Schneider National Inc (SNDR) 2018 Q1 法說會逐字稿

Greetings and welcome to the Schneider National 2018 first quarter earnings conference call. (Operator Instructions.] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Pat Costello, Senior Vice President of Investor Relations for Schneider National. Thank you, Mr. Costello, you may begin.

Thank you, operator. Good morning, everyone, and thank you for joining our call. By now you should have received a copy of the earnings release for the company's first quarter 2018 results. If you do not have a copy, one is available on our website.

Joining me on the call today are Chris Lofgren, our Chief Executive Officer; Mark Rourke, our Chief Operating Officer; and Lori Lutey, our Chief Financial Officer.

Before we begin, I would like to remind you that some of the comments made on today's call, including our financial guidance, are forward-looking statements. These statements are subject to risks and uncertainties, including those described in the company's filings with the SEC. Our actual results may differ materially from those described during the call. In addition, any and all forward-looking statements are made as of today, and the company does not undertake to update any forward-looking statements based upon new circumstances or revised expectations. Also, non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release.

I would now like to turn the call over to our CEO, Chris Lofgren. Chris?

Thank you, Pat. Good morning and thank you all for joining us. As mentioned in our earnings release, the first quarter played out much like we had expected. Demand continued to increase, bringing with it pricing opportunities and the driver capacity challenge continued to become more prominent. This created an environment we have not experienced in well over a decade.

All segments of our business performed well in this environment. With the network service offerings that execute using the full extent of our Quest platform, we're able to balance customer needs while maximizing operating contribution per load and per tractor in this highly constrained capacity market. For those of you who may have had doubts as to the importance of this platform to the execution of all of our network businesses, I believe 2018 will demonstrate the same level of effectiveness in the up part of the cycle that was demonstrated in the down cycle of 2016 and the first half of 2017. Mark will detail how price, both from a contracted basis and from exercising choice based on dynamic operating contribution, all played out through the quarter.

We continue to invest in our First to Final Mile service offering, positioning it to be the channel of choice for retailers to deliver their goods ordered on their websites into the homes of their customers. We are making good progress, both in terms of the service levels we can offer and growth in order volumes to ultimately leverage this fixed infrastructure business. Mark will provide more color to this in his remarks.

The tightness of the driver capacity has caused us to make a moderate adjustment to our capital expenditure plan for 2018. Given the lower driver-to-revenue nature of our intermodal business, combined with the tightness we are witnessing in the industry's intermodal container fleet, we are going to position this business to grow incrementally above our plan. Lori will highlight our capital expenditure guidance in her section.

While there are certainly numerous factors that could disrupt the growing North American economy, we remain bullish on the prospects, as our customers continue to grow their businesses, putting a premium on our broad portfolio of services to help meet their transportation needs in this marketplace. We have a good start to the year. We think the foundation set in the first quarter will carry us into a good second quarter, but the more significant upside will occur in the second half of the year. As such, we will raise guidance. Lori will continue to highlight this in her comments.

With that, I will turn it over to Mark for his comments on the operations.

Thank you, Chris, and good morning to everyone. First, a big thank-you to our professional driver fleet and maintenance team for persisting through a series of especially difficult weather events in the quarter. And perhaps now, with the recent mid-April storm in the Upper Midwest behind us, we can finally turn our attention to the spring.

As Chris indicated, each of our segments of truckload, intermodal, and logistics operated in an environment where demand outstripped supply consistently throughout the quarter. It was a successful quarter in working closely with our customers to address the inflationary cost environment through contractual rate increase updates and renewals, and I'll provide some additional color on that as we get within the segments.

In addition, our broad portfolio of services offered leverage to serve the customers' freight coverage needs as the over-the-road conversion to intermodal and truckload assets to third-party brokerage continued to gain increasing prominence in our transportation solution set.

In our truckload segment, our overall tractor count, which is a combination of company- and owner-operated units, was relatively flat year-over-year and down sequentially 250 units from Q4 of 2017, as driver growth has proved to be very challenging. Revenue per truck per week in Q1 of '18 increased 6% excluding field surcharge revenues compared to Q1 of 2017. Impact from price improvement was 7%, offset by a 1% erosion in productivity.

Our largest quadrant in truckload, our for-hire standard quadrant, increased revenue per truck per week 9% excluding fuel surcharge year-over-year as compared to Q1 of 2017, and nearly all of that increase was attributed to price gain. Customer contract renewals closed in Q1 averaged price gains in the low double digits. Our for-hire specialty quadrant experienced the greatest improvement in price at 10.5% year-over-year, offset also by the largest negative productivity impact of just slightly below 3%, resulting in an 8%, excluding fuel surcharge revenue, improvement in revenue per truck per week in the first quarter.

We did have one quadrant that contracted year-over-year in revenue per truck per week at 3.4%, and that was dedicated specialty. And that's largely a mix impact, as a new large Final Mile delivery truck contract resides in that quadrant.

Finally, as we noted in the Q1 earnings release, First to Final Mile services served as an approximately 250-basis-point margin drag on the truckload segment in the quarter. There are several influences, namely retooled LTL transit schedules to address the e-commerce market requirements, resulting in a 25% reduction in the terminal-to-terminal transit schedules as compared to mid-2017. At present volumes, the higher service levels are operating at a less-than-optimal fill rate on portions of the network.

The business began an implementation pilot with new First and Final Mile optimization software. The pilot delivered meaningful improvement in STM mile and run time reductions, reducing our cost to serve. The intention is to finish that technology integration effort and have all of our terminal locations up on the new software by the middle of Q4 of this year.

Finally, we brought on two large break, bulk and Final Mile facilities in top population markets in the quarter. Both facilities are expected to lower cost to serve for first, middle and final element miles of the network as they mature.

Moving on to our intermodal segment, another very solid performance quarter from intermodal. Order-per-day growth was almost 6%, with the transcon portion of the network leading the way at 11% order growth year-over-year. We did not experience the traditional lag in timing of price adjustments to the over-the-road experience, and our revenue per order improved 5% in Q1 of '18 as compared to Q1 of 2017. Furthermore, approximately 30% of our intermodal contract book renewed in Q1 with price adjustments averaging in the high single digits.

Our professional company dray fleet continues to offer advantages to the business and customer community, as our percent of orders covered with company orange dray improved 140 basis points in Q1 of '18 as compared to Q1 of 2017. Company dray execution serves as both a cost and a service advantage to third-party alternatives, especially in this market condition.

Our container count grew 450 containers sequentially from Q4 of '17. Our plan calls for an additional 3,500 or more containers and chassis to be in service in advance of the fall peak, all of which is consistent with our current CapEx guidance that we provided to you in January.

Finally, our logistics segment grew revenues 20% in Q1 of '18. The brokerage offering now makes up 77% of our logistics segment. We expanded net revenue by 70 basis points in margins over the same period in 2017. The business is adapting well to the rising carrier costing environment, as customer pricing adjustments in both the contract and spot arenas have covered the higher capacity acquisition costs experienced throughout the quarter.

And with that, I'll turn it over to Lori to be more specific on the numbers.

Thank you, Mark. Now on to the results for the first quarter of 2018. Enterprise operating revenue in the first quarter increased 13% year-over-year to $1.1 billion, while revenue excluding fuel surcharge increased 11% to $1 billion. The revenue growth was primarily due to the strong price and demand environment. The company's broad portfolio of complementary services enabled it to offer and deliver alternative capacity solutions in this tight supply market. In addition, increased revenue was generated by continued growth in the company's leasing operations.

Enterprise income from operations in the first quarter of 2018 was $67.6 million, an increase of 55% compared to first quarter of 2017. This is primarily driven by improved price. This is a record level of operating earnings for the first quarter.

Net income in the first quarter was $47.6 million or $0.27 per diluted share as compared to $22.6 million and $0.14 per diluted share of a year ago. On an adjusted basis, EPS in the first quarter of '18 was unchanged at $0.27 compared to an adjusted EPS of $0.15 a year ago. The impact of the reduction in the tax rate, estimated at $0.05 per share, is almost offset by the impact of increased share count from the IPO, estimated at $0.03 per share.

The effective tax rate of 26.2% was slightly higher than we had anticipated. Discrete tax items have and will continue to affect our effective tax rate in both positive and negative manners. We anticipate the 2018 effective tax rate to be between 25.5% and 26.5%. This is slightly more than our previous estimate, which is a result of some increases in state tax rates. Operating ratio in the first quarter improved 160 basis points year-over-year to 94.1% and improved 170 basis points on an adjusted basis to 93.4%.

Now turning to look at our results from a segment perspective. In our truckload segment, the first quarter revenue of $551 million represented a growth rate of 6%. Operating income was $47 million, resulting in an operating ratio of 91.4%. As Mark has already explained, the impact of our First to Final Mile service offering was a negative 250-basis-point drag for the quarter in our truckload operating ratio.

Turning to our intermodal segment, in the first quarter we reported revenue of $201 million with an operating income of $22 million and an operating ratio of 89.1%, an improvement of 720 basis points compared to the first quarter of '17 and 20 basis points compared to the fourth quarter of 2017. As a reminder, we have fully completed the conversion to an owned chassis model at the end of 2017. We're very pleased with how effective the intermodal team has been at executing in the current environment.

As for our logistics segment, in the first quarter we reported revenue of $221 million with an operating income of $8 million and an operating ratio of 96.5%. Brokerage revenue was in excess of 75% of the logistics revenue and just over half of that was in the spot markets.

The other segment loss was slightly larger than we had anticipated. Included in this segment are costs that we do not allocate to operations. These include additional costs related to becoming a public company, a moderate increase in incentive compensation and the impact of the change in revenue recognition accounting. Costs in this segment tend to be somewhat lumpy.

On March 31, 2018, our cash and cash equivalents totaled $300 million compared to $239 million at the end of December 2017. The company's net increase in cash and cash equivalents of $62 million was primarily due to the cash impact of strong earnings. Adjusted EBITDA for the quarter was $139.3 million, an increase of 24% compared to the first quarter of 2017. As of March 31, 2018, Schneider had a total of $434 million outstanding on various debt instruments compared to $441 million as of the end of December 2017.

The company declared a $0.06 dividend payable to shareholders of record as of March 15, 2018. This dividend was paid on April 9 of 2018. Also, on April 24 of 2018, the company declared a $0.06 dividend payable to shareholders of record as of June 15, 2018. This dividend is expected to be paid on July 9 of 2018.

Lastly, we are updating our guidance for 2018. We now anticipate full year 2018 adjusted diluted earnings per share to be in the range of $1.38 to $1.50, which at the midpoint represents a 4% increase from our previous range of $1.32 to $1.44. By way of reminder, based on our portfolio of services and our diverse customer base, we typically have more of our earnings in the second half of the year. This dynamic will be even more pronounced in 2018, as the full impact of first quarter and second quarter pricing actions will accrue to the second half of the year. We are maintaining our net CapEx guidance for 2018 of $325 million to $375 million.

Now before I close on my remarks, I would like to add that this is my final call before retiring. It has been an honor to be on the Schneider team and I will miss Chris and the team greatly. Thank you, Chris, for being such a great mentor and friend.

With that, I'll turn the call back to the operator for questions.

Let's see. There are a lot of questions here. I'll try. I think intermodal strength and kind of sustainability of that looks like one of the highlights of the quarter. I knew you had good intermodal results, very good in fourth quarter as well. How would you think about the key drivers of that strength in margin performance and kind of conviction that you sustain that trend? I guess also maybe how the new containers that you're adding, the new capacity, might affect that very favorable trend in OR performance in intermodal.

Let me just give you a bit of an overview. I think that a lot of what has happened with that business and the improvements that we've seen are driven by -- clearly, we talked about being in the sixth inning with our Quest platform when we were on the road show. And this was one of the businesses that was just starting to use the decision science that we were putting in on the revenue management side. And so I think clearly, that is helping the business perform. And without doubt, the investment that we made in our own chassis has certainly had the impact that we talked about and adjusted for last year.

But the improvement that it's made in terms of the productivity has played a key part in that. And then I think we just can't overestimate the fact that capacity is tight across North America on all surface transportation, and that's rolling into it. But in terms of execution and then how we're thinking about the extra containers, let me just have Mark provide a little more color to that.

Yes, thank you. And then certainly, our dray performance with being able to increase our coverage on our orange assets, both from a productivity and a service standpoint, I think continue to offer differentiation in the marketplace, at least from a customer experience and a cost to serve, Tom. In addition, we would estimate, just based upon missed opportunities in the market as additional boxes have been consumed on the train, just based upon overall rail fluidity, that we could have easily, based upon quality demand, done another 6,000 orders within the quarter. And so the additional boxes that we'll start to see on a more prominent basis coming in here middle of second quarter will give us an opportunity to capture the quality demand that our customers are asking us to cover. And right now we are almost as constrained, and we are as constrained on the box front, as we are on the truck front. And so that's why we believe this is sustainable. Our execution platform is operating very well, and both from a revenue management and network management, dray and now putting some additional resource boxes against the effort, we think we'll have a really good position in the market for the remainder of the year.

It sounds like you have conviction that this performance is sustainable and good visibility to using the boxes, filling the boxes. Is that a fair way to summarize it?

Yes, it is, yes.

Okay, great. Thank you and congratulations on the strong results.

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

Lori, congrats and best of luck in retirement. Mark, maybe just from a highlight -- you touched on it there at the end. But what is the approach that shippers are taking to this year's bid? You're putting up very strong performance in intermodal. You talked about constraints there on the box side. But there are service challenge numbers in growth and in brokerage. But I know a lot of these big shippers have been spending a disproportionate amount in the spot market and are looking to work that back. So your portfolio is well situated into that. What are you seeing during this year's bid? And then any peek into '19 as well to assess the durability of it. Are you seeing a migration toward committed truckload capacity and away from spot and perhaps avoiding intermodal because of the service issues? Or is there increased appetite to use intermodal over the next few years because of the visibility to rising freight rates? Maybe just from a high-level perspective, how are some of the large retail customers managing this year and thinking about supply chains over the next couple of years?

Certainly, I think customer desire and commentary with us is very much on the load acceptance vein of what can be done contractually, even at perhaps higher price points or at, as you mentioned, the service challenge is a bit at intermodal. But they're not so much that it's driving any real volume away from the train. Because if you do those well, then they believe there's less going to be into the spot market, which has been more problematic.

So we have had, and continue to see, just a real strong appetite for over-the-road to intermodal conversion, really in all geographies and virtually all segments of the customer vertical space. And again, another reason we're bullish on adding some containers to that. We haven't added a great deal of containers over the last several years, and based upon our ability to perform and where we are, we think it's absolutely the right time to do that.

And so overall, it's been, obviously, a difficult discussion at times with customers just because of the desire to have us take more freight than we're capable of, based upon the demand on our assets and services. And so as you mentioned, our portfolio allows us to bring into the brokerage arena, and so we really are trying to be very collaborative in that regard and know that we are more of a contract customer play than simply throwing everything that we do out into the spot market. And we think that's the best long-term play.

And if I could get a follow-up on that point on the brokerage side. Obviously, you're going to have more difficult comparisons as we move through the year, but have we seen enough to suggest that mid-upper single digit, perhaps low double-digit type volume growth is sustainable on the brokerage side as a result of all of that?

Yes, I believe so. And again, multimodal, we play in all forms of mode -- LTL, intermodal, and obviously, truckload being the largest of that. But yes, we feel we're positioned well and would stay on trend.

Our next question comes from the line of Ken Hoexter with Merrill Lynch.

Congrats, Lori, and obviously, the best to you as you go on to your next phase.

Can you maybe talk, Chris or Mark, talk a little bit about the last mile rollout, the impact on margins? You talked about the scale of the ramp-up. And are you going into the home now? Are you getting new trucks for that last mile, or is this still standard orange tractors? Can you maybe just talk a little bit about, given the 250-basis-point drag, walk us through the business a little bit more and what you're expanding.

Sure, I'd be happy to do that. We have multiple segments of the Final Mile market that we serve, both in the B2B space, and that's going to continue to be important in serving the over dimensional product categories and replenishing storefronts. But increasingly, where we see the growth in the market and where the biggest opportunity to have the best mousetrap, we'll ultimately be addressing the e-commerce into the home segment of the market. And what we use from a capital standpoint for that is not Class A tractors on the Final Mile, but straight truck delivery. And there's certainly been, over the last year, a considerable amount of investment throughout the network to field those units for that e-commerce consumer base.

And so what we're really in a phase of transitioning the importance of the e-commerce trend into both our geographic coverage, our execution systems and also from a transit standpoint, that we can have a very competitive e-commerce transit throughout the network. That's really necessary to serve that market well and at present volumes, because it's a much more of a fixed-cost infrastructure than is typical in a full load network, that we're not at optimal fill rates in all portions of the network. And so now that we have the transits and we have -- that we feel it's very, very competitive, it's about the volume to leverage across that. And the incremental return on every incremental dollar that we do then becomes much more accretive.

So just to clarify that, so you are buying straight trucks and moving into that last mile, less-than-truckload business as far as that segment goes?

Absolutely, yes. It's the primary focus of the business.

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

If I can just follow up on the last response, so I'm sorry if I missed it in your comments, but what's the line of sight on the timing of that 250-basis-point margin drag lifting? And not just lapping the drag from last year, but kind of when does that start to actually contribute to results? And is this something that you probably need to reconsider how you're going about this or kind of where this business fits in your overall portfolio?

This is Chris. Let me just take the last part of your question. This is a growing market, 15-plus percent. It will be a good-sized market; could be as high as a $20 billion market out there in time. People are buying more and more types of product that don't flow through a traditional package network or LTL network. And people are looking for white-glove service into the home. And these were often products that we were taking from a DC into a storefront. We want to play in that part of the supply chain and make sure that we're there to do it.

It requires a different infrastructure. And from our standpoint, we view this to be a very similar kind of phenomenon that we would have seen back when the truckload industry started to embrace putting the domestic equipment onto the railroads. So we're committed to be in this. We believe it's going to be a great growth engine for us as the way people buy these types of goods change. And so I think it's a very strategic decision from ours. And I'll let Mark talk about how we see the improvement in it and moving along the path that we're moving. But we think it fits in our business, and it is a bit of a diversification. But it's playing with all the same customer names that we're used to playing with on the retail side, and it's giving us a great opportunity to add logos to our business in terms of serving people we have never, ever been with.

So Mark, why don't you talk a little bit about the pathway?

Yes, Ravi, we would expect that this is a multiple-quarter effort to get this where we need it to be. But we would expect improvement, obviously, along that path with a number of the things that I've laid our relative to both technology, the transits now allowing and competing very well. And we're in multiple startups with new, as Chris mentioned, customers that virtually only have e-tail as part of their network. They're not a brick-and-mortar play at all. So again, we believe it's the right market. Would we like it all? Yes, we're an impatient crew; we would like it to be faster than it is. But we believe we're on a sustainable path to do that. But it will be multiple quarters.

I just have a quick follow-up here. Clearly, you guys are feeling great about the second half of the year, given that you raised guidance. But just trying to get a sense of how much visibility you have into market conditions here. Does it feel like things have stabilized at an elevated level, or do you think there's room for spot trades and tightness to go up further over the summer? And the same thing about the driver situation. Do you think it's stable from here to the end, or do you think that there's more to come?

Well, I think there were 5 questions in there, Ravi. But let me see if I can give you what you're looking for in terms of the market. This is a very, very driver-intensive market, and it will remain so. I think there's an understanding, that it's interesting as people talk a little bit about the fact that has this thing peaked? And in my mind, what is being experienced here, for those who have stayed in the market with the ELD implementation, there is without doubt, they're seeing productivity impacts, which means even if there's the same number of trucks registered with the DOT, the amount of capacity those trucks can do is, frankly, regulating to where the industry should have been if there weren't people who were essentially running outside of the legal hours of service.

So I believe that there is going to be a change in trajectory here. And we're going to have to pay drivers more, but it's going to have to be commensurate with our ability to get price. And clearly, we started that back in 2017, and I think that there's an understanding of that.

So my view into the second half of the market is, assuming the economy stays strong, the consumer stays confident, I think that this is going to look very much like the combination years of 2003 and '4. And I know a number of people on the call may not have been in the industry back then, but that's the kind of environment that I believe that we're in, and I think there's a lot of things that will start to change as a result of this as the industry in total, not just the trucking industry, but I think the logistics industry starts to understand that productivity of the ability to move goods from one place to the other is a key principle. And I think all of us in the end would prefer productivity over price because ultimately, you can generate the same kinds of returns. But until the productivity comes, we're going to have to have price.

So I think, hopefully, that gives you some context. But I don't think the capacity issues that are out there solve themselves in this calendar year.

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

I want to go back to that last mile thing again. Sorry to harp on it, but if we're doing the math right, 250 basis points of margin, it's kind of like $14 million operating income. It's almost like 30% of the truckload operating income in the quarter. So I just think it's important to just try and understand where does that number go maybe the rest of the year? And is that a number that could completely go away next year in terms of that headwind, just because it's meaningful. And maybe if there's any way to talk about you did a little over a point of operating ratio improvement in truckload in the first quarter, maybe what you expect, like full year truckload operating ratio improvement that you're embedding into the guidance.

Scott, this is Chris. I might encourage you to go back and check that algebra, because it is algebra. Coming from a couple of different points, we didn't give the number. But I think you are high on the negative impact of that.

The drag, Scott, is on truckload margin, not on enterprise margin. Perhaps that permits understanding.

Yes, maybe -- so it's just in truck. But anyway, I think that, to Mark's point here is that that number is a number that we expect to get better throughout the year and to ultimately turn into a positive as we get out into '19. So in our mind, we went into this knowing it was an investment, knowing that we were taking 2 companies -- one that gave us a footprint, a national footprint in terms of being able to have facilities for Final Mile white-glove service into the home and, frankly, a reverse logistics capability for returns from customers. And then combining that with the technology play that would allow us to create not just a Final Mile business, but a First to Final Mile business that can support the e-tailing of these larger, harder-to-handle goods.

And so we don't expect to be investing at the same rate which we have to bring us to this point. A lot of what we really need now is, with the service levels and transit times that we have across that footprint, is we need to grow that business across a fixed infrastructure that we believe can offer something that is quite unique in the marketplace. So I think to the extent you're trying to model how this thing ultimately swings positive, and every step along the positive swing is positive, so I would just have you go back and work that number. But I think there isn't a long pathway to this being a drag and, frankly, it will be a growth vehicle for the company.

Okay, that's good to know. And then Lori, just real quick, you mentioned that the other operating was a bigger loss than you thought in the first. Any sort of directional guidance you can give on the rest of the year for that line?

What I would say is that we have said over time that that's going to be very lumpy. It was more, I think it will still be in the same range that we've given before. So I wouldn't change what I said before previously. We think it's over the year, about a $25-ish million loss in that other segment, typically.

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

I did not change my --

Congratulations, by the way.

Thank you very much, Chris. And by the way, I did not change my name.

For everyone on the call who may not know, there's a new member of his family.

Thank you, sir. Thank you, Chris. Couple of the things I wanted to touch on have been addressed, particularly with First to Final Mile. But I guess in the press release, you comment about an expectation for the fleet count to stay relatively flat. But clearly, you've seen some challenges here sequentially from the fourth quarter. So I guess maybe can you talk about the confidence that you have in keeping the fleet count flat in this tough driver environment? And if you can't, what are sort of the puts and takes as it relates to the capital budget plan as well as maybe your expectation for gains on sales for the rest of the year? So pretty encompassing question, but just thoughts there would be helpful.

I'll take the first half and let Mark take the second half. Listen, this market is what it is, and it's not the first time we have seen this movie. What we are absolutely not going to do is just try to add a whole bunch of costs chasing things where it just doesn't make a lot of sense. So to the fact we could grow some things and grow them at reasonable recruiting for costs and appropriately sustainable driver costs, we're not opposed to doing that. But you can't ignore where the marketplace is today and how we want to perform, and we are fortunate with our business model to have choices, and that's driving the kinds of things that we're doing relative to putting a little more capital than we had planned into our intermodal business.

We are growing our driver base there, and the work characteristics of that are a little more favorable to getting people time at home. And the other side of it is, is that industry is not seeing the traditional lag that there's always been between truck and intermodal relative to price because our customers do value that as an opportunity to get their freight moved on those lanes where that can work. And the box capacity tightness that we saw across the industry in the third and fourth quarter has not gone away. And pressures on that should continue, and so we'll make an investment there.

And I guess we're -- that's kind of our little adjustment, if you will here, as we sit coming out of the first quarter. And we'll watch this thing. I think our cash flows are strong. We have plenty of cash on the balance sheet. And to the extent we get opportunities in our truck business, and if we were to get some sizable dedicated opportunities, I mean we'll make the investments and we'll do the things we need to do. But this is just a time to be thoughtful and, frankly, there's an opportunity to get sustainable price, and we'll continue to do that.

Mark, in terms of how you see kind of playing out the capacity and the driver and the things that we're doing, if there's something you want to add there?

No, because I think you handled kind of the spectrum there. As it relates to the equipment side, while the market is fairly stable on the number of units, and we are selling at a little better clip than we were a year ago on the total number of units, but the per gains per unit, it's still a bit challenging. And so we had less gains this quarter year-over-year versus -- despite selling more equipment to do that. So, and we would anticipate that to be the condition for the year. And if all of these new truck orders, which there's a difference between an order, a build, and a driver in a seat, could put a little additional strain on the market in the second half of the year on the used equipment. We'll wait to see there. But we don't have a lot of our kind of forecast or our guidance number baked in because of a robust gain on sale condition.

Thanks, that's very helpful. And then Lori, congratulations and good luck to you in your future endeavors.

Our next question comes from the line of Matt Brooklier with Buckingham Research Group.

So I wanted to go back to this intermodal division. Could you remind us or maybe talk to how much of that business repriced in the first quarter, and then maybe the cadence, how much of the business reprices over the next 3 quarters?

Happy to do that. In my comments, I indicated that about 30% of the contract book renewed in the first quarter, and really, as in most of our services, the first and second quarter are the predominant and busiest quarters for those type of endeavors. And we don't, even though the market is tight, I think customers are looking for as much coverage as they are price certainty. And so we would expect traditional, kind of historical efforts there to continue relative to timing. And so we'll be through a large percentage of it by the end of the second quarter.

Okay, and then how much of that business is contract versus spot? I don't think you have a lot of spot business in intermodal, but what does the mix look like, roughly?

Yes, we're predominantly a contract. Now we also support our contract carriers with spot pricing because of off-routing guide or other issues they may have in their network. So while we do have some variable pricing with our contract customers, we think of spot as just playing to the 3PL areas or the broker areas. And we don't do a great deal of that. So it's predominantly around the contract customer front.

Our next question comes from the line of Matt Troy with Wells Fargo.

I just wanted to ask a question about drivers. Specifically, you talked about a 250 sequential decline in truck count and cited the inability or the challenges of hiring new drivers. Is that a pay issue? Obviously, it's an issue that's pervasive across the nation. But I'm wondering what tactically you can do or need to do so that you can get that truck count up. Or is it just, as you maybe alluded to earlier, a portfolio decision that that capital is better allocated somewhere else? So the first part of the question is tactically what your wage inflation expectations are for the year, what can you do, or even do you want to add more drivers? And then secondary, taking a step back, we've not seen this before. How long do you think this takes? What does it take to actually fix this problem from an industry perspective? Is it we need a 45%, 50% aggregate pay increase for drivers to attract more qualified people into the industry? I'm just trying to figure out what seems to be a long-tailed problem, how it ultimately might get resolved. I'd be interested in your thoughts there.

Matt, we're going to give you two runs at this. I'll take the first half; Mark will take the second.

If you go back, from my perspective -- and this is probably more opinion, so please take it as such -- is that if you go back into 2003, '4 and the first part of 2005, the industry was trying to get to 100% fuel surcharge because it wasn't all there. The other side of the things were assessorials to be able to be paid for things like detention, trailer detention, driver detention, all of these kinds of things. And with the tightening of capacity back in that time frame, the industry made a lot of progress on fuel surcharge and on assessorial billing. And what really needs to happen, it's clearly a rate per mile or however the driver pay structure. I mean that will need to move over time as we have this full employment economy and that kind of thing.

But the other thing that has to happen is the driver cannot be a shock absorber for lack of productivity inside of customer supply chains. And I think we're certainly having those discussions. And frankly, we have embedded inside of our dynamic contribution calculations how those kinds of things play. And I think as much as anything, it's going to be a productivity. Because with hours of service and electronic logging, the driver only has so many hours in the day they can work and so many hours in the day they can drive. And to the extent that either we as a company or the freight that we have our drivers employed against drive inefficiencies, that just takes away from their opportunity to bring home W-2 income. And so my personal hope is that the pressures that we're seeing in the marketplace today bring that to the forefront. And I think the ability to address that changes in some cases the desirability of this work when it's compared against potentially construction work or those kinds of things.

So that would be my holistic view on it. And maybe let me have Mark come in and talk about the things that kind of front and center in the year he sees and the way we think about our fleet of professional drivers. And I'll start and I want Mark to finish. But we are not going to lower our standard on the quality of professional driver we're going to put in our fleet. So Mark?

Thanks, Chris. Just a couple other comments. And we certainly have been adjusting pay, really since '17. And we will, I believe, continue to do that. We want to pay our drivers more; we need to pay our drivers more. And that's part of -- ultimately, Matt, to your point -- part of the equation.

But the other part of the equation is to lever other strengths that we have -- certainly the culture of the company, the safety stance. People want to be around folks who are committed to their safety. And then ultimately leverage our portfolio relative to have choice and options based upon lifestyle and income desires.

And so one of the attractions of -- not to bring back up the First to Final Mile -- but is we have the ability to have very stable local, in-the-market jobs, ones that don't require a CDL, and grow our business in a way that's different than we've traditionally grown it. As mentioned, our intermodal business, highly productive and a great value proposition for those drivers from a time-at-home basis, and on and on.

And so we have to have this on multiple fronts, and we are really, as an organization, mobilized to be thinking about the driver experience and to make sure that everything that we're doing in our process, everything we're doing in our technology and personal interfaces, respect and understand the lens from the driver into our business. And if we do those things well and we are committed to doing those things well, we think ultimately we'll be successful with the driver community. But it takes a full effort across comp, how you think about freight selection, that you're putting the driver in the best possible condition, as Chris mentioned, and certainly your commitment to their experience.

I appreciate the thoughtful answer. And Lori, congratulations. Kind of a walk-off home run to be able to handle an IPO of this size so smoothly. You'll be missed. Thank you.

Our next question comes from the line of Chris Wetherbee from Citi.

Again, congrats to Lori. I wanted to ask about the fleet trajectory. You got a question about it before, but I guess I just wanted to come back and make sure I understood if there -- sort of what the underlying assumption on the truckload fleet is underpinning the guidance. If you could just give us a sense, do you think you can kind of move that number back into the 12s, or is there another way to sort of think about it?

On the truckload segment side, on the truck front, we typically have our peak production relative to trucks on the road is late third into the fourth quarter and then typically, because of the holiday condition and some of the other elements, have a seasonal downturn relative to the total units in the fleet, which is exactly what we experienced here. I do believe we are still looking at ways to upgrade the portfolio relative to customer mix and freight mix. And so we'll have some -- a good deal of business growth that doesn't necessarily always translate into additional tractor units because we are continually looking at how to improve the mix of the business. But as we look out for the full year, specifically to your question, we do not have a great deal. We're at this juncture putting more of our growth capital, our growth capital planned, into our intermodal offering, both tractor, container and chassis. And we would look to be fairly flat relative to the truck side of the business.

But as Chris said, that could change and we could find opportunities that intrigue us to do so. And we will absolutely, obviously have the wherewithal. Our CapEx guidance is in the middle of that range, and so we still have plenty of powder to make some adjustments there if we're excited to do so.

Okay, that's helpful. And just to clarify the flat, you're sort of talking off of that one first quarter level?

I am.

Okay, that's really helpful. And then just coming back to the intermodal point, I think what you just said was helpful as well. But when you think about the profile of the cost there in particular, sort of rail costs and, frankly, rail service, is there any -- how do we think about that as the year progresses? Is it sort of regular step-ups is sort of a reasonable matching between rail cost increases and the prices you're able -- or the ability to go back into the market and get prices? I just want to get a sense of if there's any timing differentials between sort of when you have to pay the rail relative to how you're repricing your contract book.

Hey, Chris, I would encourage you maybe in the follow-up calls. We have another couple of calls. We probably won't get to all of them, and I want to make sure that we have the opportunity to do that. So if I could just ask that you would kind of come back around and check on that when you talk on a follow-up call later today.

Sure.

I'd appreciate that. Thank you.

Our next question comes from the line of Brian Ossenbeck with JPMorgan.

Just one additional one on the First to Final Mile. You mentioned just briefly in your commentary about the whole reverse logistic returns process. So I wanted to see if you could give a little more commentary on that, if that's part of the build-out, if you're expecting that to factor into some of the demands on the equipment and how you approach that sort of business, because then theoretically, you could have more freight coming back to you which might be damaged at warranty, so I wanted to see how that fit into your strategy and how far away you are from implementing that as well. Thank you.

Great, thank you, Brian. Certainly, reverse logistics is an important part of the whole e-commerce world. Very liberal return policies really make it necessary to be a value-added partner there, that you have to have a mechanism to capture, connect and then resolve with, actually, the retailer really making the call, whether that's a return all the way back to the vendor or whether that's a disposal or a charity donation, et cetera, et cetera. That's all based upon various rules by the consumer -- or excuse me, by the retailer. But certainly having the ability to satisfy that portion of the service equation is incredibly important, and we have really been on that journey and extending some of the platform that we have acquired from the technology standpoint from one of the acquisitions to accommodate the increasingly important element of that to the service equation. So we see that as an additional revenue stream and additional earnings stream that comes with providing that service.

There are no further questions in queue. I'd like to hand the call back over to Chris Lofgren for closing comments.

Well, thank you again, everybody. We're kind of pushing this right up here to the limit, but I would not want to exit the call without thanking Lori one more time for her contributions. And, frankly, she just never missed a beat while she was here helping us make this transition as she looks out to the next phase of her life. And I appreciate everything that she has done for the company. Her commitment has been unbelievable, and everything she's done for me. So grateful, and I'm standing on the sidelines cheering you on as you move into the next phase. As you all know, Steve Bruffett will be starting next week, filling Lori's role. And I know he's looking forward to rekindling past relationships that many of you have on the call here with him.

And with that, let me thank you for your time and wish you a great day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.