Schneider National, Inc. (SNDR) Q1 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the Schneider National First Quarter 2019 Earnings Conference Call. [Operator Instructions] This webcast is being recorded and will be available for replay later in the day. This call is scheduled for one hour. [Operator Instructions] At this time, I would now like to turn the call over to your host, Steve Bindas, Director of Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer; and Steve Bruffett, Executive Vice President and Chief Financial Officer. Earlier today, the company issued an earnings press release, which is available on the Investor Relations section of our website. Before we begin, I’d like to remind you that this call may contain forward-looking statements, and that actual results may vary. Also, there may be references to non-GAAP measures. Please refer to the special notes related to risks and uncertainties of forward-looking statements and the reconciliations of non-GAAP measures included in this earnings release. Now I’d like to turn the call over to our CEO, Mark Rourke.

Good morning, everyone, and thank you for joining the call. I will offer a few summary comments for the most recent quarter and turn it over to Steve Bruffett for more specifics on the financials and moving-forward commentary. I’d like to start my commentary with the Truckload segment. We underperformed our Truckload expectations in the quarter. We did not execute to our standard or to our capability. We experienced company-specific contract volume and productivity shortfalls in our large for-hire quadrant. The shortfall resulted in an overreliance of spot market volumes as compared to the same period a year ago. In general, we support our customers’ primary and secondary lane contract order needs over their more volatile spot volumes in both up and down markets. In the second half of 2018, again, in the for-hire quadrant, we made less primary lane commitments in the pursuit of more choice options in the market. We should have done a better job of calibrating between primary and secondary customer contract orders. The level of secondary contract volumes waned as the first quarter progressed, and our primary contract lanes were not sufficient to replace them in the short-term. Actions were taken within the quarter to address the shortfall. We do expect improvements in our primary contract orders as the Q1 shipper allocation event season has been favorable. The renewal events in Q1 represent approximately 35% of our contract for-hire volume. In those events, we’ve been consistently outperforming last year’s award share and at an improved contract pricing level, averaging in the mid-single-digit range. In general, the mid-to-large shipper community continue to reinforce their expectations for a year-over-year volume growth for the remainder of 2019. In the quarter, we had 260 units of new dedicated start-up activity in progress with an additional unplanned ramp-down of approximately 200 units, led by a large customer strategic in-sourcing decision. Our Q1 2019 dedicated margin was negatively impacted by the purchasing costs associated with these activities. The dedicated pipeline remains very robust, and we expect all our Truckload unit growth in 2019 to be in dedicated contract configurations. From a variable cost perspective, we overspent in the quarter, especially around the recruiting and on-boarding expenses of drivers beyond the dedicated start-up requirements. We on-boarded several hundred more drivers than Q1 of a year ago without achieving the corresponding revenues and utilization returns for those expenses within the quarter. We expect to better utilize this capacity and manage these expenses down in Q2. We also fully implemented the execution model changes to our First to Final Mile service offering in the quarter. Specifically, we reduced the terminal-to-terminal sailing schedule variability and converted the middle mile network from largely a dedicated tractor configuration to one that moves one way Intermodal for-hire truck and third-party capacity, where possible, to significantly lower the cost to serve metrics. As we have stated previously, 2019 is an important year in establishing traction in the First to Final Mile offering. Our core Truckload operating ratio, excluding First to Final Mile, was 92.4% in the quarter. And as we look forward, we see several catalysts for Truckload segment margin recovery: improving primary contract volumes, appropriate capacity levels and tighter variable cost control among them. Moving on to the Intermodal segment. Intermodal grew revenue 18% and did a good job of holding margin performance, considering weather impacts, with 3% order volume growth and double-digit revenue per order growth over the same period in 2018. The Q1 shipper rate renewal events represent about 40% of our Intermodal contract volume, and those results have been promising. We’ve experienced year-over-year award volume growth at improved pricing, averaging positive rate adjustments in the upper single-digit percent range. This business is well positioned to take advantage of the higher volumes with solid execution fundamentals and a 22% higher box count than a year ago. And we’re also seeing record on-time service performance levels with our Eastern rail partner as the winter impacts have subsided. High reliability is the key to effectively competing against over-the-road alternatives. Finally, moving to our Logistics segment. We achieved revenue growth in the quarter of 10% Q1 of 2019 versus Q1 of 2018 to $244 million in operating revenue. Operating ratio improved 70 basis points year-over-year despite less premium revenue opportunities. We continue to gain traction with our technology investments in our brokerage offering that combine increasingly sophisticated levels of decision support science with carrier and shippers self-serve features across the Load My Truck and OrangeHub platforms. In the quarter, brokerage executed 19,000 no-touch carrier assignments, resulting in improved broker and carrier productivity. Now, I’ll turn it over to Steve Bruffett for further commentary.

Thanks, and good morning, everyone. Since Mark provided an overview of our segments, I’ll focus my comments on a few key elements of our consolidated results, so that we can get to your questions. Enterprise revenue, excluding fuel, was up 6% over the first quarter of 2018, and the growth came from Intermodal and Logistics, which were up 18% and 10%, respectively. Also, our revenue in the Other segment was up 35%, mostly from increased activity at our leasing company and the adoption of the new lease standard at this unit. Enterprise income from operations was down 24%, driven by the factors that Mark discussed, most of which were concentrated within our Truckload segment. Looking at the larger variances on the consolidated income statement. Purchase transportation expenses increased 11%, which was proportionate to the combined revenue growth at Intermodal and Logistics. Operating supplies and expenses increased 22%, and most of this increase involved our leasing company and the adoption of the new lease standard. Historically, a subset of our lease activity has been recorded on a net basis. And going forward, these leases will now be recognized on a gross basis, which separates the revenue and cost of goods sold. So compared to 2018, each quarter of 2019 will show higher revenue and, correspondingly, higher cost of goods sold. Importantly, the new accounting standard has no impact on our earnings or economics. Before I leave the income statement, I want to bring one other change to your attention, which involves in-transit revenue and earnings. Since adopting this accounting standard at the beginning of 2018, we recorded the in-transit impact for the vast majority of our enterprise in the Other segment. Having analyzed this treatment over the past year, we’ve decided to alter our approach and recognize in-transit revenue and earnings in our respective reportable segments beginning in 2019. There’s no impact on consolidated revenue or earnings in any given quarter due to this change, only minor shifts among our segments. However, we believe that this revised approach will provide clear alignment of segment results, as there can be quarters in which the effects of in-transit shipments can vary in both direction and relative size by segment. Our first quarter 2019 earnings release and Form 10-Q both recast the first quarter of 2018 in order to provide a consistent basis of comparison. Also, later today, we’ll post a schedule to the Investor Relations portion of our website that provides you with transparency to the relevant information by segment for all quarters of 2018. Shifting now to the balance sheet. The most notable variances from the December 31 measurement are related to the new lease standard, as approximately $88 million of leases were capitalized as of March 31. We also received a relatively large batch of equipment late in the quarter and was not yet placed in service at quarter-end. This temporarily inflated the trade accounts payable line of our balance sheet, and this will flow through as capital expenditures in the second quarter as the equipment is utilized. Also, during the quarter, the $25 million tranche of debt moved from long term to current, so we now have two notes totaling $65 million in the current category. We intend to repay both notes, but we’ll evaluate alternatives as we get closer to each maturity. Regarding cash flows, the impact of the income statement balance sheet items I have mentioned creates some relatively large year-over-year variances in specific rows of the statement of cash flows. Despite all the moving parts, our net increase in cash of $62 million for the quarter was virtually identical to that of the first quarter of 2018. Moving now to our forward-looking comments. We are revising our full year 2019 earnings per share guidance to a range from $1.50 to $1.60. This range is $0.15 lower than our initial guidance for the year, which primarily reflects our first quarter results. For the remainder of the year, we’re highly focused on the earnings catalysts that Mark outlined earlier, and anticipate that these results will be more in line with our prior expectations. Also, our guidance for the effective tax rate and net capital expenditures remain unchanged at 25.5% and $340 million, respectively. With that, we’ll open up the call for your questions.

[Operator Instructions] Thank you. The first question is from the line of Allison Landry with Crédit Suisse. Please proceed with your question.

Good morning. Thanks. So, I wanted to ask about the comment you made in dedicated with the unplanned ramp-down of a large customer, and maybe, if you could help us understand how much of a revenue impact that, that had in the first quarter and what your expectation or how we should think about that rolling through the rest of the year.

Sure, Allison. This is Mark. Last year, we did go through some reshaping exercise relative to putting our portfolio in the position we wanted to put it in, in dedicated. In this instance, this was an in-sourcing decision largely, which was probably one click beyond our ideal state as we went through the first quarter. But it was a gradual ramp-down through the quarter, so – and then we also, as I mentioned in my opening comments, have a series of other start-ups that are largely in line with the ramp-down of that contract. So again, it’s our desire, based upon our pipeline, that we continue to grow in the truck space that it will be in this dedicated configuration, both in the standard and the specialty lines.

Okay, that’s definitely helpful. And in terms of Intermodal, you mentioned seeing good service from CSX. So I guess, first, I would be curious to hear if any of the contract awards that you’ve received in Intermodal so far are attributable to this improved reliability. And then if you could give us a sense for the recovery efforts in the West from BN following all the flooding and other weather issues.

Sure. I’ll take that in both parts. Certainly, on the commercial side, we are very, very encouraged coming through the bid season here today. Obviously, our two partners are largely through big changes that would be associated with persistent scheduled railroading. And so we are in a very amicable position from an execution standpoint, and we’re being, I believe, rewarded for our performance and what we expect our performance to be in that arena. So coming off the weather, certainly, I think there’s been learnings on the rail partner side and our side coming through the vortex period of 2014. And so we each did a number of things differently. We staged freight. We did things to ensure that the ramps were uncongested. So sometimes, that required us to do rubber wheel exchanges as opposed to steel wheel exchanges. Sometimes, that required us to do some double drays and get it out of the ramp before it was up and scheduled for delivery. And so all of those things, I think, allowed us and our rail partners to recover quicker. And we’re really encouraged, upon the entire performance of where we stand today and post those weather impacts, and look forward to a pretty strong 2019.

Okay. Thank you.

The next question is from the line of Chris Wetherbee with Citi. Please proceed with your question.

Hey, thanks. Good morning. Wanted to touch a little bit on the guidance. So wanted to get a sense. It sounds like trends are moving in the right direction as you move into the second quarter. But when you think about sort of the earnings guidance, any hangover from what we saw in 1Q into 2Q? And maybe can you help us sort of think about some of the April trends you’ve seen in sort of the core Truckload market?

Well, Chris, again, this will be Mark. Certainly, we didn’t think we were set up as well as we needed to be in the first quarter as we came into the year, primarily based upon our primary lane commitments that were below our historical averages, which when the secondary lanes started to wane throughout the quarter, we were placing more and more of that volume shortfall into the spot market, which isn’t really hard, bailiwick and certainly wasn’t ideal from a first quarter standpoint. And so we’ve been working through the second – or, excuse me, through the first quarter to recover through the bid events at the volumes necessary to start to wheel away at the primary lane volume that we need to recover. And we’ve been able to do actually in both Intermodal and our for-hire truck business, which is our largest component of the Truckload piece. So for that, there’ll be some ramp periods for that because awards and start-ups have a little bit of a gap between them, but we’re certainly off to a much better start here in the second quarter than where we finished the first.

Okay, that’s helpful. In terms of how you think about the fleet through the rest of the year in the context of kind of the answer you just gave, it sounds like you’re growing into the fleet that you have. Maybe you weren’t necessarily rightsized for the business in the first quarter. Are there going to be – how do you think about fleet development as you move into 2Q, 3Q and 4Q?

I’ll take that question separate between Truckload and Intermodal perhaps. But on the truck side, we got ahead of ourselves a bit in the first quarter as we’ve been working driver traction programs in the second half of last year. We had some success, and we let those programs run a little too deep and a little too long coming into the first quarter. And so we pushed some expenses that we shouldn’t have put into the first quarter and didn’t get the corresponding impacts to that. So we think we’ll be obviously in a much better condition coming into the second quarter on both a cost standpoint and being able to better utilize that capacity. I don’t see us at this juncture putting any more growth into the for-hire quadrants. Again, our focus is those long-term, sustainable contracts in the specialty-dedicated and the van-dedicated space. We’ll get through this attrition that we’re dealing with here in the first quarter on that large contract, and then start to move into the growth mode.

Okay, perfect. Thanks very much. That’s all. I appreciate it.

The next question is from the line of Scott Group with Wolfe Research. Please proceed with your question.

Hey, thanks. Good morning guys.

Good morning.

So, can you talk maybe a little bit about Intermodal volume so far in April? And then when I look at the Intermodal margins down a little bit in the first quarter, do you think that’s all just sort of temporary because of weather? Maybe can you share what does the guidance assume for Intermodal margins in the rest of the year?

Yes. I certainly think our margins will improve within Intermodal. We grew our volume 3%, but we had more dray capacity. We had more box capacity to grow well beyond that, and certainly the weather impacts and the things that we did to make sure that the networks were fluid and our customers were supported had some short-term drag on the cost base, particularly in the dray arena, around the first quarter performance. And so as we’ve had better view now of the award schedules coming through in the first quarter and so far here in the month of April, we feel very, very well about our position going forward, both from a continuing growth standpoint, but also from a margin recovery.

And then any thoughts on the April volume?

Certainly up from where we were in March, yes. So as we start to implement those pieces where the new awards volume is recovering.

Okay. And then can you just give us the numbers on the Final Mile business and maybe what the loss was in the first quarter, and how you guys are thinking about the recovery there? And are you still on track to get to profitability by the end of the year?

Yes. This is Steve. I’ll take that one. And with First to Final Mile, we’ve indicated that we had a number of moving parts in the context of the first quarter. And there were some friction costs as we implemented the business model changes, which we feel are necessary to get this part of our operations pointed in the right direction. And so we indicated in the release that there was the 320 basis point drag on our Truckload segment margins, and that’s a relatively comparable drag to what it was sequentially from the fourth quarter of 2018. It is a larger drag than what it was in the first quarter of 2018. We’ve gotten to a point now where we’re lapping the comparisons of when we started providing this degree of visibility to First to Final Mile. So this is kind of the approach we’d like to take as we go forward with that. We do expect improvement in the financial performance of this unit beginning in the second quarter now that this business model change has been implemented, and we see that as a ramp as we head into a seasonally strong third quarter. And we called out the objective of being achievable at some point in the context of this year or very near to that. That remains our objective. We do have a lot of ground to cover to achieve that objective, but that remains our objective.

Okay. Thank you for the time guys.

Thanks, Scott.

The next question is from the line of Ben Hartford with Baird. Please proceed with your question.

Hey, good morning guys. If I could just come back to Truckload, Mark, to finalize that. So can you help put into perspective the dynamic of Quest and some of the shortfall in results yet having the tool of Quest? As you think about execution in the first quarter, what was it that really led to shortfall relative to internal expectations, given the fact that you’ve got the platform, it helps with resiliency? Was it the mix in spot? Was it the timing of the dedicated loss? What do you think it was?

Yes, good question, Ben. Thank you. First of all, what I would frame is the Quest platform is most beneficial to our network-based businesses. So think of the for-hire truck side of that. Think of the Intermodal side of that. And really what it allows us to do is maximize contribution dollars through our order acceptance processes. And part of that input is how much of our capacity has been reserved or committed to primary lane obligations. And then from there, that’s where we start to use the platform and the tools to maximize contribution around it. And so as you look to last year, our volume and contribution order were very healthy through the second half of the year, but what occurred is that the mix between our primary and secondary contract volume had shifted. We were making less primary lane commitments as we were pursuing some more choice options in the marketplace. And so we came into the year at a historical lower rate than is typical for us in primary lane. And so, therefore, when we had the choice to work around that, it was more in the spot market. Secondary contract volume was waning through the quarter. And so it really came back to a calibration issue, Ben, of our primary lane acceptance – or our primary lane obligations as the key driver, which is – we muted the ability for Quest to do its thing because we didn’t have that calibration correct.

Okay, that makes sense. And then, Steve, as you look at the revised guidance, still generate – still implies a healthy free cash flow generation. What are you thinking in terms of capital allocation priorities, given the free cash flow profile this year and the cash balance that you have?

Yes. Ben, we do anticipate a continuation of free cash flow generation across the course of 2019. And as we’ve discussed in prior quarters, we have a robust dialogue regarding potential uses of cash. And I indicated on my comments earlier about we do have some debt maturities coming up. So we anticipate that, that will be one of our uses of cash. And we evaluate opportunities in the market for organic growth as we can identify those, and we could potentially be interested in some form of acquisitive growth if it fits the right profile as we go forward. It’s not a swing-for-the-fences type of acquisition strategy, but we might deploy some capital over the course of time in core areas that take – that leverage what we’re really good at and fit our profile and our portfolio as we see ourselves moving forward. Specialty and dedicated type of configurations are of particular interest. So that’s a possibility as well.

Okay. Thank you.

The next question comes from the line of Ken Hoexter with Bank of America Merrill Lynch. Please proceed with your question.

Hey, great. Good morning guys. Mark, maybe you can just talk a little bit about – you talked about mid-single-digit pricing in your outlook. I just want to understand, given the pullback of the market, you’re adding more primary lanes, which means you’re – it would sound like you then need to be more aggressive to get those lanes. But if you’re getting mid-single-digit pricing, maybe you’re not. Maybe you could talk about the kind of the contract negotiations as you move through bid season and how we can still see and accept the kind of mid-single-digit pricing in this kind of market.

Yes. Ken, we’re pleased with the performance of the allocation season as we sit here at the end of April. And that’s, for the most part, holding true. Obviously, as we get to the farther part of the year and the renewals that took place late last year, those are coming from a more responsible marketplace than perhaps what’s in the front part of the year here. But we certainly think net price will still be positive for the full year, and we haven’t seen any really data points in the contract space. Obviously, there’s some stress in the spot area. But certainly, the trailer pool shipper and the larger consumers of capacity is still quite favorable.

And what – just remind me, what’s the mix between spot and contract in that for-hire?

Yes. Traditionally, we are not a very large spot player, but we were – came to the first quarter at a 30% or so increase in our spot volumes. Our objective getting through the award season is to get back to a more traditional spot player for us and close that to primary lane gap that we came into the 2019 year with.

All right. And then just to kind of follow up on the – your comments about the dedicated. We’ve seen Amazon and Walmart pulling more business back in-house. Can you talk about if that’s obviously an increasingly accelerating factor? Are you more exposed than just the contract that you’re winding down to those large customers that are pulling business back in? And can you put a scale, maybe perspective, on how much still remains?

Yes. Ken, I think for all intents and purposes, that’s all behind us now, any customer-driven or any Schneider-driven reshaping of the portfolio, if you will. If you look back towards 2018 and this year, our target for our dedicated growth is not the mega large fleets, it’s more the smaller, mid-sized fleets that are looking at that as not core to what they do. It’s not a core Logistics. It’s not a place that they feel that they have necessarily competitive advantage. And so that’s been our target. And actually, the market is obviously much larger in that space. So as opposed to 50- and 100-size wins, we’re looking at 15 to 25 truck opportunities.

All right. Mark, Steve. Thanks for the time.

You bet.

The next question is from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Thanks. Good morning everyone. So, just a first question on First to Final Mile. I think you guys have shifted your strategy there a few times now for obvious reasons kind of just to stem the flow of the losses there. Do you feel like the latest approach is like definitely the right one that’s going to get you to that goal of zero losses there? Or do you think that’s – it’s still TBD?

Yes. Ravi, I’ll take that one. This is Steve. We feel like we have a great leadership team in place. We’ve applied some of our best commercial talent to First to Final Mile efforts. We’ve made investments in technology, and we’ve made this business model change that we’ve set the unit up for success. And now it’s the proof points as we go across the remainder – the remaining quarters of 2019. And so we are looking to see some lift in the financial performance of this entity. And part of that is just gaining additional scale, buying additional scale in the marketplace, but delivering values to customers and getting rewarded for that. And I think that will add additional volume across our relatively fixed cost portion of this unit. Although we’ve made more of the cost variable now, which is helpful, I think that, that will help to provide some lift as we move across the coming months. So...

Got it. And again, is this – I mean, have you seen traction with that approach already? Or do you kind of feel like based on what some of your peers in the space are doing, this is a tried-and-tested approach? I’m just trying to get a sense of how in the bag this is, if you will.

Yes. it’s not yet in the bag. I wouldn’t characterize it that way. We came out of the first quarter with settling down the moving parts, and it’s just been across the course of April that we’ve been – had our first chance to begin to harden the operational changes. And I think as we go through May and June in particular, we will be able to refine our approach and what mode they’re moving on and how they’re moving through the sailing schedules. So there’s some fine-tuning yet to go there. And I think that will provide additional benefit at the same time, converting our sales pipeline, which is robust, into actual volume, is another key criteria to the success of First to Final Mile.

Got it. And just one last one. It’s obviously a very interesting market out there that seems to be evolving by the day. You guys are one of the more diversified companies out there kind of with your exposure to one-way spot deal, contract deal, dedicated, Intermodal. Can you just help us understand, kind of when you kind of go meet with a shipper, what’s that conversation like? What transportation modalities have the best momentum right now? And which ones are going fall in favor? And kind of what percentage of your customers do you sell kind of multiple service offerings to?

All right. There’s a little bit to unpack there, Ravi. Really, most of our top 100 customer relationships are buying across virtually all of our three segments and platforms. And so, certainly, that’s one of the advantages to having a broad portfolio. And we certainly try to leverage that and be a place that you can get multiple needs served through one provider for ease of doing business, and because things can also evolve between segments based upon changing customer needs and changing dynamics. And so capturing more share of that wallet is certainly an advantage that we have and certainly one that we try to exploit. As far as what services or mode is more in favor, we hit so many different dimensions of the customer community. Our brokerage business is generally dealing with smaller shippers. Our truck assets are generally dealing with larger shippers, and our Intermodal offering kind of bridges those gaps in between that. So as far as interest level, I wouldn’t put necessarily one ahead of the other. Intermodal is certainly top-of-mind. And certainly, I think as we continue to be able to compete better against over-the-road truck alternatives, I think there’s still share growth opportunities within that. And then if you look at the pipeline strength in those items, obviously, dedicated coming off of 2018 seems to have a bit of a higher interest level for customers. And we’re being careful to apply those in the most durable solutions possible, not just the capacity capture solution. So I don’t know if I missed an element of your question, but...

No, no. That’s exactly what I was looking for.

Okay, great. Thanks, Ravi.

The next question is from the line of Tom Wadewitz with UBS. Please proceed with your question.

Yes. Good morning. I mean, I guess, just one comment on the brokerage volume. 20% volume growth is pretty impressive, so really nice execution in that business. My question’s actually on a different topic. But the dedicated side, I know you had a question about some of the large customers, and you characterized it as being done with the reconfiguration. I guess, just to give us a little more confidence on that, do you still do a lot of business with some of those customers that are making these changes? Or are you at a pretty low level of activity, such that the risk that they surprise us again is pretty low?

Tom, yes, this is Steve. I’d characterize it as we still do a significant amount of business with these entities across our portfolio of services in the dedicated space in particular. I think that’s what Mark was referring to as being behind us and very little activity left to go there.

Okay. So it’s pretty high visibility that you’re through that and that you won’t see more kind of headwind from attrition in dedicated?

Correct.

Correct. Sorry, I should have been clear, but correct. That’s the right way.

Yes. No, okay. No, I mean, you may have said that before, I just want to make sure I understood it right. What about the – I’m trying to get my arms around the operating leverage in Truckload because you did still see even x First to Final Mile impact, it still seems like the margin deterioration year-over-year was a lot more than I would have expected. Is there some element of driver costs that are fixed that, normally, I think you drive fewer miles, you don’t pay the driver, but it just seems like there was maybe a bit more fixed cost elements in truck than I would have expected. I mean, maybe that’s not in for-hire. Maybe that’s in dedicated. But I wonder if you could run through that just in terms of the driver structure and whether that has become more fixed for you? And then related to that, it seems like you’ve got to bid off sides on primary versus secondary lanes. What do you change to make sure that, that kind of reduce the risk of that happening again in the future?

Yes, it’s a good question. It gets into incremental margin-type thought processes and so on. And obviously, it’s not what we were shooting for in this quarter, where I would characterize it more as a variable cost issue. Costs were variable and remain variable, but they should have been more variable in the first quarter rather than it being a fixed cost issue. Mark mentioned investments in driver capacity that continued on a little longer than ideally they should have that if we could replay the tape. That was part of it.

Is that recruiting costs? Or what do you mean by that?

Onboarding, yes.

Yes, exactly. Onboarding and recruiting, yes, yes.

So the expense is hitting in the first quarter and the benefit hitting just because we now have the opportunity to utilize them to the degree possible. So...

Okay. And then what about the kind of just primary versus secondary and how you might adjust, so you don’t run into that issue in the future?

Yes, absolutely, Tom. And we certainly have visibility to that. We did not react appropriately as the year progressed. We identified that very early and to make some adjustments and adaptations in early Q1, but it takes a little bit longer time to get through the processes to convert back to a more primary lane. Some of that is just working with customers. Some of that is allocation season. We certainly have taken that learning to make sure that we stay within our traditional ditch lines of what’s appropriate for us there, and we have embedded that into our thought process going forward.

Okay, all right. Thank you for the time.

The next question is from the line of Brad Delco with Stephens. Please proceed with your question.

Hey, good morning, Mark and Steve.

Good morning.

When I look at your revenue per truck per week trends, and maybe this is more of a for-hire kind of comment or question, we don’t have as much visibility on kind of utilization or miles versus rate, but can you give us some color as to how that trended in the first quarter? And should we see an improvement in 2Q? Or have we seen an improvement over the course of the quarter that gives us the confidence we’d see better results in that Truckload business going forward? And I guess, this goes to the question of getting comfortable around TL recovering in 2Q and throughout the rest of the year.

Yes. And that’s a productivity question specifically?

Yes. I mean, I guess, it’s along the same lines of, how do we get comfortable that Truckload will improve? Do you feel like it was a utilization issue on the trucks in Q1? Or was it a pricing issue because you had more spot? And have we seen that improve in April or something to the extent that would give us confidence that we’re going to see margins improve?

Yes. Certainly, as we have highlighted more in the for-hire standard portion of the business there, we suffered not only from freight mix quality, which got into – actually, the contract rates were up double – low double digit, but the erosion of seasonal or project and then the spot influence eroded that down significantly. In addition, we had a little over 6% drop in productivity, some of that weather-related, but some of that not weather-related, some of that being the quality of freight mix change that we went through in that process. So both of those were unfavorable under any standard that we’ve established historically that we’ve experienced in the first quarter, weather or otherwise. So – and as we look towards April, we’re certainly seeing virtually every metric in that regard improving. And so – and that’s – and generally, at least in my history, April is generally not a month that improves over March historically. And there’s a market difference, at least in our book, April versus March.

Yes. And then my words, another way to describe that, is we got caught in a bit of a squeezed play in the first quarter between the freight mix and the variable costs that we’ve described earlier, exacerbated by weather. And so then as you move forward, the weather disappears, and we’re...

Aggressively addressing all of the issues there.

So that gap is closing as we move forward.

And maybe as a quick follow-up to that question. I know you mentioned your spot volumes were up 30% year-over-year, but in terms of what proportion of the for-hire standard or however you want to couch it, is it 10% of your business that went to 13%? Or kind of what’s the magnitude of how much spot represented in whatever trucking segment you’d like to use as a base?

Yes, it’s in a range, but at the top side. It’s still at 10% or less. But where it came from, that mix, especially given where spot prices are or were during the first quarter and continued so far this quarter, that’s the difference.

And maybe just one very quick follow-up. Can you give us an idea of your Intermodal volume growth, what was with East and then the West?

Yes. We had a bit of a mix change year-over-year in the quarter. The fastest-growing segments of our portfolio are in the West, both intra-West and transcon as well as in and out of Mexico and a bit of attrition in the East just based upon the lane changes over the past year relative to lane availability. And we think that has bottomed out, and we’re back to being able to start to address growth in the East as well. But certainly, in the first quarter year-over-year, the West was the growth driver.

And you can’t put it into context kind of plus or minus a number for us?

We generally don’t report by railroad or by geography, sorry.

Okay. All right guys. Thanks for the time.

Thank you.

The next question is from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.

Hey, good morning. Thanks for taking the question. So, I just wanted to talk about the rail service maybe just on the longer-term implications. Clearly, we’ve seen some pretty big operating structural changes from most of the rails. They’re talking about highway-to-rail conversion as a pretty big focal point in the future, changing lanes, building density. Is it too early to see any material improvement from the conversion rates or at least interests from customers? I imagine it’s a little hard to parse that out with a softer truck market and spot rates coming down. But what would you characterize the interest level from shippers as they watch this change? Is it getting to the point where they’re starting to be interested? Or is this going to take a number of quarters, if not years, to see a really big shift over because of this new operating model?

Well, we happen to believe, in our discussions with customers, and certainly kind of our experience to date, is that the closer we can get to a truck-like reliability, and we’re starting to see, obviously, improvements in that, that’s really the focus. And customers want to – I think they can live with some different transit a day here, a day there. It comes down to, can we get to a reliability, so that we can hit those targets on a very, very consistent basis? And I think they’ll make the appropriate adjustments within the inventory process to do that. And so the interest level and the discussion level’s high. There are frustrations at times because part of this comes with eliminating lane coverage to get to some of the improvements in the railroad. And so you’ve got kind of both sides of that when service options are eliminated, and then you talk about the value you get by being a more reliable service. So we’re having discussion on both sides of that. And – but overall, I think this will be good for Intermodal offering. And because it’s so often, I would say roughly, "What’s the alternative?" And that alternative is truck. So we have to perform closer to it.

Okay. It sounds like you think you might be through some of the near-term dislocations from the changing lanes, the extra drays, the double drayage. I know some of that was tied up in the weather, but do you feel like you’re kind of through the worst of the initial changes when it comes to PSR?

Absolutely, we do. And we look forward to getting our excellent dray driver community, who’s really a difference-maker for us. Deployed were up to plus 90% now over on Orange capacity and the dray world. And that just helps us from both a cost but an execution standpoint. And so we think we’re really, really well positioned.

Okay. And just a quick second one, if I could, on the regulatory aspect. We’ve had a bunch of moving parts here for quite some time, and it feels like we’re still moving maybe towards a tighter environment if we get hair follicle testing in the drug and alcohol database, but we’ve got out of service that they might be changing or at least we’d see some details on what that might look like the change. What’s your sense as to how that plays out for capacity at both here and, yes, maybe over the next two or three years?

Yes. I think all of those elements are a tightening element because we still have, as an industry, a fair amount of AOBR [ph] to ELD conversion. That still has to take place. And the ELD landing spot is more restrictive than the AOBR spot. So there’s a conversion that has to occur in the industry and the impact of that to operations. And then as you mentioned, secondarily, not only do the drivers have to register to get into the national database before they can – before a carrier can check, it’s an absolute mandatory check that we have to do to check to see if there’s been any failures with any other prior employers. And today, that’s a phone call by phone call approach that may or may not – depending upon the carrier how that works. The national database makes that abundantly clear. And so we think that’s another restrictor as well. But good for the industry and to get the chronic drug abuser out of the industry.

Okay. Thanks, Mark. Appreciate the thoughts.

The next question comes from the line of David Ross with Stifel. Please proceed with your question.

Hey, good morning gentlemen.

Hi, David.

The first question’s on the First to Final Mile segment. It looks like you’ve been addressing the cost side of things. In the past, though, you’ve talked about pricing also being an issue. How do you feel about pricing in the last mile segment right now? And what are you doing there to help make it be a viable business model?

Yes, it is a – quite a puzzle in the space. It’s an evolving space, and we’re stepping up our game to learn how to play within it. And part of that is mix. What – if you try to go after everything, it can lead to some chaos in what you’re trying to execute upon. So I think some focus in what markets we go after and what lanes we’re trying to serve and not try to be all things to all people. It is, like I said, a rapidly evolving space, so we have to kind of pick our spots and go after them more effectively. So it’s prices nested within what I just said there than how you think about what your network really needs and how to feed it and how it ties into your operational efficiency. So it’s a combination of things we’re working at. At some point in time, we understand the new and evolving space takes some investment and so on. But broadly speaking, not just us, things can’t move at large negative margins. So over the course of time, that has to calibrate. And that probably won’t happen in the very near term. But over the longer term, you’ll see some calibration, I think, in how pricing works within this space.

So it sounds like even with the cost-cut customers still aren’t paying you enough to make adequate returns, but you think over time they will?

I think part of it is on us to leverage the operating efficiencies that we’ve now invested in, in the technology and the tools that we have to put additional volumes over the network, which will be some self-help efforts there. And then longer term, I think those initiatives can get us much closer to the breakeven point to become profitable and earn one’s cost of capital in the space and so on. That was my broader comment about the overall participation in the space, not just by us, but by others. That’s a dynamic that will take a little longer to change.

And then just a little clarification on terms because people have been talking about spot versus contract, and then you’re also talking about primary versus secondary contract lanes. I guess, how do you characterize the difference between a secondary lane and the spot market? And then the follow-on to, and as you gave earlier as well, the 10% or less spot market, was that specific to the for-hire segment being 10% or less spot? Or is that the overall trucking business being 10% or less spot?

Yes, good question. So the references in that discussion was around the for-hire standard. On the spot piece and our definition primary is when we’re in the primary position on the routing guide. And secondary is that we could be in slot two, three or fours, another place on the routing guide, which we get regular tenders because of our positioning depending upon what happened ahead of us on the routing guidance. So what I was suggesting in the first quarter is that continue to wane on the secondary orders, which was a much different condition than we experienced in the second half of last year. And that’s what we started to address with our work with the customer community beginning in Q1.

So the spot’s really the tertiary market?

Correct. Exactly how to think of it, a place to have it.

Okay. Thank you very much.

The next question is from the line of Matt Brooklier with Buckingham Research. Please proceed with your question.

Hey, thanks and good morning. So, I wanted to go back to potential or the actual weather impact, if you could talk to – if we look across your business, all your segments from either revenue or EBIT perspective, do you guys have a number in terms of how much collectively weather negatively impacted Schneider in the first quarter?

Matt, this is Steve. Of course, we go through our internal estimation process to get a feel for that order of magnitude. It clearly was above an average year, and that probably goes without needing to say that. But if you aggregated it all, it’s well less than half of our earnings miss in the quarter. So we’re not trying to hide behind that. It was real. It was there, and we navigated through it best we could. But we haven’t quantified it to a specific dollar amount. And because it is a process of estimation and so on, but we have a general sense internally for what that looks like. But we wanted to focus on the things that are in our – more in our control and provide some transparency and visibility to those items that we’re acting upon and what those trends are looking like.

Okay. No, I mean, that color is definitely – is actually pretty helpful as we look out into 2Q. And then, Steve, the 320 basis points of drag in the Final Mile business, it sounds like part of that had to do with this transition to a more variable cost model, which hopefully, down the road, is going to be a tailwind for profitability. But it sounds like there were some transitioning costs in the 320. Care to take a stab at how much those transition costs were in 1Q? And should we anticipate that those costs go away in second quarter?

Yes, I do think that the friction costs, which we have not quantified, but they were in there, I think the drag on Truckload margin, we fully expect it to diminish somewhat in the second quarter and particularly in the third. And so that’s the trajectory that we’re expecting, but we have not broken out the friction costs in the first quarter.

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