Knight-Swift Transportation Holdings Inc. Q3 FY2025 earnings call

• Freight markets were uncertain in the third quarter with more proactive customer peak season discussions. Demand was relatively stable across truckload brands. Capacity attrition was expected from multiple fronts including regulatory focus, carrier downsizing, large carriers pulling back, and private fleet growth plateauing.
• LTL business adopted the AAA Cooper brand, continued to grow customer base and volumes, and had multiple initiatives to improve cost efficiencies and operational execution despite network expansion costs.
• Adjusted operating income showed different performances across segments, with earnings growth in LTL warehousing and leasing offsetting some negatives in other areas.

Truckload segment

• Revenue declined 2.1% year-over-year, driven by a 2.3% decrease in loaded miles. Revenue per loaded mile, excluding fuel surcharge and intersegment transactions, was up slightly year-over-year and sequentially improved 1.1% over the second quarter. Adjusted operating income declined $7.3 million or 15% year-over-year, largely due to $12 million of higher insurance and claims costs at US Xpress. Excluding US Xpress and the legacy Truckload brands, it operated at a 93.7% adjusted operating ratio.

LTL segment

• Revenue excluding fuel surcharge increased 21.5% year-over-year, with shipments per day up 14.2%. Revenue per hundredweight and per shipment, excluding fuel surcharge, increased. Adjusted operating income increased 10.1%, and the adjusted operating ratio was 90.6% for the third quarter, an improvement of 250 basis points from the second quarter.

Logistics segment

• Revenue declined 2.2% year-over-year, driven by a 6.2% decline in load count, partially offset by a 3.6% increase in revenue per load. Disciplined pricing and cost management helped drive a slight improvement in the adjusted operating ratio to 94.3% and grow adjusted operating income 1.9% year-over-year.

Intermodal segment

• Revenue declined 8.4% year-over-year on an 11.5% decrease in load count, partially offset by a 3.5% increase in revenue per load. The adjusted operating ratio improved 160 basis points year-over-year to 99.8%.

All other segments

• Revenue increased 29.9% and operating income increased 86.4% year-over-year, but the fourth quarter is expected to see a seasonal slowdown with roughly breakeven operating income before intangible amortization.

• Projected adjusted EPS for the fourth quarter of 2025 is in the range of $0.34 to $0.40.
• Truckload operating income is expected to improve sequentially with operating margin improvement on fairly flat revenue. LTL is anticipated to have continued year-over-year revenue growth and similar adjusted operating margins. Logistics segment is projected to have sequential climb in revenue and earnings. Intermodal's contribution is expected to remain fairly stable. All other segments are expected to have seasonal slowdown with roughly breakeven operating income. Full year net cash CapEx is between $475 million to $525 million and effective tax rate on adjusted results is between 23% to 24% for the fourth quarter.

• Regulatory risks related to enforcement of non-domiciled CDL and English proficiency, which may cause capacity tightness and pressure on logistics gross margin.
• Insurance and claims cost risks, such as the $12 million of higher insurance and claims costs at US Xpress that impacted results.
• Market demand uncertainty risk with freight demand trends deviating from normal seasonal patterns and fourth quarter growth uncertain.

Q: So I have just a numbers question and then just a bigger picture. So am I just understanding this right, like the clean nonreportable is like $35 million in Q3 and you're saying breakeven in Q4, just that's a big drop. I just want to understand if I got that right. And then just bigger picture, like all like the regulatory stuff that you're talking about, like what's your view of how much capacity this takes out? How much of this we're seeing already in the market? How long does it all take to play out? And then maybe just with that, Adam, you made a comment about private fleet growth reversing, which I think would also be a big deal. Just what's telling you that that's happening, that would be helpful.

A: So Scott, I think that's three questions maybe. We'll try to wrap that together as one. I don't want to set a precedent here. Yes, on the all other, that is correct. You're reading that correctly. And I think we signaled that, I think maybe earlier this year, that's been the normal seasonal pattern. It's really driven by our warehousing business where we have a lot of work that we do that's somewhat front-loaded in the year, and there's a lot that just doesn't happen in the fourth quarter. And that's how that would have played out last year as well. We were trying to get that a bit more smoothed out, but that didn't happen this year. So that would be the case. And I think that's where -- that's how we've modeled that even in previous years. In terms of the regulatory question, I think there's a lot of unknowns there. We've seen several numbers out there. I think the FMCSA has projected that there was over 200,000 non-domicile CDLs that were issued. I think a good number of them were probably not issued correctly. I think the enforcement may vary by state. I know that we're seeing certain states revoke CDLs now, and we're seeing letters come in across our industry. We have a very small number of drivers that have non-domiciled CDLs. I'd say maybe a few dozen. And we've seen some activity there as well, even for those that were issued, we believe, correctly. And so I don't know, it's going to be interesting to watch, and we'll watch it very closely. I think you've seen a lot more enforcement on the English language proficiency. We've seen the violations ramp up quite a bit over the last couple of months when that's been really pushed. And now that you have some states that are having federal funding withheld, I think that's going to push some states that have been a little bit resistant to push some of these regulatory changes that may feel like they've got to act based on the new laws that have been issued. So when I look at certain markets, we could certainly see pockets where carriers are not willing to take longer lengths of haul because of the risk of going through more checkpoints certain carriers that only want to stay within certain states where they feel like the enforcement will not be as strict. And so that's created some challenges on sourcing capacity in our logistics business. And I think we've seen that from certain customers as well. We've had some customers come to us with projects, but with some requesting that non-domiciled drivers -- non-domiciled CDL drivers are not utilized. for the project because of just what concerns could come from that if there were an incident. So it does feel like this is building. And it's the non-domicile issue on top of the English language proficiency that I think early on, I didn't feel was going to move the needle as much on capacity, but it certainly feels like the momentum is there, and we're beginning to start to see some tightness in certain markets. And I -- and I believe that's only going to continue. Did I hit that, Scott?

Q: So I wanted to focus on LTL, I ask maybe a near-term question and then a longer-term one. Andrew, I think you said softer demand was noted for Q4, but also that your bid discussions are encouraging. And then you guided to flattish margins in Q4, but that would be significantly worse than normal seasonality. after you had very strong results in Q3, I think you're going to be the only carrier we cover that reports sequential margin improvement in Q3. So maybe help us square the messaging there and what's happening in Q4 and your guidance. And then just longer term, Adam, in the past, you've talked about potentially unlocking over time the unique synergy opportunities from being the only carrier that has both the strong TL franchise and growing LTL operation. Maybe elaborate on that as you've gotten some traction with LTL. How do you feel about that synergy potential? What it could look like, what inning we're in, et cetera?

A: Sure. All right. We'll touch on that, Richa. I think on the near term with LTL, I think what we want to comment is just that we've seen a little bit of softness going into the first couple of weeks of the quarter. It's hard to read into just a couple of weeks, but we felt it was noteworthy to share that and know that we're reacting to that, and we're making the adjustments where we can. A lot of that will be on the labor front. But we've built the network to handle a certain amount of volume, and we've been building into that volume over the last few quarters and to take a step back, does put a little bit pressure on the cost front. And so we're going to manage what we can over the near term. But when we look at what the bid season and how that's building, we feel encouraged by what opportunities lie in front of us that may start to go into effect in late first quarter and into the second quarter. So we want to be cognizant of being prepared to handle those volumes. And we talked about where we expect the OR to be from third to fourth. And if you look at how we trended last year, that was -- that would be pretty consistent with the degradation sequentially given the mix of customers that we work with, we tend to have a real slowdown in the back half of the quarter, particularly in December. And so that would be something that we just have to navigate. But again, we're taking a lot of steps towards just managing the cost where it makes sense and aligning that management with where our shipment volumes are. But again, as we build out this network, we still feel very encouraged that we'll see growth in our existing network that we have without opening many properties here in the near term. And then we think about what the capabilities are with LTL and truckload and the size that we have, we're finding real opportunities to leverage empty lanes between both brands where something might be a great fit for LTL partially on a lane. And so we can move a load halfway with truckload, transition to our LTL fleet to pick up some savings from not running empty. We're also seeing that our LTL business can leverage our truckload fleet for any purchase transportation instead of going to the outside. We can handle a lot of that inside when they have surge needs. And there's just more and more that we're finding as we've scaled LTL, and we're building systems that allow us to find those opportunities, not just between truckload and LTL, but between all of our truckload brands. And we've been doing a lot of this kind of manually with communication and just relationships, but we have systems rolling out that will identify these systems -- these opportunities quickly and allow us to seamlessly share those across our businesses. So I think we're in the early innings of finding opportunities to work together on truckload and LTL, and I think we're just going to grow from here.

Q: I wanted to ask about some of the cost-cutting opportunities. You had mentioned, I think, last quarter that there was kind of increased focus on scaling back costs and looking for ways you can be a little more efficient. I'm just wondering kind of where you are on that -- in terms of progressing on that for each of the segments.

A: Okay. Yes. Let me -- I kind of focused on that last question on LTL. So maybe I'll spend a little time addressing our approach to our costs in our Truckload segment. So let me break it down for you a little bit because the approach is different by area. I just want to hit a few areas. So let me talk about fixed costs. They represent maybe 1/3 of our costs in truckload and obviously very lever really well in the business. We really feel good about the progress we've made here. We've reduced our fixed cost spend, cost per mile percentage of revenue, both year-over-year and quarter-over-quarter by multiple percents. And so we -- the progress there in our cost on the fixed cost is meaningful, and we think permanent. So about half of that is equipment based. And that is obviously a big driver of our cost. And so we -- our strategy around equipment is multipronged our kind of analytical approach to equipment life cycle, how we procure our asset utilization improvement that you're seeing in our miles per truck numbers and our ability to reduce unseated trucks and then maintain optimal trailer tractor ratios, we've got a lot more miles we can put on our trucks, and we think that's going to -- with volume, it's going to really give us some leverage opportunity. But our goal is to reduce our equipment cost per mile year-over-year each quarter. And so we're seeing good results there. The second area in our fixed costs, our G&A and overhead. -- we're deploying significant initiatives, lean initiatives, technology-based initiatives, that's AI, but that's other areas as well with the goal to offset inflation, reduce our spend in G&A and overhead costs year-over-year every quarter. And so we saw good progress sequentially in this area. And we've really taken a different approach on our facility costs, our footprint and put a lot of processes in place to understand fundamentally the cost there. And I would say we have the expectation that we're going to reduce our cost per square foot lower year-over-year in this area. And so that's where we're focused. Now on the variable cost, that's the other 2/3. You got to think about that as driver pay, maintenance, insurance and fuel, those are your big ones, right? So in this area, we've really -- we put in place lean management, continuous improvement initiatives. with the goal to offset inflation and reduce our variable cost per mile. And so in each of these areas, we have a different strategy deployed to do that. And so in maintenance, we're managing how we do things internally versus externally and really understanding the cost drivers of the truck. In fuel, we really feel good about the underlying metrics in fuel in our miles per gallon results that we're seeing. But we're going to see that number kind of fluctuate up and down a little bit quarter-to-quarter, and we saw a little bit of that in this quarter. But underlying it, we think our operating performance is good there. We're using some new technologies in our trucks that are helping. But fundamentally, when it comes to fuel management, it comes down to the discipline of how you plan and coach and create a culture of accountability there. Insurance, I'll mention, I think, is a big area of focus because that's been hyperinflationary and really pressured. And what you're seeing in that we used to be able to depend on some degree of normalcy in terms of what we would expect in claims expense over time. What we're seeing is the way claims costs are settling and developing, you're going to see kind of more volatility than normal, I believe, in this area. So -- and you saw some of that translate into our results this quarter. But we -- again, we think what we're doing there is really going to start to pay effect. Our DOT crash performance is on track for that to be our best ever over the last three years. And LTL this year is going to be the best ever for our DOT crash performance. So as we really focus on these metrics, invest in technology to support this, we think we can turn insurance costs to a competitive advantage. So it's a complicated question because there's -- each area requires a different approach, but we have our focus -- our organization really focused on this to create a groundwork of sustainable constant improvement and with the goal of seeing costs become an area where we can expand our margins over time.