Q3 2019 Earnings Call
Greetings and welcome to Schneider Nationals third quarter 2019 earnings call.
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It is not my pleasure to introduce your host Mr., Steve been this director of IR. Thank you you may begin.
Good morning, everyone.
Joining me on the call today are Mark work, President and Chief Executive Officer, and Steve Brown, 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.
Actual results may very well so there may be references to non-GAAP measures. Please refer to the special know whats relate 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 work.
Good morning, everyone and thank you for joining the Schneider called today I.
I will offer a few summary comments for the most recent quarter regarding core operations I will turn it over to Steve profit for more specifics on the financials to include the first the final mile service offering shutdown status.
And the impairment of the for sale tractor inventory that was booked in the truckload segment as well as a remainder of 2019 forward commentary.
Snyder has three reporting segments truckload intermodal logistics that all operate a considerable scale and serve a highly diversified customer base throughout North America.
The commodities MOAKS ranged from general retail merchandise across multiple retail platforms. The highly specialized value added services and bulk tanker and delivery excuse me and dedicated delivery configurations.
Before we participate in answer or White Cross section up North Americas economic engine.
Well the segments operate independently, we strongly leverage the commercial operational and cost synergies between the segments.
The environment in the quarter was very competitive with persistent oversupply of capacity across all three reporting segments.
The condition continues so far in the fourth quarter, even as we were in the midst of peak season.
Well I guess 2019 as lack the typical seasonal patterns of capacity tightening.
Due to things like spring produce or sort of summer beverage seasons.
But starting in September and carrying into October we have seen some seasonality and promotion promotional volumes related to the traditional retail peak season, but there are well below the frothy conditions of last year.
As context, and the most recent quarter contract pricing is flat with a year ago and our large truckload for higher network offering. However, overall price is down year over year with spot price erosion and fewer promotional freight projects.
Intermodal delivered less order volume into a more difficult year over year comps in intermodal new contract price renewals in the quarter. We're in the low single digit increase range.
The expense front, I'm, especially a pressure of the organizational wide focus on variable and indirect cost management.
What I recognize the good work of our professional driver mechanic, an operation staff, including our driver recruiting teams for effectively lowering variable costs in the areas a fuel consumption safe operations and with process efficiency gains and maintenance and driver recruiting and onboarding.
We have reduced management overhead expenses throughout the year.
Improvement in our cost position continues to be a significant focus as we set up the business favorably for 2020.
And the truckload segment, our core operating ratio performance in the quarter exclusive of all first a final mile impacts and they held for sale tractor impairment sequentially improved 60 basis points to an 88.4 operating ratio.
Compared to second quarter.
Well operating revenues, excluding fuel surcharges were down 9% year over year, they're variable contribution dollars associated with that revenue were down only 4% due to solid variable cost control.
The results are within the truckload segment were achieved a bit differently in 2019 versus 2018, while the for higher standard business is experiencing margin compression due to market oversupply of capacity, along with less favorable contract renewals and spot prices than a year ago.
The work of reshaping the dedicated portfolio benefited our operating margin performance in the quarter, we had an excellent quarter and delivering value to our dedicated customer base and the new business sales pipeline remains robust.
Well the intermodal segment Q3 was a quarter of holding market share versus growing share our order volume decreased 4% year over year at a domestic intermodal market that we estimate contracted 5% over the same period in 2018.
Each month of the quarter was fairly consistent from an order per day volume standpoint versus a year ago, when the volume strength built throughout the quarter.
Revenue per order did improved 4% year over year and as mentioned the limited contract renewals in the quarter remain positive in this low single digit range.
Intermodal operating ratio was 89.9 for the quarter compared to our annual long term target range of between 88 and 90.
Lower order volumes and higher rail purchased transportation cost were the primary contributors to the 410 basis points of operating ratio contraction from last year's record Q3 performance.
Recent new business wins that will be implemented in Q4 and after the first of the year indicate we should return to above market growth rates.
And finally, our brokerage service offering competed effectively in a difficult market by growing order volume, 11% year over year, but a lower but at a lower gross margin per order largely contributing to the segment 60 basis points of year over year reduction that operating ratio to 95.8. However.
The focus on cost efficiency in process automation in part contributed to a 20 basis point margin expansion sequentially from the second quarter of 19.
Our carrier platform automation investments were extended into select third party platforms to specifically target and meet the micro carriers, where they are already connected.
The effort expands our carrier reach lowers our cost of capacity acquisition and serves as a complement to our direct channel of load by truck carrier applications.
I'll now turn it over to Steve for his commentary.
Thanks, Mark and good morning, everyone.
There was a lot of activity on our third quarter financial results that might seem to be noisy an unrelated.
However, there was a common theme to these activities, which included the shut down or the first the final milestone service offering the asset impairment of a group of tractors held for sale and numerous cost reduction initiatives.
The overarching theme is one of organizational focus and preparing the company for 2020 and beyond.
My perspective, we're already seeing the benefit of that focus and the day to day execution within our truckload segment that Mark discussed earlier.
Regarding the first the final mile shutdown, we recorded a 50.4 million dollar charge in our truckload segment, which is at the lower end of our guided range of 50 to 75 million.
These charges are shown on the restructuring charges line of our consolidated income statement.
This initial estimate of the charges will be refined over the next few quarters.
In addition, the operational losses for first the final mile in the third quarter were in line with her guidance of 9 million.
Moving now to the 11 and a half million dollar asset impairment of equipment held for sale that was also recorded in or truckload segment.
We typically sell or used equipment quite effectively through retail channels, but given the volume of tractors that we needed to sell this year, which was compounded by the first the final mile shut down they became impractical to solar utilize the retail channel.
As such we reached an agreement in the third quarter with the channel partner for a fourth quarter block sale tractors.
Which will help us get our U.S tractor inventory closer to our normal routers by year end.
This impairment charge is included in the operating supplies and expenses line of our consolidated income statement.
Regarding our segment results Mark addressed our primary reporting segments. So a comment on the other segment, which had a six and a half million dollar.
I've income in the third quarter compared to 5.6 million dollar loss in last year's third quarter.
So similar to 2019 second quarter. The primary reason for the variance was incentive compensation accruals for all associates, who are not directly in our operating segments.
To provide further context.
If we hit 100% of our targets in a given year the accruals for incentive pay would be approximately 25 million annually.
However, given our overachievement relative to our financial targets in 2018, and a sizeable underachievement relative to 2000 Nineteens targets. There is a larger than normal year over year variance.
Looking forward.
And assuming 100% achievement over financial targets next year will have approximately 20 billion more expense were incentive compensation than 2019.
When you put all these factors together with our core operational results our consolidated earnings per share for the third quarter or 11 cents.
Adjusted for first to fight on my or shut down charges EPS was 32 cents and that includes the 11 and a half million impairment charge.
Looking ahead. The nearest upcoming item is that November 2019 repayment of a $40 million note.
We also have an additional $55 million of notes maturing in 2020 that we currently expect to repay.
Our full year 2019, adjusted diluted EPS guidance has been updated to a range of $1.24 to $1.30 per share.
Compared to the midpoint of our prior guidance. This reflects a seven cents decline the majority of which reflects the impairment charge taken in the third quarter.
Our guidance for 2019 net Capex has been slightly adjusted to approximately 310 million.
Down from the prior guide of 325.
The primary reason for the changes increased proceeds from the disposition of equipment.
We also expect our full year 2019 effective tax rate to be approximately 25.7%.
And to wrap up my comments, we've taken a series of actions this year to focus the organization and leverage our core strengths and we're well positioned as we finish out 2019 and plan ahead or 2020 .
With that we'll open up the call for your questions.
Thank you.
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Our first question comes from Ravi Shanker with Morgan Stanley . Please state your question.
Thanks, Good morning, gentlemen.
Mark Yes, a weekend dust off your trustee Crystal ball and try and get they already read on 2020.
Again, obviously the uncertainty on the demand side or maybe a few more explicit catalysts in the supply side.
What do you think.
Next year looks like a specifically from low rates perspective for the industry and for you guys.
Good morning Ravi.
Obviously, we're not yet in the mode for 2020 guidance, but I think you articulated the kind of the ditch lines there relative to more uncertainty certainly with the macroeconomic condition, but but I do believe as we go into 2020, we have a little bit more attention on the supply.
Side, and certainly existed as we came into 2019 and love to see how that plays out but certainly.
Things associated with the hardening of the insurance markets, where which are in a significantly different place and they were a year ago.
We are now several quarters of.
Low spot prices, we've got national drug clearing house, we got DLD final conversion.
We expect a hair follicle ruling.
And and as we mentioned.
Maybe against a backdrop of economic trade discord and a little bit uncertainty, but sort of put all that together I think we're just a little.
We're following and watching many of those things, but havent.
Taking a public position yet on those but I am encouraged that there is a bit more attention.
Around the supply side than that weve than we experienced in 2018.
At this point do you feel like rates can be up.
For next year as a whole.
I'm not sure enough in the first half of the year, but certainly maybe second half that might be a more constructive condition, but again it all the supply side I think will be.
The key catalyst.
Got it maybe just very good quality for Steve. Thanks for the color on some of the moving parts. There you guys have had anything.
Little bit of what a noisy run off learning is given the number of items for the last couple of quarters at least.
The first to find in line not find anyone dominant and somebody's issues or the way you feel like.
We can get a couple of team Prince and in Fourq you under 2020.
Thanks, Robbie that certainly the objective and like I tried to articulate this has been a year of.
Positioning the company to go forward there were a number of steps that we felt we needed to take to tighten things up focus on our core strengths and and our or capabilities and feel quite well positioned in relative terms, regardless of what the environment ends up being as we go forward but.
Like how we're positioned.
Hi, good thank you.
Our next question comes from Chris Wetherbee with Citi. Please state your question.
Yeah, Hey, Thanks go I guess.
Maybe just to pick up on that last points, Steve If we could go through maybe some of the items just to make sure that it's clear so from a first the final mile perspective, I believe the impact on 2019 was about 15 cents and I think this impairment on attractors is roughly five cents. So when we think about.
2018 guidance, that's up to 80 to one 124 to 130.
There is about right. There's about 20 cents yourself sort of impacts all that number that likely will not recur. When we think about 2020 I just want make sure I understand the setup going into next year.
Sure I'm you know it was as we sit here today, we certainly wouldn't expect further.
Impairments of equipment held for sale, however will need to continue to monitor the used equipment to mark market and see how that turns out over the course of time.
We really try to dial our depreciation policy and how we set residual values to do not generate large gains or losses over the course of time and that they do.
Tactically net out over the course of time.
Oh through pockets like this or may be some some modest losses on disposition that we could incur or in the.
First couple of quarters of 2020 don't know that yet but.
As a a soft patch and they used equipment market that those things tend to come and go so it's a little difficult say what that part will look like.
But to your point.
Yes, we've removed we don't won't incur the 35 million or so of pretax losses that we incurred at first the final mile that won't repeat in 2020.
I just spoke to the.
Current view on on the asset impairment situation in 2020.
And at the same time in my earlier comments I, just trying to make it clear yes, we have those tailwinds for us as we go into 2020 or is this incentive comp thing that I was trying to size up for people. So they can.
Plan for that accordingly, as well.
Okay and just.
For the fourth quarter, you're not expecting a first to find a while negative impact or a loss to run through the piano that's right.
The operating.
Gains and losses, our dog so that entity is shut down its operations.
On the.
Restructuring charges will continue to refine those estimates as we go through time, but they'll be called out in a separate lie on the income statement and given a non-GAAP status.
Okay. That's helpful. And then the follow up question just thinking about the truckload segment.
I know you have to make adjustments, but if I think about sort of the profit excluding the first the final mile charge and put us put impairment aside for a minute it looks like the operating ratio there actually might have improved or could it potentially improved and that's relatively unique in the environment that we're seeing right now just wanted to get a sense of how you guys you're thinking about sort.
The performance of that you had it maybe as we think about Fourq you and then yes heading into the early part of the first first half of next year.
Like you're making some progress there obviously cost initiatives there you've laid out the incentive comp issues, but anything else. We can think about that seemed like it was a relatively good performance in light of environment. We're in right now.
Sure I.
I do think that.
You know this whole GAAP and non-GAAP thing can be confusing at times and we do tend to take a conservative posture when it comes to what items qualify for non-GAAP treatment.
So we didnt non gap to the impairment charge that's in the truckload unit at the same time, we feel that it's not representative of the core operational.
Execution that that the truckload segment delivered in the third quarter. So we did take that step to provide additional visibility to it.
Because we do think that.
The.
Entity, which didn't start out the year all that well has done a lot of work during the course of the year to get back on track and get the machine humming regardless of the environment. So, yes, we feel well positioned.
Things that.
We're we're performing reasonably well still here in the fourth quarter as we sit here about to enter November .
And.
Like I said dislike how we're positioned in the truckload segment.
Mark and his earlier comments mentioned the progress on the dedicated side of the business I think that's important contributor along with all the cost initiatives and just day to day revenue management and operational execution.
Okay perfect well, thanks, very much for time I appreciate it.
Our next question comes from Ben Hartford with Baird. Please state your question.
Hey, good morning goes lark.
It took a step back and looked at the truckload portfolio no with first about a mile shuttered.
How do you feel about the composition of the the services within that portfolio do you anticipate any more culling of some of the more niche offerings that you might provide or another and are there.
Are there any opportunities that you see going forward to perhaps expand that portfolio.
Yeah, Ben Thanks, Thanks for the question.
As Steve would just starting to articulate there we had some lifting to do relative to the reshaping of the dedicated portfolio and this was really our first full quarter for the most part of seeing the benefit of all that work come together and so we do believe that as a growth vehicle, we're very focused on our.
Targets of what we're after and what we're not after the value that we can bring to the customer and so from a sales standpoint, and how were resourcing the new business pipeline, we feel.
Really well positioned and and we.
We would see that as an expansion opportunity.
And don't really have any other.
Kind of reshaping to do anywhere across the truckload portfolio, we really do like some of our specialized performing assets, particularly in the tanker division and would look for other opportunities there both organically and potentially acquisitively.
Because we believe there's some real leverage of what were.
Good out there.
And the market that we conserving and grow into so those would probably be the two primary growth vehicles wouldn't see us at this juncture, putting a lot of growth into the for higher network it would be more and those specialty areas.
And then kind of a follow up.
Given some of the.
Challenges earlier in the year as it related to just utilizing quest can you talk a little bit about the experience as you move through the year and any changes that you've made as it relates to the organization utilizing that tool and how it may.
Till they trend, but it was we looked at that 2020 and look into a still difficult operating environment.
Yes. It is as a recap as we came into the year. We had just had ourselves as you recall.
Not position Favourably on the contract side of the house to degree that is typical for US. In addition to some cost positions that I'm really really pleased at how well the organization has responded.
To adjust and correct those and also were responding to a slightly different world as it relates to how secondary and tertiary freight may or may not be available as you go through.
Given cycle and so.
I would characterize the performance that you've seen in the third quarter is consistent with how we've made those adjustments.
And we'll see we got a little bit of a truncated peak season here with where.
The holidays land, but we we feel we're well positioned to take advantage of what.
We will be in a position to take advantage up question is how much will be there to do that.
Had we would expect that we're in really good fighting shape as we go into 2020.
Taking the painful learnings of.
Coming into 2019.
Helpful. Thanks.
Thank you. Our next question comes from Jack Atkins with Stephens. Please state your question.
Hey, good morning, guys. Thanks, very much for taking my question.
Steve if I could just could go back to some of the earlier questions in the sort of thinking out about 2020 understanding you're not in a position to give guidance today, but I guess.
Given all the.
All the puts and takes this year and and the incentive comp that will be coming back and next year and obviously the market maybe challenging for the first six months of next year.
But I guess as you guys you're thinking about all the puts and takes on the inflationary items. When you look at the truckload segment for next year.
What's sort of operating environment do you need whether it's from a demand perspective or from a rate perspective to be able to to see flat to modest growth in certain in terms of truckload profitability next year.
Yes.
Thanks, a question that it's really.
Boils down to the the supply demand equation that mark referenced earlier.
I think the volumes themselves will be somewhat steady and then it just comes down to.
How much prices available in the market as we go through.
Our contractual renewals and the timing of market strength or weakness in conjunction with those.
Contract renewals I think that's the biggest single variable when it comes to 2020.
Do you do you feel like that you need rate inflation to be able to drive to drive EBIT growth in truckload next year.
I think we're positioned to maintain margins in a in a flat rate environment I'd put it that way two to expand margins.
With flat pricing.
I would it would take take some heavy lifting but it's not out of the question. Okay. That's helpful. And then just last question just follow up you know Mark on your comments about the insurance markets.
You know and just the potential for attrition.
That good that that could lead to within the broader truckload sector. I mean, you know.
A little bit surprised given.
Given all the headwinds that small carriers are facing here in the second after this year that we haven't perhaps see more attrition. Thus far can you just talk about maybe the leading edge of what you're seeing out there from a from a capacity perspective, as we sort of worked towards the end of this year.
Yeah. So.
The one area Jack that we would love to have even better insight I've, just because of the fragmented nature of our industry, but.
As we check with some channel partners, particularly those that and the business.
Providing services are extending credit.
To the broader care community there are clear signs that the kind of the cumulative effect.
Of.
The both the cost condition and the rate condition is starting to have an impact, particularly on the smaller carrier.
Relative to kind of their view of the health and their view of what's coming out or in the process of coming out.
It's been a little elusive obviously.
To date.
But I think it every quarter goes by the that that condition that.
We're in exist I think it does put.
More tension in addition to the kind of the macro elements that I just talked about my opening and insurance renewals in my view is an under appreciated under.
Perhaps.
Understood catalysts, there, but again that will be seen.
Okay, great. Thank you again for the time.
Our next question comes from Bascome majors with Susquehanna. Please state your question.
Hi, Thanks for taking my question I wanted to talk a little more on capital deployment. It looks like you're sitting on 30 million or so net cash today.
Sounds like that's probably more likely to rise would fall in Fourq you in 2020.
How the board start from a buyback evolving with is rising cash balance in two and a half years as a public company under your belt.
And you know.
Is there an opportunity differentiate yourself versus truck where peers by paying a dividend that gets you above that kind of standard 1% yield.
Special dividend anything else that might be on the table would be helpful. Thank you.
Okay sure this is Steve.
I would start by saying, we have an ongoing and robust discussion about uses of cash with the board of directors and amongst ourselves on management team. So we're it's front and center and how we think about ourselves going forward all of those items that you mentioned.
We go through the classic checklist of what we could do it but first and foremost priority on organic and tech investments and then go from there.
Specifically to would we do a share repurchase weve evaluated it.
Several times as we've gone through our public.
Venture here since 2017.
So far weve leaned on the side of lighting, our public float increase gradually as we've gone through time.
So as not to have to limited liquidity in the stock.
Conversation that we revisit periodically.
Dividend itself is something that we consider at least annually as to what the level of our quarterly dividends B and we'll continue to evaluate.
So it's on the radar screen as well.
And I wouldn't rule out at some point in time, certainly not pending but special dividend is on our checklist of things that we periodically review so.
All those things are in play as well as the potential for some form of acquisitive activity.
So we feel.
Well positioned we have a strong balance sheet, we look to deploy that over the course of time, we don't want to rush into something just because we have a strong balance sheet. So.
Understood I mean is there more of a sense of urgency or not or is this something that we could hear more tangible update on in there the coming weeks in my answer or should we just kind of.
Stay tuned thank you.
At this point in time I would ask you to stay tuned I don't know that are going to point toward over going to.
Show up next quarter, and we'll have a big announcement about.
Our.
Uses of cash discussion I think its story that plays out over a longer course of time.
Thank you.
Our next question comes from Tom Wadewitz with Yes. Please state your question.
Yeah, Good morning wanted to.
If you could a I guess talk little bit more about the freight market view and I've already had a couple of questions on that but.
Mark just wanted to see if you could offer some thoughts on this improvement you've seen recently is that really a seasonality of freight without a capacity impact.
And do you feel like you have some conviction that being a freight markets bottoming and then I guess just one route relative to prior your question on insurance. If it you know insurance is really a pinch point a when does that affect most carriers is that something where you kind of have to pay to bill in first quarter or you know some of the call.
It's can do then so the capacity might be coming out in second quarter or just a couple of thoughts on the I guess, the supply demand view and within that.
Thanks to us.
Yeah, we try to choose our words carefully and and so we use the word moderate that's what we really met relative to a seasonality, but just noteworthy because of the prior.
Conditions that normally exist throughout the year on seasonality just haven't existed.
But certainly we're seeing both through.
Some project work and some typical things that you would expect around this time have been secured and we're seeing the typical kind of the import activity although not.
Nearly to the degree of year ago. So.
Again I would.
Concur with Steve's earlier comments that this is at this juncture in our view more supply driven than.
Than demand.
Driven is whats drove the imbalance, but at least encouraging that we're seeing some of the typical things that we would.
Expect to see and because we play on the truck side the intermodal side.
We get I think a fairly decent view into that but but I don't want to overstate.
The the don't want to be interpreted as overstating.
The effective seasonality, but the fact that it's here in some way shape or form has been a unique fact in 2019.
And as it relates to the insurance piece Stevens.
And I don't have a macro view to see how things aggregate in terms of when insurance renewals happen across the space and the number of tractors represented by those renewals for example, but.
Just all the various transportation companies that I've worked for of all had different.
Ciardi or renewal dates for their insurance programs. So it could happen at any point throughout a year. So I don't know that theres any particular concentration.
Okay. So that's not a clear kind of.
The year that that that would happen what just one more quick one for Steve I appreciate the insight.
Insight in how to think about the other operating income I guess.
I know incentive programs are you know a function of what you set the target level at right. So.
I know, that's a factor, but that 20 million increase in incentive comp.
Pricing doesn't turn now quite as favorably and you end up eyewear earnings are down in 2020 would you still expect that incentive comp to be up meaningfully like that or is that predicated on the idea that the financial results show some growth.
Yes, I'd say, we're fairly aggressive when we set our financial hurdles for achievement of any type of meaningful payout and our annual bonus programs.
So there would be I would expect that there would need to be earnings growth for us to end up accruing that full.
25 million or an incremental 20 million in 2020.
Right. Okay. Thank you.
Thanks. Our next question comes from Brian Ossenbeck with JP Morgan. Please state your question.
Hey, good morning, Thanks for taking my question.
So with intermodal margins during the quarter at least on the lower end to the range and we saw another downtick in container utilization.
Some of the volume.
Challenged yet in the quarter back you're just talking through what do you think that does in the fourth quarter and then into 20 do you think that rail service is going to kick up in India. The tailwind how do you think about the container fleet size in general.
And then also any any early line of sight into real inflation costs for next year.
Morning, Brian there's a lot to unpack there.
First of all as as it relates to.
Maybe a container size or container fleet, we think.
We are where we need to be in fact based upon some end of life of equipment, we could be down slightly as we.
Go through 2020, so we don't really see a large capex quite need their relative.
To certainly the growth side of that equation and.
We have room to grow and we have room to.
Drive our productivity initiatives into that fleet.
As it relates to maybe some of the inflationary areas as.
We've communicated.
Since the very to talk about since we're not really in a position to talk about contractual terms, but we do.
Recognize that our rail purchase transportation costs do reflect overtime the market, both up and down for for both participants. So we would expect we are it perhaps at the high end the peak side of that presently.
And that has.
Market rates have a rationalized a bit over the last couple of quarters that we would start to see.
Some relief.
On that end of the income statement that all plays out based upon how little market goes, but we would see will grow the higher end of that presently.
Okay. Thanks for thanks for giving me on that.
Maybe just one quick follow up on the cost savings it looks like salaries wages and benefits were down a good amount in the quarter imagine some of that or maybe a good chunk was related to the incentive comp.
Reversal, so maybe if you could clarify that and if you could it in the five so many other buckets of savings because it does sound like Theres quite a few in play right. Now that are just either getting started or are starting to have some some traction here.
Yeah, just in general you're correct there's three.
Buckets, if you want to think about that roughly $60 million decrease in salaries wages and benefits on a year over year basis for the third quarter certainly incentive comp is one of those buckets second bucket is first to file mile shut down in a partial quarter of their their compensation being with.
In there.
And then third bucket is the cost initiatives that we've referred to and they cover.
All areas of the organization, we've been quite thorough and trying to scrub through everything but.
In particular indirect costs.
Support the business we've removed.
A fair amount and gained efficiencies in those areas and we look to those are sustainable.
And.
So feel good about how we position the company in that regard.
Yeah, as we think about the overhead costs, the well inec the improvements are well in excess of anything associated with first the final mile or the other a big customer in sourcing activity that took place in the first quarter and our logistics business and so.
These are sustainable improvements some tech driven some process driven but.
I feel very good and again and in my view of a really never done there, but the organization and the leadership has responded.
Extremely well and we're seeing it.
And our cost position here in the second half of the year.
Okay, great. Thank you very much.
Our next question comes from Allison Landry with Credit Suisse. Please state your question.
Thanks, Good morning.
Just wanted to ask another one about.
2020 rates, but specifically the divergence between intermodal contract by paying an NPL contract pricing would you expect to see intermodal rates come in above the truckload rates next year, so thats similar to equal in this year.
Yes, so we we havent projected everything obviously yet.
For 2020, we certainly have seen some erosion and volume associated with truck rates.
And other alternatives that.
Can go truck versus intermodal as we progress through 2019.
Again, I think as truck capacity starts to rationalize which I think most folks believe we're on the.
Front end of that that will certainly help the intermodal business.
And as well as we've had a moderating feel condition. This year and that also kind of plays into the alchemy relative to other customers think about.
That so.
You know I'm optimistic that we can start to see.
Some return to some intermodal conversion that may have been lost here a little bit in 2019.
And obviously truck pricing has has some.
Contributing factor to that.
Right. Okay. That's that's helpful. And then in terms of a brokerage I'm coming up here the talked about aggressive pricing behavior I just wanted to see it yeah nave thoughts in terms of what you've seen in the marketplace.
And then maybe strategically if you could.
You know just share some thoughts on how do you think about market share gain personal pricing in this environment. Thank you.
It out knows our logistics question and and total there yeah.
Yeah, I think typically yes, specifically, it's a it's been an interesting year clearly I'm pleased how well we've competed weve been able to maintain a double digit growth rate from our order volumes, we would expect that we'll be able to.
Continue to do that through the fourth quarter.
But it means we've had to become more.
Competitive it's Matt we've had to.
Think about how we manage and use our decision support science to squeeze everything we can on the net revenue per order between the cost that's been under pressure from the customer.
And.
Try to maintain as much as we can as we as we get through the carrier piece and automation and taking.
Some of the cost out of that process is a key element of our future not that we believe that it will be completely a touchless world, but there are things that though we are seeing promise on and we're going to continue to invest there.
And we've had some recent announcements with some other partners of how we've done that so.
But but it's been a difficult here and.
But the team has responded well and we.
Have a great opportunity to collaborate not only with logistics, but with other services across the portfolio and brings some unique solutions to folks.
And.
What that is really had to do as sharpen our Saul on those type of items as well the to leverage the entire strengths of the organization against commercial opportunities, whether they'd be in brokerage or other parts of the business.
Great. Thank you guys.
Our next question comes from David Ross with Stifel. Please state your question.
Yes, good morning, gentlemen.
Morning.
Follow up on the intermodal.
Rail pricing question and I know.
You're not going to give us the level of increases that maybe commentary on the timing.
You'll have.
Increase has been put into place recently do you expect.
Your rail partners to raise the rate in Fourq Q1, Q, how does the timing look in terms of the rail increases.
Yes, David can get overly specific there but.
There are because of the mechanisms that recognize where market is going.
Or where market is there are various timings and different approaches of how that works. So theres no single answer to that.
What.
I think we were sitting here last third quarter revenue per order was up 15% or so.
And I think we're coming out at a quarter, where revenue per orders up 4%. So all of those things not only what we're doing but the rest of the market kind of plays into that.
And.
Just based upon those structures as how that gets adjusted so.
And unfortunately, I just can't share anything more specifically than that.
So it sounds like.
The rate increases or market related and not.
Market in different so that the rails wouldn't be raising rates next year say, 5% if the market price wasn't there is that am I hearing that correctly.
Their market sensitive I guess would be our heres how I would describe I think was your first term yes.
Okay.
And then just some more color on reshaping the dedicated business you talked about how receiving that business helped the operating ratio.
Yes, I guess, what have you done differently in dedicated how is that operating now better than it was earlier.
Yes, so great question and one that we're intently focused on and.
So we had a series of operations and unfortunately, a fairly large ones that we're not returning a what they needed to be or anywhere close to that and so we had to go in and work with the customer and sometimes we can get those fixed and sometimes.
We had to let somebody else.
Take the opportunity and so.
It's on both sides of the equation David Weve.
We've had improvement by some attrition of underperforming and replacing it.
With different targets and different performing business better aligned to the value proposition and so you have this double lift effect when you.
Do both of those and so as we've been talking it's a little bit basket because in our metrics because we've had to go through the.
Attrition and replace the tractor count and more favorable value added services to customers and generally those mean as opposed to one large went to 100 trucks of might be five smaller ones at 20 trucks.
So the commercial traction has been very very positive in the number of new startups has been very strong.
But we've replaced large operations in general as much smaller ones, which is exactly at the heart of our strategy, it's more intimate to the customer.
Perfect to general some special solutions and Thats.
Where we see our growth opportunity.
Thank you.
Our next question comes from Scott Group with Wolfe Research. Please state your question.
Hey, Thanks morning, guys. So it got Steve wanted to ask on just the cost question, where where's the impairment cost.
In the quarter show up which line.
The impairment cost is in operating supplies and expenses.
Okay perfect.
And then the other general expenses had a pretty nice a reduction in the quarter.
Can you just help us think about that.
Yes, there is obviously with the label there's a lot of.
Cost items that flow through there.
Our cost initiatives certainly are showing up in that line as we talked about indirect costs coming down in the quarter.
And.
So that's the biggest contributor to that line being decreased.
Okay.
And then I think two to an earlier question you said if truckload probably I think it was the truckload question you said of truckload pricing is flat than.
We think you can keep truckload margins flat next year.
Would you apply that same sort of thought to intermodal and overall sort of earnings that if we get flat pricing next year, we can keep intermodal margins Spider overall company.
Margins earnings flat.
I think the C., we have I believe process and efficiency improvement.
Objectives that we're going to go after in 2020 that will will help.
Our cause their biggest single variable is the rail costs that mark strive to speak too.
And how that dynamic plays out in relation to the pricing environment.
And the timing of all those things but.
I think as a general statement given that we.
I have identified areas that we can.
Perform even better in 2020 than did in 2019.
Independent of price.
So that's an objective for us is that if prices.
Flat than than we can maintain margin.
Okay, Alright very helpful. Thank you guys.
Thanks Scott.
Hi, Carolyn.
Next question comes from Ken Hoexter with Merrill Lynch. Please state your question.
Hey, good morning, Mark and Steve I'm, just on the on the quickly on the impairment charge.
You excluded it Oh are you didnt excluded while you excluded the first the final mile is that I just wanted to stand is that because you view it as part of your business or just why the difference in handling of the charges.
Yeah I appreciate the question.
So to speak to it a little earlier, but oh.
Try to be as clear as I can and I said that we do take a conservative posture when it comes to what items qualify for non-GAAP treatment or not.
And something being part of a shutdown of a service offering in our view clearly qualified for non-GAAP treatment.
Something that amounted to the sale of excess inventory of equipment was more border line. So we took a conservative approach and just provided visibility to two that item because we think it's important that people know that it was in there.
And isn't necessarily representative of the core operating performance of the truckload segment. So we chose that bifurcated path for those reasons.
So Steve just to clarify that its access capacity of of trucks just from your core service not necessarily just selling whatever was left from the first the final mile trucks.
It's the combination drug.
Duration was compounded by the first the final mile trucks coming into that pool.
Can we have.
Very effective and for years, probably last seven or eight years, a very effective retail sales arm that disposals of our equipment.
And that's our has been our preferred method and have been very successful the combination of factors and certainly first final mile and the number of equipment on top of that we felt.
And any reasonable way outstripped, our our supply line. There if you will that our capability in the retail space over an adequate timeframe and had to go do it a secondary approach and that's really what took place there.
Got it.
And then and the for higher specialty now that you've you've taken out, though so I guess that thousand tractors that the full run rate now of.
Of post first to find a mile.
Run rate fleet.
In our metrics that we provide key performance indicators by segment that you see a quarterly average so probably not looking at the full run out of that equipment quite yet, but by the time, we get fourth quarter, you would see but that is it ramp down.
Quickly, but there's still some movement in the third quarter, yes.
So it's not a okay. So maybe a little more because of that that end of Terry can you get can you tell us where they end up there it is for that segment.
We can get that T. I don't have that in front of me it's okay.
Then just I guess just in general to follow up on that is their movement within the quadrant.
In terms of fleet mix at this point.
Just given where the market is trending market demand.
I think it's our ongoing refinement of tractors deployed in the irregular route network versus the dedicated configurations that mark spoken to that as the biggest a single.
Interplay that we manage on an active basis.
Okay.
Hi, Thanks, guys.
Ladies and gentlemen, there no further questions at this time.
This concludes today.
Thank you. This concludes todays Schneider nationals third quarter 2019 earnings call. All party I mean, all parties may disconnect have a good day.