Schneider National, Inc. Q4 FY2021 Earnings Call

Greetings and welcome to Schneider’s Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Bindas, Director of Investor Relations. Thank you. You may begin.

Thank you, operator and good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer; Steve Bruffett, Executive Vice President and Chief Financial Officer, and Jim Filter, Senior Vice President and GM of Intermodal and Chief Commercial 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?

Thank you, Steve and hello, everyone and thank you for joining the Schneider call this morning. I will open our dialog today with commentary on the performance of our segments in the fourth quarter and the solid momentum that we are taking into the new year in each of them. It has been a busy start to the New Year. The market in general remains challenged in terms of network fluidity and insufficient resource availability including professional drivers, warehouse, and maintenance technicians. At the same time, freight demand remained strong. Additionally, specifically to Schneider, we have added a dedicated focused trucking acquisition with Midwest Logistics Systems or MLS as we call it, and announced a 2023 strategic alignment change regarding our Western rail partner in our Intermodal offering. On that point, Jim Filter has joined us this morning in his role as General Manager of our Intermodal offering. Jim will offer additional strategic insight on that opportunity and what we expect in terms of growth for the business and in support of our valued customer community. We will then turn to Steve Bruffett for commentary on financial performance in the quarter and provide insight into 2022 full year earnings per share guidance and an update on our recently completed review of our long-term margin performance targets across our segments. Finally, Steve will provide insight into our 2022 net capital expenditure guidance. So as a result, you can expect our opening comments to consume more time than we normally do before getting on to your questions. Our enterprise delivered record earnings performance in the fourth quarter and the full year of $178 million and $534 million respectively. These results reflect our strategy to create a premier multi-modal transportation platform that enables us to aggregate demand and capacity in a way that provides all stakeholders with access, visibility, and insights to meet their supply chain needs. I am grateful to our talented and committed associate base who adapted to the broader market conditions throughout the year and leaned into the work necessary to achieve top-tier results in it. I'm also appreciative of our valued customer base. The integrated multi-modal approach increasingly enabled by our Schneider Freight Power Platform is resonating with the needs of our diversified customer community. In addition, customers have been highly supportive of addressing inflationary costs being introduced in the business in support of higher wages, equipment, and other variable cost categories. But we don't intend to guide on 2022 price performance; we do expect to continue to address inflationary costs through our 2022 renewals across our segments. Importantly, our strategic growth drivers of dedicated Intermodal and brokerage take a great deal of momentum into 2022. Dedicated grew organically from January to December last year by over 900 driver associates. The result of delivering great value to our existing customers and our new business development team bringing in dozens of new business wins. Combining our organic growth with our MLS acquisition, Dedicated is nearly 2,000 driver associates larger than a year ago. The new business pipeline in Dedicated remains robust and we have several hundred units of new business ahead of us in the new year and we're off to a strong start in the first quarter. Growth in Dedicated is partially in recognition of the preferences of the professional driver community and the type of work in the customer alignment that most they find most satisfying. The allocation of our people and our rolling assets have increasingly shifted from network to dedicated configurations. That said, we are working diligently on stabilizing the tractor count and our network configuration, as it offers great value to our customers and to our business as indicated by revenue per truck per week and network increasing 23% year-over-year in the fourth quarter. In Intermodal, the team overcame rail fluidity challenges and container turn delays at customer locations by effectively managing network yields, minimizing the use of higher-cost third-party dray resources by leveraging our highly productive company driver dray fleet and disciplined allocation of containers to where they could be turned most efficiently. Order count was down 3% year-over-year and revenue per order increased 20% over the same period. And as we discussed last quarter, we expected to overcome the supply chain issues from Asia to take delivery of additional containers by year-end. In fact, we netted up to 1,300 containers in the quarter, bringing our full-year container growth to 15% or a net of 3,300 containers for the year. Intermodal margin performance for full year 2021 finished at nearly 14%. Now, I'll bring in Jim to talk more about the strategic positioning of Intermodal for growth and our recent announcement. Jim?

Thanks, Mark. Good morning. I am glad to be here today to share more on our recent Intermodal news. As Mark indicated, we announced a plan to partner exclusively with Union Pacific to service our Intrawest and transcontinental Intermodal business as of January 1, 2023. This partnership aligns with our Intermodal growth strategy and our environmental goal to reduce carbon emissions. Our plan to double our Intermodal business by 2030 is rooted in both our expectation of increased market demand for environmentally friendly capacity and our goal to grow faster than the market by providing exceptional value for our customers. We have established a differentiated scaled Intermodal offering through our own containers and chassis coupled with our company driver dray model. This differentiated position will be accentuated through our partnership with the Union Pacific. Schneider will have the only asset-based UP, CSX Railroad solution increase in the number of destinations we serve with more direct connections for transcontinental freight. This will improve customer transfer times and increase driver efficiencies, especially in Chicago, which has been a traditional bottleneck in the North American Intermodal system. Schneider has the largest company driver dray fleet of any Intermodal carrier hauling freight on the Union Pacific and will be the only carrier with both company-owned containers and chassis. We believe the UP CSX combination and commitment to PSR pairs well with our asset-based execution. In summary, this combination creates a compelling and differentiated value proposition for our customers, which in turn delivers shareholder value. We are working diligently to ensure the transition is done in such a way that is as seamless as possible for our customers and our business. As I mentioned, we will be fully transitioned to the Union Pacific by January 1 of 2023. We are excited to work more closely with the Union Pacific and realize the opportunities our partnership creates to accelerate growth and long-term value for our customers and our enterprise. And with that, I'd like to turn the call back to Mark.

Thank you, Jim. And before I turn to Steve for his commentary on the financials and our outlook, I will finish up with the outstanding contributions of the third leg of our multimodal platform Logistics. For the first time in our history, Logistics finished the quarter as our largest segment as measured by revenue at $548 million, surpassing truckloads revenue of $524 million. Two notable achievements stand out to me in the quarter. Brokerage saw 23% order volume growth year-over-year and we have now crested 50,000 approved carriers. The 50,000 carrier number represents nearly a 40% year-over-year growth as Schneider Freight Power for carriers enabled us to more economically reach and digitally connect to the long tail of the small carrier community and that's been a segment of driver capacity that has historically been under-represented in our brokerage business. For the year, Logistics finished with $92 million of earnings, nearly double that of 2018, which was our prior most profitable year. While I'm pleased with our accomplishments in 2021, I'm even more encouraged by what's ahead. Now, I'll turn it over to Steve Bruffett.

Hey, great. Thanks, Mark. Thanks to each of you for joining us this morning. Our fourth quarter adjusted earnings represented not only record earnings, but the third consecutive quarter of record earnings. The complementary benefits of our multimodal platform are evident throughout 2021, as all segments posted meaningful year-over-year increases in earnings and in margins. In the fourth quarter, Intermodal and Logistics combined to represent more than half or 51% of segment earnings as compared to 42% in the fourth quarter of 2020. In addition, dedicated revenues comprised 44% of Truckload segment revenue versus 39% in the fourth quarter of the prior year. The purposeful reshaping of our portfolio is progressing and we're targeting further advancement in 2022. For the full year of 2021, adjusted earnings of $533 million were 77% higher than the prior year. In addition, revenues excluding fuel surcharge crested the $5 billion mark for the first time and reflected a 22% increase over 2020. Regarding the MLS acquisition that closed on December 31, we were pleased to find a quality company that aligned so well with our strategic criteria and our capital allocation disciplines. We look forward to pursuing profitable growth opportunities with the MLS team. The deal structure was all cash and the purchase price of $263 million represented an EBITDA multiple of approximately 6 times. As we have noted, MLS results will be reported as part of our dedicated operations beginning in the first quarter of 2022. Given the timing of the MLS closing, there was no impact on our 2021 income statement. However, our year-end balance sheet reflects the initial purchase accounting for the transaction and our statement of cash flows contains the payment for the acquisition. Moving now to our forward-looking information. Our initial guidance for 2022, adjusted diluted earnings is a range of $2.35 to $2.55 a share. This range is inclusive of MLS and the guidance is based on the momentum we have earned as we began the new year. This EPS range also assumes strong freight market conditions continuing throughout the year and at the same time, the guidance incorporates the well-documented inflationary cost pressures that are occurring in the transportation space. For further context to our guidance, we expect gains on asset sales to be similar to those achieved in 2021, although, there will likely be quarterly variations on a year-over-year basis. Also, our full year 2021 adjusted EPS of $2.29 contained $0.09 of benefit from our equity investments, while our 2022 guidance assumes none. Our 2022 guidance of $2.35 to $2.55 contains solid growth in quarter earnings above the strong levels achieved in 2021, and a portion of that growth is coming from MLS. Mark mentioned our review of long-term annual margin targets for our segments. So let me provide that update. For our Truckload segment, our prior target range was 11% to 13%. Upon reviewing the progress over the past couple of years plus the opportunities we see in front of us, we're moving the target range to 12% to 16%. This moves the midpoint upward by 200 basis points, which is significant given the nearly $2 billion revenue base. For the Intermodal segment, our prior target range was 10% to 12%. The updated range is 10% to 14%. So the midpoint increases by 100 basis points and the upper end increases by 200 basis points for this key component of our growth story. For the Logistics segment, we're leaving the target range at 4% to 6% as the approach is to consistently grow earnings dollars by growing top-line revenue while also investing in technology. These updated ranges are reflective of the progress we've made over the past couple of years and they provide an attractive return on the capital profile that goes hand in hand with our strategic shaping of the portfolio. Our guidance for 2022 net CapEx is approximately $450 million. Consistent with our capital allocation framework, the planned tractor investments will focus on further improvements to the fleet age and on growth in Dedicated. We also plan to invest in trailing equipment to support growth in Dedicated, Intermodal and our power-only offering. We intend to advance our investments in technology, both internally and externally, including our mastery partnership by focusing on our key themes of automation, digital capabilities, and simplification; all of this complements our rapidly growing Schneider Freight Power Platform. In closing, we carry a lot of positive and hard-earned momentum into 2022 and we will continue to deliver shareholder value with a constant focus on our strategy to profitably grow and further broaden our multimodal portfolio. So with that, we'll now open up the call for your questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. Our first question comes from the line of Jack Atkins with Stephens. Please proceed with your question.

Okay. Great. Good morning and congrats on a great quarter.

Good morning, Jack.

So I guess maybe this one is for Mark or Jim because it's about Intermodal. I guess, can you help us think about the balance of your Intermodal business today between East and West as it sort of stands today? And then maybe where you want that to go as you look out over the next couple of years with your new partnership with the UP? And I guess kind of more broadly, is this sort of strategic shift of rail partners, is that tied more to opportunities to take market share or is it more about improved economics on your current portfolio?

Well, great question, Jack, and I'll let Jim weigh in on some of your questions here as well. But as we've discussed, we've been very pleased with our growth in the East and the ability to convert effectively from over the road to our Intermodal product; it's really where we can get great leverage of our dray offering to compete really effectively. We have felt that we have been underrepresented in our growth profile in the West. And so, the strategic shift for us is really unlocking what we think is a great transcontinental connection point to unlock the growth potential that we think we have in front of us. And so we'll ultimately get, I think, to more balance in our growth between East and West, which has been, for the last several quarters, disproportional to the East.

Yeah. And Mark, I expect the way that we can get there is by leveraging these new strengths that we're creating because we'll have more toll lane choices, including more direct connections to the CSX. And then we're improving our differentiation; we will be the only private asset company with the UP, CSX connection, leveraging our largest company driver dray fleet, the only company with private chassis on the UP. You put all those together, we're creating more value for our customers, and that will unleash greater growth potential.

Okay. That's great to hear. And I guess maybe a follow-up there on Intermodal, if I could. There have been a couple of announcements around partnerships shifting from the BN to Union Pacific, both Knight and yourselves. Any concerns around potential service issues just given all the additional volume that will be going on to that network? And would you expect the UP to make some investments in their network to help improve velocity?

Yeah. We've shared our volumes with the UP and we're comfortable with their capital plans. As you add more volume onto that UP CSX direct lanes, we may actually see more lanes that have more direct connections. So we'll be improving the efficiency of those two rails.

Okay. That's great to hear. Thanks so much for the time.

Our next question comes from the line of Bascome Majors with Susquehanna. Please proceed with your question.

Yeah. Good morning and thanks for taking my questions. On the one-way bid season, could you give us an early read on how prevalent the mini bids and shorter duration contracts are versus how that was last year? And any thoughts on the competition, you're seeing or not seeing from non-asset brokerages in the contractual one-way bid season? Thank you.

Yeah. We're really early in the process there for the calendar year. I think I would characterize most of our discussions involve ensuring capacity coverage and customers working through perhaps a bit more direct discussions versus throwing everything into the bid discussion. I think we've learned over time that both the carrier and the shipper can benefit from working together on more long-term arrangements. So we're really early in the process, but we would expect a fruitful season getting through. Obviously, we're all dealing with inflationary costs through the supply chain and our customers are also highly engaged in solving those problems. But, Jim, any other comments commercially?

Yeah. We have not seen a change in the market conditions and specifically those revenue productive discussions with customers. They're seeking out multimodal solutions to create stability in their networks and what they are specifically looking for are providers that have the scale, so we have the scale within network dedicated, Power Only, Intermodal, and then our ability to integrate those service offerings to address their supply chain challenges.

I mean, to follow up on that, did the duration of your typical one-way contract shorten in any material way last year and has that stabilized or started to go out a bit?

No. We have not seen asking them to shorten. In fact, there are customers seeking to engage in some longer-term discussions.

Thank you very much.

Our next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Thanks. Good morning, gentlemen. I get that you're not giving us specific price guidance or color for 2022 in the trucking business, but if you can just characterize how you see conditions evolving through the year, kind of any potential differences between the first half and the second half, kind of any color would be really helpful. Thanks.

Yeah, Ravi. It is probably a little early for us to have a total feel for the full year. I will tell you we're carrying a lot of price momentum into the year contractually. And we have had incredible and appreciative support from our customers on the inflationary cost pressures that they're feeling across their supply chain and certainly as a provider to them that we're feeling, so I would consider the market constructive and supportive. And again, the demand and the supply issues are still prevalent. So we would expect that we're still going to have pretty favorable freight conditions for the full year, but again, that all has to play out.

Understood. And Steve, if I can sneak two follow-ups to you, sorry. The new IM targets, was that primarily driven by the UNP switch or was that going to happen anyway? And also, sorry if I missed this, but did you quantify how much actually MLS actually contributes to 2022 EPS?

Okay. Sure. The first part of your question, we would have made this update to our Intermodal target margin ranges anyway. I think that the switch to the UP, as Jim said earlier, really just reaffirms that range and enhances the earnings dollars growth through more revenue growth potential coming through the pipe. So that's what that is all about. And we have not quantified the contribution of the MLS and we did provide the multiple that we paid so people could make some inferences about the order of magnitude within there, but that's the level of detail that we're going to provide on that one.

Great. Thank you.

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

Good morning. It's Ken Hoexter. Regarding the structural shift in trucking margins, could you discuss whether this is influenced by pricing or your perspective on market sustainability? Considering investor concerns about a potential loosening after this peak in pricing, it seems like there might be a structural gain in our margins. Could you explain what changes are occurring here from your viewpoint?

Great. Thank you. Good morning. This is Mark. Certainly, we're seeing some shift in our portfolio to a higher mix of Dedicated versus network. Some of that by design clearly, because of the preference that our driver community has for that type of work. So I think we would expect that business to have some resiliency to it. Those are longer-term contracts and we're providing great value, both with our existing customer base, but also a series of new customers that have been introduced into our portfolio. And so, we would see a disproportionate amount of our growth in truck clearly going forward continuing on that vein. And on the network side, we still really like that business. We're working on stabilizing the power count, and we're largely a contract provider there as well. So we're a bit more stable, although we do play in the spot around the edges and certainly support our customers around key project work that they find important. So as we look at, at least looking forward, I think our mix of business in the truck side helps us retain earnings, and we have a smaller, although highly effective network business that I think will continue to provide value in the marketplace.

Yeah. Amazing with the network not growing or fleet down but yet in 20% plus revenues, all right. So I get that. Now on for my follow-up, we just talk about technology a lot right with a question and now with your ability to scale Logistics and you mentioned kind of the highest dollar revenue. Maybe talk about brokerage a little bit. What is the outlook and your ability to grow that digital platform and be hands-free? Steve mentioned grow with technology budget and yet a scale that business. So maybe talk a little bit more about the opportunity set there?

Thank you, Ken. I appreciate your question because we continue to have a strong interest in technology and investment. In fact, 2022 is set to be another record year for us in that area, which is crucial for maximizing our strategic effectiveness. When we initially discussed this with Quest, it was quite some time ago. Our goal was to achieve a single source of truth by consolidating all our services onto a platform that enables us to use data for decision support models, improving our pricing, revenue management, optimization, and presenting data to help our team make well-informed decisions. Our approach has evolved; we began from within while many others have taken an external approach to their technology investment. We are now utilizing multiple data points for insights and sharing them with our external partners, including carriers and customers, with the aim of enhancing automation and digitizing our entire value chain. This is an exciting development for us. We have built a solid foundation over time, and we are now leveraging that foundation to engage our key trade partners. Our investments are focused on this area, and we are seeing significant automation, processing several hundred orders—between 600 and 700 daily—mainly in our brokerage business on the carrier side without any manual handling of the freight. Everything is automated through tender acceptance and dispatch. We are also making excellent progress in our intermodal business; for many of our orders, the first human interaction occurs only when our dray driver arrives at the customer, with the previous steps fully automated. We believe these advancements will help us improve our cost position and expand our business without a corresponding increase in staff. Our focus remains on achieving this through the Schneider FreightPower network, which we are actively pursuing.

Can I get a quick follow-up on a numbers question? I just want to make sure I understand correctly. Steve, you mentioned a range of 10% to 14% for Intermodal, right? You achieved 17% this quarter. I want to clarify if that means you’re over-earning or if your targets have potential for growth.

10% to 14% is an annual number. The 17% was the fourth quarter.

So it's a lot of seasonality, okay. Thank you very much. Appreciate the time.

Our next question comes from the line of Jon Chappell with Evercore. Please proceed with your question.

Thank you. Good morning, everybody. Mark, I kind of want to follow up on the last question, the FreightPower platform seems to have hit a pretty significant scale, you crested the 50,000 carrier mark, which I think is an important threshold for you. Just curious with the scale you have now, with the advancements that you've had there, why hasn't at least the top end of the Logistics margin range moved up, understanding you want to still grow it exponentially. I would think that just with that platform and a certain scale, obviously, the upside there could potentially be higher?

Yeah. I think we're on the front end of the benefits that will start to get into our business particularly on those efficiency factors, but also as you look at our strategy with Logistics, we are much more than an overflow model. And while we're seeing some benefit in this market of overflow and certainly now that we brought our Power Only capability to bear so that we can help large shippers connect with smaller carriers, we also have the capability regardless of market to generate demand and generate care capacity with our brokerage separate from any of our asset services. And so we believe that's a more resilient model than just an overflow, and so we have the infrastructure, and we have the capability to really I think thrive in our brokerage business regardless of the business cycle that we're in. And that might be a little bit different than some of the other asset-based approaches, but we think we want a healthy thriving logistics business that can benefit from the assets that would be withholding to them.

Okay. And then for my follow-up, Jim and maybe Steve, a little bit as well. The long-term strategic rationale for the UMP move obviously sounds great. From a short-term perspective, I know you said you're working to transition with your customers. You're not the first to make this move in the very recent past, and it sounded like others may be put at the bottom of the totem pole with the former carrier as they're making that transition and you certainly gave a lot of heads up. How comfortable are you that there's going to be very little service impact from already raising your hand to move from your existing carrier? And maybe for Steve, what kind of an order expectation have you baked into the guidance from this transitionary year?

Yeah. Thanks. So while I can't speak to the specific issues that happened to that other channel partner, most of the issues last year across the industry were related to labor and the resulting lack of availability of chassis. So our chassis ownership model and higher percentage of dray done by our company drivers better position us to control our own destiny and I expect both us and our rail partners are going to live out our contracts. It's not in either company’s best interest to live those out. And so there is also an opportunity for us to grow our business right now in the lanes that are unique to the Union Pacific as well. Steve?

I think that captures it quite well. We feel that we have a very solid game plan to transition through the course of this year. It's not a wait till January of 2023 and everything happens on one day; there is a process that we have outlined as we go through this year, and I think that we will be able to execute that with all of our partners in the West as we go through this year.

Okay. Thanks, Steve and Mark.

Yeah. The feedback we received from our customers when we did this rollout was overwhelmingly positive. And what I was really impressed with is how many of our customers explained the benefits to us before we started talking about the benefits and what they said was, we're seeking to diversify intermodal spend across railroads and at the same time remain asset-based with providers that have the scale. And so, we have this unique rail pairing that addresses this customer need, and as a result, customers are seeking to grow with us.

Yeah. That sounds like an exciting move. Thanks a lot, Jim, I appreciate it.

Our next question comes from the line of Todd Fowler with KeyBanc Capital Markets. Please proceed with your question.

Great. Thanks, and good morning. So just on the longer-term targets, just for clarification, the new ranges, are you viewing those as the ranges over the cycle, so at different points in the cycle, that's still low versus the high? And then with the comments around Intermodal potentially doubling by 2030, how do you view the mix of the business over the next couple of years, how much contribution do you see from truck versus intermodal versus logistics?

Yeah. This is Steve, I'll take the first part of that. We do intend these margin ranges to cover the vast majority of freight cycles, at least eight out of ten years, is kind of how we think of it. There's always some outliers and things that can happen in shorter periods of time, but we do feel like there's structural changes that we've made within the organization and our execution and performance as well as some structural things within the spaces in which we compete that enable the lifting of these ranges. And so, we feel pretty confident that we've landed in a good place that again provides improving and enhanced return on capital as we go forward in time.

I wanted to address a few more aspects of that question. As we consider how to shape our future portfolio and growth strategies for our truck segment, we see dedicated services and two additional growth areas focused on Intermodal. This sector has several structural advantages; for instance, much freight that has been shifted back to over-the-road can revert to intermodal transport. Additionally, there is significant value in environmental sustainability, and we offer an excellent product that improves dray efficiency and enhances our partnerships with rail companies. Thus, we believe this will significantly contribute to our growth. Furthermore, as you've noticed, Logistics has become our fastest-growing segment and, for the first time in our history, the largest segment in the fourth quarter. These are our three main growth areas, and we feel equipped and ready to pursue them vigorously without any constraints in capital or capabilities.

Got it. Okay. That helps. And then just a follow-up, do you care to share any thoughts on the shape of the cadence of the quarterly earnings for 2022? I know typically you realize, and it was again this year, a bigger fourth quarter and kind of a slower percent or lower percent, excuse me, in the first quarter. Any thoughts on kind of how you're expecting the quarters to come together in 2022?

This is Steve. It'll be interesting to see how the year plays out. We see a constructive environment pretty much throughout the year from where we sit today. As Mark mentioned earlier, we have a lot of momentum coming into the year, and I think that we will carry that through but not offering up specific quarterly trajectories at this point in time.

Yeah. Okay. Understood, Steve. Thanks for the time this morning.

Our next question comes from the line of Chris Wetherbee with Citigroup. Please proceed with your question.

Thank you. Good morning. Staying on the Intermodal topic for a moment, you wrapped up 2021 with around a 14% margin, which seems to be at the upper end of your long-term target. As we look ahead to next year, could you explain how you anticipate the business will grow? Do you expect improvements in rail service to lead to higher utilization and enhanced volume, while potentially seeing some revenue per load decrease due to lower assets, which might negatively impact margins but positively affect profits? I'm trying to grasp the dynamics involved, as otherwise, it seems we may be looking at relatively stable margins. Any insights you could share about the factors influencing Intermodal in 2022 would be greatly appreciated.

Thank you for the question, Christian. We've been experiencing some challenges with our productivity regarding asset utilization over the past few quarters as it relates to turning our boxes. However, we anticipate improvements over time. We haven't yet fully capitalized on the boxes we expanded in the second half of the year due to their late arrival, which we feel will enhance our capabilities moving forward. With the additional 3,300 boxes for this year and more to be added to our service, we will have more assets to utilize for business growth. Additionally, we're excited about our commercial initiatives, including the environmental benefits we can provide and the transition on non-competitive lanes with the UPC. Combining these factors, we believe we can expect an increase in our earnings from improved productivity and volume growth. Furthermore, as Jim mentioned regarding our dray performance, we have more control over our decisions and execution across the network, which we are optimistic will lead to further margin opportunities.

Yeah. I think just add on to that, that we've made tremendous progress over the past several years in our Intermodal margins. So I think we can stand behind the accomplishments that we've made there. And there's two ways to grow earnings dollars; you can grow the top line or you can expand margin. And given the degree of progress we've made on margin expansion in Intermodal, the toggle switch kind of goes more towards volume growth and revenue growth while maintaining that margin. We might make different behaviors in different parts of our business, but where we are right now with Intermodal, I think it makes sense to emphasize volume and revenue growth.

Okay. That's very helpful. Appreciate that. And then just on the Truckload segment, wanted to get some perspective on how you think about maybe costs in gains for ‘22 and if the gain would be flattish. Looking at the fourth quarter, typically, you have a slightly better ORR in truck 4Q versus 3Q. This year is a little bit worse, so I want to get a sense of maybe how you're sort of experiencing the cost environment driver availability, all the factors that kind of go into that, so we can maybe understand if there is adjusted seasonality we should be expecting in 2022 and then like I said, where the gains to play out?

Yeah. This is Steve. You mentioned gains there and if we were to replay the tape from our third quarter ‘21 earnings call and I was providing full year guidance at that point in time, which was really focused on the fourth quarter, I indicated that we expect gains to be about half of what they were in the third quarter as we got into the fourth, so fourth would be half of third, and that's basically what played out. So the difference in margin sequentially that you're referencing there, I would say was more than 100% driven by the difference in gains and is not indicative of a cost issue.

Okay. Gains are flat on a year-over-year basis for ’22?

For full-year 2022, we expect to be in the same range as full year ‘21.

Okay. Great. Thank you very much. Appreciate it.

Our next question comes from the line of Jason Seidl with Cowen and Company. Please proceed with your question.

Thank you, operator. Gentlemen, good morning. I wanted to focus a little bit on MLS here. As we start modeling it on a quarterly basis, could you talk a little bit about any particular seasonality it might have? Also how does the revenue per tractor compare to your base business?

Good morning. I can tell you that the business is quite stable when it comes to seasonality year-over-year. We believe we've introduced some additional growth potential, and the financial performance is comparable to what we currently see in our Dedicated business, just on a larger scale.

Okay. You talked a little bit about the ability to grow. Now, MLS has a pretty high concentration in one particular end market, but it's got a great model with exceptionally low driver turnover, which I can imagine in this day and age is particularly something that you want to focus on. So how do you think you can go about growing into some other verticals and are you already in discussions?

We believe there is a significant opportunity for collaboration, as they operate a strong business and we are managing them separately. However, we have identified several areas where we can work together, especially in different regions. They currently engage in some international markets, particularly in Mexico. We see plenty of opportunities to leverage the insights they have gained in their operating model, particularly their effective driver retention strategy, which allows for both vertical and geographical expansion.

Okay. Perfect. Those are my two. Appreciate the time, gentlemen.

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

Good morning. Steve, you shared some insights regarding CapEx, but I didn't catch any framework on capacity additions. Could you provide some details on what the net container additions for Intermodal look like, and how should we consider growth in the fleet, excluding MLS? I assume the network business is aiming for stability, but what kind of growth in tractors can we expect in Dedicated when looking back at 2022?

We have identified the key strategic areas for investment and growth within the Truckload segment. We expect the dedicated space to see the majority of our truck capacity additions, likely numbering in the hundreds. We are confident in our market momentum and anticipate this trend to continue, so we have capital ready to support this growth. In Intermodal, we plan to increase our capacity by several thousand units throughout the year. These figures may fluctuate as we assess our OEMs and the timing of deliveries, so we're not providing specific unit counts right now. However, we can say we intend to increase our container count and continue our investment as we progress through 2022.

Okay. And then I guess two quick follow-up ones if I can. I haven't really heard you talk about the timing for rail fluidity improvement and how quickly do you see that such that turns improve and you actually get year-over-year volume growth. So I wonder if you could offer a quick thought on that. And then maybe just like volume growth and Logistics has been very, very strong, should we consider tougher comps in 2022 in terms of volume growth, or you are going to keep chugging along at 20% plus volume growth in logistics? Thank you.

Yes. So I'll start out and then hand it back to these gentlemen. So what we've seen is our current provider in the West said a number of disruptions, but as of late, we've seen some improvement; our Eastern providers remained fluid in their network. The area that, of course, we are still challenged with at times is our customer networks and their ability to unload, and expect that we will see improvements as we go through the first and second quarter.

Yeah, Tom. As it relates to our Logistics business, we continue to see that as a growth driver. And we've added some more capability to our portfolio there with our emerging and growing Power Only capability and that's reported in our Logistics segment. And so, obviously, comps do get more difficult, but we also believe we've got a value proposition that will allow us to keep leading into that. I don't have an exact percentage I'll share with you, but we would expect that to continue to be a volume growth driver.

Okay. Great. Yeah. Thanks for the time.

Our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.

Hey, thanks. Good morning.

Good morning, Scott.

Steve, can you talk about Truckload margin improvement this year and what's in the guidance? Given the environment, is this a year where you think you can or should be at the upper end of that new segment margin?

Sure. Like we've said we carry a lot of momentum coming into the year. So that is helpful. And particularly in the network side of Truckload, I think, we have opportunity to resume more normal-type operations, especially once we get past the first quarter and weather events and whatnot. I think we'll see some greater productivity and efficiency start to develop in the network side of the business, which will be helpful to overall margins. And then just through top-line growth like we've been saying in the Dedicated side of the business, we've achieved some solid margins there and expect that to continue in 2022. So I think that continuing at the levels we've achieved is in our wheelhouse and what we're set out to achieve this year.

Okay. And then I want to ask about another one on logistics and Power Only. Maybe can you give some directional color how big is Power Only as a percentage of Logistics? And it strikes me that you and all the asset-based truckers are just seeing such tremendous growth in this Power Only business. And frankly, I'm just not really sure how to think about this over the next couple of years if we eventually go into more of a free downturn. How do you think this Power Only business performs through a cycle?

Yeah. Great question, Scott. As I think about Power Only, it is serving in today's world a bit of a surrogate to our network capacity that has been more difficult, particularly on the longer haul one-way business, one-way network. So it is serving a great value to the customer, and we've been very successful in this environment; when there is lots of choice from a carrier standpoint to align with us to get after a pretty significant growth in the Power Only offering. So it gives me confidence that if the market does start to subside or go the other direction from a carrier standpoint, we've done a lot of great work there to make it easy to do and also to introduce the value of our orange box to a carrier that may have trouble getting their own equipment in this environment as well as certainly a whole different access to a different type of freight, different type of flow. And I think that's going to play well probably even more so in a market that doesn't offer as much opportunity and choice. And so what we have been able to accomplish with our decision science around pricing to the customer pricing of the care, I think is very applicable regardless of what the business cycle that we're in. So obviously it has to be proven out, and I'm sure there'll be some things that we will have to adapt and adjust to, but I think just like brokerage in general, it's pretty resilient through the cycles and I think this has the opportunity to do the same.

Just so I understand when you use the word surrogate, I know you guys don't report it, but everyone's utilization is under tremendous pressure. And so as things sort of calm down, you don't think that utilization in asset-based trucking improves and loads in or Power Only loads in brokerage slow? Does that not make sense?

Yeah. I don't think we're limited with that thought. I think certainly the utilization and productivity will improve on the truck side, but I don't think it has to necessarily come at the expense of Power Only. My surrogate comment centered around if I had another thousand trucks in my network, we would be saying yes to more freight. We can still say yes because we have the Power Only offering because of our orange trailer pool sitting in that same location. And so, we've been able to in a really seamless way support our customers while growing a carrier base that's different than the carrier base that we traditionally had served with our brokerage business, Scott. So yeah, I think certainly there will be some bleeding of our back and forth to a degree, but I don't think it has to be a binary this or that. I think we can do both.

Okay. Thank you.

Our next question comes from the line of Brian Ossenbeck of JPMorgan. Please proceed with your question.

Hey. Good morning. Thanks for taking the question. Just a follow-up on the Power Only and then just the sustainability and how to think about that through the cycle. Mark, maybe you can talk about just on the shipper side, are there any things changing with supply chains and visibility and thinking how they're staging things maybe more drop and hook, is there more of a secular demand for that type of freight and how to move it, and therefore Power Only makes a little more sense from that perspective? So curious on your thoughts there. And also, if you can just give the competition, if you could maybe elaborate on the carrier retention, if you think that's really more asset based, tech-enabled, a little bit of both because obviously it's quite popular right now competitive to hang on to the carriers as well?

Yeah. I think what plays best for a trailer offering or/and like Power Only offering is the larger shipper who generally through efficiency and scale needed the ability and to have dropped and hook on either on both ends of the equation, but it's certainly at the shipper level, so they can have efficiency. And so what we like about this offering is we don't ask them to book another box or to distinguish. We can, through our decision science, offer a price, offer up coverage and then what they really see at the dock and out in their pool is our orange box and then we manage the complexity behind that. So that's why I think you see such great adoption is because we're making it easy and certainly what you're seeing on the 50,000 carriers that we've tapped into a different carrier community than we have traditionally done because we had the line to larger asset providers even in our brokerage business because as a company, we like scale, we'd like to bring scale on both sides of that equation. The technologies allowed us to get to a little lower level in that long tail of the carrier community and bring that efficiency with the box and with our technology and so that's why I think we have a growth opportunity because we're playing in a different pool of the carrier community. And we understand carriers; we treat carriers really well, we're sensitive to the quality of freight that we and the time that we ask not only our driver but another carriers driver to spend at a location, and we have all of that information that we use to our advantage.

Okay. Great. That's helpful. And just a quick follow-up on congestion more broadly speaking, you've touched on it in the prepared remarks and in the press release, but what's behind your view of just the gradual supply chain congestion improvement? Obviously, there's not a lot of visibility and that's kind of the base case, I think, from a lot of folks that we talk to you, but is there anything in particular that you're watching and more leading indicators we've seen obviously a lot of volatility to start the year but maybe a little bit more shift back to services from goods spending? So how are you thinking about that and monitoring it as you look into the new year?

Well, as it relates to fluidity, we haven't seen a great deal of that yet. We certainly, as many have dealt with COVID being more pronounced and impacting particularly our driver community of availability coming through the latter part of the year and bleeding over here into the first part of January. The good news is, it's not as longer period that people are out, but still, it's been disruptive and certainly, the weather has gotten us in more southern and eastern locations than maybe a typical period. So we haven't really seen it yet, but certainly, as we think about Intermodal, as we've talked, we have more assets to deploy. We do think over time that will start to get better. We're already seeing a good performance in the East, so we really are talking the West. So those are more aspirational comments at this point than actually seeing in the day-to-day yet, but as we get through the weather, as we get through it looks like to be more openings and getting this COVID piece behind us a little bit, we think that brings us some productivity opportunities.

Okay. Great. Thanks, Mark.

Our last question comes from the line of Bert Subin with Stifel. Please proceed with your question.

Hey. Good morning and thank you for the time.

You bet, Bert.

Following up on the previous Logistics questions, what’s the downside scenario for that business? I mean I look at it as a double-digit grower with steady margins upside from Power Only. In what scenario do you think that ends up not meeting your expectation, like what would have to happen?

What are the reasons you like a Logistics business is that it has a more variable cost structure versus a fixed cost structure to it, and so that you can adapt quicker to the market and because it also plays in the spot on a percentage basis at a far, far greater level than we play and our asset side. So it just by its very nature and we've been added for multiple business cycles over the last several decades and so we have some experience as things go up and go down, and the business has been resilient. And it's also allowed us and it does serve as our incubator for particularly our digital technology transformation. And so it's got a lot going for it relative to initiatives. What could go wrong? Well, any type of freight recession, nothing will be completely immune to that, but from the ability to scale, cost, and keep your net revenue margins, I think it's one of the most resilient portions of the portfolio.

Okay. Got it. That's helpful. Just one follow-up from me, I know you don't specifically break this out. But can you give a rough differential in the percent of your operating income you derived from the network today versus maybe five years ago? I think there is an argument that your business model hasn't changed as much as you guys have sort of pointed out; I think it has, but I think that's the piece that people look at as representing the higher volatility. So any color there would be helpful. Thank you.

I'm not completely sure I understand the question. However, this is the most diverse mix we’ve ever had in terms of dedicated versus network resources. We’re transitioning steadily, and as we head into 2022, the mix is significantly different. Historically, a dedicated configuration might offer less upside, but also less downside in the cycle due to its business model. I believe this could be the source of our resilience, based on our experience. Currently, we're likely at a split of around 55-45.

Yeah. If we roll the clock back five years, like the question, it's predominantly network-driven earnings and volumes in the Truckload segment, and today, we're rapidly approaching the 50-50 mark and probably will invert as we go through 2022 where Dedicated becomes a more prominent portion.

Thank you very much.

All right. Thank you.

There are no further questions, I'd like to hand the call back to management for closing remarks.

All right. So thanks for everyone's attention today. We used the full hour and hope everyone has a good end to your earnings season. We're thankful to get on to the first quarter here and get after what we think is going to be a terrific transportation year.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.