Adam Miller: Yes. And so I’ll hit Intermodal first and then I think, Brad may have some things to touch on as well About Intermodal, so we were actually fairly profitable in Intermodal during the pandemic and it was driven on a couple of larger projects we had that we believed were going to be longer term. And I think that prevented us from kind of building the more diverse portfolio of customers that would have allowed that profitability to be more sustainable through a challenging market. And so we lost some of that business that went away sooner than we expected about this time last year and that led to the decline in margins. And by the time that business exited, we were kind of already through the bid season. So it’s been more difficult to kind of build that volume back up.
And so we’ve got a new leadership team that started in May of last year with great amount of experience from a rail perspective and they’ve been working very closely with our sales team and our pricing team and we’ve had some very good success here recently in the bids. And so there’s a nice pipeline of freight that we believe will come on to get this business back on better footing and profitable. And so we’ve got some containers in stack that we’ve taken off just to manage costs in the meantime. But we believe we’ll be able to bring those back on once we start to see the volume pick up in this business. We’re anticipating we get closer to breakeven in the third quarter and then some small profitability into fourth and you really continue to build it from there.
And so that’s how we approach Intermodal. On the consolidated company, there’s more that we can do with cost. We probably came into this market with a little more overhead and a bit more equipment than we needed. We invested heavily in trailers because power only was so such high demand and it was very profitable. And we found as the market changed that, that wasn’t going to be as sticky as we anticipated and customers converted freight to live load, live load to pick up the savings. And it was less efficient for them but they like the savings that came from that. And so we found ourselves with more equipment than we really need in this market. So we’re in the process now of leaning that out from a trailer perspective. That’s where we have the most opportunity but there’s even some tractors that we put to work during the pandemic from a lease perspective and was very profitable.
And when they have come back, we just haven’t had the freight to support that equipment. And so we’ll be leading that as well. And I think there’s some nice cost savings that come from that. And really, we’ve got our teams just focused on just the fundamentals, the core. And we’re — the goal is we can’t have — the plan can’t be that the market is going to solve our problems. We have to control what we can control and cost is going to be the biggest focus for us. And that’s what’s going to drive, I believe, the improvement here into the later part of this year. And we get the markets help, then great, we’ll take it but we’re not going to relinquish anything on the cost side of the business.
Brad Stewart: Yes. And then I was just going to add, Ken, that initial comment that your question was referring back to was actually a comment to our LTL business, not Intermodal, where we stated that we expected while our operating ratio was [indiscernible] in the first quarter, that it will get back in line on a year-over-year basis in the second quarter.
Adam Miller: Right. Because I think we said we ran at 90 on the LTL and there were some factors with weather and then a little bit of additional cost as we rolled out some facilities but we expect to get back to the mid-80s, similar to what we would have run last year.
Operator: Your next question comes from the line of Jordan Alliger from Goldman Sachs.
Jordan Alliger: Just sort of talking about LTL for a second. Obviously, pretty strong expansion plans for the balance of this year. Can you talk to the ability to get the staffing headcount needed both in terms of drivers and the terminal folks? And is there much wage inflation to sort of get these people? And then maybe just an update on how you expect the rollout of the next ’25 to go?
Adam Miller: Yes. I mean, thus far, we haven’t had a challenge of staffing those buildings. I mean there was obviously a terminal there before and labor that supported those locations, now maybe different labor that we’d be looking for. But thus far, that hasn’t been the biggest challenge for us. As we kind of manage the rollout of these locations where we want to be very deliberate and not put too much pressure on the cost side of our business. But typically, you’re going to have some labor and some start-up costs to get a building operating. But because we have great relationships with some larger shippers and some of these locations fill out territories that they would have needs in, we’re already connected in and can plug those ZIP codes in those territories in.
And very quickly, we start to see freight come our way. So our goal is how quickly can we ramp up the shipping count to cover the cost to get those buildings operating and then certainly to be profitable. And we believe we’ve got several of them that are going online or have gone on online in April and we’ll have — I think it’s what another ’24 of that for the full year that we’ll roll out. And some of that may be done near the end of the third quarter or early fourth quarter. And so our team has been executing on this. And so far, it’s gone as planned. And if we see anything shift in the market or we see challenges from a cost perspective, we can slow that down if we want to. But right now, we’re excited about being able to expand this network and move into territories that we don’t serve today and find opportunities to grow with existing customers and new customers.
Andrew Hess: I’ll just add that we can really rightsize the costs. We can grow into the cost. There’s very little cost to kind of stand up one of these facilities at the beginning and so we can build into them as we get density. But I think maybe just one other perspective that might be helpful to you as we’ve watched this network effect on our LTL business. So as you recall, we acquired MME and AAA Cooper in 2021. We integrated them onto the same system about a year later, so early 2023. As we look back now and we look at Q1 volumes between those brands from Q1 of 2023 to Q1 of 2024, it’s up 90%. So what it takes, you get some volume initially. But once you can get into the bid processing and capture that national freight, the slowdown across our network is great.
And we’ve been — the pace of our [indiscernible] facilities is growing but we’ve been adding them throughout this period. And so that’s creating kind of this own momentum in the network. And that’s just going to escalate even further as we add these new facilities. So we’ve got great conviction based on our experience thus far about how adding density and opening new ZIP codes creates a momentum that builds on itself.
Operator: Your next question comes from the line of Brian Ossenbeck from JPMorgan.
Brian Ossenbeck: Just one for you, Adam, maybe you can just talk about. I know it’s probably a question you get to the bottom of the cycle — was hopefully at the bottom of cycle. But as we look up and figure out how this can play out, do you think anything has really structurally changed, this might not be for permanent but maybe elongating the trough here? And you think about things like there’s more guaranteed payout there, there’s more trailer pools that have more capacity, should present more data. Obviously, you got the COVID earnings carryover. But I just want to get your perspective on that and also just more near term, like why are we seeing in some of this [indiscernible] data that there’s actually truckers coming in on a net basis? I wanted to get your thoughts on that as well.
Adam Miller: Yes. Well, I think any structural changes. I really — I don’t see anything that has maybe structurally changed in our space or maybe impaired the ability to achieve margins that we typically achieve as we go through different cycles. I think from a trailer perspective, many added trailers during COVID but it was really the large players who did that. And so you would hear about it, we would see the new headlines around it but the small guys were purchasing tractors and those were extremely expensive and trailers were expensive as well. So I don’t think we saw the same growth from a trailer perspective with the small players. That was maybe largely — the larger players who have already a large asset footprint. And I think you’re going to see the trailer orders or we already have seen trailer orders really dip as I think there was an oversupply.
So I think that will correct itself over time as we’ve seen the demand from customers has lessened from a trailer pool perspective. What was your other part of the question? [Indiscernible]. We track that as well. And it’s really hard to know what that’s telling you because we look at it directionally but you can have a trucking company of one start or a trucking company of 100 could go out of business and they’re somewhat counted the same because it’s just a DOT number. And I think what we’re finding is you probably have a lot more of capacity exiting not from DOTs failing but from companies just shrinking their fleet. And we saw that with — because of the visibility that we had in our insurance business, that may have been one of the few values we got in that over time was that we had visibility to what’s happening in the — with the smaller fleets.
And yes, we saw them shrinking dramatically, not going out of business completely but just pulling down their truck count because of the inability to keep the trucks productive enough to support the payments. So that’s just — the net [indiscernible] is one data point but it really doesn’t tell the full story. There really isn’t anything out there that we — that really can tell you what’s happening fully across the board. But that’s just a data point that we look at. But there’s a lot of other things that we look at internally that give us a perspective of what’s happening on the demand and the capacity side.
Brian Ossenbeck: And that perspective on the capacity side is it is shrinking just not fast enough [ph]?
Adam Miller: Yes. I mean if you look at just how much was added during COVID because of where the spot rates were and how much — how lucrative it was for small truckers. It was — how low the barriers to entries were. Yes, a lot was added. And so we have a lot to work through. And at the same time, you saw demand fall off because of what customers are doing with from an inventory perspective. So we’ve got both demand and supply that have to come back in line to see this thing flipping. And again, it will eventually, just a matter of when that will be. And we’re hunkered down trying to manage the cost of our business and do what we can that doesn’t — it helps our margins but doesn’t impair our ability to react to the market and really drive the best returns when we see an inflection.
Brad Stewart: And I would just add there, Brian, on the — in the earlier days of the pandemic, a lot of that swelling of capacity, the one and 2 truck operators made up an outsized share of that swelling of capacity as compared to the complexion of the industry prior to the pandemic.
Operator: Your next question comes from the line of Bascome Majors from Susquehanna.
Bascome Majors: Adam, thank you for that strategic high-level overview and it feels like the traditional Knight approach of a cost focus and cyclically aware management and capital deployment and both expanding the portfolio and growing the existing services is very much how you plan to run the business. If we took a more nuanced view into how you plan to lead versus how the business has been led in the last 20 years, is there anything you’d want to highlight that you feel that you might do a little differently that we should pay attention to?
