Knight-Swift Transportation Holdings Inc.
Q2 2022 Earnings Call Transcript

Published: 20 Jul 2022

[Operator:]

Good afternoon. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Knight-Swift Transportation Second Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. Speakers from today's call will be Dave Jackson, President and CEO; and Adam Miller, CFO. Mr. Miller, the meeting is now yours.

[Adam Miller:]

Thank you, Sylvie. And good afternoon, everyone and thank you for joining our second quarter 2022 earnings call. Today, we plan to discuss topics related to the results of the second quarter, provide an update on current market conditions, and update our full year (ph) guidance. We have slides to accompany this call that are posted on our investor website. Our call is scheduled to go until 05

[David Jackson:]

Thank you, Adam, and good afternoon, everybody. Slide nine illustrates the strong growth in our businesses that are included in the non-reportable segment. This non-reportable segment hasn't been a great focus of analysts or investors over the years, but it is now building as one of our fastest growing segments. For the quarter, we had a 91.8% increase in revenue and a 615% increase in operating income. These increases in revenue and earnings is from our overall strategy to develop essential services for third party carriers. We have three primary objectives in these carrier services. First is to introduce new profitable revenue streams with lots of growth runway that further diversify our company. Two is to leverage existing expertise in areas where we've proven industry leading results, such as risk management, maintaining equipment and purchasing. Many of these services are branded under our brand of Iron Truck Services. And number three, to provide these services in a way that benefits the relationship that we have with small carriers as we build a much, much larger network using their power with our trailers and freight network. We found tremendous interest in our offerings from third party carriers that are interested in purchasing insurance and maintaining their equipment in our nationwide shop network or leasing equipment and leveraging our buying power to purchase fuel. These new and expanded services along with warehousing and equipment leasing have nearly quadrupled revenue and is on pace to generate $500 million of revenue this year with projected operating income of over $40 million, compared to a loss of $68 million in 2019. We expect these services to continue to grow and provide us with income streams that are less prone to volatility through economic cycles. As these businesses grow and develop, we will evaluate whether it makes sense to aggregate some of these businesses as a separate reportable segment. We remain encouraged with the growth and diversification and contribution from the businesses that make up our non-reportable segment. On Slide ten, we illustrate the progress of the intentional changing of the composition of our overall company 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 through second quarter of 2022. We're pleased to report meaningful contributions in earnings from each area as noted on the graph. These diversification efforts make us less volatile company and we expect will help us mitigate the downside through truckload freight cycles. Our truckload earnings now represent only 61% of earnings, which represents a meaningful shift from where we were in 2017 as noted in the graph when we did the Knight and Swift merger. Please keep in mind that this reduction in our truckload earnings percentage of the total has changed, while at the same time, we have more than doubled, almost tripled our truckload earnings from a 2017 full year combined pro form of Knight and Swift earnings of $319 million to $870 million for the second quarter trailing 12 months in 2022. The chart on the right shows our rolling four quarters adjusted earnings per share since the Knight and Swift merger. During this time, the EPS has moved from $2.16 per share to $5.67 per share for the trailing 12 months. Next to Slide 11. Strong earnings have driven increases in our free cash flow, which was $1.1 billion through the second quarter over the trailing 12 months. Year-to-date, we have used cash to increase our dividend to shareholders by 20%, repurchased $300 million worth of shares and paid down $86 million in long-term debt and leases. Since the 2017 Swift merger, we have invested $1.6 billion in acquisitions, making acquisitions remains a high priority for us. Our balance sheet is strong and we are well positioned to invest in organic growth, pursue acquisitions, purchase more shares, increase dividends and/or pay down debt. We are constantly evaluating market conditions to maximize our use of cash to create value for our shareholders. Slide 12 illustrates the trend of return on net tangible assets. Our Q2 trailing 12 months return is 24.8%, which is a substantial improvement from the 17% return we achieved during the peak of the last freight cycle. These results reflect our focus on; one, growing our less asset intensive businesses; two, acquiring and improving businesses; and three, expanding margins in existing operations. On the truckload side, we have focused for the last four years on growing our less asset intensive and variable cost based lines of business. We've expanded our traditional logistics brokerage, created a power-only service offering, created brand new revenue streams, as have mentioned, with Iron Truck Services and expanded our warehousing services. We are seeing significant improvements in revenue and income growth in each of these areas. Over the years, we've demonstrated our ability to effectively acquire and improve truckload businesses. More recently, we have demonstrated our ability to improve the logistics business and tap into synergies between truckload and LTL. Now we are supporting mutually -- our mutual acquired LTL companies as they connect their networks, while preserving brand, culture and relationships. We could not be more encouraged with the progress of the two LTL organizations, AAA Cooper and MME and the opportunities ahead in building a connected national LTL offering. In addition to this strategic acquisitions, we continue to improve our core truckload business and our existing assets to generate additional revenue. For example, we now have over 6,000 trailers in our leasing program. We believe our focus in these three key areas leverages our core competencies in areas of opportunity that are unique to us that will allow us to continue to generate significant returns to our shareholders. Now on Slide 13, we have our second half of 2022 outlook. We expect that demand may moderate as the consumer digests and deals with higher inflation and uncertainty in the economy. We expect continued decline in non-contract truckload opportunities. We acknowledge that we have less visibility on peak season surge as compared to the previous two years. Customers continue -- we expect that customers will continue to secure trailer pools as they maximize efficiencies in their supply chains. Capacity is clearly under pressure. We expect contraction in supply and are already seen it, and expect that to continue as the year proceeds as carriers deal with depressed spot rates combined with high energy fuel prices, higher maintenance and equipment costs and rising interest rates, which not only makes it difficult for those that are highly leveraged, but also disincentivizes new entrants to the market. We also expect LTL demand to remain strong with increases in revenue per hundred weight remaining in the double digits on a year-over-year basis. We anticipate that sourcing and retaining drivers will continue as it has been -- continue to improve as we have seen thus far as it has been particularly challenging for small carriers and we are seeing signs of drivers looking for new opportunities. We also expect inflationary pressure on driver related cost, equipment costs, cost to maintain equipment, labor and several other items. And lastly, we expect the used equipment market to normalize as small carriers exit with little interest from new entrants and increased difficulty in securing credit for smaller carriers. I will now hand it to Adam to finish up with our guidance.

[Adam Miller:]

Thanks, Dave. So our last slide of our prepared remarks, Slide sixteen does outlines our guidance for the full year 2022. We now expect full year 2022 adjusted EPS to be within the range of $5.30 to $5.45, which is an increase from our previous quarter's guidance of $5.20 to $5.40. We expect the moderating spot market to provide less non contract opportunities during the second half of the year. This may result in rates turning negative year-over-year late in the third quarter and continuing into the fourth quarter. This is a result of a more difficult comparison rather than rates meaningfully declining sequentially. So just a difficult comp from a year ago. We expect tractor count to remain stable throughout the year with maybe a modest sequential improvement in the miles per tractor as we improve our seeded truck count. LTL is expected to grow revenue through yield management and shipment growth, while improving margins year-over-year. Logistics revenue per load will moderate sequentially, but will be -- but will be more than offset with increased load volumes and most likely operates with an operating ratio in the mid to high 80s. Intermodal margins will remain double digits and we expect to see volumes begin to improve on a year-over-year basis in the third quarter. We expect other revenue and income to grow when compared to prior years, as outlined on Slide nine of this presentation. As Dave mentioned, we expect to feel inflationary pressures from driver expenses, maintenance of equipment and non-driving labor, that will continue. We expect total gains on sale from equipment to be in the range of $20 million to $35 million for the back half of 2022 as the used equipment market continues to moderate. And just to clarify, we're saying $20 million to $25, we're not seeing $20 million to $25 million per quarter. The $20 million to $25 million is the total for the back half of the year. Just want to clarify that. Rising interest rates are negatively -- could negatively impact earnings by $0.05 to $0.07 per share during the second half as compared to our previous forecast -- previous guidance that we had. And our net cash CapEx for the full year is expected to be in the range of $550 million to $600 million, which is unchanged from the previous quarter. And again, our tax rate is expected to be around 25% for the full year. These estimates represent management's best estimates based on current information available. Actual results may differ materially from these estimates. We would refer you to the Risk Factors section of the company's Annual Report for a discussion of the risks that may affect results. Now this concludes our prepared remarks. We would like to remind you that this call will end at 05

[Operator:]

Thank you, sir. And your first question will be from Jack Atkinson at Stephens. Please go ahead.

[Jack Atkinson:]

Hey, good afternoon, and thank you for taking my questions. So I guess.

[David Jackson:]

Hi, Jack.

[Jack Atkinson:]

Hey, Dave. So I guess my question really centers around your power-only and logistics offering. I think that the growth in power-only loads this quarter really, I think, will help -- hopefully dispel some concerns that investors might have about that business at a more challenging freight market. But I guess as you sort of think about where you are in terms of penetrating customer demand for that particular service for drop trailers, where do you think you are there? Maybe talk a little bit about what it provides your customers in terms of efficiency gains? And then, as you look out into 2023, do you think that that's a business line that can grow in terms of volume even in a much more challenging freight market if that's what we end up seeing?

[David Jackson:]

Okay. Thanks for that question, Jack. So we'll try and do our best to answer that. I think your -- first part of that question was acknowledging what are the benefits to the customer. Just to make sure that when we refer to power-only, that's understood. What we're talking about is us leveraging the 73,000 trailers we have available within for our customers to fill with truckload freight. We're talking about using those trailers where we can have a bank of trailers and stays them where we would bring a loaded in and give a customer the benefit of days, maybe a couple of days to unload that trailer as opposed to a couple of hours. The industry norms since electronic logs were mandated and enforcement began in early part of 2018 the industry standard is that you get two hours. The customer included in the freight rate is two hours to unload that trailer. After that, then there's a detention charge. And the rate is $60 an hour. The reality with freight rates going up, with driver wages going up, that number should have gone up, but it hasn't yet. But even at $60 an hour after two hours. One of the unique things about what its impact on rates are is in freight rates you have headhaul and backhaul markets. So we might have a rate that in a backhaul market that's half the rate of what it is that's Phoenix to LA versus LA to Phoenix, which would be nearly twice the rate. Well, detention charges, they don't care. There is no headhaul, backhaul, it's the same. And so, if you have a detention charge on a backhaul lane, you have a very, very low base on the price to add $60 for every hour, over two hours to be unloaded. And so, very quickly with two extra hours to unload a trailer, you can find yourself with a 30% to 40% increase on many backhaul lane moves. Well, that's completely unacceptable and would never work within supply chains. And so, because it's so punitive and prior to the electronic log mandate just a few years ago, it was not enforced and carriers just absorb that. Small carriers absorb that. The larger carriers, we have been moving towards trailer pools for many years, because it makes us more efficient. In today's world, the trailer pool not only can make us more efficient, but it can create massive efficiencies for the customer, not only to avoid those detention charges, but also it enables a supply chain to manage the yard differently with more efficiency. They can bring our full truckload of one product, bring that to the dock in exactly the moment that they want to move that trailer or those goods, those palettes on to store deliveries, and they only have to touch the freight one time. There isn't warehousing in between. And so, there's all kinds of cost savings. So as a result of that, today in the Knight and Swift, nine out of every 10 loads that we haul involves a trailer pool on at least one side, if not both. And so that type of business clearly requires a significant capital investment. You have to have meaningful scale of trailers and you have to have them scattered all over the country like we do. And so, I think that that has led us—that has led us to have some more consistency and then a little bit more durable through even the 2019 negative cycle. So, now what we've done is, is we've tried to address the area where we do have a finite limit of capacity, which is we only have so many trucks and drivers. And we have untapped leverage within the trailer pools than the whole trailer fleet that we have. And so what you've seen happen now for several quarters consecutively and again here powerfully in the second quarter is, we've been able to bring third party carriers in to move these loads that are more -- that's more efficient for the carrier, it's more efficient for the supply chain, we're able to manage that whole transaction. And what you're noticing is we're able to do it in a very high return way on our income statement. And we're able to do it not to the detriment of our asset based business that performed, again, with an operating ratio in the 70s. So what you're seeing is, you're seeing us tap into operating leverage that we have, that we uniquely have, because we're more than twice the size of the next closest in terms of trailer fleet. And you've seen us do that with a good return. You saw the gross margin of better than 24% in our logistics segment. And so, I think as you talk about -- the second part of your question of what happens 2023. We get a glimpse into that and the fact that the spot market has shrunk rather significantly in the first half of this year. And we've been able to continue to have very, very strong volumes there. And so, we're transitioning in that space from also similar to the customer paying a big premium in spot, we're transitioning from paying very large premiums to bring power-only capacity into our network to paying what -- where the market rate is and relying on the efficiencies to attract. And clearly, it's been attractive to both parties on both sides, meaning, customer and small carriers. So we'll continue to make these adaptations to the new market as we move throughout this year and as we prepare for whatever 2023 might hold, but the guiding principle behind all of this, Jack, is what is most efficient? What's the most efficient way to help a small carrier reduce their empty miles in a $5 plus diesel fuel environment and what's the best way to save the supply chains? Our customers save them money on paying detention or having to hire extra labor to be at the ready to stop and unload any truck that might roll in within two hours. So that's a little bit of color there. Adam, anything?

[Adam Miller:]

Yeah. I think Jack, I'd also add. I think you alluded to this notion that power-only is really spot only -- spot businesses. There's many ways that we approach power-only with our customers. Spot would certainly be one of them, but we react to all sorts of different customer needs. I think power-only plays a big role when customers come to us with projects that they need help on in a very short time window. And we still see some of that today even when supply is a little bit looser. We have committed volumes that run through power-only just with contracted rates, similar to how we would run most of our business on our truckload -- on the asset side. We do over for a backup where we contract with a customer where any type of freight that falls out just flows to our power-only business and we're able to support them there. And then really leveraging dedicated surge and leveraging power-only to help our dedicated business when we have customers who surge beyond the capacity we've committed to them. In many ways as opposed to pulling a tractor out of the line haul business, we're able to support them through third party capacity leveraging trailers in our network. And so, as any of those markets change, we can shift focus to another one of those areas to support our customers and continue to grow our power-only capabilities.

[Jack Atkinson:]

Okay. Thank you very much for the time guys. Appreciate it.

[Operator:]

Thank you. Next question will be from Thomas Wadewitz at UBS. Please go ahead.

[Thomas Wadewitz:]

Yes. Great. Thanks. Good afternoon. Dave and Adam, you guys have seen a lot of freight cycles, you have a lot of great perspective, not to mention all the information you see from your businesses. What's your best sense of how this evolves? Do you think that we're kind of setting up for a fairly sharp fall-off in freight? Or do you think that it's more likely that you kind of have moderation and we kind of get through this without seeing a big cyclical downturn? And I don't know if you have prior cycles to say why does this feel like 2018 or does it feel like 2016 or just some more perspective to kind of think about the cycle? Thank you.

[David Jackson:]

Yes. Thanks, Tom. Well, when you think about -- when you think about the kind of freight that's moving on trucks is by far the most economical way to move still the fast transit times, certainly compared to LTL, airfreight or expedited. It doesn't cost very much more to move it on a truck than it does in intermodal. And so the nature of the freight we haul tends to end up in the grocery store -- tends to end up in a place that's somewhat resilient through cycles. I would say, what has made our industry more choppy and more cyclical has been the fact that we grossly oversupply when it's good, and then it takes a little time for that to work off in part, because when the economy starts to sputter just a little bit you see wind at the back of a small carrier to absorb the difficult times by having low energy prices, typically used equipment prices bottom out. And so they can save themselves from a lot of maintenance costs by getting into another truck. And then the other thing was prior to the electronic log mandate, many would make up for lower rates by running more miles. And that simply isn't an option that's available. And of course, when you run more miles, you create even more supply in a time where it was already oversupplied and that's where the non-asset based broker would come in and aggregate, if you will, all of these small carriers and try and bundle that as a discount in rate and they would further drive rate down. Well, virtually every one of those factors is not the same and is different this go around. So for example, you've got the electronic logs. Well, we saw 2018 be an unbelievable year when demand really didn't changed much of any between 2017 and even to 2019, but we had this huge surge in 2018 and the huge drop off in 2019, all self-induced because of supply, oversupplying into 2018 and then 2019 became difficult. Now, it wasn't nearly as difficult for the big guys, because electronic logs was one of the big reasons why there was the surge in 2018, because people could run less miles and you couldn't double down and run even more miles in an oversupplied environment. So we have that going on as a backdrop that is different than any cycle prior to 2018. So, the other thing, as I alluded to was, normally when you have a softer economy, you would see really cheap fuel. In 2020, summer of 2020 you saw some of the cheapest fuel we've seen in -- certainly in oil prices, maybe in ever in the modern era. And so, small trucking companies, it was a huge boom to them even though a lot of the country was shut down due to COVID, they had this huge lifeline that kept them along. Well, right now, high energy prices is a huge hurdle for small carriers and it doesn't appear to be changing meaningfully anytime soon. One thing we do know that has been consistent from one cycle to the next is, when credit dries up, that brings religion to small carriers in terms of what they do to grow or refresh. And that process is well underway already. And so -- and that has been effective in every single cycle since 1980. So that would constrain supply. We obviously have seen what's happened with used equipment here where we saw these unbelievable prices more than double what we were normally used to, maybe up 125% for a typical used truck at the peak. And that has come off, probably off 25% or even maybe a little bit more. So still well above where normally we were, but there has been a huge falloff in buyers and people are willing to do that. And now, of course, the challenge would be securing enough credit to do so. So what I'm leading to in all of this, Tom, is different than any other cycle, we have never seen supply come out so early and appear to be coming out at the same pace, if not, maybe even faster than demand seems to be waning. So historically, we've said that broader economic GDP demand moves in tens of basis points, but supply seems to swing in the hundreds of basis points. And so, in our industry, we're much more sensitive to supply than we actually even our demand. And so, all indicators are that supply is contracting already as we speak. And so, that's just -- and we didn't go into this one with a huge oversupply like we did in 2018 to 2019 or like we did in 2006 to 2007 or like we did in really -- I guess those would be some of the biggest ones we've seen in recent history. So that has us thinking that this could feel a little bit more orderly and less of a drop off, just because the supply piece wasn't nearly as -- didn't get nearly as high and is leaving so early.

[Adam Miller:]

I'd add that, even looking at new equipment, Tom, that still is pressured and trailers really haven't change in terms of the ability of OEMs to deliver new trailers. And most likely that will lead to an allocation of orders for next year. Tractors, very similar. I think there's some OEMs that’s doing a little bit better than others, but still very pressured on being able to deliver on orders. And again, most likely, we'll have an allocation. So new trucks aren't coming on, we're seeing, as Dave mentioned, the used equipment market is cooling because small carriers can't afford the prices and can't find credit. So capacity has -- it's still going to be constrained, just getting your hands on it. Not to speak about just the economics of how it works for a small carrier. So I think all those go to maybe an environment where supply keeps pace, maybe outpaces the changes in demand.

[Thomas Wadewitz:]

Yes. That's great. That's very helpful. I appreciate it. Thank you.

[David Jackson:]

Thanks, Tom.

[Operator:]

Thank you. Your next question will be from Todd Fowler at KeyBanc Capital Markets. Please go ahead.

[Todd Fowler:]

Hey, great. Good afternoon, Dave. Hey, Adam. So, I wanted to ask on the -- Hi, guys. I wanted to ask on the guidance commentary around the rate assumptions for the back half of the year. And Adam, I understand your comment that it's mostly difficult compares. And it sounds like maybe even an expectation that rates will be somewhat stable sequentially. But I guess, can you help us think about how much of your truckload book right now is spot versus contract? And what that would have been like a year ago? And then also not looking for guidance, but any thoughts on how contract rates will progress into 2023, just given where the spot market is right now? Thanks.

[Adam Miller:]

Yes, sure. So just -- our spot exposure. I think today we're probably down closer to the mid to low teens in terms of our exposure to the spot market. If I compare that to last year this time will probably be 20% to 25%. So I think we've made some shifts there, very strategically through the bids and we like the position that we're in there. And when I think about rate sequentially, I think the one wildcard is what does the fourth quarter look like. And I think we have probably less visibility to the projects or type of surge opportunities we may have in the fourth quarter than we typically do this time. And it's really because our customers are still uncertain. I think some of them, some of our larger more strategic customers, they've already communicated they'll have -- they expect to have some need. They don't know what it is yet. So I think that will, obviously, impact the year-over-year change. But I think sequentially we'd expect rates to be stable. I mean we've essentially gone through the bid cycle. There really isn't much that we haven't hit from our larger customers. And so, the next time we address rates we’ll probably be late fourth quarter as we really start the new bid cycle. And really how the fourth quarter plays out will play a big role in setting the stage for what those changes could look like going forward. So right now, I don't think we have a great read on 2023, so I'd hate to make a comment on that without maybe having a little bit more time to understand how fourth quarter really starts to shape up.

[Todd Fowler:]

So, Adam, just to clarify though, it doesn't sound like you've got a lot built in for a lot of transactional opportunity into the fourth quarter. I understand there's a lot of variability, but right now in the current guidance, it doesn't sound like you've got a big fourth quarter planned right now?

[Adam Miller:]

Yes. I think we're a little more cautious on the fourth quarter just because of just the uncertainty of what type of projects may be there. And as we get more clarity around that, the next time we release third quarter, we'll obviously make an adjustment based on what we know then.

[Todd Fowler:]

Okay. It makes sense. I'll turn it over.

[Operator:]

Thank you. Next question will be from Ravi Shanker at Morgan Stanley. Please go ahead.

[Ravi Shanker:]

Thanks, gents. Good afternoon. Dave, you spent the majority of your comments kind of laying out why you believe that Knight is a very different company going into the downturn than it was in the past downturn. And on the last call, you said that in a trough scenario it was difficult to envision EPS below $4, and I'm sort of paraphrasing here. Would you care to kind of update that view here? Do you kind of feel more confident in that $4 floor in earnings? Do you feel like it's higher than $4 given the traction you've made with LTL and logistics and the other revenue segment? Kind of any helpful on where that floor is would be helpful.

[David Jackson:]

Okay. Thanks, Ravi. Yes, I would tell you that every quarter that goes by that we continue to see improvement in margins, improvement in revenue, it gives us more conviction for a higher and higher trough. And so, when you look at the fact that the full truckload piece is, first, we saw a shrink in terms of the overall revenue. Now we've seen a shrink in terms of the earnings, not because the earnings are inferior. In fact, the earnings are phenomenal there. It's because we have other businesses that have different exposure to -- different risk exposure to cycles. And in fact they have lower risk than the full truckload irregular route business has. And so, as a result of that, when you look at the progress made in LTL, for example, I mean, we're well ahead of schedule there. And we've very much enjoyed working with our partners, the businesses there and they're doing a phenomenal job. And every quarter that goes by that they get bigger, that OR gets better, and it's a larger percentage of the earnings, our business gets de risked because of the consistency of LTL earnings over time. They've proven that out. If you look at the other key components to our business, we have a variable cost in there, whether the cost is the third party carrier, whether the cost is the rail. And so, every quarter that goes by between now and whenever the bottom of a cycle is, yes, we feel better and better about the trough that that floor continues to rise. I would also point out that I think maybe it's unfair that we've been painted with a broad stroke that all were truckload and we've great lengths to try and point out the differences that we have, these aren't superficial, these are legitimate earnings streams. I mean, if you looked at our operating income, there's -- that's an operating income number that rivals the biggest market caps of anybody -- of full -- of companies moving full truckloads, whether that's over the rail or whether that's over the road in our transportation space. And so, we -- when you look at even the truckload portion, we do truckload with multiple brands, we have in that segment includes a bunch of dedicated business. Each of the brands has its own unique competitive advantages, whether that's based on the region or doing more expedited or in some cases a little longer haul. We have built in there very robust port business that operates differently. We have many fewer competitors in that space as well. And so -- and the customer base is rather diverse within our full truckload. And that's all before we get to the dead horse that we keep beating that is, trailers matter, trailers make a difference. It is not the same to have one truck and one driver show up that have to be unloaded immediately versus somebody who staged hundreds of trailers at a customer facility and give them all kinds of efficiencies. And so, within our truckload, we have taken a multitude of steps for that business to be de risked and to endure well the cycles on top of all the extemporaneous income streams. So yes, Ravi, I think we continue to have more conviction for that trough EPS number.

[Ravi Shanker:]

Great. Thank you.

[David Jackson:]

Thanks, Ravi.

[Operator:]

And your next question will be from Bert Subin at Stifel. Please go ahead.

[Bert Subin:]

Hey, good afternoon, David and Adam.

[David Jackson:]

Hi, Bert.

[Bert Subin:]

Hey, guys. 2Q is an excellent quarter for LTL. I imagine at least partially as a result of fuel and then clearly you had super strong yields there. Do you foresee a long term ability for that segments OR to ultimately rival your TL segment and to sort of be the driver of your earnings power expansion as we think about future cycles? Or should we think about that as being perhaps a sub-85 OR in a good year, it's been perhaps higher 80s in a bad year?

[David Jackson:]

Well, we said our goal initially was in three years we wanted to be to an 85. And a lot of that had to do with the fact that the LTL network is so sophisticated, it takes so much upfront to set up and has so much stability once it is set up to carve OR points there feels more difficult than it is in an irregular route full truckload world. And so, that being said, I would say that we've been pleasantly surprised at the magnitude of the synergies that are available in both a large TL that has a few advantages going forward with -- working with LTL. And two LTL partners in different parts of the country beginning to work together. We think that there are a whole -- there's a whole another level of synergies that can come as we can corner the entire country in a nationwide operating network behind the scenes with still the individual brands on the front end running the businesses. And so I would say that LTL has got ways to go. We haven't quite got to $1 billion, we're on our way to $1 billion a year run rate for that to be the big driver of the earnings for the business. But we very much like the business. We very much like a 78.7% operating ratio. And yes, there's some fuel surcharge benefit, but you've noted the fact that there was meaningful double digit yield improvement. And that is meaningful. That gets us very excited. I mean, a lot of these LTL statistics are public. You can look at our rate per hundred weight at $14.20, excluding fuel, and compare that to some of the industry leaders and what you'll find is, there's some -- there's much bigger rates out there than already what we've achieved. Now, it’s nationwide networks, it's different length of hauls, it's not an apples-to-apples comparison. I get that. I appreciate that. But we're excited about the runway that we have there. But the good news for us is, we're not in an either/or. It's not, okay, we're going to put our heart and soul into LTL and we're going to forget about full truckload. We love doing a regular route full truckload. It's been largely abandoned by the industry, because it's not -- I mean, it's a bit chaotic and to do it right takes a lot of work. But boy oh boy, that's where we add the most value to our customers. That's where the most value is created in the supply chain. And so, we see huge growth opportunities there with what we're doing and partnering with power-only and continuing to execute the way that we have already done with that business. And so, we're fortunate with over $1 billion of free cash flow over the last 12 months that we have opportunities to go in both directions and we can sing and dance, so to speak, at same time and see both of these continue to grow and flourish.

[Adam Miller:]

Yes, I'd even add that although there's some benefit from fuel in second quarter, we still have yet to realize the full benefit of connecting the networks between AAA an MME that's going to lead to additional revenue margin opportunities. When we think about LTL, I think it does provide growth, but also stability through truckload cycles. And I think that's why we like this as a nice complement to our core business.

[Bert Subin:]

Thanks Dave. Thanks Adam.

[David Jackson:]

Thanks.

[Operator:]

Next question will be from Chris Wetherbee at Citi. Please go ahead.

[Chris Wetherbee:]

Yes. Hey, thanks guys. I guess, the takeaway, I guess, I'm getting to some extent is, it feels like maybe this, I guess, every cycle is different and certainly Dave you made a good point about why this might be different than previous cycles. And then we talk a lot about sort of trough earnings and what we think we can do and clearly the non-truckload pieces of business are performing. So, I guess, should we think about the truckload piece as a normal sort of down cycle, which I think we would view sort of contract rates maybe declining as much as what we've seen from spot? Or is this just not the right way to think about at this time? And maybe there's a reason to think contract rates could kind of bottom out at a much more shallower decline? I guess I want to get your sense of how you think that sort of retracement on the contract side could look relative to previous cycles given everything that you said so far?

[David Jackson:]

Okay. Chris, we're going to answer this in record time, because we're down to -- we're about out of time right now. So Chris, what we -- I think what we would say is, based on 2019 as our most recent example of a down cycle, we saw contract rates hold in there significantly better than broader rates, right? The broader rates look like, peak to trough were down 50%, where contract during that same peak to trough were down 5%. And a case could be made with the kind of the mismatched inventories in many cases that are out there, the lack of warehouse space, the tremendous need for trailers that going into this cycle, there's probably even more value on the nationwide trailer network. So we -- 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 versus what maybe the broader would see. And I think a classic example to that would be, just look at the first half of this year. Look at how our businesses perform relative to kind of what it's been like for the smaller carriers in the broader irregular route market, particularly those that were overly reliant on spot business. So hopefully that answers your question, Chris. And for those that are in the queue that we haven't been able to get to your question, feel free to follow-up with us. We appreciate everybody's time today and your interest in our company. Sylvie, we will turn it back to you to conclude.

[Operator:]

Thank you, sir. Ladies and gentlemen, this does indeed conclude today's conference. Once again, thank you for participating. And then we ask that you please disconnect your lines.