Knight-Swift Transportation - Q3 2015

Transcript

Operator (participant)

Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Knight Transportation third quarter 2015 earnings call. All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one from your telephone keypad. If you would like to withdraw your question, press the pound key. 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, Kelly, and good afternoon, everyone, and thank you to those who've 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 until 5:30 P.M. Eastern Time. Following our commentary, we hope to answer as many questions as time will allow. If we're not able to get to your question due to time restrictions, you may call 602-606-6315 following the call, and we will return your call. Again, that number is 602-606-6315. The rules for the questions remain the same as in the past. One question per participant. If you're not clearly answered the question, a follow-up question may be asked.

More often than not, we end up with a few people in the queue that are not able to ask a question, so we ask again to keep it to one question per participant. Thank you. To begin, we'll move on to slide 2. I will first refer you to the disclosure on page 2 of the presentation. I'll also read the following. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions, and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A, Risk Factors, or Part I of the company's Annual Report on Form 10-K, filed with the United States SEC for a discussion of the risks that may affect the company's future operating results. Actual results may differ.

Now, I'll begin by covering some of the numbers in detail, including a brief recap of the third quarter results, starting with slide 3. For the third quarter of 2015, our diluted earnings per share grew to $0.37 versus $0.31 from the previous year. Our net income increased 20.6% year over year to just over $30 million, while our operating income increased 16.7% year over year to $46.4 million. Revenue, excluding trucking fuel surcharge, increased 18.5% year over year to $269.9 million, and our total revenue increased 10.5% year over year to $300.1 million. Now on to slide 4.

We ended the quarter with over $712 million of stockholders' equity, and over the last 12 months, we've returned over $65 million to our shareholders through dividends and our recent stock buyback. During the third quarter of 2015, we purchased approximately 564,000 shares of our common stock for $15 million, and year to date, we have purchased approximately 1.6 million shares of our common stock for $45.3 million. We continue to maintain a modern fleet with an average tractor age of 1.7 years, and we currently have $120 million outstanding on our unsecured $300 million line of credit, which leaves us with a meaningful amount of capacity for additional investments. Now on to slide 5. Knight continues to be an industry leader in terms of consistent, profitable growth.

We have demonstrated our ability to organically grow multiple service offerings while operating at a high level of profitability. That is, Knight also has a proven track record of successful acquisitions that have provided meaningful returns for our shareholders. We have a deep appreciation for returns and continue to focus on incrementally improving our ROIC by being more productive with our existing assets and investing in high return opportunities. We generate meaningful free cash flow and have a strong balance sheet with available capacity, which allows us to deploy capital towards growth opportunities, acquisitions, share buybacks, as well as pay a consistent dividend to our shareholders. Now on to slide 6. Over the last several years, we have experienced meaningful growth in our consolidated revenue. This is a result of our ability to expand our logistics service offering, improve yield, organically grow capacity, and successfully integrate acquisitions.

In a market not as robust as the same time last year, we increased our revenue per loaded mile 4.6%, while increasing our length of haul by 2.6%. This has resulted in a 38% increase in revenue for the third quarter of 2015 versus 2013. Year to date, we have grown our revenue 36% over the two-year period. With truckload capacity being challenged by a shortage of drivers, coupled with the pending host of regulatory changes, we see those companies that are well-capitalized and have already adapted to the proposed regulations, well-positioned to benefit in the longer term.

With that being said, we remain focused on improving our lane density, increasing the productivity of our tractors, improving our yield, and investing in long-term growth of our logistics capabilities as a means to continue to grow our business. Now on to slide 7. We continue to execute on our strategy of providing a high level of service while operating with industry-leading efficiency. We understand that operating with the lowest cost per mile in our trucking segment and the lowest cost per transaction in our logistics segment, drives significant value to our shareholders. Our service centers and departments maintain an intense focus on managing the costs associated with operating our business. This focus has helped lead to earnings that have doubled since 2013 when compared to the third quarter results. I will now turn it to Dave Jackson for additional comments on the third quarter.

David Jackson (President and CEO)

Thanks, Adam. Good afternoon, everybody. Now on to slide 8. In the third quarter, our asset-based trucking businesses operated at a 79.8% operating ratio. Despite less of a tailwind from fuel expense, a less robust freight market, less gain on sale of used equipment, and higher driver wages, we were able to maintain or to again perform with a sub-eighty OR. We continue to see positive results from our internal initiatives centered around improving yield, increasing productivity, providing a high level of service, and managing our cost per mile. Our non-asset-based logistics business continues to grow revenue, despite much lower fuel surcharge, which is included in the logistics revenue number, and a shortening length of haul in the brokerage portion of logistics.

Declining commodity prices negatively impacted income growth for logistics and was the primary reason for the 13.1% decline in logistics operating income. However, brokerage operating income improved 8.8%, and intermodal improved 20.5% on a year-over-year basis. Load volumes increased 64.8% in the brokerage business on a year-over-year basis in the third quarter. In terms of profitability, our logistics segment operated at a 93.6 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 intermodal services, in addition to our truckload services. On to slide 9. This graph demonstrates our progress in incrementally improving returns on invested capital, or ROIC, when comparing third quarters over the last five years.

We've been sharing this graph for some time, and we continue to update it, and we continue to see positive results there. Each of our business segments is designed in a way to yield double-digit returns on invested capital, and that is our expectation for each of our businesses. These current businesses include dry van truckload, refrigerated truckload, port and rail, truckload drayage, various forms of dedicated brokering freight using subcarriers, intermodal services, and our new transportation and logistics management business. 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. In each of our businesses, we're built with the culture, measurements, people, and strategy that we believe can be scaled up and grow on a consistent basis. Moving to slide number 10.

For more perspective, here are additional graphs demonstrating our consistent top-line growth in our two segments, trucking and logistics. We believe that owning and having an extensive and growing network of subcarriers that can provide quality capacity on demand, is a more efficient approach to solving customer needs, as compared to only having assets or only relying on others to provide assets. We are investing in our logistics capabilities so as to be able to provide even more sophisticated solutions and efficiencies. We believe that our model brings efficiencies to the marketplace and therefore represents a significant growth opportunity for our company in nearly any freight market. We've demonstrated the ability to grow organically in our logistics business at a leading low cost per transaction level. We have an efficient way to leverage our network.

We believe both our cost efficiency and ability to grow position us well for continued future profitable growth. Now moving on to slide 11. Our focus is creating value for our stakeholders. Our efforts to strengthen our value proposition to our customers, including evolving our uniqueness in our service offering, they continue without significant variation in the up and down of markets. However, when it comes to creating value for our shareholders, we adapt and change depending on the opportunities and the challenges associated with whichever end of the market demand spectrum we're faced with or that we anticipate. In stronger markets, we add trucks organically. We often open new service centers and explore acquisition opportunities. Growing logistics is always a priority. The variable nature of that business makes it even more attractive in challenging environments sometimes.

When we see less robust freight demand, we are less likely to add trucks organically. This usually results in significant free cash flow, which amplifies our focus on adding capacity through acquisition, and also enables us to improve EPS growth through share repurchases. Our objective is to leverage our very diversified customer base, multiple services offering, our non-asset complement to the truckload business, and healthy capital structure to create value in both strong and sluggish environments for our shareholders. Moving to slide 12. Our team remains focused on executing at the highest level in each of our businesses, departments, and service centers. We have initiatives in place that we expect to continue to lead to improving operating results. To finish the year, we are continuing to put emphasis on improving the revenue production of the existing fleet. Specifically, we want to see improvement in miles per tractor.

This means we'll likely see organic growth in the 2.5% range for the year 2015, coupled with the fourth quarter of 2014 acquisition, that will still put us in the 15% fleet growth range for the 2015 entire year as compared to 2014. Hiring and retaining quality driving associates remains the most significant challenge for the industry and represents a significant opportunity for our company. We've meaningfully improved our pay and performance bonus for our driving associates over the last several quarters. Not only do we remain committed to further improving pay for our driving associates, but to invest in technology and our service centers that improve the experience for our drivers, that our drivers have over the road. Next, talk about growth on slide 13.

We continue to evaluate and pursue opportunities to grow our company through acquisitions. Our experience in truckload and sensitivity to employee, driving associate, and customer cultures leave us confident in being able to find win-win opportunities in the acquisition arena in the future. Our logistics segment continues to grow rapidly and has become a meaningful complement to our trucking segment. We're using more technology in this process than ever before, and we're pleased with the efficiency that this affords. Based on our current outlook of driver availability and freight demand, we would expect low single-digit organic tractor growth in 2016, probably similar to what we will end up organic growth-wise in 2015. This will result in significant free cash flow in 2016, perhaps doubling the expected free cash flow of $50 million in 2015.

I'll now turn it over to Adam to discuss guidance.

Adam Miller (CFO)

Okay, thank you, Dave. Slide 13 is our final slide, where we'll discuss our guidance. Based on the current truckload market and recent trends, we are reducing our previously announced fourth quarter 2015 guidance range of $0.37-$0.39 per diluted share to $0.36-$0.38 per diluted share. Our expected range for the first quarter of 2015 is $0.32-$0.35. Our guidance is 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, as well as in the first quarter of 2015.

We remind you that last year in the fourth quarter and this year in the first quarter, we estimated a $0.03 per share benefit from the rapidly falling fuel prices. Some of the additional assumptions made by management include minimal organic growth from our current tractor count, as Dave mentioned. We expect total rate per mile for the next two quarters to be just slightly positive. We also expect slightly positive miles per tractor compared to last year. Long term, we expect to continue to grow our logistics segment in the 25%+ range, while operating with a low- to mid-90s operating ratio. In the fourth quarter and first quarter, we expect load count to continue to grow at a pace similar to third quarter.

However, we expect headwinds that include a lower fuel surcharge and a shorter length of haul will have an impact on the revenue growth year-over-year and may result in growth below that 25% pace in the near term. We expect driver wages and higher related costs to continue to be inflationary. We also expect our fourth quarter and first quarter gain on sale to be modestly lower than the prior year. And as far as our tax rate, we expect that to normalize in the fourth quarter and first quarter in the mid-39% range, again, excluding any unusual items. These estimates represent management's best estimate based on current information available. Actual results may differ materially from these estimates.

We would refer you to the Risk Factors section in the company's annual report for a discussion of the risks that may affect results. So this concludes our prepared remarks. We'd like to remind you, this call will end at 5:30 P.M. Eastern. We will answer as many questions as time allows. Again, please keep it to one question. If we're not able to get to your question due to time constraints, please call 602-606-6315, and we will do our best to follow up promptly. Kelly, we will now entertain questions.

Operator (participant)

At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one from your telephone keypad. Your first question comes from the line of Rob Salmon from Deutsche Bank. Your line is open.

Rob Salmon (Vice President and Associate Analyst)

Hey, good morning, guy, good afternoon, guys. Could you, Dave, could you perhaps elaborate a little bit in terms of the, the acquisition opportunity? That, that was something you had called out. What sort of ranges of opportunities are you guys currently seeing? And, you know, how willingness, how much willingness and, and capability do you guys have on the balance sheet to potentially, expand the credit revolver if there's a, a bigger opportunity out there?

David Jackson (President and CEO)

... Yeah. Well, you know, we, we basically look at any company that is, in our space or somehow could be, is close to our space or close enough to our space. We, we like to look at those and, and evaluate whether there's maybe a good fit or something we don't know that we could learn, and, and maybe a, a corollary to our industry. Most of the effort we look at is with folks that are, that are moving full truckloads, asset-based businesses. And, I would say that we have a lot of friends in the industry. We have ongoing dialogue at various, various forums, you know, that are, that are constant.

You know, Kevin Knight still works full-time and works as much as he ever has, and he has a little more time to have those kind of conversations and kind of explore that area a little bit more than certainly than what our company's ever had doing that. And Kevin is very insightful on how to who to look at and what to talk about. So those efforts sometimes go on for a while before you have a whole lot to show for it. Our acquisition last year was one that materialized over a period of time and with a lot of dialogue. So we don't know how to...

You can't force an egg to hatch or a bean to sprout before its time, and so we're just fostering the right kind of environment there. Now, as far as the balance sheet goes, I think, you know, we certainly have the capability to borrow a lot more. There are several others in the space who have been able to borrow several times, it seems, their EBITDA, whereas we're, you know, a fraction of our EBITDA. And so, there's a lot of opportunity there if we ever wanted to do it. We are a conservative bunch. We're very deliberate when it comes to investments, and we seek a double-digit return, ideally right away.

If we can't get a double-digit return right away, we have to have a lot of confidence that we could get there relatively quickly. So, we're careful in what we do. But if the time came or the right opportunity was there, we've got plenty of banking partners that would love for us to lever up a bit more.

Rob Salmon (Vice President and Associate Analyst)

I'm sure of that, Dave. I guess, you know, kind of my quick follow-up would be: What is the maximum leverage threshold where you guys would be comfortable, in the current environment?

David Jackson (President and CEO)

Oh, it depends on who you ask. I mean, there's a... You know, we're not necessarily all of one mind, and sometimes we feel like conservative would be a little bit, some would favor more conservatism, others might be willing to do a bit more, and we talk through it and look at opportunities. I mean, Rob, you know us, you look at our history, you know, we've never crawled very far out on the branch, and we play things pretty conservatively. When we look at borrowing money, I mean, our belief would be that if we had 1x EBITDA, it wouldn't impair the value of our stock at all, maybe even 1.5, somewhere in that range. You guys would know better than us.

And so if you're buying a good asset that's going to bring some EBITDA with it, you know, you kind of look and evaluate that. We've really enjoyed being in a position where we're not beholden to banks and got a lot of flexibility or even dry powder, if you will. But at the same time, we feel like, and we spent a lot of time trying to understand this industry, anticipate where it's going, anticipate what would be a strategic move, and if we found the right opportunity, we don't have any hard, fast rules or parameters that we've kind of boxed ourselves in with. So if you saw us do a bigger deal, it would be not because we felt like we just needed the revenue or it was a reactionary decision.

It would be because we see a lot of strategy and value creation in such a deal.

Rob Salmon (Vice President and Associate Analyst)

Makes sense. I appreciate the color and good luck in terms of cultivating those M&A opportunities.

David Jackson (President and CEO)

Yeah, if you got any leads, Rob, just give us a buzz.

Rob Salmon (Vice President and Associate Analyst)

Sounds good.

David Jackson (President and CEO)

Thanks.

Operator (participant)

Your next question comes from the line of Ben Hartford of Baird. Your line is open.

Rob Salmon (Vice President and Associate Analyst)

Hey, good morning, or good afternoon, guys, as well.

David Jackson (President and CEO)

Good after.

Rob Salmon (Vice President and Associate Analyst)

Yeah, I guess let's keep in that vein, Dave, in terms of thinking about the business strategically. You talked about some of the expanded logistics and managed transportation offerings in the quarter. I guess one of the items that stands out is your gross margin expansion, only up 70 basis points this quarter. So I'm curious to what degree was that muted relative to some of the competitors that have already reported 3Q results? Is that pace of expansion, has it been muted by some products that you're rolling out? Obviously, you're growing that logistics unit very rapidly, so maybe there's a strategic element to that as well.

But can you talk a little bit about some of those investments, new products that, that you're rolling out at the moment, which might be blunting that gross margin expansion in an otherwise soft truckload market? And then, as we think about 2016, what is your view on, on how we should think about gross margins relative to load growth in that segment in 2016 and, and going forward?

David Jackson (President and CEO)

... Okay, I'm trying to write down all of those questions, Ben, so I don't miss them, okay? So you might have to remind me. So I think first off, talking about our gross margin expansion of 70 basis points and how that compares, you know, I think that just about every broker goes about it a little bit differently, or at least they approach the market in a different way. Our brokerage approaches the market very much on maybe more of a transactional basis than a deep, long, making a bet on where rates are going to be, and we lock in a lot of commitment.

So, when we look at how committed, if you will, we would be with that, with that freight that we find third-party carrier capacity, you know, it's a minority of those loads would be under some sort of a commitment. So that's not necessarily the case with other folks, and I think some of the other folks might have, you know, those that have assets, it might be more of an overflow for an abundance of commitments they've already made on their trucks. And so by its nature, it naturally has a high level of commitment. Then you have some of the non-asset-based brokers that are just very savvy and move very quickly, and they commit, and then they move to more of a transactional, and then they move back.

As we've been growing and building this business, it's largely been transactional. So I think you've seen that. We, you know, you've seen some of the rates that we're moving those loads for have been under some pressure. But we've been able to buy in the market commensurately, and in many cases, a little bit better even than the kind of pressure we're seeing on the market side. So as that business grows and matures and gets a little bit bigger, it probably gets a little more diversified in terms of what's committed and what's not. And so we've got a strategy along those lines.

When we talk about 2016 gross margin, and load growth on the, on the brokerage or logistics side, I think, we'll know a lot more based on what the peak season looks and feels like right now. I mean, it's the... If we look at that, that broker load board space, it's been, it's been a little brutal for, for the carriers in terms of rates. And so that's probably part of what may have stunted some of the, capacity additions that we're having happening with the smaller carriers. And so we'll just have to see kind of where that goes. This is maybe, I may answer somebody else's question with this, but I'll just... I think it's related.

But, you know, when we look at kind of the supply side, particularly the small capacity that are the ones that are relying heavily on brokers, they're the ones that are relying heavily on load boards. You know, we saw the rate change quickly, sometime in spring, in the springtime, at least on the load boards, where it went from these double-digit positive rates throughout 2014 to this now double-digit declines when you factor fuel in, throughout spring and summer. You know, we've seen something interesting, and others have noted this, that the used equipment market has softened, and it's probably started somewhere in the neighborhood of 60 days ago. And that might be maybe the best evidence so far that capacity additions have peaked, particularly for the smaller guy.

And so that market was flooded, so it made it easier to buy. And as a logistics carrier, it'll be interesting to see how quickly those trucks go away. You know, when you combine the strong rates with the decline in fuel prices, I mean, it was quite a juicy invitation for a small guy to go, you know, add 3 or 4 trucks. And 3 or 4 trucks on a 15-truck fleet is pretty significant, percentage-wise growth. And so the piece that'll be interesting is, you know, when we look at trucks, they really don't have that long of useful life as compared to other transportations. You know, the airlines, you know, when they add planes, they're there for a long time. Barge is the same thing.

Even the LTL capacity trucks, you know, they don't run as many miles typically, and then they're more prone to rebuild. But in the truckload space, we put a lot of miles on trucks, and relatively quickly. And so when you have an average age that's almost two-thirds of the way into the useful life, you know, it'll just be interesting to see how quickly the tide ebbs and flows. So that's a legitimate factor when we look at 2016 and what's gross margin going to look like.

I'm not sure that it changes much over the next six months, but if you see enough trucks leave, and then we look at what happens in the market side, you could be headed back towards more of a 2014 buying environment from a gross margin perspective. But I would say that that's at a minimum a couple of quarters away, if not more.

Rob Salmon (Vice President and Associate Analyst)

Got it. That's great. Thanks, David.

David Jackson (President and CEO)

Okay, thanks, Ben.

Operator (participant)

Your next question comes from Matt Brooklier of Longbow Research. Your line is open.

Matt Brooklier (Senior Equity Research Analyst in Industrial Transportation and Manufacturing)

Hey, good afternoon. So, you talked to next year in terms of yields, and I think it was, it was either next year or the next two quarters... a low single-digit number, but I was just curious to hear if you, if you had or, or maybe, were able to quantify a range in terms of yield growth in 2016. And then I guess the follow-up question would be, what kind of demand environment would that range be assuming?

David Jackson (President and CEO)

Well, we don't know what we're going to see in rates next year, and I don't think anybody does. I think everybody's trying to understand where the market is. I can tell you this, we expect to continue to raise our driver pay into 2016, and probably in 2017 and 2018 and beyond. And so that's not going away. And so we can't afford to do what it takes to attract and recruit and retain drivers to provide good service to our customers, if we're not continuing to get a little bit more. And so I would expect that we would see an increase, not to the degree that we saw in 2015 right now, based on how we look at it.

You know, when we, as I somewhat alluded to, I think with Ben's question, the peak season will have a factor in how we all think about this and tell us kind of where the market is. We, each of the last two years, we've seen the trend pick up somewhere between the first and second week of November, is when peak hits, and then it, it's off to the races until the end of the year. And interesting enough, you know, if we look at last year, for example, the first three weeks of December were the highest volume weeks that we had, if we look at miles per truck. So the first three weeks of December were the strongest of the fourth quarter, and that's not usual.

That's not typical of trucking in the 35 years post deregulation. So, you know, e-commerce is one of the few legitimate explanations we would have for that and kind of truncating the timing of purchases and movement of goods. So it'll be interesting to see if, again, in 2015, we have the exact same effect that we saw. It was substantially similar between 2014 and 2013 in terms of volumes. Volumes actually were, number wise, were actually a little bit less for us, if we were to use miles as a way to judge that in 2014 as compared to 2013, but the pricing environment was much stronger in 2014. So, if we see that volume again, it'll be interesting just to see where the check-in with where the market is, where the pricing is.

And that probably gives everybody, shippers and us, a sense of what's going on, what's going to go on in the market, and maybe tells us where we are in the range. I would expect if we had to guess right now, we probably would guess the result of bid pricing in 2016 is maybe in that 2%-4% range. Now, if we have a stronger peak, could be towards the top end of that or maybe even higher. If things go, if we have radio silence, we probably have a bigger economic issue on our hands as a country. So, and we'll deal with that when it comes.

Matt Brooklier (Senior Equity Research Analyst in Industrial Transportation and Manufacturing)

Okay. Good call, I appreciate the time.

David Jackson (President and CEO)

Okay, thanks.

Operator (participant)

Your next question comes from Chris Wetherbee of Citi. Your line is open.

Christian Wetherbee (Senior Research Analyst)

Hey, thanks. Good afternoon, guys.

David Jackson (President and CEO)

Hi, Chris.

Christian Wetherbee (Senior Research Analyst)

Maybe wanted to catch up a little bit on sort of how you're seeing the market in October, so a little bit shorter term. And then when you think about the, the modest trim to the fourth quarter numbers, you know, specifically, sort of what were the drivers of that, the puts and takes, whether it be partially from logistics and then some from truck? I just want to get a little bit more context around that would be great. Thank you.

David Jackson (President and CEO)

Okay. So I'll maybe talk about October, and then I'll hand it to Adam to talk more about kind of the guidance. I think that it, you know, things are still good, not as, you know, not strong across the board. We, you know, do see some bright points throughout the country. It's, you know, we're not entirely convinced that we didn't have a few more goods that moved a little earlier in the year ahead of schedule.

Maybe, as some have said, with the West Coast port shutdown looming, and it not shutting down as long as some had feared, and then really, the cleanup getting worked out a little faster than maybe many expected, has maybe some of the reason why we've seen inventory-to-sales ratios bloat the way that they have. It feels like maybe that's starting to, when I say it feels like I'm talking about just very recent data here over the last few business days, but it feels like maybe some of that slack in the chain might be leaving. In most regions of the country, we feel pretty good right now. Yeah, and if there was a weakest part, I would say the Northeast at the moment feels that way.

I don't think that there's anything we're seeing right now, you know, the third week of October, that would have us abandon the anticipation of a significant volume pickup somewhere in between that first and second week of November. So feels like we're on track for that. There's some October commentary.

Adam Miller (CFO)

Yeah. And then to your question about guidance, Chris, you know, with our focus on improving our miles per tractor, and then the difficult driver market that I think our industry faces. We trimmed up maybe the tractor growth that we expected to see in the fourth quarter, so reduced that count slightly. And then in terms of our pricing, you know, Dave commented that the volume seemed to be there, but probably seeing less maybe spot market opportunities or I guess what you'd call spot market opportunities thus far in the fourth quarter. So we just trimmed up maybe our expectations on the pricing side. It really doesn't take much to move a penny when you're dealing with, when you're looking at our trucking business.

So it's more trucking related and more of a strategy of increasing our productivity, and not forcing, you know, equipment in when it may not make sense for us.

Christian Wetherbee (Senior Research Analyst)

Okay. That's a good answer. Thanks very much for the time. Appreciate it.

David Jackson (President and CEO)

Thanks, Chris.

Operator (participant)

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

David Jackson (President and CEO)

Hi, Tom.

Tom Wadowitz (Senior Equity Research Analyst)

Good afternoon. Hey, Dave and Adam.

Adam Miller (CFO)

Hey, Tom.

Tom Wadowitz (Senior Equity Research Analyst)

Let's see. So on the logistics piece, I'm not, I think I understand your comments on brokerage, but it sounds like it was outside of the truck brokerage that caused some of the pressure on the margin. Could you explain that a little bit more? I think you referred to commodities, and then is that something which, you know, how long does that recur? Is that a factor in fourth quarter that, you know, could cause the decline in logistics operating income? And, you know, would that go into 2016 as well?

David Jackson (President and CEO)

Okay. You bet, Tom. We, the piece that I was alluding to, we talk about commodity prices. It's an agricultural sourcing business that we have and that we operate, and we're just on the wrong side of where the market is at the moment. I would expect that that'll continue here in the fourth quarter and possibly as well in the first quarter. We will though, we will be clear to pull out what's going on in brokerage, just like we did this quarter. We'll continue to do that, so you have good visibility of that. It's not, it's really not a very large piece of what we do. It's just, it's just that the logistics piece isn't all that big in and of itself.

So, this was a quarter where we did see positive revenue growth out of our intermodal business, which was overdue, and we saw good operating income growth out of there again. And then, of course, you saw the positive numbers out of the brokerage, so.

Tom Wadowitz (Senior Equity Research Analyst)

Okay. So that, like

David Jackson (President and CEO)

Does that answer your question?

Tom Wadowitz (Senior Equity Research Analyst)

I think so. So that headwind continues for maybe a couple more quarters, but it's not what- whatever. It doesn't sound like it's a big concern. If I can just... On other income was a little stronger than I expected. Is that also continuing fourth quarter, like the, you know, kind of $2 million-$3 million? And then I'll let it go at that. Thanks for the follow-on or the second one.

David Jackson (President and CEO)

You bet.

Adam Miller (CFO)

Yeah. We would expect that other income to be probably similar to what we've experienced by the first three quarters of this year.

Tom Wadowitz (Senior Equity Research Analyst)

Yeah. Okay. All right, great! Thanks for the time.

David Jackson (President and CEO)

Thanks, Tom.

Operator (participant)

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

Tom Albrecht (Managing Director)

Hey, guys.

David Jackson (President and CEO)

Hey, Tom.

Tom Albrecht (Managing Director)

A couple of my questions were just answered, but on that other income, Adam, is that primarily USA Truck stock or the TRP stuff that you mentioned in the Q?

Adam Miller (CFO)

Yeah, it'd be the combination of those two would be driving that number primarily.

Tom Albrecht (Managing Director)

Okay. And then, you know, Dave, I guess just kind of a bigger question, you're going to go into the next couple quarters. The market's been more challenging, you know, who knows what? But, you know, your organization has enjoyed such success over the last couple of years. How do you keep morale up during a period where earnings are likely to be down a little bit and your business mix gets maybe hit a little bit more? I mean, what do you do to keep the spirits riding, thinking ahead to the next time when you get to be back in the saddle, so to speak?

David Jackson (President and CEO)

Yeah. Well, if you ask me a tough question like that, I'm going to ask you about the Cardinals and what happened, so.

Tom Albrecht (Managing Director)

Wait a minute.

David Jackson (President and CEO)

But I'm a Cubs fan, is the problem, so I have nowhere to stand right now. But I think the first thing I would say is, if some of our employees are listening right now, they just heard the word morale, maybe for the first time. We don't—we just don't talk about that. We're not of that, maybe we're not traditional with that, you know, mindset of the beatings will continue until morale improves kind of mentality. We don't try and do things that are aimed at helping people feel better than themselves in a maybe more of a superficial light. Where we try to go at it is the core, where we have people who can expect from us clarity in what is expected.

They, what they get from us is a number of people who are willing to help them be successful. What they get from us is on, on at least a weekly basis, the opportunity, to evaluate a very small, limited subset of all the measurements we measure in our business, but how we measure them to be successful... so that your top performers, regardless of what's going on with the stock price, regardless of even what's going on EPS, way beyond them, but in what they're responsible for, they have visibility, and even recognition or the, the proper coaching and help to be able to, to achieve their full potential.

And so it's not hidden, and there's something empowering that happens when people understand what's expected and are given things that are within their control, and then they go off and execute at a high level. And so we just have simply built a company around those principles, and the company is kind of the sum of all of those individual building blocks. But we have a lot of people around here who are unbelievably committed to giving their very best. And for the most part, we've done a decent job of helping people be aligned so that when they give their very best, they can see how that impacts, and when everybody gives their very best, we all are pulling in the same direction, and good things happen.

So, that's, that's how that works. And I'd say that most of our, you know, most of our leadership, and I'm, I'm talking 50-plus people, have been here through... were here through the good times of 2004, 2005, 2006, and then were here in 2008, 2009, 2010, 2011, 2012, the first three quarters of 2013, and then were pleasantly pleased with 2014, third or fourth quarter of 2013, and then, 2014, 2015. So it's like, we've seen both sides of the equation. We, we know about it, and we're -- we frankly are, are always somewhat paranoid and, don't ever really enjoy the moment when things are really good. If that...

Maybe that's not the right answer, but that's kind of, I think, how we all have been trained to think, if you, if you try and get by in this industry, so. Okay. That, that's helpful. I appreciate the color, Dave. Okay. Thanks, Tom. Sure.

Operator (participant)

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

Brad Delco (Managing Director and Research Analyst)

Good afternoon, Dave. Good afternoon, Adam.

David Jackson (President and CEO)

Good afternoon.

Adam Miller (CFO)

Good afternoon, Dave, Brad.

Brad Delco (Managing Director and Research Analyst)

Dave, a lot of questions have been asked. Just kind of want to take a step back. Strategically, what sort of decisions may change in how you maybe think about capital deployment or growth in brokerage or adding trucks or acquisitions, if we do see an ELD mandate in the near term versus you know the chance that we see further delay? Will it change your the way that you think about the business strategically?

David Jackson (President and CEO)

Good question, Brad. I think, we're going to proceed on the logistics side the same way regardless. We feel like we have so far to go, and that there's so much efficiency that we could provide to a customer. That's going to continue to grow. Our decision on when to organically add trucks is inseparably connected to our feel in the market. To the degree that the market is such that justifies with price, and we feel like we have the relationships and volumes to have more trucks at improving prices, then we add trucks organically.

I think that an ELD, the final rule in ELDs, would be constructive there, and possibly would be constructive there sooner than we might think, sooner than the actual drop-dead final compliance date. And so that... So I think the ELD mandate may have some impact on what supply looks and feels like, which consequently has an impact on organic truck growth. In terms of our desire to acquire businesses, we spin off a lot of free cash flow.

We've got a very good track record of with acquisitions, so far in our history, and, we, as I said in my remarks earlier, we feel like we're very sensitive to, to how important the driver culture is, how important, the customer's view of, of maybe the niche or the kind of service that's provided, that we don't, we don't damage or impair in any way what, what's working well, the culture inside the, inside the company. Those are all things that we're highly sensitive to, and, and we feel like that with the experience of truckload business and the visibility we get with our own business, that gives us confidence to make acquisitions. And so I, I don't... ELD final rule, at the end of this month or not, that's, that really, I don't see that, changing our outlook there.

Was there another question you asked on top, or did I-

Brad Delco (Managing Director and Research Analyst)

I think you covered all of it.

David Jackson (President and CEO)

Did I cover it? Okay.

Brad Delco (Managing Director and Research Analyst)

Well, thank you very much, Dave.

David Jackson (President and CEO)

Okay. Thank you, Brad. Brad.

Operator (participant)

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

Brandon Oglenski (Director and Senior Equity Analyst)

Hey, good afternoon, Dave and Adam.

David Jackson (President and CEO)

Hi, Brandon.

Brandon Oglenski (Director and Senior Equity Analyst)

Dave, I want to bring it back to the near term, and I don't want to be too negative here, but... Can you talk about your normal visibility at this time of year into what you would expect for the fourth quarter? Do you just not know until mid-November, early December, what it's going to be like?

David Jackson (President and CEO)

Sometimes and sometimes not. I think in the fourth quarter of 2013, which was a very good quarter, we did not have a lot more visibility, I would say, if any, than what we have today. Last year was different. Last year, you know, we had customers that had reserved capacity, if you will, or were willing to pay for it, regardless of whether they had enough volume to keep them busy. Some did that all the way through Labor Day, which I don't think we had ever seen before through the summer.

And so of course, in the fall, you had many that were very much positioning themselves to make sure that they had trucks, probably paying for trucks to be underproductive a little bit, in the buildup to what ended up being a very strong peak season. And so I would say that where we sit right now feels a little bit more like fourth quarter of 2013. But, you know, that's okay. That's an okay place to be. I think volume-wise, it'll be strong, and pricing environment just may not be, or we don't expect it to be what it was last year when you look at kind of what the jam may be that some shippers found themselves in, in needing to, somewhat last minute, without commitments, find capacity.

You know, the rails are working more efficiently than they did a year ago, and so you've got some factors at play there. To the degree that e-commerce grows more than it did last year, which, you know, I know in the Jackson household, it will, then there's a good chance that a lot of us do, like I did last night, which was buy my kids Halloween costumes online and do so without a whole lot of time to go. And so if we see that kind of behavior from the broader consumer base, then that probably, again, leads to a lot of freight volume in late November and throughout all of December.

And, so you know, this—if we see it again this year, which we expect to see it, it would be hard not to draw that parallel to the e-commerce phase. And, hey, when there are shifts in consumer behavior, they make a big difference. And, there have been shifts in consumer behavior, obviously, over the years, and Walmart created one of those a few decades ago that was very, very powerful. And, and so, we'll just kind of have to see what all that means for truckload. So we're all kind of watching and looking closely, so.

Brandon Oglenski (Director and Senior Equity Analyst)

Well, appreciate that. I mean, is there any validity now? You know, we were pretty dismissive as an industry of where spot rates went earlier in the year because obviously, we were comping all these issues, and still are to some extent. I mean, is there more validity now that the spot rates actually are more indicative of where the market's clearing? And if we don't get this uptake in activity like you suggest, I mean, is it possible we could give back some on rates in 2016, or is that just not even in the realm of opportunity here or possibility?

David Jackson (President and CEO)

Well, I think, Brandon, the question is in the definition of spot rates. If we want to call spot rates the rates that are provided by load boards or aggregated... or an aggregation of several load boards and call that spot rates, I think by doing that, we're looking at the least valuable truckload transportation that is the most supplied with capacity and that has the most frothiness for top-line growth. You got brokers who are all trying to grow top lines, buying capacity from small carriers, who largely were the ones that added trucks sometime, I don't know, in the last year or year and a half, when things started to get good and fuel got cheap. And that's where... That's the exchange, where those people meet each other.

And so, you know, shippers, our customers, did a very good job, I think, through the bid season in remedying a lot of the challenges that they had had in 2014. And they, they committed up, I should say, not over-committed, but they committed up their business, a little more solidly, perhaps, and they were willing to pay for that. And so to try and think that live unload freight, where you don't have extra trailers, you don't have some of the value add that comes from the larger national fleets, to draw that with a broad brush, I think would be misleading. Now, does...

What goes on in that, what I'm going to guess is 6 or 7% of the total market that we see on that load board, can that be indicative of what's going on in the broader market? Yes, it is. The problem is, I think it's late. I think by the time you see it, by the time you start to see it there, it's already started to move in other areas. And so, you know, there were a lot of people that were very surprised by the strength in the fourth quarter of 2013.

I remember in the first quarter of 2014, you know, hearing people tell me the only reason we were feeling strength was because it was all weather. And, you know, it felt much different than that, especially given that November and December didn't have bad weather, and it was really a January issue and February issue. So, that was first quarter of 2014. And so, you know, if you go back and look at those load boards, they wouldn't have. They may have been a little tardy in suggesting quite where things were gonna go. I can tell you, that some have thought that for our company, that we have a lot of exposure to that kind of spot down double-digit market.

We don't. We do not book loads through load boards. And so we have a very diverse group of customers, and when we're light in an area, we ask the customer for another load or two. And we have our relationship is such, we usually can get it, probably because we already have a collection or a concentration of trailers at that location, and it's very simple for them to load and unload. And so there might be a little bit more of a tale of two cities going on in the industry than people think. And so I just think you have to be, you have to be careful. It's. Is it a data point? Yes. Is it the data point?

I don't think so, because it's just not big enough in terms of scale, and over time, I think it'll be even less, and less timely at predicting these kind of, changes. But hey, that's one man's opinion, Brandon, for what it's worth.

Brandon Oglenski (Director and Senior Equity Analyst)

I appreciate it. Thank you.

David Jackson (President and CEO)

Yeah, thanks.

Operator (participant)

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

Todd Fowler (Managing Director)

Great. Thanks. Good evening. I guess I wanted to ask a little bit on the pressure on the earnings growth. I think I understand, you know, some of the moving parts with the fourth quarter guidance, especially given the environment last year in the fourth quarter. But thinking about the first quarter, even if I adjust for the $0.03 on the fuel side, I'm basically coming up with earnings at the midpoint of the guidance, being about flat, again, adjusting for that $0.03 at the fuel.

I guess I was wondering if you could talk a little bit about, you know, the first quarter environment and the comparisons, and kind of why we're not seeing more of the earnings growth, given the fact that you're expecting base rates to be up, you know, a little bit of a larger fleet, and kind of some of the moving parts into the first part of next year.

David Jackson (President and CEO)

Yeah, that, that's a, that's a good question. I think you're calling us conservative a little bit there, and that's probably guilty as charged. And I think,

Todd Fowler (Managing Director)

Sorry, putting words in my mouth.

David Jackson (President and CEO)

Well, we've been called worse, so. I think that when we look at, when we look at the first quarter, there's a, there's a lot, there's a lot that we're gonna learn in the next three weeks, let alone over the next, by the end of this quarter. So, I would say you've just got to look at that, take it for what it is. There was a $0.03 benefit on fuel last year, first quarter. You know, we're assuming it's gonna... That the $0.03 is gone. But you know what? The reality is, it could go the other way on us. So there's a, there's a piece there we're not sure of.

You know, when we look at organic truck growth, you know, we're not gonna go into the year with a lot of momentum in terms of adding trucks. We just typically don't. And so, you know, that's a key factor that we've got in there. So, best I could tell you is that's a range that we can give at the moment that we would be comfortable with, and we'll revise and update after the end of the fourth quarter.

Todd Fowler (Managing Director)

Okay. Are there share buybacks in either the fourth quarter or the first quarter guidance?

Adam Miller (CFO)

Yeah, we would assume some buyback, probably at a pace that you saw in the third quarter, would be what we did expect. But again, that we may adjust that based on where we see the market.

Todd Fowler (Managing Director)

Sure. Okay. Thank you for the time.

David Jackson (President and CEO)

Thanks, Todd. We'll try and squeeze one more question in here, and I'm sorry to those that are... We've got another, well, it looks like we've got 11 people that are trying to get in. I apologize. Looks like we're only gonna have time for one more. Sorry for the long answers.

Operator (participant)

Your last question comes from the line of Kelly Dougherty of Macquarie. Your line is open.

Speaker 11

Hey, guys. Thanks for fitting me in. I just wanted to follow up on something we had talked about earlier. Assuming that 2%-4% price range next year, and you know, what you're thinking about from the driver pay side of things, I mean, is there room to improve the trucking OR? You guys are already pretty efficiently run, but I know there's productivity and cost per mile things you're working on. So can you help us just think about what might happen on the trucking OR side?

David Jackson (President and CEO)

Yeah, Kelly, I'll be brief. The answer is yes. There's a lot, there's a lot we can do. You know, we closed the gap a little bit on miles per truck. We had been leaking a little more on a year-over-year basis. We closed the gap a little in the third quarter. We think that there are things we can do, to, to improve that. One of the things, that is, I guess, a blessing and a curse at the same time, is how frequent we see bids from customers. And so we have, you know, we have a very diversified group of customers, more than 1,000 customers, and, and we're using, some new technology. We're better utilizing existing technology we have to help us figure out where can we, where can we be more productive?

Where can we provide higher levels of service? Where can we find more efficiency with our trailers? And you know, the belief is that efficiency is always what wins. And so if that is where we are trying to continue to improve, where the customer benefits and we benefit, it ends up being better for our cost structure, better for our OR. And so we will have probably 450-500 opportunities between now and in the next 6 or 7 months to retool, tighten up, make adjustments in our freight network, with the exposure and visibility that we'll have to bid.

So, so our goal is to figure out if the market's gonna give us 2-4, that's where the market goes, then, our job is to amplify that, with running more miles and doing so in a more efficient manner. And so it is there, it's in the front, it's right in the front for us. You know, I'm, I wish that this was not the case, but we do—we are towards the bottom half when you look at how many miles we're running on our trucks. And so we think that there are ways that we can, there are things within our power that we can do to improve that. And so, so my answer is yes.

Speaker 11

Perfect, guys. Thanks very much.

David Jackson (President and CEO)

Thank you. Well, we appreciate everybody who's jumped on our call and who stayed till the end. Appreciate it. Take care.

Operator (participant)

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