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Knight Transportation (NYSE:KNX)

Q4 2013 Earnings Call

January 29, 2014 4:30 pm ET

Executives

Adam Miller - Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer

David A. Jackson - President

Kevin P. Knight - Chairman, Chief Executive Officer and Chairman of Executive Committee

Analysts

Christian Wetherbee - Citigroup Inc, Research Division

William J. Greene - Morgan Stanley, Research Division

Justin B. Yagerman - Deutsche Bank AG, Research Division

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Ken Hoexter - BofA Merrill Lynch, Research Division

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

A. Brad Delco - Stephens Inc., Research Division

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Scott H. Group - Wolfe Research, LLC

Brandon R. Oglenski - Barclays Capital, Research Division

Allison M. Landry - Crédit Suisse AG, Research Division

Operator

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

Adam Miller

Thank you, Anastacia, and good afternoon to everyone, and thank you for joining our call. We have slides to accompany this call posted on our website, if you haven't seen it already. The website is investors.knighttrans.com/events. Our call is structured to go to 5:30 p.m. Eastern Time. Following our commentary, we hope to answer as many questions as time will allow. If we're not able to get to your question due to time restrictions, you may call (602) 606-6349 following the call and we will return your call. [Operator Instructions] So I'll direct you to the disclosure slide.

To begin, I'll first read this disclosure. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions and uncertainties that are difficult to predict. Investors are directed to the information contained in item 1A Risk Factors or Part 1 of the company's annual report on Form 10-K filed with the United States SEC for a discussion of the risks that may affect the company's future operating results. Actual results may differ.

Now, I'll begin by covering some of the numbers in detail, including a brief recap of the fourth quarter results starting with Slide 3.

Okay. For the fourth quarter of 2013, our net income per diluted share was $0.25 compared to $0.22 from the previous year. Net income increased 13.6% year-over-year to $20.1 million, while our operating income increased 12.6% year-over-year to $32.1 million. Revenue, excluding trucking fuel surcharge, increased 5.7% year-over-year to just over $206 million, and our total revenue increased 3.1% year-over-year, just under $250 million.

Now on to Slide 4. Knight continued to maintain a solid balance sheet. We ended the fourth quarter with $551 million -- $551.5 million of stockholders' equity and have returned just under $79 million to shareholders through dividends over the last 2 years. Our fleet remains very modern. We have an average tractor age of 1.9 years. We generated just under $54 million of free cash flow in 2013, which is compared to $30 million in 2012. We continue to maintain our unsecured line of credit of $300 million, which we believe provides us some flexibility to pursue opportunities, which include acquisitions, organic growth, as well as potential share repurchases.

Now, Dave Jackson will provide some additional insight to our fourth quarter results.

David A. Jackson

Thanks, Adam, and good afternoon, everyone. We appreciate you joining us. We'll move to Slide 5.

We were able to execute for our customers many times over in the quarter by accepting more loads, not only for our trucks, but also for those of our third-party carrier providers that solved challenges for our customers, especially in areas where capacity was constrained. The other key to our revenue growth was our overall improving yield of approximately 3%, which takes into consideration our 3.4% growth in revenue per total mile and our reduction in length of haul of 1.3%, by far, the strongest yield improvement for the year.

And now on to Slide 6. My comments on the previous slide, in conjunction with improving cost as a percentage of revenue in 3-key areas, fuel expense, operations and maintenance and insurance and claims, led to our income increasing 13.6% for the quarter. Our team produced a very solid quarter. We finally experienced strong holiday seasonal demand that in connection with internal initiatives, created the financial results that we expect.

Now to Slide 7. In the fourth quarter, our asset based businesses operated at an 81.6% operating ratio, an improvement of 220 basis points year-over-year. This includes our dry van refrigerated port services, sometimes called drayage businesses. Our non-asset based businesses experienced significant revenue growth year-over-year during the quarter with 42.6% growth. Our brokerage business led the way by growing revenue 70.4%; gross margin, 67.5%; and operating income by 64.8%.

Consolidated, our operating ratio for the fourth quarter improved by 100 basis points to 84.4%, with revenues, excluding trucking fuel surcharge, growing 5.7%. Year-to-date, our operating ratio is 85.6% with 5.3% growth in revenue, excluding trucking fuel surcharge.

Now to Slide 8. Our intensity to improve revenue per tractor was well demonstrated by our asset based businesses. Over the last 3 quarters, we've experienced year-over-year improvement in our revenue per tractor, excluding trucking fuel surcharge, with that improvement building through the second half of the year. We made this improvement despite the new hours of service rules that went into effect July 1, 2013. We believe our model enables us to focus more intensely on underperforming areas of our operation and drive a high level of accountability throughout our network. We expect to continue to make year-over-year improvement in revenue per tractor.

Now on to Slide 9. We acknowledge that our revenue growth goals of 10% and earnings growth goals of 15% have not been made consistently since emerging from the downturn in 2009. Considering the overall economic environment, the compounded annual growth rates of 8.5% of revenue growth and 9.3% EPS growth are solid.

Now, I'll move to Slide 10. Our 2 segments, asset and non-asset, are figuring out how to support each other, not only to improve our company, but also to increase our execution capabilities for our customers. Our investment in the non-asset side of our business continues to produce positive results. Since 2010, our EBIT, or earnings before interest and tax, from our non-asset based businesses has grown by almost 4x. Our non-asset EBIT now makes up 7% of our consolidated EBIT when just 3 years ago, it comprised of only 2%. This has resulted in a reduction in the capital intensiveness of our business, as well as mitigating some of the cyclicality that inherently comes with our asset based businesses. I'll now turn it over to Kevin Knight for the next slide.

Kevin P. Knight

Thanks, Dave. Good afternoon, everyone. I appreciate you joining our call today, and let's move on to Slide 11. I want to personally thank all of our team members for the great work that went into our results this quarter. I know our team has a solid execution plan built around our dynamic service center network and our strong level of service center support from businesses and departments.

Freight demand strengthened seasonally throughout the quarter. It felt good to come back from the Thanksgiving holiday and have freight demand through the year end holidays. As a whole, January has produced better demand year-over-year also, although weather has become more of a factor in January than in December.

Now, let's move to Slide 12 and we'll talk about growth. As a result of our revenue growth per tractor, our improving operating margins, progress with our driver development and retention initiatives, stronger freight demand and a deeper pipeline of dedicated opportunities, we feel as though 200 tractors of growth starting in the second quarter of this year will be manageable. On the non-asset front, we are developing more and more confidence in our brokerage model. It has developed into a very solid business for us, and it is also having a positive impact on our entire business. We continue to be active on the acquisition front, though have no updates at this time in that area other than to say we continue to be active in this area. And at this time, I'll turn it back to Dave to discuss guidance.

David A. Jackson

Okay. Thanks, Kevin.

Slide 13 is our final slide, we'll discuss guidance. For the first quarter of 2014, our guidance is $0.19 to $0.21 per diluted share. Our expected range for the second quarter of 2014 is $0.24 to $0.26 per diluted share. Some of the assumptions made by management include rates to continue to be positive year-over-year, and for miles per tractor to be relatively in line with the year-ago period. It also includes consideration for potentially volatile fuel prices. These estimates represent management's best estimates based on current information available. Actual results may differ materially from these estimates. We would refer you to the Risk Factors section of the company's annual report for a discussion of the risks that may affect results. This concludes our prepared remarks. We'd like to remind you that this call will end at 5:30 Eastern. We will answer questions -- as many questions as time allows. [Operator Instructions] If we're not able to get to your question due to time constraints, you're welcome to call (602) 606-6349 and we will do our best to follow up promptly following this call. Anastacia, we'll now entertain questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris Wetherbee with Citi.

Christian Wetherbee - Citigroup Inc, Research Division

I guess my first -- my question would be sort of on the outlook for 2014. It seems like we've had several weeks now in a row, December and January, of improving demand trends. And when you think about the potential for that to continue and ultimately, maybe what that does with pricing, if you could give us some color around that, that would be really helpful.

Kevin P. Knight

Well I'll go ahead and take that. This is Kevin, Chris. I would say that we're certainly pleased with the strength that we've seen in the market over the last, let's call it, 90 to 100 days. And so it seems to us that we should be in a better environment in 2014 than we were in 2013. Also, we're coming out of the fourth quarter and into the seasonally weaker first quarter with significantly more confidence as far as what we should be able to accomplish from a yield perspective. So I don't really care to put a number on what we think we can improve our yields this coming year, but certainly, we're more optimistic than we were 1 quarter or 2 ago. And hopefully, when we talk again in the second quarter, we'll feel that strength and momentum continuing. And so really, Chris, that's how I see it. Anything to add there, Dave or Adam?

Adam Miller

No.

David A. Jackson

I don't think so. No.

Christian Wetherbee - Citigroup Inc, Research Division

Okay, that's very helpful. And I guess, it sounds like in the next 3 months, you'll get a rougher or better sense about whether you can feel a little bit more constructive about that potential rate improvement. So that's sort of the bogey we're looking at here, is the next quarter or so potential demand trend. Is that the right way to think about it?

Kevin P. Knight

Yes. I would say yes, Chris. And I would say that our customer discussions are fairly positive at this time. And so we believe that they're going to be supportive of reasonable rate increases. And it's our goal to get a reasonable rate increase and that's it. So basically, I think that we'll do well as we move through the bid season this year and improving our contract rates. And then, of course, if capacity remains tight, our noncontract freight, that just is the freight that kind of comes to you, it should improve even a little stronger. So hopefully, these trends will continue.

Operator

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

William J. Greene - Morgan Stanley, Research Division

Kevin, can you talk a little bit about the driver market? Kind of how are you seeing the sort of driver cost inflation? We're hearing, obviously, that if things get stronger, it's going to get a little tighter there. So I'm curious how you think you'll kind of manage that here in '14.

Kevin P. Knight

Well, Bill, first off, you're absolutely right. As the environment improves, it continues to strengthen the need for high-quality drivers, and we ended up taking our driver pay up through bonuses and regular pay, up almost a couple of pennies this year over last year. And our goal will probably be in that same range this year. Will be what we would hope to accomplish. We personally would like to see our driver pay, over the next 5 years, get up another $0.10 or $0.15 a mile. And in order for that to happen, we're going to have to be consistent in getting good yield improvement, and we're going to have to be consistent in improving our pay, both from a bonus perspective and a base perspective to our Driving Associates. So we would expect, Bill, to do more of the same. But then, of course, also, we've got to do a great job of sourcing and retaining and developing. And our programs really came together last year in that area towards the end of the year. And we expect to continue to strengthen on all fronts there so that we can support 200 trucks of internal growth. So that's how we're looking at it.

William J. Greene - Morgan Stanley, Research Division

That makes a lot of sense. Did -- is it -- is that the main constraint on growth, do you think?

Kevin P. Knight

Well, I wouldn't think of anything more difficult. I mean, for us, it's certainly not capital and it appears that it's not going to be quality freight. So yes, I would say it's the 800-pound gorilla in the room.

David A. Jackson

Bill, I'll just add to that, Dave here. We definitely saw the driver market become more challenging as weather -- as we moved into spring last year. And so it was a major focus for us. We felt like we fought back. We feel like we're more prepared, although not exactly sure what to expect if we see the same kind of challenges come again. But one thing I'll tell you is when we quote our numbers, so when we talk about revenue per truck per day being up 3.2%, we do that over all of our trucks. So we don't do that just on maybe trucks that are seated or ready to be dispatched, but we do that for our entire fleet. And so clearly, we would not have been able to make that kind of production progress had we not made progress with our drivers. So I think you can tell where we stand for the fourth quarter, so we feel like we've made back what we may have -- what may have been a bit challenging in the summertime. And so yes, I would just -- to reiterate, the drivers are going to be a critical thing for us being able to keep our production up on the trucks we have and grow in the future. And the good news for us is we provide a very quality job for our drivers. We maybe don't always do ourself a full justice in communicating and the -- that to potential drivers, and I think we've gotten better at that, in addition to other things that we're doing, to make sure that it's a desirable place to work, so.

Operator

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

Justin B. Yagerman - Deutsche Bank AG, Research Division

Well, your utilization was particularly good in the quarter and I -- given the hours-of-service regulations, I mean it almost felt like if you normalize things, you were kind of up 3% if you've done the environment for the hours-of-service issues. So I'm just kind of curious, just bucking the trend from what we've seen and heard from lots of carriers out there, what do you guys think you're doing differently that's enabling you to get that type of utilization? And was it just the freight environment? But it sounded kind of like you're pretty confident around holding that flat at least for the first half of this year in terms of what Dave was talking about on the guidance side. So I'm kind of curious where that confidence comes from. Obviously, you're digging out of a hole from hours-of-service, so I want to hear about it.

David A. Jackson

Yes. Justin, I'll take the first stab at that. Our third quarter, we were disappointed with the way we performed in the third quarter. And our team -- we challenged our team. I would say that everybody in our team stepped up. And we've had a much stronger sense of urgency and much higher level of intensity towards achieving the targets that we know we're capable of. And we have focused on doing the things that we know work for our business. And so when you have enough people buying into that and doing that and achieving those levels, the cumulative effect is you have a quarter that exceeds expectations. And you have good production, you make progress on the cost side simultaneously, and it leads to double digits earnings growth. And now, the good news for us is that we had -- we were more dialed in, if you will, after a bit of a wake up, I would say, after the third quarter. And the nice thing for us is we had some decent seasonal demand in the fourth quarter. And so we were in a position to make the most of it. And so I think the internal peace hasn't slowed, and frankly, I think our people, by mid-quarter, knew that what they were doing was having a result. I mean, we're big on measurement, people know where they stand. And so I think there's been a lot of very strong positive energy throughout the quarter, and so I don't think our people are surprised now to see the results a month post the quarter. And I think they're excited and focused. And the good news is we still have a lot of area to improve. And we're very excited and probably with more confidence than we've had in some time that we can continue to take this to a new level, so.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Yes, that goes a decent way to answering the question. I mean, I just -- you did nicely on the dead head side and the other piece of that was kind of, in the fourth quarter, with seasonal help, it's a little bit easier not making light of the achievement. In the first quarter, it becomes a lot more difficult. It sounded like you had confidence along the lines of that intensity continuing. Is that true? Am I not putting words in your mouth?

David A. Jackson

You're right on, you're right on. And what Kevin said is the demand, we're still seeing some decent demand here, some strong demand in January. We've had more weather to deal with than we'd be used to, but we still haven't gone through February. February is typically the first worst month of the entire year in trucking, but March has a way of being pretty good. So we're focused and prepared and feel like there are things that are within our control, within our power that can help us achieve our goals. And with the market helping a little bit, we think we can go a long way.

Kevin P. Knight

Yes. And I would say Dave's a little more in the fire than I am. But from my observation, I would say that our guys have accepted the new hours and decided that instead of that keeping them from accomplishing their goals, they're going to work through it. The blessing they received in the quarter, Justin, was good demand to really help them accomplish that. And I really believe that there's a higher level of intensity in the building today than what there was 1 quarter or 2 ago, and it feels really good from my perspective.

Operator

Your next question comes from the line of Tom Albrecht with BB&T Capital Markets.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Kevin, I want to ask the rate question from a little different angle.

Kevin P. Knight

Okay.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

So not so much percentage, but as you reflect on the last 6 weeks in the fourth quarter and what we've seen so far this year, how much has the weather in general level of being a little bit busier changed the tone of the conversations? What was the shipper mindset maybe on November 1? What's the tone change? Could you just kind of talk to that? I mean, do they believe that what's happened is primarily weather or do they believe finally supply and demand may be coming to a point where it favors the carriers?

Kevin P. Knight

Yes. I would say, Tom, that they think it's supply and demand. And we -- I would say maybe before November, most of the conversations, for us, as far as preserving our rates and lanes, were, hey, if you want to renew for -- and keep your rates flat or for them to go up 1% or 1.5%, maybe at the top, 2%, then we were able to keep stuff out of the bid. But I would say the tone has moved strongly in the 2.5% to 3% range. And I think our customers are going to be supportive in that range as far as contract rates are concerned. And so it may very well build a little more strength as we move through the year. But I would say, definitely in the last, as you've said, 6 or 7 or 8 weeks, I would say that the tone has changed more to where we're plus 2 instead of being -- we're 2 plus instead of 2 minus, is how I would describe it, Tom.

Operator

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

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Kevin, nice to see the improvement in market, but also your strong execution from you guys. Wanted to, I suppose, parse the market a little bit further. When we look at it, we say, well, I mean it really feels like the market's improving and turning a bit, but you had a tighter period between Thanksgiving and Christmas, and arguably, that could have juiced up the demand a little bit in kind of late November and December. And in January, you've had this weather, which probably effectively takes some capacity out. So we'd like to think that the market's really turning and tightening up. And I'm wondering how much do you think you can separate those 2 factors that might help the market and say, well, it's not just those things, it's really an improvement in demand that continues?

Kevin P. Knight

Yes. Well, I think it really ties to Tom's question, too, Tom. And that is we don't think it's the 26 shipping days between Thanksgiving and Christmas. I mean, certainly, there were only 26 days to shop and some people ran out of time ordering and getting their stock delivered. But, I mean, everybody knew when Christmas was coming. And so from that perspective, I really believe that it's -- I believe that we are entering a period of strengthening freight demand. And so from our perspective, I would say that we would put most of it on strengthening freight demand and not necessarily on the weather or the tightened schedule. And so that's -- the other thing, too, that I think probably should have given us a stronger indication is to what fourth quarter might be like because we did have a strong third quarter GDP number. And that number continued to get moved up, and it seems like the truck-able economy is strengthening based on the GDP numbers. So I think -- I definitely think it's an improving freight economy. So that's all I have there, Tom.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay. And is it broad-based within the customers and within the kind of geographic regions?

Kevin P. Knight

Well, it seems so. I would say though that for us, it seems probably more concentrated in the Midwest and East and then maybe moves to the Southeast. And then from there, moves to the west. And that's normally what we see when things start too tight. You've got more goods moving in the eastern part of the country as compared to the west. And so that feels like how it has worked for us. So kind of started at Midwest, Northeast, worked its way to the Southeast and then worked its way West.

Operator

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

Ken Hoexter - BofA Merrill Lynch, Research Division

Similar sentiment, great performance, obviously. Maybe you can talk a little bit about the internal programs. I know, Dave, you were mentioning getting everybody on board, but are there specific things that were changed in the quarter that got everybody whipped in shape? Were there new metrics or anything that you focused on in order to get that utilization up?

David A. Jackson

I think you would probably -- you could probably sum it up with the word intensity. We probably couldn't use that word enough to try and describe it. But there are a number of things we've been doing. I mean, we've -- we like to think that we run -- we've always run a tight ship. But there are -- there were opportunities for us to be more focused and more consistent on delivering results. And so the idea of creating the right sense of urgency and people stepping up and achieving to their full potential, it's an effective way to do it. And so we already -- we're fortunate and that we already have a culture that is one of high performance and accountability for performance. And so when we focus everybody in the right area with the right level of intensity, it doesn't take very long to begin to see results. I think the reality is, we look at the fourth quarter and we're pleased with $0.25, but we -- if we're honest with ourselves, we say, "Gosh, there should have been another $0.01 or $0.02 or $0.03 out there. And -- that we let get away.” And so we have a group that's not satisfied, that likes to win. And we consider very efficient performance with -- we were at 81.6% for the asset based business, which that meant that all of our asset based businesses individually operated at better than an 83 OR. And so to us, that is winning. And now, the chance for us to begin to add trucks, because you remember, last year, we talked about how we were -- we've thinned out the fleet just slightly as we wanted to focus on improving the production per truck. And so our people now would want to see -- they want to see growth opportunities. And we've got this large service center network that is capable of running trucks if we can keep the intensity up and continue to be successful in sourcing and retaining drivers.

Kevin P. Knight

And then, Ken, I've got one other thing to add. And I don't know if, Dave and Adam, you can correct me if this isn't accurate, but I believe it is. This was the first quarter where, really, our asset based businesses, all of them, seem to hit pretty well on all cylinders in terms of -- and how they worked together and how they solved issues, and then you add our brokerage component on top of that. And it just can't -- it just seemed to work like we've intended for it to always work. So I think the businesses are leveraging nicely off of each other. We do brokerage much different than anybody else, either on the asset based side or the non-asset based side. Our customer and market teams work very closely with both businesses, and really, are anchored by the asset business, but work very closely with our brokerage group, too, to produce. And it seems like our folks are working much better together. And I know one thing that really was -- appeared strong to me is I've always worried about the better we do non-asset, maybe it has a negative impact on us from an asset perspective. But boy, I'll tell you what, in this quarter, everybody was working hard to solve as many customer problems as we could, and that just leads to opportunity for us. So that's just an observation, Ken, from my perspective.

Ken Hoexter - BofA Merrill Lynch, Research Division

Great. So freight cures a lot of ills. But, I guess, just to the point then, so there was no change of operation or shedding freight or changed how the service centers worked, right? I mean that's, I guess, that's what I'm hearing.

David A. Jackson

Ken, we're always changing. We are always evolving and tweaking and changing. And the thing is, we're not afraid to change. We are constantly taking things apart around the table and put them back together and see if that's the right way to do that. So I wouldn't assume that we're not changing. We did a few things different, we always do a few things different. We're going to continue to do things different into the year.

Operator

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

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

I wanted to go to one of the slides. Slide 11, you've got the execution strategy and you've got a bullet point on there about reducing operating cost and overhead. And I just was hoping you could provide some color with exactly what you're getting at with that bullet point.

David A. Jackson

Okay.

Kevin P. Knight

You want to take it, Dave, or do you want me to?

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

I'll open it to anybody.

David A. Jackson

I -- well, he asked me. Yes, he asked me.

Kevin P. Knight

Okay, go ahead.

David A. Jackson

So, Todd, we want to respect your wishes there.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Kevin, but if there's anything you'd like to add, please feel free.

Kevin P. Knight

Oh, I will.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Adam, you too. Adam, you too.

Adam Miller

Thanks, Todd.

David A. Jackson

Okay. So here's what I'll tell you. When you look at cost, we made good progress on fuel, and there's multiple factors that go into fuel between purchasing, economy, surcharge and whatnot. We made good progress, but not great progress. There's still opportunity to be made in that area. If you look at insurance and claims, it was very good. And that has a lot to do with the fact that we've had many quarters now with very, very solid claims performance. And that is, we believe, due in large part to the proactive measures that our people do day in and day out to prevent the claims from happening in the first place. So while I would say that, that was very good, it is still getting better, and we think it will continue to get -- has the potential to get better over time just given the nature of how claims reserves work. Other areas, our communication costs are a little too high. Depreciation, equipment costs more. Now, we have more production, but we still need more. And we probably have a few too many trailers. If you look at purchased transportation, our brokerage, non-asset is growing and that -- and our intermodal business is growing. And both of those, of course, influenced that number. So we think we can be buying a little bit better on the purchase trans side. So we'd like to see that tighten up and see an improvement. Ops and maintenance was down $1.2 million year-over-year, which is good progress. We haven't seen that kind of improvement year-over-year in several quarters. But we feel like we still have a ways to go to get that to where it can be. We've made a lot of changes in that regard, and I would say we're not even halfway to where we want to be from a quarterly perspective and the progress we've made. Those are some of the areas to not get too granular.

Kevin P. Knight

Well, and I would say, too, Adam's group has got a strong focus on overhead. And we're trying to reduce all those costs.

Adam Miller

Yes, we'll pull apart the P&L line by line and set action plans on cost reduction and follow up on them. And our department managers are held deeply accountable to the cost to operate the business. And we hold them to budgets and benchmarks, and continue to expect progress to be made there.

Kevin P. Knight

So, Todd, did we answer your question?

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Yes. I mean, just maybe sum it up, it sounds like that the -- in the fourth quarter, there's nothing unusual from something that worked in your favor if we go down through the P&L in some of the expense items. And the message is that there's an area of focus on a lot of these items to continue to drive these down as you move into '14.

Kevin P. Knight

That's correct.

David A. Jackson

Well said.

Adam Miller

Yes.

Operator

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

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

I remember when Dave was CFO, you used to say how you were always beating him down on every single cost item. It sounds like the baton has been successfully passed or maybe it was...

Kevin P. Knight

Right, yes. You can't really -- don't take everything he says too seriously.

David A. Jackson

Thank you, sir. May I have another?

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

Exactly. Could -- I was wondering if you could just briefly touch on -- Kevin, you mentioned earlier that you were happy with the solid performance in brokerage, it's a solid business now. But you also, I think, alluded to the fact that it might be helping some of your other businesses. Could you expand on that?

Kevin P. Knight

Well, I think in the fourth quarter, what we saw more than anything is basically, we were able to really help our customers a lot. And as that push came in the second half of the month, for the first time, it felt like we had significant capacity to draw from when we really needed it and beyond our trucks. But on the same token, we have a closeness in our businesses with regard to where our Reefers are and where our dry van trucks are and where our port service trucks are. And sometimes, they even help each other out. And we saw a lot of that in some of the busier, concentrated, bigger cities where we have more concentration of all of our different types of assets. But I think the biggest thing was that basically, our market group, our people that manage our customers were able to say yes and with a high level of confidence that we were going to be able to solve a lot of their freight problems. And as you know, Anthony, I've always felt like our customers really would rather, us truckload guys, solve their problems. And in the past, we've -- when we get busy, we say no. And so we've been pretty much -- all we've been able to do is pretty much our contract freight and a little bit more. But the fact of the matter is, now, it really seems like we're in such a much better position to solve those problems. And we want to see that business just continue to grow because pretty quick, we'll be able to solve some significant challenges for our customer base. Does that answer your question? Dave, did you have anything else or not?

David A. Jackson

I think that's good.

Operator

[Operator Instructions] Your next question comes from the line of Brad Delco with Stephens.

A. Brad Delco - Stephens Inc., Research Division

I want to follow up actually on an earlier question. And it seems like there was kind of more commentary around some cost saving initiatives you guys have done and probably ties into sort of the intensity and the focus on your cost. But how do we think about -- well, first, is there sort of a public number you would like to share in terms of what kind of targeted savings you have based on these initiatives? Or how should we think about -- I know we talked about drivers or inflationary cost expectations this year and called it up into a flat tractor count sort of environment.

David A. Jackson

I'll take that, Brad. I don't think there's a public number we want to share. What I would tell you is efforts where we've made a cut or reduced cost on insurance and claims, for example. That's years in the making. And operations and maintenance, we -- the 2010 EPA-compliant engines have just come with a few more maintenance challenges for us. And so that's something I wouldn't say is years in the making. That's -- but it's several quarters in the making of getting to the point of where we are and we still have a ways to go. Fuel, there's various things we've been doing. Obviously, fuel has always been a big cost to us. But because of technologies and specs and ways that we can measure and impact driver behavior, we feel there's more we can do today. And so we when we talk about this increase in intensity we saw in the fourth quarter, it doesn't mean that we started a whole bunch of initiatives. But it does mean we took a lot of the things we've already been working on and took it more seriously. But a lot of those things have been moving for quite some time. So as far as a public number, we've taken up our guidance a little bit. And that would account for both what we would do on the revenue side, and ultimately, what we would drop down because of cost efficiencies as well. So that's probably the place to look for any kind of guidance.

A. Brad Delco - Stephens Inc., Research Division

Got you. Maybe just a follow-up. I mean, Kevin, I know you haven't ascribed to any sort of rate expectations, but you did comment, based on the environment, that kind of plus 2% or maybe 2.5% to 3% is kind of the ask going in the bid season. Is -- just focusing on your asset based business, is that enough to improve margins this year?

Kevin P. Knight

Well, we think that -- let's just say the number's 2.5% to 3% on our contract business and then let's say our noncontract business is stronger than that. We think that, that is. And we don't need a 3.5% or 4% or 4.5%. I mean, we just don't need that to make good rock-solid progress. Now we may have certain lanes that need more, but really, generally, I mean, if we can be in that, say, 2.5% to 3% range as far as getting our yield up, then we feel very confident that we can continue to make progress in our operating efficiency as a company, even with doing more for our drivers.

Operator

Your next question comes from the line of Ben Hartford with Baird.

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Maybe just provide some context to acquisitions. I know a year ago -- well, things are certainly different with the tender that had been made, but the environment is also different. And I know in the past, because you've always been very disciplined on price, you talked about price as being the primary headwind. But it sounds like the opportunities are a bit more abundant today for a variety of reasons than they were even a year ago. So do you see the constraint on acquisitions now shifting toward more of fit and selectivity versus just price and price alone, given the fact that we have seen some changes that buoys [ph] to which is a slight improvement in fundamentals?

Kevin P. Knight

I would say, Ben, that I think -- first off, I think the Heartland, Gordon transaction was a very positive transaction because you had 2 very good trucking families that basically came to a very well thought out fair agreement for both the buyer and the seller. And I believe that, that -- of any of the acquisition activity that's taken place, including our attempted acquisition or some of the other ones that you've seen, I think that sets a very strong framework for more activity. And I think back, I don't remember when there were that many very significant deals that took place in a 5- or 6-month period. And I feel like that our industry is poised for consolidation. And I think we worked our entire lives to be prepared for this opportunity. And so we're going to continue to maintain our discipline. And -- but I believe that we're very constructive in our approach to getting something done. And I believe that Heartland and Gordon demonstrated some real leadership in putting their deal together, and we're hoping that we can follow up with an opportunity in that area also. So that's kind of how I see it, Ben.

Operator

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

Scott H. Group - Wolfe Research, LLC

So I wanted to ask about the longer term 10% revenue, 15% earnings guidance. And I understand it's been a more challenging freight environment the past few years, and that's why you guys haven't gotten there. Only been 6 or 7 weeks, but does this feel like the kind of freight environment where 10% revenue, 15% earnings growth is more realistic? Or do you think that something has changed more structurally why that's a tougher growth rate to expect going forward?

Kevin P. Knight

Well, I would say, Scott, it's a tough growth rate to expect going forward, not including acquisitions. But if you think about it, if we could add a couple of hundred trucks, that gives us 5% growth right there. And if we could improve our yields by, let's just call it, 3% consistently for the next year, that gives us 8% right there. Then if we can continue with the momentum that we've seen in out of our non-asset based business over the last especially couple of quarters, then we're solidly in the 10% plus revenue range. And then, of course, if we can continue to improve on the cost side, like Dave has laid out, then certainly, it could position us to hit that 15% number. We've done a lot, Scott, on the driver development front, trying to position ourself for this period. And we've got solid training programs now in conjunction with our experienced driver recruiting, in conjunction with all of the retention efforts that we've made. And so we're -- we have some internal goals that will put us in a position to grow our fleet. And I'm going to be interested to watch and I'm going to do everything I can to help achieve those goals over the next couple of quarters to get back to where this growing is a -- of trucks internally is a solid part of our future.

Operator

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

Brandon R. Oglenski - Barclays Capital, Research Division

We can definitely see the intensity coming through in your resolve here. I guess I wanted to come back to a couple of questions earlier around acquisitions. If the freight market is getting better, I mean we're seeing the improvement in equity valuations. I'm sure a private seller would expect some similar appreciation. Is there a point where the scales flip back towards organic growth a little bit more aggressively?

Kevin P. Knight

Always. I mean, you always have to balance that, Brandon. And so I think that we always look at, do we do it organically or do we do it through acquisition? And hey, if the right opportunity presents itself, then -- through our acquisition efforts, then, hey, we're not going to be afraid to step up and close. If we have unrealistic sellers, then, hey, we'll focus more on growing internally. So I think we play that back and forth all the time. And I would say that I don't really believe the market changes much for the private carrier in terms of what the value of their company really is. I think that number is pretty much a fixed number and doesn't really change much because they're private. They don't have access to public markets. They -- it's just how it works. And so even though things have gotten a little better, I don't necessarily think that the cost of an acquisition is going to go up significantly. So that's basically how I look at it.

Operator

Your final question comes from the line of Allison Landry with Crédit Suisse.

Allison M. Landry - Crédit Suisse AG, Research Division

So I wanted to follow up on the earlier question about rates offsetting inflation. Clearly, you've been able to partially offset rising cost from increased driver pay and the productivity losses from hours of service through your -- what's pretty evident, effective internal cost controls. So I guess what I'm trying to understand is how much of your improved confidence relative to a couple of months ago, how much of that stems from your ability to control costs as opposed to the freight environment, or supply and demand is really fundamentally improving?

Kevin P. Knight

Yes. I would say, Allison, 70%-30%. I would say 30% on the control cost side, and I would say 70% as far as the strengthening market is concerned. Do you feel the same way, Dave? Adam?

David A. Jackson

Yes, I think give us another quarter and we'll be able to look back and tell you. One thing to look at is our revenue per loaded mile in the third quarter was up 1.4%. And if you look sequentially, that went up about 100 basis points on a loaded perspective. You wouldn't have had a lot of new contractual business come in. That gives you kind of a flavor for some of the extra business that customers were asking us to move and haul that was maybe beyond the normal contractual business. So that gives you kind of a flavor for some of the strength. I think that not all truckload businesses are quite prepared to move and to provide solutions for our customers in that kind of a market. I think we maybe demonstrated our ability to have some agility there. So to the degree that there is strength in the market and it continues. I think you'll see that. You'll see that piece. And then after another quarter, I think we'll know whether it's 70%-30% or if it's more of an even split.

Allison M. Landry - Crédit Suisse AG, Research Division

Okay, that's extremely helpful. And just one other question I had. Are you factoring in the potential for conditions in the driver market to become potentially significantly worse year-over-year just as a result of expectation for meaningful growth and new home starts and continued shale activity? And what actions are you taking or planning to take to mitigate this potential headwind?

Kevin P. Knight

Well, I would just stay, Allison, we put a lot of effort into our -- the driver development side of our business. And, hey, there's no question. It's going to remain tough and maybe even get a little more difficult. But at the end of the day, we get paid to figure out how to haul all of these loads. So we'll just keep working at it. And, hey, as I said earlier in the call, we're expecting that our driver cost will go up some, like they did this past year, and we're planning on it and hoping for it because we want to continue to improve the job as much as we can. So that's how we see it.

David A. Jackson

Okay. Thanks, Allison. Anastacia, that will conclude our call. We appreciate everybody joining us today.

Kevin P. Knight

Thanks, again, guys. Thanks for being with us.

Operator

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

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