Schneider National Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 1, 2024

There are 15 speakers on the call.

Operator

Good morning. My name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Schneider 4th Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.

Operator

I will now turn the conference over to Steve Vindas, Director of Investor Relations. You may begin your conference.

Speaker 1

Thank you, operator, and good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer Daryl 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.

Speaker 1

These constitute forward looking statements for 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 the risks and uncertainties discussed in our SEC filings, including, but not limited to, our most recent Annual Report on Form 10 ks 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.

Speaker 1

Now I'd like to turn the call over to our CEO, Mark O'Rourke.

Speaker 2

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 twenty twenty three. 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.

Speaker 2

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 six cycles, 3 up and 3 down, have lasted an average of 5 75 days. Therefore, historically, we are quite long into this cycle and variably macroeconomics And the demand and capacity balance environment adapts sometimes at a slow and steady pace and sometimes more abruptly due to a catalyst. Irrespective 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.

Speaker 2

1st, 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 3rd 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 Q4 versus a year ago. Encouragingly, this serves as a built in growth channel with even modest demand improvement. Revenue per truck per week in dedicated improved both year over year and sequentially, primarily due to asset productivity improvements as a result of those operations specific truck count adjustments. Our dedicated value proposition of strong operating performance combined with the robust new business pipeline gives us visibility into several 100 units of additional organic growth in 2024.

Speaker 2

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 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 weekend network improved sequentially driven by asset aided by volumes improving modestly compared to the Q3. 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.

Speaker 2

Our second strategic imperative is to grow Intermodal earnings primarily through accelerating over the road conversion opportunities. That objective was the 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 of the 1st 4 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.

Speaker 2

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're also committed to leveraging Schneider's considerable strength in Mexico the leading intermodal service capability of the CPKC. The CPKC's best in class solution is one that proved its value in the quarter by eliminating handoffs and keeping freight in motion, which is the best way to avoid thefts and other disruptions.

Speaker 2

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 FreightPower 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.

Speaker 2

This creates significant leverage for Schneider when the market begins to improve. Before I hand it over to Daryl for his commentary, let me offer some additional insight into Q4 results, including context to our guidance coming out of the Q3 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 2 accident claims from earlier in the year.

Speaker 2

Those two incidents snapped a 16 quarter consecutive period without a significant claim adjustment. On the positive side of the ledger, we posted a lower tax rate for The net of the adverse safety developments and lower tax represented a 0.4% 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, around the holiday weeks in November December. Let me now turn it over to Daryl for his insights on the most recent quarter and update on our capital allocation expectations and our 2024 guidance.

Speaker 3

Thank you, Mark, and thanks to each of you for joining us this morning. I'll provide a financial recap of our Q4 and full year results and some perspective on our 2024 guidance. You can find summaries on Pages to 25 of our investor presentation. Our adjusted earnings for the 4th quarter were down $116,000,000 or 78% from prior year. Adjusted earnings per share for the Q4 was $0.16 compared to $0.64 in the prior year.

Speaker 3

The Q4 of 2023 included a loss on the sale of revenue equipment versus a $10,000,000 gain in 2022. As Mark indicated, compared to our most recent guidance, 4th quarter earnings per share was negatively impacted by $0.04 related to 2 unexpected items. Firstly, adverse development primarily related to 2 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.

Speaker 3

Truckload revenues excluding fuel surcharge for the Q4 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 and M Transport. Truckload margins and earnings for the Q4 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, As we communicated last quarter, our spot exposure was uncharacteristically high as we have sought to avoid entering to contracts at rates that are non compensable. During the Q4, 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 4th quarter are an indication of the bottoming of the current freight cycle.

Speaker 3

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 Q4 and new business already awarded in the Q1 of 2024. We're seeing strong organic growth and stellar performance from our recently acquired businesses. Dedicated revenue per truck per week for the 4th quarter increased 3% for the prior year and 4% sequentially. We remain disciplined on customer acquisitions, which should continue to support our growth and earnings expectations.

Speaker 3

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 drilling capital. For the Q4, intermodal revenues excluding fuel surcharge declined by 17% compared to 2022.

Speaker 3

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 1st 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 Q4 of 2023 declined by 20% versus 2022, primarily due to decreased revenue per order as well as lower brokerage volumes.

Speaker 3

In addition to pricing and volume declines, logistics margins and earnings for the Q4 were also impacted by the adverse claims mentioned earlier. Our logistics businesses continue to operate profitably through a challenging freight cycle. We saw sequential improvements during 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.

Speaker 3

We ended 2023 with net CapEx of $574,000,000 just below the top end of our most recent guidance of $575,000,000 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 CAD 680,000,000 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 CAD64 1,000,000 in dividends during 2023, which was 14% above 2022, and we continue to strategically repurchase shares with total activity of $66,000,000 for the year. In addition, we recently announced an increase in our quarterly dividend to $0.095 per quarter, a 6% increase from 2023.

Speaker 3

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 in 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.

Speaker 3

We expect safety costs to be higher than 2023, primarily because of increases in premiums and the full year impact of M and 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 $30,000,000 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.

Speaker 3

Taking all these considerations into account, our guided adjusted earnings per share for 2024 is $1.15 to 1 $0.30 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 20 24 and we sequential recovery in the freight market as the year progresses with a heavier weighting towards the second half of twenty twenty four. Finally, I'll provide some guidance on our net CapEx plan for full year 2024. During 2023, we made notable progress as OEMs have recovered from their production constraints.

Speaker 3

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, spent net CapEx to be in the range of $400,000,000 to $450,000,000 for the full year 2024.

Speaker 3

With that, we'll open up the call for your questions.

Operator

Your first question comes from the line of Bruce Chen from Stifel, please go ahead.

Speaker 4

Hey, good morning, everyone, and thanks for the time here. Daryl, welcome to the call, and always great to have another flurry in the mix. But to me just a question here on the competitive environment in Intermodal. What are you seeing as far as price discipline or maybe lack thereof from your peers right now? And given that you and others have quite a bit of capacity that's kind of waiting to be unleashed how do you expect that competitive environment to trend if and as we see a recovery?

Speaker 5

Yes. So the first place when we think about competitive landscape for Intermodal, the largest competitor is over the road. And so that is the number one place that we're looking where the largest opportunity is. Across the competitive landscape, there's a lot of containers that are up on stacks. And so there isn't necessarily Strong need to put all of those back into service to be able to continue to operate.

Speaker 5

So I think there's discipline In terms of what's needed to take containers off the stack, we're not going to take containers off the stack for pricing that's not compensable.

Speaker 4

Okay. That's really helpful. And maybe just a quick follow-up to that. When I think about the discussions customers in Intermodal and maybe in your network business as well, how have those discussions been going? Contract Renewals, are they trending positive so far this year?

Speaker 4

Any signs of a turning point?

Speaker 5

Yes. Well, It's very early in the season. There's a really wide spectrum out there. So, there's not very many that have closed out at this point. I'd say there's A couple of themes here right now.

Speaker 5

Number 1, that as Daryl mentioned that we're staying disciplined. There's just There's no room to take a step back further, but also our customers approach that there's customers that are putting a lot of work and effort into these bids And at the same time, don't expect their bids to hold together through the entire bid cycle.

Speaker 4

That's really helpful. Thank you.

Operator

Your next question comes from the line of Ravi Shanker from Morgan Stanley. Please go ahead.

Speaker 6

Thank you. Good morning, everyone. So EPS guidance down year over year seems very conservative even with some of those cost Headwinds that you mentioned, kind of the equity gains and the loss on sale, etcetera. Are you guys assuming that current conditions stay stable through the rest of the year? Or I know there's obviously tremendous uncertainty on the timing of inflection, but what exactly is underpinned in this guidance?

Speaker 2

Yes, Ravi, it's Mark. I'm hesitant to put a label on the guidance beyond what we've kind of communicated there. As we look at our company specific initiatives, As we look at where the market is from and our expectations on price and productivity, we think we've given A fairly balanced view towards the range as we currently understand it and can anticipate. We do believe we are supremely positioned to pivot Quickly, depending upon where the conditions go, particularly on the upside and our model And our assets will be deployed as well as what we can do with our brokerage business and pivot quickly. So but in balance, I think we've Taking into account, clearly what we can anticipate at this point.

Speaker 2

And again, I would at this juncture probably avoid putting a label of whether that's conservative or aggressive or anything like that.

Speaker 7

Okay, got it. And maybe

Speaker 6

a quick follow-up. Can you elaborate a little bit more on the intermodal issue and the allocation with UNP, what exactly happened there? Why is it going to take 12 months

Speaker 1

to resolve? What is it right, etcetera?

Speaker 5

Yes. So first of all, we're seeing out there in the broader market, there's opportunity as I mentioned the truckload market, that's the largest opportunity. I think the second opportunity is imports. But as it relates to Our rail provider out there in the West that this is our 1st year with the UP and I really commend the UP for taking This additional on volume improving service, but it was a year for learning for both sides. And I think we have an opportunity that we have Our deals are long term, they're market based and competitive, but they're based on normal cycles.

Speaker 5

There's times when we go through a little bit of abnormal cycles and we seek to work a little bit differently with our rails during those, seek out a little bit of flexibility. And with this year of learning, we're looking forward to leveraging that for both sides and use some alignment to move forward.

Speaker 6

Great. Thanks, both.

Speaker 8

Thanks, Ravi.

Operator

Your next question comes from the line of Jordan Alliger from Goldman Sachs. Please go ahead.

Speaker 1

Yes. Hi. Just Once again thinking about the guidance for the year, you talked a little bit about second half Being better than the first half, but is there a way to think about the shape or the skew? I mean, as you're seeing it now, is it going to be pretty sharply second half versus first half? And is there a difference between your three business segments in terms of how you think about the year progressing in terms of profitability?

Speaker 1

Thanks.

Speaker 2

Hey, Jordan, thanks for the question. I wouldn't give you any Specific shaping comments beyond what we do believe that it will be continue to improve as we go through the year. Certainly, as you look at our various segments, we think that applies to all 3. Dedicated is a bit more, I guess considerably more consistent quarter to quarter. And so our network businesses, I believe, have the biggest opportunity as We come out of 2023 and come into the 2024 allocation season both in truck and intermodal.

Speaker 2

So I would characterize the opportunity to be in all three segments fairly consistent with increasing upside to both volume and pricing as the year progresses. Thank you.

Operator

Your next question comes from the line of Brian Ossenbeck from JPMorgan. Please go ahead.

Speaker 9

Hey, thanks. Good morning. Just want to go back first, Jim, to your question about some of the customers expecting their bids Maybe not to hold through the cycle. I don't know how to read into that. Does that mean they're expecting an inflection?

Speaker 9

Does that mean they're trying to Take one more bite of the apple and see what happens in the back half of the year. Maybe you can give us some context around that.

Speaker 5

Yes, thanks for the question. So it was the former that customers expect

Speaker 2

that there's going to be an inflection at some point and that They may have overreached and trying to dig as far as they did. And at some point during the year that these aren't going to hold. Yes, I would say broader conversations across the broader spectrum as folks are being, in our view, much more balanced towards The fact that we are long into this cycle, I think what Jim is referencing, there are customers that look Based upon their approach to be more aggressive and we think those folks and as we communicate with them, we'll take all of that into account and what type of commitments we will or will not make on behalf of that approach. But I think increasingly, those conversations, as I In my opening comments, no one believes we're in this condition for the long term. It's just a matter of when.

Speaker 2

And I think you're seeing more balanced thinking going forward than we would have described as we were coming into this juncture in 2023.

Speaker 9

All right. Thanks for clarifying that. And then Mark for Can you just talk about how you're positioning the network truck business into this bid cycle? You mentioned hanging on to more spot, keeping some of the capacity as a market, but it seems like that obviously came with the cost given the performance with loss making in the Q4. So do you feel like that's still in a first quarter drag, is there some permanent capacity that needs to come out or you're still just waiting kind of biding your time until you get the right rate to move these move this equipment back into the market?

Speaker 2

Yes, Brian. I think what we try to communicate there is that this is a place presently we're not looking to add capital to. We also know from Our historical practice that the truck network business both up and down cycle reacts the quickest to change. And so that's really our focus is to focus on improving the revenue quality well in advance before we think about adding Capital to the network, it does play an important role in support of our customers and dedicated startups. There's a lot of other things that They bring to the party, but we don't need to add additional capital there.

Speaker 2

Focuses on margin restoration and augmenting that network capital that we put into it with our own trucks with increasingly leveraging power only capability and third party equipment into that equation. Okay. Thanks, Mark. Appreciate it. Thank you.

Operator

Your next question comes from the line of Ken Hoexter from Bank of America. Please go ahead.

Speaker 10

Hey, great. Good morning. Mark or I guess if we could just kind of revisit the outlook you and Daryl, we're talking about with Ravi. The $1.15 $1.30 if you eliminate the $0.10 of gains this year, I guess that gets you that's why it's kind of flattish on the outlook. But maybe can you talk about puts and takes within that, your mix on volumes and pricing?

Speaker 10

It sounds like you've got fleet growth based on the CapEx. So now is it more that inflation is going to offset The fleet growth and yield growth, just trying to get the puts and takes that are within your flattish outlook.

Speaker 2

Yes, I'll start. I'll turn the mic over to Daryl here momentarily. But what we're looking at on growth, first of all, our CapEx Guidance range of $400,000,000 to $450,000,000 is down fairly considerably from a year ago because of the catch up with the OEMs and the age of fleets. So we feel really well positioned there, but depreciation is up just because of the inflationary cost associated the last couple of years with that new equipment. From a growth standpoint, Ken, we're really focused on really 2 areas And that would be dedicated where we've had sustained success organically and we have good visibility into both the first and second quarter of A number of startups that give us confidence that we will continue to have momentum through 2024.

Speaker 2

And then on success of growing our intermodal business, while we won't look to put additional container in chassis because we have Our ratio is where we need them to be. We have terrific self help leverage there with growth without adding trailing capacity, but we would look to add and grow the fleet, company Dre fleet. So we have some tractor growth in there. We don't really see the need On the trailing equipment, either in intermodal or truck outside of dedicated, and so that's all reflected in our forward guidance as it relates to CapEx.

Speaker 3

Yes. The only other thing I would add is, in addition to the equity gains that you mentioned that we're not assuming in the model, There's lower gain on equipment sale of $30,000,000 which I've mentioned in my comments. And I also talked about safety costs, which we're expecting to increase primarily due to premium increases in the market, insurance premiums. And then obviously our tax rate, which was at 22% in 2023 is expected to normalize. So all those things are headwinds that slightly impact some of what Mark talked about in terms of growth.

Speaker 10

Thanks for that. Daryl, maybe just a couple of numbers follow ups. You mentioned asset loss in the quarter. I don't think you gave a number. Was there a number with that?

Speaker 10

And then intermodal, did you say what percent of boxes are still stacked? And then if you let me get one more, I'll ask about contract rates, but that's it.

Speaker 2

We're going to probably move on after the 2. So thanks, Ken. Yes, yes, sorry.

Speaker 8

Yes, so we'll

Speaker 2

get a chance to catch up.

Speaker 3

Yes, no number on the loss. But Jim, if you want to jump in on that.

Speaker 5

Yes, so there's about 15% of the containers there on Stack.

Speaker 2

All right. Thanks guys.

Operator

Your next question comes from the line of Jon Chappell from Evercore ISI. Please go ahead.

Speaker 8

Yes. Thank you. Hate to be so short term focused, but it seems like this is going to be one of those years where It's tougher to make a call with good visibility until you get closer to see the whites of the eye. So as it relates to 1Q, typically seasonally weaker, but coming off a kind of a muted Peak season, does 1Q in basically all of the different segments look similar to 4Q or there's some maybe reasons why 1Q should be better seasonally as we look at it sequentially?

Speaker 2

Well, thank you. It's a little early in the quarter, obviously, and we've been dealing at least initially through the 1st couple of weeks, we had some adverse weather impacts, in comparison to the last couple of years. So I want to keep our really thoughts as it relates to the shaping of the year is what we said this point. We do think it will continue to improve throughout the year and be a bit more robust in the second half, but not offer any more specific guidance yet here in the Q1.

Speaker 8

Okay. Understood. Jim, as it relates to intermodal margin, obviously, there a lot of optimism about getting volume back on the different networks. But the margin has obviously taken a pretty significant step back Over the last 12 months, is this strictly a function of the volume will drive the turns, will drive productivity, will drive margin improvement Are there other things that you can actually do internally to better the cost structure, provide more operating leverage, So you can even have some volume improvement I'm sorry, some margin improvement before you really get a true volume inflection?

Speaker 5

Yes, thanks for the question. So Obviously, during the quarter, there were some additional containers that were put on stacks. So there was some additional cost that was absorbed. There's also opportunity just running a more efficient network. So it's not just getting volume, but getting the right volume that reduces our empty repositioning costs as well as our driver productivity.

Speaker 5

So Those are all the focus areas to be able to improve margin.

Speaker 8

Okay. Thanks, Jim. Thanks, Mark.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Jack Atkins from Stephens. Please go ahead.

Speaker 11

Okay, great. Thanks for taking my question. So I guess I'm going to go back to the guidance for a second because I think what folks are confused about is When you kind of adjust for the taxes and the insurance headwind in the Q4, I mean, your kind of exit rate is about $0.60 $0.65 something like that for kind of a full year exit annualized in the Q4. And you're guiding to $1.15 to $1.30 So I guess we're just what I'm trying to really kind of get my arms around is what specifically are you assuming for a cycle turn in the second half of the year to kind of get to the bottom end of this guidance range because it would seem like there's a pretty substantial improvement in underlying business trends there. So kind of help us think through that because we all hope something's going to happen, but it seems like you're expecting it to happen.

Speaker 2

Well, thanks for the question, Jack, and I'd like to address that in a couple of fronts. First, we focused in our company specific objectives The annualization of all the good work we've been doing in dedicated both acquisitively and organically and the prospects that we anticipate, many of which we have visibility to from contract closures and startups. So we are leaning into key strategic initiatives that allow us continue to improve our overall business results and that in our truck business, dramatically focuses on dedicated and feel really good about where we're positioned there. Secondly, we do believe that based upon our alignment with our customers, what they look to accomplish relative to intermodal growth and how that fits into what their strategies are that we are well positioned and we're leaning in hard to change some of the trajectory we've experienced in that business in 2023 to include the really unique opportunities that are emerging in Mexico. So that's 2.

Speaker 2

3rd, as you would expect, we've been leaning really since the middle of 2022 into a cost structure and how we can become more efficient. You saw in our results sequentially, the 3rd of the 4th quarter that asset productivity improved without demand approving in a very material way. So again, those initiatives that we are leaning into to improve asset turns across everything that we do across our portfolio is things that we think and expect to improve results. But clearly, we believe we're also very long into this cycle. Our internal metrics that we look at, which is a combination of company specific correlation factors and certain outside elements of data that also over time have correlated to cycles, We're at the end of this month will surpass 600 days, as I mentioned in my opening comments, which is historically very long in the cycle.

Speaker 2

There's some macroeconomic, whether it's rate condition, inflation, consumer confidence, we do believe things We'll turn to an extent and we'll get back into some level of restocking that's been stubbornly slow and capacity continues in a slow and steady pace to exit the marketplace. And that doesn't include a catalyst that over time has occurred that can accelerate that. So, We're taking those company specific things. We're taking a slow and steady capacity exit, a restocking, Again, a slow and steady restocking that will continue that we believe has a highest probability to improve throughout the year And that's what we put into that context, that's what we put into that guidance range.

Speaker 11

Okay, Mark. Thank you for that color. And then I guess Maybe for my follow-up, it's really on insurance. I mean, I think almost everyone that's reported so far during this earning season has had some sort of insurance, Either accrual, true up, it's been a kind of key topic on all these calls. As you sort of are thinking about this moving forward.

Speaker 11

Could you talk about any sort of inflation that you're expecting in your premium costs in 2024? But would you just expect insurance as a percentage of revenue moving forward to just be a higher number? It just feels like structurally the markets just hardened some.

Speaker 2

Yes, I think the insurance markets, whether you're talking trucking or really any other A portion of the economy is under pressure from a premium standpoint and certainly we expect and we feel that. I think what's really important when we look at Schneider specifically, we had a 16 consecutive quarter streak where we did not have these type of adjustments. So, we take, 1st of all, safety from a training, a technology, What we do every day from the core value of the company very seriously and it's reflected in our results and you see it in the incident exposure reduction that I shared with you, 19% over the last couple of years. So all of that is incredibly important and it's also incredibly Important to be realistic about when you have a risk exposure that you have evaluated it correctly and you deal with it in a way that it doesn't escalate. Unfortunately, that 16 consecutive quarter streak snapped on us this year with 2 primarily around 2 incidents.

Speaker 2

And so Again, I don't accept the fact that it's a continuous issue, but they do happen and this was our time for them to happen. So Jack, so yes, I think the insurance premium side of that is an external factor that we're going to have to deal with as everybody will. But we are leaning in really hard because nothing we do is worth hurting ourselves or others and it permeates every part of our organization. Thank you, Mark.

Operator

Your next question comes from the line of Tom Wadewitz from UBS. Please go ahead.

Speaker 7

Yes, good morning. So I wanted to ask a little bit about the Intermodal margin. I think there's been this kind of anticipated help on purchase transportation that seems like it just hasn't been visible yet In terms of helping you on the margin side, is that something that you think will continue to be elusive? Or Is it reasonable to think that if you look at whether it's 1Q or 2Q that you would see sequential improvement in that intermodal margin supported by that kind of lagged reduction in purchase transportation?

Speaker 5

Thanks, Tom. So, yes, we still have our long term margin out there and we still believe that those are the right target margins for all three of

Speaker 2

our segments. And believe there will be a point that We get to that spot, I couldn't give you timing of is which quarter do we get back to that, but we do anticipate that we'll get back to those long term margin targets. Tom, I think our approach, particularly on intermodal is well positioned to be highly competitive and effective Through normal freight and business cycles, I think obviously we've been through a significant upside. Now we've seen the backside of that. And we're working to become more nimble commercially with our customers, how we partner with our rail providers, particularly our newest ones, to deal with those market abnormality easy for me to say period.

Speaker 2

But I think overall, We're positioned well. We would continue to expect improvement there operationally as service improves and really pleased with how The real partners have leaned into that to give confidence to our customer base. And then I think we have some unique capabilities that we'll continue to pursue. And I think do have the absolute best solution in and out of Mexico. And we've got a great provider there and really looking forward to exercising that the degree we can hear through this next allocation season.

Speaker 2

So I guess I would read that as optimistic and feeling that we're in a good position and it should continue to improve.

Speaker 7

Right. Okay. Mark, I wanted to ask you a cycle question too. As I look at these results And you alluded to network losing some money, Heartland's losing money, other is pressure on the market, right? And I think it's just like I don't recall a cycle downturn where there's been such pronounced pressure on big truckload carriers, big well run truckload carriers.

Speaker 7

Do you think that results in at some point maybe a bigger capacity adjustment? I'm just trying to figure out how do you what's the result of Because it does seem like kind of a tougher downturn than we've seen in prior cycles.

Speaker 2

I think we've all been talking about the stubborn exit of capacity. I think certainly It's occurring. Would we have expected maybe a bigger exit at a faster rate? I think all many of us in the industry would have Based upon history, got there, but there's different dynamic market forces at play. I think the Compression, perhaps what you're pushing at, Tom, is as we went through the pandemic driven upside, we also had some inflationary Factors play there, particularly in the equipment space, the driver wages space.

Speaker 2

And those are a bit more difficult, at least in the short term, to get through your results, particularly on the backside of a correction. And so perhaps that is a factor that's a bit more pronounced that may have happened in some prior periods like 2,009 and some of the other more pronounced downturns. So, I think we got a handle on those costs. I think we got an approach to that, but certainly we don't think the rates are compensable for the service provided, the cost to serve. Now you throw the insurance question we had here just prior that there needs to be and we're confident that there will be a market correction on the pricing side to reflect that.

Speaker 7

I mean, I guess we'll see what the result is, but you agree with the premise that this is maybe a tougher downturn than we've seen?

Speaker 2

Memory gets harder as a bit of my number 36th year in the industry. I would say this has been at least from my experience the most challenging on both sides, when it was Extremely robust and what those implications were. And now as we're sitting here on the backside of that correction, I would put this as If not D, it's got to be in the top 2.

Speaker 7

Yes. Okay, great. Thank you for the time.

Operator

Your next question comes from the line of Bascome Majors from Susquehanna International Group. Please go ahead.

Speaker 12

Thanks for taking my questions. Following up on Tom good morning. Following up on Tom's question about the network margin, would network have operated at a loss without the claims charges that you dealt with in the quarter? And Can you give us any historical context on where you are in the gap between what Dedicated is earning now versus what Network is how that's looked at other cycle troughs just to understand how different this environment is today. And just to extend that, How necessary is pricing above inflation in intermodal and one way to get to your second half objectives?

Speaker 12

Thank you.

Speaker 2

Thanks, Vasco. Let me try to unpack that. Yes, the safety implication was pronounced Much more pronounced in truck in the quarter and certainly reflective in our network results and would have been certainly in the black without that, so a clear indicator. This is from a pricing standpoint. First of all, Dedicated, we feel is positioned very, very well.

Speaker 2

Obviously, when you're in a growth spurt, you have some additional friction costs around startups and and all the things that naturally come with leaning into that portion of the business. But even with that, in addition to our acquisitions, the gap is material and because of the volatility associated with the pricing mechanism that plays out in our network business. So we do need to lean into price. We do need to improve our book of business. And that's why we're not going to be adding capital.

Speaker 2

That's priority 1 is Simply to get after margin restoration and that's a combination of productivity, cost and rate recovery.

Speaker 3

Thank you.

Operator

Your next question comes from the line of Uday Khanapurkar From T. D. Cowen, please go ahead.

Speaker 13

Hi, thanks. This is Ode on for Jason Seidl.

Speaker 14

Maybe just

Speaker 13

a longer one, longer term one on intermodal. I appreciate that this is a fairly distinct possibility at this stage, but With China tariffs sort of creeping back into the conversation, how do you evaluate the volume and pricing dynamics Intermodal, if those play out, maybe it would be helpful if you could remind us how the Intermodal business adapted to the imposition of tariffs in 2019. Did it have any predictable Mixed implications, anything on the cross border? Any color there would be appreciated. Thanks.

Speaker 2

Yes. Thank you for the question. Certainly of all of our service offerings, the one that leans in most heavily towards imports and the effect of imports is our intermodal business. And the West Coast is a place that we have not maintained the share that we would have typically expected. And so Import recovery is an important component, particularly in the western side of our network.

Speaker 2

We also have some real positives on some of the Response to those geopolitical, which is the near shoring activity that's going on, the investment taking place in Mexico that I think is the biggest winner here. Some of those investments take time to mature and to take hold, but clearly the biggest opportunity is how much freight moves over the road on the long length of hauls that make most sense economically, emission wise in and out of Mexico. So while there might be some over time geopolitical pressures in other part of the network, there's also some winners and other parts that we want to make sure we're well positioned to take advantage of. And we have seen some shifting obviously from port activity to eastern ports and Southern ports in addition to Mexico, so which are more generally attractive to truck as opposed to intermodal over time. But Jim, maybe just other comments is 2019.

Speaker 5

If I go back to 2019, it did cause a little bit of a short term blip, really as some of our customers were finding other sources of get their products, but when they came back, it created a surge in demand. So we saw both sides of those. And so You had that type of impact right away. Most of our customers have been they took the lessons learned. They've been de risking their supply chain Using other Asian countries, other low cost countries, that's why Mexico is so strategic for us because more and more of our customers are looking at Mexico as their is their other low cost option and we have a really great service to help them.

Speaker 13

All right. Thanks. That's really helpful on the historical trends. That was my one. Thanks.

Speaker 9

Appreciate it. Your

Operator

next question comes from the line of Chris Wetherbee from Citigroup. Please go ahead.

Speaker 14

Hey, thanks. Good afternoon. Good morning, guys. I wanted to ask on the dedicated side. So we've heard a little bit of, I think competitive dynamics on the dedicated side picking up.

Speaker 14

I guess, as you'd where we kind of are in the overall cycle here. So just wanted to kind of touch base and get a sense of what the health that you think of that market. Obviously, The metrics you guys posted, whether it be revenue per truck per week or the addition of trucks, looks reasonably good in that context. But I wanted to get a sense as you think about The guidance and how the outlook for 2024 looks, where that fits in? Is that market stabilized?

Speaker 14

Is it sort of doing what you'd expect it to do at this point in the cycle?

Speaker 2

Yes, Chris, thank you for the question. As it relates to dedicated, generally has a little longer sales cycle. And so The work that you do in the year prior, you've got a lot of work under your belt. And so you generally have a little better visibility to at least 6 months out where you expect both your retention levels of your current business, but Also, as we have been leaning into the extension of our reach here, and so that's part and parcel of what you see into our guidance. We would say the market and our pipeline is still very, very robust.

Speaker 2

We've successfully are in the process It's not only new business in the Q4, but we have scheduled starts that we have visibility to both in the first and second quarter. Not as visible yet for decision making out into the 3rd Q4. But based upon that pipeline and our recent experience And success gives us confidence that that's going to be another really good story for us through calendar year 2024.

Speaker 14

Okay. Okay. That's helpful. And then just maybe one quick one on Intermodal, just thinking a little bit more big picture. I know you have the 2,030 goals of doubling the business there.

Speaker 14

I guess, what are the sort of break points we should be thinking about in terms of profitability or maybe data utilization where you start to sort of turn on the growth again, just kind of curious how you think about what you need to see from a hurdle perspective to get more constructive on investment in that business?

Speaker 5

Yes, we need to be able to see that we're getting back to the long term margin targets. And as we get back to those levels and we see the level of quality demand, that's when we'll be turning that back on and increasing capital.

Speaker 2

Yes, we have just such productivity opportunities in front of us, not even having to get back to pre highs as it relates to box turns. I think the good news is we're seeing our customer base for the most part be very efficient with the Container, we're getting back to a more normalized turn focus with our customers. And this past year, we Did some investments in the chassis front to make sure that we could take advantage of that. So our ratios are where they needed to be there, Chris. And so We like the incremental growth margins that come with not having to invest in additional capital and cost to bring things on to get after improved volumes.

Speaker 2

So it's not that we're don't want to invest, it's that we think we have invested, now it's time to yield the benefit of those investments.

Speaker 14

Okay. That's helpful. Thank you.

Operator

We have no further questions in our At this time, I will turn the conference over to Mark Rourke for closing remarks.

Speaker 2

Thank you, operator, and I really appreciate everybody's attention this morning. We had opportunity to talk about our commitment to advance our strategic growth drivers of dedicated truck, our confidence around intermodal conversion and the aggregation of our capacity and demand through our freight power platform and logistics. So we do see at least as we get in here to 2024 early that we're in a bit of a transition year With capacity and demand balancing improving as the year progresses and as we've talked about throughout this call, a bit more heavily weighted to the second half. So thank you for your attention and we look forward to engaging here as we get into conference season.

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Earnings Conference Call
Schneider National Q4 2023
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