Swift Transportation's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.28.14 | About: Swift Transportation (SWFT)

Swift Transportation Company (NYSE:SWFT)

Q4 2013 Earnings Conference Call

Jan 28, 2014, 10:00 AM ET

Executives

Jason Bates - VP of Finance and IR

Jerry Moyes - CEO

Ginnie Henkels - EVP and CFO

Analysts

Operator

Good morning. My name is Regina and I will be your conference operator today. At this time I would like to welcome everyone to the Swift Transportation Fourth Quarter and Year-End 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. (Operator Instructions). Thank you.

I would now like to turn the call over to Mr. Jason Bates, Vice President of Finance and Investor Relations Officer. Mr. Bates you may begin the conference.

Jason Bates

Great, thank you, Regina. We would like to welcome you all to Swift Transportation's fourth quarter and full year 2013 Q&A session. As a reminder we have posted a comprehensive letter to stockholders, summarizing our results on the front page of our IR website.

We’ll start the call today with forward-looking statement disclosure. This call contains statements that may constitute forward-looking statements, which are based on information currently available, usually identified by words such as anticipates, believes, estimates, plans, projects, expects, hopes, intends, will, could, may or similar expressions which speak only as of the date the statement was made. Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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 annual report, Form 10-K for the year ended December 31, 2012.

As to the company’s business and financial performance, there are many factors that could cause actual results to differ materially from those in any forward-looking statements. You should understand that there are many important factors in addition to those discussed and in our filings with the SEC that could impact us financially. As a result of these and other factors, actual results may differ from those set forth in the 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.

In addition to our GAAP results this call also contains certain non-GAAP financial measures as defined by the SEC. The calculation of each measure, including a reconciliation to the most closely related GAAP measure, and the reasons management believes each non-GAAP measure is useful are included in the schedules attached to our letter to stockholders.

So with that out of the way, I would like to recognize the members of Swift’s management team on the line today. We have Jerry Moyes, our Founder and Chief Executive Officer; Richard Stocking, our President and Chief Operating Officer; and Ginnie Henkels, our Executive Vice President and Chief Financial Officer. Again my name is Jason Bates, and I will be moderating today's Q&A session.

We appreciate all the questions that were submitted prior to the dead line last night. Similar to quarters past we have categorized them and we’ll do our best to provide detailed responses to each one. To the extent you have additional questions, feel free to reach out to me after the call. So with that, we’ll start off the call today with a couple of questions on rate and volume trends.

Question-and-Answer Session

Unidentified Analyst

So starting out on rates can you discuss how Swift's bid season with customers works? Namely when does it begin and is there a bellwether customer that sets market expectations for pricing? Can you elaborate on this subject for each of the asset-based businesses truckload, dedicated and intermodal?

Unidentified Corporate Participant

As we've discussed in the past our bid season isn't confined to any particular quarter but generally lasts all year long, the volumes of bid activity is typically a little heavier in the first quarter and with each sequential quarter the bid volumes become slightly lower than in the past, so first quarter is obviously heavier than fourth quarter.

However the bid activity is relatively even throughout. There is not a bellwether that sets the market expectations and every customer is unique. Finally these patterns are relatively consistent across our various reporting segments. With that said I think Swift and the industry did not do a good enough job last year in getting price increases and I can tell you that we're focused on doing a better job this year in this line of price increases and we think that Swift will benefit from this going forward.

Unidentified Analyst

Great, how has 2014 started off in terms of demand and spot market pricing?

Unidentified Corporate Participant

Yeah, good morning. As we've discussed in the past we don't really participate in the spot market. However we do participate in repositioning of our equipment for our customers at a cost. And that has continued to be meaningful in January. Demand has been reasonably strong as well for January. It has been the weather issues in the Midwest and the East that has hampered us to take full advantage of that booking.

Having said that three weeks does not make a quarter. We would like to see a better balance of demand across the network. However we're cautiously optimistic about the demand trends at this point in the quarter and we are likewise encouraged by the implication that has on rates.

Unidentified Analyst

Can you quantify the impact of repositioning on rate growth and deadhead percent in your truckload segment in the fourth quarter? What is deadhead expected to run in the full year 2014? Can you provide thoughts on the truckload pricing environment in the fourth quarter of 2013? The released commentary seems to indicate you received pay repositioning but empty miles were also up. Did the empty miles associated with the project work more than offset the paid repositioning?

Unidentified Corporate Participant

All right. There are a lot of questions in this one. First we can and do quantify the impact of repositioning on our various metrics but it is not a figure that we disclose at this time. Having said that we do make a point to ensure the repositioning revenues are sufficient to cover our cost when we need to make these types of moves for our customers. And yet the empty miles would be up since we count those as miles that are empty which would increase our deadhead and reduce our loaded miles per truck week.

However an offsetting benefit is accounted or in our rate per loaded. Finally we begin to see an increase in demand for this type of move from our customer for customers in the second half of 2013 and we expect that trend to continue throughout the year as we are already seeing it in the first few weeks of January.

Unidentified Analyst

The 2014 pricing guidance of 2% to 3% for truckload is essentially flat from 2013 yet the commentary in the release suggests a stronger freight market in 2014 how likely is it that rate improves year-over-year for Swift?

Unidentified Corporate Participant

As I mentioned previously demand has started out pretty strong in January. However, if volumes continue to strengthen and are sustained for a meaningful period of time than we could have additional opportunities to increase our truckload rate per mile above the 2% to 3% guidance provided in the letter to stockholders. A lot of it will depend obviously on the macro economy and what kind of consumer spending or demand environment we have through remainder of the year.

Unidentified Analyst

So there were several questions on volumes. The first one what demand drivers would you need to see improve before beginning to add incremental capacity to your network above the guided capacity growth? How much further improvement is needed in either freight volumes or pricing in order to justify further capacity in your network specifically. Can you elaborate on this subject for each of the asset base businesses?

Unidentified Corporate Participant

All right, good question. We've been focused on utilization for the past couple of years now and we've made substantial improvements. But the great thing is we still think we have major room for improvement. We have several departments and strategy teams and initiatives centered around improving the utilization of our equipment.

Improved utilization is a key metric for us because it allows our drivers to take home a bigger paycheck and provide our stockholders with higher return on their investment. As a result we have plans in place to grow our business without sacrificing our utilization. We're very disciplined in this metric but we'll adjust that if we see a stronger than expected freight and rate environment.

For our dedicated segment we'll adjust our truck count based on our ability to win incremental business while maintaining our internal guidelines for our profitability in this line of business.

Unidentified Analyst

We have seen pretty encouraging macro data points since December suggesting a potential freight inflation this year, have you seen the tighter market so far in January? How is demand trending so far in the first quarter? What are your expectations for the rest of the quarter?

Unidentified Corporate Participant

Well internally we have seen some positive signs in trends for the freight volumes in the quarter with the first few weeks of January being relatively solid. However due to seasonality January is typically a softer market and is not necessarily a good indicator for the rest of the quarter but we are optimistic about the quarter and the outlook for 2013 as we talk to our customers and obviously have seen a couple of good things so far this year.

Unidentified Analyst

Is weather having much of a negative impact on volumes and/or cost in the first quarter? Are you receiving compensation for deadhead as a result?

Unidentified Corporate Participant

Winter conditions can cause a lot of problems with service, utilization, deadhead, maintenance and safety. This is true for each of our lines of businesses that we have to travel in and through those areas. Any time we see these winter conditions it impact freight from those locations, to those locations and obviously through those locations and so it does have a disturbance on our overall network. We work diligently to mitigate these impacts but it is sometimes unavoidable. We have seen these weather related issues continue into this first quarter but we will need to see how the rest of the quarter plays out before we can tell if the weather will have more of an impact this year than last. Compensation for deadhead is more of a function of market imbalances rather than just the weather.

Unidentified Analyst

What does guidance assume for the truckload segment utilization improvement in 2014?

Ginnie Henkels

We expect the new hours of service rules to be a headwind on our loaded miles per truck through the first half of the year but we’re still targeting year-over-year improvements. We anticipate the improvements in utilization will be tempered in the first half before accelerating in the second half.

Unidentified Analyst

Should management expand on the 300 owner operator fleet to join the company in the fourth quarter along with additional customer revenue? Was there an acquisition price paid for this addition? Did the addition also secure new customer contracts? How did the margins compare to the legacy truckload business?

Unidentified Corporate Participant

We’re really happy to have them onboard. I believe this is a great opportunity for Swift. We’re working diligently with them to bring them up to speed and they’re extremely excited about the knowledge, the experience, talent and professional drivers that they are contributing and that add to our culture. They have a great customer base and several customers that we have not worked closely with them in the past. We’re excited to work with these customers and hope to build on the high level of service and products that they are already receiving.

At this time we haven’t given any specific details about the transaction and the specific profitability around the fleet and the customers but I will say that we, this new relationship is a win for the drivers, win for the employees, win for the customers and a win for Swift. We are looking at this as kind of a test case and if successful which it has been so far we believe that there is numerous other companies out there that can follow this pattern.

Unidentified Analyst

Great. In the truckload segment how attractive are these owner operator fleet additions? Is the 300 truck addition included in the 150 to 200 unit growth outlook for 2014? Are there opportunities for additional owner operator fleets of similar size and should we expect these deals to be smaller going forward? Is there any opportunity in refrigerated?

Ginnie Henkels

Yeah, to be clear the 150 to 200 truck growth will be from the beginning of 2014 through the end of 2014. So not a year-on-year average comparison. Since all of these owner operators are the 300 fleet that we’re talking about joined our network at the end of 2013 they are not counted towards the truck growth guidance for 2014. This type of owner-operator addition like Jerry said can be beneficial to all parties involved and we believe this to be the case. Before we do these transactions we look for the right fit in the right areas with the right customers and we hope to do more of these transactions in the future and think there is plenty of opportunities out there for both drive-in and refrigerated.

Unidentified Analyst

Do you have any concerns about the owner operators’ utilization?

Ginnie Henkels

It’s not true in every situation but our experience has been that the owner operators are typically professional drivers that know what it takes to be successful. As a result they tend to have high utilization with many of them running as teams and mentors. However some owners are -- own their truck outright and want to work less. That affects our utilization to some extent but we welcome them into our fleet because they are still accretive to the overall earnings and help to improve our return on that asset.

Unidentified Analyst

Many of your peers experienced strong truckload trends in the fourth quarter and you described the truckload environment and Swift experience in the fourth quarter and what might have been the drivers if any differences from what has been written about other carriers from the analyst community.

Unidentified Corporate Participant

Yeah I don't believe our experience was much different than what many of our competitors are seeing. I think we might have had tougher year-over-year comps. We had some headwinds including weather and hours of service that impacted our utilization and some market imbalances that impacted our deadhead but overall the freight environment was strong. We were also in the middle of adding several new dedicated fleets, integrating our new owner-operator fleet that we just talked about as well as moving forward with the Central acquisition.

But keep in mind we had an amazing four quarter last year and we were on our way to beating that this year, unfortunately insurance expense worked against us this year and that cost us $0.06 of EPS. Without that we would have ended or exceeded last year but we’re very optimistic about the future. We have several new pieces of business already in the pipeline for 2014.

Unidentified Analyst

Weekly revenue per tractor fell in your dedicated segment significantly in the fourth quarter of ’13. What was the primary cause of this? Was it related to mix change from 250 new units, you expect the trajectory of revenue per tractor to improve sequentially in Q1 of 2014 or over the course of the full year 2014?

Unidentified Corporate Participant

Yes, some of the drop was due to lower utilization of trucks during the initial startup phase of new contracts and some of the change was due to a change in business pace. Each contract has unique requirements that could potentially hurt this metric without negatively impacting the profitability, but in general we would expect this metric to improve over the course of 2014. Dedicated business has been extremely positive for us in the second half of 2013 and we expect this trend to continue this year in 2014. We have several new opportunities in the pipeline. In fact our pipeline is very robust and we hope to win and implement over the next few months.

Unidentified Analyst

In Central’s full year 2014 expected growth of 200 units more likely to come from dedicated or transactional customers? How will this impact deadhead and revenue for tractor?

Ginnie Henkels

We anticipate growth in both areas. The new specialty business that we brought on in 2013 has a lot of ancillary services and a shorter length of haulage drive and much higher revenue per tractor. It also has a higher deadhead percentage. As a result some of the increase in the deadhead and improvement in revenue per tractor is due to the addition of this business in the second half of 2013. So I would expect a stronger a year-over-year improvement in revenue per truck in the first half of 2014 as well as the higher deadhead percentage.

Unidentified Analyst

You provided intermodal revenue excluding fuel surcharge guidance. Any color on the other segments? Truck growth looks like it will be ahead of our expectations across all divisions. How should we be thinking about deadhead in the truck load revenue per loaded mile and deadhead at Central Refrigerated? And then in dedicated clearly this is where you will be adding the most trucks. What kind of revenue for tractor should we expect?

Unidentified Corporate Participant

Okay we touch on these a little already in some of the letter, but this it might help to recap this. In truckload we expect 150 to 200 truck growth from the beginning to the end of 2014 with a 2% to 3% improvement in rates with tempered expectation for utilization improvement especially in the first half of 2014. For dedicated I already mentioned that we’re extremely positive about the new customer awards that we have picked up since mid-2013 and continuing into 2014.

As a result we expect 350 to 400 truck growth over the year. Weekly revenue per tractor improvements will be a function of the new business but we expect improvements in this metric as well. For Central we expect roughly 200 truck growth which would equate to a 10% growth in trucks. We would expect revenue to follow similar growth depending on the growth mix of dedicated and OTR.

As we mentioned during the acquisition we believe that we have several customers that want us to make a significant jump into the refrigerated over the road business. We have recently been awarded some new refrigerated business that is beginning to yield the fruit of our labors and we are very positive about additional prospects in 2014. So we’re very optimistic about it.

Unidentified Analyst

Can you elaborate on freight volumes from a geographical strength and weakness perspective, also from an end market perspective? Can you elaborate on this subject for each of the asset based businesses, truckload, dedicated and intermodal?

Unidentified Corporate Participant

Yes, we’re experiencing typically -- typical seasonal softness in the West Coast and some up and down markets all along the West Coast and in the Texas. The upper mid-west and the East Coast have been very strong thus far. Intermodal has been following these similar trends. Our dedicated business is not as seasonal and it’s been fairly steady.

Unidentified Analyst

What specific plans or strategies are in place to drive better utilization throughout the network over and above what was accomplished during 2013? Can you elaborate on this subject for each of the asset based businesses Truckload, dedicated and Intermodal?

Unidentified Corporate Participant

Yeah for strategic purposes we do not disclose specific strategies but I will say that these strategy teams work together to identify the most impactful ways to improve the lives of our drivers, improve the utilization of our equipment and improve our ability to control our cost, improve revenue, lower deadhead, refine processes, improve accountability, reduce downtime et cetera. It’s a very long list.

We are very excited about the teams we have in place and the new initiatives that they are working on for 2014. Much of the improvements we have made over the past years and especially with regards to utilization has been a result of the efforts of these teams. So we believe that, that will continue.

Unidentified Analyst

Great. Thank you. There were also several questions about volume specific to Intermodal, so we will get into some of these. Given Intermodal's 2014 revenue guidance of 15% will likely be entirely driven by load growth. How much overall improvement from normalized 2013 bubble should we expect in 2014 given improved density in the network? Is it safe to characterize the current domestic Intermodal price environment as more challenging than drive-in and truckload.

Unidentified Corporate Participant

Yeah we are very excited about the profitability improvement potential on this line of business over the next couple of years. We do not provide specific annual profitability for our reportable segments. However we expect our adjusted operating ratio to be in the mid to low 90s over the next couple of years. Regarding pricing the Intermodal market is relatively similar to the truckload market with regards to the competitive nature of the bids as well the key drivers for improvement. However we expect the rate increase potential for Intermodal in 2014 to slightly trail that of truckload.

Unidentified Analyst

How burdensome were the rail service disruptions? Would part of that be in fourth quarter of 2013? And are you seeing incremental loads diverted to truck during January given the Chicago congestion?

Unidentified Corporate Participant

Yeah. Rail service disruptions always present a challenge for the Intermodal providers. We did experience disruptions in Q4 which caused us to lose some of those volumes. In January there have been additional weather related disruptions in the mid-west that have adversely impacted our Intermodal volumes. However that poor weather has also impacted the truckload business. So it’s difficult to determine at this point whether there has been a shift in volumes from Intermodal to Truckload.

Unidentified Analyst

What were your expectations for growing the Intermodal fleet in 2014?

Ginnie Henkels

As we mentioned in the letter we don't anticipate adding containers in 2014 but are confident in our ability to continue to more efficiently utilize the equipment we already have, increasing the turns and better covering our fixed costs. We have had several customer awards over the past few months and should be able to achieve the 15% growth this year without needing to add equipment. If we continue to experience market success that warrants purchasing incremental containers we will be prepared to do so.

Unidentified Analyst

You guided for revenue growth of 15% in Intermodal and also stated you can grow container volumes by 10% to 20% before needing to add equipment. How do you breakdown that revenue growth between TOFC, COFC and Intermodal rates? When do you begin lap the easy comps on the TOFC volume growth losses you have experienced over recent quarters?

Unidentified Corporate Participant

We have specific growth objectives for COFC and TOFC and rates increases. However we do not provide that level of detailed guidance at this time. Having said that our COFC business is by far the largest portion of the overall Intermodal revenue with TOFC being a much smaller piece of the pie. So lapping the lower volume of TOFC quarters will not be materially impactful.

Regarding rate increases, as I previously mentioned although we do expect the opportunity to be positive in 2014 but we believe that will be somewhat modest.

Unidentified Analyst

What was the constraint on COFC growth in the fourth quarter of 2013? And do you expect volume to re-accelerate to the 10% to 20% range in the first quarter of 2014 given adverse weather conditions?

Unidentified Corporate Participant

As we said previously the service disruptions presented a challenge for us in Q4. Additionally we are extremely focused on insuring the freight we choose to move Intermodal it was done so profitably. We didn't want to increase revenues and volumes at the expense of the bottom line.

Regarding our expectations to increase 10% to 20% in 2014 that confidence stems from our recent customer wins, the time and energy recently spent in providing additional training to our sales organization combined with our new found ability to more heavily pursue refrigerated intermodal opportunities.

Unidentified Analyst

On the third quarter earnings call you guided for the intermodal top line growth of 15% to 20% in 2014 but now you are guiding to approximately 15%, what drives the lower expectations for growth?

Unidentified Corporate Participant

You have an astute attention to detail. Honestly I don't know that we intentionally were lowering the guidance here. You know we’re targeting a 15% growth and are hopeful to exceed that.

Unidentified Analyst

Do you see an increased customer interest conversion to intermodal in fourth quarter given tighter truckload market?

Unidentified Corporate Participant

We believe declining truckload capacity will be an increasing challenge for shippers and therefore as we have seen and expect to continue to see a growing appetite for truckload conversions to intermodal. We’re well positioned on both sides of this coin and we’ll pursue the route that best services our customers need.

Unidentified Analyst

So there was a question on operating ratios and margins. Can a company provide 2014 operating ratio target by business segment, truckload, dedicated, central and intermodal?

Ginnie Henkels

Unfortunately we do not provide specific margin guidance at this time. However we have just completed our detailed annual operating plan process for 2014 and each of our lines of business have been tasked with improving operating ratio and has created specific plans on how to accomplish that. Each of the LBUs will have some challenges to overcome but we believe that we can achieve our internal target. Also keep in mind that due to the changes in business mix and the lower margins associated with asset light businesses it is possible to improve our operating ratio for each line of business that show an overall higher consolidated operating ratio.

Unidentified Analyst

There were several questions about equipment that we summarized. The first one was related to CNG trucks. How has the performance of the CNG trucks been and are there any plans to order more?

Unidentified Corporate Participant

It’s a little early to qualify the performance of the natural gas trucks. We just started taking delivery of them in latter part of fourth quarter and will receive the majority of the 200 throughout 2014. We don't have any current plans for additional CNG equipment. Although it’s early we’re very pleased with the performance of this equipment and the fuel economy. Just want to point out that as already stated we have bulk CNG at our facility in Houston, Texas and we’ll be having bulk CNG at our Mira Loma facility in approximately March. So these trucks will be running kind of the Texas triangle as well as California and Arizona.

Unidentified Analyst

Great. What accounts for the expected drop in gain on sale of equipment in 2014 from 2012 and 2013 levels? Was there something specific about the equipment over the last two years that made it advantageous to sell but maybe the dynamics have changed in 2014? Would you consider the 2014 expected level a normalized run rate?

Ginnie Henkels

The gains are reflective of the amount and type of equipment traded, the used truck market at a time and our trade agreements with the OEM. In the fourth quarter of 2014 we sold more tractors than originally anticipated and the gain per unit was higher. The strong demand could have been driven by the expiration of the bonus depreciation at the end of 2013 but that’s pure speculation on my part. We really don't have exposure into the drivers of demand for used equipment. We are expecting the volume of trades to be down in 2014 from 2012 and 2013 and in addition the type of equipment we will be selling is changing and thus we are not anticipating as much gain in 2014.

Unidentified Analyst

What is your outlook for driver wage inflation in 2014?

Unidentified Corporate Participant

Our goal is to remain focused on improving our drivers W2. As we previously mentioned we have several of our strategic focus teams that are centered around improving the lives of our drivers, which also includes allowing them to take more pay home to their families. We believe these initiatives are a win for our drivers, our customers and stockholders. Additionally our driver ranking program is working. We are rewarding the right behaviors and our drivers are motivated to move up the ranks. We also believe we’re making positive improvements in this area but are constantly evaluating customer pricing, markets and trends to make sure our pay is in line with the market.

Unidentified Analyst

There were several questions about various different expense line items that we will jump into now. The first one, is there anything specific to any individual operating expense categories to consider for 2014 that maybe characterized as unusually high for any given year?

Ginnie Henkels

Equipment cost meaning the depreciation and lease expense associated with our equipment will be the highest, the biggest cost headwind in 2014 similar to 2013. We do expect some offsets in maintenance and fuel to help compensate for that but that will be the biggest increase.

Unidentified Analyst

And refresh my memory, is workers comp in salaries, wages and benefits or other insurance and claims?

Ginnie Henkels

Workers comp expense is included in salaries, wages and benefits.

Unidentified Analyst

What costs are expected with the integration of the system at Central Refrigerated?

Ginnie Henkels

We will have travel cost, additional equipment per mile et cetera, costs to consolidated facilities and then the disruption and downtime associated with the actual systems change and move our facilities. We are doing everything possible to avoid disruption and downtime with our drivers and to avoid turnover and we've been successful in this so far. But the biggest challenges will lie ahead as we start this week with the system changes.

Unidentified Analyst

System integrations are notoriously difficult. How much of an issue was the February 1 integration of CRS system expected to be? And how long will the integration take before it is deemed to be successful? How quickly should the revenue and other synergies materialize after a successful integration?

Unidentified Corporate Participant

Well, we've been working very hard on this. We've been planning the systems integration for over four months now. Each function has been working together on both sides to understand requirements, gaps, processes and ex cetera. And we believe we have a thorough transition plan in place. The systems integration will facilitate the maintenance and fuel synergies as-well-as the sharing of freight between the companies.

In addition with the automation of several processes and other redundancies and support functions personal savings are anticipated beginning in the second quarter. All these changes will provide for the ability to consolidate physical locations in Utah, California and Georgia. We should have a good read on the success of the integration by the end of the first quarter and will begin to materialize some of the synergies in Q2.

Unidentified Analyst

Will be using the legacy Swift or Central system after the technology integration?

Unidentified Corporate Participant

It will be the legacy Swift system.

Unidentified Analyst

What are the anticipate synergies savings from moving the Central business onto the common systems platform this February?

Ginnie Henkels

As we talked about at the acquisition time we are expecting the cost synergies to be roughly $4 million on the annual basis. Any revenue synergies will be upside to this cost number.

Unidentified Analyst

And how should we think about the start-up cost that hit the dedicated and refrigerated segments in 2013? Is it rational to assume they will abate as the year goes on?

Unidentified Corporate Participant

The start-up costs are a function of the size and complexity of the new dedicated business. We are anticipating several new dedicated start-ups in the first half of 2014 with the potentially for additional awards in the latter half as well. We are expecting some costs associated with this but we are working to manage this as effectively as possible. With regards to Central’s major contract wins that impacted the second half of 2013, this will continue to be a challenge in the first quarter although it is progressing. We are working with the customer to fix some of the operational and other issues to improve the profitability profile going forward.

Unidentified Analyst

The release mentioned higher fees in the fourth quarter in association with an aborted equity offering. Can management expand on the contemplated offering size and intended uses of capital? What were the reasons for not pursuing the transaction?

Ginnie Henkels

The aborted equity offering was related to the equity claw in the notes. As we discussed last quarter, we had the ability to claw back 175 million of the 500 million of notes at a 10% premium with the proceeds from an equity offering. This option was only available us through November of last year. We were prepared to initiate this transaction if the stock price rose to a level that made the transaction basically neutral from a dilution standpoint. Meaning that the interest saved on the redemption of the notes was enough to offset the dilutive effect of the additional shares. This did not occur but we did incur the legal and other costs to prepare for the transaction.

Unidentified Analyst

Can you break out the increased insurance and claims expense by segment relative to Q4, 2012 to help us get a better sense of underlying margin trends without the noise from the negative loss developments on prior year claims?

Ginnie Henkels

We do not breakout this level of detail at this time. But as noted in the letter insurance and claims did have an impact, a negative impact on each one of our segments.

Unidentified Analyst

The increase in operating supplies and expenses during Q4 of 2013 how much of this was due to maintenance of aging equipment versus increased maintenance due to weather? By weather I mean weather causing maintenance issues and/or drivers being stuck in choosing to take trucks into the shop for work?

Ginnie Henkels

Our maintenance expense was relatively flat year-over-year in the fourth quarter and the average age of our company trucker fleet decreased to 1.9 years. We did have some impact to associated with weather but the newer fleet offset that. The increase in operating supplies and expenses in the quarter was due to the increased legal and professional fees total unloading expenses, hiring et cetera as we described on page six in the letter.

Unidentified Analyst

There were handfuls of miscellaneous questions the first one is in your closing summary you described that some of the disappointing items in 2013 were outside of your control while others were not what items that worked against you in 2013 were within your control and what actions are you taking to address them?

Unidentified Corporate Participant

So good question. Two of the key areas we were referencing in the letter were the safety trends and the impact of the hours of service change. Although the hours of service change were outside of our control, they had a larger impact than we anticipated. We thought we had prepared a driver to found that was not the case. We have just recently made some organizational changes that will allow terminal and fleet leaders to focus more on the drivers. Safety and utilization will be a major focus for this group in 2014.

Unidentified Analyst

How should we think about modeling the non-reportable segments? What is implicit in your full year 2014 guidance for this segment. It seems like the revenue growth and op income growth can swing from one quarter to the next?

Ginnie Henkels

This category I am sure you noticed can be very difficult to forecast. As this most other buckets are our -reportable segment is an accumulation of various different revenue and expense categories many of which move in different directions from one quarter to the next. Some of the various categories and businesses contained in our non-reportable segment include logistics, [IO] which leases equipment to our owner-operators, third-party insurance. Our owner operator leasing maintenance, specialty project business et cetera so our 2014 expectation for this group in total is modest improvement overall.

Unidentified Analyst

Can you please clarify the 2013 BPF transaction where shares tendered to an unrelated third-party someone besides Jerry Moyes or his affiliates as a result of the transaction and if so how many? Is there a potential for additional shares to be tendered to a third-party based on existing transactions going forward?

Ginnie Henkels

The 2013 BPF transaction was essentially a means for Jerry and his family to refinance the 2010 mez facility that was issued in conjunction with the IPO in December of 2010. In the BPF facility that was initiated or started in October of 2013 Jerry entered into an agreement with the bank to buy A shares which the bank borrowed on the open market, so these were existing shares in the market.

A shares were used to settle the 2010 mez while the B shares that originally collateralized the mez facility were released and are now collateral for the 2013 BPF facility. So basically there was a swap of collateral between the two facilities. The net result of all of these transactions put Jerry and his family with the same number of shares and voting percentage as they had prior to these transactions and the shares that the bank borrowed from the market went back into the market via the holders of the 2010 mez securities which for largely institutional funds. No new shares were issued nor did the number of shares outstanding changed as a result of these transactions.

Unidentified Analyst

Great, there were a handful of questions related to debt and CapEx, in addition to debt pay down guidance do you have a leverage ratio target for full year 2014?

Ginnie Henkels

Yeah as we reported we ended 2013 with a leverage ratio of roughly 2.5 times to achieve our goal of 1.5 times by the end of 2017 we need to improve by a quarter turn each year. Therefore our target would be 2.25 or before the end of 2014.

Unidentified Analyst

Guidance is for 2014 debt reduction here the high end of $50 million to $100 million annual target what are management's plans concerning the outstanding 10% notes which have more favorable redemption options later this year? Is an equity offering still being contemplated?

Ginnie Henkels

In mid-November we are able to call the existing $500 million of 10% notes at a 5% premium to par. We are looking at opportunities and alternatives to fund this call but are currently not anticipating using a straight equity offering to do so but that market remains relatively robust and if this remains consistent throughout the year we should be able to refinance the notes in November with other debt alternatives that would be very accretive. We will continue to monitor this throughout the year and will react accordingly.

Unidentified Analyst

You raised 2014 net cash CapEx guidance from $225 million in the third quarter consistent with 2013 levels to $220 million to $250 million. What accounts for the higher CapEx?

Ginnie Henkels

The increase is primarily related to the growth plans as outlined in the letter and as we talked about. With the truck growth anticipated in dedicated, Central and our truckload segment our CapEx is now expected to be higher than 2013 levels.

Unidentified Analyst

Under what circumstances could the company exceed its debt reduction targets in 2014?

Ginnie Henkels

There are several scenarios that would enable us to exceed the debt reduction targets for 2014 including further improvement to the utilization of our equipment, reduction and anticipated working capital investments, the sale of the redundant properties resulting from the Central acquisition and cash taxes less than anticipated et cetera et cetera.

Unidentified Analyst

What was your consolidated interest coverage ratio as of 12/31/2013?

Ginnie Henkels

The interest coverage ratio was 6.44 at the end of the year with a minimum required of 3.25.

Unidentified Analyst

So the last grouping of questions are related to guidance, specifically EPS guidance. What are the macro economic assumptions behind your 2014 forecast?

Unidentified Corporate Participant

We are generally anticipating a macro environment that is relatively similar to 2013 but a little more robust with regard to demand and pricing.

Unidentified Analyst

Does the 15% EPS growth target which implied EPS of $1.41 include any interest cost savings? What about the refinancing of the high yield debt which is callable late in the year?

Ginnie Henkels

There are some modest assumed interest expense reduction due to the anticipated debt reductions throughout the year but given the call options for the notes in not available until November this is not a significant driver of the 15% full year growth target.

Unidentified Analyst

I believe your original accretion guidance for Central provided in August of 2013 was for $0.04 in the second half of 2013 and $0.10 in 2014. Do you still expect $0.10 accretion from Central in your 15% EPS growth target for 2014 and is it correct to assume that $0.07 accretion would be from the legacy business?

Ginnie Henkels

You are correct in quoting our original accretion guidance but keep in mind that this was prior to the common control accounting treatment where we had to recast our historical results to include Central for the full year. Now that we’re starting with our adjusted EPS of $1.23 which includes Central for the full year the $0.10 accretion for 2014 is not an appropriate comparison. We are anticipating all of our segments to contribute to the growth for 2014 of which central will help but it’s certainly nowhere near the $0.10.

Unidentified Analyst

What are the quarterly adjusted EPS numbers for 2013? Is $0.24 including a large gain on sale number the number that you are using for the first quarter of 2013 that we should be using as a base for our year-over-year EPS growth in the first quarter of 2014?

Ginnie Henkels

Yes, our quarterly adjusted EPS numbers for 2013 are $0.24 for Q1, $0.35 for Q2, $0.29 for Q3 and $0.36 for Q4 so those of you are good at mathematics you can tell that adds out to more than $1.23 so there is some rounding going on there, but those are the quarterly numbers.

These numbers include Central in each quarter and can be found in detail in the breakdown in the 8-K we filed in October with a recap of all of our financials or the subsequent quarterly reports for Q3 and Q4. You are correct in recognizing that we had a large gain on sale of properties in the first quarter of 2013 which is one of the reasons why we are not anticipating our year-over-year adjusted EPS in the first quarter to be 15%.

Unidentified Analyst

What are the puts and takes for the guidance that calls for smaller EPS growth in the first half of 2014 versus greater EPS growth in the second half of 2014?

Ginnie Henkels

The headwinds in the first half of the year are the hours of services changes as we noted in the letter. The gain on sale of properties as I just discussed, the gains on sale of equipment will likely be half of what they were in the first half of 2013. We have dedicated start-ups from the first half that will begin contributing to growth in the second half of the year, the Central systems’ integration is requiring additional expenses in the first half that will lead to synergies in the second half. Insurance was high in the second half of 2013 which should make for easier comps in the second half of 2014, knock on wood.

And then once we lap the hours of service changes and gain traction on other utilization initiatives our utilization comps should improve at a greater rate in the second half of the year et cetera. Given all of this we are expecting our year-over-year growth in adjusted EPS without normalizing for these types of items should be tempered in the first half and in the mid-single digit range before accelerating in the second half to achieve the 15% target for the year.

Unidentified Analyst

And what is your current appetite for M&A?

Unidentified Corporate Participant

We are currently focusing on integrating Central Refrigerated and achieving the anticipated synergies valued in making that acquisition. With that said as we have discussed in the past M&A is something that we will consider in the future if it will help us achieve our goals and objectives.

Jason Bates

So in conclusion I will turn it over to Jerry.

Jerry Moyes

I believe that these were all the questions we have and would like to thank all of you for your time this morning and for everyone who took the time to submit the questions last night. We generally appreciate your continuous support of Swift. In summary I am very proud of the Swift family, many of you may not realize but we now have close to 25,000 employees, drivers and owner-operators for Swift. I want to personally thank each and every one of them for the hard work that they do day in and day out, to make this a great company.

Without their support being collectively pushing in the same direction we would not have been able to accomplish the record, the many records that we have achieved this year. In 2013 we achieved record annual revenues as well as record annual operating income with and without Central. We continue to provide excellent service to our customers and have expanded the service offerings we are able to provide them. We continue to pay down our debt, reduce our leverage ratio and above all we are pleased to see the investment community has begun to recognize the value that we deliver, which in turn led to a 142% increase in our stock over the course of last year.

I am very proud of our employees, confident in our leadership team and exciting about the future and hope each of you feel the same and look forward to a great 2014. Thank you for your support.

Jason Bates

Thank you, everyone.

Operator

Ladies and gentlemen, this does conclude today’s conference. Thank you all for joining and you may now disconnect.

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