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Good afternoon, my name is Ludie and I'll be your conference operator today. At this time, I would like to welcome everyone to the Knight-Swift Transportation Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Speakers from today's call will be Dave Jackson, President and CEO; and Adam Miller, CFO. Mr. Miller, the meeting is now yours.

Thank you, Ludie. Appreciate that. Good afternoon, everyone, and thank you for joining our third quarter 2023 earnings call. Today, we plan to discuss topics related to the results of the quarter, provide an update on current market conditions, and update our 2023 guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to last one hour today and following our commentary, we'll answer as -- we'll answer questions related to these topics. In order to get to as many participants as possible, we're going to limit the questions to one per participant. If you have a second question or a follow-up, please feel free to get back into the queue, we'll answer as many questions as possible. If we're not able to get to your question due to time restrictions, you may call 602-606-6349 following the call and we'll answer as many questions as possible at that point. So to begin, I'll first refer you to the disclosures on Slide 2 of the presentation and I’ll also note the following. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions, and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A, Risk Factors, or Part 1 of the company's annual report on Form 10-K filed with the United States SEC for a discussion of the risks that may affect the company's future operating results. Actual results may differ. Before we get into the slides, I want to turn the call over to Dave for a few opening remarks. David Jackson Thank you, Adam. And hello, everyone, and thank you for joining our call today. As has been widely reported, we continue to be in a depressed truckload freight market where rate expectations from shippers are often close to, if not, below operating cost. Spot rates are at or not at sustainable levels and are proving not to be survivable for those that are dependent on that type of freight. When we did our last call a quarter ago, there were rumors of Yellow closing. Obviously, since that call, that has indeed taken place and the already resilient LTL market has seen more strength. On the truckload side, the announcements of failures and rumors of more seem to be increasing by the week as of late. It's taken a lot to get to this point, so deep along the bottom of this current cycle. But the market is beginning to show signs of sensitivity to when supply leave suddenly or our provider cannot perform with freight lanes that were awarded by offering the cheapest price and shipper may find themselves quickly seeking a quality provider at a higher price than the original award. However, we are not seeing enough of that kind of activity or enough supply leave and/or enough strength in volumes to move rates to a meaningful inflection position right now. But it does appear that the stage has been set for positive rate pressure in the next bid season. In the meanwhile, here at Knight-Swift, we are focused on three specific objectives. The first one is, improving the performance of our truckload businesses. There is much in our control that we can do, including being better at cost, running more miles safely, and in hiring and retaining driving associates. Our people are digging in, working hard. We're grateful for that. The truckload operating ratio excluding US Xpress was a 91.5% and we are just simply not comfortable with an OR that starts with the nine and our people are working with urgency to do all that we can. Another objective is to grow our LTL network, AAA Cooper and Midwest Motor Express seamlessly operate on one operating network, while maintaining their local identities. We've opened 14 LTL service centers organically since the acquisition of AAA Cooper and MME in 2021. We've already purchased 11 additional terminals that have not yet been launched their service centers and we'll continue to pursue acquiring additional terminals that fit our nationwide plan in addition to other strategic forms of growth for LTL. We have found synergies between LTL and Truckload business, while not getting in one another's way. And the third objective that I would point out is the turnaround of US Xpress. We feel like we had good momentum going into the close of the transaction with the goal of being able to hit the ground running and it feels like that's what's happened. We've had positive sequential rate improvement, while lowering cost per mile in the first quarter of our ownership despite strong market pressure in the contrary. Still long ways to go, but we are ahead of schedule. The people at US Xpress have been great and we're so excited for where that business is headed and with some help from the market, we will get there even sooner. Now, we'll turn our overview to Slide 3. The charts on slide three compare our consolidated third-quarter revenue and earnings results on a year-over-year basis. These results now include the results of US Xpress for the full quarter. Revenue excluding fuel surcharge increased 7.6%, while our adjusted operating income declined by 60.8%. Market conditions in the LTL business were strong while soft demand continues in the truckload space. GAAP earnings per diluted share for the third quarter of 2023 were $0.37 per share and our adjusted EPS came in at $0.41 per share. These results were negatively impacted on a year-over-year basis by a $20.4 million increase in interest expense and the $22 million reduction in operating income in our third-party insurance business with the non-reportable segments. Also, the third-quarter GAAP results were positively impacted by a $14.6 million income tax benefit from the partial release of a tax benefit valuation allowance held by US Xpress associated with net operating losses and the tax credit carry-forward benefit at the time of the acquisition. This benefit was recognized post-closing due to the ability of Knight-Swift to utilize those tax attributes, which had the effect of reducing the consolidated effective tax rate at Knight-Swift to negative 2.1% for the current quarter. Our adjusted EPS of $0.41 is calculated using a normalized 23.2% effective tax rate for the quarter and excludes the $0.09 per share benefit of the lower tax rate. Now on to Slide 4. This slide illustrates revenue and adjusted operating income for each of our segments. Freight demand in the third quarter remains stable at soft levels for truckload but fairly strong and building in LTL. The truckload seasonal build usually seen in the late third quarter was subdued and this has continued thus far in early October. Our insurance business performed worse than expected. But this was largely offset by LTL in US Xpress performing ahead of our plan in the quarter, while our existing truckload businesses were largely in line. Contractual bid rates are largely baked in at this point for the 2024-2023 in the truckload business, while project opportunities are less prevalent than a normal peak season but are continuing to materialize. After generally falling for much of the past few quarters, fuel prices increased throughout the third quarter, providing a new headwind to operating margins for truckload and intermodal, though our efforts to reduce costs largely offset the impact. Our existing logistics business did a great job navigating significant declines in volume and revenue per load year-over-year to maintain a low-90s adjusted operating ratio excluding US Xpress logistics. I'll now turn it over to Adam to discuss each segment's operating performance, starting with truckload on Slide 5.

Thanks, Dave. For the Truckload segment, the ongoing soft demand, further rate pressure, and a recent sustained increase in fuel prices were headwinds to operating margins in the third quarter. However, our actions to reduce costs offset these challenges to produce a slight sequential improvement in adjusted operating ratio for our existing truckload business, excluding the results of US Xpress. The inclusion of US Xpress negatively impacted the adjusted operating ratio for this segment by 340 basis points. On a year-over-year basis, our truckload revenue excluding fuel surcharge, increased 21.9%, reflecting a 15.5% decline in the existing truckload business prior to the inclusion of US Xpress. Revenue per loaded mile fell 14% in total or 11.8% before including the US Xpress truckload business as the spring bid activity is now fully realized. Excluding the results of US Xpress, miles per tractor increased 1% for the first year-over-year increase in 2023. Including the results of US Xpress, miles per tractor increased 5.1% year-over-year. The decline in rates, partially offset by the improvement in miles per tractor produced an 8.2% decrease in revenue per tractor year-over-year. Now we'll move to Slide 6. The benefits of our diversification into LTL really stood out as this segment continues to perform well, aided by the recent disruption in the industry. Our LTL business grew revenue excluding fuel surcharge nearly 7% year-over-year and delivered an 84.9% adjusted operating ratio. Pricing growth strengthened as revenue per hundredweight, excluding fuel surcharge increased 10.7% year-over-year. Volumes built throughout the quarter as shipments per day increased 4.8% year-over-year, which reversed the trend of decline seen in the first half of the year. As Dave mentioned, we've brought on 14 new service centers online since entering the business in late 2021 and efforts are underway to continue growing this number with properties in various stages of procurement, development, or reconditioning. Filling out a super-regional network in the short-term and creating a national network in the long-term will allow us to participate in more freight and enable us to find opportunities to further support our existing truckload customers with LTL capacity. This remains a key strategic priority for us. Now on to Slide 7. The logistics market is in a difficult phase, where freight demand has been soft for over a year is producing topline price pressure that is no longer being offset by corresponding declines in purchased transportation costs. Despite these challenges, our existing logistics business remained disciplined and nimble, maintained a low-90s adjusted operating ratio before the inclusion of US Xpress. The US Xpress logistics business is already showing sequential improvement in adjusted operating ratio since the acquisition, closing it within 300 basis points of our existing logistics business, as we improve the cost structure and pricing even in a difficult environment. Overall, revenue was down 24.5% year-over-year as revenue per load declined 15.8% and load count declined 10.3%. Excluding the US Xpress logistics volumes, load count was down 29.7% year-over-year in the existing business. Now if you move to Slide 8. I'll cover our intermodal segment. Revenue declined 22.6%, which was driven by a 26.6% decrease in revenue per load, which was partially offset by an increase of 5.5% in load count. The operating ratio improved 190 basis points since the second quarter as a result of cost reductions, which offset a slight sequential reduction in revenue per load. This business improved during the quarter, reaching breakeven in September and we expect modest profitability in the fourth quarter. Now on to Slide 9. This slide illustrates our non-reportable segment, which includes insurance, maintenance, and equipment sales and rentals under the Iron Truck services brand, as well as equipment leasing and warehousing activities. For the quarter, revenue declined 14.2% year-over-year, largely as a result of our actions to address the recent challenges within our third-party insurance program, including significantly reducing the exposure basis. The $5.4 million operating loss within the non-reportable segment is modestly improved from the $7.1 million operating loss in the second quarter as improvement within other services provided greater offset to the ongoing losses within the third-party insurance business. We are evaluating strategic alternatives for the insurance business, including potential reinsurance strategies for the outstanding liabilities in order to help insulate our business from the volatility primarily arising from prior loss year's. As noted previously, it will take some time for the changes in the insurance business to fully materialize in the results, but we are making progress, raising premiums and improving the quality of risk as we work to mitigate volatility. Now, I will turn it over to Dave for an update on the progress of US Xpress.

Thanks, Adam. The team at US Xpress has really rallied around the goal of making significant improvements to this business and is currently running ahead of plan, as previously mentioned, on our projected path to reach an operating profit within the first half of next year. As noted in previous slides, the US Xpress Truckload and Logistics businesses have already made meaningful progress improving their operating ratios. Coming out of the third quarter, we have already reached a $100 million annualized run rate of realized synergies with a target of increasing that to $120 million run rate by the end of this year. We highlight some of the progress on this slide. You'll notice these are fundamental areas of the business, some of which are the most critical levers to pull-through cycles. Ultimately as we lower cost per mile, and increase rate per mile, we will make operating ratio progress and that has begun. US Xpress is rolling out a decentralized terminal-based operating model similar to Knight-Swift where there is P&L accountability at the local level with far more personal driver interaction. Nine out of the 10 locations have been converted from places to park to operating terminals. Understanding where rates need to be for a proper return has led to the elimination of brokers as the business is now dealing directly with shippers, while significantly reducing exposure to spot rates versus contract rates, which has improved from approximately 45% at the beginning of the year to approximately 15% today. This is an uphill battle as we close this transaction at the end of the spring bid cycle in July, but the team has made progress and we'll continue as we will soon begin the 2024 bid season. We are excited for this early progress and for how this consequential truckload business is positioning for the future. We have been impressed with the effort and attitude of our new fellow teammates at U.S. Xpress and appreciate their hard work. Next to Slide 11 for our outlook. Slide 11 contains our updated outlook on market conditions for the remainder of 2023. The LTL market should continue to see solid demand as the recent capacity disruption in the industry continues to be sorted out over the next several months. This should support further yield improvement and as the new business is increasingly repriced through bid activity. In the truckload space, we believe we are moving past inventory destocking. Those shippers caution about the direction of the US consumer behaviors governing freight demand for the time being it feels. We continue to expect a modest peak season, including a return of some typical seasonal activity and project opportunities with opportunities continuing to materialize. Spot rates seem to have bottomed, but have yet to inflect positively. As a result, contract rates continue to be pressured. The soft demand, unsustainably low rates, ongoing inflation, and restrictive financing conditions will keep pressure on carriers, especially smaller and less well-capitalized carriers. These factors should serve to accelerate the ongoing capacity attrition and limit immediate capacity expansion upon recovery. The pace of cost inflation should ease, though plentiful work alternatives in the general economy will pressure hiring and utilization until freight conditions improve. New equipment availability continues to improve and the used equipment market weakens further as small carriers struggle in capacity exits. I will now turn it back to Adam to cover our 2023 guidance on Slide 12.

All right. Thanks, Dave, and this will be our final slide. For the full-year 2023, we now expect adjusted EPS to be in the range of $2.10 to $2.20 per share, which is an update from our previous guidance of $2.10 to $2.30 per share. This is based on our expectation that truckload rates have stabilized at current levels for the fourth quarter. The truckload tractor count will be down modestly with miles declining sequentially similar to prior year in the absence of a strong peak. The LTL revenue excluding fuel surcharge increases in the mid-teens year-over-year, with a relatively stable sequential margin profile. The LTL shipment count in revenue excluding fuel surcharge per hundredweight improve at high single-digit percentage year-over-year. The U.S. Xpress EPS estimated dilutive impact in the fourth quarter expected at less than or around $0.05, I believe, as performance continues to improve. Logistics volumes and revenue per load remain under pressure in Q4 with OR stable in the low 90s. The intermodal operating ratio is slightly profitable with volume stable sequentially. The non-reportable op income decline roughly $10 million to $15 million sequentially as third-party insurance stabilizes and other businesses experienced their typical seasonal slowdown in the fourth quarter. We expect some easing cost pressure in the fourth quarter as we realize further cost-containment efforts on some of our cost initiatives. We expect gain on-sale to range from $8 million to $12 million, which includes now disposals at U.S. Xpress. And we expect minimal increase in interest expense from Q3, assuming the rate hiking cycle is largely complete. And our net cap -- cash CapEx is expected to be between $770 million -- $750 million for the full year 2023 and that we expect our tax rate to be approximately 26% for the fourth quarter. So that now concludes our prepared remarks. And so Ludie will now turn it to you to open the line for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Ravi Shanker from Morgan Stanley. Your line is open.

Thanks. Good evening, everyone. So, Dave, I think you said at the top of the call that you do expect to see some positive pricing momentum going into 2024. It seems hard to fathom with spot and contract rates where they are right now, but you also have spoken of cost inflation a fair bit. Can you unpack that a little bit more kind of what's the early signs on bid season looking like? Are we looking at flat first half and a positive second half or something even better than that?

Yes. I would say that, that comment is largely based on the economic position of the providers of full truckload transportation today. I think, we've seen in the reports between second quarter and what we've already seen reported out for third quarter, I mean, you have really record-tight margins in the full truckload space. And this is all while driver wages, which are by far our largest expense have not increased since 2021. And we likely will have some pent-up increase to work through as perhaps truckload is losing pace in recruiting vocational labor in the economy. And so, it feels like, we don't have the benefit or opportunity to be aggressive in pricing. In fact, we need a little bit of help. And as we noted last quarter, this is a unique freight recession or trough of a freight cycle, in that normally when we've seen it so prolonged, so pronounced, we're in a broader economic recession. And so, we naturally get cost concessions in the areas of fuel and labor and equipment. And in this case, we've seen the opposite. And now, fuel is kind of turned from being more neutral into now being more of a headwind on the truckload side. So that's how this is being set up. It feels like there are and what I referenced in my comment is, we've seen some situations where it appears that pricing lanes are meaningful bid awards were awarded to carriers at levels that we just don't understand how that would be possible from a rate perspective. And what we have found is, some of that has made its way back through -- often it's done through a mini bid as we call them, where perhaps the service level wasn't where it needed to be or they just couldn't deliver on it. And so we're starting to see some of those signs. That tells us that maybe things have been pushed to the limit. And so, we're here hunkered down, just working as hard as we can to be as efficient as we can. We have virtually no margin for error on the truckload side of the business right now. And we don't think that we're alone in that. Now I would guess that the -- our optimism of what could happen and what would need to happen in a bid season might not be the same as shippers might view right now. Truckload doesn't do cost-based pricing. That's more covered in the LTL space as we've learned. But it isn't the case for truckload, but that really is what's driving us. This is not elective, this is just the essential. And so we'll have to see how it plays out. If the bid season began right now today, we would really have a tough time, seeing it to be positive. But as things continue to materialize, I think that natural conditions are going to lead us in that direction.

And Ravi, I'd just add to that. Again, the bid season hasn't kicked off, we had so maybe just early discussions with some of the shippers that would have a bid coming out in the next quarter or so. The sentiment is, a lot of our customers have enjoyed the low rates that they've had in the spot markets, even some of the contract rates. And I think they probably moved a disproportionate amount of their volume than they historically have to brokers where they're able to capture some of that discount. And our shippers know just like carriers know that the market if not it will turn, it's when. And they -- they're concerned about ensuring that they're going to have sustainable capacity. And so, some of the commentary is even though the market may not bare today, they know six months, they could be in a tough position if they don't have capacity with asset-based carriers, especially in light of some of the failures that we've seen as of recently. So we're in dialog with our customers, we want it. We're partners with them. We know we need for a sustainable capacity, and we feel like we'll be able to work through what we believe would be fair rates moving forward.

Very helpful. A very quick follow-up. Kind of speaking of failures on the logistics side, we did hear headlines that a large digital player may have paused or stopped operations today. What kind of impact do you think that has in the marketplace? And kind of what do you think this tells us about where we are in the cycle and kind of what the brokerage model going forward? Like it was a good thing or a bad thing, kind of -- yeah, what does it mean for the industry?

So [indiscernible] we will answer that Ravi, because I think everybody on the call would like to appreciate the comment, but it's one question because I think last fall, we had the first -- the first analyst asked two, then everyone decided to ask two. So one question.

Ravi, I'm [indiscernible] to that and if we don't jump in that queue, we will answer that question. Thanks, Ravi.

Understood. Thanks guys.

Thank you. And your next question comes from the line of Scott Group from Wolfe Research. Your line is open.

Hey, thanks. Good afternoon, guys. So can you just give us some color on the revenue and OR for U.S. Xpress in the quarter? And where that goes from here? And how important is the market? How important is it for the market to get better and pricing to get better to get the U.S. Xpress OR better? Or can you do it without -- like can you get to the profitability that you want without getting the pricing up for the market?

Scott, just given where that business started once we finalized the acquisition. I mean, there is going to need to be improvement in both the cost side and the revenue side of the business. Now on the cost side, we don't really have to wait for the markets to change. We can move forward on a lot of activities there. On the procurement side, we're working on building out the terminal network that we expect will help safety, turnover, recruiting, and those all can be -- have a meaningful impact to the cost side of the business. Now we've made -- probably I think we said mid-single-digit improvement in our cost per mile, which we're excited for. We know that there is more there. On the revenue side, it's low-single digits and that's in a market where most are taking hits on the revenue per mile front and we haven't had a bid season to be able to address where the current rates are for U.S. Xpress. To get to the long-term profitability, that -- dollar of accretion, we're going to need both revenue and cost to support that. But I think that's just a matter of time before we have an opportunity to be able do what we need to do on the revenue front to really close the gap from a rate perspective between U.S. Xpress and our other brands.

Yeah. Maybe, Scott, I'll just add. The logistics business is in a good place, it's contributing earnings. The dedicated business is contributing earnings. The subsidiary total is contributing some earnings. And the wildcard is that, over-the-road component and it's made dramatic progress. And some of the things that we outlined on that slide, those are things that we have experienced that seen driver turnover go down, we have experienced seeing revenue on a per-truck basis improve and we have experienced and seen a P&L accountability on the cost side drive to lower cost to improve margin. And so we -- they are not very far. As you could tell by the earnings for this quarter, they were not nearly the drag that frankly we would have expected and this early on. And so the idea of getting to breakeven without any help from the market that is definitely within reach. And so -- of course, that's not the goal. But to take them from the state, as Adam alluded to, the state they were in coming out of the second quarter and into this. This has been dramatic and faster than we would have expected.

Thank you.

Thanks, Scott.

Your next question comes from the line of Jack Atkins from JTK [Sic] [Stephens]. Your line is open.

Okay, great. Thanks very much. Jack Atkins from Stephens. But I guess, Dave and Adam, I'd love to maybe ask you about the LTL business for a moment. You said it exceeded your expectations in the quarter. There has been further market disruption in October. Just sort of curious, how did operating ratio trend in that business relative to normal seasonality? Did you incur any additional expenses as you were trying to sort of onboard some of the market share that was probably moving around? And I guess just would be curious, the opportunity to maybe grab some of the real estate that's up for auction here with the Yellow estate over the next couple of weeks. I know it's a lot of questions in one, Adam. So if you could excuse, just kind of [indiscernible] I would be curious if you could expand on that for a minute.

Yes. Adam, the enforcer might shut this down before we get started with all those questions.

That's okay.

But it is not typical at least in the experience with the two LTL franchises that we own to see that sequential improvement from the second into a third. But we did, it was slight, but we saw slight improvement sequentially from second to third quarter. In terms of bearing an additional cost burden, I don't know that was so much the issue. I think in the LTL space, as our customers had found themselves with some immediate need, our LTL group just jumped in to get those things covered. It's more of handling those shipments and preserving the service than it is immediately talking about price. It works a little differently in the truckload space, when there is projects or things that are out of the norm. And so, some of that volume that we've picked up, some of that volume that I think is in the process of being disbursed long-term throughout the LTL providers, that will be addressed in these bids that have already started and that will continue to happen to make sure that we price it appropriately as you kind of know-how it fits the network. So I wouldn't say that, that was a -- there was a cost headwind there. I would say that, that sequential improvement was a very positive sign for us of where things are. And the fact that we are seeing shipments turn positive on a year-over-year basis and to be able to see revenue, excluding fuel per hundredweight up in the double-digits, continue that's a -- those are very positive signs for us.

Thank you.

Thanks, Jack.

Your next question comes from the line of Todd [Sic] [Tom] Wadewitz from UBS. Your line is open.

Yeah. Hey Dave, Adam, it's Tom Wadewitz here. I wanted to ask you a little bit about kind of cycle view. Dave, you offered some thoughts of kind of constructive and bid season. Do you need to see spot rates move up first in order to really see that improvement in contract? It continues to be a widespread between contract and spot and I think the brokers take advantage of that and compete against you guys. So I'm just wondering, is the kind of optimism on contract rates next year really contingent on seeing some momentum in spot rates ahead of that? And I don't know if you have a thought on just capacity exiting, and when you get enough of that to take place to tighten the market as well. So, thank you.

Yes. I would just -- I'll jump in, and then Adam can finish this off. I think that historically, through these cycles, it's worked where that spot rate starts to climb. And if you were to graph out spot rates and contract rates, you find that intersection. And when they intersect, that is the tale-tale sign that spot rates are just getting going and that is -- the curve of the contractual rate is now about to bend and turn to positive again. And so, we have not seen that. We've really seen spot rates just kind of move sideways, as time just gone on. One disadvantage we have from cycle to cycle is the dataset that we look at is constantly evolving. And it seems like increasingly the dataset that we look at is a magnifying glass into just broker and the smallest of carriers. That isn't necessarily where the majority of freight moves or how it moves. But nonetheless, we've got that corner of the market with a telescope right now, it feels like. So, it's hard to always compare that to previous years. It's hard to think that we wouldn't see that kind of -- generally speaking, that kind of mechanic happen again, where spot rates increase to a point where they intersect contract, and then now you know you're off to a different part of the cycle. The piece about that is hard to predict is that, it always -- it happens so fast and it happens unexpectedly. And there is always a catalyst or a multitude of catalysts to bring it to bear, whether it'd be weather, whether it'd be fuel prices. It feels like the extreme aggressiveness that we have seen out of non-asset-based players. It has reached a level to where it's not only unsustainable but when you add how expensive financing is and what might subsidize and allow that to happen, it becomes -- it blows up. And now all of a sudden, you had a lot of small carriers who were dependent on some kind of a model like that, that now are maybe in a little bit of trouble. So I think we're starting to see some of this. I mean, we are hearing of asset-based carriers that are closing the doors. Here, just -- I mean, just this month, we continued to hear. I think there was another one just heard about today to say nothing for a non-asset-based player that seems to be stopping operations or something. So there -- things are breaking right now. I don't know if that is enough to be this catalyst, where you start to see this happen, but inevitably, it is almost impossible to predict. And when it does change, it's always been many, many, many months, if not, many, many, quarters in the making. So it doesn't just turn around all of a sudden. So that feels like we're right, we're pushing up against that level. Adam, any thoughts?

Yes. I mean, I think, you know, as you see some of these disruptions from the operations that are seasoning, we see immediate reactions in our business, they may be short-term, some may be longer-term, and I will see how it plays out. But I think that tells us there is not much slack in the supply chain right now. And so, any type of lift in demand or exaggerated decline in capacity, I think we'll see the market turn very quickly. And again, we're predicting that will happen in 2024, it's just a matter of when. And so as we approach bids, we're looking at rates that we believe will be sustainable as the market shifts. And those are the type of conversations we're having with our customers, rather than just waiting for the spot market to turn, which would then dictate that rates -- contract rates should follow.

Thank you. Your next question comes from the line of Chris Wetherbee from Citigroup. Your line is open.

Hey, thanks, good afternoon guys. I wanted to ask about the U.S. ex-fleet and how you think about that relative to some of the cost synergies that you're realizing. So I think you said about $100 million run-rate maybe moving up to $120 million by year-end. Is there a relationship between getting that cost synergy and then ultimately profit synergy? And the size of that fleet, I guess, in other words, do you need to color a little bit more to be able to generate profitability? What do you think kind of you'll be able to net hold onto over the course of maybe one year, or maybe that 2026 target you have out there?

Yes. We don't think we have to shrink into profitability. There is -- there are a few hurdles that they had already overcome that we haven't on the Swift merger. On the Swift merger, we had -- post the deal, we adopted hair follicle drug testing, for example, and we also made some adjustments to the owner-operator program. In this case, we didn't have either one of those, and so we are really battling to hold on to that fleet and to help them -- and to help them be more profitable on a per truck basis. If I look at just sequentially, we've only owned them for a quarter here. But if I look at it, the fleet size has remained -- it's down just slightly, but it's almost the same. And so, there is not a -- there is not a plan to call the fleet.

Okay. Appreciate the color. Thank you.

Thanks, Chris.

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

Great. Good evening, and thanks for the thoughts on the -- up against the wall on the rates. Hopefully, I think we've all been watching that waiting for the capacity to leave to get that rate up there. So hopefully that follows through. Maybe just Dave, your thoughts on intermodal, you kind of talked about it getting to profitability. What -- what's the confidence there? Is that the same thing? Is that just about rate and getting that up there? Is it about going through a bid season? What -- what's operationally going on with intermodal that you've been losing money that you see a flip there?

I'm going to let Adam answer that.

Yes, I think it's a combination of multiple things, just like any business that's operating at that level. It's not one thing that you have to get done. I think there's going to be some opportunity to pick up some additional volume in the bid season, as we've got our rates with our rail partners adjusted based on the way our contract is structured with them. So I think that puts us in a better position to be aggressive there. I think we've got some operational efficiencies, we need to work through in terms of how we manage chassis. And I think we've made some progress there. And we started the quarter out on a rough start, but we saw that sequential progress all the way through, till we got to a level of profitability, just slightly in September, and we expect to continue that momentum. But it will be something that just takes time to work through and service is improving at both the West and the East. I think customers that had moved freight off of the rail to the truckload because of the issues with service are looking at that again as an option. And I think we've got some great relationships on the truckload side, that we still don't do much with on the intermodal side, that I think we'll be able to open up those doors. So it's going to be a combination of all those factors, Ken that we think will get us to a good position where that's a business that can compete with the top providers there and generate a margin in there. Hopefully, high-single-digit, low-double-digit depending on where we're at in the cycle.

But, I don't know if I can just clarify, it sounds like those were working with customers that -- is that longer-term or because you said you're going to get the profitability fourth-quarter or did I miss something or is that bid season that already happened, that's going to happen quickly?

I said, as we got to slight profitability at the end of the third quarter and we expect that to continue into the fourth quarter. So to be profitable there, but not where we -- not where we're targeting to be. I mean, that's going to take a few more quarters as we work through the operational efficiencies we need to pick up, as well as work through the bid season to pick up more volume and address rate.

Thanks for that clarification. Appreciate it guys. Thanks.

Thanks, Ken.

Your next question comes from the line of Allison Poliniak from Wells Fargo. Your line is open.

Hi, Allison.

Hey guys, it's James on for Allison. Just wanted to actually kind of go back to some question on the truckload rate. Like, basically it seems -- you said they are still under pressure, you're still seeing costs elevated, but there is a sort of an amount of capacity that's still out there. Just wanted to get your thoughts on what you thought was allowing that capacity to stay in there and sort of when do you think it might exit or if there is a particular type of event that needs to happen for it to exit? Just wanted to kind of get your thoughts on sort of the pace of capacity and exits.

Yes. Well. I appreciate the question, James. I think we're -- what we're seeing is a pretty extreme resourcefulness on the part of small carriers to survive. And it's hard to say if it's the fact that the used equipment market hasn't completely collapsed like sometimes it does at this stage of the cycle, perhaps it's kept folks on the financing side maybe willing to make some accommodations. Don't know to what degree that is the case. But there could be that for sure. You have individuals who if -- if it is one or two truck operation, that might be temporarily living out of a truck. And just to get by through the bottom part here. We know through our exposure to small carriers that they are under extreme pressure and juggling kind of cost and low on cash-flow. And in many cases, deferring maintenance for example just routine oil change maintenance. And so it just feels like there is a lot of folks out there that are just barely getting by with credit cards maxed out, hoping that they don't have to buy a tire over the road or have any other kind of mechanical failure. And so that's what it feels like, it's -- to be honest, we're a little puzzled as to why we haven't seen more capacity come out because if you look at spot rates on an absolute basis, these levels on an absolute basis were enough to send the market in 2017 into a strengthening position because of the atrophy of supply. And so if you compare the cost structure and what inflation has done, it's hard to imagine that you could have the same absolute spot rate and yet have higher-cost and still get buy, so it feels like more survival than anything else. James, but we're watching anxiously and trying to understand that better ourselves.

Got it. Small follow-up, is there anything at the end-of-the year like maintenance events, insurance renewals, or anything else that might be sort of a catalyst over in the fourth quarter for exits? Thank you for the time.

Yeah. I don't know that there is one event. I mean I -- they -- those kind of renewals and registrations happen routinely. It does feel like they do get a little bit bunched up towards the end and beginning of the year, but I don't really have a place that could point to validate that, that's just kind of a feeling, but I don't think there is one event like that.

Thank you. Your next question comes from the line of Bruce Chan from Stifel. Your line is open.

Hey, good evening, gents. Maybe just wanted to ask one here on core demand. I know you've got a pretty diverse base of customers, but is there anything that you've been seeing in terms of end-markets that may be worth calling out, especially anything around food and bev and what, at least one big shipper talked about with regard to lower spending due to Ozempic, anything related to industrial, NTL or LTL related to the UAW, anything there just maybe be material enough to affect your outlook for the rest of the year.

Adam and I are looking to each other and both kind of shaking our heads like no. So, I think what's been a little different this year is we have seen some -- a little more seasonality through the beverage season and a little bit of produce in the second quarter that we saw none of last year, seen a little bit around the holidays, which is more of a food and beverage play but haven't seen any.

Yes. I think there is maybe some specific customers who maybe, had made more progress on inventory than others that might see a different demand pattern than others, but I think that's more specific to their strategy versus something that's broader to a certain sector.

Perfect, good news. Thank you.

Yes. So that's a business that obviously has been challenging over the last, I think, now four quarters and we're working on what we can do to kind of mitigate those losses. And there's several things that we're working on. It's probably improving or tightening our underwriting standards in the near term. We're looking at some reinsurance opportunities that could help, which is eliminating some of the volatility or the outstanding liabilities we have currently on the balance sheet. So that is underway. And really, I think everything's on the table to be able to kind of work through mitigating our losses there. And do we expect to see a lesser loss into the 2024? Certainly from where we are and I think there is measures we've taken to do that, but we needed to move a bit quicker than it currently is. And we -- in a difficult cycle, this is the last thing that we need is a business that has been a bit challenging for us and we've got a lot of people working towards that and looking at every different alternative to approach it and we think we'll see some progress here, both in the fourth-quarter and as we get into 2024. And if we find some of these strategies that help us eliminate that liability sooner rather than later with the reinsurance option, we'll move quickly on that, if we find it to be appealing.

Got it. Thanks, Adam.

Your next question comes from the line of Amit Mehrotra from Deutsche Bank. Your line is open.

Thanks, operator. Hi David. Hi Adam, excuse me. I guess, there is an expectation that earnings can be up meaningfully next year and I know you guys do an exceptional job kind of pivoting to where maybe the opportunities present themselves. So there is obviously that opportunity or potential next year. But I guess the question, David, I want to understand how you're thinking about how expectations are calibrated for next year? How you think the slope of the recovery from here? Can it be more muted? Is there an opportunity to see gaps higher if you think those opportunities are likely to show up? We're just kind of late in this year now and demand doesn't seem to be there and I'm just trying to understand kind of getting your head a little bit and how you're thinking about the recovery path from where we are today.

Yes. Well, thanks, Amit. As you know and I think we've referenced in previous calls that these kind of recoveries on the truckload side start with some volume increases and then volume begets a little bit of rate improvement and then volume and rate improvement beget earnings. And so this will be a gradual process, our comparisons to start the year are not going to be as easy, but they -- they'll get a little bit easier as we go in to -- we hope into next year on the truckload side. Now if you look at our business, so we've got this LTL business that's going to continue to chug away, we expect that to be very predictable, we expect that to be very positive. And then we've got this, maybe large call option, if you will on the truckload space with U.S. Xpress, the business that's very close to breakeven. And that as there's some -- as we have another bid season to work with, to work on the network and a little bit of strength, all of a sudden that does give us quite a significant sale if you will if the wind decides to blow that we have not had in the past. And so, I think, as we mentioned a couple of quarters ago this is somewhat of a try and make sure that our -- we're trying to make sure that our cycles, that our peaks in the cycle in terms of earnings performance, outperformed the previous cycle. And so, as far as the timing to predict, that's a little bit beyond our control and very difficult to do so in the truckload space. But for us, we're just heads-down preparing ourselves to be ready for that, to be ready in terms of how our business is committed, the kind of relationships we have on the truckload side and just kind of where the operation is. So we're -- this next quarter, we'll put out our guidance for 2024. And I'm grateful that we can do that in three months, and I don't have to do it today, because a lot could change, frankly in the next three months. Now our posture in terms of running the business is, hey, we're going to -- we're heads-down, working hard as if nothing is going to change and nothing is going to be given to us and we're not going to have any wind at our back. We're just not going to wait for that to happen to try and control what we can control. But we will be prepared to move when the market -- when the wind blows, we'll be prepared. So it’s the best I could answer that right now for you, Amit.

Yes, that's very fair. Thank you, wish you guys the best. Thank you.

Thank you.

Thanks, Amit.

Your next question comes from the line of Bascome Majors from Susquehanna. Your line is open.

Yes. Going back to the insurance business and the boom-and-bust cycle you've managed through there. What have you learned from that both about how you would incubate a future business at Knight and grow it internally? And also just dealing with some of your small trucking competitors, as customers there, what have you learned about the market that will help you manage cyclically going forward? Thank you.

Well, Bascome a few things. For one, it's -- it is difficult to find small carriers who care about safety, the way that we do and are willing to do things to change behavior such as, you know, hair follicle, drug testing, to have cameras in the vehicles that track your scoring that then indicate whether you're a safe driver or not. It's difficult to find a carrier who is willing to do that at a consistent level. And that's part of the underwriting process and I think what we found is we had to be more disciplined on the compliance around some of those factors. I think we also found that you know, this is a difficult environment and so one of the first bills that may not get paid maybe the monthly insurance bill. And so, we have to do a better job getting, you know, probably a couple of months or some larger deposit on the front end to protect ourselves from any bad debt that we may incur, should you have a carrier that doesn't make payments appropriately. And I think we weren't quite a bit of just how we manage claims, what the development looks like and when, when you know that and understand it and understand how different it is, then company drivers or owner-operators that operate for us, we can be more effective at how we price that business. So I think we made some -- I think some missteps in terms of assuming that claims develop the same way they do with our own business and maybe price the business as effectively as we should. So we're in the process of moving pricing up as quickly as we can. And that affects any renewals, we're not writing any new business now until we can really understand what the right mix of carrier is and what the underwriting qualification should be and will determine to that process, whether we think it's a business that we can grow and develop profitably. So there's still more that we're working through in this process, it's relatively new to us. And -- hey, we're again open to a lot of different approaches to make this business work if we can.

Thank you, Adam.

And this ends our Q&A session. I would like to turn it back to our speakers for closing remarks.

Okay, well, thank you. Thank you, Ludie. We are grateful for your interest today. I think we hit a record number of questions today. So if we did not get to your question, please feel free to call us at 602-606-6349. Thanks for joining the call today, take care.