Schneider National, Inc. (NYSE: SNDR) announced adjusted second quarter 2019 earnings per share (EPS) of $0.34, a penny light of the consensus estimate and $0.06 lower than the second quarter of 2018. Notably, the company announced the closure of its First to Final Mile (FTFM) service offering, which had been a drag on earnings.
Takeaways from the call
On the call, management said that the company’s exposure to the spot market has returned to a mid-single digit percentage range, which is in-line with historical levels. The carrier’s outsized spot market exposure, which increased 30 percent year-over-year in the first quarter of 2019, was the primary driver behind that quarter’s earnings shortfall.
The truckload (TL) segment has completed 70 percent of its bids so far this year with low-single digit price increases being recorded. SNDR has seen positive pricing results in for-hire contractual negotiations and believes that the amount of seasonality seen in the back half of 2019 will dictate rates on the remaining 30 percent of negotiations. Management said that there is the possibility for pricing to be flat or slightly negative and indicated that July was not very robust.
They also noted that the dedicated pipeline is strong and that many new contracts are being implemented. However, the TL division could see a headwind as the equipment from FTFM (roughly 800 tractors and 2,000 trailers) will need to be repurposed. That said, the company likes their prospects in the dedicated offering.
Management said that the intermodal bid season is 85 percent complete with rate increases in the mid-single digit range. However, they noted that there is a possibility that their intermodal volumes, which have outperformed the market, could turn slightly negative on a year-over-year comparison given a significant amount of pre-tariff inventory pull forward in the back half of 2018. Again, management indicated that the strength of peak season will be the determining factor for volumes, but felt that the intermodal rate environment will continue to be stable.
Closing FTFM
The TL carrier’s FTFM network consisted of 26 leased terminal locations with nationwide service for business-to-business and business-to-consumer movements of household durable goods. In an 8-k filed with the Securities and Exchange Commission, the company said that it expects to incur pre-tax restructuring charges of $50 million to $75 million due to the closure. Further, these charges are separate from the $34.6 million goodwill impairment recorded in second quarter 2019.
“We have made the difficult decision to execute a structured shutdown of our FTFM service offering. This decision followed a careful assessment of the near- and longer-term prospects and alternatives. We believe this course of action allows us to fully focus on our services within Truckload, Intermodal and Logistics, is consistent with our portfolio management and capital allocation disciplines, and is in the long-term best interest of our company and our stakeholders,” said Schneider’s Chief Executive Officer Mark Rourke.
Financial results
The transportation and logistics services company reported total revenue of $1.213 billion, down 2 percent year-over-year. Revenue excluding fuel surcharge declined 1 percent to $1.089 billion. Adjusted operating income was down 14 percent to $83.8 million with an adjusted operating ratio (OR) of 92.3 percent, 110 basis points worse year-over-year.
“Compared to the second quarter of 2018, operating earnings were negatively impacted by FTFM, and by muted seasonality in 2019, which affected all operations. As we look to the second half of the year, we expect industry capacity levels to rationalize given the challenges of the current operating environment. Our focus will be to improve our asset utilization and our overall cost position across our Truckload and Intermodal platforms,” said Rourke.
TL revenue excluding fuel surcharge declined 6 percent to $534.9 million as revenue per truck per week declined 7 percent to $3,609. The company said that pricing was “modestly positive” year-over-year, but was more than offset by lower productivity due to lower seasonality in volumes, the onboarding of new dedicated accounts and a net increase in average tractors, up 110 units. OR for the division was 98.5 percent, 930 basis points worse year-over-year, which includes the FTFM goodwill impairment. Excluding the FTFM impacts, the division saw an 88.4 percent OR, 130 basis points worse than the year ago period.
Intermodal revenue excluding fuel surcharge improved 12 percent year-over-year to $259.8 million as orders were up 2 percent and revenue per order increased 11 percent. However, operating income declined 6 percent to $30.5 million due to higher purchased transportation costs and lower utilization.
Logistics revenue excluding fuel surcharge declined 9 percent to $227 million as brokerage volumes increased 15 percent, but was more than offset by lower revenue per order. Operating income declined 12 percent to $9.2 million. Management cited customer insourcing in the import/export business and declines in brokerage net revenue as the reasons for the decline. Brokerage revenue accounted for 87.5 percent of the division’s total revenue.
Lowered guidance
SNDR also lowered its full year 2019 adjusted EPS guidance to $1.30 to $1.38 from $1.50 to $1.60. The new range is below the current consensus estimate of $1.43. Management cited a “less favorable” pricing and demand environment in all segments for the remainder of the year as the reason.
The stock has reacted positively on the FTFM closure as shares are up nearly 2 percent in the trading session.
