Schneider National, Inc. (SNDR) Q4 2019 Earnings Call Transcript

Schneider National, Inc. (SNDR 2.65%)
Q4 2019 Earnings Call
Jan 29, 2020, 10:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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.

Steve Bindas -- Director of Investor Relations

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.

Mark Rourke -- President and Chief Executive Officer

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 improved 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%.

The less robust peak season extended even into our dedicated operations as our retail-based customers required less extra seasonal surge support than we typically experience. Our focus is on sizing our for-hire network capacity to quality demand levels while being mindful of the encouraging catalyst for meaningful industry supply side correction to include a change to the random drug testing requirement to 50% from 25% annually; the 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. Truckload's revenue per truck per week, again excluding the 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 a 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 and with 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 to 52% of orders, less seasonal premium opportunities and rate compression driven by the highly competitive spot market in Q4. The 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, have a great customer value with our asset-based and best-in-class company dray intermodal offering, capturing multiyear 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.

Steve Bruffett -- Executive Vice President and Chief Financial Officer

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 insourced 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 0.1% 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 a 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-hire and dedicated operations, and we'll discontinue the categories of standard and specialty, which are related to equipment type. So I wanted to give you a heads-up about that pending change. Another upcoming change involves a small but growing component of our business. Within our truckload segment, we've incubated a complementary service that pairs a Schneider trailer with third-party capacity operating under their own authority.

This third-party capacity is procured through our brokerage unit. So now that 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 our 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 toward 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're 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.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of David Ross with Stifel. Please proceed with your question.

David Ross -- Stifel Financial Corp. -- Analyst

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?

Mark Rourke -- President and Chief Executive Officer

Great. David, it's Mark. I'll start, and then 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 to Q4 as we had some boxes disposed of at end of life.

We believe we're very well-positioned to grow this business without additional capital, so we don't foresee, at least at this juncture, needing to add from where we are presently to both container or chassis 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 --

Steve Bruffett -- Executive Vice President and Chief Financial Officer

Service [Inaudible]

David Ross -- Stifel Financial Corp. -- Analyst

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

Mark Rourke -- President and Chief Executive Officer

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, all of 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.

David Ross -- Stifel Financial Corp. -- Analyst

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 lane or customer type?

Mark Rourke -- President and Chief Executive Officer

Well, 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 we're fairly well balanced across 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 and the Eastern part of the network.

David Ross -- Stifel Financial Corp. -- Analyst

Thank you.

Operator

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

Ravi Shanker -- Morgan Stanley -- Analyst

Thanks. Mark or Steve, when I look at your guidance, it seems relatively conservative for environment where you think that rates are going to be flat to slightly down first half but up in the second half of the year. Is there something that prevents better conversion on the OR line or especially when you consider the First to Final Mile tailwinds, maybe your OR conversion should be better or maybe you're being conservative. So maybe you can help us kind of just walk through that a little bit.

Steve Bruffett -- Executive Vice President and Chief Financial Officer

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? Of course, 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 the pace and trajectory of capacity rationalization in our view, and that pace could vary.

Ravi Shanker -- Morgan Stanley -- Analyst

So you're saying that maybe there could be upside in numbers if the market kind of tightens quicker than you expect and if capacity comes out sooner?

Steve Bruffett -- Executive Vice President and Chief Financial Officer

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

Ravi Shanker -- Morgan Stanley -- Analyst

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 on kind of what you're seeing out there? And maybe actions that you can take to maybe defend yourself against some of those trends?

Mark Rourke -- President and Chief Executive Officer

Yes, Ravi, it was a, 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 distressed category or at least having -- is that typically would go to the brokerage arena. And so as you've seen, our mix of spot to contract increased, I think, 600 basis points year over year. And so just a lot less is coming through kind of those other typical channels.

And my sense is that's what's going on across the entire competitive space. And our focus is we know we have an outstanding platform, a multimodal platform within brokerage and what we're trying to differentiate is 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 truck side or the intermodal side, it will certainly have a more favorable play here.

But presently, there's not as much of that spot volume as we would typically expect.

Ravi Shanker -- Morgan Stanley -- Analyst

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?

Steve Bruffett -- Executive Vice President and Chief Financial Officer

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 that it'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 in the 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 to the second half.

Ravi Shanker -- Morgan Stanley -- Analyst

Understood. Thank you.

Operator

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

Ben Hartford -- Baird -- Analyst

Hey, good morning, guys. Mark, interested in your perspective, Mark, on comment about the reshape dedicated portfolio, obviously, it makes sense to with regard to the changes with First to Final Mile. But anything else that's been done operationally internally that speak to the reshaping of that? And I guess in that vein, how do you think about the growth profile of the dedicated business, in particular, over a three- to five-year period as it's presently constituted?

Mark Rourke -- President and Chief Executive Officer

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 gets mass. And I've said this before on prior calls is we're not quite through all the sunset of some of the attrition that we kind of managed through because we were taking very large single-site locations, 100-plus trucks, 150 trucks, and replacing them and largely have 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 in 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 a portfolio that have, from an execution standpoint, that have a series of initiatives to continue to improve our overall integration across that full truckload platform. So feel very good momentum there. We're really pleased with the pipeline.

And our target is a much different target just based upon what we had traditionally had shaped our dedicated portfolio. So a lot less retail, more specialty services across a much wider swath of the economy. So all good. And we would expect for the multiyear, to your question, Ben, that that will be over the next several years, our primary growth vehicle.

And we'd like to see 400, 500 trucks a year growth. And it comes down to then what your retention rate and what's some of the changes that your customers 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 feel very well positioned, and the organization has really lined up well and the commercial aspects behind that objective.

Ben Hartford -- Baird -- Analyst

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 to 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 worse than the kind of flat to up portfolio pricing comment that you made for 2020?

Steve Bruffett -- Executive Vice President and Chief Financial Officer

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 in our logistics unit would probably move the quickest because it plays in the spot market, by definition, most pronounced way as a percent of its overall revenue.

And then we're predominantly contractual in the rest of the business. And so there's a little different dynamic going on within that space. So if that helps provide some context.

Mark Rourke -- President and Chief Executive Officer

Yes. We think our for-hire space and the truck side would be right there and probably on par with the logistics space. But I think, Steve, contractual nature, dedicated, more multiyear in nature, so most of those comments centered around our network businesses.

Ben Hartford -- Baird -- Analyst

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

Mark Rourke -- President and Chief Executive Officer

That'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 over the road, particularly in the East 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.

Ben Hartford -- Baird -- Analyst

Thank you.

Operator

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

Jack Atkins -- Stephens Inc. -- Analyst

Hey, guys, good morning. Thanks very much for taking my questions. So 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 increased 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?

Steve Bruffett -- Executive Vice President and Chief Financial Officer

Yes, Jack. This is Steve. I'll tackle that. I mean, we haven't taken any options off the table.

Let me 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, but we want to be prudent of 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 creates a bit of a dynamic, too. So we want to be prudent stewards of capital and measure ourselves over a longer course of time as opposed to short burst. So we're -- we do focus on long-term earnings growth.

Jack Atkins -- Stephens Inc. -- Analyst

That makes sense. That's a very fair approach. And I guess, for my second question, 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 a sign that you guys are seeing maybe some increased opportunities to move to a more automated business model? And are there maybe 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 the industry? Are you seeing more opportunities to utilize technology to drive efficiencies as you look forward over the next couple of years?

Mark Rourke -- President and Chief Executive Officer

Jack, 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 may be 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 in 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 decide to take advantage of that. So that's when we talk about our primary investments in tech, it's in exactly that space.

Jack Atkins -- Stephens Inc. -- Analyst

Great. Thank you again for the time.

Operator

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

Chris Wetherbee -- Citi -- Analyst

Hey, thanks. Good morning, guys. I guess, maybe if -- I apologize if I missed it in your prepared remarks. It's been a busy morning with multiple calls, but 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 in 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 lack of it relative to market. So kind of wanted to get sort of that early read and how you guys are thinking about it?

Mark Rourke -- President and Chief Executive Officer

Christian, I -- as you asked on what gave me momentum to finish the year, I think we were probably most disappointed with the October and early November time frames, if you would, again, measure to typical peak season, and we felt better about December and the momentum throughout, so it did appear to build. But overall, the quarter just didn't have what we would typically see. And there's lots of reasons perhaps based upon how the holiday fell and to shrink the season for whatever reason. But we just didn't see all that promotional activity we typically saw.

But we did see some build in -- 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-hire side.

Chris Wetherbee -- Citi -- Analyst

OK, OK. No, 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 gone through the First to Final Mile culling over the course of the last couple of quarters. But how do we think about the fleet in 2020?

Mark Rourke -- President and Chief Executive Officer

You're referencing fleet sizing?

Chris Wetherbee -- Citi -- Analyst

Correct, yes. That's correct.

Mark Rourke -- President and Chief Executive Officer

So yes, I think we're satisfied with where -- maybe I'll do it a little bit by segment. I think we're satisfied where we are from a for-hire standpoint, which is our largest component. And we are really focusing our growth aspirations and where we're targeting in our specialty areas that would be both in 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 potential with Intermodal and doing so without adding capital in a meaningful way to do that.

So our growth focus is in those specialty areas. And then obviously, Logistics, we think, is posed for a rebound, particularly in the second half of the year as things start to firm up.

Chris Wetherbee -- Citi -- Analyst

OK, OK. That's helpful. And then, I guess, maybe my last question just coming specifically back to Intermodal and thinking about the opportunity set there. Looks like Union Pacific is changing a little bit of some of it's approach to shares of continental business.

I wanted to get a sense of maybe how you thought the load growth outlook was going to be, obviously, bouncing back to growth in the fourth quarter? Trying to get a sense of maybe how you guys are thinking about the market share opportunity for you specifically in Intermodal?

Mark Rourke -- President and Chief Executive Officer

Yes, we've been -- we're really pleased with the progress in that business in total and our ability to execute. And as I often refer to our competitive advantage as it relates to the company -- dray-side company -- dray model that we just execute very, very well against. And so we would expect that we will continue to look for ways to grow that business. And obviously, as the truck market hardens a bit, that's a nice catalyst, particularly in the East, for more opportunity there.

So I don't know, Steve, any other kind of framing on that, but --

Chris Wetherbee -- Citi -- Analyst

I appreciate that. Thank you very much.

Operator

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

Scott Group -- Wolfe Research -- Analyst

Hey, thanks. Morning, guys. Can you guys share what you're seeing from bids early on in terms of Truckload and Intermodal? I'm not sure I heard that yet.

Mark Rourke -- President and Chief Executive Officer

Yes. We have -- Scott, we have lots of activity in flight, but it hasn't -- we're so 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 representative at this juncture.

Scott Group -- Wolfe Research -- Analyst

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

Mark Rourke -- President and Chief Executive Officer

As it relates to kind of rail costs, as you know, we have long-term contracts that recognize where the market moves. And some of the effects into certainly in 2019 was a market moved very aggressively in 2018. So as the market kind of rationalized, we would expect those same mechanisms to come into play relative to when the market goes the other direction. So it's all based upon kind of those dynamics, Scott.

Scott Group -- Wolfe Research -- Analyst

So what does that potentially mean for Intermodal margins this year?

Steve Bruffett -- Executive Vice President and Chief Financial Officer

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

Scott Group -- Wolfe Research -- Analyst

All right. Thank you for the time, guys.

Operator

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

Jordan Alliger -- Goldman Sachs -- Analyst

Yes, hi. Just a quick follow-up on the capacity in the dedicated side. I think longer term, you mentioned you'd like to see 400- or 500-truck growth per year. Does that apply to 2020 as well?

Mark Rourke -- President and Chief Executive Officer

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 in 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 may be afoot.

Jordan Alliger -- Goldman Sachs -- Analyst

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, it is -- does that imply -- I think we've -- you've mentioned this before more private, fleet-type conversions than you've traditionally done and dedicated. Just 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.

Mark Rourke -- President and Chief Executive Officer

Yes, I think that's a -- very much on line with what we have experienced and what we intend to focus on. And 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 underrepresentative of some of the other more specialty markets. And really, over the last 18 to 24 months, that's been our focus and change. And with that comes a little different sales cycle.

What comes with that is more market penetration that you have to have from a commercial standpoint, which we've been addressing. But what 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 driver and the customer, but also a more steady return to the organization.

Jordan Alliger -- Goldman Sachs -- Analyst

Right. Thank you.

Operator

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

Bascome Majors -- Susquehanna International Group -- Analyst

Yes. Thanks for taking my questions here. Apologies if I missed this earlier. I was also hopping calls.

But could you guys just quantify the expected incentive comp headwind that's going to hit in the other? And could you clarify with, call it, flat to up 7%, 8% guidance range, is this initial budget -- have you had a target incentive comp or above or below?

Steve Bruffett -- Executive Vice President and Chief Financial Officer

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 '20 to '19, 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 '19. So there's that.

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

Bascome Majors -- Susquehanna International Group -- Analyst

Thanks for clarifying and reiterating 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 the decision or announcing something there. I've noticed that you typically announce your dividend a day or two before the 4Q report.

I mean, is this something that we could hear something more for you to share from in short order? I'm just kind of curious about the cadence of when we might hear more.

Mark Rourke -- President and Chief Executive Officer

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 it's -- our responses are not passive or dismissive at all.

We're active. We're looking -- we are trying to deploy capital in productive ways for the long-term benefit of the company and our shareholders. 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 want everyone to know that we are working hard on it. And I take it very seriously.

Bascome Majors -- Susquehanna International Group -- Analyst

Thank you.

Operator

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

Tom Wadewitz -- UBS -- Analyst

Yes. Good morning. It's Tom. Wanted to -- I guess, we've seen two competitors in various businesses that have bought, I don't know if you want to call it like consolidation businesses, so Hub bought CaseStack in a while ago.

And then obviously, C.H. with the news last night on Prime Distribution Services. Is that kind of broad consolidation capability something that's a 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?

Mark Rourke -- President and Chief Executive Officer

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/deconsolidation 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, not just an LTL kind of 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 wouldn't eliminate it either.

Tom Wadewitz -- UBS -- Analyst

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

Mark Rourke -- President and Chief Executive Officer

I don't think --

Steve Bruffett -- Executive Vice President and Chief Financial Officer

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

Tom Wadewitz -- UBS -- Analyst

Right, right. OK. I think you've commented some on the kind of outlook and 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?

Steve Bruffett -- Executive Vice President and Chief Financial Officer

Yes, we've not tried to overthink that part of it because it's an election year, and who knows what 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 catalysts that we see changing that dynamic as we move through the year.

Tom Wadewitz -- UBS -- Analyst

Great. Thank you for the time.

Operator

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

Brian Ossenbeck -- J.P. Morgan -- Analyst

Hey, good morning. Thanks for taking the question. Just wanted to see, Steve, if you can offer more context around some of the cost savings initiatives. I think at least the effective cost management referred to in the last couple of press releases, if you have anything specific you can put perhaps a finer point on that? And then also perhaps address the insurance market has been getting a lot of attention recently.

I'm just curious as to what level of pressure you're feeling there compared to maybe what some of the other smaller players are experiencing?

Steve Bruffett -- Executive Vice President and Chief Financial Officer

Yes, sure. The -- I'll take the latter part of that first. The insurance markets, as you've 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 blank specifics on how those will stack up exactly, but it is definitely a headwind.

Mark Rourke -- President and Chief Executive Officer

And certainly, we see that as a coming catalyst for the capacity.

Steve Bruffett -- Executive Vice President and Chief Financial Officer

Yes.

Mark Rourke -- President and Chief Executive Officer

And rationalization.

Steve Bruffett -- Executive Vice President and Chief Financial Officer

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

Brian Ossenbeck -- J.P. Morgan -- Analyst

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

Steve Bruffett -- Executive Vice President and Chief Financial Officer

Yes. We haven't communicated what we expect the increase to be. Like I said, 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. But 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 a lot of hard work across a lot of spaces that aggregate to. 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 others is just process improvement and efficiencies that we identify from questioning how we do things and why we do things.

Brian Ossenbeck -- J.P. Morgan -- Analyst

OK. And then just one more for Mark. Real quick on the intermodal side. Obviously, the railroads are talking about truckload conversion.

Some have even talked about maybe opening up some lanes that had been closed under the rationalization programs over the last couple of years. What's your perspective on gaining more share off the highway? And how -- if you even are expecting some lanes to start to reopen here as PSR starts to take the next sort of couple of steps? Is that a 2020 event? Or is this something you just have to watch and wait and see how it develops?

Mark Rourke -- President and Chief Executive Officer

Well, I think it's 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 as a good partner, 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 interest.

But we want to make sure that we have at least a seat that we can then share perspective and share opportunities. And so I think those things are well received and sometimes they work and sometimes they don't.

Brian Ossenbeck -- J.P. Morgan -- Analyst

OK. Thanks, Mark. Appreciate it.

Mark Rourke -- President and Chief Executive Officer

Thank you.

Operator

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

Mark Rourke -- President and Chief Executive Officer

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.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

Steve Bindas -- Director of Investor Relations

Mark Rourke -- President and Chief Executive Officer

Steve Bruffett -- Executive Vice President and Chief Financial Officer

David Ross -- Stifel Financial Corp. -- Analyst

Ravi Shanker -- Morgan Stanley -- Analyst

Ben Hartford -- Baird -- Analyst

Jack Atkins -- Stephens Inc. -- Analyst

Chris Wetherbee -- Citi -- Analyst

Scott Group -- Wolfe Research -- Analyst

Jordan Alliger -- Goldman Sachs -- Analyst

Bascome Majors -- Susquehanna International Group -- Analyst

Tom Wadewitz -- UBS -- Analyst

Brian Ossenbeck -- J.P. Morgan -- Analyst

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