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

Yes. So we're still luxury. We'd be thinking of 5 years in the quarter-to-quarter, but -- and that's why we're so supportive and have been supportive from the get-go on the precision schedule railroading because we do it, and we believe that, that allowed us then to have different, more sensitive freight, not just inter mill freight, but more customer to customer freight that we can serve and customers will be more comfortable with the reliability, and we're absolutely seeing that. And so I think Steve hit it. We see the growth in our portfolio, first of all, being in really these areas. Our least understood and one of our best stories is our brokerage and our Logistics growth, both top line and profitability, maintaining it through massive investment in technology, still delivering solid returns back to the business, both in the short term and the long term. You're going to see us continue to do that, Ravi, and that's going to include also more and more how we bring our orange container and trailer to the third-party world, helping customers with that. Steve hit on dedicated and then Intermodal would be our third, and we would be more in the maintain mode on the network side of the business. So when you asked the question between truck and Intermodal, it's more on the dedicated side, not the network. What we see the growth in the network will be in our Intermodal offering.

Got it. So let's talk about that a little bit more because I think, the outlook in the brokerage business has been a little mixed in the last few years between the technology disruption and maybe some of the cyclical pressures. I'll come to some of the kind of structural factors that you like in a second, but maybe in the near term, how do we think about the third quarter in terms of numbers? Obviously, spot rates go up and you said you're 50-50. So how do we think about the margins in that segment in the third quarter? And kind of how do you think that evolves going into 2021?

Yes. 2020 has been an incredibly interesting year on just a roller coaster. We went through a massive down, carrier cost coming up slower. And now we're in that other side of the equation where we're being quite successful on the shipper cost side of this to help cover these incremental carrier costing. So we believe we're in an expansionary period in the net revenue space in our brokerage business. So we would expect that we will continue for the next quarters, a couple of quarters in that here, we're in the third quarter, we're seeing that. We would expect to see that in the fourth. Then it comes down to where is the demand picture. I think, Ravi, we could get back to, I think, there's an inventory build picture that has to happen yet in 2021. And so we feel really well positioned and very agile and nimble, obviously, as our most nimble business has to be in the Logistics space just because of the asset-light nature and the technology that we deploy to stay on top of that there.

Got it. So tell us more about kind of what excites you about technology deployment in this space? Obviously, you guys are kind of leaders and are really well known for the Quest platform. So kind of give us an update on where we are with Quest in terms of rolling out over the form and adding new capabilities to that? And also on the brokerage side of the business, kind of you hinted at that's kind of one of the more misunderstood portions of your business. So kind of what really excites you about that space?

Yes. Our brokerage business and Logistics, in general, has always been a proving ground for some of the technology pieces that we do because of its interface with carriers, interface with shippers, which were trained through our freight power platform to be more automated and more digital so that we don't have to grow the people side merely at the same rate that we have to grow the volume and the top line. And so we just think there's applicability for not only the brokerage business, but how do we automate processes, particularly around planning, freight acquisition, pricing that we can grow the business without growing the general -- the SG&A count has been traditional in this industry. I think there's a lot of potential there. Again, I think the customer is ready for that. I think the carriers are ready for that. We're ready for that. I think the industry in total is looking for those breakthroughs. And so some of that will be incremental. I think, some of that will be breakthrough. We've got some places now in the planning function. We are 40% more efficient with our internal staff, and those are real meaningful changes to our cost to serve. And I think we just from across that whole value chain, we have plenty of opportunity to take advantage of those investments.

Got it. Where are you guys in terms of transaction automation? Is that something you guys do need to invest in? Kind of where do you think you can go over time?

Yes. And Ravi, that's exactly the whole emphasis is on the transaction automation so that we can get our people working higher value items. And so we're probably most advanced in certain modes within brokerage. LTL, for example, virtually nobody involved in a business process there, increasingly so on the planning function of our assets. And what we're really now focused on is how do we do that on the carrier side of brokerage and the shipper side in our of various service offerings, particularly around that longer tail smaller ship. We're not going to -- do we need to convert the large shipper, those are very efficient processes today. It doesn't take a lot of people count. How do we get to that mid- to small-sized shipper in a more efficient fashion, and that's where our focus and investments are targeted towards.

Got it. Maybe shifting gears a little bit, Steve. If we can kind of focus on the cost side and the margins a little bit. Kind of how do we think about the kind of sequential walk from 2Q to 3Q? Obviously, lots of moving parts here but certainly a much stronger environment than when you guys did your 2Q call. So obviously, we look at your -- the guidance you gave us after 2Q, which is pretty strong, given the conditions. Do you see upside to that number? And kind of how do you think about that sequential margin bucket?

Yes. Like when we gave our guidance, resumed guidance on our second quarter earnings call, it was late July, so we were already experiencing and had evidence of a firming market. We believes that the condition that we're in was largely the one we were exceeding toward. So I think we're pretty consistent with the environment that we anticipated being in. And as you move sequentially from the second quarter, there were a number of cost actions we took, given the uncertainty of the pandemic at the time in the March time frame, April time frame. We took some cost actions. We didn't overreact, but we, I think, prudently reacted with some cost measures. Now that we've kind of advanced through the darkest part of that and are in this environment we're in, as we reflect upon things, I think at least probably more than half of those actions that we took will become permanent. There's certain things in our SG&A space, in particular, that those costs just don't need to come back. And so we'll hang on to several million dollars of benefit on an annualized basis, I think, going forward from that. And just given second quarter versus third, we should expect margin expansion out of the organization. Our Intermodal business, for example, was kind of the deepest, darkest part of the impact on that network operation was in the second quarter. We indicated on our call that we expected sequential improvement in Intermodal margins. And I think that we're not by any means where we want to be, but we are making progress along that front and expect further margin expansion in the fourth quarter in levels that will help the overall portfolio and enterprise results sequentially in the third quarter.

Got it. While on the topic, we do have an audience question and that kind of hit on what you just said. So I'll just to throw that to you just now. It says, IN really bore the brunt of COVID headwinds last quarter, but demand is stronger now. How are you dealing with Intermodal network balance? And when do you think you can return to 10% to 12% margins?

Yes. We won't get all the way there in the third quarter. But like I said, progress off of the 5% margins that we experienced in the second quarter, the fluidity isn't just snapping back. It takes hard work to get there between us and working with the rails and particularly the transcontinental moves in the west, it's just more congested and tricky to deal with and getting the timing of when your dray drivers are available to load and unload things and getting that scheduling right. Like if sometimes 2 trains will show up within close proximity of each other, say, in Chicago, and you've got one set of dray drivers. And so it creates these inefficiencies and dynamics. It's things like that, that we're dealing with at the moment plus getting the right amount of containers, [MD's] repositioned to the West Coast has lots of opportunity, but it takes time to get the containers where you need them. So -- but I would characterize it as good problems to deal with, and we're working through those and getting things more fluid. In the eastern part of the country, it's step more fluid already because the volumes we're not severely impacted in the downturn in the east. And so it's been a more stable type of operation in the east there. So like I said, we're making progress and largely where we expected to be at this point in time.

Got it. Steve, maybe can you elaborate a little bit? I mean why -- what have we had those problems in the west in your view? Is that an issue with rail service? Is that an issue with just really weird dynamics on the demand supply side where too much volume showed up at the ports when it shouldn't have? Is that a truck capacity issue? Kind of what drove that?

I think there's a lot of inputs to it. And Mark you may have some ideas, but if you're a railroad and you felt like you were going to be in a situation for a period of time, you may have done furloughs and whatever and reduced your headcount and reduced your cost and then things came flying back much more quickly than you anticipated. So there's some ramp-up time to get your own operations back up to scale. There's port dynamics, which are always tricky, and they don't handle volatility all that well. And so there's backlogs and inefficiencies at the port itself. And then just getting this long length of all type of circulation moving in the cadence, again, when you're interacting with these large ramps and just the complexities that go with all of that.

It's probably one other -- couple other dynamics, Ravi, that as product does get to a DC or it does get to a location, this labor issue of call-offs and availabilities, our dwell time. And really, our container and our trailer network is up about 20% just because of the -- once it gets into a 4 walls, how does it get processed either on the inbound side or the outbound side. So just as other parts of the economy have dealt with kind of labor disruption around COVID or availability, we're seeing that, customers are seeing that and warehouse facilities that were just not processing things. And so we don't have -- I think carriers are having more of their trailing capacity being consumed, working through that, which then impacts your ability maybe to get back as fast as you normally would or get it picked up for the next vendor load for your driver who now only got searching for a different empty because he can't get one or she can't get one out of that location. So that really hasn't alleviated itself and the call-offs that we're hearing some customers talk about at those processing locations are still quite alarming. So -- and while you get some relief on your -- maybe on some detention, what you really want is to get out there to revenue condition, not collect detention bills because that's not nearly as what you're really trying to do for the customer for your business. So that, unfortunately, the short-term here is a contributing element.

Got it. There are a few minutes left to remind on the audience to shoot across any questions you have on the webcast. Mark, maybe if I can end with a couple of kind of summarizing questions, if you will, kind of -- so maybe I should have started with this. I mean, how would you describe current conditions or things as hot as they've ever been? Ever have they been kind of as hot as they've been all year? Do you see any signs of cooling off at all? Kind of what's the kind of near-term trend than what you're seeing right now?

Ravi, this is really -- I guess I would describe the market and you have an awesome index that everyone got to, for the right reasons, look at across the industry. We also have a series of indexes that we have internally in our various service offerings to kind of assess our world in addition to the macro world. And they've been as elevated and correlated to your -- you may be a little stronger in certain cases. And it's across the geographies. It's not certain pockets. It's really all geographies are feeling that kind of throw in some of these storm disruptions you throw -- I mean, I just think we're going to be in this condition, and we're just now getting on the front end of the peak activity. And so we bridge that whole summer without any, I guess -- July, August, like hot summer in Wisconsin is very, very limited. But we bridge that very, very unseasonably strong, and now we're getting into the seasonal strong part of it. So I think we're going to -- I think your indexes and ours are going to be very robust in the foreseeable future.

Got it. And just maybe to wrap up, I think there's a lot of debate among trucking investors about whether the strength is cyclical or whether it's structural. Do you feel like it is structural? Do you feel like kind of the floor has been raised on rates, given some of the regulatory kind of factors out there? Or do you feel like this is still an industry with kind of perfect demand and supply and no barriers to entry? So it kind of finds the normal floor it usually does?

Yes. I think ultimately capitalism takes effect. It will be some -- perhaps a moderation to the condition, Ravi. But I think there's a combination of structural pieces here. I don't think the capacity situation is going to get materially easier at least in the next several quarters. I think people have changed. Fortunately, what's changed or what the economy is consuming, health care, education, entertainment, eating out isn't really what we all, what people are doing with their dollars and their time is the things that will evolve. And that -- whether you call that structural or cyclical, I guess we'll see how long those trends, but those seem to be real meaningful and -- which I think gives us some links to this recovery to include this whole depressed inventory level that nobody is happy with their stockings. I mean we don't talk to a customer in regular big box retail or extreme value retail or consumer products that feels good about its inventory condition and its in-stock performance, which, again, I think we're going to have some changes to inventory behavior. I don't know if we'll be the same just-in-time focus that we've had as a country for the last several years and maybe more of the just-in-case adjustment taking place. All those things have to, I think, kind of work their way through. So we'll see. You're smarter than we are.

On the contrary, I know it was a pretty nice quarter. I don't want to steal that from you with attribution. Mark, Steve and Steve, probably off camera, thanks so much for joining us. Obviously, very interesting times, and kind of we'll keep a close eye on this.

Thanks for having us.

Thanks, Ravi.