Knight-Swift Transportation Holdings Inc. (NYSE:KNX) Q4 2023 Earnings Call Transcript

Knight-Swift Transportation Holdings Inc. (NYSE:KNX) Q4 2023 Earnings Call Transcript January 24, 2024

Knight-Swift Transportation Holdings Inc. misses on earnings expectations. Reported EPS is $-0.06577 EPS, expectations were $0.47. KNX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Ina, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Knight-Swift Transportation Fourth Quarter 2023 Earnings Call. All lines have been placed on mute, to prevent any background noise. [Operator Instructions] Speakers for today’s call will be Dave Jackson, President and CEO; and Adam Miller, CFO. Mr. Miller, the meeting is now yours. Thank you.

Adam Miller: Thank you, Ina, and good afternoon, everyone, and thank you for joining our fourth quarter 2023 earnings call. Today, we plan to discuss topics related to the results for the quarter, an update on current market conditions and our earnings guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to last one hour. And following our commentary, we will answer questions related to these topics. In order to get to as many participants as possible, we limit the questions to one per participant. And if you have a second question, please feel free to get back in the queue. We will answer as many questions as time allows. If you’re not able to get to your question due to time restrictions, you may call (602) 606-6349.

So to begin, I’ll first refer you to the disclosures on Slide 2 of the presentation and note 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 I’ll turn the call over to Dave Jackson for our overview on Slide 3.

David Jackson : Thank you, Adam, and good afternoon, good evening, everyone. The charts on Slide 3 compare our consolidated fourth quarter revenue and earnings results on a year-over-year basis. Market conditions in the LTL business were strong, while soft demand continues in the truckload space. Revenue, excluding fuel surcharge, increased 11.6%, while our adjusted operating income declined by 78.6%. GAAP earnings per diluted share for the fourth quarter of 2023 was a loss of $0.07 and our adjusted EPS was $0.09 per share. These results include a $71.7 million operating loss in our third-party insurance business, we’ve decided to exit as we will discuss later on the call. The insurance loss negatively impacted our adjusted EPS by $0.30.

Excluding the loss on the insurance business, our adjusted EPS would have been $0.39 per share. Our results were also negatively impacted on a year-over-year basis by a $17.8 million increase in net interest expense, approximately $0.08 per share. Now on to the next slide. Slide 4 illustrates the revenue and adjusted operating income for each of our segments. Truckload freight demand saw a modest seasonal lift in November before slowing more than anticipated in December. The seasonal lift in November was not enough to offset the productivity disruption we typically experience during the holidays. This was not only impacted — this not only impacted our truckload business, but logistics and intermodal as well. Freight demand in LTL was strong and led to an 11.9% increase in shipments per day in the quarter.

U.S. Xpress made further progress and achieved positive adjusted operating income in each month of the quarter as revenue and cost per mile both improved over the third quarter. Our existing logistics business navigated significant declines in volume and revenue per load year-over-year to maintain a low 90s adjusted operating ratio and U.S. Xpress Logistics continues to close the gap posting an adjusted operating ratio that was only 150 basis points behind our existing logistics business. I will now turn it to Adam to discuss each segment’s operating performance, starting with truckload on Slide 5.

Adam Miller: Thanks, Dave. For the Truckload segment, we saw modest seasonal activity as expected, but as noted on the last slide, the drop in demand in December was greater than anticipated. There were a few seasonal projects for truckload and the projects that did exist were smaller in scale than what we see in a typical peak season. Loose capacity prevented any premium pricing opportunities as well. Revenue per mile was up 1.4% sequentially, reflecting stability in the existing businesses while U.S. Xpress saw positive progress as we continue working on the business mix. Adjusted operating ratio for our existing truckload business was flat sequentially and US Xpress improved 280 basis points. The inclusion of U.S. Xpress negatively impacted the adjusted operating ratio for this segment by 250 basis points.

On a year-over-year basis, our truckload revenue, excluding fuel surcharge, increased 25.5%, reflecting a 12.5% decline in the existing truckload business prior to the inclusion of U.S. Xpress. Revenue per loaded mile fell 11.6% year-over-year or 11% before including US Xpress. Miles per tractor increased 8.4% overall, or 6.4% before including US Xpress, largely driven by the disposal of roughly 1300 unceded tractors over the past year in order to reduce costs. Now we’ll move to Slide 6. The benefits of our diversification into LTL really stand out as this segment continues to perform well. Our LTL business grew revenue excluding fuel surcharge nearly 40% year-over-year an acceleration versus the 6.9% growth in the previous quarter. This business delivered an 85.5 adjusted operating ratio and grew adjusted operating income 14% year-over-year.

Pricing growth remained solid as revenue per hundredweight, excluding fuel surcharge, increased 9.5% year-over-year. As of the end of the year, we had bought — we have brought 14 new service centers online since entering the business in late 2021, and efforts are underway with 25 more properties in various stages of procurement development or reconditioning. Filling out a super-regional network in the short term and created a national network in the long term will allow us to participate in more freight and enable us to find opportunities to further support our existing truckload customers with LTL capacity. This remains a key strategic priority for us. Now we’ll move to Slide 7. The logistics market continues to be a challenge as many brokers have struggled to find enough volume and margins have been compressed.

Being an asset-based logistics provider allows us to provide our customers seamless service regardless if it’s on our own assets or one of our partner carriers. This allows us to provide both committed and surge capacity and drop and hook trailer pool services at scale. Because of this, our logistics business remains disciplined and nimble maintaining a low 90s adjusted operating ratio despite a challenging market. The US Xpress Logistics business continues to improve both the cost structure and pricing disciplines and made further sequential improvement in adjusted operating ratio, again, closing to within approximately 150 basis points of our existing logistics business. Overall revenue was down 5% year-over-year as revenue per load declined 7.4% and load count improved 2.6%.

Excluding the U.S. Xpress logistics volumes, low count was down 22.7% year-over-year in the existing business. Now on to Slide 8. In our Intermodal business, revenue decreased 16.4% driven by a 19.7% decrease in revenue per load partially offset by a 4.2% increase in load count. The operating ratio was essentially flat with the previous quarter. Our intermodal business didn’t perform as well as expected as volume during the quarter was negatively impacted by several service-sensitive customers temporarily converting intermodal volume to truckload during peak season to take advantage of improved transit times and the competitive truckload pricing. This conversion not only impacted volume but negatively impacted our revenue per load. Many of these customers have now begun to return volume back to intermodal, and we expect to build volume in the second quarter as we work through the current bid season.

Now we’ll move to Slide 9. Slide 9 illustrates our all other segments formerly referred to as non-reportable segments. This category includes insurance, maintenance and equipment and sales and rentals under the iron truck services brand as well as equipment leasing and warehousing activities. For the quarter, revenue declined 46.6% year-over-year, largely as a result of our actions to address the challenges within our third-party insurance program, including significantly reducing the exposure basis. The $83.5 million operating loss within the all other segments is primarily driven by the $71.7 million operating loss in the third-party insurance business. Based on recent results, including the continued negative development of claims reserves, we decided to initiate exiting this business during the quarter.

We have begun canceling policies and expect to have that completed by the end of the first quarter of 2024. At which point, all third-party insurance operations will cease that we’ll still have the outstanding claims to administer until ultimate settlement. We have already reduced the number of trucks under coverage by nearly 75% from its peak in the fourth quarter of the prior year, and we do not expect this business to have a material impact to our results in 2024. Now I’ll provide an update on the progress US Xpress on Slide 10. US Xpress continues to run ahead of plan on our projected path to improving results. As noted in the previous slides, the US Xpress Truckload and Logistics business have already made meaningful progress and achieved a combined 99% adjusted operating ratio for the quarter.

We highlight some of the progress on this slide. You’ll notice these are fundamental areas of the business, including driver support and development, a decentralized operating model characterized by empowerment and financial accountability, a cohesive strategy for the network and freight selection and a fanatical focus on cost. As the team covers ground on these initiatives, it is yielding improvement in the operating ratio. The progress on revenue per mile is noteworthy as this has been accomplished in a difficult market and in between bid seasons given the timing of the acquisition. Further improvement can be made through the bid season as we expand our pursuit of more lanes for the network. We continue to be pleased with the early progress and for how this consequential truckload business is positioning for the future, reaching positive adjusted operating income before an improvement in the market.

We are glad to see the efforts of the U.S. Xpress team already paying off, and we appreciate their hard work. Now I’ll turn it to Dave to provide an outlook on the market.

David Jackson : Thank you. Slide 11 contains our outlook on market conditions for the first half of 2024. The LTL market should continue to see solid demand as the recent capacity disruption in the industry continues to be sorted out. This should support further yield improvement as the new business is increasingly repriced through bid activity. In the truckload space, we believe that retail inventory is at a relatively low level, though shippers caution about the direction of the U.S. consumer behavior is governing freight demand for the time being. We expect current soft conditions to continue in the first quarter with modest seasonality in the second quarter. The weather disruptions early in the year only increase the degree of difficulty for operators.

On contract rates, we do not believe asset-based carriers can afford for rates to go down any further from current levels. The pace of cost inflation should ease though plentiful work alternatives in the broader economy will continue to driver retention and utilization until freight conditions improve. We expect the used equipment market will weaken further as small carriers struggle and capacity exits. Now on to Slide 12 for our earnings guidance. Given the unusual degree of uncertainty regarding the direction and magnitude of outcomes from bid season, the timing and degree of an inflection in market conditions and the difficulty assessing prevailing levels of demand as a result of weather disruptions in January we are adjusting our approach to earnings guidance to provide two quarters of forward visibility as opposed to the full year.

We will reassess this approach as market conditions develop. We expect the adjusted EPS range or the EPS will range from $0.37 to $0.41 for the first quarter of 2024 and will range from $0.53 to $0.57 for the second quarter of 2024. A more detailed thoughts on the assumptions supporting these earnings expectations are provided in the earnings release available at our investor website alongside with this slide deck at investor.knight-swift.com. That concludes our prepared remarks. Ina, we’d like to open the line to entertain questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Thomas Wadewitz from UBS. Your line is now open.

Unidentified Analyst: Hey, Dave and Adam. It’s Michael Demeter [ph] for Tom. I just wondered if you could provide a little bit more color in terms of customer activity, freight volumes over the course of December and into January. And looking at the guide for 1Q, how much weather impact is in there. Thank you.

David Jackson: Okay. Well, Mike, as we noted, we saw things trade down in December. What little project activity, and I would say little, we anticipated modest. And I would say that we saw modest in November, probably saw less than modest in December. That traded down leading to a month that didn’t produce the kind of earnings we would have expected or that we were on pace for through the first two months of the quarter. As we look into January thus far, the last two weeks have been pretty severely impacted by weather, certainly you see that we have LTL terminals that have been shuttered particularly given our concentration through the Southeast. Certainly, it’s had an impact on our productivity on the truckload side. And so, I probably — I’m not going to quantify what that means exactly what 2 weeks’ worth of weather effects on a quarter’s EPS.

But certainly, it has tempered what we thought we would typically earn into January. Now hopefully, we’ll see a little bit of a recovery as a result of things being down, but certainly not enough to make up what was lost. So, there’s a factor in there, probably those weeks you would see an impact to our business that would be a negative double digit in terms of revenue production for each of those fleets.

Adam Miller: Yes. I would say you always have some weather in the first quarter. It just depends on when it hits, right? And so I don’t think this is materially different than other periods. And again, we expect that we’ll have some freight that will — that our customers have gotten behind on that will have to pick up and move. It’s more of a question of do we see kind of that seasonality as it builds into March. And so right now, we’re just cautious on really trying to estimate that there’s an inflection early in the first half of the year. And — so I think first quarter, we’ve remained relatively conservative.

Unidentified Analyst: That’s great. Thank you.

Operator: Thank you. And your next question comes from the line of Jack Atkins from Stephens. Your line is now open.

Jack Atkins : Okay, great. Thanks for taking my questions, guys. So I guess, Dave, I would love to get your thoughts on the early part of bid season so far. Obviously, we haven’t seen a recovery in freight fundamentals to this point, but we’re also seeing some signs that this freight markets have stabilized and to your point, inventory levels are getting lower. How are shippers treating bid season? Are they trying to get the last sort of pound of flesh they can out of you? Or are they understanding that we’re kind of reaching a point where you could see a turn in the market this year and they’re preparing for that?

David Jackson: Yes. Well, Jack, it’s a good question. It’s a valid question. I will acknowledge we are still very early in the bid season. We are grateful for customers who have recognized the fact that rate concessions we’ve given have come directly out of margin because there hasn’t been any cost reprieve for us through this time frame, where we’re able to pass on efficiencies, if you will. So it’s simply come out of margin. And if you look at the industry, the publicly traded truckload carriers, it’s a common theme for all of us. And so customers who recognize that recognize where we are in the cycle, have worked with us, not to the degree where we get an increase that helps us get back to where we want to be, but also shows a sign of trying to provide some consistency in the network and allowing us to move forward.

Now there are some situations where I think we do have some customers who perhaps operating under a mandate, maybe a little bit of a more short-term focus might be a little more aggressive in pushing. The reality is there is a limit to what you can do. And I think if you look at certainly our truckload model and others, we compete with based on their public reports, we’ve hit that limit. It feels like this go around the freight market has worked in an extraordinarily efficient way where we’ve discovered the bottom. And that happened some time ago, around the middle of last year, it appears. And that’s where we are. You’ve seen small carrier rates. They’ve hit a bottom. And so it doesn’t take a lot of creativity to understand where this can go from here.

A theme, I would tell you that we — a consistent theme that we have seen through this process from many, if not — most customers has been a very definite preference towards moving their commitments to an asset-based provider as opposed to a non-asset-based broker. I don’t believe we’ve ever seen extreme commitments to the extremely high level of contractual commitments from brokers. And so they sit here today with this super high committed percentage of their business at incredibly low loads or low rates, which really you could say are unsustainable, as we see small carrier capacity leaving, as we see the bottom of spot rates not keep dropping. And as we see margins evaporate in the truckload space. And so we’re at a level that’s not sustainable.