Good afternoon, everyone. My name is Collin and I will be your conference operator today. I would like to welcome you to the Knight-Swift Transportation Third Quarter 2022 Earnings Call. All lines have been muted to minimize background noise. Mr. Miller, the meeting is now yours.

Thank you, Collin, and good afternoon, everyone, and thank you for joining our third quarter 2022 earnings call. Today we plan to discuss topics related to the results of the third quarter, provide an update on current market conditions, and update our full year 2022 guidance. We have slides to accompany this call which are posted on our investor website. Our call is scheduled to go until 5:30 PM Eastern Time. Following our commentary, we will answer questions related to these topics. In order to get to as many participants as possible, we're going to limit the questions to one per participant. If you have a second question, please feel free to get back in the queue. We'll answer as many questions as time allows. If we're not able to get your question due to time restrictions, you may call us at 602-606-6349. To begin, I’ll first refer you to the disclosures on Page 2 of the presentation and note the following. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions, and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A Risk Factors or Part 1 of the company's annual report on Form 10-K filed with the United States SEC for a discussion of the risks that may affect the company's future operating results. Actual results may differ. Now on to Slide 3. The charts on Slide 3 compare our consolidated third quarter revenue and earnings results on a year-over-year basis. Revenue, excluding fuel surcharge, grew by 9.2% while our adjusted operating income declined by 1.4%. GAAP earnings per diluted share for the third quarter of 2022 were $1.21 and our adjusted EPS came in at $1.27. On a year-over-year basis, higher interest expense, lower gain on sale, and a higher tax rate impacted adjusted EPS by approximately $0.10 per share. Now let's move to the next slide. Slide 4 illustrates the revenue and adjusted operating income for the third quarter and year-to-date periods in each of our segments. Despite a changing freight market, our performance remains strong across each of our segments. Our truckload segment operated in the low 80s, while logistics continues to generate mid-teens margins, intermodal continues to make year-over-year improvements, and our LTL segment is outperforming the targets we set at the time of acquisition. We remain focused on continuing to diversify our business and develop complementary services that bring strategic value to our customers and partner carriers. The chart on the right highlights the percentage of revenue during the third quarter of 2022 from each of our four segments, as well as the percentage of revenue from our other services, which include our rapidly growing insurance, equipment maintenance, equipment leasing, and warehousing services. We believe this diversification positions our company to successfully navigate what could be a more challenging freight environment in the coming quarters. We are encouraged with how well our different brands and services continue to collaborate to find new opportunities to grow with existing customers and forge relationships with new customers. Our company is made up of unique brands that have different strengths and provide different services throughout the supply chain. We bring creative solutions with scale to solve difficult challenges. We value vertical accountability for performance in each business but also horizontal collaboration across our brands to optimize and fully leverage our capabilities. Because of this structure, and the leaders we have on our team, we feel well positioned to successfully navigate the changing market. The next few slides will discuss each segment's operating performance, starting with truckload on Slide 5. On a year-over-year basis, our truckload revenue, excluding fuel surcharge, grew 3.7% while our operating income declined 14.9% as we operated with an 81.8% adjusted operating ratio. During the quarter, revenue per tractor grew 1.8% driven by an 8.1% increase in revenue per loaded mile and a 4.2% decrease in miles per tractor. The improvement in revenue per tractor was more than offset by inflationary pressures across our business. Most notably, we continue to see cost pressures and driver-related expenses, equipment costs, and maintenance and insurance. Within our truckload segments, we adjust to market conditions and have a diverse group of brands and services, including nearly 5,000 dedicated trucks which provide us with some flexibility and strategy. For example, as over-the-road truckload volumes have become less robust year-over-year, our dedicated business has grown top-line revenue and improved margins on a year-over-year basis. Freight demand trended below typical seasonal patterns in the back half of the third quarter, and these trends have continued into October. Given these trends, we are expecting a muted peak season this year. Spot opportunities have declined significantly, and we have been pivoting towards making more commitments through the bid season to reduce our exposure in the spot market. We've been doing this since the beginning of the year. Small carriers, who typically have significant spot exposure, are now dealing with depressed rates, higher fuel prices, higher fixed equipment costs, rising insurance costs, and now elevated interest rates that will most likely continue to rise. These factors have led to capacity attrition that we are currently seeing and will most likely accelerate the attrition in the coming quarters. Despite the changing market, our customers still value trailer pool capacity at scale, and we see this demand in both our truckload and logistics segments. We continue to invest in our already industry-leading trailer fleet, which grew sequentially to just over 75,000 trailers. We believe our scale in trailers is a competitive advantage that provides our customers capabilities that are extremely difficult to replicate. Now let's move to Slide 6. Our LTL segment continues to perform well and is exceeding the goals we set at the time of acquisition. For the quarter, revenue, excluding fuel surcharge was $224 million and we operated at an 84.5% adjusted operating ratio. This represents a 300 basis point improvement from the third quarter last year, which was the first quarter that we included AAA Cooper in our results. Volumes followed normal seasonal trends while pricing remained strong. Our revenue, excluding fuel surcharge per hundredweight, increased 15.5% year-over-year. We have been extremely impressed with the leadership at both AAA Cooper and MME as we work towards merging our systems this quarter to create seamless connectivity for our customers, while maintaining the culture and brands of each company. We believe this positions us to provide additional services to existing customers, as well as train new customer relationships. Our Knight and Swift brands have deep relationships with large shippers who in many cases deal with larger LTL networks or larger LTL providers, creating a super regional network in the short term and then a national network in the long term will enable us to find opportunities to further support our existing truckload customers with LTL capacity. We also believe this approach is very welcoming to other LTL companies who may choose to join this network. Again, we are very encouraged by the LTL results and our conviction for synergy achievements continues to grow. Now let's move to Slide 7. Our logistics segment continues to grow in volume with load count up 20.1% year-over-year. As compared to the third quarter of 2021, revenue was down just 5.2% despite a 21% decrease in revenue per load. Gross margin also expanded to 20.9% in the quarter compared to 18.1% last year, leading to an 86.8% adjusted operating ratio. This resulted in a slight improvement in operating income compared to the same quarter last year. Our customers continue to value the power-only services we provide which led to a 33.3% growth in power-only load volumes. Our vast and growing trailer network allows our customers the ability to optimize their warehouse space and labor costs. Third-party carriers prefer power-only business because it saves them hours at each load and unload location. It lowers their capital investment in risk, reduces their operating costs, and gives them access to freight they historically wouldn't be able to participate in. We continue to be excited about this business and have several technology initiatives ongoing that will improve the experience for our third-party carriers, as well as provide more seamless information internally and to our customers that will lead to more opportunities to utilize our equipment. Network fluidity and chassis availability remain a challenge within our network. However, we have made progress to the bid season to better align our freight network and our rail partners in both the West and the East. Our goal is to continue to grow intermodal to improve dock turns as well as expand capacity as we added approximately 650 containers during the third quarter this year. I'll now turn it over to Dave.

Thank you, Adam, and good afternoon, everyone. Slide 9 shows the growth in our non-reportable segment. For this quarter, we experienced a 56% increase in revenue and a 97% increase in operating income. These growth figures stem from our strategy to develop essential services for third-party carriers. As I mentioned last quarter, our three main goals in providing these carrier services are to introduce new profitable revenue streams that diversify our company, leverage our proven expertise in areas like risk management and maintenance, and to enhance our relationships with small carriers as we build a larger network utilizing their capacities along with our trailers and freight network. Many of these services fall under our Iron Trucks Services brand, where we've seen significant interest from small third-party carriers seeking insurance, maintenance through our nationwide shop network, equipment leasing, and fuel purchasing assistance. These new and expanded services, combined with warehousing and equipment leasing, have nearly quadrupled our revenue and are projected to generate over $500 million this year, with an expected operating income exceeding $60 million, a sharp contrast to a loss of $68 million in 2019. Now moving to Slide 10, this illustrates our progress in transforming the composition of our business into an industrial growth company. The left chart presents the percentage of adjusted operating income from our segments and other non-reportable services since the Knight and Swift merger in 2017 up to the third quarter of 2022. We are pleased to report strong earnings contributions from each area over the past five years. These efforts to diversify make our company less volatile, which we believe will help mitigate risks during truckload freight cycles. Truckload earnings now account for only 63% of our earnings, representing a significant shift from our position immediately following the merger in 2017. Despite this reduction in truckload earnings as a percentage, our truckload earnings have significantly improved from $390 million in full-year combined pro forma Knight and Swift earnings in 2017 to $840 million for the trailing 12 months of this year. The right chart displays our rolling four-quarter adjusted earnings per share since the Knight and Swift merger, which has risen from $2.16 to $5.64 per share for the trailing 12 months. Moving on to Slide 11, strong earnings have boosted our free cash flow to $1 billion over the trailing 12 months. Year-to-date, we've used cash to raise our dividend to shareholders by 20%, repurchase $300 million in shares, and reduce long-term debt and leases by $396 million. Since the 2017 merger, we've invested $1.6 billion in acquisitions, and pursuing acquisitions remains a priority. Our robust cash flow generation gives us the capacity for M&A opportunities. Our balance sheet is strong, enabling us to invest in organic growth, pursue acquisitions, repurchase shares, increase dividends, and pay down debt. We continuously evaluate market conditions to optimize cash usage and enhance shareholder value. Now on to Slide 12. Return on net tangible assets is a key metric for us, and over the past 12 months, we've achieved a 22.4% return, a significant improvement from previous years. Our goal is to enhance this metric by focusing on three key areas: growing our less asset-intensive businesses, acquiring and improving businesses, and expanding margins in our existing operations. During the third quarter, we made substantial progress in these areas. We saw a 20% increase in load volumes in our logistics business, largely from our power-only service offering. Warehousing revenue increased over 60% year-over-year, and Iron Services revenue surged over 140% year-over-year. We have seen synergies and improvements in every business we've acquired, whether it's warehousing, asset truckload, less-than-truckload, or truckload brokerage. In the less-than-truckload segment, we're expanding our network with four new terminals and over 125 doors added in the fourth quarter. We believe that focusing on these three objectives, leveraging our core competencies in unique opportunities, will allow us to continue delivering significant returns to our shareholders over the long term. Now moving on to Slide 13, I want to take a moment to provide background and insights into the current market. We've been preparing for the next freight downturn since before the last one. In light of the disruptions caused by COVID-19 in early 2020, we adapted quickly. The shift from the unprecedented demand starting in mid-2020 to a more typical seasonal demand has been easier to anticipate as we transition into 2023. Although we hoped for continued strength, we have followed our strategy by preparing for a slowdown in the economy and the truckload market over the past year. We reduced our spot market exposure and made necessary cost adjustments. Mitigating the volatility of the full truckload market has been a significant focus for us and a regular topic with investors. Our entry into the less-than-truckload market was driven by the desire to reduce volatility, as it has high barriers to entry and shows remarkable consistency over the past two decades. Previously, truckload carriers could only mitigate cyclicality by increasing business dedicated to regular routes. Our strong operational efficiency and size have generated substantial cash flow, allowing investment in related but less cyclical industries like LTL, insurance, and maintenance. Additionally, we continue to grow our already largest trailer fleet to enhance value and reduce volatility. We offer customers flexibility in loading and unloading trailers—something that's unique to us—maximizing supply chain efficiencies and lowering operating costs. This flexibility helps in situations where loads incur extra charges if not unloaded quickly, adding value to our contract rates. Currently, small carriers are facing unprecedented challenges, which we expect will worsen, resulting in further industry rationalization. Similar to 2019, we foresee a split between well-capitalized, profitable carriers and those struggling. We anticipate significant and attractive acquisition opportunities in the coming quarters. I'll now hand it over to Adam to conclude with our guidance slide.

Thank you, Dave. So we'll turn to Slide 14, which outlines our guidance for the full year 2022. We now expect full-year 2022 adjusted EPS to be within the range of $5.17 to $5.22, which is down from our previous quarter's guidance of $5.20 to $5.40, which reflects the performance of the third quarter expectation for the fourth quarter. For the fourth quarter, we expect a muted seasonal freight environment combined with significantly fewer spot market opportunities. This is expected to cause rates to turn negative on a year-over-year basis. Keep in mind that this is a result of a more difficult comparison than rates meaningfully declining sequentially. We continue to increase the number of seated trucks. As a result, our year-over-year change in miles per tractor has improved each quarter in 2022. We expect the year-over-year deficit in miles per tractor will improve in the fourth quarter as our truck count remains stable. Miles per tractor typically declined sequentially from the third to fourth quarter due to holiday disruptions. Normally, we would have significant spot opportunities and projects that more than offset the decline in productivity. Absent these opportunities, we expect our adjusted EPS will be lower in the fourth quarter than in the third quarter. We expect our LTL business to improve both revenue and margin year-over-year. Q4 will follow typical seasonal patterns in LTL with the fourth quarter not being as strong as Q3. Logistics load volumes and revenue per load are expected to be consistent with Q3 with an operating ratio in the mid to high 80s. Intermodal margins are to remain in the high single digits with volume improving on a year-over-year basis. We expect other revenue and income to grow when compared to the prior year, as we've outlined in Slide 9 of this presentation. And we continue to expect inflationary pressures from driver expenses, maintenance, equipment, and non-driver labor will continue to be inflationary as well. We expect total gain on sale of equipment to range between $10 million and $15 million in Q4, as the used equipment market continues to moderate. Due to rising interest rates, interest expense will continue to increase. Net cash CapEx for the full year, we expect that to be $525 million to $575 million for this year, and our tax rate is expected to stay around 25% for the year. These estimates represent management's best estimates based on current information available. Actual results may differ materially from these estimates. We will refer you to the risk factors section of the company's annual report for a discussion of the risks that may affect results. This now concludes our prepared remarks. We'd like to remind you that this call ends at 5:30 Eastern. We will answer as many questions as time allows. Again, please keep it to one question. If we're not able to get to your question due to time constraints, please call 602-606-6349, and we'll do our best to follow up promptly. That concludes our prepared remarks. We will now entertain questions. Collin?

Thank you. Your first question comes from Todd Fowler from KeyBanc Capital Markets. Todd, please go ahead.

Great. Thanks. Good afternoon.

Hi, Todd.

Hi, Dave. Hi, Adam. So Dave, maybe just to start, I know that this is a very difficult comp in the fourth quarter last year. I mean, everything just really lined up and it was a fantastic quarter. But when I think about the implied fourth quarter guidance, it's down almost 30%, about 27% at the midpoint or so. Is that what we should think about as a proxy? You still have difficult comps in the first part of '23, or are there some other levers that you can pull on the cost side? Just trying to think about the order of magnitude of earnings here in the fourth quarter and kind of the run rate into next year? Thanks.

Yes, thank you, Todd. As you mentioned, last year everything aligned perfectly for us. We experienced significant project freight and a peak in demand, coupled with tight capacity and strong pricing. As we now approach what is typically a peak season, the situation seems more organized. There doesn't seem to be the same urgency we experienced last year. Inventories appear to be elevated, and we're observing this in the subdued imports. It feels like there's a bit of a catch-up happening, and our customers do not seem to have the same level of project business that we had last year. Therefore, the year-over-year comparison for the fourth quarter will not be the same as before. However, the reasons for this difference may not apply as we move into next year. All indications suggest the economy will continue to soften. Typically, we don’t see significant project business and there isn't a peak in demand in the first quarter. So, I would caution against drawing conclusions from what you see in the fourth quarter when considering the first and second quarters of next year.

Hi, Todd. I'd like to add that I wouldn't expect the usual seasonal change from Q4 to Q1 in EPS during the transition, as there isn't the typical uplift into Q4. I believe you would see less volatility in EPS from Q4 to Q1 than usual, although we haven't provided guidance for next year yet.

Okay, that's a fair thought. Thanks for the time tonight. I'll turn it over.

Thanks, Todd.

Your next question comes from Jack Atkins from Stephens. Jack, please go ahead.

Okay, great. Good evening and thank you for taking my questions, guys.

Hi, Jack.

So I guess Dave maybe, and Adam feel free to chime in on this as well, but I'm imagining top of mind for most investors after the cut to the guidance and the modest miss is really sort of things are slowing down faster than you would have anticipated 90 days ago, maybe even 45 days ago. Could you maybe update us on that trough earnings outlook that you provided six months ago, I think you said $4 plus? I think any sort of help you could give us around what that would assume in terms of a magnitude of just a freight recession or a macro recession? And has your level of confidence in that $4 number changed at all based on what you've seen here over the course of the last few months?

Thank you for the question, Jack. We remain confident that our earnings will exceed $4 a share. Over the past three quarters, despite a changing environment and a nearly nonexistent spot market, we have managed to perform well, even as we enter a potentially sub-seasonal fourth quarter. Our performance spans various sectors; for instance, we are seeing low 80s on the truckload side, low to mid 80s in LTL, upper 80s in logistics, and low 90s in intermodal. These figures are impressive considering the market's limited spot opportunities. I believe the market may not fully recognize the resilience of our earnings per share. We also continue to generate strong free cash flow, and while it's not a buyer's market right now, we are starting to see favorable conditions that could lead us to more opportunities to acquire transportation-related businesses. Historically, we've learned that as supply in the full truckload market stabilizes, it tends to recover quicker than the overall demand market. Currently, we haven't experienced the same capacity additions as in previous cycles, and we've noticed a significant reduction in capacity even before contract rates turned negative, which we believe is continuing to accelerate. Therefore, full truckload is likely one of the few sectors with a chance to rebound before the broader economy does. Adam, do you have anything to add?

Yes. Just to reiterate, Jack, the plight for the small carrier may not have ever been as severe as it is right now. You think about the higher fixed costs that have been locked in with very elevated used equipment that's been purchased over the last couple of years. And now with rising interest rates, the inability to finance new equipment is a real challenge, or if they do, is at very elevated rates. And we're seeing signs just even from third-party data. We're seeing from the FMCSA authority, net revocations are down. The BLS data shows truck employment off over 11,000 just last month. Drug and Alcohol Clearinghouse was at a very elevated range, just under 7,000 for the month of August and is trending 20% higher year-over-year. We've had a lot of anecdotal scenarios with just carriers that we deal with even what we're seeing on the used equipment market where demand has fallen off pretty sharply here the last couple of weeks and there's probably several factors impacting that. So, we’ve talked about demand. It's not been as robust. I think that's pretty clear. But the fact that we believe capacity will rationalize much quicker than it has over other cycles still gives us great confidence in the $4 trough.

Okay.

Can I continue to stay on this topic for one more second, Jack?

Yes, sure.

As we discuss the reduction of supply in the market, it raises the question of what this means for our earnings per share at $4. For our business to sacrifice that level of earnings per share, the implications for typical carriers, including many midsized and even some larger ones, particularly small carriers, would be unfeasible. We believe it won't come to that. This also assumes we wouldn't be in a position to keep acquiring and enhancing our businesses over time. Therefore, we have numerous reasons and justifications that reinforce our belief that our earnings per share will not fall below a four handle.

Okay. Well, I really appreciate the additional color. Thanks for the time, guys.

Thanks, Jack.

Your next question comes from Ken Hoexter from Bank of America. Please go ahead, Ken.

Hi, Ken.

Good afternoon, David and Adam. How are you? I want to continue the discussion about the $4 target you mentioned, as it seems you're aiming for that run rate in the fourth quarter. As you consider the demand levels heading into early '23, are you already observing the trend of carriers leaving? Additionally, could you share your insights on your breakeven costs in relation to current rates? It would be helpful to understand how your situation compares to the broader market, especially since the fourth quarter appears to be aligning with the $4 figure you've discussed.

We are noticing that small carriers are facing significant challenges. This started to become evident around midyear when there was a notable increase in interest in our owner-operator program. Individuals who previously owned trucks and found themselves in unfavorable positions were seeking new opportunities to get back into trucking. The market for used equipment, which had been at an all-time high, became incredibly difficult, with a lack of buyers. This issue is not due to a younger average age of trucks; the need for upgrades is pressing. The industry should currently be transitioning from eight- or nine-year-old equipment to four- and five-year-old trucks at an unprecedented rate. The volume of new truck orders should be substantial, especially considering the shortfall in production over the past two and a half years that has affected the average age of equipment. It's important to note that small carriers obtaining used trucks have generally overpaid, given current valuations. We are starting to see concerning trends for small carriers’ receivables, which have worsened rapidly since the beginning of the year. The pressures facing these carriers are escalating. Many small carriers may have been holding out hope for a strong fourth quarter to recover from a challenging summer during a time of low demand. Some of these carriers have become too reliant on the stock market or on non-asset brokers, who previously charged higher rates and passed more costs onto customers. This dynamic has shifted. In contrast to these small carriers, our model is different. We operate under deep contractual agreements and are not dependent on unloading a single truck or driver. We understand our customers' supply chains and offer extensive trailing capacity, along with high service levels to help repair supply chain disruptions from the last couple of years. Consequently, our contractual market has been relatively stable compared to the volatility seen in the spot market over the last eight or nine months. As the economy cools and urgency decreases, we see some pressure on contractual rates, but the situation is significantly different from spot rates. Furthermore, rightsizing is currently underway. According to the latest Bureau of Labor Statistics data from August, trucking employment has declined by 11,400, and revocations have reached nearly 7,000. We are thankful for the Drug and Alcohol Clearinghouse, as it has revealed high disqualifications among drivers. For several quarters now, we have not been in a growth phase; our focus has been on attrition, and we expect this trend to persist.

Thanks, David. Thanks, Adam.

Thanks, Ken.

Thank you. Your next question comes from Ravi Shanker from Morgan Stanley. Ravi, please go ahead.

Thanks. Good afternoon, Dave, Adam. So I think just to touch on something that came up earlier in the Q&A. I think your tone and your message and the content of your message has fairly significantly changed since your Laguna conference a little over a month ago. Again, not just you; a lot of your peers have done the same thing. Can you just help unpack that for us? You mentioned in your release kind of the last few weeks of September saw a decline. Kind of how has that kind of unwind kind of panned out? What is your current view of peak season? What are your customers telling you that inventory situation looks like? Basically, how long do you think this downturn lasts? Do you think it's more like a 2019 or 2016, a light freight downturn, a broad consumer recession, what's your thinking right now?

There's a lot to address with that question, so I'll start and then let Dave add anything I might miss. As you know, we're active in Laguna. We still lack complete visibility on what to expect for the fourth quarter. It's unusual to enter a fourth quarter without seeing some seasonal increase in projects and opportunities. Especially for companies of our size, we usually take on large, challenging projects that often come with a premium pay. As we approached the fourth quarter and noticed that these opportunities weren’t appearing, I believe we need to reassess the market perspective. Regarding the implications for next year, we still need to see how that develops, but it would be uncommon to experience a second consecutive fourth quarter without such opportunities. We've never encountered a period this prolonged without them. As we discussed earlier in detail, capacity attrition seems to be happening faster than in previous cycles. Speaking with customers, they each have their own challenges with inventory overhangs, but many believe these will be resolved within the next six to nine months. The resolution may vary by customer depending on their industry and business strategy, but they're optimistic that it's a short-term issue they can manage. This is likely why we’re not witnessing the usual urgency to move goods in Q4. Eventually, inventory levels will normalize, and during that process, capacity will decrease. In a few quarters, I expect the market will be much more balanced, and the major players that provide value with scale and capacity will identify opportunities and enhance premiums to support our customers.

Nothing to add. Thanks, Ravi.

Your next question comes from Amit Mehrotra from Deutsche Bank. Please go ahead.

We're making the operator work today.

Thank you very much. I have a question. Looking at the quarter, yield was up 8% and utilization improved sequentially. However, the operating ratio worsened by 400 basis points, which reflects the project work and freight selection opportunities you mentioned. We haven't really seen a significant decline in contract rates. I'm trying to understand your confidence in the $4 plus EPS trough number, given that we haven't felt the real impact of falling contract rates. Dave, I would appreciate your insights on how you expect contract rates to develop over the next year and whether you're noticing any signs of contract rates starting to decrease as the largest asset base provider. Adam, you've indicated that a mid-80s operating ratio is a solid threshold in a challenging market. Is that what supports the $4 plus EPS projection, or do you believe that a combination of lower contract rates and a weaker freight selection environment could push that number down further?

Amit, we are going to address all three of your questions. I’ll begin and then Adam can cover the last one. Firstly, regarding our progress and utilization, and the decline in the operating ratio, this is relevant as you consider contract rates. It indicates significant inflation impacting our business, which has been ongoing. We have managed to mitigate and handle it reasonably well despite the downturn. Thankfully, we are not facing extreme costs like a microchip that used to cost $3.50 now costing $200, but our driver wages have significantly increased over time, which was necessary and justifiable. This is an adjustment that cannot simply be reversed. We are also experiencing higher costs for equipment, maintenance, and service. Inflation affects us across the board, and consequently, this creates pressure on pricing. I wouldn't be surprised if non-asset-based brokers feel some strain this fourth quarter as they find a pricing floor for loads while struggling to secure higher payments from customers due to factors like reduced project freight. Looking at our truckload business, this is the first quarter in quite some time where the rate increased only in the single digits, while our costs have risen more significantly year-over-year. This reflects the reality we face as truckload carriers entering the bidding season. Based on our operating ratio, I believe we have effectively managed our costs better than many in the industry, which limits our flexibility on contract rates as we compete with other carriers. Regarding the prediction of contract rates, the best reference point is to look back at 2019, where it took about 15 months to transition from peak to trough and then back up again. After a significant oversupply in 2018, the industry faced a downturn, but by late spring 2020, we saw a recovery. During that period, spot rates dropped by 50% to 55%, and this year, small carriers may have experienced even larger reductions in spot rates. However, contract rates only fell about 5% during that entire timeframe. As we enter this bidding season, with legitimate and irreversible increases in operating costs per mile, I do not anticipate a lot of room to make substantial cuts to contractual rates. Throughout this process, there are opportunities with some customers to operate more efficiently, or based on renewal timing, we might secure additional volume. We have been focused on this since January, and the outcomes are reflected in our current numbers. We will continue to adapt to find more efficient solutions. One advantage we have is our unique economies of scale, which allow us to achieve efficiencies that others may not be capable of offering, and we have already made significant progress in that regard this year. Additionally, we've been able to attract small carriers to haul loads at rates that maintain healthy margins in our logistics operations despite their multitude of options. Currently, there is considerable interest among small carriers wanting to partner with us, and we are actively working to create efficiencies and mutual successes as we navigate this bidding season. Adam?

Yes. To add to what Amit said, I believe you remember how the bidding season unfolded this year. Around the same time last year, we saw elevated spot rates, which provided an opportunity to increase contract rates where necessary. However, by the midpoint of the bidding season, spot rates had declined, resulting in minimal improvement in contract rates year-over-year during the latter half of the season. This year, we are not expecting significant movement from our customers in those lanes, given their renewal rates. It's important to understand that the bidding season has had distinct phases. Additionally, we are entering a more challenging environment where larger, well-capitalized fleets generally attract more labor due to their stable networks. This gives us a chance to see an increase in truck productivity. Our goal is to lower our empty mile percentage, which will enable us to operate more miles with our active trucks and help mitigate any rate pressures we might experience. Furthermore, as you know, we strive for a culture of cost discipline. While we are already focused on this, we will delve deeper into our organization to identify further opportunities for cost reductions.

Okay, got it.

Hopefully, you got your answer.

Thanks, Amit.

Your next question comes from Tom Wadewitz from UBS. Tom, please go ahead.

Good afternoon, Dave and Adam. Dave, you mentioned some hopeful remarks regarding M&A, indicating optimism for the upcoming quarters. You also talked about transportation options and suggested that they don’t necessarily have to focus on LTL, even though that seems to be the primary interest. Could you provide more insight on this? Are you optimistic about the possibility of an LTL deal in the next few quarters, or are you leaning more towards other alternatives? Additionally, when you refer to transportation-related aspects, could you clarify what you mean by that? Thank you.

Thank you, Tom. I appreciate your observation of some optimism. We've put in a tremendous amount of effort and have evaluated numerous deals. There's definitely an increase in the number of deals, particularly as many private equity firms are seeking new opportunities before the economy shifts. The timing is crucial in these scenarios. We've built strong relationships and believe that many people have been closely monitoring our commitment to preserving local brands and collaboratively enhancing their businesses along with our other ventures. It's like we're auditioning for opportunities with others we've been in discussions with. We're making progress, and as the environment changes and access to capital becomes more challenging, we are positioning ourselves well. We are excited about our growth potential and are prepared to assist those looking for the next step in their business. We're particularly optimistic about the LTL sector, which seems to have reached a peak in valuations. We believe this business will continue to perform well regardless of economic conditions. We're looking forward to expanding our super regional network by having MME and AAA Cooper, two independent brands, collaborate seamlessly starting in the fourth quarter. This partnership has already shown efficiencies, and we've had a positive experience in the LTL space. As we move through market cycles, we typically see valuation changes in full truckload businesses. Currently, I don't think full truckload companies are receiving the recognition they usually warrant during these periods. For instance, RPE's return on tangible net assets was 22.4% over the last year, suggesting it should command a better valuation. As we anticipate market trends, we often reconsider our interest in full truckload as well. We've expanded into various types of businesses recently, including technology and LTL firms, but we might be ready to explore truckload opportunities. There are plenty of truckload businesses available, and we are confident in our ability to navigate that sector. That sums up what I was trying to convey earlier, Tom.

That's great. Thanks, Dave. Appreciate it.

Thanks, Tom. Well, that concludes the time for our call. I will tell you it appears that we still have nine analysts that are in our call queue that we were not able to get to your questions. And so again, we would refer you to the phone number we gave earlier to give us a phone call and reach out if you'd like to still have a discussion. Thanks for everyone's interest. Be safe.

Ladies and gentlemen, this concludes your call for today. We thank you for participating and ask that you please disconnect your lines.