Knight-Swift Transportation Holdings Inc. Q3 FY2024 earnings call

Key Points

• Truckload Market: Challenging but worst of the cycle may be behind. Sequential trends in Q3 show stability/improvement. Freight rates stabilized but remain unsustainable. Focus on disciplined pricing, cost control, and operational excellence.
• LTL Market: More supportive than truckload. Steady rate improvement with network expansion. Acquisition of DHE contributed to growth. Start-up costs at new facilities drag on margins in short-term.
• Logistics Market: Dealt with soft truckload environment. Disciplined pricing maintained profitability. Adjusted operating ratio improved from Q2. Diverting logistics volumes to support asset business.
• Intermodal Market: Revenue increased year-over-year but impacted by hurricanes. Expectations of breakeven in Q4.
• All Other Segments: Revenue declined due to winding down third-party insurance, but warehousing and equipment leasing provided modest sequential improvement

Truckload Logistics and Intermodal Segments

• Revenue excluding fuel surcharge decreased 5.3% year-over-year. Adjusted operating income declined by 7.1%. The truckload market is challenging, but sequential trends in Q3 show stability and improvement. Freight rates have stabilized but remain unsustainable. The ongoing attrition of excess truckload capacity continues.

LTL Segment

• LTL segment has a more supportive market than truckload. Revenue excluding fuel surcharge grew 16.7% year-over-year with 11.1% increase in shipments per day. Acquisition of DHE contributed to growth. Revenue per hundredweight increased 9.2% year-over-year. Adjusted operating ratio was 89.6% but adjusted operating income declined 19.5% due to start-up costs at new facilities.

Logistics Segment

• Logistics market dealt with soft truckload environment. Disciplined pricing maintained profitability with adjusted operating ratio of 94.5%, improving 100 basis points from Q2. Revenue decreased 9.50% year-over-year due to lapping U.S. Xpress acquisition, but revenue per load increased 3.7% from Q2.

Intermodal Segment

• Revenue increased 1.4% year-over-year driven by 7.2% increase in load count. Operating ratio improved by 310 basis points year-over-year. Recent hurricanes impacted volumes, so intermodal load count is no longer expected to be sequentially stable with Q3, and the business is likely to be essentially breakeven in Q4.

All Other Segments

• Revenue declined 42.8% year-over-year mainly due to winding down third-party insurance business. Operating income of $6.2 million in the segment showed modest sequential improvement, driven by warehousing and equipment leasing businesses

Guidance

• Expected adjusted EPS for Q4 2024 is in the range of $0.32 to $0.36.
• Expected adjusted EPS for Q1 2025 is in the range of $0.29 to $0.33.
• Project truckload operating income to improve sequentially into Q4. Normal seasonal step down in LTL earnings and all other segments in Q4 will offset truckload profits ramp-up. First quarter range reflects normal seasonal slowdown in truckload and logistics, partially offset by seasonal improvement in LTL and all other segments

Risks

• Market Volatility: The truckload market remains challenging with ongoing attrition of excess capacity. Freight rates, though stabilized, remain at unsustainable levels.
• Hurricane Impact: Hurricanes Helene and Milton disrupted volumes across asset-based businesses, particularly for U.S. Xpress and AAA Cooper brands in the Southeast.
• Tax Rate Fluctuations: Year-over-year increases in effective tax rates on GAAP and non-GAAP results impacted earnings.
• Integration Challenges: Integration of U.S. Xpress and DHE involves challenges such as working through equipment leases, aligning network and rates, and managing start-up costs at new LTL facilities

Q: Jonathan Chappell with Evercore ISI asked about the standing of spot vs. contract business relative to a year ago and long-term averages.

A: Adam Miller responded that spot is still in low double digits vs. contract, and in stronger markets can flex to 20-25%. There's seasonality and some shippers with acute needs using additional capacity. Brad Stewart added there's room for improvement in miles per seated truck for flexibility.

Q: Tom Wadewitz with UBS asked about the cycle outlook for next year.

A: Adam Miller said the worst of the truckload cycle may be behind, expecting low to mid-single-digit rate improvements building throughout the year. Andrew Hess added bid season is ahead and they're capturing positive rates. Adam Miller mentioned Thanksgiving and December could set the tone for rate inflection.

Q: Daniel Imbro with Stephens, Inc. asked about expense growth and margin improvement.

A: Adam Miller said they need to hold or improve costs next year. Focus on safety, equipment utilization, and driver pay. Andrew Hess added they've been working on reducing fixed costs and saw sequential improvement in legacy businesses' OR.

Q: Ravi Shanker with Morgan Stanley asked about shift to asset-based carriers and impact on rates.

A: Adam Miller said shifts have occurred historically. Now, cargo security is a bigger concern. Shippers shift between brokers and asset-based carriers, but cargo theft is a new point of contention.

Q: Scott Group with Wolfe Research asked why Swift is seeing pickup in spot and margin improvement view.

A: Adam Miller said Swift is the largest brand with more equipment, handling large shipper needs. Goal is to keep cost per mile flat or better and have rate improvement flow to margins. Andrew Hess added cost pressure will continue a few quarters but 2025 will see improvement as they get into bid cycles.

Q: Ken Hoexter with Bank of America asked about margin progression and market pricing.

A: Adam Miller said they're building a network and expect to improve OR by a couple of hundred basis points annually. Andrew Hess said they're at the low point of investment pressure and expect 2025 to pay off with better bid cycles and efficiencies.

Q: Chris Wetherbee with Wells Fargo asked about U.S. Xpress integration and margin outlook.

A: Adam Miller said integration has been challenging due to prolonged freight market. Progress on cost synergies, but over-the-road rate gap remains. Better market conditions will help close revenue gap. Andrew Hess added hurricane impact on U.S. Xpress and related businesses.

Q: Brian Ossenbeck with JPMorgan asked about fleet utilization and hurricane impact.

A: Adam Miller said they're working through tractor count adjustments and realigning U.S. Xpress network. Andrew Hess said hurricanes impacted Q3 and early Q4, with some permanent impact on LTL and intermodal, but truckload may have net positive from Q4 opportunities.

Q: Eric Morgan with Barclays asked about LTL length of haul runway.

A: Adam Miller said length of haul is expected to improve with network expansion. Andrew Hess highlighted California as a game-changer for capturing long-length haul freight and strong response from customers.

Q: Bascome Majors with Susquehanna asked about seasonality and cycle comparison.

A: Adam Miller said it's difficult to apply historic seasonality to current business due to changes in segment composition. Brad Stewart added the subdued truckload market in recent years has dampened seasonal earnings volatility. Adam Miller said 2025 first half may feel better than financials suggest, with back half improving if rates play out