Knight-Swift Transportation - Q2 2015

Transcript

Operator (participant)

Good afternoon. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Knight Transportation second quarter 2015 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's comments, there will be a question-and-answer session. To ask a question during that time, simply press star, then one on your telephone keypad. To withdraw your question, you may press the pound key. Speakers for today's call will be Dave Jackson, President and CEO, and Adam Miller, CFO. Mr. Miller, the meeting is now yours.

Adam Miller (CFO)

Thank you, Ian, and good afternoon to everyone, and thank you for those who joined the call. We have slides to accompany the call posted on our website at investor.knighttrans.com/events. The call is scheduled to go until 5:30 P.M. Eastern Time. Following our commentary, we will hope to answer as many questions as time will allow. If we're not able to get to your question due to time restrictions, you may call 602-606-6315 following the call, and we will return your call. Again, that number is 602-606-6315. And the rules for questions remain the same as in the past. One question per participant, and if we do not clearly answer that question, a follow-up question may be asked.

More often than not, we end up with people in the queue that are not able to answer questions, so we ask again to keep it to one question per participant. I'll now go to slide 2, where we have disclosure. Well, and I'll also read the following. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions, and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A, Risk Factors, or Part One of the company's annual report on Form 10-K, filed with the United States SEC for a discussion of the risks that may affect the company's future operating results. Actual results may differ.

During the second quarter of 2015, the company accrued $7.2 million of expense, $4.4 million after tax. That's related to expected settlement costs for two class action lawsuits involving employment-related claims. We have provided adjusted financial information that excludes these expenses from our results of operations, as we believe the comparability of our results is improved by excluding these infrequent expenses. Now, I'll cover some of the numbers in detail, including a brief recap of the second quarter results, starting with slide 3. For the second quarter of 2015, our adjusted diluted earnings per share was $0.39 versus $0.31 from the previous year. Adjusted net income increased 24.3% year-over-year to $32 million, while our adjusted operating income increased 25.4% year-over-year to $48.8 million.

Revenue, excluding trucking fuel surcharge, increased 22.7% year-over-year to $268.6 million, and our total revenue increased 14.3% year-over-year to $301.8 million. Now on to slide 4. We ended the quarter with over $700 million of stockholders' equity, and over the last 12 months, we've returned over $50 million to shareholders through dividends and our recent stock buyback. During the second quarter of 2015, we purchased approximately 1 million shares of our common stock for just over $30 million. We continue to maintain a modern fleet and have an average tractor age of 1.7 years. We currently have $85 million outstanding on our unsecured $300 million line of credit, which leaves us with meaningful amount of capacity for additional investments.

Now on to slide five. Knight continues to deliver consistent growth, and this quarter marks the 23rd consecutive quarter with year-over-year revenue growth, excluding fuel surcharge. We've generated this growth by expanding our service offerings, growing organically, and making strategic acquisitions. This growth comes without sacrificing earnings or margins, as illustrated by our 8.3% three-year compounded annual growth rate of our adjusted earnings, as well as our industry-leading operating ratio. This has resulted in an improving return on invested capital, which is 14.8%, over the most recent trailing 12-month period. We have a solid balance sheet with a 10.8% debt to capitalization ratio, which again positions us with significant capacity to deploy capital towards growth opportunities, acquisitions, share buybacks, as well as enables us to pay a consistent dividend to our shareholders.

Now on to slide 6. As illustrated by the graphs, over the last four years, we have demonstrated our ability to consistently grow our revenue. During the second quarter, we continued to grow our consolidated revenue year-over-year as a result of improvements in our revenue per tractor, growing capacity organically and through acquisition, and growing our logistics segment. We continue to focus on operational efficiencies and expanding our service offerings. Spot market opportunities were less robust than a year ago. However, we continued to improve our yield through our contract rates. Our service center network and marketing efforts have enabled us, between both of our segments, the flexibility to react to the needs of customers and provide needed capacity. Now on to slide 7.

We continue to deliver strong earnings growth as we execute our plan to provide irregular route capacity in the markets we serve, while diligently managing our cost per mile and cost per transaction. As the graphs demonstrate, we have generated double-digit compounded annual growth in our earnings over the last four years. Our team continues to have an intense focus on our internal initiatives to improve our business. With the combination of an industry-leading trucking segment and a profitable, and a profitably growing logistics segment, we are optimistic about continued positive results. I'll now turn it over to Dave Jackson for some additional comments on the second quarter.

Dave Jackson (President and CEO)

Thanks, Adam. Good afternoon, good evening, everybody. We'll move to slide 8. In the second quarter, our asset-based trucking business operated at a 78.8% operating ratio, which represents the fifth consecutive quarter with a trucking OR in the 70s. We continue to see positive results from our internal initiatives centered around improving yield, increasing productivity, and managing our cost per mile. Our non-asset-based logistics businesses again experienced revenue and income growth year over year during the quarter, with 17.5% revenue growth and 20.8% operating income growth. It's important to point out that our brokerage business, which is the largest piece of the logistics segment, grew 31.3%, despite the declines in fuel prices and a much shorter length of haul, which had a negative impact in the top-line revenue.

Load volumes increased 64.3% in our brokerage business on a year-over-year basis. In terms of profitability, our logistics segment operated at a 93.5% operating ratio. Our logistics performance continues to confirm the opportunities for growth, as well as the value provided to our customers through our offering of brokerage and intermodal services, in addition to our asset-based services. Now on to slide 9. Each of our business segments is designed in a way to yield double-digit returns on invested capital. These current businesses include dry van truckload, refrigerated truckload, port and rail, truckload drayage, various forms of dedicated brokering freight using subcarriers and intermodal services. We continue to evaluate additional services that can be provided through our model. Adding, expanding, and evolving our services in the transportation space will continue.

We avoid deploying capital into areas that we do not believe will yield high returns, that will also, that will at least meet or exceed our weighted average cost of capital. However, this isn't the only requirement. We also want to see a pathway for long-term revenue growth and incremental ROIC improvement. In each of our businesses, we are built with a culture that values measurement, it values people. We believe we have the right strategies that can enable us to scale these up and grow on a consistent basis for many years into the future. The graph on slide nine demonstrates our progress in incrementally improving already industry-leading returns on invested capital, or ROIC, when comparing second quarters over the last five years.

Keep in mind, we purchased an asset-based carrier in Barr-Nunn in the fourth quarter of 2014, and have incrementally improved year over year despite that large capital investment. This is atypical in our industry. Now on to slide 10. For more perspective, here are more graphs demonstrating our consistent top and bottom-line growth in our two segments, trucking and logistics. We believe that owning assets and having an extensive and growing network of subcarriers that can provide quality capacity on demand is a more efficient model to solving customer needs, as compared to only having assets or only relying on subcarriers. We're investing in our logistics capabilities so as to be able to provide even more sophisticated solutions and efficiencies.

We believe that our model brings efficiencies to the marketplace, and therefore, represents a significant growth opportunity for our company, in nearly any freight market. We have demonstrated the ability to grow organically in our logistics business, at our near industry-leading costs per transaction levels. We have an efficient way to leverage our network. We believe both our cost efficiency and a cost per transaction, basis, in the logistics space, and our ability to grow the top line, in this business, position us well for future profitable growth. Now on to slide number 11. Our team remains focused on executing at the highest level in each of our businesses, departments, and service centers. We have various initiatives in place that we expect to continue to lead to improving operating results.

The second half of 2015, we're putting greater emphasis and focus on improving the revenue production on the existing fleet of over 4,800 tractors. Specifically, we want to see improvement in the back half of 2015 from a miles per tractor perspective. This means we will likely see organic growth in more of the 3%-4% range for the entire 2015 year. When you couple that with the fourth quarter of 2014 acquisition, that will still put us in the 14%-15% fleet growth range for the year 2015 as compared to last year. Hiring and retaining quality driving associates remains the most significant challenge for the industry and represents a significant opportunity for our company.

We've significantly improved our pay and performance bonus for our driving associates over the last several quarters. Not only do we remain committed to further improving pay for our driving associates, but are investing in technology and in our service centers in a way to improve the experience for our drivers over the road. Now, let's move to slide 12, and we'll get more specific in talking about growth. We expect to see similar year-over-year fleet growth continue in the third quarter, which would be in that 19%-21% on a year-over-year basis. We will lap the Barr-Nunn acquisition after the third quarter and would expect overall fleet growth, as previously mentioned, in that 14%-15% range when compared to 2014.

Our logistics segment continues to grow rapidly and has become a meaningful complement to our trucking segment. We expect additional growth opportunities to continue in that business as we continue to work with our customers. As mentioned, we continue to evaluate and pursue opportunities to grow our company through acquisitions. I'll now turn it over to Adam to discuss guidance.

Adam Miller (CFO)

Thanks, Dave. Slide 13 is our final slide, where we discuss guidance. Based on the current truckload market, as well as recent trends, we are reaffirming our previously announced third quarter 2015 guidance of $0.33-$0.36 per diluted share. And then we're also establishing our expected range for the fourth quarter of 2015, which is $0.37-$0.39 per diluted share. I'll list some of the assumptions that we've made to come to these levels of earnings. First, as Dave mentioned, growing our average tractor count approximately 14%-15% from where we ended in 2014. We expect total rate per mile to continue to improve year-over-year in that 3%-5% range.

We expect to run similar miles per tractor as we did last year, with that beginning to improve near the back half of the year. We continue to grow our logistics segment, that 25%+ range, while operating in the low to mid-90s. And then the remainder of 2015, our guidance is relatively conservative with regards to fuel, as we do not expect to experience the same benefits of declining fuel prices we experienced in the fourth quarter of 2014. So we remind you that last year, in the fourth quarter, we estimated a $0.03 per share benefit from the rapidly falling fuel prices that occurred in that time period. We also expect driver wages and hiring-related costs to continue to be inflationary.

We also expect our third quarter and fourth quarter gain on sale to be modestly lower than the prior year. Not that the market isn't still strong, but the timing of when we pull equipment out and when we trade and sell it may impact that. As far as our tax rate, we expect that to normalize in 2015, in the mid-39 range, excluding any unusual items. So 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 Factor section in the company's annual report for a discussion of the risks that may affect the results. This now concludes our prepared remarks. We'd like to remind you this call will end at 5:30 Eastern Time.

We will answer as many questions as time will allow, but again, please keep it to one question, and if we're not able to answer your question, you may ask a follow-up. And then, if we don't get to your question due to time constraints, please call 602-606-6315, and we will do our best to follow up promptly. And Ian, we will now entertain questions.

Operator (participant)

Our first question comes from the line of Todd Fowler with KeyBanc Capital Markets. Your line is open.

Todd Fowler (Analyst)

Great, thanks. Good afternoon, Dave and Adam. I, I guess, Dave, maybe to start, you know, kind of thinking about the fleet growth and, you know, the change, in the guidance. I know it's just, it's not a significant adjustment, but, you're obviously expecting the fleet to grow a little bit less, and it sounds like there's a little bit more focus on, on utilization. What's, what's different at the, the turn, at the midway point, compared to where you kind of started the year, as you think about the growth in the fleet and the utilization?

Dave Jackson (President and CEO)

Yeah. Well, you know, Todd, if you look closely at our miles, you'll see that although we've made meaningful improvements for several quarters on a revenue per truck basis, you'll see that the miles piece hasn't kept pace, certainly with the rates and most often has been down slightly. And so the cumulative effect of that is we feel like we've got an opportunity to make the fleet a little more efficient, get a little more revenue per tractor. And we, you know, we feel like we have the tools to be able to do that. The, you know, being in a freight market like we've been in, there's opportunities for us to further build density, and we think that there's a way to take advantage of that.

And, you know, and there's no doubt that anytime you're growing, and especially when you're going against the grain, when the driver side is so difficult, you know, there's that sometimes can make it difficult to improve on a per truck basis like you would like. So we're gonna have a healthy focus, even a greater focus, I should say, than we have previously. And rather than growing organically, we're going to, we're going to try and get a little bit more out of what we already have. And we think we can compensate for what we don't bring in in trucks with hopefully improvement on the trucks that we have.

The other thing I would say to that, Todd, is that, you know, the driver pay is up very healthy, if you look over the last almost two years now. And so, you know, I think, I think we feel like we're in a pretty good spot. We're still up on a year-over-year basis. And, you know, if we're not trying to go grow another couple 100 or 300 trucks in a fairly short amount of time, then that probably doesn't put quite as much pressure in the short term for us there. But, so that's kind of the outlook we have. All in all, we're still going to grow on a year-over-year basis in, you know, the mid-teens which feels pretty good, so.

Todd Fowler (Analyst)

So just to maybe kind of paraphrase that, Dave, it's not that there's a big change to the second half outlook or anything like that. It's more of a function of the capacity that you've brought on board, both through acquisitions and through retaining drivers, and then getting that utilization up to the level where you want it to be?

Dave Jackson (President and CEO)

Yeah, that's right.

Todd Fowler (Analyst)

Okay, good. Well, that's the one. I'll stop at the one and turn it over to somebody else. Thanks for the time.

Dave Jackson (President and CEO)

Thanks, Todd.

Operator (participant)

Our next question comes from Tom Albrecht at BB&T Capital Markets. Your line is open.

Todd Fowler (Analyst)

Hey, excuse me, guys. Got a little summer cold here. So, I just wanted to-

Dave Jackson (President and CEO)

Hi, Tom.

Todd Fowler (Analyst)

A couple of things in the guidance comments between what was second half and maybe what was full year. Adam, when you talk about 3%-4% organic truck growth, is that a full year number now, or just primarily the second half of the year?

Adam Miller (CFO)

Tom, that's a full year number. So when we're looking at truck growth, we're looking at what the average tractor count was for 2014, and what the average tractor count will be for the end of 2015. Then factoring how much of that came from acquisition of Barr-Nunn versus how much came organically.

Todd Fowler (Analyst)

Okay. And then when you reaffirmed your 25% logistics growth, is that the full year number, or you're reaffirming that for the second half of the year, you get back to that after growing 17.5%?

Dave Jackson (President and CEO)

I'll take that, Tom. That number is, we've had that number for several quarters. That's kind of a longer-term number. As you know, we have quarters that we break out much higher than that. Fourth quarter of last year was 90% growth. We continued to stamp out the 25%+. So it is a longer-term number. I'll tell you that, our brokerage, the way we do brokerage, we are largely transactionally based. And so, and we've seen those transactions of a shorter length of haul. I think we're not the only ones that have seen that. And so, I think that what you'll see from us is still very healthy volume, and to the degree that the market can bear with some longer length of haul or that there's a little stronger spot activity, then you'll see that number kind of jump up and down a little bit.

But, if we were forecasting for the rest of the year, 25% is a, is a number that's, that's more of an annual number, and, and we'll be working hard to keep it at that number through the back half of the year. We've got our, we've got our work cut out for us a little bit, just given how strong the spot was last year, and it's, it's not clear how much spot we're going to see in the back half of this year.

Todd Fowler (Analyst)

Right. And then lastly, and then I'll jump in the queue. On the miscellaneous operating expenses, obviously, that's where the $7.2 million accrual was. But if I net that out, and then net gains or take out the gains on sale of equipment in this year's second quarter and the year ago period, it still looks like it was about $8.1 million, and that, up until the first quarter, had been more like a $5 million-$6 million a quarter expense. Now, Q1 was $7 million-$8 million, this quarter, over $8 million. What, what's going on there? Is that kind of the new run rate for that category?

Adam Miller (CFO)

Well, I think in that category, Tom, you also have legal fees associated with defending some of the claims that we reserved for, which we didn't pull out from the adjusted 'cause kind of your normal legal expenses. So you had a couple million there of legal fees related to those claims.

Todd Fowler (Analyst)

Okay.

Adam Miller (CFO)

That wasn't included in the adjustment.

Todd Fowler (Analyst)

Okay. Okay, I'll jump in the queue. Thank you.

Operator (participant)

Our next question comes from the line of Brad Delco with Stephens. Your line is open.

Todd Fowler (Analyst)

Good afternoon, Dave.

Dave Jackson (President and CEO)

Hey, Brad.

Todd Fowler (Analyst)

Thanks for taking my questions. Dave, for you, with the lower fleet count, wondering, I guess maybe this is for Adam, is there an updated CapEx guidance for the year? And then just to tack onto that, did that give you more confidence in kind of adjusting your priorities for use of capital with the share buyback, and how should we think about the share buybacks versus pursuing acquisitions for the rest of the year?

Adam Miller (CFO)

Okay, well, I'll touch on the CapEx. I think CapEx-wise, we're still fairly comfortable with the $160 million that we projected for the year. It may come down slightly. I think part of it will be just timing of when we put trucks into service, and for any new ones that we've already ordered and we'll be taking delivery of. But, you know, we may defer some of those out to next year in terms of replacing older trucks. I think overall CapEx shouldn't materially change from what we expected it to be.

Todd Fowler (Analyst)

Is that net or is that gross?

Adam Miller (CFO)

That's net.

Todd Fowler (Analyst)

Okay.

Dave Jackson (President and CEO)

And then for the second part of your question, Brad, you know, you saw, we disclosed in the quarter that we purchased about $30 million worth of our stock. We continue to have an open authorization to purchase an additional 6.4 million shares. That's under the current authorization that we have. I think the way we would look at it is, you know, we're a business that wants to grow and wants to put capital at play. And if we feel like the good investment because of a lack of an acquisition or lack of organic growth at the time is in our own company, we'll buy back shares. And obviously, you saw us do that in the second quarter.

So we clearly reserve the right to do that in the future. And, you know, in an ideal world, we would put a significant amount of capital to play every year, either in the form of an acquisition or in returning capital to our shareholders, just because of the level of capital efficiency that we have and the kind of cash flow from operations that we're able to generate. So, I hope that answers your question.

Todd Fowler (Analyst)

No, it does, and I'll leave it at that and turn it over to somebody else. Thanks, guys, for the time.

Dave Jackson (President and CEO)

Okay. Thanks, Brad.

Operator (participant)

Our next question comes from the line of Chris Wetherbee with Citi. Your line is now open.

Chris Wetherbee (Analyst)

Hey, thanks. Good afternoon, guys.

Dave Jackson (President and CEO)

Hi, Chris.

Chris Wetherbee (Analyst)

Embedded in the guidance, I mean, if you could give us a little bit of sense of sort of how you were thinking about the spot market in 3Q and into 4Q, within sort of the guidance range that you've laid out. And then, you know, if you don't get sort of a bit of an acceleration in the spot market, how should we be thinking about 2016 in terms of sort of a rate environment, maybe even sort of your approach from a fleet growth perspective? I know I'm sort of asking for a little bit further out, but just want to get a rough sense of maybe how you're thinking about the setup as we go into the back half, as well as 2016.

Dave Jackson (President and CEO)

Yeah. Well, Chris, I'll try and answer all five of those questions. Very discrete there. So when we look at spot, we would, you know, when we look at the first half of this year, we clearly have seen less spot volume. I think that's been well documented. There was significant effort in the preceding months to secure capacity, secure carrier capacity, and I think that the shipping community has done a good job of securing capacity, and we've seen that they've done that at higher rates, some of the highest contractual rates on a year-over-year basis that we've collectively seen in the industry, in the industry's history. And so, as we look to the back half of the year, we would expect to continue to see those contract rates playing out.

In the third quarter, there isn't a whole lot of seasonal demand to that quarter, just in any year, so we would not expect to see a lot of spot. Probably see a continuation of what we've seen happen in the first half of the year from a spot to contract ratio perspective. Now, when it comes to the fourth quarter, I think that that's the one that is interesting. Last year was an unbelievable year from a spot perspective. The demand was very acute. We would not expect to see that same level of demand from a spot perspective.

However, there's a chance that the fourth quarter could play out different than the than the first three quarters of this year, just given that, you know, there are some indications that the consumer is a little bit stronger, consumer demand, consumer spending, correlates very nicely with with truckload demand. If we look at just how there, the changes in consumer behavior, and we look at how that has impacted how we buy, and maybe more importantly, when we buy, and whether it's the Amazon effect or whatever you want to call it, but but online shipping has seems to have changed things a little bit.

In trucking, what it's so far meant for us is in the fourth quarter of 2013, and of course, fourth quarter of 2014, we saw a much more compressed, very strong peak shipping season that we hadn't seen really since 2007. So I would expect to see that again in 2015, and I think that certainly has something to do with demand that could be a little bit better this year than last year from a consumer perspective, but it may have more to do with just the behavior that we're accustomed to getting things, sometimes same day, but certainly within a day or two. So you don't need to store Christmas in the garage. I hope my kids aren't listening.

You know, it's a couple of months in advance, and you can kind of wait, wait until a little bit later. So, you know, I don't, I don't claim to totally understand that, but something has changed because we've seen two consecutive years of the same kind of same kind of pattern of a much more compressed holiday shipping season. And so, you know, that might, that might continue to play out in a way that, that creates a more favorable fourth quarter. I think clearly, the environment we feel in the fourth quarter will be a factor in what the 2016 bid season looks like, that really gets going in the first quarter of 2016. So, obviously, you've got an ELD mandate that we expect will be announced here at the end of September.

That will be on the minds, you know, customers have enjoyed a little bit of relief because the fuel surcharge, I mean, oil's half of what it was a year ago, and so surcharges are off, and are down significantly and giving them a little budget space, hopefully. And there's tremendous value in quality capacity because people like to be able to rely on shorter inventories. They like to rely on trailer pools. They like to maximize efficiency in every aspect of the supply chain, and sometimes it takes high-quality carriers to do that, and we've seen that customers have been willing to pay for that a little bit. So, if we have a strong Q4 from a spot perspective, that probably bodes very well.

All in all, I think the range is low- to mid-single-digit increases in 2016, and whichever end of that range will probably be determined by what the fourth quarter feels like.

Chris Wetherbee (Analyst)

Okay. That was a very comprehensive answer to my five questions, so I appreciate the time.

Dave Jackson (President and CEO)

Yeah, there you go. Thanks, Chris.

Operator (participant)

Our next question comes from Brandon Oglenski with Barclays. Your line is open.

Todd Fowler (Analyst)

Hey, Dave, thanks for the response to that question there. I just, you know, as much as I want to ask you a long-term question, obviously, the stock just didn't behave good today, and investors have been worried about truckload stocks for six months now. Obviously, you know, I think just the weaker industrial data that we're seeing across some of the other transports is leading folks to believe that things could be slower on the retail side, too. So just, you know, how can we take this conveyance and spot rates that everyone's looking at that are deteriorating more this summer, you know, along with that conversation, and just what does it convey for the freight markets, and what are we missing, or is there good reason to be cautious here on truckload markets?

Dave Jackson (President and CEO)

Well, you know, I think that's a good question, and I think everybody's trying to kind of figure this, figure this out from the, from an investor perspective. There's a lot, clearly a lot of confusion, out there. There seems to be, for whatever reason, a great deal of momentum in the, in the trucking stocks, both, both to the benefit we saw last year and maybe the other way now that, that, you know, I'm not sure, I'm not sure how much of that is rational or not. I mean, really, my job is to keep my head down and keep, stamping out earnings growth and, improving the return on invested capital. And that's what, we, we feel very optimistic about our abilities to do that.

Feel like that there's certainly growth opportunities in the logistics space, but we're really, I mean, we're just barely cracking into that that can really lead to, I don't know. I hate to say game changing, but, I mean, it can change the complexion of how we operate, the returns we get, and our ability to grow. So I mean, we are just very excited about all those opportunities. Now we do have, you know, an announcement we're expecting from the DOT about ELDs to be mandated on September 30th that we assume would go into effect about two years from that time frame. And that will go a huge way towards improving the safety in this industry, which we need.

And as a result of that, it also levels the playing field. And, and so, you know, I think that, That's not very long term. In fact, the effects of that are not very long term, are not very far away. They're in, you know, arguably in the near term that we begin to see the effects of a more level playing field. And so, so I think if one were to look a little too, as I've said before, through the keyhole, you might miss what is really developing and really going on. And then, oh, by the way, I mean, as an industry, we've been able to absorb largely a handoff, if you will, from an industrial-led recovery with all of largely what was going on with oil.

And as that has kind of subsided, as oil has obviously today drifted into the upper 40s, you know, it, it's, it's been a boon to the consumer. And so we've had this stimulus, if you will, that hit the consumers, and that, you know, hopefully will bode well. You know, when I look at the majority, almost all of the goods we haul, they're being purchased by consumers. And so the consumer confidence started the year off very, very strong, but the problem was the industrial recovery kind of stopped in its tracks. And so, you know, trucking has navigated pretty well.

Now, the stock, the trucking stock prices haven't navigated the handoff from an industrial-led recovery, if you will, to maybe more of a what looks like the early signs of a consumer, possible consumer-driven recovery. The stocks didn't handle it very well, but if you look at the income statements, we've actually, as an industry, have done pretty well through this. And boy, we could really, you know, what would it look like if we had a little more consumer piece on top of the regulatory supply-limiting type factors that we know are out there, without even I haven't even mentioned yet, just the driver demographic issues that the industry is challenged with. So, you know, I think. I mean, the best way I can tell you the way I think, is that we bought back $30 million worth of our stock last quarter.

Todd Fowler (Analyst)

Well, I think that says it all, Dave. Appreciate it.

Dave Jackson (President and CEO)

Okay. Thanks, Brandon.

Operator (participant)

Our next question comes from Ken Hoexter with Bank of America Merrill Lynch. Your line is open.

Kenneth Hoexter (Analyst)

Great. Good afternoon. Hey, Dave. Just within the outlook, you talk about getting back to 25% on the logistics side. What happened this quarter to slow it to 17%? Was there anything in particular? What gets that to reaccelerate? You talked about some of the opportunities and huge opportunities. Can you or Adam maybe talk a bit about what, where you get that and kind of what opportunities? Is it more on brokerage? Is it more intermodal? Where do you see that, and how do you get that growth?

Dave Jackson (President and CEO)

Well, what happened is you had brokerage that grew 31.3%, so they were north of the 25%. They more than carried their weight. You know, I think a relevant number there is that the volumes or the loads that we booked were up over 64% year-over-year. So, I mean, we touched a record number of loads for us, and it's just sometimes they were of a shorter haul nature, and fuel is down big as well. So you didn't see that all transfer in the revenue line, but still it was over 30%. Our Intermodal business was down about 16% on a year-over-year basis.

So, now, that's a business that a year ago, I think we cited our press release at a 99 OR. We were an 89 and change OR this go around. So it's profitable. It's just a smaller business. And so, you know, that's a business that doesn't have the same growth trajectory, but it all gets lumped into logistics. There's some other things that we have in logistics, primarily some sourcing activity, related activities that are not trucking, but that would fall under the logistics segment, and they were not up year-over-year as well. And so I think if you look at logistics at 17.5% and try and draw a conclusion on brokerage, it's, that's maybe not the right way to look at it, I would suggest.

I think that's why we go to great lengths to spell out exactly what brokerage was up, and in this case, we even gave the volumes just for even more perspective. And that's by far the fastest growing. It's the largest within the logistics space, and it's the one that, you know, that obviously we're the most bullish about when we talk about logistics growth.

Kenneth Hoexter (Analyst)

So just to clarify, when you talk about that 25% long term, do you think we get that snapback? And I just want to understand, when you talk about your second half within your, your target range there, your EPS range, is that built into it coming back into that range, or does it take a little while to get back into that historical target?

Dave Jackson (President and CEO)

We've said 25%+ for, I want to say, at least a couple of years now. And we've usually dramatically exceeded it, but we've always known that there's going to be a time where factors change like they have here, where we're booking even more loads than ever by a long ways, and yet, because of fuel and a few other factors, it just didn't register the same top-line number. So we're comfortable leaving the 25%+ for now. Now, you know, we're going to have our work cut out for us in the third quarter and to some degree in the fourth quarter, to make sure that we're north of that number for the whole logistics business.

I mean, like I said, I think a couple of questions ago, in the fourth quarter of last year, we grew brokerage by, like, 90%. And so, you know, that's not, we're used to tough comps, but that's a particularly challenging comp. And so if we have a stronger spot or transactional market in the fourth quarter, I like our chances. I like the momentum we'll bring into that. But I'm giving you more of an answer than you really looked for. But we're comfortable on a longer term, over a 12-month basis, talking about a rolling 12 months, that 25%+ in logistics is possible, and we think we'll be there.

Kenneth Hoexter (Analyst)

Great. Thanks, David, and Adam. Thank you.

Dave Jackson (President and CEO)

Thanks.

Adam Miller (CFO)

Thanks, Ken.

Operator (participant)

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

Todd Fowler (Analyst)

Hi. Thanks for taking the question. Can you give us some color on-

Dave Jackson (President and CEO)

Hello.

Todd Fowler (Analyst)

Can you hear me?

Dave Jackson (President and CEO)

We got you, Kelly. Yep, go ahead.

Todd Fowler (Analyst)

Okay, sorry. Can you help us think about the trade-off between, you know, on one hand, there is less robust year-over-year spot activity, but, you know, I think the availability of spot capacity given the shippers' desire to lock more up. So, you know, there's less activity, but there's also less capacity out there. So how to think about, you know, what Knight offers, how valuable it is, especially as you go into what you're talking about, the peak holiday season this year?

Dave Jackson (President and CEO)

Yeah. Well, I think it's a good question. I think, when we look at, like, the second quarter, for example, when we see the way that that rolled out, May was a little slow to come around. In June, we thought might have the chances of maybe catching up, and the cooler weather may have been a factor in that. So we thought maybe in June we would see that spot market come back and try and catch up a little for May. It didn't seem to ever catch up for May, so, but I think had we seen a little bit stronger, more acute demand, yeah, your point of, if I'm understanding you right, your point of, you know, most everything's already committed.

So when there really is a need for spot business, it might be very, it might be up, I got to say this the right way. It might be up at a premium, significant premium, even to higher contractual rates. So, my point in talking about May and June is, I don't think that we've really seen that happen. We have seen, we did see spot rates in some cases where we saw the spot, where it was every bit what it was last year. We didn't see as much of it. And so I think that, and you know, the kind of spot opportunities we saw last year were unlike what we had maybe ever seen.

I follow your logic, and I think there's a chance that we could see, if we see a real real acute tightness, where we could see some opportunities where it really pays to a premium. But I'm not. The premium was so high last year. I'm not sure that it transcends that, you know, that degree of premium even more so.

Todd Fowler (Analyst)

So then it's really kind of more of a comp perspective, just versus year-over-year. But conceptually, you know, 2014 was such an anomaly. If you look at 2015 versus, you know, any of the years in the recent past, you know, you're really comfortable with the model that you guys have, even if, you know, there's less spot activity than there has been in the recent past.

Dave Jackson (President and CEO)

Well, I think maybe let me try and restate that a little bit. If you look at the spot, even from a comp basis, I think there are some folks that believe that, like, I don't know, half of our business is spot or even a third of our business was spot. That was not the case. On the asset-based side, it was even less. I mean, we talked in the past about a number of maybe 75% of our we would be 75% committed. Well, our brokerage was largely uncommitted, and so it skews that number a little bit. The asset-based side would be even more committed.

So when we talk about the spot piece, we probably don't have quite as much exposure as everybody thought that we did. But we have a healthy enough amount, and we have the ability to kind of flex with it, to move with it, that we can get enough exposure and enough rate where we can move the needle. Well, when you can get contractual rates, you know, that's, that's the best way to do it, and the easiest way sustainably to do it. It just doesn't happen all that often. And so, you know, we have, this year going into it, we have the majority of our trucks, have been able, are able to haul loads that are at higher contractual rates.

Now, the small minority of loads that are going to do spot, it's going to be even smaller opportunities this go around, that pay the healthy premium, but some of them still were, will. So, maybe a better way to put it into perspective would be to look at like a two-year stat. And, like an example is if you looked at the second quarter, if you were to look at revenue per loaded mile in the second for the last two years, our rates are up per loaded mile, about 12.5%. That's revenue per loaded. Per total mile is up about 11.5%.

And so, you know, you have, if I don't have in front of me what the fourth quarter looks like, but you've kind of got to balance those two out a little bit, and that probably gives you an idea of kind of where the market, where the market is. Now, I would just reiterate that the primary competitive advantage for our company, for Knight Transportation, is our operating cost per mile. And it's just lower than those that we've compared against and compared to. And that's how we get the return that helps us to justify reinvestment and growth in the fleet and making acquisitions as well. And so, we're not the highest. We feel like we have built-in flexibility because of our model.

We're able to move with it. We feel like we've, we devote a lot of time to, trying to understand the market and then just do the best we can, given the market that we're in. And so, you know, we'll, we'll, all I can say is we're, we're paying attention. We're not just trapped in one, immovable model, if you will, but we have flexibility, and we'll adjust and adapt and predict, and that's the mode that we're in right now. And I think, hopefully, when people look at our earnings, particularly look at over a two-year period, you'll see how much ground we've made up, both on the revenue side without, without compromising on the cost side. And, and, and so, hey, oftentimes, that leads to a premium multiple for our stock.

People just have to decide, you know, where that is and how that fits in and what that's worth.

Todd Fowler (Analyst)

That's really helpful, Dave. Can I just ask one really quick one? Can you give us a number of what percent of your customers are using you for brokerage and the asset-based side, just to kind of get a sense of how much growth runway there is just from your current customers?

Dave Jackson (President and CEO)

Yeah. We have about 1,000 active customers, and approximately less than a third of them use us for brokerage and asset-based.

Todd Fowler (Analyst)

Thanks very much.

Dave Jackson (President and CEO)

You bet, thank you.

Operator (participant)

Our next question comes from the line of Tom Wadewitz. Company was not provided, but your line is open. Please state your company as well.

Todd Fowler (Analyst)

Yeah. Hey, Dave. Hey, Adam. Let's see, we got one-

Dave Jackson (President and CEO)

Hi. This is Tom Wadewitz from UBS, right?

Todd Fowler (Analyst)

Yes, that is still correct. I didn't. I'm calling from the airport here, and I guess didn't get all the information in. But, anyways.

Dave Jackson (President and CEO)

We're set now.

Todd Fowler (Analyst)

I wanted to see if you I mean, I guess if we think about next year, and if you say, well, the spot market doesn't pick up, or if the economy is not strong enough, then maybe you get a little less rate versus a lot, getting a lot of contract rate this year. I would think, you know, how would the inflation potentially look? Because when you think about what the margin could do, you gotta think about both the price, you know, and the inflation in terms of driver pay and so forth. Any thoughts on, you know, if the market doesn't pick up a lot, spot-wise, and maybe you get, you know, 2%-3% rate instead of 4% or 5%, is there a chance that the inflation slows down, and that you could still see kind of flatter, improving margins in that type of environment?

Dave Jackson (President and CEO)

Yeah, I think it's gonna take work, but, you know, we're, you know, we're in an environment where, we just, we, we have to be more efficient just to be prepared for whatever, whatever's out there and whatever may be coming. So, that's, that's where we're at. That's, I mean, arguably what we do best, and so from a cost perspective and to be, to be very, very efficient. When you're in, when, when you're in kind of a, a blow and go and growth, growth mode, and, and customers are, have, you know, very serious needs, you know, you kind of do what it takes to be able to go, to do that for you, or for them. And, and that's not always the most efficient way.

So we are, you know, we're aggressively attacking costs so that we're better off for that. Based on my last answer, you know, I kind of talked about cost per mile, and just our belief, Tom, is that in, given the intense competitiveness of this industry, that if we can have the lowest operating cost, the most efficient operation, and that also includes the lowest transactional cost on the brokerage side, because we don't measure that, obviously, in a per mile cost, then that sets us up to be fairly resilient in up and down markets, and more importantly, sets us up to be a long-term grower and maybe even a consolidator of sorts through acquisitions and leveraging some of the efficiencies. So that's, you know, that's kind of how we think.

From an inflationary perspective, driver wages have been the most inflationary. We're now lapping some very healthy increases, so they're not as inflationary. They won't, I don't expect driver wages to be quite as inflationary in the back half of the year, given a lot of what we've already done. Used or new equipment is inflationary, but we're seeing, you know, improvements in fuel economy that are helping to offset some of that. So I feel like we have a solid handle on the inflationary side.

Now, if we were to see a small interest rate hike happen here in the back half of the year, would have a nominal effect on us from a, because of our, our, debt, our debt position, probably becomes a bigger challenge for those that are a little more, debt laden in our space. Probably not the first quarter point, of course. But then, you know, and then all the other good things that come with that, from a dollar perspective, probably, further pressure commodities, I think, as we've already seen, which is a good thing for us because our second biggest cost is fuel, and, and it's down meaningfully. So, so I'm not as scared about inflation back half of this year as maybe we have been in other years.

Todd Fowler (Analyst)

Yeah. Okay. And so, on driver pay, you think that the pace of increase might slow a bit the second half and then in 2016 potentially as well?

Dave Jackson (President and CEO)

I'm not quite ready to say that. That's just something that we evaluate on a quarter-to-quarter basis. I'm just saying that we're now starting to lap some pretty healthy increases in driver pay. Our decision to slow the organic growth puts us in a spot where you know it might allow us to be just slightly more deliberate. But that's in connection with several other things that we've spent and invested on the driver front, that might not necessarily be driver compensation, but other things to help and support our drivers. So, yeah, I hope that answers your question.

Todd Fowler (Analyst)

It, it does. I appreciate it. Thanks for the time.

Dave Jackson (President and CEO)

Okay, thanks, Tom.

Operator (participant)

Our next question comes from the line of Allison Landry. The company name was not available on the recording. Please state your company's name when you ask the question.

Todd Fowler (Analyst)

Thanks. It's Allison Landry from Credit Suisse. I just had a question. So given that valuations in the sector have contracted pretty considerably, are you seeing locations in the market that maybe are creating some additional opportunities on the M&A front, you know, versus 6 or 9 months ago?

Dave Jackson (President and CEO)

Well, I don't think that the, in the M&A world, I'm not sure that they track so real time, if you will. I think that, you know, most of the companies that are of a size that we have dialogue with, you know, there, you have folks that either started those companies or have been there for multiple decades now, and so it's a very, you know, it's a much deeper, much more personal kind of decision, as opposed to maybe buying or trading a stock kind of a thing. And so, what I'd say is we just have several parties that we have ongoing dialogue with. And, you know, I think some of it is about finding the right win-win situation.

And, some of it probably is them getting comfortable and understanding us, and clearly, some of it is, some of these folks being ready to sell. And so much has happened just in the last 12 months alone, that, you know, there's a lot for them to think about. I think a lot of these folks, had such good fourth quarters, in part because fuel dropped, and there was such a, such a benefit, to carriers. And, and, you know, everybody kind of trying to make sense of where everything is. And, and so I think there's a lot of people that are thinking, that are maybe scratching their heads and, and trying to look forward to the future and see what that looks like and means to them.

So our job is, and what we're trying to do, is just have a lot of dialogue, be very open-minded. So I think what's happened in trucking stocks so far this year, probably, I'm not sure that that has had a huge impact either way.

Todd Fowler (Analyst)

Okay. Thank you for the time.

Dave Jackson (President and CEO)

Thanks, Allison.

Operator (participant)

Our next question comes from Jason Seidl from Cowen and Company. Now, your line is open.

Jason Seidl (Analyst)

Well, I must have done something right. They got my company. Hey, guys. I want to focus a little bit on the logistics marketplace itself. There's obviously rumors today that UPS may be buying one of the larger brokers that's out there. Obviously, we've seen XPO consolidate some of the industry as well as Echo. It seems like there's a lot of very large, a handful of large companies that are forming right now and are probably just going to continue to grow. Does that sort of force your hand, going forward, to try to aggressively grow your logistics offering? Are customers asking you to do more going forward?

Dave Jackson (President and CEO)

I don't, I don't think it's forcing our hand. I think, I think, I think we look at it and think, you know, internally, we think, gosh, we're, we have capability, expertise to help shippers with, solve some of these problems. You know, we already have relationships with them. And we think we can do it in a more efficient manner, and that largely, we're the ones that have, us being the asset-based carriers, have, over the years, given opportunity to this entire industry because we say no sometimes when customers want to offer us a load.

And so, you know, it's no surprise that now us and we just hit our 10-year anniversary since we opened brokerage, and it was started a little slow, but it's really gained some steam and momentum here. And clearly, you have a lot of other large legacy asset-based folks that have figured out how to get into the space. And so I think it's a good fit for those that are already involved in the truckload, for us to be involved in everything that has to do with the truckload. I think what you'll find is there are synergies available for those that own equipment that just doesn't exist for those that don't own any equipment.

And so, so we, you know, we like our position. We, we clearly have some opinions on where it's going to go and how, how the most value is going to be provided in the future, particularly with the small carriers, and so we'll continue to kind of roll that out. All I can say is we are just in the very early stages of what this might look like. And, and, hey, we have a long ways to go to catch up, if you want to just compare our little non-asset brokerage to the non-asset brokers. But I, I think the day may come where, where just full truckload service just gets viewed as, as one piece and it is, instead of as bifurcated as it, as it, so far has been.

In that kind of a world, I like being a guy who's already got a double-digit return on an asset-based business. I wouldn't want to be somebody who has never had to own assets and has to figure out how to go get double-digit returns on assets to complement a non-asset business. So we'll have to see where that goes. I like where we're positioned.

Jason Seidl (Analyst)

Well, I think a lot of people that own assets would like to have a double-digit return. I just want a clarification question. You mentioned, you know, with the drop in energy prices being a boon to consumers, I was wondering if you could share maybe some of your initial discussions with your customers about what the peak season might look like in terms of demand.

Dave Jackson (President and CEO)

Well, we have some customers who have begun to talk about it and begun to set themselves up to make sure that they have capacity. But, but we'll have a lot more of those discussions between now and Labor Day. So it's still a little early. I think people are just recovering from getting through the build-up through Fourth of July type thing. So, so we don't, I don't have the best view of that, just yet.

Jason Seidl (Analyst)

Okay, fair enough. Gentlemen, thank you for the time, as always.

Dave Jackson (President and CEO)

Thanks, Jason.

Operator (participant)

Now I'd like to turn the call back over to Dave Jackson.

Dave Jackson (President and CEO)

Okay. Thank you, Ian. Appreciate everybody's participation and interest today, and wish you all the best. Take care.

Operator (participant)

This concludes today's conference call. You may now disconnect.