All right. Thanks, everyone. Carrying on with our transport fireside chats. Again, for the new people in the room for this one, I'm Jonathan Chappell, the Senior Transport Analyst at Evercore ISI. Joined this afternoon by Schneider National, and we have Mark Rourke, the President and CEO, sorry, and Steve Bruffett, Executive Vice President and CFO. The run of the business here is I'm gonna ask the questions I've prepared. I welcome any questions from the room. What I found so far is people like to be shy, so I can carry this if I have to, but please feel free to raise your hand if you have any questions.
Mark, just to kick things off, I think kind of a bit of a state of the union, just a broad update on the current freight environment, namely, you know, we're still in this freight recession, I think, so to speak, but timing for emergence, how this cycle's been vastly different from others, and kinda how you see the way forward, both in 2023 and beyond.
Well, you're right. The cycle has been different, I think it really just starts with the context of how did we get to where we got to here of virtually 24 months of, I guess, distortive behavior across the supply chain and maybe some overzealousness to get after product. I think that's part of what we're unwinding here a little bit as an economy. I would suggest we've been in some type of freight moderation condition about two and a half quarters. What I'm really interested in coming out and seeing what's in the inventory overhang results from some of the retailers that'll come out here soon.
I think they've been working at that diligently, which really is a catalyst for that replenishment cycle that's been a little bit off, just like it's been off on the way up, and it's off a little bit here as that's corrected. As we've talked, we didn't really have seasonality in the fourth quarter as a typical peak season, but we're also not seeing the dramatic drop that we generally see from fourth quarter to first quarter either. We're still not back what I would call to a normalcy yet, but I think there's signs and, you know, I think it's really on, on two elements. I think the demand replenishment cycle, once we get through this overhang, can be a catalyst for the industry.
I also think there's some stress in the carrier community in certain pockets that I think as we start to get to insurance renewals, licensing, and permitting, I think you'll see more capacity come out than what we've seen up to this point. I think that combination may set up a, you know, a stronger, maybe late second as we start to get in the third and the fourth quarter than what we've experienced here in the last couple.
Great. We wanna kinda focus on long-term strategic stuff at the beginning. Now that we have this little, kinda current update. Listen, transactional TL or spot for most people is really kind of the DNA of your business. Much of your growth ambition has been really skewed away from that recently.
Mm-hmm.
Talk about how you envision your business mix evolving over the next three to five years, including dedicated versus network, which again, they're nomenclature for spot, but also how ideally you'd position intermodal and logistics into that mix.
Yeah, let's maybe break that down a little bit in the segments there, Jonathan. I think it's a, it's a little bit of a misnomer that we're not committed to or growing the network business because we look at our truck count in network. If you take the customer lens and how we approach the market, the Power Only solution is very much aligned in with the network type business that we do. We don't do a lot of spot. We're a mid-single digit spot company, and so we're generally in the contract space there. The combination of our network assets and this emerging Power Only is really what the customer and the market feels as our network business.
And I think that's a great combination cause it allows us to grow that segment without having to put as much capital and as much labor against the network when the driver community favors the more predictable nature of what we can do in intermodal and what we can do in dedicated. Those where we believe we have some tailwinds based upon market need and also where the labor preference matches up best. I'm a strong believer, 35 years with the company, that a strong network business is really good for the rest of the portfolio as we ebb and flow on customer needs. While it may not be our primary growth driver, it's still gonna play an important role for the, for the long term here at Schneider.
Yeah. On the whole business mix thing, I'll step into that one a little bit. We've made a lot of progress over the past five years or so, since we've been a public company on that mix, and it's been purposeful and strategic as we sit here today. We have about half of our earnings coming from our less capital-intensive segments of intermodal and logistics, and we like that positioning. Within our truck segment, about half of our revenues are network and half are dedicated. I think we're purposefully constructed. We like where we sit right now. As we project into the future, we basically kind of like to grow it all. We like all the pieces of our business.
It may just be a different speed at which we would prefer to grow certain parts of our business, but we're not growth averse in any part of our portfolio. We've tightened up some things and pruned off some non-strategic parts of our business over the past couple of years. What we've got, we like a lot. It's complementary service offerings, and we feel well-positioned to serve the customer needs as we go through freight and business cycles with this portfolio of services. We feel pretty nicely set up and like our mix where we are.
I wanna dig into each of the segments a little bit and maybe working just backwards from the way that that's perceived, logistics.
Mm-hmm.
You know, worst kept secret, you raised your long-term margin guidance there. I mean, not that it was 100% expected, but just given the emergence of Power Only and some of the stickiness of that business and the higher margin of it, can you talk through kind of how you got to that comfort in raising a long-term margin target by 100 basis points, which is pretty meaningful from the starting point there, and how growing that business Power Only specifically was involved in that calculus.
Yeah. Yeah. Steve, you can jump in. You know, what I would call out as distinctly, competitively, perhaps different than some of our other truckload competitors, is that our logistics business is the self-generating of their own freight. We're complementary, obviously, with commercially with the other parts of our portfolio, but they're complementary to logistics. Logistics is not dependent upon the assets for overflow or for opportunity. Therefore, under itself, it's, it can be a growth engine because it's in its own destiny. Obviously, we collaborate even more tightly when we have the Power Only solution because that's a large shipper, small carrier combination that we take to our larger and medium-sized shippers.
That's very complementary to the network, and it certainly plays into how we think about margin targets there because we're now putting a little bit more capital to play, even though it's the at least expensive capital, being a trailer over a long lifetime, it is still a capital investment that we're making beyond technology and brokerage. I think it's important we get the adequate return for that. Hence, that's what you're seeing on our margin, a long-range targets, and it delivers against that today. We want to keep leaning into it. We want to grow earnings dollars contribution to the company there, maybe less sensitive to the margin target. That's 5-7%, we think will be very competitive and allow us to grow the earnings contribution.
We certainly take our margin guidance pretty seriously, so we didn't take it lightly. We wanted to live with the offering in the market for a period of time and gain comfort around its traction, which we do have that confidence. When you've got nearly $2 billion in our logistics segment of revenue, now it's, you know, we want to make sure that we're articulating what we think we can deliver on a regular basis over time. We did think considerably about it before we raised that by 100 basis points, that margin target from 4%-6%- 5%-7%. As Mark mentioned, we're return on capital focused, not surprising in our space that's an important metric to us.
With the Power Only offering, Mark mentioned that it tends to have a higher margin than our brokerage business. That's, you know, just pure transactional connecting shippers and carriers. Another dimension of the Power Only offering, though, is we have to manage this trailer pool because it's part of our overall trailer network in our truckload business. There's resources and capabilities and technology that are needed to support that. It's another element beyond just the sheer investment in a trailer. It's the management of a trailer network to be able to deliver on those customer needs.
John, I think a common question you get at times is how durable is a Power Only solution through cycles. I think in our fourth quarter results, we had, well, 5% less volume in this market in the fourth quarter than we had in one of the most robust fourth quarters of a year ago. I think, again, it gave us confidence, and it demonstrated the resiliency and not only the variable cost nature of our brokerage business, but the Power Only business as well, and pretty much maintaining our volume year-over-year.
That durability question is so common that I was just going to ask it wasn't even on the script. Okay, I think you covered that. Intermodal, big headline of late for you, especially. You've done this massive transition from, you know, one Western rail partner to another, you gave us enough kind of foreshadowing, not just us as the investor community, it was obviously more important for your shippers and as you prepared for this. You know, it seems like it went pretty seamlessly. Maybe just catch us up a little bit on, you know, how this decision transpired, why it was important for you to get a new Western partner, and how that plays into, you know, the long-term target of doubling this business by 2030.
Right. I think that's really, Jonathan, at the heart of the decision. It's not an easy decision to make a long-term relationship that we have a lot of respect for. As you look at what we're trying to do, doubling, which is about an 8% volume growth on a CAGR basis to get where we're shooting for there.
When we looked at the opportunity for competitive differentiation between our East and the West, when we look at our model of being an asset-centric, owning and controlling our own box, our own chassis, and our own company, dray. When we looked at all the difference in the origin destination pairs that the UP would offer us, in addition to more sailing schedules more often, and their commitment to really make some adjustments, particularly around technology and efficiency in the tour. They have been right on spot. Everything that they've committed to, they've delivered. That whole combination just said, I think we're better positioned to achieve who we want to achieve and create that differentiation with a UP CSX combination. As you mentioned, we came out really early, which was a question, was that too early?
Based upon how we executed and how UP executed through that transition, I don't have any regrets. I had concerns that, do we signal too early to everybody? In the end, the customer community, I think, appreciated the transparency, and it gave us in an open air to work together publicly and with our driver community to make that switch because it's not an easy switch, changing ramps, changing facilities, changing technology, deep integration. A lot of things have to go right to do that well, and I commend not only the Schneider team, but the UP team for their execution.
You have a phenomenal, in my view, partner in the East, and now you've made this huge, you know, decision and investment really in the West. The market share shift from the West to the East has been tremendous for the last 20 years. I mean, obviously a shift of that size over two decades, a lot of that is structural. It feels like a lot of it was also either cyclical or temporary as it related to the queues on the West Coast and now the labor contract there.
Yeah.
I mean, for you, how important is it to see some of that share shift back to the West? Really, I mean, kind of without making a call on ILWU negotiations, whatever, like how likely do you think it is that you will see some of that reversion back to the West Coast from the East?
Yeah, I think that'll be one of the very interesting developments as we get through this allocation season, cause you're right. People took some discretionary changes and some structural change based upon the congestion that was in the West, based upon some of the certainty issues that still exist. I still think economically and service-wise, it makes sense for some of this to shift back. The question is how much. I think that'll be a very important piece that we'll get a better insight as we get through. Really by the time we get through the 2nd quarter, I think we'll have a feel for how much of this is gonna stick this way. It's important.
Imports are very much at the heart of intermodal, and Southern California is very important to imports and very important to our network. It'll be a trend we'll watch closely, and we're very bullish cause there's so much that we know for a whole host of reasons, both in the East, in the West, particularly the regional West, that did convert to truck out of concern of reliability and congestion, that there's some good tailwinds just getting back the over-the-road conversion, let alone the emissions value and some of the market growth opportunities. So, the beauty of that is we're somewhat agnostic internally. Whether it goes truck or intermodal, and we provide both options to the customer, so they can select the value.
We would like to see more of it switch back to the West, and we would like to see more intermodal conversion, and we're certainly trying to put value propositions in front of customers to show them that value.
Mm-hmm.
I think over the course of time, as global supply chains try to figure out their new path, and how they want to set themselves up, to avoid some of the disruption that we've experienced over the past couple of years, you know, whether it's sourcing from different locations in Asia than what they've done historically, or whether it's more nearshoring, Mexico-related or Central America or something like that, the key is to be set up to be a great receiving point from wherever it's coming from. I think with our configuration, the way we're built now, I think we're perfectly suited for whatever those nuances become, cause I think there will be some structural longer-term changes that won't just all go back to where it originally was.
The key is to get set up for whatever that is.
Mm-hmm.
You mentioned the partner in the East. The combination of our company, dray, and their consistent performance, we compete very favorably against truck there, particularly as we can look at the fuel difference, we look at the emissions difference. More to the East Coast isn't, I mean, it's not a death knell to intermodal by any stretch, but that is an excellent combination. My hat's off to CSX on their execution as well as our company dray team. Cause on the street and in the terminals, the more efficient we are, the more aligned we are to their principles around PSR and the better experience the customer gets. Our interests are highly aligned.
Okay. I'm gonna shift to trucking, you know, quote-unquote, trucking, as I wrote down. I thought your comments about the dedicated pricing on the conference call last week was pretty interesting because, you know, I think there's this perception that dedicated is contract per se, but in a market where truckload spot can be so volatile-
Mm-hmm.
You know, dedicated has to fall in the same direction. Maybe not to the same magnitude, but it's not immune to it. You know, you had noted that your dedicated pricing is holding in. I think you even said, and hopefully this wasn't my misinterpretation, that you're even able to push through some of the cost inflation that you're seeing in the business into this dedicated pricing. Maybe just explain to us the difference in the dedicated pricing dynamic and why people shouldn't fall into the trap of thinking that it has to fall in the same direction as a spot?
Yeah. To your point, dedicated is not completely immune to market forces or market realities, but it is much more stable, it's much more long term, and we do have modifiers in there, particularly around those key cost areas. What's really drove inflation into the business is driver wages, equipment costs, all of those things that we're recommitting to customers on a regular basis. The recovery mechanisms, the reliability that they're looking for, they're really aligned to our driver community who gets to know their business really, really well and is a representative of them for their customer. All aligns really, really favorable, and that's why we like dedicated. It's more durable in nature. You probably don't have the highs, and you don't have as many lows.
But your recurring revenue streams, the value that the driver community gets from that predictability and our ability to do a wide array of special services across multiple equipment types, things that we're really good at, just makes a place that we would love to see more growth, and our commercial efforts are really focused in that direction. I think that's certainly more in the first half of the year as we had more of those corrections take place and the renewals in the second half. We'll see how all that plays out, but it should be a much more stable book.
Mm-hmm.
Yeah. You mentioned the commercial efforts, I'd say part of why we feel the durability of our particular dedicated portfolio is how it's been purposefully constructed by pursuing truly dedicated opportunities, as opposed to someone seeking capacity in a tight market that's
One way business masked as dedicated, that can evaporate pretty quickly. We've been very purposeful in making sure that we, in fact, are providing it as a dedicated solution that is durable.
Mm-hmm.
So.
You noted that the actual spot business is, like, mid-single digits. I imagine that's not gonna go any lower. Pretty much can't. Where's the dedicated mix now as a part of the overall trucking portfolio? It seems like when you're focusing most of your fleet growth on that segment of the business, ideally, where would you like that to be in, let's call it, three years?
Yeah. If you come out of the fourth quarter, we had about 57% or so of our tractor fleet associated against contractual relationships within our truck business, and the network was 43%. Obviously, we have a lot of Power Only that's different that's accretive to that number. You know, if I could snap my fingers and the world would be perfect, I would be really happy with where we are in our mix and grow everything symmetrically and make that all happen. Obviously, the world doesn't always operate symmetrically. The mix, it's five years in the making, and it feels like we've gotten to a place that we would be happy if we stayed here, but we'll let the market drive us. We're not pushing our agenda on the market.
We're certainly trying to represent how we can add value to it. Will it stay exactly the way it is? It will probably lean more towards the non-asset mix and a little bit more mix towards dedicated as our strategic growth drivers. We would be happy keeping it where it's at.
You know, the nuance to that is back to the Power Only thing that I talked about earlier.
Mm-hmm.
It could mask what we're actually doing in the network because Let's say we grow Power Only faster than the core network piece itself. Our trailer count would be growing to support that growth, but our tractor count would not be.
Mm-hmm.
it'd be harder to see what we're actually doing.
Yeah.
If that makes some sense.
It does.
I think we continue to see opportunities to grow that trailer count and, maybe in step with how we're growing dedicated, but it may not show up in our tractor count.
Yeah. Over time, a more trailer-centric network versus a power-centric network, if that makes sense.
Yeah. Let's take that one step further because if you're, you know, It appears to us that you're de-emphasizing network. You know, over time, you built this kind of mode agnostic, offering, a portfolio to your customers, whether it's logistics or now Power Only or now intermodal or dedicated versus network. How has that been shifting over the last two years, you know, amid this massive upheaval that we've seen from the demand side, and how do you see that evolving as well?
On the truck mix.
On the total mix of what you're offering to your customer if you're only 5% or whatever it is in single digit, spot?
Yeah. We're particularly on the asset side, it's a really interesting story from my view, is generally, trailer pool shippers and large asset carriers, whether we're talking intermodal or truck, tend to migrate to the big or midsize shipper because they take advantage of those economics, and you can add value across multiple sites across maybe a national network for a customer. Conversely, our logistics business and brokerage business goes after the very long tail of the shipper community, where most all the shipping activity happens, but it's very much a smaller shipper aligned with smaller carriers.
What that's allowed us to do, particularly with the digitalization with FreightPower for Shippers and FreightPower for Carriers, it allows us to economically, without a windshield and a salesperson, get to that part of the market that traditionally we didn't get to real effectively as an asset-based company. The acquisition cost of the carrier, the acquisition cost of the customer, whether it be LTL freight or truckload freight or refrigerated freight, has really changed the customer mix within our portfolio. And it's just a lot more customers with smaller volumes because of that logistics offering.
Over time, we can migrate that and get broader coverage across all of our services, but that's why that logistics business can operate on its own and doesn't rely on how well the and how busy the assets are because they can create that direct connection. That's been the biggest change in mix over this journey, is our customer concentration has just continued to drop as we have diversified into that longer tail, smaller shipper.
We've got a broader aperture of market that we can serve, and we expect that to continue to grow in that way. An interesting observation, though, cause we've been talking about spot versus contract predominantly around our truck network. Within our brokerage business, we're about 50/50 spot and contract, and we adjust those dials depending on market conditions, kind of staying within a 60/40 ditch lines, but we move around within there. If you think about overall portfolio management, I think it's an appropriate exposure to the spot market, but we know how to play that game really well.
Mm-hmm.
So.
You had said something earlier that I wanna follow up on. You said, I think you said it was network disguised as dedicated. It got me thinking, you know, as the shippers come out of these super tight supply chain, you know, the peak of all peaks from a pricing perspective to now, you know, it seems like the bit's in their mouth a little bit more on pushing the pricing side. How much are they looking to lock in capacity with those who are able to provide reliable service over the last couple years? You know, give a little bit more price to that reliable service provider versus how many are saying, "Ha-ha, now it's our turn?
We're really gonna push this hammer on you on the pricing side." You know, I think one of our LTL companies calls that slippery business.
Yeah, of course. It's hard to overgeneralize, cause there's customers that play across a broad spectrum of transactional versus kind of a core carrier concept. I would tell you what's more prevalent in our book is what you opened with, is let's come in and talk about renewing our book with X amount of carriers, then we'll take the remaining business and put that more into the allocation or public auction type approach. What we're really doing is what makes sense for both parties. What they, in general, prefer is to have less disruption when things are working in a network configuration, and it's working from a cost and service standpoint.
You know, not that we're immune to the pressures in the marketplace, but the more sophisticated shipper is looking to get that core wrapped up with the people that they consider core to their business and then allow this market dynamics to play more on that non-core group. Fortunately for most of those folks, we try to position ourselves into the core with our approach, and, you know, that's what's really playing out in the early part of the allocation season as we sit here early February.
Interesting. From an M&A perspective, obviously impossible to predict and certainly not good to talk about with too much clarity, but it's played more of a role in the last couple years and is part of your diversification. As you think again next two, three, five years.
Mm-hmm.
How much of a role would you expect, M&A to play, and how does that kind of fall into your capital allocation, priorities?
Yeah. It's front and center. You know, obviously our top priority is to look at our opportunity organically grow the most efficient way we can with our capital, and that's around those strategic growth drivers that we talk about, dedicated intermodal and our brokerage piece. We are also actively and enthusiastically looking for the right opportunities to augment those strategies with acquisitions. We're really happy with the last two that we've done. Those have worked out exactly as kind of we drew up, and we're pleased with the capability that we've built to do a better job of that. I would very much like to continue to look for opportunities and would be disappointed if we didn't start bringing some more across the finish line.
Ideal world and not naming names, but if we think about the buckets of your business now, where do you think is the greatest opportunity to kind of backfill in an inorganic way?
Yeah. If I look across those strategic growth drivers, I think we have such great organic momentum in our logistics business, and now with Power Only, I don't think we need to go outside too much to augment any capability there. Really, I think that is most attractive for us from an organic standpoint. Intermodal, a little less player , not as much opportunity there, but if there would be something special that would fit, we would consider that. I think the most target-rich opportunity for us centers around this dedicated truck specialty. We have a terrific little tanker business that we like a lot. Is there other things that we could build across that?
That if I was gonna handicap it, I'd put it most likely into that dedicated truck space, or the specialty truck, where we're doing something, really unique for a customer that may be value add service in addition to moving, you know, product from A to B.
Where would you put the following pieces of the capital allocation puzzle, Steve, after the M&A? Clearly, there's a big investment in just the core business too in such an asset heavy business, how would you lay out the remainder of the kind of capital allocation priorities?
Yeah. We do have a pretty structured and disciplined capital allocation framework that we revisit frequently with the board. As evidenced most recently here, we announced a share buyback program, the first in our history as a public company, predominantly targeted at keeping our share count pretty constant and not letting equity grants to associates, you know, drift that denominator in the EPS math, let it drift up over time. It's a program, and it's a shareholder-oriented use of capital. We raised our dividend again by 12.5% to $0.09 a quarter.
80% since we went public.
Yep. We're, we're focused on, you know, the broad spectrum of uses of cash. We do have some fairly heavy, just organic replacement, CapEx planned, as we have lagged a little bit where we would ideally be with our age of fleet over the past couple of years because of OEM constraints and those well-documented disruptions to their supply chains and labor forces and so on. Think we'll make good progress against those objectives with our capital spend in 2023 and 2024. We've got some growth capital in there to support power only and that type of thing. All that's in place, we do see M&A as being a contributor to our growth story.
We could see a fairly steady diet of that is what we envision over the course of years and an allocation of capital to that. We've got a pristine balance sheet. We have virtually no debt, $200 million, against $960 something million of EBITDA and a cash position of $400 million-ish. We've got a lot of firepower, not afraid to deploy it for the right opportunities.
Yeah. Sounds like you're gonna be busy this year. We have a little under five minutes left. Anybody have anything in the room? You want me to keep going? I'll keep going. Steve, you said something else that struck a follow-up question to me, and it was the kind of redrawing of the supply chain, so to speak. When you think about potential regional winners or losers of that, and then how Schneider is positioned, both from your core trucking but also your intermodal franchises, how do you see that playing out? I'm not gonna put the words in your mouth, but I mean, nearshoring is one of the things out there. Even the move to other parts of Southeast Asia, how does that kind of filter into the geographic and modal mix for you?
Well, like I said, I think it's important, for example, with intermodal, even on the West Coast, being able to build up our capabilities in Seattle and Portland and everything has been important over the past couple of years. That is an outlet valve. It sometimes isn't the most efficient channel on to get it inland, but it's there and available, so I think that there's opportunities through that channel. The North-South channel is something that we're excited about. Our capabilities across our brokerage business and our intermodal capabilities North-South.
Mexico.
Yep.
Mexico could be a nice winner.
Yeah, it's one we're looking at.
In this whole nearshoring. Yep.
Yeah. Again, what I was trying to say is you've got to set yourself up there's not perfect clarity to how all that's gonna play out. You have to set up a flexible footprint to where you can add and subtract resources as needed to adapt to market opportunities. I think that's what we've done, and we're well-positioned with that, so.
Do you have anything to add to that, Mark?
Well, yeah. That's you know, the only You know, some of these decisions take years to get implemented on what nearshoring is, but it is top of mind on many of our customers, particularly those with the elongated supply chains that really were impacted by this. The discussions are there. I think predominantly Mexico seems to be one of the winners in the end, in addition to, you know, certain pockets, domestically here in the U.S. That's one that we're keeping an eye on and we have intermodal and over-the-road services out of there. We got a presence in Mexico City and three or four other cities in Mexico. That would be a place that we could see additional investment going towards because of that trend. The question is how quickly can.
Is that a year out, two years out, three years out? How fast does that develop based upon what they have to do to make that a reality?
Did that play a role at all in the in the UP shift? Because UP's, you know, has the investment in the Mexican rail. It has seven cross-border entry points. When you think about positioning for 2030 and beyond, having that exposure through a partner who's already established there play any part in that decision-making process?
You know, today we have a formidable intermodal presence already in and out of Mexico and over the road as well, right? Intermodal seems to be getting some favor because of its ability to cross the border without an exchange and less disruption and issues there. Absolutely it's part of the mix. But it wasn't a total driver because of what we already can do and have done there. We just think there's growth opportunity, at least a couple of years out that we're excited to try to get after.
Okay. We have less than 60 seconds left. Anything you wanna close with that we didn't touch on, strategic, capital allocation, market?
Yep. You hit the hot buttons. You know, Steve mentioned, the two new things in our quiver here for the shareholder, which is another increase in the dividend, and we'll get some more structure around a share buyback that we wanna get to a little lower number and be fixed on that and then be more predictable. It's sometimes hard for our investors to understand what that share count is, so we wanna take that mystery away. We wanna make sure that we find ways to grow and acquisitive growth, and we're wide open and focused on the right opportunities. Not just any opportunity, but the right opportunity.
Perfect. Well, we're right at time. Mark and Steve, thanks for your time today.
Seven seconds. That was masterful, Jonathan.
I know. I'm pretty good. Thanks, everybody.
Thank you.