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Executives

Jason Bates – VP of Finance and IR Officer

Jerry Moyes – Founder and CEO

Richard Stocking – President and COO

Ginnie Henkels – Executive Vice President and CFO

Analysts

Swift Transportation Company (SWFT) Q3 2012 Results Earnings Call October 23, 2012 11:00 AM ET

Operator

Good evening. My name is Brigit (ph), and I will be your conference operator today. At this time, I would like to welcome everyone to the Swift Transportation Third Quarter 2012 Q&A Earnings Call. All lines have been placed on mute to prevent any background noise. (Operator Instructions)

Thank you. Mr. Bates, you may begin your conference.

Jason Bates

Thank you, Brigit. We’d like to welcome everyone out to our third quarter 2012 Q&A session. As a reminder, we have posted the comprehensive letter to stockholders summarizing results of our third quarter on the front page of our IR website. So we’re going to go and start the call today with the forward-looking statement disclosure.

This report and call contain 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 Factor section of our Annual Report, Form 10-K, for the year ended December 31, 2011.

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 from adequate.

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 presentation also includes certain non-GAAP financial measures as defined by the SEC. The calculation of each measure, including the 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’d 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, Swift’s VP of Finance and IR Officer and I will be moderating today’s Q&A session.

So with that, we’ll start today with some opening remarks from Ginnie regarding the structure of our Q&A session.

Ginnie Henkels

Thanks Jason. As Jason did mention, we have received several questions about the structure of our Q&A session and have heard various flavors over the last couple of months regarding why we do not take live questions. So I wanted to take a few minutes to address the pros and cons of our structure.

So first let’s start with reviewing where we started. So we used to issue a press release followed by a live conference call which contains prepared remarks with a slide show, then we had a live Q&A. Afterwards, we spent hours on the phone clarifying our following up from the live Q&A session due to the unstructured nature of the call. All of this was then followed by a 10-Q. Therefore together all of the information we provided, you needed to go to three or four different sources. So as we do with all of our internal processes at Swift, we decided to streamline and give the customer or investors the information they needed in a complete and efficient. We decided to incorporate all of the information we provided through various meetings into one document which is our Letter to Shareholders.

The data included in the Letter to Shareholders basically becomes our MD&A for the 10-Q. Knowing that we may not anticipate every question about our results in the letter and not wanting to create Reg FD issues by handling individual calls from analysts and investors. We knew we needed to find an efficient way to handle the question. We listen to our investor’s complaints who included or that included that our calls were too long, and that analysts would ask the same question over and over.

Based on this set of circumstances, we developed this new structure in which we allow return questions to be submitted via email. We then consolidate the questions and provide answers that are thoughtful, complete, and accurate. We recognize this process is different and that changes sometimes difficult to accept. Internally we call it disruptive innovation and believe that change can be good.

In fact, many of our largest shareholders have given us very positive feedback on the new process and I’m thankful for being mindful of their time during the busy earning season.

Also we’re now receiving questions directly from our shareholders which never happened during the live Q&A. And probably the most telling indication of our process is that the number of calls we receive post-conference call has dropped dramatically indicating the information we’re providing is meeting the needs with the investors.

We’ve heard one primary consign and one key rumor regarding the new process. The biggest concern is that we will cherry-pick questions and that we will not the address the tough questions. We do address each and every question we received although we do consolidate similar questions into one to avoid duplication.

We also realized that people other than investors listen to our calls, so we cannot disclose every detail and risk giving our competitive information. Therefore we receive a question that requests information that we do not disclose, we acknowledge the question and provide what we can. Hopefully this has become apparent over the last several quarters.

As we have stated, we’re not trying to hide anything with this new format. We’re simply trying to streamline the process and improve the quality of the output.

The rumor we have heard is that we are afraid of live Q&A because we may not know the answer to the question. We have attended over 20 conferences and have had hundreds of meetings with investors and analysts over the past two years in which we have answered many live questions. So I can assure that this is not the reason for the change in format.

We certainly welcome and listen to your feedback and have made changes based on the feedback we received such as shortening the time between the release of the letter and the conference call and adding a full cash flow statement to the letter. We continue to welcome your feedback and will continue those – consider those comments that help us achieve our goal of providing transparent comprehensive and thorough disclosure in a manner that is an efficient use of our investors time.

One other point of feedback we’ve received regarding the call is that it’s awkward that we ask the questions to ourselves. We actually agree with that comment and although we structure with Jason as a moderator does feel a bit strange for us on this side of the phone too. However, our ultimate goal is to simply provide a written form of the Q&A on our website rather than reading it you. We are hoping to be able to transition to this point at some point in the near future.

With that, I’ll turn it over to Jason our moderator.

Question-and-Answer Session

Jason Bates

Great, thank Ginnie. So we appreciate all the questions that were sent in last night. We have tried to group them as Ginnie referred to previously into different categories and will try to get them get as many as possible and as efficiently as possible here today. So we’re going to start-off with some questions on the intermodal.

What are your current expectations for intermodal revenue growth for the remainder of 2012 and how should we think about intermodal’s 2013 growth opportunity?

Richard Stocking

Yes thank you. As we have shared throughout the year, our goal for 2012 has been to increase our intermodal revenue by 20% to 25%. We are exceeding those original targets aided by the addition of more than 2,000 intermodal containers. We currently expect our full-year 2012 intermodal revenue growth to be between 40% and 45%. As we look forward to 2013, our goal would be to maximize the turns on all of these new containers. We believe that once fully integrated into our network we can grow our revenue by approximately 20% without adding any additional containers.

Jason Bates

What percentage of other services, other service revenues did intermodal represent in the third quarter?

Ginnie Henkels

It was about 60% of our other revenue line.

Jason Bates

With respect to intermodal, can you provide some context around the 41.5% revenue growth? It looks like the average fleet size was up approximately 30% year-over-year in the quarter, so can you elaborate on box turns, pricing, fuel mix and network utilization, what is your strategy for growing intermodal and what are you seeing with respect to price and margins? Is it primarily converting existing truck rate or gaining share in the market?

Richard Stocking

At this point in time, we do not report statistics on our different revenue service offerings. However, we hope to be able to provide further color in coming quarters. Regarding our strategy for a growing intermodal, as I previously mentioned the goal will be to focus on improving the utilization of our existing assets. We have focused on training – we have focused on training our sales team this year providing them with the resources and tools they need to be successful and selling this service offering and we are encouraged by the growth potential that exists.

There will be some growth that comes from converting existing truck rate as well, as we work with our customers to educate them on the benefit that comes from moving intermodal. However, a good portion of our projected revenue growth will come from gaining share and the intermodal market place as well.

Jason Bates

Intermodal growth was impressive. Can you break out the 41% intermodal growth by a region, how much of this growth is concentrated in the cross-border Mexico business versus other intermodal lanes?

Richard Stocking

Yes, currently we do not provide the regional breakouts of out intermodal growth. Regarding our cross-border Mexico business we feel we were just seeing the tip of the iceberg here. Most of our growth up to this point has been on domestic intermodal lanes.

Jason Bates

If you look at the trucking operating ratio what is the year-over-year difference, is there significant substitution effect from the lower operating ratio in the intermodal business as it grows as a percentage of revenue?

Ginnie Henkels

We do not get, provide profitability metrics on our service offerings but you are correct, and at the 40% plus growth in our lower margin intermodal service is diluting the overall consolidate operation – operating ratio partially I’m asking the improvements we’ve made, I mean continue to make in our truck load service offerings.

Jason Bates

The truck brokerage and/or on our operator services revenue decline during the quarter year-over-year.

Ginnie Henkels

No, our truck brokerage and on our operator services revenues increased in the third quarter of 2012 both sequentially as well as year-over-year.

Jason Bates

So there were also a lot of questions as it relates to volumes and utilizations, to clarify on the in-truck quarter commentary, that really states volumes were down sequentially in July and then generally consistent throughout the reminder of the third quarter. Can you provide more color on what is meant by the statement throughout the quarter? Does this means consistent sequentially or year-over-year? Similarly is the uptick in September and the first weeks of October sequentially or year-over-year?

Richard Stocking

Consistent with seasonal trends, July freight volumes were down sequentially for our trucking services; typically we see an uptick in volumes in the August that builds into September. This yea that uptick was less than what we have come to seasonally expect. The language in the letter specifically referring to this sequential trend throughout the quarter, having said that, we believe we are seeing the beginnings of a peak season building in October and although it is only a couple of weeks the freight trend has been up both sequentially and year-over-year.

Jason Bates

Over the total and loaded miles for the quarter, what was the year-over-year change in total loaded miles in the third quarter?

Ginnie Henkels

Yeah we have not, excuse me, disposed our total and loaded miles, however our year-over-year percent change and loaded miles was down 2% due to the nearly 5% reduction in our fleet offset by 2% improvement in the utilization of our loaded miles per truck.

Jason Bates

So the loaded miles were down 3%? Is that right?

Ginnie Henkels

Correct.

Jason Bates

Okay. To what extent if any, did third quarter results benefit from demand pull forward driven by the potential ILA strike? How should we think about the ongoing threat of ILA strike could impact the fourth quarter results?

Richard Stocking

The ILA strike did not have a material impact on our demand in the third quarter, nor do we believe that we’ll have a significant impact in that Q4.

Jason Bates

Well the OTR line haul miles grew 73 miles per truck per week year-over-year, what was the total increase in miles across all tractors, regional, over-the-road dedicated but excluding freight?

Richard Stocking

Yeah, for the entire fleet loaded miles per truck per week were up 2%, we do not currently dispose our utilization excluding the dray.

Jason Bates

Is the increased mileage productivity per truck per week a function of any particular initiative EOBRs, network optimization effort etcetera or just a function of fewer unseated trucks are waiting disposal?

Richard Stocking

There are various initiatives that contribute to the increase and productivity, including all of those just mentioned. We have goals at each level throughout the organization centered around what they can do to help move the needle in this regard, we continue to develop improve our processes, strategies and discipline to further the cause of improving our asset utilization and also increasing our return on our net assets.

Jason Bates

To what degree did Swift benefit from project related freight in the third quarter?

Richard Stocking

We do not have significant amounts of project related freight outside of Q4.

Jason Bates

Where are customer inventory levels currently? Can you provide some color on customer inventory levels by specific end market?

Richard Stocking

Yeah unfortunately we don’t have that much insight to our customers inventory levels, however I can’t say that based on conversations Jerry and I have had with our customers over the past several weeks, they’re leading us to believe that inventory levels are relatively low and that as customer demand increases over the next four to six weeks going into the holiday season they will have demand on capacity to keep the shelves adequately stocked.

Jason Bates

How far long are you in the EOBR implementation across the fleet and what sort of productivity headwinds have you seen thus far?

Richard Stocking

As we have mentioned in past quarters, with the exception of a few miscellaneous structure on our operator are EOBR implementation is essentially complete. Contrite what some amounts have reported in the past we have not experienced any productivity headwinds, in fact we’ve seen our utilization per truck per week steadily increase through the implementation process.

Jason Bates

Okay thanks, so there were a lot of questions about rates as well. The first one, what is driving the deceleration in yields revenue per loaded mile excluding fuel, are competitive pressures driving tougher pricing?

Richard Stocking

The deceleration in rate per mile excluding fuel is primarily a function of business inline mix. Throughout this year we have consciously decided to holy smaller percentage of freight on our over-the-road line haul business versus our dedicated service offering. We make these decisions by looking closely at the revenue per truck per week metric, what I mean is that our customer may have a slightly lower rate per mile that if the utilization per truck per week is substantially higher the overall revenue per truck per week will be higher.

This decision has generally been accretive to our bottom line but at times can have a negative impact on a statistic of rate per loaded mile. We believe this business inline mix shift negatively impacted our rate by approximately 1% on a year-over-year basis. Additionally, the past few months has brought a softer than desirable freight environment which intern has caused our network inline mix to change. This change inline mix can also lead to dilution in our rate per loaded mile as a percentage of loads hauled in each lane can vary from period-to-period.

Jason Bates

You mentioned that trucking revenue per loaded mile excluding fuel slows to less than 2% year-over-year. Can you provide the actual rate per loaded mile or a more exact growth top?

Ginnie Henkels

Yeah, the revenue per diluted mile excluding fuel surcharges was 1.6% for the quarter.

Jason Bates

Can you more fully explain the comment of pricing could be 2% to 3% for the full year if current mix trends from the shift in over the road to other service offerings continues? Is this a reference to the length of haul which looks like it came down slightly year-over-year and we would expect that to be a modest favorable for revenue per mile or is the increase dedicated business as a percent of overall mix or does it relate to the growth in intermodal and brokerage or something else entirely?

Richard Stocking

Yeah. It’s more of a function in the business mix we just discussed rather than a change in our average length of haul, intermodal or brokerage. This mix change could be even larger in the fourth quarter when we are comparing the year-over-year cost, if we have a peak season that is significantly smaller than last year.

Jason Bates

How do you plan to keep yield strong in the face of a changing business mix?

Richard Stocking

We have hundreds or more likely thousands of pricing scenarios based on the geography, low type, customer deadhead, et cetera. We could increase our profitability by improving in several areas which might result in less of an improvement in our blended rate. So a drop in revenue per loaded mile due to a shift in business mix is not necessarily a concern.

We are more concerned about the absolute profitability per load or customer than the statistic of loaded rate per mile.

Jason Bates

How much of the 1.5% to 2% revenue per loaded mile increase was due to price increases and how much can be attributed to better freight selection?

Richard Stocking

We do not disclose exact amounts in each of these areas. However, I can say that our sales team is proactively reaching out to customers to increase rates where appropriate and in conjunction with our rising costs throughout the entire customer base.

Jason Bates

Are shippers will – still willing to exchange rate increases for capacity commitments going forward or has they returned to their formal ways now that there is a little slack in the truck load system?

Richard Stocking

Little more of the ladder, our customers are much less concerned about capacity in the fourth quarter than they were two or three months ago. However, as I mentioned previously, they still believe we have a decent peak season ahead of us.

Jason Bates

What sort of rate increases are you seeing in the contractual versus spot markets?

Richard Stocking

As we have disclosed in the past, we do not significantly participate in the spot market. So our overall rate increases would reflect what we are seeing in the contractual market, partially offset by the business in line mix changes I have just described.

Jason Bates

So we’re going to shift gears a little bit to talk about drivers and the owner operators. You mentioned in your letter that driver attention has improved. Is this due to the higher salaries that you have implemented? Has the driver market got any better or it’s the combination of better salaries and your tightening truck capacity resulting in a better driver market?

Richard Stocking

We believe there are several reasons we have experienced improvement in our driver retention. As you may have noticed from many of our competitors who have reported, the driver market has not improved and driver retention and availability continues to plague our industry.

Our driver turnover levels continue to be well below the industry average which we partially attribute to our incentive bonus program, but also to our driver friendly environment. As we have shared in the past, we have various initiatives geared that helping our drivers get the miles they need to increase their W2s. When you combine these various initiatives with our regional presence which allows them to get home to see their families more often, it creates a strong value proposition for attracting and retaining good qualified drivers.

Jason Bates

How would you characterize driver supply currently? Are the schools full? Has turnover accelerated or decelerated since you put the incentives into effect?

Richard Stocking

As I mentioned, the driver market is tough right now. The supply of experienced qualified drivers is low. However, as we have discussed in the past, Swift has a unique internal academy infrastructure which differentiates us from most of our peers. Our schools are full based on our current academy staffing levels and the driver pipeline looks good. To the extent, the economy in the freight market expand, we do have the ability to further leverage our existing academy infrastructure.

Regarding the later portion of the question about turnover trends since implementing the incentives, we have noticed a reduction in the turnover levels since we’ve rolled out the driver incentive bonus.

Jason Bates

How much, if any of the increase in driver and owner operator incentives were offset by better productivity, fewer and less of your accidents and improved service for which customers presumably are willing to pay more for?

Ginnie Henkels

The cost we disclosed is $0.02 to $0.025 of earnings per share which is associated with our driver incentive bonus that does not include the benefit from the various items mentioned. Those will be incremental benefits that would help offset this cost. Unfortunately given the various moving pieces associated with each of these items, it’s difficult to isolate any one variable and determine the exact benefit associated with this incentive.

Jason Bates

Following the changes in driver and owner operator pay during the quarter, do you anticipate additional changes to driver and/or owner operator pay in the fourth quarter? Also should the $0.02 to $0.025 EPS headwind quantified in the release subside going forward either from corresponding rate increases or operational efficiencies?

Ginnie Henkels

We do not expect to see further changes in our driver and owner operator pay structure in the fourth quarter, but we would expect ongoing rate increases from our customers as well as many of the factors mentioned in the previous question to help offset this cost headwind as we roll into Q4 in 2013.

Jason Bates

So there were several miscellaneous expense related questions, within the salaries and wages, salaries, wages and benefits discussion, the release mentions an increase in the number of non-driving employees. Can you please comment on what these employees relate to?

Ginnie Henkels

The headcount increases are primarily in the shop as we have enforced more of our maintenance this year as well as we’ve added dedicated business and we have onsite personnel associated with that and then we have added an intermodal to support the growth in that area.

Jason Bates

Your rental and depreciation expense continues to increase year-over-year and the average age of the tractor fleet decreases, is there a corresponding offset from declining maintenance expense?

Ginnie Henkels

Yeah, this concept is generally correct excluding the impact from inflation on parts and tires, et cetera.

Jason Bates

You mentioned the lag effect on the fuel surcharge revenues, were there any changes to the structure of the fuel surcharge program that contributed to the negative impact in the quarter or was it just a tiny issue?

Ginnie Henkels

Yeah. The year-over-year negative impact is – was associated with the lag in the fuel surcharge recovery. It was not a function. There was no structural change through the fuel surcharge program. It was simply the lag.

Jason Bates

Were there any unusual accidents during the quarter or any unfavorable adjustments to prior period claims?

Ginnie Henkels

I wouldn’t characterize our accidents in the third quarter as unusual. Our trends have been relatively consistent. Also we did not have any significant adjustments to prior-year claims in the quarter. As we discussed in the letter, our expenses are up year-over-year because we had favorable adjustments to prior-year claims in the third quarter of last year which brought that number down.

Jason Bates

So there was a question about the guidance provided, so as you provided third quarter EPS guidance of $0.20 to $0.23 at the end of the third quarter, but the final EPS ended up at the lower end of the range. Was this primarily a result of freight trends through the end of the quarter coming in materially below management’s expectations as of 9/19 or were there other factors at play that drove 3Q results below the midpoint of management expectations?

Ginnie Henkels

We gave a range because many things can vary, freight volume, fuel prices and trends, et cetera. So for us to meet the high end of the range, all of these items would have needed to go on the right direction.

Freight trends did improve as we talked about at the end of the quarter, but they were not strong enough to help drive us to the high end of the range. Fuel prices were relatively consistent in the last month of the quarter, so we did not see a significant drop that could have boosted earnings to the high end of the range or a significant increase that could have driven EPS down further. On in insurance side, we do not receive the actual varial (ph) reports until the end of the quarter, so we can estimate where we think we will be, but we do not know for certain until we receive the final reports in that – in the quarter is complete.

And unfortunately we did not have a benefit as I just mentioned from the prior year layers as we did last year to drive that number to the higher end of the range. So these are just a few items that can fluctuate, but these are usually the larger items that drive variances.

Jason Bates

Okay. There were a lot of questions about – as we approach the end of the year and going in to 2013 about some guidance and outlook in several areas, rates, volumes, truck counts, et cetera. So we’re going to try to run through some of those right now. Starting on rates how is pricing trending so far in October and what are your expectations for the rest of the fourth quarter? Is the rate environment improving in the fourth quarter or is that a tough year-over-year comp?

Richard Stocking

Yeah, it’s too early in the fourth quarter to definitely say how pricing is trending, especially since we’re still waiting to see how the full peak season develops. However, we are encouraged by the up tick in demand as well as conversations we’re having with our customers.

In addition, we have commitments from our customers on unique fourth quarter business that is accretive to our rate and overall profitability.

Jason Bates

Please discuss conversations with shippers regarding expectations for 2013 rates, particularly given the softer third quarter freight demand and contracting spot market pricing in recent months?

Richard Stocking

As I briefly mentioned earlier, customers are much less concerned about fourth quarter capacity availability than they were a couple of months ago. However, based on our discussions with them, they believe consumers are waiting to make significant purchases and that a peak season is coming, most likely similar to last year. So our customers are positive. However, we haven’t seen a significant up tick yet.

Jason Bates

Is there danger that rates could erode in 2013?

Richard Stocking

It’s always a possibility. However, we believe that scenario is very unlikely.

Jason Bates

Regarding volumes, how is demand trending so far in October and what are your expectations for the rest of the fourth quarter?

Richard Stocking

We have seen some strength thus far in October and are encouraged by our conversations with customers, but I would say volumes are still below our expectations.

Jason Bates

The commentary regarding a stronger October is not consistent with remarks provided by some of your competitors such as Warner which decided temper to October demand. So what should we attribute the difference?

Richard Stocking

Well I really can’t speak to our competitors, specific situation. I can just tell you what we have experienced over the last couple of weeks.

Jason Bates

How are West Coast freight volumes trending currently and how is demand trending by geography overall?

Richard Stocking

Currently I would say that both the East and West Coast are stronger, in general with the middle of the country from Texas to the Midwest somewhat softer.

Jason Bates

Is this volume mostly from big box retailers pushing holiday merchandise through their supply chains?

Richard Stocking

As I mentioned earlier, most of our customers have told us that their inventory levels or inventories are fairly low and that they have not fully stocked for the holiday season. But we do not have specific data on how they merchandise. I would assume some of the up tick we’re seeing is due to the stocking for the holiday.

Jason Bates

You have added your fleet count since the end of the third quarter, are you achieving similar utilization metrics as you’ve expanded your fleet?

Ginnie Henkels

Yes, we are. We look at utilization in conjunction with our driver situation in the overall fleet environment when making decisions about size of the fleet.

Jason Bates

Can you give any guidance on how utilization on revenue per truck or mile per truck could trend in 2013?

Richard Stocking

Yes. Utilization is impacted by an assortment of different scenarios including the freight market, the availability of drivers, business mix, et cetera. While we cannot predict what will happen in 2013, we can’t say that utilization is a strong focus of ours and will be throughout 2013. As a result, I would expect to see improvement in this area.

Jason Bates

Any new dedicated contracts on the horizon?

Richard Stocking

We are consistently in negotiation with new and existing customers about expanding our dedicated fleets and have had several accounts added throughout the year.

Jason Bates

So there were several questions about trucks and how people should think about trucks going forward. Given the current economic environment and looking out in the 2013, do you anticipate a planned fleet reduction in the first quarter of 2013 on a similar level to the one executed at the beginning of 2012 or do you believe the fleet is appropriately sized near the current 14,600 level?

Ginnie Henkels

Yeah. From our years of experience, we know that volume in the first quarter will be lighter than the fourth quarter, because of this we once again are planning to reduce the size of our fleet towards the end of December and into the first part of January and February and then increasing again at the end of February, end of March. So because of this reduction or because it won’t start until the end of the fourth quarter, I would anticipate that our average operational truck for the entire quarter will be closer to our current level of 14,600.

We also don’t expect the fleet reduction in the first quarter to be as large as it was in 2012 and we do expect to be at levels where we end the fourth quarter back by March or April.

Jason Bates

Average tractor count has declined year-over-year for the past four quarters, should we expect modest decline to continue in 2013 as efficiency initiatives allow for greater asset utilization in a slow economy?

Richard Stocking

Yeah. Our focus on efficiency has yielded benefits throughout the year. We have been able to generate similar trucking revenues with substantially fewer trucks and we hope to continue this 2013. However, we have stated that our truck count is currently at 14,600 which is higher than our third quarter number. We anticipate a drop in the first quarter before picking up again throughout the remaining three quarters in 2013. But a lot depends on the strength of the market. If we have a higher GDP, then we would anticipate larger truck growth. If we have a slower growth then our truck growth will not be as substantial.

Jason Bates

What is the longer term view on truck count? Is there a way to grow the fleet over the longer term?

Richard Stocking

Our longer term view is that we want to grow our truck count and we believe that we are in a position to expand significantly. We have the infrastructure in place and as we improve our business, perfect our processes and improve the service we provide to our customers we’ll be able to expand in all of our suites and services.

Jason Bates

Are you talking to OEMs about 2013 orders yet?

Ginnie Henkels

Yes we have had ongoing discussions with the OEMs about 2013 orders but we haven’t made any final commitments yet.

Jason Bates

What drove the reduction in your gain on sale expectations for Q4? How should we be thinking about this line item for 2013?

Ginnie Henkels

For the fourth quarter, it’s a combination of the mix of trucks we’re disposing as aligned with the softer used truck markets. And at this point it’s a little too early to tell for 2013 but we certainly do not expect the gains to be at the same level as 2012.

Jason Bates

So there were some questions about natural gas trucks and whether or not how things are progressing with regard to Swift, the natural gas in any experiments that we’re doing on that front?

Richard Stocking

Any – we’re experimenting with three basic projects with natural gas. We have 10 of the 8.9 liter engines. They’re working out okay, but they’re good for like aluminum cans, plastic bottles and chips they got to be in a very light weight environment. We’re running four of the 12 liter Cummins engines. These seem to be working out pretty good. We’re running – at Utah, we got some mountains pretty good train up there and we’re pretty optimistic about the way those four were working. We’ll probably add a few more of these in the first and second quarter but it’s going to be third and fourth quarter of 2013 before Cummins starts releasing that engine in any quantity.

We’re continuing to work on our dual fuel project which is the Cummins 15 liter. All three of these projects are with the CMG. We believe the long-term that all three of these are, have very positive effects from the long-term. The natives are that these structures $40,000 to $45,000 extra to buy and when you look at the savings per year of $10,000 to $12,000 we got to make the math much better than that.

We’re working with our vendors today to get the price down on these new trucks. It’s gotten to check in the aid, you get volumes to bring the price down. But we really believe that long-term natural gas is definitely a viable option for diesel and we’re very optimistic about it, but it is a long-term project, so thanks.

Jason Bates

Great. So there was a question about fuel, the statement was that you had debated somewhat in the fourth quarter and whether or not we see to expect any tailwinds in the fourth quarter as it relates to fuel.

Ginnie Henkels

Yeah it certainly going down nicely today, but if prices still continue to drop we should see some pickup in the fourth quarter. However that’s very difficult to determine.

Jason Bates

What fuel initiatives that Swift undertaking? How much MPG improvement is Swift targeting next year?

Richard Stocking

To start with, we’re bringing in equipment which is much more fuel efficient than that which we are disposing. We are regularly analyzing our equipment specs to ensure maximum benefits as well as testing products that may yield additional efficiencies. We’re continually working with our driver’s to help educate them on the impact they can have to the profitability of our organization by managing their fuel consumption. And finally, we’re continually tweaking our Fuel Optimization Software to ensure the most optimal fuel purchasing.

Jason Bates

Is 3Q12’s EPS drag of $0.02 to $0.025 per share for the various implemented driver incentive programs and appropriate run rate for the fourth quarter and into 2013?

Ginnie Henkels

Yes. Yeah that’s our best estimate again as we talked about it earlier on the cost side, although we do expect to have some improvements from productivity as this program gain some seen.

Jason Bates

Are third quarter’s deadhead percentage improvements sustainable going forward? How much is due to better planning versus seasonal mix?

Richard Stocking

Sequential trends and changes are influenced more by seasonal mix but the year-over-year trends are in more correlated to operational and process improvements.

Jason Bates

Do you expect deadhead to pickup in the fourth quarter then as a result of the new equipment?

Richard Stocking

Yeah new equipment will not have a material impact on our deadhead in the fourth quarter. However, similar to prior years, deadhead will increase in the fourth quarter when compared to the third quarter because we do our best to get our drivers home for the holidays.

Jason Bates

Can you expand on what you may have in the seasonal project pipeline? Is it similar to last year? A competitor recently stated that project frame was weak in the fourth quarter. Do you have a competitive edge in pricing or service that you can comment on? Can you be more specific on the details?

Richard Stocking

We do not disclose specific details as it relates to our unique fourth quarter projects. However, we have commitments from our customers that meet or exceed prior year fourth quarter seasonal business.

Jason Bates

So there are also a lot of questions about debt and interest and CapEx. Given your aggressive reduction object, what do you expect the net interest cost to be in the fourth quarter?

Ginnie Henkels

Obviously this depends on when the debt is repaid and changes in LIBOR, but we do expect our interest expense to be under $28 million in the fourth quarter.

Jason Bates

Is the $100 million plus annual debt pay down sustainable into the future?

Ginnie Henkels

Our goal is to pay down, $50 million to $100 million per year. This will fluctuate depending on business performance in the capital expenditures. And to the extent, we are able to more as we are this year and we did last year we will.

Jason Bates

How much room do you have under the most restrictive financial covenants?

Ginnie Henkels

At the end of the third quarter, our leverage ratio was the most restrictive covenant and we have over 25% EBITDA cushion in this ratio.

Jason Bates

You gave the total leverage ratio of 2.97 times, what would be interest coverage ratio?

Ginnie Henkels

Our interest coverage ratio for the third quarter was approximately 4.6 times versus a minimum required of 2.875.

Jason Bates

Is the right way to think about the net debt reduction of $30 million to $50 million for 4Q, the $6 million voluntary prepayment on $10.15 million and then an increase in cash during the quarter?

Ginnie Henkels

Not necessarily, we do expect to make additional repayments on the debt in the quarter.

Jason Bates

On the equipment and CapEx front, your operational truck count was significantly lower than expected. If driver attention is up, why haven’t you ramped up purchases of trucks?

Richard Stocking

We did not ramp up the trucks in the third quarter as expected because the freight volumes did not increase as we had expected them to.

Jason Bates

If the freight market continues to improve as it has through October, does Swift have the capability to expand the fleet beyond the 14,600 that it’s currently operating with?

Ginnie Henkels

Since we are trading our equivalent based on a mileage range versus an absolute age, we have trended flexibility with regard to the size of the fleet. So at the point freight market heats up where you can delay our trade plans and can expand the fleet by accepting new trucks without selling the old one.

Jason Bates

It looks like owned trucks as a percentage of the total company fleet declined again this quarter. I believe you have touched on this before, but can you expand on the decision to lease versus own equipment?

Ginnie Henkels

This is primarily an economic decision. We have been receiving very attractive lease rates for tractors this year as a result of the bonus depreciation that leftovers are able to utilize. Since we have NOLs, we’re not able to take immediate use of the bonus depreciation on purchases and therefore have been leasing a bit more than we originally anticipated at the beginning of the year.

Jason Bates

What are the planned uses for the $50 million to $60 million of incremental CapEx spend in 2013 versus 2012?

Ginnie Henkels

The primary difference is the increase in tractors and the increase of the number of tractors purchased versus leased, offset by decrease in containers.

Jason Bates

That’s decrease in the number of new containers versus next year versus this year.

Ginnie Henkels

That’s it, correct.

Jason Bates

How much of your CapEx for 2013 is for intermodal containers, dollars and or number of containers?

Ginnie Henkels

Yeah, at this point we don’t have much plan for intermodal containers in 2013. As Richard mentioned, we’re in the process of acquiring 2,500 containers as we speak and we want to observe these into our network and increase the utilization of these containers before we add more, we will assess this as we move throughout 2013.

Jason Bates

What are the macro assumptions behind the high end of the 2013 CapEx guidance?

Ginnie Henkels

As Richard discussed, we do have some fleet growth assumed in the 2013 CapEx guidance. So the high end of the range would assume an environment that is a bit more dynamic than we’re experiencing today.

Jason Bates

What is the average age of the tractor fleet and how is that change from this time last year?

Ginnie Henkels

The average age of our company’s fleet is currently 2.7 years and it was over three at this point last year.

Jason Bates

What is the average age of the trailer fleet and how is that changed from this time last year?

Ginnie Henkels

We have not historically disclosed the average age of our trailer fleet because we have repurposed many of our older trailers for special rental or storage projects with our customers which deals the age. We expect to bring in roughly 3,000 to 4,000 trailers per year that will vary but on an annual basis going forward and we will trade or sell the older trailers as needed depending on their condition and the demand for their use.

Jason Bates

Is there any financial impact from termination of equipment under operating and capital leases with the original values of $62.3 million?

Ginnie Henkels

We did terminate leases in the quarter with original values of the equipment at the beginning of the lease of $62.3 million, of this amount $10.8 million were on Cap leases, our capital leases and $48.2 million were on operating leases. We also initiated new leases in the third quarter for equipment with original values of $19.1 million on capital leases and $48.2 million on operating leases for a total of $67.3 million. So the financial impact, our operating leases shown in our financials is rental expense, so therefore the monthly difference between the operating lease payments terminated and the operating leases originated will come through on the rental expense line.

Capital leases show as debt on our balance sheet and assets are included in P&E. On the P&L the expense comes through as depreciation and interest expense, therefore the balance sheet will be reduced by the residual value of the equipment that was terminated, on the leases that were terminated and will increase by the original value of the new equipment that was just leased and the P&L will be impacted by the change in the monthly amounts of the depreciation and an interest associated with those two.

So hopefully that answers your question.

Jason Bates

You have to keep shrinking the fleet in order to maintain the operating ratio, how do you think about the trade off between OR and operating income?

Ginnie Henkels

So we do not need to keep shrinking the fleet to improve the OR. We believe we have opportunity to improve our operating ratio in the various service offerings serves by improving our utilization, our debt head, cost control etcetera but that does not necessarily include shrinking the fleet. As we’ve discussed before one of our goals is to increase our earnings per share, to do this we have to increase our operating income. We have also discussed that we expect our consolidated OR to increase as we grow some of our asset like businesses that may have a higher OR.

Overall, we are looking to increase our EPS and our returns and the OR may or may not have the same trend in total.

Jason Bates

What was the RONA this quarter?

Ginnie Henkels

We define RONA as our last 12 months adjusted net income as a percent of our average, of the average of our tangible net assets excluding differed taxes less non-interfering liabilities excluding differed taxes. Based on this calculation our RONA was 8.1% at the end of September compared to 6.9% at the end of 2011.

Jason Bates

So looking out longer term, can you please comment on your current expectations for long-term earnings objectives of 15% EPS growth between 2013 and 2017, 100 bps annual improvement and RONA over the next five years, debt reduction and leverage ratio? I believe these targets assumed balanced industry capacity and 2% GDP growth which may or may not be likely at least over the next three to six quarters.

Ginnie Henkels

These assumptions are correct and that we were expecting to have tight capacity in the industry and GDP growth north of 2% when we establish this objective. With that said, these are long term five year goals, we may have ups and downs along the way but this the direction we’re heading and we have aligned the organization to make progress on these objectives. These goals are certainly going to be more challenging and a week economy but we believe if we continue to focus on doing what is right, when the economy turns we should be well positioned for acceleration on these objectives.

Richard Stocking

All right, we’d like to thank everybody for your questions and for being on the call this morning. We’re, as Ginnie mentioned, we’re very excited about your continued transformation, our strategies, our visions and our future. So thanks again.

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.

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