Schneider National, Inc. (NYSE:SNDR) Q3 2023 Earnings Call Transcript
Schneider National, Inc. (NYSE:SNDR) Q3 2023 Earnings Call Transcript November 4, 2023
Operator: Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Schneider 3Q 2023 Earnings Call. [Operator Instructions] I would now like to turn the call over to Steve Bindas, Director of Investor Relations.
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; Jim Filter, Executive Vice President and Group President of Transportation and Logistics; and Steve Bruffett, Executive Vice President. Earlier today, the company issued an earnings press release. This release and 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 good morning, everyone, and thank you for joining the Schneider call today. I'm going to start with some broader context on the market before getting to our third quarter results. We are operating in an elongated trough of the current freight cycle. As we've seen for the better part of the year, freight volumes remain muted and while inventories have normalized, shippers are facing an uncertain macro outlook. Despite pricing that in some cases, are below operating costs, carrier capacity has been slow to rationalize. Last quarter, we shared that we were strongly positioned to capitalize on opportunities as they begin to materialize. While we did not see those opportunities in the third quarter, recent shutdowns of a few competing brokerage operations reflect the unsustainable nature of current pricing and the expectation of targeted near-term pricing improvements.
We believe rates have fully reset during the third quarter and expect pricing to improve in the new year as the market begins to return to equilibrium. With that backdrop, let me provide context for Schneider's third quarter performance. We expected the quarter to be challenging, and it certainly was as the forceful impacts of pricing resets were realized, especially in our network offerings of truck and Intermodal. The earnings impact of this recent pricing activity was compounded by a handful of cost items and the combined result was a sharp decline in our sequential earnings. At the same time, there is encouraging progress in elements of our portfolio and promising signals emerging in the broader market. So it's helpful to provide additional context to both sides of the equation.
Regarding the cost items I just mentioned, rather than a typical quarter, which has a mix of favorable and unfavorable items, there were several areas that all fell in the unfavorable category during the third quarter. Their cumulative impact contributed to the sequential decline in quarterly earnings. First, we had unfavorable fuel dynamics during the quarter. We typically do not talk about fuel as over the course of time, fuel has a relatively neutral effect on our earnings. However, it was a notable negative factor in the third quarter of '23 compared to the prior quarter due to the rapid run-up in fuel costs. Next, we had expenses for bad debt that were much higher than normal as we typically have insignificant amounts of expense in this area.
This quarter, a combination of customer bankruptcies and uncollectible receivables resulted in meaningful expenses. In fact, more expense in the quarter than we typically experience in a full year. Also equipment gains were lower on a sequential basis due to the softening of the used equipment market. In aggregate, these costs represented a headwind of $18 million compared to the second quarter. These items are all in part of the sauce, yet they are outside of the core elements of our business results such as price, volume and productivity. So let's transition to those topics. Volumes in our truck network business have been steady, but unseasonably tepid. We improved asset utilization, but that benefit was far outpaced by the reset contractual pricing which was most acute in this part of the business.
That impact was compounded by low double-digit percentage of loads coming from the depressed spot market. In addition, the majority of cost items we called out in the third quarter resided within the truck network. The combination of these factors resulted in a pronounced sequential decline in margins and generated a margin profile in this portion of our business that is not sustainable. We have been proactively addressing our operating costs since the fourth quarter of 2022 and have implemented significant cost reduction initiatives that have enabled the maintenance of our variable contribution margins on a year-over-year basis. Yet a growing portion of the network book is not at compensable rates and therefore, unsustainable due to the remaining inflationary cost impacts of wages and equipment replenishment.
We are diligently pursuing targeted price recovery and are prepared to pivot to more compensable freight when the market supply and demand condition rationalizes further. On a brighter note, our dedicated business continues to grow and deliver expected results. We absorbed meaningful new business start-up activity in the quarter and excluding a customer bankruptcy impact, we're still able to deliver stable sequential margins. The combination of organic growth and the addition of Midwest Logistics Systems and now M&M Transport as of exiting the third quarter was 6,680 tractors operating in a dedicated contract configuration. We have a line of sight to a series of new business start-ups in the fourth quarter of 2023 and the first quarter of 2024, giving us confidence that our momentum in Dedicated will continue.
We are growing our Dedicated service offering as we enjoy deeper, more enduring relationships with customers, and we leverage our ability to deliver unique solutions that address how our customers deploy their supply strain strategy deliver differentiation in serving their end markets. Also, our professional drivers feel, participate and enjoy the experience those deeper relationships deliver at the local level. Turning to the Intermodal segment. We saw modest tender volume improvement throughout the quarter as we work to improve the balance into critical import markets such as Southern California and Mexico to lessen the financial impact of empty container repositioning. The work of improving network balance is ongoing even as we see a more pronounced lift in tender volumes in the month of October.
Revenue per order was down 4% sequentially and 16% year-over-year through a combination of price contraction and a mix change with a higher percentage of shorter haul regional volumes in both the eastern and western portions of the network. Despite not having the benefit of a meaningful customer allocation season, we have already grown our order count by 20% on the CPKC service into and out of Mexico since its implementation. Overall, we continue to believe there is a large opportunity to convert over-the-road freight to intermodal across the entire North American network. Encouragingly, discussions with several of our largest customer relationships in the consumer products, retail and automotive verticals indicate that over-the-road conversion is aligned with their 2024 transportation allocation objectives.
We have at least 30% of pent-up growth opportunity in intermodal container and chassis asset productivity. Finally, in our Logistics segment, brokerage volumes and contribution margins are under pressure from intense competition. While challenged, our contract logistics and brokerage business remain soundly profitable as we nimbly adapt to the current market realities while continuing to invest in our freight power for shipper and carrier platform as well as in growing our power-only capabilities. I will turn it over to Steve Bruffett for a quick wrap up before we get to your questions. But before I do that, I want to highlight that this will be Steve's final earnings season with Schneider. I want to thank and recognize his many contributions over the last 5.5 years in advancing the company's multimodal and capital allocation strategy as well as the modernization of the company's entire financial function.
I wish him and Susan all the best in retirement 2.0. I'm also pleased that Darrell Campbell has taken the Chief Financial Officer baton, and he is bringing a rich set of financial leadership experiences to our team and we feel very fortunate to have him. Welcome, Darrell.
Darrell Campbell : Thanks, Mark. I'm thrilled to be onboard and part of such a strong team. Over the past months, Steve and I have been diligently executing on a well-crafted transition plan which will continue through the end of the year. I've also been actively listening, engaging and learning while getting integrated into the business. I look forward to playing an active role in building on our organizational strengths and executing on our top priorities in 2024 and beyond. I would also like to take a moment to thank Steve for his significant contributions to Schneider during his tenure.
James Filter : Thank you, Darrell and good morning to everyone on the call. Mark provided some good color on our third quarter results, and I'll add a few comments from my perspective. Having been in the transportation space since 1992, this was a unique quarter, given the amount of sequential decline in pricing that we experienced from the second quarter to the third. We expected most but not all of this decline of all the freight cycles that have happened over the past 30 years, this one is in the midst of what I would characterize as an overcorrection to the freight environment of the prior couple of years. As such, the difficult pricing environment, especially in the network businesses is temporarily masking otherwise solid execution across our company.
While we still have work to do, the portfolio construction and diversification that we've strategically pursued over the past several years is proving to be beneficial. The growth in our dedicated business, both organically and through acquisitions, is supporting earnings in our Truckload segment. and over 60% of our total trucks are in dedicated configurations. Also, our intermodal business is well positioned for strong growth and an even more prominent role in our portfolio mix. Our logistics businesses, while not immune from the difficult market dynamics are performing well on a relative basis and are a growth engine with compelling return on capital. We've also been quite effective at managing variable costs in proportion to our volumes and have improved productivity on a year-over-year basis.
These efforts are being overshadowed by the sheer force of double-digit price declines, but they are real, and I think our team has done an effective job in these areas. Switching gears to the fourth quarter. We expect the continuation of current market conditions, and therefore, are assuming little to no seasonal lift from volumes or project activity. I would also note that we are now through the repricing activities across our book of business and therefore, expect no further deterioration in pricing across our operations. Also, we do anticipate that some of the cost items that Mark mentioned will abate in the fourth quarter. For example, we expect fuel to be neutral to slightly positive rather than negatively impacting earnings as it did in the third quarter.
And we expect that there will be some bad debt expense in the fourth quarter, but not at the elevated level of the third quarter. On the other hand, we expect fourth quarter equipment gains to continue to be a sequential headwind and be lower than third quarter levels. Considering these and other factors, our updated full year guidance for adjusted EPS is $1.40 to $1.45. Given our year-to-date adjusted EPS of $1.20, our fourth quarter is inherently guided to a range of $0.20 to $0.25. So we expect fourth quarter earnings to be even with or modestly above third quarter levels. We also believe that this period of time from the third quarter of 2023 through the first part of 2024, will define the trough of this freight cycle. We'll provide more information on our next earnings call, but we're currently viewing 2024 as a transition year with freight market fundamentals slowly but steadily improving, and that's barring a catalyst that could accelerate the pace of improvement, which could very much happen.
Turning now to a quick update on our usage of cash. Our guidance for full year 2023 net CapEx has remained stable throughout the year as OEM production has been more stable and predictable this year. We updated and narrowed our CapEx guidance to a range from $550 million to $575 million. And also, we've made $51 million in share repurchases since the May inception of activity under our current $150 million authorization. In closing, I would like to thank Mark and the Schneider organization for the privilege to serve as CFO since 2018, and I'm proud of our accomplishments over that time frame. It's a great team and a strong organization backed by a rock solid balance sheet. Schneider's complementary services are operating at scale and set up for continued growth and success which will benefit our associates and shareholders.
I'm also pleased to have Darrell onboard. He's already adding value, and I know that, that will only increase as he gets further acclimated. So it's great to have him on the team. And with that, we'll open up the call for your questions.
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