Knight-Swift Transportation Holdings Inc. Q3 FY2025 Earnings Call

Good afternoon. My name is Ina, and I'll be your conference operator today. I would like to welcome everyone to the Knight-Swift Transportation Third Quarter 2025 Earnings Call. 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 one 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 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 two 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 this 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 number 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 commercial driver’s licenses, 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 in the unsustainably soft price environment our industry has faced over the last three 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. 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 cost, network management, and equipment utilization and looks 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 U.S. Xpress, primarily driven by settlement of two large 2023 U.S. Xpress 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. Our 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 two 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 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 to 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. 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.

Moving to Slide 6. Our LTL business grew revenue excluding fuel surcharge, 21.5% year-over-year, with shipments per day up 14.2% as we lapped 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 five quarters as volumes remain 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 one new service center and replaced two 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 appears 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 around the makeup of 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 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 decline 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 two 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 four-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 experience 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 to fourth. 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's contribution to remain fairly stable as compared to the third quarter. For our all other segments, we expect the seasonal slowdown in earnings for this category in 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 remind everyone to keep it to one question per participant. Thank you.

We will now open the line for questions.

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 saying breakeven in Q4, just that'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 you've asked three questions, and I'll try to address them together. I don't want to set a precedent here. Yes, regarding the all other category, you are interpreting that correctly. We hinted at this earlier in the year, and it follows the usual seasonal trend. This pattern is primarily influenced by our warehousing operations, which tend to have a lot of work front-loaded earlier in the year, while very little occurs in the fourth quarter. This was also the case last year. We aimed to smooth this out, but it didn’t occur this year. That's how we've modeled it in past years as well. Regarding the regulatory question, there are many uncertainties. There are several estimates out there, including the FMCSA's projection of over 200,000 non-domiciled CDLs issued, though many of those may not have been issued correctly. Enforcement appears to differ by state, as we're noticing some states starting to revoke CDLs. We have a very small number of drivers with non-domiciled CDLs, perhaps just a few dozen, and we've observed some activity regarding those, even for those we believe were issued correctly. It's going to be interesting to monitor closely. Recently, there's been more enforcement related to English language proficiency, and violations have increased significantly over the past few months as this has been emphasized. With some states now facing federal funding being withheld, those that have been reluctant may need to implement regulatory changes based on the new laws. In certain markets, we can definitely see instances where carriers are hesitant to take longer hauls due to the risk of encountering more checkpoints. Some carriers prefer to operate strictly within states where they think enforcement won’t be as rigorous. This has created challenges in sourcing capacity in our logistics business, and we've heard from some customers who have projects but are specifically requesting that non-domiciled drivers not be used due to potential concerns should any incidents arise. It feels like this situation is escalating. The non-domicile issue combined with English language proficiency, which I initially thought wouldn't significantly impact capacity, now appears to be gaining momentum. We are starting to notice tighter conditions in certain markets, and I expect this trend to continue. Did I cover that, Scott?

Yes, I asked about the private fleet matters as well, but perhaps we can discuss that later.

I'll address that later. Yes, I believe this has just been informal feedback from many of our customers. Some have developed significant private fleets, while others created smaller fleets during the pandemic. They are realizing that they may not be fully utilizing their capacity and that outsourcing may provide more value than handling it internally. As these trucks reach 4 or 5 years in age and they consider refreshing their fleets, we are seeing that many are opting to reduce capacity and outsource where it makes more economic sense.

So I wanted to focus on LTL, I 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 the 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, what inning we're in, etc.

Sure. We'll address that, Richa. In the short term with LTL, we’ve observed some softness in the early weeks of the quarter. It’s difficult to draw conclusions from just a couple of weeks, but we thought it was important to mention, and we are responding to this by making necessary adjustments, particularly regarding labor. We've developed our network to accommodate a specific volume, and we’ve been gradually increasing this volume over recent quarters. A reduction in volume does exert some pressure on costs, and we will manage what we can in the near term. However, as we contemplate the bid season and its progression, we are optimistic about the potential opportunities that may materialize by late first quarter and into the second quarter. We aim to be ready to manage those volumes. We’ve indicated where we anticipate the operating ratio to be from the third to fourth quarter, and if you consider our trend from last year, it aligns with the typical sequential decline given the customer mix we serve. Notably, we often experience a significant slowdown in the latter half of the quarter, especially in December, which is something we need to navigate. Nonetheless, we are taking numerous steps to manage costs effectively while aligning them with our shipment volumes. As we continue to build out this network, we remain optimistic about achieving growth within our existing network without needing to open many new properties in the near term. Regarding our capabilities with LTL and truckload, we are discovering real opportunities to utilize empty lanes between both operations, allowing us to transition loads partway with truckload and then move to our LTL fleet to save on costs from running empty. Our LTL business is also leveraging our truckload fleet for any surge needs instead of outsourcing. We are continually identifying opportunities as we scale LTL and develop systems that help us find these synergies, not only between truckload and LTL but across all our truckload brands. Previously, these connections were managed manually through communication and relationships, but we are now rolling out systems that will enable us to quickly identify these opportunities and facilitate seamless collaboration across our businesses. We believe we are just beginning to uncover the potential for collaboration between truckload and LTL, and we expect to grow from this point forward.

I would like to add a couple of points. The Q3 to Q4 seasonality may appear to be somewhat stronger for us compared to what you may be accustomed to with our peers in LTL. This is due to the nature of our business, which is highly sensitive to volume, thereby impacting margins. To clarify how we improved our LTL margins by 250 basis points from Q2 to Q3 with similar volumes, I will highlight three key areas. First, in labor, we have in-sourced much of our purchase transportation, reducing it as a percentage of labor by 2.3%. Our headcount has decreased by about 2.5%, allowing us to rightsize in alignment with our freight flow. We are also seeing improvements in scheduling, hours, and dock efficiencies, leading to a $2 per shipment improvement in variable labor quarter-over-quarter. We believe these improvements will persist, independent of the volume, which will further leverage our business. Additionally, we've addressed inefficiencies related to business integrations, such as travel costs, contract labor, and equipment rental, which have all been reduced this quarter, and we anticipate this trend will continue as we see potential in these areas. The implementation of new technology in our pickup and delivery processes is already showing benefits, and we expect further gains. Moreover, we have streamlined our operations by replacing redundant facilities over time, reducing duplicate costs in certain areas. As we achieve stability in our network, these structural costs will continue to decline. The changes from Q3 to Q4 mainly reflect the volume's effect on margins in a business with high fixed costs.

Okay. Understood. Just a quick question. The softness you mentioned is mainly due to volume issues in LTL and is not related to pricing. The current market conditions remain rational and consistent with previous trends.

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.

I wanted to ask about the cost-cutting opportunities. You mentioned last quarter that there was an increased focus on reducing costs and finding ways to be more efficient. I'm curious about the progress on that for each of the segments.

Sure, let me focus on the question about LTL and discuss our cost management approach in the Truckload segment. I will break it down as our strategy varies by area. First, regarding fixed costs, which account for about one-third of our truckload expenses, we have made significant strides in reducing our fixed cost spending and the cost per mile as a percentage of revenue, both compared to last year and the previous quarter. We view this progress as substantial and likely permanent. Approximately half of these fixed costs are related to equipment, which is a significant factor in our overall expenses. Our strategy for managing equipment involves multiple facets, including a detailed analysis of equipment lifecycle, procurement practices, improved asset utilization, and maintaining optimal truck-to-trailer ratios. We believe there is still potential for further mileage on our trucks, which will provide leverage as we increase volume, and our goal is to continually lower our equipment cost per mile on a year-over-year basis. In the second area of fixed costs—G&A and overhead— we have implemented various significant initiatives, including lean management and technology-driven projects aimed at counteracting inflation and consistently reducing our G&A and overhead costs each quarter. We've made meaningful progress in this area sequentially. We have also taken a new approach to managing facility costs, enhancing our understanding of the underlying expenses, and our aim is to achieve a lower cost per square foot annually. Now, shifting to variable costs, which make up the remaining two-thirds, we primarily focus on driver pay, maintenance, insurance, and fuel. We've adopted lean management and continuous improvement practices here as well to manage inflation and reduce our variable cost per mile. Each category has its own tailored strategy. For maintenance, we are examining the costs involved in internal versus external processes. Regarding fuel, we are optimistic about our miles per gallon metrics, although we expect some fluctuations in fuel costs on a quarterly basis, as we observed this quarter. However, we believe our overall operating performance in this area is strong. We are leveraging new technologies in our trucks to aid fuel management, which hinges on disciplined planning and instilling a culture of accountability. Insurance is another critical area, facing significant inflation pressures. We anticipate seeing increased volatility in claims costs that may impact our results. However, we believe our ongoing efforts will lead to positive outcomes. Our DOT crash performance is on track to be the best it's been in three years, and this year we expect LTL to achieve its best performance in that regard as well. By concentrating on these metrics and investing in supporting technology, we aim to turn insurance costs into a competitive advantage. It’s a complex situation as each area has unique challenges, but we are committed to sustainable, continuous improvement, ultimately seeking to enhance our margins over time.

I would add...

Yes, go ahead, Adam. Sorry.

Yes. just one 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.

Could you provide more clarity on how far along you are in implementing these initiatives and what results are being seen? Additionally, how much can these initiatives improve margins independently of any rate improvements that may still be available?

No, I don't think it's too late. Our efforts in this area have been sincere for the past year. It still feels like we're in the early stages, especially regarding the technology-driven efficiencies we anticipate will impact our general and administrative expenses as well as overhead costs. This topic likely requires more time than I can devote right now to fully explain. However, we believe there is significant potential to positively influence our business. We have been diligently working on it, and we expect the results will primarily manifest in the future. We anticipate that by 2026, we will begin to see that impact on our business.

Adam, I have a quick question about the confusion regarding the adjusted EPS. Can you explain why it was set at $0.32 instead of the $0.42, which seems to be the actual figure if we disregard the two charges? Additionally, I'd like to revisit your comments about fourth quarter seasonal demand. You mentioned seeing a lot of requests, but also indicated that it's not translating into actual seasonal demand, which seems like a mixed message. I want to clarify your stance on that.

Yes, I appreciate that, Ken, and I want to clarify. Regarding the $0.10 linked to the third-party insurance and the U.S. Xpress settlement, historically, we have not excluded these from our reporting. We are maintaining our usual reporting approach, but we want to make it clear that we view these as somewhat unusual charges. We adjusted for impairments without adjusting for claims expenses. As for the fourth quarter, we started with several peak projects already awarded to us, some of which we have begun executing. There are others scheduled for later than we usually see, but they are projects we have been awarded and expect to generate significant margins. However, the overall demand hasn’t increased as we typically expect from the third to the fourth quarter during a strong peak season. Thus, there is limited seasonality with certain customers and projects we already have. Last year, we had a couple of unexpected projects develop mid-fourth quarter that positively impacted our results, mainly within our Swift business. We are discussing similar opportunities, but nothing has been awarded yet. At this point, I can't confirm any expected volume. What I'm trying to convey is that while there is some peak seasonality, it is currently limited. This situation could change, but based on our current visibility, we anticipate what is already in our pipeline and expect limited seasonality beyond that.

Would that be in your range? Is that in the $0.34 to $0.40? Or is that something that pushes beyond that?

The $0.34 to $0.40 is what we know today.

Okay. And then just a quick follow-up on an earlier answer, Theresa. I was surprised by your response regarding the OR bounce because I thought you had start-up costs from a year ago. I understand there’s talk of seasonality, but weren't there also start-up costs included in that figure?

We incurred some start-up costs with DHE, but we also saw an increase in our shipment count from the third to the fourth quarter. Currently, we have noticed a slight downturn in the first two weeks, leading us to adopt a cautious stance regarding our margins, depending on whether this trend continues. We may adjust our expectations if we see an uptick in volumes. It's unclear how much of this slowdown may be attributed to the government shutdown and how it affects LTL shipments. Notably, our channel checks suggest that other LTL carriers are experiencing similar trends.

Hopefully, the enforcement of non-domiciled CDL and English proficiency is a little bit better than asking one question and one question only. Here's my one question, Adam, a little interesting that Knight-Swift was so supportive of the 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 where on the surface, it looks like it could be more competitive to your core business.

Yes. I believe that if it provides a cost-effective solution for our customers, we would support it, especially since we have an intermodal service that supports our customers through our rail partners. Regarding the long-haul freight you mentioned, we actually don't transport much of that type of freight currently. We focus more on regional and tougher freight where we have the expertise to price effectively and generate healthy revenue per truck per day. Long-haul freight is usually the least expensive because it attracts smaller carriers who primarily aim to maximize their mileage, and these carriers are often less safe. Therefore, providing a better solution for customers needing long-haul service would not harm our business; instead, it would complement it, as we can offer intermodal services, which are not a direct competition to our truckload business.

I'm going to stick with the three run-on question 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 I just want 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 two to three weeks' time?

Yes. We will need to adjust the rules for this discussion. I believe Scott may not have started this conversation correctly. I’ll try to combine that into one question regarding how the market appears right now. Concerning capacity, we are observing some tightness in specific areas, which we can identify through our brokerage business as they seek certain capacity in various markets. This situation is starting to develop, but it is not widespread yet. However, I anticipate that over time it will increase. There is likely a timeline of one to two years before many of the non-domiciled CDLs expire. I think this process will not be gradual, and we might start seeing changes sooner in that timeline, possibly around 2026. But this is not something we are factoring into our fourth quarter projections. For the fourth quarter, we are focused on the projects that are already in our system. Some have already commenced, while others may begin in late October or early November. Some projects have specific timelines but may be delayed if the customer still requires them, which we're beginning to notice with some ongoing projects. Thus, it remains somewhat uncertain. We expect to begin any projects awarded to us on the scheduled date. The real question is whether there will be new developments that significantly impact us, similar to what occurred last year. We are not incorporating that potential into our guidance. If it does happen, it would provide us with some upside. That addresses your long question, Ravi.

So I wanted to, I guess, get your thoughts on how much price maybe you need and to improve truckload margin in 2026. Clearly, there's a lot of hard work going on, on the cost side to control costs 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 due 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 back half will be driven more by price.

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?

The approach will vary from customer to customer. Some are proactive, looking ahead to select carriers for their portfolio in anticipation of a tighter market, and are willing to engage more on the contractual side to secure that capacity. Others, however, prefer to focus on getting the best immediate prices and will address any future network impacts later. Our customers have different strategies; some issue mini bids weekly for lanes they struggle to cover, allowing carriers to place competitive bids, often resulting in premium rates in tight markets. Others use transactional spot boards, and some might seek to secure more capacity at better rates to avoid disruptions. Ultimately, we adapt to each customer's preferences and strive to provide excellent service with flexible capacity. We stay nimble, avoiding overcommitting capacity so we can quickly respond to market changes, which helps us enhance our margins more swiftly than the industry average. That brings us to the end of our call. We appreciate everyone who participated today, and if we didn't get to your question, please reach out to the provided phone number. Thank you again for joining us.

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