Schneider National, Inc. (NYSE:SNDR) Q2 2024 Earnings Call Transcript

Schneider National, Inc. (NYSE:SNDR) Q2 2024 Earnings Call Transcript August 4, 2024

Operator: Thank you for standing by. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Schneider Second Quarter 2024 Earnings Call. (Operator Instructions) I will now hand the call over to Steve Bindas, Director of Finance, Investor Relations. You may begin your conference.

Steve Bindas: Thank you, operator, and good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer; Darrell Campbell, Executive Vice President and Chief Financial Officer; and Jim Filter, Executive Vice President and Group President of Transportation and Logistics. Earlier today, the company issued an earnings press release. This release and an investor presentation are available on the Investor Relations section of our website at schneider.com. Our call will include remarks about future expectations, forecasts, plans and prospects for Schneider. These constitute forward-looking statements for the purposes of the safe harbor provisions under applicable federal securities laws. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations.

The company urges investors to review the risks and uncertainties discussed in our SEC filings, including, but not limited to, our most recent annual report on Form 10-K and those risks identified in today’s earnings release. All forward-looking statements are made as of the date of this call, and Schneider disclaims any duty to update such statements, except as required by law. In addition, pursuant to Regulation G, a reconciliation of any non-GAAP financial measures referenced during today’s call can be found in our earnings release and investor presentation, which includes reconciliations to the most directly comparable GAAP measures. Now I’d like to turn the call over to our CEO, Mark Rourke.

Mark Rourke: Thank you, Steve, and hello, everyone. Thank you for joining the Schneider call this morning. I will start by offering my perspective on our second quarter results in the context with the current business and freight cycle trends and how we are positioning the strengths of our multimodal platform on the path towards growing revenue and financial returns for our shareholders. I will then turn it over to Darrell for his commentary on the second quarter results and free cash generation and the setup for the second half of the year regarding capital allocation and earnings per share guidance. First, I want to thank all the Schneider associates, especially our professional drivers for their contributions to the progress we made in the quarter.

In the second quarter, we delivered solid sequential improvement in earnings and margins across our three primary segments of Truckload, Intermodal, and Logistics by remaining diligently focused on four areas we have the most control. First, delivering an effortless customer experience, which we know resonated based upon a number of customer recognition awards that we recently received. Second, navigating the 2024 shipper freight allocation season with purpose and discipline. Third, optimizing capital allocation opportunities across our tractor rolling stock, chiefly and dedicated intermodal by increasing the ratio of drivers to trucks. And fourth, containing costs across all expense categories. These actions will continue to drive enterprise value, allowing us to seize the opportunities ahead enhanced returns as the freight market recovers.

Our commercial philosophy is to be more agnostic across our multimodal platform and offer customers the best combination of service, cost, emission reduction and transit performance that meets their needs. While our offerings are constructed to compete and function independently based upon the unique value propositions, there is considerable enterprise commercial leverage which is evident in 46 of our top 50 customers purchasing services in all three segments. It is clear that our value is resonating with customers. In the quarter, we received five recognition awards, including Carrier of the Year and partnership and sustainability. We are continuously collaborating with our customers, both during and outside allocation events to ensure that we have a full understanding across our diverse supply chain needs, and we are aligned with what they see ahead.

We’ve been hearing more frequently from customers that they are seeking to secure asset-based capacity and balance their brokerage mix. We are now approximately three quarters through the 2024 shipper freight allocation season, so let me offer second quarter highlights that I believe are instructive for the forward positioning of our multimodal platform starting with Truckload. In our truckload network, we achieved another quarter of modest contractual price gains. And for the first time in two years, spot price in June exceeded contract price. Importantly, spot remain above contract for the full month of July as well. However, we are behind the tempo that we expected in our prior guidance, therefore, shifting out the timing of the pricing recovery.

In Dedicated, truck counts were up 12% year-over-year through a combination of organic and acquisitive growth. Dedicated represents 63% of the total tractors we deploy in truckload. Sequentially, Dedicated truck count was down 1% as new business implementations and existing account growth were offset with targeted asset efficiency actions as well as moderate account churn. Overall Truckload segment margins improved 290 basis points sequentially from the first quarter, and we expect further margin improvement for the second half of the year. Moving to our fully asset-based Intermodal segment. Order counts were slightly up year-over-year and up 3% sequentially. Growth in TransCon, Mexico and the West was offset by shrink in the East against the highly competitive truck alternative.

While domestic Intermodal has not experienced the full benefit of the higher year-over-year West Coast import levels, we have started to see increased port transload activity. Specific to our recent momentum in Mexico cross-border, we recognized double-digit volume growth with the CPKC delivering freight between Mexico and the Midwest at truck-like transit times. We continue to see significant cross-border Mexico growth opportunities as we move forward, driven by ongoing manufacturing investment, automotive production and shippers continuing to build nearshoring into their supply chains. We recently moved into a new location in Mexico City reinforcing our commitment to build and grow on our long-standing presence, more than three decades worth and the expertise that we have in that market.

Overall, Intermodal margins improved 300 basis points from the first quarter results as we continue to heal the network, which reduced friction cost, enabling drive productivity gains and fewer empty repositioning shipments. We moved more orders year-over-year with 10% fewer dray trucks while maintaining our high ratio of drays executed by our company driver fleet. We expect further improvement in margin performance in the back half of the year. Finally, logistics margins improved 180 basis points from the first quarter’s performance as we competed effectively in the quarter, especially considering the highly competitive brokerage market. Brokerage order volumes contracted 4% year-over-year while growing 2% sequentially from the first quarter as asset-based brokers are increasingly favored by shippers at this stage of the freight cycle.

Power only continued its double-digit percentage growth rate both year-over-year and sequentially as mid- to large shippers prefer the value and flexibility of trailer pools. Power only serves to augment the truckload network needs of our trailer pool shippers. And again, we expect year-over-year volume growth in the back half of the year. We continue to be encouraged by our performance in the brokerage market through these very challenging conditions, driven by our execution and differentiated strategy of our freight power platform, stand-alone freight generation capabilities and power-only offering. In summary, the quarter saw positive indicators, including seasonal demand, tightening supply during the annual Roadcheck event, increased spot pricing and modest contract price gains in our truckload network.

While we are not calling a market inflection just yet and the sustainability of these trends has not yet proven, there are signs of market improvement, which we anticipate will present opportunities as we move forward. So let me turn it over to Darrell for his summary comments on the quarter and a look ahead before we get to your questions. Darrell?

Darrell Campbell: Thank you, Mark, and thanks to each of you for joining us this morning. Our review enterprise and segment financial results and cash flows for the quarter, discuss our capital allocation priorities and provide context on our refined 2024 EPS and net CapEx guidance. You can find summaries on pages 21 to 26 of our investor presentation included on our Investor Relations section of our website. Our adjusted income from operations was $52 million for the second quarter compared to $107 million a year ago. Adjusted diluted earnings per share for the second quarter was $0.21 compared to $0.45 in the prior year. Second quarter 2023 include higher gains on equipment sales versus the current period, which represented a $0.04 headwind to EPS.

As compared to the first quarter of this year, adjusted income from operations increased $22 million or 74%. Adjusted EBITDA of $153 million was also 70% higher than the first quarter. The sequential improvements in adjusted income from operations and adjusted EBITDA reflect the results of our continued commercial cost and productivity actions and improving market conditions. Truckload revenues for the second quarter were slightly up as compared to the same quarter last year. Results were driven by a dedicated organic growth and contributions from M&M Transport, our most recent acquisition, partially offset by lower network pricing and volumes. Total earnings for the second quarter were lower on a year-over-year basis, primarily due to lower pricing and volume in our network business and lower gains on the sale of equipment.

Within our truckload network, revenue per truck per week grew sequentially at 3%, which was primarily yield driven. Our Dedicated business continued to demonstrate resiliency and delivered solid performance during the quarter. We’re excited about our ongoing new account startups, existing account growth and accretive contributions of our acquisitions under new business pipeline. Dedicated saw a 2% year-over-year growth in revenue per truck per week which was largely productivity-driven. Intermodal revenues for the second quarter decreased 3% compared to last year, primarily driven by lower revenue per order. Second quarter 2024 volumes were favorable compared to the same period a year ago. Intermodal earnings were similarly impacted by lower revenue per order, partially offset by improved dray operations, network efficiencies and cost performance.

Volume growth and productivity actions contributed to favorable sequential financial results in the quarter. Logistics revenues for the second quarter decreased 7% compared to the same quarter last year, driven by a lower brokerage revenue per order and volumes. Logistics income from operations decreased 13% compared to the same quarter in 2023, primarily due to lower brokers, net revenue per order and volumes. Our strong balance sheet and operating cash flows provide us with the ability to remain committed to our capital allocation strategy. Our asset productivity actions in the first half of the year and capital discipline have facilitated investment in the sectors of our business that yield the highest returns, facing us on a path toward increased ROIC.

These efforts have enabled us to be prudent in managing our net CapEx spend, which was $182 million on a year-to-date basis and combined with our cost containment initiatives, led to a $94 million year-over-year improvement in free cash flow. While we remain disciplined in our capital allocation efforts, we continue to execute against our age of fleet objectives and position our businesses for growth. The ongoing focus on these efforts will shape our CapEx plan for the remainder of the year, which is reflected in our guidance of $300 million to $350 million for the full year. During the second quarter, we continued to advance our share repurchase program with $13 million of opportunistic purchases. We also returned $17 million in dividends to our shareholders, which was 5% above the same period last year.

On a year-to-date basis, we have strong operating cash flows and our net debt leverage stood at 0.3 times at the end of the quarter. As Mark laid out, during the second quarter, our targeted actions to restore margins as well as improving market dynamics led to sequential progress across each of our segments. We expect to yield the benefits from our ongoing cost and productivity actions and price recovery efforts in the second half of the year as well as modest seasonality. While we expect both sequential and year-over-year earnings growth in the second half of the year, the effects of lower-than-expected contract price increases in our network businesses and volume impacts of our disciplined approach have shifted the timing of achieving the level of earnings improvement we had previously anticipated.

Based on these considerations, we have refined our full year adjusted diluted EPS guidance for 2024 to a range of $0.80 to $0.90 on assuming a full year effective tax rate of 25%. With that, we’ll open the call for your questions.

Q&A Session

Operator: (Operator Instructions) Our first question comes from the line of Dan Imbro of Stephens Inc.

Dan Imbro: Over the last week, we’ve heard a lot of different accounts for pricing in the truckload market and how that’s trending? Could you talk about what you’re seeing in like market tightness into July? And how sustainable that is? And give any color around the pricing backdrop that you’re expecting for the back half in guidance?

Mark Rourke: Yes. I’ll try to unpack that a little bit. And I think your question was more on the truckload side of the house network specifically. As we mentioned in our opening Dan, we had modest improvement in contract pricing, which is our second consecutive quarter, but less so than we had initially anticipated as we expected the market to continue to tighten, which we’re seeing, particularly as we’re seeing with spot pricing now for I think the first time in two years exceed our spot — our contract pricing in June and also a very solid performance again in the month of July. So again, too early to call an inflection, but those are encouraging signs. We have about a quarter of our allocation season left on both our Intermodal and truck network business, so we’ll continue to lean into that, in quarters three and four.

And we also have other levers that we are mindful of what’s available relative to project work, out of spot price play, we’re seeing an increased level of mini bids. So there’s a series of activities that we think we can continue to adjust and improve the mix of freight across our network businesses in the second half, which is really what’s embedded into our guidance.

Dan Imbro: Got it. And on the Intermodal side, how has the pricing backdrop change there? Are you seeing any competitive backdrop stabilized? And you mentioned seeing the freight like, as you just mentioned, the freight market is tightening. How do you expect that to flow through to the Intermodal backdrop going forward as we’ve seen for volumes pick up and a lot of positive data points on that side of the business?

James Filter: Yes, Dan, this is Jim. You have a lot of questions there. I’ll try to answer this. First is we look at that market I think the area to really focus in on is the dray capacity. And as Mark was talking about earlier, is that we’ve really focused on improving our efficiency there. We’ve taken out 10% of our trucks with more volume, so we’ve become more efficient. That really is the most critical asset in that business segment, still have that opportunity to be able to flex up to meet customers’ demand, but that’s generally going to be with third parties that come at a premium price to be able to surge up and that’s something that will be required to get from the market. So that’s where I really see the opportunity that we’ll see pricing move there.

We have seen demand increase. Last quarter, we talked about IPI, the growth there hadn’t really transferred over to the domestic side. That started to change late in the second quarter, and we started to see more transport activity, and that’s continuing through July.

Operator: Our next question comes from the line of Jordan Alliger of Goldman Sachs.

Mark Rourke: Jordan, you’re either out, or on mute.

Jordan Alliger: Can you hear me?

Mark Rourke: Now we do. If you asked a question, we didn’t hear it.

Operator: Our next question comes from the line of Bruce Chan of Stifel.

Bruce Chan: Maybe if I could just touch on dedicated here. You said some nice truck additions so far. If you could maybe walk us through the outlook for fleet capacity in the back half and maybe more broadly, what the implications are there for the pipeline and how that’s shaping up? And then just any updates on the competitive environment there in the dedicated market.

James Filter: Yes. This is Jim. Thanks for the question. And we look at our growth here in Dedicated, I think we’ve held up very well. And a big part of that is just our customer diversity. We’ve been working on that for a number of years. No customer portfolio represents more than 5% for enterprise revenue. And we’ve just been really purposeful and remaining balanced around the verticals that we want to participate in. Mark also talked about some of the efficiency gains that we’ve had in our dedicated business. We still believe that we are going to have a couple of hundred of trucks of growth this year. Now some of our fourth quarter startups might get pushed into next year, but it’s really a matter of timing there that the new customer acquisitions are still on the same pace. Our pipeline remains strong. I still see a lot of opportunities to grow that.

Bruce Chan: And then just as far as any competitiveness that you’re seeing, is that starting to abate at all? Or is that more or less consistent with where it’s been so far?

James Filter: Yes. What I’d say in terms of competitiveness, most of our losses aren’t to a competitor’s dedicated solution, but it’s rather going back to some sort of network solution or a private fleet. And if you think about moving from dedicated to network. That’s something that might provide a customer a short-term opportunity, but that’s not likely to provide value in a stronger market. And so those customers that switch from dedicated to network really provide an opportunity for us to grow with them, but we would approach that differently in a stronger market condition.

Mark Rourke: Yes, Bruce, maybe as it relates to the competitive context, Dedicated is competitive. I guess we wouldn’t be a proponent of a narrative that is any more competitive this year than it’s been in the last several years. So based upon our targeted audience that we’re after on specialty-type dedicated solutions and the mix of freight or the mix of customers that we are pursuing. We’re still very, very bullish on its prospects, not only including our legacy dedicated, but the growth opportunities within the unique sectors at our recent acquisitions, deployed. I still think we have some efficiency opportunities, particularly with one of our recent acquired companies that we can grow the business and do it so more efficiently with the capital base. We’ll continue to lean into those. But we’re not of the opinion that it’s had this incredible step level change in competitiveness.

Operator: Our next question comes from the line of Tom Wadewitz of UBS.

Tom Wadewitz: Wanted to see if you could offer some thoughts on how we should model or how we should think about revenue per load in intermodal in 3Q and then revenue per truck per week in network in 3Q relative to 2Q, is there some impact from contract rates lower that caused sequential pressure? Or did you hit the trough in 2Q when it’s stable sequentially?

Mark Rourke: Yes, Tom, it’s Mark. I’ll open it and Jim has anything to add. I’ll let him do so. Certainly, the stabilization of intermodal, we haven’t seen as of yet, material changes to contract rates. We’ve changed our mix. You’ll see that in our results. We’ve been more efficient, healing the network, less of the friction cost that impact our profitability. Our commercial teams and our operations team has done a really nice job of executing, particularly our trade drivers. So that’s where we’ve seen the lift. I think contract pricing is more in front of us. There’s generally a bit of a lag to truck on that. So we don’t obviously guide specific metrics to quarter. So that’s kind of really was a setup for the first or the second quarter. We continue to lean in and are encouraged maybe, Jim, with some of the discussions we’re planning for the second half of the year with customers that may be a little different than we experienced the last couple.

James Filter: Yes. Thanks, Mark. Really, the advantage of remaining disciplined through the freight allocation season is that we can flex our capacity to where we have the best opportunities outside of the contract season. And so it just feels like we’re well positioned and pivot wherever we see quality demand. We have a really broad portfolio of services, which helps us provide solutions to customers, but we have opportunities to be able to flex to where we see the best profitability.

Darrell Campbell: Yes. I just add one other thing, this is Darrell, that I’d add, is, obviously, what we saw in the second quarter was a lot of productivity improvements. Mark talked about tightening of our driver-to-truck ratios. We expect that to carry forward into the second half. So we expect incremental improvement in the second half as it relates to the first half and a lot of the growth that we expect also is volume driven in intermodal.

Tom Wadewitz: Okay. Yes, that’s great. And just for the follow-up, I think it was about a year ago that you did a nice dedicated acquisition. I think, Darrell, you mentioned the balance sheet leverage, which is very low. So that’s nice to sleep well at night. But I’m wondering if you decide to consider using the balance sheet a bit and just thoughts on timing for acquisitions, at this time of the cycle, when there’s been a lot of pressure if that gives you more opportunity to find attractive deals or if it’s just tougher to find things that you might want to buy. Obviously, it seems like you could do deals if you wanted to.

Darrell Campbell: Yes. No, good question, Tom. And I’d say this is a good position to be in, right? Just to say, 0.3 times net leverage. So we are conservative and there’s a reason that we’re conservative because it puts us in a position to be flexible when the opportunity arises. So if the right strategic opportunity comes up or if there’s something transformative, we’ll obviously look at it. But we intend to remain investment grade. I couldn’t see us going above 2 times, but there’s a big way to go between 0.3 times and 2 times, and we’re looking at things all the time. So I think just for reference, every 12 to 18 months, we’d expect to do something from a more programmatic perspective. So we’ve been doing that over the past several years. So for modeling purposes, you could assume that will continue, but we’re always looking in the market for things that add to our strategic portfolio and initiative of dedicated intermodal and logistics.

Operator: Our next question comes from the line of Jordan Alliger of Goldman Sachs.

Jordan Alliger: Thanks for giving me a second chance. 21st century phone problems. Anyway, on the logistics brokerage side of the equation, actually fared a bit better than we thought. Are you reaching a point where there’s a little bit more normalization in brokerage? Curious what you’re seeing in your own experience in terms of selling price versus cost of transportation? And is there actually any spot market sort of developing?

Mark Rourke: I think in general, as we talk to customers, as we mentioned in our opening, Jordan, it does feel that the asset-based players period, but also asset-based brokerage, are more in favor and the power-only offering that we also have an additional opportunity there is resonating (inaudible) but the customer community. So the spot market, we remain really disciplined, we have our tools that we try not to make that a hobby where we lose money on individual loads. It happens, but it’s constantly being calibrated. So we’re very comfortable giving up volume for margin as it relates to the spot market and which is generally what we play into our brokerage piece. But I would tell you, it’s more stable at this juncture. I wouldn’t say it’s accelerated, but both on the carrier costing side and the pricing side, it is stabilized. And continue to look forward to producing positive consistent positive earnings results quarter after quarter in our brokerage business.

Operator: Our next question comes from Ravi Shanker of Morgan Stanley.

Ravi Shanker: Just a couple of follow-ups here. One is, just on the point of you’ve shifted your timing and the expectation of the inflection in the cycle. Can you just confirm from when to when kind of it is something that’s moved to like 1Q ’25, 2Q ’25, kind of when do you think that happens now? And second, just historically, you guys have given us some pretty good color on peak season, how that’s shaping up. Any sense of what this year would effect?

Mark Rourke: Ravi, you had a hard time maybe catching all of that first one. I think maybe you were looking for a declaration of when the inflection might occur. We’re not declaring that at this juncture, probably a little bit early for us to be projecting out to 2025. So I’ll stay away from a prediction there. It’s been incredibly difficult to do through this most recent cycle. So we’ll stand down on that one. As it relates to color towards peak, this is the season that we’re in the early stages of working with customers and trying to understand and how they’re seeing the world, I think we do believe that customers, in general, will need to have volume for their sales. They’ve been very successful at price over the last couple of years, but I think volume will come back as — and increasingly a lever, and we have a bit more discussions this year, Jim, maybe just some context of how that plays out by our most recent discussions.

James Filter: Yes. And just a little context when you think about what we went through in the first quarter, there were a couple of pockets of tightness and market dropped off a little bit in between this time those pockets of tightness of Roadcheck and then end of quarter and the holiday, but what you didn’t see in between each one of those is necessarily the same degree of tightness. And Mark also mentioned the more mini bids, all these are indications that supply and demand are coming more into balance. And so we are hearing more from customers that want to start talking to us about what is our capability to surge, how would we do that? What options can we bring to the table. And so we’re having those discussions. There’s nothing definitive yet in terms of how much they’re going to ship and days, but we — just the fact that we’re having those discussions this year, and that really wasn’t the case last year.

Operator: Our next question comes from the line of Brian Ossenbeck of JPMorgan.

Brian Ossenbeck: So maybe, Jim, you can elaborate a little bit more on the IPI, the international intermodal, it sounds like you’re seeing a little bit of spillover into transloading on the domestic side. So I don’t know when that would necessarily hit the network, if that’s kind of in line with expectations or volume that you’re expecting and whether or not that accelerates from here is still kind of a slow and steady progress as opposed to maybe picking up into the peak?

James Filter: Yes. Thanks, Brian. So we were talking about this last quarter on our call that we were anticipating that we would start to see this just because of some of the tightness with ocean capacity. And it really didn’t — we didn’t start feeling it until very late in the quarter, and that is carried through July. We have not seen a drop-off in that. So I’m not sure that I could say that when are we going to see more or a bigger peak. That’s difficult to make an assessment of how much more we will see there. But we’ve definitely seen that change with that tightness of ocean vessel capacity, they’re making that decision to switch from IPI to domestic.

Mark Rourke: Yes, Brian, as we went through the quarter, solid growth in TransCon, Mexico and the Western region. Unfortunately, we had some offset out these due to the truck capacity. But some of those key intermodal markets, we did see some improvement. And as we get to the busier part of the season, we would expect some — we’re calling a return to more normal seasonality, not peak, not inflection but more normal seasonality.

Brian Ossenbeck: Understood. Just to follow up on intermodal then in terms of where the truck market is, it sounds like it’s still challenging in the East. Where are the spreads relative to history right now? And are you having shipper conversations where they’re looking to do more conversion now that rail service is stabilized and improving. Have you seen anything notable in the quarter so far?

James Filter: Yes. This is Jim. Yes, from a service standpoint, that really has not been a barrier here, we’ve seen great service from all three of our rail partners. So it really is a matter of price relative to over the road. And here more recently, as we are seeing the truckload rates start to slowly increase. It’s putting intermodal and positioned to compete there. So that’s something I would expect that we’ll start to see a little bit of an improvement, especially in those truck competitive lanes.

Operator: Our next question comes from the line of Chris Wetherbee of Wells Fargo.

Chris Wetherbee: I was wondering if you could dig in a little bit into the July commentary and maybe sort of compare it to what you’d normally expect from a seasonality perspective, some fairly negative macro data out this morning. I guess I’m just kind of curious how you guys compare and contrast what you’ve seen over the course of the last several weeks in the business? I know you mentioned that spot rates are still above contract. But broadly speaking, from a demand perspective, is it playing out the way that normal seasonality would suggest?

Mark Rourke: Yes, Chris, from my expectations and normalcy, obviously, it’s a little bit of a shorter month coming with a major holiday in it. But I wouldn’t say there was anything particularly unusual in either direction. It’s been fairly steady, which is, I think, overall, a good sign coming off end of quarter in June. So not spectacular, but not a reversion back to much less lower volumes or pricing changes, as I mentioned, in the spot market. So pretty steady performance.

Chris Wetherbee: Okay. That’s helpful. And then maybe just putting all of that into the context of the guidance, I think you guys mentioned that you expect sequential improvement in the year-over-year in earnings in the next couple of quarters. Any other sort of shape you can put around that? I guess maybe the direct question is, what will your expectations be around the fourth quarter that can have some more significant seasonality? So just trying to get a sense of maybe how to sort of pace out the rest of the year from an earnings perspective going towards your updated guidance?

Mark Rourke: Chris, I think you’ve kind of hit on kind of how we’re thinking about it. We are talking sequential first half, second half there. And when we used the phraseology of more normal seasonality, again, that would indicate the fourth quarter is generally more favorable in the third quarter, and that’s where we would expect normal seasonality to be defined as.

Operator: Our next question comes from the line of Jon Chappell of Evercore.

Jon Chappell: Spend a lot of time, I think, on the intermodal side, you’ve talked through some of the cost initiatives, I think in detail. It’s really interesting read to see most of the revenue lines effectively flat sequentially and then a doubling of EBIT in every revenue line — I’m sorry, in every segment line. So on the TL and maybe the logistics side, too, is there’s any more detail you can give around the cost initiatives that you’ve implemented to enable the margin to expand so much even in a flat revenue backdrop?

Mark Rourke: Yes, good question. And as we’ve spoken in our last several calls, and if we baseline ourselves to the fourth quarter of 2022, which is where we’ve typically discussed this topic, I’m just really proud of the entire organization’s ability across multiple expense pools to dig in and look for opportunity to arrest inflation and now in many cases, be able to turn back some of those costs to inflation. Jonathan, so it really is across the board from our maintenance organization on uptime on equipment to getting the parts and all the things that was inhibiting our ability to be low cost and high uptime. They’ve done a really good job of getting us back to what we would consider our standard spec, our driver recruiting teams, our head count actions to be more efficient.

We’ve talked about capital efficiency by being able to increase ratios. All of those, you’re not hitting one bounce double over the fence. You’re hitting lots of signals across lots of categories to build momentum. And we’re talking about how those are structural improvements. Those don’t have to change based upon market. And so really across the board from third-party expense to in-house dollars the team has leaned into, and that’s why you see it really prevalent across all three of our operating segments. It isn’t in a single or a targeted part of the business is really across the board.

James Filter: Yes, just really is across the enterprise, like Mark said and mentioned all the places we’ve taken cost out, but the value of remaining disciplined through that allocation season is we’ve been able to get a better mix of freight, and that better mix of freight helps us reduce some of the friction costs that also plays in. So it really is an enterprise action.

Jon Chappell: Jim, that leads right to my follow-up, which was the mix of freight. Are you effectively saying that you’re walking away from business that’s maybe lower margin or requires greater resources and the return you can get on at this point? And does that change the kind of trajectory that you would see when the freight headwinds do become tailwinds?

James Filter: Absolutely that we are positioning ourselves to align with freight that generates a return for the organizations that we can reinvest, I would expect that in a different market cycle, those are opportunities that become available again and create opportunities for growth.

Mark Rourke: Yes. There are multiple levers there how we accept freight, how we use the spot freight, giving ourselves the flexibility to go after in the event that it’s their more premium project work, all that’s behind our decision relative to what we’re making commitments and what we mean by discipline through the allocation season, Jonathan. And I just do want to reinforce the good work our sales and commercial team is doing, and we’ve used the example here today on intermodal by getting the network in a better position, healing the network, we have less of the accessorial cost. We have less of the repositioning cost, and it’s enabled our driver fleet to be more efficient, which has allowed us then to take capital out of the business and the corresponding expense that we save by doing that.

So the commercial healing relative to this allocation season has the cost benefits in addition to giving us additional flexibility in the event that we have the opportunity to yield in the second half of the year.

Operator: Our next question comes from the line of Jason Seidl of TD Cowen.

Jason Seidl: Jim, I wanted to focus a little bit on sort of the back half of the year, what you’re hearing about peak season. You mentioned that you kept a lot of capacity to be more flexible. Are we expecting a lot more sort of pop-up business in the back half of the year? What are shippers telling you?

Mark Rourke: Well, I’m not sure the definition we’ve kept a lot of extra capacity. What we’ve done given ourselves the flexibility to the degree that we can to help our customers who may need that type of support. And we’re in some discussions and we have been in discussions trying to understand what that may look like. And so what we’re really trying to do is make sure that we can pivot appropriately and have the resources and the aptitude to do that, Jason. So a little early for us to be definitive on that, but that’s the point of the planning process that we internally are in and also in conjunction with our customers.

Jason Seidl: Okay. Fair enough. And on the dedicated side, have you guys seen the more aggressive marketplace in terms of pricing on the contract side? It seems like some of your competitors have taken some trucks out of their dedicated operations as we look at some of the 2Q numbers?

Mark Rourke: Well, as in any market, there are a distribution of type of freight that you’re hauling even in Dedicated and Customer segments. We are in the more generic dry van type dedicated in certain locations in certain geographies. But increasingly, what our focus has been, where our growth has been both organically and acquisitively, Jason, is we’re trying to certainly position ourselves in the more durable dedicated those that we’re providing a specialty even their equipment or additional service that our driver is involved in the supply chain process for the customer. And as such, I wouldn’t say there’s less competition, there’s plenty of competition there, but it’s much stickier, harder to replace. And you’re really demonstrating your value to your customer every day.

And if you do that, your retention levels remain high, and we’re still well as we sit here today, a 95% plus through our retention actions this year. So not that we’re not immune to some of the behavior that may take place, but it’s a much, much smaller portion of our portfolio.

Jason Seidl: That makes sense and what percent of your accounts in Dedicated would you consider more durable?

Mark Rourke: Well, the vast majority, I’d probably put that in the –

Operator: Our next question comes from the line of Bascome Majors of Susquehanna.

Bascome Majors: To follow up on Jason’s first question. You noted that it’s a little early to really know what you have for peak season. Typically, how far into the calendar would it be before you really know what you’re dealing with from a price pop-up demand and ultimately, profit perspective for the fourth quarter?

James Filter: This is Jim. And typically, the processes that where customers come to us. They have a general idea, we start sharing information. It’s not until later in August that they’re really starting to put together those plans. There are some of those that are actually already completed. But the vast majority, those are getting worked here later in August and some of those actually moved even into September.

Bascome Majors: And looking beyond the peak season from this year, as we think about the bridge back in the Truckload segment from, call it, mid-single-digit operating margins today to your 12% to 16% long-term range, is it really just a couple of years of price above inflation that gets us there. Can you kind of walk us through how we get back there without necessarily trying to put a hard cyclical timeline on it? That would be helpful.

Mark Rourke: Yes. Certainly, very important is price recovery. As an industry, we went through a period of inflation around wages, equipment that is part of the business today. And what we’ve been through, particularly in the network side of the businesses is not getting compensable rates to cover that to include what’s expected from acceptance performance, and we’re just the industry in that part of the business, particularly truckload network at this juncture is just out of whack. And for us to invest in the future, we have to see some correction there. We’re confident that the value is there, and it will take some time. But as we’ll start to give guidance later in the year to 2025, we’ll be more specific about that bridge, but pricing plays a role, but also all the other actions that we’re doing today around productivity, efficiency, cost, all of those things are an important contributor to put us in a position to yield those benefits quickly as price recovery becomes more prominent.

Operator: Our next question comes from the line of David Hicks, Raymond James.

David Hicks: Congrats on the quarter. We’ve seen sequential margin improvement across the board, across segments, that outperforms typical seasonality here in 2Q. Is that kind of outperformance that we’re seeing? I know you expect sequential improvement but kind of outperformance versus seasonal trends, is that expected for the balance of the year, just kind of as we see kind of seasonality come back and there’s still room to attack on the cost side of things?

Mark Rourke: Yes, this is Mark. We still have the yield of all the cost actions that we’ve been — that will still be — what we believe is certainly durable through the remaining part of the year. And so there’s constant ability to feather those in and certainly part of our outlook. And we’ve also, from a commercial standpoint or a freight standpoint, we keep using the word return to some normalcy of seasonality. We’re not saying we’re going to have the peak of peaks but a normal seasonality after we’ve seen the end of quarter activity in March, the experience that we had in the second quarter and some of the conditions that we’ve outlined in our discussion to date would suggest have to play out. We have to see these trends be durable, which we noted in our opening comments, but based upon those data points, it gives us at least some confidence that we have some level of seasonality in front of us, which is generally in our industry, the best part of the year comes through the late third and into the fourth quarter.

David Hicks: Okay. That’s helpful. And then lastly, I was just kind of curious as to the weakness in the all other segment on the operating income line. First time we’ve seen that negative in quite a while, while revenues kind of improved sequentially from 1Q. Is this kind of a headwind expected to continue? Or should we get kind of back to that regular cadence of…

Darrell Campbell: This is Darrell. So I’ll take that. So just as a reminder, was in other is primarily the result of our leasing business. So we leased tractors to owner operators and small carriers. We also have our captive insurance business that’s in that bucket, and we have some unallocated corporate expenses there as well. To your specific question on the year-over-year decline, that’s mostly in the leasing business. So if you think about the market conditions and the stress that the small carriers are under, we’re seeing that come through in those results. So not really surprising.

Operator: Our next question comes from the line of Scott Group of Wolfe Research.

Scott Group: Can you guys — I know we talked a lot about normal seasonality. Just remind us, what’s normal seasonality Q2 to Q3 just for the various segments?

Mark Rourke: Yes. Normal seasonality would suggest a peak season, we sort of return to a level of seasonality. So a little bit nuanced there, Scott. We’re not again, calling for an inflection. So again, I want to be incredibly clear about that. The bigger sequential, if you go to history is certainly the third to the fourth quarter. But with the improved performance in the second quarter and what we saw so far in July. We think there is some seasonal improvement second to third. We have to see, again, see those trends play out and the trends that we’ve seen be sustainable, but the normal seasonality in our business is more third to fourth.

Scott Group: And on the equipment side, can you just talk about any gains in the quarter, expectations for gains? And then on the CapEx side, I think it’s the second quarter in a row you’ve lowered it. Any thoughts on CapEx next year? Are you focused on a prebuy, anything like that?

Mark Rourke: Yes. Thanks for the question, Scott. Really, the big difference of our guidance for this quarter versus last is the efficiency actions that we were able to take to lessen the need for new equipment. We’re not backing off our age of fleet. It really came down to an efficiency factor in kudos to our equipment team who’ve been able to prepare and some additional proceeds to get out and sell the equipment. That said, we don’t expect material gains. We’ve had very moderate gains. I mean, fairly positive in the second quarter. We’re not modeling anything significant at all for the third and fourth quarter. We’re moving the equipment, but we’re not moving it at a significant gain standpoint. And then as it relates to next year, a little early for us, we’re in our planning stages there with our OEMs and what we think makes sense and what, quite honestly, will actually be available.

So we’re not convinced there’s going to be a large pool of capability of prebuy, but it’s a little early for us to make any comment on that.

Operator: Our next question comes from the line of Ken Hoexter of Bank of America.

Ken Hoexter: So really interesting discussion through the morning on kind of peak and just given the consumer weakness, we hear whatever McDonald’s, Starbucks, P&G, just so many, but you’re saying spot is now above contracts. So Mark, when does that happen, right? When does that occur without an inflection? What else do you need to see to call that? I guess in the backdrop where it seems like all the major carriers have now finally decided to take out about 10% of the fleet, right, which I don’t know, is that the final cleanup that was long needed just to get to this point? And is that the beginning of the inflection?

Mark Rourke: Well, not speaking for everybody, but certainly for us, it’s been difficult for us to make a case to invest in growth in the network business based upon where it is in the return profile, Ken. So we would not be surprised that that’s more of a prevalent theme across the industry, but it’s certainly prevalent here. And so spot pricing is really a function of a couple of things. First of all, we’re disciplined. We’re not playing at 20%, 30% in the spot rate. So it’s an important component for us and it gives us flexibility, particularly if it continues to improve, to be an adder to our yield actions in the second half of the year. But I do think generally that is a sign. We have to see these trends sustain themselves before we’d be comfortable enough to say, okay, we’re now into a different phase of the market. But it’s an encouraging sign nonetheless.

James Filter: And Ken, I’ll just add on, this is Jim, that this is part of just being very purposeful on the construction of our portfolio as well in terms of the customers we’re aligning with. And when we’re talking about spot pricing, it really is working directly with customers is primarily where our spot volume comes from in our asset-based business. It’s not necessarily the same thing that you’re seeing on broker load boards.

Ken Hoexter: Yes. No, definitely. I think we’re hearing maybe more and more of that in terms of load boards, not really being realistic in terms of what’s going on, certainly as you went through the contract bid season. I guess switching over to intermodal for a second, just to wrap up, I guess, in my follow-up. Really interesting growth prospects as you gain long-haul share from Mexico, can we see — or could you see a step change in your revenue per order as you get longer length of haul from Mexico? Or is that just still a small part of the business and it doesn’t really impact the overall change?

James Filter: Yes. There’s an opportunity there. And one thing we’re really looking forward to with Mexico is STB approval of our new Southeast to Southwest and Mexico lane, and we’re looking forward to seeing that as early as the next few weeks and that creates a new corridor for their — absolutely right that has an opportunity to provide a little bit of lift on rate per order as does the UP last time we talked about the change in transit times between L.A. and Chicago, that largest intermodal lane that’s out there. We’ve seen that improvement in transit times. I think that’s an opportunity to be able to grow. So that creates a little bit of opportunity to see a little bit of lift of rate per order, but we’re not going to slow down in the East because that is also a great opportunity for us to grow our intermodal assets and believe that as the market starts to change, that’s where we would expect to see some growth as well.

So it’s difficult to say with that entire mix, specifically lift on rate per order because the East is a really large part of our portfolio.

Operator: Thank you, everyone. This concludes today’s conference call. You may now disconnect. Have a good rest of your day.