Q2 2019 Earnings Call
Good morning, and welcome to this international second quarter 2019 earnings Conference call.
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I would now like to turn the call over to your host season does director of Investor Relations. Please go ahead Sir.
Thank you and good morning, everyone. Joining me on the call today are Mark work, President and Chief Executive Officer, and Steve Brown, <unk> Executive Vice President and Chief Financial Officer.
Earlier today the company issued an earnings press release, which is available on the Investor Relations section of our website.
Before we begin I'd like to remind you that this call may contain forward looking statements.
And that actual results may vary also there may be references to non-GAAP measures.
Please refer to the special notes related to risks and uncertainties of forward looking statements and the reconciliations of non-GAAP measures included in this earnings release.
Now I'd like to turn the call over to our CEO Mark work.
Good morning, everyone and thank you for joining the call.
I will offer a few summary comments for the most recent quarter and turn it over to Steve profit for more specifics on the financials and moving forward commentary.
As expected primary contract volumes have increased in spot order volume and miles have returned to the normalized mid single digit range. In addition, the remaining spot volume has improved materially it contribution per order as rate per mile was up over 40 cents from Q1 levels.
We are now 70% through the contract renewal season for our four higher truck quadrant average renewal increases in the quarter were in the low single digits for the mid single digit levels experienced in Q1.
The change is a combination of higher comps and a persistent oversupply of capacity.
Our cost position has improved primarily on the salaries wages and benefits and other general expense lines of the income statement.
The combination of improved freight quality and cost performance led to sequential improvement in our operating margin and truckload. Excluding the effects of first the final mile a 400 basis points in the quarter versus our historical average improvement from Q1 to Q2 of 200 basis points.
The truckload segment operating ratio, excluding first a final mile was 88.4%.
Let me now address this morning's announcement of the shutdown of the first to final mile service offering.
Following a careful assessment of the near and longer term prospects for this service offering including a thorough review of viable alternatives.
We've made the difficult decision to Aucs execute a structured shutdown of the first to final mile offering over the next several weeks.
While we made significant investments in the operation the business' operating results are below target not meeting our expectation on financial performance.
Or improving at an acceptable pace or timeline.
This course of action allows us to fully focus on our core businesses of truckload intermodal and logistics and it's consistent with our portfolio management and capital allocation disciplines. We believe this plan because in the long term best interest of our company and stakeholders.
I want to express my gratitude to all the Schneider associates involved with the first a final mile offering and who have invested a tremendous amount of energy and creativity towards the endeavor over the past three years.
We are looking at all opportunities to redeploy affected associates based upon role.
Geography, they live in and business needs.
Steve will cover the financial implications of this decision and how to think about it for modeling purposes.
Moving onto the intermodal segment intermodal grew revenues, excluding fuel surcharge, 12% year over year with order volume up 2% and revenue per order up 11 over Q2 of 2018.
The growth was achieved and what we estimate to be the industry reduction year over year in the quarter between 6% to 7% of domestic intermodal movements.
At the end of the quarter, we are now approximately 85% through the contract renewal book the Q2 contract renewals increased averaged in the mid single digit range. While there have been reduced volumes as a result of less supported rail lane options and an increase of over the road capacity levels intermodal remains a strategic imperative for a large cross section of the shipper community.
Intermodal achieved an 88.2 operating ratio in the quarter 220 basis points reductions from a year ago. As a result of increased rail expense and lower asset turns.
We believe we are well positioned with very solid execution fundamentals increased container counts.
At a highly effective company Andrei.
Driver fleet as we head into the final L.D. and drug and alcohol clearinghouse implementations at the end of the year.
Finally on our logistics segment revenues, excluding fuel surcharge contracted 9% year over year, a combination of large contract in sourcing and our import export Transloading service.
A lower revenue per order in our brokerage offering.
Brokerage order volume, though grew double digits over the same period year over year and brokerage now makes up 87.5% of our logistics revenue.
Logistics operating ratio performance of 96% was essentially flat year over year.
We continue to see the benefit of automation.
In our processes as our carrier self serve feature across the load my truck and foreign Chubb platforms realize a 9% increase in no touch carrier assignments sequentially from quarter one.
Now I will turn it over to Steve for further commentary.
Thanks, Mark and good morning, everyone.
Ill begin with an overview of the key elements of our consolidated financial results.
Revenue, excluding fuel of 1.1 billion.
Down there.
Slightly from the second quarter of 2018. This was the first quarter and numerous years in which we experienced a year over year decline.
Lower volumes in the truckload segment and in the import export component of the logistics segment were the primary reasons.
Also we expect modest revenue declines to continue in the third and fourth quarters of this year given the tough comps of 2018.
Adjusted income from operations was $84 million and while this was a 14% decline from the record second quarter of last year.
It was the second most profitable Q2 in our history.
Also this reflects a 63% sequential improvement from the first quarter of 2019.
Reflecting the revenue management and cost initiatives that Mark discussed earlier.
Most of the line items on the consolidated income statement, followed recent trends in the second quarter, but there are a couple of items worth noting.
The first is that operating supplies and expenses increased about $13 million from the second quarter of last year.
Higher cost of goods sold from increased activity at our leasing unit more than explain the difference.
The second item is other general expenses, which were down about $12 million year over year.
Last year's second quarter contained a $6 million litigation charge, which explains about half of the variance the remainder of the decrease was due to cost initiatives.
Looking at our segment results Mark covered truckload intermodal and logistics, so I'll comment on the other segment.
There was a 2 million profit in the second quarter.
Compared to a $7 million loss last year.
As adjusted for this litigation charge.
The drivers of this variance were in increased leasing activity and lower accruals for incentive compensation as compared to the second quarter of last year.
Before I leave the income statement I want to explain how the accounting for first a final mile will work going forward.
First we will incur operating losses for a portion of the third quarter.
As the business operated as normal until today's announcement.
We expect about 9 million of third quarter operating losses.
This amount added to the first half losses of $26 million brings the 2019 total to approximately 35 million.
Second.
We will book estimated amounts for the cash and noncash charges that are related to the shutdown in the third quarter.
Information regarding the shutdown charges are included in the 8-K that we issued earlier today.
Beyond the third quarter.
We will monitor actual shutdown cost as they are incurred and adjust as needed.
We expect the majority of this activity to occur within the 2019 calendar year.
However lease activity will be monitored over a period of years.
We will have a separate line on the income statement for these items to provide transparency.
Moving now to cash flows our year to date cash from operations of $302 million was essentially offset by investing and financing activities.
So our cash positions virtually the same as at year end.
We do expect to generate free cash flow in the second half of the year as the pace of Capex tapers.
Also a portion of the cash is expected to be used to repay a $40 million debt maturity in November .
Looking ahead, we have updated our adjusted EPS guidance for the full year to a range from $1.30 to $1.38.
At the midpoint. This is a 14% reduction from our prior guidance and the adjustment incorporates lower volume and price assumptions across our primary operating segments for the second half of the year.
Also.
Estimates for the fourth quarter first the final mile operating losses have been removed from our updated guidance.
However, the difference between actual operating losses in the second and third quarters and those that were assumed in the prior guidance more than offset the fourth quarter benefit.
Regarding net capital expenditures, we are incrementally we are lowering our full year expectations to approximately $325 million.
From the prior level of $340 million.
And lastly, we expect the full year effective tax rate to be 25.5%.
And with that we will open up the call for your questions.
Thank you ladies and gentlemen at this time, we will be conducting the question and answer session. Again, if you would like to ask a question. Please press star one on your telephone keypad. The confirmation code will indicate that your line is in the question queue.
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Our first question comes from the line of David Ross with Stifel. Please proceed with your question.
Yes, good morning, gentlemen.
Just want to focus on first six to trucking operations that you still do have namely dedicated.
How is the dedicated pipeline looking.
And the revenue per truck per week seems to be down year over year is that.
From a mix issue or is that the customers not.
Running the trucks enough because of the soft economy freight market.
Good morning, David does this mark certainly.
We are very pleased with not only so far in 2000.
In 19 on our new business closures within dedicated.
But the pipeline remains very robust and we're in the midst of really here in the second and now the third quarter.
A fairly robust series of implementations.
Although they are a little bit different than our historical average which is.
Very much at the heart of our strategy away from Big Mega fleets supporting retail, which has been our predominant to over the years to more of a specialty service area, where we're doing smaller.
Operations, but generally doing things that are adding additional value added services versus moving the products simply from 0.8, a point b and so.
As such we have a little less slip seating activity in those operations because of the way. They are structured so that has a little bit different approach to the capital being deployed.
What time to start up from profitability and overall performance hub of those operations are superior to our our prior approach so feel very very good about that.
We do have some inefficiency through the start up process that Weve, obviously, we'll get through in hand, we are getting through it.
At within a couple of the three month process. So.
So feel very good about that and it will be a continued focus in fact, that's where we would see any increase in.
Tractor count or capacity levels for the remainder of the year would center around those dedicated operations.
And would you consider those specialty dedicated operations too.
Have any different contract length or terms of the longer term deals than the Omega fleet ones and are they better return on capital because it's a smaller deal size.
Yes, I would put all of the above on that category there on on that question David.
Generally they are longer term contracts are generally more stable and durable from a renewal standpoint.
And.
And.
In a world that.
You could argue that it's becoming more and more commoditized in the network businesses offer stable revenue stable earnings and very much.
A deeper relationship because of the services you're providing.
And then just quickly on the first the final mile shutdown. This 26 facilities.
Are they leased do you own them well is there a plan for how those are going to be read the re purpose or exited.
Yes, David This is Steve the all the facilities are leased and those lease parameters range from near term to multi year.
So it's a variety.
In there and those that have longer lease terms still.
That were obligated to we will be in the market attempting to sublease those facilities.
Excellent. Thank you.
Thank you. The next question is from Scott Group with Wolfe Research. Please proceed with your question.
Hey, Thanks morning, guys.
So.
On the Rev per truck.
In for higher can you help give us a breakdown of how much of that is utilization and rate per mile and then maybe share what you're seeing so far on those metrics in July and sort of how you're thinking about the rest of the year.
Sure Scott as it relates and this was it was in the for hire that was the question.
Yes, the down seven in the four higher yes.
Yep contract pricing is positive and so more than 100% of that is in the utility front.
With one exception is that we're just seeing less of the.
Promotional or project oriented things that we do very very well.
Overall, I think just because there's less duress and stress in the marketplace. So that generally finds its way onto the rate and price line as well.
But has currently constructed there in the quarter.
Virtually all of that is productivity related and as we did take.
A great deal of deliveries in the quarter of our replacement tractors. We're almost I think we're going to be finishing 90% through the first half of the year on the replacement front and so we have a little bit of noise in there.
Because of not getting everything out from a.
Sales standpoint, but.
All of that erosion is in the productivity space.
Are you assuming I get the contract pricing comment, but are you are you assuming rate per mile stays positive in the second half total rate per mile.
I think it's certainly going to be we believe it's going to be positive on a contract standpoint the question.
That we have is as typical seasonality and the second half of the year relative to.
The holiday season, the project work all of those things Scott if those things don't hold to a typical seasonal pattern price in total could turn negative, but thats more in the short term project space versus the contract space.
Okay and Mark did you did you say anything about July .
We did not.
We would consider July being July .
It's not it.
Very robust period generally isn't and it's playing as is typical.
Okay, and then just secondly, theres concerns and intermodal about share shifts between.
Players can you just talk about sort of volume yields margin expectations in embedded in the second half guidance do volumes stay positive yields really good in the second quarter does that continue how about margins and any thoughts there.
Yes, Im really really pleased with how we've been performing and intermodal obviously.
Having a 2%.
Volume growth in a shrinking market would suggest that were.
Competing effectively there.
If you.
Kind of think about this on a year over year basis going forward Scott.
We certainly had some lift a year ago because of the tariff activity in the <unk> and the pull forwards.
It's a little murky from our standpoint what.
The whole.
Trade.
Discord is going to deliver in the second second half of the year intermodal is.
More influenced by Asian, and international imports than the rest of our business.
So.
We would expect it.
All things being equal will probably be less of that.
Pull forward activity, so that could put some pressure on overall year over year comparisons.
But as we are 85% through the book of contractual renewals and still hanging in there nicely in the mid single digit range, we would expect.
Revenue per order and the rate to be very solid between here and the end of the year.
Just so I understand your comment about volume that's more about the market and comps and so you're not talking about contract losses or anything that would explain volume weakness.
And then what volume weakness or you're referencing what you are saying that second half volumes you have tough comps related to tariffs of volumes could be lower I. Just wonder is and is that a market and a comp comment or is that a comment about.
Some market share losses on contracts.
But we as I mentioned, we're 85% through the renewal we have wins, we have losses, we have.
On on both sides of that equation.
My comments prior were predominately around what was lifting the intermodal volumes a year ago.
Okay makes sense all right. Thank you guys appreciate the time.
Thank you. The next question is from Ravi Shanker with Morgan Stanley . Please proceed with your question.
Thanks morning, everyone.
So I think the the decision for the final mile.
I think makes a lot of sense to us.
Can you just given all the noise is can you just help us understand what teen PL largely will look like.
In Threeq and Fourq and heading into 2020 once you strip out the.
The first final mile doesn't get it im not so much looking for guidance on deal margins as much as just the the math on on what it looks like ex first Panama.
Yes. This is Steve Robby.
Just looking at the.
Second quarter for example.
We had indicated in earlier comments what the.
Truckload segment margin was excluding first to final mile.
There was about a $10 million.
Degradation year over year in the first the final mile earnings in the second quarter.
When you adjust for that does make quite a difference in the comparison.
Of the truckload segment due to the prior year, rather than being down 30, 132% on an adjusted basis. It was down more like 14%.
And so it just depends on your assumptions about first the final mile going forward, if they were going forward.
As to what that.
Drag would look like that.
Obviously, there will still be some.
Costs associated with that in the third quarter, but then we think the waters will be pretty clear pretty clean by the time, we get to the fourth quarter in the truckload segment.
Understood Thats really helpful and.
I mean, I think obviously, it's only the first the final mile and but are there any knock on effects of this I mean, clearly you guys are.
Hey, guys you ran the business in different ways.
In the time that you had.
Once you kind of freed up the assets.
And the people who kind of are there like knock on effects on the on the core business from this.
Can you just.
Ravi I don't know if I captured the question.
Accurate.
Meaning are you will you be like redeploying the trucks and the assets and the technology that maybe using the first a final mile business.
And the rest of.
The trucking business and kind of is there going to be any kind of impact on electrical and our people and the core deal business from this.
Okay, I understand better to Steve.
There were in a unique position, where we can actually re purpose a fair amount of the equipment. That's currently deployed in the first a final mile operations and we will go through a thorough process to to assess which is the best equipment keep in our truckload operations.
It's predominantly with tractors, but there will at the end of the day be roughly 800 tractors and.
2000 are slightly more trailers.
That come out of the business as a result of that that will will optimize our age of fleet in country durations.
As appropriate looking across the pool of assets.
And naturally on the people side. Unfortunately, there will be people that will be coming out of the organization in total the exact amount will be determined as we.
Short through the broad business need.
As we go forward.
Okay understood and just lastly, the in sourcing decision by the customer and the logistics business I don't think that's necessary as the price is going up given the headline similarity of the CR, but can you just put some some some color and context around that kind of what drove that decision was it a full customer in sourcing wasn't just do it three facilities.
And just kind of bigger picture do you see this as a one off development or do you think it's like the start of a bigger trend where kind of large customers will increasingly look to in source logistics.
Yes, Ravi this is mark that that decision happened earlier in the year. So now we're just into the kind of the overlap.
Comparison periods here and it was a single customer single single facility.
Change so.
But consistent with some of the.
Customer thought process, particularly the very large retailers relative to what is a core and what.
We will be outsourced so.
I would consider it in general a onetime but certainly on trend.
Great. Thank you.
Thank you. Our next question comes from Tom water with with FBR. Please proceed with your question.
Yes, good morning.
Wanted to ask you comment a little bit more on the intermodal side I know you.
Scott touched on that a bit but just wanted to make sure I understand it so using your kind of view on second half is the intermodal is likely to be down or is that where you just to make sure I understand that comment it sounded like that might be the case, but it wasn't clear.
Yeah. This is Steve I think that sitting here today, we think there is a likelihood or possibility that we have.
Negative volume comps in the second half of the year not significantly negative, but given the past traveled last year, principally as the reason for that comment.
The rate environment has been relatively stable in the intermodal space.
And our team's done a great job.
There.
And so I mean, we're largely through that book of business for this calendar year as well. So I think we'll have a constructive story on the rate side volume.
We'll have to see how it plays out with seasonality and so on but there is a possibility that it could be slightly negative.
Yeah, we feel really well positioned on the flows Thompson and the box count.
Particularly around the seasonal imports if that is robust and we are going to feel.
I think we'll feel some volume growth if that stays on kind of the sluggish path that it's been on than than maybe not but.
We feel we're really well set up to take advantage of of the market.
Okay. Good I appreciate that.
What's your broader look on the freight market.
I think we've heard a variety of perspectives are generally seems to be some optimism that there will be a.
Seasonal pick up and a peak season.
But.
I guess in terms of.
Your view on freight in peak season, and also how we might think about this.
Downturn in freight it seems like it's been maybe more rapid to the downside compared to 2015 2016 and wonder if you have a sense of how that might play out in terms of improvement that you know it might improve more quickly and maybe you get positive rates next year, but just kind of.
Peak season view and then also is this kind of a V shaped downturn or might this be a two year downturn like we saw in 15 and 16.
There's a lot to unpack in their time.
My personal view on this is that.
Information availability for both the shipper and the care community has so much more prevalent today.
On what's going on in the supply chain and.
And just to sources of information for folks to make.
Decisions and so.
And as a result of that I think these cycle changes happen more rapidly.
And.
On both the up and the down side and I think certainly as I look at this cycle.
Sitting here a year ago, which.
The spot conditions. The way we were they were there was a lot of incentives for carriers, particularly small to mid sized carriers to bring on additional capacity around the margins.
Because of those spot rates and those same influences today are much different and so.
Those same capacity that same marginal capacity that came in I think can just as quickly.
Just as quickly the part we're certainly seeing some data points.
If you take the owner operator community as a subset of that small carrier world.
The last several weeks that the income incoming volume to our program.
Inquiring about our owner operator availability here.
Has spiked considerably so that I think just another statement of duress thats occurring.
In this case that was the owner operator.
For example, and I think certainly in a smaller carrier world.
Who came into this looking for the spot rates the way they were could be very much in the same position. So I think and again this industry doesn't take.
We don't need 10, and 15% swings, we need two and 3% swings to change that dynamic.
I think we could be on the cost for that and certainly we have some external.
Things occurring with the yield the final implementation in the drug and alcohol clearinghouse coming into play early next year. So it Wouldnt surprise me that we would see some tightening as we go down the stretch and and if we get some seasonal kick maybe we'll be in a.
A quicker recovery than than is typical which is generally what a 15 to 18 months.
Slog, if you look back historically that we might be operating and tighter cycles on that.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Jack Atkins with Stephens. Please proceed with your question.
Hey, guys. Good morning, Thanks, so much for taking my questions.
Mark I guess my first question is for you you know we heard CH Robinson yesterday on their conference call talk about.
The need to maybe get more aggressive in terms of there.
They are actually to the market to drive volume growth in an effort to support their own their own business.
That I heard that and kind of interpret that is perhaps a bit of a negative with regard to.
Broader pricing moving truckload market I'm, just curious sort of your bigger picture thoughts on sort of where we're headed from here as it relates to pricing contract pricing when we truckload market as we look out to the remainder of this year end and some early thoughts into next year.
Yes, and as I mentioned were.
We have maybe 30% more to go relative to the contractual book if were talking contract prices.
Of that based upon the comps for what renewed a year ago later in the year and the current condition. It would not surprise me that visas for those to be in the flat to slightly negative category.
As it relates to the spot world.
I think some of those.
Tensions by company is depending upon your spot versus contract mix.
And certainly our business felt particularly in the month of June and the brokerage business.
A bit of a squeeze certainly.
More than we would normally expect in June .
Net revenue per order, but things have rebounded.
Nicely here in the month of July and back to a more.
Quote unquote normal condition.
Again, I think thats because were slightly less contract oriented than some of the other other big players there so.
Hey, My personal view is we may be getting closer to the bottom here relative to.
Where we stand on this whole supply capacity mix and a bit of tightening of capacity in the second half I think with certainly bode.
Bode well for this being at the bottom of the contract rate.
Condition.
Okay. Okay. Thank you for that color and then Steve just a follow up question on.
On the on the Fynineteen guidance, what does the guidance assume in the second half of the year in terms of peak season are you assuming a normal PK.
Weaker than normal peak, just sort of any color around that would be helpful and then.
Just a quick follow up to that when we think about F Y 20 on the first a final mile business.
What's your current expectation for any operating loss associated with that just related to the leases.
That will be ongoing it up like 20, just so we can have sort of an apples to apples number. Thanks again.
Okay sure. The first part of that is what type of Seasonalities assumed in our full year.
2019.
EPS guidance and my response to that I guess is we have assumed that theres seasonality, albeit a bit below average.
So we would expect.
Third to to have some moments in the fourth would be our strongest quarter.
As is typical.
But not the degree of seasonality for example that we experienced last year, but a bit more muted effect.
How that plays out we'll we'll see it could change can do we can be a month later in the year feeling completely different about things, but given the past traveled to date. This year, we've assumed a more muted overall environment.
To the second part of your question, it's about for your 2020.
I believe and maybe the rest of this year regarding leases the way, we'll will account for that is in the confines of the third quarter, we will make a onetime.
Entry that estimates the net lease exposures that we have.
Regarding the shutdown of the first to find a mile facilities.
And then over time, we'll monitor our actual results in that and adjust those as needed.
Hopefully, though they should be relatively small adjustments to the lease profile, but the charge predominantly will be booked as one entry in the third quarter. Okay. Great. So just to be clear you're not expecting any first a final mile.
Barring any changes to your.
Assumptions that you're about to taking this charge you wouldn't expect any first a final mile losses in 2020 is that the right way to think about that.
Correct that's correct.
Really.
We believe will be minimal in the fourth quarter. Okay. That's great. Thanks again for the time.
Great. Thank you.
Thank you. Our next question is from Chris Wetherbee with Citi. Please proceed with your question.
Hey, Thanks, good morning, guys.
Maybe just to pick up on that I don't want to belabor the point, but just want to make sure that were clear in terms of.
What youve already booked in terms of losses on the first two final mile. I think it was in the $12 million to $13 million range in Twoq, and then about $10 million in its you need 12 to 13 Q1 and $10 million in Twoq.
Probably something in the third quarter and then it goes to minimal in the fourth quarter is that the right way, we should be thinking about that.
Yes, let me be even more specific for you there.
First quarter was 13.
Second quarters 13.4.
And we're estimating nine in the third quarter.
And would ask that you may audits virtually nothing very small.
If any in the fourth quarter.
Okay, and so thats the number.
Those numbers are what's embedded in the guidance for the full year EPS perspective.
Yes.
And then.
Virtually nothing in 2020 as the current expectations.
That's correct.
Okay. Okay. That's helpful very clear appreciate your walk me through that.
I guess in terms of details just wanted to go to the for hire we get a sense of how you guys think about that as you move through the back half of the year or just sort of in the context of.
What has been a bit of a weaker environment and the productivity on on the trucks should we expect sort of a gradual increase here do we extend stays flat just get a sense on what you're thinking on that for higher.
Fleet going forward for the rest of the year.
Thanks, Chris I think at this juncture, what our strategy would be to put more of our trucks as we get in the second half of the year that.
And the dedicated configurations versus the for hire so I think you actually see a slightly lower number.
In the for hire space.
And some of that driven by having most of our replacement capital delivered here in the first six months of the year and so we will kind of work through all of that very rapidly here and we have so far in the month of July to.
To to get all that slack out of the system and so I would anticipate slightly smaller number than the for hire space.
Okay. Okay, and then that's in Threeq that shows up.
Correct.
Okay, great. Thank you very much for the time indicated.
Thank you. Our next question is from Brian Ossenbeck with Jpmorgan. Please proceed with your question.
Hey, good morning, Thanks for taking my questions.
Just wanted to ask you about the expectations for intermodal container fleet size.
And the service offering, especially in the context of what sounds like improving rail service.
And specifically it looks like you added a service yesterday coming out of California, So maybe can comment on that as well.
Why now is it offering and do you think you need to add add more lanes and the next the next year or so.
As it will take the first part of that maybe something around the box count.
As we finished the year I would expect us to be slightly down from today's.
Counter where we finished in the second quarter not at not a great deal, but slightly down and really the leverage point. There is that we do have some disposals that we could execute or if the market would allow.
Some additional volume that we could have a little bit of flexibility there, but we.
I believe.
We are about at the box count that we need to be and.
And for the foreseeable future where even.
Some of the mix elements that we are doing on transcons consuming a bit more boxes. So we're very mindful of how we expect our mix to play out and making those decisions.
But.
We believe we are about where we are going to be.
On the next several quarter front.
As it relates to just the overall.
Options in the marketplace I think we're seeing a bit more dialogue with some of the railroads relative to finding ways that.
They could certainly achieve their objectives that they are going after on running an effective railroad, but also looking for those areas that were.
Additional volume may be able to be.
A secured on the train and so you saw a little bit of that maybe in the last I think theres.
Perhaps some other opportunities in some other parts of the country for a similar approach. So we're in constant communication and discussion with our our partners to look for those opportunities and we will continue to do that.
For the second half of the year.
Okay. So in that case it sounded like maybe the rails are little more amenable to to adding some capacity or some some different offerings or was this more of a.
Joint joint thought process and the Inventure.
Yes, I don't want to speak for the railroads, but certainly I think one of the things that.
So that we can add value to our relationships is bring the commercial.
Opportunities for that.
And use kind of our insight into the marketplace to help our partners think about where those opportunities may be and it's generally a very collaborative.
Approach and.
And ones that we're in constant dialog about.
Okay, and just a high level question second one for first the final mile.
Yeah, obviously been working on it for a while I had.
Management changes you did some acquisitions.
What you made a few strategic shifts along the way it was there something that really changed in in the end markets.
The triggered this decision or was this.
More of kind of a combination of factors and and the opportunity cost and just the challenge of of implementing it over the last couple of years.
Well, we certainly went into this with with the objective of addressing the growing e-commerce trend in consumer purchasing and.
How that was even extending itself beyond into the older dimensional goods, which is really what was really our focus and you're right. We did some things together both from what we were doing prior and some acquisitions.
To help bring that national scope to play.
But obviously after a three year endeavor there and.
From the standpoint, not resonating from a cost to serve and a volume and a density standpoint.
That we felt.
That.
We were on a glide path and in any.
Reasonable horizon for that to be accretive to what we were trying to accomplish here with this organization. We made the decision. We made so it's a confluence of factors will play an ecommerce in different ways across our portfolio.
We just not going to play it and the way we've been kind of focused on the service the last three years.
Okay. Thanks, Mark for the thoughts.
Thank you. Our next question comes from Ken Hoexter with Bank of America Merrill Lynch. Please proceed with your question.
Hey, good morning, Mark Stevens Steve.
You sound like I, just want to revisit some of the things you said before in terms of sounding positive in the in the bid takeaways and the outlook. You noted your rates are up and maybe seeing some volume declines maybe Steve can you talk a bit about your your high end low end outlook from from that kind of the the truckload perspective.
Yes, I think our high end lower built more around.
Uncertainty around the seasonality and just to what extent that volume aspect shows up.
Anticipate that we have largely baked in.
The rate activity.
Across truckload and intermodal and in particular.
So that's our view of it is that.
We have decent insight given how far we are into the contractual renewal space. This year, and that's where the predominance of our volumes come from.
I think it's more about seasonality in volume side.
So less about rate fluctuation, given you've got that locked in and more just about where volumes and add on that side trend.
Yeah, and the associated productivity that goes with the volumes.
Okay.
On the follow up you've noted a change in customers on in dedicated is that ecommerce market shift is that you fundamentally changing your target audience I think mark you were talking about that in the in the beginning.
Yes, Ken.
Yes, that's exactly right.
And so more.
Specialty type services or whether that be on what we're doing for example in the AG space delivering chemicals to the fields too.
Various other places, where we're doing things beyond just DC to store type operations in a typical retail configuration quarter.
Could be on and off loading.
Eightv easily could be doing a whole series of other value add services around.
Some supporting the customers go to market strategy and in general those things are not.
100 truck operations they are much smaller operations.
But they have less need for surging they have less need for.
Just fourth quarter support and so we like the overall return profile, we like the stickiness profile and really over the last 18 months.
In particular, its always been part of the portfolio, but over the last 18 months the mix is starting to shift.
More directly to those and Thats our approach going forward.
We're not anti big customer retail, we're just pushing more of our forward focus that direction.
Okay is that anything due to how large customers of walmarts insourced, a bunch of businesses that due to changing.
Those larger customers how they are.
Sourcing their needs.
Not particularly.
It's more of what's the ability to sustain returns based upon the cost to serve.
Capacity acquisition.
Length of contract all of those things kind of come into play but.
I wouldn't say, it's just about insourcing, although obviously there is.
Certainly some folks who are who are more aggressive than others in that space. It's more the market the end markets that we're serving.
And then just a numbers question, Steve just minor.
I know you changed some historical stuff.
Are you providing.
I think it was some in a dedicated specialty for higher specialty are you providing historicals for the for the next couple of quarters.
On the web or anything else, we can kind of normalized growth for that.
We have adjusted the if it's the revenue recognition thing that we cited last quarter, we have a schedule by quarter by segment for those types of things.
And.
We can work with you.
Offline any questions you have about our operating statistics and how they are reported.
All right. Thanks for the time.
Thank you. The next question comes from Todd Fowler with Keybanc capital markets. Please proceed with your question.
Great. Thanks, good morning.
Mark in your prepared comments, you were talking about some cost leverage or some improvement on the cost side I forget exactly how you phrased it and Steve you went through a couple of the other expense items in your comments, but salaries and wages you look pretty positive here in the quarter as a percent of revenue and I know that there would be some variability with the miles that were driven but is there kind of a clean number on the salaries and wages side and is that what we should expect from a run rate going forward or were there any other moving parts here in the quarter.
In that line item.
Yes.
It is down I think 9% something like that quarter over quarter.
There are some some factors in there the productivity is one of them, but theres also.
Incentive compensation for the broader part of the organization lands in that line item.
And that we were above our targets last year and were below our targets. This year. So there's that dynamic housed within that line. There's also this is a lesser.
Order of magnitude, but the shift between company driver and.
And owner operator.
Dynamic the mix between those two.
As we have slightly more of our mix and owner operator this year than we had in the second quarter of last year. So that plays into that line as well, okay that makes sense and Steve can you comment maybe directionally how much the incentive comp is on a year over year basis. Just so we have an idea from a modeling perspective.
We haven't gotten into that that level of detail, but but thats, where that wouldn't show up. So okay. Okay. That's fair and then can you just remind us.
On your rail relationships with your.
Intermodal partners, what's the timing of the contract renewals and when was the last time those would have been updated I'm just trying to get a sense of what you might be looking at from a cost inflation standpoint on whats your rail partners as we move into 2020. Thanks.
That's how we don't disclose.
And were not permitted to disclose.
Items around our rail contracts, but you're right. We we generally try to enter into multi year.
Structure, so that for both sides, we have kind of durability and we're focused on the long term on the on the market and we're in the midst of that but Fortunately can't share with the specifics are.
So mark I understand maybe you can talk about magnitude can you talk about when the contracts actually renew or you can't you can't comment on that part either in the I can't comment on that part either sorry, Okay. No fair enough. Okay. Just thought I would try thanks for the time this morning.
Thanks, Dan.
Thank you we have reached the end of our question and answer session and ladies and gentlemen. This does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.