Knight-Swift Transportation Holdings Inc (KNX) 2017 Q4 法說會逐字稿

Good afternoon.

My name is Rob, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Knight-Swift Transportation Fourth Quarter 2017 Earnings Call.

(Operator Instructions)

Speakers for today's call will be Dave Jackson, President and CEO; Kevin Knight, Executive Chairman; and Adam Miller, CFO.

Mr. Miller, the meeting is now yours.

Thank you, Rob, and good afternoon to everyone who's joined the call.

We have slides to accompany this call posted on our investor website, which is investor.knight-swift.com/events.

Please note, this is a change in web address as this site is new and differs from the address we've provided in the past.

So first off, we'd like to welcome you to the Knight-Swift Transportation's Fourth Quarter 2017 Earnings Call.

We are excited for this opportunity to report the financial results for the fourth quarter of 2017, which represents the first full quarter of the combined Knight and Swift entity.

Our call is scheduled to go until 4:30 p.m.

(sic) [5:30 p.m.] Eastern Time, and will be structured similarly to our calls in the past.

Following our commentary, we hope to answer as many questions as time will allow.

If we're not able to get to your question due to time restrictions, you may call (602) 606-6349.

During this call, we plan to cover topics and any questions specific to the results of the fourth quarter, provide an update on merger and synergy initiatives as well as provide our future outlook on the markets.

(Operator Instructions)

To begin, I will first refer you to the disclosures on Page 2 and 3 of the presentation.

I will also read the following.

This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions and uncertainties that are difficult to predict.

Investors are directed to the information contained in item 1A Risk Factors or Part 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 we may -- now we'll move to Slide 4 to discuss the results of the fourth quarter.

The table on Slide 4 compares fourth quarter revenue and earning results on a year-over-year basis.

An important item to note, however, is that due to the accounting requirements associated with the merger transaction, the 2016 figures represent only Knight Transportation's historically reported results.

Due to this unique circumstance, year-over-year comparisons at the consolidated level are less meaningful.

Later in the presentation, we plan to provide more context around the year-over-year results.

Diluted earnings per share for the quarter ended December 31, 2017, were $2.50.

Our adjusted earnings per share came in at $0.52, excluding an income tax benefit of $364 million, representing management's estimate of a net impact of the Tax Cuts and Jobs Act passed during the quarter, $10.3 million of amortization expense related to the merger and $1.9 million of legal reserves related to class-action lawsuits.

We believe the comparability of our results is improved by excluding these infrequent items that are unrelated to our core operations.

Now on to Slide 5. We've provided a 3-year comparison of revenue, excluding fuel surcharge and adjusted operating income.

In this comparison, we included the historical Swift results in grey as we believe this provides a better year-over-year comparison.

With the addition of Swift, our fourth quarter consolidated revenue, excluding fuel, was $1.2 billion.

If we compare the fourth quarter of 2017 with the combination of what each entity separately reported in the fourth quarter of 2016, revenue excluding fuel surcharge was relatively unchanged from the prior year.

The combined adjusted operating income was $156 million for the quarter.

Again, if we compare the fourth quarter of 2017, with the combination of what each entity separately reported in the fourth quarter of 2016, adjusted operating income improved 33% from the prior year.

Our results for the first full quarter after the merger were encouraging.

We are beginning to see the results of our synergy efforts as well as the impact of a more favorable market dynamic in terms of freight demand.

Now let's turn to Slide 6. We view a strong balance sheet as a competitive advantage as we believe it provides operating and strategic flexibility.

We remain committed to continuing to strengthen our leverage ratio through improved EBITDA and continued deleveraging of both on balance sheet and off-balance sheet debt.

In the fourth quarter, we accelerated the timing of equipment purchases when possible to maximize tax benefits under the Tax Cuts and Jobs Act.

As a result, cash decreased and debt increased sequentially as we utilized the revolver to fund CapEx.

We expect our net capital expenditures will be in the range of $525 million to $575 million in 2018, which primarily represents the replacement of the tractors and trailers we intend to pull out of service during the year.

This range assumes all CapEx will be funded with cash and on balance sheet financing through our revolver.

Historically, Swift has utilized off-balance sheet operating leases to fund a portion of equipment purchases, which are not included in historical CapEx numbers.

Therefore, there may be a limited comparability of future CapEx to historical CapEx results as it relates to Swift.

We continue to strategically manage the fleet size and age to maintain returns in a changing market environment.

We also believe our current balance sheet positions us to have the flexibility to continue to invest in future growth opportunities.

I'll now turn it over to Dave Jackson.

Thanks, Adam.

Now to Slide 7. In the fourth quarter, our Knight trucking segment operated at an 81.6% adjusted operating ratio, which is a 210 basis point improvement over the prior year.

This improvement was primarily driven by the increase in revenue per tractor, partially offset by an increase in driver-related costs.

The strong freight market provided noncontract revenue opportunities throughout the quarter and into January.

Revenue, excluding trucking fuel surcharge and inter segment transactions, increased 6.3%, driven by a 12.2% increase in our revenue per tractor, partially offset by a 5.3% decrease in the average operational truck count.

While the average tractor count was down year-over-year, we were able to achieve a sequential increase in the ending tractor count during the quarter and narrowed the decrease in utilization from negative 3.9% in the third quarter of 2017 to negative 1.6% in the fourth quarter of 2017 as we continued to improve our ability to source and retain drivers.

Our non-asset-based logistics segment produced a 94.0% adjusted operating ratio, which is a 70 basis point increase compared to last year.

Logistics revenue increased 6.8%, driven primarily by an 8.8% increase in brokerage revenue.

Our brokerage business increased revenue per load by 17.2%, while maintaining gross margin flat year-over-year at 16%.

The brokerage revenue growth was partially offset by a 7.2% decrease in brokerage load volume.

Next on to Slide 8. We are seeing positive improvements in each Swift segment as our adjusted operating income improved 40.4% when compared to what was previously reported by Swift in the fourth quarter of 2016.

Overall, our results were positively impacted by the improving freight environment, cost controls and synergies we have begun to implement.

The difficult driver market, combined with the implementation of more stringent hiring requirements, continue to be a headwind for our business.

We believe these additional hiring requirements will have a short-term impact on our driver count, but will be a long-term benefit to our operating results.

In our Swift trucking segment, we achieved an 84.6% adjusted operating ratio.

Our revenue per tractor increased 6.7%.

Our dedicated segment achieved an adjusted operating ratio of 86.5% as average revenue per truck increased 2.6%.

Our refrigerated segment achieved an adjusted operating ratio of 92.9% as average revenue per truck increased 0.7%.

Our overall, average Swift truck count is down 6.7% compared to the fourth quarter of 2016 as sourcing and retaining high quality drivers remains the most significant challenge we face.

Our intermodal segment achieved an adjusted operating ratio of 95.0% as revenue per container increased by 8.0%.

Now on to Slide 9.

The broader economy continues to show signs of growth.

Consumer spending, durable goods and the prospects of increased manufacturing and construction all point to positive growth in the future, especially considering the recent tax relief from the Tax Cuts and Jobs Act.

The driver shortage continues to be a headwind for the industry and will likely impact the ability to increase capacity in the space.

We also believe that the ELD mandate began to have an impact on capacity late in the quarter, which has continued into the first quarter thus far.

Given the strength in the freight market and the inflationary pressures the industry is experiencing in driver wages, we expect to see rate increases in our contract business in the high-single digits to low-double digits throughout 2018.

In this environment, we will continue to monitor the markets in order to maximize both service levels to our customers and yield.

I will now turn it over to Kevin Knight.

Thanks, Dave.

I'd like to first start by reaffirming our commitment to our brands, Swift and Knight, distinct brands with distinct management.

I talk to our people all the time and share with them the fact that I want Knight to be the best Knight that it can be and I want Swift to be the best Swift that it can be.

As a result, we expect little to no change for customer and driver-facing activities.

There are some areas where we will work closely together to support our operations, and we are confident we will continue to realize additional synergies over time.

Excelling at safety and service is of the utmost importance to all of our businesses.

We believe we have significant opportunities to enhance the safety and service performance at Swift.

While the teamwork we are witnessing and the opportunities ahead of us give us confidence, we continue to face a challenging driver environment.

Longer term, we expect to overcome the near-term headwinds through the driver sourcing capabilities of Knight and Swift.

Specifically, we believe Swift has an unmatched advantage to source and train new drivers, through our academies and driver development capabilities.

Knight plans to leverage Swift's competency to source and train new drivers, and Swift plans to further leverage Knight's approach to increase the sourcing of experienced drivers.

Sourcing and retaining drivers remains a top priority across our fleets.

We are encouraged with the margin improvement we have experienced at both Knight and Swift, but understand, we have more opportunity to improve.

Our teams remain committed to working together to enhance our performance in managing markets, improving safety and service, developing high quality drivers and reducing our cost per mile and cost per transaction.

Now to Slide 11.

Our synergy efforts are in full swing, reflecting a high degree of collaboration and dialogue across the Knight and Swift platforms.

We expected to realize synergy benefits of $15 million in 2017, and we are happy to report that we are ahead of schedule, both in cost and revenue synergies.

Our intention with providing synergy targets in April at the time of the merger announcement was to provide an estimate of the improvements we believe we could achieve with the combined efforts of both companies.

Actual improvements will be realized in improved adjusted operating income.

During the fourth quarter of 2017, adjusted operating income at Swift improved over $32 million year-over-year, despite 6.7% less tractors.

Moving forward, we may not provide specific synergy updates.

However, the improvements in the business will be visible in the changes in our operating income in each of our lines of business on a year-over-year basis.

We also want to reaffirm our expectation that these synergies will increase to $100 million and $150 million in 2018 and 2019, respectively.

I would like to close this presentation by expressing how appreciative I am for the outstanding work of all the employees of both Swift and Knight, who are ultimately responsible for the solid fourth quarter results.

And Rob, with that, we will now open up the line for questions.

(Operator Instructions) And your first question comes from the line of Ravi Shanker from Morgan Stanley.

Can I just follow up on your commentary on the pricing for 2018?

You say your contract pricing could be up high-single digits, low-double digits for the year.

Does this imply kind of once you roll in spot there's even more upside to that?

And also, typically, I think, most people expected the pricing to improve in the second half of '18 given the time of your contracts.

Can you just talk about how we think about the timing of the price increases through the year?

Ravi, I'll try and take that.

When we look at kind of how rates have hit an inflection in about the middle part of last year, and we saw more of that, more of the rate increase come through the noncontract world, typically, what happens and has happened in previous cycles is as we transition into the next bid season, what we find is increased rates.

It can reduce the kind of volatility that perhaps some of the shipping community has experienced in the second half of 2017.

And so as a result of that, we'll see some meaningful improvement in the contractual rate environment.

I would say that the bid season is really just at its early stages, and so with the kind of strength that we've continued to see in January, we expect to see meaningful improvement in the contractual market.

And what I would remind you of is that we saw negative rates throughout '16 and even the back half at the very end of '15.

So we've seen significant volatility since 2014.

I think we're seeing some of the catch-up for that.

I think from our early interactions with our customers on the bids, there seems to be an understanding that in this upper single digit, in some cases, the lower double digits that, that is largely where the committed market appears to be or appears to be heading.

And so, clearly, the noncontract market has been a couple of times that for the last few months of the year and perhaps, there might be some of that.

As we look out into 2018, we would expect to see -- continue to see positive rate improvement on a year-over-year basis.

And then, when we come a year from now, and we're talking about the fourth quarter of '18 and comparing against the kind of increases that we just reported for the fourth quarter of '17, that's going to be difficult to show a lot of meaningful improvement on a year-over-year basis, but what will have happened, I would expect, is that the increases throughout 2018 will come from the contracts and not from the noncontract environment.

So that's similar to what happened in '14 going into '15, and I think what we're seeing is something similar to that.

That's very helpful.

Quickly follow-up and ask you, what do you -- are you able to quantify what do you think driver wages will be up in 2018?

I'm just trying to juxtapose it to them, and figure out just how much of that pricing you can actually keep.

Well, typically, the -- and it's not always exactly in the moment.

But over time, around 25%, maybe a couple of points higher than that, 25% to 30% of the increase goes to the driver.

As you know, driver wages are the largest expense we have.

And so, typically, you'll see it follow that way.

I would say, right now, when you look at the businesses, the driver wages are up in the neighborhood of 6% to 7%.

And given the fact that drivers in the industry did not see an increase in 2016 and they saw very little in 2017, if any, towards the -- they saw some towards the end of the year, there definitely is some pent-up wage pressure, and I think you're seeing that manifest itself in these kind of noncontract rates that we're seeing out there in the third party indices.

So -- but over time, Ravi, I think you would -- you should expect somewhere around 25% of the increase to find its way to the driver.

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

I wanted to chat a little bit about your CapEx outlook.

What do you project in terms of, by the end of the year, your fleet age?

And then, how much of this CapEx is really just playing a little bit of catch-up to get the fleet age down?

And how much do you think is really just geared towards some of the benefits now that you're going to see with the new tax bill?

So I'll take that.

This is Adam, Jason.

So I'd say, from a fleet age standpoint, Knight is currently at 2.7.

I think Swift is currently at 2.5 from an average age standpoint.

And we'd expect that number to come down, probably closer to 2 by the end of the year.

And so I think some of this CapEx will be some catch-up to refresh the fleet.

Again, we're not planning much if any growth within the CapEx.

We may see a little growth from the Knight side, but certainly not on the Swift side.

We didn't change our CapEx strategy as it relates to the new tax law.

The only thing that we did was we, probably, pulled forward some of the CapEx purchases that were planned for the first quarter and moved that into the fourth quarter, to get the deduction at the higher rates.

But generally speaking, our CapEx is going to be for replacement, and to improve the average age from where it is today.

But as I'm thinking about going forward, if you guys get down closer to 2, then you'll probably be more in line with what you're thinking, where you want that age to be longer term as you head into 2019.

Am I correct in thinking that?

Yes.

I think that's fair.

I think, historically, when you look at where Knight's been, we've been sub 2 for quite a while, but I think we're comfortable in that 2 range, give or take a few months.

Okay.

And if I could have a quick follow-up to Ravi's question.

You talk about the high single-digit rate increases.

Can you -- is there any difference between what Knight historical is going to get and what the the Swift business is going to get in terms of the rate increases?

Or is Swift more under market than Knight is, I guess, is what I'm asking?

Jason, this is Kevin.

I would say, at Swift, we just have a different portfolio of services.

Swift, I think, probably, won't get to the revenue-per-mile levels necessarily that Knight is, is my expectation.

So again, as I stated earlier, our goal is for Swift to be the best Swift and for Knight to be the best Knight.

Swift has a broader portfolio of dedicated businesses.

When you look at Swift's dedicated businesses, if you tally everything up in all segments, it's probably over 5,000 trucks, and the characteristics around dedicated are different than one way wind haul.

We, also, when you look at our Swift -- when you look at our length of haul in our line haul businesses, we tend to be a longer length of haul at Swift than we tend to be at Knight, and we don't really have any plans to superficially push that down in any way.

I, for the most part, I really like the book of business that we have at Swift.

There are some pieces of it that I'm still trying to understand a little bit better than what I currently understand.

I think, probably, the biggest opportunity for Swift is in their one way irregular Reefer segment, and that book of business was not what I would call the best book of business that I've seen.

But we are -- we're working diligently to improve that book of business and expect that you will be pleased with the improvements in revenue per mile and profitability, especially in the irregular root side of refrigerated.

And so that's how I see it.

So I wouldn't look at like these numbers merging anywhere down the road.

I would expect that with the market that we've been afforded.

I would expect that yields are going to improve for both entities.

Knight has a bigger presence in the noncontract area than Swift, and I don't see Swift probably ever having as big a presence from a percent of capacity standpoint.

So that's, basically, how I see it, Jason.

I hope that's helpful.

Your next question comes from the line of Brian Ossenbeck from JPMorgan.

So I've had a kind of think over just a strategic fit of some of the segments.

I think you gave us a little bit of color on that last time.

It sounds like, one way, refrigerated is the best upside.

But you also made some more positive comments on intermodal during the last call.

I was wondering if you could give us your sense of that business, especially when you see some of the rail services not quite where it should be, but I imagine that also has some decent upside, given where it's been operating in the past.

So if you could us an update on that.

Yes.

I'd be happy to.

We're kind of learning our way on intermodal.

And first off, on the red brand, we've got a non-asset-based intermodal offering that performs very well.

It's not large, but that business has really good trajectory.

And so we're excited about that, but it's a small piece of our overall revenue.

So as far as Swift, it's much more significant.

It's asset-based, where we own our own boxes, as I think most of you know.

We're extremely reliant on our rail partners.

They don't always provide the highest level of service.

But from Swift's perspective, we've probably not always provided the highest level of service on the gray sides of the business, and that's the area that we are focusing on.

That's how we can ensure that we provide more value to our customers.

And we're primarily focused right now on improving our revenue per box on a quarterly basis, and we made good improvement there in the fourth quarter.

We do believe that we will see good opportunities to improve our yields in terms of intermodal as this market continues to develop.

I also think we continue to have opportunities to improve our cost structure on the intermodal side.

This quarter was a little tough as far as drayage costs.

If we wouldn't have experienced higher drayage cost, we could have reported, possibly, a 93 or a 94 OR, which would be legitimate, but not where we would like to be, long term.

And so we're working to improve our understanding of the business to improve our disciplines around the business.

And I believe the yields will come, and we won't be as good at that as some of our competitors who are much more experienced in this area, but it's an important customer offering to our customer base.

And it's important that we figure out how to do our customers a good job in this area.

And I think there's certainly potential for us to grow a bit here.

I -- but before we do that, we want to make sure we know what we're doing.

And we're not 100% certain we do yet, but I think we're getting closer and closer.

So I would say that's the commentary from an intermodal side.

Was there an additional line that you had a question on?

No.

That was great.

I think intermodal was the one that you called out, specifically, being more positive on the last call, and you gave a comment on Reefer, so we'll leave it there.

Just a real quick follow-up, Adam, if you could, potentially, give us some sense of how you see 2018 stacking up from -- you gave us the rate perspective.

You've got synergies moving in the right direction faster than you originally thought.

And what sort of EPS range or growth trajectory do you think we should be modeling for next year?

And then, we've typically seen some quarter ahead guidance in the past.

So just wondering if you could give us a feel for how this story can develop in the first half of the year, at least the next couple of quarters will be helpful.

Sure.

And I think on the last call, we shared the fact, and we we're probably not going to give guidance, given we're just trying to understand, maybe, the different cadences of earnings for both businesses.

Like for instance, Swift has a history of a much steeper drop-off of EPS from fourth quarter to first quarter as compared to Knight.

So we're trying to understand what's driving that, and certainly, help mitigate that.

But I think with all the moving pieces with the market, the efforts around synergies, we're not in a position to give guidance at this point.

I'd give you, maybe, a little help on the tax rate side because I think that's a number that I think most people would want to update on their models.

We're expecting that to be around 25%.

We've given you some help on the revenue side, but in terms of trying to put out some EPS guidance, we're just -- we're not in a position to do it at this point.

Potentially, down the future, but we'll see how things transpire.

Yes.

And I would just add that on our Swift book of business, it's a heavier retail bent than on the Knight side.

And retail really intensifies in the fourth quarter, and then, kind of lightens up a bit more than food and beverage and some of those kinds of things.

So I would just reaffirm with what Adam said.

We've kind of got to get through a full year of quarters with Swift where we really understand how things change from quarter to quarter.

The good news is, that it feels like this market is definitely hanging in here with us.

And so, hopefully, we won't see the drop off at Swift like we have in the past.

But I also know that there were a lot of year-end, I think, Swift in the past has referred to them as projects.

And we were doing a lot of project work.

And so we're just going to have to get another 2 or 3 quarters down the road to really fully appreciate how things will cadence for the blue brand.

Your next question comes from the line of Casey Deak from Wells Fargo Securities.

If I can go back to kind of where Jason was asking earlier.

If you look at what Knight is doing on the revenue per loaded mile versus what Swift is doing.

And Swift, if you can exclude what happens in the dedicated kind of looking forward, are you bringing this strategy that you employ at Knight of entering the day maybe under booked so that you can attack the spot market to those irregular routes at Swift as well?

We will do some.

Swift, the makeup of their fleet is different also, where a higher majority of Swift's fleet is independent contractor.

And so we want to make sure we have enough committed freight to kind of keep the beast moving every day.

But on the same token, there's no question that we will provide a higher level of service if we are less committed.

And so by doing that, by being less committed, it gives us an opportunity to do 2 things: number one, exceed our customer expectations; and number two, when our customers have a need for additional noncontract capacity, we will be in a position to respond.

So yes, we will do more of that.

We will do more of that over time at Swift.

But still, we want to be respectful of our blue brand and how it works and make sure that we are deliberate in our processes there.

That's helpful.

If I could add to that, on top of that.

So because you -- they are separate entities and how you're managing them, are you bringing managerial talent from Knight to Swift, to maybe facilitate that change in mindset?

We have.

We've done some of that to help Swift be a little more focused on the profit side of the business, the operating ratio.

But we've also brought some talent the other way, too.

So I would just tell you that Swift is a much bigger company and I'm an old guy.

And it takes a lot of help.

And we have an amazing team at Swift.

And I've asked a few folks that I know how they think and how they operate to help me at Swift because that's where our greatest opportunities are.

So -- but I will tell you that we have an amazing group of very talented people at Swift that I believe are excited about the stability that we have added from a leadership perspective.

But yes, we have moved some people there to help a handful of people.

And there -- they've been extremely well received by the Swift team.

And so, yes, that's how we're approaching it.

Your next question comes from the line of Brandon Oglenski.

This is Van Kegel on for Brandon, with Barclays.

With, I guess, with great expectations now kind of in the, call it, 8% to 12% range, could you talk us through how to think about margins next year?

I mean, is 600 or 800 -- or 6 or 8 points of margin improvement out of the question after you pass on that 30% or so to the driver?

And can you talk to some of the other cost savings and how they might temper that outlook?

And maybe, any of the offsets from synergies at Swift?

Yes.

Maybe I'll jump in, and Adam might supplement here a bit.

But as we talked about earlier, we didn't see much by way of rate over the last couple of years, but that didn't stop the cost of trucks and the cost of trailers some quarters, fuel, and then, of course, we're in a very depressed used equipment market.

So we've definitely seen cost creep up.

There seems to be a bit of a catch up that we kind of need to get caught up.

It looks as though costs could be inflationary again here going forward.

We know for a fact that our largest cost, the driver wages will be, but that will likely not be the only thing that might be inflationary in this growing, strengthening, environment and economy.

So as we look out, our goal is going to be to get as much of that to drop to the bottom line as we can.

We're not -- we're probably not going to ever forecast right now how many points of OR we might get if we got that kind of improvement.

I think you can look at our history in the past to kind of see our track record on cost and our track record on how much of a loaded rate per mile is able to drop to the bottom line.

I -- we didn't drop was much to the bottom line this fourth quarter as we normally would have liked to have.

And I think that had to do with just some of the pent-up costs that has been there.

So I think it is reasonable, however, to assume that you'll see, on a year-over-year basis, you should expect to see OR improvement in our business.

And this particularly on the asset-based side of the business.

When we look on the logistics side, that's a difficult place right now because just because of the volatility and the purchase trends cost.

I mean, that's -- those are where we're seeing the highest rates.

And you can look at these third-party indices to get a sense for where that rate pressure is and really that's the group that saw the deep plunge in terms of pricing.

And so it's more than come back now.

And it's unclear when that is going to stop and there may be a number of factors for that.

So on the the logistics side it's going to be tougher to make margin improvement.

But on the asset-based side, we would expect year-over-year improvement every quarter.

Certainly, this year, because we feel like that there's enough strength and the bid season will carry us through the next 4 quarters.

And hopefully, it continues beyond that.

Yes.

Just to add to that, I think, historically, we would normally expect to see 2% to 3% in inflation from a cost per mile standpoint.

However, we're probably in a market where driver wages will be much more inflationary than they have in the past.

And I'd also point to, not just purchase trends on the logistics side, but also, purchase trends on the asset side, where we have our owner-operator group that there will also be some inflationary pressure there as well.

So certainly, we would hope to expand our margins in a strengthening environment, but probably see more inflationary pressure than we would in a normal year.

Yes.

And I would, maybe, just add, that when you think of these cycles in the past, it usually takes you 4 or 5 quarters to find your best OR that you're going to get in the cycle.

Now this cycle looks like it could last longer than maybe most.

And then, depending on how many new trucks creep into the marketplace.

But typically, on the Knight side, we have seen ORs in the high 70s when we hit there.

So from an asset-based perspective, that would indicate there is 300 or 400 basis points of improvement.

Could it get better than that?

It really depends on the breadth and the depth of the market.

On the Swift side, we would hope that we would be within 200 or 300 basis points of that on the asset based side, probably not including dedicated.

That's probably maybe an unrealistic goal for dedicated.

And so that's how I would see it.

Your next question comes from the line of Tom Wadewitz from UBS.

And Dave, I guess, you've already exceeded on the red truck, the peak pricing you achieved in fourth quarter '14 as it goes, that was like 12.1%.

So anyways, I wanted to ask you a little bit about the contour of the pricing, and just kind of to get to these big numbers, trying to figure out what to put in the model.

So how much of your business in fourth quarter at Knight was in the spot market?

And how much did you actually reprice on the contract side in the fourth quarter?

Well, thanks, Tom.

First thing, just to correct you, I mean, you said just my name.

As you can imagine, there's a whole team, if not, army of people, that work at Knight on rates, both the time you talked about and now.

And so when we look at -- your question was what percentage of the spot are noncontract market?

Yes.

How many trucks in spot in fourth quarter, versus just recognizing that by boost of the overall rate realized?

Yes.

We believe that, that number for the fourth quarter of '18, was north of 20%, perhaps in the low 20% range.

And to compare that, for perspective, to the fourth quarter of '17, we would've probably been in the mid- to high-single digits on a year-over-year.

And of course, that mid- to high- single-digit percentage didn't experience a premium anywhere close to kind of what we've seen here in the market over the last 4 or 5 months.

So hopefully, that gives you an idea.

When you talk about what we really saw contractually, it's at the kind of off time of the year for the contracts.

I mean, you're kind of dealing with pricing that had gone into a place 6 to 9 months previously.

So there wasn't nearly as much of an increase on a contractual basis.

We'll see that change here over the next 2 quarters, we expect.

Now there's another factor here, and that is -- that it appears as though our customers were going a little deeper in the routing guide on the back half of the year as compared to maybe the first half of the year, when -- and you don't really know what you're going to be tendered or awarded on a day-to-day basis until you get into the heat of battle.

And so you have hopes and expectations perhaps through the bid season.

And so as it played out in the first of the year, I think we found ourselves not getting a lot of loads that had been priced in a place where we thought they needed to be, given the driver difficulties and that we needed an increase.

And so on the back half of the year, I think part of this rate improvement that you've seen was also from us just being tendered loads at the agreed-upon rate, but just those -- we were a little deeper into the route guide and our customers were having a tougher time finding capacity.

So we found ourselves hauling those loads and those loads would have come at a year-over-year increase.

Modest, but at a year-over-year increase.

And so the combination of that, the combination of exposure to the spot or noncontract market and some of our efforts to get in front of this with certain customers to get things priced in a way to avoid any disruption.

And the capacity that we provide to them is what led to the rate you saw.

And so we'll continue to work, but in a slightly different way, more so through the bid process here in the next couple of quarters, and keep plugging away.

Yes.

I appreciate that.

And I didn't mean to single you out only for the kind of good performance.

Obviously, it's Kevin and Adam, broader team.

I just was noticing that particular metric that was quite strong among others.

So how do we think about when the year-over-year change might peak?

Maybe if I can also ask you that, in terms of this metric of revenue per loaded mile like fuel.

Is that maybe second quarter this year?

Or how would you think about when that year-over-year change might actually peak?

Well, typically, we get to a second quarter, much of the contract pricing is usually just beginning to take effect and at various stages throughout the quarter.

Second quarter, as you know, has a nice seasonal impact to it.

And so between beverage and just a shifting season and all that comes with warmer temperatures, we typically see a more robust noncontract market there, not quite like fourth quarter, of course, but more so than what we normally would see in a first quarter.

So I imagine we'll see strong seasonality this year, but we won't, probably, still feel the full impact of the contract pricing until the third quarter.

So I think we'll just have to -- we'll have to kind of watch and see how that plays out.

When we get to fourth quarter, I would be surprised if we saw the same degree of volatility in the noncontract market.

I mean, I think, things will be largely prepared for in this first half of the year.

Now there's a chance that because we haven't seen a year where we've had strong, broader economic growth and restrained capacity growth.

And there are reasons to believe that both of those could happen in a way that's different than what we saw in '14 or different than what we saw in '04 to '06.

And so we'll have to see how that plays out.

We're not really budgeting, if you will, that we would see a similar kind of fourth quarter at the end of 2018.

And Tom, I would probably add, I think, the supply chain, all of us that participate, were caught a little bit off guard by all the dynamics of what was going on.

It was the disruptions in weather initially and then very strong retail season.

And then, on top of that, a few weather events.

And then, on top of that, the introduction of the ELD requirement.

So our customers are very good at sourcing capacity.

And I would expect that over the next couple of quarters, that they'll focus on making serious awards at very good contract pricing to folks such as ourselves that have significant capabilities for supplying capacity.

So you could even have some dips.

You could have some dips, and you could have some strengthening, and it really, I think, depends on how strong the economy remains.

What the Tax Cuts and Jobs Act does, and really, just also what happens with the additional capacity finding its way into the system.

So we've just got to take it as it comes and navigate through it in the best way possible.

Your next question comes from the line of Brad Delco.

This is Brad with Stephens, Inc.

Dave, I wanted to focus a little bit -- or maybe this is for you, Kevin, on the direction of Knight's fleet.

I feel like I've heard you deliver the message that the driver wages need to go up at Swift.

Driver wages will go up when you get rate.

So you saw the fleet count down about 450 trucks or so in the fourth quarter.

When do you think we start seeing that turn the other way?

And what is it going to take from both a wage and a rate perspective to see that -- to that move?

Well, Brad, it's a question I wish I had the answer to.

But I will tell you that we have introduced some disciplines in this onboarding process that didn't exist at Swift to the degree that they have existed at Knight.

And so that isn't helping.

But I feel like that when you think about Swift, nobody trains and develops drivers like Swift.

And when you think about Knight, nobody develops experienced drivers like Knight.

And so I really believe that we're going to be able to make Knight better.

And I will tell you that Knight is now in positive territory for the last few months.

And we feel like we've got our feet under us at Knight.

And I appreciate Dave and his team, and I know that Dave is spending an enormous amount of his time in that area in our business.

And at Swift, we're probably a couple of quarters away, at least, maybe, from finding the bottom, but we will.

And that's an area where we're going to have to invest more time.

When you introduce more disciplines, you've got to start with more supply, and we are working on that.

And we're really building a very strong driver development and retention group at Swift that's going to be bigger and stronger than it has been in the past.

And so, Brad, that's basically how I see driver, the driver situation playing out at Swift, where we now have got good rates and -- or better rates, and rates that are going to continue to improve.

And the good thing about rate is it puts you in a position to do more for your drivers, not only from a driver pay perspective, but from a driver development perspective, from a driver retention perspective.

And so you're going to have to be a little patient with us.

I apologize for not having more clarity, but we're just going to have to stay focused and stick to our -- the way we do trucking and it should all work out very, very well.

Kevin, if I can, just a clarifying point there.

Dave suggested $0.25 to $0.30 on the dollar going to the driver at Knight.

Is that the same range you expect at Swift?

Or is there a little bit of a catch-up that needs to take place?

Yes.

Yes.

No, we're pretty close.

Not too far off.

Knight could be a little bit higher.

I'm not 100% certain about that.

I think we're really pretty dang close, Brad.

And so I don't see, necessarily, any catch-up on Swift.

One of the things that we had to do at Swift was we had to improve the cost to get a good driver on his own.

And so that is a cost that we've been experiencing for -- since we started -- or shortly after we started.

So those costs are already hitting the Swift side.

But as far as once a driver becomes solo and on his or her own, we're pretty dang close, Brad.

And that is all the time we have today for questions.

I will turn this meeting back over to our presenters.

Hey, we really appreciate the many of you that have joined, those that have asked questions.

And for those who we did not have time to get your question, we would welcome you to give us a call at (602) 606-6349, and Linda will be there to grab a message, and we'll try and get back in touch with you.

Have a wonderful evening.

This concludes today's conference call.

You may now disconnect.