Q1 2023 Knight-Swift Transportation Holdings Inc Earnings Call
Yeah.
[music].
Good afternoon, My name is <unk> and I'll be your conference operator today at this time I would like to welcome everyone to the Knight Transportation first quarter 2033 earnings calls all lines have been placed on mute to prevent any background noise. If at any time. During this call you required immediate assistance. Please press star zero for the operator.
Seekers from today's call will be Dave Jackson, President and CEO , Mr. Adam Miller CFO .
Mr. Miller the meeting is now yours.
Thank you J P and good afternoon, everyone and thank you for joining our first quarter 2023 earnings call.
We plan to discuss topics related to the results for the quarter provide an update on current market conditions and update our full year 2023 guidance, we 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.
Our commentary will answer as many questions.
You know on these topics as we receive.
We're going to limit their questions to one per participant.
The second question, please feel free to get back into the queue. We will answer as many questions as time will allow.
If we're not able to get to your question due to time restrictions you may call 602, 606 634 nights.
To begin I'll first refer you to the disclosures on slide 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.
And 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 that may affect the company's future operating results actual results may differ.
Before we get into the slides I want to turn the call over to Dave Jackson for a few opening remarks.
Thanks, Adam and good afternoon, good evening everyone.
Uh huh.
Appreciate you joining our call.
I.
I wanted to to begin by acknowledging that we recognize that we cannot entirely escaped the cyclicality of the full truckload industry, but we have taken intentional steps for years to maximize our performance in every phase of the cycle. This is included truckload acquisitions the development of technology.
And our business strategy to create maximum value for our customers and strong times and to diversify our income streams to mitigate the downside pressure.
Through the bottom of cycles.
When looking at cycles over the last decade, we've performed with higher highs and higher lows and each sequential cycle and we are on pace to do that again this cycle and are already preparing for increasing the high of the next cycle.
L T L or less than truckload dedicated and an appropriate strategy of moving away from from the spot market well in advance of the downward truckload rate pressure has been major factors in our business continuing to perform in the mid eighties operating ratio range. During this current challenging freight market.
Most recent strong cycle experienced in 2021 enabled the cash flow to make the strategic investments in L. T. L. In large part to prepare us for the bottom of the cycle, which is where we find ourselves now.
We expect the recently announced acquisition of U S Express to be one of the factors that enables us to achieve yet again, another higher high and the strengthening phase as supply attrition makes way for a correction.
We have modified our 2023 earnings per share guidance and will provide details later in this call on how.
How that change was calculated as we near the trough of this current cycle. Our revised earnings earnings guidance below $4 per share is still significantly higher than the previous cycle trough.
<unk> in the first quarter of 2020.
I'll turn it back to Adam for Slide three thank you Dave.
So as we move to slide three we compare our consolidated first quarter revenue and earnings results on a year over year basis.
Revenue, excluding fuel surcharge declined by 12%, while our adjusted operating income declined by 48, 9%.
GAAP earnings per diluted share for the first quarter of 2023 were 64 cents and our adjusted EPS came in at 73 sets.
These results were negatively impacted by an eight and a half million dollar pre tax or four cents per diluted share expense within our truckload segment for the development of certain large prior year insurance claims.
The majority of which arose from an unfavorable jury verdict during the quarter.
And in addition to a $22 8 million operating loss or 11 cents per diluted share and our third party insurance business within the non reportable segments, primarily a result, as a result of increased frequency and unfavorable claim development during the quarter.
I am premium collection issues associated with small carriers.
On a year over year basis, softer freight demand lower spot rates and contract pricing that declined throughout the quarter negatively impacted earnings.
Now, let's move to slide four.
As it illustrates the revenue and adjusted operating income for each of our segments.
Despite our first quarter impacted by consistently low import volumes weather challenges and a lack of the typical seasonal uplift in March our largest segments navigated the soft environment and pricing pressure well.
Our truckload and <unk> segments operated in the mid eighties, while logistics produced a 94 adjusted operating ratio intermodal was largely steady with a 95.4 adjusted operating ratio while growing volumes.
Great demand in the first quarter was below expectations and more persistently soft and typical seasonal patterns.
Weak demand pressured volumes and pricing while ongoing inflation was a further headwind on operating income.
There is public spot rate indicators had already fallen 30% to 40% year over year by the beginning of the quarter and the persistent softness drove spot rates, even lower by the end of the quarter. It's also serves to put more pressure on contract pricing throughout the bid season.
The chart on the right highlights the percentage of revenue during the first quarter of 2023 from each of our four segments as well as a percentage of revenue from our other services, which include our third party carrier services equipment leasing and warehousing services, we remain focused on service to our customers.
Reducing costs and position our business for the eventual improvement in demand as we navigate the current operating environment. We continue to work on diversifying our business in developing complimentary services that bring strategic value to our customers and partner carriers.
The next few slides, we'll discuss each segments performance, starting with truckload on slide five.
On a year over year basis, our truckload revenue, excluding fuel surcharge declined 8%, while our operating income declined 43, 5%, reflecting the comparison of an unusually weak first quarter of 2003 2023 against the first quarter of 2022, which was the last quarter to enjoy a combination of solid to me.
Man.
Drawing and rising contract pricing and a largely stable spot environment.
With contractual freight tenders coming in below forecasted levels, we had to divert some freight from the logistics business to the active fleet and pick up more AD hoc business as well, which served to put more pressure on the overall revenue per mile than expected.
Our truckload business navigated the south as well and operating with an $86 six adjusted operating ratio that was as a result of cost control and strong operational execution.
During the quarter revenue per tractor fell 9% driven by a five 3% decrease in revenue per loaded mile and a two 7% decrease in miles per tractor the decline in revenue per tractor combined with inflationary pressures caused the reduction in truckload operating income.
We continue to take steps to align our cost structure with the reduction in volumes and our cost per mile was essentially flat on a sequential basis.
Having a diverse group of brands and services, including roughly 4600 dedicated trucks provides us with flexibility and strategy. For example is it over as the over the road truckload volumes have soften year over year, our dedicated business has grown top line revenue and improve margins on a year over year basis.
Now onto slide six.
Our <unk> segment continues to perform well and makes progress on yield and network initiatives, which allowed this business to essentially hold revenue operating income and margin flat. Despite the softer volume environment for the quarter revenue, excluding fuel surcharge was $214 million and we operated at an $85.
Seven adjusted operating ratio.
Pricing remains remain.
Solid as revenue, excluding fuel surcharge per hundredweight increased eight 7% year over year.
Shipments per day were down five 7% year over year, but did show stabilization exiting the quarter and into April .
The map shows the a C T and MMA terminal networks and indicates new locations since the acquisition in 2021 as well as the planned locations in the near future.
Clean out a superregional network in the short term and created a national network in the long term will allow us to participate in more freight and enable us to find opportunities to further support our existing truckload customers with LTE capacity.
Now onto.
Slide seven.
Our logistics segment navigating an extremely soft freight environment to perform with an adjusted operating ratio of 90, 494%, which was a 470 basis points worse than the first quarter of the prior year gross margins remained stable to stable year over year at 19, 8% in the quarter.
Overall revenue was down 51, 2% driven by a 36, 4% decrease in revenue per load from lower spot market rates and a decrease in load count of 23, 2%.
Load volumes continued to be negatively impacted by lower import volumes, particularly out of the west coast ports. Despite the challenges in the market our logistics business remains disciplined and nimble and maintain near double digit margins.
This business also continues to support our truckload segment in certain markets, where we need additional freight to support our drivers, which put additional pressure on logistics volumes, particularly power only.
<unk> has been a great complement to our asset based businesses.
Customer behavior has exhibited a strong preference for the power only value proposition over the past few years and we expect this service will be an outsized beneficiary once demand recovers our industry, leading trailer network allows our customers the ability to optimize their own warehouse space and labor costs.
Third party carriers prefer power only because it saves them hours at each load and unload location lowers their capital investment and risk reduces their operating costs and it gives them access to freight there historically wouldn't be able to participate in.
On the right of the slide we show an actual snapshot of our trailer locations at a point in time to illustrate the extensive coverage we have throughout the supply chain network. This network of 79000 trailers provides us the ability to respond with distinctive scale in both our truckload and logistics segments to our COO.
Customers needs, 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 provide more seamless information internally and to our customers that will lead to more opportunities to better utilize our equipment.
I'll now I'll now touch on intermodal on slide eight before turning the call over to Dave.
Revenue increased one 3% driven by an eight 5% increase in low count partially offset by a six 7% decrease in revenue per load.
In addition to the well known rail service challenges intermodal intermodal volumes in general are being pressured by the soft freight environment and the current competitive position of the truckload alternative.
Customers are leveraging the low spot rates Quaker transit times and better service in the truckload market.
That being said, we are encouraged to see sequential and year over year growth in our volumes as well as bid activity, yielding promising new volume Awards. In addition, the improved hiring success in our Drayage fleet is enabling us to internalize more drayage, booz, allowing more efficient utilization of our equipment and lower costs.
While rail service has been improving intermodal shippers need to see better service consistently to allow further opportunities for more freight.
Labor within the rail network appears to be improving which should help close the service gap between intermodal and truckload and support future growth for this business.
I'll now turn the call over to Dave.
Slide nine illustrates our non reportable segment, which includes insurance maintenance and equipment sales and rentals under the iron truck services brand as well as equipment leasing and warehousing activities for the quarter revenue grew 27% year over year to $142 million, though operating income was a loss.
Loss of $15 6 million, a $27 million reduction from the prior year, while our non reportable segment has seen strong growth over the past few years. The past two quarters have seen a meaningful shift in the performance of our third party carrier insurance business.
This is primarily driven by a change in the risk profile of the small carriers, we cover and their ability to pay insurance premiums. We believe the significant pressure put on their businesses by the unprecedented drop in spot prices seen over the past year combined with persistently high inflation has had impacts on their businesses.
Which produce a higher risk than was originally underwritten as a result, we have decided to temporarily reduce our exposure to this third party carrier risk at this point in the cycle.
Effective with the start of the second quarter. This decision will be a headwind to growth for this segment, but we believe it is prudent move for our business.
And an unusually difficult difficult trough environment for small operators beyond this decision we are already taking steps to enhance our insurance program, which include higher pricing improved collections and more timely cancellations.
The other services in this segment continue to perform and are expected to drive modest revenue growth for the year and a return to positive operating income for the non reportable segments later in the year the quarterly run rate will be roughly half of the previous level.
We expect to continue growing the revenues and income from these other services over time and believe this effort supports our ongoing diversification objectives.
Now onto slide 10 on.
On March 21st we announced the transaction to acquire U S Express we expect.
This transaction to close early in the third quarter.
We're excited for this opportunity and have been impressed with U S Express leaderships willingness to help U S Express achieve the three year milestones outlined in this slide specifically within three years and upper eighties or in the over the road truckload and dedicated businesses with an upper eighties to low 90.
These or for brokerage.
Total transportation, which is an independently operated truckload carrier in Jackson, Mississippi is already consistently been in the eighties.
And we expect to assist them in getting to the low eighty's or even better.
We have much work to do but our confidence in achieving these goals has only increased since the announcement was made and we've had the opportunity to engage with a broader group of U S xpress employees and leaders.
Incoming president and incoming CFO of U S. Xpress have many years of experience at Swift transportation and were critical in the performance improvement achieved at Swift follows. It following the 2017 Knight Swift merger.
We expect to see meaningful earnings progress in 2024 from this $2 billion revenue truckload carrier.
Now onto slide 11.
This slide contains our updated outlook on market conditions for 2023.
Not much has changed since the last quarter other than we now anticipate somewhat deeper pressure on revenue per mile before stabilizing and eventually improving and that that inflection could be a little later than initially estimated we still expect the current softness will persist through the first half of 2023 based on.
<unk> from shippers on working through their inventory overhang and with a cooler and wetter weather delaying the start of produce season.
We now estimate that the average spot rates have fallen below operating cost for a large portion of the industry's carrier base.
This soft environment and lower rate expectations combined with ongoing inflation in equipment maintenance and insurance will increase the pressure on carriers, especially smaller and less well capitalized carriers.
Higher interest rates and tightening credit standards are also taking a toll these factors should serve to accelerate the ongoing capacity attrition.
As the year progresses demand should begin improving the shippers make further progress reducing inventory levels and import volumes returned to more normal levels. The combination of demand recovery and supply reduction should lead to an improving free.
Market conditions by the end of the third quarter.
Now ill turn it back to Adam to cover our 2003rd CCAR 2023 revised guidance on slide 12, alright. Thank you Dave.
So for the full year 2023, we now expect adjusted EPS to be in the range of $3 35 to $3.55, which is which is updated from our original guidance of $4.05 to $4.25.
We understand this is a significant change so we plan to walk through the key drivers of this change.
First as I noted earlier the persistent weakness in demand has created more pressure on pricing and as a result, we now anticipate that revenue per mile will decline high single digits for the year as compared to our original expectation of being down mid single digits on the year we.
We project that the path to this annual change includes the year over year decline, reaching its worst at a high single to low double digits in Q2, but for training to be flat year over year in Q4.
We still expect non contract opportunities combined with some return of peak season volume to support this comparison in the fourth quarter.
We still project dedicated rates to increase in the low single digit rate for the year.
Second growth in our revenue and operating income in our non reportable segments was slow as a result of the challenges in our third party insurance business and our strategic decision to reduce the underwritten risk during this difficult trough environment.
What was initially projected to be.
Growing contribution to earnings from this segment is now to be projected to be roughly half. The adjusted operating income. It produced in 2022 before returning to growth in 2024, there were no meaningful changes in the other services within the non reportable segments and likely likely cause.
All of that on the slide this is approximately a 35 cent impact to our guidance from what we originally had posted to the update today.
Third in logistics, we expect continued pressure on revenue per load to persist through the second quarter, which may impact margins, both margins and revenue as compared to our original assumptions.
<unk> Oh I should remain in the in the low nineties.
And fourth we are seeing better progress on operating cost than initially projected. Additionally gains on sale are now expected to be in the range of $15 million to $20 million per quarter as compared to the initial guidance of $10 million to $15 million per quarter. The decline in secondary equipment prices seems to be slowing at a refresh rate of <unk>.
Equipment remains behind her as equipment remains behind historical pace and new equipment prices remain out of reach for many carriers.
Supporting which is supporting the used equipment alternative.
Our other assumptions saw little change and is and are as follows our L. T. L segment is expected to see slight improvement improvement in revenue with relatively stable margins.
Truckload tractor count should remain sequentially stable throughout the year with miles per tractor, reflecting positive year over year in the back half of the year.
Intermodal revenue per load will deteriorate in the first half of four improving sequentially during the back half for the full year, we expect the operating ratio to remain in the mid nineties.
Inflationary pressure will decelerate as labor loosens and equipment availability improves.
And still Capex is still expected to be in that $640 to $690 million range and our tax rate is expected to be around 25%. The capex and the guidance does not include any of the results from U S Express we will provide any update.
Required.
Or appropriate once we close that transaction.
So this now concludes our prepared remarks J P will now open the line for questions.
At this time I would like the railcar everyone to quest.
<unk> and answer session. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Ken This is star one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of thumb, whether it's from UBS. Your line is now open.
Hi, great. Thanks.
Thanks, Dave Thanks, Adam.
Wanted to ask you about.
Your thoughts on second quarter, and how you think freight may <unk>.
Progress and then it's been a very unusual seasonal pattern right in terms of not seeing the pickup in March and I guess, you're saying not seeing at April so.
Is there a catalyst for freight to improve within the quarter.
And then I guess the contract rates I don't know how much of the impact you saw in <unk> of a contract rate stepping down seem.
It seemed like a sequential headwind. So how would you think about truckload or in <unk> versus <unk> is that.
Potentially under further pressure just given that lower contract rate impact so.
Just some thoughts around tucuman truck. Thank you.
Okay. Thanks, Tom maybe I'll take the first half of that question, maybe Adam can take that second half.
As you noted.
We mentioned.
We did not see that normal March seasonal uptick like like we've seen in virtually every other first quarter end.
That has continued in April .
And April never is a whole lot to be excited about just just given kind of where it falls in the calendar and the seasons.
And that continues to be true. This year. It appears that our temperatures have been quite cool through the early part of the spring and as temperatures begin to rise we expect that that will bring a little bit of a catalyst in the beverage season as that begins to pick up.
We're from the indications that we hear.
The wet the wet season.
Throughout the first quarter will lead to a little later produce season. So.
I do think in the second quarter, we have the possibility of seeing that kind of seasonal uplift, which we.
Which is too early to see any typical second quarter, but we still could see that.
As we move deeper into may for beverage and probably closer to June on the produce.
That being said the other.
Key factor to watch is is to start to see imports normalize a bit.
You know things in the southeast.
Have have stayed a little bit this year with the port I looked at a report this morning and savanna.
Savannah has got.
About 10 ships out there in L. A long beach had too and so it's very rare that you would see.
Savannah has a.
Multiple like that.
Of shifts a dock versus L. A long beach and so there are some indications.
That we're starting to see a pickup in some of the volumes that are.
About to make their way the containers that are about to make their way over the ocean income.
Into the West Coast again, and so this has been a.
I think it's been 20 years since we've seen such a prolonged deficit of imports on the west coast and so.
Obviously, we have a fair amount of exposure in the west and so we've had to navigate that already it's hard to imagine that that would that we would see a repeat as difficult on imports for a consecutive quarter and the second as we saw in the first so that would be a positive sign to look at maybe to went out for a comment on that.
Sure sure and I think you know just to dovetail off what Dave said.
Anecdotally from some of our larger customers you know they they feel in a much better position from an inventory standpoint.
And so you know what I think they expect their orders to ramp up to replenish the inventory as they work through the overhang.
It was really spring inventory that they got last year late.
When we think about our contract rates.
We're through much more bids than we would typically be at this time as you know many of our customers were pulling that forward to try to I think get some concessions on rates before they normally would bid and so I think we've felt a lot more of that pressure in the first quarter than we typically would in a normal bid season, but certainly.
Sequentially, we would expect to see more pressure on rate per mile and that would weigh on margins and so we are expecting operating margins in the truckload business to fill some some small pressure sequentially and then from there improving as we as we transition to the back half of the year in third and fourth.
<unk>.
Great. Thank you very much.
Okay.
Your next question comes from the line of Jack Atkins from Stephens. Your line is now open.
Great. Thank you and good afternoon, Dave and Adam.
So I guess two.
Two part question, if I could Dave I guess Im just trying to think about and Adam Bill fair to chime in as well, but as you think about that.
The potential for a market inflection or stabilization by the time, we get to the fourth quarter.
I guess, what's giving you the confidence to be able to make that call. It we've certainly coming off of a.
Extremely unusual last two and a half three years and I would just be kind of curious.
So it kind of gets you to flush that out a bit.
It sounds like customers are maybe a little bit more optimistic but it would just be curious if you could maybe talk a bit more about that and then as it relates to the U S. Express acquisition you have been getting some questions from from investors about.
How much potential revenue call there might need to be there.
As you guys implement profit improvement strategy, so Dave perhaps you could talk about.
What maybe that happened there in terms of calling some revenue just like you did at swift to be able to get to the profit targets.
For there thank you.
Okay, Okay, Jack what we'll try and give you answers here.
<unk> the questions.
I would say when we look at what gives us the confidence.
When we look at the supply demand equation. Despite the fact that the band has been down.
It tells us.
And things have still been.
And there is and it still continues to be weak tells us that we still have some more supply that needs to be worked through.
But we think that we're nearing levels, where where do you start to over correct. How much supply has come out. So if we look at it from a supply.
Posture.
Three key factors, there's what's going on with trucks and we know that we're now a few years with the inability to produce enough trucks to maintain the refresh rate within the industry and so as was noted.
We're seeing life still in the used market because that's the most viable alternative to a new truck and that really is not a legitimate viable alternative when you can't keep the refresh rate alone and and so given the challenges in supply chain to deliver the volume of trucks is all.
Also led to.
Steep steep price increases at a time when the rates will not support that so so so the first of the three would be look at what's going on with trucks, we would not be surprised if we saw.
Meaningful cancellations.
It sure feels like that world has loosened up quite significantly.
And typically what you know.
Have a tendency to overcorrected, a second would be labor, there's indications that labour seem to peak sometime last year and approximately three to maybe the early fourth quarter, but likely in the third quarter. When you look at over the road employment.
It feels like that's been slipping since we have our own parameters that we look internally when we look at what it takes and how difficult. It is to source leads and in particular to hire experienced drivers and so we have seen all of the signs of of labor shifting away from from other businesses.
And then we've experienced it with services, obviously that we provide to third party carriers, whether it be fuel discounts or insurance.
And then other.
The relationships we have in our brokerage we definitely are seeing attrition.
We are we understand the economics of trucking and when we look at where the rate spot rate environment is.
It's not possible on many head haul lanes to still be profitable.
And exceed your cost per mile. So.
We definitely see the attrition underway in labor and do not see a floor that that comes into play to stop that and then the third would be well you know whats the.
What's the buffer in other words, what is the appetite for financing to allow.
Small businesses small carriers to be able to weather the storm to get access to funding to to replace and replenish very old equipment with slightly newer equipment or to navigate a negative cash flow situations and you know in.
And that that is the kind of the third leg here that that has been rather abrupt in terms of banks tightening up the credit there. So so those three factors you know in previous cycles. When you have those three things going on it just doesn't it's only a matter of time and we are arguably in.
Our fifth consecutive quarter.
Of steeply negative spot rates with unrelenting inflationary costs. So.
So you know, where we're going to need to see another quarter or two.
And see where we go but the.
The combination of.
Of another quarter or two where we don't have robust demand.
And in the supply chain has been able to play a little bit of catch up.
They all seem to be pointing to a time, where there is there will eventually.
We expect in the fourth quarter, you'll have a more ordinary supply chain flow and it will be met with significantly fewer.
Trucks and drivers and trailers.
Now just my take on your second question about the revenue call. It U S Express.
Hard to to get overly specific until we've closed close the deal. There is a lot of information specifically customer rate et cetera related that we that we won't have access to until we close that likely early third quarter.
But I would tell you that.
We are not going into this with any kind of expectation for.
Revenue call that's not that's not how we look at this.
That would probably be the wrong way to look at it as well given where we are timing wise in the cycle, let alone just the way we approach these kind of businesses now.
Sensing that possibly that comment comes because after the 2000 and September of 2017 Knight Swift merger, we saw a decline in revenue primarily because of a reduction in the number of trucks over the road, but that was a different a very different scenario that was a scenario where we had.
New drivers were.
We're not subject to hair follicle drug testing and so.
After closing that deal and are in the fall of 2017, starting in January of 2018, we began hair follicle drug testing, which.
Whats disqualified a significant number of drivers very similar to the number of trucks that ultimately came off the road in the first 18 months. We also had a.
Some independent contractor exposure in areas that we werent comfortable with and so the combination of.
Reducing our.
Our increasing safety standards, while reducing risk in the independent contractor program.
And and that had more to do with that than it did.
Somehow trying to call our trim revenue and we wish it wouldn't have been that way, but that's how that was we weren't able to recruit drivers.
Qualified drivers at a fast enough pace to replace those that were not qualified of course over time by changing some of the sources and leads and things with the with the driver hiring we've been able to address and deal with that issue at U S Express.
They have already adopted hair follicle drug testing and so that that.
That bridge has already been crossed they do not have the same kind of independent contractor exposure that was that we previously had and so when you look at U S. Express what you have is a business that is largely broken up into a few big pieces, you've got a very large dedicated.
<unk> $800 million.
That's performing today.
In historically, if I look at previous times based on their public filings. They were performing in the mid nineties, you've got an over the road piece Thats very similar size almost the same number of trucks approximately $750 million.
That's that's underperforming and at.
It Hasnt been Hasnt been profitable and then you have a $300 million independent business in total transportation that was performing what appears to be largely in the in the upper mid to upper eighties, and then a brokerage business. It's got a decent decent operating ratio in the mid nineties and so so really you break all of.
That down.
Not looking at this Jack is is that there needs to be really any kind of revenue call and so we.
We'll work through those details after we close.
But I wouldn't be budgeting for that yes, just to add to that Jack as Dave mentioned the issue on the Swiss side was more driver related then a conscious effort to.
Due to cut back on any customer freight and when I look at the used express opportunity I mean, theres, a very large delta between the turnover at night lift and the U S Express turnover and so for us to put some resources there and make some progress there they already have a very good recruiting effort I think gives.
Some protection from from losing some of the drivers that we saw during the Swift merger. So so I think we feel confident that we won't be able to you won't see the same type of slipping revenue as you as you alluded to.
Okay. Thank you for the thoughtful responses guys.
Yes, Thanks Jack.
Your next question comes from the line of Ravi Shanker from Morgan Stanley . Your line is now open.
Great.
Thanks for the color.
Maybe if I just take a step back a little bit and then Adam I know you gave a bunch of detail on the guidance in the second half and everything else, but just big picture.
Dave when you told US a year ago that you thought the floor of earnings was $4. Obviously are in the mid threes right now kind of what has changed is as the cycle has been more severe than you thought back then has the diversification not helped.
With the cyclicality of earnings enough.
What changed was that initial view and kind of whats your current view of where peak our normalized EPS.
Yeah, Yeah, maybe maybe I'll touch on that first Ravi and then Dave can add any additional color. So should I think about the $4. Certainly we were not expecting to see the results in the insurance business that began to show up in the fourth quarter and continued into.
The into the first quarter and in some of those would have been attributed to probably a more challenging environment, where you have some smaller carriers that are probably pressed to run more miles to make up for lower rates that are challenged to make some of their payments on their on their insurance premiums were feeling the impact of that as well.
Just some of the other compliance issues around the program that we're a bit challenged and not having equipment available from a camera standpoint.
When we were in the heart of the pandemic and some of that equipment was not available because of supply chain constraints and so we were trying to be flexible with some of these carriers and probably found that we had some adverse selection. So when we pivoted the strategy.
To try to limit the downside on that business I think certainly we're feeling the impact on our guidance that I mentioned thats, probably about half of the change in what we made.
From what we originally put out so that was unexpected and.
Not planned for and then we think about the the current environment today, we certainly werent planning for imports to be at historic lows.
Think of 2021, we saw historic demand and some of that was just because of constrained capacity from a labor standpoint, we didn't quite know what the backside of that was going to be and it's proven to be a lot more dramatic the change now I think when we look at that how we've always tried to forecast this business can probably.
Forecast how quickly it changes from from from declining as well as improving.
And so when we look out to the back half of this year.
We still have some optimism, but it's probably been pushed out a bit given given the current environment, we're in but hey that could change more rapidly than we expect again $4 is the number that we felt.
We had some confidence around but hey, there was a few moving pieces, we didnt, we didnt account for it but you know as Dave mentioned in his opening remarks, and I look at the trough of earnings assuming the guidance holds up it's still much higher than we were in previous cycles in the businesses. We did layer on LCL has helped us get there.
The stability in that business, and growing logistics, and and and I keep the profitability coming from the Swiss business relative to where we were when we first we first merged if all have all led to that higher trough number and then we look out with what we expect to be able to do the progress we'll make with US Express will again reset.
That number higher both both the trough and the peak of earnings.
Yes, well said Adam.
Ravi I would I would just add that.
67% decline in our logistics operating income business for the first quarter that that was.
That was quite an adjustment in for some of the reasons Adam mentioned right the decline in imports, which feeds but much of the country with from a full truckload perspective.
Our logistics business helped support a little bit our asset based business I will tell you that.
To take a 51% decline in revenue.
And a 67% decline in op income in that business and yet still produced a 94% operating ratio is rather acrobatic I mean, I don't know that there are many businesses that can that can withstand that kind of top line.
Change and yet still be efficient.
And nimble to move with the market, which they did it.
It's just that Rob some income.
And and I think that that.
I can't emphasize enough that about 50% of that adjustment below the original guidance is tied to that insurance program and so.
And so that's.
I would hate for people to lose that.
Now if you still were to go down to call. It the midpoint of the new guidance.
That still is going to put you have more than 60% higher on an earnings per share basis than we were at the trough of the last cycle and so.
We're trying to mitigate the cyclicality of the best that we can but more importantly, we're trying to make sure that as we go from cycle to cycle.
That the color of the high at the low continue to increase and surely that is what we have seen happen now for the last few cycles and.
We've been able to exacerbate that by making strategic acquisitions, beginning with the Swift acquisition in 2017.
Announced in April of 2017, which was not exactly a great freight environment.
But to be able to make these moves to further amplify and put our put our free cash flow to work to help us make sure that from cycle to cycle. We go.
In improving both the top and the bottom of the performance with our earnings per share. That's that is a that is a key objective for us and I think that.
Hopefully you will agree we're well on our way to set ourselves up to continue to do that for the next cycle.
Understood. Thank you.
Thanks Ravi.
Your next question comes from the line of Kenn Hoekstra from.
From Bank of America. Your line is now open.
Okay, Great Dave Adam.
Afternoon early evening maybe.
Maybe talk a little bit about the outlook on on bid season here, obviously, we've got a spot rates that have really rolled and surprisingly continue to roll downward right, where we're now into the dollars twenties.
It seems like that has historically been a trough I know maybe you can comment on your thoughts there and how the trends are going as we kind of move almost two thirds through bid season here. Thanks.
Okay, Ken Thank you.
Yeah I think.
It does it does look a little bit like spot rates of maybe hit hit a floor there.
Hard to think.
Hard to think that imagine that they would have gone that far to begin with but.
But it seems rational that they would.
They would be bottomed, where we see them kind of bouncing on the bottom based on certain indices.
When we look at the bid season I would say.
Had somewhere between two and three years of truckload rate increases with customers.
Now looking to try and get some of that back now those rate increases that we've seen payless.
Paled in comparison to ocean rates for example, or some of what they've had to pay for warehousing or other components of the supply chain.
But there clearly is an effort to get some of that back now. They're also has been an acknowledgment through the behavior.
Our customers that they recognize the value.
With the committed contractual business that usually involves trailer pools. So that so that they have days to unload a trailer and not two hours to unload a trailer before they're panelized and take increasing cost and so.
We think that of course that is a component of changing evolving regulation with <unk> and the kind of outsized value that you get with a nationwide trailer pool network.
You may be to support that if you were to go back and look at the gap between spot rates and contract rates from the 2014 peak to the 2016 trough that spread between contract and spot was about 30.
And then if you looked at the most recent previous cycle, which would have been.
2018 until probably the first quarter of 2020.
The peak spread there was 60 <unk> of course, that's the first cycle since we've had electronic logs. So you see this double.
<unk> doubled the spread meaning.
Meaning.
Significant acknowledgment of the value of the trailers can bring.
Now if we look most recently.
Peak to trough on the spread with spot rates now somewhat moderating it looks like that spread.
It appears to be about 78, so somewhat similar.
But even more exacerbated and so.
Perhaps there's a little bit of an effort to try and get a little bit of that back by customers. We see that it's a fluid situation.
And as Adam mentioned, we've been through significant portion of those bids we think as many as 70% of our bids are already flowing through through the network and so that gives us a little bit of a visibility into what.
What to expect as we see the year play out of course.
The minute things tighten up.
Things things begin to change in rates change rather quickly.
And that kind of an environment. So.
Hope that's helpful Ken.
No. That's helpful. Yeah, I think just given the speed of the spot it's interesting to hear whats what.
What youre seeing and how that's going to pan out, but I appreciate that historical look back.
Thanks.
Your next question comes from the line of Jordan Oliger from Goldman Sachs. Your line is now open.
Yes, Hi, I was wondering if we could turn to LTE out for a second maybe talk a little bit about cerner core price environment.
You know as the industry.
Assume generally holding up maybe some color there, but also a little bit on the demand environment. Obviously, we've talked a lot about truckload, but you know as the.
Timing of things for LPL relatively comparable in terms of your expectations. Thanks.
Yeah, we're still new in this boy, it's so refreshing compared to what we see in the truckload world and so I think relative to where <unk> has always been seen.
<unk> seen some pressure on shipments.
But as we noted revenue per hundred weight was still up was positive eight 7%.
And.
First quarter is seasonally not a great quarter typically for LTE also.
Feel very good about the 85, 7% operating ratio.
From indications April is off to off to a good start in <unk>, which is not what I would.
What we have alluded to already today.
In the full truckload market so.
So we're seeing the resilience there.
And.
We've got some difficult comps here for the next couple of quarters.
On year over year shipments.
But we remain encouraged there and I would say that business is performing probably most in line with what we would have expected.
For this year.
To answer your question, Jordan and I would just add Jordan, we combined the AAA and NME networks on a on a single platform, we did that in the fourth quarter.
It kind of worked through some some challenges that have come from that as you would expect with any type of integration and probably by that by the end of the first quarter, we put most of that behind us and so as we look towards the end of the first quarter and into the second quarter. We've seen some nice volume pick up particularly in the <unk> network as a result of now being par.
The larger network with a AAA Cooper group.
Thank you.
Thanks Jordan.
Your next question comes from the line of Chris Wetherbee from CB <unk>. Your line is now open.
Hey, good afternoon, guys, it's Rob on progress.
Hi, how are you.
Great.
Could you give us a little bit more color in terms of.
The cost per mile outlook that you guys have provided top line.
<unk> sales will be staffing up.
<unk>.
Excluding the gain on sale.
What are your thoughts with regard to inflation in the back half of the year.
Alongside with the Green bonds are these pilot sales that you guys are doing <unk> and you've got good line of sight or this just being on your expectations of what you're seeing flow through.
Good.
A night stores, what we're installing in retail.
Yes, so the hit on the gain on sale.
The lion's share of these sales are going to be to third parties and then it does feel like some of the third parties because of where new equipment prices have grown too that I think their only option to improve the age of their fleet, which is certainly can be older than our fleet or other large public companies.
Would be to access the used equipment market versus going to new equipment, and so I think we've seen prices hold better than we originally thought because of that dynamic and so we trade very little now because we have a pretty good.
Salesforce in a network to dispose of these of the equipment and so that's that's what's led us to improve the guidance around gain on sale now absent gain on sale I think we're still making progress in several areas know hey, it's not easy I think there is there are certain vendors who took pricing.
I have quite a bit during the pandemic that we're going back to because you know.
Some of their raw goods prices have come off their commodities have come off and we're seeing some concessions now it's slow, but where we have quite a bit of purchasing power.
And so we'll probably get more than our fair share of discounts and then hate when we think about when we do close the deal with you as expressed it probably gives us even more opportunity to help on the cost front for not only U S Express, but that just the leverage that overall spend to get to get a better deal for all companies involved and then you take it.
Labor has loosened up some for the large carriers because there does seem to be a flight to quality from the small carriers, who are failing or don't have the freight opportunities to come to the large carriers and so that's that's that we haven't had to do as much in terms of sign on bonuses or other incentives, we're getting more experienced hires.
So not as much training required as we did several years out so we're getting some making some progress some savings in that area and then as we get into the back half of the year.
If the market plays out like we expect in volume starts to tick up we expect miles per tractor to improve on a year over year basis with search, which certainly helps cover your fixed costs and lowered your overall cost per mile. So.
That dramatic moves from where we are but some small sequential improvement as we progress through the year.
Got it.
And I would just add to that.
When you look at the miles piece. So if you were to back end you'd see our cost per mile was up about three 7% here in the first quarter that was with miles down approximately two 7% and yet those miles had been down have been down for some time several consecutive.
Five quarters and so.
And naturally in a market where.
It's it's more difficult to find loads and volumes are pressured.
We're at a spot where there is.
Rather significant amount of operating pent up operating leverage in the business.
If we can.
If we can improve that kind of productivity and what that can help us do with costs.
Adam didn't mention this but we are battling higher interest rate cost on a year over year basis, when we compare as we move throughout the rest of the year and so that's Ravi as earnings per share just a little bit as well so.
So theres been tremendous effort to keep that that cost per mile.
And an increase thats, just a low single digit but there are.
There are ways and pent up leverage that can really help us maximize the earnings and the cash flow that we can create in this business as we get through this toughest part of the cycle.
Hopefully sooner than later.
I appreciate the color guys.
Okay. Thanks.
Your next question comes from the line of basketball majors from Susquehanna. Your line is now open.
Yeah, Thanks for taking my questions.
Going back about insurance.
Hi, good evening.
You're going back to the insurance business can you walk us a little more detail through some of the disappointments that you felt in the last couple of quarters.
Tween.
What came from credit risk and non payment versus your underwriting severity and frequency that just didn't meet your expectations and if you look out a little bit further or is that a business that can grow again or is something that's going to be de emphasized permanently given the experience over the last couple of quarters. Thank you.
Those are good questions. We just have to recognize this is a new business and it's growing rather rapidly for us.
The.
Efforts that we have to mitigate risk over time have been a little bit challenged by the ability of some of these carriers to access technology and some things that they that the carriers had fully intended to do but.
But weren't necessarily always able to do because of supply chain challenges for certain technology components.
I would say that the tail.
Development on these kind of claims it takes a bit of time and and so you don't necessarily know exactly.
How these play out when youre, starting something from scratch and growing it rather rapidly you don't always know quite how that's going to play out and so it's.
It's played out for the last two quarters and an unfavorable way relative to what we would've expected from a claims perspective and so.
We had been building quite a surplus it felt based on the claims reserves up until up until these last couple of months and then then you couple on you couple that with a very difficult operating environment, where you have carriers that are finally to the point to where they are unable to pay their insurance premiums, which they recognize that means theyre going to lose there.
Coverage, which means theyre going to lose their ability to haul loads, which.
Further gives us conviction for how difficult the environment is and the likelihood of the continued supply if not accelerated.
Supply attrition.
But that is now a more recent factor to play out that was a bigger factor in the first quarter than it was in the fourth quarter.
But I would say between the two quarters you know obviously, a majority of that that expense would.
Would be on that insurance and claims due to frequency and severity of the claims that we've experienced and so.
As we noted in the release.
Youre talking about 11 in this quarter and so.
Hence we've taken some actions to mitigate that now as for where do we go from here.
You know Theres a lot in the program that are that are performing well.
That is a good return business for us we.
Operate somewhere in the neighborhood of 4 million miles a day and we.
We understand we understand safety, we understand risk and so we do think that there is a very viable business here in a very viable.
Growth opportunity in this business.
They are just are times, where you want just want to take risk and there are times, where perhaps you want to back away. This is the time, where we want to back away. It also allows us just to catch up a little bit with the prolific growth that we've had in terms of systems and our ability to manage it and allow supply chains.
To catch up so that.
Things can function the way that we intend for them to do but long term, we do see this as a growth opportunity. So this this pause in this slowing of growth we view as temporary so.
Well. We appreciate we appreciate your question Bascom and <unk> and with that it looks like we are out of time J P will turn it back to you to conclude everybody. We appreciate you joining our call.
Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect.