Knight-Swift Transportation Holdings Inc. Price & Performance (KNX)

Good afternoon, everyone, and thank you for joining our first quarter twenty twenty five 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, 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 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. Are difficult to predict. Investors are directed to the information contained in Item one 1A Risk Factors or Part one of the company's annual report on Form 10 ks, which filed with the United States Securities and Exchange Commission, a discussion of the risks that may affect the company's future operating results.

Actual results may differ. Before we get into the slides, will hand the call over to Adam for some opening remarks.

Thanks, Brad, and good afternoon, everyone. With all the uncertainty in the market, I thought it would be it makes sense to maybe open up the call with some high level remarks regarding the first quarter as well as the current market. And then I'll turn it over to Brad and Andrew to cover the remaining slides. Here to kick it off, early in the first quarter, several indicators, both internal and external, were pointing to momentum in the truckload market. Our early bid season results were positive and volumes remained healthy following the fourth quarter. In February, severe weather in areas of the country not well positioned to handle snow and ice contributed to a slowdown in volumes. We are expecting a nice seasonal volume rebound in March. However, talks of tariffs and the fluid trade policy spurred more cautious tone among shippers that brought a pause to the momentum in the market. The increased uncertainty among shippers and growing concern among consumers resulted in lower volumes and an absence of typical seasonal build in March. This has also impacted current rate negotiations in the truckload bid season. We are still achieving an increase increases in the low to mid single digit percentage range.

However, we are not seeing the increases build like we had originally anticipated bid environment would play out. Further, the progress we are making on contractual rates may not be as visible in our second quarter overall realized revenue per mile if the market experiences a low in volumes and the spot market remains weak. We are staying close with our customers as the situation unfolds and they are generally expressing a few different approaches at this point. Some are pressing forward with little change needing product as they see strength in their underlying sales, Some have already cut back or in the process of cutting back on purchases. Mostly centered around China, while still others are in wait and see mode, where they're drawing down inventory to support sales in the near term.

At this point, our customers are expressing more concern around cost impacts of tariffs and less concern regarding demand from their These strategies can create negative disruptions in volume in the near term However, if consumer spending remains steady, goods will have to move at some point and that may create opportunities for carriers that are proven to be nimble with scale like many of our Knight-Swift truckload brands. We recognize our customers' plans can change as clarity develops so we are focused on controlling what we can control. For example, we are tightening our equipment fleet by selling underutilized tractors and trailers that will lead to lower depreciation and greater utilization of our remaining assets. We are also investing in new technology and raising the intent intensity around our safety and claims and reducing overhead costs. We need to have the most efficient cost structure possible in order to be prepared for what could be a volatile environment in the near term. With all that being said, during the April, market conditions have largely been stable with where we exited the first quarter, but there is a wide range of possible pass forward from here. There could be a low in volumes as shippers work to adjust supply chains, or there could be a pull forward anticipation of a return of reciprocal tariffs Changes in trade policy could create the need for shippers to react quickly in managing inventory levels, which could benefit the fast flexible nature of truckload service.

On the other hand, concerns of recession risk could cause shippers to trim inventories and to aggressively prioritize prioritize the lowest short term cost over all other factors. In light of the unusual uncertainty, we feel we must adjust our approach to providing near term earnings guidance. Starting with this report, we are updating our guidance for the second quarter and we'll hold off on introducing guidance for the third quarter until enough clarity develops to support a return to two quarters of forward guidance. Business conditions for the second quarter are also uncertain enough that we are providing a wider range than our normal practice and with risk appearing skewed to the downside in the near term we are taking a somewhat more conservative approach as well.

Even in an uncertain environment, we continue to improve on costs and collaboration across our truckload segment and grow our volumes and network in our LTL segment. Opening seven more locations during the quarter and building to 30% growth in daily shipments year over year in March. The LTL industry is not immune to the wait and see attitude dampening freight demand but we are not expecting the same potential for volatility in LTL demand in the second quarter as we do for truckload. Also our significant LTL network expansion over the past year positions us for differentiated growth. We are confident that our experienced team, leadership alignment across our businesses, strong balance sheet and our unique scale diversified offerings and value proposition. Will serve us well as we navigate the unfolding landscape. And with that, I will turn it over to Brad for our overview on slide three. [indiscernible] The charts on slide three compare our consolidated first quarter revenue and earnings results on a year over year basis. Revenue excluding fuel surcharge increased by 1.2% and our adjusted operating income improved by 68.2% or $35,100,000 year over year GAAP earnings per diluted share for the first quarter of twenty twenty five were $0.19 our adjusted EPS was $0.28 Our consolidated adjusted operating ratio was 94.7% which was two ten basis points better prior year Slide four illustrates the revenue adjusted operating income for each of our segments for the quarter.

Overall, our Truckload, Logistics and Intermodal segments all improved adjusted operating income and adjusted operating ratio year over year. While our ongoing growth in our LTL business is driving a growing portion of our consolidated revenue mix, reaching its highest share since our entry into this segment in 2021. The first quarter continued to show the benefits of our diversified business model, as the seasonal pickup in our warehousing business helped to partially offset the early weather challenges and lack of seasonality late in the quarter, our truckload business. Now we will discuss our Truckload segment on Slide five. On a year over year basis, our truckload revenue excluding fuel surcharge for the first quarter decreased 4.2% driven by a 5.4% decline in loaded miles partially offset by a 1.5% increase in revenue per loaded mile, excluding fuel surcharge. This was the first year over year increase in revenue per loaded mile in ten quarters. Which was achieved despite the spot market softening through the back half of the quarter. The improvement in realized rate combined with a slight improvement in miles per tractor, drove a 1.9% year over year improvement in revenue excluding fuel surcharge per tractor. The improvement in utilization marks seven consecutive quarters of year over year gains in this metric, we push to improve productivity and sell underutilized assets.

As noted earlier, in March, we decided to tighten up our tractor fleet a little further alongside ongoing trailer ratio reductions in order to reduce operating costs over the next few quarters but without going so far as to sacrifice our ability to respond to opportunities in the marketplace. Our cost per mile for the first quarter improved year over year for the third quarter in a row despite the decline in miles. Modest improvements in asset utilization cost per mile and revenue per mile. Led to a 170 basis point year over year improvement in adjusted operating ratio and a 59.7% increase in adjusted operating income even while revenue declined. We are pleased with the progress in the U. S. Express Truckload business which even in a difficult environment reached a quarterly operating profit for the time since our July 2023 acquisition. 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. Now I'll turn it over to Andrew for a discussion of our LTL business on Slide six. Thanks, Brad. Good afternoon, everyone.

Our LTL business grew revenue excluding fuel surcharge 26.7% year over year as shipments per day increased 24.2%. Which includes our acquisition of DHE. Revenue per hundredweight, excluding fuel surcharge, increased 9.3% year over year while weight per shipment declined 2.5%. Year over year. The adjusted operating ratio was 94.2% and adjusted up income declined 26.8% year over year due to weather challenges, which pressured volumes and costs early in the quarter start up costs and early stage operations, at our recently opened facilities as well as cost headwinds from inefficiencies in the DHE region given our strategic commitment to maintaining service. While rapidly growing shipment counts, following the recent system integration. Operating margins and year over year volume growth improved each month of the quarter. Reaching 30% growth in daily average shipments and an adjusted operating ratio of 90.6% in March. [indiscernible] Growth in shipment count was higher than our projections, which coupled with our recent system integration, was a headwind to operational efficiency and costs. As we leaned into outside maintenance, purchased transportation, and temporary labor to augment our own resources in the short term until we in source these services.

The ramp in volume through the quarter and progress in bid awards are encouraging signs as we move forward and work to maintain high levels of service while optimizing operational efficiency. We are still experiencing steady rate increases in our business. And as our expanded network allows us to offer services on more lanes to and existing customers. We opened seven new facilities and acquired or assumed leases on four more for our pipeline during the quarter. Our pace of facility additions in 2025 should slow compared to 'twenty four but we will continue to look for both organic and inorganic opportunities to expand our footprint within the LTL market. We are focused on growing revenue and margins in 2025 and we're excited about the runway ahead of us.

Slide seven covers our logistics segments. Logistics revenue increased 11.8% year over year as revenue per load increased 11.7% with load count flat.

Contested operating ratio of 95.5% improved 160 basis points year over year Our investments in a common platform across our logistics brands have allowed us to be more efficient in procuring capacity and winning freight opportunities direct from our customers. Our power only offering continues to build momentum and differentiate us from non asset brokerages and we remain focused on being nimble in order to remain profitable regardless of market conditions.

While complementing our truckload brands and bringing value to our customers as an asset based logistics provider. Now on to Slide eight.

Our intermodal business posted a year over year increase in revenue for the third quarter in a row. Revenue increased 3.5% driven by a 4.6% increase in load count partially offset by a 1.1% decrease in revenue per load over year. Improvement in volume and progress in operating costs and network balance overcame the decrease in revenue per load to improve the operating ratio by three sixty basis points. Year over year. As tariff discussions began during the quarter, saw the intermodal market begin to soften. Which has led to a more competitive bid season. We remain disciplined on pricing and focus on improving our network efficiency reducing empty moves. In sourcing a greater percentage of our dray moves and investing in private chassis, in certain markets in order to position its business profitability. On Slide 10, we have outlined our On Slide nine illustrates our all other segments. This category includes support services, provided to our customers, independent contractors and third party carriers such as equipment sales and rentals, equipment leasing, warehousing activities, insurance and maintenance. For the quarter, revenue declined 15.9% year over year, largely as a result of winding down our third party insurance business in the first quarter of last year.

The $6,000,000 operating income within our other all other segments is primarily driven by our warehousing and trailer leasing businesses, which saw some incremental activity beyond typical seasonality. Operating income was also improved year over year because the prior year period included a $19,500,000 operating loss for the third party insurance business. I'm now on to Slide 10. We've outlined our guidance and the key assumptions, which are also stated in the earnings release. Actual results may differ from our expectations. As Adam noted earlier, because of the significant uncertainty created by the current fluid trade policy situation, and its implications for inflation, consumer demand and demand from our customers, are only updating our guidance for the second quarter, and we will not introduce guidance for the third quarter at this time. We plan to provide guidance for the third quarter when we report results for the second quarter and we'll evaluate at that time whether enough clarity has developed to allow us to return to providing two forward quarters of earnings guidance. Based on our assumptions, we project our adjusted EPS for the second quarter of twenty twenty five will be in the range of $0.30 to $0.38 which is an update from our original range of $0.46 to $0.50 The key assumptions underpinning this guidance are listed on this slide, though I won't cover them in detail.

In general, though, the guidance for the second quarter reflects the following outlook. At the top of the range, we assume volumes remain fairly steady. And we experienced limited seasonality. The bottom of the range assumes a reduction in imports occurs in May and June and causes some deterioration in demand and an absence of seasonality. The stated assumptions generally reflect the middle of the range and are only applicable to the second quarter. We project truckload operating income to improve sequentially, largely driven by modest improvement in revenue with a comparable margin profile to the first quarter. This assumes modest improvement in miles and utilization while ongoing spot market softness serves to offset contractual rate progress made through bid activity. For LTL, we project seasonal improvement in volumes and ongoing progress growing our customer base, and market share will support sequential improvement in revenue and operating margins. We also project relatively comparable contributions from our logistics, and intermodal segments with their respective first quarter levels on a sequential This concludes our prepared remarks. And before I turn it over for questions, want to remind everyone to keep it to question per participant. Thank you. Erin, we will now open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Jonathan Chappell. Evercore ISI. Go ahead, please.

Adam, thanks for laying out the different scenarios that could transpire from here. If we had the gains of 15 and a half million from one q and looks like call it, 20 for two q, in the for the second quarter of equipment sales. Is that a point where you think that you've rightsized the fleet for the kind of you know, downside scenario? I guess what I'm getting at here is I I know Brad said you're you're being very cognizant of not selling maybe to the bone, my terms. But how are you managing kind of the very different paths and then the different cost levers that you can pull as you think about moving forward the next three months?

I think when we look at our cost structure, I mean, we're gonna we're gonna look at every opportunity to be as tight as possible. And when you look at your your tractors and trailers, we have maybe a targeted trailer to tractor ratio. That we would have unique to each business. And I think today, it would tell us that we still have opportunity to pull out trailers to kind of match up to the number of seated trucks we have versus the number of trailers we're operating. And then when we look at our tractor count, there's always some degree of tractors that you just have unseated where you don't have drivers operating the tractors. And that's been a number that's been a bit elevated from our target And so we've taken we've made the choice to to tighten that up. And pull, you know, a few hundred tractors out of the network to to just clean up any excess capital that we have that we're not utilizing today. And that should drive better productivity when you look at miles per tractor in the total. Doesn't change our ability to respond to opportunities, to be flexible, to have capacity available.

If we see a surge in drivers in a market that returns, we have flexibility slow down what we pull out as we have new tractors that come in or could order more if we really needed to. I mean, we have flexibility with that. You you know, with with with the tractor count. And so in the meantime, with all the uncertainty, we felt like, let's just be a little bit tighter here. Let's still get to a reasonable percentage where we're not limiting ourselves a reasonable percentage of unseated trucks where we're not limiting to be able to hire drivers in markets where it makes sense. But let's not carry any excess costs in the meantime.

Got it. Thanks, Adam. [indiscernible] The next question comes from the line of Brian Ossenbeck JPMorgan Chase. You may now ask your question.

All right. Thanks very much. Maybe a question on LTL and filling in the the density. Do you think you'll get a little bit more visibility to filling in some of those areas that you're trying to fill? And maybe get rid of some of those additional costs that you're carrying right now to meet the service where you're not not quite able to do so. Right now? And then if you can add a few thoughts on M and A and if there's anything that kind of fits the bill right now or if we just should expect this to be a little bit more gradual of a process fill in the the rest of the the coverage gap. Thank you.

Yes. No, thanks for the question, Brian. You know, the the volume is has been building nicely, and it's been relatively consistent. Like we've said before, as we've opened up these territories, we've been aggressive at doing so because it it gives us the ability to participate in the bids that are now ongoing in in the LTL industry. And so we're seeing the volumes build really on a on a weekly basis now that we've got out of some of the disruption from from weather. And we feel very encouraged about building that density and helping us with the cost absorption and and really kind of taking advantage of the operating leverage that we really have in in this business. And so we're we're able to take market share with with maintaining price discipline. We're still seeing contractual renewals in the mid single digit range. And we're seeing volume growth at same time. And so it it'll just take time to do that in in each market, and there's still a few locations to to add this year. We we added seven in the first quarter. We probably have maybe nine or 10 net adds. I think it's close to nine in the back half of year already planned.

And hey, could have more if there's some opportunities that come our way. We feel good about the volumes building. And so I think first quarter just got off to a slower start than we had hoped. And you had some cost headwinds that we've been dealing with. But feel much better about where we ended in March and felt that trend continue into April. And so we're feeling really good about LT and and are looking to see that volume continue to build. And to be able to do that, you have to give great service. And so we've done that at the at the maybe the expense of March in the near term because we believe that gives us an opportunity to build volume. And the reaction from our customers has been very positive. They like having another option in some of the markets that we now serve. And we we feel good about building that out. You asked about M and A. Think I've said on previous calls, we're always open to organic and inorganic opportunities to grow the business. I think it's more likely if M and A were to play a role in building out particularly in the Northeast, that's probably a 2026 event, if anything.

I don't expect that to in 2025. This is a year where we kind of grow into this 37 locations that we grew organically last year. We continue to integrate the DHE business that we acquired last year. So this is a year of growing into what we have, improving our top line as well as improving our margin profile in the business. We remain committed to getting to national to be the national carrier in this space. But we're gonna do that very deliberately with some discipline And we think we have a lot of runway to grow top line and bottom line 2025 without an acquisition.

Brian, I'll just maybe add a little more color to to what Adam said is we can we're we're continuing to be in a phase of investment. I think we're mostly a lot of that's now absorbed into Q1. So if you look at the cost that we brought into the business, in Q1 compared to Q4, we We brought a lot of fixed costs still into the business as we stood up those facilities. So cost on equipment, depreciation, rents, those are now largely in our baseline now, and we'll see some of that continuing. But we mentioned we participated in in some additional leases that we've assumed from the yellow bid in Q1. Those costs are included in our financials, but those are locations that are open yet. So we're there's still a lot of opportunity. I guess what's encouraging is our volume, both revenue and shipment count is absorbing that cost and helping us drive productivity leverage in that business. Since we've practice, you know, the the things we're focused on are are first of all, driving improvement in our variable wage, efficiency. And we're seeing that as we look at where we were at in Q4 versus Q1, we're seeing that in our line haul in our P and D and our dock efficiency And certainly, as we moved our DHE business, onto the onto this same system as the rest of our business last quarter, there's been some time for them to develop that efficiency.

We feel like we're starting to start to see those results. Second, we're managing our maintenance. So we move into new locations. We have to use a lot of outside outside maintenance. And so that will get better as we build density and can in source a lot of that maintenance And the third is managing these fixed costs that what are the leverage of the business will will provide. So so I think those are kind some of the dynamics that you're seeing in the financials here, and as we look at Q2, you can see we're guiding to a low-90s OR. I think it's our progress in each of these areas that are going to help get us there as long as well as the density that that looks good. As even here in April, we feel good about the the track we're on. They gave us confidence to increase the revenue guidance here in the second quarter. From what we provided previously. Based on encouraging signs we're seeing in the market.

Okay. Very much. Very helpful.

Thanks, Brian. The next question comes from the line of Ken Hoexter, Bank of America. You may now ask your question.

Hey, great. Good afternoon. If I can just jump back to the truckload sector, I guess you mentioned U. S. Express kind of getting profitability. Maybe talk about some of the things you've done on the cost side. And I guess Adam, if we look at utilization, I think you were kind of addressing this before, but it used to be what about 22,000, 24,000 miles per tractor. Is that part of what you were talking about before getting rid of more assets to increase that utilization? Or are there things you can still do in this uncertain market to increase asset utilization Is it getting rid of assets faster? Or what do you think has to be done to improve that profitability?

Yeah. I think when you look at I'll I'll just touch on the the productivity side, and and maybe I'll turn it over to Andrew. He could talk about some of the things on the cost side with with USX. Yes. I think part of the dynamic is just not carrying tractors that that aren't producing revenue and aren't producing miles. Right? Because we didn't have the the drivers that are seated in there. And so we might as well not carry that cost. We can now turn that into capital and sell it in. What's been a relatively good used equipment market for tractors at maybe not trailers. And I think that's driven more from just scarcity of trucks in the market because of how many weren't built four or five years ago. Because of the supply chain challenges. And so we wanted to take advantage of that. And just tighten up our depreciation costs. And that'll lead to now having similar number of miles over a reduced tractor count, which will drive obviously your miles per tractor up. So I think that's that's one of the things. That's just one of the levers, Ken, that would that we think we can pull that doesn't impact top line.

It doesn't impact you know, the ability to respond to customer needs. And, again, if we see the market turnaround quickly and there are greater needs and we can hire the driver, then we can slow down on what we pull out and we can order more trucks if we need to. We could be pretty nimble and we could get new trucks pretty quickly or we could hold on to some of our trucks without trading them when we have replacement trucks coming in if we need to be. So we felt like that was a lever that we can pull that doesn't necessarily impact our business in a negative way It it it just gives us the ability to be more efficient with existing you know, tractors. That make sense?

It does. It does. Guess I was trying to lead into the asset utilization. So I stopped midway through my question. But asset utilization into bid season, What does that I guess, I don't want to ask two questions, I don't know if you could just throw one quick thought on to how bid season is progressing just given what where spot rates are?

All right. We'll let you slide that one in, Ken. Yes. So I think I mentioned this on our prepared remarks. The bid season started off, I think, just like we had thought, and I think many customers kind of understood that you know, contract rates were just not didn't have any room to go down and that they were just trying to manage what that increase is going to look like. We thought it would start low to mid single digits and build some momentum as it progressed. And it it started off that way, but I think as we got into March, when we were in having the heart of of the bid season, the slowdown because of just the uncertainty around tariffs maybe took away some of the momentum there. For that just to really build. And so the, you know, the renewals that we have are still, you know, in and they they range in that low to mid single digit range depending on the customer customer and the lane. There are some puts and takes. There's We've seen growth with customers who've seen the value that we bring. We have other customers who maybe are focused more on getting the lowest cost possible for the time being.

And we've seen some some volume that we've lost. But I think overall, we're fairing pretty well. And and I think it's gonna put us in a position where we can improve productivity on our seated trucks and see our contract rates take a step in the right direction. Now like I mentioned, having a a weaker stock spot market potentially here in the second quarter could weigh on our overall rate, but I believe that's that's temporary. And I think when we if we see the market come back whether that be because of just continued consumer demand or we finally get a we figure out our tariff policy and we have our our customers more conviction to move forward with their plans, we could see the spot market then improve and we'll be in a good position to be able to react to that and bring bring value to our customers. So There's a lot of moving pieces to it now, but I think ultimately, Ken, we do feel the business in playing out to where going to help improve productivity at rates that are higher on a year over year basis. And maybe I'll let Andrew hit the U. S. Express question here.

Yeah. Yes. And a little bit about what what cost levers we have. Here's what I would say. Look. We when we established our our path to parity of US Express to our truckload businesses, we we thought about it in these three buckets. And we still have the same conviction we always did on these points. So first of all, we knew there was a lot of initial costs that we'll take out of the business. We've communicated that on that point, we've taken out more than $180,000,000 cost on an annualized basis. We continue we're going to continue to find opportunities there. But those those are costs around procurement and other areas where there is sufficiency to be gained.

So we've kind of done those in difficult market. The second thing we're focusing on is operational cost efficiency. So think of hiring costs, safety costs, fuel, well into that. We had to establish the decentralized network of terminals that enables that that model we know works at Knight-Swift. Into the US Express business. We are starting to see that.

So just as just an example, safety takes a while to really build the safety culture that you need. We're starting to see that. So just as an example, our CSA crash rating is 20% better for that business than than it was when we acquired them. We feel like there's a lot more to go. Right? We're nowhere near kind of the potential of that business, but that starts to to drive cost efficiency to the business. And then the third area, Adam focused on, which is which is on the market side. And we are we are seeing so far in like he talked about, you know, wins well, you know, rates that would exceed what we're seeing in the truckload business because of how much more opportunity they are to to have there. So we have the same conviction. We're something like five points apart now on OR between our legacy businesses and U. S. Express. We expect both of them to continue to progress from this point forward. But we're encouraged because we're seeing kind of systemic operational efficiencies that we knew that business could generate come to fruition.

Thank you so much. Appreciate the time.

The next question comes from the line of Tom Wadewitz from UBS. You may now ask your question.

Yeah. Great. Good afternoon.

Adam, I I think it makes a lot of sense that you laid out the guidance. Appreciate the perspective on it. I wanted to see if you could maybe comment a little bit further on how you think a down in container imports into the West Coast in particular would potentially flow into your business. I mean, I I think the numbers that seem to be out there, could see, you know, 25%, 30% decline in West Coast container imports. So at the low end of your range and kind of how it affects June, is that what you're assuming? And how I guess, I you know, it's tough to have intuition with how that affects the truckload market. Right? Because you've already seen weakness in truck truckload without a decline in imports in March. So I guess if you saw that, then I don't know. How do we think about what that does [indiscernible] Thank you.

Yes.

I appreciate that, Tom. And and and, yeah, I think there's still some uncertainty about how that's gonna going to impact the truckload industry. I think what we're looking at is we're already assuming that May is gonna be weaker as a result of the West Coast imports dropping off like everyone's expecting to. We're pretty we have a lot of diversity when you look at our different brands. You know, you look at, you know, US Express, they're largely an East Coast. You know, player. We've got Bar Nun, Abilene. They they're largely in the in the East Coast in terms of their presence. You know, Knight and Swift would they would be nationwide, and they'd be pretty balanced between the East And West Coast, but would have some exposure to the West Coast. So I think we could see an impact into to to those brands. And right now, we're we're working on plans to try to limit capacity in the markets we feel could be affected. And we may need to be a bit more nimble on the spot market to position ourselves to where we're not as exposed. To the drop in freight, but that's easier said than done.

I think there's an impact to the intermodal market. I think a lot of that freight could land on on the rail, and I think there's international that I think you're not gonna move, but then there's there's gonna be, I think, an impact to our intermodal business, which is why I think we've our updated guidance have come down of where we think the load count will be for that business as Intermodal has become pretty competitive on the price front. And we've been I think made some progress in the bid, but in some cases has had to had to turn away from some business because the pricing just didn't make sense. Based on what our competitors were willing to run it on. So I think there's going to be impact in really the Knight-Swift truckload brands mostly and then in our in our intermodal business. But again, we're can kinda see that coming, and we're trying to react the best we can do it. And and not let it catch us by surprise. And I think the really, the question, when you look at the guidance, Tom, is do you see a reaction in June that where there's a rebound?

If we're able to get some clarity on trade policy and you know, our customers that are kind of, you know, living off inventory now have to replenish And do see some seasonality in June that helps offset maybe some of the weakness, the the unseasonable weakness you would see in May. So I think that's really the question how do things play out in June? We're already expecting May to be abnormal in terms of the volume you'd expect to see. And then hey, how strong is beverage and produce, which usually helps carry a second quarter. So still a lot again, that's why we've had a wider range because there's a lot of ways that this could play out. But we're we're watching it really closely and and trying to position ourselves to navigate it as well as we can.

Okay. Great. Makes sense. Thank you.

Yep.

The next question, comes from the line of Scott Gru. From Wolf Research. You may now ask your question.

Hey. Thanks. Afternoon. Just wanna clarify. Does does the high end of the guide assume the normal May, June, seasonal improvement we typically see or not? I just wasn't clear you when you laid it out. And then just bigger picture, Adam, you guys are rightsizing the the the the tractor fleet. Makes sense. At some point, do you consider shrinking the power only offering the broader brokerage or offering maybe to to potentially try to help catalyze a a [indiscernible] Okay. Well, let me hit both those questions there, Scott. So on the on the guidance, I think what we've said is the top end is really June with limited seasonality. Again, we normally don't say this, but I think when we were looking at the guidance, we were trying to to have a degree of conservatism just given the risk that's out there, the potential for risk. So really, we would assume just limited seasonality, your normal strength that you would see in June. Does that make sense?

Yes. And and and then your question on power only. I mean, we look at power only as a way to really complement our truckload business. So they're even when you have some softer markets, there's always gonna be markets where we don't have trucks available where our customers have demand. And and in some cases, are customers that have drop and hook requirements when it when it comes to their freight. And so if we don't have power only, then we we really can't participate in those freight opportunities. There's also times when our logistic business is better suited for for a certain business because it's maybe not as know, it's not as consistent. It doesn't create balance in your network, and you can you can still do that on the on the logistics front. We're we're managing trailers tightly, and we have to just manage that better even when we have power only. And so we're we're really focused on that. But but I look at power only as a way to help support truckload, keep revenue in house. Support service, support our dedicated operation when they need to surge. So we're not having to pull those trucks from from line haul if they're needed elsewhere.

So I think it gives us a lot of flexibility in our network And and we would look at that as an advantage that we would have in it brings value to our customers and allows us to to get better returns with the assets that we have.

Okay. Thank you for the perspective.

Thanks, guys. Yeah.

The next question comes from the line of Daniel Imbro from Stephens. You may now ask your question.

Yes. Hey, good evening, guys. Thanks for taking the questions.

I'm wondering to follow-up on the cost per mile discussion within truck load, but maybe within the core business, not U. S. Express. The cost per mile declined again here in 1Q. I guess, do you feel about ability to keep that flat to down for the full year just given the softer demand backdrop could make utilization maybe harder to achieve? And I know your 2Q guidance, I think, assumed relatively stable. Volumes here into April. But is there an opportunity to accelerate the cost takeout if volumes do deteriorate through the year? Just trying to get a sense for how variable that could be.

Yes.

Hey, Daniel. I'll maybe make a few comments there. So yeah. So that's like you mentioned, this is the third quarter we've reduced cost per mile, and this has been without the telly to miles. Right? So when you really look at where we're where we're seeing that progress, that gives us the conviction it's sustainable. It's let me just kind of break it down for you. So probably two thirds of the improvement we're making from a cost per mile perspective comes because of operational improvements we've made in our business. Now that comes to how we manage fuel and maintenance and safety. So safe let me just talk about safety. Safety has been we're seeing the same pressure everyone is in the industry about nuclear verdicts, and the cost of of claims, but overall, our leading metrics around safety are very encouraging, and that's in the case of the first quarter, our insurance costs are not inflationary to us. We're managing those costs in a way that it's it's it's probably, you know, better than than the industry on average. Maintenance and fuel, we're we're doing that as well. And we'll what we're seeing though is we're making a lot of progress on fixed costs.

And so I'll maybe focus on of the improvements we're making there. Now hard to show that on a cost per mile basis because of the miles your denominator changing.

But the the cost that we've reset down in our overhead costs and g and a and equipment are significant. And so we're focusing on our facility footprint and how we manage our costs with our facilities We, in some cases, are consolidating drop yards. Or facilities. We've implemented process efficiencies in our back office labor that allowed us to use attrition to manage down our non driver headcount. We've effectively negotiated with vendors on costs that allowed us in areas like benefits to to see what we believe are some savings coming up in our business. Our discretionary costs, we're managing those much more effectively than I think we have in the past. And then we're we're reducing costs or finding better ways more efficient ways to manage IT costs, professional services, consulting, things like that that that we think we are a better, tighter organization. And so so when we we'll continue to do this. We're we're not done. We've seen results from this. But what this is going to do, it it's really gonna work to our benefit going forward. As as we've introduced even more operating leverage into our business. By reducing not just equipment, but our G and A and overhead costs in the business.

So we'll continue to pivot as we watch how this market unfolds and we have a different playbook depending on kinda where the economy goes and and we're we're thinking of scenarios and how we adjust costs to continue to drive cost per mile down even in a in a environment where miles helping us.

I think there's also opportunity. I don't know if you've touched on this, Andrew, on the the safety and claims. Standpoint. I mean, we've seen our safety performance continue to improve. Now clearly the environment with nuclear verdicts is a challenge so you could have great performance and one or two claims can really impact the results. But think we've done a great job kinda navigating that the last, you know, few quarters. And we, you know, we had some, you know, some some challenging claims to deal with over the last couple of years, we feel like we've got a lot of these more challenging claims behind us. And now we just have to execute better on not having incidents. When you do have those, being able to manage them and get to a favorable outcome as quick as possible. So I do think taking claims is an area that we have some opportunities to improve. Just on execution and how we manage the claims.

Great. So much, guys.

The next question comes from the line of Chris Wetherbee from Wells Fargo. You may now ask your question. Hey, thanks. Good afternoon. Adam, I was curious to get your perspective on capacity in the truckload market. I guess, you think about the next quarter, the next several months with potential weakness in May and maybe there's rebound in June, maybe there is not. Is that enough to sort of bring down capacity to the point where we are in a more balanced or more favorable truckload environment? Kind of just curious how you're seeing capacity react real time to these potential risks coming up from a demand perspective?

Yes. I think certainly when you see activities that drive the the spot market down, I mean, that that's a catalyst for capacity to exit the market. Now is it going to be depending on the duration, is it enough for us to be back in balance? Think part of the balance is going to be if if demand improves, then then I think we would feel like we'd be in pretty good shape given what momentum we saw early in the first quarter and where we were in the fourth quarter. But I think we've got to see how both supply and demand play out here. In the near term. There's We look at different components of and different ways to measure that on a regular basis. One of the data points we look at is there's a large load board company that that, you know, provides detail of how many trucks are being posted. On their load boards. And that's I think, March '20 it's down 28% on a year over year basis in March. And so that tells us supply or capacity continues to exit. But but I think it's still kind of hard to know what needs to happen for us to be back in balance.

But But certainly, the slowdown we're expecting to see in May is not going to help the small trucker.

Hey Chris, this is Brad. Would just add a little color to that. Know, prior to this recent shift in in the marketplace, you know, here in in in the first quarter with all the tariff uncertainty and everything. Prior to that, especially in the fourth quarter and the beginning of this year, market was already behaving largely like a fairly balanced marketplace. So it's not that we were still well out of balance, and now we've got further to go. The market had largely gotten into a healthier balanced place before we had this little adjustment here recently. So certainly, if there's a leg down in demand, maybe we need more capacity rationalization to find a new level balance, but it's not like we were far off the mark just prior to this latest uncertainty here.

Got it. Very helpful.

Thank you.

The next question comes from the line of Ravi Shanker from Morgan Stanley. You may now ask your question.

Hey, thanks. Good afternoon, guys. So just to confirm the overall message here. So you said that the risk is to the downside, which is what made you change your approach to guidance. But you're also getting low to mid single digit price increases.

Are you hearing from your customers that they are, like, pulling back or, you know, going into their shell a little bit, or is this just a reaction to some of the short term data we're seeing out there? Kind of obviously, message on Transport's call so far is that we haven't seen too much change in actual behaviors. So I'm trying to see if you guys are seeing or hearing something different. Yeah. So, I mean, we've we've had dialogue with don't know, 40 or 50 of our, you know, larger customers. And and, you know, they've been, you know, for the most part, fairly open with what their strategy has been. But, hey, it can it can change daily. Depending on, you know, what what they're seeing in the market. But you know, I think probably about there's three three buckets, Ravi, they fall into. Maybe a third or around hey. We're just not making any changes because of tariffs, and it's just we're just gonna continue on our path forward. And those are maybe of our customers that don't have maybe as much exposure to to China. Then there's those that are more in a wait and see wait and see bucket.

And I think those are the customers that are maybe drawing down inventory more and living off that. So that would impact the the volume that we would be seeing or could be seen in in May, And then there are some that have told us that, yeah, they have they've canceled orders or they've stopped ordering particularly from from China, and we'll figure out how to adjust their supply chain to avoid the cost. So I think our our conservativeness is is really based on the feedback we're we're hearing from customers as well as well as just some early trends we've seen with with, you know, how they maybe shifted or maybe have forecasted what their volumes are going to be in the coming weeks. So it's not so much what we're seeing today. It's what we're expecting to see based on customer sentiment as well as forecast that that we're we're seeing in our business.

I would just clarify. As we talk to our customers on their view of consumer sentiment, you know, a very few seem to be changing behavior to your point, Ravi, because of their view of a weakened consumer at this point.

Understood. Thank you.

We're strong.

So so it it seems to be a reaction to tariff costs as opposed to kind of a changing view on consumer sentiment.

Right now. Understood. Thank you. [indiscernible] [indiscernible] The next question comes from the line of Bascome Majors from Susquehanna. You may now ask your question.

Thanks for taking my questions. When will your bid discussions with your largest three or four retail industry customers be completed? When will those bid pricing updates be implemented? And ultimately, is the decision to withdraw the two quarter forward guidance strategy. Is that more about pricing and margin risk and forecasting that from those bids that are being discussed? Or is it really more about what the macro and demand picture looks like two, three months from now? Thank you.

Okay. Vascon. So I'll hit that. You know, bids are kind of ongoing. K? And so we we've I think we've we implemented some in the first quarter. I think there's the majority of them will hit sometime in the second quarter, and then you'll have some of our larger customers that do some early third quarter. So it it's something that you're you're always doing on a regular basis, but your largest impact typically going to be in the second quarter. And we expect our contract rates to improve to that low to mid single digit as we begin to implement these awards. There's also the mini bid process that a lot of our customers go through on sometimes it's every two weeks, sometimes it's weekly, where they have a a set of lanes that they need help with for whatever reason, and we're able to bid on those lanes. And sometimes you can get some sizable awards through the mini bids. So it's an ongoing process, and that's why your network is always it's never in a static position. It's always adjusting and moving. Based on new awards that you're able to pick up through these processes. I think when we look at the guidance, it's more about the volume that you're going to receive from these awards.

Because awards are paper commitments. Right? There's no legal requirement for them to tender us those number of of loads that we've we've won through the bid process. So the concern is if they see a major change in their supply chain, do we do we not see the volume that we are expecting to see? And what potential disruption could that have on on your network. And so I think that's that gives us the the biggest know, that's the biggest challenge to forecast third quarter, not knowing if we're gonna see some you know, major disruption in in whether it be volume or just the balance in our network. And so that's why we've decided to take the approach that we have.

Adam, to that point, where is big compliance trending now versus what would be normal for this type of year? And has that loosened or deteriorated since that more normal seasonal environment you saw in January or February?

Again, we don't necessarily disclose that number, but it hasn't changed dramatically from where we've been. Again, we're more concerned about where that's going based on what we're we're seeing from the forecast from our customers and then external data. So April has been relatively stable, but we're just where our conservative comes into is you know, this this may not play out like a normal May where you see strength. Particularly in the back half as beverage and produce picks up. Is that just gonna be offset with some of the supply chain pauses from from our customers?

Thank you very much.

The next question comes from the line of Brandon Oglenski from Barclays. You may now ask your question.

Hey, good afternoon everyone and thanks for taking my question. You know, Adam, I feel like you guys have been positioning the business here for a while. For the inevitable upturn feels like maybe tariffs just push that out even more. I guess with this prolonged downturn and kind of trough earnings environment, is there anything strategically you've been thinking about like through the portfolio approach on the TL side? Are there further cost efficiencies that you could look at there maybe with all the brands? Or even thinking things about, like, intermodal and and lag of, you know, like, long term profitability in that business? Appreciate the feedback.

Yeah. I I mean, look, Andrew laid out all the different that that we're focused on, and and and we continue to be focused on. Again, we're all about controlling what we can control When I look at our different brands, we you know, through this process, we've made adjustments on size of certain brands, what we focus on with those brands, what makes them unique to each other. And and, hey. You have to make adjustments in the market, and and we have been doing so. We also don't want to make some decisions around businesses in kind of the trough of trough.

Right? This has been the most challenging cycle that we've seen. Maybe ever. And so we want to see how these some of these businesses navigate through that. And I know you you mentioned intermodal, and hey, we have a very good team in intermodal. We like the partnerships we have with the rails. We've made year over year progress in many of the metrics over the last several quarters and expect to continue to make progress in that business. And believe it's a service our It's a lower cost service that they that they would value at times. And we want to be there to provide it. But, yeah, it has to generate returns. And we wanna see that business and how it performs when we get to more balanced environment. Rather than making decisions in in a trough environment. I don't I don't think that would be advisable And then that's something that we would we would be considering at this point. Now, hey. If you get into a a a better environment and you have businesses that still can't in a better environment, then, yeah, you look at that a bit differently. But but you know, at at this point, we're we like what brands we have.

We're making the the adjustments on the cost side, as Andrew laid out. And I think we'll be able to navigate market that we'll be faced with and come out with these businesses returning to more normalized earnings when we get to a more balanced market. And so we still have tremendous confidence in that.

Thanks, Adam.

Okay. Well, think that concludes our call. We appreciate all the questions. And again, I know we have some folks in the queue. And if we haven't been able to get to your question, you can go ahead and reach out to us. It's (602) 606-6349. Thank you everyone. And ladies and gentlemen, this concludes today's conference call. And thank you so much for your participation. You have a great day.