Knight-Swift Transportation - Q2 2017

Transcript

Operator (participant)

Good afternoon. My name is Jesse, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Knight Transportation Q2 2017 earnings call. All lines will please on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. The 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, Jesse, and good afternoon to everyone, and thanks for all those who joined the call. We have slides to accompany this call posted on our website at investor.knighttrans.com/events. Our call is scheduled to go for an hour, till 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 602-606-6315 following the call, and we will return your call as soon as possible. During the call, we'll plan to cover topics and any, and any questions specific to the results of the Q2, as well as our future outlook on the markets. 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 question may be asked. Again, that's only if we have not clearly answered the original question. All right, I'll direct you to slide two. And I will begin to read the disclosure. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions, and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A, Risk Factors, or Part One of the company's annual report on Form 10-K, filed with the U.S. SEC, for a discussion of the risks that may affect the company's future operating results. Actual results may differ.

Now, I'll begin by covering some of the numbers in detail, including a brief recap of the Q2 results, starting with slide three. For the Q2 of 2017, total revenue decreased 1.1% year-over-year to $273 million, while revenue excluding truck and fuel surcharge decreased 2.7% - $247 million. For the quarter, we have provided adjusted financial information that excludes expenses related to the pending merger with Swift. We believe the comparability of our results are improved by excluding infrequent expenses that are unrelated to our core operations. So adjusted operating income decreased 14.4% year-over-year to approximately $33 million.

Adjusted net income decreased 17.4% to approximately $21 million, and adjusted earnings per diluted share were $0.25 compared to $0.31 in the same quarter last year. Now on to slide four. Knight has always valued and maintained a strong balance sheet. During years of strength, we utilize our cash to invest in organic growth. During challenging environments, we slow the asset-based growth, but continue our growth initiatives in logistics. This results in meaningful free cash flow that we would ideally use for acquisitions. If we can't find a target, we pay down debt and return to shareholders through dividends and buybacks. Over the last several quarters, we've extended the trade cycle of our tractors, therefore increasing our average tractor age as a response to the rising new equipment prices and a weak used equipment market.

Our average age is now 2.6 years. However, we expect to begin to refresh the fleet in the back half of the year, which should result in a lower average age. As of the end of the Q2, we are debt-free. We have generated $95 million of free cash flow year to date, and that builds up cash and cash equivalent balance of $89 million. Now on to slide five. Our consolidated revenue, excluding truck and fuel surcharge, was down 2.7% year-over-year, as a result of 2% fewer tractors, as well as lower revenue per tractor when compared to the same quarter last year. This was partially offset by a 6.1% increase in revenue from our logistics business.

We remain focused on improving the productivity of our assets in our trucking segment and expanding load volumes and margins in our logistics segment. Revenue per loaded mile turned positive year-over-year for the first time since the Q3 of 2015. However, this was offset by fewer miles per tractor. Revenue and load count in our brokerage business increased 12.1% and 12.4%, respectively, in the Q2 of 2017 when compared to the same quarter last year. The market is seeing tightness in the Q2, and we believe capacity will become more constrained as demand for used equipment remains weak, while additional regulatory burden weighs in over the coming quarters.

With that being said, we remain focused on increasing the productivity of our tractors, improving our yield, managing the size, the size of our fleet based on market conditions, and investing in the long-term growth of our logistics capabilities. Now on to slide six. During the Q2, we continued to face several factors that impacted earnings. We were challenged by cost headwinds that include increased driver related expenses, less gain on sale of used equipment, and lower other income. As mentioned in the previous slide, our revenue per tractor was down on a year-over-year basis, which also impacted our earnings. Although we experienced improved results in the Q2 as compared to the Q1 of this year, our leadership team remains highly focused on continuing to manage through the challenges we face in the current environment.

We also continue to make investments in areas of our business that we believe will lead to double-digit returns on invested capital. Now I'll turn it over to Dave Jackson for additional comments on the Q2.

David Jackson (President and CEO)

Thanks, Adam, and good afternoon, good evening, everyone. Now to slide seven. In the Q2, our asset-based trucking businesses operated at an 84.6% operating ratio, which includes our Dry Van businesses, Refrigerated businesses, our Drayage business, and our Dedicated business. A 190 basis point OR increase year-over-year resulted from several factors. Revenue per tractor, excluding fuel surcharges, declined 2.9%, as the 0.3% increase in average revenue per loaded mile was not enough to overcome a 3% decrease in average miles per tractor. The OR was negatively impacted from increased driver wages, maintenance expense, and driver recruiting expenses. Similar to recent quarters, gain on sale of used equipment continues to be weak and a negative impact.

Gain on sale was $800,000 for the quarter, compared with $2.7 million for the Q2 of last year. Revenue, excluding trucking fuel surcharge, was down 4.8%. As expected, we saw improvement in the freight demand and rate environment in the Q2. The strength appeared to be more than just seasonal strength. July has continued to show strength beyond seasonality. Our non-asset-based logistics segment produced an OR of 95%, with brokerage yielding double-digit revenue growth. Now on to slide eight. This graph provides insight into each of our Q2 since 2013 for our trucking segment. Some quarters, like the Q2 of 2015, benefited from strong contract rates following the freight market tightness experienced in 2014.

In this year's Q2, we experienced stronger than seasonal strength during the beverage and produce season. In most years, we see a meaningful step down in the market as we move from the second to the Q3. That may still happen this year, but so far, the July demand environment has been stronger than a year ago. Based on what we experienced in the Q2, we expect to see in the Q4 this year, freight demand that exceeds the normal seasonal demand. Such improved market demand has come about with industry reductions in supply as a result of the continued weakness in the used equipment market, limited capital investment in equipment additions, challenges with hiring drivers, and will soon be affected by the implementation of electronic logging devices, or ELDs, which we expect will further reduce supply. Next to slide nine.

This graph is similar to the previous, but shows the logistics segment. Overall, logistics revenues increased 6.1% when compared to the Q2 of 2016. Brokerage revenue increased 12.1%, and given the tightness in capacity, our gross margin compressed from 16.8% last year to 14.3% for the Q2 of this year. Because of our efficient model, we were still able to achieve a 95 operating ratio in this business. In strengthening environments, we believe we will see meaningful growth, as historically has been demonstrated, as we're successful at finding capacity for our customers with positive gross margins for our business. Now on to slide 10. This cycle has seen a precipitous decline in rates as the market seemed even more efficient in finding the absolute bottom.

This process was enabled by non-asset brokers, who, in many cases, leveraged load boards to find every bit of capacity in the network and bid down pricing on both the transactional level, and in the cases of the larger brokers, in making commitments in formal shipper bids at rate reductions, not in tune with the inflationary reality of the current cost inputs. For example, driver wages and equipment costs. This results in a temporary dip in market rates that is not sustainable, and unintentionally, often leads to further reductions in supplier capacity. This happens through businesses that fail, fleets that shrink, and the thousands of potential new drivers that choose a better-paying vocational job while driver wage increases are on hold during the rate contraction period. This cycle is unique in a few regards. It's arguably been the longest consecutive period of declining rates.

We're seeing retiring baby boomers outpacing new entrants. A very difficult used equipment market has been materially impacted, or has materially impacted the borrowing collateral of small carriers, which will likely delay prospects for growth. The opposite was true when we saw record used equipment prices in the 2014 cycle. In conversations from the major ELD providers indicate that they have an uphill battle selling ELDs to small, as many small carriers are waiting until the very end. This graph illustrates the decline in rates from the Q2 of 2015 through the Q2 of 2017. In previous cycles, we've seen rates promptly catch up for previous years' cumulative inflation. There continues to be pent-up, unrecovered inflation over the last two years, which has negatively affected operating income in recent periods.

We believe rates have inflected and will begin a positive trajectory, gaining more ground in the seasonal strong periods and creating a positive contractual pricing environment in 2018. Now on to slide 11. We're actively working with Swift on the transition plan. As mentioned at the time of the announcement, we'll operate each business independently, and we expect significant synergies as a result of helping one another improve, while leveraging economies of scale that are not disruptive to the operations, our driving associates, and our customers. We talked about this transaction in the press release and conference call on April 10, 2017. I will not have more to add in this call from those comments already made. We would refer you to that call, the press release, and the slides for answers to your questions.

As for the timing of the close, we expect to finalize the S-4 with the SEC within the next week or two, with the estimated closing being late August or early September. As we talk more about our execution strategy, experience, visibility to data, new technologies continue to aid our efforts in improving our safety. In addition to the technology that we've included in the specs of our trucks for some time now that improve safety, we're deploying additional technologies that have been proven to be effective in the coaching and training of driving associates, sometimes in the exoneration of false allegations, and proved to be helpful in the settlement of claims. Reducing costs continues to be the most obvious item within our control that will have the most impact on earnings in the current term.

We've made some improvement in our cost per mile in comparisons to the Q1. However, we continue to have areas that we're focused on to manage the inflationary pressures we continue to feel. Improving the driving job remains a priority. We're investing in technology to help in this effort. We continue our vigilance in understanding the freight market trends to best position our company. Based on the pending merger with Swift and some uncertainty around the exact timing of the close and the impacts of purchase accounting, we will not be providing earnings guidance at this time. So this will conclude our prepared remarks, and we will now entertain questions.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We will pause for just a moment, and probably come to the roster. Your first question comes from Chris Wetherbee with Citigroup. Your line is open.

Chris Wetherbee (Senior Research Analyst)

Hey, thanks. Good afternoon, guys. Thanks for taking the call.

David Jackson (President and CEO)

Hi, Chris.

Chris Wetherbee (Senior Research Analyst)

You know, I wanted to start out on sort of the rate environment and some of the improvements that we've seen, as we've moved through the Q2. You know, good rates are up on a year-over-year basis. I guess if you think about sort of the next 12 months, because that's what you're signing contracts for now, can you give us a sense of maybe sort of what types of, you know, rates on a year-over-year basis you're, you're able to get? I'm just trying to get a sense of maybe how much of the pricing environment that's beginning to improve now will impact what we see sort of beyond the second half and into the first half of that of next year, if that makes sense.

David Jackson (President and CEO)

Yeah. Yeah. Well, we are, you know, we are largely through the brunt of the typical bid season that begins in November and largely finishes towards the start of the Q2. Now, sometimes those can linger and delay, and by the time they're implemented, it's not until the Q3, but we've often been working on those for months. So I will tell you that we're inclined to price things different today than we were at the beginning of the year. I would say that I would characterize the bid season, you know, through the first, kind of that first half of the year, as we were working really hard to keep rates in the end, what seemed like flat contractually.

Something we've seen now that we've been awarded many of the lanes from those bids, what we've seen is a lot of turnover in the lanes. But then we win a lot of new lanes at the same time, which, you know, sometimes can make us nervous because you want to make sure that you price things in a way that you think you have. And so, of course, we, we feel like, we feel like, that'll all even out to be about flat. The challenge is it creates some dislocation in the network, at least temporarily. It creates, can create and does create, I guess, a lot of disruption for our driving associates as we, as we adjust and move lanes around.

And so we've been wrestling with quite a bit of that, in many cases, running to stand still through the bid season. You know, we're starting to see things a little bit differently here, late now that we're in the late summer, where, maybe some unusual bid behavior, I would say, where perhaps there are some shippers trying to secure rates that would have maybe been likely in the January, February, March timeframe. Others are trying to secure rates for a period of less than 12 months.

But I think maybe to circle back and kind of provide a, you know, a more specific answer in terms of what bids we're seeing and how we're pricing now, we just are not pricing a whole lot of business at the moment, because that's just that time has largely passed. I think we'll start to see a lot of bids come around in that late October, November timeframe, and I think there will be a different approach to those bids, you know, versus what it's looked like over the last two years, or the last two bid seasons. So when we look at rates for how we ended up with 0.3%...

Positive loaded rate per mi for the Q2, you know, that was largely a result of the strong rates in the non-contract environment that helped lift that. So, you know, I would say the Q3 is going to look and feel somewhat similar in terms of a rate per mi as where we probably are looking in the Q2. But then again, we'll probably see opportunity for more non-contract rate growth in that Q4 timeframe. But that lift will largely come from non-contract and not from contractual. We'll have to wait till we're a few more quarters away for that to happen.

Chris Wetherbee (Senior Research Analyst)

Okay. Okay, that's a, that's a very helpful answer. I appreciate it. I'll leave it there. Thank you.

David Jackson (President and CEO)

Thanks.

Operator (participant)

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

Brandon Oglenski (Analyst)

Hey, hey, everyone. Good afternoon, and thanks for taking my question. So I know you guys don't want to give guidance here, but I want to talk towards expectations, at least from the investment community, because looks like, you know, a lot of people are forecasting earnings to be up around 20%-25% next year. And I'm not asking you to, you know, go out there and at least talk to that number, Dave, but can you talk about if we see acceleration in pricing, are there going to be some offsets? Because we talked about how drivers haven't gotten significant wage increases the past couple of years. So what are the risks and the opportunities as we all think about where freight rates and earnings could be next year?

David Jackson (President and CEO)

Yeah. Well, I think, I think that this year is playing out very similar to, like, 2013, where you see signs of strength. You can tell that things are, things are going to be different. We've hit an inflection point. There's tightness in the market, and, during the seasonal times, like we saw in the Q4 of 2013, for example, you know, that was a, that was a strong rate environment, which led into a very positive contractual rate environment in 2014. And then, of course, 2015 continued to have, you know, very strong seasonal strength. And then, of course, you saw earnings numbers from us in excess of the number you just talked about.

So I'm not, I'm not drawing that full parallel by saying that 2018 is going to be 2014. 2014 was a very special year. But I think this dynamic that we're experiencing in 2013 here, where, you know, the reality is, you have these non-asset broker and 3PL companies are in retreat, and they're not offering discounts and making large, sweeping commitments. In fact, they're doing the opposite, and they're retreating, and they're trying to move away from the committed market and be in that spot, for non-contract environment as much as they possibly can without losing their customers along the way.

That sets us up in a 2018 bid season to where there's arguably quite a bit of freight that's looking for committed capacity that it's not going to find in the players that largely filled that role over the last two years. If you look at the large asset base companies, you'd be hard pressed to find one that has more irregular route capacity today than what they had two years ago. And so some of them, you know, you can look at their fleet count, and it might be positive a little bit, but you look at how many of those trucks are committed on dedicated multi-year business as opposed to irregular route.

And so, of course, when large brokers are committing capacity, that's not dedicated capacity, that's irregular route capacity that they're going out and finding in the market and buying, exploiting opportunities to buy that transportation for cheaper. So that, that whole dynamic has all changed in a very short amount of time, and that, that, I think, is similar to what we saw in 2013. And so that can have a significant impact.

And as we said a minute ago in our explaining some of the slides, you know, the way rates seem to work, at least the last couple of cycles in this, in this industry, is we see this pent up, this pent up rate pressure that, that comes swinging back, that more than makes up for the driver pay, wages, wage increases that need to happen and the rising cost of equipment and other inflationary items. And so, not only did we experience that, but most all of the publicly traded guys, like carriers, experienced that in 2014 and 2015 earnings.

And so, you know, there's going to be a little bit of build up here, as we, as we work through those and those factors take effect, but I think it positions us well for meaningful rate increases in 2018.

Brandon Oglenski (Analyst)

Appreciate it, Dave.

David Jackson (President and CEO)

Thanks.

Operator (participant)

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

Brad Delco (Managing Director and Research Analayst)

Good afternoon, Dave, Adam. How are you?

David Jackson (President and CEO)

Hi, Brad.

Brad Delco (Managing Director and Research Analayst)

Dave, I kind of want to ask just a question I think is on everyone's mind, and maybe it's not fair to Knight, but you know, we've seen stronger than expected results from some of your peers, and there's been a lot of talk of freight throughout the Q2 developing more strongly than the expectations that might have been had in April. And so I think there was a little bit of an expectation because Knight typically has the most exposure to spot... and maybe put up a little bit stronger numbers. So when we go back to kind of Adam's comments in April about how things should play out in the Q2 keeping in mind that Q2 was stronger than expected, what went well for you guys?

Where did you think you kind of missed some opportunities in the market? And, maybe I'm not being fair asking the question, but I do think it's on top of everyone's mind.

David Jackson (President and CEO)

I think it's very fair and a question that we should answer. I think when you talk about our results, you know, our operating ratio, if you look at the asset-based operating ratio of 84.6, compared really well to our competitors. And when you look at the way our business, the way we're structured, our strategy and how we work, we are at kind of the peak stress point, if you will, in the cycle. So what that leaves us vulnerable to is where we might suffer through some poor utilization or mi per truck, which we saw, of course, with utilization down 3% in the quarter. But to perhaps help you appreciate that, you know, our cost per mi continued to be significantly lower than our peers.

Some of our peers will show better miles at this stage of the cycle due to a couple of factors, in particular, one being the level of dedicated capacity. In today's competitive market, if you're going to win a dedicated operation, it's going to be optimized, and you're going to run a lot of miles on those trucks. The problem is, you might run a lot of miles, but depending on whether you're using your trailers and how many of them, or you're using the shipper's trailers, you may not get to that double-digit return. The challenge is those are multiyear deals, sometimes three, sometimes five years. What we know is driver wages will be very volatile here as they were the last time we saw pricing improvement.

Oftentimes, what might be profitable and look good today might quickly change when your largest expense becomes double-digit inflationary. You have the dedicated piece, which still represents a very, very small percentage of what we do. And then second of all, we are one of the few left that hires the vast majority of our drivers with experience instead of hiring half or even a majority as trainees. Part of what happens there is we have solo drivers. We have one driver in the truck. You know, if we were in a situation where we had you know a driver, a trainer, and a trainee, you would run more miles.

Oftentimes, it's initially like a driver and a half, and when the driver becomes more proficient, it can actually be closer to the equivalent of two drivers in one truck. And so you put good miles per truck up, however, you don't have as good of OR at the end of the day. We have fleets out there that average in the quarter 250 mi, some even maybe a little more than that, per truck per week, more than what we did, but yet didn't have the OR, and it has to do with the cost per mi. When you have two drivers in that one truck, you got a lot of driver wages in there. And so at this stage of the game, we have worked hard to hold on to yield the best that we can.

And so part of what happens is we usually concede a little bit in length of haul as we go to where we can get the yield. So you saw our length of haul down 3.4%. Well, you know, in a competitive environment where we have about the same number of loads, but they're 3.4% less length of haul, you're going to run less miles. And rather than go and try and discount rates in an effort to bring in more loads on a temporary short-term basis, we've chosen to scramble and be as flexible as we possibly could to kind of navigate our way through this. So it sets us up to be in a position here in the back half of the year, where we can move with the market a little bit more.

We're a little more exposed to the spot market today than more than we have been in the last two years. And so, as a result of that and our competency in understanding markets, I think we just have a chance to move with that market in a positive way, and then we'll be in a position to reward drivers. And so when we look at recruiting drivers was a challenge, continues to be a challenge for us. I think it is for everybody, but we've chosen to wait a bit for the rate before we are able to pay the drivers more. We paid some more, but not as much as we feel like the market probably needs.

When we look at our miles per truck, for example, when I quote that 3%, we take all of our trucks in service, whether they're seated with the driver or not, and divide that by the total miles. So, we did carry more open trucks, if you will, without drivers seated this quarter than we have in several quarters. So, you're seeing Knight results still with, you know, mid-eighties OR, but at kind of, at a moment of stress, if you will, but yet we have, you know, we're uninhibited, to move as this market improves. So Brad, I hope I was clear in making that point.

Brad Delco (Managing Director and Research Analayst)

No, that was, that was a great answer, Dave. Thank you so much. And I think, you know, everyone, just remembers Q4 of 2013 and Q1 of 2014, how because of your greater exposure to the spot market, saw a more meaningful inflection in, in nice results versus peers. And I just wanted to make sure that there's nothing different in the organization today versus what existed back then, and I think you answered that.

David Jackson (President and CEO)

Yeah, yeah. Well, hopefully, I did. I hope they sounded like reasons and not excuses, and I don't want to push the needle too far, but there is one other point that I think's worthy of mention is, you know, we do have a meaningful exposure to the West, and the West has not played out as strong in the first half of the year as the Southeast and the Northeast, and Midwest have. And so, you know, we have a fair amount of more, more than average exposure to the West. And so that probably weighs on us, or I know that weighs on us when we're trying to compare to those maybe that are a little bit more Midwest or Eastern centered.

Brad Delco (Managing Director and Research Analayst)

Okay. Well, thanks, thanks for the time, guys.

David Jackson (President and CEO)

Okay, thanks, Brad.

Operator (participant)

Your next question comes from Tom Wadewitz with UBS. Your line is open.

David Jackson (President and CEO)

Hi, Tom.

Tom Wadewitz (Senior Equity Research Analyst)

Yeah. Hey, Dave. Hey, Adam. How are you guys doing?

David Jackson (President and CEO)

Good. I'm good.

Tom Wadewitz (Senior Equity Research Analyst)

Let's see. This is probably kind of variation on the topic at hand on the cycle and so forth, but what would you, how would you characterize things in terms of the degree of pressure? To what extent are routing guides breaking down? And, you know, just kind of, I guess, level of conviction on the, you know, kind of quick turn up in contract pricing. And maybe kind of within that, you know, do you think as new entrants, you know, let's just tech-focused entrants in brokerage, you know, that might be, you know, not, I don't want to say irrational, but, you know, just focused on building share. Is that potentially a drag on how well the rates go up? Or is that kind of irrelevant, even if they probably aren't much of a presence yet?

David Jackson (President and CEO)

Okay. Yeah. Let me, and Adam can jump in, but let me try and answer those three questions, Tom.

Tom Wadewitz (Senior Equity Research Analyst)

3, 3 wrapped into one.

David Jackson (President and CEO)

Yep. We'll answer that barrage of questions. So when you talk about breakdown of routing guides, I wouldn't probably use the term that there's a breakdown of routing guides or anything like that. I think we just saw the seasonal strength hit. So when you had a little bit more than just the average day's freight moving because of produce and beverage and all that moves with a change of season, you know, you had markets, certainly some more than others, but you had markets that just had too few trucks chasing too many loads.

And so last year, Q2, we felt some of that as well, but it wasn't to the point where there was a willingness to pay for deadhead or pay to relocate trucks, to pay to track down capacity by our customers. And so this year, you saw that same kind of seasonal strength, but then to another level. And I think you saw some shippers that experienced some disruption as a result of that, and they were quick to resolve that by paying a little bit more for capacity. I think, you know, our understanding is those that, or that most, and if not all brokerages, experienced some significant margin compression in the month of June.

You know, I think one way to look at this might be that, if you don't own any assets, if you go and make commitments for the year at a certain locked-in price, you're betting that you're going to be able to buy better than that price with the margin that you want, that you seek more often than not. And it would be maybe akin to shorting a stock, so you're short the market. Well, we've had, you know, more than two years without a single short squeeze. And I think what we just experienced in the Q2 was a short squeeze. And the ability to buy to short the market, if you will, seems to have changed. And that is a big, big change. It's in the numbers, it's in these third-party industries.

Virtually every industry was tracking this. They were tracking the imbalance on loads to trucks posted on the load boards, or if you saw the rate, those independent rates providers, they are aggregators. You know, they all documented the rates were going up. And so what that'll do is it changes behaviors. First, changes behaviors in the brokers, it changes behaviors in the trucking companies, the asset-based folks. And then last, typically, to change is the shipping community begins to change, and then we find ourselves in a new market. So all of that's kind of underway. And, you know, in the Q4, I would expect that we'll see more acute tightness, and things might get a little bit more dire in some of the routing guides.

We're seeing some shippers that are expressing concern and have taken steps to secure capacity in theQ4. And, you know, I think that we'll probably see that continue to grow. We don't see a catalyst to bring more supply in. In fact, we think it's been leaking out for the last two years. And the positive inflection we've seen has been nice, and like I said, I think it can change behavior, but we don't think that it is so fundamentally strong and overwhelming that it's all of a sudden going to serve as a catalyst for more capacity to come in. In fact, it may be too little, too late for many.

When we look at the tech players, you know, I'm not sure that it ever makes sense to try and go gain share in a space that's fragmented in a market this efficient when you're dealing with, you know, two, it's a B to B, a capital B to a lowercase b. But for those who desire to go get market share in this space, you know, the time not to do it would be in an environment just like now, where the shipping community is a little slower to recognize the, the improvement in the market. Meanwhile, the actual underlying purchase trend has already reacted, hence the compressed, you know, gross margins. And so they've already reacted, and that would be a bad time to try and go out and be competitive for business to lock in.

So, you know, there's perhaps it's a little late in the cycle for the tech startups to try and go and do that. But, I think we'll, you know, we won't underestimate anybody.

Tom Wadewitz (Senior Equity Research Analyst)

Right. Okay, well, thank you for deftly handling the burrito.

David Jackson (President and CEO)

Yeah. Thanks, Tom.

Tom Wadewitz (Senior Equity Research Analyst)

All right. Have a good afternoon.

David Jackson (President and CEO)

You, too.

Operator (participant)

Your next question comes from Allison Landry with Credit Suisse. Your line is open.

Allison Landry (Senior Equity Research Analyst)

Thanks for taking my question. You know, in terms of the seasonality from June to July, you know, we've heard, you know, not only from you guys, but from other carriers and brokers, you know, that sort of the normal drop off has been, you know, less pronounced. You know, I was just curious if you think that, you know, some combination of Prime Day and the brake inspections in the second week of July contributed, you know, in any meaningful way to the better than normal seasonality that you've seen?

David Jackson (President and CEO)

You know, we would have expected, Allison, to see things stay strong through the first two weeks of July. That's kind of the typical. You know, you have, obviously right up to the fourth, and then, and then particularly this year, the way the fourth fell, it's kind of like the whole country took four days off. And so there was this whole catch up that had to happen because we consumed, as a country, pretty heavily, I think, over those three or four days. I did, in terms of hot dogs and hamburgers. But, but there's this, there's this catch up that seems to happen the next week. You, you can almost take it to the bank that you're going to see the first two weeks of July be strong.

And so, so I think those two things you talked about might have... You know, they would have just been part of what was already going on. But the reality is, we sit here today, July twenty-sixth, and, you know, this late in, to be able to say that July is feeling seasonally or stronger than the seasonal expectation year-over-year, would suggest that there's something a little bit bigger going on.

Allison Landry (Senior Equity Research Analyst)

Okay. And, like, do you have any sense of where, you know, the demand is coming from? You know, obviously in the Q2, you know, produce, beverage helped. What's driving the strength in July, if you have a sense of that?

David Jackson (President and CEO)

Gosh, it's tough to pinpoint. I will tell you something that might be a causal factor to that is the refrigerated market continues to be pretty good. And so, you know, it feels as though the reefer trucks are hauling reefer freight. And when refrigerated trucks are busy, then that takes whatever percentage of the trailing equipment that finds itself hauling dry goods in a reefer trailer, takes that away, and then you're left with just dry van. And so I think that that's a factor of what's, you know, to what's going on, and certainly there's some seasonality to what happens with refrigerated capacity.

But it wouldn't be a surprise if reefer capacity in general has suffered the largest supply losses. Because you typically have smaller, more fragmented players. A reefer trailer costs twice as much as a dry van trailer, maybe more than twice as much these days. And so you've got additional regulations in California to deal with. And so, so, you know, if the refrigerated market can stay strong, that usually bodes well for the, for the rest. Now, I'll tell you, there are some regions stronger than others. The eastern part of the country, both top to bottom, have had better strength here in July than what we've seen out west. But all in all, comparing like to like in regions, you know, it's, it's still a little bit stronger. So that's, that's encouraging.

maybe even something that, you know, I was bracing myself that once we got to the middle of July, it was just going to totally fall off. And so, you know, it hasn't done that, so.

Allison Landry (Senior Equity Research Analyst)

Okay. Thank you.

David Jackson (President and CEO)

Thanks.

Operator (participant)

Your next question comes from Ken Hoexter with Merrill Lynch. Your line is open.

Ken Hoexter (Managing Director)

Great, good afternoon. So you guys aged the fleet a bit. You talked about bringing the age down. Can you talk a bit about your experience on that in terms of cost? Have you seen an increase in your maintenance costs as you've done this, and why the reversal now?

... when you talked before about, the money you put into the fleet that it can last longer for you. What, what's different about, the environment now? Thanks.

Adam Miller (CFO)

Well, so Ken, hey, this is Adam. So, yeah, as we've aged the fleet, over the last several quarters, we have, and then probably early on, did a good job of kind of maintaining the cost pressures that you would feel from an aging fleet. I'd say in the last two quarters, we saw some inflection and some inflation costs on the maintenance side. So it's probably $0.01 or so per mi for this year, for this quarter, that we felt. Now it's up to 2.6, which, it wasn't necessarily our intention to get it that high. I think part of it falls on just the timing of when the CapEx comes in. And so the first half of the year, we typically don't bring on as many trucks.

And so the back half of the year, if you just look at what our CapEx has been, it's been relatively light. So we have more trucks coming in to refresh the trucks that are scheduled to come out. So it's more just a timing issue rather than strategically how we're trying to adjust the age.

Ken Hoexter (Managing Director)

And then the cost experience within that, has there been any shift in your cost in the aged fleet?

Adam Miller (CFO)

Right. So, yeah, so in the last two quarters, the Q1 and the Q2, we have seen an increase in our maintenance costs. As I mentioned, the Q2 was probably $0.01 per mi increase in our maintenance costs because of the older fleet.

Ken Hoexter (Managing Director)

Okay, great. Thanks for the insight.

David Jackson (President and CEO)

Thanks, Ken.

Operator (participant)

The next question comes from Amit Mehrotra with Deutsche Bank. Your line is open.

Amit Mehrotra (Managing Director)

Thanks, for taking my question. Appreciate it. Wanted to ask about, the company's ability or your ability to reduce costs further. You already have best-in-class type cost per mi. You do also have, you know, a good amount of terminals, and I think the company runs pretty decentralized in terms of those terminals having decent costs associated with them and managing freight and maybe more localized levels. I'm just wondering if that's where you see the most opportunity to reduce costs, or is that really that framework is kind of how you like to run the business, and so maybe it's not a focus or a source of cost reduction going forward? Thanks.

David Jackson (President and CEO)

Yeah, thanks for the question. We would not see changes to the facilities as a way of saving costs. It is a very important way in which we run this business that suffers from massive diseconomies of scale that come with size. And so, by running a decentralized operation, that's critical to our ability to operate the way that we do. So, and to have a kind of accountability and the kind of financial performance that we're able to achieve. I would say that there are a number of areas. In fact, every cost item, the 10 or 11 main groupings on the P&L, there are a multitude of things we can be doing better all the way through.

You know, you think about things that are very fundamental to the business, where we can improve our execution and things like trailers and utilization of trailers. We talk about the average hours driven per day, per driver. We can talk about our fuel efficiency. We can talk about continuing to improve our safety and our safety costs. And so there are a number of things, and we're fortunate that we have a culture where the people that have responsibility for those areas, and there's many that overlap, that they're tirelessly and relentlessly trying to find ways to become more efficient, trying to find ways to introduce technology in ways that can help us manage more effectively and with greater magnitude. And so, so yeah, there's a whole bunch of...

I can, I can bore you with, but there's so many areas for us to improve, and so that's where we're focused.

Amit Mehrotra (Managing Director)

Okay. All right, thanks for taking my question. Appreciate it.

David Jackson (President and CEO)

You bet. Thank you.

Operator (participant)

Our next question comes from Scott Group with Wolfe Research. Your line is open.

Scott Group (Managing Director and Senior Analyst)

Hey, thanks. Afternoon, guys.

David Jackson (President and CEO)

Hey, Scott.

Scott Group (Managing Director and Senior Analyst)

So when we talk about the environment being better than normal, I guess what I'm wondering is, is it strong enough where we can see better earnings in the Q3 than the Q2, which I guess you typically don't see? And then maybe longer term, is it is this a strong enough inflection where we can, the timing or magnitude of the Swift synergies change at all?

David Jackson (President and CEO)

Well, let me try and speak tonight first. You know, it's an important inflection point, but it was 0.3%. And so in terms of, you know, driving to the bottom line, it's not big enough that we can begin to raise driver wages. But it's an important shift directionally, and the behaviors have already changed that we believe will continue to fuel that progress. Now, when you look at a Q2 to a Q3, you know, the Q3 has just seasonally is a snoozer. I mean, there just is not a lot seasonally that goes on. And you don't have contractual changes in rates that will take place between the second and Q3 very often.

So I, you know, I would be very cautious looking at meaningful sequential improvement in earnings from a second to a Q3. Some years we see, we can see a, you know, a significant decline. Certainly, 2013 saw that, but I'm not, I'm not drawing that as an exact parallel, but, you know, but only to be more than reversed by the Q4. So, I would say that, our ability to continue to produce earnings similar in the Q3 as we did in the Q2, I would consider that to be, an appropriate and valiant effort in this kind of an environment. We're optimistic about where it goes from there.

Now, when we talk about Swift and synergies, boy, we still stand behind what we presented, what those slides showed. We're, you know, pleased with where we are at the transition teams. We are, you know, excited about the people that are there. You know, if based on their financial results that they released, they're staying focused when this is a time where there could be a lot of distraction. And so we appreciate the people that continue to be focused, and we look forward to continuing to help one another as these two independent businesses continue to move forward. Now, the conviction that we had back in April, I don't think is much different than the conviction we have today on where the market is headed.

And of course, we feel like that, that will bode very well, for the many, synergies that we're working to leverage and, take it and to make a reality, as we work on that business. So, so, you know, theoretically, we've got more evidence to base our optimism for future environments, specifically Q4 and into next year and beyond. But, but, you know, we expected to see an inflection in the Q2, which it came. So we would've, we would have been more surprised to not have seen it, so.

Scott Group (Managing Director and Senior Analyst)

Okay, very helpful. Let me just clarify, is the timing of the deal changing at all, or is it on track, so the $31 million of synergies for 2017 is still the right number to be thinking about?

David Jackson (President and CEO)

Yeah, we're gonna need to be going 55 mi an hour out of the driveway because it's a little later than we would've liked to get started, but we're not coming out with an amendment here anytime soon to that number.

Scott Group (Managing Director and Senior Analyst)

Okay. Thank you, guys.

David Jackson (President and CEO)

Yeah. Thanks, Scott.

Operator (participant)

Your next question comes from John Larkin with Stifel Nicolaus. Your line is open.

John Larkin (Managing Director of Investment Banking, Transportation and Logistics)

Hey, good afternoon, gentlemen. Thanks for squeezing me in here.

David Jackson (President and CEO)

You bet, Mr. Larkin. Thanks for joining.

John Larkin (Managing Director of Investment Banking, Transportation and Logistics)

Yeah. Maybe just a quick one on the timing and the revelation of what the combination may look like beyond the slides, once it actually happens. Do you envision an analyst day, or do you plan to lay some of this out on the Q3 earnings release call, which I guess will be a combined call? Could you give us some color around how any incremental information might be disseminated?

David Jackson (President and CEO)

Yeah. Well, obviously, the Q3r call will be a new experience for all of us, and so, we will do our best to provide visibility into both of the companies with still an idea of where we are and how this synergy and how it's coming together. So, so we would envision that as part of our Q3 release and our Q3 call. You know, we are, we're anxious, we're anxious to not have some of the regulatory and legal Chinese walls, if you will, that exist today in our transition.

And so, when, when we're able to have the full close behind us, you know, we're gonna need a little bit of time on our hands, and it's also, we're gonna find ourselves in the busy season of the year. So we're gonna have our hands full. My guess is we would, it will be next year, in 2018, that we would look to do some type of, maybe increased visibility. I'm not con-- I wouldn't say an analyst day at this stage of the game. We've, we've had discussions about how we might do that, but, but we obviously, we, we think it's in our best interest, and we feel a responsibility to keep the market up to speed with kind of where we are with a transaction of this size.

So, we'll work on what we think is the most appropriate way to do that. We anticipate continuing to do the conference call, the quarterly conference calls, and provide insight that way as well. And if we feel like an analyst day would be needed and required and a worthy investment of time, then we will do that. So, it's on the table.

John Larkin (Managing Director of Investment Banking, Transportation and Logistics)

Very good. Thanks a lot. That's what I want.

David Jackson (President and CEO)

Okay. Thanks for sticking to one, John.

Operator (participant)

Thank you. Your final question comes from Donald Broughton with Broughton Capital. Your line is open.

Donald Broughton (Principal and Managing Partner)

Thanks for taking the question.

David Jackson (President and CEO)

You bet, Don. Good to hear from you.

Donald Broughton (Principal and Managing Partner)

Good to be heard from. Looking through the operating stats as reported by Swift, obviously on Monday night and then yourself, you know, revenue per truck is continuing to decline, margin per truck, margin per dollar has continued to decline. And certainly because of what's happening with pricing between spot and contract, we're seeing margins-... and both of y'all's logistics businesses see the compression as well. Can you give us a couple of tangible examples of things you can do to turn the tide and see those both revenue and margins improve? What are the things, fundamental things you could do? Are you really just dependent upon the overall market to get tighter in order to be able to turn that battleship?

David Jackson (President and CEO)

Yeah, well, I mean, certainly, certainly rising tide lifts all boats. But if you look back to previous cycles, when we see even the least bit of lift, at least at Knight, we've had good success with, with outpacing the, the average carrier's lift, if you will, in that kind of a market. And so certainly the two thousand... the end of 2013, 2014 would be, and 2015, would be examples of that. You know, Swift, historically, over that same time period, made very meaningful progress. Maybe not quite to the same, on an earnings percentage, on an earnings growth or on a rate per mi growth perspective, not, not at the same pace as, as Knight did.

And so, you know, hopefully those are, hopefully particularly on the earnings growth side, that's something that we'll be able to improve under common ownership together. So you know, there are definitely things, Don, that are within our control that we can do better. You know, we're disappointed with our utilization. Last year, we increased it all four quarters straight, and this year, we've given much of that back in the first two quarters.

But we've been able to hold on to rate fairly well and leave ourselves not overcommitted, if you will, going into what we think will be a rising environment, where we hopefully will be able to outpace that, and consequently, put us in a position to raise driver pay faster and maybe even sooner and to a higher level, or at least on a faster pace than some of our peers. And so that would give us some very specific advantages there. So there are definitely opportunities to improve.

In the due diligence we've done with Swift, we think there's a lot of opportunities for them, similar to us, just in some of the execution and how we go about doing things, the levels of efficiency that we have in the business. So, if you look at our cost per mi, Don, for example, in the Q1 versus the Q2, you're going to see we made some meaningful improvement in the Q2. And, you know, that wasn't in any. That cost side didn't have to do with an improving market. And so there are other things that we have in motion that we think can help us.

But, it's not one or two things, it's just a small improvement in a multitude of areas that require just a lot of unselfish teamwork here behind the scenes. And so, it's been a great opportunity for people development. These tough bottom parts of the cycle are always great for people development, and we've had more than our fair share. So that's kind of where we find ourselves now, Don.

Donald Broughton (Principal and Managing Partner)

All right. Well, thank you very much, and good luck.

David Jackson (President and CEO)

Yeah, and congrats on your, on your research business there.

Donald Broughton (Principal and Managing Partner)

Thank you.

David Jackson (President and CEO)

Jesse, that concludes our call. And, for all of you who have listened and participated, we appreciate your interest and your support, and have a great evening.

Operator (participant)

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