Schneider National, Inc. (SNDR) Q3 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Schneider National 2017 Third 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, Pat Costello, Senior Vice President of Investor Relations. Thank you, you may begin.

Thank you, operator. Good morning, everyone. Thank you for joining our call this morning. By now, you should have received a copy of the earnings release for the Company’s third quarter 2017 results. If you do not have a copy, one is available at our website. Joining me on the call today are Chris Lofgren, our Chief Executive Officer; Mark Rourke, our Chief Operating Officer; and Lori Lutey, our Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today’s call, including our financial guidance are forward-looking comments. 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, non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release. I would now like to turn the call over to our CEO, Chris Lofgren. Chris?

Thank you, Pat and good morning. When we last spoke to you, I said that August would be a very telling month for the quarter in total at potentially looking out for the full year. August was a tale of two factors, improving demand leading to price increases, and continuing challenges to recruit and retain driver capacity. Between the storms, an improving economy and an historical surge in demand in the back third of the year, we’ve seen good movement in pricing across the board including spot rates, fall premiums, and contract rates. Integrating the change in pricing into our Quest platform allowed us to respond quickly, the impact being seen in our revenue per truck and revenue per order metrics. In addition to the price increase, our ability to make decisions accounting for yield through productivity also played out more and more towards the end of the quarter. The work done in our recruiting processes and the thoughtful adjustments to pay resulting in us netting up over 550 drivers across the enterprise. The cost incurred to grow capacity last quarter positions us well to capitalize on the improving market in the fourth quarter and carry this momentum into 2018. As we highlighted on our last earnings call, we grew our dedicated contracts in the third quarter bringing with it some startup costs but positioning both our revenue and cost for these sub-segments of Truckload more favorably in the fourth quarter. We continue to see growth in our First to Final Mile business, both with current customers and also the emerging e-tailers continuing to validate the promise for this business to be an important part of our portfolio. That said, our progress in getting the cost structure dialed in for the first and middle mile portion of this network has been slower than we expected. We will continue making the investments necessary to position this acquisition for our long-term intent, but the timeframe for the complete reengineering of this network will be measured in quarters, not months. The third quarter also demonstrated the resiliency of our portfolio services. We saw lower returns in our Truckload segment, but our Intermodal and Logistics businesses were able to quickly respond to market changes in the quarter and saw improvements above our expectations, without doubt the hurricanes, especially Harvey, had an impact on both our Truckload and Intermodal segments to the negative, but not all was negative to the quarter. Our Logistics segment saw increased volatility which translated into improving earnings for that business. As we moved out in the quarter, increased demand for bottle water, building materials and other items needed to start the recovery from the storm helped drive pricing in every business segment. Mark will give the detailed view into the impacts of Harvey and Irma. Before moving on, I know we have a number of driver, shop and office associates listening in on the call. I personally want to thank the entire organization for how you rallied around associates in need, our customers, protecting our equipment and facilities, and your generous response to the communities impacted by both hurricanes Harvey and Irma. You are what make it a privilege for me to work in our company. And with that, I will turn it over to Mark Rourke.

Thank you, Chris. I will start my comments with a macro view of the market environment, before moving into the most recent quarter with segment specifics. First, as Chris highlighted in his opening freight demand improved and capacity supply tightened throughout the quarter as reflected in increasing spot and contract rate environment as well as asset utilization gains. Our internal Schneider markets strength indices for the Truckload for higher standard quadrant, our largest within Truckload, surpassed the 2014 levels, the second week of September. Intermodal surpassed its 2014 internal strength indices levels beginning the second week of August. Those trends continue into Q4. Contract price renewals in the Truckload for higher standard business, both in and out of cycle increased 3.4% on average in the quarter with spot rates improving 15% year-over-year. Intermodal contract price renewals averaged 1.5% in the quarter. As Chris mentioned, sequentially, from Q2 to Q3, our professional driver base grew by over 550 drivers. We enjoyed improved retention results and by adding new drivers in the for-hire dedicated Intermodal dray in Final Mile offerings. However, the year-over-year wage and recruiting expense inflation proved to be a cost headwind to Truckload earnings performance. It is important to note that September was the first month of the calendar year that “net price” which is change in price minus change in driver-related expenses was positive in the Truckload segment, a position we expect to build on in Q4 and beyond. The business impact of the storms negatively affected the truck and Intermodal segments as we experienced missed days of operation in the markets where freight orders were suspended, while the cost of revenue equipment inspections that were flood-related and the repairs necessary were completed. There were positive yield impacts in all segments from premium price distressed freight volumes, especially in our brokerage offering, however, it did not offset the negatives in cost and lost revenue opportunities. Specifically, Truckload lost $2 million of billed revenue miles, while Intermodal lost 2200 rail orders due to the storm impacts. Therefore when we estimate the positive and negatives, we estimate a net enterprise impact to be a negative $3 million in Q3. One final summary comment, before we close with a few segment specifics, we did experience a $4 million erosion in used equipment disposal gains as the secondary market remains steady, but certainly depressed from the same period in 2016. So let’s transition into the segments starting with Truckload. Truckload revenue per truck per week excluding fuel surcharge improved 5% over Q3 of 2016. The improvement was due to price gains, a combination of contracts, spot and improved freight selection choice enabled by our Quest platform and asset productivity gains. The for-hire standard, the largest segment of Truckload, increased revenue per truck per week, again excluding fuel surcharge 4% year-over-year in the quarter, while average tractor count grew 50 units sequentially from Q2. The for-hire specialty experienced the largest revenue per truck per week gain year-over-year at 11%, as revenue grew 2%, while average tractor count contracted by 8%. The tractor tightening was an asset productivity initiative primarily in our specialty liquid tank and LTL line haul network in the First Mile operations, again as compared to Q3 of 2016. Within the quarter, the price and utilization gains did not adequately cover the inflationary expense associated with the greater than 550 net capacity growth and as a result, Truckload margins contracted 250 basis points year-over-year. We do expect to extract benefit of the increased capacity in Q4. As we transition to our Intermodal segment, despite the aforementioned disruptive impacts of the hurricanes on the Intermodal networks, Q3’s order count grew over 8% year-over-year. The Eastern Transcon portions of the network grew greater than 10% with the International lanes primarily into and out of Mexico serving as a partial offset due to the Harvey impacts. Revenue per order contracted 3.5% versus prior year, down from Q2’s 6% and Q1’s 8% reductions and over 70% of that change is mix-related primarily due to the growth in the Eastern part of the network. Furthermore, if you consider the $5.4 million of duplicate chassis rental cost experienced within the quarter, as now our implementation of our own chassis fleet is largely complete, Intermodal achieved an adjusted margin of 9%. With a great deal of focus on productivity of our containers, we moved 8,000 more orders on slightly fewer containers than we did in Q3 of 2016. And finally, our Logistics segment grew revenues 8% compared to Q3 of 2016. We had increasing success throughout the quarter in adjusting customer contract rates to reflect the market realities on purchased transportation, in addition, we increased the mix of spot versus contracts throughout the quarter, all of which enabled a margin performance consistent year-over-year. I’ll now turn it over to our CFO, Lori Lutey to discuss more about the financial results.

Thank you, Mark. For the third quarter, enterprise operating revenue increased 5% year-over-year to $1.1 billion, while adjusted enterprise revenue excluding fuel surcharge increased 5% to $1 billion. Enterprise income from operations in the third quarter of 2017 was $64.1 million, a decrease of 9%, compared to the third quarter of 2016, primarily due to increased driver cost and the net negative impact of the two major hurricanes. As Mark has already indicated, we have estimated that the storms had a net negative impact to the quarter of $3 million. Other factors contributing to the year-over-year decline included, a weaker used equipment and continuing to refine our cost structure in our First to Final Mile service offering. Net income for the quarter was $36.9 million or $0.21 per diluted share, as compared to $36.8 million and $0.24 a year ago. On an adjusted basis, EPS in the third quarter of 2017 was $0.23, which includes the impact of increased share count, compared to 2016 from the recent IPO estimated to be approximately $0.03 per share. Adjusted EBITDA for the third quarter was $139.7 million, a decrease of 2%, compared to third quarter of 2016. Adjusted EBITDA as a percentage of adjusted enterprise revenue excluding fuel surcharge was 13.7% for the third quarter of 2017, compared to 14.7% for third quarter of 2016. Operating ratio in the third quarter increased 90 basis points year-over-year to 94.2% and was up 60 basis points year-over-year on an adjusted basis to 93.2%. Adjusted operating ratio was sequentially 10 basis points higher than the second quarter. Now turning to our results from a segment perspective. In our Truckload segment, revenue excluding fuel surcharge was $551.7 million with operating income of $41.1 million. In the Intermodal segment, revenue was $196.0 million and operating income was $12.2 million. In the Logistics segment, revenue was $209.1 million with operating income of $9.1 million. As of September 30, 2017, Schneider had a total of $445.9 million outstanding on various debt instruments, compared to $699.4 million as of the end of December 2016. Given our positive free cash flow, we decided to utilize the IPO proceeds to repay all of the debt that we could without incurring prepayment penalties. At September 30, 2017, our cash and cash equivalents totaled $202.2 million compared to $130.8 million at the end of December 2016. Our year-to-date free cash flow increased $98.2 million, compared to the first nine months of 2016. Lastly, we are adjusting our full year guidance based on our third quarter results, which were lower than our internal expectations and our view into the fourth quarter. The updated range for the full year of 2017 adjusted diluted earnings per share is $0.92 to $0.97 which includes the impact of increased share count from the recent IPO estimated to be in the range of $0.10 per share. We are maintaining our full year 2017 net CapEx to be in the range of $350 million to $400 million, which includes approximately $100 million for the chassis conversion. Based on where we sit today, we anticipate being at the lower end of this range. Operator, with that, I would like to open the call for questions.

Thank you. [Operator Instructions] Our first question is coming from the line of Ravi Shankar with Morgan Stanley. Please proceed with your question.

Thanks. Good morning everyone. Lori, can I just follow-up on what you last said about the lower end of the range, were you referring to the CapEx range or the EPS range?

The CapEx range, Ravi.

Okay, got it. Thanks for the clarification. And just the main question, you bumped up your driver count by 550. Do you feel like you are stocked up on drivers going into 2018? Or do you think that’s still going to be a bottleneck going into next year? Do you feel like you are better positioned than some of your peers who seem to be struggling with that right now?

Good morning, Ravi. This is Chris. We made a conscious choice as we looked at the beginning of the year and seeing that we were a little bit behind our plan. We still are confident that this ELD mandate is going to go into enforcement and that it’s going to create a better market than even we see today and so, we made a decision to try to get our recruiting engine really dialed in right, which I am very pleased with the progress there. And then, also make sure that we made the appropriate pay adjustments to keep retention. And so, from our standpoint, we feel very good about where we sit going into the fourth quarter. And I think the big question is going to be just the dynamics of the market as we move into 2018 and what’s the impact of the driver environment and what happens to demand. So, Mark, I don’t know, if you want to follow-up on that.

Yes, Ravi, I guess, how I would reflect on the 550 growth, I think it’s a result of several of our strength as an organization, certainly at our size and scale having improved retention results, which we did have in the quarter is a meaningful impact. Secondarily, we have a very effective recruiting organization that gets our message and our value proposition out to market in a very effective fashion. And then, certainly our portfolio, when you look at the growth across the segments, the dedicated success that we talked about including private fleet replacements which allows you then to get access to qualified folks that are relatively little – in a bigger bunch at a time because of that conversion. We also grow our Intermodal dray, our IC choice model is very attractive, particularly in a rising rate environment and then, certainly our safety culture and our quality freight access plays very well in the company driver space. So, when you put that whole portfolio at play, is really how we delivered on the 550 number.

Very helpful. Thank you.

Thank you. Our next question is coming from the line of Tom Wadewitz with UBS. Please proceed with your question.

Yes, good morning. Wanted to ask you, I think, a little bit more on how you approach the driver side and then I have one on rail service. So, how do you think about the rate that you need? And considering that to the port retention you may need to [rates be] [ph] again next year? So how do you think about getting that equation right and perhaps how much price you might need in contracts in 2018? And then, I have a follow-up on the rail service?

Tom, good morning. This is Chris. I’ll start and then have Mark follow-up. What’s going to be interesting next year is, and I think where we are sitting here in this – what we talk about inside the building as net price, and Mark gave the definition essentially it is price net of driver expenses. And not all driver acquisition cost are recurring, right. Pay certainly raises that that link up, but if we do a good job on retention, we don’t have the recruiting fee, some of the sign-on bonuses, those kinds of things. And so, I think, Mark has got that dialed in the right place. But what’s going to be at play as we get into certainly into April when the enforcement rules get much more strict is, what’s going to be the availability of drivers. If people choose to exit the industry in terms of a company, are those drivers going to exit or are they going to move and are they going to be able to move and operate in a safe, safety culture company. But the other aspect that is going on, that we are sitting and trying to understand and we’ll have to keep watching it, from my perspective, this is probably the first time in a decade where we have seen the construction industry with a lot of the things around the hurricane and the homebuilding starting to happen where we could feel some pressure there. We didn’t have that pressure in 2014 when we had that good market. And it’s just not clear what’s going to happen and those two things are going to have a play on net price, we certainly know that that demand is going to be in our favor. And so, we are trying to look through those lens to understand what we are going to need in terms of price. What we are going to have to pay. But I am going to turn it over to Mark to talk about the machine that we’ve got in place here and how we think about this at a little more detail. Mark?

Yes, Tom, and my comments, from a net price standpoint that September was the first month where that turned positive where our price ability outstripped our net increases in cost relative to driver wage recruiting expense, onboarding et cetera. Now, we would expect that we are going to continue to build upon that and that the market is going to bear the cost necessary, that we and I am sure others have had the forward invest in to keep the fleet seated and to be recognize the other labor options that exist in the market beyond trucking. So, on a going forward basis, we are pretty bullish that the market and we are seeing it in October and we would expect to see it as we head into 2018 with all the other pressures that Chris just outlined.

Okay, great. I appreciate that. And I wanted to ask you on some of the CSX Intermodal changes. I think perhaps it’s the number of lanes that they are getting rid of service, canceling service on our, maybe look worse than the reality is and some of the dray changes in Chicago. But it does seem that the timing [Indiscernible] change rather poor in terms of the tight market and peak season. I just wondered if you could offer some thoughts on how does that affect your ability to market and grow the service and whether it will affect the cost structure in your Intermodal business? Thank you.

Tom, I am going to let Mark answer that. He has been very, very close to it and I think he can put some data around that, that I think gives the right perspective. I’ll just simply say that the CSX is a great partner. And we think that things that are going on there is, things that we would probably do if we were running that railroad too. So, Mark, why don’t you take it?

Yes, Tom, I think I understand the context of your question. Obviously, any time rail service opportunities are interrupted, in this case, elimination of lanes it negatively impacts us and our customers to a degree certainly. However, when you look at the reason of that elimination of certain origin and destination pairs by the railroad, they are low volume and less productive lanes and these are dozens and dozens of lanes that we currently serve. But they represent 3% of our total order count. So, we believe, even with that 3% that’s impacted, that we have viable routing alternatives to keep it on the train and keep the value proposition intact for the customer on over 90% of that 3%. So, again, I think it’s an outcome of precision railroading and focusing the resources on high volume lanes what ultimately improves the entire performance of the railroad. So, while it has an impact, we think we can mitigate it dramatically.

Okay, great. Yes, that number and that framework is very helpful. Thank you for the time.

Thanks, Tom.

Thank you. The next question is coming from the line of Chris Weatherby with Citi. Please proceed with your question.

Hey, thanks, good morning. Wanted to pick up on that net price comment. I think you mentioned September was the first month that that was positive. Can you give us a sense of maybe how October looks? And then, when you think about some of the preloading you’ve done on the driver side? And then, some of this improvement in rate as well, how we should maybe be thinking about to the OR and the Truckload segment maybe in the shorter intermediate terms in the next couple of quarters. We’ve seen some degradation on a year-over-year basis, but does that net price sort of triggered kind of looks for some improvement as we move forward?

Good morning, Chris. I am just going to turn it over to Mark. I think he has got lots of data and perspective on that and that concept of net price is, gets a lot of airtime here in the company.

Yes, well, first, we don’t expect that the fourth quarter is going to be another net of 550 drivers and so we are out pursuing catch-up for the expenses that we have incurred to position ourselves favorably on the capacity front. And really, that’s in all segments of our business, Truckload, Intermodal and our brokerage offerings. So, and while you always have some level of resistance to those initiatives, both in-cycle and out of cycle, I would tell you that we are being successful with that increasingly. So, it’s the number initiative that we have relative to our commercial organization as to recover those costs. So, we would expect going forward that the net price spread that we started to see in September will continue to expand.

Okay. And, how we should think about that relative to sort of Truckload OR, how well sort of correlated should we think those metrics are?

Good question. I certainly think, to this point, as a company, when you go out and get price you want to keep some of that to the bottom-line to the organization up to this point, that’s been a necessary to share the predominance of that to the driver community. So, again, as we get more spread there, and we expect that to occur, that will certainly have a margin implications in a positive fashion for the business.

Chris, there is nothing like net price and it really is the net price that essentially drives OR performance in the company. And so, there is a very, very tight correlation. There is a tighter correlation with net price as you can imagine than there is just with price. So, now we don’t report on that metric, but it’s front and center in our discussions.

Okay. That’s helpful. Thanks for the time. I appreciate it.

Thank you. The next question is coming from the line of Ken Hoexter with Merrill Lynch. Please proceed with your question.

Great. Good morning. Chris or Mark, I guess, or maybe even Lori, in talking about your outlook, Lori, what changed to lower it that the $0.02 to $0.05? Was it that third quarter was lower than targeted? Was it the less Truckload specialty fleet or seeing such a decline there or was it the First to Final Mile? Maybe you could talk a little bit more about that given what’s gone running on the cost side there that’s causing the adjustments here?

Hey Ken, this is Lori. The primary reasons for us lowering was really what I said in my opening comments. It was really that we missed our internal expectations for the third quarter. So that’s really the primary reason and then when we look at - what we post the hurricane and the cost of hiring and netting up the number of drivers that we did net up in the third quarter, the investment there and then when we look at the comments that Chris made about the First to Final Mile investments that we are making there, I think all of those things together really created a range that makes sense in the $0.92 to $0.97.

So, I guess, just to clarify that, are you trying to say that, this was – everything you mentioned was third quarter and kind of the – orders that had go forward effect on that increased final mile cost and decreased margin at Truckload. I am trying to figure out how much of it was in the past over the third quarter versus what you are looking for in the go forward fourth quarter and into the 2018?

Ken, this is Chris. The lowering, I mean, we started this year at $0.92 at the bottom. We came through the second quarter and we just said, hey, we can tighten this thing up and try to get a little more clarity on where we think we land and moving it back downwards just the – that we didn’t deliver for the reasons we’ve talked about in the third quarter. So that lowering to $0.92 or back down to $0.92 from $0.94 was because of the third quarter. I will tell you, there is also some work that we need to do in the Final Mile and a lot of it is really centered around – it’s not really the Final Mile portion of it, it’s the first and middle and a lot of that is how to take what is more of a fixed cost infrastructure and get that dialed in the right way, but also at the same time, making sure that we have the transit times that these e-tailers are looking for with this hard to handle kind of stuff. So, we are on it. It takes some time. We know what it is we need to do, but that cost we are going to carry forward for a couple quarters here. And it certainly will have some impact that offsets what we now see as a very, very favorable fourth quarter.

Appreciate that thought.

Mark, I don’t know if you want to…

Go ahead.

Mark, just, he didn’t have anything to add.

Great. Thanks guys. Appreciate the time.

Thank you, Ken.

Thank you. Our next question is coming from the line of Scott Group with Wolfe Research. Please proceed with your question.

Hey, thanks. Good morning guys. So, just, Mark, can you maybe give us some direction or breakdown of the Truckload price versus utilization in the quarter? And then, I think you said that Truckloads pricing renewals were kind of mid-threes in the quarter and Intermodal was sort of mid-ones. Any trends you can tell us how fourth quarter is tracking on those metrics? And what’s your view of what’s a realistic number for that Truckload and Intermodal contractual increase in 2018?

Good morning. Well, at this juncture, we are not – on this call giving 2018 guidance yet, Scott, but certainly your initial question relative to the 5% on the Truckload space, I would characterize 3% of that in the quarter would be productivity and 2% on a net basis on price. I would expect that certainly in the fourth quarter based upon where we sit today that we will see more of a price impact, certainly than a utilization impact and those performance is relative to the numbers of 3% 1.5% are improving.

So what you are saying is…

Not all of that is mid-cycle, lot of that to be out of cycle to go back and recover some of the cost that we have invested.

Okay, so what you are saying is, so far in the fourth quarter, that that 3% Truckload increase is a bigger number now and the 1% in Intermodal so bigger now in the fourth quarter?

And we would expect that to be how the quarter plays out.

Okay. And then, just going back to the Intermodal question, can you just maybe talk about if there was any negative impact in the quarter from CSX to service issues and where you think they stand from a just overall service standpoint today? And then, as we look out to 2018, do you have any visibility to rail cost increases?

As it relates to kind of service, well, I think it was the first question, Scott, we would consider all railroads to not to be performing to where they need to from a service and a reliability standpoint and how we get impacted by that as we just have more boxes being consumed on the rail just based upon the slower fluidity of the railroad. So, we could be doing a bit more, even though I am very pleased with the productivity improvements that we’ve had relative to our box turns and our box performance, there are some impacts just based upon overall rail fluidity on the network. It’s not eroding, but it’s certainly keeping get better and we would expect particularly with the CSX and the precision railroading as that matures that that will in fact, better. But the Western railroads are also in that same predicament relative to the slower fluidity of the box on the train. As it relates to next year, I don’t really have any guidance yet to provide to you there. Obviously, we would expect catalyst for the Intermodal pricing world to be the tightening capacity over the road. Those things are highly correlated and we believe that favorable condition that will exist on truck will be a flywheel effect for our Intermodal business as well.

Okay. Thank you, guys.

Thank you.

Thank you. Our next question is coming from the line of Brian Ossenbeck with J.P. Morgan. Please proceed with your question.

Hey, good morning. Thanks for taking my question.

Good morning.

Good morning.

Chris, if we just go back to the First to Final Mile for a second and I think, you maybe just add a little more context as to what needs to be done to meet those transit times that the e-tailers were looking for. I think you mentioned you specifically need, knew what you needed to do, I was just looking little bit more clarity, because it seems like on the Final Mile side with their acquisitions in the last year or so, you built out a footprint. So, if you can just tie it together with a little more detail in terms of what needs to be done and what the timing might be? I know, you said it’s going to be measured in quarters, not in months.

Sure, I’ll start and then Mark, Mark is telling me, he’d like to make some comments too, but essentially, the Final Mile is that that, from that crosstalk, to the home, to a site, those kinds of things and that’s a business that we were doing before we made the acquisition. A lot of what we are doing now is, putting more of our company drivers and company equipment into that. But, where the real work comes is really the – getting the cost, the utilization, the transit on that first pick-up to get the freight into the system. And then it’s making sure that we have a network designed and essentially operating to a set of very predictable standards that balances essentially transit times with utilization. And that’s what has to be done. Volume is a very, very good friend to that. So clearly, growth will help there. But we also have some things to do in terms of refining the execution of that network and that’s where the real work is being done. Mark, is there you want to?

No, I think that covers. Obviously, in a national LTL network, we are optimizing and the tension between cube fill rate and transit and we have a number of start-up activity going with the large e-retailers coming here in the fourth quarter that we expect on the volume standpoint as Chris mentioned to be a nice headwind for that business, or excuse me, a nice tailwind for that business. But it’s that constant tension between the cube – the transit and making sure that we have the most efficient routing possible through our break bulk terminals as that national footprint gets leveraged.

Okay, got it. And then, just a quick follow-up on the financial side for Lori. I know that the other segment income is kind of bounced around a little bit, but it was, I think a little more positive, or actually positive this quarter. I didn’t know if there is anything in particular that was in that number that you could point out to us?

Yes, where I would go with that is, our leasing business is captured in that and we had an uptick in our number of leases. And so that created some income there. That’s probably the biggest driver. Last year, we also had captured in that category, some IPO cost and acquisition cost. So from a year-over-year perspective, that was what drove last year down a bit.

Okay. Any way to quantify the increase on the leases? I know you said that was a good business when rates or rates were expected to go up.

Yes, we don’t really comment on that. We do capture owner/operators. But we don’t break out which are leasing through us versus leasing on their ends.

Okay. Thanks for your time this morning.

Okay, thank you.

Thanks, Brian.

Thank you. Our next question is coming from the line of Todd Fowler with KeyBanc. Please proceed with your question.

Great. Thanks good morning and thanks for taking the question. Just talking about the – if you could give us some color around the timing of your contract renewals and really the ability to address some of the driver pay increases, I would think that on some of the dedicated contracts, maybe there is price escalators in there or you’ve got the ability to go back and on a more real time capture some of the cost inflation. But for the marjority of the businesses this brought the way to the 2018 bit season to get some of the rate increases to offset some of the driver pay or can you go back and do some out of period contract renewals to stem some of the cost pressure right now?

Well, Todd, just generally, and then I’ll let Mark talk about what the process is. But this industry, the way contracts work is, if they have the freight, if they give it to you, this is the rate that you’ll get and it essentially happens and as things cycle, you might have a contract for a year or 18 months or two years, but their in-cycle changes. The customers certainly will take the opportunity to recognize where the market is and essentially re-bid those contracts. And frankly, we do the same thing. Dedicated contracts have more structure around those whereas the for-hire stuff is more open. And so, we are not going to wait until 2018 in order to address some of these market issues and essentially the cost that we’ve had to take to make sure that we have the fleet positioned to serve. So, Mark?

Yes, I think the customer community and the carrier communities’ interests are highly aligned here to make sure that there is adequate capacity both in the short-term, which we are in a robust period, but also what’s envisioned to come in 2018. So, I would characterize our discussions outside of a procurement events or a bid event to be highly constructive with our customer community and we are finding great responsiveness to the issue. So, you have to have a position of strength and what you are providing to the customer and you have to have the courage to go out and talk about what’s necessary to continue that. And again, I think those interests are highly aligned and we are finding a receptive response to that.

Good. Okay, that’s helpful and that makes sense. And just my follow-up and maybe it’s too early to ask the question, but do you have any initial thoughts on 2018 CapEx at this point? I know that the chassis fleet investment will be coming down, but do we have any other parameters that we can think about as far as capital spending into next year? Thanks.

Okay. This is Lori. We are not providing any guidance. Obviously, we will be completed and we are essentially complete with our chassis conversion now. So that will not be a repeating capital expenditure. But we are going to provide guidance in our next quarterly call.

Okay, understood. Thanks for the time.

Thank you.

Thank you. Our next question is coming from the line of Matth Brooklier with Buckingham Research Group. Please proceed with your question.

Hey, thanks and good morning. Can you give us an update in terms of your Truckload, the for-hire side of your business? What percentage of that business would you classify as being in the spot market? And then, maybe you can talk to your expectations over the next twelve months in terms of its contribution in mix. For the total business, if you are expecting that mix to potentially change just given how tight the market is currently and potentially trying to leverage maybe some incremental opportunities on the transactional side of things?

Yes, let me, on the for-hire standpoint, so think of this as the network business just whether they reside in specialty or a van business or a Intermodal. There is really three ways we think about the question I think you are asking here, you have contract capacity, you have spot capacity and – but incredibly important is also the ability to exercise choice. And so, looking at the basket of freight available and particularly the market that where we have materially more offers coming in every day, then we have the capability with it to serve. And so, we have the ability to offering upsell, premium, shift charges or premiums to help cover issues with customers and overall selection of the basket. And so, when you put all of those together, that obviously fits much better in our for-hire segments and we are exercising that choice with a mindset that we have to be thoughtful to the year around needs of the business and not to be overly opportunistic, but certainly on the margins and all of those locations in the specialty for-hire and our Intermodal networks or exercising that choice today.

Matt, I think just, this is Chris, just to come back around, we don’t essentially say in a market like this that we are going to go from where we might traditionally be with taking spot freight. With our Quest platform, we have the ability to pick from the basket and that’s more of – and that’s where we have relationships and contracts and those kinds of things, but that we are able to pick well. And so, these kinds of things, we don’t just kind of turn our business upside-down and say all right, we are going to now take more spot freight than contract freight, because the spot rate market is becoming favorable. But, the choice opportunities and the opportunity to go back and to recontract, is more how we run the business and that’s not necessarily exactly how others do.

Okay. So it sounds like more - not a tremendous amount of anticipated change in terms of, I guess, the mix of business on a go forward basis and you also let your - the Quest platform make some of those decisions in terms of what is the opportunity and I guess, ability to take up incremental...

We think there will be a big change in how we think about the dynamic contribution of the freight that we are hauling. It’s just we don’t kind of change our design point for running the network to shift from the relationships that we have with customers.

Okay, that’s helpful. Appreciate the time.

You bet. Thank you.

Thank you. The next question is coming from the line of Allison Landry with Credit Suisse. Please proceed with your question.

Good morning. So, in terms of the guidance, looking at the last two years, the average sequential change in EPS from Q3 to Q4 is somewhere in the mid 20% range. But the implied guide for 4Q 2017 is close to double that and I realize you don’t have a lot of history, but how should we think about this? And what gives you confidence in the magnitude of the sequential increase in the fourth quarter? Thank you.

Allison, this is Mark. Couple of things to mind. Certainly, the increased spread between what we’ve talked on the call here relative to net price, relative to the driver wage and recruiting expense and the extraordinary effort in the third quarter at over 550 net increase again, we don’t expect that to be the fourth quarter scenario. At least at his juncture, we don’t intend to have a couple more hurricanes. I think we are out of that season. And the improving productivity and choice and the price market that we anticipate as well as the influence and growingly of the e-commerce network which extends even more so now, the season well into December and into early January and we really don’t see the same level of drop-off that historically has occurred in the last couple of weeks of December. And it’s strong all the way through the middle part of January, because of that growing phenomena of the e-retail experience and how that plays out in our portfolio. So, the combination of some unique adventures that took place in the third quarter reference those scenarios and then, the change of the business mix and price that we expect to achieve in the fourth.

Okay, and just sort of following up on that. In terms of the e-commerce, is there a way to size relative to historical trends sort of the contribution of that business sequentially going from Q3 to Q4, I know you mentioned that, the trends for e-commerce are sort of extending more into December and January, but if you could give us any sense on sort of the magnitude of that and how much that may contribute to the sequential increase here in the fourth quarter, that will be helpful?

Yes, I don’t know if I have an exact way as I understand that question, Allison. But we do have – in that environment, those are at superior contribution levels and we do a number of things operationally to make sure that we can seize all the potential to include putting volunteer groups of our solos together to teams for a portion of the year to take advantage of that. We manage our capacity availability in vacation seasons a bit differently to reward the driver community for being available at the peak period that allow us to extract those premium contribution opportunities. So, there is a number of planning elements that go into that. But we do that because, they offer superior options for our drivers and superior returns to the business.

Allison, I think, when you think about what happens in the fourth quarter, most of that is going to show up particularly, as you get to the back end of December in our Trucking business. You’ll see some of that start to drop-off early to mid-December in our Intermodal business. And we can see some of it on our brokerage business as people have distressed freight and are looking for almost any way to move that. But that’s how you’ll see the holiday season, the e-commerce push work through our organization.

Okay, thank you.

Thank you.

Thank you. It appears there are no further questions at this time. So, I’d like to pass the floor back over to Mr. Lofgren for any additional concluding comments.

Well, I appreciate everybody being on the line. It was an interesting third quarter having the hurricanes behind us. As Mark talked about, it’s a good thing. Again, we really feel like the efforts to put the drivers in place as we now are into the fourth quarter and the things that we are seeing. We feel pretty bullish on the fourth quarter and we think it’s going to get quite interesting in a positive way as we move into 2018. So, have a great end of quarter, great holidays and we’ll look forward to getting back with you in the early February timeframe. Have a great day. Thank you.

Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation and you may now disconnect your lines at this time.