Apr 25, 2013
Operator
Speakers for today's call will be Mr. Kevin Knight, Chairman and CEO; Dave Jackson, President; and Adam Miller, CFO.
Mr. Miller, the meeting is now yours.
Adam Miller
Thank you, Gina, and good afternoon, everyone. Thanks for joining our call today.
Hopefully you've had a chance to print out the slides that we've posted along with the press release. The slides that will accompany this commentary are available on our website.
The actual web address is investors.knighttrans.com/events. Our call is scheduled to be only until 5:30 p.m.
Eastern Time. Following our commentary, we hope to answer as many questions as time will allow.
If you're not able to get to your question in due to time restrictions, you may call (602) 606-6349 following the call, and we will return your call. [Operator Instructions] So to begin, I will first refer you to the disclosure on Page 2 of the presentation.
I'll also read the following: This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions and uncertainties that are difficult to predict. Investors are directed to the information contained in item 1A risk factors or Part 1 of the company's Annual Report on Form 10-K filed with the United States SEC for a discussion of risks that may affect the company's future operating results.
Actual results may differ. I'll begin by covering some of the numbers in detail, including a brief recap of the first quarter results starting with Slide 3.
For the first quarter of 2013, total revenue increased 7.2% year-over-year to $235.4 million, while revenue, excluding trucking fuel surcharge, increased 8% to $189.6 million. Income from operation increased 7.3% year-over-year to $25.5 million, while net income increased 5.1% year-over-year to $15.2 million.
Our net income per diluted share was $0.19 versus $0.18 from the previous year, which is an increase of 5%. Just as a note, all prior year comparisons exclude the noncash $4 million pretax, $3.9 million after tax charge for stock option acceleration taken in the first quarter of 2012.
Now on to Slide 4. We finished the quarter with $502.5 million of stockholder's equity.
And over the previous 24 months, we've returned $95.9 million to shareholders through dividends and repurchased shares. We continue to maintain a modern tractor and trailer fleet with our average tractor age of 2 years.
We've also -- we also repaid $37 million of our outstanding debt and ended the quarter with $43 million outstanding on our unsecured line of credit. Dave Jackson will now review slides providing additional insight of the first quarter results.
David A. Jackson
Thanks, Adam, and good afternoon to everyone. Appreciate you joining the call.
Just one quick announcement, if you had pulled up our website and you did not see the presentation, we'd ask that you refresh your web browser and hopefully, you'll be able to see it there. It is posted there.
Some had some difficulty finding that the first time. Now to Slide 5.
Revenue continues to trend positively as we've recorded the highest revenue, excluding trucking fuel surcharge, in the first quarter in our company's history. We experienced revenue growth in each of our businesses, with our non-asset based business contributing much more meaningfully to the overall increase.
All of this growth has come organically as we continued to invest in providing logistic solutions to our customers that have led to, and will continue to lead to, additional revenue opportunities. Our average revenue, excluding fuel surcharge per loaded mile, increased 0.7% while our average revenue per tractor declined 1.2% due to a 1.6% decrease in our miles per tractor.
Our length of haul remained essentially flat on a year-over-year basis. We expect rates to continue to improve throughout the year.
On to Slide 6. Despite the challenging operating and economic environment, we continued to grow our earnings.
Not only did our asset and non-asset based segments improve top line revenue, but they also improved their operating ratio on a year-over-year basis. This marks the eighth consecutive quarter with a year-over-year diluted earnings per share growth, as well as the highest operating income in the first quarter since 2007.
Now on to Slide 7. Since coming out of the downturn in 2009, we've consistently grown our revenue in each and every quarter.
During this time period, we've averaged 9.6% year-over-year revenue, excluding fuel surcharge growth. I'll now turn it over to Kevin.
Kevin P. Knight
Thanks, Dave. Good afternoon, everyone.
And moving to Slide 8, if you would. We continue to be committed to developing multiple logistic solutions that allow us to meet the supply chain needs of our customers, while operating as efficiently and effectively as possible.
As illustrated by the graphs, over a short 3-year window, we've diversified our revenue sources and have grown our consolidated revenue, excluding trucking fuel surcharge, by 35%. During this period, our asset based businesses grew 18%, while our non-asset based businesses grew by more than 4x.
This has resulted in our non-asset based businesses now accounting for 17% of our revenue when compared to just 4%, 3 years earlier. As we continue to invest in our multiple services, our people, our systems and deepening our relationships with our customers while leveraging our network of services and standards, we feel well positioned to capitalize on future growth opportunities.
Now to Slide 9. Our asset based businesses improved their operating ratio from an 85.4% to an 85.3% for the 2013 quarter, while growing revenue 2.1%.
Our non-asset based businesses improved their operating ratio from 94.4% to 92.8% from a year ago for the 2013 quarter, while growing 57.9%. In a low growth economic environment, top line revenue growth can pressure efficiency.
Our people are working hard to control cost and it was evident in the quarter. We have many important cost initiatives being worked on by many teams within our organization.
Consolidated, our operating ratio for the year increased by 10 basis points to 86.5%, with total revenues growing 7.2%. Moving to Slide 10.
Knight is now built to grow in service multiple truckload modes at high levels of efficiency as measured by on-time service, cost per mile or cost per transaction. Our value proposition to our customers is growing.
Our people are specially excited about our resources and what they can accomplish for our customers. Our team is very high quality and ready for the challenges we face in terms of a slow economic environment, coupled with more regulation.
Our belief is those challenges will bring our company significant opportunity. I will turn it back to Dave to discuss guidance.
David A. Jackson
Thank you. On Slide 11, I will review the guidance.
It's our final slide. For the second quarter 2013, we reiterate our guidance of $0.23 to $0.25 per diluted share, and our expected range for the third quarter 2013 is $0.22 to $0.25 per diluted share.
Some of the assumptions made by management include rates to continue to be slightly positive year-over-year and for utilization to be relatively in line with the year-ago period. It also includes consideration for potentially volatile fuel prices.
These estimates represent management's best estimates based on current information available. Actual results may differ materially from these estimates.
We would refer you to the Risk Factors section of the company's Annual Report for a discussion of the risks that may affect results. This concludes our prepared remarks.
We would like to remind you that this call will end at 5:30 p.m. Eastern daylight time.
We will answer as many questions as time allows. [Operator Instructions] If we're not able to get to your question due to time constraints, please call (602) 606 6349, and we'll do our best to follow up promptly.
I do want to announce, it appears that some of you have had difficulty and based on the text messages that I've received, some of you have had difficulty in pulling up the slides. And I understand that the slides are out there and available now.
And so as we begin to entertain questions, as you take a look at those slides, if you have specific questions, we of course, would be open to going back and maybe explaining one of those slides that maybe you didn't have our commentary at the same time you were viewing the slides. So with that, Gina, we'll entertain questions.
Operator
[Operator Instructions] Your first audio question comes from the line of Tom Wadewitz with JPMorgan.
Thomas R. Wadewitz
Wanted to ask you on the pricing side. I guess I may have missed this, but I'm not sure if you gave us a revenue per loaded mile like field, just kind of roughly what that was in the first quarter and how do you think that -- thoughts on pricing environment and how that might play out through the year?
David A. Jackson
Yes, Tom, I'll back up to that. What we gave you was the year-over-year change.
And on a revenue per loaded mile, our rates improved by 0.7%. And as you noticed in the statistical information we gave on the release, our length of haul was virtually flat.
And we -- as far as the second part of your...
Kevin P. Knight
It's about 1 mile.
David A. Jackson
Yes, Kevin points out, we were up 1 mile. So it was a little longer, 0.2% to be exact.
And so, Tom, maybe to answer the rest of your question, I think you asked about rates, where they were and maybe where we saw rates. And what I would say there is we believe the -- our feeling going into this year that a 2% to 3.5% rate environment, we believe that, that continues to be intact.
We think we're through the worst of the year, if you will, as it comes to rates. And we expect to see it to continue to develop as we get into the second quarter and we go throughout the rest of the year.
Kevin P. Knight
And Tom, I would -- this is Kevin. I would just add that I agree with Dave that I think first quarter represented the low point.
There is no question that we are receiving a lot of bid activity and have, this year, it seems like that becomes a little more popular every year. But every time you get a chance to reprice your business, you have a chance of improving those rates.
And so we've been pretty deliberate about it. I'm sure it'll probably cost us a few loads.
But with the opportunities that we have in front of us, with all of our customers, I think there's also many opportunities for us to get additional freight that we don't currently haul. So I would agree with Dave.
I think this will probably be the low point in this cycle as far as our rate improvement and we expect for things to start to improve. We also believe, Tom, that we're going to have a pretty strong produce season in the Reefer area of our business.
And as you know, during the first few months of the year, the drive ends and the reefers are competing very much for some of the same freight and we believe that with that, there is going to be opportunities to not only increase our contract rates, but also to increase the spot, our spot rates. So that's basically how we see it.
Operator
Your next question comes from the line of Justin Yagerman with Deutsche Bank.
Justin B. Yagerman
So wanted to ask you about the fleet and how you're thinking about growth as we move through the year. Obviously, you had a sequential decline Q4 to Q1.
Is that -- was that purposeful in terms of trying to mitigate during a softer seasonal time of year? Or was that more because you're having trouble seating tractors or getting the kind of growth that you were hoping for.
And the second part of that's, obviously, as you think about the cadence to the rest of the year, how would you expect the fleet to progress as you move through Q2, 3 and 4?
Kevin P. Knight
Justin, I'll take that and then, of course, Dave or Adam, if you guys think that I don't cover everything, then jump in here. When I think about fourth quarter, Justin, it became apparent to our leadership team that we were putting additional stress on the system by growing at a rate that was significantly more rapid than others and especially on the drive-end side of our business.
We -- and so as a result of that, we felt like, going into first quarter, it was prudent for us to hedge just a bit. And so basically, it was really by design and so I think we would be a little more cautious moving throughout the year on our fleet growth.
I think we've given a range of maybe 4% on the bottom side, maybe 3% or 4% on the bottom side, and 6% or 7% on the topside. And so I would say today, I feel like for the year, we'll be at the low end of that.
And of course, that's subject to change up or down. The good news is in our non-asset based business, we're building significant momentum and that doesn't necessarily mean that we won't be able to experience solid revenue growth if we're on the wider side of our asset growth.
So I would say, Justin, that I'm a little more negative in terms of fleet growth as we sit today. And it isn't just the environment.
I mean, every first quarter is challenging. And really, every -- most all Aprils are.
And -- but it's also more challenging from a driver perspective. And even though we put much effort into our driver development and continue to do well in the area of retention, it's a more challenging environment to, let's say, add assets without it having a negative impact on our earnings.
So that's how I feel. Dave, you look like you've got something else to add or did I cover it?
David A. Jackson
Well, maybe I'll just add an additional perspective just to last year and how it relates to this year. Last year, on the fleet growth side, we grew just over 5% and we leaned in if you will, into the back half of the year, assuming that we would have a little stronger freight environment.
And when that didn't come, and as made most notable by revenue per tractor, because we didn't have the utilization and we didn't have the rate, then we felt like maybe we leaned into a little too much. Going into this year, we're taking a little bit more of a conservative approach.
And given that we're in an environment where we are facing cost -- inflationary cost pressures to operate the business, we want to make sure that we get the right kind of rate to offset appropriately. And as we see that, then we're growing.
We have a tremendous amount of flexibility when it comes to turning on the growth button in a relatively short amount of time. And so we'll watch this, really, quarter to quarter.
You can see what happens in a quarter like this first quarter where we're not aggressively growing. And we build a tremendous amount of free cash flow, in this case, somewhere close to $42 million of free cash flow in the first quarter when you look at the net CapEx and the cash flow from operations.
So...
Operator
Your next question comes from the line of Ken Hoexter with Bank of America.
Ken Hoexter
Can you just talk about utilization for a bit? Obviously, we saw it declining 1.5%.
Is this a factor of as you continue to grow the fleet, you should get used to seeing a deterioration on that utilization? Or are there other factors that you can work on to kind of turn that around and get that improving, I guess?
Kevin P. Knight
I'll comment on that, and then if anybody else wants to, they can also. But through my eyes, we're not in a strong enough economic environment in conjunction with fleet growth to where we can really optimize to make our fleet as productive as it otherwise could be.
We have a very sophisticated planning and optimization software tool that sits on top of our dispatch system. And when you don't have a strong a freight demand as you would like to have, what happens is it's very difficult to optimize and so as well as you otherwise could.
So we still believe, Ken, because we've already adapted electronic onboard recorders, we feel like we can improve our productivity for truck in terms of miles and in terms of revenue if we have as robust of freight environment as is necessary. Now -- and especially an area where we're big and most companies aren't as big as we are, is the West.
And the West has been a bit softer than other parts of the country. So I wouldn't assume that we can't gain some of the -- this productivity back and even improve upon where we are.
Now I will caveat that with, we have a new hours-of-service regulation that may or may not go into effect July 1, that we are currently preparing to adopt. And unless our customers take the steps to keep us as productive and avoid doing work between 1:00 a.m.
and 5:00 a.m., and unless our customers bring more flexibility back into their appointment and schedule times, that could have a negative impact on our productivity and more than likely, will have to the tune of probably 1%, 2% or 3%. But when you have your optimizer that those new regulations tighten up, it's going to optimize maybe a little bit better than otherwise we would.
So I feel like we can be at least 3, 4, 5, 6 points more productive than we are today in the right economic environment with the right cooperation from our customers, if indeed the new regulations do go into effect. So that's how we see it.
Ken Hoexter
Wonderful. So just to clarify simply, I guess, it's not because you have to get freights to fill all these additional tractors that's causing the utilization decline.
It's because of just the lack of overall freights.
Kevin P. Knight
Yes, that's -- it's just not a strong environment. And hey, we wouldn't expect for it to be strong in the first quarter.
And really wouldn't expect for it to be strong in the first half of April. So -- but nonetheless, the more strong the overall freight environment, the better we can optimize and the more we can improve our utilization.
Operator
Your next question comes from the line of Brandon Oglenski with Barclays.
Brandon R. Oglenski
Kevin, I don't know if this question's for you or Dave or even Adam, but can you just talk to the components that is driving this non-asset based growth? We used to get some insight into intermodel and brokerage and port services.
But can this be a sustainable growth rate going forward? And also can you speak to the OR improvement in the segment this quarter as well?
Kevin P. Knight
Yes, we can, Brandon. First off, we've had good growth in all areas.
Now port services is actually part of our asset based businesses. So we align that with our refrigerated business and we align that with our drive-end truckload business.
Because even though we don't have to buy the trailers because we're pulling intermodal containers or import/export containers, that is aligned with our asset-based businesses. So when we talk about our non-asset based businesses, we're really just talking about primarily our brokerage, our intermodal, and then we do, do some sourcing.
And basically, those businesses are all growing nicely. And I think we're gaining some momentum.
We're still behind in the software race as far as our brokerage product, but we are not behind as far as our intermodal product. And we are seeing more growth on the intermodal side than we are on the brokerage side.
I think also on the intermodal side, we're starting to have a some economies of scale where we're spreading our cost better over -- because we've got a greater amount of revenue to absorb. On the brokerage side, we've probably also, just without the software that others have but building in that area, we're demonstrating more efficiencies there and probably go a little bit counter to the overall market in that area because it isn't like we're dealing from a year or 2 ago when we were efficient, or more efficient than we were 1 year or 2 ago.
And so as a result of that, that's what we see. And I think the other thing, too, Brandon, is our customers are starting to look at us a little bit differently.
And it isn't that they were slow to figure it out. It's probably more that when you're such an efficient driven asset-based business, it's difficult to really grasp the way the non-asset base side works.
And so I think what we're seeing is, the maturing of our organization is really helping. And our people are becoming more comfortable putting the right solution in front of our customer, irregardless if it makes their business win or if it makes one of our other businesses win.
And so, I don't think you should expect 50% plus growth every quarter, but I think in our stated goal has been 25% in that area and I think we're very comfortable continuing to deliver that type of growth, at least through the next few quarters, is what our expectation is.
Brandon R. Oglenski
And I'm not going to try to cheat here with a second question, but I think it might qualify as a clarification. Your non-asset revenue was -- like it really picked up some growth rate later in '12, and obviously, it continued into this quarter.
And you said it's driven a lot by intermodal. Obviously, I don't believe you guys own the containers there.
Is that something you're considering, ramping up your own container fleet going forward?
Kevin P. Knight
Not really at this time. In other words, if our rail partners continue to treat us well and they probably don't treat us as well as they need to, then I don't think we need to make the investment.
Because we really want to reserve our capital for truck growth. We really do believe that as we continue to see capacity come out of this system, as we see the information that ATA publishes every month and shows the small fleets are really down significantly on a year-over-year basis in terms of revenue, we do feel like when things do pick up, that there is going to be significant opportunity for us either in the form of buying trucks or an acquisition opportunity that creates the same thing.
So I would say that we are leaning towards not. Although by building our network out the way that we are, Brandon, it puts us in a position 2 or 3 or 4 years from now, where we will have enough freight to where if we decided to bring in a few thousand containers, we would already have the business to fill them up.
Now we wouldn't have the business to fill up a few thousand containers today, but certainly, if we keep building our intermodal network and our pick-up and delivery capabilities, we would be in a position to where we don't have to chase the business and put significant pressure on our earnings.
Operator
Your next question comes from the line of Chris Rusio (sic) [Ceraso] with Crédit Suisse.
Christopher J. Ceraso
Chris Ceraso with Crédit Suisse. Just a question about how the shape of the market is trending in terms of supply versus demand and what that means as we go into the bid season.
How is April shaping up and is that having a positive or negative influence on the bids that you're seeing?
Kevin P. Knight
I would say, Chris, that first off, typically how our industry works is you have -- you used to have -- January was the slowest, but now January, the first 2 or 3 weeks, we think because of card redemptions, is a little busier, and then it kind of slows down and then usually, the last half of March, things perk up. And March is typically a longer month, although it wasn't nearly as long.
It wasn't quite as long this year as normal because of where Easter landed and the number of work days. But typically, the first half of April, sometimes even most of April, it just isn't that strong.
And so I would say that we still feel -- it still feels like to me we're kind of in a typical environment. As I said earlier, I do have an expectation that the movement of produce and agricultural products is going to be fairly strong this year.
That starts basically any day. I mean, we're getting to that point where stuff moves up from the south and then Arizona will be right behind it, and we'll move over to California and the southeast will get a little more active in that area.
And so I think I'm not overly excited or overly worried based on what I see in the market. And so we're approaching this bid season as a company.
We know that there is cost inflation and it's apparent that we were able to offset most of that based on the work of our initiatives and our teams. And -- but we know that certain things, as far as cost, are increasing.
And trucks are increasing. We need to continue to find ways to reward our drivers, our driving associates and health care is just around the corner.
We know we have those challenges ahead of us. And the list goes on and on.
And so at the end of the day, we have to improve our rates by somewhere in that, in my opinion, 2.5% to 3.5% range if we're going to make any progress as far as our overall profitability is concerned. I do believe, Chris, that the industry recognizes that we've got to improve our rates.
And if we can improve our rates to the point to where we can create a really good driving job for our driving associates, then really, there's no point in continuing to add equipment. So I really think that the mentality, the stick-to-itiveness of our industry has reached a point where I really believe that people are going to do the right thing for their business.
And if we want to continue to provide our customers with high-quality services and the capacity, then we have no choice. But rate...
Christopher J. Ceraso
And just to clarify, not to put words in your mouth. But if you can't get 2.5% to 3.5%, are you saying that you won't buy trucks, that we'll continue to see sequential declines in your truck count?
Kevin P. Knight
Well, I'm probably not there yet, Chris, but I'm leaning more that direction today than I was a quarter or 2 ago.
David A. Jackson
And maybe if I could chime in Chris.
Kevin P. Knight
Go ahead, Dave.
David A. Jackson
I think we would evaluate how we invest our capital, maybe as opposed to shrinking the fleet, as maybe you are leading towards. It weighs into do we want to grow the fleet?
And to what degree do we want to grow the fleet on a year-over-year basis? As you see, our average tractors for the quarter were up 2.5%.
We're still positive. And so when we look at how we want to invest the capital, we have to evaluate, hey, if we're building a lot of free cash flow because we're not growing at a faster clip, do we want to buy back shares?
Do we want to do something with the dividend? Or we want to find some other strategic opportunity to invest that money in a way that can get the best return?
So I think, hopefully, that helps you understand our mindset.
Operator
Your next question comes from the line of Chris Wetherbee with Citi.
Christian Wetherbee
Maybe a question on hours of service. And as we think about it, assuming it does get implemented at the beginning of July and you do see at least some modest impact to utilization, I guess, going forward, how do you think about the reaction of pricing to that?
It feels like bid season, so far, at least what we've been hearing from other carriers, is maybe trending a little bit towards the lower end of previous expectations. I guess I just want to get a sense of how receptive do you think shippers would be to potential rate increases to offset some of that utilization?
And would there be a timing lag that we would need to think about once the implementation happens to when you might actually be able to get those rates? So just kind of broadly about hours of service.
Kevin P. Knight
Let me tell you the way I look at it. It really comes down to, can the trucks haul the freight that's available?
And if those new hours of service go into effect and the produce season is strong, and things build throughout the year, then really, without more flexibility coming from our customers in terms of adding an extra shift to do some loading and unloading, or giving us more flexibility in terms of our appointment times as far as our pick-up times and our delivery times, then the spot market will go up instantaneously. And then contract rates will go up over time.
But what will happen is the companies that have lesser invested in the relationships with the shipping community, they won't take the loads that they should take and they'll chase the spot market freight and then that would put more pressure on true contract carriers, such as ourselves, to step up. And then that will give us an opportunity to talk to our customers about, "Hey, we're going to take 2 or 3 or 4 more loads but we need some additional compensation, and would you be open to that?"
And in most of those cases, they are. I mean, our customers really just want to make sure they're getting a fair deal.
And if they're convinced, if things get tight, that they're getting a fair deal, based on where the environment is, then if we're doing them a good job, then they'll be supportive. If we're not doing them a good job, they'll be less supportive.
So that's kind of how I see it. I really hope that first off, they don't go into effect, but if indeed they do, I think we can overcome it if our customers really hear what I'm saying in terms of, maybe we have a shift Sunday evening that unloads trucks so that every truck's ready to do something and load Monday morning.
And maybe the customers that really figured out will get a half a shift ahead instead of being a half a shift behind. I think the other thing, we've seen some of our customers be very effective.
First off, drop and hook is pretty much been adapted throughout the industry. Those that care to do it.
So on the pick-up side, we do have flexibility in terms of drop and hook. But if we can get windows instead of exact times to deliver, then we can put that information into our optimizer, and our optimizer can get our trucks more productivity based on us having flexibility.
I think the biggest issue that we've had as an industry is that we still have very little influence on affecting that delivery. Now many of our customers will say, "Oh yes, we let them call and get their appointments."
Well, at the end of the day, may times, we have very little flexibility on what our choices are. So I think it's a good time for our customers to step back and say "Hey, what can we do to really help our truckers be more productive?"
Because we've watched all this productivity evaporate and we've gotten much more restricted in terms of how the hours of service apply with the new rules and with electronic on-board recorders. So it really depends on how we react.
I mean, we're still the only mode of transportation that comes to my mind that the customer decides when we take off and when we land. And it would be a screwed up way to run an airline.
I do know that. And I don't think we could go to Union Pacific and tell them, "Hey, we want the train to leave here and we want the train to leave there."
I mean, when I see the improvements in utilization and in service with people that control the pick-up time and the delivery time, I lay there in my bed and dream, what would it be like if we could actually do that? So that's how I see it.
And if things get tight, I think that's how our customers will think. And I'm hoping that maybe they'll think that way even before that time comes.
Operator
Your next question comes from the line of Todd Fowler with KeyBanc Capital Markets.
Todd C. Fowler
I wanted to talk a little bit about the cost side. We've heard from some of your competitors about some of the cost issue here in the quarter.
I know that you have a different footprint, but you did a really nice job of holding serve on the asset based side with the operating ratio. I'm just kind of curious what your experience was with cost and how you're thinking about margins and cost as you move through the rest of the year?
David A. Jackson
Yes, I'll take that if it's okay, Todd. I think there are some areas where we've seen fruits from our labors and there are some areas where we're clearly not happy and we need to continue to improve.
I can tell you in insurance and claims, as an example, the place that -- and it's taken many, many quarters, if not years, of getting to a point to where we're experiencing very good results in frequency and severity on that side and on that front. And so we've had some wins there.
We have our work cut out for us to continue to do our operations and maintenance line at levels that we've done in the past. And that was an area that crept up year-over-year and represents an area of opportunity for us.
If there's anything you know about us, it's we're organized and designed in a way to drive accountability on a, certainly on a -- from a cost standpoint and just from driving efficiencies all the way down to the -- to a 1-truck-at-a-time level. And so I think that a lot of the credit goes to the fact that we run this decentralized model, where we've got business owners that have accountability, that have visibility into their performance.
And they've got a group of people that are experienced that, for the most part in the headquarters area, that they are reaching out and constantly helping our businesses to get better and better and nobody is ever satisfied there fully with where their results are.
Kevin P. Knight
Yes, and I would add to that, Todd. One of the things -- it's been challenging for us as we've added these additional services, to stay as efficient as we otherwise would have.
And as a result of that, we haven't been as cost effective as we otherwise could be. And I think that we'll continue to be more effective now, that we actually have each of our services are rock solid, growing profitable businesses.
I think the other thing, too, Todd, where I'm starting to feel more comfort, is we have departments that are very, very important at the support of our service centers. And as you build all these services and as you have more leaders that you're counting on to execute the same exact way, you have multiple businesses that you're counting on the run exactly the same way, it can be hard for your department to keep up with everything that's going on.
And I believe our departments have a better grasp on where we are, who we are, where we're going, and the strength of the role that they have to provide to support these service centers. I mean, and I'm seeing improvement there.
I mean, we talk a lot about our businesses. We don't talk as much about our departments, but we have very sound leadership in our departments and we've really taxed them by developing this business the way that we have.
And -- but I feel like they're catching up. And if they're not, they at least, know what they have to do in order to get there, if that's correct.
Now, Todd, it is inflationary in the areas that your other folks in our space are discussing. And so I don't want to come across as though our cost can remain flat.
I mean, but our goals has always been for our cost to go up a little less than everybody else's and that's what we're bound and determined to do. So did we answer your question?
Adam?
Adam Miller
Yes, I just want to add something. Dave mentioned on the operation and the maintenance line that, that was an opportunity.
And we saw that number creep up in the back half of 2012 and we've put a lot of emphasis on that first part of this year. And we've seen some progress there from an absolute dollar standpoint, as well as a percentage of revenue.
So when we do identify these issues, we assign our departments, we have a committee that works through that and we're starting to see progress in that line item. Although it's still an area where there's a lot of opportunity, but I think we're moving in the right direction, just an example of what Kevin and Dave were alluding to.
Operator
Your next question comes from the line of Brad Delco with Stephens.
A. Brad Delco
Dave, this may be for you. And I don't want to get caught up in kind of the words here.
But looking at the guidance range, I thought your commentary on rates were for them to be slightly positive and for utilization to be roughly flat. And listening to the commentaries so far, I guess the question I have is, what are your expectations around hours of service and is that essentially being accounted for in your model?
And when I heard comments about rates getting to the -- was it 2% to 3.5%, do you need hours of service to get that? Or do you think the environment is such that we can get there without hours of service?
Or I guess ultimately, the question is how would hours of service effectively change the outlook for you on utilization and rates?
David A. Jackson
Well, a great question and I hope that I can answer it. Obviously, I'll ask for a clarification if we don't get there.
But when we talk about the 2% to 3.5%, we've talked about that for now a couple of quarters. And so I would say that we're not putting a lot of emphasis either way on the hours of service when we talk about a 2% to 3.5% rate improvement for the year.
Now potentially, the way we could see hours of service play out is, we're hoping to mitigate the impact on utilization with us, as Kevin mentioned, with the optimization systems and whatnot. And we're somewhat betting on the fact that if we can manage that better than most folk and we see a negative impact on our utilization as a result of it, that the broader group is going to have a negative impact, which of course, makes capacity a little bit more scarce.
Now this regulation is set to go in July 1, and typically, we see some strength through probably the first 10 days of July. It's anybody's guess what adoption and enforcement would be like those first 10 days.
And then we find ourselves in the kind of July, August, which isn't necessarily the most robust time of the year. So it may take a couple of months to play out and see this, but there's an assumption here that if we see overall capacity reduced as a result of the hours-of-service changes, then that will create some corresponding increase that hopefully will, at a minimum, offset the utilization loss and may be might even be more than that.
So for the purposes of looking at guidance and then we talk about a 2% to 3.5% increase, we're really looking at the loss of utilization and the potential corresponding increase in rate as watching one another out, when we talked about looking forward here in the second, third quarter, and I guess, rest of the year, rest of 2013. So did I answer your question with the way you were looking?
A. Brad Delco
I think you did a great job.
Operator
Your next question comes from the line of Anthony Gallo with Wells Fargo.
Anthony P. Gallo
I wonder if maybe I can stitch together some of the earlier comments and just ask, if within the next several years, it's possible that we're not even talking about fleet growth and whether or not your customers are willing to give you rate to cover cost inflation, but instead the non-asset based business is driving almost all of the growth. I mean, the core truckload's still keeping you essential to customer supply chain and being the core of the business.
But is there anything that would keep that scenario from unfolding?
Kevin P. Knight
Well, I would say, Anthony, that we certainly expect to grow our non-asset based side of our business at a more rapid rate than our asset based side. And the conditions certainly support that.
I do think though, that if we could be successful in acquiring, then I think that would be the better way to increase our capacity, if you will, and especially if it's a fleet that -- where we feel like we can improve their operations significantly. So -- but we, personally, Anthony, hope that at some point, we aren't focusing so much on that and that it's more about what's our overall business doing.
We feel really strongly about when you look at this whole truckload supply chain, running assets, especially in a shorter length to haul, all the way down to now we've been successful at doing it at in drayage and also reefer, which has been a more difficult market in past years than it is now. I mean, we've mastered the top part.
And I believe that our customers are hoping that we can do a much better job on this logistic side and on taking a load and moving it on the train or moving it on behind one of our trucks, or moving it behind a third-party truck. So that's kind of what I see.
Our background has been one of internal growth, minimally supported by small acquisitions. And I think if we're going to get back over that 10% or 15% growth rate, that it's probably going to be more driven by acquisitions then it is in conjunction with some internal growth as compared the internal growth being the support.
Now, if rates got to a point to where we could really provide people with a great job instead of a somewhat less desirable job, then we could grow. But it's interesting when you even look at those that pay the most, I mean, they're having a really tough time growing and we try to be on the topside but not at the top.
And so I guess, did I answer your question?
Anthony P. Gallo
I mean, the way I see it, is you're not disadvantaged relative to a completely non-asset based provider because you've got the scale and you got of the capabilities, but at the same time, they don't have the assets. So I just, I can see it unfolding where it's going to be a much bigger part.
Yes, you answered my question. I don't want to take too much of your time.
Kevin P. Knight
Yes, and Anthony, I'm a firm believer that our customers really do want their truckload provider to own assets. And if we can put a really strong non-asset offering in conjunction with that asset offering, that I think we go into the meeting with a much better chance of winning.
Because, hey, at the end of the day, our customers know that trucks and trailers moved the freight and I believe that they would rather invest in carriers that are investing in their network. It's kind of like, hey, if the guy needs to use his cell phone, he needs that wireless network to make it all happen.
Well, with our customers, even if you give the load to a third party, I mean, at the end of the day, a truck and trailer's got to move it. So that's how we see it.
Operator
Your last question comes from the line of Art Hatfield with Raymond James.
Arthur W. Hatfield
I'm trying to be real quick here. It's been a long call and you've pretty much answered all my questions.
But going back to hours of service, do you think that maybe the expectations for disruptions could be a little bit overblown without effective enforcement mechanisms, such as everybody having to have EOBRs on their tractors at that given time? And that maybe we won't see the disruptions that people expect initially as this goes into service?
Kevin P. Knight
Art, yes, I mean the answer is it usually is overblown. And the fact of the matter is, when we're all on an equal playing field, which hopefully we will be within the next year or 2 or next couple or 3 years, the fact of the matter is, then it becomes a much more of an issue.
And that's really when unfortunately, our customers will really take more of a deep dive into, "Hey, what can we really do to make these truckers more efficient and more effective?" And like I say, we have some customers that are doing that, but not the lion share.
So I do think, Art, that until everybody is operating the same way and playing by the same rules, these regulatory issues don't have as much effect as they otherwise would. The good news is, I think the adaption rate of EOBRs is fairly rapid in our industry.
And I think the smaller guys, if they're going to survive, they've got to do it the right way. And so anyway, did I answer your question, Art?
Arthur W. Hatfield
You did.
Kevin P. Knight
Well, thanks everybody for being with us again. If you weren't able to get your question in, if you would just reach out to Dave or Adam by calling (602) 606-6349, I think that will take you to Dave.
And then between Dave and Adam, they'll try to get back with you shortly. And appreciate all your support.
Thanks.
Operator
This concludes today's conference call. You may now disconnect.