Schneider National, Inc. (SNDR) Q3 2018 Earnings Report, Transcript and Summary

Greetings. And welcome to the Schneider National, Inc. 2018 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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 of Investor Relations. Thank you. You may begin.

Thank you, Operator. Good morning, everyone, and thank you for joining our call. By now you should have received a copy of the earnings release for the company’s third quarter 2018 results. If you do not have a copy, one is available on our website. Joining me on the call today are Chris Lofgren, our Chief Executive Officer; Mark Rourke, our Chief Operating Officer; and Steve Bruffett, 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 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, 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. Finally, this call is scheduled to go 60 minutes. After some introductory comments, we will answer as many questions as time will allow. Please limit yourself to one question and a related follow-up question. There are multiple people in the queue to ask questions and we want to get to as many as we can. I would now like to turn the call over to our CEO, Chris Lofgren. Chris?

Thank you, Pat. The third quarter was very good for our company and demonstrated the power of the portfolio of services. As we have said time and again, our strategy has built the company that can resiliently perform through each stage of an economic and industry cycle. Q3 was no exception. The availability of commercial drivers continues to be tight and the pressures on driver recruiting expenses and pay for the over the road business have been growing. As a result, we pulled the levers available to us and pivoted capital investment and our hiring of drivers to our Intermodal business. The Intermodal business segment had another highly successful quarter both in terms of growth and volume, price and the resulting revenues, as well as, operating earnings. While we would agree some truck capacity has come into the market, there are still constraints in capacity to meet demand, particularly when considering the daily volatility associated with trucks moving into and out of key markets. These conditions have allowed our Logistics business to create value through the use of our Quest technology platform and the continued advancement of tools available to serve both customers and other capacity providers. This business segment also experienced significant growth in revenue and earnings in the third quarter and also enhanced its operating margin. Collectively, our Intermodal and Logistics businesses delivered 90% of the year-over-year growth in the enterprise revenue, not including fuel surcharge, 45% of the total revenue, again not including fuel surcharge and 50% of the operating earnings for the enterprise versus a 51% of the growth in the enterprise revenue, not fuel surcharged, 40% of the total revenue, not fuel surcharged and 31% of the operating earnings in Q3 of last year, another example of the adaptability of our portfolio of services through market cycles. All-in our Truckload segment delivered very good results. We entered 2018 recognizing the driver constraints would bring with them increased recruiting expenses particularly in the for-hire standard equipment business and therefore wanted to operate holding that portion of the fleet relatively flat. In addition, our business model is based on adjusting contract rates to market versus playing significantly in the spot market. We have executed consistent with that plan producing growth driven predominantly by pricing with strong margin performance. In addition, we are focused on exiting dedicated contracts that aren’t reflective of driver related costs and adjusting contracts that could be restructured to a win-win for the customer and our company. More importantly, both in the third quarter and looking forward into the near future, we are directing growth capital for Truckload on dedicated contracts that have sustainability and positive driver experiences both in the short and longer term. One disappointing aspect of our third quarter performance was our First to Final Mile business. The losses here created a 300 basis point margin drag on our traditional Truckload business. In our zeal to provide exceptional service and transits, we got too far out over our ski tips, driving a cost structure well beyond the customer’s willingness to pay for the value delivered. As a result, we took a setback on the turnaround trajectory we were managing this business to creating the two quarter delay in our plan to get this business into the black. We have no one to blame but ourselves and we have taken the necessary measures, including changes across management, reengineering the service and pricing models for this business as we speak. We remain committed to be a significant player in this portion of the market and continue to believe that we will provide a channel for long-term growth. We will provide maximum focus and intensity to get this business up on plane, and performing the longer term targets. Mark will provide more color on this business. Looking into the remainder of the year and into 2019, we remain relatively bullish. While we have seen slight increases to supply and a moderation in demand, there is still tightness in capacity that should continue through the fourth quarter and into next year, barring an economic downturn. The repricing of contract rates over the past 12 months and extra efforts to increase the number of drivers in our third quarter, much as we did in Q3 of 2017, sets us up well for seasonal surge in demand associated with the fourth quarter and our diversified customer base. Steve will provide you updates to our annual guidance for EPS and net CapEx spending. With that, I will turn it over to Mark Rourke to provide more detail regarding the business performance.

Thank you, Chris. Good morning, everyone. I’ll offer a few summary comments about the quarter and as usual quickly move into the three business segments. I’ll start with an update on our contractual renewal status of our book of business. As we enter the fourth quarter, our largest Truckload quadrant for-hire standard, the percentage of our contractual book that has been rerated is in the mid-90% range and we are in the upper 90% range for the Intermodal segment’s contractual book business being updated. Considering the rate of the collective bid and pricing reset levels achieved in Truckload and Intermodal for-hire networks across the broader shipment community, it has resulted in less routing guide chaos in the quarter than we experienced in the first half of the year. Also as Chris mentioned in the quarter, the company’s driver condition improved meaningfully as gains and retention and recruiting performance resulted in a sequential increase in capacity of over 500 drivers from Q2 to Q3, just like a year ago. The improvement was realized in both the Truckload and the Intermodal segments with the extra recruiting expense dollars largely centered in Q3, with the benefits to be realized more in Q4 in 2019. Now moving in to Truckload. The Truckload segment, the overall tractor count which is a combination of company and owner-operator units was down 4% year-over-year, and down 103 units sequentially from Q2 of ‘18 at 11,393 units. This metric has reported as an average truck count for the quarter. However, we finished the quarter 150 units higher than the average, primarily due to growth in dedicated and for-hire standard operations. The standard equipment quadrants in for-hire and dedicated each increased revenue per truck per week excluding fuel surcharge 10% year-over-year and the largest quadrant in Truckload for-hire standard with over 6,000 tractors, price improved 12% year-over-year as compared to Q3 of ‘17, with productivity down 2% and the dedicated standard quadrant yields improve 9% with productivity increasing another 1%. Last quarter, we indicated we were reshaping some of our dedicated business, the planned actions for 2018 process is complete and that’s represented in the year-over-year net reduction of 200 units or nearly 10% in the specialty dedicated quadrant. We did, however, add 200 new dedicated driving positions in the quarter, offsetting a portion of this plan churn, and as a reminder, the objective of reshaping the exercise in dedicated was largely to allocate capital to the most attractive configurations from a driver experience and financial return standpoint. As we expressed last quarter, the dedicated specialty quadrants revenue per truck per week contracted due to customer fuel surcharge program changes, resulting in more dollars being recognized in fuel surcharge and less in line-haul rates as compared to prior periods. And then, finally, in our for-hire specialty quadrant, our objectives, as Chris mentioned, the First to Final Mile service offering have not changed, to profitably address the movement and care of over dimensional products and B2B configurations, as well as the growing B2C e-commerce driven marketplace. However, our recent financial performance coupled with a comprehensive business review provided clear insight that a change to our business model is necessary. Our plan is adapt our model to reduce the variability and increase the structure of the network and closely to find standards of service areas and transit levels, effectively eliminating the complexity of customization of those items by customer-by-customer. This model enables an increased level of simplicity and enhanced alignment for sales, pricing and execution processes. To effect these changes, we have revamped the senior leadership team at the business lead level to accelerate our execution. This includes bringing in an experienced industry talent to lead this offering from a respected LTL service provider and high service predictability, key product milestone visibility throughout the supply chain, and an exceptional end customer experience remain the tenants of our value exchange. Therefore, the core Truckload segment excluding First to Final Mile had an operating ratio of 87.6 in the quarter. Now, transitioning to Intermodal, we are pleased with Intermodal segment performance, growing revenues year-over-year by 29%, while achieving another record operating ratio result of 85.7%. Order volume grew at 11% year-over-year, Q3 of 2018 to Q3 of 2017 and revenue per order increased 16% as compared to the prior year Q3, within that yields improved 12% with mix impacting revenue per order by another 4% mostly due to longer length of haul on our transcon business. We took delivery of an additional 1,800 containers within the quarter and the corresponding number of chassis to support them. Despite the additional containers and 14% year-over-year growth in company driver dray resources, we had more opportunity than we could serve in the quarter. Rail fluidity and our mix change within Intermodal consumed more containers and we believe we are supremely positioned to take advantage of the peak shipping season here in the fourth quarter. Our Logistics segment also achieved revenue growth in the quarter of 29% year-over-year to $269 million in operating revenue. We now have both Logistics and Intermodal on a $1 billion brand run rate for both of those segments. Earnings performance increased year-over-year in the quarter by 37% as margin expanded by 30 basis points year-over-year and 60 basis points sequentially from Q2. The mix continues to move higher into the spot arena -- the spot order percentage average in the high-50% range in the quarter. But our brokerage offering too is set up well with agreements to support our customers with additional seasonal and surge support coverage across all modes of transportation coming into peak season. With that, I’ll turn it over to Steve for final comments.

Thanks, Mark, and good morning, everyone. I’ll begin with a quick recap of our enterprise results and provide context to the notable items. Enterprise revenues, excluding fuel increased 13% over the third quarter of 2017, with growth percentages at our reporting segments ranging from the low-single digits at Truckload to the upper 20s at Intermodal and Logistics. And as Mark mentioned, for the first time, quarterly revenues excluding fuel topped $250 million for both Intermodal and Logistics, with highlighting the scale of these valuable components of our portfolio. Looking now at operating expenses, one of the larger variances for the quarter was purchase transportation, which was up 29%. Most of this increase was in support of the revenue growth, I just mentioned for Intermodal and Logistics. Also, operating supplies and expenses decreased 9% from the third quarter of 2017, and more than half of that decline was attributable to the lower chassis costs both duplicate and otherwise at Intermodal. On the year-to-date income statement other general expenses were up 48%, which at first glance looks unusual. However, when adjusted for 2017 benefit from contingent consideration and a 2018 litigation charge, the year-over-year variance makes more sense. Our quarterly incremental margins on an adjusted basis have been in a narrow bend of 22% to 25% so far this year. However, the composition of the incremental margins by reporting segment has varied as we progressed through the year. Also we are now measuring against tougher comparisons from the second half of 2017. So for the third quarter incremental margins were 6% at Logistics, which is solid performance for their business model, 33% in Intermodal when adjusted for last year’s duplicate chassis costs and 90% at Truckload on moderate revenue growth. Year-to-date, our consolidated incremental margin was 23%, with Truckload at 44%, Intermodal at 46% and Logistics at 6%. Regarding diluted EPS with the $0.40 recorded in the third quarter of 2018 was a 90% increase over last year and an increase of 74% on an adjusted basis. Year-to-date, EPS was up 65% and again 74% on an adjusted basis. Wrapping up the overview of the income statement, I want to note that on an adjusted basis, our trailing 12-month EBITDA was over $650 million. Moving now to the statement of cash flows, year-to-date cash from operations increased $94 million compared to 2017, driven mostly by a $78 million increase in net income. Regarding investing activities, our year-to-date purchases of transportation equipment were similar to the last year. However, the composition is different as investments were being made last year to convert the Intermodal chassis fleet. This year, with the chassis conversion completed, there’s been more of a focus on growing the Intermodal container fleet. On the balance sheet, our cash and marketable securities were $405 million at September 30th, that’s up $125 million from year end and our total debt was $423 million. Moving now to some forward-looking comments, our full year guidance for adjusted diluted EPS is $1.47 to $1.53. This guidance maintains the midpoint and narrows the range from our prior guidance in July, and as a reminder, we raised the midpoint of our annual guidance by $0.06 per share in July. Our 2018 net CapEx guidance is $325 million to $350 million, which again has narrowed from our prior guidance, but also has a slightly lower midpoint and that’s mostly due to higher proceeds from dispositions. So to recap the quarter, there was a fluid three months during which we leveraged our technology and predictive analytics to identify opportunities in fluctuating market conditions. We invested in driver capacity and in Intermodal containers to position us for the fourth quarter. And we continue to focus on our core themes, leveraging the portfolio of services, the resiliency through business cycles and capital allocation disciplines, all enabled by our Quest technology. I will now turn it back to Chris.

Thanks, Steve. As many of you may have heard, we issued a press release after the market closed on Tuesday, announcing my retirement at the Annual Shareholders Meeting this coming April and the Board of Directors decision to promote Mark Rourke to the CEO role. Succession of key roles, including the CEO role is something we take very seriously at Schneider and is something we manage very actively. We are blessed with a great number of highly talented executives and the way you keep them is to provide them increasing opportunities to grow their careers. Sometimes that means being willing to get out of the way when the time is right. I’ve had the privilege of sitting in the CEO role here at Schneider going into my 17th year. I’ve also had the wonderful opportunity to work directly with Mark Rourke for over 12 years. He is a tremendous business leader and he now deserves the opportunity to lead this great company into its great future. The Board of Directors working with both Mark and me, have executed a thoughtful and extensive succession plan with the next phases for me to step aside and for Mark to step forward. I am highly confident in Mark’s readiness. I love this company and I am proud of what we have collectively accomplished during my tenure. I will deeply miss the people in the work. But I will be most proud of watching Mark, the exceptional team of leaders in place take the company to the next level of performance. But I am not done until April. There is much left to be accomplished. So, with that, I’ll turn it back to the Operator for questions.

Thank you. [Operator Instructions] First question comes from the line of Ben Hartford with Baird. Please proceed with your question.

Hey. Good morning, everyone, and congratulations Chris on the retirement and Mark on the new position. Maybe, Mark, just kind of thinking about 2019 and core industry contractual pricing growth expectations as it stands today both on the Truckload side and on the Intermodal side in the context of your comments about 3Q trends. How do you see the industry, what are reasonable benchmarks for core contractual pricing on Truckload and Intermodal, and for you guys specifically, how do you think about net price in both modes for 2019? Thanks.

Well, good morning, Ben, and thank you for the comments. We haven’t at this juncture issued a great deal of guidance, obviously, for 2019 yet. We still think there’s room on contractual price. Certainly the driver condition and the labor inflation associated with that we don’t think is completely mitigated. We are very mindful of the contractual work we have done this year and where that plays and carryover aspects into the various quarters next year. We will, I think, next time probably give you a bit more guidance as it relates to those matters. But we still think there is a solid contractual movement yet to be had as we enter into 2019.

And if I could get a follow up on that, when you think about Truckload versus Intermodal, some of the service issues on the Intermodal side, but the capacity constraints on the Truckload side. What is the kind of the average delta between Truckload and Intermodal pricing as it stands right now and is there the opportunity for Intermodal to meet or exceed Truckload pricing growth as we think about the upcoming quarters?

Yeah. Ben, I think, certainly, there is an influence on truck pricing to where Intermodal is, but we have seen a contraction in that delta in 2018 particularly in the East, where we are competing more heavily against truck on the Intermodal product offering. And so, when I mentioned in my comments that we have got room on both contract rating in 2019, I think, that certainly applies to the Intermodal segment as well and so those deltas have shrunk and I think they may continue to shrink a bit further.

Okay. Thank you.

Ben, this is Chris. Thank you for your kind words when the announcement came out. I appreciate that very much.

Thank you. Our next question comes from the line of David Ross with Stifel. Please proceed with your question.

Yes. Thank you. Good morning, gentlemen.

Good morning.

On the Intermodal side of things, you talked about the discounted truck shrinking a little bit in the east. On the demand side, how would you characterize demand on the west long-haul versus eastern short-haul, and then, what are you seeing in terms of any pre-shipping as it relates to tariffs and how that’s impacted the Intermodal demand?

Yeah. This is Mark and I’ll offer some thoughts there. We really haven’t seen any level change of demand throughout the whole year in Intermodal, east, west or otherwise, and obviously, we are now starting to see the peak season hit particularly in the import locations of Pacific Northwest and Southern California, but we are busy across the Board. When we grew volume, I think 11% on a market that we assessed that grew about 4%. So we are taking market share, and we expect a very, very solid fourth quarter as it relates to the seasonal elements of that. So, a very bullish on our Intermodal offering.

And then just to follow-up as you extrapolate that into next year, do you expect a similar amount of container growth or capacity growth at Schneider on the Intermodal side we probably see it?

Our plan does have some container and chassis growth next year, but obviously over the last 12 months to 18 months we have amped up our box count. We took 1,800 in the third quarter. We have about 600 left to take if all the shipping activity goes out as planned into the port location and then we will give further consideration to next year. But we think we have room to grow because of those investments that we have made here and the growth of the fleet in 2018.

Thank you.

Thank you. Our next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Thank you. Good morning, everyone. And good luck on retirement Chris. Mark, congratulations. You have big shoes to fill, but I think you have big feet as well, so feel good.

Thank you.

Gentlemen, can we take -- can I just ask you kind of for your thoughts on peak season, because I mean, we are certainly not seeing it kind of show up in a meaningful way in the data and I think you guys have said maybe you are seeing some of it, and I am and maybe not kind of in the overall business, kind of where are we in the peak season demand kind of as you would have expected it, because I think there certainly was an expectation for maybe an earlier and fairly robust peak season this year?

Ravi, this is Chris, again, thanks for your nice comment. As human beings, we get really conditioned sort of by the current and kind of a short history behind us. And I think, if we were to really step back and look at where the market is and where it’s performing today. It’s a very positive market. We came into fourth quarter last year with a number of things that really, really had impact, the two hurricanes. Clearly, the EOBR mandate moving out as quickly, and frankly, coming out of a market that was pretty challenging relative to price. And so, I think, Mark, has a nice view as to kind of what’s going on and in some cases how this is shaping both our experience, our competitors experience and the shippers experience in the market. But I think we should just all kind of reflect that this is still a very good market condition and we think fourth quarter will be like fourth quarters within that. So, Mark, why don’t you kind of share your insight as to what we are seeing and what we believe is kind of behind what shippers and carriers are feeling vis-à-vis what kind of expectations might be?

And maybe just a couple of things to add there, Ravi, when we look at the extent of the reset level of the rate structures not only here at Schneider, but in the industry, you certainly are now seeing I think just much higher acceptance rates, because the Board has been reset, the shippers are happy getting the coverage, carriers happy to accept and so all the secondary and tertiary chaos that was going on earlier in the year, I think I’ve subsided with those resets. With that said, there are still pockets that are more robust as we sit here today in the early fourth quarter than others, particularly around as I mentioned earlier, the import centers are seeing, what we would consider typical peak season, the demand by mode for Intermodal and for our team service to expedite product inland is growing and we expect to be incredibly robust as we would normally expect in the fourth quarter, and so to us, it seems fairly average in that respect or fairly I should say expected in that respect.

And this is Steve, I would just add, there are numerous strength indexes in the external space, you have one of them. We also have internal strength index that we monitor pretty closely as you might imagine and so we have looked back over the last several years to look at this specific dates in the fourth quarter when strength begin to appear in our internal index, and those dates really range from October 15th to November 7th over the past number of years. So we are right in the middle of where we would expect to start to see some upward trajectory in that strength index.

Got it. That’s helpful color. And just a follow-up, Chris and Mark, I think, you guys sounded just as smart as anyone with the First to Final Mile kind of step back this quarter. Are you confident, this is a one off and it’s going to be kind of back to normal service or better than normal performance the next quarter. I think you said that you took a couple of quarters -- you are going to take couple of quarters longer to get to that final target. But are you fully confident you are going to get there and kind of at what point do you guys decide that this is maybe not worthy effort?

Well, I’ll tell you there is a great deal of intensity and focus and it’s the one place that we have certainly big opportunity to with kind of focus leverage to improve the enterprise performance. I think we have stepped back and really taken a look at in some cases. I think we -- with all of our, with all of the best of intentions, we are running out to create a champagne and caviar offering for people who would really like a good beer and a good brat and I think we are going to focus the orientation on creating value, creating a level of standard and predictable service at a price point that is competitive. We believe there is opportunities out there. We think the assets that we acquired have many, many, many uses and many points of leverage for us both in that business and across the enterprise. But we are to a place where we think we understand how to get there. But this isn’t something that we are going to spend 24 months and wonder. So made some real important changes, I think we have some deep insights. There’s a lot of heavy lifting to be done. As long as we are seeing the progress and the direction where we believe this business can go and should go, that’s going to be good. But if we don’t see the ship turn and then get in where it needs to go, we are not really into hobbies here. So I don’t think this is going to be one, but if it turns out, we will have -- all have hobbies in my retirement but not here.

Very good. Thank you, guys.

Thank you. Our next question comes from the line of Chris Wetherbee with Citigroup. Please proceed with your question.

Yeah. Hey. Thanks. Good morning, guys, and Chris congrats on the retirement, Mark congrats on the new roles, pleasure working with you guys and look forward to more to come. I wanted to pick up just on, Steve, your comment about the strength index and just to make sure I was clear with what you said or have we seen that sort of pickup in activity as we stand here, I guess, about a week left in that sort of historical band where you would normally see it. Are you suggesting that we are still in the middle of that until in the next week or so you’d expect to see a pickup, I am just trying to make sure I understand sort of the lay of the land as we are sitting here, but you had some comments about deceleration, I just want to make sure I completely understood that?

Sure. This is Steve. So I’ll follow up on that. And what we are saying is that we are in the middle of -- if you look a lot of the external indexes, we have followed a similar trajectory with our internal one and where we said, today we would expect to see the upward bend in that curve coming up within the next week.

Okay. So you haven’t seen yet. Okay. Got it. And then just as a follow-up to that in the context of First to Final Mile and what we are seeing from peak or the maybe slower development of peak, incremental margins have been good broadly speaking. Just want to get a sense as we move forward with some of the challenges the First to Final Mile, some of the seasonality or lack thereof, how generally we should be thinking about that, rate environment is still quite good, just trying to get a sense of maybe the trajectory of the business, are we in sort of a leveling off type of period now that maybe persist for a couple of quarters, I just want to get your sense how that looks.

Yeah. It all, of course, depends on what you are comparing to and I noted in earlier comments that as we get into comparing to the, say, the fourth quarter of 2017, which was our most profitable quarter in our history at that point in time and remains that, that was incremental margins will likely moderate a bit, but we have been running in the mid to upper 20s so far this year as an enterprise, and perhaps, that settles into the mid-teens or so as we move forward. But we do expect additional leverage in the model as we go forward.

Okay.

Chris, this is Chris. The one thing again with our approach, we spend a lot of time working with our customers trying to move our book of business and our engagement in their supply chains and transportation needs at the contract level. Takes a little bit more effort and a little longer time to get it, but it also is sustainable, and so a lot of that work we carry into 2019, which has positioned us well. So, I think, it’s within that spirit that we kind of go, okay, a lot of that work has been done, the customers have said, look, here’s what we would like you to do and here’s what we are willing to pay for it and so, I think that carries us into the first quarter and maybe even to the second quarter without dramatic efforts as we would have seen starting in fourth quarter of last year and kind of every single quarter of this year. So, I think, that’s a perspective that you need to kind of carry into thinking about modeling us for ‘19.

Okay. That’s very helpful perspective. I appreciate it then. Again congrats Chris and Mark. Thanks.

Thank you. Our next question comes from Todd Fowler with KeyBanc Capital Markets. Please proceed with your question.

Great. Thanks, and good morning, everyone. This probably follows on the last line of questioning, with just the comments around having the growth capital being directed right now at the dedicated in the Intermodal segments. It sounds like maybe the pretension on the driver side has improved a little bit, the rates have gotten maybe back up to a better or more acceptable level, with the expectations moving to ‘19, is that -- should we still expect the capital to be dedicated or to be focused on dedicated Intermodal or would you shift back into one of the other quadrants from a capital allocation standpoint?

Good question. This is Mark. And certainly, while there has been and we had some success in the third quarter on the driver front, it did come with the corresponding expense to achieve that. But, certainly, our thoughts relative to the labor is still going to be very tight and very much in demand. And so increased focus in our mind is on those work configurations and driver experiences both in the work that they do and the customers they interact with is paramount and we believe certainly dedicated and Intermodal give us that edge, and that’s exactly where we believe our growth will entail particularly as it relates to the driver in our capital spend.

So it sounds like no significant change going into ‘19 versus what we saw in ‘18?

Yeah. I think that’s -- we are refining and finalizing our CapEx plans for 2019, but generally speaking, it’s more of the same where we would invest in Intermodal containers as we see the opportunity to do so and other organic growth opportunities are first and foremost in our prioritization.

Okay. And actually, Steve, I do want to follow up on that. And so just thinking strategically, where are you at from a standpoint of looking at anything externally and then from a capital allocation standpoint beyond the organic growth opportunities, what are you guys considering at this point?

Yeah, I mean, we are -- we say capital allocation disciplines and that -- we do try to enforce the discipline part of that and so we are -- we do have interest in looking externally as we have openly acknowledged, but we are selective in what we would pursue and probably on the fairly conservative side of that spectrum. So not everything is going to fit and we are looking for things that leverage our capabilities, our core capabilities, our technology, our ability to deal with complexity, customer stickiness is an important criteria and what markets we are serving. So when we look at that combination of factors that that all comes together and how we prioritize our efforts.

Okay. Thanks for the time and congratulations to both Chris and Mark.

Thank you.

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

Hey. Good morning and thanks for taking the question, and again, congrats to Chris and Mark on the new roles in life. It’s been a pleasure working with you both. Just to maybe I ask a different question here. There’s been a lot of activity on the regulatory side. I was assuming this is coming up for comments. You have some exemptions on advance, the push for younger drivers. How do you see that impacting the industry, are these headlines that are going to translate into something substantial from a capacity perspective or are we just seeing sort of the end result of a big tightening in capacity and just like anything and government will take a little while to get to resolution, what are you guys expecting on that front?

Brian, this is Chris. I’ll give you my view and have Mark follow on. Yeah. The government even when they decide that they are going to move, it takes a while for implementation. That said, when they finally implemented this EOBR, I mean, there are still things going on, but in general, I would give the DOT and FMCSA pretty high marks in terms of when they move to getting it done. I think there’s no doubt there’s an effort to try to get younger drivers. Again, that may work. It’s just -- it’s challenging, you want somebody who is proficient and professional behind an 80,000 pound vehicle moving with passenger vehicles. Clearly the vehicles are getting more and more safe in and of just their capabilities to know what and who is around them and so that that may open up that possibility. I think a lot of this around the hours of service. My hope is given that there is electronic data in this data that is then being shared that we can get to an hours of service that really understands the work, the driver’s life, and how do we have the driver be productive, but be safe and productive at the same time. And I am hopeful to the extent that they are going to make changes this broader database and if they will take a similar kind of approach, we will land in a good place and then we can stay there, because it is disruptive to the industry changing hours of service. It has a huge impact in terms of how we think about freight, price, markets, all of those kinds of things, and so, I would like them to do a ready, aim, check windage, aim again and then fire, if we are going to go through that, and my hope is that kind of given the EOBR thing, may be that that’s what’ll happen. In the end my view is, it’s going to be incremental, it isn’t going to be earth shattering change in terms of capacity and a workforce. The workforce is going to change by raising pay by the whole industry carriers and shippers recognizing that the driver has to be productive and those -- that is where I think the greatest opportunity lies, and I think, we are in many cases just on the front. Mark?

Yes. Such as…

Give it to me like.

It’s pretty comprehensive. There’s no doubt though that the regulatory apparatus has slowed down with the new administration and be it into some level of burn in period and the only real negative for capacity, but good for society and safety as the national drug database that could be coming out this year and 2020, which gets after the habitual drug use. And then you saw the other item, some approval to get after a hair follicle testing, which we believe is superior in its ability to identify and weed out the habitual drug users. So those are the, probably, two that’s going to put the additional crimping on capacity going forward, but probably for a very good reason.

Okay. I appreciate all the details and the answer and maybe just a quick follow-up on the rail service impact. You mentioned it was clearly a headwind in the quarter. Just want to see if that was improving sequentially, I think, in the past, you have given us some context of how many loads were kind of left on the Board in terms of capacity that was just constrained your box turns that were lower than expected. So maybe you can kind of quantify that and give us a bit of sense for expectations going forward. Thank you.

Yeah. Certainly. What I think we are seeing more is just the congestion in the terminals now and particularly our western partner has got some excellent plans on automation and some things I think are going to be very, very helpful to just to the throughput around the terminal constraints, and so we are very much looking forward to their investments there. But certainly in the short run, it’s -- we would estimate we could have done reasonably another 6,000 orders through the quarter, based upon the fluidity slowdown and some of the impacts of that congestion, both within the boxes we had available is demand that we could have deployed there. But certainly, our eastern partner is -- as we expected is improving, and obviously, it’s still dealing with making some adjustments to their network that we have got to work through, but they are listening and looking at the opportunities to do exactly what they want to do, which they need to do is improve the overall execution and speed of their network, which we absolutely are behind. We just want to make sure we get a chance to have some input and some influence there to make sure we can do that the best way possible for the customer and us as a carrier community.

All right, Mark. Thanks a lot. I appreciate the time.

Thank you. Our next question comes from Tom Wadewitz with UBS. Please proceed with your question.

Yeah. Good morning. Hi. Chris and Mark also congratulations to you, I think, it’s worth noting for both of you that you have presided over some pretty big changes at Schneider I think in terms of a big focus on improving profitability over the years and also the IPO and so it’s been great interacting with both of you guys and I wish you the best.

Thank you, Tom. Appreciate that.

Let’s see. So when we think about 2019, is it reasonable to expect margin improvement across the Board or how would you think about, it seems like you are expecting more contract pricing gains. I guess within truck you have got this, if you move to breakeven in the First to Last Mile business -- First to Final that would be pretty meaningful boost to margin. But how would you just kind of broadly think about margins in the different businesses in 2019 and kind of opportunity for improvement?

Well, Mark is looking at me like, well, you are not going to be here to deliver the whole year. But I think that -- I think as you -- just kind of a general construct thinking about ‘19. ‘18 was fairly prolific in terms of what the shipping community experienced in terms of moving rates. It was driven by the fact that many or all of us in the carrier community did move driver related expenses pretty significantly as well, in some cases starting even back in 2017 to have to do that. I think that -- and so as a result, I think, if you are going to go or we are going to get another turn on ‘18 and ‘19, I’ve never seen that happen in this industry and because I think a lot of things did get addressed and we are in a place that’s pretty strong. I think, again, we will see movement in driver expenses that will have to go into the marketplace and be able to recover. So, I think, as long as the economy doesn’t make a big turn, I think, there’s going to be pricing activities that happen. But I think if -- I just can’t imagine and if we don’t have anything in history that would say we would duplicate what happened in ‘18 and ‘19. And so, I think, you will probably go back in history and have some pretty good models to kind of think about what would happen until there is the ultimate economic slowdown and if we were really good at predicting that, we would probably have a different division in our enterprise that was doing a lot more speculation. So, Mark or Steve, I don’t know, if you want to add to that.

Yeah. Tom, I think, we have as I look at where the opportunities are for us and you called that one clearly in First to Final Mile. We have the ability to do things that we are working on to make that a very, very positive comp condition and we are focused on doing that obviously. I think we have room in our dedicated reshaping that we have done which was all enhanced around -- are all focused on the driver experience and getting in a position where we have the appropriate returns for the services we are providing. So that is a place that we are believing that we will have improvements in ‘19. The irregular route networks, the large networks, maybe we don’t have as much, certainly, as Chris points, a year-over-year pop to those same degrees. But when we look at the whole portfolio, we are not sitting here and thinking that we are maxed out in Truck, Intermodal or Logistics and we have improvement opportunities. And particularly maybe more driven by growth in some of those segments and expansion of margin, but we can increase our earnings profile with our more asset light functions regardless, in some respects, regardless of where we are in the market cycle.

Steve, anything?

No. It’s exactly what I was going to say what Mark said there at the end where it sets the beauty of having this portfolio. We have some margin improvement opportunities within it, but we also have just earnings dollars growth opportunities from topline expansion in our less driver intensive businesses. So it’s a good combination.

So, okay, that’s good. If I could maybe just follow up on that a little bit. What’s the conviction level that like is it good to say base case on First to Final. We get to breakeven next year or would you say, hey, you have to still model a loss on that. And then on Intermodal, where you have had the most dramatic improvement, maybe to your comment, Chris, is that, you say think about a flat Intermodal margin next year or is that too cautious?

This is Steve. I’ll weigh into that a little bit. This First to Final Mile for example when Chris mentioned in earlier about a couple of quarter delay in achieving profitability with that given where we are today and the amount of work we need to do to retool that business. I’d be hesitant to say like on a full year basis that there’s profitability. What we are signaling is we expect to achieve profitability sometime during the year and that’s likely in the second half of the year. That’s our objective and that’s what we are striving for with a lot of earnest activity. So that’s how I would respond to the First to Final component of that. In Intermodal, given the step up in margin that we achieved this year through a variety of initiatives and investments, it’s more of an organic growth story there going forward in my opinion and maintenance and fine tuning of those margins rather than robust expansion of those margins.

Okay. Great. That makes a lot of sense. Thank you for the time.

Thank you. Our next question comes from the line of Allison Landry with Credit Suisse. Please proceed with your question.

Hi. Good morning. And I just wanted to echo congratulations to you guys similar to that everybody else has been doing during the call.

Thanks.

I wanted to ask on Intermodal with your Western rail partner. Have you seen anything that maybe suggests that there’s potentially some testing of precision railroading going on there or even implementation, just curious if you have seen any changes?

Good morning, Allison. I don’t want to speak for them or perhaps their strategy. You are asking -- as you asked for our opinion on that. As you look at their network and what they have done over time, they have always been very, very disciplined relative to how they think about opening additional ramps and slowing the train down or making it if you look at the tenets of precision railroading, which is long trains going long distances, I think, their current network is highly aligned to that philosophy presently, and so perhaps, there is less need and less opportunity based upon kind of how they have set their network up. What we are encouraged by there also we think being very forward thinking relative to automation within the terminals, which as you look at the Class 1 railroads, the one of the biggest items or one of the largest items they have to deal with is landlocked around those terminals and so the ability to get more efficient within and do things that -- and invest in activities in capability that drives efficiency within those terminals as we think is just a great opportunity to improve the whole fluidity of the network and so maybe that will be their version of precision railroading, and again I am hesitant to speak for them, but that would be kind of our view looking from the outside in.

Okay. That’s -- and totally understood in your last comment there, but that’s definitely a good context. And I am sorry if I missed this earlier if this came up, but wondering if you could give us any sense in terms of -- for 2019 what you are expecting for rate increases from the rails?

Well, our mechanisms that we have in our arrangements with our railroad partners is that from a rate standpoint, if there’s mechanisms are recognized where the markets at and so that will adjust up or down based upon where the markets at. So I can’t get into the details of that. But there are elements that allow for both parties to enjoy, where the market is currently performing.

Okay. And is it sort of fair to think about when you guys are whether you have longer term contracts or any annual with your own customers. Is there anything linked in maybe the multi-year ones, two, what the rail rate increases or if that changes?

We have long-term arrangements in place with our two primary railroads. The mechanisms are consistent and again they adjust based upon where the market is at. So we don’t anticipate any changes to the mechanisms, we just -- we will have to see where the markets at and those things take care of themselves.

Yeah. Relative to the customer contracts, those we have to do the work relative to the market as opposed to have anything in customer contracts that take that into account.

Okay.

The only thing I would add is that, there is not like one day where everything resets. It’s a more fluid process.

Right. Understood. Okay, great. Thank you very much.

Thank you. Our next question comes from the line of Brad Delco with Stephens. Please proceed with your question.

Hey, guys. Good morning.

Good morning.

Good morning, Brad. You are going to get to be the last one here.

Well, I appreciate that and Chris congratulations and Mark congratulations to you as well.

Thank you.

I had an easy one I think and I apologize I jumped on late, so I hope you didn’t address this. Can you comment on what bid season looks like, I mean, has it started, have you heard any anecdotes from shippers about when they plan to come to bid and are there any surprises to either of you?

Brad, at this juncture, as in our opening comments, we are largely through as we think in our Truck business in the mid-90s, in our Intermodal segment we are in the upper 90s of being through the kind of the rate reset process here for calendar year 2018. And in many respects, I think the carrier community and the shipper community are getting what they needed, wanted out of those arrangements was solid routing guide performance and predictable coverage and the whole network is operating as I mentioned in my opening comments with a lot less chaos as associated with that. At this juncture, as we sit here in early fourth quarter. There are no surprises to that either for the shipper or for the carrier at least from our vantage point and so I don’t know if the question is pushing as people moving up, moving back, I mean, it’s all operating pretty much as we would expect at this point.

Okay. That’s helpful. And then maybe just to follow up on that. As it relates to sort of dedicated bid activity, would you say that slow down just by the nature of supply demand dynamics being left out of balance or is dedicated bid activity is still pretty robust.

Yeah. I’d break that down in a couple of what type of dedicated are we referencing there. We have been very cautious of putting our resources against capacity generated type dedicated meaning things that are troublesome in a network, one way configuration being reformatted into a dedicated type coverage point. We don’t generally subscribe that those are durable through cycles and our resiliency focus and learnings over the years would suggest that that’s generally not in our best interest to do that and so we haven’t been pursuing those at all through the 2018 capacity crunch timeframes. Our focus has been on those specialty types or giving a higher level service configuration that is durable through cycles. And that pipeline is still very, very good. It’s not driven by people just looking for capacity coverage type solutions. So we feel that’s our focus and that’s where we will be taking into our strategy and approach to 2019.

No. That’s very helpful. Thanks for the color there, and again, congrats to you both.

Thanks.

Thanks everyone for joining the call. We appreciate it. We will get back to work and see you in 13 weeks.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.