Knight-Swift Cutting Costs, Focuses on Asset Utilization

Like many in the truckload arena, the company was busy adding trailing equipment in recent years to provide customers flexibility through trailer pools and to build out a power-only brokerage operation. It ended last year with more than 96,000 trailers. It entered the pandemic with just 58,300 although some of the equipment was acquired through acquisition. (It added more than 14,000 trailers when it acquired U.S. Xpress last year).

"I think our overarching strategy is still intact" said the company's new CEO Adam Miller on a Wednesday evening call with analysts. "There can be times when the market's really good that you can sometimes take your eye off the ball in a couple of areas on the cost side of the business."

Previously the chief financial officer, Miller was tapped for the position after Dave Jackson abruptly departed in late February.

Knight-Swift reported a headline net loss of $2.6 million for the 2024 first quarter. Adjusted earnings per share were 12 cents, in line with the company's update last week in which it cut its first-half outlook by more than half.

The adjusted result excluded several acquisition-related costs and severance expenses. It included an 8-cent hit from the closure of its third-party insurance business. That business lost $125 million last year. Using a normalized tax rate, higher net interest expense (due to acquisitions) was an 8-cent headwind year over year (y/y) while lower gains on equipment sales were a 7-cent headwind.

Table: Knight-Swift's key performance indicators – Consolidated

Miller said some volume was coming back to the network, noting a little seasonal lift in March and again in April. However, difficult rate negotiations have it walking away from unprofitable contract freight, forcing it to place more equipment in the spot market. That is expected to weigh on equipment utilization until the market eventually transitions to recovery.

During the first quarter, the company's TL segment reported a 26% y/y revenue increase (excluding fuel), all of which was tied to the U.S. Xpress acquisition. The unit's top line was off 11% when excluding the acquisition. Revenue per loaded mile fell 10% in the period as more equipment was placed in the spot market.

The unit posted a 97.3% adjusted operating ratio, more than 1,000 basis points worse y/y and 340 bps worse than the fourth quarter. U.S. Xpress was roughly breakeven on the operating line in the period but its operations were a 120-bp drag on the TL unit's adjusted OR. The U.S. Xpress fleet saw "positive progress on contractual rates through bid activity" during the quarter.  

Management said it is roughly 40% through this year's bid season.

Miller said he wants the company to return to industry-leading margins during all points of a market cycle, pointing out that the TL unit's legacy operations averaged a 16.8% adjusted operating margin (83.2% OR) from the third quarter of 2020 through the recent quarter.

The company reiterated adjusted EPS guidance of 26 to 30 cents for the second quarter (versus the previous 55-cent guide at the midpoint). It issued third-quarter adjusted EPS guidance of 31 to 35 cents compared to a consensus estimate of 46 cents at the time of the print. The outlook assumes no demand inflection outside of normal seasonal trends.

Truckload revenue is expected to build sequentially through the third quarter with a mid-90% OR in the legacy business in the next two quarters. U.S. Xpress is expected to again see breakeven results in the second quarter, posting a high-90% OR in the third quarter.

Table: Knight-Swift's key performance indicators – TL

Knight-Swift will focus on investment in its less-than-truckload business. It opened seven new locations in the quarter with plans to open another 25 by the end of the year. It acquired some of these properties at auction from Yellow Corp. YELLQ. It added 14 LTL terminals to the network last year.

The LTL unit reported a 13% y/y increase in revenue as shipments per day increased 6% and revenue per shipment excluding fuel surcharges increased 8%. A 90% adjusted OR was 430 bps worse y/y and 450 bps worse than the fourth quarter. Most of the deterioration is tied to growth initiatives and onboarding incremental capacity. Also, adverse winter weather negatively impacted expenses, however, the unit saw adjusted OR improvement throughout the quarter and into early April.

Knight-Swift plans to grow the LTL operating to $2 billion in annual revenue through organic terminal additions and acquisitions. The unit generated $942 million in revenue over the last four quarters.

Table: Knight-Swift's key performance indicators – LTL

The logistics segment reported a 97.1% adjusted OR, which was 670 bps worse y/y. Loads were down 10% y/y even with the acquisition of U.S. Xpress' brokerage operations. A mid-90% OR is forecast in the near term.  

The intermodal segment reported a fourth straight operating loss in the quarter as revenue per load plummeted. The unit is expected to be operating near breakeven by the third quarter.

The goal is for both segments to operate at high-single to low double-digit operating margins over time. 

Table: Knight-Swift's key performance indicators – Logistics and Intermodal

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