thus increasing our revenue.

Due to fluctuations in the amount of tractors, I am moving on to slide 14, due to fluctuations in the amount of tractors leased versus owned, we group our rent and depreciation expense together for analytical purposes.

Combined rent and depreciation expense in 2011 increased $2.9 million to $70.8 million, but has decreased as a percent of net revenue from 10.9% to 10.5%.

The dollar increase is primarily due to the growth in intermodal containers and an increase in the number of trucks.

We received several hundred trucks late in the quarter due to two reasons.

First, we received price breaks from one manufacturer for units received before June 30, so these were back end loaded in the quarter.

And we also had some alignment issues with another manufacturer that backed up our deliveries.

This issue was fixed in June.

We will in-service these trucks over the next several weeks while we pull the corresponding trade units.

But overall, that resulted in an increase in our fixed asset count at the end of the quarter.

Our overall fleet plans remain the same, as Richard mentioned.

We expect to grow our day cab fleet by 200 trucks.

As we insource some of the existing dray in select markets, and we also service the new Walmart facilities that Richard discussed.

We also expect growth in Mexico of roughly 50 to 100 units, and we expect our owner/operators to grow roughly 300.

Capital expenditures and growth investment in equipment and facilities are shown on slide 15.

Net cash capital expenditures were $61.1 million in the quarter.

This includes $10.5 million of proceeds from the sale of equipment.

Therefore, gross cash CapEx was $71.6 million in the quarter.

Additionally, we brought in $121.5 million worth of equipment on operating leases, of which approximately $90 million was for owner/operators through our IAL subsidiary.

Due to beneficial lease rates we are receiving on leases resulting from bonus depreciation, and the fact that we cannot immediately take advantage of bonus depreciation by purchasing equipment due to the large NOL we have, it's economically beneficial for us to lease equipment this year.

Therefore, our net cash CapEx will be a bit lower than we originally guided to and should be in the range of approximately $225 million for the full year.

A reconciliation of our cash and liquidity is shown on slide 16.

Our total liquidity including restricted cash increased to $454 million at the end of June compared to $397.4 million at the end of March.

We refinanced our accounts receivable securitization facility in June, which had three benefits for us.

First, the total facility size was increased to $275 million from $210 million.

Second, the reserve and eligible receivables requirements were modified, which immediately increased our borrowing base on our receivables by roughly $50 million.

And finally, we reduced the interest rates on this facility by approximately 175-basis points on amounts drawn.

This leaves us with a very healthy liquidity position at the end of the quarter.

A couple of additional transactions are highlighted on slide 17.

Within the second quarter, we completed the registration of the $500 million of fixed rate notes that were originally issued in December of 2010.

This process involved an exchange of the unregistered notes for registered notes, but had no impact on the financials.

In addition, a couple of weeks ago, we initiated a call for the $11 million of remaining floating rate notes that were originally issued in May of 2007 at LIBOR plus 775.

This process should be completed by August 16.

With that, I will turn the call over to Jerry.

Thank you, Ginnie.

To summarize Richard and Ginnie, recently there have been several interesting trends in our industry.

For several quarters now, capacity continues to remain very tight.

Compounding this issue is the fact that very few, if any, of the large carriers are adding incremental trucks to their fleet, and the small carriers are having a difficult time getting financing.

Therefore, we expect the capacity issue to continue into the foreseeable future.

Shippers are continually contacting us, citing concerns over capacity availability, and many of them are looking to secure that capacity now, before it becomes a more significant issue.

Another noteworthy item is the current regulatory environment, with the CSA-2010, the hours of service, the electronic logs and what's going on in Mexico, there are several potential issues for carriers.

Having said that, we feel that we're very well-positioned to deal with these and even take advantage of many of these proposed regulatory changes.

Driver availability and retention has been an issue in our industry for as long as I can remember, and it is not going away any time soon.

In fact, some of the regulatory issues will only further constraint the driver work force.

However, as Richard has noted, we're unique from many of our peers in this regard, with our -- with our academies and our infrastructure and driver-friendly culture.

We actually have all the drivers we need at this point.

Industry trends aside, we're very pleased with many of the trends that we're seeing at Swift.

Our rates were up 4.7% this quarter, which exceeded our 4% goal we accomplished last quarter.

This will continue to be a focus area going concern, with the goal of continuing in the 4% range.

In spite of head winds Richard discussed, our trucking miles were up 4.3% in the quarter.

Our margins continue to expand, with our operating ratio coming in at 89.2, which is the third time in the last four quarters that we've been sub-90.

More importantly, the quality of our earnings is strong, being driven largely through miles, rates, and continued focus on cost containment.

As our strategic focus teams, our lean Six Sigma and our 40-X process continue to generate results.

I've already mentioned our unique recruiting retention efforts which we will continue to capitalize on in a very tight-driver market.

As many of you know, our customer service has been my main focuses, I am pleased to see that our customers appreciate the emphasis our team has placed in the responsibility by awarding us 12 carrier of the year awards so far through June.

This is in addition to the 25 that we received last year.

I believe this focus on customer service has also played a role in many of the new business awards that we have received.

In addition, we have placed a strong emphasis on increasing our employee morale of both drivers and our non-drivers and will continue to focus on making Swift an employer of choice.

In summary, we're very excited about the improvements we've made in our organization over these past few years, which is evident in the favorable trends that we have shared with you today.

However, we are more encouraged by the fact that we have the potential to achieve so much more.

Our employees, myself, our processes are aligned with you, the investor, to maximize the value of Swift stock.

With that, we'll open it up for any questions you may have.

Cody.

(Operator Instructions)

(Operator Instructions) Ken Hoexter, Bank of America.

Maybe Jerry or Ginnie, we could start off with the -- on the truck side there -- you kind of increased the number of trucks a healthy amount, and it looks like you're increasing the company tractors a sizable amount, kind of deviating from the original goal of really focusing on the owner/operators.

Can you kind of address that and why, Jerry, if the market is getting tighter, how do you balance out focusing on price versus expanding capacity and what kind of level capacity you look to expand?

Yes, some of those trucks that are listed as Company, if they are not seated in an owner/operator, we list them as Company.

So, some of that is just classification, but a lot of them are brought in for the owner/operators.

So again, we don't -- there is timing issues going on with the fixed asset fleet at the end of quarter, but as we stated, our goal is to grow 300 owner/operators.

We'll have growth of 200 day cabs for intermodal and the new Wal-Mart business we're bringing on, and then we'll increase Mexico by a 50 to a 100.

So, I wouldn't focus on that number too much, the year -- the month end fixed-asset number.

Okay, because it did seem like a large increase in capacity at the end of the quarter.

The intermodal, I'm kind of surprised by the trail-over -- the TOFC kind of shift there.

Can you break out within -- because you don't provide the level of detail.

You kind of talked about intermodal through the IPO process.

Maybe you can talk about, within the other category, what is intermodal, and then break out intermodal into COFC and TOFC just so we can understand what the mix looks like?

Ken, Ginnie's looking that up.

We're a little disappointed in our intermodal growth and the position that we're in.

It's an area that we're going to really focus on in second half and going into 2012.

We still are very, very bullish about that area of our business.

It's about 8% of our business, so it's not a big percentage.

But it's going to have a lot of pretty high profile, and we've just got to do better in that arena than what we have done.

Ginnie's got some numbers.

And we believe the TOFC reduction, Ken, is finished.

We had to clean up some of those lanes.

We will grow that.

Again, the COFC, we believe, is 15% plus for the rest of this year and into 2012.

We are winning new awards just this week, and we continue to win those awards.

So we will grow those, respectfully there.

Go ahead, if you've got the breakdown.

Yes, we don't have that, we don't have that with us, Ken.

We'll have to get back to you.

Okay.

Jerry, or Richard, can you talk about how or what you are seeing as you enter -- here we are a month before things start to tight into the peak shipping season, how are you being approached by the shippers at this point preparing for that?

Can you talk a little bit about the July environment?

Yes, so you know, again, Ken, the customers still feel pretty good about the last half of this year.

You know, we're seeing improvements there.

We're continuing -- when you look at bids, we're continuing to get bids in and winning those bids.

Our volumes, we anticipate kind of being, you know, like 5, 6 years ago, typical of that peak volume.

We believe that it will continue to trend up in the third quarter and fourth quarter.

All right.

Thanks for the time.

Anthony Gallo, Wells Fargo Securities.

Thank you.

Richard, I want to talk briefly just about the EOBRs.

You and I have discussed that over the intermediate term there are some really neat things they can do for you from a productivity and safety standpoint; but it seems like some of your peers at least over-the-near term have got some head winds as they implement these.

Clearly, that was not evident in your really strong improvement in utilization.

So just, can you walk us through where you are with all of that, how much of the fleet had EOBRs, and what your initial response has been from them.

Yes, Anthony.

By the end of July, we'll have about 7000 of the units put into place.

We're hopeful by the year's end, maybe into the first of January to have the fleet completed.

We're finding, Anthony, that we have 2 to 3, 4 hours per driver, per week, and we're utilizing those with our load optimization software to help us improve those miles.

I would say, and take you back to one of our strategic focus teams, though, when we focus on the targeted ETA, we think there's opportunity to pick up more mileage there as well.

So part of it's the electronic logs.

Part of it is, you know, getting rid of waste in that whole process.

So it's kind of a combination of both those things.

So far, we're very happy with the improvements that we're getting with the electronic logs.

Okay.

As well as everything else that comes along with it that the drivers, like the text-to-voice, the video streaming that we are able to provide training, safety training, MPG training, idle training, whatever that, is we can get into the cab of the truck today.

Turn by turn directions, routing, fuel -- there's a great driver retention situation that comes along with this MCP 200.

That's great detail.

And then just briefly on the new dedicated contracts, will the equipment that's going to serve those, is that coming off of other dedicated?

Is that going to be cycled in from the over-the-road business, or how are you going to equip that new business?

Yes, it will be cycled in, and it's power-only type of a situation.

So there's a few owners obviously that will come with this business, but then we'll use existing power to facilitate the need there in Florida.

From dedicated or just from over the road?

Over the road.

Okay.

Okay, thank you.

Your next question comes from Scott Group with Wolfe Trahan.

Just want to follow up on the Wal-Mart business.

Did I hear right that it's 4 new facilities that at $15 million to $20 million of revenue each?

That is correct.

How should we think about -- how quickly should that business ramp up?

What's the length of the contract?

Are there any start-up costs associated?

Can you give just a little bit more color there?

Yes, it's a 3 year deal.

And we believe it will go past those 3 years.

Start-up costs will be relatively low, as we've got these day cabs and owners going in.

We know how to do this business.

We'll probably be hiring most of the people that are already on site, so there shouldn't be a whole lot of change there.

You know, there is a slight computer change over to the AS 400, but there shouldn't be a whole lot in addition to that.

And how quickly do you think you ramp up to that $15 or $20 million of revenue per facility?

Yes, that's annualized, but we're going to start mid-September.

And it will start immediately.

There will not be a ramp up.

It will turn on the 12th of September.

Over that week, we'll transition.

Just rough numbers, we think it will probably be about 100 owner/operators and about 200 company.

That's -- this fleet is 100% owner/operator we're taking over, so we're not quite sure how that number is, but today we think is about 200 company and a 100 owner/operators.

Great.

That's great color.

When we think about 4.7% yield growth and 4.3% loaded miles, can you give us directionally how that played out throughout the quarter by month, and what you're seeing into July?

As far as rates, they have been very consistent, actually since the first of the year.

Miles, the last couple of months, May and June, were definitely better than April, and as we said previously, it built throughout the quarter, but June was a very good month.

Okay, great.

And then just last one for me, there's been so many changes in the Company, and it's tough to know where we go from here.

So assuming kind of a normal freight environment, what's a realistic expectation relative to a [915 OR or 892] net of fuel [OR] in second quarter.

Where do we go from here in the back half of the quarter?

Or directionally?

Well, I think, Scott, you got to look at the improvements we've done and is that going to continue and can we continue with our little bit of increase in miles and our goal of 4% in pricing and that and a few trucks and you guys can come up with the math.

One thing that we're really excited about is our network engineering, as we engineer this network and drive the efficiencies.

We think we're just the first base there, and we're gaining ground and steam, and we look forward to a good second half with our strategic focus groups and our asset utilization, our revenue growth, our cost control.

You know, those things.

We're all excited about it and it's building.

It's got a great foundation.

It's building line upon line and getting stronger all of the time.

We continue to feel very strongly about this organization and the transformation that we're making.

Okay, thanks for the time, guys.

Appreciate it.

Thanks, Scott.

Justin Yagerman, Deutsche Bank.

Hey, good afternoon.

I was trying to get a little more detail on the Wal-Mart contract.

When thinking about this, you said that it was handled by owner/operators in the past.

Was this won from a competitor?

Was it a company that you guys took this from?

Yes, there's another company, organization that had this in the past.

So this was a win, but it wasn't an acquisition?

Correct, that's right.

It was probably our largest one-time win sale in our company's history, but it was not an acquisition.

Okay, and Jerry, you said from day one it should be kind of running at that $60 million to $80 million run rate?

Yes.

And just a correction, we're thinking about 250 on the company and 100 on the owner.

250 on the company, okay.

I guess I wanted to get a sense of what was driving insurance this quarter.

It looked like, while it was relatively -- it was lower on a year-over-year basis, but it's a bit higher than where you guys have been coming in for the last few quarters.

What's a normal insurance quarter for Swift on a go-forward basis?

How should we be thinking about that when we're doing our modeling?

Right, you know, I would say this quarter, we were a little bit higher.

We had some expense come through in our captive insurance company associated with some owner/operators that we provide coverage to.

But it's not that high -- so, I mean, not that much of a negative.

In the first quarter, as we talked about, we did have a benefit from prior years in the first quarter.

So I would say that's a little low from a run rate prospective.

It was at 3.7%, so I would say in, between -- if you average out first and second quarter, that's probably a good run rate.

Okay.

Now, with that said, you know, typically, if our accident frequency and severity stays on the trend it is, in the last few years, we've had some benefits in the third and fourth quarter.

So, to the extent that we continue to improve upon our accident frequency and severity, there could be some benefits in the future.

Okay, and you are buying trucks from Mexico.

We've got some news on potential pilot programs that are going on.

Just curious how you believe that's going to impact your business and whether or not this is an opportunity for you guys, or if the competitive dynamic makes things more difficult.

A little bit of color on Mexico would be helpful.

First of all, Justin, we're concerned there's going to be some lawsuits filed against that, the OOIDA as well as the Teamsters.

I think they maybe have already filed them.

We're not sure what the timing of that is really going to be.

With that said, we think it's a very competitive advantage for us.

We can run our Mexico driver into the United States, you know -- I don't think we're going to be running him into downtown Manhattan, but we certainly could send him to, as an example, to Memphis or to Phoenix and exchange a trailer going back into Mexico with him.

Don't want to place too much emphasis on it, but it should be a competitive advantage to us if that happens.

What's the cost differential in terms of what you pay a Mexican driver versus what you're paying your guys?

There is a differential.

I don't want to get into it, Justin, but it's a little cheaper.

Yes, yes, and--

And the other issue is, you know, our Mexican work force is very, very strong down there.

Our turnover's low, and we've just got a really exciting Mexican operation down there.

Richard and I were just down there in February, just came out of there.

We've got great people, they're on the bus, sitting in the right seats, and that includes the driver force we've got down there.

So, if this thing opens up, you know, we could take some pretty good advantage of it.

But keep in mind, it's a 650-truck fleet, and it's fairly small percentage-wise.

And kind of what's exciting there, too, is we're starting to see manufacturing come back into Mexico, and volumes are increasing down there and there's great opportunity for us in that country.

Okay.

Last question and I'll turn it over to someone else.

Gains on sales, Ginnie, as we look to the back half of the year, truck trades, we've been hearing a lot about used truck pricing moving up this quarter.

What should we be thinking?

You guys had significantly more in the first quarter, dropped here in the second quarter.

What's a good place holder for the back half as we look out?

Yes, what we talked about in the first quarter was -- we did have -- that was abnormally high due to some old 2005 equipment we have.

We don't have much of that left.

So I would say that they should be pretty consistent with where we were in the second quarter going forward.

Great.

Thanks for your time, guys.

Appreciate it.

Thanks, Justin.

John Langenfeld, Baird.

On the OR side, you continue to make improvement there.

I think, if my memory serves me right, coming into the year, is by the time you got to here you expected to be 100 basis points or more to the good.

So, if you just kind of broadly think about that Delta, what are the buckets that -- instead of being an 88, it's an 89--what are the buckets that create that delta?

We're very focused on our miles.

The miles have been somewhat short in our opinion.

We believe we can get those back.

But, I think that's the biggest delta is the mileage issue.

You look at our rates.

You look at our empty miles.

You look at our insurance.

You look at everything else, we're there.

It's the productivity, and that's the hyper focus for the back half of the '11 here.

Okay.

And you had a big improvement into the third quarter last year, and I think you also had that planned to the third quarter this year.

What are the pieces?

You know, most of the companies in the trucking world, truckload world, have similar profitability on an absolute basis second and third quarter.

What are the components that could be different there for Swift?

Why would there be such a jump to the third quarter?

The third quarter in our numbers or our miles?

No, the operating ratio specifically.

The improvement from the second to the third.

Well, I think -- well, there's several reasons, but again, mileage is the biggest driver of that, you know, John.

When you look at the back-to-school and the start of the peak and so on and so forth.

That's how the year traipse on and improves quarter over quarter is those mileages.

Okay.

Last year, in the third quarter, was the first year we really started to see rates improve, so we were up a little over 3% in rates in the third quarter of last year.

We also, as I was alluding to earlier, had some insurance benefits in the third quarter of last year.

Okay.

So, improvement from the second and third is really dependent upon the economy coming back.

It sounds like the rates continue to layer in, though not accelerating.

I'm just trying to get the puts and takes here as we go into third quarter -- how we think about it.

Right

So, basically, it's the economy and some of these new business winds to see if those can lever to the bottom line

Yes, it's -- the biggest driver is volumes and rates and obviously we continue our safety campaigns and so on and so forth and watch our costs.

Okay, and then on the rate side, any difference in the success or the attitude of the shippers in the rate negotiations you had in, let's say, June versus the ones you had in April.

Given all the negative headline risk out there and what they were paying attention to -- just curious how those progressed.

Well, as you can see, we are progressing, and we're creating value for the customer.

That's our job -- is to help them see the value in the suite of services, and they are willing to pay that.

We've been paid repositioning since the first of the year.

Some months are larger than others, but customers are still looking for that quality CSA compliant carrier that can do multiple things and not be a 1 or 2 trick pony -- but to really give them a suite of services that they can sink their teeth into, and we have that, and we sell to that.

So we have had continuous improvements in that, in those rates.

So you're getting the same -- we can't see it in the numbers because of the way it would factor into the quarter, but -- you were getting the 4% to 5% rate increases in June like you were in April?

Or did that temper off with kind of the economy and anniversarying that the previous set of rate increases?

It has been pretty consistent.

Okay, great.

Thank you.

Tom Wadewitz with JPMorgan.

Good afternoon.

I wanted to ask you a couple questions.

On first time utilization, what is it that you say -- I mean, Richard, you said you're focused on that, but what is it you think would be the key to driving that miles per tractor up year-over-year?

And do you think that's likely in third quarter and fourth quarter?

Yes, I do.

And it's a potpourri of different things that we're doing.

Obviously, the freight basket has to be full across the country, and then these strategies that we're putting in place that we talked about previously, is what's going to drive that button.

That -- the one truck/one driver model piece, the targeted ETA, the driver hours, the network engineering that we discussed a little bit earlier, Tom, will definitely play a part in that, because they are focused on the head haul, back haul, the over booked/under booked markets, the rates and then the empty miles and the repositioning that our customers are paying.

So, I think all those things will help us to achieve our goals in the third and fourth.

Okay, and I think I'm the third or fourth, perhaps, to take a shot at this, but what -- when you look specifically at third quarter, do you think it's likely you would see earnings improve sequentially, or you just don't have visibility to that?

I mean, obviously the street is calibrated for that, and I still don't feel like I have a real sense of whether you think that's likely to see that third quarter versus second quarter improvement or not.

You're making the hair on our General Counsel's neck stand up.

(laughter)

I guess what I would say, if you're asking Swift's opinion, we feel good going forward in the third and fourth quarter.

There's a lot of things, exciting things we're doing internally that will help regardless if the economy, you know, is strong or less strong.

So, we're excited about that piece.

We're going to focus on those things that we can control and, obviously, Tom, you know, we need a good economy, obviously, the whole industry does, to continue to be consistent.

But, we're excited about where we're at right now.

Do you -- I guess your current look on the economy, do you feel okay about where the economy is headed?

You obviously have a lot of big customers -- is your look -- and based on what they're telling you in inventories and so forth, does it look constructive or, you know, what do you think on economy from here?

You know, Tom, we had this projected going into 2.5%, 3% GDP, and you guys see what the number is.

So it's not where we had it projected.

Coming out of second quarter to 89.2%, we felt pretty good on that, And we think that's going to continue.

Our customers are fairly bullish -- you know what our customer base is, we're very, very retail oriented and Big-Box, you see those guys numbers.

They've actually put out some pretty good numbers.

You know I think we're comfortable with the numbers going forward.

And then the great thing is we think we're taking market share in some of these consolidation of carriers with the shippers back to the suite of services that we're able to sell.

We're able to leverage that so that helps our company as well.

Okay, great.

John Larkin, Stifel Nicolaus.

If you look at some of the spot markets indices and sort of analyze some of the anecdotal evidence, it appeared that the whole economy kind of decelerated a little bit in April and May and then picked back up again in June.

Did you see it that way, or because Swift is kind of the number one core carrier for so many of your retailers, are you more or less insulated from that kind of month-to-month variability and demand?

We had, John.

April had cooled down obviously from March and then built through May -- the last 2 weeks of May were very good and then June stayed up with the last couple of weeks of May.

So, you feel the softness along with everybody else.

Maybe it's not quite as pronounced.

Correct.

Okay.

And then, as we look forward into October, I believe the FMCSA is going to promulgate the hours of service ruling.

Do you have any inkling as to what that's going to look like in terms of the number of hours per day drivers will be able to drive, what the timing of the implementation is going to be, and what the impact of that is going to be on Swift in terms of your ability to remain as profitable as you are now?

And your ability to maybe pass through any costs of those hours of service rule changes to your customers?

I think the customers are aware of these issues, and they are understanding when we're going in and talking with them.

Back to the electronic logs, we found that very few of our folks were utilizing that eleventh hour, and maybe that's why we're picking up productivity is because we're getting better at those efficiencies.

So, you know, we believe that will be a good guide.

So, it's hard to answer, you know, that first part of your question relative to what that will actually cost.

But we think we've mitigated it by being more efficient, especially in those long haul runs, you'll see some issues on solos.

But, you know, our average length of haul is 420, 430ish.

And, you know, that lends itself to not having to utilize that eleventh hour.

Richard, you mentioned that turnover was lower than, I guess, the industry average.

Have you seen an inflection point in the last quarter or 2, where the turnover has increased as driver supply and demand has tightened?

Yes, John.

It's started to come up.

We've really combated that, again, with the driver-friendly environment and the options that we're providing with dedicated, the regional, the comfort zones, those types of things, but it has risen, you know, since last quarter.

But I still think we're lower than some.

Do you plan to reveal that as a percentage or just give us kind of a directional feel?

You know, we're in the high 60%s, low 70%s, depending on the fleets.

Got it.

The fleet age --are you keeping that pretty steady?

Are there any bullets of trucks that will need to be replaced over the next, say, 12 to 18 months, that you're at all concerned about in terms of being able to bring those new tractors in to replace the old ones?

How is that going to pan out over the next year, year and a half?

Not concerned.

We've got a program in place and we'll follow that program, so we're not concerned with the trades or bringing them in.

And the idea is to keep the tractor age -- remind us -- at what level on average?

We're looking more at mileage, right?

Okay.

When we get to a certain mileage, we know where the maintenance cost really hockey-sticks, and that's where we'll trade those trucks.

So, in the event that we're bringing more miles on the trucks, then that will start to change the average age and I believe, Ginnie, the average age is still in that 3 range.

Yes.

In the 3 range.

And just a last question -- congratulations on winning that big piece of business with Wal-Mart.

That sounds exciting.

Do you at some point get concerned with Wal-Mart being too big a customer?

Are you approaching that level, or do you still have some room to run with Wal-Mart?

You know, John, we're not concerned about that.

They are obviously very, very large and they probably at least 5 separate, whole separate departments that we deal with from Sam's to the grocery facilities and, you know, they are about, what, 10%, 11% of our business.

We're not too concerned about that.

We've got a very, very strong relationship with them and, you know, despite what you hear on the street, you know, they are just a very, very good customer for us.

And they have been for 20 years.

There's a lot of trust between the 2 organizations.

The 10% or 11% will rise how far after you add in the new business roughly?

Does it approach 15%?

No, no, no.

It won't be.

No, no, no.

Not that high?

$80 million.

(multiple speakers)

Somewhere like call it 12% to 13%?

Yes.

Somewhere in that range?

Okay -- pretty helpful.

Back to John's question, keep in mind, these contracts with Wal-Mart --some are 3, some are 5, some are a year, some are a day.

So it's, it's not like, you know, overnight they're going to put everything out for bid and you lose 10% of your business.

And on the other hand, who's going to replace us with this business?

So, you know, I wouldn't get concerned on that.

We just got a very strong relationship with them, and we need them and they need us, and it's just very, very positive.

When I saw the bullet point in the slide show about an award from Wal-Mart, I was thinking that you were referring to the award you won for being carrier of the year.

Well, we got that, too, John.

And also from Sam's club, if I'm not mistaken.

That's correct.

Congratulations on that.

Yes, thank you.

Chris Wetherbee, Citigroup.

Yes, hi.

Good afternoon, guys.

I wondered if maybe I could ask on kind of the current state of business activities.

You look out as we're almost through July here coming out of a strong June.

-- just get a sense if we're seeing normal seasonality or where the trends you're seeing first in the truckload business.

Yes, I think we are.

I think we're seeing those normal seasonality trends of a few years ago when things were normal.

And, you know, so we believe it will build throughout the quarter, and we think we'll have a good 3 and 4.

We're hearing from a couple different places that we should be looking for a bit of a compressed peak.

I guess when you think about it, I know you talked about it a little bit today it on the call, when you think about, kind of the peak season and your outlook there.

Is that what you're hearing from customers?

Are customers continuing to be somewhat reluctant to get out in front of this and place orders?

Or what's your sense there and does that mean it's a little bit more pushed back into the third quarter, fourth quarter type of time frame?

It's hard to say.

I think it's going to be kind of a normal year.

We're not hearing anything different other than kind of a normal year.

I think this economy has been pretty sluggish over the last couple of quarters.

If we can get through some of these issues that we're having in Washington that, you know, we could come out a little stronger at the end of the year.

I think it's really customer -- you know, the consumer confidence is what's going to drive third and fourth quarter.

Sure.

That certainly makes sense.

When you think geographically, obviously, in the first quarter we had the weakness coming out of the West Coast.

It seems like that mostly corrected itself.

I was curious to get your sense -- did that persist at all in the beginning of the quarter but kind of turned itself around by the end -- your thoughts there?

And we still have seen weaker numbers coming out of the West Coast porch.

Just curious how that looks right now, too.

West Coast is very strong today, and we think it will continue through the rest of the year.

So we started the quarter somewhat soft there in the west, and it did turn in the quarter, to answer that part of your question.

Okay.

That's helpful.

Switching gears onto the intermodal side, just trying to get a better sense, when you think about -- I guess first from a modeling perspective, my guess would be that, from a revenue standpoint for other revenue, we should be thinking about kind of down on a year-over-year basis, but gross sequentially after the culling of the TOFC business relative to COFC business?

Yes, so we'll build that back, Chris, as we cut--

It should be relatively flat.

Model it flat sequentially?

Flat year-over-year.

Oh, flat year-over-year, okay.

That's helpful.

And when you think about, I guess, the profitability dynamic of this, you said you're through kind of getting through some of that TOFC business as it stands right now.

I guess, could you give us a sense roughly kind of the profitability levels of the business, kind of in the second quarter and maybe go forward as you think about getting rid of some of this less profitable or less attractive business on the trail-arm flat car?

Yes, we don't break that out Chris, so we can't really go through that with you.

But, again, we've culled the unprofitable situation in the TOFC.

It's not that we're not going to do TOFC.

We're going to continue to grow and look at those situations, but we don't break that out.

Okay, okay.

That's helpful.

John Barnes, RBC Capital Markets.

Real quick on just a couple of the small things.

1, on your utilization efforts, I'm curious as to what impact the new dedicated operations may have.

From a mix standpoint, it would -- my math would suggest maybe that's a negative, if I look at just total utilization, but you're obviously getting paid for that.

Am I thinking about that the right way that you're probably putting less miles on the dedicated truck and it would really serve to lower that number.

It could.

We've modeled these, some of them in the slip seat situation, as well as modeled it as a region.

So, when you look at a few facilities, it's not just the small outback, but it's more of a regional focus for them.

This one -- to answer your question on when you're growing dedicated, that's primarily the case.

In this situation, though, it's somewhat different because of the regional aspect.

Okay.

All right.

Very good.

And I appreciate the way you've given some color in buckets around where you think either merchant opportunities and utilization opportunities with truckload.

Do you have a similar type of look at intermodal, Jerry?

You clearly stated that you were a little disappointed with intermodal.

What do you think is the easiest thing to get right on intermodal that can make the quickest difference?

Well, our turns.

We've just got to get more top line going into the funnel on our intermodal, and that will push turns and push profitability.

You know, as I said, we're a little disappointed in our intermodal, I can tell you Richard and I are going to be focused pretty heavily on it over the next 2 quarters.

It's a top line issue.

We've got to get more freight going into buckets.

And is it -- this persistent weakness off the West Coast we keep hearing about, has that been what's inhibited that ability to get top line, or is it something else?

West Coast is, I don't know, 20% of the business, so that's not the main issue, that's a factor.

Early on, that was in the quarter and then obviously the west -- just to make sure everybody understands, the west is going.

It's not weak like we're hearing from you guys.

Okay, and then lastly, I guess the Ports put out a list of carriers they were asking for refunds from on some of the incentive money used to buy the clean trucks.

I think you guys made that, and I think the number was right around $1.4 million that they were requesting to be refunded.

Can you just talk to what the issue was there?

Is that a legit number, and, if so, when would that impact?

We're, we're addressing that.

There's 2 sides to every story and, you know, we're not, we're not recognizing that number.

Yes, there's no financial impact.

It would be a cash flow event if we do have to send something back, but that has not been reported as revenue or anything that would need to be reversed.

Okay, fine.

Thanks for your time, guys.

Appreciate it.

Jeff Kauffmann, Sterne Agee.

It's actually [Katya Venigradian] for Jeff.

I just had one quick question on the fleet.

Kind of curious if you could talk about what type of trucks you added to the fleet in Q2?

Are you taking make?

Make of trucks?

Yes.

We're adding Kenworth, Freightliner and Volvo.

Great.

Pretty well a combination of all 3.

Okay.

That's all I had.

Thanks so much.

CJ Baldoni, Principal Global.

Hi, thanks for taking my question.

Do you have what the, you know, the growth in loaded miles and revenue per loaded mile was on a sequential basis?

The revenue per loaded mile was 2% quarter-over-quarter.

The miles themselves, was up about -- loaded miles were up about 6.3%

6.3% and 2%.

That's correct.

Okay, thank you.

Then when you were talking about the Wal-Mart business, you mentioned that, I think, that there were 6 centers that you served, 4 of which you picked up as part of this new business.

Is there an opportunity for the other 2 distribution centers?

Yes, we actually are in 9 of the 40-some odd buildings, and we picked up 4 new ones, just to clarify with you.

So that will give us a total of 13.

Okay, thanks.

Thanks for that.

And when you were talking about the rates, you spoke about mix improvement as well.

Is that related to the, you know, the TOFC business, or is there something else that you were alluding to?

Yes, that's -- as we engineer our network, that is improving the freight mix over the road.

Is there anything that you can elaborate with respect to that -- what you're doing?

Well, we're just looking at optimizing loading where they land and looking at the head haul versus back haul markets and running those trucks into those better areas.

Okay, great.

That's all that I have.

John Mims, BB&T Capital Markets.

Good afternoon, guys.

Couple quick things.

On the utilization, if I've got revenues per truck up 4.9%, and rates up 4.7%.

So that's 0.2% on utilization, is that right for the quarter?

Is that how we should look at that?

Say that one more time.

Are you going on the year or sequentially?

(multiple speakers)

What time period?

For the quarter, year-over-year.

If you look at revenue per truck --

Yes, revenue--

He's looking at revenue per truck year-over-year.

Right, which was up 4.7%.

Excuse me, not 4.9%.

I'm sorry.

Revenue per truck per week was up 4.9% and the price was up 4.7% -- so utilization is up 0.2%, is that correct?

Yes, that's correct.

Okay, so when we look at Q3 and Q4, is that a decent -- should we see that kind of 10 to 20 BP year-over-year increase, or should that ramp up into the 2% to 3% range?

We're hoping that we ramp and, obviously, to the questions earlier, Tom Wadewitz's question, we need the economy to be strong as well and keep the basket full.

We get that done, then yes.

Okay, okay.

That makes sense.

One other question on tractor count.

You added, you know, on the dispatch trucks, there's owner/operator and company trucks brought online.

I think the number comes out to be about 104 or 105.

When you look at the company description in the 8-K, in Q1, you said approximately 16,100 units.

This quarter, it's 16,900 units.

So can you tell me where that 800 is coming from?

I know obviously all of that doesn't show up in dispatch -- just curious why there is such a big jump.

At the end of the quarter, we had about 500 new trucks that were not in service yet and we had about 400 or so trucks that we had pulled for trade.

So, there's just a lot of inflow and outflow going on right at the end of the quarter that drove that number up.

Okay.

And then just one last one.

The tax rate going forward is supposed to be 42% in 2011, 40% in 2012, 39% in 2013 is what we have.

Is that still accurate, or is there a different way to look at that?

No, that's still pretty close.

Okay.

That's all I got.

Thank you.

Chaz Jones, Morgan Keegan.

Just one quick question.

I know everybody's asked a lot of questions.

On the driver pay front, do you guys still have anything budgeted for the second half of the year?

We do.

And would that start in third or fourth quarter?

You know, we don't know yet.

So far, so good.

You know, we're working to increase our drivers W-2 pretty hard, so, as far as the rate increases go, you know, we've got it budgeted.

But we don't have a specific date or plan on when that would go into effect just yet.

Okay, great.

That's all I had.

Jack Waldo, Stevens, Inc.

Ginnie, what is the impact of the changes you guys have made to your balance sheet on, I guess, interest expense or EPS?

Right, the change in the AR facility should be about a $3 million reduction in interest expense on an annualized basis.

Okay, and then what are you guys working on, on further balance sheet deleveraging or changing of interest rates, I guess.

Right.

So, we'll pay off the $11 million, which is roughly at just over 8%, so that's a small number -- the $11 million of floating rate notes I mentioned that we're calling in August.

We also are continually looking for a repricing opportunity if the market firms up there, so, you know, that's to be determined as far as what that could be.

We will also, with the increase in the facility size on the AR facility, you know, look to pay down the term loan a little bit to save the difference between -- in the rates between the two facilities as well.

We are hoping to time that with a repricing, if necessary.

But, if the repricing market isn't there, we'll go ahead and do that later this year.

Okay.

Maybe a more general question, Jerry or Richard.

We've seen from, I guess yourself and many -- well, every one of your competitors, so far, have reported utilization figures that have been below what consensus was expecting.

And I think, you know, one thought could be that capacity's loosening in the space.

But, on the other side, you could also say that electronic onboard recorders, driver availability, and hard year-over-year comps are actually making it -- it's not a loosening of capacity, but more a reduction of supply, maybe.

What are your thoughts on that and maybe even as it pertains to your brokerage, and what you're seeing in brokerage spread.

How do you think -- how do you guys reconcile where utilization is relative to the idea -- how do you reconcile where that is relative to where true industry fundamentals are?

Well, that was about 20 different questions.

(laughter)

We certainly do not see a -- any --let me rephrase that.

Capacity is still tightening, and we see that.

So, that's not an issue.

I think we've had a little increase in our utilization because of a lot of hard work and some of the stuff -- the issues that Richard has discussed.

And we think we can continue that.

We are probably on first base with a lot of these initiatives that we're doing and, you know, it's a long process, but we're making good improvement on it.

Our brokerage is such a small part of our business, although it is a growing part, you know, it's kind of hard to measure that.

What else did I miss?

I guess the question is, if you have excess miles to drive, why don't you just lower rates and drive more miles, just fundamentally speaking?

Can you even do that?

It don't work quite that way.

It's a little more complicated than that.

our goal is to keep the revenue per mile going up.

It's not only for margins.

Our costs are going up.

So, you know, we have got to continue pressing rates up very, very hard and that's what our goal is.

And then last question, I know you guys talked about a normal, seasonal July.

I guess I'm a little unfamiliar with exactly what a normal, seasonal July is anymore.

Are your volumes or utilization, is it up over June?

Is that the new normal, or--

No.

It's just like the second quarter, right where April is less than March, and then it builds through the quarter.

It's the same kind of situation in Q3.

Okay, okay.

Thank you guys very much.

Bill Greene, Morgan Stanley.

Hi, good afternoon.

Just one quick question on EOBRs.

What percent of the fleet has them now?

I didn't catch that.

Yes, so at the end of the month, Bill, we'll have 7000 of them done, and we're putting in about 1000 to 1200 a month.

Okay, perfect.

And then one quick question on COFC.

So, I understand the issue on TOFC, but there's been quite a bit of investment in containers from a number of different parties in the industry.

How do you think about what that could mean for pricing?

Is that any risk, or how do we think about what could happen there, because I realize that's actually performed okay?

I think we're okay on pricing on it, Bill.

You know, Hunt's obviously the leader in this industry, and their pricing' s been pretty good.

We've just got a little more emphasis on it on our part and we're going to get where we need to be on it.

We just kind of falling behind on it, to be honest with you.

So, I'm not concerned about the pricing on it.

It should take care of itself.

Okay.

Thanks for the time.

And your final question comes from Donald Broughton with Avondale Partners.

I would love to get a little bit more information.

I know historically you've had a great system of driver recruiting -- driver schools.

Can you give me an update on how many schools you have that you're getting 100% of the students from because you actually directly control them, and what's that pipeline look like?

Yes, I mean, we don't have all of our schools at 100%.

We slowed some of them down during the downturn.

We haven't had to crank them to 100% just yet.

The ones that we do control, we get 100% of those -- of those drivers, obviously.

3 or 4?

5.

5 schools, but they are not all up and rolling 100%.

And are you planning to increase--

Not yet.

Not yet?

Not yet.

Yes, we're okay.

Our trucks are full and we've got 1590 drivers in the pipeline.

So, right now we feel comfortable and confident with the numbers we're bringing in and the reduction, or I guess, I should say the focus on retention.

Sure.

What's turnover running at right now?

Again, the high 60%s, low 70%s.

Okay, and if I had a sneak peek at your recruiting budget -- your advertising budget, how is that kind of evolved over the year and what do you expect it to do in the back half?

Yes, we definitely have increased and spent more.

Ginnie, I don't know if you've got the exact number, but we are up year-over-year, but watching that very closely.

So as we continue to bring these folks in, we'll moderate that.

We'll be up for the year, probably $3 million or so, but it's actually less than we had originally planned.

Very good.

Thank you very much.

Good luck in the back half.

What's that last part you said, Donald?

Good luck in the back half.

All right.

With no other questions, thank you very much, then.

This concludes today's conference.

You may now disconnect.