Knight-Swift Transportation Holdings Inc. Q4 FY2025 Earnings Call

Good afternoon. My name is Constance Constantine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Knight Swift Transportation Fourth Quarter twenty twenty-five Earnings Call. All lines have been placed on mute to prevent any background noise. If at any time during this call you require immediate assistance, please press 0 for the operator. Speakers from today's call will be Adam Miller, Chief Executive Officer Andrew Haas, Chief Financial Officer and Brad Stewart, Treasurer and Senior VP of Investor Relations. Mr. Stewart, the meeting is now yours.

Thank you, Constance. Good afternoon, everyone, and thank you for joining our fourth quarter 2025 earnings call. Today, we plan to discuss topics related to the results of the quarter, current market conditions and our earnings guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to last 1 hour. Following our commentary, we will answer questions related to these topics. In order to get to as many participants as possible, we limit the questions to 1 per participant. If you have a second question, please feel free to get back in the queue. We will answer as many questions as time allows. If we're not able to get to your questions due to time restrictions, you may call (602) 606-6349. To begin, I will first refer you to the disclosures on Slide 2 of the presentation and note the following. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A, Risk Factors, or Part 1 of the company's annual report on Form 10-K filed with the United States SEC for a discussion of the risks that may affect the company's future operating results. Actual results may differ. Now please turn to Slide 3, and I will hand the call over to Adam for some opening remarks.

Thank you, Brad, and good afternoon, everyone. During the fourth quarter, the truckload market saw demand that was generally stable, but lacking the typical broad-based seasonal lift in demand until late in the quarter. Seasonal project activity occurred in October, but wound down quickly in early November. As a result, truckload volumes were lower than we expected. While we did see some improvement in overall demand and a tightening spot market in December, it was a reduction in available capacity that seemed to be the primary driver of the tightening market. The pressure on capacity also may be affecting the secondary equipment market as we experienced slowing equipment sales trends and falling average prices during the quarter. Developments such as these are often a precursor to a more healthy market. Thus far in January, network balance is running better than typical seasonality as capacity continues to be under pressure. We are pleased that our people were able to deliver meaningful sequential operating margin improvement in our Truckload segment, even while demand was short of our expectation for much of the quarter. For the full year, our progress on structurally cutting costs out of the business helped us overcome a $125 million decline in truckload revenue, excluding fuel surcharge, but grew adjusted operating income $28 million in this segment. At the same time, the Truckload business overcame inflation pressures to hold its 2025 cost per mile flat with 2024 despite miles declining 3.6%. Our LTL team was able to produce year-over-year shipment growth for the fourth quarter in a lower demand environment even after lapping the DHE acquisition in the prior quarter as our expanding network continues to help us create new opportunities. This team also responded quickly to the changing environment, stepping up the intensity of our cost initiatives to deliver operating margin within 60 basis points of the prior year levels, even while shipment count growth fell well below that of the growth in facilities and door count year-over-year. As we move into a new year and with anticipation building for a turn in market conditions, we felt it would be helpful to review our company's profile and to highlight some of the things we are focused on to better position ourselves for earnings growth moving forward. I won't touch on every part of our business here, but I wanted to share a few thoughts. First, we operate the largest fleet in the truckload industry and roughly 70% of our fleet is deployed in one-way or over-the-road service. It is true that the one-way market has been the most difficult place to be over the past 3-plus years as this market has felt the brunt of the influx of capacity since the pandemic, but one-way service is what typically improves first and most in a tightening market. Our unique ability to deliver responsiveness at scale and with industry-leading trailer pool flexibility are competitive differentiators that attract opportunities, especially in a tightening market. Second, the significant progress we have made cutting costs out of our truckload business has driven year-over-year earnings growth despite lower revenue. Further, while the deleveraging effect of lower miles has masked some of our progress in reducing cost per mile, we believe most of the fixed cost reductions are permanent and position us for better incremental margins as volumes and pricing recover. The incremental margin opportunity is further enhanced by the room to improve utilization on the existing fleet. While we have made meaningful progress on cost to date, there are still a number of opportunities to further improve and to scale our business efficiently. We have been investing in internal development and external products to facilitate tech-enabled efficiency gains as well as better revenue capture, including through AI and other methods. We expect the benefits to begin to be realized in 2026 as we more fully roll out these technologies and as an improving marketplace provides us opportunity to scale more efficiently. Finally, our entry into the LTL industry and subsequent expansion over the past few years is just the beginning of what we believe will be a multiyear journey with an attractive runway for reinvesting free cash flow towards improving revenues, margin and earnings stability. As we have grown our facility count faster than our shipment count over the past 2 years, this has weighed down margins, but we expect a more deliberate pace of network expansion in the near term will allow us to restore margins as we continue to grow into these investments. We believe the existing infrastructure has capacity to support annualized revenue of $2 billion. As we continue growing into these investments, the operating leverage will be further enhanced by building density and optimizing our cost structure to help us reach our goals of steady margin improvement. Then, when we look externally, there are a number of factors that increasingly indicate the truckload market could begin to grow stronger in 2026. Capacity reduction is clearly underway. Regulatory enforcement of qualifications and safety standards was arguably the most welcome development in 2025 for our industry. The influx of capacity from 2021 to 2024, much of which was played by a different set of rules and operating with different cost structures has distorted pricing behaviors and cyclical patterns. The ongoing efforts of the FMCSA and DOT to prevent and revoke improperly issued CDLs, shut down noncompliant CDL schools and address hour of service abuses should, in our view, have an outsized impact on the lowest priced capacity in the one-way truckload market. Aside from the regulatory cleanup, capacity continues to erode, especially in the one-way truckload market where struggling carriers are running out of liquidity and large players continue to shift towards dedicated services. Second, market data trends have improved of late. Despite muted demand, rejection rates climbed in recent months and are hanging in above year-ago levels in early January. Similarly, market spot rates and the spot versus contract spread improved exiting 2025 to the best level seen since early 2022. These market trends align with those seen within our own businesses. And finally, the inventory pull forward appears largely worked off as a result of solid holiday sales, and there is a potential for stimulative support for demand from the tax bill and Fed rate cuts. It appears the market has progressed to a point where even small increases in demand can cause disruption and our industry-leading over-the-road capacity is uniquely positioned to create value for our customers and capture opportunities for our business. The market and regulatory developments in the back half of 2025 give us increased confidence in the path to return our Truckload segment back to mid-cycle margins. We are not here to call the turn by any means, but we are closely monitoring market trends, bid developments and signals from our multiple nationwide truckload networks, and are prepared to execute our playbook for deploying capacity towards the most valuable opportunities as the landscape shifts. We remain committed to thoughtfully deploying capital, intentionally leveraging our strengths and creatively unlocking synergy opportunities across our business. And with that, I will turn the call over to Andrew and Brad to review the results of the quarter and our guidance.

Thank you, Adam. The charts on Slide 4 compare our consolidated fourth quarter revenue and earnings results year-over-year. Before diving into the comparisons, it's crucial to highlight that our GAAP results for this quarter include $52.9 million in noncash impairment charges, mainly due to our decision to merge our Abilene Truckload brand with our Swift business. These impairments have been excluded from our non-GAAP results as detailed in the reconciliation schedules following this presentation. Revenue, excluding fuel surcharge, slightly decreased by 40 basis points, and operating income fell by $51.5 million year-over-year, primarily because of the impairment charges mentioned earlier. Adjusted operating income decreased by 5.3% year-over-year due to softer truckload and LTL demand compared to the fourth quarter of 2024. GAAP earnings per diluted share for the fourth quarter of 2025 reported a loss of $0.04, chiefly related to the aforementioned impairments. In the prior year, GAAP earnings per diluted share were $0.43, which included a $36.6 million benefit from a mark-to-market adjustment related to the U.S. Xpress acquisition. Adjusted EPS was $0.31 for the fourth quarter of 2025 compared to $0.36 for the fourth quarter of 2024. Our consolidated adjusted operating ratio stood at 94%, up 30 basis points year-over-year and 20 basis points sequentially. The effective tax rate for our GAAP results was 21.6%, representing an increase of 820 basis points year-over-year. The effective tax rate for our non-GAAP results was 23.1%, higher by 460 basis points year-over-year. Slide 5 illustrates the revenue and adjusted operating income for each of our segments for the quarter. Overall, truckload increased as a portion of our consolidated revenue quarter-over-quarter, with the fourth quarter typically being the peak season for this sector, while it is usually the weakest for LTL. We expect LTL to return closer to its recent 20% share in the coming quarter as seasonal improvements occur. We have been enhancing our ability to generate revenue synergies across our brands and service lines. Our key strategies involve intentional leadership to foster collaboration and using technology to ensure seamless connectivity. By utilizing excess capacity in one brand to meet excess demand in another, we enhance our ability to identify and seize more market opportunities while addressing internal network discrepancies. We have previously relied on collaborative practices, but these recent advancements make such efforts more systematic, responsive, and scalable. These are deliberate investments chosen based on their potential to drive our business forward. Now, let's discuss each of our segments, starting with the Truckload segment on Slide 6. As Adam noted, volumes in the Truckload segment fell short of expectations, reflecting generally lower demand compared to the same period last year until late in the quarter. Moreover, seasonal project activities in October were shorter than in the prior year, likely because some freight was moved earlier than usual due to trade and tariff issues throughout 2025. Additionally, blockades at the Mexico border during the quarter hindered productivity, particularly for our TransMex division. While we observed some improvement in demand towards the end of the quarter, supporting spot rates, it was not enough to fully offset the weaker results in November. The secondary equipment market declined during the quarter, likely in part due to increased regulatory enforcement affecting smaller carriers, resulting in gains on sale being approximately $4 million below our expectations and prior quarter levels. Year-over-year, revenue excluding fuel surcharge dropped by 2.4%, and adjusted operating income decreased by $9.2 million or 10.7%, primarily due to a 3.3% drop in loaded miles. Revenue per loaded mile, excluding fuel surcharge and intersegment transactions, rose by 0.7% year-over-year and improved by 1.4% sequentially over the quarter. The combined adjusted operating ratio for the fourth quarter was 70 basis points higher year-over-year. Excluding U.S. Xpress, the Legacy Truckload brands operated at a 91.6% adjusted operating ratio, while U.S. Xpress enhanced its adjusted operating ratio by 430 basis points year-over-year to the mid-90s as seasonal project participation reached its peak since the 2023 acquisition. Finally, in the fourth quarter, we opted to merge the Abilene trucking operations with our Swift business to boost efficiency and increase productivity by integrating these assets and freight flows into a more robust network with additional freight opportunities. We continue to make significant strides in improving our cost structure to position our business for meaningful returns as market conditions recover.

Moving on to Slide 7. Our LTL business grew revenue excluding fuel surcharge by 7% year-over-year with shipments per day up 2.1%, a lower growth rate than the previous quarter as we lapped the acquisition of DHE on July 30, and as market demand moderated at the beginning of October. Revenue per hundredweight, excluding fuel surcharge, increased 5% year-over-year. Adjusted operating income decreased 4.8% and the adjusted operating ratio increased slightly by 60 basis points year-over-year. As Adam noted, in response to the moderating demand environment during the quarter, we stepped up the cost initiatives we had announced last summer to mitigate pressure on margin. We are taking action where prudent in the short term, but without sacrificing our ability to respond to growth opportunities through ongoing bids as discussions around bids currently in process are encouraging. During the fourth quarter, we opened one new service center and replaced another with a larger site, bringing our growth in door count to 10% year-over-year. We have opportunities to optimize our operations and cost structure as our network and business mix mature, and we have confidence in our plans to achieve this. Our solid service levels, growing customer base and ground to make up on pricing provides a compelling runway for the value to be generated by this business. Now, I will turn it over to Brad for a discussion of our Logistics segment on Slide 8. Thanks, Andrew. Logistics revenue for the fourth quarter declined 4.8% year-over-year as volumes were down 1%, while revenue per load was 4.1% lower due to mix change. Third-party carrier capacity grew noticeably more difficult to source during the quarter, which pressured gross margins. Gross margin of 15.5% for the fourth quarter declined 230 basis points from third quarter levels and 180 basis points year-over-year. The adjusted operating ratio was 95.8% for the quarter. Another recent trend is the increase in cargo theft in the industry. While fraud and theft in the industry has been on the rise over the past couple of years, channel checks indicate a rash of theft in the quarter, some of which appear to be related to operators being forced out of the business through either financial struggles or regulatory enforcement. If these trends continue, it could further encourage shippers to allocate more business to direct asset-based carrier relationships. For our part, we have been further tightening our already rigorous carrier qualification standards and narrowing the existing carrier base that we tender loads to. Also, if upward pressure on third-party capacity cost continues, this could cause further pressure on gross margin in the near term as capacity continues to erode. However, given the relationship between our Logistics segment and our Asset-Based Truckload segment, we believe these dynamics would ultimately benefit both our asset and logistics businesses over time. Our Logistics business has demonstrated its agility in navigating a volatile market the past few years by maintaining its operating margin close to target levels through disciplined pricing and cost management. This team is now further leveraging technology to take cost efficiencies to a new level as well as to improve our responsiveness and ability to capture opportunities in the market, which we expect will contribute to earnings in 2026. These enhancements, combined with its complementary relationship with our asset business, position our Logistics business to accelerate revenue growth and the return on our trailer assets in an improving market. Now on to Slide 9 for a discussion of our Intermodal business. The Intermodal segment improved its adjusted operating ratio 140 basis points year-over-year to 100.1%, driven by a 2.8% increase in revenue per load as well as structural cost reduction and improvement in network balance, which led to significant year-over-year reductions in empty repositioning, trade and chassis costs. Revenue declined 3.4% year-over-year on a 6% decrease in load count, partially offset by the increase in revenue per load. On a sequential basis, revenue grew 1.7% with a 2.6% increase in load count, with both measures reaching their highest marks for the year. We look forward to leveraging the new chapter in our rail partnerships in an improving market. And in the meantime, we remain focused on delivering excellent service and driving appropriate returns through growing our load count with disciplined pricing, cost control, network balance and equipment utilization. Slide 10 illustrates our all other segments. This category includes support services provided to our customers, independent contractors and third-party carriers such as equipment sales and rentals, equipment leasing, warehousing activities, insurance and maintenance. For the quarter, revenue increased 17.7% and the operating loss in the seasonally slow period for this category improved by $5.9 million or 37.3% year-over-year, primarily driven by growth in our warehousing and leasing businesses. Now on Slide 11, we have outlined our guidance and the key assumptions, which are also stated in the earnings release. Actual results may differ from our expectations. Based on our assumptions, we project our adjusted EPS for the first quarter of 2026 will be in the range of $0.28 to $0.32. In general, this guidance for the first quarter assumes current conditions remain stable and that we experienced some seasonal slowing in the truckload market and seasonal recovery in the LTL market. The key assumptions underpinning this guidance are listed on this slide. I won't take time to read through all of our assumptions here, but I do want to touch on a couple of the more significant moves other than the typical seasonality in truckload. We expect a strong bounce back in our all other segments category after its seasonal slow period in the fourth quarter, and we have significantly reduced the range for expected gain on sale based on the secondary equipment market trends that we noted in our earlier comments. Now this concludes our prepared remarks. And before I turn it over for questions, I want to remind everyone to please keep it to one question per participant. Thank you.

Your first question comes from the line of Richa Harnain from Deutsche Bank.

I guess we can begin with the outlook. Adam, you mentioned several items to look forward to in 2026, some positive factors. Can you elaborate on why we're not seeing a stronger outlook for Q1 in light of those factors? I understand there’s some seasonality, but could you discuss that? Additionally, any guidance on how we should think about Q1 in relation to the whole year? Has seasonality changed at all? Given that the incremental margin should ideally improve due to the work done on costs, how should we view the progression of margins as the year continues?

Thank you, Richa. I'll address your question by outlining the outlook beginning with Q4 and then discussing expectations for Q1 and beyond. While I won't provide EPS guidance past Q1, I will share my thoughts on potential market trends. In our last earnings call, we mentioned having several projects in the pipeline, some of which we hadn't seen for years, and these projects came to fruition in October. Generally, when such projects arise, we also see other initiatives kick off in Q4, as customers with urgent needs typically push for stronger performance in November, building momentum through Thanksgiving, followed by a slight slowdown. However, after completing our October and early November projects, we did not experience continued strength in November, which was disappointing. Despite some recovery in late December, the reduced volumes in November were hard to offset, especially with the usual holiday productivity disruptions. As we entered January, we observed some improvement in the balance of supply and demand. At this point, we feel more optimistic about our ability to push rates during the bid season and potentially secure premium spot opportunities early in Q1, something we haven't accomplished in a while. However, the effects of bid work typically do not show until the second quarter or later, so while we may feel optimistic in Q1, the results might not reflect that just yet. There's increased confidence in our capacity to raise rates and restore margins. We've began the bid season with more positive discussions with customers focused on securing incumbent lane rates. Our goal would be to achieve low to mid-single-digit increases in contract rates, leaning towards the mid-range. Feedback from customers indicates a desire to shift more volume from brokers to asset-based solutions, influenced by recent trends in the spot market and regulatory changes that have reduced market capacity. This shift boosts our confidence in the market's direction, though we might not fully realize the benefits in Q1. We've seen false indicators before, but we're encouraged by the current market trajectory and the actions being taken by the DOT and FMCSA to address capacity issues in our industry. Our Knight, Swift, and especially U.S. Xpress operations are well-prepared with the necessary tools and culture to leverage our scale and flexibility, positioning us advantageously for potential opportunities in the latter part of the year.

Q1 is always a challenging quarter due to seasonality. I don't anticipate much of a year-over-year increase in rates for us in Q1, especially since we are operating with a smaller fleet compared to last year. We expect to see continued progress in costs, particularly an improvement in cost per mile year-over-year in the first quarter. While we've focused a lot on truckload, we are also keeping an eye on how LTL volumes recover, as this will partly influence the quarter's performance. We are optimistic about the early signs of volume recovery in January, but there's still ample time to observe how the volumes will evolve throughout the quarter. Our guidance reflects a reasonable perspective on how the quarter may unfold, but there is potential for variation based on changing market conditions.

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

Yes, we definitely want to focus on both revenue and cost. However, if the revenue expectations for the latter half of the year don't materialize, we won't let that hinder us. We will aggressively pursue cost reductions to enhance year-over-year margins. While an increase in spot market rates can help achieve normalized margins, it's important to note that cost management alone won't suffice; some improvement in the market is essential as well. We actively tackle both revenue and cost challenges consistently. Recently, our successes have been more on the cost side, but we're optimistic about making progress on the revenue front as well.

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

Could you provide more details on what you're observing in the LTL market? Last quarter, you mentioned that conditions were softer than many expected, and it seems this trend continued into October without significant recovery. Can you clarify whether this is more of a market issue or if it relates to your network expansion? Additionally, you mentioned plans to increase the length of haul for the network. How long does that process typically take, and what impact does it have on margins as the year progresses?

We noticed a decrease in demand starting early in October, which continued throughout the quarter. As a result, we've made some adjustments to our costs. With our expanded network, we now have the chance to bid for larger shippers that we couldn't before due to limitations in our network. These opportunities may involve heavier loads and longer hauls, allowing us to leverage our relationships in the truckload sector for our LTL business. It’s still too soon to determine if volumes are truly increasing or if there's a shift from Q4 to Q1. Margins started off okay, but we're aiming for improvement. We have several bids in the pipeline that could significantly impact our LTL shipment volume, particularly with new customers that present growth potential. We’re navigating this while also managing labor costs to align with a market where volumes are currently lower than what we can handle, being prepared for any potential increase in demand while maintaining a high service level.

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

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

Sure. I mentioned TL earlier, but let me provide more details. Over the past two quarters, we've made some strategic adjustments concerning our brands. In terms of LTL, we recognized that having a single, unified network with one pro number and one customer voice yields significant benefits. Customers prefer this approach over interline methods. Despite having integrated systems and similar visibility across different brands, it still did not give the impression of a single company. Therefore, we determined that it was necessary to revise our LTL strategy to offer one brand and one voice to maximize the advantages of our established network. This was a tough decision, but we strongly believe it was the right one. You might have heard that we are integrating Abilene Motor Express into our Swift Transportation business. We acquired Abilene, a smaller company with approximately 300 trucks, in 2018, but it faced challenges due to brand recognition and was struggling to secure freight opportunities. We brought in leadership from Swift to help improve operations at Abilene. Ultimately, we decided it would be beneficial for Abilene's employees and drivers to operate under the Swift network. We're currently working to transition their direct customers to Swift and support Abilene with backhauls to enhance efficiency. I want to clarify that we do not have any other brands that we anticipate taking this approach with. Abilene was unique, as it experienced declining margins over the years and lacked a clear path to profitability, making this the quickest way to restore sustainable operations while reducing overhead. Regarding the TL bid, it's still early, but we've had positive discussions with our customers about rates, and we are not facing pressure to lower rates to maintain volume. The key now is identifying where rates should settle during the bids. Some negotiations may take place beforehand, while others will unfold during the bidding process to allow customers to assess market conditions. I'm optimistic that contract rates will rise as we head into the bid season. There are several looming capacity challenges, including approximately 12,000 drivers put out of service since June due to English proficiency issues. In California alone, around 17,000 non-domicile CDLs may expire in March, with New York facing a similar situation. Most states, except one, have stopped issuing non-domicile CDLs, restricting the influx of new drivers. Additionally, as temporary protective statuses expire for individuals from countries like Somalia, Ethiopia, and Haiti, we might see a decline in the number of legally permitted drivers. Finally, there have been significant school closures, with around 3,000 schools removed from operation due to compliance issues, and another 4,000 placed on notice. We’ve had audits at two of our schools at Swift, and we passed successfully. These developments are real and consequential. Overall, the early signs for the bid season seem constructive, and I believe we will see rates improve as we progress.

I want to mention that we've had customers tell us that one of their goals during the bid season is to improve their asset coverage. We are noticing that customers are analyzing the market and the regulatory changes, realizing that this is an opportunity for procurement organizations to enhance their coverage of assets. This perspective is beneficial for our discussions during the bids.

I believe everyone understands that you are currently underperforming like others in the industry. However, you are also in a good position to gain momentum in terms of rates. I have two main questions regarding your cost-reduction efforts. You have been concentrating on managing costs and improving your landed cost. Can you update me on your progress in this area? How much work remains, or are you reaching a point where focusing on rates becomes more important? Additionally, if the rate environment improves in 2026, will there be a chance to approach customers early on to secure noncompensatory rates? Thank you for your time.

Yes. Dan, I’ll talk about rate, and then Andrew can discuss cost. Rates are quite dynamic in our markets because we're not locking in guaranteed volumes with customers in the over-the-road space. Dedicated is a bit different, but the 70% of our operations over-the-road are quite fluid. When the market shifts and it becomes harder to find capacity, even if we have contractual rates, we're managing commitments closely. We begin to see overflow volumes, which can sometimes come at a premium. In a market like this, backup rates are often higher than the contractual rates. We also see ad-hoc spot opportunities on our customer load boards that may offer a premium. This means we can quickly adjust to market changes. Even if you've secured rates early in the bidding process, there's still potential to do more for that customer since they may struggle to find capacity in a challenging market, which allows us to sometimes charge a premium. It's important to understand your commitments and be able to manage them effectively. That’s something Knight has historically excelled at, and we've successfully applied that approach at Swift. U.S. Xpress is also following this strategy. We are well-equipped to respond to the market, monitoring it closely every day. Our unique network maps for each brand help us identify trends sooner than many others in our sector. We also have APIs and algorithms that we can adjust in real-time when we notice market changes. I believe we will be well-positioned to maximize value if the market shifts. Andrew, would you like to discuss cost?

I can provide some insight on costs and evaluate our performance as I reflect on 2025 and give you an idea of what lies ahead in 2026. In 2025, market rates were under 1%, which didn't even keep pace with inflation, estimated at around 3% to 4%. So, we weren't gaining much support from the market. Looking at our Truckload segment, costs decreased by roughly $150 million, with about two-thirds of that reduction being variable costs and one-third fixed costs. This resulted in approximately 80 basis points improvement in our operating ratio year-over-year. The reduction in variable costs contributed significantly to this improvement. Early in the year, we implemented initiatives aimed at reducing costs in what we identified as the largest opportunities: maintenance, fuel, and insurance. All these areas saw improvement in dollar terms, but more importantly, they were lower as a percentage of revenue in 2025 compared to 2024 and also on a cost-per-mile basis. This denotes genuine progress rather than just volume-driven reductions. We're actively continuing these projects, which include collaborating with our drivers to develop new routing and fuel optimization strategies to enhance route efficiency and identify the most cost-effective fueling options. We are introducing technology that will primarily yield benefits in 2026. Additionally, we are encouraged by the prospect of advanced auto planning technology to help us optimize freight routing and load assignments. This should significantly enhance driver and asset utilization, reduce deadhead miles, and improve overall network efficiency. We will persist in implementing these tools to lower variable costs per mile. With fixed costs, we’ve made substantial strides. Losing 3% or 4% in miles makes it difficult to show improvements on the profit and loss statement because of fixed cost leverage, yet as a percentage of revenue, fixed costs declined in 2025 compared to 2024, despite the decrease in volume. We believe these reductions are structural and won’t revert, offering long-term leverage. We anticipate improvements in three main areas: equipment, costs, and productivity. We saw improvements in our utilization, which increased by 2 to 3 percentage points compared to the previous year. In terms of real estate costs, we have strategically rationalized our facilities, exiting and selling 13 locations while maintaining a long-term outlook that won’t hinder our ability to seize opportunities. This has contributed to reducing facility costs. Our facility maintenance costs dropped about 4% last year, and we aim to replicate this in 2026. Additionally, we focused on reducing overhead costs, achieving a 5% decrease in non-driver headcount in the truckload segment after a similar reduction the year prior. Many of the AI initiatives we will roll out in 2026 will assist us in identifying opportunities in general and administrative costs. We also mentioned the Abilene project, which will further enhance the efficiency of our operations. Cost management is a primary focus for us, and we are tackling it from multiple angles. We are optimistic about the progress we are making with our cost management strategy.

Could you provide some insights into what you’re hearing from shippers as we enter the bid season? Specifically, are you sensing any urgency from shippers to address their capacity needs earlier? Additionally, regarding the work you’re doing on cost management, how do you view the potential for driver wage increases over this cycle? With the current enforcement focus affecting the driver pool, do you see any risk that might alter the traditional dynamics of how price shifts translate to driver compensation as we progress through the cycle?

Chris, regarding the shipper commentary, we're currently in the early bid season, which means negotiations are underway. Some shippers are aware of potential risks and may delay acknowledging those risks, while others want to proactively address them, especially if a significant portion of their freight involves brokers where their exposure lies. However, it's still early, and discussions are happening without immediate actions. We'll continue to monitor the situation and engage in dialogue, though shippers might not be fully transparent as we negotiate rates. On the driver front, a common question is whether rising rates lead to increased driver wages. Historically, around 25% to 30% of our revenue per mile has gone to drivers. This cycle may be different due to the need to restore margins that have been low for several years. We might hold off on blanket wage increases until we see sustainable revenue per mile growth. Monitoring our hiring and retention is key. Our drivers often experience wage increases from running more miles, and as conditions improve, we see better truck utilization, which naturally raises wages. If the driver market tightens and we anticipate improving rates, we may consider sharing some of that with drivers to maintain capacity for customer needs. Our approach will be dynamic, focusing on specific markets rather than applying a uniform strategy, and we'll allocate resources where we face challenges in hiring and retaining drivers.

Adam and team, I want to revisit a couple of your comments. You mentioned that recent trends in truckload have continued into early January and are modestly better than typical seasonality. I would like to understand if this comment relates to demand, capacity, or weather. Could you elaborate on any demand factors as we enter the first quarter and your thoughts moving forward? Similarly for LTL, it appears you mentioned modest volume improvement. Is this primarily due to gaining market share, or are you also commenting on demand in this case?

Yes. On the truckload side, every day in the office, we review the market regarding the number of loads compared to the trucks we have available. In the first quarter, we often need additional loads each morning to utilize the available trucks. The maps we get show the balance in the network, and in early January, those maps indicate a more balanced situation than usual for this time of year, indicating that we have a nearly equal number of loads for every truck, reducing the need for same-day freight booking. It's challenging to determine if this is due to demand or capacity, but I tend to think it's more about capacity based on available third-party data, showing that load tenders remain relatively low compared to the past three years while rejections are higher, which aligns with our experience. Our load tenders are improving, suggesting a potential shift towards quality, with customers moving loads to Asset-Based carriers. However, from an industry perspective, I believe this situation is more about tight capacity than demand, which is encouraging because it suggests that an increase in demand could lead to stronger market performance. On the LTL side, we typically see some softness at the end of the fourth quarter, especially with our retail-focused customer base. We are currently witnessing shipment counts return to more normal levels, but there hasn't been a significant demand shift to highlight. We are looking to gain market share with newer customers during the bidding season while also exploring opportunities with larger shippers.

So Adam, looking at the bigger picture, in prior cycles, we've typically seen increased prices, but utilization usually declines, and seated tractor counts may drop as well while driver pay rises significantly. From one of your previous responses, it seems you believe we might not need to reduce driver pay as much this time. Also, do you think we can achieve a pricing cycle that allows for increased utilization simultaneously? If we manage to secure both good pricing and utilization, it appears we may not need to reduce driver pay as much. You've mentioned working on technology productivity—could this lead to a more favorable relationship between price and margin? Historically, 10 points of price led to 5 points of margin; do you believe this time it could be significantly improved?

So Scott, our goal is to achieve both utilization and price simultaneously. When we have that utilization, it significantly benefits us by helping cover fixed costs. Reflecting on the last cycle during COVID, the labor market was highly disrupted, which made it difficult to source drivers, leading to incredibly high rates. This situation caused our network to shift towards shorter hauls at higher rates based on customer needs, distorting historical metrics. I see this as a more typical cycle and anticipate an upward adjustment. I believe we can achieve better utilization with our equipment, but the key factor will be the state of the labor force. However, we are confident that with our academies training drivers at a high standard and minimizing competition from non-compliant academies, we will be well-positioned to source drivers and increase volume as rates improve.

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

Scott, we appreciate you sticking to one question. That will conclude our call. We appreciate all the interest and questions. If we weren't able to address your question, you can call (602) 606-6349, and we will try to get back to you as soon as possible. Thank you, everyone.

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