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

Okay. Hopefully, we're now ready. Good afternoon. Thank you, everybody, for participating in the CS Industrials Conference. Very happy to have Schneider National here with us today, joined by Mark Rourke, the CEO; and Steve Bruffett, EVP and Chief Financial Officer. Mark or Steve, if you'd like to have any opening comments, feel free to jump in. Otherwise, we can go right into the Q&A. [Technical Difficulty] Okay. Good afternoon. Thank you for staying with us. We had a little but of a technical difficulty, but I think we're back. And thank you, everybody, for participating in the CS Industrials Conference. I'm very happy to have Schneider National here with us today. I'm joined by Mark Rourke, who is the CEO; and Steve Bruffett, who's the EVP and CFO. Mark and Steve, thanks so much for joining. Would you guys like to start off with any comments, recent trends? Of course, there's a lot going on with the freight market and Truckload and Intermodal. So wherever you guys would like to start, and -- yes, but maybe if you could just sort of give some introductory comments about what the current state of affairs are within the freight transportation market across your various segments?

Great. Well, Allison, thanks for having us, and we're happy to be here from Green Bay, Wisconsin. So let me just -- perhaps just a little bit, we'll frame that within the context of our 3 segments, as you mentioned. So we're at the cross section. We have a very large truck operation of scale, $2.5 billion, and we play about 60% in the regular route network side and also another large component in dedicated. Conversely, we're one of the few large Intermodal players. And so we're seeing trends, obviously, with what's going on in the marketplace via that lens. And then lastly, but not least, and we don't probably get enough airtime on this last segment, which is our $1 billion in scale in brokerage and Logistics business that's servicing a whole wider range of customers, particularly the smaller customer on the long tail of the shippers. So each of those have a different driver, concentration and centricity, a different capital intensity, and -- but we use those in a very collaborative fashion with our customer and across our tech platform. So Allison, I think we see the market from all 3 of those different and unique lenses. And I think what you've maybe want to hit on initially is that we really haven't seen any level of peak or slowdown across those 3 platforms as we are now here in the early part of December. We've been in this build phase since about mid-July and are running at really historical levels of demand levels versus what we consider the supply to be in the marketplace. So -- go ahead.

I was just going to ask that you -- obviously, you're saying we're not at peak, and it's just a steady flow, demand, demand, demand. Where do we sit in December? And I know you guys don't necessarily give intra-quarter guidance. But does it feel like, by now, you would have seen somewhat of a seasonal slowdown in any of the segments and it just has persisted? Is that a fair way to characterize it?

Well, with the influence of e-commerce, that has changed over what would have been a more traditional slowdown. And so over the last several years, we've seen it go in a more historical pattern, very much up until about that -- at least to the middle part of December before you see a little bit of a slowdown. And then January has been increasingly strong as a replenishment cycle over the last couple of years. And so -- but we haven't -- we're not quite to that point in the calendar yet, but we're also -- as we work our tenders out, it doesn't feel like -- I mean, I think we're going to run right through the tape. It would be our kind of assessment at this point. But...

And do you have a sense from your customers -- I mean, obviously, there's been a lot of inventory restocking that's taken several months, and it doesn't even appear that we're close to having supply chains normalized even in a broad sense. Are your customers giving you any indication of how long they think it will take to catch up? Is there a new sort of normal versus what was previously a just-in-time model? Or any customer saying, "Well, maybe that doesn't work anymore, and we want to keep more inventory on hand." And obviously, with e-commerce, you want it in more places and obviously closer to the end consumer. Do you think that COVID has really sort of accelerated these trends? Is it something that your shippers are now trying to figure out, okay, how do we change the way that we manage inventory and how do we rely on our carriers, whether it's Truckload or Intermodal or even brokerage? So maybe if you could address that -- with multiple questions, but kind of a broad topic.

Yes. Well, I think you hit all the trends within the question, I must say. And I think this just-in-case inventory versus just-in-time, I think there are much different conversations going on because of being caught short here. And we serve such a broad cross section. We're consumer products, all really segments of retail, food and beverage, manufacturing. And I would say -- and I'm sure there's exceptions to this statement, but I haven't really ran across too many of these where the conversations on inventories are low and it's generally described in an adjective like record low. And so -- and that's why I think we got a little bit of in front of us yet on that inventory build, whether that's through the first half of the year or just in the first quarter and there will be some catch-up. I think that's a little uncertain. But that trend around inventory and probably the trade-offs are going to be a little bit different in the economic models with this experience than maybe it has been traditionally. And so we do believe there'll be more inventory. And then you hit on the other point of this is because of the e-commerce and the rapid response, more inventory in more places. And I think that's the other development that we've really seen is our kind of traditional brick-and-mortar customers in retail have really advanced through necessity this whole e-commerce fulfillment out of the store or order online, pick up in store or fulfill out of the store. I think from a technology or process and a supply chain standpoint, they've adapted pretty rapidly. But I think that's also going to have this influence on inventories. And I think that still bodes well for full load because the most efficient way to get things there is still that full-load approach. So absolutely.

What about -- so on the Intermodal side, I mean, obviously, there's -- if we're thinking about sort of a new supply chain sort of configuration and more inventory in more places. But I guess on the longer-haul side, you can perhaps manage it a little bit better and use something less time-sensitive. Is that driving conversations with your Intermodal customers about how they could perhaps use that product more for more upstream moves if they're holding more inventory? Do you think that's a positive market dynamic for the Intermodal space going forward? I mean obviously you have the tight trucking market.

Absolutely.

But outside of just the cyclical, does it seem like customers are more willing to look at that as a transportation option?

Yes, Allison. I think, absolutely. I think that goes for our -- even just the straight e-tailers are seeing that as a great benefit economically and coverage-wise and so a big appetite for your e-tailers to do that. And then when we think about this replenish out of store or buy online, pick up in store, that's kind of followed the very traditional patterns of vendor to DC, DC to store, and we're seeing it in our dedicated DC to store, and we're seeing it in our vendor is we just have amped up volumes going through those channels. And so again, Intermodal is a great value there, and particularly now with our performance, and we really -- in the East, particularly, very reliable. And I think what customers will say, transit is less important. What's important is we know what the transit is so that we can plan around it and we can adjust it accordingly. And so we think as we continue to perform truck-like with Intermodal, that's another catalyst for conversion and other catalysts for use of Intermodal.

Okay. Maybe we can focus on the rate side. Obviously, things are very tight. You've seen spot rates go through the roof, much like what we saw 2 years ago -- or 3 years ago, end of 2017. Does it feel similar? I mean, obviously, there are different dynamics leading up to the tightness in 2017. You had the just normal cyclical supply contraction, then the hurricanes and the ELD implementation. 2020 has obviously been something altogether different. But does it generally feel tight enough, whereby as you look ahead a few months to when you're renegotiating most of your contracts in the bid season, how feasible does the sort of high single-digit, low double-digit Truckload contract rate increase feel at this point? So maybe if we could start there.

Yes. Maybe if we just back up just a bit. What -- I think, certainly, the demand picture feels very similar. But if you go back to that 2017, particularly the second half and the early part of 18, we at Schneider and the industry in general were having pretty decent success adding capacity at those same periods, which -- and then that's when we have the more abrupt down cycle from a supply/demand standpoint. So today, the demand feels very similar. But we're not having that same success for a host of reasons, which you're familiar with relative to the pandemic-related issues of new entrants into the industry. So we're not having that replenishment cycle on the capacity side anywhere near. And virtually, not at all. It's just -- right now. So that's what's different. I think we have some inflation in front of us on the driver cost front. But as we really assess where we are today, Allison, relative to the renewals and the out-of-cycle discussions we're having, very confident that the customers are receptive to that. And so the range that you just described there, I think, is very achievable. And I think it's achievable in both Intermodal and truck. I don't think there's going to be much of a gap or much of a lag between those 2.

Okay. That was going to be my next question. So you beat me to the punch there. But so this will be the second -- possibly the second cycle with these unprecedented rate increases. Obviously, you guys kind of give back, I don't now, some, call it, 1/4 or 1/3 of every dollar of rate to the drivers. But given that just because of the pandemic and the driver schools are -- which are not filling up, and if they used to even if it was that, it's harder to find drivers. You have a bunch of different insurance costs that are hurting smaller carriers, a possible second round of stimulus checks. Do you think all of this, even though like the rate increases should be similar to what you saw in 2108, could the inflation to get drivers actually creep up a bit? Or is that something that you think may happen just down the road more?

Yes. I think our focus is to do the best job we can to get out in front of that with the market, knowing that it's coming versus respond to it because that's when we really get caught sideways. And I think those are the discussions and the focus that we're having. But I think you're on it. I'm not sure, even with that, we're going to see because of those constraints around the drug and alcohol clearinghouse and the lack of remediation that's really going on there, I'm not surprised of the number in there. I'm just surprised at the lack of remediation to get out. You throw in the schools, that will be a couple of quarters. And then -- because actually, retention and the things that we have inside are actually quite attractive. It's the -- when you do have turnover, how are you replacing it? And Allison, I think that's got a couple of quarters to it. And money, in and of itself, I don't think is going to solve all of that.

Right. So what is Schneider doing perhaps that -- different tactics that maybe employed historically to try to overcome these challenges and keep a steady pipeline of drivers coming into your network? Is there anything different? I mean, obviously, you're right, like money does talk on one hand. But then there's other sitings that employees would be looking for. So have you done anything different? And have you seen any success to that end?

Well, this is where the diversification of our portfolio comes in to play a bit, right? Certainly, our Intermodal effectiveness is terrific jobs for drivers because of the predictability of the work, home most days. And so leveraging our company driver dray with our own chassis and our own box, we are highly competitive. And we expect to see some nice growth, not only in Intermodal, but the dray configuration that goes with that, and that's going to be very positive for our driver community. Secondly, I think as an industry, and maybe these -- what you were referencing, these cycle changes being so hard and abrupt, we'd like to get out of this 52-car pickup every year of these procurement events and get into a longer, steady relationship so that we can bring certainty to our network, certainty to the driver. I think there's going to be different pay constructs. I think we've got to work on taking the variability of their payout. And so more fixed, more guaranteed, I think, is a trend that is likely to gain some root here, which, again, puts value on stability of the customer and the carrier relationship. And so I think there's going to be some real meaningful adjustments both on the shipper side and the carrier side as a result of this, Allison. And we're probably in the early innings of that, but I think it's going to be meaningful.

Okay. I mean could that mean just longer-duration contracts with customers other than the typical kind of 1-year cycle? Yes, you're going to have variability in demand and capacity. But ultimately, we've seen 2 cycles where you're just getting this really tight constraints and shippers are getting squeezed. Does it seem like there's a higher propensity for them to want to maybe reevaluate the length of their contracts and try to come up with solutions like you just were talking with, Mark, that is maybe a little bit different than what has been done historically in order to secure that stability and consistency?

Yes. I think that getting to a place where there's mechanisms to adjust to market in a more structured and more data-driven way, I think, would be helpful. The question is, depending upon where you were in the cycle, who wants to give up where they are in the cycle to get to that, right? We just got to get by. And I think with some of your longer-term, mature relationships that have been through this together, I think it's a great place for that to start. And we are having those conversations because I think it's in everybody's best interest. It's the driver to the carrier and certainly the customer and their customers. So...

Maybe turning to Intermodal. You talked about -- and this has been a trend for the last few quarters that your -- the service performance from CSX and your partnership with them has been very successful. Their intermodal volumes have been very strong, at least in the last quarter or so. Even BN, I mean, I think just if you look at their public service metrics, their train speed is going up pretty dramatically, dwell is down. And I know that's an overall network thing, not specific to Intermodal. But have you seen any improvement in the equipment imbalances that were persistent in Q3 and just some of the supply chain disruptions from all the goods coming into the West Coast ports and that causing a ripple effect? Because it started to ease a bit with BN in the West or has it just kind of moved around from West Coast to maybe Dallas or whatever other cities? It just -- is the problem just kind of shifting around, but in aggregate, not really changing?

Yes. Both of our partners, BN in the West and CSX in the East, have -- actually, the line haul portions of these things have been very reliable and improved, and they're doing what we think is an excellent job on that portion. Unfortunately, BN is stuck with the Western ports and some of those unique aspects that create some unique congestions. That, we think, will alleviate here soon, but we're still dealing with some of that with inside the terminal issues and the overall demand issues, which is natural at this point. We're probably not quite where we want to be on getting our empties repositioned in the places we'd like because of the focus which is absolutely appropriate on the loaded boxes and containers. So they're on it. It will improve. We probably got a little bit of time yet and maybe it will take us through the first of the year to get to places that we both like. And -- but overall, the whole execution around the line haul portion, the longer term, all of that is working as designed, and both are doing very, very well.

Okay. For the terminals. Any changes in the thought process for how you guys are approaching your container fleet? I know you went through a big sort of shift over the last 3 to 4 years and cycled through that. But as you look forward, are you contemplating growing the fleet more? What's sort of your -- the thought process there?

Good question. Steve, do you want to...

Yes, sure.

Get a different voice going here instead of mine.

So when it comes to Intermodal, I think we kind of took a breather this year given the dynamics with COVID and so on. And after some rapid growth in the container count, I think for 2021, we'd anticipate some modest container growth. And it's -- some of it is for pure growth and some of it is to have the ability to have those boxes positioned where we need them to be. So I think it will be a double benefit by doing so. So we do see continued growth, particularly in the East. Market share gains and conversion in the East, and we anticipate that will continue. So that's part of the reason for the containers as well.

And we'll invest in dray as well.

Yes. Sure.

Maybe we could shift to capital deployment. Obviously, a special dividend. How are you guys thinking about just the free cash flow of the business going forward? And what you're -- we just talked about the Intermodal fleet, but maybe your broader sort of capital needs or equipment needs or what have you, real estate, versus any sort of changes in how you're thinking about capital allocation, specifically returns to the shareholders going forward?

Sure. Yes. We have generated a ton of free cash flow over the last couple of years, and that ultimately led to the special dividend that you mentioned that we paid out in November. Some of that kind of, I guess, normalized our capital structure a bit here in the near term. And so we feel good about that. And we've talked on our earnings calls and so on about our anticipated capital expenditures in 2021 will be a fair amount higher than they have been this year and even in the couple of years prior as we both catch up from some of the equipment that we wanted to get in 2020 but weren't able to get delivered. So there'll be some of that. There's some age of fleet catch-up that we'll be doing in 2021 as well. And then we'll be investing in pockets of growth in dedicated and then the dray fleet for Intermodal that Mark mentioned and possibly some containers in Intermodal. So the overall capital spend will be larger, and we'll likely have some working capital needs in 2021 as well if it plays out like we think it will. And so our overall free cash flow generation, we anticipate, will be quite a bit less in 2021 as a result of those things, plus we have about, I think, a $40 million debt repayment that we plan to make later in the year next year. So you put all that together, and it's not like we'll be generating big piles of free cash in 2021, we wouldn't anticipate. So that gives us a little time to step back and assess things. We have a continuous dialogue about capital allocation and looking for opportunities to organically and inorganically grow to the benefit of the shareholders. And we also have the outlet valves of the special dividend and, maybe at some point in time, some form of buyback. But for the near term, we're looking to let our public float expand a bit before we crimp it.

Okay. That makes a lot of sense. Maybe just shifting gears. When you guys went public about 3.5 years ago, one of the big elements of the Schneider value proposition and what you guys are doing differently, not only just that you're -- the way that you have the business segment structure, but the Quest platform. Quite a bit different than anything that's traditionally seen in Truckload. You guys gave a lot of really cool demonstrations. How has that advanced over the last few years? And do you think that just having gone -- I guess, since then, we've gone through kind of a couple of pretty dramatic cycles, even though a short period of time, how do you think that helped you to manage the upswing in late '17 and early '18, then the downswing and then now what looks like we're kind of going back to an upward -- I guess, we are back into an upswing on the Truckload market. But how has that helped you to sort of minimize the volatility and cycle exposure? And if you could sort of talk about what's the latest there that you think will be incremental to driving further efficiency gains and productivity improvements at your various divisions going forward.

Allison, there's a lot there. I could go about 20 whole minutes on that. But let me hit a few highlights. First, we think we're in a constant state of renewal and advancement of our tech platform. And so -- and we think we can do that and be profitable in a fashion and still create returns as we do that. But we really want to be good. And we've continued to invest in these areas of revenue management, of our ability to automate process. We want to make sure we're taking advantage of the safety technologies. And if we do those things well, we are then -- we're collaborating across those 3 segments because we're under one ecosystem or one system of the truth to do that. And so -- but you've also seen us out of plays, step out and leverage some outside expertise, like we do a Platform Science on telematics, like we're working with Mastery on some of the brokerage platforms and perhaps dedicated there soon. And so we can take some really unique intellectual and capabilities from outsiders and put that into our ecosystem for speed of delivery, cost management. And so that's our approach. And so we're constantly -- I mean, we're never going to stop investing there. And I think the place that you might see some uniqueness come out from us is how then do we tie in this $1 billion franchise plus we're now in our brokerage business by tying this orange box to small carriers that can help serve large shippers and how we get that ecosystem bring that to bear. And so we're excited. And this market and this year has given us an opportunity to really test that with both customers and carriers and what we need to do from a technology standpoint. So you'll see some additional investments that can help us bridge these segments even more effectively by using the cheapest asset we have, which is the trailing asset.

Well, Just by your facial expression, it seems like something you're pretty excited about. So I guess we'll stay tuned there, but definitely picked up on that. I think we're a couple of minutes over. I know we started late.

Yes. Bye-bye. Apologies, yes.

Mark and Steve, thank you so much. Looking forward to speaking with you guys again in January and seeing the Q4 results and looking forward to 2021. So thank you both so much, and I hope you have a good holiday. Take care.

Thanks, Allison.

Thanks, Allison. Appreciate the invite.