Q1 2022 Knight-Swift Transportation Holdings Inc Earnings Call
Good afternoon, My name is Christian and I'll be a conference operator today at this time I would like to welcome everyone to the Knight Swift Transportation first quarter 2022 earnings call all.
All lines have been placed on mute to prevent any background noise speakers for today's call will be deep Jackson, President and CEO and Adam Miller CFO .
Mr. Miller debating is now yours.
Hey, Christian appreciated good afternoon, everyone. Thank you for joining our call.
I don't know what can I say Ah we enjoyed I guess the last near four year break from live conference calls, but I guess, we're back now, but we've decided to reinstitute the quarterly conference call and plan to hold a call on an ongoing basis. So you would expect to see this every quarter now or.
We plan to touch on quite a few topics today and have slides to accompany this call. The slides are posted on our investor website, which is investor Dot Knight Swift Dotcom backslash events.
Yeah, Dave Jackson here glad to have you back you know Adam and I are we're excited we're excited to spend the next hour with you.
It's amazing to think that it has been four years since the last call boy, how things have changed in addition to a global pandemic that none of us saw coming our business has transformed rather significantly over that period of time I mean, we have Swift transportation, who are who are since call. It second.
Quarter of 2018, which was the last earnings call you arguably Swift is now the most profitable truckload carrier in the industry. We're in the L. T L business with more than 900 million of revenue.
Free cash flow on the last earnings call. We did was $52 million this quarter its $352 million.
Or maybe what another little fun fact is we were $99 6 million of adjusted net income.
On the last call. This one it's a 225 million for this quarter. So all of this has been done while derisking and diversifying our model, which.
We plan to talk about we've got quite a bit of pent up so hopefully youll bear with us as we walk through these slides and talk about our business. Thanks, Dave. So our call is scheduled to go until 530 P M Eastern time.
During the call we plan to discuss topics related to the results of the first quarter provide an update on current market conditions and update our full year 2022 guidance.
In our commentary.
Answer as many questions.
Possible in order to get to as many participants as possible, we're going to limit your questions to one per participant.
I know this is our first call back in a while so please don't try to sneak a second question as a follow up question just remember those tricks. So if you have a second question. Please feel free to get back in the queue, we'll answer as many as time allows.
Well, if we don't get to your question.
E call 602, 600, 66349, and we'll try to connect back with you later today.
With that I'll refer you to the disclosure slide.
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.
That's just a direct you to the information contained in item one a risk factors or part one of the company's annual report on Form 10-K filed with the United States S. T. C for a discussion of the risks that may affect the company's future operating results actual results may differ.
Now we'll move on to slide three this compares our consolidated first quarter revenue and earnings results on a year over year basis, we continue to generate meaningful revenue and income growth, both organically and via acquisitions and demonstrated the operating leverage of our business. Each reportable segment improved both revenue and margin.
Which ultimately led to a 49, 4% increase in revenue and an 82, 7% increase in adjusted operating income on a consolidated basis GAAP earnings per diluted share for the first quarter of 2022 were $1 25, which represents a 62, 3% improvement from the prior year and our adjusted earnings per share.
It came in at $1 35.
Both GAAP and the adjusted earnings per share include a $13 1 million after tax loss in other income or expense from an unrealized mark to market adjustments in our investment related to embark trucks. This loss reduced our adjusted earnings per share by eight cents.
And now we'll move to the next slide.
Slide four illustrates the revenue and margin contributions for the first quarter and trailing 12 months in our segments chart on the right highlights the percentage of revenue during the first quarter of 2022 for each of our four segments as well as the percentage of revenue from our other services, which include a rapidly growing insurance equipment and maintenance.
<unk> certainly seen in warehousing services.
Our strategy is to continue to diversify our business, while improving both margin and revenue in each segment.
During the first quarter of 2022, our truckload segment grew revenue eight 8% year over year, but as a percentage of total revenue both from 77% in the first quarter of 2021% to 57% in 2022.
This is the result of our continued focus on growing logistics intermodal and our recent investment in the L. T L markets.
<unk> revenue increased 142% year over year and as a percentage of the total move from 10% last year to 17% this year.
Revenue from services group together in the other bucket grew a 172% and as a percentage of revenue doubled from 3% to 6%.
And with our recent acquisition of AAA Cooper in July of last year and NME in December our L. T. L segment represents 13% of revenue.
The next few slides, we'll discuss each seven each segment's operating performance starting with truckload on slide five.
On a year over year basis, our truckload revenue excluding fuel surcharge grew nearly 8% while our operating income grew nearly 30% our adjusted operating ratio of 78 point. She was at 360 basis point improvement over the prior year. It was the first time, we were below an 80 or in the first quarter since the merger of Knight.
<unk> Suisse back in 2017.
During the quarter revenue per tractor grew nine 4% driven by 22, 9% increase in revenue per loaded mile and a nine 6% decrease in miles per tractor.
Potential shift to shorter length of haul partially contributed to the increase in revenue per loaded mile and a decrease in miles per tractor.
Now lets protector also impacted.
Higher year over year unseated tractor count as well as Covid, a relation COVID-19 related issues early in the quarter.
Recruiting and retaining drivers continues to be a challenge, but we are seeing improvements sequentially and have made modest improvements in ceding tractors, primarily as a result of our extensive training programs.
Freight demand followed normal seasonal trends, but was generally strong throughout the quarter contract rates continue to increase as customers work to increase committed capacity, we are especially seeing greater demand from our customers to secure trailer pool capacity through our truckload and logistics segments as we make more commitments we asked.
We expect other large carriers are we are seeing higher tender acceptance levels and fewer non contract opportunities as the bid season progresses, we are reducing our exposure to the spot market as high contract rates support greater commitments.
We continue to invest in our trailer network grew sequentially by 2200 trailers to just over 71000 trailers fleet right fleet wide.
We believe our scale and trailers is a competitive advantage and provides our customers capabilities that are extremely difficult to replicate.
Our Q1 results continued to reflect the structural and fundamental changes within our Swift brand that has created parity in margins between both night and Swift. We believe these changes are lasting and expect the margins for a split brand continued to be in line with historical night margins over the coming quarters.
Now, we'll move to slide six.
This slide illustrates the results of our <unk> operations, which now include a full quarter results of <unk>.
For the quarter revenue, excluding fuel surcharge was $215 million adjusted operating income was $30 million and our adjusted operating ratio was $85 nine which was a 410 basis point improvement from the fourth quarter.
Sequential improvement in Omar was driven by AAA, Cooper's five 2% increase revenue per shipment and two 4% increase in shipments per day.
Improvements were also driven by the benefit from our ongoing synergy efforts and the full quarter results of M D.
The teams from both AAA Cooper and NME had been working to harmonize network systems to AAA Cooper's footprint in the southeast and then these footprint in the knee and northwest portions of the U S. We believe that connecting these networks has begun to create additional revenue opportunities and improve margins.
We are very encouraged by the collaboration of the enemy and AAA Cooper teams in a can.
Dickson for synergy achievement continues to grow customers.
Customers are still seeking to secure capacity and we continue to find revenue synergies from introducing our truckload customers to our LTE service.
In January and February we saw some negative impact from more frequent whether brand events.
Volume and margins to finish strong in March and that momentum has carried into the second quarter, we expect double digit increases in pricing coupled with realized cost synergies that will more than offset inflationary pressures and keep US ahead of our three year goal to achieve an 85 O R. While growing revenue in the high single digits.
Additionally, we continue to look for opportunities to build out our LTE network, primarily in the southwest and the northeast and we are pleased to announce that during the first quarter, we acquired five facilities in Texas and one in Las Vegas to support organic growth. We continue to explore additional acquisitions and partnerships as we work to build out a nation.
Yeah.
Now, let's move to slide seven.
Our logistics segment continues to grow at a rapid pace, while expanding margins our power only service continues to thrive growing over 400% and helping to fuel logistics year over year revenue growth of 140%.
William growth of 77% and revenue per load growth of 37% gross margin was 22% in the quarter compared to $14 four last year, leading to an $85 seven adjusted operating ratio. This revenue growth combined with improvements in gross gross margin led to more than a 400% improvement in operating income.
<unk>, which was nearly $40 million for the quarter.
We were able to grow volumes in both our traditional and power only services our expansive trailer network gives our customers tremendous flexibility in how they run their operations allows third party carriers to participate and drop and hook freight it would not historically have access to it gives it gives us additional revenue opportunities by utilizing third party carriers.
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 questions.
So go to slide eight.
To talk about intermodal, we've made some meaningful progress in expanding margins as we monetize our underutilized containers, while we were transitioning rail partners.
We expect to pull these containers back into our operation during late second and third quarter, leading to additional growth in load volumes are switched from the BNS theft to the Union Pacific was completed early 2022, and we're pleased with our new partnership we did experienced some customer disruption through the transition, but have a strong pipeline of Bob.
<unk> said weeks that will lead to year over year load count growth in the back half of the year.
During the quarter volumes were negatively impacted by chassis allocations and some disruption in network fluidity from switching rail providers, but it appears. These these disruptions are behind us as we move through the bid season, we are seeing contract rate improvements in the high single to low digit range, while improving committed volumes occur.
Current rail partnerships allow us to approach customers with with creative multiyear solutions, which has been received positively through the bid season.
Additionally, we continued to make investments in the growth of this business it will be adding 2000 containers throughout the year as this business skills, we expect our operating ratio to trend between the high eighty's to low nineties.
We'll move to slide nine.
The non reportable segment has hasn't been a great focus for analysts or investors over the years, but is now building. That's one of our fastest growing culmination of businesses. We've seen significant growth in revenue and margin related to iron truck services, which provides third party carriers insurance equipment maintenance from our exist.
In shops, as well as discounts on fuel purchases the growth in these services, particularly insurance has been exponential and we believe will be sustainable regardless of the freight environment, we've seen tremendous demand from our customers to lease trailers for storage seasonal projects or kit or typical operational use with the shortage of trailing equipment.
Being built we believe demand will remain strong in this area.
They both performed well you know warehousing business and we are currently looking for areas to expand these services.
And as these businesses grow and develop we will evaluate whether it makes sense to aggregate. Some of these business as a separate reporting reportable segment in the future.
We remain encouraged with the growth and diversification and contribution from the businesses that make up our non reportable segment.
And this will be my my last slide before I turn it over to Dave.
So we're moving to slide 10.
Ultimately, we remain focused on creating value to our shareholders. The improved performance of our segments over the years have led to not only strong returns, but significant increases in the amount of free cash flow. We have generated this free cash flow has enabled us to invest in Oregon organic growth.
Aggressively pursue M&A opportunity.
Optimize our capital structure following the Knight Swift merger Opportunistically buy back shares every year and consistently increase our dividend.
We've been able to position our business for long term growth and to navigate the different markets. We may face along the way.
So with that I'll now turn it over to Dave Jackson. Thanks, Adam.
I'm going to start here with slide 11, our objective has been to build a successful industrial growth company with consistent double digit returns on tangible net assets.
This requires multiple growth avenues that requires diversification of revenue streams to mitigate seasons in cycles.
It requires massive network building to accumulate economies of scale, which we have done with over 200 facilities, representing approximately 3000 acres.
In the right places with employees equipment and execution for our customers that enables us to operate with industry leading cost efficiency.
<unk> values and create value for our customers yields abundant revenue opportunities, we've seen huge demand for our trailers as electronic logs have changed supply chains to using trailer pools opposed to paying for detention when a driver can immediately be loaded or unloaded upon arrival.
Historically in prior to the regulation in 2018.
That's largely gone uncharged to the supply chains from small carriers.
To that electronic log mandate.
Consequently, we've been able to provide our customers additional capacity, while still using trailer pools, when we hire the power only from small carriers the power as the truck and the driver of moving our trailer. This has been hugely successful with more customer and small carrier demand that we can keep up with it has the potential to be.
Massive growth platform, one we've been designing and implementing technology along the way over the last couple of years to further remove friction and maximize the use of this platform, which in essence is our freight network a profitable loads combined with our trailers.
We will continue to share more about this in coming quarters as additional technology is rolled out.
The significance of the trailer in our industries.
Largest trailer fleet of 71000 truckload trailers makes us a more resilient company.
In 2019, when index spot rates between brokers and small carriers was nearly cut in half contract rates endured better than at any other negative cycle since deregulation. Most contract business uses trailer pools on at least one and not.
Non asset brokers offering one truck and one trailer who need to be immediately loaded or unloaded is no longer a viable alternative.
As it was in previous cycles.
And it was exploited heavily in those cycles, whether that was oh, eight or nine or 10, or 11, or 12, or 13 or 2016 or 2017.
Hence traditional non asset brokers have struggled to have more than single digit load volume growth and what has been the strongest freight demand in history.
It's about value creation, and electronic logs changed economics, and large trailer fleets are finally being rewarded and can mitigate volatility to the additional value that we created to the supply chain.
Further evidence of this trend.
And at the increased resilience in our truckload model is that over 90% of the truckloads that we move.
Involve a trailer pool on at least one side if not both.
It was never that high before this regulation took effect in early 2018.
But we'll continue to speak to the other new growth verticals in coming quarters, particularly the organic L. T. L growth in the fast growing services to third party carriers through Iron truck services.
And in addition to steps that we've mentioned to mitigate the seasonality and cyclicality of our truckload business, our revenues come from more diverse sources than ever.
Over 40% of revenue.
Comes from non truckload services, 14% of revenue is multiyear dedicated resulting in only 43% of our total revenues coming from irregular route truckload service.
Next onto slide number 12.
You can see.
How are changing revenue diversity is leading to a diversity of earnings as well. This 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 Swift merger in 2017 through the first quarter of this year, we're pleased to.
A report meaningful contributions in earnings from each of these areas. It's also like to point out that in 2017 virtually 100% of our earnings were generated by our truckload segment for the first quarter of 2022. This percentage of adjusted operating income has moved to 64% keep in mind that this reduction in our truckload earnings percentage has changed.
At the same time.
We more than doubled our truckload earnings from a 2017 full year combined pro forma at night and Swift earnings of $319 million.
786 million for the full year of 2021.
The chart on the right shows our rolling four quarter adjusted earnings per share since the night and Swift merger. During this time. The EPS has moved from $2 16 per share to $5.24 per share.
Next on to slide 13, it shows the scale of our network across our various brands and services throughout North America. The graphic highlights our locations by brand, including major truckload locations at Knight Swift Abilene bar, none and our L. T O locations of AAA Cooper and Midwest Motor Express.
M. M me also our warehouse locations.
In total as mentioned we have over 200 sites across the U S and Mexico the size and scale of our network allows us to provide end to end services to our customers the opportunity to link various solutions to optimize each brand.
And collectively.
Afford us significant buying power I don't want to say that our network can't be replicated theres just nothing that rivals what we have and we're just beginning to leverage all that can be done with this network.
Next to slide 14.
Just a glimpse into some of our ESG related activities.
Paying ability and being good stewards to all stakeholders, including the community and the environment are important and a priority to us.
We're making progress towards our multiple goals, including the near term goal of a 5% reduction in C. O two grams per mile by 2025.
We've made major investments in safety related technology and experienced a 37% decline in our.
Combined D O T recordable crash rates since 2018.
Supporting worthy community causes and supporting individuals seeking education and training to better themselves have long been part of our culture now more so than ever.
On slide 15 will.
Provide a bit of an outlook.
We see our contract rates continued to be strong.
Which is pulling capacity from the spot market to be locked up in committed contractually.
The extraordinary demand for trailers right now.
Different in 2020 , one we do expect to see and have seen some seasonality. The 2022 produce and beverage are typically the first seasonal upticks in the year, we typically don't see those until middle part of the second quarter, which we would expect to see.
Used equipment is scarce and at all time high prices with very limited access to new trucks or new trailers, all of which is creating a very high barrier for any growth.
Fuel of course further discourages capacity additions at the moment.
Speaking industry wide, we're seeing and expect strong L. T L demand to continue throughout the year.
Driver hiring continues to be difficult the drug and alcohol clearinghouse continues to make the industry safer, but does disqualify a meaningful amount of drivers each month.
The cost of everything is on the rise, especially for those that don't have economies of scale speaking, particularly too.
Small carriers that we might compete with cost per mile has been irreversibly increased in many ways in many areas for a perspective, the peak and rates in 2018.
Seems insufficient to cover small carrier cost today, so that trough.
In rates this cycle could very well be.
Higher than the 2018 peak rates.
I'll now turn it over to Adam for guidance Okay.
Will be our last slide and then we'll jumping to the calls.
Slide 16 outlines our guidance for the full year 2022.
We now expect full year 2022, adjusted EPS to fall within the range of $5 20 to $5 40. This is an increase from our previous quarter guidance of $5 10 to 530.
During the first quarter bid season was robust and we expect full year double digit contract rate increases with larger increases occurring earlier in the bid season, and now moderating as the bid season progresses and spot rates, we expect those to continue to moderate.
We expect tractor count to remain stable through the year with a modest sequential improvement in miles per tractor as we improve our seated truck count.
Strong intermodal margins in the first half of the year, then normalizing into the high eighty's or low ninety's by year end at least half load volumes will grow sequentially and expect to surpass year over year numbers in the second half.
Logistics, we expect that to grow by about 30% with margins in the high eighty's to low nineties.
And it's with L. T L. We're expecting to grow through the year and improve our margins toward the mid 80 goal that we referred to.
We expect other revenue and income to grow when compared to the prior year as well.
There's still going to be inflationary pressures from driver expenses maintenance equipment non driver labor will continue to be inflationary, we're feeling pressure really everywhere in our business.
Gain on sale was elevated in the first quarter, but we expect to see that is still on a much higher level than in a normal year, but begin to moderate in the back half of the year.
And then we expect our net cash capex for the full year to be in the range of $550 million to $600 million with our tax rate to stay around 25% for the year.
So these estimates represent management's best estimates based on current information available actual results may differ materially from these estimates we would refer you to the risk factors section of the company's annual report for a discussion of the risks that may affect results.
This now concludes our prepared remarks, we'd like to remind you that this call will end at 530, Eastern we will answer as many questions as time will allow us again keep it to one question and if we can't get to your questions you can dial 602.
606.
6349, and we'll do our best to follow up promptly.
We will now entertain questions Christian.
Ladies and gentlemen, if you have any questions at this time. Please press star and then the number one key on your Touchtone telephone again that is star one to ask a question.
Your first question is from Jack Atkins from Stephens.
Okay great.
Got it thanks very much for taking my question.
Hi, Jack.
So I guess, let me start with.
Probably the top of mind for most investors on the call.
As did a great job.
<unk>.
The steps you've taken over the last several years to diversify the business make it more resilient to the cyclical ups.
Outside of the freight markets.
I guess as we look forward nobody has a crystal ball, but you know what do you think that translates into in terms of the potential risks to earnings. If we were to go into a more challenging.
Going back to 2019.
Your earnings were down sort of mid teens versus 2018 do you think the changes that you've made the business.
Mute that somewhat as we kind of think about what could come next for the freight markets.
I'll just hand, it over to you and let you kind of talk about that.
Yeah, Yeah, well I think.
The business profile has changed quite a bit and you know I think in those prepared remarks hopefully.
They werent too comprehensive, but we've covered quite a bit of that but I think when you look at our business and you look at the just.
Just a kind of a recap here just to size up really how much we're talking about in terms of volatility.
This will support kind of my my end statement, which is we have trouble finding a trough EPS that doesn't start with a four that's the.
That's ultimately where I'm headed with this but thats quite a bit different than where we were in 2019, but the make up at the end of the business is quite a bit different so if 43% call. It of our of our business is really a regular route exposed and that's when you back away dedicated you back away all the other businesses recognizing that again.
90% of that business is tied to trailer pools, which makes it where there's a relatively small number of competitors that we have that can come in and bring thousands of trailers and a nationwide type type of a bid.
To compete with.
24% of our revenue is variable and that would be logistics and the new arrangements. We have with our rail partners provide some variability for us so, allowing us to be a little flexible in the market and then of course, you've got 13% presently and we have an appetite to continue to grow that both organically and through acquisition, but <unk>.
14% is L. P L. A which historically is is incredibly durable.
And then we got another 6% of other revenues that's growing rapidly that is not really tied to freight rates. So.
So that's that's why when we look at our model and we look at okay, giving up as much as comparing to where we just performed with our truckload business in the first quarter, giving up as much as nine or 10 or points, we still can see our way to the EPS annual number that starts with a for that.
That's significantly different than than any other cycle. We've been part of as we can as we think about our crystal ball and just look out for a moment.
Yeah.
The reality is equipment is very scarce and has a limited useful life and we've not as an industry supplied.
<unk>.
Supply the industry with with enough trucks to really accommodate the aging useful life of equipment.
The Oems are taking any more orders this year for trucks. They havent opened up the order book for 'twenty three yet they are having difficulty delivering on time and add trucks from last year have been pushed into this year and we suspect the same will happen.
As a as they have difficulty there dealers are on allocation right now.
And in previous cycles, where there hasnt been discipline and theres been an oversupply.
What we've seen is we've seen that the dealers are complicit in that as they speculate.
The finance companies, even the banks.
Get a little aggressive in the financing side to this and so.
Those are not those are not happening now another another impact that I'm not sure.
Has been fully recognized is that the large fleets like us we're not trading or small trucks, we're not selling those at a normal pace that we have.
We're accustomed to because we can't replace them with new trucks.
It's preventing.
Introducing affordable 40 year old call. It four to five year old is with a typical large fleet would trade out on the trade cycle, we're not supplying or enabling small carriers to affordably come in and add capacity and the limited number of used trucks, we are selling in <unk>.
Some cases were selling these for us as much or close to what we paid for them brand new before we put 450 for 500000 miles on the trucks, and so which sets up a whole new problem. If the economy is headed for a little soft.
Soft patch in the banks decided to not be so.
Aggressive and the financing them so.
I would say that that watching what's happening with the equipment.
Is maybe the most valuable thing we can look at for the Crystal ball for full truckload now we know that demand has been incredibly high but part of that demand has been <unk>.
Because of urgency.
And you've.
You've had a normally theres six months are sophisticated supply chains are buying products that they import nine months in advance and so things have been more hand to mouth and more urgent and.
And the supply chain and so.
Because you could look at inventory to sales ratios.
And the reality is there there's been a little bit of a dead cat bounce off the bottom, but it's still I think the last number was 1.13, which is well below the one four historical average and so.
I think when we look at.
Whats happened most recently.
And freight rates.
The reports of the death of the freight market, which have been greatly exaggerated.
I think that what we're seeing a little bit of seasonality.
And there isn't the kind of urgency that there has been in the last that we saw last year or really that we've seen for almost a year and a half non stop and so there isn't a lot of urgency theres not a holiday with a deadline, that's driving a lot of this and it.
It'll be interesting to see what seasonality looks like when beverage and produce season come into play, but I suspect that we're back to a world, where we'll see the seasonality of the ebbs and flows and so.
Some of what we've seen here in the first quarter.
Was likely.
You know some of the least efficient freight this was live load live unload and I'm speaking to what we saw happen in the index, which is are the indices that are out there, which is smallest carrier getting a load from a broker and so it's live load live unload it stuff that didn't have commitments and it paid at ridiculous.
Fleet high rates and of course, that's going to be the first stuff to go away. So so I think it's a little early to try and call the defeat the overall market.
Even given the given what I shared about equipment.
But that being said our business is prepared and its been years in the making.
Whether whatever cycles might come our way.
You know in the future Adam anything Yeah, again, I think talking about the used equipment market those that have.
Ventured into it to grow their their truck count from the small carrier perspective their cost structure is very different than where it has ever been and so they can only afford to drop rates to a certain level before they exit our space because they're buying equipment that probably three to four times, what they would have purchased it in the previous cycle. So that's one thing to watch.
Really closely and as Dave mentioned, there's less urgency, but theres still a firm market out there, there's still quite a bit demand to secure trader pool capacity, even looking at some of the indices, although they're off their record highs.
Very elevated when you compare it to.
Prior years or even even averages over a period of time.
Okay Jack.
That was a that was it.
Answers for one question.
Thanks, very much for that really appreciate the time I'll hand it over.
Thanks Jack.
Your next question is from Brett <unk> from Stifel.
Hey, guys good afternoon, and thanks for the time.
You bet Bert.
So Adam you said, you expect spot rates to continue to moderate but ex fuel rates were already down roughly 20% from the peak.
What makes you think they'll continue that that trend will continue to persist and how does that make you assess when you guys get to that four handle.
Well when we were thinking about spot rates for thinking about what we do in our business I think what you've seen some of the indices as really more of a broker to small carrier transaction.
We do spot right now is going to be at a premium to where our contract rates are and as we improve our contract rates, we make more commitments, we will probably see less exposure to spot and probably see those rates come a little bit tighter in to where our contract rates as rates are as.
Maybe less urgency to move goods, but I think what we do on the contract side, which now represents closer to 85% of our low count on a regular route trucking.
That I think it puts us individually, we can offset any impact from the fewer spot loads that we're able to haul.
So not not a follow up just a clarification you werent, making any sort of prognostication about spot rates from here, you're just talking about sort of how you guys are switching to contract yes.
Yes, I think we're just thinking about the progression of the market and how we would navigate through it and how it impact our business in the back half of the year, Yeah. So yeah. So Bert.
Comment is not tied to what we think will happen with D. A T rates or internet truckstop sourced or any other derivatives of those on the.
That relationship between small carriers and brokers yeah. We don't we don't participate we don't get those kind of spot rates through brokers and so.
In that World, we think that you'll see some seasonality, which is part of what we've seen already and so yeah. I think the comment that we talk about moderating is as we have been we've had the throttle a little bit more opened.
In terms of a percentage of our revenue that is more in that spot basket.
And that is that we are seeing very strong contractual renewals and I would even dare say stronger than we would've expected.
And and that is that is naturally pulling some of that spot that very high spot into a longer term more durable.
Contract arrangement. So there are two different things. So please don't take that as a.
Industry wide prognostication.
Thanks, Dave Thanks, Adam.
Yeah.
Your next question is from Ravi Shanker from Morgan Stanley .
Thanks, So first of all gentlemen, thank you so much for bringing the conference call back kind of generally mean that you want to go at it.
Let's hope we don't really next question.
But just.
Just wanted to focus a little bit odd power only your commentary there was.
Could it be powerful as it has been the last several quarters.
Do you see a long term shift in the would've been a traditional quote unquote brokerage market away from the asset light brokers towards the asset heavy carriers because of power only what does this look like and what does the long term margin in that business look like.
Yeah Ravi Thanks for the question.
Yeah.
Yeah, we've seen a shift I mean this is the first time, where you've had such strong freight demand in <unk>.
And truthfully the non asset broker.
As has been somewhat on the sideline thats not marginalized in this.
We kind of have this new term, we referred to which is traditional broker within our own.
Logistics business, we kind of have the traditional brokerage, which which we.
To some degree of running to stand still like some of the other large ones, where it's hard to get above its single digit load volume growth. Meanwhile, we have our power only business that.
That represents give or take 40% of our logistics revenue.
And we see we saw load count improvement year over year in the first quarter of 166% and so now collectively our logistics business was up about 77 or 76, 9%. So that gives you a sense of what the pace is and keep in mind.
This is at a time where.
We're small carriers have opportunities other opportunities to haul loads and so they're choosing to come in you saw that our gross margin for our logistics business was 22% I can tell you that the power only margin was higher it pulled that average up.
The average for the traditional brokerage was was much lower and so this isn't a case, where we're we are artificially propping up or were in some way cannibalizing.
Our business to make this work and so there is there's no doubt that there is there is demand from both sides from small carriers to participate in freight that they used to be part of but no longer are because of shipper preference and demand to use trailer pools. So they have two days to unload.
Our load as opposed to two hours to unload and load and so there's no doubt that those forces exist. The question is how.
How do you eat efficiently.
Facilitate a platform that can serve both of their needs while at the same time, serving our need to get a return and that's what we're doing and that's where we have technology that we've been developing that we've been acquiring.
That will help us to facilitate this and so the difference for US is we don't have X number of trailers that we've allocated to this.
We have as we've mentioned about five times so far in the call. We have 71000 trailers, we're going to keep talking about that if all goes well this year, we're going to add more than 10% to our trailer fleet.
We should receive that based on what we what we think our schedules will allow and so.
So it's going to continue to grow and so.
If we have this kind of demand and the strong environment, we feel like there are ways, we can transition and.
And make that even more appetizing and appealing.
And an even more difficult environment. So it is very much a different.
Offering to your point. It is it is very much a different offering and is a tale of two cities in terms of one the traditional old school live load live unload way that is struggling struggling to grow versus this that we almost cant slow it down so rob.
Ravi just talking to customers.
I was just talking to customers.
The value proposition is so different than a traditional broker who arent visit bringing equipment and some customers limit how much of their business. They will allow to actually go to brokers.
Because they because they want people with assets and when we come with a logistics sell that involves trailers that is not put into the brokerage bucket. They allow for as much growth in many cases as they can get from that service because it allows for them to keep the fluidity of that network, which has become so much more important to supply chain and it really ever has.
And.
Ken.
And you're confident that this is not just a course of the last cycle I mean does it go to state right.
This is this we believe this is here to stay because this is a function of a regulatory change that took effect technically December 18th 2017, when electronic logs were mandated enforcement I don't think started until like April of 2018, but.
But on that day in December and our brokerage we had the smallest of carriers demanding to be.
Paid or unloaded within two hours and all of a sudden the industry began to charged attention because the truth is that regulation should that change should have happened January four 2004, when the when elect when the hours of service rules were changed that's when we saw that and if you look at most carriers when you are.
Just comparing a solo driver in the truck, we saw somewhere between eight and 10% of miles per truck productivity just disappear.
So the fleets that had ways to audit against the logs that we didn't have <unk> in the trucks. They hadn't been developed to the to the level that they that they eventually were.
But for just trying to live up to that hours of service change, where you can't stop the clock.
Guys. We felt that we felt the impact and we saw our detention go up and we saw it become much more difficult to compete frankly since 2004 until 2018, because we were largely competing with in some cases large brokers were three pls debt that we're dealing with small carriers.
Perhaps.
Had more flexibility, we'll just call it that with the log book than what those of US that we're living by the 2004 rule and so now the 2004 rule is finally being enforced.
And it's dramatically changed the economics of trucking because.
This is a penny business and on many backhaul lanes.
At charge, an extra $60 $60 on a on a 350 mile length of haul back haul load youre talking about a 50% increase because it took you three hours to unload instead of two hours and so historically that small carrier was kind of the rubber band and the customer that didn't have.
To pay for that kind of inefficiency and they they just weren't built for it and they probably didn't even realize how much how inefficient. It was and so of course in 2018, we had immediate overnight tightness because you had these carriers happening to drive less miles, perhaps 8% to 10% just like we had seen back in <unk> four and so.
This is not this is not a fluke of of the pandemic in fact, if you look at the 2019.
Look at what happened to spot rates and contract rates in 2019 spot rates were off about 50% contract rates were off about 5%, it's never been that wide of a gap between those two.
And you know.
The big the Big difference was contract rates are largely.
Nearly nearly all today, but back then were largely trailer pool connected and so so Ravi if you look at we talk about iron truck services that we see that kind of growth in the other reportable. We're now a couple of years into developing.
For example, the maintenance network, where we're doing maintenance out of 29, or so shops or we're underwriting insurance for.
Wins of carriers now.
And we're really addressing the pain points for these small carriers because the nature of our relationship with third party carriers is evolving and changing it's becoming less transactional as it normally wasn't a non asset broker world, where you can take a margin off of desperation, when a small carrier needs to move.
And that does that's not 100% of how brokerage work, but that's a lot of the broker load. So that's how that works and so we are finding ways to create more of a win win and dare I say consolidation and that's that's where this is headed.
And and so we're able to help them, we're able to leverage our size and scale to bring some of these benefits to them that ultimately we believe can lead us to more competitive pricing, which can be more enduring and up and down cycles and give us the kind of variability that we're looking for so what you have.
Now I hope is is that these things are not unrelated.
Ultimately efficiency wins, the day, which is why trailer pools R. R.
Such high demand from the supply chain. It is so much more efficient and so we are bringing other efficiencies to these small carriers because in the end, we think that will allow us.
To be even more efficient in the kind of pricing, we can offer long term growth.
Great. Thanks, Steve Madden.
Thanks Robyn.
Your next question is from Todd Fowler from Keybanc capital markets.
Hey afternoon, Zach on per ton.
Okay sorry.
Sorry, it's not exact but a question on LPL.
So solid growth in terminals during the quarter I guess, how do you guys think about your ability to continue to grow that business organically through the year and that through leveraging existing locations or maybe just additional terminal adds and if that's the case is there a cadence we should be thinking about in terms of those ads quarterly.
Conversely, just kind of your general thoughts on the M&A environment and LPL.
Yeah.
Yeah, Paul Thanks for the question.
We as we noted we picked up six new facilities and these are these are in existing <unk>.
<unk> terminals there.
Ben <unk> terminals in the past and so theres a little bit of work will do to get these things ready to go and embrace those and so.
We will have a couple of those hopefully will get get get rolling with them, but before the end of the second quarter and then between Q3 and Q4 will continue to add some more and and there may be a terminal or two that.
Don't really come into full life until maybe even early next year and so we saw an opportunity to pick those up which we did.
You know Adam in his remarks mentioned.
About how connecting just the AAA Cooper and the MLB network is leading to revenue opportunities.
We're seeing that I mean, we this was by far the our best performance.
In our limited time, so far in our nine months that we've been in the <unk> business.
And if you were to break it down you know January and February , particularly in the southeast suffered quite a bit of inclement weather and so.
There were at least five weeks between in January and February where we are.
Where were we were not where we would have normally been.
March was perhaps the best in history.
And we brought that momentum into the second quarter. So when you look at that that mid 80. So are.
March March helped significantly there so we're starting to see the impact of these of working together, we're starting to see the impact of some customer introductions.
And increasing just organically the volume and we're seeing improvement in the rates were.
A way to think about this as we're going from two regional businesses to you could maybe say, we now have a super regional.
L P L presence and we're on our way to a national presence in.
And it appears that that the pricing when you can be superregional, there's pricing opportunities with that when you can be national.
Theres, even more pricing opportunity that can come with that so.
So we're just we're just getting getting going in and exploring that and so.
Adam anything else I think asked about yes, so growth cadence throughout the year, yes, as I mentioned nearly refining customer synergies and when you look at that.
The customer base of our truckload business. So those are very large shippers and many of them are not in the AAA or NME portfolio. So as you make those introductions what rate those are big wins big opportunities to grow and diversify the freight mix in those businesses and we've seen several several of those wins.
That are starting to scale and we will see more and more of those as the quarters.
Progress and so we're excited about that and then.
We will bring in the M&A team onto the AAA system. So we have better connectivity to the customer more fluidity to the network.
There's a lot that can be done that that wasn't.
Nick did versus two separate systems. So we're excited about that and I think whats most encouraging is that the.
Mmk team and the AAA team are on the same page and they're working hand in hand.
Find the best way to develop the most fluid cost efficient effective LCL network and as we bring on other LCL providers, which are that's our desire. That's our plan. We have now a roadmap to be able to do that and to know how that could work.
Great appreciate it.
Thanks.
Your next question is from Amit Mehrotra Deutsche Bank. Your line is open.
Thanks, Operator, Hi, Dave.
Hey, Dave Hey, Adam.
So I just wanted to ask you I guess a couple of quick questions. If I could first one.
The operating ratio last year high Seventy's, even mid Seventy's at some point last year. Obviously, you showed the power of the model the power of the switch to integration in a really really good market.
What does that look like at the other end of the spectrum in a in a really bad market.
The one I'm not calling for that you guys aren't calling for that but clearly I think that's an important question in the context of conversations today and then the second related to that Adam you talked about rejections coming down due to higher contract rates that makes entirely good sense from a carrier's perspective, but what I'm wondering is have shippers.
Tendered less volume because of what's happening in the spot market doesn't appear that way because of you know.
The the the drop and hook or the trailer pools, but if you could just talk about at what point do you think have you seen any indication of the shippers moving away from tendering volumes that they've committed to because of what's happening in the spot market.
So real quick I think Dave touched on it a little bit on the potential downside, particularly on the truckload side.
The way we look at that is.
We expect the full truckload segment, which includes the swim business in the night business in a difficult market to operate in that mid <unk> operating ratio consolidated including our dedicated and a more normalized environment. Maybe that's 80% low 80 is in a good environment like we are in your operating in the seventies.
And consistent with how we performed in the night business through cycles, when we think about 10 years.
Again, as David alluded to Theres less of the urgency in the in the system and so a lot of times. They rejections, we see ore and others will see the same load their tendering it to as many people as they can until they can get someone to accept it and so now as well.
The customers have been willing to make concessions on contract rates more commitments are being loaded in the systems for these carriers and they are accepting more loads and so there's there's no longer the waterfall that these loans have to go through and get tendered out to multiple carriers to see who has capacity to pick it up.
Think that has.
The greater number of commitments being made has helped that.
And I would say a bit where we.
We watch really closely kind of.
What what the response in behavior and demand is from our customers and we've already seen where some of those that started the bid season late last year and finally got through to tender the awards in the first quarter, which those would be the earlier ones.
We've already seen where.
It appears that.
That those bids.
They didnt get as many commitments as they would've hoped because we immediately see many bid following the normal bid.
That in essence was seeking commitments on what had just gone through the system and of course.
Of course that.
Second round typically comes with much higher rates because they were already increases in the first one but that many bids follow on typically is even.
Even higher and so you know.
We're still seeing that and we have been seen that we saw that all through 2021, we saw that through the back half of 'twenty, but really the bid season of 'twenty, one which was a year ago that was the norm and so.
We're still seeing that today so.
It speaks to the fact that they are just the kind of capacity that they need in their supply chain. So just it's become scarce and if you'd look at.
Irregular route capacity.
Particularly on a larger scale, which would include.
Having access to <unk>.
Trucks and trailers in about every market.
Even the large guys don't doors goes along with it can really provide that but the large truckload players have been moving away from irregular route full truckload and <unk> been moving maybe into the arms of dedicated a little bit more or something else and so.
So there just isn't as much of that now that's.
That's our bread and butter I mean, we love, we love that we're very comfortable with that.
And it arguably is the most valuable to the customer and so I.
That's that's what that's what we continue to see so.
I think one has to be careful and extrapolating too much on a.
On data that comes from a load board when the high quality capacity.
And the kind of capacity that the majority of the shippers in this country look for.
We're not on load boards looking for loans.
Right, Okay very good thank you very much.
Your last question is from Tom lot of Wix. Please state your company affiliation and your line is open.
Yeah, Hey, Dave Hey, Adam.
Thanks Christy.
Yeah, Tom from UBS, you you got it thank you.
And thanks for doing the call it's great to hear.
Here you guys live in.
So I appreciate it.
I wanted to.
Just get your thoughts on use of cash you generated a lot of cash in the quarter I think clearly there's an intention to it.
Spanned these.
Non irregular route truckload businesses more aggressively.
How do we think about the most likely uses of cash I know when you do M&A, it's hard to forecast when that happens but.
Are you optimistic on.
Doing L. T. L deals. This year are you thinking there other types of deals or just whats your kind of lay the land and most likely uses of that.
Pretty significant free cash you have and balance sheet capacity.
Yeah, well thanks, Tom.
Yes, the cash flow creation is is astounding in probably.
I don't know Dare I say underappreciated, a little bit I mean, when you look at over $900 million of free cash flow generated last year or in our first quarter $352 million.
It's significant.
If you look at where our debt is our debt is at.
At the low end, if not slightly below our what our target capital structure with habitat. So.
We're definitely poised to continue to make investments.
We would love to grow with LPL, but.
But we will only grow as fast as <unk>.
As a reasonable opportunities present themselves and so we're going to continue to execute we're really we.
We did two deals in six months and so we've been.
Been digesting those in and I think one of the most compelling things that we have for future L. T L deals.
His success.
With the current partners that we have right now.
And proving proving out that this can work readout.
AAA Cooper he gives us.
A great example, talking about how you know.
The load to get picked up in Birmingham, Alabama are picked up by AAA Cooper and just as they would've expected in those loads might be delivered in Bismarck North Dakota loads delivered by <unk>.
And then me, which is exactly who they expected to deliberate and behind the scenes, where they're connecting networks and making it all happened behind the scenes.
Very few people have ever done it quite that way certainly nobody has done it that way on a nationwide scale using those different brands in those NME drivers they enjoy driving for MMA Likewise for AAA Cooper so.
The fact that we're having success. The fact that we just posted an 85 nine or.
With continued revenue growth that's powerful for other.
Other our other families or individuals that own. These other LDL regional <unk> business as they put their heart and soul into it and the fact that they can look and see what we're doing we think stands as powerful evidence. So we're going to continue to do that hopefully put some money to work and L. T L and continue to look for.
Other deals that connect and help us diversify and become.
A stronger industrial growth company now.
Along the way.
When our stock price gets attractive.
You can expect that.
Bill.
We will take advantage of an opportunity to buy back some shares.
As you know vary but feel like very discounted p/e multiples, so bought back almost $150 million worth of stock here in the first quarter and and you know at some point it could be that we just generate so much cash that.
But we continue to look at the dividend as well, but the priority is investing in our current business and making acquisitions.
Thanks, Tom for the question everybody else point, we appreciate we appreciate you joining our call this afternoon and.
Everybody be safe.
Ladies and gentlemen, this does conclude today's conference call. Thank you for participating and have a great evening.
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Okay.
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