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

Okay. Perfect. All right. Why don't we -- let's try this. Let's hope for the best. And then I don't know if you can see me, we can see you, but you're much better looking than me anyway. So it's all good. Thank you, Steve, for being here. Sorry for the technical difficulty, Steve and everyone. So Steve, I don't know if you have any opening comments that you want to make, but maybe just a general market update, and we'll get going.

Okay. Yes. Always fun to get these things started. But from the Schneider perspective, things are -- it's always interesting in the transportation space, the second quarter to date have certainly been no exception to that. There's been lots of big news items and things going on underneath the scenes. Freight volumes remain pretty steady for us, and the environment remains constructive as we move through periods of time. So I feel like we're really positioned well as a portfolio company and like how we're set up for that.

Okay. Great. So you mentioned there's a lot of things going on. Let's talk about that. So obviously, we had Target and Walmart last week talk about inflated inventory levels. What are you seeing and hearing from your customers? Is there something unique about these large retailers? Or is this -- are you hearing this more broadly from your customers about bloated inventory levels right now?

I'm really sorry about the technology issues here because I can't hear you.

All right. Give us a sec. Hopefully, we'll -- still can't hear us, Steve?

I can tell you're trying to talk, but I can't hear anything.

Okay. Give us a sec, Steve. [Technical Difficulty] All right, Steve, we're going to try again. Can you hear me now?

I can hear you nicely, yes.

Okay. Now we're going. Okay, for now. Sorry about this, Steve. I really do apologize. Okay. So I was just asking, you mentioned there's a lot going on in the market. And I wanted to get your perspective of what Target and Walmart said last week and what you're hearing from customers more broadly, are we seeing inventory issues sort of across the whole supply chain? Or is this more unique to a few big shippers?

Well, just broadly, I don't find it surprising that companies are having difficulties with their supply chains. It's been going on for a couple of years, and I think that will continue throughout the remainder of this year anyway, especially those with global supply chains. It's -- if you think about it, here we are almost in June, so large companies are having to think about back-to-school inventories and all of that type of thing and still dealing with the do-it-yourself season that was muted because of weather and all the supply chain issues. So I think it really just depends on what retail space you're in and what your particular supply chain looks like. But I do think that there will be some spottiness in freight flows and supply chains as we go through the summer months but don't find that overly surprising because it's just a different flavor of the types of disruptions that have been going on for the past several quarters.

Okay. Now let's talk about the spot market. Obviously, we've seen a lot of pressure over the last few months. Are you seeing any signs of the seasonal uptick in spot rates that we always see it during this time of year?

The -- I've been saying the word seasonality hasn't meant a whole lot, at least to us over the last couple of years. And that continues to be the case now. So we're not really sure what normal looks like from a seasonality standpoint as we go through all these phases of disruption. I would say, though, that as everyone has noted, there's been a pretty sharp drop in spot prices, broadly speaking. What we have observed lately is more of a plateauing. I wouldn't call it an uptick per se, but a flattening out of that decline. So what was a pretty sharp decline is now trending sideways.

And so what does this mean from a contractual pricing standpoint? There's this dichotomy of spot rates that are down a lot, but all the carriers, I think, are still talking about good momentum on contractual pricing, how long can this last? Are you seeing any signs of deceleration in contractual pricing discussions? Any signs of pressure in contractual rates?

I think that the contractual space remains constructive and that we continue to see year-over-year increases in those rates. We're more than 50% through the book as we go through. I would point out, though, that the percentage increase that we're seeking and achieving at this point in time is a bit less than what we had been because we're cycling through those that were priced at this point in time last year. So the need for increase is less on those businesses than ones that were earlier this year, if that makes sense. So I would expect a bit of a tapering as we go through this year in the amount of year-over-year increase, but still seeing some sequential improvement as we bring on that awarded business here in the second quarter.

And so do you think that, that comment can continue all year where you'll continue to see some degree of year-over-year and sequential increases in contractual rates?

I do think we're in a situation where we'll see year-over-year improvement through the year. Although like I said, it will taper, it'll be smaller and smaller percentages as we progress through the year would be our expectation at this point.

And so what's -- is this a potentially just -- you mentioned there's nothing normal. Is this just a different kind of cycle, in your opinion, where spot rates are not ultimately going to be a leading indicator of contractual rates this time around?

I think, inevitably, they are tied together at some level. However, I would think one thing that's different -- or a few things that are different about this cycle as it relates to spot rates are: one, fuel prices are high. And a lot of cases in prior cycles, fuel prices would be lowering themselves now. That provides a higher floor for spot prices, I think; the second item is the entry cost of new capacity in the space that came in to serve the spot world over the past year, their cost basis is higher than what it has been in prior cycles, partly driven by the absence of equipment, and therefore, higher cost of equipment if you're able to get it. Even if you're buying used equipment to get into the space, you're paying more, so your cost basis is higher. All those, I think, support spot price above a level that they would have been otherwise. And so it's a higher floor, and that's a good read through to the contractual pricing space.

Let's bring intermodal into the discussion. So maybe where do you right now see the spread between truckload rates and intermodal rates? And are you seeing that same tapering of intermodal contractual pricing increases? Or are those holding up better than truckload contractual pricing discussion?

I think they're following a fairly similar trend as we go through this year, and it's partly driven by the shape of last year's curve that we're comparing to, which was obviously upward sloping by quite a bit. So I'd say similar dynamics in the intermodal pricing space, and we're roughly about the same percentage through our book of business there. So have a pretty good perspective.

But it sounds like those comments are really just a function of the comp getting tougher than any sort of underlying softening of the discussions.

That would be our assessment at this point in time.

Okay. Let's talk intermodal volume trends, demand trends. How should we -- what are you expecting from a volume -- intermodal volume perspective, how should we think about container additions this year?

On containers, we expect to add several hundred each quarter and have that underway. We certainly did that in the first quarter. We know of several hundred that we'll take possession of. So we'll be in the low thousands. We'll see where we end up at the end of the year, but a couple of thousand anyway of container adds this year. And we anticipate having volume growth just to support that. We certainly have the box count to support some volume growth, and we anticipate that coming on board. It's coming on board as we sit here speaking today and expect that, that will continue, especially as we head through the -- if there is a peak season.

Everyone in the industry has challenges with their box turns in the first quarter. Yours were particularly challenged. Any sense on why you specifically? And then maybe more importantly, are you seeing improvement in box turns as you trend into the second quarter?

I think we'll see modest improvement sequentially each quarter as we go through the year. The first quarter was challenged in our particular case by a variety of factors. I would say underlying it all, our dray operations continue to be quite efficient despite what gets thrown at them. But all the different points along the way impact box turns, including the receipt of new containers coming in at less than optimal locations because that's what we're having to do to get them in the -- get them over here where we can actually use them. So that creates some inefficiency until they get in the power lanes and circulating. We also have had -- I think it just depends on a company's mix of customers and what they have going on at their locations and how long containers are sitting on their yards as well as what's your exposure to certain ramps in rail systems. The more you have going through Chicago, the more delays there has been and more issues. And so there are just a lot of factors in there. But I think, overall, we're well positioned and look forward to further efficiencies and fluidity as we go through the year.

Okay. So you guys announced the move to UP early. And so since then, you've seen BN and J.B. Hunt talk more collaboratively together. What's your view of the revenue retention of your business in the West? Is there a risk of losing some of this business to, I guess, BN and J.B. Hunt working together? So -- and then thinking more positively, what's the biggest opportunity you see from Union Pacific? And does this move in any way change your long-term margin expectations for intermodal?

Well, it's a competitive space. I suppose there's always a risk of business moving around and -- but feel that we've executed very well, and we'll continue to execute well with our partners in the West as we go through this year as far as the timing of it. If you think about if we're doing an annual contractual discussion with a customer, at this point in the year, what we're talking about what's going to be going on in the first and second quarters of next year, and we'll be on the UP. So being able to have that conversation about what lanes that we're actually serving and how that freight is going to move is an important part of why we did it. We wanted to be open and transparent with everyone, including our drivers and our partners and customers. And so that, I think, is playing out well for us and allows us to do a lot of careful planning. And we're executing well against that plan to date and anticipate that, that will continue. So we're excited about the opportunity with UP. We think that with their embracing of companies now that own their chassis and container and the operations, the disciplined operations that we bring in our dray fits well with their PSR-type configurations and think that the movements of containers through the middle of the country and how much of that can happen over the rail versus happen to be loaded through our dray operations across city moves and so on. We feel really good about the growth opportunities that we have in front of us there, and that's -- we've provided our longer-term margin targets, and I think that the switch to the UP will help us achieve our growth targets in addition to those margin targets.

Okay. Crystal ball question for you for intermodal. So we've had really good pricing and margin and earnings growth in intermodal despite some really poor rail service that's limited volumes. If next year, we have better rail service, better container turns, better volumes but rates are down, do you think you still can grow intermodal earnings next year?

Absolutely. I think we can grow earnings dollars at intermodal next year and think that we will. And even if there is a bit of change in price year-over-year, I think that we would prefer to play that efficiency game all day long. And we're good at it, and we would welcome the fluidity and the opportunity to perform on the street as we're capable of doing. So you couple that with growth opportunity, I think there's clearly opportunity to grow earnings dollars in intermodal next year.

Would you think that, that logic, right, can apply to truckload, right? Truckload, tons of pricing, but utilization, I know you don't report it, but got to imagine you're in a similar position with every utilization. Under a lot of pressure, pricing really good, margin's good, earnings up a lot. If next year is a year of rates down but utilization up, would you think that truckload is a place that can grow earnings dollars next year?

I think the same there, and we kind of have to bifurcate our network from our dedicated business within the Truckload segment as we talk about that. Certainly have productivity, efficiency, fluidity opportunities within the network space as well. So look forward to that. In the dedicated, it's mainly just continuing to execute like we are and continuing to grow the top line. So I think you couple those things together, there's opportunity for earnings dollars growth in the truckload sector as well.

Steve, thinking more near term for truckload, your margins in truckload typically improve decent range, 100 to 300 basis points sequentially, first quarter and second quarter. Again, I hate to ask about normal seasonality, given your comments earlier. But do you think that, that logic applies again in 2Q this year?

I think we'll continue to operate well and have good margins. But whether it follows that traditional pattern or not, it's a little difficult to say. I think that we'll be producing solid, strong margins all year long in the truckload space. So they just may be in a more narrow band.

Do you think we improve those second quarter over first?

Opportunity to improve, yes.

And now with that, I think you had very -- you had minimal gains, I think, in the first quarter.

That's correct.

How do we think about gains second quarter, rest of the year?

I'd anticipate that we'll have a bit more in gains in the second quarter than the first, which again, were minimal. Of the total $45 million or so that we've guided to for the full year, the vast majority of that is going to be in the second half, and it's somewhat aligned with -- as we receive new equipment and are in position to outprocess the old. So $5 million to $10 million maybe in the second quarter of gains, and then the remainder in the -- spread fairly evenly across the third and fourth.

So I would think that alone would get you sequential margin improvement in the second quarter. Is that fair?

All else being equal, that would be around the edges, some improvement, but not significant.

Okay. But there's other factors at play, I guess, you're saying?

Sure.

Okay. And then when we think about the cycle, lots of questions about earnings resiliency in a downturn, right? Last cycle, your truckload margins bottomed around 10%, if I exclude the Final Mile business. How would you think about the next trough? Is it better than that 10%, do you think? And why?

I think it is. I mean we updated earlier this year our longer-term margin targets for the Truckload segment to be 12% to 16%. And there was some thought, obviously, put into those numbers. And so the way we're seeing the world now that, that would be the range that we intend to operate in. And that's for a variety of reasons, one of which is the growth of dedicated within the Truckload segment, it's prominence now. We have more trucks in our dedicated configurations than we have in network configurations as well as just higher starting point from within the network from a margin standpoint. So I think we're set up to be more resilient across the portfolio, including the truckload space.

OEM production, any signs of that getting better? Driver market, any signs of that getting better?

OEM production, I guess it's been steady and somewhat predictable. We've tried to base our guidance based on our conversations with our OEMs about what they think they'll be able to produce and deliver through this year. There may be some variation once we get to the year-end and whether there's spillover or not. But so far, it's just been like a couple of week delay or something like that, they're generally receiving the equipment we expected to receive and anticipate that, that will continue.

Okay. Let's turn to logistics for a couple of minutes. Obviously, the results there have been terrific. As the spot market has loosened, have you seen any change in demand for power-only that's been such a nice driver for you guys?

It remains growing rapidly. And so not really. I would point out that our power-only solution is predominantly pointed at the contractual space. So it is largely serving our large customer base out of trailer pools and that type. So we've not seen a decline in demand for that offering.

What percentage of logistics now is power only?

Well, we haven't gotten into that level of granularity and likely won't. But I would say it is rapidly growing. It's still relatively small in proportion to the size of our traditional brokerage business and the other services we offer in the Logistics segment, but it is rapidly growing.

You did, I think, $42 million of logistics earnings in the first quarter. Does that -- do you think that grows from here throughout the year?

Well, I think we'll have to see how things play out because there are -- like we say, there's a lot going on, and we have roughly half of our brokerage business in the spot market and roughly half in contractual space. So there's -- if we have exposure in the spot market, it's more there. Although with our tools and experience, I would say that we do quite a good job of navigating the bigly changes going on in the marketplace. So I think there's a great opportunity to at least maintain those types of earnings dollars levels. And we'll see if we can improve upon them as we go forward.

And when I look at the margins for this business over time, they've historically bounced around 5%. They're a good amount better than that right now. Is that sustainable in your mind to see more like upper single-digit Logistics margins?

Well, we'll have to see how things play out a little bit. There have been quite a bit of disruption in the market that's provided opportunities there. Our guided range of 4% to 6% has been more typical for us, as you've noted in our past, we're operating above that level now and likely will in the second quarter again. But I'd say at this point in time, our expectation would be that we'll continue to grow the top line and operate toward the upper end of our guided range, if not slightly above, and just continue to grow that piece of our business.

So overall, I mean, it sounds like, yes, we're seeing some pressure on spot, but it's -- and it's plateauing, but hasn't really negatively impacted other parts of the business. So at this point, are you still very comfortable with the guidance that you laid out on the first quarter call?

Yes, it's about 3.5 weeks ago, and I don't think anything has really changed about our outlook of the world. We anticipated that at some point in time, as we went through 2022, there would be something a little different. It's hard to describe how that was going to be. We got some news from some large retailers this last week and so on, but we didn't find it overly surprising. So I think it just -- the narrative still fits together as far as we're concerned.

Okay. And then hopefully, we're -- I know we got off to a late start. So hopefully, I'm just going a couple of minutes over. Hopefully, that's okay, Steve, and we'll wrap it up in a couple. Just longer term, so your non-truckload earnings continue to grow and grow and grow as a percentage of the mix, they're now bigger than the truckload earnings. Is this something that you think will continue over time to have truckload become a smaller and smaller part of the earnings? And then I want to marry that with this question of, right, your valuation is obviously quite low. And I think all the truckload multiples are quite low, but you might argue we're -- we've got less truckload exposure than any truckload company. And so given that, do you think about doing anything in terms of a big buyback to -- given where the valuation is?

Okay. So it strains my memory here, I'll go back to the first of your question, which is the composition of our portfolio basically and how we see that going. And I would call it rather than deemphasizing truck, we're just purposefully trying to grow the other parts of our business faster. We're trying to grow the top line and earnings dollars across the portfolio. And so certainly, the investments are there for intermodal and logistics to continue their growth pattern. Within truckload, we would fund and put capital behind dedicated growth as much as the business can support. So I think it'd be a good internal contest to see whether dedicated can outgrow the other parts of our business, while basically kind of maintaining the network portion. So over the course of time, I think that you would see, in particular, the network part of our business become a less and less significant contributor, although still strategic to us. We think it's important to have a well-functioning and robust network. It helps with the dedicated operations as well as this meeting your broad customer needs. So don't mean that it's not strategic because it is. It's just how do you fund it and how do you grow it and how do you maintain the different aspects of your business. So the second part of your question, obviously, we feel tremendously undervalued based on the progress that we've made with the composition of our portfolio and how we think that resilience will play out across the cycle. And so I wouldn't take anything off the board at this point in time. We've stayed away from share repurchase programs to date with considerations around our public float profile. But I certainly wouldn't rule out some form of buyback in the future. No decisions have certainly been made on anything like that, but we'll continue to evaluate that with the Board. And we continue -- we've got a great balance sheet, lots of strength and firepower there. So we'll continue to evaluate whether further acquisitions make sense for us.

Yes. How about a big acquisition? Would you entertain something like that?

We would for the right strategic fit, absolutely.

And that is more likely to be outside of network truckload?

I think that's fairly safe to say. But I don't want to completely limit our universe, but there could be an element of that, but that would, I don't think, be the driver.

Okay. And I'm going to ask everybody this, and I know it's a tough one. Just sort of best guess, we always ask this sitting in May at our conference, best guess what you think sort of pricing will look like in 2023 as you sit here today. And so maybe a best guess of pricing for truckload and intermodal, if you could take a shot.

Wow, that's quite a parting shot.

I know it's a tough one.

So much would play out between now and then. As you know, things can change rapidly in the context of a quarter, even in this space. I happen to think that things will remain constructive and that there would be modest but maybe more traditional type of year-over-year price increases in both the truckload and intermodal space, and more of a business-as-usual mindset as we go about our work next year.

Before we wrap, any final thoughts or comments you want to leave with us, Steve?

No, I appreciate doing this virtually, and I apologize for the slow start there, but feel really good about how we're positioned, both this year and whatever comes at us. And just appreciate the opportunity to talk about Schneider today.

Okay. Sorry about the technical difficulties on our side, and I appreciate you sticking with us. Thank you, Steve. Have a good one.

No problem. Thank you.