Jan 29, 2009
Operator
Good day ladies and gentlemen and thank you for your patience. You’ve joined the fourth quarter 2008 earnings release call for Knight Transportation.
(Operator instructions) I would now like to turn the conference over to the host of this conference, the CFO of Knight Transportation, Mr. Dave Jackson.
Sir, you may begin.
David Jackson
Thank you, Latif. Good afternoon everyone and thanks for joining our call today.
Hopefully, you’ve had a chance to review the slides that we’ve also posted in addition to our press release today. Those slides that will accompany this commentary that we offer today are available on our website.
The actual web address would be investors.knighttrans.com/presentations. Our call is scheduled for one hour following our commentary we hope to answer as many questions as we can up until 6:15 Eastern time.
We would ask call participants to limit to one question and one follow-up question if needed. First I’ll start with the disclosure.
I would refer you to the disclosure on page two of the presentation. I also read the following: This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions and uncertainties that are difficult to predict.
Investors are directed to the information contained in item 1A risk factors or Part 1 of the company’s annual report on Form 10-K filed with the United States SEC for discussion of the risks that may affect the company’s future operating results. Actual results may differ.
I will cover some of the numbers in detail including a brief recap of the four-year results; I’ll then turn the call over to Kevin Knight after through with the discussion. First I’d like to refer you to the summary on slide 3 on the presentation, for the fourth quarter on 2008, for the revenue, decreased 6.3% to a $174.8 million.
Revenue before fuel surcharge decreased 5.5% to a $143.6 million. We operated an average of 19 fewer trucks during the quarter compared to the last year’s fourth quarter, and while revenue for total mile improved as a result of the 9.3% decrease in average length of all (ph).
Tractor utilization was negative with miles per truck down 7% for the quarter as compared to the year ago period. The decline in miles per truck began in the latter part of October and further deteriorated as the quarter progressed.
As a result of the negative miles per truck, we reduced our fleet size modestly in the quarter. Operating income of $26.9 million represented an increase of 20.7% from the same period last year.
Net income increased from $13.8 million in the fourth quarter of 2007 to $16.1 million in the fourth quarter of 2008. Our net income for diluted share was $0.19 for the quarter, an increase of 20.2% over the $0.16 per share for the same quarter of last year.
For the year, total revenue increased 7.5% to $766.9 million from $713.5 million for the same period of 2007. Revenue before fuel surcharge decreased 1% to $595.5 million from $601.3 million for the same period of 2007.
Net income decreased to $56.2 million from $63.1 million for the same period of 2007. Net income per diluted share was $0.66 compared to $0.72 for the same period of 2007, a decrease of 9.4%.
Slide 4, reflects the balance sheet information. As of December 31, 2008, we continue to be debt-free while our cash and short term investment balance grew to $53.9 million.
Our cash and short term investment balance has grown by $22.6 million since December 31, 2007 and that’s after spending $66.3 million during the year for dividends and stock repurchases. With a low (inaudible) operating ratio, we can basically self-fund fleet growth probably in a low double digit range.
During periods when we choose to either modestly turn the fleet or even hold it about flat, we generated the truck with level of free cash flow. If you can see the summary inside the Slide 4, there was a time free cash flow is net cash flow from operations less net cash used in investing activities.
We can use these cash flow for dividends, share repurchases, or as we have in the past, to make acquisitions. We finished the year with shareholders’ equity of $483.9 million.
We’ll next hear from the company’s CEO and Chairman, Mr. Kevin Knight.
Kevin Knight
Well, thanks Dave and I appreciate you guys being on the call today and this is a little different for us trying to have our call right after the earnings released, but we feel like this is a better way to do it. We’re also going to spend a little more time with our prepared remarks than what we have in the past, due to the reason of making sure that shareholders that are interested in owning our business have an understanding of how our business works.
Sometimes, I think we can be confused or it can be confusing if you try to keep track of how all these different transportation business is worth. I’ll refer to Slide 5 next.
The fourth quarter was certainly a challenging trade environment what we have become somewhat accustomed to not seeing seasonally peaks. The sharpness in the fall-off of economic activity late in the quarter was unprecedented.
Price competition was capped, but the industry continued to rationalize. We saw more curious (inaudible), many the large fleet continue to downsize and there are a good number of carriers I’m sure were on the ropes.
In that regard, I can’t help but feel that the longer and tougher this is, the better it would be for the surviving carriers. As Dave mentioned, despite the challenges we were able to grow our operating income and net income at double digit rate in the quarter.
Profitability in the quarter was helped by falling diesel prices, our own initiative to reduce cost and the flexibility of our decentralized business model to adjust and to adapt the market condition. With fuel prices climbing rather steadily over the couple of years, it took a big deal of internal disappointment to not succumb to short term fixes and by that I mean costly expenditures that will only make sense until state at historically by levels or alternatively hedging programs, which are really not our area of expertise.
Higher fuel prices, which we cannot control did however helped sharpened our focus on improving those items that we can’t control such as reducing outer out miles, decreasing idle time, improving our fleet MPG and improving our fuel purchasing. We improved in each of these areas in 2008 and we take those disciplines into 2009 and beyond.
On Slide 6, I refer you to Slide 6 since our inception is an important element of our operating model has been an extreme focus on our cost per mile. We carry this focus with us as we act in service centers grow existing service centers and tucking acquisitions.
We sometimes get questions about whether or not we are a growth company. We firmly believed that we are.
If we look at the truckload environment over the last few years, first we had the industry-wide pre-buy in 2006, the head of the 2007 emission standards. Meanwhile, housing and auto industries began to slow significantly, then we experienced an unprecedented hike in fuel prices.
We began to slow our fleet growth given these headwinds. We have subsequently experienced two more full years of economic weakness, which has created and unfavorable supply-demand balance for carriers.
When we reached more of a supply-demand equilibrium, we intend to continue growing. Referring you to Slide 7, we continue to operate in three primary business line that’s shown on Slide 7.
All three of our homegrown businesses performed well in the quarter. Each businesses are stand-alone, successful businesses that complement one another.
They work in harmony with each other to deliver solutions to our customers that otherwise wouldn’t be possible. Moving to Slide 8, we continue to be encouraged by the overall growth of our loads of our three businesses.
If you refer to Slide 8, our load count grew by 2734 loads in the fourth quarter of 2008 over the fourth quarter of 2007, an increase of 1.7%. Given the continued bulk (ph) off in housing, autos, industrial production and retail to name a few, we believed we are taking market share and we know our customers value our service proposition.
Moving to Slide 9, Knight has operated profitably through multiple economic cycles. We do these cycles as opportunities to gain market share from other competitors that do not have the financial staying power to survive the cycles.
These cycles also provide valuable experience to our managers that will help us develop the leaders to grow this business profitably. Slide 10, we currently operate 3699 tractors including owner-operators.
We have a relatively young fleet of fuel efficient 2007 emission compliant engines and they are all paid for. In contrast, the average truckload carrier fleet is old, getting older with limited financing opportunities from banks.
This was evident in the third quarter and it has only gotten worse. The only break it seems that anyone has gotten recently was the long awaited decline of fuel prices.
However, fuel relief came only as economic activity took a sharp downturn. Beyond the immediate challenges that many carriers faced, the issues of safety, security, environmental restrictions are becoming increasingly stringent and costly.
We think all of these factors set to stage for future growth opportunities for low cost, high quality carriers that can self-fund growth and serve customers on a national basis. We believed these factors resonate with shippers and can help us differentiate ourselves from our competitors.
Moving to Slide 11, each Service Center we open become somewhat less risky and both strengthens and it strengthened by our existing network at centers. We’ve opened 35 asset-based service centers, 32 of which are home-grown, starting with one truck.
When market conditions improved, adding just a few trucks to each center creates pretty leaning full top line growth, while at the same time is manageable for our people. They add trucks for in-market customers with drivers that they have recruited at the local level.
We also sell complementary services in our existing markets. Moving to Slide 12, we think our strategy and business model have served us well and enabled us to grow more rapidly than our asset-based peers.
We remain committed to the truckload business. This slide compares us to the best of the best.
I give you three initials, J, H, and W. Let’s move to Slide 13.
When our customers have a need we tend to fill it and most of the time those opportunities really helped our business become better and stronger. I remember many of the comments we received when we got into the refur business, well, the porterage business could be just as significant.
It raised markets so broken, they don’t work for the environment and there has been zero return for the truck owner. We plan to provide the highest level of service and contribute to a better environment.
We also expect that our service will be cost effective for our customers. Let’s move to Slide 14.
We have a diversified customer base with no customer at county for more than 5% of our revenue. We believed we are diversified by geography and by the type of goods that we haul for our customers.
Each service center branch or truckload complementary business we open brings new customer opportunities. Moving to Slide 15, during these times we’re also pleased that we have a relatively low fixed cost structure as compared to other modes of transportation.
These are JP Morgan estimates and we think among asset-based truckload carriers the 31% fixed cost estimate is fairly accurate. We also have a significant advantage over those that have equipment receivables finance as the finance charge increases this fixed cost.
We’re continuing to work towards less fixed and more variable cost, our brokerage business, our owner operators and our trade business are all asset-like compared to our core truckload businesses. Let’s move to Slide 16.
I don’t think you need to be in the (inaudible) to realize that demand conditions are likely to be difficult at least over the near term. From our perspective, the issues that has been causing the truckload fleet to rationalize are perhaps more pressing than at anytime we can remember.
We’re now in the (inaudible) weakest period of year, licenses are billed, insurances billed, competition for loads is high, and used equipment values are crasher and credit availability is low. We think that all of these mean that benefits will accrue to the quality carriers that have sufficient capital and a profitable business models.
Moving to our final slide, our strategy for these challenging times has not changed and we will continue to utilize the flexibility of our decent price models to react and adapt to market condition. We utilize our low cost truckload business model to gain market share in any environment.
We do something to centralize, and we do something to decentralize. We’ll continue to focus on improving our cost per miles.
We continue to open new service centers and branches and we’ll carefully act businesses that serve the truckload market. We’ll now open the call up for question.
Just as a reminder, we’ll conclude the call at 15 minutes after the hour and we would ask that you limit your questions to one question and one follow-up and then after we get through all the questions, if there’s any time left, we can call on to you again. So, Latif, we’d like to turn it back to you.
Operator
Yes, sir. Thank you.
(Operators instructions) Our first question comes from Tom Wadewitz from JP Morgan.
Kevin Knight
Hey, Tom.
Thomas Wadewitz
Hey, Kevin. Hey Dave.
Let’s see thanks for the slides that was very helpful and well put to get the presentation as helpful to -- and if you go to the story and drivers. I want to get your sense, I guess, first (inaudible) and feel and in terms of what is within the quarter, what is efficiency if you can (inaudible) that out cause perhaps that would ongoing?
And how if you have gallons of fuel paid, something like that. First, is what was the timing benefit and then on the surcharge and I have one follow-up.
Kevin Knight
I would say when you take all things into consideration Tom that we control. I would say that probably a double digit is the stock with draw, maybe in the 10% to 15% range, and I would say the balance would come as a result of fuel.
Now when you look at fuel on our income statement, one of the things you have to recognize is that in purchase transportation we pay our brokerage carriers. There are fuel surcharge and our own operators their fuel and that goes out on the purchase transportation line that the actual fuel charge gets the credit that do our fuel surcharge lines.
So it’s not the easiest thing to understand and sometimes it understates fuel a little bit in terms of true percentages. I think the other thing Tom, when you look at fuel, we are fuel cost if we’re doing a good job should be roughly 10% to 11% give or take.
So, when you think about things -- last year we had fuel prices that were overstated, (inaudible) sales were overstated, but higher than they should have been. This year we have fuel prices that are lower than they should have been.
And awfully, that number probably belongs in that with the amount of purchase transportation that we have in that 10% to 11% range is what I would say.
Thomas Wadewitz
Okay, great. That’s helpful.
And I guess that, to follow on is it just your view on the bid season that sounds like this fanatic pace with a bit activity going on and what do you think that this ability to capacity reduction comes in quickly and opt to avoid the reduction in wage or what do you think that, you know maybe have to take some pains for a little while on lower rates before that capacity rationalization really start to benefit you.
Kevin Knight
Yes. I would say we expect it to be a robust big season.
You know, I’m an optimist and so I tend to look at these bids like based on our diversified base of customers and the fact that no customers more than 4.7% of our business. I tend to look at them as so, you know, there’s probably a lot of opportunity in those bids for us.
We have a, what I would call a very refined process in working these trade opportunities in our business and so, you know, I’m sure in some cases, we’ll lose some, but I’m sure in some cases we’ll gain some. As far as the overall rate structure, I expect that it will be competitive and if things will try to get a little worse Tom, before they get a little better, whether that’s 1% or 2%, or 2.5% or whatever that number ends up being, I wish I had a crystal ball that could tell me.
Yes, I think it’s gonna be active, I think there will be a some pressure on cost early in the year and that’s how I see it. I hope that helped.
Thomas Wadewitz
Yes, that’s very helpful. Thank you for the time.
Kevin Knight
Okay. Thanks Tom.
Operator
Thank you. Our next question comes from Justin Yagerman of Wachovia.
Kevin Knight
Hey, Justin.
Justin Yagerman
Hi, how you’re doing Kevin?
Kevin Knight
We’re doing great.
Justin Yagerman
That’s good to hear. When looking at fleet management in the quarter and as we moved on to’09, I’m just curious when you started taking tractors off the road in the quarter.
Did you wait awhile or was it kind of that’s more constant throughout the quarter? And then as you’re looking out and reading your (inaudible) in’09, you know, what are you looking for to potentially start adding some capacity back to the fleet and give you the confidence that you want to start putting some more trucks out there and I guess conversely, what would get you to take more capacity off the road?
And are you doing that now in January?
Kevin Knight
Well, I would say Justin, the answer to your question is we started taking equipment out late in the quarter. And basically when things dropped off in November and December in our utilization, we could see was worsening.
That’s’ when we started taking equipment out. We really haven’t stopped.
We took some out in the fourth quarter and we’ve also taken maybe 75 or 100 trucks out in the first quarter and we’re going to watch it there for awhile and kind of see where this thing takes us. Within another three or four days we’ll be able to compare January to January and certainly it’s health for us to take that equipment out.
I wouldn’t expect Justin, that we would add anything until we probably get in to the May, June time frame. We kind of wait and see what happens around the beverage and produce season and when I say that I’m saying is as a whole.
Well, probably Justin the – I mean as we’ve looked at this we’ve taken more capacity out of our drive end fleet. We’ve not taken any (inaudible) out of our refrigerated fleet and certainly we’re growing our import/export drage (ph) fees.
But when you look at the whole conglomerate, I would probably say you might look for us to go negative by up to a 100 trucks in the first quarter and it could be a little bit more, could be a little bit less. Then probably you don’t stand the holding pattern at least in February, March and April would be my guess as far as growth and then – and I just hope for the best.
Justin Yagerman
Got it. That’s really helpful Kevin, thanks and when I’m thinking about this drage (ph) business that you guys are building out, there was an article I think in the Orlean Times recently about the incentives that were being giving out and there were problems with the, I think $20,000 per truck that were supposed to be allocated.
Is that something that excused the returns in that business? Is that a problem that you guys are encountering or is there a work around on that and how do you see that the eventual returns on that business as compared to kind of Knight as a whole?
Kevin Knight
Yes, we really haven’t encountered for any of that. We didn’t receive any of that in the fourth quarter, Justin.
So, we’re expecting for the ports to fulfill their promises to us. But I got to tell you, even without that we like the way we’ve been received over there.
And then we have some of our current customers, but several new customers that it’s really allowed us to develop a relationship we had. The word on the street is that the fees gonna start being charged in February and for trucks that aren’t as environmentally sensitive as ours, and so I would expect that if that happens, if we don’t have another start or stop, I would expect that should help that business as we move in to March, April, and May.
Certainly with the Chinese New Year, and I understand they have extended it. February is gonna be, probably a difficult month for that business, but you know, it’s not being that we haven’t dealt with before, and we’re basically trying to grow or try to take market share through this more difficult times.
Justin Yagerman
Yes, is there a significant cross-sale opportunity there that you’re starting to experience or –?
Kevin Knight
Well, I would just say yes. I mean, certainly we’ve picked up customers that are now using our drive-end service that hadn’t in the past from that particular shipping occasion.
And certainly we’ve leveraged the customer base that we have in order that, you know, when business in the ports. So, yes, it’s these big businesses that – these truckload businesses that we start, they all tend to help each other.
Justin Yagerman
Thanks a lot Kevin. Great shape, the call.
Kevin Knight
Okay, thank you, Justin.
Operator
Thank you. Our next question comes from Chris Thristle (ph) of Credit Suisse.
Kevin Knight
Hi Chris. How are you?
[Chris Thristle
How are you?
Kevin Knight
Good.
[Chris Thristle
You know, I apologize if you’ve covered this, but what’s the scope of this opportunity that porterage business? How big is it?
How big do you think it would be? What kind of capital you’re putting into it?
Kevin Knight
Well, I’m being creative. It probably has the potential to be a pretty solid business.
I think probably, our initial target is probably in the $40, $50, $60 million in revenue opportunity and probably would most of that coming from the Southern California ports. I think, though, you know this initiative moved the way up the coast and also as they moved their way down the other coast.
I think there will be opportunities for us just because we have a click driver-based. We build the focus team ship lines.
We’ll have people on the West Coast, they’ll have their things to tell people on the East Coast. I look at it like I would expect this business sold the course the next two to three years.
They probably grow in somewhere in the probably $50 to $75 million range and it’s gonna be interesting Chris to see how serious everybody who drives these drage (ph) gets about really cleaning up the air. I mean, when you look at where we are from a truckload perspective, we’re way ahead of the ports and the rails and all these other different modes of transportation in terms of what we’re doing as compared to where we were to enhance the environment.
And so, just kind of depends on how it catches on. I would say probably, the next most environmentally unfriendly place for a port would probably a rail yard and it's going to be interesting to see how long the cities and towns really put up with that.
So I think as long as the environment remains important and as long as we do a good job and build these customer relationships, Chris, I think it'll be meaningful. The other thing I would like to highlight is it's also asset–wide.
I mean it's a business that basically we don't have to provide the trailer and so from that perspective, we do have to provide the truck, but from that perspective, it makes the return on capital much more favorable on the same type of operating ratio. So we like it for a number of reasons.
[Chris Thristle
Any environmental angles, is that just because you have newer sort of postal 7 trucks (ph) trucks?
Kevin Knight
Well, yes and I don't think it's just kind of newer postal 7 trucks. The fact that we're competing with trucks that– I remember running when I first started at Swifts (ph 00:31:22) so I mean there's such a wide gap, Chris, as far as even the '03, '04 models that we've ran.
Then you go to the '07 models and soon we'll be adapting the '10 models and it is most of that dredge (ph 00:31:41) work is being done with very old equipment.
[Chris Thristle
Okay. The second question, what's your participation or your view on the dedicated service (ph) market.
Is that something that you plan to get into in greater level?
Kevin Knight
Well, we probably do, Chris, between probably $50 and $60 million worth of dedicated business on an annualized basis already. And I wouldn't say it's something we plan to get into any more than we currently are.
Certainly there's not a week that goes by that we're not working on something and we'll continue to do that and I think the business that we have, good business for us, it works for our customers and our service centers like it, too. And it lands on their P&L and they’re the ones that manage it and so I would expect that we'll continue to look for ways to grow that business over time.
[Chris Thristle
Okay, thank you very much.
Kevin Knight
Thank you, Chris.
Operator
Thank you our next question comes from Chris Stapacolo (ph) of Damon Rhode (ph). Your line is open.
[Chris Stapacolo
Good evening, gentlemen. I was just wondering if you could comment on the OR for the reaper (ph), it was below dry vans, they are seeing less capacity out there in the reaper market, anything special happen there?
Kevin Knight
Say that again, I missed your question. Go ahead.
[Chris Stapacolo
The OR for reaper or refrigerated, below that of dry vans for the quarter? Are you seeing any less capacity in the reaper market, or did anything special happen in the quarter?
Kevin Knight
Nothing really special. That's a business that we got in in 2004 and I think everybody on the call here probably felt we were crazy and they certainly heard at least a thousand experts tell them how stupid we were, but I would say that nothing special happened in the quarter from a reaper perspective.
We bought two reaper carriers that were underperforming, one in '05 and one in '06, and it’s taken us a while to really get that business operating delay that we felt like it could operate. So I would just say for us in the third quarter we did very well.
In the fourth quarter the moon and the stars aligned for the way we run the reaper business and so I would say that we would expect for the reaper business going forward to be very competitive in terms of dollars with our dry van business, so it’s a business we grew last year. We didn’t do an acquisition last year, but we grew it internally by I don't know, 15, 16, 17% and we plan to continue that growth in that business.
[Chris Stapacolo
Okay. Could you comment on so far as you see any attractive acquisitions in the current marketplace?
Kevin Knight
It’s been a little bit challenging there. One of the difficulties is with the used equipment and you saw this with our minimal amount of gain on sell (ph) being as challenging as it is.
It's difficult to find a candidate that doesn't owe more on their equipment than their equipment is worth. And to also in this type of an environment, there just aren't that many truckload businesses performing well enough where the owner will feel good about what we would be able to pay them.
So I think it's going to be a little bit challenging in that area probably for at least the next couple or three quarters until the limited amount of new trucks sells and kind of catches up with where the used equipment market is. So it's probably going to be tough to find something that can work here in the short-term.
[Chris Stapacolo
Okay. Thanks for the time.
Kevin Knight
Thank you.
Operator
Thank you. Our next question comes from John Larkin from Stifel Nicolaus.
Your line is open.
Kevin Knight
Hey, John.
John Larkin
Hello, Kevin. How are you?
Kevin Knight
Hey, we're good.
John Larkin
Good. I was wondering with your particular operating model not being as your regular route as many truckload carriers where you're as I understand to try to basically connect the dots between your service centers not be all things to all people, but essentially have cut holes running in both directions, it would seem to me that it puts you in a position to do more company fueling at your service centers.
Is that a fair assessment?
Kevin Knight
John, yes, that's a fair assessment.
John Larkin
And with that having been established, given that in the second half of 2008 there was a pretty good spread between the wholesale price and the retail price with surcharges are tied to the retail price would seem to me that a carrier such as yours might have pretty good tailwinds during a declining fuel price environment.
Kevin Knight
Yes, John, I don’t think there's–
John Larkin
Is that true?
Kevin Knight
Yes, that's true.
John Larkin
Would you care to quantify how much that helped you?
Kevin Knight
Well, I think, John, when you look at normal fuel, if you look and say it should be somewhere between 10 or 11% and we were shy of 7%, it probably helps us probably 3 or 4 points on our OR is about what I would describe it as and that's one of the reasons, John, our numbers are acceptable in this very difficult environment. And so there's no question that fuel was a significant benefit for our business.
In the last year (ph) of '08 and really we had just the opposite of that throughout all of '07 and throughout most of '08, so at least the first seven or eight months. So it’s good to have a quarter where it works for us.
I still wish we could become a mode of transportation that could get fully compensated for our fuel and all in all that's difficult to do, but certainly this quarter, it worked in our favor.
John Larkin
I hear you. That's very helpful.
And then my second question relates to this very intriguing port business. I agree with you, it could be very large.
It could grow into the (inaudible) dredge (ph) business which would be very complementary to what you're doing now. I had a chance to hear Jimmy Hoffa (ph) speak about a year ago, it was quite interesting and amongst his top three or four priorities was the organization of the dredge business in and around the ports of L.A.
and Long Beach (ph). I'm sure you've probably–
Kevin Knight
Right.
John Larkin
And I know you've been out in that operating world for a long time with a much smaller operation than you aspire to here over the next few years. How do you cope with that kind of a threat especially with maybe a more pro–labor administration in Washington?
Kevin Knight
Well, I would say, John, certainly every new opportunity there are challenges that have to be managed. I would say we cope with it the same way we have over there thus far and we give our drivers a good truck, a truck they like and a job they like and we get home on a regular basis and we communicate with them and stay very close to them and I think that if we do a good job of managing our drivers and making sure they feel like a part of our team then I think we'll be good.
We're also, John, going to have owner- (ph) operators as part of our solution through our dredge fleet and our port (ph) fleet and so I think we've got a good plan. I think we have to stay close to it.
I think we have to manage it very well, but we're– I don't want to say we're not overly concerned. I mean I think the opportunity outweighs the risk if there is some.
John Larkin
Have the economics of that business helped dramatically by the $20,000 per truck payment?
Kevin Knight
We really haven’t looked at it that way, John. We’ve looked at this business as though it has to stand on its own and so as we look at this business, we don't plan to get to the low to mid 80s OR as a result of the assistance that we should be receiving from the Port of L.A.
So certainly that won't hurt it, but basically that commitment by the port of L.A. to those fleets who are actually going out and buying the equipment is probably a much better deal than what's been proposed to address the clean air issue in other ways.
So certainly it will help over time through the end of the fourth quarter. We haven't received any of those monies and so basically what you see so far is just a pure (ph) operation, but we've gotten into that business not because of that.
John Larkin
I really appreciate you taking the time, Kevin. Thank you.
Kevin Knight
Okay, thanks, John.
Operator
Thank you. Our next question comes from Jon Langenfeld of Robert W.
Baird. Your line is open.
Kevin Knight
Hey, Jon. You there, Jon?
Operator
Sir, please make sure your line is in mute and lift your (ph) speaker phone with your handset. Jon Langenfeld – Robert W.
Baird How is that Kevin?
Kevin Knight
Hey that's good we can hear you, Jon. Jon Langenfeld – Robert W.
Baird Sorry, my headphone ran out of battery.
Kevin Knight
Okay. Jon Langenfeld – Robert W.
Baird Alright, so just following up on that fuel side, would it be your expectation that if fuel stays where it's at, you kind of get back to the 10 or 11% range in the first and in the second quarter?
Kevin Knight
We certainly believe that we could be south of that in the first quarter, Jon and we're really too early to tell where that's going to land, but we certainly would probably expect to be south of that and then maybe as we work our way through the end of the year, middle to the end of the year then in the next year, that's where were hoping that it will settle. Jon Langenfeld – Robert W.
Baird And south of that because of the wholesale, retail lag?
Kevin Knight
Well, not so much the wholesale, retail lag. I mean we've had– what everybody has to understand is we've had it when retail is less expensive than wholesale and so it can change very rapidly and we've actually seen some significant changes since the end of the fourth quarter going both ways and so I believe that number one, you have to recognize, Jon, that if we only recover 80% of the total fuel that we should recover through the surcharge program, anytime you're leading off (ph) of a lower base, I mean that gives you some pick up there irregardless of what happens to wholesale or irregardless of what happens to surcharge lags.
So I think that there's kind of three things that affect it. One being surcharge lag, one being the difference between wholesale and retail and one being the fact that you're just $2 to $2.50 a gallon less and your surcharge is only being not recovered on 2.25 a gallon instead of 4.5 a gallon.
Jon Langenfeld – Robert W. Baird Okay, good, good clarification.
And then just one clarifying point on Page 8 of your presentation. Does that load count include all modes including (inaudible)?
Kevin Knight
Yes, it does, it does, Jon. Jon Langenfeld – Robert W.
Baird Okay, okay. And then that kind of led into my next question just in terms of the pricing.
Can you talk a little bit about (inaudible) pricing went negative again in the quarter which isn't surprising given the environment, but can you just talk about kind of where the sources of pricing pressure is? Is it spot market or is it also contractual business and then maybe the magnitude of it?
Kevin Knight
Well, I would say first off, Jon, our pricing did not go negative. Our utilization went negative and our length of haul went negative, so– Jon Langenfeld – Robert W.
Baird Yes, that is right.
Kevin Knight
But really our pricing did go negative based on the amount of length of haul, we had to shorten to maintain basically what we had, but as I look at it, Jon, from our perspective, the spot market was nonexistent. In an environment such as this, basically our customers' transportation management teams and systems go through a selection process in most cases the sophisticated shippers to basically call out who gets that freight and much of that is done electronically.
So we really don't see that part of the spot market because we just end up not getting the load tendered to us or we get the load tendered to us. Now certainly when a person calls with freight today, our quote is going to be less than what it was in May or June of last year because we have demand, but for us the spot market is we look at it as though it's nonexistent and our live quotes certainly are a little more aggressive in this environment than they would be when supply and demand is in balance.
So did I answer your question? Jon Langenfeld – Robert W.
Baird Yes, I think so and the length of haul, I can appreciate that part, but I mean the revenue per loaded mile, you got a number of different factors going on there. I guess at the end of the day what your saying is that there is some pressure on the pricing overall.
Kevin Knight
Oh, no question. No question, Jon, yes.
Jon Langenfeld – Robert W. Baird And you'd expect that to kind of or I would expect that I guess to continue given the environment, but your existing contractual business, do you see them coming back to you and asking for further rate reductions?
Kevin Knight
Well, you know what, it really depends. Some will, some won't.
Some will bid, some won't. Some will just pick up the phone and ask, some won't.
It's all over the map and the good thing I think, Jon, about our business that I want to emphasize is we have a very good team that we rely on to make those pricing decisions and all three of our businesses work together, soon to be with our dredge business, and I guess it already is four, but the fact of the matter is I think we're well set up to do as good as we can, but I would expect that we'll see some pricing pressure and probably the first opportunity for relief there will probably be in that May–June timeframe, Jon. Jon Langenfeld – Robert W.
Baird Great. Thanks for the color.
Kevin Knight
If we get any. Jon Langenfeld – Robert W.
Baird Yes, good luck. Thank you.
Kevin Knight
Okay.
Operator
Thank you. Our next questions comes from Ed Wolfe of Wolfe Research.
Go ahead.
Kevin Knight
Hey, Ed.
[Tim Deloyer
Hey, Kevin. This is Tim Deloyer (ph) in for Ed.
How are you?
Kevin Knight
That's good, go ahead.
[Tim Deloyer
First, can I ask about how utilization and pricing trended throughout the quarter by month perhaps?
Kevin Knight
Well, I would say it kind of trended how you would expect both of them, a little more pricing competition in November than October, and a little more in December than November, and we'll probably see a little more in January than December, more on the utilization side than on the price side in November and December, Tim.
[Tim Deloyer
And you said that pricing net of the shorter length of haul was still up for the fourth quarter, did that go negative in December?
Kevin Knight
No, the pricing was positive, but due to the length of haul falling off significantly as it did, as far as I'm concerned pricing was negative.
[Tim Deloyer
Okay, good. If adjusting for the shorter length of haul is pricing even in January still positive year-over-year (ph)?
Kevin Knight
I don't know. I don't know.
I mean there's a chance that it will be, but to be like truthful, I don't have the answer to that question, Tim.
[Tim Deloyer
Okay.
Kevin Knight
One follow up, okay.
[Tim Deloyer
In guidance for CapEx for 2009 and (inaudible) respect to–
Kevin Knight
Tim, we haven't decided yet what we're going to do as far as new openings (ph). By now we usually have the first one or two on the map, but we haven't got there yet and then what was the other part?
David Jackson
CapEx.
Kevin Knight
CapEx, I would probably model similar to 8 (ph) and I don't know exactly what that was.
David Jackson
80.
Kevin Knight
About 80, Dave is telling me.
[Tim Deloyer
Okay.
Kevin Knight
Okay?
[Tim Deloyer
Okay. Thank you very much.
Kevin Knight
Thank you, Tim. Latif (ph), we need to keep going here for a minute.
We've got some people that haven't had a chance to ask a question, so I want to make sure we get to them, so keep going here.
Operator
Thanks a lot, sir. Our next question comes from Todd Faler (ph) at Key Bank Capital.
Kevin Knight
Hey, Todd. How are you?
Go ahead.
[Todd Faler
Kevin, I'm doing well. Thanks for the extra time.
Hi, Dave.
David Jackson
Hi.
[Todd Faler
Kevin or Dave, if you wouldn't mind, I know you guys are doing some things internally to improve driver safety. Insurance and claims were a little bit better than what I would have anticipated here in the quarter especially given some of the newness of the programs.
I was wondering if you could talk about it, if there was anything unusual in that line item and then how some of the internal issues are progressing and what to expect on the expense side going forward.
Kevin Knight
I would say, Todd, that really we've been working on this stuff for a long time and it seems like it's finally starting to get traction. I mean we started talking about our insurance and claims (inaudible), I don't know maybe two years ago and it just didn’t seem like we could get there and as a matter of fact, in many months we were plus five and even plus six.
So I would just say, Todd, we talked about (inaudible) systems. We we're driving more accountability out to our drivers and out to our safety folks in the field.
Each one of our service centers has a head of safety. I would say that our head of safety here and his team are doing an effective job of better integrating into our operations both refrigerated, dredge and dry vans and so I just think it's been a lot of effort.
I don't think I can sit here and promise you that it'll always be (inaudible), but certainly we believe we have a chance for it to be. In this world of high deductible, the way it works, we could have quarters where we weren't so successful as we would hope to be, but certainly we hope to stay in that full range, plus or minus a half and certainly we accomplished that for the last couple of quarters.
[Todd Faler
Okay, good and then that's helpful and then there wasn't anything unusual though from an (inaudible).
Kevin Knight
No, no, no.
[Todd Faler
Okay, good. And then just for a follow–up here and I know it's getting a little bit late, but taking a could of tractors out of the fleet here again in the first quarter, are there other class that you have to take out from the organization to match up to running a smaller fleet?
If so, how quickly can you adjust some of those costs given taking tractors out here (inaudible) near–term basis?
Kevin Knight
Yes, it lags. It lags, Todd, there's an inefficiency period, but certainly you've got trailers that have to follow (ph) and then you have head count, there's and various other things that have to follow and you always hope that that's going to work through attrition (ph) on its own, but yes, there's other things that have to happen, it's just a little more fixed cost on the overall group because we're not into shutting down facilities and so when we tend to downsize, we tend to take from markets that aren't performing as well as they should.
So it takes a while and so there's some inefficiencies that go with that downsizing your fleet just like there are some efficiencies you get from upsizing. Okay?
[Todd Faler
Yes, that's helpful. Thanks a lot guys.
Kevin Knight
Okay. Keep going, Latif, we've got a few more.
Operator
Yes, sir, our next question comes from Chaz Jones of Morgan, Keegan.
Kevin Knight
Hey, Chaz.
Chaz Jones
Hey Kevin. Hi Dave.
Thanks for taking my question. Maybe just a point of clarification on the dredge.
Kevin, you had talked earlier I think on the call and had mentioned a $40 to $60 million opportunity there. Is that indicative of a 50,000 loads per year or is that kind of a multi–year target?
Kevin Knight
Yes, that's more of a multi–year target and keep in mind we've thrown (ph) that very rapidly in the fourth quarter and that's the annualized basis that we're currently operating at. In order to get to those numbers, Chaz, that number has to at least double and –
Chaz Jones
Okay.
Kevin Knight
– maybe even triple, but I think that it can.
Chaz Jones
And I guess the point of clarification as well is does the dredge that – will those be blended in with TL (ph) or will those just kind of – that that revenue be separated out?
Kevin Knight
Yes, it’s going to be blended, but we'll try to give color as that business develops so that you guys at least understand what we’re doing.
Chaz Jones
That was great. Thanks for the time, Kevin.
Kevin Knight
Yes, okay. Thank you, Chad.
We've still got some more, Latif, so let's keep going.
Operator
Yes, sir. Next question comes from John Barnes of BBT.
Kevin Knight
Hey, John.
John Barnes
Hi, Kevin. Hi, David.
Good afternoon. Real quick one, your comment a moment ago about adjusting cost to a smaller fleet and that type of thing.
Looks like most of this year you've been running kind of closer to a mid $50 million run rate on your labor cost whereas last year you were closer to $50 million. Do you see head count adjusting enough to kind of get back into that $50 million run rate especially given the weaker freight (ph) volumes and is there actually a specific effort in place at reducing head count right now?
Kevin Knight
Yes, we should, we should, John. It may not happen overnight, but we should.
We didn't have the best quarter as far as Workers' Comp is concerned and so our claims development there wasn't as favorable as what we would have hoped and of course that's in that same line also, but no, our goal is to be in that $50 million give or take and we're a little bit too much on the take side this quarter, John, I think that we can do better there.
John Barnes
Okay. And then secondly in terms of the refrigerated business I mean (inaudible) competitor put up a pretty nice number, it seems like bad business has maybe stabilized a little sooner than the dry van business has, even your temperature control business in the quarter was better than your dry van.
Looking at that, I mean would you be inclined to maybe get a little more aggressive in '09 in your investment in that business maybe new investment in dry van and all of your effort on the temperature control side?
Kevin Knight
Well, we could, we could, John. We like to give everybody a chance and what you have to understand is within the dry, my gosh, we had I don't know 21 facilities that operated in the 70s between dry and reaper and so it's kind of hard to shut those guys out and so I mean I would say though, John, it’s a reasonable thought that we would bend ourselves a little more to putting more into the reaper business this year than the dry, but that isn't really quite how it works in our business, but yes, I think that's a good thought and we grew the reaper business last year and our goal is to grow it again this year.
John Barnes
Okay, very good, nice quarter, Kevin. Thanks for your time.
Kevin Knight
Thanks so much. I think we still have a couple of more, Latif, so let's keep going if we can.
Operator
Yes, sir, Donald Broughton of Avondale. Your line is open.
Kevin Knight
Hey, Don.
Donald Broughton
Hey, Kevin. Thanks very much that we're still in the time so we could all talk and ask a question.
Appreciate it.
Kevin Knight
Okay.
Donald Broughton
I'm always accustomed to you using cash to continue to grow a fleet. It's kind of interesting to see downright explosion in free cash (inaudible), you’re saying that about 80 million, 79.8 is what has been on that CapEx in '08, that's probably a decent target for '09.
Maybe you can walk us through, maybe this is maybe a better question for Dave, a lot of moving pieces here, I'm looking at free cash, '08 versus '07 really you would multifold at 2.4 times as much free cash were generated. I know the amount of fuel surcharge coming down helped boost that.
What were the other moving pieces and is this what you got, I come up with 61 million of free cash for the year? Is that a sustainable amount until you turn the growth tap back on?
David Jackson
Yes, I think that is. If you mentioned to me fuel certainly helped us in that regard and has helped us in the back half of '08, but if we're not freshening the fleet – we're not adding to the fleet I should say, and then we're just freshening, keep maintaining our (inaudible), yes, I think that's a sustainable number.
And really what it does, Don, is it gives us the ability to build cash and use it and (inaudible) the way we think is most effective, which may be acquisition, maybe share buyback, and maybe dividends.
Donald Broughton
You had more brokerage, I guess I should also expect that to expand as well.
David Jackson
Absolutely, yes, that's cash that need to be reinvested in asset.
Donald Broughton
How close are we to break it out brokerage rev as a separate line item?
David Jackson
We're not there yet.
Kevin Knight
We're probably a long ways away, Don.
Donald Broughton
Alright. I'll let someone else ask a question.
Thanks again.
Kevin Knight
Okay, thanks for your support. Okay, keep going, Latif.
Operator
Yes, sir. Next question comes from Charles Rapinski of Maxim Group (ph).
[Charles Rapinski
Yes, guys, good evening, thanks for extending the call.
Kevin Knight
You're welcome.
[Charles Rapinski
I just had a quick question on the driver turnover and if you might have any comments on what your salary expense as a general, as a whole would be over the next couple of quarters and how driver turnover is trending given the way the economy is moving, if that going to be of any help over the next couple of quarters?
Kevin Knight
I would say that certainly the good news about the economy being south is people are more inclined stay with what they have and we expect that line item will not be inflationary and so I would expect, Charles, that what you should see as long as our revenues stay about the same here, I would expect that you should see that salaries, wages and benefits' number be $50 million, give or take.
[Charles Rapinski
Thank you very much. I'm just going to hold the follow up and let someone else get a chance.
Thank you.
Kevin Knight
Okay, Latif, do we have any others?
Operator
Actually, sir, I show no further questions at this time.
Kevin Knight
Okay, we sure appreciate you all being with us. Appreciate your commitment to our company.
And we'll see you next quarter if not sooner. Thank you.