Knight-Swift Transportation Holdings Inc.

Good afternoon. My name is Ludi, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Night Sweep Transportation Third Quarter 2023 Earnings Conference 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. 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, Ludi. Appreciate that. And a good afternoon, everyone, and thank you for joining our third quarter 2023 earnings call. Today, we plan to discuss topics related to the results of the quarter, provide an update on current market conditions, and update our 2023 guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to last one hour today. And following our commentary, we'll answer questions related to these topics. In order to get to as many participants as possible, we are going to limit the questions to one per participant. If you have a second question or a follow-up, please feel free to get back into the queue. We'll answer as many questions as possible. If we're not able to get to your question due to time restrictions, you may call 602-606-6349 following the call, and we'll answer as many questions as possible at that point. So to begin, I'll first refer you to the disclosures on slide two of the presentation, and I'll also 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 risk that may affect the company's future operating results. Actual results may differ. Before we get into the slides, I want to turn the call over today for a few opening remarks.

Thank you, Adam, and hello, everyone, and thank you for joining our call today. As has been widely reported, we continue to be in a depressed truckload freight market where rate expectations from shippers are often close to, if not below, operating cost. Spot rates are not at sustainable levels and are proving not to be survivable for those that are dependent on that type of freight. When we did our last call a quarter ago, there were rumors of yellow closing. Obviously, since that call, that has indeed taken place, and the already resilient LTL market has seen more strength. On the truckload side, the announcements of failures and rumors of more seem to be increasing by the week as of late. It's taken a lot to get to this point so deep along the bottom of this current cycle, but the market is beginning to show signs of sensitivity to when supply leaves suddenly or a provider cannot perform with freight lanes that were awarded by offering the cheapest price and And a shipper may find themselves quickly seeking a quality provider at a higher price than the original award. However, we are not seeing enough of that kind of activity or enough supply leave and or enough strength and volumes to move rates to a meaningful inflection position right now. But it does appear that the stage is being set for positive rate pressure in the next bid season. In the meanwhile, here at Knight Swift, we are focused on three specific objectives. The first one is improving the performance of our truckload businesses. There's much in our control that we can do, including being better at cost, running more miles safely, and in hiring and retaining driving associates. Our people are digging in and working hard. We're grateful for that. The truckload operating ratio, excluding U.S. Express, It was a 91.5%, and we are just simply not comfortable with an OR that starts with a 9, and our people are working with urgency to do all that we can. Another objective is to grow our LTL network. AAA Cooper and Midwest Motor Express seamlessly operate on one operating network while maintaining their local identities. We've opened 14 LTL service centers organically. since the acquisition of AAA Cooper and MME in 2021. We've already purchased 11 additional terminals that have not yet been launched as service centers, and we'll continue to pursue acquiring additional terminals that fit our nationwide plan in addition to other strategic forms of growth for LTL. We have found synergies between LTL and the truckload business while not getting in one another's way. And the third objective that I would point out is the turnaround of US Express. We feel like we had good momentum going into the close of the transaction with the goal of being able to hit the ground running, and it feels like that's what's happened. We've had positive sequential rate improvement while lowering cost per mile in the first quarter of our ownership despite strong market pressure and the contrary. Still a long ways to go, but we are ahead of schedule. The people at US Express have been great, and we're so excited for where that business is headed. And with some help from the market, we'll get there even sooner. Now we'll turn our overview to slide three. The charts on slide three compare our consolidated third quarter revenue and earnings results on a year-over-year basis. These results now include the results of US Express for the full quarter. Revenue excluding fuel surcharge increased 7.6% while our adjusted operating income declined by 60.8%. Market conditions in the LTL business were strong while soft demand continues in the truckload space. Gap earnings per diluted share for the third quarter of 2023 were $0.37 per share and our adjusted EPS came in at $0.41 per share. These results were negatively impacted on a year-over-year basis by a $20.4 million increase in interest expense and the $22 million reduction in operating income in our third-party insurance business with the non-reportable segments. Also, the third quarter gap results were positively impacted by a $14.6 million income tax benefit from the partial release of a tax benefit valuation allowance held by US Express associated with net operating losses and the tax credit carry forward benefit at the time of the acquisition. This benefit was recognized post-closing due to the ability of Knight-Swift to utilize those tax attributes, which had the effect of reducing the consolidated effective tax rate at Knight-Swift to negative 2.1% for the current quarter. Our adjusted EPS of 41 cents is calculated using a normalized 23.2% effective tax rate for the quarter and excludes the $0.09 per share benefit of the lower tax rate. Now on to slide four. Slide illustrates revenue and adjusted operating income for each of our segments. Freight demand in the third quarter remains stable at soft levels for truckload but fairly strong and building in LTL. The truckload seasonal build, usually seen in the late third quarter, was subdued, and this has continued thus far in early October. Our insurance business performed worse than expected, but this was largely offset by LTL and U.S. Express performing ahead of our plan in the quarter while our existing truckload businesses were largely in line. Contractual bid rates are largely baked in at this point for 2024-2023 in the truckload business, while project opportunities are less prevalent than a normal peak season but are continuing to materialize. After generally falling for much of the past few quarters, fuel prices increased throughout the third quarter, providing a new headwind to operating margins for truckload and intermodal, though our efforts to reduce costs largely offset the impact. Our existing logistics business did a great job navigating significant declines in volume and revenue per load year over year to maintain a low 90s adjusted operating ratio, excluding U.S. Express logistics. I'll now turn it over to Adam to discuss each segment's operating performance, starting with truckload on slide five.