Knight-Swift Transportation Holdings Inc.

Good afternoon, my name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to the Knight Swift Transportation second quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. If at any time during the call you require immediate assistance, please press star zero for the operator. Speakers from today's call will be Dave Jackson, President and CEO, and Adam Miller, CFO. Mr. Miller, the meeting is now yours.

Thank you, Sylvie, and good afternoon, everyone, and thank you for joining our second quarter 2022 earnings call. Today, we plan to discuss topics related to the results of the second quarter, provide an update on current market conditions, and update our full year 2020 guidance. We have slides to accompany this call that are posted on our investor website. Our call is scheduled to go until 5.30 p.m. Eastern time. Following our commentary, we will answer as many questions as possible. We will get to one question per participant. And if we are not unable to answer a question during our call, you can call us at 602-606-6349. And again, it's one question per participant. To begin, we'll move you to slide two, where I'll read the disclosure. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions, and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A, Risk Factors, or Part 1 of the company's annual report on Form 10-K filed with the United States SEC for a discussion of the risk that may affect the company's future operating results. Actual results may differ. Now on to slide three. The charts on slide three compare our consolidated second quarter revenue earnings results on a year-over-year basis. We continue to generate meaningful revenue and income growth both organically and through acquisitions and demonstrate the operating leverage of our business. Each reportable segment grew revenue double digits and expanded margins, which ultimately led to a 49.1% increase in revenue and a 66.1% increase in adjusted operating income on a consolidated basis. GAAP earnings per diluted share for the second quarter of 2022 were $1.35, which represents a 46.7% improvement from the prior year. Our adjusted earnings per share came in at $1.41. Both GAAP and adjusted earnings per share include a $33.8 million pre-tax loss in other income or expense from an unrealized mark-to-market adjustment in our investments related to MBARC technology. The loss reduced both the GAAP earnings per diluted share and the adjusted earnings per share by 16 cents. Now on to the next slide. Slide 4 illustrates the revenue and margin contributions for the second quarter and unit date periods for each of our segments. The chart on the right highlights the percentage of revenue during the second quarter of 2022 from each of our four segments, as well as the percentage of revenue from our other services, which include our rapidly growing insurance, equipment and maintenance, equipment leasing, and warehouse services. We are encouraged by the significant contributions from each of our segments. Our truckload business continues to run with an operating ratio of the 70s. Our LTL business showed great improvement and ran in the 70s for the first time. Our logistics business was in the low 80s, and our intermodal business achieved double-digit margins. Across all of our brands, we have a tremendous team of drivers, shop technicians, and office personnel. Our team continues to act with agility and move with the market. We anticipate changes in the environment and pivot our strategies accordingly. We have invested in technology that allows us to efficiently leverage our assets throughout multiple segments, including truckload, logistics, and LTL. Technology has been a meaningful factor in how we've been able to not only significantly grow our logistics business, but do so while expanding margins. We are also leveraging technology to connect our AAA Cooper and MME LTL networks, as well as build a connection to our truckload network to leverage revenue opportunities across segments. Certainly, we have more technology to develop, but between our ability to connect our systems across brands, our enhanced visibility and utilization of trailers, and the actionable insights our reporting capabilities provide our team, we are leveraging tech to successfully navigate the market, execute on our strategies, and deliver on our relentless efforts to be the most productive and have the lowest operating costs in the industry. Our strategy continues to focus on diversifying our business while improving both margin and revenue in each segment. During the second quarter of 2022, our truckload segment grew revenue 11.2% year over year, but as a percentage of total revenue moved from 72% in the second quarter of 2021 to 57% in 2022. This is a result of our continued focus on growing our logistics and intermodal services our progress towards building a nationwide LTL network, and the development of new revenue streams that provides expanded services to third parties. The next few slides will discuss each segment's operating performance, starting with truckload on slide five. On a year-over-year basis, our truckload revenue, excluding fuel surcharge, grew 11%, while our operating income grew over 22%. Our adjusted operating ratio of 78.9% was a 200 basis point improvement over the prior year and was the fourth consecutive quarter in the 70s. During the quarter, revenue per tractor grew 11.1%, driven by a 21.2% increase in revenue per loaded mile and a 6.6% decrease in miles per tractor. Our miles per tractor continued to be negatively impacted by our intentional shift to a shorter length of haul and a higher unseated truck count year over year. Recruiting and retaining drivers continues to be a challenge, but we are seeing improvements sequentially in our ability to recruit drivers. This has allowed us to make progress towards reducing the number of unseated trucks and slow the reduction in productivity year over year. Freight demand followed normal seasonal trends, but was generally strong throughout the quarter. As we make more commitments, we are seeing higher tender acceptance levels and fewer non-contract opportunities. As spot rates have declined, we have increased commitment levels with our customers and have reduced our exposure to the spot market. We are seeing strong demand from our customers to secure trailer pull capacity through our truckload and logistics segments. We continue to invest in our already industry-leading trailer network, which grew sequentially by 1,700 trailers to just over 73,000 trailers. We believe our scale in trailers is a competitive advantage and provides our customers capabilities that are extremely difficult to replicate. As I mentioned on the previous slide, our investment in technology has allowed us to seamlessly leverage trailers across our over-the-road fleet, our dedicated operations, and logistics business to provide our customers with ample trailer pool capacity. Now on to slide six. Now this slide may be one of my favorite slides for the quarter. as our LTL businesses have made significant strides in increasing yield, managing costs, and expanding margins. For the quarter, revenue excluding fuel surcharge was $224 million, and the adjusted operating income was $47.8 million. When AAA Cooper joined the KNX family last year, one of our stated goals was to improve the OR performance from the high 80s to the mid-80s over a three-year period. To achieve a 78.7 OR performance, just one year after the acquisition, while also adding MME to the business, is remarkable in our opinion. We have been extremely impressed with the leadership at both AAA Cooper and MME on how open-minded the teams have been in working with the KNX leadership, as well as with each other in developing the strategy to leverage the now enhanced scale of the network. The teams have been aggressive at capturing both revenue and cost energies, and are rapidly moving towards harmonizing the network through AAA Cooper's footprint in the southeast and MME's footprint in the mid and northwest portions of the U.S. We continue to maintain separate brands while working towards connecting these networks, which we believe will create additional revenue opportunities and improve margins. And we believe this approach is very welcoming to other LTL companies who may choose to join the network. We are very encouraged by the LTL results and our conviction for synergy achievement continues to grow. We have identified several locations to develop or expand our LTL footprint. Through the rest of the year on an organic growth side, we expect to add 300 additional doors at nine new or existing facilities. Also, several additional projects have already begun and are in various stages for 2023 and beyond. Now on to slide seven. Our logistics segment continues to grow at a rapid pace while expanding margins. Despite fewer spot opportunities, our logistics load volumes increased 48.2% year over year, with our power-only service offering growing 96.7%. Gross margin also expanded to 24.4% in the quarter compared to 15.7% last year. leading to an 82.2% adjusted operating ratio. This revenue growth combined with improvements in gross margin led to $44 million in operating income, which is more than a 200% improvement for the quarter. Demand for our power-only service offering remains strong and provides a strategic advantage compared to traditional brokers. Our expansive trailer network allows our customers the ability to optimize their own warehouse space and labor costs. Third-party carriers prefer power-only business because it saves them hours at each load and unload location, lowers their capital investment and risk, reduces their operating costs, and gives them access to freight they historically wouldn't be able to participate in. We continue to be excited about this business and have several projects ongoing that will improve the experience for our third-party carriers, as well as provide more seamless information internally and to our customers that will lead to more opportunities to utilize our equipment. The intermodal results are included on slide eight. Operating income increased by 143.8% as the operating ratio improved from 95% to an 89.3%. While rail service remains a challenge, we did see meaningful improvements in street and rail velocity in many corridors. Volumes in the beginning of the quarter were negatively impacted by longer container and chassis dwell times, as well as inconsistent rail network speeds. These factors contributed to a 39.2% increase in revenue per load, partially offset by a 17.2% decrease in load count. Labor challenges within the rail network appear to be softening, leading to improved notification times and more consistency for our customers. We have made meaningful progress in expanding margins as we monetize our underutilized containers while we were transitioning rail partners. We have pulled some of these containers back into our operations and will continue to do so in 2023. We expect load volume to increase and margins to remain double digits in the back half of the year. We have used the recent bid season to develop a freight network that better aligns with the Union Pacific network. with much of that volume coming on throughout the third quarter. Additionally, we continue to make investments in the growth of this business and added 450 containers in the second quarter and plan to add an additional 1,500 throughout the rest of the year. I'll now turn it over to Dave.

Thank you, Adam, and good afternoon, everybody. Slide 9 illustrates the strong growth in our businesses that are included in the non-reportable segment. This non-reportable segment hasn't been a great focus of analysts or investors over the years, but it is now building as one of our fastest growing segments. For the quarter, we had a 91.8% increase in revenue and a 615% increase in operating income. These increases in revenue and earnings is from our overall strategy to develop essential services for third-party carriers. We have three primary objectives in these carrier services. First is to introduce new profitable revenue streams with lots of growth runway that further diversify our company. Two is to leverage existing expertise in areas where we've proven industry-leading results, such as risk management, maintaining equipment, and purchasing. Many of these services are branded under our brand of Iron Truck Services. And number three, to provide these services in a way that benefits the relationship that we have with small carriers is we build a much, much larger network using their power with our trailers and freight network. We have found tremendous interest in our offerings from third-party carriers that are interested in purchasing insurance and maintaining their equipment in our nationwide shop network or leasing equipment and products. leveraging our buying power to purchase fuel. These new and expanded services, along with warehousing and equipment leasing, have nearly quadrupled revenue and is on pace to generate $500 million of revenue this year with projected operating income of over $40 million compared to a loss of $68 million in 2019. We expect these services to continue to grow and provide us with income streams that are less prone to volatility through economic cycles. As these businesses grow and develop, we will evaluate whether it makes sense to aggregate some of these businesses as a separate reportable segment. We remain encouraged with the growth and diversification and contribution from the businesses that make up our non-reportable segment. On slide 10, we illustrate the progress of the intentional changing of the composition of our overall company into an industrial growth company. The chart on the left shows the percentage of adjusted operating income from each of our segments and our other non-reportable services since the Knight and Swift merger in 2017 through second quarter of 2022. We're pleased to report meaningful contributions in earnings from each area, as noted on the graph. These diversification efforts make us a less volatile company, and we expect will help us mitigate the downside through truckload freight cycles. Our truckload earnings now represent only 61% of earnings, which represents a meaningful shift from where we were in 2017, as noted in the graph when we did the Knight and Swift merger. Please keep in mind that this reduction in our truckload earnings percentage of the total has changed while at the same time, we have more than doubled, almost tripled our truckload earnings from a 2017 full year combined pro forma night and swift earnings of 319 million to 870 million for the second quarter trailing 12 months in 2022. The chart on the right shows our rolling four quarters adjusted earnings per share since the Knight and Swift merger. During this time, the EPS has moved from $2.16 per share to $5.67 per share for the trailing 12 months. Next to slide 11, strong earnings have driven increases in our free cash flow. which was $1.1 billion through the second quarter over the trailing 12 months. Year-to-date, we have used cash to increase our dividend to shareholders by 20%, repurchase $300 million worth of shares, and pay down $86 million in long-term debt and leases. Since the 2017 SWIFT merger, we have invested $1.6 billion in acquisitions. Making acquisitions remains a high priority for us. Our balance sheet is strong and we are well positioned to invest in organic growth, pursue acquisitions, purchase more shares, increase dividends and or pay down debt. We are constantly evaluating market conditions to maximize our use of cash to create value for our shareholders. Slide 12 illustrates the trend of return on net tangible assets. Our Q2 trailing 12 months return is 24.8%, which is a substantial improvement from the 17% return we achieved during the peak of the last freight cycle. These results reflect our focus on one, growing our less asset-intensive businesses, two, acquiring and improving businesses, and three, expanding margins in existing operations. On the truckload side, we have focused for the last four years on growing our less asset-intensive and variable cost-based lines of business. We've expanded our traditional logistics brokerage, created a power-only service offering, created brand-new revenue streams, as have been mentioned, with iron truck services, and expanded our warehousing services. We are seeing significant improvements in revenue and income growth in each of these areas. Over the years, we've demonstrated our ability to effectively acquire and improve truckload businesses. More recently, we have demonstrated our ability to improve a logistics business and tap into synergies between truckload and LTL. Now we are supporting mutually or mutual acquired LTL companies as they connect their networks while preserving brand culture and relationships. We could not be more encouraged. with the progress of the two LTL organizations, AAA Cooper and MME, and the opportunities ahead in building a connected national LTL offering. In addition to the strategic acquisitions, we continue to improve our core truckload business and our existing assets to generate additional revenue. For example, we now have over 6,000 trailers in our leasing program. We believe our focus in these three key areas leverages our core competencies in areas of opportunity that are unique to us and will allow us to continue to generate significant returns to our shareholders. Now on slide 13, we have our second half of 2022 outlook. We expect that demand may moderate as the consumer digests and deals with higher inflation and uncertainty in the economy. We expect continued decline in non-contract truckload opportunities. We acknowledge that we have less visibility on peak season surge as compared to the previous two years. We expect that customers will continue to secure trailer pools as they maximize efficiencies in their supply chains. Capacity is clearly under pressure. We expect contraction in supply and are already seeing it and expect that to continue as the year proceeds as carriers deal with depressed spot rates combined with high energy fuel prices, higher maintenance and equipment costs, and rising interest rates, which not only makes it difficult for those that are highly leveraged, but also disincentivizes new entrants to the market. We also expect LTL demand to remain strong with increases in revenue per hundred rate remaining in the double digits on a year-over-year basis. We anticipate that sourcing and retaining drivers will continue to improve as we have seen thus far, as it has been particularly challenging for small carriers, and we are seeing signs of drivers looking for new opportunities. We also expect inflationary pressure on driver-related costs, equipment costs, cost to maintain equipment, labor, and several other items. And lastly, we expect the used equipment market to normalize as small carriers exit with little interest from new entrants and increased difficulty in securing credit for for smaller carriers. I will now hand it to Adam to finish up with our guidance.