Earnings Call Transcript - KNX Q2 2025

Brad Stewart, Treasurer and Senior VP of Investor Relations

Good afternoon, everyone, and thank you for joining our second quarter 2025 earnings call. Today, we plan to discuss topics related to the results of the quarter, current market conditions, and our earnings guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to last 1 hour. Following our commentary, we will answer questions related to these topics. In order to ask a question, please use the instructions that will be provided. 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.

Adam W. Miller, CEO

Thank you, Brad, and good afternoon, everyone. So the second quarter saw unprecedented trade actions, which brought a range of responses by shippers and volatility in freight flows that differed meaningfully from normal patterns and typical seasonality trends in the truckload market. This called for agility from our businesses and our people responded, demonstrating the flexibility of our over-the-road capacity and network in order to mitigate pressure on miles and earnings. While the import cliff that many anticipated did not prove to be a start, there was a general softness in freight demand for most of the quarter, especially on the West Coast. We did experience a mild lift in freight opportunities and projects near the end of the quarter, but short of the normal seasonal build in freight volumes we typically see in the second quarter. Given this backdrop, we are pleased that our truckload business was able to prevent a deeper decline in revenues while growing margins and operating income meaningfully year-over-year. Further, we are pleased to see our U.S. Xpress brand build on the profitability it established in the first quarter by expanding operating margins sequentially in the second quarter. While we continue to drive costs out of our businesses, we are careful not to sacrifice the competitive advantage we have through our industry-leading scale and the flexibility of our over-the-road model provides, allowing us to deliver distinctive value to our customers. We are continuing to grow our LTL network, customer base, and volumes, and we are committed to doing this while maintaining strong service levels. We are encouraged to see customers responding to our service offering, awarding us robust growth at a time when industry volumes remain under pressure. At the same time, the cost of expansion and integration and our efforts to ramp staffing levels and fleet assets in anticipation of further growth are putting pressure on margins. We have multiple initiatives underway to accelerate the normalization of our operational fundamentals and the regaining of efficiencies in our cost performance even as our network and freight portfolio grow rapidly. The fluid policy environment makes forecasting even more difficult than normal. We are staying close with our customers as the situation unfolds, delivering solid service and bringing our capacity and creativity to bear in responding to disruptions created by the shifting landscape. As we noted last quarter, changes in trade policy can create the need for shippers to react quickly in managing inventory levels, which could benefit the fast, flexible nature of truckload service. As we begin to navigate the third quarter, we are in early discussions with a few customers regarding potential projects during peak season. It is too early to know if these discussions will materialize into additional business, but these types of conversations provide encouragement that one-way capacity is becoming less plentiful and more valuable when it can be provided with scale. We cannot say when the freight market will finally turn, but we are confident that we are well positioned to make the most of the opportunities that the next cycle will bring our larger truckload business and heavy mix of One-Way Truckload service, our growing LTL business, our agile and efficient logistics business, which complements our asset model and the progress we continue to make structurally cutting costs out of our organization. With that, I will now turn it over to Andrew for Slide 3, our overview.

Andrew Hess, CFO

Thanks, Adam. The charts on Slide 3 compare our consolidated second quarter revenue and earnings results on a year-over-year basis. Revenue, excluding fuel surcharge, increased by 1.9% and our adjusted operating income improved by 17.2% or $15.2 million year-over-year. GAAP earnings per diluted share for the second quarter of 2025 were $0.21, a 61.5% year-over-year increase, and our adjusted EPS was $0.35, a 45.8% year-over-year increase as earnings improved year-over-year for the third consecutive quarter. Our consolidated adjusted operating ratio was 93.8%, which was 80 basis points better than the prior year. The effective tax rate of 29.2% on our GAAP results and 28% on our non-GAAP results, each lower year-over-year, but were higher than previously projected. Slide 4 illustrates the revenue and adjusted operating income for each of our segments for the quarter. Overall, most segments experienced pressure on revenue year-over-year with a soft freight environment. While our LTL segment continues to post strong growth driven by our ongoing network expansion with the LTL segment reaching its highest share of the consolidated revenue since our entry into the segment in 2021. Our Truckload and Logistics segments also improved adjusted operating income and adjusted operating ratio year-over-year.

Adam W. Miller, CEO

Now we will discuss each of our segments, starting with our Truckload segment. The flexibility of our over-the-road model and meaningful progress improving our cost structure helped our Truckload segment improve its adjusted operating ratio by 260 basis points and grow adjusted operating income 87.5% year-over-year despite loaded miles declining 2.8% and revenue per loaded mile, excluding fuel charge being flat year-over-year in an unseasonably soft second quarter. The lull in import-driven freight demand caused the absence of certain contractual freight, particularly off the West Coast. Shifting our capacity toward other freight lanes allowed our truckload business to grow loaded miles sequentially, but revenue per loaded mile, excluding fuel surcharge, declined 1.4% sequentially due to spot market weakness and because California headhaul markets were underrepresented in our freight mix. Bid outcomes remained in the low to mid-single-digit increase range during the quarter. We anticipate that as freight flows normalize, our realized revenue per mile will recover. On a year-over-year basis, our truckload revenue, excluding fuel surcharge for the second quarter decreased 2.7%. We have been reducing the number of underutilized assets, which has resulted in a 6.6% decline in truck count. However, we continue to make progress on our utilization, with miles per truck improving 4% year-over-year, making 8 consecutive quarters of year-over-year gains in this metric.

Andrew Hess, CFO

We anticipate that tractor count will be fairly stable for the remainder of 2025, while we do have room to further reduce our trailer ratio as we continue to tighten our cost structure. Our cost per mile for the second quarter improved year-over-year for the fourth quarter in a row despite the decline in miles. We are pleased with the progress of our U.S. Xpress Truckload business, which even in a difficult environment, improved its operating margins by 200 basis points on a sequential basis. We are committed to disciplined pricing, intense cost control, and quality service as we position our business for the current volatility and for potential opportunities that may arise. On Slide 6, we provide a little more context on our cost-cutting progress in our Truckload business. On a trailing 12-month basis through the end of the second quarter, our realized cost per total mile has declined 1.5% or $0.03 per mile as compared to the preceding 12-month period. This task was made more challenging due to the deleveraging effect of the reduction of miles during this period. Our efforts produced results in both fixed costs and variable costs.

Adam W. Miller, CEO

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

Andrew Hess, CFO

There are still a number of areas with additional opportunity for gains, such as further leveraging technology-enabled efficiencies, rationalizing our capital asset profile, refreshing vendor relationships and terms, and optimizing hiring processes and expenses. Our largest segment is already benefiting from the meaningful progress made thus far, and this progress should not only grow but be magnified once volumes recover. Moving on to Slide 7, our LTL business grew revenue excluding fuel surcharge 28.4% year-over-year as shipments per day increased 21.7%, which includes our acquisition of DHE. Revenue per hundredweight, excluding fuel surcharge, increased 9.9% year-over-year, while weight per shipment declined 2.6% year-over-year, but was stable sequentially. The adjusted operating ratio was 93.1%, a 110 basis point sequential improvement.

Adam W. Miller, CEO

Adjusted operating income declined 36.8% year-over-year due to the decline in operating margin primarily attributable to early-stage operations at our recently opened facilities as well as continued costs related to the integration of DHE. As context, quarter ending door count is up 7.8% year-to-date and 27.5% year-over-year. Further, our strategic decision to maintain service during this rapid expansion requires that we onboard staffing and equipment costs in advance of anticipated volume growth. In a steady state, where growth might be more in the single-digit range, that incremental cost would be less noticeable. But in a business growing volumes on the order of 20%, that headwind is more pronounced relative to existing revenue levels.

Andrew Hess, CFO

That is not to say that we accept the current pressure on margin in this business. We believe we have opportunities to deliver better margins and have confidence in our plans to achieve this. While the LTL segment continues to post strong growth in customers and freight volumes across the expanding network, we are taking actions to accelerate the realization of cost efficiencies and to better align our resources with evolving volumes and freight flows. After 24 months of continuous geographic expansion and an acquisition, multiple initiatives are underway to return to our normal operational focus and fundamentals, including expanding our sales efforts to build volume and density into these new markets. We have identified a number of actions to improve yield and reduce costs that should drive multiple points of margin expansion, in addition to the operating leverage benefits of growing into our network investments.

Adam W. Miller, CEO

Some of these initiatives include improving variable cost per shipment through refined scheduling and alignment of resources to volumes, leveraging software currently being implemented for enhanced pickup and delivery planning, and optimizing linehaul routing and load factors. We anticipate that progress on these initiatives and ongoing new business awards will partially offset the normal seasonal pattern of operating margin degradation in the back half of the year and help expand margins in 2026. We opened 3 new service centers and replaced another with a large facility during the quarter. Our pace of facility additions in 2025 is slower compared to 2024 as we focus on growing in our existing investments. But we continue to look for both organic and inorganic opportunities to expand our footprint within the LTL market. There is much work to do, but even more opportunity to be excited about. Our solid service levels, growing customer base, and ground to make up on pricing provide a compelling runway for the value to be generated by this business. Now I will turn it over to Brad for a discussion of our Logistics segment on Slide 8.

Brad Stewart, Treasurer and Senior VP of Investor Relations

Thanks, Andrew. The Logistics segment experienced soft volumes for much of the quarter, other than brief tightening around the International Roadcheck week in mid-May and the buildup to July 4 at the very end of the quarter. Revenue for the second quarter declined 2.6% year-over-year, driven by an 11.7% decrease in load count, largely offset by a 10.6% increase in revenue per load. Despite the decline in revenue and load count, our disciplined approach to pricing and cost management helped us improve the adjusted operating ratio of 70 basis points to 94.8% and grow adjusted operating income 13.3% year-over-year with opportunities for further efficiency gains ahead. We continue to invest in technology that has allowed us to seamlessly connect with customers to react quickly to spot market opportunities with real-time quotes. We've also developed trailer tracking technologies that enabled our Logistics segment to more efficiently and securely utilize our trailer fleet for power-only opportunities, giving our customers drop and hook capabilities at greater scale. This has helped bring more resiliency to the margin profile of our Logistics business.

Andrew Hess, CFO

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

Adam W. Miller, CEO

Furthermore, we expect load count to grow sequentially as a result of recent business awards and as volumes in the West normalize from recent disruptions. We remain disciplined on pricing, with over 80% of the year-over-year volume loss attributable to a few large accounts whose moves were strictly based on aggressive price competition. Moving forward, we are focused on improving our execution, getting more out of our business awards, and driving further network and cost efficiencies to position this business for profitability. Slide 10 illustrates our all other segments. This category includes support services provided to our customers, independent contractors, and third-party carriers such as equipment sales and rentals, equipment leasing, warehousing activities, and insurance and maintenance. For the quarter, revenue increased 9% and operating income increased 73.6% year-over-year, primarily driven by growth in our warehousing and leasing businesses. The operating result also includes a $2.8 million charge for additional premiums related to the third-party auto liability risk we transferred in 2024 following the closure of this business in March of '24.

Andrew Hess, CFO

On Slide 11, we have outlined our guidance and the key assumptions, which are also stated in the earnings release. Actual results may differ from our expectations. We are again providing 1 quarter of forward guidance. Based on our assumptions, we project our adjusted EPS for the third quarter of '25 will be in the range of $0.36 to $0.42. In general, this guidance for the third quarter assumes current conditions remain fairly stable and that we experience some seasonality. The key assumptions underpinning this guidance are listed on this slide, though I won't cover them in detail here. We project Truckload operating income will improve sequentially, largely driven by revenues and operating margin that has slightly improved sequentially. This assumes modest sequential improvement in revenue per mile, supported by normalizing freight mix, while miles and utilization are largely flat with the second quarter levels.

Adam W. Miller, CEO

For LTL, whereas normal seasonality would call for modest sequential degradation in revenue and operating margin, we project modest sequential improvements in both measures, driven by ongoing progress growing our customer base and market share, yield improvements, and progress driving cost efficiencies in our growing operations. We project a relatively comparable contribution from our Logistics segment as compared to the second quarter and for Intermodal to reduce its operating ratio and operating loss as compared to the second quarter, largely driven by sequential volume recovery and our cost initiatives. In our all other segments, while year-to-date operating results and our expectations for the third quarter are above our initial projections entering this year, we now anticipate a sequential slowdown in earnings for this category in the fourth quarter, similar to the seasonal trend in the prior year.

Andrew Hess, CFO

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

Brad Stewart, Treasurer and Senior VP of Investor Relations

Your first question comes from the line of Chris Wetherbee from Wells Fargo.

Christian F. Wetherbee, Analyst

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

Adam W. Miller, CEO

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

Brad Stewart, Treasurer and Senior VP of Investor Relations

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

Daniel Robert Imbro, Analyst

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

Adam W. Miller, CEO

Yes, we receive that question frequently. We view our margin profile during this more volatile cycle, which is unprecedented for our industry, as follows: in a mid-cycle situation on the truckload side, we anticipate operating in the mid-80s range. Near peak demand, we expect it to be in the low 80s to high 70s. In a more challenging market that resembles previous cycles more than the current one, operating margins would likely be in the upper 80s. We believe this remains valid. Currently, we are concentrating on improving our cost structure, as we have more control over that aspect. Additionally, when opportunities arise in the market, we are ready to respond swiftly, offering value to our customers and ensuring we are rewarded for that value. We have managed to stay flexible and agile, strategically adjusting our commitments and adapting to the spot market when it benefits us.

Andrew Hess, CFO

Daniel, I would like to add to what Adam mentioned. We believe that in the current competitive landscape, there are fewer carriers interested in one-way service compared to 2019. As we analyze the market, when one-way service is less commoditized and under pressure, we feel well-positioned as a business. Since 2019, we have added U.S. Xpress and now have three large brands capable of participating in one-way service, effectively addressing urgent needs with large trailer pools. We think our current position is stronger than ever, which should lead to significant gains. However, at this moment, the spot market is economically appealing to our customers.

Brad Stewart, Treasurer and Senior VP of Investor Relations

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

Kenneth Scott Hoexter, Analyst

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

Adam W. Miller, CEO

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

Andrew Hess, CFO

When integrating a new system, it's not just about the technical changes; there are also process and cultural changes needed while scaling the business. These changes, along with managing increased volume, have presented some challenges for us. Our team is now focused on figuring out how to recover some of the costs we've incurred during this process, as we've had to increase labor and add assets to meet the demands of these additional load counts. We need to optimize our approach now.

Adam W. Miller, CEO

We have technology that allows us to do that, but we have to utilize that more effectively, particularly with the brands that have been acquired after AAA Cooper. So our team is focused on that quite a bit now to get us back to more kind of normalized margins without giving up the opportunities to grow into the network that we've developed because I think we still have a long runway to get to more optimal levels of shipment count through the different terminals that we've opened up. Clearly, we've kind of slowed the growth there intentionally, and we may just have a few kind of strategic places that we're going to potentially open up in the back half of this year.

Ken Hoexter, Analyst

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

Brad Stewart, Treasurer and Senior VP of Investor Relations

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

Scott H. Group, Analyst

I understand that you don't have a fourth quarter guidance. Considering the significant fluctuation in other operating income, do you believe it’s reasonable to expect Q4 to be similar to Q3? Or Adam, since peak activity is beginning to ramp up, is there still a chance for notable sequential earnings improvement? Additionally, I’m curious if the reduction in CapEx and changes in bonus depreciation influence your outlook on CapEx moving forward.

Adam W. Miller, CEO

Yes. Regarding the CapEx change, we are tightening our focus in different areas. It's not primarily about equipment; rather, it’s more related to facilities and IT investments where we've noticed some adjustments. Our equipment strategy remains unchanged; we aim to maintain a consistent replenishment process to avoid significant fluctuations in CapEx. If we were to make adjustments, it could lead to a substantial increase in CapEx four or five years down the line. We are consistent in our tractor purchases, while trailer purchases can vary based on our needs and ratios. However, our strategy for tractors remains stable.

Andrew Hess, CFO

When I think about the fourth quarter, Scott, we don't have a guidance figure available. There's still too much uncertainty for us to provide a number. What we wanted to communicate regarding the All Other segment is that we believed we had adjusted the billing for one of our customers in that segment, which was expected to create more consistent revenue throughout the quarters. However, we didn't complete that change, so we're continuing with the standard revenue recognition from the previous year. This results in higher revenue generation in the first three quarters, followed by a slowdown in the fourth quarter.

Brad Stewart, Treasurer and Senior VP of Investor Relations

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

Unidentified Analyst, Analyst

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

Adam W. Miller, CEO

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

Andrew Hess, CFO

Yes, Richa. Over the past year, we have focused on continuous cost reduction within our organization. We are applying lean management techniques to foster a culture of ongoing improvement in our costs. Initially, it took some time for these efforts to yield results, but we are now starting to see that reflected in our numbers. We have identified several areas for improvement, as mentioned in the slide. Importantly, our safety performance remains a positive factor against inflation. While this can be affected by a single large claim, we have generally adopted a more proactive approach to manage potential accruals compared to the past. We no longer wait until the year’s end to consult actuaries and make adjustments; instead, we assess these figures quarterly, allowing us to have a clearer understanding of our costs.

Adam W. Miller, CEO

We are proactively managing our accruals, reducing the likelihood of unexpected issues. Regarding trailers and equipment, we believe there is still an opportunity to decrease trailer costs. We are above historic levels, which allows us to be opportunistic in varying market conditions. This is advantageous for us. We have initiated several projects that leverage technology, including AI, automation, and data science. Significant resources have been invested in these tools. We are assessing our organization to determine what delivers value to our customers and what does not. If something does not add value, we explore automation or consider discontinuing it.

Andrew Hess, CFO

We are leveraging technology to transform the fundamental processes involved in our service costs. Our objective is to significantly reduce these costs over time in a substantial manner. We will utilize all available tools and make strategic investments to achieve this. Additionally, we are improving our ability to enhance efficiency across our divisions, optimizing both resources and support. We have become more strategic in reallocating assets between our divisions. For example, we can take dedicated trucks from our truckload operations and deploy them in our LTL day cab services. Our leasing business allows us to repurpose trailers when they reach the end of their lifespan. We're also transferring trailers from our Swift operations to U.S. Xpress while replacing them with more cost-effective leased trailers. Ultimately, we are identifying opportunities to leverage all of our brands to drive efficiencies and improve our processes.

Adam W. Miller, CEO

We have thoroughly evaluated our fixed costs related to our facilities. We currently operate around nine truckload facilities and a few LTL facilities that are underutilized. While these facilities are not affecting our operations, we are planning to exit and sell them, which will significantly reduce our costs. We are proceeding carefully in this process, and we believe it will not hinder our ability to seize opportunities or impact our market. We've identified opportunities through this review. Additionally, we have improved in all key variable cost areas such as fuel, maintenance, and insurance. The advancements we've achieved are the result of initiatives we've put in place, and we are beginning to see positive outcomes. We are still in the early stages of many of these projects, so we anticipate ongoing improvements in these areas.

Brad Stewart, Treasurer and Senior VP of Investor Relations

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

Ravi Shanker, Analyst

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

Adam W. Miller, CEO

Yes, I believe that market experiences some fluctuations. It also depends on our inventory levels and the demand for those products. We may have been lacking some items that were in higher demand at the end of the quarter. As we enter the third quarter, I think we're in a better position regarding inventory, and we've already noticed some early demand that appears to be stronger than what we experienced in the second quarter.

Ravi Shanker, Analyst

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

Adam W. Miller, CEO

It's challenging to determine the consistent trends with these smaller carriers. Currently, there is strong demand for tractors, but not as much for trailers. However, this could shift in the fourth quarter. Predicting accurately is tough. We focus on forecasting the third quarter, and while I don't expect significant changes for the fourth quarter, it could go either way depending on the trends we observe.

Andrew Hess, CFO

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

Brad Stewart, Treasurer and Senior VP of Investor Relations

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

Ariel Luis Rosa, Analyst

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

Adam W. Miller, CEO

I think there is clearly more transparency in the market than we had 10, 15 years ago, clearly. And I don't know if it's necessarily brokers are doing. I mean there's third-party data sets that all of our customers subscribe to or most of them that have scale, and they can see what's happening to rates. And I think that leads to just a market that's just more efficient. And so when rates are going down, everybody kind of sees that and kind of presses from a procurement standpoint for rate concessions. But it also works the other direction, and we saw this during COVID, when rates are going up, everyone could see and acknowledge it and they use that to go to their leaders to say, 'Hey, we need to do something here if we want to secure capacity because it's clear rates are going up.' So I just think it gives more insight and probably these cycles move a little faster based on real supply and demand. And it's not necessarily the relationship where you're trying to go get rate and they have to go through procurement and go through the whole process to see what the market will bear like you did 10, 15 years ago.

Ariel Luis Rosa, Analyst

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

Adam W. Miller, CEO

I don't believe so. I think the cycle is moving quicker because it's easier to see what's happening with supply and demand. From our perspective, when capacity tightens, that’s when a carrier of our size and different brands can step in and address significant issues for our customers. We do this using asset-based capacity that isn't necessarily impacted by what's occurring with third-party small brokers. Instead, it's secure capacity that allows for drop and hook operations, ensuring safety around the freight we transport, and we'll be able to return to the margins we previously achieved.

Brad Stewart, Treasurer and Senior VP of Investor Relations

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

Jason H. Seidl, Analyst

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

Adam W. Miller, CEO

Building tonnage has gone well in the West. Customers have been very responsive and appreciate having another option. We are leveraging the strong relationships with AAA Cooper and MME as we entered the West Coast. However, there have been challenges, particularly with scaling and system integration, which have led to some cost pressures. We now have initiatives in place to address these issues. Overall, tonnage has performed as expected, but the change management process and the costs associated with building that tonnage have been more challenging than anticipated, and we are actively working through these aspects.

Andrew Hess, CFO

When you think of a pricing standpoint, I mean, it's been relatively consistent. I think the renewals have been still solid in the mid to upper single digits. And I don't think there's anything right now that indicates that that's really changing as we get into the third quarter.

Brad Stewart, Treasurer and Senior VP of Investor Relations

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