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

Well, great and good afternoon. So we're going to go ahead to get started with our 120 fireside chat. I'm joined by Steve Bruffett, who's the CFO of Schneider National; as well as Steve Bindas, who's the Director of Investor Relations. Having 2 Steves makes it either easy or complicated when I ask the questions, we'll figure out which one it is as we go through this. But very happy to have the team join us today. Certainly, given the breadth of their operations and all the markets that they cover, the vantage point that they have, we've got a lot of ground to cover here in 30 minutes. So we're probably going to go ahead and jump right into it. [Operator Instructions] But with that, I think we'll go ahead and get started. So Steve and Steve, thanks so much for joining us today.

And maybe to start, just on that comment of the breadth of portfolio and the services that you offer, we always think about your organization having one of the more balanced portfolios out of the peers that we cover, about 40% of the EBIT coming from Intermodal and Logistics, the remainder from Truckload. I guess to start, can you comment a little bit about how you think that, that positions you within the marketplace and differentiates you and some of the benefits that, that brings? And then secondly, do you have a view on kind of an optimal mix and where you want those -- that the mix of the businesses to be on a longer-term basis?

Okay. Sure. Thanks, Todd. This is Steve Bruffett here and Steve Bindas. So not only are we both Steves, but our last names, begin with a B. So it's doubly complicated around. Thanks for having us, Todd, good to be here. So the portfolio is a great place to start for us. It is a strategic asset for us. And to be operating at scale across the Truckload, Intermodal and Logistics spaces gives us some capabilities in the market that we think add value. I think that's probably -- its biggest value is being able to offer solutions that fit the scenario, if you will. We've learned over the last year plus, how disrupted supply chains can actually get and having multiple solutions that sets that you can tap into across the portfolio to help satisfy our customers' needs or help them out by shifting capacity around or doing different things for them, I think, really is where the value lies in there. Sitting in the CFO chair, you appreciate the benefits of some diversity in your earnings stream, and there's some -- that diversification has value. But I think the greater value is in the marketplace that we're not single-threaded on a particular solution, and we can shape ourselves around what best fits the needs of our customers. So I think that is how we would describe the value of the portfolio we have, being at scale and all. We do a lot of different things for customers, the vast preponderance of the work we do is in the full load space, be it in Truckload or Intermodal. So that network management and asset management component that go with that, I think, is a key strength of ours.

Yes. And we've definitely seen that, Steve, even in the last year, the strengths and weaknesses in the different portfolios, the extremes in Truckload last year, Intermodal and then kind of as things have shifted. So do you have kind of a view on maybe an optimal mix or a target with where you want either from an EBIT contribution or a revenue or a size for the respective service offerings?

We have numerous objectives within the portfolio itself. But broadly speaking around the portfolio, we don't like to limit it too much because the world changes. And as we go through time to declared some particular outcome as far as mix goes, I would say the one thing that we'd like to be mentioned that about 40% of our earnings or EBIT comes from our asset lighter configurations of Intermodal and Logistics. And over the long course of time, we'd like to have 50% or more of that earnings stream come from those 2 spaces. At the same time, we don't want to get there by shrinking our Truckload segment, those earnings, we want all portions of our portfolio to grow just at different paces.

And so from the CFO seat, how do you think about capital allocation between the different segments? I mean, what are the drivers behind that? Is it purely the growth opportunity that's out there? Is it balanced based on returns? Or how do you think about when you're making CapEx investments, which pieces of the portfolio gets some of those dollars?

Yes. And we did have some good internal tensions on those discussions. Fortunately, we've got a strong balance sheet, too. But still, you got to be prudent with the allocation of capital. And what you're willing to invest in and when and why. Another dimension within this is the duration of the assets within the portfolio. For example, you could go on one end of the extreme from our team drive -- team driver cabs, they're in our fleet for 2 years. Compare and contrast that to an Intermodal container chassis, which could be 20-plus years in service. So that dimension of time, it factors into how we think about investments as well. But it's really opportunity driven and return on capital is an important financial metric to us. So that obviously weighs in. There are constraints to that. It's not our single lever, but we're overall looking to drive earnings growth and deliver shareholder value through investing in the right places at the right times in our portfolio.

Yes. No. Of course, that makes sense. And yes, I understand. And the comment about the balance sheet, I mean, given the flexibility, it's great to have the ability to be able to make those investments. So maybe just sticking with your comment on Intermodal and some of the investments over the past several years since you've been public. We've seen the iteration where you invested in the chassis fleet relatively close to becoming public, and then there was some growth on the container side. I guess, how do we think about that business being positioned going forward, both from a growth standpoint? Is there another investment that you have to make? Is it a top line story? And then on the margin side, in the last several years, you've been close to a 90% OR, which is very good within the industry. Are there levers that you can pull to improve the margins within the Intermodal business? So kind of 2 parts, both on the growth and then on the margin side within Intermodal?

Yes. I think we feel really well positioned in the marketplace with our Intermodal offering, around $1 billion of revenue there. And we have made investments over the past several years that you noted. We feel it's very important for us to own and operate our own chassis and containers, which really sets us up to excel with our street operations, our dray operations on either end of the railroad. And that's part of what makes the whole formula work. And I think that we're certainly willing to continue to invest in top line growth in our Intermodal space by adding container and chassis capacity as we go through time. In fact, if you want to tie it into one of our recent ESG objectives, which was to double the size of our Intermodal operations by 2030. So there's obviously an implied growth theme inherent in our Intermodal segment that we are comfortable with. And so we'll continue to make those types of investments and likely we'd be adding more containers this year if we could get our hands on them. It's just a difficulty in getting them here.

Yes. No. So that makes sense. And maybe just to that point, can you talk a little bit about just the Intermodal market from -- it sounds like there's some constraints on just the availability of capacity at this point. Is that more on the supply side? And how are you thinking about the demand environment for Intermodal for just the current environment and your ability basically to service the demand and given what's a very tight market right now?

Yes. I'll circle back and address the margin portion of your prior question and then I'll get in the current conditions, I forgot to address that earlier. But we've stated publicly that our longer-term range are that we expect to operate in this 10% to 12% in the Intermodal space, 10% to 12% margins. And we're comfortable with that range being applicable from where we sit here today. So I think it's predominantly a top line growth while maintaining that margin band as we go forward in time. Market conditions in the Intermodal space now remain very robust, and it's still a bit -- it's more fluid than it has been over the past several months. There are still hiccups along the way, particularly at ports or certain rail heads or certain types of customer configurations where they're struggling with their own labor challenges. But it's becoming a bit more fluid, which is very helpful because we can make better use of the containers we do have already. And so that's what we're focused on at the time being. I don't know, Steve, do you have anything else to add to the Intermodal environment?

No, I would just add that there is a difference between our operations in the east where we would say, they're performing at pre-pandemic levels where the west is slightly behind. So as the west catches up, I think that adds more fluidity and then it adds more opportunity for over-the-road conversion freight. More share on that side of the fence.

And that pre-pandemic comment, that's a rail service or that's a service-level comment more than anything, right?

Right.

That's helpful. And Steve Bruffett, thank you for -- usually, if I don't get the answer to the question, we move on. So you came back and checked the box for me, so I appreciate that. So just on a couple of last ones on Intermodal. When I think about Intermodal pricing, it seem like that there was a period where for some of the large participants in the market, if they wanted to grow or they wanted to balance their network, that price was one of the main ways that they would do that. The last several years, the pricing environment has been a bit more rational. And obviously, we're in a tight demand environment right now, which helps pricing. But can you speak to kind of your thoughts on, number one, Intermodal pricing currently? I know you've got some public comments that are out there about that. But also number two, do you think that structurally the market has shifted a bit where some of the larger participants are more rational from a pricing standpoint and go-to-market strategy?

Yes, I think any time you talk about Intermodal pricing, you have to put it in the context of the broader over-the-road pricing environment as well because there is this interplay that Steve alluded to between road and rail. And so we always have to be mindful of that. I would say from where we sit, I can speak for us. I can't really speak for others, we're very margin focused. And maintaining those margins. And therefore, the return on capital profile that comes with that is an important part of how we see our strategic path going forward. So inherent in that comes pricing discipline through cycles.

Yes. No, and that makes sense, and that's a great comment about that. It's got to be related to what's happening in the broader Truckload cycle, but that's a good comment just about to be focused on profitability. I mean, pricing is a huge component of that. So let's talk a bit about Truckload. And Steve, you had made the comment about growing the businesses, and it's not by design to shrink one of them to grow the other pieces of the pie. But obviously, Truckload has been a bit more challenging to grow, particularly in the past year. And you've had some more success, I think, on the dedicated side relative to the network side. But how do you think about contribution between dedicated and over-the-road, and it always seems like in tight markets, people want to shift and say, "Hey, there's a lot of opportunity and benefits to being in dedicated, but obviously, there's value in the over-the-road fleet." So how do you think about growth within the Truckload and then also growth more specifically between dedicated and over-the-road at this point?

Yes. We definitely have had some challenges in growing the network portion of our business, in particular, it's obviously shrunk by several hundred trucks over the past year, while we managed to grow the dedicated portion. But if you step back from the most recent activities and look at a longer time frame, what we're trying to accomplish within there. So I mentioned earlier, we have some objectives within our portfolio that aren't necessarily overarching, but segment specific. And so this is one of them. Using round numbers, we have or want to have about 6,000 trucks in our network. We're below that now, and it will take us a year or 2 probably to net up to get back to that waterline that we think is a really healthy network level for us. So we'd like to get back to 6,000 there. And currently, we're at about 4,000 or slightly above in our dedicated configurations. In terms of tractors. So there's about 10,000 total in there. Over the course of time, we would like to have our dedicated truck offering equal to our network trucks. So trying to get from 4,000 to 6,000, for example, over a period of a few years, by adding several hundred a year over a period of time is an objective that we have within there. Generally speaking, the return and margin profiles are similar between the 2 when, we're humming in both. And so that by itself is not a big distinguishing factor between network and dedicated. That tends to be a more consistent margin profile in the dedicated offerings, though, given the majority of them are multiyear contracts, and there's less seasonality and change going on within the dedicated configurations. And they tend to be more driver friendly, lower driver turnover configurations as well. So we like that aspect of it.

Yes. That makes sense, and that's helpful on kind of the split of the business. And if we could maybe just spend a moment on drivers, just because it's an area, I think it's very pertinent to everybody on the call. And you guys really have a great viewpoint of what's happening with the driver market. And Steve, we were talking about just the cyclicality of the business. And you've had the chance to be in the industry for a longer period of time. How do you view the driver situation currently? And as you think about the driver market going forward, do you have a view on it? Is this something that's structurally different? Or is this something that we're seeing from the normal cyclicality of a tight job market and it's difficult to get drivers? So would just love the company's thoughts on driver availability right now and longer-term as well?

Yes. I guess the most recent comparison point was the 2017, '18 time frame, where there was a strong freight market. But then shortly thereafter, there was a lot of driver capacity that came in into the marketplace. That has not happened this time around. But I do think it is structurally different and likely to last a fair amount longer this time around. And there will ultimately be some form of cyclicality to all of that, I think, but it's not immediate or pending. I can tell you that. It still remains very challenging to add driver capacity.

And with some of the things that you've done on the driver pay side and the whole industry has moved driver pay has the response been different than what you would have seen in a prior cycle as far as either attracting new drivers in or retention of drivers? Or are you getting kind of the expected response from your driver pay actions that you've put into place?