Schneider National, Inc. (NYSE:SNDR) Q4 2022 Earnings Call Transcript

Schneider National, Inc. (NYSE:SNDR) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Greetings, and welcome to Schneider’s Incorporated Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Steve Bindas. Thank you. You may begin.

Steve Bindas: Thank you, operator, and good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer; Steve Bruffett, 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 CFO, Steve Bruffett.

Stephen Bruffett: Thank you, Steve, and thanks to each of you for joining us this morning. I’ll provide a financial recap for our fourth quarter and full year results, and then Mark will provide his insights on various aspects of our operations as well as on market conditions. I’ll then offer some additional context for our 2023 guidance before we open up the call for your questions. As Steve Bindas indicated, Jim Filter is with us today on the call, and he will be joining our quarterly earnings calls on an ongoing basis. So we look forward to his participation and perspectives. Also, we have refreshed our Investor Relations presentation, and it’s available for your reference on our website as we’ll mention some of the slides during our comments today.

Regarding our quarterly results, the $148 million of adjusted earnings was the second most profitable fourth quarter in our history, behind only the $177 million we earned in the fourth quarter of 2021. Adjusted EPS for the fourth quarter was $0.64 compared to the record high of $0.76 in 4Q, ’21. The 2022 fourth quarter included an adjustment for our full year tax rate, mostly related to state income taxes and the associated apportionment that has been slightly modified by the inclusion of MLS in our mileage. The lower effective tax rate bolstered EPS by $0.03 as compared to the 25% rate, we’ve been using as an estimate for the first three quarters of the year. While fourth quarter adjusted earnings were 16% below those of 2021, full year earnings of $617 million or 16% above 2021.

In addition to the favorable financial results of 2022, the path traveled is worth noting. 2022 as a year in which we advanced our strategic objectives of growing dedicated, intermodal and logistics at, a faster rate than the other components of our portfolio. Dedicated revenues within the Truckload segment grew 45% over 2021, a result of organic growth in the MLS acquisition. For the year, dedicated revenues were 53% of Truckload segment revenues as compared to 42% in 2021. Intermodal and Logistics both posted record revenues and earnings in 2022 and together, they delivered about half of segment earnings. Regarding cash flows, we generated $856 million of cash from operations, which was an all-time high and compares to $566 million in 2021.

Net capital expenditures finished 2022 at $462 million, just below our most recent guidance of $475 million. During 2022, we reduced our debt by over $60 million and our total debt currently stands at $205 million. Also, we paid $56 million in dividends during 2022, which was 12% above 2021 as we steadily increase our returns to shareholders. And I’ll now hand it over to Mark for his comments.

Mark Rourke: Thank you, Steve. I want to thank our valued and diversified customer community and our 17,000 associates across North America, especially our professional driver community for their contributions and tireless efforts in support of another record performance year for the company in 2022. We set records in revenue, excluding fuel surcharge of $5.7 billion, delivered record adjusted earnings of $617 million, achieved record free cash flow of $395 million and posted record adjusted EBITDA of $967 million. In my comments, I’ll provide additional commentary on our fourth quarter results by segment and what that may signal for the New Year here in 2023. Specifically, I will highlight the status of our three strategic growth drivers of intermodal dedicated and brokerage, including the emerging influence of Power Only.

As expected, the fourth quarter was atypical what is normally experienced during the peak holiday, shipping season, especially in the regular route network portions of our business, in both truckload and intermodal. Domestic intermodal container volume moderated as import activity waned and apart from specific e-commerce driven channels, high-intensity capacity coverage, volume and service premium project work in truckload was limited. Notably, in the month of December, we successfully completed the conversion to our new Western intermodal rail partner with the Union Pacific. So let me start there. The planning and execution work of the conversion teams of both Schneider and the Union Pacific exceeded expectations as we collaboratively focused on ensuring a positive customer experience through the conversion.

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I also want to thank and recognize our experienced professional dray driver associates who made it happen at the rail terminals and on the street. In the end, we did not have as much cost impact as expected as we move from running two networks in the West to one. A good portion of the setup work of positioning and stacking containers and chassis for the conversion was completed in the third quarter. With less overall seasonal volumes and with rail congestion improving, our intermodal operations enjoyed higher dray productivity levels, less use of third-party dray resources as well as running less empty repositioning miles than we had anticipated. In the quarter, intermodal year-over-year revenue per order improved 7% with order volume contraction of 6%.

This combined with solid execution and transitioning our Western rail partner resulted in only a 50 basis point year-over-year contraction in operating ratio to 83.3%, a 740 basis point improvement sequentially from the third quarter. As we look at 2023, we are now uniquely positioned with our intermodal model of company-owned containers and chassis and company driver dray partnering with the Union Pacific in the West and the CSX in the East. With more origin destination pairs and more frequent daily to purchase schedules in the West and CSX highly reliable execution model in the East, we are very well situated to take advantage of opportunities for growth including over the road conversion. That being said, in the near term, we expect intermodal volumes in the first quarter to be pressured until Asia import activities ramp back up.

We are in the early stages of the 2023 contract renewal process, and we are monitoring several customer decision threats. For instance, how are they shaping their import location strategies between the Eastern and Western ports. For those who push more volume through the Eastern ports in the last 18 months, considering going back to the West, as fluidity has improved, what is the differential between intermodal pricing and over the road alternatives as well as what are customer strategies and take advantage of the favorable emission reduction opportunities that intermodal uniquely offers. For the latter, we intend to offer additional value throughout the year as we ramp up our sizable battery electric dray presence in Southern California for customers looking for the greenest solutions available.

We are intently focused on intermodal asset productivity to take advantage of the investments our rail partners have made in service recovery and the investments we’ve made in container count growth in ’21 and ’22. As such, we do not anticipate adding to our container count this year. Let’s move on to the Truckload segment. Our Dedicated tractors count grew 33% year-over-year through a combination of organic and acquisitive growth. Truck count was down slightly from the third quarter as new business start-ups were limited and contractual flexing was were less prominent in certain customer applications as we match resources with individual customer demand levels. Dedicated revenue per truck per week improved 2% sequentially as annual pricing adjustments are being implemented.

We expect positive price appreciation in dedicated in 2023 as first half renewals reflect the inflationary pressure of equipment replacement costs, parts, maintenance and driver wages. We finished the year with dedicated tractors making up 57% of the truckload fleet. Our strategy is to continue to grow dedicated truck counts due to the long-term nature of the contractual relationship and the deeper integration level with the customer which leads to a higher percentage rate of contract renewals. Furthermore, and importantly, professional drivers increasingly prefer the predictable nature of the work and proximity to the customer relationship that dedicated provides. As we enter the New Year, our dedicated sales team has closed on several hundred units of new dedicated business awards and we’ll begin implementation later in the first quarter and ramp throughout the year.

Our network tractors finished the year at 43% of truckload fleet, essentially flat sequentially from the third quarter. Revenue per truck per week was down low double-digit percentages year-over-year, with two-thirds of that being price comparison driven primarily to the lack of premium project work and lower seasonal spot rates. The remaining third was productivity driven due to the moderating demand condition and the disruptive nature of the winter weather front that we experienced across a large swath of the nation during the week leading up to Christmas. Our 2023 plan in truckload will be focused on organic growth in dedicated. However, we are also actively pursuing and screening acquisitive opportunities in specialty and dedicated truck and are positioned well to move on the right opportunities this year.

Finally, our logistics operating ratio dipped only 36 basis points sequentially from the third quarter from this year as third-party support for port dray transloading and promotional support work in brokerage moderated in the fourth quarter. Despite the limited seasonal project and promotional opportunities, order volumes in brokerage proved highly resilient, down just 5% over last year’s fourth quarter. We would attribute the resiliency in order volumes to a few things. First, it is our direct demand creation capability in brokerage, a function that is complementary to our truckload offering but not depend upon it. Secondly, our contract percentage in brokerage is 60%, and our investments in our digital freight power connections for shippers and carriers continues to increase our market nimbleness in both the capture of demand and capacity while lowering our acquisition costs on both the buy and sell side of the equation.

Thirdly, we expect the year improving our collaboration technology and processes between our Power Only third-party carrier offering and our asset-based network truckload service. We have improved on the customer lens, our revenue management, order acquisition and trailer management execution model. It fits our strategic imperative to offer a broader submitted contract solution to our customers to address their regular route coverage needs. As a result, over time, we see our network business evolving to a more trailer-centric versus truck-centric service offering. So with that, I’ll turn it back to Steve to provide an update on our 2023 guidance.

Stephen Bruffett: Great, Mark thanks. And moving now to our forward-looking comments, you can find the summary of our 2023 guidance on Slide 26 of our investor presentation. As it has been well documented, 2023 has started off in a softer economic and freight environment than we experienced a year ago. At the same time, we expect that the broader macro forces of supply chains and inventories will further rationalize in the early months of the year as our customers have been diligently working to address these issues for several quarters already. As such, we expect steady improvement in freight conditions as we progress through the year. Importantly, we expect our earnings to demonstrate resiliency given the progress we have made over the past several years with the composition and performance of our multimodal platform.

Speaking of the platform, I wanted to touch on the long-term margin targets – target ranges that we have for our three segments, given that this is the time of year when we review these targets and provide any updates. For the Truckload segment, that range remains at 12% to 16% and for the Intermodal segment that range continues at 10% to 14%. For the Logistics segment, we are raising the long-term target margin ranges by 100 basis points, and that will be to 5% to 7%. This range has been at 4% to 6% for the past several years but with the momentum of our brokerage business, coupled with our rapidly growing Power Only, offering it makes sense to raise the parameters for this rapidly growing piece of our business. You can find these target margin ranges on Slides 23 through 25 of the IR deck.

Moving now to equipment gains for 2023, we currently expect these to be in the vicinity of $27 million that we realized in 2022. Also, our 2022 adjusted EPS of $2.64 included $0.06 of net equity gains, while our 2023 guidance currently assumes none. As we incur equity gains or losses, we’ll incorporate them into our guidance as we progress through the year. Regarding our effective tax rate, we expect it to be approximately 24.5% for the full year of 2023. And that brings us to our 2023 guidance range for adjusted EPS of $2.15 to $2.35. Our guidance for net CapEx is a range of $525 million to $575 million and our capital plan includes meaningful investments in trailing equipment in support of growth in our Dedicated, Power Only and Intermodal offerings.

The plan also enhances our tractor age of fleet that has trailed our targets for the past couple of years due to OEM production constraints. Continuing with the theme of cash flows, we’ve announced a share repurchase authorization of $150 million. Then the primary purpose of this repurchase program is to offset the dilutive effect of equity grants to employees over time. And the program will serve as a complementary component of our overall capital allocation framework. And finally, we recently announced an increase in our quarterly dividend to $0.09 per quarter, a 12.5% increase from the $0.08 per quarter in 2022. That’s also an 80% increase from our IPO five years ago. So capital allocation, return on capital and shareholder returns remain at the forefront of our financial priorities in the year ahead.

So we’ll now open up the call for your questions.

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Q&A Session

Operator: Thank you. Our first question comes from Ravi Shanker with Morgan Stanley. Please proceed with your question.

Ravi Shanker: Great, thank you. Good morning everyone. So with the new logistics margin targets and the commentary kind of that you’re focusing on more of a trailer-centric rather than a tractor centric network. It sounds like you guys are going all in on Power Only, which is understandable given the growth in that business in the last couple of years? So a few questions there, one is, does it – in the downturn, is it not clear that, that is a structural growth area of the industry and not something that was driven by kind of pandemic supply chain tightness? Second, what is the competitive environment there compared to the rest of brokerage? And maybe third, what’s the margin profile for that business like compared to the rest of logistics?

Mark Rourke: Great, thank you, Ravi. This is Mark. We’ve been at the Power Only game long enough to really understand what we believe is a very resilient model. It was – in my opening comments of despite the fourth quarter of 2022 being much different than the fourth quarter of 2021 from a seasonality standpoint. Our brokerage volumes inclusive of Power Only, only contracted 5%. So I think that’s a good indication that the durability of that business model. Increasingly, we see it as a very instrumental part of our overall network offering alongside our excellent owner operator and a company-driver model within our truckload group. And so from a customer perspective, that is a very seamless decision point for the customer. What we’re ultimately trying to do is offer a broader range of contractual commitments and then use our processes and technology that we continue to invest in to integrate Power Only into that.

So, we would only expect us to be more effective over time for those investments. And certainly, we’ve now seen the benefit of Power Only in conjunction with our network offerings and on the asset side, both in upmarket and now in a more moderating market and our enthusiasm and our commitment there remains very, very strong.

Ravi Shanker: Great. And maybe as a follow-up kind of on the intermodal business, you guys had a pretty good fourth quarter and kind of the guide shaping up pretty – nicely as well. How do we think about what the margins of that business looks like in ’23, especially given some of the competitive shifts in the marketplace, kind of do you feel like the business that’s move through UP kind of – is it now stable or do you feel like there’s going to be a little bit of back and forth there on maybe the price initiative shifts?

Mark Rourke: Yes, Ravi, good question. As you think about 2022 in one form or another, we were in a state of transition throughout the year, whether it be commercially or whether that would be operationally. And so, we’re quite pleased on how well that transition went from a customer view and our ability to execute, and that’s a great credit to the Union Pacific. And certainly, the Schneider team who was heavily invested throughout the year to get to that type of result. And so, if you kind of put the whole year in context, we came within our 10% to 14% range, which we reiterated earlier on our call this morning at about 13%. And so as we move forward, we’re pleased that we have some of the distraction, if you will, and we’re operating in much clear air all across the board as we head into 2023.

Obviously, we want to see some import activity return. We want to see some of the other value that we think the customers are going to get particularly around emissions and what we believe is a very rich pool of over the road conversion. And so, those are the things that we’ll be focused on in 2023, and we feel that we’ll be well positioned within our margin range that we stated going forward.