Schneider National, Inc. (SNDR) Earnings Call Transcript & Summary

In the east, we're, particularly, on the shorter length of haul, we're very much truck-like. And we can stay where we are, we're going to be competitive through really any cycle. And we're improving in the west. Obviously, a little longer length of haul. Sometimes you have some more issues with weather. But still very, very good service, and we're not having any of that being a hindrance to taking additional share in Intermodal.

In realizing that some of the domestic intermodal movements are actually international movements coming out of a box and going into a 53-foot container, do you have an idea of how much of your traffic on the intermodal network is tied to imports/exports specifically on the [ Transpak ]?

Do you want to talk? Do you want me to keep going? So clearly, on the Intermodal side, much more reliant on international trade flows. There's no doubt about it. I think 22% or so, I think of the U.S. imports come through China, which is where the difficulty is. Our truck business is much more domestically driven, so it will have a disproportion as this air bubble, at some point, comes through the system, it will have more of an adverse impact on the Intermodal business. I don't have the exact number that I can share with you what that is, but it's certainly much more prominent than the truck side.

So when you talk to your customers or large companies that have global supply chains, what's the current thinking on the coronavirus? Whether it be impact on ocean container volumes, intermodal network, the truck network at some point?

Yes, we're in that process of canvassing our top 300 shippers on that presently, and trying to understand that exactly where they are, what their alternatives and what their strategies are to try to adjust our import/export business. We have a number of customers that we can really see that today, and there's obviously an impact coming. A couple or 3 weeks from now, I think we'll see a -- really a step-level change in what's coming through. But -- and a lot of customers don't have a lot of options as it takes some time to change the origin point, and we're going to be stuck, I think, dealing with it. And I think what the reverse of this is we're going to have some type of bathtub effect, whether that's April, May, June, whatever that would be that we'll have the opposite impact that could cause some chaos and some disruption as well.

Yes, if you remember back to some of the West Coast port slowdowns, lockouts, over the past 20 years, what happened when that got resolved? What was the impact on Schneider's network and...?

Well, it has influence now on the rail network, with the truck network as you need to find ways to deal with that. And generally, chaos is good for the industry because we have to then come up with solutions, and it could be a catalyst for some other corrections. And so I would anticipate this is another potential catalyst for some more difficult second half of the year.

Steve, I want to talk about the balance sheet of Schneider. You guys are in a very healthy financial position. How do you plan on using the cash, keeping the cash, building a war chest, both on M&A versus buybacks, dividends, everything else that's on the table?

Yes, sure. I'd say that it's been a robust dialogue that we continue to have amongst ourselves and with the Board. And I'm sure that, that will continue. We've not taken any of those options off the table. We do recognize we have a conservative balance sheet. And want to maintain a conservative balance sheet that don't intend to continue to build cash over the long term. So we are looking to deploy it. We'd love to deploy it in organic growth opportunities, first and foremost, so we're aggressively looking for those opportunities this year, and have identified some we'll begin to invest in, and so that's first and foremost. And then you get into reducing debt, which we don't have that much debt, and we'll repay roughly $50 million, $55 million this year as notes mature. So that's a partial use of proceeds or cash application, if you will. And then you get into, do we do acquisitions? Do we buy back stock? Do we do special dividends? Do we do those sorts of things? And so that dialogue is ongoing. We've said repeatedly that we're interested in growing potentially through acquisition, our dedicated and/or specialty Trucking operations and are looking foremost in that space. Whether we're able to land something there or not in the near term, we'll have to see if everything lines up, given the nature of the M&A, but we are actively looking. If we do something, we do want it to be close to what we are good at and know how to do very well and would complement what we already do. So we've made that part clear. And -- but then all the rest of those potential users that said there are in the mix, and we'll continue to evaluate this as we move through this year.

Mark, I want to dive back into IT? Because you mentioned the Quest platform earlier and the investment you're making and looking to shift more to automation. One of the other rooms right now, we've got the logistics panel going on, so the so-called digital brokers that have a bunch of people working in offices that aren't as digital as they might think they are, have caused a lot of, I guess, chatter around what's going on in the brokerage space, what's going on with IT. What are your thoughts in general about the IT environment, the brokerage environment, how you guys are using it at Schneider to make the business better?

Yes. The brokerage is a great incubator for a lot of these technologies, and I think that's what we transition. We had our investment thesis we did with Quest. We had a very big spend and build, and we had initially thought we'd be going down and reaping some of the benefit of less spend but, obviously, the opportunities are so great that we've actually even increased overall spend from those Quest development days. And I think, as I mentioned, where we're most excited is how we take, again, friction out moving from this whole idea. We have great decision support models that have been very mature now relative to everything from order acceptance to network management to optimization around the assets that would present information to help people make very informed decisions to now saying, "We're so mature there, we can start to just automate that whole process versus presenting it." So we can grow our business without growing the people count and do so in a way that is faster, more accurate and how we exchange information with our trade partners at near instantaneous speed. And all of those things, we -- that's where our focus is. And that certainly plays on our brokerage side, but it has just as many applications on Intermodal and the Truck segment. Think about dedicated, we're not making nearly the same amount of decisions as it relates to load acceptance. We're all committed, and we have all those -- those things are just right for complete automation with the customer. And again, that all can be integrated into our Quest platform.

In terms of service and visibility with ELDs and the trucks, people have an easier time keeping track of them, putting that into a network. One of the gaps have been the railroads on the line haul, where do you see the rails and their investment and the ability to have an end-to-end visibility solution for your intermodal customers?

Yes, I think there's a lot of automation in and around the ramp themselves so that one of the things that comes with -- I can of come at this a couple of different ways, the precision scheduled railroading is ramp operations and how well do you schedule so that you're not dwelling in the ramp. And so all of that visibility has to be very strong to get to the full promise of that. And that includes what's -- where is it located, as it's in transit and its reliability. Because we can't afford neither cost or execution wise for that to dwell for 12 or 24 hours, we've got to get it, and all of that has to be integrated with the customer. And so there's, again, this is another one of those great automation opportunities. We're not where we need to be there yet, but I'm confident that everyone understands the value of that throughput.

And on the brokerage side, with new people entering the business and trying to grow their trucking operation without adding trucks, have you seen an increased competition for capacity? Do you have either a shrinking number of carriers? Or is it harder to find carriers that accept the loads that you post and offer them?

No, I wouldn't -- at some point, we may get to that. We really haven't seen that in the present marketplace. And we grew our volumes 5%, even in the fourth quarter on our brokerage side, at a very competitive marketplace. And capacity isn't the constraint. It's more of the pricing side on the shipper, and that would put as a more difficult issue now than the capacity side.

And I want to open up the floor for questions. If anybody has a question for Schneider. Yes. Barry.

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So the question, just to repeat for the audience is, the railroads talk on the one hand about volume growth and intermodal being a growth there. On the other hand, they talk about raising price, and how do you square those 2 because if you keep raising price when truckload rates are not going up, you can't grow.

Yes. I always like to try to address those that, in general, our interests are highly aligned, right? We want to grow volume. We want to work the margin. We want to take efficiencies and very much the same discussion with, I believe, the railroads are in. There are some gating factors because there is a truck alternative. And so that's a market reality that can get against the growth vehicle if collectively, we're being too aggressive there. And it just so happens intermodal is a great growth vehicle, I believe, for the railroads than some of the other more challenging segments of their franchise. So I still, at this juncture, think our interests are highly aligned. We have the ability to move with the market. And our discussion is more on how do we get more volume generally than any other issue that we discuss with the railroads. And so as long as those interests stay aligned, we stay very bullish on the Intermodal product.

And to follow-on to that, as you talk to the railroads about your contract and Intermodal pricing and growing volumes, have the contracts changed at all in terms of, is there a gain share, pain share type agreement? Or is it just -- this is our rate increase and if you can't get it, then your margins decrease?

Yes, it's a frequent question. Unfortunately, it's one that we can't get into a whole great specifics on because of the contracts. But again, it gets back to this, our interests are highly aligned in that our structure moves with the market. So that we have -- so we don't get out of sync, so that we even come running across purposes for what's in their interest and what's in ours. And so if the market goes up, there's a mechanism for that. If the market goes down, there's a mechanism for that.

Any other questions from the audience? Yes.

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The question was the pilot that was announced at the end of last year with Truckstop and how that's going?

I think that's a great question because I think that, maybe, is one of our philosophies as we think about how to be pragmatic with our tech spend and get to the leverage. And certainly, we love those channels that are direct with us, whether it's through our portals, through our apps to interact with carriers. But we also think there's a great opportunity, particularly, around the micro carrier, the one that you're referencing with Truckstop that they may be at a place that they go to from an application standpoint more frequently for other reasons, we want to meet them where they're at. And we can extend these automation capabilities that are in our direct channels with our -- some trade partners and do so and leverage their investments. So it's not all Schneider dollars, all Schneider tech spend. And how do we find ways to both do that but extend into these locations that the carrier or the shipper may already be at and take that leverage. So -- and that you'll continue to see us do and challenge ourselves to look for other channels to take advantage of that. So is it as big as I want it to be yet? No. Is it working? Exactly, as we planned it is.

So does that make Schneider a preferred partner through those channels or an exclusive partner through those channels in the brokerage arena? Or how does this...?

Yes. David, I want to -- we get to a place where it's exclusivity because then, it kind of lose the ability to get to the financial leverage for both partners. But we certainly believe, if we're first to market, we're easy to do business with and we can make that as easy for them to get some advantage that we'll be advantaged in doing that.

Yes. Any other questions from the audience? Otherwise, I'll wrap up with 1 or 2 more. Insurance. We talked a lot about yesterday. What are you seeing in the insurance market? Have you had a renewal recently? Is the renewal coming up? And what are your thoughts on the cost pressures?

We have an upcoming renewal in the first quarter yet here and so we're actively in market and getting feedback. Obviously, there's no surprise to anyone that the markets have hardened significantly. And I've been through a lot of these, and people talk about, "Oh the market is hard and you get a few percent increase on your premium." Now this is very different. This is a step function in premium and there's a lot less capacity available. So those elements are clear. Exactly the impact on us. We're not sure yet because we've got probably another month of assembling the roster, if you will, to see how it goes. But it is a very different environment.

And have you talked to any of the small fleets within your brokerage network about the impact of insurance on them?

Not directly, but we've gotten a lot of feedback through other channels that it is very challenging, especially for those who -- I mean, we invest a ton in safety. We're amongst the best when it comes to safety technology and our safety record, and whatever, and what we're experiencing in the markets like it's got to be compounded by those who don't have all the [indiscernible].

I certainly think this is another one of those capacity constriction catalyst, but everybody generally has -- the renewals are different by carrier, so this will have -- some will be January, March, June, so this will have a -- can get to the full year to get to the full effect based on your renewals. But clearly, the inflation is at a place that will have impact, not staggering.

Excellent. Well, with that, we'll wrap it up. I want to thank Mark. Thanks, Steve, for joining us from Schneider. Coming up next, we'll have [ Kevin ].

Great. Thank you.