Q2 2020 Schneider National Inc Earnings Call
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Steven you may begin.
Operator, and good morning, everyone.
Joining me on the call today are Mark <unk>, 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 that Schneider dotcom.
Our call will include remarks about future expectations forecast plans and prospects for Schneider, which constitute forward looking statements for the purposes of the safe Harbor provisions under applicable Federal Securities laws.
Forward looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations.
The company urges investors to review the risks and uncertainties discussed at our FCC filings, including but not limited to our most recent form 10-K and those risks identified in todays earnings release. All forward looking statements are made as of the data this call and Schneider disclaims any duty to update such statements except as required by.
Well.
In addition, pursuant to regulation G., a reconciliation of any non-GAAP financial measures reference during today's call can be found in our earnings release, which includes reconciliations to the most directly comparable GAAP measures now I'd like to turn the call over to our CEO Mark work Mark.
Thank you, Steve Hello, everyone and thank you for joining Schneider call today, I will open with a few summary comments on the quarter regarding our operating segments.
And then before we get to your questions I've been asked Steve profit just to provide some additional insight on the overall enterprise results are strong liquidity position and the reintroduction of earnings guidance based upon the best information we have available at this time.
As it relates to the corner it was a demanding one and I'm, especially grateful Im proud of the resiliency, our associates demonstrated daily, especially our professional drivers.
And these highly uncertain fluid types are key business priorities are to first safeguard the health and safety of our associates.
And secondly to adapt to the dynamic freight demand needs of our valued customer community.
I try to we have nearly 19000 associates and owner operators across the globe nearly four out of fiber that must report to work daily to fulfill our promises to customers.
They are driver shop warehouse and driver services professionals and they continue to shine in keeping goods flowing across the nation supply chain.
The impacts of Cobot 19, our daily work lives are pronounced since the onset of the pandemic. We've had over 100 associates, who have experienced a confirmed called the diagnosis.
Fortunately all of them have recovered or in the process of recovering from the effects.
We have supported another 800 associates are so we've gone through monitoring protocols due to a potential exposure.
For those on roles I cannot work remotely that supported times includes emergency paid leave and other benefit driven relief to ensure we are doing our best to eliminate community spread of the virus.
Safeguard our associates, we've adjusted our deep cleaning protocols.
Provide disinfectant supplies and face mask among other measures at approximately an incremental $1 million of expense per month.
As it relates to the economic recovery, a freight markets, it's been uneven across our various service lines.
The intermodal segment has been impacted the most due to a combination of higher business mix of quote unquote not essential shippers.
And the reduced level of Asian sourced import activity.
While volumes did improve throughout the quarter in total year over year intermodal order count contract at 13%.
But in addition to the volume reductions.
The disruption to the network in terms of load balance increased empty repositioning movements.
In rail purchased transportation costs.
Led to a disappointingly low operating margin for the quarter of 5%.
Now they are most recent quarter does not change our long term operating margin target expectation for intermodal that remains in that 10% to 12% range.
And assuming we avoid another economic shock the work done in the second quarter fire intermodal sales and operations team.
Working in concert with our customers and rail partners.
Is expected to result in a material improvement towards our target range in the third quarter of 2020.
Improved order volumes imbalance will contribute to that rebound in performance and we are certainly seeing the benefit of that body of work already here in the month of July.
No one more note on our intermodal.
Segment.
Publish intermodal metrics indicate our total trailer count per container count excuse me finished the quarter at approximately 21200 and that number is roughly 600 units lower than we projected during our last earnings call.
Just want to highlight at that number is largely just a timing nuance between when end of life containers were pulled out of service and when our new containers are placed into service and we expect that difference to largely be resolved as we operate through the remainder of 2020.
Our truckload liquid bulk tanker service also was disproportionately impacted in the quarter as its end cup market customers on the industrial energy market experienced a mid.
Teen percentage drop in business volume starting in April.
Uptake network business volumes improved throughout the quarter and delayed bulk dedicated startups became operational very late in the second quarter. The positive upward trend continue so far the month of July in bulk generally serves as a leading indicator for dry van truckload business volumes speaking of dry van overall, our business volumes and build customer miles rebound.
The fastest across our network and dedicated truckload business I think last quarter. We indicated we had about 445 dedicated units that have been displaced due to temporary customer shutdown activity.
As the quarter closed all of those accounts have become operational again, although several with less units than pre covered levels.
In addition, several new business startups that were delayed became operational late in the quarter.
Again, assuming no market setbacks, we would expect that in the third quarter of 20, we will rise above pre covance and year over year volume Comparatives in our core truckload segment.
Our focus in the second half will be on improving the network freight basket from a yield standpoint has contractual pricing through the second quarter is down low single digit percentages year over year.
Now daily network freight tenders now are far exceeding our acceptance levels and spot pricing has spike throughout the quarter is now double digit percentage is above contract levels.
We also believe capacity levels are likely to tighten further as we head into the second half of the year.
New truck orders remained well below industry replacement levels.
New driver entrance to the industry the top of the funnel. If you will has been materially curtailed as public and private driving schools have responded to the pandemic with closures were certainly with smaller class sizes.
And the national drug and alcohol clearinghouse process is now fully implemented.
Finally, our logistics segment.
Business posted a positive year over year growth numbers in terms of order counts and operating revenue our brokerage business continues to adapt well to the highly variable market conditions that we experienced throughout the quarter.
Brokerage experienced a tightening capacity market as a quarter progressed in the corresponding rising carrier costing that comes with that but despite all that volatility margins improved 180 basis points sequentially.
From the first quarter.
So in summary, there's still a high degree of macro uncertainty, but at the same time, our retail food beverage and consumer nondurable customers a large composition of our business mix are projecting increased volumes through the second half of the year.
We are in constructive planning conversations with our customers across our intermodal and truckload segments.
And we're seeing this near term tightening of supply and demand in most geographies across our networks.
Furthermore, we believe the some drivers supply conditions actually could tighten further with the pending public policy decisions being debated in Washington presently.
Before we get to your question, Steve Once you just wrap up the quarter.
Thanks, Mark and good morning.
I'll provide some perspectives on our enterprise results for the quarter and then give an update on our outlook for the remainder of the year.
Enterprise revenues, excluding fuel surcharge were down 124 million or 11%.
Operating expenses were down in proportion to the revenue decline and this resulted in adjusted income from operations of 64 million compared to 84 million last year.
Regarding the impact of covert on our results.
Included in the second quarter were direct corporate expenses of about 3 million. This includes pp eat costs, primarily for drivers additional cleaning costs and related items. We expect this level of quarterly expense will continue at least through the remainder of the year.
To date, the covert situation has not had a meaningful impact on our bad debt expense. We're on our D. So we continue to monitor and manage that situation very closely.
Also the quarter included some reduced cost areas that were largely attributable to covert. Most notable were healthcare expenses, which were lower than normal as elective visits and procedures were largely deferred.
And there were driver costs that were lower as retention levels were strong during the quarter.
Collectively these specific cobot cost areas had a nominal impact on our second quarter results. However, the overall impact of coated including its impact on volumes and pricing was clearly negative in the second quarter, especially in our intermodal segment as Mark discussed.
Regarding equipment, there was about a 3 million dollar negative year over year impact from asset impairment charges and gain loss on sale.
And the second quarter of 2020, the net of these two items was 2.9 million of expense, while the second quarter of last year was 100000 of expense.
Difficult to say, what they used equipment market would have been had cobot not happened, but we believe that placed additional downward pressure on use tractor prices.
Moving now to our other segment.
On our earnings call in January of this year I guided to an average quarterly expense of 4 million and indicated that there would likely be variability by quarter.
The first quarter of 2020, there was 2.2 million of expense and then the second quarter. There was 3.7 million of income.
So what drives this level of variability from one quarter to the next.
As is typically the case for us accruals for incentive compensation for our associates not directly in and operating unit are the largest contributor.
Less expense was recognized in the second quarter than in the first due to the earnings impact of the covert environment.
Also a portion of our corporate cost containment efforts showed up as a favorable in the other segment in the second quarter.
For the remaining two quarters of the year. We now expect an average quarterly expense of 3 million, but again note that actual results could vary.
In the non operating portion of our income statement, both interest expense and interest income were down about 2 million from the second quarter of last year.
Interest expense was lower due to the repayment of senior notes and interest income was down due to the sharp drop in short term rates earlier this year.
Also in this section or the second quarter true up of the Mark to market gain from our investment in the Telematics company platform Science.
We recognized a 2.7 million gain during the quarter once the valuation work was completed.
And this resulted.
In a total of 8.8 million booked so far this year.
Moving now to the balance sheet.
Our cash balance is growing faster in the first half of 2020 that typically would as due to lower levels of capital expenditures in working capital.
In addition, the deferrals of income and payroll taxes under the carriers Act have contributed to the cash balance.
We expect a reversal of these items in the second half of 2020 and anticipate being net users of cash during that timeframe.
For context, we have remaining about 180 million of our projected 260 million in net capital expenditures.
And with the sequential revenue growth that's inherent in our EPS guidance working capital will likely consumed cash between now and year end.
Addition, while our cash flows will continue to benefit from the deferral of certain payroll taxes.
We will resume the payment of quarterly income tax estimates.
We also plan to repay a $30 million noted its maturity in September.
Net result of these items, we expect our year end cash position to be closer to 700 million them at June thirtyth level of 761 billion.
Regarding our cash position, we know and understand that there are questions about what we intend to do with it.
As I've stated in the past, we will maintain a conservative balance sheet, yet are actively evaluating various alternatives for Ics excess cash position and we'll continue to do so.
The deployment of cash as a strategic decision for us and we have an objective of deploying at least a good portion of the excess cash within the next four to six quarters.
Regarding our forward looking comments, while there is uncertainty regarding your operating conditions in second half the year, we have chosen to restore a full year EPS guidance to provide additional perspective of what we're currently seeing for our business.
Our guidance for adjusted diluted EPS of $1.10 to $1.25 assumes that consistent with our comments on our last call. The second quarter represented the largest negative impact of the pandemic.
And there will be steadily improving operating conditions during the second half of the year.
Lastly, our guidance for full year net capex remains at 260 million.
And with that well open up the call for your questions.
Go ahead Jim.
Okay.
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Our first question is from Brian Ossenbeck from Jpmorgan. Please proceed with your question.
Hey, Thanks, Good morning, I appreciate taking the question.
So maybe if you can.
Provide a little bit more context into.
What assumptions you haven't the guidance recognizing you have some improvement baked in for intermodal coming into the third quarter easy because you take those actions you outlined.
But what else do you see across the truckload business, both a regular out one way.
And dedicated I think that'd be helpful. Just understand what you're expecting here.
As we look back after the year.
Yes, there's a this is Steve there's.
Quite a number of assumptions as you would imagine inherit in there you mentioned intermodal certainly we.
We expect.
Improvement in those margins as we move sequentially into the third quarter here as Mark indicated.
And we feel pretty confident we'll make good progress to getting much closer.
To our targeted margin range.
The second half of them then was experienced in the second.
So that is an element.
Inherent in our guidance, we expect continued growth in our dedicated.
Point, a number of tractors and that.
Nice robust pipeline and the new business wins that we're executing against as we speak. So that's another element that we expect to be contributors in second half.
And.
We do see affirming price environment, obviously, we've played predominantly in the contract space.
There are elements of.
Their actions that we can take and we'll be taking.
Hope for the margin profile in the trucks space as we go in to the second half.
Those are the biggest levers bolt business has seen recovering nicely as well so they will be helpful contributor.
Mark other dimensions that come to mind, no I think you covered most of them.
Hi, Thanks, Steve So maybe Mark if you mentioned the second half focus on improving I guess, the free Baskin Europe within next driven in particular.
And you have to the contract exposure, but do you think the markets positioned well enough to maybe get a little more project feet or.
He did you read tenders as we do seem to be at an inflection point.
Well, we might start hearing more of that assuming things hold.
The way they are now or is it too early to anticipate some of that.
Incremental improvement and this is more of a the 2021 story.
Hi, Brad I think you know as we've kind of assess the market the capacity condition.
Conversations and expectations of what our.
Core.
Customer community expects in the second half of the year.
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I think there is a reasonable.
A chance that project work.
Additional.
Coverage at perhaps different than the current contract pricing gives us an opportunity to.
Certainly around the edges and.
To start to shape and improve the yield profile really across all of our service offerings.
And so obviously, we can't have it major coal that second wave that shut the kind of out all those type of items, but assuming that.
We keep in a reasonable recovery both from a health standpoint.
Of the nation.
Think we have a decent chance of.
Improving the basket through the second half of the year.
Got it and then one one more for you Mark.
On the supply side you mentioned.
Factors of the where orders the drug and alcohol testing fewer trainees. They also mentioned that in the public policy decisions.
Moving through Washington, you can expand on on that I assume you referring to the hair follicle testing which has been.
Tied up for quite some time, but we're also hearing some.
Some.
Repairs at least that it might actually finally moved forward. So what's your expectation on timing for that and do you have a sense as to what could be coming out of there and what type of impact that you might have on on the industry.
Yes, I think certainly the science is a.
Jordan and I think becoming.
More broadly accepted from the regulatory standpoint, and so.
We've been working in doing this for a number of years and I think we're as close as we've ever been for that being to become the more of the standard exact timing.
I'd hesitate to throw a.
A specific data out there.
But also I think there's other public policy issues relative to.
Unemployment insurance again, other things that could die me the top of funnel for industry, New industry participants I think our professional driver community in general not only in Schneider, but across the industry has responded to the challenges and the needs of the nation.
Extremely well and.
But anytime you start to have.
Outside forces start to play with the new entrants coming into the industry, which could be the extended unemployment or.
The continued slower lower class sizes, and new school slots that are available I think we'll continue to put pressure on the overall capacity situation and that won't resolve itself quickly there is a.
Long recovery period before even once things start to loosen up there before that materializes itself and added capacity. So I think all of those ingredients give us a little more confidence again, because we have to see a play out.
That.
We're going to be in a tighter capacity such situation for a few quarters here.
Okay, great. Thanks for the time this morning.
Thanks.
And our next question is from Chris Wetherbee from Citi. Please proceed with your question.
Hey, Thanks, and good morning, guys.
Morning.
I guess, maybe just kind of curious about the maybe some specific sort of truckload rate assumption underlying the back half and then maybe you just kind of within that.
How quickly do you think you can start to realize some of the tightness in the market with better contractual rates I know typically tends to be a little bit first half weighted but how do you see that playing out.
Yeah, Chris It is it is a bit first half weighted if you look at where we are in the book both on the intermodal side on the truck cyber about 80% through but we also have some very early in the cycle.
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Pricing that that will have to see if we have to go back candidate and address but I think as we look out for the year. We think we havent given a reasonable chance of being net positive year over year as we head into the fourth quarter.
As a combination of not only contracts spot, but also increased opportunities and the special service and.
And projects space. So we put all that together and get I think we.
I believe we're well positioned to still have a positive impact yet in 2020.
Okay. Okay no that's.
That's very helpful. And then in terms of some of the cost pressures I guess and maybe how we think about sequential operating ratio changes as we go into third quarter clearly with the revenue rebound there should be some incremental leverage but historically I don't know if the margin necessarily have improved in the third quarter and may be layering in sort of your.
It's around driver availability and you talk a little bit about it but are you starting to see some some pressures there are there any incentives or anything that you have had few include that may kind of show up in third quarter potentially impact that historical seasonal pattern of operating ratio in the truckload side.
Yeah. This is Steve on the you mentioned the driver costs and that element I think could be a bit of a headwind as we enter the second half of the year. The average cost per higher is ticking up a bit.
And the driver availability is diminished as as we've talked about here. So that's in the mix and contemplated in our guidance at the same time I think we see.
So.
Efficiency improvements and network fluidity, particularly in intermodal.
Other items like that that will be favorable.
So obviously we're.
Do the math were indicating that we got a good shot at making in the second half what we made in the second half of last year. So.
That would be some pretty solid performance.
Okay. Okay perfect Olson, thanks, very much for the time this morning I appreciate it thanks, Chris.
And our next question is from Jack Atkins Stephens. Please proceed with your question.
Hey, guys. Good morning. Thank you for taking my question Mark If you could maybe just expand a bit on.
The changes or just the improvements that you expect to see within the intermodal business Twoq to Threeq you reference some some network action that you're taking but also some.
I'm work, you're doing on the sales side than the operation side could you see expand on that for a moment, maybe give us a little more detail on sort of what's going on there.
Yeah, Jack happy to do that as I mentioned, we're now about 80% through of book renewal.
And so I think we have.
Sitting here the best view that we've had in some time relative to the network and how that should play out in the second half of the year.
And certainly what's also a tremendous helped to us as number of our quote unquote not essential shippers, particularly in the apparel retail or the specialty retail are now starting to come back online.
And really took all of late in the quarter in the second quarter for that to start to gain some traction.
And so that.
Had some negative impacts not only to the volume that we've experienced in second quarter, but also the network implication so.
How weve view.
Commercial activity that took place in the second quarter and the balance issues.
While we still have to work through as those won't be magically done in one quarter.
We do think we're going to be materially improved both volume and and network balance and so.
Drive some of the.
Inefficiency that we experienced in the in the second quarter out and those are pretty decent flywheel effects for us relative to margin improvement.
It's why we believe we can make some material progress towards our long term targets here in the third quarter.
Okay, Great Great and then for my follow up question.
Just curious if you could talk a bit about your recently announced partnership with mastery.
Jeff Silver is obviously, a long long time leader in terms of pushing technology within the transportation sector, just sort of curious if you could talk about what you hope to accomplish through that partnership.
Yes. Thanks for the question Jack certainly technology investment Advancement is very critical to the long term success of our enterprise, we strongly believe either going forward or you're going backward.
And.
So technology deployment and alignment is critically important.
What we philosophically we have identified a several places where we believe.
It's important that it's our secret sauce that we must develop and feed internally.
Things like revenue management things like network in asset optimization.
Owning the connection and interface it digitally between us.
Our customers our driver community and third parties.
But there is also I think a great opportunity to look for some collaborative partners, who bring a real domain expertise and some innovation.
That we can combine ultimately with our scale with our intellectual capital.
Two.
Have increased speed results and effectiveness and.
We took advantage of what we thought was a great opportunity with platform science and the industries need for an improved telematics.
And we think what we're embarking upon with mastery and Jeff Silver is another such opportunity.
And particularly as our strategy has evolved from our initial quest implementation.
Around the blending of our asset and are not asset world and obviously the things that Jeff is done in his background here.
Automation and efficiency combined with our scale in our assets and so we're really excited about where we're getting started there and we think that.
We're going to have some great success in that partnership so really excited about that okay. Great. Thank you again.
Our next question from Ben Hartford with Baird. Please proceed with your question.
Hey, good morning, guys Ben.
Mark just interested in your perspective on really what's going on real time in the rail network you talk about sequential improvement in some levers, but it does sound like the.
The network, particularly out west is tight for a variety of reasons and we're starting to see some.
Transactional and related surcharge put into place now.
To what extent.
Are you concerned about network fluidity in order to relative was seasonally weak period, but the markets very tight there just kind of talk through.
Maybe offer some perspective as to some of the dynamics that are going on.
Real time, because they didn't seem to be a little bit unusual.
Yes for this time of year, Ben, particularly if there is some nodes within the network that its experiencing some unusual.
Congestion Theres no doubt I think thats just a function.
If we go from have an industry some pretty low volumes do is a very rapid and quick recovery in volumes and it takes some time to get.
Just like it takes time for our network has an intermodal provider I think it takes some time for the rail network to respond to that with crews and positioning.
Of equipment, and we're seeing some of that certainly and you mentioned a place I think its most pronounced which is in the southern Cal market presently I think that will improve over the next couple of weeks.
But again I think again, where there isn't one of the reasons were.
Bullish on the recovery in intermodal we think.
It's going to be a good solid demand market for the rest of the year and so I mean at that doesn't mean, we will probably have time to time, some pressures across the network and.
From congestion to.
To sum.
Ebbs and flow on reliability, but overall I think we'll start to see some relief for the current condition here in the next couple of weeks.
Okay. That's helpful and then.
Just want to talk to your perspective on contract pricing I know it's early.
To be thinking about 21, you mentioned that spot pricing is.
As above contract raised pricing by 10% or more.
I think there's concern that some of the the disruptions that we've seen in the market recently could be short lived as you think about contract pricing in the trajectory that we may be on as we exit the year and look toward 2021, I know, it's too early to be talking about.
2021, but.
Is there a reasonable kind of.
Benchmark that we that we can think about in terms of what contract rate growth can be.
During the next bid cycle, just given the disparity that we see at the moment between spot and contract pricing both on truckload and intermodal.
Yes, but how should I understand the.
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The need for that question, a little hesitant to to at this juncture in the middle the pandemic and.
Residential election, coming up and although we are at that we can project out too far into 2021.
But.
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If I would look at the things that we look at Indicee wise, I think theres more and the positive category than the.
Negative category for for a more positive constructive price condition as we head into 21, but I'd be just hasn't had to do too much predicting yet.
Okay understood appreciate the time.
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And our next question is from Ravi Shanker with Morgan Stanley. Please proceed with your question.
Thanks Congrats.
Steve.
If I can follow up on the the response of the Masri question to me is there any.
One or two particular focus areas.
For the for the collaboration is it like focused on the next generation of Quest is focused on that more of the logistics side of the business, maybe the technology side of the actual suneet itself any any areas that there are exploring would be great to know and.
And what point do you think you can see them. The fruits of this partnership in terms of improved utilization or better margins or something on the numbers.
Okay.
Great. Thank you for the question.
Yes, we have a bit of a roadmap that we've been working for the last several months on it and certainly.
Well, we're going to enter the relationship will be as you kind of highlighted there on the logistics side of the relationship.
But with our growing a blending of our asset non asset world, which I referenced which.
Is how we bring the power of the Orange box and a power only solution with.
Smaller long tail carriers on behalf of our largest shipper community. We believe that is a place.
That we can drive some additional efficiency and effectiveness and margin improvement into our logistics business and so thats a great starting point.
But we also are looking at places within our dedicated services and our other parts of our asset piece.
That.
We see this partnership helping with and so it'll be embedded and connected into our quest ecosystem.
And.
If you know jaffe likes to move at Lightning speed, but we'll make sure we'll do everything.
In a concerted fashion that we get it right and.
We feel very good where we are presently, but it will be on that logistic side to get started.
Understood and just a follow up on the core business. If you will water shipper customers, telling you know about.
Dl versus intermodal and which lowered the it before.
Given everything that's going on with the pay somebody willing supply chains feel just despite the market nothing else.
Yeah, we can we can certainly a point to conversion back a bit from intermodal to truck in the short term, although even with our a difficulty in the second quarter. We grew in the east which was a very competitive.
Truck market, obviously in the second quarter and so the still have almost.
Upper single digit growth in the east year over year still demonstrates the interest that customers have in the long term positioning of between truck in intermodal.
And so we're.
And Weve, obviously up until some of the congestion points here that I think we'll get through quickly the intermodal product from a reliability standpoint has been.
Performing really well and performing on par with truck relative to reliability from kind of hub to hub. So.
So while there is some bleed back and forth, which is natural at this time, particularly with where fuel prices are and where truck availability availability was in the first half of the year.
I think those same forces might go the other direction as we get to the second half.
Understood. Thank you.
Okay.
Our next question is from Tom Wadewitz would you be US. Please proceed with your question.
Yes, good morning.
Wanted to ask you.
A bit about just kind of broader view on slate and kind of conviction level. So.
What do you think that.
You know the market's tightened up grow rapidly June July.
Do you think that's pretty likely to continue and it gets kind of based on prior experience when you get into one of these.
Inventory replenishment type of backdrops, I mean is a pretty reasonable to think that you have strength through the second half.
And also just in terms of peak season, do you kind of feel like you are set up for a strong peak at this at this point. So it really just some questions around freight demand and visibility in second half.
Yet to us as we've been in various conversations.
Whether it's the home improvement channel food beverage consumer product.
Kind of this whole nesting effect.
Peoples closer to home.
Most of those conversations would indicate that customers are.
Expecting.
We're almost since some of these categories and peak season volumes already it feels like.
There is.
Fair degree of expectation that that it's going to stay in that.
Level for the remainder of the year.
So that's.
Part of our thought process as we've kind of kind of looked out and provided our guidance. So.
So thats really baked upon those conversations with customers. What we're seeing I think there are number those that have are not building inventory yet at all or just trying to keep their supply chain fluid.
And I think in its number of categories. The inventory build processes is yet to come.
That might be the 2021 play.
And I would just add onto that I think in this environment in particular, the notion of peak season could could be really interesting when you think about retailers and.
Other viewing black Fridays or not and whether to spread that out over time, and what that does inventories and freight volumes I think we'll be especially interesting. This year as we go through that.
Yeah. I think you were asked are a bit about price I think yet.
You know some capital comments on that but just you know so if that plays out as you're describing you would think that year, even though you have some contract that are our contract overall, but maybe down low single digit.
You can be fairly fluid and get rate up in or maybe in fourth quarter and flat and third is that kind of that differing you you think is reasonable.
Yes, I think theres, a reasonable chance time that as we entered the fourth quarter were.
Particularly on the truck side of the business.
In a positive year over year condition and start to build from there I think other parts of the portfolio in the logistics I think were pressured a bit on those same functions on carrier costs.
But.
Trucks still drives the largest percentage of of the enterprise and that's our thought at this point.
Great. Okay. Thank you for the time.
Yep.
Our next question is from Scott Group with Wolfe Research. Please proceed with your question.
Hey, Thanks morning, guys. So.
Just start with intermodal I know you said things are improving but can you give us some sense on on volumes in July and then with with truckload pricing that you think turns positive by the fourth quarter.
I'll quickly do you think your intermodal pricing.
Starts to improve and when do you think that.
I didn't quite positive.
Yes, Scott as it relates to intermodal volumes April was certainly our troughing. It improved may it improved in June it's improved further from an overall volume standpoint in the month of July and we have a number of.
Kind of awards that are yet to be implemented and that we think can continue to drive some of that recovery and volume that.
With such a big impact in the second quarter.
Pricing isn't a similar fashion to truck, maybe just down a little bit further.
We're still low single digits, but.
That might take a little longer there is usually generally a little bit more of a lag between truck and intermodal pricing.
So we think the primary contributors to our improvement.
In the second half of the year from intermodal, who will be more in the network in the volume side than it will be in the price side.
Okay, and then just quickly maybe what's in the guidance around logistics margins in the back half of the year and then Steve any color on the other operating income and how to model that in the back half of the year.
I'll start back part of your question there in the prepared comments there.
Indicated roughly 3 million of expense per quarter in the other segment for the remaining two quarters of this year.
It's it's a bit of I guess, but.
The best I know how to guide at this point for for that part of our income statement.
And.
Remind me the first part of your question again.
Well logistics margins.
Yes.
I think its they've all obviously been under pressure across the logistics space.
And our brokerage operations.
As as reflected that as well in the first half of this year I do think we anticipate some modest improvement in there.
Our brokerage unit in particular is about 50% contract 50% spot.
So that by itself I think lends itself to some margin expansion in the second half of the year.
Okay. Thank you guys appreciate it.
[noise].
Our next question is from Bascome majors with Susquehanna. Please proceed with your question.
Yes. Thanks for taking my question you, Steve you you talked a little bit about use of cash in.
Gathered up four to six quarter timeline to that for the first time at least that I've heard publicly. So can you frame the amount of cash you think you need to run the business. So we can better assess what excess might mean and understanding that.
In this environment, you certainly not want to take that down to bare bones by any means thank you.
Yeah sure glad to address that.
No. This is one of those topics that you could debate endlessly and but from where we said we've done.
Some analysis on our.
Our balance sheet and cyclicality and.
Capex.
Expectations overtime and so on them.
And we target somewhere around 250 million of cash to retain on our balance sheet. So you could in general terms I think of the amounts above there as being excess cash in our definition.
And so if that helps you give some orders of magnitude how we think about it.
No that's a that's quite helpful actually in.
Just to expand on that point I mean, we've seen in in your space. Some other.
Competitors with very high family Ownerships choose to monetize some of that this year.
I don't know if that's a reflection of the stock price change or.
Fear of tax changes ahead in the U.S., but I'm curious.
How is the engagement with the Schneier family you know is there an opportunity to perhaps seek some liquidity ahead of some tax regime change is and if it's that work to happen would would a rising flowed in liquidity in your shares that would hopefully stem from that opened up a share repo.
Purchase program as you better option for some of that cash deployment. Thank you.
Yes, we just don't.
We have nothing pending and there's really nothing we can discuss at this point what plans may or may not be thought of in the long term, there's just nothing going on in that space presently so.
Thank you.
The next question is from the line of Jason Seidl with Cowen and company.
Thanks, Operator hobby guys you Mark I think you mentioned earlier about the intermodal space.
And there are some surcharges being levy biased.
The West Coast rail providers, we talk a little bit about how you guys pass them through the success rate you guys normally have.
Yes, Theres certainly a at times and really a which is a function generally of making sure that theres enough box container capacity to get to the west coast.
Which really funds the network flow of additional containers out west and.
And generally that's a market driven phenomenon that's generally.
And the traditional peak season, because of the inherit in balance that occurs between.
Eastern bound flows coming from the imports versus what naturally flows west.
And so as those market opportunities are available and obviously we have a.
A large asset on container network, we will take advantage.
And take the opportunity to help support our customers and if the market bears that we will absolutely be in that mix.
Okay, and I guess the other a follow up question I'll have as I think you alluded to the fact that you might be able to go back to some of your customers. What some of those those early contracts that you signed that may be way way out of the market right. Now in terms of pricing can you talk talk less about like what percentage of your book of business would you consider really.
Under market at this time.
Well I think regardless of where you are in any cycle or any point, there's always a bottom 10% of anything.
Whether it's the strongest market or the weakest market and so I think theres also a different customer behaviors overtime that allow for a more fluid response.
Two conditions on both sides of that equation and so obviously we know.
Where are those opportunities are and will be pursuing those as appropriate.
Well I guess another way to ask it is that bottom, 10% now more agreed usually away from market prices than it typically is.
I would say in balance it.
It.
We have some work to do there, yes, I would put it ends and a urgently.
Reviewing category.
Okay Fair enough guys I appreciate the time as always.
Good.
Next questions from the line of Allison Landry with credit Suisse.
Good morning. Thanks.
Good.
Well I'm going to beat the dead horse with with that.
Intermodal equipment involved there.
Two for specifically parse out what yeah that the competition for it in Q2.
And then just that's where we're thinking about.
You know that's sort of progression of the sequential margin improvement in the back half well, but would you sort of what should we think about the comp in Q3 sort of being in a similar range out in Q2, maybe and maybe start to subside in Q4.
Just really trying to get a site.
You know how to think about that the cooling of the margin in the Bakken.
And this is.
Related to intermodal.
The nature of your question Okay.
So as we've indicated the.
The heaviest part of disruption in the networks happened in April and May timeframe and.
Well, there's still disrupted we've been chipping away at the container repositioning and.
Empty moves and so on that need to happen.
As a result of that displacement that happened earlier so being.
At least.
Well into that process helps the third quarter already.
As we sit here in late July.
And I.
I think the remaining couple of months of this quarter will be good ones.
As they continue to.
Get that fluidity back in the network.
So.
But I don't see it as necessary to see it more of a step function a threeq and Fourq you.
Things more similar to each other than us step.
By step sequential move if that makes any sense.
Okay, Okay that does.
And then mark from just sort of on a longer term.
To your question, but as you think about the.
Acceleration pull forward and E commerce and see the need to have more inventory that more facility. How do you do the long term.
Opportunity for intermodal to protect market what can you do as at the I am here or what can the wild due.
The caps are potential growth.
I think allows me to maintain the outline performance but.
Strategically are there ways to work with high volume customer tip.
Well density Lewke Lane, maybe if you could talk through.
Longer term dynamics that thank you.
Yes, Thank you Allison.
Absolutely I think it really does start whether you where you kind of finished there which was.
Highly reliable and.
Consistent rail network, which.
We've seen just great progress in that over the last couple of years.
When you're in conversation with customers, what's the most often discussion as it relates to really anything.
Intermodal.
It's.
If we can get the reliable and consistent and sometimes it doesn't matter if it's three days or four days or five days transit. If it's just consistent then they can tweak the inventory play to take advantage of the full load economics.
Value that intermodal provides and so and we're seeing that with our growth in the east, particularly because of that highly reliable.
Truck like service and so it really just does come down to consistency and I think customers can generally adapt a bit relative to the inventory.
That may be slightly different between intermodal and truck and so.
Thats why I still think Theres a great play.
Oh for intermodal and then.
Increasingly E commerce world because of the full load economics.
Of moving even high replenishment product or fast moving product.
Cetera. So.
And that just like in truck has had a lower length of haul over time, it's likely to play out in some respects of the intermodal network as well.
Obviously talking all the import activity I'm talking that kind of the domestic source product.
And so that whole reliability is what's what's key.
Okay. Thank you.
Our next question is from the line of Ken Hoexter with Bank of America.
Great Good morning.
Okay, Hey, Mark Steve.
Talking about your fleet, a little bit it barely budged on the downside from one cuda this second quarter Deps year.
Dedicated was down a few tractors for higher actually increased.
I'm talking sequentially since most of the reduction for the for higher was back in for Q, How do you envision the fleet panning out yet.
Yes. Thanks for the question, Yes, Theres, obviously, just on a lot of noise and between dedicated and hand, our network just because of the kind of the dislocation in the second quarter. So I think over time.
I guess I should say over as we progressed into 2020.
We would see more of those unit growth coming into the dedicated arena.
As we get as I mentioned late in the quarter. These are average numbers in the quarter that we kind of report publicly but the.
New business start ups and the recovery of some of the nine quote unquote not essential gotten back online more late in the second quarter. So you'll see I think a little bit more of a shift towards that dedicated number.
As we progressed through the year.
So let me ask I mean, there's been a lot of question on on rates and your thoughts and the acceleration replacing contracts.
The industry always seems to kind of overstate the benefit sometimes a of hours of service rule benefits or or drug and alcohol as that comes up now.
What about the thought Oh, but now it's a tight market. So we're not going see production picking up in net winners and low we tend to see that reactors obviously production.
Was down, but that's picking up as it just like the autos. So companies like you noted most of your Capex is going to be in the second half and so we're going to see an increase in production. We've heard for most of the truckers, there's going to be a kind of really big ramp up in the second half in production do we start seeing I guess and best you've asked a lot we start seeing a cap on on rates and the rate potential.
Here, because we start seeing a big pickup in that field, maybe just expand on that give your thoughts on candidate. The other things that can kind of keep that down and really allow the rates to to get to where they need to be.
Yes, I would characterize certainly in our case and I think and many others is that's more of a delay in replacement first half to second half that's not.
Necessarily.
So to interpret that as growth, we would have taken additional units and the first half of.
The customer or excuse me the Oems could could.
Have delivered on them.
And we would have been more on plan. So that the changes has nothing to do I think thats playing out across.
Many fleets as well can so I went over over interpret first half versus second half.
And for the and you're speaking kind of broadly.
The industry, yes.
Yes, that's my sense, Yeah, my sense talking to the Oems I mean, I don't have perfect information, obviously, but it's my sense in those discussions.
And then just the last one for me just on logistics is obviously as we see that tighten here and you've talked a little bit about the pricing piping. There. What's your outlook is this a period, where you're starting to really scale on the on the other side of that on the gross revenue side to see that the topline give me that growth are you starting to spend is that the reason for.
Working with with with Jeff and his team or is that just more on a cost side just want understand if you're focused more on on the topline there.
Yes, I would say, we think we're focused on both of those.
If you've been following our logistics business, it's been a consistent growth driver.
For our enterprise, but also competitively.
It had we like this 50 50 mix, we don't want to be too heavy one direction or the other so that we can be more responsive and resilient to market.
And it's a place that's been a technology incubator for us.
To it to advance some of the automotive.
Automation features.
And the and the digital.
What print of the enterprise and what we're going to do with mastery is just an extension an accelerator of that same thought process.
Okay wonderful per se.
Right.
The next question comes from the line of Todd Fowler with Keybanc. Please proceed with your question.
Hey, guys is that Todd Thanks for taking my question.
Just want to ask about the networks fleet and your assumptions for the second half of 2021 does that assume for I guess the mix of spot and contract.
And that you could maybe what was that in the second quarter, how did that thank you to quarter and anytime, whereas it out right now thanks.
Yes, we typically in the network side move between call it five or 6% and maybe 9% to 10% on the upper end of that scale for in the spot market.
Right now we're sitting right in between that.
And as we move through the second half the year, the JV opportunity to ramp that up toward the upper end of that percentage range that I cited.
Okay. That's helpful and I guess just.
Last one.
With respect to acquisitions I.
Appreciate the detail you gave.
My remarks, but I guess, just kind of broadly on what is what's the current M&A environment looks like and what's what's your general view that.
Yeah, I mean, we're we're actively looking and screening opportunities as we've indicated in the past predominantly interested in and.
Something close to home meaning.
Type of service that were accustomed to offering and.
And likely asset based and so on.
Dedicated and specialty.
Arenas.
But you know, there's a lot of really small opportunities but.
What we take a look out but it takes something.
We'll take something special to get us really motivated are.
We are motivated sets the wrong use words that something.
That.
Thanks, a lot of the boxes.
For Us to act upon it so we continue to screen and are interested and.
Just kind of where where things are.
Okay, great. Thanks, it yes.
Yeah.
Thank you ladies and gentlemen, this does conclude today's conference you may disconnect. Your lines at this time, we thank you for your participation.