Knight-Swift Transportation Holdings Inc.

Good afternoon, ladies and gentlemen. My name is Colin. I'll be your conference operator today. At this time, I'd like to welcome everyone to the Night Swift Transportation third quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. If at any time during this call you require immediate assistance, please press star zero for the operator. Mr. Miller, the meeting is now yours.

Thank you, Colin, and good afternoon, everyone, and thank you for joining our third quarter 2022 earnings call. Today, we plan to discuss topics related to the results of the third quarter, provide an update on current market conditions, and update our full year 2022 guidance. We have slides to accompany this call, which 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 questions related to these topics. In order to get to as many participants as possible, we're going to limit the questions to one per participant. If you have a second question, please feel free to get back in the queue. We'll 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. But to begin, I'll first refer you to the disclosures on page two 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 one 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 on to slide three. The charts on slide three compare our consolidated third quarter revenue and earnings results on a year over year basis. Revenue excluding fuel surcharge grew by 9.2% while our adjusted operating income declined by 1.4%. Gap earnings per share or per diluted share for the third quarter of 2022 were $1.21 and our adjusted EPS came in at $1.27. On a year over year basis, higher interest expense, lower gain on sale, and a higher tax rate impacted adjusted EPS by approximately 10 cents per share. Now let's move to the next slide. So slide four illustrates the revenue and adjusted operating income for the third quarter and year-to-date periods in each of our segments. Despite a changing freight market, our performance remains strong across each of our segments. Our truckload segment operated in the low 80s, While logistics continues to generate mid-teens margins, Intermodal continues to make year-over-year improvements, and our LTL segment is outperforming the targets we set at the time of acquisition. We remain focused on continuing to diversify our business and develop complementary services that bring strategic value to our customers and partner carriers. The chart on the right highlights the percentage of revenue during the third 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 maintenance, equipment leasing, and warehousing services. We believe this diversification positions our company to successfully navigate what could be a more challenging freight environment in the coming quarters. We are encouraged with how well our different brands and services continue to collaborate to find new opportunities to grow with existing customers and forge relationships with new customers. Our company is made up of unique brands that have different strengths and provide different services throughout the supply chain. We bring creative solutions with scale to solve difficult challenges. We value vertical accountability for performance in each business, but also horizontal collaboration across our brands to optimize and fully leverage our capabilities. Because of this structure and the leaders we have on our team, we feel well-positioned to successfully navigate the change market. 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 3.7%, while our operating income declined 14.9%, as we operated with an 81.8% adjusted operating ratio. During the quarter, revenue per tractor grew 1.8%, driven by an 8.1% increase in revenue per loaded mile and a 4.2% decrease in miles per tractor. The improvement in revenue per tractor was more than offset by inflationary pressures across our business. Most notably, we continue to see cost pressures in driver-related expenses, equipment cost and maintenance, and insurance. Within our truckload segment, we adjust to market conditions and have a diverse group of brands and services, including nearly 5,000 dedicated trucks, which provides us with some flexibility and strategy. For example, as over-the-road truckload volumes have become less robust year-over-year, our dedicated business has grown top-line revenue and improved margins on a year-over-year basis. Freight demand trended below typical seasonal patterns in the back half of the third quarter and these trends have continued into October. Given these trends, we are expecting a muted peak season this year. Spot opportunities have declined significantly, and we have been pivoting towards making more commitments through the bid season to reduce our exposure in the spot market. We've been doing this since the beginning of the year. Small carriers who typically have significant spot exposure are now dealing with depressed rates, higher fuel prices, higher fixed equipment costs, rising insurance costs, and now elevated interest rates that will most likely continue to rise. These factors have led to capacity attrition that we are currently seeing and will most likely accelerate the attrition in coming quarters. Despite the changing market, our customers still value trailer pool capacity at scale, and we see this demand in both our truckload and logistics segments. we continue to invest in our already industry-leading trailer fleet, which grew sequentially to just over 75,000 trailers. We believe our scale in trailers is a competitive advantage and provides our customers capabilities that are extremely difficult to replicate. Now let's move to slide six. Our LTL segment continues to perform well and is exceeding the goals we set at the time of acquisition. For the quarter, Revenue excluding fuel surcharge was $224 million, and we operated at an 84.5% adjusted operating ratio. This represents a 300 basis point improvement from the third quarter last year, which was the first quarter that we included AAA Cooper in our results. Volumes followed normal seasonal trends while pricing remained strong. Our revenue excluding fuel surcharge per 100 weight increased 15.5% year over year. We have been extremely impressed with the leadership at both AAA Cooper and MME as we work towards merging our systems this quarter to create seamless connectivity for our customers while maintaining the culture and brands of each company. We believe this positions us to provide additional services to existing customers as well as create new customer relationships. Our Knight and Swift brands have deep relationships with large shippers who in many cases deal with larger LTL network or larger LTL providers. Creating a super regional network in the short term and then a national network in the long term will enable us to find opportunities to further support our existing truckload customers with LTL capacity. We also believe this approach is very welcoming to other LTL companies who may choose to join this network. Again, we are very encouraged by the LTL results and our conviction for synergy achievement continues to grow. Now let's move to slide seven. Our logistics segment continues to grow volume with load count up 20.1% year over year. As compared to the third quarter of 2021, revenue was down just 5.2% despite a 21% decrease in revenue per load. Gross margin also expanded to 20.9% in the quarter compared to 18.1% last year. leading to an 86.8% adjusted operating ratio. This resulted in a slight improvement in operating income compared to the same quarter last year. Our customers continue to value the power-only services we provide, which led to a 33.3% growth in power-only load volumes. Our vast and growing trailer network allows our customers the ability to optimize their warehouse space and labor costs. Third-party carriers prefer power-only business because it saves them hours at each load and unload location. It 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 technology initiatives 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. Network fluidity and chassis availability remains a challenge within our network. However, we have made progress through the bid season to better align our freight network and our rail partners in both the west and the east. Our goal is to continue to grow Intermodal through improved ox turns as well as expanded capacity as we added approximately 650 containers during the third quarter this year. I'll now turn it over to Dave.

Okay, thanks, Adam. And good afternoon, everybody. Slide 9 illustrates the growth in our businesses that are included in the non-reportable segment. For the quarter, we had a 56% increase in revenue and a 97% increase in operating income. These increases in revenue and earnings are from our overall strategy to develop essential services for third-party carriers. As outlined last quarter, the Three primary objectives in these carrier services are, number one, to introduce new profitable revenue streams with growth potential that further diversify our company. Second, to leverage existing expertise in areas where we've proven industry-leading results, such as risk management, maintaining equipment, and purchasing. And three, provide these services in a way that benefits the relationships we have with small carriers as we building much, much larger network using their power with our trailers and freight network. Many of these services are branded under our Iron Truck Services brand. We found tremendous interest in our offerings from small third-party carriers interested in purchasing insurance, maintaining their equipment in our nationwide shop network, leasing equipment, and leveraging our buying power to purchase fuel. These new and expanded services, along with warehousing and equipment leasing, have nearly quadrupled revenue and are on pace to generate over 500 million of revenue this year with projected operating income in excess of 60 million compared to a loss of 68 million in 2019. Now to slide 10. This slide illustrates the progress of the intentional changing of the composition of our business 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 the third quarter of 2022. We're pleased to report meaningful contributions and earnings from each area over the last five years. 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 63% of earnings, which represents a meaningful shift from where we were in 2017, immediately following the Knight-Swift merger. This reduction in our truckload earnings percentage has changed, while at the same time significantly improving our truckload earnings from a 2017 full year combined pro forma Knight and Swift earnings of 319 million to 840 million for the third quarter trailing 12 months of this year. The chart on the right shows our rolling four quarter adjusted earnings per share since the Knight and Swift merger. During this time, EPS has moved from $2.16 per share to $5.64 per share for the trailing 12 months. Moving to slide 11, strong earnings have driven increases in our free cash flow, which was $1 billion through the third quarter over the trailing 12 months. Year-to-date, we've used cash to increase our dividend to shareholders by 20%, repurchased $300 million worth of shares, and paid down $396 million in long-term debt and leases. Since the 2017 Knight-Swift merger, we've invested $1.6 billion in acquisitions. Making acquisitions remains a high priority, and our strong cash flow generation provides us with ample capacity for M&A opportunities. 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. On to slide 12. Return on net tangible assets remains a key metric for us over the past 12 months. We've achieved a 22.4% return on net tangible assets, which you can see from the graph is a substantial improvement from where we've been in the past few years. Our goal is to improve this metric by focusing on three key areas. One, growing our less asset-intensive businesses. Two, acquiring and improving businesses. And three, expanding margins in existing operations. During the third quarter, we made significant progress in many of these areas. In our less asset-intensive businesses, we saw 20% increases in load volumes for our logistics business. with a large part of those coming from our power-only service offering. We saw warehousing revenue increase over 60% year-over-year, and our iron services revenue increase over 140% year-over-year. We've experienced synergies and improvement in every business we've acquired, be they warehousing, asset truckload, of course, less-than-truckload, or truckload brokerage. less than truckload or LTL, we're expanding our network in the fourth quarter with the addition of four new terminals and over 125 doors. We believe our focus in these three key objectives, leverage our core competencies in areas of opportunity that are unique to us, will allow us to continue to generate significant returns to our shareholders over time. Now on to The next slide, slide 13. And I'm going to take just a moment and give a little bit of background and kind of view into the market as we see it. So bear with me as I kind of walk through this. I won't hit each one of those bullet points, but I'll try and kind of cover them one way or another, but just give some commentary here on what we're seeing in the market. We've been preparing for the next freight downturn since before the last one. When we saw the unexpected disruption from COVID-19 in the April and May timeframe of 2020, we quickly jumped into action, made immediate changes to adapt and to perform. The changing freight market from the all-time high demand experience that started really in the summer of 2020 and continued into a more typical seasonal demand, which we started to see at the beginning of this year, And now in some ways, we're seeing sub-seasonal demand as we come towards the end of 2022 and head into 2023 has been a little easier to anticipate, predict, and even prepare for than what we originally saw back at the start of COVID-19. Now, although we've been hoping that this strength would continue, over the last year, we've followed our playbook in preparing for the economy and the truckload market to slow. We reduced our exposure to the spot market at the beginning of the year and have made certain cost adjustments throughout the year. Mitigating the volatility associated with the full truckload market has long been a major focus for our company and something we frequently talk about with investors. A major part of the rationale for our entrance into the LTL market was the reduced volatility in the LTL market, which has considerably high barriers to entry and has performed with remarkable consistency over the last two decades. It used to be that a truckload carrier's only real option for mitigating cyclicality was to increase the percentage of their business that's dedicated as opposed to a regular route. Our industry-leading O.R., and size have afforded us the meaningful cash flow to invest in related but less cyclical industries such as LTL or insurance or maintenance, and maybe even more impactful to increase our already industry-leading largest trailer fleet, but to continue to increase that to create more value and reduce volatility with increased trailer pool business with our truckload customers by providing the truck and driver to power from one of our partner carriers in our massive portfolio of third-party carrier relationships. The ability to provide access to concentrations of trailers in all 48 states is unique to us. It maximizes supply chain efficiencies, has a very high barrier to entry, and we operate trailers at what may very well be the industry's lowest operating cost per mile. These trailer pools offer customers flexibility in loading and unloading trailers based on their labor availability as opposed to unloading or loading when the truck arrives and the driver is waiting. Since the electronic log mandate nearly four years ago, most loads accrue additional charges to the shipper if not unloaded in two hours when a driver is waiting. The flexibility from our pools to unload in a day or two creates value and helps our contract rates and awards for both our own trucks and for loads that we secure for partner carriers. These challenges, there are massive challenges facing small carriers today, and they are unprecedented, and we expect they will further intensify and result in and further rationalization of industry capacity or supply. Similar to 2019, we expect that this will be a tale of two cities with shorter-term challenges for the well-capitalized, highly profitable carriers versus those already challenged in what has been a very strong freight market. We expect meaningful, attractive acquisition opportunities over the next few quarters. I'll now turn it to Adam to finish up with our guidance slide.