Yahoo Finance Knight-Swift Transportation Holdings Inc. (NYSE:KNX) Q1 2024 Earnings Call Transcript
Knight-Swift Transportation Holdings Inc. (NYSE:KNX) Q1 2024 Earnings Call Transcript April 24, 2024
Knight-Swift Transportation Holdings Inc. misses on earnings expectations. Reported EPS is $0.12 EPS, expectations were $0.19. Knight-Swift Transportation Holdings Inc. 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 John and I'll be your conference operator today. At this time, I would like to welcome everyone to the Knight-Swift Transportation First Quarter 2024 Earnings Call. [Operator Instructions] Speakers from today's call will be Adam Miller, Chief Executive Officer; Andrew Hess, Chief Financial Officer; Brad Stewart, Treasurer and Senior Vice President of Investor Relations. Mr. Miller, the meeting is now yours.
Adam Miller: Thank you, John and good afternoon, everyone and thank you for joining our first quarter 2024 earnings call. Today, we plan to discuss topics related to the results of the quarter, 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 1 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 1 per participant. 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 were not able to get to your question due to time restrictions, you may call (602) 606-6349.
Now before we jump into the slides, I want to introduce the 2 gentlemen that will be joining me on the call today for the first time: Andrew Hess and Brad Stewart. Andrew Hess is our newly appointed CFO. Andrew has been with our company for the last 5 years and has served in several financial roles, including the VP of Finance at Knight when he started in 2019, then led our M&A efforts beginning in January of 2021. Andrew played a significant role in closing on the AAA Cooper, MME and U.S. Xpress acquisitions. And just prior to becoming the CFO, Andrew was leading the finance efforts at Swift, along with continued oversight of M&A. So we want to welcome Andrew to the call. And then many of you may be familiar with Brad Stewart as he has been leading our Investor Relations activity for the past year.
Brad is our Treasurer and has held various finance leadership roles in the Knight and Swift businesses over the past several years and Brad has been with the company for 20 years now. I'm excited to welcome both Brad and Andrew to the call. And with that, I will now turn the call over to Brad.
Brad Stewart: Thank you, Adam. To begin, I will 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 Securities and Exchange Commission for a discussion of the risks that may affect the company's future operating results. Actual results may differ. Now I will turn to our overview on Slide 3. The charts on Slide 3 compare our consolidated first quarter revenue and earnings results on a year-over-year basis.
Market conditions in the LTL business continue to be solid, while soft demand and excess capacity persist in the truckload space. Revenue, excluding fuel surcharge, increased 11%, while our adjusted operating income declined by 68.5%. GAAP earnings per diluted share for the first quarter of 2024 was a loss of $0.02 and our adjusted EPS was $0.12. These results include a $19.5 million operating loss in our third-party insurance business with ceased operations at the end of the quarter. The insurance loss negatively impacted our GAAP and adjusted EPS by $0.08. Excluding the loss on the insurance business, our adjusted EPS would have been $0.20. Our results were also negatively impacted on a year-over-year basis by an $18 million increase in net interest expense or 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. In general, the LTL segment continues to experience a much more supportive market than the Truckload, Logistics and Intermodal segments do. The first quarter saw greater than average winter weather disruption which negatively impacted all of our operating segments. In addition, the pricing and demand environment has proven more challenging than we anticipated for all of our LTL business in the first quarter. The combination of the weather disruption, more challenging bid environment and ongoing cost inflation weighed on operating results across our businesses during the quarter. U.S. Xpress continues to make progress on cost and contractual pricing in the Truckload business.
And the U.S. Xpress Logistics business continues to close the gap, performing in line with our legacy logistics business on gross margin and operating margin for the quarter. Now on to Slide 5. For the Truckload segment, we did see some recovery following the January weather disruption as well as some seasonal improvement in March but neither was enough to overcome the negative impact to volumes and operating costs from the poor start to the quarter. Loose capacity continues to plague the truckload market, preventing the ability to recover ongoing cost inflation or attain appropriate utilization levels on our equipment. Combined Truckload revenue per loaded mile was down 2.5% sequentially, though our contract rates are largely stable thus far in 2024.
The early part of the bid season led to greater-than-expected pressure on freight rates as some shippers are still trying to push rates down further. In some cases, we have lost contractual volumes because we were not willing to commit to further concessions on what we view as unsustainable contractual rates. This resulted in more of our capacity being allocated to the spot market which creates further pressure on revenue per mile and utilization in the near term but positions capacity to react to changes in the market when the market does inflect. U.S. Xpress made further progress on costs and contractual rates through bids which allowed this business to overcome the weather disruption and some dedicated business losses to stay largely flat on operating ratio from the fourth quarter.
On a year-over-year basis, our Truckload revenue, excluding fuel surcharge, increased 26%, reflecting an 11% decline in the legacy Truckload business prior to the inclusion of U.S. Xpress. Revenue per loaded mile fell 10% year-over-year or 9% before including U.S. Xpress. Miles per tractor increased 8% overall or 6% before the inclusion of U.S. Xpress, largely driven by our earlier decision to reduce the number of unseated tractors in our legacy businesses in order to reduce cost. We have been intentionally trimming our tractor and trailer fleets over the past few quarters in order to improve our cost structure through the down cycle but without cutting so far as to sacrifice our ability to flex when the market does improve. Now, I'll turn the call over to Andrew to discuss our LTL business on Slide 6.
Andrew Hess: Thanks, Brad. The benefits of our diversification continue to stand out as market conditions in the LTL industry remain much more supportive than in Truckload. Our LTL business grew revenue, excluding fuel charge, nearly 13% year-over-year. Our shipments per day increased 6%. And revenue per hundredweight, excluding fuel surcharge, increased 3% year-over-year. With our LTL activities concentrated in regions exposed to the severe weather during the quarter, the disruptions were particularly impactful to our network and operating costs for our LTL segment. In addition, maintenance and labor costs were higher than normal as we stretched to cover growing volumes and extend our reach into new facilities. We anticipate these costs should normalize as we scale volumes and staffing while growing revenue in new locations.
The cost pressures contributed to a 90% adjusted operating ratio for the quarter and adjusted operating income declining by over 20% year-over-year. While this margin level is not up to our expectations or recent performance, it did improve in each month of the quarter after bottoming in January and continues to progress thus far and we're on track with our expectations to be back online for the second quarter. After being impacted by weather disruptions in January, volumes recovered well as average shipments per day in February increased nearly 7% over January and held steady into March. Since acquiring AAA Cooper and MME in 2021, we have acquired or assumed the leases on 56 additional properties. We have brought 14 locations online prior to 2024 and we opened 7 more during the first quarter.
We expect to open another 25 terminals by the end of 2024. Overall, the 32 locations planned to open in 2024 will represent a 16% increase to our door count from the end of 2023, meaningfully impacting the reach of our service offering and increasing the density of our network. Filling out a super-regional network in the short term and ultimately creating a national network, will allow us to participate in more freight and enable us to find opportunities to further support our existing truckload customers with LTL capacity. Acting on organic and inorganic opportunities to geographically expand our footprint within the LTL market remains a key strategic priority for us. Now on to Slide 7. Logistics market continues to be a challenge as many brokers have struggled to find enough volume and margins and margins have been compressed while purchased transportation rates offered little room for relief.
Being an asset-based logistics provider allows us to provide our customers seamless service, regardless if it is on our own assets or one of our partner carriers. This allows us to provide both committed and search capacity and drop-and-hook trailer pool service at scale. Because of this, our Logistics business remains profitable, though margins were squeezed by the weather-induced capacity crunch in January and by our decision to divert loads to the asset division to help offset losses of contractual business through bid activity. Overall revenue was down 7% year-over-year as revenue per load improved 2% and load count declined 10%. The U.S. Xpress Logistics business continues to make progress and performed in line with our legacy logistics businesses on gross margin and operating margin for the quarter.
Now moving to Slide 8. In our Intermodal business, revenue decreased 20% year-over-year, driven by a 19% decrease in revenue per load and a nearly 2% decrease in load count. The decline in project revenue from the prior year largely drove the decline in revenue per load and negatively impacted the adjusted operating ratio which was largely in line with the fourth quarter. Load count declined 4% sequentially which is better than the typical seasonal progression coming out of the fourth quarter and we anticipate sequential volume growth into the second quarter based on progress thus far in bid season. And moving to Slide 9. Slide 9 illustrates our All Other segments formerly referred to as our nonreportable segments. This category includes support services provided to our customers, independent contractors and third-party carriers, such as insurance, maintenance, equipment sales and rentals, equipment leasing and warehousing activities.
For the quarter, revenue declined 40% year-over-year, largely as a result of winding down our third-party insurance business which ceased operations at the end of the quarter. The $20 million operating loss within All Other segments is primarily driven by the $19.5 million our operating loss in the third-party insurance business as well as $8.2 million of severance, legal, accrual and impairment charges recorded during the quarter within this category. In order to further reduce the risk of ongoing income statement volatility from potential adverse development of the claims of the third-party insurance program, we executed a transaction during the quarter to transfer the majority of the risk to another insurance company. The cost of this transaction are included in the operating loss of the insurance business for the quarter.
Now, I will turn the call over to Adam for Slide 10.
Adam Miller: All right. Thank you, Andrew. Over the next few slides, we plan to talk through our structure as a company and how we are positioned to navigate the cyclical freight environment, the strategic intent each of our businesses are measured against and the ability of our model to generate profits and cash flows and how we manage that capital to drive long-term value for our stakeholders. We will start with our Truckload segment on Slide 10. It's no secret that we are in one of the deepest freight recessions the truckload industry has ever felt. And it comes during a time when the rest of the economy is performing well such that cost inflation continues to be a challenge, labor is staying tight and interest rates are up significantly.
This has resulted in both significant pricing and cost pressures and has led to razor-thin margins and even losses for some of the best run companies in our industry. This environment, however, comes on the heels of one of the best market our industry has ever seen, where many experienced record earnings and margins. It's clear that the highs during the pandemic have led to the lows in the current environment. As a cyclical industry, we are accustomed to changes in the market. We have never seen these streams we are currently experiencing. When we compare our margin performance during this current cycle to previous cycles, we have found that while the current cycle highs were much higher and the low is much lower, our average margin over this cycle has been very similar to what we have typically achieved.
Given that, we are at the lowest levels of operating performance our business may have ever seen. We believe we are positioned to benefit from significant operating leverage as business conditions improve. While we can't change the timing of any change in market dynamics, we believe we have positioned our business to endure a difficult market and to be prepared to rapidly improve margins and cash flow when we begin to experience an inflection in the market similar to our performance in previous cycles. We have a unique position in our Truckload segment as compared to peers. We have several large brands between Knight, Swift and U.S. Xpress and several other smaller brands that provide us a view of the markets on a daily basis. We're able to read what is happening to supply and demand in each market and to determine if changes are a result of market trends or specific changes to the network of one of our brands.
We believe this provides insight to shifts to the market before most of the industry has visibility. We can leverage technology and automation to connect to customers and find solutions, leveraging all of our brands. We have scale that enables us to solve large problems quickly and at a high level of service. We have maintained the majority of our truckload capacity in one way over the road service which becomes very valuable to our customers in a favorable freight market. We intentionally managed our contractual versus spot exposure through different phases in the cycle in order to create value for customers and for our business. Although we have areas where we can further improve costs, we maintain a culture of cost discipline throughout cycles which allows us to reach levels of industry-leading margins in both good and difficult markets.
Now that we have acquired U.S. Xpress and have had time to establish the right rigors around cost and revenue management, we believe this business is positioned to perform at levels significantly better than legacy U.S. Xpress and we expect to close the margin gap within our legacy Knight and Swift fleets when we have a more favorable market. As margins improve, we generate significant amounts of free cash flow that enable us to invest in organic growth, M&A and other high-return investment opportunities across our segments. Now if we turn to Slide 11. The significant free cash flow generated by our Truckload business allowed us to make a meaningful investment in the LTL market in 2021 without meaningfully increasing leverage. We purchased AAA Cooper and MME and have converted them to one platform, providing seamless service from the Southeast through the Northwest.
We further identified opportunities to put capital to work to invest in 56 additional terminals to expand our footprint towards building out a nationwide network. We plan to continue down the path of organic growth but also maintain a desire to acquire LTL companies that will provide a foothold in the Southwest and Northeast regions. Our goal over the medium term is to achieve a nationwide network with $2 billion in annual revenue. We believe developing this network will provide access to more freight opportunities with existing and new customers which should lead to improved margins and create additional synergies with our nationwide truckload network. A nationwide LTL network will also provide a larger base of more stable income that should reduce the earnings volatilities of the company that come with the cyclical nature of the Truckload segment.
We also believe that in the next up cycle, we will grow our Logistics business at a rapid pace as it complements our Truckload business and provides differentiated value through our scalable power-only solutions. And lastly, in our Intermodal business, we continue to build a diverse customer base while developing strategic partnerships with our rail partners in the West, East and in Mexico. We believe we can build this business back to profitability while offering our customers a sustainable alternative that complements our truckload services. Performing in these 3 segments, coupled with our Truckload business returning to historical margins, we will lead to both significantly improved earnings and cash flow. Now on to Slide 12. We outlined how our path to generate strong cash flow from the previous slides, combined with our prudent capital structure and disciplined capital allocation strategy to drive long-term value.
We have always valued a strong balance sheet to provide us flexibility in a cyclical industry. We are also mindful of optimizing our weighted average cost of capital. We target what we believe is our optimal leverage position of 1 to 1.5x of EBITDA. As we execute on M&A, this leverage can flex up, such as when we acquired AAA Cooper in 2021 or U.S. Xpress in 2023. And then we used free cash flow to reduce leverage back to this level to preserve flexibility for navigating cycles and pursuing additional opportunities. We will also prioritize investing in organic growth of our businesses where we believe we can generate double-digit returns throughout cycles. Organic LTL expansion is our near-term focus. But as the truckload market improves, we are willing to invest in additional capacity in terminals where we believe we can successfully grow.
At Knight-Swift, we have had several successful large acquisitions and we remain opportunistic with acting on M&A opportunities that drive value for our organization. Currently, our priority is building out our LTL network. As we strengthen our balance sheet, improve the margins of our core businesses and generate additional free cash flow, we will remain open to additional types of M&A outside of LTL. We also remain committed to reviewing our dividend policy on a regular basis and have increased our quarterly dividend $0.02 per share for 5 consecutive years now. A flexible balance sheet also gives us the ability to opportunistically repurchase our shares when we believe it is the best return option for our free cash flow. In summary, we are compelled by the outsized runway ahead of us for improving earnings of both our legacy and newly acquired businesses, driving significant free cash flow through cycles and leveraging a disciplined approach to deploying capital to further increase the capital generating power of our company through successive cycles.
Now on to our last Slide 13 for our earnings guidance. We have outlined in great detail our key assumptions to our guidance in this slide which are also stated in the earnings release. I won't plan to read through them all because the timing of the inflection has proven especially difficult to predict during this cycle, we are not incorporating an inflection in market conditions for the purposes of these forecasts but rather are basing these ranges on expected seasonality and a continuation of existing market conditions, similar to what we've felt in March and April thus far. Based on these assumptions, we expect our adjusted EPS for the second quarter will be in the range of $0.26 to $0.30 and our adjusted EPS for the third quarter will be in the range of $0.31 to $0.35.
Our expected adjusted EPS ranges are based on the current Truckload, LTL and general market conditions, recent trends and the current beliefs, assumptions and expectations of management and actual results may differ. Now, that concludes our prepared remarks. And before I turn it over for questions, I just want to remind everyone to keep it to one question per participant. And John, we can now open the line for questions.
Operator: [Operator Instructions] Your first question comes from the line of Ravi Shanker from Morgan Stanley.
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