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

Welcome again to our 30th Annual BofA Transport Airline Industrial Conference. I'm Ken Hoexter, BofA's Airfreight and Surface Transportation and Marine Shipping Analyst. Next up, we've got Schneider National, a $5 billion market cap multiservice truckload, intermodal and logistics firm. Joining us on the day is from the company, we've got President and CEO, Mark Rourke for his fifth time at our BofA conference. Steve Bruffett, CFO, here for the sixth time, getting closer and closer to your 10 timer jacket. I know Steve you want one. This is Schneider National's tenth time joining us in the 22 years we've hosted going all the way back to 2003 when the company was still private. So truly appreciate your dedication and contribution to the conference. Also in the audience do we have Steve -- there we go. All right. We've got Steve Bindas and Tyler [indiscernible]. So Mark said to hit them with the tough questions before you leave.

Mark, we've heard a lot through the last 1.5 days in terms of the backdrop for the market. Maybe you can set the stage from just given your breadth and your reach of so many different facets in transportation. A backdrop of kind of what you're seeing as we're midway through the second quarter?

Yes. Well, maybe not a lot has changed 3 weeks from our public earnings call, Ken. And first of all thanks for having us. I'd -- probably focus is we'll talk maybe about more present, but it hasn't taken our eyes off our strategic horizon here, which is making sure we're positioning the company for the long term and what we're trying to accomplish. And first and foremost, we've really grown our dedicated share, which is what we have to do in our trucking business is to shift share and grow earnings, grow earnings contribution in a consistent, sustainable way. So last year, we added 1,800 or so units, half of that organically, half of that through acquisition. And as we sit here today, we feel very confident we had several hundred more units of growth organically and still looking at targeted acquisition opportunities to further enhance that. So again, we believe that positions us through cycles and a very consistent growth of both earnings and revenue over a multiyear horizon and very excited about our progress there. Secondly, a lot of news in our intermodal offering as we've, again, looking to double that business by 2030, and we've changed our Western rail partner. Exciting. We haven't got a chance to exercise that change yet with the current market conditions with the UP. But also, we're very bullish about Mexico and very pleased to be the anchor intermodal provider now for the new CPKC service, Northbound and Southbound and out of Mexico. So as we think about the positioning of that business to offer great economics to our shipper community, but we also are going to offer sustainability benefits as that becomes more and more a critical component of their decision-making. So I feel very good about positioning that business and really pleased with our rail -- underlying rail providers for us to go ahead and accomplish that. And then kind of the third item on our stool is our logistics business, much less capital intensive. We're really leveraging other providers' capital base and driver base. And we've added in the last 1.5 years now another tool to that toolbox with Power Only. So it doesn't diminish what we're trying to accomplish in the traditional live, live business of brokerage, but gives us another avenue to grow our earnings stream by leveraging our competencies around managing assets and then in a trailer configuration, give access to the small carrier to big shippers using that trailer conveyance. So those are our 3 primary objectives. We look out towards the horizon, we'll get through this current economic cycle and freight cycle and get back to the real focus, which is growing the business on the top line and the bottom line.

Yes. No, I mean, obviously, and you've talked a lot about the third, third, third and how you're going to grow and grow in each segment. Let's just knock off some of the near-term questions and then we can kind of build up to that because I...

Your favourites.

Just -- you mentioned not a lot has changed in the 3 weeks, but I want to understand, does that mean nothing really has changed in terms of the levels that you were seeing in April and early May. I just want to understand is there any green shoots or anything that you can say, "Oh, we're starting to see kind of shifts? " Or is this really kind of, "hey, we'll be lucky if we see any kind of second half rebound given what's going on in the truck market?" And I guess in that I'm phasing more towards your network than your dedicated side, right, in terms of your view of what's going on in market activity.

Yes. We typically see a little bit more green shoots if that's the right term, this time of the year coming into the home improvement in the spring season and the food and beverage. And we are seeing some increased tender volumes, and we are seeing some of that, Ken, but it wouldn't be what I would consider what we would typically see. So still muted, consistent with what we were discussing 3 weeks ago. So I think that's still more in front of us than what we're currently experiencing today.

So you ended up lowering your EPS target, right, about 7% noting you expect 2Q, 3Q at the trough of the cycle. So that still pushes us a bit out, right? I mean it still is about 6 months before you see the trough of the cycle, if I'm understanding your terminology. So just wanted to see if that was, I guess, still your thought.

Well, how we position that is we believe that we're -- and by the time we get to the fourth quarter, certainly, we think the stress that's happening in particularly the small carrier and the exit of capacity. And we are seeing more signs of what we mentioned. We can certainly see some leading indicators in our brokerage insurance renewal stats, we see it in at least defaults and owner operators and the third element that is always a leading indicator for us is what's happening in your new driver replacement pipeline, and that is heavily skewed to more of an experienced profile than we've experienced in the last several years. So all of those give us insight that there is the capacity correction happening. But again, the dampened demand, I think where our customers are a bit more cautious on their inventory levels, even though I think they're dealing well with the inventory. It's the replacement cycle, the replenishment cycle is a bit delayed. And that's really our thought is, as we're talking to customers, we're seeing the demand and the capacity condition is more back half loaded, but more steered towards late third, early fourth.

So just sticking on that insurance thought, right, because we've had, I guess, some debate in terms of what's going on with the capacity in the marketplace. I just want to understand your view. So you're saying from that, you're seeing some of the capacity start to come out accelerated pace given how low spot rates are relative to cost? Or ...

It's been stubborn. There's no doubt but...

That's probably more of what we heard this morning, it's not coming out as...

As fast. But there's always leading indicators. And those -- in our view, when we can see an insurance certificate of a year ago being renewed in a brokerage for X amount of trucks versus Y amount of trucks as we see the inexperience versus experienced mix in the new driver pipeline. All of those can, I think, are just leading indicators. And we have to see those things happen before we ultimately see what we expect to have happen relative to the capacity coming out.

Yes. And so the leading indicators are starting to give you at least some belief, even though we're not seeing the mass [Indiscernible]. It seems like even where you are seeing the capacity leave, you mentioned the drivers, you're getting more availability drivers. So they're just -- they're coming back over and ...

I think what that suggests that the smaller carrier, the owner operator looking for a different house now because of the difficulty.

Yes. Yes. Okay. Again, only just a couple of short-term ones. And then historically, your first quarter, second quarter, operating ratio would see about 150 basis point improvement on a sequential basis. Given the heightened freight pressures this year, I guess, do you still -- would you still expect that kind of a sequential improvement given by some of the cost levers? Or is just the backdrop and macro backdrop too tough?

Yes.

You're a different voice.

Yes. I would say that consistent with what we said on our earnings call, we wouldn't expect normal seasonality, which would improve earnings in the second quarter. And while we try to stay out of the quarterly guidance game, we did try to steer things a bit on our earnings call to say that we expected more flattish type earnings as we move sequentially because we don't see the demand part of the equation coming into play that soon in the cycle. But -- and we do think the second quarter will be our toughest year-over-year comps because a year ago, this was just beginning, this part of the freight cycle that we're in, things were just beginning to soften. So we think that will be our toughest year-over-year quarterly comparison.

Great. So Steve or Mark, I mean, I guess, let's talk about long-term targets, right? In terms of your truckload. I'll run them down, right, just for everybody's kind of update right? And tell me if I've got to right truckload, 12% to 16%; margin targets, 10% to 14%; and intermodal 5% to 7% at logistics. Maybe talk about what kind of growth, pricing backdrop is set up in those kind of targets to get in the top and bottom end of those targets. And then is this the environment where you break -- I think you mentioned, hey, there are periods where you're going to operate outside those bands, it happens and then you kind of -- you pick back up, but those are the long-term bands. Is that still kind of the right way to look at it?

Yes, Ken, let me open. I'll let Steve follow. But we look at those as an annual target. So quarterly can vary a bit, obviously, with the seasonality in the business, but those are -- when we select those ranges, we believe those are what we'll be able to perform in through cycles. There can be an extraordinary cycle that can get us outside of that on the upper end. There could be an extraordinary cycle that can get us out of that on the lower end. But out of a 10-year horizon, we would think 8 years that, that's kind of our thought process that we would fit within that because that's the guidance that we're trying to give folks and we're still confident that even as we're dealing with these struggles, that's still what we think we can hit in this calendar year.

Okay. I think you -- you said you were going to add on some.

Like that was all the fairway stuff I was going to describe as well then.

I thought there was some more elegance in there.

Let's go to segments, right? So dedicated. You sold 280 tractors in the first quarter. Noted the pipeline remained strong. We just heard from the prior panel, kind of dedicate, they're just working to replace some of the stuff that just demand has taken away some of that -- the volume there. How do we think about tractor adds on the dedicated side and maybe throwing rate increase thoughts or rate change in there on the dedicated side?

That's more of the stable. A lot there. That's why we like that business. It's a multiyear contract, very sticky. We're generally doing something more than just delivering from point A to point B, it could be extremely high service levels. It could be value-add product handling in and around the customer. So it's a much more stable high renewal rate. Drivers like being aligned to customer and feeling ownership there. And so just for a whole host of reasons, it fits very well to what we're trying to do strategically. And as such, we have good mechanisms to deal with the inflationary impacts there. So we would expect our pricing to increase year-over-year and recognition, particularly around driver wages. And for the first time in a while we're starting to get equipment more on schedule, particularly on the tractor front. And so we're actually trying to move up some start-ups versus trying to delay some start-ups, which is what we were doing the last couple of years. Still a little difficult on the specialty trailer front. They're a little more constrained there that depending upon the configuration that we've sold to the customer. But as we look at the value and success. We get success, we're on a great momentum role there, Ken. So as we sit here today, we would expect several hundred units of growth, and we might be able to overachieve that if we can get to the equipment soon enough based upon what we've already got contractual commitments from customers.

Yes. I mean, you focused on growth on dedicated I think, a bit more lately, right? So when you went public right, we had the for a higher than network and dedicated business. Is it the business is maturing? Or is it just that it's become so much obvious that you thought you could get better returns on the [ prior ] because you got to get paid for the risk, but yet ultimately dedicated as -- what's changed and matured that the industry has seemed to jump more toward the dedicated?

Well, I think there's -- I don't think that's a total industry piece. I think there's a few of us that are really good at having a balance sheet to do it, having the capability on startup and the scale to do that well. I think scale does help in this...

we're hearing more from the larger carriers that are focused on...

Yes. And that's -- I think we're playing to our strengths. And there's a couple of pieces. It's increasingly, our driver community has a choice of what they like to do and where type of work configurations and dedicated fits that need better overall than network. We still have a number of drivers that have no interest in dedicated. They like the network business, but that's more and more rare relative to what drivers prefer. So labor and their interest is a key component of that. But also just the recognition of the longevity and the fact that everything doesn't get thrown up every 12 months on an allocation play, you can be much more strategic with your customer. You're much more linked together for your mutual success, and it's just -- in our view, just a better environment to achieve what we're trying to achieve in growing our earnings stream.

So you recently noted you were looking for potential inorganic opportunities in dedicated. Anything -- does this market make it easier to attract that business? What's your view on maybe the pace and scale?

I think what's really probably more prevalent there for why there's activity in that space as we're at a phase now of where the founders of many of these businesses are looking for an alternative. And their planning and can, unfortunately, not all of the second and third generations of these companies want to take the helm and to keep the family business going. And so what we want to be is an acquirer of choice, how we approach that, how we align with the family business. We have a family kind of founding of our own that I think plays well there, and we're trying to certainly leverage those strengths. And so the activity is still there and we would be excited if we could get something done here in the short term.

So let's talk about the network side. Maybe I'll just start off simple, right, obviously, this March to May is bid season. We're here in mid-May, out of bid season pan out on the network side.

Yes. This will be -- this is our biggest quarter by far both in our network businesses, whether that be intermodal or over the road. So we would expect to be 65% or so, maybe upwards of 70% done as we get through the second quarter. We're in the midst of a series of renewals presently. So as we get to our next public call, we'll be in a much better position to give you additional guidance there. But it's the busiest part. Second quarter always is the busiest part for us.

Maybe then tell us what you can in terms of the spread between contract and spot seems to be wider than normal, right? Still saying, I think we've heard a couple of times still staying about $0.60 apart from each other. Is that because the market -- the spot market has shifted so dramatically contract rates, as you said, the relationships stick around? Why are we seeing such an extreme when we didn't in prior cycles?

Well, I think there's a couple of things. And I understand the spot market is highly correlated. So I'm not dismissing that component. But A, we don't play a lot in the spot market more than presently a few percentage points higher than we would like to in our network business. But also we play in the trailer pool space. And spot market and trailer pool are a little bit more disconnected. Customers, particularly ones that we align with mid to large shippers need scale. They need trailer pools. And so while it's instructive. It's not as correlated as folks would believe.

Yes. And what percent is spot now in the ...

Yes. We are typically mid-single digits to 7%, 8%, and we're around 10% presently in our network truck business. So we're up a couple of percentage points over what we would typically be.

So in terms of revenue per truck, right, it was down 11% in the first quarter, down to about 4 -- just over -- about $4,100 per truck. If we go, I guess, during COVID, it was as low as $3,400, $3,500 per truck. Are we seeing rates stabilize at this level? Is that kind of the message?

Yes. I think we're at the bottom of the cycle, in my view. I think we're up from here, but there's pricing pressure, no doubt. And the supply/demand condition in the pokiness, if you will, of the recovery is still not what we would expect it at this juncture, certainly, as we would have given our original guidance back in January. But all the signs are there and it's just a matter of when, not if.

I want to just add on to that, when we talk about spot market pricing and so on, if you look at the charts back a year ago and how quickly and abruptly spot market correction took place. We think the opposite of that can be true on the other side of the cycle, and it just hasn't happened yet. And we don't have a lot of proof behind this, but something that we think might have some credibility into why spot market prices have remained so low for so long, is the robustness of the prior. The other side of this cycle when things were really strong. We think that a lot of the small carrier capacity may be made excess earnings, if you want to call that and had some money in their bank accounts and weren't just living week to week. They gave them some durability through this lower part of the cycle that wasn't there in prior cycles. And our belief is that if that is the case, then they're tapping that out.

So if that's the case. Are -- do you think that cushion is coming to an end? Or is that still the -- not until the third quarter that's when...

Well, I think that feeds into what Mark was saying earlier, I think that we're seeing signs of it coming. It hasn't happened in a very noticeable way to date, but we are seeing forward-looking indications.

That's what -- our trucks are per survey, right? The demand level has fallen yet inventory levels finally off that peak. They're starting to tick down. And I think that's the setup you want, right, is, okay, let's keep drawing down. We hear from Walmart yesterday, right, when inventory is down. So if you keep drawing that down, then when that supply demand meets then you'll have that.

You just need the demand part of that to hold up as well.

That's right. Yes. That's right. And not fall through the floor, which it is pretty weak. I mean there's no doubt about that from -- at least from our survey.

Yes, Ken, I think as you look at this allocation season, I think we're now at the part of the cycle where I would expect both the carrier and the customer have to determine what's going to be durable, right? And overaggressive on either side, particularly on the rate side, I think would certainly draw in the question whether what's going to be durable even as early as later this year. So I think there's going to be increasingly pressure on that durability factor.