Q2 2024 Knight-Swift Transportation Holdings Inc Earnings Call
Yeah.
Good afternoon, My name is John and I'll be your conference operator today at this time welcome everyone to the Knight Transportation second quarter 2024 earnings call.
As I have been placed on mute to prevent any background noise. If at any time. During this call. If you could acquire immediate assistance. Please press star zero for adopt either.
From today's call there'll be Adam Miller, Chief Executive Officer, Andrew Hess, Chief Financial Officer.
Brad Stuart Treasurer, and senior Vice President Investor Relations Mr. Stuart The meeting is now yours.
Thank you John.
Good afternoon, everyone and thank you for joining our second quarter 'twenty 'twenty four earnings call today, we plan to discuss topics related to the results of the quarter current market conditions and our earnings guidance, we have slides to accompany this call which are posted on our investor website.
Our call is scheduled to last one hour.
Following our commentary we will answer questions related to these topics.
In order to get to as many participants as possible we limit the questions to one per participant.
If you have a second question, please feel free to get back into queue.
Answer as many questions as time allows.
I was able to get to your question due to time restrictions you may call 602, 600, 663 or four nights.
To begin.
Oh first refer you to the disclosures on slide two of the presentation and note that 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 actual results may differ.
Now I will turn to our overview on slide three.
The charts on slide three compare our consolidated second quarter revenue and earnings results on a year over year basis.
Revenue, excluding fuel surcharge increased 18, 1% due to the acquisition of U S Express in July of last year.
Our adjusted operating income declined by 22, 8%.
GAAP earnings per diluted share for the second quarter of 2024, it was 13th.
Our adjusted EPS was <unk> 24 cents.
These results include a 12 and a half million dollars pre tax charge for the settlement of a large auto liability claims from 2020.
This settlement negatively impacted our adjusted EPS by <unk> <unk> per share excluding the settlement, our adjusted EPS would've been 30 cents for the quarter.
Our results were also negatively impacted on a year over year basis by $17 $8 million increase in net interest expense.
And the 11, 3% increase in the effective tax rate on our GAAP results and five 3% increase in the effective tax rate on our non-GAAP results year over year.
Impairment severance and legal accruals totaling $6 $5 million are also excluded from our non-GAAP results now onto the next slide.
Slide four illustrates the revenue and adjusted operating income for each of our segments.
In general our truckload logistics and intermodal segments continue to navigate a challenging full truckload market domestic inland freight demand has yet to show the strength seen in the ocean container market and the <unk>.
Ongoing attrition of excess trucking capacity added during the up cycle still has further to go.
Freight rates have largely stabilized but at unsustainable levels.
The LCR segment continues to experience some much more supportive market where rate increases remain consistent.
The combination of seasonal demand improvement stable pricing and moderating cost inflation supported sequential improvement in operating results across our businesses during this quarter.
The market is giving more and more signs of being balanced acute customer needs are increasingly noticeable.
Trailer pools are starting to be valued again.
In scale and service are becoming more of a differentiator. These are all signs that align with the unique value that we are positioned to create for our customers when the market strengthens.
For now.
We remain focused on disciplined pricing cost control operational excellence and collaborating across our unique suite of brands to create distinctive solutions.
Now I'll turn it over to Adam to discuss our truckload business like five.
Thank you Brad and good afternoon, everyone.
The truckload segment.
Man has yet to truly break out in further attrition of the excess capacity is still needed. We have a long way to go to return to our target levels of performance, but it is starting to feel like the bottom is behind us for this cycle in.
In short I think the story on our truckload business for the second quarter is one of stabilization and a seasonal build in demand.
We saw steady demand that has generally followed seasonal pattern since march develop into an uptick in June.
It's fairly broad based as a number of customers look to secure additional capacity to support elevated volumes.
This helped to support a stabilization in revenue per mile a quarter earlier than we had anticipated as well as an improvement in utilization.
It's too early to call this a trend and for it to be a meaningful material driving for savanna earnings but in prior cycles. This would indicate the early signs of the market setting up to change.
There's been some moderation in demand and the lag in the two weeks since the fourth of July holiday, which is in line with the typical seasonal pattern if the trends over the past few months continue we should see demand building as we exited the third quarter and some return of season seasonal activity for the fourth quarter.
For the first time in years.
On a year over year basis, our truckload revenue, excluding fuel surcharge for the second quarter increased 33%, reflecting a five 7% decline in the legacy truckload business prior to the inclusion of U S Express.
The year over year decline in revenue per loaded mile. Excluding fuel surcharge narrowed to five 5% in the current quarter as rate held stable with the first quarter.
Further our spot exposure remained relatively consistent with where we entered the second quarter.
Miles per tractor increased eight 5% largely driven by our earlier decision to reduce the number of unseated tractors in our legacy businesses to reduce cost excluding U S. Xpress revenue per tractor, excluding fuel surcharge increased three 5% year over year, which is the first year over year incur.
In six quarters as the improved miles per tractor with while the decline in pricing Decelerates.
He was express experienced modest sequential declines in revenue and miles for the quarter as a result of some churn and its fate portfolio. However, sequential progress on revenue per mile and stable costs helped offset these challenges to hold the operating ratio flat with the first quarter.
We are preparing our businesses in the trough to maximize the benefits of operating leverage when the cycle turns when considering the sequential progression from the first quarter into the second quarter. Our truckload segment was able to turn flat cost per mile flat revenue per mile and a 1% improvement in total miles.
Into a 7% improvement in adjusted operating income and this includes the 12 and a half million second quarter charge for the claims settlement discussed earlier, if not for the claim settlement the sequential improvement in adjusted operating income would've been 50%.
Now onto slide six.
Where we cover our L. T L segment.
Market conditions in the <unk> industry remained much more supportive than in truckload, allowing for steady rate increase increases through the first half of the year. Our LTE business grew revenue excluding fuel surcharge 15, 1% year over year as shipments per day increased eight 4% and revenue per hundred.
Wait excluding fuel surcharge increased 13, 4% year over year.
While weight per shipment was down four 7% year over year in the second quarter. It was flat with the first quarter adjusted.
Adjusted operating income grew eight 2% year over year as the adjusted operating ratio of 85 nine was fairly in line year over year.
Since acquiring AAA Cooper and then me in 2021, we have acquired or assumed the leases on 56 additional properties. We opened 11 new locations during the second quarter and expect to open another 20 terminals by the end of 2024.
Overall to 38 locations planned to open in 2024 will add over 1000 doors to our network, representing a 22% increase to our door count from the beginning of the year, which we believe will meaningfully impact the reach of our service offering and increase the density of our network.
We expect these investments will bring opportunities to service additional freight and customers.
These new locations initially bring margin headwinds in the form of setup costs and operational inefficiencies, we expect that as the locations continues to scale and particularly as they participate in the next bid cycle. They will help drive growth and margin expansion in the business.
We remain encouraged by the strong performance within our <unk> segment, and we continue to look for both organic and inorganic opportunities to geographically expand our footprint within the L. T L market feeling.
Filling out a superregional network in the short term and ultimately, creating a net national network will allow us to participate in more freight and enable us to find opportunities to further support our existing truckload customers with LTE capacity.
Now moving to slide seven.
The logistic mark the logistic market.
You know continues to be difficult as volumes, which were already soft are now fairly further challenged by a number of shippers allocating more of their business to asset based providers gross margins have been under pressure for a few quarters as purchased transportation costs offered little room for relief.
Beyond these general market dynamics, our logistics business can face additional challenges in a down market because we divert some volume to support our asset business.
However, this headwind should flip to a tailwind when the market turns as the asset division will overflow freight to the logistics business, particularly for our power only service.
This relationship with their asset division can create more volatility through a cycle for the logistics business, but it means there is significant amount of runway ahead for our logistics business at this point in the cycle.
We remain disciplined on price, which is a headwind to volumes, but allowed our logistics business to sequentially improve profitability in the second quarter, while load count remains stable.
<unk> increased 11, 8% year over year driven.
Driven by an increase in revenue per load as low count was flat, reflecting the inclusion of the use express in the current quarter, which offset the 25% year over year decline in load count in the legacy business.
After first turning modestly positive last quarter revenue per load increased 10, 8% year over year in the second quarter, representing a four 6% increase from the previous quarter.
The year over year increase in revenue per load is largely driven by the inclusion of the U S Express logistics in the current quarter as it has a different business mix.
We continue to leverage our power only capabilities to complement our asset businesses build a broader and more diversified portfolio and to enhance the returns on our capital lapses.
Now I'll turn it over to Andrew Hess for siding.
Thanks, Adam.
Okay.
In our intermodal business, we grew low count sequentially by 10, 8%, while maintaining stable revenue per load as compared to the first quarter.
Which helped improve the operating ratio by 380 basis points over the first quarter.
On a year over year basis, the operating ratio improved by 460 basis points.
Revenue decreased six 5% year over year, driven by a four 9% decrease in revenue per load and a one 7% decrease in load count.
The year over year decline in revenue per load narrowed from recent quarters as we have now lapped.
Loss of project revenue in the prior year.
We anticipate sequential growth volume growth into the second half based on progress in the bid season.
Should help us execute our strategy of diversifying our business mix building density, reducing empty moves and reducing cost we expect progress in these areas should make this business modestly profitable for the fourth quarter.
Now onto slide nine.
Slide nine illustrates our all other segments. This category includes support services provided to our customers independent contractors and third party carriers, such as equipment sales and rentals equipment leasing warehousing activities insurance and maintenance.
All other segments also includes certain corporate expenses, such as the $11 7 million of quarterly amortization of intangibles related to the 2017 merger between Knight and square and certain acquisitions.
For the quarter revenue declined 47, 5% year over year, largely as a result of winding down our third party insurance business in the first quarter.
The $3 9 million operating operating income within our all other segment as the first operating profit for this category in seven quarters and was primarily driven by the warehousing and equipment leasing businesses.
On slide 10, we have outlined our guidance and key assumptions, which are also stated in the earnings release.
Because of the timing of an inflection has proven especially difficult to predict during this cycle, we are not incorporating an inflection in marketing conditions.
For the purposes of these forecasts, but rather are based on these ranges unexpected seasonality and the continuation of existing market conditions similar to what we have felt in the second quarter and into July thus far.
Based on these assumptions, we expect our adjusted EPS for the third quarter will be in the range of 31% to 35.
And our adjusted EPS for the fourth quarter will be in the range of 32 to 36.
The key assumptions underpinning this guidance include the following.
For our truckload segment.
Revenue up slightly sequentially in the third quarter and again in the fourth quarter with sequential improvements in operating margins each quarter, resulting in adjusted operating ratio steadily improving.
Into the low to mid nineties.
Tractor count down modestly sequentially in the third quarter before stabilizing for the fourth quarter.
Miles per tractor, increasing low single digit percent year over year in the third and fourth quarters.
Prior year comparisons begin to include U S Express.
For our <unk> segment.
Low double digit percent growth in revenue, excluding fuel surcharge year over year as shipments count as shipment count in the third and fourth quarters improved mid single digit percent year over year and revenue per hundredweight, excluding fuel surcharge improved high single digit percent year over year.
And adjusted operating ratios in the mid to high <unk> as a result of normal seasonal progression and as we continue to expand our network.
For our logistics segment load count sequentially growing mid single digit percent in the third quarter and stabilizing into the fourth quarter with adjusted operating ratios in the mid nineties.
For intermodal.
Load count sequentially growing high single digit percent in the third quarter and stabilizing into the fourth quarter with an operating ratio modestly below breakeven by the fourth quarter.
In all other segments before including the $11 $7 million of quarterly intangible amortization, we expect operating income of approximately $10 million to $15 million for the third quarter and modestly negative for the fourth quarter and some of these services experienced a typical seasonal slowdown.
Additionally, we project equipment gains to be in the range of $5 million to $10 million per quarter.
Net interest expense to be modestly sequentially up modestly sequentially in the third quarter and fourth quarter.
In summary, we project truckload operating income to improve sequentially into the third and fourth quarters. We also expect the normal seasonal step down in <unk> earnings and activities.
Within our other segment in the fourth quarter, which will largely offset the projected ramp up and the truckload profits given that suppressed current truckload earnings level at this point in the cycle.
Our expected adjusted EPS ranges are based on the current truckload L T O and general market conditions.
<unk> trends and the current beliefs assumptions and expectations of management actual results may differ.
While we can't drive the timing of any change in the market dynamics. We believe we have positioned our business to under a difficult market and to be prepared to rapidly improve margins and cash flow. When we begin to experience an inflection in the market similar to our performance in previous cycles.
In closing we are compelled by the outsized runway ahead of us for improving earnings at both our legacy and newly acquired businesses driving significant free cash flow through cycles, and leveraging a disciplined approach to deploying capital to further increase the capital generating power of our company.
<unk> through successive cycles.
That concludes our prepared remarks before I turn it over for questions to remind everyone to keep it to one.
Participant.
Thank you John we will now open the line for questions.
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First question comes from the line of Chris Wetherbee from Wells Fargo. Your line is now open.
Yeah, Hey, thanks, good afternoon guys.
Maybe just on the truckload outlook as you think about <unk> and then <unk> in particular I guess you noted the seasonal improvement we saw in the second quarter I guess, how close are we getting back to sort of that relationship between.
Supply and demand and I guess as you think about the third quarter or.
What is included from a seasonal perspective in the outlook I guess, we're just trying to make sure.
Do you get a sense of how you guys are thinking about a potential ramp or is it really more of the same until we get to.
Better supply demand environment.
Yeah, I'll take that Chris good to hear Affinia.
It does feel like we're that we're getting a lot closer to a balanced market and what would lead us to that is just the seasonal uptick we saw as we came to a close of the second quarter and got into the to the holiday for the fourth of July where we saw many of our customers you know somewhat trying to six.
<unk> additional capacity, where their routing guides were starting to fail. We saw rejections pick up on some of the third party data as well as our own data and Thats. One of the first indications that that the supply chain does not have enough slack into to absorb some incremental demand and then you know as <unk>.
We noted in the prepared comments that we did see a little bit of a slowdown following the holiday, which is typical and we expect that to start to ramp up as we get closer to the holiday season, and so I think when we think about the guidance for Q3 and Q4.
You would expect to see in it in an improving environment, which we think we are in the bottoms behind us that the law would see some progression in terms of improvement from Q2 to Q3 and that could be in the 100 150 basis point range and then from a Q3 to Q4 kind of a similar range of could be a 100 <unk>.
The 200 basis points and if you look at the how especially from Q3 to Q4, how that's trended over.
The cycles over the last probably six years, we've probably averaged around close to just shy of 200 basis points improvement in the or from third to fourth now certainly an environment where.
Where there is a lot less.
Supply and demand that number can be larger closer to 400 basis points and then.
<unk>, where we see too much supply you could see that number even coming off from third to fourth so we're projecting somewhat of a kind of a normal type of uplift. It's just coming off a lower base, obviously and so we're gonna have a lot of work to do to improve those.
Margins kind of over time, but I do feel based on the way our volumes have trended and rejections and some other data points that we conduct costs. The next bid season that we should be in a position where rates should be going up across the board in.
And the next bid season, it's just a matter of by how much and that will be.
Really determined by what we see in the fourth quarter in terms of the acute demands from our customers or maybe lack thereof.
But I think there's really not that a scenario today, where I see rates going down and the next bid cycle.
When I think of where we landed here and the most recent of kind of tail end of the bids. There is we still felt pressure from certain customers to.
We'll reduce our rates and some that you can almost double digit levels, but clearly we don't have that to give now maybe there is some private companies that maybe don't have the same disciplines as us that'd be willing that would be willing to sacrifice that ray, but clearly we couldnt do I don't think some of our public peers can as well and so we've held the line and.
What we've found is we were still awarded a healthy amount of the business that we bid on even add small increases when customers were looking for a big decreases because I think they're understanding that the market is coming closer into balance and that that they probably need to begin to secure quality capacity and rigs.
Used their reliance on maybe brokers are smaller carriers and so we expect that trend to just play out but it just could take longer than maybe some had hoped.
But hey, these things can move fast in this space, we know that it's hard to forecast and predict and so we're kind of cautious on trying to predict the inflection because.
It's been probably been saying six months for probably 12 months now. So so we're taking more of a cautious approach in and expecting just seasonality to play out like we have been seen in HAE that maybe if that moves more rapidly maybe there's some upside to that.
Hey, Chris I, just wanted to clarify that.
Sure Sorry go ahead.
So go ahead Chris.
Hey, just a point of clarification. There as you think about that progression does that gets you kind of back to flattish, maybe give or take versus the fourth quarter of last year from a profit perspective in truckload.
Yes, I think there's probably some opportunity for truckload to be a bit better than it was last year from a profit standpoint, I think one thing we have to consider when you're looking at our overall business now the composition has changed quite a bit since maybe 2018 2019 year periods that you might be comparing against.
Because you've layered on LCL and that has maybe different seasonality than truckload and then we also have in our all other segments.
So non trucking businesses, particularly our warehousing and some of the equipment in and leasing business that maybe works counter seasonal where do you see a lot of strength in the first three quarters and maybe a lot less in the fourth quarter. So some of that offsets some of the strength you would see in truckload.
We like that I think that would show more consistency over time, it's just I think it may not you may not see the same kind of lift sequentially from Q3 to Q4 as you would have typically seen when we were primarily a truckload company.
Speaker Change: Chris on that very helpful. Maybe one other point we expect.
Yes, I think roughly what you said is right, but we expect <unk> to start contributing income, which it wasn't doing last fourth quarter. So I think we expect that to happen here in the back half.
It's going to be a process to get.
Where we need to be on U S. U S xpress, but there will be a contribution in our view in the fourth quarter.
Maybe one other one other point that you know another indicator that we watch that we think has some meaning is.
That we've watched it occur over the last few months the unplanned freight right now is not for us does not being secured debt at a discount.
Earlier in the year, we saw backup parameters spot freight that we were securing was going at a discount to our primary rates in that.
From a recent period, where we're seeing that flipped and we're seeing a small premium.
On those on those unplanned.
Demand. So it's just another indicator that it's going to be a process, but we are seeing.
Movement in that direction Thats encouraging.
Speaker Change: Okay.
Thank you very much I appreciate it.
Your next question comes from the line of Ken <unk> from Bank of America. Your line is now open.
Ken: Hey, great good afternoon.
Adam Andrew and Brad So I guess, just a little surprised given the commentary of improving backdrop, maybe just you know as we look at that spot rates on the load boards kind of near decade lows not just pulling back seasonally but just so we can maybe you can help us kind of interpret why why that is and then also we saw a lot of freight coming to the west coast, but then we're not really seeing kind of a.
Our flow through of that into the system is there I don't know is there a rebuild of inventory somewhere around the chain or is that prepped and ready to go as we go into peak season, giving you maybe more confidence as you move into the fall maybe worked through those those issues. Thanks.
What was the first part of the question Ken.
It was.
I'm just surprised on the commentary of.
The return to seasonality I know you said it pulls back at this point in July but yet on some of the low load ports, we're seeing kind of spot rates near near decade lows not not just low but dec.
Decade lows in terms of where they are on on the boards and that's just kind of makes it seem like the environment is even.
Speaker Change: And a week like.
At Covid week in terms of the demand out there. So I'm just wondering what why the differentiation of your confidence in looking forward and what at least the spot rates on load boards or are suggesting.
Ken: Yeah I think.
I think we have.
It maybe a different purview of the market because of the different brands that we have in sizable brands that operate in different networks and so we would look at a combination of our own data as well as what we see on third party data.
What are the what are the metrics, we would focus on would be the number of rejections that that the industry has seen and that picked up quite a bit hit.
The level, we havent seen probably since 2022 during the fourth of July and it came back down, but not not back to where it was it actually leveled out at levels that were similar to what we saw during memorial day. So that I think that tells there is still that it's not as easy to find capacity for some of our customers. We also look at the different <unk>.
<unk> that we have ongoing and these are project as Andrew alluded to that that pay a premium and although some of them have scaled back since the holiday we still have several ongoing throughout throughout all of our larger trucking company. So we've got U S Express we've got Swift, we've got night that are still participating in premium types.
Right, where customers need help and are securing capacity to do so so so there's there may be some of the indications that we see in our own business rather than just looking at at third party data and then also just discussions that we have with customers and he feels like many of them feel comfortable with where they're at from an inventory standpoint, and I think even serve.
<unk> that had been done would illustrate that as well and then that many feel like the market is in balance and hey, we were probably some lift that we're going to see in the fourth quarter. So that's just some commentary it's kind of anecdotal, but those are some large shippers that we're having discussions with as we try to plan out our fourth quarter now I still.
Ken: I think there's a little bit of unknown of what that could look like in the fourth quarter because normally you have discussions around those plans.
In August maybe even even early September where we start talking about potential projects are tiered pricing or where they have may need to have some surge needs. So I think theres more to come there, but we would certainly feel better about the market today than we would have certainly three months ago or six months ago.
And I think your other question was on it was a truckload.
Yeah, well, let me, yes, the west coast volumes that came in here yeah.
Yeah, I think we've seen this is talking with maybe different rail partners that we have as well that there has been a surge in the west coast and I think a lot of that volume has moved on the international containers versus the trans loading to truckload, but I do feel like as as volume starts to <unk>.
Up in truckload capacity becomes a little more scares that we will have some need to trans load I think that that starts to convert to truckload.
But right now it does feel like a lot of that is going on the international containers, but when there is a need for those containers and then they start to pick up they're going to have the trans load and that could go intermodal or could go truckload.
Thanks, I appreciate the thoughts.
Your next question comes from the line of Ravi Shanker from Morgan Stanley. Your line is now open.
Great. Thanks, a lot for any one there's a couple of follow ups here.
Adam You said, obviously, thanks for all the data that shows that you are seeing signs of improvement, but you also said that you don't think this is a trend just yet so what would you need to see to believe that this is real like is it somebody our dataset is it a continuation with just time is at a certain level of price is kind of what makes you think that this is going to be a continued trend.
Speaker Change: Also on the NPL cycle, the impressive door growth. There organically are you shifting your mix between organic and potential inorganic growth there.
That has taken a little bit of time to consummate that deal. Thank you.
Speaker Change: Yeah.
Yeah. So.
Maybe I'll hit the.
<unk>, yes.
Yes.
Excited about the opportunity that we had to pick up some properties due to the yellow bankruptcy and so we've got the team hard at work rolling those terminals out and building volumes.
And in those markets and it does take a little time and so it creates a little bit of a headwind from a from a margin standpoint, because of the costs associated with that but but we feel like having those markets opened up allowing us to participate in spot activity in the near term and then as.
Speaker Change: As we get into the next bid season, I think picked up some additional volume that get those.
Terminals back to more of an optimal level really helps us grow from a top line, but also from a margin perspective, and so I think we've got a lot of work ahead of us on that front I think we've been very open about also wanting to grow inorganically.
And clearly we have the southwest and the northeast as areas, where we have a need and and I think we've been you know we haven't done a transaction since <unk> in 2021. So we feel like the next 12 months that I think we'd be disappointed if we weren't able to get a transactional.
<unk> one transaction done to help fill in some of the gaps in those markets. So we think we can do both Ravi we're going to continue down the organic front.
And when we find the right partner and.
It has the right leadership and it's going to be the right fit and the organization will be very quick to pull the trigger on that because we believe.
Building out a nationwide <unk> has a lot of benefits not just from increased profitability and service for our customers, but also I think theres a lot of synergies that can align with our truckload business as well I think Brad you have some bad to this I was just going to add Ravi that to get to the growth targets that we want to hit in the timeline, we want to hit them, it's going to take.
Both the organic and inorganic running in parallel with the with the need to fill out those regional gaps in the southwest and the northeast the puzzle pieces, you're left with Theyre going to be regional and so if you consider the sizes of the likely available targets out there, it's going to take organic and complement two inorganic transactions to really fill that out and hit our growth targets. So it's not an either or it's both.
Okay.
Okay, and what was your first of all I wanted to just what do you need to see you on the data do I believe that this is real.
Yeah, I think Rob I think we just need to start to need to see how things play out in the third quarter. If we do in fact see the seasonal uptick as you get probably to the back half of August and really into September.
And I think we would have more confidence that this is maybe a trend that we would expect to continue into fourth quarter and lead to a much more favorable bid season into into next year, but again you have the little the lull that you see following the fourth slide that is normal and we just need to see that that builds back and then also just the conversations we're having with customers.
And then helping us understand what their needs are so we don't want to be too quick to call. It but I think we're cautiously optimistic that certainly the trough is behind us and we're on our way to building back and Andrew you want to add to this I'd say one other.
One of the thing we pay a lot of attention to that I think has meaning and particularly as we are.
Suddenly signals across our different brand is when we see.
Hey, behaving outside of seasonal patterns in other words, we see strong freight when it shouldnt be seasonally and that that's an indication.
For us of that.
Theres something different so we'll pay attention to the.
Following the seasonal patterns, but also where is it strong when it shouldnt be and we've got a lot of signals to that tell us when that is happening and so.
That will be one indicator for us.
Speaker Change: Understood. Thank you.
Ravi: Alright, thanks, Thanks Ravi.
Your next question comes from the line of Scott Group from Wolfe Research. Your line is now open.
Yeah.
Hey, Thanks afternoon, guys. So I wanted to just clarify something with respect to the guidance. So it looks like you're assuming a much higher tax rate now.
So is that right and why.
Assuming that we're looking at this right.
Are you effectively sort of raising the third quarter operating guidance. So just want to make sure. We're thinking about this right and then Adam can you. Just clarify you also said that truckload margin should improve 100 to 150 basis points Q2 to Q3 is that based on the reported number or.
The adjusted if we exclude the impact of the claim.
Yeah sure. So on the tax rate Scott, maybe without I don't want to get too technical here.
You know.
To access a temporary and permanent differences that drive the effective tax rate. When you have a lower operating income those permanent differences have a bigger impact on your tax rate. So because the operating income is lower than it was the previous year. That's effectively raised our effective tax rate I think as we see margins build operating income.
<unk>, which you would expect for next year, we would we would believe that tax rate will come back to a more normalized level. When we think about Q3 and now applying that higher tax rate I do feel like we've now forecast at a little bit stronger than we would we would have.
Last quarter.
And that helps offset the higher tax rate that we're now forecasting.
Sorry to make you put your CFO hat back on their own but and then just a question on the debt.
The truckload or comment just the sequential.
Yes, I think you could see.
Close to 100 100 basis points on the call it the adjusted operating ratio.
Excluding the claim.
Speaker Change: That's based on that.
Scott: They're in the second quarter, but I think Scott if you're asking is that based on the claim being in or out of the adjusted or so as reported that adjusted or with the claim and Theyre still leaves room for the type of step up yes, yes. So yes, you adjust that claim out there's still there's still room for a 100 basis point improvement Scott.
Scott: Very helpful. Thank you guys.
Ravi: Yep.
Ravi: Okay.
Your next question comes from the line of Tom <unk> from UBS. Your line is now open.
Yeah. Good afternoon wanted to ask a little bit about like the pricing assumption so.
Revenue per loaded mile ex fuel <unk> <unk> are you thinking that that will.
Start to move up where you think that is kind of flattish and what are you doing in terms of like percent of fleet in the spot market and kind of how you want that to be positioned if you gain some more confidence in the.
The cyclical upturn looking out a few quarters.
Yeah, Yeah sure. So I think when we think about pricing Tom we just see some some sequential improvement not a large change it could just be a percent or two as you go from Q2 to Q3 and in Q3 to Q4, probably be a larger lift in Q4, assuming that you have longer seasonality I'll play.
And in Q4, and so when we think about our spot contract relationship today, we hang about low double digits, you know the 10% 11% between the.
Our larger brands, we can flex that certainly if there is opportunity that comes our way in.
Ravi: In the past and really strong markets that brought that number to 2025% I don't think we'll have that opportunity in the near term, but certainly we'd be open to flexing that number up based on what opportunities come our way in the pricing on those opportunities.
I would say just maybe to add one comment there just.
We've seen.
Great stability.
Pretty consistently we kind of expect that outside of the spot premium opportunities, but just from here I think.
Our anticipation is that probably only goes up from here and how fast and to what extent that we don't know, but we don't we don't anticipate rate pressure down overall in the business and so our assumptions are based on a relatively stable rate environment for the rest of their.
And in terms of your percent of trucks and spot that's been kind of the same level of new for a few quarters and you keep it there for a few quarters going forward.
Yes, I think those trucks are now more profitable because the spot opportunities as Andrew mentioned are more of a premium than than a discount, but but again I think Tom we would have the ability to flex that up pretty quickly if the right opportunity comes our way.
Right, Okay, great. Thank you.
Alright, Thanks, Tom.
Okay.
Okay.
Your next question comes from the line of Brian <unk> from Jpmorgan. Your line is now open.
Brian: Hey, good afternoon, thanks for taking the question.
Just wanted to see if you could give us little more color behind U S Express.
Should be improving in this in this market I don't know how much of that could be.
What you would attribute to self help if you would.
<unk>, maybe percentage of market based versus self help that would be.
Useful to kind of figure out how that's progressing.
Right now and then just as a follow up to clarify the other segment income.
Turning negative in the fourth quarter and sort of offsetting some of the normal seasonal uplift that you might see is that really showing up now because insurance has gone in the other segments are still off of a pretty low base and thats why its a bigger impact or is that something that you think is going to.
Kind of mute the fourth quarter.
Speaker Change: More normal environment, whatever we end up getting there. Thanks.
Yes, yes, so maybe let me hit the all segment.
Our all other segment insurance really blurred.
Those results over the last couple of years and at first it was a positive and certainly turned to a negative there, but we have some core businesses within the all other segment like our warehousing and equipment leasing that had a relatively consistent and typically they play out where they have strong results in the first three.
Three quarters, and then they see a little bit of a dip.
And go breakeven could have a small loss in the fourth quarter I think that that's having a bigger impact in terms of the percentage of the EPS because of just where the truckload margins are today. So that that seasonality has always been there. It's just when our truckload business is operating in the low eighties.
Just not as readily visible because it's a smaller percentage of the overall income and so that's why we're calling that out now Brian. So that you can understand why there isn't maybe the same lift from Q3 to Q4 that maybe some would have anticipated, but nothing has really changed in those other businesses other than we just.
Pulled out the insurance, which clearly we didn't have any impact to the business, which is a positive I'm knocking on wood.
To make sure that we feel that same way here the next quarter.
When I think about U S xpress.
The progress there I mean really all of that self help I mean, there really hasnt been any market base support if anything that's been a headwind like it has been to everybody in the industry and so U S Express has been able to make some progress. Despite some of the market headwinds that we face with and so we've done a lot of the <unk>.
<unk> work, we've built out our terminal network of 11 terminals, we've made meaningful progress on costs that are getting closer from a cost per mile parity with Knight and Swift.
Dedicated business at U S Express is performing fairly well, that's very close to parity with with our Swift dedicated and logistics is also doing well and thats that performance very closely to our Knight Swift logistics businesses. The over the road business. The one way over the road is where we have the biggest opportunity and.
That's also where we feel we have a core competency as a as an organization and we've got great leadership, there and you expressed that know how to operate.
One way over the road capacity, it's just the starting point was just in a really bad spot. We've made some progress there, but as we get some market support I think we would expect that that business really makes some some big strides and becomes.
Profitable and begins to close the gap between diet, and Swift, but hey, we'll need a little market tailwind to help with that but you know as you've seen some of the seasonality we've talked about.
Introducing some of these projects in the U S Express business, where historically they wouldn't tiv.
Participated in those so I think theres some theres some additional you know.
Markets that they are reaching out to and finding opportunities in and as we see that change the market change and improve we will continue to find more wins for you is expressed and again make some some progress we expect some meaningful progress here in the next year, especially if the market changes.
There's always going to take some time to restructure the book of business. They were operating under two network strategy. So theres been a lot of work in lift onto to build the type of customers in the current network that we're that we know works and that means you've got to leave spot market.
When we acquired them they were probably close to half of their demand on us at spot market and in line now with rest of our businesses and as we've done that it's taken a long time, we've got the right type of customer the right type of freight that's going to be responsive.
Responsive when the market is ready and we can operate efficiently and we are U S. U S Express is operating counter to kind of where the.
The industries.
As we've done that overall is down on rates. So they are probably double digit up year over year on rate and they are probably up mid single digit from first quarter. That's because we are.
We've got the right type of customers.
<unk>.
They're going to be able to respond and we are going to start to see that a little bit here in the second half.
But there's a lot of signs that are encouraging to us that with a little bit of tailwind that business has a lot of runway.
And just a quick follow up can you keep the fleet roughly the same sizes when you.
Acquired it to hit all those metrics and gets parity assuming the market.
When the market recovers or do you think you need to shrink that down a little bit.
I think we've come off the suites and I think that was maybe more on the dedicated side, where we had some accounts that.
We weren't able to retain or the customer decided to disband the fleet to take advantage of the more attractive one way opportunity. The goal is that we can keep that debt that fleet stable and make improvement as the market improves.
Okay. Thanks, very much guys I appreciate it.
Okay.
Your next question comes from the line of Daniel <unk> from Stephens, Inc. Your line is now open.
Yeah, Hey.
Good afternoon, everybody. Thanks for taking my questions.
Daniel: I wanted to ask a follow up Adam on the LDL segments. So obviously youre, adding a good amount of rooftops and doors. This year and the guidance. You mentioned you expected revenue per hundredweight, I think up high singles, So pricing remains supportive, but curious how you envision going to market to fill that capacity is it just waiting on the industry to reflect higher where you have more stranded costs in the near term.
Curious how you weigh the puts and takes of bringing that capacity online and ultimately how you fill it.
Yeah, I think initially when you open up a new territory I mean, you look for some of the three Pls, where you can now add a zip code or a certain market and you put your pricing in and you start to see freight begin to flow into those markets, assuming you have competitive pricing.
And then you have a sales force there that's that's knocking on doors finding opportunities to.
To leverage the new network and then you have some of your large national bids that now open up for you because you have full state coverage or.
Some additional service area that they are interested in and then you also as you build additional scale you can bring on.
Some larger customers, who only like to deal with the largest players in and we have a lot of relationships with those type of shippers on the truckload side and many of them did not utilize our <unk> service because we don't have nationwide.
Coverage and so as we build this out they don't all have to they don't all need nationwide coverage, but they need certain scale in certain markets as we build these out we'll find some additional opportunities to bring on new customers that we already have relationships on the truckload side. So it's a process to build the volumes up so in the meantime, it does create a little bit of a head.
And from a cost per transaction standpoint, but the yields we've been able to secure helps overcome that and so we've been able to hold margin.
Relatively flat and that we will see some seasonal you know degradation of margin, which is which is normal for the AAA Cooper <unk> business in the back half of the year, but as we get stable with these terminals and see the volume begin to flow, we would expect that puts us in a good position to not only grow topline input.
To expand margins and how that flow through to the to the operating income.
One other point.
We're going to open up 38 locations this year that increases our our door count by 20% you know I think when meaningful.
Contributor you know this was a heavy organic growth year next year, we expect to be able to really grow those businesses, because we're going to be active and operating ahead of next year's bid cycle. So that's going to give us a kind of a step function opportunity to grow that business because because we're going to be ahead of that cycle. So our customers are asking for us too.
To participate there.
Wanting to ask they want options they want to include us.
In their bid process and so we're encouraged that there is a lot of opportunity, but we're being very very thoughtful about the cost.
We grow into that business, we don't overdo, it and to do that because we understand and we we value the need to maintain margin as we grow but this is a good environment for us to invest because the rate environment has been so favorable.
I appreciate the color best of luck.
Thanks Daniel.
Okay.
Speaker Change: Your next question comes from the line of Jon Chappell from Evercore ISI. Your line is now open.
Thank you good afternoon.
Andrew I don't want to kind of over complicate this but if we look at the the core number X. The claim of 30 in the second quarter, you've laid out a lot of like small step change positive in every single segment and we're still looking at midpoint of 33 and 34 for the third quarter and the fourth quarter I know, there's the other income and <unk> I know there is a seasonality in <unk>.
Oh I know we've identified the tax rate, although your tax rate was quite high in the second quarter as well. So is there just as this is an element of conservatism on kind of not quite getting there.
The true seasonality that you would typically get in September October and just keeping a really low bar with a potential step change to 'twenty five or do you feel like you really have line of sight on this this kind of whats called them really steady into year end with kind of a hope for 25.
So so so John I hate ever calling our guidance conservative right I think.
John: No one's done that before.
Yes, so I think.
This is the.
The best indication of where the business is going to perform with the information that we have today.
And again, we don't want to sit here and call. The inflection again, we saw positive signs.
As I mentioned earlier, we can't call it a trend yet.
But we've seen this market move rapidly both up and down and typically we haven't been able to forecast that so there's always the risk that it moves faster than we forecast.
But right now our assumptions are that we have this steady improvement in the business and as you've seen as you said, we've made some step function changes in each of the different segments, which we're encouraged by that are nowhere near where they need to be.
And and.
Based on what we're hearing from customers based on the data that we're seeing from our businesses as well as third party. We believe that will be a consistent improvement throughout the rest of this year now could that be.
Could it be more volatile to that certainly I think we've seen that in the past, we're just not in a position right now to try to forecast that.
Okay I understand thank you Adam.
Yep.
John: Your next question comes from the line of Eric Morgan from Barclays. Your line is now open.
Hey, good afternoon, Thanks for taking my question.
I guess I'll ask one on logistics, just just the brokerage gross margin improving sequentially from Q to Q.
Can you just speak to some of the drivers there any shifts in power only.
Some of this volume transfer without the asset based business that had an impact.
Speaker Change: Just based on Covid, given what we're seeing in the spot market just curious if you could.
Speaker Change: Offer some color there. Thank you.
Yeah, So Eric I think that's probably largely driven from just pricing discipline.
We're always managing.
The pricing dynamics of customers between our logistics business and our asset based business.
And we try not to undercut each other unless it really makes sense in a certain market, where we're one service offering would would take the lead with the customer and so because we appreciate how much pricing flows to the bottom line and in some case it would value that over just sheer volume, especially in logistics.
That we've probably taken a more disciplined approach to maybe others in the market.
And I think also the addition of the U S. Express team has helped that I mean, they they actually had a a good logistics business, we had to make some adjustments on on how it was staffed and weigh that in the way that work to help the gross margin flow to the bottom line to operating income, but but they've been added to that team.
<unk> got some some niche customers that they do really well with and so we've helped them with some systems and in the way they approach the market, but but that team has helped improve our overall logistics capabilities and also the gross margin and profitability.
Thank you.
Alright, we will do.
The last question here.
Thank you. Your last question comes from the line of Bruce Chan from Stifel. Your line is now open.
Hey, good afternoon, and thanks for the question here Adam I just wanted to follow up on some of the commentary around U S. Express you gave us some good color there already but I want to make sure I'm understanding it properly you said most of the opportunity. There is self help and I would think theres still some juicy low hanging fruit, but you also.
That it would the process in terms of finding the profit contribution in the back half and that would come with some some help from the market. So is the idea there that U S Express will contribute if you have some market tailwind, but we could be close to another breakeven quarter couple of quarters again, if that doesn't materialize I just.
I want to make sure that I'm understanding that properly.
Speaker Change: Sure.
What I was trying to say is the progress we've made with U S Express up to today has been largely self help because it really hasnt been market support its been probably more of a head right. So I think we've made progress despite.
The market is.
When we look at the back half of the year for U S Express if seasonality plays out like we are forecasting for the rest of our business I think U S Express would see the same benefits from that and would be a contributor, particularly in the fourth quarter more so than than the third quarter as they as they start to enter.
Into similar markets that a night in a swift participate in when you when you hit the fourth quarter with some seasonality. So so yes I think.
We expect to make some continued progress if the market is significantly different than forecasted obviously that could change how they perform.
When we see the inflection.
Where it's more meaningful in contract rates are up in a more meaningful way then that's what I believe U S. Xpress will see meaningful improvement really will start to close the gap to Tonight, and Swift and get closer to operating in the <unk>.
The eighties and then they start with high Eighty's, and then and then low AE or mid eighties, and it gets back to that dollar per share that we.
Initially.
<unk> talked about in terms of accretion it may take a little longer to get there. Given this this down cycle has lasted longer than expected, but we certainly see that there's line of sight based on how that business is positioned and what we think the opportunities could be in a strengthening market.
Okay, great. Thanks for that clarification that's helpful.
Okay.
Alright.
We'll conclude our call I appreciate all the questions that everyone dialing in and if we didn't get to your question.
Can call Us at 602, 600, 663 49, okay. Thanks, everyone.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
Yes.
Okay.