Knight-Swift Transportation - Q2 2014

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 Second Quarter 2014 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. Speakers for today's call will be Kevin Knight, Chairman and CEO, Dave Jackson, President, and Adam Miller, CFO. Mr. Miller, the meeting is yours.

Adam Miller (CFO)

Thank you, Tracy. Good afternoon, everyone, and thank you to everyone who's joined the call. We have slides to accompany this call posted on our website at investors.knighttrans.com/events. 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 we're not able to get to your question due to time restrictions, you may call 602-606-6349 following the call, and we will return your call. Again, that number is 602-606-6349. The rules for the questions remain the same as in the past. One question per participant. If we don't clearly answer the question, a follow-up may be asked. Let's begin.

Let's move to slide two. I'll first refer you to the disclosure on page two of the presentation. I'll also read the following: This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions, and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A, Risk Factors, or Part I of the company's Annual Report on Form 10-K, filed with the United States SEC for a discussion of the risks that may affect the company's future operating results. Actual results may differ. I'll now begin by covering some of the numbers in detail, including a brief recap of the second quarter results, starting with slide three. For the second quarter of 2014, we earned $0.31 per diluted share versus $0.24 from the previous year.

Net income increased 36% year-over-year to $25.8 million, while our operating income increased 21.8% year-over-year to $38.9 million. Revenue, excluding fuel surcharge, increased 9.4% year-over-year to $218.9 million, and our total revenue increased 7.9% year-over-year to $264.2 million. Now to slide four. Again, our balance sheet remains solid. We ended the second quarter with over 600 million of stockholders' equity, and have returned just under 80 million to shareholders through dividends over the past two years. We continue to refresh our fleet with modern equipment and have an average tractor age of 1.8 years.

As of the end of the quarter, we had just $15.4 million of borrowings under our $300 million unsecured line of credit, which we believe provides us flexibility to pursue all opportunities, including acquisitions and organic growth. Now on to slide five. Improving our return on invested capital remains a top priority for our company. Our internal initiatives, centered around increasing our revenue per tractor, growing our logistics segment profitably, and optimizing our network for efficiency, has resulted in a 140 basis point improvement in our trailing twelve-month return on invested capital since the third quarter of 2013. Dave Jackson will now provide some additional insight to our second quarter results.

Dave Jackson (President)

Thanks, Adam. Good afternoon, everyone. I'll start with slide six. During the second quarter, we continued to experience strong demand for our truckload services. The flexibility and responsiveness of our service center network and operations enabled us to provide needed capacity to our customers. In addition to our nationwide fleet, we're also able to provide meaningful capacity through the sourcing of third-party capacity by our non-asset logistics business. We grew our revenue, excluding trucking fuel surcharge, by 9.4% compared to the second quarter of last year. In our trucking segment, we were able to improve our revenue per tractor by 6% by increasing length of haul, operating with a lower empty mile percentage, and increasing our loaded rate per mile. This quarter marked the fourth consecutive quarter of year-over-year improvement in empty miles percent.

When looking at our second quarter revenue growth over the last four years, we've averaged a compounded annual growth rate of 9% without any growth coming from acquisitions. This also marks the eighteenth consecutive quarter of year-over-year revenue growth since coming out of the downturn in 2009. On to slide seven. Our industry-leading performance is a result of focused execution of our plan to provide an irregular route capacity in the markets that need it most, when they need it most. We do this with both our asset-owned capacity and capacity provided by our third-party carrier partners through our brokerage. We increased net income 36% when compared to the same quarter last year. When comparing second quarters over the last four years, our compounded annual growth rate for earnings is 12.9%, which is illustrated by the graph.

Since coming out of the downturn in 2009, we have now averaged 11.5% year-over-year growth in net income over the last 18 quarters, again, without any growth coming from acquisitions. With the combination of the improved trucking environment and our internal initiatives, our team produced a very solid quarter, and we're optimistic about continued positive results. Now to slide eight. In the second quarter, our asset-based trucking business operated at a 79.0% operating ratio. This is an improvement of 270 basis points year-over-year. I just want to point out and remind you that that includes Knight Transportation, which is our dry van business, Knight Refrigerated, which is our temperature-controlled business, and Knight Port and Rail Services, which is our drayage business.

We continue to see positive results from tightening 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 growth year-over-year during the quarter. Our brokerage business continues to find opportunities to grow with new customers as well as our existing customer base. Our brokerage business increased revenue 64.1% and increased gross margin 69.5%. Consolidated, our operating ratio for the second quarter improved by 180 basis points to 82.2%. It'd be one thing to achieve a low 80s or upper 70s OR in our dry van business alone. It's saying something to do that also and simultaneously in the refrigerated business.

But I think you can say that we're beginning to really demonstrate the model of the future with strong brokerage top and bottom-line growth, in addition to the industry-leading asset-based performance. This is a model that brings efficiencies to the marketplace and represents a significant growth opportunity for our company. Currently, we're only capturing a small portion of the daily opportunities presented to us for brokerage. It seems as if we can't hire and train people fast enough to keep up with the brokerage opportunity. Our aggressiveness for growth in the brokerage business has increased as our confidence in our model has also increased. Now on to slide nine. Our revenue per tractor continues to improve year-over-year, and our efforts and focus on improved asset productivity has been effective.

We've leveraged technology, our understanding of regional freight markets and customer needs with the strengthening freight environment, have led to us achieving these results. We believe these levels of production are sustainable. As for the growth in the trucking segment, we've increased driver pay meaningfully over the last three quarters, which has increased our cost but has enabled us to maintain our fleet size with some year-over-year growth, when most in the industry are downsizing their fleet size due to the difficulty in attracting and retaining drivers. More importantly, we believe we're positioned for additional organic growth. We expect to grow the fleet by 200 tractors, as mentioned earlier in the year. We believe we expect to do this before the end of the year.

We believe that the many efforts that have been underway, in addition to the driver pay increases, should enable us to achieve this target. Specifically, we expect to add approximately 75 tractors by providing additional services in three existing service centers. The remainder of the 200 tractor growth target will be achieved if we are successful in every service center, adding a net of just a couple of tractors over last year's tractor count. Now to slide 10. Our team remains focused on executing at the highest levels in each of our businesses, departments, and service centers. We have plans in place that we expect to continue to lead to improving results. Hiring and retaining quality driving associates remains the most significant challenge and represents a significant opportunity for our company. I'm pleased to tell you that the driving job at Knight is improving.

In the last 12 months, we've significantly improved our driver pay and performance bonus, all in conjunction with the benefits our service center strategy creates for our driving associates. We continue to make Knight the place of choice for professional drivers. The overall trucking environment has remained strong for three consecutive quarters since the fourth quarter of last year. We expect to see continued demand improvement for our services in the coming quarters. I'll now turn it over to Kevin Knight.

Kevin Knight (CEO)

Thanks, Dave. If we could now move to slide 11, and I'd like to discuss growth a little more than what Dave has touched on. Again, as Dave outlined earlier, we have a solid plan to grow trucks in the back half of 2014 by a count of 200. On the logistics front, we are pleased with our model, as it continues to grow and develop, and we increase the number of customers utilizing this service offering. It's become a very solid supporting business, and it is also having positive impact on our overall capabilities with our customers. We expect the growth in this business to accelerate. We also continue to be more active on the acquisition front and are pursuing several high-quality opportunities. Now to slide 12.

This month, we created Kool Trans. Knight has a strong track record of successful startup truckload businesses. We expect Kool Trans to be like Knight Transportation and Knight Refrigerated in terms of growth trajectory and industry-leading profitability. Kool Trans is a full truckload, temperature-controlled transportation company created to be attractive to professional drivers while providing high-quality, consistent service to our customers. We hired Jon Isaacson, former CEO, CEO of a large temperature-controlled truckload transportation company, to lead and grow this business. We're excited about the combination of Jon's leadership and experience with Knight's established network and freight opportunities. We believe that leveraging the scale, resources, and network of Knight with the culture Jon will lead in Kool Trans, will be attractive to professional drivers and will lead to meaningful capacity creation in the refrigerated marketplace. The response and anticipation so far from customers and drivers has been very positive.

We are excited to have Jon as part of our team, and actually, this is the second time we've had an opportunity to work with Jon. Back in our Swift days, my brother, Keith, I believe, hired Jon, and they worked together in Swift's Southern California operations. We're glad to be fortunate enough to be reacquainted with Jon. We believe we're in a long-term positive environment for irregular route truckload, and this is an opportunity to leverage an experienced an additional experienced leadership team to provide much-needed capacity for our customers and generate meaningful returns for our stakeholders. I'll now turn it back to Dave to discuss guidance.

Before I do that, Dave, I'd just like to tell everybody listening to the call how pleased we are with the effort of our entire team. With that, Dave, we'll-

Dave Jackson (President)

Yeah.

Kevin Knight (CEO)

Turn it back to you.

Dave Jackson (President)

Well said. slide 13 is our final slide. Based on the strengthening market, we are updating our previous, previously announced third quarter 2014 guidance from $0.23-$0.26 per diluted share to $0.24-$0.27 per diluted share. Our expected range for the fourth quarter of 2014 is $0.26-$0.29 per diluted share. Some of the assumptions made by management include rates to continue to be positive year-over-year, and for miles per tractor to be relatively in line with the year-ago period, and for the used equipment market to remain strong. It also includes consideration for potentially volatile fuel prices. These estimates represent management's best estimates based on current information available. Actual results may differ materially from these estimates.

We would refer you to the Risk Factors sections of the company's annual report for a discussion of the risks that may affect results. This concludes our prepared remarks. We would like to remind you that the call will end at 5:30 Eastern. We will answer as many questions as time allows. Please keep it to one question to allow us to get to more of those of you that have questions. If you're not able to get your question answered due to time constraints, please call 602-606-6349, and we'll do our best to follow up promptly. Tracy, we'll 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 Bill Greene with Morgan Stanley.

Bill Greene (Managing Director)

Hi there. Good afternoon. Thanks for taking the question. Can I just ask, since driver wages and driver shortages and all this just keep coming up, can you give us some sense for what the average kind of driver cost inflation is, or what the wage increases you're giving, or something, some color around, just so we can get a sense for what the kind of pressures are that you're seeing?

Kevin Knight (CEO)

Yeah, I'll go ahead and take that, Bill. First off, it's not the easiest question to answer. What we've done is we've improved our driver base pay, you know, 2x or 3x here in the last year or so. And we've also improved bonus to align pay with performance. And so, that could equate to as much as, you know, $0.05 or $0.06, $0.07 a mile if a person hits it out of the park, but at a minimum, it's like $0.025-$0.03 per mile. So, when you look at that in conjunction with our driver pay, it would be somewhere in the, you know, 5%-10% range, you know, over the last 12 months.

We, you know, we would expect for that number to continue to improve as the market for truckload services continues to strengthen.

Bill Greene (Managing Director)

I think we've sometimes heard you say, or maybe not, not attributed to you, but that roughly half of the rate increase is often passed along to the driver. Is that a fair ratio as you think about it?

Kevin Knight (CEO)

No, we would, I would say less than that, Bill. We've, I don't think we've given indication of half, more like a third. So that's basically the guideline that we use.

Bill Greene (Managing Director)

Okay, that's great. Thank you for the time.

Kevin Knight (CEO)

Thank you, Bill.

Operator (participant)

Your next question comes from Scott Group. If you could please state your company affiliation, your line is now open.

Scott Group (Managing Director and Senior Analyst)

Yeah. Hi, it's Scott Group from Wolfe Research.

Kevin Knight (CEO)

Hey, Scott.

Scott Group (Managing Director and Senior Analyst)

So I wanted to ask about the guidance for the third quarter, because if I look historically, second quarter and third quarter are typically pretty similar. And the past couple of years, I understand there was a big fuel hedge in second quarter that turned into a drag in the third quarter. Why the big sequential drop in earnings that you're expecting from 2Q to 3Q?

Adam Miller (CFO)

Sure. Hey, Scott, this is Adam. Maybe I'll just outline some of the factors that went into our guidance here. We're expecting in the third quarter to start to pick up some of the tractor growth that Dave alluded to in our prepared remarks, and so that would, we would start to see a little bit of year-over-year growth from a tractor basis. Again, probably see a similar type of rate improvement on a year-over-year basis that we've experienced here. Again, miles probably flat, maybe could be potentially slightly up, but now that we're lapping the hours of service regulations, but I wouldn't expect that to be up more than 100 basis points at the most.

We see continued growth in our logistics business, like we have been, both sequential growth as well as year-over-year. From an OR perspective, just looking at the past 2 years, you've seen typically a, you know, a few hundred basis points increase in the operating ratio from second to third. So, we're kind of penciling that into our guidance here, just without knowing exactly how this third quarter is gonna play out. But we would expect to see the logistics. It's not as subject to the volatility, you know, as our asset-based business, so we'd expect that OR to be positive on a year-over-year basis, but probably similar to what we saw in the second quarter.

Kevin Knight (CEO)

Yeah, and I would, I would add, too, Scott, that, you, you know, in the past, third quarters were typically the same as second quarters. But, you know, since the downturn, we've experienced, I think, more third quarter that we weren't that excited about than third quarters that we are excited about. But the momentum going into the third quarter seems strong. And so, basically, that's how we've, you know, come up with our guidance. I think we earned $0.19 last year in the third quarter, and the range we've given is an increase from where we were like a quarter ago, at the $0.24-$0.27 range. And certainly, we hope to be, you know, on the upper half of that and not on the lower half of that. So that's how we look at it.

Scott Group (Managing Director and Senior Analyst)

That, that's all very helpful. So it sounds like, though, you think that the drop in margin from 2Q to 3Q the past couple of years is more about seasonality and less about the impact of fuel.

Kevin Knight (CEO)

Yes. Yes, absolutely. In recent history, you know, I would say pretty much the whole month of July and the half month of August seems like they haven't been all that great. And so the good news is July here has started off fairly strong and stronger than what we've seen in the recent past. And so we're optimistic about being in the, you know, kind of upper half of that range that Adam has given, and hopefully we'll be able to accomplish that.

Scott Group (Managing Director and Senior Analyst)

Okay. Thanks, guys.

Kevin Knight (CEO)

Thank you.

Operator (participant)

Your next question comes from Brandon Oglenski with Barclays.

Kevin Knight (CEO)

Hey, Brandon.

Brandon Oglenski (Director and Senior Equity Analyst)

Hey, good afternoon, everyone. Kevin, you know, I just wanted to ask you, how sustainable is this pricing environment gonna turn out to be? I mean, I know in the past couple calls, you've talked about a demand environment here that you thought was quite robust and is gonna have some longevity. Is that still the case, and are things even looking better at this point?

Kevin Knight (CEO)

Well, I would say that we're feeling stronger, Brandon, about price than we were a quarter ago. And so, you know, we had expected contract rates to increase at the beginning of the year, the end of last year, maybe 2%-3%, and then we moved that to 3%, and then we moved that to 3%+. We're currently expecting contract rates to be in the 4%-5% range, and which is a really good year for contract rates, as those represent, you know, going through the bid process and dealing with many of our larger and more meaningful, in terms of revenue, customers. So basically, our bent towards rate improvement, you know, has strengthened again this quarter over last quarter.

You know, we really don't see anything on the horizon that makes us feel like what we've produced is not sustainable. We have a very unique model, one that really was... We started to modify the model that got us through, you know, the first 15, 20, the first 15 years of our existence. We really started to modify that model back in 2005. But you know, then we hit the downturn, and we really didn't ever get the chance to really make that whole thing work the way that a healthy freight environment can help make it work.

So we believe that, based on what we've seen in the fourth quarter, the first quarter, the second quarter, and thus far into the third quarter, we feel like that, what we've done over the last 10 years has positioned our company to continue to make a headway in our return on invested capital, to give us significant additional growth avenues through the logistics side of our business, and really continue to maintain that premier position as far as growth and earnings from our truckload business. That was the big risk for us going back, you know, when I think of 2005 and 2006 timeframe, I mean, we had stepped out of the box and started Knight Refrigerated, which was a very good success.

So we had now started two truckload entities, but we'd never been in that logistics space, and especially with the heavy brokerage bent to it. And so we're really very pleased that, you know, our experience of the last however many years in determining the direction we wanted to take our business is paying dividends, and we think that it's gonna pay dividends for many years because we're really, we're, it's becoming fairly large. And so it's kind of like pushing the old flywheel. We've kind of got that thing moving now, and you can tell based on Dave's remarks, we're having a bit of a tough time on the people side, just keeping up with the opportunities.

So, I believe that it's sustainable.

Brandon Oglenski (Director and Senior Equity Analyst)

Well, I mean, if you don't mind, just a quick follow-up. Your other large competitors are obviously pursuing similar strategies with brokerage. What is it about your model here that seems to be driving some outperformance relative to some of the other fleets?

Kevin Knight (CEO)

You know, Brandon, it's just the way we do things. I don't know how else to explain it without giving you maybe too much information. So just like in the truckload business, where we've been able to be more efficient and more effective with the revenue dollars that the company produces, operating in a market where we don't set the price, but where really the market sets the price, we've been able to leverage that expertise in conjunction with the non-asset side that really just puts us at, in a different place at the end of the day. Without sharing anything specific, I mean, we are absolutely, positively going about this differently than any of our competitors. So, you know, and we're glad that that it's working.

So that's, that's really all I have to... Do you have anything to add?

Dave Jackson (President)

No, I would say that it's a strategy that's working now. That doesn't mean that it's a strategy per se, that would have worked as well in maybe the downturn, more recessionary years. But, you know, it works for us now. We think it's gonna work for a long time, and we think we have learned enough about it, that we'll be ready for the next change in pace, that'll come in hopefully several years down the road. So, as I said earlier, I think it's a space that we've gained a lot of confidence, and so now we're in growth investment mode there. That's where we feel most comfortable, is when we're in a growing type of a mode and a growing type of an environment.

There are opportunities from a technology perspective that we are yet to leverage. So an example is our brokerage business. We're hopefully about 30 days away, 37 days away, from going live on a system we've spent a lot of time in preparing. And so, you know, the kind of technology that we're using in our brokerage today was invented in the 1970s. And so, it's a business that we're doing a lot with limited resources, if you will. And so we think that there are several inroads to be made. We're not content, we're not happy with the volume, frankly, although we see revenue and margin up in the 60 percentile range, it could be better than that.

And so, we're working through those barricades, and that's gonna be a strong piece for us. And the good news, I think the best news of all is that this is all being done not at the expense of our asset-based businesses. And so, because of that and because the way we've figured out how to weave that together, that business is able to leverage the strong support of this network we have across the country. So, that's where... You'll, you'll keep hearing us talk about it, I guess, is a safe assumption.

Brandon Oglenski (Director and Senior Equity Analyst)

Well, well, the results definitely show it. Thank you.

Kevin Knight (CEO)

Thanks.

Operator (participant)

Your next question comes from Rob Salmon with Deutsche Bank.

Rob Salmon (VP and Associate Analyst)

Good evening, guys.

Dave Jackson (President)

Hi, Rob.

Kevin Knight (CEO)

Hey, Rob.

Rob Salmon (VP and Associate Analyst)

You know, with, with regard to your fleet growth, is that incorporating Kool Trans in, in the 200 net additions you're expecting to achieve? And can you talk a little bit more about how you're planning to kind of grow Kool Trans? Will it be leveraging the, the infrastructure of Knight Transportation, or will this be a completely separately run entity?

Dave Jackson (President)

... Well, I'll speak on part of that, and maybe Kevin will chime in on another part of that. The 200 tractor growth that I talked about, we laid that out at the start of the year, which was before Kool Trans started and before that opportunity became available to us. We expect to do 200 with the existing Knight fleet, apart from the growth that we see at Kool Trans.

Kevin Knight (CEO)

Yeah, and I would just say for Kool Trans, we expect to add 50 trucks very quickly, and those trucks, we're taking delivery of them as we speak. We've got our first group of drivers in orientation this week as we speak. And so basically, our goal for Kool Trans is within the next 12 to 24 months to be operating, hopefully, 150 to 200 units would be our goal. And basically, that is separate from Knight. We also expect for you know, Kool Trans to be a contributor to our brokerage effort also. So when we look at Kool Trans, we don't look at the Kool Trans start exactly the same way as we do Knight Transportation or Knight Refrigerated.

We look at what we've learned now with Knight Refrigerated and Knight Transportation, and we're trying to make sure that we take advantage of all growth opportunities. So Kool Trans should have a fairly significant brokerage component to it right from the get-go. And as a matter of fact, we've already created some revenue there. Now we will have, you know, some startup costs as a result of the start of Kool Trans. So I wouldn't expect that it should be much of a bottom-line contributor until we get into next year, and then certainly it will be more significant as we move forward. So we think that we've got a significant opportunity with Kool Trans.

Rob Salmon (VP and Associate Analyst)

That's helpful. What should we be penciling in with regard to the startup costs in the third quarter?

Kevin Knight (CEO)

Say that again, Rob.

Rob Salmon (VP and Associate Analyst)

Kevin, you know, what should we be modeling in terms of the startup costs related to just to getting the entity up and running?

Kevin Knight (CEO)

Yeah, I would just look at it neutral in the third quarter, like whatever revenues create, we'll probably have expenses to offset those. So I'm not sure, Rob, you even need to do any modeling. Now, you could follow up with Adam after the call if you want a little more detail. But you know, and then we would expect for it to start making a you know, ever so slight contribution as we get into the fourth quarter. But we'll have to get that thing up to a couple hundred trucks you know, before you'll start to see some meaningful EPS contribution is how I would look at it, Rob.

Rob Salmon (VP and Associate Analyst)

Thanks so much for the time, guys.

Kevin Knight (CEO)

Thank you.

Operator (participant)

Your next question comes from Todd Fowler with KeyBanc Capital Markets.

Todd Fowler (Managing Director)

Great. Thanks so much.

Kevin Knight (CEO)

Hey, Todd.

Todd Fowler (Managing Director)

Hey, Kevin. Hey, Dave. Hi, Adam. Kevin, I guess I'm curious to get your thoughts about the operating environment in the second quarter, and maybe if you want to comment on what you've seen so far into July. I'm curious if you felt that the second quarter was normal from a seasonality standpoint, or if there was anything that, you know, benefited the environment either one way or another. I know there's been some moving parts with the first quarter weather and some other things going on with intermodal and some stuff like that, so I'm curious to get your perspective on the second quarter in July at this point.

Kevin Knight (CEO)

Yeah. Well, what I would say, Todd, is really April felt stronger than we would have expected from a seasonality perspective, and we haven't really heard that from many, but for us, that's how it felt. May seemed to be kind of normal. May seemed to be a little late. The produce seemed to be a little late. It just didn't seem like things took off the way we would have expected in May, and then, you know, June finished very strong. And it seems like that some of that June has carried over into July. I really expected, you know, things to be a little bit disappointing during and after the holiday, but we actually performed fairly well.

Now, a lot of that has to do with the holiday falling on a Friday, so, so we can't, we can't forget that, you know, the Fourth of July was on a Friday versus a Thursday of last year. So, so really, I, I would say kind of normal seasonality, although it seemed to us like there was more activity in April, probably as a result of loads that maybe didn't get moved as a result of the, the weather that was experienced in the, in the first quarter. So then it seemed like once we got that cleaned up, then it seemed like it took a little longer for, you know, this, the, the second quarter seasonality to, to really kick in. But then it seems like it's hung in there, you know, a little bit longer.

So that's basically how the seasonality has played out, Todd.

Todd Fowler (Managing Director)

Is it produce, Kevin, that's still carrying it into July, or is there something else that I would think that, you know, the-

Kevin Knight (CEO)

Well-

Todd Fowler (Managing Director)

surge in some of the... Go ahead.

Kevin Knight (CEO)

...Well, I think it was just late. I think maybe the water was a little late, the beverage was a little late. I don't know. It's hard to explain. I think, too, some of it could have been the stuff around the Port of L.A. and the Port of Long Beach, and everybody trying to get stuff in here, certainly before the contract could have expired. And so you know, we've probably got a little bit of overhang from that. Stuff that hit the port at the end of June would've been getting still moved from a line haul perspective thereafter.

And so I think from our customers' perspective, they just wanted to make sure it was out of the port by the end of June, and didn't necessarily care whether they had it or not, probably didn't want it. Because, you know, our sense is that our customers probably pulled things forward, you know, a week or two or three, just for any disruption that may have taken place. So at least in the customer meetings that I've been involved in, that seems to be what the general tone was. So that's probably had, you know, a bit of an effect.

Dave Jackson (President)

Yeah.

Kevin Knight (CEO)

And Dave?

Dave Jackson (President)

Maybe, you know, also the fact of the matter is the GDP for the first quarter was disappointing and dramatically different than what we had seen from a third quarter and a fourth quarter. So we may have felt a little bit of that in May. But you know, June was very, very strong, and capacity was very, very scarce to find and was expensive. So certainly through the mid-half of July, that pace continued, which hopefully speaks well to broader GDP as we for the overall economy. If that continues to keep up, then given where supply is, then I think it bodes well for what the back half, third and fourth quarter of this year might look like.

Todd Fowler (Managing Director)

Okay. Thanks a lot for the color, and congratulations on the quarter.

Kevin Knight (CEO)

Thanks, Todd.

Operator (participant)

Your next question comes from Allison Landry with Credit Suisse.

Dave Jackson (President)

Hey, Allison.

Allison Landry (Senior Equity Research Analyst)

Hi, good afternoon. Thanks for taking my questions. Dave, you mentioned that you're becoming more aggressive in growing the brokerage business, you know, as your confidence has increased. So I was just curious if we should interpret that as an indication that you're going after market share? And if that's not the case, maybe if you could comment on what the strategy is for the business.

Dave Jackson (President)

Yeah. I, I would tell you that market share is just a term that, that I'm not sure it has a place in all of truckload transportation, just given how things work. I think, we don't, we don't look at things in terms of market share, especially because that's usually code for, it's not profitable. And so we are interested in, in growing that business profitably. And what you've noticed over the last several quarters is very strong top line, but a bottom line that is, that is keeping pace with a, with a, an aggressive top line. So, that's how we want to do it, want to build it right.

It's a variable-based business, and so it's a very difficult concept to try and argue that you can, in a variable-based business, you cannot be profitable today, but somehow with size, you're gonna turn that into profitability. So, at least we're not smart enough to figure that piece of it out, so we're just gonna build it profitably one step at a time as we grow. When we talk about aggressively growing that business, that's a business we're giving more resources to, and not only in terms of just adding new headcount, but technology resources, also experience within the Knight business. And so, we've moved some folks around, to continue to give that business people that are talented managers, that are proven on the Knight side of things.

So for us, that's kind of a, that's a big deal, because these are folks that are productive in whatever role they do. And so to put them into brokerage, we're beefing up the horsepower, if you will. And that's a, that's a space where, you know, on any given day, we're, we're still turning down way too many loads. And we're turning down loads that, with, with more resources, we could, we could find an appropriate double-digit gross margin that we're able to convert into a, into a 93 to a 94 operating ratio, and grow that business significantly.

So, to say nothing of the fact that it positions us well with our customers, we're able to alleviate and help them, especially in a time like they've seen over the last three quarters. We're able to help them find capacity when it can be sometimes the most difficult to find. And so, this hybrid model, if you will, of us doing a lot on our assets, it's great for us to get to know the customer, understand what they have going on. And when our customers allow us to leverage the brokerage side of it, it's everybody, everybody wins.

Allison Landry (Senior Equity Research Analyst)

Okay. That was really helpful. Thanks for that explanation. And then just my follow-up question. One of your competitors noted that, driver challenges are intensifying as carriers, you know, of all sorts of sizes are, are essentially poaching drivers from one another, with sign-on bonuses and other short-term benefits. And, you know, seemingly, this suggests that conditions are almost becoming desperate for some companies. So I was just curious to get your thoughts on this and, if you're seeing similar trends and, and what Knight might be doing in response?

Dave Jackson (President)

... Yeah, I think the immediate response would be, what else is new? I mean, this has always been an environment where drivers trade from one to another. It's an industry known for having high turnover. And so I, in terms of desperation, I think there are definitely inflationary pressures that every single trucking carrier faces. I think the reality is most carriers have not been able to raise their rates to a level that allows them to give back to the driver to make it a more attractive driver job. We don't just compete with each other for drivers, but we have to be attracting individuals into the space that want to come and get a CDL and gain experience and be a truck driver.

We've relied maybe too much on the baby boomer generation for many years, and so we find ourselves with a problem that's been growing and brewing for many, many years. And so, I think, you know, we talk about rates and how, where contract rates are up, how spot rates are probably a bigger deal this year than we've seen in maybe 5 or 6 or 7 years, and probably will be part of a norm, in terms of just there's this intense need for and the capacity is scarce. What this all comes down to is carriers need to raise rates in order to cover these costs that haven't been covered sufficiently for several years now, and on top of that, we gotta find a way to get another $0.12 or $0.15 to the driver.

It's going to take a while. I think shippers are recognizing this need and recognizing that the driver and attracting drivers is really the driving factor in this whole piece, and rates are going to continue to increase until we have plenty of drivers, and we're a long, long ways from there. So, in terms of desperation, I think it's just a difficult business to be in right now, and the folks, doesn't appear that there's new folks getting into it, except for Kool Trans. And it feels like more players continue to leave the space, and the established largest players seem to be running less and less trucks year-over-year. And so, so I, and I don't know if that's desperation, but it certainly is a challenging environment in general.

I think for a business like ours, you know, this is... We do pretty well in this. We view this type of a time as very much an opportunistic time for us to grow. Kevin?

Kevin Knight (CEO)

Yeah, I would say, Allison, I mean, first off, we used to get all of our drivers from through experience, and we, over the last couple of years, have intensified our training initiatives, which is definitely paying dividends, allowing us to, you know, grow a few trucks year over year. Not as many as what we would like, but I'm in strong agreement with Dave. I think this type of environment is exactly what we thrive on. And, you know, we look forward to continue to lead and be ahead of the group with regard to, you know, our driver initiatives. So certainly we're investing in our driving associates. We're investing in the programs that develop those driving associates.

Kool Trans is a perfect example of, you know, thinking outside of the box. Driving associates like to be part of something new. They like to be part of a smaller team as compared to a larger team. And, you know, when you have somebody like Jon that's got that much experience in our industry, I mean, it's a very appropriate way to go about instead of adding to our refrigerated business, which already has a good management group, we get to add another good management group. And typically, two good management groups are going to hire more driving associates than one good management group. And so really, we're doing a lot in that area.

Kool Trans is part of that, and we'll continue to push the edges in that area. But like Dave said, we've just got to improve our rates as an industry in order to make sure that it's a job that you know that definitely attracts people. And we've taken some significant steps this year, and we expect to continue. I also think, Allison, that you know the logistics systems that exist today really only address the needs of our customer, the shipper, and the consignee. And pretty much the rest of it lands on our shoulders to either buy more trailers so we can drop and hook, or to try to negotiate with a grocery store warehouse a reasonable appointment based on when our driver picked up.

What you're going to see start to take place as it becomes apparent that we're in an environment like this is we're going to end up having more control over when we're able to deliver. The customers that we have that are able to you know figure out okay when would be the best time for your driver to deliver based on the hours of service based on all the regulations that you have and when they're able to fill that requirement for us then basically that's gonna work well. If you are a customer and you don't have the ability to control that or don't take the initiative to control that then basically your price will go up more so than the other people competing for capacity.

So, long answer, but I, but I hope we answered your question, Allison.

Allison Landry (Senior Equity Research Analyst)

... Absolutely, that was extremely helpful, and it sounds like the Kool Trans is going to be an interesting little business. So looking forward to, to seeing how that goes. Thank you for the time.

Kevin Knight (CEO)

Well, we're excited about it, so thank you.

Allison Landry (Senior Equity Research Analyst)

Thanks.

Operator (participant)

Your next question comes from John Larkin. If you could please state your company affiliation, your line is open.

John Larkin (Managing Director)

Sure thing. It's, John Larkin from Stifel Nicolaus. Good afternoon, gentlemen.

Dave Jackson (President)

Good afternoon.

Kevin Knight (CEO)

Good afternoon.

Dave Jackson (President)

Hey, John.

John Larkin (Managing Director)

Hey, all, as well. Hey, a little clarification, if you don't mind, on the non-asset-based side of the business. You stated a couple of times that the brokerage piece is growing like wildfire, up 64%. Yet the overall business, the overall business is up, just 22% on the asset-light side?

Kevin Knight (CEO)

Yep.

John Larkin (Managing Director)

I would have thought that brokerage was a bigger component of the total, non-asset-based business.

Kevin Knight (CEO)

Yeah. Well, first off, John, it is. And you'll see that more so as we move into third and fourth quarter. We have three components in logistics. We have sourcing, we have intermodal, and we have brokerage. And we had some revenues in second quarter of last year, significant revenues in intermodal that are not repeating, you know, this year. So what I think you'll - and our sourcing business is not a fast-growing business. I mean, it may be growing by, you know, some months a little and some months not so much.

Our actual intermodal business revenues were down 40% year-over-year as we cycled off the, you know, the one-time stuff that we did in second quarter of last year. So, so I think, John, the picture will become much clearer, you know, as far as what our, our logistics business is really doing as we move into the second half of this year.

John Larkin (Managing Director)

Okay, fair enough on that one. And then, Dave, you talked about the new operating system that will be put into place, I guess 37 days from now, to bring the brokerage operation into the modern era. Is there anything similar that's been rolled out on the trucking side? It's interesting how successful you've been at taking revenue per loaded mile up while reducing empty miles. I'm wondering if there's some technology application that you're using to help make better decisions because I'm guessing that not all of that 5%+ revenue per loaded mile increase is rate. Some of it is probably better freight selection.

Dave Jackson (President)

Yeah. I think, the technology we've used on the truck side has helped us go or improve the revenue per total mile, which is, which is greater than the 5.6% because of the reduced empty miles. We have an optimization system that we use. I would say that most large fleets already use it. What makes it different for every carrier is, it doesn't tell you intuitively or natively where to go, what to do. You have to populate all kinds of assumptions and thinking. And so it's taken us quite a while to do that and take our approach into, yeah, 2 or 3 years now, to load that with all the preferences and how we want to look at freight.

And so we are now leveraging that tool more than ever, more than we ever have before, and on the vast majority of our loads, feed through this, this modeling. And of course, it takes into account a number of factors, which, empty miles, of course, is one major factor there. So I think the combination of, I would say, three things are, are leading to that. One is, when you're in an environment that's got more loads, combined with an optimizer, that it gives it more flexibility on what to choose.

Kevin Knight (CEO)

You put the effort to prepare.

Dave Jackson (President)

That, that—those two things help, right? And you don't just get there overnight. We've paid the price to get to that point. I think the third piece that's really helped us doesn't have to do with technology, but it has to do with some changes we've made over the last year or two on approaching markets and pricing. And so we have just a great deal of analysis that goes into lanes we haul, what the rates are. And so the discipline that we have for building density and lanes throughout the country, which enables us to create a little bit better driving job with a little more predictability, and then it allows us, as we go through these massive bids, the opportunity to comb through and find things that really work for us.

So when you combine all three of those things, you know, that's what's made a big difference on the empty miles.

John Larkin (Managing Director)

Thanks for walking me through that.

Dave Jackson (President)

Sure. Thanks, John.

Operator (participant)

Your next question comes from Brad Delco with Stephens Inc.

Brad Delco (Managing Director and Research Analyst)

Good afternoon, Kevin, Dave, Adam. How are you all?

Kevin Knight (CEO)

Hey, Brad.

Dave Jackson (President)

Hey, Brad. Good, Brad.

Brad Delco (Managing Director and Research Analyst)

I wanted to ask you a little bit, just kind of follow up on a couple other questions, but maybe to boil down to it, the cadence of these contractual rates that you saw come into the second quarter, when were majority of those recently negotiated contracts put in place? And what percentages of your freight do you feel like had these new rates in place during the second quarter?

Kevin Knight (CEO)

Well, you know, Brad, I'll take that one. I mean, first off, it's such a moving target. I mean, we're still working bids that, you know, we thought would be finalized months ago. So basically, it is absolutely an ongoing process. I would say the initiative typically starts in November, December, and you would expect to be completely done by now, but certainly, in some cases, we are not. We've also have customers where, you know, they're they don't bid, and basically, their rates become old, you know, once a year has gone by. And so we have to take the initiative to work through those, and sometimes that takes a little bit longer than we would like for it to.

But I would say that, you know, a greater percentage than you know call it 20% maybe went into effect in first quarter, and call it maybe 30 or 35 or 40 went into effect second quarter, and maybe 30% will go in third or fourth quarter, and then maybe the rest in fourth quarter. I mean and that's just totally, Brad, shooting from the hip, but it's an ever ongoing process. And you know it's important in this environment for customers not to get behind.

And so, you know, we're always, our systems evaluate all of the loads that we haul on lanes, and basically, we're being fed information on a regular basis, that basically tells us, you know, where each of our customers are in certain areas, certain lanes, et cetera. So it's a never-ending process, Brad, with probably the biggest chunk happening in second and third quarter, and you know, not quite so much in first and fourth quarter.

Brad Delco (Managing Director and Research Analyst)

Gotcha. That's the color. And maybe just to follow up on that, back to one of Adam's comments earlier. He said, you know, expect similar rate increases on a year-over-year basis. It sort of implies flat sequential rates, and my sense is that we're hearing, and to your comments earlier, Kevin, that rates have accelerated from where you thought they were three months ago, that we might see some sequential improvement in rates. And tying that into your 3%-5% comment, I mean, rates per loaded mile were already up 5.6%. So I'm trying to make sense of-

Kevin Knight (CEO)

Yeah, but you... Yeah, and Brad, you've got a, you've got a big market component there. There's what we call market loads that basically come to you real time, and so you know, that can be a significant factor. Our five point nine percent was more driven by contract rates than whatever we got in the first quarter, but you still don't know what that market component is going, you know, is going to be. When some of the large third-party guys release, it'll be interesting to see what's happened to rates, and that'll, you know, that'll give us a feel there a little bit more as far as direction is concerned. But, hey, Brad, it could be a little bit stronger.

It could be maybe not as strong, depending on what's actually happening in the market that day.

Brad Delco (Managing Director and Research Analyst)

Got it. Well, I appreciate the, the clarification there. Thanks for the time, guys.

Kevin Knight (CEO)

Okay. Thank you.

Operator (participant)

Your next question comes from Tom Albrecht. Would you please state your company affiliation. Your line is open.

Tom Albrecht (Managing Director)

BB&T Capital Markets. Thanks very much. I guess, Kevin and Dave and everyone, like, my question is kind of two-pronged. Number one, I'm still a little confused why you're launching Kool Trans. I'm not saying it's a negative development, but it seems like it has the potential to maybe cannibalize a little bit of your existing business, although I'm sure you've thought that through. But I'd like to hear you talk about that. And then in your press release, you talked a little bit about Dedicated, has started to experience some meaningful revenue and earnings growth. Historically, I kind of viewed Dedicated as not being an 80-82 OR business. Are you finding that that is becoming that now? I'll throw it back to you.

Kevin Knight (CEO)

Yeah. Well, first, let's talk about Kool Trans, and then we'll talk about Dedicated, Tom, and keep me on course, if you will. So basically, when you think of Kool Trans, you know, Jon ran a refrigerated company before he came to work for us, and he wanted to... The option was he wanted to run a refrigerated company. He didn't want to work for somebody that ran a refrigerated company. He wanted to run one. So basically, we took that opportunity, and as we thought through the process, we came to the conclusion that the refrigerated market is strong enough that we shouldn't have to worry.

As a matter of fact, Jon has very strong customer relationships with a different group of customers than what we have, and so we actually expect that the top customers, eventually, for both of those companies, may be somewhat different. Jon's strategy will be just a little bit different than ours, but in really sitting down with Jon and working through what we hope to accomplish, we think we can generate the same amount of profitability. Our refrigerated group has been very open and worked very closely with Jon in this initial initiative. Really, we're just very pleased that Jon picked us, if you want-...

You know, if I can explain, I mean, it's really you know, Jon had a relationship with us long ago, and when he became available, he wanted to go back to that spot, and he wanted it to be with Knight. And you know, he really was the bus driver there, so to speak. Once the opportunity was presented to us, Tom, then, of course, we jumped on it. And you know, that's basically where it is. And I really believe that Jon and his team are gonna do a really good job of developing our driver base. And so we're really excited about that.

And really, if you step back, Tom, and look at our model, I mean, we really do run, you know, several companies. They all start with Knight, but even in our dry van business, it's broken into four parts. And you know, so you know, Jon's like another part of our reefer business. And you know, we currently have four parts to our dry van business. So I think that over time, you know, I think everybody will understand the madness behind our thinking, so to speak.

As far as dedicated is concerned, you know, Tom, we're not what I would call a quote unquote "dedicated carrier." Again, you know, we have to do things in a way that create uniqueness in our model. And so probably much of the dedicated stuff that you see many of our competitors going after, you know, we're not going necessarily after that. I mean, it's something that works great for them, but it might not work so much for us. It's also not really a separate enterprise. You know, we use dedicated to support our truckload operations and vice versa. And you know, our goal is for every service center to have a meaningful amount of that activity, but it's just different.

So from our perspective, dedicated has been very good. It's been growing rapidly. It's not, you know, it's maybe $60-$80 million in revenues as far as total. But you really see that in our, in our, you know, in our refrigerated business, dry van business, port services business reports. So we just have somewhat of a different approach there that works good for us and probably wouldn't work the same for anybody else.

Tom Albrecht (Managing Director)

Okay. That's helpful, Kevin. Thank you.

Kevin Knight (CEO)

Thank you.

Operator (participant)

We've now come to the end of the Q&A session. I turn the call back over to Mr. Kevin Knight.

Kevin Knight (CEO)

Well, we appreciate everybody, and if any of you were unable to get in, again, let me just give you that number. What is it? 602-606-6349. You won't get me, but you will get Dave or Adam. So anyway, and we appreciate your interest and appreciate you all being on the call. Thanks.

Operator (participant)

Thank you for joining, ladies and gentlemen. This concludes today's conference call. You may-