Knight-Swift Transportation Holdings Inc. (KNX) Q4 2008 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and thank you for your patience. You’ve joined the fourth quarter 2008 earnings release call for Knight Transportation. (Operator instructions) I would now like to turn the conference over to the host of this conference, the CFO of Knight Transportation, Mr. Dave Jackson. Sir, you may begin.

Thank you, Latif. Good afternoon everyone and thanks for joining our call today. Hopefully, you’ve had a chance to review the slides that we’ve also posted in addition to our press release today. Those slides that will accompany this commentary that we offer today are available on our website. The actual web address would be investors.knighttrans.com/presentations. Our call is scheduled for one hour following our commentary we hope to answer as many questions as we can up until 6:15 Eastern time. We would ask call participants to limit to one question and one follow-up question if needed. First I’ll start with the disclosure. I would refer you to the disclosure on page two of the presentation. I also read the following: This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions and uncertainties that are difficult to predict. Investors are directed to the information contained in item 1A risk factors or Part 1 of the company’s annual report on Form 10-K filed with the United States SEC for discussion of the risks that may affect the company’s future operating results. Actual results may differ. I will cover some of the numbers in detail including a brief recap of the four-year results; I’ll then turn the call over to Kevin Knight after through with the discussion. First I’d like to refer you to the summary on slide 3 on the presentation, for the fourth quarter on 2008, for the revenue, decreased 6.3% to a $174.8 million. Revenue before fuel surcharge decreased 5.5% to a $143.6 million. We operated an average of 19 fewer trucks during the quarter compared to the last year’s fourth quarter, and while revenue for total mile improved as a result of the 9.3% decrease in average length of all (ph).…

Well, thanks Dave and I appreciate you guys being on the call today and this is a little different for us trying to have our call right after the earnings released, but we feel like this is a better way to do it. We’re also going to spend a little more time with our prepared remarks than what we have in the past, due to the reason of making sure that shareholders that are interested in owning our business have an understanding of how our business works. Sometimes, I think we can be confused or it can be confusing if you try to keep track of how all these different transportation business is worth. I’ll refer to Slide 5 next. The fourth quarter was certainly a challenging trade environment what we have become somewhat accustomed to not seeing seasonally peaks. The sharpness in the fall-off of economic activity late in the quarter was unprecedented. Price competition was capped, but the industry continued to rationalize. We saw more curious (inaudible), many the large fleet continue to downsize and there are a good number of carriers I’m sure were on the ropes. In that regard, I can’t help but feel that the longer and tougher this is, the better it would be for the surviving carriers. As Dave mentioned, despite the challenges we were able to grow our operating income and net income at double digit rate in the quarter. Profitability in the quarter was helped by falling diesel prices, our own initiative to reduce cost and the flexibility of our decentralized business model to adjust and to adapt the market condition. With fuel prices climbing rather steadily over the couple of years, it took a big deal of internal disappointment to not succumb to short term fixes and by that I…

Yes, sir. Thank you. (Operators instructions) Our first question comes from Tom Wadewitz from JP Morgan.

Hey, Tom.

Hey, Kevin. Hey Dave. Let’s see thanks for the slides that was very helpful and well put to get the presentation as helpful to -- and if you go to the story and drivers. I want to get your sense, I guess, first (inaudible) and feel and in terms of what is within the quarter, what is efficiency if you can (inaudible) that out cause perhaps that would ongoing? And how if you have gallons of fuel paid, something like that. First, is what was the timing benefit and then on the surcharge and I have one follow-up.

I would say when you take all things into consideration Tom that we control. I would say that probably a double digit is the stock with draw, maybe in the 10% to 15% range, and I would say the balance would come as a result of fuel. Now when you look at fuel on our income statement, one of the things you have to recognize is that in purchase transportation we pay our brokerage carriers. There are fuel surcharge and our own operators their fuel and that goes out on the purchase transportation line that the actual fuel charge gets the credit that do our fuel surcharge lines. So it’s not the easiest thing to understand and sometimes it understates fuel a little bit in terms of true percentages. I think the other thing Tom, when you look at fuel, we are fuel cost if we’re doing a good job should be roughly 10% to 11% give or take. So, when you think about things -- last year we had fuel prices that were overstated, (inaudible) sales were overstated, but higher than they should have been. This year we have fuel prices that are lower than they should have been. And awfully, that number probably belongs in that with the amount of purchase transportation that we have in that 10% to 11% range is what I would say.

Okay, great. That’s helpful. And I guess that, to follow on is it just your view on the bid season that sounds like this fanatic pace with a bit activity going on and what do you think that this ability to capacity reduction comes in quickly and opt to avoid the reduction in wage or what do you think that, you know maybe have to take some pains for a little while on lower rates before that capacity rationalization really start to benefit you.

Yes. I would say we expect it to be a robust big season. You know, I’m an optimist and so I tend to look at these bids like based on our diversified base of customers and the fact that no customers more than 4.7% of our business. I tend to look at them as so, you know, there’s probably a lot of opportunity in those bids for us. We have a, what I would call a very refined process in working these trade opportunities in our business and so, you know, I’m sure in some cases, we’ll lose some, but I’m sure in some cases we’ll gain some. As far as the overall rate structure, I expect that it will be competitive and if things will try to get a little worse Tom, before they get a little better, whether that’s 1% or 2%, or 2.5% or whatever that number ends up being, I wish I had a crystal ball that could tell me. Yes, I think it’s gonna be active, I think there will be a some pressure on cost early in the year and that’s how I see it. I hope that helped.

Yes, that’s very helpful. Thank you for the time.

Okay. Thanks Tom.

Thank you. Our next question comes from Justin Yagerman of Wachovia.

Hey, Justin.

Hi, how you’re doing Kevin?

We’re doing great.

That’s good to hear. When looking at fleet management in the quarter and as we moved on to’09, I’m just curious when you started taking tractors off the road in the quarter. Did you wait awhile or was it kind of that’s more constant throughout the quarter? And then as you’re looking out and reading your (inaudible) in’09, you know, what are you looking for to potentially start adding some capacity back to the fleet and give you the confidence that you want to start putting some more trucks out there and I guess conversely, what would get you to take more capacity off the road? And are you doing that now in January?

Well, I would say Justin, the answer to your question is we started taking equipment out late in the quarter. And basically when things dropped off in November and December in our utilization, we could see was worsening. That’s’ when we started taking equipment out. We really haven’t stopped. We took some out in the fourth quarter and we’ve also taken maybe 75 or 100 trucks out in the first quarter and we’re going to watch it there for awhile and kind of see where this thing takes us. Within another three or four days we’ll be able to compare January to January and certainly it’s health for us to take that equipment out. I wouldn’t expect Justin, that we would add anything until we probably get in to the May, June time frame. We kind of wait and see what happens around the beverage and produce season and when I say that I’m saying is as a whole. Well, probably Justin the – I mean as we’ve looked at this we’ve taken more capacity out of our drive end fleet. We’ve not taken any (inaudible) out of our refrigerated fleet and certainly we’re growing our import/export drage (ph) fees. But when you look at the whole conglomerate, I would probably say you might look for us to go negative by up to a 100 trucks in the first quarter and it could be a little bit more, could be a little bit less. Then probably you don’t stand the holding pattern at least in February, March and April would be my guess as far as growth and then – and I just hope for the best.

Got it. That’s really helpful Kevin, thanks and when I’m thinking about this drage (ph) business that you guys are building out, there was an article I think in the Orlean Times recently about the incentives that were being giving out and there were problems with the, I think $20,000 per truck that were supposed to be allocated. Is that something that excused the returns in that business? Is that a problem that you guys are encountering or is there a work around on that and how do you see that the eventual returns on that business as compared to kind of Knight as a whole?

Yes, we really haven’t encountered for any of that. We didn’t receive any of that in the fourth quarter, Justin. So, we’re expecting for the ports to fulfill their promises to us. But I got to tell you, even without that we like the way we’ve been received over there. And then we have some of our current customers, but several new customers that it’s really allowed us to develop a relationship we had. The word on the street is that the fees gonna start being charged in February and for trucks that aren’t as environmentally sensitive as ours, and so I would expect that if that happens, if we don’t have another start or stop, I would expect that should help that business as we move in to March, April, and May. Certainly with the Chinese New Year, and I understand they have extended it. February is gonna be, probably a difficult month for that business, but you know, it’s not being that we haven’t dealt with before, and we’re basically trying to grow or try to take market share through this more difficult times.

Yes, is there a significant cross-sale opportunity there that you’re starting to experience or –?

Well, I would just say yes. I mean, certainly we’ve picked up customers that are now using our drive-end service that hadn’t in the past from that particular shipping occasion. And certainly we’ve leveraged the customer base that we have in order that, you know, when business in the ports. So, yes, it’s these big businesses that – these truckload businesses that we start, they all tend to help each other.

Thanks a lot Kevin. Great shape, the call.

Okay, thank you, Justin.

Thank you. Our next question comes from Chris Thristle (ph) of Credit Suisse.

Hi Chris. How are you? [Chris Thristle: How are you?

Good. [Chris Thristle: You know, I apologize if you’ve covered this, but what’s the scope of this opportunity that porterage business? How big is it? How big do you think it would be? What kind of capital you’re putting into it?

Well, I’m being creative. It probably has the potential to be a pretty solid business. I think probably, our initial target is probably in the $40, $50, $60 million in revenue opportunity and probably would most of that coming from the Southern California ports. I think, though, you know this initiative moved the way up the coast and also as they moved their way down the other coast. I think there will be opportunities for us just because we have a click driver-based. We build the focus team ship lines. We’ll have people on the West Coast, they’ll have their things to tell people on the East Coast. I look at it like I would expect this business sold the course the next two to three years. They probably grow in somewhere in the probably $50 to $75 million range and it’s gonna be interesting Chris to see how serious everybody who drives these drage (ph) gets about really cleaning up the air. I mean, when you look at where we are from a truckload perspective, we’re way ahead of the ports and the rails and all these other different modes of transportation in terms of what we’re doing as compared to where we were to enhance the environment. And so, just kind of depends on how it catches on. I would say probably, the next most environmentally unfriendly place for a port would probably a rail yard and it's going to be interesting to see how long the cities and towns really put up with that. So I think as long as the environment remains important and as long as we do a good job and build these customer relationships, Chris, I think it'll be meaningful. The other thing I would like to highlight is it's also asset–wide. I mean it's a business that basically we don't have to provide the trailer and so from that perspective, we do have to provide the truck, but from that perspective, it makes the return on capital much more favorable on the same type of operating ratio. So we like it for a number of reasons. [Chris Thristle: Any environmental angles, is that just because you have newer sort of postal 7 trucks (ph) trucks?

Well, yes and I don't think it's just kind of newer postal 7 trucks. The fact that we're competing with trucks that– I remember running when I first started at Swifts (ph 00:31:22) so I mean there's such a wide gap, Chris, as far as even the '03, '04 models that we've ran. Then you go to the '07 models and soon we'll be adapting the '10 models and it is most of that dredge (ph 00:31:41) work is being done with very old equipment. [Chris Thristle: Okay. The second question, what's your participation or your view on the dedicated service (ph) market. Is that something that you plan to get into in greater level?

Well, we probably do, Chris, between probably $50 and $60 million worth of dedicated business on an annualized basis already. And I wouldn't say it's something we plan to get into any more than we currently are. Certainly there's not a week that goes by that we're not working on something and we'll continue to do that and I think the business that we have, good business for us, it works for our customers and our service centers like it, too. And it lands on their P&L and they’re the ones that manage it and so I would expect that we'll continue to look for ways to grow that business over time. [Chris Thristle: Okay, thank you very much.

Thank you, Chris.

Thank you our next question comes from Chris Stapacolo (ph) of Damon Rhode (ph). Your line is open. [Chris Stapacolo: Good evening, gentlemen. I was just wondering if you could comment on the OR for the reaper (ph), it was below dry vans, they are seeing less capacity out there in the reaper market, anything special happen there?

Say that again, I missed your question. Go ahead. [Chris Stapacolo: The OR for reaper or refrigerated, below that of dry vans for the quarter? Are you seeing any less capacity in the reaper market, or did anything special happen in the quarter?

Nothing really special. That's a business that we got in in 2004 and I think everybody on the call here probably felt we were crazy and they certainly heard at least a thousand experts tell them how stupid we were, but I would say that nothing special happened in the quarter from a reaper perspective. We bought two reaper carriers that were underperforming, one in '05 and one in '06, and it’s taken us a while to really get that business operating delay that we felt like it could operate. So I would just say for us in the third quarter we did very well. In the fourth quarter the moon and the stars aligned for the way we run the reaper business and so I would say that we would expect for the reaper business going forward to be very competitive in terms of dollars with our dry van business, so it’s a business we grew last year. We didn’t do an acquisition last year, but we grew it internally by I don't know, 15, 16, 17% and we plan to continue that growth in that business. [Chris Stapacolo: Okay. Could you comment on so far as you see any attractive acquisitions in the current marketplace?

It’s been a little bit challenging there. One of the difficulties is with the used equipment and you saw this with our minimal amount of gain on sell (ph) being as challenging as it is. It's difficult to find a candidate that doesn't owe more on their equipment than their equipment is worth. And to also in this type of an environment, there just aren't that many truckload businesses performing well enough where the owner will feel good about what we would be able to pay them. So I think it's going to be a little bit challenging in that area probably for at least the next couple or three quarters until the limited amount of new trucks sells and kind of catches up with where the used equipment market is. So it's probably going to be tough to find something that can work here in the short-term. [Chris Stapacolo: Okay. Thanks for the time.

Thank you.

Thank you. Our next question comes from John Larkin from Stifel Nicolaus. Your line is open.

Hey, John.

Hello, Kevin. How are you?

Hey, we're good.

Good. I was wondering with your particular operating model not being as your regular route as many truckload carriers where you're as I understand to try to basically connect the dots between your service centers not be all things to all people, but essentially have cut holes running in both directions, it would seem to me that it puts you in a position to do more company fueling at your service centers. Is that a fair assessment?

John, yes, that's a fair assessment.

And with that having been established, given that in the second half of 2008 there was a pretty good spread between the wholesale price and the retail price with surcharges are tied to the retail price would seem to me that a carrier such as yours might have pretty good tailwinds during a declining fuel price environment.

Yes, John, I don’t think there's–

Is that true?

Yes, that's true.

Would you care to quantify how much that helped you?

Well, I think, John, when you look at normal fuel, if you look and say it should be somewhere between 10 or 11% and we were shy of 7%, it probably helps us probably 3 or 4 points on our OR is about what I would describe it as and that's one of the reasons, John, our numbers are acceptable in this very difficult environment. And so there's no question that fuel was a significant benefit for our business. In the last year (ph) of '08 and really we had just the opposite of that throughout all of '07 and throughout most of '08, so at least the first seven or eight months. So it’s good to have a quarter where it works for us. I still wish we could become a mode of transportation that could get fully compensated for our fuel and all in all that's difficult to do, but certainly this quarter, it worked in our favor.

I hear you. That's very helpful. And then my second question relates to this very intriguing port business. I agree with you, it could be very large. It could grow into the (inaudible) dredge (ph) business which would be very complementary to what you're doing now. I had a chance to hear Jimmy Hoffa (ph) speak about a year ago, it was quite interesting and amongst his top three or four priorities was the organization of the dredge business in and around the ports of L.A. and Long Beach (ph). I'm sure you've probably–

Right.

And I know you've been out in that operating world for a long time with a much smaller operation than you aspire to here over the next few years. How do you cope with that kind of a threat especially with maybe a more pro–labor administration in Washington?

Well, I would say, John, certainly every new opportunity there are challenges that have to be managed. I would say we cope with it the same way we have over there thus far and we give our drivers a good truck, a truck they like and a job they like and we get home on a regular basis and we communicate with them and stay very close to them and I think that if we do a good job of managing our drivers and making sure they feel like a part of our team then I think we'll be good. We're also, John, going to have owner- (ph) operators as part of our solution through our dredge fleet and our port (ph) fleet and so I think we've got a good plan. I think we have to stay close to it. I think we have to manage it very well, but we're– I don't want to say we're not overly concerned. I mean I think the opportunity outweighs the risk if there is some.

Have the economics of that business helped dramatically by the $20,000 per truck payment?

We really haven’t looked at it that way, John. We’ve looked at this business as though it has to stand on its own and so as we look at this business, we don't plan to get to the low to mid 80s OR as a result of the assistance that we should be receiving from the Port of L.A. So certainly that won't hurt it, but basically that commitment by the port of L.A. to those fleets who are actually going out and buying the equipment is probably a much better deal than what's been proposed to address the clean air issue in other ways. So certainly it will help over time through the end of the fourth quarter. We haven't received any of those monies and so basically what you see so far is just a pure (ph) operation, but we've gotten into that business not because of that.

I really appreciate you taking the time, Kevin. Thank you.

Okay, thanks, John.

Thank you. Our next question comes from Jon Langenfeld of Robert W. Baird. Your line is open.

Hey, Jon. You there, Jon?

Sir, please make sure your line is in mute and lift your (ph) speaker phone with your handset. Jon Langenfeld – Robert W. Baird How is that Kevin?

Hey that's good we can hear you, Jon. Jon Langenfeld – Robert W. Baird Sorry, my headphone ran out of battery.

Okay. Jon Langenfeld – Robert W. Baird Alright, so just following up on that fuel side, would it be your expectation that if fuel stays where it's at, you kind of get back to the 10 or 11% range in the first and in the second quarter?

We certainly believe that we could be south of that in the first quarter, Jon and we're really too early to tell where that's going to land, but we certainly would probably expect to be south of that and then maybe as we work our way through the end of the year, middle to the end of the year then in the next year, that's where were hoping that it will settle. Jon Langenfeld – Robert W. Baird And south of that because of the wholesale, retail lag?

Well, not so much the wholesale, retail lag. I mean we've had– what everybody has to understand is we've had it when retail is less expensive than wholesale and so it can change very rapidly and we've actually seen some significant changes since the end of the fourth quarter going both ways and so I believe that number one, you have to recognize, Jon, that if we only recover 80% of the total fuel that we should recover through the surcharge program, anytime you're leading off (ph) of a lower base, I mean that gives you some pick up there irregardless of what happens to wholesale or irregardless of what happens to surcharge lags. So I think that there's kind of three things that affect it. One being surcharge lag, one being the difference between wholesale and retail and one being the fact that you're just $2 to $2.50 a gallon less and your surcharge is only being not recovered on 2.25 a gallon instead of 4.5 a gallon. Jon Langenfeld – Robert W. Baird Okay, good, good clarification. And then just one clarifying point on Page 8 of your presentation. Does that load count include all modes including (inaudible)?

Yes, it does, it does, Jon. Jon Langenfeld – Robert W. Baird Okay, okay. And then that kind of led into my next question just in terms of the pricing. Can you talk a little bit about (inaudible) pricing went negative again in the quarter which isn't surprising given the environment, but can you just talk about kind of where the sources of pricing pressure is? Is it spot market or is it also contractual business and then maybe the magnitude of it?

Well, I would say first off, Jon, our pricing did not go negative. Our utilization went negative and our length of haul went negative, so– Jon Langenfeld – Robert W. Baird Yes, that is right.

But really our pricing did go negative based on the amount of length of haul, we had to shorten to maintain basically what we had, but as I look at it, Jon, from our perspective, the spot market was nonexistent. In an environment such as this, basically our customers' transportation management teams and systems go through a selection process in most cases the sophisticated shippers to basically call out who gets that freight and much of that is done electronically. So we really don't see that part of the spot market because we just end up not getting the load tendered to us or we get the load tendered to us. Now certainly when a person calls with freight today, our quote is going to be less than what it was in May or June of last year because we have demand, but for us the spot market is we look at it as though it's nonexistent and our live quotes certainly are a little more aggressive in this environment than they would be when supply and demand is in balance. So did I answer your question? Jon Langenfeld – Robert W. Baird Yes, I think so and the length of haul, I can appreciate that part, but I mean the revenue per loaded mile, you got a number of different factors going on there. I guess at the end of the day what your saying is that there is some pressure on the pricing overall.

Oh, no question. No question, Jon, yes. Jon Langenfeld – Robert W. Baird And you'd expect that to kind of or I would expect that I guess to continue given the environment, but your existing contractual business, do you see them coming back to you and asking for further rate reductions?

Well, you know what, it really depends. Some will, some won't. Some will bid, some won't. Some will just pick up the phone and ask, some won't. It's all over the map and the good thing I think, Jon, about our business that I want to emphasize is we have a very good team that we rely on to make those pricing decisions and all three of our businesses work together, soon to be with our dredge business, and I guess it already is four, but the fact of the matter is I think we're well set up to do as good as we can, but I would expect that we'll see some pricing pressure and probably the first opportunity for relief there will probably be in that May–June timeframe, Jon. Jon Langenfeld – Robert W. Baird Great. Thanks for the color.

If we get any. Jon Langenfeld – Robert W. Baird Yes, good luck. Thank you.

Okay.

Thank you. Our next questions comes from Ed Wolfe of Wolfe Research. Go ahead.

Hey, Ed. [Tim Deloyer: Hey, Kevin. This is Tim Deloyer (ph) in for Ed. How are you?

That's good, go ahead. [Tim Deloyer: First, can I ask about how utilization and pricing trended throughout the quarter by month perhaps?

Well, I would say it kind of trended how you would expect both of them, a little more pricing competition in November than October, and a little more in December than November, and we'll probably see a little more in January than December, more on the utilization side than on the price side in November and December, Tim. [Tim Deloyer: And you said that pricing net of the shorter length of haul was still up for the fourth quarter, did that go negative in December?

No, the pricing was positive, but due to the length of haul falling off significantly as it did, as far as I'm concerned pricing was negative. [Tim Deloyer: Okay, good. If adjusting for the shorter length of haul is pricing even in January still positive year-over-year (ph)?

I don't know. I don't know. I mean there's a chance that it will be, but to be like truthful, I don't have the answer to that question, Tim. [Tim Deloyer: Okay.

One follow up, okay. [Tim Deloyer: In guidance for CapEx for 2009 and (inaudible) respect to–

Tim, we haven't decided yet what we're going to do as far as new openings (ph). By now we usually have the first one or two on the map, but we haven't got there yet and then what was the other part?

CapEx.

CapEx, I would probably model similar to 8 (ph) and I don't know exactly what that was.

80.

About 80, Dave is telling me. [Tim Deloyer: Okay.

Okay? [Tim Deloyer: Okay. Thank you very much.

Thank you, Tim. Latif (ph), we need to keep going here for a minute. We've got some people that haven't had a chance to ask a question, so I want to make sure we get to them, so keep going here.

Thanks a lot, sir. Our next question comes from Todd Faler (ph) at Key Bank Capital.

Hey, Todd. How are you? Go ahead. [Todd Faler: Kevin, I'm doing well. Thanks for the extra time. Hi, Dave.

Hi. [Todd Faler: Kevin or Dave, if you wouldn't mind, I know you guys are doing some things internally to improve driver safety. Insurance and claims were a little bit better than what I would have anticipated here in the quarter especially given some of the newness of the programs. I was wondering if you could talk about it, if there was anything unusual in that line item and then how some of the internal issues are progressing and what to expect on the expense side going forward.

I would say, Todd, that really we've been working on this stuff for a long time and it seems like it's finally starting to get traction. I mean we started talking about our insurance and claims (inaudible), I don't know maybe two years ago and it just didn’t seem like we could get there and as a matter of fact, in many months we were plus five and even plus six. So I would just say, Todd, we talked about (inaudible) systems. We we're driving more accountability out to our drivers and out to our safety folks in the field. Each one of our service centers has a head of safety. I would say that our head of safety here and his team are doing an effective job of better integrating into our operations both refrigerated, dredge and dry vans and so I just think it's been a lot of effort. I don't think I can sit here and promise you that it'll always be (inaudible), but certainly we believe we have a chance for it to be. In this world of high deductible, the way it works, we could have quarters where we weren't so successful as we would hope to be, but certainly we hope to stay in that full range, plus or minus a half and certainly we accomplished that for the last couple of quarters. [Todd Faler: Okay, good and then that's helpful and then there wasn't anything unusual though from an (inaudible).

No, no, no. [Todd Faler: Okay, good. And then just for a follow–up here and I know it's getting a little bit late, but taking a could of tractors out of the fleet here again in the first quarter, are there other class that you have to take out from the organization to match up to running a smaller fleet? If so, how quickly can you adjust some of those costs given taking tractors out here (inaudible) near–term basis?

Yes, it lags. It lags, Todd, there's an inefficiency period, but certainly you've got trailers that have to follow (ph) and then you have head count, there's and various other things that have to follow and you always hope that that's going to work through attrition (ph) on its own, but yes, there's other things that have to happen, it's just a little more fixed cost on the overall group because we're not into shutting down facilities and so when we tend to downsize, we tend to take from markets that aren't performing as well as they should. So it takes a while and so there's some inefficiencies that go with that downsizing your fleet just like there are some efficiencies you get from upsizing. Okay? [Todd Faler: Yes, that's helpful. Thanks a lot guys.

Okay. Keep going, Latif, we've got a few more.

Yes, sir, our next question comes from Chaz Jones of Morgan, Keegan.

Hey, Chaz.

Hey Kevin. Hi Dave. Thanks for taking my question. Maybe just a point of clarification on the dredge. Kevin, you had talked earlier I think on the call and had mentioned a $40 to $60 million opportunity there. Is that indicative of a 50,000 loads per year or is that kind of a multi–year target?

Yes, that's more of a multi–year target and keep in mind we've thrown (ph) that very rapidly in the fourth quarter and that's the annualized basis that we're currently operating at. In order to get to those numbers, Chaz, that number has to at least double and –

Okay.

– maybe even triple, but I think that it can.

And I guess the point of clarification as well is does the dredge that – will those be blended in with TL (ph) or will those just kind of – that that revenue be separated out?

Yes, it’s going to be blended, but we'll try to give color as that business develops so that you guys at least understand what we’re doing.

That was great. Thanks for the time, Kevin.

Yes, okay. Thank you, Chad. We've still got some more, Latif, so let's keep going.

Yes, sir. Next question comes from John Barnes of BBT.

Hey, John.

Hi, Kevin. Hi, David. Good afternoon. Real quick one, your comment a moment ago about adjusting cost to a smaller fleet and that type of thing. Looks like most of this year you've been running kind of closer to a mid $50 million run rate on your labor cost whereas last year you were closer to $50 million. Do you see head count adjusting enough to kind of get back into that $50 million run rate especially given the weaker freight (ph) volumes and is there actually a specific effort in place at reducing head count right now?

Yes, we should, we should, John. It may not happen overnight, but we should. We didn't have the best quarter as far as Workers' Comp is concerned and so our claims development there wasn't as favorable as what we would have hoped and of course that's in that same line also, but no, our goal is to be in that $50 million give or take and we're a little bit too much on the take side this quarter, John, I think that we can do better there.

Okay. And then secondly in terms of the refrigerated business I mean (inaudible) competitor put up a pretty nice number, it seems like bad business has maybe stabilized a little sooner than the dry van business has, even your temperature control business in the quarter was better than your dry van. Looking at that, I mean would you be inclined to maybe get a little more aggressive in '09 in your investment in that business maybe new investment in dry van and all of your effort on the temperature control side?

Well, we could, we could, John. We like to give everybody a chance and what you have to understand is within the dry, my gosh, we had I don't know 21 facilities that operated in the 70s between dry and reaper and so it's kind of hard to shut those guys out and so I mean I would say though, John, it’s a reasonable thought that we would bend ourselves a little more to putting more into the reaper business this year than the dry, but that isn't really quite how it works in our business, but yes, I think that's a good thought and we grew the reaper business last year and our goal is to grow it again this year.

Okay, very good, nice quarter, Kevin. Thanks for your time.

Thanks so much. I think we still have a couple of more, Latif, so let's keep going if we can.

Yes, sir, Donald Broughton of Avondale. Your line is open.

Hey, Don.

Hey, Kevin. Thanks very much that we're still in the time so we could all talk and ask a question. Appreciate it.

Okay.

I'm always accustomed to you using cash to continue to grow a fleet. It's kind of interesting to see downright explosion in free cash (inaudible), you’re saying that about 80 million, 79.8 is what has been on that CapEx in '08, that's probably a decent target for '09. Maybe you can walk us through, maybe this is maybe a better question for Dave, a lot of moving pieces here, I'm looking at free cash, '08 versus '07 really you would multifold at 2.4 times as much free cash were generated. I know the amount of fuel surcharge coming down helped boost that. What were the other moving pieces and is this what you got, I come up with 61 million of free cash for the year? Is that a sustainable amount until you turn the growth tap back on?

Yes, I think that is. If you mentioned to me fuel certainly helped us in that regard and has helped us in the back half of '08, but if we're not freshening the fleet – we're not adding to the fleet I should say, and then we're just freshening, keep maintaining our (inaudible), yes, I think that's a sustainable number. And really what it does, Don, is it gives us the ability to build cash and use it and (inaudible) the way we think is most effective, which may be acquisition, maybe share buyback, and maybe dividends.

You had more brokerage, I guess I should also expect that to expand as well.

Absolutely, yes, that's cash that need to be reinvested in asset.

How close are we to break it out brokerage rev as a separate line item?

We're not there yet.

We're probably a long ways away, Don.

Alright. I'll let someone else ask a question. Thanks again.

Okay, thanks for your support. Okay, keep going, Latif.

Yes, sir. Next question comes from Charles Rapinski of Maxim Group (ph). [Charles Rapinski: Yes, guys, good evening, thanks for extending the call.

You're welcome. [Charles Rapinski: I just had a quick question on the driver turnover and if you might have any comments on what your salary expense as a general, as a whole would be over the next couple of quarters and how driver turnover is trending given the way the economy is moving, if that going to be of any help over the next couple of quarters?

I would say that certainly the good news about the economy being south is people are more inclined stay with what they have and we expect that line item will not be inflationary and so I would expect, Charles, that what you should see as long as our revenues stay about the same here, I would expect that you should see that salaries, wages and benefits' number be $50 million, give or take. [Charles Rapinski: Thank you very much. I'm just going to hold the follow up and let someone else get a chance. Thank you.

Okay, Latif, do we have any others?

Actually, sir, I show no further questions at this time.

Okay, we sure appreciate you all being with us. Appreciate your commitment to our company. And we'll see you next quarter if not sooner. Thank you.