Good afternoon. My name is John, and I'll be your conference operator today. I would like to welcome everyone to the Knight-Swift Transportation First Quarter 2024 Earnings Call. Speakers from today's call will be Adam Miller, Chief Executive Officer; Andrew Hess, Chief Financial Officer; Brad Stewart, Treasurer and Senior Vice President of Investor Relations. Mr. Miller, the meeting is now yours.

Thank you, John, and good afternoon, everyone, and thank you for joining our first quarter 2024 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. And 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. Now before we jump into the slides, I want to introduce the 2 gentlemen that will be joining me on the call today for the first time: Andrew Hess and Brad Stewart. Andrew Hess is our newly appointed CFO. Andrew has been with our company for the last 5 years and has served in several financial roles, including the VP of Finance at Knight when he started in 2019, then led our M&A efforts beginning in January of 2021. Andrew played a significant role in closing on the AAA Cooper, MME and U.S. Xpress acquisitions. And just prior to becoming the CFO, Andrew was leading the finance efforts at Swift, along with continued oversight of M&A. So we want to welcome Andrew to the call. And then many of you may be familiar with Brad Stewart as he has been leading our Investor Relations activity for the past year. Brad is our Treasurer and has held various finance leadership roles in the Knight and Swift businesses over the past several years, and Brad has been with the company for 20 years now. I'm excited to welcome both Brad and Andrew to the call.

Thank you, Adam. 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 Securities and Exchange Commission for a discussion of the risks that may affect the company's future operating results. Actual results may differ. Now I will turn to our overview on Slide 3. The charts on Slide 3 compare our consolidated first quarter revenue and earnings results on a year-over-year basis. Market conditions in the LTL business continue to be solid, while soft demand and excess capacity persist in the truckload space. Revenue, excluding fuel surcharge, increased 11%, while our adjusted operating income declined by 68.5%. GAAP earnings per diluted share for the first quarter of 2024 was a loss of $0.02, and our adjusted EPS was $0.12. These results include a $19.5 million operating loss in our third-party insurance business with ceased operations at the end of the quarter. The insurance loss negatively impacted our GAAP and adjusted EPS by $0.08. Excluding the loss on the insurance business, our adjusted EPS would have been $0.20. Our results were also negatively impacted on a year-over-year basis by an $18 million increase in net interest expense or approximately $0.08 per share. Now on to the next slide. Slide 4 illustrates the revenue and adjusted operating income for each of our segments. In general, the LTL segment continues to experience a much more supportive market than the Truckload, Logistics and Intermodal segments do. The first quarter saw greater than average winter weather disruption, which negatively impacted all of our operating segments. In addition, the pricing and demand environment has proven more challenging than we anticipated for all of our LTL business in the first quarter. The combination of the weather disruption, more challenging bid environment and ongoing cost inflation weighed on operating results across our businesses during the quarter. U.S. Xpress continues to make progress on cost and contractual pricing in the Truckload business. And the U.S. Xpress Logistics business continues to close the gap, performing in line with our legacy logistics business on gross margin and operating margin for the quarter. Now on to Slide 5. For the Truckload segment, we did see some recovery following the January weather disruption as well as some seasonal improvement in March, but neither was enough to overcome the negative impact to volumes and operating costs from the poor start to the quarter. Loose capacity continues to plague the truckload market, preventing the ability to recover ongoing cost inflation or attain appropriate utilization levels on our equipment. Combined Truckload revenue per loaded mile was down 2.5% sequentially, though our contract rates are largely stable thus far in 2024. The early part of the bid season led to greater-than-expected pressure on freight rates as some shippers are still trying to push rates down further. In some cases, we have lost contractual volumes because we were not willing to commit to further concessions on what we view as unsustainable contractual rates. This resulted in more of our capacity being allocated to the spot market, which creates further pressure on revenue per mile and utilization in the near term, but positions capacity to react to changes in the market when the market does inflect. U.S. Xpress made further progress on costs and contractual rates through bids, which allowed this business to overcome the weather disruption and some dedicated business losses to stay largely flat on operating ratio from the fourth quarter. On a year-over-year basis, our Truckload revenue, excluding fuel surcharge, increased 26%, reflecting an 11% decline in the legacy Truckload business prior to the inclusion of U.S. Xpress. Revenue per loaded mile fell 10% year-over-year or 9% before including U.S. Xpress. Miles per tractor increased 8% overall or 6% before the inclusion of U.S. Xpress, largely driven by our earlier decision to reduce the number of unseated tractors in our legacy businesses in order to reduce cost. We have been intentionally trimming our tractor and trailer fleets over the past few quarters in order to improve our cost structure through the down cycle, but without cutting so far as to sacrifice our ability to flex when the market does improve.

Thanks, Brad. The benefits of our diversification continue to stand out as market conditions in the LTL industry remain much more supportive than in Truckload. Our LTL business grew revenue, excluding fuel charge, nearly 13% year-over-year. Our shipments per day increased 6%. And revenue per hundredweight, excluding fuel surcharge, increased 3% year-over-year. With our LTL activities concentrated in regions exposed to the severe weather during the quarter, the disruptions were particularly impactful to our network and operating costs for our LTL segment. In addition, maintenance and labor costs were higher than normal as we stretched to cover growing volumes and extend our reach into new facilities. We anticipate these costs should normalize as we scale volumes and staffing while growing revenue in new locations. The cost pressures contributed to a 90% adjusted operating ratio for the quarter and adjusted operating income declining by over 20% year-over-year. While this margin level is not up to our expectations or recent performance, it did improve in each month of the quarter after bottoming in January and continues to progress thus far, and we're on track with our expectations to be back online for the second quarter. After being impacted by weather disruptions in January, volumes recovered well as average shipments per day in February increased nearly 7% over January and held steady into March. Since acquiring AAA Cooper and MME in 2021, we have acquired or assumed the leases on 56 additional properties. We have brought 14 locations online prior to 2024, and we opened 7 more during the first quarter. We expect to open another 25 terminals by the end of 2024. Overall, the 32 locations planned to open in 2024 will represent a 16% increase to our door count from the end of 2023, meaningfully impacting the reach of our service offering and increasing the density of our network. Filling out a super regional network in the short term and ultimately creating a national network will allow us to participate in more freight and enable us to find opportunities to further support our existing truckload customers with LTL capacity. Acting on organic and inorganic opportunities to geographically expand our footprint within the LTL market remains a key strategic priority for us. Now on to Slide 7. Logistics market continues to be a challenge as many brokers have struggled to find enough volume and margins, and margins have been compressed while purchased transportation rates offered little room for relief. Being an asset-based logistics provider allows us to provide our customers seamless service, regardless if it is on our own assets or one of our partner carriers. This allows us to provide both committed and search capacity and drop-and-hook trailer pool service at scale. Because of this, our Logistics business remains profitable, though margins were squeezed by the weather-induced capacity crunch in January and by our decision to divert loads to the asset division to help offset losses of contractual business through bid activity. Overall revenue was down 7% year-over-year as revenue per load improved 2% and load count declined 10%. The U.S. Xpress Logistics business continues to make progress and performed in line with our legacy logistics businesses on gross margin and operating margin for the quarter. Now moving to Slide 8. In our Intermodal business, revenue decreased 20% year-over-year, driven by a 19% decrease in revenue per load and a nearly 2% decrease in load count. The decline in project revenue from the prior year largely drove the decline in revenue per load and negatively impacted the adjusted operating ratio, which was largely in line with the fourth quarter. Load count declined 4% sequentially, which is better than the typical seasonal progression coming out of the fourth quarter, and we anticipate sequential volume growth into the second quarter based on progress thus far in bid season. Moving to Slide 9. Slide 9 illustrates our All Other segments formerly referred to as our nonreportable segments. This category includes support services provided to our customers, independent contractors, and third-party carriers, such as insurance, maintenance, equipment sales and rentals, equipment leasing, and warehousing activities. For the quarter, revenue declined 40% year-over-year, largely as a result of winding down our third-party insurance business, which ceased operations at the end of the quarter. The $20 million operating loss within All Other segments is primarily driven by the $19.5 million operating loss in the third-party insurance business as well as $8.2 million of severance, legal, accrual, and impairment charges recorded during the quarter within this category. In order to further reduce the risk of ongoing income statement volatility from potential adverse development of the claims of the third-party insurance program, we executed a transaction during the quarter to transfer the majority of the risk to another insurance company. The cost of this transaction is included in the operating loss of the insurance business for the quarter. Now I will turn the call over to Adam for Slide 10.

All right. Thank you, Andrew. Over the next few slides, we plan to talk through our structure as a company and how we are positioned to navigate the cyclical freight environment, the strategic intent each of our businesses are measured against and the ability of our model to generate profits and cash flows and how we manage that capital to drive long-term value for our stakeholders. We will start with our Truckload segment on Slide 10. It's no secret that we are in one of the deepest freight recessions the truckload industry has ever felt. And it comes during a time when the rest of the economy is performing well such that cost inflation continues to be a challenge, labor is staying tight, and interest rates are up significantly. This has resulted in both significant pricing and cost pressures and has led to razor-thin margins and even losses for some of the best-run companies in our industry. This environment, however, comes on the heels of one of the best markets our industry has ever seen, where many experienced record earnings and margins. It's clear that the highs during the pandemic have led to the lows in the current environment. As a cyclical industry, we are accustomed to changes in the market. We have never seen these extremes that we are currently experiencing. When we compare our margin performance during this current cycle to previous cycles, we have found that while the current cycle highs were much higher and the low is much lower, our average margin over this cycle has been very similar to what we have typically achieved. Given that, we are at the lowest levels of operating performance our business may have ever seen. We believe we are positioned to benefit from significant operating leverage as business conditions improve. While we can't change the timing of any change in market dynamics, we believe we have positioned our business to endure a difficult market and to be prepared to rapidly improve margins and cash flow when we begin to experience an inflection in the market similar to our performance in previous cycles. We have a unique position in our Truckload segment as compared to peers. We have several large brands between Knight, Swift and U.S. Xpress and several other smaller brands that provide us a view of the markets on a daily basis. We're able to read what is happening to supply and demand in each market and to determine if changes are a result of market trends or specific changes to the network of one of our brands. We believe this provides insight into shifts in the market before most of the industry has visibility. We can leverage technology and automation to connect with customers and find solutions, leveraging all of our brands. We have scale that enables us to solve large problems quickly and at a high level of service. We have maintained the majority of our Truckload capacity in one way over the road service, which becomes very valuable to our customers in a favorable freight market. We intentionally managed our contractual versus spot exposure through different phases in the cycle in order to create value for customers and for our business. Although we have areas where we can further improve costs, we maintain a culture of cost discipline throughout cycles, which allows us to reach levels of industry-leading margins in both good and difficult markets. Now that we have acquired U.S. Xpress and have had time to establish the right rigors around cost and revenue management, we believe this business is positioned to perform at levels significantly better than legacy U.S. Xpress, and we expect to close the margin gap within our legacy Knight and Swift fleets when we have a more favorable market. As margins improve, we generate significant amounts of free cash flow that enable us to invest in organic growth, M&A and other high-return investment opportunities across our segments. Now if we turn to Slide 11. The significant free cash flow generated by our Truckload business allowed us to make a meaningful investment in the LTL market in 2021 without meaningfully increasing leverage. We purchased AAA Cooper and MME and have converted them to one platform, providing seamless service from the Southeast through the Northwest. We further identified opportunities to put capital to work to invest in 56 additional terminals to expand our footprint towards building out a nationwide network. We plan to continue down the path of organic growth, but also maintain a desire to acquire LTL companies that will provide a foothold in the Southwest and Northeast regions. Our goal over the medium term is to achieve a nationwide network with $2 billion in annual revenue. We believe developing this network will provide access to more freight opportunities with existing and new customers, which should lead to improved margins and create additional synergies with our nationwide Truckload network. A nationwide LTL network will also provide a larger base of more stable income that should reduce the earnings volatilities of the company that come with the cyclical nature of the Truckload segment. We also believe that in the next up cycle, we will grow our Logistics business at a rapid pace as it complements our Truckload business and provides differentiated value through our scalable power-only solutions. Lastly, in our Intermodal business, we continue to build a diverse customer base while developing strategic partnerships with our rail partners in the West, East and in Mexico. We believe we can build this business back to profitability while offering our customers a sustainable alternative that complements our Truckload services. Performing in these 3 segments, coupled with our Truckload business returning to historical margins, will lead to both significantly improved earnings and cash flow. Now on to Slide 12. We outlined how our path to generate strong cash flow from the previous slides, combined with our prudent capital structure and disciplined capital allocation strategy to drive long-term value. We have always valued a strong balance sheet to provide us flexibility in a cyclical industry. We are also mindful of optimizing our weighted average cost of capital. We target what we believe is our optimal leverage position of 1 to 1.5x of EBITDA. As we execute on M&A, this leverage can flex up, such as when we acquired AAA Cooper in 2021 or U.S. Xpress in 2023. Then we used free cash flow to reduce leverage back to this level to preserve flexibility for navigating cycles and pursuing additional opportunities. We will also prioritize investing in organic growth of our businesses where we believe we can generate double-digit returns throughout cycles. Organic LTL expansion is our near-term focus. But as the truckload market improves, we are willing to invest in additional capacity in terminals where we believe we can successfully grow. At Knight-Swift, we have had several successful large acquisitions, and we remain opportunistic with acting on M&A opportunities that drive value for our organization. Currently, our priority is building out our LTL network. As we strengthen our balance sheet, improve the margins of our core businesses and generate additional free cash flow, we will remain open to additional types of M&A outside of LTL. We also remain committed to reviewing our dividend policy on a regular basis and have increased our quarterly dividend by $0.02 per share for 5 consecutive years now. A flexible balance sheet also gives us the ability to opportunistically repurchase our shares when we believe it is the best return option for our free cash flow. In summary, we are compelled by the outsized runway ahead of us for improving earnings of both our legacy and newly acquired businesses, driving significant free cash flow through cycles and leveraging a disciplined approach to deploying capital to further increase the capital generating power of our company through successive cycles. Now on to our last Slide 13 for our earnings guidance. We have outlined in great detail our key assumptions to our guidance in this slide, which are also stated in the earnings release. I won't plan to read through them all because the timing of the inflection has proven especially difficult to predict during this cycle; we are not incorporating an inflection in market conditions for the purposes of these forecasts but rather are basing these ranges on expected seasonality and a continuation of existing market conditions, similar to what we've felt in March and April thus far. Based on these assumptions, we expect our adjusted EPS for the second quarter will be in the range of $0.26 to $0.30, and our adjusted EPS for the third quarter will be in the range of $0.31 to $0.35. Our expected adjusted EPS ranges are based on the current Truckload, LTL and general market conditions, recent trends and the current beliefs, assumptions, and expectations of management, and actual results may differ. Now that concludes our prepared remarks. And before I turn it over for questions, I just want to remind everyone to keep it to one question per participant. And John, we can now open the line for questions.

Your first question comes from Ravi Shanker from Morgan Stanley.

Congratulations to Adam, Andrew and Brad on your respective new positions. Adam, your commentary on the average margins being in line with historical levels was interesting. Do you think that's a good benchmark for how we think about normalized mid-cycle margins in the next cycle and beyond that? And the same thing for EPS as well, obviously regarding U.S. Xpress? Or how do you think of what normalized earnings look like?

Yes, I think that's a great question, Ravi. And I think that's a good goalpost to use in terms of just trying to gauge what the performance will be across the next cycle. I do believe that we probably don't see the same highs as we saw in the COVID cycle or the pandemic and certainly hoping not the lows that we are currently experiencing right now. I do feel like it won't take long for the U.S. Xpress business to begin to align their performance with Knight and Swift. It may not be right in the first up cycle, but maybe the second one might be when we close that gap, but I think we will make some progress here in the first up cycle. I think we would also want to look at the performance of our LTL business when you think about earnings potential because we do believe that will continue to scale, and we've laid out the expectation of getting to $2 billion in the midterm here. And again, that may be another cycle or two before we get there depending on how quickly we can move on M&A targets. And certainly, there's opportunity to improve the margin in that business. I think we're targeting now a mid-80s operating ratio, but there are certainly other companies out there performing much better than that and having a nationwide network, and it gives us the opportunity to expand those margins. I do believe in the next up cycle, Intermodal should perform better as we kind of reset how we're building up that business with a diverse portfolio of customers. And really Logistics with layering on U.S. Xpress Logistics with the Knight-Swift Logistics and the capabilities we have; I think there's more potential in that segment as well. But when I look at Truckload, I think that's probably a good gauge of what that kind of mid-cycle margin may be.

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

I appreciate your insights on how to approach cycles. I wanted to know if you could share your thoughts on the previous two cycles, as the increase in rates seems to have been more significant in 2018 with ELD and then again during COVID, which was quite unusual. Do you think there will be another catalyst that leads to a significant increase? Or should we expect a more gradual rise as the base case?

Yes, I don't know that my crystal ball is any better than yours, Tom. When I think about the last few cycles, I think they've all had a unique catalyst that have kind of kicked them off. I think of 2013, early '14, we've been in a long period of kind of pressure on the carrier, and it was somewhat of a severe weather event to kind of kick that off and all of a sudden, it was tough to find a truck. I think the capacity that had been coming out of the market finally caught up with where demand was. And that led to, I think, very healthy rate increases and very strong margins. And then as you referenced in late '17, that was right when we closed the Knight and Swift merger, we saw the market take off, and I think that was attributed largely to the ELD mandate. And then obviously, we had COVID, that kicked off huge demand. It's difficult to identify what will trigger changes in the market. We can see capacity decreasing as we monitor the changes in DOT authorities and hear about long-established companies struggling to adapt to current market conditions. It’s uncertain when the balance between supply and demand will be achieved. I believe a combination of factors will likely lead to demand improvement, as customers finish destocking and begin replenishing their inventories one-for-one. Eventually, their focus will shift more toward increasing top-line sales, potentially leading to inventory growth even as demand declines. Historically, this industry rarely maintains balance; it’s akin to an object in motion remaining in motion, which may create an opportunity to increase rates. However, I can't predict to what extent that will happen. We might find that there’s more room for cost reductions, which hasn’t been seen during this freight recession due to the lack of typical economic conditions that provide cost relief. Therefore, when we return to healthy margins, it won't solely be due to rate increases. While rates will contribute significantly, we also need cost support for our industry to return to historic margin levels. We know improvement will occur; it's just a question of timing, which has been hard to predict. Thus, our strategy will be to focus on improving margins across all segments. We will control what we can and position ourselves to respond faster than our competitors when the market turns.

Maybe just add a couple of thoughts to what Adam shared, which I agree with. So yes, we're deeper than we've ever been. But I would say our operating leverage is higher than it's ever been for. If we truly look at, obviously, rates have been incredibly impactful in terms of getting to the position we're at right now on margins, but volume has also been equally impactful. So as we really look at our variable costs, we're performing kind of in line with where we've been in the past. In a significant way, there's a fixed cost absorption play here, which means with volume, our costs are going to grow slower on the ramp back up. So that leverage is going to see that curve move quickly north as well as it's gone down because of that lost volume. So as we've kind of modeled that, it gives us some encouragement that the path back could be maybe a little faster than you think if we can get volume and rate working together.

Yes, it's uncommon to see the market change in a straight line. There are usually rapid fluctuations, both increases and decreases. We're monitoring all the indicators closely, and we will respond quickly when we notice any changes.

It's a good point to consider the volume lever and utilization as well as the price. So yes, thank you for that point as well, Andrew.

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

I think there were some maybe small signs of life as we progress through the end of March, but it was obviously uncertain that was the timing around when Easter fell or was it something real? Can you just maybe give us an update on that in terms of if you saw any of that actually carry over into April? And Adam, I think, like I assume one of the reasons for the depths of the decline is because you aren't signing up for contracts and you're participating probably more so in company load boards than you have in the past. And so that obviously has an implication for what the pivot could be. And if you could just talk about the concentration in the spot market and the company load boards today relative to what it is in history and maybe what that means for your ability to participate if the spot market gives you anything to participate with?

Sure, I will address your three questions together. In March, which we've mentioned before during our pre-announcement discussions with analysts, we observed a slight seasonal change as we approached the quarter's end. This was the first significant shift in volume and the emergence of a few projects in certain markets that we’ve experienced at quarter end in quite a while. However, this change was temporary. A few weeks later, we entered April, which typically sees a slowdown as we move past quarter end, especially coinciding with Easter. This pattern is normal, but we are beginning to notice some of that volume returning. While this hasn’t resulted in premium pricing, it has generated additional volume, which is encouraging. This suggests that the supply chain is not as slack as it once was, getting closer to a balance between supply and demand, especially as we observe a slight uptick in demand consuming available capacity in specific markets. We monitor these fluctuations closely across our various brands and different markets, as these changes can occur weekly or even daily. It’s clear that some markets have strengthened, particularly with seasonal increases. We will remain attentive as we reach mid-May when the weather warms up and consumer beverage consumption rises. We anticipate seeing similar seasonal trends then, which will provide further insight into the supply and demand dynamics. In the near term, we've examined the initial bids, and we have implemented about 40% of the new pricing for our freight network. We've engaged in negotiations for around 75%. There have been some ups and downs; in some cases, we secured rate increases to support our capacity, while in others, we started at a higher premium rate and had to concede a bit, and there were instances where rates remained flat. However, there are some areas where we were unwilling or unable to meet our customers' demands. We couldn't agree to rates that weren’t sustainable. Currently, there’s a dynamic where large public carriers, focused on returning value to their shareholders, face limitations on their pricing strategies. Meanwhile, smaller private companies are merely trying to stay afloat, hoping for a market rebound to recover losses they’ve incurred. This disparity seems to be wider than we've observed in a considerable time. Our customers need to manage their budgets and costs, just as it is our responsibility to return to our business. There are situations where we determine that a partnership may not be the best fit. We will remain flexible and seek other opportunities to support our network, which could involve using customer load boards or securing bids from different clients. Even though there are some gaps in our network, we have numerous bids to pursue in order to address these issues. This process is quite dynamic as we navigate through the bidding season.

I think another positive sign, although still early, is that as we've seen some of these bids go live and implemented, there has been a churn bid coming to us. We have an opportunity to potentially secure some freight that wasn't awarded to us due to some carrier failure or rejection of the award based on pricing. This gives us a chance to continue repairing our network. While the pricing may not be at a premium today, it is closer to what we originally bid. This has been a consistent theme, not large in scale, but it serves as another indication that we are moving closer to balance. On the spot exposure complement to that question, we were in the high single digits late in 2023, and then through the churn on the contractual volume Adam talked about in the bid season. That's pushed up into the low double digits at this point. And depending on how bid season continues to play out, that could creep up further through the rest of the bid season or maybe it levels off here.

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

I would like to focus on the guidance for a moment. We expect Q2 to be better than Q1 and Q3 to exceed Q2 earnings. Some years, Q3 performs better than Q2, while in other years it performs worse. Ultimately, I am trying to understand whether you anticipate truckload rates increasing to support this guidance, or if this expectation is based on rates remaining stable. Additionally, for the LTL side, you have revenue per hundredweight projected to rise in the low to mid-teens for Q2 and Q3. Those are significant increases, and I am interested in your visibility on this, particularly for Q3 as we move forward.

All right. Scott, I'm going to have Andrew, he'll kind of dive into some of those questions here.

Thank you for the questions. There are a few dynamics to clarify as we examine the sequential numbers. Q2 is expected to be our strongest quarter from an LTL perspective, which is typically the case seasonally in our business. This will lead to a significant increase from Q2 to Q3. However, we anticipate some additional rate pressure from Q1 to Q2, not necessarily affecting our primary rates. As we engage with spot rates, we may face some downward pressure, although not significantly. Therefore, we do not expect any increases in rates between these quarters. I would describe our forecast as reflecting what we consider normal seasonality for our business under current market conditions. We are anticipating some seasonal strengthening in May and June, and Q3 will likely follow a similar trend to Q2. As such, we do not foresee any notable increases in those figures heading into Q3.

Scott, what I would add is from a rate perspective, I think it's very steady from Q2 to Q3. We don't see a lot of change there. I think some of the margin improvement will be driven more from some of our cost efforts. We're kind of leaning out our trailer fleet right now to get a tighter trailer detractor ratio. We're seeing better utilization on our seated trucks. Typically, the third quarter is one of your better utilization quarters. But I know that sometimes Q2 to Q3, it gets better, it gets worse. We're just thinking just marginally better, really driven by some of our cost initiatives, not expecting the market to really drive that change.

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

Adam and Andrew, congrats on the roles. Andrew, you mentioned back online in operating ratio for Intermodal in the second quarter. I don't know what back online means? What level is that? How much of the fleet is parked right now? And I guess, Adam, what do you eventually sell this or get out if you can't flip this to profitability? We've been hearing about this for years. And that goes back to, I guess, Knight's historic religious focus on costs. I just guess I'm not clear on what's been lost here. I get the fixed leverage. So do you just get rid of more tractors and get rid of more containers and bring it down if the industry is not doing it? What do you do to focus on those costs?

Yes, Intermodal, specifically, Ken, is your question?

The first part was Intermodal. The second part relates to corporate, reflecting the company's historical emphasis on cost control. I've heard about your leverage before, but I'm curious why there aren't more strategies to reduce costs during this downturn. What can be done to focus on that?

Yes. And so I'll hit Intermodal first, and then I think Brad may have some things to touch on as well. About Intermodal, we were actually fairly profitable in Intermodal during the pandemic, and it was driven on a couple of larger projects we had that we believed were going to be longer-term. And I think that prevented us from building the more diverse portfolio of customers that would have allowed that profitability to be more sustainable through a challenging market. And so we lost some of that business that went away sooner than we expected about this time last year, and that led to the decline in margins. And by the time that business exited, we were kind of already through the bid season. So it's been more difficult to build that volume back up. And so we've got a new leadership team that started in May of last year with a great amount of experience from a rail perspective, and they've been working very closely with our sales team and our pricing team, and we've had some very good success here recently in the bids. There's a nice pipeline of freight that we believe will come on to get this business back on better footing and profitable. And so we've got some containers in stack that we've taken off just to manage costs in the meantime. But we believe we'll be able to bring those back on once we start to see the volume pick up in this business. We're anticipating we get closer to breakeven in the third quarter and then some small profitability into fourth and really continue to build it from there. That's how we approach Intermodal. On the consolidated company, there's more that we can do with cost. We probably came into this market with a little more overhead and a bit more equipment than we needed. We invested heavily in trailers because power only was such high demand and it was very profitable. We found as the market changed that that wasn't going to be as sticky as we anticipated, and customers converted freight to live load, live load to pick up the savings. It was less efficient for them, but they liked the savings that came from that. We found ourselves with more equipment than we really need in this market. So we're in the process now of leaning that out from a trailer perspective. That's where we have the most opportunity, but there's even some tractors that we put to work during the pandemic from a lease perspective and were very profitable. When they have come back, we just haven't had the freight to support that equipment. So we'll be leading that as well. I think there's some nice cost savings that come from that. Really, we've got our teams just focused on the fundamentals, the core. The goal is not to rely on the market to solve our problems. We need to focus on what we can control, and cost will be our main priority. I believe this will drive our improvement in the latter part of the year. If the market helps us, that’s a bonus, but we are not going to compromise on our cost management.

Yes. And then I was just going to add, Ken, that initial comment that your question was referring back to was actually a comment to our LTL business, not Intermodal, where we stated that we expected while our operating ratio was 90 in the first quarter, it will get back in line on a year-over-year basis in the second quarter.

Right. Because I think we said we ran at 90 on the LTL, and there were some factors with weather and then a little bit of additional cost as we rolled out some facilities, but we expect to get back to the mid-80s, similar to what we would have run last year.

Your next question comes from the line of Jordan Alliger from Goldman Sachs.

Just sort of talking about LTL for a second. Obviously, pretty strong expansion plans for the balance of this year. Can you talk to the ability to get the staffing headcount needed both in terms of drivers and the terminal folks? And is there much wage inflation to sort of get these people? And then maybe just an update on how you expect the rollout of the next '25 to go?

Yes. I mean, thus far, we haven't had a challenge of staffing those buildings. I mean, there was obviously a terminal there before and labor that supported those locations. Now maybe different labor that we'd be looking for. But thus far, that hasn't been the biggest challenge for us. As we kind of manage the rollout of these locations where we want to be very deliberate and not put too much pressure on the cost side of our business. But typically, you're going to have some labor and some startup costs to get a building operating. But because we have great relationships with some larger shippers and some of these locations fill out territories that they would have needs in, we're already connected in and can plug those ZIP codes in those territories in. Very quickly, we start to see freight come our way. Our goal is to quickly increase the number of shipments to cover the costs of getting our buildings operational and to achieve profitability. We believe several of these facilities are already online or will be by April, and we expect to launch around 24 more throughout the year. Some of this may occur towards the end of the third quarter or early fourth quarter. Our team has been working diligently on this, and everything is proceeding as planned. If we encounter any market shifts or cost challenges, we have the option to adjust our pace. Currently, we are enthusiastic about expanding our network, entering new territories where we don't operate yet, and exploring opportunities for growth with both existing and new customers.

I want to emphasize that we can effectively manage our costs. We can adjust our spending as we grow. Initially, establishing one of these facilities requires minimal investment, allowing us to gradually scale as we increase our volume. Additionally, it's worth mentioning the positive impact we’ve seen in our LTL business due to the network effects. After acquiring MME and AAA Cooper in 2021 and integrating them onto the same system about a year later, we have observed significant growth. Specifically, Q1 volumes from those brands increased by 90% from Q1 2023 to Q1 2024. Initially, we gain some volume, but as we delve into the bid processing and capture more national freight, the benefits across our network become substantial. The pace at which we are adding facilities continues to accelerate, generating its own momentum in the network. This momentum will only increase as we continue to open new facilities.

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

Adam, could you share your thoughts on the current state of the cycle? We hope we are at the bottom, but as we analyze what comes next, do you believe any structural changes have occurred that might extend this downturn? There seems to be more guaranteed payouts and increased capacity in trailer pools, which should provide more data. Also, considering the COVID earnings carryover, I’d like to hear your perspective on that. Additionally, why are we seeing a net increase in truckers according to some recent data? I’m interested in your insights on this as well.

Yes. I don't see any structural changes in our industry that would hinder our ability to maintain typical margins through various cycles. During COVID, many large companies added trailers, which was widely reported, but smaller companies focused on purchasing tractors, which were quite expensive. Consequently, we did not observe the same level of trailer growth among smaller players; it was primarily the larger companies with substantial asset bases that experienced that growth. I believe we are starting to notice a decline in trailer orders, which I attribute to an oversupply. This situation should self-correct over time, especially as the demand from customers for trailers has decreased. What was your other question? Apologies, I couldn't catch it. We monitor that as well, but interpreting the data can be challenging because we assess it in a general sense. A small trucking company and a large one are treated similarly in terms of data, as they both just represent a DOT number. What we're finding is that there is likely a significant amount of capacity exiting not due to DOT failures, but because companies are reducing their fleets. We observed this through our insurance business, where we gained visibility into the smaller fleets. We indeed saw many of them dramatically reducing in size, not going out of business entirely, but decreasing their truck counts because they couldn't maintain productivity levels to support their payments. The net figure is just one data point and doesn't provide the complete picture. There is nothing that fully captures what is happening overall. While we use this data point, we also consider many other internal factors that help us understand the demand and capacity situation.

And that perspective on the capacity side, is it shrinking just not fast enough?

Yes. If you consider how much was added during COVID due to the appealing spot rates for small truckers and the low barriers to entry, a significant amount was introduced. Consequently, we have a lot to manage. Simultaneously, demand has decreased because of customer inventory adjustments. We need both demand and supply to realign to see improvement. This will happen eventually; it's just a question of timing. We are focused on managing our costs and optimizing our margins while ensuring we can respond effectively to market changes and capitalize on opportunities when they arise.

And I would just add there, Brian, in the earlier days of the pandemic, a lot of that swelling of capacity, the one and two truck operators made up an outsized share of that swelling of capacity as compared to the complexion of the industry prior to the pandemic.

Your next question comes from the line of Bascome Majors from Susquehanna.

Adam, thank you for that strategic high-level overview, and it feels like the traditional Knight approach of a cost focus and cyclically aware management and capital deployment and both expanding the portfolio and growing the existing services is very much how you plan to run the business. If we took a more nuanced view into how you plan to lead versus how the business has been led in the last 20 years, is there anything you'd want to highlight that you feel that you might do a little differently that we should pay attention to?

I believe our overall strategy remains strong. I've collaborated closely with Kevin Knight over the past two decades, and we share a similar perspective. On the truckload side, we need to be a market leader no matter the circumstances. During prosperous times, we aim for the best operating ratio and efficiency, and we must maintain that in challenging times as well. It's easy to overlook some cost aspects when the market is thriving, but we must stay disciplined in both good and bad times to ensure we maintain a cost advantage over our competitors. We're going to continue to build out the LTL network. I think everyone here is very aligned with that and sees the value in that, and we're going to do that organically where we can and where we think it speeds up the process and we can get good returns, we will look at M&A as an opportunity. I think from a Logistics standpoint, we found that we really have invested in power only, but we found that we can do that business. We can operate it with fewer trailers than we have today. I think that's one of the major adjustments that we're making currently is rightsizing that trailer to tractor ratio without impairing our ability to do power only, and we think there's quite a bit of opportunity to do that. We want our Logistics business to complement what we do on the asset side. In many cases, it's there to support from a service perspective. But in some cases, it's giving freight back to truckload. Now certainly, we have direct relationships with Logistics with our customers, and we like doing that as well. But our Logistics business can really ride the wave of being part of one of the best operated truckload businesses in the industry, and we need to make sure that we create that alignment. I already talked a lot about Intermodal and what we need to do to build the profitability back up there, and that's underway. It will take some time, but we feel confident with the agreements we have with our rail partners and the leadership we have there and the progress we're making in some of the early bids this year that we'll have a pathway to see that profitable. But really, again, we want to keep the nimbleness in the market to be able to react to changes. We've got to have a cost discipline and again, leverage the unique position we're in as an industry leader.

I think our time has expired here. So I think we'll go ahead and conclude the call. For those of you who weren't able to get a question or want to follow up, you can call (602) 606-6349, and we'll try to return your call as quick as possible. I appreciate everybody who joined the call, and we'll look forward to talking to you later if you have a question.

Thanks, everyone.

Thank you.

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