Knight-Swift Transportation Holdings (KNX) Q1 2025 earnings call transcript

Brad Stewart Treasurer & Senior VP of Investor Relations Thank you, Aaron. Good afternoon, everyone, and thank you for joining our first quarter 2025 earnings call. Today, we plan to discuss topics related to the results of the quarter, current market conditions and our earnings guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to last 1 hour. Following our commentary, we will answer questions related to these topics. In order to get to as many participants as possible, we limit the questions to 1 per participant. If you have a second question, please feel free to get back in the queue. We will answer as many questions as time allows.

If we are not able to get to your question due to time restrictions, you may call (602) 606 6349. To begin, I will first refer you to the disclosures on Slide 2 of the presentation and note the following: This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A Risk Factors or Part 1 of the company's annual report on Form 10- K filed with the United States Securities and Exchange Commission, for a discussion of the risks that may affect the company's future operating results. Actual results may differ. Before we get into the slides, I will hand the call over to Adam for some opening remarks.

Adam W. Miller CEO & Director Thanks, Brad, and good afternoon, everyone. With all the uncertainty in the market, I thought 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 positive 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, toxic 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 the typical seasonal build in March. This has also impacted current rate negotiations in the truckload bid season. We are still achieving increases in the low to mid-single digit percentage range. However, we are not seeing the increases build like we had originally anticipated the 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.

KNIGHT-SWIFT TRANSPORTATION INC. Q1 2025 EARNINGS CALL APRIL 23, 2025 spglobal. com/marketintelligence 4 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, meeting product as they see strength in their underlying sales. Some have already cut back or are 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 customers. 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 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 first half of April, market conditions have largely been stable with where we exited the first quarter, but there is a wide range of possible path forward from here. There could be a lull in volumes as shippers were to adjust supply chains or there could be a pull forward in 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 recess risks could cause shippers to trim inventories and to aggressively 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 2 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 7 more locations during the quarter and building to a 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 3.

Brad Stewart Treasurer & Senior VP of Investor Relations Thanks. The charts on Slide 3 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 $35.1 million year-over-year. GAAP earnings per diluted share for the first quarter of 2025 were $0.19, and our adjusted EPS was $0.28. Our consolidated adjusted operating ratio was 94.7%, which was 210 basis points better than prior year. Slide 4 illustrates the revenue and 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 KNIGHT-SWIFT TRANSPORTATION INC. Q1 2025 EARNINGS CALL APRIL 23, 2025 spglobal.

com/marketintelligence 5 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 in our Truckload business. Now we will discuss our Truckload segment on Slide 5. 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 10 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 for tractor. The improvement in utilization marks 7 consecutive quarters of year-over-year gains in this metric as 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 minus.

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. Xpress Truckload business, which even in a difficult environment, reached a quarterly operating profit for the first 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 6.

Andrew Hess Chief Financial Officer 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 the adjusted operating 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.

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, purchase transportation and temporary labor to augment our own resources in the short term until we in-source these services. The ramp in volumes through the quarter and progress and 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 7 new facilities and acquired or assumed the leases on 4 or more for our pipeline during the quarter.

Our pace of facility additions in 2025 should slow compared to '24, and -- 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. KNIGHT-SWIFT TRANSPORTATION INC. Q1 2025 EARNINGS CALL APRIL 23, 2025 spglobal. com/marketintelligence 6 Slide 7 covers our Logistics segment. Logistics revenue increased 11.8% year-over-year as revenue per load increased to 11.7% with load count flat. The adjusted operating ratio of 95.5% improved a 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 8. 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 360 basis points year-over-year. As tariff discussions began during the quarter, we saw the intermodal market begin to soften, which has led to a more competitive bid season. We remain disciplined on pricing and focused on improving our network efficiency, reducing empty moves, insourcing a greater percentage of our dray moves and investing in private chassis in certain markets in order to position its business profitability.

Slide 9 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 housing 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 million operating income within our 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 $19.5 million operating loss for the third-party insurance business.

Now on to Slide 10. We have 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 we 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 2 forward quarters of earnings guidance.

Based on our assumptions, we project our adjusted EPS for the second quarter of 2025 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 the 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 basis. This concludes our prepared remarks. And before I turn it over for questions, I want to remind everyone to keep the 2 question per participant.

Thank you.

Jonathan B. Chappell Evercore ISI Institutional Equities, Research Division Adam, thanks for laying out the different scenarios that could transpire from here. If we had the gains of $15.5 million from 1Q and it looks like, call it, $20 million for the second quarter of equipment sales. Is that a point where you think that you've rightsized the fleet for the kind of downside scenario? I guess what I'm getting at here is, I know Brad said you're being very cognizant of not selling maybe to the bone in my terms. But how are you managing the kind of the very different paths and then the different cost levers that you can pull as you think about moving forward in the next 3 months?

Adam W. Miller CEO & Director Yes. I think when we look at our cost structure, I mean, we're going to look at every opportunity to be as tight as possible. And when you look at 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 made the choice to tighten that up and pull a few hundred tractors out of the network 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 to slow down what we pull out as we have new tractors that come in or could order more tractors if we really needed to. I mean we have flexibility with the tractor count.

So in the meantime, with all the uncertainty, we felt like let's just be a little bit tighter here, but still get to a reasonable percentage where we're not limiting ourselves, a reasonable percentage of unseated trucks where we're not limiting ourselves to be able to hire drivers in markets where it makes sense. But let's not carry any excess costs in the meantime.

Adam W. Miller CEO & Director Thanks for the question, Brian. The volume 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 in doing so because it gives us the ability to participate in the bids that are now ongoing in the LTL industry and so we're KNIGHT-SWIFT TRANSPORTATION INC. Q1 2025 EARNINGS CALL APRIL 23, 2025 spglobal. com/marketintelligence 8 seeing the volumes build really on a weekly basis now that we've got out of some of the disruption from weather, and we feel very encouraged about building that density and helping us with the cost absorption and really kind of taking advantage of the operating leverage that we really have in this business.

So we're able to take market share with maintaining price discipline. We're still seeing contractual renewals in the mid-single-digit range and we're seeing volume growth at the same time. And so it will just take time to do that in each market. And there's still a few locations to add this year. We added 7 in the first quarter, we probably have maybe 9 or 10 net adds, I think it's closer to 9 in the back half of the year already planned. And hey, we could have more if there's some opportunities that come our way, and we feel good about the volumes building. 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 LTL 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 maybe the expense of margin 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 feel good about building that out. You asked about M&A, I 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&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 happen in 2025. This is a year where we kind of grow into the 37 locations that we grew organically last year, we continued 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 being a national carrier in this space. But we're going to do that very deliberately with some discipline. And we think we have a lot of runway to grow top line and bottom line in 2025 without an acquisition.

Andrew Hess Chief Financial Officer Brian, I'll just maybe add a little more color to what Adam said is 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 costs that we brought into the business, in Q1 compared to Q4, we brought a lot of fixed costs still into the business as we stood up those facilities. So costs 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 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 aren’t open yet.

So 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. The things we're focused on 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&D and our dock efficiency. And certainly, as we’ve moved our DHE business onto the 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 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 maintenance. And so that will get better as we build density and can insource a lot of that maintenance. And the third is managing these fixed costs that the leverage of the business will provide. So I think those are kind of 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 our progress in each of these areas that are going to help get us there as well as the density that looks good as even here in April, we feel good about the track we're on that gave us confidence to increase the revenue guidance here in the second quarter from what we provided previously based on the encouraging signs we're seeing in the market.

KNIGHT-SWIFT TRANSPORTATION INC. Q1 2025 EARNINGS CALL APRIL 23, 2025 spglobal.

Adam W. Miller CEO & Director Yes. I'll just touch on the productivity side, and maybe I'll turn it over to Andrew. He could talk about some of the things on the cost side with USX. Yes, I think part of the dynamic is just not carrying tractors that aren't producing revenue and aren't producing miles, right because we didn't have 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 least, 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 4 or 5 years ago because of the supply chain challenges.

So we want to take advantage of that and just tighten up our depreciation costs, and that will lead to now having a similar number of miles over a reduced tractor count, which will drive, obviously, your miles per tractor up. So I think that’s one of the levers, Ken, that we think we can pull that doesn't impact top line. It doesn't impact the ability to respond to customer needs. And again, if we see the market turn around quickly and there are greater needs and we can hire the drivers, then we can slow down on what we pull out and we can order more trucks that we need to. We can be pretty nimble and we can get new trucks pretty quickly or we can 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 just gives us the ability to be more efficient with existing tractors. Does that make sense?

What does that -- I guess I don't want to ask 2 questions, but I don't know if you could just throw 1 quick thought on to how bid season is progressing just given where spot rates are? Adam W. Miller CEO & Director All right. We'll let you slide that one Ken. 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 contract rates were just didn't have any room to go down and that you're 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 started off that way. But I think as we got into March, when we were kind of in the heart of the bid season, the slowdown because of just the uncertainty around tariffs, maybe took away some of the momentum there for that to really build. And so the renewals that we have are still increases, and they range in that low to mid-single-digit range depending on the customer and the lane. There are some puts and takes. We’ve seen growth with customers who've seen KNIGHT-SWIFT TRANSPORTATION INC. Q1 2025 EARNINGS CALL APRIL 23, 2025 spglobal. com/marketintelligence 10 the value that we bring. We have other customers who maybe are focused more on getting the lowest cost possible for the time being.

We’ve seen some volume that we've lost. But I think overall, we're faring pretty well. And I think it's going to 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 weaker spot market potentially here in the second quarter could weigh on our overall rate, but I believe 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 figured out our tariff policy and we have our customers with 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 value to our customers.

There’s a lot of moving pieces to it now, but I think, ultimately, can we do feel the bid season playing out to where it's going to help improve productivity at rates that are higher on a year-over-year basis.

And maybe I'll add Andrew hit the U. S. Xpress question here. Andrew Hess Chief Financial Officer Yes, you asked a little bit about what cost levers we have. Here's what I would say. Look, we when we established our path to parity of U. S. Xpress to our truckload businesses, we thought about it in these 3 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 take out of the business. We've communicated, but on that point, we've taken out more than $180 million of cost on an annualized basis. We continue and we're going to continue to find opportunities there.

But those are costs around procurement and other areas where there is efficiency to be gained. So we've kind of done those in this difficult market. The second thing we're focusing on is operational cost efficiency. So think of hiring costs, safety cost, fuel, we're well into that. We had to establish the decentralized network of terminals that enables that model we know works at Knight-Swift into the U. S. Xpress business. We are starting to see that. So just an example, safety takes a while to really build the safety culture that you need. And we're starting to see that. So just as an example, our CSA crash rating is 20% better for that business than it was when we acquired them.

And 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 drive cost efficiencies into the business. And then the third area Adam focused on, which is on the market side. We are seeing so far in bids like talked about wins, rates that would exceed what we're seeing in the Truckload business because of how much more opportunity they are to have there. So we have same conviction. We're something like 5 points apart now on OR between our legacy businesses and U. S. Xpress, we expect both of them to continue to progress from this point forward. But we're encouraged because we're seeing the kind of systemic operational efficiencies that we knew that business could generate come to fruition.

I appreciate that, Tom. And yes, I think there's still some uncertainty about how that's going to impact the truckload industry. I think what we're looking at is we're already assuming that May is going to be weaker as a result of the West Coast imports dropping off, like everyone's expecting to. We have a lot of diversity when you look at our different brands. You look at U. S. Xpress, they're largely an East Coast player. We've got Bar-Nunn, Abilene, they're largely in the East Coast in terms of their presence. Knight and Swift, they would be nationwide and they'll 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 those brands.

And right now, 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 the rail. And I think there's international boxes that I think you're not going to move, but then there's going to be, I think, an impact to our Intermodal business, which is why I think why our updated guidance have come down on where we think the low count will be for that business as Intermodal has become pretty competitive on the price front.

And we've made some progress in the bid, but in some cases, has 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 and Swift Truckload brands mostly and then in our Intermodal business. But again, we're we can kind of see that coming, and we're trying to react the best we can do it and not let it catch us by surprise. And I think really the question when you look at the guidance, Tom, is you see a reaction in June that where there's a rebound, if we were able to get some clarity on trade policy and our customers that are kind of living off the inventory now have to replenish and do you see some seasonality in June that helps offset maybe some of the weakness, unseasonable weakness you would see in May.

So I think that's really the question, how the things play out in June. We're already expecting data to be abnormal in terms of the volume you'd expect to see. And then, how strong is beverage in produce, which usually helps carry second quarter. So still a lot to gain, that's why we've had a wider range because there are a lot of ways that this could play out, but we're watching it really closely and trying to position ourselves to navigate it as well as we can.

Adam W. Miller CEO & Director Okay. Well, let me hit both of those questions there, Scott. So on the guidance, I think what we've said is that the top end is really June with limited seasonality. So again, we normally don't say this, but I think when we were looking at the guidance, we were trying 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, not your normal strength that you would see in June. Does that make sense? . KNIGHT-SWIFT TRANSPORTATION INC. Q1 2025 EARNINGS CALL APRIL 23, 2025 spglobal.

Adam W. Miller CEO & Director And then your question on power only. I mean we look at power only as a way to really complement our Truckload business. So there even when you have some softer markets, there's always going to be markets where we don't have trucks available where our customers have demand. And in some cases, those are customers that have drop and hook requirements when it comes to their freight. And so if we don't have power only, that we really can't participate in those freight opportunities. There's also times when our logistics is better suited for a certain business because it's maybe not as that is consistent, it doesn't create balance in your network, and you can still do that on the logistics front.

We're managing trailers tightly, and we have to just manage that better even when we have power- only. And so we're really focused on that. 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 line haul if they're needed elsewhere. And so I think it gives us a lot of flexibility in our network. And we would look at that as an advantage that we would have and it brings value to our customers and it allows us to get better returns with the assets that we have.

Just trying to get a sense of how variable that could be. Andrew Hess Chief Financial Officer Yes, Daniel, I'll maybe make a few comments there. So like you mentioned, this is the third quarter we've reduced cost per mile, and this has been without the tailwind to miles, right? So when you really look at where we're seeing that progress that gives us the conviction it's sustainable. Let me just kind of break it down for you. So probably 2/3 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. Let's just talk about safety. We're seeing the same pressure everyone is in the industry about nuclear verdicts and the cost 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 probably better than the industry on average. On maintenance and fuel, we're doing that as well. And what we're seeing though is we're making a lot of progress on fixed costs. And so I'll maybe focus on some of the improvements we're making there. Now it's hard to show that on a cost per mile basis because of the miles your denominator changing. But the cost that we've reset down in our overhead costs in G&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- KNIGHT-SWIFT TRANSPORTATION INC. Q1 2025 EARNINGS CALL APRIL 23, 2025 spglobal. com/marketintelligence 13 office labor that's 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 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 reducing costs or finding better ways, more efficient ways to manage IT costs, professional services, consulting, things like that, that we think we are a better, tighter organization. And so we'll continue to do this.

We're not done. We've seen results from this. But what this is going to do it's really going to work to our benefit going forward as we've introduced even more operating leverage into our business by reducing not just equipment, but our G&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 kind of where the economy goes and we're thinking of scenarios and how we adjust costs to continue to drive cost per mile down even in an environment where miles aren't helping us.

Adam W. Miller CEO & Director I think there's also opportunity and I don't know if you've touched on the safety and claims standpoint. I mean we've seen our safety performance continued to improve. Now clearly, the environment with nuclear verdicts is a challenge. So you could have great performance and 1 or 2 claims can really impact the results. But I think we've done a great job kind of navigating that the last few quarters. And we had some challenging claims to deal with over the last couple of years, and 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. And when you do have those being able to manage them and get to a favorable outcome as quick as possible.

So I do think safety and claims is an area that we have some opportunities to improve just on execution and how we manage the claims.

Kind of just curious how you're seeing capacity react real time to these potential risks coming up from a demand perspective. Adam W. Miller CEO & Director Yes. I think certainly, when you see activities that drive the spot market down, I mean, that's a catalyst for capacity to exit the market. Now depending on the duration, is it enough for us to be back in balance. I think part of the balance is going to be if demand improves, then I think we would feel like we'd be in pretty good shape given what momentum we saw early in the first quarter 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.

We look at different components of capacity 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 provides detail of how many trucks are being posted on their load boards and that's, I think, in March it's down 28% on a year-over-year basis in March. And so that tells us supply or capacity continues to exit. But I think it's still kind of hard to know what needs to happen for us to be back in balance. But certainly, the slowdown we're expecting to see in May is not going to help the small trucker. KNIGHT-SWIFT TRANSPORTATION INC. Q1 2025 EARNINGS CALL APRIL 23, 2025 spglobal.

com/marketintelligence 14 Brad Stewart Treasurer & Senior VP of Investor Relations And Chris, this is Brad. I would just add a little color to that. Prior to this recent shift in the marketplace in the first quarter with all the tariff uncertainty and everything, prior to that, especially in the fourth quarter and in the beginning of this year, the market was already behaving largely like a fairly balanced marketplace. And 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 of balance, but it's not like we were far off the mark just prior to this latest uncertainty here.

Adam W. Miller CEO & Director Yes. So I mean, we've had dialogue with, I don't know, 40 or 50 of our larger customers and they've been, for the most part, fairly open with what their strategy has been. But hey, it can change daily, depending on what they're seeing in the market. But I think there are three buckets, Ravi, they fall into and maybe 1/3 are around, hey, we're just not making any changes because of tariffs, and it's just we're just going to continue on our path forward. And those are maybe some of our customers that don't have maybe as much exposure to China. Then there's those that are more in a 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 volume that we would be seeing or could be seen in May. And then there are some that have told us that, yes, they have, they've canceled orders or they've stopped ordering, particularly from China and we'll figure out how to adjust their supply chain to avoid the cost. So I think our conservativeness is really based on the feedback we're hearing from customers as well as just some early trends we've seen with how they may be 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 forecasts that we're seeing in our business. Andrew Hess Chief Financial Officer And I would just clarify, as we talk to our customers on their view of consumer sentiment, a very few seem to be changing behavior to a point, Ravi, because of their view of a weakened consumer at this point are strong. So it seems to be a reaction to tariff costs as opposed to kind of a changing view on consumer sentiment right now. KNIGHT-SWIFT TRANSPORTATION INC. Q1 2025 EARNINGS CALL APRIL 23, 2025 spglobal.

Or is it really more about what the macro and demand picture looks like 2, 3 months from now? Adam W. Miller CEO & Director Okay, Bascome. So I'll hit that. Bids are kind of ongoing and so we I think we implemented some in the first quarter. I think the majority of them will hit sometime in the second quarter, and then you'll have some of our larger customers that do so early third quarter. So it's something that is just you're always doing on a regular basis, but your largest impact is typically going to be in the second quarter, and we expect our contract rates to improve to that low to mid-single digits 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 2 weeks, sometimes it's weekly, where they have 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 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 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 loads that we've that we've won through the bid process. So the concern is if they see a major change in their supply chain, do we not see the volume that we are expecting to see and what potential disruption could that have on your network. And so I think that gives us that's the biggest challenge to forecast third quarter, not knowing if we're going to see some major disruption 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. Bascome Majors Susquehanna Financial Group, LLLP, Research Division And 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? Adam W. Miller CEO & Director 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 seeing from the forecast from our customers and then external data. So an April has been relatively stable, but where our conservative comes into is 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 going to be offset with some of the supply chain positives from our customers. KNIGHT-SWIFT TRANSPORTATION INC. Q1 2025 EARNINGS CALL APRIL 23, 2025 spglobal.

I appreciate the feedback. Adam W. Miller CEO & Director Yes. I mean, look, Andrew laid out all the different costs that we're focused on and we continue to be focused on. Again, we're all about controlling what we can control. When I look at our different brands, 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 hey, you have to make adjustments in the market 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 some of these businesses navigate through that.

And I know 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 customers value. It's a lower cost service that they would value at times, and we want to be there to provide it. But yes, it has to generate returns. And we want to see that business and how it performs when we get to a more balanced environment rather than making decisions in a trough environment. I don't think that would be advisable and that's something that we would be considering at this point.

Now hey, if you get into a better environment and you have businesses that still can't perform in a better environment, then yes, you look at that a bit differently. But at this point, we like what brands we have, we're making the adjustments on the cost side, as Andrew laid out, and I think we'll be able to navigate the 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. Okay. Well, I think that concludes our call. We appreciate all the questions. And again, I know we have some folks in the queue. And if we're able -- 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.