Knight-Swift Transportation - Q1 2013
April 24, 2013
Transcript
Adam Miller (CFO)
Thank you, Gina, and good afternoon, everyone. Thanks for joining our call today. Hopefully, you've had a chance to print off the slides that we posted along with the press release. The slides that will accompany this commentary are available on our website. The actual web address is investors.knight-trans.com/events. Our call is scheduled to go until 5:30 P.M. Eastern Time. Following our commentary, we will hope to answer as many questions as time will allow. If you're not able to get, to get your question in due to time restrictions, you may call 602-606-6349 following the call, and we will return your call. Again, that number is 602-606-6349. The rules for the questions remain the same as in the past. One question per participant. If we do not clearly answer the question, a follow-up question may be asked.
To begin, I will first refer you to the disclosure on page 2 of the presentation. I'll 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 One of the company's Annual Report on Form 10-K, filed with the United States SEC, for a discussion of risks that may affect the company's future operating results. Actual results may differ. Now, I'll begin by covering some of the numbers in detail, including a brief recap of the first quarter results, starting with Slide 3.
For the first quarter of 2013, total revenue increased 7.2% year-over-year to $235.4 million, while revenue, excluding trucking fuel surcharge, increased 8% to $189.6 million. Income from operations increased 7.3% year-over-year to $25.5 million, while net income increased 5.1% year-over-year to $15.2 million. Our net income per diluted share was $0.19 versus $0.18 from the previous year, which is an increase of 5%. Just as a note, all prior year comparisons exclude the non-cash $4 million pre-tax, $3.9 million after-tax charge for stock option acceleration taken in the first quarter of 2012. Now on to Slide 4. We finished the quarter with $502.5 million of stockholders' equity, and over the previous 24 months, we've returned $95.9 million to shareholders through dividends and repurchased shares.
We continue to maintain a modern tractor and trailer fleet, with our average tractor age of two years. We've also repaid $37 million of our outstanding debt and ended the quarter with $43 million outstanding on our unsecured line of credit. Dave Jackson will now review slides providing additional insight of the first quarter results. Dave?
David Jackson (CEO)
Thanks, Adam, and good afternoon to everyone. Appreciate you joining the call. Just one quick announcement. If you had pulled up our website and you did not see the presentation, we'd ask that you refresh your web browser and hopefully you'll be able to see it there. It is posted there. Some had some difficulty finding that the first time. Now to Slide 5. Revenue continues to trend positively as we've recorded the highest revenue, excluding trucking fuel surcharge, in a first quarter in our company's history. We experienced revenue growth in each of our businesses, with our non-asset-based businesses contributing much more meaningfully to the overall increase. All of this growth has come organically as we continue to invest in providing logistics solutions to our customers that have led to, and will continue to lead to, additional revenue opportunities.
Our average revenue, excluding fuel surcharge per loaded mile, increased 0.7%, while our average revenue per tractor declined 1.2% due to a 1.6% decrease in our miles per tractor. Our length of haul remained essentially flat on a year-over-year basis. We expect rates to continue to improve throughout the year. On to Slide 6. Despite the challenging operating and economic environment, we continue to grow our earnings. Not only did our asset and non-asset-based segments improve top-line revenue, but they also improved their operating ratio on a year-over-year basis. This marks the eighth consecutive quarter with year-over-year diluted earnings per share growth, as well as the highest operating income in a first quarter since 2007. Now on to Slide 7. Since coming out of the downturn in 2009, we've consistently grown our revenue in each and every quarter.
During this time period, we've averaged 9.6% year-over-year revenue, excluding fuel surcharge growth. I'll now turn it over to Kevin.
Kevin Knight (Executive Chairman)
Thanks, Dave. Good afternoon, everyone, and moving to Slide 8, if you would. We continue to be committed to developing multiple logistics solutions that allow us to meet the supply chain needs of our customers while operating as efficiently and effectively as possible. As illustrated by the graphs, over a short 3-year window, we have diversified our revenue sources and have grown our consolidated revenue, excluding trucking fuel surcharge, by 35%. During this period, our asset-based businesses grew 18%, while our non-asset-based businesses grew by more than 4 times. This has resulted in our non-asset-based businesses now accounting for 17% of our revenue, when compared to just 4% 3 years earlier.
...As we continue to invest in our multiple services, our people, our systems, and deepening our relationships with our customers, while leveraging our network of services and centers, we feel well positioned to capitalize on future growth opportunities. Now to Slide 9. Our asset-based businesses improved their operating ratio from an 85.4 to an 85.3 for the 2013 quarter, while growing revenue 2.1%. Our non-asset-based businesses improved their operating ratio from 94.4%-92.8% from a year ago for the 2013 quarter, while growing 57.9%. In a low growth economic environment, top line revenue growth can pressure efficiency. Our people are working hard to control cost, and it was evident in the quarter. We have many important cost initiatives being worked on by many teams within our organization.
Consolidated, our operating ratio for the year increased by 10 basis points to 86.5%, with total revenues growing 7.2%. Moving to Slide 10. Knight is now built to grow and service multiple truckload modes at high levels of efficiency, as measured by on-time service, cost per mile, or cost per transaction. Our value proposition to our customers is growing. Our people are especially excited about our resources and what they can accomplish for our customers. Our team is very high quality and ready for the challenges we face in terms of a slow economic environment, coupled with more regulation. Our belief is those challenges will bring our company significant opportunity. I will turn it back today to discuss guidance.
David Jackson (CEO)
Thank you. On Slide 11, we'll review the guidance. It's our final slide. For the second quarter 2013, we reiterate our guidance of $0.23-$0.25 per diluted share, and our expected range for the third quarter 2013 is $0.22-$0.25 per diluted share. Some of the assumptions made by management include, rates to continue to be slightly positive year-over-year, and for utilization to be relatively in line with the year-ago period. It also includes consideration for potentially estimates represent management's best estimates based on current information available. Actual results may differ materially from these estimates. We would refer you to the Risk Factors section of the company's Annual Report for a discussion of the risks that may affect results. This concludes our prepared remarks.
We would like to remind you that this call will end at 5:30 P.M. Eastern Daylight Time. We will answer as many questions as time allows. Please keep it to one question. If we're not able to get to your question due to time constraints, please call 602-606-6349, and we'll do our best to follow up promptly. I do want to announce, it appears that some of you have had difficulty in, based on the text messages that I've received, some of you have had difficulty in pulling up the slides. And I understand that the slides are out there and available now.
And so as we begin to entertain questions, as you take a look at those slides, if you have specific questions, we, of course, would be open to going back and maybe explaining one of those slides that maybe you didn't have our commentary at the same time you were viewing the slides. So with that, Gina, we'll entertain questions.
Operator (participant)
At this time, if you'd like to ask an audio question, please press star one on your telephone keypad. Again, that's star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first audio question comes from the line of Tom Wadewitz with JPMorgan.
Kevin Knight (Executive Chairman)
Hey, Tom.
Tom Wadewitz (Senior Analyst)
Hey, Kevin. Hey, Dave, Adam. Wanted to ask you on the pricing side. I guess I may have missed this, but I'm not sure if you gave us a revenue per loaded mile, like feel, just kind of roughly what that was in the first quarter, and how you think that, you know, thoughts on pricing environment, how that might play out through the year. Thank you.
David Jackson (CEO)
Well, yeah, Tom, I'll, I'll back up to that. What we gave you was the year-over-year change, and on a revenue per loaded mile, our rates improved by 0.7%. And, and, as you noticed in the statistical information we gave on the release, our length of haul was virtually flat. And, and, as far as the second part of your-
Kevin Knight (Executive Chairman)
It's up one mile.
David Jackson (CEO)
Yeah, Kevin points out we were up one mile, so it was a little longer, 0.2%. To be exact. And so, Tom, maybe to answer the rest of your question, I think you asked about rates, where they were and maybe where we saw rates. And what I would say there is, we believe our feeling going into this year, that a 2%-3.5% rate environment, we believe that that continues to be intact. We think we're through the worst of the year, if you will, as it comes to rates, and we expect to see it continue to develop as we get into the second quarter, and we go throughout the rest of the year.
Kevin Knight (Executive Chairman)
And Tom, this is Kevin. I would just add that I agree with Dave that I think first quarter represented the low point. There's no question that we are receiving a lot of bid activity and have this year. It seems like that becomes a little more popular every year. But you know, every time you get a chance to reprice your rebid business, you know, you have a chance of improving those rates. And so, we've been pretty deliberate about it.
You know, I'm sure it'll probably cost us a few loads, but with the opportunities that we have in front of us with all of our customers, I think there's also, you know, many opportunities for us to get additional freight that we don't, you know, that we don't currently haul. So I would agree with Dave. I think, I think this will probably be the low point in this cycle as far as our rate improvement, and we expect for things to start to improve. We also believe, Tom, that, you know, we're gonna have a pretty strong produce season in the reefer area of our business.
As you know, during the first few months of the year, the dry vans and the reefers are competing very much for some of the same freight. We believe that with that, there's going to be opportunities to not only increase our contract rates, but also to increase our spot rates. That's basically how we see it.
Tom Wadewitz (Senior Analyst)
Okay, great. Thank you.
David Jackson (CEO)
Thanks, Tom.
Operator (participant)
Your next question comes from the line of Justin Yagerman with Deutsche Bank.
Kevin Knight (Executive Chairman)
Hey, Justin.
Justin Yagerman (Head of Equity Research)
Hey, how you doing?
Kevin Knight (Executive Chairman)
Good.
Justin Yagerman (Head of Equity Research)
Wanted to ask you about the fleet and how you're thinking about growth as we move through the year. Obviously, you had a sequential decline in Q4 to Q1. I, is that, was that purposeful in terms of trying to mitigate, you know, during a softer seasonal time of year, or was that more because you, you were having trouble seating tractors or getting the kind of growth that you were hoping for? And then, you know, the second part of that's obviously, as you think about the cadence of the rest of the year, how would you expect the fleet to progress as you move through Q2, three, and four?
Kevin Knight (Executive Chairman)
You know, Justin, I'll take that, and then, of course, Dave or Adam, if you guys think that I don't cover everything, then jump in here. You know, when I think about fourth quarter, Justin, it became apparent to our leadership team that we were putting additional stress on the system by growing at a rate that was significantly more rapid than others, and especially on the dry van side of our business. And so as a result of that, we felt like going into first quarter, it was prudent for us to hedge just a bit.
And, so, so basically, it was really, it was really, by design, and, and, and so I think we would be a little more cautious moving throughout the year on, on our fleet growth. I think we've given a range of, you know, maybe 4% on the bottom side, maybe 3%-4% on the bottom side, and 6-7 on the top side. And so, you know, I would say today, I, I feel like for the year, we'll be at the low, end of that, and of course, that's subject to change up or down.
The good news is, in our non-asset-based business, we're building significant momentum, and that doesn't necessarily mean that we won't be able to, you know, experience solid revenue growth, if we're on the lighter side of our asset growth. So I would say, Justin, that I'm a little more negative in terms of fleet growth, as we sit today. And it isn't just the, you know, the environment. I mean, every first quarter is challenging, and really, most all Aprils are. And, you know, but it's also more challenging from a driver perspective.
Even though we've put much effort into our driver development and continue to do well in the area of retention, you know, it's a more challenging environment to, let's say, add assets without it having a negative impact on our earnings. So that's how I feel. Dave, you look like you've got something else to add, or did I cover it?
David Jackson (CEO)
Well, maybe, maybe I'll just add an additional perspective just to last year and how it relates to this year. You know, last year, on the fleet growth side, we, the fleet grew just over 5%, and we leaned in, if you will, in-
... into the back half of the year, assuming that we would have a little stronger freight environment. And when that didn't come, as most notable by, you know, revenue per tractor, because we didn't have the utilization, and we didn't have the rate, then we felt like maybe we leaned into it a little much or a little too much. Going into this year, we're taking a little bit more of a conservative approach. And given that we're in an environment where we are facing inflationary cost pressures to operate the business, we wanna make sure that we get the right kind of rate to offset appropriately. And as we see that, then we'll grow.
We have a tremendous amount of flexibility when it comes to turning on the growth button in a relatively short amount of time. And so, so we'll watch this really quarter to quarter. You know, you can see what happens in a quarter like this first quarter, where we're not aggressively growing, and we build a tremendous amount of free cash flow. In this case, you know, somewhere close to $42 million of free cash flow in the first quarter, when you look at the net CapEx and the cash flow from operations, so. Thanks for the question, Justin.
Justin Yagerman (Head of Equity Research)
Thanks. Appreciate it.
Operator (participant)
Your next question comes from the line of Ken Hoexter with Bank of America.
Kevin Knight (Executive Chairman)
Hey, Ken.
Ken Hoexter (Managing Director)
Hey, good afternoon.
Kevin Knight (Executive Chairman)
Hey.
Ken Hoexter (Managing Director)
Can you just talk about utilization for a bit? You know, obviously, we saw it decline 1%-1.5%. Is this a factor of as you continue to grow the fleet, we should get used to seeing a deterioration on that utilization, or are there other factors that you can work on to kind of turn that around and get that improving, I guess?
Kevin Knight (Executive Chairman)
You know, I'll comment on that, Ken, and then if anybody else wants to, they can also. But kind of through my eyes, we're not in a strong enough economic environment in conjunction with fleet growth, to where we can really optimize, you know, to make our fleet as productive as it otherwise could be. We have a very, you know, sophisticated planning and optimization software tool that sits on top of our dispatch system. And, and when you don't have as strong a freight demand as you would like to have, what happens is, it's very difficult to optimize, and so, as well as you otherwise could.
So we still believe, Ken, because we've already adapted electronic onboard recorders, we feel like we can improve our productivity per truck in terms of miles and in terms of revenue, if we have as robust of freight environment as is necessary. Now, and especially in an area where we're big, and most companies aren't as big as we are, is the West, and the West has been a bit softer than, you know, than other parts of the country. So I wouldn't assume that we can't gain some of this productivity back and even improve upon where we are.
Now, I will caveat that with, you know, we have a new Hours of Service regulation that may or may not go into effect July first, that we are currently preparing to adopt. Unless our customers take the steps to keep us as productive and avoid doing work between 1 A.M. and 5 A.M., and unless our customers bring more flexibility back into their appointment and schedule times, that could have a negative impact on our productivity, and more than likely will have, to the tune of probably 1%, 2%, or 3%. But when you have your optimizer, you know, those new regulations tighten up, it's gonna optimize maybe a little bit better than otherwise we would.
So, you know, I feel like we can be at least you know three, four, five, six points more productive than we are today in the right economic environment with the right cooperation from our customers, if indeed the new regulations do go into effect. So that's how we see it.
Ken Hoexter (Managing Director)
Wonderful. So, just to clarify simply, I guess, it's not because you have to get freight to fill all these additional tractors that's causing the utilization to decline, it's because of just the lack of overall freight?
Kevin Knight (Executive Chairman)
Yeah, that's—it's just not a strong environment. And, hey, we wouldn't expect for it to be strong in the first quarter, and we really wouldn't expect for it to be strong in the first half of April. So, you know, but nonetheless, the more strong the overall freight environment, the better we can optimize, and the more we can improve our utilization.
Ken Hoexter (Managing Director)
... Appreciate the insight. Thanks, guys.
Kevin Knight (Executive Chairman)
Thank you.
Operator (participant)
Your next question comes from the line of Brandon Oglenski with Barclays.
Brandon Oglenski (Director and Senior Equity Analyst)
Good afternoon, everyone.
Kevin Knight (Executive Chairman)
Good afternoon.
Brandon Oglenski (Director and Senior Equity Analyst)
You know, Kevin, I don't know if this question's for you or Dave or even Adam, but can you just talk to the components that is driving this non-asset-based growth as both? You know, we used to get some insight into intermodal and brokerage and port services, but can this be a sustainable growth rate going forward? And also, can you speak to the OR improvement in the segment this quarter as well?
Kevin Knight (Executive Chairman)
Yes, we can, Brandon. First off, you know, we've had good growth in all areas. Now, port services is actually part of our asset-based businesses. So we align that with our refrigerated business, and we align that with our dry van truckload business, because even though we don't have to buy the trailers, because we're pulling, you know, intermodal containers or import/export containers, that is aligned with our asset-based businesses. So when we talk about our non-asset-based businesses, we're really just talking about, you know, primarily our brokerage, our intermodal, and then we do some sourcing. And basically, those businesses are all growing nicely, and I think we're gaining some momentum.
We're still behind in the software race as far as our brokerage product, but we are not behind as far as our intermodal product. And we are seeing more growth on the intermodal side than we are on the brokerage side. I think also on the intermodal side, we're starting to have some economies of scale, where we're spreading our costs better over you know, because we've got a greater amount of revenue to absorb.
On the brokerage side, we've probably also, you know, just without the software that others have, you know, but building in that area, we're demonstrating more efficiencies there and probably go a little bit counter to the overall market in that area, because it isn't like we're dealing from a year or two ago when we were efficient. We're more efficient than we were a year or two ago. So as a result of that, that's what we see. And I think the other thing, too, Brandon, is our customers are starting to look at us a little bit differently.
And it isn't that they were slow to figure it out, it's probably more that when you're such an efficient, driven, asset-based business, it's difficult to really grasp the way the non-asset-based side works. And so I think what we're seeing is the maturing of our organization is really helping. And our people are becoming more comfortable putting the right solution in front of our customer, irregardless if it makes their business win or if it makes one of our other businesses win.
So, you know, I don't think you should expect 50% plus growth every quarter, but I think, you know, our stated goal has been 25% in that area, and I think we're very comfortable continuing to deliver that type of growth, at least through the next few quarters. That is what our expectation is.
Brandon Oglenski (Director and Senior Equity Analyst)
Well, and I'm not gonna try to cheat here with the second question, but I think it might qualify as a clarification. You know, your non-asset revenue was—like, it really picked up some growth rate later in 2012, and obviously, it continued into this quarter, and you said, you know, it's driven a lot by intermodal. It-obviously, I don't believe you guys own the containers there. Is that something you're considering, you know, ramping up your own container fleet going forward?
Kevin Knight (Executive Chairman)
You know, not really at this time. In other words, if our rail partners continue to treat us well, and they probably don't treat us as well as they need to, then I don't think we need to make the investment, because we really wanna reserve our capital for truck growth. We really do believe that as we continue to see capacity come out of the system-...
As we see, the information that ATA publishes every month and shows the small fleets are really down significantly on a year-over-year basis in terms of revenue, we do feel like when things do pick up, that there is going to be significant opportunity for us, either in the form of, you know, buying trucks or an acquisition opportunity that creates the same thing. So I would say that we are leaning towards we not, although by building our network about the way that we are, Brandon, it puts us in a position, you know, two or three or four years from now, where we will have enough freight to where if we decided to bring in, you know, a few thousand containers, we would already have the business to fill them up.
Now, we wouldn't have the business to fill up a few thousand containers today, but certainly, if we keep building our intermodal network and our pickup and delivery capabilities, we would be in a position to where we don't have to, you know, chase the business and put significant pressure on our, you know, on our earnings.
Brandon Oglenski (Director and Senior Equity Analyst)
Well, thank you, Kevin.
Kevin Knight (Executive Chairman)
You're welcome, Brandon. Thank you.
Operator (participant)
Your next question comes from the line of Chris Ceraso with Credit Suisse.
Chris Ceraso (Managing Director)
Chris Ceraso at Credit Suisse.
Kevin Knight (Executive Chairman)
Hey, Chris.
Chris Ceraso (Managing Director)
Just a question about how the shape of the market is trending in terms of supply versus demand, and what that means as we go into the bid season. How is April shaping up, and is that having a positive or negative influence on the bids that you're seeing?
Kevin Knight (Executive Chairman)
You know, I would say, Chris, that first off, typically, how our industry works is you have you used to have January was the slowest, but now January, the first two or three weeks, we think because of card redemptions, is a little busier, and then it kind of slows down, and then usually, you know, the last half of March, things perk up, and March is typically a longer month, although it wasn't nearly as long, it wasn't quite as long this year as normal because of where Easter landed and the number of work days. But typically, the first half of April, sometimes even most of April, it just isn't that strong.
I would say that we still feel it still feels like, to me, we're kind of in a typical environment. As I said earlier, I do have an expectation that the movement of produce and agricultural products is gonna be fairly strong this year. That starts, you know, basically any day. I mean, it's we're getting to that point where stuff moves up from the south, and, you know, and then Arizona will be right behind it, and then we'll move over to California, the Southeast. You know, we'll get a little more active in that area. And so I think I'm not overly excited or overly worried based on, you know, what I see in the market.
We're approaching this bid season as a company. We know that there is cost inflation, and it's apparent that we were able to offset most of that based on the work of our initiatives and our teams. But we know that certain things, as far as cost, are increasing. You know, trucks are increasing. We need to continue to find ways to reward our drivers, our driving associates, and you know, healthcare is just around the corner. We know we have those challenges ahead of us. You know, the list goes on and on.
And so at the end of the day, we have to improve our rates by somewhere in that, in my opinion, 2.5%-3.5% range, if we're gonna make any progress as far as our overall profitability is concerned. I do believe, Chris, that the industry recognizes that, that we've, we've got to improve our rates. And if we can't improve our rates to the point to where we can create a really good driving job for our driving associates, then, then really there's, there's no point in continuing to, to add equipment. So, so I really think that the mentality, the stick-to-it-iveness of our industry has reached a point where, you know, I, I really believe that, that, uh, you know, people are gonna do the right thing for their business.
If we want to continue to provide our customers with high-quality services and capacity, then, you know, we have no choice. But
Chris Ceraso (Managing Director)
Just to clarify, Kevin,
Kevin Knight (Executive Chairman)
Okay.
Chris Ceraso (Managing Director)
Just to clarify, not to put words in your mouth, but, if you can't get 2.5%-3.5%, are you saying that you, you won't buy trucks, that we'll continue to see sequential declines in your truck count?
Kevin Knight (Executive Chairman)
...Well, I'm probably not there yet, Chris, but, but I'm leaning more that direction today than I was a quarter or two ago.
David Jackson (CEO)
And maybe if I-
Kevin Knight (Executive Chairman)
Go ahead, Dave.
David Jackson (CEO)
If I could chime in, Chris, I think we would when we evaluate how we invest our capital, maybe as opposed to shrinking the fleet, as maybe you were leaning towards, it weighs into, do we want to grow the fleet? And to what degree do we want to grow the fleet on a year-over-year basis? As you see, we our average tractors for the quarter are up 2.5%. We're still positive, and so when we look at how we want to invest the capital, we have to evaluate, hey, if we're building a lot of free cash flow because we're not growing at a faster clip, do we want to buy back shares?
Do we want to do something with the dividend, or do we want to find some other strategic opportunity to invest that money in a, in a way that can get the best return? So I think, hopefully, that helps you understand our mindset.
Chris Ceraso (Managing Director)
Yeah, that's clear. Thank you very much.
Kevin Knight (Executive Chairman)
Thank you.
Operator (participant)
Your next question comes from the line of Chris Wetherbee with Citi.
Kevin Knight (Executive Chairman)
Hey, Chris.
Chris Wetherbee (Senior Analyst)
Maybe a question on hours of service, and as we think about it, assuming it does get implemented at the beginning of July, and you do see at least some modest impact to utilization, I guess, going forward, how do you think about the reaction of pricing to that? It feels like bid season so far, at least what we've been hearing from other carriers, is maybe trending a little bit towards the lower end of previous expectations. I guess I just want to kind of get a sense of how receptive do you think shippers would be to potential rate increases to offset some of that utilization? And it would there be a timing lag that we would need to think about once the implementation happens to when you might actually be able to get those rates?
Just kind of, you know, broadly, about Hours of Service.
Kevin Knight (Executive Chairman)
You know, Chris, let me tell you the way I look at it. It really comes down to, can the trucks haul the freight that's available? And if those new hours of service go into effect and, you know, the produce season is strong and things build throughout the year, then really, without more flexibility coming from our customers in terms of, you know, adding an extra shift to do some loading and unloading, or giving us more flexibility in terms of our appointment times, you know, as far as our pickup times and our delivery times, then, you know, the spot market will go up instantaneously, and then, you know, contract rates will go up over time.
But what will happen is, you know, the companies that have lesser invested in the relationships with the shipping community, you know, they won't take the loads that they should take, and they'll chase the spot market freight, and then that'll put more pressure on true contract carriers, such as ourselves, to step up. And then that will give us an opportunity to talk to our customers about, "Hey, we're gonna take two or three or four more loads, but we need some additional compensation, and would you be open to that?" And in most of those cases, they are. I mean, our customers really just wanna make sure they're getting a fair deal.
You know, if they're convinced, if things get tight, that they're getting a fair deal based on where the environment is, then, you know, if we're doing them a good job, then you know they'll be supportive. If we're not doing them a good job, they'll be, you know, they'll be less supportive. So that's kind of how I see it. I really hope that first off, they don't go into effect, but if indeed they do, I think we can overcome it if our customers really hear what I'm saying in terms of, you know, maybe we have a shift Sunday evening that unloads trucks so that every truck's ready to do something and load Monday morning.
And maybe the customers that really figure it out will get a half a shift ahead instead of being a half a shift behind. I think the other thing, we've seen some of our customers be very effective. You know, first off, drop and hook is pretty much been adapted throughout the industry, those that care to do it. So on the pickup side, we do have flexibility in terms of drop and hook, but if we can get windows instead of exact times to deliver, then we can put that information into our optimizer, and our optimizer can give our trucks more productivity based on us having flexibility. I think the biggest issue that we've had as an industry is that we still have very little influence on affecting that delivery.
Now, many of our customers will say, "Oh, yeah, we let them call and get their appointments." Well, at the end of the day, many times we have very little flexibility on what our choices are. So I think it's a good time for our customers to step back and say, "Hey, what can we do to really help our truckers be more productive?" Because we've watched all this productivity evaporate, and we've gotten much more restricted in terms of how the hours of service apply with the new rules and with electronic onboard recorders. So it's it really depends on how we react. I mean, we're still the only mode of transportation that comes to my mind, that the customer decides when we take off and when we land.
And, you know, it'd be a screwed up way to run an airline, I do know that. And, you know, I don't think we could go to Union Pacific and tell them: Hey, you know, we want the train to leave here, and we want the train to leave there. You know, I mean, when I see the improvements in utilization and in service with people that control the pickup time and the delivery time, you know, I lay there in my bed, and I would dream, what would it be like if we could actually do that? So you know, that's how I see it. And if things get tight, I think that's how our customers will think, and I'm hoping that maybe they'll think that way even before that time comes.
Chris Wetherbee (Senior Analyst)
Okay. That's, that's a very helpful explanation. I appreciate it.
Kevin Knight (Executive Chairman)
Thank you.
Operator (participant)
Your next question comes from the line of Todd Fowler with KeyBanc Capital Markets.
Kevin Knight (Executive Chairman)
Hey, Todd.
Todd Fowler (Director and Equity Research Analyst)
Kevin, good afternoon. I wanted to talk a little bit about the cost side. You know, we've heard from some of your competitors about some of the cost issues here in the quarter. I know that you have a different footprint, but you did a really nice job of holding serve on the asset-based side with the operating ratio. I'm just kind of curious, you know, what your experience was with cost and how you're thinking about margins and costs as you move through the rest of the year.
David Jackson (CEO)
Yeah. I'll take that, if it's okay, Todd. I think there are, there's some areas where we've seen fruits from our labor, and there's some areas where we're clearly not happy, and we need to continue to improve. I can tell you insurance and claims is an example of a place that, and it's taken many, many quarters, if not years, of getting to a point to where we're experiencing very good results in frequency and severity on that side and on that front. So we've had some wins there. We have our work cut out for us to continue to do our operations and maintenance line at levels that we've done in the past.
You know, that was an area that crept up year-over-year and represents an area of opportunity for us. You know, if there's anything you know about us, it's that we're organized and designed in a way to drive accountability, certainly from a cost standpoint, and just from driving efficiencies all the way down to the one truck at a time level.
And so, I think that a lot of the credit goes to the fact that we run this decentralized model, where we've got business owners that have accountability, that have visibility into their performance, and they've got a group of people that are experienced, that, for the most part, in the headquarters area, that are reaching out and constantly helping our businesses to get better and better, and nobody is ever satisfied fully with where their results are.
Kevin Knight (Executive Chairman)
Yeah, and I would add to that, Todd. You know, one of the things, you know, it's been challenging for us as we've added these additional services to stay as efficient as we otherwise would have. And as a result of that, you know, we haven't been as cost effective as we otherwise could be. And I think that we'll continue to be more effective now that we actually have each of our services are rock solid, growing, profitable, businesses. I think the other thing too, Todd, where I'm starting to feel more comfort is, you know, we have departments that are very, very important to the support of our service centers.
You know, as you build all these services, and as you have more leaders that you're counting on to execute the same exact way, you have multiple businesses that you're counting on to run exactly the same way, it can be hard for your departments to keep up with everything that's going on. And I believe our departments have a better grasp on where we are, who we are, where we're going, and the strength of the role that they have to provide to support these service centers. I mean... And I'm seeing improvement there. I mean, we talk a lot about our businesses.
We don't talk as much about our departments, but we have very sound leadership in our departments, and we've really taxed them by you know, developing this business the way that we have. But I feel like they're catching up, and if they're not, they at least know what they have to do in order to get there, if that's correct. Now, Todd, it is inflationary in the areas that you know, your other folks in our space are discussing. So I don't want to come across as though you know, our costs can remain flat.
I mean, but you know, our goal has always been for our costs to go up a little less than everybody else's, and that's what we're bound and determined to do. So did we answer your question, Adam?
Adam Miller (CFO)
Yeah, I just want to add something. You know, Dave mentioned on the operation and maintenance line that that was an opportunity, and we saw that number creep up in the back half of 2012, and we've put a lot of emphasis on that first part of this year. And we've seen some progress there from an absolute dollar standpoint as well as a percentage of revenue. So when we do identify these issues,
... we assign our departments, we have a committee that works through that, and we're starting to see progress in that light on them. Although it's still an area where there's a lot of opportunity, but I think we're moving in the right direction, just as an example of what Kevin and Dave were alluding to.
Kevin Knight (Executive Chairman)
Yeah. Did that answer your question, Todd?
Todd Fowler (Director and Equity Research Analyst)
Yes, between working everybody in that, that was definitely helpful. Thanks a lot for the time tonight, guys.
Kevin Knight (Executive Chairman)
Thank you.
Operator (participant)
Your next question comes from the line of Brad Delco with Stephens.
Kevin Knight (Executive Chairman)
Hey, Brad.
Brad Delco (Equity Research Analyst)
Hey, guys. Good afternoon. Thank you for taking my question. Dave, this may be for you, and I don't want to get caught up in kind of the words here, but looking at the guidance range, I thought your commentary on rates were for them to be slightly positive and for utilization to be roughly flat. And listening to the commentary so far, I guess the question I have is, you know, what are your expectations around Hours of Service? And is that, you know, is that essentially being accounted for in your model? And, you know, when I heard comments about rates getting to the, was it 2%-3.5%, do you need Hours of Service to get that? Or do you think the environment is such where we can get there without Hours of Service?
Or I guess, ultimately, the question is: How would hours of service effectively change the outlook for you?
David Jackson (CEO)
Let me talk about the 2%-3.5%. We've talked about that, you know, for now, a couple of quarters. And so, I would say that we're not putting a lot of emphasis either way on the hours of service when we talk about a 2%-3.5% rate improvement for the year. Now, potentially, the way we could see hours of service play out is, we're hoping to mitigate the impact on utilization with us, as Kevin mentioned, with the optimization systems and whatnot.
We're somewhat betting on the fact that if we can manage that better than most folks, and we see a negative impact on our utilization as a result of it, that the broader group is going to have a negative impact, which, of course, makes capacity a little bit more scarce. Now, this regulation is now set to go in July 1st, and, you know, typically, we see some strength through probably the first 10 days of July. It's anybody's guess what adoption and enforcement would be like those first 10 days. And then we find ourselves into kind of July, August, which isn't necessarily the most robust time of the year.
So, it may take a couple of months to play out and see this, but there's an assumption here that if we see overall capacity reduce as a result of the Hours of Service changes, then that will create some corresponding increase that hopefully will, at a minimum, offset the utilization loss and maybe might even do more than that. So for the purposes of looking at guidance, and then we talk about a 2%-3.5% increase, we're really looking at the loss of utilization and the potential in corresponding increase in rate as washing one another out, when we talk about looking forward here in second, third quarter, and I guess rest of the year, rest of 2013. So did I answer your question with the way you were looking?
Brad Delco (Equity Research Analyst)
I think you did a great job. Thanks, Dave. Thank you for your time.
David Jackson (CEO)
You bet.
Kevin Knight (Executive Chairman)
Thanks, Brad.
Operator (participant)
Your next question comes from the line of Anthony Gallo with Wells Fargo.
Kevin Knight (Executive Chairman)
Hey, Anthony.
Anthony Gallo (Managing Director)
Congratulations, guys. Thank you.
Kevin Knight (Executive Chairman)
Thank you.
Anthony Gallo (Managing Director)
I wonder if maybe I can stitch together some of the earlier comments and just ask if within the next several years, it's possible that we're not even talking about fleet growth and whether or not your customers are willing to give you rate to cover cost inflation, but instead, the non-asset-based business is driving almost all of the growth. I mean, the core truckload's still keeping you essential to customer supply chains and being the core of the business, but is there anything that would keep that scenario from unfolding?
Kevin Knight (Executive Chairman)
Well, I, I would say, I would say, Anthony, that we certainly expect to grow our non-asset-based side of our business at a more rapid rate than our asset-based side, and the conditions certainly support that. I do think, though, that, you know, there if we could be successful in acquiring, then, then I think that would be the better way to increase our capacity, if you, if you will, and especially if it's, you know, a fleet that, you, you, you know, where we feel like we can improve their operations significantly. So, you know, but, but we personally, we, Anthony, hope that at some point we aren't focusing so much on that and that it's, it's more about what's our overall business doing.
We feel really strongly about, you know, when you look at this whole truckload supply chain, running assets, especially in a shorter length of haul, all the way down to now, we've been successful at doing it in, drayage and also reefer, which has been a more difficult market in past years than it is now. I mean, we've mastered the tough part, and I believe that our customers are hoping that we can do a much better job on this logistics side and on taking a load and moving it on the train or moving it on behind one of our trucks or moving it behind a third-party truck. So that's kind of what I see. I mean, you know, our background has been one of, you know, internal growth....
Minimally supported by small acquisitions. And I think if we're going to get back over that, you know, 10% or 15% growth rate, that, you know, it, it's probably going to be more driven by acquisitions than it is, you know, in conjunction with some internal growth, as compared to the internal growth being the support. Now, if rates got to a point to where, you know, we could really provide people with a great job instead of a somewhat less desirable job, then, you know, we could grow. But it's interesting, when you even look at those that pay the most, I mean, they're having a really tough time growing. And we try to be on the top side, but not at the top.
You know, I guess, did I answer your question?
Anthony Gallo (Managing Director)
Yeah. I mean, the way I see it is you're not disadvantaged relative to a completely non-asset-based provider-
Kevin Knight (Executive Chairman)
No
Anthony Gallo (Managing Director)
... because you've got, you've got the scale, and you've got the capabilities, but at the same time, they don't have the assets. So I just, I can see it unfolding-
Kevin Knight (Executive Chairman)
Right
Anthony Gallo (Managing Director)
where it's going to be a much bigger part. Yeah, you answered my question. I don't want to take more of your time.
Kevin Knight (Executive Chairman)
Anthony, I'm a firm believer that our customers really do want their truckload provider to own assets. And, you know, if we can put a really strong non-asset offering in conjunction with that asset offering, that I think we go into the meeting with a much better chance of winning. Because, hey, at the end of the day, our customers know that trucks and trailers move the freight, and I believe that they would rather invest in carriers that are investing in their network. It's kind of like, hey, if a guy needs to use his cell phone, he needs that wireless network to make it all happen.
Well, with our customers, even if you give the load to a third party, I mean, at the end of the day, I mean, a truck and a trailer's got to move it. So that's-
Anthony Gallo (Managing Director)
Exactly.
Kevin Knight (Executive Chairman)
That's how we see it.
Anthony Gallo (Managing Director)
Exactly. Thank you, Kevin.
Kevin Knight (Executive Chairman)
Thank you.
Operator (participant)
Your last question comes from the line of Art Hatfield with Raymond James.
Kevin Knight (Executive Chairman)
Hey, Art.
Art Hatfield (Senior Equity Analyst)
I'll try and be real quick here. It's been a long call, and you've pretty much answered all my questions. But going back to hours of service, do you think that maybe the expectations for disruptions could be a little bit overblown without effective enforcement mechanisms, such as, you know, everybody having to have EOBRs on their tractors at that given time, and that maybe we won't see the disruptions that people expect initially as this goes into service?
Kevin Knight (Executive Chairman)
You know, Art, yes. I mean, the answer is, it usually is overblown. And the fact of the matter is, when we're all on an equal playing field, which hopefully we will be, you know, within the next year or two, or next couple or three years, the fact of the matter is, then it becomes much more of an issue. And that's really when, unfortunately, our customers will really take more of a deep dive into, "Hey, what can we really do to make these truckers more efficient and more effective?" And like I say, we have some customers that are doing that, but not the lion's share.
So, you know, I do think, Art, that until everybody is operating the same way and playing by the same rules, you know, these regulatory issues don't have as much effect as they otherwise would. The good news is, I think, you know, the adoption rate of EOBRs is fairly rapid in our industry. And, you know, I think the smaller guys, if they're going to survive, they put the right way, you know? So, anyway, did I answer your question, Art?
Art Hatfield (Senior Equity Analyst)
You did. Thank you very much.
Kevin Knight (Executive Chairman)
Thank you. Well, thanks, everybody, for being with us again. If you weren't able to get your question in, if you would just reach out to Dave or Adam by calling 602-606-6349, I think that'll take you to Dave, and then between Dave and Adam, they'll try to get back with you shortly. And appreciate all your support. Thanks.
Operator (participant)
This concludes today's conference call. You may now disconnect.