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

All right. Let's go ahead and get started with the next presentation. So for those that don't know me, my name is Felix Boeschen, Senior Machinery and Trucking analyst here at Raymond James. Today, we have Schneider with us. With us company's CEO, Mark Rourke; as well as Group President, Jim Filter. Before we get into more of a true Q&A fireside-type format, I was just hoping, Mark, you could maybe give a bit of an overview of Schneider, who you are, what you do and some of the key end markets that you play in.

Great. Well, thanks for having us, Felix. And Schneider is a large, diversified transportation and logistics provider. Our primary end markets is that we're serving the consumer side of the economy and the industrial side of the economy, the things that move in the back of 53-foot containers and trailers. And so as such, we are largely centered around retail which is a big part of the consumer economy, everything from big box to high-value dollar -- or excuse me, extreme value retail like dollar stores and then the specialty folks in between, but also have a very big presence in consumer products. So the things that you're picking up at the store every week or so. And then on the industrial side, we serve automotive. We serve the chemical industry as feedstocks, into the manufacturing process, paper goods. And so we get a very good view, broad section view of the economic activity across the country and Mexico. Those are our primary service areas, Mexico and the domestic United States. Strategically, we look at ourselves really serving in 3 primary segments: full truckload which is a component of both one-way network type configuration, somewhat just as an order from A to B. But increasingly, our business has shifted to a dedicated contract configurations where we are aligning ourselves with customers on some very specialty service, either very high service levels, can be very focused around specialty equipment where you're doing something besides moving product from A to B, the drivers doing some value-added service. And that is where we have 60% of our truckload business is now in that configuration. The reason we like that, those are 3- to 5-year contracts. They are very deep and sticky with the customer, very, very high renewal rates. And as you think about the labor market today, drivers prefer that type of work because it's predictable work, predictable schedules. And it takes them off -- and generally they're home on a more frequent basis. And so Truckload is our largest segment, it represents about half of our earnings. And then we're one of the very large Intermodal providers where we use our rail partners on the middle mile to serve the longer length of haul. We'll get a chance to talk more about that because we went through a big strategic shift there. But the tailwinds in that business what we like is, it's favorable economics for the customer, because we can leverage where truck is effective and where rail is effective, and it's got a tailwind because of the emission reductions in the carbon footprint pressure, so many of our customers are under and there's no better way to reduce emissions than to convert from over the road to intermodal. And then our third segment is where we operate on behalf of our customers, but it doesn't necessarily have to be our truck or necessarily our trailers. So we are serving a logistics and brokerage function where we can grow our earnings and revenue without investing as much capital to do that, but still add great value to the customer, helping them solve their transportation challenges. So the first 2 segments, largely focused around trailer pools with large-to-midsized shippers. And what our logistics business allows us to do is capture the long tail customer, the small shipper in a more economical fashion digitally. So we collaborate across all those segments commercially, but we run those very separately because it takes different skills and different ability to serve the customer based upon those various service offerings.

I was hoping we could start maybe big picture. But if I look at the Schneider sort of portfolio and maybe from a modal exposure perspective, I think -- you mentioned Truckloads about 50%, and that includes, obviously, one-way plus dedicated.

Correct.

But the other half of the business, Intermodal and Logistics has really grown as a percent of the total pie. I think it's up from 30% or so 5 years ago. How do you think about that mix long term at Schneider? Is 50% the right level? Do you want to be more asset light? Just help us maybe understand how you manage the business in that light?

Well, you're right, Felix. So from the time we went public in 2017, our portfolio has transformed and very purposefully to, a, to allow us to be able to serve across multiple modes, help the resiliency of the business, but also reflect how we can grow earnings and revenue without having to always put a truck and a driver in a spot. And so our intermodal logistics allows us to grow with less capital intensity. I would tell you, we're probably a little ahead of where we thought we would be at this juncture. We're really pleased at that mix. And so if we even stayed here and just grew the segments, in a proportionate way, I think we would be happy with that. We would consider ourselves right now not capital constrained. If we can hit our hurdle rates, we have a bulletproof balance sheet. And so dedicated is really uncapped on what we think we can grow there. Our Intermodal business, we throw our goals there to double that by 2030. And then Logistics, obviously, is more of a technology and a digital play for us. And we've been growing that rapidly. That's been growing at about a 15% to 20% CAGR for the last 5 years, and we continue to look for ways to do that. And so I think as we sit here today, we think we got a terrific mix. It doesn't mean we won't ebb and flow as the markets develop over time. But we don't feel we're misallocated on capital or were misallocated relative to that mix, and they're all investment grade.

And that's the key that they're all investment grade. So we're not holding anybody back. We want to make sure that we're continuing to invest and continue to grow in all 3 segments.

And you mentioned trailer pools in your prepared remarks. And I thought, Mark, you said something really interesting in your last earnings call, you said you want to be a more trailer-centric organization. Can you help us understand what does that mean?

Well, what we can provide as a large trailer provider to our customers is they're looking for efficiencies in their operations at the warehouse, at the distribution center or even at their end customer delivery. And so that means a drop-and-hook operation. We can feed a trailer pool and the customer can bring the trailer in and out of their location when they loaded or unloaded at their convenience versus having to be there at a specific time because that's when we arrive. And so what that's allowed us to do is not only run our operations more efficiently with our company assets, but we've introduced this power-only concept where we bring our trailer to bear, we can accept the order at a very seamless and easy way from a customer standpoint, and then we can determine if it's a company driver, owner, operator or a third party. And so that's given us a little bit of a bridge between our asset-centric truck business and our brokerage business and allows us then to grow share and do so by leveraging that Orange trailer. And I think over time, that will be more of our focus of let's use our advantages of a large national trailer pool network, our technology and bring solutions to customers that doesn't have to be just exactly where our company driver is on any given day.

And within that sort of drop trailer business, can you maybe talk about some of the recent growth rates. And I think one of the questions that investors are struggling with is, frankly, the sustainability, right? Because we're coming out of a very, very tight market. And so to what degree did that help? And how is it holding up today in a more balanced or loose market?

Yes, that's a great question. I get that frequently. So maybe let's frame it this way. When we had this during the COVID area, it was a great concept to customer, so we had great adoption just because of the stress of the market. So if you compare the fourth quarter of '21 versus the fourth quarter of '22, vastly different market conditions and yet our volumes held to 95%.

So that's the power only volume.

That's the power only volume because the question is, is that sustainable? While the markets were much different, and we're feeling that effect today as well that we've made it easy for the customer. It's really an extension of our network business in many ways. And so I'm convinced through these cycles now that we have something that can sustain itself.

And you mentioned the network business, and I just want to make sure I'm clear on understanding this right. It's not as though you're deemphasizing the Truckload segment. So maybe help us understand how do you figure out where to put that incremental load, whether it's logistics, more asset-lighter or you do it in-house with your own power capacity?

Yes. Well, first of all, the customer is in control if they're going to be able to switch between intermodal or truckload. But when we're spotting that trailer that's at their location, we're looking at where is our capacity and what's going to make the most economical sense for us. And then we use this Schneider Freight Power App to be able to post loads to make those available when we don't have enough capacity. And beauty of that is a small carrier can go and accept that load, and then it gets digitally assigned in our system without a person ever having to touch the order.

And really what that does, it gives carriers who would have no access to large trailer pool shippers directly. We are the mechanism that connects that shipper with that carrier and that Orange box is the mechanism that happens.

And I do want to talk about Intermodal, but before we get there, just to wrap up on maybe Logistics. You did increase your margin target in that -- for that segment, I think on your 4Q earnings call. Can you talk about what drove that? And to what degree is power only play in that?

We raised our long-term target range of margin, 5% to 7%, up from 4% to 6%. There's really 2 components there. We've invested in the digital transformation of our business, and brokerage generally leads the way in our tech hub there. And so we believe we can grow the business at a faster rate without growing our people at that same level. So that's a contributor to margin. And then the second one, if we're going to inject capital into the business, we have to get a return on that capital via power only and the trailer. And so those 2 combination effects is behind the raise in our targets. And we've been performing mid- to upper end of that range.

And so maybe talking about Intermodal, we talked about it, you want to double that business by 2030, I think, is how you've put it. You just recently switched your Western rail partner. Could you maybe talk about that transition? What allows you to do now? What's different about the Schneider Intermodal network today versus a couple of years ago?

Yes. Jim, I'll let you take that. Maybe just one framing before we get there, Felix. Unlike the truck business, which is highly fragmented, the domestic intermodal business, the top 4 players have about a 70% market share. And that's a very specialized business. You have to be very good at an execution and hence, I'll let Jim kind of answer the question as it relates to the change, but we're in a much different competitive environment and one that we want to see that we believe we can leverage.

Yes. And previously, we're operating on the same railroad as our largest competitor in the West. And by moving over to the UP, we've differentiated ourselves relative to that largest competitor in the West. And then the other competitors that are on the UP, we're differentiating based on being more asset based. So we have the largest company driver dray fleet on the UP. We're the only competitor that owns our own chassis. And then the connection to the UP is much more efficient.

CSX.

So between UP and CSX, thank you. Much more efficient. So it went from about 6 lanes where we would have a steel wheel connection where the containers wouldn't have to come off of the train, to now we're over 40 connections that are steel wheel connections, so they move directly from the UP on to the CSX and gives us improved transit time, improves reliability and lower costs for all of us. So that ability to differentiate is what changed for us.

Can you maybe talk just a little bit about current demand within the Intermodal business? I think what, frankly, I wrestle with and maybe some investors wrestle with is, I think there's inherently fairly large retail exposure in that business. But then you're also coming off a really tight truckload market or maybe you couldn't put as much volume into the Intermodal business as you would have liked. So maybe how are you thinking about sort of volumes into 2023? What are you hearing?

Yes, I'll take that one. Yes. So -- and just a little bit more specific on Intermodal first, and Mark kind of wrap up on maybe a little bit broader. But specifically in Intermodal, it's not just total demand out there, but relative to truck and being able to compete. And I think Mark talked about this earlier that customers are starting to get to that spot of thinking about sustainability and now having to take action. So there's an opportunity to convert from over the road to intermodal. And for the last couple of years, it's been slow because of rail performance that's inhibited some of that changeover. CSX continues to operate at an extremely high level and Western railroads have improved from where they were operating before, really just coming out of hiring more crews. The other area of opportunity for Intermodal is really a private asset carrier like ourselves against the rail loaned equipment, which, at one point, was about 1/3 of the total Intermodal moves or containers that were owned by the railroads themselves and a small intermodal marketing companies that would lease a box, lease a chassis, hire dray people on both sides, coordinating all those to all that margin stacked up. It's just not as efficient as a company-owned equipment. So those are large opportunities to be able to take share there.

And Felix, you're right, the Intermodal has more of a concentration of imports, and the imports have certainly moderated, but we don't think that's going to be a long-term trend. And we also think Mexico can be a winner in the reallocation of supply chain decisions across the globe. And so both of those markets, and particularly Mexico can be very favorable towards an Intermodal offering as well. So we are in the middle of an air pocket, clearly, but we don't think that's a long-term trend.

And Jim, I thought the comment around decarbonization is quite interesting. Could you maybe put it into perspective, how much cleaner, how much better is Intermodal move versus an equivalent truckload move. And then I think the logical follow-up to that is, how much is that actually driving modal conversion? Is there any internal way you look at that?

It's always difficult to answer that which ones were specifically because of carbonation and/or decarbonation and versus all the other factors that play into that. But typically, you're looking at between 60%, 70% less carbon emissions by switching intermodal. It depends on the specific lanes. There are some that are even a little bit higher than that. But as much as we really didn't see a lot of that movement over the last few years, and while we've been talking about it, starting to see more shippers that are saying specifically, I'm going to make this move because I need to decarbonize, need to start to show some improvement because they've set targets that are largely at 2030. But every year, they're starting to show what was our results this year and several customers that made -- took positions are showing that they took a step back last year, and now they're feeling the pressure. I've got to do something to be able to show some improvement. Otherwise, there's no belief that you could ever get there by 2030.

Yes. And maybe sorry for the blunt question here, but does that give you more pricing power in Intermodal?

Yes. So overall value, so your ability to decarbonize, as well as your service level, I believe it creates some favorability for us.

If you look at our fourth quarter results, our revenue per order was up 7.5% in Intermodal despite the moderating market. And so absolutely, we think we can add value. The other things we're adding value, we have converted, and we're in the process of converting dray trucks to electric, particularly in the Southern California Basin, which gives us another differentiator as we bring 100 units on that we can really show value to customers that are looking to do that. And so we certainly want to hold those resources back for those folks that find value there. And with that, I think there's some economic value that the company can take.

And I don't know if this might be best for Jim. But I'm just curious, I think your box turns are down almost 30% off of peak levels. Is there something structural that's changed, maybe with your exposure transcon versus east coast? Or do you think we can get back there over time?

Yes. We'll start with -- we can get back there. So what initially drove the decline in box productivity, it was customer unloading as they're going through the pandemic, as well as rail performance that was driving that. But both of those have improved back to the previous levels or better. And so we're targeting the same number that you are looking at about 2017 numbers as that's realistic to get back to. So it's really just a function of having quality demand to be able to grow back to that level.

And I guess my logical follow-up question to that is, if I look at your 4Q margins in Intermodal, they were actually ahead of your long-term target.

Yes. So those long-term margins are full year margin targets. And so there is some seasonality that occurs, especially in Intermodal. And if you look at the full year, we're 12.8%, I believe, margin, so right in the middle of that long-term trend. So I believe that's where we want to be. So we want to make sure that we're staying within that ditch line and then maximize growth on top of that.

Okay. That's helpful. We got about 10 minutes left, and I really haven't talked much about your traditional truckload business. So I was hoping we could maybe do that. So first of all, I think everybody here is probably watching the spot rates. And one of the things I'm asking all my transportation company is there's this idea out there about capacity coming out of the market because you're effectively running at or below operating costs from a spot rate perspective. I guess my question is this, have you seen capacity come out of the market? And what's sort of the key indicators that you're watching on that front?

Well, capacity does need to come out of the market, and I think we are starting to see that. A couple of things that we look at internally are lease defaults, particularly around the owner-operator community and those are virtually nonexistent in the last 2 years, and we're back to pre-pandemic levels of defaults, which is both within the Schneider portfolio and other companies that we have visibility into. And the other thing we look at is through channel checks. What's going on in the insurance renewals. And the companies that might have been at 15 trucks that went to 25 because they could because of the spot market, our channel checks are indicating they're coming back to 15 or 13 or 12 trucks on the renewal front. And so those are really good leading indicators. It has a little bit of a lag to it as we -- but this is the high renewal period here in the first quarter. And so I think -- and particularly, also talk to the truck stop change, what they're seeing on the small carrier fills. I think we're starting to see that impact play out.

Felix, you're talking about spot rates, one thing that looks a little bit different to us this cycle versus previous cycles is that elasticity for spot rates. So 5 years ago, if you were trying to get a spot rate from a large public carrier, you're e-mailing or calling can I get a rate. Well, now we have apps. We have APIs, we're directly connected. And so when spot rates decline this time, in matter of a couple of months, they had declined about 30%, previously that took a couple of years to decline 30%. So as we're talking to customers, elasticity because of this transparency, works both directions. And we don't know when precisely that's going to happen, as customers burn through inventory. But when it does, you expect that you're going to see this lift. And if it's customers burned through inventory in a few months, maybe you're at a goldilocks where these things kind of happen.

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Yes. If it's 9 months from now, there's just that much more capacity that we'll have left and will be -- at much sharper change.

And now correct me if I'm wrong, but if I think about your truckload business, your spot exposure actually is quite minimal. But what I'm more curious about is the softness in spot rates, to what degree do you think that's impacting contractual truck pricing. Maybe talk to us a little bit about what you're expecting there, maybe how much you're through bid season at this point and sort of how those conversations are going?

Yes. I think if you look at it across our portfolio, and we'll get to the network side of that. But as you looked at our fourth quarter, Intermodal 7.5% revenue per order. We feel that that's going to be very well positioned as we go through the allocation season. And so I think we'll hang in there quite favorably. Dedicated as long-term contracts, and we have some renewals that have to take into account some of the inflationary impacts. So we're actually expecting our pricing to improve year-over-year in the dedicated arena. And I think what you're pushing on is the network side of the business where we have about 4,000 trucks and our exposure there. And you're right, we're generally in the 5% to 7% range in spot. We're a little bit higher now. But it doesn't really drive us because we're largely a contractual piece. And I think we'll see, at least as we get to the early part of this, the mid-single to maybe upper single-digit percentages could adjust. But that's coming off some very positive price movement we've had over the last couple of years. So we're not going to get back to 2000 and you picked the number rates. But the most exposure we have in that is in the network side, but it's also a much smaller part of our company.

And I thought on your last earnings call, you sounded a bit more encouraging about the second half of the year. Can you maybe talk us through what's driving that? Maybe how you think volumes could play out through the year just based on what you're hearing from customers?

Yes. I'll let Jim comment as well. And I think part of this is the mix of our change of our mix over time is more resilient. That was very purposeful in how we wanted to construct that. Secondly, we were really looking forward to seeing through the earnings season here how the inventory played out in both the big box, the specialty players, the home improvement channel. And that was mixed, right? You had some folks who have been working on this for several quarters, actually had some really good progress. You have others have got more work to do. But as that burns through because the market is holding up pretty well, considering all of that, right? And we have to get through the remaining part of that inventory burn. I would feel fairly confident that, that will largely get dealt with here as we get through the second quarter, and we'll start to get back into a more normal replenishment that we just haven't been in for the last 3 quarters. So that's where our optimism is born.

And then we talked about Schneider's portfolio from modal perspective early on. But there's been sort of another mix within mix change, if that makes sense, if I look at your Truckload business because Dedicated continues to grow as a percent of the overall tractor count. Could you maybe talk about how you think Schneider might look a couple of years from now in terms of network versus Dedicated. Yes.

Well, I'm a firm believer that a healthy network business benefits the whole portfolio. It's one of the hardest things to do for a customer. Customers value that for having a dedicated business that you have some ebb and flow. It's a great collaborative element on behalf of your customer, on behalf of capturing additional opportunity. So we want a healthy and large one-way network. But we don't want it to be necessarily any larger in the percentage than it currently exists. We'd be very happy with that. So we could see some moderate growth there, but we are really leaning in both organic and acquisitive to grow those Dedicated contract configurations. And so we're out in front. We've had several hundred units that we expect to grow organically this year. We're well on our pace to do that. But we would also be very encouraged if we could find another acquisition that we had like we had a year ago to boost that further.

Maybe that's a good segue into capital allocation. But as you mentioned, you did 1 or 2 smaller deals, mostly on the Dedicated side in recent history. Is that the sort of deals that we should expect out of Schneider? Is there anything within your portfolio maybe where you feel you could add something incremental? And Mark, you specifically have talked about specialty.

Yes.

Can you maybe explain what that means in the context of what you're looking at, what you define as specialty?

Yes. As we think about -- first of all, we have great organic opportunities in front of us, and that's our primary allocation of capital, priority is our organic growth opportunities. As we look at acquisitive though, we don't really see a lot of opportunity that would -- at the multiples that would be attractive to us in the logistics space when you look at our track record of growth there. We think we have -- and now that you've got Power Only in there, that's really going to be an organic play for us. Intermodal has a little different playing field, so not a tremendous amount of opportunity there. So that leaves the truck side of our business and specialty to us is what is things that you're doing that's not generic. What are -- specialty, either through specialty equipment, specialty services, long-term nature contracts, very sticky, hard to replicate. Those are the things that we find most interesting, and that's what we found with our MLS acquisition, and that's what we're looking to duplicate.

And can we talk just a little bit about CapEx in general? Because I think you've talked about correct me, if I'm wrong, but no major container adds this year. But your CapEx is still up quite a bit. And my hunch is that has to do with fleet replenishment. Could you maybe talk about what do you think is a good maintenance CapEx level through cycles. And once we're through 2023, do you think your average age of equipment could be all caught up relative to what you hope it would be?

Yes, I've been saying that for 2 years. But you're right, there's -- as you look at our range, we think it's $525 million to $575 million. There's really 2 components. It's the organic growth of Dedicated that we expect to achieve there. And then we are behind -- we've been behind. We haven't had a chance to catch up in a couple of years because of the constraints and allocation from the OEMs. And so we do have some artificial catch-up that we have to do there. We're not dramatically behind, but that's -- we are more confident sitting here today that we could get out of this year on our targets than we have been the last couple, but we have to see it. And you're right. We feel we're going to sweat our assets in our intermodal containers. We might do a few chassis. But most of our CapEx this year will be on the truck side.

We have about 45 seconds, but I do have to ask you just this last one. You talked about M&A a little bit, and it sounds like the focus there is specialty. You talked about organic investments in CapEx. What do you do with the rest of the cash? You announced a modest buyback. Maybe talk to us about that versus dividend and how you think about that long term.

Yes. We raised our dividend again. We're up about 60% growth in our dividend since we went public, right? So we're looking for ways to return to our shareholders. The modest buyback that you mentioned, we'd like to be at least in a position we could target where our share count will be and that could just be equity grants. We'll probably trim a few million above that. And then organic acquisitive dividend and those buybacks, that would be our priority order.

Mark, Jim, that takes us to 30 minutes.

I am going to say thank you very much. I appreciate it.