Schneider National - Q1 2020

Transcript

Operator (participant)

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

Steve Bindas (Director of Investor Relations)

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

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

Mark Rourke (CEO)

Thank you, Steve, and good morning, everyone, and thank you for joining the Schneider call today. We recognize as we sit here on April 30, amid these unprecedented times, that the results in the first quarter are perhaps a bit less instructive than normal. Our approach today will balance Q1 commentary while flexing a bit from normal protocols to provide visibility into the impacts of the health crisis, both from a humanitarian and a business implication standpoint in the current period. Schneider has approximately 19,000 associates and owner-operators across the globe, and nearly four out of five of these great individuals fill essential roles, roles that must report to work daily to fulfill our promises to our customers. They are drivers, owner-operators, shop, warehouse, and driver services personnel, and in short, they've been outstanding in their commitment to keep the nation's goods moving.

We recognize and thank them for their professionalism and commitment. Since the onset of the COVID-19 health crisis, we've had 26 associates who have experienced a confirmed diagnosis. Another 200+ associates have been tested and instructed to quarantine by a health professional due to a potential exposure. The company has responded with emergency paid time off support, and in the more advanced cases, provided additional benefit support assistance so they could fully focus on their recovery. The efforts are all consistent with best health practices. Today, with some new tools and processes, the business continues to operate very effectively. In my view, these experiences will certainly drive lasting change in where and how work is structured and executed that will ultimately benefit the, the business, our associates, and our customer base.

While the impacts of COVID-19 on our daily work lives are pronounced, it's also proving to be another demonstration of our company's resolve and adaptability. We entered this condition operating from a position of strength, financially strong, a strong and diverse customer base, and a purposefully constructed portfolio of services. These advantages enable us to play the long game and take a balanced approach that includes prudent elements of defense and the near-term actions regarding cost and cash flows, while positioning the company on the offensive for an economic and freight recovery. As part of the lasting change on how work is accomplished, we've continued our investments in AI-driven automation, and we've advanced those efforts through the first quarter.

For instance, in our for-hire truckload business, 80% of orders now go through an AI-driven enrichment process, where the Quest platform completes missing or incorrect data elements from the customer tender so that it can pass through our algorithm for an acceptance or rejection decision. If accepted, the order is automatically created in the system, making the entire process touchless. This enables our people to focus on higher customer value elements and will increasingly be a driver of productivity into our business. Another example is intermodal. We're in the early stages of implementation of company dray fleet dispatch automation. The Quest platform takes in the rail grounding data, balances the order appointment process by company dray availability, and then automatically dispatches the dray driver through an optimization algorithm, and the dray dispatch is executed in a touchless fashion. In April, we will surpass 30% automated company dray dispatch.

In addition, we've improved our variable cost position through improving our performance in areas of safe operations, driver recruiting mix, fuel efficiency gains, and equipment maintenance efficiencies, many of which we consider to be sustainable variable margin gains. We believe that we are at the height of the crisis-driven business impacts. Across the enterprise, I think it's helpful to look at our book of business through the lens of end market served.... As companies began to act against the non-essential business designations around the middle of March, a segment of our customer base, predominantly in the retail and industrial verticals, was impacted. For instance, in various dedicated operations, we had roughly 445 drivers impacted due to customer temporary shutdowns.

We expect this situation to continue to improve throughout the second quarter, and we have worked with our customers in a fashion consistent with the integrated and strategic nature of the relationship to balance the needs of both organizations in these unprecedented times. We expect most all operations to restart once the broad shelter-in-place restrictions begin to lift, but at various levels of ramp-up velocity. In keeping with the whole Dedicated theme, one of the many disappointing fallouts of the current environment is how our Dedicated planned new business startup activity has slowed due to customer distraction, and certainly understandable. We have over 200 units in startup holding pattern that should break loose once the restrictions begin to lift and business normalizes again.

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

The impact is more pronounced in the network for-hire portion of our business. That's a function of approximately 300 fewer trucks and lower demand levels than a year ago, April. Let's move on to intermodal. Year-over-year order growth in the first quarter was 3.2%, with a large mix change due to the competitive condition in the West and impact of port activity with the extended Asia export market closures. We enjoyed order growth of 20+% year-over-year in the combination of the East and Mexican portion of the network, offset by an 8% order shrinking year-over-year in the quarter in the Western regional and transcon combination.

The higher rail expense and dray costs as a percent of revenue, due in part to this mix change, contributed in part to 160 basis point margin erosion year-over-year in the quarter. As we now look to where we are in the month of April, the intermodal segment is being negatively impacted by the Asian import air pocket, limiting volume through the ports, combined with a higher mix of non-essential retail than we enjoy in our truckload segment. Therefore, our intermodal daily tender volumes, as compared to a year ago in April, are currently down in the upper-teen percentages.

We are disposing of containers that have reached end of life without replacing them in the short term, so we expect to have roughly 1,000 less containers in service at the end of Q2 of 2020 as compared to the end of Q2 of 2019. Finally, our brokerage business continues its growth trend with volume growth in the high single digits in the first quarter. The volumes were certainly helped by consumer restocking behavior in March in support of larger shipper needs, with some margin offset with the tightening capacity situation. Before we get to your questions, I want to turn it over to Steve to provide some additional insight into our going forward actions to position the company favorably for a recovery in economic activity and freight demand.

Steve Bruffett (EVP and CFO)

Thanks, and good morning, everyone. As Mark noted at the beginning of his comments, we are adapting our approach for this call to focus primarily on the current state of the business, and we'll speak only briefly to our first quarter results. So I'll begin with an overview of the framework we're utilizing as we move through this virus event. I'll reiterate Mark's comments that it's truly a strategic asset to be able to address this situation from a strong position, not just financially, but organizationally with the Schneider culture, a diverse customer base, a balanced portfolio of services, and robust decision support tools. While no one knows exactly how this will play out, we are utilizing a base case assumption that the brunt of the negative impact from lower freight volumes will be borne in the second quarter.

Mark described elements of the downward slope we experienced during April, and we are expecting second quarter volumes to remain depressed, as it will likely take some time for various industries and regions of the country to pass through the necessary stages to reopen and/or regain scale in their operations. Beyond the second quarter, we are looking for a steady pickup in freight volumes throughout the third and fourth quarters, although we expect the second half upslope to be more gradual than the abrupt April downslope. So our emphasis is on balancing near-term pressures with midterm opportunities. To partially address near-term pressures, we've implemented several cost initiatives. We've implemented a hiring freeze for non-driver positions, deferred annual merit increases, pursued targeted furloughs, and reduced work hours in volume-related areas of the company.

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

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

The next item relates to interest income. While there was not a large impact on our first quarter, interest income, we expect that the remaining quarters of 2020 will be affected by the abrupt decline in short-term interest rates. We now anticipate lower interest income of about $1.5 million per quarter for your EPS modeling purposes. Looking ahead and given the circumstances, we've made the decision to suspend full-year earnings guidance. It's our intention to resume this guidance as soon as it's practical to do so. Regarding net capital expenditures, we have made several adjustments. We are maintaining steady investments in replacement equipment to maintain our desired fleet age, but have removed most of the budgeted growth capital. In addition, we have deferred some discretionary projects, which are mostly property-related.

On the other hand, we're accelerating our investments in technology, particularly in decision science and automation. The net effect of these actions is a revised full year 2020 guidance number of $260 million, down from our initial guide of $310 million. With that, I'll turn it back to Mark for closing comments.

Mark Rourke (CEO)

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

Operator, we will now open the call for questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue, and for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Jason Seidl with Cowen and Company. Please proceed. Jason, your line is live.

Jason Seidl (Managing Director)

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

Mark Rourke (CEO)

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

Jason Seidl (Managing Director)

I'm

Mark Rourke (CEO)

Behavior-

Jason Seidl (Managing Director)

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

Mark Rourke (CEO)

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

Jason Seidl (Managing Director)

... the renewal side?

Mark Rourke (CEO)

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

Jason Seidl (Managing Director)

Right. And in terms of the rates that you're getting, could you give us a little bit of color on those?

Mark Rourke (CEO)

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

Jason Seidl (Managing Director)

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

Mark Rourke (CEO)

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

Jason Seidl (Managing Director)

Okay. Appreciate the color, appreciate the time. Everyone, be safe out there.

Mark Rourke (CEO)

Thanks.

Operator (participant)

Our next question is from Jack Atkins with Stephens. Please proceed.

Jack Atkins (Managing Director and Senior Research Analyst)

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

Mark Rourke (CEO)

Morning.

Jack Atkins (Managing Director and Senior Research Analyst)

So, Mark, I guess maybe if we could just kind of go back to the nearer-term demand trends for, for a moment before I ask a longer-term follow-up question. But, you know, is, is there a way to maybe talk for a moment about... And, and first of all, thank you very much for providing some insight into sort of how you expect the rest of the year to go. I, I know there are a lot of moving pieces, but I know we all really appreciate that. But, you know, as you think about what you're seeing in April, could you, could you maybe kind of talk for a moment about, you know, how the demand trends on the, on the truck side break down between, you know, more of your standard equipment type versus your specialty equipment?

I know you guys aren't breaking it out quite like that anymore from a reporting perspective, but maybe just kind of generally, how the different types of assets are faring, you know, here in April, and how you think the recovery process is going to go for those as we look out over the next several months?

Mark Rourke (CEO)

Sure. I'll maybe start with just reiterating what we covered on the dedicated side. We had about 445 of our assets that got caught up in phase. And most, while we're starting to see some come back, that is still ahead of us yet. So we really, of the non-essential to be more consistent with how states are determining when they get normal business climate. So until the middle of May to the end of May do we start to see some of that. And what we've been able to do, for the most part, is redeploy to some shippers have been very accommodating, understanding the conditions, and have worked into the network if... So that's, so that's on. You know, we do believe that, as we mentioned, the second quarter will be the trough.

You know, we're looking and trying to understand where that will be. There are some more positive signs that our customers are starting to communicate on some of their plans of volume and starting to get back to more normal cadence. But we expect April, and we expect May, in part, to see some more recovery as we get into June. And I think that's consistent across really all our segments, Jack.

Jack Atkins (Managing Director and Senior Research Analyst)

Good. So there's not really a difference in sort of how the specialty equipment is performing relative to more of the standard van equipment?

Mark Rourke (CEO)

Well, the dedicated specialty has been more consistent. And now, where we've seen the erosion would be in some certain industrial markets and certain non-essential retail, and our specialty kind of got spared into that, that's still operating fairly effectively or fairly, fairly normally.

Jack Atkins (Managing Director and Senior Research Analyst)

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

Steve Bruffett (EVP and CFO)

... Yeah, Jack, this is Steve. I'll take that one. And, I think it's safe to say that over the last couple of months, that we've redirected all of our internal resources to be fully focused on the mission at hand. So, any such M&A screening activities have kind of been put on pause.

Now that we are gaining a sense of footing and things are moving along a path that we somewhat anticipated starting in mid-March, as we started trying to imagine what this might look like, some of those efforts and are certainly interested in these to deploy capital, and we'll resume those act- It takes two parties to engage in, and so there's that dynamic about when someone might be willing to sell and why, and so on, and what would fit what we're looking for. But so that's just some context, but yes, we would be we remain interested in that pursuit as long as it-

Jack Atkins (Managing Director and Senior Research Analyst)

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

Mark Rourke (CEO)

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

Jack Atkins (Managing Director and Senior Research Analyst)

Okay. Thank you.

Mark Rourke (CEO)

Thanks.

Operator (participant)

Our next question is from Ravi Shanker with Morgan Stanley. Please proceed.

Ravi Shanker (Managing Director)

Thank you. Morning, gentlemen. Of the extent of the disruption so far, if your customers are still up and running, your exposure to staples versus, industrial end markets, and also essential versus non-essential?

Mark Rourke (CEO)

Yeah, Ravi, I'll give you some perspective there, and I'll give you how we really think about that is, as we define essential, it would be the things that you would expect, food and beverage, consumer products, essential retails, certain paper verticals, i.e., packaging and home improvement. And if you look at that consistently across our book of business, the dedicated numbers I gave you pretty much define that. That's in the upper 80s that we would consider that to be in essential services. Our remaining truck business is about 81%-82% into those categories, and our least concentrated around essential happens to be intermodal. And if you think about what is generally imported, not food and beverage type products, it's apparel and other kind of general merchandise through retail channels, and so it's in the low 60s.

So mid-80s

Ravi Shanker (Managing Director)

Got it.

Mark Rourke (CEO)

Low 80s for our network business on the truck side, and low 60s for our Intermodal network business.

Ravi Shanker (Managing Director)

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

Mark Rourke (CEO)

Yeah, I, you know, the top 70 or 80 customers in our truck and intermodal business make up the vast, vast majority of our mix, and then the logistics customers that make that up, Ravi. So, I guess if they're shipping with us, we those percentages, I think, are pretty close.

Ravi Shanker (Managing Director)

Got it. Understood. Mark, your comments at the top of the call on the algorithms and the touchless operations are pretty interesting. I mean, is this event, again, never waste a good crisis, right? So is this the power of some of the place, and kind of what does the number of transactions per employee truck look like in five years' time, if you can really leverage those kind of systems?

Mark Rourke (CEO)

What we think the opportunity is, and so we've been very proud of the whole organization and, in fact, we accelerated through this the automation activity, not only in our implementation schedule, with us to advance our investments within the calendar year because of the potential. And so, I am high without having to have near the same investment that we used to have relative to the G&A side of the house. So it's not necessarily looking to cut this. How do we grow our business at a much lower internal cost point to do so? And the tools and the platform on this kind of second Quest, if you will, our full investment here has been very, very encouraging.

And from the original vision of taking all of the inputs of data and assembling in such a way that we can help our people, the needs of the customer, the business, and perhaps the driver associate, to now modeling to, to say, we don't need to just put the information, we can have the system largely make those decisions, and so that we can get our people focused on additional sales activity, additional penetration of the customer book. Things are of much higher value than the transactional part of the business. And so, and I think going through this massive disruption here and going, maybe out of a bit of necessity, we turn those things on faster, and we've been very pleased with the outcome.

Ravi Shanker (Managing Director)

Very good. Thank you.

Operator (participant)

Our next question,[audio distortion]. Please proceed.

Scott Group (Managing Director and Senior Analyst)

... Hey, thanks. Morning, guys. So I just want a couple on the trucking side, can you break down the decline between utilization, if you have it, over the road versus dedicated? I think there was a comment about brokerage net rev, if you have some color there. And then on intermodal or whatever you said, is that getting progressively worse as the month is going?

Steve Bruffett (EVP and CFO)

Start at the tail end of that question. I guess with the intermodal volumes, what we were trying to express is that we did, both with truck and intermodal, experience a decline through the first part of the month, declining in late March, say mid-April, and then plateaued, and we're starting to see some rebuilding of exit the month here. And on the truck side, we saw a several-week decline fairly rapidly in the truck business, and then a stabilization as we finish the month here. There were. I'm not sure I absorbed.

Scott Group (Managing Director and Senior Analyst)

The brokerage net revenue comment, just some color there, and then if you have thoughts on utilization versus fleet on the trucking side.

Steve Bruffett (EVP and CFO)

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

Mark Rourke (CEO)

Utility, it's got a little less utility on the network side and a little more positive utility on the Dedicated side. But the net of all of that in the first quarter was positive. And if we had consistent with the load volume drop, we've had some drop relative to utility in the month of April, but we think we'll—that will improve out.

Scott Group (Managing Director and Senior Analyst)

Okay, that's helpful. And then just lastly, maybe Steve, any thoughts on how to think about in the near term here?

Steve Bruffett (EVP and CFO)

Yeah, the incremental margin one's an interesting one because we typically refer to those things where all else is held equal except for volume, you know, and we're in a price and mix all at the same time, so it kind of threw a bit. At the same time, we're trying to be as it's prudent to do so with the cost structure. You know, a little harder to answer the question on the downside, especially when things happen abruptly. That's another dimension to this. It's normally you're referring to a flow through seasonality where things moving down. This is a little different when things take a step function down. So we do anticipate [inaudible], but then well positioned to begin improving after that.

Operator (participant)

Ben Hartford with Baird, please proceed.

Ben Hartford (Senior Research Analyst)

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

Steve Bruffett (EVP and CFO)

Yeah, I think from a macro standpoint, we'll put some stress on incremental or marginal capacity. For us, haven't seen a large impact to date with our working capital. However, you know, I think the second quarter will be the dynamic. There have been a series related to earlier of a subset of our customer group wanting to talk about their payment, other payment-related matters. And so we're taking a look at those in a reasoned manner and understanding the situation, but at the same time, you know, the vast majority order and

Ben Hartford (Senior Research Analyst)

holds in terms of the improvement in the back half of the year sequentially, how quickly do you think you'll be to add incremental CAPEX on the upside?

Steve Bruffett (EVP and CFO)

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

... those will more than offset any degradation of our working capital condition in the year. So we do anticipate free cash flow generation, and, we're looking to deploy that.

Mark Rourke (CEO)

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

Ben Hartford (Senior Research Analyst)

Helpful. Thank you.

Operator (participant)

Our next question is from Brian Ossenbeck with JPMorgan. Please proceed.

Brian Ossenbeck (Managing Director and Senior Equity Research Analyst)

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

Mark Rourke (CEO)

Yeah, Brian, I think that is the real trick, is how do we be mindful of the short term kind of condition, with being very mindful of how we can take advantage of all our strengths coming out the backside of this. And so, we're very much meaning to keep our scale through this. It's one of our advantages that we have, is our scale. And so, could we be down a bit on the network side, depending upon if this extends a slower period for a longer period of time? Perhaps.

But our focus is really to the best we can maintain our scale through this, particularly if we get some positive signs here over the next several weeks, that it looks like June recovery as kind of our thought process presently, that would be kind of our going-in thesis: let's keep our scale the best we can and be ready for the recovery. And our flexibility to take advantage of that is first and top of mind. You know, on the intermodal side, you know, we certainly have dislocation just because it's such a network business of pitch and catch between your containers.

And when the West has gone through kind of the import shrink to the degree it has, and we've grown a lot in the East and Mexico and some other locations, we just had, in the short term here, some dislocation, more empty repositioning costs, and those items that, you know, impact our ability in the short term. But we think we could quickly recover that relative to our demand picture to get back onto our normal flow. So we really do think this is a short-term, second quarter type impact, even in the Intermodal business.

Brian Ossenbeck (Managing Director and Senior Equity Research Analyst)

Okay, got it. A follow-up on the intermodal side. You're talking more about this rail dray product, which is surging, as I'm assuming it's off a pretty low level. But if you can give some context as to who's that for, how much capacity you have to offer that, and, you know, what's sort of the business case for Schneider to offer that in terms of margin and return?

Mark Rourke (CEO)

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

Brian Ossenbeck (Managing Director and Senior Equity Research Analyst)

Okay, got it. All right. Thank you for your time.

Operator (participant)

Our next question is from Ken Hoexter with Bank of America. Please proceed.

Ken Hoexter (Managing Director and Senior Research Analyst)

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

Mark Rourke (CEO)

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

And then the other question was around the spot, I believe. Yeah, we haven't gone up. We are a mid-single digit spot player. We might be up 100 basis points, 150 basis points from our normal, cadence there. So we are still largely, across really everything that we do in the asset side of the world, still, maintaining our integrity relative to the contract mix.

Ken Hoexter (Managing Director and Senior Research Analyst)

Yeah. And is that the mid-single digits on total revenues or just on the trucking side?

Mark Rourke (CEO)

That would be on our,

Steve Bruffett (EVP and CFO)

In truck.

Mark Rourke (CEO)

Yeah, I guess actually, probably within network.

Steve Bruffett (EVP and CFO)

Right.

Mark Rourke (CEO)

Or, excuse me, our for-hire side of the business. Yep.

Ken Hoexter (Managing Director and Senior Research Analyst)

Just on the for-hire side. Okay.

Mark Rourke (CEO)

Yes.

Ken Hoexter (Managing Director and Senior Research Analyst)

The CAPEX, given your changing targets here, can you talk about the timing of trucks, given what's going on with the OEMs and what your view is on capacity? Is that just replacement capital, or what do you see for the fleet?

Steve Bruffett (EVP and CFO)

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

Ken Hoexter (Managing Director and Senior Research Analyst)

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

Steve Bruffett (EVP and CFO)

If anything, it's increased a little bit. It's such a predominant part of the logistics segment brokerages that the statistic stopped having much meaning. So, yes.

Ken Hoexter (Managing Director and Senior Research Analyst)

Okay. Yeah, it was just clarification. Appreciate that.

Steve Bruffett (EVP and CFO)

All right.

Ken Hoexter (Managing Director and Senior Research Analyst)

Thanks for the thoughts.

Mark Rourke (CEO)

Yeah. Appreciate it.

Operator (participant)

Our next question is from Thomas Wadewitz with UBS. Please proceed.

Thomas Wadewitz (Managing Director and Senior Equity Research Analyst)

Yeah, good morning. Wanted to ask you, Mark, about your thoughts on how this would impact competitive dynamic in brokerage and truckload in terms of, you know, it seems that there's some logic that would say, you know, the big guys or the high quality big guys, to be more precise, could gain benefit as, you know, work from home may be difficult, value of technology skill would be maybe accentuated, you know, financial strength, strength, things like that. So do you think that kind of is that a real benefit that could persist and help you out, or, you know, in terms of share gain in brokerage and truck, or is that something that's pretty incremental and pretty temporary?

Mark Rourke (CEO)

Well, Tom, I think there are many forces at play, and you mentioned several of them. I think the technology play is becoming more and more critical across all platforms of our portfolio, not just in the brokerage space. You know, I think about the hardening of the P&C, that that has really across the, really all of the platforms, liquidity. We always see drivers fleeing to quality in times of difficulty. That is playing out very strongly. You know, there's some other things that can help. Low fuel costs can help, perhaps. Maybe lenders not wanting equipment back could help in the short term, so there could be some other offsets to that.

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

Thomas Wadewitz (Managing Director and Senior Equity Research Analyst)

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

Mark Rourke (CEO)

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

I think that plays well to the large shipper, and I think it plays well to the large carrier.

Thomas Wadewitz (Managing Director and Senior Equity Research Analyst)

Okay, great. Just, one follow-up question for you. You know, it's a little tricky to tell, you, you know, first quarter, and obviously second quarter is quite a bit different, but you saw, a lot of load growth in intermodal in the East... And that seems in kind of contrast to the idea of, you know, weak truck market, you know, intermodal is more vulnerable, tougher to, you know, kind of grow in intermodal, and that would be particularly true in the shorter haul market in the East. Are you optimistic that you can, you know, kind of grow well in the East, even as the truck market, you know, looking to second half, not second quarter, obviously. But do you think the East is still a good opportunity, for intermodal growth?

Or do you think they maybe have to, you know, wait a bit longer, look out a year or two, just given how much capacity there is in truck?

Mark Rourke (CEO)

Well, I make this comment not as a replacement to the West or the transcon that we certainly are looking forward to the bounce back of, but we don't believe we're at our caps or at our ability, and we have a number of interesting things in late stage pipeline that would suggest we still have legs in the East. And it helps when our provider is performing as strong as they are performing. But there is still we can demonstrate a value proposition to our customer community, and even easier done when we're performing from a reliability on par with truck. And so, Tom, it's not our entire focus.

You know, we're excited about the nearshoring things that can come back and make Mexico even a bigger strategic play into the future, and certainly looking forward to the more normal import patterns as well. But yeah, we're not discouraged that we're at the upper limits of what we're capable of in the East.

Thomas Wadewitz (Managing Director and Senior Equity Research Analyst)

Even against the weak truck market?

Mark Rourke (CEO)

Yep, as demonstrated in the first quarter, yes.

Thomas Wadewitz (Managing Director and Senior Equity Research Analyst)

Yeah, sure. Okay, great. Thank you for the time. I appreciate it.

Operator (participant)

Our next question is from David Ross with Stifel. Please proceed.

David Ross (Managing Director and Equity Analyst)

Yes, good morning, gentlemen.

Mark Rourke (CEO)

David.

David Ross (Managing Director and Equity Analyst)

Mark, this one. Just wanted to circle back on the truckload volume comments in April, because there has been some decline in the fleet. So wanted to know of that high single digit decline, what's attributed to lower miles per tractor, and which is, how much is contributed to lower number of tractors?

Mark Rourke (CEO)

That's into the network side of the business, David? That was the question, the for-hire side?

David Ross (Managing Director and Equity Analyst)

Yes.

Mark Rourke (CEO)

Well, I mean, how you frame that?

David Ross (Managing Director and Equity Analyst)

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

Mark Rourke (CEO)

Yeah

David Ross (Managing Director and Equity Analyst)

- because I figured that was where it was more volatile.

Mark Rourke (CEO)

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

David Ross (Managing Director and Equity Analyst)

If dedicated is down low to mid-single, then for hire would be down double digits on the volume side?

Steve Bruffett (EVP and CFO)

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

David Ross (Managing Director and Equity Analyst)

Okay. The for-hire fleet was mostly down year-over-year due to the First to Final Mile exit-

Mark Rourke (CEO)

Correct

David Ross (Managing Director and Equity Analyst)

- which I'm certainly glad you guys aren't in right now, but also down 3% sequentially. Why the sequential drop, and how do you see that for the balance of 2020?

Mark Rourke (CEO)

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

David Ross (Managing Director and Equity Analyst)

Last question, just on fleet age. You know, Steve, where does the tractor fleet stand right now? Are you keeping a normal replacement schedule this year?

Steve Bruffett (EVP and CFO)

Yeah, we are. We're even with the pruning of the CAPEX, we would maintain or at most age our fleet by a month, and we're within a month or so of our target fleet age to begin with. So that's one of the benefits of being able to steadily invest through good times and tough times is that dynamic. So we're very close to where we want to be with fleet age.

David Ross (Managing Director and Equity Analyst)

At around two years?

Steve Bruffett (EVP and CFO)

We're running-

Mark Rourke (CEO)

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

Steve Bruffett (EVP and CFO)

Intermodal, dray fleet, they all have their own configurations, but all of them, we keep our-

David Ross (Managing Director and Equity Analyst)

Maybe the for-hire fleet, if you just want to, you know, pick that one because that's where it matters most, I would think, specialize in drayage or[inaudible].

Mark Rourke (CEO)

Yeah, we generally average about 2.5-3 years, depending upon where we are in the cycle on the sleeper unit, if that's, which is the predominant play in our or higher network.

David Ross (Managing Director and Equity Analyst)

That's helpful. Thank you.

Mark Rourke (CEO)

You bet.

Operator (participant)

Our next question is from Jordan Alliger with Goldman Sachs. Please proceed.

Jordan Alliger (Senior Equity Research Analyst)

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

Mark Rourke (CEO)

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

Jordan Alliger (Senior Equity Research Analyst)

Any thoughts more broadly on, you know, inventory levels that you're hearing as you talk to customers?

Mark Rourke (CEO)

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

Jordan Alliger (Senior Equity Research Analyst)

Hmm. Okay, thanks very much.

Operator (participant)

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.