Schneider National (NYSE:SNDR) Q1 2020 Earnings Call

0:00 Greetings. Welcome to Schneider First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Steve Bittes, Director of IR. Thank you. You may begin.

0:25 Thank you, Operator, and good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer, and Steve Bruffet, Executive Vice President and Chief Financial Officer. Earlier today, the company issued an earnings press release, which is available on the investor relations section of our website at Schneider.com. Our call will include remarks about future expectations, forecasts, plans, and prospects for Schneider, which constitute forward-looking statements for the purposes of the safe harbor provisions under applicable federal securities laws. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. The company urges investors to review the risks and uncertainties discussed in our SEC filings, including, but not limited to, our most recent Form 10-K and those risks identified in today's earnings release.

1:21 All forward-looking statements are made as of the date of this call, and Schneider disclaims Any duty to update such statements except as required by law. In addition, pursuant to Regulation G, a reconciliation of any non-GAAP financial measures referenced during today's call can be found in our earnings release, which includes reconciliations to the most directly comparable GAAP measures. Now I'd like to turn the call over to our CEO, Mark Rourke.

1:50 Mark? Thank you, Steve, and good morning, everyone, and thank you for joining the Schneider call today. We recognize as we sit here on April 30th amid these unprecedented times that the results in the first quarter are perhaps a bit less instructive than normal. Our approach today will balance Q1 commentary while flexing a bit from normal protocol to provide visibility into the impacts of the health crisis, both from a humanitarian and a business implication standpoint in the current period. Schneider has approximately 19,000 associates and owner-operators across the globe, and nearly four out of five of these great individuals fill essential roles. Roles that must report to work daily to fulfill our promises to our customers.

2:35 They are drivers, owner-operators, shop, warehouse and driver services personnel and in short, they've been outstanding in their commitment to keep the nation's goods moving. We recognize and thank them for their professionalism and commitment. Since the onset of the COVID-19 health crisis, we've had 26 associates who have experienced a confirmed diagnosis. Another 200 plus associates have been tested and instructed to quarantine by a health professional due to a potential exposure. The company has responded with emergency paid time off support and in the more advanced cases provided additional benefits support assistance so they could fully focus on their recovery. The efforts of continued sourcing of protective face masks, hand sanitizers, and disinfectant wipes is now and very appropriately the new business normal.

3:28 Our support functions in the areas such as customer facing, driver leadership, route planning, tech and back office functions in a matter of days converted to a work from home model consistent with best health practices. Today, with some new tools and processes, the business continues to operate very effectively. And in my view, these experiences will certainly drive lasting change in where and how work is structured and executed that will ultimately benefit the business, our associates, and our customer base. While the impacts of COVID-19 on our daily work lives are pronounced, it's also proving to be another demonstration of our company's resolve and adaptability. We entered this condition operating from a position of strength, financially strong, a strong and diverse customer base, and a purposefully constructed portfolio of services.

4:24 These advantages enable us to play the long game and take a balanced approach that includes prudent elements of defense and the near-term actions regarding cost and cash flows while positioning the company on the offensive for an economic and freight recovery. As part of the lasting change on how work is accomplished, we've continued our investments in AI-driven automation, and we've advanced those efforts through the first quarter. For instance, in our for-hire truckload business, 80% of orders now go through an AI-driven enrichment process where the Quest platform completes missing or incorrect data elements from the customer tender so that it can pass through our algorithm for an acceptance or rejection decision. If accepted, the order is automatically created in the system, making the entire process touchless.

5:14 This enables our people to focus on higher customer value elements and will increasingly be a driver of productivity into our business. Another example is Intermobile. We're in the early stages of implementation of company Dray fleet dispatch automation. The Quest platform takes in the rail grounding data, balances the order appointment process by company Dray availability and then automatically dispatches the Dray driver through an optimization algorithm and the Dray dispatch is executed in a touchless fashion. In April, we will surpass 30% automated company drain dispatch. In addition, we've improved our variable cost position through improving our performance in areas of safe operations, driver recruiting mix, fuel efficiency gains, and equipment maintenance efficiencies, many of which we consider to be sustainable variable margin gains.

6:07 We believe that we are at the height of the crisis-driven business impacts. Across the enterprise, I think it's helpful to look at our book of business through the lens of end market served. As companies began to act against the non-essential business designations around the middle of March, a segment of our customer base, predominantly in the retail and industrial verticals, was impacted. For instance, in various dedicated operations, we had roughly 445 drivers impacted due to customer temporary shutdowns. We expect this situation to continue to improve throughout the second quarter, and we have worked with our customers in a fashion consistent with the integrated and strategic nature of the relationship to balance the needs of both organizations in these unprecedented times.

6:54 We expect most all operations to restart once the broad shelter-in-place restrictions begin to lift, but at various levels of ramp-up velocity. And in keeping with the whole dedicated theme, one of the many disappointing fallouts of the current environment is how our dedicated plan new business startup activity has slowed due to customer distraction and certainly understandable. We have over 200 units in startup holding pattern that should break loose once the restrictions begin to lift and business normalizes again. Non-specialty assets and capacity allocation are fungible, especially in the short term, and we routinely flow resources or verticals that are experiencing a surge in demand from places that are contracting.

7:39 As industrial non-essential retail verticals lagged, we quickly allocated resources to surging food, beverage, consumer products, and other essential retail segments. Despite the dislocation of assets in mid-March, tractor asset productivity improved slightly in Q1 on a light comparison basis. As the pantry restocking surge began to normalize, the ability to redeploy is becoming more difficult as the month of April has progressed. We have moderated our incoming driver hiring numbers for the months of April and May to account for the more tepid demand levels. On a month-to-date basis, on a year-over-year comparison, truckload build miles are currently down high single digits daily from the prior year.

8:24 The impact is more pronounced in the network-for-hire portion of our business. That's a function of approximately 300 fewer trucks and lower demand levels than a year ago April. Let's move on to intermodal. Year-over-year order growth in the first quarter was 3.2%, with a large mix change due to the competitive condition of the West and impact of port activity with the extended Asia export market closures. We enjoy order growth of 20-plus percent year-over-year in the combination of the East and Mexican portion of the network, offset by an 8% order shrinking year-over-year in the quarter in the Western Regional and TransCon combination. The higher rail expense, and Drake Costas' percent of revenue due in part to this mix change contributed in part to 160 basis point margin erosion year over year in the quarter.

9:18 As we now look to where we are in the month of April, the intermodal segment is being negatively impacted by the Asian import air pocket limiting volume through the ports combined with a higher mix of non-essential retail than we enjoy in our truckload segment. Therefore, our intermodal daily tender volumes, as compared to a year ago in April, are currently down in the upper teen percentages. We are disposing of containers that have reached end of life without replacing them in the short term, so we expect to have roughly a thousand less containers in service at the end of Q2 of 20 as compared to the end of Q2 of 19. And finally, our brokerage business continues its growth trend with volume growth in the high single digits in the first quarter, The volumes were certainly helped by consumer restocking behavior in March in support of larger shipper needs with some margin offset with the tightening capacity situation.

10:13 Before we get to your questions, I want to turn it over to Steve to provide some additional insight into our going forward actions to position the company favorably for a recovery in economic activity and freight demand.

10:26 Thanks and good morning, everyone. As Mark noted at the beginning of his comments, We are adapting our approach for this call to focus primarily on the current state of the business and will speak only briefly to our first quarter results. So I'll begin with an overview of the framework we're utilizing as we move through this virus event. I'll reiterate Mark's comments that it's truly a strategic asset to be able to address this situation from a strong position, not just financially, but organizationally with the Schneider culture, a diverse customer base, The Balance Portfolio Services, and robust decision support tools. While no one knows exactly how this will play out, we are utilizing a base case assumption that the brunt of the negative impact from lower freight volumes will be borne in the second quarter. Mark described elements of the downward slope we experienced during April. and we are expecting second quarter volumes to remain depressed as it will likely take some time for various industries and regions of the country to pass through the necessary stages to reopen and or regain scale in their operations.

11:38 Beyond the second quarter, we are looking for a steady pickup in freight volumes throughout the third and fourth quarters, although we expect the second half upslope to be more gradual than the abrupt April downslope. So our emphasis is on balancing near-term pressures with mid-term opportunities. To partially address near-term pressures, we've implemented several cost initiatives. We've implemented a hiring freeze for non-driver positions, deferred annual merit increases, pursued targeted furloughs, and reduced work hours in volume-related areas of the company. These are measured steps that can be taken while ensuring that we're positioning the company for the subsequent upside of this situation.

12:27 At the same time, we're providing financial support for our associates who have been impacted by the virus and are actively investing in the safety of our people by procuring large quantities of masks and cleaning supplies. Regarding our first quarter, I'll provide a few summary comments. We were well positioned as we entered the year and were experiencing modestly firming market conditions prior to the virus-related impacts on our business. So we were meeting our expectations as an enterprise, and it felt like a good setup for the year. Then, in response to the rapid changes in operating conditions, the team did a great job during March to quickly adapt and get resources where they were needed.

13:12 There are a few items in our first quarter results that I'll bring to your attention. The first is a negative year-over-year impact due to equipment-related items. In the first quarter of last year, we had gains on sale of $2.8 million, and in the first quarter of this year, we had $4.8 million of expense, which was the combination of losses on disposition and asset impairment charge on equipment held for sale. The next couple of items are in the non-operating portion of our income statement. We recognized a valuation gain of $6.1 million related to our equity position in the telematics company Platform Science. They raised additional funding during the first quarter, and that prompted a valuation event for us. Also, there's the possibility that we will further adjust this valuation in the second quarter as our funding round is completed.

14:11 The next item relates to interest income. While there was not a large impact on our first quarter interest income, we expect that the remaining quarters of 2020 will be affected by the abrupt decline in short-term interest rates. We now anticipate lower interest income of about $1.5 million per quarter for your EPS modeling purposes. Looking ahead and given the circumstances, We've made the decision to suspend full-year earnings guidance. It's our intention to resume this guidance as soon as it's practical to do so. Regarding net capital expenditures, we have made several adjustments.

14:56 We are maintaining steady investments in replacement equipment to maintain our desired fleet age, but have removed most of the budgeted growth capital. In addition, we have deferred some discretionary projects which are mostly property related. On the other hand, we're accelerating our investments in technology, particularly in decision science and automation. The net effect of these actions is a revised full year 2020 guidance number of 260 million, down from our initial guide of 310 million. With that, I'll turn it back to Mark for closing comments.

15:35 Thank you, Steven. In closing, Schneider Drivers shop, Warehouse and frontline leaders shined when our customers and the nation needed them most through the height of the health crisis. As we look forward, our eyes are squarely focused on the horizon and the rebound in economic activity as the country begins to reopen for business. We came into the crisis in a strong financial position and with a portfolio of services that gives our customers optionality by mode and value proposition. We think that matters now and perhaps even more so in the future as customers look to adapt their strategies related to production, inventory placement, and responsiveness to variable demand patterns. Finally, we are leveraging our considerable financial strength by continuing our critical investments in our Quest technology platform that not only provides for long-term favorable positioning of the business but delivers tangible benefits in the present.

16:32 Operator, we will now open the call for questions. Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Jason Speedle with Cowan & Company. Please proceed. Jason, your line is live.

17:08 Thank you, Operator. Morning, gentlemen. I appreciate the time. I hope you're all doing well. I wanted to talk a little bit about what you're seeing out there from your clients in terms of people putting downward pressure on pricing. Is anybody asking to reopen contracts at this time? And then I have a follow-up on the intermodal side.

17:35 So is that a question, Jason, more of where we are in the renewal process or just maybe out of cycle?

17:43 I'd love to hear renewal too, but this is more of the out of cycle stuff. Are customers coming to you on the out of cycle time right now or not really?

17:51 Yeah, as we look across the portfolio, I don't think we have very many examples of that. There have been some discussions about other items like payment terms and some other items based upon where people may be feeling some distress. But for the most part, everything is kind of operating on the same cadence that we would have expected, maybe a little bit of delay in the renewal process just based upon some distraction. And so, again, we have very deep and longstanding relationships with most of our top customers and We've been through many cycles together on both sides of it, so I would say overall the behavior on both sides have been very steady.

18:37 And the renewal side? Yeah, I guess I would characterize it. Maybe in some cases we've got some delay of implementation on both, whether it's dedicated or mobile or our network side. We're about 50%. 30% or so through on the intermodal book of business. And I define that as not only through the process, but the actual understanding of what the award looks like. There's more of that in flight. We've got insight back on what the future will look like is about 30% on the intermodal side and 35% to 40% on the van side. which is about typical, but I don't expect as much of that to get done in the second quarter just based on where we are in handling the virus.

19:25 Right, and in terms of the rates that you're getting, could you give us a little bit of color on those?

19:33 A couple of comments. I'll break it again down by kind of segment. On the network side, we're seeing, again, how we measure this is we understand What the award looks like, we try to take into account what historical realization rate is by customer because they do vary based upon the quality of the information that they utilize in their process. And we would suggest, the early feedback would suggest we have a bit of share gain, 5% to 8% or so, at slightly lower pricing on the truck side, and more material share gain on the intermodal side, again, with slightly lower pricing. But again, we have to make sure and understand what the real realization rate will be once everything gets back to a quote-unquote more normal timeframe.

20:20 Okay, a quick follow-up on the intermodal side. A lot of the railroads have been touting operational gains. Clearly, volumes for them are down, so we would expect some of the operations to look better. What are you seeing on the performance on the intermodal side from the rails? and how would you expect that to react sort of as we come out of this pandemic?

20:46 Well, rail performance has been outstanding. I guess we'd also characterize it as record performance and I think most of it is sustainable, particularly in our Eastern partner who's been on a very solid performance trajectory and and very much competes on a consistent basis with the reliability of truck. And I don't see that changing. As you saw, we had a 20% or so growth in the combination of the East and the Mexican markets. And so even with the growth that we've had, the performance has been outstanding.

21:21 Okay. Appreciate the call. Appreciate the time. Everyone be safe out there. Our next question is from Jack Atkins with Stevens. Please proceed.

21:33 Hey, guys. Good morning. Thanks very much for the time.

21:35 Good morning.

21:37 So, Mark, I guess maybe we could just kind of go back to the near-term demand trends for a moment before I ask a longer-term follow-up question. But, you know, is there a way to maybe talk for a moment about – and, first of all, thank you very much for providing some insight into sort of how you expect the rest of the year to go. I know there are a lot of pieces, but I know we all really appreciate that. But, you know, as you think about what you're seeing in April – Could you maybe kind of talk for a moment about how the demand trends on the truck side break down between more of your standard equipment type versus your specialty equipment? I know you guys aren't breaking it out quite like that anymore from a reporting perspective, but just curious how those different types of assets are faring here in April and how you think the recovery process is going to go for those as we look out over the next couple of quarters.

22:29 Sure, I'll maybe start with just reiterating what we covered on the dedicated side. We had about 445 of our units of roughly 3,900 to 4,000 that got caught up in the non-essential shutdown phase. And most, while we're starting to see some come back, that is still ahead of us yet. So we really expect more of the recovery of the non-essential to be more consistent with how states are determining when they get back to a or normal business climate. So we would expect that we'd still have until middle of May to the end of May do we start to see a material portion of that. And what we've been able to do for the most part is redeploy to some surging dedicated and our drivers have been very accommodating, understanding the condition and have worked into the network if necessary.

23:21 So that's on the dedicated side. You know, we do believe that, as we mentioned, the second quarter will be The trough, you know, we're looking and trying to understand every day when exactly that will be. There are some more positive signs that our customers are starting to communicate on some of their plans of volume and starting to get back into kind of a more normal cadence. But we expect April and we expect May in particular to probably be a tough month and start to see some more recovery as we get into June. And I think that's consistent across really all our segments, Jim.

23:59 Okay, that's good. So there's not really a difference in sort of how the specialty equipment is performing relative to more of the standard van equipment.

24:08 Well, the dedicated specialty has been more consistent because it's generally not – where we've seen the erosion would be in some certain industrial markets and certain non-essential retail, and our specialty equipment, for the most part, has kind of got spared into – into those verticals. So that's still operating fairly effectively or fairly normally.

24:34 Okay. That's great to hear. And then just for a follow-up question, you know, just going back to your comments both in the press release and in the prepared remarks about, you know, you guys are coming into this crisis with an extremely strong balance sheet, a lot of net cash. I know you guys have been looking to deploy that capital, you know, for M&A purposes. for the last little while here. And how are you guys thinking about the M&A market? Has that changed at all because of this? Are you seeing different types or maybe an increased number of targets that you think could be really attractive for Schneider longer term? Just curious how you guys are thinking about deploying this balance sheet because it seems like the opportunity set has just gotten greater over the last 90 days.

25:25 Yeah, Jack, this is Steve. I'll take that one. And I think it's safe to say that over the last couple of months, we've redirected all of our internal resources to be fully focused on the mission. And so any such M&A screening activities have kind of been put on pause for a while. Now that we are gaining a sense of footing and things are Moving along a path that we somewhat anticipated starting in mid-March as we started trying to imagine what this might look like, I think we can start to redirect some of those efforts and are certainly interested in strategic opportunities to deploy capital, and we'll resume those activities.

26:17 Obviously, it takes two parties to engage in the transaction, and so... There's that dynamic about when someone might be willing to sell and why and so on and what would fit what we're looking for. So that's just some context, but yes, we remain interested in that pursuit as long as it meets our strategic criteria.

26:46 Okay, great. But I guess just from a strategic perspective, Mark, as you sort of think about You know, the opportunities that are in front of you from an M&A perspective, you know, has this crisis sort of changed sort of what you would be willing to look at or what you're looking for in terms of additional capabilities or anything like that?

27:09 Yeah, we'll probably have to move on here, but no, I don't think it changes our thoughts relative to what we would strategically be interested in. I think I agree with your approach that for your thesis that things might be more reasonably available for a whole host of criteria. And so I think we're looking forward to getting back and making and spending time against those assessments.

27:38 Okay, thank you. Thanks. Our next question is from Robbie Shanker with Morgan Stanley. Please proceed.

27:47 Thank you. Morning, gentlemen. Just to get a better understanding of the extent of the disruption so far, can you share with us what percentage of your customers are still up and running your exposure to staples versus industrial and markets and also essential versus non-essential?

28:05 Yeah, Ravi, I'll give you some perspective there. I'll give you how we really think about that. As we define essential, it would be the things that you would expect, food and beverage, consumer products. Central Retail, Certain Paper Verticals, i.e. Packaging, and Home Improvement. And if you look at that consistently across our book of business, the dedicated numbers I gave you pretty much define that. That's in the upper 80s that we would consider that to be in essential services. Our remaining truck business is about 81%, 82% into those categories. and our least concentrated around essential happens to be intermodal.

28:50 And if you think about what is generally imported, it's not food and beverage type products, it's apparel and other kind of general merchandise through retail channels. And so our mix of essential and the intermodal space is in the low 60s. So mid 80s, low 80s for our Network Business on the truck side in low 60s for our intermodal network business.

29:19 Got it. And what percentage of these customers roughly are still running, do you think?

29:28 Yeah. It's so different by, you know, to top 70 or 80 customers in our truck and intermodal business make up the vast, vast majority of our mix. And in the logistics side, It's thousands of customers that make that up, Ravi. So I guess if they're shipping with us, we call them essential. So those percentages, I think, are pretty close.

29:51 Got it. Understood. Just a follow-up. Mark, your comments at the top of the call on the algorithms and the touchless operations were pretty interesting. I mean, is this event, again, never waste a good crisis, right? So is this event kind of telling you, The power of some of the automated processes that you guys already have in place and kind of what does the number of transactions per employee or employees per truck look like in five years' time if you can really leverage those kind of systems?

30:26 Yeah, Ravi, that's exactly what we think the opportunity is. And so we've been very proud of the whole organization's ability to adapt and and in fact we accelerated through the first quarter in the midst of all of this the automation activity not only in our implementation schedule but also emboldened us to advance our investments within the calendar year because of the potential. And so I am highly confident that we can grow our business without having to have near The same investment that we used to have relative to the G&A side of the house. So it's not necessarily looking to cut this.

31:11 How do we grow our business at a much lower internal cost point to do so? And the tools and the platform on this kind of second Quest X, if you will, our second generation of meaningful investment here has been very, very encouraging. And I think it really moves us from The original vision of taking all of the inputs of data and assembling in such a way that we could help our people make better decisions across the needs of the customer, the business, and perhaps the driver associate, to now having the confidence of doing it and the modeling to say we don't need to just put the information, we can have the system largely make those decisions, kick out the unusual ones, and so that we can get our people focused on additional sales activity, additional penetration of the customer book. Things are a much higher value than the transactional part of the business. And I think going through this massive disruption here with the virus has shown maybe out of a bit of necessity we turn those things on faster, and we've been very pleased with the outcome.

32:24 Very good. Thank you. Our next question is from Scott Group with Wolf Research. Please proceed.

32:34 Hey, thanks. Morning, guys. So I just want a couple of follow-ups on some of the April updates. On the trucking side, can you break down the decline between utilization and fleet and then if you have it over the road versus dedicated? I think there was a comment about brokerage net revenue improving in the press release, but if you have some color there. and then on intermodal, the high teens decline or whatever you said, is that getting progressively worse as the month is going on?

33:11 This is Steve. I'll start at the tail end of that question. I guess with the intermodal volumes, what we were trying to express is that we did both with truck and intermodal experience a decline through the first part of the month. Intermodal actually started declining in late March and continued through, say, mid-April, and then plateaued, and we're starting to see some rebuilding of those volumes as we exit the month here. And on the truck side, it was pretty strong through the end of March. Saw a several-week decline fairly rapidly in the truck business, and then a stabilization of those trends that continues as we finish the month here.

34:03 There were other elements of your question that I'm not sure I absorbed.

34:07 Yeah, sorry, I know there was a bunch there. The brokerage net revenue comment, just some color there, and then do you have thoughts on utilization versus fleet on the trucking side?

34:19 Yeah, it's on the Logistics and brokerage side, it's obviously a very fluid and rapidly changing market almost week by week. But most recently, we have been able to use our tools to adapt quickly to market conditions and have been able to procure third-party capacity quite efficiently, particularly on the spot side of the business, which is about half of the brokerage volume we do. So it was in that space, that transactional space that we were making that reference to.

34:50 And then the comment relative to utility, got a little less utility on the network side and a little more positive utility on the dedicated side. But the net of all of that in the first quarter was positive. and if we had consistent with the load volume drop, we've had some drop relative to utility in the month of April, but we think that will improve as the quarter plays out.

35:23 Okay, that's helpful. And then just lastly, maybe Steve, any thoughts on how to think about decremental margins in the near term here and the losses on sales?

35:37 Yeah, the incremental margin one's an interesting one because we typically refer to those things where all else is held equal except for volume. And we're in an environment where we've got volume and price and mix changes all at the same time. So it kind of throws those rules of thumb up in the air a bit. At the same time, we're trying to be as nimble as we can at as it's prudent to do so with the cost structure. So it's a little harder to answer the incremental margin question on the downside, especially when things happen abruptly.

36:23 That's another dimension to this. It's normally referring to a flow through seasonality where things move a little more gradually up and down. This is a little different when things take a step function down. So we do anticipate the second quarter will be a difficult one from an earnings standpoint, but then well positioned to begin improving after that.

36:55 Thank you for the time, guys.

36:56 Thanks, Scott. Our next question is from Ben Hartford with Baird. Please proceed.

37:04 Hey, good morning, guys. Steve, could you talk a little bit about network and capital dynamics here into April and the commentary thus far has been really helpful. So anything you can talk about from a receivable and a payable side, any changes you might have made on the payable side given some changes in the market, and then what are you hearing from customers on The receivable side, how might you reasonably expect that to play out in 2Q? And I guess in that vein, how much does this stress cash collection issue in the industry, how much opportunity from a share perspective might that present to you, whether it's truckload or brokerage?

37:50 Yeah, I think from a macro standpoint, the whole working capital dynamic will put some stress on incremental or marginal capacity. For us in particular, haven't seen a large impact to date with our working capital. However, I think the second quarter will be the proving ground for that dynamic. There have been a series of requests that Mark alluded to earlier of a subset of our customer group wanting to talk about their payment terms and other payment-related matters. And so we're taking a look at those in a reasoned manner and understanding the situation, but at the same time, you know, the vast majority of our bills are paid in very short order, and so therefore we need to take a pretty firm stance on the whole discussion around payment terms.

38:56 How would you expect the supply dynamic to play out in the industry? And for you guys, the reduction in capex, if the baseline assumption holds in terms of the improvement in the back half of the year sequentially, how quickly do you think you'll be to add incremental capex on the upside?

39:22 Yeah, I think we're well positioned to turn that switch back on soon. Pretty much as soon as the opportunity set is there, including OEM capacity and seeing some firming in the market. I think we'll pretty quickly switch our mindset and may need to update our CapEx guidance as we get later into the year. We just wanted to provide some commentary of where we are at the moment. In broad strokes around cash flows, we still anticipate free cash flow generation for the full year as we anticipate the adjustments we've made to CapEx combined with the deferral of payroll taxes, the company portion of some payroll taxes provided under the CARE Act.

40:15 Those will more than offset any degradation of our working capital condition in the year. who anticipate free cash flow generation and are looking to deploy that.

40:28 Yeah, Ben, maybe just some other color around that. Our dedicated pipeline is very strong. We would be very bullish to put additional capital to play there and are quite confident we could do that. What we always see in these times is a flight to quality from the driver community, so we are essentially only hiring experienced drivers and and gives us a chance to show them on a broader basis what we have to offer as a company. And so these times we want to make sure we can take advantage of that. And if this recovers at a faster pace, I think we're going to be well positioned to take advantage.

41:10 Thank you. Our next question is from Brian Asenbeck with J.P. Morgan. Please proceed.

41:24 Hey, good morning. Thanks for taking the question. Mark, I think earlier you referred to balance in the for hire network as maybe it's getting a little bit harder now as things are normalizing a bit or trying to find a new normal. Can you talk a little bit more about that as well as what's the balance within intermodal and what do you think that means for truck counter, how you would try to manage that with the potential for a pretty big snapback in the second half of the year?

41:52 Yeah, Brian, I think that is the real trick is how do we be mindful of the short-term kind of condition with being very mindful of how we can take advantage of all our strengths coming out the backside of this. And so we're very much meaning to keep our scale through this. It's one of our advantages that we have is our scale. And so could we be down a bit on the network side depending upon if this – and a number of others. We've been working on this for a long time. We've been working on this for a long time. to take advantage of that is first and top of mind.

42:58 On the intermodal side, we certainly have dislocation just because it's such a network business of pitch and catch between your containers. And when the West has gone through kind of the import shrink to the degree it has, and we've grown a lot in the East and Mexico and some other locations, had in the short term here some dislocation, more empty repositioning costs, and those items that impact our ability in the short term. But we think we could quickly recover that relative to our demand picture to get back onto our normal flow. So we really do think this is a short-term, second-quarter-type impact even in the intermodal business.

43:42 Okay. Got it. To follow up on the intermodal side, you're talking more about this – is a real great product, which is surging, as I'm assuming, is off a pretty low level. But if you can give some context as to who's that for, how much capacity you have to offer that, and what's sort of the business case for Schneider to offer that in terms of margin and return.

44:11 Yeah, Brian, we looked at... We don't generally give specific customer context, but... We looked at that as an opportunistic play to maybe help some of the customers that we support in other areas of the portfolio with them exploring a private box play there. We don't really see that being a major growth driver of the business or having massive application across much of the portfolio. So we were looking at that as a way to experiment a bit to see what the potential might look like, how we could perhaps leverage our scale. But we don't really think it's going to be an important and large strategic play for us of any meaningful size.

45:05 Okay, got it. All right, thank you for your time. Our next question is from Ken Hoekstra with Bank of America. Please proceed.

45:17 Hey, good morning. Mark and Steve, can you maybe talk a bit about the, you noted a delay in completing some of the dedicated orders through the bid season. Maybe can you talk about how the spot business is going, talk about your spot exposure versus contract, and then just backing up to the bigger picture, your thought on targeted mix of dedicated versus for hire.

45:43 Yeah, Ken, good morning. You know, we are Largely in the 60-40 range network versus dedicated, I think over time that the 50-50 mix is really where we've kind of placed our targets on. I think there's great synergies between the two and how they – which manifests itself for value to the customer, and so that mix feels about right to us. My questions around the delay with just some of the awards have been delayed in implementation just because of the distraction of the startup activity that customer resources aren't available for. And so that's, again, I think that's just pushing it out a quarter or so.

46:29 That's not going to change the trajectory over the long term of the business. And then the other question was around the spot, I believe. Yeah, we haven't gone up. We are a mid- and many, many more. Yeah, I guess actually probably within network, or excuse me, for hire side of the business, yeah.

47:20 Just on the for hire side, okay. Yes. The CapEx, given your changing target here, can you talk about the timing of trucks, given what's going on with the OEMs and what your view is on capacity? Is that just replacement capital, or what do you see for the fleet?

47:40 Yeah, it is predominantly replacement equipment, tractors and trailers. And so far, it's been a reasonably steady flow. There's been a little bit of delay, stuff we were expecting in March. We got in April, for example. But a relatively steady cycle throughout the year. We tend to get most of our equipment delivered prior to the fourth quarter. We've been following that cadence this year as well.

48:13 And just the last one, a minor one, but brokerage as a percent of logistics, you usually provide that in the upper 80s. It wasn't in the, I guess, in the data that I saw. Did that change in terms of anything going on within the brokerage side or logistics?

48:30 If anything, it's increased a little bit. It's such a predominant part of the logistics segment brokerage is that the Our next question is from Thomas Wadwitz with UBS.

48:44 Please proceed. Good morning. I wanted to ask you, Mark, about your thoughts on

49:08 How this would impact competitive dynamic in brokerage and truckload in terms of, you know, it seems that there's some logic that would say, you know, the big guys or the high-quality big guys, to be more precise, could gain benefit as, you know, work from home may be difficult, value of technology scale would be maybe accentuated, you know, financial strength, things like that. Do you think that kind of – is that a real benefit that could persist and help you out, or, you know, in terms of share gain in brokerage and truck, or is that something that's pretty incremental and pretty temporary?

49:48 But, Tom, I think there are many forces at play, and you mentioned several of them. I think – Thank you. Thank you. Thank you. You know, are there some other things that can help? Low fuel costs can help, perhaps. Maybe lenders not wanting equipment back could help in the short term, so there could be some other offsets to that.

50:34 But I think this is an opportunity for large, well-capitalized, technology-savvy, good providers, quality providers to take share. And that's really the mindset that we have across logistics, across our truck business, particularly in dedicated areas. and across our intermodal business over the long term.

51:00 I mean, that's maybe a typical cyclical effect. Do you think there's a bigger effect this time in terms of when you get up, you know, when freight improves, if you're looking at later this year or next year, that it's kind of a bigger benefit than we normally see to the big guys and the high-quality players?

51:21 Yeah, I do. I think there's a lot of play on the customer side, too. I think there's going to be supply chain changes relative to this just-in-time inventory to just-in-case is going to play out. I think this e-commerce piece puts inventory in more play. It all just drives more and more precision in some of that, and I think those who can adapt to that and have the wherewithal to do it, which I do believe is skewed towards to the Large providers who have the wherewithal to invest in those. I think this is a changing moment of the industry, and it always is on these very, very world-changing events. And I think that plays well to the large shipper, and I think it plays well to the large carrier.

52:11 Okay, great. Just one follow-up question. You know, it's a little tricky to tell you, you know, first quarter and obviously second quarter is quite a bit different, but you saw a lot of load growth in intermodal in the east. And that seems in kind of contrast to the idea of, you know, weak truck market, you know, intermodal is more vulnerable, tougher to, you know, kind of grow in intermodal, and that would be particularly true in the shorter haul market in the east. Are you optimistic that you can, you know, kind of grow well in the East, even as a truck market? You know, looking at the second half, not second quarter, obviously. But do you think the East is still a good opportunity for motor growth? Or do you think that maybe you have to, you know, wait a bit longer, look out a year or two, just given how much capacity there is in truck?

53:03 I make this comment not as a replacement to the West or the TransCon that we certainly are looking forward to the bounce back of, but we don't believe we're at our caps or at our ability. We have a number of interesting things in late-stage pipeline that would suggest we still have legs in the East, and it helps when our provider is performing as strong as they're performing. There is still, we can demonstrate a value proposition to our customer community and even easier done when we're performing from a reliability on par with truck. And so, Tom, it's not our entire focus. We're excited about the nearshoring things that can come back and make Mexico even a bigger strategic play into the future and certainly looking forward to the more normal import patterns as well.

53:59 But, yeah, we're not discouraged that we're at the upper limits of what we're capable of in the East.

54:06 Even against the wheat truck market?

54:12 As demonstrated in the first quarter, yes.

54:15 Yeah, sure. Okay. Great. Thank you for the time. I appreciate it. Our next question is from David Ross with Staple. Please proceed.

54:27 Good morning, gentlemen. Mark, just wanted to circle back on the truckload volume comments in April because there has been some decline in the fleet. So I wanted to know of that high single-digit decline, what's attributed to lower miles per tractor and how much has contributed to lower number of tractors?

54:54 And that's in the network side of the business, David? That was the question?

55:03 Well, I mean, it said in late April truckload volumes are down upper single-digit percentages. I don't know if that's overall dedicated and for hire. I was speaking specifically on for hire because I figured that was where it was more volatile.

55:16 It is. It's a higher – yeah, got your question. Sorry. That is a full truck statement, and it is – More heavily weighted towards the network side of the business than the dedicated side of the business, and that's on all contracts, whether that's on our tanker or our dry band or whatever the trailing equipment side is there. So that is more of a network impact. And, again, that's where we generally feel it first is in the irregular route business. The dedicated business is generally, and in this case, more steady.

55:55 So if dedicated is down low to mid-single, then four-hour would be down double digits on the volume side?

56:05 It's a tighter band than that, and they're both in the single digits.

56:11 Okay. The four-hour fleet was mostly down year-over-year due to the first-to-final-mile exit, which I'm pretty much glad you guys aren't in right now, but also down 3% sequentially. Why the sequential drop, and how do you see that for the balance of 2020?

56:28 Yeah, as I mentioned earlier, we want to really maintain our scale through this. Could we have a little bit of attrition through the second quarter? Yes. Our driver count really isn't down in a material way. We did do some tightening up of our ratios, and we're always mindful of how we can get – higher ratios of driver to a truck. So there's really no signaling being given there, David, if that's the question relative to the sequential change or the tightening up of our capital.

57:04 And the last question is just on fleet age. Steve, where does the tractor fleet stand right now, and are you keeping a normal replacement schedule this year?

57:13 Yeah, we are. Even with the pruning of the gap X, we would That's one of the benefits of being able to steadily invest through good times and tough times is that dynamic. So we're very close to where we want to be with fleet age.

57:47 About around two years? are running. Yeah, if you do it by... We have such a mixed fleet, David, between sleepers, day cabs, shunts, so that's why we generally don't publish an average age of fleet because it all depends on the configuration. So our sleepers are the youngest age, our day cabs are slightly older, and then our yard equipment is... quite a bit older than our daycaps, so intermodal grade fleet.

58:24 They all have their own configurations, but all of them.

58:28 Maybe the four hire fleet, if you just want to pick that one, because that's where it matters most, I would think, specialize in dredge or funky.

58:39 Yeah, we generally average about two and a half years to three years, depending upon where we are in the cycle. on the sleeper unit, which is the predominant play in our higher network.

58:54 That's helpful. Thank you.

58:56 You bet. Our next question is from Jordan Alliger with Goldman Sachs. Please proceed.

59:05 Yeah, hi. I think you mentioned in the release that you were seeing perhaps some encouraging signs around customers or suppliers reopening or ramping. I'm just sort of curious, as you talk to them, is this a function of trying to get inventory in place before things open because there's been a drawdown of stocks? I'm just trying to get a sense for sort of the restock, the punishment angle to all this. Is that what you're thinking or seeing or hearing?

59:38 That comment is mostly around those who were in more of a shutdown mode because of being non-essential, which is skewed in the large shipper mode to the non-essential retail and some industrial markets, and on our logistics side, skewed to the very small micro-shipper who, based upon their community and where they are, weren't deemed essential. And so starting to see the dialogue about the planning cycle of when they start to come back online is really, was the basis for that thought and comment.

1:00:14 Any thoughts there broadly on inventory levels that you're hearing as you talk to customers?

1:00:22 Yeah, that's a little bit across the board. I think inventories overall, particularly around those in the essential category, we would still, based upon our discussion, fairly lean and perhaps some need to rebuild inventory to be more comfortable. Conversely, on some of the non-essential side, There is some concern that the inventory didn't get into the locations and stores to take advantage of the season. And so some discussion is that inventory going to have to wait for next year on the seasonality side. And so there is some displacement of exactly when this hit and what's in the pipeline and then how do they kind of recover from that and get back into the other normal seasonal pattern.

1:01:09 And so it's kind of a mixed bag.

1:01:14 Okay, thanks very much. Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.