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

Jack, as it relates to overall performance of our Truckload segment, we expect and we believe we're going to be a top-tier performer, top quartile performer. For the very reasons, we're more than capable of doing that. And you mentioned a couple of those levers. We're highly diversified within this portfolio from network to dedicated to specialty, like our Tanker business. And we think that sets us up to have top-tier performance. We do believe as we move our mix more towards dedicated that will take a little bit of the top off and will take probably a little bit of the bottom off as those are longer-term commitments that both sides are making, but I still think it will be a very attractive earnings profile and particularly into this labor front, the drivers having desires to have more predictability of work, lifestyle, time and all of it. And so our focus on growth, I think, is very consistent with improving our margin profile. And so I don't expect us to take a backseat over time to anybody relative to what's capable in this space and that's how we're going to approach it. And certainly, the network and the allocation and the mix of customer has a big play of what we can do to shape that. So tracking with you completely.

Absolutely. Okay, right. Great. That's really encouraging to hear. Maybe if we could pivot to the Intermodal side of the business for a moment. Typically, Intermodal pricing just lagged Truckload by a couple of quarters. I think most folks were expecting a pretty constructive intermodal environment in 2021. You guys are making some real progress here over the course of this year, improving your Intermodal profitability. As you look out longer term, Mark, I don't think most folks really view Intermodal sort of as secular growth story that it was maybe 5 or 7 years ago. But it's -- how are you guys thinking about Intermodal profitability, near-term, longer-term? And then sort of where does it fit into the portfolio as you think out 3 or 5 years?

Yes. There's a lot to unpack there, Jack, a lot of things to talk about, all appropriately framed. But yes, we believe we've got great legs as it relates to our Intermodal product. It's much different in the fragmentation. If you take out LTL and parcel or maybe some of the privatization, you've got the top 3 or 70% of the market. And as you think about the ESG focus that folks are having, and it's coming out more and more frequently. It's going to play well into that trend. When we start to get to fielding electric trucks or hydrogen fuel cells, it's going to be in day caps, it's going to be in our Intermodal dray fleet first, which is going to enhance that story. So I think it's got some nice trending for other contributions that other people are trying to make in their carbon footprint that is going to be more important. It's always been there, but it seems like it's really gaining traction in today's world. And while we're more mature, I think, as an industry and the conversion opportunities in the West, we don't believe we're nearly as mature in the East and places like in and out in and out of Mexico that give us above-market growth opportunities. So we're -- we think growth of both a great margin profile, a great driver profile because of our company dray fleet and the markets that we can adapt. Because part of this, as you mentioned, going into the bid season next year, it's going to be about coverage for shippers as much as it is going to be about rate and mode. And with how our providers are performing outside of these kind of unique pandemic times, it will very much improve the reliability, which we take another kind of objection off the table with customers. And so I'm really bullish on what we're going to be able to do. It's going to be a growth vehicle for us. So you're going to see some additional container count there. You're going to see some additional dray count there. And coming through the bid season of what we expect, I think we've got a good constructive setup for Intermodal.

Okay. Great. That's encouraging to hear. Maybe kind of taking a step back and asking some bigger picture industry questions. Again, not near term, maybe longer term. We did a discussion -- we had a discussion yesterday during one of the fireside chats with [ 2Simple ]. And I think autonomous trucking is -- it's a major kind of thing for me as I look out over the long-term within the sector. Mark, how are you thinking about the role that autonomous vehicles, [ drivers ] vehicles will play in the truckload sector over time? I know it's not coming quickly, but what's your long-term view on autonomous?

Yes. We've assigned resources technically to 3 folks that we think have varying approaches to this answer. [Audio Gap] And we want to be up in the front end of this to understand, really, not only the technical side, but what's the impact on business model? How is this most likely to be applied? And how do you take advantage and still operate with a very driver centric need for a long period of time yet as that gets commercially viable. But Jack, I'll tell you what I thought maybe it was 2030, I think there might be some things we'll start to see in the middle part of this decade. So I think there's been some advancement. I think it will be -- in many respects, probably the first is how it look more like our Intermodal business. The middle mile maybe be moving in an autonomous fashion. And it's like our dray business on the origin and destination ends. So I think that could be very positive for the driver community to be more in those type of jobs that people are more aligned to for their personal needs. But there's a whole host of things. They have to be resolved. The edge cases are very complex. The computations of what to do. You've got weather, you've got government policy. You've got -- there are going to be factions that aren't going to be exactly for it because of the impact, maybe over the long-term to people. I don't know if that will be in my lifetime of career here or not, but just like most things, though. We're going to get in front of that. We're going to be involved in that process. And we don't think there's going to be a single answer or maybe a single winner. And so as things are going to stuck -- can't be in denial. I think there's going to be meaningful impact, a meaningful change to the good, and we want to be participating in it.

Okay. No, I understand. Yes, it's very theoretical at this point, but it's quite a fascinating topic. I guess, maybe a little bit on that subject would be consolidation because I think one of the things that could potentially drive consolidation in the truckload sector would be autonomous drivers vehicles just because what it could do to the cost structure of operating a truck. But Mark, this is a highly fragmented industry, barriers to entry are very low. It's ultimately a lot of small seed capitalists in this industry. How are you -- do you foresee a time where we can see some meaningful consolidation? I'm not necessarily thinking about M&A. I'm just trying to get about where the bigger platform companies like yourself can really take it the next leg in terms of consolidating the industry? And what would drive that?

Yes, you kind of stole my thunder. That's exactly where it's going to go. I think there will be traditional merger acquisition. But I don't think that's going to be the game-changing element, particularly in our space. I think it's going to be -- what you're just starting to push on is that our belief is how do we aggregate capacity and demand, some of it on our assets, some of it on others and some on hybrid where it might just be our trailing assets, where we're using third-party by connecting small carriers with a bigger shipper that has those efficiency needs. And so again, I think technology is making that easier to do. But you still got to understand how to run a network, you still have to understand how to have technology to connect those things effectively. We have many moments of truth around pricing and selection and you have to be very sophisticated to do that well. So again, I think that's what will allow multiple, perhaps at the end of the day, large players to scale these platforms that isn't all about assets or all about non assets, but how do those things all emerge. And that's how we see the world. That's how we think about our investments in tech and we're making great progress this year relative to the -- using our orange trailers to bring solutions to customers with other people's power capacity. And we just see those lines perhaps further blurring over time. And that's where we see a great growth vehicle for us because we think we have all the ingredients. I don't think it's just a pure tech play. I don't think it's a pure asset play. I think those who can bring all of that to bear in the most unique way, I think is going to have the advantage.

Well, maybe if we can -- that kind of dovetails with my next question around the collaboration that you're doing with mastering because I think maybe that's hoping to sort of solve that riddle a little bit in terms of how do you combine all these different elements together. But could you talk a little bit about this collaboration partnership, whatever word you want to use that you've got with Jeff Silver and Mastery. And sort of maybe a couple of tangible sort of examples of sort of over the next [ 24 months ], well, what do you expect to realize from this? I'm not asking for financial implications. But I'm just -- maybe some project basis or just things like that for folks to kind of understand it better.

Yes. I think we do have some real clear priorities there that we can share on that journey, Jack. And really, the whole concept here, and we've done this in a couple of places, is how do we bring in very unique and talented domain expertise and combine it with our size, scale and intellectual capital to advance not only what they're doing and participate in that, but also accelerate our pace of change in adoption in those unique places. So we did that with a company called Platform Sciences in the telematics space to really get after what we felt was an unmet need in the marketplace. And then Mastery, I think, brings, particularly around these emerging asset non-asset platforms, some real domain expertise. So as you think about what's next for us, our brokerage business, our dedicated business, and certainly, as we think about what we're calling our power-only offering, is bridging those trailers with third parties, I think Jeff's Platform, Mastery is one of those elements that we're going to use to accelerate the automation of that. I think what's really important for a company to understand is what is your secret sauce that you're keeping that's specific to you. And so our decision science support, our algorithms around the customer facing and the carrier facing will likely stay with us, but there's a number of things that we can leverage, Mastery or Platform Sciences, a technology platform that advances without us having to do it. So it lowers our cost over time, and it speeds our to-market effectiveness. And so we don't see 100 of those out there, but we see some strategic ones just like we're pursuing here that make a great deal of sense.

Okay. Very interesting. And so I mean, as we look out into 2021, 2022, do you think we're going to be able to start on this journey, this longer journey that we've been talking about in the last few minutes around, really taking the next step around leveraging your platform to drive top line revenue growth and become a bigger and bigger player in the broader logistics sector, not just the trucking sector. Do you think we're going to see tangible steps on that journey in '21 and '22? Or is this more of a much longer horizon?

I think you're seeing steps in that in 2020, actually, Jack. If you look at our Logistics growth of 20% last quarter, our margins hung in there. We didn't create our margins to invest in these things. And I would expect even more of that in 2021. Yes. So this isn't a 5-year out there. I mean, we won't get to everything that I just talked about in 2021 with Mastery and some of those things that we're working on, but we're going to make some good progress.

Okay. Got you. When you think about the utilization of owner-operator capacity, we talk -- obviously, there's some unknowns on the regulatory front that could be coming. But would you -- I don't currently know how to frame this question to kind of incorporate again this platform idea, this platform model. But would they still be pure third-party capacity? Or could you maybe look to bring in all owner-operators and have them driving just for Schneider, similar to maybe what a Landstar does with their BCOs? I don't know -- not a perfect example, but I'm trying to think about how to use owner-operator capacity, third-party capacity differently than just broker capacity.

Yes. I think it's an all-of-the-above strategy, Jack. We have -- a good portion of what we do today in our one-way network is owner-operators that are onto us that are completely selecting digitally their freight. They don't have anybody involved in that. They're dispatching themselves through portals. And it's -- and we think that could be leveraged on third parties as well, but it doesn't necessarily add the replacement of the owner-operator. It's an addition to a broader reach and probably small companies versus just small operators. And so we're -- we very much are aligned to our owner-operator group. They do a great job for us. They're a hotbed of behavioral economics, just watching what they do, how they do it through the portal, how they select freight. You get a lot of behavior understanding of how people think and third parties think. And so we kind of leverage that back into our decisions support on how we price freight, how we select freight and then ultimately, how we show pricing to not only inside the building but out. So a lot of great stuff there, but we think this is additive, not in replacement of.

Okay. Makes sense. Makes sense. Maybe we can pivot to capital allocation here for a minute. Steve, to kind of bring you back into the conversation. I mean, there are -- I think there are a lot of folks who are going to get beginning $2 a share tomorrow in their brokerage account across the world, including folks sitting here in the room. But -- so that's obviously 1 answer in terms of the capital allocation question I think folks have had for a while. But you guys are a strong cash flow generator. You still have a lot of cash on the balance sheet. What are some additional options for capital allocation as you look forward over the next, call it, 4 to 5 quarters to deploy your capital in a shareholder-friendly way, but also for growth?

Yes, sure. Yes, you mentioned the special dividend, and we view that as evidence of our ability to generate strong free cash flow, and certainly have done so over the last couple of years. So feel fortunate to be able to be in that position to provide that shareholder return in the form of the special dividend. And as you mentioned, while preserving tons of firepower and optionality on our balance sheet and our cash position. So feel well advantaged and ready to go in that space as far as looking forward. So nothing's changed about our strategy, our ability to execute because of the special dividend at all. And we continue to think that we have plenty of organic growth opportunities that we'll be investing in. I've signaled like on our recent earnings call that we fully expect our net CapEx in 2021 to be well above what we had this year, which was a bit below normal for a variety of reasons. But part of that we'll be investing in growth in dedicated and intermodal as we indicated as well as continued investments in technology. So that would be part of the use of capital cash as we go into next year. I would also signal, we don't expect to generate as much free cash flow in 2021 because of the higher CapEx and a debt repayment that we anticipate making later in the year, and we'll repay the CARES Act benefit that we've gotten this year, deferred payroll taxes will be repaid. So you put all those factors together, along with maybe some working capital requirements, and it will be a more neutralized cash flow generation in 2021, I would anticipate. But still, beyond that arena, we continue to think about ways that we can constructively provide shareholder value over a long course of time. And that could potentially involve something in the acquisitive space. And we're -- continue to be open minded about what it is we look at and how we think about it. But core to that is that it needs to fit who we are and what we do and not be disruptive to this portfolio that has tons of value today, but be very complementary and mesh without it -- with it without being a distraction to it. So we continue to look. We're not afraid of size and scale in that arena necessarily, and it just needs to be hit. We continue to have that as an objective, but don't want to be -- get deal fever and just do something to say we did it just because we have the capability of doing it. But it's very strategic and well thought out. So it's an exciting period of time for us as an organization to have this optionality in the platform to work with.

Yes. I don't think anybody was complaining about your net cash position in the middle of March. I think everyone was glad to see that. It's huge, it still is. It's a huge strategic asset. So we're down to the last couple of minutes here. Mark, I would like to maybe turn the floor back over to you to atleast sort of close out. As you look forward here over the next 12 months. Certainly, it's going to be an exciting time in the freight markets. But as you kind of make the pitch to the investors that are either you're meeting went throughout the day or that are on the line with us right now, the long-term value proposition, shareholder value proposition for Schneider, I just would love to -- if you could just maybe take a few minutes to kind of walk folks through that, and we'll let you move on back to your one-on-ones.

Great. Well, thanks, Jack, and I appreciate everybody's attending today. I'll go back a little bit where we started. And we have, I think, just the platform with these 3 segments of size and scale. And I think over time, you're going to see us, as I mentioned, being a little bit higher skewed towards the more asset-light portions, a higher return on capital versus -- and that's not being anti that more capital intensive is what we think the market and the growth and the scale opportunities are in front of us with all the tech investments that we've made and how that, as Steve mentioned, complements our portfolio. So we feel we're in a great position, and we don't think we're where we need to be across the board. So we have margin opportunities, particularly in our network businesses to enhance in the Truck side and certainly, Intermodal as well. And so we have an improvement story. We have a growth story. And I think we have the right strategic positioning. We love this tough market. I mean it creates and separates people over time. And this whole disruptive element of what's coming, whether it's autonomous, again, I think what we've proven in our history is our ability to adapt and adjust and embrace those trends. Not try to hold on to where we are, but to embrace to where those opportunities are. And so we look forward to getting to a post-pandemic world and getting our people together again, and I'm pleased with how we're performing despite those challenges, but certainly looking forward to a better macro environment to get our folks back focused on these great opportunities that are in front of us.

Absolutely. Well, gentlemen, thank you so much for your time today. Thank you for attending our conference and looking forward to seeing you soon, not just talking to you soon. So take care. Thanks so much.

Happy honey.

Thank you, Jack.

Thank you, Stephen.