Knight-Swift Transportation - Q4 2014

Transcript

Operator (participant)

Good afternoon. My name is Ronnie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Knight Transportation fourth quarter 2014 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll 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. Speaker 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, Ronnie, and good afternoon to everyone, and thanks for joining our call. We have slides to accompany the call posted on our website. If you haven't got that already, it is posted at investors.knighttrans.com/events. The call is scheduled to go to 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 can call 602-606-6315 following the call, and we will return your call. Again, that number is 602-606-6315. The rules for questions remain the same as in the past. It's one question per participant, and if we don't clearly answer the question, a follow-up question may be asked.

So to begin, I will refer you to the disclosure on page two of the presentation. 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 1 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, and we can move to slide three. For the fourth quarter of 2014, we earned $0.40 per diluted share versus $0.25 from the previous year.

Net income increased 63.9% year-over-year to just under $33 million, while our operating income increased 64.1% year-over-year to $52.8 million. Revenue, excluding trucking fuel surcharge, increased 32.6% year-over-year to $273.7 million, and our total revenue increased 27.1% year-over-year to $317.5 million. Now on to slide four. Brief recap of the 2014 annual results. We earned $1.25 per diluted share versus $0.86 from the previous year.

Our net income increased 48.5% year over year to $102.9 million, while our operating income increased 42.9% year over year to $162.7 million. Revenue, excluding trucking fuel surcharge, increased 16.9% year over year to $926 million, and our total revenue exceeded $1 billion for the first time in company history, which increased 13.7% from 2013. Now we'll move to slide five. We ended the year with nearly $678 million of stockholders' equity, and have returned just under $20 million to shareholders through dividends over the last 12 months.

We continue to refresh our fleet and have an average tractor age of 1.6 years, which includes the tractors that we recently acquired in the Barr-Nunn acquisition. We ended the year with $134.4 million of borrowings under our $300 million unsecured line of credit. On October 1, we borrowed just over $112 million to fund the acquisition of Barr-Nunn Transportation. Excluding that amount that we used to fund the acquisition, we reduced our net debt by $30.5 million in the fourth quarter. Now we'll move to slide six. During the fourth quarter, we continued to experience strong demand for our truckload services. The robust freight environment, coupled with the acquisition of Barr-Nunn, resulted in revenue, excluding trucking fuel surcharge growth of 32.6%.

Excluding the growth related to the Barr-Nunn acquisition, Knight grew revenue, excluding trucking fuel surcharge, 18.9% when compared to the same quarter last year. We experienced a greater number of freight opportunities where compensation was based on the daily use of our tractors rather than the miles driven. This resulted in slightly fewer miles per tractor, yet improvement in our revenue per tractor of 9% when compared to the same period last year. Our flexibility and our execution within our service center network, as well as our operations, enabled us to provide needed capacity to our customers during this period.

Our logistics businesses also continued to thrive as we grew our revenue 56.2% when compared to the fourth quarter last year. For the entire year of 2014, we grew our revenue, excluding trucking fuel surcharge, 16.9%, which comprised of logistics up 42.9, with trucking up 11%. These businesses continue to complement each other as we execute our growth strategy by expanding our capacity capabilities. We'll move now to slide seven. Our industry-leading performance is a result of our disciplined execution of our plan to provide irregular route capacity in the markets we serve. We continue to integrate the services offered by our capacity, the capacity provided by independent contractors, and our third-party carrier partners, which include the rails.

In the fourth quarter, we increased net income again 63.9%, and for the full year, we increased again 48.5%, which represents a 14.3% compounded annual growth rate since 2010. During the fourth quarter, our earnings per share were positively impacted by rapidly falling fuel prices. We estimate that impact to be approximately $0.02-$0.03 per diluted share, and we also benefited from an increase in other income from investments year-over-year, which resulted in approximately an additional $0.015 of earnings per diluted share. With the combination of the improved trucking environment and our internal initiatives, our team produced a very solid quarter, and we are optimistic about continued positive results.

I'll now turn it over to Dave Jackson for additional comments on the fourth quarter.

Dave Jackson (President and CEO)

Thanks, Adam. Good to be with everybody. Appreciate you joining our call today. I'll start with slide eight. In the fourth quarter, our asset-based trucking businesses operated at a 77.5% operating ratio. We continue to see positive results from tightening capacity, improved market demand, and our internal initiatives centered around improving yield, increasing productivity, and managing our cost per mile. Our non-asset-based logistics businesses again experienced significant revenue growth year-over-year during the quarter. Our logistics segment operated at a 91.0% operating ratio. Our logistics offering, which provides non-asset brokerage and intermodal services, continue to develop opportunities to grow with new customers, as well as our existing customer base, as evidenced by increased revenue growth of 56.2% and increased operating income growth of 216.4%.

Our model is one of industry-leading efficiency on the asset-based trucking side, with low 80s to upper 70s operating ratios and a high return on invested capital. In our logistics business, that also has industry-leading efficiency with an operating ratio in the low 90s, where the income growth often more than keeps pace with the aggressive organic top-line growth, yielding an even higher return on invested capital. We believe this is a model that brings efficiencies to the marketplace and represents a significant growth opportunity for our company. It provides valuable capacity to our customers and solid returns to our shareholders that enables us to invest in growth, which creates opportunities for our employees. Now on to slide nine. We're excited about the fourth quarter results from our recent acquisition, Barr-Nunn. During the quarter, Barr-Nunn increased the average seated truck count and showed sequential improvement in the operating ratio.

Barr-Nunn ended the quarter with an operating ratio comparable to the Knight dry van business. We've been successful in reducing costs in a way that has resulted in little to no disruption to the business, and we found revenue opportunities that have integrated well into the Barr-Nunn freight network. We are grateful for and appreciate the good work from everyone at Barr-Nunn and their willingness to accept us as teammates. Now on to slide 10. We continue to see meaningful improvement in our revenue per tractor as we focus our efforts on increasing our asset productivity. Our ability to execute for our customers during a strengthening freight environment has led to additional revenue opportunities.

Through the use of technology and our understanding of regional markets, we've made significant progress in optimizing the use of our equipment while servicing the needs of our customers, and, and we still have a lot more opportunity, still in front of us. Growth in our logistics segment will lead to improved efficiency with our asset fleet. Now on to slide 11. This is a, a new slide this quarter. Non-asset logistics has grown to become a meaningful contributor to both revenue and operating income. As illustrated by this graph, this segment continues to not only consistently grow revenue at a rapid pace, but has not sacrificed operating margin to achieve the top-line growth. For the fourth quarter, logistics achieved operating income of $5.8 million, which represented over 11% of the consolidated operating income for our company.

This non-capital-intensive business leads to very attractive returns on invested capital for what has become a rapidly growing portion of our company. Now on 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. Hiring and retaining quality driving associates remains the most significant challenge for the industry and represents a significant opportunity for our company. We've significantly improved our pay and performance bonus for our driving associates over the last several quarters. Not only do we remain committed to further improving pay for our driving associates, but to invest in technology and our service centers that improve the experience our drivers have over the road.

Safety also remains a high level of focus for us as our overall fleet safety continues to improve, benefiting from the innovation of effective technologies and the integration into our operational and fleet management systems and processes. As a result of our focus and efforts, and thanks to our outstanding driving associates and operations personnel, the number of serious accidents and work-related injuries continues to trend downward. In 2014, our overall fleet DOT recordable accident rate was our best result in company history, despite the considerable growth of our fleet and expansion of our service centers. Overall, the trucking environment has remained strong since the fourth quarter of 2013, and we expect to see continued demand improvement for our service, services in the next coming quarters. Now on to slide 13.

Excluding the Barr-Nunn acquisition, we grew the Knight fleet 5% in 2014. We expect to see similar growth, excluding Barr-Nunn, in the 5%-7% range for 2015. We've continued to increase driver pay meaningfully and feel well positioned to be able to source and retain driving associates to support our growth targets. Our logistics segment continues to grow rapidly and has become a meaningful complement to our trucking segment. We expect additional growth opportunities to continue as we demonstrate our ability to source capacity for our customers. We continue to evaluate and pursue opportunities to grow our company, including acquisitions. I'll now turn it over to Adam to discuss guidance.

Adam Miller (CFO)

Thanks, Dave. Move to slide 14, which is our final slide, where we discuss guidance. Based on the strengthening market and recent trends, we're updating our previously announced first quarter 2015 guidance from $0.26-$0.29 per diluted share to $0.29-$0.32 per diluted share. Our expected range we're establishing for the second quarter 2015 is $0.34 on the low end to $0.37 on the high end per diluted share. We're also updating our full year 2015 guidance from $1.32-$1.36 per diluted share to $1.37-$1.41 per diluted share.

Some of the assumptions made by management include, as Dave mentioned, growing our tractor fleet 5%-7% from where it ended in 2014, and we would expect that growth to be relatively consistent throughout the year. We also expect rates to continue to improve year-over-year in that 4%-5% range. We'd expect to run similar miles per tractor as we did last year. We're going to continue to grow our logistics segment in that 25%+ range, while operating with a low- to mid-90s operating ratio. In Q1, we've taken into account that we would expect a fuel benefit year-over-year, but with the expectation that retail fuel prices begin to stabilize in the second quarter and back half of the year.

We expect that fuel benefit would be partially offset, though, with increases in driver wages and hiring-related costs, as well as a modestly lower expected gain on sale. We also expect our tax rate to normalize in 2015 to probably the high 39 range, that 39.5 to maybe just under 40% is our expectation. Again, these estimates represent management's best estimates based on current information available. Actual results may differ materially from these estimates. We'd refer you to the Risk Factors section of the company's annual report for a discussion of the risks that may affect results. This concludes our prepared remarks. Again, we'd like to remind you that this call will end at 5:30 P.M. Eastern Time. We will answer as many questions as time will allow. Please keep it again 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. And Ronnie, we'll now turn it over to you, and we will 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. We'll pause for just a moment to compile the Q&A roster. Okay. Your first question comes from the line of Bill Greene with Morgan Stanley.

Bill Greene (Senior Transportation Analyst)

Hi, good afternoon. Dave and Adam, I wanted to ask you a quick question here. Last year, it seems you were able to keep a fair amount of capacity available, almost in a spot kind of way, where you talked about not sort of putting yourselves high up in routing guides and whatnot. When you think about 2015, how does that change, and does that change the trajectory of growth, how we think about revenue per tractor?

Dave Jackson (President and CEO)

Well, it's a great, it's a great question, Bill. We, we look at 2015 in a, in a similar way that we looked at the end of 2014, which is, we're very deliberate about the commitments we make. We focus on, committing to customers and lanes that, that, that are going to work for our driving associates, are going to work operationally and financially for us. In, in the process of doing that, historically, over the last several years, that's, that's meant that we, we usually had some capacity that was unspoken for. Throughout 2014, we, we saw a dramatic increase in, requests for our capacity, if you will, and for more commitments. We were very careful and disciplined.

I think in 2014, especially in the towards the back half of the year, we saw more situations where customers were looking for a short-term commitment situation. And so, going into 2015, we would expect to see those similar types of requests. And so, you know, that's different than maybe an annual commitment. It's different than just maybe being out there without a load in the pure spot market, if you will. It's something kind of in between. So looking into 2015, we're factoring in that there might be some of those shorter term commitments that happen. All in all, I would say that we would probably be maybe a little bit less committed throughout the year in 2015 than what we even were in 2014.

And so of course, in seasonally strong times of year, you'll see more benefit from that. And then, when you don't have the seasonal strength, we have to hustle a little bit more to make sure we have enough loads. But typically, we've been successful in finding a load for the trucks as we need them.

Bill Greene (Senior Transportation Analyst)

Okay, that's very helpful. Can I ask one clarification on this? Do you think the change or the easing of the hours of service rules will affect the revenue production per tractor? Is that meaningful to you?

Dave Jackson (President and CEO)

You know, it's a good question, and I'm... We're not really. It's not really clear to us how much that's going to change it. I, you know, on paper, you would see a small amount of capacity created in an optimal, ideal world. And so, you know, it probably enables us to get a few more miles. I would say we haven't totally seen that in our fleet, so I'm not. I wouldn't be ready to paint with a broad stroke that industry wide, we've got X percentage that's now. I mean, even if you did that, it would be a low, low single digit number. But I'm not quite ready to say that, it's that simple. I don't think that it dramatically changes our outlook on revenue per production per truck.

I think there might be some folks that feel like that is, you know, maybe been a change here in the first quarter. As we've seen, if you look at any of the, the indices, the many indices that are out there that demonstrate that the spot market hasn't been quite as quite as strong or acute as it was last year, this time of year in January. But I think what we saw last year in January had a lot to do with the, the dislocation that was created by weather. And, you know, there was obviously a lot of discussion about weather, and I think a lot, a lot of folks that had concluded that maybe the market wasn't as strong, but it was really weather driven. And then as the year played out, it proved to be that it was both.

And I think if we look at it now, you still have a strong market. You just don't have that weather dislocation to drive that spot. And if you still were to rank this January, compare it to last year or any January, probably in the last decade, you'd find that this is, even in the spot world, probably the second best January, with last year being better on the spot. But again, weather had a little bit to do with that. The underlying market strength is still there and intact.

And so I know that wasn't totally your question, but I'm kind of reading into, maybe reading into the fact that, maybe there's a belief that, that excess capacity has come in and somehow dramatically changed the, the spot market or the revenue projection, or the revenue production capabilities within the, within the space.

Bill Greene (Senior Transportation Analyst)

Yeah, actually, I was more thinking that when hours of service came in, it was a negative for costs for truckload. And then if you ease it, I'd actually think it would help with productivity and wouldn't necessarily affect, given the demand function, the, the revenue production, which is more or less what you said. So I think that makes sense.

Dave Jackson (President and CEO)

I think we're on the same page there, Bill.

Bill Greene (Senior Transportation Analyst)

Yeah. Okay, great. Thank you so much for your time. Congrats on the good results. Thank you.

Dave Jackson (President and CEO)

Thank you. Appreciate it.

Operator (participant)

Your next question comes from the line of Chris Wetherbee with Citi.

Chris Wetherbee (Managing Director and Senior Research Analyst)

Maybe just a question, thinking about the guidance a little bit and just looking particularly at the implied second half of 2015, it looks like sort of just modest year-over-year growth over what you did in the second half of 2014. And it seems like there's probably some specific situations there. Adam, you called out a couple of items in the fourth quarter that maybe added a little bit, fuel being one of them, and then maybe that flips over to be a bit of a headwind as we move into the back half of 2015. But just want to get a rough sense of maybe how you think about that earnings cadence, first half versus second half. You know, is there a level of conservatism in there?

Just kind of want to get a rough sense of kind of how you feel about the market and how it plays out over the course of this year?

Adam Miller (CFO)

Yeah, I think historically, we've been very conservative when we've put out our guidance. And I think you've hit it right on. In the fourth quarter of this year, certainly, you saw a fuel benefit that I've kind of, you know, laid out in the prepared remarks that we're just not anticipating, or at least have it modeled into our guidance to be able to pick up in 2015. And you also had that other income that I pointed out as well that was very healthy. So you have a few headwinds there that we would have to, you know, overcome.

So that would become, you know, a little bit more difficult of a comp when you're looking at that back half of the year, and it's really the fourth quarter that would be the biggest challenge.

Chris Wetherbee (Managing Director and Senior Research Analyst)

Okay. But nothing from sort of, you know, from a capacity perspective or sort of trends within the industry that you would- you're sort of thinking about or anticipating that necessarily changes the trajectory of what we've seen, sort of, coming out of the, of 2014 on a, on a pretty strong note going into 2015?

Adam Miller (CFO)

No, I think that difference there is really more on the cost side than anything to do with revenue. We'd expect that, you know, it's still a strengthening environment and to be able to, to bring on the capacity at that 5%-7% rate that we had, you know, we suggested.

Chris Wetherbee (Managing Director and Senior Research Analyst)

Okay, that's great. Very helpful. Thanks for the time, guys. Appreciate it.

Dave Jackson (President and CEO)

Bet.

Operator (participant)

Your next question comes from the line of Jason Seidl with Cowen and Company.

Jason Seidl (Managing Director)

Thanks for the time, guys. Just looking a little bit at the logistics side, I mean, clearly, it's been great growth and impressive that you guys haven't sacrificed on the margin. You know, if you could talk about the goals, I mean, it's 11% now, you know, over the next, call it, you know, two to three years, what percent of the business do you think you could grow to?

Dave Jackson (President and CEO)

Well, we're gonna see that will be the fastest growing segment in our business. And so, you know, we'd like to see that quickly become a third, and then on its way to half of revenues, and probably not stop there, so, definitely not stop there. So, you know, we talk publicly about 25% plus. You know, that plus number, we say plus because internally, the expectation is much, much higher.

We've seen, as we, as we've looked at other non-asset-based, particularly brokerages, mainly private folks that have shared information about their growth trajectory, we've seen, we've seen those folks, once they hit a certain scale and kind of hit, find their groove, they start, they start to grow significantly and adding $75 million-$100 million a year pretty quick. And so, and I, and I think we've experienced some of how and why that happens. And benefit we have is it's not a standalone business, from the perspective of the Knight Transportation asset base side, has about 1,000 active customers and a lot of relationships, and we happen to be in a strong freight environment, where our customers need help and need capacity.

So we feel like we've got tools and resources that are available to us that maybe a standalone, if you will, would not have. So we are very bullish on that. The good news for our shareholders and for our business in general is that we have found a way to grow that business kind of in tandem, parallel to the growth we have on the asset-based side, and it doesn't rob from one to help the other. So when that's the case, and we're in this kind of a market, and we have this kind of a model for profitability, we're gonna be very aggressive at pushing the growth there.

The good news is all the folks on the asset-based side of our business have an appreciation, I think, for what the logistics side offers us as a company, what it offers us in terms of flexibility and variability in whatever kind of environment we might find ourselves over the next decade, where in tougher times, we have some variability to our business, and in the good times, we can provide our customers a lot of capacity. And as that business ramps up to sufficient scale, there's probably a lot of benefits that can find their way back over to the truck group. And so, you know, I credit our people with having a strong sense of vision to not just think about the red truck, but think big picture when we're working with our customers.

And, you know, the truth of the matter is, we're not even, we're not even a fraction of where we want to be in terms of providing logistics services for all of our customers. And so, so long answer to a very simple question, Jason, but, I think from a growth perspective, we'll be very aggressive, and, and there's no limitation on the size for us on how big it would be.

Jason Seidl (Managing Director)

So just to clarify here, you said you'd like to get it to a third to a half. Is that within the two to three year timeframe that I posed in the question?

Dave Jackson (President and CEO)

I think if you look at the operating income, the $5.8 million we spun off, we would love to double that number here over the next two to three years.

Adam Miller (CFO)

So you got operating income, which is what? 11%. Revenue is over 20% today, so.

Jason Seidl (Managing Director)

Okay, fair enough. Guys, thank you for the time as always. I appreciate it.

Dave Jackson (President and CEO)

Bet.

Operator (participant)

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

Dave Jackson (President and CEO)

Hi, Brad.

Brad Delco (Managing Director and Research Analyst)

Hear me okay?

Dave Jackson (President and CEO)

We can hear you now.

Brad Delco (Managing Director and Research Analyst)

Dave, I wanted to get some comments from you on acquisition targets and what the market looks like. And, you know, given the improvement we've seen in just truckers' profitability, how has that changed expectations on valuation? And what gives you comfort that that growth strategy is still makes sense at this point in the cycle?

Dave Jackson (President and CEO)

Yeah. Well, it's a primary focus of Kevin Knight and Gary Knight. I probably should say, it sounds like we just kicked Kevin out of the building and out of the call. Kevin is in the building. I'm sure he's listening to the call. He may even dial in with a question, if I'm not careful. And so, I think we appreciate his wisdom in giving us some space. It probably makes it a little easier for Adam and I to sit here and answer questions without him staring at us, since he's so good at this and so insightful. And so, Kevin is spending a majority of his time evaluating strategic growth opportunities for us, which would include looking at carriers and the like.

And so, you know, there are folks that I think we're interested in. There are folks that reach out occasionally. I think every situation is different. So just because things have gone a little bit good for truckers, doesn't mean that that has been a remedy to all the challenges and sometimes succession planning issues that exist in many carriers throughout the country.

I think that there are some who probably like the fact that EBITDA is looking a little bit nicer, and they can maybe feel like they can walk out on a higher note than they otherwise would have, as opposed to looking at that and saying, "Yeah, I'm ready for another 10 years of this." I think also the fact that the used equipment market has held up has been a positive in the acquisition front. For a lot of fleets, it's, you know, a lot of their equity is in their equipment. And so as those prices have held up, I think there's some that maybe don't want to push it too long. And so all in all, I think it's a good environment.

I think the Barr-Nunn acquisition, certainly with only one quarter under our belt, but you could certainly say that that seems to be off to a good start. I think that I think we have a very good idea of what we would look for. I think maybe more importantly, we, we're very open-minded and recognize that every single situation would be unique and different and might need to be handled in a different way. And so, you know, all those factors have us as a buyer when there aren't very many buyers, and hopefully, there will be sellers. It's impossible to predict how that timing will line up and when we'll find the next good opportunity.

But suffice it to say, there's good effort put into it, and hopefully, we'll find some matches.

Brad Delco (Managing Director and Research Analyst)

Gotcha. And then maybe just a quick follow-up on that. I think I heard your comment that the Barr-Nunn margins were very similar to your asset base margins at Knight. Is that a function of, you know, just the seasonal aspect of their business, or, you know, has there been that much improvement in the margin performance of that business just in the short three months you've had that business under your control?

Dave Jackson (President and CEO)

Yeah, I would say that they're a business that does very well in the kind of environment we saw in the fourth quarter. I think they do well in most environments, but they do particularly well, you know, as we talked about last quarter on the call. You know, they've got a little more exposure in the expedited world than what we do, and that clearly was a good opportunity. But that being said, we have found some ways to improve their costs in a kind of behind the scenes fashion, having to do with pricing and a few other things. We're just barely beginning to find some good wins on the revenue side, and there definitely are some opportunities.

We talked in our press release about our empty mile percentage. Their empty mile percentage is a little bit higher than what we see in the Knight fleet. And so, you know, there are definitely some opportunities there. There is not a need for Knight to be invasive with Barr-Nunn. And so things have all been done in a nice, very orderly fashion. We're just happy to have people that in both businesses, Knight and Barr-Nunn, that, I think, think a lot alike and have the same kind of objectives. So good things happen, you know, when we put our heads together.

So, I would not say that Knight has come in and made dramatic changes, but it's helped, and they've more than pulled their own weight there, so...

Brad Delco (Managing Director and Research Analyst)

Well, great. Well, I appreciate the color, guys. Thanks, and congrats on the good quarter.

Dave Jackson (President and CEO)

Thanks, Brad.

Operator (participant)

Your next question comes from the line of Rob Salmon with Deutsche Bank.

Rob Salmon (Director and Senior Analyst)

How you doing?

Dave Jackson (President and CEO)

Hi, Rob.

Rob Salmon (Director and Senior Analyst)

Hey, Dave, you know, with the 4%-5% rate expectations that you guys kind of outlined for 2015, could you give us a sense of how that's broken down between mix, contract increases, and your expectations on the broader spot market?

Dave Jackson (President and CEO)

Well, Rob, given how long it's taken me to answer the other questions, which were much more simple, I'm not sure we have time for me to ramble on how I think that would work, and I would probably be wrong anyway. So I would say when, when we're talking four to five, we would hope that most of that would come from contractual increases, and then there would be some extra from spot market exposure throughout the year.

In the event we see the kind of spot market exposure, seasonal exposure like we've seen in 2014, which we may very well see, and I, for a similar amount of time, I know, I know we'll see the strong seasonality, just a question of how often and how long, and, and, you know, then that number could go up from what we've quoted you. So, so I, I guess what I'm getting to, Rob, is it would be very hard for me to break that down very specifically for you in the four to five. Most of it would be contractual.

Rob Salmon (Director and Senior Analyst)

That's fair. And I guess, Dave, as a quick follow-up to that, obviously, the Barr-Nunn performance in the fourth quarter was particularly strong with the benefit of some of the expedited business that they do. Would you consider actually allocating more tractors to that side of the to that underlying business exposure looking out to next year, given the strength that you'd seen in 2014? Or do you think that the mix is right where it is today?

Dave Jackson (President and CEO)

Well, we're always, we're always learning, and I think, in an e-commerce world, which we seem to be quickly, quickly adapting, as consumers, you know, there's probably gonna be more and more opportunities. I would imagine that not a lot of the e-commerce finds itself on the rail for movements. And so we'll, we pay a lot of attention there. The flexibility we have with the nationwide network that we have today, you know, we could we can move some expedited in places where we would like. We have some situations with our training program where we might have, we might have more like one and a half drivers, if you will, that can help us in some of those expedited moves with length of certain lengths of hauls.

So it's a space where we're trying to understand and learn more. I don't think it's something that we feel like we have to kind of be officially in that or out of that. I think that, you know, Barr-Nunn, as a percentage and as a complement to the total portfolio, does give us a really nice, healthy exposure to that we didn't use to have. So that's already a huge, huge step up, but we'll watch it close.

Rob Salmon (Director and Senior Analyst)

Makes sense. Thanks so much.

Dave Jackson (President and CEO)

Thank you.

Operator (participant)

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

Brandon Oglenski (Director and Senior Equity Analyst)

Good afternoon, gentlemen.

Dave Jackson (President and CEO)

Hi, Brandon.

Brandon Oglenski (Director and Senior Equity Analyst)

Way to take over here for Kevin. I think the answers are just as robust. You know-

Dave Jackson (President and CEO)

Well, you'll find out. If our next call, we just ask for questions, and we just read you the answers on the call, then you'll know that, maybe it didn't go as well. So, but, I appreciate it, Brandon.

Brandon Oglenski (Director and Senior Equity Analyst)

I think the live Q&A works a little bit better. Look, I want to follow up on Bill's first question here because investors are quick here to be questioning whether the cycle is over or not, more holistically at a macro level. You know, we're getting some confirmation from these recent, you know, various industry data points about spot pricing and demand. But it sounded like you were trying to say this is more of a comp issue year-over-year. It sounds like, and I don't want to put words in your mouth, but that things are okay sequentially as you see it in January. Is that the right takeaway?

Dave Jackson (President and CEO)

I think, yeah, I think that's a good way to say it. As far as Januaries go, this is a good, a bit, maybe a very good January. And to compare it to last year, when you had one of a kind shutdowns from weather and acute tightness, I mean, that would, I think, it would be a mistake to compare to that and try and extrapolate that throughout the year and try and somehow draw a conclusion about a much longer term cycle that took a long time to build, that will likely endure for a long period of time, and extrapolate that off of maybe spot market changes on a year-over-year basis. I think that might, that may be a mistake.

But in terms of where the spot is relative to where spot normally would be in January, this January would mark high over the last several years. And in terms of rate, demand, and volumes, I mean, it's you've got your typical kind of things that happen in January, where the whole country doesn't have the same kind of demand. But hey, trucks are moving. We're in the middle of bid season. The outlook is our customers understand and appreciate the limitations on capacity and the need to pay drivers more. And so based on what we see going on in the bids, customers also recognize the need and the challenges with the need for capacity, the challenges with securing it, particularly 12 months out of the year. And so, you know, all that leads me...

To be very positive.

Brandon Oglenski (Director and Senior Equity Analyst)

Well, and along those lines, if I can just get one more in. We talk about drivers a lot, and the shortage, and, you know, the ability to retain folks last year was pretty challenging. But there's also a view that with all the layoffs that we're seeing in the energy sector, could that drive an influx of potential candidates? Does that potentially, you know, wash out some of the supply constraints that we've seen along with, you know, the hours of service issue that we discussed earlier?

Dave Jackson (President and CEO)

Well, I think that there is a chance that we will see drivers that we've lost to oil field services not have those opportunities any longer and need to find some other kind of work, vocational work of some sort. Probably a lot of them will come back to truck driving. I don't know that they all left truck driving. Some of them left other jobs to go for lucrative opportunities in the oil field, and they may go back to being plumbers or other vocational work where there is high demand still, nonetheless. But, in trucking, we could use them. We need them.

Even if, you know, even if 10,000 or 15,000 of them become available, you know, as a percentage of the 2.7 million active Class 8 trucks over the road today, you're talking about a few tenths of a percent of the total trucks that are out there that we need. I would expect that looking at GDP, that we will likely end, sounds like the 2014 with a 3% GDP growth.

If you just assume fourth quarter is half of what third quarter was, half of the 5% GDP growth in the third quarter, you know, there's a good chance in 2015, especially with a much healthier consumer, with oil prices in particular, that, that just the overall market growth will exceed, and, and drive the need for those kind of drivers that we might see get freed up. So I, I don't think by any stretch, that it that, that creates a flood of drivers or a surplus of drivers.

Brandon Oglenski (Director and Senior Equity Analyst)

I appreciate it as always, Dave.

Dave Jackson (President and CEO)

Okay. Thanks, Brandon.

Operator (participant)

Your next question comes from the line of Ken Hoexter with Bank of America.

Ken Hoexter (Managing Director)

Good afternoon. Hey, Dave, Adam. Can you talk a little bit about the... I think you threw out there before, you changed the comp metrics for the drivers. Can you maybe expand on that and talk about the driver pay rate increases that you've seen and what you expect in your outlook?

Dave Jackson (President and CEO)

Yeah, we've done a few things over the last several quarters where we've improved the bonus that our drivers can receive. And of course, that's tying them to critical behavioral functions that they can do, and if they perform well, usually leads to lower cost for us and enables us to pay them more money. And so we've done, I think, a fair job of creating a simple, attainable program and helping them to know where they stand. So when I referenced a bonus program, that's what I'm talking about, and it's become more significant over time. We plan to make it more significant.

If you look at overall driver compensation for 2014, driver pay per mile would probably been up, upper single digits, seven, eight.

Adam Miller (CFO)

Yeah, close to 10%.

Dave Jackson (President and CEO)

Yeah. So, you know, in 2015, it'll continue to increase. We don't have a particular percentage set out, but we have multiple ways of increasing the pay, whether we do more in a particular bonus, or we pay a certain group of drivers a little bit more, or... And then, of course, there's across the board. We did last year, in the first quarter and early second quarter, we began and did some across-the-board catch-ups in pay. And I think that we're going to have the rate environment this year to be able to accommodate further increases.

And typically, we would pass about a quarter of the rate improvement would find its way to the driver, and that'll be meaningful and continue to do the trick. Over time, as we've talked about, we feel like we need to make the job more and more attractive. These are certainly some of the most hard-working folks in the entire economy, and their pay has largely been held up throughout the entire recession period. So, there's some, probably some catching up that needs to take place over the next few years, and then also to make it a more attractive space so that we can bring more drivers into the space.

Ken Hoexter (Managing Director)

Appreciate that. I'm sorry, it just sounded like when you stated initially, you were moving away from a per mile metric to something else, but sounds like just more bonus things. For a follow-up, everybody else has been throwing in different questions, but I guess maybe just a clarification. On the logistics, was there any Barr-Nunn in that brokerage number, or is that just a pure growth at intermodal and brokerage? And are you going to separate the two in terms of what where the growth is coming from?

Dave Jackson (President and CEO)

It's almost entirely Knight. Barr-Nunn just experimented slightly, is the way I would describe it, into the brokerage, non-asset space. So, there's probably an opportunity there, with them over time, but that, that is not in the fourth quarter numbers.

Ken Hoexter (Managing Director)

Okay.

Dave Jackson (President and CEO)

Thanks again.

Operator (participant)

Your next question comes from the line of Scott Group with Wolfe Research.

Scott Group (Managing Director and Senior Analyst)

Hey, thanks. Afternoon, guys.

Dave Jackson (President and CEO)

Hi, Scott.

Scott Group (Managing Director and Senior Analyst)

So, wanted to get your perspective on the impact of lower fuel here. So, you know, we've heard from all the rails, and they're kind of saying that they don't think it changes much in terms of the intermodal story. But curious from a trucker's perspective, do you think that this lower fuel environment is going to, you know, create opportunities for truckload guys to regain share? Or is the rail service getting better enough for intermodal to regain some share this year? I'm just curious how you think about that, the dynamic between truckload and intermodal with lower fuel. And then just one other kind of side question on fuel. Adam, within the guidance, are you assuming fuel is a net positive or drag in 2015?

Dave Jackson (President and CEO)

Okay, we'll hit both those questions. I'll take the first one, let Adam handle the second one. So I'm happy to give you a trucker's perspective of fuel on the rails, at least for what it's worth. We look at a rule of thumb that for every 50-cent drop in a diesel price, it probably changes the break-even price by about 80 miles on the for the rails. So it's possible that maybe by as soon as the end of this first quarter, that you'll see diesel fuel price settle, maybe about $1.50 lower than where they were back at the $3.80 range in September.

So to lose $1.50 in diesel prices would suggest that maybe in the neighborhood of 240 miles has been added to that break-even calculation with intermodal. You know, that being said, there's. It's estimated to be more than 70% of the truckloads that move in this country are 500 miles or less. Of course, that number falls off dramatically for every 100-mile band that you have.

So to move intermodal, you know, into, into a range to where it's, you know, and it's now 750 and above, let's say 750 or, or maybe even a little higher than that, at miles and above from a length of haul perspective, that, that the economics work for intermodal there, then, then, you know, that would suggest that there are thousands and thousands of truckloads that, that, that might be more economical on truck, to say nothing for the, the growing, the, the growth we've seen in the expedited space, that over time might fi- some of that might find itself in less expedited, but, but still on a truck, as the e-commerce, evolution continues to take hold through, through retailers throughout the country.

So, our position would be that fuel is a meaningful change. And, I mean, if you look at the growth of intermodal relative to the growth in fuel prices that we saw in the first half of 2008, you know, there's a big difference, or there's a high correlation, I should say. And, we're clearly a long ways away from the $1.25 fuel price. We'd have to go back to 2002 or 2003, and I don't think we'll get to that price again. But intermodal was very hard to pencil back in those days.

So, now it may sound like, I mean, that may be a trucker's perspective, but, but I think that there may be some truth to some of those measurements that kind of laid out to you. So we'll let Adam answer the,

Adam Miller (CFO)

Sure, on the fuel benefits. Well, Scott, a large portion of your fuel benefit, or even headwind, typically comes when there's a rapid increase or decrease in fuel prices. So, you know, obviously in the fourth quarter, we saw, you know, a large benefit that we already talked about, and we're still seeing fuel prices, at least at the pump, retail or national average retail prices still are coming down fairly rapidly. So we would expect to see some, you know, some fuel benefit in the first quarter.

Now, as fuel prices settle down closer to that, you know, lower $2 range, the kind of one-time benefits go away, but certainly we would benefit from lower fuel prices on an absolute dollar, because, you know, probably 20%-25% of the miles we drive or the gallons we burn aren't covered, you know, under our fuel surcharge programs. So I think we would still think fuel as a whole for 2015, if it goes as we expect, would be a net benefit, maybe not huge. It'd probably be bigger on the, on the, you know, the first half of the year, particularly in the first quarter, and probably still be a benefit in the second and start to neutralize in the third, and may even be...

It's probably going to be a little bit of a headwind in the fourth quarter. But net-net, I'd expect it to be a, you know, a slight positive for us for the full year.

Scott Group (Managing Director and Senior Analyst)

Okay, thanks a lot.

Adam Miller (CFO)

Yeah.

Scott Group (Managing Director and Senior Analyst)

That really insightful comments on the truck intermodal. Just without putting words in your mouth, would you think the local lease market is where you'd see most of that risk on the intermodal side?

Dave Jackson (President and CEO)

I don't, you know, I'm not sure. I probably wouldn't have a good opinion there for you.

Scott Group (Managing Director and Senior Analyst)

Okay. Thank you, guys.

Dave Jackson (President and CEO)

You bet.

Operator (participant)

Your next question comes from the line of Matt Brooklier with Longbow.

Matt Brooklier (Senior Equity Research Analyst)

Hey, thanks, Dave, Adam. Good afternoon.

Dave Jackson (President and CEO)

Good afternoon, Matt.

Matt Brooklier (Senior Equity Research Analyst)

So, a couple of questions on drivers thus far in the call, but I'm just gonna ask it more directly. You know, as we sit here in January, and you think about the driver market, maybe 3-6 months ago, you know, is your opinion that as a whole, the market on a relative basis, and relative being the key word, on a relative basis, has the driver market improved at this point?

Dave Jackson (President and CEO)

I would be careful to say that. I, I don't know that I would go that far. I would tell you, we have... We're going now on a few years of that being a very, very intense focus for us. So I, you know, I think as evidenced by the growth that we've had, and the fact that we're talking about another 5%-7% fleet growth, within our, our fleet, you know, that speaks to the fact that we feel, we feel good that we can do it. I wouldn't say that that isn't has as much to do with external factors. Now, seasonally, there are times of the year where it's a little bit easier to find, and easier is maybe not the right term, but less difficult is probably a better way to say it, to find drivers.

When weather begins to change as we move into the springtime, you know, that April-May timeframe when the weather is nice throughout the entire country, there's typically, you know, that's when it can become even more difficult to find drivers. So this is the time of year where, you know, oftentimes we'll have a little more success, it would feel. But I would, you know, the demographic hasn't changed. A recent study showed that, it was a vast study, that showed that the average age of an over-the-road driver was 46 years old. The average age of a private fleet driver was 52 years old. And so, you know, for, in terms of average ages, you know, that's worrisome.

And that means that we have a long ways to go, and we're gonna find a lot that are leaving and retiring that aren't being replaced with new entrants coming in. So this is here to stay for a long time.

Matt Brooklier (Senior Equity Research Analyst)

Okay. Appreciate the call.

Dave Jackson (President and CEO)

Okay. Thanks, Matt. We, Ronnie, I think we have time for one more question.

Operator (participant)

Okay, and this question comes from the line of Art Hatfield with Raymond James.

Art Hatfield (Managing Director and Senior Equity Analyst)

Afternoon, Dave and Adam, and hopefully, I-

Dave Jackson (President and CEO)

Hi, Art

Art Hatfield (Managing Director and Senior Equity Analyst)

Can ask you a question that will only take 60 seconds to answer. Just real quick.

Dave Jackson (President and CEO)

The burden's on me.

Art Hatfield (Managing Director and Senior Equity Analyst)

Just real quick, you've asked a lot about capacity today, but can you give us kind of your latest thoughts on how you see, assuming we get the ELD rule in June, how that's gonna play out over the next six, you know, or 12-18 months?

Dave Jackson (President and CEO)

You know, it's a good question 'cause I, 'cause I imagine there will be grandfather periods and whatnot. From what we've seen, there are a lot of fleets that have had to, that due to having follow-up as a result of poor CSA scores, there are a lot of small fleets that have signed up for ELDs as a condition of compliance and improving a log violation, CSA BASIC. And so, there's been a kind of a, what's turned into maybe a brisk walk-up to this regulation. So, there are a lot that are already implementing, that will continue to implement. And so I think whatever grandfather period there may or may not be, I think we may be surprised at how many adopt so quickly.

So, if this entire industry used ELDs, I think it would be a dramatically different situation in this country. And so, you know, we're going on, I wanna say, five years of when we implemented ELDs in our fleet. And a lot of the big folks have, but as a percentage of total trucks over the road, it's the vast minority actually have ELDs. And, I mean, this could move the needle several percentage points in terms of capacity out there over the road. So, game...

I mean, I don't wanna throw out the term game changer too often, but this that would go down as the most significant regulatory change that this industry has ever seen, and would clearly have a constraining effect on capacity to a degree we don't know. But even if it doesn't happen, capacity's already tight, and with the slightest of growing economy, which, you know, all indications are that this is, that, that. This is one of the brightest outlooks we've had since the recession, from an overall economy. I mean, it could come at a kind of a difficult time in terms of finding capacity. So, hey, it's gonna be a big deal.

Art Hatfield (Managing Director and Senior Equity Analyst)

Great. Hey, that's, that's very helpful, color. Thanks.

Dave Jackson (President and CEO)

Very technical answer for you, Art.

Art Hatfield (Managing Director and Senior Equity Analyst)

That's, no, that's very helpful. Thank you.

Dave Jackson (President and CEO)

Okay. Thanks, Art. Well, we appreciate everybody dialing in and joining our call. If we didn't get to your call, hopefully, hopefully, you'll give us a call at 602-606-6315, and we'll try and get back to you quickly. Thanks, everybody. Take care.

Operator (participant)

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