Schneider National, Inc. Q1 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome, everyone, to the Schneider First Quarter Earnings Call. I will now hand the call over to Mr. Steve Bindas of Schneider. You may begin your conference.

Thank you, operator, and good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer; Darrell Campbell, 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 CEO, Mark Rourke.

Thank you, Steve, and hello, everyone. Thank you for joining the Schneider call this morning. In our opening comments, we will cover first quarter results in context with the current freight cycle, the positioning of our multimodal platform, including the ability to quickly pivot with the eventual market recovery, as well as our updated 2024 full-year guidance. Let's start with the recap of the themes we highlighted on our last earnings call. First, we noted that in general, customers entered 2024 with a heightened sense of uncertainty, but they also have a mindset that it's not a matter of if the supply and demand conditions would recalibrate, but when. Second, our internal indices suggested that as we enter the year, the full-load freight down cycle surpassed 600 days below neutral, which is long by any historical standard. Third, irrespective of the market, we are focused on company-specific initiatives, including cost reduction actions, asset efficiency improvements, and returning our diversified and scaled operating segments of truckload, intermodal, and logistics on a path toward their long-term margin targets. All of these themes continue to be relevant as we sit here today. In the first quarter, the excess capacity condition persisted. January was especially challenging with sluggish volumes and adverse winter weather, which negatively impacted a large portion of the network. We are assessing signs that market conditions are beginning to moderate. For the first time in 6 quarters, we experienced positive contract price renewal closures in the low single digits for the truckload network. While this is a promising sign, we have not seen enough to consider the market at an inflection point. In the first quarter, the outcomes of pricing renewals varied across our service offerings. We achieved positive pricing and volume share gains with some large strategic customers as they prepare for the next market phase. We also renewed with certain customers at reduced volumes if retaining volume required contractual price concessions. In the short term, we are prepared to place more of our capacity in other configurations, including dedicated and the spot market, if necessary. This approach positions us to quickly pivot, leveraging our scale across our multimodal platform, and to be at an advantage when the market improves. Next, I'd like to provide some insights specific to each of our business segments. In the truckload network, revenue per truck per week in the first quarter contracted 10% year-over-year, with most of the change due to depressed rates. The majority of the year-over-year and sequential change in network truck count is centered around the owner-operator community, which highlights the financial strain that small operators are enduring through this extended down cycle. Our company truck count has been steady as we maintain flexibility to take advantage of an improved market when it materializes, even if that means a higher spot percentage in the short term. In truckload dedicated, revenue per truck per week was flat year-over-year and down 4% sequentially from the fourth quarter, with low single-digit utilization impact primarily due to the severe weather in January. Our commercial and operational teams, along with our professional drivers, are executing with purpose against the dedicated portfolio, and our survey is a catalyst for growth. Dedicated will also benefit from an improving network market, improved pricing on backhaul, and revenue share arrangements, enhancing margin performance while adding value back to our customers. Average dedicated truck count grew year-over-year by 773 units and 80 units sequentially from the fourth quarter. Dedicated now represents 62% of truckload tractors. The pipeline remains strong, and we have successfully closed on a series of second and third-quarter new business award implementations, and this gives us further confidence to continue to take action to address below contract threshold accounts. Moving to the Intermodal segment. Volumes were flat year-over-year. Growth in the West, TransCon in Mexico was offset by the East, which is the most competitive region with the truck alternative. Revenue per order was down 7% compared to the first quarter a year ago. Intermodal margins improved 40 basis points sequentially from the fourth quarter, overcoming typical seasonal declines and more severe weather impacts. The intermodal network is showing modest signs of healing with new business awards being implemented and dray cost efficiency gains. Intermodal first-quarter contractual renewals were largely flat compared to a year ago. I consider this favorable as last year's first-quarter renewals were the most constructive of 2023. However, the outcomes of the early renewal season were more volatile than is typical. Pricing and volume gains and losses were higher in their amplitude depending upon customer allocation strategies. Our fully asset-based positioning with the Union Pacific and the CSX rail partners differentiates us as we take further advantage of how well they are connected to deliver volume growth and operating efficiencies that enhance our long-term intermodal returns. In addition, we are excited about the opportunity that will be created pending STB approval to allow two of our rail partners, the CPKC and CSX to provide a new service between Mexico and Texas to the Southeast. We are also encouraged by today's announcement that the Union Pacific will reduce transit by two days on the country's largest freight lane from LA to Chicago. In our Logistics segment, we have observed that customers, in general, are favoring asset-based solutions. We have seen the favorability for our assets and asset-based brokerages play out in the first quarter as our overall brokerage order volumes contracted only 8% year-over-year and power-only order volumes grew each month through the quarter and year-over-year. Similar to other segments, brokerage has maintained its pricing discipline by going volume to maintain accretive returns. In the quarter, January's weather impacts were not absorbed easily in the market as carrier costing and customer spot rates surged. However, the market moderated quickly. Logistics operating margins eroded over 300 basis points compared to the first quarter a year ago, but only 10 basis points sequentially from the fourth quarter. Our Power Only offering has proved its value through both extreme up and down cycles, and we expect it to play an increasingly larger role in serving our customers' network truckload freight gains when the freight market rebounds. We can grow share of wallet with our customers and earnings to the business at highly efficient capital turns. Despite current market conditions, we are encouraged that margins improved each successive month of the quarter across Truckload, Intermodal, and Logistics, with March experiencing a semblance of seasonality and a slight end-of-quarter push. Before I turn it over to Darrell to offer his financial summary insights for the first quarter and our updated guidance for the full year 2024, I want to take this opportunity to recognize five amazing Schneider Hall of Fame Driver associates who recently surpassed a significant and extremely rare safe-driver milestone. I offer congratulations to John, Kurt, Daniel, Wayne, and Michael for achieving 4 million safe driving miles. Everyone at Schneider is looking forward to an event being held in their honor this summer, where we will celebrate their accomplishments, commitment to safety, and dedication to providing outstanding service to our customers. They are among the 92 professional driver associates who have earned safe driver awards of 1 million miles or more this year, and we are grateful for them and all the professional drivers at Schneider, who live out our core values every day.

Thank you, Mark, and thanks to each of you for joining us this morning. I'll provide a financial recap of our first quarter results and give perspective on our updated 2024 guidance. You can find summaries on Pages 21 to 26 of our investor presentation included on our website. Our adjusted income from operations for the first quarter was down $85 million or 74% from the prior year. Adjusted diluted earnings per share for the first quarter were $0.11 compared to $0.55 in the prior year. The first quarter of 2023 included net gains on equity investments and higher gains on equipment sales versus the current period, which represented a $0.12 aggregate headwind to earnings per share. EBITDA of $131 million, which was in line with the fourth quarter of 2023, demonstrated a level of sequential stability and reflects the asset efficiency and cost actions we continue to implement. In our Asset-Based truckload segment, revenues excluding fuel surcharge for the first quarter of 2024 are flat year-over-year. Solid dedicated organic and acquisitive growth was offset by lower revenue per truck per week on volumes in our network business. Truckload earnings for the first quarter were lower on a year-over-year basis, primarily due to network price and volume pressures. Lower gains on equipment sales, costs related to dedicated new business start-ups, and inflationary equipment-related costs were also factors. Across all business segments, we can implement mitigating actions to improve asset efficiency and manage controllable costs while executing from a position of strength to be advantaged as the market recovery builds. We continue to be disciplined in our commercial actions. Our dedicated business continues to grow due to strong account start-up activity, a robust pipeline, and solid operating performance of existing accounts. The year-over-year consistency in Dedicated revenue per truck per week is indicative of the resilient nature of the dedicated portfolio. In our Intermodal segment, first quarter revenues, excluding fuel surcharge, were down 7% year-over-year as a result of corresponding declines in revenue per quarter. Intermodal earnings were down year-over-year, primarily due to lower revenue per quarter and higher MT repositioning costs, partially offset by improved dray performance. In our non-asset logistics segment, revenues for the first quarter declined 15% on a year-over-year basis, primarily due to decreased revenue per order and overall volume declines. We're encouraged by the earnings improvement we have seen across all segments as the first quarter progressed, with a return of more seasonality, and we believe this is a positive indicator as we continue to navigate the current freight cycle. We expect to build on this momentum through the remainder of the year as we work to restore our long-term margin targets. We're also encouraged by the strength of our balance sheet, which allows us to remain committed to our capital allocation strategy regardless of the cycle. As reflected in the $112 million of net CapEx spend for the quarter, we continue to execute on our age of fleet objectives while taking appropriate actions to improve asset efficiency. We executed opportunistic share repurchases and paid nearly $17 million in dividends during the quarter, which was 5% above the same period in 2023. We continue to generate strong operating cash flow of $98 million during the quarter, and our net debt leverage stood at 0.4x. Moving now to our forward-looking comments. We remain intensely focused on executing all areas of the business, leaning heavily on those factors within our control, including commercial and revenue management discipline, managing asset efficiency, and delivering on cost containment initiatives. These efforts are ongoing, and we've been successful in delivering meaningful improvements. However, these efforts only partially offset the impact due to the persistent supply and demand challenges. We're seeing signs that inventory destocking has largely concluded, although shippers are cautious and reluctant to begin meaningful restocking partly based on the impact of inflation and interest rates on consumer confidence, including uncertainty around the timing and extent of interest rate cuts by the Federal Reserve. In addition, since we shared our previous guidance, spot rates have not improved to the degree expected, and we're experiencing varying results in contract pricing throughout the allocation season to date. We're seeing positive signs across our business with dedicated on Power Only resiliency and improvements in earnings within our network businesses. While we do anticipate capacity attrition, modest demand growth in a market that moves towards balance as the year progresses, the timing of market recovery differs from what was contemplated in our previous guidance. Our current guidance reflects a return to some degree of seasonality in anticipation of modest sequential improvement in market conditions for the remainder of the year. As in all market conditions, we remain focused on controllable costs and asset efficiency actions. As we progress through the year, we anticipate improving yields in our network businesses, volume growth in Intermodal and Logistics, and continued truck growth in dedicated based on visibility to our pipeline. Taking our first quarter results and our revised market expectations into account, we have updated our adjusted diluted earnings per share guidance range for 2024 to $0.85 to $1, assuming a full-year effective tax rate of 25%. We're also adjusting our net CapEx expectations to be in the range of $350 million to $400 million for the full year 2024.

Our first question comes from Brian Ossenbeck from JPMorgan.

Maybe I just wanted to start off with intermodal, maybe Mark or Jim, you can talk about just the allocation season, especially on the Western side. I think that was an area you called out last quarter; there was a little more challenging you expected to get a bit more balanced there. How did that turn out? How much visibility do you have to that, and will that start to help bring some more balance through the rest of the year?

Yes, Brian. Thanks for the question. This is Jim. So we're still about 40% of the way through our allocation season. As we've gone through that, as Mark was saying, we've remained disciplined. And been able to sell into those areas where we have differentiation in our network. And in the West, we talked about it in Mark's opening. We're really excited about the fact that we have an improvement in transit time on the largest corridor. So we're going from a position where we were 24 hours behind the competing transit to now we're 24 hours faster than the competing transit. So we think we have an opportunity to continue to grow there. So we feel really good about that. We've had terrific results in Mexico. And now, with the additional opportunity between the CPKC and CSX to provide that service between the Southeast and Texas and Mexico, there's some great opportunities for us there. And getting back to the West, the UP expanded their capacity in the Inland Empire. And so there is nothing constricting us from growing that really important corridor.

Yes, in the first quarter, we experienced growth in the West, particularly in the TransCon region. Additionally, as Jim mentioned, we gained traction in and out of Mexico, which helped us navigate some challenges in the East, where the market is more affected by truck pricing. This marks a change from last year when we saw more growth in the East. We're encouraged by this resurgence of growth in the West and plan to continue pursuing it.

Okay. And then just maybe more broadly speaking, when you look at the guidance for the rest of the year and global competition that's out there. You've mentioned the East is pretty competitive. You've got one other large competitor looking at basically down mid-single-digit rates for their book of business this year. How can you work through that? And I guess, what are you seeing that gives you the confidence to see more seasonality and then sort of this back half recovery, even though it's a little bit later than you initially thought? Is that more on the demand side? Do you really think capacity is going to start to get squeezed out? What are your specific thoughts on that?

It has been challenging to make predictions in this market over the past couple of years. However, as we evaluated the first quarter and the ongoing improvement in results from January to March, particularly regarding demand and the upcoming allocation season, we are beginning to see some positive movement in pricing, albeit not universally. This trend is promising. We anticipate that the consumer has remained resilient, given our diverse industrial markets that cater to both consumer and industrial needs. The insights we’ve gathered in April form the basis of our expectations for the upcoming quarters. While we were more optimistic at the end of last year, noticing increases in revocations and capacity changes, particularly as we approached what we assumed would be a tougher insurance market, we are witnessing a bit more resilience in capacity. We predict moderate reductions in capacity along with gradual demand improvements as we enter seasonal cycles. These elements are central to our outlook for the rest of the year.

And Brian, this is Jim. The other factor is we're looking at the East is the competing rail service. There's a potential for some disruption as they will be reworking potentially their network, and that's something that we experienced with the CSX a number of years ago. It was a challenge for us. And so there's a potential coming up here in the remainder of the year that we could see some disruption on that computing service.

Yes. Feeling some real momentum in Intermodal in total.

And sorry, just to clarify the low single-digit contract renewal you mentioned earlier. Was that for Truckload? Is that just for the current wave of contracts, maybe you can put a little more content...

The truckload, it was referencing truck network.

Our next question comes from Ravi Shanker from Morgan Stanley.

I think the commentary on recent contract rate increases was pretty encouraging. Can you impact that a little bit more? Is that for customers who just had the easiest comp? Do you feel like that's sustainable, how are some of those increased conversations going down with customers?

Yes, Ravi, regarding your comment about easier comparisons, I believe the more favorable ones will come later in the year. As mentioned in our opening remarks, the most constructive allocation period last year was in the first quarter for both our intermodal and truck network. Additionally, I pointed out that strategic customers are increasingly focusing on their next moves in the marketplace and are valuing established relationships and asset-based solutions more. This appears to be a consistent theme during the allocation season, though it doesn’t apply to everyone. For those who wish to pursue a different direction, we must ensure we are acting in the best interests of our shareholders and our business. If needed, we will consider reducing volume and exploring other options. Nonetheless, I agree that it is a positive sign and momentum that we plan to build on as we progress through the rest of the season.

Got it. Just to follow up on your point about customers favoring asset-based carriers, is that a trend you're consistently observing? We are starting to hear that shippers may be leaning towards asset-light options, which could be a reason for rate suppression. Do you anticipate a shift back towards asset-based carriers?

Well, I base my comments and assessment on just customer conversations and behaviors. And I do think we are advantaged when we have a multimodal platform the way we do and certainly Power Only in our brokerage business that integrates well with our trailer pool offering on the asset side for a customer, we work hard to make that incredibly seamless. And so I think the combination of how we go to market and our portfolio as it relates to brokerage with that Power Only offering gives us an advantage, and we're seeing it in volumes growing even year-over-year across that segment and showing its resiliency whether the market is up or whether the market is down.

Our next question comes from the line of Jason Seidl from TD Cowen.

I wanted to start on intermodal. I mean, clearly, there's a lot going on with improved service, whether it's coming from the West or coming cross-border. I was wondering, as we look out into the future, do you think that, that could actually maybe push that intermodal growth rate sort of beyond what we've seen in the past?

Great. Thanks for the question, Jason. Jim?

Yes. This is Jim. Absolutely. I agree with you that it creates a differentiation for us that, in addition to service that customers in the past looked at reliability and service as a reason why they expected a discount savings for using intermodal as you reduce that transit difference, it's more reliable as well as sustainability. It starts to change that. And there are customers that we have today that are already looking at this and they no longer expect a discount for intermodal given the service that it's already at and the sustainability improvement. And we expect as you go further, there are more customers that'll put more weight towards sustainability.

So as we look out, and if we just assume that truckload rates recover, so you're going to have that spread narrow between intermodal and truckload as well as service improve. Should we just expect that they're going to be stronger growth rates at least on the volume side for Intermodal?

Yes. So we'd expect that Intermodal would grow faster than over-the-road transportation.

So, Jason, we also have more tools in our toolbox here with the performance in Mexico. And again, we had some STB approval on some other lanes, and now we're getting a chance to fully exercise after a year with our UP partner in the West and not going through a change this year like we were going through last year, all of those I think we're just in a more stable condition in customers like stability when it comes to intermodal.

That makes sense. My other follow-up is just sort of trying to get a clarification on your guidance. So what do you have built in for equipment sales in the back half of the year?

Yes. So for equipment sales, if you recall, when we gave our guidance for the fourth quarter, we said that we expected some headwinds as it relates to gain on sale of equipment. So we are essentially assuming flat or 0 gain on sale, which was a $30 million headwind. So what we saw as we progressed through the first quarter is that proceeds were stronger primarily based on the mix of what we're selling, but also as it relates to the trailer pool, we saw unit price improvements versus what we initially thought. But as we go through the year, the expectation is that that's going to moderate. So some of the gains that we saw in the first quarter would not be expected to continue. So we're more in line with what we had initially guided a few months ago.

So pretty much flat in the back half of the year right now.

Yes. Very little gain.

Our next question comes from Ken Hoexter from Bank of America.

Mark, you're definitely a little surprised by the positive backdrop, given what we've heard from some others. So I just want to interpret that a little bit. It sounds like maybe seeing a little bit more of a turn in Intermodal, Darrell has been pretty positive on the comments here. You answered Ravi, on the contract market, which was up a little bit. I guess I'm still trying to figure out if that was just because contracts were underwater or if that's real strength? Because then in your commentary, you threw in we've also moved more business to spot. So maybe just parse that out a little bit or follow up with some more thoughts.

Yes, thank you for allowing me to clarify. We're not indicating a shift in the market. What we emphasize is our disciplined approach to the allocation season and our alignment with customers who appreciate our long-standing relationship and the value we provide. We want to be recognized for that, and our commitments reflect this. If there are customers who do not align with that view, they may look for more opportunistic or spot market options, which we believe is not sustainable. In such cases, we may reduce our commitments and volume with those customers. Overall, in the first quarter, we saw a slight positive net on the contractual renewals, but I want to be clear that this doesn’t signal a market inflection. It is at least a positive sign, or at the very least, less negative.

Yes. And just a follow-up on Dedicated. The sequential decline in revenue per truck. I guess some peers have noted some competitive undercutting. I know you talked about a big win maybe a quarter or two ago. Can you talk about the market now on the dedicated side? How is it panning out?

Yes, we see the dedicated market as quite stable. We are highly diversified within that market, particularly in retail, spanning virtually every segment from extreme value to home improvement in big box stores. However, we are increasingly concentrating our growth efforts on the industrial side of the economy, particularly in specialty equipment. We find that competition exists, but we don't view it as more challenging than what we've encountered over the past couple of years. It's an area of focus for us, and we are performing well with our pipeline continuing to expand.

This is Jim. There was no drop-off in pricing. There were some weather events in Q1 that had some impact on our productivity. That was the primary driver.

Our next question comes from the line of Tom Wadewitz from UBS.

I know you mentioned rates quite a bit, and it’s encouraging to hear that positive feedback. Regarding the modeling for the second quarter in terms of revenue per truck per week or intermodal revenue per load, should we expect that to remain stable sequentially, or is it declining? I assume from your comments about contract rates that it might actually be increasing slightly sequentially. I'm just trying to understand how to integrate that into the model for the second quarter.

Yes, Tom, we don't give specific quarterly guidance on metrics or business, but I'd draw you back to improving conditions through the quarter. January through March, and really all three of the businesses relative to its operating metrics and ultimate performance was a pretty difficult start to the quarter and the start to the year, and a little bit of what we obviously can see here in the month of April. So that is what's behind our adjusted downward guidance, but how we build what we consider modest momentum from here, both on a capacity and demand standpoint and the fact that we've been leaning into costs very directly for the last several quarters and getting to get some of the benefit of our cost position, and our cost actions; and give the organization great credit in doing it in a smart fashion that it doesn't impede our ability to respond when the market condition starts to turn. So what I would consider smart, constructive, and sustainable leaning into cost positions across the income statement.

How do you view the intermodal competitive dynamics? It appears that there has been some increased movement recently, possibly due to one of the players becoming more aggressive on volume. Your outlook seems positive regarding volume growth. How much visibility do you have on this growth? Were you able to mitigate the greater rate pressure? What is your perspective on the changes occurring in the competitive market?

Yes. Tom, I think I got your question; if I miss it, please come back. But what I really want to start with is how we are approaching this from a strategic standpoint, and that starts with how we've aligned relative to our underlying rail partners, which we feel really, really good about, and we did that for the specific purpose based upon our asset-based model of owning our own box chassis, and largely our own company dray that we wanted to have as much distinction with our key competitors as possible so that we could bring a different type of solution to our customers and the underlying railroads that help support that. And that's only been encouraged further by the newer relationship with the CPKC, a terrific operator doing extremely well for us in Mexico and looking like us to extend reach and capability in other parts of the network, which they've announced some intentions to do that. So it's the combination of getting some maturity in what we outlined in our strategy. And ultimately, the market has to be there. And ultimately, the Intermodal business has not been immune to pricing pressures or competitive pressures. But again, I think we're poised and ready to take advantage of what's in front of us. Now we just need the market to go along with us a bit.

Do you think you have good visibility to the volume growth like you kind of have the contracts in place to get that? Or just what about the visibility on the volume side?

Yes. We're about 40% through, which gives us better visibility. The fulfillment rate is always the key measure. What we are awarded and what the customer's business requires must ultimately be delivered to us. We still have a lot of the year remaining and a significant portion of the allocation season ahead, but we have visibility to roughly about 40%.

Our next question comes from the line of Jordan Alliger from Goldman Sachs.

Just a quick question just on intermodal and the margins and sort of return to the longer-term targets that you guys have talked about. Is it safe to say that the price dynamic has to be the key driver of that at this point relative to the volumes and perhaps productivity even that you're seeing with the rails?

Yes. This is Jim. So there's a number of actions here. First of all, staying disciplined on price as we go through the allocation. So price is a part of that, but also we're seeking to heal our network where we need to drive out some empty miles and driving out those empty miles helps us improve our asset utilization, our productivity. And you saw a little bit of that as we saw some improvement on dray. And then Intermodal is no different than our other segments where we're focused on managing cost but at the same time preserving that ability to grow. And where we're growing is going to be specifically growing into those areas where we have differentiation. And so taking those actions is what puts us on the path to hitting our long-term margins.

It's a combination of our revenue strategies, rail costs, and our overall cost positions. We are on the right path, but we still have some work to do given our current market situation.

Our next question comes from Bascome Majors from Susquehanna.

I want to go back to the seasonality question. If you look historically, you typically see a pretty meaningful lift in the second quarter. It sounds like you've got confidence in that from your comments about sequential momentum in all your businesses through the first and that continuing into April. And just for the second half, it tends to be kind of sideways in the third quarter depending on the market. And then you see the typical 4Q peak seasonality. Is that the shape of the year contemplated in your guidance? Just any thoughts about how your seasonality might be a little different than the historical patterns would be helpful as we think about the rest of the year.

Thanks for the question, Bascome. As we reflect on seasonality, one notable aspect was the weather events. Last year, those events were quickly absorbed into the marketplace with minimal impact on pricing and carrier costs. This year, however, the weather patterns resulted in a swift increase in both spot prices and carrier costs, indicating some degree of tightening. While spot pricing has started to retract, we did observe changes in the marketplace dynamics. Looking ahead to seasonality, it seems inventory levels for most of our customers are back to where they should be. We resumed end-of-quarter projects and protective measures for volumes that customers tend to push heavier at the end of the quarter. It's important to clarify that this isn’t a significant inflection point, but rather a return to typical market practices. As we consider the remainder of the year, we view seasonality as moderately returning to historical behaviors. We're not claiming that we've completely navigated through the cycle, but that's our perspective on seasonality, and it aligns fairly closely with what you've mentioned in your question.

Our next question comes from Daniel Imbro from Stephens.

I want to start on the dedicated side. Growing truck count nicely on dedicated. We may have missed it, but what does the sales pipeline look like there? And then as we think about the embedded ramp in earnings in the back half, are there start-up costs as you're winning these contracts that are weighing on the first half? Or how should we think about the profitability of dedicated as we roll through the year?

Yes, good question. And certainly the best time for cost for dedicated is when you're just farming everything that you have and you're not starting up. So there is impact when you go through start-up. But we're in a pretty consistent cadence of start-up on a quarterly basis. What I outlined in my opening comments is we have several start-ups in the second and third quarter based upon implementation schedule. We laid out at the beginning part of the year that we expected to net up several hundred dedicated trucks knowing that now that we're at 6,200, 6,300 trucks, even a modest churn of 2% or 3% creates a couple of hundred units of new business that you have to grow to maintain yourself. And so those initial projections are pretty much where we see and expect the year to play out. So the pipeline is strong. We've increased our efficiency, meaning we have improved our tractor-to-driver ratios in Dedicated, which has helped us lower costs for new implementation. We've got more efficient, so we use those tractors on some new start-ups which lowers our friction costs to get things started up. But overall, we would still be very bullish, and this is across a very diversified part of the economy. We're not really concentrated in any one area. We have good distribution across both the industrial and the consumer markets.

That's helpful. And then as a follow-up, maybe on intermodal margin, you had revenue down sequentially. There was some disruption from weather, and yet OR improved from the fourth quarter. Is that just some rail cost adjustments that flow through in the first quarter with your partners? Or what specifically drove that margin improvement despite those conditions?

Yes. This is Jim. And thanks for the question. Specifically, it's some improvements that we're sequentially healing our network and as well as utilization of our drivers. So when we were talking about going through the bid season being very specific of growing where we have differentiation, where we can take out empty miles. And as we're taking out empty miles, that's improving the asset utilization and productivity, and that's enabled us to have some sequential improvement in margin.

Our next question comes from Jonathan Chappell from Evercore.

Mark, on the Power Only. So some real positive comments there, increased each month throughout the quarter. It seems like that's been one part of the business that's held up pretty well, relatively speaking, relative to the rest of the portfolio. Yes, the logistics margin now is still in the sub-2% level. So can you help us just understand, does Power Only just provide kind of a stickier business from a volume perspective? Or is it truly higher margin? And I guess maybe in the absence of Power Only you'd be kind of bouncing around breakeven.

Yes, let me share some insights. Generally, our brokerage business is split evenly, with about 50% in contracts and 50% in spot transactions. This ratio can shift to 60-40 in either direction depending on the market dynamics. Specifically within the Power Only model, the percentage of contract business is even higher, providing us with predictable revenue through allocation events. Additionally, because we contribute some asset components, such as trailers, we achieve a higher net revenue per order in Power Only compared to our traditional brokerage services. This situation is particularly pronounced now due to the challenging and competitive environment in the live/live brokerage market. As a result, Power Only positively impacts the overall margin performance of our business, especially during this tough period for our live/live brokerage offerings.

Okay. That helps. And then I apologize for how big picture this is, but I think it's pretty important. It feels like the capacity is still pretty stubborn across the truckload side and just hasn't accelerated to the pace necessary. And then we're also seeing some really negative commentary out of some of the biggest consumer products companies in the country or the world. So I'm just trying to understand with those two headwinds remaining seemingly, where do you think some of the sequential improvement has come from since January consistently and even into April? Is it just like things couldn't go lower, and there's only one way to go from here? Are there green shoots outside of maybe the bigger picture things that we focus on that we just can't see yet?

Yes. It's hard to have perfect vision across all of those elements, which I think has been so stubbornly difficult going through this current elongated freight cycle, Jonathan. But I do believe most customers are through the inventory destocking, right? So whatever is kind of moving through the channel. There is something that's backing it up to replenish. And so while it's not building necessarily, we don't see a lot of that condition. It does seem to be more normal relative to where inventory is, sales occur. And then whether it's coming through the vendor inbound into DC or through our dedicated trucks from DC to store, it's steady. I would consider demand fairly steady. And certainly, we saw improvements through the quarter in the first quarter and our early view here in April. So again, always hard to predict the future. But what we're seeing would seem to be a more normalized condition.

Yes. And I think the other key aspect here is just the importance of remaining diversified. We're not tied to any one single customer that's making up a significant portion of our volume in any one of our segments, and that enables us to be successful through the cycle.

Yes. And I guess the only thing I would add is some of those macro factors that you did outline have led to the reduction in the guidance, right? But as we look forward, we do have some conviction based on the sequential improvement. It's not only on the pricing side, but the productivity actions and the cost actions that we've taken have helped to improve our earnings as we've gone through.

Our final question for the day comes from Brian Ossenbeck from JPMorgan.

I wanted to ask quickly about the negative cash flow. Darrell, it seems like this could be the low point, yet you're still committed to most of your CapEx plan. Could you elaborate on that? Jim, I'd also like to hear your perspective on the dynamics in international intermodal. We've noticed strong growth with easy comparisons, but I'm curious about how that impacts the domestic market. Is that channel becoming more saturated, suggesting we might see more transloading? Or do you believe that ocean carriers are content with sending more boxes IPI, which could pose a challenge for growth?

Yes. So I guess I'll start. So just to clarify your question, negative free cash flow, right? So our operating cash flow was actually positive, almost $100 million in the cycle, which I think is very, very impressive. So the dynamic really is the CapEx. So as we kind of entered into the year, we talked about the improvements that we've made in our age of fleet targets, right, and that would continue some of those actions. We talked about the growth that we expected in dedicated and intermodal tractors will become more efficient as the quarter has come through, and that's really what's allowed us to reduce our CapEx guidance as it relates to attractive growth going forward. But as Jim said, we want to make sure that as we become more and more disciplined, we're still positioning ourselves for the recovery. So we're not trying to cut CapEx that's necessary for our growth. So the dynamic really for free cash flow is the combination of lower earnings for the first quarter and our continuation on our CapEx strategy.

Yes, this is Jim addressing the question about international intermodal. It is indeed showing an increase year-over-year, but that's largely due to how poor the situation was last year. The distribution between the East Coast and West Coast appears more stable, moving towards normalization. However, I wouldn't characterize this as growth in international intermodal at the expense of domestic intermodal. It's encouraging to see things returning to a more normal state. Regarding the ocean carriers, there are still disruptions present. The ongoing disruptions in the world mean that any further issues could lead ocean carriers to request their containers back, as they would need them for longer routes, which would further affect transloading.

Thank you, ladies and gentlemen. As you have no further questions at this time, we will conclude today's conference call. We thank you for participating, and you may now disconnect.