Schneider National, Inc.

Thank you for standing by. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Schneider Second Quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. I will now hand the call over to Steve Bindis, Director of Finance Investor Relations. You may begin your conference.

Thank you, operator. And good morning, everyone. Joining me on the call today are Mark Lark, President and Chief Executive Officer, Darrell Campbell, Executive Vice President and Chief Financial Officer, and Jim Filter, Executive Vice President and Group President of Transportation and Logistics. Earlier today, the company issued an earnings press release. This release and an investor presentation are available on the investor relations section of our website at schneider.com. Our call will include remarks about future expectations, forecast 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 filing, including but not limited to our most recent annual report on form 10K and those risks identified in today's earnings release. All forward-looking statements are made as of the day 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 and investor presentation, which includes reconciliations to the most directly comparable GAAP measures. Now I'd like to turn the call over to our CEO, Mark Rourke.

Thank you, Steve, and hello, everyone. Thank you for joining the Schneider call this morning. I will start by offering my perspective on our second quarter results in the context with the current business and freight cycle trends and how we are positioning the strengths of our multimodal platform on the path towards growing revenue and financial returns for our shareholders. I will then turn it over to Dale for his commentary on the second quarter results in free cash generation and the setup for the second half of the year regarding capital allocation and earnings per share guidance. First, I'm gonna thank all the Schneider associates, especially our professional drivers for their contributions to the progress we made in the quarter. In the second quarter, we delivered solid sequential improvement in earnings and margins across our three primary segments of truckload, intermodal, and logistics by remaining diligently focused on four areas we have the most control. First, delivering an effortless customer experience, which we know resonated based upon the number of customer recognition awards that we recently received. Second, navigating the 2024 shipper freight allocation season with purpose and discipline. Third, optimizing capital allocation opportunities across our tractor rolling stock, chiefly in dedicated intermodal by increasing the ratio of drivers to trucks. And fourth, containing costs across all expense categories. These actions will continue to drive enterprise value, allowing us to seize the opportunities ahead, enhance returns as the freight market recovers. Our commercial philosophy is be mode agnostic across our multimodal platform and offer customers the best combination of service, cost, emission reduction, and transit performance that meets their needs. While our offerings are constructed to compete and function independently based upon the unique value propositions, there is considerable enterprise commercial leverage, which is evident in 46 of our top 50 customers purchasing services in all three segments. It is clear that our value is resonating with customers. In the quarter, we received five recognition awards, including carrier of the year and partnership and sustainability. We are continuously collaborating with our customers, both during and outside allocation events to ensure that we have a full understanding across their diverse supply chain needs. And we are aligned with what they see ahead. We've been hearing more frequently from customers that they are seeking to secure asset-based capacity and balance their brokerage mix. We are now approximately three quarters through the 2024 shipper free allocation season. So let me offer second quarter highlights that I believe are instructive for the forward positioning of our multimodal platform, starting with Truckload. In our Truckload network, we achieved another quarter of modest contractual price gains and for the first time in two years, spot price in June exceeded contract price. Importantly, spot remain above contract for the full month of July as well. However, we are behind the tempo that we expected in our prior guidance, therefore shifting out the timing of the pricing recovery. In Dedicated, truck counts are up 12% year over year through a combination of organic and inquisitive growth. Dedicated represents 63% of the total tractors we deploy in Truckload. Sequentially, Dedicated truck count was down 1% as new business implementations and existing account growth were offset with targeted asset efficiency actions as well as moderate account churn. Overall, Truckload segment margins improved 290 basis points sequentially from the first quarter, but we expect further margin improvement for the second half of the year. Moving to our fully asset-based intermodal segment, order counts were slightly up year over year and up 3% sequentially. Growth in Transcon, Mexico and the West was offset by shrink in the East against the highly competitive truck alternatives. While domestic intermodal has not experienced the full benefit of the higher year over year West Coast import levels, we have started to see increased port transload activity. Specific to our recent momentum in Mexico cross border, we recognize double digit volume growth with the CPKC delivering freight between Mexico and the Midwest at truck-like transit times. We continue to see significant cross border Mexico growth opportunities as we move forward, driven by ongoing manufacturing investment, automotive production and shippers continuing to build nearshoring into their supply chains. We recently moved into a new location in Mexico City, reinforcing our commitment to build and grow on our long standing presence, more than three decades worth and the expertise that we have in that market. Overall intermodal margins improved 300 basis points from the first quarter results as we continue to heal the network, which reduced friction costs, enabling trade productivity gains and fewer empty repositioning shipments. We moved more orders year over year with 10% fewer trade trucks while maintaining our high ratio of drays executed by our company driver fleet. We expect further improvement margin performance in the back half of the year. Finally, logistics margins improved 180 basis points from the first quarter's performance as we competed effectively in the quarter, especially considering the highly competitive brokerage market. Brokerage order volumes contracted 4% year over year while growing 2% sequentially from the first quarter as asset based brokers are increasingly favored by shippers at this stage of the freight cycle. Power only continued its double digit percentage growth rate both year over year and sequentially as mid to large shippers prefer the value and flexibility of trailer pulls. Power only serves to augment the truck club network needs of our trailer pull shippers. And again, we expect year over year volume growth in the back half of the year. We continue to be encouraged by our performance in the brokerage market through these very challenging conditions driven by our execution and differentiated strategy of our freight power platform, standalone freight generation capabilities, and power only offering. In summary, the quarter saw positive indicators including seasonal demand, tightening supply during the annual road check event, increased spot pricing, and modest contract price gains in our truck load network. While we are not calling a market inflection just yet and the sustainability of these trends is not yet proven, there are signs of market improvement which we anticipate will present opportunities as we move forward. So let me turn over to Darryl for his summary comments on the quarter and a look ahead before we get to your questions. Darryl.

Thank you, Mark. And thanks to each of you for joining us this morning. I'll review enterprise and segment financial results and cash flows for the quarter, discuss our capital allocation priorities, and provide context on our refined 2024 EPS and Net CapEx guidance. You can find summaries on pages 21 to 26 of our investor presentation included on our investor relations section of our website. Our adjusted income from operations was 52 million for the second quarter compared to 107 million a year ago. Adjusted diluted earnings per share for the second quarter was 21 cents compared to 45 cents in the prior year. Second quarter 2023 include the higher gains on equipment sales versus the current period which represented a 4 cent headwind to EPS. As compared to the first quarter of this year, adjusted income from operations increased 22 million or 74%. Adjusted EBITDA of 153 million was also 70% higher than the first quarter. The sequential improvements in adjusted income from operations and adjusted EBITDA reflect results of our continued commercial costs and productivity actions and improving market conditions. Truckload revenues for the second quarter were slightly up as compared to the same quarter last year. Results were driven by a dedicated organic growth and contributions from M&M Transport or most recent acquisition, partially offset by a lower network pricing and volumes. Truckload earnings for the second quarter were lower on a year over year basis primarily due to lower pricing and volume in our network business and lower gains on the sale of equipment. Within our truckload network, revenue per truck per week grew sequentially at 3% which was primarily yield driven. Our dedicated business continued to demonstrate resiliency and delivered solid performance during the quarter. We're excited about our ongoing new account startups, existing account growth, the creative contributions of our acquisitions on a new business pipeline. Dedicated saw 2% year over year growth in revenue per truck per week which was largely productivity driven. Inomoto revenues for the second quarter decreased 3% compared to last year, primarily driven by lower revenue per order. Second quarter 2024 volumes were favorable compared to the same period a year ago. Inomoto earnings were similarly impacted by lower revenue per order, partially offset by improved trade operations, network efficiencies and cost performance. Volume growth and productivity actions contributed to favorable sequential financial results in the quarter. Logistics revenues for the second quarter decreased 7% compared to the same quarter last year, driven by a lower brokerage revenue per order and volumes. Logistics income from operations decreased 13% compared to the same quarter in 2023, primarily due to lower brokers net revenue per order and volumes. Our strong balance sheet and operating cash flows provide us with the ability to remain committed to our capital allocation strategy. Our asset productivity actions in the first half of the year and capital discipline have facilitated investment in the sectors of our business that yield the highest returns, placing us on a path toward increased ROIC. These efforts have enabled us to be prudent in managing our net capex spend, which was 182 million on a year to day basis and combined with our cost containment initiatives led to a 94 million year over year improvement in free cash flow. While we remain disciplined in our capital allocation efforts, we continue to execute against our age of fleet objectives and position our businesses for growth. The ongoing focus on these efforts will shape our capex plan for the remainder of the year which is reflected in our guidance of 300 million to 350 million for the full year. During the second quarter, we continue to advance our share repurchase program with 13 million of opportunistic purchases. We also returned 17 million in dividends to our shareholders which was 5% above the same period last year. On a year to day basis, we had strong operating cash flows and our net debt leverage stood at 0.3 times at the end of the quarter. As Mark laid out, during the second quarter, our targeted actions to restore margins as well as improving market dynamics led to sequential progress across each of our segments. We expect to yield the benefits from our ongoing costs and productivity actions and price recovery efforts in the second half of the year as well as modest seasonality. While we expect both sequential and year over year earnings growth in the second half of the year, the effects of lower than expected contract price increases in our network businesses and volume impacts of our disciplined approach have shifted the timing of achieving the level of earnings improvement we had previously anticipated. Based on these considerations, we have refined our full year adjusted diluted EPS guidance for 2024 to a range of 80 cents to 90 cents assuming a full year effective tax rate of 25%. With that, we'll open the call for your questions.

At this time, we'd like to remind everybody that to ask a question, please press star or fall by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Daniel Imbrow with Stevens, Inc. Your line is open.

Hey guys, thanks for taking the question. Over the past week, we've heard a lot of different accounts for pricing and in the truck load market and how that's trending. Could you talk about what you're seeing in like market tightness into July and how sustainable that is and give any color around the pricing backdrop that you're expecting for the back half end guidance?

Yeah, I'll try to unpack that a little bit. I think your question was more on the truck load side of the house network specifically. As you mentioned in our opening, Dan, we had modest improvement in contract pricing, which is our second consecutive quarter, but less so than we had initially anticipated as we expected the market to continue to tighten, which we're seeing, particularly as we're seeing with spot pricing now, I think first time in two years exceed our spot, our contract pricing in June and also very solid performance again in the month of July. So again, too early to call it inflection, but those are encouraging signs. We have about a quarter of our allocation season left on both our intermodal and truck network business. So we'll continue to lean into that in quarters three and four. And we also have other levers that we are mindful of what's available relative to project work out of spot price play. We're seeing an increased level of mini bids. So there's a series of activities that we think we can continue to adjust and improve the mix of freight across our network businesses in the second half, which is really what's embedded into our guidance.

Got it, thank you. And on the intermodal side, how has the pricing backdrop changed there? Are you seeing any competitive backdrop stabilized? And you mentioned seeing the freight, like as you just mentioned, the freight market's tightening. How do you expect that to flow through to the intermodal backdrop going forward, as we've seen? Poor volumes pick up and a lot of positive data points on that side of the business.

Yeah, Dan, this is Jim. You have a lot of questions there. I'll try to answer this. First is, you know, we look at that market. I think the area to really focus in on is the trade capacity. And as Mark was talking about earlier, is that, you know, we've really focused on improving our efficiency there. We've taken out 10% of our trucks with more volume, so we've become more efficient. That really is the most critical asset, you know, in that business segment. So I have that opportunity to be able to flex up, to meet customers' demand, but that's generally gonna be with third parties that come at a premium price to be able to surge up. And, you know, that's something that will be required to get from the market. So that's where I really see the opportunity that we'll see pricing move there. We have seen demand increase. Last quarter, we talked about IPI, the growth there, hadn't really transferred over to the domestic side. That started to change late in the second quarter, and we started to see more transload activity, and that's continuing through July.

Got it, thanks for the color, guys.

As a reminder, when asking a question, please ask one question, and then you will have one follow-up. Our next question comes from the line of Jordan Allager with Goldman Sachs. Your line has opened.

Well, Jordan, you're either out, or you're out of the question. You're on mute.

Can you hear me?

Now we can. I hear you now. If you asked a question, we didn't hear it.

Hello?

All right, we're gonna move on to Bruce Chen with Stifle. Your line has opened.

Yeah, thanks, and good morning, everyone. Maybe if I could just touch on dedicated here, you've had some nice truck additions so far. If you could maybe walk us through the outlook for fleet capacity in the back half, and maybe more broadly what the applications are there for the pipeline and how that's shaping up, and then just any updates on the competitive environment there in the dedicated market.

Yeah, this is Jim. Thanks for the question. When you look at our growth here in dedicated, I think we've held up very well, and a big part of that is just our customer diversity. We've been working on that for a number of years. No customer portfolio represents more than 5% of our enterprise revenue, and we've just been really purposeful and remaining balanced around the verticals that we wanna participate in. Mark also talked about some of the efficiency gains that we've had in our dedicated business. We still believe that we are going to have a couple hundred trucks of growth this year. Now, some of our fourth quarter startups might get pushed into next year, but it's really a matter of timing there that new customer acquisitions are still on the same pace, our pipeline remains strong. Still see a lot of opportunities to grow there.

And then just as far as any competitiveness that you're seeing, is that starting to abate at all, or is that more or less consistent with where

it's been so far? Yeah, what I'd say in terms of competitiveness, most of our losses aren't to a competitor's dedicated solution, but it's rather going back to some sort of network solution or a private fleet. And if you think about moving from dedicated to network, that's something that might provide a customer a short-term opportunity, but that's not likely to provide value in a stronger market. And so those customers that switch from dedicated to network really provide an opportunity for us to grow with them, but we would approach that differently in a stronger market condition.

Yeah, Bruce, maybe as it relates to the competitive context, you know, dedicated is competitive. I guess we wouldn't be a proponent of the narrative that is any more competitive this year than it's been the last several years. So, you know, based upon our targeted audience that we're after on specialty type dedicated solutions and the mix of freight or the mix of customers that we are pursuing, you know, we're still very, very bullish on its prospects, not only including our legacy dedicated, but the growth opportunities within the unique sectors that our recent acquisitions deploy. I still think we have some efficiency opportunities, particularly with one of our recent acquired companies that we can grow the business and do it so more efficiently with a capital base, we'll continue to lean into those, but yeah, we're not of the opinion that it's had this incredible step level change in competitiveness.

That's great, really helpful, thank you.

Our next question comes from the line of Tom Wadowitz with UBS, your line is open.

Yeah, good morning, wanted to see if you could offer some thoughts on how we should model or how we should think about revenue pro load in intermodal in three Q and then revenue per truck per week in network in three Q relative to two Q. Is there, you know, is there some impact from contract rates lower that cause sequential pressure or did you hit the trough in two Q when it's stable sequentially?

Yeah, Thomas and Mark, I'll open it and Jim has anything to add, I'll let him do so. Certainly that the stabilization of intermodal, we haven't seen as of yet material changes to contract rates, we've changed our mix, you'll see that in our results, we've been more efficient healing the network less of the friction costs that impact our profitability, our commercial teams and our operations teams on a really nice job of executing particularly our trade drivers. So that's where we've seen the lift, I think contract pricing is more in front of us, there's generally a bit of a lag to truck on that. So we don't obviously guide specific metrics to quarter. So that's kind of really was a setup for the first or the second quarter, we continue to lean in and encourage, maybe Jim with some of the discussions for planning for the second half of the year with customers that may be a little different than we experienced the last couple.

Yeah, yeah, thanks Mark. Really the advantage of remaining disciplined through the freight allocation season is that we can flex our capacity to where we have the best opportunities outside of the contract season. And so it's just feel like we're well positioned and pivot wherever we see quality demand, we have a really broad portfolio of services which helps us provide solutions to customers. But we have opportunities to be able to flex to where we see the best profitability.

Yeah, I guess the only other thing, this is Darrell that I'd add is, obviously what we saw in the second quarter was a lot of productivity improvements. Mark talked about tightening of our driver to truck ratios. We expect that to carry forward into the second half. So we expect incremental improvement in the second half as it relates to the first half. And a lot of the growth that we expect also is volume driven in the intermodal.

Okay, yeah, that's great. And just for the follow up, I think it was about a year ago that you did a nice dedicated acquisition. I think Darrell, you mentioned the balance sheet leverage which is very low. So that's nice to sleep well at night. But I'm wondering if you decide to consider using the balance sheet a bit and just thoughts on timing for acquisitions. If this time of the cycle when there's been a lot of pressure, if that gives you more opportunity to find attractive deals or if it's just tougher to find things that you might wanna buy. Obviously it seems like you could do deals if you wanted to.

Yeah, no, good question, Tom. And I'd say this is a good position to be in, right? Just to say 0.3 times net leverage. So we are conservative and there's a reason that we're conservative because it puts us in a position to be flexible when the opportunity arises. So if the right strategic opportunity comes up or if there's something transformative, we'll obviously look at it. But we intend to remain investment grade. I couldn't see us going above two times, but there's a big way to go between 0.3 times and two times and we're looking at things all the time. So I think just for reference, every 12 to 18 months would expect to do something from a more programmatic perspective. So we've been doing that over the past several years. So for modeling purposes, you could assume that will continue. But we're always looking in the market for things that add to our strategic portfolio and our initiative of dedicated and moral and logistics.

Great, thanks for the time. Thank you, Tom.

Our next question comes from the one Jordan Alliger with Goldman Sachs. Your one is open.

Yeah, thanks. Thanks for giving me a second chance 21st century phone problems. Anyway, on the logistics brokerage side of the equation, actually fair a bit better than we thought. Are you reaching a point where there's a little bit more normalization in brokerage? Curious what you're seeing in your own experience in terms of selling price versus cost of transportation and is there actually any spot markets sort of developing things?

I think in general, as we talk to customers, as we mentioned our opening Jordan, it does feel that the asset based players period, but also asset based brokerage are more in favor and the power only offering that we also have an additional opportunity there is resonating not only in the player community, but the customer community. So the spot market we made really, really good. We have our tools that we try not to make that a hobby where we lose money on individual loads. It happens, but it's constantly being calibrated. So we're very comfortable giving a volume for margin as it relates to the spot market, which is generally what we play into our brokerage piece. But I would tell you it's more stable at this juncture. I wouldn't say it's accelerated, but both on the carrier costing side and the pricing side it is stabilized and continue to look forward to producing positive, consistent positive earnings results quarter after quarter in our brokerage business.

Thank you. Our next question comes from the line of Ravi Shankar with Morgan Stanley, your line is open.

Thanks, everyone. Just a couple of follow ups here. One is just in the point of you've shifted your timing and the expectation of the inflection, the cycle. Can you just confirm from when to when kind of this is something that's moved to like one Q25 to Q25 kind of when do you think that happens now? And second, just historically, you guys have given us some pretty good color on peak season, how that's shaping up. Any sense of what this year or the second?

Ravi had a hard time maybe catching all of that first one. I think maybe you were looking for a declaration of when the inflection might occur. We're not declaring that at this junction probably a little bit early for us to be projecting out to 2025. So I'll stay away from a prediction there. It's been incredibly difficult to do through this most recent cycle. So we'll stand down on that one. As it relates to color towards peak, this is the season that we're in the early stages of working with customers and trying to understand and how they're seeing the world. I think we do believe that customers in general will need to have volume for their sales. They've been very successful at price over the last couple of years, but I think volume will come back as an increasingly a lever and we've had a bit more discussions this year, Jim, maybe just some context of how that plays out by our most recent discussions.

Yeah, and just a little context. You think about what we went through in the first quarter, there were a couple of pockets of tightness and the market dropped off a little bit in between this time and those pockets of tightness, a road check, and then end of quarter and the holiday. But what you didn't see in between each one of those is necessarily the same degree of tightness. And just, and Mark also mentioned the more mini-bits, all of these are indications that supply and demand are coming more into balance. And so we are hearing more from customers that want to start talking to us about what is our capability to surge, how would we do that, what options can we bring to the table? And so we're having those discussions. There's nothing definitive yet in terms of how much they're going to ship and days, but just the fact that we're having those discussions this year and that really wasn't the case last year. Understood, thank you. Thank

you, Robbie.

Our next question comes from the line of Brian Osenbeck with JPMorgan. Your line is open.

Hey, good morning, thanks for taking the question. So maybe you can... Hey, good morning. Maybe Jim, you can elaborate a little bit more on the IPI, the International Intermodal. It sounds like you're seeing a little bit of spillover into transloading on the domestic side. So I don't know when that would necessarily hit the network if that's kind of in line with expectations or volume that you're expecting and whether or not that accelerates from here or if it's still kind of a slow and steady progress as opposed to maybe picking up into the peak.

Yeah, thanks, Brian. So we were talking about this last quarter on recall that we were anticipating that we would start to see this just because of some of the tightness with ocean capacity and it really didn't start... We didn't start feeling it until very late in the quarter and that is carried through July. We have not seen a drop off in that. So I'm not sure that I could say that, when are we gonna see more or a bigger peak? That's difficult to make an assessment of how much more we will see there, but we've definitely seen that change that with that tightness of ocean vessel capacity, they're making that decision to switch from IPI to domestic.

Yeah,

Brian,

as we went through the quarter, solid growth in Transcon, Mexico and the Western region. Unfortunately, we had some offset out the East due to the truck capacity, but some of those key intermodal markets, we did see some improvement. And as we get to the busier part of the season, we would expect some, what we're calling, return to more normal seasonality, not peak, not conflection, but more normal seasonality.

Understood. Just to follow up on intermodal then, in terms of where the truck market is, it sounds like it's still challenging in the East. Where are the spreads relative to history right now, and are you having shipper conversations where they're looking to do more conversion now that rail service is stabilized and improving? Have you seen anything notable in the quarter so far?

Yeah, this is Jim. From a service standpoint, that really has not been a barrier here. It's seen great service from all three of our rail partners. So it really is a matter of price relative to over the road. And here more recently, as we are seeing the truckload rates start to slowly increase, it's putting intermodal in a position to compete there. So that's something I would expect that we'll start to see a little bit of an improvement, especially in those truck competitive lanes.

Okay, thank you for the time.

Our next question comes from the line of Chris Weatherby with Wells Fargo. Your line has opened.

Hey, thanks. Good morning, guys. I was wondering if you'd dig in a little bit into the July commentary and maybe sort of compare it to what you'd normally expect from a seasonality perspective. You know, some fairly negative macro data out this morning. I guess I'm just kind of curious about that. I'm just curious how you guys compare and contrast what you've seen over the course of the last several weeks in the business. I know you mentioned that spot rates were still above contract, but broadly speaking from a demand perspective, is applying out the way that normal seasonality would suggest?

Yeah, Chris, from my expectations and normalcy, obviously it's a little bit of a shorter month coming with a major holiday in it, but I wouldn't say there was anything particularly unusual in either direction. It's been fairly steady, which is, I think, overall a good sign coming off end of quarter in June. So not spectacular, but not a reversion back to, much less lower volumes or pricing changes, as I mentioned, in the spot market. So pretty steady performance.

Okay, that's helpful. And then maybe just putting all of that into the context of the guidance. I think you guys mentioned that you'd expect sequential improvement in a year over year in earnings in the next couple of quarters. Any other sort of shape you can put around it? I guess maybe the direct question is, what will your expectations be around the fourth quarter that can have some more significant seasonality? So just trying to get a sense of maybe how to sort of pace out the rest of the year from an earnings perspective, going towards your updated guidance.

Chris, I think you've kind of hit on kind of how we're thinking about it. We are talking sequential first half, second half there. And when we use the phraseology of more normal seasonality, again, that would indicate that fourth quarter is generally more favorable than third quarter. And that's where we would expect normal seasonality to be defined as. Okay, okay. All right, thanks very much for the time. Appreciate it.

Thank

you.

Our next question comes from the line of John Chappell with Evercore ISI. Your line is open.

Thank you. Good morning. Good morning. So you've spent a lot of time, I think, on the intermodal side, you've talked through some of the cost initiatives. I think in detail, it's a really interesting read to see most of the revenue lines effectively flat sequentially and then a doubling of EBIT in every revenue line. I'm sorry, in every segment line. So on the TL and maybe the logistics side too, is there any more detail you can give around the cost initiatives that you've implemented to enable the margin to expand so much even in a flat revenue backdrop?

Yeah, good question. And as we've spoken in our last several calls, if we baseline ourselves to the fourth quarter of 2022, which is where we've typically discussed this topic, I'm just really proud of the entire organization's ability across multiple expense pools to dig in and look for opportunity to arrest inflation and now in many cases be able to turn back some of those costs to inflation. Jonathan, so it really is across the board and from our maintenance organization on uptime on equipment to getting the parts and all the things that was inhibiting our ability to be low cost and high uptime, they've done a really good job of getting us back to what we would consider our standard spec, our driver recruiting teams, our headcount actions to be more efficient. We've talked about capital efficiency by being able to increase ratios. All of those, you're not hitting one bounce double over the fence, you're hitting lots of signals across lots of categories to build momentum and we're talking about how those are structural improvements those don't have to change based upon market. And so, really across the board from third party expense to in-house dollars, the team has leaned into and that's why you see it really prevalent across all three of our operating segments. It isn't in a single or targeted part of the business, it's really across the board.

Yeah, then this just really is across the enterprise like Mark said and mentioned all the places we've taken cost out and the value remaining discipline through that allocation season is we've been able to get a better mix of freight and that better mix of freight helps us reduce some of the friction costs that also plays in. So really is an enterprise action.

Jim, that leads right to my follow-up which was the mix of freight. Are you effectively saying that you're walking away from business that's maybe lower margin or requires greater resources than the return you can get out at this point and does that change the kind of trajectory that you would see when the freight high winds do become tailwinds?

Yes, John, absolutely that we are positioning ourselves to align with freight that generates return for the organizations that we can reinvest. I would expect that in a different market cycle those are opportunities that become available again and create opportunities for growth.

Yeah, there are multiple levers there how we accept freight, how we use the spot freight giving ourselves the flexibility to go after in the event that it's their more premium project work all that's behind our decision relative to what we're making commitments and what we mean by discipline through the allocation season, Johnathan. And I just do wanna reinforce the good work our sales and commercial teams doing and we've used the example here today on Intermobile by getting the network in a better position healing the network, we have less of the accessorial costs we have less of the repositioning costs and it's enabled our driver fleet to be more efficient which has allowed us to take capital out of the business and the corresponding expense that we save by doing that. So the commercial healing relative to this allocation season has the cost benefits in addition to giving us additional flexibility in the event that we have the opportunity to yield it in the second half of the year.

Okay, that's great, thanks Mark, thanks

Jim. Our next question comes from the line of Jason Seidel with TSE Company, your line is open.

Hey Mark, Jim, team. What is the focus a little bit on sort of the back half of the year, what you're hearing about peak season, you mentioned that you kept a lot of capacity to be more flexible, are we expecting a lot more sort of pop-up business in the back half of the year, what are you still in here?

Well, I'm not sure the definition we've kept a lot of extra capacity, what we've done have given ourselves the flexibility to the degree that we can to help our customers who may need that type of support and we're in some discussions and we have been in discussions trying to understand what that may look like. And so what we're really trying to do is make sure that we can pivot appropriately and have the resources and the aptitude to do that, Jason. So a little early for us to be definitive on that, but that's the point of the planning process that we internally are in and also in conjunction with our customers.

Okay, fair enough. And on the dedicated side, have you guys seen the more aggressive marketplace in terms of pricing on the contract side, it seems like some of your competitors have taken some trucks out of their dedicated operations as we look at some of the two queue numbers.

Well, as in any market there are, it's a distribution of type of freight that you're hauling even in dedicated customer segments. We are in the more generic dry van type dedicated in certain locations and certain geographies, but increasingly what our focus has been, where our growth has been both organically and acquisitively, Jason, is we're trying to certainly position ourselves in the more durable dedicated those that we're providing a specialty either equipment or additional service that our drivers involved in the supply chain process for the customer. And as such, there's, I wouldn't say there's less competition, I said there's plenty of competition there, but it's much stickier, harder to replace and you're really demonstrating your value to your customer every day. And if you do that, your retention levels remain high and we're still well, as we sit here today, 95% plus through our retention actions this year. So not that we're not immune to some of the behavior that may take place, but it's a much, much smaller portion of our portfolio.

That makes sense. And what percent of your accounts are you in dedicated would you consider more durable?

Well, the vast majority, I'd probably put that in the 75, 80% at least. Okay,

fantastic. Appreciate the time,

gentlemen. Our next question comes from the line of Bascom majors with Susquehanna. Your line has opened.

To follow up on Jason's first question, you noted that it's a little early to really know what you have for peak season. Typically, how far into the calendar would it be before you really know what you're dealing with from a price pop-up demand and ultimately profit perspective for the fourth quarter?

Yeah, Bascom, this is Jim. And typically, the processes that customers come to us, they have a general idea, we start sharing information. It's not until later in August that they're really starting to put together those plans. There's some of those that are actually already completed, but the vast majority, those are getting worked here later in August and some of those actually move even into September.

Thank you for that. And looking beyond the peak season from this year, as we think about the bridge back in the truckload segment from call it mid-single digit operating margins today to your 12 to 16% long-term range, is it really just a couple of years of price above inflation that gets us there? Can you kind of walk us through the process and can you kind of go through the how we get back there without necessarily trying to put a hard cyclical timeline on it that would be helpful? Thank you.

Yeah, certainly very important is price recovery. As an industry, we went through a period of inflation around wages, equipment that is part of the business today. And what we've been through, particularly the network side of the businesses is that not getting compensable rates to cover that, to include what's expected from acceptance, performance, and we're just, the industry and that part of the business, particularly truckload network at this juncture is just out of whack. And for us to invest in the future, we have to see some correction there. We're confident that the value is there and it will take some time, but as we'll start to give guidance later in the year to 2025, we'll be more specific about that bridge. But pricing plays a role, but also all the other actions that we're doing today around productivity, efficiency, cost, all of those things are an important contributor to put us in a position to yield those benefits quickly as price recovery becomes more prominent.

Thank

you. Our next question comes from the line of David Hicks with Raymond James, your line.

Thanks, guys, congrats on the quarter. Morning, David. We've seen sequential margin improvement kind of across the board, across segments, as well as outperforming typical seasonality here in QQ. Is that kind of outperformance that we're seeing? I know you expect sequential improvement, but kind of outperformance versus seasonal trends, is that expected for the balance of the year, just kind of as we see seasonality come back and we're still working on that. Is there room to attack on the cost side of things?

Yeah, this is Mark. We still have the yield of all the cost actions that we've been, that will still be, what we believe is certainly durable through the remaining part of the year. And so there's constant ability to kind of feather those in and is certainly part of our outlook. And we've also, from a commercial standpoint and a freight standpoint, we keep using the word to return to some normalcy of seasonality. We're not saying we're gonna have the peak of peaks, but a normal seasonality. After we see the end of quarter activity in March, the experience that we had in the second quarter and some of the conditions that we've outlined in our discussion today would suggest, has to play out. We have to see these trends be durable, which again, we noted in our opening comments. But based upon those data points, it gives us at least some confidence that we have some level of seasonality in front of us, which is generally in our industry, the best part of the year comes through the late third and into the fourth quarter.

Okay, that's helpful. And then, last, I was just kind of curious as to the weakness in the all other segments on the operating income line. First time we've seen that negative in quite a while while revenues kind of improved sequentially from one queue. This kind of a headwind expects to continue or should we get kind of back to that regular cadence? Good question, thank you.

Yeah, this is Darrell, so I'll take that. So just as a reminder, what's in other is primarily the results of our leasing business. So we lease tractors to owner operators and small carriers. We also have our captive insurance business that's in that bucket, and we have some unallocated corporate expenses there as well. To your specific question on the year over year decline, that's mostly in the leasing business. If you think about the market conditions and the stress that the smaller carriers are under, we're seeing that come through in those results. So not really surprising.

All right, very helpful, thank you.

Our next question comes from the line of Scott Group with Wolf Research, your line is open.

Hey, thanks. Can you guys, I know we talked a lot about normal seasonality, just remind us, what's normal seasonality Q2 to Q3 just for the various segments?

Yeah, normal seasonality would suggest a peak season. We said a return to a level of seasonality, so a little bit nuanced there, Scott. We're not again calling for an inflection, so again, wanna be incredibly clear about that. The bigger sequential, if you go to history, is certainly the third to the fourth quarter. But with the improved performance in the second quarter and what we saw so far in July, we think there is some seasonal improvement second to third. We have to see again, see those trends play out and the trends that we've seen be sustainable. But the normal seasonality in our business is more third to fourth.

And on the equipment side, can you just talk about any gains in the quarter, expectations for gains? And then on the CAPEX side, I think it's the second quarter in a row, you've lowered it. Any thoughts on CAPEX next year? Are you focused on a pre-buy, anything like that? Thank you.

Yeah, thanks for the question, Scott. Really, the big difference of our guidance for this quarter versus last is the efficiency actions that we were able to take to lessen the need for new equipment. We're not backing off our age of fleet. It really became down to an efficiency factor and kudos to our equipment team who've been able to prepare and some additional proceeds to get out and sell the equipment. That said, we don't expect material gains. We've had very moderate gains, I mean, barely positive in the second quarter and we're not modeling anything significant at all for the third and fourth quarter. We're moving the equipment, but we're not moving it at a significant gain standpoint. And then as it relates to next year, a little early for us, we're in our planning stages there with our OEMs and what we think makes sense and what quite honestly will actually be available. So we're not convinced there's gonna be a large pool of capability of pre-buy, but it's a little early for us to make any comment on that.

Thank you. Thank you.

Our last question comes from the line of Ken Hoekstra with Bank of America. Your line is open.

Hey, great. Good morning and thanks for getting me in here. So really interesting discussion through the morning. Sorry, Mark. Interesting discussion through the morning on kind of peak and just given the consumer weakness, we hear whatever, McDonald's, Starbucks, P&G, just so many, but you're saying Spot is now above contract. So Mark, when does that happen? When does that occur without an inflection? What else do you need to see to call that? I guess in the backdrop where it seems like all the major carriers have now finally decided to take out about 10% of the fleet, which I don't know, is that the final cleanup that was long needed just to get to this point? And is that the beginning of the inflection?

Well, I'm not speaking for everybody, but certainly for us, it's been hard. It's been difficult for us to make a case to invest in growth in the network business based upon where it is and the return profile, Ken. So I would not be surprised that that's more of a prevalent theme across the industry, but it's certainly prevalent here. And so Spot pricing is really a function of a couple things. First of all, we're disciplined. We're not playing 20%, 30% in the Spot rate. So it's important component for us and it gives us flexibility, particularly as it continues to, if it continues to improve to be an adder to our yield actions in the second half of the year. So, but I do think generally that is a sign. We'd have to see these things, these trends sustain themselves before we'd be comfortable enough to say, okay, we're now into a different phase of the market, but it's an encouraging sign nonetheless.

And Ken, I'll just add on this, Jim, that this is part of just being very purposeful in the construction of our portfolio as well, in terms of the customers we're aligning with. And when we're talking about Spot pricing, it really is working directly with customers is primarily where our Spot volume comes from in our asset-based business. It's not necessarily the same thing that you're seeing on broker load boards.

Yeah, definitely. I think we're hearing maybe more and more of that in terms of load boards not really being realistic in terms of what's going on, certainly as you went through the contract bid season. I guess switching over to Intermodal for a second, just to wrap up, I guess, in my follow-up, really interesting growth prospects as you gain long haul share from Mexico. Can we see, or can you see a step change in your revenue per order as you get longer lanes of haul from Mexico, or is that just still a small part of the business and it doesn't really impact the overall change?

Yeah, there's an opportunity there. And one thing we're really looking forward to with Mexico is STB approval of our new southeast to southwest and Mexico lane. And we're looking forward to seeing that as early as the next few weeks. And that creates a new corridor for there, absolutely right, that as an opportunity to provide a little bit of lift on rate per order, as does in the UP last time we talked about the change in transit times between LA and Chicago, that largest Intermodal lane that's out there. We've seen that improvement in transit times. Think that's an opportunity to be able to grow. So that creates a little bit of opportunity to see a little bit of lift at rate per order, but we're not gonna slow down in the east because that is also a great opportunity for us to grow our Intermodal assets and believe that as the market starts to change, that's where we would expect to see some growth as well. So it's difficult to say with that entire mix, specifically the lift on rate per order because the east is a really large part of our portfolio.

Understood, thanks Jim, thanks Mark, appreciate the time. Thanks Ken, appreciate you.

Thank you everyone. This concludes today's conference call. We now disconnect, have a good rest of your day.