Operator: If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. If at any time during this call you require immediate assistance, please press star 0 for the operator. Speakers from today's call will be Adam Miller, Chief Executive Officer, Andrew Hess, Chief Financial Officer, and Brad Stewart, Treasurer and Senior Vice President of Investor Relations. Mr. Stewart, the meeting is now yours.
Brad Stewart: Thank you, Jillian. Good afternoon, everyone. Thank you for joining our Q3 2026 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. The 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.
Brad Stewart: 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 SEC for a discussion of the risks that may affect the company's future operating results. Actual results may differ. Now I will hand the call over to Adam for some opening remarks.
Adam Miller: Thanks, Brad, and good afternoon, everyone. I just want to let you know I am getting over a cold here, so I might have some lingering coughs that come through. If you hear any noise in the background, that would be me. I apologize for that, but wanted to make sure I was available for the call here. First I would like to start by recognizing our team and the progress we have made in each of our distinct brands. We continue to build out our diversified service model and saw solid performance across each of our segments this quarter. In addition, I was very encouraged to see the improvement in our core truckload margins that are finally approaching recognizable territory after such a long and difficult down cycle.
Adam Miller: We are so grateful for the focus, teamwork, and commitment of our professional drivers and driver support personnel who brought us through the past cycle and whose creativity and collaboration will help us navigate the new one. There is much work yet to be done to return to normal operating levels, but the good news is we see many opportunities for improvement to get us there and to help our organization chart new heights moving forward. We truly have an amazing team, and I look forward to navigating this next cycle together. Yes, we believe the new cycle still has plenty of gas left in the tank. The truckload freight market continues to remain tight, and while broad measures of industry demand have been largely stable, demand for our capacity has been strong.
Adam Miller: We have more peak season project arrangements in place than at any time since the pandemic, and freight tenders have already started under several of these projects. We believe we are well-positioned to generate distinctive results for two main reasons: the differentiation in our service mix and in our business model. Regarding service mix, our single largest service is the one-way truckload market, a space experiencing a supply-driven tightening after 3-plus years where artificially low pricing drove unusually weak industry margins. During the downturn, many carriers either went out of business, partially liquidated fleet assets, or shifted one-way capacity into dedicated services where there was less competition from non-compliant operators.
Adam Miller: Because we have remained committed to one-way truckload service and operate the largest one-way fleet in the industry, we are now seeing consistent opportunities to deliver valuable capacity solutions to our customers in the space experiencing the most supply contraction. We believe this is contributing to our spot rates and low tender rejection rates trending stronger than broad market indicators on these metrics. Also, because one-way service is the most flexible, our industry-leading one-way scale and history of responsive problem-solving means we are often the first call large shippers make when they have an acute need for transportation service. The one-way market also has an active spot market, where rates that are highly responsive to the supply contraction not only accelerate our rate recovery, but also help provide insightful observations on price discovery, particularly as our spot rates are often much stronger than public spot rate data.
Adam Miller: Regarding our differentiated business model, there are a few things I would highlight that are already serving us well and which will be the key to delivering industry-leading margins. First would be our market management practices and unique purview on the freight market. We are continually refining our playbook for how we read and respond to signals in the market and how to manage the deployment of capacity in support of service and yield. We couple this with distinctive competitive intelligence provided by our industry-leading scale and combination of multiple truckload brands in the marketplace, which further enhances our ability to read market signals and respond with agility. Related to this area is our intentional practice of engaging in spot-rated transactions and modulating our spot exposure based on the phase of the cycle. This enhances our signal detection and allows for faster price recovery in up cycles.
Adam Miller: Next would be our large academy network and driver training program, through which we source and develop a significant portion of our professional driver base. This is helping to somewhat blunt the negative impacts of the tight driver market on our business and will be key to helping us seat more trucks and increase utilization to capture more opportunities. Next would be our large terminal network and decentralized operating model. This has allowed us to construct a dense freight network that is primarily built on regional freight, which allows us to minimize empty miles and maximize revenue per truck relative to cost. Such a network also supports driver recruiting, retention, and development, as well as internalizing maintenance as advantageous cost. Finally, I would call out our intense culture focus on cost and execution, which allows us to convert opportunities into earnings.
Adam Miller: Of note lately, our disciplines around fuel procurement, efficiency, and recovery are helping us mitigate the negative impacts of record-high diesel as best we can. To be clear, we are not immune from cost pressures, but we are focused on doing everything we can to mitigate cost impacts and recover inflation through pricing. We remain encouraged by momentum in the market and strong early progress in our core truckload business. We are pleased with the significant progress the team at U.S. Xpress has made in improving costs, service, safety, business mix, and pricing, and we look forward to making further progress. We have also significantly reduced our floating interest rate exposure through our 1% convertible bond offering in the spring and are making meaningful progress reducing our acquisition-related leverage.
Adam Miller: As free cash flow continues to improve, we anticipate being back to our target leverage range not before long and will again have maximum flexibility as we consider opportunities for organic growth, M&A, and share buybacks. With that, I will turn the call over to Andrew and Brad to review the results and our guidance.
Andrew Hess: Thanks, Adam. The charts on slide 3 compare our consolidated Q3 revenue and earning results on a year-over-year basis. Consolidated revenue increased 14.2%, and consolidated revenue excluding truckload and LTL fuel surcharge increased 7.7% year over year. Operating income grew $128 million, or 255.1% year over year. Adjusted operating income grew $93 million, or 87.4% year over year. The improvement in earnings was primarily driven by pricing and network efficiency gains across our asset-based businesses, in addition to gross margin recovery in our logistics business. GAAP earnings per diluted share for Q3 2026 were $0.72 compared to $0.05 in Q3 2025. Adjusted EPS was $0.83 for Q3 2026 versus $0.32 last year. Our consolidated adjusted operating ratio was 89.3%, a 450-basis point improvement year over year.
Andrew Hess: Slide 4 illustrates the revenue and adjusted operating income from each of our segments for the quarter. Overall, the relative share of our various service offerings remained largely consistent. Intermodal again gaining slightly over the previous quarter as it grew revenue 8.4% sequentially. Now we will discuss each of our segments, starting with our Truckload segment on Slide 5. Our Truckload segment is making meaningful progress, restoring margin through disciplined yield management and cost control. After being driven by spot rates in Q2, realized revenue per mile accelerated in Q3, driven by contract rate changes primarily within our OneWay division. This quarter marks the first one in a few years that operating margins for our OneWay service exceeded those of our Dedicated division.
Andrew Hess: We continue to see opportunities through many bids, turn back bids, while peak season projects have started to move even while conversations on late developing needs continue to surface. We are leveraging collaboration to support our various brands and service lines while providing greater capacity solutions to our customers. There are many reasons to be encouraged and plenty of levers to drive further improvement. One of the biggest priorities across our operation is seating more trucks and increasing utilization. This will allow us to retain more opportunities and grow revenue at compelling incremental margins. We are leveraging our academy and training network to navigate driver sourcing challenges and to manage cost. We have 12 CDL academies across the US, with plans to open a few more in the coming months, plus partner schools operating on-site at seven additional terminals.
Andrew Hess: After graduating from CDL school, the next phase is our finishing program, where we have more than 2,000 qualified mentors who train new CDL holders over the road to ensure the readiness to be safe, productive, and successful. Last two years, we have built a training program at U.S. Xpress, modeled after our legacy program, and student count continues to climb. Our scale is a distinct advantage in Dedicated, where startup costs on new fleets can pressure margins because equipment must be positioned and trucks must be staffed before they are fully productive. When we onboard a new Dedicated fleet, we can draw upon equipment and drivers from our national OneWay network, along with our academies program. Only in certain markets are we limited to recruiting experienced drivers at a premium. This helps us manage margin pressure from growth.
Andrew Hess: Recently, we have been having success in growing our Dedicated fleet, which has grown approximately 3.5% since mid Q2. Our Dedicated revenue, excluding fuel surcharge, grew nearly 4% sequentially between Q2 and Q3. Operating income essentially unchanged. The investments we made in the quarter in recruiting, training, and driver pay have helped us to stabilize our truck count. We are preparing further targeted measures to improve our driver development and enhance utilization, given that our Truckload margins are progressing according to plan and our load rejection rates continue to run at strong levels well ahead of the market. We continue to closely monitor driver market conditions as well as our own metrics around seated tractors, utilization, and pay as a percentage of revenue to gauge appropriate action and invest where it generates a return. We are balancing the need to restore margins with opportunities for growth.
Andrew Hess: Turning to slide 6, I'd like to spend a few minutes on truckload cost. Recently, investors seem to be indicating some level of concern that cost inflation could consume too much or perhaps even all of the rate gains being made in the industry. However, our model is generating meaningful margin progress through the combination of our significant exposure to the OneWay truckload market, which is benefiting the most from capacity reduction, and our distinctive approach to yield management and cost control, as Adam touched on earlier. The table on the left is the headline. Year-over-year gains in revenue per mile, excluding fuel surcharge, have accelerated from 2.5% in Q1 to 12.2% in Q3. Over the same period, cost per mile stayed in a tight range between 3.3% and 3.8%.
Andrew Hess: The result is that 68% of our third quarter rate improvement flowed through to margin, up from 50% in the second quarter. Note that while we typically cite rate per loaded mile metrics, these rate gains are stated in terms of rate per total mile in order to make it comparable to cost per total mile figures. It also helps to look at this over the full cycle. From 2019 through 2025, our cost per mile grew at an average annual rate of 4.5%. That period includes the inflation surge of 2021 and 2022. Thereafter, we structurally reduced costs that allowed us to hold cost per mile flat from 2023 through 2025 as pricing and volumes declined. A 3.5% cost per mile increase this year is below that recent average, and much of it reflects deliberate reinvestment now that the rate opportunity supports it.
Andrew Hess: That clearance when you separate our two largest businesses. Dedicated rates has largely kept pace with modest cost growth, and margins have stayed in a stable range through the cycle. In our OneWay business, rates fell sharply from 2022 through 2025, and we responded by taking out cost. With OneWay rates rising significantly year-over-year, our tender rejections running strong, it's time to begin investing again in that business, and we're investing primarily in drivers. To be clear, we're not immune to inflation. Driver pay and fuel are currently the most acute cost pressures, while insurance and claims may continue to be volatile. Equipment costs continue to rise. However, we're offsetting these specific pressures with cost discipline and efficiency. On driver pay, we're not making broad across-the-board increases. Pay actions are targeted by market, fleet, and tenure, where they improve retention and seat trucks.
Andrew Hess: On fuel, operationally, we're focused on fuel procurement, efficiency, and recovery. We held fixed costs flat year-over-year despite higher equipment costs. With fewer non-driver roles, real estate rationalization, AI automation, and lower vendor costs. The fleet is also more productive. In the third quarter, miles per seated tractor rose 2.7%, and empty miles fell 170 basis points year-over-year. To sum up, cost per mile is currently growing at a fairly normal inflationary pace, below our recent average, while rate is accelerating. That combination is why the majority of our rate improvement is now contributing to margin. Now on to slide 7 for a discussion of our LTL business. The LTL demand environment was steady with pockets of improvement.
Andrew Hess: Third quarter trends generally followed normal seasonal patterns, our average daily shipments showed a modest sequential outperformance. Our network and freight mix continue to evolve from the regional routes to a national profile, as seen in further year-over-year growth in length of haul and weight per shipment. After slightly decreasing during July and August, weight per shipment rebounded in September to our highest mark in 3 years. Continuing this evolution and building greater density and longer-haul shipments should facilitate better network efficiencies, less touch points, better transit, and enhanced service over time. The pricing environment remains steady to slightly improving, with renewals at mid-single-digit pace. Our focus continues on optimizing freight mix and network efficiency in efforts to improve margin, protect service, and position us for further growth.
Andrew Hess: We expect that over time, growing into our network investments, a maturing freight mix, improvement in network density, and continuously refining our operational and cost execution will allow us to drive sustained, methodical improvement in operating margin. Now, I will turn it over to Brad for a discussion of our Logistics segment on slide 8.
Brad Stewart: Thanks, Andrew. In our Logistics segment, we leveraged our efficient model and our disciplined pricing approach to profitability and carrier selection to drive a nearly 20% year-over-year improvement in adjusted operating income, despite revenue falling 1%. The third quarter adjusted operating income and adjusted operating ratio were the best third quarter marks in 3 years. This margin recovery was partly driven by our progress in resetting contractual pricing to align with the tighter market conditions, as well as the seasonal easing in spot market capacity costs during the quarter, yielding the first year-over-year improvement in gross margin percentage in 4 quarters. We anticipate the third-party capacity will seasonally tighten again during the Q4, and we are beginning to see the early stages of this in October. We continue to hear customers express a preference for asset-based providers, and customers are increasingly asking about carrier qualification practices.
Brad Stewart: At this point, we really feel like they are still trying to understand what the evolving broker liability landscape will ultimately mean for their businesses. With capacity remaining tight, we believe many shippers are not yet hurrying to materially reduce the number of brokerages that they work with. After periodically developing new refinements to our carrier vetting protocols over the past several quarters, we saw our third-party carrier count largely stabilized during the third quarter. Now, we will continue to evaluate the feasibility and effectiveness of potential additional refinements moving forward as access to new or improved data elements develops. Our company's longstanding commitment to safety and operational execution extends to our Logistics business, and we believe the new risk landscape enhances the value proposition of these principles in the eyes of our customers.
Brad Stewart: Over time, we expect our Logistics business to benefit from share gains as shippers become more selective and as brokers with less robust safety or compliance infrastructure are pressured by increased costs from compliance, insurance, and third-party capacity. Now, on to slide 9 for a discussion of our Intermodal business. The Intermodal segment posted strong year-over-year growth in revenue and load count for a second consecutive quarter, reaching the highest quarterly load count in over 5 years. Our concerted efforts to improve service and network balance in recent years have earned the trust of shippers, allowing us to capture business with new and existing customers, especially as they are more open to Intermodal service in the face of tight trucking capacity, as well as record high diesel price.
Brad Stewart: We are cross-selling our Intermodal offering to our broad network of truckload customers to help add more value where we cannot allocate more trucks. Our pipeline is strong and supported by many bid and turn-back bid activities, in addition to the modal conversion opportunities. We are encouraged by the potential to drive further improvement in this business. The supportive setup has helped pricing progress notably in recent months, as shown in the 15.2% year-over-year increase in revenue per load or a 5.5% increase when excluding fuel surcharge revenues. We were able to drive recovery and pricing while meaningfully growing volumes and further addressing network balance in pursuit of sustainable profit improvement.
Brad Stewart: Now, drayage capacity has become tighter in a number of markets around the country, though the fact that we use outside dray for a low single-digit percentage of our moves has helped to insulate us somewhat from the cost impact. We anticipate further rate progress in the upcoming bid season, given the ongoing pressure on trucking capacity and inflation in the cost base, and we will maintain our focus on service and disciplined pricing and cost management to drive profitable growth. Slide 10 illustrates our All Other segments. This category includes warehousing activities and support services provided to our customers, independent contractors, and third-party carriers, such as equipment sales and rentals, equipment leasing, insurance, and maintenance. Additionally, beginning 1 January 2026, All Other segments also includes the cost of our accounts receivable securitization program that was reported below the line in interest expense in prior years.
Brad Stewart: Now, for the quarter, revenue increased 41.8% year over year, reaching the highest mark in 3 years, driven primarily by growth in the warehousing and independent contractor services activities. The past 2 quarters have been particularly strong for our warehousing business, as new business growth and some project activity have driven strong top-line and bottom-line results. This growth in revenue and our corresponding growth in our facility footprint creates a challenging sequential comparison setup, as the activity that drives revenue recognition typically slows down meaningfully in Q4 without a corresponding decline in the now higher fixed cost base. Our independent contractor services have grown as the number of contractors on our platform has grown meaningfully this year.
Brad Stewart: We expect further opportunities to attract more owners to our platform, given the reach and the density of our freight network and the cost structure advantages we can facilitate in support of their businesses. On slide 11, we have outlined our guidance and the key assumptions, which are also stated in the earnings release. Actual results may differ from our expectations. Based on our assumptions, we project our adjusted EPS for Q4 2026 will be in the range of $0.78 to $0.84. Our projections reflect recent trends in volumes, spot rates, bid activity, and driver hiring, as well as expectations for seasonal project activity and truckload. The key assumptions underpinning this guidance are listed on this slide. I will not read through all of these components here, but I do want to highlight the seasonal cadence of some of our business units for Q4.
Brad Stewart: In summary, we project truckload operating income to meaningfully improve sequentially into Q4 as driven by further rate realization and seasonal project activity. At the same time, we expect the typical seasonal step-down in LTL and all other segments earnings in Q4. In fact, we anticipate the all other segments will produce an operating loss for Q4, as noted on this slide. In our warehousing business, the majority of our revenue is recognized based on certain activity drivers under our customer contracts. Given the heavy retail mix, our customers prefer to minimize disruption in the holiday shopping period, which means the drivers of revenue decline in Q4. In addition to the normal seasonal slowdown in revenue recognition, our recent growth in our facility footprint to support growing revenues has increased the fixed cost base.
Brad Stewart: Therefore, costs remain in Q4 without the corresponding revenue. This dynamic is factored into our full-year pricing agreements. Finally, all other segments' Q4 projection also includes an estimated $6.5 million of costs for our AR securitization facility that were recorded in interest expense below the line in prior years. So the sequential decline in these two segments is expected to offset the projected ramp-up in our truckload profits. This concludes our prepared remarks, and before I turn it over for questions, I want to remind everyone to please keep it to one question per participant. Thank you. Jillian will now open the line for questions.
Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. Your first question comes from the line of Chris Wetherbee with Wells Fargo. Chris, your line is open. Please go ahead.
Chris Wetherbee: Yeah. Hey, thanks. Good afternoon, guys. I guess maybe we can just hit on sort of maybe the contractual rate environment. Kind of curious of how that sort of pending, we are sort of post the traditional bid season, but I think there is still rate activity going on. As we think about 2027, I think there is an expectation that we need to see the spot rate environment kind of improve seasonally through the peak season to put us in a position where we can kind of achieve maybe that high single digits or maybe even low double digits again in 2027. Let us sort of hear your perspective on what you are seeing in the environment now from a contract perspective and maybe what the outlook is, the early outlook for 2027 is. Thank you.
Brad Stewart: Yeah. No, I appreciate that, Chris. We have largely gone through the large national bids through the bid season. There is not a lot of work being done on, like, a national bid standpoint. There is still a lot of turn back bids or mini bids, securing capacity for the short term or even medium term. That can vary widely in terms of where we are at in specific markets and what the need will be from a volume perspective. But certainly, there is still good strength around how we are pricing that business and what that would look like compared to a year ago. I do think there is still a lot of strength even for the setup for 2027 in terms of where contract rates will at least start the bid process. We are early on in having discussions. The bid season really starts to kick off in November.
Brad Stewart: You have some larger customers that kick off their bid then. Then you had some where we have had maybe some pre-bid negotiations. I certainly feel like we are in a position to start with at least double-digit increases as we get going in this bid season, and we will see how the market progresses from here. It is going to be quite dependent on what happens with capacity and if it continues to exit the market, given some of the regulatory push. It will vary based on what happens with demand, because I think as everyone is well aware of, the challenges in the market have not been demand-driven. It has been more capacity-driven. Demand has been relatively stable. If we get any type of lift there, I think we could see the contract rate market even improve from low double digits. It will also depend on when you are addressing the rates.
Brad Stewart: If you have a customer who had their rates renewed further into the bid season this year, then maybe their rates are in a better position when you look at renewing them versus a customer who had their rates renewed earlier in the bid season this year. So it really depends on when you are going into the bid, when you are going to be addressing the rates of the customer. Also depend if you did a mid-cycle adjustment, which we have had to do in many cases where rates just fell short based on where the market had turned to. Again, easy way to answer that is I think we will start the bid season with the idea of probably low to mid double digits and see how it develops from there, Chris.
Chris Wetherbee: Perfect. Thanks. Appreciate it.
Operator: Your next question comes from the line of Ravi Shanker with Morgan Stanley. Ravi, your line is open. Please go ahead.
Ravi Shanker: Thank you. Good afternoon, everyone. Adam, you did a great job in prepared remarks, so hope you feel better soon. If I can shoot a question your way, just to follow up on your comments on demand there. Potentially record peak season notwithstanding, are you concerned about demand at all and what you are seeing out there? You said it was stable. Should we expect to see better than that? Do you think supply alone can drive an up cycle if demand doesn't show up?
Adam Miller: Well, I think demand alone has already driven. What is that?
Brad Stewart: Supply alone.
Adam Miller: Yeah, sorry. Thanks, Brad. I think supply alone has already driven an up cycle here, Robbie. When we look at the peak season opportunities that we are seeing today, many of them will have to see what that demand comes in. You kind of set the pricing and what the surge capacity would cost. Then you have to see how the demand materializes. So far, early on in the peak season, we are seeing things develop as expected, largely. You have some will be a little bit more, some will be a little bit less. But in discussions with our customers, they are deviating from their forecasts. So I feel like even just demand being stable, we are still in a position with where capacity is, what our turndowns have been, what the mini bid activity has been, where there is still opportunity for rate to improve.
Adam Miller: We could see our margins have improved meaningfully, but still nowhere near where they would be in the midst of an up cycle. So I think there is still a lot of room for that to run. If you look at the broader industry, there are some of the private guys, I know we do not see those results, but just with channel checks, they have not seen the margin improvement yet. We have had some peers report. There is still some room to improve margin, certainly, I believe from their perspective, in terms of how they have performed in up cycles. So I think there is still a lot of room to run there, and we are kind of in the early innings on this.
Ravi Shanker: Thank you.
Operator: Your next question comes from the line of Tom Wadewitz with UBS. Tom, your line is open. Please go ahead.
Tom Wadewitz: Yeah, great. Good afternoon. Adam, I wanted to get your thoughts on just like, you have kind of a unique backdrop with Montgomery and rising insurance and all these things that could put a lot of pressure on the small carrier. I guess the backdrop is it has been really tough for a big trucker like you to grow organically with the fleet count over time, right? You used to do that in a really big way, but that has been tough for a while. Do you think there is, can you actually grow, let us say, over the road fleet count and driver count in 2027, or is there a kind of a path to that? Or maybe it is more owner-operators help you to grow there.
Tom Wadewitz: But yeah, just kind of wanted to get your thoughts on how you would approach that and what is maybe realistic or what kind of visibility do you have to that happening?
Adam Miller: Yeah, certainly. That is a great question, Tom, and that has been a challenge for all large carriers over the last couple cycles, because I think largely the growth that has come in during an up cycle has been from the very small carriers with low barriers to entry and many of those not being as compliant as the large carriers have had to be. That has been a challenge to grow in that type of market. I feel like we are finally seeing some level of barriers to entry, and I feel like the carriers that really understand how to develop drivers and develop safe, quality drivers have a shot at growing next year. Now, it will not be easy, and so we are being very mindful about where we are making our investments to position to grow.
Adam Miller: We've been very targeted and tactical about where we do driver pay and ensuring that we have the rate and the margin to support it. I think we've done a good job managing that. We've done some things on the owner/operator front because I do feel like the small independents that want to come in to access this market, they may come in under the cover of the large carrier from an insurance perspective. I think we've done some things to be very dynamic to the market and provide market-based pricing for owners, which is different than what we've done historically. We've seen some good demand there and some growth in our owner/operator count the last 9 months. We're encouraged with that and are going to continue to invest in that area.
Adam Miller: I told our team that over the next 12 months, we'd be somewhat disappointed if all of our growth has come from just rate. We want the growth to come from running more miles with our existing trucks, growing into open trucks that we have, and then ultimately growing our truck count. That's probably a number one priority as we get rate, as we improve margins, is to try to grow organically into this market.
Tom Wadewitz: What's your confidence you can actually do that, though? Yeah, sorry.
Adam Miller: Yeah. I would say, look. Yeah, sorry. We've made some early investments there with really growing our recruiters, and it takes time for that to be trained and started to really contribute the way that we would expect. We've done some things on the driver pay front that we're just kind of testing between different brands on what's the most effective at bringing on new recruits and retaining drivers. We're learning from that. The strategy that we have of being able to do things different at each brand allows us to test things and then compare them against others and then eventually harmonize to what we think works best. I think the early results are encouraging, but they're still a small sample size right now.
Adam Miller: I am encouraged, but not. There is still to be seen if it is something that could sustain through the holidays, and then as we lap into 2027, if we still see some momentum there, then I would feel better about saying, "Yeah, I have confidence in doing this." It just has not been anything really the large carriers have done over the last probably decade. We are cautious before calling, hey, a success there. But certainly an area that we are greatly focused on and plan to invest in the future because we think that is the biggest opportunity for us to show earnings growth, is really get the margin through rate, but also grow our fleet.
Andrew Hess: One insight I would add, Tom, is that our view is that broad driver pay wages do not necessarily buy growth. The competitive place for experienced drivers is very high. So when we look at where we deploy our capital from a driver pay perspective or from recruiting, we look at, we are able to test out different areas and their different brands. We think our thesis is that we target pay where it improves retention in our student profile. We think that is, from our evidence, from our history, where we have seen growth in the past, it is when we have direct resources there. So we are going to be opening up new academies, new partner schools. We have deployed resources to assist our recruiting teams using AI to help with recruiting, onboarding, retention, training. As Adam mentioned, we are staffing up our recruiting team. Look, Q4 is tough.
Andrew Hess: It is hard to grow your seated truck count in Q4. That is what our evidence shows historically. But I think the setup is pretty positive that with the fertile ground we have with our academy network and with the very targeted approach we have to our investment, that we stand a good shot of seeing progress in our seated truck count in 2027.
Tom Wadewitz: Great. Thank you.
Adam Miller: Great. Thanks, Tom.
Operator: Your next question comes from the line of Scott Group with Wolfe Research. Scott, your line is open. Please go ahead.
Scott Group: Hey, thanks. Afternoon. I thought that was a really helpful slide on the price cost and wanted to get some perspective there. So that, I guess, 8.5 point price cost spread in Q3, how do you see that evolving into next year? Sounds like you think the price will stay up double digits into next year. Do you think the cost sort of stays in that 3% to 4% range? I guess ultimately, that 70% margin flow through you saw in Q3, do you think that is sustainable? I guess, Adam, what do you think that means for where margins ultimately can go this cycle?
Adam Miller: Well, we are going to see how that develops, Scott. I do think I have confidence on the cost side that we can really manage that effectively. Again, we are going to invest when we have margin to do so. We laid out kind of what historic normal inflation, how that trended over the last cycle, and we think we can manage costs within that range. I think there is still a lot of question about what equipment pricing is going to be with the new EPA regulation. We are working through that. If we make more progress on the dedicated rate, which I do think we will be able to do that next year, then we will make some investments in driver pay on the dedicated side. We typically do not do that until we have rate to support it.
Adam Miller: The cost inflation will be somewhat dependent on what we see on the rate front. But we know that we need additional margin expansion, and I think we are pretty vocal about that earlier in this year. It might have been the Q1 call where, hey, when we get rate, it is going to go to margin first because where margins have been are not sustainable. And I think we are finally getting to the point where we are getting to more familiar territory, but still don't feel like we are where we need to be, and that needs to continue. I do expect to see a spread there. I don't know if it is going to be the exact same spread as we saw in the Q3 here. That was pretty healthy, but hey, coming from an easier comp perspective from a rate standpoint.
Adam Miller: But certainly over the next year, if we are able to get rates in the double-digit range, at least starting the mid-teens, I certainly see an opportunity for that to continue to flow through to the bottom line.
Andrew Hess: Scott, the way to think about it is we are not going to see, in the areas of driver pay and recruiting, significant pressure Q3 to Q4. The two things I would point out to you that are somewhat variable that can change, one is insurance liability claims. So development on prior claims, new large cost settlements and new credits can drive a lot of variability. And then fuel is going to change one quarter to the next based on timing. We think we view that as fairly transitory. So those are going to, in the short term, affect the results. But certainly as we go into 2027, we will continue to decide what is the right level of investment on drivers for us to make based on where the market is and our view on it.
Andrew Hess: But fundamentally from a perspective, I think the takeaway is that we have got a pretty dialed-in way we are managing cost, and we are pretty confident in our ability to manage that from a base inflationary perspective.
Scott Group: Thank you, guys.
Adam Miller: All right. Thanks, Scott.
Operator: Your next question comes from the line of Dan Moore with Baird. Dan, your line is open. Please go ahead.
Dan Moore: Good evening, guys. Thanks for the question. Real quick, a lot's already been covered, but one thing I'm curious about, it's kind of a soft touch item, but in a post-Montgomery world, it strikes me that ordinary care, while that's historically been the standard for hiring a carrier, things like collision avoidance systems, drug and alcohol testing, established safety cultures and practices, they're probably taking on a much more important role in the counterparty equation of your customers. If you could maybe just opine for a minute around how that's influencing the market. It strikes me the top 10 truckload carriers are probably 5% of the total market. For really large retailers, there are a very limited number of companies that they can go to presumably get the highest standard driver and capacity in the market.
Dan Moore: If you could just address that for a minute, that would be great, and appreciate all the context.
Adam Miller: Yeah. So if I understand your question correctly, at least the conversation we are having with our customers, how are they viewing the safety of the carriers that are ultimately hauling their freight?
Dan Moore: Yeah. I guess maybe just to add one piece to it, too, and I am sorry, Adam, but it strikes me the dedicated market has changed a lot in the last 6 to 9 months. We are certainly seeing that with some of your peers. So it seems like there is a big change that is developing, and it certainly has not been volume. The housing market is a disaster. Automotive is a disaster. Cost of capital is meaningfully higher, so are fuel prices. I will just stop there. Sorry.
Adam Miller: Okay. I will take a stab at answering your questions here. So, with our discussions with our customers, I think they are trying to understand, I think, what they should be asking or what they should be looking for in terms of trying to understand if a carrier should be viewed as a safe carrier, right? The challenge is there is limited data out there. You will have the ratings through FMCSA. They are very limited because there are so many carriers out there, and there is not enough of the staff to really do proper ratings. You have CSA data that you can look at. It does not always correlate perfectly with safety, but it is something that is out there that you could look at.
Adam Miller: There is third-party services that gather information that we would leverage to try to pull together our own algorithm of what we feel like is due care in the carriers that we would hire. We have been sharing our view on that with our customers because we would, I think, have a different view of it because we understand what it takes to have a safe driver in our own fleet. The challenge is you cannot have that same type of control with a third party.
Adam Miller: You have to rely on the information you have readily available and then do whatever diligence you can on the actual driver hauling the load, and that is what we have done from our logistics standpoint, which is why we have really limited the carriers that we have access to and why we took the approach of let us maintain profitability with good, safe carriers as opposed to chase load count that may expose us to risk or lack of profitability. I think our customers are asking what should they be asking the brokers that they work with to ensure that they have safe carriers and what their criteria is. I think it is a process of learning, and it has been evolving really since Montgomery.
Adam Miller: I think it will take some time before you see some of the change really be invoked, and that could be from our customers asking brokers to have a certain standard. It could be from insurance companies requiring a certain standard to be covered with the insurance policy. I think there is more to become there, but we are constantly watching it and evolving just as we gather more data and as we just learn from what others are doing, and I think our customers are doing the same thing. As it relates to dedicated, anytime you see capacity over the road, OneWay capacity become constrained, and then the pricing rises rapidly as it has, you will see customers start to be a bit more interested in dedicated.
Adam Miller: Dedicated the last couple of years has not been in vogue because it is typically a more expensive proposition because you are paying round trip for the capacity, and you are required to keep it highly utilized. When over-the-road capacity is cheap and widely available, you have seen customers move volume away from dedicated to over the road, and now you see them shifting potentially some of that back to dedicated if they assume the rate market is going to continue to rise and capacity will continue to be constrained. We are starting to see that. We talked a little bit about the growth we have seen in dedicated. We are starting to see that from some customers who really even have not done dedicated in the past just to look to say, "Hey, can you look at my market?
Adam Miller: Can you look at my network to see would dedicated be a fit anywhere? We are starting to explore that, but I still think it is early on in that process. That is typically how these cycles play out. When over the road gets really tight, dedicated gets a little bit more popular with our customers.
Dan Moore: Thank you.
Adam Miller: Hope I answered your question, Dan Moore.
Dan Moore: You did. Thank you.
Operator: Your next question comes from the line of Bascome Majors with Stephens Inc. Bascom, your line is open. Please go ahead.
Bascome Majors: Thanks for taking my questions. Can we go back to the all other and the warehousing and independent contractor services? The trajectory from Q3 to Q4 and just how to think about that business and the cadence off of the Q4 guidance you gave as we get into next year with some of the investments you are making. Thank you.
Adam Miller: Yeah. Figured that would be a question given the volatility we are expecting for Q3 to Q4. Think about this, particularly on the warehouse business. So it is a business where we are investing in leases to manage warehouses, and generally, the customers that we work with, we bill based on activity. In the Q4, because the nature of our customers, there is not as much activity that flows through to not disrupt anything going into their stores during the holiday season. So your cost is fixed throughout the year, so you recognize that evenly through the year, but your revenue can be volatile based on how much activity runs through the warehouses. It is priced in for a full year to work really well for us.
Adam Miller: But you see somewhat of an outsized amount of revenue in the first three quarters, particularly Q2 and Q3, and then you see the dip in Q4. As we have grown this business, which we have this year, that means your cost basis grows each quarter, yet you still see the dip in revenue in the Q4. Now, there are times in years where we have gotten projects thrown at us during the Q4 that would be something that we would not have anticipated, been able to project, and that kind of softens the volatility from Q3 to Q4. As of today, where we sit, we do not see a line of sight to that.
Adam Miller: Doesn't mean it couldn't happen, we're kind of giving you our best forecast of what we expect to occur, which would be a drop in your normal activity, but with a higher cost basis that's impacting Q4.
Andrew Hess: Asking for 2027 until we give guidance, probably the best assumption is it's in the same quarterly cadence in 2027 as 2026. Not speaking to the amount of revenue and margin, just the cadence should be roughly similar next year.
Brad Stewart: Yeah, one element I would add, Beth, this is Brad, in terms of making sense of the volume or the activity in our warehousing slowing down in what would be a high activity quarter in the holiday shopping season, is that more of what our warehousing business traffics in is the store infrastructure relative to the store's products on the shelves. That's why you're seeing less of that activity in the fourth quarter.
Bascome Majors: Thanks, all three of you, for giving some color on that. Just the big picture, I think what I'm hearing is that the fixed cost structure of the business is higher as you've grown it, just the degree of quarter-to-quarter seasonality is more significant based on the way you recognize revenue there. But the underlying annual earnings potential isn't changing here. Is that a fair assessment without getting the guidance?
Adam Miller: Yeah. I would say the annual earnings have improved as we've grown. So it's still a profitable business for us, one that does really well. But yeah, it has this volatility you just have to live with.
Bascome Majors: Thank you.
Operator: Your next question comes from the line of Ari Rosa with Citigroup. Ari, your line is open. Please go ahead.
Ari Rosa: Great. Thank you for taking the question. Adam, I was hoping we could stay on the subject of Montgomery, and just broaden it out a little bit. I'm curious, kind of two parts. One, are you seeing shifts in customer behavior and more inbound requests, especially on kind of the asset-based side? Then second, just given how many trucks you're running, it seems to me that accidents are inevitable in this industry. How are you thinking about insulating yourself from that risk? Even the best operators, it seems to me, are vulnerable when nuclear verdicts are being handed out in the kind of magnitude that they are. What steps are you guys taking, or is there anything you're doing differently now versus, say, six months ago? Thanks.
Adam Miller: Well, here is what I would say, Ari, is unfortunately, the truckload guys have been dealing with nuclear verdicts for quite some time. I think the brokers are now welcome to the party with us. We have been thinking about this, trying to mitigate our risks here for years. We buy a certain level of insurance. We keep some exposure to ourselves. We have got highly evolved training programs. We have a lot of technology in the truck. We do a lot of coaching with our drivers, and we just try to put ourselves in the best position to defend our driver, even if they are in an accident. It can never be perfect. We know that. We try to protect ourselves with a certain amount of insurance, but also really it is all about how you can prevent the accident.
Adam Miller: We put a lot of focus on that. Really the changes we have made is ensuring that we have the right criteria for our third-party carriers to ensure that that does not expose us any further than what we have on the asset side. This is not a new topic for us whatsoever. I think a beacon of light has been shone on it because of now the brokers being liable for it and then some of the big verdicts that have been out there. This has been something top of mind, I think every large carrier would tell you the same thing, for probably over a decade now. In terms of shifts from customers, we are seeing a lot of that. I think it is hard to know if that is driven by changes from wanting to move freight from non-asset to asset.
Adam Miller: We have heard that from some shippers. Or it could just be capacity is just extremely tight and they are trying to find capacity with a provider who can solve acute problems. I think we noted in our prepared remarks, given our Scale, we usually get one of the first calls when there is a project or an acute need because we can typically round up capacity because of how much exposure we have to the OneWay market when that may take 10 or 15 calls with smaller carriers. We are seeing a lot of that inbound. You just do not know if it is because they are intentionally shifting away from brokers or it is because just capacity as a whole is tight.
Ari Rosa: Do you think it is a net positive to your business?
Adam Miller: Yeah. No, absolutely. I think, any time that our industry can ensure that we have good, safe capacity on the road, that is a positive to everyone in our industry. I think, this is going to make it difficult for non-compliant carriers who are just entering the market, have not gone through proper training, right, and do not care about safety like the large carriers would. It is going to make it more difficult for them to access the freight market, and I think that is good for everyone involved. It does not mean there will not be some pain along the way, maybe with some of the brokers who really leaned on that type of capacity. But at the end of the day, I think we are in a better space as an industry because we have safer drivers on the road.
Ari Rosa: Great. Thank you.
Operator: Your next question comes from the line of Ken Hoexter with Bank of America. Ken, your line is open. Please go ahead.
Ken Hoexter: Hey. Great. Good evening, and thanks for squeezing me in here at the end. Great thoughts on the rate versus cost and the all other segments. Thanks for that insight. Really interesting and great to see the rate flow through at Intermodal finally. Just jumping over to LTL, maybe thoughts on where you stand, right? Density, progress on if you are doing the Northeast expansion. You noted September weight per shipment rebounded to the highest mark in three years. Maybe what is driving that, and then your thoughts on the adjusted operating ratio, Q4 into 2027. How do we think about this business now as it keeps growing?
Adam Miller: Yeah. I will give you a little color, then Andrew, I know he loves to spout out LTL stats. In terms of our business and how that is progressing, we are still going through this evolution from a regional player to a national provider, and it is quite honestly taking a little longer than we probably anticipated. But hey, we have never done this before. But we are seeing a shift from really the lion's share of loads that we would or shipments that we would have hauled two years ago had a one- to two-day transit, and now we are seeing that shift to where we are seeing an elevated percentage of shipments that are moving three to four, and some even beyond four days. That tells you it is a longer length haul, a heavier shipment, and it represents more of the kind of national network we want.
Adam Miller: I think part of the challenge is when you do not have the density quite yet, your line haul is still less efficient on moving that across your network. You have too many touch points along the way. As you build net density, you can kind of zone skip and go direct into markets without having to stop at certain locations. It introduced a little more cost to the line haul service while you are making this transition, and we have got great tools that are identifying where that is, and we are building out plans on how we mitigate that and how we go try to address the freight needs that we have to build the density. It has been this evolution that we are just still working through. But we are really encouraged with the progress.
Adam Miller: Last year, from the transition from Q3 to Q4, we typically see a little bit of a lull in demand. Last year, we saw kind of a healthy step back, more than we anticipated, and we are not seeing that to the same extreme this year. We are seeing volumes are much more steady, and I feel like on a year-over-year basis, we will see some good volume comparables. Look, we are encouraged about where this business is headed, and really, I think 2027 is set up to where we will probably start to organically grow into the Northeast. We have got several locations already picked out that I think would work from a location standpoint. If the volume continues to hold in and we continue to make progress on managing the cost of that business, we will start expanding to the Northeast. We will be very deliberate.
Adam Miller: We will be really focused on managing our costs and the impact to the OR. Ultimately, we want to start growing into that market. Andrew, I do not know if you had anything more to add.
Andrew Hess: I guess I would add, there is some noise in our metrics as we are going through this transition. I would just make maybe three points how we see our results. We view what you should see in these results as steady pricing. I think that is how we view it. Second, underneath these results, there is a lot of work that Adam referred to build the efficiency in the network. It is a situation where there is a lot more going on and there is a little lag before we start to see the results, but we feel really good about the work that is being done. Then there is volume and momentum building. You saw a little bit of that from Q2 to Q3. We saw our OR progress got better every month of the quarter. We feel like there is good momentum. Now we are going to see our normal Q4 seasonality.
Andrew Hess: Our more retail-exposed profile of our business just typically sees Q4 soften up quite a bit. As Adam mentioned, we are seeing it better than last year. That is a function of the changing mix of customers we are developing, more industrial and some growth, some new wins that are coming into the business. A lot of foundational things happening that I think set us up to see margin improvement as we move into next year.
Adam Miller: Ken, hey, I want to say thank you for recognizing the intermodal margin. I think our team there has been hard at work, and I think they were very proud to be in the black and seeing some good momentum on volume and price. Hey, they are going to continue to push forward to sustain profitability. Glad you mentioned that here at the tail end of the call here.
Ken Hoexter: Adam, we picked on it on the other side for long enough, so great to see. Thank you. Thanks for the thoughts.
Adam Miller: All right. Well, I think that's-
Operator: We have reached the end.
Adam Miller: Oh, sorry, I was just saying, I think we wrapped up the call here. Appreciate everyone who's joined us. Again, if you wanted a follow-up call, if we didn't answer your questions, you could call us at 602-606-6349, and I'll hand it back to you, Jillian.
Operator: Thank you, Adam. This concludes today's call. Thank you all for attending. You may now disconnect.
