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

Thanks, everyone. Carrying on with our transport fireside chats, again, for the new people in the room for this one, I'm John Chappell, the senior transport analyst at Evercore ISI. Joined this afternoon by Schneider National, and we have Mark Rourke, President and -- CEO, sorry; and Stephen Bruffett, Executive Vice President and CFO. So the run of the business here is I'm going to ask the questions I've prepared. I welcome any questions from the room. What I found so far is people like to be shy, so I can carry this if I have to, but please feel free to raise your hand if you have any questions.

So Mark, just to kick things off, I think kind of a bit of a state of the union, just a broad update on the current frame environment, namely, we're still in this freight recession, I think, so to speak, but timing for emergence, how this cycle has been vastly different from others and kind of how you see the way forward, both in '23 and beyond.

All right, the cycle has been different. And I think it really just starts with the context of how did we get to where we got to here of virtually 24 months of -- I guess, distortive behavior across the supply chain and maybe some overzealous to get after product. And so I think that's part of what we're unwinding here a little bit as an economy. And so I would suggest we've been in some type of freight moderation condition, about 2.5 quarters. And what I'm really interested in coming out and seeing what's in the inventory overhang results from some of the retailers that will come out here soon because I think they've been working at that diligently and which really is a catalyst for that replenishment cycle. That's been a little bit off just like it's been off on the way up and it's off a little bit here as that's corrected. And as we've talked, we didn't really have seasonality in the fourth quarter as a typical peak season, but we're also not seeing the dramatic drop that we generally see from fourth quarter to first quarter either. So we're still not back what I would call to a normalcy yet, but I think there are signs, and I think it's really on 2 elements. I think the demand replenishment cycle once we get through this overhang can be a catalyst for the industry. And I also think there's some stress in the carrier community in certain pockets that I think as we start to get to insurance renewals, licensing and permitting, I think you'll see more capacity come out than what we've seen up to this point. So I think that combination may set up a stronger maybe late second, as we start to get in the third and the fourth quarter than what we've experienced here in the last couple.

So we want to kind of focus on long-term strategic stuff at the beginning of we have this little kind of current update. So with some transactional TL or spot for most people is really kind of the DNA of your business. But much of your growth ambition has been really skewed away from that recently. Talk about how you envision your business mix evolving over the next 3 to 5 years, including dedicated versus network, which is, again, their nomenclature for spot. but also how ideally, you'd position intermodal and logistics into that mix.

Let's maybe break that down a little bit in the segments there, Jonathan. I think it's a little bit of a misnomer that we're not committed to or growing the network business because we look at our truck count and network. But if you take the customer lens, and how we approach the market. The power-only solution is very much aligned in with the network type business that we do. And we don't do a lot of spot. We're a mid-single-digit spot company. And so we're generally in the contract space there. So the combination of our network assets and this emerging power only is really what the customer and the market feels as our network business. I think that's a great combination because it allows us to grow that segment without having to put as much capital and as much labor against the network when the driver community favors the more predictable nature of what we can do in Intermodal, what we can do in dedicated. Those are where we believe we have some tailwinds based upon market need and also where the labor preference matches up best. So I'm a strong believer, 35 years with the company that a strong network business is really good for the rest of the portfolio as we ebb and flow on customer needs. And so while it may not be our primary growth driver, it's still going to play an important role for the long term here at Schneider.

And on the whole business mix thing, I'll step into that one a little bit. We've made a lot of progress over the past 5 years or so since we've been a public company on that mix, and it's been purposeful and strategic as we sit here today. And we have about half of our earnings coming from our less capital-intensive segments of Intermodal and Logistics, and we like that positioning. And within our truck segment, about half of our revenues are network and half are dedicated. And so I think we're purposefully constructed. We like where we sit right now and as we project into the future, we'd basically kind of like to grow at all. We like all the pieces of our business. It may just be a different speed at which we would prefer to grow certain parts of our business, but we're not growth averse in any part of our portfolio. We've tightened up some things and pruned off some nonstrategic parts of our business over the past couple of years. And so what we've got, we like a lot. It's complementary service offerings, and we feel well positioned to serve the customer needs as we go through freight and business cycles with this portfolio of services. So we feel pretty nicely set up and like our mix where we are.

I want to dig into each of the segments a little bit and maybe working just backwards from the way that it's perceived logistics. So worst-kept secret, you raised your long-term margin guidance there. I mean, not that it was 100% expected. But just given the emergence of power only and some of the stickiness of that business and the higher margin of it, can you talk through kind of how you got to that comfort in raising a long-term margin target by 100 basis points, which is pretty meaningful from the starting point there. And how growing that business, power-only specifically was involved in that calculus.

Yes. Steve, you can jump in. What I would call out is distinctly competitively perhaps different than some of our other truckload competitors is that our logistics business is the self-generating of their own freight. We're complementary, obviously, with -- commercially with the other parts of our portfolio but they're complementary to logistics is not dependent upon the assets for overflow or for opportunity. And so therefore, on itself, it can be a growth engine because it's in its own destiny. Obviously, we collaborate even more tightly when we have the power-only solution because that's a large shipper small carrier combination that we take to our larger and medium-sized shippers. And so that's very complementary to the network. And it certainly plays into how we think about margin targets there because we're now putting a little bit more capital to play even though it's at least expensive capital being a trailer over a long lifetime, it is still a capital investment that we're making beyond technology and brokerage. And so I think it's important we get the adequate return for that. Hence, that's what you're seeing on our margin, long-range targets, and it delivers against that today. And so we want to keep leaning into it. We want to grow earnings dollars contribution to the company there, maybe less sensitive to the margin target. That's 5% to 7%, we think will be very competitive and allow us to grow the earnings contribution.

We certainly didn't take -- we take our margin guidance pretty seriously. So we didn't take it lightly. We wanted to live with the offering in the market for a period of time and gain comfort around its traction, which we do have that confidence. And when you've got nearly $2 billion in our logistics segment of revenue, now it's -- we want to make sure that we're articulating what we think we can deliver on a regular basis over time. So we did think considerably about it before we raised that by 100 basis points, that margin target from 4% to 6% to 5% to 7%. And as Mark mentioned, we're return on capital focused, not surprising in our space that, that's an important metric to us. And with the power-only offering, Mark mentioned that it tends to have a higher margin than our brokerage business, that's just pure transactional connecting shippers and carriers. Another dimension of the power-only offering, though, is we have to manage this trailer pool because it's part of our overall trailer network in our truckload business. And so there's resources and capabilities and technology that are needed to support that. So it's another element beyond just the sheer investment in a trailer. It's the management of the trailer network to be able to deliver on those customer needs.

John, I think a common question you get at times is how durable is a power-only solution through cycles. And I think in our fourth quarter results, we had 5% less volume in this market in the fourth quarter than we had in one of the most robust fourth quarters of a year ago. So I think, again, it gave us confidence, and it demonstrated the resiliency and not only the variable cost nature of our brokerage business, but the power only business as well and pretty much maintaining our volume year-over-year.

That durability question is so common that I was just going to ask it. And it wasn't even on the script, but okay. I think you covered that. Intermodal big headline of late for you, especially. You've done this massive transition from one Western rail partner to another. And you gave us enough kind of foreshadowing, not just us as the investment community is obviously more important for your shippers and as you prepared for this. But it seems like it went pretty seamlessly, but maybe just catch us up a little bit on how this decision transpired, why it was important for you to get a new Western partner and how that plays into the long-term target of doubling this business by 2030.

I think that's really driving at the heart of the decision. It's not an easy decision to make a long-term relationship that we have a lot of respect for. But as you kind of look at what we're trying to do doubling, which is about an 8% volume growth on a CAGR basis to get where we're shooting for there. When we looked at the opportunity for competitive differentiation between our East and the West, when we look at our model of being an asset-centric owning and controlling our own box, our own chassis and our own company, dray. And when we looked at all the difference in the origin destination payers that the UP would offer us in addition to more sailing schedules more often, and their commitment to really make some adjustments, particularly around technology and efficiency in the tour, and they have been right on spot, everything that they've committed to, they've delivered. And so that whole combination just said, I think we're better positioned to achieve who we want to achieve and create that differentiation with the UP CSX combination. And as you mentioned, we came out really early, which was a question, was that too early. And based upon how we executed and how UP executed through that transition, I don't have any regrets. I had concerns that do we signal too early to everybody, but in the end, the customer community, I think, appreciated the transparency. And it gave us in an open air to work together publicly and are with our driver community to make that switch because it's not an easy switch changing ramps, changing facilities, changing technology, deep integration. A lot of things have to go right to do that well, and I commend not only the Schneider team but the UP team for their execution.

Now you have a phenomenal in my view, partner in the East. And now you've made this huge decision and investment really in the West. The market share shift from the west of the East has been tremendous over the last 20 years. I mean, obviously, a shift of that size over 2 decades, a lot of that is structural. But it feels like a lot of it was also either cyclical or temporary as it related to the Qs in the West Coast and now the labor contract there. I mean for you, how important is it to see some of that share shift back to the West? And really, I mean, kind of without making a call on ILWU negotiations whatever, like, how likely do you think it is that you will see some of that reversion back to the West Coast from the East?

I think that will be one of the very interesting developments as we get through this allocation season because you're right, people took some discretionary change from structural change based upon the congestion that was in the West based upon some of the certainty issues that still exist. But I still think economically and service-wise, it makes sense for some of this to shift back. The question is how much. And I think that will be a very important piece that we'll get a better insight as we get through really by the time we get through the second quarter, I think we'll have a feel for how much of this is going to stick this way but it's important. Imports are very much at the heart of intermodal and Southern California is very important to imports and very important to our network. So it's this thing it will be a trend we'll watch closely but we're very bullish because there's so much that we know for a whole host of reasons, both in the East and the West, particularly the regional West that did convert to truck out of concern of reliability and congestion that there's some good tailwinds just getting back the over-the-road conversion, let alone the emissions value and some of the market growth opportunities. So the beauty of that is we're somewhat agnostic internally, whether it goes truck or intermodal, we provide both options to the customers so they can select the value. But we would like to see more of it switch back to the west, and we would like to see more intermodal conversion. And we're certainly trying to put value propositions in front of customers are showing that value.

And I think over the course of time, as global supply chains try to figure out their new path and how they want to set themselves up to avoid some of the disruption that we've experienced over the past couple of years, whether it's sourcing from different locations in Asia than what they've done historically or whether it's more near-shoring, Mexico related or Central America or something like that. Key is to be set up to be a great receiving point from wherever it's coming from. And I think with our configuration, the way we're built now, I think we're perfectly suited for whatever those nuances become because I think there will be some structural longer-term changes that won't just all go back to where it originally was. So the key is to get set up for whatever that is.

And you mentioned the partner in the East. The combination of our company dray and their consistent performance, and we compete very favorably against truck there. And particularly as we can look at the fuel difference. We look at the emissions difference. More into the East Coast -- I mean it's not a death melt to intermodal by any stretch but that is an excellent combination. My hats off to execution as well as our company dray team because on the street, in the terminals is more efficient we are, more aligned we are to their principles around PSR and the better experience the customer gets. So our interests are highly aligned.

We're going to shift to "trucking," as I wrote down. I thought your comments about the dedicated pricing on the conference call last week was pretty interesting because I think there's this perception that dedicated is contract per se, but in a market where truckload spot can be so volatile, if dedicated has to fall in the same direction. Maybe not to the same magnitude, but it's not immune to it. But you had noted that your dedicated pricing is holding in. I think you even said, and hopefully, this wasn't my misinterpretation that you're even able to push through some of the cost inflation that you're seeing in the business into this dedicated pricing. So maybe just explain to us the difference in the dedicated pricing dynamic and why people shouldn't fall into the trap of thinking that it has to fall in the same direction as spot?

To your point, dedicated is not completely immune to market forces or market realities. But it is much more stable. It's much more long term, and we do have modifiers in there, particularly around those key cost areas. And what's really drove inflation into the business is driver wages, equipment costs, all of those things that we're recommitting to customers on a regular basis. And so the recovery mechanisms, the reliability that they're looking for that are really aligned to our driver community gets to know their business really, really well and as a representative of them for their customer. All lines are really, really favorable. And that's why we like dedicated. It's more durable in nature. You probably don't have the highs and you don't have as many lows, but your reoccurring revenue streams, the value that the driver community gets from that predictability and our ability to do a wide array of special services across multiple equipment types, things that we're really good at just makes a place that we would love to see more growth, and our commercial efforts are really focused in that direction. So I think that's certainly more in the first half of the year as we had more of those corrections take place and the renewals in the second half. So we'll see how all that plays out, but it should be a much more stable book.

You mentioned the commercial efforts, and I'd say part of why we feel the durability of our particular dedicated portfolio is how it's been purposefully constructed by pursuing truly dedicated opportunities as opposed to someone seeking capacity in a tight market that's one-way business masked as dedicated and that can evaporate pretty quickly. So we've been very purposeful in making sure that we, in fact, are providing it as a dedicated solution that is durable.

And you noted that the actual spot business is like mid-single digits. I imagine that's not going to go any lower, really pretty much can't. But where is the dedicated mix now as a part of the overall trucking portfolio? And it seems like when you're focusing most of your fleet growth on that segment of the business, ideally, where would you like that to be in, let's call it, 3 years?

If you come out of the fourth quarter, we had about 57% or so of our tractor fleet associated against contractual relationships within our truck business and the network was 43%. Now obviously, we have a lot of power only that's different that as that's accretive to that number. If I could snap my fingers and the world would be perfect, I would be really happy with where we are in our mix and grow everything symmetrically, make that all happen. Obviously, the world doesn't always operate symmetrically. So the mix, it's 5 years in the making, and it feels like we've gotten to a place that we would be happy if we stay here, but we'll let the market drive us. So we're not pushing our agenda on the market. We're certainly trying to represent how we can add value to it. So we'll stay exactly the way it is. It will probably lean more towards the non-asset mix and a little bit more mix towards dedicated as our strategic growth drivers, but we would be happy keeping it where it's at.

The nuance to that is back to the power only thing that I talked about earlier. And it could mask what we're actually doing in the network because you can't -- let's say, we grow power only faster than the core network piece itself. Our trailer count would be growing to support that growth, but our tractor count would not be. And so it would be harder to see what we're actually doing, if that makes some sense. And so I think we continue to see opportunities to grow that trailer count and maybe an in-step with how we're growing dedicated, but it may not show up in our tractor count.

Yes, over time, a more trailer-centric network versus a power-centric network, if that makes sense.

Let's take that one step further because if you're -- it appears to us that you're deemphasizing network. But over time, you built this kind of mode agnostic offering a portfolio to your customers, whether it's logistics or now power only or intermodal or dedicated versus network. How has that been shifting over the last 2 years amid this massive upheaval that we've seen from the demand side? And how do you see that evolving as well?

On the truck mix?

On the total mix of what you're offering to your customer, if you're only 5% or whatever it is mid-single-digit spot?