Knight-Swift Transportation Holdings Inc.

Good morning, my name is Chloe and I will be your conference operator today at this time, I would like to welcome everyone to the night swift transportation third quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise if at any time during this call you require immediate assistance, please press star zero for the operator. Speakers from today's call will be 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. Good afternoon, everyone, and thank you for joining our third quarter 2024 earnings call. Today we plan to discuss topics related to the results of the quarter, current market conditions, and our earnings guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to last 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 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, part one of the company's annual report on Form 10-K filed with the United States SEC for a discussion of the risks that may affect the company's future operating results. Actual results may differ. Now I will turn to our overview on slide three. The charts on slide three compare our consolidated third quarter revenue and earnings results on a year-over-year basis. Revenue excluding fuel surcharge decreased 5.3% and our adjusted operating income declined by 7.1% year-over-year as we lapped the acquisition of US Express at the beginning of the quarter. GAAP earnings per diluted share for the third quarter of 2024 was 19 cents, and our adjusted EPS was 34 cents. Our consolidated adjusted operating ratio was 93.9%, which was flat with the prior year, while representing a modest sequential improvement over the second quarter. This was the first sequential improvement in third quarter consolidated adjusted operating ratio since 2021. Our results were negatively impacted on a year-over-year basis by a $6.6 million increase in net interest expense and the 34.1 percentage point increase in the effective tax rate on our GAAP results and the 6.1 percentage point increase in the effective tax rate on our non-GAAP results year-over-year. Impairment charges and an investment write-off totaling $13.1 million are also excluded from our non-GAAP results. Now on to the next slide. Slide 4 illustrates the revenue and adjusted operating income for each of our segments. In general, our truckload, logistics, and intermodal segments continue to navigate a challenging full truckload market, but as we noted last quarter, we believe the worst of this truckload cycle may be behind us. This view has been further supported by several sequential trends in the third quarter. Revenue excluding fuel surcharge, adjusted operating income, and adjusted operating ratio were at least stable and in most cases improving over the second quarter results for each of these three segments. The ongoing attrition of excess truckload capacity added during the upcycle still has further to go. Trade rates have largely stabilized and are showing modest improvement but remain at unsustainable levels. The LTL segment continues to experience a much more supportive market than truckload, where our business continues to achieve steady rate improvement as we extend the reach of our network and capture new volumes. At the same time, startup costs and early stage operations at so many new facilities that have yet to go through a bid cycle are a drag on margins in the near term. The market in the third quarter largely played out as expected prior to Hurricane Helene and the impending port strike, curtailing volumes across our asset-based businesses in the last week of the quarter. The arrival of Hurricane Milton in the early days of October extended the market disruption into October, particularly for our US Express and AAA Cooper brands based in the Southeast. Aside from these events, the truckload market is giving signs of being balanced, and scale, service, and freight security are becoming more of a differentiator. These are signs that align with the unique value that we are positioned to create for our customers when the market strengthens. For now, we remain focused on discipline pricing, cost control, and operational excellence. As we see opportunities across our enterprise, we leverage our unique suite of brands, intentionally driving collaboration to create distinctive solutions for customers. This allows us to offer solutions across different services and to retain more volumes than any single brand could execute. As the market improves and shippers have acute needs, we expect this to become a more valuable advantage. Now I will turn it over to Adam to discuss our truck lift slide five.

Thanks, Brad, and good afternoon, everyone. Although we remain cautious in an environment that remains challenging, where further attrition of excess capacity is still needed, we continue to observe positive signs, including a continuation of seasonal patterns with some project activity underway in the fourth quarter, achieving rate increases in more recent truckload bid awards, sequentially improving our average truckload revenue per mile over the second quarter, and seeing customers reducing their usage of brokers in efforts to improve cargo security as well as the ongoing stability of their supply chain. Our average spot rate remains higher than our average contract rate, as we believe we are seeing opportunities to address acute needs for our customers that may not be reflective of the broader market. This is where our scale and unique suite of diversified brands offer distinct value to our customers. On a year-over-year basis, our truckload revenue excluding fuel surcharge for the third quarter decreased 6.1%, reflecting a similar decrease in loaded miles as we lapped the acquisition of U.S. Express at the beginning of the quarter. Revenue per loaded mile excluding fuel surcharge was essentially flat year-over-year. Miles per tractor were also flat year-over-year as improvements in the legacy truckbook trucking business were offset by a decline at U.S. Express. reflecting a turn in the freight portfolio as well as we redefined the freight network over the past year for U.S. Express. Similarly, revenue excluding fuel surcharge per tractor declined slightly by 0.6% year-over-year as improvements in the legacy business were offset by a decline at U.S. Express. On a sequential basis, revenue per loaded mile excluding fuel surcharge increased slightly over the second quarter. Miles and truck count were stable, producing a modest improvement in revenue, excluding fuel surcharge. Our spot exposure remained relatively consistent with the second quarter. The adjusted operating ratio for the legacy trucking businesses sequentially improved by 250 basis points, driven by improvements in cost per mile and revenue per tractor. The US Express adjusted operating ratio was fairly flat sequentially, as modest declines in its total miles and utilization were offset by improvement in revenue per mile. Now on to slide six, where we cover the LTL. Market conditions in the LTL industry remain much more supportive than in truckload, though the pace of year-over-year rate increases appears to be slowing a bit as comparisons get increasingly more difficult while industrial production is stuck in neutral. We are still experiencing solid demand and steady rate increases in our business, partly aided by our expanding network that allows us to offer our services on more lanes to new and existing customers. Our LTL business grew revenue, excluding fuel surcharge, 16.7% year-over-year, as shipments per day increased 11.1%. Our acquisition of DHE, the LTL division of Dependable Highway Express, on July 30th, contributed approximately 7.5% to each of those improvements. Revenue per hundredweight excluding fuel surcharge increased 9.2% year-over-year. The year-over-year trend of declining weight per shipment slowed to 3.9% in the third quarter. The adjusted operating ratio was 89.6, and adjusted operating income declined 19.5% year-over-year due to startup costs, and early stage operations at our recently opened facilities. Now on to slide seven, where we summarize the recent progress on our LTL expansion strategy. During the quarter, we opened 16 additional service centers following 18 openings in the first half of the year. We expect to open four more service centers by the end of 2024. Also, our acquisition of DHE represents approximately 10% growth in both service centers and door count and adds the key southwest markets of California, Arizona, and Nevada to our network. Overall, our organic and inorganic expansion activities in 2024 should add nearly 1,500 doors this year, representing a 32.2% increase in our door count from the beginning of the year. We have been hard at work integrating the systems and business of DHE into our network and expect to complete the integration during November. Customer responses to this acquisition and adding the Southwest to our service offering have been very strong. We expect meaningful opportunities for growth following the integration and are excited about the value this adds to our existing business as well. Over the past year, we have chosen to invest capitalizing on opportunities to significantly expand our LTL capabilities and service territory. The associated startup costs and operational inefficiencies are initially headwinds to improving operating margins. Moving beyond 2024, our focus is on continuing to capture volume with new and existing customers, particularly as we go through our first bid cycle with the expanded network. Our relative pricing position allows us to pursue incremental volume with less risk of diluting our yield. Our approach here will not be unlike our approach in truckload, where a cohesive network strategy, disciplined pricing, and intentional capacity deployment support better market density, operational efficiency, and service quality. Progress in this strategy should allow us to unlock new levels of operating performance and margin in the long run. We remain encouraged by the growth and opportunities for our LTL segment, and we continue to look for both organic and inorganic plans to geographically expand our footprint within the LTL market. Filling out our super regional network in the short term and ultimately creating a national network will allow us to participate in more freight and enable us to find opportunities to further support our existing truckload customers with LTL capacity. Now let's move to logistics on slide eight. The logistics market continued to deal with the soft truckload environment as most public spot rate indicators faded throughout the quarter. Our disciplined approach to pricing has allowed our business to maintain profitability with our adjusted operating ratio of 94.5%, improving 100 basis points over the second quarter. We also increased revenue per load 3.7% over the second quarter. Gross margin percent was stable both sequentially and year-over-year. As discussed last quarter, the logistics market is further challenged by a number of shippers allocating more of their business to asset-based providers. Also, we continue to divert a portion of our logistics volumes to support our asset business in certain markets. However, this headwind should flip to a tailwind when the market turns as the asset division will overflow freight to the logistics business, particularly for our power-only service. This relationship with our asset division can create more volatility through a cycle for our logistics business, but it means there is a significant amount of runway ahead of it at this point in the cycle. Revenue decreased 9.5% year-over-year as we lapped the acquisition of the US Express at the beginning of the quarter. Load count was down 21.1% year over year, but was partially offset by a 13.6% increase in revenue per load. We continue to leverage our power-only capabilities to complement our asset business, build a broader and more diversified freight portfolio, and to enhance the returns on our capital. Now I'll turn it over to Andrew on slide nine. Thanks, Adam.

In our intermodal business, revenue increased 1.4% year-over-year. This is the first year-over-year revenue increase in six quarters. It was driven by a 7.2% increase in load count. The improvement in volume and progress in operating costs overcame a 5.3% decrease in revenue per load to improve the operating ratio by 310 basis points year-over-year. With recent hurricanes negatively impacting volumes early in the fourth quarter, we no longer expect intermodal load count to be sequentially stable with the third quarter. This will also likely cause the business to be essentially breakeven in the fourth quarter, whereas we had previously projected to be slightly profitable. We remain focused on executing our strategy of diversifying our business mix, building density, reducing empty moves, and reducing cost. We expect ongoing progress in these areas should make this business profitable in 2025. Now on to slide 10. 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 rental, equipment leasing, warehousing activities, insurance, and maintenance. For the quarter, revenue declined 42.8% year-over-year, largely as a result of winding down our third-party insurance business in the first quarter. The $6.2 million operating income within the All Other segment represents modest sequential improvement over the second quarter and was primarily driven by the warehousing and equipment leasing businesses. 11, we've outlined our guidance and key assumptions, which are also stated in earnings release. As noted in previous quarters, we are not incorporating an inflection in market conditions for the purpose of forecasts, but are rather basing these ranges on expected seasonality and a continuation of existing market conditions, similar to what we have felt in the third quarter and into October thus far. Actual results may differ from our expectations. Based on these assumptions, we expect our adjusted EPS for the fourth quarter of 2024 will be in the range of 32 to 36 cents, and our adjusted EPS for the first quarter of 2025 will be in the range of 29 to 33 cents. The key assumptions underpinning this guidance are listed on the slide, though I won't cover them. In summary, We project truckload operating income to improve sequentially into the fourth quarter. We also expect a normal seasonal step down in LTL earnings and activities within all other segments in the fourth quarter, which will largely offset the projected ramp up in truckload profits. Our first quarter range reflects the normal seasonal slowdown in our truckload and logistics segments, but this should be partially offset by seasonal improvement in our LTL segment, and the all other segments. While we cannot drive the timing of an improvement in market conditions, we are focused on leveraging the scale and service of our unique suite of brands to solve complex problems and create distinctive value for our customers. Growing and expanding LTL network and improving efficiency, service, and margins, and fully capturing the synergies at U.S. Express. recognizing the outsized margin improvement opportunity as market conditions recover. 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. Thank you. Chloe, we will now open the line for questions.

Certainly. At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may withdraw yourself from the queue at any time by pressing star two. And we'll take our first question from Jonathan Chappell with Evercore ISI. Your line is open.

Thank you. Good afternoon. Adam or Brad, Adam, you mentioned in your comments and in the release as well that Spot's doing better than Contract. As it relates to your portfolio business within TL, Can you kind of give us a sense for where you stand now on spot or kind of more short-term business relative to maybe a year ago in long-term averages, just so it can help us frame kind of your flexibility and leverage for when the entire market starts to inflect?

Yeah, sure, John. I appreciate that. We're still in that range of just low double digits for spot versus our contract business and In stronger markets, we've been able to flex that as high as 20%, 25%. So we still have good ways to go in terms of being able to be nimble in this market. And as we mentioned in the release, we've seen some seasonality that has carried over from Q3, and maybe some of that was delayed in Q3 because of the disruption from the hurricanes. But we are seeing a handful of shippers that have acute needs that they need to secure additional capacity above and beyond what they can secure in their routing guide. And we're seeing a lot of those opportunities in our larger brands, particularly Swift. And then we're seeing some of that flow into maybe a US Express and then a little bit more into Knight, but still not something that is as robust as we're seeing in Swift. So that tells us that the inflection, there isn't really a broad-based inflection, but that some of these shippers, as they have real needs, are going to go to the larger asset-based players that are going to have the flexibility and the nimbleness and the equipment to accommodate those needs and to provide value for them. And it also means that the small carriers out there are still probably in a difficult environment where we'll still expect to see some attrition, which I think we still need to get back to where we feel like the market is in balance. So we still have plenty of opportunity to flex. if the market is there. And I think we have opportunity to provide even more capacity from our other brands that maybe aren't seeing the same spot opportunities as we are on the SWIFT business. Hey, John, I would just add to that.

In terms of our existing capacity for spot exposure or for flexibility, if you look at our miles per seated truck, there's still a lot of room for improvement on a seated truck basis. And so there's slack in the system. Should there be opportunities, we could create more capacity. if you will, to capture those and create more spot exposure without having to lose any contractual business. Got it. Thanks, Brad. Thanks, Alan.

We'll move next to Tom Waitowitz with UBS. Your line is open.

Yeah, good afternoon. Wanted to just ask Adam and Bud your best view on how this cycle might play next year. It seems like there's a bit of disruption in the market with a couple of hurricanes and short life port strike and just a lot of noise strength off into the West Coast with container imports as well. But at the same time, it's not clear whether you get enough strength to really get tightness and maybe a better rate increase next year. So I don't know if you think it's kind of a gradual trend. you know, cycle turn or if you're more optimistic than that at this point. But I know it's crystal ball is probably not hard to have a clear one these days, but any thoughts on how we might go into next year on the cycle as kind of a base case?

Yeah, so Tom, I think everyone has been predicting three months for about 12 months now. So it's really hard to tell where that's going to land. But I do think that the worst is behind us and i feel like you know in in the as the bids start to pick up here that we'd expect to see low to mid single digit improvements and then see that build throughout the year i i don't expect there to be a a real sharp um inflection i think it's somewhat of a of a grind upwards but that's that's probably okay because some of those sharp inflections create almost a gold rush for the small carriers because you see the spot rates really jump dramatically. And I think that may keep more capacity in the market. So I think as you have a progressively better market that's building over time, I think the larger, well-capitalized asset players that are the stronger performers typically see an outsized amount of opportunities there versus brokers or small carriers. And so that's how I see it playing out now. It's just kind of a slow progression to the positive. And, you know, I think rates could end up in the late part of the bid season up, you know, high single digits perhaps. There's still a long ways to go on, you know, margin recapture to make, you know, the public companies, you know, closer to where they've been historically and ourselves included in that. So we've got a ways to go, and what we plan to get there with Ray, probably productivity and continue to focus on our cost structure to put us in a better position to, again, improve margins, but also bring value to our customers.

I'll just add, you know, we got the bid season largely in front of us here, so we don't have a lot of signals, but what we are seeing is capturing positive rate. And often that escalates from early bid season as it progresses. So, you know, a year ago, we were defending trying to hold rate, but that's no longer the case. Generally, we're capturing rate, but there's a lot of signals we got to still understand as we go through this. But certainly, we think the rate environment is going to be a lift to us as we walk, as we work for 2025.

And I think, Tom, I think what's maybe the most telling is how does the market feel once you get past Thanksgiving? Because I think we're going to be busy up to that point. And then once you get past there, do you still see strength in December or does it weaken? And I think that can really set the tone for where rates will inflect.

Okay. Yeah, great. That's helpful. Thank you. All right. Thanks, Tom.

We'll move to Daniel Embro with Stevens, Inc. Your line is open.

Yeah, thanks. Good evening, guys. Thanks for taking our questions. Maybe you want to follow up related to that last question. So I think it sounds like you're still expecting sequential pricing improvement kind of to accelerate 3Q to 4Q into next year. Curious on the expense side. You know, we have insurance costs up, equipment costs up, maybe driver wages. We'd love your thoughts there. But are the rate increases today or the cadence you just laid out enough to cover that? cost inflation next year to where we actually get margin improvement and OR improvement through 2025? Or do you have any thoughts on the underlying expense growth there? It'd be great.

Yeah. So I think we feel like we still have some opportunity on the cost side in our business. You know, the insurance expense has been, you know, I think a challenge for everyone in our space, given how the environment on, you know, litigation has developed, but We believe we have some opportunity to keep that expense stable or make some progress in that area, just given some of the initiatives we have around safety and managing claims. I think there's still some opportunity to right-size our fleet. I think today we have a higher trailer-to-tractor ratio than we would like, and so we're still in the process of becoming more efficient from an equipment standpoint and to improve the utilization of our equipment. When we think of driver pay, typically we would share 25% to 30% of our rate increase with our drivers. And so when we start to feel like there's a consistent trend of rates improving and we see a pathway for that to continue, then maybe that's something we would look at, but it's really going to depend on where we see the market from a recruiting and retention standpoint, Daniel. I think 2025, we're going to have to, as an industry, convert any rate improvement into margin improvement. I think so. So our focus will be keep inflation to a minimum. If anything, continue to improve on a cost per mile basis while you're getting margin or while you're getting yield to flow down the margin. I also believe that improving our utilization will also help with our cost per mile. Like when I think of the market, it typically starts with additional load count, and then you start to get spot rate, and then you start to get contract rate. So we're seeing that already in a fourth quarter. Again, it's early, and it may be short-lived. We don't know yet, but as you get load count, you get more miles, you cover your fixed costs more effectively, and then you start to get rate to help drop to the bottom line. So really, on an inflation standpoint, we have to hold steady or, if not, improve for next year.

I would just add that, you know, through the last few years, one of the I guess maybe the most wicked elements of the cycle is rate decreasing and costs in kind of a hyperinflationary environment. We see something different today. We're seeing more normalized cost inflation as we're seeing across the general economy. But we've been at heart of work on reducing our fixed costs. And I think that's going to give us a lift as we go into next year. If you look at our Our legacy businesses, we improved sequentially. We set 250 basis points from Q2 on our OR. Our cost per mile essentially drove that entirely, right? Because we were basically flat on rate, flat on mile. So we've been hard at work on cost intelligently in ways that don't impair our ability to capture market opportunities, but ways which we think are going to benefit us as we see market improvements.

I appreciate all the color. Thanks, guys.

We'll move to Ravi Shankar with Morgan Stanley. Your line is open.

Great. Thanks, Sudhafran, guys. I want to follow up on the comments on the shift of customers to an asset base and away from brokers that you know is a positive sign for the cycle. How is this compared to a similar trend at this point in previous cycles And also, if you are seeing a shift more towards asset-based carriers, what does this mean for potentially rates into the upcycle? Like in the past, people were pointing the fingers at brokers and said, hey, the rates are too low in downturns and too high in upturns because of brokers. Does that mean we'll see less volatility on rates going forward because of the shift?

Yeah, I think, Robbie, we've seen these shifts in the past. We've seen them shift towards brokers when the market rates are really cheap and brokers can get small carriers to do things at lower rates than the larger asset players. And then when some of our customers feel less comfortable with the brokers and what that could mean to their supply chain or their available capacity when the market, when they think it's going to turn, start to shift towards the asset-based carriers. I think All that's playing out like normal cycles typically would. I think one difference is we're starting to hear a lot more comments around cargo security. I think there's been a rash of cargo thefts across the industry. I think the proliferation of power only, hey, we have power only, we do it in a certain way that we feel like makes it very secure, but it's not unusual to see a smaller carrier hauling a larger carrier's trailer because it happens all the time. We used to be concerned about that when we'd see a small carrier hauling a Swift or an iCarrier. We'd probably call it into safety. Now it's common practice. And you could do it really well and effectively, but there are some bad actors out there who have leveraged that and have found a way to steal loads, especially when we've tried to make it very easy to interact and engage with these small carriers and shippers. And so I think there's been several of our customers who've come to us and have asked for opportunities to leverage our equipment because, hey, saving a couple hundred dollars on a shipment over a period of time gets washed out really quickly when you start having full loads stolen. And when I think of our business and what we do from a security standpoint, between all of our brands, we may haul 4 million loads a year, and I can count on one hand how many times we have a full trailer stolen. I mean, we have a very robust security department. It's one of the more impressive things. We have customers visit our operations that they get to see the team that's watching all the high value loads and locations where you shouldn't drop trailers. And we're tracking those very closely. Very few have that type of security. So that has become a bigger point of contention with some of our customers. And I've gone to different conferences here over the last few months and cargo theft is now a prevailing topic when really, really wasn't discussed that much in the past. So that's one thing that I believe is new, but I think our, you know, shippers, they shift back and forth between broker and asset based customers on a regular basis. I don't see that changing outside of the concern around cargo theft.

Very helpful. Thank you.

We'll move next to Scott group with Wolf research. Your line is open.

Hey, thanks. Good afternoon. So any thoughts on why SWIFT is seeing the pickup in spot and not the other businesses? Is it just because they're bigger? Are the rates lower? I don't know. Any idea on why that? And then, Adam, I just want to make sure I'm understanding your point about the margin improvement. So if you think back historically, like whatever price you get typically margins improve a little less, right? Because you're giving some back on drivers, usually utilization, you give some a little bit back because the market gets tight. It sounds like your view is that whatever you get in price, you'll get at least that margin and maybe more. Am I understanding that right?

Yeah, I mean, that's the goal, Scott, is because of just how much inflation that we've felt over the last several years, we just have a lot to get back there. And it'll come from again, you know, managing safety more effectively, improving our turnover, like the, you know, doing the tough basic things and trucking to grind through that. But also when you get more utilization on your equipment, that really does help. And if you have an improving market, you'll get utilization and then you'll get rate. And so that'll help offset the, you know, any kind of typical inflation you'd have on a year to year basis. So You know, it may not be perfect that way, Scott, but that's our objective here for 2025 is to keep cost per mile flat or even better, and then any rate improvement, be able to flow that to margins. And then on your SWIFT question, Scott, you know, SWIFT is just, it's the largest brand we have, and it has the most equipment, the most trailers. And so when, especially certain customers that ship heavier in the fourth quarter are they're used to being able to call SWIFT and for SWIFT to be able to solve big challenges. And so instead of calling three or four or five carriers to pull together the capacity they need, they may be able to call just SWIFT and have them figure that out. And so that's why we really identified this through having multiple brands now, how those calls and how those bids start to flow. And so what we're doing is finding where we can win with SWIFT, with these customers, but then take the opportunities that we can't do at SWIFT and leverage Knight, leverage US Express, leverage Bar None, Abilene to find additional capacity to solve the problems for the customer. So it feels like they're coming to one entity, but we're giving them access to multiple brands. And you do it the right way. Sometimes it's going direct with each brand. Sometimes it could just flow through one if it's a project. And so it really depends on the customer. But a lot of those opportunities are starting with SWIFT because of the sheer size and the capabilities that SWIFT has to solve problems.

Thank you, guys.

Yep.

We'll move next to Ken Hoxter with Bank of America. Your line is open.

Hey, good afternoon, Adam and team. So you brought a lot of less than truckload facilities online in the quarter. I think it was almost double what you had done year to date. So how do you see the margin progression as we move forward? And then it looks like you're targeting, well, I'll leave it at that. Maybe the state of the market, your thoughts on pricing kind of within the market as a whole.

Maybe I'll get a thought on just the market and then maybe I'll let Andrew touch on the margin profile and how we see that progressing. You know, I think we're still seeing good opportunities as we expand the network with these terminals. And, hey, it's been aggressive. We acknowledge that. And there's been some headwinds on margins because of it. But we look at 2024 as the year where we invest in the network. And then 2025 is the year that, hey, we grow into it. And we grow into it with top line growth and improvement in margins. And we're really excited about the addition of DHE. California market was really important. And as well as Nevada and Arizona, we had a lot of truckload customers that we have very close relationships with that are very large shippers that like dealing with national players. And so some of them were a little reluctant to leverage the AAA and MME network until we had California. That was a big piece for them. And so as soon as we announced the DHE, we had several customers reach out and say, hey, when can we start? And we said, well, let's get our networks connected in so you have one system, one pro number, so it feels like one network to them. And we expect to have that done probably in the next seven to ten days. And so there's a host of customers that have shipment volume that they want to flow to us that would be a significant increase to what DHE is accustomed to hauling. But now that they're tied in, to a broader network, we think there's some real opportunity there. And then as we mentioned on the call or on the prepared remarks, you know, we feel like where our pricing is, we still have some room to improve to kind of close the gap from the larger players that are out there that operate at, you know, at better margins than us currently. And so we don't feel like we need to pressure pricing to grow into the terminal network that we've grown. And so we're kind of excited about getting to 2025 and really growing into what we've built out. And then obviously look towards the Northeast and find an opportunity to grow organically or inorganically in that market to start to round out the nationwide network. And Andrew, maybe you want to touch on how we see that progressing from a margin standpoint as we grow into those facilities.

Yeah, I'd say, and just briefly, We think about it this way, Q3 and Q4 are sort of the kind of low point in terms of the upside down math on cost versus revenue. So our heaviest investments have occurred this quarter. And so from this point, we're going to add some additional facilities, but largely the big investment in our organic growth is behind us. And we're going to start filling up that. We usually start it with 3PL revenue. Once we get into the bid cycles, we're going to be converting that to a higher value freight that's going to help overall. But we have sort of an idiosyncratic path here that maybe is going to look a little different than some of our peers. You saw that our revenue ex-fuel per hundred weight was up 9.2%. We believe that we'll be able to see strong rate capture as we go into Q4 and into Q1 because of the way that our network is sort of being restructured our length of haul is growing and we're capturing longer length of haul as we are able to deliver to new regions so i expect kind of just to your question on margin i expect that that cost pressure is going to continue for a few quarters but by early 2025 we're going to probably turn the corners we get more into bid cycles rates more favorable and we start getting better at our efficiencies and our pickup and delivery and our dock labor and making sure our line haul utilization is where it needs to be. So I think we're somewhere around the low point in terms of the upside down math that this was an investment that we expect 2025 is going to pay off.

And Ken, really, our goal there is, we've kind of built, we've grown pretty dramatically this year, is to just keep marching down a path where we're improving a couple hundred basis points in OR Just every year as we grow into our network, we just need to start marching down a path to where we're competing with the best public companies out there.

Wonderful. So just to clarify then, in your guidance assumptions, the high 80s, you're talking about kind of exactly your target here, your fourth quarter, first quarter, and then start to see improvement from there? Yes.

Yeah, we'd expect to see some improvement in the second quarter of 25. All right. Thanks, Adam. Thanks, Andrew.

We'll move next to Chris Weatherby with Wells Fargo. Your line is open.

Hey, thanks. Good afternoon, guys. I was curious how the progress at U.S. Express is going. I guess, you know, I think margins were flattish in the quarter sequentially, but Can you talk a little bit about how that integration is going? There's a bit of a rehabilitation of the book of business and the customer portfolio, the rates. I'm going to get a sense of maybe how that's going and maybe any thoughts if it's different at all in terms of the longer term outlook for it. And do you need a different or better freight environment to really start to pull the value out of that deal?

Yeah, that's a great question, Chris. And it's certainly been more challenging than we originally anticipated. And that's really more of a function of having a prolonged difficult freight market that we've had to deal with. There's really two sides of synergies that we have to capture, right? You have the cost side, and then you have the revenue side. We've done, I think, a really good job on capturing cost synergies. We have closed the gaps substantially on the cost per mile of U.S. Express versus the cost per mile on, you know, our legacy Swift and Knight businesses. Now, there's still more improvement that's needed, and these are in areas that, you know, take time to show that improvement. They're kind of cultural shifts, and that'd be in the safety side of the business, so that's kind of ensuring that we're coaching, we're bringing in the right drivers, that we have the right culture around, you know, safety versus productivity, and And really just having good relationships with our drivers. And so we've had to build out a terminal network, which didn't exist before. We did that very rapidly over less than a year period. And then we've got to improve driver retention. And that also is a function of having those relationships, a terminal network, and having the right people with the right mindset. So I feel like that's been established, but it takes some time. to see that flow through the business, but we're very comfortable the progress you've made on the cost side of the business. Now, there's also some, I see equipment, long-term leases that you purchase with the business that we have to work through and those can take time as we replace them with better financial terms on the equipment that we have. So still leverage the pool on the cost side, but feel good about the progress there. The real challenge is the over-the-road business and the gap between the U.S. Express rate per mile and how we perform at Knight and Swift. And there's still a lot of room there that has to be worked through. And in a market that we've been managing through, it's been a challenge to do so. So we've been working on developing a network that runs between the terminal networks that we've worked on. And sometimes that can create a shorter length of haul, but better rate per mile. And really, ultimately, you're trying to achieve a certain revenue per tractor. But that's fully in progress. But I think when you have some wind at our back from a market standpoint, we will close that gap much more rapidly on the revenue side. I think that's when you'll start to see the margin expansion that we probably originally forecasted when we purchased the U.S. Express. They've also felt some pressure on dedicated. They actually had a good dedicated business. They felt pressure there, just like every other large carrier has when, when over the road is really cheap, dedicated feels pressure. And so we felt that at a, you know, at, at Swift, I know that others in the public space have, have mentioned that, but you know, but us stress has a really good logistics business. They they've performed really well. They've performed similar to, to where we have at night and Swift, and that's a good compliment. to what they do on the asset side. So the big challenge is rate in the over-the-road business, and certainly better market conditions will help us close that gap faster.

Got it. That's a helpful call. I appreciate it. Thank you.

We'll move next to Brian Offenbeck with J.P. Morgan. Your line is open.

Hey, good afternoon, guys. Thanks for taking the question. But maybe just a quick follow-up on I guess the broader topic of fleet utilization. It sounds like there's a little bit of puts and takes between Legacy and USX and maybe some normal seasonal decline into the first quarter in terms of the tractor count. But Adam, how are you thinking about tractor count utilization in general across the different brands? Are there still some areas you need to maybe bring down a little bit? So I think you did a little proactively earlier in the year. And then Maybe, Andrew, if you can just talk more about the impact, the financial impact of the hurricanes, because it sounded like it was pretty broad-based, impacting intermodal and truckload and probably LTL as well. So is that something you expect to recoup next quarter, or is that sort of an impact that we should be thinking about here in 3Q? Thank you.

All right. We'll start with your three-pronged question here, Brian. So on the tractor counts, TAB, Mark McIntyre, But yeah. TAB, Mark McIntyre, So so on on the tractor account there's you know I mentioned earlier that there's been some pressure on the dedicated front and we felt some of that the US express business so there's. TAB, Mark McIntyre, there's probably some tractor account that we need to bleed out of the network to offset some of the carrying costs that they've that they've had and we've started that. TAB, Mark McIntyre, Already in the in the fourth quarter and so that's why you're you'll see a slight decline from. from Q3 to Q4 and then Q4 into Q1 on like an average tractor count number, we'd expect it to be pretty stable after we get through that adjustment. And that's just probably a few hundred tractors that we need to work through to help kind of reduce some of the cost burden that US Express is carrying on that. When I think of the utilization, having the open truck certainly hurt on the US Express side, But also, again, we talked about realigning their network. And I think what we've done is we've replaced maybe some longer length of haul freight that were at rates that were incredibly low with some shorter length of haul regional freight that fits within the networks where our drivers live and want to come in and out of. And so less miles per tractor, but rates have improved as a result of that. So if you're just strictly looking at miles per tractor, it would show that we've given up some as a result of this shift. But we did something similar to this when we merged with Swift, when we adjusted their network. Because really our focus is on having the best revenue per truck per day, but also a network that supports driver retention and drivers coming in and out of networks that they're comfortable in. And so sometimes the numbers can look a little funky when you're working through that. I know you asked questions about hurricanes. I mean, Andrew can touch on some of that now if you want to, Andrew.

Yeah. Hey, Brian. You know, I think the hurricane did have some impact on us in Q3 in that final period, and that carried over into the early part of October. I would say this. I would say, you know, our U.S. Express business and our AAA Cooper businesses were in that region almost exclusively or heavily. They were maybe disproportionately impacted. So there is some permanent probably impact on our LTL business. Intermodal seems to have had a slow start here in Q4, but we think it's largely behind us at this point. So from our perspective, and truckload had some impact on US Express, but it really probably overall didn't impact our truckload business. in a global way. But I would say, you know, what's the kind of permanent impact of it? It's probably some impact on LTL and our intermodal business for Q4.

Yeah, but it may be a net positive when you compare the impact from Q3 to maybe some opportunity you pick up in Q4 for the truckload business. Maybe not so much on LTL, you'll have the same type of rebound, but on the truckload side, Brian, we may see that be a net positive.

Yeah, and Brian, what I would add is While it's difficult for us to really quantify in financial terms what that's done to our business through hurting volumes, I can say that the impact of the hurricanes likely would have brought our Q4 guidance down. You know, we held it flat with where we started with that from a quarter ago. It would have come down if not for the opportunities we're starting to see percolate on the truckload side here in the fourth quarter.

Okay. All very helpful. Thanks very much.

We'll move next to Eric Morgan with Barclays. Your line is open.

Hey, good evening. Thanks for taking my question. I wanted to come back to LTL, just the discussion on pricing and length of haul. Do you have a good handle on the runway for where length of haul can go just as the network sits today, as more customers take advantage of the reach you have now and If you can keep up the pace of improvement you've seen, should that naturally come with sustained yield more in like the mid to high single digits over the next couple of years maybe? Or is that not the right way to think about it? Thanks.

I mean, we would expect the length of haul to improve as we grow density and we expand our reach. We don't know exactly where that number may settle out, right? The early bid season will give us some indication of that, but we really won't see that until obviously we connect in the DHE network and we start to see some of those shipments flow. We do believe that longer length of haul freight, some of the heavier freight, does yield a better margin and is maybe one component as to why some of the larger fleets have a better margin than the regional fleets. We just don't know exactly where that will land until we kind of start working through the sales process and the RFPs. But certainly that's our expectation.

I mean, we think California was a game changer for us. As we've talked to customers that participate in long length of haul freight, we were not even a viable option for them until we had California. And so as we've now approached those customers and talked about DHE and our network. And just so for clarity, we expect that to happen in November. We've been, I guess, surprised on, in a good way, the response in terms of the desire for us to participate in bids. We've seen sort of all-time highs on shipment count in that business. And we have a lot of demand I think we can capture. So I think California, not every location Not every service center is the same. California, for us, had, in our view, outside strategic importance that has an outsized impact on our ability to capture opportunities with our customers. So we feel like that is a very important part of what's going to give us some tailwind right now.

Great. Appreciate it.

We'll move next to Bascom Majors with Susquehanna. Your line is open.

Thanks for giving us an early look at the start of next year from your own budgeting if you don't have meaningful recovery and just simple seasonality there. If I look historically in years where there's been meaningful sequential strengthening in the truckload market, the first quarter has been as low as mid-teens percent of the full year and You know, conversely, years where you've had sequential deterioration, it's been as high as, call it, mid-20s percent. You know, I know there's no incentive to guide the full year at this point with all the uncertainty on rate. But, you know, is that seasonality bookend a good starting point for us to think about a range of outcomes? Is there something different about this cycle and this year that could make that historic look back just unreasonable today? Thank you.

Yeah, I think it's really difficult to apply in a historic look back to our business today. I mean, if you look at our consolidated business, we were just comprised so much differently than we were four or five years ago. You now have, obviously, the LTL component. We're larger now as we're still digesting the U.S. Express business. And we've got, there are all other segments where we have some leasing and warehousing that that performs different to normal trucking seasonality. So it has changed the way our earnings progress from quarter to quarter. I think what we'd expect, Bascom, is probably the same type of kind of seasonal adjustment of volume from Q4 to Q1, but we do feel like the bids will be playing out in our favor, like we mentioned earlier. And sometimes In trucking, you feel better than you look, and sometimes you look better than you feel. And I believe 2025, the first half, we're probably going to feel a little bit better about where we're at as a company than we look on the financials, but it will come in the back half of the year if these rates begin to play out and we can control costs and we can grow into our LTL facilities and continue to make progress with the U.S. Express business. And so it's, you know, we didn't give guidance for the full year, so I don't want to insinuate anything. We've given our guidance for Q4 and Q1, but, you know, trying to apply previous cycles to this company today is a bit challenging, and I don't know that would be, you know, directionally correct.

Yeah, and Baskin, what I would add, this is Brad, what I would add is, you know, in the last, going on three years now, the truckload market has been so subdued, right? And so that has also dampened volatility, you know, you've seen in the seasonal cadence of earnings throughout the year. Whenever we get into a more normalized and tighter and stronger truckload market, that's going to argue for, you know, broader amplitude and more seasonality being expressed as a truckload core kind of carries that.

Thank you both.

Yep. All right. And so I think that concludes now our presentation. I know there's probably a few of you that we weren't able to to get to your question. And if you'd like, you can call 602-606-6349. But we appreciate the interest, appreciate everyone jumping on. And hey, we'll talk to you next quarter.

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful evening.