Schneider National, Inc. (SNDR) Q4 2018 Earnings Report, Transcript and Summary

Greetings and welcome to Schneider National 2018 Fourth 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. I would now like to turn the conference over to your host, Pat Costello. Please go ahead, sir.

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 fourth quarter and full year 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 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. Finally, this call is scheduled to go 60 minutes. After some introductory comments, we will answer as many questions as time will allow. Once again, I ask that you please limit yourself to one question and a related follow-up question. There are multiple people in queue and we want to get to as many as we can. Now, I would like to turn the call over to our CEO, Chris Lofgren. Chris?

Thank you, Pat. In every quarterly earnings call, I reiterate our strategy of a portfolio services, all at scale and competitive margins and how that allows the company to perform resiliently in every phase of the economic cycle. This fourth quarter was no exception. Given driver capacity challenges for the industry, we focused efforts in our truckload segment on sustainable contract rate increases. We reallocated growth capital to our less driver intensive intermodal segment, positioned this business to benefit from the over the road conversion freight and we implemented new revenue management capabilities in our Quest platform, initially within our logistics segment to drive faster growth through alternative capacity solutions, all producing a fourth quarter and full year record operating returns. Market dynamics clearly helped us recover increasing driver and purchase transportation expenses with the impact of positive net price in each segment of our company. Mark Rourke will detail the performance highlights for each business in his comments. Each step along the way in 2018, we positioned the company for greater resiliency and the ability to have greater nimbleness in response to any future changes in market dynamics. It was a year of significant long-term positioning of the company. Every year brings its own unique challenges. We move forward into 2019 confident of our preparations. Steve Bruffett will provide insights and discuss our annual EPS guidance and capital expenditures in his comments. Before turning to Mark, I wanted to recognize Pat Costello. Pat will bring his incredible 37 year career with Schneider National to a close at the end of this first quarter. His contributions to our organization are too numerous to list. Many of you have engaged with Pat after he took over our Investor Relations activities, following the IPO. We, like I'm sure you, will miss working with Pat, but wish him and his wife, Barnie a fantastic next phase of life. I will now turn the call over to Mark Rourke.

Thank you, Chris and good morning, everyone. I'll offer a few summary comments about the quarter and then quickly move into our three business segments. We experienced the delay with traditional peak season in Q4, particularly in the retail and growing e-commerce influence verticals. The result is a record earnings and margin performance, led by our intermodal and logistics segments. Intermodal and logistics represented 48% of the company's operating earnings in the quarter. While not as active a contractual renewal quarter in Q4 ‘18 as we experienced in the previous two quarters, we did experience contract renewals at improved pricing, particularly in the for hire quadrant networks within truckload and our intermodal offering with the average increase in the mid to upper single digit range and our definition of pricing is measured on a like lane basis by shipper. Shippers in most cases are valuing consistent order acceptance and delivery performance in their renewal outcomes. While spot rate activity in our internal truckload strength indexes are muted as compared to last year's historically strong January, the strength of retail sales, the relative health of the consumer and recent job creation numbers give us a sense of optimism as we head into 2019 that freight volumes will remain healthy. Now, let's move into truckload. In the truckload segment, the overall tractor count, which is a combination of our company and owner operator units, grew sequentially in all four quadrants from Q3 of ’18 to Q4 of ’18 to 11,575 units. On a year-over-year basis, in Q4, the truckload tractor count contracted 3.6%. Dedicated standard was the largest revenue growth driver in truckload, excluding fuel surcharge revenues both year-over-year and sequentially from Q3 to Q 4 at 19% and 10% respectively. Dedicated specialty partially offset this dedicated standard growth. As was highlighted last quarter, we finished a reshaping exercise with a few dedicated specialty contracts in order to redeploy capital and more favorable financial return configurations. Our dedicated new business pipeline continues to build and we have several new business awards scheduled for startup in Q1 of ‘19 and we expect all of our 2019 tractor growth and truckload unit count to be derived in our dedicated contract offerings. On our last call, we articulated that we were adjusting our execution model in our first to final mile service to achieve a material improvement in financial performance. The change is centered around reduced variability by increasing the structure of the network through day of week service by area, balancing commercial focus between B2C and B2B solutions, a revamp of the leadership team with proven industry talent and we are moving to a more variable cost structure by moving the middle mile network from a largely dedicated tractor configuration to one that converts over the road moves to one way intermodal for hire truck and third party capacity to significantly lower the cost to serve metrics. While recasting to that degree has taken time, we do expect full implementation of the execution model changeover to be complete no later than the end of March of 2019. Our core truckload segment, excluding first to final mile operated at an operating ratio of 83.3 for the fourth quarter. Now transitioning to intermodal, the intermodal segment grew operating revenues, again excluding fuel surcharge revenues. Year over year, in Q4, by 31% while achieving another record operation, excuse me, operating ratio result of 84.8%. Order volume grew 16% year-over-year comparing Q4 of ‘18 to Q4 of ’17 and in the second half of ’18, the intermodal segments run rate is now more than $1 billion in annual operating revenue. It was a robust peak season with consistently strong order volumes throughout the quarter. Revenue per order increased 13% as compared to Q4 for the prior year, with yields improving 11% with mix impacting revenue border by another 2%, mostly due to longer length of haul in our transcon business. We took final delivery of our final allotment of containers within the quarter and the corresponding number of chassis to support them, bringing our total container count to 21,800. The additional container count was largely absorbed through double digit order volume growth, longer length of haul business, mix impacts and some rail fluidity challenges. Year over year, in Q4, the professional company driver fleet expanded by 18%, delivering leading customer service and business cost performance versus third party jury options. And finally, on the logistics, we achieved revenue growth in the quarter of 14% Q4 of ‘18 versus Q4 of ‘17 to 286 million in operating revenue. For the full year, logistics segment for the first time eclipsed $1 billion in operating revenue. Earnings performance increased year-over-year in the quarter by 27%, as margin expanded 50 basis points year-over-year in Q4 and 120 basis points sequentially from Q3 of ’18. Now, 78% of the logistics segment’s revenues originate in the brokerage service offering and the margin expansion sequentially and year-over-year demonstrates the resilient nature of the margin profile of this segment, especially considering the difficult Q4 of ‘17 comps, driven by hurricanes in a highly distressed Southern Cal marketplace. Our prescriptive data science models enable purchase transportation expense to adjust consistent with market forces and in addition, we have now 8000 carriers, assessing the Buy It Now feature on our load my truck carrier portal, creating an automated selection and assignment of freight movements. I'll now hand it off to Steve Bruffett to summarize the enterprise financial performance for the quarter. Steve?

Thank you, Mark and good morning, everyone. I'll begin with a recap of our enterprise results for the fourth quarter and full year and then provide some commentary on 2019. Starting with revenue, excluding fuel, it was 10% in the fourth quarter and 11% for the full year. Consistent with our themes throughout 2018, intermodal and logistics provided the majority of top line growth. Intermodal revenue grew 31% in the fourth quarter and 22% for the year, while logistics grew 14% in the fourth quarter and 23% for the year. Truckload revenue grew 2% in the fourth quarter and 4% for the full year, reflecting the driver constrained operating environment. Adjusted income from operations improved 21% to 121 million in the fourth quarter, which as Mark mentioned was a record level of quarterly profitability. All 3 of our primary operating segments contributed with intermodal increasing by 44% when adjusting for last year's duplicate chassis costs, while truckload and logistics each improved by over 20% from the fourth quarter of 2017. On a full year basis, adjusted income from operations increased 102 million or 36% to 384 million. Truckload improved 23%, intermodal 94% and logistics 39%. And our portfolio and our mix of business remain important parts of our ongoing story. When reviewing our financial results, I'd like to provide context, any items that might not be intuitive. For this earnings release, the results of the other segment need further explanation, given the number of moving parts involved. For the full year of 2018, a 42 million loss was incurred on a GAAP basis and this compares to a 2 million loss in 2017. There's a $40 million change year-over-year. However, when adjusting both years for the non-GAAP items that were recorded in the other segment, the year-over-year changes reduced from 40 million to 19 million. And within that remaining amount, there were two primary explanations. The largest variance was from compensation plans for company associates that are not directly aligned with their operating units. In 2018, actual results exceeded targeted levels for these plans, while they were below targeted levels in 2017. The second item was an increase in public company costs as we implemented SOX during 2018. Moving now to incremental margins, which were 20% for the fourth quarter and 22% for the full year at the enterprise level and on an adjusted basis. There were storylines within each of our reporting segments, as we progress through the year, such as the normalization of the incremental margin at intermodal, which ranged from 70% in the first quarter to 20% in the fourth quarter, as we started to lap the benefits from our 2017 chassis conversion and ongoing operational initiatives. For the full year, incremental margin at truckload was 55%, intermodal was 36% and logistics was 7%, representing strong performance across the portfolio. Regarding diluted adjusted EPS, the $0.49 recorded in the fourth quarter of 2018 was an increase of 48% over the last year and for the full year, adjusted earnings improved 65% to $1.55 per share. Wrapping up the overview of the income statement, our 2018 EBITDA was 675 million on an adjusted basis. Moving now to the statement of cash flows, our full year cash from operations was 567 million, which was an increase of 105 million and that increase was predominantly due to the higher adjusted net income. Regarding investing activities, our 2018 equipment purchases of 422 million were virtually identical to those in 2017. The proceeds from sales were 21 million higher in 2018, so the net CapEx of 332 million was incrementally lower than in 2017. We further strengthened our balance sheet over the course of 2018 as cash and marketable securities increased by 150 million to 430 million. Also, debt was reduced by 29 million and totaled 411 million at December 31. [indiscernible] we have a $40 million tranche of privately placed debt, maturing in November of 2019 and therefore it’s reflected in current maturities on our year-end balance sheet. Our present plans are to repay this note at maturity, however, we will monitor the interest rate environment and our potential investment opportunities before concluding whether to repay or refinance the note. Continuing now with forward-looking comments about 2019, our full year 2019 guidance for adjusted diluted EPS is $1.65 to $1.75, the midpoint of which represents a 10% increase on top of a record year of profitability. This guidance assumes modest economic growth and a continuation of the constructive balance between shipper demand and carrier supply. Also, we expect our full year tax rate before discrete items to be approximately 25.5% and that’s slightly lower than in 2018. Our 2019 net CapEx guidance is approximately 340 million, comparable to the levels of the past couple of years. The themes for our investments are similar to those of 2018, as we expect to allocate growth capital to intermodal containers, chassis and to our dedicated service offerings. The rest of the business, we are mostly planning replacement capital. We will also continue to invest in the Quest platform and enhance our operational and customer facing capabilities. And if needed, we'll adjust our CapEx guidance throughout the year, as we continue to be opportunistic and flexible in our capital deployment. So to recap, 2018 was a strong year and we effectively navigated through fluctuating market conditions and it is rewarding to pause for a moment to celebrate milestones such as record earnings, logistics achieving a $1 billion in annual revenue, free cash flow generation of 244 million and yet, our focus is on the present and on the future as we look forward to the opportunities and challenges that 2019 will bring and we continue to emphasize our core themes, leveraging the portfolio of services, resiliency through business cycles and capital allocation disciplines, all enabled by Quest technology. Now in closing, I want to echo Chris's comments regarding Pat Costello. Pat has made countless contributions to the company during his 37 year career and I'm fortunate that our time at Schneider overlapped. Going forward, Steve [indiscernible] will be the primary contact for Investor Relations. Most of you know Steve from his involvement in Investor Relations since prior to the IPO and I know that hell do a great job. So congratulations to both Pat and Steve. I’ll now turn it back to Chris.

With that, operator, we will open up the lines for questions.

Our first question comes from the line of Tom Wadewitz with UBS.

Good morning and congratulations to Pat on his retirement coming up. Let's see, I think that you gave some comments on balance in the market, maybe and kind of constructive view on economy, how do you think about the bid season outcome and the contract outcome for both for higher truckload, third party truckload and also Intermodal and then kind of how much conviction do you have in those views.

Go ahead, Mark.

Good morning, Tom. This is Mark. We come off of a very solid renewal period in the fourth quarter. I mentioned in my opening comments, it's not as busy as a renewal quarter generally as earlier in the second quarter and early third quarter, but it was very, very constructive across particularly the for hire networks in both specialty and standard equipment and the Intermodal offering and again I think what we assess through that is most of our shippers are looking for continued performance of what we have seen in the second half of the year, which is solid order acceptance, and solid coverage performance from an on time coverage standpoint. So those will certainly give us confidence, as we head into 2019. Obviously on the spot market, it’s a little bit more rational, but again I continue to point to the level of reset on the contract price standpoint and 2018 has stabilization factor where parties are getting what they want and so the markets are operating pretty efficiently right now and I think that's a good sign, particularly because we're such a contract focused organization.

So can you put numbers around what your kind of best guess would be for truck and intermodal and maybe whether is it low single digits, is it mid and do you think they will be kind of the same area or I think one of the competitors in their model said, maybe intermodal pricing could be stronger than truck.

Yeah. I think we're gauging to right now a mid-single digit range. I do think there will be certain lane configurations within intermodal that could do better than that. Just based upon alternatives and strength in the network, so -- but mid-single digits I think is a good benchmark.

And then maybe just a second quick one, why don’t we think about truckload margin in 2019, it seems like you've -- you have anticipation of reducing a loss in first to final. So that should be a tailwind which could help if you still have mid-single pricing, that would seem to be conducive to a margin expansion. Is that reasonable to think the margin improves or how would you best look on truckload margin before 2019?

That'll be a bit of a function of the demand and supply dynamic, but you hit two catalysts that you believe are improvements and probably the third one is the dedicated reshaping exercise that we went through in 2018 to reallocate to better performing financial configurations and the growth that we have seen and the awards in the fourth quarter, what we expect in 2019. So those would be the three areas that I think are constructive to our margin profile.

Our next question comes from the line of Brad Delco with Stephens.

Wanted to ask on the Intermodal. These results are quite strong, kind of have your box turned at around or slightly north of 2 turns a quarter and yet you commented on kind of rail service challenges. So two questions here, can you give us an outlook on what expectations if any you have from disruption from PSR and then two, what opportunities are there for box turns if rail service does get better in 2019?

Well, Brad, I think that one of the things that we have to acknowledge at this point is the efforts that we have put into really trying to transform our intermodal offering. One is the private equipment, the move to our own chassis clearly has helped us be effective and be effective on the street, which is a key component of the cost structure. We have really worked hard to add to the company driver in this area and that was all part of design that we had early last year. So, I think when you have to think about this business now, this is a transformed business and is operating at a pretty good set of cliff here. We're pleased with it, we're ready to continue to invest in it, we think it's well positioned and so I think we have to look through that lens. And, as for what you can kind of expect out of turns, clearly, I mean, what we'll see in January with this arctic cold that has moved in, particularly into Chicago, you're going to see some things tighten up in that network. I mean, Chicago is going to be under a lot of pressure. It's a major, major interchange point. So, in the end, our ability to work with the railroads allows us to try to be as fast on our feet as we can. They will have challenges as they always do, whether it's forest fires or natural disasters and those have impacts and in terms of this precision railroading, the main railroads that we engage with have been through a lot of those efforts. And so I wouldn't expect to see significant challenges. And maybe I'll just turn it over to Mark and see if he can add to kind of the, how we think about opportunities in terms of managing box turns, given where we are today, the things that we're doing to invest in Quest and the environment itself.

As we look at specifically to the box turn question, it’s influenced certainly by the mix of our business between length of hauls and the good news here is that we're growing in all markets and we have a good partner in the East, we have a good partner in the West. We've been through many of those changes and come up stronger on the other end, particularly with the precision scheduled railroading effort. And so we know where the growth opportunities are, we know we've had to do some rerouting to take advantage of keeping it in intermodal and we know where there's opportunities because of those changes that we're going to see some over the road conversion and I think we weathered that very, very effectively. But as you mentioned going forward, we would anticipate some opportunities arise as others go through that process, it does, as the Kings get worked out and the changes occur, we believe that will create some bit of chaos perhaps, a little bit of tension in the marketplace and we'll be ready to find a way that makes sense for us to help be part of that solution.

Maybe a quick follow up for Steve. You mentioned some allocation of capital to grow. You said intermodal and dedicated, but is there any way you can provide us an idea of what type of container growth you're looking for, for ‘19.

Sure. We can provide some color commentary on it. We grew considerably in 2018 4000 plus containers to be at about 21,000 in total and we would not see or anticipate the rate of growth in 2019 to be what it was in ’18, it's still a constructive number. Another way to say it is if you look at the total amount of capital we have allocated for growth in 2019, it's more evenly split between container and chassis growth at intermodal and our dedicated service offering whereas it was almost all intermodal growth in 2018 while we're reconfiguring the dedicated fleet and its allocation in 2018.

Our next question comes from the line of Ben Hartford with Baird.

I echo congratulations to Pat on his retirement. Mark, maybe just some perspective on how you're looking at the balance of 1Q, talk about inventory pull forward in the fourth quarter and what are you anticipating in terms of import activity on the other side of Chinese New Year and maybe the seasonal ramp in March and 2Q and in conjunction with that, any sort of context to customer inventory levels at this point in time?

Yeah, Ben. We're always searching every place we can to get better insight and understanding of that. It's not been as easy to understand completely what is terrible forward. We do know we just had very, very solid volumes, all of October, November and December and the January start has been solid. Obviously, it's been a bit more difficult because of some of the weather challenges to get a real good feel for that, but the volumes look good. I think the railroads are positive about what that looks like really across their segment, there are segments to include intermodal. And the other thing we have is that we didn't have all of our boxes for the full year that we had on the growth piece, so we've got some opportunities just based upon what we have available to take advantage or wherever that is, but to say we have great and perfect insight there, we just don't. But we're confident that based upon what we see into the fourth, what we see here, I guess -- also the Chinese New Year in there and the impacts of that coming up as well, but I just don't have anything more specific to share with you unfortunately.

And then if I could come back to the point on truckload margins, specifically the first to final mile changes that you had referenced. I think you had said that you expect a full execution to be complete by the end of the first quarter here, you obviously are running losses a year ago throughout the course of the year, any thoughts on timing in terms of when first to final mile won't be a drag from an EBIT standpoint, in other words, when it can be breakeven, will it be at the end of the first quarter or is this something that'll take through the balance of 2019 before first to final mile is not producing operating losses?

Great question. I'll let Steve answer that.

Sure, Ben. Just putting in context what we have to say about first to final mile, we've stated previously that the trajectory of first to final mile during 2018 is really important to us. So we're implementing a series of well-planned operational and commercial changes that should be fully implemented by the March timeline, as Mark said. The primary objective of those changes is to achieve profitability at some point during the second half of the year, while being mindful of customer experience. So to clarify that a little bit, we still expect an operating loss for the full year of ‘19 in first to final mile, however given the expected steady lift from the business model changes we're implementing and how they play out as we progress through the year, we anticipate losses to taper, especially in the second half of the year and then that trajectory would position us well as we move forward in this evolving space.

Our next question comes from the line of Ravi Shanker from Morgan Stanley.

And good luck, Pat and thanks for the help as well. Just a couple of question here. One is, there were some media reports that spoke about a change in your relationship with Wal-Mart as a customer and maybe a couple of facility closures as well, can you just elaborate on that a little bit and is that going to be a drag on numbers in ’19?

Well, Ravi, I'll start and then let Mark really give the color around that is that clearly, Wal-Mart is a very large customer, it has been a very large customer and there's things that we have opportunities to do for them that we really, really like and there were some things that just didn't match up in terms of kind of how we want to sort of deliver the service and those costs that we have to carry on with us and frankly what they are willing to pay for it. So there was some work done throughout the year that just says, look, where can we best serve you with the things that we do and that we like to do and an understanding that they will execute in absolutely their best interests. So, I think in terms of where it positions us with Wal-Mart, I think it's great, we're doing things with them and frankly the things that we're doing, we want to do. So, I would say it was actually a positive outcome through the course of the year and we're set up to do some good things for them. Mark, if you want to add any more to that?

I think the specific question centers around one of our value added service areas in logistics that’s not core transportation related, it’s servicing warehouse functions and that decision was a decision to in source versus outsource and that's what transpired here early 2019.

And if I can just sneak in one follow up, Mark, you said in the call that renewals are running in the mid to high single digit range for both one way truckload and intermodal, is it the same range for both of them?

In my comment there Ravi, our fourth quarter related, we're pretty early in the process here in January, so I don't have much to report to you on that. A little stronger on the for hire truck side. So the upper side of that range and the more the mid part of the range has been intermodal.

Are you surprised that one of your bigger competitors talking about high single digit pricing for intermodal in ’19?

I won't comment on a competitor's comment there, but what we would expect on certain lanes of the network and again based upon other alternatives and length of haul, we do believe that there is opportunity for that to be a bit higher. So no, that would be our take.

Our next question comes from the line of Allison Landry with Credit Suisse.

Wanted to get a little bit of color on where wage inflation or your all in driver cost inflation tracked in the fourth quarter and what your expectations are for 2019?

This is Steve, Allison. Just generally speaking in 2019, while we haven't determined exact timing of anything, our general assumptions for overall cost inflation are probably in the 2.5% to 3% range, depending on the category of expense and there's always outliers, some costs will be flat to down and others will be up more than that, but if you look at the meat of our expense lines, they’re probably in that range. Would be an expectation for us and that's somewhat similar to what we experienced throughout 2018.

And then -- but specifically for drivers, whether it's wage hikes, recruiting, can you give us a little bit of granularity on what the inflation was like there?

Well, Allison, the answer to that question is so dependent upon where we have opportunities with dedicated wins. Again Mark said that a lot of our growth in the truck side will get focused on dedicated configurations. Those are going to be driven by the cost structures that we find in those regions in which we stand up those operations. And so kind of at its aggregate, that's a question that would be difficult for us to answer to a degree of accuracy. I think across, I mean the reality is that the other place where we're driving growth will be in intermodal and those jobs are mostly on every night or every other night kinds of things and those have a structure. So I know you're trying to figure out how to model the average, but the reality is, nobody is really home at that average number and so I think our approach is that there will continue to be some pressure around the driver capacity issue. I think the discipline that we exercised in the company, given the levers that we have to pull says we're not going to implement extreme recruiting kinds of things and frankly, we don't need to do them hiring into those things, where we see our growth of course, we have to do replacement as drivers turn over and move on, but we're going to be pretty disciplined as it relates to that and that's kind of how we have targeted our growth rates. So it's, we're not going to chase to the extreme, driver hiring, we think a lot of the work frankly that we did in ’18, which was as part of our renewal or rebidding of freight was defined freight that fits our network, that is friendly to our drivers, because frankly our ability to turn the asset, as we talked about through this managing of contribution per truck and contribution per load is really trying to find ways to get our drivers pay increases by getting them more miles as opposed to merely just trying to inflate a wage per mile kind of thing. So how we executed in ‘18 I think would be consistent to how we will look at approaching ‘19 and so I'm not expecting exorbitant kinds of increases on the driver front.

And just to add to that a little bit further that we did, even with the disciplines and so on that Chris mentioned, we did incur a step up in driver recruiting cost in 2018. Our expectations at this point is that we're probably plateau in ‘19. Still a considerable amount of effort and expense involved there, but more of a plateauing in that and Chris answered the driver compensation piece best we know how to at this point.

And then just as my follow up question, if you could maybe talk a little bit about the challenges in first to final mile, specifically what changed since the time of the acquisitions that you made and then maybe if your internal expectations about the long term growth and profitability of this business, have those expectations changed at all?

Allison, I’ll start with the first part of that centering around what may or may not have changed since the acquisition. The acquisitions were part of a longer term strategy, a couple of pieces not in and of themselves sufficient, but our attempt to follow what’s on trend, which is the e-commerce channel and its continuing impact it's having on our traditional brick and mortar customers and where the consumer behavior was going and so the acquisitions were meant to help build out a strategy that as we work with customers centered around a unique experience of employee models and transparency from really where either comes to the port or comes through the vendor all the way to the consumer's home. And we use those acquisitions along with other pieces and parts that we had internally to start to execute against that strategy. What became apparent was the inability to get paid as much as we needed to, to keep that largely a Schneider end-to-end process and our changes that we're going through is to balance our strengths around where those assets are deployed, but more literally, using third parties to include multiple different modes of transportation from that first to final mile and so we're just recasting and ultimately getting after a different cost to serve, while certainly trying to maintain the customer experience through that process. So, we were pleased with the differentiation that perhaps created, but ultimately from a financial return standpoint, probably a bit ahead of where the market could accept and where it’s at and so that is the change. We don't really see any difference relative to those trends on trend relative to e-comm impacts and big and bulky items and what have you, it's just we have to recast our ability to do that at a price point that makes sense for the customer and that we can get to a level of profitability.

Our next question comes from the line of Chris Wetherbee with Citigroup.

And congrats Pat. I wanted to ask about sort of the truckload business, the fleet size and sort of what you think you might be able to do in 2019 sort of on the broad truckload business, if there is anything specific in there that looks more interesting in terms of deploying incremental assets.

Certainly. This is Mark and I'll take that. We’ve spent a good portion of 2018 making sure that we had the right mix and the right configurations in our dedicated business and we went through a series of changes there. We’re really enthused and excited about where we are relative to our pipeline on kind of that reshaping and so whether that would be in specialty markets or standard markets, whether that would be in things like we're doing in the bulk arena or drive van, we're seeing more of our dedicated, more of our truck mix over time will be into that dedicated configuration and we think it will be a kind of an inflection point for us in 2019 in that regard, doesn't mean that we're not excited about our one way random network, over 6000 assets, truck assets deployed there, but we would be thinking of that being more of maintain that fleet size and our growth being in those dedicated configurations.

So there is growth across truckload, but obviously specific in that dedicated configurations.

It's how I think about it. Yeah.

And then I guess as a follow up to that, I'm trying to make sure I understand sort of the growth projections, as we move into 2019 and in the context of the guidance. So, the rate environment is still relatively favorable as it stands right now, maybe a little bit of freight growth, particularly in some specific areas. It seems like the first to final mile will maybe see a bit of a deceleration of the headwind, if you will, from the losses there in 2019. Can you help us sort of square that all out with sort of what is obviously a slower pace of growth and I know it's a more mature business and intermodal grew quite a bit in ’18, I’m just trying to understand some of the moving parts that get you to incremental margins that may be a little bit on the lower side than what we've been able to see over the course of the last several quarters.

The general nature of your question there's the incremental margin and top line growth versus earnings growth and so on and we did experience quarterly incremental margins ranging from 20% to 25% in 2018 and we had a considerable step up in our margins in the intermodal business, contributing to that, now that we've hit the anniversary date of some of that margin expansion at intermodal, and are moving forward, continuing that, the incremental margin, particularly in intermodal will moderate a bit, so that's part of what's playing into this. What I'd like to see us target as we move ahead in an environment like we find ourselves in 2019, incremental margins probably more looking like 15% to 20% at the enterprise level and that will ultimately depend on the rate of growth amongst our various segments because there's quite a variance in the incremental margins between logistics, intermodal and the truckload segment. So part of the answer is, it depends on the rate of growth in the mix of our portfolio that we feel like we're well positioned to capture an incremental margin as we move forward.

Our next question comes from the line of David Ross from Stifel.

Steve, a little follow up on the other EBIT line that you talked about, the big swing year-over-year from 2 million loss to 42 million loss and some of that was one time, but what do you expect I guess the run rate to be as our modeling that out or what is assumed in your 2019 guidance, is it more in the 5 million to 10 million range.

On a full year basis, maybe an easier way to talk about the other segment because there are a lot of moving parts in there. Our Asia operations, our captive insurance and our leasing business and so on and numerous other items. So, collectively, it's a little hard to know exactly where we're going to land, but we could probably be thinking in annual terms of 25 million to 30 million, best we know at this time, understanding that there will be quarterly variability within that number, just given the number of items that flow through that other segment.

And then just to get a little bit more color on the intermodal growth plans, you said not as much as this past year, so less than 4000 containers. Is it 2000 containers, 2500, I guess where do you expect to end the year on the container count?

I think there is really two components of that. We haven't gotten the full deployment of the second half containers that we took delivery of and so we've got some anniversary element of that that gives us growth lift into the first half of the year and we would expect to, to Steve’s earlier comments, be prepared to add additional capital into that, but I wouldn’t expect it's going to be at the 4000 container level. It will be well short of that, but we are going to use every other box that we've taken delivery of throughout the year and take advantage of that.

Our next question comes from the line of Brian Ossenbeck with J.P. Morgan.

So you talked about sustainable contract increases in the past, so that's not really anything new, but do you think this next cycle will be materially different based on the last one here, are shippers more open to considering partnerships really stings to choice and is the interest level and dedicated evident of a change in mindset or do you think a bit more back to the transactional relationship as the spot market continues to slow?

It’s always, I guess, a million dollar question. One of the things that I would just give extremely high marks to the shipper community have large is this sensitivity to the driver experience component and the role that they play either through their processes, their freight characteristics and their support of the carrier community, relative to how we can improve that whole end to end experience that the driver feels through the works that we can attract, retain and get people excited about a very, very noble profession. And so – and because of the level of visibility within the organizations from the C suite down particularly in 2018, there's a real and meaningful traction there and I think that does create a bit more of a shipper of choice, a bit more of a partnership slant, it doesn't mean that there won’t be pressures that come from multiple different angles on that equation, but in my mind, I'm optimistic that there's been a step level change, of kind of the channel partners coming together and I think that's a little bit of perhaps why we're bullish on the ability through this cycle, for the experience being, the cost of change being more difficult, the uncertainty being more difficult if it's working and the acceptance of performance is there, I think there is a bit more perhaps of a longer term view, that's an all-party best interest, but again until we’re tested, until they're tested, we'll see where that comes out, but –

Brian, this is Chris. One of the things that, I know that the spot rate data is something that’s sort of very dynamically available and things like that, but -- and the degree to which we and many of our competitors play in the spot market will vary across companies, but the reality is that these big massive shippers who play in the supply chain of North America, most of them, whether it's coming inbound into them, they're taking that end to trailer pools or whether it's out of manufacturing or out of distribution centers, those things are coming out of trailer rules. So this isn't an environment that us particular with the way we think about hard into more contract rate kind of relationships where you see this thing moving at this dynamic rate, because the reality is, is equipment is positioned in to customer’s supply chains and they're not always just playing the spot market and so I recognize that the spot rate is an element that is reflective of kind of where the market is, but it isn't that the large bulk of our revenue base is playing in the spot market every day to move their freight and that's part of the reason that we talk about sustainable contract rate changes. I don't know if that helps you or not, but I think it's an important point to think about the environment, particularly where we've come from and again there was significant rate increase pressures to respond to the increases in driver pay so that there was some net price increase and a lot of that work, just you rarely see those things happen at the same level a year following that.

Just one very quick follow up, on a dedicated reshaping, is there any way Steve you can quantify the impact, similar to what you've done with the first to final mile and are there any more of those actions that are needed to be taken into 2019 or has that pretty much run its course?

I guess what I'd have to say about that is we achieved the desired margin impact during 2019 with those reconfigurations in the dedicated opportunities and we’ll continue to harvest additional pipeline opportunities in 2019. I don't have a specific number to provide you on that one.

Our next question comes from the line of Scott Group with Wolfe Research.

So, I want to start Mark just a couple of things, just market, so if intermodal pricing maybe is going to go up a little bit more than truckload and fuel is down a little bit, are you seeing or hearing anything from shippers that suggest we might see some shift from intermodal to truckload and then how are you guys thinking about the impact of weather here, do you think it could have a prolonged impact in terms of higher spot rates?

The first part of that, Scott, I think there was a lot of a good discovery of value of intermodal through 2018 and certainly reflective in our growth numbers that we posted there. We don't see a great deal of activity or a discussion with customers that are looking to shift back over the road. Obviously, there are some pressures on some of the changes the railroads are making on availability of lanes that are driving that, but not out of the customer desire. And so I really – out of the top of my head, I can't think of a really a single circumstance of any materiality there. So, there's no real change to report there. And then the second part of January, obviously, we came through the polar vortex of 2014, there was an extended period of impact and chaos I think all partners or all channel partners have learned from that and there's, at least at this juncture, we would expect a quicker recovery just based upon the learnings that have been deployed and invested in whether it's additional switch heaters and where those are at or how to manage the engaged flows during these difficult times. So I think we're seeing some evidence that there was some good planning, some good execution going on here, but those things are always hard to predict and. this arctic blast is at least from our view is unprecedented and while we're an outdoor sport, we're talking the changes that and the temperatures we're talking about, they are disruptive to both truck and to intermodal.

And then just for Steve, just in terms of the guidance, can you say does the guidance assume or contemplate intermodal margin improvement this year and then the double digit earnings growth for the year, do you think it's similar throughout the year or is it more front half back half.

The first part of the question on intermodal margins, without giving a specific, we’ve indicated -- we took a pretty large step function change in our margins in 2018 for the Intermodal business and so the gain going forward is largely, in other words, the opportunity for margin expansion going forward is less than it was and so it becomes more of a maintenance and growing our earnings in that segment through volume growth and so that's where we're largely targeting our efforts in 2019. And pardon me, the second part of your question about –

Just the earnings cadence and double digit for the year, is it sort of similar styles to the year?

Right. Again without getting into the space of quarterly guidance, there probably is on a relative basis more upside opportunity as we see it right now in the first parts of the year, just given that what we're comparing to, we strengthened steadily as we went through 2018, so our comps will naturally get tougher as we go, but our expectations are relatively steady improvement as we go through the year, perhaps a bit front end loaded.

Our final question comes from the line of Ken Hoexter with Bank of America.

And Pat thanks for the help since the IPO. Mark, just returning to the precision rail question on the railroads, just your thoughts as a customer point of view on the difference between say CSX that is converted over and executing and versus maybe Burlington that resist convert -- converting over to PSR, how sizeable have the lane cuts and operational changes for you as a customer that you have to operate within and for ultimately for your end customers.

I’ll try to unpack that on really two parts, which is the impact relative to customer. There was more impact on the number of lanes than actually volume on the lanes because that's really the key tenet of the precision schedule railroading is the limiting, the inefficient lower volume lanes and so with good communication and with options to consider different routings, I think we managed through that well, but what I think is key and certainly it got better. As the changes were implemented, it’s just a good solid communication so that we could be in front of our planning and can certainly help the customer get through their planning and I think that's certainly a best practice. Ultimately what we're excited about though is really solid execution gives more confidence to convert over the road to intermodal and that's really behind the improvements we're seeing with our eastern partner and I think in the long term, predictability and performance will be a catalyst for growth that we will exceed perhaps what's been eliminated based upon the low volume lanes and I wouldn’t say that the our Western partner isn't focused on many of the same thing, they just didn't have maybe as many of the same issues as are related to multiple origin points that have had lower volume and so we would consider them focused on execution and doing the things to improve so that we can grow our business and we're seeing really, really good success on the transcon portion of that presently. So, overall though, if everybody executes better, I think the whole strength of the intermodal service offering in the marketplace will do nothing but improve.

And then just a follow up on intermodal as well, just you talked about rates. I guess Steve did on the intermodal side. Mark, what about the or Chris even, the cost of the purchase transportation site for intermodal, your contracts with the rails, are we seeing any renegotiations or step up functions on the cost side given their focus on yields as well.

Our contract focus there is long term in nature and Ken, I think we've stated that there are mechanisms that is shared relative to recognizing where the market is and adjustments are made in both directions in recognition of that. So, but these are long term in nature and so there's not a step function change in these items, these things happen over time and based upon where the market is at.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Chris Lofgren for closing remarks.

Well, we'll wrap up our first quarter call here with you guys and appreciate everybody dialing in and we've got some work to do here in the short term with the impact of the arctic air, we will get through it and we're looking forward to another very good, another good year following what for us was a pretty outstanding year. So with that, I will say good bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.