Earnings Call Transcript - KNX Q4 2024

Brad Stewart, Treasurer and Senior VP of Investor Relations

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. 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 in the queue. We will answer as many questions as time allows. If we're not able to get to your questions due to time restrictions, you may call 602-606-6349. To begin, I will first refer you to the disclosures on Slide 2 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 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. Before we get into the quarterly results, I'll hand the call over to Adam for some opening remarks.

Adam Miller, CEO

Thanks, Brad, and good afternoon, everyone. 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. 2024 was another very difficult year, but it also brought a stabilization in pricing, 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. 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. We have deployed capital strategically via acquisitions to create more runway for growth and margin improvement in both Truckload and LTL. We have diligently trimmed costs in our businesses to mitigate margin pressure in the trough. 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. 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. And we have worked to enhance our collaboration across service lines to capture more opportunities and drive more synergies. As customer needs become more 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, particularly because our industry-leading one-way truckload exposure can be arguably the most commoditized service during loose markets, but become some of the most valuable capacity we offer in a tighter market. Now please turn to Slide 3. So with this perspective, for 2025, we have identified the following key levers that will help drive our near-term success. 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. For our customers, this means maximizing our capacity and agility towards creatively solving larger and more complex problems. For us, this means more market opportunities are captured and kept in-house, and that distinctive solutions are less commoditized. For LTL, while the past 18 months have been a period of significant investment to expand our network, the focus in 2025 will pivot to growing shipment count to drive margin expansion through revenue growth, freight mix upgrades, operational efficiency gains, and better cost absorption while maintaining price discipline. Our team has positioned the business well and we couldn't be more excited about the opportunities ahead of us in 2025. 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. For Logistics, we spent much of the down-cycle harmonizing our technology platform. 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. This business continues to be a great complement to our asset business as it augments our capabilities in a stronger market 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, 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. 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, we will continue our path towards developing a unique ability to service freight needs. 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. 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. And now I'll turn it over to Brad to kick off the overview of the quarter.

Brad Stewart, Treasurer and Senior VP of Investor Relations

Thanks, Adam. The charts on Slide 4 compare our consolidated fourth quarter revenue and earnings results on a year-over-year basis. 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 $0.43 and our adjusted EPS was $0.36. Our consolidated adjusted operating ratio was 93.7%, which was 350 basis points better than the prior year and essentially flat sequentially. 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. 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. Also, the effective tax rate on our non-GAAP results decreased 5.8 percentage points year-over-year. 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. Additionally, our GAAP results included 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. Xpress, both of which are excluded from our non-GAAP results. Moving on to Slide 5. Slide 5 illustrates the revenue and adjusted operating income for each of our segments for the quarter. 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 other segments and cost headwinds from the significant expansion in system integration in our LTL segment. The market in the fourth quarter largely played out as expected. Hurricane Celine and Milton disrupted freight volumes for the first half of October, particularly for our U.S. Xpress Truckload and AAA Cooper LTL brands based in the Southeast. 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. 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. 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. Also, the responses to weather disruptions thus far in early January are further signs that the marketplace is growing more balanced. 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. Now, I will turn it over to Adam to discuss our Truckload segment on Slide 6.

Adam Miller, CEO

Thank you, Brad. On a year-over-year basis, our truckload revenue, excluding fuel surcharge for the fourth quarter decreased 4.4% as loaded miles declined 3.7% and revenue per loaded mile excluding fuel surcharge declined slightly by seven-tenths of a percent. 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 loaded mile excluding fuel surcharge. This improvement in utilization marked six consecutive quarters of year-over-year gains in this metric. The improved asset utilization coupled with our cost-cutting initiatives led to a 170 basis point year-over-year improvement in adjusted operating ratio. On a sequential basis, revenue per loaded mile excluding fuel surcharge and miles per tractor each increased 1.1%, driven by seasonal project opportunities. 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 a 100 basis point improvement in U.S. Xpress. Our spot exposure remained relatively consistent with the third quarter and our average spot rate remained higher than our average contractual rates. Now on to Slide 7. On Slide 7, we cover our LTL segment. The LTL market saw slightly less supportive demand trends than Truckload for the fourth quarter, though pricing trends held strong. 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. 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. Revenue per 100 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. The adjusted operating ratio was 94.5%, and adjusted operating income declined 54.9% year-over-year 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. 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. 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. 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. 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 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, 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. We expect the majority of the DHE integration costs do not extend beyond the fourth quarter and 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. 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.

Andrew Hess, CFO

Thanks, Adam. The logistics market saw spot rates improve early in the quarter with the hurricane import strike disruptions and this strength was generally sustained with a seasonal build through the quarter. 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. We maintained our disciplined approach to pricing while growing revenue 17% and adjusted operating income 34.6% sequentially. The adjusted operating ratio of 93.7% improved 80 basis points over the third quarter. Revenue increased 2.1% year-over-year as the increase in revenue per load offset a 9.9% decrease in load count. As discussed last quarter, the logistics market continues to see a number of shippers allocating more of their contractual business to asset-based providers. Historically, as the truckload market tightens, we have seen our logistics business experience outsized growth, particularly due to the collaboration with our asset-based businesses, and we expect that trend to continue into 2025 as the market improves. We continue to leverage our power-on 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. Our Intermodal business posted a year-over-year increase in revenue for the second quarter in a row. Revenue increased 4.9%, driven by a 10.2% increase in load count, partially offset by a 4.8% decrease in revenue per load year-over-year. 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. After getting off to a rough start with the recent hurricanes negatively impacting volumes early in the quarter, the monthly progression of volumes held up better than in the previous year. 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. 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. 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. On a sequential basis, the decline in revenue and operating income reflected the typical seasonal patterns associated with our warehousing business. 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. Additionally, in the 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. The cost of this transaction is included in these operating results. 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. 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. Based on these assumptions, we expect our adjusted EPS for the first quarter of 2025 will be in the range of $0.29 to $0.33, and our adjusted EPS for the second quarter of 2025 will be in the range of $0.46 to $0.50. The key assumptions underpinning this guidance are listed on this slide, but I won't cover that in detail. In summary, we project Truckload operating income to decline sequentially into the first quarter in keeping with normal seasonality, though we anticipate that the accretive decline will be mitigated by contractual pricing improvements through bid activity. Thereafter, we expect seasonal improvement in truckload volumes and utilization as well as rate progress through bid season. We'll lift earnings in the second quarter. 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. 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, which will bring a smoother allocation of earnings across the full year. 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.

Brad Stewart, Treasurer and Senior VP of Investor Relations

Thank you, Andrew. We will now open the line for questions.

Tom Wadewitz, Analyst

Yes. Good afternoon. I wanted to see if you could maybe offer a little more perspective on some of the key assumptions. It's a pretty meaningful move up in 2Q versus 1Q. Is there kind of a greater traction on LTL because more of the costs fall out? Or is that more 1Q versus 4Q? 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 what's assumed in the 2Q guide? Thank you.

Adam Miller, CEO

Yes. 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 just normal seasonality on the truckload business from Q1 to Q2, and just building a little bit more momentum in the market. And we're expecting 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 all of our truckload businesses. And then you hit it as well on the LTL front. Q1 will be largely improved because we're kind of putting the DHE integration costs behind us, but we also expect to build some momentum through the bid season on building more volume density in our newer facilities, which should lead to a greater shipment count, 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 you've seen a lift from a revenue standpoint. And then Intermodal, we talked about the path to profitability in Intermodal, 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 earnings from Q1 to Q2, Tom.

Tom Wadewitz, Analyst

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?

Adam Miller, CEO

Yes. I think there's some self-help on the LTL front because of the expectation of growing volume in our newer facilities, but also really leveraging, having DHE now integrated into our network and what can come from having access to the California markets.

Ken Hoexter, Analyst

Good afternoon. Adam, it seems like there are many factors at play, but could you elaborate on the truckload situation? It appears you might be experiencing benefits earlier in the season, perhaps even an early bidding season, which is contributing to your confidence. Can you discuss whether you’re seeing many bids come in early? Is it primarily related to the bidding process, or more about the structural cost measures you’re implementing? Please address both aspects.

Adam Miller, CEO

Yes, it's going to be improvement across all of those areas, Ken. There is not really one silver bullet here. 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 think what I would touch on is just the early wins we're seeing or the early indications we're seeing from the bid season is that our customers understand that rates most likely are heading up. There may be a few that maybe disagree with that view, but from the awards we've received, the rates have been trending positive. Last conference call, we mentioned our thought would be that the rates would start up in the low to mid-single digits build 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. And we have maybe a few of our brands or at least at least one of them that's starting at a lower point and so there ask maybe even higher than that. So I feel like we are gaining some momentum there and it's not going to be a large inflection. It will just be just a kind of 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. We talked last quarter about wanting to maintain our operating cost per mile 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, but you got to offset that, and that can come from improvements in other areas of business. It could come from just better productivity on the equipment. But again, it's got to be improvement in a host of areas to be able to achieve what we're hoping to achieve. But we do believe that seasonality from Q1 to Q2 is intact 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.

Andrew Hess, CFO

As we conclude Q4, I can say we've made significant strides this quarter, especially in the latter half of the year regarding costs. We've been diligently addressing both our variable and fixed costs. Looking ahead to 2025, we are optimistic that this will provide us with considerable leverage on our margins, which is reflected in our guidance for 2025. We've seen substantial progress, particularly in our utilization, which has improved year-over-year for six consecutive quarters and is positively impacting our cost flow-through. We're encouraged by the advancements we've made in equipment costs, wages, fuel, maintenance, and a notable reduction in overhead costs. These improvements will support our efforts as we enter 2025 and facilitate quicker margin expansion. We are confident that the cost management work we've implemented will contribute to our margin enhancement moving forward.

Ken Hoexter, Analyst

Great. Appreciate the time. Thank you, guys.

Ravi Shanker, Analyst

Thank you. Good afternoon, everyone. I understand that you are indicating that the guidance reflects typical seasonality. However, based on the recent trends in our index and the truck spot rates observed from November through January, it appears to be stronger than usual seasonality. Is there a reason to think that the strength seen over the past six to eight weeks may not be sustainable? Could it be that there isn't enough of a tariff-related pre-buy, and do you anticipate that this will taper off? Or do you believe that this unusual seasonal strength can persist, and you might achieve results that surpass your current guidance?

Adam Miller, CEO

Yes, I believe it’s still difficult to make broad conclusions based on the data from recent weeks. Ravi, it feels too early for that. Looking ahead from 2024 to 2025, the first quarter can sometimes provide insights into market trends. However, the last few weeks have been challenging to interpret due to weather disruptions. We experienced this during the first week of January, followed by what appeared to be a recovery, as reflected in some of the third-party data you mentioned. This week may also pose challenges due to the weather conditions we're encountering in the Southeast. We need a bit more time to see how 2025 starts to develop in order to assess whether there's more strength than we're currently observing. At this moment, we're setting our guidance based on what we believe is realistic according to the current market situation. If we continue to see signs of strength, there could be potential for upside, but we aren't relying on that right now. We analyze all relevant data, including industry-wide rejections, which have certainly increased, and we're seeing a similar trend in our own operations. From a capacity perspective, it appears there are fewer trucks available based on various load boards. Nonetheless, it seems too early to declare any significant change. We need more consistent data before we can adopt a more assertive stance on the market.

Ravi Shanker, Analyst

Understood. Thank you.

Scott Group, Analyst

Thank you for the update. Good afternoon, everyone. To address the previous question from a different perspective, Truckload revenue decreased by about $10 million from the third quarter to the fourth quarter, yet Truckload earnings improved by nearly $40 million. This is a significant increase, and I’d like to understand how that occurred. How sustainable is this trend, and what implications might it have for Truckload margins throughout the year and across the cycle? Additionally, I have a broader question. Adam, when you outlined the priorities for 2025, you mentioned a focus on achieving industry-leading truckload yields and indicated that Intermodal is focused on gaining market share. Why take different approaches in the market, prioritizing price in one case while focusing on share in the other? Thank you.

Adam Miller, CEO

I'll address the four questions you mentioned, Scott. First, regarding the sequential decline in revenue alongside improving margins, there are a few factors at play. In the fourth quarter, holiday disruptions typically occur, affecting productivity due to events like Thanksgiving and Christmas. This can lead to a drop in revenue. However, we did see improvements in yield from the third to the fourth quarter, and we also made progress on reducing costs. This combination contributed to the margin improvements. When it comes to our strategy between Truckload and Intermodal, we're open to growing Truckload volumes, and we believe there's potential for that. However, growth in volume isn't the only way to increase profitability in Truckload. There are opportunities to raise rates and manage costs effectively. If we spot chances to gain market share, we will pursue them. On the Intermodal side, we have untapped capacity in our containers, and we need to increase our market share and volume to remain competitive and improve margins compared to the top players in the market. Thus, both pricing and volume are crucial for our businesses, but right now, pricing is a more significant factor for Truckload, while we focus on volume growth for Intermodal, considering our current competitive position and fixed costs.

Scott Group, Analyst

Helpful. Thank you, guys. I appreciate.

Chris Wetherbee, Analyst

Thank you. Good afternoon, everyone. I'd like to follow up on the cost dynamics in the Truckload segment. There appears to be notable improvement in operating expenses per mile both year-over-year and sequentially. Looking ahead to 2025, I'm curious about your thoughts on further enhancing this situation. We're optimistic that the revenue environment will improve as well, and it seems you're managing the controllable aspects effectively. In light of your comments regarding restoring the legacy businesses to an 80s performance after about seven quarters, it looks like you're achieving this with significantly lower revenue per mile compared to that period. I'm trying to ensure we grasp the margin opportunities for the business as we navigate through this next cycle, considering the cost management you're implementing.

Adam Miller, CEO

So, Chris, maybe I'll have Andrew jump in on the first part of your question on the cost for 2025, and then I can add any color if I need to.

Andrew Hess, CFO

There are several factors at play in the cost initiatives we are pursuing in the business. Let me highlight a few. We have improved our utilization of our assets, both in trailers and tractors, and we believe there is still significant potential for improvement. We are currently able to use our equipment for many more miles than we are at present, which gives us confidence in the long-term sustainability of this strategy. This is a key contributor to our success. We have also achieved substantial reductions in our overhead costs, which we consider permanent. We have restructured our business and fixed costs to ensure they do not increase with rising load volumes. We have introduced productivity processes and tools that allow us to operate at lower fixed costs, and you can see the results of this effort in our performance in the third and fourth quarters. In a market with little margin for error, we’ve refined our management of variable costs such as maintenance and fuel, and we are more efficient in managing driver pay. We now have stronger processes in place than in years past. We have sharpened our focus on cost management, which is fundamentally how we operate, and the current market environment has heightened this focus. Looking ahead to 2025, we do not anticipate any reversion of the initiatives we have implemented. Therefore, we will continue to focus on reducing our costs, which we believe will support our margin expansion expectations for the business.

Adam Miller, CEO

Chris, you inquired about the potential for margins. We believe we can return to our typical performance on the truckload side throughout different cycles. During peak times when full truckload capacity is at its highest, the regular route becomes incredibly valuable. We remain committed to this area, unlike many of our competitors who have moved away from it, and we can operate in the upper 70s in terms of operating ratio. I don't see any reason why this can't be achieved across our major brands: Knight, Swift, and U.S. Xpress. In a normalized market, which I don't think we are currently experiencing, I believe we could see ourselves in the mid-80s range by 2026, and during tougher market conditions, we might find ourselves in the upper 80s. This is how we anticipate the normal cycles to unfold. While the last cycle featured unusually high peaks and low troughs, I don't expect to see the same level of volatility going forward, but I do see us returning to our historical business operations, particularly in Truckload.

Chris Wetherbee, Analyst

Very helpful.

Adam Miller, CEO

Yes. On the LTL side, we don't anticipate it being as volatile. Our goal is to grow this business while making incremental improvements in the operating ratio year after year, similar to others in this space who have successfully built out their nationwide networks. 2024 was a significant investment year for us, presenting an opportunity we couldn't miss to acquire numerous new properties and an acquisition that provided access to the Southwest. This has put more pressure on the margin than we desired, but we would do it all over again because we believe it positions us well for this bid season and, from a long-term view, allows us to establish a solid nationwide network with favorable margins.

Jon Chappell, Analyst

Thank you for your response, Adam and Andrew. Could you elaborate on your initiatives related to Intermodal and Logistics? It seems like you've taken effective steps you can manage, Andrew, throughout the cycle. However, the logistics and Intermodal sectors present unique challenges, such as imbalances, overcapacity, and fierce competition. Are you applying similar strategies in those areas, akin to how Adam described the TL and possibly LTL goals at the peak of the cycle, to achieve comparable progress in the other two businesses?

Adam Miller, CEO

I will discuss Logistics. Our Logistics business complements our Truckload business. When market demand is strong, we see a significant flow of loads into our logistics operations. By utilizing our trailer network, our customers benefit from accessing third-party capacity while also having trailer pools, which are especially efficient when irregular route capacity is in demand. This positions our Logistics business for substantial growth as the market improves. Conversely, when the market loosens and supply exceeds demand, we can shift more volume from Logistics to Truckload to support our Truckload operations, which rely on capital assets and drivers’ income. This means our Logistics operations can be somewhat more volatile compared to a standalone non-asset logistics business, but we maintain price discipline due to our asset-based nature, ensuring profitability. Although the operating ratio fluctuates in different market conditions, we consistently achieve profitability throughout various cycles. Following the U.S. Xpress acquisition, our Logistics business has performed well, and we are harmonizing platforms across all our Logistics brands. This enhances continuity in load sharing, opportunity identification, effective purchasing, and carrier vetting. We are optimistic about Logistics when Truckload is strong, which also benefits our customers. The Intermodal sector operates differently, as there isn’t as much overlap with Truckload due to differing lanes and price points. We enjoy strong partnerships with rail operators and have contracts that allow us to be adaptable in response to market changes. We faced challenges a year and a half ago and are still working to achieve a sufficient scale and the right revenue per load. While we’ve made strides in both areas, we need to continue building density for better container turnover and ensuring optimal revenue per load. As truckload market rates start to rise, Intermodal rates usually follow suit, and we are beginning to see that trend emerge.

Jon Chappell, Analyst

Got it. Thank you, Adam.

Bascome Majors, Analyst

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 ploughing that into buyback? Thank you.

Brad Stewart, Treasurer and Senior VP of Investor Relations

Thank you, Adam. It's challenging to discuss our free cash flow expectations for the year without providing guidance on our earnings. However, we are indicating a strong start to the year and expect a steady and gradual improvement. We anticipate significant enhancements in our earnings, which will lead to corresponding improvements in our free cash flow. Our CapEx guidance is manageable relative to our business size, and we have taken some conservative estimates into account. Most of our CapEx is focused on maintenance, with only about 20% to 25% allocated for growth, including some real estate and facility investments, primarily related to our LTL business. As mentioned earlier, our strategy for 2025 will concentrate on driving volume growth to enhance efficiency and margins in the LTL segment. We have ample plans for 2025 and will adopt a more opportunistic approach regarding further footprint expansion in the LTL business. This should yield a healthier free cash flow for deleveraging in 2025, as our leverage is currently above our usual levels. Additionally, we aim to remain opportunistic regarding share buybacks.