Greetings, ladies and gentlemen and welcome to Schneider National's Fourth Quarter 2019 Earnings Call [Operator instructions]. It is now my pleasure to introduce your host, Steve Bindas. Thank you. You may begin..

Thank you, 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.

Before we begin, I'd like to remind you that this call may contain forward-looking statements and that actual results may vary. Also, there may be references to non-GAAP measures.

Please refer to the special notes related to risks and uncertainties of forward-looking statements and the reconciliations of non-GAAP measures included in this earnings release. Now I'd like to turn the call over to our CEO, Mark Rourke..

Thanks, Steve and good morning everyone. Thank you for joining the Schneider call today. I will offer a few summary comments for the most recent quarter results regarding core operations, and then I will turn it over to Steve Bruffett for more specifics on the financials and forward commentary for 2020.

Schneider has three operating segments; truckload, intermodal and logistics that all operate at considerable scale and serve a highly diversified customer base throughout North America.

With strong Q4 performance, intermodal in 2019 for the first time surpassed $1 billion in annual revenues joining the prior achievements of the truckload and logistics segments. Logistics first crested $1 billion in operating revenues in 2018.

Despite continued brokerage volume growth logistics did not maintain that threshold level in full year 2019 primarily due to a large customer insourcing decision in our import export service line, combined with a more muted pricing environment in brokerage.

However, we expect to regain this milestone in 2020 as we are positioned for volume growth and improve spot pricing environment as the year progresses. Overall the market environment in the quarter was a continuation of the persistent oversupply of capacity trend, particularly in truckload and brokerage.

While we did see promotional activities that reflects the value customers expect from Schneider especially in the larger more complex solution set, the pricing and volume of this project-based work was less than what we experienced in the same period in 2018.

In our truckload segment, the core trucking operations excluding the effects of First to Final Mile delivered an 89.1% operating ratio for the quarter, that would be a 70 basis point sequential erosion from Q3’s 88.4% a less robust peak season extended even into our dedicated operations as our retail base customers required less extra seasonal surge support than we typically experience.

Our focus is on sizing our for higher network capacity to quality demand levels, while being mindful of the encouraging catalysts for meaningful industry supply side correction to include a change to the random drug testing requirement to 50% from 25% annually, a hardening auto liability insurance markets, the effects of full EOBR conversion and the National Drug and Alcohol clearinghouse on the top of the now extended multiple quarter weak spot pricing market environment.

Truck loads revenue per truck per week again excluding effects of First to Final Mile contracted 5.5% year-over-year primarily due to less seasonal promotional opportunities, lower spot rates, and dedicated mix changes.

As we move on to the intermodal segment, we experienced the most robust demand picture across intermodal, intermodal used the combination of above market order volume growth as a result of recent new business awards and optimal container network availability to take advantage of solid seasonal demand, including a higher mix of unique seasonal project work.

Despite the challenging marketplace, Intermodal through a solid network execution, pursuit of unique areas of opportunity, analysts improving levels of service reliability from our primary rail partners, delivered an 87.7% operating ratio in Q4 versus an 85.2% performance of Q4 of last year.

It's actually interesting to do a two-year comparison with Q4 of 2017. Intermodal since then has grown container count 29%, revenue 25% and our earnings have increased 45%. In logistics, our brokerage operating revenues contracted 12% year-over-year while growing order count 5%.

Revenue per order was lower year-over-year in brokerage due to a 600 basis point increase in contract mix, the 52% of orders, less seasonal premium opportunities in rate compression driven by the highly competitive spot market in Q4. Logistics operating ratio of 96.5% was a 220-basis point increase year-over-year.

And before I ask Steve to close out on 2019 and discuss our guidance for 2020, I will finish my comments on our strategy to unlock the full potential of our portfolio of services, and that starts with how we allocate our capital, both people, technology and rolling stock, and we will enter 2020 as a stronger company with the 2019 actions taken with First to Final Mile and the maturity of our reshaped dedicated portfolio.

Our revenue and earnings growth focus are squarely centered on delivering a truck like reliability execution at a great customer value with our asset based and best-in-class company [Indiscernible] intermodal offering capturing multi-year specialty dedicated solutions that continuously create improving value for customers while delivering a consistent driver experience and return profile for the company.

The continuing deployment of shipper, driver and carrier facing digital technologies that lower execution friction costs, while continuing to improve our customer carrier and driver experience.

And finally, 2020 will be an important development and testing year for us with equipment electrification and new safety and autonomous technologies that support our professional drivers. With that, I'll turn it over to Steve..

Thanks Mark, and good morning everyone. I'll begin with fourth quarter revenue excluding fuel surcharge, which was down $144 million compared to the robust fourth quarter of 2018.

For context, $63 million of that decline was due to a year-over-year difference in revenue from First to Final Mile, and from import export business that was in sourced by a customer earlier in 2019. So adjusting for these two items, fourth quarter 2019 revenue was down $81 million or 7.2%.

For the full year, $139 million of the $173 million decrease was attributable to these same reasons. On the topic of First to Final Mile, we booked 13 million of shutdown costs in the fourth quarter. This is somewhat larger than we originally anticipated and it's related to point in time valuations for tractors with the First to Final Mile specs.

In total for 2019, we recorded 64 million of shutdown costs, which was in the middle of our guided range of 50 million to 75 million. This should substantially close the books on this service offering and we do not anticipate this being a topic of discussion for 2020 results.

Moving to earnings, while fourth quarter adjusted income from operations of $91.4 million was down 24% from the fourth quarter of 2018, it’s my view that we operated even better in the fourth quarter of 2019 than the prior year, given the difference in operating conditions.

On a full year basis, adjusted income from operations of 306 million was well below our expectations going into the year. This amount of earnings also represents the second highest earnings in our history, second only to those of 2018. More important is the fact that we improved our portfolio and our positioning throughout the year.

Mark covered the results of our three primary operating segments so I will address our other segment. Fourth quarter 2019 included a 2.4 million loss compared to a 12.1 million loss last year. As we've discussed in recent quarters, the primary reason for the year-over-year improvement is lower accruals for incentive compensation.

Outside of that, there were only minor variances. Looking ahead into 2020, we currently expect quarterly losses for the other segment to average about 4 million and there will likely be some variability among the quarters. Moving now to the balance sheet.

It's ironic that with all the moving parts we had during 2019, our total assets at year-end were only 36 million or one tenth of a percent different from the prior year end. One of the items that moved the most was cash and marketable securities, which increased by 170 million during 2019.

That amount is above normal and the main reason was a reduction in trade accounts receivable, which was driven by lower revenues and the collection of First to Final Mile receivables. We expect our cash build to be lower in 2020 than in 2019 due to more typical working capital dynamics.

The balance of our cash and marketable securities was 600 million at year-end. We've stated on numerous occasions that we will maintain a conservative balance sheet and are comfortable with the healthy cash position.

We've also stated that we're actively looking for organic and acquisitive ways to invest in the long-term success of the company and for the benefit of our stakeholders, not our expectation that we will continue to build cash, rather, we're looking to productively deploy cash and it's our intention to begin to do so.

On the liability side of the balance sheet, we ended the year with 362 million of debt and anticipate a further reduction of 55 million during 2020 as existing notes reach their maturities. Transitioning now to 2020. There's an upcoming change to the performance metrics that we provide for our truckload segment.

Given the First to Final Mile shutdown, it makes sense to streamline these metrics from four categories down to two. Beginning with our first quarter 2020 results, we will continue to provide key performance metrics in our for higher and dedicated operations.

We will discontinue the categories of standard and specialty which are related to equipment type. So we want to give you a heads up about that pending change.

In other upcoming change involves a small, but growing component of our business within our truckload segment, we've incubated a complimentary service that pairs a Schneider trailer with third party capacity under -- operating under their own authority. This third party capacity is procured through our brokerage unit.

So now as this capacity is up and running, it makes sense to align it with our logistics segment beginning in 2020. We also want to provide some context for 2020 EPS guidance. First, the guidance assumes that overall economic conditions remain similar to those of 2019.

Second, as Mark noted earlier, we anticipate capacity rationalization in 2020, not all at once or driven by a single catalyst, but a steady progress as a result of multiple confluences. And while we do not currently envision tight market conditions across 2020, we do see a balancing of capacity and demand.

As such we anticipate overall pricing across our service offerings to be flat to slightly down early in the year, and building to favorable comparisons later in the year. On a full year basis, our guidance assumes average pricing to be flat or up low single digits across the service offerings.

Our full year guidance for diluted EPS of $1.25 to $1.35 is therefore incrementally more weighted towards the second half of the year than typical seasonality would suggest.

Regarding net capital expenditures, we expect them to be approximately 310 million similar to 2019 and our growth capital will be directed toward dedicated and specialty operations as well as trailers to enhance the density of our network. As always, we will likely make some incremental changes to our CapEx plans throughout the year.

In closing, we believe that we are well-positioned for 2020 and are energized by the opportunities in front of us, and we'll now open up the call for your questions..

Thank you [Operator Instructions] Our first question comes from David Ross with Stifel. Please proceed with your question.

Good morning, gentlemen. I wanted to talk a little bit about the very strong performance in intermodal and how you think about that going into 2020.

First, where do you expect the container count to go as we move through the year? Are you going to add a lot of containers or are you going to try to do more with the existing containers? And then, when you talked about offering a more truck like intermodal product, can you comment on the rail service? How it's improved and if there's any partners that have done a better job of getting it there?.

Great. David, it's Mark. I'll start and Steve can offer any insight. As it relates to the intermodal container count. As you'll know we came down a little bit sequentially from Q3 Q4 as we had some boxes disposed of at end-of-life.

We believe, we are very well positioned to grow this business without additional capital, so we don't foresee atleast at this juncture needing to add from where we are presently into both container or chastity levels in a meaningful way in 2020.

And so, we're focused on the network effects and I think that was one of the key drivers to our performance in the fourth quarter is managing the network very very well and having the containers where we needed them to take advantage of where there was a solid demand. And that's really our focus is to tighten up our turns and tighten up that network.

And I think we're well positioned to do that. The second part of that question, I….

It’s been on the rail partners and the improved service levels..

Yes. Excuse me, David. Yes, we had improved reliability really all across the network and in both cases meaningful improvement year-over-year.

But certainly, our Eastern rail partner is distinguished themselves relative to performing on par with truck like performance, and so again, although our partners are focused on that, and all of that allows us then to more ultimately compete with the truck alternative and so we see all those signs as very very encouraging..

And then last question just on the intermodal market outlook.

From talking to your customers and seeing the volumes that are coming through where are you most optimistic about volume growth in intermodal, whether it's by the lane or customer type?.

We're optimistic about the trade deal. We would like to be able to see additional share. We had some good share growth coming in and out of Mexico, so we're a little bit bullish there. And still the conversion opportunities, the sea of opportunity is still more pronounced in the east, but that's also where the higher truck competition is.

So, we would say are we're fairly well balanced across to where we expect to have opportunity, but maybe the international market forced me into a kind of a position to be part of the international markets in the eastern part of the network..

Excellent. Thank you..

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

Thanks. Good morning, gentlemen. Mark and Steve, we're looking at guidance it seems relatively conservative for environment where you think that rates are going to be flat to down first half but up in the second half of the year.

Is there something that prevents you know better conversion on the or line or especially when you consider the first to final mile mild tailwinds. Maybe your y OR conversion should be better, or maybe you're being conservative, and maybe you can help us kind of just walk that a little bit..

Yes sure. This is Steve and of course we're sitting here in late January and there's lots of this game to be played out. And could we perform better than our guidance? Ofcourse we could. Could things go the other direction? Yes.

We're just trying to assess how we feel about things, we do feel that like I said the cost actions we've taken during 2019 have tightened up the organization. We're operating well across the service offerings and well positioned to leverage whatever environment presents itself. It’s just sometimes things take time.

And so, it's really a degree of pace and trajectory of capacity rationalization in our view, and that that pace can vary..

Because you're seeing -- it could be upheld numbers if the market kind of tightens quicker than you expect, and if capacity comes out sooner..

Yes, but we expect to operate well regardless of the conditions. So, there's that element too..

Got it. And just on the Logistics segment, obviously you've seen a number of players kind of talk about increased competition in the segment and kind of pressure on price.

Can you just elaborate and kind of what you’re seeing up there and maybe actions that you can take to maybe defend yourself against some of those trends?.

Yes, Ravi it's weather as you mentioned, a highly competitive environment. I think some of that is driven by just the increase in the contract mix related to the routing guides and a lot less volume finding its way in the distress category or at least avenues that typically would go to the brokerage arena.

And so, as you've seen our mix of spot the contract increased I think 600 basis points year-over-year. And so just a lot less is coming through. And of those other typical channels, my sense is that's what's going on across the entire competitive space.

Our focus is when we have an outstanding platform of multimodal platform within brokerage and we're trying to differentiate how we make it easier to do business with us, whether it be carrier or the shipper and do so in a way where we certainly want to do that direct with us when possible, but also make sure that we're reaching out and finding them where they're operating, and partnering with others to expand our reach.

It’s a little lower cost of acquisition, and a higher reach across multiple platforms versus just the direct ones.

But I think the rationalization of capacity will help just as we talked on the on the truck side or the intermodal side, it will certainly have a more favorable play here, but presently there's not just not as much of that spot volume as we would typically expect..

Got it. And just one last one for me, Steve.

Apologies if I missed this in your commentary, but any thoughts on the used truck market in 2020 and kind of what we can think of in terms of gain on sale for you guys?.

Sure. I did not make any comments earlier so, on that topic obviously there's plenty of public stats out there that show that the used equipment market has softened quite a bit. And we think there's just a period of time maybe another quarter or two before that in and of itself starts to balance out again and normalize.

So going in, it’s kind of this first half, second half story that we were talking about with our earnings guidance. We expect a little drag in the first half of the year from losses on disposition of equipment and then that kind of stabilizing as we get in the second half..

Understood. Thank you..

Thank you..

Thank you. Our next question comes from the line of Ben Hartford with Baird. Please proceed with your question..

Good morning guys..

Morning, Ben..

Mark, interested in your perspective Mark on comment about the reshaped dedicated portfolio. It obviously makes sense with regard to the changes with first to final mile, but anything else that's been done operationally, internally that that speak to the reshaping of that.

And I guess in that vein, how do you -- how do you think about that the growth profile of the dedicated business in particular over a three to five year period as it's presently constituted?.

Yes, thanks Ben. Certainly, we see on the truck side of our business that to be our primary growth target. And I'm really pleased with the reshaping of the portfolio and really what it's mass.

And I've said this before on prior calls, is we're not quite through all the sunset of the some of the attrition that we that we kind of manage through because we were taking very large single site locations, 100 plus trucks, 150 trucks and replacing them and largely replaced all of that, but with 10 and 15 size more specialty type solution sets versus just capacity generation plays.

And so the sales effort to do that, the execution effort to do that, the integration with more closely and with our one way network which I think makes the dedicated network even stronger when we're well integrated there.

All of those, and we're not done we still have other improvement opportunities to take across the portfolio and have portfolio and have from an execution standpoint, and have a series of initiatives to continue to improve our overall integration across that whole truckload platform. So a very good -- good momentum there.

We were really pleased with the pipeline and in our target is a much different target just based upon what we have traditionally had shaped our dedicated portfolio. But a lot less retail, more specialty services across a much wider swath of the economy. So, all good.

And we would expect for the multi-year to your question then that that will be over the next several years our primary growth vehicle.

And we'd like to see four or five hundred trucks a year growth and it comes down to then what's your retention rate and what's the some of the changes that your customer may be going through that alters the current portfolio.

And we've seen some of that with customers changing some of their distribution patterns, has had some effects on the overall tractor count, but still very well positioned and the organization is really lined up well and the commercial aspects behind that objective..

That's helpful. And then if I can get any level of specificity on the comment from you or Steve.

With regard to pricing being flat up across the portfolio in 2020, I mean, can you kind of rank order the buckets dedicated truckload and intermodal, how you see that playing out? Whether you see one mode being better or more or worse than that kind of flat to up portfolio pricing comment that you made for 2020? Thanks..

Yes, I guess that's a layer of specificity that we haven't gotten into, but obviously the tide kind of moves all of those together. I think, our net revenue per order and our logistics unit would probably move the quickest because it has plays in the spot market by definition most pronounced way as a percent of its overall revenue.

And then, we're predominantly contractual and the rest of the business and so there's a whole different dynamic going on within that space though that helps provide some context..

Yes, we think our hit for higher space and the truck side will be in a right there on probably par with the logistic space, but I think Steve contractual nature dedicated more multi-year in nature. So, most of those comments centered around our network businesses..

Thanks. If I could just get one specific question answered. A truckload versus intermodal, do you see one as being if you look at one-way truck load versus domestic intermodal, one is being more competitive than the other during 2020 from a contractual bid perspective? Thanks..

Let's think about that a little bit, Ben. I think, we certainly don't see any strategic appetite changes from our customers relative to looking for opportunities to maximize intermodal. Obviously we've seen some conversion back this year to so over the road particularly and it’s just because of pricing.

So very bullish on the intermodal alignment with the customer community, and so I don't think I really would put a difference between the two..

Thank you..

Thank you. Our next question comes from the line of Jack Atkins with Stephens. Please proceed with your question..

Hey guys. Good morning. Thanks very much for taking my questions. I guess, just starting off for me is your capital allocation. I guess Mark or Steve, how do you think about balancing M&A relative to increase shareholder returns. Your balance sheet is very strong. You're going to have nice free cash flow continuing.

I mean, are there opportunities in the M&A market accelerating from your perspective, and what would it take for you guys to maybe get to a point to feel comfortable returning cash to shareholders here?.

Yes Jack, this is Steve. I'll tackle that. I mean, we haven't taken any options off the table, I want to be clear about that.

And as in my earlier comments, just trying to convey the message that we're very aware that we have this cash on the balance sheet and we absolutely want to put it to work for the benefit of shareholders whether that's investment in long term returns and revenue and earnings growth that we can generate and/or some return to shareholders.

So, they're all on the plate and being considered, and we're not force ranking them at this point that we want to be prudent with deploying capital. If it isn't an acquisition or acquisitive space, we want to make sure that we're fine paying a fair price. We don't want to pay more than fair price. And so that that creates a bit of a dynamic too.

So we won't [ph] be prudent stewards of capital and measure ourselves over a longer course of time as opposed to short bursts. So, we do focus on long-terms earnings with growth..

That makes sense and that's a very fair approach. And I guess for my second question, you're kind of going back to the partnership you announced during the fourth quarter with Truckstop.com I think specifically related to this "Book It Now" pilot.

Is this the time which you guys are seeing maybe some increased opportunities to move to a more automated business model. And are there may be some potential fairly meaningful synergies to be gained over the next several years as you guys maybe do more with technology in your business.

Even though you're already I think on the forefront of technology within that within the industry.

Are you seeing more opportunities to utilize technologies to drive efficiencies as you look forward over the next couple of years?.

Jacky, you're right on our strategy.

We believe there is ample opportunity across all parts of our business to use the power of technology and automation to really just increase the speed and accuracy of information that we share with our various trade partners to as you mentioned both on our platform direct but extending into others like Truckstop.com to reach people where they maybe at and do so in such a way that takes the friction and the time out of it by using some automated technologies.

And our Quest platform enables that the decision science to be able to post that and various places we think has great promise. And I think people are more and more getting comfortable changing the way they do business on both the carrier shipper and side to take advantage of that.

So, that's what we talk about our primary investments in tech it's in exactly that space..

Okay, great. Thank you again for the time..

Thank you. Our next question comes from the line of Chris Wetherbee with Citi. Please proceed with your question..

Hey thanks, good morning guys..

Good morning..

I guess maybe you know if, and I apologize if I missed in your prepared remarks, it's been a busy morning with multiple calls. But I wanted to kind of touch a little bit on sort of the more near term fundamentals that you're seeing in the truckload market.

Kind of how December shaped up, does it feel like it ended up kind of coming and a bit better than maybe the expectations were and how is sort of that translated into early January activity. I know it's a challenging time of year to kind of measure the health or like error of the market.

But kind of want to get through that early read and how you guys are thinking about it?.

Chris, I -- as you asked on what can maybe momentum to finish the year. I think we are probably most disappointed with the October and early November timeframes if you would again measure to typical peak season. And we felt better about December the momentum throughout. So, it did appear to build.

But overall the quarter this did have what we would typically see and there is lots of reasons perhaps based upon how the holiday fell and the strength of season would have a reason but we just didn’t see all that promotional activity we typically saw.

But we did see some build and we wouldn’t say it's a terrific robust start to January but it's on expectation and we have seen some build throughout the month again like we saw in December. So, and again I'm speaking mostly to the network side of the businesses, the for higher side..

Okay. Now, that's helpful. And then when you think about sort of your pricing commentary for 2020, can you talk a bit about how we should be thinking about fleet development in that context. So, obviously you've got to gone -- you've gone through the first to final mile calling over the course of the last couple of quarters.

But how do we think about the fleet in 2020?.

You're referencing fleet sizing?.

Correct yes, that's correct..

Yes. I think and we're satisfied with where -- maybe I'd do a little bit by segment, I think we're satisfied where we are from a for higher standpoint and which is our largest component.

And we are really focusing our growth aspirations and where we're targeting in our specialty areas of the bulk and the liquid tanker space for example which would be in the specialty area and dedicated.

And as I mentioned earlier, I think we have great growth potentials in their model and doing so without adding capital in any meaningful way to do that. So, our growth focus is those specialty areas even obviously logistics we think is poised for a rebound particularly in the second half of the year as things start to firm up..

Okay, that's helpful. And then I guess maybe my last question. Just coming specifically back to intermodal and thinking about the opportunities out there.

Looks like you need specific exchanging a little bit of some if it's approached to transcontinental business or want to get a sense of maybe how you thought the load growth outlook was going to be obviously that impact the growth in the fourth quarter.

Trying to get a sense of maybe how you guys are thinking about the market share opportunities for you specifically in intermodal..

Yes. We've been -- we're really pleased with the progress in that business in total and our ability to execute in and as I often refer to our competitive advantage as it relates to the company Drey & Company, Drey model that we just execute very well again.

And so, we would expect that we will continue to look for ways to growth that business and obviously as the truck market hardens a bit, that's a nice catalyst particularly in the east from more opportunity there. So, I don’t know see if any other kind of framing on that but..

Okay. I appreciate and thank you very much..

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

Hey thanks, good morning guys..

Good morning..

Can you kind of share what you're seeing from bids early on in terms of truckload and intermodal, I'm not sure I heard that, yet..

Yes. We have, Scott we have lots of activity in flight but it hasn’t, we're still early in that process. I don’t think we have really any real great insight to share yet relative to being through that.

And we didn’t have a whole lot of activity in the fourth quarter and so it's hard to have something from a sample set to be represented at this juncture..

Okay. On the intermodal side, can you say do you have visibility or your rail cost increases in '20 higher or lower than they were in '19. And then, I don’t know if you would have any can give any guidance on the direction of intermodal margins for the year..

As it relates to kind of rail costs, as you know we have long-term contracts that recognize where the market moves and in some of the effects and to certainly in 2019 was a market moved very aggressively in 2018.

So, as the market kind of rationalize, we would expect those same mechanisms to come into play relative to when the market goes the other direction. And so, it's all based upon kind of those dynamics, Scott..

So, what does that potentially mean for intermodal margins this year?.

Yes. we've stated in the past, so we expect to offer 8% in the 10% to 12% margin range and I think our expectations for 2020 would certainly fall comfortably in that range..

Okay, alright. Thank you, for the time guys..

Thank you. Our next question comes from the line of Jordan Alliger with Goldman Sachs. Please proceed with your question..

Yes, hi. Just a quick follow-up on the capacity in the dedicated side. I think longer term you mentioned you would like to see 400 or 500 truck growth per year.

Does that apply to 2020 as well?.

Yes. we're probably on the lower side of that and it really comes down to Jordan some of those other dynamics that go on the changing supply chain of customers. But certainly on the new business acquisition front, we're very comfortable with that number. It comes down to kind of where your current network is and what changes maybe afoot..

And just a quick follow-up. With the move to more specialty on the dedicated and some of what you're talking about I mean is does that imply I think we have you've mentioned this before more private fleet type conversions than you've traditionally done and dedicated so the process maybe a little bit longer in terms of bringing this in.

I'm just trying to get a feel for the strategy around that..

Yes. I think that's a very much on line with what we have experienced and what we intend to focus on in.

not that we're anti big box retail or any of those items but we were over our history our mix was probably too heavy in that regard and underrepresented in some of the other more specialty markets and early over the last 18 to 24 months that's been our focus in change.

And with that comes a little different sales cycle and what comes with that is a more market penetration that you have to have from a commercial standpoint which we've been addressing. But well also comes with that is very predictable very driver value added type solutions that we think are stickier.

And provide not only a great experience for the drive and the customer but also a more steady return to the organization..

Great, thank you..

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

Yes. Thanks for taking my questions here. Apologies if I missed this earlier, I was also having calls but did you guys just quantify the expected incentive comp headwinds that's going to hit in the other and could you clarify with the call it flat up 7% 8% guidance range.

Is this initial budget have you at a target incentive comp or above or below, thanks?.

Sure. This is Steve. And we haven’t talked about it on this call but I have on prior calls where if we talk about headwinds and tailwinds comparing 2020 to 2019, of course we have the first to final mile tailwinds that are about $35 million worth of operating losses that won't be in 2020 that were in 2019.

So, there is that and we've also stated roughly a $20 million year-over-year headwind in 2020 on the incentive comp piece that you're enquiring about. And that at that number it assumes a target pay up for the annual bonus and some of the long-term incentive components of that number..

Yes. Thanks for clarifying and really airing that, Steve. And just a follow-up on Jack's question in your prepared remarks on the capital allocation. I mean it sounds like you guys are perhaps closer to decision and announcing something there. And noticed that you typically announced your dividend in a day or two before the 4Q report.

I mean, is this something that we could hear something morphing into share from and short order, I'm just kind of curious about the cadence and we want to hear more. Thanks..

We're not on the cusp of anything big there, so I don’t want to convey that message. What I am trying to convey is that we take this very seriously, we take capital allocation and return on capital very seriously. And its responses are not passive or dismissive at all or active.

We're looking, we're trying to deploy capital in productive ways for the long-term benefit as a company and a shareholder. So, that is the message we're trying to convey. How we deploy that and when we do it, I don’t have specifics about yet. I just wanted everyone to know that we are working hard on it and taking very seriously..

Thank you for the colorful responses on both, thanks..

Yes..

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

Yes, good morning. It's Tom. Wanted to I guess we've seen two competitors in various businesses that have bought and if you want to call it like consolidation businesses. So, how about CaseStack a while ago and then obviously see it for the news last night and prime distribution services.

Is that kind of broad consolidation capability, something that it's useful capability to have with big retail customers, is that something that you might want to have in the future or is that something that's kind of outside the range of capabilities you might consider in M&A?.

Hi Tom, this is Mark. No, I think we would consider a wide range of items and then we certainly would potentially have some leverage there.

We have a consolidation the consolidation business which is really centered around the ports with our import-export business which is largely taking international boxes and consolidating and placing into the domestic supply chain. And so, in some respects it's not just an LTL consolidation model but more of an international one.

So, there are some technologies and there are some other things that could offer some leverage there. But it's we're not narrowing it to that scope but we haven’t eliminated it either..

I mean, is that a view that just kind of close -- is that a business that's close proximity to trucker intermodal and it will be pretty helpful or is it reasonably distant and not particularly necessary?.

Yes. I don’t think it's an absolute for us, I think there is different ways to accomplish that service set solution set the customers across this space. But as Mark said earlier, nothing has really ruled out at this point..

Right, okay. I think you've commented some on the kind of outlook in the pricing outlook. When you look at second half and you anticipate some improvement.

Is that driven primarily by the capacity rationalization or are you expecting some actual pickup in loads and maybe hearing some optimism from your customers on level of activity when you look to second half?.

Yes. We've not tried to over think that part of it because it's election year, who knows what far might go on in the broader economic space. So, we've just kind of assumed status quo from the broader economic setting.

Our assumptions are more built about around specifically within the freight environment and the capacity and supply equation and the kind of works that we see changing that dynamic as we move through the year..

Okay, great. Thank you for the time..

Thanks, Tom..

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

Hey good morning, and thanks for taking the question. I just wanted to see Steve if you can offer more context around some of the cost savings initiatives. I think at least there effective cost management effort to in the last couple of press releases. If you've anything specific, can you put a perhaps a finer point on that.

And then also perhaps address the insurance market has been getting lot of attention recently. And just curious as to what level of pressure you're feeling there compared to maybe what some of the other smaller players are experiencing..

Yes, sure. The I'll take the latter part of that first. The insurance markets says probably seen and read about definitely have hardened significantly since our last renewal.

Ours is pending later in the first quarter, so we don’t have specifics on that yet but do anticipate a fairly hefty increase in our premiums depending on how we end up structuring our program. And so, lack specifics and how those will stack up exactly but it is --..

Certainly, you'd add a point in catalyst for the capacity rationalization..

Yes. That's the extension of that thought is it's one of those things that puts pressure on marginal capacity..

Okay.

And so, right on the cost savings and then just if you could maybe elaborate what type of increase you have baked in to the guidance at this point from insurance sides specifically?.

Yes. We haven’t communicated what we expect the increase to be would or I guess say there are a lot of moving parts as we begin the conversations with the markets. So, we'll probably need to give a better update on that on our first quarter call. And on the broader topic of the cost savings that you started with.

We've kind of surgically gone through the organization whether it's operational costs or back office costs, and indirect or direct or however you like to think about those things. And have identified numerous pockets of change that we've made in the organization.

So, it's not just one area that we've found some magic solution to, it's just the large part of work across a lot of spaces that aggregate. And we expect to continue that in 2020 and have a pipeline of things that we're pursuing including benefits from tech investments that we're making and we'll continue to make.

But other is just process improvement and efficiencies we identify from questioning how we do things and why we do things..

Okay. Then just one more for Mark, a quick on the intermodal side. Obviously that we were talking about truckload conversion and some have even talked about maybe opening up some lanes that had enclosed under the rationalization programs over last couple of years.

What's your perspective on gaining more share up the highway and how if you even are expecting some lanes to start to reopen here as TSR stress to take the next sort of couple of steps. Is that a 2020 event or is it something you just have to watch and wait and see how it develops..

Well, I think its incumbent upon us to continue to have dialogue to be able to demonstrate where we think that there could be some advantages to either addressing a decision that was made or even as we did a couple of times and announced last year having some new service lanes just develop because of the commercial capability and the commercial attractiveness that we can show to the railroads.

And we want to make sure that has a good partner and we're continuing to bring those and surface those up. Obviously, I can't speak for them. They'll make the decision that's ultimately in their best interests, but we want to make sure as we have at least a seat that we can share perspective and share opportunities.

And so I think, those things are well received, and sometimes they work, and sometimes they don't..

Okay. Thanks Mark, appreciate it..

Thank you. Ladies and gentlemen, at this time there are no further questions. I would like to turn the floor back to management for closing comments..

Great. Well thanks everyone. I know it's a busy day with lots of alternatives out there, but we appreciate the time you gave us..

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..