Q4 2024 Knight-Swift Transportation Holdings Inc Earnings Call
Andrew: Good morning, my name is Andrew and I will be your conference operator for today. At this time, I'd like to welcome everyone to the Knight Swift Transportation fourth quarter 2024 earnings call.
Andrew: All lines have been placed on mute to prevent any background noise.
Andrew: If at any time during your call you require immediate assistance, please press star zero for the operator.
Adam Miller: Speakers from today's call will be Adam Miller, Chief Executive Officer, Andrew Hess, Chief Financial Officer, and Brad Stewart, Treasurer and Senior VP of Investor Relations.
Mr. Stewart, the meeting is now yours.
Adam Miller: Thank you, Andrew. Good afternoon, everyone. Thank you for joining our fourth quarter 2024 earnings call. Today, we plan to discuss topics related to the results of the quarter, current market conditions, and our earnings guidance.
Adam Miller: 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.
Adam Miller: If you have a second question, please feel free to get back in the queue.
Adam Miller: We will answer as many questions as time allows. If we are not able to answer your questions due to time restrictions, you may call 602-606-6349.
Speaker Change: To begin, I will first refer you to the disclosures on slide two of the presentation and note the following.
Speaker Change: 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.
Speaker Change: Investors are directed to the information contained in Item 1A, Risk Factors, or Part 1 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.
Speaker Change: Before we get into the quarterly results I'll hand the call over to Adam for some opening remarks.
Thanks, Brad, and good afternoon, everyone.
Adam Miller: So, as we close the book on 2024, we have more conviction that we are finally moving on from the prolonged down cycle that has weighed on the freight transportation sector for nearly three years.
Adam Miller: 2024 was another very difficult year but it also brought a stabilization in pricing.
Adam Miller: A return of seasonal patterns, a cooling of cost inflation, and a marketplace that gave more and more indications of approaching balance in the second half of the year.
Adam Miller: While the extended drop in freight rates alongside stiff inflation over much of the past three years has taken margins to unusual lows, we have not been waiting for the next up cycle to prepare our business to produce significantly higher margins.
Adam Miller: We have sustained efforts to develop technologies that will help our business be more efficient and responsive to both opportunities and challenges created by a new cycle.
Adam Miller: We have taken advantage of unique opportunities to accelerate the organic expansion of our LTL network on our path to developing a valuable nationwide service offering.
Adam Miller: and we have worked to enhance our collaboration across service lines to capture more opportunities and drive more synergies.
Adam Miller: As customer needs become increasingly acute and dynamic in an improving market, we believe these efforts, our leading truckload scale, and our diverse service offerings will position us to be an outside beneficiary in an improving market.
Adam Miller: particularly because our industry-leading one-way truckload exposure can be arguably the most commoditized service during loose markets but becomes some of the most valuable capacity we offer in a tighter market.
Now please turn to slide three.
Adam Miller: So with this perspective, for 2025, we have identified the following key levers that will help drive our near-term success.
Adam Miller: For truckload, we will intentionally leverage our scale, suite of services, trailer network, and flexible over-the-road capacity in order to enhance our value proposition.
Adam Miller: For our customers, this means maximizing our capacity and agility towards creatively solving larger and more complex problems.
Adam Miller: For us, this means more market opportunities are captured and kept in-house and that distinctive solutions are less commoditized.
for LTL.
Adam Miller: Well, the past 18 months have been a period of significant investment to expand our network
Adam Miller: The focus in 2025 will pivot to growing shipment count to drive margin expansion through revenue growth.
Adam Miller: freight mix upgrades, operational efficiency gains, and better cost absorption while maintaining price discipline.
Adam Miller: Our team has positioned the business well, and we couldn't be more excited about the opportunities ahead of us in 2025.
Adam Miller: We will continue to be opportunistic regarding organic and inorganic opportunities to grow our network and business where the strategic fit is right, but we expect to be more selective in 2025 while we drive returns on the existing investment.
and the
for Logistics.
Adam Miller: We spent much of the down cycle harmonizing our technology platform.
Adam Miller: As the market recovers, we will leverage this platform to sharpen how we value opportunities and buy capacity, to enhance how we engage with carriers, and to improve the efficiency of how we execute transactions.
Adam Miller: This business continues to be a great complement to our asset business as it augments our capabilities in a stronger market.
Adam Miller: and it augments our freight opportunities in a weaker market. It also affords us the ability to better utilize our trailer assets to enhance returns through our power-only service.
for Intermodal.
Adam Miller: We have been grinding on improving our volumes, cost structure, network balance, and customer diversification and have made meaningful progress in a weak pricing environment.
Adam Miller: For 2025, our focus will be on gaining market share through the bid season to improve network balance and enhance asset efficiency on a path to profitability.
and for our customers.
Adam Miller: We will continue our path towards developing a unique ability to service freight needs.
Adam Miller: with several large national truckload brands with unique networks and trailer capacity, we have the capabilities to solve acute challenges and support projects by leveraging capacity across our network.
Adam Miller: We are also refining our capabilities to leverage our national offering in both full truckload and LTL to support our customers, and our conviction on the synergy opportunities is just as great as it has ever been.
Brad: And now I'll turn it over to Brad to kick off the overview of the quarter.
Brad: Thanks, Adam. The charts on slide 4 compare our consolidated fourth quarter revenue and earnings results on a year-over-year basis.
Brad: Revenue excluding fuel surcharge decreased slightly by 0.9% and our adjusted operating income improved by 127% or 59.4 million year-over-year. GAAP earnings per diluted share for the fourth quarter of 2024 were 43 cents.
and our adjusted EPS was 36 cents.
Brad: Our consolidated adjusted operating ratio was 93.7%, which was 350 basis points better than the prior year, and essentially flat sequentially.
Brad: Our results were positively impacted on a year-over-year basis by our closure of the third-party insurance business in the first quarter, as this business generated a $71.7 million operating loss in the fourth quarter of the prior year.
Brad: This positive impact was partially offset by a $6.5 million increase in net interest expense and a $5.4 million decrease in gain on sale year over year.
Brad: Also, the effective tax rate on our non-GAAP results decreased 5.8 percentage points year-over-year.
Brad: The effective tax rate for the fourth quarter came in lower than previously projected, primarily as a result of realizing greater discrete benefits upon filing our state returns and more favorable apportionment results than previously estimated.
Brad: Additionally, our GAAP results include an $8.1 million impairment charge and a $36.6 million benefit for a mark-to-market adjustment related to certain purchase price obligations associated with the acquisition of U.S. Express, both of which are excluded from our non-GAAP results.
Moving on to slide five.
Brad: Slide 5 illustrates the revenue and adjusted operating income for each of our segments for the quarter.
Brad: Overall, the fourth quarter showed the benefits of our diversified business model as sequential improvements in our truckload and logistics segments offset the seasonal slowdown in our all other segments and cost headwinds from the significant expansion and system integration in our LTL segments.
Brad: The market in the fourth quarter largely played out as expected.
Brad: Hurricane Celina and Milton disrupted freight volumes for the first half of October, particularly for our U.S. Express, Truckload, and AAA Cooper LTL brands based in the southeast.
Brad: Aside from this, some seasonal project activities and pockets of incremental demand for truckload services occurred through Black Friday and generally wound down in mid-December.
Brad: Truckload freight market conditions have not been consistent across regions or across our various brands, but the fourth quarter brought more signs of a market that is getting healthier.
Brad: We noted improved customer sentiment, seasonal spot rate progression, further capacity erosion, and early bid season activity that aligns with our outlook for contractual rate improvement.
Brad: Also, the responses to weather disruptions thus far in early January are further signs that the marketplace is growing more balanced.
Brad: While general demand levels in the LTL market faded a bit in recent months, pricing trends held strong, though industrial production has languished for some time. Our LTL business continues to achieve volume growth and steady rate improvement as we extend the reach of our network and capture new volumes, with this segment growing to represent 17% of our revenues in the quarter.
Brad: Now I'll turn it over to Adam to discuss our truckload segment on slide 6.
Adam Miller: Thank You Brad. On a year-over-year basis our truckload revenue excluding fuel surcharge for the fourth quarter decreased 4.4 percent as loaded miles declined 3.7 percent and revenue per load revenue per loaded mile excluding fuel surcharge declined slightly by seven-tenths of a percent.
Adam Miller: However, our revenue excluding fuel surcharge per tractor grew 1.7% year-over-year, as a 2.4% improvement in miles per tractor overcame the slight decline in revenue per voted mile excluding fuel surcharge.
Adam Miller: This improvement in utilization marks six consecutive quarters of year-over-year gains in this metric.
Adam Miller: The improved asset utilization coupled with our cost-cutting initiatives led to 170 basis point year-over-year improvement in adjusted operating ratio.
Adam Miller: On a sequential basis, revenue per loaded mile excluding fuel surcharge and miles per tractor each increased 1.1 percent, driven by seasonal project opportunities.
Adam Miller: The improvement in rate and progress on cost-cutting initiatives led to a 430 basis point sequential improvement in the adjusted operating ratio in our legacy truckload businesses.
and 100 Bases Point Improvement at U.S. Express.
Adam Miller: Our spot exposure remained relatively consistent with the third quarter, and our average spot rate remained higher than our average contractual rate.
Now on to slide seven.
On slide seven, we cover our LTL segment.
Adam Miller: The LTL market saw slightly less supportive demand trends than truckload for the fourth quarter, though pricing trends held strong.
Adam Miller: We are still experiencing shipment growth and steady rate increases in our business, partly aided by our expanding network that allows us to offer our services on more lanes to new and existing customers.
Adam Miller: Our LTL business grew revenue excluding fuel surcharge 20.2% year-over-year, as shipments per day increased 13.3%, which includes our acquisition of DHE.
Adam Miller: Revenue per hundred weight excluding fuel surcharge increased 9.6% year over year. Our weight per shipment declined 2.8% year over year but inflected positively in Q4 compared to Q3.
Adam Miller: The Adjusted Operating Ratio was 94.5% and Adjusted Operating Income declined 54.9% year-over-year.
Adam Miller: due to startup costs and early stage operations at our recently opened facilities, as well as the costs for the DHE system integration, which we completed just over three months after the acquisition.
Adam Miller: The cost to integrate DHE into our systems and network were higher as a result of the speed with which we sought to complete this initiative and for our efforts to avoid volume and service disruption in the transition.
Adam Miller: It took roughly 11 months to do a similar transition following the MME acquisition in 2021, and we wanted to complete the integration much faster in this case, due to the strategic importance of adding the Southwest, and particularly California, to our network coverage.
Adam Miller: Our pace of expansion is also a headwind on margin as facility, startup, staffing, and equipment positioning costs all occur before revenue ramps. The margin drag has proven greater than we anticipated largely due to the scale of the change.
Adam Miller: With 51 locations and over 1,400 doors added in 2024 alone, this represents over 40% growth in locations and over 30% growth in doors for the year.
our significant network growth rate.
Adam Miller: is a function of the unique opportunities in the marketplace to attain properties over the past 18 months, as well as our desire to extend the reach of our service offering as soon as we were able to in order to pursue volume in the corresponding coverage areas as bids are conducted.
further.
Adam Miller: Some of the margin headwind came as we put a priority on maintaining service levels and onboarding new customers during the network expansion and the integration of DHE as a form of investment in customer satisfaction with an eye toward ongoing bid opportunities as we grow.
Adam Miller: We expect the majority of the DHE integration costs do not extend beyond the fourth quarter, so that we will begin to make progress reducing the margin drag from the network expansion in the second quarter as bid season progress begins to be realized in our results.
Adam Miller: We are excited about the opportunities ahead of us, some of which have already begun to materialize.
Now, I'll turn it over to Andrew for Slide 8.
Thanks, Adam.
Adam Miller: Logistics market saw spot rates improve early in the quarter with the hurricane and port strike disruptions.
Adam Miller: This tightening of the market drove a 12.3% improvement in revenue per load year-over-year, but put pressure on gross margins in advance of corresponding contractual pricing improvements.
Adam Miller: We maintained our disciplined approach to pricing, while growing revenue 17% and adjust-adopt income 34.6% sequentially.
Adam Miller: The adjusted operating ratio of 93.7% improved 80 basis points over the third quarter.
Adam Miller: Revenue increased 2.1% year-over-year as the increase in revenue per load offset a 9.9% decrease in load count.
Adam Miller: As discussed last quarter, the logistics market continues to see a number of shippers allocating more of their contractual business to asset-based providers.
Adam Miller: Historically, as the truckload market tightens, we have seen our logistics business experience outsize growth, particularly due to the collaboration with our asset-based businesses.
Adam Miller: and we expect that trend to continue into 2025 as the market improves.
Adam Miller: We continue to leverage our power-only capabilities to complement our asset business, build a broader and more diversified freight portfolio, and to enhance the returns on our capital assets.
Now on to slide 9.
Adam Miller: Our intermodal business posted a year-over-year increase in revenue for the second quarter in a row.
Adam Miller: Revenue increased 4.9% driven by a 10.2% increase in load counts, partially offset by a 4.8% decrease in revenue per load year-over-year.
Adam Miller: The improvement in volume and progress in operating costs overcame the decrease in revenue per load to improve the operating ratio by 320 basis points year-over-year.
Adam Miller: After getting off to a rough start with recent hurricanes negatively impacting volumes early in the quarter, the monthly progression of volumes held up better than in the previous year.
Adam Miller: We remain focused on executing our strategy of diversifying our business mix, building density, reducing empty moves, and reducing cost. We expect ongoing progress in these areas should make this business profitable in 2025.
Now on to slide 10.
Adam Miller: Slide 10 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.
Adam Miller: For the quarter, revenue declined 36.4% year-over-year, largely as a result of winding down our third-party insurance business in the first quarter.
Adam Miller: On a sequential basis, the decline in revenue and operating income reflected the typical seasonal patterns associated with our warehousing business.
Adam Miller: The $15.9 million operating loss within our other segments is primarily driven by the intangible amortization and also includes a loss in our warehousing business.
Adam Miller: Additionally, in quarter we successfully transferred the remaining risk from the third-party insurance business to another insurance company.
similar to the transaction we executed in the first quarter.
Adam Miller: The cost of this transaction is included in the operating results.
Adam Miller: On slide 11, we've outlined our guidance and key assumptions, which are also stated in the earnings release.
Actual results may differ from our expectations.
Adam Miller: Because we anticipate a gradual recovery in market conditions in 2025, these adjusted EPS ranges reflect expected seasonality and a steady improvement in existing market conditions.
Adam Miller: and our adjusted EPS for the second quarter of 2025 will be in the range of 46 to 50 cents.
Adam Miller: The key assumptions underpinning this guidance are listed on this slide, but I won't cover them in detail.
Adam Miller: In summary, we project truckload operating income to decline sequentially into the first quarter in keeping with normal seasonality, though we anticipate the decree of decline will be mitigated by contractual pricing improvements through bid activity.
Adam Miller: Thereafter, we expect seasonal improvement in truckload volumes and utilization, as well as rate progress through bid season.
who will lift earnings in the second quarter.
Adam Miller: For LTL, we expect seasonal improvement and a lack of system integration costs to lead to a sequential improvement in earnings in the first quarter. Seasonal trends and progress in growing volumes should further drive earnings and margin growth in the second quarter.
Adam Miller: I want to point out that while our expectations for the earnings in all other segments is lower than what we previously projected, we are also reflecting in this guide a change in the cadence of the quarterly revenue and income profile in our warehouse business.
Adam Miller: which will bring a smoother allocation of earnings across the full year.
Adam Miller: This concludes our prepared remarks and before I turn it over for questions I want to remind everyone to keep it to one question per participant.
Speaker Change: and I'm going to be talking about the new technology called the Google Assistant. So, let's get started. Google Assistant is a free app that lets you create a new account and it's free of charge. So, let's get started. So, Google Assistant is a free app that lets you create a new account and it's free of charge. So, let's get started.
Adam Miller: Thank you, Andrew. We will now open the line for questions.
Thank you. Bye-bye.
Speaker Change: Your first question is from Todd Wadewitz from QBS. Please go ahead.
Yeah.
Good afternoon.
Wanted to see if you could
Speaker Change: If you offer a little more perspective on some of the key assumptions, it's a, you know, it's a pretty meaningful move up in 2Q versus 1Q.
Speaker Change: Is there kind of a, you know, kind of greater traction on LTL because more of the costs fall out?
or is that more 1Q versus 4Q?
Speaker Change: And then I guess in terms of just how much pricing do you expect and how much lift in 2Q from the view on contract rates. So I think really just some more perspective on, you know, what's assumed in the 2Q guide. Thank you.
Speaker Change: Sure, Tom, I'll touch on that, and if Brad and Andrew have anything to add, feel free to jump in here. I won't go into great detail here, but I think when we think about the lift from Q1 to Q2, I think it's
Speaker Change: Just normal seasonality on the truckload business from Q1 to Q2 and just, you know, building a little bit more momentum in the market.
and, you know, we're expecting...
Speaker Change: You know the bid season to be favorable from a contractual rate standpoint And so we'd expect some of those rate increases to begin to be implemented in Q2 and that should Translate to an improvement in the operating ratio really across you know all of our truckload businesses
Speaker Change: And then you hit it as well on the LTL front, you know, Q1 will be largely
Speaker Change: improved because we're kind of putting the DHE integration costs behind us.
Speaker Change: But we also expect to build some momentum through the bid season on building more, you know, volume density in our newer facilities, which should lead to, you know, greater shipment count.
Speaker Change: greater optimization of our line haul fleet for LTL and expanded margins. And so I think we're seeing a step up in margins from Q1 to Q2 for the LTL business. And then really logistics to be relatively stable from Q1 to Q2, maybe seeing a lift from a revenue standpoint. And then intermodal, we talked about
Speaker Change: you know the path to profitability in their model and our expectation is we start to see that turn positive from a margin standpoint in Q2. So I think all of those are contributing to the step up in the in the earnings from Q1 to Q2, Tom.
Tom: So it sounds like kind of normal seasonality for truckload and logistics, but maybe stronger than normal seasonality in LTL. Is that a fair understanding?
The
Right. Okay, great. Thank you.
Tom: Your next question is from Ken Hoekstra from Bank of America. Please go ahead.
Tom: Hey, great. Good afternoon. So, Adam, sounds like a lot of moving parts here, but maybe just dig into the truckload. Sounds like you're talking about maybe seeing benefits earlier in the season, maybe even an early bid season.
Tom: and that's giving you some confidence. Can you talk about maybe are you seeing kind of many bids come early? Are you, is there, was it more on the bid side or is it kind of the structural cost steps you were taking? Maybe just kind of delve into both those ends of it.
Tom: It's going to be improvement across all of those areas, Ken. There's not really one silver bullet here.
Tom: As I was noting on the bid season, it's really following its normal pattern. I don't think it's moving any sooner than it normally would. I just, I think what I would really touch on is just...
Tom: The early wins we're seeing or the early indications we're seeing from the bid season is that
Tom: You know, our customers understand the rates most likely are heading up.
Tom: There may be a few that maybe disagree with that view, but...
Tom: You know, from the awards we've received, you know, the rates have been trending positive. You know, last...
Tom: conference call. We mentioned our thought would be that the rates would start up.
Tom: in the low to mid-single digits, middle to mid-single digits as the bid season progresses and maybe could end at the mid to high single-digit range. I think at this point now, we're kind of transitioning to that mid-single-digit ask from a bid standpoint.
Tom: and and we have maybe a you know a few of our brands or at least at least one of them that's starting at a lower point and so they're asked maybe even higher than that so
Tom: I feel like we're gaining some momentum there, and it's not going to be a large inflection. It'll just be a grind or just a slow progression in terms of margin improvement, but it's going to come from making just meaningful progress or just making some incremental progress on rate, and then keeping the cost disciplines in the business.
left for about...
wanting to maintain our operating cost per mile.
Tom: on a year-over-year basis. And so if you have a market that's improving, you may have some areas of inflation, such as driver pay.
Tom: But you've got to offset that, and that can come from...
Tom: But again, it's got to be improvement in a host of areas to be able to...
Tom: to achieve what we're hoping to achieve, but we do believe that you know, that seasonality from Q1 to Q2 is intact and and we expect it to begin to improve even further in the back half of the year.
I think, Andrew, you may have some to add.
Speaker Change: Hey, Ken. So I would say, you know, we're, as we leave Q4 here, we, you know, we've made some good progress in the core, really in the back half of the year on cost. We've been working hard both on our variable and fixed costs. We're fairly encouraged that as we look into 2025 that that's going to give us
Speaker Change: Some real leverage in our margins, and I think you're seeing that
Speaker Change: in our guide here for 2025. So we've made a lot of progress. We talked about our utilization has been better year-over-year sequentially, or better year-over-year six quarters in a row. That's really playing out in terms of the flow through to our costs, so equipment costs, but really
Speaker Change: We're pretty encouraged by the progress we've made in our wages, in our fuel, in our maintenance costs, and really our overhead costs.
Speaker Change: are substantially down. That's going to help us as we go into 2025 and be able to expand that margin quicker. So we do think the carry forward of the cost work we've been doing into 2025 is going to give us that confidence.
that it contributes to our margin expansion.
Great. Appreciate the time. Thank you, guys.
All right, thanks again.
Your next question is from Rabi Shanker from Worthington, Maryland.
and Morgan Stanley. Please go ahead.
Rabi Shanker: Thanks for that. So, I'm very clear that you guys are pointing to the guidance reflecting normal seasonality, but I think with the ramp and some of the data points, whether it's RTLFI index, the truck spot rates you've seen in November, December, into January,
I think it's...
Rabi Shanker: It seems like it's much better than seasonality, so is there some reason to believe that the strength you've seen in the last 6-8 weeks or so is...
Rabi Shanker: Not sustainable and like, you know, maybe there's not enough of a tariff related pre-buy And do you expect that to wind down or do you think that this? Seasonal kind of this kind of extra seasonal strength can continue and you can actually put up a better print than then you guys did
That you guys are going to.
Thank you for joining us.
Speaker Change: Yes, I think it's still hard to draw sweeping conclusions from the data from the last several weeks.
Robby, I think it's just too soon to do that.
Speaker Change: When we look at the turn from 24 to 25 as you go into the first quarter, sometimes that can be telling on where the market's going to land. To be honest, the last few weeks have been really hard to read through because of the disruption from the weather. We saw that the first week of January, then we saw probably a nice rebound, which you're seeing in some of the third-party data out there you're referring to. I expect this week to feel some challenges as well with the weather that we're feeling in the Southeast.
Speaker Change: a little bit more time to see how 25 begins to materialize, to, you know,
Speaker Change: determine if we feel like there's more strength than what we're seeing today.
Speaker Change: But right now, we're trying to set our guidance in what we believe is achievable based on
Speaker Change: where we see the market right now. And if we see continued strength, then certainly there's upside, but we're not banking on that at the moment. And, you know, we look at all the data that you would look at, and we track, you know, rejections from...
Speaker Change: from an industry standpoint, and that's certainly been up, and we would see something similar in our own business.
From a capacity standpoint, it does seem like they're
Speaker Change: are less trucks available when you look at the different load boards that are out there.
Speaker Change: But I think it's too soon to call that any type of meaningful inflection. I think we need to see more sustained data like that before.
We get more aggressive on our view on the market.
Understood. Thank you.
Speaker Change: Your next question is from Scott Group from Wolf Research. Please go ahead.
Hey, thanks, afternoon, guys. So maybe a different...
Speaker Change: Way to approach that last question, right? If you look, truckload revenue actually.
Speaker Change: sell about 10 million from third quarter to fourth quarter, but
truckload earnings improved nearly 40 million so
Speaker Change: Obviously, that's really strong, but like, how does, you know, some color, like, how does that actually happen, how sustainable is that sort of trend, and what do you think that means for, like, ultimately where truckload margins are?
Speaker Change: can go over the course of the year, over the course of the cycle. And then maybe just, I have one just.
Speaker Change: Big picture question. I just want to make sure I'm understanding. Adam, when you laid out the priorities for 25 I think you said like industry leading truckload yields And then you said intermodal focused on market share. Why the different approaches to the market where one's about price and one's about share?
Thank you.
Speaker Change: I'll try to unpack the four questions you laid out there, Scott. So forgive me if I missed one here. I think the first question was just revenue declining sequentially but margins improving. I think there's a couple pieces of that.
Speaker Change: Certainly in the fourth quarter, you're going to have disruptions that naturally occur from the holidays. So your Thanksgiving
Speaker Change: Christmas on a Wednesday isn't ideal and so you'll you'll see a drop in your productivity of your assets over those periods of time Which usually leads to that, you know, there's a risk that you have
Speaker Change: a step down in revenue there, but we did see yield improve over that period from third to fourth.
Speaker Change: from a pricing standpoint, and then we continue to make progress on the cost side of our business. And so, ultimately, that's what led to...
Speaker Change: the improvement in in the margin and and when we think about our approach truck load versus intermodal we're not opposed to growing truck load we certainly want to grow volume and
Speaker Change: and we and we believe that we have an opportunity to do so but that I don't think that it has to be the major driver to become more profitable in truck load I think there's gonna be opportunity to pick up
Speaker Change: David Stewart, Andrew Hess, David Jackson, Adam Miller David Stewart, Andrew Hess, David Jackson, Adam Miller
Speaker Change: We still have so much latent capacity from a turn standpoint on our containers where we do need to grow market share there. We do need to grow the volume there to to compete from a from a, you know, overall margin standpoint with the better players out there in the market.
Speaker Change: So, you know, pricing, volume are all important for each of our business, but I think it's a bigger lever than an intermodal today, given where we stand from.
Adam Miller: Helpful. Thank you. Did I get them all shot? You got them all. All right. Thank you, Adam.
This is a very interesting story, I think.
Speaker Change: Your next question is from Chris Weatherby from Wells Fargo. Please go ahead.
Chris Weatherby: Hey, thanks. Good afternoon, guys. Maybe I could pick up on that sort of cost dynamic in the truckload side. It looked like there was some pretty good improvement on op-ex per mile on a year-over-year basis. Also, it looked like sequentially.
Chris Weatherby: So I guess if you think about 2025, I'm kind of curious how you think about the opportunity from here to further improve that. Obviously, we're hopeful that the revenue environment will get better as well, but a lot of the stuff that you're controlling or can control, you're doing a good job on. And I guess in the context of the comments you made about getting the legacy businesses back into the 80s after I think seven quarters or so, it seems like you're doing that at a pretty meaningfully lower revenue per mile than where we were at that point. So I guess I'm just trying to make sure we're...
Chris Weatherby: capturing what the opportunity from a margin perspective of the business is as we move through this next cycle given the cost control you're doing.
Speaker Change: So Chris, maybe I'll have Andrew jump in on the first part of your question on the cost for 2025 and I can add any color if I need to.
Speaker Change: You know there's a there's a number of factors involved here in the cost initiatives we've been driving in the business. Let me just address a few.
Speaker Change: We've made a lot of improvements in our utilization of our assets, both on the trailer and the tractor side.
Speaker Change: Yet we we believe there's a lot of runway ahead of us in this regard We were able to put a lot in our view a lot more miles on our equipment than we're doing now So what gives us confidence in the sustainability of that? We feel like there's a lot of future utilization improvement well ahead of us here
Speaker Change: That is a major contributor. We have made significant reductions in our overhead costs.
Speaker Change: Those are permanent in our view. We've reset our business and our fixed costs and continue to do so in a way that is not going to put pressure on that cost in our view to increase.
Speaker Change: as load volume increases. We've implemented productivity, processes and tools that allows us to operate at a lower fixed cost. And you're starting to see that. We've been working on that all year and you're starting to see that come through our results here in the third and fourth quarter.
and when you get into an environment like this...
Speaker Change: where there's so little margin of error, we've had to become, we've had to refine our ability to manage our variable costs. So our key variable costs of maintenance and fuel.
Speaker Change: and our driver, managing wisely our driver pay, those costs, we have the stronger processes now than we've had in years.
Speaker Change: Fundamentally, we've sharpened our process, our focus on cost management in a way that
Speaker Change: that it's fundamentally how we operate, but certainly this market has caused us to become even more focused on it. So.
Speaker Change: So when we think about 2025, we don't see any reason why any of those initiatives we've driven
Speaker Change: will revert on us. So we're gonna continue to put pressure to manage our costs down and.
Speaker Change: And so we think that gives us, you know, confidence about the margin expansion.
expectations of our business.
Speaker Change: And Chris, you know, you asked about where margins can go.
Speaker Change: You know, we can, we believe we can get back to how, you know, we typically.
performed on the truckload side.
throughout cycles where
Speaker Change: in the very best times, when you're over the road, kind of full truckload capacity, that's irregular route, is the most valued.
Speaker Change: I mean, which is really where we're still invested in, where many of our peers, many people in the market have moved away from that. That can operate in the upper 70s from an OR standpoint. And I don't see a reason why that can't be between all of our major brands, Knight, Swift, and U.S. Express.
Speaker Change: Now, in a kind of normalized market, which I don't think we're at yet, I think maybe that might be the case in 2026.
Speaker Change: is, you know, operating in that mid 80s range, and then in a more difficult environment, you're in that upper 80s. I mean, really, that's how we would see kind of the normal cycle.
Speaker Change: playing out. Now obviously, this last cycle was the highs were much higher than the lows much lower. I don't see that, I don't expect to see that same type of volatility. But I see us getting back to kind of how we've operated these business historically.
And that's just on the prep code side.
Speaker Change: Yeah, on the LCS side, we don't see that being as volatile, right? Our goal is to make, to grow this business, but make incremental improvement in the operating ratio year after year, just like others in the space who really are building out their nationwide network have done.
Speaker Change: 2024 was a big investment year for us. It was an opportunity we just couldn't pass up to be able to pick up a lot of new properties and also
Speaker Change: and acquisition that really gave us access to the southwest. So put more pressure on the margin than we would like, but...
Speaker Change: But hey, we would do it all over again because we feel like it really puts us in a great position going into this bid season and from a long-term standpoint building out a real solid nationwide network that has good margins.
Helpful color guys, thank you.
Thank you.
and Andrew.
Speaker Change: Your next question is from John Chappell from Evercore ISI. Please go ahead.
John Chappell: Thank you. Thanks for that last answer, Adam and Andrew. If you could just take that one step further then as it relates to intermodal logistics.
John Chappell: Sounds like you've done a lot of initiatives that you can control, you think, Andrew, through Cycle.
Speaker Change: the cutthroat competition in logistics? Or are you implementing the same types of things in those business lines, where you can see kind of how Adam laid out the TL and maybe the LTL aspiration to the strong part of the cycle. You can see the same type of move in those other two businesses.
Speaker Change: Well, I'll touch on logistics. So when I look at our logistics business, it's very much complementary to our truckload business.
strong from a demand standpoint.
Speaker Change: You know, we see so much flow through of those of those loads to our logistics business and because we have
Speaker Change: the trailer network to leverage, our customers would benefit from, you know, pulling in third party capacity, but also having trailer pools and the efficiency that comes with, with trailer pools. Again, when you, you know, the irregular route capacity is very valued.
Speaker Change: And so that's why we believe as the market strengthens, the logistics business is positioned to have outsized growth.
Speaker Change: Now conversely, when the market loosens or becomes, you know, there's more supply out there than demand, will we shift more of that volume from logistics to our truckload business to support the truckload business where we have capital assets and you have drivers counting on a paycheck?
Speaker Change: I would just admit it can be a little bit more volatile than just your stand-alone
Speaker Change: and I'm the CEO of O-R. We're a non-asset logistics business. We have price discipline and that comes from being part of an asset-based business. We always maintain profitability.
Speaker Change: in different environments, but we maintain profitability throughout the cycles, and we would continue to do that, and, hey...
Speaker Change: You know, with the U.S. Express acquisition, that logistics business has done really well.
Speaker Change: We're harmonizing the platform that we use between all of our logistics brands. And I think that gives us more continuity on sharing loads, sharing opportunities.
Speaker Change: buying effectively, vetting the right carriers. And so we're bullish on logistics when truckload is healthy. And I think that bodes well for us and also really supports our customer.
on the the intermodal front.
Speaker Change: That operates a bit differently. There's not as much over, you know, overflow from truckload business to intermodal because it's a different lane, typically a different, a different price point.
Speaker Change: And so, that's a business where we really enjoy, I think, better partnerships with the real partners we work with, and we have contracts that allow us to be a little bit more nimble as we navigate markets.
Speaker Change: And, you know, we were in a tough spot a year and a half ago, and so we've had to kind of dig out of that, and part of that was you had to get a certain amount of skip from a low count standpoint, and we're still, you know, not quite where I want to be, and then you have to get the right
Speaker Change: and I'm going to be talking about how to get the right revenue per load to really get the right earnings for the business. So I think we've made progress in both fronts, but we need continued progress both on building the density to get the right turns on the containers.
Speaker Change: But then ensuring that we have the right revenue per load and as the truckload market rates begin to improve, typically you'll see intermodal rates begin to follow and we're already starting to see that.
The
Speaker Change: I have a comment on intermodal. We think we are structurally set up in a much better position than we have ever been. Let me address that in a couple of ways.
Speaker Change: We feel really good about the Book of Customers we've built. It's a diversified group that we believe can provide a long-term framework for us to grow. And you're seeing the escalation of our growth rates. Ten percent.
Speaker Change: growth rate and we've got into some I think what we would say some pretty healthy numbers for first quarter and second quarter and in growth we've we think pricing will be good
Speaker Change: But the volume growth is going to help that business a lot. The second is I think from a network perspective, we're better organized, more efficient now that it's going to allow us to allow that volume to come into our network.
Speaker Change: and produce the bottom line margin that comes out of it. So we've been building towards this profitability as a first step in this business. We feel like 2025 is going to be that year, and that's not where we want to end. We want to be with the best.
Speaker Change: In the industry in our intermodal margins, but we believe 2025 is going to be a big step forward on that path
Okay, appreciate it. Thanks, Andrew.
Speaker Change: Your next question is from Daniel Imbro from Stevenson. Please go ahead.
Hey, good evening, everybody. Thanks for taking the questions.
Speaker Change: Maybe to follow up on an earlier pricing strategy question, so on the LTL side, you guys are clearly growing tonnage faster than peers. I guess, how are you balancing yield versus shipment growth or tonnage growth? Yields were up almost 10% x fuel in the quarter, but it does sound like, Adam, you need to add volume to leverage the rooftops you did. So how do you strike that balance, and are you seeing any positive indicators that underlying market growth has at least stabilized or is improving at all out there? Thanks.
Speaker Change: Yeah, again, I mean, you're always trying to strike the right balance between volume and yield, right? And you may look at different markets differently depending on what your need is.
Speaker Change: And, you know, when you open up a new facility and, you know, you kind of start off with
Speaker Change: with, you know, volume coming from 3PLs because you typically have, you know, API connections. It allows you to kind of start to flow business.
Speaker Change: through those terminals, and that may not be the highest-yield business to start.
Speaker Change: But it gives you a nice, you know, starting point to start to flow freight through those terminals. And then as you work through the more national bids, you start to build.
Speaker Change: greater density, and that's where you probably have an opportunity to get, you know, you know, business that's kind of priced more towards the market and where you want to be. So, you know, way we look at it is
Speaker Change: You know, pricing still trends in that mid-single digit, you know, increases as we do renewals in LTL, and we want to remain disciplined there.
Speaker Change: But I think just indications from the customers that we have existing in our network.
Speaker Change: is that when the bids come out and now we have new territories that we can serve, they're very interested and they have a great desire to get us into those areas. And we've already had some commitments that haven't been implemented yet, but will be implemented kind of late first quarter into second quarter. We have a lot of interest.
Speaker Change: and the DHE business, we actually had to kind of slow it a little bit just to make sure the integration was done effectively.
So
Speaker Change: We have no plans to discount our pricing to win volume. We want to remain disciplined and we think we're priced very fairly. If you look at the MassGEO survey, I think our pricing does look very favorable to most.
Speaker Change: So I think we have an opportunity to maintain discipline pricing and grow the volume that we need to really start to gain some traction and to start to optimize some of these new terminals that we've opened up.
Thanks.
Speaker Change: Your next question is from David Hicks from Raymond James. Please go ahead.
David Hicks: Hi guys, thanks for taking the question. I kind of wanted to hit on the LKL plugin as well, particularly around your growth into the Northeast to kind of fill out the national network.
Speaker Change: We've heard some commentary on some deals taking place among regional LPLs in that region, kind of expanding on their own, with some overlap into your existing geographies. Does that kind of limit the acquisition targets in the region, given kind of more of a need to divest assets if you were to go after those?
Speaker Change: and kind of make you more prone to grow via select terminal expansion and kind of gradually expand into the region as opposed to kind of a platform and M&A deal that we've seen with dependable.
Speaker Change: Yeah, look, I don't think we want to go into great detail, you know, on specific targets. I think we look at the Northeast as we have, we have a couple options there. I mean, we could go an approach of organic completely in there to take us probably longer to do so. But that's.
Speaker Change: certainly an option that we could explore and is certainly actionable.
Speaker Change: There are, you know, we believe there is a pathway from an M&A standpoint to at least get a nice foothold.
Speaker Change: in the in the Northeast. And yeah, we don't, you know, overlap isn't the, you know, ideal, but
Speaker Change: It's not the end of the world if you have to make some adjustments because of overlap. I don't think that that would prevent us from moving on. A partnership with a company out there that really helps us gain a strong foothold in the Northeast.
Speaker Change: And then, hey, if you do a deal, you may still have some organic...
Speaker Change: growth beyond that, or there could even be another smaller deal you can tuck in. You kind of, you know, we have a couple different pathways that we would look for.
Speaker Change: Right now we have, you know, a lot that we're digesting with with DHE and the new facilities, you know, certainly we know the Northeast is the kind of next big area to take on. But, you know, right now we're kind of working on
Speaker Change: You know, optimizing what we currently have and hey, when we get to a point where we think it makes sense to start exploring what those options could be, then we'll do so. But right now, we still feel like we have several options on a pathway to building out into the Northeast.
Awesome. Thanks, Adam.
Speaker Change: Your next question is from Brian Offeneck from JP Morgan. Please go ahead.
Hey guys, good afternoon.
Speaker Change: Adam just wanted to get an update maybe on U.S. Express. I know it's it's part of the entire segment, but he did mention it a couple of times.
Speaker Change: Didn't improve as much sequentially in terms of margins. Sounds like it's still below market and below the other businesses from a rate perspective. So is that something where you have some outsized gains when we do see recovery? Is there anything else you can do from a
I don't know, footprint perspective operationally.
Speaker Change: Anything you're doing, adjusting trailers or equipment, or is that a call on used truck pricing? Maybe some comments to help understand that also be helpful.
I hope you found this helpful.
Speaker Change: Thank you. Yeah. Yeah. Okay. All right. Let me touch on those. And I may hit on the market side for U.S. Express, and I think Andrew may touch on some of the cost initiatives that we have continuing that's ongoing there.
you know
Andrew: With U.S. Express, we've done an overhaul of their network, and so that's really changed the type of freight that we're hauling, and the length of haul, and the rate per mile. And hey, that's not easy to go through, and we went through that pretty rapidly.
Andrew: a terminal network, US Express of 11 locations, I think Total also has a few locations as well, and that's led to a shorter length of haul but a higher revenue per mile.
Andrew: and we feel like we have been to build good density and it's good lanes for drivers and that can lead to profitable trucks but also a good driving job with more consistency, more home time.
Andrew: And so we've kind of gone through that evolution without any help from the market in terms of the ability to move pricing up, although rates have gone up through this process.
Andrew: And so, when we look at, you know, the bid season and starting to build some momentum...
Andrew: I'd say largely, you know, with U.S. Express, you know, we're going to start probably at a lower point than some of our other brands. And so, in many cases, we'll plan to target a higher percentage increase, even though the absolute number may still be shy of where we see the market with other brands.
Andrew: But I think we'll be able to gain some more ground than others in the space because of where the starting point is.
Andrew: You know, that team has been doing everything it can to grind through, you know, just improving costs, improving margins.
Andrew: You know, I think we had some momentum here in the fourth quarter, but there was some some cost headwind some some, you know Pick up in an insurance expense that that set us back a little bit from making, you know Similar type progress that we saw in the legacy business
Andrew: But really, there's nothing there that I feel like that would prevent us from, you know, eventually becoming in parity in terms of the margin profile between U.S. Express and the rest of our large truckload businesses.
Speaker Change: and Andrew, I don't know if you want to touch on some of the costs and issues we still have ongoing. Yeah, maybe just going to unpack that a little bit to help you understand. So, if you look at the, you know, you think of that business as logistics, dedicated and OTR. So, let's just talk about the OTR business.
Since the acquisition occurred, our
operating ratio in the OTR business has improved.
somewhere in the range of 700 basis points.
Speaker Change: There's been a lot of progress made, and in context, probably in the industry, ORs have probably increased 500% amongst peers in the same period. So versus the field, there's been a lot of progress there made, and from a cost-energy perspective.
Speaker Change: The last number I saw was north of 180 million dollars annualized, and so...
Speaker Change: A lot of those costs are, there will be a lot of progress in cost, there's a lot more to go because the costs that we're going to see now are going to be a function of some of the more difficult structural things that we're putting in place. So as I look at the business go forward, I would focus you on five things.
Speaker Change: that are key in our strategy for U.S. Express. First, we're gonna bring market rates up as the market allows. We have a lot of opportunity there, as Adam alluded to. Second, we're gonna increase our seated truck count.
Speaker Change: We believe there's a lot of opportunity to do that, and we're well underway in terms of building blocks for that. Third is we're going to build our dedicated fleet.
Speaker Change: That is a business that is operating well. It is operating on parity with our legacy dedicated business from an OR perspective.
Speaker Change: and we believe it has an opportunity for growth and so we're going to see that that grow as well. Fourth, we're going to build on the safety culture.
Speaker Change: Let me mention that in the fourth quarter, we had development on a couple of reserves that we view as quite unusual, that we don't think will repeat. That had about a 250 basis point impact on the U.S. Express.
Operating ratio in the quarter.
Speaker Change: So we believe that as we continue to work on safety and build the right culture around safety that that is going to be a real advantage and cost. And the fifth is we've got to work through on the equipment side.
That business is carrying a lot of high cost.
Speaker Change: equipment leases that over time we'll be able to replace with more favorable price equipment based on the CapEx model we
Speaker Change: we apply in our legacy businesses. So all of those strategies together give us confidence that we, you know, we guided, we're going to be profitable in 2025 and start working to close down, close the gap from an O.R. perspective to our legacy businesses.
And Brian, just to hit on the last question.
Speaker Change: on Gain On Sale. You know, we've gone through a big initiative to really right-size our trailer-to-tractor ratio, and that's ongoing. And, you know, as you pull some of these trailers out that are a little long in the tooth,
Speaker Change: Not a lot of book value there, but there's you know better You know some healthier you know gains when you're able to sell those and we've seen that some momentum build there We've been able to kind of work through quite a bit of inventory that we've
Speaker Change: you know, pulled out over the last several quarters, and so I think that's one of the factors in why we've seen a little bit more momentum on the gain on sale front.
All right. Appreciate all the details. Thank you, guys.
Speaker Change: Your next question is from Baskin Majors from Susquehanna. Please go ahead.
Speaker Change: Can you talk a little bit about your free cash flow expectations for the year and what you see the opportunities as between expanding the LTL network or opportunistic TL acquisitions or just plowing that into buyback? Thank you.
Speaker Change: We'll let Brad get into this one here. He's the money guy.
Yeah, thanks, Adam. Hey, Bascom.
Speaker Change: Look, it's tough to answer a question about free cash flow for the year when we're not guiding to the earnings basis for the year, but we are.
Speaker Change: certainly pointing to a stronger start to the year and our outlook includes one that says we think there's going to be a steady gradual improvement so we we do expect
Speaker Change: meaningful improvements in our earnings this year and therefore meaningful improvement in our our fee cash flow. You saw the CapEx guide that we gave that's that's
Speaker Change: That's a manageable number relative to the size of this business. I think we've made some conservative...
Speaker Change: assumptions there. It's basically, the larger majority of that is maintenance capex. There's just only about 20-25% representing growth, some of that being on the real estate facility side, not necessarily all equipment.
Speaker Change: And any of that would be largely weighted towards the LTL business, kind of as you alluded to.
But as we talked about in our earlier comments,
Speaker Change: The focus in 2025 is largely going to be around driving volume growth to drive efficiency and margin improvement in the LTL business we've bitten off.
Speaker Change: Plenty to chew for 2025 will be more so opportunistic as it relates to
Speaker Change: further footprint expansion in the LTL business. So that should leave.
Speaker Change: A healthier amount of free cash flow in 2025 for deleveraging, because our leverage is a little higher than what we tend to carry. And beyond that, we like to remain opportunistic as it relates to buybacks as well.
and the
This concludes the conference for today.