Knight-Swift Transportation - Q4 2013
January 29, 2014
Transcript
Operator (participant)
Good afternoon. My name is Anastasia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Knight Transportation fourth quarter 2013 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Speakers for today's call will be Kevin Knight, Chairman and CEO; Dave Jackson, President; and Adam Miller, CFO. Mr. Miller, the meeting is now yours.
Adam Miller (CFO)
Thank you, Anastasia, and good afternoon to everyone, and thank you for joining our call. We have slides to accompany this call posted on our website, if you haven't seen it already. The website is investors.knighttrans.com/events. Sorry. Our call is structured to go to 5:30 P.M. Eastern Time. Following our commentary, we would hope to answer as many questions as time will allow. If we're not able to get to your question due to time restrictions, you may call 602-606-6349 following the call, and we will return your call. Again, that number is 602-606-6349. The rules for the questions remain the same as in the past.
One question per participant, and if we don't clearly answer the question, a follow-up question may be asked. So I'll direct you to the disclosure slide. To begin, I'll first read this 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 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 fourth quarter results, starting with slide three. Okay.
For the fourth quarter of 2013, our net income per diluted share was $0.25, compared to $0.22 from the previous year. Net income increased 13.6% year-over-year to $20.1 million, while our operating income increased 12.6% year-over-year to $32.1 million. Revenue, excluding trucking fuel surcharge, increased 5.7% year-over-year to just over $206 million, and our total revenue increased 3.1% year-over-year, to just under $250 million. Now on to slide four. Knight continues to maintain a solid balance sheet.
We ended the fourth quarter with $551.5 million of stockholders' equity, and have returned just under $79 million to shareholders through dividends over the last two years. Our fleet remains very modern. We have an average tractor age of 1.9 years. We generated just under $54 million of free cash flow in 2013, which is compared to $30 million in 2012. We continue to maintain our unsecured line of credit of $300 million, which we believe provides us some flexibility to pursue opportunities, which include acquisitions, organic growth, as well as potential share repurchases. Now Dave Jackson will provide some additional insight to our fourth quarter results.
Dave Jackson (President)
Thanks, Adam, and good afternoon, everyone. We appreciate you joining us. We'll move to slide five. We were able to execute for our customers many times over in the quarter by accepting more loads, not only for our trucks, but also for those of our third-party carrier providers that solve challenges for our customers, especially in areas where capacity was constrained. The other key to our revenue growth was our overall improving yield of approximately 3%, which takes into consideration our 3.4% growth in revenue per total mile, and our reduction in length of haul of 1.3%. By far, the strongest yield improvement for the year. And now on to slide six.
My comments on the previous slide, in conjunction with improving cost as a percentage of revenue in three key areas: fuel expense, operations and maintenance, and insurance and claims, led to our income increasing 13.6% for the quarter. Our team produced a very solid quarter. We finally experienced strong holiday seasonal demand that, in connection with internal initiatives, created the financial results that we expect. Now to slide seven. In the fourth quarter, our asset-based businesses operated at an 81.6 operating ratio, an improvement of 220 basis points year-over-year. This includes our dry van, refrigerated, port services, sometimes called drayage businesses. Our non-asset-based businesses experienced significant revenue growth year-over-year during the quarter, with 42.6% growth.
Our brokerage business led the way by growing revenue 70.4%, gross margin 67.5%, and operating income by 64.8%. Consolidated, our operating ratio for the fourth quarter improved by 100 basis points to 84.4%, with revenues excluding trucking fuel surcharge growing 5.7%. Year to date, our operating ratio is 85.6%, with 5.3% growth in revenue, excluding trucking fuel surcharge. Now to slide eight. Our intensity to improve revenue per tractor was well demonstrated by our asset-based businesses. Over the last three quarters, we've experienced a year-over-year improvement in our revenue per tractor, excluding trucking fuel surcharge, with that improvement building through the second half of the year. We made this improvement despite the new hours of service rules that went into effect July 1, 2013.
We believe our model enables us to focus more intensely on underperforming areas of our operation and drive a high level of accountability throughout our network. We expect to continue to make year-over-year improvement in revenue per tractor. Now on to slide 9. We acknowledge that our revenue growth goals of 10% and earnings growth goals of 15% have not been made consistently since emerging from the downturn in 2009. Considering the overall economic environment, the compounded annual growth rates of 8.5% of revenue growth and 9.3% EPS growth are solid. Now I'll move to slide 10. Our two segments, asset and non-asset, are figuring out how to support each other, not only to improve our company, but also to increase our execution capabilities for our customers. Our investment in the non-asset side of our business continues to produce positive results.
Since 2010, our EBIT, or earnings before interest and tax, from our non-asset-based businesses has grown by almost four times. Our non-asset EBIT now makes up 7% of our consolidated EBIT, when just three years ago, it comprised of only 2%. This has resulted in a reduction in the capital intensiveness of our business, as well as mitigating some of the cyclicality that inherently comes with our asset-based businesses. Excuse me. I'll now turn it over to Kevin Knight for the next slide.
Kevin Knight (Chairman and CEO)
Thanks, Dave. Good afternoon, everyone. Appreciate you joining our call today, and let's move on to slide 11. I want to personally thank all of our team members for the great work that went into our results this quarter. I know our team has a solid execution plan built around our dynamic service center network and our strong level of service center support from businesses and departments. Freight demand strengthened seasonally throughout the quarter. It felt good to come back from the Thanksgiving holiday and have freight demand through the year-end holidays. As a whole, January has produced better demand year-over-year also, although weather has become more of a factor in January than in December. Now let's move to slide 12, and we'll talk about growth.
As a result of our revenue growth per tractor, our improving operating margins, progress with our driver development and retention initiatives, stronger freight demand, and a deeper pipeline of dedicated opportunities, we feel as though 200 tractors of growth starting in the second quarter of this year will be manageable. On the non-asset front, we are developing more and more confidence in our brokerage model. It has developed into a very solid business for us, and it is also having a positive impact on our entire business. We continue to be active on the acquisition front, though have no updates at this time in that area, other than to say we continue to be active in this area. And at this time, I'll turn it back to Dave to discuss guidance.
Dave Jackson (President)
Okay, thanks, Kevin. Slide 13 is our final slide. We'll discuss guidance. For the first quarter of 2014, our guidance is $0.19-$0.21 per diluted share. Our expected range for the second quarter of 2014 is $0.24-$0.26 per diluted share. Some of the assumptions made by management include rates to continue to be positive year-over-year and for miles per tractor to be relatively in line with the year-ago period. It also includes consideration for potentially volatile fuel prices. These estimates represent management's best estimates based on current information available. Actual results may differ materially from these estimates. We would refer you to the Risk Factors sections of the company's annual report for a discussion of the risks that may affect results. This concludes our prepared remarks. We'd like to remind you that this call will end at 5:30 P.M. Eastern.
We will answer questions, as many questions as time allows. Please, if you'd keep it to one question. If we're not able to get to your question due to time constraints, you're welcome to call 602-606-6349. One more time, it's 602-606-6349, and we will do our best to follow up promptly following this call. Anastasia, we'll now entertain questions.
Operator (participant)
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Chris Wetherbee with Citi. Your line is open.
Kevin Knight (Chairman and CEO)
Hey, Chris.
Chris Wetherbee (Senior Research Analyst)
You know, I guess my question would be sort of on the outlook for 2014. It seems like we've had several weeks now in a row, December and January, of improving demand trends. And when you think about the potential for that to continue and ultimately maybe what that does with pricing, if you could give us some color around that, that would be really helpful.
Kevin Knight (Chairman and CEO)
Well, I'll go ahead and take that. This is, this is Kevin, Chris. I, I would say that, you know, we're, we're certainly pleased with, with the strength that we've seen in the markets over the last, let's call it, you know, 90-100 days. And, so it seems to, it seems to us that we should be in a better environment in 2014 than we were in 2013. Also, we're coming out of you know, the fourth quarter and into the seasonally weaker first quarter with significantly more confidence as far as what we should be able to accomplish from a yield perspective.
So, you know, I don't really care to put a number on what we think we can improve our yields this coming year, but certainly we're more optimistic than we were a quarter or two ago. Hopefully, when we talk again in the second quarter, we'll feel that strength and momentum continuing. So really, Chris, that's how I see it. Anything to add there, Dave or Adam?
Dave Jackson (President)
I don't think so. No.
Chris Wetherbee (Senior Research Analyst)
Okay, that's very helpful. And I guess it sounds like in the next three months, you'll get a rougher or better sense about whether you can feel a little bit more constructive about that potential rate improvement. So that's sort of the bogey we're looking at here is the next quarter or so, potential demand trend. Is that the right way to think about it?
Kevin Knight (Chairman and CEO)
Yeah. And I would say yes, Chris, and I would say that our customer discussions, you know, are fairly positive at this time, you know? And so, we believe that they're gonna be supportive of reasonable rate increases. And, you know, it's our goal to, you know, get a reasonable rate increase, and that's it. So basically, I think that we'll do well as we move through the bid season this year in improving our contract rates. And then, of course, if capacity remains tight, our non-contract freight, that just is the freight that kind of comes to you, you know, it should improve even a little stronger. So hopefully, these trends will continue.
Chris Wetherbee (Senior Research Analyst)
Great. Thanks very much for the time. I appreciate it.
Kevin Knight (Chairman and CEO)
Thank you.
Operator (participant)
Your next question comes from the line of Bill Greene with Morgan Stanley. Your line is open.
Kevin Knight (Chairman and CEO)
Hey, Bill.
Bill Greene (Managing Director)
Hey, Kevin, can you talk a little bit about the driver market? Kind of how are you seeing the sort of driver cost inflation? We're hearing, obviously, that things get stronger, you know, it's gonna get a little tighter there. So I'm curious how you think you'll kind of manage that here in 2014.
Kevin Knight (Chairman and CEO)
Well, Bill, first off, you're absolutely right. As the environment improves, it continues to strengthen, you know, the need for high-quality drivers. And you know, we ended up taking our driver pay up through bonuses and regular pay up almost a couple of pennies this year over last year. And our goal will probably be in that same range, this year, will be what we would hope to accomplish. You know, we personally would like to see our driver pay over the next five years, you know, get up another $0.10 or $0.15 a mile.
And in order for that to happen, we're gonna have to be consistent in getting a good yield improvement, and we're gonna have to be consistent in improving our pay, both from a bonus perspective and a base perspective to our driving associates. So we would expect, Bill, to do more of the same. But then, of course, also, we've got to do a great job of sourcing and retaining and developing, and our programs really came together last year in that area towards the end of the year. And we expect to continue to strengthen on all fronts there, you know, so that we can support, you know, 200 trucks of internal growth.
So that's how we're looking at it.
Bill Greene (Managing Director)
That makes a lot of sense. Is that the main constraint on growth, do you think?
Kevin Knight (Chairman and CEO)
Well, I would not think of anything more difficult. I mean, for us, it's certainly not capital, and it appears that it's not going to be quality freight. So yeah, I would say it's the 800-pound gorilla in the room.
Bill Greene (Managing Director)
Yeah. Okay. Makes a lot of-
Dave Jackson (President)
Yeah, I think, maybe-
Bill Greene (Managing Director)
Sorry.
Dave Jackson (President)
Bill, I'll just add to that. Dave here. You know, we definitely saw the driver market become more challenging as we moved into spring last year. And so, you know, it was a major focus for us. We felt like we fought back. We feel like we're more prepared, although not exactly sure what to expect if we see the same kind of challenges come again. But one thing I'll tell you is, when we quote our numbers, so when we talk about revenue per truck per day being up 3.2%, we do that over all of our trucks. So we don't do that just on maybe trucks that are seated or ready to be dispatched, but we do that for our entire fleet.
And so, you know, clearly, we would not have been able to make that kind of production progress had we not made progress with our drivers. So I think you can tell where we stand for the fourth quarter. So we feel like we've made back what we may have, what may have been a bit challenging in the summertime. And so yeah, I would just to reiterate that drivers are going to be a critical thing for us being able to keep our production up on the trucks we have and grow in the future. And the good news for us is we provide a very quality driver job for our drivers.
We maybe don't always do ourself a full justice in communicating and that to potential drivers, and I think we've gotten better at that, in addition to other things that we're doing to make sure that it's a desirable place to work, so.
Bill Greene (Managing Director)
Yeah, that's great. Very helpful. Thank you for the time.
Operator (participant)
Your next question comes from the line of Justin Yagerman with Deutsche Bank. Your line is open.
Kevin Knight (Chairman and CEO)
Hey, Justin.
Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)
Hey, good afternoon. How are you doing?
Kevin Knight (Chairman and CEO)
We're doing great.
Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)
Good. Well, your utilization was particularly good in the quarter, and, you know, given the hours of service regulations, you know, I mean, it almost felt like if you normalize things, you were kind of up 3% if you'd done, you know, the environment for the hours of service issues. So, you know, I'm just kind of curious, this is bucking the trend from what we've seen and heard from lots of carriers out there. What do you guys think you're doing differently, that's enabling you to get that type of utilization? And, you know, was it just the freight environment, but it sounded kind of like you're pretty confident around holding that flat, at least for the first half of this year, in terms of what Dave was talking about on the guidance side.
Kind of curious where that confidence comes from. Obviously, you're digging out of a hole from hours of service, so want to hear about it.
Dave Jackson (President)
Yeah. Justin, I'll take a first stab at that. You know, our third quarter, we were disappointed with the way we performed in the third quarter. And our team, you know, we challenged our team. I would say that everybody on our team stepped up, and we've had a much stronger sense of urgency, a much higher level of intensity towards achieving the targets that we know we're capable of, and we have focused on doing the things that we know work for our business. And so when you have enough people buying into that and doing that and achieving those levels, the cumulative effect is you have a quarter that exceeds expectations, and you have good production, you make progress on the cost side simultaneously, and it leads to double-digit earnings growth.
And now, the good news for us is that we were, you know, more dialed in, if you will, after a bit of a wake up, I would say, after the third quarter. And the nice thing for us is we had some decent seasonal demand in the fourth quarter, and so we were in a position to make the most of it. So I think the internal piece hasn't slowed, and frankly, I think our people, by mid-quarter, knew that what they were doing was having a result. I mean, we, we're big on measurement. People know where they stand.
I think there's been a lot of very strong, positive energy throughout the quarter, and so I don't think our people are surprised now to see the results a month post the quarter. I think they're excited and focused. The good news is, we still have a lot of area to improve, and we're very excited and probably with more confidence than we've had in some time, that we can continue to take this to a new level, so.
Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)
Yeah, so that goes a decent way to answering the question. I mean, I guess, you know, you did nicely on the deadhead side, and the other piece of that was kind of in the fourth quarter, with seasonal help, it's a little bit easier, not making light of the achievement. In the first quarter, it becomes a lot more difficult. It sounded like you had confidence along the lines of that intensity continuing. Is that true, or am I not putting words in your mouth?
Dave Jackson (President)
Oh, you're right on. And you know, what Kevin said is that demand, we've still seen some decent demand here, some strong demand in January. We've had a little more weather to deal with than we'd be used to, but we still haven't gone through February. February is typically the worst month of the entire year in trucking, but March has a way of being pretty good. So, we're focused and prepared and feel like there are things that are within our control, within our power, that can help us achieve our goals. And with the market helping a little bit, we think we can go a long way.
Kevin Knight (Chairman and CEO)
Yeah, and I would say, you know, Dave's a little more in the fire than I am. But from my observation, I would say that, you know, our guys have accepted the new hours and decided that instead of that keeping them from accomplishing their goals, they're going to, you know, they're going to work through it. The blessing they received in the quarter, Justin, was good demand to really help them accomplish that. And, you know, I really believe that there's a higher level of intensity in the building today than what there was a quarter or two ago, and it feels really good from my perspective.
Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)
That's great. Thanks for the time, guys. Appreciate it.
Kevin Knight (Chairman and CEO)
Thank you.
Operator (participant)
Your next question comes from the line of Tom Albrecht with BB&T Capital Markets. Your line is open.
Kevin Knight (Chairman and CEO)
Hey, Tom.
Tom Albrecht (Managing Director)
How are you?
Kevin Knight (Chairman and CEO)
We're doing good.
Tom Albrecht (Managing Director)
Excellent. Kevin, I want to ask the rate question from a little different angle.
Kevin Knight (Chairman and CEO)
Okay.
Tom Albrecht (Managing Director)
So not so much percentage, but you know, as you reflect on the last six weeks in the fourth quarter and what we've seen so far this year, how much has the weather and general level of being a little bit busier changed the tone of the conversations? What was the shipper mindset maybe on November first? What's the tone change? Could you just kind of talk to that? I mean, do they believe that what's happened is primarily weather, or do they believe finally, supply and demand may be coming to a point where it favors the carriers?
Kevin Knight (Chairman and CEO)
Yeah. I would say, Tom, that they think it's supply and demand. And you know, we- you know, I would say maybe before November, most of the conversations for us, as far as preserving our rates and lanes, were, "Hey, if you want to renew for, you know, and keep your rates flat, or for them to go up 1% or 1.5%, maybe at the top, 2%," then you know, we were able to keep you know, stuff out of the bid. But you know, I would say the tone has moved strongly in the 2.5%-3% range.
You know, I think our customers are gonna be supportive, you know, in that range as far as contract rates are concerned. So, you know, it may very well build a little more strength as we move through the year. But I would say definitely in the last, you know, as you said, six or seven or eight weeks, you know, I would say that, you know, the tone has changed more to where we're, you know, we're 2+ instead of 2-, is how I would describe it, Tom.
Tom Albrecht (Managing Director)
Okay, that's helpful. Thanks very much, Kevin.
Operator (participant)
Your next question comes from the line of Tom Wadewitz with JPMorgan. Your line is open.
Kevin Knight (Chairman and CEO)
Hey, Tom.
Tom Wadewitz (Senior Equity Research Analyst)
Hey, Kevin. Nice to see the, you know, the improvement in the market, but, you know, also your strong execution from you guys. So, congratulations on the good quarter. Wanted to, I suppose, parse the market a little bit further. When we look at it, we say, well, you know, it really feels like the market's improving and turning a bit, but you had a, you know, a tighter period between Thanksgiving and Christmas, and arguably, that could have juiced up the demand a little bit in kind of late November and December. And in January, we've had this weather, which probably, you know, effectively takes some capacity out. So, you know, we'd like to think that the market's really turning and tightening up.
I'm wondering: how, how much do you think you can separate those two factors that might help the market and say, "Well, it's not just those things, it's really an improvement in demand that, that continues?
Kevin Knight (Chairman and CEO)
Yeah. Well, I think it really ties to Tom's question, too, Tom, and that is, we don't think it's the 26 shipping days between Thanksgiving and Christmas. I mean, certainly there are only 26 days to shop, and some people ran out of time ordering and getting their stuff delivered. But, you know, I mean, everybody knew when Christmas was coming. And so from that perspective, I really believe that it's I believe that we are entering a period of strengthening freight demand. And so from our perspective, I would say that we would put, you know, most of it on strengthening freight demand and not necessarily on you know, the weather or, you know, or, or-
or the tight, or the tightened schedule. And so that's the other, the other thing, too, that I think, you know, probably should have given us a stronger indication as to what fourth quarter might be like, is we did have a strong third quarter GDP number. And, you know, that number continued to get moved up, and, and it seems like the truckable economy is strengthening based on you know, the GDP numbers. So, so I think, I definitely think it's an improving freight economy. So, you know, that's all I have there, Tom.
Tom Wadewitz (Senior Equity Research Analyst)
Okay, is it, and is it broad-based within the customers and within the kind of geographic regions?
Kevin Knight (Chairman and CEO)
Well, it seems so. I would say, though, that, you know, for us, it seems probably more concentrated in the Midwest and East, and then maybe moves to the Southeast, and then from there, moves to the West. And that's normally what we see when things start to tighten. You know, you've got more goods moving in the Eastern part of the country as compared to the West. And so that feels like how it has worked for us. So kind of starting that Midwest, Northeast, work its way to the Southeast, and then work its way West.
Tom Wadewitz (Senior Equity Research Analyst)
Great! Thanks for the time.
Kevin Knight (Chairman and CEO)
Thank you.
Operator (participant)
Your next question comes from the line of Ken Hoexter with Bank of America Merrill Lynch. Your line is open.
Kevin Knight (Chairman and CEO)
Hey, Ken.
Ken Hoexter (Managing Director)
Good afternoon. Yeah, a similar sentiment. Great, great performance, obviously. Maybe you can talk a little bit about the internal programs. I know, Dave, you were mentioning getting everybody on board, but are there specific things that were changed in the quarter that got everybody whipped in shape? Were there new metrics or anything that you focused on in order to get that utilization up?
Dave Jackson (President)
I think you would probably you could probably sum it up with the word intensity. We probably couldn't use that word enough to try and describe it. But there are a number of things we've been doing. I mean, we like to think that we run it. We've always run a tight ship, but there were opportunities for us to be more focused and more consistent on delivering results. And so, the idea of creating the right sense of urgency and people stepping up and achieving to their full potential, it's an effective way to do it. And so, we're fortunate in that we already have a culture that is one of high performance and accountability for performance.
And so, you know, when we focus everybody in the right area with the right level of intensity, it doesn't take very long to begin to see results. I think, you know, the reality is, we look at the fourth quarter, and we're pleased with $0.25, but if we're honest with ourselves, we say, "Gosh, there should have been another penny or two or three out there, and that we let get away." And so, so we have a group that's not satisfied, that likes to win, and we consider very efficient performance with we were 81.6 for the asset-based business, which, you know, that meant that all of our asset-based businesses individually operated at better than an 83 OR. And so, to us, that is winning.
Now the chance for us to begin to add trucks, 'cause you remember last year, we talked about how we thinned out the fleet just slightly as we wanted to focus on improving the production per truck. So our people now would want to see, they wanna see growth opportunities. We've got this large service center network that is capable of running trucks, if we can keep the intensity up and continue to be successful in sourcing and retaining drivers.
Kevin Knight (Chairman and CEO)
And then, Ken, I've got one other thing to add. You know, and I don't know, Dave and Adam, you can correct me if this isn't accurate, but I believe it is. This was the first quarter where really our asset-based businesses, all of them, seemed to hit pretty well on all cylinders in terms of, and how they work together-
Dave Jackson (President)
Yeah
Kevin Knight (Chairman and CEO)
... and how they solved issues, and then you add our brokerage component on top of that, and it just can—it just seems to work like we've intended for it to always work, you know? So I think the businesses are leveraging nicely off of each other. You know, we do brokerage much different than anybody else, either on the asset-based side or the non-asset-based side. Our, you know, our customer and market teams, you know, work very closely with both businesses and really are anchored by the asset business. But we work very closely with our brokerage group, too, to produce, and it seems like our folks are working much better together.
I know one thing that really appeared strong to me is I've always worried about the better we do non-asset, maybe it has a negative impact on us from an asset perspective. But boy, I'll tell you what, in this quarter, you know, everybody was working hard to solve as many customer problems as we could. And, you know, that just leads to opportunity for us. So that's just an observation, Ken, from my perspective.
Ken Hoexter (Managing Director)
Great. So freight cures a lot of ills. But I guess just to the point then, so there was no change of operation or shedding freight or changed how the service centers worked, right? I mean, that's, I guess that's what I'm hearing.
Dave Jackson (President)
Hey, Ken, we're always changing.
Ken Hoexter (Managing Director)
Yeah.
Dave Jackson (President)
We are always evolving and tweaking and changing. And, and the thing is, we're not afraid to change. We are, we are constantly taking things apart around the table and put them back together and see if that's the right way to do that. So I, I would, I wouldn't assume that, that we, that, that we're not changing. We, we did a few things different. We always do a few things different. We're going to continue to do things different into the year.
Ken Hoexter (Managing Director)
Appreciate the insights. Thank you, guys.
Operator (participant)
Your next question comes from the line of Todd Fowler with KeyBanc Capital Markets. Your line is open.
Todd Fowler (Managing Director of Transportation and Logistics Equity Research)
Thanks. Good afternoon, everybody. Dave-
Kevin Knight (Chairman and CEO)
Hey, Todd.
Todd Fowler (Managing Director of Transportation and Logistics Equity Research)
Hey, Kevin. I wanted to go to one of the slides. Slide 11, you've got the execution strategy, and you've got a bullet point on there about reducing operating costs and overhead. I just was hoping you could provide some color with exactly what you're getting at with that bullet point.
Kevin Knight (Chairman and CEO)
Okay. Do you want to take it, Dave, or do you want me to? It's my slide.
Dave Jackson (President)
I, well-
Todd Fowler (Managing Director of Transportation and Logistics Equity Research)
Hey, I'll open it to anybody.
Kevin Knight (Chairman and CEO)
He asked me.
Dave Jackson (President)
Oh, did he ask you?
Yeah, he asked me.
Kevin Knight (Chairman and CEO)
Okay, go ahead.
Dave Jackson (President)
So, you know, Todd, we want to respect your wishes there.
Todd Fowler (Managing Director of Transportation and Logistics Equity Research)
Kevin, if there's anything you'd like to add, please feel free.
Kevin Knight (Chairman and CEO)
Oh, I will.
Todd Fowler (Managing Director of Transportation and Logistics Equity Research)
Adam, you too. Adam, you too.
Adam Miller (CFO)
Thanks, Todd.
Kevin Knight (Chairman and CEO)
Anything less.
Dave Jackson (President)
Okay, so here's what I'll tell you. When you look at cost, we made good progress on fuel, and there's multiple factors that go into fuel, between purchasing, economy, surcharge, and whatnot. We made good progress, but not great progress. There's still opportunity to be made in that area. If you look at insurance and claims, it was very good, and that has a lot to do with the fact that we've had many quarters now with very solid claims performance, and that is, we believe, due in large part to the proactive measures that our people do day in and day out to prevent the claims from happening in the first place.
So, while I would say that was very good, it is still getting better, and we think it has the potential to get better over time, just given the nature of how claims reserves work. Other areas, our communication costs are a little too high. Depreciation, you know, equipment costs more. Now we had more production, but we still need more, and we probably have a few too many trailers. If you look at purchase transportation, our brokerage, non-asset, is growing, and that and our intermodal business is growing, and both of those, of course, influence that number. But we think we can be buying a little bit better on the purchase trans side, so we'd like to see that tighten up and see the improvement.
Operations and maintenance was down $1.2 million year-over-year, which is good progress. We haven't seen that kind of improvement year-over-year in several quarters, but we feel like we still have a ways to go to get that to where it can be. We've made a lot of changes in that regard, and I would say we're not even halfway to where we want to be from a quarterly perspective in the progress we've made. Those are some of the areas to not get too granular.
Kevin Knight (Chairman and CEO)
Yeah.
Todd Fowler (Managing Director of Transportation and Logistics Equity Research)
I'll add then, too granular.
Kevin Knight (Chairman and CEO)
Well, I would say, too, Adam's group has got a strong focus on overhead, and, you know, we're trying to reduce all those costs.
Adam Miller (CFO)
Yeah, we'll pull apart the P&L line by line and set action plans on cost reduction and follow up on them. Our department managers are held deeply accountable to the cost to operate the business, and we hold them to budgets and benchmarks and continue to expect progress to be made there.
Kevin Knight (Chairman and CEO)
So, Todd, did we answer your question?
Todd Fowler (Managing Director of Transportation and Logistics Equity Research)
Yes. I mean, just to maybe sum it up, it sounds like, in the fourth quarter, there's nothing unusual from a something that worked in your favor. If we go down through the P&L and some of the expense items, and the message is there's an area of focus on a lot of these items to continue to drive these down as you move into 2014.
Kevin Knight (Chairman and CEO)
That's correct.
Dave Jackson (President)
Well said.
Todd Fowler (Managing Director of Transportation and Logistics Equity Research)
Okay. Okay, thanks a lot for the help.
Kevin Knight (Chairman and CEO)
Thank you.
Operator (participant)
Your next question comes from the line of Anthony Gallo with Wells Fargo. Your line is open.
Kevin Knight (Chairman and CEO)
Hey, Anthony.
Anthony Gallo (Managing Director)
Good afternoon. I remember when Dave was CFO, he used to say how you were always beating him down on every single cost item. It sounds like the baton has been successfully passed, or maybe it's the-
Kevin Knight (Chairman and CEO)
Right. Yeah.
Anthony Gallo (Managing Director)
Congratulations.
Kevin Knight (Chairman and CEO)
He's not really, you know, don't take everything he says too seriously.
Dave Jackson (President)
Yeah. Thank you, sir. May I have another?
Kevin Knight (Chairman and CEO)
Exactly.
Anthony Gallo (Managing Director)
Hey, I was wondering if you could just briefly touch on, Kevin, you mentioned earlier that you were happy with the solid performance in brokerage and the solid business now, but you also, I think, alluded to the fact that it might be helping some of your other businesses. Could you expand on that?
Kevin Knight (Chairman and CEO)
Well, I think in the fourth quarter, what we saw more than anything is basically we were able to really help our customers a lot. And, you know, as that push came in the second half of the month, you know, for the first time, it felt like we had significant capacity to draw from when we really needed it, and beyond our trucks. But on the same token, you know, we have a closeness in our businesses with regard to, you know, where our reefers are and where our dry van trucks are and where our core service trucks are, and sometimes they even help each other out. And we saw a lot of that in some of the busier, concentrated, bigger cities, where we have more concentration of all of our different types of assets.
But I think the biggest thing was that, basically, our market group, our people that manage our customers were able to say yes, and with a high level of confidence that we were going to be able to solve a lot of their freight problems. And as you know, Anthony, I've always felt like our customers really would rather us truckload guys solve their problems. And in the past, we've -- when we get busy, we say no. And so, you know, we've been pretty much all we've been able to do is pretty much our contract freight and a little bit more.
But the fact of the matter is, now, it really seems like we're in such a much better position to solve those problems, and we want to see that business just continue to grow, because pretty quick, you know, we'll be able to solve some significant challenges for our customer base. Does that answer your question, Dave? Did you have anything else or not?
Anthony Gallo (Managing Director)
I think that's good.
Kevin Knight (Chairman and CEO)
Okay.
Anthony Gallo (Managing Director)
I'll pass it along. Thank you. Well done.
Kevin Knight (Chairman and CEO)
Thank you.
Operator (participant)
Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Brad Delco with Stephens. Your line is open.
Brad Delco (Managing Director and Research Analyst)
Thank you.
Dave Jackson (President)
Hi, Brad.
Brad Delco (Managing Director and Research Analyst)
I wanted to follow up actually on an earlier question, and it seems like there was kind of more commentary around some cost-saving initiatives you guys have done and probably ties into sort of the intensity and the focus on your cost. But how do we think about, you know, well, first, is there sort of a public number you would like to share in terms of what kind of targeted savings you have based on these initiatives? Or, you know, how should we think about... I know we talked about drivers, your inflationary cost expectations this year, in call it a, you know, a flat-tractor-count sort of environment.
Dave Jackson (President)
I'll take that, Brad. I don't think there's a public number we want to share. What I would tell you is, you know, efforts we've made to cut or to reduce cost on insurance and claims, for example, that's years in the making. And, operations and maintenance, you know, we, the 2010 EPA compliant engines have just come with a few more maintenance challenges for us. And so, you know, that's something I wouldn't say is years in the making. That's but it's several quarters in the making of getting to the point of where we are, and we still have a ways to go. Fuel, there's various things we've been doing.
Obviously, fuel's always been a big cost to us, but because of technologies and specs and ways that we can measure and impact driver behavior, there's more we can do today. And so when we talk about this increase in intensity we saw in the fourth quarter, it doesn't mean that we started a whole bunch of initiatives, but it does mean we took a lot of the things we've already been working on and took them more seriously. But a lot of those things have been moving for quite some time.
So, as far as a public number, you know, we've taken up our guidance a little bit, and you know, that would account for both what we would do on the revenue side and ultimately what we would drop down because of cost efficiencies as well. So that's probably the place to look for any kind of guidance.
Brad Delco (Managing Director and Research Analyst)
Gotcha. Maybe just to follow up. I mean, Kevin, I know you haven't ascribed any sort of rate expectations, but you did comment, based on the environment, that kind of +2% or maybe 2.5%-3% is kind of the ask going in the bid season. Is just focusing on your asset-based business, is that enough to improve margins this year?
Kevin Knight (Chairman and CEO)
Well, we think that let's just say the number's 2.5%-3% on our contract business, and then let's say our non-contract business is, you know, stronger than that. We think that is, and, you know, we don't need a, you know, 3.5% or 4% or 4.5%. I mean, we just don't need that to make good, rock solid progress.
Now, we may have certain lanes that need more, but really, generally, I mean, if we can be in that, say, 2.5%-3% range as far as getting our yield up, then, you know, we feel very confident that we can continue to make progress in our operating efficiency, as a company, even with doing more for our drivers.
Brad Delco (Managing Director and Research Analyst)
Mm-hmm. Great. Thanks, guys, for the time.
Kevin Knight (Chairman and CEO)
Thank you.
Operator (participant)
Your next question comes from the line of Ben Hartford with Baird. Your line is open.
Kevin Knight (Chairman and CEO)
Hey, Ben.
Ben Hartford (Senior Equity Research Analyst)
Guys, how are you?
Kevin Knight (Chairman and CEO)
Good.
Ben Hartford (Senior Equity Research Analyst)
Maybe just provide some context to acquisitions. I know a year ago, well, things are certainly different with the tester that had been made, but the environment's also different. And I know in the past, you guys have always been very disciplined on price. You talked about prices being the primary headwind, but it sounds like the opportunities are a bit more abundant today for a variety of reasons than they were even a year ago. So do you see the constraint on acquisitions now shifting toward more of fit and selectivity versus just price and price alone, given the fact that we have seen some changes, not the least of which is a slight improvement in fundamentals?
Kevin Knight (Chairman and CEO)
I would say, Ben, that you know, I think first off, I think the Heartland-Gordon transaction was a very positive transaction because you had two very good trucking families that basically you know came to a very well thought out, fair agreement for both the buyer and the seller. And I believe that of any of the acquisition activity that's taken place, including our attempted acquisition or you know some of the other ones that you've seen, I think that sets a very strong framework for more activity. And I you know I think back, I don't remember when there were you know that many fairly significant deals that took place in a five or six-month period.
I feel like that our industry is poised for consolidation. I think, you know, we've worked our entire life to be prepared for, you know, this opportunity. And so, you know, we're gonna continue to maintain our discipline, and but I believe that we're very constructive in our approach to getting something done. And I believe that, you know, Heartland and Gordon demonstrated some real leadership in putting their deal together. And we're hoping that we can follow up with an opportunity in that area also. So that's kinda how I see it, Ben.
Ben Hartford (Senior Equity Research Analyst)
That's helpful. Thank you.
Kevin Knight (Chairman and CEO)
Thank you.
Operator (participant)
Your next question comes from the line of Scott Group with Wolfe Research. Your line is open.
Scott Group (Managing Director)
Hey, thanks. Good afternoon, guys.
Kevin Knight (Chairman and CEO)
Good afternoon.
Scott Group (Managing Director)
So wanted to ask about the longer-term 10% revenue, 15% earnings guidance. I understand it's been a more challenging freight environment the past few years, and that's why you guys haven't gotten there. Only been six or seven weeks, but does this feel like the kind of freight environment where 10% revenue, 15% earnings growth is more realistic? Or do you think that something has changed more structurally, while that's a tougher growth rate to expect going forward?
Kevin Knight (Chairman and CEO)
Well, I would say, Scott, hey, it's a tough growth rate to expect going forward, not including acquisitions. But if you think about it, if we could add a couple-hundred trucks, you know, that gives us 5% growth right there. And if we could improve our yields by, let's just call it 3% consistently for the next year, that gives us 8% right there. Then, if we can continue with the momentum that we've seen in out of our non-asset-based business over the last, especially couple of quarters, then we're solidly in the 10%+ revenue range.
And then, of course, if we can continue to improve on the cost side, like Dave has laid out, then certainly, you know, it could position us to hit that, you know, that 15% number. We've done a lot, Scott, on the driver development front, trying to position ourselves for this period. And we've got solid training programs now in conjunction with our experienced driver recruiting, in conjunction with all of the retention efforts that we've made. And so we're -- we have some internal goals that will put us in a position to grow our fleet.
I'm gonna be interested to watch, and I'm gonna do everything I can to help achieve those goals over the next couple of quarters to get back to where this growing as a sort of trucks internally is a solid part of our future.
Scott Group (Managing Director)
That's very helpful, Kevin. Thank you.
Kevin Knight (Chairman and CEO)
Thank you.
Operator (participant)
Your next question comes from the line of Brandon Oglenski with Barclays. Your line is open.
Brandon Oglenski (Director and Senior Equity Analyst)
Good afternoon, everyone. We can definitely see the intensity coming through in your results here, so, congrats on the quarter. You know, I guess I wanted to come back to a couple questions earlier around acquisitions. If the freight market is getting better, I mean, we're seeing the improvement in equity valuations, I'm sure a private seller would expect, you know, some similar appreciation. Is there a point where the scales flip back towards organic growth a little bit more aggressively?
Kevin Knight (Chairman and CEO)
Always. I mean, you know, you always have to balance that, Brandon. And so, you know, I think that we always look at, you know, do we do it organically, or do we do it through acquisition? And, hey, if the right opportunity presents itself, then you know, through our acquisition efforts, then, hey, we're not gonna be afraid to step up and close. If we have unrealistic sellers, then, hey, we'll focus more on growing internally. So, you know, I think we play that back and forth all the time. And I would say that I don't really believe the market changes much for the private carrier in terms of what the value of their company really is.
I think that number is pretty much a fixed number and doesn't really change much because they're private, they don't have access to public markets. You know, it's just how it works. So even though things have gotten a little better, I don't necessarily think that the cost of an acquisition is gonna go up significantly. So you know, that's basically how I look at it.
Brandon Oglenski (Director and Senior Equity Analyst)
... Okay, thank you.
Kevin Knight (Chairman and CEO)
Thank you.
Operator (participant)
Your final question comes from the line of Allison Landry with Credit Suisse. Your line is open.
Allison Landry (Senior Equity Research Analyst)
Thanks for taking my question. How are you?
Kevin Knight (Chairman and CEO)
Yeah, good. And we may have time for one more, too, Anastasia, so we're, we've still got three minutes. Let's just see how long it takes this year.
Allison Landry (Senior Equity Research Analyst)
So I wanted to follow up on the earlier question about rates offsetting inflation. Clearly, you've been able to partially offset rising costs from increased driver pay and the productivity losses from hours of service through your, you know, what's pretty evident, effective internal cost controls. So I guess what I'm trying to understand is, how much of your improved confidence relative to a couple of months ago, how much of that stems from, you know, your ability to control costs as opposed to, you know, the freight environment or supply and demand is really fundamentally improving?
Kevin Knight (Chairman and CEO)
Yeah, I would say, Allison, 70/30. I would say 30% on the control cost side, and I would say 70% as far as the strengthening market is concerned. Do you feel the same way, Dave, Adam?
Dave Jackson (President)
Yeah. I think give us, give us another quarter, and we'll be able to look back and tell you. One thing to look at is our revenue per loaded mile in the third quarter was up 1.4%. And if you look sequentially, you know, that went up about 100 basis points on a loaded perspective. You know, you wouldn't have had a lot of new contractual business come in. That gives you kind of a flavor for, you know, some of the, you know, some of the extra business that customers were asking us to move and haul that was maybe beyond the normal contractual business. So that gives you kind of a flavor for some of the strength.
I think that not all truckload businesses are quite, you know, prepared to move and to provide solutions for our customers in that kind of a market. I think we've maybe demonstrated our ability to have some agility there. So, to the degree that there's strength in the market, and it continues, I think you'll see that. You'll see that piece, and then after another quarter, I think we'll know whether it's 70/30 or if it's more of an even split.
Allison Landry (Senior Equity Research Analyst)
Okay. That, that's extremely helpful. And just, one other question I had. Are you factoring in the potential for conditions in the driver market to become potentially significantly worse year-over-year, just as a result of expectations for meaningful growth and, and new home starts and continued shale activity? And what actions are you taking or planning to take to mitigate this potential headwind?
Kevin Knight (Chairman and CEO)
Well, I would just say, Allison, we put a lot of effort into our, the driver development side of our business. And, hey, there's no question it's going to remain tough and maybe even get a little more difficult. But at the end of the day, we get paid to figure out how to haul all of these loads. So, you know, we'll just you know, keep working at it. And, hey, as I said earlier in the call, you know, we're expecting that, you know, our driver costs will go up some, like they did this past year, and we're planning on it and hoping for it because, you know, we want to continue to improve the job as much as we can.
So that's how we see it.
Allison Landry (Senior Equity Research Analyst)
Okay, great. Thank you for the time.
Kevin Knight (Chairman and CEO)
Yeah.
Dave Jackson (President)
Yeah. Okay, thanks, Allison. Anastasia, that'll conclude our call. We appreciate everybody joining us today.
Kevin Knight (Chairman and CEO)
Thanks again, guys.
Dave Jackson (President)
Thank you.
Kevin Knight (Chairman and CEO)
Thanks for being with us.