Knight-Swift positioned to perform in H2; LTL provides spark in Q2

A Knight Transportation sleeper van on the highway

Knight-Swift Transportation announced better-than-expected second-quarter results Wednesday after the market closed. The company saw revenue and margin improvement in each of its operating segments, with the less-than-truckload unit providing the biggest upside surprise.

Knight-Swift (NYSE: KNX) reported adjusted earnings per share of $1.41, 6 cents ahead of the consensus estimate and 43 cents higher year over year. The result included a 16-cent-per-share mark-to-market adjustment tied to an unrealized loss in its investment in Embark Trucks. Gains on equipment sales were nearly $8 million higher y/y, contributing an additional 4 cents to EPS.

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

A year ago, the company made its first LTL acquisition, adding AAA Cooper in a $1.35 billion deal. Before the close of 2021, it added its second, Midwest Motor Express, for $150 million in cash. At the time, the goal was to reach an 85% operating ratio (15% operating margin) within the first three years. In the recent quarter, the division recorded a 78.7% adjusted OR, easily eclipsing internal expectations.

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

Pricing initiatives, network integration and favorable fuel surcharge mechanisms paved the way for LTL to outperform in the quarter. Knight-Swift doesn’t provide prior-year comparisons for most LTL metrics, but management said a 13.6% y/y increase in yields was a key tailwind to the quarterly result.

“We’re well ahead of schedule there,” Dave Jackson, president and CEO, stated on a conference call with analysts. “We’ve very much enjoyed working with our partners, the businesses there, and they’re doing a phenomenal job.”

The LTL outperformance, in part, prompted management to raise its full-year 2022 EPS guidance to a range of $5.30 to $5.45, up from a range of $5.20 to $5.40 provided in the first-quarter report and ahead of the $5.32 consensus estimate at the time of the print.

“Every quarter that goes by that [LTL] gets bigger and that OR gets better and it’s a larger percentage of earnings, our business gets de-risked because of the consistency of LTL earnings over time,” Jackson continued.

Also embedded in management’s new guidance is the assumption that consumer demand moderates and spot market opportunities continue to dry up. The company has less visibility into the ultimate magnitude of surge capacity needs from customers during the upcoming fourth quarter.

However, management believes the company is well positioned given its more than 73,000 trailers, which allows it to fully utilize a driver’s hours of service. It also believes lower spot rates and a higher cost profile will continue to force smaller spot market-dependent carriers out of business, ultimately correcting any oversupply in short order.

“We’re of the belief that there’s definitely going to be resilience like there was in 2019 in the kind of contract business that we’re able to do given size and scale,” Jackson said. “A classic example to that would be, just look at the first half of this year. Look at how our business has performed relative to what it’s been like for the smaller carriers … particularly those that were overly reliant on spot business.”

Knight-Swift’s spot market exposure is down into the low- to midteen percentages compared to roughly 20% to 25% at the peak of the cycle.

2nd-quarter highlights

Truckload reported an 11% y/y increase in revenue to $982 million excluding fuel surcharges. Revenue per loaded mile excluding fuel increased 21% to $3.26 in the quarter, and loaded miles fell 8%. The division recorded 200 basis points of margin improvement, posting a 78.9% OR.

Looking forward, management expects rates to remain stable from current levels, but to be down on a y/y comparison.

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

Logistics revenue increased 53% y/y to $247 million in the quarter. Loads were up 48% y/y with revenue per load increasing just 3%. The division’s OR improved 890 bps to 82.2%, mostly due to an 870-bp jump in gross margin.

Management is forecasting load volume growth to be offset by lower revenue per load in the back half as spot rates remain under pressure and contractual rates hold steady. The combination is expected to push the OR into the high-80% range.

Intermodal revenue increased 15% y/y to $133 million. Revenue per load was almost 40% higher, but this was partially offset by a 17% reduction in load counts. Knight-Swift’s intermodal volumes underperformed the broader market, which saw intermodal traffic decline 5% y/y. Rail congestion and disruptions from its move to a new rail partner were headwinds.

Management said volumes should increase from current levels, inflecting higher y/y in the second half of the year. Margins are expected to remain at double-digit percentages. The division recorded an 89.3% OR in the second quarter, 570 bps better y/y.

Table: Knight-Swift’s key performance indicators – Logistics & Intermodal

Through the first half of 2022, Knight-Swift has generated $529 million in free cash flow, increased its quarterly dividend by 20% to 12 cents per share, repurchased $300 million in stock and paid down $86 million in debt and leases. The company plans to use its dry powder to facilitate similar actions in the back half, including the possibility of more acquisitions.

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