Q3 2022 Schneider National Inc Earnings Call
Volume improvement, but muted seasonal peak demand and below historical average of special project programs.
While the supply and demand market dynamics have become more balanced in the quarter, we continue to deliver customer value and gain market share across our multimodal platform with specific focus across our strategic growth drivers of dedicated truck intermodal and logistics.
Our dedicated service offering grew revenues, excluding fuel surcharge was 50% over a year ago, a combination of organic and acquisitive growth.
On average in the quarter, we had 6020 tractors operating in dedicated contract configurations or 57% of the truckload fleet.
We favor dedicated and resilient nature due to multi year contracts the high level of customer integration points, resolving and high renewal rates and the preference of our professional drivers due to the more predictable nature of the work and the close alignment with the customers' business.
Dedicated new business wins and sales pipeline remains robust, particularly in our specialty equipment segments.
Additionally, our MLS acquisition at the end of last year is surpassing plan synergy and performance expectations to include recent new business awards due to its unique relay based execution model.
Intermodal grew order volume year over year by 4% as network fluidity issues remain despite moderate rail service improvement throughout the quarter we.
We did experienced volume erosion in September as customer hedged against the labor uncertainty on the rails.
Converting volume back to truck.
We continue to be encouraged by the positive customer response to our western rail partner change.
Bringing our own container chassis in company controlled dray to the Union Pacific Western network in combination with our high performing Eastern network.
<unk> offers our customers a distinct asset based alternative to our largest competitor.
20% of our Western volume is now moving on non overlapping lanes on the Union Pacific franchise.
Finally, and importantly, our detailed conversion plan with the Union Pacific remains on schedule and we are targeting a flawless transition.
First of the year.
Our financial results in the third quarter reflect additional cost impacts, resulting from executing on to western railroads.
Temporary redundant costs to protect the customer experience as reflected in suboptimal dray efficiencies as the business Optimizes dray chassis and container resources between the two networks.
We expect to quickly shed those additional expenses in the first quarter of 2023, consistent with our implementation plan.
And a moderating spot market environment, our brokerage business grew order volumes year over year by 5% and expanded net revenue per order by 10%.
Logistics, earning contribution also increased by 26% by leveraging our digital freight power platform and its robust decision science capability to efficiently match transportation orders with third party capacity in both carrier trailer and power only configurations.
We believe we are in the early stages of capacity level correction, especially with the small carrier community that increasingly relies on the spot market.
It is our assessment that a meaningful portion of the spot market has dropped below the breakeven point for carriers.
There are series of meaningful and persistent inflationary impacts facing the small carrier community such as wages equipment acquisition cost replacement parts and field to name a few.
Let me stop there I'll turn it over to Steve for more financial commentary on the quarter and our full year 2022 guidance.
Thank you Mark good morning to everyone on the call and we appreciate you joining us today.
Beginning with our truckload segment revenues, excluding fuel were up $87 million over the third quarter of last year, driven by MLS and by organic growth in dedicated.
Speaking of them MLS They continue to meet or beat our expectations as we approach the one year anniversary of the acquisition.
We also see solid growth prospects for them in the future and they are Great addition to our dedicated operations.
Truckload segment earnings of $83 million were close to last year's number despite having lower equipment gains this year.
Also there was a modest sequential improvement in earnings from second quarter levels.
So while this segment was not immune to the changing market conditions, the constructive customer mix and largely contractual nature of the revenue base performed solidly.
In our intermodal segment revenues grew nearly $40 million as both order count and revenue per order increased over the third quarter of 2021.
Delivering volume growth despite the operational complexities over the quarter speaks well for what we can accomplish as we look ahead.
Intermodal earnings of $31 million were well below last year's level and there was also a sequential decline.
Mark just provided the context for these results as we are making investments in the customer experience and managing temporary operating complexities during the transition to the <unk>.
Moving to the logistics segment third quarter revenues were down slightly from the prior year after nine consecutive quarters of year over year growth.
Volume growth in both our brokerage and power only offerings continued over the prior year, but it was more than offset by a decline in revenue per order.
At the same time, our year to date logistics revenues were up over 20% to one 5 billion in this segment.
As a key component of our growth story.
Logistics segment earnings increased about $6 million over the prior year to $28 million.
While down from the elevated levels of <unk> 22 margins of 6% remains historically strong and increased over the prior year.
At the enterprise level revenues, excluding fuel increased $112 million driven by a dedicated growth complemented by MLS.
And higher intermodal revenues.
Year to date revenues, excluding fuel were up $675 million or 18% with each of our three primary segments contributing a similar percentage growth.
Adjusted income from operations of $146 million was below the prior year comparison for the first time in a couple of years.
For further context last year's third quarter included $32 million of equipment gains while this third quarter contained only $11 million.
Adjusted diluted earnings per share was <unk> 70, <unk> and.
In the third quarter as compared to 62 in last year's third quarter.
On a year over year basis, there was a <unk> benefit from our equity investments and a <unk> <unk> drag from lower equipment gains.
Year to date adjusted income increased.
$113 million.
$469 million with logistics driving over half of the increase.
In addition, I want to note that over the past 12 months, we've generated $980 million of adjusted EBITDA.
We've discussed EBITDA on a regular basis, but it is worth highlighting as we are near the $1 billion milestone.
Looking ahead.
Our outlook for the remainder of 2022 continues to call for stable market conditions in freight volumes, along with a muted peak season.
Great volumes, especially in the contractual space are expected to remain steady.
Through mid December and then experienced a typical seasonal decline in the last couple of weeks of the year.
We also expect intermodal margins to remain under pressure for the next two to three months as we invest in the transition to the <unk>.
In addition, we have again reduced our expectations for fourth quarter equipment gains by a couple of million to approximately $10 million.
As such we've tightened our full year adjusted EPS guidance to a range from $2 60 to $2 65.
And regarding net capital expenditures, we are slightly lowering our full year guidance to $475 million from $500 million as some units are now expected to rollover into early 2023.
We look forward to deploying our strong balance sheet and to furthering our strategic initiatives in the upcoming year and I will now turn it back over to Mark.
Thank you, Steve I'll finish up our opening comments, where I started.
We have deep and strategic relationships with customers that are winning in their marketplaces, and we are intensely focused on delivering value to them that only a diversified transportation on logistics offering like ours can.
The mix of services have been purposely constructed with the intent to be more resilient through economic and freight cycles.
And I would offer you a few important proof points for.
First dedicated prominence within truckload is now approaching 60% of our deployed tractor units.
We continue to invest in innovation, such as freight powder for shipper and carrier that enabled us to improve the business results year over year, and a moderating freight market and leverage the highly variable cost nature of our brokerage business.
We continue to develop and mature and new capabilities to grow revenues and earnings beyond our driver and tractor assets.
With the power only offering that links small carriers to large trailer pool shippers.
We have grown our intermodal container count and are in the process of growing chassis to align ourselves with the customer value drivers for economic and sustainability benefits that intermodal uniquely offers.
Our innovation efforts also extent outside the four walls of Schneider in.
In the quarter, we experienced a positive valuation change involving our equity investment and mastery logistics.
Our primary interest in mastery is the value we will achieve operationally as we implement the mastermind Tms across our various service offerings and.
In the third quarter, we fully implemented power only.
With the rest of brokerage and dedicated scheduled next.
Finally, our strong balance sheet offers us optionality to pursue our capital allocation priorities of ensuring maximum resiliency through business cycles and to maximize total shareholder return.
Those priorities include targeted organic and acquisitive growth and reliable and consistent quarterly dividends.
We are well positioned as we close out the year and look forward to advancing our strategic objectives in the year ahead.
With that we'll open it up to your questions.
Thank you we will now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad.
From each in total will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for.
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Your first question comes from Jason Seidl with Cowen. Please go ahead.
Thank you operator, good morning, all I wanted to focus a little bit on the intermodal side as we look into 'twenty three how should we think about both the top line and the margins I mean, obviously youre going to have some of these start up expenses go away I'm assuming.
The congestion issues in the network, whether they are on the rail or they're on the drayage side, we will have debated by then.
So you should have a better comp there and also how maybe should we think about pricing given where truckload rates R&D longer term.
Sure.
Okay.
Okay.
Hello.
Okay.
Cleanup phase.
And I believe certainly.
Can you. Please start over again your line was muted I apologize.
This concludes been unit.
I guess I left you guys speechless.
Can you hear US now can you hear us Jason we can I can yes, okay.
Start over again.
Was all of that and that captured none of it was okay.
Okay.
That was them I'm sorry.
Jason.
And your question there what I wanted to while we believe as we work through the transition.
The majority of those costs and expenses and redundancies will be borne in the fourth the third and the fourth quarter as we prepare for the transition.
We'll clearly have a few weeks as we get in the first year on the cleanup phase of that but we believe again most of the.
Most of the transition expenses will be borne this year. So we believe we'll get off to a.
A flawless start and Thats really the objective and the plan that we've been working through with the <unk> and part of the reason to get 20% volume moving this.
This year is to start to work out those kinks. So we feel really really solid and we feel good where we are and others questions. What are they prepared for us to come with our volume and I can tell you that the <unk> planning has been outstanding not only in their investments for lift capacity.
Far exceeds what would need to bring over at the first of the year.
As well as our investments and the driver experience and the drag we've got some really.
Fantastic experience is now at the ramp locations with our fleet based upon their technology investments. So all of that gives us confidence of a good start to the year.
It's a little early for us to give guidance for 'twenty three to your questions.
Theres still a larger than typical gap between intermodal and truck pricing and that should that should continue to contract a bit as we get farther into the next year, but.
As we get to the first quarter, we will give you more insight into what we think about the business.
Fair enough I appreciate the time guys.
Your next question comes from Bert <unk> with Stifel. Please go ahead.
Hey, good morning.
Good morning.
Maybe just a follow up to that question a little bit of a broader question.
Do you still feel comfortable with the margin targets that you have out there by segment or do you anticipate any of those will change not just in 'twenty three but just as we progress over the next couple of years.
Yes.
Yes. This is Steve.
Take that one.
That we feel quite comfortable with our margin profiles that we've laid out there.
As you know we go through an annual process and if we're going to make changes we would do that in our fourth quarter call. So three months from now we would make any adjustments in like we signaled.
On the last earnings call if Theres anything under review, it's our logistics segment margins and there would be.
An upward bias.
And how we view those targets, but I think we remain quite comfortable with where we stand in the truckload segment and intermodal segment margin profile.
Okay. That's great. Thanks, so much Steve and just as a follow up maybe sticking onto that logistics topic.
What do you see as the next phase of growth there. It seems like currently lower spot rates seem to be weighing on the topline, but volumes and power only remained pretty strong is there a way to to drive top line expansion in an environment like this or does your focus become more squarely on margin expansion.
Yes.
We think.
The primary growth of our earnings contribution from our logistics offering is in top line growth.
And our model is one that as we've talked before certainly collaborates.
At the customer level between our assets and are not asset capability and even further now with the power only offering.
But we also have a freight generation capability.
In our own brokerage area. So it is not reliant on whats happening on our assets.
Generally target a smaller shipper base, which.
Which we have invested heavily in the digital connections via our freight power for shippers to make that more efficient to get after that type of customer versus <unk>.
How we typically serve medium to large sized customers with sales resources.
So again, that's why we continue to invest not only in the technology, there, but the resources that can decouple their success.
Simply what's going on on the asset side. So it should continue to be a volume driver for us as you saw this quarter, we still grow grew volumes.
Moderating spot market because of that capability.
Thanks, Mark Thanks, Steve.
Thank you.
Your next question comes from Jack Atkins with Stephens. Please go ahead.
Okay, great. Good morning, and thank you for taking my questions.
Jack.
I guess, maybe this first one is for FERC would just love and I know, we're going to get a more robust 2023 outlook next next conference call, but I guess kind of thinking bigger picture, Ohio higher level.
Some of the inflationary pressures next year and maybe some potential offsets for that could you maybe kind of help us think through some of the items, where youre seeing some of the.
The greatest levels of inflationary pressure and maybe some areas, where you can look to offset that whether it's through better equipment utilization.
Or.
Maybe driver wages, beginning to plateau would just love to kind of get some thoughts on that.
Yes, I do think to your point that there will continue to be some inflationary pressure on the cost base.
But at a much lower rate than what's been experienced over the last 18 months or so.
I would anticipate a plateauing and most of those areas.
They're not.
Not going away, it's still something to be very conscious of and to deal with.
You mentioned efficiency and I think asset in <unk>.
Productivity is one of the biggest opportunities. So we clearly have in front of us as things become more fluid.
Customer locations.
Our partner locations as well and the things that we can do with our with our own four walls to become more efficient. So I think that would be our primary offset vehicle.
And at the same time, I think that there's a reasonably.
Good construct as we head into 2023 as we start out the year I think there was a pull forward in freight volumes that happened earlier. This year that are leading to a softer peak season.
As we're currently in but then.
Pull through of that.
The rollout forward into next year I think there is a reasonably solid start to the year.
So.
That.
Well positioned I think across the portfolio and excited about the intermodal opportunity that we have in front of us.
To start to capitalize upon that as the year progresses. In 2023 is part of our self help story there too okay. Okay. That's very helpful. Steve. Thank you and I guess, Mark maybe if you could just expand a bit on Steve's comment kind of comment bigger picture macro thoughts on 'twenty three I mean.
I guess the setup just from a from a market perspective in the first half of the year is pretty challenging but.
You noted that youre, starting to see some capacity began to come out of the truckload market.
I guess, how do you see the next.
Three to four quarters, playing out maybe maybe four to six quarters, playing out just in terms of the broader freight markets.
So it's tough to have a crystal ball, but.
I think you guys have a great insight into that.
Yes, Jack Thanks for the question and maybe just a couple of.
Flanks to go down to build on Steve's comments on one of the.
The difficulties of having the OEM issues that we have which we fully expect to continue to some degree all of 2023.
Is that we have several hundred units multiple hundreds of units that are beyond what we would consider our ideal life that is from an expense standpoint maintenance parts.
A real drag on the operating income statement and so I think those same elements.
Probably an even more pronounced way hit the small carrier community is why we do believe as we look at our brokerage business and we look at.
Kind of our assessment of that spot market that there is a good deal of stress that should start to see a moderation of capacity in the marketplace.
That's we're on the cusp of that presently thats not like let's kind of wait until the first half of next year for that to occur.
But when you look at our truck business made it to talk about that inflation, just just a bit and.
And I believe gains are due should be it in the results and thats, whether they go up or whether they go down that's a legitimate.
Out of the business, but when we have $20 million or so less gains predominantly that in truckload and pretty flat earnings shows that the business is pretty resilient dealing with those inflationary pressures.
Really are still quite heightened at this point I, absolutely agree with Steve that will start to moderate and has started to moderate particularly on the capacity acquisition front. So.
As we look towards the first half of the year I think there's some interesting things developing there around the customer we had one of our real valued customers in.
On a discussion about.
Demand how is this peak season play out how does it play into the first of the year.
They indicated they had extended their lead time for product three to four fold what is kind of their quote unquote average lead time.
And so their seasonal goods got in in July versus what they would typically get it much later than that.
And so as we pull that through for the peak season for the holiday season. They are already back to their normal lead times. They expect first quarter to be a normal lead times.
And so it's a <unk>.
Data sample of one but it does kind of demonstrate that it may not be as we may already be dealing with the air pocket.
Today, they may not as extent is heavily into the first quarter as conventional wisdom is but.
We'll wait to see how that plays out.
Okay. Thank you so much for the color really appreciate it.
Next question Kenn Hoekstra with Bank of America. Please go ahead.
Hey, great good morning, Mark its Steve.
I think that was really helpful to understand the timing of your thoughts there.
Mark maybe Steve mentioned, some thoughts on the balance sheet. There you mentioned I think some some things about strict strategic acquisitions, maybe you could expand on that a little bit youre down at two times debt.
That coverage you have been above one in the past what is your strategic comfortable level on leverage ratios and are you seeing more opportunities in the market have valuations adjusted in and do you think we can actually see economic benefits of consolidating more within the <unk> assets.
Yes, Steve I'll take the first part of that as far as comfort level with that and so on and.
Certainly.
We will maintain a strong balance sheet, regardless of what strategic paths, we go down.
Because we feel like that's an important strategic asset in this space and.
Our comfort level with with that.
<unk>.
It depends on the opportunity and what type of cash flow you are acquiring and so on as part of the equation, but in terms of our ratio I think.
Certainly a one times EBITDA type of ratio was comfortable one and a half is comfortable.
For the right opportunity, even two times would be.
Palatable for our profile.
Sure.
So that's kind of how we think about our capacity our firepower if you want to label it that way.
From a balance sheet strength.
And then mark probably have some color to add to this but as far as the M&A front and what we're seeing out there I think there are quite a number of assets either end market or.
Planning to come to market in the not too distant future as we understand it.
So we're just carefully assessing things and.
We're talking about that cost of debt has gone up.
Not historically out of bounds, yet quite a bit higher than than we've had.
Opportunities to access over the past several years. So I think that will have some element of what people are willing to pay.
In the M&A space.
We will probably see some.
Normalization or leveling out of.
Earnings streams from those.
Assets that are in the market. So I think there probably is.
Balancing out if you will.
Rationalization evaluations.
Yeah again as I mentioned in my opening comments.
Very much are leaning into.
Sure.
Accretive ways to grow grow the business and the acquisition front is.
Along with our organic growth objectives are kind of prime.
And prime be so.
We'd be disappointed if we couldnt.
Find opportunities to do that.
Is there a specific Gary again isn't more truckload dedicated like MLS is there is there anything you are seeing more of that you like.
Yes.
Yes, I'm sorry, as you look at our portfolio. We certainly believe our logistics business is a great and has been a great organic driver and even more now so with our ability with the power only offering as we discussed so our intent and our focus is on the specialty truck side of the business presently.
Dedicated is obviously very interesting there, but it wouldn't necessarily have to be just dedicated but something that adds something unique and sticky and.
That we believe is highly defensible and so.
Dedicated is probably our most interest but we are looking at a series of other specialty type operations as well.
Great. Thanks, Mark Thanks, Good luck.
Thank you. Our next question comes from Chris Wetherbee with Citigroup. Please go ahead.
Hey, great. Thanks, Good morning, guys.
I guess I wanted to ask a little bit about sort of the rate environment versus the cost environment as we start to get into next year and.
Maybe it's a little too early to start talking about sort of the financials, but maybe in sort of bigger picture trend dynamics. How do you expect sort of the dedicated in truckload pieces of your business to trend from a rate standpoint, and then when you look at the cost environment that we're in which is quite inflationary do you think that there are lags between when one is still <unk>.
<unk> and the others potentially falling just wanted to get a sense of roughly speaking how youre approaching 23 from a price cost perspective.
So Chris as you think about as we think about the truck side of the business clearly dedicated more stable and we have escalators.
And how we deal with inflation cost, particularly around the driver and those are still as they come up when those annual type renewal dates are still being addressed and we're still seeing.
Customers, obviously being responsive.
The driver needs there and so dedicated is probably still on the upward trend as it relates to price while the network side has.
Moderated and flattened out and so what we're really focused on as Steve mentioned, there is how do we bring fluidity back.
As customers arent sitting on equipment as long how.
How do we start to see our self help items be.
Focus around asset utility and asset utilization on both the.
The truck trailer container.
And Thats one of the things that.
Every day, we're coming and looking and focusing on to bring yourself hype self-help item to the business.
Deflation around the equipment is still a bit of a concern.
And so getting some OEM relief here to get some of this older equipment back out of his businesses would be quite helpful. But again I think we're going to be the industry is going to be challenged throughout 2023, as allocations and difficulty of producing at a level even that we experienced here in 2022 might be challenging. So I think the whole industry will be under some of that pressure.
Sure.
But I do think the cost of capacity and recruiting and some of the other items that have been really inflationary will not.
Not be as big a drag as we head into 2023.
Okay. That's helpful color I appreciate that and then just maybe too little quick detail ones here and I apologize. If you gave this already but do you have a sense.
Maybe tell us what what you assume for gains in the fourth quarter and then I was wondering if you have broken out the intermodal cost in the quarter that were related to the sort of administrative or technical dynamics of switching over carriers.
This is Steve on the first part of that I'd indicated that were at about $10 million or so expected of equipment gains in the fourth quarter.
And that was I believe $16 million or so a year ago.
So again, another slight step down.
And we talked about the buckets of.
Inefficiencies for making the transition, but we haven't we haven't shared the dollar amount.
Okay, Alright, thank you very much appreciate it.
Thanks, Chris.
Next question comes from Ravi Shanker with Morgan Stanley . Please go ahead.
Good morning Gents.
So just to kind of summarize what happened this quarter or kind of when you look at the sequential step down and the earnings trajectory at I am in logistics.
How much of that would you say it was like.
One time ish or kind of driven by events that are specific to the quarter versus not going forward or is this kind of where the cycle is right now and kind of the new.
<unk> base going forward.
Okay.
Good morning, Ravi, Let me take the logistics one first clearly we believe in the second quarter, we were at the.
The maximum benefit of the economic condition, there between the buy sell and contract spot as we played out and logistics and also we had a very robust quarter on the port services part of our business that we don't talk a lot about but we support the customer around warehousing and port management important Dre.
That was also at its peak in the second quarter. So there was a step down in the port activity as well and as spot prices moderated and in brokerage.
You saw our results follow that still expanded net revenue per order still expanded volume certainly over a very good third quarter of a year ago.
But those are really special quarter for logistics in the second quarter of this year.
As it relates to our intermodal business. There is two things that just.
While dealing with all the <unk>.
Complexities of the quarter, we still grew order count 4%, but we also had a significant shrinkage of our regional part of that business because of the rail labor.
Concerns that shippers had particularly on those shorter length of hauls.
And so we have a step back in volume on a regional play there that we didn't actually anticipate going into our guidance.
Again, that's starting to rebound, but thats that puts it doesn't just happen for a day or two that's a couple three week effort when people make the switch and it gets the air pocket through the system. So we're starting to see some recovery in those volumes on intermodal.
As Steve mentioned, we will have some other expenses this quarter as we get to the final push on the transition, but that really started in earnest.
New facilities, new drivers optimizing between the two railroads around your chassis in containers and that will continue again here in the fourth quarter.
Expect Ravi to quickly shed those redundancies as we get into the first quarter.
Yes, so great and just as a follow up to that.
Speaking of potential strike and the impact maybe athene due of the unions I've had rejected the tentative agreement.
You feel like there is the risk of a potential strike action, maybe a couple of weeks from now and kind of do a big unions announced their verdict.
And if so do you think shippers will similarly trying to adjust for that beforehand, and so you may see a similar headwind in November or December .
Yes, it's really hard for us to comment specifically on that.
Ravi I will.
As we've kind of assess shipper behavior. It was clear the first time that they were making more diversionary actions because of that concern.
I would characterize the sentiment presently doesn't mean, that's what in change is that.
They think there'll be some type of them.
More government intervention this time as opposed to <unk>.
Getting a strike actually occur, but again thats outside of our expertise.
But the customer behavior to date Hasnt indicated that they're taking those actions at least yet.
Understood. Thank you.
Next question, Jon Chapell with Evercore. Please go ahead.
Thank you and good morning.
Steve you indicated that there was to be a review of the long term margin target might be an upward bias to logistics, which is primarily because of power only when we look at the third quarter and maybe going forward that revenue per load decrease that you spoke about is there any way to parse out how much of that.
Traditional brokerage versus how much of that was in power one needs. So we can kind of get a sense too if power one needs a bit stickier through the course of the cycle.
Yes, we haven't broken those two dimensions out within our <unk>.
<unk> results that we report.
<unk>.
We are growing both.
The rate of growth within the power only has been <unk>.
Higher, but it's off a smaller base obviously.
And we would anticipate that dynamic continuing as we go forward.
And the power only contribution as a reason why they are there is an upward bias.
Within our targeted margin range for the logistics segment.
So.
With all of those but I think we would stop short of.
Giving specifics between our brokerage business and the power only business at this point, Jonathan I would offer that our power only business is largely contractual.
And so we're making commitments via those allocation events.
In our brokerage business is about 50% contracted 50% spot. So there is a more fluid.
Revenue per order play in our traditional brokers and there is an R.
Power only because of that difference.
Got it so even without the magnitude.
<unk>.
Even better.
Mark My second question for you.
Forgive me, it's probably a bit of a long winded one because there are some puts and takes here. We've had one month now of a real acceleration in class eight orders and opening up the book for next year finally, pent up demand.
As you think about the benefits or potential risks Schneider on the one hand, I think it would help you with some of those hundreds of units that are.
Beyond where you'd like them to be so maybe replacement would be really good on the other hand, maybe it takes away from some equipment sales opportunities as others are able to get access to new equipment.
How do you think about first of all the duration is this just a one month blip or do you think that there is a lot of pent up demand for the coming months and two when you kind of net it all out for Schneider positive negative neutral.
Yes, good good.
Good question.
Okay.
And it kind of parse through that a little bit.
While the order board is opened up I wouldn't overreact to that what I would react to is what is the expected deliveries of new units in the calendar year 2023.
I don't think theres going to be any material uptick than anything that we experienced in 2022 and there is some question of whether it could be even slightly contracted so.
So the order timing is less relevant in my mind, it's the delivery and what's going to be capable of.
Actually getting placed into service and purchased.
And I don't see a real material change there so the dynamics of.
The lifecycle ownership the impact of maintenance.
Disposal sales I still think will be.
Fairly similar to this year. So obviously the value dynamics may change based upon what the market condition is but.
I don't think a influx of new equipment is going to dynamically change.
The marketplace I, just don't see that as a as a risk in 2023.
Okay, great. Thanks, Mark Thank you.
Next question comes from Ari Rosa with Credit Suisse. Please go ahead.
Okay.
Hey, good morning, Mark Good morning, Steve.
So.
You mentioned in your opening comments that a meaningful portion of the spot market or you think that that has now dropped below the breakeven point for a lot of carriers I just wanted to ask how do you think about what the floor might be on how much further downside there might be to rates and one of your competitors and Im sure you are well aware just kind of given an indication of.
What's the implied earnings might be based on kind of what their view is on what that floor might be on rates.
Was hoping we could get your thoughts on that even if it's not a specific number maybe directionally kind of how youre thinking about what that might look like.
For 2023, Im assuming youre pushing there.
Yes, yes.
You want to speak to 293, that'd be great, but just kind of as more of a.
Where's the floor on rates and kind of how far are we from that from that place and then kind of.
How do we Schneider earnings trend.
In that environment.
Yes, I do think there is a different.
Floor quote unquote.
And what is typical in a if we're into some type of on a long term freight cycle change and I think thats yet to be seen.
Because of the wage inflation because of the equipment cost.
So the major drivers up and down the income statement.
Are the ones that are experiencing the highest level of increase that are half.
Even though we may moderate.
Some of the variable cost like.
Getting after drive recruiting and others, but the wages those arent going to change the equipment cost and the inflationary there the replacement parts.
The maintenance Tech all of the things that it takes to operate this.
Type of operation is still going to have I think those costs are going to stay at an elevated level I may not be going up dramatically from here, but.
I think they're going to remain at an elevated level, which will certainly put a floor of.
Whats.
Capable on any type of rate change.
As it relates to obey.
Just on.
Alright, I was going to say sorry Ravi.
But I was going to ask.
As it relates to how much further downside there might be a risk to rates what are the implications of that are we are we narrow floor.
Well I think we've seen a stabilization even in the spot market and.
As you know that we have to get through the allocation season next year, but I don't see a dramatic drop off in rate.
And the contract space.
Because of those fundamentals, we just talked about so yeah. So I guess said another way I think we are close to it.
The spot quote unquote spot market influence can be on that type of that type of allocation.
Yeah and to the second part of your question.
Given the.
Portfolio construction that we have today versus what we had.
Several years ago, or even four years ago.
Feel like were.
Positioned as a more resilient.
Company, even more resilient I should say.
Theres, obviously relative and absolute dimensions are comparisons when it comes to the definition of resilience and what that means.
As we go forward, but.
Without providing specific numbers or whatever do feel like we.
Have a more durable earnings stream in a portfolio.
Built for.
Those variability and so.
I feel pretty confident about where we sit.
Got it Okay. That's very helpful. And then just for my second question I wanted to ask operating supplies and expenses.
Took a big step up over the past few quarters, maybe you could speak to what's driving that increase should we.
Interpret that as being related to some of these costs related to intermodal and kind of operating across two networks or is it something else that's going on there and then obviously forecasting that how should we think about kind of Ken that moderate in the coming quarters.
I think the biggest dimension that's going on there is that gains equipment gains go through that line. So there were a lot more gains which kind of reduced the number last year in the comparative period and fewer gains in this third quarter.
So I think thats, what youre seeing.
Lee there if you were to be able to strip those out I think you'd see something like a nine nine or 10% year over year increase in that line so within bounds.
Type of inflationary pressures that we've seen.
Got it okay. That's very helpful. Thanks for the time.
Youre welcome. Thank you.
Next question comes from Brian <unk> with Jpmorgan. Please go ahead.
Hey, good morning, guys. Thanks for taking the question.
Maybe just two quick ones can you just talk about refinery.
Finally, seeing I think after two years some service improvements on BNS, Jeff, but I realize youre transitioning off that and then where do you feel like that's going to help you a little bit here towards the tail end of the transition or is there just a little bit too much.
To kind of get over the goal line in terms of the additional costs in the duplicative chassis and things like that you mentioned.
And then secondly, if you could just offer some context.
On rates I know there is there is mix and length of haul involved but the intermodal rates increase a little bit lower than we would've thought is there anything that you would call out in there in terms of relative to the market. Your peers and then also I guess relative to that spread you mentioned.
Intermodal is still quite a bit cheaper than truck.
The first part of that was.
Costs in the quarter I'm, sorry can you.
Just the first part of that sorry, Brian sorry.
Alright.
Once you there.
The first part was really just the NSF finally, getting some service improvements last year transitioning off but does that provide any benefit here is that just too little too late essentially given the big lift to get them to shift down.
Thank you, Brian sorry for missing.
I missed that first part, yes, absolutely fluidity and service is a big help.
Predictable we are that the more turns we can get in.
Yeah, we're pleased at any part of our partner a.
Partner network can improve upon that so I would I would not diminished.
The importance of that and because we're going to be on the BN in a meaningful way all the way through the tape. So every bit of help there that helps us get another box turn.
Again, another customer surrogate other box freed up all contributes to improve results. So.
So appreciative of their focus on our push above of the.
<unk>.
Okay.
Second part of that is.
Hawaiian.
B titles relative.
Yes.
Hi.
Up on coffee this morning, and both and so that's the second one.
Second one really was on rates.
J B I got up close to 20%, China was up closer to 10 X fuel.
Theres any mix impact between those two and yes Korea, yes, there is service or it.
It seems like there's more room to price at least at this point in the cycle.
Yes.
Mix.
Did change.
We did.
<unk>.
International was certainly a nice bright spot in and out of Mexico as I mentioned, we had a contraction in our regional lanes, particularly out east because of the more readily.
<unk> available to convert to truck because of the labor uncertainty and so this was a.
Kind of a goofy quarter for us as it related to what is typical comparisons.
Because of the mix and we introduced more western regional type lanes as well.
Are not overlapping with <unk>. So it's a it's a little bit of a hard comparison for us because it is a different mix for for a series of influences there Brian .
Brian .
Okay. Thanks, Mike I appreciate the details here.
Thanks.
Next question comes from Tom <unk> with UBS. Please go ahead.
Yes, good morning.
Mark I wanted to ask you what your view on.
Kind of how optimistic really we should be on volume for intermodal in 2023.
It seems like you've got two kind of significant but opposing forces. So you've got probably some meaningful weakness in freed.
Be meaningful weakness in container imports.
At the same time, I think <unk> got a lot of conversion opportunity truck truck to intermodal. So how do you think about.
How does that shake out are you optimistic about volume growth for intermodal in 2023 or would you say hey, we ought to be a little guarded because just that broader freed backdrop.
Might be a bit soft.
Yes.
There are as you mentioned there Tom opposing forces.
It could have some influence there, but I can't tell you we've gone through now two consecutive years of.
More conversion from rail to truck versus the conversion from truck to rail and so there is in our view, some pent up opportunity and demand.
Just to get back to.
What really should be moving on the railroad and Thats on a regional basis or.
In the east or the west and so we think theres plenty of opportunity there.
As I mentioned International Mexico was also I think can be a nice.
Catalysts for growth in the coming year as well so from that standpoint.
We feel that there's probably more opportunity.
And then we certainly experienced here in the last couple of years combine that with having more origin destination pairs. Some more efficiencies that we're gaining with our change in the west that's the better connection points that we have with the <unk>.
One of the things we've suffered a great deal.
Is just the fluidity of the box at the customer the inefficiencies at the rail. So we have again another one of those great self help opportunities.
With just better fluidity to get our boxes in the right place more efficiently.
And all of that generally leads to growth.
And I think we have to just see if this recovery of demand is a little quicker than people think just because of the distortion that we've been through in the early placement of goods in the country here in the middle part of the year as we get through that that has to be replenished.
And so.
I am looking for maybe some pleasant surprise just based upon.
Things getting back to a more normal replenishment cycle as well.
Okay.
Great and then I guess, the second question or follow up.
How do you think about volume versus price I think.
Youre optimistic on volume growth and intermodal.
I think.
Your competitor from Arkansas is very optimistic on volume <unk> got some new capacity available on the <unk> they get a lot of boxes.
Hi.
Im assuming your Chicago competitors going to be optimistic on volume too so.
I think there might be more flexibility in some of the rail arrangements than historical so.
Are you going to prioritize volume and if you need to push a little harder on price you'd be willing to do that or if there is.
Kind of.
Significant price pressure.
Say, hey, we don't need to grow volume, if there's too much pressure on price.
We look to optimize contribution to the business and.
And.
We're always constantly looking at the levers between volume and price in.
And so I think we will respond to the market I think we have the resources and the capability and the technology to do that effectively Tom.
And Thats.
Whether that's in our highly variable cost nature of our brokerage business.
We are now as Ive mentioned in trucks, 60% dedicated so we have less influence or less those dynamics have less influence on the truck side of our business still meaningful but not as much is because of that switch.
To the dedicated portfolio.
And then we have more boxes, we were a little behind on our chassis, we're going to get that caught up was we are starting to take chassis is here in the fourth quarter, which again puts us in better fighting shape.
On the volume gains next year and the customers have been really really responsive so.
We will be up against tough competition, we're always up against tough competition.
But we'll optimize and respond to the market as appropriate.
So you think about balance or do you think more about volume.
I think our view is we don't generally chase volume, we're chasing contribution and if we can do.
To do that at a reasonable return, we will and if we can't then we'll probably look for other avenues.
Within our portfolio.
Okay. Thanks, a lot. Thank you mark.
Yes.
Next question Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks, Good morning, good morning, Doug.
The underlying guidance for Q4 is up from Q3, if you sort of.
Strip out that the equity gain which is a little different than we've heard from some of the other truckers, maybe just what's the driver of the sequential earnings growth.
Q3 to Q4, which segments are broadly what's driving.
Yes, Scott Steve There is a combination of things in there.
I do think that.
Sure.
We just.
Some of the dynamics within our intermodal operations.
We'll continue into the fourth quarter of those complexities, but I think that we have an opportunity to put a few more dollars on the board from our intermodal segment in the fourth quarter than we did in the third.
And.
That's.
Perhaps true with across the board across all of our three primary segments, it's incremental it's not not huge.
Think that there is a little bit of lift just from a volume.
Dynamic if you think about the third quarter you got July July was pretty soft volume month, and I think we will have better volumes.
As we go through.
October and November and up through mid December .
So that volume play translates across our service portfolio.
That's helpful.
Okay.
Also add Scott that our dedicated fleet is <unk>.
Largely implemented we don't have a lot of startup activity in the last six to eight weeks of the month. So there is generally a little less drag than we typically have startups.
Startups pushed into next year.
Okay helpful and then.
Your comment Mark that are.
Costs were up so rates have this right.
Half the bottom higher than maybe they bottomed in the past I guess, I'm wondering where our spot rates today versus historical bottoms and is that sort of proving out your point.
Or not.
At bottoms.
I guess so.
<unk> specific I do believe it has certainly stabilized Scott I don't think we are.
And as we look at.
What we do which is at a more moderated basis, but is what we look at what is occurring with our.
Brokerage offering.
I think carrier costs half have stabilized.
And.
Net revenue per order I think we will we will stabilize as a result of that so I don't know if that means we are at bottom, but it kind of feels that way to me.
And certainly I think thats over now and extended several week period. So.
So I think we are at.
At the what is considered a trough if that's the right word.
I guess, what I was kind of so so if this is the trough what we'll ultimately see how is this trough look versus prior troughs are are we dropping higher or not I'm just trying to think.
Actually seeing it play out that that rates are trough being higher than they did.
<unk> cycles.
From a carrier costing standpoint, I think that would be absolutely the statement.
I don't have a percentage number or something to put some extra but Scott will take a closer look at that maybe we can.
Be prepared for a better answer on that.
A follow up call but.
But certainly our expenses are higher than the last trough as it relates to the carrier piece.
Yes, that's not just ours I think it's across the space, which by itself, which is our third party costs articulated that type of position.
For the past several quarters that we do believe that all of those dynamics, including.
The <unk>.
Constraints on OEM capacity, which is a.
Meaningful input to this equation does support a higher.
Trough.
If you will the reason for my hesitation as we look at our business. We look at net revenue per order, which is which is the spread between those two we don't know.
So you just look at the price point, we look at the spreads so.
That's where my head is around our metrics so.
Okay, Alright, maybe we'll take it offline. Thank you guys.
Thanks.
Next question comes from Jordan <unk> with Goldman Sachs. Please go ahead.
Yes, hi, good morning, you guys have a relatively diverse customer base I'm, just curious I know you've touched on demand and.
Thoughts around that and replenishment big picture, but as you look at the various sub sectors. Some of the bigger pockets like retail or consumer home improvement can you maybe talk a little bit about.
Sure some of the demand thoughts on some of the bigger segments and maybe even how they're suggesting inventories look as we move into peak. Thanks.
Yes, John we do we do play in a very diversified way across the.
The economy in various verticals I would tell you what.
Perhaps the strongest presently.
Maybe surprisingly the home improvement channel is.
Is showing some strength as well as off price retail value retail.
And from a and that's more on kind of what I would consider our general.
Vendor inbound type, but obviously, a dedicated DC to store and the things that we're doing at this period of the year are also pretty busy and as you would expect us and getting ready for the holiday season, but.
And then I'd, probably put food and Bev is showing some strength and those would be the.
Three or four verticals that I think are are that we're most.
Mystic about.
And on and perhaps on the side that might be a little bit pressured I presume that would be other retail or.
Bulkier retail I don't know Im just curious.
Yes, I guess I would just consider.
Maybe that is just more stable.
Not necessarily retracting, it anyway, but not not perhaps increasing.
Because of the seasonality either so those are the ones that I mentioned are the ones, who kind of standout that our move.
Moving above their kind of average number.
Got it thank you.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.