Q3 2022 Knight-Swift Transportation Holdings Inc Earnings Call
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Good afternoon, ladies and gentlemen, my name is call and I'll be your conference operator today at this time I'd like to welcome everyone to the Knight Swift Transportation third quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise.
At any time during this call you require immediate assistance. Please press star zero for the operator, Mr. Miller The meeting is now yours.
Thank you Colin and good afternoon, everyone and thank you for joining our third quarter 2022 earnings call.
We plan to discuss topics related to the results of the third quarter provide an update on current market conditions.
Our full year 2022 guidance.
Have slides to accompany this call which are posted on our investor website. Our call is scheduled to go until 530 P. M. Eastern time, following our commentary we will answer questions related to these topics.
Order to get to as many participants as possible, we're going to limit the questions to one per participant if you have a second question. Please feel free to get back in the queue. We'll answer as many questions as time allows but not able to get to your question due to time restrictions you may call 602.
Six O 66349.
To begin I'll first refer you to the disclosures on page two of the presentation 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 and investors are directed 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 SEC for a discussion of the risks.
It may affect the company's future operating results actual results may differ.
Now onto slide three.
The charts on slide three we compare our consolidated third quarter revenue and earnings results on a year over year basis.
Revenue, excluding fuel surcharge grew by nine 2%.
Our adjusted operating income declined by 1.4% gas.
GAAP earnings per share.
Per diluted share for the third quarter of 2022 were $1 21, and our adjusted EPS came in at $1 27.
On a year over year basis, higher interest expense lower gain on sale and a higher tax rate impacted adjusted EPS by approximately 10 cents per share.
Now, let's move to the next slide.
Slide four illustrates the revenue and adjusted operating income for the third quarter and year to date periods in each of our segments.
Despite a change in freight market our performance remained strong across each of our segments. Our truckload segment operated in the low eighties, while logistics continues to generate mid teens margins.
Intermodal continues to make year over year improvements in our L. T. L segment is outperforming the targets we set at the time of acquisition.
We remain focused on continuing to diversify our business and develop complimentary services that bring strategic value to our customers and partner carriers.
The chart on the right highlights the percentage of revenue during the third quarter of 2022 for each of our each of our four segments as well as the percentage of revenue from our other services, which include our rapidly growing insurance equipment maintenance equipment leasing and warehousing services.
We believe this diversification positions our company successfully navigate what could be a more challenging freight environment in the coming quarters.
We are encouraged with how well our different brands and services continued to collaborate to find new opportunities to grow with existing customers and forge relationships with new customers or companies made up of unique brands.
They have different strengths and provide different services throughout the supply chain.
We bring creative solutions with with scale to solve difficult challenges, we value vertical accountability for performance in each business, but also horizontal collaborate collaboration across our brands to optimize and fully leverage our capabilities because of the structure and the leaders we have on our team.
<unk>, we feel well positioned to successfully navigate the changed market.
The next few slides, we'll discuss each segment's operating performance starting with truckload on slide five.
On a year over year basis, our truckload revenue excluding fuel surcharge grew three 7%, while our operating income declined 14, 9% as we operated with an 81, 8% adjusted operating ratio.
During the quarter revenue per tractor grew one 8% driven by an eight 1% increase in revenue per loaded mile and a four 2% decrease in miles per tractor.
The improvement in revenue per tractor was more than offset by inflationary pressures across our business. Most notably we continue to see cost pressures in driver related expenses.
Any cost and maintenance and insurance.
Within our truckload segment, we adjust to market conditions and have a diverse group of brands and services, including nearly 5000 dedicated trucks for which provides us with some flexibility and strategy for example, as over the road truckload volumes have become a less robust year over year, our dedicated business has grown top line revenue.
And improved margins on a year over year basis.
Great demands trended below typical season seasonal patterns in the back half of the third quarter and these trends have continued into October given these trends we are expecting a muted peak season this year spot.
Spot opportunities have declined significantly and we had been pivoting towards making more commitments through the bid season to reduce our exposure in the spot market. We didn't do this seems to be getting it up to you.
Small carriers.
Two typically have significant spot exposure are now dealing with depressed rates higher fuel prices higher fixed equipment costs rising insurance costs and now elevated interest rates that will most likely continue to rise.
These factors have led to capacity attrition.
But we are currently seeing it will most likely accelerate the attrition in coming quarters. Despite.
Despite the changing market, our customers still value trailer pool capacity at scale and we see this demand in both our truckload and logistics segments.
Continue to invest in our already industry, leading trailer fleet, which grew sequentially to just over 75000 trailers. We believe our scale and trailers is a competitive advantage provides our customers capabilities that are extremely difficult to replicate.
Now, let's move to slide six.
Our <unk> segment continues to perform well is exceeding the goals. We set at the time of acquisition for the quarter revenue. Excluding fuel surcharge was 22 point was $224 million and we operated at an 84, 5% adjusted operating ratio. This represents a 300 basis point improvement from the third.
Quarter last year, which was the first quarter that we included AAA Cooper and our results.
Volumes, followed normal seasonal trends, while pricing remains strong our revenue excluding fuel surcharge per hundred weight increased 15, 5% year over year.
We have been extremely impressed with the leadership at both AAA Cooper N M and me as he worked towards merging our systems this quarter to create seamless connectivity for our customers, while maintaining the culture and brands of each company.
We believe this positions us to provide additional services to existing customers as well as creating new customer relationships.
Our night and Swift brands have deep relationships with large shippers, who in many cases deal with larger L. T L network.
Larger LCL providers.
Creating a superregional network in the short term and then a national network and a long term will enable us to find opportunities to further support our existing truckload customers with LTE capacity.
We also believe this approach is very welcoming to other L. T O companies, who may choose to join this network again, we are very courage by the L. T O results and our conviction for synergy achievement continues to grow.
Now, let's move to slide seven.
Our logistics segment continues to grow volume with load count up 21% year over year as.
As compared to the third quarter of 2021 revenue was down just five 2%. Despite a 21% decrease in revenue per load.
Gross margin also expanded to 29% in the quarter compared to 18, 1% last year, leading to an 86, 8% adjusted operating ratio.
This resulted in a slight improvement in operating income compared to the same quarter last year.
Our customers continue to value the power only services, we provide which led to a 33, 3% growth in power only those volumes are vast and growing trailer network allows our customers the ability to optimize their warehouse space and labor costs Third Party third party carriers prefer power only business because it saves.
Some hours that each load and unload location it lowers their capital investment and risk reduces their operating cost and gives them access to free the historically wouldn't be able to participate in.
We continue to be excited about this business and have several technology initiatives ongoing that will improve the experience for our third party carriers as well as well as provide more seamless information internally and to our customers that will lead to more opportunities to utilize our equipment.
Okay.
Network fluidity and chassis availability remains a challenge with it our network. However, we have made progress through the bid season to better align our freight and freight network and our rail partners in both the west and the East. Our goal is to continue to grow intermodal to improve clocks turns as well as expanded capacity as we add.
Added approximately 650 containers during the third quarter this year.
I'll now turn it over to Dave.
Okay. Thanks, Adam.
And good afternoon, everybody slide nine illustrates the growth at.
Our businesses that are included in the non reportable segment for the quarter, we had a 56% increase in revenue with a 97% increase in operating income.
These increases in revenue and earnings from our overall.
Our from our overall strategy to develop essential services for third party carriers.
That way last quarter, the three primary objectives and these carrier services are number one to introduce new profitable revenue streams with growth potential that's further diversify our company.
Second to leverage existing expertise in areas, where we've proven industry, leading results such as risk management maintaining equipment purchasing.
And three provide these services in a way that benefits the relationships, we have with small carriers as we build a much much larger network using their power with our trailers and freight network.
Any of these services are branded under our iron trucks services brand.
Tremendous interest in our offerings from small third party carriers interested in purchasing insurance.
Turning their equipment and our nationwide shop network.
Leasing equipment, and leveraging our buying power to purchase fuel.
These new and expanded services, along with warehousing and equipment leasing.
Nearly quadrupled revenue and are on pace to generate over $500 million of revenue. This year with projected operating income in excess of $60 million compared to a loss of $68 million in 2019.
Now to slide 10, this slide illustrates the progress of the intentional changing of the composition of our business into an industrial growth company.
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 and Swift merger in 2017 through the third quarter of 2022, we're pleased to report meaningful contributions in earnings from each area over the last five years.
These diversification efforts make us less volatile of a less volatile company and we expect will help us mitigate the downside through truckload freight cycles.
Our truckload earnings now represent only 63% of earnings which represents a meaningful shift from where we were in 2017 immediately following the Knight Swift merger.
This reduction in our truckload earnings percentage has changed while at the same time significantly improving our truckload earnings from a 2017 full year of combined pro forma at night, and Swift earnings of $319 million to $840 million for the third quarter trailing 12 month.
<unk> of this year.
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 $5.64 per share for the trailing 12 months.
Moving to slide 11 strong earnings have driven increases in our free cash flow, which was 1 billion through the third quarter over the trailing 12 months.
Year to date, we've used cash to increase our dividend to shareholders by 20% repurchased $300 million worth of shares and paid down $396 million in long term debt and leases.
Since the 2017 Knight Swift merger, we've invested $1 6 billion in acquisitions.
Acquisitions remains a high priority and our strong cash flow generation provides us with ample capacity for M&A opportunities. Our balance sheet is strong and we are well positioned to invest in organic growth pursue acquisitions.
<unk> more shares increased dividends and or pay down debt.
We're constantly evaluating market conditions to maximize our use of cash to create value for our shareholders.
Onto slide 12.
Return on net tangible assets remains a key metric for us over the past 12 months, we've achieved a 22, 4% return on tangible net tangible assets, which you can see from the graph is a substantial improvement from where we've been in the past few years.
Our goal is to improve this metric by focusing on three key areas, one growing our less asset intensive businesses too.
Acquiring an improving businesses and three expanding margins in existing operations.
During the third quarter, we made significant progress in many of these areas.
In a less asset intensive businesses, we saw 20% increases in load volumes for our logistics business with a large part of those coming from apparel only service offering we saw warehousing revenue increase over 60% year over year, and our iron services revenue increase over 140% year over year.
We've experienced synergies and improvement in every business, we've acquired B the warehousing asset truckload.
Of course less than truckload or truckload brokerage.
And less than truckload or L. T. L. We're expanding our network in the fourth quarter with the addition of four new terminals in over 125 doors.
We believe our focus in these three key objectives leverage our core competencies in areas of opportunity that are unique to us will allow us to continue to generate significant returns.
To our shareholders over time.
Now onto the next slide.
Slide 13 and <unk>.
I'm going to ask.
Take just a moment and give a little bit of background and kind of view into the market as we see it.
So bear with me as I kind of walked through this I won't hit each one of those bullet points, but I'll try and kind of.
I'll cover them, one way or another but just give some commentary here on what we're seeing in the market.
We've been preparing for the next freight downturn since before the last one.
When we saw the unexpected disruption from COVID-19 in the April and May timeframe of 2020, we quickly jumped into action made immediate changes to adapt and to perform.
The change in freight market from the all time high demand experienced that started really in the summer of 2020.
Continued into a more typical seasonal demand, which we started to see at the beginning of this year.
And now in the subway some waves that we're seeing sub seasonal demand as we come towards the end of 2022 and N and head into 'twenty twenty-three, there's been a little easier to anticipate predict and even prepare for than what we originally saw back at the start of COVID-19.
Now, although we've been hoping that the strength would continue.
Over the last year, we followed our playbook and preparing for the economy in the truckload market to slow we reduced our exposure to the spot market at the beginning of the year and have made certain cost adjustments throughout the year.
Mitigating the volatility associated with a full truckload market has long been a major focus for our company and something we frequently talk about with investors.
Major part of the rationale for our entrance into the L. T O market was the reduced volatility in the LTE market, which has considerably high barriers to entry and is performed with remarkable consistency over the last two decades.
It used to be that of truckload carriers only real option for mitigating cyclicality was to increase the percentage of their business, that's dedicated as opposed to irregular route.
Our industry, leading or.
And size of afforded us the meaningful cash flow to invest in related but less cyclical industries, such as L T L or insurance or maintenance.
And maybe more even more impactful.
To increase our already industry, leading largest trailer fleet.
To continue to increase that to create more value and reduce volatility with increased trailer pool business with our truckload customers by providing.
The truck and driver to power from one of our partner carriers that are massive portfolio of third party carrier relationships.
The ability to provide access to concentrations of trailers and all 48 states is unique to us.
It maximizes supply chain inefficiencies as a very high barrier to entry.
And we operate trailers that what may very well be the industry's lowest operating cost per mile.
These trailer pools offer customers flexibility in loading and unloading trailers based on their labor availability as opposed to unloading or loading when the truck arrives and the driver is waiting.
Since the electronic log mandate nearly four years ago, most loads accrue additional charges to the shipper if not unloaded in two hours when a driver is waiting for.
The flexibility from our pools to unload in a day or two.
<unk> value and helps our contract rates and awards for both our own trucks and for loads that we secure for partner carriers.
These challenges.
They're they're massive challenges facing small carriers today and they are unprecedented and we expect they will further intensify and result in further rationalization of industry capacity or supply.
Similar to 2019, we expect that this will be a tale of two cities with shorter term challenges for the well capitalized highly profitable carriers.
Versus those already challenged and what has been a very strong trade in freight market.
We expect meaningful attractive acquisition opportunities over the next few quarters.
I'll now turn it to Adam to finish up with our guidance slide.
Thank you Dave.
So, we'll turn to slide 14, which outlines our guidance for the full year 2022.
We now expect full year 2022, adjusted EPS to be within the range of $5 17 to $5.22.
Which is down from our previous quarter's guidance of $5 20.
$5 40, which reflects the performance of the third quarter, our expectation for fourth quarter.
For the fourth quarter, we expect a muted seasonal freight environment combined with significantly fewer spot market opportunities.
Is this is this is expected to cause rates turn negative on a year over year basis keep in mind that this is a result of a more difficult comparison than rates meaningfully declining sequentially.
We continue to see we are we continue to increase the number of seated trucks as a result, our year over year change in miles per tractor has improved each quarter in 2022, we expect the European or deficit at miles per truck you will improve in the fourth quarter as our truck count remained stable.
Miles per chapter typically declined sequentially from third to fourth quarter due to holiday disruptions normally we would have significant spot opportunities and projects that more than offset the decline in productivity apps.
Absent these opportunities.
We expect our adjusted EPS to be lower in the fourth quarter than in the third quarter.
We expect our <unk> business to improve both revenue margin year over year for Q4 will follow typical seasonal patterns and L. T L with a fourth with the fourth quarter not being as strong as Q3.
Logistics load volumes and revenue per load are expected to be consistent with Q3 with an operating ratio in the mid to high Eighty's.
Intermodal margins to remain in the high single digits with volume improving on a year over year basis.
Expect other revenue and income to grow when compared to the prior year as outlined in slide nine of this presentation.
And we continue to expect inflationary pressures from driver expenses maintenance equipment.
Non driver and non driver labor will continue.
Continue to be inflationary as well.
We expect total gain on sale of equipment to range between $10 million to $15 million in Q4 as the used equipment market continues to moderate.
Due to high due to rising interest rates interest expense will continue to increase.
Our net Capex net cash capex for the full year.
We expect that to be $5 25 to $5 75 for this year and our tax rate is expected to stay around 25% for the year.
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 and $5 30 eastern.
We will answer as many questions as time allows can please keep it to one question, we're not able to get to your question due to time constraints. Please call 602, 600, 66349, and we'll do our best to follow up promptly.
That concludes our prepared remarks, we will now entertain questions Colin.
Thank you at this time I'd like to remind everyone in order to ask a question. Please press star followed by one on your telephone keypad again this is star.
Followed by one on your telephone keypad.
We'll pause for just a moment, while we compile the Q&A roster.
Okay. Your first question is going to come from Todd Fowler from Keybanc.
Keybanc capital Markets' Todd. Please go ahead.
Great. Thanks, Good afternoon, Hey.
Hey, Dave Hey, Adam.
So Dave maybe just to start I know that this is a very difficult comp in the fourth quarter fourth quarter last year, I mean, everything just really lined up and it was a fantastic quarter, but when I think about the implied fourth quarter guidance, it's down almost 30% about 27% at the midpoint or so.
Is that what we should think about as a proxy you still have difficult comps in the first part of 'twenty three or are there. Some other levers that you can pull on the cost side.
Just trying to think about the order of magnitude of earnings here in the fourth quarter and kind of the run rate into next year. Thanks.
Yeah. Thanks, Todd I think you know as you noted last year, we had about everything working for us.
Significant project freight there was a significant peak.
Capacity was tight and pricing was strong.
And I would say that as we move into this is we're moving now into that what would be normally our peak season things are much more orderly.
It appears that.
There isn't the same kind of urgency that we saw last year.
Inventories.
Peer to be.
Our high end.
And I think we're seeing that in the pull through we're seeing that in the muted imports coming in.
And so there's there's a it feels like there is some catch up going on an AD at.
It appears that our customers are they definitely don't have the level of project business that we had last year or so.
Yes, so what we are.
That year over year comparison for the fourth quarter I wouldn't say that that is the same comparison for the reasons for that to be off the way that it is isn't.
It doesn't hold true as you move into next year now you know all indications are the economy is going to continue to soften, but we don't we don't normally see a.
Kind of project business, and we don't have a peak in the first quarter.
And so.
So I would be careful Todd to try and extrapolate or read through what you see for fourth quarter and the first and second thought I'd also add to that I think I wouldn't model the normal.
Seasonal change from Q4 to Q1 in terms of what happens with EPS as you transition because you just don't have the uplift into Q4 that you typically would so I think Q1 would be you know we haven't put out guidance yet for next year, but I think you would see less volatility in EPS from Q4 to Q1 than you typically would.
Okay. That's a fair thought thanks for the time Tonight I'll turn it over.
Thanks Todd.
Your next question comes from Jack Atkins from Stephens Jack. Please go ahead.
Okay, great. Good evening and thank you for taking my questions guys.
Okay.
I guess, Dave maybe and Adam feel free to chime in on this as well but.
I'm imagining.
That's top of mind for most investors after the cut to the guidance on that.
A modest Smith is really sort of things.
Thanks for slowing down faster than you would have anticipated 90 days ago, maybe even 45 days ago.
Could you maybe update us on that trough earnings outlook that you provided six months ago, I think you said $4 plus.
I think.
To help you could give us around what that would assume in terms of a magnitude of a freight recession or a macro recession and has your level of confidence in that $4 number changed at all.
Just on what you've seen here over the course of the last few months.
Yeah.
Appreciate the question Jack.
We continue to have conviction for that floor that is north of $4 a share.
Okay.
You look at the kind of performance that we've been able to do these last three quarters and what has been a.
It's a changing environment, where the where the spot market is has been.
Almost non existent and things have worked in a much more seasonal type pattern than now.
Maybe even.
Even even sub seasonal now as we go into our fourth quarter and so you see the way that we've continued to perform in our business.
And it isn't just one business in particular, but you can look at the the low 80, so are on the.
On the truckload side, you can look at a low to mid eighties on the L. T. L side, you can look at still being in the upper eighties on our logistics side and low ninety's in intermodal I mean.
Those are those are those are remarkable numbers and what has been a market that has not given a lot of spot and so.
I don't know that that's totally appreciate it.
Maybe by the market and I don't know that I I don't know that people appreciate how durable.
The earnings per share of this business really are so we continue to have.
Good conviction for that and Jack I would say that you know we continue to pile up free cash flow and it is it has not been a buyer's market and.
Things are working in our favor a little bit here as things start to adjust that will give us.
Hopefully better opportunities.
And more opportunities to acquire businesses that are transportation related not just we've obviously talked about L. T L quite a bit but transportation related.
Transportation companies and so.
You know that and so that's going to that's going to afford us a wonderful opportunity to continue to grow our business.
Even even in kind of an uncertain time I would also add.
That.
From prior cycles, we've learned this that as supply rationalises in the full truckload market.
We can see we usually see and we expect to see that the that the truckload freight market will recover.
Before the broader demand market recovers because supply eventually gets to a point where enough has come out that that you find that.
At least equilibrium or maybe at that point, where you're under supplied in a market, even though you might have muted demand in so.
There has not there has not been in this last cycle. There has not been the kind of capacity additions that we've seen in previous cycles and we've never seen that that we've noted we've never seen capacity come out as early as we've seen it come out of this cycle really before contract rates were even negative.
We saw capacity slipping away and we believe that that's accelerating right now and so.
There are a few industries that.
Have a prospect of recovering.
For the broader economic demand has a chance of recovering and so but full truckload I think is one of those so Adam anything yeah, I mean, just to reiterate jackman the plight for the small carrier may not have ever been as severity as it is right now do you think about the higher fixed costs have been locked in with <unk>.
Very elevated used equipment, that's been purchased over the last couple of years and now with rising interest rates the inability to finance new equipment.
It is a real challenge or if they do is that at very elevated rates and we're seeing signs just even if on third party data, we're seeing from the S. N S. F N CSA authority net revocations or down the BLS data shows truck employment off over 11000 this last month.
And alcohol clearinghouse was.
Very elevated range just under 7000 for the month of August and is trending 20% higher.
Year over year, we've had a lot of anecdotal.
Scenarios with just carriers that we deal with even what we're seeing on the used equipment market, where demand has has fallen off pretty sharply here. The last couple of weeks and there's probably several factors.
Impacting that so yes, we've talked about demand has not been as robust I think that's pretty clear, but the fact that we believe capacity will rationalize much quicker than it has.
Over other cycles still gives us great confidence in the $4 trial.
So.
And I can I can I continue to jumbo stay on this topic for one more second there Jack Xu Yes sure.
And so you know as we sit here and we talk about supply eroding out of the space or what is what does that have to do was $4 a share.
It's for our business to give up that much earnings per share what that would mean for a typical carrier for even many of the mid size, even some larger carriers, but especially the small carriers what it would take what they would have to give up for us to get down to $4 a <unk>.
Sure.
Is is unsustainable it doesn't it wouldn't work it doesn't.
We don't we don't see it getting getting that far and that would assume that.
Ed.
It wouldn't be in a position also to continue to acquire and improve businesses over time as well so that's.
There's there's so there's a myriad of.
Of of reasons and rationales that help us to have conviction that our earnings per share that doesn't drop below a four handle.
Okay.
Really appreciate the additional color thanks for the time guys.
Thanks Jackson.
Okay.
Next question comes from Ken <unk> from Bank of America. Please go ahead Ken.
Okay, Great and good afternoon, David Adam, Yes, Hey, how are you.
So I'm going to stick on that theme a little bit right. Because I think you set the bar with that with that $4 discussion right and so now youre looking at that dollar.
On a run rate in the fourth quarter.
And so as you think about.
Two early 'twenty, three and the demand level.
Youre, saying Youre seeing are you are you, saying youre already seeing that pace of carriers are leaving and I just want to understand maybe talk about your thoughts on your breakeven costs, where rates are relative to that what.
What the Mark just so we understand kind of how it differs for you versus the market.
In terms of those costs, just given it seems like where the fourth quarter is trending towards that $4 number you are talking about.
Well.
We where we see signs all around that small carriers are having difficulty I think we saw that earliest.
Materialize.
By mid year, when we had.
Significant interest and at our owner operator program, where individuals that had previously owned a truck and were superior to be upside down in their truck and we're getting out of a truck and looking to find somebody else that would put them into a truck and.
The used equipment market.
Went from White Hot all time high to two.
Very difficult to find anybody interested I can I can assure you that's not.
Because everybody's average age of a truck is so young that they don't have to do that I mean, the need is real and acute for this industry. This industry should be buying.
For upgraded eight year old at nine year old equipment to.
Five year old equipment at a record pace right now the the truck orders the new builds should be massive right now for what wasn't built over the last two and a half years that should have been built to maintain an average age and so.
So completely contra trend based on the average age of the way it's always worked.
Have small carriers that.
Body, who did get their hand on the used truck over the last year and a half has grossly overpaid based on where valuations are today and I think that's just beginning.
Anecdotally, we hear from those that have receivables.
With small carriers and it's it has turned ugly very very quickly for them.
It began early part of the year and has accelerated dramatically so.
The pressures just continue to mouth I wouldn't be surprised if there aren't.
Many small carriers that were just holding out hope for the fourth quarter, our strong fourth quarter to bail them out of a of a tougher summer with no spot.
Because many of them have found themselves very dependent on the spot market or very dependent on our non asset broker, who who who used to be able to charge a much higher rate to the customer and pass a lot of that through and so that is that that has changed and are at an end.
And so you know how does that change what is that different to US will you know Ken we're not you know we're not one truck and one driver that needs to be unloaded when we roll in we have deep contractual commit.
Commitments, where we know our customer supply chains, and we provided them all kinds of trailing capacity at a high level of service and help to try and help them smoothed out supply chain that have been distorted and disrupted over the last couple of years and so.
We as a result of that the contractual market has not experienced anything close to what.
The spot market has been experiencing for the last eight or nine months and so.
You know naturally as the economy cools and theres not urgency you'll start to see pressure on contractual rates, but.
But it's been.
A much different story than what happened to spot rates and so.
So I think that's that's one of those factors and so there's there is right sizing that's happening as we speak I think as Adam quoted the BLS data from the most recent month that they've reported which was August I don't think that was September that was August .
For the trucking employment to be down 11400.
When it when it was not oversupplied to begin with.
That is that's meaningful.
That revocations of nearly 7000.
And you continue to have with which we're grateful for the drug and alcohol clearinghouse and and it's it's it's it's Ed.
Record high rates of drivers that are that are not qualified so.
So.
Well, we definitely have not been in a mode for now multiple quarters of any kind of any kind of growth and it's all about attrition and we expected that that will that will continue.
Thanks, Dave Thanks, a lot.
Thanks, Ken.
Thank you. Your next question comes from.
Ravi Shanker from Morgan Stanley Ravi. Please go ahead.
Thanks, Good afternoon, Dave Adam.
So I think just to touch on something that came up earlier in the Q&A.
Thank you art.
Message and the content of your message has fairly significantly changed.
Since you were at our Laguna Conference a little over a month ago again, not just to you a lot of your peers have done. The same thing can you just help unpack that for US kind of you you mentioned in your release kind of the last few weeks of September .
September .
So a decline how has that kind of unwind kind of panned out.
What is your current view of peak season, what are your customers, telling you that inventory situation. It looks like basically how long do you think the downturn last do you think it's more like a 2019 or 2016, a light freight downturn, a broad consumer recession, where do you what's your thinking right now.
There's probably lots of impact with that question Ravi So I'll take a stab and then let Dave clean up anything I missed there, but you know we are out there and in Laguna, we still didn't have perfect visibility.
The ability of what we were expecting for fourth quarter right and it's rare that you would go into the fourth quarter and not see some type of seasonal uplift in projects and spot opportunities in especially with companies of our scale. We typically get some of these large kind of difficult projects to handle in and they typically pay a premium.
And so as we got closer into the fourth quarter and realized none of that stuff materialize I think that we would certainly view the market a bit differently.
And you know how.
How that translates into next year I still think it's it's you got to see how that plays out but it.
It would be rare to see a second fourth quarter in a row to have that type of lack of spot opportunities right. We just have never seen I think the appeared at a time that's lasted that long without any type of spot opportunities and as we talked about earlier with.
Great detail about the attrition of capacity, we think that's probably coming out faster than we than we've seen really in any other cycle.
And just say anecdotally talking with customers.
They all have in their own unique ways, some inventory overhangs, they've got to deal with and in most of our conversations they feel like those are resolved over this over the next six to nine months and it's probably going to be unique by each customer depending on the industry, they're in and the strategy of their of their business.
But what did they do feel like it's a shorter term issue that that they can solve and I think that's why we're just not seeing the urgency to move goods in Q4 that we typically would but eventually I think inventories will be rationalized and during that process capacity will come out and I think we'll be in a position and that could be just a few quarters from now where.
Where the markets are.
Much more balanced and the large players that bring value with scale and trailer capacity are in a position to see opportunities that premiums to help support our customers.
David anything you want to add great. Thank you said nothing.
Nothing to add thanks Ravi.
Your next question comes from Amit <unk>.
A hero trial.
From <unk> Bank. Please go ahead.
We're making the operator work today.
Thank you very much.
I guess I have maybe one question so.
If I look at the quarter.
The yield was up 8% utilization was actually better sequentially.
But yet you know operating ratio deteriorated 400 basis points, which obviously reflects.
The project work the freight selection opportunities all the stuff that you mentioned.
But we haven't really seen like the real.
Crack in contract rates at all and so I was just trying to I'm trying to sensitize the model.
You seem convicted in the $4 plus EPS trough number, but we actually haven't seen the real pain.
As it relates to contract rates coming down and so Dave I'd love to get your kind of latest and greatest Crystal ball estimate about.
How you think contract rates kind of evolve over the next 12 months and if youre actually starting to see you.
Obviously, you're the largest asset based provider or if youre seeing contract, where you can start to crack a little bit and and Adam you've talked about kind of this mid eighties O R.
Being kind of a very defensible line in the sand in a bad market is that is that is that kind of whats underwriting that $4 plus number or.
Do you feel like the combination of weaker contract to NIM and then still a weaker freight selection of project environment can actually take you a little bit worse than that.
Okay.
Okay.
We're going to try and answer all three questions. There. Okay. So I'll start then maybe Adam you can pick up that last one in.
So first.
This idea of.
The the the progress.
The progress in utilization.
The deterioration in the operating ratio I think that this this somewhat is.
The explanation there I think is is instructive as you look forward to contract rates. What that tells you is there is meaningful inflation for our business. There has there has been and it continues.
We've done a fair job of mitigating and managing it.
Through throughout the downturn I mean.
Not fortunately not in a situation, where you tried to buy a microchip that used to call you crushed it $3 50 says now close to $200 or something but.
But our driver wages have gone up materially over the timeframe and that's that was that was a it was needed. It was appropriate and you don't just backtrack on that that's not how that works.
Cost for equipment costs for maintenance items and the maintenance service as we look around you know were affected by inflation and so I do believe that does create a bit of a floor in terms of pricing I wouldn't be surprised if the non asset based brokers don't feel a little bit of pinch.
In this fourth quarter as they.
As they are is they're finding a floor and pricing that carriers can set haul a load for.
While well maybe you know what the lack of project freight and whatnot are not able to get as much from a customer and so you.
If we look at what our rate per loaded mile did in our truckload business. This was the first quarter in quite a while where the rate was only up single digits and clearly our costs are up more than single digits on a year over year basis. So that is the reality that is the reality that we are facing as truckload.
Carriers going into the bid season, and and I would say that based on our operating ratio I'm not sure that there's anybody in this industry, that's manage the costs better than the way that we have and how we've performed and so we go in and compete with other carriers.
Just only have so much room to work with for contract rates second thing I would note about you know in trying to predict an anticipated contract rates. You know the Best example, we have to go with our bet would be to go back to 2019, we're over that 15 month period, when we went from <unk>.
Peak to trough took 15 months give or take.
A few weeks.
To go.
From the lowest and and to see the highest.
Highest right. We went from a unbelievable period of 18 grossly oversupplied the industry saw saw the downturn take place.
Then by a late spring of 2020 things that had kid bounced back well.
Alright, we had an unintentional mute there.
<unk> over that timeframe, we saw and we saw.
A massive drop off 50% to 55% and spot rates now arguably what we've seen this year may it may even be more than that for small carrier spot rates.
And we saw contract rates only off approximately 5% and that the full 15 month period. So.
As we go into a bid season.
With with.
With a legitimate imputed cost operating cost per mile increases that are that are in many cases irreversible.
You know I'm I'm not expecting that there's the kind of room.
Two to retrench, a whole lot on contractual rates now as we go through this process, we have some customers where.
Perhaps we can do things a little bit more efficiently or based on the timing of the renewals are maybe there's an opportunity for us to do something and secure some volume we've been doing that since the first of the year since January and those results are in our numbers thus far.
And so wilkie.
Okay.
Alright, we have.
We have a mute button that likes to go on its own there.
And so we will continue we will continue to.
To.
Provided deal if if if if we can find a more efficient way to do this in one of the things that we have going for us is.
We have economies of scale that are unique to our business, where there are sometimes some things and efficiencies that we have or we can offer that maybe others can't and those are some of the things we've already exploited thus far this year, there's more we're going to do this is partly why we talk so much about power only.
We weren't able to find small carriers to come at a haul loads at rates that gave us meaningful.
Meaningful margins and are in our logistics business.
When they had all kinds of opportune other opportunities and and you can imagine right now the interest in small carriers to want to come and partner up where we have loads and we have trailers I mean, it's definitely more than we can keep up with and so we're finding ways to create efficiencies.
And to create wins as we are as we move through the bid season, Adam Yeah, just to add and then I think you got to recall, how the bid season really played out this year.
Earlier about this time last year's Lids started spot rates were still elevated there is probably opportunity to move contract rates up that needed to be but as you've gotten halfway through the bid season spot rates had come off and so there wasn't a lot of contract rate improvement on a year over year basis in the back half of the bid season.
And so as you go through the issues they season theres not going to be near the movement needed with those customers in those lanes based on what they've renewed act. So I just want to make sure. We realize that that you know that the bid season kind of played out Theres a tale of two cities. There also as you go into a more difficult environment.
Large well capitalized.
We typically see.
Okay.
Sorry, we had rolled mute button.
Or labor more labor come to the large well capitalized leads with stable networks and so we'll have an opportunity to see more trucks, most likely be more productive our goal is to reduce our empty mile percentage to allow us to do to be to really run more miles with our seated trucks help offset any of the rate pressure. We may feel and then certainly I think.
You know our culture will become very cost discipline, we already are but we'll dig deeper into our organization and most likely make progress where we can from a cost standpoint.
Okay, sorry, and then I know what you're hearing.
But hopefully you got your answer.
Thank you very much I really appreciate it.
Thanks, Amit.
Yeah.
Your next question comes from Tom <unk> from UBS, Tom. Please go ahead.
Yeah, Dave.
Dave and Adam Good afternoon.
What Dave I think you had some comments about <unk>.
M&A that it seemed to indicate that you have some optimism I think you said maybe the next several quarters.
You also referred to a tree.
<unk> related and kind of said well it doesn't have to be L. T. L. I think most people are focused on L. T O.
Wanted to see if you could offer some further perspective do you think are you optimistic you you might be able to do in L. T. L deal in next several quarters or would you point its more to other things and then when you say transportation related what I don't know if you can give us a little more perspective, what you what you mean by that.
Thank you okay.
Yeah. Thanks, Tom.
Hi.
I think if you'd noted some optimism I think that's fair boy, we've worked really really hard on.
And then looked at many many deals I would say that are you know certainly seen an influx of deals, particularly with.
Like a lot of private equity or looking for a new home here before we enter into a different economic environment and so.
A lot of things we've looked at a.
Timing is everything in these kind of situations, we have a loan.
So we think we felt we felt like there's a lot of individuals.
That have.
Watched us closely are probably watching us closely and to understand how serious we are about preserving local brands and then.
You're trying to collaboratively helped their business to be better than the other multiple businesses that we have so we feel like we're somewhat auditioning. If you will for others that we've had conversations with so that's all underway and I feel like we're making some headway I think when you see a change in the environment you know when it's a.
Little harder for individuals to get access to capital.
It is.
Okay.
Sorry go.
And I have to get into a mute button when it doesn't mute on it so so.
And so.
When you know when when.
So, but what I was saying is we we felt like we've got some good headway there and some good relationships are our interest in acquiring only continues to grow and we can be a source of capital in salt and solves some issues for individuals that are looking for what's next for their business now that being <unk>.
Said, a continued to be very interested in L. T. L. A it feels like L. T. L has been through.
Perhaps a peak there in valuation.
And you know we've been through an unbelievable time, there and we still think that that business will navigate well whatever is coming our way economically relative to other businesses.
So that's that's one that we continue to be very optimistic that we're going to have some matches to expand our super regional network.
Yeah, we talked about this in the release that.
Here in the fourth quarter, we're going to have M. N me and AAA Cooper to totally independent brands working under one networks together in a seamless way and Theres there have already been efficiencies with the way we've already worked together and this will take it to a new level. So you know, we're just over a year into L. T L already and we.
Love everything we've seen and so that is very interesting to us I would say that.
Yeah typically as we are.
Rollover on cycles, we start to see valuations change over time, and the full truckload world and so I.
I don't know that full truckload companies have been have been given the kind of reward that historically they deserve in a time like this if you look at RPE multiple in particular, especially given the return on tangible net assets of 22 point for the last trailing 12 months just to name a stat.
And what kind of multiple you would normally see business like that trade up itself.
It's times like this that we often have interest in full truckload again, because of where we anticipate the market to be going and moving as well as you.
It's times like these that sometimes businesses.
Reassess what the what's the game plan is so when I say transportation related.
It would be in part because we've got a variety of different types of companies just over the last year and a half between tax.
The expedited broker not asset and and two L. T L firms.
But.
We may be overdue for some truckload business and there is no shortage.
Of of truckload businesses out there and and we feel like we.
You know, we know how to we know how to do truckload for sure and and that would be interesting to us. So that's that's where I'm, that's where I am.
What I intended with what I shared earlier Tom.
Okay.
That's great. Thanks, Dave I appreciate it.
Thanks, Tom.
That concludes the time for our call I will tell you. It appears that we still have nine analysts that are in our call to you that we were not able to get to your questions and so.
Again, we would refer you to the phone number we gave earlier.
To give us a phone call and reach out if if you'd like to still have a discussion thanks for everyones interest be safe.
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