Q4 2022 Schneider National Inc Earnings Call
Greetings and welcome to Schneider incorporated fourth quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. Steve Ventas. Thank you you may begin.
Thank you operator, and good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer, Steve <unk>, Executive Vice President and Chief Financial Officer, and Jim filter.
He is 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 Dot 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.
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 breath it.
Thank you, Steve and thanks to each of you for joining us this morning.
I will provide a financial recap for our fourth quarter and full year results and then Mark will provide his insights on various aspects of our operations as well as on market conditions.
I'll then offer some additional context for our 2023 guidance before we open up the call for your questions.
As Steve indicated.
Jim filters with us today on the call and he will be joining our quarterly earnings calls on an ongoing basis. So we look forward to his participation in perspective.
Also we have refreshed our investor relations presentation.
And it is available for your reference on our website as will mentioned some of the slides during our comments today.
Regarding our quarterly results 148 million of adjusted earnings was the second most profitable fourth quarter in our history behind only the 177 million we earned in the fourth quarter of 2021.
Adjusted EPS for the fourth quarter was 64 cents compared to the record high of 76 cents in <unk> 'twenty one.
The 2022 fourth quarter included an adjustment for our full year tax rate.
Mostly related to state income taxes, and the associated apportionment that has been.
Slightly modified by the inclusion of MLS and our mileage.
The lower effective tax rate bolstered EPS by three cents as compared to the 25% rate we had been using as an estimate for the first three quarters of the year.
Yeah.
While fourth quarter adjusted earnings were 16% below those of 2021 full year earnings of 617 million or 16% above 2021.
In addition to the favorable financial results of 2022, the past travel that's worth noting.
2022 is a year in which we advanced our strategic objectives of growing dedicated intermodal and logistics at a faster rate than the other components of our portfolio.
Dedicated revenues within the truckload segment grew 45% over 2021, a result of organic growth in the MLS acquisition.
For the year dedicated revenues were 53% of the truckload segment revenues as compared to 42% in 2021.
Intermodal and logistics, both posted record revenues and earnings in 2022 and together they delivered about half of segment earnings.
Regarding cash flows we generated $856 million of cash from operations, which was an all time high and compares to $566 million in 2021.
Net capital expenditures finished 2022 at 462 million just below our most recent guidance of $475 million.
During 2022, we reduced our debt by over $60 million and our total debt currently stands at $205 million.
Also we paid 56 million in dividends during 2022, which was 12% above 2021.
As we steadily increase our returns to shareholders and I'll now hand, it over to Mark for his comments. Thank you Steve.
I want to thank our valued and diversified customer community and our 17000 associates across North America, especially our professional driver community for their contributions and tireless efforts in support of another record performance year for the company in 2022.
We set records in revenue, excluding fuel surcharge of $5 7 billion.
Record adjusted earnings of $617 million achieved record free cash flow of $395 million and posted record adjusted EBITDA of $967 million.
In my comments I will provide additional commentary on our fourth quarter results by segment.
And what that May signal for the new year here in 2023.
Typically I will highlight the status of our three strategic growth drivers of intermodal dedicated and brokerage, including the emerging Influencer power only.
As expected the fourth quarter was atypical what is normally experienced during the peak holiday shipping season, especially in the irregular route network portions of our business in both truckload and intermodal.
Domestic intermodal container volume moderated as import activity Wayne and apart from specific e-commerce, driven channels high intensity capacity coverage volume and service premium project work and truckload was limited.
Notably in the month of December we successfully completed the conversion to our new Western intermodal rail partner with Union Pacific. So let me start there the planning and execution work of the conversion teams at both Schneider and the Union Pacific exceeded expectations.
As we collaboratively focused on ensuring a positive customer experience through the conversion.
I also want to thank and recognize our experienced professional dray driver associates, who made it happen at the rail terminals and on the Street.
We do not have as much cost impact is expected as we moved from running two networks in the west to what a good portion of the set up work or positioning of stacking containers and chassis for the conversion was completed in the third quarter.
It's less overall seasonal volumes and with rail congestion improving our intermodal operations enjoyed higher dray productivity levels less use of third party dray resources as well as running left empty repositioning miles than we had anticipated in.
In the quarter intermodal year over year revenue per order improved 7% with Warner volume contraction of 6%. This combined with solid execution in transitioning our western rail partner resulted in only a 50 basis point year over year contraction in operating ratio to 83, 3%.
740 basis point improvement sequentially from the third quarter.
As we look at the 2023, we are now uniquely positioned with our intermodal model of company owned containers and chassis. The company driver Dray pardon me with the Union Pacific and the last and the FX in the east.
With more origin destination pairs and more frequent daily to purchase schedules in the west and CSS highly reliable execution model East, we're very well situated to take advantage of opportunities for growth, including over the road conversion.
That being said in the near term, we expect intermodal volumes in the first quarter to be pressured retail Asia imports activities ramp back up.
We are in the early stages of the 2023 contract renewal process and we are monitoring several customer decision threats for instance, how are they shaping their import location strategies between the eastern and western ports.
Are those and push more volume through the eastern portion of the last 18 months concerning going back to the west.
Fluidity has improved.
What is the differential between intermodal pricing in over the road alternatives.
As well as what is customer strategies that take advantage of the favorable emission reduction opportunities intermodal uniquely offers.
For the latter we intend to offer additional value throughout the year as we ramp up our sizeable battery electric dray presence in southern California for customers looking for the greenhouse solutions available.
We are intently focused on intermodal asset productivity needs to take advantage of the investments our rail partners have maintenance surface recovery and the investments we've made in container count growth in 'twenty, one 'twenty two.
As such we do not anticipate adding to our container count this year.
Let's move onto the truckload segment.
Our dedicated tractor count grew 33% year over year through a combination of organic and acquisitive growth truck count was down slightly from the third quarter as new business startups were limited and.
And contractual flex units were less profit in certain customer applications as we matched resources with individual customer demand levels.
Dedicated revenue per truck per week improved 2% sequentially as annual pricing adjustments are being implemented.
We expect positive price appreciation in dedicated in 2023 as first half renewals reflected inflationary pressure of equipment replacement cost parts maintenance and driver wages.
We finished the year with dedicated tractors, making up 57% of the truckload fleet.
Our strategy is to continue to grow dedicated truck count due to the long term nature of the contractual relationship and a deeper integration level with a customer which leads to a higher percentage rate of contract renewals.
Furthermore, and importantly professional drivers increasingly prefer the predictable nature of the work and proximity to the customer relationships are dedicated that provides.
As we enter the new year, our dedicated sales team has closed on several hundred units of new dedicated business awards that will begin in <unk>.
<unk> later in the first quarter and ramp throughout the year.
Our network tractors finished the year at 43% of truckload fleet essentially flat sequentially from the third quarter.
Revenue per truck per week was down low double digit percentages year over year with two thirds of that being price comparison, driven primarily to the lack of premium project work and lower seasonal spot rates.
Remaining third was productivity driven due to the moderating demand condition and the disruptive nature of the winter weather fronts than we experienced across a large swath of the nation during the week, leading up to Christmas.
Our 2023 plans in truckload, we focus on organic growth in dedicated however, we are also actively pursuing and screening acquisitive opportunities in specialty and dedicated truck and are positioned well to move on the right opportunities this year.
Finally, our logistics operating ratio dipped only 36 basis points sequentially from the third quarter.
So this year has third party support for Port Dray, Trans loading and promotional support work in brokerage moderated in the fourth quarter.
Despite the limited seasonal project and promotional opportunities order volumes in brokerage proved highly resilient down just 5% over last year's fourth quarter.
We would attribute the resiliency and order volume through a few things first it is our direct demand creation capability in brokerage a function that is complementary to our truckload offering but not dependent upon it.
Secondly, our contract percentage in brokerage is 60% and our investments in our digital freight power connection for shippers and carriers continues to increase our market nimbleness and both of the capture of demand and capacity, while lowering our acquisition costs on both the buy and sell side of the equation.
Thirdly, we have spent the year, improving our collaboration technology and processes between our power only third party carrier offering and our asset base network truckload service.
We have improved on the customer lens on our revenue management order acquisition and trailer management execution model that fits our strategic imperative to offer a broader submitted contract solution to our customers to address the irregular route coverage needs.
As a result over time, we see our network business evolving to a more trailer centric versus truck centric service offering.
So with that I'll turn it back to Steve to provide an update on our 2023 guidance.
Great. Thanks, and moving now to our forward looking comments you can find the summary of our 2023 guidance on slide 26 of our Investor presentation.
As has been well documented at 2023 has started off in a softer economic and freight environment than we experienced a year ago at the same time, we expect that the broader macro forces of supply chains and inventories will further rationalize in the early months of the year as our customers have been diligently working to address these issues.
For several quarters already.
As such we expect steady improvement in freight conditions as we progress through the year.
Importantly, we expect our earnings to this to demonstrate resiliency given the progress we have made over the past several years with the composition and performance of our multi modal platform.
Speaking of our platform.
I wanted to touch on the long term margin targets.
<unk> ranges that we have for our three segments given that this is the time of year. When we review these targets and provide any updates.
For the truckload segment that range remains at 12% to 16% and for the intermodal segment that range continues at 10% to 14%.
For the logistics segment, we are raising the long term target.
Margin ranges by 100 basis points and that will be two 5% to 7%.
This range has been at 4% to 6% for the past several years, but with the momentum of our brokerage business, coupled with a rapidly growing power only offering it makes sense to raise the parameters for this rapidly growing piece of our business.
You can find these target margin ranges on slides 23 through 25 of the IR deck.
Moving now to equipment gains for 2023, we currently expect that used to be in the vicinity of $27 million that we realized in 2022.
Also our 2022 adjusted EPS of $2 64 included <unk> <unk> of net equity gains while our 2023 guidance currently assumes none.
As we incur equity gains or losses will incorporate them into our guidance as we progress through the year.
Regarding our effective tax rate, we expect it to be approximately 24, 5% for the full year of 2023.
And that brings us to our 2023 guidance range for adjusted EPS of $2 15 to $2 35.
Our guidance for net Capex is a range of $525 million to $575 million and our capital plan includes meaningful investments and trailing equipment in support of growth and our dedicated power only in intermodal offerings.
The plan also enhances our tractor age of fleet that has trailed our targets for the past couple of years due to OEM production constraints.
Continuing with the theme of cash flows.
We've announced a <unk>.
Share repurchase authorization of $150 million.
The primary purpose of this repurchase program is to offset the dilutive effect of equity grants to employees overtime in.
And the program will serve as a complementary component of our overall capital allocation framework.
And finally, we recently announced an increase in our quarterly dividend to nine <unk> per quarter at 12, 5% increase from the eight per quarter in 2022.
That's also an 80% increase from our IPO five years ago.
So capital allocation return on capital and shareholder returns remain at the forefront of our financial priorities in the year ahead.
So we will now open up the call for your questions.
Thank you at this time well be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad. We ask that you. Please limit to one question and one follow up.
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Our first question comes from Ravi Shanker with Morgan Stanley . Please proceed with your question.
Great. Thank you good morning, everyone.
So with the new logistics margin targets in the commentary that you're focusing on more of a trailer centric rather than in factor centric network. It sounded like you guys are good.
Going all in on empower only which is.
It is understandable given the build in that business the last couple of years.
So a few questions. There one is does it in the downturn is it not clear that that is a structural growth area of the industry and not something that was driven by pandemic.
<unk> supply chain tightness.
And what does the competitive environment, there compare to the rest of the brokerage and maybe start.
What's the margin profile for that business like compare to the rest of the logistics.
Great. Thank you Ravi this is mark yeah, we've been at the power only game a long enough to really understand what we believe is a very resilient model was opened in my opening comments of.
Despite the fourth quarter of 2022 being much different in the fourth quarter of 2021 from a seasonality standpoint.
Our brokerage volumes inclusive of power only only contracted 5%. So I think that's a good indication that the durability of that business model increasingly we see it as a very instrumental part of our overall network offering.
How long side, our excellent owner, operator and company driver model within our truckload group and so from a customer perspective.
That is a very seamless disc.
A decision point for the customer.
Ultimately trying to do is offer a broader range of contractual commitments.
And then use our processes and technology that we continue to invest and to integrate power only into that so we would only expect us to be more effective overtime for those investments and certainly we've now seen the benefit of power only in conjunction with our network offerings on the asset side, both in our up market and now in a more moderating mark.
And our enthusiasm and our commitment there remains very very strong.
Great and then maybe as a follow up on the intermodal business you guys had a pretty good fourth quarter.
And kind of the guide is shaping up pretty nicely as well going on how do we think about.
What the margins of that business looks like in 'twenty three.
Given some of the competitive shifts in the marketplace.
Do you feel like the.
The business, that's close to the U P kind of is it now stable or do you feel like there's going to be.
A little bit of a back and forth there or maybe the price and the share shifts.
Yeah Ravi Good question as you think about 2022 and in one form or another we were in a state of transition throughout the year, whether that'd be commercially or whether that would be operationally and so we're quite pleased.
How well that transition went from a customer view and our ability to execute and thats, great credit to the Union Pacific and certainly the Schneider team who was heavily invested in.
Throughout the year to get to that type of result, and so if you kind of put the whole year in context.
We came within our 10% to 14% range, which we reiterated earlier on our call. This morning at about 13% and.
And so we.
We move forward. We're pleased that we have some of the distraction if you will and.
We are operating a much clear air all across the board as we head into 2023, obviously, we want to see some import activity of return we want to see some of the other.
Value that we think the customers are going to get particularly around emissions.
And what we believe is a very rich pool of over the road conversion and so on.
Those are the things that we'll be focused on in 2023, and we feel that we'll be well positioned within our margin range that we stated.
Going forward.
Very helpful. Thank you.
Okay.
Our next question comes from Ken <unk> with Bank of America. Please proceed with your question.
Hey, good morning, that's a new one it's kind of extra from Bofa.
It was it again.
[laughter] just following up on intermodal can maybe can we talk a little bit conceptually about revenue per load given the softer market and the transition out west.
You are now competing with hub at night on that same network does that.
Do we see more pricing competition given there there are more moving on U P and in the new environment or or.
As you know as fuel comes off maybe just talk about the pricing environment and how that's going to impact.
Ultimately that margin question as well.
Yeah, Ken This is Jim filter really right now when I think about the competition for our intermodal services by far the largest competition is from over the road and that's the focus available to continue to grow that service offering we've seen over the last few years that intermodal has lost share to over the road.
And the opportunity to be able to grow theirs by providing overall value and so some of that is based on service.
To provide more value there that's competitive with truck and we've certainly seen an improvement in our rail partners that we're working with especially over the last couple of months here on the Western network. So we think we have a great opportunity to be able to sustain that value.
Can you talk to you in terms of metrics at all perhaps you know I don't know maybe box turns or something that helps us understand the efficiency shift with the new network.
Or too so.
Yeah box turns obviously, we're having a huge opportunity to improve box turns.
There is there is an opportunity we've been below this or.
Expected level of box turns over the last couple of years now from a math matter of necessarily outperformance, but just overall demand. So theres an opportunity to get back up to the one seven to one eight turns that we're operating at previously.
<unk>.
Both of the rail networks are operating efficiently as well as the way that they are.
Operating with our drivers our ability this cycle and then all of the Ram. So stock has improved dramatically over the last 18 months.
Great. Thanks Kim.
Well.
Yeah.
Our next question comes from Jon Chapell with Evercore. Please proceed with your question.
Thank you good morning.
Mark you had mentioned how the dedicated pricing environment was holding in pretty well and I think even said.
And to be up this year based on early bid season.
Customers' willingness to kind of fully absorb some of these elevated inflationary costs.
Given your service and your growth in that business are you able to get kind of inflation plus pricing or are you just kind of trying to hold on to cover the cost inflation and dedicated on me.
So one of the benefits good questions out of the one of the benefits of dedicated is we have less variability in that business, both from a demand standpoint, and our overall.
Cost structure much more steady than sometimes we experience in the irregular route network side.
Hey, because thats, where their drivers want to participate in and we just have a better.
Predictability, there that being said it is not immune to the inflationary pressures that have taken place in the business and the industry from wages maintenance cost parts equipment replacement et cetera, and so we have mechanisms in working with our customers there were deeply integrated.
We provide great value and we have confidence that we have seen confidence and our renewals in the second half of the year to recognize those inflationary pressures and we're confident that we'll be able to based.
Based upon how we're structured there to achieve that as we enter the new year here and I think that's probably more of a first half renewals.
We had our second half renewals those were taken into account a fairly effectively. So that's why we still think overall, we'll still have some price appreciation in dedicated for full year 2023.
Okay, Great and then just to follow up on the truck side.
Have to go back a long way to see a sequential decrease in the dedicated truck count.
I'm guessing there's some pruning of equipment I don't know if there is some seasonality involved too but network moved up sequentially again small numbers, but kind of against the run of play so to speak as we think about the fleet growth. This year I mean, I guess, there's two parts to this one is it primarily still in the dedicated segment.
We continue to gain share there and two as the Oems kind of eased a bit but what's the total kind of overall growth to your fleet that youre expecting in 'twenty three.
Hey, Jonathan strategically our growth focus on the truck side of the business is in dedicated.
I mentioned earlier, we have sold 700, several hundred units of new business that will start to implement here.
The late first quarter.
And through the second quarter, and so that will be our growth focus.
And as we've mentioned that we want to make sure that.
Best we can as we want to stay stable on the network side.
Provide additional coverage and value by integrating our power only offering and with our network asset side.
So our growth on the network side, while it's reported in logistics will be more focused around power only then truck count on the asset side and our network business.
Got it thanks Mark.
Okay.
Our next question is from Scott Group with Wolfe Research. Please proceed with your question.
Hey, Thanks, Good morning, guys. Good morning, Scott any color, Steve any color on the on the margins.
For the segments in 'twenty three I know, we got the long term margin targets I'm, just curious 23 looks any differently for any of the businesses.
Yeah, I guess, providing those ranges is our attempt to provide some insight in how we view the business over the longer term and that can vary year by year, where we fall within those ranges, but as far as the benefit of having the complementary portfolio of services that we do have.
Any given year, one might be towards the upper end it might be in the middle there might be lower or whatever might end up but it all contributes to the enterprise profitability.
Over the course of time so.
On a full year basis.
It's hard to nail down a specific number and it's probably not a path that will go down on a frequent basis, but feel very comfortable with the.
The range of margins that we have outlined as we look at 2023 here early in the year.
Okay.
Okay, maybe just a follow up like the one <unk>.
Intermodal 91 O. One Q3 83 in Q4, so that's the one that's moving around the most.
Maybe the one we need the most help with.
Any thoughts on.
Beginning of the year, we should be thinking about for for intermodal margins do you think does improve or.
We're not.
Any color.
Yes sure Scott.
As we look at 2022, we look at that on a full year basis. Obviously, we had a lot of work that we were doing.
And the transition of working with our rail partners to effectively execute that.
Have you look at maybe the second half of the year, but by putting the third quarter and the fourth quarter together.
And that too would be on average almost of that 13% right. So.
There were different puts and takes based upon when we were staging and preparing for the transition.
Facility coming down through the stretch with a little less volume, we were a bit more efficient in the fourth quarter than we anticipated.
But overall I think that full year looking at full year, 13%, both within our 10% to 14% range is I think is very appropriate to assess 2022 and <unk>.
And as we kind of enter here at 2023, we feel.
The same relative to that positioning.
Add to that Scott.
We looked through a lens of growing.
Earnings dollars.
And providing a steady growth story to go with our organization here. So there's a balance between volume and margin that we're conscious of that conviction as we adjust so styles it could vary a bit.
By segment and by service offering is what we've got going on in there. So I would anticipate some of that to continue but the point I'm trying to make is we emphasized growth in earnings dollars and.
Aren't necessarily trying to always be at the high end of our margin range or whatever depending on what type of profitable opportunities. We see ahead of us.
Okay. Thank you guys.
Yeah.
Yeah.
Our next question is from Bert <unk> with Stifel. Please proceed with your question.
Hey, good morning, and thank you for the questions.
Good morning Bert.
I guess it says this is probably for you mark.
You've been able to stay above the $400 billion Mark in terms of logistics during <unk>, which you guys mentioned, the clear rate and volume headwinds.
Where does that segment go from here and I'm not really talking about 2023, but more maybe 2030, even talked about intermodal doubling in size by 2030 do you see a similar setup for the logistics segment.
And if you do do you think that becomes more a function of increased footprint in the digital side or is it really more of the power all decided.
Yes, Brian as it relates to the logistics side of the business, we're really place logistics intermodal and dedicated as our strategic growth drivers.
On the logistics side less capital intensive and so.
Getting a bit more capital intensive with the power all the offering but our strategic approach to that is why we have a complementary commercial.
Collaboration with our asset side of the business and I think that's one of the real benefits of our brokerage business tied to assets is your ability to collaborate and power only as a perfect example of that.
Between assets and third.
Third parties.
But we also have heavily invested in not only the ability to generate our own freight demand within logistics. So they can chart their own course in <unk>.
And be accountable for their own success, while collaborating but not dependent upon our assets and the digital investments we've made in freight power for shipper and freight power for carrier and ways that we can scale that business.
And so the aggregate capacity I wanted it in aggregate.
Demand on the other particularly around that long tail small carrier small shipper and the digital footprint allows us to do that economically feasible.
And grow our business without growing our people count in nearly the same rate and so we will continue to invest in those elements and we're seeing great benefit by.
On the efficiency factor with power only coming upon our freight powder for carrier freight powder for shipper execution.
So really we don't see that being limited for growth, it's our ability to go out and add value and we will continue to invest.
To the degree necessary to achieve there and so very bullish and we think we are more resilient through cycles because of this.
Asset based brokerage alignment that we have that I think offers advantages over perhaps others was slightly different models.
Maybe just to clarify there.
It's more of a margin than a revenue growth story I know you've talked more about the net revenue side there.
But you know clearly the two go hand in hand, when you think about operating income I'm just curious like based on your answer there. If you think there's just more efficiency to be get to B b.
Had in the market.
By increased automation.
Automation or if you think it's a combination of that and expanding the market in which you play.
Yes, we think we have opportunity to improve margin with the efficiencies of the technology and being more digital there's there's no question. We probably are focused more on earnings dollar growth here than margin because of the more asset light nature that logistics has and so we want to make sure we're growing.
And growing earnings and so that is really a focus of the logistics group.
And the change in the range that we've made as a recognized if we're going to bring assets to bear in some way shape or like a trailer and power only we have to get.
A good return on that additional investment that we're making on the assets in which is what's behind our range expansion from four to six to five to seven so yes, we're leaning on topline growth margin improvement and getting a return on the investments that we're making there.
We've got a really good group and.
And the results of what we've seen in this business, we really track over the last three years is really from our view at least impressive.
Got it and just a quick follow up you provided your.
Your initial look at 'twenty three guidance range of 215% to 35.
Can you give us some more detail on how you develop to that guidance and really the reason I ask is I'm. Just curious if you made assumptions that you know the first quarter as the trough and then ultimately we see sort of incremental improvement through the year or do you assume that you know there's a big step up in the second half.
Clearly an uncertain backdrop I'm just curious how how you were able to back into the numbers just for some more detail. Thank you.
What was that three questions Bert.
And the clarification are there.
Yeah.
This is Steve and I'll take a crack at that one.
I think it probably is.
But we don't.
Necessarily when we were sitting here a year ago, we felt pretty strongly about our first half second half narrative of 2022, we felt like the first half of the year.
We remain.
Quite robust and then soften a bit in the second half.
Laid out that way.
In that year as we sit here at this point in the year I don't know if it's exactly a first half second half narrative, but I think it's.
Like I articulated in my prepared comments earlier more of a steady improvement as we go through the year. So I do think fourth first quarter of 2023 could be the soft disappoint.
And then we see some traction steadily gaining.
And as we move throughout the year, so that by definition play out to be a stronger second half than the first but I don't know that it'll neatly fit within the months quite like that I think could we see some improvement before the second half.
Thanks, Steve and thanks Mark.
You bet.
Yeah.
Our next question is from Jack Atkins with Stephens. Please proceed with your question Okay.
Okay, great. Good morning, and thanks for taking my questions. Good morning, Jack So Mark I guess, maybe maybe maybe a question for you I mean I'm looking at the stock is trading at a couple of turn discount to your larger truckload peers.
Pretty substantial discount to.
Some of your intermodal peers.
When you think about capital allocation, you guys announced a $150 million buyback, but it's principally related to sort of offsetting dilution.
My understanding is there's just some challenges buying back stock more aggressively because of the dual share class structure. So I guess as you guys think about.
Moving forward you know what why why does the dual share class makes sense here.
Do you feel like it's doing your <unk>.
The class a shareholders justice.
And I guess.
The board considering some changes.
Yes.
Well, Jack there's a lot there.
Probably not at Liberty to discuss her.
Let's talk about so I don't have any changes.
To predict or.
Or really even bring color too as it relates to that so what we are focused on as it relates to your opening comments a discount and I think we're going to continue to focus on this multimodal platform.
That has different capital intensity is based upon our truck intermodal and logistics business and keep looking for ways organically to invest in those strategic growth drivers that we keep hitting upon.
But also prepare ourselves and.
Be very active in looking for acquisitive opportunities from our capital allocation priorities that can help advance those three strategic growth drivers of dedicated intermodal and logistics and so those are the things that we're focused on.
We would like with our with our share buyback.
From a capital allocation approach there as we'd like to get to a fixed amount of shares. So that we can be more predictable what our share count is.
And not to add to it with incentives.
Incentive grants and so we think that the $150 million authority over the next three years will allow us to achieve that portion of our capital allocation strategy, but.
Our real primary focus is on the organic investment and potentially where we can find.
The acquisitive opportunities that help us advance like we did this past year with MLS a raging success from our view.
From both the dedicated growth in a dedicated effectiveness standpoint, and so we would like to.
So we look at those options as well.
It makes sense I guess my point is you guys are just doing an outstanding job.
Really across the business and I, just don't know if the stock's hitting a lot of credit for it so.
I guess, maybe for my second question I would love to kind of get your thoughts on sort of the strategic increasing strategic value that trailer pools are providing we've touched on it a lot, but you know.
As you guys are going through bid season here in 2023.
Degree.
Such a large trailer pool and the ability to deploy trailer pools to customers is that helping you navigate through this bid season, maybe better than folks would have anticipated. If you go back a year or so ago, just kind of curious how that's impacting rate negotiations if at all.
Yeah.
Jack This Jim.
The real opportunity here is also for our customers because when this large trailer pool and being able to integrate both the asset base.
We're using a company driver and using third party being seamless to our customers gives us some flexibility that you don't have that for just limited to one or the other and so that's providing additional value for our customers and additional value for our enterprise.
Okay. Thank you.
And Jackie you know as we get into the into the allocation season.
Obviously, we're looking for where those may complement each other or where we can add it and take a broader share and do so in a way that's easy for the customer to say, yes to us and obviously easy for us to say, yes to two that increased share and so really pleased with the flexibility of the integration and the collaboration on those.
Works that.
That trailing asset allows us to share back and forth and be effective in doing that.
Thanks again for the time.
Our next question is from Chris Wetherbee with Citi. Please proceed with your question.
Yeah, Hey, thanks, good morning, guys.
Good morning wanted to touch on intermodal again, if I could maybe ask sort of the margin question, a little bit differently, obviously, youre not updating the long term forecast, but theres a major shift obviously changing the carriers to providers that you're using so I'm curious do you feel like there is any.
Uptick that you might get or any increased dynamic aspects of the pricing arrangement that you have with the new railroad out last I could influence how margins play out, particularly in 2023, when when obviously, there's going to be pressure on truckload rates.
Yeah.
Our deals with all of our railroads are long term deals that are market competitive and there was some adjustments in a structure that we work with.
We just don't get into details about how those necessarily worried but we believe that this is gonna posting a very competitive position when.
When we look at how we're operating in and it doesn't matter if we're talking about competing with truck or what the competitors on the rail.
Bring some differentiation on the <unk>. The fact that we are bringing the largest company dray fleet using our own chassis will be the only one that has a large chassis fleet using all of our own chassis and our company drivers are able to be more productive. So we feel like we compete well in all directions on this new rule.
Partnership as well as the just tighter integration between the UK and the <unk>, having more steel wheels, and expect that as we grow this network.
We'll be able to expand that and creating even more seamless options for our customers.
Okay. That's helpful. I appreciate that and then Mark maybe a bigger picture question. Just when you think about sort of the M&A landscape or anything else you wanted to do obviously you've had some success there kind of curious if you think theres going to be incremental opportunities in 2023, as we see a little bit of this transition period going on or is it something that maybe takes a little bit of a breather for a ton just curious what your sense is in.
And where maybe those opportunities could be.
Of course, Chris I think.
We're certainly active in the.
I feel that we're positioned if the right one that we can get to where we wanted to be can be done in calendar year 2023, when we have anything obviously to announce at this point.
But.
That's our mindset is to continue to look for those opportunities both proactively and.
And prospectively.
So that we can continue to advance those strategic initiatives and the success and the approach that we've taken with our most recent too that we've had in the last I guess, it's 13 months now.
Suggesting gives us confidence that we're on the right path there.
So, yes, I would love for that to be something Thats.
Steady and periodic just don't have anything to announce just yet.
Just anything from a from a vertical standpoint, where it might fit in the portfolio, where you think you have needs in the portfolio.
As it relates to.
Something we don't have today or expanding services and then the question is is there a part of the business that you would be maybe more focused on than others.
Yeah, well logistics is a growth segment for us we think we have such robust organic growth opportunities there for the investments that we're making in our digital footprint power only offering in our own ability. It would have to be something I think really special there for for perhaps that to be the primary focus we wouldn't.
Eliminate it but I think we'd have to be really special.
Intermodal causes a little bit more concentration in a few less options to consider there so that leaves the most.
Probably attractive target for us would be in that specialty truckload dedicated truck arena.
And that's the one that's probably has our attention. The most and then within that you can find yourself at times expanding into new markets that you don't presently serve or don't have a large overlap of customers, which is the additional <unk>.
Benefit of that so I wouldn't rule out logistics I put a really remote on.
Hopped on intermodal and.
How much more target rich environment, perhaps into dedicated and specialty truck area.
Okay. That's really helpful. I appreciate it thank you.
Our next question comes from Ari Rosa with Credit Suisse. Please proceed with your question.
Great. Good morning, and thanks for all the color, particularly on the intermodal piece I wanted to stay on that maybe you could talk about the long term target.
Double that business by 2030.
Maybe if you could kind of go into some of the details of how you think that.
That doubling what would proceed in terms of whether it's taking share or overall growth for the intermodal industry kind of what's the progression.
Get to that target.
Yeah. Thank you. So it's really based on both of those factors first of all the largest opportunity is clearly over the road conversion and we've seen the swing towards more over the road and intermodal over the last couple of years, but believe the.
The country has set an objective to remove.
Our carbon emissions by 50% by 2030 the.
The fastest way to do that is by converting.
To intermodal and.
<unk> expect as we get closer and closer to 2030, but theres more customers that are going to be feeling the pressure to reduce their scope three emissions and we're going to be there and available with the capacity to help them do that and then certainly we feel really good about our position relative to our other intermodal competitors whether they.
Asset based or non asset base, so we don't feel that.
Converting from over the road that we would see a slip back that it's been.
One by one of our competitors.
Got it Okay very helpful. And then just for my second question I wanted to ask about the potential for efficiency gains, particularly on the truckload side I think during COVID-19 when supply chain has got really tight obviously we saw.
Some inefficiencies kind of creep into not just for you guys, but for many many carriers, whether it was higher deadhead miles higher unseated tractor counts to what extent do you think that can kind of reverse in 2023 or to what extent has that already been in the process of reversing maybe you could just touch on that that would be appreciated.
Yeah, we think.
Asset productivity and people productivity is our largest self help items as we quote unquote returned to something more normal we are seeing improvement.
The efficiency factor and how quickly boxes are turning we're not back to pre.
Pandemic levels, yet in intermodal, where Jim mentioned earlier, but we are seeing improvement and less friction in the supply chain and we need to take advantage of that.
While we still expect some allocation.
Constraints with our OEM providers those are improving slightly.
We want to get more efficient equipment to higher excuse me lower cost per mile maintenance is associated with getting some catch up in our age of fleet.
But whether its our tractor whether its a trailer whether it's a container.
We believe we have.
Some light at the end of the tunnel here that we would expect to start to see some reversal of some of the erosion. We've had because of all the supply chain and the friction issues that we've experienced to include.
The nice progress our rail partners are making relative to.
Crews and the investments that <unk> has done a terrific job on some of the technology.
Advancements that they've made to make us more efficient with our dray fleet hit in house.
Rail terminals and if we can make them more efficient and make ourselves. We all win in that environment. Our alignments are are very closely aligned and I am really really I'm pleased and impressed with the commitment that <unk> has made and we're seeing the benefits of that very very early in our relationship here. So.
That's where we're focusing the entire organization on how do we arrest some of the inflationary impact and asset productivity is our best remedy.
Is there any way to quantify the magnitude of that that benefit or maybe if you could give us like a data point or two in terms of what some of those efficiency metrics might have looked like.
To what extent they can improve in 'twenty three.
Yeah.
Yeah, there's a host of those there are areas certainly we look for a build miles per tractor per day, we look at contribution across those assets per day. When you look at net revenue per order differences.
In our brokerage business. So we have a series of metrics that really focus our associate base and can impact those metrics to include our professional driver community and how that benefits the entire enterprise to include themselves and so.
We have great visibility to those and those are distributed and embedded in everything that we do in our operational approach to the business.
Got it okay wonderful thanks for the time.
Our next question comes from Tom <unk> with UBS. Please proceed with your question.
Yes, good morning so.
Mark or Jim I wanted to ask you about your thoughts on the competitive dynamic in intermodal I know you've had a few kind of questions probably along that lines along those lines.
It does seem like the backdrop is weak in the near term just given the imports being down.
I think that the competitors you know you want to grow are there other big players want to grow. So how do you think that the kind of bigger models will put names will play or do you think that there is a risk of you know everybody focuses on volume you all have flexibility with our rail partners and you kind of push price down or do you think there'll be.
You know maybe a.
Ability to except weaker volumes for a period and just kind of focus more on preserving price I mean, I guess, it's a you know.
A couple of big players in the competitive behavior does matter.
Yeah Tom.
Certainly already felt the.
Competitive dynamic here in terms of demand in the fourth quarter with the extreme.
Decline in imports into the West coast. So I believe we're already experiencing that type of situation and you've seen that you know when you look at our revenue per order.
Up seven 5% year over year up sequentially. Despite the weakening demand. So I don't believe that we're we're seeing a situation where everybody is growing.
Needing to move every assume continuing a little bit different than over the road, where you have a driver and you need to get that driver moving.
You have the ability to take capacity out of the marketplace and.
Just by staffing containers.
It appears that across the industry theres been some of that.
So I think Tom as you look at our 2023 approach here, where we don't anticipate at this juncture of adding container count we've done a good job in <unk>.
One in 22 of building our containers and we're really focused on the asset throughput and <unk>.
Injunction with our rail partners and.
And looking to focus on has a productivity yields and being a really good alternative to over the road and that's why it's so important that we serve it well and that the.
The connection between the <unk> and the efficiency factor all of that matters because that allows us to put a very truck like experienced particularly all the investments that they have made to improve fluidity and so.
What we're focused on and we won't be adding.
Container count this year.
Okay. That's helpful. So you think that.
Even as you go through the contract season I, you know I wouldn't expect the rate pressure to show up in <unk>, because you're not you don't have new contracts coming in right but.
Even if you look at the bid season and contracts do you think that you'll have a pretty good amount of discipline.
Mobile contract rates being down a lot less than truck.
And then I guess, just one more element to that and I'll pass it along well what about the how mindful should we be of storage revenues accessorial revenues rolling off is that is that a real headwinds in intermodal or is that something that it's not really that big a deal.
Yeah, I don't think storage revenues that big of a deal because that's not something that you make money on you'd rather have your assets out there generating additional earnings rather than the cost to stack in store or hold on to that equipment. So whether it's there or not doesn't necessarily have an impact on.
Earnings sometime as we get through this allocation season here.
As I mentioned in my opening comments, we're looking for several customer threads.
How are they thinking about are the locations of the important decisions that they make between the east and the western there has been some shift to the east.
As there has been concerns about fluidity and as that has now improved and returned how are they thinking about that.
This year and going forward, obviously, the emission reduction piece is a very powerful trend in the favor of intermodal.
There's different customers at different locations around that spectrum of where that's important.
And then obviously we have to then see the differential between.
The value proposition between pricing between over the road and intermodal to include the dynamic of fuel and how that impacts those decisions and so theres a lot that goes into that customer we certainly tried to.
<unk> where value can be derived through those combinations and that's the beauty that we have is that we are.
We don't really care, if it's over the road or intermodal we have options on both of that so we're agnostic we are really trying to put the best solution.
Front of the customer that meets what they're trying to accomplish.
Okay, great. Thank you.
Our next question is from Brian <unk> with J P. Morgan. Please proceed with your question.
Hey, good morning, Thanks for the time.
So at last.
And then last part Mark.
What's the visibility you have to taking share back from from the highway.
It's a big focal point of the industry and you talked about it several times today.
Yeah, but spread savings spreads are probably coming down you mentioned some of the factors that are going to affect that but demand is probably weaker in the near term.
So do you have visibility to that coming back in is a little too early with bid season.
The level of confidence and it gets connection you have to plan for that coming back in and how much headwind do you think you can make this year is as service improves and the transition is done.
Brian It is a bit early but I would tell you.
Our customers are enthused about.
Getting back to an intermodal option that they can put into there.
Allocation mix and a more aggressive way and for all the reasons, we just talked about cost commissions et cetera, and so.
And we've all been working.
Way to give them more confidence that they can do that with a good service product in the end and I know our rail partners are intently focused on that as well.
So you.
We're optimistic as we sit here and I guess, the first couple of days of February .
But it's really early in that process.
So the dialogue that we've had really throughout last year and we're always in constant dialogue around what customers are trying to accomplish and how all of the services we have fit so well.
We will have a better feel for that as we get out.
The April may timeframe Gen. So maybe yes it.
It does appear that spot rates are have really found a floor and there is some movement around there but at this point, we do see signs that capacity is leaving the market at these levels and so the question is if demand returns in the second quarter, that's probably less of a shock benefit.
If that occurs in the fourth quarter at the back end of the year it would be.
To assess that would be a larger shock and so as we're talking to customers. That's the dynamic that they were thinking about it.
At what point this demand start to return what impact does that have that gone through some dramatic shifts over the last couple of years and so while.
Balancing the opportunity to reduce costs today versus explosion in the organization to risk later in the year and so that's the dynamic that they're playing.
Alright. Thank you so just to follow up on that with the capacity, leaving the market. What are you seeing specifically there now.
When we first.
Saw some of the owner operators, leaving.
I'm sorry of people, leaving to go on their own phone operators that can I call. It late <unk> 'twenty I guess.
The first sign of things getting really tight.
I mean, some of them are coming back or maybe are still coming back. So is that one of the data points that you are viewing in terms of monitoring capacity.
What else are you looking at that.
At.
Is it a purge or is it just continued kind of grind out of some of the excess to that might've been built up over the last cycle.
Maybe a little bit more of a grind out and there is a variety of different factors that we're using.
<unk>, our organization to get data points to understand what's going on with capacity, but it would indicate that there is.
More of a grind out exiting the marketplace.
We're about entering things of.
Defaults on leasing of units.
It looks like through our channel checks that thats back.
To pre pandemic levels, which was quite muted coming through the pandemic era.
Also insurance renewals and the number of units being renewed versus prior so theres a number of signals that again. These are the public I think.
The government employment stats, maybe a bit lagged and so we're trying to get what's what's more real time and looking for some of those other signals.
Those channel checks, Brian I think would suggest that we're seeing an accelerated on that small carrier front.
And some of those some of those indices.
Okay, Mark or Jim. Thank you very much I appreciate it.
Okay.
We have reached the end of the question and answer session I would like to turn the call back to Mark Rourke for closing comments.
Great I appreciate everyone's time and attention today and let me just close by referring you. If you have an opportunity to go to page 12 of our updated investor presentation.
Our strategy is to be disciplined in our deployment of capital to enhance shareholder returns and grow this enterprise and to achieve that we have outlined our key strategic growth drivers of dedicated intermodal and logistics, obviously had a chance to talk about that today.
While our priority is on organic growth first we are actively pursuing the right acquisitive opportunities that advance those priorities.
And we're continuing in this environment to evaluate our whole enterprise for cost saving opportunities.
And maximize our operational efficiencies to expand our margins.
Furthermore, we're committed to the design and implementation of discontinued digital transformation in our industry.
And we want to dramatically improve the speed and the accuracy of information that we share in the visibility that we have with all our stakeholders across our value chain in both transportation and logistics.
And finally, we intend to lean in and advance, our social and environmental goals and offer our customers sustainability options tools and services.
To provide value as they reduce their carbon footprint and we can be a key and trusted partner in doing that so again. Thank you everybody today.
We will talk to you next quarter.
This.
Today's conference you may disconnect your lines at this time and we thank you for your participation.
Okay.
Yeah.