Schneider National, Inc. (NYSE:SNDR) Q2 2020 Results Conference Call July 30, 2020 10:30 AM ET
Steve Bindas – Director, IR
Mark Rourke – President and CEO
Steve Bruffett – EVP and CFO
Conference Call Participants
Brian Ossenbeck – JPMorgan
Chris Wetherbee – Citi
Jack Atkins – Stephens
Ben Hartford – Baird
Ravi Shanker – Morgan Stanley
Tom Wadewitz – UBS
Scott Group – Wolfe Research
Bascome Majors – Susquehanna
Jason Seidl – Cowen and Company
Allison Landry – Credit Suisse
Ken Hoexter – Bank of America
Zachary Haggerty – KeyBanc
Greetings. Welcome to Schneider National’s Second Quarter 2020 Earnings Call. [Operator Instructions] Please note this conference is being recorded.
I will now turn the conference over to your host, Steve Bindas. You may begin.
Thank you, operator, and good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer; and Steve Bruffett, Executive Vice President and Chief Financial Officer.
Earlier today, the company issued an earnings press release, which is available on the Investor Relations section of our website at schneider.com.
Our call will include remarks about future expectations, forecasts, plans and prospects for Schneider, which constitute forward-looking statements for the purposes of the safe harbor provisions under applicable federal securities laws. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. The company urges investors to review the risks and uncertainties discussed in our SEC filings, including, but not limited to, our most recent Form 10-K and those risks identified in today’s earnings release. All forward-looking statements are made as of the date of this call, and Schneider disclaims any duty to update such statements, except as required by law.
In addition, pursuant to Regulation G, a reconciliation of any non-GAAP financial measures referenced during today’s call can be found in our earnings release, which includes reconciliations to the most directly comparable GAAP measures.
Now I’d like to turn the call over to our CEO, Mark Rourke. Mark?
Thank you, Steve. Hello, everyone, and thank you for joining the Schneider call today.
I will open with a few summary comments on the quarter regarding our operating segments. And then before we get to your questions, I’m going to ask Steve Bruffett just to provide some additional insight on the overall enterprise results, our strong liquidity position and the reintroduction of earnings guidance based upon the best information we have available at this time.
As it relates to the quarter, it was a demanding one, and I’m especially grateful and proud of the resiliency, our associates demonstrated daily, especially our professional drivers. In these highly uncertain and fluid times, our key business priorities are to first safeguard the health and safety of our associates, and secondly, to adapt after the dynamic freight demand needs of our valued customer community.
At Schneider, we have nearly 19,000 associates and owner-operators across the globe, and nearly 4 out of 5 of them must report to work daily to fulfill our promises to customers. They are drivers, shop, warehouse and driver services professionals, and they continue to shine in keeping goods flowing across the nation’s supply chain.
The impacts of COVID-19 in our daily work lives are pronounced. Since the onset of the pandemic, we’ve had over 100 associates who have experienced a confirmed COVID diagnosis. Fortunately, all of them have recovered or in the process of recovering from the effects. We have supported another 800 associates or so who have gone through monitoring protocols due to a potential exposure. For those in roles that cannot work remotely, that support at times includes emergency paid leave and other benefit-driven relief to ensure we are doing our best to eliminate community spread of the virus. To safeguard our associates, we have adjusted our deep cleaning protocols, provide disinfectant supplies and facemask, among other measures, at approximately an incremental $1 million of expense per month.
As it relates to the economic recovery of freight markets, it’s been uneven across our various service lines. The Intermodal segment has been impacted the most due to a combination of higher business mix of “non-essential shippers” and a reduced level of Asian sourced import activity. While volumes did improve throughout the quarter, in total, year-over-year Intermodal order count contracted 13%. But in addition to the volume reductions, the disruption to the network in terms of load balance, increased empty repositioning movements and rail purchase transportation costs led to a disappointingly low operating margin for the quarter of 5%.
Now the most recent quarter does not change our long-term operating margin target expectation for Intermodal, that remains in the 10% to 12% range. And assuming we avoid another economic shock, the work done in the second quarter by our Intermodal sales and operations team, working in concert with our customers and rail partners, is expected to result in a material improvement towards our targeted range in the third quarter of 2020. Improved order volumes and balance will contribute to that rebound in performance, and we are certainly seeing the benefit of that body of work already here in the month of July.
And one more note on our Intermodal segment. Our published Intermodal metrics indicate our total trailer count — or container count, excuse me, finished the quarter at approximately 21,200. And that number is roughly 600 units lower than we projected during our last earnings call. I just want to highlight that, that number is largely just a timing nuance between when end-of-life containers were pulled out of service and when our new containers are placed into service. And we expect that difference to largely be resolved as we operate through the remainder of 2020.
Our truckload liquid bulk tanker service also was disproportionately impacted in the quarter as its end cap market customers in the industrial and energy market experienced a mid-teen percentage drop in business volumes starting in April. Bulk tank network business volumes improved throughout the quarter, and delayed bulk dedicated start-ups became operational very late in the second quarter. The positive upward trend continues so far in the month of July, and bulk generally serves as a leading indicator for dry van truckload business volumes.
Speaking of dry van, overall, our business volumes and build customer miles rebounded the fastest across our network and dedicated truckload business. I think last quarter, we indicated we had about 445 dedicated units that have been displaced due to temporary customer shutdown activity. As the quarter closed, all of those accounts have become operational again, although several with less units than pre-COVID levels. And in addition, several new business start-ups that were delayed became operational late in the quarter. Again, assuming no market setbacks, we would expect that in the third quarter of ‘20, we will rise above pre-COVID and year-over-year volume comparators in our core truckload segment. Our focus in the second half will be on improving the network freight basket from a yield standpoint as contractual pricing through the second quarter is down low single-digit percentages year-over-year.
Now daily network freight tenders now are far exceeding our acceptance levels. And spot pricing has spiked throughout the quarter, it is now double-digit percentages above contract levels.
We also believe capacity levels are likely to tighten further as we head into the second half of the year. New truck orders remained well below industry replacement levels. New driver entrants to the industry, the top of the funnel, if you will, has been materially curtailed as public and private driving schools have responded to the pandemic with closures or certainly with smaller class sizes. And the national drug and alcohol clearinghouse process is now fully implemented.
Finally, our Logistics segment business posted a positive year-over-year growth numbers in terms of order counts and operating revenue. Our brokerage business continues to adapt well to the highly variable market conditions that we experienced throughout the quarter. And brokerage experienced a tightening capacity market as the quarter progressed and the corresponding rise in carrier costing that comes with that. But despite all that volatility, margins improved 180 basis points sequentially from the first quarter.
So in summary, there’s still a high degree of macro uncertainty. But at the same time, our retail, food, beverage and consumer nondurable customers, a large composition of our business mix, are projecting increased volumes through the second half of the year. We are in constructive planning conversations with our customers across our Intermodal and Truckload segments, and we’re seeing this near-term tightening of supply and demand in most geographies across our networks. Furthermore, we believe the driver supply condition actually could tighten further with the pending public policy decisions being debated in Washington presently.
Before we get to your questions, Steve, why don’t you just wrap up the quarter?
Thanks, Mark, and good morning. I’ll provide some perspectives on our enterprise results for the quarter and then give an update on our outlook for the remainder of the year. Enterprise revenues, excluding fuel surcharge, were down $124 million or 11%. Operating expenses were down in proportion to the revenue decline, and this resulted in adjusted income from operations of $64 million compared to $84 million last year.
Regarding the impact of COVID on our results, included in the second quarter were direct COVID expenses of about $3 million. This includes PPE costs, primarily for our drivers, additional cleaning costs and related items. We expect this level of quarterly expense will continue at least through the remainder of the year. To date, the COVID situation has not had a meaningful impact on our bad debt expense or on our DSO. But we continue to monitor and manage that situation very closely.
Also, the quarter included some reduced cost areas that were largely attributable to COVID. Most notable were health care expenses, which were lower than normal, as elective visits and procedures were largely deferred. And there were driver costs that were lower as retention levels were strong during the quarter. Collectively, these specific COVID cost areas had a nominal impact on our second quarter results. However, the overall impact of COVID, including its impact on volumes and pricing, was clearly negative in the second quarter, especially in our Intermodal segment, as Mark discussed.
Regarding equipment, there was about a $3 million negative year-over-year impact from asset impairment charges and gain/loss on sale. In the second quarter of 2020, the net of these 2 items was $2.9 million of expense while the second quarter of last year was $100,000 of expense. Difficult to say what the used equipment market would have been had COVID not happened, but we believe that it placed additional downward pressure on used tractor prices.
Moving now to our Other segment. On our earnings call in January of this year, I guided to an average quarterly expense of $4 million and indicated that there would likely be variability by quarter. In the first quarter of 2020, there was $2.2 million of expense. And in the second quarter, there was $3.7 million of income. So what drives this level of variability from one quarter to the next? As is typically the case for us, accruals for incentive compensation for our associates not directly in an operating unit are the largest contributor. Less expense was recognized in the second quarter than in the first due to the earnings impact of the COVID environment. Also, a portion of our corporate cost containment efforts showed up as favorable in the Other segment in the second quarter. For the remaining 2 quarters of the year, we now expect an average quarterly expense of $3 million, but again, note that actual results could vary.
In the nonoperating portion of our income statement, both interest expense and interest income were down about $2 million from the second quarter of last year. Interest expense was lower due to the repayment of senior notes and interest income was down due to the sharp drop in short-term rates earlier this year. Also in this section was a second quarter true-up of the mark-to-market gain from our investment in the telematics company, Platform Science. We recognized a $2.7 million gain during the quarter once the valuation work was completed. And this resulted in a total of $8.8 million booked so far this year.
Moving now to the balance sheet. Our cash balance has grown faster in the first half of 2020 than it typically would as due to lower levels of capital expenditures and working capital. In addition, the deferrals of income and payroll taxes under the CARES Act have contributed to the cash balance. We expect a reversal of these items in the second half of 2020 and anticipate being net users of cash during that time frame.
For context, we have remaining about $180 million of our projected $260 million in net capital expenditures. And with the sequential revenue growth that’s inherent in our EPS guidance, working capital will likely consume cash between now and year-end. In addition, while our cash flows will continue to benefit from the deferral of certain payroll taxes, we will resume the payment of quarterly income tax estimates. We also plan to repay a $30 million note at its maturity in September. As a net result of these items, we expect our year-end cash position to be closer to $700 million than the June 30 level of $761 million.
Regarding our cash position, we know and understand that there are questions about what we intend to do with it. As I’ve stated in the past, we will maintain a conservative balance sheet, yet are actively evaluating various alternatives for excess cash position, and we’ll continue to do so. The deployment of cash is a strategic decision for us, and we have an objective of deploying at least a good portion of the excess cash within the next 4 to 6 quarters.
Regarding our forward-looking comments. While there is uncertainty regarding the operating conditions in the second half of the year, we have chosen to restore a full year EPS guidance to provide additional perspective of what we are currently seeing for our business. Our guidance for adjusted diluted EPS of $1.10 to $1.25 assumes that, consistent with our comments on our last call, the second quarter represented the largest negative impact of the pandemic, and there will be steadily improving operating conditions during the second half of the year. Lastly, our guidance for full year net CapEx remains at $260 million.
And with that, we’ll open up the call for your questions.
And at this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Brian Ossenbeck from JPMorgan. Please proceed with your question.
Hey thanks. Good morning. Appreciate you taking the question. So maybe if you can provide a little bit more context into what assumptions do you have in the guidance, recognizing you have some improvement baked in for Intermodal coming into the third quarter, as you take those actions you outlined. But what else do you see across the truckload business, both a regular route one way and dedicated. I think that would be helpful just to understand what you’re expecting here as we look to the back half of the year.
Yes, Brian. This is Steve. There’s quite a number of assumptions, as you would imagine, inherent in there. You mentioned Intermodal, certainly, we expect improvement in those margins as we move sequentially into the third quarter here, as Mark indicated. And we feel pretty confident that we’ll make good progress to getting much closer to our targeted margin range in the second half than was experienced in the second. So that is an element inherent in our guidance. We expect continued growth in our dedicated deployment, a number of tractors that we have a nice robust pipeline and the new business wins that we’re executing against, as we speak. That’s another element that we expect to be contributors in the second half. And we do see a firming price environment. Obviously, we play predominantly in the contract space, but there are elements of — there are actions that we can take, and we’ll be taking that help further the margin profile in the truck space, as we go into the second half. Those are the biggest levers in the bulk business, I think, is seeing recovering nicely as well. So they will be helpful contributor. Mark, other dimensions that come to mind?
No, I think you covered most of them.
So maybe, Mark, you mentioned the second half focus on improving, I guess, the freight basket in yield, within, I guess, driving, in particular, granted, you have any contract exposure, but do you think the market’s positioned well enough to maybe get a little more project feed or mini bids or retenders as we do seem to be at an inflection point, where we might start hearing more of that, assuming things hold the way there are now. Or is it too early to anticipate some of that incremental improvement, and this is more of a 2021 story?
Brian, I think as we’ve kind of assessed the market, the capacity condition, some conversations and expectations of what our core customer community expects in the second half of the year, I think there is a reasonable chance that project work, additional coverage at perhaps different than the current, contract pricing gives us an opportunity to certainly around the edges and to start to shape and improve the yield profile really across all of our service offerings. And so obviously, we can’t have a major COVID second wave that shut the economy out in all those type of items. But assuming that we keep in a reasonable recovery, both from a health standpoint of the nation, I think we have a decent chance of improving the basket through the second half of the year.
Got it. And then one more for you, Mark. Just on the supply side, you mentioned all the factors of lower orders, the drug and alcohol testing, fewer trainees. They also mentioned that the public policy decisions moving through Washington. Can you expand on that? I assume you’re referring to the hair follicle testing, which has been tied up for quite some time. But we’re also hearing some rumors at least that it might actually finally move forward. So what’s your expectation on timing for that? And do you have a sense as to what could be coming out of there? And what type of impact it might have on the industry?
Yes. I think, certainly, the science is very important and I think becoming more broadly accepted from the regulatory standpoint. And so we’ve been working and doing this for a number of years. And I think we’re as close as we’ve ever been for that being to become the more of the standard. Exact timing, I’d hesitate to throw a specific date out there. But also, I think there’s other public policy issues relative to unemployment insurance and other things that could tie me the top of the funnel for industry, new industry participants.
I think our professional driver community, in general, not only at Schneider, but across the industry, has responded to the challenges and the needs of the nation extremely well. And, but any time you start to have outside forces start to play with the new entrants coming into the industry, which could be the extended unemployment or the continued slower, lower class sizes and new school slots that are available, I think, will continue to put pressure on the overall capacity situation. And that won’t resolve itself quickly.
There’s a long recovery period, before even once things start to loosen up there before that materializes itself and added capacity. So I think all of those ingredients give us a little more confidence. Again, we have to see it play out that we’re going to be in a tighter capacity situation for a few quarters here.
And our next question is from Chris Wetherbee from Citi.
I guess maybe just kind of curious about the, maybe some specific sort of truckload rate assumptions underlying the back half. And then maybe kind of within that, how quickly do you think you can start to realize some of the tightness in the market with better contractual rates? I know, typically, it tends to be a little bit first-half weighted. But how do you see that playing out?
Yes, Christian, it is a bit first-half weighted. If you look at where we are in the book, both on the Intermodal side and the truck side, we’re about 80% through, but we also have some very early in the cycle pricing that we’ll have to see if we have to go back and address. But as we look out through the year, we think we have a reasonable chance being net positive year-over-year as we head into the fourth quarter, has a combination of not only contract spot, but also increased opportunities in the special service and project space. So we put all that together. Again, I think we believe we’re well positioned to still have a positive impact yet in 2020.
And then in terms of some of the cost pressures, I guess, and maybe how we think about sequential operating ratio changes as we go into the third quarter. Clearly, with the revenue rebound, there should be some incremental leverage. But historically, I don’t know if the margins necessarily have improved in the third quarter.
And maybe layering in sort of your thoughts around driver availability. I know you talked a little bit about it. But are you starting to see some pressures there? Are there any incentives or anything that you have had to include that may kind of show up in third quarter potentially impact that historical sort of seasonal pattern of operating ratio on the truckload side?
Yes. This is Steve. On the, you mentioned the driver costs, and that element, I think, could be a bit of a headwind as we enter the second half of the year. The average cost per hire is ticking up a bit and the driver availability is diminished, as we’ve talked about here. So that’s in the mix and contemplated in our guidance. At the same time, I think we see some efficiency improvements and network fluidity, particularly in Intermodal and other items like that, that will be favorable. So obviously, if we’re to do the math, we’re indicating that we’ve got a good shot at making in the second half what we made in the second half of last year. So I think that would be some pretty solid performance.
Our next question is from Jack Atkins from Stephens.
Mark, if you could maybe just expand a bit on the changes or just the improvements that you expect to see within the Intermodal business, 2Q to 3Q. You referenced some network actions that you’re taking, but also some work you’re doing on the sales side and the operations side. Could you just expand on that for a moment? Maybe give us a little bit more detail on sort of what’s going on there.
Yes, Jack. Happy to do that. As I mentioned, we’re now about 80% through the book renewal. And so I think we have — sitting here the best view that we’ve had in some time relative to the network and how that should play out in the second half of the year. And certainly, what’s also a tremendous help to us is a number of our “nonessential shippers,” particularly in the apparel retail or the specialty retailer, now starting to come back online. And really, it took all late in the quarter — in the second quarter for that to start to gain some traction. And so that had some negative impacts not only to the volume that we’ve experienced in the second quarter, but also the network implications. So how we view the commercial activity that took place in the second quarter and the balance issues. While we still have to work through those, those won’t be magically done in 1 quarter. We do think we’re going to be materially improved, both volume and in network balance. And so drive some of the inefficiency that we experienced in the second quarter out. And those are pretty decent flywheel effects for us relative to margin improvement. That’s why we’re — believe we can make some material progress towards our long-term targets here in the third quarter.
Okay. Great. Great. And then for my follow-up question. Just curious if you could talk a bit about your recently announced partnership with Mastery. Jeff Silver is obviously a long-time leader in terms of pushing technology within the transportation sector. Just sort of curious if you could talk about what you hope to accomplish through that partnership.
Yes. Thanks for the question, Jack. Certainly, technology investment advancement is very critical to the long-term success of our enterprise. We strongly believe you’re either going forward or you’re going backward. And so technology deployment and alignment is critically important. What we — philosophically, we have identified several places where we believe it’s important that it’s our secret sauce that we must develop and feed internally things like revenue management, things like network and asset optimization, owning the connection and interface digitally between us, our customers, our driver community and third-parties. But there’s also, I think, a great opportunity to look for some collaborative partners who bring a real domain expertise and some innovation that we can combine ultimately with our scale, with our intellectual capital to have increased speed results and effectiveness. And so we took advantage of what we thought was a great opportunity with Platform Science and the industry’s need for an improved telematics. And we think what we’re embarking upon with Mastery and Jeff Silver is another such opportunity. And particularly, as our strategy has evolved from our initial quest implementation around the blending of our asset and our non-asset world in, obviously, the things that Jeff has done and his background here on automation and efficiency, combined with our scale and our assets. And so we’re really excited about where we’re getting started there. And we think that we’re going to have some great success in that partnership. So really excited about that.
Okay, great. Thanks again.
And our next question is from Ben Hartford with Baird. Please proceed with your question.
Hi, good morning guys. Mark, just interested in your perspective on really what’s going on real-time in the rail network. You talked about sequential improvement in some levers. But it does sound like the network, particularly out west, is tight for a variety of reasons, and we’re starting to see some transactional and related surcharge put into place now. To what extent are you concerned about network fluidity? We’re in a relatively seasonally weak period, but markets very tight there. Just kind of talk through or maybe offer some perspective as to some of the dynamics that are going on real-time because they just seem to be a little bit unusual.
Yes. For this time of year, Ben, particularly, there is some nodes within the network that is experiencing some unusual congestion. There’s no doubt. I think that’s just a function that we go from — an industry some pretty low volumes to a very rapid and quick recovery in volumes. And it takes some time to get just — like it takes time for our network — as an Intermodal provider, I think it takes some time for the rail network to respond to that with crews and positioning of equipment. And we’re seeing some of that certainly. And you mentioned the place, I think it’s most pronounced, which is in the Southern Cal market presently. I think that will improve over the next couple of weeks. But again, I think, again, one of the reasons we’re bullish on the recovery in Intermodal, we think it’s going to be a good, a solid demand market for the rest of the year. And so I mean that does mean we’ll probably have time to time some pressures across the network and, from congestion to some ebbs and flow on reliability. But overall, I think we’ll start to see some relief of the current condition here in the next couple of weeks.
Okay. That’s helpful. And then just want to talk or get your perspective on contract pricing. I know it’s early to be thinking about ‘21. You mentioned that spot pricing is above contract pricing by 10% or more. I think there’s concern that some of the disruptions that we’ve seen in the market recently could be short-lived. As you think about contract pricing and the trajectory that we may be on as we exit the year and look toward 2021, I know it’s too early to be talking about 2021. But is there a reasonable kind of benchmark that we can think about in terms of what contract rate growth can be during the next bid cycle just given the disparity that we see at the moment between spot and contract pricing, both on truckload and Intermodal?
Yes. Ben, I obviously understand the need for that question. I’m a little hesitant to, at this juncture, in the middle of the pandemic and presidential election coming up and all where we’re at that we can project out too far into 2021. But if I would look at the things that we look at industry-wise, I think there’s more in the positive category than the negative category for a more positive and constructive price condition as we head into ‘21. But I’d be just hesitant to do too much predicting yet.
And our next question is from Ravi Shanker with Morgan Stanley.
Mark and Steve, if I can follow up on the response to the Mastery question. I mean is there a 1 or 2 particular focus areas for the collaboration? Is it like focused on the next-generation of Quest? Is it focused on more of the logistics side of the business, maybe the technology side of the actual fleet itself? Any areas that they’re exploring would be great to know. And at what point do you think we can see some of the fruits of this partnership in terms of improved utilization or better margins or something on the number side?
Yes, Ravi, thank you for the question. Yes, we have a bit of a road map that we’ve been working for the last several months on. And certainly, where we’re going to enter the relationship will be, as you kind of highlighted, they’re on the logistics side of the relationship. But with our growing blending of our asset, non-asset world, which I referenced, which is how we bring the power of the orange box and the power-only solution with smaller long-tail carriers on behalf of our large shipper community, we believe that is a place that we can drive some additional efficiency and effectiveness and margin improvement into our logistics business. And so that’s a great starting point. But we also are looking at places within our dedicated services and our other parts of our asset piece that we see this partnership helping with. And so it will be embedded and connecting into our Quest ecosystem. And if you know Jeff, he likes to move at lightning speed. But we’ll make sure we’ll do everything in a concerted fashion that we get it right, and we feel very good at where we are presently. But it will be on the logistics side to get started.
And just to follow-up on the core business, if you will. What are shipper customers telling you now about TL versus Intermodal? And which mode they prefer given everything that’s going on with the pace of rebuilding supply chains, fuel, just time to market and everything else?
Yes. We can certainly point to conversion back a bit from Intermodal to truck in the short term. Although even with our difficulty in the second quarter, we grew in the East, which was a very competitive truck market, obviously, in the second quarter. And so they still have almost upper single-digit growth in the east year-over-year. It still demonstrates the interest that customers have in the long-term positioning between truck and Intermodal. And so, and we’ve, obviously, up until some of the congestion points here that I think we’ll get through quickly.
The Intermodal product from a reliability standpoint has been performing really well and performing on par with truck relative to reliability from kind of hub to hub. So while there is some bleed back and forth, which is natural at this time, particularly with where fuel prices are and where truck availability was in the first half of the year, I think those same forces might go the other direction as we get to the second half.
And our next question is from Tom Wadewitz with UBS.
I wanted to ask you a bit about just kind of broader view on freight and kind of conviction level. So do you think that the market’s tightened up really rapidly in June, July? Do you think that, that’s pretty likely to continue? And I guess kind of based on prior experience when you get into one of these inventory replenishment type of backdrops, I mean is it pretty reasonable to think that you have strength through the second half? And also just in terms of peak season, do you kind of feel like you’re set up for a strong peak at this point? So really just some questions around freight demand and visibility in second half.
Yes, Tom. As we’ve been in various conversations, whether it’s the home improvement channel, food, beverage, consumer product, kind of this whole nesting effect that people closer to home, most of those conversations would indicate that customers are expecting, we’re almost, in some of these categories in peak season volumes already.
It feels like that there’s a fair degree of expectation that it’s going to stay in that level for the remainder of the year. And so that’s part of our thought process as we’ve kind of looked out and provided our guidance. So, and so that’s really baked upon those conversations with customers. What we’re seeing, I think there are a number of those that have, are not building inventory yet at all. They’re just trying to keep their supply chain fluid. And I think in a number of categories, the inventory build process is yet to come. That might be the 2021 play.
And I would just add on to that I think in this environment, in particular, the notion of peak season could be really interesting when you think about retailers and how they’re viewing Black Fridays or not and whether to spread that out over time, and what that does to inventories and freight volumes, I think, will be especially interesting this year as we go through that.
Yes. I think you were asked a bit about price. I think you had some helpful comments on that. But just — so if that plays out, as you’re describing, you would think that your — even though you have some contracts that are contract overall, that may be down low single digits, you can be fairly fluid and get rates up in — maybe in fourth quarter and flat in third. Is that kind of the frame you think is reasonable?
Yes. I think there’s a reasonable chance, Tom, that as we enter the fourth quarter, we’re — particularly on the truck side of the business, positive year-over-year condition and start to build from there. I think other parts of the portfolio, on the logistics side, I think we’re pressured a bit on those same functions on carrier costs. But truck still drives the largest percentage of the enterprise, and that’s our thought at this point.
Okay. Thank you for your time.
Our next question is from Scott Group with Wolfe Research. Please proceed with your question.
Hey, thanks. Good morning, guys. So I wanted to just start with Intermodal. I know you said things are improving, but can you give us some sense on volumes in July? And then with truckload pricing that you think turns positive by the fourth quarter, how quickly do you think Intermodal pricing starts to improve? And when do you think that could inflect positive?
Yes, Scott. As it relates to Intermodal volumes, April was certainly our trough, and it improved May, it improved in June. And it’s improved further from an overall volume standpoint in the month of July. And we have a number of kind of awards that are yet to be implemented and that we think can continue to drive some of that recovery in volume that — with such a big impact in the second quarter. Pricing is in a similar fashion to truck, maybe just down a little bit further. Still low single digits, but that might take a little longer. There’s usually generally a little bit more of a lag between truck and Intermodal pricing. And so we think the primary contributors to our improvement in the second half of the year from Intermodal will be more in the network, in the volume side than it will be in the price side.
Okay. And then just quickly, maybe what’s in the guidance around logistics margins in the back half of the year? And then, Steve, any color on the other operating income and how to model that in the back half of the year?
I’ll start with the back part of your question there. In the prepared comments there, I had indicated roughly $3 million of expense per quarter in the Other segment for the remaining 2 quarters of this year. It’s a bit of a guess, but that’s the best I know how to guide at this point for that part of our income statement. And remind me the first part of your question again?
The logistics margins.
Yes. I think it’s, they’ve obviously been under pressure across the logistics space in our brokerage operations, as reflected that as well in the first half of this year. I do think we anticipate some modest improvement in there. Our brokerage unit in particular is about 50% contract, 50% spot. So that by itself, I think, lends itself to some margin expansion in the second half of the year.
Our next question is from Bascome Majors with Susquehanna.
Yes. Steve, you talked a little bit about use of cash. And I think added a 4- to 6-quarter time line to that for the first time, at least that I’ve heard publicly. Can you frame the amount of cash you think you need to run the business so we can better assess what excess might mean and understanding that in this environment, you certainly don’t want to take that down to bare bones by any means?
Yes, sure. Glad to address that. This is one of those topics that you could debate endlessly and, but from where we sit, we’ve done some analysis on our balance sheet and cyclicality and CapEx expectations over time and so on. And we target somewhere around $250 million of cash to retain on our balance sheet. So you could, in general terms, think of the amounts above there as being excess cash in our definition. And so if that helps you give some orders of magnitude and how we think about it.
No. That’s quite helpful, actually. And just to expand on that point, I mean we’ve seen in your space some other competitors with very high family ownerships choose to monetize some of that this year. I don’t know if that’s a reflection of the stock price or fear of tax changes ahead in the U.S. But I’m curious, how is the engagement with the Schneider family? Is there an opportunity to perhaps seek some liquidity ahead of some tax regime changes? And if that were to happen, would a rising float and liquidity in your shares that would hopefully stem from that open up a share repurchase program as a better option for some of that cash deployment?
Yes. We just don’t, we have nothing pending, and there’s really nothing we can discuss at this point on what plans may or may not be thought of in the long term. There’s just nothing going on in that space presently so.
The next question is from the line of Jason Seidl with Cowen and Company.
Mark, I think you mentioned earlier about the Intermodal space. And there are some surcharges being levied by some of the West Coast rail providers. Could you talk a little bit about how you guys pass them through and the success rate you guys normally have?
Yes. There’s certainly at times and really which is a function generally of making sure that there’s enough box container capacity to get to the West Coast, which really funds the network flow of additional containers out West. And generally, that’s a market-driven phenomenon that’s generally in the traditional peak season because of the inherent imbalance that occurs between Eastern bound flows coming from the imports versus what naturally flows West. And so as those market opportunities are available, and obviously, we have a large asset-owned container network, we will take advantage and take the opportunity to help support our customers. And if the market bears that, we will absolutely be in that mix.
Okay. And I guess the other follow-up question I’ll have is, I think you alluded to the fact that you might be able to go back to some of your customers with some of those early contracts that you signed that may be way, way out of the market right now in terms of pricing. Can you a talk to us about like what percentage of your book of business would you consider really under market at this time?
Well, I think regardless of where you are, in any cycle or any point, there’s always a bottom 10% of anything, so, whether it’s the strongest market or the weakest market. And so, I think there’s also different customer behaviors over time that allow for a more fluid response to conditions on both sides of that equation. And so obviously, we know where those opportunities are, and we’ll be pursuing those as appropriate.
I guess another way to ask it, is that bottom 10% now more egregiously away from market prices than it typically is?
I would say, in balance, it, we have some work to do there. Yes. So I would put it in a urgently reviewing category.
Next question is from the line of Allison Landry with Credit Suisse.
So just, I’m going to beat the dead horse with the Intermodal equipment imbalances. But is there a way to sort of specifically parse out what the competitions were in Q2? And then just as we’re thinking about the sort of progression of sequential margin improvement in the back half, I mean would you sort of, should we think about the comp in Q3 sort of being in a similar range as in Q2, then maybe start to subside in Q4? Just really trying to get a sense of how to think about the cadence of the margins in the back half.
And this is related to Intermodal was the nature of your question?
Okay. Yes. Well, as we’ve indicated, that the heaviest part of disruption in the networks happened in the April and May time frame. And while we’re still disrupted, we’ve been shipping away at the container repositioning and empty moves and so on that need to happen as a result of that displacement that happened earlier. So being at least well into that process helps the third quarter already as we sit here in late July. And I think the remaining couple of months of this quarter will be good ones as they continue to get that fluidity back in the network. So I don’t see it as necessary. I see it more of a step function. 3Q and 4Q being more similar to each other than a step-by-step sequential move, if that makes any sense.
It does. It does. That’s helpful. And then maybe, Mark, from — just sort of a longer-term strategic question. But as you think about the acceleration, pull forward in e-commerce and the need to have more inventories at more facilities, how do you view the long-term opportunity for Intermodal to participate in this market? What can you do as the IMC? Or what can the rails do to capture this potential growth? I mean, obviously, the rail need to maintain the on-time performance. But strategically, are there ways to work with high-volume customers to really both density in key lanes. Maybe if you could talk through the longer-term dynamics there. Thank you.
Yes. Thank you, Allison. Yes, absolutely. And I think it really does start with where you kind of finish there, which was a highly reliable and consistent rail network, which we’ve seen just great progress in that over the last couple of years. When you’re in conversations with customers, what’s the most often discussion as it relates to really anything Intermodal, it’s — if we can get the reliable and consistent. And sometimes, it doesn’t matter if it’s 3 days or 4 days or 5 days transit. If it’s just consistent, then they can tweak the inventory play to take advantage of the full load economics value that Intermodal provides. And so — and we’re seeing that with our growth in the East particularly because of that highly reliable truck-like service. And so it really just does come down to consistency. And I think customers can generally adapt a bit relative to the inventory that may be slightly different between Intermodal and truck. And so that’s why I still think there’s a great play for Intermodal in an increasingly e-commerce world because of the full load economics of moving even high-replenishment product or fast-moving product, et cetera. So — and just like in truck has had a lower length of haul over time, it’s likely to play out in some respects of the Intermodal network as well. Obviously, I’m not talking all the import activity. I’m talking kind of the domestic source product. And so that whole reliability is what’s key.
Perfect. Thank you.
Our next question is from the line of Ken Hoexter with Bank of America.
Great. Good morning. Talk about your fleet a little bit. It barely budged on the downside from 1Q to the second quarter depths here. Dedicated was down a few tractors, for hire actually increased. And I’m talking sequentially since most of the reduction for the for-hire was back in 4Q. How do you envision the fleet panning out here?
Yes, Ken. Thanks for the question. And yes, there’s obviously just a lot of noise in between dedicated and our network just because of the kind of the dislocation in the second quarter. So I think over time, I guess, I should say over, as we progress through to 2020, we would see more of those unit growth coming into the dedicated arena as we get, as I mentioned, late in the quarter, these are average numbers in the quarter that we kind of report publicly, but the new business start-ups and the recovery of some of the nonessential got back online more late in the second quarter. So you’ll see, I think, a little bit more of a shift towards that dedicated number as we progress through the year.
So let me ask, I mean there’s been a lot of question on rates and your thoughts and the acceleration of repricing contracts. And the industry always seems to kind of overstate the benefit sometimes of hours of service rule, benefits or drug and alcohol as that comes up now. What about the thought of, but now it’s a tight market, so we’re not going to see production picking up and net quotas are low. We kind of see that reacts obviously, production was down, but that’s picking up just like the autos.
So companies like, you noted most of your CapEx is going to be in the second half, and so we’re going to see an increase in production. We’ve heard from most of the truckers, there’s going to be a kind of really big ramp-up in the second half in production. Do we start seeing, I guess investors have asked a lot, do we start seeing a cap on rates and the rate potential here because we start seeing a big pickup in that build? Maybe just expand on that and give your thoughts on kind of the other things that can kind of keep that down and really allow the rates to get to where they need to be.
Yes. I would characterize, certainly, in our case, and I think in many others, is that’s more of a delay in replacement first half to second half that’s not necessarily, to interpret that as growth, we would have taken additional units in the first half of the customer, or excuse me, the OEMs could have delivered on them, and we would have been more on plan. So the change has nothing to do. And I think that’s playing out across many fleets as well, Ken. So I won’t over interpret first half versus second half.
And for the, and you’re speaking kind of broadly for the industry?
Yes. That’s my sense. My sense talking to the OEMS. I mean I don’t have perfect information, obviously, but it’s my sense in those discussions.
And then just the last one for me, just on logistics. It is, obviously, as we see that tighten here, and you’ve talked a little bit about the pricing tightening there. What’s your outlook? Is this a period where you’re starting to really scale on the side of that, on the gross revenue side, to see that the top line give you that growth? Or are you starting to expand? Is that the reason for working with Jeff and his team? Or is that just more on the cost side? I just want to understand if you’re focused more on the top line there.
Yes. I would say I think we’re focused on both of those. If you’ve been following our Logistics business, it’s been a consistent growth driver for our enterprise, but also competitively. And we like this 50-50 mix. We don’t want to be too heavy, one direction or the other so that we can be more responsive and resilient to market. And it’s a place that’s been a technology incubator for us to advance some of the automation features and the digital footprint of the enterprise. And what we’re going to do with Mastery is just an extension and accelerator of that same thought process.
The next question comes from the line of Todd Fowler with KeyBanc.
This is Zach on for Todd. Just want to ask about the network fleet and your assumptions for the second half of 2020. What does that assume for, I guess, the mix of spot and contract? And then if you could, maybe what was that in the second quarter? And how did that trend through the quarter? And kind of where is it at right now?
Yes. We typically, in the network side move between, call it, 5% or 6% and maybe 9% to 10% on the upper end of that scale for, in the spot market. Right now, we’re sitting kind of right in between that. And as we move through the second half of the year, there may be opportunity to amp that up toward the upper end of that percentage range that I cited.
And I guess just last one. With respect to acquisitions, I appreciate the detail you gave in the prepared remarks. But I guess just kind of broadly, what’s the current M&A environment look like? What’s your general view there?
Yes. I mean we’re actively looking and screening opportunities. As we’ve indicated in the past, we’re predominantly interested in something close to home, meaning the type of service that we’re accustomed to offering and likely asset-based and so on dedicated and specialty arenas. But there’s a lot of really small opportunities that we take a look at. But it takes something, it will take something special to get us really motivated or, I don’t, we are motivated, so that’s the wrong use of words. But something that checks a lot of the boxes for us to act upon it. So we continue to screen and are interested. And that’s just kind of where things are.
Thank you. Ladies and gentlemen, this does conclude today’s conference. You may disconnect your lines at this time. We thank you for your participation.