Good afternoon. My name is JP, and I'll be your conference operator today. Welcome to the Knight-Swift Transportation Fourth Quarter 2022 Earnings Call. [Operator Instructions] Speakers from today's call will be Dave Jackson, President and CEO; Adam Miller, CFO. Mr. Miller, the meeting is now yours.

Thanks, JP, and good afternoon, everyone, and thank you for joining our fourth quarter 2022 earnings call. Today, we plan to discuss topics related to the results of the fourth quarter, provide an update on current market conditions and share our full year 2023 guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to go until 5:30 PM Eastern Time. Following our commentary, we will answer questions related to these topics. [Operator Instructions] We will answer as many questions as time allows. If we're not able to get to your question due to time restrictions, you may call (602) 606-6349. To begin, I'll first refer you to the disclosure on Page 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. And now on to Slide 3; this chart on Slide 3 compares our consolidated fourth quarter revenue and earnings results on a year-over-year basis. Revenue excluding fuel surcharge declined by 9.5%, while our adjusted operating income declined by 39.3%. GAAP earnings per diluted share for the fourth quarter of 2022 were $0.92, and our adjusted EPS came in at $1. These results included a $15.4 million pretax charge, which negatively impacted EPS by $0.07 for an actuarial insurance adjustment related to third-party carrier risk in our iron insurance business. On a year-over-year basis, lower volumes in the absence of a…

Thank you, Adam, and good afternoon, everyone. Slide 9 illustrates the growth in our businesses that make up the non-reportable segment, which include insurance and maintenance under the Iron Truck Services brand as well as equipment leasing and warehousing activities. For the full year of 2022, we reached $517 million in revenues, representing 69% year-over-year growth. For the quarter, we had a 32% increase in revenue year-over-year. As previously mentioned, the results of the other services were negatively impacted in the fourth quarter by an actuarial adjustment of $15.4 million pretax related to third-party carrier risk in the iron insurance business, which resulted in the $11.6 million operating loss for this segment. We are already taking steps to enhance our insurance program, which include a recent conversion to a new platform that we expect will lead to improved collections and more timely cancellations. We've applied rate increases to various lines of coverage that will bring underwriting results in line with expectations. These service offerings have found tremendous interest from small carriers, especially as we help them improve their cost structure. But later in 2022, we have observed the pressure of the weaker environment impacting these carriers as seen through their difficulties, paying insurance premiums and the practice of extending maintenance service intervals on their equipment. We expect to continue growing the revenues and income from these other services over time and believe this effort supports our ongoing diversification objective. Next on to Slide 10; this slide illustrates the progress of the intentional changing of the composition of our business into an industrial growth company. The chart on the left shows the percentage of adjusted operating income from each of our segments and our other non-reportable services since the Knight and Swift merger in 2017. We're pleased to report meaningful contributions…

Thanks, Dave. On to our last slide here, Slide 14. For the full year 2023, we expect adjusted EPS to be in the range of $4.05 to $4.25. Last year, we expected the first half to be strong and then cool off in the second half, which is largely what happened. In 2023, we expect the opposite: more challenging environments in the first half before we start to see a recovery to a more typical freight demand, leading up to an improving Q4 peak season. Over-the-road truckload contract rates will be pressured with few noncontract opportunities until the latter half of the year. We expect these noncontract opportunities, combined with some return of peak season volume, to result in rates inflecting positive year-over-year in Q4. Overall Truckload revenue per mile should be down mid- to high single digits in Q1 and trending to be positive by low single digits in Q4. Dedicated rates should increase in the low single digits for the year. Truck count should remain sequentially stable throughout the year with miles per tractor reflecting positive year-over-year by the middle of the year. Our LTL segment is expected to see slight improvement in revenue with relatively stable margins. Sequentially, Logistics revenue per load should drop in the first quarter before increasing sequentially throughout the year. We expect volumes to follow a similar trend. Gross margin will compress as the freight market picks up, pushing logistics OR to climb into the high 80s to low 90s. Intermodal revenue per load in margin will deteriorate in the first half before improving again in the back half. For the full year, we expect the operating ratio to be in the mid-90s. Revenue and op income in our other services will increase driven primarily by improvement in rates and new customer growth in our insurance business and increased volumes in warehousing. Inflationary pressure will decelerate as labor loosens and equipment availability improves. Gains are expected to be in the range of $10 million to $15 million per quarter, and our CapEx is expected to be in the range of $640 million to $690 million, and our tax rate is expected to be around 25%. Interest expense is also projected to increase from where we were in the fourth quarter as rates continue to climb. So that concludes our prepared remarks. And so JP, we will now open the line for questions.

[Operator Instructions] Your first question comes from the line of Jack Atkins from Stephens.

So I guess maybe a two-parter here. But Dave, I'd be curious if you could maybe comment a bit on the fourth quarter to first quarter seasonality given that the fourth quarter of 2022, to your point, was anything but peak. How would you sort of think about that trending sequentially? If you could kind of help us set our expectations there. And then, I guess, just to kind of follow up on your comment about what your customers are telling you about the trends and trajectory of their businesses. Well, I guess, what's giving you the confidence to think that we're going to see a trough in sort of freight fundamentals in the first half of the year and that we can kind of build back in the second half? If you could just expand on those two items, I'd appreciate it.

Okay. Thank you, Jack. Yes, I would say that from fourth to first, this is one where the step down is significantly lower than what we're used to. And I would say that the freight market continues to show signs of life here as we get -- as we go through January. And so typically, you would see quite a bit of seasonality in the fourth quarter, which then changes with the holiday in the rearview mirror moving into the first. We do expect first to be seasonably softer than the fourth, they always are. But there's a good chance that after we complete the first quarter, we'll look back, and this might have been the most benign change sequentially from the fourth to a first. I would say that some of what gives us some indications of how this will play out maybe from customers would be the fact that in the fourth quarter, so much of their holiday inventory had already arrived. Some of it has already arrived 10 or 11 months before. It kind of sat around. It just barely missed the holidays. So it seemed that by the time October started, the fourth quarter freight was already -- had already arrived and was largely in position. So that explanation made sense to us. And so naturally, our next question is, well, how long are you going to continue to have this inventory overhang. And the general consensus, almost unanimous from customers that have given us this kind of -- or given us feedback about their inventories, has been that by the time they get through the spring, things are caught up. And that makes sense. I mean it was -- freight was flowing rather normally by the time we got to summer of 2022. So throughout…

Yes. And just to add to that, Jack, I mean just looking at historical data of how cycles have typically trended, it's unusual for rates to be down year-over-year for more than 4 quarters. I think that's what gives us confidence in looking at fourth quarter of this year where rates could inflect positive. I think we've had a lot of dialogue with many of our customers. Many of those are the largest retailers in the nation, a lot of the largest CPG shippers in the nation. And independent conversations would support just their buying habits and how they change pretty dramatically in the fourth quarter and even into the first quarter. But in all those conversations, the expectation is for those ordering patterns to begin to normalize and to see those volumes really begin to pick up into that June and July mark. So I think -- so it's not only just our view of the market looking at historic data and then our own information but also through the discussions with our customers.

Your next question comes from the line of Tom Wadewitz from UBS.

Dave, you talked a bit about this in your response to the first question, but just really on the cycle and how you see it playing out. I guess another kind of angle on that topic, do you think there are reasons why shippers may behave differently in the current freight downturn compared to other downturns? And I mean truckloads are highly fragmented. It's kind of hard to get my arms around the industry behaving differently, but maybe like the largest trailer pool players behave differently. I'm just trying to get a sense of if there's not a bigger downturn on rates or what could be partly shipper behavior is different or even large carrier behavior is a bit different. So yes, that's the question.

Thanks for the question, Tom. So I would say one thing that stands out that's a different behavior than what we've seen maybe historically from previous cycles is how well contractual rates have hung in there and what the demand for trailer pools has been. I think that where you see that showing up in our business is how well we've held on to our rate per mile. Now of course, we try to anticipate the market many months, many quarters in advance. Ideally, we're somewhere between 6 and 12 months ahead of schedule all the time in how we anticipate and plan. And so this time last year, we were clearly increasing our commitments and moving away from the spot market. And that, of course, has served us well as you see in the results. But when you look at our Logistics business, for example, one that had an 86.4% operating ratio despite the fact that load volumes were down almost 19%. And you got to remember, when you have a Logistics business, but you also have such a large asset-based business, there's going to be probably a little support -- normally, the loads would flow the other way, but there might be a little bit more support that business. But you look at our power-only volumes, and those were down 14%. But our gross margin continued to be very strong, 22.1%. So there's some value that's been created there. There's customers giving us opportunities when, I would say, other logistics firms are struggling to break even. We've been able to enjoy nice margin, hold on to volumes, and I think that's because we create more value with the trailer pool. So I think those are connected. I think we see that in our logistics. We clearly see that…

Your next question comes from the line of Todd Fowler from KeyBanc Capital Markets.

Maybe just to pick up -- and Adam, I think you touched on this on the first question. Dave, you touched on this a little bit to Tom's response. But thinking about your commentary on revenue per mile and the high single-digit declines to start the year and then an inflecting positive, how do you have that parsed out between contract and spot? And what are you seeing right now on kind of the contract renewal pricing side? How is that working through the numbers as we move through the revenue for model assumptions for the year?

Yes. I think -- so Tom, there's -- or Todd, sorry, there's very little spot opportunity in our expectation in the first half of this year. So most of that decline will be a result of contract renewals. And it's still early on in the bid season, and so we haven't had too many final awards. So those are still more -- those declines are more anticipated than what we actually have received. And so we're still in the early phases of that and having good dialogue with our customers. And then our expectation is in the back half of the year, some of the improvements in rate will come from contract renewals, but more or less the spot rate improving and then some of the projects that we typically participate in, in the fourth quarter.

And Adam, just a follow-up on that comment. So on the contract side, what is a reasonable expectation for contracts this year, I mean, just given the spread right now between spot and contract?

Yes. Again, we're still kind of filling it out to the bid. So I don't want to put a number on that right now. We're still kind of understanding -- it really depends, Todd, on when we renewed the contract with that customer. I think the early parts of the bid season, that number will be larger. The higher single digits will be lower double digit. And as the bid season progresses, that number gets reduced.

Yes. Todd, it's hard for us to just generalize the whole thing because we have pieces of business that still need to be increased in rates because of how it works and how it fits into our network and the fact that we continue to see inflation. We do have other parts where sometimes we have an opportunity to maybe make a concession, help a customer who's trying to hit a budget target or goal if things are working in a super-efficient way and perhaps, to Adam's point, the time in the cycle when that rate was renewed. But this is not an across-the-board answer that the rates are automatically down. That's just not the case.

Yes. Because I think we mentioned that some of our dedicated business, I think that's what David's alluded to, we'll have to increase because of how it's performing. And I think -- that's, I think, a typical hedge and an environment that we're faced with when you have OTR and dedicated, they perform differently in these type of environments.

Yes. Understood. No, it's helpful context. Just really trying to think about that expectation for that positive inflection in the fourth quarter, which certainly would seem to be positive?

Your next question comes from the line of Ravi Shanker from Morgan Stanley.

So I think, Dave, you said, I think it was about a year ago now, that you think trough EPS has a $4 on it, and clearly, your guidance for the year implies that you're comfortably above that level. But if I were to kind of just like take a step back and listen to what you've been saying on this call so far, kind of talking about the cycle actually not being as bad as prior cycles and a midyear inflection and everything else, it doesn't really sound that bad. And in that context, kind of the guide seems kind of punitive at this point, especially given that you have a really easy fourth quarter comp in '23. So I'm just thinking of like are there any puts and takes in some of the non-TL segments that we need to keep in mind? Or kind of what are some of the kind of the moving parts and maybe the bull case or the bear case that can get you to a higher number than what you've guided to or a lower number at the cycle turned out to be much worse than you expected?

Yes. Well, I mean, the full Truckload still represents 2/3 of our earnings. So the full Truckload is by far the piece that gets -- that moves the needle the most. So when we look at what we would expect for them to earn in the first half of the year, that's going to be less than 50% of what our annual guidance would be. So I don't know if it's 45-55, 45% in the front half of the year, 55% in the back half of the year. But it's not like we're looking at a back half that's a total hail Mary in order to get over $4 a share. But I will tell you that for us to achieve more than $4 a share would be a tremendous accomplishment, recognizing that here in 2022, we just earned $5 -- just over $5 a share with such a tremendous environment. And for us to adapt and yet have a stock that trades based on being a pure cyclical, well, a cyclical would not react that way. That would be -- we would be countercyclical to earn more than $4 a share. So it isn't going to be easy, but our model guides us there or we wouldn't put it there. I think one factor that we have working for us is the LTL portion of our earnings. Boy, we just couldn't -- we couldn't be more happy with that group. I mean that's a group that -- yes, LTL is feeling -- as an industry is feeling a little bit of pressure, but it's nothing like the volatility that you see and what happens with rates on the full Truckload side. And so -- and it's a business that, for us, we just continue to make incremental progress. And…

Yes. And Ravi, I think last quarter, I went into greater detail of how each segment would need to perform to achieve that $4 mark. And I think as we look at our guidance, we're not going to that detail in our guidance today. But fairly aligned there. I think maybe the one outlier is the intermodal. We talked about that being a mid-90s operating ratio. We've just seen some challenges there on volume, especially with the better availability of truckload capacity and the service that, that performs at versus intermodal. And so that would be one area that would be maybe off from what we would have called out last quarter. But generally speaking, our segments will perform as I laid out. And we'll still have to see how everything plays out in this bid season, but we just have a tremendous amount of confidence based on how these cycles have developed historically and the communication we're having with our customers.

Your next question comes from the line of Ken Hoexter from Bank of America.

If I can just kind of maybe follow up on that $4 floor and the stress test there, just maybe talk a little bit about the Truckload side moving back into the -- does that go to mid -- upper 80s in your thought? And I guess, specifically, confidence in the gains, you've got $10 million to $15 million. It seems to have $10 million to $15 million sense to the targets, which would -- could put some pressure alone, I guess, on that floor. And then on the -- I guess, on the intermodal side, any comments on the now transition of Schneider over to Union Pacific? Obviously, they had some service issues, how your service has been. And is that -- I know you mentioned kind of the mid-90s that -- can you see deterioration if they start getting maybe better access to the yards or thoughts on intermodal?

Sure. So I'll start on your truckload question. Last quarter, I talked about in a difficult environment, the Truckload segment as a whole, which would include our over the road and our dedicated business operating in the mid-80s. And that would be our expectation for the full year with that being a little more challenged in the first half of the year and then improving into the back half, particularly into second quarter -- or sorry, the fourth quarter. As it relates to your intermodal question, thus far, there hasn't been much impact with the conversion from Schneider from the BN to the UP. I think we watch our service closely. I mean there's certain areas where we certainly can improve the service. And I don't know that it's related to the Schneider conversion. I think just kind of the challenges that we've been dealing with, with some of our rail partners across the board. But it does seem like the rail fluidity is improving, rail labor is more readily available, and we have confidence that will continue to improve. And I think our customers have seen that. I think we've improved service dramatically with certain customers where we expect to receive large awards this year. And so we're confident to be able to build that low count into the back half of the year. But I think the first half is still going to be a bit of a challenge kind of given the environment we're currently in.

And Adam, can you just wrap up on the gains on sale, right? Because that's such a big, I guess, swing factor in that range.

Yes. We had the gains coming off meaningfully from where they were last year. And we have a good purview into the used equipment market. And even in the first quarter when spot market has been as slow as it has been, which would typically mean that you've got small carriers not buying equipment, we're still seeing activity. And I think that's a result of just very lean inventories because the OEMs have still been challenged to fill everyone's orders. And I think most of the large carriers have continued to age their fleet out. And so that's just limited the inventory of used equipment. And so what we are selling is still at healthy margins. And we don't see that changing dramatically throughout the year.

Your next question comes from the line of Bert Subin from Stifel.

Dave, if I look at Slide 14, I don't want to belabor the point, but I think it's obvious thinking about your $4-plus earnings guidance, that implies about 100% earnings power expansion, which is obviously a tremendous feat. And so I think people are trying to get their arms around that. If I look at Slide 14 in those guidance assumptions, where would you say the greatest uncertainty is in your mind as you go through them?

Yes. I mean it's tough to say. I mean, I know -- look, the guidance is kind of our best guess based on what we know in the market today. I don't want to say it's aggressive. I don't want to say it's conservative, and this is what we feel is kind of down the fairway with the knowledge that we have today for -- so it'd be tough to point out one of the data points as being more uncertain than another.

Well, if Washington somehow messes with tax rates, that would be the biggest. So we'll start there, if we can't stay at close to 25% tax rate. Does that help you, Bert?

Yes. I think that moves the needle. Yes, go ahead.

Realistically, Bert, rate per mile -- if rate per mile -- weird, weird things happen with rate per mile. Obviously, that's a big lever to move. But we're not sitting here looking at a market that's about to slow. Spot rates peaked 13 months ago. And so I mean -- so we already are well into this. And so if you can predict what's going to happen with rates, you can predict a lot of things. And so nobody knows exactly how that's going to go. But we've seen significant resiliency in our rate per mile through this year as a result of the way we've built the business and the way we do things, but also the relative value that we create compared to other folks. And so you'd be hard-pressed to go back and find any other cycle where you went peak to trough in longer than 18 months. It's just -- you just don't find it. I mean often, it's -- you don't see the double digit -- or you don't see the declines in over 12 consecutive months. But you'd be hard-pressed to find peak to trough in greater than 18 months. And this -- we're already over 12 months into this, and this one was not was not precipitated by an oversupply of equipment coming into it like every other cycle was. And so that gives us a little bit of little bit of a glimpse into what we can expect both in contract rates as well as spot rates that we think will rebound in the back half of the year. So -- but that would be -- I mean that would arguably be the biggest lever in the guidance.

Maybe just put another way, Logistics, the manner in which you operate it is certainly different from several years ago. And LTL is a new business altogether for Knight-Swift. I guess my question is maybe how do you get comfortable with those assumptions because Logistics OR, you're implying sort of low double-digit to high single-digit margins, which would be fantastic, particularly in a bad year. In LTL, somewhere in this sort of mid-low teens range on margins, both would be really good and haven't really played those out through a down cycle, at least in their current form. So I know you've talked about your models consistent. I'm just curious, are those not -- there's not a ton of uncertainty there for you? It's more on sort of how contract rates play out?

No. I would say there's less uncertainty in the LTL world. I mean they just perform -- it performs just so much more consistent than full Truckload does. And then we have a bit of a secular story on top of what's going on in the industry. And that's -- the secular story just has to do with the kind of synergies and opportunities we have and what can come from a super-regional that could connect large portions of the country and allow us to compete in some of the national arena already. And the other side of that, I would tell you, is wages continue to go up. LTL industry wages are on pace for probably about a 5% increase to the wage of those drivers. Now that's different than LTL or different in full Truckload. And so I think you're going to continue to see LTL rates have to go up because their largest expense continues to be inflationary. On Logistics, Logistics is going to be volatile. But the reality is our Logistics business, if I look at just this most recent quarter, it produced $23.5 million of operating income, of the which we're grateful for all of it. But in terms of moving the needle on our entire nearly $8 billion parent company, that isn't the one that -- that isn't the biggest lever.

Yes. And I'd add on the Logistics front, Bert, I mean we do have that moving up from the mid-80s, which we accomplished in 2022. And we note here in the guidance, high 80s, low 90s shift. If you look at the absolute performance for 2023, it would be very good compared to really anybody else in the market. It's just we're coming from such a strong position in 2022. So we do expect to give up something there. Now I mean, as you know, in Logistics, your largest cost is purchase trends. That's going to be variable and move with rates. And generally speaking, when you're doing power-only loads that -- those rates are less volatile too, typically hold in stronger because there's less competition in the brokerage market, yet you're buying capacity in the open market. So the gross margins there are a lot more resilient than your pure live load, live unload opportunities.

Your next question comes from the line of Amit Mehrotra from Deutsche Bank.

I guess I just had a couple of quick ones. One, Dave, how likely is it do you think for Knight to do another acquisition this year, kind of like a meaningful acquisition like AAA that can really move the needle in terms of earnings contribution? And then, Adam, if we look at the fourth quarter results, I want to go back to maybe Jack's question around the first quarter. Because in the fourth quarter, we didn't really see crack in yield on a loaded-mile basis. It was down by 1% sequentially. And it's probably going to be down by 10% sequentially in the first quarter. So I'm trying to reconcile that dynamic with Dave's comments initially, saying that you should see like not much of a seasonal -- a very counter-seasonal move 4Q to 1Q? Because if I look at 4Q, we just didn't see the crack in yield that we may be expecting in the first quarter. So it would be just helpful, Adam, I think if you could help us frame like what is the actual decline you expect in Truckload profits from 4Q to 1Q just given that dynamic on yield.

So Amit, from an M&A perspective, we sit here right now at about 0.97 leverage ratio. So we're well positioned to act. Our number one priority clearly is LTL. Those take time and you have to have the right timing in some cases for that to work out. And so in between those, we look at a variety of companies. And as we alluded to in our last quarterly call, truckload carriers are attractive to us and -- because we had so much comfort. We have, we think, an enviable track record with that and we know it, we love it, and we wouldn't be afraid to do truckload deals as well. So we think we have the bandwidth to be able to do both. And so we remain very interested, and I would say, very active in the M&A world.

And on the -- your second question, Amit. when I look at 2021 versus 2022, I mean the fourth quarter there was unbelievable in 2021 led to a big step down, I think almost $0.25 $0.26 a share into Q1, which Q1 was still strong. Q4 this year, we are hauling freight in just normal course. We didn't have projects, we didn't have spot opportunities. And so as you transition from Q4 into Q1, you don't have a lot changing in that freight dynamic. Now you have bids that you're working through. But many of those bids aren't effective until you go into probably early second quarter, some will be later in the second quarter. And then as the bid season progresses, you're probably complete by probably mid-third quarter. So is rate going to be pressured Q4 to Q1? Probably. I don't know is to the extent that you quoted. But -- so I don't see the normal step down you would see from the Q4 where you have project business, you have robust spot market and then you move into Q1 where you're just, again, moving freight in the normal course. The dynamic hasn't changed that dramatically.

So -- but adjusted profits in truck cracking went down 18% 4Q '21 to 1Q '22. Are you basically saying that it's going to be down significantly less than that as you move from 4Q '22 to 1Q '23?

I would say overall for the business, I wouldn't see the same step down in profit from -- the same percentage step down in profit from Q4 to Q1.

Yes. Thanks, Amit. Well, JP, we appreciate your help as our operator. Everyone, thanks for joining our call today. we apologize to a little more than a half dozen who were in the queue to ask questions that we didn't get to. Welcome to reach out to us directly and hope everyone has a great evening.

This concludes today's conference call. Thank you for participating. You may now disconnect.