Operator: Good day, and welcome to the Schneider Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Steve Bindas, Director of Investor Relations. Please go ahead.
Steve Bindas: Thank you, operator, and good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer; Steve Bruffett, Executive Vice President and Chief Financial Officer; and Jim Filter, Executive Vice President and Group President of Transportation and Logistics. Earlier today, the company issued an earnings press release. This release and an investor presentation are available on the Investor Relations section of our website at schneider.com. Our call will include remarks about future expectations, forecasts, plans and prospects for Schneider. These constitute forward-looking statements for the purposes of the safe harbor provisions under applicable federal securities laws. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations.
Pixabay/Public Domain
The company urges investors to review the risks and uncertainties discussed in our SEC filings, including, but not limited to, our most recent annual report on Form 10-K and those risks identified in today’s earnings release. All forward-looking statements are made as of the date of this call, and Schneider disclaims any duty to update such statements, except as required by law. In addition, pursuant to Regulation G, a reconciliation of any non-GAAP financial measures referenced during today’s call can be found in our earnings release and investor presentation, which includes reconciliations to the most directly comparable GAAP measures. Now I’d like to turn the call over to our CFO, Steve Bruffett.
Steve Bruffett: Good morning. Thanks for joining us today. I’ll provide some opening comments on the quarter and on our guidance, and then Mark will offer his perspectives before we take your questions. I’ll begin with our recently announced acquisition of M&M Transport. We deployed $225 million for this transaction, which represents an EBITDA multiple of about 6x. From this investment, we expect not only immediate EPS accretion but also a return on capital well above our cost of capital. In addition, we will be pursuing both revenue and cost synergies that benefit the customers and employees of M&M Transport and therefore, deliver additional value to our shareholders. While there are operational differences between M&M Transport and Midwest Logistics Systems, our earlier acquisition in the dedicated space, the financial characteristics are quite similar between these two quality companies.
Mark will provide some additional context to this acquisition. The next topic is share repurchases. The second quarter contained our first-ever repurchase activities, and we returned $31 million to shareholders. As a reminder, our objectives for this $150 million authorization are to reduce our diluted share count to approximately 175 million and then maintain that level by offsetting the impact of equity grants that are part of our compensation programs. Turning now to our second quarter results. A reminder to refer to the IR section of our website to review the investor presentation. The second quarter represents what is likely to be the most challenging year-over-year comparison as freight conditions were just beginning to soften in the second quarter of last year.
Now that we’re over a year into this freight downcycle, the cumulative effect of pricing pressure is nearing its largest impact. Our second quarter revenues, excluding fuel, were down 20% compared to the prior year. And our adjusted income from operations was down 39%. We obviously do not prefer this phase of the freight cycle, but we do like how our portfolio positions us to compete and perform across all phases of the freight cycle. And while these results do not yet reflect our full potential, they do illustrate meaningful progress on our journey to deliver resilient and growing earnings over time. Our Truckload segment results would have undoubtedly been lower if not for the support from dedicated operations. Our dedicated operations include our legacy business, along with MLS and going forward will include M&M Transport.
We still have opportunities in front of us to further improve our dedicated operations, and we’re energized by those prospects. In the Intermodal segment, our results continued to be challenged by sluggish port activity, which resulted in 14% lower volumes compared to the second quarter of 2022. We have yet to have a market opportunity in which we can demonstrate the full value of our Intermodal service offering since establishing our new rail partnerships and having grown our container fleet by 24% over the last two years. As a result, we view Intermodal as one of our largest upsides going forward. The Logistics segment reported nearly a 4% margin for the quarter in a highly challenged freight condition. While this was considerably lower than last year, this shows the benefit of our Logistics model that generates its own demand and is not reliant on overflow volume from our Truckload operations.
Moving now to our forward-looking comments. Our updated guidance for full year diluted adjusted earnings per share is $1.75 to $1.90, which includes a modest but immediate contribution from the M&M Transport acquisition. At the midpoint, the updated EPS guidance reflects a 13% decrease from our prior guidance range of $2 to $2.20. In our view, third quarter 2023 earnings will likely show a moderate sequential decline from the second quarter as the full effect of virtually all contractual rate renewals will be in place during the third quarter. Then the fourth quarter is expected to show sequential earnings improvement due to anticipated seasonal upticks in volume. Said another way, our updated guidance includes expectations for second half EPS to be lower than first half EPS.
A contributing factor to this is the timing of equipment gains within the year. We recorded $0.10 of EPS from equipment gains during the first half, and our expectations for the second half equipment gains are minimal. While it’s early to have clear insight into 2024, we anticipate that we will begin next year in a more balanced freight condition. I’d stop short of saying the word recovery, but our expectations are that incremental capacity will exit yet this year, and there will be marginally improved demand from customers. It does not take a large amount of change in these two levers to derive better equilibrium in the freight market. So we’re well positioned to execute and deliver regardless of the conditions. So Mark’s going to now provide his additional insights.
Mark Rourke: Thank you, Steve, and good morning, everyone, and thank you for joining us on the Schneider call today. Before we get to your questions, let me offer additional context into how we are positioning the business to perform favorably through economic and freight cycles. First is our investments to profitably grow Dedicated in our Truckload segment. Dedicated proved highly resilient year-over-year and compared to the first quarter, which was evident in stable truck count and revenue per truck per week performance. While on a sequential basis, Dedicated grew by only 25 trucks from first quarter levels, we do expect to add an additional 225 to 250 units of new business in the second half of the year based upon current implementation timelines.
In addition to organic growth, we are selectively looking for high-quality dedicated contract carriers to add to our portfolio, and we’re pleased to welcome the M&M Transport associates to the Schneider team. Through the acquisition, we added nearly 500 trucks and 1,900 trailers that primarily operate in specialty equipment configurations serving the retail and manufacturing verticals. M&M Transport is a very well-run regional dedicated carrier that largely operates in the Northeast, Midwest and Southwest regions of the country. It is our intention to follow our established acquisition playbook. M&M Transport will run independently, keep their name, brand and successful operating model intact. We have identified a list of synergies that enhance the customer and associate experience.
Those synergies identified include driver-recruiting resources, customer-facing technology support and access to truck and trailer growth capital, among others. And I’m personally pleased that the founder is staying with the business. The organic growth, combined with the addition of M&M Transport puts our Dedicated offering on a glide path towards $1.5 billion in annual revenues and a deployed tractor count of 6,500 units. Now let’s turn to the network portion of our Truckload segment. It is under the most margin pressure as inflationary costs and wages, insurance and new equipment costs are rising into contract renewal rates that in certain elements of the book are not durable, perhaps not even through the end of this year. Our commercial and operational teams are ready to pivot to upgraded opportunities as they begin to materialize.
Now let’s transition to the Intermodal segment. We have chosen to retain our revenue management discipline through this cycle and not chase the price leader to the bottom. That discipline and muted import volumes are reflected in the 14% order volume reduction year-over-year. We are poised for the freight recovery through offering our customers a strong service cost and emission reduction value proposition with a leading combination of rail providers, the Union Pacific, CSX and most recently, the CPKC. Moving forward, we expect even further reliability and execution benefits with the Union Pacific as leadership implements their proven playbook. The addition of the CPKC gives us advantages into and out of Mexico and soon across Meridian Speedway into the Southeast through a seamless connection with the high-performing CSX.
Our early experience with the CPKC’s one-rail solution has been exceptional. We have found that transits not only beat the other competing service offerings and their published transits but now match solo truck levels with nearly 100% on-time reliability performance. The next Intermodal allocation season will be one where we now have a proven record with the Union Pacific transition, a proven top performer in the CSX and new capability with the CPKC with what we expect to be a tailwind in the inevitable restocking cycle. It is important to note that we have paused additional containers being added to the fleet to focus on volume growth with meaningful room for asset productivity measures. Also in the second quarter, we achieved an important sustainability milestone with a large-scale installation of one of the nation’s most advanced commercial electric battery charging depots at our Southern California intermodal hub.
And I’d like to recognize our professional driver fleet, our facilities, equipment engineering, intermodal operation teams for building the capability to move beyond merely testing battery electric vehicles to operating at scale. This capability offers the value of zero emission first or final-mile dray in combination with the emission savings of a middle-mile intermodal rail movement. And we are on track to have 93 battery electric dray units deployed by year-end, positioning us favorably for the rapidly approaching zero-emission vehicle mandates in the State of California. Last year at this time, we noted in our call that our Logistics segment was coming off a special quarter where freight rates were rising into moderating purchase transportation costs in combination with peak port services dray and warehousing demand.
Fast forward a year, and this second quarter is whatever the opposite of special is. Contract pricing renewals proved to be even more competitive than asset-based services, putting net revenues under considerable pressure. Overall brokerage order volumes per day contracted 10% year-over-year, inclusive of Power Only. And Power Only is proving resilient through the cycle, especially considering we are optimizing more Power Only volume on our network and dedicated backhaul assets than is typical. The freight generation capability of our Logistics model keeps us relevant and adaptable through all freight cycles. While we believe this cycle is starting to show its age as both the inventory destocking phenomenon reaches its natural conclusion and marginal capacity accelerates their exit from the market, the third quarter will still have challenges before giving way to moderate seasonality in the fourth quarter.
And so with that, operator, let’s move to the question-and-answer session. Thank you.
See also 20 Cities with the Highest Weed Consumption in the World and 10 Oversold Global Stocks To Buy.
Q&A Session
Operator: [Operator Instructions] Our first question comes from Ravi Shanker with Morgan Stanley.
Ravi Shanker : You guys are somewhat of peak season whisperers, if you will. So it’s very interesting to hear your comments about a pickup in seasonality in the fourth quarter. I was just wondering how much visibility you have into that? What are your customers telling you right now about both their current inventory levels as well as their need and desire to start restocking at some point in the next quarter or two?
Mark Rourke : Ravi, thank you for the question. I think we’re getting increasingly confident in our discussion with customers that the long destocking trail is coming to an end. We had a recent discussion with a retailer that reflected that they are back to chasing inventory a bit as opposed to destocking it. And in fact, enough so that it starts to weigh on decisions between intermodal and truck transits on certain lanes and on certain products. And so I wouldn’t say that’s everybody across the spectrum, but it is illustrative of the work that folks have done over the last several quarters to get to a different spot. So I think most folks feel that they are getting in with — within the zone. I think the concern has changed to the health of the consumer and what categories they’ll be purchasing in through the remainder of the year and perhaps less focus on the inventory.
Ravi Shanker : Got it. Also as a follow-up, a little bit of shifting gears here because I know you’re going to get a million cycle questions in the call. So I did want to ask you about your recent EV initiative. It feels like there’s some change coming with kind of our focus on building a charging infrastructure, the availability of long-haul electric Class 8 semis now. Obviously, kind of what you just did was a pretty big kind of showcase of your capabilities. Kind of are we at that tipping point where we can start to think of commercial deployment of electric trucks in a significant manner? Or what more do we need to get there?
Steve Bruffett : Well, as mentioned, we have a large-scale operation now moving beyond just the testing phase, Ravi, but I still think there are significant challenges on the infrastructure side and what would be necessary to move beyond some of the applications that we’re presently deploying in, which is the real short haul, high-density markets of Southern California. So again, I think the easy part of this is the truck. And although we have to have different types of operational parameters as we implement battery electric trucks, I still think there’s not an answer, an adequate answer at this juncture for us to be thinking much broader in the short term because of the infrastructure concerns.
James Filter : Yes. The other piece, Ravi, is just the regulation in California is driving this adaptation of electric vehicles. The end of this year will be the last time that we’ll be able to bring a new diesel truck into that operation. So beginning next year, all new trucks will be battery electric vehicles as mandated by — in California.
Operator: Next question comes from Bruce Chan with Stifel.
Bruce Chan : I just wanted to square maybe some of the comments around the optimism in terms of the cycle recovery with the lower guidance. And then when you think about the guide down, you mentioned the lower equipment gains. Is that just due to pricing? And were there any other big factors in that guide down? Any parts of the portfolio that you can isolate as the biggest driver of the remainder of that softer outlook?
Mark Rourke : The optimism is an interesting word. I think the words that we would choose is that we think that the cycle is getting aged. We think some of the drags that have been most prevalent is the inventory condition, and that is starting to age as well. So we’re being cautious. I wouldn’t say overly optimistic would probably be a mischaracterization. But I think we’re getting to the end and that a restocking mode starts to happen at least within — it’s in the sight lines. As it relates to the gains, unlike a year ago, we’ve got more of our equipment on time this year. And so we’ve taken a larger percentage of our new equipment in the first half of the year. And thus, more of our disposal activity took place in the first half of the year.
So that’s a contributor. And then secondly, the demand, which is also reflective of perhaps the health of the small carrier, has waned as the year went on. So we put the combination of those 2 things that we think will have minimal impact on gains in the second half of the year.