Knight-Swift Transportation - Q1 2016

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 2016 Earnings Call. All 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, and your speaker 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, for joining our call. We have slides to accompany this call posted on our website at investors.knighttrans.com/events. The call is scheduled to go until 5:30 P.M. Eastern Time. Following our commentary, we'll hope to answer as many questions as time will allow. If we're not able to get to your questions due to time restrictions, you may call 602-606-6315, and we will return your call. Again, that number is 602-606-6315. And the rules for questions remain the same as in the past. One question per participant. If you don't clearly answer the 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 we ask again that you keep it to just one question per participant. To begin, I'll first refer you to the disclosure on page 2. I'll read the following as well. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions, and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A, Risk Factors, or Part 1 of the company's annual report on Form 10-K filed with the United States SEC for a discussion of the risks that may affect the company's future operating results. Our actual results may differ.

Now I'll begin to cover some of the numbers in detail and a brief recap of the first quarter, starting with slide 3. For the first quarter of 2016, we earned $0.28 per diluted share versus $0.36 in the same quarter last year. Later in the presentation, I'll go into greater detail on some items that negatively impacted our EPS this quarter, some of which are more one-time in nature. Our net income decreased 23.7% year-over-year to $22.6 million, while our operating income decreased 16.4% year-over-year to $38.7 million.

Our revenue, excluding truck and fuel surcharge, decreased 1.4% year-over-year to $253.6 million, and our total revenue decreased 6.3% year-over-year to $272.1 million. Now on to slide four. We ended the quarter with over $730 million of stockholders' equity, and over the last 12 months, returned over $92 million to our shareholders through dividends and stock buyback, which amounts to over 4% of our current market cap. During the first quarter, we repurchased 1.1 million shares of our stock for approximately $27 million. We currently have approximately 4.7 million shares authorized under our share repurchase plan, and we'll continue to evaluate buyback opportunities in the second quarter.

We continue to maintain a modern fleet with an average age of 1.7 years, and in the first quarter, we generated almost $56 million in free cash flow. We expect to continue to generate meaningful cash flow or free cash flow, as we do not have plans to grow our fleet until we see signs that customer demand has come back in balance with supply. We currently have $106 million outstanding on our unsecured $300 million line of credit, which leaves us with meaningful amount of capacity for additional investments. Okay, now on to slide 5. Over the last several years, we've experienced meaningful growth in our consolidated revenue, excluding truck and fuel surcharge. This is a result of our ability to expand our logistics service offering, improve yield, organically grow capacity, and successfully integrate acquisitions.

Over the last four years, our compounded annual growth rate has been approximately 10%. During what has been a less robust freight environment, we have remained focused on improving the productivity of our assets and expanding load volumes and margins in our logistics segment. During the first quarter, we improved our miles per tractor 1.8%, grew our brokerage load volumes 31%, and expanded our brokerage gross margins by 350 basis points. A slight reduction in tractor count, essentially flat revenue per tractor, and declines in revenue per load in our logistics business led to a 1.4% decline in consolidated revenue, excluding truck and fuel surcharge.

The truckload capacity being challenged by a shortage of drivers, declining new truck orders, and a host of pending increased regulatory burdens, we see those companies that are well-capitalized and have already adapted to the soon-to-be-enforced regulations, well-positioned to benefit in the longer term. With that being said, we remain focused on improving our lane density, increasing the productivity of our tractors, improving our yield, and investing in long-term growth of our logistics capabilities as a means to continue to grow our business.... Now on to slide 6. We continue to execute on our strategy of safely providing a high level of service while operating with industry-leading efficiency. We understand how critical it is to manage inflationary pressures in order to maintain the lowest cost per mile in our trucking segment and the lowest cost per transaction in the logistics segment.

During the first quarter, several factors impacted the earnings of our business. Losses from exiting our agricultural sourcing business and a higher tax rate combined to impact our results by $0.03 per diluted share. Less gain on sale and higher net fuel costs also negatively impacted our earnings another $0.04 per diluted share when compared to the previous year. We made meaningful progress in controlling costs in the operation and maintenance area of our business, which helped partially offset higher driver wages. Our service centers and departments maintain an intense focus on managing the costs associated with operating our business. We have become more efficient with our non-driving employees and continue to innovate ways to further increase that efficiency.

Our earnings in the first quarter of 2015 were up 55.1% year-over-year, and despite earnings being down 23.7% in the first quarter of this year, over the last four years, we have grown earnings at a compounded annual growth rate of 11.8%. Now I'll turn it over to Dave Jackson for additional comments on the first quarter.

David Jackson (CEO)

Thanks, Adam, and good afternoon, everyone. Now to Slide 7. In the first quarter, our asset-based trucking businesses operated at an 82% operating ratio, which includes our dry van businesses, refrigerated businesses, drayage business, and dedicated business. Most of the 280 basis point OR increase year-over-year was a result of increased net fuel expense and lower gain on sale of equipment. Our asset-based equipment businesses remain focused on developing the type of freight in the specific lanes we desire at appropriate prices through the bid process that continues with several customers still to this day. Multiple cost reduction and efficiency improvement efforts are underway, and every business in each service center is focused on closing the year-over-year OR gap.

Our improvement in miles per truck of 1.8% year-over-year and improvement in maintenance costs help offset the inflationary cost pressures from increased driver wages. Our non-asset-based logistics segment produced an OR of 94.8%. However, when adjusting for the $1.9 million expense associated with the exit of our Ag sourcing business, the logistics segment operated at a 90.2%. As Adam mentioned earlier, our brokerage business, which is the largest component of our logistics segment, grew volumes 31%, expanded gross margins 350 basis points, which resulted in operating income growth of 13.7%. Lower fuel surcharge, shorter length of haul, and lower non-contract pricing led to a 9.2% decline in revenues.

We're encouraged by the pace of the volume growth and believe that the growth momentum will continue. Our logistics performance continues to confirm the opportunities for growth, as well as the value provided to our customers through our offering of transportation management, brokerage, and intermodal services, in addition to our asset-based truckload services. It also provides an outlet for growth in times like the current, when it's not rational to grow by adding additional capacity or new trucks to the market. Next, on to slide number 8. This graph puts into perspective the revenue and income growth over the last few years. Our growth in both revenue and income originate from the most fundamental building block of our trucking segment, which are service centers.

Our approach is one that incorporates a high level of decentralized local autonomy with extreme centralized coordination to enable us to be close to the driver and the many moving pieces of the irregular route truckload, while providing customers a high level of service with a more centralized customer service experience. This has been an evolving part of our company and one which has received considerable focus and attention. Recent recognition from our customers suggests that we're on the right track. We were recently awarded the 2015 Walmart General Merchandise Platinum Carrier of the Year Award. We also received the Lowe's 2015 Gold Carrier Award and the Lowe's 2015 Outstanding Program Development Award. We were also recognized as the DHL 2015 Carrier of the Year.

We appreciate these customers and this recognition, and we're excited for where we're headed, especially as we introduce additional technology and visibility to the services that we are already providing. Today, our people are working harder than ever to keep our driving associates moving productively and safer than ever while analyzing more data than ever before to make sure our capacity is committed to the best, available freight opportunities. Our people also understand the importance of operating with the lowest cost per mile and why this is a significant differentiator, in such a competitive industry. While there are some market variables over which we have little control, we do have control over many, if not most, of the cost variables to drive a low eighties OR and return double-digit return on invested capital. Next, on to slide number nine....

When excluding the $1.9 million expense to exit the Ag sourcing business, which was a very small portion of the overall logistics segment, the logistics segment, which is primarily brokerage, had another positive quarter. As stated a couple of slides earlier, brokerage business saw strong load volume growth again, with double-digit operating income improvement. Revenue was a more difficult comparison. We believe we're seeing improved efficiency as a result of the technologies that we've implemented to assist and optimize the buying of transactional capacity. We believe there are things that we can offer because of our 25, almost 26 years of being an asset-based carrier, that only a very select group can offer.

We believe our understanding of freight markets and supply chains, extensive customer relationships and customer portfolio, and most recently, our growing investment in logistics-related technology, can lead to sustainable long-term growth. Our brokerage growth and profitability have been solid over the last few years, and we have more confidence than ever in our model. We believe we have demonstrated its scalability. We believe we have a long ways to go in terms of fully introducing the offering to our customers. We've found good success in a hybrid approach with certain customers. We expect to increase our investment in our logistics technologies. Next, some commentary for slide number 10. 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 and brokering freight using third-party carriers and also intermodal services. We expect there will be additional services and growth pillars 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 business, we're built solidly with the culture, the measurements, the people, and strategy that we believe can be scaled up and grown on a fairly consistent basis for years into the future. Our individual and organizational relentless desire for top line growth also fuels our passionate effort to improve efficiency and profitability.

It's not either/or in our culture, it's about profitable growth. This graph on slide 10 demonstrates our progress on incrementally improving already industry-leading returns on invested capital, or ROIC, when comparing first quarters or the trailing 12 months through the first quarter over the last several years. Next is slide 11. Our focus is creating value for our stakeholders. Our efforts to strengthen our value proposition to our customers, including our evolving service offering, continue without significant variation in the up and down markets. However, when it comes to creating value for our shareholders, we adapt and change depending on the opportunities and challenges associated with whichever end of the market demand spectrum we're faced with or anticipating. In stronger markets, we add trucks, open new service centers, and explore acquisition opportunities. Growing logistics is always a priority.

The variable nature of that business makes it even more attractive in challenging environments. When we see less robust, less robust freight demand, we are less likely to add trucks organically. This usually results in significant free cash flow, which amplifies our focus on adding capacity through acquisition, also enables us to improve earnings per share growth through share repurchases. Our objective is to leverage our very diversified customer base, multiple services offering, our non-asset complement to our truckload businesses, and healthy capital structure to create value in both strong and sluggish environments. It's no surprise that e-commerce is changing supply chains. Some are aiming for more of an omni-channel approach with their within their existing supply chain, while others are keeping their them separate, their, their traditional bricks-and-mortar supply chain, separate from their e-commerce supply chain. One thing that is consistent with e-commerce is flexibility.

Our asset-based business has been built from the beginning for flexibility. Our brokerage business amplifies the degree to which we can be flexible, adaptive, and immediately responsive. We're finding ways to better engage technology to provide the responsiveness and visibility for this new path to consumers that affects virtually all of our customers and their supply chains. Now to slide number 12. Experience, visibility to data, and new technologies continue to aid our effort to be the safest fleet on the road. In addition to the technology that we've been speccing on the trucks for some time now that improves safety, we're deploying additional technologies that have been proven to be effective in the coaching and training of driving associates, their exoneration, in some cases, of false allegations, and also helpful in the settlement of claims when they do happen.

Reducing cost is the most obvious item within our control that will have the most impact on earnings in the current term, or in an environment where the contractual pricing seems to have started in that 2%-3% range. But as we've gone through the bid season to this point, is moving more towards a flat to 2% range with limited non-contract opportunities. Several specific efforts have been underway to reduce cost. We expect to improve cost, but not impair our longer-term growth capabilities. Improving the driving job remains a priority, and you know, there, I will at least mention there is a uniqueness to the culture here at Knight and the environment that's fostered that just doesn't allow for us to stop with normal barriers or less robust markets.

But this is a place where we've got all kinds of great people that feel empowered, and where they set expectations for themselves that are higher than probably we would even ask. And we hold one another accountable to some degree, and we help raise the expectation one to another. We somewhat thrive in the face of challenging environments. Recently, we've had to make some tough decisions to be leaner and more efficient, from a cost, from an overhead perspective, and we appreciate the way that our people have stepped up and continue to take ownership for their work. Next, on to slide number 13. We continue to evaluate and pursue opportunities to grow the company through acquisition. Our logistics segment continues to grow load count rapidly.

It's become a meaningful complement, as we've mentioned, and based on the current status of balance between freight and truckload supply, we're not forecasting organic growth in 2016. And so this will result in significant growth in our free cash flow that will be available to help fund acquisitions and be returned to shareholders in the form of buybacks and/or dividends. I will now turn it over to Adam to discuss guidance. Okay.

Adam Miller (CFO)

All right. Thanks, Dave. On to slide 14, it's our final slide, we'll discuss guidance. Based on the current truckload market and recent trends, we're reducing our previously announced second quarter 2016 guidance range from $0.32-$0.35 per diluted share to $0.31-$0.34 per diluted share. Our expected range for the third quarter of 2016 is $0.32-$0.35. So I'll maybe walk through some of the assumptions that's built into this guidance. As Dave mentioned, no organic growth from our current tractor count. In terms of rates, we expect total rate per mile in the second quarter to be down slightly from the previous year, and for rates in the third quarter to be flat to slightly positive from the previous year.

In terms of contract rates, we expect to see flat to 2% increase during the year. However, during the first half of the second quarter of 2015, we had more non-contract opportunities above contract rates than we would expect to have this year. Therefore, we expect to see rates begin to improve in the aggregate in the back half of the year versus the second quarter. We also expect miles per tractor to continue to trend positively, similar to as we experienced in the first quarter. Our assumption is that net fuel expense will begin to normalize and will be probably net neutral in the next two quarters. However, as we all know, fuel can be very difficult to predict.

Long term, we expect to grow our logistics segment in the 25%+ range, while operating with a low-to-mid 90s operating ratio. In the first half of 2016, we expect load counts to continue to outpace that 25% growth target. However, we expect continued revenue per load headwinds that include lower fuel surcharge, shorter length of haul, and less non-contract opportunities. And these headwinds will likely impact the overall top-line revenue growth year-over-year, and more likely will result in revenue growth below the 25% pace. We expect driver wages will continue to be inflationary on a year-over-year basis, based on the pay increases that were put in place last year.

We also expect gain on sale in the second quarter will continue to be a headwind, as we recorded what were record sale, record gains of $5.2 million in the second quarter of 2015. However, in the third quarter, we expect less of a headwind as our gains on sale were $2.3 million in the third quarter of 2015. Other income will also be a headwind on a year-over-year basis. As far as our tax rate, again, we expect that to normalize in the next two quarters in that mid-30s range, excluding any unusual items, which will result in an earnings headwind for both the second and third quarter of 2016. These estimates represent management's best estimates based on the current information available. Again, 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, and again, we'd like to remind you this call will end at 5:30 P.M. Eastern Time. We will answer as many questions as time allows, and please keep it to one question. If we're not able to get to your question due to time constraints.

... you may call 602-606-6315, and we'll do our best to follow up promptly. Tracy, we will now entertain questions.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Brad Delco with Stephens. Your line is now open.

David Jackson (CEO)

Hi, Brad.

Brad Delco (Managing Director and Equity Research Analyst)

Good afternoon, Dave. Good afternoon, Adam.

Hi. Dave, can you just talk about kind of the cadence of the freight market in the first quarter and what you've seen thus far in April?

David Jackson (CEO)

Yeah, as you noted by the 1.8% improvement in miles per truck, you'd have to go back a long time to find a quarter where we improved our miles to that degree. So, you know, we felt pretty good throughout. I will tell you, March was not what—not as strong as we would have hoped. We had hopes for a back half of March that was really tight. Things seemed to be a little warmer than normal. And yet that didn't, it didn't materialize. It didn't feel all that tight. It felt very similar, maybe to the way the rest of the quarter was. All in all, from the volume perspective, it was better.

When we look at from a pricing perspective, you know, the contractual prices that took effect some point throughout last year, those are largely in place, so those would compare year-over-year favorably. And then, however, there were no or very few non-contract premium pricing opportunities out there, whereas in the first quarter of 2015, we definitely saw those opportunities. So, that was a headwind in that balance. So, if I were to look into April thus far, we would say what we have seen so far in April has been more of the same, where we're seeing our trucks run a little bit better in terms of miles year-over-year.

We're seeing decent volumes on a year-over-year basis. Too early to know kind of how that pricing shakes out, but we're definitely not seeing the non-contract premiums. Now, a year ago, the extra money for the non-contract freight largely ran out by the end of March. So we're starting to have a little bit of an easier comparison as we move into the second and third quarters, when we compare against the non-contract portion. And so the piece that remains to be seen is how well does the contractual piece compare year-over-year? Because we're going to begin lapping those increases from a year ago, and, you know, and clearly, we don't have the same level of increases to double up with.

Brad Delco (Managing Director and Equity Research Analyst)

Got you. That makes sense.

David Jackson (CEO)

Does that help? Does that answer your question, Brad?

Brad Delco (Managing Director and Equity Research Analyst)

That's perfect, and I want to respect the one question, but just to clarify, would there be any difference between your dry van and refrigerated on your comments?

David Jackson (CEO)

I would say that both would fit into what I just described.

Brad Delco (Managing Director and Equity Research Analyst)

Okay, perfect. Thank you so much for the time.

David Jackson (CEO)

Thanks, Brad.

Operator (participant)

Your next question comes from the line of Kelly Dougherty with Macquarie. Your line is now open.

Kelly Dougherty (Associate Director and Senior Transportation Analyst)

Hi, guys. Thanks for taking the question. Just maybe to just follow up on that one, can you talk to us maybe about how the general outlook from your customers may differ depending on their end markets? And, you know, maybe how the traditional retailers are feeling versus the e-commerce customers, and you know, whether their expectations are in line with, or whether their volumes are in line with their expectations, and maybe similar, more on the industrial dependent side of things.

David Jackson (CEO)

Yeah. Well, we probably don't have as much insight there as you would like and frankly, as we would like. We're we do such a small piece with such large customers, it's hard for us to get a full, a full view of that. Clearly, there's one particular e-commerce customer that seems to be growing at unbelievable leaps and bounds. I think we know who that is. There are other customers we work with that are also growing at, in the e-commerce side. They have the traditional retail outlet, but they're developing the e-commerce side, and so we do see some growth on that side. We have others that are trying a little bit more of an omni-channel, and we do see opportunities and growth there. But that growth is, you know, slow, steady, very measured.

We don't really have a lot of industrial, direct industrial exposure. So, you know, we just see what we read in The Wall Street Journal and realize that that's been a pretty rough place to be. So but e-commerce clearly is moving. What I would maybe say about that is that what works for e-commerce is, or the needs associated with e-commerce are much different than what the needs are on just your traditional full truckload store delivery, distribution, regional distribution type of a network. And so we think that we think we're starting to get a handle on some efficient ways to address that. There's some unique things that we're doing in that realm to try and help out.

I think as you see greater volumes and larger concentrations in certain geographies or the e-commerce, on the e-commerce side, I think there's a lot that the truckload guys can do to help out. If you look at just a typical e-commerce budget for a retailer, you know, it's costing them somewhere in the neighborhood of 4-5 times the transportation costs to fulfill e-commerce versus their traditional distribution to store via truckload model. And so, and that's largely because the parcel guys and the LTL guys seem to be playing a big role there. But as this, it appears, this is a newsflash, but it appears as though e-commerce is here to stay and that the internet isn't going anywhere.

And so, in light of, in light of that, you know, as consumer behavior continues to move down this path, we're gonna see greater concentrations. We're gonna see opportunities where we're well-capitalized with plenty of trailers and plenty of technology, because the technology updates are totally different in the e-commerce space. But the players that can play at that pace and have the flexibility are gonna have a chance to save those shippers a lot of money on their e-commerce, and the shipping community can begin to close the gap. So I know your question wasn't so much about, tell me about e-commerce, but that's where I took it, so hopefully-

Kelly Dougherty (Associate Director and Senior Transportation Analyst)

Yeah, no, I appreciate that.

David Jackson (CEO)

Hopefully, somewhat answered your question.

Kelly Dougherty (Associate Director and Senior Transportation Analyst)

Can I just do a quick follow-up to the mention of technology? You know, the spending on the brokerage and logistics side, should we assume that that may be a headwind from a margin perspective as you guys look to invest a little bit more on the technology side there?

David Jackson (CEO)

Not so much. I mean, those systems, you know, we capitalize that expense over time, and, you know, we don't spend $15 billion a year in R&D like some firms do. So it's big for us, but it, but you would have already begun to see it. Now, that's what we've already spent in terms of the ability to have a robust transportation management or TMS system. Then we also have a new system that we're just, I think, barely a year into full 100% implementation using in our brokerage business, and we think it's, it is helping our margins, and, it's not overly costly. But you will see us invest in technology in a much bigger way.

Already today, we've allocated some of our most experienced and talented people in that real realm, and you're gonna see us continue to spend money. Now, I don't expect that... I don't expect you to read a press release where we're blaming not being where we want to be earnings-wise because we're spending too much money on technology. It's not that big. But for us, relative to historical, you will see us spend and invest a lot of money there.

We're, we have a little bit of catch up to play, but we think we've got some clear visibility on where the path is going, and it affects virtually every side of our business, whether it's to the customer, it's to the driver, it's the way we use equipment, it's the way we improve safety. So we're moving down the several paths at the same time, and it's gonna get faster.

Kelly Dougherty (Associate Director and Senior Transportation Analyst)

Thanks very much, Dave.

David Jackson (CEO)

Okay. Thank you, Kelly.

Operator (participant)

Your next question comes from the line of Tom Wadewitz from UBS. Your line is now open.

Thomas Wadewitz (Senior Equity Research Analyst)

Yeah, good afternoon, Dave. Hi, Adam.

David Jackson (CEO)

Hey, Tom.

Thomas Wadewitz (Senior Equity Research Analyst)

On the fourth quarter call, you know, I think you had some commentary where you said, “Look, there's this kind of natural balancing that occurs in the truckload market, you know, lower Class 8 orders and so forth, and you anticipated some improvement in the second half of the year, I think is the way you characterized it then.” Has that view changed in terms of how long it takes to balance? And it sounds like you still have some optimism for second half of the year. How much conviction do you have that you'll see a tightening in, you know, maybe third quarter, fourth quarter on the kind of contract pricing you get then? Thanks.

David Jackson (CEO)

Okay. Yeah, great question. So, I think that, we continue... I'll start off by saying, yes, we continue to have conviction that we'll see things improve by the back half of the year, and I'll tell you what that's predicated on, right now. So, we are just now here in late April, beginning to lap the year-over-year double-digit declines that we saw on these load boards, which would be your most transactional, largely used with through, and by non-asset-based brokers. And so we're now lapping where, you know, a year ago, it was down 20%, 18%, 20%. Now, that included fuel. As we lap it, it continues to be negative and still significantly negative. So if you start to look at it over a 2-year period, it's an unbelievable decline in pricing.

And so in some cases, it's even with a shorter length of haul, which exacerbates how, how much it's declined. And so we view that as not, not an issue of how long, how long will these small carriers hold on, but it's just how long can they, when they're hauling, in many cases, headhaul loads at below their costs. So, you know, most truckers, every truckload carrier I know of, you know, you haul backhaul loads where you lose money. It's your, your revenue is below your cost, but you have a headhaul that helps more than make up for that. And so today, for the small carrier, when you look at those rates, and we compare them to our cost per mile, and hey, we do, we do a decent job on cost per mile.

When we look and see that on headhaul rates, it's below our cost per mile, we make the assumption that it's below theirs. So that's clearly not sustainable, particularly for small carriers, where that kind of load board freight makes up a significant portion, maybe a third, maybe even half of what they do. We think that, you know, this. We've seen this kind of aggressiveness in price, probably largely driven by the larger brokerage firms, who just are aggressively seeking the bottom. We don't know that we've seen the bottom yet on that non-contract kind of spot freight, but we do believe that the large brokerage firms will take it all the way to that bottom.

When we look at the Class 8 orders, and we look at, you know, that ten-year average is somewhere around 20,000 a month. So far, we've been below that 20,000 for the first three months of the year, and we're running at 8,000 tractors below where the average would have been. I think that that number is gonna, that 8,000 number is gonna begin to accumulate very quickly throughout the summer. We may even see single months where there's an 8,000 deficit under that average of 20,000. So we may be in that 10,000-12,000 for maybe consecutive months.

So when you look at new orders being, you know, slowing down so dramatically, so quickly, without really a change in sight, when you look at the tone of the larger fleets especially, you've got low demand and weak pricing for used equipment. The declines I mentioned in the non-contract broker pricing, and yet on the cost side, there is no relief, and frankly, for most, insurance and driver pay is inflationary on a year-over-year basis. You know, then you begin to ask the question, how long can this situation last? And so that's—based on that, we think that we've hit the bottom.

In terms of supply being added to the market, we think supply has been coming out of the market, and we wouldn't be surprised if we don't see progress, a little bit of progress each month as time goes on, and as we get, especially as we get through the dog days of summer, so that by the time we get to the fall, things feel maybe a little bit different.

Thomas Wadewitz (Senior Equity Research Analyst)

Okay, great. So that, that sounds like you still got confidence that, you're gonna balance and the market can't stand it that much longer in terms of capacity needs to come out, I guess, right?

David Jackson (CEO)

Yes. So sorry, Tom, was that a yes or no? Should I just have said yes to that question? Just joking.

Thomas Wadewitz (Senior Equity Research Analyst)

No, no, no. I think the color was very helpful, but you think it's gonna, the capacity will really start to come out in a meaningful way, and that's the key to balancing the market.

David Jackson (CEO)

We think that's the key. To say nothing about demand, to even say nothing about ELDs in this case, this stage of the game, which there's plenty to say there, but not even including that, when we just look at new orders, used equipment pricing, and non-contract rates, those three, we think can be very predictive of what's to come in the not too distant future.

Thomas Wadewitz (Senior Equity Research Analyst)

Right. Okay, I appreciate all the color. Thank you, Dave.

David Jackson (CEO)

Okay, thanks, Tom.

Operator (participant)

Your next question comes from the line of John Barnes from RBC Capital Markets. Your line is now open.

John Barnes (Managing Director of Senior Research Analyst)

Hey, appreciate you taking my question today. So I guess, piggybacking on, you know, what Tom was asking, I mean, obviously, the industry is going through this massive self-correction in terms of industry orders and that kind of thing. I mean, you know, do you think enough of the headwinds correct themselves to, you know, allow the industry to begin to, you know, maybe add capacity again in 2017? Does it allow Knight to add capacity in 2017, or are we way too early in the process to figure out, you know, you know...

I guess I'm asking, how do you feel that if you get past the, you know, the near-term headwinds, you know, do we start to see fleet growth again for the industry, and more importantly, organic fleet growth again for Knight, you know, in late 2016, early 2017?

David Jackson (CEO)

Yeah, that's a great question. I think the easy answer for me right now would be to say that it's too early to tell. I think that it's a really good question, and I think a very difficult question to answer because I think the game begins to change in 2017. I think that the behaviors start to change and will start to change from the shipping community because just because the current process of appointment pickups and appointments for deliveries and the waiting around to be loaded or unloaded, and in some cases, the amount of time that takes to unload a dropped trailer, will need to change to be more sensitive to the ELD environment.

I think as a result of that, a lot of good things happen, one of which is that our drivers can hopefully begin to utilize a much greater portion of their available driving time, whereas today, we're only using 65%-70% of the available drive time. And it's been hard with a minority of the carriers having ELDs to really, you know, to really change that game. I'm optimistic that some of those things may start to even improve and change in 2017. If you think back to 2004, 2004 is when really the real substance of the hours of service rules that are intact today, that's when they really took effect.

There wasn't a carrier that I'm aware of that charged for any kind of detention of equipment and the driver time prior to 2004. So what we have with ELDs is they're really finally enforcing the 2004 standard. So some people might be confused if it just, when you move from paper to logs, the reality is you're moving from pre-2004, that many carriers are still stuck in pre-2004 land because of the flexibility they're taking advantage of with paper logbooks, to where everybody is now living in an enforceable 2004+ environment. So, just as shipper behavior changed in 2004, I think there's a chance that we might see some changes that take effect.

Maybe it's not until after December of 2017, but I tend to think from our conversations that shippers are a little bit ahead of the game on this one. So, if we can be more productive with the drive hours, then what that would prompt us to do is probably invest even more in technology and equipment in the truck to be safer and to be more cost effective, so that we get the equivalent of adding more trucks and yet don't have the capital investment to do so. So, it's in our nature to grow, and so if we're in a favorable environment, we're gonna get the production in one way or another.

We obviously, you can tell which my preference would be, in being more productive with the assets we've already invested in. But, but we'll watch that closely, and I think you'll see us be, hopefully wise, you know, wise stewards of when, when to add and, and maybe when not to add, so.

John Barnes (Managing Director of Senior Research Analyst)

Okay. Thanks for taking the question. I appreciate it.

David Jackson (CEO)

Thanks, John.

Operator (participant)

Your next question comes from the line of Todd Fowler from KeyBanc Capital Markets. Your line is now open.

Todd Fowler (Managing Director and Transportation & Logistics Equity Research Analyst)

Great. Good afternoon, Dave. Hey, Adam.

David Jackson (CEO)

Hey, Todd.

Todd Fowler (Managing Director and Transportation & Logistics Equity Research Analyst)

Hi, Dave. Just on the slippage in the expectations for contract rates, the 2%-3% at the beginning of the year, down to the flat to 2%, can you help give some context around what percent of your freight has already been out for bid, what percent you've gotten back? And then maybe help us think about, you know, is there additional risk if we move through, you know, April and May, and we don't see additional seasonality, that there's more pressure on the contractual rate expectations, you know, from the flat to 2%?

David Jackson (CEO)

Well, I would say that we're of the bids that we would expect to see in the bid season, you know, we've received a majority of them. And of those that have actually gone through and are all the way through the process, it's probably just my guess would be a little over half. So a lot of these have seemed to drag out a little longer than we would have than normal. But I think that there have been, as it's gone on, the longer it's gone on, it seems like maybe the more aggressive we've seen from some in the shipping community.

I think that correlates to the fact that we've seen the non-asset-based brokers get more aggressive as time has gone on in the bid season. And so I think that there's a kind of a correlation to that. We're not surprised to see the non-asset brokers be, you know, variable and maybe move around a little. We are a little surprised at the level of aggressiveness in lowering pricing to win bids, because, you know, that in turn means much lower rates for the carriers that they're relying on.

And, and it's right on the eve of arguably the biggest change and challenge in those small carriers' businesses history by converting to ELDs, and like I said before, in our, in, you know, in my mind, anyway, living up to the 2004 rule, finally. And, and so, I think, I'm not sure that if the larger brokers had the experience that the larger carriers have had in adopting the ELDs, if they would be as aggressive as they have been. You know, for, for us, pre-2004 versus post-2004, you know, we lost 14, almost 15% in terms of miles per truck.

Todd Fowler (Managing Director and Transportation & Logistics Equity Research Analyst)

Yeah

David Jackson (CEO)

... from what we used to run. And so, the only thing I can conclude is that those non-asset brokers are underestimating this, and I don't really fault them for that.... because, you know, we underestimated what the impact was, and we actually own trucks, and we actually audit logs, and we actually have and had the safety program for a paper log world, and still we underestimated, the challenges and what was associated. So, so I think you have a little bit of opportunistic behavior going on, and so that's- that seems to have changed things here just a little bit towards the end of this, what seems like this current bid season.

Todd Fowler (Managing Director and Transportation & Logistics Equity Research Analyst)

Okay. So you've got about half the bids back at this point, but the longer it's been taking the bids to come back, you've seen deterioration from, you know, from the earlier bids this year?

David Jackson (CEO)

That's correct, Todd.

Todd Fowler (Managing Director and Transportation & Logistics Equity Research Analyst)

Okay. That's my one. Thanks for the time tonight, guys.

David Jackson (CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Scott Group with Wolfe Research. Your line is now open.

Scott Group (Managing Director and Senior Analyst)

Hey, thanks. Afternoon, guys.

David Jackson (CEO)

Hi, Scott.

Scott Group (Managing Director and Senior Analyst)

Dave, I don't think we're going to see many truckers with positive utilization this quarter, and so kind of the fleet cuts seem to be working. I guess I'm wondering, are you entertaining the idea of additional cuts to the fleet, at least in the near term? And then maybe if I can just broaden the question on industry capacity a little bit. So I guess following up on your points with Tom, like, I think everything you said makes sense in terms of low used truck pricing and low rates are going to pressure capacity. I'm wondering why you think we're not seeing it yet, and is it possible that low fuel is just changing the math or the numbers, and it's keeping this capacity in longer than you would have thought?

David Jackson (CEO)

Yeah. Good questions. So... I remember your second question. What was your first question?

Scott Group (Managing Director and Senior Analyst)

Just on, are you thinking about cutting the fleet more?

David Jackson (CEO)

Yeah, cuts on capacity. So, Scott, we were pretty early. I mean, this was early last year when we decided to pull back on the reins from an equipment addition perspective. So you know, this isn't a, we didn't just decide it. And I would say that, you know, right now, things continuing at the pace where we are, we don't feel the need to go pull out a bunch of trucks, but we would be more inclined to pull trucks out than we would be to lower rates. So that, we'll continue to watch that. That's somewhat of a fluid, that's somewhat of a fluid decision for us. Now, for the second part of your question and wondering maybe why have we not seen more come out?

You know, gosh, when you look at the number of trucks that we brought in in such a short time, I mean, we're talking, if the ten-year average is to buy about 240,000 trucks, the industry brought in, in 2014, 380,000 new tractors. Fifteen was 290. So you had this massive wave that came in, and, I'm not so sure that us larger fleets and our desire to have, the latest and greatest in terms of fuel efficiency and technology and driver amenities with buying on such aggressive new cycles. I'm not so sure we haven't somewhat been part of the problem, because we've made a lot of high-quality equipment available on that secondary market where it is more affordable.

And so I think we almost have to reevaluate a little bit how that looks, not so much because of the supply side, but because most of the large players, we're spec'ing a more advanced spec. Well, you know, we have over half of our fleet now has automated manual transmissions. Those are expensive, but they're good for a host of things. We have the collision avoidance, and we have anti-rollover and other things, and we'd like to continue to put things into the cab, and so we may have to hold on to a truck a little longer. It's something we're looking at very closely and evaluating.

We may need to hold on to equipment a little bit longer to get our return out of that. So, you know, I think the industry's got a little bit of... We've got some room to go to kind of really figure out what makes the most sense. And, and how, and in the end, as we figure some of those things out, we might reduce some of the volatility. But I think that just as this equipment came on so quickly, it was a lot of equipment, but we think it's working its way out. I mean, if you look at whether it's bankruptcy data, it adds up. It's separate. That was several thousand trucks. If you look at every month so far this year, it's 2 or 3 thousand or 4 thousand here, most recently below that 20,000 number.

And so, I think it's going to start to, I don't want to call it an avalanche, but I think it'll start to move pretty quick. Now, fuel has been, you know, helpful. The problem is, you know, for these guys, fuel is, call it 10% of their revenues. When their revenues are down 30% year-over-year, you know, looking at fuel is straightening deck chairs on the Titanic. They've got a much bigger issue when you look at what is going on with their revenue per mile. And, and that's, that, of course, is in the face of ELD. So, I think, I think that the trend is only going to go one way. I think it's already started, and I think it'll... Yeah, I think, I think it'll snowball, it'll accumulate and, and accelerate.

And it's ironic. It's the very people that begged these guys to go get trucks to come into the market for premium pricing that are the same people that are basically gonna run them out of business. And so, and it's just all happening right before our eyes. So it's a cool world.

Scott Group (Managing Director and Senior Analyst)

Thank you, guys.

David Jackson (CEO)

Thanks.

Operator (participant)

Your next question comes from the line of Jason Seidl from Cowen and Company. Your line is now open.

Jason Seidl (Managing Director)

Hey, afternoon, guys..

I guess I'll switch segments for my question here. You mentioned it a little bit in some of your comments. But looking at the logistics side, you know, clearly, you guys are doing well. I mean, your load count's up 31%. You're growing your gross margins, and that's obviously has to do with what the spot market is doing. But talk a little bit about the outlook there. You know, what should we look at for continued growth going forward in terms of your loads? And who do you think you're taking market share from? Because I don't think the industry is growing like this.

David Jackson (CEO)

Yeah. Well, number one, we're not huge, so, and yet we're doing over $1 billion a year with a full truckload business with customers, and this business represents, you know, low 20% of what we do. So, we think it should be much bigger, and we think that customers should have a desire to work with us because we already do so much for them on the asset side, and we know and understand their business. And so when they have, particularly when they have surges or have seasonal volume changes, we just think we're the right partner to do that. So, yeah, that would be—we would be outplacing somebody who's maybe more of a one-dimensional play with the customer.

So, I think that's where we see a lot of the opportunity that we do get. Our outlook is that revenue is still gonna be pressured for the reasons we talked about. You don't, fuel surcharge is down year-over-year, just as the nature of fuel, where fuel prices are. And we'll begin eventually to lap the shorter length of haul, but the length of haul is shorter, and it's, and those spot rates, as I've talked about several times now, you know, are lower. So what's happening is that revenue per load is down. So makes it hard to see the revenue side. We're a little more focused at the moment on volume because that's what we can control, and as some of those other market factors turn around, if we still have...

We're increasing the throughput of the transactions, and doing so profitably, which we have been, then we like, you know, we like our chances of being able to have all three categories positive over 20%, which those three categories would be load count, which our outlook would be that we're gonna be able to maintain a 25%+ improvement in load count volumes year-over-year. The second category would be operating income or margin dollar growth, and that's a number that is probably gonna not quite be to 25%, but we still expect to be up positive year-over-year. We've double digits this last quarter. And then the third one would be revenue. We'd like to see revenue north of that 25%, you know, were some of those factors to change.

If that were to happen, we would be thrilled. We've not been in that environment really yet. We got close a couple of years ago. So for right now, what's most predictable for us are the volumes and the throughput, so.

Jason Seidl (Managing Director)

Now, the margin going forward on the gross margins, obviously, it's a good result early on here, but is your outlook for projecting that those gross margin gains are gonna start to narrow?

David Jackson (CEO)

I think as the market gets, as capacity tightens, which is what we think, has a good chance of happening, late in the year, then, yeah, those margins probably start to tighten back up again. Long term, it's hard to imagine. It's really hard to imagine that a middleman with no capital investment is gonna be able to hold on to as higher returns as the brokerage has always held on to. So, we feel like we're prepared for that day because our operating costs of doing business are very low because of the way that we can leverage what we already are doing on the asset-based side.

And so we think we have a low-cost option for brokerage so that the returns, we can still justify the investment and the returns, but that it can, over time, probably be a little more, you know, a little more competitive on the profit side than what it is today, so.

Jason Seidl (Managing Director)

Mm-hmm. Well, listen, guys, thanks for getting me in here, and I really appreciate the time, as always.

David Jackson (CEO)

Okay, we appreciate it. Looks like you're, we're a little over time. You're, you got in under the wire, so thanks, Jason. Okay, so, Tracy, looks like, that's we're over time. So, for all that have, participated and listened, we appreciate, your interest and support. Those that have been in the queue that did not get an answer, we hope that, that you'll call the number we mentioned earlier, and we'd be happy to, try and answer your questions. Thank you.

Operator (participant)

Thank you for joining. This concludes today's conference call. You may now disconnect.