Schneider National, Inc.

Greetings. Welcome to the Snyder First Quarter 2022 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 your host, Steve Vindas. You may begin.

Thank you, operator, and good morning, everyone. Joining me on the call today are Mark Roark, 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. These 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 10-K and those risks identified in today's earnings release. 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 Roark. Mark?

Thank you, Steve, and hello, everyone, and thank you for joining Schneider's call this morning. This month marks our fifth anniversary of being a publicly traded company. Many of you have been with us on the journey since April of 2017, and we are grateful for your insight, encouragement, and support. I'll start our prepared comments this morning on our first quarter operating performance by illustrating, with metrics, how our portfolio of services has been reshaped into a leading multimodal transportation and logistics platform. The transformation of Schneider to date has not been consistently recognized when you consider the current trading multiple of the company. In the most recently completed quarter, in our three segments of truckload, intermodal, and logistics, the asset light segments of intermodal logistics represented 61% of the segment's revenue mix, excluding fuel surcharge. Year-over-year intermodal order count grew 1%, with year-over-year container growth of 26%. enabling an attractive runway opportunity for rail conversion and growth as rail fluidity begins to return to the network. Logistics produced another quarter with order count growth exceeding 20% in our brokerage offering, placing revenue essentially on par with our truckload segment. Since 2016, our compounded annual order volume growth rate in brokerage is 16%. In truckload, we averaged over 10,300 tractors in the quarter, with 56% or 5,700 of those operating within dedicated customer configurations, with additional startups currently in flight and a very strong new business pipeline. While we are very proud of our truckload heritage, and truckload remains a very important element of our long-term positioning of the Schneider Enterprise, these metrics illustrate Schneider is much more than a one-way truckload organization. So let's transition to the segment specifically with particular emphasis on our strategic growth drivers of dedicated truck, intermodal, and logistics. In the quarter in truckload, dedicated revenue grew 52% over one year ago, and the growth is nearly evenly split between organic growth and the addition of our acquisition of Midwest Logistics Systems at the end of 2021. The acquisition is going well. We intended to build upon the associate and customer-based strengths with an approach of running it separately with targeted costs and operational synergies that are focused on improving driver and customer experienced opportunities. With one quarter under our belts, we are pleased that the approach has been well received by the MLS associates and customers, and the business results are at or above expectations for both revenue and earnings. Revenue per truck per week again, excluding fuel surcharge, and dedicated and network was up year over year by 10% and 19%, respectively. In dedicated, more of that improvement was realized in asset productivity as our new business startups mature. More than 100% of the improvement in network was price-related as asset productivity in the network was affected the most by the temporary system outage we experienced in the quarter due to a vendor hardware failure, as well as COVID-related impacts on driver availability early in the year. As it relates to current market conditions, the first quarter contract renewals and price adjustments in dedicated and network remain highly supportive of the inflationary costs in the business, particularly around driver compensation and direct cost areas such as new equipment acquisition, equipment maintenance, and replacement parts. It is our view that shipper allocation events have largely moved spot price business to contract, which in general delivers better cost acceptance and service, Better acceptance results results in less tender rejects and smoother supply chain execution for all parties. In fact, in our network-based offerings, we are seeing materially higher levels of award tenders and acceptance after allocation events than prior to those events. So let's transition to intermodal. On our last earnings call, we discussed the role we expect intermodal to play as a growth driver for the company while offering our customers additional value in achieving their carbon emission reduction commitments. Specifically, our stated goal is to double intermodal by 2030. Part of that plan was to create competitive differentiation with the largest industry player with shippers who most value an asset-based execution model of own container, own chassis, and company driver drape model. The unique asset-based model alignment with the Union Pacific in the west and the CSX in the east provides the desired differentiation. We also chose to announce the Western Rail partner change to the Union Pacific a year in advance so we could operate in an open and transparent manner with our stakeholders, namely our trade drivers and our customers, and importantly, to act with integrity and be highly respectful of our long-term relationship with the BNSF team. It speaks to the quality of their organization and leadership as we are collectively working through this transition in a constructive and professional fashion. The timing also gave us the open air time to develop a robust plan with the Union Pacific to execute the change with a very high level of operational excellence and be in regular communication with all our stakeholders to allow them to be an ally in the change. The joint commitment, resources, and plan to do just that is on track and we are highly confident in our collective execution capability. Sequentially within the first quarter, we grew the intermodal container count by 2,200 containers. We expect the 26% growth in containers year over year to be translated into order volume growth as rail fluidity and labor conditions improve at our customers' loading and unloading locations. Revenue per order improves 16% year over year, excluding fuel, contributing to a 510 basis point improvement in operating ratio to 87.1%. As we move to logistics, they were led by our brokerage offering, which delivered another quarter of excellent business results, improving operating ratio year over year, 320 basis points to 92.3%. Logistics earnings surpassed the intermodal segment for the first time. Our investments in Schneider Freight Power are focused on digitally connecting to the shippers and third-party carriers with price, book, and track automation benefits. The advancements are helping to drive productivity in the business. In fact, in the quarter, brokerage grew order count over 20%, with people count increasing just 7%. Finally, we experienced a sizable net asset property gain, so I wanted to write some strategic context for that development. The gain was derived from a capital allocation exercise we regularly perform across our various operating units. While we have been operating inside Canada for nearly 30 years, The assessment determined that the current and future prospects of cross-border operations based in Canada was expected to remain substantively inferior to other uses of resources, especially rolling stock capital assigned across our truckload and intermodal offerings. Therefore, by the end of the quarter, we have largely reallocated the power, trailer, and container capital to a series of higher return profile operations in the United States. The attractiveness of the commercial property in Canada resulted in an expedited sales process. So as I turn it over to Steve for his remarks, I feel we have ample opportunity to continue to deliver leading performance across our three operating segments, and that confidence is embedded in our full-year guidance raise.

Thank you, Mark, and thanks to each of you for joining us this morning. Picking up where Mark left off, I'll begin with additional context regarding our forward-looking comments. We've increased our guidance for full-year adjusted diluted earnings per share to a range of $2.55 to $2.70 per share. This represents an 18-cent, or 7%, increase from our prior guided midpoint. We're making this increase despite the fact that we now expect to sell less equipment this year than was inherent in our initial guidance. During our last earnings call, I noted that we expected equipment gains for 2022 to be similar to those of 2021, which were 64 million. Our updated outlook for gains is approximately 45 million, and it reflects our expectations to retain some equipment, especially trailers, so that we can support the growth opportunities we see in our dedicated and power-only offerings. So, our updated EPS forecast reflects expectations for strong operational performance across the portfolio for the remainder of the year. As Mark mentioned, we're seeing a return to normalcy as the contractual market has stabilized over the past couple of months and absorbed many of the tenders that were going to the spot market. The contractual rate environment remains healthy as shippers value the capacity and service that we provide. We expect constructive conditions to remain intact throughout 2022, and this applies to both our truckload and intermodal segments. In our logistics segment, dynamic market conditions provide the opportunity to fully utilize our decision science tools and rapidly adapt. We actively participate in both the contract and spot markets and are able to leverage our core brokerage capabilities while augmenting them with our power-only solution, and the broad reach of the Schneider Freight Power Platform. Regarding capital expenditures, we're increasing our full year expectations for net capex to $500 million. This increase is due to cost increases combined with some incremental trailing equipment. I'll wrap up with brief comments regarding our first quarter. Revenues excluding fuel surcharges were up 28% over the first quarter of 2021, and all three segments made meaningful contributions to this top-line growth. Adjusted income from operations increased 95% over the first quarter of 2021, while adjusted earnings per share increased 84%. So the reason for the differing percentages was a $0.04 loss on equity investments that was recorded this quarter. Also, it's important to note that the first quarters of 2022 and 2021 contained minimal gains from equipment sales as there were limited dispositions in either quarter. So operating performance was even stronger than the year-over-year EPS comparison implies. The portfolio is executing effectively and generating strong returns on invested capital, which is a strategic outcome of the reshaping that's been underway for the past several years and will continue as we move forward. On the topic of capital, net CapEx during the first quarter was only $9.9 million, and this was a function of the property proceeds mostly offsetting the CapEx for equipment. As is apparent from our full year, guidance of $500 million. We anticipate a sizable step up in equipment deliveries over the remaining three quarters of this year. And we continue to prioritize capital allocation toward our strategic priorities of growing dedicated, intermodal, and logistics businesses, all while making steady investments in technology. And so with that, we'll open up the call for your questions.

And at this time, we will be conducting a question and answer session. 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we poll for questions.

And our first question comes from the line of John Chappell with Evercore ISI. Please proceed with your question.

Thank you. Good morning. Mark, starting with Intermodal, you laid out your growth ambitions there and a lot of what you're doing to attain that growth by 2030. I'm just wondering how the transition's been going early days. Obviously, it doesn't fully start until next year, but as you said before, you're kind of preparing for And as it relates to that, revenue per order down sequentially. Just wondering if that's part of the preparations to move over to the UP, if that was seasonality or was it some of the accessorials maybe going away a little bit and being more representative of a run rate going forward?

Great. Thank you for the question, John. And as you mentioned, we're in a great deal of planning as it relates to the transition across the commercial aspects, the DREA aspects, And just the whole integration of the business process, and we're feeling two things. We're feeling really good about the engagement with the Union Pacific to do that well, and we've been really pleased with the commercial receptivity of the change coming from our customer community. And so part of that is preparing how we go ahead and make commitments through the rest of the year. and have a really, really solid plan to do this with a high degree of operational excellence. So I'm really proud of the team. I'm really pleased with the engagement across all of our stakeholders. And as we sit here now at the end of April, we feel we're really well positioned to do exactly what we set out to do. So that's the first part. Second part as it relates to the revenue per order, yeah, there are some seasonality impacts through the peak retail season that's evident in that. But I will tell you that the contract renewals continue to be highly reflective of the inflationary costs in the business around the expense line, and customers are highly responsive to that, and that applies whether we're talking our truck business or our intermodal offering.

And, John, this is Steve. I would just add to that sequential comment that you're making about revenue per order there. There was also a length of haul statement component of that as most of our growth is occurring in the east, which has shorter length of haul than in the west or the transcontinental moves. So that's a factor in that number as well.

Got it. That's really helpful, Steve. And then just the second one as it relates to equipment availability. Steve, you just laid out how that's going to be a back-end loaded kind of capex. And you were able to add more dedicated trucks to the MLS acquisition. But How do you think about the truck count and how it's spread between dedicated and network just as it relates to OEM availability and your ability to actually spend that capital through the rest of the year?

Yeah, we're giving you our best kind of estimate at this point. We believe we're going to get a good portion of what we've laid out here. Will we get it in a slightly delayed fashion? Potentially. which we didn't have a lot of plan for new equipment in the first quarter so this is consistent with how we've laid out our expectations with the OEM and the OEM so at this junction we're feeling pretty good but as you know the supply chain has been fairly fluid and while their confidence is high we'll have to see how the whole year plays out.

Yeah and as far as the mix of the equipment the tractor count if you will now versus end of this year. If we see growth, I would expect it to be in dedicated configurations or supporting our intermodal dray fleet and kind of a maintenance mode with the truckload network component of it.

Got it. That makes sense. Thanks, Steve. Thanks, Mark. Our next question comes from the line of Bert Subin with Stifel.

Please proceed with your questions.

Great, thank you, and good morning, everyone. Good morning. So it seems like your business has obviously changed a fair amount over recent years. How are you thinking about earnings volatility for the overall enterprise, just this cycle versus last? If I look at the parts, obviously your network exposure is quite a bit lower, so I think that would come down to your view on intermodal logistics growth from here. Any color would be really helpful.

You're absolutely right. The mix of our business and the configuration of it is much different than if you generally compare back to prior periods, particularly the 2018 phase. As you sit here today in our truck configuration, as I mentioned, we're at 5,700 dedicated units to 4,500 units in the network business, and we would anticipate continued growth in The dedicated portion of that, I think we had 280 or so units in the first quarter in startup, sequentially from the fourth quarter to the first quarter organically. And as I mentioned in my opening comments, a very robust pipeline. So there has not been any dampening of enthusiasm for what dedicated provides to our customer community and the certainty around cost and service. particularly in the markets that we're serving in the more specialty type dedicated markets. So we would expect that those mix elements that we're seeing change will continue to be the trajectory in the truck business, which as you think about the dedicated mix being longer term contracts as well as more consistent volumes, we think that bodes well for resiliency of our truck segment. On the logistics front, excuse me, on the intermodal front, We, again, believe there's been too much conversion back to over the road based upon the activities of the last couple of years relative to the urgency around the supply chain. In addition to what we can help customers solve on increasing the commitments they're making on carbon emissions. And so as we sit here, we think we have some great tailwinds. We're executing well. And then the differentiation that we're bringing to market so that we can offer that service relative to own truck, own container, and own chassis to give a great experience to our customers we think will continue to be received very well in the marketplace, regardless of the business cycle. And thirdly, our logistics business is more variable in its cost nature by its setup. And we can adapt and have proven to adapt very well there with our decision support and our freight power platform. And again, all of those have been developed and honed over the last several years all with the idea of being a more resilient business model.

That's a great overview. Maybe just following up on your last point there on logistics, it seems like if I look at the numbers on a year-over-year basis, you saw a sequential improvement in brokerage volumes, which I would think is encouraging, yet you're still talking about bringing some more stuff in-house. Can you talk about what's allowing you to differentiate that logistics business perhaps from your peers? Are there things you're doing in terms of loyalty programs for drivers that are keeping them in-house or is it purely what you're doing on the technology side? Thanks again for taking the time.

Yeah, I think what things that we offer differentiation is that from a business model standpoint, we have the ability to leverage whole organization and enterprise to the benefit of our customer, which allows us, I think, to grab share because we're playing in the truck, we're playing intermodal, and we're helping them on some of the other lanes that don't fit other people's networks, which is so well how our logistics model plays. But we also have and have invested in the ability for them not to be totally reliant on the enterprise or overflow and that they have developed a capability to develop their own customers, develop their own demand, and be a self-serving part of the portfolio. And so we're getting the benefits of both of that capability from a commercial standpoint. Obviously, we've found ways, importantly, to bring more solutions by using our orange box in a fashion that's easy for our customers to say yes to us and that we've develop the networks underneath that with smaller carriers to go ahead and operate that business in a network configuration which you really have to do because you have to balance your trailer pools and so you have to think in a network way and that is how really our business model is positioned and so I think that again favors the carriers like ourselves who can manage both capacity our capacity as well as third parties but also keep that trailer network in balance in a way to serve our customers. And so all of that is kind of playing out what you're seeing in our results.

Just to clarify on that, that seems beneficial for the shippers. How do you think about the drivers in that ecosystem, you know, being able to keep them on your platform?

Yeah, how we set up and how we think about our integration with power only is, is that we're running on networks that are not being disruptive to our valued company driver network and owner operator network. And so our technology and tools allow us then to segment and determine where those things fit best, both from a price and value to the customer, but also from the capacity that ultimately will serve that. And so we have de-conflicted that on the front end of the processes so that we can go ahead and execute with excellence on the back end. And so that is valuable to both our company and owner operator capacity, but also increasingly to third parties who don't have access to some of the same quality shippers that we do because of the trailer pull-back network, and that's what we're really aggregating on that power-only front.

Understood. Thank you for your time.

You bet.

Our next question comes from the line of Ken Alkester with Bank of America. Please proceed with your question.

Hey, good morning. Good morning, Ken. Mark or Steve, can you just talk a little bit about the environment now in terms of your thoughts on the market? And I asked that in looking at your revenue per truck, which showed deceleration. I got your answer before to John about kind of seasonality and other things. But maybe then just talk about the components within revenue per truck, what you're seeing and how we should think about that going forward as you go through bid season.

When we talk about, Ken, our networks, we're talking about really the contract trailer pool network. If we do play in the spot world, it's generally supporting our contract customers on something that's dislocated within their business that they need help with. I know there's a lot of emphasis and focus on the truck stop boards and the things of nature of spot, but that's really not applicable to what we do, particularly on the asset side of the business. When we look at demand, it's quite healthy across the contract side. We've been through nearly 40% of our contract renewals already in the first quarter. We are seeing share gain and very healthy improvement in price with recognition towards the inflationary costs around the driver, around equipment. So we think the market is still very responsive to that and necessary based upon the costs that have come into the business. And so we've been nothing but encouraged based upon the first quarter of the year and how those things have progressed. As you look at the network side of the business and the truck side, we have a 19% improvement in revenue year over year with well over 100% of that being on the price line because of some of the throughput issues that I highlighted in my earlier comments. So again, reflective of where the market is and the value that we're providing.

And can you talk to the components of revenue per truck? Maybe just talk about where you're seeing, is it length of haul? Is it anything that's shifting within the mix?

The shift that we're experiencing in truck is more between dedicated configurations and network configuration. There hasn't been a great deal of shift in length of haul or anything underlying that's driving any of the difference there, Ken.

My comments are clear again. We're on the intermodal revenue per order, and that's where I was referring the length of haul differences. It was not applicable to the truckload segment, east versus west.

No, I guess I got that on the intermodal. I guess I was thinking more maybe utilization of miles per truck if anything is aiding or detracting, aside from just pricing, right, if there was anything within mix, you know, just given, you know, break out other than the revenue per truck. And then my follow-up is just, you mentioned kind of in getting out of Canada, you did kind of a business review where you do it quite often. Was there also a look at, you know, how you allocate capital between whether it's adding more dedicated resources or growing intermodal more specifically or focus on logistics, you know, just in the three segments of the business, was there a kind of analysis of where you want to focus a little more or just kind of keep the same in terms of your third breakdown?

As we have kind of assessed what we believe, how we want to allocate capital, but where we believe the market will best reward the things that we do well, Ken, is that we have focused our strategic growth driver and thus our capital allocation around dedicated truck, intermodal, both container chassis and power when we say intermodal. And then technology and increasingly more trailers for power only in our logistics business. And so that's really our focus of growth. But within those elements, we constantly look for ways to improve capital allocation to put those against the best value to the customer and the best value back to the enterprise, and that really was within the truck segment, the truck network segment, was the change in Canada to redeploy those assets.

Thanks, Mike. And our next question comes from the line of Ravi Shankar with Morgan Stanley.

Please proceed with your question.

Thanks. So I want to follow up on the point about intramodal conversions. I think you mentioned, and you've seen this in our data as well, that we saw actually more truck conversion, real truck conversion, the cycle because of the congestion and everything else, despite how tight the truck market was. So even if rail congestion eases, if the truck market loosens even more in the back half of the year, I mean, do you see that traffic going back to rail? Does it stay on truck? Or how do you see that playing out over the next, say, 6 to 12 months kind of if we do enter a down cycle here?

Okay, Ravi, maybe a longer-term comment and maybe something more close in. As we study the intermodal market on what's available as an addressable market, to your point, we have seen some conversion back initially in the 2015 timeframe because of persistent scheduled railroading and then more recently because of the congestion. We think there's ample opportunity for the growth aspirations that we have laid out and our execution model to achieve what we've laid out as that doubling by 2030. I think the market can support that, particularly when we have such a valuable commodity as it relates to emission reduction. That's where, as we start to adopt electric vehicles, that'll first happen around the dray performance or the dray operations within our intermodal offering. The combination of all of those things together, I think, offer great customer value. The combination of those two, just the conversion back and then the unique value that Intermodal can provide on the emission reductions gives us confidence that in the longer term we can get to our objectives. Short term, we still think with the price of fuel and with customer unloading starting to finally improve so we can get our box turns more back to normal that we can see some improvement yet this year, obviously, in the volume as it relates to Intermodal. We think we have both a short and a long-term improvement opportunity.

Great. Thanks for the detail there. The second question is interesting to note on the negligible gain on sale. I think you and some of your peers are also talking about this kind of lower gain on sale in the short term because you don't have the ability to replace your trucks because of what's happening in your truck market. I don't think the industry has been in this position for a while. So how do you think about how this is going to play out? When do you think those new trucks come in? What does the guidance and guarantee look like? And also, is there a maintenance cost drag here if your truck fleet gets older than you'd like?

Yeah, there certainly is tension between age of fleet and maintenance cost. And so we're very mindful of that. As it relates to the availability, I think was your first part of your question, Ravi, I don't think this is going to materially improve outside what we've been experiencing, what we're projecting here in 2022. I think this could stick with us all through, I think the most likely scenario is even through 2023. So we have to be very good at the utility of the equipment that we do have, and we have to leverage our relationships and our scale to get the equipment from our OEM providers. so we can get favor there so that we can get to that equipment better than the average carrier, and that's what we're focused on.

Got it.

There's a completely kind of off-the-wall type thought slash question, but I know in the airline space, if the airline OEM is not able to deliver an airline on schedule or plane on schedule, there's potential compensation from the OEM to the airline, right? At what point do you tell your OEM partners, hey, what gives, and what can you do to help us with our fleet age and maybe any cost tracks? Ravi, I'm taking notes.

I'm going to try that.

You heard it here first. Thanks, gentlemen.

Take your time. I'll credit you.

Our next question comes from the line of Jordan Alliter with Goldman Sachs. Please proceed with your question.

Yeah. Hi morning. I'm just curious, you know, with spot truck rates sort of well off their peak, you know, why are shippers looking to, uh, to shift into contract? Is it, I'm just sort of curious, you know, maybe you could talk to how much the gap is closed between spot and contract today versus, I don't know, a few months ago. I'm just trying to get a sense.

Yeah. From a shipper standpoint, um, You know, again, we play largely in the contract trailer pool market. And so why would shipper value contract is really around the trailer pool and the efficiency that that creates. And so I think there are limitations to how effectively and efficiently people can try to get after the tail of the spot market because of the live load, live unload inefficiencies that come with that type of capacity. It can play around the edges. but it doesn't generally play in the places that our assets are being deployed. And as I mentioned earlier, we generally are supporting our contract customers with dislocation issues that they're dealing with when we play in the spot market. So not that we're completely isolated, but we're more isolated because of that approach to the market and what we bring as a major container and trailer provider.

Okay, and then just a quick follow-up on dedicated. I'm just curious... I know your pipeline is really strong today. I assume that pipeline that you're referring to is business that you have waiting to start. What about future pipeline or request for proposals for business that's not yet sort of in the official pipeline? Does that continue to be on a rising curve? Thank you.

Yeah, there hasn't been any real slowdown as it relates to the dedicated pipeline activity. And in that space, we are focused a little bit more on the specialty areas of a special equipment, whether it be temp, flatbed, private fleet, things that we're providing additional services beyond just moving a product from A to B or from a DC to a store, for example, that you see in the dry van space. So it's a bit broader market reach for us because of the specialty nature of that business, whether it be a food grade tank to, as I mentioned, the over-dimensional product in a flatbed. all of those needs in the marketplace around that, certainly cost and price and service, I think, are playing very, very well.

Thanks so much. Our next question comes from the line of Tom Wadewitz with UBS. Please proceed with your question.

Yes, good morning. I wanted to I'll ask you a little bit about the logistics side and the look forward. Obviously, the performance continues to be very impressive there in terms of the volume growth and also the margin. Should we think about that year-over-year momentum sustaining on the load side? I mean, the market's changing a bit with, I know, not your primary focus on spot market, but maybe more of an impact in brokerage. And then what about the impact of margin? Is that something you think that the strong OR can be sustained the next couple quarters?

Thanks, Tom. Yeah, we've just had just really solid performance. As you saw, not dropping off from sequentially fourth quarter to the first quarter. And we do play in the spot market a little bit more aggressively there. We're about 50-50 contract to spot in that quarter. can go up and down a little bit from there. So we have our feet firmly into both camps as it relates to that in our brokerage business. In our power only, in our faster growing power only, more so that's in the contract space. So we believe that is more durable. It's more durable from the customer standpoint because of that, but it's also more durable from the carrier standpoint if we go into any type of change in freight condition. We'll even be, in my view, more attractive to the carrier community. And as such, that business generally has done and continues to demonstrate a solid job of adapting quickly to carrier costing and chipper costing and therefore been able to demonstrate a very consistent and durable margin performance. So I guess to answer your question specifically, we see great opportunities across both our live-live traditional brokerage, our power-only, and the investment that we've made in our platform to stay ahead of the market and to be very responsive to it. And you're seeing our results.

Okay. So it sounds like pretty bullish continuing outlook on that business. I guess one more question. Just on intermodal, the turns were pretty challenged in the quarter. I understand that, you know, that the, you know, kind of rail issues, customer issues, maybe to a lighter warehouse issues to a lesser extent. Does it make sense to be optimistic on sequential improvement? Is that something that we'd be better off just modeling that that, you know, kind of sequentially stays the same? How, you know, what are your thoughts on outlook and level of conviction and you know, improvement if you think that'll be the case on the container turns.

There's a combination of several things there, Tom, in the quarter. Certainly, we were impacted by COVID early in the year in a couple of our key hub markets. When you take a lot of equipment on during a particular quarter, you're not as efficient in getting it in service and getting it all In the right spots, although they're on your books, you're not getting the full benefit of those, and 2200 sequential fourth quarter, first quarter was a pretty big change. And then our network businesses, which Intermodal is one, where we had the system hardware failure, they were impacted for a couple of days there disproportionately to some other parts of our portfolio. All of that served as a bit of a drag to our performance as it related to box turns. What I'm encouraged by is coming through the allocation season here in the first quarter, the receptivity to the changes that we're making and announcing in our business and the share that we're getting relative to those allocation events. So it gives us optimism that with the additional boxes and with COVID behind us and with, I would like to think it's behind us, and with the awards that we're enjoying, that we'll have some lift in our throughput, lift in our turns, and then ultimately lift in the volume associated with those boxes.

Are you optimistic on the rails improving, or it seems like that would be an important component of that?

Yeah. I mean, there's differences between railroads. The east is performing from a fluidity standpoint better than the West, and that's, again, how we allocate our boxes as to how we can best get those served. But, yeah, we think everything will start as a fluidity returning, less chaos in the network. We think all parts of that will start to improve.

Right. Okay. Thanks for the time. Our next question comes from the line of Jack Atkins with Stevens.

Please proceed with your question.

Okay, great. Good morning, and thank you for taking my questions. So I guess, Mark, I would just love to get your perspective, you know, on the market in general, you know, in terms of what's kind of going on here, what's been kind of going on through the first three, four months of the year, and how you think the rest of the year plays out, just in terms of the truckload market but the freight markets more broadly do you think what we're seeing here in the spot market is it is it more of just an air pocket uh or do you think there's something kind of changing from like a demand perspective or capacity perspective we'd just love to kind of get your thoughts because you know i understand the contract market isn't really changing that much but certainly we're seeing a you know pretty meaningful shift in the spot market and that tends to lead the contract market so we'd just love to get your your thoughts there

Yeah, Jack, maybe just some overall comments on the market. And certainly I think when shippers are looking and have been looking to get more stability in their allocation, they are specifically targeting getting freight from the spot to the contract. And so I think there is some bleed into the contract world as a result of that. We do believe, particularly us in the northern part of the country here, are a bit delayed on some of the seasonality impacts because of weather. And we're now just getting to the front end of the BEV and summer food season. And we're starting to see some of that break loose here finally at the end of April. And so I think we're on a bit of a delayed seasonality because of particularly the home improvement channels that are more weather dependent. And we're starting to see that change in some of the tender behaviors coming through those various parts of our customer base. But, you know, that being said, I still think that it's a fairly healthy world. We've talked to a few customers that, you know, can see some changes at the affluent customer, maybe more service oriented. The lower income folks feeling obviously a bit more stress as it relates to the cost performance, the inflationary impacts, but have really through their data suggested that the large middle is still very much intact and spending and well-positioned, and they're quite confident relative to their mix of customer that they're going to do okay with what's going on. So again, we have to see how all this plays out over time, but our tenders and our contract business appears to be quite solid, and what's getting all the attention is the load boards.

Jack, to add on to that, this is Steve. I don't know how to quantify this, but just from a macro level, I think that there was some form of pull forward, especially large customers that have global supply chains that took place maybe in the fourth quarter and created a little bit of this dynamic that we're seeing here that happened late in the first quarter and into the early second, but I think that that is kind of a That will work its way through. So it could be a contributor, not trying to call it the contributor, but it was a factor based on what we've heard from some of our customer base.

Okay. Now that's all very helpful, caller. And I guess maybe to follow up on that for a moment, as you sort of think about the second half of this year and contracts in the marketplace that will renew in the second half of this year, on the there are inflationary cost pressures out there. The market still feels like it's still somewhat tight, although not as tight as it was. Do you think that the market will support contractual rate increases in the second half of the year, or is it maybe going to be customer dependent?

As we look out to the remainder of the year, certainly the second half of last year, we were

with support of our customers, addressing the inflationary cost. And so I think the comps will be much different, but I think they're still going to be reflective of the inflation that we have experienced. But we did a very good job as a company and perhaps as an industry addressing those in the second quarter. For those that renewed later in the year, I had to go back and address some of the things that probably weren't covering what they needed to cover that we did earlier in the year. So particularly as of now, we've gotten through this first quarter renewals. Feeling very, very good about the understanding where the customer are relative to those and the ability to ensure that they get the capacity that they need to meet their objectives, Jack. So at this point, we don't feel that we're going to be in a net negative price area relative to the inflation.

Okay. All right. Thank you again for the time, Mark and Steve. Thanks, sir.

Our next question comes from the line of Basecamp Majors, Ms.

Susquehanna. Please proceed with your question. Hello, Basecamp Majors. Are you on the line? Please make sure you're not on mute.

If we do not have Basecom majors on the line, our next question will come from Scott Goup with Wolf Research. Please proceed with your question.

Hey, thanks. Good morning. I want to go back to the question about logistics results just in a slower market. Maybe, Steve, it would be helpful, I think, can you just share, when you, Logistics at $42 million of operating income in the first quarter. What does the guidance assume the rest of the year? Does it go higher from $42 million? Does it go down? What's in the guide?

Well, you know, we don't give segment guidance to begin with, but I think that based on Mark's earlier comments about how we view the ongoing growth prospects and the the various tools and capabilities that we have in the market that we're optimistic that the margin and revenue profile that we've experienced here lately will continue throughout this year. So we do incorporate a continuation of those contributions from our logistics segment.

Okay, and then can you just share, Steve, the the cadence to get to that 45 million or whatever of gains throughout the year, and then any just thoughts on progression of margins the rest of the year at truckload and intermodal. Thank you.

Sure. As far as the 45 million of equipment gains, we currently would anticipate the bulk of that being largely evenly distributed between the third and fourth quarters. but we would expect some in the second. So hopefully that's helpful in shaping that part of it. And so I think we will see some form of typical, if you want to call it that, seasonality in terms of our margin performance as we move through this year. And so that's inherent in our assumptions as well. Okay.

Thank you, guys. Our next question comes from the line of Chris Weatherby with Citi.

Please proceed with your question.

Hey, thanks. Maybe two questions on the dedicated side. Maybe first, big picture. Maybe this is for the total truckload business. Obviously, the acquisition of MLS takes the fleet count and skews it more dedicated heavily versus the network, but network's been coming down pretty consistently. If you think out over a couple of years, what do you think the right – weighting is between dedicated and network in that business.

Is network going to continue to get smaller? Well, Chris, our objective would be to grow around network.

Our objective wouldn't necessarily for network to get smaller, but clearly the driver community has some affinity for the value that they believe that they get in their work, like configuration balance or certainty or route schedule that makes dedicated a bit more attractive obviously to the professional driver and that is at play between the mix that we have between network and dedicated. But we're working on things that we're to do to drive more predictability, to drive more certainty, to drive more regularity into the network portion of our business to help combat that. So we have a number of initiatives to improve that overall consistency element that dedicated offers to our driver community. So I would love for us to be back to, I'm hesitant to throw numbers out since that's been difficult for us to do relative to the network side of the place, but we're not purposeful, we're not in a purposeful shrink mode of the network configuration, but we are in a purposeful growth mode as it relates to the dedicated side and the dedicated offering

Okay, that's very helpful. I appreciate that. And then on that point about dedicated growth, what should we be expecting this year in terms of incremental truck counts as we go forward from the first quarter?

Without being overly specific, I think that recent trends where we've been able to add several hundred trucks sequentially per quarter of net gains in the dedicated Configurations, we would expect that to continue based on the pipeline that we see.

Okay, great. Well, thanks very much for the time. I appreciate it. Our next question comes from the line of Todd Fowler with KeyBank Capital Markets.

Please proceed with your question.

Hey, great. Thanks and good morning. So I guess just a high-level question on the guidance raise. Steve, I think you said it was about 18 cents at the midpoint, and then you pick up maybe another four or five cents operationally from the lower equipment gains. Can you help us think about what's driving the higher guidance for the remainder of the year relative to where we were maybe two or three months ago?

I think we've touched upon many of the points already. It's how the purposefully reshaped portfolio is performing in this market and as we see the market we play in unfolding across the course of the year. When we were assembling our original budgets that we based our initial guidance off of, it wasn't exactly clear how the year would start off and so on and now that we're into it and have a good sense being basically four months in now. So it's really eight months that we're projecting here. It gives us some confidence to go ahead and increase those numbers based on the path traveled to date and what we have line of sight to in front of us here.

I guess, Steve, maybe to drill down, I mean, is there a way you can help us think about is it better performance and logistics? Is it, you know, the contract renewals on the truckload side? I guess, is there any way just to think about, you know, where you've got that better line of visibility?

It's kind of a yes to all of the above. It's not a singular thread that we're basing it on. It is, I think, the portfolio effect that we've strove to achieve and want to continue to build upon. But we also see the... you know, the growth prospects at logistics and intermodal and dedicated coming to fruition. So there's a top line element that goes with this, as well as the operational execution portion of it to deliver the margins to go with the top line growth.

Okay, fair enough. And then just for a follow-up, I think you've also touched on this a little bit, but just to make sure we've got it correct from a modeling standpoint, It sounds like that the cadence of the quarters, that the gains are a little bit more back-end weighted, and then you're expecting some seasonality, which would typically suggest, you know, stronger margins in 2Q and maybe 4Q. But is there anything else we need to think about from a modeling perspective as we shape the quarters off of 1Q to get to the full-year range? Thanks.

I think that pretty much captures what we're trying to convey there. Todd, and by the way, that second half, if you will, equipment gains are somewhat similar to what we experienced in 2021 when you add the third and fourth quarter together. So if that's helpful as you think about things, and then it's just... I think steady as she goes. The machine is up and running, and we just need to keep the throughput going through it and execute our plans, and I fully anticipate that the team is set up to do so.

Okay. Sounds good. Congratulations on the results. Thanks for the time.

Thanks, Ted.

Our next question comes from the line of Brian Ausenbeck with J.P. Morgan. Please proceed with your question.

Hey, good morning. Thanks for taking the question. So maybe sticking with reshaping of the portfolio, looking at logistics, I think the long-term range on the margin side is 4% to 6%, obviously well above that right now. Do you think you've done enough and reached enough scale on things like power only and freight power to potentially move that target up over the long term? Or is this more of growing with the same margin but just generating more EBIT dollars? How are you thinking about that at this point?

Yeah, that's a good question, and I think it's something that we would take under review. We typically do that on an annual basis as we begin our three-year planning process in the fall, and it's certainly something that would be on our list. We contemplated whether we should change that or not as we entered this year, but we'll certainly be taking a look at it. What we've been focused on has obviously been maintaining margins while driving top line growth and then as a result delivering more earnings dollars through our logistics segment. And that's certainly proven to be successful in the marketplace and becoming an increasingly important contributor to our overall earnings and revenue profile. So it's a balance there and I guess as a simplistic statement, we're always trying to grow revenue and margins at everything we do. It's how much do you emphasize one versus the other, and the answer to that is dependent on what part of the portfolio it is and what's going on in the market at a given point in time. So I think for the near term, at least, we'll continue to focus on maintaining solid margins in our logistics segment and focusing on top-line growth.

Okay, thanks, Steve. Appreciate that. Maybe just a quick follow-up for Mark. It was helpful to hear kind of the process and the strategy of doing the transition over to the UP. We have seen a bit of a fall-off in the competitor who made the move earlier this year. They expect to get that back. But maybe you can elaborate in terms of like what type of commitments and resources you're able to secure from some shippers. We know that UP is investing quite heavily. So you started early. You put some parameters out there. Are you able to get some confidence that you're able to bring over the types of volumes and the customers, the lanes that you're expecting at this point?

Yeah, Brian, thanks for the question. And absolutely, you know, there's a lot of debate whether to go ahead and announce as early as we did. But we did so because we wanted to make sure that we could get our whole organization, the whole Union Pacific organization, and then what the implication that means for our commercial efforts to get out in front as much as possible to have a very robust plan. And we've put a lot of effort and a lot of resources internally as well as the Union Pacific and increasingly together to go out and demonstrate to our customer community how we're going to have a great transition and we're going to sell into that and how that's going to be of value. And so looking at the early response and the allocation exercises that we've recently been through and the discussions with our customers, I'm even more confident that I was with you than we looked at this initially. And I just couldn't feel better about the response all the way around those stakeholders to what we're trying to do here. And I think going early and being transparent and being really respectful of our partner and what they mean to us and what they have meant to us, all that is playing out in a way that, hey, we'll be proud, I think, of the effort, but also I think we'll benefit from that planning.

Okay, great. Thank you, Mark. Appreciate all that.

And we have reached the end of the question and answer session, and this also concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.