Green Bay, Wisconsin- based transportation and logistics services company, Schneider National, Inc. (NYSE: SNDR), provided some color on the company and the freight environment in a question and answer format at the UBS Global Industrials and Transportation Conference. Schneider’s Chief Executive Officer, Mark Rourke, and Chief Financial Officer, Stephen Bruffett, were on hand to field questions.
Management said that they have been disappointed by the lack of seasonal improvement in demand in the second quarter and pointed to June as a make or break type month for not only the quarter, but potentially the rest of the summer.
When asked about second quarter 2019 expectations, management said that they have corrected the issues (increased variable driver costs and outsized exposure to the spot market) that led to the earnings weakness in first quarter 2019. Also, start-up costs on new dedicated business have moderated and weather has improved. That said, the company’s first to final mile conversion is likely to be a drag on earnings. SNDR continues to try to minimize the variability in its first- and middle-mile operations and improve density in these lanes.
Recall, on May 2, 2019, SNDR reported earnings of $0.21 per share, $0.10 worse than the consensus estimate. Additionally, management lowered its earnings guidance by $0.15 per share on each end of its new $1.50-$1.60 earnings per share range.
On the earnings call, management attributed the bulk of the lower guidance to the first quarter underperformance. Management acknowledged that the company was poorly positioned entering 2019 with lower volume commitments on its primary lanes and increased spot market exposure. Additionally, SNDR had success recruiting drivers at the end of 2018, didn’t want to let these new hires go even as volumes declined and found themselves carrying incremental labor costs that weren’t appropriately matched with their guaranteed volume.
Demand, pricing and capacity suggest downside of the cycle
Management said that overall demand is lower than last year as expected, but that the normal sequential increase in freight activity from the first quarter to the second quarter has been “muted” compared to prior years. They believe that capacity added in 2018 is being pressured and that the excess capacity will “burn off” as the prolonged demand malaise continues.
SNDR is not seeing outsized weakness in any one industry. However, they did note that demand in the do-it-yourself segments remains delayed in almost every geography given prolonged inclement weather. However, management said that most of its customers expect volumes similar to a year ago and continue to have a bullish outlook on demand. They said that none of their customers have trimmed expectations or are calling for a significant falloff in demand.
When asked about contractual pricing, management said they expect pricing to remain net positive for 2019, but noted that the comps get tougher as 2019 progresses. SNDR has seen six consecutive quarters of improved rate renewals on its contractual business. Bid season has been a mixed bag with negotiations providing increases with some shippers, flat results with others and in “some rare cases” rate declines. While the back-half of 2019 will be more challenging given the tougher comps, management believes that modest rate increases for the year will be the net result as the overall pricing metric will be aided by seasonal and project work.
Management sees capacity tightening for several reasons in the second-half of 2019. A prolonged weakness in freight volumes will likely purge capacity. Additionally, the industry has until December 16, 2019 to convert automatic onboard recording devices to electronic logging devices which Rourke believes is only 50 percent complete currently. Further, the national drug and alcohol clearinghouse, which is expected to come on-line in January 2020, is likely another capacity tightening event. Rourke believes that the clearinghouse could produce a 200 to 300 basis point reduction in the driver and warehouse labor pool throughout the industry.
“Our industry doesn’t need a five to ten percent correction, two and three percent [corrections] have big impacts,” said Rourke.
SNDR has been hair-follicle and urine testing for drugs and alcohol for the last seven years.
Intermodal growth to continue
When asked about the company’s intermodal offering, management remains “very bullish” and highlighted its growth in the mode as industry intermodal volumes have declined. SNDR grew volumes three percent in the first quarter of 2019 while the industry saw five to six percent domestic intermodal volume declines. SNDR expects to see continued volume growth in the second quarter of 2019 as it still benefits from the annualized effect of adding 4,500 containers in 2018. Operating ratio improvements should be seen as rail network fluidity improves post-winter and precision scheduled railroading initiatives take hold.
Since its first quarter earnings miss and guidance revision, the stock is down more than 12 percent compared to roughly a 3.5 percent decline for the S&P 500 over the same time period. In addition to SNDR’s lower guide, weak volumes throughout the industry and increased global trade concerns have weighed on the stock.
“June is a big month in the second quarter historically…and if we don’t see it here in the month of June you really have to question what we are going to see in July and August,” said Rourke.
