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

Great. Let's keep the trucking content going here with Schneider and very happy to have with us EVP and CFO, Darrell Campbell; and Jim Filter, EVP of Transportation, Logistics and Group President. Gentlemen, thanks so much for being here. Maybe kind of start the same way with everyone, which is just to talk about what you're seeing out there in terms of market trends. Obviously, it's been the weirdest couple of years of my career. I'm sure most executives that speak was going to say the same thing. But it did seem like we were seeing a little bit of an uptick through 2Q with some emerging seasonality. How has -- how did 2Q end kind of -- and how has that continued to 3Q so for from what you see?

Yes. So first, Ravi, thanks for having us here again. We appreciate it, opportunity to connect. And you're right, we did talk about that at -- we saw some -- really not a market inflection but return to seasonality. That started at in June carried through July. If you look at Port Long Beach, there are vessels now waiting. We'd say all of these are signals to a more normal seasonality. And that's just very different than what we experienced last year where there was no seasonality. But I would say this is seasonality similar to what you would have seen in 2019, where wasn't a strong market, but you at least saw seasonal trends, and that's what we're experiencing right now.

Got it. At what point do you start high fiving. Like what do you need to see out there to get really excited about. I mean, not quite '21, '22, but kind of to get to a normal mid...

I don't know if we ever high five each other and we probably don't celebrate enough, even as we've gone.

That's the [indiscernible].

Yes, to say that there's more of a market inflection. I think you have to see really go through a bid season and see rates start to materially change, and that can be driven either from a combination -- from either capacity exiting the market that sufficient capacity is exited or a demand increase. And that's when we'll start to see a change in the market.

Got it. What have you seen for back-to-school season? And what are you hearing on peak seasons before?

Yes. Well, for us, clearly back to season, was already done for us. And that was really some of what we saw in June and July that it was it really was more seasonal. And even some of the Halloween trends, that's already coming in, in July. In terms of early part of the supply chain, the restocking portion, and that was very much the normal seasonal trends as we start having -- at least this year, having discussions with customers about peak season, that played out very similar to the past where they came in, in July with their plans and their plans look very similar to previous peak seasons, and started having discussions about how much capacity we could provide at different price points. So those were more normal discussions and not really an inflection, but something that we just didn't experience last year.

Got it. I'm hearing you say the word normal a lot, and that's important because there's a thesis out there that there's been a lot of pull forward of peak season ordering, maybe even 2025 ordering, whether it's because of the Red Sea situation or East Coast port concerns or elections or whatever. Are you seeing any of that? Or is this like you said, kind of more normal timing in terms of when they discuss much of you?

Yes. And all we can see is what's come so far. We see our customers plans and then the vessels there in the water. And what we're seeing is more normal. We have not gotten to that spot yet to see is there a drop off? Could that be in 2025? We're not seeing that at this point.

Okay. Got it. In terms of the vessels that are coming in kind of -- and I'm sure the Intermodal implications as well, which I'll touch upon in a second, but does it feel like those containers are being taken off the ship and are sitting there and have not yet kind of come into circulation? Or are you seeing that move already, because there's seems to be a little bit of a gap between what -- the tightness we may be seeing at the ports versus kind of what we are seeing across the truck and rail network?

Yes. And I'd say probably the first 1/3 of the year, we weren't seeing that translate into Intermodal activity. And what we shared on our call, we were just beginning to see that switch from IPI to Domestic Intermodal and beginning to see a Transload activity. And that really did carry. That was really what we were talking about in June and July that there's a little bit tighter connection into our business.

Got it. I'll come back to intermodal in a second, but just a few more questions on TL, please. Just in terms of supply, kind of what are you seeing out there, kind of it seems like in the media, we are reading about -- just at least a couple of big bankruptcies kind of every week. And if the big guys are kind of -- or medium size guys are face feeling pain, and the small guys maybe seeing more pain kind of what are you seeing in your internal data in anecdotal?

It's just -- it's a really slow attrition and slower than what we would have expected in terms of this market, what's leaving. At the same time, what I believe the potential implication is that ability to grow when the market does start to correct that there's a number of carriers out there that normally would have been able to grow with their customers. I don't believe they're going to be in a financial position to be able to scale up when the market does start to correct.

Do your customers know this kind of are you having those conversations? Do they feel like they need to be prepositioned for '25 right now? Or are they like that's a bridge we cross?

I think we're seeing that across our portfolio as we talk to customers. If we look at our Logistics business is still performing very well based on us being an asset-based logistics company. We are seeing a little bit more of a movement from those non-asset-based brokers into our truckload business. And so I think customers believe -- nobody knows when this is going to change, but they know the implications of when the market does start to correct.

And I think in terms of attrition, given that we have leasing business as well with smaller carriers and owner operators, we're seeing some strain in terms of kind of, I guess, the volume of, I guess, smaller carriers that are leasing our equipment. So it's slow and steady, but it's not at the kind of level that we would hope.

Understood. And just kind of maybe lastly for now on TL, just the price environment. Obviously, you see the spot rate kind of come off the bottom but kind of be fairly subdued. When do you kick off 2025 bid season, kind of I think it's typically in October. And kind of what kind of conversations do you think you're going to have? Kind of obviously, you're going to be looking for a price increase kind of is that in the bag? Kind of do you think -- what kind of reception do you think you're going to get for that?

Yes. Really, some of these are already beginning now. It's really over the course of the next 5 months that are more of the pre-work going into these bids and beginning to have those discussions and planning meetings with customers. And for customers, they have -- they're thinking about, I'm doing this work right now, it's going to take us 4 to 6 months to get through a bid and then expect that those rates are going to last 12 months after that. And so really what customers are also watching is that gap between spot and contract pricing. And when those even get to within 15% of each other, they just don't have as much confidence in a broker's price that it's really going to maintain over the course of 12 months. And that's why we've seen a little bit of a benefit there, I think, as we go through this cycle, that's even more so. So it creates opportunities for more conversion from brokers to asset-based carriers. So so far, our customers, they're aligning to that thesis.

I'll come back to brokerage in a second. But maybe a couple of questions on dedicated kind of -- where do you think kind of -- what's the good mix between dedicated and kind of OTR kind of in a normal environment, right? I mean so do you -- are you tempted to kind of lean more towards a spot market now just given where it is and the potential inflection to come? And kind of what's that right mix on forward?

Yes. So our mix, when we went public, we were 2/3 net worth, 1/3 dedicated. And now that's completely flipped that we're about 2/3 in our dedicated business and 1/3 that's in the network. And we're not capping our network business other than we're only going to grow it to the extent that we can do so profitably. So we've really -- the plan there is to more maintain that. And so we see a difference. The way that we have an opportunity to grow that is through power only to utilize our trailer capacity, but then use our really our tools to be able to provide a non-asset solution there. But with dedicated, we still see a lot of opportunities to continue to grow. We have a solid pipeline, and so we're growing organically, but also inorganically, we've had 3 acquisitions in the last few years. And each one of those acquisitions bring something a little bit different to our business. MLS got us much deeper into automotive, have a really great modest trap to serve customers at a low cost, really high service levels. And then MLS really unique in terms of delivering service to certain retailers with liftgate equipment. And so really pleased with how that's changed our business.

Yes. We don't have a target mix per se, right? Everything that we do is return-based, obviously, based on what Jim said, given where rates are on the Network side, we're not going to continue to invest today. But one of the benefits of having a Multimodal platform and being flexible is that as things move, we can kind of pivot.

Got it. I think during the pandemic year, I think Dedicated to one of the fastest-growing parts of the market along with Power Only brokerage. And a lot of that was because I think your customers said, "Hey, I want visibility and uncertainty over the best possible rate at any point in time. Has that thinking shifted? Has that thinking accelerated? Kind of what do you think the growth of Dedicated is going to look like going into the next up cycle?

Yes. At that time, it was because of all the disruptions that customer is trying to get control over their networks. But actually, customers are really focused on building supply chains that are much more responsive and able to service omnichannel distribution model. And some of the ways that they manage their networks before just aren't feasible with really high service expectations, transit expectations. And so Dedicate continues to grow, even though the overall market hasn't been as strong continue to see growth in Dedicated, because that's really the only way when you're looking for 98%, 99% on time. I really do need a dedicate configuration.

Got it. Some of your peers on the dedicated side have spoken about a more competitive environment. Are you guys seeing that as well? And kind of where is that competition coming from?

Yes. And say it, I mean, it's always competitive. But that competition -- and it's a little bit different. These are 3- to 5-year business cycles. It's not every year, you're doing a renewal, customers understand. I'm not trying to get just this year's rate. This needs to be durable. It's all the other services that you provide to customers. So we have really high retention, always well above 90% retention of our customer business. But when we are losing business this year, one thing that's perhaps a little bit different than I think what perhaps our customers are alluding to that you're seeing some of those were built maybe during the pandemic, those dedicated configurations reverting back to a network type configuration and could be taking advantage of spot rates, opportunities like that. But those are ones that we will be watching as we get to the next disruption and really not treat that necessarily as a Dedicated type opportunity. But really, this is a network solution for those types of [indiscernible].

And that's interesting because historically, you guys have always said that that's poor quality dedicated, right, because you don't have a customer that's not committed to doing and as being opportunistic, that's sucks, right? And so are you sensing a shift in their thinking? Like did they not know what they want to put in the marketplace? Kind of why is that happening? And how do you involve?

Yes, I think there is some of those situations where I just have to go and do something. I'm willing to think about the craziness that we went through, the types of solutions and rates that were out there in '22 and even in '21. This is just one additional lever that was getting pulled. And some of those were undone here.

Okay. Understood. So maybe kind of switching a little bit to Intermodal here. And again, you alluded to the opportunity kind of on the West Coast port. Obviously, Intermodal had a bit of a tough time, at least relative to expectations versus truck even over the last 12 months or so. Are you starting to see some momentum there in terms of kind of volumes coming through?

Yes. And we're seeing that seasonality more of a traditional seasonality that we just did not experience over the last couple of years. So that is returning, but still very competitive with trucks in the East. We shared in our last earnings call, that was one area where we saw shrink. That's a very competitive market. And expect that's something that just a combination of customers trying to find capacity, competitive price, but also for sustainability reasons, there's a lot of opportunity for growth in that market.

Got it. I think historically, there's been like a 1- or 2-quarter lag between what we see in the truck market and what we see in the intermodal market on pricing. I think the last up cycle, all intermodal guys said that, hey, that's now become relatively concurrent. What do you think it's going to look like in the next up cycle? And do we go back to that gap? Or do you think it's going to stay in current?

Yes. And the last cycle probably wasn't reflective of a normal cycle that it was so dramatic and so fast that there really was no lag during that one. And you could even say 2018 was somewhat similar because of the ELD mandate. But traditionally, a couple of quarter lag is what we experienced, really just relative to the timing and how some of those deals work. And I believe that's more of what we're looking at.

Got it.

I was just going to say on the Truckload network side, obviously, we saw some modest increases in price, which came through in the second quarter, particularly, whereas Intermodal, we said pricing was flattish. I think that lag effect is something that we'd expect.

Understood. How would you also characterize the competitive environment? Because obviously, a lot of capacity has gone in the Intermodal space, especially in like the 2021, '22 time frame. Kind of is that something that's probably holding back Intermodal pricing reselling as well?

But when you say capacity is added, you're talking about containers? Specifically yes, containers have been added, but that is the least costly asset in the Intermodal business, the railroads themselves and our dray capacity are the most critical assets. Railroads have continued to invest, but when I think -- when you look at the dray fleets, they have rightsized to the current demand levels. And so when I think about what causes an inflection when we eventually get there, it's going to be driven more by a dray capacity. And that's what we traditionally saw in previous cycles is the -- that change happens on a market-by-market where dray starts to get constrained.

Okay. And right now, you think dray is still pretty tight or...

I'd say dray is appropriate. And so we shared we're about flattish year-over-year in the second quarter, and we had reduced our truck count by 10%. And really getting down to a level that we needed to be able to execute, and that was something that helped improve our margin in that business. So that part of it, we feel like we're at the right level -- but if there is a shift, you can only add capacity or shrink capacity at a speed that is much slower than demand moves or down.

You guys obviously made a big change in your intermodal business in the last year or so with the UP move -- how long has been...

Yes -- a little bit. Yes, 18 months.

Has that settled down? Kind of what's that relationship kind of evolving like?

Yes. It's been fabulous. Everything that we've asked the UP to do, they've delivered. It's putting us in a different competitive situation. So we're really excited about that. Being on opposite railroads as our largest competitor having more of a unique solution, and with our solution being the only one that's on the UP, CSX and now CPKC that's fully asset-based. It's more than 90% of the drays are on our company drivers. It's our containers and it's our chassis. So really providing something that's unique in the marketplace.

Got it. Obviously, we had CBKC here earlier today and obviously talking about the MMX offering quite a bit. You're in a unique spot in that you have the trucking side of the business as well. And the rail industry has, in recent years, sort of struggled to drive truck conversion. What are you hearing from your customers in terms of how they are evaluating a really competitive intermodal offering versus a trucking offering? Is it all about speed? Is it all about price? Kind of what's the dynamic like?

Speed and reliability was the biggest factor. So prior to the acquisition of KCS by CP. That wasn't a very reliable service. I had a number of different issues. It was lack speed as well. And so from day 1, the reliability has been near perfect. The speed very competitive relative to truck. And so we've seen double-digit growth even now that we've lapped a year, we're still seeing double-digit growth on top of the growth that we saw last year. So excited about what we're seeing there, the big opportunity still in front of us though is automotive. And that's still sitting out there. And we are starting to prove to those customers that the reliability, what we can do bigger opportunities out in front of us just based on the structure of those contractual deals. But what we're really excited about also is growth into the Southeast. And we think we're getting close to that being improved by the STB. And that's exciting for customers that actually have the opportunity to change their distribution models because right now, that's -- it's a market that is heavily truck. And yes, we do truck, but there's a lot of other trucking opportunities out there that are not moved by us. And so the conversion opportunity is really dramatic. And that's where we see the primary growth on that channel.

Understood. Maybe shifting gears and talking about Logistics. Kind of again, spot rates have come up a little bit kind of off the bottom kind of how do you see that playing out over the next couple of months as the market continues to evolve? Again, you and several of your peers have spoken about this potential to -- of customers moving away from pure-play brokers towards brokers who have belong to an asset-based carrier. Talk to us a little bit more about that shift.

Yes. We're a little bit different in our Logistics, the way that it's -- first of all, it has its own demand generation. It's not an overflow that if you can't move in your assets, it gets moved by your logistics. So we're working directly with customers, and there's some benefits that you can provide as an asset-based logistics company to a customer in terms of being able to scale up and down and manage product promotions and projects that are just very efficient there. So I see opportunities there. And then it's really the technology as well. And there's a couple of platforms. So I thnk about Quest and then what we have -- with Schneider FreightPower. And the Quest platform makes us effective in terms of using AI and tools like that, so that we're getting to the right rate and FreightPower makes us efficient so that it's not a manpower just grinding through that. So we think we're in a really good position there. If you think about the number of brokers that grew over the pandemic, that market really swelled up that is starting to come down. And you really have to be able to have those types of investments that make you both effective and efficient. -- and we think we're in a good position there.

Yes. And I think even though the market is so challenging, we continue to be profitable in our Logistics business, which I think is remarkable in this time. A lot of it has to do with the decision science -- that's around our platforms, just making decisions easier for the buyers. The customers as well and shippers as well. But also as it relates to productivity, we're investing in technology that makes us more efficient. So and it is customer-facing or driver facing, making that interaction more seamless. We talk -- a lot of companies talk about AI, but we're actually putting our money behind that. And we're seeing some benefits in terms of productivity.

I'm going to have a few questions on tech. I'm going to come back to that in a second. But just kind of to revisit the point of shippers moving towards logistic of asset-based carriers. Is that a normal cyclical shift that you always see at this point of the cycle? Or is something different this time?

Yes. I think that's more of a normal shift that you see more of this flight to quality that as the spot prices get closer to contract prices, having that believability that you're going to be able to execute and knowing as an asset-based carrier, you have a little bit more visibility on what prices are likely to do over the next 12 months. I have that understanding of what our true costs have increased and the inflationary cost. They just have a better view of that.

Got it. Any questions from the audience?

You mentioned a little bit earlier that you guys have been fairly acquisitive in the dedicated kind of space lately. But maybe, Darrell, you can talk a little bit about targets going forward, how you guys are thinking about balancing M& organic growth? And if there's any pockets that you're looking to fill either geographically or service based?

Yes, sure. So what I would say is we have a robust pipeline. We're always looking at potential targets. Over the last couple of years, as Jim mentioned, we've been very successful in terms of programmatic acquisitions in the dedicated space. Obviously, if it's not broken, don't fix it. So we're obviously going to continue doing that. So we have a pipeline of dedicated acquisition targets that we always look at. At the same time, we have a leverage of 0.3x right? So obviously, there's a reason why we've been conservative on our balance sheet because it enables us to do something transformative if that opportunity arises. So rough numbers, if we went from 0.3x to something closer to 2x. That's a meaningful size of a transformative acquisition that we could do, but we're very patient in terms of looking at things with the highest returns, right? So Dedicated obviously works. But when you think about our Multimodal strategy, we're doubling down on Logistics. We doubled down on Intermodal. Obviously, an intermodal space, there's not a lot to buy. But if the right brokerage opportunity came through something we'd obviously look at. But for now, that kind of 12- to 18-month cadence of doing something acquisitive and programmatic in Dedicated, I think, is a run rate that we'll continue to look at.

Are you biasing towards something bigger and semi transformative versus little bolt-on-ish?

I wouldn't say we're biased towards that. I would say we're open to it.

Or when you look at your pipelines and see the most exciting opportunities in a rather chunky stuff or....

Yes. So I think most of the opportunities that come across the desk aren't going to be transformative, right? Otherwise, everyone want do it. So just in terms of the mix of what is probably the more routine and kind of fits better with what we know we can do well, and we're seeing more of that. But the fact that we have the capability to do more if that came across our desk, we're obviously open to it.

Absolutely. Any more questions? So maybe kind of just looking at are two things, right? One is in the near term, where we are in the cycle and potentially where we're going. Kind of are you a little more excited about any of the 3 businesses versus the other like trucking versus intermodal versus logistics versus any of the other? Or is it like equal opportunity?

Yes, I want to stay disciplined to our strategy. Darrell was just sharing here of dedicated Intermodal and Logistics and we're going to invest. We'll get the best return -- so I'd say there's opportunity across all three of those.

Got it. And so kind of maybe kind of switching now to the kind of technology questions that we had. Obviously, kind of multiple avenues for you guys, electric, autonomous, AI/ML, not unlimited money out there, even with 0.3x leverage. So kind of what are your focus areas? And how do you decide where to allocate your capital in terms of just those three technology buckets?

Yes. So I mean, I think, as I've mentioned before, everything hat we did based on return, right? So each one of the businesses has a different return profile. So obviously, on the Logistics side, we don't need the same level of margin because it's asset light. But -- because it's asset intensive, that margin requirement obviously becomes a lot more significant. We look at tech in the same way. We look at AV in the same way, look at EV in the same way. As it relates to EV, there's some structural limitations in terms of how far we go. Obviously, California has gone a lot further than most of the states. So in terms of our dray operations, Intermodal in California, we have almost 100 VVs, right? So they're performing very well. Operationally, the drivers like it, range is not an issue. A lot of time to hear that, but I think the cost to operate and acquire those vehicles absent grants, something that's obviously challenging, right? So in the absence of subsidies, it makes it harder to kind of scale that fleet, but it's something that we're obviously ahead of the curb-in. There are other states that we're looking into probably smaller level having some kind of EV operation. AV, I would say, and Jimmy can jump in. We want to be at the front of the technology. We know that it's going to be disruptive at some point. The question is when? But we got to be flat-footed and wait. So we're partnering with OEMs, there are 2 OEMs that we're partnered with and continue to partner with to develop the technology that ends up being built as opposed to add it on to the end. And we believe that's important to influence kind of the direction of where that's going. But I think that's a longer-term play. We talked about decision science, we talked about AI within our logistics business, Obviously, that's coming through in our margin. We think that's one of the biggest differentiators that we have, not replacing humans, but making humans more productive and just making the experience of shippers and carriers a lot easier.

I mean just add on to electric vehicles on that one is so important is from an investment standpoint, it was really only possible because of the grants and subsidies that we received and both to purchase the trucks, but also the charging infrastructure. And this has really transformed the change in how you operate a fleet when you go to electric. And it was important to us, because of the ACF, which is here California, we expect that it could be implemented in other states. And for those that aren't aware of the implication for a dray network is the last diesel truck that you could add to the registry was December 31 of last year. So right now, everybody is operating on old diesel trucks, which is fine for 1 year or 2 years, but as you start to move on, if you don't have electric trucks, you can't expand your fleet. And so I believe that's -- and it's one thing to just go and buy some trucks and just do a couple. But until you're operating at scale, I don't understand how to drive this network so you don't have the range anxiety that drivers change behaviors. You understand the best way to charge that equipment and maintain it. And so we feel like we're well ahead of that. And so it's part of -- we're able to do it efficiently effective use of capital, but prepare us to be able to continue to grow our Intermodal operations.

Have you worked with the Tesla Semi at all?

We have on -- They're a customer of ours and potential suppliers. So that's another one that beginning that were more early stages with them.

Got it. Maybe just one last one on this. Kind of what have your learnings been from deploying those 100 trucks, 100 EVs in California? Kind of would you consider owning and operating your own charging infrastructure for captive use or kind of [indiscernible]

Yes. Well, no, we're not going to share with others. It's something to differentiate [indiscernible] We're -- it takes a lot of work to do to really a 3-year time cycle. Because you're working directly with utility companies, which is something different for a trucking company to connect directly with utilities and then building really new technology and understanding what is the ideal charging setup for the type truck and type of operation that you're building? And then changing your driver -- the drivers have to change in terms of how they operate the equipment is different. They enjoy it, better acceleration, it slows down differently. You need to learn some different behaviors on different types of environments, rainy, dry. So it's been all of that type of experiential learning that we've had. And just building a better product there and what times you charge and how far up you charge your batteries as well as maintaining the equipment.

Got it. On that forward-looking note, we will end there. Gentlemen, thanks so much for being here.

All right. Thank you. Appreciate it.