Schneider National, Inc. Q1 FY2021 Earnings Call

Greetings, and welcome to Schneider's First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Bindas, Director of Investor Relations. Thank you. You may begin.

Thank you, operator. And good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer; and Steve Bruffett, Executive Vice President and Chief Financial Officer. Earlier today, the company issued an earnings press release, which is available on the Investor Relations section of our website at schneider.com. Our call will include remarks about future expectations, forecasts, plans, trends 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 Form 10-K and those identified in today's earnings press 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 press release, 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?

Thank you, Steve. Hello, everyone, and thank you for joining the Schneider call today. I will open with the company context for 2021 trends and expectations and with commentary on our segment results for the first quarter. Before we get to your questions, Steve Bruffett will provide some additional insight on our updated full year 2021 earnings per share guidance, affirm CapEx range expectations and close out on some brief overall enterprise result commentary. First of all, the freight market catalysts that were evident in the second half of 2020, in our view, have only intensified in early 2021 and, as a result, we expect the constrained capacity supply and excess freight demand condition to persist at least through the remainder of the year. The freight market catalyst of supply chain bottlenecks, particularly those involving internationally sourced freight flows, healthy consumer spending, fresh government stimulus, record low sales to inventory levels and especially a heavily constrained professional driver market provide optimism for the current up cycle continuing. We see this market condition further accelerating a full load industry consolidation toward companies that efficiently capture and aggregate freight and capacity across multiple modes of transportation. Our growth strategy of scaled offerings and mode mix across our Truckload, Intermodal and Logistics segments is anchored on that trend and by addressing the varying needs of a large medium and increasingly now, the micro shipper and carrier communities. Each of our segments offers varying degrees of asset and capital intensity, margin return profiles and professional driver requirements. Truckload being the most Schneider driver and asset-centric, with Logistics requiring minimal Schneider driver and capital assets and Intermodal falling in between the two ends of the asset intensity spectrum. We believe this aggregation execution capability will demonstrate increasing value for our shareholders. Let's start with how the strategy played out in the first quarter. The overall contract and spot pricing environment are running slightly ahead of our original expectations. On the contract front, we are solidly into the low to mid-double-digit percentage range territory, with renewals in our Truckload network business and high single-digit percentages in Intermodal. We would expect Intermodal to climb further by the end of the second quarter renewals. We finished the first quarter with slightly less than 40% of our book renewed in both the Truckload and Intermodal network segments. Also running ahead of our expectations are the cost impacts of the professional driver condition. We grew driver counts year-over-year and sequentially in the company driver positions that possess the most desirable driver configuration, specifically in dedicated and Intermodal dray. The irregular route network is the most challenging due to the combination of less predictable daily schedules and the opportunity to transfer it to, for many, the more desirable, dedicated and intermodal growth opportunities which we enthusiastically support as a driver satisfier and retention differentiator for Schneider. The net impact of the strong pricing environment, segment business mix implications in contrast to the heightened inflationary cost realities is reflected in our increased earnings per share guidance that Steve will cover here momentarily. As it relates to the business mix, again, in the first quarter, the Logistics segment delivered outstanding results. Logistics' 49% year-over-year revenue growth and 279% earnings improvement were both first quarter records. Brokerage benefited from truckload synergies in the quarter to include strong execution in our core services, complemented by the continuing maturation of our power-only offering where third-party carriers gain access to Schneider's nationwide trailer pools through Power Only movements. After the successful launch of FreightPower for carriers in 2020, we launched FreightPower for shippers in the first quarter. The initial launch was targeted to the long tail micro shipper to digitally automate the quote, book and track process functionality to more easily serve their freight coverage needs. We are already enjoying several hundred orders per day coming through this frictionless channel of brokerage, and as the year progresses, we will be introducing FreightPower for shippers to other elements of our service offering portfolio. Also during the quarter, the above-normal weather impacts in February were extraordinary, not only in their intensity, but also in the expanse of geographies impacted. The industry-wide impact to rail and intermodal spaces have been well chronicled, however, it should be noted that our Truckload segment, both network and dedicated, were highly impacted in some very non-traditional areas, namely Texas and the Southwest region of the country. In Truckload, Texas represents the highest concentration of Schneider drivers and freight flows in the country, including support of freight into and out of Mexico. In fact, Texas has 2.5 times more Schneider driver activity than our second highest freight activity state. Our strategic growth drivers of dedicated contract services and Truckload and Intermodal solutions were evident in our first quarter results. Dedicated set a new first quarter company revenue record, with 6% growth in average truck count, including 150 units in early-stage startup in the quarter. Our existing customer growth, strong new business pipeline gives us confidence in additional full year growth of several hundred more units in various specialty dedicated configurations. On the topic of truck counts, our stated goal of returning the irregular route truckload network fleet to 6,000 units by year-end does not appear achievable considering the extended capacity market challenges and the other alternative opportunities for growth. A more appropriate target for year-end now just 5,500 units. Finally, moving to our Intermodal segment. We delivered first quarter records of total orders delivered and revenue per order despite the mix change to a higher concentration in the East. For the fourth time in the last five quarters, Intermodal volumes in the eastern part of the network grew in the mid-double digit or higher percentage levels. We have targeted adding several thousand intermodal containers in calendar year 2021. New business award levels, confidence in additional over-the-road conversion opportunities as well as double-digit percentage company trade driver growth support our desire to step up our container count. So I'll stop there. I'll turn it over to Steve. And then we'll get to your questions.

Thanks, Mark, and good morning to everyone on the call. I'm going to reverse my typical sequence and begin with our forward-looking comments. Our initial guidance for adjusted EPS was $1.45 to $1.60, and our updated guidance is $1.60 to $1.70. So what was the upper end of the range is now the lower end, and the midpoint has increased by 8%, and that represents over $30 million in pretax earnings. The updated guidance is based on the ongoing combination of robust demand and constrained capacity, and as Mark stated, this is a condition that we expect to remain in place throughout 2021 and likely beyond. Our portfolio of services is functioning well and providing shareholder value by serving a broader portion of our customers' needs. Regarding the portfolio, we expect that our asset by Intermodal and Logistics segments will deliver 45% to 50% of our total earnings for the year. And we feel well positioned to deliver strong results across the remainder of 2021. We continue to expect a full year effective tax rate of approximately 25% and are updating our net CapEx guidance to a range of $375 million to $425 million. The range allows for some potential delivery delays resulting from OEM supply chain issues. However, nothing has changed about our underlying intent to purchase the budgeted number of tractors and lower the average age of fleet and, at the same time, continuing our ongoing funding for the development of new tech capabilities. I'll now shift to a recap of our enterprise results for the first quarter. Beginning with revenue, excluding fuel surcharge, our first quarter 2021 was up 12% on the strength of record revenue from our Logistics segment. Our adjusted income from operations of $76 million was the most profitable first quarter in our history and was up 42% compared to the first quarter of 2020. Strong January and March helped compensate for a weather-challenged February. Looking at our quarterly income statement, I'll note that 1Q '21 is a relatively clean comparison to 1Q '20 as COVID had only a limited impact on the first quarter of last year. We were initially starting to see effects in mid-March of 2020 in our Intermodal operations, but there was not a material financial impact. As such, there are not a lot of notable items on the income statement other than the higher purchase transportation costs to support the revenue growth in the Logistics segment. Moving now to the balance sheet. I would just point out that we now have $100 million of debt maturities in the next 12 months, $40 million in November and $60 million in March of 2022. It's our current intent to repay both notes at maturity. On the statement of cash flows, you'll see a limited amount of cash used in investing activities, and this is due to light CapEx in the quarter along with strong proceeds from the sale of used equipment. Given our full year expectations for net CapEx, we obviously anticipate considerable amounts of cash being used over the final three quarters of the year. Closing, we're well positioned and off to a solid start to the year, and we look forward to crisply executing our plans over the remainder of the year and delivering shareholder value as a result. So with that, we'll open up the call for your questions.

Thank you. Our first question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Thank you. Good morning. Thanks for the update. And kind of given where the new guidance is and where we are in the cycle, and kind of many of your peers are saying that it feels like they're still fairly early in the cycle and this will continue to '22, Steve or Mark, I'm wondering if you have a sense of where kind of normalized mid-cycle margins and EPS can be? But obviously, there's a lot of debate right now about exactly where we are or what - if we are close to peak, et cetera. Kind of based on where you think we are at the cycle right now, what do you think is that normalized EPS number? Is it $1.50, is it $1.60, is it $1.30? What's your view there?

This is Steve. I'll jump into that, Ravi. There's a lot in that question, I suppose. And what the definition of mid-cycle is, is, I guess, subject to interpretation and definition. We do feel well-positioned with the portfolio that we have in market and its adaptability to changing market conditions, and we think that provides some resilience as we go through different market conditions. We've stated for a period of time now our target margin ranges that vary from - in Truckload, they're 11% to 13% that we've stated; and Intermodal, 10% to 12%; and Logistics, 4% to 6%. So it really is kind of by segment where it makes sense for us because they have different growth trajectories and so on. And I think we remain, at this point in time, comfortable with these ranges. And as we get a little later into the year and into our strategic planning cycle, we'll review those guided ranges like we do on an annual basis. So we will do that. And if anything, I think the one under most scrutiny would probably be our Truckload margins and what we think we can do with those over the course of time. But I think that would be my response. I'd rather not get into the normalized or mid-cycle EPS number because that's a tough one to answer, I think.

Okay. Got it. No, that's a helpful framework. And when you say kind of evaluating the TL margins, again, are you talking about evaluating them up or down?

I don't see them going down.

Okay. Just want to clarify that. And maybe as a follow-up, can you give us a sense of what your conversations with customers are like right now? Obviously, it's very well known that we are an unprecedented tight truck market. As a counter to that, are your customers like willing to sign longer-term contracts with more visibility on the trucking side? Are they looking to more actively switch to rail intermodal? Kind of what's their initial reaction when you tell them, hey, drivers are hard to find and you may not get your trucks?

Good morning, Ravi. It's great to connect with you. This is Mark. We've been experiencing a really interesting time for various reasons. Our focus is on providing solutions to our customers through the different services we offer. We're noticing a strong interest in both our Intermodal and Logistics services as customers seek solutions to move freight and serve their clients. This aligns well with our strengths. During challenging times, customers tend to be more open to creative solutions. We're observing instances where some clients are switching from truck to intermodal for better capacity coverage, while in other situations, there may be a shift back to truck due to higher service needs and reliability. This is why we remain flexible in our approach; we aim to provide various options, allowing our customers to choose based on what matters most to them.

Very good. Thanks for the color, Mark and Steve.

Hey, great. Good morning. And great job on the results despite the storms and tough environment. So just a quick clarification, Steve, can you throw out the gains on sale in the quarter? And then I just want to understand that getting back to 5,500 trucks in over-the-road adding a few hundred and dedicated, so still sounds like you're looking for fleet growth in this environment. And then your - I guess, contrast that with the driver commentary? Thanks.

I'll tackle the first part of that, and then Mark can take the second part. The gains in the quarter on sale of equipment were modest. They're modest gains, a couple of million, I believe, and compared to last year, modest losses of a couple of million. So year-over-year, there's a $4 million or $5 million difference in that space.

As it pertains to the truck segment, we aim to stabilize our truck count in this environment related to our network business. We are observing some recovery in team configurations, which is a key strategic priority for us. Progress is slow and steady, but we are moving in the right direction. There is significant competition for drivers, and while we are satisfied with our retention rates overall, turnover has posed challenges. We are competing with private fleets, LTL providers, and others that we typically don't face the same level of competition from. This is why we expect the truck count to rise modestly from our current levels, and our focus is on sustaining these numbers as we value this business. However, we are cautious not to overly pursue growth at the expense of costs, which is why our strategy in Truckload emphasizes long-term commitments and value-added services. We are seeing an increase not only year-over-year but also sequentially, and we experienced a significant amount of startup activity in the first quarter. Unfortunately, the majority of this activity occurred in Texas, resulting in challenges not just with startups but also with customer performance and inefficiencies due to unusual weather conditions. Despite this, we are very optimistic and pleased with our performance in the dedicated segment.

Great. And if I can get my follow-up, it sounds like a phenomenal pricing environment, obviously, given all the backdrop. Maybe just a little bit on Intermodal. How is the rail service levels meeting your conversion growth needs? Are you still seeing that accelerate? And maybe a little bit more of an outlook on Intermodal?

Yeah. Certainly, good question, Ken. And as it relates to Intermodal, in the East, we are back to reliability that's pre-pandemic, so performing very, very well. As I mentioned in my opening thoughts, four or five quarters now where we've grown in the mid-double-digit range in the East, and that continues to be a real area of strength across our network because of our dray performance, but also we have a rail partner that's performing very, very well there. The West is improving, still not back to, I think, where anybody would be satisfied, but at least showing signs of improvement. But there's just a lot of other constraints going on there relative to the port activity, customer delays of getting equipment turned. And so it's a little more challenging in the West than it's proven to be in the East, but improving.

Wonderful. Appreciate the color. Thanks.

Great. Thanks and good morning. Mark, in your prepared comments, you talked about seeing some consolidation towards carriers that are able to offer multiple modes of service. Obviously, you guys sitting at that area. Can you expand a little bit more on that comment? Is that something that you feel is more anecdotal? Or are there things that you can point to that you're seeing within big results that are supportive of that trend?

I think strategically, Todd, we're under the belief that there is opportunity for multimodal providers to be a source of aggregation both on the demand side and the capacity side because of our reach and tech investments in connection with large, medium and increasingly now, small customers and small carriers, that offer some - a form of consolidation. It wouldn't be the traditional like - I don't think we're going to get down to four or five airlines and half a dozen-or-so LTL providers type. But I do think it could be a - our view is that's a form of consolidation that the big multimodal providers that are tech-savvy and are investing heavily to make that as easy on the shipper and the carrier as possible and bring their own assets to bare to offer great value in that exchange as well. It is really at the heart of our strategy. And customers, I think, respond to that. They respond to a service spec and an acceptance spec and, at times, increasingly less concerned about how it gets done.

Yeah. Okay. That makes sense. And then a little bit of a follow-up, maybe along the same lines. The strength that you're seeing within the Logistics segment and the substantial revenue growth there, how sticky do you view some of that business? Is that more transactional in your view that maybe once we see less capacity constraints, some of that goes away? Or is this business that when you look out once you've provided the service, you think that, that revenue is going to be more consistent going forward? Thanks.

Well, there's no doubt that all parts of our portfolio are benefiting a bit from the demand and supply condition as it exists today. But increasingly, the role of effective third parties or 3PLs in the middle of solutions, I think, for customers, have durability to them, and it can have a bit more of a variable cost structure to adapt to the varying markets that allows, I think, to perform well in really all market conditions. So - and the fact that we're increasingly being able to bring and maturing this whole trailer pool of concept with third parties, particularly for the mid- to large shipper who needs those efficiencies, again, I think that's another element that allows us to have some staying power and stickiness, but certainly benefiting from the market, no doubt about that.

Understood. Thanks for the time.

Thank you. Good morning, everybody.

Morning, Jon.

Mark, to follow-up on that last question and comment, so your Logistics operating margin is solidly in the long-term guidance range where TL and Intermodal are still kind of grinding higher. Is there something about the Logistics business, whether it's the asset-light model, whether it's your new Power Only, whether it's some of your technology investments that are structurally changing the potential margin opportunity at that business? Or is it just that this is kind of a leading edge or kind of frontrunner based on the favorable macro in industry dynamics right now?

Jon, there are several factors at play here, some related to the current market conditions, but many stem from the ongoing investments we have made. This particular segment of our business serves as our incubator for new technology. It is where we develop our decision science, and we are quite advanced in this area concerning the buy-sell arrangement, which proves advantageous in all market cycles. This remains a space where we can create differentiation and enhance margins. The investments we've made in FreightPower are aimed at improving productivity on both the carrier and shipper sides. However, I still believe this segment is too reliant on personnel. We have excellent staff and innovative technology, and I think that over time, we can scale the business through transactions without the need to grow our workforce at the same rate as in the past. You can see some of this reflected in our margin performance, as well as the value generated from our Power Only solutions for large shippers. Overall, this is a multifaceted strategic approach that is yielding positive results.

Okay. That makes sense. And then just second on the dedicated contract renewals, I noticed in the KPIs that the revenue per truck per week was essentially flat year-over-year despite the significant increase in the network side. Is there a period of time where there's more contract renewals than others where we can see a more representative move in the dedicated revenue per truck per week vis-à-vis kind of what you're seeing in the spot market today?

Yes. We still have work to do regarding dedicated contract renewals. We appreciate their stability for both parties, but we are currently in the middle of several renewals and discussions about rates. Our goal is to ensure that our drivers are paid competitively while also aligning our customers with this process and the dedicated contracts. There's significant effort involved, which we believe will yield results and shape our expectations for the remaining quarters of the year. The business remains stable, with very high renewal and retention levels, and we will continue to address the driver aspect, particularly regarding rate increases.

Good morning, and thank you for taking my questions. First, for Steve, can you quantify the weather impact in the first quarter, particularly regarding your Truckload operations? Additionally, if we look back to 2018, excluding the First to Final Mile business, the Truckload operations were around a 13% margin. It appears that this year's guidance is closer to 11.5% to 12% at the midpoint. Is there a way to understand what's holding you back from reaching the upper end of that longer-term guidance range this year, especially in such a strong freight environment?

Okay. Jack, this is Steve. I'll address the first part. We haven't specifically assessed the impact of the weather. When considering the quarter, it seems that March saw some recovery compared to the limitations we faced in February, but overall, the net effect was negative for the quarter. Additionally, if we look at some analyst reports indicating we had a miss in Truck and a success in Logistics and Intermodal, I believe the shortfall in Truckload might be linked to weather conditions.

Okay. Okay. Got you. And then as it relates to the ability to hit the upper end of that guidance range this year?

Yes, Jack, we are definitely focused on that. We are considering the inflationary impact on capacity, and when we reflect on 2018, we were successfully adding drivers. However, this time has proven to be more challenging and costly. This challenge is central to how we want to align our network business. We see this as a significant opportunity. In the short term, when expanding dedicated services, we incur certain start-up costs, which impacted the first quarter. However, we have observed better revenue indicators related to dedicated services since the latter half of March. As we move into April and move past some of those start-up challenges, we remain focused on our long-term margin performance in the truck segment. We are not fully satisfied with our current position and anticipate, as should everyone else, that we will perform closer to the upper end of our expected range over time.

Hey, thank you. Hey, guys. Gentlemen, good morning. I guess I'm playing anchorman here today. Congratulations on 1Q. I wanted to talk a little bit about sort of the overall market and how you see supply and demand. We've heard from many carriers, both public and private that they expect sort of the strong market to continue throughout the remainder of the year. How do you sort of view capacity as it can potentially come back to the marketplace? So sort of what are the drivers there, no pun intended, in terms of driving schools coming back and maybe new ones opening up versus just still COVID restrictions and then some restrictions you have on the OEM side? How do you view sort of capacity? And I think you alluded to maybe your seated tractor count?

We do not anticipate significant relief in capacity for the rest of the year. The government stimulus acts as a barrier for some individuals, depending on their state, and we hear that from our recruiters and truck driving schools. This situation is likely to persist at least until September, meaning we won't see any short-term catalysts encouraging people to return to driving. We're observing constraints in new schools, leading to a trend where some are opting to build their own capacity. However, training new drivers and integrating them into fleets is a lengthy process. As we consider overall demand, April is typically a slower month, and as we enter May, we will face additional challenges such as inspection week, which will remove trucks from the road. With summer approaching, people are expected to re-engage in activities that drive demand for consumer products and food. Altogether, we believe this will only help during the peak season, and we do not foresee any resolution to capacity issues this year.

Hey, guys. Good morning. Thanks for taking the question. Just to get a little more specific - I'm sorry?

We're just under the wire. Go ahead, sorry.

Okay. Thank you. So I'll try to keep it quick. I'll keep it to one. When you think of fluidity improving in the Intermodal side, I know we're expecting better weather, which will help, of course. But when you look at like the street turns and the fluidity at shipper locations, are you seeing any sort of improvements when you drill down into that level of detail, realizing there's still a lot going on and it does tie back to the rail to certain points? And then, I guess, second part would be on a rail capacity side. With the constraints on teams and the priority for freight moving fast, are you seeing any TOFC taking some priority or maybe taking up some capacity as the rail network serve more of that premium LTL and parcel?

Lot to unpack there. So the first part of that, again, Brian, was?

The street turns and warehouse fluidity, anything in your supply chain you're seeing improvement there in addition to what you expect on the rails.

It remains a challenge, and our metrics are not yet at the level we expect or need regarding customer fluidity. However, we are making progress in our acceptance decisions, which are now more influential than before. Customers who are effectively adapting to this are receiving favorable consideration in terms of acceptance, and we are basing our decisions on this. We have strong data by shipment and consumer location to optimize our acceptance and network. Therefore, we are focusing more on these decisions rather than some labor and demand challenges that are delaying equipment turnover. Additionally, the increase in e-commerce, parcel, and LTL is affecting the fluidity of the rail network, especially in the West. We recognize this situation, and while it is improving, last year's fourth quarter had a greater impact than usual.

There are no further questions. I'd like to hand the call back to management for closing remarks.

Since we've already got everybody passed, thanks for tuning in. And any other questions, please follow up with the team. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.