Knight-Swift Transportation Holdings Inc. Q1 FY2025 Earnings Call

Good afternoon, everyone, and thank you for joining our first quarter 2025 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, limit the questions to one per participant. If you have a second question, please feel free to get back in the queue. We will answer as many questions as time allows. If we are not able to get to your question due to time restrictions, you may call (602) 606-6349. To begin, I will first refer you to the disclosures on slide two of the presentation and note the following. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions, and uncertainties that are difficult to predict. Investors are directed to the information contained in item one, a, risk factors, or part one of the company's annual report on Form 10-Ks, filed with the United States Securities and Exchange Commission, for a discussion of the risks that may affect the company's future operating results. Actual results may differ. Before we get into the slides, I will hand the call over to Adam for some opening remarks.

Thanks, Brad, and good afternoon, everyone. You know, with all the uncertainty in the market, I thought it would make sense to maybe open up the call with some high-level remarks regarding the first quarter as well as the current market. And then I will turn it over to Brad and Andrew to cover the remaining slides. Here to kick it off early in the first quarter, several indicators, both internal and external, were pointing to positive momentum in the truckload market. Our early bid season results were positive, and volumes remained healthy following the fourth quarter. In February, severe weather in areas of the country not well positioned to handle snow and ice contributed to a slowdown in volumes. We are expecting a nice seasonal volume rebound in March. However, talks of tariffs and the food trade policy spurred a more cautious tone among shippers that brought a pause to the momentum in the market. The increased uncertainty among shippers and growing concern among consumers during the typical seasonal build in March resulted in lower volumes, and an absence of this has also impacted current rate negotiations in the truckload bid season. We are still achieving increases in the low to mid-single-digit percentage range. However, we are not seeing the increases build like we had originally anticipated the bid environment would play out. Further, the progress we are making on contractual rates may not be as visible in our second quarter overall realized revenue per mile if the market experiences a low in volumes and the spot market remains weak. We are staying close to our customers as the situation unfolds, and they are generally expressing a few different approaches at this point. Some are pressing forward with little change, needing product as they see strength in their underlying sales. Some have already cut back or are in the process of cutting back on purchases mostly centered around China, while still others are in wait-and-see mode, where they are drawing down inventory to support sales in the near term. At this point, our customers are expressing more concern around cost impacts of tariffs and less concern regarding demand from their customers. These strategies can create negative disruptions in volume in the near term. However, if consumer spending remains steady, goods will have to move at some point, and that may create opportunities for carriers that are proven to be nimble with scale like many of our Knight-Swift truckload brands. We recognize our customers' plans can change as clarity develops, so we are focused on controlling what we can control. For example, we are tightening our equipment fleet by selling underutilized tractors and trailers that will lead to lower depreciation and greater utilization of our remaining assets. We are also investing in new technology, raising the intent around our safety and claims and reducing overhead costs. We need to have the most efficient cost structure possible in order to be prepared for what could be a volatile environment in the near term. With all that being said, during April, market conditions have largely been stable with where we exited the first quarter, but there is a wide range of possible paths forward from here. There could be a low in volumes as shippers work to adjust supply chains, or there could be a pull forward anticipation of a return of reciprocal tariffs. Changes in trade policy could create the need for shippers to react quickly in managing inventory levels, which could benefit the fast, flexible nature of truckload service. On the other hand, concerns of recession risk could cause shippers to trim inventories and to aggressively prioritize the lowest short-term cost over all other factors. In light of the unusual uncertainty, we feel we must adjust our approach to providing near-term earnings guidance. Starting with this report, we are updating our guidance for the second quarter and will hold off on introducing guidance for the third quarter until enough clarity develops to support a return to two quarters of forward guidance. Business conditions for the second quarter are also uncertain enough that we are providing a wider range than our normal practice and with risk appearing skewed to the downside in the near term, we are taking a somewhat more conservative approach as well. Even in an uncertain environment, we continue to improve on costs, collaborate across our truckload segment and grow our volumes and network in our LTL segment. Opening seven more locations during the quarter and building to 30% growth in daily shipments year over year in March. The LTL industry is not immune to the wait-and-see attitude dampening freight demand, but we are not expecting the same potential for volatility in LTL demand in the second quarter as we do for truckload. Also, significant LTL network expansion over the past year positions us for differentiated growth. We are confident that our experienced team, leadership, alignment across our businesses, strong balance sheet, and our unique scale diversified offerings and value proposition will serve us well as we navigate the unfolding landscape. And with that, I will turn it over to Brad for our overview on slide three.

Thanks, Adam. The charts on Slide three compare our consolidated first quarter revenue and earnings results. On a year-over-year basis, revenue excluding fuel surcharge increased by 1.2% and our adjusted operating income improved by 68.2% or $35.1 million year over year. GAAP earnings per diluted share for the first quarter of 2025 were $0.19 and our adjusted EPS was $0.28. Our consolidated adjusted operating ratio was 94.7%, which was two basis points better than the prior year. Slide four illustrates the adjusted operating income for each of our segments for the quarter. Overall, our Truckload, Logistics, and Intermodal segments all improved adjusted operating income and adjusted operating ratio year over year, while our ongoing growth in our LTL business is driving a growing portion of our consolidated revenue mix, reaching its highest share since our entry into this segment in 2021. The first quarter continued to show the benefits of our diversified business model, as the seasonal pickup in our warehousing business helped to partially offset the early weather challenges and lack of seasonality late in the quarter in our truckload business. Now we will discuss our truckload segment on Slide five.

Our LTL business grew revenue excluding fuel surcharge by 26.7% year over year as shipments per day increased 24.2%, which includes our acquisition of DHE. Revenue per hundredweight excluding fuel surcharge increased 9.3% year over year, while weight per shipment declined by 2.5%. The adjusted operating ratio was 94.2%, and adjusted operating income declined due to startup costs and early-stage operations at our recently opened facilities as well as cost headwinds from inefficiencies in the DHE region given our strategic commitment to maintaining service or rapidly growing shipment counts. Following the recent system integration, operating margins and year-over-year volume growth improved each month of the quarter, reaching 30% growth in daily average shipments and an adjusted operating ratio of 90.6% in March. Growth in shipment count was higher than our projections, which coupled with our recent system integration, created a headwind to operational efficiency and costs as we leaned into outside maintenance, purchased transportation, and temporary labor to augment our own resources in the short term until we insource these services. The ramp in volume throughout the quarter and progress in bid awards are encouraging signs as we move forward and work to maintain high levels of service while optimizing operational efficiency. We are still experiencing steady rate increases in our business, and as our expanded network allows us to offer service on more lanes to existing customers. We opened seven new facilities and acquired or assumed leases on four or more for our pipeline during the quarter. Our pace of facility additions in 2025 should slow compared to '24, but we will continue to look for both organic and inorganic opportunities to expand our footprint within the LTL market. We are focused on growing revenue and margins in 2025, and we are excited about the runway ahead.

Slide seven covers our logistics segments. Logistics revenue increased 11.8% year over year as revenue per load increased 11.7% with load count flat. The contested operating ratio of 95.5% improved 160 basis points year over year. Our investments in a common platform across our logistics brands have allowed us to be more efficient and direct from our customers in procuring capacity and winning freight opportunities. Our power-only offering continues to build momentum and differentiate us from non-asset-based brokerages, and we remain focused on being nimble in order to remain profitable regardless of market conditions.

Now on to slide eight. Revenue increased 3.5% driven by a 4.6% increase in load count, partially offset by a 1.1% decrease in revenue per load. Improvement in volume and progress in operating costs and network balance overcame the decrease in revenue per load to improve the operating ratio by 360 basis points year over year. As tariff discussions began during the quarter, we saw the intermodal market begin to slow, which has led to a more competitive bid season in certain markets, in order to position our business profitability. On Slide 10, we have outlined our guidance and the key assumptions which are also stated in the earnings release. Actual results may differ from our expectations. As Adam noted earlier, because of the significant uncertainty created by the current fluid trade policy situation and its implications for inflation, consumer demand and demand from our customers, we are only updating our guidance for the second quarter, and we will not introduce guidance for the third quarter at this time. We plan to provide guidance for the third quarter when we report results for the second quarter, and we will evaluate at that time whether enough clarity has developed to allow us to return to providing two forward quarters of earnings guidance. Based on our assumptions, we project our adjusted EPS for the second quarter of 2025 will be in the range of $0.30 to $0.38, which is an update from our original range of $0.46 to $0.50. The key assumptions underpinning this guidance are listed on this slide, though I will not cover them in detail. In general, the guidance for the second quarter reflects the following outlook: At the top of the range, we assume volumes remain fairly steady and we experience limited seasonality. The bottom of the range assumes a reduction in imports occurs in May and June and causes some deterioration in demand and an absence of seasonality. The stated assumptions generally reflect the middle of the range and are only applicable to the second quarter.

We project truckload operating income to improve sequentially, largely driven by modest improvement in revenue with a comparable margin profile to the first quarter. This assumes modest improvement in miles and utilization while ongoing spot market softness serves to offset contractual rate progress made through bid activity. For LTL, we project seasonal improvement in volumes, and ongoing progress in growing our customer base and market share will support sequential improvement in revenue and operating margins. We also project relatively comparable contributions from our logistics and intermodal segments with their respective first quarter levels on a sequential basis. 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. Thank you. Erin, we will now open the line for questions.

Adam, thanks for laying out the different scenarios that could transpire from here. If we had the gains of $15.5 million from one quarter and it looks like call it 20 for the second quarter of equipment sales, is that a point where you think that you have right-sized the fleet for the kind of downside scenario? I guess what I am getting at here is, I know Brad said you are being very cognizant of not selling maybe to the bone. My terms. But how are you managing the kind of the very different paths and then the different cost levers that you can pull as you think about moving forward the next three months?

I think when we look at our cost structure, we are going to look at every opportunity to be as tight as possible. And when you look at your tractors and trailers, we have maybe a targeted trailer to tractor ratio that we would have unique to each business. And I think today, it would tell us that we still have an opportunity to pull out trailers to match up to the number of seated trucks we have, versus the number of trailers we are operating. And then when we look at our tractor count, there is always some degree of tractors that you just have unseated where you do not have drivers operating the tractors. That has been a number that has been a bit elevated from our target. We have chosen to tighten that up and pull a few hundred tractors out of the network to clean up any excess capital that we have that we are not utilizing today. That should drive better productivity when you look at miles per tractor. It does not change our ability to respond to opportunities or to be flexible or to have capacity available. If we see a surge in drivers in a market that returns, we have flexibility to slow down what we pull out as we have new tractors that come in or could order more tractors if we really needed to. We have flexibility with that, you know, with the tractor count. In the meantime, with all the uncertainty, we felt like let us just be a little bit tighter here, but still get to a reasonable percentage where we are not limiting ourselves—reasonable percentage of trucks where we are not limiting ourselves to be able to hire drivers in markets where it makes sense. But let us not carry any excess costs in the meantime.

Yeah. Alright. Thanks very much. Maybe a question on LTL and filling in the density. Do you think you will get a little bit more visibility to filling in some of those areas that you are trying to fill and maybe get rid of some of those additional costs that you are carrying right now to meet the service where you are not quite able to do so right now, and then you can add a few thoughts on M&A and if there is anything that kind of fits the bill right now or if we just should expect this to be a little bit more gradual of a process to fill in the rest of the coverage gap? Thank you.

Yes. No. Thanks for the question, Brian. You know, the volume has been building nicely, and it has been relatively consistent. You know, like we have said before, as we have opened up these territories, we have been doing so because it gives us the ability to participate in the bids that are now ongoing in the LTL industry. We are seeing the volumes build really on a weekly basis now that we have got out of some of the disruption from weather. We feel very encouraged about building that density and helping us with the cost absorption and really kind of taking advantage of the operating leverage that we really have in this business. We are able to take market share while maintaining price discipline. We are still seeing contractual renewals in the mid-single-digit range and we are seeing volume growth at the same time. It will just take time to do that in each market, and there are still a few locations to add this year. We added seven, you know, in the first quarter. We probably have maybe nine or ten net adds, I think it is close to nine, planned for the back half of the year already. We could have more if there are some opportunities that come our way. We feel good about the volumes building. To be able to do that, you have to give great service. We have done that, maybe at the expense of margins in the near term, because we believe it gives us an opportunity to build volume. The reaction from our customers has been very positive. They like having another option in some of the markets that we now serve, and we feel good about building that out. If you ask about M&A, I have said on previous calls that we are always open to organic and inorganic opportunities to grow the business. I think it is more likely if M&A were to play a role in building out particularly in the Northeast, that is probably a 2026 event, if anything. I do not expect that to happen in 2025. This is a year where we kind of grow into the 37 locations that we grew organically last year. We continue to integrate the DHE business that we acquired last year, so this is a year of growing into what we have, improving our top line as well as improving our margin profile in the business. We remain committed to getting to a national carrier in this space, but we are going to do that very deliberately with some discipline. We think we have a lot of runway to grow top line and bottom line in 2025 without an acquisition.

Brian, I will just maybe add a little more color to what Adam said. We are continuing to be in a phase of investment. I think we are mostly a lot of that is now absorbed into Q1. If you look at the cost that we brought into the business in Q1 compared to Q4, we brought a lot of fixed costs into the business. So we are there is still a lot of opportunity. I guess what is encouraging is shipment count is absorbing our volume, both revenue and that cost. Helping us drive productivity leverage in that business. As we have practiced it, the things we are focused on are, first of all, driving improvement in our variable wage efficiency. We are seeing that as we look at where we were at in Q4 versus Q1. We are seeing that in our line haul, P&D, and dock efficiency. Certainly, as we moved our DHE business onto this same system as the rest of our business last quarter, there has been some time for them to develop that efficiency. We feel like we are starting to see those results. Second, we are managing our maintenance. As we move into new locations, we have to use a lot of outside maintenance. That will get better as we build density and can insource a lot of that maintenance. And the third is managing these fixed costs that leverage the business. I think those are kind of some dynamic factors that you are seeing in the financials here, and as we look at Q2, you can see we are guiding to a low 90s operating ratio. I think our progress in each of these areas are going to help get us there as well as the density that looks good, and even here in April, we feel good about the track we are on that gave us confidence to increase the revenue guidance here in the second quarter from what we provided previously, based on encouraging signs we are seeing in the market.

Hey, great. Good afternoon. If I can just jump back to the truckload sector, I guess you mentioned U.S. Express kind of getting profitability. Maybe talk about some of the things you have done on the cost side. And I guess, if we look at utilization, I think you were kind of addressing this before, but it used to be, what, about 22,000, 24,000 miles per tractor. Is that part of what you were talking about before, getting rid of more assets to increase that utilization? Or are there things you can still do in this uncertain market to increase asset utilization? Is it getting rid of assets faster? What do you think has to be done to improve that profitability?

I think when you look at productivity, I think I will just touch on the productivity side, and maybe I will turn it over to Andrew. He can talk about some of the things on the cost side with U.S. Express. I think you know, part of the dynamic is just not carrying tractors that are not producing revenue and are not producing miles, right? Because we do not have the drivers that are seated in there. We might as well not carry that cost. We can now turn that into capital and and sell it in what has been a relatively good used equipment market for tractors, at least, maybe not trailers. I think that is driven more from just scarcity of trucks in the market because of how many were not built four or five years ago, because of the supply chain challenges. We wanted to take advantage of that and tighten up our depreciation costs. That will lead to now having a similar number of miles over a reduced tractor, which will drive, obviously, your miles per tractor up. So I think that is just one of the levers, Ken, that we think we can pull that does not impact top line, does not impact the ability to respond to customer needs. Again, if we see the market turn around quickly and there are needs, we can hire the drivers, then we can slow down on what we pull out and we can order more trucks if we need to. We could be pretty nimble and we could get new trucks quickly, or we could hold on to some of our trucks without trading them when we have replacement trucks coming in if we need to be. We felt like that was a lever that we could pull that does not affect our business negatively. It just gives us the ability to be more efficient with existing tractors.

Here is what I would say. When we established our path to parity of U.S. Express to our truckload businesses, we thought about it in these three buckets. We still have the same conviction we always did on these points. So first of all, we knew there was a lot of initial costs that we could take out of the business. We have communicated that on that point. We have taken out more than $180 million of cost on an annualized basis. We are going to continue to find opportunities there, but those are costs around procurement and other areas where there is sufficiency to be gained. The second thing we are focusing on is operational cost efficiency. Think of hiring costs, safety costs, and fuel. We are well into that. We had to establish the decentralized network of terminals that enables that model; we know it works at Knight and Swift, and we are starting to see that. For example, our CSA crash rating is 20% better for that business than it was when we acquired them. We feel like there is a lot more to go. We are nowhere near the potential of that business, but that starts to drive cost efficiency. The third area Adam focused on is on the market side. We are seeing in bids rates that would exceed what we are seeing in truckload business because of how much more opportunity there is to have. We expect both of them to continue to progress from this point forward, but we are encouraged because we are seeing systemic operational efficiencies that we knew that business could generate come to fruition.

Thank you so much. Appreciate the time.

I appreciate all the questions. Again, I know we have some folks in the queue. If we are not able to get to your question, you can go ahead and reach out to us. It is (602) 606-6349. Thank you, everyone. Ladies and gentlemen, this concludes today's conference call. Thank you so much for your participation.