Knight-Swift Transportation Holdings Inc

NYSE:KNX

Earnings Call Transcript 2017-Q4

[Operator]

Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Knight-Swift Transportation Fourth Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. Speakers for today’s call will be Dave Jackson, President and CEO; Kevin Knight, Executive Chairman; and Adam Miller, CFO. Mr. Miller, the meeting is now yours.

[Adam Miller, Chief Financial Officer]

Thank you, Rob and good afternoon to everyone who has joined the call. We have slides to accompany this call posted on our investor website, which is investor.knight-swift.com/events. Please note this is the change in web address as this site is new and different from the address we have provided in the past.

So, first off, we would like to welcome you to the Knight-Swift Transportation’s fourth quarter 2017 earnings call. We are excited for this opportunity to report the financial results for the fourth quarter of 2017 which represents the first full quarter of the combined Knight and Swift entity. Our call is scheduled to go until 4:30 p.m. Eastern Time and will be structured similarly to our calls in the past.

Following our commentary, we hope to answer as many questions as time will allow. If we are not able to get your question due to time restrictions, you may call 602-606-6349. During this call, we will plan to cover topics and any questions specific to the results of the fourth quarter, provide an update on merger and synergy initiatives as well as provide our future outlook on the market. The rules for questions remain the same as in the past. One question per participant, if we don’t clearly answer the question, a follow-up question maybe asked.

To begin, I will first refer you to the disclosures on Page 2 and 3 of the presentation I will also read the following. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A risk factors or Part 1 of the company’s Annual Report on Form 10-K filed with the United States SEC for a discussion of the risks that may affect the company’s future operating results. Actual results may differ.

Now, we will move to Slide 3 to discuss the results of the fourth quarter. The table on Slide 4 compares fourth quarter revenue and earning results on a year-over-year basis. An important item to note, however, is that due to accounting requirements associated with the merger transaction, the 2016 figures represent only Knight Transportation’s historically reported results. Due to this unique circumstance year-over-year comparisons at the consolidated level are less meaningful. Later in the presentation we plan to provide more context around the year-over-year results.

Diluted earnings per share for the quarter ended December 31, 2017 were $2.50. Our adjusted earnings per share came in at $0.52 excluding an income tax benefit of $364 million, representing management’s estimate of the net impact of the Tax Cuts and Jobs Act passed through the quarter, $10.3 million of amortization expense related to the merger and $1.9 million of legal reserves related to class action lawsuits. We believe the comparability of our results is improved by excluding these infrequent items that are unrelated to our core operations.

Now, on to Slide 5, we have provided a 3-year comparison of revenue, excluding fuel surcharge and adjusted operating income. In this comparison, we have included the historical Swift results in grey as we believe this provides a better year-over-year comparison. With the addition of Swift, our fourth quarter consolidated revenue excluding fuel was $1.2 billion. If we compare the fourth quarter of 2017 with the combination of what each entity separately reported in the fourth quarter of 2016, revenue excluding fuel surcharge was relatively unchanged from the prior year. The combined adjusted operating income was $156 million for the quarter. Again, if we compare the fourth quarter of 2017 with the combination of what each entity separately reported in the fourth quarter of 2016, adjusted operating income improved 33% from the prior year. Our results for the first full quarter absent the merger were encouraging. We are beginning to see the results of our synergy efforts as well as the impact of a more favorable market dynamics in terms of freight demand.

Now let’s turn to Slide 6, we view a strong balance sheet as a competitive advantage. As we believe it provides operating and strategic flexibility. We remain committed to continuing to strengthen our leverage ratio through improved EBITDA and continue de-leveraging of both on balance sheet and off balance sheet debt. In the fourth quarter, we accelerated the timing of equipment purchases when possible to maximize tax benefits under the tax cuts and jobs act. As a result cash decreased and debt increased sequentially as we utilize the revolver to fund CapEx. We expect our net capital expenditures will be in the range of $525 million to $575 million in 2018 which primarily represents the replacement of the tractors and trailers we intend to pull out of service during the year. This range assumes all CapEx will be funded with cash and on balance sheet financing through our revolver.

Historically, Swift has utilized off balance sheet operating leases to fund a portion of equipment purchases which are not included in historical CapEx numbers. Therefore there may be limited comparability of future CapEx to historical CapEx results as it relates to Swift. We continue to strategically manage the fleet size and age to maintain returns in a changing market environment. We also believe our current balance sheet positions us to have the flexibility to continue to invest in future growth opportunities.

I will now turn it over to Dave Jackson.

[Dave Jackson, President and Chief Executive Officer]

Thanks Kevin. Now to Slide 7, in the fourth quarter our Knight Trucking segment operated at an 81.6% adjusted operating ratio, which is a 210 basis point improvement over the prior year. This improvement was primarily driven by the increase in revenue per tractor, partially offset by an increase in driver related costs. The strong freight market provided non-contract revenue opportunities throughout the quarter and into January. Revenue excluding trucking fuel surcharge and inter-segment transactions increased 6.3% driven by a 12.2% increase in our revenue per tractor, partially offset by a 5.3% decrease in the average operational truck count.

While the average tractor count was down year-over-year we were able to achieve a sequential increase in the ending tractor count during the quarter and narrow the decrease in utilization from negative 3.9% in the third quarter of 2017 to negative 1.6% in the fourth quarter of 2017 as we continue to improve our ability to source and retain drivers. Our non-asset based logistics segment produced a 94.0% adjusted operating ratio which is a 70 basis point increase compared to last year. Logistics revenue increased 6.8%, driven primarily by an 8.8% increase in brokerage revenue. Our brokerage business increased revenue per load by 17.2% while maintaining gross margins flat year-over-year at 16%. Our brokerage revenue growth was partially offset by a 7.2% decrease in brokerage load volume.

Next on to Slide 8, we are seeing positive improvements in each Swift segment as our adjusted operating income improved 40.4% when compared to what was previously reported by Swift in the fourth quarter of 2016. Overall, our results were positively impacted by the improving freight environment, cost controls and synergies we have began to implement. The difficult driver market, combined with the implementation of more stringent hiring requirements, continue to be a headwind for our business. We believe these additional hiring requirements will have a short-term impact on our driver count, but will be a long-term benefit to our operating results. In our Swift Trucking segment we achieved an 84.6% adjusted operating ratio. Our revenue per tractor increased 6.7%. Our dedicated segment achieved an adjusted operating ratio of 86.5% as average revenue per truck increased 2.6%.

Our refrigerated segment achieved an adjusted operating ratio of 92.9% as average revenue per truck increased 0.7%. Our overall average Swift truck count is down 6.7% compared to the fourth quarter of 2016 as sourcing and retaining high quality drivers remains the most significant challenge we face. Our intermodal segment achieved an adjusted operating ratio of 95.0% as revenue per container increased by 8.0%.

Now on to Slide 9, the broader economy continues to show signs of growth, consumer spending, durable goods and the prospects of increased manufacturing and construction all point to positive growth in the future, especially considering the recent tax relief from the Tax Cuts and Jobs Act. The driver shortage continues to be a headwind for the industry and will likely impact the ability to increase capacity in the space. We also believe that the ELD mandate began to have an impact on capacity late in the quarter, which has continued into the first quarter thus far. Given the strength in the freight market and the inflationary pressures the industry is experiencing in driver wages, we expect to see rate increases in our contract business in the high single-digits to low double-digits throughout 2018. In this environment, we will continue to monitor the markets in order to maximize both service levels to our customers and yields.

I will now turn it over to Kevin Knight.

[Kevin Knight, Executive Chairman]

Thanks, Dave. I would like to first start by reaffirming our commitment to our brands, Swift and Knight distinct brands with distinct management. I talked to our people all the time and share with them the fact that I want Knight to be the best Knight that it can be and I want Swift to be the best Swift that it can be. As a result, we expect little to no change for customer and driver facing activities. There are some areas, where we will work closely together to support our operations and we are confident we will continue to realize additional synergies over time.

Excelling at safety and service is of the utmost importance to all of our businesses. We believe we have significant opportunities to enhance the safety and service performance at Swift. While the teamwork we are witnessing and the opportunities ahead of us give us confidence, we continue to face a challenging driver environment. Longer term, we expect to overcome the near-term headwinds through the driver sourcing capabilities of Knight and Swift. Specifically, we believe Swift has an unmatched advantage to source and train new drivers through our academies and driver development capabilities.

Knight plans to leverage Swift’s competency to source and train new drivers and Swift plans to further leverage Knight’s approach to increase the sourcing of experienced drivers. Sourcing and retaining drivers remains a top priority across our fleets. We are encouraged with the margin improvement we have experienced at both Knight and Swift, but understand we have more opportunity to improve. Our teams remain committed to working together to enhance our performance in managing markets, improving safety and service developing high-quality drivers and reducing our cost per mile and cost per transaction.

Now to Slide 11, our synergy efforts are in full swing, reflecting a high degree of collaboration and dialogue across the Knight and Swift platforms. We expected to realize synergy benefits of $15 million in 2017 and we are happy to report that we are ahead of schedule both in cost and revenue synergies. Our intention with providing synergy targets in April at the time of the merger announcement was to provide an estimate of the improvements we believe we could achieve with the combined efforts of both companies. Actual improvements will be realized in improved adjusted operating income. During the fourth quarter of 2017, adjusted operating income at Swift improved over $32 million year-over-year despite 6.7% less tractors. Moving forward, we may not provide specific synergy updates. However, the improvements in the business will be visible in the changes in our operating income in each of our lines of business on a year-over-year basis. We also want to reaffirm our expectation that these synergies will increase to $100 million and $150 million in 2018 and 2019 respectively. I would like to close this presentation by expressing how appreciative I am for the outstanding work of all the employees of both Swift and Knight, who are ultimately responsible for the solid fourth quarter results.

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

[Operator]

[Operator Instructions] And your first question comes from line of Ravi Shanker from Morgan Stanley. Your line is open.

[Ravi Shanker, Morgan Stanley]

Thanks. Good afternoon, everyone, can I just follow-up on your commentary on the pricing for 2018, you said your contract pricing could be up high single-digit to low double-digits throughout the year, does this imply kind of once you roll in spot there is even more upside to that. And also typically I think most people expected the pricing to improve in the second half of ‘18 given the time of your contracts, can you just talk about how we think a little bit timing of the price increases through the year? Thanks.

[Dave Jackson, President and Chief Executive Officer]

Yes. Hi, Ravi. I will try and take that. When we look at kind of how rates have hit an inflection and about the middle part of last year and we saw some more of that – more of the rate increase come through the non-contract world typically what happens and this happened in previous cycles as we have transitioned into the next bid season what we find is increased rates. It can reduce the kind of volatility that perhaps some of the shipping community has experienced in the second half of 2017. And so as a result of that we will see some meaningful improvement in the contractual rate environment. I would say that bid season is really just at its early stages and so with the kind of strength that we have continued to see in January, we expect to see meaningful improvement in the contractual market. And what I would remind you of is that we saw negative rates throughout ‘16 and even the back half at the very end of ‘15. So we have – we have seen significant volatility since 2014. I think we are seeing some of the catch up for that. I think from our early interactions with our customers on the bids, there seems to be an understanding that in this upper single-digit, in some cases the lower double-digits that that is largely where the committed market appears to be or appears to be heading. And so clearly the non-contract market has been a couple of times that for the last few months of the year and perhaps there might be some of that. As we look out into 2018, we would expect to see – continue to see a positive rate improvement on a year-over-year basis. And then when we come a year from now and we are talking about the fourth quarter of ‘18 and comparing against the kind of the increases that we just – we have just reported for the fourth quarter of ‘17 that it’s going to be difficult to show a lot of meaningful improvement on a year-over-year basis. But what will happen I would expect is that – is that the increases throughout 2018 will come from the contracts and not from the non-contract environment. So that’s similar to what happened in ‘14 going into ‘15 and I think what we are seeing is something similar to that.

[Ravi Shanker, Morgan Stanley]

That’s very helpful color. Can I quickly follow-up and ask you what you – are you able to quantify what you think driver wages will be up in 2018, I am just to trying to juxtapose it to them and figure out just how much of the pricing you are going actually keep?

[Dave Jackson, President and Chief Executive Officer]

Well, typically the – and it’s not always exactly in the moment, but over time around 25% maybe a couple of points higher than that 25% to 30% of the increase goes to the driver. As you know driver wages are the largest expense we have and so typically you will see it follow that way. I would say right now when you look at the businesses the driver wages are up in the neighborhood of 6% to 7%. And given the fact that the drivers in the industry did not see an increase in 2016 and they saw very little in 2017 if any towards we saw some towards the end of the year. There definitely is some pent-up wage pressure and I think you are seeing that manifest itself in these kind of non-contract rates that we are seeing out there in the third-party indices, so but over time, Ravi, I think you should expect somewhere around 25% of the increase to find its way to the driver.

[Ravi Shanker, Morgan Stanley]

Great, thank you.

[Dave Jackson, President and Chief Executive Officer]

Thanks.

[Operator]

Your next question comes from the line of Jason Seidl from Cowen & Company. Your line is open.

[Jason Seidl, Cowen & Company]

Yes, thank you operator. I wanted to chat a little bit about your CapEx outlook, what do you project in terms of by the end of the year your fleet age and then how much of this CapEx is really just playing a little bit of catch-up to get the fleet age down and how much do you think is really just geared towards some of the benefits now that you are going to see with the new tax bill?

[Adam Miller, Chief Financial Officer]

So, I will take that. This is Adam, Jason. So, I would say from a fleet age standpoint, Knight is currently at 2.7, I think Swift is currently at 2.5 from an average age standpoint and we would expect that number to come down probably closer to 2 by the end of the year. And so I think some this CapEx will be some catch-up to refresh the fleet. Again, we are not planning much of any growth within the CapEx. We may see a little growth from the Knight side, but certainly not on the Swift side. We didn’t change our CapEx strategy as it relates to the new tax law. The only thing that we did was we probably pulled forward some of the CapEx purchases that were planned for the first quarter and moved that into the fourth quarter to get the deduction at the higher rates, but generally speaking, our CapEx is going to be for replacement and to improve the average age from where it is today.

[Jason Seidl, Cowen & Company]

But as I am thinking about going forward if you guys get down to closer to 2, then you will probably be more in line with what you are thinking where you want that age to be longer term as you add into 2019, am I correct in thinking that?

[Adam Miller, Chief Financial Officer]

Yes, I think that’s fair. I think historically when you look at where Knight has been, we have been sub 2 for quite a while, but I think we are comfortable in that 2 range give or take a few months.

[Jason Seidl, Cowen & Company]

Okay. And if I can have a quick follow-up to Ravi’s question, you talked about the high single-digit rate increases, is there any difference between what Knight historical is going to get and what the Swift business is going to get in terms of the rate increases. Is Swift more under market than Knight is I guess is what I am asking?

[Kevin Knight, Executive Chairman]

Jason, this is Kevin. I would say at Swift, we just have a different portfolio of services. Swift, I think probably won’t get to the revenue per mile levels necessarily that Knight is, is my expectation. So, again, as I stated earlier, our goal is for Swift to be the best Swift and for Knight to be the best Knight. Swift has a broader portfolio of dedicated businesses. When you look at Swift’s dedicated businesses, if you tally everything up in all segments, it’s probably over 5,000 trucks and the characteristics around dedicated are different than one-way line haul. We also when you look at our Swift, when you look at our length of haul in our line-haul businesses, we tend to be a longer length of haul at Swift than we tend to be at Knight and we don’t really have any plans to superficially push that down in anyway. For the most part, I really like the book of business that we have at Swift. There are some pieces of it that I am still trying to understand a little bit better than what I currently understand. I think probably the biggest opportunity for Swift is in their one-way irregular Reefer segment and that book of business was not what I would call the best of book of business that I have seen. But we are working diligently to improve that book of business and expect that you will be pleased with the improvements in revenue per mile and profitability especially in the irregular route side of refrigerated. And so that’s how – that’s how I see it. So I wouldn’t look at it like these numbers merging anywhere down the road, I would expect that with the market that we have been afforded, I would expect that yields are going to improve for both entities. Knight has a bigger presence in the non-contract area than Swift and I don’t see Swift probably ever having as bigger presence from a percent of capacity standpoint. So that’s basically how I see it Jason I hope that’s – I hope that’s helpful.

[Jason Seidl, Cowen & Company]

That’s great color. Thank you very much. And thank you for the time guys.

[Operator]

Your next question comes from the line Brian Ossenbeck from JPMorgan. Your line is open

[Brian Ossenbeck, JPMorgan]

Hi, good afternoon. Thanks for taking my question.

[Dave Jackson, President and Chief Executive Officer]

Hi, Brian.

[Brian Ossenbeck, JPMorgan]

So I said, can we think over just a strategic fit of some of the segments, I think you give us a little bit of the color on that last time, it sounds like one way refrigerated is the best upside, but you also made some more positive comments on intermodal during the last call I was wondering if you could give us your sense of that business especially we see some of the rail services not quite where it should be, but I imagine that also had some decent upside given where it’s been operating in the past, so can you give us an update on that?

[Dave Jackson, President and Chief Executive Officer]

Yes, I would be happy to. What kind of learning our way on intermodal and first off on that on the red brand, we have got a non-asset based intermodal offering that performs very well. It’s not large, but that business has really good trajectory and so we are excited about that, but it’s a small piece of our overall revenues. As far as Swift it’s much more significant, its asset based where we own our own boxes. As I think most of you know we are extremely reliant on our – on our rail partners. They don’t always provide the highest level of service, but from Swift’s perspective, we have probably not always provided the highest level of service on the gray sides of the business. And that’s the area that we are focusing on. That’s how we can ensure that we provide more value to our customers. And we are primarily focused right now on improving our revenue per box on a quarterly basis and we made good improvement there in the fourth quarter. We do believe that we will see good opportunities to improve our yields in terms of intermodal as this market continues to develop. I also think, we continue to have opportunities to improve our cost structure. On the intermodal side this quarter was a little tough as far as drayage costs. If we wouldn’t have experienced higher drayage costs, we could have reported possibly a 93 or a 94 or which would be a legitimate, but not where we would like to be long-term. And so we are working to improve our understanding of the business to improve our disciplines around the business. And I believe the yield will come and we won’t be as good at that as some of our competitors who are much more experienced in this area, but it’s an important customer offering to our customer base and it’s important that we figure out how to do our customers a good job in this area. And I think there is certainly potential for us to grow a bit here. But before we do that, we want to make sure we know what we are doing and we are not 100% certain we do yet, but I think we are getting closer and closer. So I would say that’s the commentary from an intermodal side. Was there an additional line that you had a question on?

[Brian Ossenbeck, JPMorgan]

No, that was great. I think intermodal was the one that you called out specifically being more positive on the last call and you have a comment on the reefer. So, we will leave it there. Thanks for all the details. Just a real quick follow-up Adam if you could potentially give us some sense of how you see 2018 stacking up from you gave us the rate perspective you have got synergies moving in the right direction faster than you originally thought? What sort of EPS range or growth trajectory do you think we should be modeling for next year? I know, we have typically seen some quarter ahead guidance in the past. So, just wanting to give us a feel for how this story can develop in the first half of the year at least the next couple of quarters would be helpful? Thanks.

[Adam Miller, Chief Financial Officer]

Sure. And I think on the last call, we shared that and we are probably not going to give guidance given we are just trying to understand maybe the different cadences of earnings from both businesses, like for instance, Swift has a history of a much deeper drop-off of EPS from fourth quarter to first quarter as compared to Knight. So, we are trying to understand what’s driving that and certainly help mitigate that. But I think with all the moving pieces with the market, the efforts around synergies we are not in a position to give guidance at this point. I would give you maybe a little help on the tax rate side, because I think that’s the number, I think most people will want to update in their models. We are expecting that to be around 25% and we have given you some help on the revenue side in terms of trying to put out some EPS guidance, we are not in a position to do it at this point potentially down the future, but we will see how things transpire.

[Dave Jackson, President and Chief Executive Officer]

Yes. And I would just add that on our Swift book of business, it’s a heavier retail band than on the Knight side and you know retail really intensifies in the fourth quarter and then it kind of lightens up a bit more than food and beverage in some of those kinds of things. So, I would just reaffirm with what Adam said. We have kind of got to get through a full year of quarters with Swift, where we really understand how things change from quarter – from quarter to quarter. The good news is that it feels like this market is definitely hanging in here with us. And so hopefully we won’t see the drop-off at Swift like we have in the past, but I also know that there were a lot of year end I think Swift in the past has referred to them as projects. And we were doing a lot of project work and so we are just going to have to get another two or three quarters down the road to really fully appreciate how things will cadence for the blue brand.

[Brian Ossenbeck, JPMorgan]

Okay, great. Thanks for all the time. Appreciate it.

[Operator]

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

[Casey Deak, Wells Fargo Securities]

Hi, thank you. If I can go back to kind of what Jason was asking earlier, if you look at what Knight is doing on the revenue per loaded mile versus what Swift is doing and Swift if you can exclude what happens in the dedicated, kind of looking forward are you bringing this strategy that you employ at Knight of entering the day may be under booked, so that you can attack the spot market to those irregular routes at Swift as well?

[Dave Jackson, President and Chief Executive Officer]

We will do some. Swift, the makeup of their fleet is different also where a higher majority of Swift’s fleet is independent contractor. And so we want to make sure we have enough committed freight to kind of keep the beast moving every day. But on the same token there is no question that we will provide a higher level of service, if we are less committed. And so by doing that, by being less committed it gives us an opportunity to do two things. Number one, exceed our customer expectations. And number two, when our customers have a need for additional non-contract capacity, we will be in a position to respond. So yes, we will do more of that. We will do more of that over time at Swift, but still we want to be respectful of our blue brand and how it works and make sure that we are deliberate in our process there.

[Casey Deak, Wells Fargo Securities]

That’s helpful. Thank you. If I could add to that on top of that, so because you – they are separate entities and how you are managing them, are you bringing managerial talent from Knight to Swift to maybe facilitate that change in mindset?

[Dave Jackson, President and Chief Executive Officer]

We have done some of that to help Swift to be a little more focused on the profit side of the business, the operating ratio, but we have also brought some talent the other way too. So I would just tell you that Swift is a much bigger company. And I am an old guy and it takes a lot of help and we have an amazing team at Swift. And I have asked a few folks that I know how they think and how they operate to help me at Swift, because that’s where our greatest opportunities are. So, but I will tell you that that we have an amazing group, very talented people at Swift that I believe are excited about the stability that we have added from a leadership perspective. But yes, we have moved some people there to help a handful of people and there they have been extremely well received by the Swift team. And so yes, that’s how we are approaching it.

[Casey Deak, Wells Fargo Securities]

Alright, that’s great. Thank you very much.

[Dave Jackson, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question comes from the line of Brandon Oglenski. Please state your company affiliation. Your line is open.

[Van Kegel, Barclays]

Hi, this is Van Kegel on for Brandon with Barclays. Thanks for taking my question guys. Good afternoon. With – I guess with rate expectations now kind of in the call it 8% to 12% range, could you talk us through how to think about margins next year, I mean is 600 or 800, 6 or 8 points of margin improvement out of the question after you passed on that 30% or so to the driver and can you talk to some of the other costs items and how they might temper that outlook and maybe any of the offsets from synergies at Swift?

[Dave Jackson, President and Chief Executive Officer]

Yes. Maybe I will jump in and out of my supplement here a bit. But as we talked about earlier we didn’t see much by way of rates over the last couple of years, but that didn’t stop the cost of trucks and the cost of trailers some quarter’s fuel and then of course we are in a very depressed used equipment market. So, we have definitely seen cost creep out. There seems to be a bit of a catch up that we kind of need to get caught up. It looks as though costs could be inflationary again here going forward we know for a fact that our largest cost, the driver wages will be. But that will likely not be the only thing that might be inflationary. And this is growing, strengthening the environment and economy. So as we look out our goal is going to be to get as much of that to drop to the bottom line as we can. We are not – we are probably not going to ever forecast right now how many points of OR we might get. If we got that kind of improvement I think you can look at our history in the past to kind of see our track record on cost and our track record on how much of the loaded rate per mile is able to drop to the bottom line. We didn’t drop as much to the bottom line this fourth quarter as we normally would have like to have. And I think that had to do with just some of the pent up cost that has been there. So I think it is reasonable however to assume that you will see on a year-over-year basis you should expect to see a lot of improvement in our business and this is particularly on the asset base side of the business. When we look on the logistics side, that’s a difficult place right now because – just because of the volatility and the purchase trends costs. I mean that’s those are where we are seeing the highest rates. And you can look at these third-party indices to get a sense for where that rate pressure is. And really that’s the group that saw the deep plunge in terms of pricing and so it’s more than come back now in it’s unclear when that is going to stop and there maybe a number of factors for that. So the logistic side is going to be tougher to make margin improvement, but on the asset based side, we would expect year-over-year improvement every quarter, certainly this year because we feel like that there is enough strengthen and the bid season will carry us through the next four quarters and hopefully continues beyond them.

[Adam Miller, Chief Financial Officer]

And just to add to that I think historically we would normally expect to see 2% to 3% inflation from a cost per mile standpoint. However, we are probably in a market where driver wages will be much more inflationary than they had in the past. And I would also point you not just purchased trends on the logistic side, but also purchase trends on be on the asset side where we have our owner operator group that there will also be some inflationary pressure there as well. So certainly we would hope to expand our margins in the strengthening environment, but probably see more inflationary pressure than we would in a normal year.

[Dave Jackson, President and Chief Executive Officer]

Yes. And I would I would maybe just add that when you think of these cycles in the past, it easily takes four quarters or five quarters to find your best OR that you are going to get in the cycle. Now this cycle looks like it could last longer than maybe most, kind of depending on how many new trucks creep into that – into the marketplace. But typically on the Knight side we have seen ORs in the high-70s when we when we hit there, so from an asset based perspective that would indicate there in 300 basis points or 400 basis points of improvement, it could have get better than that, it really depends on the breadth and the depth of the market. On the Swift side, we would hold that we would be within 200 basis points or 300 basis points of that. On the asset base side probably not including dedicated, that’s probably maybe an unrealistic goal for dedicated. And so that’s how I would – that’s how I would see it.

[Van Kegel, Barclays]

Thanks for the insight, guys. I will keep it to one.

[Dave Jackson, President and Chief Executive Officer]

Thank you.

[Operator]

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

[Tom Wadewitz, UBS]

Yes, good afternoon. Congratulations on the strong results. And Dave, I guess you have already exceeded on the red truck. The peak pricing you achieved in fourth quarter ‘14 I think was that was like 12.1%. So, anyways I wanted to ask you a little bit about the contour of the pricing and just kind of you get to these big numbers, it’s hard to figure out what to put in the model. So, how much of your business in fourth quarter at Knight was in the spot market and how much did you actually re-priced on the contract side in the fourth quarter?

[Dave Jackson, President and Chief Executive Officer]

Well, thanks, Tom. First thing, just to correct you, I mean you said just my name, as you could imagine there is a whole team, it’s not Army of people that work at Knight on rates both the time you have talked about and now – and so when we look at your question was what percentage of the spot or non-contract market.

[Tom Wadewitz, UBS]

Yes, how many in spot in the fourth quarter versus just recognizing that probably boosted the overall rate realized?

[Dave Jackson, President and Chief Executive Officer]

Yes, we believe that, that number for the fourth quarter of ‘18 was north of 20%, perhaps in the low 20% range. And to compare that for perspective to the fourth quarter of ‘17, we would have probably been in the mid to high single-digits on a year-over-year and of course that mid to high single-digit percentage didn’t experience the premium anywhere close to kind of what we have seen here in the market over the last 4 to 5 months. So hopefully that gives you an idea when you talk about what we really saw contractually is that the kind of off time of the year for the contracts. I mean, you are kind of dealing with pricing that had gone into a place 6 to 9 months previously. So, there wasn’t nearly as much of an increase on a contractual basis. We will see that change here over the next two quarters we expect. Now, there is another factor here and that it appears as though our customers were going a little deeper in the routing guide on the back half of the year as compared to maybe the first half of the year. And you don’t really know what you are going to be tendered or awarded on a day-to-day basis until you get into the heated battle. And so you have hopes and expectations perhaps for the bid season. And so as it played out in the first half of the year, I think we found ourselves not getting a lot of loads that had been priced in a place where we thought they needed to be given the driver difficulties and that we needed an increase. And so on the back half of the year, I think part of this rate improvement that you have seen was also from us just being tendered loads at the agreed upon rate, but just those that we were a little deeper into the route guiding and our customers were having a tougher time finding capacity. So, we found ourselves hauling those loads and those loads would have come at a year-over-year increase modest, but yet a year-over-year increase. So, the combination of that, the combination of exposure to the spot or non-contract market and some of our efforts to get in front of this with certain customers to get things priced in a way to avoid any disruption in the capacity that we provided them is what led to the rate you saw. And so we will continue to work, but in a slightly different way more so through the bid process here in the next couple of quarters and keep plugging away.

[Tom Wadewitz, UBS]

Yes, I appreciate that. And I didn’t mean to single you out only for the good performance, obviously, it’s Kevin and Adam brought our team just noticing that particular metric that was quite strong among others. So, how do we think about when the year-over-year change might peak, maybe if I can also ask you that in terms of this metric of revenue per loaded mile I feel, is that maybe second quarter this year or how would you think about when that year-over-year change might actually peak?

[Dave Jackson, President and Chief Executive Officer]

Well, typically, we get to a second quarter. Much of the contract pricing is usually just beginning to take effect and at various stages throughout the quarter. Second quarter as you know has a nice seasonal impact to it and so between beverage and just the shifting season and all that comes with warmer temperatures. We typically see more a robust non-contract market there, not quite like fourth quarter of course, but more so than what we normally would see in a first quarter. So, I imagine we will see strong seasonality this year, but we won’t probably still feel the full impact of the contract pricing until the third quarter. So, I think we will just have to – we will have to come watch and see how that plays out when we get to fourth quarter. I would be surprised if we saw the same degree of volatility in the non-contract market. I mean, I think things will be largely prepared for in this first half of the year. Now, there is a chance that because we haven’t seen a year where we have had strong broader economic growth and restrained capacity growth and there are reasons to believe that both of those could happen in a way that’s different than what we saw in ‘14 or different than what we saw in ‘04 to ‘06. And so we will have to see how that plays out. We are not really budgeting if you will that we would see a similar kind of fourth quarter at the end of 2018.

[Kevin Knight, Executive Chairman]

And Tom, I would probably add, I think the supply chain all of us that participate were caught a little bit off guard by all the dynamics of what was going on. It was the disruptions in weather initially and then very strong retail seasons. And then on top of that, a few weather events and then on top of that, the introduction of the ELD requirements. So, our customers are very good at sourcing capacity and I would expect that over the next couple of quarters that they will focus on making serious awards at very good contract pricing to folks such as ourselves that have significant capabilities for supplying capacity. So, you could even have some dips. You could have some dips and you could have some strengthening and it really I think depends on how strong the economy remains, what the Tax Cuts and Jobs Act does and really just also what happens with additional capacity finding its way into the system. So, we have just got it. We have just got to take it as it comes and navigate through it in the best way possible.

[Tom Wadewitz, UBS]

Great. Thank you for the time.

[Operator]

Your next question comes from the line of Brad Delco. Please state your company affiliation. Your line is open.

[Brad Delco, Stephens, Inc.]

Good afternoon, gentlemen. This is Brad with Stephens Inc.

[Dave Jackson, President and Chief Executive Officer]

Hi, Brad.

[Brad Delco, Stephens, Inc.]

Dave, good afternoon. Dave, I wanted to focus a little bit and maybe this is for you, Kevin, on the direction of Knight’s fleet, I feel like I have heard you deliver the message that the driver wages need to go up at Swift, driver wages will go up when you get rates. So, you saw the fleet count down about 450 trucks or so in the fourth quarter. When do you think we start seeing that turn the other way and what is it going to take from both a wage and a rate perspective to see that move?

[Kevin Knight, Executive Chairman]

Well, Brad, it’s a question I wish I had the answer too, but I will tell you that we have introduced some disciplines in its on-boarding process that didn’t exist at Swift to the degree that they have existed at Knight. And so that isn’t helping, but I feel like that when you think about Swift nobody trains and develops drivers like Swift. And when you think about Knight, nobody develops experienced drivers like Knight. And so I really believe that we are going to be able to make Knight better and I will tell you that Knight is now in positive territory for the last few months and we feel like we have got our feet under us at Knight and I appreciate Dave and his team and I know that Dave is spending an enormous amount of his time in that area, in our business. And at Swift, we are probably couple of quarters away at least maybe from finding the bottom, but we will and that’s an area where we are going to have to invest more time. When you introduce more disciplines, you have got to start with more supply and we are working on that. And we are really building a very strong driver development and retention group at Swift that’s going to be bigger and stronger than it has been in the past. And so Brad, that’s basically how I see driver – the driver situation playing out at Swift, where we now have got good rates and that were better rates and rates that are going to continue to improve. And the good thing about rate is it puts you in a position to do more for your drivers, not only from a driver pay perspective, but from a driver development perspective, from a driver retention perspective. And so you are going to have to be a little patient with us, I apologize for not having more clarity, but we are just going to have to stay focused and stick to the way we do trucking and it should all work out very, very well.

[Brad Delco, Stephens, Inc.]

Kevin, if I can just a clarifying point there. Dave suggested $0.25 to $0.30 on the $1 going to the driver at Knight, is that the same range you expect at Swift or is there a little bit of catch up that need to take place?

[KevinKnight]

Yes, we are pretty close not too far off, but Knight could be a little bit higher I am not 100% certain about that. I think we are really pretty darn close, Brad. And so I don’t see necessarily any catch up on Swift. One of the things that we had to do at Swift was we had to improve the cost to get a good driver on his own. And so that is a cost that we have been experiencing since we started, but shortly after we started. So, those costs are already hitting the Swift side, but as far as once a driver becomes so low and on his or her own, we are pretty darn close, Brad.

[Brad Delco, Stephens, Inc.]

Okay, great. Thanks guys for the time.

[Dave Jackson, President and Chief Executive Officer]

Thank you.

[Operator]

And that is all the time we have today for questions. I will turn this meeting back over to our presenters.

[Dave Jackson, President and Chief Executive Officer]

We really appreciate many of you that have joined those that have asked questions and for those who we did not have time to get your question, we would welcome you to give us a call at 602-606-6349 and Linda will be there to grab a message and we will try and get back in touch with you. Have a wonderful evening.

[Operator]

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