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

Yes. Certainly, I understand and we thought about those things ourselves, Scott. But when you take the top 10 carriers in the full truckload space, somewhere 12% or 13% market share, inclusive of what we're talking about here in power only, right? So to your point, is it's still highly fragmented. We see Convoy go out and see absolutely some gap being filled there with really no issue. So to me, if we don't do it, somebody will. And when you look at our strategy of aggregating as much demand on one side as much capacity on the other and using our technology and then to optimize for the customer but also optimize for optimal returns for Schneider, while we're meeting that customer spec. We think -- I think, personally, that strategically the right advantage for our company is to have as much capacity, options and as much demand options and go to market with that.

And do you feel like -- are there a lot of large but private fleets doing power only as well? Or is it more really isolated to the public carriers?

Yes. Could people be playing in power only around the edges or we even use that and dedicated to help on some surge activity at times. But I think largely, it's a handful of carriers predominantly at the large carrier standpoint that have a large amount of assets and have the technology available to do that right from a pricing standpoint, the acceptance standpoint and the optimization. So to do it at scale, you have to have the underlying technology to do it as well.

I don't know, Derek, what -- now that [indiscernible] thought a little bit better?

I know you thought the first time -- and look, our answer is not dissimilar from what Mark talked about. So I'll try to be additive to the answer, but just a couple of other things would be, I think at the premise of the thought there would be this assumption that if we didn't do it via power only. And maybe you could get a little incremental pricing, we'll just play that argument out a little bit, then we still would then turn around and have to do it on our own assets. And the reality in one way and the cyclicality of the one-way business, at least from my view, is the shippers have voted and they don't put the value -- the reinvest-able value on that part of the portfolio that we believe they should. It's a capital-intensive business. It's expensive to operate, and it ought to perform better through the cycle than it does. We were moving our assets to where that value proposition does make more sense, which is dedicated, but we want to provide solutions to those shippers. On the one-way side in some way. And make no mistake, one-way exposure to a shipper is often kind of the equivalent of dating before you get married. And so we need an opportunity to get to know one another, meet our cultures, be able to work together in order to get into a longer, more sustainable relationship. So I don't ever see it going to 0. But if I can make that a less asset-intensive approach, I can get exposure and get them exposed to our technology and our ability to do things for them that only large well-capitalized fleets can do, I think it's a win for everybody. Again, to your point, could it make marginally some carriers survive that otherwise would not? Maybe, but they're going to get loads brokered to them one way or another. Whether it's from the 4 or 5 large asset players or whether it's from the non-asset behemoth brokers, they're going to get freight broker told me either way. We save them a trailer. That's not saving a much in terms of extending their life if they were to go pure power only all the time with folks like us, but I think it's a better solution. The only reason -- the only way fleets like ours get 11% production increase year-over-year is by making darn certain that through proper engineering, our one-way assets go where they're good, where they're able to be efficiently utilized where we have density and where it's repeatable. I can't gain that kind of productivity year-over-year if I'm trying to be all things to all people. And in the old days, I think all of us in the large fleet size used to try to be pleasers too much as it related to -- you're a national carrier, I expect national support. Well, your pricing does not reflect my ability to give you national support. So I'm going to give you support where I can make sufficient returns to reinvest, and I'm going to bring non-asset applications to play elsewhere.

So quick follow-up on the productivity side because it's an interesting point, -- we've got a Werner model that goes back to the '90s, right? Utilization miles per tractor peaked in the '90s, right? It's been on this sort of steady sort of decline. Part of that is just shorter length of haul. But you're now seeing a pretty meaningful increase in utilization last couple of quarters. Is -- could this become a right? Is there an opportunity for this to be a multiyear sort of improvement in utilization? Because I think prior cycles, you can get a lot of price, usually as the market tightens, you give up some utilization, but if you could ever get price and utilization at the same time, right, I think the outcome could be pretty powerful. So I don't know, again, maybe Derek starting with you and...

I mean I think it's a bit early for me to be signing up for multiyear utilization improvements coming off double-digit year-over-year improvements. But we are excited about what all of this means. So you were approaching power only from the potential negative lens from the potential positive lens, it's learning what we do well, learning where our assets belong, keeping discipline on those assets, staying in those lanes and using power only to support our customer in a seamless way elsewhere. That's a big part of it. The length of haul has been an ongoing headwind that I don't see subsiding. I don't know that it continues to go low at the rate that it has over the last decade because that was mostly driven by intermodal conversion. And although there'll be more intermodal conversion, it's not going to have the same impact. But I think what we're going to see is the opportunity through technology, engineering and focus on [indiscernible] to hold the ground on the utilization gains we've made, potentially eke out some incremental ones from here. But to your point, Scott, this is what I think is underestimated about fleets like ours and others. But these gains we've made today bear very little fruit to the bottom line because you're doing it at rate levels that are essentially breakeven. The rate level today is terrible. You take those same 11% miles that we've already gained and already placed onto those assets, and you see rates starting to move, those 11%, that incremental miles, that's like gold. And it does fall to the bottom line in a hurry. And so we're really excited about seeing that play out.

Mark, it's a little tougher to see utilization for you, you guys just report total revenue per truck. But are you seeing the same benefits that maybe power only is leading to better utilization? Or how do you think about the utilization opportunity more broadly?

Yes. I think asset productivity is a terrific self-help item inside the company through a couple of different levers. First, leveraging down and getting as tight as we can on a driver to tractor ratio really across our platform, dedicated intermodal and network where we can drive less -- same revenues with less capital, and we made some progress there. We continue to make progress in that direction. Secondly, when we can get better choice, particularly in the network side, one of the best ways to get better choice is to take the friction out for the driver, so they can be more efficient and the customer, both at the shipper and the [indiscernible] and we don't have as much choice now as we would typically expect to have based upon market. And as that starts to improve, that's where you'll see another flywheel [indiscernible] in my view, for increased utilization, which is terrific for the driver because that's a pay increase without changing your rate, it's more productive for them. And that really applies across all aspects of our portfolio. So -- and then the other item that I think is underappreciated, even improved pricing in our network business helps Dedicated because there's opportunities for backhaul that can enhance your value to the shipper and enhance your value to the bottom line. And as that price improves, Dedicated improves with it.

Okay. I want to spend time just talking about what the next sort of cycle is going to look like for both of you. But before we get there, maybe just if I can ask a near-term one, right? We typically see margins improve Q1 to Q2 in both your businesses. We didn't see that last year, again, a function of just pricing coming down. Just how should we think about just near term, should we be seeing sequential margin improvement? It sounds like maybe price a little bit better, I don't know. Maybe Mark, if you want to go first?

If you think about kind of where we came out of the first quarter and where we've guided to, we should expect sequential improvement throughout the year. We talked about seeing modest seasonality return. We would even say coming into the Memorial Day weekend, and we could see some modest seasonality returning like we did at the end of the quarter. Talked a little bit about the price renewals. I say you, again, being very careful not to call it an inflection in the marketplace. That's not what we're talking about, but steady sequential improvement without having to have an inflection in the market is really at the heart of our guide.

And as you know, Scott, we don't do quarterly guidance or annual guidance for that matter around from an EPS perspective. But coming out of Q1 as in keeping with some of the comments I've been making, we do see signs of life. We're not calling it a turn either. We do see some positives in current period renewals, but we still have the lag effect of what took place in Q4 and Q1. That is now coming to [indiscernible] being implemented in the quarter. So you put all the puts and takes of that is that our expectation would be we'd see a quarterly improvement in the year. But we don't think that Q1 to Q2 is some pronounced step-up because we still got a little bit of work to do to get into the latter part of the year to see some of the more recent renewals and other things take hold.

As we think about maybe lessons learned over this past cycle, and maybe what we maybe want to do differently or not differently this coming cycle. Both of you guys have seen a pretty significant increase in the mix of Dedicated versus where we've been. Is that sort of -- has that worked? Do we want to continue to increase that mix of Dedicated? Do we think have we swung too far? I don't know. It's -- I'm not sure it's helped reduce the cyclicality on the way down, but it's still -- but it didn't necessarily stunt the cyclicality on the way up either. And so -- but I don't know, open-ended question, do we want to sort of continue to increase our mix of Dedicated? Or do you think we're at a good sort of [indiscernible] versus Dedicated. Derek, I'll let you go first here.

Yes. I mean, so from our perspective, the things that I liked about Dedicated prior, I still like about it today. It's complicated to do. It's -- it's very service-sensitive. It is not something that can be replicated through technology or aggregation of small carrier capacity. It's driver involved. It takes significant training and investment to do it well. So we still like all of those things. It did not anchor us during the last up cycle, and we don't believe it will this time. When the market gets better, Dedicated improves much more than people realize because every Dedicated fleet grows by 3, 4, 5 trucks, you expand that over 100-plus fleets in our Dedicated network. That's meaningful growth without meaningful additional investment. So your fixed costs are fixed, your on-site personnel are in place, there's a lot of upside. Backhaul gets better, both in volume and in price. That helps Dedicated. So we're excited about what it looks like in the upturn. During the downturn, I would argue Dedicated did, in fact, do at least directionally exactly what we thought it would do. The problem is one way was under much more duress than anybody ever imagined. And so our one-way network has been hurting. It continues to be hurting. And -- but yet Dedicated even on a trailing 12-month basis is still a double-digit margin business. But it gives you kind of [indiscernible] behind the window of how tough one-way really is.

Does that suggest that one-way is like breakeven-ish, give or take?

Yes, give or take, but more take than give.

Mark, same question, if you want to broaden it out a little bit to intermodal brokerage as well -- if you want to broaden it out a little, I'll let you go with this.

We'll do that. Scott, I understand the question, and I appreciate the kind of the sense of, okay, what's the ratios between network and Dedicated. And we really disconnect that. We said if we can get to the return thresholds with the right customer and the right solution, that's durable, multiyear good earnings stream and with the wherewithal and the balance sheet that we have to invest organically, it's not, in our view, a percent of this versus a percent of that. It's -- that's where we believe the best earnings stream and long-term positioning of truck sits and that's within Dedicated for all the reasons we've talked about here on the volatility within network. The other area that we think just talk a lot about here is Intermodal, which also will benefit as pricing firms and capacity tightens because there's so much truck freight that's moving over the road today that should be from a cost and efficiency and an emission standpoint, be moving on intermodal. And so we're a little frustrated as well as we have the capacity. We have 20% to 25% growth without adding an incremental piece of capital to get after the intermodal market. And we have some new toys. Certainly, the [indiscernible] out of Mexico, a market that's underrepresented on Intermodal versus truck because of the lack of the reliability that, that market has experienced over the years. So when you combine all of that, there's collaboration and there's a flywheel effect within the portfolio that benefits from whatever happens in network truck, other services will benefit.

And just think about, again, what maybe we want to do differently or the same. Both of you have done some acquisitions this past cycle, do you feel like have those been working? Do we want to do more of these sort of $100 million, $200 million types of deals going forward in the next cycle?

Yes. We're -- I'll turn it to Derek here in a minute. But yes, very happy with those, very much a specialty truck solution and are very active. And I actually think the back half of this year and '25 could be a very attractive year for the industry on some consolidation opportunities. While they've been smaller in nature and been specialty, we -- if we have something that we believe can be more transformational, we have the wherewithal to go after, and we'll look at things on a much broader basis than $200 million and $250 million acquisitions.

Yes, similar. So we've done 4. They were all done for unique specific portfolio reasons. I think they've served exactly the purpose that we thought they would serve as we brought them on board in terms of customer acceptance, the ability to penetrate and expand with either existing customers or enter into new customers. What hasn't been able to materialize because of the market backdrop that we've been in during the time of integration of those acquisitions is a significant or noticeable or meaningful financial impact at this point. But when I look at something like our acquisition of the Northeast and 40,000 incremental loads with existing winter customers that would have otherwise probably been met with a no that is now met with a yes and we're able to service those customers in ways that they were previously not able to be satisfied. That is a great positive for the future and our relationship with those customers and our ability to expand in other products and other regions. So it's exciting. I think it's -- we're happy with the acquisitions itself at the product level. We have more work to do on the integration level. And obviously, the same market we've been talking about, we need more support overall from the market as it turns, but as it does, we feel excited. Similar to Mark's comment, the last one we did was the largest one we did, which was the ReedTMS acquisition. We've learned quickly that larger is actually not harder. And that we feel like the integration capabilities of a larger organization into our own is better, more efficient and something that can be acted upon more immediately. So that's a different way of saying we are open-minded and open for business to include something transformational. But at the current state right now that we're at in the market, until such time we find the right one and we look and we're active all the time, we're going to keep our head down, keep focusing on the control and the controllables, keep focusing on taking cost out of our network, leaning into a best-in-class, we believe Dedicated solution, cross-border Mexico solution and kind of the work we do today because the right one will present itself, and I think we'll know it when we see it, and we'll act accordingly.

Not a -- again, what do we do similar or different this cycle. Not a power-only question, just a broader brokerage question, right? Both of you if I just look at logistics for both of you, revenue basically doubled last cycle -- do we want to do as much brokerage growth? Do we think that, in some way, contributed to the up of the cycle, the down of the cycle, just the proliferation of brokerage. I don't know, do we approach brokerage the same way this time around? More broadly?

Yes. I think strategically, I think the asset-based brokerage model has advantage for the customer and for the business and the ability to collaborate and leverage relationships within the enterprise. And so -- and we can do so with very little capital outside, making sure we're still calibrating and reinvesting in the tech to keep current. So that very much we see continuing. And Scott, we're sometimes colored as a trucker, and we're very proud of trucking, and that's who we were born as clearly, but 50% of our revenues are now in the Asset-Light segments of intermodal and trucking 40% of our earnings. So we really are a multimodal and we're working to be recognized as a multimodal provider. And with that comes with that is that brokerage, I think, will be here. And as we look to aggregate more demand and more capacity, that's one of our arms to do that.

Similarly, I think brokerage is right for further consolidation. I think the reality is we still have brokers all over this country. There are 5 guys in [indiscernible] 2 in a basement. There's a lot of that work that's out there where that's where fraud exists, that's where you're not the broker themselves, but they're subs, they're more subjected to fraudulent carriers, fraudulent billing, fraudulent issues. I think we've seen customers really see the value in well-capitalized brokers that have know-how that understand trucking at its core because that's where we came from. I think the actual offering is superior with the asset-backed offering of asset-backed broker is a superior offering. I think customers are voting frankly, with their freight. And that's why you see the outsized growth in brokerage within the asset community, I expect that would continue. But we're not going to grow just to grow in any one of the product lines. I mean we're going to look at each opportunity independently. We're going to make sure that we think it makes sense and that it shows sufficient returns. And if it doesn't, then similar to one way, it will be deemphasized over time or at least modified into an asset-light-type model.

While capacity itself has been a little long to come out, there's 11% less brokers this first quarter than there was last first quarter. So that market is contracting.

And again, both of you and based on our models, plus or minus in that mid-single-digit margin range in truckload this year. I know that's not your guide, what we have in our models. Help us think about where -- what do you think normal looks like? How much price do we need to get back to the double-digit teens margins we'd like you guys to have -- how many years does it take? Can we get there this -- can we get there in one cycle, does it take more than one cycle to get back to where we were? I don't know, Derek, I don't know if you have a thought?

Yes. I mean, so we've stayed committed, although we're outside of that range right now for certain, but long-term guidance range of 12% to 17%. We have a clear path in that Dedicated. We have a tougher [indiscernible] so to speak, in the one-way side. However, the one-way side has much greater leverage to an up cycle. And so the ability to improve that OR significantly with price is upon us, and that's why we spend so much time trying to lean that network out, trying to engineer it to increase productivity, which we've clearly done double-digit utilization increase year-over-year. And I think we're prepared, but we're going to need the market to continue to mature. The equilibrium to continue to arrive and then tightness thereafter to make that happen. We earlier had guided that we thought it was possible late '24, early '25. That may be optimistic at this point in the year but we're going to work our tails off to get there.

Scott, I think our long-term ranges that we've laid out there for our 3 segments and we're not performing there today. We don't believe those are structural -- there's been structural changes to the extent that that's not where we should be and can be. And I would certainly expect, at least on a run rate basis in 2025, we are much, much closer to being back inside those ranges. It may not be for the full year. We'll have to see we're certainly finding one more cycle of renewals or allocation season of the early '25 season. But to me, it's not like throw those out and start over.

Okay. One thing -- I know [indiscernible] last things I just want to touch on, if we can. One thing that I think we've been very wrong about is we didn't anticipate was this massive divergence in fundamentals for trucking companies and just the Class 8 cycle, right? Do you have views on sort of if and when and how the trends sort of meet again, ultimately, I'm trying to -- like when do we stop seeing big orders and trucks and big increases in pricing for trucks. Does that change?

Well, I think the closer you see truckers getting back to their naturalized age of fleet level, the pre-COVID level of fleet. We're there now. It took us a while to get there. It took us an outsized CapEx year last year to get there. But you still got a lot of people playing catch-up and so people get kind of caught up in the orders. I mean I would start with this orders [indiscernible] they never end up equating and so some optimism coming into the year on orders, which may or may not translate to the same build rate. So let's just start there. But those orders that are placed that translate into builds still, in my view, are more reflective of people trying to get their fleet where they want it prior to the engine and emission changes than they are any kind of growth. And that's clearly shown through fleet size across the publicly traded group. I mean the fleet is not getting bigger. It's actually shrinking. That's the predominance of orders that's coming out of that group, not the 25, 10 truck carriers. And so they're trying to get their fleet right. And the bifurcation was clearly started during COVID because at a time when freight went through the roof, truck availability went to the floor. And so that's working itself out.

Do you start your prebuy in '25 or '26 or you don't subscribe to a prebuy? Mark?

Well, we generally aren't fans of taking early generation new engines, right? We like to see those burn up. So we like Derek take those first. But I think this is really a question for the OEMs, Scott. I think if you ask me, do you think there's going to be the opportunity for significant prebuy, I would be highly skeptical. Is the OEM is going to be able to [indiscernible] supply chain to go through a 30% increase in one year only goes through a 30% decrease the next, I call that into question if that's even going to be possible.

So you might be interested in one, you don't know that they can deliver one?

I would speak to that.

Yes, we're going to keep our fleet fresh where we have it today. We'd like to keep it there going into that engine change. We also are not fans of first generation or early generation engine changes. So we'll certainly take a bit of a time out for a bit. I don't know that you'll see a large prebuy out of us. Maybe around the edges just some got to cover the stumps type work. But we're going to sit back and see where this all plays out. This engine is more expensive. It's as of yet, unproven but we believe they'll figure it out. They've got good people, good engineers, they'll figure it out.

And then just last thing. I know we spent a lot of time talking broadly about the industry, and I appreciate you guys doing this, but maybe just give each of you an opportunity for a minute or 2 for something that you just want to make sure we know about Schneider, we know about Werner in terms of your story and where you go from here?

Yes. I think I have a chance to really talk about this multimodal, it's not just trucking company. And I think you're going to see us continue to pursue that strategy. I think it's being received well by the marketplace. And with the balance sheet that we have, I think we can continue to look at both organic and acquisitive ways to accelerate that growth [indiscernible].

I'll be quick. I mean, look, for us, I think we've set the table as well as we can set it through the work we've done over the last couple of years, back-to-back years of over $40 million of cost takeout. An ongoing quarter-over-quarter sequential and year-over-year improvement in utilization, and that's a result of engineering and the fleet. I want to set the record straight on to one of the questions I've been most asked today, which is about discount retail dollar stores, et cetera and its impact on our fleet. We're up year-over-year with every member of the discount retail space in our portfolio. That's something that shows, I think, our stickiness with them and our ability to grow with them through good times and bad. And as this portfolio [indiscernible] in place, when it turns, I like our chances on the upside. I think we're well positioned to capitalize head-to-head with anyone.

Mark, July 25, 10:30 a.m., I'll be there. Derek, I'll do my best. Thank you, guys. This is great. Appreciate it.