Schneider National Inc (SNDR) 2018 Q4 法說會逐字稿

Greetings, and welcome to Schneider National 2018 Fourth Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Pat Costello. Please go ahead, sir.

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 fourth quarter and full year 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 Steve Bruffett, 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 comments. 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.

Finally, this call is scheduled to go 60 minutes. After some introductory comments, we will answer as many questions as time will allow. (Operator Instructions)

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

Thank you, Pat. In every quarterly earnings call, I reiterate our strategy of a portfolio of services, all at scale and competitive margins, and how that allows the company to perform resiliently in every phase of the economic cycle. This fourth quarter was no exception. Given driver capacity challenges for the industry, we focused efforts in our Truckload segment on sustainable contract rate increases. We reallocated growth capital to our less driver-intensive Intermodal segment to position this business to benefit from the over-the-road conversion freight. And we implemented new revenue management capabilities in our Quest platform, initially within our Logistics segment, to drive faster growth through alternative capacity solutions, all producing a fourth quarter and full year record operating returns.

Market dynamics clearly helped us recover increasing driver and purchase transportation expenses, with the impact of positive net price in each segment of our company. Mark Rourke will detail the performance highlights for each business in his comments.

Each step along the way in 2018, we positioned the company for greater resiliency and the ability to have greater nimbleness in response to any future changes in market dynamics. It was a year of significant long-term positioning of the company. Every year brings its own unique challenges, and we move forward into 2019 confident of our preparations. Steve Bruffett will provide insights and discuss our annual EPS guidance and capital expenditures in his comments.

Before turning to Mark, I wanted to recognize Pat Costello. Pat will bring his incredible 37-year career with Schneider National to a close at the end of this first quarter. His contributions to our organization are too numerous to list. Many of you have engaged with Pat after he took over our Investor Relations activities following the IPO. We, like I'm sure you, will miss working with Pat but wish him and his wife, Bonnie, a fantastic next phase of life.

I will now turn the call over to Mark Rourke.

Thank you, Chris, and good morning, everyone. I'll offer a few summary comments about the quarter and then quickly move into our 3 business segments.

We experienced a delayed but traditional peak season in Q4, particularly in the retail and growing e-commerce-influenced verticals. The result is a record earnings and margin performance led by our Intermodal and Logistics segments. Intermodal and Logistics represented 48% of the company's operating earnings in the quarter.

While not as active a contractual renewal quarter in Q4 '18 as we experienced in the previous 2 quarters, we did experience contract renewals at improved pricing, particularly in the for-hire quadrant networks within truckload and our Intermodal offering, with the average increase in the mid- to upper single-digit range. And our definition of pricing is measured on a like lane basis by a shipper. Shippers, in most cases, are valuing consistent order acceptance and delivery performance in their renewal outcomes.

While spot rate activity in our internal Truckload strength indexes are muted as compared to last year's historically strong January, the strength of retail sales, the relative health of the consumer and recent job creation numbers give us a sense of optimism as we head into 2019 that freight volumes will remain healthy.

Now let's move into Truckload. In the Truckload segment the overall tractor count, which is a combination of our company and owner-operator units, grew sequentially in all 4 quadrants from Q3 of '18 to Q4 of '18 to 11,575 units. On a year-over-year basis in Q4, the truckload tractor count contracted 3.6%.

Dedicated standard was the largest revenue growth driver in truckload, excluding fuel surcharge revenues, both year-over-year and sequentially from Q3 to Q4 at 19% and 10%, respectively. Dedicated specialty partially offset this dedicated standard growth. As was highlighted last quarter, we finished a reshaping exercise with a few dedicated specialty contracts in order to redeploy capital in more favorable financial return configurations. Our dedicated new business pipeline continues to build, and we have several new business awards scheduled for startup in Q1 of '19. And we expect all of our 2019 tractor growth in Truckload unit count to be derived in our dedicated contract offerings.

On our last call, we articulated that we were adjusting our execution model in our First to Final Mile service to achieve a material improvement in financial performance. The changes centered around reduced variability by increasing the structure of the network through day of week, service by area, balancing commercial focus between B2C and B2B solutions, a revamp of the leadership team with proven industry talent, and we are moving to a more variable cost structure by moving the middle mile network from a largely dedicated tractor configuration to one that converts over-the-road moves to one way Intermodal for-hire truck and third-party capacity to significantly lower the cost to serve metrics. While recasting to that degree has taken time, we do expect full implementation of the execution model changeover to be complete no later than the end of March of 2019.

Our core Truckload segment, excluding First to Final Mile, operated at an operating ratio of 83.3% for the fourth quarter.

Now transitioning to Intermodal. The Intermodal segment grew operating revenues, again excluding fuel surcharge revenues, year-over-year in Q4 by 31% while achieving another record operation -- excuse me, operating ratio result of 84.8%. Order volume grew 16% year-over-year comparing Q4 of '18 to Q4 of '17. And in the second half of '18, the Intermodal segment's run rate is now more than $1 billion in annual operating revenue. It was a robust peak season with consistently strong order volumes throughout the quarter. Revenue per order increased 13% as compared to Q4 from the prior year, with yields improving 11%, with mix impacting revenue per order by another 2%, mostly due to longer length of haul in our transcon business. We took final delivery of our final allotment of containers within the quarter and the corresponding number of chassis to support them, bringing our total container count to 21,800. The additional container count was largely absorbed through double-digit order volume growth, longer length of haul business, mix impacts and some rail fluidity challenges.

Year-over-year in Q4, the professional company driver fleet expanded by 18%, delivering leading customer service and business cost performance versus third-party dray options.

Now finally, onto Logistics. We achieved revenue growth in the quarter of 14% Q4 of '18 versus Q4 of '17 to $286 million in operating revenue. For the full year, Logistics segment for the first time eclipsed $1 billion in operating revenue. Earnings performance increased year-over-year in the quarter by 27% as margin expanded 50 basis points year-over-year in Q4 and 120 basis points sequentially from Q3 of '18. Now 78% of the Logistics segment's revenues originate in the brokerage service offering, and the margin expansion sequentially and year-over-year demonstrate the resilient nature of the margin profile of this segment, especially considering the difficult Q4 of '17 comps driven by hurricanes and a highly distressed Southern Cal marketplace.

Our prescriptive data science models enabled purchase transportation expense to adjust, consistent with market forces. And in addition, we have now 8,000 carriers assessing the buy-it-now feature on our Load My Truck carrier portal, creating an automated selection and assignment of freight movement.

I'll now hand it off to Steve Bruffett to summarize the enterprise financial performance for the quarter. Steve?

Thank you, Mark, and good morning, everyone. I'll begin with a recap of our enterprise results for the fourth quarter and full year and then provide some commentary on 2019.

Starting with revenue. Excluding fuel, it was up 10% in the fourth quarter and 11% for the full year. Consistent with our themes throughout 2018, Intermodal and Logistics provided the majority of top line growth. Intermodal revenue grew 31% in the fourth quarter and 22% for the year, while Logistics grew 14% in the fourth quarter, 23% for the year.

Truckload revenue grew 2% in the fourth quarter and 4% for the full year, reflecting the driver-constrained operating environment. Adjusted income from operations improved 21% to $121 million in the fourth quarter, which as Mark mentioned, was a record level of quarterly profitability. All 3 of our primary operating segments contributed, with Intermodal increasing by 44% when adjusting for last year's duplicate chassis costs, while Truckload and Logistics each improved by over 20% from the fourth quarter of 2017.

On a full year basis, adjusted income from operations increased $102 million or 36% to $384 million; Truckload improved 23%; Intermodal, 94%; and Logistics, 39%. So our portfolio and our mix of business remain important parts of our ongoing story.

When reviewing our financial results, I'd like to provide context to any items that might not be intuitive. For this earnings release, the results of the Other segment need further explanation given the number of moving parts involved.

For the full year of 2018, a $42 million loss was incurred on a GAAP basis, and this compares to the $2 million loss in 2017. So there's a $40 million change year-over-year. However, when adjusting both years for the non-GAAP items that were recorded in the Other segment, the year-over-year changes reduced from $40 million to $19 million. And within that remaining amount, there were 2 primary explanations. The largest variance was from compensation plans for company associates that are not directly aligned with our operating units. In 2018, actual results exceeded targeted levels for these plans while they were below targeted levels in 2017. The second item was an increase in public company costs as we implemented SOX during 2018.

Moving now to incremental margins, which were 20% for the fourth quarter and 22% for the full year at the enterprise level and on an adjusted basis. There were storylines within each of our reporting segments as we progressed through the year, such as the normalization of the incremental margin at Intermodal, which ranged from 70% in the first quarter to 20% in the fourth quarter, as we started to lap the benefits from our 2017 chassis conversion and ongoing operational initiatives.

For the full year, incremental margin at Truckload was 55%, Intermodal was 36% and Logistics was 7%, representing strong performance across the portfolio.

Regarding diluted adjusted EPS, the $0.49 recorded in the fourth quarter of 2018 was an increase of 48% over the last year. And for the full year, adjusted earnings improved 65% to $1.55 per share.

Wrapping up the overview of the income statement, our 2018 EBITDA was $675 million on an adjusted basis.

Moving now to the statement of cash flows. Our full year cash from operations was $567 million, which was an increase of $105 million, and that increase was predominantly due to the higher adjusted net income.

Regarding investing activities, our 2018 equipment purchases of $422 million were virtually identical to those in 2017. The proceeds from sales were $21 million higher in 2018. So the net CapEx of $332 million was incrementally lower than in 2017. We further strengthened our balance sheet over the course of 2018 as cash and marketable securities increased by $150 million to $430 million. Also, debt was reduced by $29 million and totaled $411 million at December 31.

And while I'm on the topic of debt, we have a $40 million tranche of privately placed debt maturing in November of 2019, and therefore, it's reflected in current maturities on our year-end balance sheet. Our present plans are to repay this note at maturity. However, we'll monitor the interest rate environment and our potential investment opportunities before concluding whether to repay or refinance the note.

Continuing now with forward-looking comments about 2019. Our full year 2019 guidance for adjusted diluted EPS is $1.65 to $1.75, the midpoint of which represents a 10% increase on top of a record year of profitability. This guidance assumes modest economic growth and a continuation of the constructive balance between shipper demand and carrier supply. Also, we expect our full year tax rate before discrete items to be approximately 25.5%, and that's slightly lower than in 2018.

Our 2019 net CapEx guidance is approximately $340 million, comparable to the levels of the past couple of years. The themes for our investments are similar to those of 2018 as we expect to allocate growth capital to Intermodal containers and chassis and to our dedicated service offering. For rest of the business, we are mostly planning replacement capital. We'll also continue to invest in the Quest platform and enhance our operational and customer-facing capabilities, and if needed, will adjust our CapEx guidance throughout the year as we continue to be opportunistic and flexible in our capital deployment.

So to recap 2018, it was a strong year, and we effectively navigated through fluctuating market conditions, and it is rewarding to pause for a moment to celebrate milestones such as record earnings, Logistics achieving $1 billion in annual revenue, free cash flow generation of $244 million and the other focus is on the present and on the future as we look forward to the opportunities and challenges that 2019 will bring. And we continue to emphasize our core themes: leveraging the portfolio of services, resiliency through business cycles and capital allocation disciplines, all enabled by Quest technology.

Now in closing, I want to echo Chris' comments regarding Pat Costello. Pat's made countless contributions to the company during his 37-year career, and I'm fortunate that our time at Schneider overlaps. Going forward, Steve Bindas will be the primary contact for Investor Relations. Most of you know Steve from his involvement in Investor Relations since prior to the IPO, and I know that he will do a great job. So congratulations to both Pat and Steve. I'll now turn it back to Chris.

Well, with that, operator, we will open up the lines for questions.

(Operator Instructions) Our first question comes from the line of Tom Wadewitz with UBS.

Great. And congratulations to Pat, on his retirement coming up. The -- let's see, I think that you gave some comments on balance in the market maybe and kind of constructive view on economy. How do you think about the bid season outcome and the contract outcome for both for-hire Truckload, third-party Truckload and also Intermodal? And kind of how much conviction do you have in those views?

Go ahead, Mark.

Tom, this is Mark. We come off a very solid renewal period in the fourth quarter. I mentioned in my opening comments, it's not as busy as a renewal quarter generally as earlier in the second quarter and early third quarter, but it was very, very constructive across, particularly the for-hire networks in both specialty and standard equipment and the Intermodal offering. And again, I think what we assess through that is most of our shippers are looking for continued performance of what we have seen in the second half of the year, which is solid order acceptance and solid coverage performance from an on-time coverage standpoint. So those certainly give us confidence as we head into 2019. Obviously, on a spot market, it's a little bit more irrational, but again, I continue to point to the level of reset on the contract price standpoint in 2018 as a stabilization factor where parties are getting what they want. And so the markets are operating pretty efficiently right now. And I think that's a good sign, particularly because we're such a contract-focused organization.

So if you're -- can you put numbers around where your kind of best guess would be for truck and Intermodal? And maybe whether you -- is it low single digits? Is it mid? And do you think there'll be kind of the same area? Or I think one of the competitors in Intermodal said maybe Intermodal pricing could be stronger than truck.

Yes. I think we're gauging to right now a mid-single-digit range. I do think there will be certain lane configurations within Intermodal that could do better than that, just based upon alternatives and strength in the network. So -- but mid-single digits, I think, is a good benchmark.

Okay. And then maybe just a second quick one. The -- how do we think about Truckload margin in 2019? It seems like you've -- you have anticipation of reducing a loss in First to Final. So that should be a tailwind, which could help. If you still have mid-single pricing, that would seem to be conducive to a little margin expansion. Is that reasonable to think, the margin improves? Or how would you, with your best look on -- excuse me, Truckload margin be for 2019?

Look, I bet that ultimately, that will be a bit of a function of the demand-and-supply dynamic. But you hit 2 catalysts that we believe are improvements, and probably the third one is the dedicated reshaping exercise that we went through in 2018 to reallocate to better performing financial configurations and the growth that we have seen in the awards in the fourth quarter, what we expect in 2019. So those would be the 3 areas that I think are constructive to our margin profile.

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

Wanted to ask on Intermodal. These results are quite strong. I kind of have your box turns at around or slightly north of 2 turns a quarter, and yet you commented on kind of rail service challenges. So 2 questions here. Can you give us an outlook on what expectations, if any, you have from disruption from TSR? And then two, what opportunities are there for box turns if rail service does get better in 2019?

Well, Brad, I think that one of the things that we have to acknowledge at this point is the efforts that we have put into really trying to transform our Intermodal offering. One is the private equipment, the move to our own chassis clearly has helped us be effective and be effective on the Street, which is a key component of the cost structure. We have really worked hard to add to the company driver in this area, and that was all part of a design that we had early last year. So I think when you have to think about this business now, this is a transformed business and is operating at a pretty good set of clip here. We're pleased with it. We're ready to continue to invest in it. We think it's well positioned, and so I think we have to look through that lens. And as for what you can kind of expect out of turns, clearly, I mean, what we'll see in January, with the -- with this arctic cold that has moved in, particularly into Chicago, you're going to see some things tighten up in that network. I mean, Chicago is going to be under a lot of pressure. It's a major, major interchange point. So in the end, our ability to work with the railroads allows us to try to be as fast on our feet as we can. They will have challenges as they always do, whether it's forest fires or natural disasters, and those have impacts. And in terms of this precision railroading, the main railroads that we engage with have been through a lot of those efforts. And so I wouldn't expect to see significant challenges. And maybe I'll just turn it over to Mark and see if he can add to kind of the how we think about opportunities in terms of managing box turns given where we are today, the things that we're doing to invest in Quest and the environment itself.

Yes, as we look at the -- specifically to the box turn questions, it's influenced certainly by the mix of our business between length of hauls. And the good news here is that we're growing in all markets. And we have a good partner in the East, and we have a good partner in the West. We've been through many of those changes and come out stronger on the other end, particularly with the precision scheduled railroading effort. And so we know where the growth opportunities are. We know we've had to do some rerouting to take advantage of keeping it in Intermodal, and we know where there's opportunities because of those changes that we're going to see some over-the-road conversion. And I think we weathered that very, very effectively. But as you mentioned going forward, we would anticipate some opportunities arise as others go through that process. It does -- as the kinks get worked out and the changes occur, we believe that will create some bit of chaos, perhaps, a little bit of tension in the marketplace. And we'll be ready to find the ways that make sense for us, to help be part of that solution.

Okay, great. And maybe a quick follow-up for Steve. You mentioned some allocation of capital to grow. You said Intermodal and dedicated. But is there any way you can provide us an idea of what type of container growth you're looking for, for '19?

Sure, we can provide some color commentary on it. We grew considerably in 2018, 4,000-plus containers, to be at about 21,000 in total. And we would not see or anticipate the rate of growth in 2019 to be what it was in '18. That's still a constructive number. Another way to say it is if you look at the total amount of capital we have allocated for growth in 2019, it's more evenly split between container and chassis growth at Intermodal and our dedicated service offering, whereas it was almost all Intermodal growth in 2018 while we were reconfiguring the dedicated fleet and its allocation in 2018.

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

I'll echo congratulations to Pat on his retirement. Mark, maybe just some perspective on how you're looking at the balance of 1Q. Talk about inventory pull forward in the fourth quarter. And what you're anticipating in terms of import activity on the other side of Chinese New Year? And maybe the seasonal ramp in March and in 2Q. And in conjunction with that, any sort of context to customer inventory levels at this point in time?

Yes, Ben, we're always searching every place we can to get better insight and understanding of that. It's not been as easy to understand completely what's tariff pull-forwards. We do know we just had very, very solid volumes all of October, November and December. And the January start has been solid. Obviously, it's been a bit more difficult because of some of the weather challenges, to get a real good feel for that. But the volumes look good. I think the railroads are positive about what that looks like, really across their segments to include Intermodal. And the other thing we have is that we didn't have all of our boxes for the full year that we had on the growth piece. So we've got some opportunities just based upon what we have available to take advantage of wherever that is. But to say we have great and perfect insight there, we just don't. But we're confident that based upon what we've seen for the fourth, what we see here, I guess it will -- we'll fill the Chinese New Year in there and the impacts of that coming up as well. But I just don't have anything more specific to share with you, unfortunately.

Okay, that's -- and then, if I could come back to the point on the Truckload margins, specifically the First to Final Mile changes that you had referenced. I think you'd said that expected full execution to be complete by the end of the first quarter here. You obviously were running losses a year ago, throughout the course of the year. Any thoughts on timing in terms of when First to Final Mile won't be a drag from an EBIT standpoint? Or in other words, when it can be breakeven? Will it be at the end of the first quarter? Or is this something that will take through to the balance of 2019 before First to Final Mile is not producing operating losses?

Great question. I'll let Steve answer that.

Sure, Ben. Just to put in context what we have to say about First to Final Mile. We've stated previously that the trajectory of First to Final Mile during 2018's really important to us. So we're implementing a series of well-planned operational and commercial changes that should be fully implemented by the March time line, as Mark said. The primary objective of those changes is to achieve profitability at some point during the second half of the year, while being mindful of customer experience. So to clarify that a little bit, we still expect an operating loss for the full year of '19 in First to Final Mile. However, given the expected steady lift from the business model changes we're implementing, and how they play out as we progress through the year, we anticipate losses to taper, especially in the second half of the year, and then that trajectory would position us well as we move forward in this evolving space.

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

Good luck, Pat, and thanks for the help as well. Just a couple of questions here. One is, there were some media reports that spoke about a change in your relationship with Walmart as a customer and maybe a couple of (inaudible) as well. Can you just elaborate on that a little bit? And is that going to be a drag on numbers in '19?

Well, Ravi, I'll start and then let Mark really give the color around it is that clearly, Walmart is a very large customer, has been a very large customer. And there's things that we have opportunities to do for them that we really, really like. And there were some things that just didn't match up in terms of kind of how we want to sort of deliver the service and those costs that we have to carry in with us and frankly, what they are willing to pay for it. So there was some work done throughout the year that just says, "Look, where can we best serve you with the things that we do and that we like to do and understanding that they'll execute in absolutely their best interest." So I think in terms of where it positions us with Walmart, I think it's great. We're doing things for them. And frankly, the things that we're doing, we want to do. So I would say it was actually a positive outcome through the course of the year, and then we're set up to do some good things for them. Mark, if you want to add any more to that.

I think the specific question centers around one of our value-added service areas in Logistics, it's not core transportation related. It's servicing warehouse functions, and that decision was a decision to in-source versus outsource. And that's what transpired here early 2019.

Got it. And if I can just sneak in one follow-up. Mark said in the call that renewals are running in the mid- to high single digit range for both one-way truckload and Intermodal. Is it the same range for both of them?

In my comments there, Ravi, were fourth quarter related. We're pretty early in the process here in January. So I don't have much to report to you on that. A little stronger on the for-hire truck side. So the upper side of that range and more the midpart of the range has been Intermodal.

Got it. Are you surprised that one of your bigger competitors talking about high single-digit pricing for Intermodal in '19?

Well, I won't comment on competitors, the comments there, but what we would expect on certain lanes of the network, and again, based upon other alternatives and length of haul, we do believe that there is opportunity for that to be a bit higher. So no, that would be our take.

Our next question comes from the line of Allison Landry with Credit Suisse.

I wanted to get a little bit of color on where wage inflation or your all-in driver costs, inflation tracks in the fourth quarter? And what your expectations are for 2019?

This is Steve, Allison. And just generally speaking, in 2019, while we haven't determined the exact timing of anything, our general assumptions for overall cost inflation are probably in the 2.5% to 3% range, depending on the category of expense. Then there's always outliers. Some costs will be flat to down and others will be up more than that. But if you look at the meat of our expense lines, they're probably in that range, would be an expectation for us. And that's somewhat similar to what we experienced throughout 2018.

Okay. And then -- but then specifically for drivers, whether it's wage hikes, recruiting, can you give us a little bit of granularity on what the inflation was like there?

Well, Allison, the answer to that question is so dependent upon where we have opportunities with dedicated wins. Again, Mark said that a lot of our growth in the truck side will get focused on dedicated configurations. Those are going to be driven by the cost structures that we find in those regions in which we stand up those operations. And so kind of at its aggregate, that's a question that would be difficult for us to answer to a degree of accuracy. I think across -- I mean, the reality is, is that the other place where we're driving growth will be in Intermodal. And those jobs are mostly home every night or every other night kinds of things, and those have a structure. So I know you're trying to figure out how to model the average, but the reality is, is nobody is really home at that average number. And so I think our approach is, is that there will continue to be some pressure around the driver capacity issue. I think the discipline that we exercise in the company, given the levers that we have to pull, says we're not going to implement extreme recruiting kinds of things. And frankly, we don't need to do them, hiring into those things where we see our growth. Of course, we have to do replacement as drivers turn over and move on. But we're going to be pretty disciplined as it relates to that, and that's kind of how we have targeted our growth rates. So it's -- we're not going to chase to the extreme. Driver hiring, we think a lot of the work frankly that we did in '18, which was as part of our renewal or rebidding of freight was to find freight that is -- fits our network, that is friendly to our drivers because frankly, our ability to turn the asset as we talked about through this managing of contribution per truck and contribution per load, is really trying to find ways to get our drivers pay increases by getting them more miles as opposed to merely just trying to inflate a wage-per-mile kind of thing. So how we executed in '18 I think would be consistent to how we'll look at approach through '19. And so I'm not expecting exorbitant kinds of increases on the driver front.

And just to add to that a little bit further. We did, even with the disciplines and so on that Chris mentioned, we did incur a step-up in driver recruiting cost in 2018. Our expectations at this point is that, that would probably plateau in '19. Still a considerable amount of effort and expense involved there, but more of a plateauing in that. And Chris answered the driver compensation piece best we know how to at this point.

Okay, got it. And then just as my follow-up question. If you could maybe talk a little bit about the challenges in First to Final Mile, specifically what changed since the time of the acquisitions that you made? And then maybe if your internal expectations about the long-term growth and profitability of this business, have they -- have those expectations changed at all?

Allison, I'll start with the first part of that, centering around what may or may not have changed since the acquisition. The acquisitions were part of a longer-term strategy, a couple of pieces not in of themselves sufficient, but our attempt to follow the what's on trend, which is the e-commerce channel and its continuing impact it's having on our traditional brick-and-mortar customers and where the consumer behavior was going. And so the acquisitions were meant to help build out a strategy that, as we work with customers centered around a unique experience of employee models and transparency from really where it either comes through the port or comes through the vendor, all the way to the consumers -- consumers' home, and we use those acquisitions along with other pieces and parts that we had internally to start to execute against that strategy. What became apparent was the inability to get paid as much as we needed to do to keep that largely a Schneider end-to-end process and -- our changes that we're going through, is to balance our strengths around where those assets are deployed but more liberally using third parties to include multiple different modes of transportation from that First to Final Mile. And so we're just recasting and ultimately getting after a different cost to serve, while certainly trying to maintain the customer experience through that process. So we were pleased with the differentiation that perhaps created, but ultimately, from a financial return standpoint, probably a bit ahead of where the market could accept and where it's at. And so that is the change. We don't really see any difference relative to those trends on trend, relative to e-com impacts and big and bulky items and what-have-you. It's just we have to recast our ability to do that at a price point that makes sense for the customer and that we can get to a level of profitability.

Our next question comes from the line of Chris Wetherbee with Citigroup.

Congrats, Pat. Wanted to ask about sort of the Truckload business, the fleet size and sort of what you think you might be able to do in 2019, sort of on the broad Truckload business, if there's anything specific in there that looks more interesting in terms of deploying incremental assets.

Certainly. This is Mark, and I'll take that. We spent a good portion of 2018 making sure that we had the right mix and the right configurations on our dedicated business, and we went through a series of changes there. We're really enthused and excited about where we are relative to our pipeline on kind of that reshaping. And so whether that would be in specialty markets or standard markets, whether that would be in things like we're doing in the bulk arena or a dry van, where you're seeing more of our dedicated -- excuse me, more of our truck mix over time, will be into that dedicated configuration. And we think it will be kind of an inflection point for us in 2019 in that regard. Doesn't mean that we're not excited about our one-way random network. We have over 6,000 assets, truck assets deployed there. But we would be thinking of that being more of maintain of that fleet size and our growth being in those dedicated configurations.

Okay, okay. So there is growth across Truckload, but obviously specific in that dedicated configurations.

That's how I think about it, yes.

Okay, that's helpful. And then, I guess, as a follow-up to that, I'm trying to make sure I understand your sort of the growth projections as we move into 2019 and in the context of the guidance. So you had a great -- the rate environment is still relatively favorable as it stands right now, maybe a little bit of fleet growth, particularly in some specific areas. It seems like the First and Final Mile, we'll maybe see a bit of a deceleration of the headwind, if you will, from the losses there in 2019. Can you help us sort of square that all out, with sort of what is obviously a slower pace of growth? And I know it's a more mature business in your Intermodal group quite a bit in '18. I'm just trying to understand some of the moving parts that get you to incremental margins, that may be a little bit on the lower side than what we've been able to see over the course of the last several quarters.

Yes, Christian. The general nature of your question there is the incremental margin and top line growth versus earnings growth and so on, and we did experience quarterly incremental margins ranging from 20% to 25% in 2018. And we had a considerable step up in our margins in the Intermodal business contributing to that now that we've hit the anniversary date of some of that margin expansion at Intermodal and are moving forward, continuing that the incremental margin, particularly at Intermodal will moderate a bit. So that's part of what's playing into this. What I'd like to see us target as we move ahead in an environment like we find ourselves in 2019 is incremental margins probably more looking like 15% to 20% at the enterprise level. And that will ultimately depend on the rate of growth amongst our various segments and because there's quite a variance in the incremental margins between Logistics, Intermodal and the Truckload segment. So part of the answer is it depends on the rate of growth and the mix of our portfolio. But we feel like we're well positioned to capture incremental margin as we move forward.

Our next question comes from the line of David Ross from Stifel.

Steve, a little follow-up on the other EBIT line that you talked about, the big swing year-over-year from the $2 million loss, the $42 million loss, some of that, onetime. But what do you expect, I guess, a run rate to be as you're modeling that out? Or what is assumed in your 2019 guidance? Is it more in the $5 million to $10 million range?

On a full year basis, maybe an easier way to talk about the Other segment. Because there are a lot of moving parts in there, our Asia operations, our captive insurance and our leasing business and so on and numerous other items. So collectively, it's a little hard to know exactly where we're going to land. But we could probably be thinking in annual terms of $25 million to $30 million, best we know at this time, understanding that there will be quarterly variability within that number, just given the number of items that flow-through that Other segment.

And then just into -- can you give a little bit more color on the Intermodal growth plans. You said not as much as this, as this past year. So less than 4,000 containers. Is it 2,000 containers? 2,500? I guess, where do you expect to end the year on the container count?

Well, I think there's really 2 components of that. It's -- we haven't gotten the full deployment of the second half containers that we took delivery of. And so we've got some anniversary element of that. That gives us growth lift into the first half of the year. And we would expect, to Steve's earlier comments, be prepared to add additional capital into that, but I wouldn't expect it's going to be at the 4,000 container level. It'll be well short of that. We are going to use every other box that we've taken delivery of throughout the year and take advantage of that.

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

So you talked about sustainable contracts increases in the past. So that's not really anything new. But do you think this next cycle will be materially different based on the last one? Your shippers, more open considering partnerships, really staying shippers of choice? And is the interest level in dedicated evident of a change of mindset? Or do you think, we go back more to a transactional relationship as the spot market continues to slow?

Well, it's always the, I guess, the million-dollar question. One of the things I would just give extremely high marks to the shipper community at large is this sensitivity to the driver experience component and the role that they play either through their processes, their freight characteristics and their support of the carrier community relative to how we can improve that whole end-to-end experience that the driver feels through the works that we can attract, retain and get people excited about a very, very noble profession. And so -- and because of the level of visibility within the organizations from the C-suite down, particularly in 2018, there's a real and meaningful attraction there. And I think that does create a bit more of a shipper of choice, a bit more of a partnership slant. It doesn't mean that there won't be pressures that come from multiple different angles on that equation, but in my mind, I'm optimistic that there has been a step-level change of kind of the channel partners coming together. And I think that's a little bit perhaps why we're a little bullish on the ability through this cycle for the experience being the cost of change being more difficult, the uncertainty being more difficult if it's working and the acceptance of performances there, I think there is bit more perhaps of a longer-term view that's in all parties' best interest. But again, until we're tested and until they're tested, we'll see where that comes out, but...

Brian, this is Chris. One of the things that, I know that the spot rate data is something that's sort of very dynamically available and things like that. But -- and the degree to which we and many of our competitors play in the spot market will vary across companies. But the reality is, is that these big, massive shippers who play in the supply chain of North America, most of them, whether it's coming inbound into them, they're taking that in into trailer pools or whether it's out of manufacturing or out of distribution centers, those things are coming out of trailer pools. So this isn't an environment that us, particularly with the way we think about leaning hard into more contract rate kind of relationships, where you see this thing moving at this dynamic rate because the reality is, is equipment is positioned in to customers' supply chains, and they're not always just playing the spot market. And so I recognize that the spot rate is an element that is reflective of kind of where the market is. But it isn't that the large bulk of our revenue base is playing in the spot market every day to move their freight. And that's part of the reason that we talk about sustainable contract rate changes. I don't know if that helps you or not. But I think it's an important point to think about the environment, particularly where we've come from. And again, there was significant rate increase pressures to respond to the increases in driver pay so that there was some net price increase. And a lot of that work, just -- you rarely see those things happen at the same level a year following that.

That's helpful. Just one very quick follow-up. On the dedicated reshaping, is there any way, Steve, you could quantify the impact similar to what you've done with the First to Final Mile? And are there any more of those actions that are, need to be taken into 2019? Or has that pretty much run its course?

Sure. The -- I guess, what I'd have to say about that is we achieved the desired margin impact during 2019 with those reconfigurations in the dedicated opportunities. And we'll continue to harvest additional pipeline opportunities in 2019, but don't have a specific number to provide you on that one.

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

So want to start, Mark, just a couple of things just, market. So if Intermodal pricing maybe is going to go up a little bit more than Truckload and fuel's down a little bit, are you seeing or hearing anything from shippers that suggest we might see some shifts from Intermodal to Truckload? And then how are you guys thinking about the impact to weather here? Do you think it could have a prolonged impact in terms of higher spot rates?

The first part of that, Scott, I think there is a lot of -- a good discovery of the value of Intermodal through 2018 and certainly reflective in our growth numbers that we posted there. We don't see a great deal of activity or discussion with customers that are looking to shift back over-the-road. Obviously, there's some pressures on some of the changes the railroads are making on availability of lanes that are driving that, but not out of the customer desire. And so, I really, off the top of my head, I can't think of a really single circumstance of any materiality there. So that -- there's no real change to report there. And then the second part of January, obviously, when we came through the polar vortex of 2014, there was an extended period of impact and chaos. I think that all partners or all channel partners, they've learned from that. And there's, at least at this juncture, we would expect a quicker recovery just based upon the learnings that have been deployed and invested in, whether it's additional switch heaters and where those are at or how to manage the in-gate flows during these difficult times. So I think we're seeing some evidence that there was some good planning, there's some good execution going on here. But those things are always hard to predict. And I as already blasted, at least from our view is unprecedented, and while we're an outdoor sport, we're talking the changes in the temperatures, we're talking about, they are disruptive, to both truck and to Intermodal.

Okay, that's helpful. And then just for Steve. Just in terms of the guidance, can you say, does the guidance assume or contemplate Intermodal margin improvement this year? And then the double-digit earnings growth for the year, do you think it's similar throughout the year? Is it more front half? Back half?

The first part of the question on Intermodal margins, without giving a specific, we've indicated, we took a pretty large step function change in our margins in 2018 for the Intermodal business. And so the game going forward is largely -- in other words, the opportunity for margin expansion going forward is less than it was. And so it becomes more of a maintenance, and growing our earnings in that segment through volume growth. And so that's where we're largely targeting our efforts in 2019. And pardon me, the second part of your question, about...

Yes, just the earnings cadence, is double-digit for the year, is that sort of similar throughout the year? Yes.

Yes, first half, second half. Right. Again, without getting into the space of quarterly guidance, there probably is, on a relative basis more upside opportunity as we see it right now in the first parts of the year, just given the -- what we're comparing to. We strengthened steadily as we went through 2018. So our comps will naturally get tougher as we go, but our expectations are relatively steady improvement as we go through the year, perhaps a bit front-end loaded.

Our final question comes from the line of Ken Hoexter with Bank of America.

Mark, just returning to the precision rail question on the railroads. Just your thoughts as a customer point of view, on the difference between say, CSX that is converted over and executing and versus maybe Burlington that resists converting over to PSR. How sizable have the lane cuts and operational changes for you as a customer that you have to operate within, and for, ultimately, for your end customers?

I'll try to unpack that on, really 2 parts, which is the impact relative to customer. There was more impact on the number of lanes than actually volume on the lanes because that's really the key tenant of the presumed schedule railroading, is eliminating the inefficient lower volume lanes. And so with good communication and with options to consider different routings, I think we managed through that well, and what I think is key and certainly it got better, as the changes were implemented is just a good, solid communication, so that we could be in front of our planning and can certainly help the customer get through their planning. And I think that's certainly a best practice. Ultimately, what we're excited about though is really solid execution, gives more confidence to convert over-the-road to Intermodal. And that's really behind the improvements we're seeing with our Eastern partner. And I think in the long term, predictability in performance will be a catalyst for growth that will exceed perhaps what's been eliminated, based upon low volume lanes. And I wouldn't say that the -- our Western partner isn't focused on many of the same things. They just didn't have maybe as many of the same issues as it related to multiple origin points that have had lower volume. And so we would consider them focused on execution and doing the things to improve, so that we can grow our business, and we're seeing really, really good success on the transcon portion of that presently, so. Overall though, if everybody executes better, I think the whole strength of the Intermodal service offering in the marketplace will do nothing but improve.

And then just to follow on Intermodal as well. Just -- you talked about rates, or I guess Steve did on the Intermodal side. Mark, what about the -- or Chris even, the cost on the purchase transportation side for Intermodal, your contract with the rails? Are we seeing any renegotiations or step-up functions on the cost side given their focus on yields as well?

Mark, our contract focus there is long term in nature, and can, as I think we have, I think we've stated, that there are mechanisms that is shared relative to recognizing where the market is and adjustments are made in both directions in recognition of that. So -- but these are long term in nature. And so there's not a step function change in these items. These things happen over time. And based upon where the market's at.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Chris Lofgren for closing remarks.

Well, we'll wrap up our first quarter call here with you guys and appreciate everybody dialing in. And we've got some work to do here in the short term, with the impact of the Arctic air. We'll get through it, and we're looking forward to another very good -- another good year following what, for us, was a pretty outstanding year. So with that, I will say goodbye.

This concludes today's conference, you may disconnect your lines at this time. Thank you for your participation.