Schneider National, Inc. (NYSE:SNDR) Q4 2023 Earnings Call Transcript
Schneider National, Inc. (NYSE:SNDR) Q4 2023 Earnings Call Transcript February 1, 2024
Schneider National, Inc. misses on earnings expectations. Reported EPS is $0.1547 EPS, expectations were $0.21. Schneider National, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Schneider Fourth Quarter Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Steve Bindas, Director of 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 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. Hello, everyone, and thank you for joining the Schneider call this morning. Let me start by offering our perspective on the current freight cycle by placing that in context for our most recent quarter results and our long-term strategic priorities. A consistent theme emerged from the discussions we have had with our highly diversified customer base through the back half of 2023. While customers still find themselves in a heightened state of uncertainty heading into 2024, virtually no one believes the current demand and capacity cycle is a new normal, or even that it's durable. The consistent question is, when does it change? In alignment with that theme, at the end of January, Schneider's Internal Truckload Freight market index crested 600 days of being below neutral, while the prior 6 cycles, 3 up and 3 down, have lasted an average of 575 days.
Therefore, historically, we are quite long into this cycle. Invariably, macroeconomics and the demand and capacity balanced environment adapts sometimes at a slow and steady pace and sometimes more abruptly due to a capitalist. In respect of the market, we are intently focused on company-specific initiatives to return our diversified and scaled operating segments of Truckload, Intermodal and Logistics to their long-term margin targets. Let me recap the important developments in the most recently completed quarter regarding those initiatives. First, in Truckload segment, our average dedicated truck count in the quarter is up 674 units over a year ago, and up 283 units sequentially from the third quarter through a combination of organic and acquisitive growth.
Included in those numbers is truck count attrition across dozens of operations, particularly in retail support applications due to less overall demand this fourth quarter versus a year ago. Encouragingly, this serves as a build-in growth channel with even modest demand improvement. Revenue per truck per week and dedicated improved both year-over-year and sequentially, primarily due to asset productivity improvements as a result of those operation-specific truck count adjustments. Our dedicated value proposition of strong operating performance, combined with a robust new business pipeline, gives us visibility into several 100 units of additional organic growth in 2024. Dedicated's consistent revenue and earnings profile places it at the top of Schneider's strategic growth priorities alongside intermodal.
Presently, the growth and performance impact of dedicated within truckload is muted due to the challenges of generating returns in the network offering. Over 100% of truckload's earnings in the quarter were associated with the dedicated offering. Revenue per truck per week in network improved sequentially driven by asset productivity, aided by volumes improving modestly compared to the third quarter. However, at this time, there is not a compelling reason to allocate additional capital in network until freight rate levels are compensable for the service provided. Our second strategic imperative is to grow intermodal earnings, primarily through accelerating over-the-road conversion opportunities. That objective was a driving force behind our new rail partnership alignments with the Union Pacific and the CPKC.
We are not gauging success with the UP network conversion off the first four quarters of operations. We are playing the long game here. Achieving our desired outcomes in the West requires not only service reliability, which the UP team has urgently and successfully addressed, but also flexibility in the solution commercially. 2023 was a year we took a step back in Western intermodal order volumes. The corresponding mix change is reflected in the 11% lower year-over-year revenue per order, evenly distributed between a change in mix and a change in price. That said, I am pleased that we are working in a highly collaborative manner with the UP to reverse that trend in the 2024 allocation season, and I am confident we're going to be successful.
We are also committed to leveraging Schneider's considerable strength in Mexico with the leading intermodal service capability of the CPKC. The CPKC's best-in-class solution is one improved its value in the quarter by eliminating handoffs and keeping freight in motion, which is the best way to avoid thefts and other disruptions. However, to unlock the full potential of the intermodal conversion opportunity requires changing long-held market beliefs and experiences on the reliability of intermodal solutions into and out of Mexico. Again, we're playing the long game here, and we expect by the time we exit 2024, we will be well on our way to realizing that potential. Thirdly, the logistics and brokerage market are hyper competitive, and I appreciate how our team has nimbly navigated the environment by leveraging its own freight generation capability and the resilient power only model to stay profitable.
I am pleased with the advancement of Schneider freight power and the growth of our digital connections. Despite market softness, the number of orders that we acquired digitally increased approximately 25% over a year ago. This creates significant leverage for Schneider, when the market begins to improve. Before I hand it over to Darrell for his commentary, let me offer some additional insight into fourth quarter results, including context to our guidance coming out of the third quarter earnings call. From a safety performance basis, our operations, safety and professional driver teams have reduced the frequency of auto liability incidents by 19% as compared to the pre-COVID 2019 baseline. That is an important trend line as cutting exposure is the first line of defense against rising settlement costs.
However, in the quarter, we experienced adverse development, primarily on two accident claims from earlier in the year. Those two incidents snapped a 60 quarter consecutive period without a significant claim adjustment. On the positive side of the ledger, we posted a lower tax rate for the year. The net of the adverse safety developments and lower tax represented a 4% drag on earnings per share from what we contemplated in our prior guidance. Otherwise, the quarter played out nearly as we expected in terms of freight yields, cost performance and lack of equipment disposal gains. Encouragingly, year-over-year volumes were up in December for both network truck and intermodal, but overall volumes in the quarter were more tepid than expected, especially around the holiday weeks in November and December.
Let me now turn it over to Darrell for his insights on the most recent quarter and update on our capital allocation expectations and our 2024 guidance.
Darrell Campbell: Thank you, Mark, and thanks to each of you for joining us this morning. I'll provide a financial recap of our fourth quarter and full year results and some perspective on our 2024 guidance. You can find summaries on Pages 20 to 25 of our Investor presentation. Our adjusted earnings for the fourth quarter were down $116 million or 78% from prior year. Adjusted earnings per share for the fourth quarter was $0.16 compared to $0.64 in the prior year. The fourth quarter of 2023 included a loss on the sale of revenue equipment versus a $10 million gain in 2022. As Mark indicated, compared to our most recent guidance, fourth quarter earnings per share was negatively impacted by $0.04 related to two unexpected items.
Firstly, adverse development, primarily related to two accident claims that Mark mentioned. While higher claim costs were predominantly in truckload, all segments were impacted. Secondly, the favorability in our income tax rate, which related to increases in tax credits from our investments in new electric trucks and research and development activities in addition to changes in our valuation allowance for losses associated with the sale of our Asia business. Truckload revenues, excluding fuel surcharge for the fourth quarter of 2023 were slightly above 2022 as the network pricing shortfall was more than offset by revenues from solid organic growth in dedicated and our recent acquisition of M&M Transport. Truckload margins and earnings for the fourth quarter were also lower on a year-over-year basis, primarily due to network price, the adverse claims development discussed earlier, a loss on equipment sales and inflationary costs.
In our Truckload network business, 2023 and particularly the second half was challenging, and we believe that rates have largely reset. As we communicated last quarter, our spot exposure was uncharacteristically high, as we have sought to avoid entering into contracts at rates that are non- compensable. During the fourth quarter, we continued to rebalance our spot to contract mix and saw a marginal seasonality in pricing. We believe the pricing and volume stabilization seen sequentially in the fourth quarter are an indication of the bottoming of the current freight cycle. We expect to build on this momentum and to improve contract rates during 2024. As Mark mentioned, we remain very encouraged by the performance of our dedicated business as we continue to see solid start-up activity in the fourth quarter and new business already awarded in the first quarter of 2024.
We're seeing strong organic growth and stellar performance from our recently acquired businesses. Dedicated revenue per truck per week for the fourth quarter increased 3% from the prior year and 4% sequentially. We remain disciplined on customer acquisitions, which should continue to support our growth and earnings expectations. As of the end of the year, dedicated truck count represented over 60% of the truckload segment total as compared to 57% a year ago. This trend reflects progress on our stated commitment to strategically grow this business organically and through opportunistic acquisitions. Turning to Intermodal. We continue to see our intermodal business representing a key structural growth opportunity. We are well-positioned with our existing container and chassis to grow our business 25% to 30% without the injection of trailing capital.
For the fourth quarter, intermodal revenues, excluding fuel surcharge, declined by 17% compared to 2022. As in the Truckload network, significant pricing pressures weighed heavily on results. For the quarter, volumes decreased 1% compared to 2022. However, December marked the first month of year-over-year growth since February. Intermodal earnings were impacted primarily due to price in addition to lower orders year-over-year, and increased empty repositioning and claim costs. Logistics revenues for the fourth quarter of 2023 declined by 20% versus 2022, primarily due to decreased revenue per order as well as lower brokerage volumes. In addition to pricing and volume declines, logistics margins and earnings for the fourth quarter were also impacted by the adverse claims mentioned earlier.
Our logistics businesses continue to operate profitably through our challenging freight cycle. We saw sequential improvements during the quarter in both net revenue per order and orders per day in part due to seasonality. The asset-light nature of these businesses also continues to support our optimism for continued growth and long-term return on capital. Turning to capital allocation for the year. We ended 2023 with net CapEx of $574 million, just below the top end of our most recent guidance of $575 million. During the year, we increased our debt balance, partially related to our acquisition of M&M Transport in August. Our net debt leverage was 0.3x at the end of the year, and we generated $680 million in cash from operations. Despite current operating conditions, the strength of our balance sheet gives us a conviction to remain confident and committed to our capital allocation strategy, including returning value to our shareholders.
As such, we paid $64 million in dividends during 2023, which was 14% above 2022, and we continue to strategically repurchase shares with total activity of $66 million for the year. In addition, we recently announced an increase in our quarterly dividend to $0.095 per quarter, a 6% increase from 2023. Moving now to our forward-looking comments. From a macro perspective, while higher inflation and interest rates have pressured consumer demand, inflation has been moderating and the Federal Reserve's indication that interest rates could be lower by the end of 2024 has been a key factor in recent optimism and consumer confidence. Given the normalization of inventories, we believe shippers will pivot to restocking in 2024, if consumer confidence persists.
In addition to the actions we're taking to recover pricing and volume, we continue to maintain discipline in managing costs across our business segments in an inflationary environment. As we do throughout all market conditions, we continue to identify incremental opportunities during 2024. We expect safety costs to be higher than 2023, primarily because of increases in premiums and the full year impact of M&M transport. Despite our ongoing focus on and investments in safety, we're also not immune to increased litigation, inflated settlements and elevated insurance premiums. We expect equipment gains to be approximately $30 million lower than realized in 2023, given the current and expected state of the used equipment market. Also, our 2023 adjusted EPS of $1.37 included $0.09 of net equity gains from strategic investments, while our 2024 guidance assumes not.
As is our usual practice, as we record equity gains or losses, we will incorporate them into our guidance throughout the year. Taking all these considerations into account, our guided adjusted earnings per share for 2024 is $1.15 to $1.30. This guidance assumes a normalized effective tax rate for 2024 of 24.5%. While we believe we're at the bottom of the cycle, both the timing and pace of recovery during 2024 remain uncertain. The continuing effects of lower contract pricing in our network businesses of truckload and intermodal and net revenue compression in logistics are expected to impact our results as we enter 2024, and we expect sequential recovery in the freight market as the year progresses with a heavier weighting toward the second half of 2024.
Finally, I'll provide some guidance on our net CapEx plan for full year 2024. During 2023, we made notable progress towards our tractor and trailer Asia fleet targets as OEMs have recovered from their production constraints. We also remain confident in our ability to grow intermodal volume without the need to add any containers or chassis in 2024. We, therefore, do not expect the same level of CapEx investments in 2024. In addition to continued technology investments, we'll invest in growth capital in dedicated and intermodal tractors. We also anticipate moderating proceeds from equipment sales as compared to 2023. As a result of these considerations, we have net CapEx to be in the range of $400 million to $450 million for the full year 2024.
With that, we'll open up the call for your questions.
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