Q4 2023 Knight-Swift Transportation Holdings Inc Earnings Call
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 light space transportation of fourth quarter <unk> earnings call. All lines have been placed on mute to prevent any background noise.
Any time during this call are required immediate assistance. Please press star zero for the operator speakers for today's call will be Dave Jackson, President and CEO and Adam Miller CFO. Mr. Miller. The meeting is now yours. Thank you.
Adam Miller: Thank you Ina and good afternoon, everyone and thank you for joining our fourth quarter 2023 earnings call.
Adam Miller: Today, we plan to discuss topics related to the results for the quarter, an update on current market conditions and our earnings guidance.
Adam Miller: We have slides to accompany this call which are posted on our investor website.
Adam Miller: Our call is scheduled to last one hour.
Adam Miller: Following our commentary we will answer your questions related to these topics in order to get to as many participants as possible we limit the questions to one per participant and if you have a second question. Please feel free to get back in the queue.
Adam Miller: As many questions as time allows if youre not able to get to your question due to time restrictions you may call 602, 600 66349.
Adam Miller: So to begin I'll first refer you to the disclosures on slide two of the presentation and note the following.
Adam Miller: 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.
Adam Miller: For a discussion of the risks that may affect the company's future operating results actual results may differ.
Adam Miller: Now I will turn the call over to Dave Jackson for our overview on slide three.
Dave Jackson: Thank you Adam and good afternoon, and good evening everyone.
Dave Jackson: The charts on slide three compare our consolidated fourth quarter revenue and earnings results on a year over year basis.
Dave Jackson: Market conditions in the LCL business were strong while soft demand continues in the truckload space.
Dave Jackson: Revenue, excluding fuel surcharge increased 11, 6%, while our adjusted operating income declined by 78, 6%.
Dave Jackson: Earnings per diluted share for the fourth quarter of 2023 was a loss of seven cents and our adjusted EPS was <unk> <unk> per share. These results include a $71 7 million operating loss in our third party insurance business.
Dave Jackson: We have decided to exit as we will discuss later on the call the insurance loss negatively impacted our adjusted EPS by 30 <unk>.
Dave Jackson: Excluding the loss on the insurance business, our adjusted EPS would have been 39 per share.
Dave Jackson: Our results were also negatively impacted on a year over year basis by a $17 $8 million increase in net interest expense approximately eight <unk> per share.
Dave Jackson: And now onto the next slide.
Dave Jackson: Slide four illustrates the revenue and adjusted operating income for each of our segments truckload freight demand saw a modest seasonal lift in November before slowing more than anticipated in December.
Dave Jackson: The seasonal lift in November was not enough to offset the productivity disruption. We typically experience during the holidays. This was not only impacted this not only impacted our truckload business, but logistics and intermodal as well.
Adam Miller: Freight demand.
Adam Miller: T. L was strong and led to an 11, 9% increase in shipments per day in the quarter U.
Adam Miller: U S Express made further progress and achieved positive adjusted operating income in each month of the quarter as revenue and cost per mile. Both improved over the third quarter.
Adam Miller: Our existing logistics business navigated significant declines in volume and revenue per load year over year to maintain a low ninety's adjusted operating ratio in U S. Express logistics continues to close the gap posting an adjusted operating ratio that was only 150 basis points behind our existing logistics business.
Adam Miller: I will now turn it to Adam to discuss each segment's operating performance starting with truckload on slide five.
Adam Miller: Thanks, Dave.
Adam Miller: For the truckload segment, we saw modest seasonal activity as expected, but as noted on the last slide the drop in demand in December was greater than anticipated. There were a few seasonal projects for truckload and the projects that did exist we're smaller in scale than what we see in a typical peak season.
Adam Miller: Loose capacity prevented any premium pricing opportunities as well.
Adam Miller: Revenue per mile was up one 4% sequentially, reflecting stability in the existing businesses, while U S Express our positive progress as we continue working on the business mix adjust.
Dave Jackson: Adjusted operating ratio for existing truckload business was flat sequentially and U S Express improved 280 basis points. The inclusion of U S Express negatively impacted the adjusted operating ratio for this segment by 250 basis points.
Adam Miller: On a year over year basis, our truckload revenue, excluding fuel surcharge increased 25, 5%, reflecting a 12, 5% decline in the existing truckload business prior to the inclusion of U S Xpress Rev.
Adam Miller: Revenue per loaded mile fell 11, 6% year over year, or 11% before including U S Express miles per tractor increased eight 4% overall or six 4% before including U S Express largely driven by the disposal of roughly 1300 unseeded tractors over the past year.
Dave Jackson: In order to reduce cost.
Dave Jackson: Now, we'll move to slide six.
Dave Jackson: The benefits of our diversification into L. T O really standout as this segment continues to perform well our <unk> business grew revenue excluding fuel surcharge nearly 14% year over year, an acceleration versus the six 9% growth in the previous quarter. This business delivered an 85 and a half adjusted operating ratio.
Dave Jackson: And grew adjusted operating income 14% year over year.
Dave Jackson: Pricing growth remained solid as revenue per hundredweight, excluding fuel surcharge increased nine 5% year over year.
Dave Jackson: As of the end of the year.
We had bought <unk>, we have brought 14, new service centers online since entering the business.
Dave Jackson: In late 2021 and efforts are underway with 25 more properties in various stages of procurement developing development or reconditioning Sealy.
Dave Jackson: Filling out a superregional network in the short term and creating a national network and a 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 priority for us.
Dave Jackson: Now I will move to slide seven.
Dave Jackson: The logistics market continues to be a challenge as many brokers have struggled to find enough volume and margins have been compressed <unk>.
Dave Jackson: And asset base logistics provider allows us to provide our customers seamless service, regardless, if it's on our own assets or one of our partner carriers. This allows us to provide both committed and surge capacity and drop and hook trailer pool services at scale.
Dave Jackson: Of this our logistics business remains disciplined and nimble maintaining a low ninety's operating adjusted operating ratio despite a challenging market.
Dave Jackson: The U S Express logistics business continues to to improve both the cost structure and pricing disciplines and made further sequential improvement in adjusted operating ratio again closings with an approximately 150 basis points of our existing logistics business.
Dave Jackson: Overall revenue was down 5% year over year as revenue per load declined seven 4% and load count improved two 6% excluding the U S Express logistics volumes low count was down 22, 7% year over year.
Dave Jackson: The existing business.
Dave Jackson: Now onto slide eight.
Dave Jackson: In our intermodal business revenue decreased 16, 4% driven by 19, 7% decrease in revenue per load, partially offset by a four 2% increase in load count.
Dave Jackson: The operating ratio was essentially flat with the previous quarter, our intermodal business didn't perform as well as expected as volume during the quarter was negatively impacted by several service sensitive customers temporarily converting intermodal volume to truckload during peak season to take advantage of improved transit times and.
The competitive truckload pricing this conversion not only impacted volume, but negatively impacted our revenue per load.
Dave Jackson: Many of these customers have now begun to return volume back to intermodal and we expect to build volume in the second quarter as we work through the current bid season.
Dave Jackson: And we'll move to slide nine.
Dave Jackson: Slide nine illustrates our all other segments, formerly referred to as non reportable segments.
Dave Jackson: This category includes insurance maintenance and equipment sales and rentals under the iron truck services brand as well as equipment leasing and warehousing activities.
Adam Miller: For the quarter revenue declined 46, 6% year over year, largely as a result of our actions to address the challenges within our third party insurance program, including significantly reducing the exposure basis.
Dave Jackson: The $83 5 million operating loss within the all other segments is primarily driven by the $71 7 million operating loss in the third party insurance business.
Adam Miller: Based on recent results, including the continued negative development of claims reserves, we decided to initiate exiting this business during the quarter. We have begun canceling policies and expect to have that completed by the end of the first quarter of 2024 at which point all third party insurance operations will cease.
Adam Miller: Still have the outstanding claims to administer until ultimate settlement.
Adam Miller: We have already reduced the number of trucks under coverage by nearly 75% from its peak in the fourth quarter of the prior year and we do not expect this business to have a material impact to our results in 2024.
Adam Miller: Now I'll provide an update on the progress U S Express on slide 10.
Adam Miller: U S Express continues to run ahead of plan on our projected path to improving results as noted in the previous slides to use express truckload and logistics business have already made meaningful progress and achieved a combined 99% adjusted operating ratio for the quarter.
Adam Miller: We highlight some of the progress on this slide you will notice. These are fundamental areas of the business, including drivers support and development a decentralized operating model characterized by empowerment and financial accountability.
Adam Miller: <unk> strategy for the network in freight selection and a fanatical focus on cost as the team covers ground on these initiatives. It is yielding an improvement in the operating ratio.
Dave Jackson: The progress on revenue per mile is noteworthy as this has been accomplished in a difficult market and in between bid seasons, given the timing of the acquisition.
Further improvement can be made through the bid season, as we expand our pursuit of more lanes for the network.
Dave Jackson: Continue to be pleased with the early progress and for how this consequential truckload business is positioning for the future reaching positive adjusted operating income before an improvement in the market we.
Adam Miller: We are glad to see the efforts of the U S Express team already paying off and we appreciate their hard work.
Adam Miller: Now I'll turn it today to provide an outlook on the market.
Adam Miller: Thank you.
Adam Miller: Slide 11 contains our outlook on market conditions for the first half of 2024.
Adam Miller: <unk> market should continue to see solid demand as the recent capacity disruption in the industry continues to be sorted out. This should support further yield improvement as the new business is increasingly reprice through bid activity in the truckload space. We believe that retail inventory is at a relatively low level.
Adam Miller: Those shippers caution about the direction of the U S. Consumer behavior is governing freight demand for the time being we expect current soft conditions to continue in the first quarter with modest seasonality in the second quarter. The weather disruptions early in the year only increase the degree of difficulty for opt.
Adam Miller: Operators.
I am contract rates, we do not believe asset based carriers can afford for rates to go down any further from current levels.
Adam Miller: The pace of cost inflation should ease, though plentiful work alternatives in the broader economy will continue to transfer driver retention and utilization until freight conditions improve.
Adam Miller: We expect the used equipment market will weaken further as small carriers struggle in capacity exits.
Adam Miller: Now onto slide 12 for our earnings guidance.
Adam Miller: Given the unusual degree of uncertainty regarding the direction and magnitude of outcomes from bid season the tie.
Dave Jackson: <unk> and degree of an inflection in market conditions and the difficulty assessing prevailing levels of demand as a result of weather disruptions in January we are adjusting our approach to earnings guidance two to provide two quarters of forward visibility as opposed to the full year.
Dave Jackson: We'll reassess this approach as market conditions develop.
Dave Jackson: We expect the adjusted EPS range or the EPS will range from 37 to <unk> 41 for the first quarter of 2024 and will range from 53 to 57 cents for the second quarter of 2024.
Dave Jackson: More detailed thoughts on the assumptions supporting these earnings expectations are provided in the earnings release available at our Investor website alongside with this slide deck at Investor Dot Knight heightened Swift Dot com.
Dave Jackson: That concludes our prepared remarks, we will now.
Dave Jackson: Like we'd like to open the line to entertain questions.
Dave Jackson: Thank you at this time I would like to remind everyone in order to ask a question press star and the number one on your telephone keypad.
Dave Jackson: Again that is star and wanted to ask a question.
Dave Jackson: Your first question comes from the line of Thomas <unk> from UBS.
Dave Jackson: Your line is now open.
David: Hey, David.
David: And Adam It's Tom Michael Dimitri for Tom I, just wanted to see if you could provide a little bit more color in terms of customer activity and freight volumes over the course of December and into January and looking at the guide for FY <unk>, how much weather impacted days in there. Thank you.
Tom: Okay, well, Mike as we noted.
Tom: We saw things trade.
Tom: Trade down in December what little project activity and I would say little.
Tom: We anticipated modest and I would say that we saw modest in November probably saw less and modest in December.
Tom: That traded down leading to a month that didn't produce the kind of earnings we would have expected or that we were on pace for through the first two months of the quarter as we look into January thus far the last two weeks have been.
Tom: Yeah pretty severely impacted by weather certainly you see that we've had LDL terminals that have been shuttered.
Tom: <unk> given our concentration through the southeast.
Tom: Certainly it's had an impact on our productivity on the.
Dave Jackson: On the truckload side and so.
Dave Jackson: Probably.
Adam Miller: I'm not going to quantify what that means.
Adam Miller:
Adam Miller: Exactly what two weeks worth of weather effects on our quarter's EPS.
Adam Miller: But certainly it has tempered what we thought we would typically earn in the January now hopefully, we will see a little bit of.
Adam Miller: Have a recovery as a result of things being down, but certainly not enough to make up what was lost.
So there is a there is a factor in there.
Adam Miller: Probably those weeks.
Adam Miller: You would see an impact to our business that would be a negative double digit in terms of revenue production for each of those fleets. Yes, I'd say you always have some weather in the first quarter just depends on when it hits right and so I don't think this is materially different than other periods end.
Adam Miller: Can we expect that we will have some freight that will that are.
Adam Miller: Customers have got behind on that will have to pick up and move it.
Adam Miller: In a more of a question of do we see kind of that seasonality as it builds into into March and so right now we're just cautious on.
Adam Miller: Really.
Adam Miller: Trying to estimate that there's an inflection early in the first half of the year end.
Dave Jackson: So I think first quarter, we remain relatively conservative.
Dave Jackson: That's great. Thank you.
Thank you and your next question comes from the line of Jack Atkins from Stephens. Your line is now open.
Okay, great. Thanks for taking my questions guys, I guess, Dave would love to get your thoughts on on.
Dave Jackson: The early part of bid season, so far obviously, we haven't seen a recovery.
Dave Jackson: And freight fundamentals to this point, but we're also seeing some signs that the freight markets have stabilized and to your point inventory levels are getting lower.
Dave Jackson: How are shippers treating bid season are they are they trying to get the last sort of.
Dave Jackson: Powder flushed I cannot have you or are they understanding that we're kind of reaching a point, where you could see it turn to the market. This year and they are preparing for that.
Dave Jackson: Yeah well.
Dave Jackson: Yes, Jack its a good question. It's a valid question I will acknowledge we are.
Jack: We are still very early in the bid season.
Jack: We are grateful for customers, who have recognized the fact that rate concessions, we've given have come directly out of margin.
Jack: Because there hasn't been any cost.
Jack: Repreve for us through this timeframe, where we're able to pass on efficiencies. If you will so it's simply come out of margin and if you look at.
Jack: If you look at the industry the publicly traded.
Jack: Truckload carriers.
Jack: Common theme for all of us and so customers, who recognize that recognize where we are in the cycle.
Jack: <unk>.
Dave Jackson: Have have worked with us not to the degree where we get a an increase that helps us get back to where we want to be but.
Dave Jackson: But also <unk>.
Adam Miller: The sign of trying to provide some consistency in the network and allowing us to move forward now there are some situations where.
Adam Miller: We do have some customers, who perhaps operating under a mandate.
Adam Miller: Maybe a little bit of a more short term focus.
Adam Miller: Might be a little more aggressive in pushing the reality is.
Adam Miller: There is a limit to what you can do.
Adam Miller: And I think if you look at certainly our truck load model and others, we compete with.
Dave Jackson: Based on their public reports, we've hit that we've hit that limit.
Dave Jackson: It feels like this go around the freight market has worked and then.
Dave Jackson: Extraordinarily efficient way.
Dave Jackson: We've discovered the bottom.
Dave Jackson: And that happened some time ago.
Adam Miller: Around the middle of last year, it appears and Thats, where we are you've seen small carrier rates they haven't they've hit a bottom.
Adam Miller: Yeah.
Adam Miller: And so.
Adam Miller: It doesn't take a lot of creativity to understand where this can go from here.
Adam Miller: A theme I would tell you that we are consistent theme that we have seen through this process.
Adam Miller: From many if not.
Adam Miller: Most customers has been a very definite preference towards moving their commitments to an asset based provider as opposed to a non asset based broker.
Adam Miller: I don't believe we've ever seen.
Adam Miller: Extreme commitments to the extremely high level of of.
Adam Miller: We have contractual commitments from brokers.
Adam Miller: And so they sit here today with this super high committed percentage of their business at.
Incredibly low loads or low rates, which.
Adam Miller: Which really you could say are unsustainable.
Adam Miller: And as we see capacity small carrier capacity, leaving as we see the bottom of spot rates not keep dropping and as we see margins.
Dave Jackson: <unk> operate in the truckload space and so we're at a level, that's not sustainable and so we have not.
Adam Miller: Non asset broker capacity that that is committed at these very very low rates.
Adam Miller: And you know certainly seems to be setting up for a squeeze there and so some of our customers.
Dave Jackson: We are able to read the riding on that wall, what none of US know is exactly when that's going to happen every day that goes by we're a day closer to an inflection.
Dave Jackson: And and we've we've read now the longest trough that.
Dave Jackson: Certainly that I've seen in.
To almost 24 years of being here so.
Dave Jackson: So that's a little bit of the lay of the land Jack I'm not sure if I adequately answered. Your question do you have a follow up to that.
Dave Jackson: No you did Dave I guess I'm, just trying to get a feel for.
Dave Jackson: Sure.
Dave Jackson: For some shippers really trying to get that last push or are they willing to work with you and it sounds like the answer is they're willing to work with you a little bit here.
Dave Jackson: By and large and it is.
Dave Jackson: Is that the right way to kind of think about it.
Dave Jackson: Hi.
Dave Jackson: These are negotiations and I can appreciate that our customer on the other side.
Dave Jackson: They're they're trying to do the best they can for their interests.
Dave Jackson: And.
Dave Jackson: I will tell you.
Dave Jackson: We there is a place.
Dave Jackson: Clint Eastwood line of man's got to know as limitations. There is a place where we simply cannot concede anymore.
And we often get to these in cycles.
Dave Jackson: But we've never been pushed this far from.
Adam Miller: How <unk> gets here, but we are definitely in a in that place to where the alternative to accepting rate decreases is we have less commitments were more exposed to the spot and we have to rely on our diversified model and so the way I would answer your question, Jeff because I would say.
Dave Jackson: There are some customers that I believe through this process.
Dave Jackson: Will lead us to have a little more exposure to the spot because because of.
Dave Jackson: Perhaps a short term.
Jeff Smith: Objective that they have now that seems to be.
Dave Jackson: The minority so far but again, it's only January we're early on in the process.
Dave Jackson: We hope that doesn't happen because that only leads to disruption for us and for them and we think it costs more in the end I think we could we could demonstrate that with data.
Dave Jackson: So we hope that's not the case, but.
Dave Jackson: We are not in a position to lower our rates through bids right now okay.
Dave Jackson: That's very helpful. Dave. Thank you for the time really appreciate that answer.
Jack Smith: Okay. Thanks Jack.
Jack Smith: Thank you and your next question comes from the line of Ravi Shanker from Morgan Stanley. Your line is now open.
Ravi Shanker: Great Good afternoon gentlemen.
Dave Jackson: Dave and Adam.
Dave Jackson: I would like to pick your brain on your extensive cycle knowledge, if you will again.
Ravi Shanker: We've seen spot rates come up.
Ravi Shanker: Quite meaningfully in the last few weeks.
Ravi Shanker: Our in house embassies are also going up.
Ravi Shanker: Looking a little bit better.
Im a little surprised that you still had late December drop off with this improvement and doesn't look like you're pointing to much better for January.
Ravi Shanker: Why do you think there is this disconnect between the data points and what Youre seeing on the ground. If there is a disconnect because it whether there's something else and if you can just kind of elaborate a little bit more on what happened late in the fourth quarter that'd be great. Thank you.
Ravi Shanker: Yeah, I think Ravi we have to be careful that just because some of the data is a little bit more accessible and easier to get access to.
Ravi Shanker: And it kind of almost a real time I think we just have to be a little careful to not paint with too broad of stroke.
Ravi Shanker: On some of those smaller data points I do think that that may.
Ravi Shanker: Maybe I'll share an anecdotal that we've heard.
Ravi Shanker: Our team and our logistics group has heard this multiple times from small carriers, which is.
Ravi Shanker: We're going to see what the next four to six weeks looks like and decide what we do with our business from there.
Ravi Shanker: And so I do think you have some small carriers that are just basically, saying, hey, I just cant I cant.
Ravi Shanker: Can't run to stand still I can't just keep.
Moving and getting loads long haul loads in particular at unsustainably low rates just to keep moving in hopes that something else will happen and so I think youre starting to see people that are just saying hey, if it doesn't pay I'm not going to do it and so.
Ravi Shanker: The market is stressed I think.
Ravi Shanker: A data point, that's been interesting to watch has been.
Ravi Shanker: The net replications of authority on the last business day of the month, we've seen spikes as the last business day of November we saw it happen again in December December.
Ravi Shanker: Decembers was smaller than November however.
Ravi Shanker: Not not very many would renew their insurance on the last business day of the calendar year.
Ravi Shanker: And so I suspect at the end of January we could see that Spike again, we think that spike is tied to.
Ravi Shanker: Carriers, who.
Ravi Shanker: Who are not able to find insurance it isn't just increasing insurance premiums that's been an issue, but there have been people willing to finance that of course, it pretty expensive rates on top of that which further burdened the business, but allow you to live for another day. The challenges if somebody is not willing to underwrite the risk.
And painfully were aware of what that risk is with very small carriers.
Ravi Shanker: And we completely understand why that market is shrinking and why there are small carriers that we believe will struggle to find anybody willing to take that risk. We think we're seeing the signs of that in that data point in particular, so so the markets, particularly stressed so.
Ravi Shanker: And as for why you might see one one little data point until you something different a month like December versus maybe what we might feel over a broader period of time I'd just say.
Ravi Shanker: You know not all data is created equal when I'd also note Ravi is over the period. If you look at the last four weeks you've had the holidays, where you have a lot of small carriers independent contractors, who are afraid is plentiful. They will take time off during the market. So that puts a little pressure on finding capacity you may see a blip in spot.
Ravi Shanker: And then you had the same issue that you can go through whether where you have a lot of trucks, especially the safe ones that are shutting down and that puts pressure on the market I mean, we see it in our own markets today, but it's not necessarily because demand is there. It's because you just don't have supply readily available. So I think as we let as he watched as the weather starts to clear up and.
Ravi Shanker: We watch those trends over the next few weeks I think that'll be a little bit more tally that just looking at the last four.
Ravi Shanker: Good points.
Ravi Shanker: Thanks Ravi.
Ravi Shanker: Thank you. Thank you.
Ravi Shanker: Thank you and your next question comes from the line of Ken Huckster from Bank of America. Please go ahead.
Nathan: Hi, This is Nathan <unk> dialing in for Kevin Hester.
Nathan: Just wanted to focus a little bit on the encouraging signs coming out of the U S. Xpress integration with 99% of operating ratio on the 100 basis points of sequential improvement.
Nathan: Now that the segment is contributing a little bit.
Nathan: Operating profits I'd love to understand a little more on what's next for further alignment of its business structure and within your first quarter and second quarter targets. What are you expecting in terms of further kaufmann growth synergy gains.
Adam Miller: Nathan Thanks for the question, maybe I'll start off and Adam you can you can certainly chime in and.
Adam Miller: First I use this as an opportunity to just acknowledge the wonderful people we have at U S Express Couldnt I can't say enough good things for how they have gone to work.
Adam Miller: And work together with us the degree to which they've been open to collaborate.
Adam Miller: We're just we're excited for them.
Adam Miller: That they are excited to be part of the group and and maybe to answer your question about structure and how that changes. This is a brand an independent brand that we support and so we have two leaders that have moved to Chattanooga. They did this.
Adam Miller: Several months ago in anticipation of the.
Adam Miller: The transaction.
Adam Miller: So they are there they are.
Adam Miller: They are taxpaying residents of Chattanooga and have assimilated with the team and so so that that business will continue to perform independently I would say.
Adam Miller: Thus far in these first six months. The progress has has probably been two thirds cost one third right.
Adam Miller: That likely flips here as we go into the next two quarters, where.
<unk> continues to grow as cost doesn't grow at the same kind of pace that there still are cost opportunities.
Adam Miller: As was mentioned Adam that Adam mentioned with the slide that we highlighted a few key things one of those was a.
Adam Miller: Dealing directly with our customers not going through a broker intermediary and so the sales group and the operations group have worked very hard to.
Adam Miller: When they when they had an abrupt change and are needed to deal direct and so that's that's been a positive to the rate per mile.
If we look at.
Adam Miller: Just overall the approach in the network and their approach to bids.
Adam Miller: We've been able to bring a different mindset in terms of how they can go about building the network and they've been very receptive to that and so.
Adam Miller: Now we are receiving a steady diet I would say kind of across our business of about 110 bids are weak is the going rate. Some of those can be many bid some of those are much larger network bids and so.
Adam Miller: That's that's feeding into this this decentralized.
Adam Miller: Operations that is that U S express as well on their way towards that we think will lead to lower driver turnover.
Jack Smith: Better operating cost with a high level of service and good good returns good could revenue generated on our trucks with Oh ours that over time, we believe we'll be in that low 80 range similar to what we would expect over time.
Adam Miller: Our Swift a night brands, Adam anything else that May I think you hit it well again I'd just highlight being more active in the bid season, probably having more opportunities with with customers that have relationships with our other asset based brand that will open doors for you. This express.
Adam Miller: Then just continued progress on closing the rate gap between U S Express and our other asset based brands and so I think we will we expect to make progress.
Adam Miller: It's tougher to do that on rate in an environment, where you don't have much wind at your back and so they've been <unk> been able to make sequential progress despite that.
Adam Miller: When I think there is a more favorable environment, we would expect that path that progress to to ramp up very quickly.
Adam Miller: Got it that's very clear thanks, Dave Thanks, Adam.
Adam Miller: Thanks Nathan.
Adam Miller: Thank you and your next question comes from the line of Bruce Chan from Stifel. Please go ahead.
Bruce Chan: Alright, Thank you operator in the afternoon gents.
Bruce Chan: Yes, just insurance side. It was good to see the progress with growth in the <unk> segment, maybe just wanted to get your thoughts on the timeline for how those new terminals are going to come online.
Bruce Chan: Especially as you start to think about the potential for maybe any margin drag as you spool that network up.
Bruce Chan: The thing that we should be watching there as we model out the LR.
Yeah, Hi.
Adam Miller: Well, let me maybe I'll talk.
Ravi Shanker: For a moment here on what some of the cadence of what these look like and then maybe that I'm sure you want to chime in on.
Ravi Shanker: Temporary or as we do this but.
Ravi Shanker: We will acknowledge.
Ravi Shanker: First off Bruce that since 2021, we've opened 14 locations, while while we've seen that or.
Bruce Chan: Consistently on an annual basis improves as we've settled into that mid 80%. So.
Bruce Chan: We like that along the way about this time last year that we were integrating.
Jeff Smith: The <unk> network in the in the AAA Cooper network and so those are operating on one network. So from a technology optimization standpoint, we're just one LDL company, but from a uniform and relationship in the local markets.
Jeff Smith: We appear and we work with two different brands F&B and in one region of the country and AAA Cooper and another and so we anticipate that as we.
Jeff Smith: We have opportunities to enter new markets.
Jeff Smith: Through.
Jeff Smith: Organic and also through acquisitions.
Jeff Smith: That will continue.
Jeff Smith: For the most part with acquisitions.
Jeff Smith: Now as for organic we mentioned we have 25 in the pipeline five of those locations just opened up this week.
Jeff Smith: There's 20 more that will cycle through <unk> through the remainder of the year prop.
Jeff Smith: Probably about half of those we expect to be opened in the first half of the year.
Jeff Smith: And then the remainder in the back half first 60 days, we're really trying to get.
Buildup enough volume to breakeven and.
And that's a.
That's largely done by opening up those zip those new serviced zip codes to three pls.
Jeff Smith: And then over the course of the year you get a chance to.
Jeff Smith: Build out that business through the nationwide Ben or bids. There is also some local business will often pickup in addition to things that come through the three pls.
Jeff Smith: There are still some additional locations through the yellow bankruptcy that we are that we're pursuing and so we think we expect that the 25 number will grow.
Jeff Smith: And and those will likely be on the lease side those are.
Jeff Smith: Those are in the process of being settled as we speak so.
So this is.
Jeff Smith: This is very measured growth I would say I'll give you. An example, the five locations we just opened.
And the bustling cities of West, Burlington, Iowa, or Cherry, they'll, Kansas or Rock Island, Illinois, or Forrest City, Arkansas, Wichita Falls, Texas.
Jeff Smith: So these are smaller markets. These are not huge facilities, we've been able to procure these at attractive rates on a per door basis.
Jeff Smith: So.
Jeff Smith: So this is a I would say that it's a it's a very.
Jeff Smith: Conservative growth plan, but nonetheless, there will be some pressure.
Adam Miller: Two award in those locations Adam any thoughts on yeah.
Adam Miller: Yes, I think as you mentioned it does take 60 to 90 days to build up volume to breakeven. So it does put a little pressure on the business and so you may see you may see maybe a sequential change from Q4 to Q1, that's a little higher than normal seasonality, but I do feel like once we get our legs under us at least with the.
Adam Miller: And the first batch of them or maybe the first half there'll be that that revenue generation of that half will more than offset the cost that we experienced from wrapping up the back half. So I don't see a material impact, but maybe earlier in the year, we would feel that and then we would be ramping that in the back half.
Adam Miller: Thanks for the question Bruce.
Adam Miller: Thank you. Thank you Bob good question.
Adam Miller: Yes. Thank you and your next question comes from the line of Jordan <unk> from Goldman Sachs. Your line is now open.
Hi, Yes, just a follow up a little bit on the last question. This is very helpful to think about this year and the growth.
Adam Miller: Obviously there.
Jordan <unk>: At your math there is I think you talked about overtime gone from Super regional to a national <unk> carrier Theres, obviously, some gaps in the math that exists today. So I'm just curious.
Jordan <unk>: How long does it take to go to.
More of the country and some of the areas.
Jordan <unk>: Youre not in now and does the current plan. Even this year include newer areas or will that have to come more unlikely chunky type of acquisition type of the deal.
Jordan <unk>: I appreciate the question Jordan.
Jordan <unk>: We.
Jordan <unk>: Realistically, we would anticipate over the next two years being able to consider ourselves as having nationwide coverage that was in house. So of course today with Interline partners. We do we can service the whole nation, but but there's a.
Jordan <unk>: We will get access to nationwide network bids.
Jordan <unk>: When we can do that all in house together.
Jordan <unk>: Together on our system and so we expect we expect for that math to look less superregional and more nationwide over the next two years a lot of these.
Jordan <unk>: Locations that we just referred to that are you know.
The 25 call it that that we have in the pipeline plus.
Jordan <unk>: Perhaps we may add another 10 lets say.
Jordan <unk>: Lease type facilities on top of that those are largely.
Jordan <unk>: Gap fillers, if you will.
Jordan <unk>: Those those fill in space as part of a very intentional effort. So that we can.
Jordan <unk>: We can acquire some.
Jordan <unk>: Chunks as you will I think how you referred to it.
Jordan <unk>: In other regions that we.
Jordan <unk>: We don't currently service. So so we are.
Jordan <unk>: This is a multiyear plan, but it's it it's not as far out as you might think so so we're well on our way I would say that the yellow terminals I would say.
We purchased <unk> terminals from two other businesses.
Jordan <unk>: No longer use them or or also had went through a bankruptcy or liquidation process.
Jordan <unk>: Those have been you know those have been wonderful gifts for us I mean, what it would have cost us.
Jordan <unk>: To go acquire the land and build these.
Jeff Smith: What we would have we would've had a much more significant capital investment and so we're grateful that these have come we've taken a very conservative approach here.
Jeff Smith: But but we're on our way over hopefully by the end of 2025, we're able to.
Jeff Smith: We're able to show you a map that.
Jeff Smith: That makes it very clear we are a nationwide <unk> network.
Jeff Smith: Thank you.
Jeff Smith: Thank you and your next question comes from the line of Allison <unk> from Wells.
Allison <unk>: Fargo. Please go ahead.
James: Hey, guys. This is James on for Allison.
James Allison: Wanted to ask about TL capacity and just the amount that its oversupplied.
James Allison: Yes.
James Allison: Do you expect sort of a clearing event to push out some of the capacity drive exit or do you kind of see more of a gradual process and kind of what im trying to get at realistically is without a clearing event could you realistically see contract rates up in the second half versus the first half or do you really need a clearing event and not the gradual to see positive.
James Allison: In the second half.
James Allison: Well James.
James Allison: Impossible to predict exactly how it's going to go if we look at previous cycles.
James Allison: Yeah.
James Allison: You get you have several challenges that sometimes theres, a little catalyst, whether it could be a spike in fuel prices back in the day.
James Allison: I think we have seen even a weather event before that had a big impact there.
James Allison: Or a material change in demand.
James Allison: We're not seeing a big material change coming in demand. The fact that inventories have been drawn down so much.
James Allison: Hopefully a day is coming where theres, a little bit more mindset for growth feels a little bit like.
James Allison: Our retailers have a more conservative view and are more focused on profits as opposed to top line and we would benefit a little bit more on top.
Top line focused environment, but.
James Allison: But I think that the.
In this business a capital intensive business, if you take time off investing in the capital.
James Allison: Our investing the capital that's required it starts to really catch up with you and the cost of new equipment continues to be inflationary.
James Allison: The values for used equipment have dropped after being at record high prices, which is in many cases, where people when people acquire their equipment and so so there's a limited useful life to the assets that they have and so you can get by for a while.
James Allison: But eventually things start to accumulate it appears that insurance could serve as a bit of a catalyst that.
James Allison: Finally is that final straw for people.
<unk>.
James Allison: One thing that we have seen in previous cycles is this this seems to snowball.
Adam Miller: Avalanche might be too strong, but where as these things all accumulate eventually you hit a tipping point at once capacity starts to come out. It's just the beginning and as capacity starts to come out.
Adam Miller: Financing dries up nobody wants to take the risk.
Adam Miller: Operating environment gets difficult small carriers, perhaps cut corners next thing you know they become too risky to insure and so.
Adam Miller: There is just kind of a.
Adam Miller: Chain of events that start to happen. So it's hard to guess exactly when that's going to be or how far we are down that path.
Our view here is is going to be a very difficult first quarter for small carriers.
Adam Miller: Which is we're well on our way to the probably two year anniversary.
Adam Miller: There, it's hard to think that a small carrier would have.
But have profit really over our nearly two year span and so.
Adam Miller: So that's.
Adam Miller: That's probably the best I could I could stay for that and so we just watch for these indicators that give us a sense for all of the different factors that are accumulating and then we see if there is this kind of avalanche effect.
Got it.
Adam Miller: But without that avalanche effect, there would still be incremental pressure in the second half or is it sort of trending where it could actually still improve without the avalanche sort of to the point of it.
Adam Miller: Thank you.
Adam Miller: Yes, we're not.
Adam Miller: Not getting a read on broader economic demand that says that that could be a catalyst. So we think this will be.
By driven as we feel that that most if not all trucking cycles have really come.
Adam Miller: On the on the under supply side, maybe maybe four or five or six of those were some.
Adam Miller: Banner economic years that maybe that was the exception to that but outside of <unk> 405, or six it sure feels like every other cycle has been supply induce every other recovery I should say has been due to a pretty meaningful reduction in supply. This one.
Adam Miller: Our economic outlook on the freight side is that.
The inflection has to come from supply, there's not enough and not enough to make us think that the demand is going to be enough lift on its own.
Adam Miller: Thank you I appreciate the time.
Adam Miller: Thanks.
Speaker Change: Thank you and your next question comes from the line of Jason Seidl from TD Cowen. Please go ahead.
Speaker Change: Thank you operator, Hey, gentlemen, how are you.
Speaker Change: Good doing well.
Jason H. Seidl: So I know you werent, giving exact guidance.
For the remainder of the year, but I guess given some of the gains that you guys have seen with Usx.
Jason H. Seidl: And I guess, a gradual improvement in the marketplace. How confident are you that youre going to be able to grow earnings in the back half of the year.
Jason H. Seidl: Excluding insurance and then I guess, just real quick what percent of your book of business gets repriced in the truckload.
Jason H. Seidl: Section on a quarterly basis.
Jason H. Seidl: Yeah, well, Jason I appreciate the question and I would say that if we really felt.
Jason H. Seidl: If we if we felt like we had a really good read to speak on the second half we would have done that through our guidance. So for now we're.
Jason H. Seidl: We're just going to stop with what we've given for the first two quarters in terms of guidance now clearly what you see is.
Jason H. Seidl: You see a range in the second quarter, that's better than the first quarter and so.
Jason H. Seidl: It would be safe to assume that we don't see.
Jason H. Seidl: We're not expecting a big drop off we think the worst is behind us, but that's as.
Jason H. Seidl: As far as I think we would feel comfortable to talk about that right now as for what percentage of our business might turnover I think with technology, it's become rather.
Jason H. Seidl: It's rather easy for many of our customers to do what we call mini bids which is in essence they fire off.
Jason H. Seidl: Electronic request for us to bid on a handful of lanes and so.
Jason H. Seidl: Where we are bidding on freight.
Jason H. Seidl: Every single week of the year now the majority of the network bids if you will.
Jason H. Seidl: <unk> is a call it mid to late November through.
Jason H. Seidl: All it April with these awards largely materializing in before the end of the second quarter.
It used to be.
Like everybody fit in a pretty tight window there.
Jason H. Seidl: And today again I think technology has is a factor in that it's not such an undertaking for them.
Jason H. Seidl: It's kind of spread out so.
Jason H. Seidl: So.
Jason H. Seidl: I hope that helps I hope that gives you a bit of a sense. So the majority of our the majority of our incumbent business will be repriced.
Jason H. Seidl: For the first six months of the year no no. That's helpful and that has the duration of the contracts changed any or have the shippers have been pushing for longer contracts.
Jason H. Seidl: Yeah.
You know it it depends.
Jason H. Seidl: Hence on who feels like they have leverage in the market and.
Jason H. Seidl: Usually they are agreed to for a certain amount of time I will tell you that there are some shippers that are pulling forward bids that they normally would do later in the year and they are pulling them from call. It June to February.
Adam Miller: You can guess, maybe what their motivation might be to do might.
Adam Miller: My drive that.
Adam Miller: And.
Adam Miller: It seems like our customers expect that.
Adam Miller: Rates are going to be up in the second half of the year. That's that's what the behavior is showing us. So so it sometimes can it sometimes can change Jason is what I'm, saying.
Adam Miller: Understood I appreciate the time as always.
Adam Miller: Thank you.
Thank you and your next question comes from the line of Jeff Kauffman from vertical research. Please go ahead.
Thank you very much hey, guys.
Adam Miller: Two quick questions.
Jeff Kauffman: Little more number detail a big jump in insurance costs. This quarter could you talk a little bit about what went on on the insurance is this related to what happened in non reportable is something different.
Jeff Kauffman: But it looks like that was up something on the neighborhood of almost $36 $40 million this quarter.
Yes, so Jeff that you are right I mean thats related to the insurance.
Jeff Kauffman: Business and the decision to exit that in and.
Jeff: Try to fully through the claims that we have outstanding in this business. So we can run them out without seeing much of an impact in the 2024 results. So that would be the largest driving factor.
Jeff Smith: Alright can you help us understand that I know you said youre going to be exited from the business at the end of <unk>.
So was this 71 really a bit of a <unk>.
Jeff Smith: Forward looking charge, where we're accruing liabilities.
Jeff Smith: After <unk> is that going to be all we're going to hear from insurance business or are there are going to be some legs that occur after that even though you've exited the business.
Jeff Smith: Kind of close that out.
Ravi Shanker: Yes, you can't look forward liabilities and so I think we looked at the claims development and how that had been growing over time.
Jeff Kauffman: And took a more conservative approach at reviewing the potential growth in editor of the book of business and that led to a higher accrual that we believe more accurately reflect reflects what exposure. We have today will have because we have to give certain notice to the share eased before making cancer policy there.
Jeff Kauffman: Or is this run out period, we have reduced the exposure greatly already and so I think theres private limited financial impact we would expect in Q1 and then it's essentially.
Jeff Kauffman: Running out the claims and closing out the the outstanding liabilities over the next probably a year or two.
Jeff Kauffman: Okay, and then just one last clarification on that so if I look at this as an unusual event in making a decision to exit a business and I want to try to segregate that.
Jeff Kauffman: From the operating activities of the business in the fourth quarter, what would that split of the $71 7 million.
Maybe I don't understand the question how much how much weather may be been tied to.
Maybe a receivable or insurance software versus the claims is that.
Jess: Youre asking Jess.
Jess: Hi, I'm asking if we did not exit the business what would that $71 7 million would've looked like operating wise in the quarter.
Jess: Yes, we don't we don't have that.
Jess: We haven't differentiated.
Jess: Alright, gentlemen, thank you.
Jess: Hi, good.
Jess: Yes.
Jess: Thank you and your next question comes from the line of Chris Wetherbee from Citigroup. Please go ahead.
Jess: Good afternoon.
Chris Wetherbee: Maybe along similar lines as you think about non reportable accident insurance itself, we cannot put that aside for the time being can you sort of remind us how we should think about the cadence of that business as we go over the course of the year I know there is there has been historically some seasonal work in there, but just give us a sense of what we should be thinking from a baseline perspective, because we've had insurance in there on a look back period.
Yes, so if you exclude insurance.
Chris Wetherbee: Sometimes it depends on some seasonal projects, Chris So we've got a warehousing business that slows in the Q in Q4, and so youll see a seasonal decline there.
Chris Wetherbee: Does ramp up in the Q1 is typically strong through the remainder of the year.
Chris Wetherbee: Sometimes we do a trailer leasing project in Q4, if you're absent of that then you see you don't see a lift there sometimes you can see lift there. So there's sometimes it depends on what activity you see there I think once you get into Q1, it's relatively stable in Q4, which you could see a drop or it could be stable.
Chris Wetherbee: I hope that it turns out with your question.
Chris Wetherbee: It is from a seasonal perspective that maybe any sense around magnitude. If we can maybe look back at 2003 and thinking about what the numbers actually look like.
Jeff Smith: And they're just trying to get a sense of level setting what the earnings power of non reportable might be going forward.
Yes so.
Jeff Smith: I think if you look at 'twenty, three and you pull out the insurance numbers I mean that probably.
Jeff Smith: A decent.
Jeff Smith: Idea of how that how that flows from a seasonality standpoint.
Okay, Alright, that's helpful. And then maybe just one on <unk> you guys have talked about that and obviously some improvement there turning profitable I guess, if you think about where you are relative to the guidance you had given us when you close the transaction in terms of.
Jeff Smith: The potential accretion from the dollar of earnings I guess, where are you in that process do you feel like you're on schedule ahead of schedule behind just kind of get a sense because obviously the market has moved around a little bit too.
Brian: So Chris you're breaking the rule of one question, Brian but since it's late in the game I'll I'll answer this quickly right. So it's I'd say hey, we're ahead of schedule.
Chris Wetherbee: Especially on the cost side of the business and we're encouraged with the fact that we've been able to make some progress on rate and sequential progress on rates for the third.
Fourth without the help of the markets and so we feel well positioned that when the market does turn that we'll be able to close the gap between our historic nitish lift or to use express or and certainly would be in line to achieve the dollar.
<unk> accretion that we're targeting.
Chris: Alright, I appreciate the leniency. Thank you very much.
Chris: Alright, Alright, this will probably be our last question here.
Chris: Thank you and your next question comes from the line of Scott Group from Wolfe Research. Please go ahead.
Hey, Thanks for squeezing me in so I know the last two questions I'll just touch on it but can you just maybe clarify for all of US what was the total number of insurance losses in 'twenty three.
Chris: Yes.
Chris: Don't have that right on me.
Chris: It's a little bit skewed because it's a little apples to oranges. When you look at some of what went into the 71 seven versus <unk>.
Chris Wetherbee: Expenses are losses that we had.
Chris Wetherbee: And the other three quarters, but yes, so Scott its about up about $125 million is where we ended for the for 2023 and that that's going to include some extra thing extra cost.
Chris Wetherbee: Prepare.
Scott: Prepare us here and as we exit the business yes.
Scott: Perfect Super helpful. Okay, and then can I just I wanted to just trying to understand the guidance a little bit better. So Q4 underlying 39, youre sort of telling US Q1 dollars 39.
Jeff Smith: I don't know that Thats ever happened, where it doesn't go down and then Q1 to Q2s got decent probably a better than normal step up and it doesn't sound like you guys are counting on things to get a whole lot better yet so I'm just trying to understand what's driving the much better than normal sequential if we're not.
On better than normal sort of demand and pricing yet.
Jeff Smith: Yes, so a couple of things Scott first of all because I look at it the same way at times in because your mind gets stuck in thinking we're just a truckload carrier.
Scott: And also youre thinking that truckload carrier that has a nice fourth quarter. So we certainly didn't see the lift in the fourth quarter and so we don't expect to see the same step down from Q4 to Q1, and then usually L. T. L fourth quarter is not a great quarter for <unk>.
Scott: A little bit of a lift into Q1, which we would expect and then some of the non reportable, excluding the insurance like I mentioned, the warehousing business you see that slow down meaningfully in Q4, and then that ramps back up into Q1. So there is some sort of count on seeing the seasonal businesses that we've layered into the model, which we mean you don't see the same volatility from Q.
Scott: For Q1.
Scott: Okay that makes sense. Thank you guys.
Thanks Scott.
Scott: Well, thanks, Ana for for helping moderate our call everybody. We appreciate you joining Andrew.
Scott: And your interest in our company enjoy your evening.
Scott: Thank you that does conclude our conference for today. Thank you all for participating you may now disconnect.
Scott: Yes.
Scott: [music].