Knight-Swift Transportation Holdings Inc. (KNX) Q2 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Tanisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Knight Transportation Second Quarter 2013 Earnings Call. [Operator Instructions] speakers for today's call will be Mr. Kevin Knight, Chairman and CEO; Dave Jackson, President; and Adam Miller, CFO. Mr. Miller, the meeting is now yours.

Thank you, Tanisha. Good afternoon, everybody. We appreciate those of you that have joined us for our conference call. We've had a little bit of a technical difficulty with the link that we have our slides going to, so we've actually created a new link for the slides. It is knighttrans.com\slides.pdf. So if you go to that website, you should be able to have access to all the slides accompanying this call. 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. [Operator Instructions] So I'll start with the disclosure on Slide 2. Hopefully, many of you have had a chance to get onto the website where the slides are located. To begin, I'll first refer you to the disclosure, like I said, on Page 2. 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 United States SEC for a discussion of the risks that may affect the company's future operating results. Actual results may differ. I'll begin by covering some of the numbers in detail including a brief recap of the second quarter results, starting with Slide 3. For the second quarter 2013, total revenue increased 3.6% year-over-year to $244.8 million while revenue, excluding trucking fuel surcharge, increased 6% to just over $200 million. Income from operations decreased slightly 0.6% year-over-year to $31.9 million while net income was down 1.8% year-over-year to $18.9 million. Our net income per diluted share was $0.24 versus $0.24 for the same period last year. Now on to Slide 4. For the first half of 2013, total revenue increased by 5.3% year-over-year to $480.2 million while revenue, excluding trucking fuel surcharge, increased 6.9% to $389.7 million. Our income from operations increased 2.8% year-over-year to $57.5 million while net income increased 1.2% year-over-year to $34.1 million. Our net income per diluted share for the first half of 2013 was $0.43 versus $0.42 for the previous year. This is a note. All prior year-to-date comparisons exclude the noncash $4 million pretax, $3.9 million after-tax, charge for stock option acceleration taken in the first quarter of 2012. Now on to Slide 5. Again, Knight remains financially strong. We finished the quarter with $517.4 million of stockholders' equity. And over the previous 24 months, have returned $78.5 million to shareholders through dividends and repurchase shares. We continue to maintain a modern tractor fleet with an average age of 2.1 years. With our business operating at a high level of profitability, coupled with lower capital expenditures, we have generated significantly more free cash flow in the first half of 2013 when compared to 2012. This has allowed us to repay $54 million of our outstanding debt on our unsecured line of credit. Dave Jackson will now review slides, providing additional insight of the second quarter results.

Thanks, Adam. Good afternoon, everyone. I'll start on Slide 6. Revenue continues to trend positively as we recorded the highest revenue excluding trucking fuel surcharge in a single quarter in our company's history in the second quarter. Our non-asset based businesses continue to grow at a rapid pace while at the same time improving margins. Our growth remains organic as we continue to invest in providing logistics solutions to our customers that have led to and will continue to lead to additional revenue opportunities. Our average revenue, excluding fuel surcharge per loaded mile, increased 0.8%, while our average revenue per tractor increased 0.2%. Our miles per tractor and length of haul remained essentially flat on a year-over-year basis. The rate environment remains a challenge. On to Slide #7. As a result of the challenging operating and economic environment, net income was down just slightly for the second quarter. However, it's still trending positively for the year. We do, however, expect that the second quarter would be our toughest comparison of the 2013 year. Now on to Slide 8. We continued our streak of positive year-over-year revenue growth as we continue to develop each of our service offerings. This slide, Slide 8, illustrates our ability to show consistent growth over the last 14 consecutive quarters despite the difficult environment that we're faced with. I'll now turn it to Kevin Knight.

Thank you, Dave, and it's good to be with all of you, and appreciate you being on our call today. On Slide 9, which is the slide you should be on currently. We continue to invest in the people and technology that enable us to grow in all of our businesses and especially in our non-asset based service offerings. This growth has better aligned us with our customers in order to meet their ever-changing supply chain needs. Currently, our non-asset based businesses make up 20% of our revenue, while just 3 years ago, it comprised only 4%. In the current market, we planned to have a balanced approach to growth. As long as the rate environment and driving associate environment is challenging, we will be deliberate about where we grow our tractor fleet. We will continue to focus on cost control and productivity. However, we believe we have a significant opportunity to continue to grow our non-asset based businesses in order to grow our consolidated revenue and improve returns for our shareholders. Now to Slide 10. In the second quarter, our asset-based businesses operated at an 81.7% operating ratio with revenue declining by 2.5% year-over-year. This decline is a result of operating 107 fewer average tractors as we reduced our fleet in areas where we experienced lower productivity. Again, our focus is on improving the productivity of our assets and controlling our costs effectively . Our non-asset based businesses improved their operating ratio from 96% to 93.6% from a year ago for the 2013 second quarter while growing top line revenue over 64%. This resulted in an improvement of 164% in operating income for our non-asset based businesses. Consolidated, our operating ratio for the second quarter increased by 100 basis points to 84% with revenues excluding trucking fuel surcharge growing 6%. Year-to-date, our operating ratio is up 60 basis points with just shy of 7% growth in revenue, excluding trucking fuel surcharge. Moving to Slide 11. Our strategy remains consistent with prior quarters. We are designed to grow and service multiple truckload modes at high levels of efficiency as measured by on-time service, cost per mile or cost per transaction. Our value proposition to our customers is growing. Our people are excited about our resources and what they can accomplish for our customers. Our team is very high quality and ready for the challenges we face in terms of a slow economic environment coupled with more regulation. Our belief is those challenges will bring our company significant opportunity. And I will turn it back to Dave to discuss guidance.

Thank you, Kevin. On Slide 12, it's our final slide. For the third quarter 2013, we have adjusted our guidance to a range of $0.22 to $0.24 per diluted share from our previously announced guidance of $0.22 to $0.25 per share. Our expected range for the fourth quarter 2013 is $0.22 to $0.25 per diluted share. Some of the assumptions made by management include rates to continue to be slightly positive year-over-year and for utilization to be relatively in line with the year ago period. It also includes consideration for potentially volatile fuel prices. These estimates represent management's best estimates based on current information available. Actual results may differ materially from these estimates. We would refer you to the Risk Factors section of the company's annual report for a discussion of the risks that may affect results. This concludes our prepared remarks. We will now entertain questions.

And Tanisha, this is Kevin. Before we get started on questions, I'll only be on the call until 2:00. I've got a flight to catch. I've got meetings in a different state tomorrow, so I'm unable to stay on for the entire call. But I'm sure that Dave and Adam will be fine to take us all the way till 2:30 our time, which is 5:30 Eastern. And I'll be leaving at 2:00 our time, which is 5:00 Eastern. So with that, Tanisha, let's open it up for questions.

[Operator Instructions] And your first question comes from the line of Ben Hartford with Baird.

Before you run off, maybe we can talk about the second quarter pricing environment and revenue per loaded mile being just less than 1%. I think last quarter, you had talked about anticipating rate growth to be up between 2% and 3.5%. End of the second -- I guess, the third quarter guidance number is coming down by a $0.01 on the top end. So I know that the second quarter environment was a little bit sluggish. Kevin, I'm just looking for your perspective in terms of the rate growth, how those conversations are going and whether you continue to expect rate growth to accelerate through the year.

I would say that we do expect rate growth to continue throughout the year, but it's turned out to be more challenging than we had hoped. And I would say that probably if you go through the month, maybe June wasn't quite as strong as we would have hoped. And it's going to be interesting to see how the second half of the year materializes. So I would say compared to our last call, we're a little less bullish on rates than we have been. As you all know, with the cost inflation that we're facing as an industry, we absolutely have to continue to work on improving our rate with our customers. I think you can continue to see throughout the industry more trucks coming out of the system. And sooner or later; if not sooner, certainly later than where we should find ourselves in an environment where rates will strengthen. Our goal has always been to improve our rates 2% to 3% to offset the cost of inflation, but we're working very diligently to control our costs in the quarter. We had less than $0.02 a mile cost inflation. And so that's how we're going to approach it. We're also going to deploy more resources in terms of people and technology in our non-asset based business as compared to deploying those resources in our asset based businesses to manage through this environment the very best that we can. So I would expect that we expect for rates to be up year-over-year. But as we speak today, it's going to be really tough to get to that 2% to 3% range.

That's great. Just to clarify, Dave or Adam, the third quarter guidance, in particular, taking the top end down by $0.01, is that fundamentally due to the slightly less bullish outlook on rates?

Yes, that's correct, exactly.

And your next question comes from the line of Tom Wadewitz with JPMorgan.

Wanted to, I guess, get to your -- some of the breakdown comments, maybe if you cared to offer them on the non-asset businesses, what the growth looked like, if you want to talk about brokerage and some of the others. And then on the brokerage, I don't know if you can offer any kind of gross margin comments whether that was improved or was off year-over-year in the quarter.

Dave, you want to take that?

Yes, the intermodal business is growing the fastest, of course, off the smallest base -- smaller base. Combined, they grew 64.2%. So the -- for brokerage business, it's growing still at a healthy clip, but maybe just a little less than -- the low 30s is where I would guide you to from a brokerage perspective. And maybe just a couple of comments on that and where we're seeing that. I think the way that we do brokerage, it's very much connected to the service center operations throughout the country, if not interdependent on one another, for success in the brokerage space. And so this isn't something that we've set up overnight. This is something we've been working on for a number of years now. And we have the benefit of significant depth when it comes to the carrier base. And as we're finding more and more matches with our customers and opportunities for more of a hybrid approach where we can blend opportunities to leverage third-party equipment while at the same time leveraging the longtime and long-established lanes and business that we do with customers on the asset based side, we're starting to see some real breakthroughs. And so to answer the second part of your question, maybe about margins and whatnot, gross margin was relatively unchanged year-over-year in the brokerage business for us, but we did see our margins improved. And that's just because with more and more scale, we feel like we have a very efficient offering there if you look at a cost per transaction. So the good news and one of the reasons we're so bullish on that space is because we're just -- we feel like there's many more opportunities that we're yet to explore with customers and with asset based customers to explore the brokerage and more logistics, if you will, including intermodal. And so it's leading the top line growth and we get more efficient, it seems, as we go along for now. Even with a gross margin that isn't as good as what we've read by some of the non -- about some of the non-asset based folks who are more in the mid- to upper teens or at least were, we've never been quite that high. We're more into the low teens and we were able to, of course, have a pretty decent OR build [ph] in this environment. Does that help, Tom?

And your next question comes from the line of Allison Landry with Crédit Suisse.

So sort of piggybacking on the comments about the non-asset based business, I was wondering maybe if you could talk a little bit about the longer-term prospects of this business and where you see this maybe as a percent of total revenue and profits.

This is Kevin. I'll take that. When we entered the downturn, Allison, many years ago, I guess it's been many years now, but when things started to slow down in 2007 and then, of course, '08 and '09, we felt like we had an opportunity to move part of our business into the non-asset side to make us much less cyclical for the next time that we go into a downturn. And so it's our goal that, at some point, that we would be around 50% of our business would be asset based and around 50% of our business would be non-asset based. We don't really have a time frame. If we continue to grow at the rate we're growing on our non-asset based side within the next several years, we've got an opportunity to be there. We're still continuing to build upon the culture that we've had to run assets in conjunction with the culture to operate successfully in the non-asset based business and we're making good progress there. Our goal is to grow both parts of that business, although this has been the most challenging in the 38 years that I've been in this space. This has been the most challenging, it has felt to me, in terms of growing asset. But we still have our diverse set of service centers. We've got 3 asset-based businesses and some of those service centers are growing and some of those service centers are not. So we want to be a better balanced business over the long term. We believe that our customers are accepting the services that we're providing very favorably in those areas. And so that's where we see it going. And we hope that, over time, it provides a better return on invested capital for our shareholders. So we're going to continue aggressively to build out the non-asset side of our business. And if the market, in terms of drivers and strength, give us the ability, then we'll grow the asset side. Or if we could be fortunate enough to do an acquisition, we, of course, would take advantage of that opportunity, and probably more so on the asset side from an acquisition standpoint than the non-asset side. So I don't know, Allison. I hope I answered your question.

And your next question comes from the line of David Tamberrino company with Stifel.

I was wondering if you could give us a sense of kind of volume trends seen throughout the quarter into the beginning of July so far with a view towards how your second half guidance is kind of baked in, what type of economic growth your base case is at this point.

Yes. I would say, David, when I -- when we look at the past quarter, April was a pretty normal April considering that Easter landed in March. I think April played out about how we would expect it. I would say May played out pretty much as expected. June ended up being a little bit more challenging. We had one less workday in June, which had a negative impact. Fuel didn't work for us like it did in the prior 2 months. And so I would say June was a little more difficult. July feels about like a normal July to me. It may be a little bit early to describe how things feel for July. But so far, I would say, it feels, David, like a normal July as far as business is concerned. I would say that the Driving Associate market remains difficult. And hey, getting yield remains difficult, too. So -- but hey, we're fighting like crazy on all ends. We're focused on costs very much so and it's just how we manage through the business every single month. So -- and I don't know, does anybody else have anything to add, Dave?

I think, maybe notably, just in the month of June, there wasn't the same degree of spot activity that there was that we experienced 1 year ago.

For us.

For us.

Yes, right.

Okay. And I guess, just to clarify, is that a similar a assumption going forward for your guidance that's kind of a normal seasonality throughout the year much as you felt in April, May and so far in June -- in July or is it more going to be a little bit more challenging like June? Maybe that's the lower end of your range.

Yes -- no. I would say really July feels very normal right now, David. And last year, fuel really worked against us in the third quarter. And hopefully, that won't be the same case this year, so...

Okay. But I mean, is it still a 2% GDP growth as your base case assumption going forward or do you see a ramp in back half or maybe a slowdown from your customers you have been talking to?

Yes, we're assuming status quo.

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

Kevin, for you, I mean, I know the strategy has always been about a balanced approach looking at growth. But you also mentioned in your comments some focus on improving productivity and efficiencies. I was hoping you could just dive a little bit deeper into -- in this type of economic environment or in this challenging truckload environment, where do you think the bigger opportunities are for you in the back half of the year? Is it growing the fleet or what specifically on the productivity or efficiency side do you think could take precedence over that?

Well, I would say, Brad, in order for us to grow our fleet in the second half, we would have to be more successful in developing our Driving Associate base. I would say that is the key number for us. And up until a couple of years ago, basically we only source Driving Associates via experience. They came from somewhere else to work for us. Now we've moved more into training, but we aren't developing as many Driving Associates as we need to through our Squire effort. Now if we can continue to gain traction there, then I think that would be the most important piece. Many times throughout the year, you evaluate your business. And is it Driving Associates that are keeping us from being productive or is it freight? Today, I would say it's more on the Driving Associates side and less on the freight on the freight side. And so I believe there are enough additional freight opportunities to support additional growth, but the key is from a Driving Associate perspective. And then, of course, we're going to keep our foot on the pedal as far as our intermodal business and our brokerage business. And we're going to focus like crazy on costs. And that's really how I see it. Did I answer your question, Brad?

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

Kevin, I'm not sure if you're still there or not, but I understand kind of the near term what you're talking about in terms of the fleet. I'm wondering longer term if you think out a few years. In your mind, is the growth trajectory of the asset based business just not what you used to think it was or what we've come to know from you? If that's the case and it's just going to be tougher to grow the asset based business, do you think that there are -- maybe there are some opportunities to get a little bit more margin out of the asset based business or from, admittedly, really good levels, is that just going to be tough to do?

Scott, I think that, really, that the change is to hire the quality of a driving associate that you need today to be successful around all of the regulations that are now in place. And by taking some of our testing even to a higher level to make us a safer carrier than what's required by FMCSA, I think the driving associate part is much more difficult. Now having said that, Scott, at some point, there aren't going to be enough trucks. And when that opportunity presents itself, I mean, we -- our customers all have businesses to run. They can only do so much. But the good news is, we'll see strong rate improvement when that happens. We'll also see much more awareness around what our customers can do to help make our trucks as efficient as they possibly can. And typically, our customer base has to struggle for capacity in order to maybe think a little broader, might be a fair way to describe it. And it isn't that they're not thinking -- they don't care about our driving associates, it's just that they're busy with their daily responsibilities. And so I don't think there's any question at some point that will happen. I also believe, Scott, that we're going to start to see some consolidation, more meaningful consolidation. And whereas in the past, I've always thought our best opportunity was greenfield and if we could make a small acquisition to supplement that, that would be very positive. But to me, I think at some point, you're going to start to see in this cycle, consolidation. And the reason I say that is, there's just a lot of carriers that aren't earning their cost of capital, and it's just probably the next cycle. So we're going to continue to be ready to advantage those opportunities as they present themselves to us. And in the meantime, we're also going to work very diligently on building out our non-asset based side and our carrier relationships and continuing to build our intermodal offering and building our relationships with our rail partners. So I still see good news ahead with the strength of this recovery. It really hasn't presented itself in conjunction with the way we have grown in the past.

And your next question comes from the line of William Greene from Morgan Stanley.

So Kevin, I assume you're walking out. So Dave, if this applies, please feel free to think -- to answer this. The question is really around acquisitions. And in the past, Knight has actually done some interesting acquisitions, whether in port services or refrigerator that I think some folks thought at that time didn't make a lot of sense. And so, I'm wondering if you think that there's -- is it worthwhile to go into a different segment of trucking, flatbed, tank car, or something we haven't ever thought about just because it might offer sort of a new path to growth that is sort of new, rather than trying to sort of deal with the regulatory challenges that face the broader trucking segment?

Okay. Bill, yes, I'll take that. Kevin has left the building, so you've got the JV squad here. Hopefully, we'll do a decent job here. When it comes to acquisitions, we have acquired 2 refrigerated carriers in our history and then another dry van carrier. And our move into purchasing those refrigerated carriers, that was after we had already started our own Refrigerated business, and so we had a certain degree of confidence there. I would say that, anything that has wheels or involves transportation, we do our best to, at least, get a hold of the book and look at it and understand and think what makes sense and try to understand what applies to our business and where could we help. We feel like that our management of cost on a per-mile basis could be leveraged across other verticals. But when it comes to -- going into another vertical to avoid regulation or whatnot, I'm not sure that the net that's been casted for regulation is exclusively the truckload, full truckload dry van Reefer port. I think it goes well beyond that, anything that has wheels or transportation. So I would say, we wouldn't rule it out. Kevin alluded to the fact that from an acquisition standpoint, we're probably more interested in the asset-based side. We feel like we know how to run and arguably fix a refrigerated carrier given our history with 2 refrigerated carriers that we were able to bring them to low-80s operating ratios in relatively short order. And both of those businesses, one of them was losing money when we purchased it, the other one was slightly profitable. On the dry van side, likewise, we have a lot of confidence that we could do something there. And it's not for lack of trying and lack of looking, I think there's been a disconnect in terms of valuation for running an asset-based business. When you -- particularly, when you compare the return on invested capital to the weighted average cost of capital. And so that has been the primary issue that has prevented a deal for us. It certainly hasn't been lack of interest or even lack of confidence and maybe our competency, so.

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

I guess along those same lines. You've put some money into, I guess, the port services business. I guess volumes there continue to be extremely volatile. Have you given any thought to -- there's been a lot of talk about growth. Have you given any thought to potentially shrinking your presence in any of your particular business lines and specifically, on the port side?

John, we don't -- we don't, we have not, no. We've not thought about shrinking our presence in a particular business line. Any degree of reduction in fleet is typically tied to a service center. Usually, a dry van or a refrigerated service center that we feel like is not -- it isn't performing at the level of productivity and maybe it doesn't have access or sufficient number of drivers. And because we always have businesses that are -- that do have drivers and that are performing at a level that would justify reinvestment, and so we're typically growing in some and others might be going back a few. But in terms of looking at an entire business, no. And I'll tell you, in fact, our port services business, that's a business that is running at better margins year-over-year. That's a business that continues to have double-digit revenue growth year-over-year. And has for the last year, almost 1.5 years, it's been a very, very solid business for us. So in fact, in the port, we continue to look for more opportunities. That is a very competitive place and it's a business that certainly does have volatility, but what we've been able to do is, do our best on the downturns, leverage that equipment in those drivers and assimilate them with some of what we've already got going in our fleet, so that the valleys aren't quite so low in that business. So we're not thinking going backwards in any of the businesses.

Okay. All right. And then just one question on the discussion around M&A activity. Obviously, trucking market went through, obviously, the big downturn in '08 and '09. Things haven't necessarily bounced back to prior levels yet. There's been this large window of time to maybe do something. I'm kind of curious as to why would now be more attractive than maybe the last couple of years? Has something changed in terms of, you've got a better read on what quality is left out there? Or is it -- has anything really changed in that front in terms of the attractiveness of M&A now versus maybe a couple of years or maybe you could have picked them off the bottom a little bit, at a little bit better valuation or something?

That's a great -- it's a great question. I think we've always been interested in the downturn, of course. We were interested because of the fact that we thought that maybe we could buy something for a little less. But at that time, very few, if any, were interested in selling. And so I think we've seen more folks that'd be more open-minded to selling their fleets, particularly in that smaller fleet world, maybe in the last 9 months or so. And so our interest hasn't -- I wouldn't say that it's changed dramatically over time. One thing that has changed for us that does give us maybe a little bit more of an appetite for an acquisition is just people-wise and the depths on the bench. We grew -- we were growing so fast opening service centers through that '03 to '07 time frame, that over the last several years, it's been great seasoning for our folks, for our people who've had to manage through what have been -- what's been a very difficult time. In fact, if you were to look at our earnings in the second quarter of 2009, which would have been maybe the very bottom, I think we earned something like, what, $0.14 or something. And earnings are up 60% since '09 without any acquisitions, and that's with us, just kind of clubbing it out here as we work our way through. So that's been terrific experience for our people. I think it's allowed us to deepen the bench a little bit. We feel like we have the leadership. We could spare the leadership, if you will, and turn particular leaders loose with 1 or even multiple acquisitions. And so that probably gets us feeling a little more comfortable about that. So hope that helps, John.

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

I wanted to talk a little bit, I mean, obviously, you guys are doing great on the non-asset side and building out the intermodal and brokerage, as well. Could you talk a bit about whether that's coming from existing customers, and you're just leveraging kind of your existing relationships on the TL side, or whether you're adding any kind of new customers. And who are you displacing as you're taking over some of that business? And then also, was there any special project work or anything that went on this quarter to really result from the strong -- strengthened net? Or again, is that just kind of the increasing trends in the market share gains?

Well, I would say -- and Adam, feel free to jump in whenever -- if you'd like. I would say that, I'll start with the project answer and I'm assuming you're talking about project freight related to brokerage for the non-asset side. Really, not much in the project world for brokerage. That's a space though that tends to do well in that seasonal period. Beverage season, of course, being one, but they of course, had that last year and still were able to grow it pretty significantly. The intermodal business, and maybe this is somewhat relative to our size, that is a business that sometimes might have some up-and-downs. This was a good quarter for us and hopefully, we'll continue to find good opportunities to help that growth to be very consistent. When we look at our book of business in our brokerage business, there are some customers that they'll -- that we do direct and don't do -- or do very little business in our asset side. But that is, that is definitely is the minority. Most of our opportunities are customers that either we do business with today or we've done business with in the past to some degree or another. And part of that comes because we have such a diverse, wide book of business in our asset-based business. We -- our biggest customers is only about 5% of our revenues. And so, we're very diverse in that regard. We work diligently to provide multiple services, particularly for the larger accounts where we have -- we've invested time and people into understanding their networks and their needs. And what we find is that, when we really understand their needs and we look at our capabilities in brokerage or intermodal, we can find some matches beyond just that asset-based business that we're already doing. And so we -- every quarter, we seem to have a little bit more breakthrough with another customer and another customer, and it continues to grow. And I think, this is a slightly different angle than maybe the non-asset play. You asked, who are we displacing? It's very difficult to know, for sure. It feels, in some regards, that some folks like the idea of us having some assets in the background that we can use. And so potentially, we're displacing folks that don't have assets. I don't know that for sure. But a lot of our brokerage business feels like business that we can manage on a year-round basis that isn't so much of the seasonal nature. Maybe I'll just use this moment just to, I guess, make the point that, if you were to look at the non-asset broker in general, and look at the true value that can be provided that I think is provided particularly, when it comes to the seasonal surges, whether it's produce or beverage or whatnot, or special projects or inconsistent shipment volumes, there can be value that comes there. And more and more, we're finding that, that non-asset based play is finding its way into the day-to-day freight, usually through bids. And oftentimes, we're finding them to be very competitive on pricing. And so I don't know how sustainable that is. I can tell you, from our perspective as an asset-based player, it's really difficult for us to lose a lane, maybe that we hauled with our own trucks. And now to then get a phone call from an non-asset based player asking us to haul that same lane at a lower rate. I mean, you probably can guess what our answer would be. And so, but it does feel however, that our approach, our book of business in the brokerage that it does feel sustainable. It feels like we add value in the capacity, the third-party capacity we provide.

And I think to Dave's point, just to reiterate our top customers and how many that are actually utilizing our brokerage service, we've had a slide on this before. Over 75% of our top 100, utilized 2 of our services. And many times the brokerage services is the second service that they're utilizing. And there are several that use 3 or more services. So I think we're really starting to penetrate that top 100 and really align ourselves with them to be able to meet our other supply chain needs, so.

And The next question comes from the line of Justin Yagerman from Deutsche Bank.

It's Taylor Mulherin on for Justin. So my question is surrounding the hours of service rules. There's been a lot of talk about the potential impact on the overall industry. Can you talk about any impact you see the utilization so far in July? And then, as far as the second half estimates go, you mentioned kind of a flat, flattish year-over-year utilization assumption. Is there any sort of productivity headwind baked into that guidance?

This could be our shortest answer of the day. I think the answer to your first question on what's kind of the impact so far in July, the answer is, it's just too early to tell. When we look at our estimates for the back half of the year, given that it's too early to tell, we've not placed a whole lot of impact in our estimates as a result of the July 1 hours-of-service. Now, we may need to correct that after we get through the third quarter, but at this point, it's still too early to tell. So I'm not sure.

And have you seen any impact on utilization, month-to-date in July?

Like I said, it's early to tell. But I would imagine that if that was a -- if it was a more meaningful impact, at least at this stage of the game, it would be more noticeable. And I'll just say, Taylor, it remains to be seen whether -- the result of that. There doesn't appear to be much enforcement at this stage of the game. And we've done a lot of training and so we just need to let it play out to make sure we truly understand.

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

And Dave, Hi, Adam. Dave, I apologize if I missed this, but did you give an expectation for what the fleet, the average fleet count should be sequentially for the rest of the year? And also what that would mean for your CapEx guidance?

We did not -- maybe I'll take that first part and I'll let Adam speak to CapEx guidance. But as you could see in the quarter, and as we alluded to in the first quarter, we began to trend the fleet at the end of the fourth quarter of 2012, and then continue to trend in the first quarter particularly, during the -- towards the end of the quarter, which then has resulted in a lower average tractor count for the second quarter. In terms of beginning and ending truck counts in the second quarter, we're essentially flat. So what you're seeing in that negative average is a result of what we've done really, in the first quarter. Now, as we look for the back half of the year, we, at this stage of the game, wouldn't expect much, if any, sequential tractor growth from where we sit. Unless of course, we see the per truck fundamentals start to improve. And then we may begin to move that up slightly a little bit more. So hopefully, it will help the guidance.

Yes. And the right quarter of number would be that 3,920 units for the end of the second quarter?

Well, that -- we don't actually share with you what the ending number is. I will tell you that the ending number is, it's in that ballpark. So, yes.

Okay, that helps. And I'm sorry, Adam, I didn't mean to cut you off. On the CapEx guidance?

On the CapEx, as Dave alluded, we may not be adding trucks to the fleet, but we still have the refreshment of the trucks that were coming out of our trade cycle. So we expect it'll still be around that mid-60s range by the end of this year. We didn't have much CapEx at all in the first quarter. I think we actually had an inflow from our sell of equipment, and came in around $20 million for the second quarter. And I think that would be fairly consistent with what we would expect to see in the back half of the year.

So I'm sorry, Adam, mid-60s of net CapEx on a full-year basis?

Correct.

And your next question comes from the line of Anthony Gallo with Wells Fargo.

Let me get back to the brokerage question, and if I wouldn't -- and I want to make sure I heard it correctly. Are there situations where maybe during the bid process, you'll be offered a particular maybe distribution center or a lane where it doesn't make sense for the asset-based business, but you could make it work on a non-asset based? I thought I heard you say that's not what you're doing. I'm curious why you wouldn't. Is it just the -- is it a scale issue at this point? Or strategy? And if it is strategy, why wouldn't you take that?

Yes. We would do that. I'm not sure what I said, Anthony, to elude otherwise. But when we look at a bid, we look at bids as significant opportunities particularly, for our non-asset folks. And so when we are going through a bid, our non-asset group works collectively with the asset-based folks to understand who can be most competitive in what areas. Historically, I would say, we're really only competitive on a very small percentage of the total bid and that would just be -- if you just look at the simple numbers of how much business we do with customers and how big their networks really are, and so there's all kinds of freight where we in the past because it didn't work for our own assets, or our own network, where we would bid a price that probably was not very competitive. And in the broker space, yes, with every bid, there are significant opportunities in every bid. And so we understand long-term what we could buy it for and how we could complement that with the business. The -- I think maybe the comment that I said that confused was maybe of a broad comment on the difference between the non-asset based folks who, in the past, focused really on surge freight and seasonal-type freight that are finding their way into the day-to-day freight and tend to be offering pricing that's not rational in some cases, and doesn't appear to be sustainable long-term. We feel like we have an idea of where rates are, where they should be, given our history. And so we feel like we know where things could work where -- and we can find matches.

That makes much more sense. And then, I don't think you touched on what the main drivers of margin improvement were in the non-asset based business. If you could briefly touch on that, that would be great.

Yes. Okay. Sure, Anthony. I think, if you look at this existing network of service centers, we're working all of these markets, if you will, these geographic markets. While at the same time, we are developing, strengthening relationships with customers and executing on their business in their evolving and changing supply chains. And so across that network, there are clearly opportunities for us to find matches for us to use third-party capacity to move loads. And so there is this working together or almost interdependentness that works between our buying group and our brokerage business and that marketing effort, and so that results in significant operating leverage as you grow with size because we're -- we've already got a business that's, in essence, are already paying for a lot of its marketing efforts. And so it's a business that with scale, we think we get better and better at. So we look at -- we've long looked at on the asset side at a cost per mile. We feel like to be the long-term growth player. We need to be the most efficient at cost and have the lowest operating cost per mile. We think that in the non-asset based side of the business, we look at that and we feel like that the cost per transaction maybe the more appropriate way for us to look at that. And so margins, as we've note -- as we've seen in the industry, margins on the brokerage side have been shrinking and under pressure and may continue to be under pressure, and may not be at their final resting point yet. And so we feel like a very efficient operating business that allows you to drop more to the bottom line. It can be an answer that allows you to really be a growth player in that long-term and beyond just some particular point in the cycle of that -- the maturation cycle of that non-asset based broker world. And so we don't really view ourselves as the non-asset broker. We view ourselves as an asset-based broker, if you will, using third-party assets. And we think a there's a difference there. One more.

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

Question about utilization and the potential hurdles you need to see, to get a little bit more aggressive with the fleet count going forward. Do you have a kind of hurdle there? Or do you think that the fleet is a little bit more constrained by driver limitations as Kevin was mentioning earlier on the call? Just trying to get a rough sense of that balance between utilization and fleet growth.

Yes, it's a great question and they do somewhat go hand-in-hand, right? Because if you have a truck that doesn't have a driver, that really drags on your, on that overall fleet revenue per tractor, if you were to look at it that way. So for us, we feel pretty good in many of our locations, many of our service centers from a revenue per tractor perspective that maybe if we felt a little stronger about the drivers, they would be adding more trucks. So it's a balance, but I would say, and I think Kevin alluded to this, that the driver piece is probably the -- it would edge out the revenue per truck per day issue right now for preventing us from adding more equipment.

Okay. So that's kind of still is the hurdle and I guess, just a point of clarification around that as far as any wage increase is kind of applied to the workforce as it stands so far this year, your expectations in the back half? Just kind of thoughts about that when you think but that driver hurdle?

I think we have -- we've been putting more money into the hands of the producers, the highly efficient driving associates that are safer, that are more productive. That are, in essence, maybe because of their performance, they're earning the extra money because we maybe don't have it coming from the top line revenue per mile. And certainly, not as much as we would like to be able to share with the drivers. So there has been a little bit of increase, and that will probably continue to go on. We'll continue to look in and adjust that quarter-by-quarter, trying to put it really into the hands of the performers. And of course, the goal is to have more and more performers. Tanisha, I think we're out of time for calls.

That's all the time we have for questions. That does concludes today's conference call. You may now disconnect.

Thanks for joining, everyone.