Schneider National, Inc. (SNDR) Earnings Call Transcript & Summary

Great. Good afternoon, everybody. This is Ken Hoexter from BofA. I'm the Airfreight and Surface Transportation and Marine Transportation analyst. So we welcome you, again, to the afternoon of our 27th Annual Transportation and Industrials Conference. Next up, we've got Schneider National. We've got Mark Rourke, the CEO; Steve Bruffett, the CFO; and Steve Bindas, also from Investor Relations. We welcome Mark for his third consecutive year, second at CFO. And Steve, if you can imagine his third time as well. But having been our luncheon speaker all the way back in 2010, when he was at Conway. Schneider has actually been a very frequent participant even through its private days for us here. This is their seventh time joining us, including as far back as 2003 when they were private. So truly appreciate the commitment of the organization to the BofA Transport Conference over the year. So Mark, hey, happy to have you join us along with Steve and Steve. And I know I'm going to turn it over to you for your thoughts on the trucking market ahead of and into the pandemic. And just general thoughts on the truck competitiveness and intermodal within that. Before I do, let me just -- give me 5 seconds for the attendees and listeners. If you want to ask a question, feel free on the WebEx, you can e-mail me a question, just click on that question link. And then -- or you can, of course, always e-mail me or Bloomberg id me through the presentation. But with that, Mark, let me throw it over to you and let's get started.

Great. Ken, thank you. Thanks for inviting us. And maybe I'll just start with some context of kind of where we are and then allow you to go where you'd like on any of the more specific details. But we thought we'd give just some context of where we are with the market challenges. And I think we all just recognize in various ways, we've all witnessed the pandemic impact, not only in our populus, from a health standpoint, but also the economic fallout that followed. And from a freight standpoint, at least the pandemic and how it spread gave us a little bit of chance as transportation providers to plan for it. To do what we could to take some mitigating actions, even in the midst of the mid-March pantry restocking effort. I think we all knew, where we would ultimately, have some challenges. And certainly, first of those were in Intermodal due to the reliance on the Asian imports. But again, the lead time gave us some opportunity to get our network ready, to think about the size of our asset base, for example, to make some pivots to markets that perhaps we could take advantage of our strengths that weren't as reliant on the Asian imports, places like the east of Mexico. How that affects our dray placement of our excellent driver dray resources. And then importantly, take this opportunity to master some of the advancements in the automation efforts that we're making. And so all of that very purposeful. And then secondly, in the truck space, a little bit delayed before we felt that impact, but certainly gave us a chance to do some adjustments, to think about how we redeploy some of our assets to surging locations from those that were suffering some demand issues. And then very importantly, be very planful about -- at least in the short term, how we can get after some cost actions. And so that was really, as we sit here today, about where we expect it to be. But we had to make sure that we maintain our deep respect for the 4 out of 5 associates -- of Schneider associates that have to report to work every day to fulfill our promises to our customers. So how we keep people safe. How we make adjustments to our process, technology, our communications, our supplies, then we always had their interest at the forefront. So conversely, as we sit here today in a midst of kind of the impact time and because of the strength of our balance sheet and our financial condition, we also have the luxury to be planning for the upside and for the -- getting out the other side of this. So that we're back focusing on our growth drivers that we're advancing our very important tech initiatives. And we're considering and probably still adjusting to what we consider to be the long-term impacts of this experience and how that might change, how we work, and where we work, and how we do some things differently. But feel that we're in the planning stages of the other side of this and still mindful, obviously, of the day-to-day things we have to focus on, but equally balanced towards the future. So I just want to provide that as context. And then obviously, any where you'd like to kind of delve into.

Sounds wonderful. Thanks, Mark. Maybe just start off with that kind of macro thought, right? So if we think about it, our truck shipper survey, had set 4 consecutive all-time lows and seem to then, last Friday, show a bit of bounce up with some of the slight reopening early. But the capacity indicators showed plenty of available capacity that bankruptcies really weren't occurring yet within the market and pricing kind of maybe had bounced off that floor. We're seeing rail carload trending down 20%, but maybe again, having seen the floor somewhere around now. What are your thoughts on the state of the market as you move closer toward those reopenings? The auto plants looking to open up in a week or so. How do you view this? And how do you prepare as you see that rebound?

Yes, Ken, maybe the -- a little context for our original thesis that we expected as we got through the quarter that this certainly would be the most difficult quarter of the year. Our original give thesis felt that perhaps May would be the most significant impact to overall demand levels. And as we reported on our call at the end of April, that was still our position. But as we've kind of work through our way here in the early parts of May. We are maybe starting to see some curl on both the Intermodal volumes and the truck demand levels. And perhaps, and we'd like to see a few more data points that as we look back, maybe it will be April, that will be the trough, and that will be a more advanced level of recovery a little sooner than initially expected. But again, it's a curl at this point. It's not as dramatic as the drop coming throughout the month of April. But there are some positive signs, both on those customers who were deemed nonessential in getting some indication of kind of their plans. But also maybe as we get into the seasonal elements here a bit of produce, and we get some automotive back and we get some other items that we might be getting after some improvement in volumes, just a bit quicker than we initially thought. Maybe consistent with -- with some of the...

Right. Consistent with...

More recent data points, yes.

Yes. now, so you've got your business split between kind of the dedicated over-the-road side. And then obviously, even within that, you've got specialized. But how do you think about the rate environment, right? So let's start off with over-the-road. Or maybe just talk about base set for everybody. What is spot? What is contract in your mix? But then within that, it seemed like after the restocking that occurred in March, we had this incredible loosening of capacity, as I mentioned, and that really hurt spot rates. But have you seen that -- start -- you've said kind of accrual, but have we seen spot rates at least in flex? Maybe talk about what your experience is in the market now?

Yes. Maybe a couple of dimensions to that question. Starting with our truckload business, it's 60% roughly in our for-hire irregular route network. and 40% presently in the dedicated space. And within the spot question specifically, most of that activity when it occurs, occurs in our for-hire network space. And we are generally a 5% to 8% or so range. And we're on the upper end of that as we went through the month of April. And then the other place that we get good exposure to understanding the spot market is our brokerage business, which is about $1 billion in scale and about a little over half of that is -- plays daily, spot with both the customer and with the carrier community. And so it gives us, I think, a fairly robust view of that. And we certainly, over the last week or so, in particular, started seeing a hardening of the spot pricing -- had gone through a downward trend, certainly in the heart of April. But we're starting, again, the curl, I think, would also apply as you think about the spot pricing environment as well.

And how about the same concept on the capacity side, right? So I guess we would have figured you would have seen some of that capacity falling away. I think that was the market's expectation to see it fall away a little quicker, which could cause a better rebound. But maybe some of the government stimulus packages help keep some businesses around even longer. So does that mean just a more drawn out, but eventual rebound to that supply demand balance?

This is Steve. I'll tackle that one. I think our view is that there will be continued pressure on the capacity in the space as we progress through 2020. There's been a variety of well documented influencing factors that put pressure on that capacity. And I think there's a general flight to quality in situations like this. And so we believe that as we go through the summer months, even if there is some stabilization in the market, there will continue to be a bit of a challenge for the marginal capacity in the space.

Yes, Maybe just --

So maybe let’s see. Go ahead.

Maybe just add -- just to add just a little bit, Ken, is the choke point of new entrants into the industry is also something, I think, will have some impact as we think about the rationalization of capacity. So much of the new school participants come through government public educational locations, which have shut down. And then correspondingly, even for the 4 profit locations, depending upon state, it's also been quite a bit of challenged from a testing and availability standpoint because of resource availability or redeploying of resources. So it has a little bit of a lag effect. So I think there'll be some, I think, Steve mentioned, well documented. When you look at new truck builds, you look at insurance impacts that we're seeing in our brokerage carrier base. And you kind of add into this a tightening of the top of the funnel. I think all of those point to with an increase in demand levels have some contraction of capacity. There is some optimism, I think, that's well warranted here as we get into the second half of the year.

Let's talk about your own fleet for a minute on that. Your trucks were up about 1% sequentially and dedicated, down 3% and for-hire. How do you think about your asset focus in both those segments going forward? You mentioned the 60-40 split and for-hire to dedicated. So how do you aim to grow or balance those fleets as you move forward?

Yes, Ken, I'd tell you, one of the real disappointments of many going through this current period is the delay and some of the great work going on in dedicated. We have a number of start-ups that for all the appropriate reasons and that have been delayed a bit, that we'll start to see them break loose from an implementation standpoint here by the end of the quarter and early third. Ultimately, as we think about the next 12 to 18 months, our objective is to get to about a 50-50 split between our for-hire and dedicated networks. I think what's important there is that we want to grow our way to that, as in the dedicated and not have that simply being attrition and shifting from van into dedicated. But to use the -- some great work that we've done and the reshaping of the portfolio and the whole execution improvements across the board to get to a growth vehicle for dedicated. And we're excited that we're on the cusp of that. So we just got to get back folks focused on our customer base and feel comfortable that we can get after that, and we should start to see that progress here at the end of the quarter.

All right. Let's flip to intermodal for a minute, which is about a quarter -- almost a quarter of your revenues. You noted -- Mark, you noted intermodal volumes were down kind of mid-teens in April. Any thoughts on an update? And through May, just trying to understand, if that accelerated like we're seeing, given some of the port volumes and domestic loosening of the truck market? Did it stabilize? Or as the manufacturing looks to reopen at a measured pace and needs to move inventory ahead of that? Or does it wait until you really start to see that open before you see that rebound?

Yes. I think that's -- the intermodal market, I think, will be difficult throughout the entire quarter. As we think about how that customer mix is a little bit more focused on nonessential businesses or retail that is not big box-related, more of the specialty retailers. And so that's had a more pronounced effect on our flows. And really what the all whole -- overall Asia imports is such a much more central theme to our intermodal offering than it is to the truck side. So we need to see some rebound there. But importantly, knowing where we were headed, we do think there are important markets like Mexico, and the east that we pivoted towards and enjoyed even in the first quarter in a fairly pedestrian truck market. For the whole quarter, we grew 20% in those Mexican and eastern markets in combination. So that is really driven by our focus and our great alignment with our partner in the East, who is delivering very much truck-like reliability. That's allowed us to sell into that very effectively. And so while we think we still have great opportunities there to get the network totally healthy, we need to see those Asian imports come back in a more normal fashion.

And I would just add on to that, that on our earnings call a couple of weeks ago, we'd indicate -- indicated that our intermodal volumes were down upper teens compared to the prior year. And what we've experienced over the last couple of weeks is similar to what Mark described in our Truckload space with our volumes is kind of a curve, an upward curl, if you will, to the point where we probably would say more mid-teens now rather than upper teens and where we're trending.

Certainly.

And Steve, just to clarify, you're talking on an all year-over-year basis for maybe the last few weeks as opposed to the quarter-to-date, right?

Correct.

Okay. All right.

Sequentially, the absolute volumes have improved over the last couple of weeks.

Yes. That's -- means we kind of have definitely passed that bottom. Now would you say the same discussion on -- let's pick pricing but revenue per order, however you want to look at it within Intermodal? Is the same trend there? Or just given the dynamics of the customer mix, meaning it stays a little softer?

Are you -- is that question based -- coming through the bid season or just the current customer mix that we have?

I guess I'll take both, right, in terms of the bid season because that's going to be more newer feel on the market. But overall, blended would be helpful?

Yes. Our revenue per order certainly has some influence on mix. The Easter part of the network is a much shorter, the length of haul. And so has some dynamics associated with revenue per order there, and we would expect that that's still going to be highly influential in the second quarter. We felt very good about the allocation season prior to COVID. And we've had some recent discussions that we're quite encouraged by. So we would expect -- we grew share in the first quarter, 3% order growth on a -- probably a 4% to 5% domestic shrink overall in the market. We would expect that we would be able to improve upon that dynamic as we kind of get through the second quarter based upon the award season. Now customers obviously have to have them -- have the freight. The realization rate has to be there. But on a historical like customer basis, which we think we have a pretty good feel for realization rates that we believe we can continue to find ways to be growing ahead of market and do that for the remainder of the year.

Thanks, Mark. So Steve, in the quarter, you lowered your CapEx or mid-teens, 16% to $260 million. Maybe just give an update on kind of what you're still spending. Do you still increase the tech spend on Quest and the platform? Is that just replacement? And so therefore, without growth, you took out some of the growth capital. Maybe just walk through your thoughts on the capital? And I'll throw in the tech as well.

Sure. And I'd clarify that our CapEx is currently guided to about 6% of our revenues, down from 8%. And that's revenue excluding fuel surcharge, just for context. And to get at the heart of your question, where we made the most adjustment was in tractors and the assumed growth in there -- in that part of our CapEx spend. We'll continue to revisit that. Part of that is driven by OEM capacity and getting there, ramped back up. We could revisit both factor in [ rest out the year]. Where We are right now comfortably replaces our equipment and keeps our fleet age in line with where we're targeting. So that's the emphasis on a revenue equipment. Regarding the rest of our spend, we are, in fact, accelerating our investments in technology. And so the part of that gets capitalized and runs through CapEx is actually been increased in our update incrementally because we see opportunities to accelerate some of those investments that Mark touched upon earlier. So the big moving part, though, in CapEx was growth tractors that were presumed, that were maintaining a full complement of replacement CapEx.

And so just continuing that, again, within Intermodal still for a second, I think you mentioned the 1,000 fewer containers this quarter. I presume you continue that through the year. Is that just retirement of older fleet? And again, savings by not replacement? Or is that sales of assets? What are your thoughts on that comment?

Yes. Great question, Ken. Those are all end of life containers we held onto a little longer just because of the opportunity to do so and from a demand standpoint. But now with the improvements. And really, I think, give credit to the rail partners here of being much more reliable relative to service performance and the whole integration of our operations from a tech standpoint that we don't have to carry as much safety stock. And so we believe, we can grow our business by sweating the assets further, and do so effectively and do that in constant with what's important to our rail partners and what's also important to us. And we can be more productive with the assets we have, and we're really disposing of some higher costs from a maintenance standpoint boxes at -- [Audio Gap] and also because of our mix in the East, which we turn faster, that just makes sense for us. So happy to get back on the growth trajectory. We just don't see a need to do that in calendar year 2020.

Perfect. And then going over to the brokerage side, about 90% of logistics. Maybe talk about -- we just talked about J.B. Hunt kind of about the impact of the digital brokers, which we talked about with over time. But if I recall, you still are focused more on using the brokerage to kind of round out your trucking ups, not as truly a solely independent operation. Or is it more an independent operation that slightly feeds the trucks? Maybe just refresh us on your goal with the Logistics side?

Yes, absolutely. Yes, we have about $1 billion or so that we would expect this year in this space and very little of that is in support of the assets. So think of it almost as -- they are absolutely accountable to chart their own path not to be reliant on either overflow and either direction. I mean, it's a very much of a stand-alone offering. And sometimes we bristle, Ken, at the digital focused brokers because it kind of paints the incumbents as if we're not focused on and just plotting along. And it's very much of a tech incubation place for us as well, both on the shipper and the carrier front, and we will be doing more of that investment in 2020. But we do think for the large shipper, and maybe just back up just a second here. What's predominantly different about our brokerage offering than our other service offerings is that it's focused primarily on the very long tail of the shipper community, the small shipper and conversely on the very long tail of the small carrier. And so when you think about our intermodal offering or our truck offering, a little more skewed towards the mid- to large shipper, very much trailer pool centric. Where in the brokerage arena, largely centered around live loads and live on loads. And so a very much a different customer base, and very much a different execution model. That being said, we have found success, and we'll continue to find success, bridging those 2 worlds by bringing an orange box that small carriers can have access to by helping augment and cover additional demand coming out of large trailer pool shippers. So there is some convergence in those with some customer collaboration. But predominantly, those things are completely accountable for their own path and quite successful in those different markets.

How about changing subjects just with a couple of minutes left. The truck driver availability and wages. Can you talk about what's going on, obviously, in such a loose market with unemployment as high, yet, you've still got to get people out of the house and into the trucks? So what's your thought on availability for getting the drivers you need? And you mentioned the schools before and then with government programs, but then also what's going on with wages?

Yes, for sure. Again, just incredibly appreciative to our professional driving community who has responded and has just done a fantastic job through this pandemic and being available and being there for our customers and the organization. And so can't speak highly enough of those efforts. But just similar to other trying times, there is a flight to quality. And certainly, from an experienced driver standpoint, we have a very robust pipeline, probably in many cases, more than what we have an appetite for in some key geographies. And so we would expect that, that continues. And that lowers the overall variable cost as it takes to go out and acquire and replenish the fleet. So we would think we're in a very good position there, particularly with our dedicated focus on top of the current market environment. So similar experiences that we had and other recessionary periods that we're experiencing today. So overall, I think that puts at least some stabilization into the driver wage area. And we wouldn't anticipate that changing, at least for the remainder of 2020.

Steve, how about maybe just stepping back and thinking about overall variability in costs? Is that something when we think about operating leverage on the way up and way down in terms of volumes here you can you can provide for the corporate as a whole? Or does it really need to be on a segment-by-segment basis?

Well, clearly, there are differences in the cost structure and execution models across our portfolio of services, even within the truckload segment, there are differences amongst start specialty and dedicated versus network components. But by and large, in a normal time, where it's predominantly just a volume variance that you're trying to isolate when you talk about variable costs, and therefore, incremental margins. We'd characterize that somewhere in the 20% to 25% range for us, if you aggregate it. Given the current environment, it would -- changes in other areas with fuel and price and some network disruption with things that some of those rules of thumb can be thrown on their side. But if that helps give you some idea about how we function.

Yes. No, definitely. So I guess if I were to sum up, hitting the curl on truck volumes and pricing, not really a bounce, dedicated contracts taking a bit longer to come to fruition. Maybe April is the toughest part of the quarter. Maybe it moved up a little bit from what you might have imagined. Capacity continues to see some pressure. Getting drivers is not an issue. Intermodal, great service in the East, but you need those volumes in the west to grow. Anything else you'd kind of walk away, and say, that's the key takeaways?

I would just say that it's -- I've been with the company 2 years, and can say, that the reasons I joined the company, a strong balance sheet, the portfolio of services, tech and decision support tools, their assets and they've come into play in ways I didn't even imagine. So that position of strength is something that I'd like to reinforce from my perspective.

That's a great add on. So Mark, just to wrap up, earlier, we had the Service Transportation Board, Patrick Hughes, who is a fellow Wisconsinite, he did not want to talk about the QB drastic. So I guess I will just ask you when the packers are going to play their first game?

Tough. With or without fans?

All right. Hey, everybody, that's -- thank you very much to Mark, Steve and Steve. Next up is at 2:40, we've got Old Dominion. So if you want to log off the WebEx and back on to that presentation. So again, Schneider, thank you very much to you and the team. Mark and Steve, for joining us this afternoon and for your great insights into operations and what's going on in this really tough environment. I appreciate your thoughts.

Thanks, Ken.