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DATE
Wednesday, July 23, 2025 at 5:30 p.m. ET
CALL PARTICIPANTS
Chief Executive Officer — Adam Miller
Chief Financial Officer — Andrew Hess
Treasurer and Senior Vice President of Investor Relations — Brad Stewart
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RISKS
Management noted margin pressure in the Less-than-truckload (LTL) segment, citing "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."
The effective tax rates of 29.2% (GAAP) and 28% (non-GAAP) were "higher than previously projected" in Q2 2025.
Intermodal segment revenue declined 13.8% year over year in Q2 2025, attributed mainly to "the decline in import volumes on the West Coast"
"The fluid policy environment makes forecasting even more difficult than normal." according to management, increasing uncertainty in business planning.
TAKEAWAYS
Revenue (ex. fuel surcharge): Revenue excluding fuel surcharge increased 1.9% year over year, despite overall soft freight demand and segmental revenue pressure.
Adjusted Operating Income: Adjusted operating income rose 17.2% or $15.2 million year over year, marking the third consecutive quarter of year-over-year earnings gains.
GAAP EPS: GAAP EPS was $0.21, up 61.5% year over year.
Adjusted EPS: Adjusted EPS was $0.35, up 45.8% year over year.
Adjusted Operating Ratio (Consolidated): Consolidated adjusted operating ratio was 93.8%, an 80 basis point improvement year over year.
Truckload Segment – Adjusted Operating Income: Truckload segment adjusted operating income increased 87.5% year over year, with a 260 basis point improvement in adjusted operating ratio for the truckload segment.
Truckload Revenue (ex. fuel surcharge): Truckload revenue excluding fuel surcharge decreased 2.7% year over year as loaded miles declined 2.8% and revenue per loaded mile remained flat.
Truckload Cost per Mile: Improved year over year for the fourth consecutive quarter; realized cost per total mile fell 1.5% (three cents per mile) versus the prior trailing twelve months.
US Express Truckload – Operating Margin: US Express truckload operating margin expanded by 200 basis points sequentially from Q1 2025 to Q2 2025.
Tractor Count: Tractor count decreased 6.6% year over year, as underutilized assets were reduced; Miles per truck increased 4% year over year, the eighth consecutive quarter of improvement.
LTL Segment – Revenue (ex. fuel surcharge): LTL segment revenue excluding fuel surcharge rose 28.4% year over year, with LTL daily shipments increased 21.7% year over year and LTL revenue per hundredweight excluding fuel surcharge increased 9.9% year over year.
LTL Adjusted Operating Income: LTL adjusted operating income declined 36.8% year over year due to early-stage operations at new facilities and integration costs from the DHE acquisition.
LTL Adjusted Operating Ratio: 93.1%, a 110 basis point sequential improvement.
LTL Door Count: Increased 27.5% year over year and LTL door count increased 7.8% year to date, reflecting rapid network expansion.
Logistics Segment – Revenue: Decreased 2.6% year over year, as Logistics segment load count fell 11.7% year over year, partly offset by a 10.6% increase in revenue per load.
Logistics Adjusted Operating Income: Logistics adjusted operating income increased 13.3% year over year, with the adjusted operating ratio improved 70 basis points to 94.8%.
Intermodal Segment – Revenue: Intermodal segment revenue was down 13.8% year over year, with Intermodal segment load count was down 12.4% year over year and Intermodal segment revenue per load was down 1.6% year over year.
Intermodal Adjusted Operating Ratio: Intermodal adjusted operating ratio deteriorated by 230 basis points year over year, the first degradation in five quarters.
All Other Segments – Revenue: All other segments revenue increased 9% year over year, with All other segments operating income increased 73.6% year over year, primarily from warehousing and leasing growth; included a $2.8 million charge for additional premiums related to the third-party auto liability risk transferred in 2024 following the closure of this business in March of 2024.
Q3 2025 Adjusted EPS Guidance: Projected adjusted EPS in the range of $0.36 to $0.42 for Q3 2025, based on stable market conditions and some seasonality.
Q3 2025 Truckload Operating Income: Management expects sequential improvement in Q3 2025 on slightly higher revenue per mile and operating margin; utilization is expected to remain flat sequentially in Q3 2025.
Q3 2025 LTL Outlook: Modest sequential improvement in both revenue and operating margin is anticipated for Q3 2025. contrary to normal seasonal trends.
Q3 2025 Logistics and Intermodal Outlook: Logistics segment is expected to contribute comparably in Q3 2025 to the previous quarter; Intermodal is projected to reduce its operating loss and operating ratio sequentially in Q3 2025.
Full-year 2025 Net Cash CapEx: Projected at $525 million to $575 million for full-year 2025, reduced from the prior $575 million to $625 million range for full-year net cash CapEx.
Policy Volatility: Management emphasized ongoing policy uncertainty as a headwind for forecasting and planning.
SUMMARY
Knight-Swift Transportation Holdings Inc.(KNX -0.33%) management reported significant year-over-year improvement in consolidated profitability in Q2 2025, driven mainly by cost discipline and operating leverage, rather than top-line growth. Strategic investments in technology, flexible operational models, and targeted cost reductions have enabled the company to expand margins across Truckload and Logistics segments despite ongoing freight market softness. The LTL business continues rapid expansion but faces temporary margin headwinds as new facilities and integration costs are absorbed. Management's full-year CapEx guidance was reduced, and disciplined asset strategy was emphasized as part of long-term margin improvement initiatives.
CEO Miller said, "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"
Management noted that Bid outcomes remained in the low to mid-single-digit increase. suggesting incremental pricing momentum amid a still-sluggish spot market.
The company completed a transition to private intermodal chassis fleets in five markets to control future costs.
Management observed, "we are watching this closely, and so I think we are still cautious on where the market is going to head in the back half of the year, but I feel like, you know, again, the worst is behind us. We are seeing supply and demand tighten up,"
Additional cost reduction opportunities are being pursued in asset optimization and technology-enabled process improvements, with early-stage efficiency gains already reflected in fixed and variable cost metrics.
Bid-cycle contractual rate increases in Truckload are reported in the "low to mid-single digits." and management expects further margin recovery as project business and freight mix normalize.
Management highlighted early signs of strengthening demand mid-July, stating that recent weeks have shown "more strength than maybe we would have anticipated at this time in the quarter." though caution remains due to prior "head fakes"
INDUSTRY GLOSSARY
LTL (Less-than-truckload): Freight shipping for relatively small loads or quantities of freight that do not require a full trailer.
Intermodal: Transportation segment involving the movement of containers or trailers using multiple modes (rail, truck) without handling the freight inside.
US Express: Acquired brand within Knight-Swift's Truckload segment providing truckload transportation services, referenced as part of ongoing operating margin expansion initiatives.
Adjusted Operating Ratio: Operating expenses as a percentage of revenue, excluding certain nonrecurring or nonoperational items, used to measure operational efficiency.
Revenue per Loaded Mile: Trucking metric tracking revenue generated from each revenue-generating mile driven with a load, often excluding fuel surcharges.
Revenue per Hundredweight: LTL pricing metric reflecting the average revenue earned per 100 pounds of freight transported.
DHE: Dedicated acquisition within Knight-Swift's LTL segment, contributing to recent network expansion and referenced in margin and integration commentary.
Full Conference Call Transcript
Adam Miller, Chief Executive Officer; Andrew Hess, Chief Financial Officer; and Brad Stewart, Treasurer and Senior VP of Investor Relations. Mr. Stewart, the meeting is now yours. Thank you, Constantine.
Brad Stewart: 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 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 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 two of the presentation to note the following. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions, and uncertainties. These are difficult to predict. Investors are directed to the information contained in Item 180, Risk Factors, or Part I of the company's annual report on Form 10-Ks 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 Miller: 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 as stark, 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 a 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 US Express 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 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 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 three, our overview.
Andrew Hess: Thanks, Adam. The charts on slide three 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. 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 were each lower year over year but were higher than previously projected. Slide four 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, 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. Now, we will discuss each of our segments starting with our truckload segment on slide five.
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 low and 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 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 eight consecutive quarters of year-over-year gains in this metric.
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 US Express 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.
Andrew Hess: On slide six, we provide a little more context on our cost-cutting progress in our truckload business. On a trailing twelve-month basis through the end of the second quarter, our realized cost per total mile has declined 1.5% or three cents per mile as compared to the preceding twelve-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. We made meaningful progress reducing fixed costs on an absolute basis which has allowed us to keep our fixed cost per mile flat during the down market.
Our fixed cost progress prevented 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 the recovery in our truckload earnings.
There are still a number of areas with additional opportunity for gain, 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 seven, our LTL business grew revenue excluding fuel surcharge 28.4% year over year as shipments per day increased 21.7%, which includes the 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. 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. 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.
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 cost that should drive multiple points of margin expansion in addition to the operating leverage benefits of growing into our network investments. 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 line haul 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 three new service centers and replaced another with a larger facility. Our pace of facility additions in 2025 is slower compared to 2024 as we focus on growing in our existing investments. 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 eight.
Brad Stewart: Thanks, Andrew. The Logistics segment experienced soft volumes for much of the quarter, other than brief tightening around the International Road Check Week in mid-May and the build-up to July fourth 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 by 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 have also developed trailer tracking technologies to enable 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. Our logistics segment continues to provide additional capacity and scale to our customers while complementing our Truckload segment.
Now on to slide nine, 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 five quarters.
Brad Stewart: As part of our efforts to improve the cost structure, we converted to private chassis in five 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. Further, 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 ten illustrates our all other segments. This category includes support services provided to our customers, independent contractors, and third-party carriers, as well 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 2024. On slide eleven, 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 one quarter of forward guidance. Based on our assumptions, we project our adjusted EPS for the third quarter of 2025 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 will not cover them in detail here. We project truckload operating income will improve sequentially, largely driven by revenues and operating margin that are slightly improved sequentially. This assumes modest sequential improvement in revenue per mile supported by normalizing freight mix, while mounting utilization is largely flat with the second quarter levels. 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. 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. 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. Before I turn it over for questions, I want to remind everyone to keep it to one question per participant. Thank you. Constantine, we will now open the line for questions.
Constant: Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from the line of Chris Wetherbee from Wells Fargo. Your line is now open.
Chris Wetherbee: Yeah. Hey, great. Thanks. Good afternoon, guys. Maybe we could just start with a big picture question about sort of some supply and demand and where we think we are kind of in that equilibrium process. So in particular, I think there are 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 is your general take?
I guess I am curious how you guys think about the dynamic of the market, where we are relative to equilibrium, and maybe where we can go in the second half of the year.
Adam Miller: Sure. I will start that, Chris, and then if Andrew or Brett have anything to add, they can jump in. So I think about the current market conditions, you know, anecdotally, we hear about failures in our industry. Some are sizable fleets compared to the one or two truck failures that I think we all see on the third-party data. It is always hard to really have a good feel of exactly what is happening with capacity. We feel, and we have stated this for the last few quarters, that we think it is going to be a slow process for capacity to exit the market.
And I think we are seeing that from just discussions with customers and what they are doing with how much they are willing to be exposed to brokers and maybe some of the service failures they are 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 dedicated pieces of business for them that are no longer going to be continuing to operate. So it certainly feels like capacity is continuing to exit. The question would be, what is going to happen with demand?
I think some stability with tariffs and trade policy will help our customers get a better feel on decisions they want to make around inventory and help them better understand where the customer is going to land. I think conversations today with customers are a bit more stable than they were a quarter ago. I think there is maybe less of a reaction concerned about.
And as we noted in the release and the prepared remarks, we actually are having some discussions around maybe potentially doing some peak projects with customers that have historically done that and there are certainly some that are concerned about what one-way capacity may look like at scale if you get into a fourth quarter where enough capacity has come out where it is no longer easy to fulfill a larger need through your waterfall.
And so when you look at just the actual start to the third quarter, typically, the third quarter starts off with us slowing after the fourth of July and is generally soft as you go through August, and then it begins to pick up and build into September as you get into the fourth quarter. And so I would say for the first few weeks of July, we have kind of felt that softness. But if I look at the maybe the last kind of back half of last week and into this week, we are seeing a bit more strength than maybe we would have anticipated at this time in the quarter.
Now, hey, there is still, you know, that is just an early indication. We have seen maybe a lot of head fakes over the last several years. But we are watching this closely, and so I think we are still cautious on where the market is going to head in the back half of the year, but I feel like, you know, again, the worst is behind us. We are seeing supply and demand tighten up, and I feel like the over-the-road capacity at scale is going to become more valuable, especially when you have projects. Now, hey, it still transacts for load. It is still, I think, relatively easy to find capacity.
It is getting a little tougher when there are bigger projects out there or greater needs for our customers. So, again, I think it is just a slow progression of supply coming out of the market and demand really remaining stable at this point.
Chris Wetherbee: Thanks, Adam. Appreciate the comments.
Constant: Your next question is from the line of Danielle Imbro from Stephens. Your line is now open.
Danielle Imbro: Yeah. Hey. Thanks. Good evening, guys. Thanks for taking our questions. Maybe just to follow up on that last kind of truckload outlook, Adam. You know, rates this year are clearly not developing as quickly as you hoped. But when you think about Knight-Swift Transportation Holdings Inc.'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 two things together?
Do you see as structurally different with the margin profile and how it looks through a maybe longer but less speed-up cycle?
Adam Miller: Yeah. So, I mean, I think we get that question on a regular basis. And the way we would look at our margin profile coming out of this much more volatile cycle than I think we have ever seen in our industry is, you know, mid-cycle on the truckload side, we would expect to operate our business in the mid-eighties. And when you are near peak, from a demand standpoint, it is probably low eighties to high seventies. And in a more challenging market, you know, that maybe is more similar to what previous cycles have been versus our current cycle, you would operate in the upper eighties. We still think that is intact.
And today, we are really focused on shoring up the cost side of our business. We feel like we have a bit more control over things that we can do there. And then position ourselves to when there are opportunities in the market, we are ready to react to that quicker than anyone, provide value to our customers through that process, and certainly be compensated for the value that we are bringing. We have done a good job of still continuing to be flexible and nimble, and we really manage where our commitments are and can flex into the spot market when it is advantageous to us.
And, you know, we noted in the second quarter that the slowdown, particularly in the west, led to us having to be a little bit more aggressive in the spot market with our customers to try to keep trucks moving while the demand had waned. And so that did weigh a bit on our overall rate per mile between, you know, sequentially. But we have already started to see that come back and start to normalize. And so I think we will start to realize some of the contractual rate improvements that we have been able to achieve in this bid cycle, which we have noted was low to mid-single digits.
And if some of this potential project business comes to fruition in the back half of this year, I think that could provide some upside in margins, and that I think would lead to a more favorable bid environment next year where I think we would have an opportunity to raise contractual rates. So again, we are focused on what we control right now, which is really positioning us from a cost perspective to provide leverage in our business to when the market does turn, we can quickly get our margins back to the levels I spoke to earlier.
Danielle Imbro: And Daniel, maybe I will add one other comment where Adam said. So I would say relative to the competitive landscape, we believe, you know, we are seeing fewer carriers wanting to participate in the space for one-way service than say, you know, how it looked in a year like 2019. So at this point, we kind of look at it as when one-way service becomes less commoditized, when service is pressured, we think we are positioned well as a business who since, say, 2019, we have added US Express. We have three large brands that are well capable of participating in one-way service, solving acute needs with trailer pools at scale.
We think our position is maybe better than it has ever been in regards to that to see outsized gains. But at this point, the spot market is very compelling economically to our customer. And so until you see that tighten up and services impacted, then you are going to start, I think, those opportunities become stronger for us. So we believe there is a real opportunity here when opportunity is available to us.
Danielle Imbro: Thanks for the color. Thanks a lot, guys.
Constant: Your next question comes from the line of Ken Hoexter from Bank of America. Your line is now open.
Ken Hoexter: Great. Good afternoon. So Adam, the commentary on truckload sounds a bit different. We were guessing, like, we are turning in. Feels like now capacity is coming out continuously, and maybe there are some projects on the demand side. The consumer building and manufacturing opportunities from the big build. So maybe relay that over to the LTL side, which is different than the overall market given the build-out that you are doing. So maybe talk some color on the share wins, the cost you are taking out there, I think you mentioned counter-seasonality given the opportunity. Can you dig into the scale and the momentum there? Thanks.
Adam Miller: Sure. Yeah. Thanks, Ken. Yeah. So on the LTL front, you know, we have done a lot over the last 24 months in terms of scaling that business. We have had an acquisition through the process, and it has given us a real opportunity to provide additional services to our customers in markets that we just did not serve historically and customers that really liked the service that AAA Cooper or MME or DHE have been able to provide. And so we have really kind of leaned into developing density and growing with the new network that we have created, but there have been certainly challenges in that process.
When you are integrating a new system where you have, it is not just the technical changes in terms of how you operate a system, there are process changes. There are just cultural changes that are required while scaling the business and having to deal with more volume. It has created some challenges for us. And so we have got our team now kind of focused on, hey, let us figure out how we pull some of the costs that we have incurred through this process because, hey, you have had to add labor, we have had to add an asset to fulfill the service for this additional load count. And we have to optimize that now.
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 have 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 have opened up.
Clearly, we have kind of slowed the growth there intentionally, and we may just have a few kind of strategic places that we are going to potentially open up in the back half of this year. But largely, it is going to be a focus on growing into what we currently have. We have remained disciplined on price. You could see the revenue per hundredweight continues to grow at a healthy clip. We think there is a potential to just kind of catch some of the leaders in the space in terms of where they are at from a pricing standpoint.
But right now, it is going to get back to fundamentals to improve the margin, capture more operating income with the network we have, and then kind of grow into the shipping count that we know that the door count can really handle and just kind of take a balanced approach in how we approach that. But we really love the team that we have there. They have done a great job navigating such a growing business. Tremendous amount of confidence. But, hey, now it is time to execute and just make consistent progress in this business. And, you know, historically, from Q2 to Q3, we have seen margins take a little bit of a hit.
But we feel like with some of the initiatives we have around the cost side of the business, labor management, as well as some bid opportunities we have with the additional scale that we had, that we were able to maybe overcome some of the normal seasonality that we encounter from second quarter to third quarter.
Ken Hoexter: Yeah. That last part, that is the great stuff. Thank you. Appreciate that, man.
Adam Miller: Yep.
Constant: Alright. Thanks. The next question comes from the line of Scott Group from Wolfe Research. Your line is now open.
Scott Group: Hey. Thanks. Afternoon. So I know you guys do not have a fourth-quarter guide. Just wondering, given the big swing in other operating income, do you think it is fair to think about Q4 being similar to Q3 or maybe, Adam, because of some of the peak activity starting to pick up, maybe there is still an opportunity to see some decent sequential earnings improvement. And then I know just separately, if I can, does the bill change your and bonus depreciation change your views about CapEx going forward at all?
Adam Miller: Yeah. So on the last piece there, I think the CapEx change there is just kind of us tightening up in different areas. It is maybe not so much on the equipment front. Maybe from a facility standpoint, an IT investment standpoint is really where we are seeing some of the adjustments. We really have not changed our equipment strategy. We like to keep a pretty consistent replenishment process so you do not have a lot of volatility in your CapEx as you have, you know, because if you make adjustments there, then four or five years down the road, you have a big jump in CapEx. So we are pretty consistent in how we purchase tractors.
Trailers can be a little, you know, a little bit more of also depending on where our need is and what our ratios are. But from a tractor standpoint, it did not really change our strategy around that. When I think about the fourth quarter, Scott, you know, we do not have a guide out there. Again, there is still a little bit too much uncertainty for us to put a number out there.
I think what we wanted to convey around the all other segment is, you know, we believe we had made an adjustment in how we bill one of our customers in our all other segment that was going to create maybe more consistency of revenue throughout the quarters, and we just never made that we never got that change over the finish line. And so we are continuing with the normal revenue recognition that we had the previous year, which leads to, you know, more revenue generation in the third quarter, you know, the first three quarters, and then you see a slowdown in the fourth quarter.
So instead of we were trying to go fix variable, but we were not able to accomplish that. So we just wanted to make sure that the investment community, the analyst community was aware of that, but we are not prepared to put a number out there for the fourth quarter at this point.
Scott Group: Very helpful. Thank you, guys.
Constant: Your next question comes from the line of Rika Hayanin from Deutsche Bank. Your line is now open.
Rika Hayanin: Hey, everyone. Thanks for the time. So Adam, I wanted to double-click on the comment you made around maybe further cost savings in the truckload segment. I think that is quite an impressive statement given all the success you have had there so far. So maybe you can walk us through some tangible examples of what is 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, you know, I am 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 incremental here given that change in cost structure? Thank you.
Adam Miller: Yeah. So, Rishan, maybe I will turn that over to Andrew. He has kind of been the driving force around some of these cost initiatives. I will let him kind of walk through some of your questions there around what is on to come there. I think the slide we had tried to highlight some of those and then maybe even a breakdown of fixed versus variable.
Andrew Hess: Yeah. Hey, Richard. So, yeah, let me kind of, what I would say is that we have, in the last year or so, we have really been building the muscle of continuous cost reduction in our organization. So we are using lean management tools to drive a culture of continuous improvement and cost, and it took a little while for that to really start to show results. We are starting to see that in the numbers. So there are a number of areas that we are looking at. We identified a few in the slide, but I would say our performance on safety is continuing to be a contra-inflationary area.
Now that can change with one large claim, but what we have done is we have generally taken a more proactive position ahead of getting ahead of accruals that could develop adversely than we have in the past. And we do not wait till the end of the year to look at actuaries and adjust those. We look at those each quarter. So we have a better handle on our costs. We are on top of our accruals in a proactive way. So we are less likely to see surprises there. On trailers, on equipment, we still feel like our trailer ratio has an opportunity for us to bring down trailer costs.
And we are still well above historic levels that we need to be opportunistic in various market conditions. So we think that is to our advantage. We have implemented a number of and we are in the process of implementing projects enabled by technology. Now that is AI. It is automation of other types. It is using data science. We have a number of tools that we have put significant resources to. And so we are looking across our organization, determining, doing value stream assessments, understanding what is the value to our customer and what is not. And if it is not a value, we look at ways to automate it or stop doing it.
And so we are using technology to change the core processes of what it costs to serve this business. So our goal is to dramatically over time change the cost to serve on the back end of our business in a material way. And we are going to use every tool and invest where it makes sense to go capture that. Now I would also say we are getting much better at looking across our divisions to improve efficiency there, both in resources and in support levels. We have gotten pretty smart in a way we have not been in the past about how to move assets between our divisions.
So we can take dedicated trucks out of our truckload businesses and then use them in LTL day cabs. We have a leasing business for trailers that end of life, we can bring those trailers to that leasing business. We are moving trailers out of our Swift business to US Express and replacing more expensive lease trailers. So we are figuring out how to take advantage of all of our brands to drive efficiencies and processes to get more, get smarter about that. We have also taken a real hard look at our fixed costs around our facilities.
We have, I think, nine or so truckload facilities and a handful in LTL facilities that we are, that were underutilized, are not going to impact us from an operational perspective, but we are exiting and selling. And so that is going to take a lot of costs out as we do that. We are being very thoughtful. None of these, we believe, impairs our ability to be opportunistic or affects our market. But there are opportunities we have as we have looked at that. Then as you have seen, we have made improvement in all of the core variable cost areas.
In the fuel and maintenance, I talked about insurance, the progress that we made are because of initiatives in those areas that we have implemented and we are seeing results in our actual results. And we are just kind of early stages on a lot of those projects. So we expect there is going to be continued improvement in those areas. So when it comes down to it, we are looking at cost everywhere, and in a market like this, you start to look at cost in a different way. You start to really assess what are the drivers of your cost, what creates value, and where you can take cost out.
And so I expect our expectation is we continue to see cost per mile year over year improve ongoing where we cover inflation plus. And so that is kind of what the journey we are on cost that we think is going to position this business better than ever from a leverage perspective to be really opportunistic because we are more cost competitive, I think, than we have ever been.
Rika Hayanin: That is great. I appreciate all that color.
Andrew Hess: Appreciate it.
Constant: Your next question comes from the line of Ravi Shanker from Morgan Stanley. Your line is now open.
Ravi Shanker: Good day. Thanks for having everyone. 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 it looks like that is stepping up versus our expectations in Q3 as well. Can I just ask about some of the moving parts there, please?
Adam Miller: Yeah. I mean, I think it is, you know, that market just seems to have some starts and stops to it, Ravi. It also, you know, will be dependent on the inventory that we have in stock and where the demand is. And so we were maybe short on certain items that were in higher demand near the end of the quarter. And as we go into the third quarter, I think we are better positioned from an inventory standpoint, and we have seen some early demand that seems to be positioning that to be stronger than what we saw in the second quarter. Did we lose you, Ravi?
Ravi Shanker: Sorry. I was on mute. So how do you think of that kind of run rate going forward? Is that something that can come back in the back half?
Adam Miller: Well, hey. I mean, it is kind of hard. These small carriers are, you know, it is hard to count on what that trend is going to be on a consistent basis. I think right now, you have seen good demand on the tractor front, maybe not as much on the trailer front. And so, but, hey, that could change in the fourth quarter. It is just hard to predict. I think we try to forecast out the first, you know, obviously, the third quarter, but the fourth quarter still, you know, I do not see deviating dramatically, but could be less, could be more. Kind of depends on what the trends we are seeing, Ravi.
Andrew Hess: Ravi, our CapEx is kind of back-end loaded. So we are going to be bringing more new equipment into our fleet in the back half of the year. It is going to give us more inventory to be able to sell. So I think that is maybe one difference between the first half and second half.
Ravi Shanker: Understood. Thank you.
Adam Miller: Alright. Thanks, Ravi.
Constant: Your next question comes from the line of Aria Rocha from Citigroup. Your line is now open.
Aria Rocha: Hey. Good afternoon. So I was hoping you could speak about the impact that brokers are having on the market. Do you think they are 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 the tech that brokers are bringing to the industry. Is that part of what is making it harder for the market to recover? Thanks.
Adam Miller: I think there is clearly more transparency in the market than we had ten, fifteen years ago, clearly. And I do not know if it is necessarily brokers doing it. I mean, there are third-party datasets that all of our customers subscribe to or most of them that have scale, and they can see what is happening to rates. And I think that leads to just a market that is 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. 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 is 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 is not necessarily the relationship where you are trying to go get rate and they have to go through procurement and go through a whole process to see what the market will bear like you did ten, fifteen years ago.
I think it is easier to set up the expectations of rates going up or down. I think brokers out there are really just a function of more small carriers, more small capacity being available in the market. When there is more of that capacity available, you will have more brokers come into the space. And as that capacity exits, I think you are going to have brokers that exit the space. That is what naturally happens.
And I think what we focus on, what we see from our customers is we will go through a bid process where, hey, they are going to take the third-party data out there and they will set up their expectations about where rates should go. But you have to remember that largely is transactions between small carriers and shippers or brokers, and that may not be as indicative of what the larger players are dealing with from a revenue per mile standpoint. But they will use that to negotiate with us. And at times, they may find themselves with more exposure to brokers coming out of their national bid than they are comfortable with.
And so we will start to see mini bids, and these mini bids will come to us most likely because you have a carrier that is failing a lane. They just cannot fulfill the demand that the customer has, and then they are looking for a larger player to come in or another player to come in and take over that lane. And in many cases, it is at a rate that is higher than what you bid on in the national bid. And so we are seeing more of that occur. I think we are having more dialogue with customers about what is causing that.
And so that is going to be the brokers falling off because they do not have the carriers that can support the volume. And in other cases, it is maybe some larger carriers that have come off the lane that are not necessarily carriers that they are coming through brokers. So that is what we are seeing again. It is anecdotal, but it is a trend that is starting to develop.
Aria Rocha: Adam, if I could just follow up quickly. Is there any dimension in which that greater price transparency makes it harder to get to the margin targets that you were discussing earlier?
Adam Miller: I do not believe so. I think it just leads to the cycles, I think, moving quicker because it is easier to see what is happening to supply and demand. I think from our standpoint, when capacity gets tight, I mean, that is when a carrier of our size at our different brands has the ability to come in and solve large problems for our customers. And you do it with asset-based capacity.
That does initially get tied to what is happening in the third party with the small brokers, but it is secured capacity that they can do drop and hook, that has security around the freight that we are hauling, and that, you know, we will be able to get back to the margins that we have been at. Because if you look at, we had this transparency during COVID, and that led to the best margins we have ever seen. And part of that was because everyone could see that rates were going higher. Everyone could see they were going down, and so procurement leverages that to the negotiation.
At the end of the day, it is going to come down, Aria, to supply and demand and where it is at, and it is just easier to see where that is at in the market today than it was ten or fifteen years ago.
Aria Rocha: That is great. Thanks for the time, Adam.
Constant: Your next question is from the line of Jason Seidl from TD Cowen. Thank you. Evening, guys.
Jason Seidl: I wanted to switch back to LTL here. You know, you guys are coming up on your anniversary of purchasing DHE. I was wondering if you could talk about how building tonnage into the western network is going and then broadly, overall, would you categorize the pricing environment in the LTL marketplace versus the prior quarter? Would you say it is sequentially about the same? Did it worsen a little bit? Then how should we think about the rest of the year? Thank you.
Adam Miller: So here is what I would say, Jason. You know, building tonnage has gone well in the west. I think we have seen customers very responsive to it. They like having another option out there. And again, leveraging the great relationships that we had with AAA Cooper and MME coming in, you know, as we embark on the West Coast. You know, but there have been challenges with, as I mentioned earlier, with scaling like we have in the West Coast while doing a system integration that has put some cost headwinds into the business that, hey, we have initiatives now to work through. So I think tonnage has worked just as expected.
I think it has been a bit more challenging on the change management of the process and then some of the costs that we have incurred to build out that tonnage, and that is what we are going to work through. You think about a pricing standpoint, I mean, it has been relatively consistent. You know, I think the renewals have been still solid in the mid to upper single digits, and I do not think there is anything right now that indicates that is really changing as we get into the third quarter.
Andrew Hess: Appreciate the call. Is it out? Yeah. Just to have a little color on kind of the dynamics that are going on there. So we are opening new locations on the West Coast as well. So, you know, DHE, we went through the wholesale implementation of their port process. Right? They used to operate in, and now, that was a big lift, but we, you know, while we have done that with new volumes and new locations, the team has done a great job. It was good help from our AAA team there, but that takes time to get fully up to speed. And so, you know, I feel like there is a lot more opportunity still there.
So when we approach this, kind of give you a sense for what you can expect on the business. In a high-growth environment, which we are in, and with our top priority being to deliver high service, we brought on capacity and cost, like we have mentioned, ahead of that demand. And sometimes that can be very expensive cost. Right? That could be subcontractors, outsource maintenance, sometimes rented equipment. Meanwhile, we are in the process in those locations where we are seeing a lot of growth of hiring and training and onboarding new employees. And it creates some redundancy. Right, in the network.
And as you are bringing in this new capacity online and opening new locations, that changes your network flow. And sometimes when you do that, you have headcount inefficiencies that are kind of misaligned with your evolving network. So until that stabilizes, you have some inefficiencies you have to work through, and that is kind of where we are at. So as we are bringing these new locations up on the West Coast online, it is opening up new opportunities for us. So we are making sure that we do not bring in more capacity into that part of our business than we can service effectively. We are playing the long game here. Right?
We are not going to sacrifice short-term margin for long-term opportunity. And so that is where we are at. We are building that efficiency, and then we are going to continue to scale and pull more volume into the region.
Jason Seidl: Well, that makes sense. If you guys are out there running equipment, that can get very expensive. I did it back in the day. Should we expect maybe CapEx to go up next year? Are you guys going to be purchasing more equipment for next year?
Andrew Hess: I mean, one of the beauties of the synergies of truckload and LTL altogether is that we can run tractors out of our dedicated fleet day cabs and into LTL. It is feeding our growth in a very cost-efficient way. So we will look at that, but I do not think that I would expect it to be materially different next year from an equipment CapEx perspective.
Jason Seidl: Fair enough. Appreciate the time, gentlemen.
Constant: Yep. Thanks, Jason. Next question is from the line of Zoran Allihir from Goldman Sachs. Your line is now open.
Zoran Allihir: Yeah. Hi, everyone. Hey. I wanted to circle back on the miles per tractor, you know, being up 4% this past quarter, which seemed pretty strong against some tough comps. Is that some indication? I know you are reducing your tractor fleet, but is that some indication on supply demand broadly? And do you expect to build on that as part of the thought process for the third quarter and beyond? Thanks.
Adam Miller: Yeah. So there are a couple of factors weighing on the, I mean, one would be disposing of underutilized assets. So if we had unseated tractors and did not feel like we had the driver pool to be able to fill those nor the freight market, then we would dispose of those, which we did some of that. Clearly, you saw that. You see that in the track account. But also, when you look at production on a seeded basis, which we do not provide that number, we are seeing that improve on a year-over-year basis as well.
So we are being more productive with the trucks we had seeded this year than we were with the trucks we had seeded last year. So, again, it is another indication that the market is slowly improving. We believe the worst is behind us, we expect the slow progression of the market to continue into the back half of this year, kind of barring any unforeseen real market disruptions, whether that be tariffs or other policies. But, yeah, we believe that is a sign and, hey, that is something we track on a regular basis and really put a great focus on.
And it does allow us to capture some of the operating leverage in the business when you are running more miles on your fleet. So it is certainly a big focus for it, Zoran.
Zoran Allihir: Thank you.
Adam Miller: Okay. Well, I think that is now we hit an hour. So, hey, we appreciate all the questions, the interaction from the group. And so we will go ahead and conclude. And, again, if we were not able to get to your question, you can call 602-606-6349, and we will schedule a follow-up call. Appreciate it, everyone.
Constant: This concludes today's conference call. Thank you for your participation. You may now disconnect.