Schneider National, Inc. Q1 FY2023 Earnings Call

Greetings, and welcome to Schneider National Inc First Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference to your host, Mr. Steve Bindas. 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, Executive Vice President and Group President of Transportation and Logistics. Earlier today, the company issued an earnings press release. This release and an investor presentation are available on the Investor Relations section of our website at schneider.com. Our call will include remarks about future expectations, forecasts, plans and prospects for Schneider. These constitute forward-looking statements for the purposes of the safe harbor provisions under applicable federal securities laws. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. The company urges investors to review the risks and uncertainties discussed in our SEC filings, including, but not limited to, our most recent annual report on 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 and investor presentation which includes reconciliations to the most directly comparable GAAP measures. Now I'd like to turn the call over to our CFO, Steve Bruffett.

Thank you, Steve, and welcome to each of you. I'll begin with the financial recap of our first quarter results, and then Mark will provide his insights on the start to the year and what we see ahead of us across the remainder of 2023. I'll return to comment on our full year 2023 guidance, and then we'll open up the call for your questions. As usual, we will endeavor to get to as many of you as possible in the allotted time. Our refreshed investor presentation is available for your reference and can be found on our website. Slides 21 through 26 are specific to our first quarter results and our full year guidance. Our first quarter revenues, excluding fuel, were down $205 million to $1.25 billion. $164 million or 80% of the decline was in our Logistics segment, and it's important to note that their purchase transportation cost decreased in proportion. And that's the primary reason that our consolidated purchase transportation costs were down $177 million year-over-year. Regarding our quarterly earnings, we obviously had a tough year-over-year comparison as last year was our most profitable first quarter in company history with adjusted operating earnings of $148 million. Contrast that with the challenging freight market conditions of this year's first quarter, which were characterized by soft volumes, the absence of month-end surges and increasing pricing pressures. Given that context, our first quarter 2023 operating earnings of $115 million represented solid performance, and our second best first quarter. Inherent in our results are some of the benefits of the portfolio restructuring we have strategically pursued and invested in over the past couple of years. Adjusted diluted earnings per share for the first quarter was $0.55 compared to $0.57 in the first quarter of 2022. As noted in our earnings release, our results included a $0.07 equity gain related to our strategic investments. When looking at the line items of our income statement, please note that last year's first quarter included a few sizable non-GAAP items that, at first glance, can create odd looking year-over-year comparisons. The first item is the $51 million net property gain, which reduced the operating supplies and expenses line and the other items were legal settlements totaling $64 million, most of which flow through the other general expenses line. Regarding our cash flows and net CapEx, in particular, equipment deliveries have been much closer to being on schedule this year than they have been for the past couple of years. As such, our first quarter net CapEx is in line with our expectations, and we expect that to continue throughout the rest of the year. In addition, we announced our $150 million share repurchase authorization earlier this year. We now have established the program and expect repurchase activity to begin in the second quarter. And I will now hand it over to Mark for his comments.

Great. Thank you, Steve, and good morning, everyone, and thank you for joining the Schneider call today. Let me start by offering a strategic framework for our priorities as an organization. It starts with maintaining a disciplined approach to the allocation of capital with specific emphasis around our targeted strategic growth drivers of dedicated, intermodal and logistics. Over the long term, we believe these strategic priorities enable growth, market share gains, more stable and resilient earnings streams and enhance return on invested capital. Secondly, our additional investment priorities involve our people, process and technology efforts to deliver the optimal customer carrier and associate experience. That experience is increasingly digital in nature, and it provides timely and relevant information in ways our trade partners and associates prefer and need to consume it. Now let's bring it in close to the first quarter of the year, and let me offer a high-level assessment of what is transpiring consistent with our beliefs coming into the year. And then what is developed differently than our expectations or perhaps occurring at a different pace than expected. First, to the progressing as expected front. Starting with Dedicated. Dedicated truck count grew 228 units year-over-year in the first quarter. The number of new business contract closures for late second quarter and third quarter implementations are very encouraging as we continue to prioritize growth in Dedicated in our Truckload segment. Our new business pipeline remains at historically high levels. In fact, Dedicated solutions presented to customers in the first quarter is up over 40% from the first quarter of a year ago. We are in position to close the year with several hundred more units of organic tractor growth. Additionally, we are actively pursuing potential acquisitive opportunities that complement our Dedicated organic growth initiatives and overall enterprise growth strategy. Next, in Intermodal, we are focusing on our new and existing strategic rail partnerships and the broader positioning of the offering for volume recovery. Overall, rail fluidity has improved as we are experiencing less friction and delays associated with the container dwell time at customer loading and unloading locations, as well as within the rail terminals. With the transition to the Union Pacific, we are experiencing improved network fluidity and service reliability. As the freight demand recovers, we expect to gain additional asset productivity quickly and grow revenues and earnings contribution with the current container asset base. We continue to look for additional ways to pursue intermodal conversion growth by leveraging the core competencies that our asset-based model enables. We believe the recently announced partnership with the newly formed CPKC offers an attractive opportunity to garner additional freight volume between Mexico and the United States. This is a relatively small portion of our total agreement with the UP, and this also opens up corridors that do not overlap with the UP, and where we were previously less competitive. We believe this new agreement by itself will be a catalyst for intermodal growth. In addition to the strength of this new agreement, our asset ownership model, our experienced operating team in Mexico City, where we've been doing business for over 30 years, provide further substance to our service offering. The next item is our power-only offering in the Logistics segment. I am pleased with the relative resiliency of power-only and the incremental enterprise volumes that is enabled in a challenging freight demand condition. Sequentially, from the fourth quarter to the first quarter, power-only maintained 93% of their daily order volume. This service offering performed well during a soft quarter while maintaining the additional capacity that will enable growth and our ability to service our customers during a market correction. Finally, we are making progress arresting inflationary cost pressures in key input cost areas, such as front and back office efficiencies, driver recruiting and onboarding costs and equipment parts expense. Furthermore, the planned delivery of new tractor equipment is occurring on schedule, and we expect these investments to enhance the driver experience and further reduce operating expenses. Now let's transition to the areas that have developed differently than our expectations or perhaps at a different pace than expected. Industry capacity levels are correcting, but at a slower pace than we anticipated. However, we are seeing signs of correction that we believe will materialize in more meaningful ways across the next couple of quarters. Those signs include owner-operator lease defaults running ahead of pre-pandemic levels, a meaningful increase in the availability of experienced driver candidates on our new driver hiring pipeline, and the overall stress in the small carrier community operating in our brokerage business as spot rates dipped below the breakeven point. It is our belief that the accelerated tightening of credit across the small carrier supply base will further hasten the level and timing of capacity correction. The inventory positioning across many of our customers is making solid progress, but the replenishment cycle remains spotty and delayed compared to our original expectation. This dynamic has been especially evident in low import volumes, which highly correlates to the intermodal volumes. The percentage of spot freight in our asset-based network is incrementally higher than we planned for this time of year. Also, the contractual renewal rates have been marginally lower than planned, and we have seen in certain customer applications, renewal rates that are not likely to be durable for all of 2023, creating pressure in the near term, but opportunities on the horizon. In summary, the current market condition has introduced a higher degree of freight volume recovery uncertainty from a timing perspective, particularly in the network offerings, in Truckload and Intermodal along with the transactional volumes in Logistics. However, we do expect an improvement in freight volumes into a moderating capacity condition in the latter portion of 2023. Let me turn it back to Steve to provide further insight into our 2023 guidance.

Moving now to our forward-looking comments. You can find a summary of our 2023 guidance on Slide 26 of our investor presentation. Regarding our updated expectations for full year 2023 adjusted diluted earnings per share, we now expect the range to be from $2 to $2.20. This update lowers the range by $0.15 or 7% from our initial guidance. For additional context, I'll offer a reminder that we do not forecast equity gains or losses. However, we do incorporate them into our results and guidance once they've been recognized. So considering the $0.07 equity gain in the first quarter, our updated guidance is essentially a 10% adjustment to our income from operations. In addition, first quarter 2023 results were largely in line with our initial expectations. Therefore, the adjustments to full year earnings projections compared to our original forecast are applicable to the remaining three quarters of the year, with the second and third quarters being most impacted as we work our way through the trough of this freight cycle. Our initial guidance assumed the resumption of more typical seasonality in the fourth quarter characterized by higher volumes along with promotional and project opportunities. Our updated guidance retains this expectation, although at a slightly lower level. Overall, our portfolio is performing well, especially given the operating backdrop. And while we always feel like we have room for improvement, there has been a fair amount of progress achieved, and we feel well positioned to achieve profitable growth and deliver shareholder returns over the long term. We continue to make investments in our equipment and technology and have the cash flows and balance sheet to do so throughout freight cycles. Our guidance for 2023 net CapEx remains at a range of $525 million to $575 million. And at this point, we're trending toward the upper end of that range as we implement new dedicated business awards. So with that, we'll now open up the call for your questions.

Our first question comes from Jack Atkins with Stephens.

I want to express my appreciation for the insights you've shared regarding the changes in your outlook. As you consider the possibility of a recovery or a shift in fundamentals in the fourth quarter during the peak season, could you provide some insights into what your customers are saying about their expected freight flows or plans for later this year that give you confidence in this outlook? There seems to be a lot of uncertainty regarding what we might encounter in the second half of the year. Of course, no one can predict the future, but I'm interested in hearing what your customers are communicating about their plans.

Thanks for the question, Jack. Generally, our customers seem to be progressing against some of the inventory challenges they faced, likely within the pace they anticipated. However, there's increased uncertainty regarding the replenishment cycle and when demand will rise. Overall, there's cautious optimism, although we are seeking more concrete evidence rather than just optimism. This sentiment is reflected across various segments and verticals we serve. Looking ahead, we have some caution as we observe that the start of the first quarter and the beginning of the second quarter appear to be somewhat delayed compared to our initial expectations mentioned earlier.

Okay, that makes sense, and I appreciate that, Mark. For a follow-up question, can you provide an update on what you're anticipating regarding rate realization from contractual renewals during bid season, both in the for-hire market and in Dedicated? It seems that shippers are becoming increasingly competitive and aggressive as bid season progresses, and I would be interested in hearing your thoughts on this.

The second quarter is significant for us in terms of renewals, and we have some work to do to get a complete picture. However, it is definitely a competitive market. In our Dedicated business, we are encouraged by what we have accomplished and what we will be implementing throughout the year, and our pipeline is very strong. Our execution is solid, contributing to a more stable and consistent earnings and revenue stream. From our perspective, all these factors are aligning well. On the other hand, our network businesses face more challenges. As we noted, our Intermodal business is closely linked to imports, and we need to see an increase in import activity driven by the replenishment cycle. However, our revenue per order is holding steady. Our main challenge currently is determining the final price point for our network truck business, which is where we face the toughest competition.

Mark, you mentioned in your prepared remarks that your Dedicated business is performing at historic highs. What does this indicate about our current position in the cycle? How are your customers perceiving the potential upcycle ahead? Does this suggest they are seeking more stability and visibility in their supply chains, or are they being more defensive? What insights can we draw from this?

Yes, Ravi, I believe your question suggests that at this point in the cycle, there might be reduced interest in our Dedicated services. I want to highlight a couple of points. Our focus in the Dedicated sector is shifting away from merely providing capacity generation solutions. Instead, we are concentrating on offering extremely high-volume services that cater to the increasing demands in areas such as retail and store operations. Additionally, we are focusing more on specialized services rather than just increasing our presence in the commodity or generic parts of the market. Our efforts, sales resources, and approach are reflected in the results I shared. Unlike ten years ago, there is no longer a direct correlation between network conditions and dedicated services. We have evolved from that point, although some connection still exists. Primarily, we are pursuing types of Dedicated operations that require high reliability from customers who also need a strong financial foundation to invest in specialized equipment. This is a multiyear effort for us to achieve the commercial and operational traction we have now in the targeted markets. Therefore, I would suggest separating these aspects slightly for historical context.

That's helpful. And kind of exactly the color I was looking for. And maybe as a follow-up, maybe a longer-term question on the Intermodal side. Obviously, we now have CPKC closed, and we have the new service with CN, UP and Grupo Mexico. I'm sure the third West Coast Railway is not going to sit back and kind of wait to see how the other 2 play out. What's the 2- to 3-year outlook in the Intermodal space? Do you think that you can finally deliver the kind of truck conversion that many of these players have been wanting to do over the last several years? Do you think it's going to be more of an intra-rail competitor taking share from each other? How does that play out?

Yes, this is Jim. I'll start with a broad overview and then focus more specifically on Mexico. You're right that surface issues have been a constraint on Intermodal. Over the past few years, we've seen a shift from Intermodal to over-the-road services, accompanied by competitive pricing pressures and a transition in freight movement from West Coast to East Coast ports, which has affected us. I anticipate some improvements ahead. We have already seen enhancements in service levels, and the railroads recognize the need to stay competitive on pricing, presenting opportunities for conversion. In Mexico, the changes with CPKC present a significant opportunity. Previously, moving freight from Mexico into the U.S. involved several interchanges, each representing a potential point of failure. CPKC has streamlined this process by providing a direct rail service from our three ramps in Mexico to the Midwest, along with improved service levels that were lacking with the former KCS. We have strong confidence in CPKC and expect to see a substantial enhancement in service. This focus is crucial because, for similar lengths of haul, we can expect a much higher conversion rate to intermodal services, which we view as a significant growth opportunity.

Sorry. Can you hear me?

Yes. We can, Bert. Now we can.

Yes.

Maybe a near-term question on the Intermodal side. Something you've talked about as your container turns, and how those have been sort of running well below where they've been historically. How are you thinking about that flipping back to normalized levels? I think you had talked last quarter about getting back to a 1.7-ish range at some point within the year. Has that moved out? And has that just really been driven by what we're seeing on the import side?

Yes, this is Jim. Absolutely. About 15% of our containers are currently stacked, which provides an opportunity for us to grow. The only factor preventing us from moving forward at this time is demand. This is influenced by both West Coast imports and overall economic activity.

I believe we have the opportunity to increase our volumes and earnings without requiring more containers. Regarding your original question, we reached a peak of approximately 1.8 several years ago. While we may not return to that exact level, we can significantly enhance our performance with the current dray resources we have. The customer dwell time and rail time have both improved, and we are eager to make the most of our existing assets.

Got it. Okay. Just a follow-up on the logistics side. Sales there declined significantly year-over-year, but actually seemed to perform slightly better than your peers. Would you say that's mainly driven by the growth of power-only within the offering? Or is that a result of how you operate your brokerage business, specifically the last-minute overflow model?

Yes, that's a good question, Bert. As a comparison, our order volume contracted by about 7%, which is consistent across our offerings. I would say this reflects your point that we do not operate solely as an overflow model. We actively seek opportunities to collaborate and utilize our strengths, and we've had significant success in doing so over the past couple of years. However, when the market shifts, our investments and ability to generate demand within our brokerage offering help us to be more resilient, which is integral to our strategy.

I wanted to ask a little more about the comments you've made regarding rates. I'm curious about the competitive behavior in Intermodal. There has been significant capacity added in terms of containers, and you've mentioned having some stacked up and improving rail efficiency, which supports capacity. How do you view the discipline or pressure in the market? Do you believe that there will be less pressure on Intermodal contract rates compared to Truckload rates? We've heard some suggestions in that direction, which could be beneficial for margins. Alternatively, are you worried that the excess capacity and the desire for growth among some of the largest Intermodal players might create more pressure in the market? I would appreciate your thoughts on the competitive dynamics in Intermodal.

Tom, thanks for the question. I'll share our perspective in relation to others. We believe there is significant potential for conversion. It's atypical that we've experienced a reverse trend over the past couple of years for various reasons we've discussed. Before delving into competitor dynamics, there's a substantial opportunity for the industry to grow and return to where it should be with rail transport. We're particularly excited about the recent arrangement we announced because we see Mexico as a key player economically in terms of freight origination, with Intermodal offering substantial opportunities there. We believe there's potential for increased conversion across virtually every market we operate in, including the East and regional West, moving freight from road to rail. That frames the opportunity for us. If you examine our revenue per order, it contracted by 2% year-over-year, which indicates that the market is somewhat resilient regarding pricing and value. Now, our focus is on optimizing freight movement on trains compared to over-the-road transport.

That price decrease was over while it was still a very strong Q1 last year. So that's a relatively small decline year-over-year. I think the other thing you have to consider is that once you stack your containers, there really isn't a great deal of cost there. So there's nothing pushing us saying you just have to get this volume to be able to manage costs on our business.

Yes, the point I was going to make. This is Steve, is that we'd much rather retain the discipline, just keep a container stack rather than move it at noncompensatory rates. It just doesn't make sense, and we're return on capital focused like we emphasize. And so that goes into the equation side. I do think you'll see disciplined behavior as we go through this period of time.

Okay. Yes, that's great. It sounds like there is recognition of cyclical pressures or some discipline. The follow-up question I have is, Steve, as we consider the financials and how the lower contract rates in Truckload affect us, did you notice much of an impact on the margin from lower rates in the first quarter? Or have you not seen much impact yet, anticipating a greater impact as we move forward? I'm trying to understand how the timing of that affects the margins for lower contracts in Truck.

Sure. And we did try to craft our prepared comments in a way that reflected the maturity and realization of this year's bid cycle as we go through time. The first quarter definitely had some downward pressure reflected in it. If we don't feel like it's the full force of this particular cycle yet. And that's why we signaled second quarter and third quarter could be a bit more challenged, as we get the forward book of business and contractual renewals completed, but then we start to see some balance or lift as we get a little later in the year after that.

Let me ask a question here. I wanted to stay on Intermodal a bit here, how should we think about your sort of revenue per unit as that CPKC business begins to develop. Is that going to expand because there's going to be a longer length of haul attached to it?

Yes. If that becomes a larger portion of our total, it could have an effect. However, as Mark mentioned, we anticipate many conversion opportunities across the rest of our network. Therefore, I do not expect a significant change in the overall distribution across our network at this time.

Okay, fair enough. Let me switch back a little bit to the dedicated side. I believe, Mark, in your comments, you talked about how there's a couple hundred more additions coming on between now and the end of the year. How should we expect that to flow sequentially between 2Q and 4Q?

Yes, as we mentioned earlier, we have completed implementations for the late second quarter and into the third quarter. Most of these will have a full impact in the second half of the year, which is beneficial because we need to address some of the initial challenges from that level of activity. The later we can schedule these in the year, the more we can move past that initial phase. So if you're considering the year as a whole, it's primarily focused on the second half because what was completed in the first quarter requires time for the equipment to arrive, be positioned, and get started. Therefore, we are looking at late second quarter for the majority of this.

I believe you mentioned that you have a record amount of business lined up, awaiting bids. I expect there might be additional opportunities before the fourth quarter.

Yes, I'd say our pipeline is maintaining its historical high level that we've experienced the last couple of years. A year ago, we had an acquisition of about 900 units and about 800 units of organic growth. So we're not yet predicting all of that to be a repeat, but our pipeline would suggest that we're well positioned to keep capitalizing on one of those key strategic growth areas, and so feel really good about where we are. And we just got to see how it plays out.

Just first, Steve, I just wanted to clarify. Did you guys share what gains on sale were? And then can you share like what percentage of your Intermodal volume is Mexico cross-border?

I'll address the first part of your question. This is Steve. We did not include it in our earnings releases as it wasn't a significant figure for this quarter. However, we recorded $12 million in gains in the first quarter of 2023. In terms of our full year earnings per share guidance, we remain aligned with our initial expectations. I believe we mentioned that we expect full year 2023 equipment gains to be similar to the approximately $27 million we achieved in 2022, which remains the range we are operating within this year.

Second question was around Mexico. Cross-border, we do really across all of our services across Logistics, Truckload and Intermodal. We don't break out geographically by segment. It's an important part of what we do, but we think more of the growth is in front of us than currently exists in our portfolio today.

Okay. And then I know you guys don't break out over-the-road versus Dedicated margin. One of your peers does. I thought maybe it would be helpful like can you just give some color directionally, how are over-the-road margins versus Dedicated margins year-over-year or what percentage of the earnings now in Truckload or over-the-road versus Dedicated? I thought maybe it would be helpful to give some context in terms of how much bigger Dedicated is as a percentage of the business.

Yes. I believe we have generally indicated that over the last couple of years, those services have performed similarly. Of course, one may have a slight advantage depending on your growth stage, and the initial setup can temporarily affect performance. Historically, and in terms of expectations, we anticipate that both will perform equally throughout any part of the cycle, although there could be variations during different quarters due to specific factors. Looking at long-term positioning, we do not foresee significant differences in margin performance.

I'm going to put my 2 together in one question. Starting with you, Mark. You talked about inorganic opportunities a little bit in relation to Dedicated, looking at some opportunities there. But given the pain points in some other segments, maybe ones what you've been deemphasizing a little bit, traditional logistics or brokerage or network Truckload. Do certain things get so attractive from a bottom-of-the-cycle perspective that you may actually look outside of the core competencies of where you really want to target your inorganic growth? And then secondarily to Steve, as you get started on this new buyback program, how do you think about the capital you're willing to deploy there vis-a-vis the M&A opportunities that are out there?

So the first part of that, I think we maintain a healthy dose of intellectual curiosity of things that may sit directly outside of what we traditionally outlined as our strategic growth priorities. At this juncture, though, we haven't found anything that would knock us off our current path, and we get opportunities to see things and explore things on a regular basis, but we really have honed in, particularly on the truck side, where we believe the inorganic growth can be most valuable to our shareholders around the specialty truck location. And I would maybe correct you on just 1 part of your question is that we have not deemphasized logistics and third-party growth at all. We're talking more about a newer service called power only, but that's not deemphasizing a more traditional brokerage or third-party support for our customers just in concert with that. So yes, we remain open. But at this juncture, what we have pursued is consistent with that specialty truck. And I think in the short term, I think it's certainly through 2023 or where we are that should be the expectation.

Yes, this is Steve. I will address the second part of your question regarding our approach to capital allocation between share repurchases and M&A opportunities. At a high level, we are in a strong position, with substantial balance sheet capability and capacity. This gives us considerable flexibility. Currently, our strategy for the repurchase program involves maintaining a steady level of repurchase activity over time, along with potential opportunistic actions. The scale of these opportunistic buybacks may vary based on the number of acquisition opportunities we encounter. So, there is a relationship between the two. I understand your question, and we will manage this as we progress. In terms of our overall capital structure, cash flow generation, and balance sheet capacity, the $150 million repurchase program aligns well with our capabilities. We are confident in our overall strategy for capital allocation and look forward to implementing it over the next few years.

I'm curious about your expectation that loads will improve or that volumes will increase in the latter part of 2023. Considering your three segments, excluding Dedicated—Network, Intermodal, and Logistics—do you have a consistent level of confidence across all three, or do you have a preference for one segment over the others as you approach peak season?

As we've looked at this and talk to our customers assess, the carrier and the capacity condition through kind of several different lenses, we do obviously think there's an interplay to some level of capacity correction, which needs to occur and is occurring in our view, which I think serves as a bit of a catalyst. But we also believe that the inventory correction will largely be behind at some point here in the second or early third quarter for most of our customers that we're aligned with, and it does come down to what is the replenishment cycle and how confident our customers to get back to buying more. And so that's that combination. We think both of those are instructive. They both have I think a current concert to have a full recovery. And we think the conditions are increasingly moving that direction, not here yet, but increasingly moving that direction.

I wanted to ask maybe for Jim. Can you just give some comments about your confidence or maybe visibility into converting Truckload freight off the highway. Do you see any of that baked into the bids? Are you having real conversations of that more than you maybe were a couple of quarters ago? It seems like there's certainly some excess capacity. As you pointed out, the spreads are still constricting. So I just wanted to see how we should think about that in terms of timing and magnitude. And what sort of visibility you have on that front?

Yes, thank you. We're increasingly hearing from customers about the environmental impacts of Intermodal, which is starting to influence their decision-making. I believe that over the long term, Intermodal will grow significantly faster than the overall transportation market. In the short term, we are particularly seeing strong performance in the East with CSX, enabling transitions from over-the-road to Intermodal. We have already captured some freight this year through over-the-road conversion, but there are still substantial opportunities ahead for further conversion. I anticipate that we will see more of this as the market begins to tighten.

Okay. For a follow-up on the capacity front, Mark, you provided some interesting insights. It seems to have been more resilient than many of us anticipated. Do you believe we are approaching a critical juncture? Should we expect a surge in market departures, or is this more likely to be a gradual decline? How are you viewing this situation? Also, have you noticed anything that has intensified as we moved into April, considering it doesn't appear to have rebounded as strongly seasonally as we had hoped?

Brian, I agree that the situation is taking longer to improve than we anticipated. We are looking for leading indicators, one of which is the number of experienced driver candidates interested in joining us and our driver hiring pipeline, which reflects challenges in other areas of the transportation sector. We have historical data to reference, and when we observe significant changes, like what we’re seeing now, we consider that a recent indicator. We're noticing signs from our supply base as well, including some credit tightening and reports from competitors about delayed payments, which indicate stress in the market. Suppliers will need to respond to these issues, and I believe that the combination of these factors could signal a quicker correction than what we have been experiencing.

Okay. So you think it could accelerate from here based on those factors?

I'm optimistic.

Our next question is from Chris Wetherbee with Citi.

Maybe you wanted to touch a little bit on the guidance and just maybe if you could help us think about sort of the cadence for the year. So I know you noted that 2Q and 3Q might be the more challenging quarters of the year. I guess if I look at the first quarter and maybe look through the gain, the equity gain. Do you still feel like sequential improvement, which I think is historically normal seasonally normal in 2Q versus 1Q, and that respect is possible? Or is there just going to be incremental weakness that has the potential to offset what would normally be seasonality?

Yes, this is Steve. Well, we're trying to stay away from quarterly guidance, which we want to stay in the annual space, we were trying to steer things a little bit there to give some additional perspective and insight on how we see things unfolding. And as in particular, like we noted earlier on the call, we get deeper into the bid renewal cycle, and those new rates take effect and so on. There is some dampening effect on earnings that comes from that. And so sequentially, you may not see some of the seasonal lift that you might expect ordinarily in second and third quarter. It may be more flattish type of sequential trajectory. Before picking up, it would be our expectation at this point in time. But we'll have to see how that plays out. But if that helps with some additional color, that's how we're seeing things today.

Thank you for that insight. I appreciate the thorough explanation. As you consider fleet size for the upcoming year, especially in a challenging environment like this, could you share your thoughts on how you plan to manage it? It seems that your fleet size has gradually decreased over the past few quarters, which is understandable given the current situation. Should we anticipate this trend to continue in the next few quarters as we navigate what we hope is the low point of the cycle? More generally, how do you view fleet count for the next few quarters?

Yes, Chris, we don't have any specific plans based on the cycle or the conditions we want to address. I believe your question relates to the network. We have noticed some added pressure in the owner-operator sector due to the combination of rate structures and inflationary costs, which impacts our overall capacity mix. We've also observed reports from some of our competitors in this area, and it's the segment experiencing the most stress, similar to small carriers. However, we don't plan to approach this any differently; we hope for stabilization. I also want to emphasize that our customers perceive our network offering positively, not just through the network trucks we provide but also through our Power Only offering, which is reported under Logistics. Power Only is increasingly seen as part of our network from the customer's viewpoint. We're utilizing third-party power and are committed to reporting that correctly within the different segments we operate. From the customer's perspective, they observe a network presence from us that is stable to slightly growing.

Our final question is from Ari Rosa with Credit Suisse.

I wanted to revisit Brian's question. You mentioned that the industry's capacity is adjusting at a slower rate than anticipated. Could you elaborate on the reasons behind this? Has there been a structural change in the market that is encouraging carriers to remain in the market longer than expected?

Yes. I understand the question. I don't really characterize it as anything structural per se, certainly, what has perhaps changed over time is the discovery of information, discovery of price, both from a customer and a carrier perspective. Perhaps some of the activities that we're doing with Power Only and services as carriers, and maybe in a different way than happened structurally before. But this is still a business you have to cash flow, and you have to have the adequate revenue stream across the asset base. And I still think that is more challenged in this type of environment, clearly in the small, undercapitalized carrier than it is in the larger well-capitalized space. So I don't know if there's massive restructuring. Obviously, there's some influences there that are different over time. But...

I also think that this may or may not be true. I don't have anything to prove it to you with. But given the strength of the prior couple of years, if you're a small carrier or independent...

And a little more cash reserves.

You may have built up some cash reserves in that time period, some excess earnings, if you will, that allowed you to last a bit longer in an environment like we're in today. And that might be different from past cycles, given just how strong the last couple of years were.

Got it. That's very helpful. And then just for my last question, switching to the Intermodal side. We've seen a lot of headlines, railroad is making a big deal of partnering with you on the Intermodal business. I just want to make sure I understand what it is that's actually going on. So obviously, this year, you moved your Western business over to the UP and now CPKC is talking about the growth on their network that they're expecting. Is there any business from UP that you're actually migrating over to CPKC? Or is it just part of a larger pie that you're seeing? Or kind of where was that business previously moving that you're moving into the CPKC network? Let me just make sure I understand that.

Good question. Thank you.

Yes. Sure. So there was a small amount of the business that we're running on the UP that we're migrating over to the CPKC, but also there are some additional lanes that don't overlap with the UP that we're going to be implementing. Those are lanes that we either don't have today or were uncompetitive today. So there's a little bit of an extension of our service network.

And there was business we were doing directly with the KCS, right?

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