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

Hi, everyone. We're back here, continuing our day 1 session at Cowen's 13th Annual Global Transportation & Sustainable Mobility Conference. I'm the Cowen's transport analyst, Jason Seidl. With me today is Schneider National, very pleased to have them. Their CFO, Stephen Bruffett; and their Head of IR, Steve Bindas. Gentlemen, welcome. Thank you for coming. I'm going to jump right into the Q&A portion of this to make sure we keep rolling along and are on time.

I want to talk a little bit about spot rates in the truckload marketplace. Clearly, of late, they've been extremely strong. I mean we're closing in on peak 2018 levels. Given that trucking is purely a supply/demand-driven marketplace. What's having more of an impact on this move upward? Is it demands coming back? Or has supply come out of the market? Or is it a combination of both?

Yes. Good morning, everyone, and thanks, Jason. It's good to be here. To your question, I think, certainly, in this environment, it is elements of both, which is an easy answer, but I think literally both dynamics are in play when you look at the tender volumes that we're experiencing on a daily basis in our Truckload business. Now for context, we're substantially a contract carrier in our Truckload business. Probably 90% of what we do on average is in the contract space. So we don't play heavily in spot market, but we do adjust dials in our overall allocation of our fleet to the spot market. In a softer market, we might have 6% of our total loads in the spot market, whereas today sitting near more like 12%, and that's like the upper end of a normal boundary for us. So just for that particular context. But back to the supply/demand question. Certainly, driver supply is constrained in this environment. And we see some durability, if you will, to that condition. And that's somewhat driven by the flow of new drivers into the space. Schools have been shut down, getting a [ CDO ] is not a straightforward process to begin with. And even with some of the schools coming back online, training drivers and so on, the output of that channel has been significantly reduced, and we would expect that to remain a limited supply. So there's other factors that go into the driver dynamics, driver availability across this space besides just new drivers coming into the space. But I think that condition, as I indicated, is likely to have some legs into it. Then on the demand side, you mentioned the heavy volumes. And even if they backed off, for us, like 10% or 15%, we would still have more tenders than we could possibly handle on a daily basis. So there's some cushion there, if you will, to -- on the demand side of things, and things would still be constructive for us. We think that demand condition will remain strong throughout the remainder of this year and become a pretty good setup for 2021.

So you're getting more tenders? You're getting in excess of 10% above your available capacity?

Well in excess of that right now, yes.

Interesting.

Very much like 2018 when we were in this.

Yes. And it looks like we might even eclipse 2018 peak spot pricing, which is interesting. Because if you would have told me that back in -- on August 1, I would have told you were crazy, but it's interesting how the markets change so rapidly.

Yes. Certainly, if you were to do that in the April-May time frame at the depths of this and then how quickly, I think that's one distinction between 2018 and this environment. 2018 was kind of a steady build, steady build, steady build and then kind of crested and so on, whereas in this year, things went like that then they've...

We've hockey sticked right back up.

Yes, got into a compressed state here. So...

But it's interesting because this goes into my next question. We're hearing some very large shippers offering very large capacity bonuses in 3Q. Is that going to move the needle at all in the quarter for somebody like Schneider? I mean I know you guys are, let's say, 12%, but some were offering up $500 per load if you go beyond your normal committed capacity, or is this just something that's going to help with pricing negotiations in the out quarters?

I think there's elements of both of that. But even outside of the spot market, in the contractual space, which is mainly where we play, we have numerous examples of customers who have struggled to get their loads picked up, their tenders accepted, and they've proactively come back -- I mean carriers and offering like what is it going to take because we need to get our stuff moved. So that's kind of the condition things are in. I'm not saying that's happening with every customer, but it is acute in some large customers across the country. And so those are conversations that are underway, both in our Truckload and our Intermodal and our Logistics space. So I think there is some near-term lift available in that. But I wouldn't try to overplay that like for the third quarter. But to your point, I think it does set up for a constructive peak season, if you want to call it that, and then that flows into the contractual rate renewals as we get into 2021.

And what are you seeing for 3Q renewals right now for the Truckloads division?

Yes. Just for context, most of our book of business has been repriced in the normal course of things by the time we're sitting here in mid-September. We probably have maybe 20% of our book to go, but they tend to not be retailers, which retailers like to have their capacity secured and there's a contract in place in advance of this season, if you will. So those remaining contractual negotiations are going well. And as you can imagine, the price discussion is quite different than it was when we came into this year or even in the second quarter. Now we're talking about price increases versus the downward pressure on price so...

And how about some of those contracts that you signed like a year ago or -- that are severely underwater versus spot? Are you reopening some discussions with some of these people that might be in your bottom 10%, if you will, on pricing?

Yes. I think there's always opportunities for customer conversation. Some of those are the ones I referenced earlier, where they may have hit the magic moment to do a rate renewal earlier this year.

No, shockingly, they are finding capacity.

Yes. And then just by nature of the change in environment, has put them in that lower 10% or whatever. And so just market forces almost make them come out and say we need to acknowledge that we need to do something differently there. So there's that element, and then we have lots of long, long-term customer relationships that we value and so we want to respect that. They respect us in weak times, weak freight markets, and we respect them in strong ones. So there's this all across the spectrum of customer relationships, and...

It's very nuanced.

Yes. So it is hard to be generalized in the commentary. I'm trying to provide some flavors that -- it's a bell curve, if you will. There's a certain set that behave one way in the soft market, and we're comfortable behaving, in like, kind and in a strong environment, that's the game they like. So that's how we'll play it. There's others that don't do that, and so we don't. And then there's all places in between so...

Well, let's switch a little bit to the Intermodal side. We're seeing volumes in the industry recover finally. But pricing usually is a little bit of a lag, even though that we're seeing truckload pricing go up. Talk about sort of that volume that you're seeing in the Intermodal side and talk about when should we expect the pricing side to recover.

Yes. I think it's actively underway. But one dynamic, at least with us, and I presume this is the case with other large carriers, our book of business in our Truckload segment is quite diverse but it's quite a bit more concentrated in Intermodal by design and by market dynamics. I mean those who -- those shippers who have significant volumes and are able to effectively leverage Intermodal are the bigger companies just by definition and so that concentrates your book of business. So how that renewal cycle is timed and whatever, has a large influence on how the price works within our Intermodal book of business. So given that, you just take the situation you've got. Again, just like with our Truckload business, we're getting a lot more tenders in our Intermodal business than we can handle that we can get our dray drivers to. That's probably one of our biggest constraints right now. We have enough containers, but getting those containers in the right spot when we need them, say, the West Coast now as volumes have fortunately started to pick up a lot there. So getting things that weren't needed there earlier this year back to the West Coast and in position and have the dray drivers in place to get the things and dealing with the ramp dynamics around the country has been quite challenging as of late, but things are improving there. But getting back to your core question about how's price going in Intermodal. We have opportunities to pursue premium price moves even in this environment and with contractual customers. We've also done a lot of work to diversify our book of business with the small- and medium-sized shipper. And I think you'll see increased focus from us in that space as we go forward in time. So that's another opportunity for some improvement in price.

I want to follow-up on one of your comments on the dray side. You said, obviously, you're having -- you're seeing the most constraints with the drayage drivers. Remind me what percent of dray does Schneider cover with its own drivers versus outsourced?