Q2 2023 Knight-Swift Transportation Holdings Inc Earnings Call
Good afternoon.
I'm as JP and I'll be your conference operator today at this time I would like to welcome everyone to the Knight Transportation second quarter 2023 earnings call all.
All lines have been placed on mute to prevent any background noise.
If at any time during this call category immediate assistance. Please press star zero for operator.
Speakers from today's call will be Dave Jackson, President and CEO .
Adam Miller CFO Mr. Miller, the meeting is now yours.
Thank you JP and good afternoon, everyone and thank you for joining our second quarter 2023 earnings call.
Today, we plan to discuss topics related to the results of the quarter provide an update on current market conditions and update our full year 2023 guidance. We have slides to accompany this call are posted on our investor website.
Call is scheduled to go until 530 PM Eastern time, following our commentary we will answer questions related to these topics in 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 will answer as many questions as time allows.
We are not able to get to your question due to time restrictions you may call 602, 600 66349.
So 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 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 that may affect the company's future operating results.
<unk> results may differ before.
Before we get into the slides I want to turn the call over to Dave for a few opening remarks.
Thanks, Adam and we appreciate you joining us today.
Okay.
We're now over a year into afraid down cycle with an unusual combination of dynamics at work to create a particularly difficult operating environment.
No that we've ever seen freight demand fall this far so fast and for so long without an accompanying economic recession.
Not suggesting the truckload demand softness is an automatic read through where predictive indicator of broader economic weakness in fact, we're very encouraged with how consumers and the economy of digested interest rate increases and their positive impact on inflation.
But the truckload market was severely impacted by the reduction from the unusual an enormous growth in inventories that built in the latter part of 2021 and into 2022, the worst of those adjustments appear to be behind us and we expect further normalization in the flow of goods and supply chains.
This amortization is now being met with less truckload capacity as carriers that survived.
Yes.
The harsh truckload freight environment.
What are the reasons is the lack of cost reprieve that would normally be associated with such a decline in truckload freight demand.
Inventory Destocking ketchup is created ordinarily a broader economic recession would have matched those soft freight volumes with significantly lower fuel prices very low equipment costs and a loose labor market drivers more plentiful than any other time.
None of those cost concessions have been present, this time, leading to margin pressure business failures for others.
These prolonged challenges are setting up for an eventual strong recovery such recoveries opt income from an unlikely catalyst and can be difficult to predict with precision.
We're positioned to grind in the current environment and thrive as conditions improve this includes our newly acquired U S Express.
Additionally, we have significant opportunities unique to Knight Swift such as the build out of our LTE network and doing for U S Express what we have done with Swift and achieving new levels of profitability. We are seeing the benefits of diversification with our <unk> segment and their continued growth and performance.
Now I'll turn to slide three.
Slide three compares our consolidated second quarter revenue and earnings results on a year over year basis.
Revenue, excluding fuel surcharge declined by 17, 9%, while our adjusted operating income declined by 66, 3%.
GAAP earnings per diluted share for the second quarter of 2023 were <unk> 39.
Per share and our adjusted earnings per share came in at 49%.
These results were negatively impacted by a $10 2 million dollar increase or <unk> <unk> per diluted share in interest expense and the $15 million operating loss or <unk> <unk> per diluted share and our third party insurance business within the non reportable segments, primarily as a result of ongoing claims development.
During the quarter as we work to realign the performance of this business.
Operating loss was reduced from the $22 $8 million loss in the first quarter.
We anticipate that the operating loss will moderate further to approximately $10 million for the second half of the year.
Now onto slide four.
This slide illustrates the revenue and adjusted operating income for each of our segments freight demand in the second quarter was below expectations and is largely.
A lag to the typical seasonal patterns of support.
For the fourth consecutive quarter.
The depressed spot market and weak demand cause pressure on contractual pricing to intensify in the truckload intermodal and logistics segments.
This caused acute pressure on margins in our truckload and intermodal segments, our LTM segment weathered the soft environment well operating in the mid eighties.
Logistics navigated significant declines in volume and revenue per load year over year to produce a 91, 6% adjusted operating ratio.
I'll now turn it to Adam to discuss each segment's operating performance starting with truckload on slide five.
Thanks, Dave.
On a year over year basis, our truckload revenue, excluding fuel surcharge declined 15, 5%, while our operating income declined by 67, 1%.
Selecting the comparison of it, especially difficult second quarter of 2023 against the record setting quarter, a record setting second quarter earnings of 2022.
The prior year quarter was the peak of overall rate per mile is still rising contract rates overcame spot rates have begun to fall rapidly.
Softer than expected demand in the first quarter put more pressure on contractual pricing through the second quarter than expected.
Our cost control efforts helped hold cost per mile flat with the first quarter. The costs were still up two 7% year over year.
During the quarter revenue per tractor fell 14, 5% driven by an 11% decrease in revenue per loaded mile and a three 3% decrease in miles per tractor.
Overall miles and utilization bottomed in April before building modestly throughout the balance of the quarter.
This second quarter marks the lowest absolute utilization level for it for a second quarter ever.
Largely due to the weak demand environment, coupled with the persisted tightness in labor in the general economy. The low utilization is one of the headwinds on cost per mile and revenue per truck that makes the current environment, particularly difficult, but which represent a meaningful operating leverage opportunity once demand levels be cut.
<unk>.
Now I will move to slide six.
Our <unk> segment continues to perform well modestly growing revenue, excluding fuel surcharge and delivered 85, 1% adjusted operating ratio.
The softer volume environment.
Pricing remains solid as revenue, excluding fuel surcharge per hundred weight increased 7% year over year shipment.
Shipments per day were down three 9% year over year, but did show.
Did show a sequential build in May and June which appears to be continuing into July .
Further we have experienced a recent increase in inbound requests from shippers for additional capacity support moving forward.
The map shows the AAA Cooper and MMA terminal locations and indicates new locations since the acquisitions in 2021 as well as planned locations in the near future.
Filling out a super regional network in the short term and creating a national network into 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. This remains a key strategic strategic priority for us.
Now on to slide seven.
Despite the challenges posed by the soft market, our logistics business remains disciplined and nimble and maintain near double digit margins with an adjusted operating ratio of 91, 6%. This was achieved while the current environment is marked by topline price pressure is no longer being offset by corresponding declines in purchase transportation.
Rotation costs overall revenue was Dallas 82, 4% driven by a 26, 8% decrease in revenue per load and a decrease in load count of 35%.
Customer behavior has exhibited a strong preference for the power only value proposition over the past few years. These.
These volumes were stable quarter over quarter, while our traditional brokerage volumes declined sequentially.
Further we expect this service will be an outsized beneficiary once demand recovers.
On the right we show an actual snapshot of our travel locations at a point in time to illustrate the extensive coverage we have throughout the supply chain network. This network of nearly 80000 trailers growing further with the addition of the U S Express provides us the ability to respond with distinctive scale in both our truckload and logistics segments too.
Our 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.
On slide eight I will cover our intermodal segment.
Revenue decreased 21, 5% driven by a 24, 5% decrease in revenue per load, partially offset by a 4% increase in load count.
Additionally, the wind down of our container leasing project further pressured revenue and operating margin in the quarter.
Intermodal industry volumes are down due to the soft freight environment and the current competitive position of the truckload alternative customers are leveraging the low spot rates quicker transit times and the better service in the truckload market. However improvements in rail service and positive volume Awards, we are seeing through the bid at.
<unk> should support volume growth and a return to profitability further we will experience improvements in underlying rail costs in the second half of the year.
Now on to slide nine.
Slide nine illustrates our non reportable segment, which includes insurance maintenance and equipment sales and rentals under iron truck services as well as equipment leasing and warehousing activities for the quarter revenue growth slowed to one 6% year over year, largely as a result of our.
To address the recent challenges within our third party insurance program, our efforts to improve our iron insurance line of business reduced its operating loss by $7 8 million since the first quarter to $15 million.
Operating loss during the second quarter.
We have made progress reducing the exposure basis of third party carrier risk and we are applying more stringent underwriting criteria and higher premiums for any pertained risks as policies come up for renewal. The current operating loss is primarily due to ongoing claims development and the time it takes to work higher premiums through the portfolio.
No.
The other businesses within the non reportable category remained largely stable and their income partially offset the loss within the iron insurance business, bringing the non reportable segments.
As a whole to an operating loss of seven 1 million, which includes amortization of intangibles of $12 million related to the 2017 merger between Knight and Swift and other acquisitions.
We anticipate modestly positive operating income for the non reportable segments for the second half of the year, we expect to.
Continue growing the revenues and income from these other services over to over time and believe this effort supports our ongoing diversification objectives.
Now onto slide 10.
While incoming cash flows are down during this freight recession, they still compare well in a historical context when compare to pre pandemic levels. Despite the challenging current environment, we continue making strategic investments in technology and businesses with an intentional approach to deploying capital to improve returns and diversifying our business.
<unk> and position it for further growth.
Recent examples of this are our 2021 entry and further organic expansion in the <unk> sector to tap into new growth vertical that also enjoys greater stability than the truckload industry.
Organic and inorganic investments in technology to remove friction empower our drivers and third party carriers to allow greater earnings power enhanced value and visibility for customers and unlock synergies between businesses.
As our acquisition of the U S Express earlier this month to bring 2 billion in revenues with significant room to improve operating income and cash flows in a business, where we have demonstrated competence.
For more context on our plans for use express I'll turn it over to Dave for Slide 11.
Thanks, Adam we're excited to have the transaction closed as of the beginning of this month and to have our synergy teams fully engaged with work well underway to execute the plans formed over the past few months to improve results at U S Express.
We've already begun to realize $6 million of monthly cost savings out of the gate with more ground still to cover.
We're already making moves to deal directly with shippers and remove intermediaries that often prevent profitability for U S. Xpress.
The revenue opportunities are not only in pure price, but a network strategy freight selection lane density customer mix and cross brand collaboration not all of which require an improving market to facilitate progress. Additionally, we are preparing the business with tools and training to react to a changing.
Market similar to our approach at night, and Swift and our other truckload brands.
Most of our focus is the over the road U S Express business that has not performed profitably for some time the.
The need for improvement at total transportation in Jackson, Mississippi, and the dedicated segment is less however, we expect to see meaningful progress there too.
We expect U S express to achieve breakeven operating results before interest expense in the first half of 2024.
We still target positive earnings accretion for 2024 and reached the $1 per share of earnings accretion milestone in 2026 as previously communicated early on barring a market recovery, we anticipate much of the improvement realized will be on the cost side increasingly shifting towards the realization of revenue synergies over.
Time as the market improves we estimate that 60% to 70% of the synergy opportunities are in the revenue per truck for the balance in the cost per mile.
Given the scale of U S Express and the large opportunity. It represents for earnings accretion over time, we feel it appropriate to provide a little more detail on the types of efforts that are underway that are underway to achieve the goals. We have communicated I'll turn it to Adam to provide some detail on the synergy and transformation efforts.
Thanks, Dave.
So we established 10 synergy teams across the business with members from both U S Xpress and night and Swift that have been working closely together since we announced the transaction in March. So these teams are all focused on different areas, but all with the goal of reducing our cost per mile <unk>.
<unk>, improving our revenue per tractor.
We have several initiatives already underway I'll give a few examples.
We are building out the terminal network with existing U S Express properties that will mirror, how we execute the OTR the over the road businesses at both night and Swift.
So two terminals have already been established and we have more to come.
This will allow the U S express team to develop better relationships with drivers improved turnover enhanced safety recruit in the local market develop freight density and regional opportunities and finally have financial accountability to a detailed P&L now this is a significant change for U S. Xpress.
The team is excited and fully onboard.
And a second example would be our pricing and account management teams that are developing a more cohesive market strategy and our building tools and leveraging available resources to allow them to navigate changes in the environment. We're focused on upgrading our freight selection libertine reliance on brokers.
<unk> seen outsized spot exposure that exists and securing more commitments all with the intent of significantly increase in our revenue per truck per day and meaningfully improving margins. We have many more initiatives in process that we wanted to share a couple on the call.
We have a lot of progress to make with you as expressed in total transportation, but we couldnt be more excited about the team we have working on these initiatives and we have confidence that we will see meaningful progress in the near term as well as in the long term.
Ill turn it back to Dave to touch on the market outlook on slide 12, Okay. So slide 12 contains our updated outlook on market conditions for the remainder of 2023.
We believe we are in the final stage of inventory Destocking, while we're not ruling out a market inflection in the next few months.
Calling for such a turning point as such our base case is for a modest seasonal uplift in the fourth quarter, but not a moderate seasonal uplift or a strong one but a modest seasonal uplift, including a return of some typical seasonality.
Activity and project opportunities with some early movement on project arrangements already showing signs.
Having experienced deeper pressure on revenue per mile in the second quarter than we previously expected we anticipate contract rate declines will slow as bid activity has quieted down and volumes seem to have stabilized after bottoming in the second quarter spot rates may bounce along the bottom a show modest improvement in the third.
Quarter before showing expected modest seasonal uplift in the fourth quarter of this year.
The soft environment and lower rate expectations combined with ongoing inflation in equipment maintenance that insurance will keep the pressure on carriers, especially smaller and less well capitalized carriers higher interest rates and tight credit standards are also taking a toll these factors should serve to accelerate.
The ongoing capacity attrition and limit immediate capacity expansion upon a recovery.
Pressure on LDL shipment volumes seems to be easing throughout the second quarter, and especially entering into the third quarter. We anticipate this trend to continue and for pricing to remain positive year over year.
Inflationary pressures should ease the clinical work alternatives in the general economy will pressure hiring and utilization until freight conditions improve.
Demand should begin improving as shippers stabilized inventory levels in import volumes returned to more normal levels combination of demand recovery and supply reductions should lead to improving freight market conditions in the near future. So long as the consumer spending remains largely stable.
I'll now turn it back to Adam to cover our 2023 guidance on slide 13.
Okay. Thanks day, this will be our last slide of our prepared remarks for.
For the full year 2023, we now expect adjusted EPS to be in the range of $2 10 to $2 30.
Which includes a projected U S express loss of 25 to <unk> 30 per share, including roughly <unk> 11 per share for acquisition related and legacy interest expense. This guidance is updated from our previously previous guidance of $3 35 to $3 55 per share, which did not include U S Express.
Now we recognize this is a significant change so we're going to walk through some of the key drivers.
First as noted earlier the persistent weakness in demand cost pressure on pricing to intensify in our truckload segment. As a result, we now anticipate that revenue per mile will decline high single to low double digits for the year as compared to our previous expectation of being down high single digits on the year.
We anticipate the 11% year over year decline in Q2 should prove to be the worst, but we are now recovering off a lower base and expect a slower pace of recovery than previously projected with the deficit narrowing in Q4, but no longer being flat year over year.
We still expect non contract opportunities combined with some return to peak season patterns to provide some support to rates in Q4 as discussions around certain projects have already begun.
Our second gains on sales continue to fall as small carriers struggle in the soft market. So our projection has reduced from $15 million to $20 million per quarter for Knight Swift to a range of 10% to $15 million per quarter inclusive of U S. Express moving forward also there is proving more difficult to make further progress on cost reductions.
We had previously anticipated in our truckload segment, while we as Hell cost from a largely flat since late last year. The tightness in labor in the general economy is preventing us from seeing the typical benefit from labor availability that occurs and freight recessions. This serves as a governor on hiring and utilization, resulting in a headwind on cost per <unk>.
While.
And third as in the truckload business, we are seeing greater pressure on revenue per load in intermodal than originally projected even as we continued to modestly grow volumes. As a result, we now project this business to breakeven for the year as compared to our previous expectation for a mid <unk>.
And fourth our guidance now includes the impact of U S Express for the back half of the year, we estimate a loss.
25 to <unk> 30 per share for this business inclusive of the acquisition related to legacy interest expense of approximately 11.
Our other assumptions saw little change and are as follows our <unk> segment is expected to see slight improvement in revenue with a relatively stable sequential margin profile subject to typical seasonality.
Logistics volume and revenue per load remain under pressure in Q3 before improving sequentially in Q4, we still expect an or in the low 90% for the year.
For our non reportable segments, we expect modest growth for the year and our operating income for the second half.
Of the year to be in line with what the second half of the year was last year.
Excluding U S Express truckload tractor count should be down modestly with miles per tractor slightly positive year over year in Q4.
Interest expense should increase roughly $20 million in the second half over the first half of the year, primarily acquisition related and assuming the fed hiking cycle is nearly complete.
Capex is expected to be $700 million to $750 million as you've now added U S Express to the back half of our projections and our tax rate is expected to be 25% to 26%.
That concludes our prepared remarks, so JP, we will now open the line for questions.
At this time I would like to welcome everyone.
To the question and answer session.
Wish to ask a question. Please press Star then the number one on your telephone keypad.
Again this is star one on your telephone keypad.
Your first question comes from the line of Jack Atkins from Stephens. Your line is now open.
Okay, great. Good afternoon, and thanks for taking my questions, Dave and Adam appreciate it.
Okay.
I guess.
If we could maybe start.
I'd like to touch on LCL for a minute I know, it's probably not.
Not the biggest question people will have out there today, but there's a lot of changes going on in the LTE market right now you touched on.
An uptick in activity here in recent days Adam in your comments I'm wondering if you could maybe expand on that a bit and how.
How you think things could unfold here, assuming we do have a closure yellow or maybe a strike early next week.
Are you planning on.
<unk> the network.
Against any sort of operational challenges.
And then I guess.
Return, if we were to see yellow shut down.
Does that change the thought around ACA.
Acquisitions versus building out the rest of the LTE network organically. So if you could maybe touch on that for a minute I would really appreciate it.
Okay. Thanks Jack.
Yeah.
I guess, it's probably.
Reasonable to assume that some of the very recent volume gains that we've seen in our <unk> network might be connected to some of the uncertainty.
That you that you've noted.
Not appropriate for us to try and speculate a whole lot more than that.
But with.
But clearly thats.
Factor at play right now yet to be totally understood how that will totally play out.
I would say that our R.
Our vision and view for building out the <unk> network as one.
It is.
It's steady it's going to involve consistently.
Growing organically and making some.
Key acquisitions, along the way to to fill out the country hopefully doing so with the least degree of overlap.
In cities that are we are already existing hub.
<unk> existing service with our <unk> business, and so I would say that.
Any opportunity to pick up properties along the way.
You know, we would have great interest in that and I would say that we would be opportunistic there as we have been.
Prior there was a <unk>.
Central freight lines.
Sure.
Yeah.
With their bankruptcy and liquidation, we had an opportunity to pick up some valuable facilities.
Thank.
There are some others that are underway that hopefully will pick up some facilities.
There were to be a nationwide network here in the near future that.
Where to offload those facilities there might be some of their larger ones that but we're not quite ready for but.
But if a larger center is swallowed up by somebody who is a little further down in their <unk> networks and we are it may mean that there are some smaller or mid sized that open up.
Trade up so so we're we.
We watch this very closely.
The <unk> business for the long game.
And we've established kind of the style.
The labor style, if you will that we've approached for our network and so.
We're still committed to that and we will stay committed to that clearly if.
If there were to be a disruption as a result of yellow.
I think that.
That could be felt in all types of transportation included in the truckload world.
There is space to absorb that I would say in our own <unk> network. There is there is space to absorb.
Increased volume even to the degree of double digits and so.
We stand ready to help and serve our customers.
Especially if they are dealing with some uncertainty along the way and so.
Our <unk> group.
And AAA Cooper and MMA are incredibly capable.
At being able to I think provide a lot of solutions through a time of uncertainty and so they are positioned and ready to do so and Jack I mean, I would also add that even in our truckload businesses, we're seeing more opportunities come our way from not only AAA Cooper, but other LDL providers and so I think that's an opportunity that could.
Pool, some truckload capacity into the <unk> space to handle maybe some surge volumes that others are seeing but that Jack that you want to be clear, we're not taking that into account right now and our and our estimates for the back half of the year and so that could play out to become a much bigger catalyst.
That is not taken into account right now.
Okay. Thank you very much for the time.
Thanks Jack.
Sure.
Your next question comes from the line of Scott Group from Wolfe Research. Your line is now open.
Hey, Thanks afternoon, guys, sorry about my voice.
Maybe I'm getting a little ahead of myself, but what do you think are the.
Puts and takes in terms of the ability to grow earnings next year, obviously, the pricing that we're seeing now we got to live with that at least through the first half of next year. So I don't know what are the puts and takes as you see it.
So from this reduced space this year.
Well.
And hope you feel better soon Scott first off.
The if you look at the kind of or degradation that we've seen in the truckload business.
At 290 basis points.
If we were to look at our rate per total mile. It's off 1100, 50, so were largely tied to what's going on in rates.
And certainly feeling like that is bottom so.
We would sure hope and we expect that where we've seen the bottom of this.
This cycle, if we look at previous.
<unk>.
Transition points in the cycle, obviously 2017 that came in the second week of September .
In 2020, it came really the start of June of 2020.
And so it kind of just sneaks up youll see things building buildings, and then it turns and.
Our our ability has been with each successive cycle, we have enable to make capacity available in a strong market very quickly almost almost create capacity and so if you were to look at we alluded to the fact that our miles per truck or as low as they've been.
Probably in any second quarter that we have record of and and so we're which is which definitely weighed on your cost per mile but at depth, but it also.
It means we have a lot of pent up operating leverage and capacity to run more miles. So when a strong market not only do rates go up but our ability to begin to maximize the productivity of the business. It can change really fast so again to reiterate we're not forecasting that in our numbers, we're not ruling it out but we're.
Not forecasting it as we look at the back half of the year, but it may not take a traditional.
The bid cycle, if you will to see some meaningful lift come from that so.
If we look at U S Express.
I would say gosh, what a tough time to be to have even more truckload exposure I wouldn't necessarily disagree with that but now is exactly the time to help a business like that positioned itself to be ready for what we think is inevitable. It's just a matter of time and to what degree.
And then how potent that recovery is so.
So that being said I think I think we could very much exit next year.
Sure.
Having made up.
Several hundred basis points in margin.
But probably doesn't go back up as fast as it came down.
But I think it may surprise, you how fast it could be how fast we could recoup earnings now that we have this expanded.
Revenue base with the extra $2 billion from U S Express, yes, Scott I think when we think of how the trucking cycles work.
You see a lift in load count and then that leads to spot opportunities at a premium and that will lead to improvements in contractual rates.
We believe we're one of the first to know when the spot becomes available at a premium.
Isn't being is that we have scale. Unlike anyone else and we get the calls when our customers are in a pinch and need to have someone who can be nimble and we see some of that already very short temporary type projects. So there's a few green shoots but again nothing.
Across the network that would give us confidence in predicting a strong recovery this year, but we're already starting to see some of that percolate in and these are opportunities that we're seeing in many cases, others. Even some of our other brands are seeing those opportunities. So when it does turn I think we know it probably faster than anyone else.
And can react to it and then as Dave mentioned, we have the self help story with you has expressed that will just layer on top of that additional earnings when the market does turn.
Okay that makes sense.
I wasn't sure if it was one question or two if I can get if I can get a second one just follow up on LPL is there given how rapidly things changed in the last week or so.
Is there any are you with anyone starting to talk about Gee, our eyes as pricing really changing given all the changes in the market right now.
I think it's still just a little early.
We would have views and opinions, but things need to play out here.
But yes, probably too too premature for us to comment right now we would have opinions, but too premature for a public comment.
Fair enough.
Thank you guys.
Thanks.
Your next question comes from the line of Ravi Shanker from Morgan Stanley . Your line is now open.
Thank you good afternoon, everyone.
Dave can you elaborate a little bit more on kind of what are you hearing from your customers right now on the cycle kind of destocking or they've done destocking, but are hesitant to restock or they're thinking of restocking.
Kind of how quickly do you think does the cyclic arne.
If people will decide that a consumer is holding up and we're not going to recession.
Yeah, well Ravi I think.
Our customers we've heard stories.
Great lengths they went too.
Store product to find warehousing space certainly our trailers were used in them.
In an unprecedented way to store product and so we've firsthand have seen that that go away.
We have seen so we've seen things.
We've seen that inventory deplete now we've just come through.
Our bid season, where our customers are.
You know that are sort of the largest businesses in the world.
<unk> been negotiating on rates and of course for their own businesses, representing their own interest to try to maximize the decreases that they could get I would tell you that as we've come through this bid cycle.
We have fared better.
Then we would have expected based on.
What the demand might be too strong of a word but.
But.
But we were in many cases, given targets and target decreases in rates.
The customer expected us to get to and somewhat.
<unk> put our incumbent business in jeopardy, if we didn't get to those levels.
I will tell you that in most cases.
We did not get certainly in the cases, where they were aggressive aggressive declines we did not lower our rates to those levels and yet we were awarded business and in some cases, we were awarded even more business than the incumbent business that we have and so.
So it's been a little bit difficult.
<unk> Ravi to always get the exact story in exact outlook, but if we.
It's like the old basketball Defense example, watched the belly button don't fall for the head fake if we watched the belly button, perhaps meaning.
What happens as a result of the bit whats the end product what it's telling US is there is not new capacity out there.
We're not facing severe competition from fellow trucking companies trying to gobble up share or anything I think what we have experienced is perhaps the most.
Irrational aggressiveness, we've ever seen out of the non asset broker group through a bid season and I think there has been an all out attempt to hold onto volume and some of those some of those shops.
That debt.
That has led to some unrealistic expectations for some of our customers full truckload shippers as to what kind of rate decreases.
It could possibly get and so.
When it when it comes down that comes down to it.
Our costs continue to go up our cost per mile was still up two 7% now we're glad that number is down to only $2 seven but it's.
That number has been extremely inflationary for the last few years and so we are not in a position to digest those kind of decreases and still provide the kind of.
Trailer pools nationwide capacity that we've that we've done so it's it feels like we're we're at that point, where as much blood is can be extracted out of the turnover has been extracted and the market seems particularly sensitive right now to the least degree of seasonality.
Now I would say that the freight volumes still have not normalize the imports still are still are weaker.
Then then one would expect them to be so theres still has some room to go here.
But things are things are sensitive. So this is we're in that phase, it's I'm not going to try and predict when and when exactly it's going to turn never gotten it right in the past don't expect I ever will but what we do know as Adam alluded to.
We see it fast maybe as fast as anybody, but I will tell you we see it.
Immediately fast and we've seen it immediately as it happens.
Without.
Nearly the amount of data that we now have and collect and without nearly the kind of size and scope that now we have a.
Across all of our network and so.
What matters most to us isn't exactly when it's going to happen, but it's have you taken the steps necessary to prepare for it to happen.
And so an example would be.
If we look at the Knight Swift network.
It's approximately 2% of our business comes via an.
An intermediary that isn't acting as a.
Hey.
Call. It <unk>, that's personally representing the carrier, but through an intermediary.
Whereas U S Express that number is significantly higher I would say that.
If you were to go back in time, just a little bit prior to our acquisition that number could be as high as 40% and so it's not unrealistic to believe that if youre going through intermediaries versus dealing directly with customers and positioning yourself for the cycles to be able to deal directly with the customer it's not unlikely to see.
The difference in rate that could be as much as 80 or 90 cents per mile to provide in essence. The same service in many cases in the same lanes and so so it's all about how you've set up and how you position your business to be able to provide.
To provide the value and service to our customers and so that's where our focus is right now is to be prepared so whenever it comes in everyday that goes by we're obviously a day closer to it.
But we will be prepared and we are.
And this guidance that we've given.
We're going to let we're going to let you and we're going to let the investing public decide when they think that turn is going to come and so you have guidance that just assumes that that we're not going to see it here in the next two quarters.
Thanks for the color, Dave I May borrow you are.
At the Bellybutton quote for my report, but I'll turn it over here. Thank you.
It's all yours.
Your next question comes from the line of Amit Mehrotra from Deutsche Bank. Your line is now open.
Hi, This is bad more calling in for augment <unk> at Deutsche Bank.
Wanted to ask what's your outlook on yields and or in your truckload segment as we move from <unk> to <unk> do we take another leg down or do we stabilize from these levels.
I don't know that we're going to get that granular on the guidance on the call here I think think of rate I think we gave the color that kind of being down 11% year over year is kind of would be the bottom would be the trough and that starts to improve on a year over year basis more so because of <unk>.
Year comparison, rather than making improvement in rate.
I think with the bid season being largely complete there may be a few.
Bids out there that still need to be implemented.
Right rates been relatively stable and Thats, what we would expect and I think you can kind of run your model to try to back into it to in or on the truckload business that gets you to the guidance, we've put but it probably doesn't change a ton.
<unk>, maybe a little bit of a lift in Q4, if we see the very modest seasonality we alluded to.
Thanks, and if I can just squeeze one more in do you expect to acquire another LDL company before the end of the year. It felt like you guys were maybe close <unk> not sure. If the recent yellow developments change that outcome at all for <unk>.
Yes, sorry, I missed <unk> and then <unk>.
We don't speak to the timing of.
Any kind of.
At least not intentionally we don't speak to the timing of any potential future acquisition.
We since our commitment to move into the <unk> space, which which really.
Took shape I think we were committed to get into the space probably as early as 2020.
Maybe even into maybe late 19, and then finally, we're able to do so in the middle of 'twenty one.
We've been committed ever since and so.
We continue to have dialogue and evaluate potential opportunities as you know the pool there is not.
It's not huge.
And so we've been patient we'd ask everybody else to be patient, but we are committed.
To building it over time.
Okay. Thanks for the insights.
Yes.
Your next question comes from the line of Tom <unk> from UBS. Your line is now open.
He didn't Adam this is Mike looking at CFO Tom.
Can you provide more details on the evolution of definition for us perhaps in the back half of 'twenty three.
Into 2024, and then how much of the path to growth is macro versus the opportunities that you described in the slides.
Yes so.
<unk> described in the slides, we've already identified $6 million of monthly cost savings on the <unk> business and we expect that number to improve as we can dig into many of the areas that we've identified as having opportunities. We just had the business one.
And for 20 days now so theres still a lot of room to to to figure out what's going to be an opportunity and how much savings will come from that so I think those will be done regardless of the market.
So we expect the up the results of the business to improve sequentially and I think we talked about this in the in the presentation that we expect to be breakeven in the first half of 'twenty four.
Certainly if we have some wind at our back from a market perspective that could lead to capturing revenue synergies sooner than what we've projected but again, that's kind of subject to what happens with the overall trucking market.
We'd be prepared if that does occur to be able to react very quickly to the synergy opportunity similar to how we would on the on the night and Swift business.
Great. Thank you and just is there a way to think about the evolution of or we will look at 18 months.
Could this be.
Mid 90 or business or what's the way to think about it.
Yes, I think Michael.
Where we are right now again to Adam's point, where 20 days into ownership.
Is we're targeting that dollar per share for 2026 and in a strong market brings that forward a lot faster.
We are.
We're trying to not.
We don't have the ability to be the economists predict when that change happens obviously, we have a high degree of confidence that we will see.
The cycle switch and see some some strength and recovery between now and 2026 period.
But we're not prepared to give any more commentary on the margins than what we've what we've already alluded to through the first half of 2024 right now.
That's helpful. Thank you.
Your next question comes from the line of Ken <unk> from Bank of America. Your line is now open.
Hey, Dave Adam Good afternoon.
We've now moved.
Your outlook to have your prior trough target that was below you are now seemingly below your prior cyclical low not sure if you're being overly conservative now versus not being prior but.
I don't know is there something you need to do here in terms of the downturn define that higher floor that you kept talking about is it consolidating the brand names and operations have things gotten too sprawling with U S Express in Barr Nunn in too. Many brand names is intermodal the issue do you need to get rid of intermodal maybe just.
<unk> thinking about that conceptually versus the cost machine that we saw it at the prior night stand alone.
Well, what I would answer with none of the above Ken.
Is that a lot.
So really.
We first rolled out the $4 trough I think that was early 'twenty. Two there was a few things that have kind of changed I'd say materially since that some may be out of our control others.
We just didn't anticipate the type of downturn that we would experience coming off the.
The strength, we had in 'twenty one in the first half of 'twenty. Two for instance, rising interest rates have had probably a negative impact of about 35 cents.
Beyond what our original expectations were just given the.
The rising rates, which when you think about in a freight recession rarely does that align with rates that are rising as rapidly as we as we've seen so that's been a headwind to those original projections.
Our insurance business, we were very bullish on that business early on we had great results. When we first rolled that out and in starting in the fourth quarter of last year. We saw claims experience developed well beyond what we had historically seen and so that's been a headwind this year much more than we anticipated we actually.
We had baked in that we would.
Make money in that business and so now that we're going to lose money for the full year, that's probably a 45% delta between original projections. So so right. There you had an 80 cent difference from what our original expectations were.
And then we think through the rate pressure that we felt I don't think we've ever seen double digit declines in rate per mile. Even considering what we have in dedicated which those rates have been have been very stable and so when we put out the $4 floor. It was really.
Comparing how we've navigated these downsides in previous cycles and this one has proven to be more dramatic than we would've anticipated.
And so.
Given that that sharp decline I think that all of those factors led to the type of EPS that we see but look here's what I would say, we're confident that our margins will return very quickly when the market is.
Improves.
And we think we will make meaningful improvement with the U S Express business. We've already started on the cost side, we will continue to chip away. There and then we'll make even further improvement on the revenue side when we have some wind at our back.
I think a lot of people don't really understand how these businesses operate to combine brands. We would lose accountability you would probably lose scale you'd lose market efficiency. It doesn't work that way it on paper it sounds a lot easier, but but to have these brands out there that have the accountability and they can navigate the market be more nimble.
We just we have our job is to ensure we have great leaders that understand what we're trying to accomplish and that we're executing and where we have opportunities to prove the help and give them resources. So we would not change our strategy given the market that we have today.
Great. Thanks for that I appreciate it thanks, Tim.
Your next question comes from the line of Jason Seidl from DB Cowen. Your line is now open.
Hey, Thank you guys very much listen I wanted to focus a little bit on the intermodal sector.
A bigger loss than we expected in the quarter was there much difference in performance between sort of the night legacy in sort of that Swift intermodal business and then how should we think about volumes going forward as we look into 2024 and as truckload rates are expected to increase.
Well, we don't really have much of a night intermodal legacy to compare against that was very small and very different model and so when I look at the Swift intermodal business, we made it.
So nice progress on operating ratio the last couple of years, but that was really on the back of some leasing we've done with some containers that proved to be very profitable and we were making some changes in our network in terms of rail providers and we're doing that.
You have some fallout from customers that you have to rebuild that we felt very confident with the providers that we have and knew that we would eventually build that volume back up and so when that lease project that has been data and we've received.
We received most of those containers containers back you lose that revenue you pick up that you still have that depreciation and it weighed on our margins a bit more than we anticipated and then pricing has been a bit of a challenge because intermodal kind of follows the path that we see on the truckload side. So revenue per load is taken.
A bit of a bit of a hit if I back out the effect.
Ex us.
The leasing.
Project that we had as well as the change in fuel revenue pillows, maybe off 10% right. So much better than what the print looks like but we're building volume right. So were up 4% this year and the bids that we have coming in the door.
Are going to prove.
You have more volume that we add to that network.
Just on the way we have our contracts we do have some savings that we expect it to pick up in the back half of this year from the from our rail cost standpoint.
We have some new leadership in place to have different strategies that we think will help us improve the operating costs of our business. So yes, we had a tough quarter in the second quarter here.
We expect to get that business back to profitability, but by the end of this year and and believe 2024 could be a nice rebound year will be grow both top line to grow margins and ultimately the bottom line of that business.
That's correct.
More in here when you guys look at your non reportable insurance segment. Obviously, you gave us good guidance for the back half of the year, but do you think you've gotten that segment, where we shouldn't expect any more losses as we head into 'twenty four.
Well look the insurance, we talked about we've stemmed some losses there we still have.
Some things to work through there, but we do believe that the overall segment will be profitable.
In the third and fourth quarter, and then expect that to continue into 2024, but hey, we still have some work to do on the insurance rocket to get there, yes, so jason to be kind of specific what we mentioned earlier in the remarks was we expect.
To be around $10 million in losses for the insurance piece for.
For the remainder of the year, so so thats third and fourth quarters combined.
Course is down considerably from.
The 15 and 22, almost 23 of the first quarter. So.
And then just one comment on the intermodal piece that container leasing business will lap that come call. It middle of the first quarter. So it will be.
That will make for a more difficult comparison, so when we do look at 2024 comparisons for nearly the entire year of 2024 will be.
A favorable comparison versus what we've been doing with up to this point.
Okay, well thank you all.
Motorcycles.
When we do one more question and that actually does need one more question. So we'll reiterate that next time a little bit more.
So JP will take our last question here.
Our next question or your last question is coming from the line of piece Wetherbee from Citi. Your line is now open.
Hey, guys. Thanks for squeezing me in under the wire here.
We'll keep it to one so just wanted to ask about U S. Xpress.
I guess, Adam you said that you're going to be breakeven as you think about the first half next year should we assume that U S ex contributes to earnings assuming.
The market, that's arguably better than what we have here in 2023, just want to get a sense will it be accretive in 'twenty four.
Yeah, I mean, we do believe it'll be accretive in 'twenty, four and it hey, if the market turns quicker than hey that could come even sooner and yeah. Hey, we'll think we believe we will make tremendous amount of progress on the cost side, but as we mentioned in our prepared remarks, the revenue side represents 60% to 70%.
Energy opportunity. So if we get a little help from a market perspective that'll move sooner.
Got it thank you.
Thanks, Chris.
Well.
Thanks, everybody for joining our call that we will conclude our call. We appreciate your interest take care.
This concludes today's conference call. Thank you for your participation you may now disconnect.