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

Assuming that, I'll go ahead and get started. Thank you for joining us here today. We've got Schneider National. We've got Mark Rourke and Steve Bruffett representing the company. I'm going to turn it over to them for some just very broad comments about the business, and then, we'll jump into the question-and-answer session. After that, after a half hour or so, we'll move over into the breakout. And in the meantime, I have e-mail up, so if there's any questions from the audience send it my way. But with that, Mark and Steve, I'll turn it over to you guys for some comments.

Great. Good morning, Ben. Thanks for having us. It's a pleasure to be here. Just -- maybe just a little bit of overview of the company briefly, for those of who may not be as familiar. We are a large transportation and logistics provider that really plays across 3 unique platforms but collaborate both with the customer and with our technology across the 3 segments. The first being truckload, which is our largest at a little over $2 billion in scale. High capital intensity, very driver-centric. As we go down our segments, we have less capital intensity and a little less driver centricity with those various platforms. The second one of those being intermodal, where we're leveraging our container network, and we own our own containers, our own chassis, and we predominantly play with 2 railroads, one in the West and one in the East. And bring a unique value to customers just based upon our ability to be in really complete end-to-end control of our service offering. And then our fastest-growing segment in the Logistics area, predominantly in the brokerage and technology space. Again, another $1 billion franchise plays in a very asset-light, very tech-orientated way and generally leveraging everybody else's asset. But increasingly, we're starting to bring our trailing asset to bridge the 2 between our asset, truck business and our non-asset brokerage business. And so we're finding some unique ways to play in the seams to provide value to customers. But over time, I think you'll see us be more and more leaning towards the more asset-light portions of our portfolio for growth.

That's great. We'll get into some of the segment details in a minute. Just curious, Mark, about your high-level perspective on the environment. At least from an investor point of view, there's been, I think, a bit of a premature declaration of the peak of the cycle, so to speak. Spot rate growth, at least according to our data continues to accelerate. Growth continues to accelerate and make new kind of cycle eyes here into the fourth quarter. But could you just kind of provide some framework about how you look, how the organization looks at the positioning of the cycle at this point in time, mid-November in 2020. Maybe anchor it to any other periods in time. COVID is unique, sure. But does this feel look like any other periods of time. I don't want to bias you in terms of naming out years. But could you provide some broader cycle perspective for us?

Yes, Ben, I think that's the most pertinent question that's on everyone's mind is where are we in the cycle. I think our view is that we still think we're relatively early. If you want to do the baseball analogy, maybe the third inning of the cycle. And as we enter here in the fourth quarter, as you mentioned, it's accelerated relative to the -- I call it, market agitation, the supply/demand equation. And I think what's perhaps a little bit different than prior cycles, and obviously, at some point, we'll revert back to the mean at some point. But the reason we think we're in the early innings of this is we have a couple of phenomena. Certainly, the demand picture has stayed robust and inventories. There isn't a customer that we talk to that I can recall, really good about where they are in the inventory levels, stock outs, what have you. And so there's a whole inventory building phase that I think is yet to come, even once we get off this red hot demand supply equation. And so that should give us some confidence for the next couple of quarters. We believe, we've got some demand triggers. On the supply side, if you want to look back maybe at the last really strong peak season we had, the '17-'18 time frame. Even though it was really busy at that time from a demand standpoint, the industry and us included, were adding capacity and doing so with relative success. And that's not occurring this time, not only -- I don't believe certainly within our 4 walls, but I think within the industry. And so you have -- this elevated demand picture, we think, has some legs to it, but we also think there's multi-quarter correction, COVID being a contributor to that, on the supply side. And so that's why you put those 2 things together, Ben, and we don't think we're close at this "peak season."

Sure. Okay. Let's talk about the specific segments. We'll start with truckload and kind of break it down by core offering. The one-way truckload business, as you see it today, in that context, where we are in the cycle. What is your bias as you think about 2021 in terms of committing capital, your ability to expand that more one-way truckload oriented type of product offering within Truckload. How do you think about positioning that segment for 2021.

Yes. Our one-way network, which generally around 6,000 trucks is our largest portion within the company and certainly within Truckload. And we've lost a little bit of ground through COVID, particularly as we highlighted in our third quarter call around the team configuration and a little bit in the owner-operator space. So we want to get some of that leakage back. But we don't really see, even in 2021, making that our growth focus catch up a little bit from the second and early third quarter attrition rate we have experienced there. It's our most volatile business, most susceptible to the changes in market. And so we think that 6,000 truck or so range, give or take, on either side of that is the appropriate size and scale still offers great value to customers that really like it. But it doesn't sit at the top of our growth profile. Then we're seeing constructive price discussion. We're seeing renewals, healthy contractual increases. We see that being proactive even by customers that get out in front of that. So we think we've got some good legs and some good constructive positioning as we go into 2021. But our focus is probably more on the yield front there than it is on the growth front.

I guess, to that point, as you think about -- can you -- of the 6,000 trucks in that segment, how many are unseated right now? And in that driver situation, I mean, gosh, I've been doing this 15 years, and I feel like from day 1 on the job, people were talking about this driver shortage, right? And it comes and goes. But clearly, it's acute now. And COVID's added a different wrinkle to it. So as you think about unseated track account, the ability to recruit drivers and rates as they come next year, how do you think about wage inflation? And are there other solutions to this riddle that perhaps you can help solve as it relates to the driver front and making sure that your fleet remains utilized.

Yes. Absolutely. And I'm increasingly confident that we will have some prefunding for whatever increases that we feel is necessary and we'll certainly be market driven on those as it relates to driver. We started with our team configuration, most recently. And so I think the customer and the shipper community, highly attuned to that. So we're very, very encouraged about the collaborative discussions that we've had to get out in front of that, Ben. So -- but I think there's other things we have to be thinking about. Certainly, particularly in that one-way network configuration that has more variability to it, both for the driver at times and for the business. And so I think some different pay constructs, more fixed pay, I think, over time, starts to introduce itself, particularly in that segment into the industry, and we're looking hard at where are those things that may make sense for us to do that to help provide some more assurance and stability into that segment. The other thing we keep focusing on is the whole driver experience as it relates to the interaction between all our interfaces as a company but certainly at the touch points with the customer, and we have a little bit of strain there right now, particularly around container and trailer availability just because of the dwell times are excessive right now just based on everyone's adaption to the volume and labor availability with COVID, et cetera. So we have to be very mindful of our decision-making as it relates to that experience. We have great data, the telematics platform, everything that we have I think will just take more and more prominence as we think about the places that we target and the customers that we serve and the importance of that driver experience.

And I want to come back to telematics in a minute, but to complete the thought on the dedicated portion of the business within this portfolio. Similar question, what does it look like? How is it positioned for growth in 2021? What's your appetite to put more capital into it? And really, how did it perform in 2020 in relation to how you might have expected it into, obviously, an unprecedented environment with COVID?

Ben, I'll give Mark a break and tackle this one. Dedicated, we are interested in growing as we've articulated. And so in the asset-intensive segment of our business in truckload, that is the space that we would be willing to commit more capital to, in fact, are planning to put more capital in that part of our business in 2021. We have roughly 4,000 trucks in that space. And looking to, over the course of time, approach that 6,000-truck number that we have in our one-way network, so it's a longer-term objective for us. We like the space. We have a pipeline of opportunities that has grown robustly during the year. And we've got some great commercial resources applied to that space. And I think that we'll continue to show growth in that arena.

Obviously, you guys have relatively limited tenure in the public market space, but a long tenure as a life of the organization. As you think about growing that dedicated business by 50% over an undefined period of time -- I'll come back to telematics here in a minute, Mark. But the margin profile of Truckload, would you expect it to rise over time? Is there opportunity to cut cost, mix shift, et cetera, to be able to produce better, let's say, margins next cycle relative to whatever your historical experience is?

Absolutely, Ben. We think we have, short term, the margin improvement opportunities that we're aggressively prosecuting against. But certainly, over time, and the mix is so important as it relates to, in our view, a healthy one-way network is very important to have a very healthy customer-centric, but profitable, dedicated network as well. So having that balance, we think, creates both customer value, but ultimately, improved margin profile over time. And particularly the things that we're pursuing. It's things that are very durable and very value-added versus just a capacity-driven type of dedicated that could come into fashion in these tight times. It's really not where we're focused. It's focused on those sticky, more specialty applications. But -- so very bullish on that. As Steve mentioned, we have a number of contracts, obviously, that came back after the second quarter of COVID, but not quite at the full strength yet just because of where the customer's business is. And we also think that gives us some upside as the economy solidifies and we get back to whatever "normal" is that we have some legs just in our current business, let alone the pipeline business that Steve just mentioned.

Your -- no, not so recent, but your partnership with Platform Science. Maybe you could talk a little bit about that product, what they bring that hasn't existed or doesn't exist in the marketplace right now. Why you took the approach of the kind of investment collaboration [ respective ] to that partnership? And to what extent will their technology play a role in walking up margins over the next several years.

Yes. Great question, Ben. And yes, we're extremely pleased with how those type of "venture investments" fit. To be able to bring, in the case of platform science, a great user interface, very much consumer-grade feel and look in technology, very open source so that we can bring our apps, we can bring third-party apps, customer apps, whatever the case may be, to bear on the solution that we provide and the customer and driver experience that it supports. And to tie it into our kind of strategic focus going forward is as bring that great capability, but then we bring our size, scale and our intellectual capital to help a particularly early 10-year firms really get some traction in the marketplace and Platform Science is a great example of that. But because of that unique platform and that user interface, and as we talked about even, for example, a dedicated example, is that I think what we can do really, really well is create some very unique solutions for the customer that perhaps has a long-term private fleet we can engineer through the telematics, all that experience and put it in the [ cavalier ] truck and the experience of our driver that really bridges that tribal knowledge. And using the telematics and the customization that we could do there to really bridge that gap -- it creates some differentiation for us as we pursue those unique dedicated opportunities. So it has lots of legs. It has not only the experience of the driver that we talked about, the great experience that we're providing to them, but it gives us a commercial advantage as well, and we're certainly looking to exploit that.

Sure. I'm going to touch on intermodal and logistics in a minute. But that final point that you were just making. I want to get your perspective on it. Because if you take a look at the industry since deregulation 40 years, there's been periods, eras. Clearly, logistics came into vogue in a scaled manner from the mid-'90s until, say, the early part of last decade. In the last decade, it's been one of kind of maturity. There's been start-ups. There's been slower growth. But the scale providers have kind of been stuck, for the lack of a better term, in terms of being able to continue to really take discernible share. But it does feel to me that we're at a bit of an inflection point, and you mentioned technology. You touched on some of these topics. But I'm kind of curious about how you think -- or what you think is changing that allows you to kind of reintroduce scale as a differentiator with technology and some other solutions to be able to kind of continue down the next decade of growth, whatever that may look like. And I'd ask you what you think kind of next decade worth of that -- the industry composition looks like as well. Hopefully, that can be done succinctly. But I'm curious about your thoughts here.

Yes, there's a lot to unpack there, Ben. But certainly, I think the advent of the technology revolution with folks of scale like us with assets, I think, creates some really unique opportunity. I think there is going to be the consolidation word be more prevalent. And we see ourselves as an aggregator of both demand and capacity. Some of that will be with our asset. Some of that may just be with the trailer. Some of them may be fully third party. But this whole combination of the truck, the intermodal, logistics and with our assets that can kind of bridge those worlds, we believe gives us an opportunity to aggregate and grow, and not have to have the capital, the people match that same trajectory that's traditionally been done in our space. And so over time being less asset concentrated, if you will, across those -- across the portfolio of the companies. This whole portfolio, I think, is a very important concept that I think gives us a unique capability to go out and take advantage of some of these trends. But I think your point of technology is the enabler and the connecting point for all those various parties that I think is the difference maker.