Knight-Swift Transportation Holdings Inc. (KNX) Q1 2012 Earnings Report, Transcript and Summary

Welcome, ladies and gentlemen, to the Knight Transportation First Quarter 2012 Earnings Release Conference Call. [Operator Instructions] The speakers for today's call will be Mr. Kevin Knight, Chairman and CEO; Dave Jackson, President and CFO; and Adam Miller, Senior Vice President of Finance and Accounting. Mr. Miller, the meeting is now yours.

Good afternoon, everyone, and thanks for joining our call today. Hopefully, you’ve had a chance to print and pull up the slides that we've posted in addition to the press release today. The slides that will accompany this commentary that we offer are available on our website. The actual web address is investors.knighttrans.com/presentations. Our call is scheduled to go until 5:30 p.m. Eastern time. Following our commentary, we hope to answer as many questions as time will allow. If we're not able to get to your question due to time restrictions, you may call (602) 606-6349 following the call, and we will return your call. The ground rules for the questions are simple. One question per participant. If we do not clearly answer the question, a follow-up question may be asked. To begin, I'll first refer you to the disclosure on Page 2 of the presentation. I'll also read the following: This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A Risk Factors or Part 1 of the company's annual report on Form 10-K filed with the United States SEC for a discussion of risks that may affect the company's future operating results. Actual results may differ. I will cover some of the numbers in detail, including a brief recap of the first quarter starting with Slide 3. For the first quarter of 2012, total revenue increased 17.7% year-over-year to $219.5 million, with revenue before trucking fuel surcharge growing 16.7% year-over-year to $175.6 million. Income from operations increased 49.3% to $23.8 million in the first quarter of 2012, compared to the same quarter in 2011 and this is excluding the noncash $4 million pre-tax, $3.9 million after-tax stock compensation charge recorded in the first quarter this year. Our net income per diluted share increased 54.7% to $0.18 for the quarter, compared to $0.12 per share for the same quarter last year. And again, that's excluding the noncash stock compensation charge for Q1 this year. Now to Slide 4. Our financial position remains strong. We finished the first quarter of 2012 with $489.4 million of stockholders equity. In 2011, we repurchased 4.6 million shares of our stock and over the previous 24 months, we have returned $178.8 million to shareholders through dividends and repurchased shares. We have continued to invest in our tractor and trailer fleet. Our average tractor age ended the first quarter of 2012 at 1.7 years. We expect our net capital expenditures to be approximately $85 million for 2012, which is down from $138 million in 2011. Dave Jackson will now walk through some slides providing some additional information for the first quarter results.

Thanks, Adam, and good afternoon, everyone. Now to Slide 5. Positive trends have continued in the first quarter, as demonstrated by the graphs. The graph on the left side of Slide 5 charts the progress made in our top line revenue growth, excluding fuel surcharge in the first quarter of each of the last 3 years. As demonstrated by the graph on the right, we've experienced revenue growth, excluding fuel surcharge for 10 consecutive quarters. On Slide 6, we illustrate the earnings growth trends over the last 3 years, not including the noncash $4 million pretax, $3.9 million after-tax charge in the first quarter of 2012. The first quarter of 2011 was one of the most challenging quarters in our company's history. We experienced rapidly escalating fuel prices, with weaker demand specifically in the West. In 2012, we responded with improved per unit operating fundamentals, fuel MPG improvements and revenue growth. As demonstrated by both graphs, our 2012 results show significant improvement in both EPS and net income when compared to the prior year. On Slide 7, we've summarized our first quarter performance in some of the key operating statistics. All stats are year-over-year comparisons from the first quarter of 2012 to the first quarter of 2011. Revenue per tractor, excluding fuel surcharge, improved 10.3%. Miles per tractor increased 7.3%. Revenue per loaded mile increased 3.1%. Revenue per total mile increased 2.8%, and length of haul increased 2.6%. Our non-paid empty mile percentage ended the first quarter at 10.7%. We ended the quarter with a tractor fleet of 4,032 tractors, including owner operators, an increase of 154 tractors from the end of the first quarter of 2011. On Slide 8, we show the average revenue per tractor, excluding fuel surcharge for the first quarter in each of the last 4 years. The revenue per tractor for the quarter has grown from roughly $35,400 in the first quarter of 2011 to just over $39,000 in the first quarter of 2012. Now to Slide 9. We experienced revenue growth in all businesses. Our largest business, Dry Van and Refrigerated, showed meaningful year-over-year improvement in their operating ratios. Our Port & Rail Services business did experience an increase in operating ratio, as we continue to build out our network. We expect to see improved results in future quarters. Our brokerage business continues to grow revenues at a double-digit rate while operating in the low 90s. On a consolidated basis, we improved our operating ratio 300 basis points to an 86.4% and increased revenue, excluding fuel surcharge, by 16.7% when compared to the previous year. Now onto Slide 10. We are focused and committed to creating and operating Knight in a way that generates industry-leading margins and revenue growth. We believe our decentralized model affords us strategic advantages that can be leveraged from one business or transportation mode to another, while providing greater value to our customers. On Slide 11, we continue to bring our businesses together to provide our customers with services that meet their changing needs while leveraging our established geographic network and low-cost operating model. We believe there are many opportunities to grow with our existing customers and introduce new customers to our multiple services network. Our businesses, Dry Van, Refrigerated, Port & Rail Services, Intermodal and Brokerage, continue to complement each other, while providing premium cost competitive service to our diversified customer base. Since 2004, we have diversified our business model by expanding our service offerings. Our Dry Van business went from comprising 99% of our revenue in 2004 to 68% in 2011. I'll now hand it off to Kevin Knight to discuss the next couple of slides.

Sustained high fuel prices, moving on to Slide 12, I guess, I should say. Sustained high fuel prices have created significant challenges for our industry. We have responded by dramatically improving our fuel efficiency and also making sure that we're competing in all modes of the truckload dry van and closed van space. With the average tractor age for the industry at record high levels, many carriers are burdened with exponentially rising maintenance costs and struggle for the capital necessary to refresh. With access to capital, we have been able to maintain a modern fleet and capitalized on reduced maintenance costs and more fuel-efficient engines. The cost of new equipment tractors and trailers has risen sharply. A trucking company's ability to purchase and sell equipment has always been vital and is now more important than ever. Purchasing equipment remains one of our core competencies and we have also established a very solid equipment sales business for our used equipment. Regulation continues to become more prevalent in our industry. And we feel we stand to benefit, given our proactive approach in the way we manage our business. We continue to develop multiple sources for qualified drivers, this includes our Squire training and CDL programs. We also feel our decentralized service center network, regional freight lanes, late-model tractor fleet, financial strength and overall culture offer competitive advantages in recruiting and retaining qualified driving associates. Trade markets are constantly changing. We are investing in the technology and resources to react to the ever-changing trucking environment in order to advantage opportunities that are sourced and presented. Moving onto Slide 13. Our network is designed to grow and service multiple truckload modes at one of the highest levels of efficiency, as measured by on-time service, cost per mile and cost per transaction. There continues to be opportunity for us to improve the productivity of our tractor fleet. We remain vigilant on cost control in every business. We believe that we have strong models for each of our businesses that lead or will lead us to rewarding returns on invested capital. We're providing more services to more of our customers. We continue to evaluate acquisition opportunities. And I'll turn it now back to Dave.

Thank you. Now to Slide 14, our final slide. We reiterate our expected range for the second quarter of 2012 of $0.21 to $0.23 per diluted share, and our expected range for the third quarter of 2012 is $0.22 to $0.24 per diluted share. These estimates represent management's best estimates based on current information available. Actual results may differ materially from these estimates. We would refer you to the risk factors section of the company's annual report for a discussion of the risks that may affect results. This concludes our prepared remarks. We would like to remind you that this call will end at 5:30 Eastern time. We will answer as many questions as time allows. If you would, please keep it to one question. If we're not able to get to your question due to time constraints, again, you can call (602) 606-6349, and we will do our best to follow up promptly. We will now entertain questions.

[Operator Instructions] Your first question comes from the line of Ken Hoexter with BoA Merrill Lynch.

Dave, can you talk about, within that guidance, what are you targeting in terms of -- are you looking for your 4% growth in the fleet to accelerate as we move through the year? Are you expecting kind of rates to hold at these levels as you go through the bid season, are they accelerating? I just want to understand what is in those kind of quarterly outlooks.

Yes, really, really, all of those -- both of those number, the fleet growth and on a revenue per mile growth, those are single digit, low single-digit numbers, right? Somewhere in that range of, on the rate side, loaded per mile, we were 3.1. We've said throughout the year, we expect overall to be somewhere in that 3% to 4% range. On the fleet growth side, we've projected a 4% to 7% growth. And so, from a guidance standpoint, we would be modeling based on the low end of that range from a growth standpoint. And the tricky thing is what happens on the cost side. What happens with fuel cost. What happens with what it takes to attract sufficient numbers of drivers. And so those are some of the bigger unknowns that we take into consideration on the guidance range.

So just to clarify, that's what moves you up and down between those ranges is on the cost side or is there something that would get you to add more tractors faster as you go through the year? I just want to understand what would swing you on that one.

Yes, well, the time to add trucks is we're now approaching that kind of timeframe. Typically, we don't do a lot in the first quarter. And so we've said 4% to 7%, I think we're pretty comfortable that, that's going to be the range that we would see. I think if we have a really strong freight market, we're also going to need to make sure that we have enough drivers to help justify that at the same time. So I don't know that there's -- there would need to be multiple events that would have to happen, Ken, for us to be beyond that 7% top in terms of growth.

Your next question comes from the line of Justin Yagerman with Deutsche Bank.

Want to piggyback on there and try to figure out what the limiting factor is in keeping you at the lower end of that 4% to 7% range. Is it primarily finding drivers right now? And then, I guess, as a follow-up to that, if it's not, is it freight? Because it feels like March, we had extremely strong West Coast port import volumes, and that should translate historically into a stronger April freight environment here. So just trying to get a sense of how that guidance plays into the driver’s side and the freight side. So if you follow, I've asked 2 questions even I'm only supposed to ask one.

Yes. Well, we'll -- I'll take that one, Justin. And I mean at the end of day, it's all about freight and it's all about how well we do in developing and retaining drivers. And so both of those have an effect. As far as April is concerned, April has felt pretty normal from a seasonal perspective in terms of what we've had in April's past. Maybe not quite as strong as April of last year, because you had April at the end of the month. But certainly, April seems to be building -- or you had Easter at the end of the month. And April seems to be building like it typically would. We expect for the summer shipping season to be strong. We're taking into consideration that we think beverage will be strong, and we also believe that produce will be strong to tighten up the overall market. We, as you know, from a driver perspective, we're in a challenging environment. We seem to continue to do better than most there. And we expect to continue to be able to do that. And so I would say, Justin, that as we move through the year, if we're doing well from a driver perspective and if freight continues to build, then we would expect to be closer to 7%. And if we don't see those events, then we would expect to be closer to 4%. But those are the 2 things that will determine that.

Your next question comes from the line of John Barnes with RBC Capital Markets.

Kevin, just talking about the fleet growth again. I'm just curious as to -- I guess, when you think about fleet growth of 4% to 7% this year, you've been pushing this pretty hard. The rate environment feels a little softer in the first quarter for all the guys that have reported thus far. Are you concerned at all that you get some kind of deceleration in pricing where it becomes a little bit more difficult to justify adding that kind of fleet growth until we see a material surge in volumes from here?

I don't. I've also watched the press releases, John, that have been released prior to us. And I've been a little bit surprised that others in the marketplace haven't done quite as well. It seems like every time I go speak somewhere, I'm the conservative one when it comes to rates. And then it seems like when everybody puts up their numbers, that they haven't quite made the progress that they told everybody they expected to make. So we are feeling the same. In other words, we said 3% to 4%, and that's where we feel like we'll be, which is a little bit ahead of where we were last year. And so we really haven't seen anything, John, that indicates to us that if we're doing a good job for our customers and if we're providing them with the services that they need, we believe that we should be fine as far as rates are concerned.

Okay. And just along those lines, I mean, you mentioned you've been a little bit surprised, that it hasn’t follow through for some of the other carriers. Have you noticed anything in the marketplace that's an impediment to pricing right now? I mean, is it fuel surcharges are too high and that's kind of cutting into core rate? Or have you noticed anything in the marketplace that would be preventing you from pushing pricing more aggressively or the industry from pushing it more aggressively?

Not really, John. I mean as you know, it's a very sophisticated world now. And if you don't come with the tools and if you can't back your pricing up with service, then it makes things more difficult. And so, basically, that's how I would describe it. We've not really seen any impediments. We've actually, thus far, and hey, everything, I guess, is always subject to change. But we've actually felt more acceptance this year as compared to last year, as far as contract rate increases. So I can only tell you how I see it.

Your next question comes from the line of Jeff Kauffman with Sterne Agee.

I hate to nitpick, but I want to get a little bit more deeper understanding of the stock option acceleration. What caused it? I know it related to 2009. But was it related to incentive compensation, bonus compensation for officers?

I'll take that, if I could, Jeff. A very, very small percentage of it had to do with the executive officers. This was primarily -- these were options that were issued throughout our company, pretty deep into our company, in fact, that for the most part, a majority of which were underwater at the end of the year. And so the way that the accounting for stock options is pretty draconian and very unforgiving. And so, our company, we've expensed x amount per share. And when the option's underwater, there's no value per share to the employee. And so, we finally felt like we were at a point where it made sense to fully vest those options, take the onetime hit because all of that expense has to run through the P&L, there's not a way to escape that...

Right, you're going to incur it later or now, right?

Later or now. And so we did that now. And at the same time, we think it was a favorable thing for our employees because those options don't just disappear. They now have those options. And as they become in play and in the money, then there can be value for them down the road. So we felt like this was, if you will, maybe a bit of just housecleaning. And because of how the accounting rules work, this is how that works. There's no way to cancel those options that are underwater. They have to kind of play the course, so that's what happened. Now these were options that were all issued in 2009 and prior...

No, prior to 2009.

I'm sorry, prior to 2009. So they've been around for a while. And...

Yes, and Jeff, I would just add. Our focus is more driven by RSUs now as compared to stock options. For those of you who have followed our company since the beginning, stock options were always a big portion of our compensation practices. And then, as you all know, they changed the rules on us long after we had started that practice. And we just feel like, based on the new rules, RSUs are a better, more consistent way to go for rewarding our people. So that's it.

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

Maybe if we can talk a little bit on the expense side. I know you guys had been talking about how your terminals are reaching new profitability levels that you hadn't seen in a while. Maybe talk about beyond the pricing initiatives, what you guys are doing on the efficiency side and the cost side that are helping drive those outcomes?

Well, I think the main thing that we're doing is, first off, it's -- we're very fortunate to have capital and access to capital and be in a position where we can buy trucks and trailers the way we do. We can sell trucks and trailers the way we do. And especially our facilities pay a big role in helping us maintain our trucks and trailers the way we do. And so having a very diversified network of shops is certainly -- helps us a lot. I think another area that we've had good success on is, even though fuel has risen significantly in the last year or 2 and really has been inflationary for most of the last 4 or 5 years, we've really continued to focus on improving our fuel mileage. And we've made very, very solid improvements in our fuel economy. We've also probably deployed more trailer blades than I would think than anybody else in the industry, which basically is an aerodynamic device that hangs off the bottom of our trailers. They're very good devices. We've had very little damage. They're holding up very well. Quite honestly, I believe when we sell our trailers, we'll probably get every dollar back in terms of what the cost has been of equipping our trailers with those, because we've noticed that those that we're using are just -- they're just doing a really good job. So I would say those are probably the main issues. We've also focused significantly on the productivity per employee. We've done very well there on a year-over-year basis. And so that's my color there.

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

So first, I wanted to just clarify one of the comments on the fleet and then I had a question on utilization. But with the fleet, when you talk about 4% to 7%, are you talking about on average for the year, or you're talking about beginning of the year to the end of the year?

Year-over-year. So what we hope to do is grow by 4% to 7% from a fleet perspective when you look at all of our asset-based businesses combined. When you compare them year-over-year, that's our goal.

I would probably say that, that's an ending tractor count number, not the average number, if you follow me. We give both an average tractors and we give an ending tractor.

Yes, okay. That makes sense. And then just on the utilization side, obviously, very strong in the quarter. But there were some easy comps with demand last year and EOBRs. Can you give us some sense on how that's tracking in April? And then what's a reasonable expectation for the next few quarters in terms of utilization? I'm guessing it can't be up 7%, but what do you think you can get out of the trucks?

Well, I would say that, first off, a lot of that improvement this year, as you mentioned in your comment, is a result of the weakness on the West Coast last year. We've also made really good progress in our Eastern operations, even though we were busier in the East last year, we're much better operators in the East this year. And so what I would say is you definitely shouldn't expect this kind of year-over-year mileage growth in the quarters to come. I mean, I think we've done a very good job of adapting to EOBRs. And now what will drive further efficiency is our overlaying of technology based on the visibility that we have in terms of producing more miles. But they'll come in bits and pieces. So as we move forward, if we can be up, I don't know, what have I said before like a couple or 3 points. I mean, I think we're getting in the range where I would be extremely happy if we could consistently improve our mileage by a couple of points on a quarter-over-quarter, year-over-year basis. Now that isn't as easy as these numbers that we released this quarter make it look. And so I just want to caution everybody there. And so when you look at $39,000 worth of revenue per truck in the first quarter, I mean, those aren't inefficient numbers. So I think we've just got to keep working on it. And we've got to advantage technology to the best of our ability. We've got to work hard to make sure that we're sourcing and retaining the driver force that we need and make sure that we don't get ahead of ourselves in terms of bringing in equipment. So that's really the way I see it.

Okay. So, Kevin, it sounds like you think 2% to 3% is reasonable. And maybe if we start going above that is when you'll take on more tractors, is that a fair way to think about it?

Well, we're going to take on more tractors this year, assuming we can continue to build our driver ranks. And I think in order for it to get more than what we've told you, then it would have to be stronger than that. But it's going to be 2%, 2% to 3% isn't going to be easy, I promise you.

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

I was wondering if maybe you can comment a little bit on length of haul and kind of the characteristics of the freight that you've been seeing in the first quarter and maybe the first month of the second quarter? You guys posted a nice increase average length of haul, which is a little bit different than what we've seen from some of the competitors. And I just wanted to kind of catch up a little bit on that and get your thoughts on if you're seeing any different dynamics in the types of freight you're moving right now.

I would say, probably not. I would say that, really, it's just more of the same. I think we probably watch that number a little closer than some of our other competitors do, because we really have a strong understanding of the negative impacts with regard to yield, especially as you're operating in the shorter length of haul markets. And we've had to bite off a lot of competition that's moved into this space and we just see that they really struggle in terms of pricing adequate return, because I don't think they watch that length of haul enough. And so it's just an important number to us. It isn't like we have a specific length of haul that we want to haul. We just don't want to go backwards in that area significantly without getting yield to offset that. So -- and I mean, I think, as you know, I mean, certainly, intermodal is becoming a larger player in terms of the over-the-road linehaul. And you have that dynamic that has changed things over time. And as long as fuel prices stay high, will continue to change things over time. And you have our regional markets that we focus on from each one of our service centers. And we have certain areas that we run and we like to run in each of those facilities. And it's very dynamic, but we just -- we're pleased that we were able to improve our rates by 3.1%, and then also gain a little on the length of haul, because, ultimately, that gives us a stronger yield.

Sure. Okay. So when you think forward, there's -- you're probably going to be within a band that you guys have historically kind of been excelled within without seeing a lot of necessary -- a little bit of variability around that band, but not necessarily a structural move one way or another, is the way to think about it?

Yes, that's what we would suspect. If it was -- if it changes significantly, we'll be as surprised as you are.

Your next question comes from the line of Chris Ceraso with Credit Suisse.

This may dovetail with some of the earlier questions. But the revenue per tractor was particularly strong. And I'm wondering if there were seasonal effects there, whether the weather was favorable and that helped the mix of traffic that you had or the mix of what you were carrying. Usually, it's down a bit more than it was from Q4 to Q1 than what we saw here. It was up a lot year-over-year. I know the comp was easy, but can you talk about the strength in revenue per tractor, and what we should expect looking ahead?

Well, yes, I'll maybe talk about that. And then Dave, you can add if there's anything you feel like I missed. Really, first quarter was just a good, solid quarter. It was a very normal seasonal quarter with January and February seeming a little better than they otherwise would because of how soft things were 1 year prior. So March had really good strength at the end of the quarter and really rivaled some of our best weeks at the end of the year last year. So it just seemed very seasonal. And it seems like there's maybe been some talk about how April didn't get off to that strong of a start. Well, really, I'll tell you based on my 37 years of experience, most Aprils don't when you're in a normal seasonal pattern. And so we've really seen April kind of build as we would normally expect. And I think that the Easter holiday landing at the end of April last year had a little bit of a negative effect on the comparison for the first couple of weeks, because freight would have been moving heavily to protect that holiday. So I think that, and as everybody knows, gosh, we had good weather, we didn't really have any storms that really shut us down for days, it was more like hours. And I just think the gods were -- the freight gods were with us. So, hopefully, we'll get a few more of those. But we'll just have to see kind of how it plays out.

Okay. Maybe, hey, Chris, I'll -- just to get your money’s worth, if you look back over the last several quarters, you've seen this trend of us. For the last 4 consecutive quarters, we've been improving year-over-year the miles per truck. And so, Kevin commented about the EOBRs. Maybe we understand that a little bit better, I think that definitely is the case that has maybe a little bit to do with it. I think there's genuine momentum in the production we're putting on trucks. And so when we can combine our ability to put miles on the truck with the marketing efforts that we have, the providing a high level of service, getting a little bit more on rate, quickly, we find that there's -- each of our service centers were operating at much better levels that they've been in a long, long time. And so we saw that in the fourth quarter, in particular, where many of our locations were operating at a level where we would consider deploying capital based on a revenue per truck per day where they were at. And so I think we saw similar momentum work its way into the first quarter. And so, I think, this is -- it's not a result of just one particular market condition. I think it's a result of a lot of hard work in developing disciplined operations in each service center throughout our networks. So...

One other comment, and I know you're really getting your money's worth now, Chris. But this is just really a thought that I have that I feel important is, and the more people know it, the better our industry will perform. And really, we now have a very good grasp on how EOBRs work. And there are other fleets that pioneered this prior to us, and I'm certain that they have a very good grasp on how they work. But as we get more fleets that really grasp how EOBRs work, then the next opportunity that we have is really helping our customers understand how they work. Because today, you have very -- the world that we operate in, you have many appointments, both on the front end and the back end. You used to not have appointments, then you had appointments on the back end. And now you have a lot of appointments on the front end and the back end, even when you're dealing with dropped trailers, because they just want to know when the truck's going to come and when the truck's going to go. Well, that system was really efficient when we had more of a flexible hours of service environment. And so now what I look for our customers to start understanding is that we no longer have flexibility. So if our -- if the customer base in our industry can start to come to the table and say, "Okay, based on when your trucks are emptying, when is the best time for you to come and get this load? And when is the best time for you to deliver it?" Then I'm telling you, that's when we have an opportunity to do much better as an industry in terms of productivity. And I don't think that the general customer base is thinking that way yet. I mean, first, we have to understand it and have a good handle on the consequences. And then, secondly, we have to help our customers understand it. And that's -- we're in the early stages of that. So hopefully, as you see more and more fleets moving to EOBRs, and it seems like there's a strong movement there in our industry, I think then we'll have an opportunity for more of the guys who really control when trucks pickup and when trucks deliver them truly understanding. So probably too much commentary for one question, but I felt like it's something that's important for everybody to be thinking about.

Your next question comes from the line of Donald Broughton with Avondale Partners.

Your guidance on fleet growth is encouraging, because I know you don't start growing your fleet unless you're confident that profitability is going to be there. But that guidance on fleet growth, you're talking about only organic, correct?

Yes, that's correct, Don.

Given the current marketplace conditions, what are the odds that we saw you doing an acquisition again this year?

Well, gosh, we would love to, and we feel like we're well managed enough to do that. We've spent the last few years digesting some of these new businesses, and we don't have them all performing to the level that we would like. But certainly, we feel capable of doing that. But we work on it every day, and we get close occasionally and we just haven't been able to get anything done. Our strategy is when we acquire somebody, we're really trying to build on what we have. And we just haven't been able to get anything done, Don. But for those of you who know Gary Knight, who's our Vice Chairman and one of our founders along with me. I mean, he spends a lot of time and effort on it. And Clark Jenkins, who was our CFO years ago, he also works with Gary in that space part time. And so we've got a team that is working it, and we just haven't gotten anything done there. But certainly, we hope that we will.

Your next question comes from the line of Matt Young with Analyst MorningStar.

Just another highlight on the acquisitions, on the acquisition front. Do you still feel that a purchase would require burdensome levels of immediate capital investment, given the run up in average tractor age across the industry over the past several years? Or could you say that the carries you looked at have generally upgraded their fleets more recently?

Well, it's really a mix, Matt. I mean, it's -- we see all spectrums. We see opportunities, where the average age of equipment is 6-plus years. And then, we see opportunities where, hey, it's 3 to 4 years, which is a little older than we'd like to see, but still probably within acceptable levels. And then, we see -- we're starting to see opportunities where people have really got back to their cycle. And so it's really across the board right now. I would say still more leaning towards those that are significantly underinvested than overinvested. I mean, it's not normal for us to see an opportunity where somebody has a fleet age of less than 2 years. And years ago, that used to be the norm. So it has changed. And I think that's the biggest challenge for our industry. is our industry is so underinvested from a capital perspective and you're seeing truck orders slow, I think it's just difficult to write out the big check and to sign up for the big loan. And so that probably favors us over time.

Your next question comes from the line of Nate Brochmann with William Blair.

Hey, Kevin, I wanted to talk a bit more about the rates environment. Where certainly a feel or hear some things are tightening up on some lanes here and there. You guys talked about a kind of positive outlook heading in the beverage season. What are you thinking about in terms of kind of the just general overall supply and demand characteristics, particularly in the face of, if things tighten up a little bit more getting to the higher end of those rate increases?

It just seems to me, Nate, like the economy is just getting on a little more stable ground. I think the biggest thing for us is we've really had normal seasonality now for a full year. And what I mean by that is a good second quarter, good third quarter, good fourth quarter. Not as busy a first quarter, but because of the poor quarter we had a year ago, it looks a lot better than it probably otherwise would have. And so that kind of tells me in my view of the world that things are improving bit by bit. I also think that I just don't think that there's the will or the way for an enormous amount of capital right now to come back into this business. And what I mean by that is, number one, trucks are up $25,000 or $30,000 in the last cycle compared to the prior cycle. Trailers are more expensive, capital isn't as available and it's also, there's more and more of this -- it's becoming more and more difficult to -- win at rates. I think is maybe a way I would describe it. And maybe not for us and maybe not for those who have invested, but maybe for others. So I just don't see a lot of additional capacity coming in. Now we do have the competition from the intermodal side. And that is competition. And so we have those challenges that, for us, we're trying to create opportunity out of that. So I really believe that the economy is continuing to improve ever so slightly, that there really isn't and isn't going to be the capital required to probably keep up with the expected investment in equipment. And so, Nate, I think, over time, we're going to be in good shape. I feel like that's the way I see it playing out.

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

Kevin or Dave, I was hoping you could talk a little bit about the brokerage business and the expectation for the revenue growth for that segment for the rest of this year. I know you've made some investments in the past couple of quarters for personnel there. How should we think about revenue growth there? And any comments that you can make on the OR in that business would be helpful as well.

I'll maybe take a stab at that, if that's okay, Todd. We saw a 20% growth in the first quarter. We saw exceptional growth last year, as we grew that business from $40 million to $60 million for the year 2011. So there definitely is growth momentum here. And so we are working very hard to leverage this existing network and marketing network that we have within our company, where we're seeing benefits already on the asset side and on the non-asset side simultaneously. So I would say that to be certainly upper teens to 18% to 25% growth would be the target for us to grow that business. I think that there's a potential for us to maybe even do a bit better than that, as market kind of helps us. That's an area of our business where we are ramping up a bit to be prepared and ready, and really, to take advantage of the opportunities that we think are already there. And maybe I'd comment on the OR. 92 9 is what we have for the first quarter. So we do more with less gross margin in terms of dropping the bottom line than what some of the dominant players in that space do. So we feel like there's some advantages to what -- and maybe some synergies is a better way to use it or to say it from the existing business network that we have on the asset side. So we think that there's opportunities for us to continue to operate in that low 90s number without happening to have the biggest gross margin on the street, which we think competitively can help us there as well.

And Todd, I would just add. I mean, the fact to the matter is, there's a big difference between the way the asset-based business works and the way the logistics business works. And we're still learning. But I think we're getting pretty dang good at it. We see many of our competitors in that space. It's like they have a philosophy of hire the people and they will come. That's a little hard for an asset-based guy to get their arms around. And especially when we're really dialed on really mitigating the cost per transaction, so that over the longer period, regardless of what happens, we're the guys that can go to the customer with the better solution, if you will. So I like the progress. I see just as the CEO, I like the progress I see on the intermodal side of our business. I like the progress I see on the brokerage side of our business. We're very committed to both of those spaces. And we're making progress with both of those businesses. And it's a little more of a mountain decline than an old trucker would have thought. You know what I'm saying. But, hey, there's a learning curve with everything. I remember when we got in the Refrigerated business, everybody thought we were crazy. And we've ended up doing a pretty good job there. And I know this is different, but I think we're investing in the right things to really move this forward. I mean, a lot of the problem, Todd, as far as our industry being underinvested, I read an analyst report the other day that said that $50 billion in our space goes to brokerage. And when you think of the average gross margin of, say, 15%, that's $6 billion or $7 billion a year that goes to some company that has no intention of buying a truck or a trailer. And that's a lot of money. And I think our customers, I think that with the sophistication of our customer base, I think they're going to become more and more aware of that. And I think that's going to advantage us to go to our customers with that solution in our bucket, so to speak. And hey, it isn't for everybody. But I really do think it's for us. I think it's -- I mean, I'm very optimistic about the long-term prospects there.

Todd, just one other quick thought on this. This bid season, maybe more than ever before, we're hearing this term of asset-based brokerages. And some particularly large shippers have realized the value that can come from somebody who understands their business and their needs, but then also has the ability to flex and surge using third-party carriers to help pull it off, but yet with a consistent service level all the way throughout. And so perhaps and hopefully, that a trend that we're going to continue to see, I think there's legitimacy behind that kind of thinking. And so we're hearing shippers talk about it. So we'll see what it turns into.

Your next question comes from the line of Bill Greene with Morgan Stanley.

Hey, I wanted to know if I can get to some clarification on your guidance and tell me if you think this is the wrong way to look at it. So you beat your guidance in the first quarter. You didn't change your second quarter. Now maybe is that -- did the beat sort of come from one-time items, like the weather or some seasonal effect that we got to think about and that's why you wouldn't say, like, hey, the trends looks pretty good. If I look at your revenue trend shown on that chart, you've actually been accelerating them. I mean, we could maybe argue you don't see an acceleration from here, but still that's some pretty strong growth. Some I'm just curious why the second quarter number wouldn't go up a $0.01 or $0.02 just for the strength that you've seen at least in the first quarter.

Well, Bill, first off, we want to be clear that we're comparing off of a very weak first quarter in 2011. And the fact of the matter is, we don't want to get ahead of ourselves. And when you look at just how things work in our space in an environment like we've been in for the last 4 or 5 years, I mean, we just believe it is prudent to not get ahead of ourselves and stay the course and to just keep blocking and tackling the very best we can. And we'll be happy if we're in the upper end of that range, and we'll probably be disappointed if we're in the lower end of that range. And if we beat it, we'll be even more happy. But at the end of the day, I think that it's -- I guess, it is what it is. All's you got to do, Bill, is read your reports and you'd be a little cautious, too.

Fair enough. Except we did call for a beat this quarter you did it. And so I just wanted to make sure we weren't kind of looking at the first quarter. And sort of the takeaway is, well, that was kind of some one-time stuff. That's what I'm -- I just want to make sure of that. Now the strength is real, and if it continues then, you'll be at the upper bend or maybe even above.

Yes. Well, that's what we certainly hope. Thank you. And this concludes our call. LaShawna, we're at 5:30. And so if there's any of you that were unable to get in, Dave, you want to give them that number?

Yes, you can give us a call at (602) 606-6349.

And from the bottom of our hearts, we appreciate your interest and your support. And this concludes the first quarter 2012 knight transportation conference call. So it's back to you, LaShawna. Thank you.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.