Q2 2022 Knight-Swift Transportation Holdings Inc Earnings Call
Speaker 1: Center. Please hold for the next available operator.
Speaker 1: Welcome to the Comprehencing Center. Please hold for the next available operator. Welcome to the Comprehencing Center. Thank you.
Speaker 1: Welcome to the Conferencing Center. Please hold for the next available operator. Welcome to the Conferencing Center. Please hold for the next available operator. Welcome to the Conferencing Center. Please hold for the next available operator. Welcome to the Conferencing Center. Please hold for the next available operator. Welcome to the Conferencing Center. Please hold for the next available operator.
Speaker 2: following our commentary, we will answer as many questions as possible. We will get to one question per participant.
Speaker 2: And if we are not unable to answer a question during our call, we will, you can call us at 602, 606, 6349. And again, it's one question per participant. The 3-4-9, again, it's one question per participant.
Speaker 2: To begin, we'll move you to slide two.
Speaker 2: We're all read to disclosure.
Speaker 2: 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 10K filed with the United States SEC. The company's annual report on Form 10K filed with the United States SEC.
Speaker 2: or a discussion of the risks that may affect the company's future operating results.
Speaker 2: actual results may differ.
Speaker 2: Now on to slide three.
Speaker 2: The charts on slide 3 compare our consolidated second quarter revenue and earnings results on a year-over-year basis.
Speaker 2: We continue to generate meaningful revenue and income growth both organically and through acquisitions and demonstrate the operating leverage of our business.
Speaker 2: Each reportable segment grew revenue double digits and expanded margins, which ultimately led to a 49.1% increase in revenue, and a 66.1% increase in adjusted operating income on a consolidated basis.
Speaker 2: Gap earnings per deluded share for the second quarter of 2022 were $1.35, which represents a 46.7% improvement of the prior year. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
Speaker 2: Our adjusted earnings per share came into the $1.41.
Speaker 2: Both GAAP and adjusted earnings per share include a $33.8 million pre-tax loss in other income or expense from an unrealized mark-to-market adjustment in our investments related to MBARC technology.
Speaker 2: The loss reduced both the GAAP earnings per diluted share and the adjusted earnings per share by 16 cents.
Speaker 2: Now onto the next slide.
Speaker 2: Slide 4 illustrates the revenue and margin contributions for the second quarter and unit date periods for each of our segments.
Speaker 2: The chart on the right highlights the percentage of revenue during the second 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 and maintenance, equipment leasing, and warehouse services.
Speaker 2: We are encouraged by the significant contributions from each of our segments.
Speaker 2: Our truckload business continues to run with an operating ratio of the 70s.
Speaker 2: Our LCL business showed great improvement and ran in the 70s for the first time. Our logistics business was in the low ages and our intermodal business achieved double-digit margins. In our intermodal business achieved double-digit margins.
Speaker 2: Across all of our brands, we have a tremendous team of drivers, shop technicians, and office personnel. Our team continues to act with agility and move with the market. We anticipate changes in the environment and pivot our strategies accordingly.
Speaker 2: We have invested in technology that allows us to efficiently leverage our assets throughout multiple segments including truckload, logistics and LTL. us.
Speaker 2: Technology has been a meaningful factor in how we've been able to not only significantly grow our logistics business, but do so while expanding margins.
Speaker 2: We're also leveraging technology to connect our AAA Cooper and MME LTO networks as well as build a connection to our truckload network to leverage revenue opportunities across segments.
Speaker 2: Certainly, we have more technology to develop, but between our ability to connect our systems across brands, our enhanced visibility and utilization of trailers, and the actual insights our reporting capabilities provide our team, we're leveraging tech to successfully navigate the market, execute our strategies, and deliver on our relentless efforts to be the most productive and have the lowest operating costs in the industry. And we have more than one of the most productive and most productive and have the lowest operating costs in the industry. We are now in the industry. We are now in the industry. We are now in the industry. We are now in the industry.
Speaker 2: Our strategy continues to focus on diversify our business while improving both marching and revenue in each segment.
Speaker 2: During the second quarter of 2022, our truckload segment grew revenue 11.2% year-over-year, but as a percentage of total revenue moved from 72% in the second quarter of 2021 to 57% in 2022. This is a result of our continued focus on growing our logistics at Intermodal Services, our progress towards building a nationwide LTL network, and the development of new revenue streams that provides expanded services to third parties.
Speaker 2: The next few slides will discuss each segment's operating performance starting with truck load on slide five.
Speaker 2: On a year over your basis, our truckload revenue, excluding fuel surcharge, grew 11%, while our operating income grew over 22%. Our adjusted operating ratio of 78.9% was a 200 basis point improvement over the prior year and it was the fourth consecutive quarter in the 70s. It was the fourth consecutive quarter in the 70s.
Speaker 2: During the quarter revenue protractor grew 11.1%, driven by a 21.2% increase in revenue-perloaded bile.
Speaker 2: and a 6.6% decrease in miles per tractor.
Speaker 2: Our miles per tractor continue to be negatively impacted by our intentional shift to a shorter length of pole and a higher unseated truck count year over year. And a higher unseated truck count year over year.
Speaker 2: Recruiting and retaining drivers continues to be a challenge, but we are seeing improvements sequentially in our ability to recruit drivers.
Speaker 2: This has allowed us to make progress towards reducing the number of unseated trucks and slow the reduction in productivity year over year. and slow the reduction in productivity year over year.
Speaker 2: Rate demand followed normal seasonal trends but was generally strong throughout the quarter. As we make more commitments, we are seeing higher tender acceptance levels and fewer non-contract opportunities.
Speaker 2: As spot rates have declined, we have increased commitment levels with our customers and have reduced our exposure to the spot market.
Speaker 2: We are seeing strong demand from our customers to secure trailer pool capacity through our truckload and logistics segments.
Speaker 2: We continue to invest in our already industry leading trailer network, which grew sequentially by 1700 trailers to just over 73,000 trailers.
Speaker 2: We believe our scale in trailers is a competitive advantage and provides our customers capabilities that are extremely difficult to replicate.
Speaker 2: As I mentioned on the previous slide, our investment in technology has allowed us to seamlessly leverage trailers across our over-the-road fleets, our dedicated operations, and logistics business to provide our customers with ample trailer pool capacity.
Speaker 2: down onto slide six
Speaker 2: Now this slide may be one of my favorite slides for the quarter, as our LTL businesses have made significant strides in increasing yield, managing costs and expanding margins.
Speaker 2: For the corridor, Revenue Excluding Field Surgery Charge was 224 million, and the adjusted operating come was 47.8 million.
Speaker 2: When Trip Lake Cooper joined the K&X family last year, one of our stated goals was to improve the OR performance from the high 80s to the mid 80s over a three year period.
Speaker 2: To achieve a 78.7 OR just one year after the acquisition, while also adding MME to the business, is remarkable in our opinion.
Speaker 2: We have been extremely impressed with the leadership at both AAA Cooper and MME on how open-minded the teams have been in working with the KNX leadership, as well as with each other in developing the strategy to leverage the now enhanced scale of the network.
Speaker 2: The teams have been aggressive at capturing both revenue and cost energies and are rapidly moving towards harmonizing the network through AA Cooper's footprints in the southeast and M&M East footprint in the mid and northwest portions of the US. The M&M East footprint in the mid and northwest portions of the US.
Speaker 2: We continue to maintain separate brands while working towards connecting these networks.
Speaker 2: which we believe will create additional revenue opportunities and improve margins.
Speaker 2: And we believe this approach is very welcoming to other LTO companies who may choose to join the network.
Speaker 2: We are very encouraged by the LTL results and our conviction for synergy achievement continues to grow.
Speaker 2: We have identified several locations to develop or span our LTL footprint to the rest of the year on an organic row side. We've spec'd to add 300 additional doors at nine new or existing facilities. We've created an?? as a member of 7 class you
Speaker 2: Also several additional projects have already begun and are in various stages for 2023 and beyond.
Speaker 2: Now on to slide seven.
Speaker 2: Our logistics segment continues to grow to rapid pace while expanding margins.
Speaker 2: Despite fewer spot opportunities, our logistics load volumes increased 48.2% year over year with our power-only service offering growing 96.7%. With our power-only service offering growing 96.7%.
Speaker 2: Gross margin also expanded to 24.4% in the quarter compared to 15.7% last year, leading to an 82.2% adjusted operating ratio.
Speaker 2: This revenue growth combined with improvements in gross margin that the 44 million in operating come, which is more than a 200% improvement for the quarter.
Speaker 2: Demand for our power-only service offering remains strong and provides a strategic advantage compared to traditional brokers. Poly olu?ant Agro consequences
Speaker 2: Our expansive trailer network allows our customers the ability to optimize their own warehouse space in labor costs.
Speaker 2: Third party carries preferred power only business because it saves them hours at each load and unload location. Loads are capital investment and risk, reduces their operating costs, and gives them access to freight and the historically wouldn't be able to participate in. The historically wouldn't be able to participate in.
Speaker 2: We continue to be excited about this business.
Speaker 2: We 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 equipment.
Speaker 2: The intermodal results are included on slide eight.
Speaker 2: Operated income increased by 143.8% as the operating ratio improved from 95% to 89.3%.
Speaker 2: While rail service remains a challenge, we did see meaningful improvements in street and rail velocity in many corridors.
Speaker 2: Volumes in the beginning of the quarter were negatively impacted by longer container and chassis dwell times, as well as Inc. Cicent Rail Network Speeds.
Speaker 2: These factors contributed to a 39.2% increase in revenue per load, partially offset by a 39.2% decrease in load count.
Speaker 2: Labor challenges within the rail network appear to be softening, leading to improved notification times, and more consistency for our customers. And more consistency for our customers.
Speaker 2: We have made meaningful progress in expanding margins as we monetize our underutilized containers while we were transitioning rail partners.
Speaker 2: We have pulled some of these containers back into our operations and we'll continue to do so in 2023.
Speaker 2: We expect load volume to increase and margins to remain double digits in the back half of the year. We have used the recent bid season to develop a freight network that better aligns with the Union Pacific Network.
Speaker 2: with much of that volume coming on throughout the third quarter.
Speaker 2: Additionally, we continue to make investments in the growth of this business and added 450 containers in the second quarter and planned to add an additional 1,500 throughout the rest of the year. Throughout the rest of the year. Throughout the rest of the year.
Speaker 3: I'll now turn it over to Dave. Thank you, Adam, and good afternoon everybody. Slide nine illustrates the strong growth in our businesses that are included in the non-reportable segment. This non-reportable segment hasn't been a great focus of analysts or investors over the years, but it is now building as one of our fastest growing segments.
Speaker 3: For the quarter, we had a 91.8% increase in revenue, and a 615% increase in operating income. We link to v!'s Q&A EU in the 2genes to opens 35% and, when moving back to 22, alsoChildurs. and often large numbers of children have sorted the listening screen. Bashart of??ach was a soldering up sample for twice The child needed pregnancy-related investigated by an actual patients prior to receiving birth date secure But personally, it is also able to present families registered on public health you
Speaker 3: These increases in revenue and earnings is from our overall strategy to develop the central services for third-party carriers.
Speaker 3: We have three primary objectives in these carrier services. First is to introduce new profitable revenue streams with lots of growth runway that further diversify our company. And that further diversify our company. And that further diversify our company.
Speaker 3: Two is to leverage existing expertise.
Speaker 3: In areas where we've proven industry leading results such as risk management, maintaining equipment and purchasing. In areas where we've proven industry leading results such as risk management, maintaining equipment and purchasing. In areas where we've proven industry leading results
Speaker 3: Many of these services are branded under our brand of Iron Truck Services.
Speaker 3: And number three, to provide these services in a way that benefits the relationship that we have with small carriers, as we build a much, much larger network using their power with our trailers and freight network.
Speaker 3: We have found tremendous interest in our offerings from third-party carriers that are interested in purchasing insurance and maintaining their equipment in our nationwide shop network or 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 is on pace to generate $500 million of revenue this year with projected operating income.
Speaker 3: and contribution from the businesses that make up our non-reportable segment.
Speaker 3: On slide 10, we illustrate the progress.
Speaker 3: of the intentional changing of the composition of our overall company into an industrial growth company.
Speaker 3: 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 night in Swift merger in 2017 through 2nd quarter of 2022. The chart on the left shows the percentage of adjusted operating income from each of our segments through 2nd quarter of 2022.
Speaker 3: We're pleased to report meaningful contributions in earnings from each area as noted on the graph.
Speaker 3: These diversification efforts make us a less volatile company and we expect will help us mitigate the downside through truckload freight cycles.
Speaker 3: Our truckload earnings now represent only 61% of earnings, which represents a meaningful shift from where we were in 2017 is noted in the graph when we did the night and swift merger.
Speaker 3: Please keep in mind that this reduction in our truckload earnings percentage of the total has changed while at the same time we have more than doubled, almost tripled our truckload earnings from a 2017 full year combined Pro Forma Knight and Swift earnings of $319 million.
Speaker 3: to 870 million for the second quarter, in 12 months.
Speaker 3: in 2022.
Speaker 3: The chart on the right shows our rolling four quarters adjusted earnings per share since the Knight & Swift merger. During this time, the EPS has moved from $2.16 per share to $5.67 per share for the trailing 12 months.
Speaker 3: Next to slide 11.
Speaker 3: Strong earnings have driven increases in our free cash flow, which was $1.1 billion through the second quarter over the trailing 12 months. Year-to-date, we have used cash to increase our dividend to shareholders by 20%, repurchase $300 million worth of shares, and pay down $86 million in long-term debt and leases.
Speaker 3: Since the 2017 Swift merger, we have invested 1.6 billion in acquisitions.
Speaker 3: Making acquisitions remains a high priority for us. 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.
Speaker 3: We are constantly evaluating morphine conditions to maximize our use of cash to create value for shareholders. We are constantly evaluating morphine conditions to create value for shareholders.
Speaker 3: Slide 12 illustrates the trend of return on net tangible assets. Our Q2 trailing 12 months return.
Speaker 3: is 24.8%, which is a substantial improvement from the 17% return we achieved during the peak of the last freight cycle.
Speaker 3: These results reflect our focus on 1. Growing our less asset-intensive businesses, 2. Acquiring and improving businesses, and 3. Expanding margins in existing operations.
Speaker 3: On the truckload side, we have focused for the last four years on growing our less asset-intensive and variable cost-based lines of business.
Speaker 3: We've expanded our traditional logistics brokerage, created a power only service offering, created brand new revenue streams as have been mentioned with iron truck services and expanded our warehousing services.
Speaker 3: We are seeing significant improvements in revenue and income growth in each of these areas.
Speaker 3: Over the years, we've demonstrated our ability to effectively acquire and improve truckload businesses.
Speaker 3: More recently, we have demonstrated our ability to improve a logistics business and tap into synergies.
Speaker 3: between truckload and LTL. Now we are supporting mutually or mutual acquired LTL companies as they connect their networks while preserving brand culture and relationships.
Speaker 3: We could not be more encouraged.
Speaker 3: with the progress of the two LTL organizations, Triple A Cooper and MME.
Speaker 3: and the opportunities ahead in building a connected national
Speaker 3: LTL offering.
Speaker 3: In addition to the strategic acquisitions, we continue to improve our core truckload business and our existing assets to generate additional revenue. For example, we now have over 6,000 trailers in our leasing program.
Speaker 3: We believe our focus in these three key areas, leverages our core competencies in areas of opportunity that are unique to us, that will allow us to continue to generate significant returns to our shareholders.
Speaker 3: Now on slide 13, we have our second half of 2022 outlook.
Speaker 3: We expect that demand may moderate as the consumer digest and deals with higher inflation and uncertainty in the economy.
Speaker 3: We expect continued decline in non-contract truckload opportunities.
Speaker 3: We acknowledge that we have less visibility on peak season surge as compared to the previous two years.
Speaker 3: customers continue, we expect that customers will continue to secure trailer pools as they maximize efficiencies in their supply chains.
Speaker 3: A capacity is clearly under pressure. We expect contraction and supply, and already seen it. We expect contraction and supply, and already seen it.
Speaker 3: and expect that to continue as the year proceeds, as carriers deal with depressed.
Speaker 3: Spot rates.
Speaker 3: combined with high energy fuel prices.
Speaker 3: Higher maintenance and equipment costs.
Speaker 3: rising interest rates.
Speaker 3: which not only makes it difficult for those that are highly leveraged but also disincentivizes new entrance to the market. When jump roach, open the car and get a perspective, the car can continue to do what we could now, market.
Speaker 3: We also expect LTL demand to remain strong with increases in revenue per 100 rate remaining in the double digits on a year over your basis. We also expect to remain strong with increases in revenue per 100 rate remaining in the double digits on a year over your basis. We also expect to remain strong with increases in revenue per 100 rate remaining in the double digits on a year over your basis. We also expect to remain strong with increases in revenue per 100 rate
Speaker 3: We anticipate that sourcing and retaining drivers will continue as it has been, continue to improve as we have seen thus far.
Speaker 4: as
Speaker 3: It has been particularly challenging for small carriers and we are seeing signs of drivers looking for new opportunities. Thank you for new opportunities. Thank you for new opportunities.
Speaker 3: We also expect inflationary pressure on driver-related costs, the equipment costs, cost to maintain equipment, labor.
Speaker 3: and several other items.
Speaker 4: And...
Speaker 3: Lastly, we expect the used equipment market to normalize.
Speaker 3: as small carriers exit with little interest from new entrants and increase difficulty in securing credit for smaller carriers.
Speaker 3: I will now hand it to Adam to finish up with our guidance.
Speaker 2: Thanks, Dave.
Speaker 2: So our last slide of our prepared remarks, slide 16, as outlines are guided for the full year 2022.
Speaker 2: We now expect full year 2022 adjusted EPS to be within the range of $5.30 to $5.45 which is an increase from our previous orders got into $5.20 to $5.40.
Speaker 2: We expect the moderating spot market to provide less non-contract opportunities during the second half of the year. This may result in rates turning negative year over year, late in a third quarter, and continuing into the fourth quarter. This is a result of a more difficult comparison rather than rates meaningfully declining sequentially.
Speaker 2: So it's just a difficult column from a year ago.
Speaker 2: We expect tractor count to remain stable throughout the year with maybe a modest sequential improvement in the miles per tractor as we improve our seated truck count.
Speaker 2: LCL is expected to grow revenues through yield management and shipment growth while improving margins year over year. Logistics revenue per load will moderate sequentially but will be more than offset with increased load volumes and most likely operates with an operating ratio in the mid to high 80s.
Speaker 2: Intermodal margins will remain double digits and we expect to see volumes begin to improve on a year-over-year basis in the third quarter.
Speaker 2: We expect other revenue and income to grow when compared to prior years as outlined on slide 9 of this presentation.
Speaker 2: As Dave mentioned, we expect to fill inflationary pressures from driver expenses, maintenance equipment and non-driving labor that will continue.
Speaker 2: Respect total gains on sale from equipment to being the range of 20 to 25 million for the back half of 2022, as the use equipment market continues to moderate. And just to clarify, we're saying 20 to 25 million, we're not saying 20 to 25 million per quarter, the 20 to 25 million is the total for the back half of the year. I just want to clarify that.
Speaker 2: Rising interest rates could negatively impact earnings by 5 to 7 cents per share during the second half as compared to our previous forecast.
Speaker 2: And our net cash cap X for the full year is expected to be in the range of $550 to $600 million, which is unchanged from the previous quarter. And again, our tax rate is expected to be around 25% for the full year.
Speaker 2: 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 factor section of the company's annual report or discussion of the risk that may affect results.
Speaker 2: Now this concludes our prepared remarks. We'd like to remind you that this call will end at 5.30 Eastern time. We will answer as many questions as time allows. Please again, keep it to one question.
Speaker 2: And if we're not able to get to your question due to time constraints, please call 602-606-5
Speaker 2: 6349 and we will do our best to follow up promptly.
Speaker 2: Sylvie, we will now entertain questions.
Speaker 3: equipment prices bottom out and so they can save themselves from a lot of maintenance costs by getting into another truck. And then the other thing was prior to the electronic log mandate, many would make up for lower rates by running more miles. And that simply isn't an option that's available. Of course, when you run more miles you create even more supply at a time where it was
Speaker 3: 2018 be an unbelievable year when demand really didn't change much of any between 17 and even to 19, but we had this huge surge in 18 and this huge drop off in 19, all self-induced because of supply, oversupplying into 18 and then 19 became difficult. Now it wasn't nearly as difficult for the big guys because electronic logs...
Speaker 3: was one of the big reasons why there was the surge in 18, because people could run less miles and you couldn't double down and run even more miles in an oversupplied environment. So we have that going on as a backdrop that is different than any cycle prior to 2018. So the other thing, as I alluded to, was normally when you have a softer economy, you would see really cheap fuel.
Speaker 3: you know in 2020, summer of 2020, we saw some of the cheapest fuel we've seen in and certainly in oil prices maybe an ever are in the modern era. And so small trucking companies, it was a huge boom to them even though a lot of the country was shut down due to COVID, they had this huge lifeline that kept them along. Well right now, high energy prices.
Speaker 3: is a huge hurdle for small carriers and it doesn't appear to be changing meaningfully anytime soon. One thing we do know that has been consistent from one cycle to the next is when credit dries up, that brings religion to small carriers in terms of what they do to grow or refresh. And that process is well underway already and so and that has been effective.
Speaker 3: and every single cycle since 1980. So that would constrain supply. We obviously have seen what's happened with used equipment here, where we saw these unbelievable prices, more than double what we were normally used to, maybe up 125% for a typical used truck at the peak, and that has come off, probably off 25% or even maybe a little bit more. So still well.
Speaker 3: coming out at the same pace, if not maybe even faster, then demand seems to be waning. So historically we've said that broader economic GDP demand moves in a tens of basis points, but supply seems to swing in the hundreds of basis points. And so in our industry, we're much more sensitive to supply than we actually even are demand. And so all indicators are that supply is contracting already as...
Speaker 2: a little bit more orderly and less of a drop off just because the supply piece wasn't nearly as high and is leaving so early. Yeah, I'd add that even looking at new equipment that still is pressured and trailers really haven't changed in terms of the ability of OEMs to deliver new trailers and most likely that'll lead to an allocation of orders for next year.
Speaker 2: tractors, very similar. I think there's some OEMs doing a little bit better than others, but still very pressured on being able to deliver on orders. And again, most likely we'll have an allocation. So new trucks aren't coming on. We're seeing, as they mentioned, the used equipment markets cooling because small carriers can't afford the prices and can't find credit. So capacity is still going to be constrained just getting your hands on it.
Speaker 2: not to speak about just the economics, how it works for a small carrier. So I think all those go to maybe an environment where supply keeps pace, maybe outpaces the changes in demand.
Speaker 5: Yeah, that's great. That's very helpful. I appreciate it. Thank you.
Speaker 4: Next time.
Speaker 6: Thank you. Your next question will be from Todd Fowler at KeyBank Capital Markets. Please go ahead.
Speaker 7: Okay, great. Good afternoon, Dave. Okay, Adam.
Speaker 7: I wanted to ask on the guidance commentary around the rate assumptions for the back half of the year. And you had my understanding in your comment that it's mostly difficult comparisons. It sounds like maybe even an expectation that rates will be somewhat stable sequentially. But I guess can you help us think about how much of your your truckload book right now is spot versus contract and what that would have been like a year ago. And then also.
Speaker 7: Not looking for guidance, but any thoughts on how contract rates can progress into 23, just given where the spot market is right now. Thanks.
Speaker 2: Yeah, sure. So just our spot exposure, I think today we're probably down closer to the mid to low teams in terms of our exposure to the spot markets. If I have compared that to last year this time, we'd probably be 20 to 25%. So I think we've made some shifts there very strategically through the bids and we like the position that we're in there. And when I think about rate sequentially,
Speaker 2: You know, I think the one wild card is what does the fourth quarter look like? And I think we have probably less visibility to the projects or type of surge opportunities. We may have in the fourth quarter that we typically do this time. And it's really because our customers are still uncertain. I think, you know, some of them, some of our larger more strategic customers, they've already communicated they'll have, they expect to have some need. They don't know what it is yet. So I think that will, you know, obviously impact that the year over year change.
Speaker 2: But I think sequentially, we'd expect rates to be stable. I mean, we've essentially gone through the bid cycle. There really isn't much that we haven't hit from our larger customers. And so the next time we address rates, we'd probably be the late fourth quarter as you really start the new bid cycle. And really how the fourth quarter plays out will play a big role in setting the stage for what those changes could look like going forward. So right now, I don't think we have a great read.
Speaker 2: on 2023, so I'd hate to make a comment on that without maybe having a little bit more time to understand how fourth quarter really starts to shape up. to understand how fourth quarter really starts to shape up.
Speaker 7: So Adam, just to clarify, though, it doesn't sound like you've got a lot built in for a lot of transactional opportunity into the fourth quarter. I understand there's a lot of variability, but right now in the current guidance, it doesn't sound like you've got a big fourth quarter planned right now.
Speaker 2: Yeah, I think we're a little more cautious on the fourth quarter just because of just the uncertainty of what type of projects may be there. And hey, as we get more clarity around that, the next time we release third quarter, we'll obviously make an adjustment based on what we know then.
Speaker 7: Okay, make sense. I'll turn it over.
Speaker 6: Thank you. Next question will be from Ravi Shankar at Morgan Stanley . Please go ahead.
Speaker 8: Thanks, Shenzhen. Often, if you spent the majority of your comments laying out why you believe that night is a very different company going into the downturn and the past downturn. And in the last call, you said that in a trough scenario, it was difficult to envision EPS below $4 and I'm sort of paraphrasing here. Would you care to kind of update that view here? Do you feel more confident in that audience?
Speaker 8: You feel like it's higher than Ford given the traction you made with LPL and the logistics and the other revenue segment are going to be helpful and where that floor is will be helpful.
Speaker 3: Okay, thanks Ravi.
Speaker 3: Yeah, I would tell you that every quarter that goes by that we continue to see improvement in margins, improvement in revenue. It gives us more conviction for a higher and higher trough.
Speaker 3: And so, you know, when you look at the fact that the full truck load piece
Speaker 3: is. kids.
Speaker 3: you know, first we saw it shrink in terms of the overall revenue. Now we've seen it shrink in terms of the earnings, not because the earnings are inferior, in fact the earnings are phenomenal there, it's because we have other businesses that have...
Speaker 3: different exposure to
Speaker 3: There are different risk exposure to cycles and in fact they have lower risk than the full truckload irregular route business has.
Speaker 3: As a result of that, when you look at the progress made in LTL, for example, I mean, we're well ahead of schedule there. And, you know, we've very much enjoyed working with our partners, the businesses there, and they're doing a phenomenal job. And every quarter that goes by that they get bigger, and that OAR gets better, and it's a larger percentage of the earnings.
Speaker 3: Our business gets de-risked because of the consistency of LTL earnings.
Speaker 3: over time. They've proven that out. If you look at the other key components to our business, we have a variable cost in there. Whether the cost is the third-party carrier, whether the cost is the rail. Every quarter that goes by between now and whenever the bottom of a cycle is, we feel better and better about the trough that that floor continues.
Speaker 3: to rise, I would also point out that I think
Speaker 3: Maybe it's unfair that we've been painted with a broad stroke that all work truckload. And we've gone to great lengths to try and point out the differences that we have. These aren't superficial. These are legitimate earnings streams. I mean, if you looked at our operating income,
Speaker 3: You know, there's...
Speaker 3: That's an operating income number that rivals...
Speaker 3: the biggest market caps of companies moving full truckloads, whether that's over the rail or whether that's over the road.
Speaker 3: in our transportation space.
Speaker 3: When you look at even the truckload portion, we do truckload with multiple brands. We have in that segment includes a bunch of dedicated business. Each of the brands has its own unique.
Speaker 3: competitive advantages, whether that's based on the region or doing more expedited or in some cases a little longer haul. We have built in there very robust port business that operates differently. We have many fewer competitors in that space as well. And the customer base is rather diverse within our full truck load. And that's all before we get to the dead horse that we keep beating that is.
Speaker 3: trailers matter, trailers make a difference. It is not the same to have one truck and one driver show up that have to be unloaded immediately versus...
Speaker 3: Somebody who has reached the stage hundreds of trailers.
Speaker 3: at a customer facility and give them all kinds of efficiencies. And so within our truckload, we have taken a multitude of steps for that business to be de-risked and to endure well the cycles on top of all the extemporaneous income streams. So yeah, Robbie, I think we continue to have more conviction for that trough EPS number.
Speaker 5: Great, thank you.
Speaker 5: Thank you. Thanks, Ravi.
Speaker 6: And your next question will be from Bird's Super at Stiefel. Please go ahead.
Speaker 9: Hey, good afternoon, Dev Rattles.
Speaker 7: Hey guys, 2Q is an excellent quarter for LTL. I imagine at least partially as a result of fuel, and that clearly you had super strong yields there. Do you foresee a long-term ability for that segments OR to ultimately rival your TL segment and to sort of be the driver of your earnings power expansion as we think about future cycles? Or should we think about that as being, you know, perhaps a sub 85 OR to good gear? And perhaps higher 80s and a...
Speaker 3: and irregular route full truckload world. And so that being said, I would say that we've been pleasantly surprised at the magnitude of the synergies that are available in both a large TL that has a few advantages going for it with working with LTL.
Speaker 3: And so that being said, I would say that we've been pleasantly surprised at the magnitude of the synergies that are available in both a large TL. It has a few advantages going for it with working with LTL. And...
Speaker 3: two LTL partners in different parts of the country beginning to work together. We think that there are a whole net, there's a whole nether level of synergies that can come as we can corner the entire country in a nationwide operating network behind the scenes with you know still the individual brands on the front on the front end running the businesses and so
Speaker 3: I would say that LTL's got a ways to go. We haven't quite got to a billion. We're on our way to a billion dollar a year run rate for that to be the big driver of the earnings for the business. But we very much like the business. We very much like a 78.7 operating ratio. And yeah, there's some fuel surcharge benefit, but you've noted the fact that.
Speaker 3: there was meaningful double digit yield improvement. And that.
Speaker 3: That is meaningful. That gets us very excited. I mean, a lot of these LTL statistics are public. You can look at our rate per 100 weight at $14.20, excluding fuel. And compare that to some of the industry leaders. And what you'll find is...
Speaker 3: is, you know, there's some...
Speaker 3: There's much bigger rates out there than already what we've achieved. Now, there's nationwide networks, it's different length of halls. It's not an apples to apples comparison. I get that, I appreciate that. But we're excited about the runway that we have there. But the good news for us is we're not in an either or. It's not, okay, we're going to put our heart and soul into LTL and we're going to forget about full truckload. We love doing irregular route full truckload. It's been largely abandoned by the industry because it's not.
Speaker 3: I mean, it's a bit chaotic and to do it right takes a lot of work, but boy or boy, that's where we add the most value to our customers. That's where the most value is created in the supply chain. And so we see huge growth opportunities there with what we're doing and partnering with power only and continuing to execute the way that we have already done with that business. So.
Speaker 3: We're fortunate with a, you know, over a billion dollars of free cash roll over the last 12 months that we have opportunities to go in both directions and we can sing and dance, so to speak, at the same time. And see, both of these continue to grow in flourish. Yeah, I'd even add that, you know, although there's some benefit from fuel in second quarter, we still have yet to realize the full benefit of connecting the networks between AAA.
Speaker 2: and then me that's going to lead to additional revenue and margin opportunities. And we think about LTL, I think it does provide growth but also stability through truckload cycles. And I think that's why we like this with a nice compliment to our core business. We're going to be doing this with a nice compliment to our core business.
Speaker 9: Thanks, Dave. Thanks, Adam.
Speaker 6: Thanks. The next question will be from Chris Weatherby at Citi. Please go ahead. You're welcome.
Speaker 10: Yeah, thanks guys. You know, I guess the takeaway I guess I'm getting to some extent is it feels like maybe this, you know, I guess every cycle is different and certainly they've been a good point about why this might be different than previous cycles. And then we talk a lot about sort of trough earnings and what we think we can do and clearly the non-truckload pieces of business are performing. So, you know, I guess should we think about the truckload pieces in normal sort of down cycle, which I think we would, you know, view sort of contract rates maybe declining as much as what we've seen from a spot or is this not the right?
Speaker 3: example of a down cycle, we saw contract rates hold in there significantly better than broader rates, right? The broader rates look like peak to trough, we're down 50% we're contracting that same peak to trough, we're down 5. And a case could be made with the kind of the mismatched inventories in many cases that are out there, the lack of warehouse space, the tremendous need for trailers.
Speaker 3: that going in this cycle.
Speaker 3: there's probably even more value on the nationwide trailer network. So we were of the belief that
Speaker 3: that there's definitely going to be resilience like there was in 2019 in contract, in the kind of contract business that we're able to do given size and scale versus what maybe the broader would see. And I think a plastic example to that would be, just look at the first half of this year, look at how our business has performed relative to kind of what it's been like for the smaller carriers in the broader irregular route market, particularly those that were overly reliant on spot business.