Schneider National - Q2 2018
August 2, 2018
Transcript
Operator (participant)
Greetings and welcome to Schneider National 2018 Q2 earnings conference call. At this time, all participants will be in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Pat Costello, Director of Investor Relations. Please go ahead.
Pat Costello (Head of Investor Relations)
Thank you, operator. Good morning, everyone, and thank you for joining our call. By now, you should have received a copy of the earnings release for the company's Q2 2018 results. If you do not have a copy, one is available on our website. Joining me on the call today are Chris Lofgren, our Chief Executive Officer, Mark Rourke, our Chief Operating Officer, and Steve Bruffett, our new Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call, including our financial guidance, are forward-looking statements. These statements are subject to risks and uncertainties, including those described in the company's final filings with the SEC. Our actual results may differ materially from those described during the call.
In addition, any and all forward-looking statements are made as of today, and the company does not undertake to update any forward-looking statements based upon new circumstances or revised expectations. Also, non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release. Finally, this call is scheduled to go 60 minutes. After some introductory comments, we will answer as many questions as time will allow. Please limit yourself to one question and a related follow-up question if necessary. There are multiple people in the queue to ask questions, and we want to get to as many as we can. I would now like to turn the call over to our CEO, Chris Lofgren. Chris?
Chris Lofgren (CEO)
Thank you, Pat. Good morning. First, I want to welcome Steve Bruffett to his first earnings call with Schneider. Steve is no stranger to this process. We are delighted to have him part of our team, and I know many of you are familiar with him from his past CFO roles. We performed pretty much to our expectations in the Q2 Our portfolio of services, all at scale, were able to deliver 12% revenue growth, excluding fuel surcharge, in a market that was very tight relative to driver availability. Our lighter asset intermodal and our non-asset logistics businesses led the way with growth of 17 and 30%, respectively.
While we saw overall enterprise truck count decline by almost 180 units Q1 to Q2, consistent with our comments in last quarter's call, we shifted growth CapEx into our intermodal business, growing truck count by 76 units quarter-over-quarter and adding nearly 1,500 containers and associated chassis, all to capitalize on appropriate growth opportunities recognizing these market dynamics. We have a deliberate strategy of managing the diversification of our customer portfolio and our freight network to position the company to resiliently perform through industry market cycles. This places emphasis on customer work to sustainably adjust contract rate structures. The current and foreseeable market allows us to reshape the for-hire network businesses, our dedicated contracts, to partake in the pricing upsides while positioning our book of business for the longer term.
As John Kennedy stated, "The time to fix the roof is when the sun is shining." I am pleased at the balanced approach taken by our sales and customer service professionals, working with our customers to address rate, needed rate increases and driver productivity while recognizing long-term relationships and partnerships. Mark will give more detail in his section of the call. We saw good margin improvement across all the segments in our enterprise, supported by the execution capabilities of our Quest platform. While we still have work ahead of us to move the First to Final Mile business to achieve the long-term targeted performance, we saw relative costs improve and the order volume growth consistent with the expectations we communicated to you during our last quarter's call. There's no shortage of focus or intensity as we move this business forward.
I'm pleased with the initiatives playing out across our business segments to enhance operating contribution per truck and operating contribution per load. As we assess the market, we are bullish on the pricing dynamics continuing through the H2 of 2018, and assuming there's no economic recession, expect strong fundamentals into 2019. As a result, we are raising our 2018 full-year guidance. Steve will provide more color on this in his portion of the call. It would be impossible not to recognize sentiments being expressed by the investors vis-à-vis the speculation as to where we sit within the market cycle. That said, we do not see cited metrics such as new truck orders or concerns from trade war escalation creeping their way into our realities of daily execution.
This is demonstrated by continuing record turndowns of freight in July, which is traditionally one of the two slowest months of the year. Combining this with the intensity of customer interactions to prepare for the surge of demand associated with the H2 of the calendar year, we remain bullish on industry performance. We will continue to execute in a disciplined manner, adding truck capacity in areas of our business that we can do so in an economically viable and sustainable way, leveraging our light and non-asset businesses to provide solutions to customers in a challenging capacity market, and capitalizing on our Quest platform to seek the highest yields and returns consistent with our strategy to operate in a resilient manner through all phases of the market cycle. With that, I will turn it over to Mark Rourke.
Mark Rourke (COO)
Thank you, Chris, and good morning, everyone. I'll offer a few summary comments about the quarter and then quickly transition into our three business segments. Overall, it was a busy and successful contractual rate renewal quarter. Through the Q2 year to date, we have renewed and updated rates on approximately 70% of the book of business in our largest truckload quadrant, the for-hire standard quadrant. A little over 80% of the intermodal segment book has been addressed year to date through the end of Q2. In the quarter, net price, and our definition of net price is change in price minus the change in driver-related expenses, continued its positive momentum for both our truckload and intermodal segments. Truckload net price improved 5% year-over-year, with the for-hire quadrants in both standard and special equipment leading the way at over 7% improvement.
Intermodal's net price gain for the quarter finished at 4%. Now, moving into truckload. The truckload segment, as Chris mentioned, had overall tractor count, which is a combination of company and owner-operator units, down slightly below 2% year-over-year and slightly over 2% when compared to Q1 of 2018. 60% of that sequential reductions was concentrated in a portion of our dedicated contract offering as we are reshaping the portfolio to allocate capital to the most attractive configurations from a driver experience and financial return standpoint. We expect to enjoy the benefits in the H2 of both additional dedicated contract price resets and a more margin-accretive business mix. The remaining sequential tractor reduction of approximately 100 units was in our for-hire standard quadrant as driver market challenges remain.
The standard equipment quadrants for for-hire and dedicated increased revenue per truck per week, excluding fuel surcharge revenues, 11% and 13% respectively year-over-year as compared to Q2 of 2017. The largest quadrant, truckload for hire, which we have over 6,000 tractors, yields improved 13% year-over-year as compared to Q2 of 2017, with productivities down slightly over 2%. In the dedicated standard quadrant, yields improved 10%, with productivity increasing another 3% year-over-year. You may have noted the one quadrant that contracted 7% excluding fuel surcharge year-over-year as compared to Q2 of 2017 in the revenue per truck metric, and that was our dedicated specialty quadrant. Dedicated customer fuel surcharge program changes resulted in more dollars being recognized in the fuel surcharge and less in the line haul rate as compared to prior periods. This represented close to half of the variance.
In addition, the quadrant's mix is changing as final mile delivery trucks are increasing in prominence at a lower revenue per truck per week than our Class 8 fleet. But we also have some underutilized capital here as we're working to add drivers to our middle mile operations in First to Final Mile. As noted in our Q2 earnings release, First to Final Mile results improved sequentially, leaving the multiple quarter effort on track, leaving the truckload segment excluding First to Final Mile with an 86.9 operating ratio in the Q2. Now, transitioning to Intermodal. We are really pleased with Intermodal segment performance in the quarter, achieving a record 86.5 operating ratio. The quarter was highlighted with nearly 7% growth in order volume and revenue per order increased nearly 10% in comparison to the same period in 2017, with that improvement a function of price appreciation.
H1 earnings performance now has passed full year 2017 performance. As Chris mentioned, we did take an additional 1,500 containers within the quarter and the corresponding number of chassis to support them. In fact, in early July, we crested the 20,000 container mark. We do estimate that we will take on an additional 2,000-2,500 containers in service in the Q3, well in time to support our fall peak growth objectives. Our professional company driver fleet continues to offer advantages to the business and the customer community. Our tractor count in the dray fleet grew 140 units over the same period last year and just over 75 units sequentially from Q1. As we've talked before, company dray execution serves as both a cost and service advantage to third-party alternatives, especially in this market condition.
In our fastest-growing segment, logistics, we grew earnings year-over-year by 57% as the brokerage offering within this segment is effectively adapting to the rising carrier costing environment as customer pricing adjustments, both in contract and spot arenas, are covering the higher capacity acquisition costs experienced throughout the quarter. Our mix continues to move higher into the spot arena, and the spot order percentage now is averaging in the mid-50% range. Finally, we continue to invest in robust decision support science enhancements to support the buy-sell transaction, combined with automation features that enable transactions to execute more efficiently in a carrier and shipper self-service configuration. Several hundred orders a day are now executing in that fashion, and our expectation is that number will continue to climb throughout the remainder of 2018. I'll turn it over to Steve to offer final comments on our opening.
Steve Bruffett (CFO)
Thank you, Mark, and good morning, everyone. I want to open by stating that it's great to be here as part of the Schneider team. I'm appreciative of the opportunity, and my first three months at the company have really been gratifying. The portfolio of services, the Quest platform, the strong balance sheet, all provide a foundation for profitable growth. And the outstanding people, this tied all together into a vibrant culture that's focused on both day-to-day execution and on the future. The benefits of the portfolio of services were evident in our Q2 results. Revenues, excluding fuel, were up 12% over the Q2 of last year. And that percentage reflected the mix of our reportable segments, which had revenue growth rates ranging from 5%-30%. Understanding our portfolio and its mix is paramount to assessing our consolidated results.
For example, if you look at the first line of expense on our income statement, purchased transportation expenses were up 25% over the Q2 of 2017. This may not seem intuitive at first glance, but the rate of increase reflected strong revenue growth in both our logistics and intermodal segments. The second line of expense is salaries, wages, and benefits, which were up only about 3% compared to the prior year. And again, this may not seem to make sense initially, but among other things, it reflected the timing of driver pay increases, which were more significant in 2017, and the ongoing capacity constraints in our truckload segment. So in total, our adjusted income from operations was up 44% compared to the Q2 of 2017, and the segment improvements ranged from 17% to 175%.
The resulting incremental margins at the enterprise level was 25%, and that was comprised of 35% at truckload, 58% at intermodal, and 6% at logistics, reflecting strong performance against the leverage that's available in the various business models. Also, our adjusted operating ratio was 91.2% in the Q2 of 2018, which was a 190 basis point improvement over the Q2 of 2017. Wrapping up the overview of the income statement, adjusted EPS per diluted share of 0.40 was up 74% over the Q2 of 2017. This represents the second most profitable quarter in our history, behind only the Q4 of 2017.
For the full year of 2018, we are increasing our guidance for adjusted diluted EPS to a range of $1.45-$1.55, the midpoint of which is an increase of $0.06 or approximately $15 million of pre-tax earnings from the midpoint of our prior guidance. Now, this guidance assumes a continuation of current economic conditions along with strong operational execution in a capacity-constrained environment. In addition, we anticipate continued growth in our intermodal and logistics segments. Moving now to cash flows, our year-to-date cash from operating activities was $255 million, up $28 million from the H1 of 2017. This increase was driven by higher net income and was partially offset by working capital associated with our revenue growth. Our year-to-date net CapEx of $110 million was below last year's amount of $147 million.
This variance was mostly due to the investments we made last year to convert the intermodal chassis fleet. This year, while we had originally anticipated incrementally higher CapEx in the H1 of 2018, we remained comfortable with our full year guidance of $325-$375 million. Financing activities so far this year used $54 million for the repayment of debt, dividend payments, and other items. Last year, financing activities provided $64 million in the H1 of the year, which included the net effect of the IPO proceeds and a portion of those proceeds being applied to debt reduction. The result of these activities was a cash and marketable securities balance of $373 million at June 30th, and that compares to $280 million at the end of the year.
We will continue to deploy capital to the parts of our business that offer the best return profiles while being cognizant of driver conditions. Our portfolio, coupled with our balance sheet, provides us with valuable optionality for capital allocation and the agility to adjust quickly. So with that, I will turn it over to the operator for your questions.
Operator (participant)
Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad and the confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In order to allow as many as possible to ask questions, we ask that you please ask one question and one related follow-up question. One moment while we pull for questions. Thank you. The first question comes from the line of Chris Wetherbee with Citi. Please proceed with your question.
Chris Wetherbee (VP)
Hey, thanks. Good morning, guys. Wanted to touch base on starting on the intermodal side. Obviously, strong performance there. And Steve, you mentioned the incremental margins, which were very solid. When you think about the fleet container, the container additions, you think about sort of the rate environment, can you give us a sense of sort of what you think the normalized sort of incrementals in this business? I don't think we're used to seeing the numbers quite as big as they've been coming through the last several quarters. Just want to get a sense of some of the puts and takes and what maybe we think about how we can think about that in the back half of the year.
Chris Lofgren (CEO)
Good morning, Chris. This is Chris. I'll take the front side of that and then give Mark and Steve an opportunity to jump in. Clearly, this business is performing very well. Again, the investments that we made in that private chassis pool have been helpful, not just in the ownership costs, but frankly, in terms of our ability to execute on the street and the experience that our drivers have relative to operating with and around the equipment. And so clearly, this business is performing well. It's made a lot of the structural changes that we were leaning into. And the Quest platform has certainly helped us in this environment in order to exercise choice very, very well around the network. There's some favorable winds just in the environment itself.
As for the addition of the containers, it is still a very, very tight box market in the intermodal business and frankly, also in the over-the-road business. So we feel pretty good about where that business is performing and should perform through the remainder here of the year, especially as we get into that high peak season. So where this thing goes long term, which I know you want to model, I think you can count on the fact that we have repositioned this business. We've got some really good competitors out there, but we've aligned the business with an ability to compete for the long term. So I'll give Mark or Steve an opportunity to chime in.
Mark Rourke (COO)
No, I think you covered it well, Chris. One addition, perhaps, is that certainly appreciation for our professional driver dray fleet. Really, the leverage of this business is how well you operate on the street and how efficient you are with utilizing the boxes and the ability to grow our company fleet in the environment and the value proposition that we can offer to the professional driver and their ability to perform the way they've done is also just a significant contributor to the improvement in this business.
Steve Bruffett (CFO)
This is Steve. Just a follow-on comment to that. We clearly have taken a step function in the operating performance of our intermodal segment, and that's good to see. And so as we continue through 2018, we would expect to see incremental margins that are generous, if you will, compared to 2017. Once we anniversary the step function we've taken, it'll be a more moderate pace. It's a function of price and growth and operating performance. But we're in a healthy place and feel like we're well positioned in the marketplace with that service offering.
Chris Wetherbee (VP)
Great. That was a helpful answer. I'll leave it there. Thank you.
Chris Lofgren (CEO)
Thank you, Chris.
Operator (participant)
The next question is from the line of Brad Delco with Stephens. Please proceed with your questions.
Brad Delco (Managing Director)
Chris, Mark, good morning.
Steve Bruffett (CFO)
Good morning.
Steve, welcome back.
Thanks. Good to hear your voice.
Brad Delco (Managing Director)
Maybe for Mark or Chris, and this is kind of a big picture question. Chris, you mentioned record turndowns in July. It seems consistent across a lot of these conference calls that July demand is good, and it is typically a weak month. How do you think big box retailers are planning for peak and for the surge? And to the extent you have visibility on any demand being pulled forward, just kind of entertaining that idea, anything you could provide or comment on that?
Chris Lofgren (CEO)
Well, clearly, as capacity tightens or there's a perception that it will tighten, all of the kind of the retail and consumer product side starts to think about how they want to manage and position inventory. So I've got to believe just in discussions that we're having, there's a recognition that clearly, this is a very tight capacity market in both the intermodal space and over the road. And so we don't get visibility into how they're thinking specifically, but I think July could be a byproduct of just a recognition of what the back half of the year should look like and essentially their need to be able to meet their revenue projections. This is the demanding thing about this industry is that everyone's going to work hard in the upcycle because that's just the environment and the opportunity. And we work hard in the down market.
So everyone's working hard now. On the shipper side, I think there is a real recognition, finally, that the investments weren't going to get made in terms of capacity until things were sustainable. I think there was discipline in the industry, and I think they'll continue to be disciplined. The other side of it is that we did have to move pay, and us as well as a lot of our competitors took those big bites as we were in 2017, and we'll have to continue to adjust accordingly. But the other side is just the general labor market and what's available to actually put to work. This, again, is where we think the portfolio of businesses that we've put in place helps us help our customers with some choices where you can look across the different asset intensity businesses and look for ways to help.
So I think getting back to the beginning of your question about what's happening with the big box retailers, there is no doubt they're aware of the situations. They're responding, and that's why we're, in many cases, very bullish on the second half of the year. Mark, I don't know if there's anything. Mark says no.
Brad Delco (Managing Director)
Maybe just to quickly kind of ask the follow-on, there seems to be challenges getting equipment or new trucks or trailers delivered in light of this tight environment. You feel pretty confident about your ability to take delivery of the 2,000 or 2,500 containers prior to peak?
Steve Bruffett (CFO)
Mark, why don't you respond to that?
Mark Rourke (COO)
Yeah. Certainly, part of our CapEx being a little heavier in the H2 versus the H1 is recognition of some of those supply chain challenges that the OEMs are experiencing. But we've been very planful as it relates to both the tractor capital, and we feel solid that our largely replacement there is in good shape. And the containers that we anticipated bringing in in the Q2 came in as we expected, and we've been thoughtful in planning with our key suppliers there. And we don't anticipate, at this juncture, any issues hitting that. That's why we ranged it at 2,000-2,500 predominantly into the Q3.
Brad Delco (Managing Director)
Great. Thanks, gentlemen, for the time.
Chris Lofgren (CEO)
Thank you.
Operator (participant)
The next question is from the line of Allison Landry with Credit Suisse. Please go ahead with your question.
Allison Landry (Director in the Research Division)
Thanks. Good morning. So I wanted to hear your thoughts on rail service trends. And maybe first, if you could tell us how the missed volume opportunities, if you saw any in Q2, how those may have compared to what you saw in the Q1. And then as we talk about what's shaping up to be a pretty good peak season, are you concerned that the congestion issues that some of the rails are having may worsen with more volumes being added to the networks? And really, I guess the question is, how big of a risk do you think this is to your H2 intermodal outlook?
Mark Rourke (COO)
Hi, Allison. It's Mark. Terrific question. Obviously, we're highly dependent upon the reliability of our two primary partners, one in the west and one in the east. As we have indicated, our eastern partner is performing much better and consistently. So what we're really looking for is consistency. We know that there'll be and we plan every year relative to expecting additional congestion, but so do they. We did experience periodic issues throughout the Q2. We had a series of derailments and other things that ultimately happen in this business that you have to deal with. That's why we believe the best answer to all of this is to be highly integrated with a partner in the west and highly integrated with a partner in the east so that you can foresee and have the ability to react and take priority when there are issues.
And so while we can't totally predict what the future lies in this regard, we believe that as we're thinking about our business and the boxes that we've committed that we're going to be in a position to utilize them, and we've been able to deal with any level of slowdown or disruptions or short-term issues, it just goes with the territory.
Allison Landry (Director in the Research Division)
Okay. And then as my follow-up question, when you think about, broadly speaking, the incremental margins on the business and what the model can deliver throughout a cycle, and in particular, in the upcycle, how do you think about what the upper band is, if you will, in terms of the contributions? And maybe for context, the 25% you saw in the Q2 do you think that the incrementals can and should go above that?
Steve Bruffett (CFO)
Allison, this is Steve. In terms of incremental margin, it's a bit of the same answer provided around the intermodal segment itself. As we're cycling through 2018 and the opportunity to compare to 2017, I think we'll continue to see really robust incremental margins at an enterprise level. And then once we get into 2019 and are comparing to a higher base, I mean, by all accounts, 2018 has been a very strong year to date. We anticipate that continuing. Then that incremental margin may come down and moderate a bit. But the important thing is that with the technology platform that we have, it helps you dial into those conditions. Say if the rate of economic growth slows down a little bit, we're still able to dial in on the best opportunities in the market within our largely contractual framework of opportunities that we have in front of us.
So feel good about the ability to continue to deliver on incremental margins.
Allison Landry (Director in the Research Division)
Okay. That's helpful. If I could just ask for a clarification, obviously, as you mentioned, intermodal is helping out right now in terms of the incrementals. But is there sort of a range we should think about on a longer-term basis, like 15%-20%, for example? How do you think about incrementals over a period of time?
Steve Bruffett (CFO)
Yeah. I'd be hesitant to just throw out a number on that because, as I tried to note in my opening comments, our enterprise results are a function of our mix, and we have different levers in different parts of our business. There's fewer incremental margins available in the logistics segment, for example, than there are in the truckload and intermodal segments. It depends on what's going on in the environment and what is going on in each of the modes.
Allison Landry (Director in the Research Division)
Okay. Fair enough. Thank you.
Chris Lofgren (CEO)
Thank you.
Operator (participant)
The next question is from the line of Ken Hoexter with Merrill Lynch. Please proceed with your questions.
Ken Hoexter (Managing Director)
Good morning. Great job on the quarter. Just wanted to visit, I guess, one of the segments in the truckload side. What happened in dedicated specialty? Was that a lost contract that you walked away from? Just trying to understand, as trucks decline sequentially, I think you also threw in the final mile. Was that an impact on operations within that segment? Thanks.
Mark Rourke (COO)
Sure, Ken. This is Mark. I'll start with that. Certainly, we have taken a look at our portfolio around a couple of lenses that we have assessed against. It's certainly the driver experience that we create by where we deploy our capital and then certainly how that capital deploys financially. There were a couple of locations, some of them that were fairly on the larger side relative to individual sites, locations that we felt we were better positioned to reallocate that capital to improve both those conditions, both for the driver and for the financial returns. So throughout the quarter, on those contracts that we felt we wanted to move to a different place, we've been executing against that. That's been really a strategic decision that we've made, working with our customer to do that in a professional and effective way.
That is largely behind what I described in my opening comments on the attrition of trucks in the short term, and we will be reallocating based upon more targeted business. Then I think the second question or second part of that is just in the revenue per truck. As our delivery units, the final-mile delivery units have a different revenue profile than a Class 8 truck. And has that become more prominent? It just changes the mix in that quadrant, and you see it reflected in the revenue per truck per week metric.
Ken Hoexter (Managing Director)
Great. Thanks for that, Mark. I guess if I can, like Allison, follow up on a margin question within that same concept but on the truckload side, is there a range, I guess, Steve, that you think the truckload should run at given where pricing runs? I mean, is this a business that can operate in the mid-80s? Can you go lower than that? Just looking at what some of your peers have done, just wondering how you think, given your mix of dedicated last mile and everything else within that, where do you think that business can operate in this pricing environment?
Chris Lofgren (CEO)
Ken, this is Chris. I will answer that probably not exactly the way you would like me to, but I'll try to give you some color, and I think you can get to where you're trying to get. One of the things is that I think here at Schneider, we understand how we're strategically running the business. We don't take lightly this statement that says creating a business that can be resilient through cycles. We have a very, very strong commitment to operating within the contractual space. Our business model is one where we just choose not to pursue a lot of spot opportunity, which clearly, in markets like this, give you great opportunities. There's no doubt about it, but creates some challenges when the market tends to flip.
And so when you look at some of our very, very prominent competitors and what happens in markets like this, I don't think you should expect us to get to that place. But what we will do is we will move the contract base that we think is sustainable through that cycle, and that's the work that we're doing. So as you look to try to say where are we going to land, I think that business is performing well. I think as we move the margin performance in our First to Final Mile where we need it to be, you'll see that be positive. I think that's one of the reasons we've tried to break out here in the last couple of quarters. The investment that we're making in First to Final Mile is to give you some visibility into how our overall truck business is performing.
And again, we also have this mix of dedicated contracts and network business. And that mix will change a little bit, and dedicated moves a little bit slower just because of the longer-term contract characteristics. I think Mark and his group have done a terrific job of working with customers where, essentially, we just think we can't get what the drivers and we deserve in those businesses and exit them and reposition that capital. And that tends to move over a little bit slower time period. And then in the for-hire business where we do have great opportunities to move the rate structure, but also in this environment to leverage the Quest system, the platform there to essentially choose well and to think about how to balance productivity for our assets.
So I wouldn't want you to walk away and think that we're going to move out there to some of the truck operating ratios that are being reported. But we think we're pretty darn competitive. We can do this at scale. And again, we can perform through the cycle. And so that's really our approach as we think about that. And hopefully, that's given you something to work with relative to that question.
Ken Hoexter (Managing Director)
Perfect. Thanks, Chris, Mark, and Steve. Appreciate the time.
Chris Lofgren (CEO)
Thank you.
Operator (participant)
The next question comes from the line of Ravi Shankar with Morgan Stanley. Please proceed with your question.
Ravi Shanker (Executive Director)
Thanks. Morning, everyone. So if I can just follow up on the last comments on the first and final mile, I mean, clearly, you guys have been talking about this as a multi-quarter turnaround for a while, but you did make some good traction this quarter. So just wanted to check kind of where you are with that turnaround and if you think that this is something that can kind of get back into the green this year, maybe even next quarter.
Mark Rourke (COO)
Hi, Ravi. This is Mark. Certainly, we've laid out a plan of improvement and investment to get there both from a technology and infrastructure and an execution standpoint that we feel we're on track to what we have laid out as identified in the Q2 results. We're really, in our mind, targeting 2019 as a consistent positive margin performance for the business, although, obviously, this business also has some of the peak characteristics that we see in some other parts of our transportation businesses. And so we would expect that we're going to continue to improve upon that as we've laid out but would hesitate to be overly committed to that getting into the black in the Q3.
Ravi Shanker (Executive Director)
Got it. Just to follow up to that and the tech investments, Mark, can you remind us where Quest is in terms of a company-wide rollout and in terms of the businesses that have already been on Quest for a while? Are there any new features or capabilities being added to the systems? I wanted to see kind of how much you're still investing in it.
Mark Rourke (COO)
Yeah. We don't consider ourselves ever done there, really, Ravi. We are making investments, particularly that continue to enhance the platform, particularly around decision support science and analytics to help us continue to refine how we assess our freight, how we assess our network. That really plays across all aspects of our business. What we're really trying to do is bring the one place that we don't yet have on the platform, which is our First to Final Mile business. We're continuing to develop and get that business caught up. But yeah, you'll see us continue to invest there and have set aside a plan over the next three years to continue to do that. In addition, looking at ways to have more automated features for how we execute the business, how our customers interact with us, how the carrier community interacts.
And we just think a great opportunity to continue to improve how we perform and improve the performance of our margin profile.
Chris Lofgren (CEO)
Ravi, this is Chris. Let me just follow up on Mark's comments in that we continue to you think you know what you're going to be able to do. And yet, once you get one version of the truth of just massive amounts of data organized in ways that you can search it, analyze it, and then put it into sophisticated models that let you be predictive and then, frankly, beyond just being predictive, prescriptive, and help people in the business make those decisions around what's the impact of operating contribution per truck and per load, it's just been terrific. And so we're going to continue to make those investments to add, in some cases, and be able to leverage external data sources against our internal data sources to continue to squeeze out those opportunities as we make decisions along our value chain. And so we're not done.
We talked about what inning we're in. I think what we're doing right now is we're starting the second game of the double-header in terms of those investments, and we're going to continue to do that.
Ravi Shanker (Executive Director)
Great. Thank you.
Operator (participant)
Our next question comes from the line of Brian Ossenbeck with JPMorgan. Please proceed with your questions.
Brian Ossenbeck (VP of the Equity Research Division)
Hey. Good morning. Thanks for taking my question.
Steve Bruffett (CFO)
Good morning, Brian.
Brian Ossenbeck (VP of the Equity Research Division)
CSX has mentioned that the next phase of their scheduled railroading plan is going to go heavily into intermodal, but they're going to take it a bit slower than what we saw right around this time last year. So just curious what you've heard so far. Are you planning for anything in particular? And basically, a year later, how have all the initial changes affected your network?
Mark Rourke (COO)
Yeah. This is Mark. As we stated early on in our experience with the precision railroad concept, we encourage everyone to have patience. I think that patience has been rewarded in both the execution and the performance of the railroad and certainly in our partnership with the CSX. We feel very good where we are. While we would expect that they'll continue to refine their service offering and perhaps refine their network, we also believe we'll be able to be in a position to respond to that effectively with the appropriate timelines that I think maybe you were referencing there that it was happening so fast, 48-hour turn times. I think they've come to realization that there's better ways to do that, and we are appreciative of their partnership to engage, get feedback, and then ultimately, they have to do what's in their best interest.
If they do what's in their best interest, we think that'll be in our best interest. And so from our view, just terrific progress. And we think that the future is very bright with the CSX.
Brian Ossenbeck (VP of the Equity Research Division)
Okay. Thanks, Mark. Just one quick follow-up back to the technology topic. It's small, but just wanted to ask about this $2.5 million investment in Platform Science. If there's anything else you can share on that or other areas that you're looking to invest in? You already went through a couple, but just wanted to see if there's anything in particular you could call out?
Chris Lofgren (CEO)
Sure. Let me just tell you, it probably relates to our philosophies around our willingness. If we cannot find something that is being provided in the market, then we want to be great adopters of those things. And when we can't find what we believe we need, then we are blessed with a technology group here that is very, very talented. And I think we have both a culture and a capacity to innovate ourselves. And in that case, there were some big challenges in some of the states relative to meal and rest break, not just paying overtime in a day or overtime in a pay period but having to pay overtime or pay a minimum wage for each hour that's worked. And there's some sophistication that is required to fundamentally perform within some of those states.
And we wanted to make sure that we didn't have to walk away from our pay-for-performance philosophy while being able to comply to, in some cases, very, very challenging requirements from a reporting and pay standpoint. So we used telematics in the truck to essentially create a mechanism to do that. And recognizing that others who are going to choose to operate are going to have to do the same thing, we just felt like, "Okay. How can we recoup that investment and have that get into the marketplace with us not trying to become a technology seller?" And so we partnered with Platform Science to transfer some intellectual property. And that was essentially the basis of it. And we want them to be very successful, and we hope that that works.
That was really what was behind that "investment" was a way to essentially recapture investments that we made, and we see the benefits operationally of today. Is that helpful for you, Brian?
Brian Ossenbeck (VP of the Equity Research Division)
Yeah. Thanks, Chris. It does help. And if you can just take a quick follow-up on that, would you ever see a movement towards maybe an activity-based payment for truck drivers instead of a rate per mile or some sort of hybrid? Just curious your thoughts on that if you're investing in more telematics and, in general, the industry is getting more and more data on the merge and time on the road and things of that nature.
Chris Lofgren (CEO)
Brian, today, we take a lot of those things into account. Sure, in some applications, there isn't even a mileage pay. It's just based on activities depending on kind of where you're working in the organization and the kind of work you're doing within that. So those are all the things that we do today, and we blend across that. So yes, that's where those things are used. And we think this technology that got developed allows us to do that and to expand on that.
Brian Ossenbeck (VP of the Equity Research Division)
All right, Chris. Thanks for all the details. Appreciate it.
Chris Lofgren (CEO)
Thank you.
Operator (participant)
The next question comes from Ben Hartford with Robert W. Baird & Co. Please proceed with your questions.
Ben Hartford (Senior Research Analyst)
Hey. Good morning, guys. Maybe some detail within the logistics segment and the brokerage volume growth of 19%. But Chris, in the context of the tightness of the market, your back half of the year outlook, and obviously, the strength of the spot market over the past year, it's been putting strain clearly among the shipping community. Just wondering if the growth that we saw this quarter from a volume side within logistics specific to brokerage was all spot or if there was evidence that your integrated model, Quest, was able to capture, share, grow the contractual business, and perhaps be sustainable as you look into 2019. So really, just a question around the more committed business and the growth in volume here during this year's bid season within logistics.
Chris Lofgren (CEO)
Let me start with an answer, and then Mark will finish it up, Ben. But again, it can be sort of a siren song in an environment like this with volume and things like that. But we've made some real progress on two fronts with the Quest platform in that business. One of them is just always making sure that people understand that what we're really looking for and how we want decisions made there is really kind of this net margin because you can see revenue growth at the top line, but what really matters to us is what's happening after you pay the purchased transportation. Because if that margin isn't big enough, then it can kind of be a seductive run to less performance.
So Mark and Erin have done a great job, I think, of making sure people understand let's not lose sight of how we're going to assess ourselves, which is operating contribution per load. We've put some tools in place that really help them do that, both kind of at that load level but also in the market level. I think that's why we've been able to see that. Now, clearly, a lot of pressure and a lot of volatility that goes on in that. The other thing that we're investing in over there and is being adopted well, as Mark talked about, was this whole area of how do we use automation in the form of machine learning in terms of self-service, all of these kinds of things. That's going to help us manage also the cost side of playing, particularly in a market like this.
I really feel like there's some really good things being done for that business and in that business that should help us be able to continue to grow this business at a good clip. With that setup, I'll let Mark kind of follow in behind.
Mark Rourke (COO)
Yeah. Specifically to the point of contract spot sustainability, Ben, we go to the customer why we have separate service offerings that have different dynamics. We do so on the sales function a very collaborative way. So the beauty of our portfolio is that most of our customers use all three elements of it to obviously varying degrees. In this environment, we've certainly used the leverage of our portfolio. So while our mix, just based upon the dynamics, has shifted a bit more towards the spot arena, we are also growing contract volumes in doing so through that leverage across the collaborative nature in the sales process. So I guess I would consider that an and, both contract and spot.
Steve Bruffett (CFO)
Okay. That's helpful. And then just as a quick follow-up, to follow up on your comment, Mark, in the prepared remarks, the net pricing growth in truckload and intermodal of 5% and 4%, do you expect the rate of that growth to accelerate in the back half of 2018 for each one of those segments or modes?
Mark Rourke (COO)
From the remainder of the year, obviously, that remains to be seen a little bit. But certainly, we're very bullish. We're not completely through the price, as I mentioned, where we are through the books. So we have some room to go there. But we'll probably also have some room to go on the pay front. So we'll always have to monitor and make sure that we're positioned favorably there. But I would expect that we're going to be improving upon the net price in the H2 of the year, but that'll be dependent upon the driver market most specifically.
Ben Hartford (Senior Research Analyst)
Thanks for the time.
Operator (participant)
Our next question is from the line of Scott Group with Wolfe Research. Please proceed with your questions.
Scott Group (Managing Director and Senior Analyst)
Hey. Thanks. Morning, guys.
Steve Bruffett (CFO)
Morning.
Scott Group (Managing Director and Senior Analyst)
Good morning.
So I wanted to ask, are you going to continue to reallocate trucks to intermodal? Is there any sort of target in terms of how big you want intermodal to be as a percentage of revenue, as a percentage of earnings? I guess I'm just sort of thinking, do you in any way start to contemplate any meaningful shift from truckload to intermodal similar to what Hunt did 10, 15 years ago?
Chris Lofgren (CEO)
Scott, this is Chris. I think that we have to. This is a different business than the over-the-road trucking business or the dedicated business. And I think that what we are planning to do is to kind of grow at or above the market as we can do so in sustainable ways. We've got some pretty significant competitors that are there that create things that we just have to be mindful of. So it's kind of a. We're not going to play a market share game here. We think this business is running really well that we can compete favorably. And we plan to do that. But you shouldn't expect us to wake up one day and say, "We're taking all these drivers out of our over-the-road business, and we're putting them into intermodal." I think we will grow that business as we can do so profitably and sustainably profitably.
There certainly is opportunities to do that. But I don't think you will see us shrink our over-the-road business and move that business onto intermodal.
Mark Rourke (COO)
With that being said, Scott, though, I would expect our intermodal and logistics businesses to, as a percent of enterprise, continue to grow and be more prominent if that's the question. And as it relates specifically to the reallocation of capital, there are and we do have performance in the Q2 that we did shift some of that capital and the driver capacity from underperforming places and specifically in the dedicated world into intermodal. And it was a win for the business. It was a win for the driver. And so around the margins, I think we'll continue to do those things. And I think intermodal and logistics will continue to be, on a percentage basis, more prominent.
Scott Group (Managing Director and Senior Analyst)
Okay. As I think about or trying to understand the sustainability of these margins, can you just remind us how your rail contracts work? Do your costs reset annually? Is it more multi-year? Anything coming up next year that we should be thinking about? I guess what I'm trying to understand is, is there a risk that you and others are getting high single-digit pricing this year? The rails are not. Do they come back to you next year and say, "Well, we want much bigger cost increases next year"?
Mark Rourke (COO)
Well, we're not at liberty to discuss our rail contracts, unfortunately. But there are mechanisms that are in play on how things work. And those are long-term in nature. And so there's nothing that we will put out there that, say, would be a difference in how we've been operating against those contracts. So those are again, unfortunately, Scott, I just can't get into the particulars of that.
Scott Group (Managing Director and Senior Analyst)
Maybe to ask it differently than, is there anything that we should be thinking about from a rail cost standpoint that would suggest that these margins are not sustainable?
Chris Lofgren (CEO)
Scott, I would say that the step-level change that you have seen us take in this business was driven by reshaping a cost component on ownership of chassis that was real. And it was significant that, in addition to that, we got execution capabilities that were derivative benefits, but significant derivative benefits in our business and with our driver force that is sustainable. There's all these kinds of things. So I would say this business made a step-level change in terms of its ability to execute. And where that lands, these are clearly very favorable pricing environment right now. It's difficult to see that that is going to change, barring a significant economic recession here that would change the demand profile.
And so I think you should not expect this business to return back to where it executed pre-IPO kinds of levels because through this timeframe and their ability to adopt the Quest platform and the decision science capabilities are real, and those are sustainable.
Scott Group (Managing Director and Senior Analyst)
Perfect. Thank you, guys. Appreciate the time.
Operator (participant)
The next question is from the line of David Ross with Stifel. Please proceed with your questions.
David Ross (Managing Director)
Yes. Thank you very much, gentlemen. Wanted to talk about the newer, I guess, exciting growth area of First to Final Mile. Can you elaborate a little bit more on the strategy, how you're building out that network? Are you doing it on a regional basis? Is it a combination of dedicated and for-hire? And where that is in its evolution.
Mark Rourke (COO)
Sure. I'll take that. Our strategy is, and specifically, as noted in the name, is that we think we can capture more of the value chain by focusing on the first through the final mile elements, both whether it comes through the ports or whether it comes through vendors. So our network, which is national in scale and predominantly centered around large population centers, that we can offer leverage on that First to Final Mile through that network, both as a breakbulk and then ultimately as a final mile consumer delivery launch point. Do so with a very consistent experience across our assets and our visibility through our technology, which eliminates all the handoffs and the black holes that exist so frequently in that first to the final mile supply chain that exists today. That's our predominant strategy.
And we continue to look for ways to be more efficient and effective across that supply chain. I kind of forget what the question was relative to the second part of that. Excuse me.
David Ross (Managing Director)
Right. Yeah. It was just about building out the strategy. Is there any change in, I guess, the fleet mix, whether it's vans or straight trucks?
Mark Rourke (COO)
You mentioned Dedicated. I apologize for that.
David Ross (Managing Director)
Yes.
Mark Rourke (COO)
Yeah. You mentioned dedicated. There's a combination of things that we do here that run through our facilities, may run through the customer facilities. The contracting can be both for a for-hire basis or for a dedicated solution set where you're not co-mingling with other customer freight. So it spans that spectrum. It's a combination of Class 8 and final mile straight trucks that can operate efficiently, effectively in residential areas. So it's a combination of contractual arrangements and equipment deployed against it.
David Ross (Managing Director)
Excellent. Thanks.
Mark Rourke (COO)
Thank you.
Operator (participant)
Thank you. Ladies and gentlemen, we have come to the end of our question-and-answer session for today and are out of time. But now, let's turn the call back over to Chris Lofgren for closing remarks.
Chris Lofgren (CEO)
I would just want to thank all of you for taking time to be with us this morning and the thoughtful questions. We will see you in about 13 weeks where we can do this all again. Wish everybody a great day. Thank you.
Operator (participant)
This will conclude today's teleconference. Thank you for your participation. You may now disconnect your lines at this time.
