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Executives

David A. Jackson – Chief Financial Officer, Treasurer & Secretary

Kevin P. Knight – Chairman of the Board & Chief Executive Officer

Analysts

Jon Langenfeld – Robert W. Baird & Co.

Thomas Wadewitz – JP Morgan

Ed Wolf – Wolf Research

Donald Broughton – Avondale Partners

Chaz Jones – Morgan, Keegan & Company, Inc.

Greg [Oliver] – BB&T Capital Markets

Justin Yagerman – Wachovia Capital Markets

[Chris Thristle] – Credit Suisse

Knight Transportation, Inc. (KNX) Q3 2008 Earnings Call October 23, 2008 4:00 PM ET

Operator

Welcome to your Knight Transportation third quarter ’08 earnings conference. At this time all participants are in a listen only mode. Later, there will be question and answer session which instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded. Now, it’s my pleasure to announce your host for today’s call Dave Jackson, Chief Financial Officer.

David A. Jackson

Thanks for joining our call today. Hopefully you’ve been able to review the slides that we’ve posted on our website at investors.KnightTrans.com/presentations. Those will accompany the commentary we offer today for the result of the third quarter 2008. Our call is scheduled for one hour. We hope to answer as many questions as we can following our commentary up until 5PM Eastern Daylight time.

We would ask all call participants to limit to one question and one follow up question if needed. First, I’ll start with the disclosure. [Inaudible] disclosure on page 2 of the presentation and 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 of part 1 of the company’s annual report on Form 10K filed with the United States SEC for a discussion of the risks that may affect the company’s future operating results. Actual results may differ. I would first like to refer you to the summary on slide 3 of the presentation. For the third quarter 2008 total revenue increased 16.3% to $209.7 million.

Revenue before fuel surcharge increased by 2.8% to $155.9 million and net income increased from $14.5 million in the third quarter of 2007 to $16 million in the third quarter of 2008. Our net income per diluted share was $0.19 for the quarter, an increase of 11.7% over $0.17 per share for the same quarter last year. Slide 4 reflects some balance sheet information. As of September 30, 2008 our balance sheet continues to be debt free while our cash and short term investment balance grew to $67.5 million.

Our cash and short term investment balance has grown by $36.2 million since 12/31/07 while spending an additional $27.5 million for dividends and stock repurchase through the third quarter of 2008. The graph on slide 4 demonstrates the relationship between our generation of free cash flow and the growing of our fleet. When we are not plowing back significant cash flow in to the year-over-year fleet additions, we generate significant free cash flow.

With free cash flow calculated as net cash flow from operations less net cash used in investing activities. During encouraging freight markets we add equipment with the cash generated to self fund our growth. During less encouraging freight markets we continue to generate significant cash which positions us to repurchase shares, return capital to shareholders by way of dividends and be positioned to fund possible strategic acquisitions.

Slide 5 is a summary of our three businesses. All three of our homegrown businesses performed well in the quarter. These businesses are standalone successful businesses that complement one another and one does not benefit at the expense of another. They work in harmony with each other to leverage resources and synergies to achieve consolidated results that are greater than the sum of the individual businesses.

Knight Transportation operated at an 83.2% operating ratio. Knight Refrigerated operated at an 85.6% operating ratio. Of our 35 asset based service centers which includes the four centers opened this year, 13 operated in the 70s for the quarter and three operated in the 90s from an operating ratio standpoint. Knight Brokerage’s operating ratio was 94.6% for the quarter.

We’ll now hear from the company’s CEO and Chairman Kevin Knight.

Kevin P. Knight

Thanks for being on our call today and welcome to you. I’ll make a few comments and then we’ll open it up for questions. We continue to be encouraged by the overall growth of loads across our three businesses. If you refer to slide 6 our load count grew by 8,626 loads in the third quarter 2008 over the third quarter 2007, an increase of 5.3% and it is stronger than our year-to-date increase.

We believe we are taking more market share and we believe that our customers value our service proposition. It’s been a lot talked about what’s been happening in the market in the last five to six weeks. Let me just give you some numbers, in July not including the holiday week, we averaged hauling between all three businesses 13,252 loads. In August, with no holiday weeks we averaged hauling 13,554 loads per week.

In September, not including the holiday week we averaged hauling 13,392 loads and through the first full two weeks of October we have averaged hauling 13,465 loads. Moving to slide 7, Knight, as you know is a growth company. As demonstrated by our strong cash flow capabilities we were able to self fund our growth. We have opened 35 asset based service centers, 32 of which are homegrown starting with one truck.

We currently operate 38,000 tractors including owner operators. In addition to the growth from existing service centers we will continue to open new service centers and branches. Not only do we intend to grow and open new service centers and branches but we intend to do it profitably. Slide 8 is an illustration of our operating ratio going back to 1994, the year we went public with the corresponding fleet growth. We grow and operate our business in manageable chunks which enables us to grow profitably.

We continue to be in a prolonged difficult freight environment which began with the oversupply of tractors over two years ago and has moved in to a recessionary economic environment. We will continue to closely evaluate the truckload market as we add equipment. Slide 9 is a summary of some of the macro factors facing the truckload industry. We continue to see truckload companies fail. Most recently we have seen two large industry players file for bankruptcy protection just within the last couple of weeks.

Those truckload carriers that remain for the most part continue to downsize their fleets. The inventory to sell census numbers remain near all time lows which infer that even small increase in demand both seasonal or otherwise may have a positive effect on creating truckloads much as we witnessed in May and June of this year. Average truckload carrier fleets are old and getting older with limited financing opportunities from banks.

High quality drivers continue to be in short supply and the long awaited decline of oil prices began in the third quarter and has continued in to the fourth quarter. We’re happy for the consumer, we’re happy for our company, however it is possibly too little too late for many of our competitors. Slide 10, I’ll refer you to that, we made progress in the quarter as we worked to reduce our operating costs per mile. This slide outlines five areas we are focused on for reducing our cost per mile.

They include managing more trucks with the same resources, leveraging our Smith Systems training to improve insurance and claims costs, reducing our overall fuel cost per mile, reducing our empty and outer out miles and proactively managing our drivers to reduce our maintenance costs, fuel costs and insurance and claims costs. Slide 11 is a summary of our operating model. We’ve discussed several of these items so far today. First, we operate a decentralized reasonably located national network of service centers.

We’ve put extreme attention on our cost per mile. We have a model that is built for profitable growth. We have a culture of accountability for performance. We self fund double digit revenue growth with mid to low 80s operating ratios. On slide 12 our strategy is to utilize our low cost hybrid truckload business model to gain market share in any environment. Hybrid in this case as you know doesn’t mean half electric. We do some things centralized and we do many things decentralized.

We’ll continue to focus on improving our cost per mile. We’ll continue to open new service centers and branches and we will carefully add businesses that service the truckload market. In conclusion and before your questions I want to share some of my personal thoughts. I’m pleased with the development of our management team both executive and throughout our service center network. For some time now we’ve experienced a very difficult operating environment and I believe it has made us a better company.

I’m confident with the group of leaders we have assembled and developed that we will be successful in carrying out our strategy. Collectively we are more experienced today than we have ever been. Our asset based service center managers have been with Knight for an average of seven years with an average of nine years of industry experience. Our leadership group of 30 has an average 18 years of industry experience and 13 of those years working for Knight or with the Knight family. We believe we are the best positioned truckload carrier.

We’ll now open the call up for questions and just as a reminder we would ask you to limit it to one question and one follow up.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jon Langenfeld – Robert W. Baird & Co.

Jon Langenfeld – Robert W. Baird & Co.

One clarification in the press release Kevin, the 3.9% revenue per total mile is that with or without fuel?

Kevin P. Knight

That’s without fuel.

Jon Langenfeld – Robert W. Baird & Co.

Then on the pricing side specifically, do you think given that you have access to the spot market do you feel like maybe some of the pricing gains you’re seeing have come because fuel prices have come off and so maybe the all in price to the shipper is still lower but you’re getting better yields on the spot market because of it?

Kevin P. Knight

I would probably say no Jon. Certainly that could be the case on some loads but really the spot market hasn’t been much especially on the drive van side. We’ve had more spot opportunities on the refrigerated side but the shipper I’m sure maybe has that mindset but from our perspective I don’t think that’s what’s driven it.

I’ll be honest with you Jon, I’m somewhat surprised by that number and I was not listening to C.H. Robinson’s call but reading their call and I saw where those folks also were a little bit surprised by the strength of the pricing environment. I think from my perspective it shows you that if we weren’t in such a weak economic environment I think we would have passed equilibrium by now.

I definitely think the excess from the pre-buy has worked its way off and will continue. But, I was somewhat surprised by that number.

Jon Langenfeld – Robert W. Baird & Co.

Is there any reason why you might think you might be bucking the trend here? Pretty much every other freight provider out there from UPS down to the small truckers saw a noticeable drop off even sequentially of volume per week and it seems like you kind of moved through the process in rather stable fashion. Any thoughts on that?

Kevin P. Knight

Well, first off Jon we’re a long ways away from this quarter being over so I don’t want to come across as being overly optimistic but I just think that our model is with our people in the field and all the locations that we have, I think it just allows us to accomplish things that our competitors can’t.

I think we’re as close to the customer as we can be and I really believe that in that group of leaders we’ve got a very strong group of general managers that basically manage and monitor our network and help us to determine where the market is on a daily basis in conjunction with our people in the field. We’ve put a lot of effort in to becoming good at winning in this market. I think we’re doing a good job with our service proposition, with our customers.

We have more solutions for more of our customers now than we’ve ever had in the past. The three businesses work well together and we’re continuing to do things to kind of help them work better together. Our leadership grew but as I said earlier is just more experienced than its every been not only with the leaders close to me but also with our people leading the divisions in the field.

I just feel like there’s a lot that we have to offer to the market. I’ll also tell you Jon that I think we’ll well priced. I think that we price our service fair. I would be that the other modes whether it’s the guys with the big owner/operator model or whether it’s the guys with the big brokerage model or whether it’s some of the other truckload carriers that provide very high levels of service like we do. I just think we’re priced right. I think we’ve got a good value proposition.

Operator

Our next question comes from Thomas Wadewitz – JP Morgan.

Thomas Wadewitz – JP Morgan

What do you think about the fuel impact and then the fuel impact in the fourth quarter? Is that looking like you may get a similar benefit?

Kevin P. Knight

I would expect that based on where we are right now I would expect that we should have a favorable fuel impact. We’re only three weeks in to the quarter but based on the trend of oil prices I would expect that fuel should continue to impact us favorably probably over the next couple of quarters at least is probably what I would guess. Of course Tom, I’m assuming that the price of oil continues to go down which I happen to think that it will. I would say that we will probably continue to benefit from fuel over the next quarter or two.

Thomas Wadewitz – JP Morgan

I know that visibility is difficult [inaudible] but if you look out to 2009 and you assume that you’ve got a couple of quarters of recessionary type demand and then maybe you get a little bit improvement in the second half, do you think there’s an opportunity for you to maintain flat margins and put up a little bit of earnings growth? Or, do you think that ends up being pretty difficult to do if you do have a recessionary environment for a few quarters?

Kevin P. Knight

I think Tom we should be able in 2009 to do better than we’ve done in 2008. Now, things may be worse than I recognize. I have to throw that out there because I just don’t know but, based on where I sit today and where we are as a company, I would certainly hope that yes we can improve our earnings in 2009 and I hope to be able to continue to grow our fleet.

I think you’ll see a little bit of additional fleet growth in the fourth quarter, probably not much. We should finish the year operating more trucks this year than we did last year by 50 or 100. Hopefully, we can improve upon that this next year depending on what happens to the competitive environment. We could lose a lot of capacity here as we move in to the first quarter.

I think this capital restriction thing is probably bigger than people recognize as far as for people to get financing of their old equipment, for people to get financing of their licensing, for people to get financing of their insurance policies. I just think it’s going to be very challenging in this economic environment for those things that typically happen in our business to happen. I think the cost of factor receivables will be much higher. I just think there’s a lot of challenges there for people in our industry that rely on financing.

Operator

Our next question comes from Ed Wolf – Wolf Research.

Ed Wolf – Wolf Research

Did I hear that right with Tom that the goal is 50 to 100 trucks in fourth quarter?

Kevin P. Knight

Well, not 50 to 100 in fourth quarter. I said we should finish the year up 50 to 100 trucks from where we ended last year Ed. So, we should add a few more trucks this quarter maybe between 25 and 50 and that should put us up for the year. It should put us really close at getting back if not to where we were before we parked the 200 trucks in fourth quarter of last year and first quarter of this year. Hopefully, we’ll even be a little bit ahead of that number but I don’t know for sure.

Ed Wolf – Wolf Research

In terms of the revenue per loaded mile up 2.7%, on second quarter’s call everybody was very optimistic that things had really tightened in June and July. It seems like you carried out that plan. You’re showing it and everyone else backed off of getting the rate and went back flat.

What’s your guess when we look at fourth quarter and first quarter and we look back over the next couple of quarters assuming that we’re in a recession, so things don’t get better they get worse give or take, is 2.7% the right number? Is zero the right number? Is 3.7% the right number? How should we think about the direction of that?

Kevin P. Knight

Well, I would say Ed from my perspective I would be very cautious on thinking of 2.7% just through the fourth and the first quarter. But, I would have told you that I wouldn’t have expected that in the third quarter based on no real seasonal uptick like we thought we were getting in to as we exited second quarter. So, I would probably be more cautious in the fourth and first quarter and then probably about the same, hopefully we could do the same in the second quarter next year but probably remain somewhat cautious.

Then hopefully in third and fourth but, I’m a little hesitant to say that because I think I said hopefully in third and fourth about year ago. We’re just going to have to see how it all plays out.

Ed Wolf – Wolf Research

Is it safe to say from a pricing perspective, I mean it feels like when demand finally comes back there’s going to be some pricing to go get. The longer we go the harder that’s going to be, the more pricing we’re suddenly going to see one day. But, is it really demand? Supply keeps coming out but demand keeps going [inaudible]. So it feels like it’s demand that’s going to flip this switch at some point. Is that a fair way to look at it?

Kevin P. Knight

I would say so unless the supply gets worse than the underlying economy. I think the supply was becoming worse than the underlying economy and then the economy kind of took a double dip. I don’t think we’ve slowed down losing supply I just think demand has weakened. But when you think Ed about what low gas prices are going to do for the consumer especially as we get in that $1.50 to $2.00 a gallon range, that puts a lot of money back in the consumer’s pocket and much more than any stimulus package that our government will ever come up with.

I’m feeling like fuel kind of helped us get where we are as far as the economic environment and I think it’s certainly going to help get us out of this struggle. Anyway, those are my thoughts.

Ed Wolf – Wolf Research

Have you seen the used truck market start to move again in the last eight or 10 weeks? And, what do you see there in terms of pricing and buyers. It feels like there’s more buyers recently, are you seeing that?

Kevin P. Knight

I wouldn’t say Ed that we’re seeing more buyers. I would say that the used equipment market continues to be from our view very challenging. We’ll have to see what lower oil prices do in that particular market. But, I think it remains pretty tough Ed.

Ed Wolf – Wolf Research

How much are you seeing a typical three or four year old truck down year-over-year?

Kevin P. Knight

Not significant Ed for us. I mean, we’re probably down maybe 5%, 6%, 7% on that value. But, not too significant.

Ed Wolf – Wolf Research

Last thing and I’ll let someone else have it, on the west coast ports, how is that test going and what’s the plan there?

Kevin P. Knight

Well, we’ve operated in the west coast ports for every year that we’ve been in business. We continue to do it. We’re taking a little stronger position there over coming months and I would say we’re pleased with our progress there. It’s a tough, operationally its very challenging and it’s very difficult but I would say that we see opportunities there and hopefully when Long Beach and LA officially put their charges in to effect by us having clean trucks and that charge not applying it should be positive for us in the marketplace with our customers.

Ed Wolf – Wolf Research

What’s the timing of that and how much do you get per truck? Is that once a year? How does that work?

Kevin P. Knight

Well, the port of LA and the port of Long Beach told us it was October 1st but it hasn’t happened yet. It probably will go in effect sometime in the month of November and it’s $70 per load.

Ed Wolf – Wolf Research

So every time you pull in with a load there’s a $70 rebate of some form?

Kevin P. Knight

No. When we pull in with a load whether it’s export or import, whether it’s outbound or inbound to the country, our customers based on our fleet of clean trucks, I should say 2007 EPA trucks they will not be charged the $70 by the ports.

Ed Wolf – Wolf Research

So it just gives you an advantage over the truck who’s not compliant?

Kevin P. Knight

That’s correct.

Ed Wolf – Wolf Research

How many trucks are you going to put to this?

Kevin P. Knight

Well, we don’t know Ed. We’re hoping that it can be 200, 300, 400, is what we’re hoping overtime but like we do most things we’re going to be very, very deliberate about it and make sure we build a good business. Then, if we build a good business we won’t have to worry about how big we are, we should be able to keep going.

Operator

Our next question comes from Donald Broughton – Avondale Partners.

Donald Broughton – Avondale Partners

Let’s delve down in to the numbers a little bit. You’ve struggled with the insurance and claims line especially last quarter, you really had a big push back and really your historical load numbers if not slightly below. If you can kind of give us some color on what exactly are the moving pieces there?

Kevin P. Knight

Well, I think for us Don we’ve talked about discipline a lot in our company the last few quarters. I really believe that our people now understand what discipline means and what discipline management mean and what discipline choice means. So, from a management perspective I think our team is doing a very good job of making sure that there’s progressive discipline in that particular part of our business.

I do think though Smith Systems has also been a big part of that and it’s defensive driver training that each and one of our drivers we hope will have received by the time we finish up in the first quarter of 2009. I would say Don just the disciplines in other parts of our business are making sure that we have probably a better group of driving associates as a whole. That’s basically what I relate that to.

We’ve been working on this for a long time. It hasn’t seemed like we’ve really been able to deliver the results but we have seen things that are indicative to us and that’s why I’ve been talking about it on not only this call but the prior calls that I really believe there’s an opportunity for us to show success here. So, I expect for us to be at or near these types of numbers going forward based on the training and the discipline that I see now in our business.

I’m optimistic you know Don that this isn’t a one-time event. I think we’ll continue to improve in this area over time.

Donald Broughton – Avondale Partners

That’s encouraging to hear because I’ve modeled you for years to be around $0.07 a mile so as it ticked up to $0.075 a mile and higher obviously it was troubling to you as well as worse to everyone else. This [inaudible] you fell all the way back to $0.06 a mile so you’re telling me that you expect it to be well below $0.07 a mile for the foreseeable future.

Kevin P. Knight

Yes. I don’t know if the right description is well but we expect for it to be below $0.07 a mile in the future is how we feel.

Donald Broughton – Avondale Partners

You’re bringing up your driver training which dovetails in to the next thing I’d really love to hear you talk about which is there’s been continued pressure on that salary and wages line on a per mile basis. Is that still more a function of the brokerage headcount that you’re adding or is it that we’re actually spending more money on the driver training? Exactly how is that? That’s one of the lines that’s sees continued pressure.

Kevin P. Knight

I would say Don that certainly brokerage could have effect on that. Developing our management group certainly has an effect on that. We’ve certainly have got a business now that can handle significantly higher revenues as far as the infrastructure that we have built. I think there’s probably a few things there. Certainly, the way our compensation package works is as we shorten our length of haul it increases the compensation per mile to our drivers and as we lengthen the length of haul it decreases that.

Donald Broughton – Avondale Partners

That’s one of the other moving pieces?

Kevin P. Knight

Yes. That could also have a slight effect.

Operator

Our next question comes from Chaz Jones – Morgan, Keegan & Company, Inc.

Chaz Jones – Morgan, Keegan & Company, Inc.

I just wanted to quickly ask you about the temperature control side of the business. It looks like you guys have made some considerable improvement there over the last 12 months. I think if memory serves me right you guys were probably running closer to maybe a 93 OR and I was just wondering if maybe you could get some better visibility on what’s driving that improvement?

Kevin P. Knight

Well, I would just say Chaz when we started the refrigerated business over four years ago we really had great success up through the first 100 or 150 trucks. Then we got real smart and we decided we needed to go out and buy a company and we thought we were so smart we decided to go out and buy another company. Right as we were buying the other company the world kind of turned on us a bit and really the two acquisitions made it difficult for us to be as successful in that business as we would have liked to.

Now, that we’re gosh I think we’re not quite two years we’ve had an opportunity Chaz to really work on those two businesses as well as growing our other business. We’ve opened in Dallas and we’ve opened in Memphis and we’ve now opened in Columbus. We’ve had good openings. I mean Columbus is a little early so let’s not get carried away there yet. But certainly we’ve done pretty well.

Actually Greenbay was part of the Edwards Brothers acquisition. We’ve just really Chaz had time to work on it if that’s a fair statement. We’ve also got a year or two more experience under our belt. Our management team is becoming more experienced there and so it’s just a lot of things. I’m really glad that we’re in that business. We still don’t have it working quite as effectively as the dry van business but we’re sure trying hard Chaz.

Chaz Jones – Morgan, Keegan & Company, Inc.

The improvement is impressive and you’re getting darn close to being there on the dry van side. Maybe just a quick follow up, do you see any relief in terms of the owner/operator losses any time soon? Is that something that we should expect that is going to continue to come off pretty dramatically? I know we’re getting closer to being on a pretty small base here but I was just wondering your thoughts there.

Kevin P. Knight

Well, one of our goals this last year was to grow that group but we had no idea that fuel prices were going to play out like they have. I think that as fuel prices come down it puts us in a much better position to increase our owner/operator fleet both by taking market share in that area and also maybe doing some things to help create owner/operators like some of our competitors do.

If fuel prices stay down which I think they will, I will be very disappointed if we aren’t at the bottom and if we don’t start to improve that going forward. With lower fuel prices, of course we’ve got to have the freight and we don’t have as much of that as we’d like to have but it should put us in a situation where we should be able to do better there. We’re working hard in that area just to stay where we are. It’s a little bit frustrating.

But basically I do think that we should be able to improve upon that next year. The caveat to that is just as long as fuel prices stay low. And, I shouldn’t say stay low, get low.

Operator

Our next question comes from Greg [Oliver] – BB&T Capital Markets.

Greg [Oliver] – BB&T Capital Markets

Just a few quick questions, I just wanted to get a feel for how the acquisition market was? And, since fuel came down a little bit maybe you saw less people come across your desk throughout the quarter or can you compare that to last quarter?

Kevin P. Knight

Well, I would say Greg it’s kind of more the same. We certainly try – again, that’s been another goal of ours this year was to be successful in doing something there and we just haven’t got the job done there. But, it isn’t for lack of effort I can assure you. But, I think it’s just been very difficult with fuel where it is, with the used equipment market where it is, there have been many challenges in that regard.

But I think as fuel prices go down and if we can work our way through kind of this difficult freight environment over the course of the next two or three quarters I believe that we’ll success there. Probably not anything in the next quarter or two but certainly maybe sometime later next year we would hope. But, as far as numbers of opportunity, the numbers are still about the same as far as our effort in that area, still about the same. We just haven’t been successful Greg.

Greg [Oliver] – BB&T Capital Markets

One quick follow up, can you refresh me if you have a current buyback plan?

Kevin P. Knight

We do.

Greg [Oliver] – BB&T Capital Markets

How much is left there?

Kevin P. Knight

Not much.

Greg [Oliver] – BB&T Capital Markets

Are you just opportunistically kind of chipping away at that?

Kevin P. Knight

We have been active with regard to our buyback. I believe we were active in the first quarter, we’ve been active in the third quarter and we’ve been active in the fourth quarter.

Operator

Our next question comes from Justin Yagerman – Wachovia Capital Markets.

Justin Yagerman – Wachovia Capital Markets

Have you seen any change in shippers behavior in the last couple of months as fuel has started to come down? I’m just curious. We’ve heard about more [milk] runs and maybe pull distribution as fuel started to go up and I’ve been trying to ask this question on a few different calls. If we’ve seen the opposite reaction as fuels come down? If you’ve started to see any change in behavior there or loosening up on rates? Just anything discernable from that angle?

Kevin P. Knight

I mean not really Justin that we say is a trend. Certainly, all of our shippers have various strategies in order to improve their cost of delivery so there’s never a day that doesn’t go by where opportunities are presented before us as a result of those initiatives. I believe that it’s actually from a bid perspective it’s been very quite. There are one or two large shippers that are actively going through a bidding process that we won’t really comment any further on. But, it’s been fairly quiet on that front. I haven’t seen really Justin any noticeable changing trends.

Justin Yagerman – Wachovia Capital Markets

I imagine real estate is getting a little bit easier to come by out there? You guys like to buy real estate when it makes sense. Are you thinking about expansion plans for next year? Are those opportunities coming about through the LTL guys going out of business potentially or the ones that have already may afford some sites you can turn in to a TL terminal? What are your thoughts on that? Do you have any cities earmarked that if you found the right terminal you’d try to open up in ’09?

Kevin P. Knight

Justin first up I’d say real estate being soft helps us and we’ve certainly found some opportunities this year that we’ve been able to acquire facilities to open or even just acquire facilities where we were leasing otherwise or renting otherwise. Next year is the same as the last year or two. I mean, on the refrigerated side we’ve got our next two or three cities targeted. On the dry side we’ve got our next four or five cities. On the brokerage side we’ve got our next three or four cities targeted.

It will just be a matter of working through that process as we move in to the first part of the year. I would imagine that you’ll see similar openings this coming year as what you saw this year would be my guess.

Justin Yagerman – Wachovia Capital Markets

As we get in to ’09 and closer to 2010 are you guys catching any engines yet? Any thought on your fleet plan and kind of if you were to handicap what kind of fleet ads you were going to do next year do you have any thoughts on what that looks like?

Kevin P. Knight

Well, I would say yes we are testing 10 product and have been for a number of months. It doesn’t seem to be anything earth shattering there. We’ll continue to buy equipment in ’09 as we have in the past with all cycles and it will be our intention to buy equipment again in 10. We’re hoping to grow our fleet next year and hoping that we can keep building upon what we have and we’ll just have to see how that develops.

I would say Justin I would hope that we could get at least a couple of hundred trucks worth of growth next year and maybe it’s a little less than that, maybe it’s a little more than that. We’ll just have to kind of see how the year plays out.

Justin Yagerman – Wachovia Capital Markets

Then lastly because I’ve completely not respected your two question rule unfortunately, the cap ex for this year and next year any thoughts on that?

Kevin P. Knight

I would say next year would be maybe a little bit more than this year would be our guess today and I don’t know where we’re going to end up this year. Dave?

David A. Jackson

We’ve basically planned on a low 80s number, low $80 million for net cap ex. Between that and $100 million at least from today’s vantage point is what ’09 would probably look like. We’ll certainly know more as we get in there and as the market develops.

Operator

Our last question comes from [Chris Thristle] – Credit Suisse.

[Chris Thristle] – Credit Suisse

Can you give me an idea as to the timing and expansion plans for the brokerage business? I saw there on slide 7 that you’ve got 12 service centers targeting upwards of 70. What’s the timeframe around that growth plan?

Kevin P. Knight

Well, you know Chris we don’t really have a specific timeframe. Again, for that it’s developing people, it’s developing a market so it’s strong enough to support that brokerage. We do not have a specific timeframe. As I said earlier we would hope to open maybe three or four locations next year. It could be a little more than that, it could be a little less than that. I would expect for it to be in that three to five range.

[Chris Thristle] – Credit Suisse

And a three to five year range, what percentage of the business do you think brokerage would be in terms of revenue?

Kevin P. Knight

Well gosh, that’s hard to say. We certainly hope that it’s more than it is now. Probably, maybe 10% to 15% would probably be a realistic goal based on the way we do brokerage and the way we built the rest of our business. If we could be in the say 12% to 15% range I think that would be very good for us.

[Chris Thristle] – Credit Suisse

Then just one question on fuel, if I compare the fuel surcharge revenue with your fuel expense [inaudible] in the third quarter was the smallest that we’ve seen since the first quarter of ’06. Is there some catch up benefit there or because of the lag in surcharge? Will it stay quite that tight in Q4?

Kevin P. Knight

Chris, there is and as you know it’s really worked against us for the last couple of years. We finally had one quarter where it’s worked for us. I would say that probably as these prices work their way down in to the low $2 and hopefully the high $1 we should continue to see benefit there.

Operator

I’m showing no further questions at the moment.

Kevin P. Knight

We appreciate all the interest from everybody. We’ll get back to work now. Thanks. Have a great day.

Operator

Ladies and gentlemen this does conclude today’s presentation. You may now disconnect.

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Source: Knight Transportation, Inc. Q3 2008 Earnings Call Transcript
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