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

Okay, everybody. So staying with the transportation team, we'll now switch from rails to trucks. And we are very happy to have with us Schneider National and CEO, Mark Rourke; and CFO, Steve Bruffett. Gentlemen, thanks so much for joining us. Before I turn over to you, I would point out that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And also for the audience, if you have any questions for the management team, please submit them via the webcast, and I can pass them on to Mark and Steve. So gentlemen, thanks so much for joining us. Obviously, it's probably a good time to be a trucker right now. So maybe you can kind of share -- open a bit some of your thoughts on what you're seeing out there. Clearly, post the hurricanes and continued supply chain tightness, we've seen truck rates hit an all-time high. Where do you see the opportunities? Where do you see the bottlenecks right now?

Well, good morning, Ravi. Thanks for having us, and here's to Laguna Beach in 2022.

That's definitely going to happen, I guarantee that.

Well, Ravi, as you would have expected and you're hearing, the distortion and the disruption that we've been experiencing, which seems now for several quarters continues. And really, every metric that we would follow in our network businesses, whether they be Intermodal or over-the-road, continue to be elevated, tenders, turndowns, spot pricing. And so as we get ready to head into what is going to be a peak season still, and as I have talked, it's really hard to distinguish seasonality here in the last several quarters. The market is very robust in really every metric that you look at. So we expect we're going to take that well into 2022 at this point.

Got it. Can you just talk about the last -- not to get too granular here, but just the last few weeks in general with what's happened with the hurricane? You've seen that tightness. Are you still seeing that in the system, we saw rates jump up about 5% or so. Again, do you think that normally tapers down as we get past hurricane season, or do you think that's kind of embedded in numbers at this point?

I think we're going to build from here. Obviously, the difficulty, because of the far reach of the store, both in the Northeast and down in the Gulf, was fairly disruptive. Secondly, we are seeing across the network more COVID cases that -- or at least exposure, so we're dealing with some of those disruptions. Its still relative to the capacity condition in the marketplace. So really, on all fronts, Ravi, I think we just expect that we're going to build from here, and it continues to escalate. We haven't, in our mind, hit anything relative to peak, whether it be rates or demand at this point.

Got it. You said earlier that, again, seasonality has been kind of broken since the start of the pandemic, and I totally agree with that notion. But this time last year, we were heading into peak season, kind of flying somewhat blind, didn't know quite what to expect, and a lot of people are really nervous. What do you think happens this year? Kind of do you feel like there's a greater sense of visibility and certainty going to peak season? Do you feel like your customers are better prepared for it? Do you think we will see the same seasonal uptick that we normally do for peak season?

Yes. Well, we think certainly the consumer is healthy. We think the demand picture is going to be there. I'm not sure that the supply side has dramatically improved, whether you measure available capacity or container availability, trailer availability. We're still not pleased where we are from a fluidity in the networks to get our equipment back, so we can get it applied to the next customer as we would typically see, Ravi. And we've been in that same condition now here for several quarters, and I think that's going to be another constraining factor as we head down through the peak season.

Got it. Can you remind us about your spot versus contract exposure in your TL business? And kind of how do you see that ratio evolving from here potentially with spot rates at an all-time high? Is that a good thing or a bad thing for your spot exposure? And maybe a general comment on the pricing environment in general. Have you opened 2022 negotiations yet like the first round? And kind of what do you think happens there?

A couple of -- I'll start maybe here with the spot -- on the truck side. We generally have upper single digits to low double-digit percentages that we play in the spot. We're on the upper-end of that presently. And in addition to that -- that's on our truck side, but also the other augmentation to our network truck is what we're doing in the Power Only front that leverages some of our brokerage capability that connects at a higher percentage than that, obviously. So that combination puts us in the low teens. And we would expect that's probably the maximum we want to be to make sure that we can still fulfill some of our long-term commitments relative to the contract side of the house, Ravi. As it relates to 2022, pricing, we're in the early stages of that, obviously, in our planning and some of our key customers. And really, the question is, are we just going to work through the dynamics in the marketplace and try to avoid the 52-car pickup exercise, and what's in the best interest of the shipper and the carrier, we're in the midst of those discussions with a number of shippers.

Got it. A couple of follow-ups there. On the spot versus contract, like you said that your current spot exposure is as high as you would like it to be. When do you start winding that down? Do you want to see rates start to come down first so that happens, or would you do that preemptively?

Yes. We have a number of industries that we look at. We want to make sure we're taking care of the driver needs, we're taking care of the network needs, and obviously, we have to be very cognizant of how we can get after yields that are appropriate. And so we look at all those things in concert, Ravi, and get a read-on where the market is going and make those decisions, both for the short term, but also make sure that we're positioned for the long-term health of the business.

Got it. And just on 2022, since you won't say it, I will. Our early shipper surveys on 2022 have come back saying a 5% rate increase is like the starting point or what shippers are seeing right now. If I gave you that for the full year '22, would you be disappointed? Would you take it? What do you think about it? What do you think about 5%?

I'd put that on a disappointing side of the equation.

Okay. That's -- that is very clear. Maybe kind of switching to some of your other segments. On the dedicated side of things, I mean, clearly, that's been one of the big growth areas within trucking within transportation as a whole. Have those conversations with customers who are maybe looking for a little more certainty or a little more visibility in their trucking supply, have they been accelerating? Have they peaked? Do you think 2022 is going to be another really strong year for dedicated? Do you care about the mix between one way or dedicated or you're agnostic to that?

Well, we strategically think dedicated is our primary growth driver within the truck side of our business. We think that makes sense from the customer, the stability of our performance as well as a fit for the driver needs and what's most important to them. So as we put all that together, Ravi, we think dedicated is and will be a growth driver in 2021. We expect similar performance in 2022. And our pipeline and our success there, both with the driver community and the customer community suggests that we're on the mark.

Got it. Let's give a little bit and talk about the supply side. Clearly, kind of that's where the biggest constraint is right now. What is the current situation with the driver market? Are you seeing any signs of light in the tunnel in terms of supply improving there?

We haven't really seen anything get easier there, Ravi. What, perhaps, we have done though is we've made some investments, particularly in the second quarter, to redeploy some infrastructure to get after building some of our own CDL capability with the community that's interested in doing that because of the constraints in the for-hire and public school system. So we've done some things in the second quarter that we're starting to see the fruition of that here play out for us in the third, which we're encouraged by, but we've invested handsomely to do that. So that's probably the one area that we've seen some inflection positively, but we had a lean into that ourselves to make that happen.

Got it. But kind of overall in the industry, again, it sounds like you guys are like buying or have a pipeline to tap into with the driver schools or something, but there's only so much you can do from that side. So are you looking at bumping up your sign-on bonuses? Are you boosting advertising? Kind of what do we think of -- I threw out a 5% number out there for 2022 pricing. What are we looking at in terms of labor, wage inflation and sign-on bonuses over the next 12 months?

Great question. I guess, I'm going to tackle that one, Ravi. It's this equation that you're always trying to balance in the marketplace, and you don't want to get over the tips of your skis when it comes to the cost side because sign-on bonuses come and go. But if you're changing the base pay of the driver, it's very difficult to reverse if things were to change in the operating environment. So you need to be careful with that. We've made a lot of changes in our overall pay structure over the last 12 to 18 months, and we'll probably continue to make some more. But we do expect market conditions to be such that any further increases in driver pay would be covered by increases in price and rate.

Got it. And is that like a fairly direct correlation? I mean, do you guys just -- are very transparent with your customers about that, so it's effectively like a pass-through, or do you -- is there some negotiating involved?

Yes. Fundamentally, we believe in securing, from the market, in advance of trying to make an investment on the driver wage front, Ravi, and that really plays out. And it has played out effectively both in the dedicated contract world, the network world. And yes, we're in constant dialogue, and customers get it. I mean, they're seeing every aspect of their business from the DC world to what they're dealing with. So it's been a highly responsive and we've been fortunately been supported by our customers against the need for doing so.

Got it. Just last question on this topic. There's been a proposal to allow teenage drivers to drive trucks and -- for across state lines. What do you think of this proposal? Is it realistic? I know it's been tried before with not much success. And do you think it's a specific boost to large carriers like yourselves that have the latest technology on your trucks relative to smaller carriers?

Ravi, you hit on an important component there, is the technology and the trucks have advanced certainly. It's still a very difficult risk profile based upon that age group, one that we understand why we're pursuing that as an industry and why that can make sense. It's a place that we have a bit of hesitancy, in our view, that probably doesn't make sense for us. But certainly, as the technology advances, you can start to see how a case could be built.

Got it. Understood. Maybe switching gears a little bit and talk about Intermodal. So last quarter, you noted the goal of adding a net of 1,500 to 3,000 Intermodal containers. Can you talk about how progress has been on that so far? And kind of when do you expect to hit that target?

Yes, it's been hand-to-hand combat trying to get to physically get onshore. But we believe we have a solution that's going to allow us to get the high end of that number, and do so in such time that we can support our customers at least somewhat here through the peak season. But there's still opportunity for some dates to slide around just because now we're dealing with typhoons in Asia and other items. But we have those -- the transportation secured, and we would expect that we're going to take delivery of those units in totality in 2021.

Got it. Mark, maybe just stepping back a little bit and kind of if you go back to Jan 1 of this year, would you say that you're a little bit surprised or even disappointed at the truck to rail conversion you've seen on the Intermodal side, or maybe the lack thereof? And kind of how much of that is driven by the network congestion? And kind of how do you see that playing out over the next 6 to 12 months?

Yes, Ravi, I think certainly, we would have typically expected in this environment to see more truck to rail conversion versus in some markets actually seeing the opposite of that. So yes, I would characterize that -- in the short term, its disappointing. But in the long term as an opportunity, that will return once fluidity and this whole congestion issue starts to get behind us. To include a significant contributor to that is just our customers are well-timed relative to those containers that don't have anything to do with the rail network congestion. It's their congestion inside their four walls, and that's a significant impact. And we really are working with our customers and the choices that we make to try to be as fluid as we can. But you put all that together on an end-to-end basis and certainly, the volume that we could be doing versus what we are doing in Intermodal is a bit disappointing.

Got it. So just kind of -- it's obviously not just you who is adding that container capacity, kind of a lot of your peers are doing that as well. But you guys are really confident that, that is the right thing to do and it's not going to end up increasing capacity in the industry. There's absolutely going to be demand for that in '22 and beyond.

Yes. I think we're -- as we -- obviously, we try to take the lead from our customers and what's important to them and what they're trying to do in their strategies, whether it be on capacity coverage, the emerging ESG component that Intermodal helps with. And all of that, I think we certainly would have the opportunity to utilize the boxes that we're investing in.

Got it. Maybe switching gears a little bit again and talking about the Logistics business. I think that segment has done really well for you guys in the last 2 or 3 quarters. And on the 2Q call, you sort of alluded to moving to a point where Logistics can almost be a stand-alone business. Can you maybe unpack that a little bit more, kind of talk about some of the technology investments you've made in that business? What's the future of brokerage at Schneider?

Yes, Ravi, our strategy is to have this multimodal platform that gives us the ability to -- in our view, to be resilient, but also be agnostic a bit to how the customer can best be served, whether that be truck, Intermodal and Logistics. And we really built this Logistics business to be a stand-alone business that can withstand the vagaries of various business cycles. But increasingly, with our digital interfaces that we're taking to the carrier community, that we're taking to the shipper community and the introduction of this Orange Box in a way to bring third-party carriers together with larger shippers via our box, there are some more blurring of these lines that we think make sense. Our technology allows us to do that efficiently and make the right decisions on the front end. And so we would expect that our big growth engine will continue to be in our Logistics business. They're executing very, very well. That is the place that we've placed the most technology and catching up on some of the other parts of our portfolio. And it really is quite evident in our results. And that momentum continues and very, very bullish on what we're able to do there.

Got it. We have seen with some of your peers in that business, there appears to be a little bit of tension, if you will, in terms of really, aggressively growing the top line versus boosting the margins in that business. How do you see that balance going forward?

Yes, we don't see any reward internally or externally for growing for growth's sake. And so our whole focus has been and always has, even with the significant technology investments that we make that we do so in a profitable way and we get the returns on a fairly quick turn time. So -- and you see that in our results, so pretty darn consistent, yet still making the leading investments we need to make to stay in front of the market. So we don't believe we're going to sacrifice profitability for growth. Those are going to go hand in hand, and that's what you should expect out of our portfolio.

Got it. So maybe, again, switching gears and kind of moving from the top line to some of the cost items and to margins. Maybe, Steve, a question for you. TL truck count, what does the fleet look like through the end of the year and into 2022? Clearly, you and others have spoken about your inability to get new trucks, given some of the production constraints and -- does that limit your ability to grow the fleet? Do you want to grow the fleet? So how does that look like over the next 12 months?

Sure. There's a number of things in there, both our network and our dedicated portion of our Truckload business, so I'll tackle each of them. We've stated that we would like to get back to 5,500 trucks in our network, our one-way fleet and by year-end. And I think sitting here today, that's going to be a challenge for the reasons you cite, both driver capacity and OEM capacity, given the supply chain disruptions we're likely going to be dealing with through the remainder of the year. And frankly, into 2022, it looks like there will still be a lingering effect when it comes to both tractors and trailers. So we do -- we would ideally be adding a few tractors to our one-way fleet, and will likely do so between now and year-end from where we are today. But I don't know that we'll get to that 5,500 target that we set out there. At the same time, we are continuing to grow our dedicated fleet and are deploying each month, additional units and able to secure some driver capacity. Sometimes that comes with a trade-off of our network and what's going on there as some drivers will transfer from the network over to dedicated. We're great to have that option within our portfolio for the driver community to take. So feel well positioned. We had stated a longer-term target of having dedicated trucks be equal to our network trucks. At the time, we had about 6,000 in our network and 4,000 in our dedicated when we first started making these statements. Then we've gone through this last year or so, and there's been a decline in our network business for reasons everyone knows and understands the growth in our dedicated. So those numbers are coming closer together at a faster clip than what we originally set out to. So as we head into 2022, I think we'd look for continued growth in our dedicated and what we would phrase more as just getting back to a water line in our network business. You call it growth because it's higher from where we are today, but it's trying to kind of get back to where we were from [indiscernible].

That's a very clear way of framing it. If you're not able to get to that 5,500 number, does that put the guidance at risk at all, or is there enough buffer built into that?

I think that as we sit here today that we had a $0.10 range on the full year guidance that we gave. And when we gave it, there was about 5 months left in the year. So I think we feel pretty good about the overall condition of the price and margin and execution in the business. We're running our network. Our ratios are as tight from an efficiency standpoint as they have been in a while. So we're gaining some traction there in addition to just the pure price and cost dynamics that are in play.

Got it. And just a reminder to the audience, please submit your questions to the management team via the webcast, and I can pass them along. Just staying on the topic of OR. Obviously, Intermodal, despite the challenges that you and everybody else seems to be facing, the OR there is on a nice improving trajectory. What does that look like through the end of the year and into '22? Kind of are we looking at kind of staying in the high 80s pushing to the mid-80s?

Yes. We feel, to your point, Ravi, that we're executing very well within the challenges and constraints of the marketplace. And we feel that, that is where we're going to be operating at least for the foreseeable future, and why we're bullish to augment that service with additional boxes and serve the customers that we know we could serve and push more volume across this platform. And so we feel very good about the overall execution of the Intermodal business.

Got it. And just kind of looking long term, if I were to ask you an OR question, where do you see the most opportunity to improve margins both on an absolute basis and on a relative basis? Is the one-way business? Is it dedicated? Is it Intermodal? Logistics, obviously, has a much easier starting point. But where do you see the biggest opportunities?

If you would look across our 3 segments, the way you frame that question, I think that, in my view, we have a number of things that we could do to improve margin everywhere, and we're focused on that, both on the revenue side, the cost side and how we operate our business. The delta that I believe we have the biggest opportunities across the truck platform, both on the network and dedicated and a number of initiatives that we have in-house to do just that.

Got it. So a couple of more topics here. I want to switch to technology because you guys obviously made an investment in [ Too Simple ]. You've ordered Tesla trucks. So you're really right up there at the forefront of technology disruption.

[indiscernible] electric trucks in California next year, right? So...

Yes, there you go. So two questions here. One is, what is your plan for -- not necessarily deploying because that's probably a couple of years out, but what's your plan for staying on top of these technologies and kind of continuing to stay on the forefront there? And second technology question is, on the Logistics side, when you look at the investments you've made in Quest over the years, your partnerships on the Logistics side, what are some of the data science and other tech tools you can use to drive incremental productivity? So question 1 is technology in the fleet itself, and second is data tools.

Yes. We believe we're much closer on the battery electric or the fuel cell side on the truck, and we make a big announcement last week relative to the Southern California 50 units that I mentioned. So feel that we're very well positioned to go through the learning curves. Probably more so on the infrastructure side than actually operating on the truck side. And you mentioned, an investment in [ Too Simple ], but we're also involved with several other providers that are linking themselves to various OEMs. And really, that's to understand a whole series of things around the business model, how do we deploy? Will it be a ramp-to-ramp? Will it be end-to-end? And so we just want to make sure that we understand how our business approach, commercially and certainly, execution wise, will continue to adapt and adjust as those things come to market. So you can count on us to be at the forefront of that. As it relates to the technology investments, and you mentioned where we generally start all of those is in our Logistics business. Ravi, our focus right now is to continue to find ways to automate the transactions, whether it be with the shipper, with the carrier and then how we execute internally. And so that whole digitization world is at the forefront of that so that we can get our people working on higher-value tasks and automate the process, lower our cost to serve and be able to grow the business without having to grow the people side of the house, how this industry has done traditionally. And so that's, by far, in addition to the decision science is where our investments are in our Quest platform, both with what we'll do ourselves and who we'll partner with as we made some announcements to advance that through their help as well. So lots going on in the tech front.

Right. Clearly, lots going on. Just a follow-up on the electric and autonomous. Are you OEM agnostic when it comes to these technologies? I mean, will you -- like irrespective of your traditional preferences for OEMs, as another OEM or even a new OEM, like a tech start-up or a tech company came out with a really superior electric autonomous product. Like would you be willing to try that?

Yes, absolutely. We're focused on total cost of ownership from its life cycle. And so, who can help us best do that with the driver experience in mind. And I think a number of innovations could happen across the whole series of suppliers that could advance. So absolutely, we'll be playing where it makes the most sense.

Got it. There are a couple of questions here from the audience. Peers are deploying balance sheets more active on M&A. What are Schneider's plans here?

Sure. We obviously have a lot of dry powder and a conservative balance sheet as we sit here today. And we've articulated over the last couple of years, a general interest if something were to bid that we would be willing to deploy in inorganic growth, deploy capital against that, and that continues to be the statement that we would make. And just haven't found something that we feel would make sense for us, and we don't want to force something just because we have the ability to do it. But we continue to scour the landscape. And we've said predominantly, we're focused on areas of -- that would add to things that we already do well and add additional scale in our dedicated or specialty types of businesses and that continues to be predominantly where we look.

Got it. What do you think of acquiring companies to get drivers? Do you believe in that? Do you think that can work?

I think a component is looking at when you're acquiring something, what is the driver condition of that business. And dedicated, for example, Ravi, we think can have a profile that makes that more attractive than maybe some other alternatives that may not have as favorable condition there. But simply doing it as an avenue to get drivers exclusively, I don't think that would be our focus. It would have to add some additional scale and benefit to the business. But it's a component that you look at for sure.

Got it. And also, again, you guys, in the past, have not been shy of going into new end markets, and even kind of going out of them if those investments don't work. Would you look at adjacent areas? Obviously, LTL, e-commerce, logistics, kind of would you look at some of those areas as well on the M&A side?

We have 3 or 4 areas that we've identified that makes sense for us, Ravi. I think I would tell you, at this point, it's probably closer to our core than getting a standard deviation or two away from that. We think there's plenty of opportunity within the things that we do really, really well. But there's a fairly broad spectrum of things that we think can fit for us. Some of the ones that you mentioned there might be a standard deviation or two away, at least in our current thinking.

Got it. With that, I'm going to wrap-up here. So Mark and Steve, thanks so much for joining us. Obviously, it's a good time to be a trucker. So enjoy it. And we will speak again at your conference call.

Well, thanks for having us, Ravi. Well done.

Thank you. This does conclude the presentation.