Schneider National, Inc. (SNDR) Q1 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Schneider National First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Pat Costello, Senior Vice President, Investor Relations. Thank you, you may begin.

Thank you, operator. Good morning everyone. By now you should have received a copy of the earnings release for the company’s first quarter 2017 results. If you do not have one, one is available at our website at schneider.com. Joining me today on the call are Chris Lofgren, our Chief Executive Officer; Mark Rourke, our Chief Operating Officer; Lori Lutey, our Chief Financial Officer. Before we begin, I would like to remind you that some of the comments on today’s call, including our financial guidance are forward-looking statements. These statements are subject to risks and uncertainties, including those described in the company’s filings with the SEC. Our actual results may differ materially from those described during the call. In addition, any and all forward-looking statements are made as of today and the company does not undertake to update any forward-looking statements based upon new circumstances or revised expectations. Also, our non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the table attached to our press release. With that, I’d like to turn you over to our CEO, Chris Lofgren. Chris?

Thank you Pat and thank all of you joining us for our first earnings call as a publically traded company. We appreciate your patience in getting to this call, while we stayed in compliance with a quiet period required after our IPO. Going forward, we will schedule this call in a more traditional timeframe. Given this is our first call, and some investors may not have had the benefit of hearing our road show, this morning I’m going to recap some key messages from that event. In addition, I will provide some overarching comments about our results for Q1, and the industry environment we see currently. Then I will turn it over to Mark, who will take you into a segment level view of our performance. Mark will be followed by Lori, who will provide an overview of the financial numbers and give our full-year guidance. Schneider is truly one of the great American success stories. Al Schneider, with a third grade education, coming out of the great depression, sells the family car and buys a truck. One man, a big dream, followed by lots of hard work, risk-taking, and a number of great people who join along the way, and today we’re a $4 billion company serving customers and employing associates all across North America and China. We go to market serving customers with three principal business segments, all of scale and all with competitive financial performance. This is a tenant of our strategy, a highly diverse, but related set of service offerings to a diverse set of customers, across diverse industry sectors. Our largest segment is our truckload business, which we referred to as our aircraft carrier. We view that business through four quadrants defined by how we contract with our customers and the type of trailing equipment deployed. We are the second largest truckload carrier with the highest diversity of service offerings and competitive margins. Our next segment, intermodal, utilizes privately owned containers, tractors, and at the end of this year chassis to provide a high service model offered in combination with our rail partners. We are the third largest domestic intermodal provider and the second most profitable. Finally, our third and fastest growing segment is logistics. At $0.75 billion it has significant scale and highly competitive margins. This non-asset based business operate separately, but collaboratively with our other businesses to reach a growing list of new customers and provide differentiated solutions to the complex needs of our larger shippers. A key differentiator and a key factor in our historical improvement in margins across each business segment is our Quest technology. This platform enables the organization to execute with one version of the truth, related to our driver’s equipment, customer demand, micro market behaviors, and then predictably directs decision making on a dynamic basis focused on operating contribution per truck, trailing equipment, and order. This is our version of Moneyball. We believe process, enabled by technology, wrapped around our exceptional associates and based on a culture focused on our core values is a long-term competitive advantage. The dynamics of the industry in the first quarter were set up by the rebidding of contract rates with shippers in the third quarter, and in some cases fourth quarter of 2016. As our customers corporate procurement organization saw excess capacity available in the marketplace this putdown downward pressure on contract rates, which we have carried into the first half of 2017. With capacity and surplus it has similar impact on spot rates. Going hand-in-hand with capacity, we also saw weaker used equipment market for disposing off our replaced rolling stock. Finally, and in some cases historically at odds with the levels of freight demand, the industry has experienced greater challenge in hiring drivers. We also have not been immune to this challenge. As in 2016, we saw the investments made in our Quest technology platform along with the business transformation centered around dynamically managing operating contribution; it has helped us to minimize the downside impacts of a difficult 2017 Q1. Looking forward, we’re starting to see some hardening in the contract and spot rates as the concerns of what lies ahead for shippers with the enforcement of the yielding mandate is looming larger. While potential implications of this regulation could be highly impactful, our approach will be to remain disciplined and adding capacity until we are adequately performing with the rolling stock and drivers we have. Only then will we systematically grow the capacity as both the driver market and the freight market allows us opportunities. Again, we believe the Quest transformation we have in place will be instrumental through the upturn. We continue to be slightly bearish with respect to the second quarter and growing bullish throughout the second half of the year. With that, I will turn it over to Mark to provide another level of detail into our first quarter.

Great, thank you Chris. I’ll offer a few macro comments as well and then transition into our various business segments. First from a demand standpoint, our services across our three segments of truckload, intermodal, and logistics had demand increases each month throughout the quarter, while not robust, the market did exhibit its typical seasonality trends. We now think we have enough of a size of sample of both RFP and rate review results to assess the pricing environment as one of stabilization to slightly improving. And we measure this based upon a basket of retained incumbent lanes by customer events, simply comparing the before and the after, while recognizing that and most of those events you are getting a mix of different lanes and existing incumbent ones, but by comparing the incumbent lanes we think we have a good benchmark to make that assessment. So with that as context, intermodal remains our most challenging from a competitive standpoint with just below 50% of those events resulting in our basket of incumbency having a lane increase. The truckload segment though has been more positive with 65% to 70% of those events, resulting in our basket of incumbency being improved year-over-year. My final macro comment centers around the inflationary cost pressures that are more pronounced this quarter than they were a year ago, particularly in the areas of net fuel expense, driver related expenses, and as Chris mentioned less gain on sale of our rolling stock disposals. So let me transition into the various segments starting with truckload. Our truckload revenue per truck per week, excluding fuel surcharge improved slightly over 3%, when compared to Q1 of 2016. Through the freight selection process focused on contribution with our Quest technology platform combined with a slight improvement in price and more so in productivity, we are the key contributors to that 3% improvement. Our standard equipment offerings in both for hire and dedicated experienced a reduction in tuck count year-over-year. First the for hire standard. First quarter of last year was our peak truck count as we began the process of optimizing our fleet to match the quality demand contribution levels available in the market, and as you advance now to Q1 2017 and compare it to a year ago, our revenue per truck again, excluding fuel surcharge revenue improved 3.1% year-over-year. Our dedicated standard business experienced two large account losses in the first part of the quarter fairly non-typical for us as we chose not to match the lowest bidder at less than desirable contribution levels. This was partially offset by several contract renewals where our customers supported the need to address inflationary pressures for that we are appreciative and we added several new business wins at the appropriate contribution levels, which enabled of 5.1% improvement year-over-year in our dedicated standard segment of revenue, excluding fuel surcharge on a truck per week basis. However, overall, the margin and truckload eroded a 120 basis points year-over-year to 92.6 OR from a 91.4, but 90 basis points of that production was due to forward investments in our first to final mile business from which we capture that data in our for hire specialty quadrant. It was the only quadrant of our four that had contraction in revenue per truck per week year-over-year. Key contributors to that is that we rolled out an extensive and for Schneider unprecedented trade, print, and digital marketing campaign targeting those producers of specialty products and retailers focused on difficult to handle product categories, but more importantly we opened up several company final mile locations that brought current expense forward with non-mature operating metrics across our assets and our buildings associated with that because of start-up. While we expect to continue to invest in 2017 in this area, Q1 will be the most concentrated quarter of activity. Overall, we remain highly encouraged by the customer buying behavior and their interest in our differentiated first to final mile offering both in the B2B space, but also the emerging e-com B2C space, again focused on those difficult to handle product categories. Moving on to our intermodal segment, we're very pleased that our intermodal order count grew 6% year-over-year, actually almost 7% if your account for the adjusted work days. Over a 100% of that growth was in the East and intro west geographies as we saw additional shrinkage in the ultracompetitive Transcon Lines and business. Those mixed changes as well as the annualized contract renewals from 2016 resulted in an 8% reduction in revenue per order, but most of that impact was on the mix. We had a highly productive dray operations execution, which helped us stabilize our margin performance, resulting only in a 10 basis point contraction year-over-year. As Chris mentioned, we are on a chassis conversion program moving from least post to a Schneider owned chassis that plan is on schedule in terms of both timing and the operating reduction of friction costs associated with this new high quality asset. In fact, if you consider the 1.3 million of duplicate costs associated with this program in the first quarter, we actually improved our operating margin of 60 basis points year-over-year. Finally, our final segment logistics, in our brokerage component from within continued its year-over-year double-digit revenue growth trajectory. Brokerage orders per day grew a healthy 13.2%. That benefit was offset by net revenue per order compression as customer pricing, particularly in brokerage has remained muted, resulting in a 10 basis point OR reduction year-over-year. Now, I’ll turn it over to Lori, so she can cover the enterprise financial results.

Thank you, Mark. The first quarter enterprise operating revenue increased 8.4% year-over-year to $1 billion, while adjusted enterprise revenue, excluding fuel surcharge increased 5.1% to 916.2 million. Enterprise income from operations in the first quarter of 2017 was $43.6 million, decrease of 16.3%, compared to the first quarter of 2016, primarily due to lower volume levels and unfavorable market conditions. We are currently in the process of converting our intermodal business to a owned chassis model as both Chris and Mark referred to, which requires the replacement of over 10,000 rented units. However, the lease requirements of these rented units do not expire until December 31, 2017. As a result, we are also reporting and adjusted income from operations number for the first quarter of 2017 of $44.9 million. The $1.3 million adjustment accounts for the duplicate charge as the owned units are brought into operations and are used in lieu of the rented units. Net income for the quarter was $22.6 million or $0.14 per diluted share, as compared to $28.1 million and $0.18 a year ago. On an adjusted basis earnings per share of $0.15 was down from $0.18 last year. Adjusted EBITDA for the quarter was $112.7 million, a decrease of 2.8%, compared to the prior period. The increased depreciation resulted from a larger fleet and the acquisition of Watkins & Shepard, and Lodeso which was more than offset by lower earnings. Adjusted EBITDA as a percent of adjusted enterprise revenue, excluding fuel surcharge was 12.3% for the first quarter of 2017, compared to 13.3% for first quarter of 2016. Our operating ratio in the first quarter increased 130 basis points to 95.7% and was up 110 basis points year-over-year on an adjusted basis to 95.1%. Now turning to review our results from a segment perspective, in our truckload segment, revenue excluding fuel surcharge was $522.1 million. Operating income was $38.5 million. In the intermodal segment, revenue excluding fuel surcharge was $181 million and operating income was $6.6 million. Turning now to the logistic segment, revenue was $183.9 million; operating income was $5.2 million. As of March 31, 2017 Schneider had a total of $604 million outstanding on various debt instruments, compared to $699.4 million as of the end of December 2016. At March 31, 2017 our cash and cash equivalent totaled $79.3 million, compared to $130.8 million at the end of December 2016. Our free cash flow increased $31.1 million, compared to the first quarter of 2016. I would also like to highlight that in the first quarter we paid a quarterly dividend of $0.05 to shareholders. During the IPO process, we communicated our intention of paying a regular quarterly dividend as a public company. On April 5, we priced our initial public offering and we used to 100 million of the proceeds to pay down a 4.8% senior note that was due in May 2017. And we also paid off our outstanding variable debt balances. We anticipate using the remaining proceeds for general corporate purposes, including further debt reductions and capital expenditures, including the chassis investment. Operating conditions thus far in 2017 have been challenging and we expect them to remain so through the first half of 2017. However, based on our initial lead related to the impending ELD mandate and an improving freight market, we are trending bullish on the second half of the year. Based on these expectations, we expect full-year 2017 net CapEx expenditures to be in the range of $325 million to $350 million, which includes approximately $100 million for the chassis program. Proceeds from the sale of used equipment is expected to be $60 million to $70 million. Additionally, we anticipate 2017 adjusted diluted earnings per share to be in the range of $0.92 to $1.02 per share, which includes the impact of increased share count from the recent IPO estimated at $0.10 per share. With that, operator, I’d like to now open up the call for questions.

Thank you. [Operator Instructions] Our first question today is coming from Ken Hoexter of Merrill Lynch. Please proceed.

Great. Good morning and congratulations on the IPO in the first call here. Lori, maybe just talk a little bit about, or maybe on the start-up cost, you mentioned the new dedicated business versus the lost businesses there, are they going to offset each other in terms of increased costs as you go chasing new business in that dedicated segment?

Really we consider, maybe those two separate approaches to that. Imagining on the e-commerce was just more of the start-up relative to building out and finishing our network, which we anticipate to do in 2017 and the first quarter had the heaviest concentration of that activity. We are already replacing the other more standard dedicated business that I referenced where we had some of the churn business. And we would expect by the time we get to the full-year that we will have that plus more of that replaced.

And then maybe more generally can you talk about the business environment since the IPO, I appreciate the thoughts on the pricing on the contract renewals there, but you also talked a bit about may be more aggressive pricing on the intermodal side, can you just talk about the environment as you finish up bid season here in terms of how the environment is now because Lori, you talk about the inflection you anticipate in the second half, have you begun to see that in terms of the contract bids or is it still remaining as aggressive as you highlighted on the intermodal side?

Ken, this is Chris. I am not sure I would use the term aggressive. I think what we see is that firming and turning a little bit and that gives us some bullish outlook going forward, it was kind of the things that we were looking to start to see as the year would go forward, but this is not aggressive price change yet, the capacity hasn't tightened enough, but I think in the discussions, we’ve been involved in, there is a growing concern and awareness that the mandate itself and in some cases, if you think about it the threat of terrorism is terrorism, and you might think about the yield through that lens is that just the uncertainty around that I think is causing a lot of shippers who are pretty thoughtful, as we've always, I think we said on the road show. Our customer probably gets read reprimanded if their budget is a little bit over. They get fired if the freight doesn't move and I think there is just an assessment happening about what that market will look like and as a result I think there is also with the people who are pretty enlightened, I understand that the driver market is tight, the costs are moving up that the disciplined carriers in the industry are going to have to find a way to get that covered. So, I think that is the environment that we are starting to see right now. It is the one we were hoping to see and it is the first step in this process and so that’s positive from our perspective and the first step along the way.

Appreciate the time and insights and again congrats on the IPO.

Thanks again.

Thank you. Our next question is coming from Ravi Shankar of Morgan Stanley. Please go ahead.

Thanks, good morning everyone. Congrats from my side as well. You guys sound like you have been doing this for years, so well done on the first one. First question is on Quest, can you just talk about how Quest performed in the first quarter versus your expectations. And just how do we think about, how the system works, does it work better in tough times or good times, and kind of how do we see the benefits of that flow through?

Ravi this is Chris, thanks and thanks for the coverage and participation. I’m going to let Mark take that question.

Yes, our Quest platform really does give us the ability to have the insights that are necessary to make a proper choice and what we are seeing through the first quarter and increasingly now into the second quarter is the ability in certain markets to exert more choice. So that as we have always talked about is not always just price taking from a customer, which is, it is also how do you take the best basket of available freight in a given market based upon your network and the ability to maximize and access contributions. So, we're feeling that that continues to be an advantage for us and it showed in our results. And we would expect that, again one of our advantages not only in a difficult market, but increasingly where we expect to take advantage of our ability there is in an improving marketplace.

Got it. And just as a follow-up, your full-year CapEx guidance came in quite a bit below where we were expecting, can you talk about whether something has changed whether your capital plans for the year and kind of now that you have passed the IPO, what are your top priority strategically here, are you kind of looking to get back into the M&A well or any other uses of cash?

Okay. I think you have got a couple of questions in there, but I think I can take them quickly. Let’s start, we were a lot more disciplined I think in getting ourselves sized appropriately for the first quarter market. We’ve just found over the years that if you have excess trucks and you keep trying to fill them at higher expenses than the choices you make, the miles you run you are just, it just sets out a whole set of derivatives, cost implications, and I give Mark and the organization a lot of credit for really thinking through how to size the different pieces of our business. So we certainly purchased less and disposed of more. I think we did a good job in a difficult used equipment market, getting equipment moved out and so that’s part of the benefit that you are seeing on a full-year basis and I think we are going to just be very, very thoughtful and disciplined. We could come back in a quarter or two and tell you that the market is moving faster and we are going to up our CapEx, but as I said on the road show the two easiest things to add in this business are people and capital, and the two most difficult things to rip out are people and capital. So we're going to be disciplined throughout the year on that. And then on M&A we said we would look for opportunities in the more specialty markets, we don't have anything that’s eminent, we will let you guys know when we do something, and a whole lot before, but that’s where things stand. Lori, I don’t know if you have any comments that you want to make relative to the chassis or some of the other things looking out into the year.

Yes I guess the only thing I would add is, I think you had a pretty complete answer there Chris, the only thing I would add is we are anticipating about $100 million for the chassis program and our schedule of equipment if you look specifically at quarter one, we have year-over-year, less of our replacement equipment coming in, in quarter one than in prior years, but other than that, I think you covered that very well.

Understood, thank you.

Thank you.

Thank you. Our next question is coming from Alex Johnson of UBS. Please go ahead.

Good morning. It is Alex here, and I am on for Tom Wadewitz.

Good morning, Alex.

Congratulations on the IPO from us as well. Just a housekeeping item first, if I may, what’s the right share count to use for second quarter?

So when you see our queue coming out, you will see the current share count will be updated to show with the shoe [ph] and the full IPO, we will have outstanding about 176.8 million shares. So that will be the correct share count. So if you look at the average share count for the year you will see our first quarter obviously is in the earnings release, but then that will be the share count for the remaining of the year.

Okay, great, thank you for that. And then the commentary here around increased driver cost, is that something that Quest can help you with or are there other actions that you might take to perhaps get ahead of a tight labor market, a tight market for drivers and so forth, any thoughts around that?

Sure, this is Chris, let me start and then turn it over to Mark. There are capabilities that got put in places part of that Quest platform, which certainly allowed us more capabilities to integrate social and mobile kinds of applications into the process of recruiting. I would say though that what - where Quest helps us is that ultimately our drivers get paid by the miles that they can run and the miles they can be paid for. So, our ability to execute with that platform certainly helps them as part of the company to maximize their W-2 income and clearly one of the challenges is to hire them, but you also want to use their time very, very effectively and the platform has given us a number of mechanisms to do that. So, it’s not - so that would be the lens through which I would say it helps us in this marketplace, but let me turn it over to Mark and have him give some more color to that.

Yes, just maybe to build on the concept there a bit. It is certainly through our contribution focus and assessing freight quality. The driver experience is increasingly important, obviously in that equation and so one of the elements that was really a positive in the mix change and what variable do in intermodal is we had slightly less intermodal dray drivers on the street, we grew our order count 6% to 7%, meaning that we had 10% more work of productivity across our dray drivers, which is again as an assessment of the freight characteristics and how do we best bring throughput through the network, and our drivers certainly benefit from that. So, absolutely it is the focus and enabler of improving the condition or its compensation or experience of our driver community.

Terrific. That's very helpful. Thanks for the time this morning.

Thank you.

Thank you.

Thank you. Our next question is coming from Scott Group of Wolfe Research. Please go ahead.

Thanks, good morning everyone.

Good morning

Good morning.

You mentioned kind of bear second quarter, bullish second half, just because we don't have a whole lot of history in the model, is there any way you can help us think about the seasonality or quarterly earnings progression at a high level and then maybe just specifically on that, the other segment that was a $6.8 million loss in the first quarter how to think about that, the rest of the year or at least second quarter?

Scott, this is Chris. I guess I will walk around the table with both Mark and Lori on your question. Traditionally, we started to see in the first quarter things used to start real slow in January that’s changed a lot frankly driven by the retail segment in gift cards and those kinds of things. So the kind of the turn down in the first quarter has moved out a little bit from what it would have been a decade ago, but the first quarter is clearly always the most challenging. And then the second quarter you start to see some pickup as you get kind of past April because as the weather warms, people get outside more you’ve got the start of some holidays and so the second quarter starts to pick up a little bit more and then the third quarter there is a lot happening in preparation for the fourth quarter, so our earnings tend to follow that progression. We get a little bit of benefit in the first quarter from our bulk businesses as manufacturing tends to kick in and that will kind of peak of a little bit sooner, so again we try to align these different aspects of our business up to get a little less variance in it, but it is never going to be flat and it’s always going to have a trend towards the fourth quarter. So, Mark let me, if you want to … Marl says that is complete.

Okay. That’s complete from a seasonality standpoint. The way I look at either as you know Scott that includes our leasing company, our captive insurance, as well as some corporate expenses. The quarter performance and other really is related to - we had a little bit more of a focus in our leasing company and leasing used equipment, which also indicated or included some higher receipting cost as we bring in the tractors in and refresh them to be released. So that drove a little bit less profitability than we would normally experience. There is also some of the longer term incentive programs are accrued at the corporate level and so there is a little bit higher expense there year-over-year. How to think about that going forward? The way I would think about that is, it will be, I think this is probably a lower performance quarter than I would expect going forward, not by a lot, but I would - if I were modeling it, I would look at that performance being a little bit better in the following quarters.

Okay, very helpful and then just one more for Mark. Why does the plan for the truckload and dedicated fleet kind of the rest of the year and then when you talk about same-store pricing flat, up slightly what percent of the book is same-store and kind of on a realized basis including lanes you are winning losing, how would you - would pricing still be flat or is it up or is it down?

If you put it in total, Scott?

Yes.

I mean, including incumbency and new?

Yes.

I would say across our businesses with the exception of intermodal still were up slightly across the board, when you consider both incumbent and new.

Okay good. And then just the thoughts on the fleets from here.

We would like - personally I would like to have a couple more - hundred more trucks, if the market would allow and the driver community efforts that we’re taking in our standard for higher network business between now and the end of the year, we don't really see that occurring in the second quarter that would be more the bullish element that Chris had mentioned out in the second half of the year, and then dedicated we don't really have any hampering on them at all, just based upon opportunity or you have a very good pipeline. So we have growth built into the remainder of the year, but as Chris mentioned, if we have quality opportunities, we would potentially come, back and up that CapEx plan take advantage.

Okay, thanks a lot for the time and good to have you guys on the call.

Thanks Scott.

Thanks Scott.

Thank you. Our next question is coming from Chris Weatherby of Citi. Please go ahead.

Hi thanks. Good morning everybody.

Good morning, Chris.

Wanted to ask a question on the intermodal side, so certainly getting a sense about your confidence in the direction of the truck market, but wanted to get a sense sort of the competitive nature in intermodal, we've heard from other players in the space that there was sort of a higher degree of complication for new business wins as we went through the first quarter of the year. So, you know when you think about that solid low growth relative to the revenue per low, maybe how do we think about that trending over the course of the next couple of quarters, does it get a little bit more challenging before it starts to improve, can you just give us some cadence that might be helpful?

I'm going to turn that over to Mark, Chris.

Yes, Chris, certainly our intermodal business does serve, has a catalyst element when truck pricing and truck availability become the firm and more difficult or the - in addition to the field market. So, I think there will be as the second half of the year progresses, I think our intermodal business will have some benefit associated with that, but our focus is to compete in the areas that we bring some differentiation, which is in the intro west market in the eastern half of the US, and that is where we had our success in the first quarter, and that’s continuing in the second quarter here. So the ultracompetitive trends kind of where we don't have as much advantage as some of the others is where we saw the shrinkage and that’s why the revenue per order element that we report has a heavy mix component to that, just because of the difference in length or hall associated with the transcon business versus the shorter haul East and West. So, again combined that, you really have three components. You have your - the real components you have your price component from the customer and then you have your ability to effectively operate on the street. And so putting all that together to have a 10 basis point reduction in margin year-over-year, I think it is pretty decent performance, considering those constraints and then especially when you consider the duplicate cost in the chassis we actually had an improvement. So, again I think we will be able to continue that.

Okay that’s extremely helpful. I appreciate that. And then when we think about the back half improvement in the broader business, may be specifically in truckload and I think the comments have been pretty consistent about firming from a contract perspective, if you can maybe give us a little bit of help or sort of what is embedded in sort of the back half guidance from a truckload pricing standpoint, you just give us some maybe rough ranges about what you think that sort of growth might look like in the back half that would be helpful?

Well again, this is Chris. And I will have Mark kind of tuck-in behind me here is that, what we think - what is in our heads and what’s in our plans related to the guidance that’s out there is that seeing some firming in pricing and starting to change price moving back the other direction is consistent with what we both wanted to see and had planned to see, and again this is where the investment that we’ve made in our Quest technology, which allows us to look at the choices that we have relative to the contracts that we have in place, taking into account some sport opportunities and make choice. So in some cases we know everyone likes to hear about pricing and we think of pricing relative to contract rates. There is an element of price that comes to us through choice. And we think that every bit is important to us as a company as just absolute price and so our belief is, is that as things firm as capacity tightens both because of seasonality, but also we think some people will choose not to play in the emerging world of the ELDs that that will help us relative to freight selection opportunities and driving contribution within the system, and then as you start to see capacity tighten then you start to see the overall pricing and we would think about through a lens of static contribution for that to tighten and to rise. And so that’s really behind it. The other side of it is, again how we move into the marketplace with these three segments as you see capacity tighten in the truck market it creates opportunities for growth and tightening in the intermodal market. And frankly both of those give start to create some volatility that allows us to both create value, but also become more effective within our logistics business. So, these things play together and we expect that concert if you will to improve kind of it as a slow drumbeat throughout the remainder of the year. Mark? You said, I guess I said it all. All right.

Thank you very much that’s a very comprehensive answer Chris. I appreciate the time and congratulations on the first quarter aggregate.

Thank you.

Thank you. Our next question is coming from Brian Ossenbeck of J.P. Morgan. Please go ahead.

Hi good morning. Thanks for taking my question.

Of course, how are you this morning?

Good thanks. I just wanted to go to a little bit different round talk about Watkins & Shepard, and Lodeso coming up on, I think the one-year anniversary of that acquisition before too long here, so just wanted to get a sense of how that acquisition has progressed an integrated and maybe you can give us some details on what that actually contributed into the quarter because it does seem like it was one of the growth factors when you look at the truckload segment and then if you can just step back and give us like three or five year view of how you think the final mile delivery white-glove service is going to progress here throughout the next couple of years?

This is Chris, why don't I start with the back end of your question and then I will turn over to the front part of it to Mark. There is just no doubt that all of us in terms of our buying behavior whether it is our busy lifestyles or just the matter of convenience, more and more things are being purchased through an e-commerce website, and it goes even to things like exercise equipment gun saves, furniture, and flooring carpet, you know all of these kinds of things we're seeing a lot of growth, and those type of goods don't flow, as easily through the traditional mechanisms where e-commerce has moved in. And that was behind the strategy, we see that continuing, building out a pipeline of opportunities, and so we're very, very positive about what we’ve done, these things are always interesting to do when you combine two companies there is just you can't foresee everything, but from our standpoint, we couldn't be more pleased with the reception that we’ve gotten from the customers. We have a great group of people that have become part of our company now and we are very excited about the long-term benefits that can be brought to customers and to our shareholders by us now having a very, very strong position in that niche of that market. So, Mark, maybe I will turn it over to you and you can talk about some of the flavor of the integration, the things that we are doing and the things that we want to maybe even improve on as start to get to the anniversary of this event.

You bet it. And where the investments and the focus has been over the last couple of quarters is what we believe is the differentiated piece of this which is the first mile combined in a seamless way all the way through the, either the B2B or the B2C that a consumer delivery in one seamless approach was one company handling that, which is being received extremely positively from the customer standpoint, but has required us then from a tax standpoint to do some things. From our technology to integrate that to change some of our business processes to do that and then because at the time of the acquisition there really wasn’t much, they had just started to do a company final mile delivery network, so we can leverage the Breakbulk Buildings and all the other investments that they have already made, but we still have to go through the process and the hiring and bringing a capital to bare against that. So that is where our inefficiencies are presently and that was what had a bit of drag on our performance overall in truckload from a margin standpoint in the first quarter and again every week we get by them, then we have improved operatic metrics associated with that. So, we will still be investing in those locations between now and the end of the year, but we just really the fourth and first quarter was our heaviest period of bringing those locations on line. And secondarily, we’re getting involved in a whole different set of customers that are straight e-tailers that have no brick and mortar that don't have a distribution network that’s tradition and we normally serve in the other retail channels. So, it has brought a whole series of new relationships to bear. That also has benefit that we’re seeing in other parts of our offering. So highly encouraged, but it is very hard work and we're not through that and we're not done, but it offers great promise to the market and great promise to the organization.

Okay great. Thanks for all the information there. Last one, just a quick follow-up to the earlier comments on used vehicles market, it sounded like you were putting some into the lease fleet and think a little bit more to get those up and running and out the door, so to speak, so just wanted to get a broad sense of how you expect that market to progress throughout the rest of this year, kind of what’s embedded in your guidance and have you seen any sort of stabilization or uptick here, and after the quarters ended through the middle of May?

Brian this is Chris. So, let me take one piece of it and then I will turn it over to Lori. I think what we’re seeing is again like in the pricing area that we're seeing things stabilize, harden, I am not sure in the used equipment market that we are seeing any big upturn, but has probably reached the bottom hopefully. Hopefully, and I think that from our standpoint people did a really good job of executing in that market, in the first quarter for the disposals that we got. I am going to - I think Lori wants to make sure that you understand when we talk about our leasing company, what’s going on there. It has or not to do with the equipment that’s part of our fleet has to do with the equipment that we may end up, it gets through the leasing business and we are got to look at those reasonably separately. So, Lori go ahead.

Okay.

Yes, so just to clarify, obviously in our normal Schneider fleet we’ve got equipment that we end up selling as we replace it in the used equipment market. Separately from that we have a leasing business and sometimes the equipment that we’ve put out on lease is returned to us for whatever reason by the owner operator, and so we will take that equipment back and we will refresh it and rerelease it and so when you do that, there are additional expenses, which impacted our other segment as we had more leasing of used equipment versus leasing of new equipment, but that’s separate and distinct from the used equipment for the normal Schneider fleet. Does that help clarify that?

Yes it does. Thanks for making that distinction, and for taking the time this morning, appreciate it.

All right, have a good day.

Thank you.

[Operator Instructions] Our next question is coming from Ben Hartford of Baird. Please go ahead.

Good morning. Thanks for fitting me in. On the brokerage side, strong volume growth, specifically in brokerage and logistics generally, interested in the sources of that growth share gains or otherwise in the components of it, truckload versus LTL, and then I guess in that same venue, how do you think about the cadence of that volume growth in particular through the balance of the year, and the underlying yield dynamic as you do expect the back half of the year to harden as you say Chris?

Ben, I’m going to hand that ball over to Mark and let him kind of get down into the detail of that.

Sure Ben. Our brokerage offering has a heavy component of truckload and LTL more so than the other modes. And both of those are experiencing the growth trajectory that’s representative of that number. What we’ve had more issue with in the short-term really is this is a multi-quarter effort now here is in the net revenue per order as truck expectations and then we just talked about affirming, we are seeing some of that certainly in the brokerage PT space, purchase transportation space, and we are not getting at the same rates or have not got the same rates from the customer and the brokerage markets, there is more choice there. So it is stable, it hasn't really gotten down, but we haven't seen enough volatility in that market for us to be able to improve the net revenue per order and so that’s why the revenue growth is coming on a order count basis, but we are not extending the margin on a per order, at least at this juncture. But certainly that’s the business that moves the fastest and we would expect that as we go out through the rest of the year that we will start to see some return to volatility that will allow us to do that, but from a growth standpoint we feel both in the spot and the contract space we are on that same trajectory.

And I guess to follow on that Mark, absent any sort of volatility to the market, you have the Quest platform, there is obviously increased interest from new entrants in the brokerage space is generally, when you think of the opportunity on the brokerage side with regard to growth, where does that come from? Does it come from share gains, does it come from expanding the overall addressable domestic brokerage market? And how do you think about and assess the credibility of some of the threats of new entrants in technology and potential spread compression?

I think, our review to that is that we have both share again opportunity and growth gain just because of, and just brokerage growth just because of what we expect to see a tightening. Our investments with Quest really do center around advanced decision science as it relates to both the buy-sell of the equation, so that we can give more real time information in front of our sellers and brokers that’s ultimately focused on expanding net revenue per order is really our objective or our contribution per order focus there. So those investments have been made and we are seeing some benefit of that and you got the group excited about that potential. And ultimately, we expect that there is going to be, as always in this space lots of new entrants, ultimately when a customer puts an order into brokerage they expect it to move, not just to have it sit there and be exchanged, and I think what we and others do well is ensure that once it gets there it moves, and that’s an important component that sometimes, I don't think it’s talked about enough because to get liquidity the customer has to have their proper experience on both the coverage and the price point.

Got it. That's helpful. Thank you.

Thank you. Our next question is coming from Matt Troy of Wells Fargo Securities. Please go ahead.

Thanks. You mentioned using about 100 million in proceeds for debt reduction, you know a lot of carriers in your sector run without debt on a consistent carried basis anyway, I was wondering in terms of priorities for capital, how shall we think about deployment going forward in terms of your prioritization of debt reduction, dividends, container purchases, and truck purchases just help us understand how you prioritize them?

Let me start with that and then see if Lori wants to come in behind on that. Matt we are willing to put capital into this business when we can generate reasonable returns. Now we do that thinking about where are we in this cycle, but also through a cycle and sizing the organization appropriately and we do think that the Quest capabilities have given us, maybe a little bit more opportunity to stretch on the upside recognizing that there is going to be a downside in every cycle. So when we can find opportunities to purchase equipment and to put quality safe drivers into them, we're going to do that, we're not going to relax our standards in terms of what we insist on having in terms of capabilities of our drivers that are out there. They have to face a challenging motoring public in terms of operating an 80,000 pound vehicle around those and sometimes in high congestion and so we are not going to compromise safety for growth, but we have been able to successfully do that over 80-plus years and we are going to continue. So we want to grow the business when we can do it appropriately, but we want to do that with a discipline. We plan to be a dividend paying company and the board will give the opportunity to vote on a second quarter dividend, and we paid one in the first quarter. So we are committed to that program. We’re obviously with not a significant amount of float of the company. We are not looking to repurchase shares. And when we can buy down debt, we will do it. If we don't have better uses of the capital and position ourselves to be able to do some things with acquisitions, but Lori probably has a better view of the - sort of the tone and tenure of our debt and how that will play out. Maybe you can talk about the structure of the debt coming out of this event and kind of the horizon for which we have some that may help Matt figure out how to model that.

So, the $100 million repayment that we made here in May was our highest cost and really the most significant tranche of debt that we have coming due anytime soon. We have, not as of the end of the quarter, but as of the IPO we paid off all of our variable debt. We do have some fixed debt that comes due in various tranches through, I believe 2024 and there are significant prepayment penalties that we will have to way before considering using cash to pay down any of that debt on an early basis. So, I guess our prioritization would be making sure if we adhere to our level by strategy and our replacement equipment, we think that’s an important item to do than use as Chris said, any additional CapEx for growth when it’s responsible and we will provide the right return. And then finally, making sure we are a dividend paying company, and have cash available for M&A should we see the opportunity.

Thank you for the detailed answer. My follow-up would be, simply, I know that the brokerage business, logistics business has been a rapid grower and has reached critical mass in the last several years, one area where you might look for settlement, potential would be more internationally I’m wondering if you are weighing that, or should we really think about the growth focus and the potential acquisition opportunities is being primarily domestic?

This as Chris, Matt. If you think about the business that we have, the small business that we have in China, it’s principally driven, really from a logistics standpoint and a lot of that - it is a little bit different, but if you think about that as mostly a brokerage business with some consolidation centers to help facilitate that. From an international standpoint, our focus isn’t to jump into forwarding or anything like that. And then we do have the business that crosses border with Canada and Mexico and maybe I can turn that over to Mark and just let him talk a little bit about how those aspects of our business play.

Matt, I don't know if you were thinking Mexico Canada would be more domestic, but we are predominantly across border, all of our service offerings play from intermodal to brokerage to our truck assets and so important markets for us, big trade partners with the US, but I wouldn't see us doing anything beyond - like I guess that would be the extent I think of our international thought process.

Okay, so sticking to your knitting, appreciate it. Thank you very much.

I think we have time for one more call.

Thank you. Our next question is coming from Allison Landry of Credit Suisse. Please go ahead.

Good morning, thanks for getting my question in. So, I wanted to follow-up on the focus on contribution and how it’s helping you whether the current environment specifically in the truckload segment, you know I would assume that fuel had a sizable negative impact there, so if we were to isolate that impact from OpEx would segment operating income have increased year-over-year or would the detrimental margins be lower than what your peers are seeing or may be relative to your own historical? Just trying to think through the quantitative impact of Quest? Thank you.

Quest or fuel Alison?

Well, if we were able to isolate the impact of fuel from those segment operating expenses, how would operating income look whether it’s increasing year-over-year or thinking about it from a detrimental margin standpoint?

Yes, I think if you look at the truck business with the exception of the Ford investments, the 120 basis points back from a year ago and 90 basis points or so that’s associated with our for Ford investments in our new acquisition, I would contend that that’s a fairly solid performance considering the environment and as you mentioned fuel, fuel surcharge recovering all of that is contemplated and how we assess freight. And our system allows us to take all those components from price to throughput to field surcharge recovery. All of those things go into the calculation so that we have an all-in look and all-in value as it associates with our decisions, and again the decision that we can make. We are not making dynamic decisions on 100% of our freight, but where we have those opportunities and on the edges that’s where we take great advantage of the investments that we’ve made. And so I think putting all that together Allison looking at the performance, considering the environment and some of the other competitive pressures, I think it’s a good demonstration what Quest does for us.

Okay, thank you.

Thank you.

Thank you. At this time, I’d like to turn the floor back over to management for closing comments.

Well we appreciate everybody coming on the call today. It’s good to get this one underneath our belt. We are now, I think we have to go to a conference or two and we will start to build our muscle as a public company, but we appreciate everybody's time and for those of you who have chosen to come along and invest with us, we appreciate that. And we are looking forward to the journey. So, wish everybody a good day. Thank you.

Ladies and gentlemen, thank you for your participation. Today's conference has concluded. You may disconnect your lines at this time and have a wonderful day.