Knight-Swift Transportation - Q1 2015
April 22, 2015
Transcript
Operator (participant)
Good afternoon. My name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Knight Transportation First Quarter 2015 Earnings Call. Our lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Speakers for today's call will be Dave Jackson, President and CEO, and Adam Miller, CFO. Mr. Miller, the meeting is now yours.
Adam Miller (CFO)
Thank you, Tracy, and good afternoon to everyone, and thank you to those who have joined the call. We have slides to accompany this call posted on our website at investors.knighttrans.com/events, so hope you've had a chance to download those. Our call is scheduled to go until 5:30 P.M. Eastern Time. Following our commentary, we hope to answer as many questions as time will allow. If you're not able to get to your question due to time restrictions, you may call 602-606-6315 following the call, and we will return your call. Again, that number is 602-606-6315. The rules for questions remain the same as in the past. One question per participant.
If we do not clearly answer that question, a follow-up question may be asked. More often than not, we end up with people in the queue that aren't able to ask a question, so again, we ask that we keep it to one question per participant. To begin, I'll first refer you to the disclosure on page two of the presentation, and 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 U.S. SEC for a discussion of the 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 three. For the first quarter of 2015, we earned $0.36 per diluted share versus $0.23 from the previous year. Net income increased 55.1% year-over-year to $29.6 million, while our operating income increased 48.2% year-over-year to $46.3 million. Revenue, excluding trucking fuel surcharge, increased 25.1% year-over-year to $257.2 million, and our total revenue increased 16.5% year-over-year to $290.3 million. Now on to slide four.
We ended the quarter with over $700 million of stockholders' equity and have returned just under $20 million to shareholders through dividends over the last 12 months. We continue to maintain a very modern fleet and have an average tractor age of 1.7 years. During the first quarter, we generated $52.5 million of free cash flow and paid down $56 million of our outstanding debt, which left us with just over $78 million outstanding on our unsecured $300 million line of credit. Now on to slide five. Over the last several years, Knight has continued to deliver consistent growth, and this quarter marks the 22nd consecutive quarter with year-over-year revenue growth, excluding fuel surcharge.
We've generated this growth by diversifying our service offerings, growing organically, and making strategic acquisitions, all without sacrificing margins, as illustrated by our industry-leading operating ratio. We continue to diversify our model to improve the productivity of our assets, as well as to grow our non-asset-based logistics offering. This has resulted in an improving return on invested capital, which is 14.5% over the most recent trailing twelve-month period. We have a solid balance sheet with less than a third of turn of EBITDA debt, which positions us with significant capacity to deploy capital towards growth opportunities, as well as pay a consistent dividend to shareholders. Now on to slide six. During the first quarter, we continued to experience strong demand for our truckload services. The spot market opportunities were less robust than a year ago.
However, we continued to improve our yield through contract rates. The West Coast port slowdown negatively impacted our volumes, particularly in the West, with our port and rail service business experiencing the most significant impact. We reacted by improving contract rates and accessorial agreements to offset the reduction in miles. Our logistics segment continues to successfully grow as we increased revenue 25.7% when compared to the first quarter last year. Our service center network and cohesive marketing efforts have enabled us, between both of our segments, the flexibility to react to the needs of our customers and provide needed capacity. Now on to slide seven. We continue to perform at industry-leading levels as we execute our plan to provide irregular route capacity in the markets we serve.
We continue to integrate the services offered by our capacity, the capacity provided by independent contractors and our third-party partner carriers, including the rails.... In the first quarter, we increased net income 55.1% when compared to the same quarter last year. During the first quarter, our earnings per share were positively impacted by rapidly falling fuel prices. We estimate that impact to be approximately $0.02 per diluted share. But the combination of the favorable trucking environment and our internal initiatives, our team produced a very solid quarter, and we are optimistic about continued positive results. I'll now turn it over to Dave Jackson for some additional comments on the first quarter.
Dave Jackson (CEO)
Thanks, Adam. Good afternoon, everybody. Now to Slide 8. In the first quarter, our asset-based trucking businesses operated at 79.2% operating ratio, which represents our fourth consecutive trucking OR in the seventies. We continue to see positive results from tight capacity, improved market demand, and our internal initiatives centered around improving yield, increasing productivity, and managing our cost per mile. Our non-asset-based logistics businesses again experienced significant revenue and income growth year-over-year during the quarter, with 25.7% revenue growth and 95.3% operating income growth. It's important to point out that our brokerage business, which is the largest piece of our logistics segment, grew revenues at 46.4%, despite declined fuel prices, which had a negative top-line impact. Load volumes in brokerage increased 53% on a year-over-year basis.
In terms of profitability, our logistics segment operated at a 92.4% operating ratio. Our logistics performance continues to confirm the opportunities for growth, as well as the value provided to our customers through our offering of brokerae and intermodal services in addition to the asset-based services. Next, on to Slide nine. Each of our business segments is designed in a way to yield double-digit returns on invested capital. These current businesses include dry van truckload, refrigerated truckload, port and rail, truckload drayage, various forms of dedicated, brokering freight using subcarriers and intermodal services. There will be additional services to come in the future. We avoid deploying capital into areas that we do not believe will yield returns that will more than exceed our weighted average cost of capital. However, this is not the only requirement.
We also want to see a pathway for long-term revenue growth and incremental ROIC improvement. In each of our businesses, we are built, they are built with the culture, measurements, people, and strategy that we believe can be scaled up and grow on a fairly consistent basis for years into the future. Our individual and organizational desire and craving for top-line growth also fuels our never-ending desire to improve efficiency and profitability. It's not an either/or in our culture, it's all about profitable growth. This graph, on Slide nine, demonstrates our progress in incrementally improving already industry-leading returns on invested capital or ROIC, when comparing first quarters over the last five years, as we've done on the graph.
Keep in mind, we purchased an asset-based carrier in Barr-Nunn in the fourth quarter of 2014, and have incrementally improved year-over-year despite that large capital investment. This is atypical in our industry. Next to Slide 10. Not to beat a dead horse here, but these are more graphs demonstrating our consistent top and bottom-line growth in our two segments, trucking and logistics. Our model is one of industry-leading efficiency on the asset-based trucking side, with a low 80s to upper 70s operating ratios and a high return on invested capital. In our logistics businesses, that also have industry-leading efficiency, we operate with operating ratios in the low 90s, where the income growth often more than keeps pace with the aggressive organic top-line growth, yielding an even higher return on invested capital.
In transportation, as with most things, efficiency always wins. Given the number of transportation companies and level of competition in the space, combined with the sophistication of our customers, efficiency seems to surface sooner than perhaps in other industries. We believe that owning assets and having an extensive and growing network of subcarriers that can provide quality capacity on demand, is a more efficient approach to solving customer needs, as compared to only having assets or only relying on others to buy the assets. We are investing in our logistics capabilities so as to be able to provide even more sophisticated solutions and efficiencies. We believe that our model brings efficiencies to the marketplace and therefore represents a significant growth opportunity for our company in nearly any freight market.
We've demonstrated the ability to grow organically with our logistics business at a time when some are paying handsomely for such revenue growth. We have an efficient way to leverage our network. That's not to say that we're not very much interested and active in the acquisition space, just that it's not our style to overpay for revenue, earnings, or for revenue and earnings in this space. On the trucking side, it's noteworthy to mention that our asset-based fleet, including independent contractors, grew by 19.6% in the quarter on a year-over-year basis for the quarter. We've expanded our service center network and have started up new operations in a few locations over the last couple of quarters. We expect fleet growth to continue. Now to slide 11. Our team remains focused on executing at the highest level in each of our businesses, departments, and service centers.
We have initiatives in place that we expect to continue to lead to improving operating results. Hiring and retaining quality driving associates remains the most significant challenge for the industry and represents a significant opportunity for our company. We have significantly improved our pay and performance bonus for our driving associates over the last several quarters. Not only do we remain committed to further improving pay for our driving associates, but to invest in technology and our service centers, that improve the experience our drivers have over the road. Safety also remains a high level of focus for our overall fleet, and safety continues to improve, benefiting from the innovation and effective technologies as the integration into our operational and fleet management systems and processes.
As a result of our focus and efforts, and thanks to our outstanding driving associates and operations personnel, the number of serious accidents and work-related injuries continues to trend downward. Overall, the trucking environment has remained strong since the fourth quarter of 2013, and we expect to continue to see continued demand improvement for our services in the coming quarters. Now, let's move to slide 12, and then we'll discuss growth more specifically. We expect to see similar fleet growth on a year-over-year basis in the second quarter, somewhere in that 19%-21% range. We will lap the Barr-Nunn acquisition after the third quarter of this year and would expect overall fleet growth of 16%-17% for the entire year of 2015 versus 2014.
Our logistics segment continues to grow rapidly and has become a meaningful complement to our trucking segment. We expect additional growth opportunities to continue as we demonstrate our ability to source capacity for our customers, and our outlook is, continues to be a 25%+ growth target there. And as mentioned, we continue to evaluate and pursue opportunities to grow our company, including acquisitions. I will now turn it over to Adam to discuss guidance.
Adam Miller (CFO)
Thanks, Dave. Slide thirteen is the final slide where we discuss our guidance. Based on the favorable truckload market and recent trends, we are updating our previously announced second quarter 2015 guidance of $0.34-$0.37 per diluted share to $0.35-$0.38 per diluted share. We're establishing our expected range for the third quarter of 2015, which is $0.33-$0.36. We're also updating our full year 2015 guidance from $1.37-$1.41 per diluted share, to $1.41-$1.49 per diluted share. Some of the assumptions made by management will include growing our tractor fleet, as Dave mentioned, 16%-17% from where we ended 2014.
We would expect the growth to be relatively consistent throughout the year. I'm sorry. When I say 16%-17%, that's the average tractors we had for 2014 versus what the average tractor count would be for 2015. We expect rates to continue to improve year-over-year in that 4%-5% range. And when we talk about rates, we're referring to total rate per mile, so factoring in the impact from empty miles. And then, we expect to run similar miles per tractor as we did last year, and then continue to grow our logistics segment in that 25%+ range, while operating with a low- to mid-90s operating ratio.
For the remainder of 2015, our guidance is conservative with regards to fuel, as we do not expect to see the same benefits of declining fuel prices we experienced in the fourth quarter of 2014, as well as in the first quarter of 2015. We do continue to expect driver wages and hiring-related costs will continue to be inflationary. We also expect second quarter gain on sale to be relatively similar to last year. However, third quarter may be modestly lower. As far as our tax rate, we expect that to normalize in 2015 in the kind of mid 39% range, excluding any unusual items that may occur. So these estimates represent management's best estimates based on the current information available.
Again, actual results may differ materially from these estimates. And again, 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. So this concludes our prepared remarks. We would like to remind you that this call will end at 5:30 Eastern Time. We will answer as many questions as time will allow. Again, please keep it to one question, and if we're not able to get to your question due to time constraints, please call 602-606-6315, and we will do our best to follow up promptly. Tracy, we will now entertain questions.
Operator (participant)
As a reminder, in order to ask a question, please press star one on your telephone keypad. Your first question is from John Barnes. If you could please state your company name, your line is now open.
John Barnes (SVP-Financial Advisor)
RBC Capital Markets. Thanks, guys, for taking my question.
Dave Jackson (CEO)
Hi, John.
John Barnes (SVP-Financial Advisor)
Can you just talk a little bit about, you know, the kind of the progression of the freight environment in the quarter and, and maybe what you've seen, you know, into April, you know, and specifically, you know, have you noticed any weakness, you know, either geographically or by customer vertical that you, that you serve?
Dave Jackson (CEO)
Yeah. You know, I think it was a good quarter. The January, February time frame, we were off to a pretty good start. We felt pretty good. Fuel obviously helped us from the earnings side, but demand felt okay, and I think we felt, you know, March ended off strong from a demand perspective. All that being said, trying to compare that to last year, where we had a first quarter that had an unprecedented amount of kind of spot demand, if you will, you know, it didn't compare in those respects, of course.
It seemed a little bit more orderly, but as far as first quarters go, one of the best first quarters we've ever seen, from just a consistent freight demand perspective. I think what we've seen happen is, customers have done a good job at securing commitments probably over the last 12-14 months, to avoid and prevent being in maybe the position that some of them found themselves in last year in the first quarter with weather and challenges on the rail. And so I think for that matter, we saw it more efficient, but fortunately, we've seen good progress on the contractual rate side. I think if we fast forward, look into April, that, you know, we've got a little more than halfway through, I would say the freight demand continues to be good.
We would expect to see it ramp up as we get a little bit more into the seasonal time of things, which typically by middle of May, we start to see the effects of the warm weather driving more beverage, and then produce, you know, give or take a week, is starting to hit to pull capacity away from the things that are more of a staple nature and more consistent that we see 12 months out of the year. So, so the outlook continues to be good, positive and strong. And, did I answer your question, John?
John Barnes (SVP-Financial Advisor)
Yeah, that was really good. Thanks for that color. And then you brought it up, the contractual rate side. Can you just comment a little bit on, you know, kind of the success you had in the quarter? You know, have you seen any weakness in pricing at all?
Dave Jackson (CEO)
Well, I think if we talk about pricing in general, pricing, it remains strong. I would say everywhere on a year-over-year basis, pricing is strong. Now, you know, this whole idea of a spot market, I think that there's more attention to it today because there's websites that track that, that didn't use to exist. And so I think if we're just trying to judge a freight market on one little data point like that, I think we might come to the wrong conclusion. I think if you look at us in particular, and maybe I'll go a little deeper than what your question is, because I'm, if you don't ask it, the next guy will.
So, I think that to try and look at us in particular and say, "Okay, we're a 75% committed, 25% spot," would probably be an oversimplification of things. The truth is, the irregular route freight market is a living, breathing, dynamic machine. And I think the best way to kind of understand at least how we're positioned would be, first, that we're close to the market on a daily basis. We're in tune with where the opportunities are, where things are hot, where we need more loads, in addition to being in tune with what that corresponding pricing is.
Then second of all, our business has the flexibility or agility to transfer that information immediately in real time and do something with it, in order to make day-to-day decisions that can enhance the revenue production on our trucks or, or the loads that get hauled by a third-party carrier. And so this, this allows us to have more exposure when we want it. But frankly, that whole world is so much more complex than a more, the more static view and straightforward view that happens through a bid when you're looking at the whole, maybe their whole network of that particular customer and looking over a year's time.
And so when we can be good on that day-to-day, sometimes on-the-fly, reading markets that adjust and change throughout the day, we like our chances in a more static, maybe even sterile world, being able to do well on understanding what the markets should bear and can bear, and what the economics need to be for our trucks. And so I think that, you've seen that in our results. I think us improving our revenue per loaded mile by 8.5% in the first quarter, on top of a year ago, where we made very good progress, first quarter of 2014, in terms of rates as well, speaks to that ability, especially given that we didn't see the kind of spot activity in the first quarter.
So I think one has to be careful in not oversimplifying that spot versus contractual. But so long answer to your short question of, you know, what are we seeing in the pricing world? And the truth is that looking at the big picture, it is, it's positive, and it's positive everywhere.
John Barnes (SVP-Financial Advisor)
Thanks. That was great color. I agree with you. There seems to be an obsession with spot rates these days, unlike anything I've seen before. So, thanks for that color. I appreciate your time today.
Dave Jackson (CEO)
Hey, you bet. Thanks, John.
Operator (participant)
Your next question comes from the line of Bill Greene with Morgan Stanley. Your line is now open.
Bill Greene (Managing Director)
Yeah. Hi there, good afternoon.
Dave Jackson (CEO)
Hi.
Bill Greene (Managing Director)
Dave, I wanted to ask you about inventories at your customers. Do you have a sense for how they're running? Because as you know, we've seen some weak consumer spending data, and I'm just curious if you have insights into that based on your customer base.
Dave Jackson (CEO)
You know, Bill, I wish we did. We don't have great visibility into that. As you know, even our biggest customers, we're really we do a fraction of what that customer even does. So, we don't have the best visibility into that. I would tell you that our customers are highly focused on efficiency. So, my sense is that those inventories may not be very deep, and I'm... That's more anecdotally driven than anything else. But when I look at how many of our customers want to touch the load just one time, so we would come to a distribution center, and they want to be in a position where they can unload it and immediately move that freight.
And for example, we have an inbound of one product, and they want to go take that product across three or four trailers into their stores, and they want to pull it off and load those other trailers all at the same time. You know, that speaks to a very high level of efficiency from an inventory perspective. And I think what that means for us in the trucking world a little bit, at least speaking to that efficiency at the dock, is customers want trailers. They want trailer pools. They want... Because in order to do something like that, they need to have some trailers sitting there.
They need us to bring in a loaded and drop it and take an empty, and they take some time, and based on their schedule, they unload it when, so they can line everything up optimally, which, you know, it takes assets. You gotta, you gotta be, you gotta be a truck line to do that. You gotta have trucks, and you gotta have trailers, as opposed to a live unload world, that you would be left to if you were purely a non-asset player. So, but that's about as big as my window in inventories for customers. Sorry, Bill, I don't have more for you.
Bill Greene (Managing Director)
No worries. No, no, that's fair enough. Dave, you've also made a comment on the drivers, and you hope to give them more wage increases, or perhaps that was Adam. But, do you have a sense for what that inflation rate should be this year or would be based on your models?
Dave Jackson (CEO)
Well, you know, it's interactive, obviously, because our, we have competitors that are also doing the same things, and so we're all kind of moving based on what we're getting in rate and, and what, what, where the market is with drivers. And so, we have consistently been between that 7%-10% range now for more than a year, almost a year, probably better than a year and a half. And so that, that seems to be kind of the pace, a steady pace for us. I would say right now, in the first quarter, our driver wages were up about 8% year-over-year. And if we were to go to a year ago, they were up, somewhere in that same neighborhood. So over a two-year period, that's pretty good inflation.
But that pace, we probably see that pace continuing throughout the year.
Bill Greene (Managing Director)
All right.
Adam Miller (CFO)
Right, and we instituted an increase in the back half of the first quarter, which we'll start to see some of that in the second quarter, which again, will lead to what Dave said about continuing inflation in that line item.
Bill Greene (Managing Director)
Okay. Thank you, Dave and Adam. Appreciate it.
Dave Jackson (CEO)
Thanks.
Operator (participant)
Your next question comes from the line of Brad Delco from Stephens Inc. Your line is now open.
Brad Delco (Managing Director and Research Analyst)
Good afternoon, Dave. Good afternoon, Adam.
Dave Jackson (CEO)
Good afternoon, Brad.
Brad Delco (Managing Director and Research Analyst)
Dave, the question I had related to your comments, talking about sort of the diversity of your model, and I don't know if I want to read in too much this comment, but you basically said you'll be looking to add some additional services. Do you care to expound on that at all, or kind of what sort of things you're sort of looking at growing that are outside the scope of what you do today?
Dave Jackson (CEO)
You know, I probably won't go into tremendous detail, but what we're finding is that our customers have logistics needs, and we know how to help them, and we have many of the resources and tools already to help them. So, in that logistics space, there's probably more we can do. So, the thing about us, Brad, and I think you know this, but we like to kind of work on it and get it rolling and going, and then tell you about it after we've, we're kind of already down the highway a little bit. So we... I would say that we've gradually been heading in this direction just as we've gotten more involved in the non-asset play.
Our dedicated services offering has gotten, has expanded from maybe the more traditional pure truckload. We've kind of expanded and done some things a little bit different in that space. And so there's a natural migration for us to get involved in just in perhaps more sophisticated soup to nuts logistics as it relates to transportation for many of our customers. We've got hundreds and hundreds of customers, nearly 1,000 active customers today. And so, you know, once you get past about the biggest 75 or 100, they get very small, and a lot of those, there's a lot of need in, you know, there. And I think we've seen some of the non-asset-based players get involved in some of those areas as well.
What we're finding is, with a little bit of technology, with our knowledge and understanding and our ability to provide capacity, both owned and purchased through brokerage, there's just a lot. We haven't fully tapped into the capabilities and network that we've created.
Brad Delco (Managing Director and Research Analyst)
Gotcha. Well, I'll, I'll respect the request and leave it at one, but, but thanks, guys, for the time.
Dave Jackson (CEO)
Hey, thank you, Brad. Appreciate that.
Operator (participant)
Your next question comes from the line of Chris Wetherbee with Citi. Your line is now open.
Chris Wetherbee (Senior Analyst)
Hey, thanks, guys. Good afternoon.
Dave Jackson (CEO)
Good afternoon.
Chris Wetherbee (Senior Analyst)
Let me ask a little bit about the guidance. And as I'm sort of doing the math here, it feels like maybe it's a bit of a conservative outlook or implied outlook for the fourth quarter. Just in terms of sort of the pace of the business, is there any reason to think that it should be sort of flattish as we get into the back half of the year? Adam, I know you mentioned fuel, but I just wanted to get a rough idea about how you guys should think about the pace of growth.
Adam Miller (CFO)
Yeah. So when you're looking specifically at fourth quarter, for one, we're lapping our acquisition with Barr-Nunn in that quarter, as well as fuel was... You know, we saw, I think we quoted on our conference call last quarter, that fuel was a benefit of about $0.02-$0.03, that we're just not expecting to get in this, you know, this year. So that's going to be a challenge. And then if you look at our other income line, that was pretty significant as well. I think just over $3.5 million on that line item, which is not what we would... We wouldn't guide to that as well. So there's just some headwinds there, particularly in the fourth quarter, that would just be a challenge.
Hey, naturally, we've always been conservative from a guidance standpoint, but we feel comfortable with what we've put out.
Chris Wetherbee (Senior Analyst)
Okay. That's very helpful. I appreciate the time, guys. Thanks.
Dave Jackson (CEO)
Thank you, Chris.
Operator (participant)
Your next question comes from the line of Todd Fowler with KeyBanc Capital Markets. Your line is now open.
Todd Fowler (Analyst)
Great. Thanks for taking the question. Good afternoon. Dave, I was hoping you could comment a little bit on the fleet growth expectations. You know, it seems like you made a little bit of progress here organically, if I back off what I think Barr-Nunn added here in the quarter. Can you talk a little bit about what you're seeing with respect to drivers? And then, I think in the release, you comment on adding some new service centers or adding some trucks to new service centers. Is that saying that you've opened some new service centers, or is that just something that you're anticipating going forward?
Dave Jackson (CEO)
Yeah. Okay, good question. So, first off, on drivers, continues to be difficult. I think, I think obviously we're all trying to grow because everybody's, everybody's, increasing driver wages at, at the fastest pace we've seen in decades, if not ever. And so it continues to be a challenge. We, we, you're correct in your, your assumption that organically we have made some progress. If you back away Barr-Nunn, we were somewhere between 5.5 and 6%, fleet growth, without the Barr-Nunn acquisition, helping on a year-over-year basis, which, you know, we've, we've traditionally tried to target that. We've been at that 5-7, now for a little while, which, you wish it could be—we wish it could be more. We wish that was double digits.
But in this environment, and getting the kind of revenue production on a per truck basis, that does lead to get you to a more than 10% growth just on the fleet side. So, but it, it's not getting any easier. And then, what was your second question?
Todd Fowler (Analyst)
Just on the comment about-
Dave Jackson (CEO)
Service.
Todd Fowler (Analyst)
Yeah. Thank you.
Dave Jackson (CEO)
Yeah, yeah. I did make a comment. I did make a comment that we had, we had begun some operations in expanding our service centers, and so, most of that's been done in an existing service center, but that didn't offer that particular service, like refrigerated, for example. And so, we've got some, we've got a few new openings where we've, where we've begun to add, add tractors, and, and we don't... We probably won't announce more details than that. We won't announce the locations, probably won't even talk about how many of them we're doing, but, we've done a few, and we expect to do more of those. Main reason we're not talking about it is, is for the reason I just got done explaining, which is how difficult the drivers are.
And, you know, we'd just as soon not telegraph that per se, all over to everybody and all over the country, so.
Todd Fowler (Analyst)
Sure. That makes sense. And just to follow up on the driver side, is it that retention's a little bit better right now, or is it recruitment that's helping with the organic growth, or is it a combination?
Dave Jackson (CEO)
It's really, it's a combination, although, you know, retention has been difficult. It's been, we saw some good progress in the back half of the year, and it's not been as easy for us, not dramatically different. But we're, we've got good lead generation. That whole world has changed. It's all gone digital. It's just, I think it can be very confusing for drivers. They are absolutely inundated with offers for employment. And so, you know, we just, we're working hard to make sure that it's a very high quality job. And so, you know, we've obviously been making some progress to be able to have some growth on top of what we had going.
Of course, we report all of our numbers, our revenue, production numbers, revenue per truck, based on total trucks, not seated trucks. So that gives you a full effect of trucks that have been added and any trucks that may be open. It's all factored in there.
Todd Fowler (Analyst)
Sure. Okay, that makes sense. Congratulations on the good quarter.
Dave Jackson (CEO)
Thank you.
Tom Wadewitz (Senior Equity Research Analyst)
Thanks, Doug.
Operator (participant)
Your next question comes from the line of Allison Landry with Credit Suisse. Your line is now open.
Allison Landry (Senior Equity Research Analyst)
Thanks. Good afternoon. I was wondering if you could give us a sense of Route guide compliance during the quarter, perhaps relative to one, you know, the first quarter of 2014, and then also, compared with maybe the average for the full year 2014.
Dave Jackson (CEO)
I missed the first part of your question, Allison. Do you mind repeating that?
Allison Landry (Senior Equity Research Analyst)
Sure, sure, no problem. I was asking about route guide compliance, and you know, what that was like during the quarter, compared with the same quarter of the prior year. And then if you had a sense of, you know, comparing that with the average route guide compliance in the full year of 2014.
Dave Jackson (CEO)
Well, I’m not sure that we have a real good read on the route guide compliance, and maybe you’ll have to explain more of what you mean. Are you talking from the customer’s perspective?
Allison Landry (Senior Equity Research Analyst)
Yeah. So, you know, customers that are looking for sort of, you know, contra- sort of like contractual business, I guess.
Dave Jackson (CEO)
Yeah
Allison Landry (Senior Equity Research Analyst)
... more committed business.
Dave Jackson (CEO)
Yeah. I would say that we saw shippers, our customers, indeed, had done a better job of finding capacity that was willing to be committed to move a lot of the freight in the first quarter, which was much different than what it was a year ago. And a year ago, I think it was atypical. I think perhaps we had a lot of customers that had committed freight on the rail, and with the challenges associated with weather and the rail service, they found themselves without a commitment and out there somewhat scrambling to find capacity. And so I think that over the year, through mini bids and full-blown bids, I think they've found a way to try and get capacity. Now they've done that at higher rates, as we've seen.
I think so it's been a little bit more orderly. We didn't see the same level of disruption that we had previously seen in prior years that typically drives a strong spot market. Now, I think that that's going to be different in the second quarter. We're not accustomed to strong spot activity, if you will, in the first quarter like we saw last year, but we are used to it as an industry in the second quarter. Other than 2009, we've seen a very, you know, we've seen that strong seasonal demand with a lot of freight that just pops up out of nowhere that just can't be committed 12 months out of the year. And so you'll see some of that spot activity take place.
In terms of Route Guide compliance, that's... We don't get a whole lot of visibility into exactly where we are with customers. When we go through bids, we sometimes will be awarded the primary or, but we'll still get phone calls to haul other lanes that we weren't the primary on. Oftentimes, because of the short to medium length of haul nature of our business and our ability to respond very quickly, we'll sometimes benefit from some of those re-tendered loads, where whoever was the primary wasn't able to service the load, and so we're able to, we're able to come in and provide a solution, either with our own assets or with our brokerage. And so we, we do a lot of that, both in good times and in bad, it seems.
But, but all in all, maybe the best answer to your question would be the first quarter was much more orderly, but that doesn't... I don't think you should draw a sweeping conclusion from that about the freight market in general.
Allison Landry (Senior Equity Research Analyst)
Okay. Thank you. That was a really comprehensive answer. I appreciate it.
Dave Jackson (CEO)
Okay. Thank you.
Operator (participant)
Your next question comes from the line of Scott Group with Wolfe Research. Your line is now open.
Scott Group (Transportation Analyst)
Hey, thanks. Afternoon, guys.
Dave Jackson (CEO)
Good afternoon, Scott.
Tom Wadewitz (Senior Equity Research Analyst)
Good afternoon.
Scott Group (Transportation Analyst)
Four quarters sub-80 operating ratio. And wanted to get your thoughts on, like, I know you haven't done it before, but is there a reason why you couldn't get to a mid-70s operating ratio on the asset-based side? Or just maybe color your thoughts if you think that's realistic or not. And if the margin part of the story gets tougher, maybe just help us think about the earnings drivers beyond that. Can you sustain double-digit fleet growth into next year? Do you think you can sustain mid-single-digit pricing into next year?
Dave Jackson (CEO)
Okay. So what you're saying is the OR's not good enough for you. Well, I got you there. No, and there is not any of us that are content. So, we look at this quarter and think there's still a lot of meat left on that bone, because look, our miles were not positive on a year-over-year basis. There are some challenges that come with your, in a rate-raising environment like we are, and so there's obviously been some changes with lanes and whatnot, that can sometimes hamper productivity.
Of course, the West Coast ports had a negative impact that we saw in the first quarter, but that's, you know, reversed towards the end of the first quarter, and will have fully reversed here throughout the second quarter, we would expect. So, nobody here is, nobody here is content. I don't think that we're actually trying to do it. We're not trying to manage to one particular number. We're just trying to be the very best we can be in about 30 different areas that lead you to an 80 or better operating ratio. And so, we're, you know, we're trying to, as you can tell, we're pushing the needle on growth at the same time. So, we're trying to make sure we've got the kind of returns we want, coupled with the growth.
So our sole focus isn't trying to get to a particular OR number, and then settle there and be happy. It's the OR is a result of a lot of effort and a lot of work and a whole bunch of different areas. And I don't know of one of those 30-some odd areas within our company that we manage closely that has hit its full stride. And we've made good progress in maintenance on a year-over-year basis, but we still see big opportunities there. We've made a lot of progress in our fuel economy, beyond just the benefit we see from fuel prices, but there's still more we can do there.
And then, but miles, by far, is the biggest opportunity for us, and, and you can bet that we're putting a lot of work, and effort into that. The other thing is drivers. If we had more drivers than we had trucks, you would see, you would see a much improved operating ratio. And so, so we're obviously, we need drivers to grow, but, but in addition to the growth, we'd, we'd love to be the surplus of drivers, where we could really, really optimize all of these assets that we've invested in. When you talk about your question on continuing the double-digit growth on the fleet, you know, over the last several years, we've been more in that 5%-6%, 4%-6%, organic fleet growth pace.
But the goal was 4%-6% fleet growth with somewhere in that same neighborhood of revenue per mile improvement, and then hopefully, getting a little bit more efficient with miles gets you to the low teens, certainly into the double digits, and then you have a very fast-growing logistics business, and all of a sudden, you've got top-line revenue growth of 15%, hopefully 15%+, consistently. That's kind of been the formula. Now, the acquisition of Barr-Nunn obviously juices the fleet growth numbers here for four quarters. And we're not done looking at companies. That acquisition has gone very good. And so we're anxiously, I mean, we'll answer the phone call if anybody wants to give us a call.
Well, we're anxiously at work looking for other companies. And so that is a part of our strategy, but we still think that organically we can get that mid-single digit growth, which coupled by those other factors I said, lead us to certainly double-digit revenue growth. I mean, if we can approach 20% top-line revenue growth on a consistent basis, that means we're doubling our business every five years. Our people get very excited about that. And so we're putting things into place today that we think will help us long term for that.
An example might be, if you look at brokerage, back, if you were to go back and have to relive the calls from 2008 and 2009 and 2010, during those painful trucking years, we talked about changes that we felt like needed to be made in our model and how we needed to become more variable. A lot of that was, because we saw the non-asset folks continue to just march along when the truckers were really having a tough time. So a lot of the progress we see today in our brokerage intermodal business, that, that's from work we did years ago and setting it up. Of course, there's a lot of work going on today, but positioning and setting that up was, was years in the making.
I'd like to think that several of the things we've been working on the last couple of years and continue to work on, that likewise that's going to give us, continue to give us some juice for further growth. So hopefully, I answered your question there, Scott.
Scott Group (Transportation Analyst)
Yeah, very helpful. Thanks, appreciate it.
Dave Jackson (CEO)
Thank you.
Operator (participant)
Your next question comes from the line of Matt Brooklier with Longbow Research. Your line is now open.
Matt Brooklier (Senior Equity Research Analyst of Industrial Transportation and Manufacturing)
Hey, thanks, and, good afternoon.
Dave Jackson (CEO)
Afternoon.
Matt Brooklier (Senior Equity Research Analyst of Industrial Transportation and Manufacturing)
Conversation around West Coast ports being a negative during the quarter, maybe you could kind of, you know, provide a little bit more color in terms of how much of a headwind or negative it was. Then, I guess, how much catch-up do we have, do you think, that will benefit second quarter?
Dave Jackson (CEO)
Yeah. Well, you know, we have a port and rail services business. It obviously was the most impacted. There would have been a residual impact on the West Coast, which we have a lot of trucks out there, too. So, you know, there was an impact, but frankly, there was an impact in the third and fourth quarter of last year as the port was operating on a very slow pace. And so things there have become much more efficient. I think they've cleaned things out very fast, maybe even faster than some had expected. And so good progress has been made. I think, you know, the port will still have some challenges where, you know, there's just very large ships.
The ships are larger in many cases, and there just is congestion that just happens based on how it's all set up over there. So, to say nothing for the fact that there may be a rebound effect as all these boxes finally get to Asia, that's been starved for empty boxes. And so, you know, there could be another wave that kind of hits, to say nothing for the fact that we're about to go into the seasonal strength in the Southwest from a produce and beverage perspective that could pull capacity away from some of these port loads. So we'll just have to kind of see how it all plays out. Still, I think it's, you know, from what we can tell, we've still got a couple, two, three months or something maybe of digging out.
But that's a dynamic world as more, as more ships come in. So, so there will be, there will be a little bit of help in the second quarter, but I wouldn't say it's overly material, just as I wouldn't say it was overly material in the first quarter. If that makes sense.
Matt Brooklier (Senior Equity Research Analyst of Industrial Transportation and Manufacturing)
Okay. Helpful. Thanks for the time.
Dave Jackson (CEO)
You bet. Thank you.
Operator (participant)
Your next question comes from the line of Rob Salmon with Deutsche Bank. Your line is now open.
Rob Salmon (VP and Associate Analyst)
Hey, thanks. Good afternoon, Dave. You know, similar to Scott's question about-
Dave Jackson (CEO)
Good afternoon
Rob Salmon (VP and Associate Analyst)
... about the optimization of the truckload margins, when I think about the logistics segment, historically, I've always thought you're doing a great job if you can get to a 5% operating margin gross of fuel. You guys are now in the high single digits. So are there any sort of constraints with regard to your model of how high that can go?
Dave Jackson (CEO)
Well, I don't know that it gets much better than that. I think the challenge is, the barriers to entry in that space are so much lower than they are on the asset-based side. So you could, we could see massive consolidation, and I think we have, across large brokers and large non-asset-based logistics companies. And I don't, I'm not smart enough to know. I don't know if that consolidation is going to lead to any kind of pricing leverage for those large companies, because there are just so many agents. And the fact that there's load boards make it where you can find tractors. If you have any kind of loads, even make-believe loads, that you post on a load board, you get responses from carriers.
The world has become much more transparent in that regard. So, I'm not sure that that space, that those margins are going to change a lot. The thing we have going for us is we can start with a lower gross margin, but drop more to the bottom line just because of the efficiency. We can just do it at a much more efficient rate. And when you look at the earnings generated by our logistics business based on those revenues and compare those throughout the industry, you'll find that we're just much more profitable. We're much more efficient from an overhead cost perspective.
We're able to hold on to more of that gross margin, and that has everything to do with the fact that we've already got an established business and sales business. And so we probably can do it with a lot less folks, maybe even half the folks, in some cases, on a, you know, on generating the revenue side. And so that's an advantage that we have that long term, we think, means we can have an upper single digits margin if gross margins stay in that mid-teen range, which is kind of where they seem to have somewhat settled in. So as long as we can produce more out of a dollar of gross margin, we like our chances of long term being viable and being able to grow it very quickly.
Rob Salmon (VP and Associate Analyst)
Makes sense. Thanks for the time.
Dave Jackson (CEO)
Okay, thanks, Rob.
Operator (participant)
Your next question comes from the line of Tom Wadewitz with UBS. Your line is now open.
Tom Wadewitz (Senior Equity Research Analyst)
Good afternoon. It's Alex Johnson on for Tom.
Dave Jackson (CEO)
Hi, Alex.
Tom Wadewitz (Senior Equity Research Analyst)
So we wanted to ask you, and I think you touched on this a bit, a couple of questions ago in terms of fuel efficiency. But, in this lower oil price environment, does that change how you think about sort of some of the investments that you might make in the business to drive fuel efficiency? And if so, what does that mean for potential uses of, you know, excess free cash?
Dave Jackson (CEO)
Yeah, I don't think that it changes much for us. I think we've made a decision to move, to make certain investments that work, that don't have to work at $4 or $5 fuel. And I don't know that we've ever made investments and used free cash flow at the $4 or $5 price range, that now we wouldn't today, to answer your question more specifically, so. But the good news is there are good technologies. Now, they cost more upfront, may add a little to depreciation, but that have a very solid payback time horizon for us. And keep in mind, we're going to keep a truck for four years, and so we can get our payback in well under that timeframe.
So we're making those investments today, and to say nothing of the kind of advancements in technology that help us help our drivers be more fuel efficient, that ends up putting more money in their pockets as well. So we have a lot of efforts going on there. You know, we're going to have those efforts, whether we're paying $1.50 for fuel or whether we're paying $3 for fuel.
Tom Wadewitz (Senior Equity Research Analyst)
Okay, great. Thanks for answering the question and for the time.
Dave Jackson (CEO)
You bet.
Operator (participant)
Your next question comes from the line of John Larkin with Stifel. Your line is now open.
John Larkin (Managing Director of Investment Banking,Transportation, and Logistics)
Good afternoon, gentlemen.
Dave Jackson (CEO)
Hi, John.
Adam Miller (CFO)
Hi, John.
John Larkin (Managing Director of Investment Banking,Transportation, and Logistics)
Hey, I was wondering if you could talk a little bit more about the driver pay that you're sliding in here pretty much every year at a fairly high clip. When you first discussed it, it sounded as if it was more of a comprehensive pay-for-performance type of a program, and then later on, I got the impression that it was more of an across-the-board increase. Could you illuminate us on that a little bit and tell us how that works and why you think it's going to be effective in retaining and recruiting drivers?
Dave Jackson (CEO)
Yeah. Yeah, I'll talk maybe historically, what we've done and, you know, what we're doing today, we might be a little more strategic about. But, in 2013, we rolled out some pay increases that was more on a variable basis tied to, bonus opportunities for drivers. So that, you know, in 2013, we still didn't kind of have the rate improvement we really felt like we needed, but yet we felt like we needed to do more for the driver, and so we set it up in a way where they were somewhat manufacturing their own, their own bonuses through some efficiencies and things. So that's where we started in 2013. In early 2014, so a year ago, we felt like we were in a different environment.
So, the first of March, and again, the first of April, we instituted across-the-board, $0.01-per-mile pay increases. We hadn't done an across-the-board increase like that since the 2010 timeframe, when we gave back a $0.01 that we had had to reduce in 2009 with the difficulties of '09. So, so really, you know, we arguably were going back as a net pay increase for the first time since early 2008. And that... So that went into effect a little over a year ago, and we did that with two $0.01, 30 days apart. And then, as we went throughout the year, throughout 2014, we continued to do other things to improve the bonus and whatnot. Now in 2015, you know, we've just instituted another across-the-board increase.
There are other areas of compensation that we have increased for our drivers. We've continued to tweak the bonus. We've got technology that they can have in their pocket or in their truck to tell them where they stand relative to their bonus, to really try and help them achieve the maximum compensation that they can receive. And if, you know, if you were to look at just run through all of our websites, I guess, you would probably see that we all are giving compensation in various one form or another. And so, so you know, we've got a list of where we would next like to increase the compensation, and so we'll continue to do that, so we can kind of reach out to the broadest group of potential drivers that we have to satisfy everybody's needs.
Some issues are maybe more important to some drivers than others, and it's not just as simple as across-the-board pay per mile increases. So I hope that answers your question, John.
John Larkin (Managing Director of Investment Banking,Transportation, and Logistics)
Maybe as a related follow-on, what, what are the factors that drive the bonus that you've referred to a couple of times?
Dave Jackson (CEO)
Well, it's things you would expect, you know, a driver being safe, a driver being productive, and a driver having good fuel. So I don't think that-
John Larkin (Managing Director of Investment Banking,Transportation, and Logistics)
Okay
Dave Jackson (CEO)
... that's terribly unique in our space.
John Larkin (Managing Director of Investment Banking,Transportation, and Logistics)
Got it.
Dave Jackson (CEO)
Uh, yeah.
John Larkin (Managing Director of Investment Banking,Transportation, and Logistics)
Thanks very much.
Dave Jackson (CEO)
You bet. Thanks, John.
Operator (participant)
Your next question comes from the line of Jason Seidl with Cowen and Company. Your line is now open.
Jason Seidl (Managing Director)
Thank you, operator. Good afternoon, gentlemen. You know, if you go back to one of the earlier lines of questioning, they were talking about maybe some of the, the weakness in the spot market. You know, clearly, you guys are, are putting up very good numbers, and the comps seem to be, at least for the industry, getting a little bit more difficult here in 2Q. But it seems like the market's very good out there right now. What, what would it take to, for, for a cause of concern from you in terms of the outlook for pricing? It would seem that it would have to take a material downshift in the economy for me to get more concerned. I, I'd just love to hear your thoughts.
Dave Jackson (CEO)
Yeah, yeah. I think, Jason, if all of a sudden, we didn't know what to do with all the drivers that were coming on board, I think that that might be a cause of concern because the economics have improved such in the space that we would probably all run out and buy more trucks. And that supply, that change in supply, is quantitatively could be measured easier than what's going on with the broader demand and GDP trends.
But I think that what gets confusing in our space is there are so many data points, and they all come at different times throughout the month or throughout the quarter, that in this industry, in particular, we might suffer sometimes from kind of a keyhole analysis, if you will, where we kind of have a tendency to narrowly look through the keyhole at one or two data points and make sweeping conclusions. Meanwhile, we ignore all kinds of compelling data that surround this keyhole, if you will. And I think peripheral vision can go a long way in an industry as broad and big as we are.
You know, some of these compelling macro data items would, of course, include, you know, drivers, I think, being the biggest, where, you know, it's preventing all of us from growing by leaps and bounds. We're all raising pay at unprecedented rates. It doesn't appear as if we've attracted more people into the space, potential drivers into the space. It feels a little bit more like we're trading drivers. The, I think the second maybe macro factor might be that the freight has steadily been improving now for several quarters, off of a very deep low, a few years back, more than a few years now. But, pricing clearly is rising, and everybody is benefiting, it appears from that. Oil is still very low for us. Obviously, that's a big deal for truckers.
Regulations are no doubt on the rise and becoming even more of a challenge. Capital requirements are at an all-time high. It's never cost more to buy a truck and a trailer. Insurance and other things are additional factors that make barriers to entry relatively high, as compared to where they've been over the 35 years of this industry. So I think if one's not careful, you peek through that little keyhole and you might think you see a peak. You step back, and you look at the macro data, and you realize, wow, there are a lot of compelling forces at play here, and we might see some false starts and stops or some microdata that might scare us in one way or another.
But by and large, I think the likely conclusion from looking at the macro is that this is gonna be a strong market, maybe for some time to come. So I hope that somehow answered your question there, Jason.
Jason Seidl (Managing Director)
No, no, it did. In light of the post 5:30 P.M. time here, I will, I will ask any questions I have offline.
Dave Jackson (CEO)
Okay.
Jason Seidl (Managing Director)
Gentlemen, thank you.
Dave Jackson (CEO)
Okay. Sorry for taking up all your time there for a follow-up. It looks like, unfortunately, we're out of time for questions. For any that are still in the call queue, Adam will relay that phone number for you, and hopefully, we can still answer your question.
Adam Miller (CFO)
Yeah, you can call 602-606-6315, and we'll do our best to get back to you shortly.
Dave Jackson (CEO)
Appreciate everybody's interest in our call. Tracy, that will conclude our call.
Operator (participant)
Thank you for joining, ladies and gentlemen. This concludes today's conference call. You may now disconnect.