Knight-Swift Transportation Holdings Inc. Class A Aktie

Good afternoon. My name is Sarah, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Knight-Swift Transportation First Quarter 2026 Earnings Call. [Operator Instructions]

Speakers from today's call will be Adam Miller, Chief Executive Officer; Andrew Hess, Chief Financial Officer; Brad Stewart, Treasurer and Senior VP of Investor Relations. Mr. Stewart, the meeting is now yours.

Thank you, Sarah. Good afternoon, everyone, and thank you for joining our first quarter 2026 earnings call. Today, we plan to discuss topics related to the results of the quarter, current market conditions and our earnings guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to last 1 hour. Following our commentary, we will answer questions related to these topics. In order to get to as many participants as possible, we limit the questions to one per participant. If you have a second question, please feel free to get back in the queue. We will answer as many questions as time allows. If we are not able to get to your question due to time restrictions, you may call (602) 606-6349.

To begin, I will first refer you to the disclosures on Slide 2 of the presentation and note the following: this conference call and presentation 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.

Now I will hand the call over to Adam for some opening remarks.

Thank you, Brad, and good afternoon, everyone. So these are certainly interesting times, and there are now more reasons to be optimistic about our industry than we have seen in over 4 years now. We operate one of the largest fleets in the truckload industry, and roughly 70% of our fleet is deployed in one way or over-the-road service. It is true the one-way market has been the most difficult place to be over the past 3 years plus as this market has felt the brunt of the influx of capacity over the last several years. Much of that capacity may not have been playing by the rules that we play by and therefore, operating with a different cost structure with distorted pricing behaviors and cyclical patterns.

The ongoing efforts of the FMCSA and the DOT to prevent and revoke in validly issued CDLs, shut down noncompliant CDL schools and address our service abuses are in the early stages and are already having an impact on the market. This cleanup effort should, in our view, have an outsized impact on not just the one-way truckload market, but on the lowest price capacity in this market.

The market that was the hardest hit over the past few years is now benefiting the most from the removal of capacity, a dynamic which we expect will continue. As we mentioned last quarter, the market has progressed to a point where even small changes can cause disruption. And we saw evidence of that during the first quarter as the severe weather in January led to acute tightness in an elevated spot market almost overnight.

We were able to leverage our one-way over-the-road capacity at scale to provide solutions across multiple brands to help our customers recover from the storm when others in our space were not able. Following the recovery from the storm, the tightness in the truckload market has continued to build, largely due to declining capacity though some indications of improving demand are beginning to emerge.

Broad truckload market indicators show improving trends for low tenders, tender rejections and spot pricing. Our business is experiencing even stronger levels on these metrics as our leading presence in the one-way market grows increasingly valuable to shippers. So late in the first quarter, we began to see the outcomes from early first quarter bids, which showed our volumes generally holding steady or growing while achieving mid-single-digit percentage rate increases. For reference, that is better than last year at this time when targeting slightly lower price increases often led to lower volumes.

Price activity is very busy now. In addition to bid season being in full swing, many bid activity has increased, indicating incumbent carriers are unable to or perhaps unwilling to service right at existing rates. In addition, turn back bids are happening more frequently as bid awards are being at least partially rejected by the awarded carriers as networks have shifted or the market has moved well past rates that were proposed even 1 or 2 months ago.

Unlike the past few years, shippers are generally not issuing off-cycle they're not issuing off-cycle bids opportunistically to improve service or drive prices lower, these actions are driven by a need to secure capacity. At the same time, previously deep discounts in the spot market have evaporated. Further encouraging shippers to align with quality asset capacity. This is on top of a trend of shippers favoring asset-based relationships that have formed late last year in response to the regulatory enforcement efforts.

Whether for these reasons or because of expectations of improving demand, we have already had a number of shippers initiate discussions about peak season demand support, which is not typical this early in the year. As we navigate a busy and rapidly evolving bid environment, we have shifted our bid targets to a range of high single to low double-digit percentage increases on current pricing activity as compared to our low to mid-single-digit target 1 quarter ago.

Across our truck blue brands, we are reviewing business that is not subject to current or near-term bids and addressing rates that are below market. Aside from the market developments and our position in one-way service, we believe our work over the past 2 years structurally cutting cost out of our business with ongoing opportunities for further progress sets us up for greater incremental margin as business conditions improve.

As the market improves, recruiting and retaining quality drivers have and will become more challenging. We believe we have an advantage with our terminal network and academies to source and develop drivers. However, we expect this to be a challenge for the industry in the back half of the year. While the LTL sector is not seeing the same sharp tightening as truckload, we are seeing our freight mix improve and rate renewals continue at a mid-single-digit pace.

Shipment volume trends have been directionally in line with normal seasonal patterns, though somewhat understated until late in the first quarter. However, we saw a notable improvement in weight per shipment for the first time in years with this measure progressively growing throughout the quarter. This is a result of bringing on more industrial customers who can leverage our expanded network footprint to move heavier and longer length of haul shipments.

We believe we are in the early stages of our network transition from regional to national. We expect that over time, growing into our network investments on maturing freight mix, improvement in network density and continuously refining our operational execution will allow us to drive sustained methodical improvement in operating margin.

We remain committed to thoughtfully deploying capital intentionally leveraging our strengths and creatively unlocking synergy opportunities across our businesses.

And with that, I will turn the call over to Andrew and Brad to review the results and our guidance.

Thanks, Adam. The charts on Slide 3 compare our consolidated first quarter revenue and earnings results on a year-over-year basis. Consolidated revenue, excluding Truckload fuel surcharge was essentially flat and operating income declined by $38 million year-over-year largely due to the $18 million of expense for claim development in our LTL segment, primarily related to an adverse arbitration ruling on the 2022 claim.

$4 million of expense in our Truckload segment for an adverse decision on VAT reimbursement in Mexico for prior tax years. Warehousing project business deferred to future quarters and an estimated $12 million to $14 million net negative impact for volume and cost headwinds from severe winter weather disruptions and sharply rising fuel prices during the quarter. Adjusted operating income declined $37 million year-over-year, primarily driven by the same items.

GAAP earnings per diluted share for the first quarter of 2026 were a loss of $0.01 and primarily due to the items noted above. GAAP earnings per diluted share in the prior year quarter were $0.19. Adjusted EPS was $0.09 for the first quarter of 2026 and compared to $0.28 for the first quarter of 2025. Our consolidated adjusted operating ratio was 97%, up 230 basis points year-over-year. The effective tax rate on our GAAP results was 7%, and our non-GAAP effective tax rate was 28%.

Slide 4 illustrates the revenue and adjusted operating income for each of our segments for the quarter. Overall, the relative shares of our various services -- service offerings remains largely consistent quarter-over-quarter, with LTL gains slightly over the fourth quarter as it exits its seasonally weakest period of the year.

Now we will discuss each of our segments, starting with our Truckload segment on Slide 5. Aside from the negative impacts to volume and cost from severe winter weather and fuel challenges in the quarter, most operational metrics were improving throughout the quarter. Revenue per loaded mile, excluding fuel surcharge and intersegment transactions, turned out stronger than we anticipated and even improved sequentially over our end of year peak season result.

Largely driven by spot opportunities that developed within the quarter. However, volumes and cost per mile for the quarter were both unfavorable as a result of the weather and fuel challenges. On the whole, our truckload adjusted operating ratio of 96.3% only degraded 70 basis points year-over-year as a reduction in empty miles and the strengthening rate environment largely offset the headwinds to volume and cost.

Q1 marks the seventh consecutive quarter of year-over-year improvement in miles per tractor. Importantly, the strengthening rate backdrop and improving network efficiency have ongoing implications for our business, while the weather issues are not expected to reoccur. On a year-over-year basis, revenue excluding fuel surcharge was essentially flat as a 1.4% improvement in revenue per loaded mile, excluding fuel surcharge and intersegment transactions, largely offset a 1.8% decrease in loaded miles.

Adjusted operating income declined $7.6 million year-over-year, largely as a result of the adverse decision in VAT reimbursement, as noted earlier as well as the cost headwind from severe winter weather and fuel escalation in the quarter. U.S. Express made further progress on operating efficiency and trailed the legacy brands and adjusted operating ratio by approximately 300 basis points for the quarter. The ongoing progress that U.S. Express is encouraging, and we expect this business will continue closing the gap in margin performance with our legacy brands as the market.

Moving on to Slide 6. Our LTL business grew revenue, excluding fuel surcharge, 2.6% year-over-year, driven by a 5.2% increase in weight per shipment, with an 8.5% increase in the length of haul. Tonnage trends showed momentum as the quarter progressed, ending with March average daily tonnage up 7% year-over-year. Our expanded service coverage and presence in new markets is helping us win business with new customers, gradually increase our industrial exposure and transition our network and freight mix from regional to national.

Shipments per day were down 1% year-over-year for the quarter, largely as a result of winter weather disruption in January and the shift in freight mix to a higher weight per shipment. Revenue per hundred weight excluding fuel surcharge, fell slightly by 70 basis points year-over-year, driven by the increase in weight per shipment, while renewal rates continued their trend of mid-single-digit increases.

We continue to make progress normalizing operational and cost fundamentals following a period of significant change to our network and freight. Purchased transportation as a percentage of revenue, equipment rent and variable labor per shipment all showed improvement year-over-year in the first quarter, and we anticipate further improvements in efficiency as we refine our network and freight flows.

As mentioned earlier, adjusted operating income and adjusted operating ratio were negatively impacted year-over-year by the adverse claims development. We are encouraged by emerging seasonal freight patterns steady progress on rate renewals, accelerating volume trends late in the quarter and an improvement in weight per shipment for the first time in years as freight mix continues to develop into our expanded terminal network.

Now I'll turn it over to Brad for a discussion of our Logistics segment on Slide 7.

Thanks, Andrew. Logistics revenue for the first quarter declined 9.9% year-over-year as volumes were down 18.9%, while revenue per load grew 10.4%. Third-party carrier capacity grew more difficult to source during the fourth quarter, and this trend continued through the first quarter. Gross margin of 16.6% for the first quarter declined 150 basis points year-over-year but improved 110 basis points from fourth quarter levels as strengthening spot opportunities helped to offset pressure on contractually priced business.

Despite the year-over-year decline in volumes and gross margin, our Logistics segment produced an adjusted operating ratio of 96.2%, only a 70 basis point degradation year. In addition to the increase in third-party carrier costs brought on by the regulatory pressures on capacity, our Logistics business experienced increased pressure on gross margin as we further enhanced our already rigorous carrier qualification standards in response to a sharp increase in cargo theft in the industry and the troubling carrier practices exposed by recent regulatory efforts.

This affects not only new applicants seeking to join our carrier base, but also resulted in a reduction in the number of existing carriers we are tendering loads to. While such efforts were a headwind to capacity costs and caused us to eject more loads as unprofitable, as we reset contractual pricing through the bid season, we expect that load count will improve and pressure on gross margin should lessen.

Given the complementary relationship between our Logistics and asset-based Truckload segments, we believe the improving market dynamics will ultimately benefit both our asset and logistics businesses over time. Our Logistics business has demonstrated its agility in navigating a volatile market in the past few years by maintaining its operating margin close to target levels through disciplined pricing and cost management. This team is now further leveraging technology take cost efficiencies to a new level as well as to improve our responsiveness and our ability to capture opportunities in the marketplace, which we expect will contribute to our earnings in 2026.

Now on to Slide 8 for a discussion of our Intermodal business. The Intermodal segment grew revenue 2.7% and improved its operating ratio of 50 basis points year-over-year as a 1.6% increase in revenue per load and a 1.2% increase in load count offset headwinds from winter weather in the quarter. Load count and revenue per load improved progressively throughout the quarter, with March load count up 8.4% year-over-year. While the intermodal pricing environment is more competitive than truckload, at this point.

We are encouraged by ongoing opportunities to leverage our strong service performance and our truckload relationships to continue growing our volumes at improving rates. We remain focused on delivering excellent service and driving appropriate turns through growing our load count with disciplined pricing, cost control, network balance and equipment utilization.

Slide 9 illustrates our all other segments category. This category includes warehousing activities and support services provided to our customers, independent contractors and third-party carriers such as equipment sales and rentals, equipment leasing, owner-operator insurance and maintenance.

Additionally, beginning January 1, 2026, all other segments also includes the cost of our accounts receivable securitization program that was formerly reported below the line in interest expense in prior quarters. For the first quarter, revenue increased 13.5%, operating results declined to an operating loss, partially due to the inclusion of $5 million of costs for the accounts receivable securitization program as well as start-up costs on new contract awards in our Warehousing business, for which revenue is expected to ramp in the coming months.

On Slide 10, we have outlined our guidance and the key assumptions, which are also stated in the earnings release. Actual results may differ from our expectations. Based on our assumptions, we project our adjusted EPS for the second quarter of 2026 will be in the range of $0.45 to $0.49. This range represents a larger-than-normal sequential increase in quarterly results. As the first quarter was negatively affected by events that we do not expect to recur and because freight market fundamentals are improving, exiting the first quarter.

Our projections reflect recent trends in volumes, spot rates and bid activity as well as expectations for a continued seasonal build in freight demand for both truckload and LTL services. The key assumptions underpinning this guidance are listed on this slide. I won't take time to read through all of our assumptions here but I do want to highlight the point that the recent strengthening of the truckload pricing environment will generally impact our contractual rates beginning late in the second quarter and into. This concludes our prepared remarks. And before I turn it over for questions, and everyone to keep it to 1 question, perfect discipline. Thank you. Sarah we will now open the line for questions.

[Operator Instructions]

Your first question comes from Chris Wetherbee with Wells Fargo.

I guess, obviously, the pricing environment in the truckload market is improving, probably materially versus what we talked about last time. So Adam, I was kind of curious as you think about the margin opportunities or maybe the earnings opportunity for the truckload business as we go through, I guess, this year, but maybe bigger picture. Do you think this cycle has the potential to be what you kind of hoped it could be in terms of the cycle earnings of the Truckload business or the midscale margins of the truckload business? Any color around that and maybe timing towards getting there would be helpful.

Yes. So I mean, a great question, Chris. And it's early in the inflection here. So it's hard to know exactly the strength, the duration and the timing of how that will play out. But just leaning in on our experience in previous cycles, I don't think we've ever really seen the pressure on capacity and that, I mean, from regulatory forces versus just normal economics.

And so I think we could see more capacity coming out of the network than we typically would see in a cycle. And I feel like that could be a catalyst to really drive a strong bid season this year but also into next year. So the question is going to be, can we capture rates, but can we also improve the utilization on our equipment, which we've done that now for 7 consecutive quarters on a year-over-year basis. And then can we grow our seated trucks, not necessarily investing in more trucks. Now hey, if we get to that point, obviously, we'd have the ability to do that. But to be able to see more of the trucks that we have on our fleet, while running them productively.

If we're able to do all 3 of those, then I do believe this sets up to be able to get back to a more normalized earnings or margin profile that we're accustomed to seeing in our businesses, and that includes even U.S. Express getting to the legacy performance that we've seen at Knight and Swift. It's early in the cycle, and we're just getting some feedback on bids, and we're seeing how those awards are coming in. And then how -- some of our customers are tendering those awards and what mini bid activity looks like, what turndown business is looking like.

So still a lot to read through into the market. But it certainly feels like the setup is there for those in the industry to get back to kind of sustainable rates that puts our industry in a position where the good quality compliant carriers have the ability to make enough margin to invest in their businesses, invest in drivers, invest in safety and invest in good quality equipment.

The next question comes from Richa Harnain with Deutsche Bank.

So just following up from that previous question, just Adam, when you say normalized margins, maybe you can highlight kind of what that is mid-cycle, -- is it sort of low teens that we're talking about here? And then just I think, Brad, when you ended the segment, you said the impact of this high single-digit, low double-digit rate improvement will really be seen towards the end of Q2 into the back half of the year.

But if you can just kind of like give us a sense of the level of magnitude of margin expansion as we move through the year, you're already calling for 100 to 200 basis points of year-over-year improvement in Q2 before we really start to see the evidence of this type of rate environment, I think in 2Q, you just caught a low single-digit improvement, right?

So I'm just trying to get a sense of how we should flow through this in the model near term and maybe more longer term, if you could help things.

Okay. Well, I'll hit on maybe the first portion. I'll try the second and Brad, you can dovetail on that. I think we probably got this question on normalized margins for the last like 5 earnings calls in a row. So I'll try to be consistent on how I answer this. We look at our business in a normalized market, the truckload business typically operates in the mid-80s, right? So that's kind of a mid-teens margin when the market is really good, we've operated sub-80s and then typically, in a difficult market, you're upper 80s, obviously, this cycle played out differently has been far more challenging across the industry and for us, included in that.

But that's what I'm referencing getting back to that mid-80s normalized earnings. I feel like there's the setup here in this bid season and going into next to be able to achieve that. And then when you look at where we're at, we have our LTL business that's been growing, and that doesn't have the same cycles as truckload and we look at just methodically improving the margins in that business. Obviously, we had the anomaly with the claim development in the first quarter, but we expect that to be put behind us and continue down the path of improving margins as we grow in to that network and start to march down into the 80s, which I still feel this year, we can achieve a sub-90 operating ratio during the year and just continue to build upon that.

And then typically, when our truckload business is healthy, the logistics business can grow exponentially. Now early on as the cycle changes, logistics feels pain because the rates haven't adjusted yet to what the third-party capacity rates are. And so you probably see a low-count degradation which we've seen because you just can't take freight that you can't make a margin on.

As rates reset, contractual rates, but also backup rates which we do a lot of with our customers. And so when the routing guy falls apart, they tend to slow to the backup rates that hopefully put us in a position where we can do it with our own trucks, we could do it with quality third-party capacity through our logistics business, 1 that we were able to take a lot more of the loads that we're turning down today.

So in normal earnings, I would expect logistics to be growing. And then Intermodal, we believe is on a path to profitability. I think we laid out the improvement sequentially that we expect to achieve in intermodal, which would mean we're profitable. And volumes are really starting to build in that business.

Last year, this time, we took a big step back when you had the tariffs announced that we were kind of pushing for improving our revenue per load, and that led to us losing some volume. But this year, it's very different. We're getting improvement, some improvement in rate, not near where you're going on the truckload side, but some improvement, and it's resulting in better volume as well.

So we're starting to see things build and we'd expect intermodal to get it to profitability and to see that improve as the cycle strengthens. So that's how we're viewing kind of this, say, normalized, you're never really at normal. It's kind of you're always flowing in the cycle. But that's how I'd frame it up, be sure for that question.

And then in terms of the high, low double-digit request, right now, we've probably got about 70% of our business in bid -- but a lot of that starts to be implemented kind of mid- to late second quarter and then it starts to flow into the third quarter. We have some pretty big customers that hit in the third quarter. So we may be seeing the activity really build in terms of approving a healthy rate improvement or rate increases, but it may not flow through to the P&L immediately. but we expect that margin to really start to flow through kind of fully based more in the third quarter and then build into the fourth quarter.

Brad, I don't know if you had anything else you want to elaborate on.

And just one thing I would add is in terms of our contract versus spot mix, we came into the first quarter in the 10% to 12% kind of range low double digits, where we had been for really the last couple of years in terms of spot exposure. We exit the first quarter, just a couple of points higher than that, kind of low to mid-teens perhaps. And look, as we navigate the pricing environment and navigate trying to manage our business and extract yield from our network, jumping into spot exposure is step one in trying to manage yield.

And so our first priority is our contractual recurring relationship business, and we have expectations for what -- where the market is on price at this point. And that's what we're trying to address first and foremost. And -- if we can't come to agreement on price the same way in terms of the market, -- we may end up with less contractual exposure on certain accounts, and that will create more spot exposure. And so that's something that can evolve over the next several months as we continue to work through bid season. And so that's just another lever that can contribute to our realized rate per mile this is the contract and the backup rates as that 1 spoke to. So that's something that we're going to be managing and watching week by week as we work through this, but a lot of different avenues to generate.

Your next question comes from Ken Hoexter with Bank of America.

And I guess, Brad, just to extrapolate on that a bit, right? It sounds like in the prepared remarks, Adam, I think you might have mentioned you're revisiting contracts that are longer in nature. Are you already starting to give those notices to to get out of the contracts and start to renew? Is that how tight the market has got. And I just want to understand kind of the comments around that.

And to clarify on the LTL, did you say the delay but the weights are ramping, the delay in getting pricing, but you're seeing weights ramping given the industrial move. How long does that delay get until you get that pricing?

Well, let me clarify that. We're not saying we're getting delayed pricing on LTL. I think we're saying we're getting mid-single digit on the renewals, but we're seeing a freight mix change where we're getting longer length of haul, heavier shipments that we believe will improve the yield of the business. And so the revenue per hundredweight make it a little bit skewed in terms of the year-over-year comparison because of the freight mix change, but we're not seeing delay in LTL pricing.

And then in terms of the rate review is what we would call them is we're going through our network and looking at any rate that may just be stale. If it's beyond a year, it's something we're going to look at. We're reviewing those that are called the bottom 20% performing and looking at what we need to do to get those rates to where they're closer to market. And so if we don't have an active bid to address those, we're being proactive of making that going through that review and then having discussions with customers around that.

So that is something that is active. I think early stages right now because there are a customer a lot of customers that do RFPs and like I said, we're probably in the heart of about 70% of that business, but there is the 30% that we need to make sure we're addressing as the market moves quickly.

And same for the LTL, does that gap closed, do you get if you're already at high single, low double in truckload. Can you see that transfer to the LTL market?

I don't know that they align that right now in LTL on renewals, we're getting mid-single digits right now.

Okay.

Your next question comes from Ravi Shanker with Morgan Stanley.

Adam, last quarter, you very helpfully walked through what you saw were upcoming catalysts on the supply side. Obviously, lots of moving parts here, but everything from derailers law, the Montgomery case and the brokerage side, you proposal for a $5 million minimum insurance as well as all of the rules that we saw last year. How do you see this evolving over the next few months and potentially the market tightening up more?

Yes. I mean I think you hit them, Ravi. I mean these are all pressures that we think are going to deter bad actors from coming into our space. I think it's going to push capacity out of the market that aren't at sustainable rates and are acting in a compliant manner. I think clearly, when our industry saw spot rates jumped dramatically in 2021 and then we had this push for immigration, this industry was targeted. And we had a lot of people enter our space and didn't have much experience in trucking, probably didn't have a great safety background, didn't have proper training and also we're probably exploded by some of the Camelian carriers that are out there and ultimately paid them rates well below what someone who's a citizen in the U.S. would view as livable wages.

And so I think that population is getting pushed out with the pressure on eliminating the improperly issued nondomicile CDLs. And I think Delia's law will help codify that into law, among other things. I think we've got an administration who is really pushing on what some of these Camelian carriers, how they've exploited the system and the self-certification of training, the self-certification of logs and putting more regulation behind that. And I just think there's going to be a lot more oversight from the FMCSA that's needed.

Now hey, if we get minimum insurance, that's another big thing. I mean you got English language proficiency, that's pushing capacity out of the market. And hey, I think drug testing is another big one where we already have set a much higher standard for ourselves. We've been doing hair follicle drug testing for over a decade. And we see that you're probably 10x to 15x more likely to pick up a positive drug testing you would with urine. Yet we don't accept that as a valid way to test drivers, and you can't even submit those positive results to the clearinghouse. And so those drivers can just go on to another company and get a job and be behind the wheel.

And we don't think that's right. And so I think that's another thing that I think this industry needs to help clean it up and really be focused on putting the safest drivers on the road.

But Ravi, what I'd say is we've never seen this type of push to clean up some of the capacity and the unsafe drivers out on the road. And when you pull that one of them, I think moves the needle enough, but when you aggregate them, I think we're already starting to see that influence the market. And really, the improvement we're seeing and the ability for us to get rate is driven largely by capacity reduction versus demand. And if we start to see demand pick up in conjunction with some of these other efforts that are just in the early innings, I think we could find ourselves in a much more favorable position from a carrier standpoint.

Ravi, I would say that I think it's clear to us through our conversations, the administration is committed to the cleanup that needs to happen in our industry. We think if we can get legislative support through -- law and the like. But obviously, that makes that more durable through future administrations, but we don't think it's dependent on that. We think whether that happens or not, that the actions of the administration are going to be effective over the next few years as we continue to kind of get things right with our industry.

Your next question comes from Scott Group with Wolfe Research.

So Adam, what are you seeing with seated tractor counts and drivers generally? And then just big picture, if you think back last cycle, just massive growth in your and everyone's brokerage business, but all the things that you talked about and that last question with nondomicile and Camilion and Montgomery, all these sorts of things. I'm wondering, as you're having these big conversations, is there a sense from shippers that they're less willing to do a brokerage offering right now and maybe are they willing to pay more for asset-based this time versus maybe prior cycles?

Yes. Okay. Well, let me hit on those, Scott. So on the ceded truck side, that -- certainly, finding drivers hiring driver has always been a challenge in our space. I've always said, in our industry, you either have drivers or you have loads. Really do you have them at the same time, right? So we're starting to see the loads come through. And so we're making investments to ensure that we can have an advantage in sourcing drivers. And so we're making investments in our marketing spend and the number of recruiters we have.

We're leveraging AI to ensure that we're very quick to react to leads as they come in. And we're really leveraging the Academy network that we have to train and develop drivers. And we're -- as we've made those investments as we saw the market change, we're starting to see that build some momentum really across all of our different brands. And so I'm feeling more bullish on our ability to not only improve rates, but to improve our utilization and grow seated truck which I know was the biggest challenge during the last up cycle in the pan I think everyone went backwards to truck with how difficult labor was. I think the challenge that we'll have is that we've only gone after the high-quality drivers in some of our space have been able to hire those that don't meet the criteria that we had.

Now as some of those drivers are kind of pushed out of the market because of some of the things we just talked about, the quality drivers that we look at are going to be more attractive. But we believe we bring far more to the table with terminal network we have, the equipment we have and the ability to give high-quality training. And so we feel like we'll have an advantage to maintain and even grow our seated truck count as drivers become more challenging.

And to your point about logistics, I agree with you that I think we saw this proliferation in logistics because you had customers that just had to move goods at all cost because demand was so high and you had this lot of capacity coming in. I think when talking to shippers, I think they're going to have a bias towards towards asset-based carriers. I mean we're already starting to see that.

We're starting to see that they're limiting even some bids, many bids only to asset-based carriers are living the percentage that they will allow in terms of brokers to participate in a bid. And I think that's going to continue. Now I think we get viewed a little bit differently because we do bring some assets to the equation with the power only that we offer. But we've also talked about what we're doing to vet the carriers that we work with. We have taken a great number of steps to really ensure that we have high-quality safe carriers. Now you're not always going to be perfect that, but we have cut down the number of carriers that we work with dramatically.

Just since the beginning of this year, were down 30%, and we had made a large cut even earlier last year. And so we had, how long you've been in business. We're looking at evidence that you have logs that we could see where your tractors are at we actually -- because I think 1 of the challenges in our space is the broker has no idea in most cases, who is actually driving the truck. And I think that's been a real challenge. -- for the broker and the shippers really know that. And so we are taking steps to ensure we know we have a copy of the license, we know who's in the truck, especially if they're going to operate and leverage 1 of our trailers.

So we're taking a lot of steps to put ourselves in a position that when customers kind of demand that as part of the logistics solution. We have that to offer. So I don't think you're going to see the same expensive growth that we saw during the pandemic. But I do think those that are good quality logistics providers do it the right way and have an asset solution to complement what they're offering. -- will have the ability to grow in a strengthening market.

Your next question comes from Jonathan Chappell with Evercore ISI.

Adam, I know you don't go into the monthly detail on LTL as some of the pure plays do. But is there any way to help give a cadence on kind of how the first quarter maybe April transpired as we think about like weight's been good, that's you're finally getting the turn there. But are we going to start to see more consistent kind of shipment tonnage growth? And then importantly, are you -- do you feel if you do get that demand tailwind or tonnage tailwind shipment tailwind behind you. I know cost alignment was kind of pretty difficult. Have you been building out the national network?

Do you feel like your costs are now appropriately aligned that if there were to be a demand pickup that would kind of go right to margin improvement as opposed to still kind of chasing that with resources?

Okay. That was a long question, John. I'll try to hit every component of it. That's the shortest one so far. Yes. Okay. So on the LTL front, I think we talked about in our commentary that we were a little bit slower on volume to begin the quarter but a good build with March being the strongest and then those trends continuing into April. We only got a couple of weeks into April, but we're not seeing that slow down at all.

And then typically, second quarter is our one of our strongest quarters in LTL. We do believe we have a tremendous amount of operating leverage in the business. There's just a few pinch points that we have, where we may have a few locations to open up this year, but it's not going to be near the investment we had to make in the prior years. And so it's allowed us to focus on the fundamentals with ensuring that we're efficient with our labor, managing the purchase trends.

I think some of the things that Andrew touched on the LTL discussion, and so yes, as we see the tonnage improve, and it may not -- because of the freight mix, it may not even have to be a huge lift in shipment count if you're getting more tonnage that typically yields better. As we look at our kind of our weekly performance and we have an estimated OR in that weekly performance as we see that building, yes, I think we're seeing the operating leverage in the business and a lot of that flowing to improved margins. And so that's where, if you feel like if this continues, it could be back half of this year, we start to see that operating ratio began with an 8 versus the 9 and then just continue to build from there.

I mean, hey, we're still working on freight flows and again, adjusting to the different -- the changing network but we feel very confident about our LTL team and what we're doing there and just making kind of consistent improvement in both the freight mix and the cost structure. I don't know, Andrew, you may have something you want to add to that?

Well, let me just say a couple of things. Just to give you a sense for the momentum within the quarter. So obviously, the Southeast was pretty heavily impacted by weather, and that's kind of our highest density volume is in our business. But if you look at tonnage in January, it was up 1.6%, February 2.6% and March 6.9%. So we really ended up at 4.1% up or so on tonnage year-over-year.

So we really did see that build as we kind of moved out of the weather and some of the new contract wins took effect. So I think that's going to be a positive momentum as we build into for us. In Q2 was our strongest seasonal quarter of our business. But when it comes to cost, I think below the surface, obviously, the claim or the arbitration liability cost impacted the core low, but we're seeing steady progress in our cost efficiency.

So we saw our variable wage per ship improved from the fourth quarter to the first quarter, we expect that's going to continue. We have seen, I guess, I would say, just to give you a little feel for it. We're seeing the most improvement in our dock wages per shipment. And I think line haul is the next area where we're going to start to see the most improvement. So the costs that came out of the business as we brought our different businesses together last year, in terms of vehicle-oriented travel costs, right-sizing our equipment, all of those are showing positive trends.

The one thing I would probably mention to you is we've mentioned that we're slowing down, building new locations. And that is right. That's kind of where we're at. But we're going to -- we have locations where there are pinch points that in our -- the security of our flow need to be addressed, and we are increasing door counts in those locations. That's going to allow our freight to flow in a more natural way, in a more cost-efficient way.

So you're going to see a fab locations where we need to, to help with that flow. Those are going to create some growth, but primarily, they're going to help with our costs. So we're still aligning our evolving network with our footprint but we're in a place now where it's just -- we're positioned well. We're just going to see improvement in terms of that efficiency we expect going forward.

Your next question comes from Dan Moore with Baird.

A lot of questions have been asked and answered, but one that was not addressed yet that I think is definitely worth a little bit of time is leverage around U.S. Express. So I can't imagine about a rate environment to begin to realize momentum in that business. I think we've argued for a while now that, that's really what was needed. I know you guys have done a lot of cost repair and management repair.

In terms of the business, but just the ability to move to a rate cycle, much less a rate cycle like this one. really presents a lot of opportunity. Can you talk to us about the size of the business today, generally? And maybe talk to the potential earnings leverage of U.S. Express as we move forward.

Yes. Well, so Dan, I think you're right. I mean when we purchased U.S. Express a few years ago, I mean, we felt like we were going to be in a more favorable environment sooner than we have found ourselves. So that's put some pressure on the margin and how quickly we are able to drive accretion through that acquisition.

But I agree, we're finally in a place now where we can work on improving their freight network and improving their rates to a more sustainable level. And we've got a great team there, the gentleman who leads that business that was led sales at Swift following the merger and was an integral part of the improvement at Swift and the margin profile at Swift. And so we feel him and his team are well positioned to understand what it takes to make some of the changes.

And hey, some of those rates are going to need to go up in a very meaningful way. And they're very equipped with understanding of the market, leveraging the network information we see across all of our brands. And closing the gap on where we're at from a legacy standpoint, I think this last quarter, they're about 300 basis point difference from an OR standpoint. Some of that is still a cost delta but I think a lot can be made up through getting the rates closer to where we are from a legacy standpoint, I think we've got the right team there.

We've made a lot of changes there, but feel well positioned in the discussions with our customers and getting, I think, good feedback in the early parts of the bid and expect to see rate continue to grow and develop.

And from a cost perspective, let me just make a couple of points. I'll point to

What are we going to say, Dan?

Yes, I'm sorry. I just wanted to -- 1 thing that would be helpful to understand is just the size of the business today and if you want to bracket it, that's fine or any manner in which you'd like to answer the question. I know it's -- I know, obviously, it's a consolidated business at this point, but we don't know how how -- we don't know what the revenues are. So if you can maybe add some context around that today, if at all possible, that would be really appreciated.

Yes. I think between the trucking and the logistics business, I mean, you're just under $2 billion between those 2.

Close to that. And now, Andrew, you want to...

Yes. So just I think 4 areas that I think are opportunities ahead of us on cost. First, the cost of insurance and safety. So that -- we've had to go through something of a culture change there in regards to how we manage safety and insurance. And the CSA crash basic, I think, is a good number for us to look at. That's over 60% better from where we were we at the acquisition.

So we are seeing, especially, we're starting to see that impact the business. And those legacy costs of insurance and claims have weighed on the business. We think that the -- the safety performance that's improved dramatically is going to start to impact the business. The equipment costs, we're still working through some of our high-cost equipment leasing and so we think as we roll through that equipment, that's going to provide some opportunity -- we've -- in terms of hiring costs and advertising, we think there's opportunity there as we get better at that to bring that cost down.

Obviously, the biggest opportunity is rate that Adam talked about, where we think we have more than a normal amount of progress to make on rate. So a lot of the work we've done on cost has been on the fixed cost side. On our overhead costs, which has been pretty significant in the last year. We think that, that's going to be structural and sustainable through volume growing in the business.

A lot of tailwinds emerging, a good look for the remainder of the year, guys.

Your next question comes from Brian Ossenbeck with JPMorgan Chase.

Maybe just to come back to some of the more topical ones here will be discussing here for a while. Just in terms of the -- I guess, the work you did with carriers in the logistics business, down 30% I think it was for accepted Carrier. That's a pretty significant number. So is that something you feel like the rest of the industry has to go through as well. Maybe they have an even higher number of carriers they're going to have to squeeze out of their networks. And Adam, we've heard for a long time about hair follicle testing and things of that nature.

It sounds like I think you said there's some momentum. But like what are the steps we would have to see for that to get a bit more progress? And when should we expect maybe we could see that start to begin.

Well, look, I don't want to speak to what other logistics companies should do or have to do, I think about what we felt like was required of us to ensure that we're putting quality carriers hauling our shipments, hauling our trailers when they're doing power only. We're anticipating that our customers are going to start being more concerned about this. as this becomes more of a relevant issue. And I think we're already seeing that in mainstream media.

We've already had some discussions with some of these shippers about how we're really monitoring who's hauling their freight who's actually driving the truck. And so we felt it was prudent for us to take the steps to eliminate capacity that we didn't feel comfortable with. And do I think others will do that. I think some will. I think some will still take the cheapest carrier when they're available, and that may just be based on survival. So I don't know how that will play out.

But I do think some of this capacity is just going to have to exit regardless because of some of the regulatory changes that are being enforced. And we feel very -- we were very supportive of this administration and the actions that they're taking. So some logistics company may not have a choice because the capacity of the leverage today won't exist. But we're not waiting for that. Where we want to be proactive and to do the right thing.

On the hair follicle, Brad, do you want to maybe touch on that, Brad, you've been engaged in that?

Yes, it was just maybe get a share in terms of what we've seen in our own experience over the last decade or so, as Adam mentioned, we do both, right? We do the year analysis because that's what's recognized by the feds. And we do the hair follicle test because that's what works. So we pay incremental cost to do that in addition to that because that is an important part of our hiring process. And what we found over doing this thousands, if not tens of thousands of times a year, is that the hair follicle test identifies roughly 14x the drug users that the urinalysis test does. So that prevents us from hiring them, it does not prevent them from driving in our industry because not all carriers do that. And so there is an openness it seems in Washington to at least engage in this conversation.

Congress past this years ago, and just health and human services has not gotten around to writing the rules to actually put this into practice. So it does seem like there's maybe an openness to engaging in that conversation. We would ask just to allow us to report but those of us who are paying for the test, what we are finding. Maybe we don't require it of everyone, but if we're going to pay for it, let us report that to the registry because we do think that is important for safety for the motoring public.

Your next question comes from Ari Rosa with Citigroup.

So Adam, I wanted to ask a bit of a strategic question. You've said a few thousand tractors since the USX acquisition. It makes sense to us, of course, why that decision would have been desirable in the downturn when obviously it was difficult to find loads. But now as we think about the up cycle, is there any dimension in which that holds back the ability to get the same level of upside that you might have seen if you kind of retain those tractors.

I'm just hoping you can kind of discuss that decision or maybe defend that decision a bit, give us a little bit of color on like why that was the right decision to shed those tractors and also put it in the context of, on an absolute basis, obviously, we're looking at a larger tractor count now than what you had in kind of the prior cycle. So kind of how do those dynamics play out against each other as we think about what the upside could look like?

Well, what I'd say, Ari, is we don't go into an acquisition with intentionally trying to shrink the capacity. I think as we go in and review the freight network and U.S. Express, 40% of their loads were coming from brokers which obviously you're not going to be successful if that's where -- who you're relying on for your freight. So we had to go in and adjust their network to find direct relationships, loads that can support their network.

And so in doing so, you had to turn some of the business they were very dependent on. At the same time, we're ensuring that we have good quality, safe drivers. And so we did change the standards at the hiring standards that U.S. expressed very early on in the acquisition to ensure that we had good quality drivers to drive down the craft basics to improve the safety, to improve productivity. Some of the things that Andrew has mentioned, -- and so when you do that, you kind of -- you're limiting the class sizes that you're going to have and then you're changing your freight network.

When you have that kind of churn, you'll naturally end up or you have the risk of ending up with more open trucks than you feel comfortable carrying as overhead. And so as you went through that to get the business on a better foundation and position them to be far more healthy long term, you end up with some capacity that you just need to sell and exit and remove from your brand. And so that was the process that we went through at Express.

Now we feel stable today -- and we're making the same investments there on the recruiting front and now leveraging that we have at Swift and said some at night to be able to train like our other brands do. And obviously, as you have a better freight market, they'll be able to make some progress on repairing their network and putting themselves in a position to have sustainable rates to grow the business back.

And hey, we'd love to be able to seat more trucks and grow trucks. But today, we have -- we still have some empty trucks that we want to fill before we invest in additional capital but hey, we're in a much better spot today than if we would have just tried to hang on to all the trucks from the original acquisition and keep the porphyry and not adjust the standards that we hire in terms of drivers.

So I still feel it was the right move. We feel good about how we're positioned and expect to make some real progress on margin and to the business.

And I'm just going to add a little bit of context, this is Brad. I know the op income right now coming out of the long and Argos down cycle doesn't show it, but we are running more miles than we were prior to the last up cycle. So we've got more of a basis there to work with going to this new cycle.

So appreciate the question, Ari. I think that now concludes our call. I think we're beyond the time here. So appreciate all the questions and interest from everyone. And again, if we weren't able to get to your question, you can call (602) 606-6349, and we'll try to return your call as quick as possible. Thank you, everyone.

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

Good afternoon. My name is Constantin and I'll be your conference operator today. At this time, I would like to welcome everyone to the Knight-Swift Transportation Fourth Quarter 2025 Earnings Call. [Operator Instructions] Speakers from today's call will be Adam Miller, Chief Executive Officer; Andrew Hess, Chief Financial Officer; and Brad Stewart, Treasurer and Senior VP of Investor Relations. Mr. Stewart, the meeting is now yours.

Thank you, Constantin. Good afternoon, everyone, and thank you for joining our fourth quarter 2025 earnings call. Today, we plan to discuss topics related to the results of the quarter, current market conditions and our earnings guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to last 1 hour. Following our commentary, we will answer questions related to these topics -- in order to get to as many participants as possible, we limit the questions to 1 per participant. If you have a second question, please feel free to get back in the queue, and we will answer as many questions as time allows. If we are not able to get to your question due to time restrictions, you may call (602) 606-6349.

To begin, I will first refer you to the disclosures on Slide 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.

Now please turn to Slide 3, and I'll hand the call over to Adam for some opening remarks.

Right. Thank you, Brad, and good afternoon, everyone. During the fourth quarter, the truckload market saw a demand that was generally stable, but lacking the typical broad-based seasonal lift in demand until late in the quarter. seasonal project activity occurred in October but wound down quickly in early November. As a result, truckload volumes were lower than we expected. While we did see some improvement in overall demand and a tightening spot market in December, it was a reduction in available capacity that seemed to be the primary driver of the tightening market. The pressure on capacity also may be affecting the secondary equipment market as we experienced slowing equipment sales trends and falling average prices during the quarter.

Developments such as these are often a precursor to a more healthy market. Thus far in January, network balance is running better than typical seasonality as capacity continues to be under pressure. We are pleased that our people were able to deliver meaningful sequential operating margin improvement in our Truckload segment even while demand was short of our expectation for much of the quarter. For the full year, our progress on structurally cutting costs out of the business helped us overcome a $125 million decline in Truckload revenue, excluding fuel surcharge, but grew adjusted operating income $28 million in this segment. At the same time, the truckload business overcame inflation pressures to hold its 2025 cost per mile flat with 2024 despite miles declining 3.6%.

Our LTL team was able to produce year-over-year shipment growth for the fourth quarter in a lower demand environment even after lapping the DHG acquisition in the prior quarter as our expanding network continues to help us create new opportunities. This team also responded quickly to the changing environment stepping up the intensity of our cost initiatives to deliver operating margin within 60 basis points of the prior year levels, even while shipping count growth fell well below that of the growth in facilities and door count year-over-year.

As we move into a new year and with anticipation building for return and market conditions, we felt it would be helpful to review our company's profile and to highlight some of the things we are focused on to better position ourselves for earnings growth moving forward. I won't touch on every part of our business here, but I wanted to share a few thoughts. First, we operate the largest fleet in the truckload industry, and roughly 70% of our fleet is deployed in one way or over-the-road service. It is true the one-way market has been the most difficult place to be over the past 3-plus years as this market has felt the brunt of the influx of capacity since the pandemic, but one-way service is what typically improves first and most in a tightening market. Our unique ability to deliver responsive this at scale and with industry-leading trailer pool flexibility our competitive differentiators that attract opportunities, especially in a tightening market.

Second, the significant progress we have made cutting costs out of our truckload business has driven year-over-year earnings growth despite lower revenue. Further, while the deleveraging effect of lower miles has masked some of our progress in reducing cost per mile, we believe most of the fixed cost reductions are permanent and position us for better incremental margins as volume and pricing recover. The incremental margin opportunity is further enhanced by the room to improve utilization on the existing fleet. While we have made meaningful progress on cost to date, there are still a number of opportunities to further improve and to scale our business efficiently. We've been investing in internal development and external products to facilitate tech-enabled efficiency gains as well as better revenue capture, including through AI and other methods. We expect the benefits to begin to be realized in 2026 as we more fully roll out these technologies and as an improving marketplace provides us opportunity to scale more efficiently.

Finally, our entry into the LTL industry and subsequent expansion over the past few years is just the beginning of what we believe will be a multiyear journey with an attractive runway for reinvesting free cash flow towards improving revenues, margin and earnings stability. As we have grown our facility count faster than our shipment count over the past 2 years, this has weighed down margins, but we expect a more deliberate pace of network expansion in the near term will allow us to restore margins as we continue to grow into these investments. We believe the existing infrastructure has capacity to support annualized revenue of $2 billion. As we continue growing into these investments, the operating leverage will be further enhanced by building density and optimizing our cost structure to help us reach our goals of steady margin improvement.

Then when we look externally, there are a number of factors that increasingly indicate the truckload market could begin to grow stronger in 2026. Capacity reduction is clearly underway. Regulatory enforcement of qualifications and safety standards was arguably the most welcome development in 2025 for our industry. The influx of capacity from 2021 to 2024, much of which was planned by a different set of rules in operating with different cost structures has distorted pricing behaviors and cyclical patterns. The ongoing efforts of the FMCSA and DOT to prevent and revoke in validly issued CDLs, shut down noncompliant CDL schools and address hour-of-service abuses should, in our view, have an outsized impact on the lowest price capacity in the one-way truckload market.

Aside from the regulatory cleanup, capacity continues to erode, especially in the one-way truckload market where struggling carriers are running out of liquidity and large players continue to shift towards dedicated services. Second, market data trends have improved of late. Despite muted demand, rejection rates climbed in recent months and are hanging in above year ago levels in early January. Similarly, market spot rates and the spot versus contract spread improved exiting 2025 to the best level seen since early 2022. These market trends align with those seen within our own businesses.

And finally, the inventory pull forward appears largely worked off as a result of solid holiday sales and there is a potential for stimulative support for demand from the tax bill and Fed rate cuts. It appears the market has progressed to a point where even small increases in demand can cause disruption and our industry-leading over-the-road capacity is uniquely positioned to create value for our customers and capture opportunities for our business. The market and regulatory developments in the back half of 2025 give us increased confidence in the path to return our Truckload segment back to mid-cycle margins. We are not here to call the turn by any means, but we are closely monitoring market trends, good developments and signals from our multiple nationwide truckload networks and are prepared to execute our playbook for deploying capacity towards the most valuable opportunities as the landscape shifts. We remain committed to thoughtfully deploying capacity capital, intentionally leveraging our strengths and creatively unlocking synergy opportunities across our business.

And with that, I will turn the call over to Andrew and Brad to review the results of the quarter and our guidance.

Thanks, Adam. The charts on Slide 4 compares our consolidated fourth quarter revenue and earnings results on a year-over-year basis. Before getting into the comparisons, it's important to note that our GAAP results for the current quarter include $52.9 million of noncash impairment charges primarily related to our decision during the quarter to combine our Abilene truckload brand into our SWP business. Impairments have been adjusted out of our non-GAAP results, as shown in the reconciliation schedules following this presentation.

Revenue, excluding fuel surcharge, decreased slightly by 40 basis points and operating income declined by $51.5 million year-over-year, largely due to the $52.9 million of impairment noted above. Adjusted operating income declined 5.3% for the year as a result of lighter truckload and tile demand environments compared to the fourth quarter of 2024. GAAP earnings per diluted share for the fourth quarter of 2025 were a loss of $0.04, primarily related to the impairments at above. GAAP earnings per diluted share in the prior year quarter were $0.43, which included a $36.6 million benefit for a mark-to-market adjustment of certain purchase price obligations associated with the U.S. Express acquisition.

Adjusted EPS was $0.31 for the fourth quarter of 2025 compared to $0.36 for the fourth quarter of 2024. Our consolidated adjusted operating ratio was 94%, up 30 basis points year-over-year and 20 basis points sequentially. The effective tax rate of 21.6% on our GAAP results was 820 basis points higher your effective tax rate of 23.1% of non-GAAP results was 460 basis points higher year-over-year.

Slide 5 illustrates the revenue and adjusted operating income for each of our segments for the quarter. Overall, truckload grew as a share of our consolidated revenue quarter-over-quarter as the fourth quarter is typically the strongest season for this business, while it is the softest preview. We would anticipate LTL returning closer to its recent 20% share next quarter as LTL seasonality begins to improve. We have been enhancing our ability to generate revenue synergies across brands and lines of service. The key levers are intentional leadership to drive powerful collaboration and deploying technology to foster seamless connectivity, leveraging excess capacity in one brand against excess demand and another effectively increases our ability to surge and capture a greater share of market opportunities while solving internal network imbalances. To be certain, we have leaned on each other before, but for these advances, -- but these advances make such practices systemic, more responsive and scalable. These are calculated investments, designed and prioritized based on their ability to propel our business.

Now we will discuss each of our segments, starting with our Truckload segment on Slide 6. As Adam mentioned, volumes in the Truckload segment were lower than expected, with generally lower demand than the prior year period until late in the quarter. Additionally, seasonal project activities in October had shorter duration than in the prior year, likely due to some freight having been moved earlier than the normal given trade and tariff disruptions throughout 2025. Additionally, blockades of the Mexico border during the quarter were a headwind to productivity, especially for our Transmix division. While demand did show some improvement late in the quarter, which helped support spot rates, this could only partially overcome the muted November results.

The secondary equipment market weakened during the quarter, which appears to be at least partially related to the impact of regulatory enforcement on smaller carriers, which caused gains on sale to come in roughly $4 million below the prior quarter level and our expectations. On a year-over-year basis, revenue excluding fuel surcharge declined 2.4% and adjusted operating income declined $9.2 million or 10.7% year-over-year largely as a result of the 3.3% decline in loaded miles. Revenue per loaded mile, excluding fuel surcharge and intersegment transactions increased 0.7% year-over-year. and sequentially improved 1.4% over the quarter.

The fourth quarter combined adjusted operating ratio was 70 basis points higher year-over-year. Excluding U.S. Express, the legacy Truckload brands operated at a 91.6% adjusted operating ratio, while U.S. Xpress improved its adjusted operating ratio of 430 basis points, year-over-year to the mid-90s as a seasonal project participation was at its highest since the 2023 acquisition.

Finally, during the fourth quarter, we decided to combine the Abilene trucking operations into our Swift business to improve efficiency and enhance the productivity by incorporating these assets and freight flows into a more robust network with more freight opportunities. We continue to make tangible progress improving our cost structure to position our business to generate meaningful returns as market conditions recover.

Moving on to Slide 7. Our LTL business grew revenues, excluding fuel surcharge, 7% year-over-year with shipments per day up 2.1%, a lower growth rate than the previous quarters, we lapped the acquisition of DHE on July 30 and as market demand moderated at the beginning of October. Revenue per hundredweight, excluding fuel surcharge, increased 5% year-over-year. Adjusted operating income decreased 4.8%, and adjusted operating ratio increased slightly by 60 basis points year-over-year. As Adam noted, in response to the moderating demand environment during the quarter, we stepped up the cost initiatives we had announced last summer to mitigate pressure on margin. We are taking action where prudent in the short term, but without sacrificing our ability to respond to growth opportunities through ongoing bids as discussions around bids currently in process are encouraging.

During the fourth quarter, we opened one new service center and we placed another with a larger site, bringing our growth in door count to 10% year-over-year. We have opportunities to optimize our operations and cost structure as our network and business mix mature, and we have confidence in our plans to achieve this. Our solid service levels, growing customer base, ground to make up on pricing provides a compelling runway for the value to be generated by this business.

Now I will turn it over to Brad for a discussion of our Logistics segment on Slide 8.

Thanks, Andrew. Logistics revenue for the fourth quarter declined 4.8% year-over-year as volumes were down 1%, while revenue per load was 4.1% lower due to mix change. Third-party carrier capacity grew noticeably more difficult to source during the quarter, which pressured gross margins. Gross margin of 15.5% for the fourth quarter declined 230 basis points from third quarter levels and 180 basis points year-over-year. Adjusted operating ratio was 95.8% for the quarter. Another recent trend is the increase in cargo theft in the industry. While fraud and theft in the industry has been on the rise over the past couple of years, channel checks indicate a rash of test in the quarter, some of which appear to be related to operators being forced out of the business through either financial struggles or regulatory enforcement. If these trends continue, it could further encourage shippers to allocate more business to direct asset-based carrier relationships.

For our part, we have been further tightening our already rigorous carrier qualification standards and narrowing the existing carrier base that we tender loads to. Also, if upward pressure on third-party capacity cost continues, this could cause further pressure on gross margin in the near term as capacity continues to erode. However, given the relationship between our Logistics segment and our asset-based Truckload segment, we believe these dynamics would ultimately benefit both our asset and logistics businesses over time. Our logistics business has demonstrated its agility in navigating a volatile market the past few years by maintaining its operating margin close to target levels through disciplined pricing and cost management. This team is now further leveraging technology to take cost efficiencies to a new level as well as to improve our responsiveness and ability to capture opportunities in the market. which we expect will contribute to earnings in 2026. These enhancements, combined with its complementary relationship with our asset business, position our logistics business to accelerate revenue growth and the return on our trailer assets in an improving market.

Now on to Slide 9 for a discussion of our Intermodal business. The Intermodal segment improved its adjusted operating ratio of 140 basis points year-over-year to 1.1 driven by a 2.8% increase in revenue per load as well as structural cost reduction and improvement in network balance, which led to significant year-over-year reductions in MTV repositioning, grade and chassis costs. Revenue declined 3.4% year-over-year on a 6% decrease in load count, partially offset by the increase in revenue per load. On a sequential basis, revenue grew 1.7%, a 2.6% increase in load count. with both measures reaching their highest marks for the year. We look forward to leveraging the new chapter in our rail partnerships in an improving market. And in the meantime, we remain focused on delivering excellent service and driving appropriate returns through growing our load count with disciplined pricing, cost control, network balance and equipment utilization.

Slide 10 illustrates our all other segments. This category includes support services provided to our customers and [indiscernible] and third-party carriers, such as equipment sales and rentals, equipment leasing, warehousing activities, insurance and maintenance. For the quarter, revenue increased 17.7% and the operating loss in the seasonally slow period for this category improved $5.9 million or 37.3% year-over-year. primarily driven by growth in our warehousing and leasing businesses.

Now on Slide 11, we have outlined our guidance and the key assumptions, which are also stated in the earnings release. Actual results may differ from our expectations. Based on our assumptions, we project our adjusted EPS for the first quarter of 2026 will be in the range of $0.28 to $0.32. In general, this guidance for the first quarter assumes current conditions remain stable. and that we experienced some seasonal slowing in the truckload market and seasonal recovery in the LTL market. The key assumptions underpinning this guidance are listed on this slide. I won't take time to read through all of our assumptions here, but I do want to touch on a couple of the more significant moves other than the typical seasonality in truckload.

We expect a strong bounce back in our all other segments category after its seasonal slow period in the fourth quarter. And we have significantly reduced the range for expected gain on sale based on the secondary equipment market trends that we noted in our earlier comments. Now this concludes our prepared remarks. And before I turn it over for questions, I want to remind everyone to please keep it to 1 question per participant. Thank you, Constantin. We will now open the line for questions.

[Operator Instructions] Your first question comes from the line of Richa Harnain from Deutsche Bank.

I guess maybe we can start with the outlook Adam, you walked through some various items to be -- look forward to in 2026 some tailwinds. Maybe you can just elaborate on like in light of those tailwinds, why we're not seeing maybe a more robust outlook for Q1? Why -- and I understand that there's some seasonality, but maybe you can just talk about that. And then just generally speaking, like any sort of guidance on how we should think about Q1 relative to the entirety of the year? Has seasonality shifted at all? And given the incremental margin should maybe be better given all the good work you did on cost, like how should we think about how margins could progress as the year goes on?

Yes. Okay. Thank you, Richa. We'll count that as one question. So just to go through the outlook here. Maybe I'll start with just maybe walking through Q4 and then how that kind of sets up in Q1 and maybe how we're looking out beyond that, I won't give any guidance in terms of EPS beyond Q1, but I can give you my view of how I think the market may progress. When we came into the fourth quarter. I think on our last earnings call, we talked about having some projects in the queue some of them we haven't seen in several years. And those did materialize in October and typically, when you see projects like that materialize, you have other types of projects that just kick off during the fourth quarter where you have customers that have acute needs, and those typically drive a stronger November and build up through Thanksgiving and then you have a little bit of a lull coming out of that, and then you could finish the quarter strong.

Once we got through our projects in October or maybe early November, we did not see the strength continue and it was a bit disappointing the volumes in November, and it was just tough to overcome that even with some of the strength we saw the back half of December. And we don't get too wrapped up in the spot market jumping up for a couple of weeks because we're still largely contractual, but we did see some of the lift, but it wasn't enough to overcome the slower November and then just the disruption you get in productivity during the holidays.

But as we saw that market kind of continue in or bleed into the first part of -- the first couple of weeks of January, I think we became a bit more constructive on maybe the balance between supply and demand. And so as we sit in early January, we're feeling a bit better about our ability to push rates in the bid season and maybe find some ways to even get some spot -- there's some premium spot opportunities early in the first quarter, which has been some time since we've been able to do that. But when I look out to what that means for the first quarter, a lot of the work that we do in the bids, we don't really feel the benefit of that or see the benefit of that until you get into the second quarter, earlier mid-second quarter and then throughout the back half of the year. So I think the first quarter, we may be in a period where we feel better than we look in terms of the results, but the confidence in our ability to start to push rates higher and to restore or begin to restore our margins.

And I think we've started off the bid season with far more constructive conversations with customers where the discussions are starting around securing incumbent lanes with positive rates. Now I think what we'd be pushing for would be low to mid-single digits and improvements in contract rates and maybe closer to mid than low and maybe that being aligned with what our customers want to see in a pre-bid. And so some of this stuff is going to go into a bid to see where the market is from a balance standpoint. And we've already heard from several customers about wanting to shift a bit more volume from brokers to assets because of the spot market trends that we've been seeing and then some of the capacity that's been coming out of the market from a regulatory perspective.

So I think that gives us more confidence in where this market is headed. But I don't know that we really feel the full benefit or see the full benefit of that in the first quarter. But again, we're not trying to call the inflection yet. It's -- we've seen head fakes before. But I think we're feeling better about where this market is headed, and we do feel better about what the DOT and the FMCSA are doing to clean up capacity in our industry. And I could tell you our Knight or Swift and especially now our U.S. Xpress business is well positioned and prepared with the tools even the culture around what we're going to do to find opportunities to really leverage the scale and the flexibility that we have in our network. And so we're encouraged about what that could mean here in the back half of this year.

Richa, I mean, Q1s are always a hard quarter to really flex, right? Just based on that seasonality, I -- you rarely, and I don't expect rate will be much of a lift for us year-over-year in Q1. And so -- and we're operating on a smaller fleet than we were last year. So I think all those go together. We do expect continued progress on cost. And I think that's our expectation here in the first quarter improvement in cost per mile year-over-year. But -- and I guess the other side, we talk a lot about truckload but in LTL, I mean, I think there's -- we're still watching how the volume is built back. And that's to some degree, going to determine how this quarter plays out. And we're encouraged is kind of watching the early build back of volumes here in January, but there's still a lot of kind of runway ahead of us to see really where volumes build to in the quarter.

So our guidance range that we provided is not does not we think, reflects a reasonable kind of middle line view of how the quarter plays out, but certainly, if market conditions improve or worse then there is a degree of variation around the guidance we're providing here.

Your next question comes from the line of Jonathan Chappell from Evercore ISI.

Adam, as it relates to the priorities and the strategic goals, almost every single segment, you highlight cost to serve, technology, automation, optimization, et cetera. So when we think about your margin progression from 1Q, do you kind of view this as all the things you're doing on the cost side and the efficiency side, can make margins improve even without a true inflection of the market? Or is it more you need price, price kind of drives an exacerbated move in margins and kind of higher, high than higher lows?

Yes. I mean, really, John, we really want to see both. But if the market doesn't play out on the revenue side, like we're maybe expecting in the back half of the year. We're not going to be a victim of that. We're going to go after as much as we can on the cost side to improve margins on a year-over-year basis. But certainly, when you have a lift in rates in the spot market, that mean that's going to help you get to kind of normalized margins. I don't think you get to normalized margins just on cost alone. You'll need some lift in the market. But we look at it as, hey, we fight bulk battles on a regular basis and really the wins we've had have been more on the cost side in the last couple of years. And I think we're due on the revenue side, but our goal is to get -- to make progress on both. .

Yes, it's really a 3-pronged right, to full repair margins. It's capturing price. It's bringing volume back into the business and reducing our cost per mile. We expect each one of those independently to contribute in 2026 to margin improvement. And the price obviously is going to be very much market dependent and to some degree, the miles, but we expect cost alone should drive margin expansion in 2026.

Your next question comes from the line of Brian Ossenbeck from JPMorgan.

Maybe if you can expand a little bit more what you're seeing in the LTL market. It sounded -- I mean you guys called out things were softer than I think most others saw last quarter. So that seemed to play on October, but it hasn't really built back the way you might have thought. So I want to see if you can elaborate on that if it's more of a market perspective or maybe something with the network as you expand it. And then just some quick color on you mentioned expanding the length of haul for the network. Like how does that -- how long does that take? And what does that really mean from a margin perspective as you go throughout this year?

Yes. So I think we talked about how we saw a shift downward of demand starting early in October, and that really progressed throughout the quarter. And so we've had to make some adjustments on the cost side of the business to adjust for that, but also factoring in that with our expanded network now, we're now going to have an opportunity to bid with larger shippers that we just hadn't had an opportunity with before because we didn't have the breadth of the network that would support what they're looking for in a carrier. And so a lot of those loads may be heavier loads, may have a longer length of haul. And this is where we tap into the relationships that we have on the truckload side of the business to provide opportunities for our LTL business to bid on that volume.

So it's kind of still a little too early to tell. How is volume really -- is it really picking up? Are we seeing a shift from Q4 into Q1? I think margins were okay to start, but we're looking for a greater lift. But we have a lot in the pipeline right now in terms of bids that we think could be impactful to the shipment volume of our LTL business because we just have new customers that we have opportunities to grow with. So we're kind of working through those still early progress on that. And I think more to come, but we're just kind of balancing what you do on the labor front to manage your expense in a market where you have volumes lower than I know what we can handle, knowing that we could have an opportunity to see those volumes shift up, and we want to be prepared to handle that with a high level of service.

Yes, Brian, maybe one point I'd add to that is one of the things we identified last year was even though we had integrated from a back-end perspective and systems between the 3 businesses that we have combined, it was creating confusion in our sales efforts. And as we took our business to the market. And so we announced in the third quarter, we're moving to a unified brand. We've already seen that really help us in our sales efforts that we can present a single face to our customers and get them comfortable with our ability to deliver across our network in a way that meets their needs. So we think that is enhancing our sales efforts. We think that's going to help in addition to just the design of our network that we're going through. I mean it is a process to really put our network as we understand how our freight is flowing with these customers. There's been a process of doing that network design that we've been going through. And I think we're getting to the point where we've managed a lot of those bottlenecks. It's really put in a position on bid on business that we have not been able to participate on the floor. And so there's a lot of tailwind here in terms of -- we think that the strength is going to build in our ability to sell and build volume into the business that we built the structure on.

Next question is from the line of Ravi Shanker from Morgan Stanley.

Maybe as a follow-up to that, in the past, I think you've said you're keeping the brands that you've acquired protecting them so that you don't have any customer losses, driver losses and kind of other negative implications in taking those brands away. So, a, how do you protect against that? What does this mean for the other separate brands in your portfolio? And if I can squeeze a really quick 1 in, kind of you spoke about LTL bid season going well. Any early comments on TL bid season would be great as well.

Sure. I thought I touched on TL already, but I'll come back to that to Ravi. Yes. So if I look over the last 2 quarters, we've made a couple of adjustments to our strategy around some of our brands. On the LTL front, I think what we realized going into the strategy we had with buying multiple brands is the outsized benefit you get on the LTL front, when you have 1 distinct network, 1 Pro number, just 1 voice to the customer, I mean that is what they long for. They don't like the interline approach. And even though we had the systems integrated, we had this -- the visibility was similar across the different brands regardless of the website, it still didn't feel like 1 company and 1 carrier to them. And so we felt like we needed to shift that strategy around LTL to provide 1 brand, 1 voice to the customer in order to really maximize the potential of the network that we've built.

And so that wasn't an easy decision. We put a lot of thought into it, but we still think that was the right approach. Now you may have seen or we did comment on rolling Abilene Motor Express into our Swift Transportation business. Abilene Motor Express was a smaller company that we purchased in 2018, and it had gotten down to around 300-plus trucks and was really struggling. And what we found was, given the size of that company, and maybe the lack of brand recognition with some of our customers, it was really tough for them to break through with freight opportunities that was going to support their network. And we had had some change in leadership that came from the Swift business to help write the ship at Abilene. And ultimately, we made the decision that it would be best for the Abilene employees, that the drivers, in particular, to run under a more robust network under Swift. We're trying to convert as many of the Abilene customers that went direct with them to the Swift network. And we had a lot of overlap of customers. So we're in that process right now of keeping that freight within Swift and then supporting Abilene with backhauls and things that allow them to be far more efficient from a network perspective.

I would not -- we don't have another brand out there that we own that we believe we would ever need to take this approach with. This was one that really saw margins degradate over the last several years and didn't have a clear path to profitability, and we felt like this was the fastest way to get that business back to generating a reasonable turn for the assets that we have and then allow us to reduce some overhead and put our drivers in a position to be successful. So again, it wasn't -- this isn't something that we would take lightly, but this was the right decision for the situation we were in.

And on the TL bid, again, it's early, but we've had constructive conversations with our customers around rates being positive. And we're not having discussions about having to reduce rates to retain volume. And now it's just a matter of where can we get comfortable about where rates seem to settle out in the bids. And some may be done in prebid negotiations, others, it will probably have to go to the bid. So the customers can really where the market is. But I feel more confident going to this bid season, that rates or contract rates are going to be up. And I think that will build as capacity continues to exit. I mean, we have some cliff events coming potentially with capacity, Ravi, where we've already seen with English proficiency, nearly 12,000 drivers who've been put out of service since June. We have -- with California, there's 17,000 non-domiciled CDLs potentially expiring in March. New York has a similar number that isn't further that far out from there. Really all states other than I think, one, are not issuing nondomiciled CDL, so you kind of shut off that funnel of capacity coming in.

And then there are several countries where the temporary protective status is ending as well in Somalia, Epiopia, in Haiti, where I would believe actually, you're going to have some of those individuals that are driving the truck. That may not be legal to be able to do that. any longer than I mentioned just in my opening remarks about all the schools that are being shut down. I think there were 3,000 schools recently removed because of noncompliance and another 4,000 schools that are placed on notice for noncompliance. And there are audits out there being completed. I mean we -- 2 of our schools at Swift were audited. And hey, we passed with flying colors as we'd expect. So it is real. It is happening. And so I think, again, constructive on early bid, but I think we'll start to see rate improve as the bid season progresses.

And I think maybe 1 -- just 1 note to add to that is we've had customers share with us that one of their objectives out of the bid season is to increased their asset coverage. And we are -- I think we're seeing customers looking at the market, looking at the regulatory changes and realizing that this could be particularly more strategic procurement organizations are looking at this as a chance to increase their coverage of asset. And I think that's helpful in our conversations in the bids.

Your next question is from the line of Dan Moore from Baird.

I appreciate the time, and I appreciate the opportunity to ask a question. I think everyone realizes that you're positioned, first of all, that you're under-earning along with everybody else in the space. Secondly, that you're well positioned here from the standpoint of starting to get some momentum in terms of rate. I guess 2 questions, I'll call it one, 2 things that I'd like to get some perspective on is one, cost out story. You guys have been very focused on cost, lane balance, improving your landed cost. Where are you with that? And then, i.e., how much is left? Or you had a pivot point there where you really need to be more focused on rate and then to the extent that the rate environment improves over '26? Is there an opportunity to go back to customers in the early innings to try and lock in at rates that are noncompensatory? That's it. And I appreciate the time again.

Yes. So Dan, maybe I'll hit on rate, and I'll let Andrew talk about cost. Rate is pretty fluid in terms of how it works in our markets. because you got to realize we're not locking up with guaranteed volumes with the customer on the over-the-road space. Now dedicated is a little bit different, but the 70% that we do over the road is pretty fluid. And when the market begins to shift and it becomes tougher to find capacity, even if we've done contractual rates we're managing commitments. We start to get overflow volumes, which sometimes can be at a premium, you give backup rates where in a market like this would typically be higher than your contractual rate. You'll have spot opportunities that are ad hoc on our customer load boards that sometimes can be a premium. And so we can move pretty quickly to adjust to the market if we see a change in. And so even if you've kind of locked up rates early in the bid cycle, there's still opportunity with that customer. Even if it's not going back and changing what you've already agreed to, it's just doing more for them because it's tough for them to find capacity in a more challenging market, and that's where you can at times charge a premium.

And so you've got to know what your commitments are, be able to adjust those, manage it very closely and that's what Knight historically has always done. We brought that logic to Swift and they've deployed that extremely well. And that logic is there with U.S. Xpress now. And so I think we're well equipped to be able to react to the market. And again, we're watching this every single day. We have the network maps that are unique to each brand that we see trends before probably many in our space would see those trends. And we have API, we have algorithms that we can adjust on the fly if we see the market changing. And so I feel like we are -- we will be well positioned to get the most value out of the market if it does indeed does change.

Andrews, do you want to hand the cost?

Yes, to give you a little perspective on cost and kind of how I rate our performance as I look back on 2025 and give you a sense for how much more ahead of us is in 2026. So when you look at an environment like 2025 when we got less than 1% on rate, you're not even covering inflation, which probably wants to be 3% to 4%. So you're not getting a lot of help from the market. And so if you look at our Truckload segment, where our costs are down something like $150 million, probably 2/3 of that reduction is variable, maybe 1/3 of that is fixed. And so you put that all together and you get about, I think, an 80 basis points improvement on year-over-year. And so when you think about the variable costs, it probably drove half of that OR improvement. So you've covered inflation plus some margin expansion from these areas.

So -- at the beginning of the year, we put initiatives in place to drive cost out of what we viewed as the biggest opportunity 3 variable cost areas of maintenance, fuel and insurance. And those -- all of those areas improved, obviously, from a dollar perspective, but I think even more meaningful is that each one was lower in 2025 as a percentage of revenue in 2024 and on a cost per mile basis. So real improvement, not just volume-driven reductions. So those projects are continuing.

And just to give you a sense for some of the work we're doing there is we're working with our drivers to create new routing and fuel optimization processes to really get more efficient in our routes and identify a lowest cost fueling solutions. We have technology that we are deploying that is largely going to benefit us in 2026. I would -- but also another project that we're really encouraged by some additional tools to drive advanced auto planning technology to just help us optimize our freight routing and load assignments. I think this has a chance to help -- really help us driver and asset utilization and reduced deadhead and just improve our overall network efficiency. So we're going to continue to deploy these tools to drive variable costs per mile down.

On fixed costs, gosh, we made so much progress there. Obviously, you lose 3% or 4% miles are really -- it's hard to show up in your P&L because of the fixed cost leverage. But as a percentage of revenue, it also declined in 2025 versus 2024, even with that loss in volume. So we view these as structural in nature that won't come back and will lever really well. And I think it's going to come in 3 areas: equipment and cost and productivity. There, you saw that in our utilization improving 2 or 3 percentage points last year over the year before. Our real estate costs, look, we've done some really smart, in my view, facility rationalization, we exited and sold, I think, 13 locations that we don't think -- we're looking at this very long term. These aren't things that are going to impair our ability to capture opportunities, but drove -- are going to drive cost out of our business just in how we manage our facility costs. So our facility means costs are down about 4% last year. We want to do that again in 2026.

Our overhead costs are the other big area we're focusing. I think our -- in the truckload space, we're about 5% down on nondriver headcount after doing 5% or so the year before. So a lot of the AI initiatives that we've made reference to or we're rolling out in 2026 are really going to help us identify opportunities in G&A. And we talked about Abilene net screen area that's also going to create some opportunity for more efficiency in the cost of our business. So -- the costs are a huge area of focus for us. We're attacking it from a lot of angles, and we're optimistic about the momentum we're building on our strategy and cost.

Your next question is from the line of Chris Wetherbee from Wells Fargo.

I guess maybe kind of curious if you could elaborate a little bit on what you're hearing from shippers as you're going through the beginning of bid season here, I guess, maybe specifically around capacity reductions, I guess, is there any sense of urgency from the shipper community to kind of think about covering some capacity needs as we're -- and maybe doing that on the earlier side, just kind of thoughts about how they're thinking about it. And then maybe related to that, I know you're doing a lot of work on the cost side. But as you think about the potential for driver wage increases through the cycle, obviously, the enforcement focus is on the driver side, and we're seeing that pool shrink. Do you think there's risk to the upside in terms of the traditional relationships that we think about a point of price, getting a portion of that to the driver? Has that changed at all as we go through the cycle, given what this enforcement action looks like?

Well, so Chris, on the shipper commentary, I mean, look, we're in early bid season. So everyone's always negotiating at this point. So I think there are certainly some that acknowledge that there is potential risk, some would push that risk out a little bit further into the year and may not feel some of that pain today. There's others that recognize that they most likely want to get ahead of it, especially if they have a higher percentage of their freight running through brokers or where the real exposure is. But again, it's still kind of early on where it's more of a discussion point rather than then taking real action on it right now. So I think we -- again, we're going to watch that. We continue to have dialogue. And again, they may not always be so upfront with us because we're in the process of negotiating rates.

On the driver front, this is always a question we get, hey, when rates go up, do you have to share that with driver wages. And I think historically, we would typically share, it's probably around 25% to 30% of our revenue per mile would go to drivers. Now in this cycle may feel a little different. There's a lot of margin to restore given how low that margin has gotten over the last few years. And so I think we've got to take some of that margin to the bottom line before doing a blanket driver wage increase, unless we feel like there's enough momentum where we're going to have plenty of revenue per mile to share.

But we just watch are we able to hire? Are we able to retain? I think our drivers get just a noticeable increase in pay just from running more miles on the truck. And so typically, when in an environment that's improving, you're going to get better utilization, which you're already seeing that out of our trucks, which just naturally raises the wages for our drivers. But hey, if we find the driver market gets really tough kind of given the -- where the -- with the tightness of capacity and we are compelled that rates are going to be improving, then yes, we may share with the drivers so we can ensure that we have enough capacity to meet the needs that our customers have in terms of operating loans.

So it's pretty dynamic. And hey, we wouldn't -- we would look at it in pockets, and we would look at specific markets rather than historically we've done across-the-board approaches. We would be very dynamic based on the region and where we have challenges, retaining and hiring and that's where we put our resources.

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

Adam and team just want to revisit a couple of your comments, right? So you said recent trends in truckload have continued into the early part of January, modestly better than typical seasonality. So I just want to understand, is that are you making a comment on anything demand-led? Is that just the capacity side? Is that weather? So maybe dig into the -- if there's anything in there on demand side as we go into the first quarter and your thoughts as we go forward? And I guess the same for LTL, it seems like you said something modest volume improvement. Is that just share gains? Or are you making a demand commentary there, too?

Yes. I think on the truckload side, what I'm referring to is every day will come into the office, and we get a look at the market in terms of the relationship of number of loads versus number of trucks that we have available. And in the first quarter, a lot of times, you're having to dig out every morning needing additional loads to feed the trucks that are available to operate a load. And so every morning if we get these maps, and we have -- it gives us an idea of the kind of the balance of the network. And so early part of January, that -- those maps are far more balanced than we would typically see in the first quarter, meaning you have -- you're very close to relationship of having enough loads for every truck that you have available, and you're not having to book as much same-day freight.

It's hard to know if that's demand or capacity. I would lean towards capacity can simply from the third-party data that we have that's available out there where low tenders have -- are still relatively low, even if you look at the last 3 years, yet rejections are higher. And that would align with what we're seeing on our rejections as well. Now our low tenders are still better. So I do feel like there's maybe a flight to quality in terms of customers shifting loads to the asset-based carriers. But from an industry perspective, I think it's for driven by capacity tightness versus demand, which I think is encouraging, because that helps me any uplift in demand is just going to be that much stronger for the market. It will be that much more disruptive potentially.

And then on the LTL side, I would say, I think it's just the -- we always see some real softness at the tail end of the fourth quarter, particularly with our customer base. We're a bit more retail than maybe some of the larger peers out there. And so we're just seeing that shipment count restore to kind of more normalized levels. But I don't know that we've really seen a big shift in demand that I would call out. And so for us, we're looking at through the bid season, can we pick up share through the customers that are newer to us, but again, they are larger shippers that now we have an opportunity to participate with.

Your next question comes from the line of Scott Group from Wolfe Research.

So Adam, just a bigger picture. If you look back at prior cycles, you've gotten a lot of price, but utilization usually goes down, maybe see the tractor counts go down or something like that driver pay goes up a lot. It sounds like from the -- one of the last questions, you don't think we have to give up maybe as much driver pay this time. And then maybe the other piece, like do you think you can get a -- can we get a pricing cycle where we also get utilization at the same time. And so if we have good price and utilization, maybe we don't have as much driver pay. It sounds like you're doing some stuff on technology productivity. Like could that relationship between price and margin being much better, meaning like if historically, 10 points of price is 5 points of margin, do you think it's a lot better this time around?

So Scott, I mean, our goal, what we intend to accomplish is to get some utilization along with price. So then, yes, that price goes a lot further because you got that utilization that also helps cover your fixed costs. And so I don't think we -- like if I look at the last cycle with COVID, I mean, the labor market was totally disrupted. And so I think that made it very challenging to source drivers. And so then obviously, rates were incredibly high. And even that shifted our network to where we were doing shorter length of haul at higher rates because that's where the needs were with the customer. So I think it really distorted the metrics if you're trying to look at it historically. I look at this as maybe a more typical cycle and the adjustment up. And I would think that we would be able to achieve better utilization with our equipment.

The key is going to be what happens in the labor force, but we believe that with the academies that we have, the ability to train drivers at a very high level and reducing competition from other academies that I think are not compliant, that we'll be in a good position to source drivers, get volume, while rates are improving.

Scott, I would just make one point that one thing we have not had in the prior cycles is we spent most of 2025 developing the capability to match up our demand between our different brands, between our large truckload brands and even LTL and truckload to find efficiencies where there's excess capacity in workplace and demand, we can match them up. That is not a toolkit we've had at scale with the level of sophistication that we're going to go into this next cycle with. So I think that's going to help infill in some of those gaps to drive utilization up.

Scott, we appreciate you sticking to 1 question. Okay. So yes. So that will conclude our call. We appreciate all the interest and all the questions. If we didn't -- if we weren't able to get to your question, you can dial (602) 606-6349, and we'll try to get back to you as soon as possible. Thank you, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.

Good afternoon. My name is Ina, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Knight-Swift Transportation Third Quarter 2025 Earnings Call. [Operator Instructions] Speakers from today's call will be Adam Miller, Chief Executive Officer; Andrew Hess, Chief Financial Officer; and Mr. Brad Stewart, Treasurer and Senior VP of Investor Relations. Mr. Stewart, the meeting is now yours.

Thank you, Ina. Good afternoon, everyone, and thank you for joining our third quarter 2025 earnings call. Today, we plan to discuss topics related to the results of the quarter, current market conditions and our earnings guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to last 1 hour.

Following our commentary, we will answer questions related to these topics. In order to get to as many participants as possible, we limit the questions to 1 per participant. If you have a question, a second question, please feel free to get back in the queue. We will answer as many questions as time allows. If we are not able to get to your question due to time restrictions, you may call (602) 606-6349.

To begin, I will first refer you to the disclosures on Slide 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. Before we get into the slides, I will hand the call over to Adam for some opening remarks.

Thanks, Brad, and good afternoon, everyone. The third quarter saw freight markets still grappling with uncertainty, with many shippers hesitant to take much risk and freight demand trends that continue to deviate from normal seasonal patterns. However, the third quarter brought more proactive customer discussions around peak season projects than we have seen since 2021. Some of these involve customers who did not express any such needs last year. Some peak projects are already underway, while our base level of normal demand through the first 2 weeks of October have remained stable and have not yet begun a seasonal build.

Last year, some peak projects developed almost overnight during the fourth quarter, and we still do not have visibility to forecast that, that will happen again this year. With still some uncertainty around how volumes will build during the quarter, we are taking a more cautious approach to our expectations for the fourth quarter. Despite some of the uncertainties in the present environment, we see a number of factors that make the opportunities of the next cycle more compelling for our businesses.

First, on the demand front, despite all the noise from tariffs and the shift in freight ordering patterns, demand has remained relatively stable throughout our different Truckload brands. We believe the value we deliver through our scale, flexibility and service has allowed us to maintain most of our volume in a challenging market. Early in the new bid season, we are seeing less churn of incumbent lanes and growth in awarded volume with low single-digit rate improvement.

This contrasts against last bid season where a similar pricing approach produced more churn in incumbent lanes and lower volume awards as some shippers were still pursuing discount offerings, especially through brokers. In recent weeks, more customers have been upfront about reducing the numbers of carriers they want to work with and are focused on increasing volumes with quality asset-based carriers. And as far as capacity, we expect ongoing attrition on a number of fronts that include the recent and developing regulatory focus on enforcement of standards related to English language proficiency and the qualifications and controls around the issuance, renewal and [ revocation ] of non-domiciled CDLs, which we believe may have an outsized impact on the lowest price capacity in the one-way over-the-road market.

Second, ongoing carrier downsizing [ and failures ], especially among medium-sized carriers who invest in safety and compliance but do not have the scale to overcome cost inflation and the unsustainably soft price environment our industry has faced over the last 3 years. Third, we see large carriers continuing to pull back from over-the-road service in favor of dedicated opportunities given difficult business conditions in the one-way market. And fourth, we see private fleet growth plateauing and likely reversing course as capital assets increasingly come up for replacement and at higher prices.

And while the spread between the cost of internalizing the service versus outsourcing it to the market is historically high. We believe the majority of the capacity attrition from these factors will be concentrated in the one-way market, which is where we do roughly 70% of our truckload business. There are signs that the recent regulatory focus is starting to have an impact on capacity availability but it may take some time before that tightness is consistently felt across the market, absent an increase in demand.

If enforcement efforts are sustained and effective, there could be a meaningful shift in the supply-demand dynamic in 2026. Such developments would bring a more favorable setup for carriers and one particularly beneficial to our truckload business given our unique ability to deliver responsiveness at scale and with industry-leading [ trailer pool ] resources that provide valuable flexibility to our customers. Also, the improvements we have made on our cost structure during the down cycle provide great opportunities for margin growth in a stronger market.

Beyond our Truckload segment, our Logistics business is well positioned through its complementary relationship with our asset business to augment revenue capture and to leverage our tech-enabled power-only services to enhance the return on our trailer assets. Further, our intermodal business targets additional progress on costs, network management and equipment utilization and look forward to leveraging the new chapter in our rail partnerships in an improving market.

Now shifting gears to our LTL business. We're excited to share that we are adopting the AAA Cooper brand across our entire LTL business. The consolidated branding recognizes that we are already one business operating seamlessly on one system through one network, delivering a cohesive solution to our customers. We are continuing to grow our LTL network, customer base and volumes, and we are committed to doing this while providing strong service levels. As we build our network, we are capturing growth opportunities with new LTL customers as well as from some of our long-standing truckload customers.

This growth has come during the time when the industry volumes remain under pressure. Although we have felt some cost pressure during our network expansion, we remain focused on improving margins and have multiple initiatives underway to accelerate improvements in cost efficiencies and operational execution as we adapt to the growing network and customer base in a fluid market. So with that, I will turn it over to Andrew for our overview on Slide 3.

Thanks, Adam.

The charts on Slide 3 compare our consolidated third quarter revenue and earnings results on a year-over-year basis. Before getting into the comparisons, it's important to note that our GAAP results from the current quarter include $58 million of significant unusual items. Included in our GAAP results are $28.8 million of trade name impairments as a result of our decision to combine our LTL brands under one trade name, $6 million of real property lease and software impairments, a loss contingency of $11.2 million related to the 2024 exit from the third-party carrier insurance business and $12 million of higher insurance and claims costs at US Express primarily driven by settlement of 2 large 2023 U.S. Express auto liability claims, one of which occurred prior to our July 2023 acquisition and the other shortly thereafter.

The impairments have been adjusted out of our non-GAAP results, as shown in the reconciliation schedules following this presentation. However, the loss contingency and the claim settlement accruals have not been adjusted out and negatively impacted our adjusted operating income by $23.2 million and our adjusted EPS by $0.10. Revenue, excluding fuel surcharge, increased by 2.4% and operating income declined by $31.1 million or 38.2% year-over-year, largely due to the $58 million of unusual items noted above.

Adjusted operating income improved by 14.2% year-over-year as earnings growth in our LTL warehousing and leasing businesses more than offset the loss contingency and U.S. Xpress claims costs in the current quarter. GAAP earnings per diluted share for the third quarter of 2025 were $0.05 compared to $0.19 for the third quarter of 2024. Adjusted EPS was $0.32 for the third quarter of 2025 compared to $0.34 for the third quarter of 2024, a 5.9% year-over-year decrease primarily as a result of the $0.10 negative impact of the loss contingency and claims accrual noted above.

Consolidated adjusted operating ratio was 93.8%, which was flat year-over-year and sequentially. The effective tax rate of 47% on our GAAP results was 15 percentage points higher year-over-year. The effective tax rate of 29.6% on our non-GAAP results was 30 basis points higher year-over-year and higher than the 27% to 28% range we had previously projected due to deferred tax impacts of combining our LTL legal entities.

Slide 4 illustrates the revenue and adjusted operating income for each of our segments for the quarter. Overall, our LTL business has become a larger share of our consolidated revenue through our ongoing network expansion over the past 2 years. For the third quarter, the LTL segment held steady sequentially at 20% of our consolidated revenue, its highest share since our entry into this segment in 2021.

Our strategy of building diversification in our enterprise is complemented by our strategy to enhance revenue synergies across brands and lines of service. To this end, we are applying intentional leadership to drive powerful collaboration. We continue to develop and deploy technology to foster seamless connectivity, enabling us to leverage excess capacity in one brand against excess demand in another, which effectively increases our ability to surge and to capture greater share of market opportunities while solving for network imbalances.

To be certain, we have leaned on each other before, but these advances make these practices systemic, more responsive and scalable. Now we will discuss each of our segments, starting with our Truckload segment on Slide 5. Our Truckload segment navigated atypical demand patterns in the third quarter to generate miles that were flat with the second quarter as we had expected. While freight flows and spot rates did show some progress in normalizing after an unusual second quarter, the partial recovery in these dynamics pressured our revenue per mile and operating margin relative to our expectations for the third quarter.

Additionally, while we made further meaningful progress reducing fixed costs in our business, the quarter saw headwinds on variable costs such as insurance and claims, health insurance and fuel. On a year-over-year basis, revenue declined 2.1%, driven by a 2.3% decrease in our loaded miles. Revenue per loaded mile, excluding fuel surcharge and [ intersegment ] transactions was up slightly year-over-year and sequentially improved 1.1% over the second quarter.

Adjusted operating income declined $7.3 million or 15% year-over-year, largely as a result of the $12 million of higher insurance and claims costs at U.S. Xpress which was a $0.05 negative impact to adjusted EPS. These accidents occurred prior to our integration of U.S. Xpress' hiring, safety and claims management practices which have since begun to produce meaningful improvements in safety metrics. The third quarter combined adjusted operating ratio was 60 basis points higher year-over-year as the U.S. Xpress claims noted above negatively impacted this metric by 110 basis points and offset ongoing progress on our cost structure.

Excluding U.S. Xpress, the legacy Truckload brands operated at a 93.7% adjusted operating ratio. While these claim developments disrupted U.S. Xpress' trend of improving results, we expect this business to return to profitability in the fourth quarter and be back on track to make further progress closing the margin gap with our legacy Truckload brands. Miles per tractor improved 4.2% year-over-year as a result of our efforts to drive productivity as well as our reduction of underutilized assets over the past several quarters.

Sequentially, tractor count was flat within the second quarter -- within the second -- third quarter -- was flat from the second and third quarter. We continue to make tangible progress in improving our cost structure to position our business to generate meaningful returns as market conditions recover. We remain committed to disciplined pricing, [ intense ] cost control and quality service.

All right. Moving to Slide 6. Our LTL business group revenue, excluding fuel surcharge, 21.5% year-over-year with shipments per day, up 14.2% as we lap the acquisition of DHE on July 30. Revenue per hundredweight, excluding fuel surcharge, increased 6.1% while revenue per shipment, excluding fuel surcharge, increased 6.6%. Weight per shipment increased 0.4% for the first year-over-year increase in this metric since our 2021 entry into this business.

Our GAAP results for this segment include a $28.8 million trade name impairment as a result of our decision to combine our LTL brands under the AAA Cooper trade name. Adjusted operating income increased 10.1%, marking the first year-over-year improvement in 5 quarters as volumes remained sequentially stable, while operational and cost initiatives begin to gain traction. The adjusted operating ratio was 90.6% for the third quarter, which was an improvement of 250 basis points from the second quarter, counter to typical seasonal degradation.

Some of the areas where we're making early progress on costs are in reducing purchase transportation as we deploy our own staff and equipment, optimizing pickup and delivery through our new technology implementation and in refining our staffing levels and scheduling across locations as we gain more visibility into our evolving freight mix. During the third quarter, we opened 1 new service center and replaced 2 more with larger sites, bringing our growth in door count to 8.5% year-to-date and 10.2% year-over-year.

Two weeks into the fourth quarter, LTL demand appeared softer than the normal fourth quarter seasonal slowdown. This may be short-lived, but we are stepping up the yield and cost initiatives we began launching last quarter to respond to market developments. We intend to take action where prudent to mitigate margin pressure in the short term, but without sacrificing our ability to respond to growth opportunities through ongoing bids as discussions around bids currently in process are encouraging.

We believe we have opportunity to deliver improving margins through growth, cost control and maturing operations and have confidence in our plans to achieve this. Our solid service levels, growing customer base [indiscernible] on pricing provide a compelling runway for the value to be generated by this business.

Now I will turn it over to Brad for a discussion of our Logistics segment on Slide 7.

Logistics volumes were down year-over-year, but generally [ built ] throughout the third quarter after the lull seen during the second quarter. This segment experienced brief market tightening around the 4th of July and at the end of the quarter. Revenue for the third quarter declined 2.2% year-over-year, driven by a 6.2% decline in load count, partially offset by a 3.6% increase in revenue per load. Despite the decline in revenue and load count, our disciplined approach to pricing and cost management helped us drive slight improvement in the adjusted operating ratio to 94.3% and to grow adjusted operating income 1.9% year-over-year.

We anticipate opportunities for further profitability gains ahead as we are early on in deployment of technology tools to drive better capture of opportunities and more efficient execution, which we expect will contribute to earnings beginning in 2026. In recent weeks, we are seeing what we believe are the early impacts that the renewed emphasis on regulatory enforcement is beginning to have on third-party carrier capacity availability.

The impact is not yet consistently felt but there has been a noticeable reduction in capacity availability and pressure on gross margin in certain lanes and types of service. If such trends were to continue, this could cause further pressure on gross margin in the near term as capacity erodes, and it could cause pressure on brokerage volumes if shippers increasingly rely on asset-based relationships.

However, given the relationship between our logistics segment and our asset-based truckload segment, we believe these dynamics would ultimately benefit both our asset and logistics businesses.

Now on to Slide 8 for a discussion of our Intermodal business. The Intermodal segment improved its adjusted operating ratio of 160 basis points year-over-year to 99.8%, driven by a 3.5% increase in revenue per load and improvements in efficiency and network balance. Revenue declined 8.4% year-over-year on an 11.5% decrease in load count, partially offset by the increase in revenue per load. On a sequential basis, after seeing load count declined in the second quarter on import softness and volume churn through bid outcomes, our Intermodal segment produced an 8.2% sequential recovery in volumes during the third quarter to reach the highest quarterly load total year-to-date.

This was largely driven by more favorable bid awards taking effect, even while achieving a 3.4% sequential increase in revenue per load. The adjusted operating ratio improved 430 basis points on an 11.9% increase in revenue compared to the second quarter. We remain focused on delivering excellent service and driving appropriate returns through cost control, network balance equipment utilization and through growing our load count with disciplined pricing.

Slide 9 illustrates our All Other Segments. This category includes support services provided to our customers, independent contractors and third-party carriers, such as equipment sales and rentals, equipment leasing, warehousing activities, insurance and maintenance. For the quarter, revenue increased 29.9% and operating income increased 86.4% year-over-year, primarily driven by growth in our warehousing and leasing businesses.

Additionally, the current quarter GAAP and adjusted results include a loss contingency of $11.2 million or a $0.05 negative impact to our adjusted EPS, representing estimated additional premiums related to our 2024 transfer to another insurance carrier of the outstanding auto liability claims from the third-party carrier insurance business we closed in March of 2024. The transfer of these claims was completed in 2 separate tranches, each of which carried the potential for up to $14 million of additional premium being owed as well as potential recovery of some premiums we paid depending on claim development over the succeeding 4-year period.

The change in the current quarter exhausts the additional premium exposure on the first tranche. Now on Slide 10, we have outlined our guidance and the key assumptions, which are also stated in the earnings release. Actual results may differ from our expectations. Based on our assumptions, we project our adjusted EPS for the fourth quarter of 2025 will be in the range of $0.34 to $0.40.

In general, this guidance for the fourth quarter assumes that current conditions persist and that we experienced some seasonality. The key assumptions underpinning this guidance are listed on the slide. We project that truckload operating income will improve sequentially, largely driven by operating margin improvement on fairly flat revenue. This assumes modest sequential improvement in revenue per mile while utilization sees a slight seasonal decline from third quarter.

For LTL, we anticipate continued year-over-year revenue growth and adjusted operating margins that are similar year-over-year in the fourth quarter. We project a sequential climb in revenue and earnings from our logistics segment as compared to the third quarter and for intermodal contribution to remain fairly stable as compared to the third quarter.

For our all other segments, we expect a seasonal slowdown in earnings for this category and the fourth quarter will result in roughly breakeven operating income before including the $11.7 million of quarterly intangible amortization. And finally, we project our full year net cash CapEx will be between $475 million to $525 million and that our effective tax rate on adjusted results will be between 23% to 24% for the fourth quarter. This concludes our prepared remarks. And before I turn it over for questions, I want to remind everyone to please keep it to 1 question per participant.

Thank you. Ina, we will now open the line for questions. .

[Operator Instructions] Your first question comes from the line of Scott Group from Wolfe Research.

So I have just a numbers question and then just a bigger picture. So am I just understanding this right, like the clean nonreportable is like $35 million in Q3, and you're seeing breakeven in Q4. Just it's a big drop. I just want to understand if I got that right. And then just bigger picture, like all like the regulatory stuff that you're talking about, like, what's your view of how much capacity this takes out, how much of this we're seeing already in the market? How long does it all take to play out? And then maybe just with that, Adam, you made a comment about private fleet growth reversing, which I think would also be a big deal. Just what's telling you that, that's happening that would be helpful.

So Scott, I think that's 3 questions maybe. We'll try to wrap that together as one. I don't want to set a precedent here. Yes, on the All Other, that is correct. You're reading that correctly. And I think we signaled that, I think maybe earlier this year, that's been the normal seasonal pattern. It's really driven by our warehousing business where we have a lot of work that we do that's somewhat front loaded in the year, and there's a lot that just doesn't happen in the fourth quarter.

And that's how that would have played out last year as well. We were trying to get that a bit more smoothed out, but that didn't happen this year. So that would be the case. And I think that's how we've modeled that even in previous years. In terms of the regulatory question. I think there's a lot of unknowns there. We've seen several numbers out there. I think the FMCSA has projected that there was over 200,000 nondomiciled CDLs that were issued.

I think a good number of them were probably not issued correctly. I think the enforcement may vary by state. I know that we're seeing certain states revoke CDLs now, and we're seeing letters come in across our industry. We have a very small number of drivers that have done domicile [ CDLs ], I'd say maybe a few dozen. And we've seen some activity there as well, even for those that were issued, we believe correctly.

And so I don't know, it's going to be interesting to watch, and we'll watch it very closely. I think you've seen a lot more enforcement on the English language proficiency, we're seeing the violations ramp up quite a bit over the last couple of months when that's been really pushed. And now that you have some states that are having federal funding withheld, I think that's going to push some states that have been a little bit resistant to push some of these regulatory changes that may feel like they got to act based on the new laws that have been issued. So when I look at certain markets, we could certainly see pockets where carriers are not willing to take longer lengths of haul because of the risk of going through more checkpoints, certain carriers that only want to stay within certain states where they feel like the enforcement will not be as strict. And so that's created some challenges on sourcing capacity in our logistics business, and I think we've seen that from certain customers as well.

We've had some customers come to us with projects, but with some requesting that nondomiciled drivers -- nondomiciled CDL drivers are not utilized for the project because of just what concerns could come from that if there were an incident. So it does feel like this is building. And it's the nondomiciled issue on top of the English Language proficiency that I think early on, I didn't feel was going to move the needle as much on capacity, but it certainly feels like the momentum is there, and we're beginning to start to see some tightness in certain markets. And I only -- and I believe that's only going to continue. Did I hit that, Scott?

Yes, that was -- I mean I asked about the private fleet stuff, too, but if you want to maybe talk to that later. think.

Yes, I think that's just an anecdotal dialogue that we've had with many of our customers who -- and some of them have ramped up fairly large private fleets and others that built up a private fleet not nearly as large as others, during the pandemic, and they're just seeing that they're probably not optimizing the capacity that they have and that there's probably more value to outsource it than to do that internally. And so as these trucks hit the year age and they have to determine if they want to refresh the trucks finding that many of them are just shrinking that capacity and outsourcing it where it makes more economic sense for them. .

I think the data on the private fleet cost per mile, how it's been pressured over the last few years if you compare that to the [ 4 ] higher cost per mile. It's quite different than it has been historically. And so make it an economic case for private fleets more challenging, especially as you're having to refresh the fleet. I think that economics are changing a little bit. So we'll see how that plays out, still kind of to be determined, but we think that we might see a shift there..

And your next question comes from the line of Richa Harman from Deutsche Bank.

I wanted to focus on LTL. I'll ask maybe a near-term question and then a longer-term one. Andrew, I think you said softer demand was noted for Q4, but also that your bid discussions are encouraging. And then you guided to flattish margins in Q4, but that would be significantly worse than normal seasonality. After you had very strong results in Q3, I think you're going to be the only carrier we cover that reports sequential margin improvement in Q3. So maybe help us square the messaging there and what's happening in Q4 and your guidance. And then just longer term, Adam, in the past, you've talked about potentially unlocking over time, the unique synergy opportunities from being the only carrier that has both a strong TL franchise and growing LTL operation. Maybe elaborate on that as you've gotten some traction with LTL. How do you feel about that synergy potential, what it could look like [ with anywhere ], et cetera?

Sure. All right. We'll touch on that, Richa. I think on the near term with LTL, I think what we wanted to comment is just that we've seen a little bit of softness going into the first couple of weeks of the quarter. It's hard to read into just a couple of weeks, but we felt it was noteworthy to share that and know that we're reacting to that. And we're making the adjustments where we can. A lot of that will be on the labor front. But we've built the network to handle a certain amount of volume, and we've been building into that volume over the last few quarters.

And to take a step back, it does put a little bit pressure on the cost front. And so we're going to manage what we can over the near term. But when we look at what the bid season and how that's building, we feel encouraged by what opportunity line in front of us that may start to go into effect in late first quarter and into the second quarter. So we want to be cognizant of being prepared to handle those volumes. And we talked about where we expect the OR to be from third to fourth.

And if you look at how we trended last year, that was -- that would be pretty consistent with the degradation sequentially given the mix of customers that we work with. We tend to have a real slowdown in the back half of the quarter, particularly in December. And so that would be something that we just have to navigate. But again, we're taking a lot of steps towards just managing the cost where it makes sense and aligning that management with where our shipment volumes are.

But again, as we build out this network, we still feel very encouraged that we'll see growth in our existing network that we have without opening many properties here in the near term. And then we think about what the capabilities are with LTL and truckload and the size that we have, we're finding real opportunities to leverage empty lanes between both brands where something might be a great fit for LTL partially on a lane. And so we can move a load halfway with truckload, transition to our LTL fleet to pick up some savings from not running empty.

We're also seeing that our LTL business can leverage our Truckload fleet for any purchase transportation instead of going to the outside. We can handle a lot of that inside when they have surge needs. And there's just more and more that we're finding as we've scaled LTL, and we're building systems that allow us to find those opportunities, not just between truckload and LTL, but between all of our truckload brands.

And we've been doing a lot of this kind of manually with communication and just relationships. But we have systems rolling out that will identify these systems. These opportunities quickly and allow us to seamlessly share those across our businesses. So I think we're in the early innings of finding opportunities to work together on truckload and LTL and I think you were just going to grow from here.

I would just add a couple of points there. So I think the Q3 to Q4 seasonality may look a little stronger for us than you're used to kind of with our peers in LTL. And that's just, I got to mention the nature of our business. So it's obviously a extremely volume-sensitive business. So that puts pressure on the margins. But to kind of unpack a little bit what enabled us to improve our LTL margins by the 250 basis points from Q2 to Q3 with similar volumes, it's what we've been telling you, we've been doing all along. We're starting to see results in that.

And so I'll point out 3 areas that I think are probably important for you to understand, first in labor. So we've in-sourced a lot of our purchase trends, we reduced that as a percentage of labor by 2.3% [indiscernible]. Our headcount is down about 2.5%. So we've been able to kind of rightsize our head count as we understand the flow of our freight. And so the rate of work we're doing and increased discipline on scheduling in hours and building the [ dock ] efficiencies, are starting to translate into real improvement and our variable labor per shipment improved quarter-over-quarter by $2 per shipment.

So I would say those improvements are going to continue fundamentally outside of the volume that's going to obviously lever in the business. The other costs that we've talked about in prior discussions here is some of the inefficiencies that are -- we had just from the system and business integrations. So that's travel costs, contract labor, equipment rental, all of those were reduced in the quarter, and we expect that will continue.

We feel like there's opportunity there. We're seeing good results as we implement technology in our P&D and rolling that out, we feel like we're just starting to see the benefit of that, and we feel like there's a lot of opportunity there to see more benefit. And then there was -- we had some redundant facilities as we've upsized certain locations over periods of time, we've been replacing existing facilities and upgrading our facilities with larger facilities where we've had a yard or door pressure. So we've been carrying some duplicate costs in some areas. Now we were able to exit some of those prior locations. So those are kind of some of the structural costs that will come out as we get stability in our network. So all of those are going to continue. What you're seeing from Q3 to Q4 is simply a matter of the volume impact on the margins in a high fixed cost business.

Okay. Understood. Quick -- just a quick one. So the softness that you cite, that's mainly on the volume side in LTL. It's not from a pricing perspective, what you're seeing in the environment is still pretty rational and consistent with what it's been. .

That's absolutely right. Pricing has been disciplined. We've not seen any pattern of change there. What we're seeing is some softness. Now it's early in the quarter. We'll see how it persists through the quarter. But these first few quarters have definitely signaled some softness.

And your next question comes from the line of Ariel Rosa from Citi Group.

So I want to ask about some of the cost-cutting opportunities. You had mentioned, I think, last quarter that there was kind of increased focus on scaling that cost and looking for ways you can be a little more efficient. I'm just wondering kind of where you are on that in terms of progressing on that for each of the segments.

Okay. Yes. Let me I kind of focus on that last question on LTL. So maybe I'll spend a little time addressing our approach to our cost in our Truckload segment. So let me break it down for you a little bit because the approach is different by area. I just want to hit a few areas. So let me talk about fixed costs. They represent maybe 1/3 of our costs in truckload and obviously, very lever really well in the business.

We really feel good about the progress we've made there. We've reduced our fixed cost spend cost per mile percentage of revenue, both year-over-year and quarter-over-quarter by multiple percents. And so we -- the progress there on our cost -- on the fixed cost is meaningful, and we think permanent. So about half of that is equipment based, and that is obviously a big driver of our costs. And so we our strategy around equipment is multipronged.

We are kind of analytical approach to equipment life cycle, how we procure our asset utilization improvement that you're seeing in our miles per truck numbers and our ability to reduce unseated trucks and then maintain optimal trailer tractor ratios. We got a lot more miles we can put on our trucks. And we think that's going to -- with volume, it's going to really give us some leverage opportunity. But our goal is to reduce our equipment cost per mile year-over-year each quarter. And so we're seeing good results there. The second area in our fixed costs that are G&A and overhead, we're deploying significant initiatives, lean initiatives, technology-based initiatives, that's AI, but that's other areas as well, with the goal to offset inflation, reduce our spend in G&A and overhead costs year-over-year every quarter.

And so we saw good progress sequentially in this area. And we really take a different approach on our facility costs, our footprint and put a lot of processes in place to understand fundamentally the cost there. And I would say we have the expectation that we're going to reduce our cost per square foot lower year-over-year in this area. And so that's where we're focused. Now on the variable costs, that's the other 2/3. You got to think about that as driver pay, maintenance, insurance, [ fuel ], those are your big ones, right? So in this area, we've really we put in place [ management ] continuous improvement initiatives with the goal to offset inflation and reduce our variable cost per mile.

And so in each of these areas, we have a different strategy deployed to do that. And so in maintenance, we're managing how we do things internally versus externally and really understanding the cost drivers of the truck and fuel. I really feel good about the underlying metrics in fuel in our miles per gallon results that we're seeing. But we're going to see that number kind of fluctuate a down a little bit quarter-to-quarter, and we saw a little bit of that in this quarter. But underlying it, we think our operating performance is good there. We approach and create a culture of accountability there.

Insurance, I will mention, I think, is a big area to focus because that's been hyperinflationary and really pressured. And what you're seeing in that [indiscernible] depend on some degree of normalcy in terms of what we would expect in claims expense over time. What we're seeing is the way claims costs are settling and developing, you're going to see kind of more volatility than normal, I believe, in this area. So -- and you saw some of that translate into our results this quarter. But we -- again, we think what we're doing there is really going to start to pay effect. Our [ DOT crash ] performance is on track for that to be our best ever over the last 3 years and LPL this year is going to be the best ever for our DOT [ crash ] performance. So as we really focus on these metrics, invest in technology to support this we think we can turn insurance costs to a competitive advantage. So it's a complicated question because there's -- each area requires a different approach, but we have -- our focused -- our organization is really focused on this to create a groundwork of sustainable, constant improvement and with the goal of seeing costs become an area where we can expand our margins over time.

I would add...

Yes, go ahead, Adam. Sorry.

Yes, [ we just said ] we didn't touch on intermodal. I mean that's an area where we've made, I think, a good amount of progress. And some of the areas we will be focused on is investing in chassis in certain markets, and that's given us some real operating leverage. And as we've improved the volume in that business, we've seen more of that volume translate to improved margins. And so we look to continue down that path. And then we're finding ourselves being able to balance our network a lot more effectively as well. And so that's another area that we're focused on, on the intermodal front.

Just as a follow-up, if you don't mind, I'm trying to get a little bit more clarity on like how far along you are in terms of implementing these initiatives and to what extent it's kind of showing up results -- showing up in results? And then how much it can drive kind of improvement in margins independent of rate improvement that might still be on the table?

No, I don't think -- look, I think it's -- I think our efforts in this have been earnest for the last year. It Still feels like early stages, particularly around the technology-enabled efficiencies that we expect to really translate in our G&A and overhead costs. So that's probably take a little more time than I probably can allocate here to really unpack that. But we feel like that is -- there's going to be a lot of opportunity there to really impact our business. We've been hard at work at it and we think the results are largely ahead of us. We think 2026 is we're going to really start to see that impact our business.

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

Adam, just a real quick 1 on the -- a lot of confusion, I'm getting some messaging. Is the technical reason, any technical reason why adjusted EPS, [ you went with ] $0.32 versus the $0.42, which it seems like that's your actual number if you exclude the 2 charges. And then my question would be just revisiting your fourth quarter comments, talk about seasonal demand, you're seeing it or you're not seeing -- you did a lot of requests, but then said it's not building into actual seasonal demand. So a little mixed message, I just want to understand your message there.

Yes. I appreciate that, Ken. And give me an opportunity to clarify there. So for one on the $0.10 related to the third-party insurance and the U.S. Xpress settlement, historically, we have not adjusted those out -- and so we're just following the historic pattern that we've used for reporting, but we wanted to make it clear to the reader that we believe these are kind of abnormal type charges and -- but we want to -- we didn't want to change our approach to how we actually do the accounting. So we adjusted out the impairments, but not the claims expense If that makes sense.

Yes.

And then in terms of fourth quarter, so let me -- I know I was kind of saying 2 things at once. But what I would say is we went into this fourth quarter with some peak projects already awarded to us and some of those are already beginning to -- we're already beginning to execute. There's some that have maybe a later date than we would have seen historically, but still a project that is under the works that we've been awarded and are anticipating generating outsized margins. .

Now what I was trying to convey is kind of the more of just the broad-based demand in terms of I look at every day how we're booked out. We haven't seen that, that demand grow like we would typically see from third to fourth when you have a strong peak season. So there's kind of limited seasonality with certain customers, that projects that we already have. Now last year, we had a project or 2 that developed kind of out of the blue kind of mid-fourth quarter that really had an impact on our results, and that was largely in our Swift business. And we're having dialogue around that, but nothing has been awarded, nothing there's nothing that we can count on that's going to occur.

So that still may happen. But today, I can't sit here and say, yes, [indiscernible] we expect to see. So I guess what I'm trying to say is there is some peak seasonality. It's somewhat limited right now. That could change. But based on what we see, what we know we're expecting what we've already had in the pipeline to occur and really just limited seasonality beyond that.

Would that be in your range? Is that in the 34, 40? Or is that something that pushes beyond that?

The [ 34, 40 ] is what we know today. .

Okay. And then just a follow-up on an answer you gave before to Richa, just a real quick one. The OR balance, I was surprised at your answer there just because I thought you had start-up costs a year ago. Is that -- I know you're talking seasonality or Andrew was talking about it, but wasn't there a start-up cost in that number as well?

We had some start-up costs with DHE, but we also had accelerated load count that [indiscernible] count from third to fourth. And so today, where we stand, we've seen a little bit of softness in the first 2 weeks, and so we're just taken a conservative approach on if that continues, this is what we would expect margins to do with us taking steps to try to limit the impact on it.

That could change if we see -- those volumes begin to pick up. We don't know how much could be related to government shutdown, how much that flows through in terms of LTL shipments. But it was just kind of unusual to see a little bit of a slowdown. And our channel checks would indicate that the other LTL carriers are seeing something similar.

And your next question comes from the line of Jonathan Chappell from Evercore ISI.

Hopefully, the enforcement of non-domiciled CDL and English efficiency is a little bit better than asking one question or 1 question only. Here's my 1 question, Adam. a little interesting that Knight-Swift is [ still in support ] of UNP and NSC potential merger. I understand the benefits to your intermodal franchise given that you're on both rails as your primary carrier. But can you walk through what it means to your TL business, especially the long haul, 70% of your business is one-way spot market or one-way market. And it seems like that's the area where a lot of the revenue synergies are coming from, from this transaction. So maybe the puts and takes on why you're so supportive of that were on the surface, it looks like it could be more competitive to your core business?

Yes. So here's what I would say, without giving too detailed here, if it offers a cost-effective solution to our customers, we think that we would be supportive of that, considering that we have an intermodal offering that we could be there to support our customers with our rail partners. Now when I think about that long length of haul freight that you're referring to, quite honestly, that is not -- we don't haul a lot of that freight today.

We do a lot of the regional kind of the tougher freight that we know how to price and generate a healthy revenue per truck per day. The long length of haul is typically the cheapest freight out there because it's very attractive to the really small micro carriers that really care about just running miles on those trucks. And typically, those are some of the less safe carriers out there. And so I feel like offering a good solution, a better solution for our customers for that type of length of haul would not be detrimental to our business. It would be additive because we can provide that with intermodal because, hey, that's just not freight that we really compete for in our truckload business.

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

I'm going to stick with the 3 [ run-on correction ] strategy here. Just 3 follow-ups from me. One is just to confirm, you guys sound excited about what's happening on the capacity side, but you said it may take some time. So just wanted to confirm that you don't have anything capacity-wise in terms of tightness reflected in your guidance versus normal seasonality. Second, can you give us an update on where bid season has been going for '26 in your early conversations. And third, when will you know if those special projects for peak season materialize, you said mid-fourth quarter. So will you know in like 2 to 3 weeks' time?

Yes, we're going to have to change the rules for this. I think Scott started this off, not on the right foot here. Yes, I know. I know. So so I'll try to wrap that in as one question, right, in terms of just how we're seeing the market right now. Yes, I think, again, on the capacity front, we're seeing certain areas where there's some tightness and that's really we get some visibility of that through our brokerage business and when they're trying to secure certain capacity in some markets. It is starting to percolate, but it's not widespread yet.

But I do think over time, it's going to build. And I think there's probably a year or 2 time line when a lot of these kind of nondomiciled CDLs will expire. I think it will -- it won't be linear. I believe we'll see that happen maybe on the earlier part of that time line. So I do feel like we start to see that into '26. But really, that's not something that we're baking into the fourth quarter. so the fourth quarter is, hey, we have the projects that we've already had built into our system, some have already started, some will begin kind of -- could be late October, early November is really the time line. And some of them have a definite time but get pushed out if the customer still has the need, and we're starting to see see that with some of the projects we have already started. So it's still a bit of a moving target, but anything that's been awarded to us, we expect to start on target and on the date that we were awarded it.

I think -- the real question is, is there going to be something that builds in a meaningful way that we're just not aware of today similar to what happened last year. And so again, we're not baking that into our guidance. If that were to occur, that would give us some upside.

Your long on run on question there, Ravi.

And your next question comes from the line of Tom Wadewitz from UBS.

So I wanted to, I guess, get your thoughts on how much price maybe you need to improve truckload margin in 2026? Clearly, there's a lot of hard work going on on the cost side to control cost and reduce your cost per mile, which is great. I don't know if you anticipate any driver inflation or if that's just going to be another kind of muted year. But how do you think about inflation that you'll have to offset? And what kind of pricing do you think you need in 2026 to see some meaningful improvement in truckload margin?

Yes. So Tom, I think the way we're looking at it is I think early in the bid season where we don't see the tightness that could come in '26. We're going after securing healthy wins on the volume front, but probably getting the low single-digit pricing in the early part of the bid, which I think we shared in our prepared remarks. I think that, that pricing will grow if the capacity tightens like we think it will, but we wanted to start the bid season with a healthy amount of volume because when we can run our trucks at more volume and improve the utilization on the equipment, that certainly helps with that fixed cost absorption.

And so that helps drive our cost per mile down and manage any inflation that we may feel on the driver front, it's really going to be dependent on what we see in the market. If drivers get really tight, obviously, as an industry, we're to do something for drivers, but it's going to be market-driven, and we haven't determined if that's something that we're going to do yet. So I think the margin improvement that we expect to see in 2026 will be a combination of volume and price earlier in '26 will be probably more volume. And I think that half will be driven more by price. .

But if you get that low single-digit pricing, is that enough to get margin improvement? Or you need to see something stronger through the bid season than that to really get the margin improvement?

If that leads to additional volumes and productivity, then yes, that can improve margins. But if the market does tighten like we expect it will, we'll have opportunities on the -- in the spot market, where we'll shift capacity over there where we'll be able to see rates move much faster than what we've done on the contractual business.

And your next question comes from the line of Fred from Stephens.

I wanted to touch on exactly what you just talked about, was on the contract side. As we look at this tightening, I'm sure shippers are seeing a lot of the same things that you are. when you start your negotiations for next year, do you get any leverage when you talk about the tightening that you're seeing in the capacity coming out? Or are they still pretty hesitant to give you any credit for that right now as we sit.

That's going to be really case-by-case with our customers. There's some that try to look ahead and try to see what carriers they want in their portfolio if they do come across a tighter market and may be willing to do more on the contractual side to lock in that capacity. And then there's others that are going to take the approach of getting the best price possible in the near term and deal with any fallout in their network down the road. Our customers have different means of doing that. Some have many bids that they put out on a weekly basis where they have challenges covering certain lanes, and they allow carriers to bid on that in many cases, in a tightening market that becomes a premium rate that they pay to cover any holes. And then there's others that put things out on just spot boards that are transactional that we participate in. And then there's others that may come to us and try to secure more capacity at, I guess, more favorable rates for us to ensure that they don't have fallout.

pBut again, it's going to be customer by customer. And hey, we're fine with any approach that they want to utilize, and we work with them to provide them good service. to have flexible capacity at scale. And hey, we understand the market similar to what -- how they would, but some take different approaches. And so -- we just -- we always try to be very nimble in the market. So we don't lock in too much capacity. And so when there are changes, we could be one of the first carriers out there to capture what the market will bear. And that usually leads to us improving margins faster than the broader industry. .

Okay. So I think that hit our time for the call. We appreciate everyone who has joined. And again, we've got the phone number out there if we weren't able to get to your question, 602 606-6349. And again, we appreciate everyone who joined the call. .

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Good afternoon. My name is Constantin and I'll be your conference operator today. At this time, I would like to welcome everyone to the Knight-Swift Transportation Second Quarter 2025 Earnings Call. [Operator Instructions] Speakers from today's call will be Adam Miller, Chief Executive Officer; Andrew Hess, Chief Financial Officer; Brad Stewart Treasurer and Senior VP of Investor Relations.

Mr. Stewart, the meeting is now yours.

Good afternoon, everyone, and thank you for joining our second quarter 2025 earnings call. Today, we plan to discuss topics related to the results of the quarter, current market conditions and our earnings guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to last 1 hour. Following our commentary, we will answer questions related to these topics in order to get to as many participants as possible. We limit the questions to 1 per participant. If you have a second question, please feel free to get back in the queue. 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 will first refer you to the disclosures on Slide 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. Before we get into the slides, I will hand the call over to Adam for some opening remarks.

Thank you, Brad, and good afternoon, everyone. So the second quarter saw unprecedented trade actions, which brought a range of responses by shippers and volatility in freight flows that differed meaningfully from normal patterns and typical seasonality trends in the truckload market. This call for agility from our businesses and our people responded, demonstrating the flexibility of our over-the-road capacity and network in order to mitigate pressure on miles and earnings. While the import cliff that many anticipated did not prove to be a start, there was a general softness in freight demand for most of the quarter, especially on the West Coast. We did experience a mild lift in freight opportunities and projects near the end of the quarter but short of the normal seasonal build in freight volumes we typically see in the second quarter.

Given this backdrop, we are pleased that our truckload business was able to prevent a deeper decline in revenues while growing margins and operating income meaningfully year-over-year. Further, we were pleased to see our U.S. Express brand build on the profitability it established in the first quarter by expanding operating margins sequentially in the second quarter. While we continue to drive costs out of our businesses, we are careful not to sacrifice the competitive advantage we have through our industry-leading scale and the flexibility of our over-the-road model provides, allowing us to deliver distinctive value to our customers.

We are continuing to grow our LTL network, customer base and volumes and we are committed to doing this while maintaining strong service levels. We are encouraged to see customers responding to our service offering, awarding us robust growth at a time when industry volumes remain under pressure. At the same time, the cost of expansion and integration and our efforts to ramp staffing levels and fleet assets in anticipation of further growth are putting pressure on margins. We have multiple initiatives underway to accelerate the normalization of our operational fundamentals and the regaining of efficiencies in our cost performance even as our network and freight portfolio grow rapidly.

The fluid policy environment makes forecasting even more difficult than normal. We are staying close with our customers as the situation unfolds, delivering solid service and bringing our capacity and creativity to bear in responding to disruptions created by the shifting landscape. As we noted last quarter, changes in trade policy can create the need for shippers to react quickly in managing inventory levels which could benefit the fast, flexible nature of truckload service. As we begin to navigate the third quarter, we are in early discussions with a few customers regarding potential projects during peak season. It is too early to know if these discussions will materialize into additional business, but these types of conversations provide encouragement that one-way capacity is becoming less plentiful and more valuable when it could be provided with scale.

We cannot say when the freight market will finally turn, but we are confident that we are well positioned to make the most of the opportunities that the next cycle will bring our larger truckload business and heavy mix of one-way truckload service, our growing LTL business, our agile and efficient logistics business, which complements our asset model and the progress we continue to make structurally cutting costs out of our organization. With that, I will now turn it over to Andrew for Slide 3, our overview.

Thanks, Adam. The charts on Slide 3 compare our consolidated second quarter revenue and earnings results on a year-over-year basis. Revenue, excluding fuel surcharge, increased by 1.9% and our adjusted operating income improved by 17.2% or $15.2 million year-over-year. GAAP earnings per diluted share for the second quarter of 2025 were $0.21 and a 61.5% year-over-year increase and our adjusted EPS was $0.35, a 45.8% year-over-year increase as earnings improved year-over-year for the third consecutive quarter. Our consolidated adjusted operating ratio was 93.8%, which was 80 basis points better than the prior year. The effective tax rate of 29.2% on our GAAP results and 28% on our non-GAAP results, each lower year-over-year but were higher than previously projected.

Slide 4 illustrates the revenue and adjusted operating income for each of our segments for the quarter. Overall, most segments experienced pressure on revenue year-over-year with a soft freight environment, while our LTL segment continues to post strong growth driven by our ongoing network expansion, with the LTL segment reaching its highest share of the consolidated revenue since our entry into the segment in 2021. Our truckload and logistics segments also improved adjusted operating income and adjusted operating ratio year-over-year.

Now we will discuss each of our segments, starting with our Truckload segment on slide -- the flexibility of our over-the-road model and meaningful progress improving our cost structure helped our Truckload segment improved its adjusted operating ratio by 260 basis points and grow adjusted operating income 87.5% year-over-year despite loaded miles declining 2.8% and revenue per loaded mile, excluding fuel charge being flat year-over-year in an unseasonably soft second quarter. The lull and import-driven freight demand caused the absence of certain contractual freight, particularly off the West Coast. Shifting our capacity toward other freight lanes allowed our truckload business to grow loaded miles sequentially, but revenue per loaded mile, excluding fuel surcharge, declined 1.4% sequentially due to spot market weakness and because California headhaul markets were underrepresented in our freight mix.

Bid outcomes remained in the low to mid-single-digit increase range during the quarter. We anticipate that as freight flows normalize, our realized revenue per mile will recover. On a year-over-year basis, our truckload revenue, excluding fuel surcharge for the second quarter decreased 2.7%. We have been reducing the number of underutilized assets, which has resulted in a 6.6% decline in truck count. However, we continue to make progress on our utilization with miles per truck improving 4% year-over-year, making 8 consecutive quarters of year-over-year gains in this metric. We anticipate that tractor count will be fairly stable for the remainder of 2025, while we do have room to further reduce our trailer ratio as we continue to tightening our cost structure.

Our cost per mile for the second quarter improved year-over-year for the fourth quarter in a row despite the declining in miles. We are pleased with the progress of our U.S. Express truckload business, which even in a difficult environment, improved its operating margins by 200 basis points on a sequential basis. We are committed to disciplined pricing, intense cost control and quality service as we position our business for the current volatility and for potential opportunities that may arise.

On Slide 6, we provide a little more context on our cost-cutting progress in our truckload business. On a trailing 12-month basis through the end of the second quarter, our realized cost per total mile has declined 1.5% or $0.03 per mile as compared to the preceding 12-month period. This task was made more challenging due to the deleveraging effect of the reduction of miles during this period. Our efforts produced results in both fixed costs and variable costs. We made meaningful progress reducing fixed costs on an absolute basis, which has allowed us to keep our fixed cost per mile flat during the down market.

Our fixed cost progress prevented the typical margin pressure of a reduction in volumes, which allowed us -- allowed our reduction in variable cost per mile to drive margin improvement. While our lower fixed cost base may not be visible in our realized cost per mile currently, we believe these improvements primarily in areas of equipment, G&A and facilities are durable and will provide increased leverage from margin expansion as freight markets recover. Our reduction in variable cost per mile is the result of improved execution and process improvement, primarily in areas of insurance and claims, maintenance and fuel. We believe these new levels of efficiency will be sustainable as the market recovers, aiding to the recovery in our truckload earnings.

There are still a number of areas with additional opportunity for game, such as further leveraging technology-enabled efficiencies, rationalizing our capital asset profile, refreshing vendor relationships and terms and optimizing hiring processes and expenses. Our largest segment is already benefiting from the meaningful progress made thus far, and this progress should not only grow but be magnified once volumes recover.

Moving on to Slide 7. Our LTL business grew revenue, excluding fuel surcharge, 28.4% year-over-year as shipments per day increased 21.7%, which includes our acquisition of DHE. Revenue per hundredweight, excluding fuel surcharge, increased 9.9% year-over-year, while weight per shipment declined 2.6% year-over-year, but was stable sequentially. The adjusted operating ratio was 93.1%, a 110 basis point sequential improvement. Adjusted operating income declined 36.8% year-over-year due to the decline in operating margin primarily attributable to early-stage operations at our recently opened facilities as well as continued costs related to the integration of DHE. As context, quarter ending door count is up 7.8% year-to-date and 27.5% year-over-year.

Further, our strategic decision to maintain service during this rapid expansion requires that we onboard staffing and equipment costs in advance of anticipated volume growth. In steady state, where growth might be more in the single-digit range that incremental cost would be less noticeable. But in a business growing volumes on the order of 20%. That headwind is more pronounced relative to existing revenue levels. That is not to say that we accept the current pressure on margin in this business. We believe we have opportunities to deliver better margins and have confidence in our plans to achieve this.

While the LTL segment continues to post strong growth in customers and freight volumes across the expanding network, we are taking actions to accelerate the realization of cost efficiencies and to better align our resources with evolving volumes and freight flows. After 24 months of continuous geographic expansion and an acquisition, multiple initiatives are underway to return to our normal operational focus and fundamentals, including expanding our sales efforts to build volume and density into these new markets.

We have identified a number of actions to improve yield and reduce costs that should drive multiple points of margin expansion, in addition to the operating leverage benefits of growing into our network investments. Some of these initiatives include improving variable cost per shipment through refined scheduling and alignment of resources to volumes. Leveraging software currently being implemented for enhanced pickup and delivery planning and optimizing line haul routing and load factors. We anticipate the progress on these initiatives and ongoing new business awards will partially offset the normal seasonal pattern of operating margin degradation in the back half of the year and help expand margins in 2026.

We opened 3 new service centers and replaced another with a large facility during the quarter. Our pace of facility additions in 2025 is slower compared to 2024 as we focus on growing in our existing investments. But we continue to look for both organic and inorganic opportunities to expand our footprint within the LTL market. There is much work to do, but even more opportunity to be excited about. Our solid service levels, growing customer base and ground to make up on pricing provide a compelling runway for the value to be generated by this business.

Now I will turn it over to Brad for a discussion of our Logistics segment on Slide 8.

Thanks, Andrew. The Logistics segment experienced soft volumes for much of the quarter other than brief tightening around the international road check week in mid-May and the buildup to July 4 at the very end of the quarter. Revenue for the second quarter declined 2.6% year-over-year, driven by an 11.7% decrease in load count, largely offset by a 10.6% increase in revenue per load. Despite the decline in revenue in load count, our disciplined approach to pricing and cost management helped us improve the adjusted operating ratio of 70 basis points to 94.8% and grow adjusted operating income 13.3% year-over-year, with opportunities for further efficiency gains ahead.

We continue to invest in technology that has allowed us to seamlessly connect with customers to react quickly to spot market opportunities with real-time quotes. We have also developed trailer tracking technologies that enabled our logistics segment to more efficiently and securely utilize our trailer fleet for power-only opportunities, giving our customers drop and hook capabilities at greater scale. This has helped bring more resiliency to the margin profile of our logistics business.

Our logistics segment continues to provide additional capacity and scale to our customers while complementing our Truckload segment.

Now on to Slide 9. Our Intermodal segment was the most impacted by the decline in import volumes on the West Coast and saw revenue decline 13.8% year-over-year, driven by a 12.4% decrease in load count and a 1.6% decrease in revenue per load. Reductions in costs and improvements in network balance helped to partially offset the decrease in revenue and load count as the operating ratio was negatively impacted by 230 basis points year-over-year, which was the first year-over-year degradation in operating ratio in 5 quarters. As part of our efforts to improve the cost structure, we converted to private chassis in 5 markets during the quarter, completing an initiative we began early this year, which will benefit future periods as we no longer experience both rental charges and chassis ownership costs in tandem.

Further, we expect load count to grow sequentially as a result of recent business awards and as volumes in the West normalize from recent disruptions. We remain disciplined on pricing with over 80% of the year-over-year volume loss attributable to a few large accounts whose move were strictly based on aggressive price competition. Moving forward, we are focused on improving our execution, getting more out of our business awards and driving further network and cost efficiencies to position this business for profitability.

Slide 10 illustrates our all other segments. This category includes support services provided to our customers, independent contractors and third-party carriers, such as equipment sales and rentals, equipment leasing, warehousing activities and insurance and maintenance. For the quarter, revenue increased 9% and operating income increased 73.6% year-over-year primarily driven by growth in our warehousing and leasing businesses. The operating result also includes a $2.8 million charge for additional premiums related to the third-party auto liability risk we transferred in 2024, following the closure of this business in March of '24.

On Slide 11, we have outlined our guidance and the key assumptions, which are also stated in the earnings release. Actual results may differ from our expectations. We are again providing 1 quarter of forward guidance. Based on our assumptions, we project our adjusted EPS for the third quarter of 25% will be in the range of $0.36 to $0.42. In general, this guidance for the third quarter assumes current conditions remain fairly stable and that we experienced some seasonality. The key assumptions underpinning this guidance are listed on this slide though I won't cover them in detail here.

We project truckload operating income will improve sequentially largely driven by revenues and operating margin that has slightly improved sequentially. This assumes modest sequential improvement in revenue per mile, supported by normalizing freight mix, while milling utilization are largely flat with the second quarter levels. For LTL, whereas normal seasonality would call for modest sequential degradation in revenue and operating margin, we project modest sequential improvements in both measures, driven by ongoing progress, growing our customer base and market share, yield improvements and progress driving cost efficiencies in our growing operations.

We project a relatively comparable contribution from our logistics segment as compared to the second quarter. And for Intermodal to reduce its operating ratio and operating loss as compared to the second quarter, largely driven by sequential volume recovery and our cost initiatives. In our all other segments, while year-to-date operating results and our expectations for the third quarter are above our initial projections entering this year, we now anticipate a sequential slowdown in earnings for this category in the fourth quarter, similar to the seasonal trend in the prior year.

And finally, we now project our full year net cash CapEx will be $525 million to $575 million, which is a reduction from the original range of $575 million to $625 million. This concludes our prepared remarks. And before I turn it over for questions, I want to remind everyone to keep it to 1 question per participant. Thank you. Constantine, we will now open in for questions.

[Operator Instructions] Your first question comes from the line of Chris Wetherbee from Wells Fargo.

Maybe we could just start with a big picture question about sort of supply and demand and where we think we are kind of in that equilibrium process. So in particular, I think there's some concerns about overhang with inventories and maybe consumer weakness growing in the back half of the year, you have maybe some industrial activity that could improve now that we have legislation in place and seems like capacity is sort of slowly coming out. But what's your general take? I guess I'm curious how you guys think about the dynamic in the market where we are relative to equilibrium and maybe where we can go in the second half of the year?

Sure. I'll start that, Chris. This is Adam, and then if Andrew or Brad have anything to add, they can jump in. So I think about the current market conditions, anecdotally, we hear about failures in our industry. Some are sizable fleets compared to the 1 or 2 truck failures that I think we all see on the third-party data. But it's always hard to really have a good feel of exactly what's happening with capacity. We feel and we have stated this for the last few quarters that we think it's going to be a slow process for capacity to exit the market. And I think we're seeing that from just discussions with customers and what they're doing with how much they're willing to be exposed to brokers and maybe some of the service failures are seeing from brokers that rely on small carriers as well as other customers that have a little bit more sizable fleets that may have operated a dedicated piece of business for them that are no longer going to be continue to operate.

So it certainly feels like capacity is continuing to exit. So the question would be what's going to happen with demand. I think some stability with tariffs and trade policy, I think, will help our customers get a better feel on decisions they want to make around inventory and help them better understand where the customer is going to land. I think conversations today with customers are a bit more, I think, stable than they were a quarter ago. I think there's maybe less of a reaction to maybe some of the tariffs that everyone was concerned about. And as we noted in the release in the prepared remarks, we actually are having some discussions around maybe potentially doing some peak projects with customers that have historically done that and there's certainly some that are concerned about what one-way capacity may look like at scale if you get into a fourth quarter where enough capacity has come out where it's no longer easy to to fulfill larger needs through your waterfall.

And so when you look at just actual start to the third quarter, Typically, the third quarter starts off with a slowing after the 4th of July and is generally soft as you go through August, and then it begins to pick up, build into September as you get into the fourth quarter. And so I'd say for the first few weeks of July, we've kind of felt that softness but if I look at maybe the last kind of back half of last week and into this week, we're seeing a bit more strength than maybe we would have anticipated at this time in the quarter. Now, hey, there's still -- that's just an early indication. We've seen maybe a lot of head fakes over the last several years. But we're watching this closely. And so I think we're still cautious on where the market is going to head in the back half of the year. But I feel like, again, the worst is behind us.

We're seeing supply and demand tighten up and I feel like the over-the-road capacity at scale is going to become more valuable, especially when you have projects. Now hey, still transactionally load per load. It's still I think relatively easy to find capacity, but it's getting a little tougher when there's bigger projects out there, greater needs for our customers. So again, I think it's just a slow progression of of supply coming out of the market and demand really remaining stable at this point.

Your next question is from the line of Daniel Imbro from Stephens.

Maybe just a follow-up on that last kind of truckload outlook at the rates this year have clearly not developed as quickly as you hoped. But when you think about Knight's ability to grow earnings through the upcoming cycle, can you maybe talk about where you see mid-cycle margins going, maybe specifically in Truckload? Because on one hand, you have capacity out there, which you mentioned, on the other hand, you made a ton of progress on cost per mile. How do you put those 2 things together? What do you see as structurally different with the margin profile and how that looks through a, maybe longer but less [ deep up ] cycle.

Yes. So I mean I think we get that question on a regular basis. And the way we look at our margin profile kind of coming out of this a much more volatile cycle than I think we've ever seen in our industry. is mid-cycle on the truckload side, we'd expect to operate our business in the mid-80s. And when you're near peak from a demand standpoint, it's probably low 80s to high 70s. And in a more challenging market that maybe is more similar to what previous cycles have been versus our current cycle, you'd operate in the upper 80s. We still think that's intact. And today, we're really focused on sharing up the cost side of our business.

We feel like we have a bit more control over things that we can do there and then position ourselves to when there's opportunities in the market, we're ready to react to that quicker than anyone provide value to our customers to that process and certainly be compensated for the value back we are bringing. I think we've done a good job of still continuing to be flexible and nimble, and we really manage where our commitments are and can flex into the spot market when it's advantageous to us.

We noted in the second quarter that the slowdown, particularly in the West, led to us having to be a little bit more aggressive in the spot market with our customers to try to keep trucks moving while the demand had waned. And so that did weigh a bit on our overall rate per mile between -- sequentially from first to second quarter. But we've already started to see that come back and start to normalize. And so I think we'll start to realize some of the contractual rate improvement that we've been able to achieve in this bid cycle, which we noted was low to mid-single digits. And it's certainly some of this potential project business comes to fruition in the back half of this year, I think that could provide some upside in margins, and that I think would lead to a more favorable bid environment next year where I think we have an opportunity to raise contractual rates.

So again, we're focused on what we can control right now, which is really positioning us from a cost perspective. to provide leverage in our business. So when the market does turn, we can quickly get our margins back to the levels I spoke to earlier.

And Daniel, maybe I'll add one other comment to what Adam said. I would say relative to the competitive landscape, we believe we're seeing fewer carriers wanting to participate in the space for one-way service than say, how it looked in a year like 2019. So this -- once we kind of look at as when one-way service becomes less commoditized when service and is pressured. We think we're positioned well as a business who's since, say, 2019, we've added U.S. Xpress. We have 3 large brands that are well capable of participating in when we service solving acute needs with trailer pools, at scale. We think our position is maybe better than it's ever been in regards to that to see outsized gains.

But at this point, the spot market is very compelling economically to our customers. And so until you see that tighten up and service is impacted, then you're going to start -- when that happens, you'll start to see I think those opportunities become stronger for us. So we're -- we believe there's a real opportunity here when opportunity is available to us.

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

Great. So Adam, the commentary on truckload sounds a bit different than maybe some of the past quarters where we were guessing like we're turning in feels like now capacity is coming out continuously and maybe there's some project on the demand side, the consumer building and manufacturing opportunities from the big bill. So maybe relay that over to the LTL side, which is different than the overall market given the build-out that you're doing. So maybe talk some color on the share wins, the costs you're taking out there. I think you mentioned counter seasonality given the opportunity. Can you dig into the scale and the momentum there?

Sure. Yes. Thanks, Ken. Yes. So on the LTL front, we've done a lot over the last 24 months in terms of scaling that business. We've had an acquisition through the process. And it's given us a real opportunity to provide additional services to our customers in markets that we just didn't serve historically and customers that really like the service that AAA Cooper or an MME or DHE, have been able to provide. And so we've really kind of leaned into developing density and growing with the new network that we've created, but there's been certainly challenges in that process.

When you're integrating a new system where you have -- it's not just the technical changes in terms of how you operate a system, there's process changes. There's just cultural changes that are required, while scaling the business and having to deal with more volume, it's created some challenges for us. And so we've got our team now kind of focused on, hey, let's figure out how we pull some of the costs that we've incurred through this process. Because, hey, you've had to add labor, we've had to add assets to fulfill the service for these this additional load count and we have to optimize that now. We have technology that allows us to do that, but we have to utilize that more effectively, particularly with the brands that have been acquired after AAA Cooper.

So our team is focused on that quite a bit now to get us back to more kind of normalized margins without giving up the opportunities to grow into the network that we've developed because I think we still have a long runway to get to more optimal levels of shipment count through the different terminals that we've opened up. Clearly, we've kind of slowed the growth there intentionally, and we may just have a few kind of strategic places that we're going to potentially open up in the back half of this year. But largely, it's going to be -- we're going to be focused on growing into what we currently have. We've remained disciplined on price. You could see the revenue per hundredweight continues to grow at a healthy clip. We think there's potential to just kind of catch some of the leaders in the space in terms of where they're at from a pricing standpoint.

But right now, it's going to get back to fundamentals to improve the margin, capture more operating income with the network we have and then kind of grow into the shipment count that we know that the door count can really handle and just kind of take a balanced approach in how we approach that. But we really love the team that we have there. They've done a great job navigating such a growing business. Tremendous amount of confidence. But hey, now it's time to execute and just make consistent progress in this business.

And historically, from Q2 to Q3, we've seen margins take a little bit of a hit. But we feel like with some of the initiatives we have around the cost side of the business, labor management as well as some bid opportunities we have with the additional scale that we have that we're able to maybe overcome some of the normal seasonality that we encounter from second quarter to third quarter.

Yes, that last part, that's the great stuff.

Your next question comes from the line of Scott Group from Wolfe Research.

So I know you guys don't have a fourth quarter guide. I'm just wondering given the big swing in other operating income. Do you think it's fair to think about Q4 being similar with Q3? Or maybe, Adam, because of some of the peak activity starting to pick up, maybe there's still an opportunity to see some some decent sequential earnings improvement. And then I know just separately, if I can, does -- I know you're cutting CapEx does the bill change your -- and bonus depreciation change your views about CapEx going forward at all?

Yes. So on the last piece there, I think the CapEx change there is just kind of us tightening up in different areas. It's maybe not so much on the equipment front. Maybe from a facility standpoint, an IT investment standpoint is really where we're seeing some of the adjustments. We really haven't changed our equipment strategy. We like to keep a pretty consistent replenishment process, so you don't have a lot of volatility in your CapEx as you have -- because if you make adjustments there, then 4, 5 years down the road, you have a big jump in CapEx. So we're pretty consistent in how we purchase tractors. Trailers can be a little bit more of volatile depending on where our need is and what our ratios are. But from a tractor standpoint, it didn't really change our strategy around that.

When I think about fourth quarter, Scott, we don't have a guide out there. Again, there's still a little bit too much uncertainty for us to put a number out there. I think what we wanted to convey around the all other segment, is we believed we had made an adjustment in how we bill one of our customers in our all other segment that was going to create maybe more consistency of revenue throughout the quarters. And we just never made that -- we never got that change over the finish line.

And so we're continuing with the normal revenue recognition that we had the previous year, which leads to more revenue generation in the third quarter -- the first 3 quarters and then you see a slowdown in the fourth quarter. So instead of we were trying to go fixed variable, but we were able to accomplish that. So we just wanted to make sure that the investment community, the analyst community was aware of that, but we're not prepared to put a number out there for fourth quarter at this point.

Your next question comes from the line of [indiscernible] from Deutsch Bank.

Adam, I wanted to double click on the comment you made around maybe further cost savings in the Truckload segment, I think that's quite an impressive statement given all the success you had there so far. So maybe you can walk us through some tangible examples of what's on the come in terms of driving more cost improvement? And then if you can clarify where you are now in terms of fixed versus variable costs. And I'm trying to get a sense of what the incremental margin potential is? I know you walked through like long-term overall margins. But just as we see the cycle uplift occur, Kind of how should we think about incrementals here given that change in cost structure?

Yes. So [indiscernible], maybe I'll turn that over to Andrew. He's kind of been a driving force around some of these cost initiatives. So I'll let them kind of walk through some of your questions there around what's going to come there, which I think the slide we tried to highlight some of those and then maybe even a breakdown of upticks versus variable. .

So yes, let me kind of -- what I would say is that we've -- in the last year or so, we've really been building the muscle of continuous cost reduction in our organization. So we're using lean management tools to drive a culture of continuous improvement in cost. And it took a little while for that to really start to show results. We're starting to see that in the numbers. So there's a number of areas that we're looking at. We identified a few in the slides. But I would say our performance on safety is continuing to -- for us to be a contra inflationary area. Now that can change with one large claim but what we've done is we've generally taken a more proactive position ahead of getting -- ahead of accruals that could develop adversely than we have in the past. And we don't wait until the end of the year to look at actuaries and adjustables. We look at those each quarter. So we have a better handle on our costs. We're we're on top of our accruals in a proactive way. So we're less likely to see surprises there.

We -- on trailers, on equipment, we still feel like our trailer ratio has an opportunity for us to bring down trainer costs. And we're still well above historic levels that we need to be opportunistic in various market conditions. So we think that, that's to our advantage. We have implemented number of -- and we're in the process of implementing projects enabled by technology. Now that is AI, it's automation of other types. It's using data science, we have a number of tools that we have put significant resources to. And so we're looking across our organization, determining doing value stream assessments, understanding what is the value to our customer and what is not. And if it's not a value, we look at ways to automate it or stop doing it. And so we are using technology to change the core processes, what it costs to serve this business.

So our goal is to dramatically over time, change the cost to serve on the back end of our business in a material way, and we're going to use every tool and invest where it makes sense to go capture that. And I would also say we're getting much better at looking across our divisions to improve efficiency there, both in resources and in support levels. We've gotten pretty smart in the way we haven't been in the past about how to move assets between our divisions. So we can take dedicated trucks out of our truckload businesses and use them in LTL, day cabs. We have a leasing business for trailers that at end of life, we can bring those trailers to that leasing business. We're moving trailers out of our Swift business to U.S. Express and replacing more expensive lease trailers. So we are figuring out how to take advantage of all of our brands to drive efficiencies and processes to get more -- get smarter about that.

We've also taken a real hard look at our fixed costs around our facilities. We have, I think, 9 or so truckload facilities, a handful in LTL facilities that they were underutilized, aren't going to impact us from an operational perspective, but we are exiting and selling. And so we're -- that's going to take a lot of costs. How do we do that? We're being very thoughtful. None of these, we believe, impairs our ability to be opportunistic or affects our market, but there's opportunities as we've looked at that.

And then as you've seen, we've made improvement in all of the core variable cost areas. The fuel and maintenance, I talked about insurance. Those -- the progress that we made are because of initiatives in those areas that we have implemented, and we're seeing results, in our actual results, and we are just kind of early stages on a lot of those projects. So we expect there's going to be continued improvement in those areas. So -- when it comes down to it, we are looking at costs everywhere. And in a market like this, you start to look at cost in a different way.

You start to really assess what are the drivers of your costs, what creates value and where you can take cost out. And so I expect -- our expectation is we continue to see cost per mile year-over-year improve ongoing where we cover inflation plus and so that's kind of what the journey we're on, on cost that we think is going to position this business better than ever from a leverage perspective to be really opportunistic because we'll be more cost competitive, I think, than we've ever been.

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

Apologies if I missed this in your comments, but I think your gain on sale this quarter was meaningfully lower than your initial guidance and looks like that's stepping up versus our expectations in 3Q as well. Can you just talk about some of the moving parts there, please?

Yes. I mean I think it's -- that market just seems to have some starts and stops to it, Ravi. It also will be dependent on the inventory that we have in stock and where the demand is. And so we were maybe short on certain items that were in higher demand at the end of the quarter. And as we go into the third quarter, I think we're better positioned from an inventory standpoint, and we've seen some early demand that seems to be positioning that to be stronger than what we saw in the second quarter.

So how do we think of that kind of run rate kind of going forward? Is that something that can come back in the back half?

Well, hey, I mean it's kind of hard. These small carriers are -- it's hard to count on what that trend is going to be on a consistent basis. I think right now, you've seen good demand on the tractor front, maybe not as much on the trailer front. And so -- but hey, that could change in the fourth quarter. It's just -- it's hard to predict. I think we try to forecast out the first -- obviously, the third quarter, but the fourth quarter still I don't see deviating dramatically but could be less, could be more, kind of depends on what the trends we're seeing, Ravi. .

Ravi , our CapEx is kind of back-end loaded. So we're going to be bringing more new equipment into our fleet in the back half of the year, it's going to give us more inventory to be able to sell. So I think that's maybe 1 difference between the first half and the second half.

Your next question comes from the line of Ariel Rosa from Citigroup.

So I was just hoping you could speak about the impact that brokers are having on the market. Do you think they're driving greater price transparency. Adam, I think you mentioned a couple of service failures on the broker side. Maybe you could talk about that and kind of balance that against is greater participation from brokers or maybe kind of the tech that brokers are bringing to the industry, is that part of what's making it harder for the market to recover?

I think there is clearly more transparency in the market that we had 10, 15 years ago, clearly. And I don't know if it's necessarily brokers are doing. I mean there's third-party data sets that all of our customers subscribe to or most of them that have scale and they can see what's happening to rates. And I think that leads to just a a market that's just more efficient. And so when rates are going down, everybody kind of sees that and kind of press this from a procurement standpoint for rate concessions. .

But it also works the other direction, and we saw this during COVID, when rates are going up, everyone could see and acknowledge it, and they use that to go to their leaders to say, "Hey, we need to do something here if we want to secure capacity because it's clear rates are going up. So I just think it gives more insight and probably these cycles move a little faster based on real supply and demand. And it's not necessarily the relationship where you're trying to go get rate and they have to go through procurement and go the oil process to to see what the market will bear like you did 10, 15 years ago. I think it's easier to set up the expectations, rates going up or down.

I think brokers out there are really just a function of more small carriers, more small capacity being available in the market. When there's more of that capacity available, you'll have more brokers coming to the space. And as that capacity exit I think you're going to have brokers that exit the space. That's what naturally happens. And I think what we focus on, what we see from our customers is we'll go through a bid process where, hey, they're going to take the third-party data out there and they'll set up their expectations about where rates should go. But you got to remember that, that largely is transactions between small carriers and shippers or brokers, and that may not be indicative of what the larger players are dealing with from a revenue per mile standpoint, but they'll use that to negotiate with.

And at times, they may find themselves with more exposure to brokers coming out of their national bid then they're comfortable with. And so we'll start to see mini bids and these mini bids will come to us most likely because you have a carrier that's failing a lane. They just cannot fulfill the demand that the customer has. And then they're looking for a larger player to come in or another player to come in and take over that lane. And in many cases, it's at a rate that's higher than what you bid on in the national bid. And so we're seeing more of that occur. And I think we're having more dialogue with customers about what's causing that. And so that's going to be the brokers falling off because they don't have the carriers that can support the volume. And in other cases, it's maybe some larger carriers that have come off the lane that aren't necessarily carriers that they're coming through brokers. So that's what we're seeing, again, it's anecdotal, but it's a trend that is starting to develop.

Adam, if I could just follow up quickly. Is there any dimension in which that greater pricing transparency makes it harder to get to the margin targets that you were discussing earlier?

I don't believe so. I think it just -- it leads to the cycles, I think, moving quicker because it's easier to see what's happening to supply and demand. I think from our standpoint, when capacity gets tight, I mean, that's when a carrier of our size at our different brands has the ability to come in and solve large problems for our customers. And you do it with asset-based capacity that doesn't necessarily get tied to what's happening in the third party with the small brokers, but it's secure capacity that they can do drop and hook that has security around the freight that we're hauling, and that we'll be able to get back to the margins that we've been at.

Because if you look at we have this transparency during COVID, and that led to the best margins we've ever seen. And part of that was because everyone could see that rates were going higher, then everyone could see they were going down and so procurement leverages that to the negotiation. At the end of the day, it's going to come down already to supply and demand and where it's at, and it's just easier to see where that's at in the market today than it was 10 or 15 years ago.

Your next question is from the line of Jason Seidl from TD Cowen.

I wanted to switch back to LTL here. You guys are coming up on your year anniversary of purchasing DHE. I was wondering if you could talk about how building tonnage in the Western network is going? And then broadly, overall, how would you categorize the pricing environment in the LTL marketplace versus the prior quarter? Would you say it's sequentially about the same? Did it worsen a little bit? And then how should we think about the rest of the year?

So here I say, Jason. Building tonnage has gone well in the West. I think we've seen customers very responsive to it. They like having another option out there and again, leveraging the great relationships that we had with AAA Cooper and MME coming in as we embarked in the West Coast. But there's been challenges with -- as I mentioned earlier, with scaling like we have in the West Coast, while doing a system integration that's put some cost headwinds into the business that, hey, we have initiatives now to work through. So I think tonnage has worked just as expected.

I think it's been a bit more challenging on the change management of the process and then some of the costs that we've incurred to build out that tonnage, and that's what we're going to work through. When you think of a pricing standpoint, I mean, it's been relatively consistent. I think the renewals have been still solid in the mid- to upper single digits. And I don't think there's anything right now that indicates that that's really changing as we get into the third quarter.

Just add a little color on kind of the dynamics that are going on there. So we're opening new locations, West Coast as well. So DHE ,we went through the wholesale implementation of their core process, right, they used to operate in. And that was a big lift, but while we've done that with new volumes and new locations, the team has done a great job, good help from our AAA team there, but that takes time to get fully up to speed. And so I think we feel like there's a lot more opportunity still there.

So when we approach this kind of give you a sense for what you can expect from the business high-growth environments, which we're in and with our top priority being to deliver high service. We brought on capacity and cost like we've mentioned ahead of that demand. And sometimes that can be very expensive cost, right? That's could be subcontractors, outsourced maintenance, sometimes renting equipment. Meanwhile, we're in the process in those locations where we're seeing a lot of growth hiring and training and onboarding new employees and it creates some redundancy, right, in the network. And as you're bringing this new capacity online and opening new locations, that changes your network flow. And sometimes when you do that, you have head count and efficiencies that are kind of misaligned with your evolving network.

So until that stabilizes, you got some inefficiencies, you got to work through, and that's kind of where we're at. So -- but as we're bringing these new locations on the West Coast online, it's opening up new opportunities from us. So we are making sure that we don't bring in more capacity into that part of our business, then we can service effectively. We're playing the long game here, right? We're not going to sacrifice short-term margin long-term opportunity. And so that's where we're at. we're building that efficiency and then we're going to continue to scale and pull more volume into the region.

Well, that makes sense. If you guys are out there running equipment, that can get very expensive. I did it back in the day. Should we expect maybe CapEx to go up next year? Are you guys going to be purchasing more equipment for next year?

I mean one of the beauties of our -- the synergies of truckload and LTL together is that we can run tractors out of our dedicated fleet, day cabs and into LTL, it's feeding our growth in a very cost-efficient way. So we'll look at that, but I don't think that I would expect it to be materially different next year from an equipment CapEx perspective.

Next question is from the line of Jordan Alliger from Goldman Sachs.

I wanted to circle back on the miles per tractor being up 4% this past quarter, which seem pretty strong against some tough comps. Is that some indication? I know you're reducing your tractor fleet, but is that some indication on supply/demand broadly? And do you expect to build on that as part of this thought process for the third quarter and beyond?

Yes. So there's a couple of factors weighing on the improvement there, Jordan. I mean, one would be disposing of underutilized assets that we had unseated tractors and didn't feel like we had the driver pool to be able to fill those nor the freight market than we would dispose of those, which we did some of that. Clearly, you saw that -- you can see that in the tractor account. .

But also when you look at production on a ceded basis, which we don't provide that number, we are seeing that improve on a year-over-year basis as well. So we are being more productive with the trucks we had seeded this year than we were with the trucks we had seeded last year. So again, it's another indication that the market is slowly improving. We believe the worst is behind us and we expect the slow progression of the market to continue into the back half of this year, kind of barring any unforeseen real market disruptions, whether that be tariffs or other policies.

But yes, we believe that, that is a sign, and hey, that's something we track on a regular basis and really put a great focus on and does allow us to capture some of the operating leverage in the business when you're running more miles on your fleet. So it's certainly a big focus of our Jordan.

Okay. Well, I think that is now -- we hit an hour. So we appreciate all the questions, interaction from the group. And so we will go ahead and conclude. And again, if we didn't -- weren't able to get to your question, you can call (602) 606-6349, and we'll schedule a follow-up call. Appreciate it, everyone.

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