Knight-Swift first quarter results and outlook

The largest truckload (TL) transportation company in North America, Knight-Swift Transportation Holdings, Inc. (NYSE: KNX), reported adjusted earnings per share (EPS) that were ahead of analysts’ expectations by $0.03 per share. Adjusted EPS were $0.11 per share higher than the same period in 2018.

The company doesn’t host an earnings call with investors, but FreightWaves was able to speak with David A. Jackson, Knight-Swift Transportation’s President and Chief Executive Officer.

When asked about the outlook for the market moving forward, Jackson noted that the overall freight market is very healthy. He said that the comparison to last year’s trucking market, likely the strongest since deregulation, clouds the picture a little. He noted that inventories remain stuffed as freight was pulled forward ahead of tariff concerns and that this presents some volume opportunity as its delivered to the consumer, which he believes will happen in the first-half of 2019.

KNX’s forecast calls for second quarter adjusted EPS of $0.62 to $0.64 (in-line with the consensus estimate of $0.63) and initial third quarter adjusted EPS guidance of $0.62 to $0.66 (below the current $0.67 per share consensus estimate). The company said that this EPS guidance assumes a stable tractor count (increased 106 units sequentially in the first quarter of 2019), positive contractual rates with a lower reliance on the spot market, operating ratio (OR) improvements in the legacy Swift businesses and easing in the year-over-year declines in miles per tractor.  

Jackson noted that while trucking employment appeared to plateau across the industry (down 1,200 jobs in March), he believes that future declines are likely given the capacity growth seen on the small carrier side in 2018 as spot rates soared (DAT Van Freight Rate Index (National US Van – SONAR:DATVF.VNU). He said that the smaller carriers were able to increase their truck capacity, relying on spot market brokered freight to do so. Now that the spot market has cooled, these carriers will likely be the hardest hit as the economics work against them (hauling freight at lower spot rates and increased cost structure due to new assets which will eventually impair their ability to borrow).

In the quarter, KNX saw a 4.1 percent year-over-year revenue decline (excluding fuel surcharges) as TL revenue was 4.7 percent lower, which was partially offset by modest revenue increases in logistics and intermodal.

KNX’s TL business, roughly 80 percent of the company’s revenue, saw its average tractor count decline 3.6 percent as non-paid miles increased 60 basis points (bps). In total, miles per tractor were down 8.7 percent in the quarter. Revenue per loaded mile (excluding fuel) increased 9.4 percent year-over-year, but average revenue per tractor declined 1.1 percent.

When asked about the pricing environment, Jackson said that the company continues to work off of previously negotiated contracts that were mostly inked in the second and third quarters of 2018 when spot rates were high. Freight demand is still good and the outlook for pricing is positive, but there is a bit of a capacity overhang which has hurt spot prices and will make the comparisons tougher as the year progresses. Jackson said that both the Knight and Swift fleets have reduced their spot exposure by half, with Knight down to 10 percent spot exposure and Swift down to 5 percent.

TL adjusted operating income was up 15 percent year-over-year as the adjusted OR improved 220 bps to 86.7 percent. The company noted that OR improvements were seen in Swift’s over-the-road TL fleet (85.3 percent adjusted OR) and Knight’s TL fleet (81.4 percent adjusted OR). Jackson said that they continue to de-risk the Swift business, which has led to fewer accidents and improved insurance and claims results. Through operational improvements and continued technology enhancements, the belief is that profitability at Swift, as well as the entire company’s profitability, will continue to improve.  

Logistics revenue, primarily Knight and Swift’s brokerage services, was up slightly to $87.2 million. Excluding intersegment transactions, revenue increased 6.2 percent in the division as loads increased 20.7 percent, which was partially offset by a 12 percent decline in revenue per load. The adjusted OR improved 380 bps to 91.6 percent. Brokerage gross margins improved 470 bps year-over-year to 17.8 percent.

Intermodal revenue increased 5 percent year-over-year as load counts declined 5.8 percent, which was offset by an 11.5 percent increase in revenue per load. The division saw operating income decline to $2.4 million from nearly $4 million in the same period in 2018. The intermodal OR was 160 bps worse year-over-year at 98 percent.

Jackson said that poor weather and increased costs as container capacity was added were the culprits, but noted that the division remains profitable and it is seeing good demand from its customers. The company expects sequential improvements in the division as weather improves and load counts and revenue per load increase.

Adjusted operating income increased nearly 22 percent in the period as the company’s adjusted operating ratio improved 250 basis points to 88.4 percent. Management said that increases in revenue per loaded mile, improved safety results and improved cost control provided tailwinds in the quarter. Also, the company benefitted from a $4.7 million increase in gains on sale in the quarter as part of its normal fleet replacement plan.

KNX expects to see capital expenditures in the $550 million to $575 million range for 2019 (as it invests in its terminal network in addition to fleet replacement).