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

[Audio Gap] international and very happy to have with us President and CEO, Mark Rourke; and EVP and CFO, Stephen Bruffett. Gentlemen, thanks so much for joining us in person again, live. And it's...

Nice to be back.

It's nice to be back. So I was going to start with a bunch of TL questions. But I think I should start with a bunch of intermodal questions.

[ Why would that be? ]

Somewhat obvious reasons. And any thoughts on how things are shaping up? What contingencies might be, et cetera?

Yes. Obviously, we have -- unfortunately, over time, we've had some playbooks we've got to deploy on various levels of disruption. And certainly, we're in an uncertain period. Good news is that the rails for the most part are keeping the gates open and anticipating, I think, some success here. But obviously, it could be highly disruptive. And we're seeing some customer behavior take some measures just to divert a little bit off of the train now as kind of a hedge. So it's starting to have some impact on the intermodal tender volumes. But so far, we're still keeping the gate, the outgate process flowing. So we'll see how it plays out.

And the most logical solution is to extend the deadline or obviously, you are not involved, but what do you think? What does Monday morning quarter [indiscernible]?

I'll probably let you talk to the rails who are better positioned to talk about it. But I think it's just a tough position with the administration and the various stakeholders and their alignment. And so I think it's a tough resolve here, and we're running out of time. So...

Yes, yes. I believe your phone was ringing off the hook because you have a TL operation attached to an intermodal operation, and so you or your own fallback, if you will. So tell us kind of how that works, kind of what the interlinks are between the segments? And how you might be kind of using the TL business to maybe offset [indiscernible]?

Yes. For maybe folks who don't know us as well, Ravi, we have these 3 large at-scale segments, Full Truckload, Intermodal, Logistics/Brokerage. And they're very complementary. We run them separately. Obviously, we're providing different levels of solutions to the market. But one of the advantages of working with someone like us is that we can collaborate as we have through this whole pandemic season. And you've really seen our portfolio shine, I think, as you've looked at the outsized growth we've had in our non-asset businesses. So we're not as restricted just space where we have a driver or a truck, we can bring other solutions to bear it. And this opportunity, if it comes to it, will give us an opportunity to do that again here. So a lot of planning, a lot of discussion with customers. It's not easy to divert everything that goes to the rail to an over-the-road solution. And so -- but we're going to do our best.

Is that just something like a screen on quest where you're going to click a button and say, "Hey, that's -- take that thing over train, putting on truck? Or obviously, am I kind of being a usual Wall Street-er that's oversimplifying a complex business?

Yes. There's network implications on everything that you do on the truck side and the Intermodal side, less on Brokerage, where we don't have to worry as much about networks. So we have decision science in there that helps us understand what's the right price point, what's the right service point and what's right for our network. And so at times, we'll have to bend that to support our customers, and we may ask for some help on how to best do that. But yes, the systems give us great visibility to what our solution set looks like and what we can offer. And so that was the whole intention is to put information in front of our people, a single source of the truth so that we can make the best decision for the customer and for the company.

Got it. So let's -- obviously, who knows what's going to happen. Let's hope that there's an amicable solution here in the next few days. Let's -- as I was saying to our management team earlier, let's go back to the good old days of last week when this was not as much of an issue. And just give us a sense of what the market is like as you see it? Obviously, we are in a pretty unprecedented environment with a -- spot rate is off meaningfully with the contract rates holding up pretty tightly, leading indicators like our TLFI and dealers and indices have all fallen quite shortly, but the management teams like yourselves are saying that, hey, your customers are telling you that things are a little pretty decent. So has there been any evolution since 2Q? What are you seeing on the overall macro going into 3Q and 4Q?

Yes. Obviously, spot rates and spot pricing gets a lot of visibility in the industry. And that plays differently across our various segments were low- to mid-single digits now on the spot pricing as it relates to our truck business, but heavily spot in our brokerage, predominantly, particularly on the carrier front. So those dynamics play out differently in the contract space, which is our predominant play with both our Truckload and Intermodal, Ravi. I would tell you it's off, it's craziness that we've been in a groundhog day for like 2.5 years of being at peak. And now it's more typical, I would say, 2018, 2019, there are ebbs and flows. There are differences by day, which we hadn't experienced in some time. But overall, the contract world is pretty strong, I should say, pretty typical. And the spot world is dynamic, but the beauty of our brokerage business, our costs are so variable there that we can ebb and flow with what goes on there. So I think that's, again, the benefit of the portfolio and how it's deployed.

Got it. For better or worse, Mr. Bruffett here is my go-to peak season guru. I think it was either Laguna 2018 or Laguna 2019 where you laid out peak season in the best terms that I have ever seen it. So I'll ask you now...

Well, we see them [indiscernible] '80s.

Are we going to have a peak season? Like do you have a sense of what that's going to be like? And kind of when do you start to see that pick up?

Sure. Mark mentioned the seasonality that we've started to experience, and we talked about that a bit on our second quarter earnings call that we were experiencing seasonality for the first time in a couple of years. And in the definition of seasonality is some softer pockets and some stronger pockets as you go through the second half of the year. And I think we're certainly experiencing that the volumes have been a bit soft, not off the cliff by any means, but not as robust as they had been. But we had assumed that there would be at least a form of seasonal peak this year. And we still believe that as we head into the second half of September here and into October, I do believe that there will be there's slack in the rope a bit now, and I think that will tighten up a bit as we go through. So still feel pretty comfortable that the overall operating conditions remain pretty well balanced, and there will be some form of seasonal peak just not a crazy peak. I think there's a lot of inventory already in play. Maybe the wrong inventory in the wrong places for some individual companies. But overall, retailers, in particular, motivated, have a good holiday season, and there will need to be some pull-through to support that.

Got it. I just want to touch on that point because you brought it up in a recent conversation we had, which I think was a very interesting dynamic. When investors on the outside kind of listen to your customers, kind of put up the red flag on their conference call saying we have too much inventory and demand is slowing, et cetera, they're automatically thinking, "Hey, that's going to be really bad for you." But you were saying that, hey, that's not really the case because there may actually be some tailwinds, there's an incremental business from you for you from your customers having to either fire sale products or move inventory in 1 place or the other. Can you just unpack that a little bit more for investors who are -- need that dynamic?

Yes. The interesting part of our portfolio in truck and Intermodal is that we play -- and this is probably more of a truck comment here. We play in the inbound part, which is vendor into the DC world, but we also play in our dedicated business heavily across the value -- the extreme value of retail chain, the Big Box retailers, the specialty retailers. And so we have a DC to store operation that even though the inventory ultimately has got to get to the end point of sales. So and some of the more public issues with inventory, there's still been a very heavy push to get that to the stores. We've been very busy in certain segments of the supply chain because of where we play. So it all depends. If it's import driven, it's intermodal generally, if it's a domestic vendor inbound is more so on the truck side and then see the store is on our dedicated portion of the portfolio, and we play heavily on all 3 of those.

Got it. I wanted to move from the demand side to the supply side of the equation. You mentioned of maybe a little bit of like slackening of the rope, if you will. And I think there's been a little bit of incremental capacity, a little bit better driver availability in the last few months. But at the same time, a tough market, especially a tough spot market tends to push mom-and-pop carriers out of the industry even more. So what's the net dynamics like and what you're seeing between some of these factors that will lose in capacity versus some of the factors that would tighten capacity?

The whole capacity is such a noisy assessment, a noisy area, Ravi. So much of the growth that experienced in the last couple of years in the capacity arena was generally the 1 truck operator who may have left companies like ourselves, the donor operator went after the spot market got their own authority where people coming back to the industry with their own authority. And so as you see some of the ebb and flow back, and we're seeing some of that, it gets counted as truckload employment, but it's hard to see the revocations that don't get renewed because there's a little bit of delay in the governmental reporting. So it puts just a lot of noise in there. I would tell you, I think it's certainly under stress, particularly on the small operator as they are much more dependent on the spot market. Conversely, though, the industry has done enough with attraction on pay and some other things that we did start to introduce some new people into the industry via the schools getting back up and running in the post COVID era. So there has been some newer entrants, which we really didn't have for a very long time through the COVID period. But to me, I don't think we're going to see more capacity come out in the short term because of those dynamics of where the capacity grew during the pandemic era.

I'd just add to that, it's always difficult hiring drivers and retaining drivers, but I would just say it's incrementally less difficult. I'd like to use a weather analogy in that space at Wisconsin winter, for example, people confuse less cold for being warm. And it's kind of that way in the driver recruiting space right now. It's less...

There's room [indiscernible] Wisconsin winter right now [indiscernible].

It starts with early November.

Yes. Exactly. Speaking of early November, a couple of questions on pricing. When do you guys start talking about 2023 contract rates? And are you surprised that contract rates have held up as to what they have?

Well, I think there's a stark realization of the inflationary pressures that our customers have felt in their business across the board. And our #1 cost in our income statement is the driver wages and recruiting all the things it takes to keep those trucks seated and the customers have been incredibly supportive all the way through those type of costs. Now you've got the equipment issues relative to inflation and insurance. And so it's a very -- in my 34 years, the highest inflationary period. So I'm not surprised. I think that puts a floor on where things can go. As I think the shippers are thinking about their products in a very, very similar fashion. So it's held up well. I think the big question is, is it worth fulfillment? What's the demand picture? I think it's going to be more in that arena than it's going to be in the price arena. The prices, I think, is set pretty well until the next period.

Got it. So I'm wondering when does that experience start in '23?

Well, yes, traditionally, we get through about 3/4 of the renewal period by the end of June, and it starts the pick up in margin. It's a very busy 3 or 4 months a year.

Got it. So I hope you brought your crystal ball because I'm going to ask you, between -- rough numbers out there. If contract rates are down low mid-single digits next year and spot rate cycle, this 30% decline at some point next year, is it possible that rates could be up next year overall lending?

Yes. It's really hard for us to predict at this juncture. We are going to be hesitant to do so. But I don't think the pressures are going to go away relative to the cost at least in the short term. And we have this dynamic that we've really not had before in these cycles, I'm always hesitating is different this time because it's dangerous to do. But we've had this artificial capping of what could happen on capacity because of the OEM on getting availability of trucks and trailers and those -- and that's not going to get any better in 2023, all right? So we're at probably peak capacity already, and we've got these other dynamics that we've been talking about that I think you'll see that come down, which should help relative stabilize the rates.

Got it. One big elephant in the room for '23 is going to be AB5, which is technically already low of at least this land, but could potentially spread over time. Are you seeing any developments or enforcement, any developments on real world changes here in California as well of that? And kind of what's the impact that going to be next year?

Well, I think this is a highly underappreciated issue in the industry. And as you mentioned, it starts in California, 17 states, generally like to follow some of the lead that California does on certain issues, and there's 70,000 of those owner operators here in the state of California. And what happens, they disproportionately support intermodal dray and the ports, which is where most of the friction is already into the system and the issues. And so I think it can be a very meaningful impact for fluidity, for service, for availability, and it's going to be another one of those issues that are going to -- why I think we're at peak capacity because of that. So Ravi, I don't think people understand what that could really drive. And fortunately, that's not our business model. We made those adjustments several years ago. So we're in a good position. But the industry, all of us rely on the ports of fluidity. And many of us -- many people rely on the owner operators as it relates to the dray side of this as well. So I think we've got to really watch this one closely.

Got it. I want to switch gears, talk back about Intermodal. Obviously, near-term noise aside. You guys have a significant catalyst coming off Jan 1 when you switch to the UP. Talk us through, a, kind of how that came to pass? What you're doing right now to prepare for it? And what that switch over to look like?

Yes. We're really bullish on the Intermodal piece. We got some tailwinds industry-wide because it's the most emissions friendly way to move product and customers increasingly need to address that and the goals that they're making. It's also an industry or a service that is more concentrated, right? We're used to this truckload being so highly fragmented. On the domestic intermodal side, you have the top 4 players have 70% share. And so it's a more concentrated world because it's harder to do. You have to have great alignment with -- the railroads, you have to be very good at intermodal dray on the street, which is much different than trucking. And so what we've set out to do, we want to double that business by 2030. And as we step back and say the best way we could do that was to create massive -- the maximum differentiation between us and the largest competitor in the industry. And so as we go to the UP in January, we've already started, we had 15-or-so percent as we came out of the second quarter on the Western part of our network already on the UP, but it gives us more origin destination payers to grow. It gives us more efficient steel wheel connections at major gateways with the CSX, our partner in the East. And it gives us the only own chassis, own box, own company dray on the UP Railroad, which is a very similar setup to our competition -- our large competitor on the other side. And so because we're in all different railroads and because we have a similar model, I think we're going to be able to take more share vis-à-vis the whole buy with that setup, and that's absolutely the intention.

Got it. Just on the last one, your large competitors was here earlier saying that they don't think it's a share shift play because they think that you can actually expand the market and take share from truck, and -- so everybody can win. Is that how you see it? Or do you think there's going to be some share shifting?

Well, when I -- a couple of things here. Absolutely, I agree that there's been too much all that could convert, that hasn't converted because of the difficulty in the fluidity. So absolutely. But we also have that last remaining 25% to 30% of the market that's running on an IMC, small, almost brokerage platform that doesn't align as well with precision scheduling railroad and the efficiencies that we can bring to the railroad and to that part of the market. So I think that's the most vulnerable, that last remaining 30%.

Yes. Look, it's not the big guys taking share from each other.

No, I should have been clear. I think that's the place that we have the opportunity to redistribute the pie a bit. But absolutely, there's growth potential for on-the-road conversion.

Got it. The margins in IM have been a real success story for you. You came out off of the IPO in 2017, saying, "hey, we're going to convert all the chassis to owned", like, bear with us. And now you're seeing the results of that, as you said, the only kind of owned operated intermodal provider out there. What's the runway there? And what's the -- how do you work the dials between growth and margin in the IM space?

Yes. We -- what we're really trying to do with those investments, both our change and our tech investments with the railroads is to take friction out of the network, right? And having our own chassis and getting out of that shared pool and the maintenance issues associated with that was a major step forward to eliminating friction so that we can get more throughput. And Ravi, that's our biggest self-help item right here, right? We've got boxes with chassis and our dray, we can do so much more once we get some fluidity back in the network without adding additional investment. So that's what we're excited about. So we think we're happy with our margin performance in this 10% to 14% range, depending upon the cycle, and we think our earnings potential growth is on taking growth into that business more so than flowing margins up.

So [ forward ] the margins and really push forward to the topline.

Yes, we're always working on margins, and we always have opportunities, but the growth and the earnings performance and contribution to intermodal can be through the topline growth.

Got it. You said earlier that Schneider was a 3-legged stool. And I think the third leg of that stool has probably been the real surprise to us sort of snuck up upon us as an underappreciated growth opportunity, which is logistics. Again, you guys have been making some really significant tech investments in the space. You've made some M&A partnerships in the space. What is the future of that business? And kind of what has been -- look, a skeptic might say, "Hey, you just benefited from a record up cycle, you capitalized on spot. And so -- but you're going to have to give all this up."

Well, fortunately, you're not a skeptic.

Well, I have to push both sides. So how would you counter that? And kind of what is the future of that is like?

Yes. So the reason we are so excited about our logistics portfolio. If you think of our asset centricity on Truckload and Intermodal. We're largely aligned with mid-to-large shippers there because that's a trailer pool environment, big on big play well, you bring efficiencies to each other. On our brokers and logistics, it's almost the opposite. We have synergies that we play, but we also get after the small tail of the market, the smaller shipper and the smaller carrier. So that gives us a growth vehicle. It's different than our traditional, that's what you're really seeing. We're on a run rate to $2 billion brokerage offering, a logistics offering. And we're not constrained by capital because we're generally leveraging, obviously, the capital of others to execute that. So it's just opened a whole other series of customer and market opportunity for us. We brought this power-only solution to bear where we now are tying our large shippers with our small carriers by bringing the orange trailer has the surrogate -- or excuse me, as the vehicle to connect those 2. But you got to manage the network well, you have to have the technology at the moment of truth how you price and how you accept and how you run. And that's the beauty of the investments that we've made in the technology front. But it's also a place that digital is a much more prominent play for us. Almost 1 in 4 orders now are coming in via our shippers where we think a low to our digital tools, get a price, book to load themselves. And so we're not -- we can grow our business without growing the people at the same. So there's a really nice people efficiencies and margin efficiencies in that business on top of it. So it's a great incubator for us on tech, growth vehicle for us, and we offer more to our solutions to our customers. So it's hard not to get excited about, not only what it's done, but the durability of that, right?

Got it. especially on the trailer pool part of that business. So power-only has been a huge growth area within transport as a whole for you guys and some of your peers. Again, are you seeing any signs of that cooling off or being transitory during the pandemic? Or is that real and sticky. And again, between that, the power-only portion and the traditional brokerage portion, kind of which is going to be the driver of the growth looking forward?

Yes, both. On our power-only, I think that's a legitimate concern is how durable is that. As you look at our approach to this, about 80% of that is allocated and contracted business. So while we have the opportunity to take advantage of the over flow or the -- or a project that comes up that can be a spot in nature, and we certainly do that. But as we've come through the allocation season, we have placed commitments, pricing and capability against that power only. And so it's coming to us regardless of the cycle of the day or the spot market of the day and only 20% of that or so plays in the spot market. So again, we're adding great value to the shipper because we're making it easy. It's just the orange box. They don't have to change any of their processes of how they tender, how they manage their facilities. We take care of all that complexity for them behind the scenes. And so that's why, Ravi, as we think of this -- now certainly, this period allowed us to accelerate our investments and accelerate our processes faster than we may have otherwise. But I'm more convinced than ever, particularly from the carrier side, if we go soft, we get them access to freight that they would never have otherwise. And so I think we have a quite durable option here.

Got it. How long are the contracts in that business, also 1 year?

Yes, it's very similar to -- and it's almost a surrogate to our asset, and it's in combination with our asset one way or network business. very similar.

Got it. And apologies if I missed this, but what's the split within your logistics business between trailer pool and regular?

We haven't shared that yet. We're still in the early phases of that, and we're considering what would be helpful to our investors to -- as it relates to the metrics, but is the fastest-growing element of our portfolio, and we feel really good about its durability.

Got it. So Steve, you obviously raised guidance on the 2Q call. And so from then to now, obviously, assuming that the rail network doesn't completely stop on Saturday morning. Are you feeling good about that full year guide and kind of what you need to hit that number?

Yes. On our second quarter earnings call, which was in the later part of July, we kind of had 3 tenants that were underpinning our full year guidance. We give full year guidance, not quarterly. And so at the juncture in time, we were looking at the seasonality that I described earlier. We are looking at the durability of contract price because we've been through the majority of our renewals for 2022 and had a pretty good sense of where that has landed. And we expected some form of seasonal peak. And as we sit here today, at least 2 of those 3 tenants are still in place, the contract price, as we've talked about, has been durable. We do expect some form of seasonality. And probably our guess would be it's not quite as robust of a seasonal peak as the last couple of years, but still something that is a bit more robust. What we're watching closely though is the volume side of things. I think it's been pretty well documented over the last month or 2 that overall volumes have been a little softer across the truckload and intermodal spaces collectively, and we've experienced some of that ourselves. So that's the thing that we're watching the most closely as far as what we originally guided to and how we'll be tracking forward. But all in all, pretty well-balanced market and executing while there is. So Mark alluded to some of the efficiencies, we feel like we can pick up in the intermodal space. Same goes for our truckload network. We really feel like there's opportunities for greater asset utilization and so on as a customer, labor situations get freed up a bit as we move forward in time that can contribute a lot to what we can do with our own assets that we already have. And so that will be part of a theme, I think, as we head into 2023.

Got it. Talking about gain on sale as well because here's an area where you're somewhat different versus your peers where you have, I think more gain on sale coming in the back half versus some of your peers kind of having that kind of fade off. So a, how do you quantify that? And b, how much visibility do you have at this point?

Yes. Just the timing of when we were able to get new equipment onboarded this year kind of push things to the back half of the year...

In addition to our dedicated and power-only growth, right. Yes.

Yes. And so we do have more of that as that new stuff comes in, we're able to offload some of the older equipment that we've held on longer than we would have ideally held onto. But -- so we do anticipate a bit more gain on sale in the second half than we had in the first half. It was pretty minimal in the first half, $5 million to $10 million of gain, as I recall. And we guided to, I believe, $25 million of gains in the second half of the year, kind of equally distributed amongst the third and fourth quarters. I think we're generally headed in that direction. And so that was inherent in our guidance. The used equipment market has softened a bit from where it was in the first half of the year, but we incorporated a lot of that into our guidance when we updated. So...

Got it. Any questions from the audience?

[indiscernible] the last couple of year [indiscernible]. Can you talk about outlook? Do you think softer market moved to then opportunities? What are you kind of looking to capital next year?

Sure. On the M&A space, we have executed a couple of deals in the last 9 months, 1 at the very end of last year and 1 in June, both medium to small type of activity there. We definitely remain active in the space and actively screening and would be interested. We do see the upcoming years has been a good opportunity for us to continue more of that activity. We certainly have the balance sheet to support it, and I think a pretty good mechanism by which to bring on those types of assets into the portfolio and complement our organic growth with some inorganic growth. It's part of our overall strategy as we think about capital allocation. Organic growth is at the top of that pile. But right underneath it is complementary growth through M&A. And I think we have a good structured and disciplined approach to it. And I think we'll see some opportunities over the next year.

We have 3 strategic growth drivers we're focused on. On the truck side, it's dedicated in specialty services, which we think would be the most targeted for -- with organic and acquisitive growth. We've grown 1,800 trucks year-over-year in that space, about half and half between organic and acquisitive. I think our growth opportunities and logistics are more organically based. We think we have -- as we've demonstrated today, in Intermodal because of its concentration, it's probably the same. So it's really that specialty truck would be the most likely scenarios. And we have a lot to put a play there.

Great. We are out of time. Mark, Stephen, thank you so much for coming down here and good to meet you again.

It's our pleasure. Good to see you, Ravi. Thank you.

Thank You.