On its first earnings call in four years, Knight-Swift Transportation management laid out a positive long-term thesis for the company. It expects that transportation operators with huge trailer pools will continue to prevail in the future. The short-term outlook for smaller carriers was less optimistic.
After the market closed Wednesday, Knight-Swift (NYSE: KNX) reported adjusted earnings per share of $1.35, 52 cents higher year over year and 9 cents ahead of the average estimate.
The result includes a $13.1 million mark-to-market adjustment (8 cents per share) for an unrealized loss on its investment in Embark Trucks. However, gains on sales were $34.8 million, up from $10.5 million in the previous quarter. The incremental gains added around a cent to EPS.
Big will outperform tiny.
“In reality, equipment is scarce and has a finite useful life.” And we haven’t supplied the industry with enough vehicles to properly meet the aging useful life of equipment,” said Dave Jackson, president, and CEO, on the call.
He highlighted that original equipment manufacturers are dealing with production delays, aren’t taking new orders, and will be late with deliveries, as they were last year. With less new capacity, large fleets aren’t trading equipment as quickly, limiting small carriers’ ability to add capacity or forcing them to buy at peak costs.
“We’re not allowing small carriers to come in and add capacity economically,” Jackson added. “The limited amount of old trucks we’re selling… in some cases, we’re selling these for the same price or near to what we paid for the brand new before we put 450,000 or 500,000 miles on them.”
He cited the 2019 downturn, in which contract prices were just 5% lower than spot rates, which were cut in half. “There’s never been such a chasm between those two. The significant difference was that contract rates are essentially, virtually all today, but was largely trailer pool connected back then.”
Guidance for 2022 has been raised to reflect Q1 outperformance.
Contractual rate renewals advanced faster than projected during the first quarter, according to management. The business anticipates that TL contract rates would rise by double digits in 2022, while spot rates will remain mild.
Full-year logistics revenue is expected to increase by more than 30% year on year, signaling a slowdown as the year proceeds. Operating ratios are also predicted to fall from the first quarter to the upper 80s to the low 90s.
Intermodal loads are likely to increase in the second half of the year, while margins are expected to shrink.
Cost inflation will continue throughout the business, particularly in the labor, maintenance, and equipment lines, with gains in equipment sales continuing higher throughout the year but declining from present levels.
The full-year projection has been increased to a range of $5.20 to $5.40 per share, which is 10 cents more on both ends of the range than the initial guidance released in January. At the time of publication, the consensus EPS projection was $5.24.
According to Jackson, he does not anticipate a situation in which earnings decrease significantly. “It’s difficult to find a trough EPS that doesn’t begin with a 4.” Even if margins fall by nine to ten percentage points, a $4 per share figure is still within reach.
Highlights from Q1
The TL division reported a 9% year-over-year rise in revenue per tractor, while revenue per loaded mile excluding fuel increased by 23% to $3.23. This was somewhat compensated by a 10% drop in utilization. Higher rates resulted in an operating ratio of 78.2 percent, 360 basis points higher than the previous quarter.
Logistics income climbed 142% year on year to $280 million, with loads increasing 77% and revenue per load increasing 37%. The expansion of the power-only brokerage business increased gross margins by 580 basis points to 20.2 percent.
Knight-newly Swift’s created LTL unit is witnessing revenue and cost benefits after purchasing two less-than-truckload carriers last year. Although prior-year numbers were not supplied, the category defied seasonal norms, earning an 85.9 percent OR, which was 440 basis points higher than the fourth quarter.
During the quarter, the company added six new terminals to its LTL network.
