Knight-Swift Transportation Holdings Inc. (KNX) Q4 2007 Earnings Report, Transcript and Summary

Good afternoon everybody. Thanks for joining our call today. I’m Dave Jackson, CFO. First, I will start with the disclosure. This conference may contain forward-looking statements made by the company that involve risks, assumptions, and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1-A risk factors of Part 1 of the company’s Annual Report on Form 10-K filed with the United States SEC for a discussion of the risks that may affect the company’s future operating results. Actual results may differ. First I will review some of the main points from our fourth quarter earnings press release that was released yesterday. Total revenue for the quarter increased 6.6% to $186.5 million. Revenue before fuel surcharge decreased by two-tenths of 1% to $151.9 million and earnings decreased from $20.2 million in the fourth quarter of 2006 to $13.8 million in the fourth quarter of 2007. Our net income per diluted share was $0.16 for the quarter and $0.23 for the same quarter the previous year. For the year, total revenue increased 7.4% to $713.6 million. Revenue before fuel surcharge increased 5.8% to $601.4 million. Net income decreased to $63.1 million from $73 million in 2006. Net income per diluted share for 2007 was $0.72 compared to $0.84 for 2006. Our fourth quarter consolidated operating ratio was 85.3%, which includes an approximately $3 million pre-tax increase to auto liability claims reserves relating primarily to the settlement of certain claims incurred in the prior year. Declines in both revenue per mile and miles per tractor contributed to a 6.5% year-over-year decline in average freight revenue per tractor for the quarter. Our average fleet size grew 4.4% when compared to the fourth quarter of 2006. We ended the fourth quarter with 105 fewer tractors sequentially. Including owner-operators, we ended the quarter and the year with 3,758 tractors. We currently operate 27 dry van service centers, four refrigerated service centers, and 12 brokerage branches. Our cash and cash equivalents increased to $31.3 million. At the end of the year, we continue to have a debt free balance sheet and our shareholder equity increased to $487.6 million. I will now turn the call over to our Chairman and CEO, Kevin Knight.

It is good to be with you. We are glad to have quarter four behind us. As you know that the quarter four of 2007 continued to be challenging with low demand and excess capacity muting the normal surge that you’d expect in the seasonally strong fourth quarter. And as I’ve said, we are pleased to have the quarter behind us and look for the first quarter to continue to be very challenging as a result of the current freight environment. Demand in January continues to be weak, and I would expect for this environment to continue through the first quarter and into the second quarter of this year. We hauled 162,000 plus loads in the fourth quarter as compared to 152,000 plus loads last year, an increase of 6%. We were successful this quarter in reducing our empty miles. It was a significant focus for our company and our high quality associates responded to the challenge and our brokerage group also gets an assist for these efforts. We slowed our growth this year as a result of economic conditions. We opened eight brokerage branches and four asset-based service centers. We were not successful in acquiring any fleets this year. We expect to open three asset-based service centers in 2008 and five brokerage branches as we continue to build our service network. Thirty-three of our forty-three branches and service centers have opened in the last six years. We continue to build our markets and our customer relationships as the new kids on the block from each of our locations. Many in our industry continue to hold the line on growth with several large carriers reducing fleet size significantly. I also believe that this same phenomenon is happening with carriers across the board and size. I also believe debt levels are weighing heavy throughout our industry. I remain optimistic with regards to growth opportunities in the future for our company. And I will now open it up for questions.

[Operator Instructions]. Our first question comes from Edward Wolfe of Bear Stearns.

Just the reading that I got from your release was that you’re going to flat net tractor fleet at this point with the ability to change that if the environment requires it. Is that the fair reading?

I would say that’s a fair reading. Ed, we’ve got currently 300 growth trucks scheduled for this next year in terms of truck orders, but certainly those can be cancelled. We have got divisions that are wanting to add capacity, but until we see a better supply-demand balance, we think it’s prudent to hold growth here before we turn the dogs loose so to speak.

When will those 300 start to come in if you do take them?

We currently have those scheduled to start growing, I think, in the first to middle part of the second quarter, Ed.

And should we assume that we are not going to see down fleets like we saw in the fourth quarter going forward?

Right now, we have no plans. We are planning on just guttin’ it out through this environment. I wouldn’t say that we wouldn’t downsize, but it’s not expected at this time.

What are some of the things you look for when you say we look to see a better supply-demand before we invest a little more vigorously? What are some of those indicators and signs that you are looking for?

Just greater demand for our services. Less effort on our part to book loads and more effort on the shipping communities’ side to get things covered. So really just looking at our daily demand, Ed.

How many weeks do you need to see a better pre-book before you say, “all right, now I have got conviction?”

I’m not sure, Ed. Probably not that much; probably two or three solid weeks would probably do it for us based on the assumptions. And depending on what the ATA information was saying and the various indices and the analysts, and just what we hear in general in the industry and from our customers.

Can you talk a little bit about used equipment? We’re seeing everybody having less gains on sales. Can you talk about pricing versus number of units for sale? And what the market looks like for used tractors?

I would say, Ed, it continues to be challenging in terms of numbers. Pricing has held its own, so to speak, and we really don’t believe that if we lowered the price of the equipment that it would have a significant impact. So we are taking a deliberate approach and trying not to force the market. I think used truck inventories are under control. I don’t think we are swimming in a lot of used equipment. But the fact of the matter is in this type of environment with credit markets being what they are, it’s the truck sales and trailer sales just aren’t as robust as what you would hope.

Sure. Can you take us through, taking the seasonality out the best you can, year-over-year, how October, November, December, and now January have played out for you from a demand perspective?

I would just say, generally weak, Ed. We certainly had some weeks that were better than others, but for the most part, it has just remained seasonally weak. And that same feeling has continued through today. So we don’t really see anything right now that indicates to us that supply-demand balance has shifted.

So how do you we think about pricing as contracts come up, should we think that reported yields keep deteriorating? That they stabilize? How do we think about that?

We are certainly hoping that we can stabilize. Most of our contract pricing through last year was primarily neutral. Basically where we gave up most of our price was on the spot side of our business. But there continues to be pressure there. People are continuing to try to move their freight as economically prudent as possible. And so I would expect that at least through the first few months of this year that not much is going to change there. And I would expect it will continue to be under a little bit of pressure for at least the next couple or three months, is how I would see it, Ed.

Okay. That makes sense. Can you talk about when you open up a brokerage office versus an asset-based center, I’m guessing there is a major difference in terms of the cost and the planning and preparation. What does an average asset-based terminal cost to get up versus a brokerage center? And how do we think about the difference in sizes and commitment and that kind of stuff?

We typically open an asset-based facility with three to four additions. In terms of our head count, we typically lease the facility to get started. And then, we’ll end up buying something and constructing something permanently a few years into the process. So most of it is still trucks and trailers, and that’s where the greatest expense is. If we take a facility that we take say to 40 or 50 trucks in the first year, we have to spend $5-$6-$7 million bucks in terms of capital expense for that equipment. Assuming that it comes from company equipment and not owner-operators, which is typically the case in our start-ups. From a brokerage perspective, we can start those offices with one or two people, and really no capital expense other than desks and telephones, et cetera. And we typically open those branches within our service centers. And so there really isn’t much of an overhead increase in that particular area, Ed. There really aren’t any significant capital expenses for us to open a brokerage branch.

So when you talking about opening up five branches that’s not much cost, but are any of those five typically within your existing centers or when you talk about five new ones, that means they are on their own?

They more than likely, most of them would be within our existing service center network on the asset-based side of our business, Ed.

One last question and I’ll let someone else have it. Can you talk about the acquisition market, and why we really haven’t seen more acquisitions, not just from you, but from anybody really, and the timing of when that might change a little bit?

I would say the biggest inhibitor is really the debt loads. When you look at paying a reasonable EBIT or EBITDA multiple, the fact of the matter is, in many cases that isn’t enough to just pay off the debt, let alone for there to be anything left for the owner. And so, as long as the owner can continue to limp along, it really doesn’t make sense for them to exit the business when they are hoping that things will get better. So if they are in a cash flow position where they can continue to operate and keep things cranking, then it’s difficult to find a price match because of the debt that they are carrying on their books.

That makes sense. Thanks a lot for the time. I appreciate it greatly.

Our next question comes from Justin Yagerman - Wachovia.

I wanted to get on the back end of what Ed just asked. You obviously got enough in cash here. What do you start thinking of doing with that if you can’t find acceptable acquisitions? Obviously, you invest some of it back into the business. But you haven’t been big into share buybacks in the past. Is that something you think about doing or increasing your dividend or anything along those lines?

We certainly look at that on a regular basis. We built about $30 million in cash year-over-year when you compare the year-end. We have the authority for a share buyback, and we didn’t do that in the fourth quarter. But certainly, looking at the CapEx that we will see for equipment into 2008 and where we will deploy our capital, certainly that’s an option for us that we have. But beyond that, we are not in a position where we feel desperate to go use that cash to grow the business at a time when it doesn’t make sense. Also, we don’t feel desperate to go and maybe pick up an acquisition that doesn’t quite make sense. So we are content to have a certain amount of cash on the balance sheet. I don’t think this is a business that has to have an extraordinary amount of cash, but we’re comfortable having $20 or $30 million there.

Yes. And I would add to that, Justin, that I think it’s prudent to have cash when you’ve got many in your industry that are strapped with significant debt. As opportunities do present themselves, we are probably one of the few that could step up to the pump so to speak. So and we still see much opportunity in terms of growing our business over the long term. It might not be immediate, but certainly, we believe that we are going to have a need to deploy that cash through other growth opportunities. And also just when we get ready to start adding equipment again.

Yes. And that’s fair. So when you think about this year, and capital planning, what are you thinking in terms of CapEx, with or without those 300 growth tractors on a net basis?

I think we spent about $90 million bucks this year in CapEx; maybe it was a little over $90, is that right? $92 million. And I would say that by the time the year plays out that we’re probably within $10 or $12 million of that, give or take would probably more on. Probably I’d guide you to lower than where we were last year instead of higher, but probably in that $80 to $90 million range is what I would guess.

Sounds all right. Having gone through this year and not being one of the carriers who have pre-bought in a huge way, where are you with your ‘07 engines? And what’s your experience so far with those from a cost and maintenance standpoint?

Justin, we’ve got about 1,000 of those that we are running right now. And we’ve had just the typical, not major engine issues, just little stuff that you normally have with any new introduction. Certainly with the ultra low sulfur fuel and lesser energy content where we have seen a dip in our fuel mileage, although we’ve tried to offset the majority of that with lower idle times. And we are focusing significantly on that. And so, I would say, we will continue to bring in the new engine in ‘08 and in ‘09 and see what ‘10 brings. So nothing really significant or earth shattering to report there.

And that’s, I guess, a good thing. On the freight mix side, in the fourth quarter, how would you compare the amount of broker freight that you ended up taking on within your network, and how you’re seeing that playing out in the first quarter here?

With fuel prices where they were in the fourth quarter, Justin, we made a conscious decision to reduce brokerage freight −as far as outside brokerage freight. Now, in terms of Knight Brokerage, in the past few quarters we typically hauled about 5% of their freight. And this last quarter, quarter four, we were closer to 10% of their freight. So from that perspective, we did increase a bit. But overall, because of where fuel prices are, and the fact that when you haul a load for a broker, it typically includes fuel, we made a conscious effort to reduce the amount of broker freight that we brought in. And we also made a very conscious effort to reduce our debt head. We felt like even in a difficult freight environment that with fuel prices where they were, we just had to reduce our debt head. And so, all in all, we did a good job considering the lackluster freight environment.

Was that a conscious effort to raise that from 5 to 10% within Knight Brokerage or is it just the Knight was the better solution for that freight or how does that play out?

I would say it was a conscious effort. The asset side of our business has done a lot to help those guys get out of the blocks. And basically, the asset guys said to our brokerage guys, “hey, we’re in this environment, we are going to need some help.” And so, as a result, I would call it a conscious effort, Justin. But still 90% of the loads that our brokerage group booked went to outside carriers.

And last, just wanted to get some color around what kind of conversations you are having with your customers and shippers right now. And then how much of those conversations revolve around fuel surcharge as well as pricing?

I would say for the most part, our shippers have been very good on the fuel side, all in all. Now we don’t get made whole, but for the most part, I would say at least 90 to 95% of our shippers pay what I would describe as a fuel surcharge, what I would say in the fair range. We have seen just a few − you could count them on one hand, maybe a hand and a half − we’ve had a few shippers that have tried to minimize their fuel surcharge responsibility in this environment through various approaches. And we have tried to remain very deliberate in our approach to fuel surcharge and not go there. So, I would say there is some effort there, but that’s it on the fuel surcharge side. Now was there another part of that question, Justin, or not?

Just price, but I am assuming that it is more of what you described as the overall environment right now?

Yes. It’s challenging. But again, I think we are seeing less bids right now than maybe this time last year. I’m not certain of that. The bids seem to be a little bit more strategic in their approach. But certainly in this environment, I think pricing is going to continue to be challenging. But I do believe that as we proceed into the second quarter of this year that I think maybe things will have reached a balance by then I am hoping.

That’s encouraging. Thanks, Kevin. I appreciate the time.

Thank you. Our next question comes from Tom Wadewitz - J.P. Morgan.

So I have got a couple of questions for you. On the cost side, you did a pretty good job in the quarter pushing hard on cost. And I am wondering, where do you think there is room to continue that or to push harder perhaps some thoughts and maybe what the overhead ratio would look like, when you consider tractors and non-driver head count and just maybe some real thoughts on cost opportunities.

I would say, Tom, our biggest cost opportunity is production. When you look at our recent release and in last quarter, certainly with operating our fleet with the new engines and just with lack of utilization, certainly we are depreciating more as a percent as a result of the lack of utilization. So, if we can improve our asset utilization in the coming months that’s the biggest thing we could do for cost. We are certainly watching our non-driving head count very closely. One of the areas that I think that we’ve made significant improvements over the last year or two is on the insurance and claims line, and it really hasn’t shown up yet, but I believe that certainly that’s an area that we can improve. So, I think the key to improve our cost is to increase our production and continue to improve on the insurance and claims line would be the two biggest areas, Tom.

If you look at effective driver pay across the board, and how much that was up in ‘07? And when you look at ‘08, is that going to be flat, going to be slightly down or slightly up, how do we think about driver pay as a factor in the cost?

I think certainly the driver pay increase is moderated in this past year and we were flat there. But I would think that that’s still an area where I believe requires improvement over the longer term. So, what I would see is probably not much happening in that area until we are able to strengthen the pricing side of our business. So, from a driver cost per mile perspective, those numbers will probably be near flat to up minimally year-over-year. Would you agree with that Dave?

Yes.

And you’ll be in a similar position in ‘08, you can’t really bring that down, but you keep it flat in ‘08 versus ‘07?

That’s the goal.

Okay. On acquisitions, you’ve made the comment that you’re one of the few players out there that has cash, and you’ve got no debt. So that favors you in looking at potential acquisitions. Do you ever consider something a little on the bigger side? Maybe 400 or 500 trucks or something like that. What’s the range of size that you would consider?

We are of a size now, Tom, where 400 or 500 wouldn’t be that big of a deal. But we just haven’t been successful in finding anything there where, like I say, when we figure reasonable multiples that there is something left over for the owners. But, yes, we certainly would consider that. I think if we did anything bigger, say in 600 or 700 trucks, then that would probably be surprising. But certainly if we did, we wouldn’t integrate that. We would probably isolate that and not make it part of Knight. But we’re looking at all opportunities, and so if you know anybody that’s looking for a good owner, feel free to send him our way.

Okay. I’ll keep that in mind. Last question: It seems like capacity maybe has been a little bit slow to lead the industry in terms of bankruptcies. And I wonder if you agree with that. And if so, how much time do you think it would take to really get the ball rolling on bankruptcies taking place and tightening up capacity through that avenue?

I’m probably not so much of this school where I think that come February or March that all of a sudden all these trucking companies are going to disappear. So I wouldn’t say that I believe that over the course of next couple of months that’s going to be the cliff event that gets things back in perspective. I think we are making progress every month. And I’m not sure what that number was in terms of oversupply. I don’t know if it was 50,000 trucks or 100,000 trucks. I just don’t know. I do know that certainly builds are down and I know that much of the used equipment now is going offshore. I know many of the large carriers are reducing their fleet size. And we know that because they are public. We have to disclose that or do disclose that type of information. You can only assume that if indeed that is the case, then certainly that’s a phenomenon within all of the ranges in size of our industry, and probably more so the phenomenon with the smaller carriers. And trailer sales have been very much down, which really is where that capacity is to load loads. And so, I just think we’ve got to just continue to work our way through this. And hope that our industry will continue to really recognize the challenges. It’s obvious that those fleets that have tried to grow, that when we can get access to their numbers, it’s really been difficult on them the last year. So I think that we have got capacity exiting. I don’t think it’s going to be a cliff event. But I think once it does change and once it does come into balance, I think it will be steady improvement from there. I also believe that with what we went through in the ‘06 pre-buy, I’m holding out hope that we won’t have a significant pre-buy or as significant of a pre-buys in ‘10. I’m hoping our industry has learnt significantly from that.

Right. Okay. Great. Thank you for the time.

Our next question comes from Jon Langenfeld – Robert W. Baird. Jon Langenfeld – Robert W. Baird: Kevin, how successful can you be inside the company redistributing capacity if you need to?

Now when you say redistributing capacity, you mean as far as to get growing again, Jon? Jon Langenfeld – Robert W. Baird: I mean you have trucks that are basically domiciled or owned by a given location and you made the mention that there are some locations that would actually like more capacity to them. Assuming there’s other locations that probably may have too much capacity, is there a way to fluidly move those trucks or the ownerships of those trucks inside the company from one location to another?

Yes. We do, do that. But we really don’t encourage it, Jon. At the end of the day, just like when we open the doors here, when we have a truck come in, we have to figure it out. And we are certainly trying to do the same thing with our divisions. In terms of wanting additional trucks, we virtually have no division that isn’t asking to operate more trucks this year. The only problem being until we get a better sense of direction on the freight side, like I’ve said earlier, that turns the dogs loose. So we really tried not to redistribute. We have done some of that, but it’s certainly something that we expect to do less of in the future. I believe when a division says that they are going to grow by 10 or 15 or 20 trucks, I think that’s what they need to do. Jon Langenfeld – Robert W. Baird: Got it. And then, switching gears on the brokerage side, are you seeing anything different in terms of payment terms or accelerated payments or advances to the smaller carriers to still make that model work?

I don’t think so. We pay quite rapidly. We have a Quick Pay program, Jon but I don’t think we’ve really seen any major changes there. I think the guys that were taking advantage of Quick Pay yesterday are still taking advantage of it. The guys that weren’t, aren’t. A lot of our brokerages is to larger carriers, and they typically don’t take advantage of Quick Pay, and typically our smaller carrier base does. So I can’t really say that we’re seeing anything significantly different there. Jon Langenfeld – Robert W. Baird: Okay. And then, finally on the pricing side, a lot of moving pieces just in terms of the type of freight and length of haul. But if you were to just characterize contractual pricing now and you almost made it sound like, it’s not getting worse, it’s just not getting better. Am I reading that right in that assessment?

I would say so. The first quarter, Jon, you always feel pressure. And the reason you feel pressure is because there just isn’t enough freight. And so, you always feel in the first quarter like you are losing some ground. And I mean that’s just a natural feeling. I tried to shake the negative thoughts out of my mind every first quarter. But I have never figured out quite how to do it completely. But I think when I look at last year and our contract prices, I think we did a pretty good job. All in all, we are holding on to what we had. Our biggest disappointment was just that we didn’t really get much spot opportunity last year. So I have always got a negative bent in first quarter as to what’s going to happen to pricing. But like I say, looking back on last year, all in all, I think we held our own pretty well. Now we didn’t hold nearly as many loads as we would have liked to, but that’s how it works. Jon Langenfeld – Robert W. Baird: And is that your sense that there is still a portion of the freight out there that the shippers are holding back for spot markets simply to try and take advantage of the weak market more so than they would have in the past?

I think there is always somewhat of a spot market going on, Jon, either on the plus side or the minus side, via these transportation management systems that many of our shippers rely on. And so, I think in today’s environment, those systems are finding lesser expensive transportation solutions. And then as we move into the busier part of the year, they struggle to find those solutions. And then if you get into the year, when we have our next peak, which we are certainly hoping is in ‘08, that’s when really the spot side of things start to favor us. But there is always a certain amount of spot going on. It’s just, where is the market, and are we on the positive or the negative side of the ledger? I think that certainly shippers are struggling to get their freight covered and they are trying to use technology to get it covered as price favorable as they can, assuming that the provider provides service. Jon Langenfeld – Robert W. Baird: Got it. Okay. Well, thanks for the color, Kevin.

Our next question comes from Jason Seidl - Credit Suisse.

A quick question. You did a very good job in empty mile factor in 4Q. Do you see that trend continuing here as we move throughout 2008?

We are sure going to work on it. It remains a focus for us, Jason, and so we would expect to be down year-over-year in that particular area. And, hopefully, we’ll be successful. But with fuel prices in the three plus range, I mean, it’s expensive to dead head an old truck. So we are really trying to mitigate that.

And, Kevin, just so I can understand how you are thinking about the marketplace, you mentioned that you believe that probably pricing should firm up after the second quarter, but you also said that you don’t expect a rash of bankruptcies. So I’m just going to assume you are anticipating that the economy picks up some time after 2Q?

I’m hoping, but I’m not sure I’m really expecting the economy to pick up that quickly. I’ve always felt like about the time that Wall Street Journal says we’re into a recession, that for the truckers the worst will be over.

Probably right.

For some reason or another that seems to be the way that it works. But I would say my feelings come more from the fact that, Jason, I think we are steadily moderating the capacity and at some point, we are going to start to fill that. And is that in the second quarter or is that in the third quarter or is that next year? I don’t think I really have a strong enough feel for it. But I’m certainly hoping that by the time we move into the second quarter that we start to see that change.

Okay. And I have one follow-up and I’ll let somebody else have at it. Dave, I didn’t see in the release or maybe I just missed it, did you have a mile per tractor number or growth in miles per tractor for the quarter?

We don’t have that in there. But we replaced it with − and we did this several quarters ago − was the freight revenue per tractor. And then, there was some commentary in there that the 6.5% decline year-over-year for the quarter, that half of that was attributed to miles, the other half was revenue per total miles.

Okay. Fair enough. Gentlemen, thanks for the time as always.

Our next question comes from Tom Albrecht - Stephens Inc.

Dave, just a real quick question first off, the tax rate has been a little bit volatile the last few quarters. What’s your latest thoughts on what we should be modeling for ‘08?

I’d model in the 39.7 range for ‘08.

Okay. It’s actually what I have got. And then, Kevin, I was just reviewing some notes from several years ago on sort of hidden ways that you used to drive productivity with your assets. And I don’t know which of these are still relevant, if you still think about these things. But one is, I remember you used to have a voluntary slip seeding policy. I think your goal was to get between 5 and 10% of the trucks operating basically every day of the week even if it meant slip seeding. Can you talk about whether that’s still one of those tools that occurs within your fleet? And then, can you talk about maybe what your ratio of drivers to trucks is?

Tom, that is one of our strategies and continues to be one of our strategies. And, of course, with not having the freight to really support it, it is sometimes difficult to do that. I mean certainly if we could run a truck seven days a week, that’s a whole lot better than five or four or six. Unfortunately, in this environment, our drivers have to run the truck six or seven days a week to get the productivity of five days. So we continue to encourage our divisions to think basically in those terms. And what was the second part, Tom?

Driver to truck ratio? I think a lot of fleets have 1.1 or slightly higher. But as I recall, you used to have better-than-average ratio, and I’m guessing you put renewed focus on that?

We put renewed focused on that in the last quarter too, Tom. But literally that number is in the 1.1 to 1.5 range and we’re trying to get that number higher. And we are going to work hard to do that. Of course, freight is working against us a bit here because we have to be careful about making sure that our drivers get enough work to earn a good check. And so, it’s a ‘danged if you do, danged if you don’t’ type scenario when the freight demand isn’t as cooperative as you wish it would be. I will say this, Tom, when things do pick up, we are going to have renewed focus there, and we are definitely going to try to enhance that.

So do you still even have a part of your fleet that what I would call a weekend fleet? Retired worker?

Yes. We do.

Is it about the same as it used to be or has that shrunk over the years?

I would say that some of our divisions haven’t yet incorporated like others have. I think probably a lesser percentage of our divisions get it. When it comes to that or demonstrated yet that they get it. So I would say, Tom, all in all, it’s probably a lesser percentage of the overall fleet to what it was several years ago.

Okay. And then, in terms of pricing and then earnings, but I am not really looking for earnings guidance, but it used to be that your first quarter, unlike most truckers never missed a beat with the fourth quarter. Your earnings were very comparable because you had a lot of dry food, and your rates were almost the same. But I’m going to assume that because of the current environment, I’m just going to pick a number, if you were close to $1.70 a mile in the fourth quarter, we’re probably going to see a couple of pennies fall off just because it’s slower time of the year?

Yes. I think that’s a reasonable assumption, Tom.

And I know you commented to one of the other guys earlier on pricing, and I think there are going to be a little fewer bid packages than a year ago. But that was kind of one for the ages. I still think it’s going to be high relative to many years. But I’m hearing that fuel is one of the tools that’s being used more aggressively, where that old threshold was $1.20 a gallon when the surcharge kicked in and people are pushing that to $1.80 or $2, and carriers are then afraid to roll that into the base rate for fear of losing freight. Can you talk about whether you are seeing more of that attempt to reset where the fuel surcharges kick in?

Probably not any more so than last year, Tom. I think there is a few out there probably making a lot of noise about that phenomenon. But for the most part, Tom, our shippers really understand that their costs are a combination of fuel and the rate per mile, and they really recognize that it’s just a cost of doing business. Now I will say most of the shipper directed programs don’t make us hold for our idle time and our empty miles and our outer route miles. So I don’t want to get in too much credit. But it’s a small minority. And when we look at that business, if we had somebody that came to us and said, we’re taking the base to $1.80 instead of $1.20, quite honestly, we are probably going to err on the high side in terms of what we put in to cover up that $0.60 gap. Now it probably doesn’t help us get a lot of freight, but we just believe that most of that activity is done for the purpose of reducing overall freight cost. And so, if you aren’t on top of your game, somehow you are going to lose. And so if that happens to us, we probably not only put that in the price, but a little extra. Now like I say, it’s probably not been effective to getting us many extra loads. But with this fuel where it is, it’s just really, really difficult to take on any more of that.

Okay. This is why we come to work every day to see how it plays out.

Yes.

One last question here, I know that recently you’ve emphasized accountability again and discipline within your network and all the different service centers. Does that mean that there has been some turnover within the service center leadership as you are really holding people accountable for the trucks, i.e., the small fleets that they run?

Could be a little bit. We’ve had a little more turnover, Tom, in our leadership in the last, I would say, 12 to 18 months than we have in the past. It’s a different environment. In our model and the way we do things in a good environment, it is a little easier to not feel pressure. And when we get into a much more difficult environment like we are in, and because many of these service centers that we have opened have been in the last six years and some of our people don’t have a great deal of experience, it’s a little different feeling for them. And some of them haven’t experienced that before. I think the good news that comes with an environment like this is that many of our people that have been brought on since 2002, this year for the first time got more of a taste of how it can be. And so, I would say that’s the positive. But I would tell you, we feel we’re more excited than ever about the leadership that we have in the divisions that we have and the sales effort that we have behind backing those people up.

And what do you attribute the recent improvement in the refrigerated division to 100% your own initiatives, or was there some improvement in the demand dynamics of the refrigerated market?

I would say on the refrigerated side, we’ve now owned both the carriers that we purchased for at least a year. So we’ve made some progress there. We actually operated that fleet in the quarter to 90, which as you know that’s not where we want it to be. I think we saw better demand for our refrigerated services in the fourth quarter than we did in the third quarter. Now January and February will typically be pretty tough months in that business also and kind of tough through April. And so, we will have our work cutout for us. We’ve also further developed our management team there. We’ve given the refrigerated guys some of our higher quality people on the dry side. And so, I would say that they have a very sound leadership team. And so, just in that progression of integrating the acquisitions and development of people and the leadership to where we can ultimately achieve the operating results where we were with the refrigerated trucks that we brought from the ground up ourselves.

Okay. That’s all I had. Thanks.

[Operator Instructions]. Our next question comes from Ken Hoexter - Merrill Lynch.

I just have two questions. One on the brokerage side. I just want to know if you are getting a feel in the market; you talked about the bankruptcies in the market. You hadn’t seen much on the competitors. Just as you use a lot of carriers in the brokerage side, are you seeing that start to tick-up?

We have carriers that come and go on that side of our business. We’re probably not a good measurement there, Ken, because we’re still in the early stages. And so, our carrier base is significantly larger today than it was a year ago. Now certainly, we’ve had carriers go by the wayside, but I don’t track the statistics of carriers that go from being qualified to unqualified in our business. We are still just out there trying to get that thing build up to where we’re a meaningful player in that side of our business. So I don’t think I can give you much of a read there.

Okay. Fair. And just on your move to your outlook for more a flattish type of growth. Do you think the industry has gone kind of an overhaul more as a cyclical growth, a little bit different − I guess it’s deregulation − you’ve really continued to see growth of the major fleets continuing to focus on market share. Do you think this is the new world that unless you continue revert back to making acquisitions that there is no more market share gains, or can you continue to take market share?

No. I think we can continue to take market share. I think certainly what you say, Ken, as an industry is probably applies; we are now 27 years post deregulation. But we’ve really tried to build our business in a way that will allow us to continue to build our markets and take market share. As we open each service center, we are reaching a point where there almost isn’t a distribution center that we aren’t within 50 or 100 miles out. Now we aren’t there yet, but certainly as we get the rest of these things opened, we think we’re going to be in an excellent position, both with the small shipper and also with the large shipper; the small shipper will be rewarded by us because it won’t be a service center because none of them are that big that we will take their freight for granted. And on the larger side, it’s a pretty powerful sales approach when you can offer dry, refrigerated, and brokerage to the larger shippers, and where you can provide the high touch that we do out of each of our service centers. Typically with the larger shipper, we’ve got 10 or 15 of these locations that are providing service. And so it really gives us an opportunity to build our relationships with those shippers. We still are the new kids on the block. So, like in the East, we are the Johnny-come-lately, so we’ve still got a lot of work to do. But I don’t think there is any question, our model is the one that can sustain growth and market share penetration.

Kevin, I’m little confused on that point, just because it seems like if everyone now amongst the larger carriers now agreeing to reduce fleets to not add too much excess capacity. I just want to understand, when the market turns, does it then just become who has got the better service will then take the market share? Or is it just the need to run these smaller companies out into bankruptcy to get them off the map, I am just trying understand that. So when we have growth again, how then does Knight return to 15% fleet growth that you were talking about a few years ago?

You just turn the dogs loose, Ken. You’ve got 31 service centers and every one of them have the ability to build their market. None of them are oversized in their market either from a driver standpoint or a customer standpoint. You’ve got to have the freight to do that. And in the environment that we’ve been in, it just doesn’t make sense for us to do it. So we still have a very high level of confidence that we’ll return to growth. So that’s how we see it.

Okay. So tuck-in does well during the downturns and then grows rapid faster than market in the upturn?

On our asset based side and just continue to grow and develop our brokerage side as fast as we can consistently to become a meaningful player there.

That’s helpful. Thanks for the time.

Thank you. At this time, I show no further questions.

Okay, then we will conclude the call. We appreciate all of those who have been with us today and appreciate all of our people and all that they do to help us build our business, and we will talk next quarter. Thanks. Good bye.